U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB - Quarterly or Transitional Report (Added by 34-30968, eff. 8/13/93, as amended) (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 31,2006. ----------------- [ ] 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 small business issuer as specified in its charter) NEW YORK 13-2538207 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 420 LEXINGTON AVENUE, NEW YORK SUITE 212 10170 ---------------------------------------- ------------------- (Address of principle executive offices) (Zip Code) Issuer's telephone number (212) 687-1050 -------------- ________________________________________________________________. (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Class Outstanding at October 6, 2006 ---------------------------- -------------------------------- Common Stock $.001 par value 31,057,418 LESCARDEN INC. CONDENSED BALANCE SHEETS ASSETS August 31,2006 May 31, 2006 (UNAUDITED) (AUDITED) ---------------- --------------- Current Assets: Cash and cash equivalents $ 952,762 $ 1,094,677 Accounts Receivable 89,018 68,823 Inventory 198,599 202,466 ---------------- --------------- Total Current Assets 1,240,379 1,365,966 Deferred Income Tax Asset, net of valuation allowance of $1,736,000 and $1,687,000 at August 31, 2006 and May 31, 2006, respectively Total Assets $ 1,240,379 $ 1,365,966 LIABILITIES AND STOCKHOLDERS' EQUITY Currents Liabilities: Accounts payable and accrued expenses $ 142,630 $ 86,536 Deferred license fees 1,105,750 1,143,500 -------------- ------------- Total liabilities 1,248,380 1,230,036 Commitments and Contingencies Stockholders' Equity: Convertible Preferred Stock 1,840 1,840 Common Stock 31,057 31,057 Additional Paid-In Capital 16,634,596 16,634,596 Accumulated Deficit (16,675,494) (16,531,563) -------------- -------------- Stockholders'(deficiency) Equity <8,001> 135,930 -------------- -------------- Total Liabilities and Stockholders'(deficiency)Equity $ 1,240,379 $ 1,365,966 -------------- -------------- See notes to financial statements LESCARDEN INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) For the Three Months Ended August 31, 2006 2006 2005 ----------- ---------- Total Revenues $ 118,910 $ 482,129 ----------- ---------- Costs and Expenses: Cost of Sales 58,780 256,606 Salaries Officer 37,500 31,250 Salaries - Office 24,231 33,478 Professional Fees and Consulting 61,161 58,612 Research and Development - 20,397 Rent and Office Expenses 32,416 36,486 Travel and Meetings 30,817 26,127 Payroll and Other Taxes 6,563 4,740 Insurance 4,671 10,173 Other Administrative Expenses 6,702 11,916 ----------- ---------- Total Costs and Expense 262,841 489,785 Net Income (Loss) $ (143,931) $ (7,656) ----------- ----------- Net Income (Loss) Per Share - Basic and Diluted $(0.00) $(0.00) ----------- ----------- ----------- ----------- Weighted Average Number of Common Shares Outstanding - Basic and Diluted 31,057,418 30,907,418 ----------- ----------- ----------- ----------- See notes to financial statements LESCARDEN INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Three Months Ended August 31, 2006 2006 2005 ------------- -------------- Cash Flows Used in Operations Net Loss $ (143,931) $ (7,656) Adjustments to reconcile net loss to net cash used in operating activities: Changes in operating assets and liabilities (Increase) in accounts receivable (20,195) (410,288) Decrease(Increase) in inventory 3,867 (1,144) Decrease in prepaid expense 2,959 Increase(Decrease)in accounts payable and accrued expenses 56,094 (4,107) (Decrease)in deferred license fees (37,750) (28,375) ------------ ------------- Net Cash Flow Used In Operations (141,915) (448,611) ------------ ------------- Decrease in cash (141,915) (448,611) Cash - Beginning of Period 1,094,677 1,030,019 ------------ ------------- Cash - End of Period $ 952,762 $ 581,408 ------------ ------------- See notes to financial statements LESCARDEN INC. (UNAUDITED) NOTES TO FINANCIAL STATEMENTS August 31, 2006 Note 1 - General: The accompanying unaudited financial statements include all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods. The statements have been prepared in accordance with the requirements for Form 10-QSB and, therefore, do not include all disclosures or financial details required by generally accepted accounting principles. These condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended May 31, 2006. The results of operations for the interim periods are not necessarily indicative of results to be expected for a full year's operations. Note 2 - Operations and Significant Accounting Policies: 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. The deferred license fee of $1,105,750 stated on the balance sheet relates to licensee fees received from the Company's licensees and is being amortized over the term of the license agreements. Note 3 - Segment Reporting: Due to the materiality of the sales of its cosmetics product and food supplements in addition to the company's CATRIX(R) Wound Dressing product, the Company believes it has one business segment for financial reporting purposes. Note 4 - Inventory: Inventory at August 31, 2006 consists of the following: Finished Goods and deposit $ 80,649 Raw Materials 117,950 ----------- $ 198,599 Note 5. Recent Accounting Pronouncements In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006.The Company is currently reviewing this new standard to determine its effects, if any, on its results of operations or financial position. LESCARDEN INC. Management's Discussion and Analysis of Financial Condition and Results of Operations August 31, 2006 Results of Operations Overview 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, skin care, osteoarthritis and cancer applications. In the ensuing years, significant studies substantiated the ability of Catrix(R), Lescarden's proprietary cartilage powder, to function as a biological response modifier, by stimulating the body's immune system. Further studies indicated that, Catrix could also be effective against diseases such as arthritis, scleroderma, psoriasis and even cancer. Due to the amount of capital required to conduct ongoing research for new product development, as well as the large scale testing necessary to secure regulatory approvals, the Company in recent years has shifted its focus to 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(R) Wound Dressing, a powder derived from bovine cartilage that has been shown in clinical tests to be effective, when topically applied, in the management of an array of chronic lesions and burns, including decubitus ulcers, venous stasis ulcers,and diabetic ulcers. The product has been approved for sale by the FDA and the Spanish Health Ministry. Under an exclusive license, Valeant Pharmaceuticals International is currently marketing Catrix Wound Dressing in the European Market countries, and is awaiting regulatory approval to commence commercialization in Russia, the Balkan States and the CIS States. Lescarden also derives revenue from a line of Catrix-based skin care products targeting the Plastic Surgery, Dermatology and Spa markets. Sales of two nutritional supplements, BIO-CARTILAGE(R) and a patented glucosamine polymer, Poly-Nag(R), also contribute to the Company's overall sales. Critical 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 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 amortized over the term of the license agreements. 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. Three months ended August 31, 2006 compared to August 31, 2005 The Company's revenues decreased in the fiscal quarter ended August 31, 2006 compared to August 31, 2005 by 75% or $363,219 primarily due to decreased sales of Catrix(R) Wound Dressing to its licensees. The decrease in product sales was largely due to significant inventory that Valeant, the Company's European licensee, had acquired for the region toward the end of fiscal 2006, which was still being worked off in this quarter. In June, Lescarden reached an agreement with Smith & Nephew, a leader in the wound care market to distribute Catrix Wound Dressing in Spain to general practitioners and primary care physicians, leaving Valeant to cover the dermatology segment of the market. Smith & Nephew has extensive field experience and a solid reputation among physicians it is already contacting. The Company believes this new arrangement will help to reinvigorate Spanish sales of the Wound Dressing. In addition, the Company continues to work with licensees in the non-EU countries and the Far East to obtain the various marketing and reimbursement approvals necessary to facilitate large scale use of the Company's products. Total costs and expenses during the three months ended August 31, 2006 were 47% or $229,944 lower than those of the comparative prior year period. The decrease was principally due to lower, cost of product sales of $197,826 and research and development of $20,397. Liquidity and Capital Resources Overview The Company had a loss of $143,931 for the three months ended August 31, 2006 principally as the result of lower revenues. Present Liquidity As of August 31, 2006, the Company's current assets exceeded its accounts payable and accrued expenses by $1,097,749. The Company's cash and cash equivalents balance decreased by $141,915 in the quarter ended August 31, 2006 to $952,762. The material direct costs related to the Catrix(R) Wound Dressing product were incurred in periods prior to those presented. The estimated costs necessary to support the product's development, other than to finance significant inventory levels, is not expected to be significant. The Company has no material commitments for capital expenditures at August 31, 2006. Disclosure 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 Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company's management, including the Chief Executive Officer and the 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 Officer and the Company's 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 Officer 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 quarterly report on Form 10QSB. 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 quarterly report on Form 10-QSB. LESCARDEN INC. Part II - Other Information Item 6. Exhibits and Reports on Form 8-K (A) Reports on Form 8-K: There were no reports on Form 8-K filed for the three months ended August 31, 2006. INDEX TO EXHIBITS 31 Certification pursuant to Exchange Act Rule 13a - 14 (a)/15d-14(a) 99.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 ofthe Sarbanes-Oxley Act of 2002 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LESCARDEN INC. (Registrant) Date: October 9, 2006 S/William E. Luther William E. Luther President and Chief Executive Officer