U.S. Securities and Exchange Commission


Washington, D.C. 20549




FORM 10-K




(Mark One)




þ  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the fiscal year ended May 31, 2011




 ̈  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the transition period from _____ to ____




Commission file number 0-10035




LESCARDEN INC.


(Exact name of registrant as specified in its charter)





New York

13-2538207(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)




420 Lexington Avenue, New York, NY

10170(Address of principle executive offices)

(Zip Code)





Issuer's telephone number (212) 687-1050




Securities registered under Section 12(b) of the Act: None




Securities registered under Section 12(g) of the Act:




Common Stock $.001 par value




Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ̈   No þ




Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ̈   No  ̈




Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes þ   No  ̈




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




Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not 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-K or any amendment to this Form 10-K.   þ




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




Large accelerated filer
o
Accelerated filer
oNon-accelerated filer
o
Smaller reporting company
þ





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  ̈   No þ




Issuers revenues for its most recent fiscal year were $ 556,694.




The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant on September 7, 2011 was approximately $311,999.




The number of shares of registrant’s Common Stock outstanding as of September 7, 2011 was 40,076,783.










Forward Looking Statements




This annual report on Form 10-K contains predictions projections and other statements about the future that are intended to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (collectively “forward-looking statements”). Forward-looking statements involve risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward-looking statements. In assessing forward-looking statements, readers are urged to read carefully all cautionary statements including those contained in other sections of this annual report on Form 10-K.










2




PART I




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 $14 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.




3




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.




4




Burns




In February 2007 a pilot study was presented in Korea demonstrating the benefits of utilizing Catrix Wound Dressing with pediatric patients suffering from 2ndand 3rddegree burns. The purpose was to evaluate whether Catrix provided caregivers with a viable alternative to skin grafting, the standard treatment for these severe burns.




The results 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.




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.




In April 2002, a 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 skin care line includes a 5% Catrix Rejuvenation Cream and a 5% Catrix Lip Balm. The Cream is a skin moisturizer for daily use and is effective in relieving symptoms associated with psoriasis, dermatitis and other skin anomalies. Domestically, sales of these products have occurred principally through physicians, skin care professionals, specialty retailers and via the internet.




Distribution




Through a licensing agreement with Smith & Nephew signed in June 2009, the Company increased sales of the Wound Dressing in Spain.   In December 2008 the Company entered into a distribution agreement with Cranage Healthcare Ltd. to market Catrix in the United Kingdom and Ireland. The agreement with Cranage Healthcare was terminated in connection with the purchase of the company by Sinclair Pharmaceuticals, Ltd.  In June 2010, the Company entered into a distribution agreement with Serene Medical, Ltd.to sell Catrix wound dressing in Turkey, Kuwait, Lebanon, Jordan, Cypress and Azerbaijan.    In
December 2009, Lescarden entered into a license agreement with Harvest Biotech, Ltd to distribute Catrix wound dressing and Catrix skin care products in Taiwan.





Philippines




In December 2008 the Company signed an agreement with the Philusa Corporation of Quezon City, Republic of the Philippines.  Under the terms of the agreement, Philusa will have exclusive rights to the marketing and distribution of Lescarden’s Repliderm Burn Relief line of consumer products for cuts, minor burns and wounds. The Companies are continuing to perfect the required marketing application to the local regulatory authorities.




Philusa Inc., a subsidiary of the privately-owned Mercury Group of Companies, is the leading distributor of drug and personal care products in the Philippines. Included in their distribution network is the Mercury Drug chain with over 800 stores country-wide in addition to a network of over 3,000 independent distribution outlets.






5




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  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, packaged and sterilized 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 New Zealand. An additional manufacturer is being developed in the Western Pacific Area.




Catrixis 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 Notified Body in Europe, and accepted as part of the review of the Company's official submissions with respect to studying Catrix in patients.




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.




Our target markets are highly competitive with multi-national and regional companies offering alternative wound and skin care products.  Local customary practices, regulation and market dynamics necessitate specialized knowledge and a local presence.   Strategic alliances with established companies allow Lescarden to minimize the initial investments in new sales territories. 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 September 9, 2011, 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.




6





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.




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.




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. PROPERTIES




The Company owns no real property. Its executive offices in New York City, occupying approximately 2,200 square feet, are currently leased under a five-year lease ending January 31, 2016. Management considers that its leased premises are well maintained and sufficient for its present operations.




ITEM 3. LEGAL PROCEEDINGS




NONE




ITEM 4. (REMOVED AND RESERVED)
  7




PART II




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.




Fiscal Year Ending May 31, 2011

High


LowFourth Quarter


0.05



0.02Third Quarter


0.03



0.02Second Quarter


0.03



0.02First Quarter


0.07



0.01Fiscal Year Ending May 31, 2010

High


LowFourth Quarter


0.03



0.03Third Quarter


0.05



0.02Second Quarter


0.05



0.01First Quarter


0.08



0.04





On September 7, 2011 the closing bid price per share of Common Stock, as reported by the National Quotation Bureau, was $0.02. As of May 31, 2011 there were 395 holders of record of the Company's Common stock.




ITEM 6. SELECTED FINANCIAL DATA




Not applicable to smaller reporting Companies.




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, 2011 were negatively impacted by the need to transfer the packaging of Catrix to an alternative packager. In February 2010, the former packaging facilities were certified by the European regulated body and production and shipment of Catrix wound dressing continued until weather related damage caused the facility to close and discontinue operations in May, 2011.  The Company has identified an alternative packaging facility and expects to restore normal production and packaging of its products by October 2011.  Sales of skin-care products to Korean distributor increased significantly due to improved economic conditions and market
penetration which mitigated the decrease in Catrix wound care sales.




Trends and Opportunities




The Company continues to focus on both Asia and Europe business development opportunities that offer easy access to targeted market segments and reliable distribution partners that are well positioned to strengthen brand awareness and increase demand for the Company’s products in growth markets. Growth prospects for the market for wound and burn treatment remain strong, driven by an aging population and an increase in obesity which is linked to a higher incidence of diabetes.




In addition, the global community is demonstrating an appreciation for the value of biologic products by the medical community; especially in the area of tissue regeneration and orthopedics. At the same time world-wide use of nutritional supplements and natural products is also expanding with a greater acceptance of non-traditional treatments and the wider availability of information supporting the potential benefits to patients. We feel these trends, combined with the existing market opportunities, bodes well for the future sales growth of the Company




8




. 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 collectibility 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. 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, 2011 compared to May 31, 2010




The decrease of $62,866 in revenues during the year ended May 31, 2011 compared to May 31, 2010 was attributable to a decline of $149,455 or 86% in the sales of Catrix during the fourth fiscal quarter resulting from weather related damage and a subsequent discontinuation of operations at the Company’s packager in April 2011. An increase of $65,885 in sales of Korean skin care products offset the decline in Catrix production and sales during the same fiscal period.  Sales to UK distributors commenced during fiscal 2011 and aggregated a $25,600 increase in sales for the year


The cost of sales during the year ended May 31, 2011 increased by $7,968 or 5% due to the write-off of expiring product totaling $11,858.  Cost of sales as a percentage of product sales increased from 28% for the year ended May 31, 2010 to 33% during fiscal 2011 due to an increase in raw material cost in addition to the write-off of expiring product. The Company expects gross margins to remain at current levels for the foreseeable future.




Total expenses excluding cost of sales decreased by 3% or $12,738 during the year ended May 31, 2011. The decrease was principally due to decreases in non-recurring rent escalations, telephone expense and office expenses aggregating $16,537 and a decrease in commission expense of $9,964, offset by increased professional fees of $9,592 and an increase in payroll expenses of $3,598.




Liquidity and Capital Resources




The Company had a net loss of $117,289 for the year ended May 31, 2011. Net cash decreased by $127,148 for the fiscal year ended May 31, 2011 due to cash from operations and an increase in loan from shareholder of $37,000. As of May 31, 2011, the Company’s liabilities exceeded its assets by $126,894.




The Company has no material commitments for capital expenditures at May 31, 2011.




9




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




See page F-1 for Lescarden Inc. Index to Financial Statements.




ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE




On December 13, 2010, the Company dismissed McGladrey & Pullen LLP (“McGladrey”) as the Company’s independent registered public accounting firm. The Company, also on December 13, 2010, engaged Meyler & Company LLP (“Meyler”) as the Company’s new independent registered public accounting firm. The decision to dismiss McGladrey and engage Meyler was made at the direction of the Company’s board of directors.
 
 The reports of McGladrey on the financial statements of the Company for the fiscal years ended May 31, 2010 and 2009 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to audit scope or accounting principles.
 
 The reports of McGladrey for the fiscal years ended May 31, 2010 and 2009 did contain an explanatory paragraph indicating that substantial doubt exists about the Company’s ability to continue as a going concern due to recurring losses from operations, and stockholders’ deficiency and working capital deficiency.
 
 During the Company’s fiscal years ended May 31, 2010 and 2009, and through December 13, 2010, the Company did not have any disagreement with McGladrey on any matter of accounting principle or practice, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of McGladrey, would have caused it to make reference to the matter in connection with its report on the Company’s financial statements for the relevant year.
 
 During the Company’s fiscal years ended May 31, 2010 and 2009 and through December 13, 2010, no “reportable events” as defined in Item 304(a)(1)(v) of Regulation S-K have occurred.
 
 During the Company’s fiscal years ended May 31, 2010 and 2009 and through December 13, 2010, neither the Company nor anyone acting on its behalf consulted with Meyler regarding any of the matters specified in Item 304(a)(2) of Regulation S-K.




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 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, 2011 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, 2011, the Company’s internal control over financial reporting was effective based on the criteria established in Internal Control—Integrated Framework.




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.




10




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 quarter ended May 31, 2011 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.




ITEM 9B. OTHER INFORMATION




None.




11




PART III





ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE




The executive officers and directors of the Company are as follows:




Name

PositionWilliam E. Luther

President, Chief Executive and Chief Financial Officer, Director.George E. Ehrlich, M.D.

Director.Charles T. Maxwell

Director.Russell O. Wiese

Director.Xavier Gras Balaguer

Director.





Mr. Luther (age 51) 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.




Dr. Ehrlich (age 82) is the President of George E. Ehrlich Associates, International Consultant Firm, a position he has held for more than the past five years. He became a Director of the Company on March 2, 1995. Dr. Ehrlich is a graduate of Harvard University and received his medical degree from Chicago Medical School.




Mr. Maxwell (age 79) 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 and in April 2000 Mr. Maxwell became Senior Energy Analyst with Weeden & Co., Greenwich, Connecticut. Mr. Maxwell is a graduate of Princeton University and Oxford University.




Mr. Wiese (age 45) 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 58) 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. EXECUTIVE COMPENSATION


Annual Compensation


Long-Term

Compensation AwardsName
Fiscal Year Ended May 31,

Salary $


Warrants(#)William E. Luther
2011

$
100,000



––2010

$
93,750



––2009

$
100,000



––





Aggregated Option and Warrant Exercises in Last Fiscal Year and FY End Option and Warrant Values




Shares Acquired

on Exercise

Value Realized

Number of Unexercised Options/ Warrants at FY End (#)

Value of Unexercised In-the-money Options Warrants at FY End ($)Name

(#)

($)

Exercisable

Exercisable




12




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS




The following table sets forth, as of May 31, 2011 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.




Title of Class (1)

Name and Address of Beneficial Owner

Number of Shares

beneficially Owned

Percent of ClassCommon Stock

Charles T. Maxwell

420 Lexington Ave.

Suite 212

New York, NY 10170

21,866,845

54.56%George Ehrlich

420 Lexington Ave.

Suite 212

New York, NY 10170

150,000

0.37%William Luther

420 Lexington Ave.

Suite 212

New York, NY 10170

310,000

0.77%Russell O. Wiese

420 Lexington Ave.

Suite 212

New York, NY 10170

2,000,000

4.99%Xavier Gras Balaguer

420 Lexington Ave.

Suite 212

New York, NY 10170

150,000

0.37%Directors and Officers as a Group

5 persons

24,476,845

61.07%





———————


(1)
The percentages are calculated on the basis of 40,076,783 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, 2011 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.


13




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.




During the year ended May 31, 2011 the major stockholder of the Company provided loans to the Company totaling $37,000 to fund working capital requirements. In November 2010, the Company issued 9,133,333 shares to the majority shareholder in exchange for the cancellation of $274,000 of loans to the Company. The Company recorded an interest accrual equal to the applicable Federal rate of interest throughout the term of the loans and will record a semi annual interest accrual on the aggregate indebtedness in the future.




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.




2011


2010Audit fees(1)

$
32,500


$
32,500Audit-related fees(2)


—



—Tax fees(3)

$
2,500


$
2,500


———————


(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.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES.







Exhibit

Number

Description of Exhibit2.1

Plan of Reorganization dated. January 15, 1997 (and Amended Disclosure Statement dated. March 12, 1997).**3.1

Certificate of Incorporation of Registrant, as amended.*3.2

By-Laws of Registrant, as amended.*22.1

Subsidiaries of the Registrant.*31.1

Certification pursuant to Exchange Act Rule 13a-14(a)/15d-14(a)31.2

Certification pursuant to Exchange Act Rule 13a-14(a)/15d-14(a)32

Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002


———————


*
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.


14
  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.




LESCARDEN INC.Date:  September 9, 2011
By:
/s/ William E. LutherWilliam E. LutherChief Executive and Chief Financial Officer




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,September 9, 2011

Principal Accounting Officer and DirectorBy:
/s/ George E. Ehrlich

DirectorGeorge E. EhrlichSeptember 9, 2011By:
/s/ Charles T. Maxwell

DirectorCharles T. MaxwellSeptember 9, 2011By:
/s/ Russell O. Wiese

DirectorRussell O. WieseSeptember 9, 2011By:
/s/ Xavier Gras Balaguer

DirectorXavier Gras BalaguerSeptember 9, 2011


15


LESCARDEN INC.


INDEX TO FINANCIAL STATEMENTS





Report of Independent Registered Public Accounting Firm


F-2Balance Sheets as of May 31, 2011 and 2010


F-3Statements of Operations for the Years Ended May 31, 2011 and 2010


F-4Statements of Stockholders’ Deficit for the Years Ended May 31, 2011 and 2010


F-5Statements of Cash Flow for the Years Ended May 31, 2011 and 2010


F-6Notes to Financial Statements


F-7 / F-11






F-1


MEYLER & COMPANY, LLC
 CERTIFIED PUBLIC ACCOUNTANTS
 ONE ARIN PARK
 1715 HIGHWAY 35
 MIDDLETOWN, NJ 07748
 
 
 
 Report of Independent Registered Public Accounting Firm
 
 
 To the Board of Directors and
 Stockholders of Lescarden Inc.
 
 We have audited the accompanying balance sheets of Lescarden Inc. as of May 31, 2011 and 2010, and the related statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended May 31, 2011. Lescarden Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
 
 We conducted our audits 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 audits 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, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the two-year period ended May 31, 2011, 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/ Meyler & Company, LLCMiddletown, New JerseySeptember 9, 2011






F-2


LESCARDEN INC.


BALANCE SHEETS




As of May 31,


2011



2010ASSETSCurrent assets:Cash and cash equivalents

$
10,780


$
137,928Accounts receivable, net of allowance for doubtful accounts of $19,396at May 31, 2011 and 2010, respectively


49,287



5,321Prepaid expenses


––



6,800Inventory


97,720



76,824Total current assets


157,787



226,873Deferred income tax asset, net of valuation allowance of $1,721,000and $1,681,000 at May 31, 2011 and 2010,  respectively


––



––Total assets

$
157,787



226,873LIABILITIES AND STOCKHOLDERS’ DEFICITLiabilities:Accounts payable and accrued expenses

$
221,106


$
174,844Shareholder loan


37,000



274,000Deferred revenue


4,075



33,134Deferred license fees


22,500



28,500Total current liabilities


284,681



510,478Stockholders' deficit:Convertible preferred stock - $.02 par value; $1.50 liquidation value; authorized 2,000,000 shares, issued and outstanding 92,000 shares


1,840



1,840Common stock - $.001 par value; authorized 200,000,000 issued and outstanding 40,076,783 and 30,943,450 shares respectively


40,077



30,943Additional paid-in capital


16,882,481



16,617,615Accumulated deficit


(17,051,292
)


(16,934,003
)Total Stockholders' deficit


(126,894
)


(283,605
)Total liabilities and stockholders' deficit

$
157,787


$
226,873




See Notes to Financial Statements
  F-3
  LESCARDEN INC.


STATEMENTS OF OPERATIONS




Year ended May 31,

2011


2010Revenues:Product sales

$
550,669


$
613,535License fees


6,000



82,304Interest income


25



23Total revenues


556,694



695,862Costs and expenses:Cost of product sales


181,994



174,026Salaries and wages


106,641



103,043Professional fees and consulting


173,215



163,623Rent and office expenses


112,968



129,505Insurance


44,714



42,989Other administrative expenses


29,363



34,367Interest expense


3,852



-Commission


21,236



31,200Total costs and expenses


673,983



678,753Net (loss) income

$
(117,289
)

$
17,109Net (loss) income per common share - basic and diluted

$
(0.00
)

$
0.00Weighted-average number of common shares outstanding:Basic


36,011,948



30,943,450Diluted


36,011,948



30,943,450




See Notes to Financial Statements




F-4





LESCARDEN INC.


STATEMENTS OF STOCKHOLDERS’ DEFICIT




Convertible

Preferred StockCommon Stock


Additional

Paid-in

Capital


Accumulated

Deficit


Stockholders’ Equity

(Deficit)Number of Shares


Par Value Amount


Number of Shares


Par Value AmountBalance at May 31,2009


92,000



1,840



30,943,450



30,943



16,617,615



(16,951,112
)


(300,714
)Net loss






















17,109



17,109Balance at May 31,2010


92,000


$
1,840



30,943,450


$
30,943


$
16,617,615


$
(16,934,003
)

$
(283,605
)Loan conversion










9,133,333



9,134



264,866







274,000Net income






















(117,289
)


(117,289
)Balance at May 31,2011


92,000


$
1,840



40,076,783


$
40,077


$
16,882,481


$
(17,051,292
)

$
(126,894
)




See Notes to Financial Statements
  F-5
  LESCARDEN INC.


STATEMENTS OF CASH FLOWS


Year ended May 31,

2011


2010Cash flows from operating activities:Net (loss) income

$
(117,289
)

$
17,109Adjustments to reconcile net (loss) income to net cash used in operating activitiesChanges in operating assets and liabilities:(Increase) decrease in accounts receivable


(43,966
))


17,829
)(Increase) decrease in inventory


(20,896
))


86,454Decrease (increase) in prepaid expense


6,800



(6,800
)Increase (decrease) in accounts payable and accrued expenses


46,262
)


(45,119
)(Decrease) increase in deferred revenue


(29,059
))


25,494Decrease in deferred license fees


(6,000
)


(82,304
)Net cash used in operating activities


(164,148
)


12,663Cash flow from financing activities:Increase in shareholder loan


37,000



85,000Cash provided by financing activities


37,000



85,000Net (decrease) increase in cash


(127,148
)


97,663Cash and cash equivalents at beginning of year


137,928



40,265Cash and cash equivalents at end of year

$
10,780


$
137,928
  Non-cash financing activitiesIncrease in common stock resulting from loan conversion


9,134Increase in paid-in capital resulting from loan conversion


264,866Decrease in shareholder loan


(274,000
)





See Notes to Financial Statements




F-6





LESCARDEN INC.


NOTES TO FINANCIAL STATEMENTS




1.
OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:




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. In its research and testing to date, the Company has discovered Catrix, a complex of mucopolysaccharides derived from bovine cartilage. The Company is currently selling products using CATRIXmaterials and is licensing its technologies in Canada, Europe and Korea.




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 $117,289 from operations for the year ended May 31, 2011, has a stockholders’ deficiency and 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 committed to provide loans to the Company as needed to fund operating expenses until the Company can return to profitability.




The Company’s plan and ability to continue as a going concern is primarily dependent upon maintaining regulatory certification in key markets in order to enable the Company to grow revenue through existing and new lines of business. There can be no assurance that the Company will be able to grow revenues or secure sufficient additional financing to meet future obligations in the event of a loss of the Company’s regulatory certification.




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 collectibility of the sales price is reasonably assured.




The deferred license fees of $22,500 stated on the balance sheet relate to license fees received from the Company's licensees in Korea which are amortized straight-line over the term of the license agreement.  The Korean licensee continues to seek regulatory approval for the Company’s product pursuant to the terms of the agreement but it is unclear if this process will be completed prior to the termination of the agreement in 2014.




The Company believes it has one business segment for financial reporting purposes since it operates in the medical products industry.




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.




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. At May 31, 2011, two customers accounted for 57% and 28% of the accounts receivable.




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.




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 warrants to purchase 120,000 shares of the Company’s common stock , were not included in the calculation, due to the fact that these warrants were anti-dilutive for the year ended May 31, 2010.




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 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.




F-7




LESCARDEN INC.
 NOTES TO FINANCIAL STATEMENTS


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 consolidated financial position, results of operations or cash flows.




In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) ASC 105 (formerly No. 168). The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (the “Codification”). This standard replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, and establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and non-authoritative. The FASB Accounting Standards Codification (“ASC”) will become the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of
authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. The adoption of the Codification changed the Company’s references to GAAP accounting standards but did not impact the Company’s results of operations, financial position or liquidity.




2.
INVENTORY:




Inventory at May 31, consists of the following:

2011


2010Finished goods

$
49,406


$
54,027Raw materials


48,314



22,797$
97,720


$
76,824




3.
STOCK OPTIONS AND WARRANTS:




In the year ended May 31, 1993, the Company approved the 1992 Employee Incentive Stock Plan (the "1992 Plan"). The 1992 Plan authorized the issuance of stock options, restricted shares of stock and stock bonus awards to eligible participants. The 1992 Plan provides for the reservation and availability of 2,000,000 shares of common stock, subject to adjustment for future stock splits, dividends, reorganizations and other similar events, at exercise prices not less than the fair market value at the date of grant. Options are exercisable from 12 months after the date of grant and expire 10 years from the date of grant. At May 31, 2011, no options were granted under the 1992 Plan.




The following is a summary of transactions relating to warrants which are granted at the discretion of the board of directors:




Number of Warrants Exercisable


Weighted-average Excise Price per ShareBalance at May 31, 2010


120,000


$
.17Expired


(120,000
)


.17Balance at May 31, 2011


––


$
––







F-8




LESCARDEN INC.
 NOTES TO FINANCIAL STATEMENTS


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. This determination requires significant judgments to be made by the Company. The following table sets forth the Company’s assets and liabilities that were measured at fair value as of May 31, 2011, by the level within the fair value hierarchy:


Total


Quoted Prices in

Active Markets for

Identical Assets

Level 1


Significant Other Observable

Inputs

Level 2


Significant

Unobservable

Inputs

Level 3Cash equivalents*

$
10,780


$
10,780$
10,780


$
10,780


$
—


$
—


———————


*
Cash equivalents consist of money market instruments with original maturity dates of less than three months for which the fair value is based on inputs observable in active markets for identical securities.




4.
MAJOR CUSTOMERS AND SUPPLIER:




During the year ended May 31, 2011, sales to two customers accounted for approximately 52% and 29% of net product sales, respectively. During the year ended May 31, 2010, sales to two customers accounted for approximately 72% and 17% of net product sales, respectively.








May 31,2011


2010United States

$
57,022


$
52,575Europe


323,350



438,999Asia Pacific


170,297



121,961$
550,669


$
613,535




The Company purchases its primary raw material from one vendor.




5.
COMMITMENTS AND CONTINGENCIES:




The Company has a non-cancelable lease with an unrelated third party to rent office space. The lease, which expires on January 31, 2016, is subject to escalations based on real estate taxes and utilities. The aggregate minimum rental payments under this lease for the year ended May 31, 2011 is as follows:





May 31, 2012

$
81,225May 31, 2013


83,662May 31, 2014


86,172May 31, 2015


88,757May 31, 2016


60,343$
400,159





The Company also pays rent to warehouses for storage of its finished goods and raw materials.  Rent expense charged to operations for the years ended May 31, 2011 and 2010 amounted to approximately $105,000 and $115,000, respectively.




F-9


LESCARDEN INC.
 NOTES TO FINANCIAL STATEMENTS
  On June 4, 2002, the Company announced that it had entered into a license agreement with another entity related to ICN granting this entity a 10-year exclusive license to market the Product in Canada. License fees were paid in the fiscal year ended May 31, 2003, upon the Company having secured registration and marketing approval for the Product from the Canadian Health Authorities. The Company terminated this agreement in June 2009 and fully amortized the related deferred license fees totaling $70,000 during the fiscal year ended May 31, 2010.
  On September 16, 2004, the Company announced that it had entered into a license agreement with Valeant Pharmaceuticals International (formerly ICN Iberica) granting Valeant a 10-year exclusive license to market Lescarden's proprietary product, Catrix Wound Dressing throughout Europe. This agreement expanded the existing relationship between the two companies. In July 2006, the company approved a sub-license agreement between Valeant and Smith and Nephew for distribution of Catrix wound dressing in Spain through June 15, 2009. The company terminated its agreements with Valeant except for distribution in Spain which expires on June 15, 2009. Due to the termination of the sub-license agreement in
June 2009, the remaining deferred license fees of approximately $5,000 associated with this agreement were fully amortized in the fiscal year ended May 31, 2010.




On December 22, 2004, the Company announced that it had entered into a license agreement with Daewoong Pharmaceutical Co. Ltd. of Seoul, Korea granting Daewoong a 10-year exclusive license to market Lescarden's proprietary product Catrix Wound Dressing in South Korea. Daewoong is the fourth largest pharmaceutical manufacturer and distributor in Korea. In the accompanying balance sheet, $22,500 of license fees received from this agreement is included in deferred license fees at May 31, 2011.




6.
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 (aggregating $138,000). Additionally, holders of preferred stock are entitled to vote for directors of the Company on a one-share/one-vote basis.




7.
INCOME TAXES:




The Company has net operating loss carry forwards of approximately $5,061,000 available to reduce future taxable income, which expire in various years through 2031.




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, 2011 and 2010 respectively:




2011


2010Gross deferred tax assets

$
1,721,000


$
1,681,000Valuation allowance


(1,721,000
)


(1,681,000
)Net deferred income tax asset

$
-0-


$
-0-




F-10




LESCARDEN INC.
 NOTES TO FINANCIAL STATEMENTS
  A reconciliation of the effective income tax rate to the statutory rate is as follows:
 
 Year ended May 31,

2011


2010Tax benefit at federal statutory rate


(34
)%


(34
)%Increase in valuation allowance


34



34-0-
%


-0-
%
 
 Effective January 1, 2007, the Company adopted the provisions of FASB ASC 740, "Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109." FIN 48 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements in accordance with SFAS No. 109. Tax positions must meet a "more-likely-than-not" recognition threshold at the effective date to be recognized upon the adoption of ASC 740 and in subsequent periods. Upon the adoption of ASC 740, the Company had no unrecognized tax benefits.
  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,
2011.
  The tax years 2007 through 2010 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.




8.
RELATED PARTY TRANSACTIONS:




During the year ended May 31, 2011, the Chairman of the Board and major stockholder of the Company provided additional loans to the Company totaling $37,000. The aggregate balance at May 31, 2011 of $37,000 of shareholder loans are interest bearing and due on demand. In November 2010, the Company reached an agreement with the Chairman of the Board and major stockholder to convert the $274,000 shareholder loan during the 2011 fiscal year to common stock. As a result of the conversion, there was a change of control with the benefical ownership of the Chairman of the Board increasing from 41.15% to 54.56%. As such, the Chairman of the Board has the effective power to control the vote on substantially all matters
requiring shareholder approval.




During the year ended May 31, 2011, 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 $21,236 and $31,200 during the year ended May 31, 2011 and 2010, respectively.