Unassociated Document
As
filed with the Securities and Exchange Commission on February 9,
2005 |
Reg.
No. 333-___ |
U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
SB-2
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Arbios
Systems, Inc.
(Name
of Small Business Issuer in its Charter)
Nevada |
3841 |
91-1955323 |
(State
of jurisdiction of incorporation or organization) |
(Primary
Standard Industrial Classification Code Number) |
(I.R.S.
Employer
Identification
No.) |
8797
Beverly Blvd., Suite 206
Los
Angeles, California 90048
(310)
657-4898
(Address
and telephone number of principal executive offices and principal place of
business)
Jacek
Rozga, M.D., Ph. D
President
8797
Beverly Blvd., Suite 206
Los
Angeles, California 90048
(310)
657-4898
(Name,
address and telephone number of agent for service)
Copy
to:
Istvan
Benko, Esq.
Troy
& Gould Professional Corporation
1801
Century Park East, Suite 1600
Los
Angeles, California 90067
(310)
553-4441
Approximate
date of proposed sale to the public: From time to time after the date this
registration statement becomes effective.
If
this Form is filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If
this Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
this Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. o
|
CALCULATION OF
REGISTRATION FEE |
Title
of each class of securities to be registered |
Amount
to be registered |
Proposed maximum offering
price per unit(1) |
Proposed
maximum aggregate offering price(1) |
Amount
of registration fee(1) |
Common
stock, par value $0.001 |
4,602,122
(2) |
$2.95 |
$13,576,259 |
$1,597.93 |
___________________
|
|
(1) |
The
price is estimated in accordance with Rule 457(c) under the Securities Act
of 1933, as amended, solely for the purpose of calculating the
registration fee and represents the average of the high and the low prices
of the Common Stock on February 8, 2005, as reported on the OTC Bulletin
Board. |
(2) |
Of
these shares, 2,991,812 are currently outstanding shares to be offered for
resale by selling stockholders and 1,610,310 shares are currently unissued
shares to be offered for resale by selling stockholders following issuance
upon exercise of outstanding warrants. In addition to the shares set forth
in the table, the amount to be registered includes an indeterminate number
of shares issuable upon exercise of the warrants, as such number may be
adjusted as a result of stock splits, stock dividends and similar
transactions in accordance with Rule 416. |
|
|
The
registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
PROSPECTUS
ARBIOS
SYSTEMS, INC.
4,602,122
Shares of Common Stock
This
prospectus relates to the sale or other disposition of up to 2,991,812 shares of
our currently outstanding shares of common stock that are owned by some of our
stockholders, and 1,610,310 shares of our common stock issuable upon the
exercise of currently outstanding common stock purchase warrants held by some of
our stockholders. For a list of the selling stockholders, please see "Selling
Stockholders." We are not selling any shares of common stock in this offering
and therefore will not receive any proceeds from this offering. We will,
however, receive the exercise price of the warrants if and when those warrants
are exercised by the selling stockholders. None of the warrants has been
exercised as of the date of this prospectus. We will pay the expenses of
registering these shares.
Our
common stock is traded in the over-the-counter market and is quoted on the OTC
Bulletin Board under the symbol ABOS. On February 8, 2005, the closing price of
our common stock was $2.95 per share.
The
shares included in this prospectus may be disposed of on any stock exchange,
market or trading facility on which the shares are traded or in private
transactions. These dispositions may be at fixed prices, at prevailing market
prices at the time of sale, at prices related to the prevailing market price, at
varying prices determined at the time of sale, or at negotiated prices. We will
not control or determine the price at which a selling stockholder decides to
sell or otherwise dispose of its shares. Brokers or dealers effecting
transactions in these shares should confirm that the shares are registered under
applicable state law or that an exemption from registration is available.
You
should understand the risks associated with investing in our common stock.
Before making an investment, read the “Risk Factors,” which begin on page 4 of
this prospectus.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of the prospectus. Any representation to the contrary is a criminal
offense.
The
date of this prospectus is February __, 2005.
TABLE
OF CONTENTS
Page
Prospectus
Summary |
1 |
Risk
Factors |
4 |
Forward-Looking
Statements |
13 |
Use
of Proceeds |
14 |
Market
Price of Common Stock and Other Shareholder Matters |
14 |
Management’s
Discussion and Analysis or Plan of Operation |
15 |
Business |
20 |
Directors,
Executive Officers, Promoters and Control Persons |
40 |
Executive
Compensation |
42 |
Security
Ownership of Certain Beneficial Owners and Management |
45 |
Selling
Stockholders |
47 |
Plan
of Distribution |
51 |
Certain
Relationships and Related Transactions |
53 |
Description
of Securities |
54 |
Change
of Accountants |
56 |
Interests
of Named Experts and Counsel |
57 |
Disclosure
of Commission Position of Indemnification for Securities Act
Liabilities |
57 |
Legal
Matters |
58 |
Where
You Can Find More Information |
58 |
Glossary
of Terms |
58 |
Index
to Financial Statements |
60 |
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus; it does
not contain all of the information you should consider before investing in our
common stock. Read the entire prospectus before making an investment
decision.
Throughout
this prospectus, the terms “we,” “us,” “our,” and “our company” refer to Arbios
Systems, Inc., a Nevada corporation formerly known as Historical Autographs
U.S.A., Inc., and, unless the context indicates otherwise, also includes our
wholly-owned subsidiary, Arbios Technologies, Inc., a Delaware
corporation.
A
glossary of certain terms used in this prospectus is contained on page 58
under “Glossary of Terms.”
Company
Overview
Arbios
Systems, Inc. is a Nevada corporation based in Los Angeles, California. Through
our wholly owned subsidiary, Arbios Technologies, Inc. (“ATI”), a Delaware
corporation, we seek to develop, manufacture and market liver assist devices to
meet the urgent need for therapy of liver failure.
Products
Under Development.
We currently have two types of products in development for the treatment of
acute and chronic liver failure; a novel extracorporeal (outside of the human
body) blood
purification therapy called selective plasma filtration therapy (“SEPET™”) and
an extracorporeal, bioartificial liver device that contains biologic components
(in
this case, pig liver cells).
Our
SEPET™ product consists of a single-use cartridge that is designed to remove
toxins and mediators of inflammation in the patient’s blood. The SEPET™
cartridge is placed on a blood perfusion apparatus (such as a standard kidney
dialysis machine) that is attached to the patient’s blood circulation system. At
the end of the selective plasma filtration treatment, the SEPET™ disposable
cartridge is discarded, and a new cartridge is used for the next therapy.
We
currently have the two following bioartificial liver systems in development that
are designed to provide essential liver functions. Both bioartificial liver
systems are based on similar technologies and both depend upon our proprietary
method of procuring, cryopreserving (freezing), storing and handling the porcine
hepatocytes (pig liver cells).
HepatAssist-2™.
In April 2004 we purchased a bioartificial liver system from Circe Biomedical,
Inc., known as the “HepatAssist” system. The HepatAssist system we purchased
included a standard hollow fiber single-use cartridge designed to contain
approximately 5 billion viable pig cells, a
charcoal column and
a proprietary perfusion apparatus. We believe that the original HepatAssist
system can be enhanced by, among other things, increasing the number of viable
pig cells in the cartridge to 15 billion and by using the perfusion platform we
plan to use for LIVERAID™. We refer to our enhanced version of the HepatAssist
system as our “HepatAssist-2™.”
We are currently testing, and expect to use the PERFORMER as the perfusion
platform for our HepatAssist-2™ system. RanD
S.r.l., the manufacturer of the
PERFORMER, has equipped the PERFORMER with proprietary software and a tubing set
specifically designed for use with our HepatAssist-2™ system.
LIVERAID™.
In 2000 we commenced the development of LIVERAID™, a bioartificial liver that
incorporates several proprietary components and technologies, including a
single-use dual hollow-fiber cartridge with fiber-within-fiber geometry and a
blood purification circuit utilizing sorbents. The cell module is attached to a
base instrument which facilitates perfusion of the LIVERAID™ with a patient’s
plasma. LIVERAID™ currently is in pre-clinical development.
We
purchased the HepatAssist system and other assets from Circe Biomedical in order
to facilitate and accelerate the development of LIVERAID™. However, since the
original HepatAssist system has already been tested on over 100 patients in
FDA-approved clinical studies and we acquired an FDA- approved Phase III IND
protocol for that system, we currently intend to focus our resources first on
the development of our HepatAssist-2™ system and then on the development of
LIVERAID™. As a result, we are currently evaluating the possibility of
conducting clinical studies of the HepatAssist-2™ system under a modified
version of the FDA- approved Phase III IND protocol that we acquired. The timing
and allocation of resources to the development of the HepatAssist-2™ and/or
LIVERAID™ systems will depend upon various factors, including FDA regulatory
requirements and our future financial resources.
Certain
countries, including Japan, France and the United Kingdom, have in the past
objected to transplantation of animal cells in humans because of the risk of
transmitting viruses from the animals (including pigs) to humans. Since both of
our bioartificial liver systems use pig liver cells to provide essential liver
functions, these regulatory objections may prevent our bioartificial liver
products, if developed and approved by the FDA, from being marketed in those
other countries. The original HepatAssist system was used in FDA-approved
clinical studies using pig cells without any signs of transmission of viruses of
disease from the pigs to humans, and the FDA has approved a new IND protocol
that also contemplates the use of pig cells.
We
currently own 11 U.S. patents applicable to our liver support technologies, one
U.S. patent application, and three foreign patent applications. In addition, we
are the licensee of seven patents.
Company
History.
Arbios Systems, Inc. was originally incorporated in February 1999 as Historical
Autographs U.S.A., Inc. (“HAUSA”). Until October 2003, HAUSA was an e-commerce
based company engaged in the business of acquiring and marketing historical
documents. On October 30, 2003, HAUSA completed a reorganization (the
“Reorganization”) in which HAUSA, through its wholly-owned subsidiary, acquired
all of the outstanding shares of ATI in exchange for 11,930,598 shares of HAUSA
common stock. As a result of the Reorganization, ATI became the wholly-owned
subsidiary of HAUSA. After the Reorganization, HAUSA changed its name to “Arbios
Systems, Inc.,” replaced its officers and directors with those of ATI, closed
its offices, ceased its e-commerce business, and moved its offices to Los
Angeles, California. We currently do not plan to conduct any business other than
the business of developing liver assisted devices as heretofore conducted by
ATI.
Our
principal operations and executive offices are located at 8797 Beverly Blvd.,
Suite 206, Los Angeles, California 90048 and our telephone number is (310)
657-4898. We also maintain a web site at www.arbios.com. The information
on our web site is not, and you must not consider such information to be, a part
of this prospectus.
Recent Developments
On
January 11, 2005, we completed a $6,611,905 private equity financing to a group
of institutional investors and accredited investors. In the offering, we sold
2,991,812 shares of our common stock at a price of $2.21 per share to the
investors and issued to them warrants to purchase an additional 1,495,906 shares
of our common stock at an exercise price of $2.90 per share. The warrants are
exercisable for five years and can be redeemed by us after January 11, 2007 if
the average trading price of our common stock for 20 consecutive trading days is
equal to or greater than $5.80 and the average trading volume of the common
stock is at least 100,000 shares during those 20 days. The proceeds of the
private equity financing will be used to fund our general working capital needs
and the further development of our products. This prospectus is part of the
registration statement that we filed as a result of our agreement to register
for resale under the Securities Act both the shares of common stock sold in that
offering and the shares of common stock issuable upon exercise of the warrants
sold in the financing. Rodman & Renshaw acted as our placement agent in the
offering, and we issued to Rodman & Renshaw warrants to purchase 114,404
shares of common stock, which warrant shares are also included in this
prospectus.
The
Offering
Common
stock covered hereby |
|
4,602,122
shares, consisting of 2,991,812 outstanding shares owned by selling
stockholders and 1,610,310 shares issuable to selling stockholders upon
exercise of outstanding warrants. |
|
|
|
Common
stock currently outstanding |
|
16,207,909
shares (1) |
|
|
|
Common
stock to be outstanding assuming the sale of all shares covered hereby and
assuming no exercise of the warrants for the shares covered by this
prospectus |
|
16,207,909
shares (1) |
|
|
|
Common
stock to be outstanding assuming the sale of all shares covered herby and
assuming the exercise of all warrants for the shares covered by this
prospectus |
|
17,818,219
shares (1) |
|
|
|
OTC
Bulletin Board Trading Symbol |
|
ABOS |
|
|
|
Risk
Factors |
|
An
investment in our common stock involves significant risks. See “Risk
Factors” beginning on page 4 |
__________________________________
(1)
In addition to these outstanding shares of common stock, as of February 1, 2005,
there were outstanding (i) options to purchase 743,000 shares of our common
stock (with exercise prices ranging from $0.15 per share to $3.40 per share),
and (ii) warrants (other than the warrants owned by the selling stockholders) to
purchase 5,672,500 shares of our common stock (with exercise prices ranging from
$0.15 per share to $3.50 per share).
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below and the other information contained
in this prospectus and in the documents incorporated by reference before
deciding to invest in our company. If any of the following risks actually occur,
our business, financial condition or operating results and the trading price or
value of our securities could be materially adversely affected.
RISKS
RELATED TO OUR BUSINESS
We
are an early-stage company subject to all of the risks and uncertainties of a
new business, including the risk that we may never market any products or
generate revenues.
We
are an early-stage company that has not generated any operating revenues to date
(our only revenues were two government research grants). Accordingly, while we
have been in existence since February 1999, and ATI, our operating subsidiary,
has been in existence since 2000, we should be evaluated as an
early-stage
company, subject to all of the risks and uncertainties normally associated with
an
early-stage
company. As an
early-stage,
we expect to incur significant operating losses for the foreseeable future, and
there can be no assurance that we will be able to validate and market products
in the future that will generate revenues or that any revenues generated will be
sufficient for us to become profitable or thereafter maintain
profitability.
We
have had no product sales to date, and we can give no assurance that there will
ever be any sales in the future.
All
of our products are still in research or development, and no revenues have been
generated to date from product sales. There is no guarantee that we will ever
develop commercially viable products. To become profitable, we will have to
successfully develop, obtain regulatory approval for, produce, market and sell
our products. There can be no assurance that our product development efforts
will be successfully completed, that we will be able to obtain all required
regulatory approvals, that we will be able to manufacture our products at an
acceptable cost and with acceptable quality, or that our products can be
successfully marketed in the future. We currently do not expect to receive
significant revenues from the sale of any of our products for at least the next
three years.
Before
we can market any of our products, we must obtain governmental approval for each
of our products, the application and receipt of which is time-consuming, costly
and uncertain.
The
development, production and marketing of our products are subject to extensive
regulation by government authorities in the United States and other countries.
In the U.S., SEPET™ and our bioartificial liver systems will require approval
from the FDA prior to clinical testing and commercialization. The process for
obtaining FDA approval to market therapeutic products is both time-consuming and
costly, with no certainty of a successful outcome. This process includes the
conduct of extensive pre-clinical and clinical testing, which may take longer or
cost more than we currently anticipate due to numerous factors, including
without limitation, difficulty in securing centers to conduct trials, difficulty
in enrolling patients in conformity with required protocols and/or projected
timelines, unexpected adverse reactions by patients in the trials to our
liver
assist systems,
temporary suspension and/or complete ban on trials of our products due to the
risk of transmitting pathogens from the xenogeneic biologic component, and
changes in the FDA’s requirements for our testing during the course of that
testing. We have not yet established with the FDA the nature and number of
clinical trials that the FDA will require in connection with its review and
approval of either SEPET™ or our bioartificial liver systems and these
requirements may be more costly or time-consuming than we currently
anticipate.
Each
of our products in development is novel both in terms of its composition and
function. Thus, we may encounter unexpected safety, efficacy or manufacturing
issues as we seek to obtain marketing approval for products from the FDA, and
there can be no assurance that we will be able to obtain approval from the FDA
or any foreign governmental agencies for marketing of any of our products. The
failure to receive, or any significant delay in receiving, FDA approval, or the
imposition of significant limitations on the indicated uses of our products,
would have a material adverse effect on our business, operating results and
financial condition. The health regulatory authorities of certain countries,
including those of Japan, France and the United Kingdom, have previously
objected, and other countries’ regulatory authorities could potentially object
to the marketing of any therapy that uses pig liver cells (which our
bioartificial liver systems are designed to utilize) due to safety concerns that
pig cells may transmit viruses or diseases to humans. If the health regulatory
agencies of other countries impose a ban on the use of therapies that
incorporate pig cells, such as our bioartificial liver systems, we would be
prevented from marketing our products in those countries. If we are unable to
obtain the approval of the health regulatory authorities in Japan, France, the
United Kingdom or other countries, the potential market for our products will be
reduced.
Because
our products are at an early stage of development and have never been marketed ,
we do not know if any of our products will ever be approved for marketing, and
any such approval will take several years to obtain.
Before
obtaining regulatory approvals for the commercial sale of our products,
significant and potentially very costly preclinical and clinical work will be
necessary. There can be no assurance that we will be able to successfully
complete all required testing of SEPET™ or our bioartificial liver systems.
While the time periods for testing our products and obtaining the FDA’s approval
are dependent upon many future variable and unpredictable events, we estimate
that it could take between two to three years to obtain approval for SEPET™,
approximately five years for LIVERAID™, and three to four years for
HepatAssist-2™. We have not independently confirmed any of the third party
claims made with respect to patents, licenses or technologies we have acquired
concerning the potential safety or efficacy of these products and technologies.
Before we can begin clinical testing of these products, we will need to file an
investigational new drug application (“IND”) for LIVERAID™,
amend a Phase III IND to resume clinical testing of our HepatAssist-2™
bioartificial liver, and
file an investigational drug exemption for SEPET™ with the FDA, which
applications will have to be cleared by the FDA. The FDA may require significant
revisions to our clinical testing plans or require us to demonstrate efficacy
endpoints that are more time-consuming or difficult to achieve than what we
currently anticipate. We have not yet completed preparation of either the INDs
or the investigational drug exemption application, and there can be no assurance
that we will have sufficient experimental
and technology validation
data to justify the submission of said applications. Because of the early stage
of development of each of our products, we do not know if we will be able to
generate clinical data that will support the filing of the FDA applications for
these products or the FDA’s approval of any product marketing approval
application or IND that we do file.
The
cost of conducting clinical studies of HepatAssist-2™ exceeds our current
financial resources. Accordingly, we will not be able to conduct such studies
until we obtain additional funding.
We
are currently considering requesting FDA approval for a Phase III clinical study
of the HepatAssist-2™ system. Such a request will require that we supplement
and/or amend the existing Phase III IND that was approved by the FDA for the
original HepatAssist system on which the HepatAssist-2™ is based. The
preparation of a modified or supplemented Phase III IND will be expensive and
difficult to prepare. Although the cost of completing the Phase III study in the
manner that we currently contemplate is uncertain and could vary significantly,
if that Phase III clinical study is authorized by the FDA, we currently estimate
that the cost of conducting that study would be between $15 million and $20
million. We currently do not have sufficient funds to conduct this study and
have not identified any sources for obtaining the required funds. In addition,
no assurance can be given that the FDA will accept our proposed changes to the
previously approved Phase III IND. The clinical tests that we would conduct
under any FDA-approved protocol are very expensive to conduct and will cost much
more than our current financial resources. Accordingly, even if the FDA approves
the modified Phase III IND that we submit for HepatAssist-2™, we will not be
able to conduct any clinical trials until we raise substantial amounts of
additional financing.
Our
bioartificial liver systems utilize a biological component obtained from pigs
that could prevent or restrict the release and use of those
products.
Use
of liver cells harvested from pig livers carries a risk of transmitting viruses
harmless to pigs but deadly to humans. For instance, all pig cells carry genetic
material of the porcine endogenous retrovirus (“PERV”), but its ability to
infect people is unknown. Repeated testing, including a 1999 study of 160
xenotransplant (transplantation from animals to humans) patients and the
Phase II/III testing of the HepatAssist system by Circe Biomedical, Inc.,
has turned up no sign of the transmission of PERV to humans. Still, no one can
prove that PERV or another virus would not infect bioartificial liver-treated
patients and cause potentially serious disease. This may result in the FDA or
other health regulatory agencies not approving our bioartificial liver systems
or subsequently banning any further use of our product should health concerns
arise after the product has been approved. At this time, it is unclear whether
we will be able to obtain clinical and product liability insurance that covers
the PERV risk.
In
addition to the potential health risks associated with the use of pig liver
cells, our use of xenotransplantation technologies may be opposed by individuals
or organizations on health, religious or ethical grounds. Certain animal rights
groups and other organizations are known to protest animal research and
development programs or to boycott products resulting from such programs.
Previously, some groups have objected to the use of pig liver cells by other
companies, including Circe Biomedical, Inc., that were developing bioartificial
liver support systems, and it is possible that such groups could object to our
bioartificial liver system. Litigation instituted by any of these organizations,
and negative publicity regarding our use of pig liver cells in a bioartificial
liver device, could have a material adverse effect on our business, operating
results and financial condition.
Because
our products represent new approaches to treatment of liver disease, there are
many uncertainties regarding the development, the market acceptance and the
commercial potential of our products.
Our
products will represent new therapeutic approaches for disease conditions. We
may, as a result, encounter delays as compared to other products under
development in reaching agreements with the FDA or other applicable governmental
agencies as to the development plans and data that will be required to obtain
marketing approvals from these agencies. There can be no assurance that these
approaches will gain acceptance among doctors or patients or that governmental
or third party medical reimbursement payers will be willing to provide
reimbursement coverage for our products. Moreover, we do not have the marketing
data resources possessed by the major pharmaceutical companies, and we have not
independently verified the potential size of the commercial markets for any of
our products. Since our products will represent new approaches to treating liver
diseases, it may be difficult, in any event, to accurately estimate the
potential revenues from our products, as there currently are no directly
comparable products being marketed.
Despite
our recent $6.6 million private equity financing, we still need to obtain
significant additional capital to complete the development of our liver assist
devices, which additional funding may dilute our existing
stockholders.
Based
on our current proposed plans and assumptions, we anticipate that our existing
funds will be sufficient to fund our operations and capital requirements for at
least the 12-month period following the date of this prospectus. However, the
clinical development expenses of our products will be very substantial. Based on
our current assumptions, we estimate that the cost of developing SEPET™ into a
commercial product will approximately $3 million to $4 million, the cost of
developing HepatAssist-2™ into
a commercial product will
be between $15 million and $20 million, and the cost of developing LIVERAID™
into
a commercial product will
be between $20 million and $25 million. These amounts, which could vary
substantially if our assumptions are not correct, are well in excess of the
amount of cash that we currently have available to us. Accordingly, we will have
to (i) obtain additional debt or equity financing in order to fund the
further development of our products and working capital needs, and/or
(ii) enter into a strategic alliance with a larger pharmaceutical or
biomedical company to provide its required funding. The amount of funding needed
to complete the development of one or both of our products will be very
substantial and may be in excess of our ability to raise capital.
We
have not identified the sources for the additional financing that we will
require, and we do not have commitments from any third parties to provide this
financing. There can be no assurance that sufficient funding will be available
to us at acceptable terms or at all. If we are unable to obtain sufficient
financing on a timely basis, the development of our products could be delayed
and we could be forced to reduce the scope of our pre-clinical and clinical
trials or otherwise limit or terminate our operations altogether. Any equity
additional funding that we obtain will reduce the percentage ownership held by
our existing security holders.
As
a new small company that will be competing against numerous large, established
companies that have substantially greater financial, technical, manufacturing,
marketing, distribution and other resources than us, we will be at a competitive
disadvantage.
The
pharmaceutical, biopharmaceutical and biotechnology industry is characterized by
intense competition and rapid and significant technological advancements. Many
companies, research institutions and universities are working in a number of
areas similar to our primary fields of interest to develop new products, some of
which may be similar and/or competitive to our products. Furthermore, many
companies are engaged in the development of medical devices or products that are
or will be competitive with our proposed products. Most of the companies with
which we compete have substantially greater financial, technical, manufacturing,
marketing, distribution and other resources than us.
We
will need to outsource and rely on third parties for the clinical development
and manufacture and marketing of our products.
Our
business model calls for the outsourcing of the clinical development,
manufacturing and marketing of our products in order to reduce our capital and
infrastructure costs as a means of potentially improving the profitability of
these products for us. We have not yet entered into any strategic alliances or
other licensing or contract manufacturing arrangements (except for the
contractual manufacturing of LIVERAID™ modules by Spectrum Labs) and there can
be no assurance that we will be able to enter into satisfactory arrangements for
these services or the manufacture or marketing of our products. We will be
required to expend substantial amounts to retain and continue to utilize the
services of one or more clinical research management organizations without any
assurance that the products covered by the clinical trials conducted under their
management ultimately will generate any revenues for SEPET™ and/or our
bioartificial liver systems. Consistent with our business model, we will seek to
enter into strategic alliances with other larger companies to market and sell
our products. In addition, we may need to utilize contract manufacturers to
manufacture our products or even our commercial supplies, and we may contract
with independent sales and marketing firms to use their pharmaceutical sales
force on a contract basis.
To
the extent that we rely on other companies to manage the conduct of our clinical
trials and to manufacture or market our products, we will be dependent on the
timeliness and effectiveness of their efforts. If the clinical research
management organization that we utilize is unable to allocate sufficient
qualified personnel to our studies or if the work performed by them does not
fully satisfy the rigorous requirement of the FDA, we may encounter substantial
delays and increased costs in completing our clinical trials. If the
manufacturers of the raw material and finished product for our clinical trials
are unable to meet our time schedules or cost parameters, the timing of our
clinical trials and development of our products may be adversely affected. Any
manufacturer that we select may encounter difficulties in scaling-up the
manufacture of new products in commercial quantities, including problems
involving product yields, product stability or shelf life, quality control,
adequacy of control procedures and policies, compliance with FDA regulations and
the need for further FDA approval of any new manufacturing processes and
facilities. Should our manufacturing or marketing company encounter regulatory
problems with the FDA, FDA approval of our products could be delayed or the
marketing of our products could be suspended or otherwise adversely
affected.
Because
we are dependent on Spectrum Laboratories, Inc. as the manufacturer of our
LIVERAIDTM
cartridges, any failure or delay by Spectrum Laboratories to manufacture the
cartridges will negatively affect our future operations.
We
have an exclusive manufacturing arrangement with Spectrum Laboratories, Inc.
("Spectrum Labs")for the fiber-within-fiber LIVERAID™ cartridges. Although we
have no agreement with Spectrum Labs for the manufacture of the SEPET™
cartridges, Spectrum Labs has also been providing us with cartridges for
prototypes of the SEPET™ and has expressed an interest in manufacturing the
HepatAssist-2™ cartridge. Spectrum Labs has encountered problems manufacturing
the LIVERAID™ cartridges for us, which problems, if not remedied, may limit the
amount and timeliness of cartridges that can be manufactured. Spectrum Labs has
informed us that it can, and is willing to develop a manufacturing process for
large-scale manufacturing of the LIVERAID™ cartridges that will reduce or
eliminate these problems and shorten the manufacturing period. However, since
such manufacturing process is expensive, Spectrum Labs has not yet undertaken to
acquire or develop the necessary equipment and technology. No assurance can be
given that Spectrum Labs will, in fact, be able to acquire or develop a
large-scale manufacturing process or that Spectrum Labs will otherwise be able
to satisfy our needs for the LIVERAID™ cartridges. In the event that Spectrum
Labs is either unable or unwilling to manufacture the amount of LIVERAID™
cartridges that we need, we will have to find one or more alternative
manufacturers for the cartridges. Although Spectrum Labs has agreed to transfer
all of the know-how related to these products to any other manufacturer of our
products if Spectrum Labs is unable to meet its contractual obligations to us,
we may have difficulty in finding a replacement manufacturer or may be required
to alter the design of the LIVERAID™ cartridges if we are unable to effectively
transfer the Spectrum Labs know-how to another manufacturer.
We
currently do not have a manufacturing arrangement for the cartridges used in the
HepatAssist-2™ system. While we believe there are several potential contract
manufactures who can produce these cartridges, there can be no assurance that we
will be able to enter into such an arrangement on commercially favorable terms,
or at all.
We
may not have sufficient legal protection of our proprietary rights, which could
result in the use of our intellectual properties by our
competitors.
Our
ability to compete successfully will depend, in part, on our ability to defend
patents that have issued, obtain new patents, protect trade secrets and operate
without infringing the proprietary rights of others. We currently own 11 U.S.
patents on our liver support products, three foreign patents, have one patent
application pending, and are the licensee of seven additional liver support
patents. We have relied substantially on the patent legal work that was
performed for our assignors and licensors with respect to all of these patents,
application and licenses, and have not independently verified the validity or
any other aspects of the patents or patent applications covering our products
with our own patent counsel.
Even
when we have obtained patent protection for our products, there is no guarantee
that the coverage of these patents will be sufficiently broad to protect us from
competitors or that we will be able to enforce our patents against potential
infringers. Patent litigation is expensive, and we may not be able to afford the
costs. Third parties could also assert that our products infringe patents or
other proprietary rights held by them.
We
will attempt to protect our proprietary information as trade secrets through
nondisclosure agreements with each of our employees, licensing partners,
consultants, agents and other organizations to which we disclose our proprietary
information. There can be no assurance, however, that these agreements will
provide effective protection for our proprietary information in the event of
unauthorized use of disclosure of such information.
The
development of our products is dependent upon Dr. Rozga and certain other
persons, and the loss of one or more of these key persons would materially and
adversely affect our business and prospects.
We
are highly dependent on Jacek Rozga, MD, PhD, our President and Chief Scientific
Officer. To a lesser extent, we also depend upon the medical and scientific
advisory services that we receive from the members of our Board of Directors,
all of whom have extensive backgrounds in medicine. However, each of these
individuals, except Dr. Rozga, works for us as an unpaid advisor only on a
part-time, very limited basis. We are also dependent upon the voluntary advisory
services of Achilles A. Demetriou, MD, PhD, FACS, the other co-founder of
ATI and the Chairman of our Scientific Advisory Board. We do not have a
long-term employment contract with Dr. Jacek Rozga, and the loss of the
services of either of the foregoing persons would have a material adverse effect
on our business, operations and on the development of our products. We do not
carry key man life insurance on either of these individuals.
As
we expand the scope of our operations by preparing FDA submissions, conducting
multiple clinical trials, and potentially acquiring related technologies, we
will need to obtain the full-time services of additional senior scientific and
management personnel. Competition for these personnel is intense, and there can
be no assurance that we will be able to attract or retain qualified senior
personnel. As we retain full-time senior personnel, our overhead expenses for
salaries and related items will increase substantially from current
levels.
The
market success of our products will be dependent in part upon third-party
reimbursement policies that have not yet been established.
Our
ability to successfully penetrate the market for our products may depend
significantly on the availability of reimbursement for our products from
third-party payers, such as governmental programs, private insurance and private
health plans. We have not yet established with Medicare or any third-party
payers what level of reimbursement, if any, will be available for our products,
and we cannot predict whether levels of reimbursement for our products, if any,
will be high enough to allow us to charge a reasonable profit margin. Even with
FDA approval, third-party payers may deny reimbursement if the payer determines
that our particular new products are unnecessary, inappropriate or not cost
effective. If patients are not entitled to receive reimbursement similar to
reimbursement for competing products, they may be unwilling to use our products
since they will have to pay for the unreimbursed amounts, which may well be
substantial. The reimbursement status of newly approved health care products is
highly uncertain. If levels of reimbursement are decreased in the future, the
demand for our products could diminish or our ability to sell our products on a
profitable basis could be adversely affected.
We
may be subject to product liability claims that could have a material negative
effect on our operations and on our financial condition.
The
development, manufacture and sale of medical products expose us to the risk of
significant damages from product liability claims. We plan to obtain and
maintain product liability insurance for coverage of our clinical trial
activities. However, there can be no assurance that we will be able to secure
such insurance for clinical trials for either of our two current products. We
intend to obtain coverage for our products when they enter the marketplace (as
well as requiring the manufacturers of our products to maintain insurance). We
do not know if it will be available to us at acceptable costs. We may encounter
difficulty in obtaining clinical trial or commercial product liability insurance
for any bioartificial liver device that we develop since this therapy includes
the use of pig liver cells and we are not aware of any therapy using these cells
that has sought or obtained such insurance. If the cost of insurance is too high
or insurance is unavailable to us, we will have to self-insure. A successful
claim in excess of product liability coverage could have a material adverse
effect on our business, financial condition and results of operations. The costs
for many forms of liability insurance have risen substantially during the past
year, and such costs may continue to increase in the future, which could
materially impact our costs for clinical or product liability
insurance.
Changes in
stock option accounting rules may adversely affect our reported operating
results, our stock price, and our ability to attract and retain
employees
In
December 2004, the Financial Accounting Standards Board published new rules that
will require companies in 2005 to record all stock-based employee compensation
as an expense. The new rules apply to stock options grants, as well as a wide
range of other share-based compensation arrangements including restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. Large public companies will have to apply the new financial
accounting rules to the first interim or annual reporting period that begins
after June 15, 2005, while small business issuers such as this company will have
to apply the new rules in their first reporting period beginning after December
15, 2005. As a small company with limited financial resources, we have depended
upon compensating our officers, directors, employees and consultants with such
stock based compensation awards in the past in order to limit our cash
expenditures and to attract and retain officers, directors, employees and
consultants. Accordingly, if we continue to grant stock options or other stock
based compensation awards to our officers, directors, employees, and consultants
after the new rules apply to us, our future earnings, if any, will be reduced
(or our future losses will be increased) by the expenses recorded for those
grants. These compensation expenses may be larger than the compensation expense
that we would be required to record were we able to compensate these persons
with cash in lieu of securities. Since we are a small company, the expenses we
may have to record as a result of future options grants may be significant and
may materially negatively affect our reported financial results. The adverse
effects that the new accounting rules may have on our future financial
statements should we continue to rely heavily on stock-based compensation may
reduce our stock price and make it more difficult for us to attract new
investors. In addition, reducing our use of stock plans to reward and
incentivize our officers, directors and employees, we could result in a
competitive disadvantage to us in the employee marketplace.
RISKS
RELATED TO OUR COMMON STOCK
Our
stock is thinly traded, so you may be unable to sell at or near ask prices or at
all if you need to sell your shares to raise money or otherwise desire to
liquidate your shares.
The
shares of our common stock are thinly-traded on the OTC Bulletin Board, meaning
that the number of persons interested in purchasing our common shares at or near
ask prices at any given time may be relatively small or non-existent. This
situation is attributable to a number of factors, including the fact that we are
a small company which is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven, early stage company such as ours or purchase or recommend the purchase
of our shares until such time as we became more seasoned and viable. As a
consequence, there may be periods of several days or more when trading activity
in our shares is minimal or non-existent, as compared to a seasoned issuer which
has a large and steady volume of trading activity that will generally support
continuous sales without an adverse effect on share price. We cannot give you
any assurance that a broader or more active public trading market for our common
shares will develop or be sustained, or that current trading levels will be
sustained. Due to these conditions, we can give you no assurance that you will
be able to sell your shares at or near ask prices or at all if you need money or
otherwise desire to liquidate your shares.
If
securities or independent industry analysts do not publish research reports
about our business, our stock price and trading volume could
decline.
Small,
relatively unknown companies can achieve visibility in the trading market
through research and reports that industry or securities analysts publish.
However, to our knowledge, no independent analysts cover our company. The lack
of published reports by independent securities analysts could limit the interest
in our stock and negatively affect our stock price. We do not have any control
over research and reports these analysts publish or whether they will be
published at all. If any analyst who does cover us downgrades our stock, our
stock price would likely decline. If any independent analyst ceases coverage of
our company or fails to regularly publish reports on us, we could lose
visibility in the financial markets, which in turn could cause our stock price
or trading volume to decline.
You
may have difficulty selling our shares because they are deemed “penny
stocks.”
Since
our common stock is not listed on the Nasdaq Stock Market, if the trading price
of our common stock is below $5.00 per share, trading in our common stock will
be subject to the requirements of certain rules promulgated under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), which require additional
disclosure by broker-dealers in connection with any trades involving a stock
defined as a penny stock (generally, any non-Nasdaq equity security that has a
market price of less than $5.00 per share, subject to certain exceptions). Such
rules require the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith and impose various sales practice requirements on broker-dealers who
sell penny stocks to persons other than established customers and accredited
investors (generally defined as an investor with a net worth in excess of
$1,000,000 or annual income exceeding $200,000 individually or $300,000 together
with a spouse). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser’s written consent to the transaction prior to the sale. The
broker-dealer also must disclose the commissions payable to the broker-dealer,
current bid and offer quotations for the penny stock and, if the broker-dealer
is the sole market-maker, the broker-dealer must disclose this fact and the
broker-dealer’s presumed control over the market. Such information must be
provided to the customer orally or in writing before or with the written
confirmation of trade sent to the customer. Monthly statements must be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. The additional burdens
imposed upon broker-dealers by such requirements could discourage broker-dealers
from effecting transactions in our common stock, which could severely limit the
market liquidity of the common stock and the ability of holders of the common
stock to sell their shares.
Anti-takeover
provisions in our articles of incorporation could affect the value of our stock
Our
Articles of Incorporation contains certain provisions that could be an
impediment to a non-negotiated change in control. In particular, without
stockholder approval we can issue up to 5,000,000 shares of preferred stock with
rights and preferences determined by the board of directors. These provisions
could make a hostile takeover or other non-negotiated change in control
difficult, so that stockholders would not be able to receive a premium for their
common stock.
Potential
issuance of additional common and preferred stock could dilute existing
stockholders
We
are authorized to issue up to 25,000,000 shares of common stock. To the extent
of such authorization, our board of directors has the ability, without seeking
stockholder approval, to issue additional shares of common stock in the future
for such consideration as the board of directors may consider sufficient. The
issuance of additional common stock in the future will reduce the proportionate
ownership and voting power of the common stock offered hereby. We are also
authorized to issue up to 5,000,000 shares of preferred stock, the rights and
preferences of which may be designated in series by the board of directors. Such
designation of new series of preferred stock may be made without stockholder
approval, and could create additional securities which would have dividend and
liquidation preferences over the common stock offered hereby. Preferred
stockholders could adversely affect the rights of holders of common stock
by:
· |
exercising
voting, redemption and conversion rights to the detriment of the holders
of common stock; |
· |
receiving
preferences over the holders of common stock regarding or surplus funds in
the event of our dissolution or liquidation; |
· |
delaying,
deferring or preventing a change in control of our company;
and |
· |
discouraging
bids for our common stock. |
Substantial
number of shares of common stock may be released onto the market at any time,
and the sales of such additional shares of common stock could cause stock price
to fall
As
of the date of this prospectus, we had outstanding 16,207,909 shares of common
stock, of which approximately 8,363,000 are currently freely tradable shares or
are registered for re-sale pursuant to another outstanding prospectus. However,
in the past year, the average daily trading volume of our shares has only been a
few thousand shares, and there have been many days in which no shares were
traded at all. As a result of the registration of the shares included in this
prospectus, 2,991,812 additional shares of our currently outstanding common
stock will be able to be freely sold on the market, which number will increase
to 4,602,122 shares if the warrants owned by the selling stockholders are
exercised and the underlying 1,610,310 shares that are included in this
prospectus are purchased. Because of the limited trading volume, the sudden
release of 4,602,122 additional freely trading shares that are included in this
prospectus onto the market, or the perception that such shares will come onto
the market, could have an adverse affect on the trading price of the stock. In
addition to the shares that may be registered for re-sale under this prospectus,
we have also previously registered 5,597,500 additional currently unissued
shares of our common stock that can be issued upon the exercise of outstanding
warrants and can be immediately resold pursuant to that prior registration
statement. If these other warrants are exercised and the underlying 5,597,500
registered shares are released for sale on the market, the market price could
further be adversely affected. Finally, there are currently 4,900,500 shares of
unregistered, restricted stock that are currently eligible for public resale
under Rule 144 promulgated under the Securities Act, some of which shares also
may be offered and sold on the market from time to time. No prediction can be
made as to the effect, if any, that sales of the 4,602,122 shares included in
this prospectus, the sales of the 5,597,000 previously registered warrant
shares, or the sale of any of the 4,900,500 shares subject to Rule 144 sales
will have on the market prices prevailing from time to time. Nevertheless, the
possibility that substantial amounts of common stock may be sold in the public
market may adversely affect prevailing market prices for our common stock and
could impair our ability to raise capital through the sale of our equity
securities.
The
market price of our stock may be adversely affected by market
volatility.
The
market price of our common stock is likely to be volatile and could fluctuate
widely in response to many factors, including:
· |
announcements
of the results of clinical trials by us or our
competitors, |
· |
developments
with respect to patents or proprietary rights, |
· |
announcements
of technological innovations by us or our
competitors, |
· |
announcements
of new products or new contracts by us or our
competitors, |
· |
actual
or anticipated variations in our operating results due to the level of
development expenses and other factors, |
· |
changes
in financial estimates by securities analysts and whether our earnings
meet or exceed such estimates, |
· |
conditions
and trends in the pharmaceutical and other
industries, |
· |
new
accounting standards, |
· |
general
economic, political and market conditions and other factors,
and |
· |
the
occurrence of any of the risks described in this
prospectus. |
FORWARD-LOOKING
STATEMENTS
The
Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for
forward-looking statements. This document contains forward-looking statements,
which reflect the views of our management with respect to future events and
financial performance. These forward-looking statements are subject to a number
of uncertainties and other factors that could cause actual results to differ
materially from such statements. Forward-looking statements are identified by
words such as “anticipates,” “believes,” “estimates,” “expects,” “plans,”
“projects,” “targets” and similar expressions. Readers are cautioned not to
place undue reliance on these forward-looking statements, which are based on the
information available to management at this time and which speak only as of this
date. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
For a discussion of some of the factors that may cause actual results to differ
materially from those suggested by the forward-looking statements, please read
carefully the information under “Risk Factors” beginning on page 4.
The
identification in this document of factors that may affect future performance
and the accuracy of forward-looking statements is meant to be illustrative and
by no means exhaustive. All forward-looking statements should be evaluated with
the understanding of their inherent uncertainty. You may rely only on the
information contained in this prospectus.
We
have not authorized anyone to provide information different from that contained
in this prospectus. Neither the delivery of this prospectus nor the sale of
common stock means that information contained in this prospectus is correct
after the date of this prospectus. This prospectus is not an offer to sell or
solicitation of an offer to buy these securities in any circumstances under
which the offer or solicitation is unlawful.
USE
OF PROCEEDS
We
will not receive any proceeds from the sale or other disposition of the common
stock covered hereby by the selling stockholders pursuant to this prospectus.
However, we may receive the sale price of any common stock we sell to the
selling stockholders upon exercise of the warrants. If all warrants included in
this prospectus are exercised for cash, the total amount of proceeds we would
receive is $4,670,000. We expect to use the proceeds we receive from the
exercise of warrants, if any, for general working capital purposes. We will pay
the expenses of registration of these shares, including legal and accounting
fees.
MARKET
PRICE OF COMMON STOCK
AND
OTHER SHAREHOLDER MATTERS
Market
Information
Our
common stock has been traded on the OTC Bulletin Board over-the-counter market
since March 18, 2004 under the symbol “ABOS.” From the Reorganization until
March 18, 2004, our common stock was listed on the Pink Sheets over-the-counter
electronic trading system under the symbol “ABOS.” Before to the Reorganization
on October 30, 2003, our common stock was listed on the Pink Sheets under the
symbol “HIAU,” but there was virtually no trading in the common stock.
Our
common stock will be offered in amounts, at prices, and on terms to be
determined in light of market conditions at the time of sale. The shares may be
sold directly by the selling stockholders in the open market at prevailing
prices or in individually negotiated transactions, through agents, underwriters,
or dealers. We will not control or determine the price at which the shares are
sold.
To
our knowledge, there was no trading in our common stock until shortly before the
Reorganization on October 30, 2003, and any trading was not based on our
company’s current operations or prospects. Accordingly, the following table only
sets forth the high and low bid information for our common stock for the periods
indicated since the Reorganization. The following price information reflects
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions:
Quarter
Ending |
|
High |
|
Low |
December
31, 2003(1) |
|
$3.26 |
|
$3.00 |
March
31, 2004 |
|
$3.50 |
|
$3.40 |
June
30, 2004 |
|
$4.25 |
|
$2.75 |
September
30, 2004 |
|
$5.15 |
|
$4.00 |
December
31, 2004 |
|
$5.15 |
|
$2.65 |
(1)
Reflects
initial trading activity commencing on November 1, 2003 through the end of the
calendar quarter ended December 31, 2003.
Our
common stock is also listed on the Frankfurt Stock Exchange in Germany. The
trading symbol of our common stock on the Frankfurt Stock Exchange is “NNV.”
Holders
As
of February 1, 2005, there were 164 holders of record of our common stock.
Dividends
We
have not paid any dividends on our common stock to date and do not anticipate
that we will be paying dividends in the foreseeable future. Any payment of cash
dividends on our common stock in the future will be dependent upon the amount of
funds legally available, our earnings, if any, our financial condition, our
anticipated capital requirements and other factors that the Board of Directors
may think are relevant. However, we currently intend for the foreseeable future
to follow a policy of retaining all of our earnings, if any, to finance the
development and expansion of our business and, therefore, do not expect to pay
any dividends on our common stock in the foreseeable future.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
On
October 30, 2003, we completed a reorganization (the “Reorganization”) in
which Arbios Technologies, Inc. (“ATI”), our operating company, became our
wholly-owned subsidiary. At the time of the Reorganization, we had virtually no
assets and virtually no liabilities (prior to the Reorganization we were an
e-commerce based company engaged in the business of acquiring and marketing
historical documents). Shortly after the Reorganization, we changed its name to
“Arbios Systems, Inc.” In the Reorganization, we also replaced our officers and
directors with those of Arbios Technologies, Inc. Following the Reorganization,
we ceased our e-commerce business, closed our former offices, and moved our
offices to Los Angeles, California. We currently do not plan to conduct any
business other than the business of developing liver assist devices that Arbios
Technologies, Inc. has conducted since its organization.
Although
we acquired ATI in the Reorganization, for accounting purposes, the
Reorganization was accounted for as a reverse merger since the stockholders of
ATI acquired a majority of the issued and outstanding shares of our common
stock, and the directors and executive officers of ATI became our directors and
executive officers. Accordingly, the financial statements contained in this
prospectus, and the description of our results of operations and financial
condition, reflect (i) the operations of ATI alone prior to the Reorganization,
and (ii) the combined results of this company and ATI since the Reorganization.
No goodwill was recorded as a result of the Reorganization.
Since
the formation of ATI in 2000, our efforts have been principally devoted to
research and development activities, raising capital, and recruiting additional
scientific and management personnel and advisors. To date, we have not marketed
or sold any product and have not generated any revenues from commercial
activities, and we do not expect to generate any revenues from commercial
activities during the next 12 months. Substantially all of the revenues that we
have recognized to date have been Small Business Innovation Research grants (in
an aggregate amount of $321,000) that we received from the United States Small
Business Administration.
Our
current plan of operations for the next 12 months primarily involves research
and development activities, including clinical trials for at least one of our
potential products, and the preparation and submission of applications to the
FDA. We currently intend to submit an investigational new drug exemption
application and to commence conducting clinical studies for SEPET™ in the first
quarter of 2005. We also intend to reactivate work on the HepatAssist
bioartificial liver system by modifying the FDA-approved Phase III IND protocol.
Because the anticipated cost of conducting clinical studies for the
HepatAssist-2™ system exceeds our current financial resources, we will not,
however, be able to commence clinical studies for the HepatAssist-2™ system
until we raise additional capital. As a result of our intention to focus our
attention and financial resources on conducting studies on SEPET™, submitting
FDA filings for SEPET™, and further developing our strategy for revising and
activating our HepatAssist-2™ system’s FDA applications, we do not currently
anticipate that we will devote substantial resources to the development of
LIVERAID™ in the near term. The actual amounts we may expend on research and
development and related activities during the next 12 months may vary
significantly depending on numerous factors, including the results of our
clinical studies and the timing and cost of regulatory submissions. However,
based on our current estimates, we believe that we have sufficient financial
resources to conduct our planned operations for at least the 12-month period
following the date of this prospectus.
In
April 2004 we purchased certain assets of Circe Biomedical, Inc. including a
portfolio of patents, rights to a bioartificial liver (HepatAssist), a Phase III
IND, selected equipment, clinical and marketing data, and over 400 standard
operating procedures and clinical protocols that have previously been reviewed
by the FDA. The purchase price paid for these assets was $450,000, which amount
has now been fully paid.
Critical
Accounting Policies
Management’s
discussion and analysis of our financial condition and results of operations are
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, management evaluates its estimates, including
those related to revenue recognition, impairment of long-lived assets, including
finite lived intangible assets, accrued liabilities and certain expenses. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ materially from these estimates under different assumptions or
conditions.
Our
significant accounting policies are summarized in Note 1 to our audited
financial statements for the year ended December 31, 2003. We believe the
following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial
statements:
Development
Stage Enterprise
We
are a development stage enterprise as defined by the Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 7, "Accounting and Reporting by Development Stage Enterprises." We are
devoting substantially all of our present efforts to research and development.
All losses accumulated since inception have been considered as part of our
development stage activities.
Patents
We
capitalize certain patent rights that are believed to have future economic
benefit. These patent rights are amortized using the straight-line method over
the remaining life of the patent. Certain patent rights received in conjunction
with purchased research and development costs have been expensed. Legal costs
incurred in obtaining, recording and defending patents are expensed as
incurred.
Stock-Based
Compensation
SFAS
No. 123, "Accounting for Stock-Based Compensation," as in effect prior to
December 2004, established and encouraged the use of the fair value based method
of accounting for stock-based compensation arrangements under which compensation
cost is determined using the fair value of stock-based compensation determined
as of the date of grant and is recognized over the periods in which the related
services are rendered. The statement also permitted companies to elect to
continue using the current intrinsic value accounting method specified in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," to account for stock-based compensation. To date, we have used
the intrinsic value based method and have disclosed the pro forma effect of
using the fair value based method to account for our stock-based compensation.
For non-employee stock based compensation, we recognized an expense in
accordance with SFAS No. 123 and value the equity securities based on the fair
value of the security on the date of grant. In December 2004, the FASB
issued SFAS No.123 (revised 2004), "Share-Based Payment". Statement 123(R)
requires that the compensation cost relating to a wide range of share-based
payment transactions (including stock options) be recognized in financial
statements. That cost will be measured based on the fair value of the
equity instruments issued. Statement 123(R) replaces FASB Statement No.
123 and supersedes APB Opinion No. 25. As a small business issuer, we will
be required to apply Statement 123(R) to our first interim or annual reporting
period that begins after December 15, 2005.
Results
of Operations
Comparison
of Nine-Month Period ended September 30, 2004 to Nine-month Period ended
September 30, 2003.
Since
we are still developing our products and do not have any products available for
sale, we have not yet generated any revenues from sales. Revenues of $72,030 and
$127,828 for the nine month periods ended September 30, 2004 and 2003 represent
revenues recognized from a government research grant.
General
and administrative expenses of $1,679,832 and $93,619 were incurred for the nine
months ended September 30, 2004 and 2003, respectively. For the nine months
ended September 30, 2004, the expenses include $929,000 in non-cash option and
warrant charges for grants awarded to consultants, $447,000 in fees incurred to
outside consultants and professionals, and $110,000 in salaries and other
administrative expenses. The 2003 expenses consist primarily of legal fees,
audit fees and travel expenses incurred. Professional fees increased in the 2004
periods due to legal and accounting fees related to our status as a public
company and legal expenses associated with the acquisition of certain assets
from Circe Biomedical Inc. in April 2004. In 2004 we also incurred additional
consulting fees in connection with our investigation of the suitability and
advisability of submitting a Section 510(k) Pre-Market Notification with the
United States Food and Drug Administration (“FDA”) for our SEPETTM
product. General and administrative expenses are expected to remain at a
significantly higher level than in past periods due to the lease of additional
office space (effective as of April 1, 2004), the addition of more employees and
consultants (primarily to assist with our financial controls and investor
relations strategies and to evaluate and prepare submissions to the FDA), and
additional professional and other fees related to being a public
company.
Research
and development expenses of $1,183,366 and $310,658 were incurred for the nine
months ended September 30, 2004 and 2003, respectively. Research and development
expenses for the nine months ended September 30, 2004 increased by $872,708 over
prior year levels primarily due to $450,000 of purchased research and
development from Circe Biomedical, Inc., $197,000 incurred for various research
and development consultants regarding manufacturing, regulatory and product
management, $97,000 non cash option grant charges for options awarded to
scientific consultants, $52,000 in higher salary costs for scientists and
technicians, an $88,000 increase in preclinical testing of SEPETTM
and LIVERAIDTM.
We expect our research and development activities and expenses specifically
related to regulatory and clinical trial costs for SEPETTM
to increase during the balance of the current fiscal year ending December 31,
2004.
Interest
income of $13,367 was earned for the nine months ended September 30, 2004. There
was no interest income for the corresponding 2003 period. In September and
October 2003, we raised $4,400,000 in the private placement of our securities.
As a result, during the nine-month period ended September 30, 2004, we
maintained cash balances of over $2.5 million. In addition, we used a portion of
the foregoing offering proceeds to repay all outstanding indebtedness, thereby
substantially decreasing our interest expense.
Our
net loss was $2,781,044 and $298,644 for the nine months ended September 30,
2004 and 2003. The increase in net loss is attributed to an increase in
operating expenses incurred in the fiscal 2004 period as compared to the same
period in 2003 as explained above without an increase in revenues. Operating
expenses are expected to further increase in the current fiscal year compared to
last year as we increase our operations, while revenues are not currently
anticipated.
Comparison
of Fiscal Year ended December 31, 2003 to Year ended December 31,
2002.
Revenues
for fiscal year 2003 ($138,000) and fiscal year 2002 ($111,000) represented
revenues recognized during those periods from two government research grants
that we have received. The total amount of the two grants is $304,000, of which
we have received $249,000. We anticipate that the balance of the foregoing
grants, a total of $55,000, will be recognized as revenues and paid to us during
2004.
General
and administrative expenses consist primarily of salaries, office and equipment
lease expenses, and professional fees and expenses. General and administrative
doubled from $173,000 in fiscal 2002 to $340,000 in fiscal 2003 due to an
increase in the number of employees and consultants employed by us in fiscal
2003, and increased professional fees. In addition, professional fees increased
during 2003 due to the legal and accounting fees and expenses related to the
Reorganization and the additional legal, consulting and accounting fees and
expenses related to our status as an active public company. General and
administrative expenses are expected to significantly increase during the
current fiscal year ending December 31, 2004 due to the lease of additional
office space (which new lease went into effect on April 1, 2004), the addition
of more employees and consultants (primarily to assist with our financial
controls and to evaluate and prepare submissions to the FDA), and additional
professional and other fees related to being a public company.
Research
and development expenses consisted primarily of salaries for our scientists and
technicians, laboratory costs, and the cost scientific supplies. Research and
development expenses remained substantially unchanged from fiscal 2002 to fiscal
2003 because of the limited amount of capital available to us during most of
fiscal 2003 and because of our focus on completing the studies sponsored and
funded by the SBIR. However, we expect our research and development activities
and expenses to increase significantly in the current fiscal year ending
December 31, 2004.
Interest
expense increased from $1,000 in fiscal 2002 to $243,000 in fiscal 2003 due to
the accounting treatment of the $400,000 we borrowed from certain investors
during fiscal 2003. The $400,000 aggregate amount of loans were represented by
convertible notes that were issued to the investors. In addition to the
convertible loans, the investors also received, in the aggregate, warrants to
purchase 300,000 shares of our common stock at an exercise price of $1.00 per
share. All of the loans were converted by the investors in October 2003 into
400,000 shares of common stock and warrants to purchase an additional 400,000
shares at a price of $2.50 per share. Most of the $243,000 interest expense in
fiscal 2003 represented a non-cash expense recognized under accounting rules
based on the value of conversion feature of the convertible notes and the value
attributed to the warrants. Since the convertible notes have all been converted,
no additional interest will be accrued under these notes during the current
fiscal year.
Our
net loss increased to $886,000 in fiscal 2003 from $495,000 in fiscal 2002 due
to the increased operating and other expenses incurred in fiscal 2003. Operating
expenses are expected to further increase in the current fiscal year as we
increase our operations, while revenues are expected to remain
insignificant.
Liquidity
and Capital Resources
As
of September 30, 2004, we had cash of $2,006,000 and $354,000 of total
indebtedness (both long-term and current liabilities reduced by non-cash
unvested option expense of $225,000). We do not have any bank credit lines. To
date, we have funded our operations primarily from the sale of debt and equity
securities and an SBIR government grant. On January 11, 2005. we completed a
private placement in which we raised a total of $6,611,905 from the sale of
2,991,812 shares of our common stock and the issuance of warrants to purchase an
additional 1,495,906 shares at an exercise price of $2.90 per share. In addition
to our own legal and related offering expenses, we paid our placement agent
commissions of $253,000 and reimbursed the placement agent and the investors for
approximately $55,000 of their expenses and legal fees. The remaining net
proceeds of the private placement will be used for working capital
purposes.
In
April 2004 we purchased certain assets of Circe Biomedical, Inc. including
Circe’s patent portfolio, rights to a bioartificial liver (HepatAssist)™, a
Phase III Investigational New Drug application, selected equipment, clinical and
marketing data, and over 400 standard operating procedures and technical
validation protocols that have previously been reviewed by the FDA. The purchase
price paid for these assets consisted of $200,000 paid at the closing and our
agreement to make a second payment, in the amount of $250,000, on the earlier of
April 12, 2006 or when we raised gross proceeds of $4 million from the issuance
of debt or equity securities. Since the January 11, 2005 private placement
satisfied this condition, we paid the remaining unpaid portion of the purchase
price for the Circe assets ($250,000) in January 2005. We believe that the
original HepatAssist™ bioartificial liver that we acquired can be enhanced by,
among other things, increasing the number of pig cells used in the device and by
using a different perfusion platform. As a result, we have recently shifted our
emphasis from the development of LIVERAID™ to the further development of the
HepatAssist™ bioartificial liver (we refer to the enhanced version of this
bioartificial liver as our HepatAssist-2™ system). Many of the standard
operating procedures and technical protocols that we acquired will be usable by
us and will eliminate the need for us to independently develop these procedures
and protocols.
We
do not currently anticipate that we will derive any revenues from either product
sales or from additional governmental research grants during the next twelve
months (other than a $38,200 final payment from the prior research grant
expected to be received later this year).
Based
on our current plan of operations, we believe that our current cash balances
will be sufficient to fund our foreseeable expenses for at least 12 months from
the date of this prospectus. However, the estimated cost of completing the
development of our products and of obtaining all required regulatory approvals
to market our products is substantially greater than the amount of funds we
currently have available and substantially greater than the amount we could
possibly receive under any governmental grant program. For example, based on our
current assumptions, we estimate that the cost of developing SEPET™ will be
between $3 million and $4 million. The cost of developing HepatAssist-2™ will be
between $15 million and $20 million, and the cost of developing LIVERAID™ will
be between $20 million and $25 million. We currently expect to attempt to obtain
additional financing through the sale of additional equity and possibly through
strategic alliances with larger pharmaceutical or biomedical companies. We
cannot be sure that we will be able to obtain additional funding from either of
these sources, or that the terms under which we obtain such funding will be
beneficial to this company.
The
following is a summary of our contractual cash obligations at September 30, 2004
for the balance of this fiscal year and for the following fiscal years:
Contractual
Obligations |
|
|
Total |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007
and thereafter |
|
Purchased
Research &Development |
|
$ |
250,000(1 |
) |
|
— |
|
|
— |
|
$ |
250,000(1 |
) |
|
— |
|
Long-Term
Office Leases |
|
$ |
325,000 |
|
$ |
34,000 |
|
$ |
137,000 |
|
$ |
77,000 |
|
$ |
77,000 |
|
__________________
(1)
This amount was paid in January 2005.
We
do not believe that inflation has had a material impact on our business or
operations.
We
are not a party to any off-balance sheet arrangements, and we do not engage in
trading activities involving non-exchange traded contracts. In addition, we have
no financial guarantees, debt or lease agreements or other arrangements that
could trigger a requirement for an early payment or that could change the value
of our assets
BUSINESS
We
conduct all of our operations through our wholly owned subsidiary, Arbios
Technologies, Inc. (“ATI”). We currently have three products in development; a
novel extracorporeal blood purification therapy called selective plasma
filtration therapy (“SEPET™”) and two extracorporeal, bioartificial liver
systems
("HepatAssist-2™" and "LIVERAID™") that
incorporate porcine hepatocytes (pig liver cells).
Product
Overview
We
currently own the rights to two bioartificial liver systems. The system that we
have been developing is known as LIVERAID™. This system was developed by this
company’s founders, Drs. A. A. Demetriou and J. Rozga. In April 2004, we
acquired from Circe Biomedical, Inc., an unaffiliated biomedical company, the
rights to another bioartificial liver, known as the HepatAssist system. Certain
technologies included in the HepatAssist bioartificial liver were designed and
tested in pre-clinical and clinical studies by Drs. A. A. Demetriou and J.
Rozga. Both of our bioartificial liver systems are based on substantially
similar underlying medical technologies, and both utilize a single-use cartridge
that contains pig liver cells
and a column that contains certain
sorbents. When a patient’s blood is pumped through either the bioartificial
liver cartridges, substances normally metabolized by the liver and accumulated
in the blood during liver failure move across the porous tubes into two plasma
compartments, one of which is filled with pig liver cells and the other that
incorporates
columns that contain
chemical particles (sorbents). The exposure of the viable pig liver cells to
plasma will cause toxic substances contained in plasma to be metabolized,
thereby reducing their level. In addition, the sorbents also lower the level of
pathological blood components, such as ammonia. At the same time, substances
produced by pig liver cells move across the porous wall back into the blood
compartment. As a result of these two processes (provision of whole liver
functions by the pig liver cells and removal of toxins by the sorbents), we
believe the levels of pathological and normal blood components will move toward
normal ranges. Our belief is confirmed by the results of tests performed using
the HepatAssist bioartificial liver system that we acquired and now own, which
system is an earlier version of our LIVERAID™ system.
Our
HepatAssist-2™ system effectively is the HepatAssist system that has been
enhanced by using more pig cells. HepatAssist-2™ is based on a single-use
hollow-fiber cartridge that contains pig liver cells and a single-use blood
detoxification column that contains charcoal particles. However, we do not
expect that the HepatAssist-2™ will use the proprietary perfusion platform that
was designed and developed for the HepatAssist system. Instead, we are testing a
perfusion platform known as the PERFORMER for use as the platform to provide
bioartificial liver therapy. The PERFORMER is a multi-function integrated system
capable of supporting extracorporeal blood/plasma/fluid circulation therapies
that is manufactured by RanD S.r.l. (Italy). The PERFORMER has been equipped
with proprietary software and a tubing set for use with our HepatAssist-2™
system.
LIVERAID™
is based on a single-use cartridge that contains our proprietary designed porous
tubes. In addition, the LIVERAID™ cartridge contains approximately three times
more pig cells than the cartridge that was originally used in the HepatAssist
system. We anticipate that LIVERAID™ cartridge will be attached to a perfusion
platform (a machine-- such as a kidney dialysis machine-- through which the
patient’s blood is circulated) that has been customized to operate with this
system. At
this time, we anticipate that the PERFORMER will be used as the platform to
provide LIVERAID™ therapy.
SEPET™
is a single-use cartridge that contains specially designed porous tubes. When a
patient’s blood is pumped through these tubes, substances normally metabolized
by the liver and accumulated in the blood during liver failure move across the
porous wall and are discarded. As a result of this blood purification
(detoxification) process, we believe that the levels of pathological blood
components will move toward normal ranges.
SEPET™,
LIVERAID™ and HepatAssist-2™ all rely on single-use cartridges that are placed
on a blood perfusion apparatus that is attached to the patient's blood
circulation system. For SEPET™ the blood perfusion apparatus is a standard
kidney dialysis machine. At the end of the treatments with any of our products,
the disposable cartridges are discarded, and new cartridges are used for the
next therapy.
Background
of our company
Arbios
Technologies, Inc., our operating subsidiary, was formed in August of 2000 by
Drs. A. A. Demetriou and J. Rozga, two leaders in the field of artificial
liver therapy, to develop extracorporeal devices for the treatment of liver
failure. As employees of Cedars-Sinai Medical Center, Drs. A. A. Demetriou
and J. Rozga previously were involved in the development of a first generation
bioartificial liver (known as HepatAssist) that was licensed by Cedars-Sinai
Medical Center in 1994 to W.R. Grace & Co. and then subsequently transferred
to other entities, including Circe Biomedical, Inc. The prior owners of this
technology, including in particular W.R. Grace & Co. and Circe Biomedical,
Inc., spent many millions of dollars on the research and development of the
original HepatAssist system, the perfusion platform and on the related
technologies and operating procedures necessary to bring the product to market.
The original HepatAssist system was tested in Phase II/III clinical trials
approved by the FDA in patients with fulminant/subfulminant liver failure and
primary non-function following liver transplantation. These trials of the
original HepatAssist system were the first large (171 patients) prospective,
randomized, controlled multi-center trial demonstrating a survival advantage for
an extracorporeal liver assist system utilizing pig liver cells. Although
treated fulminant/subfuliminat hepatic failure patients with viral and
drug-induced liver injury had improved survival compared to controls when
adjusted for the effect of confounding factors (such as liver transplantation),
the primary clinical end point in the overall study population (survival at 30
days post-transplantation) was not achieved. Accordingly, the HepatAssist system
was not approved for marketing, and the FDA requested that a new Phase III
clinical study be performed. A new Phase III protocol was prepared and approved
by the FDA. However, before these new studies could be undertaken, in 2003 Circe
Biomedical, Inc. ceased its operations. In April 2004, we purchased most of the
remaining assets of Circe Biomedical, Inc. that related to its bioartificial
liver operations, including rights to the original HepatAssist system, the new
Phase III protocol that was approved by the FDA, and over 400 manufacturing and
quality control and quality assurance standard operation protocols previously
reviewed by the FDA.
To
date, we have funded our operations from funds we raised from the sale of over
$12,000,000 of our equity securities and $321,000 of Small Business Innovation
Research (SBIR) grants that have been awarded by the United States Small
Business Administration. We intend to apply for additional SBIR grants to fund a
portion of our research expenditures. However, whether or not we receive
additional SBIR grants, we will have to raise substantial additional proceeds to
fund our future clinical development expenses and our on-going working capital
needs.
Our
research offices and laboratories are located at Cedars-Sinai Medical Center,
Los Angeles, California. Under our lease agreement and other arrangements with
Cedars-Sinai, we have access to all of the key development resources of that
leading medical center (e.g., animal facility, surgical core facility, clinical
laboratory and others). Cedars-Sinai Medical Center will be considered as one of
the clinical testing sites.
We
have also entered into various agreements with Spectrum Laboratories, Inc.
(“Spectrum Labs”), including research and development agreements and
manufacturing agreements. Spectrum is expected to be the manufacturer of the
cartridges to be used in both liver assist devices. Spectrum Labs is a company
that specializes in the development and manufacture of innovative molecular
separation products for the research community and is a supplier of dialysis and
ultrafiltration membranes used for biomedical research, molecular biology and
clinical diagnostics throughout the world.
Strategy
We
have established collaborations with Cedars-Sinai Medical Center and Spectrum
Labs that
are expected to facilitate the development of SEPET™ and our bioartificial liver
systems and could potentially accelerate the clinical testing, regulatory
approval and commercialization of those products in the United States and other
markets. In addition, in
April 2004 we purchased certain assets (including a bioartificial liver system
that is the predecessor of our HepatAssist-2™) that we intend to utilize to
reduce our development costs and expedite the testing and regulatory process for
our bioartificial liver systems. We currently do not intend to engage in the
manufacture of either of our products or of the pig cells that would be used in
the bioartificial liver systems and intend to rely on third parties for these
functions.
We
believe that the testing and regulatory approval periods for SEPET™ will be
shorter than for either of our bioartificial liver systems because SEPET™ will
be evaluated as a medical device that does not contain biological components
(such as pig cells that are an integral part of our two bioartificial liver
systems). Accordingly, because
of the shorter regulatory period and the ability of SEPET™ to operate through
the use of a standard, currently available kidney dialysis unit, we expect that
the development of SEPET™ will be completed before the development of either
LIVERAID™ or HepatAssist-2™ is completed.
We
have engaged regulatory consultants and an FDA attorney to counsel us with
respect to regulatory approval of our products and are currently in the process
of designing clinical trials to demonstrate the safety and efficacy of SEPET™ in
treating patients with acute exacerbation of chronic liver failure. We are also
preparing an investigational device exemption for SEPET™ for submission to the
FDA. See, “Governmental Regulation,” below.
We
have already performed in
vitro
and in
vivo
testing of the SEPET™ and LIVERAID™ prototype devices and currently plan to
commence clinical testing of SEPET™ during 2005. We anticipate that we will be
able to file an application requesting market approval of the SEPET™ in late
2006. We are currently evaluating the possibility of conducting clinical studies
of the HepatAssist-2™ system under a modified version of the FDA- approved Phase
III IND protocol that we recently acquired. Since we are still currently
developing our clinical and regulatory strategies for our two bioartificial
liver systems, we cannot estimate when an application requesting marketing
approval of either systems will be filed with the FDA.
The
April 2004 acquisition of the assets of Circe Biomedical has potentially
provided us with new opportunities for the development of a bioartificial liver.
The Circe bioartificial liver device that we acquired consisted of the following
four distinct components that will be useful to the development of our
bioartificial liver products: (1) FDA-approved
standard operating procedures.
These are standard operating procedures for production of porcine cells
including harvesting, freezing, and thawing of the cells (we expect that the
cells used in our bioartificial liver systems will be derived from the same herd
of pigs previously used by Circe in its Phase III trial of HepatAssist.).
Because these procedures and protocols have already been approved by the FDA, we
will not have to establish our own similar protocols and obtain the FDA’s
approval for those protocols, thereby saving time and money. In addition, the
herd of pigs that Circe used has already been tested and approved by the FDA for
health status, safety, biological compatibility and functionality in human
patients. By using cells from the same herd of pigs that the FDA had previously
approved, we do not expect to have to apply for, and obtain, the FDA’s approval
for the safety of these pigs, thereby eliminating another time consuming and
expensive process to obtaining approval for our bioartificial liver systems. (2)
The
cartridge used in the Phase III trial of HepatAssist.
While we could use this existing, FDA-approved cartridge, we intend to request
the FDA’s approval to increase the number of pig cells that the cartridge could
contain, which increase we believe will improve the functionality of the system.
(3) An
FDA approved Phase III protocol.
We intend to modify this protocol and submit the modified protocol to the FDA
for approval. (4) The
HepatAssist perfusion platform.
The HepatAssist perfusion platform is Circe’s specially designed machine that
pumped the patient’s plasma through the HepatAssist cartridge. This machine was
used in the Phase III trial of HepatAssist. We believe that there currently are
other existing machines that are more efficient and easier to use than Circe’s
machine. Accordingly, we are testing a machine called The PERFORMER that has
been equipped with proprietary software and our tubing to enable the machine to
work with our bioartificial liver products. We expect that the PERFORMER will
become the platform for both our HepatAssist-2™ and LIVERAID™
systems.
Based
on our current assumptions, we estimate that the cost of developing SEPET™ into
a commercial product will be between $3 million to $4 million. The cost of
developing HepatAssist-2™ into
a commercial product will
be between $15 million and $20 million, and the cost of developing LIVERAID™
into
a commercial product will
be between $20 million and $25 million. These amounts, which could vary
substantially if our assumptions are not correct, and are well in excess of the
amount of cash that we currently have available to us. See, “Risk
Factors.”
Liver
Function Background
The
liver controls, or affects, almost every aspect of metabolism and most
physiologic regulatory processes, including protein synthesis, sugar and fat
metabolism, blood clotting, the immune system, detoxification (alcohol, chemical
toxins, drugs) and waste removal. Loss of liver function is a devastating and
life threatening condition. Liver failure affects all age groups and may be due
to many causes, including viral infection (hepatitis), ingestion of common
medications, alcohol, and surgical liver removal for trauma and
cancer.
Currently,
there is no direct treatment for liver failure, except for a successful liver
transplant. There is, however, a current scarcity of donor livers, and
approximately two thousand patients on the waiting list for donor livers die
annually before receiving liver transplants. Treatments with currently available
technologies (e.g., blood purification methods) are, at best, short-term
measures, and none of them has achieved wide clinical use or ability to arrest
or reverse liver failure and improve survival. As a consequence, liver failure
patients must still either undergo liver transplantation or endure prolonged
hospitalization with low probability of survival. In addition, many patients do
not qualify for transplantation. Still others do not recover after
transplantation because of irreversible brain damage caused by liver failure.
Although the liver has a remarkable capacity for regeneration, the repair
process after massive liver damage is markedly impaired.
There
is a need to develop artificial means of liver replacement and/or assistance
with the aim of either supporting patients with borderline functional liver cell
mass until their liver regenerates or until a donor liver becomes available for
transplantation. Such an “artificial liver” should also support patients during
recovery after transplantation with marginal livers and after extended liver
resections for trauma or cancer. To achieve these effects, an effective liver
support system should be able to lower blood levels of substances toxic to the
brain and liver and to provide whole liver functions, which are impaired or
lost.
It
is generally believed that liver support at this level of complexity requires
utilization of viable isolated liver cells (hepatocytes). The founders of this
company as well as investigators not associated with this company have
demonstrated in
vitro
and in animal models of liver failure that cell-based bioartificial livers can
provide whole liver functions. However, only a few bioartificial livers were
tested in humans and it remains to be seen whether systems utilizing hepatocytes
as the only means of liver support are effective. We believe that in order to
provide the maximum support for the failing liver, porcine hepatocyte therapy
should be combined with blood detoxification.
Each
of our bioartificial liver systems (LIVERAID™ and HepatAssist-2™) was designed
to become an advanced effective application of the basic bioartificial liver
concept. In these bioartificial liver systems, liver cell therapy (porcine
hepatocytes) is combined with blood detoxification (sorbent
based plasma therapy).
Depending on the cause of liver disease, severity of illness and deficiency of
specific liver functions, these bioartificial liver modes of therapy can be provided
individually, simultaneously or sequentially. Because of these features, we
believe our bioartificial liver technology is well suited to treat patients with
liver failure of all causes and severity, including those requiring maximum
liver support. While the original HepatAssist Phase II/III clinical trial
demonstrated an increase in patient survival in patients with viral and
drug-induced fulminant/subfulminant hepatic failure, a new Phase III clinical
trial will be needed before our HepatAssist-2™ system (which is an enhanced
version of the original HepatAssist system) can be used by human patients.
Pre-clinical data for our LIVERAID™ system has indicated that, as with
HepatAssist, this novel bioartificial liver system can improve heart rate and
blood pressure, clearance of ammonia and ICG (a liver function test) and
prolonged survival time of pigs with terminal liver failure. The pre-clinical
data provide evidence of feasibility and efficacy in laboratory testing and in
animal studies. However, the efficacy of the LIVERAID™ system still needs to be
demonstrated in FDA-approved clinical trials before it can be used by human
patients.
In
liver failure patients, there is a need for an effective blood purification
therapy that will clear the blood of toxins. SEPET™ (selective plasma filtration
therapy) is a novel form of such therapy. During selective plasma filtration
therapy, the plasma fraction containing substances that are toxic to the brain,
the liver and other internal organs and tissues would be removed from patient
blood and replaced with normal human plasma.
The
Products We Are Developing
We
currently are developing two novel treatments for acute and chronic liver
failure. We believe that both our SEPET™ and either of our bioartificial liver
systems may:
· |
Help
keep liver failure patients alive and neurologically intact before, during
and immediately after transplantation. |
· |
Allow,
in selected cases, survival without a transplant (a “bridge” to liver
regeneration). |
· |
Support
patients during periods of functional recovery and regeneration after
extensive removal due to liver trauma and/or
cancer. |
· |
Accelerate
recovery from acute exacerbation of chronic liver
disease. |
· |
Shorten
length of stay in intensive care units. |
· |
Reduce
the cost of care. |
· |
Reduce
intractable itching associated with severe
jaundice. |
We
believe that SEPET™ and our bioartificial liver systems can achieve these
effects because it can lower blood levels of substances that are toxic to both
the brain and liver. However, proof of feasibility is lacking at this time, and
the clinical utility of this product still needs to be demonstrated in patients
with acute liver failure.
We
own certain technologies and rights related to our products, and have licensed
certain other technologies. See “Patents and Proprietary Rights” below, for a
description of the rights that we own and have licensed.
SEPETTM
We
are developing SEPET™ (selective plasma filtration therapy) as a blood
purification measure to provide temporary liver support during acute liver
failure and acute exacerbation of chronic liver disease. Selective plasma
filtration therapy will be provided through our single-use, disposable cartridge
that contains a bundle of hollow fibers made of bio- and hemo-compatible
material and being capable of sieving substances with molecular weight of up to
100 kDa. The importance of using fibers with this sieving characteristics is
that most hepatic failure toxins have a molecular weight that is less than 100
kDa, while all "good" blood components have molecular weight greater than 100
kDa. At present, Spectrum Labs is the manufacturer of these disposable
cartridges. See “Business—Manufacturing,” below. The SEPET™ system is designed
for use with any commercially available kidney dialysis unit or other similar
machines that utilize hollow-fiber cartridges. Accordingly, no apparatus needs
to be developed or manufactured for SEPET™. Accessory components for the SEPET™
system (e.g., tubings, connectors, pressure gauges, etc.), will consist of
standard components that are currently used in renal dialysis. We expect that
these accessory components will be manufactured for us by third-party
vendors.
During
therapy, an ultrafiltrate containing toxins and mediators of inflammation with
molecular weight of 100 kDa or less will be recovered from the side port of the
cartridge, while at the same time, commercially available (e.g., blood bank)
fresh frozen plasma and/or
its synthetic substitute will
be administered to the patient.
We
believe that as a result of these two processes, the levels of pathological and
normal blood components present in the patient’s circulation will move toward
normal ranges, thereby facilitating recovery from liver failure. Based on
published medical literature, rapid and efficient blood detoxification is
expected to protect the liver, brain and other organs against further injury,
accelerate healing of the native liver and improve its residual
functions.
LIVERAID™
And HepatAssist-2™ Bioartificial Liver Systems
We
currently have two bioartificial liver systems under development that have been
designed to function similarly. Although there are distinctions between the two
systems as described below, both systems are designed to (i) provide liver cell
functions by utilizing viable pig liver cells that are housed in specially
designed cartridges and (ii) detoxify blood. Since it has been scientifically
established that pig liver cells perform liver functions when maintained in
specially designed cartridges outside of the human body, our bioartificial liver
cartridges are designed to bring human plasma into contact with viable pig liver
cells in a manner similar to that observed in the normal human liver inside the
body in order to provide liver functions to the patient. In addition, both of
our bioartificial liver systems are designed to lower the levels of pathological
blood components (through charcoal and other purification
sorbents).
We
have designed and intend to demonstrate that our
HepatAssist-2™ and
LIVERAID™ products can provide temporary liver support during acute liver
failure and acute exacerbation of chronic liver disease. The LIVERAID™ utilizes
a proprietary multi-compartment hollow fiber module incorporating viable pig
liver cells and a blood
detoxification circuit.
The module is attached to a base instrument pumps the patient’s plasma through
the LIVERAID™ cartridge. The hollow fibers are made of a polyethersulfone
membrane or a similar material and
assembled using
our proprietary fiber-within-a-fiber geometry. This geometry allows for the
integration of two different functions within a single module. Depending on the
causes of liver disease, severity of illness and deficiency of specific liver
functions, LIVERAID™ is designed to offer liver cell therapy, blood
detoxification or a combination thereof. During treatment, individual modes of
therapy may be added or removed.
The
HepatAssist-2™ system also incorporates several proprietary components and
technologies into an integrated liver assist system, including a hollow fiber
cartridge with porcine hepatocytes and a plasma re-circulation
circuit
that incorporates sorbents.
However, since the HepatAssist-2™ is based on the HepatAssist system, its
cartridge does not contain our proprietary fiber-within-a-fiber geometry
At
present, most bioartificial liver systems (including the original HepatAssist
system) are filled with plasma rather than blood. Both the LIVERAID™ and
HepatAssist-2™ systems are designed to be perfused with a patient’s plasma to
prevent leakage of pig cells and cell debris into patient blood circulation. The
platform for our bioartificial liver systems will utilize an oxygenator, sorbent
column(s), and a disposable tubing kit. These components are available from
third party vendors.
A
critical aspect of both the LIVERAID™ and HepatAssist-2™ technology include the
source and method of procurement of liver cells, the cryopreservation (freezing)
of the liver cells, the storage of the liver cells, the proprietary plasma
re-circulation loop incorporating the cell cartridge and sorbents, and the
standard operating procedure protocols and quality control and programs related
to the foregoing. We currently own or have licensed numerous proprietary
technologies and methods for sourcing and using hepatocytes, which technologies
and methods apply to both our LIVERAID™ and HepatAssist-2™ systems. The
following addresses our current plans and procedures regarding viable liver
cells (hepatocytes).
Hepatocyte
donors. Ideally,
human hepatocytes should be used in a bioartificial liver. However, there is a
shortage of organ donors and published data demonstrated that pig liver cells
outperform animal and human liver cell lines, including those derived from liver
cancers. In addition, use of human cancer-derived cells raises safety concerns.
At this time, we intend to utilize normal pig liver cells.
Hepatocyte
harvest. The
founders of our ATI subsidiary and Circe Biomedical, Inc. developed certain
semi-automated methods for large-scale harvest of pig hepatocytes. The methods
of harvesting and collecting liver cells are covered by four patents, which
patents we either have acquired from Circe and now own or have licensed from
Cedars-Sinai Medical Center.
Hepatocyte
storage. Hepatocyte
storage, quality control and shipment of cells to treatment sites are best
achieved by use of cell freezing (i.e., cryopreservation). Cryopreservation also
provides greater protection from bacterial and viral contamination because
frozen cells can be stored until microbiologic testing is completed and cells
are then released for clinical use. Prior to use, cells are rapidly thawed and
their viability is tested. The patented hepatocyte cryopreservation technology
is now owned by us and by Cedars-Sinai Medical Center, who has licensed this
technology to us.
The
pig liver cells will be harvested from young purpose-bred, pathogen-free,
vaccinated pigs raised in an United States Department of Agriculture
(“USDA”)
certified facility specifically for biomedical research purposes. Each batch of
cryopreserved pig liver cells will be released for clinical use only after
proper verification of biosafety and viability/functionality of the cells. We
acquired all of the required laboratory and quality assurance protocols from
Circe Biomedical, which protocols were previously reviewed by the FDA and deemed
to be in compliance with FDA requirements.
HepatAssist-2™
and LIVERAID™ are designed to be used in the same manner as any other plasma
therapy device. In a typical clinical procedure, the operator will install
bioartificial liver components (cell cartridge, oxygenator, sorbent
detoxification column(s), tubing kit) into the blood/plasmaperfusion
platform.
Approximately 15 billion viable pig hepatocytes will be seeded into the
extra-fiber space through the cell module side ports. At the start of treatment,
the platform will be attached to the patient and the bioartificial
liver system will
be perfused with the patient’s oxygenated plasma. In
the LIVERAID™ system,
in addition to the foregoing, fresh frozen plasma will be recirculated through
the sorbent columns
in the diafiltration circuit. At the end of treatment, the disposables will be
discarded in the normal manner that all other biohazardous waste products (such
as syringes and bandages) are handled and disposed of. No special governmental
regulations have been required, or are expected, to dispose of the used
cartridges and disposable products.
We
expect to demonstrate that during LIVERAID™ or HepatAssist-2™ therapy,
substances normally metabolized by the liver and accumulated in the blood during
liver failure will diffuse freely across the porous membrane into the
compartment containing pig liver cells. At the same time, products of pig liver
cell metabolism will diffuse back into the plasma compartment and then into the
blood circuit. It is anticipated that as a result of these two processes, the
levels of pathological and normal blood components present in the patient’s
circulation will move toward normal ranges, thereby facilitating recovery from
liver failure. Additional therapeutic benefits may be provided by blood
purification (detoxification) therapy. In
this mode of therapy, small and large protein-bound toxins, which accumulate in
the blood during liver failure are expected to be
removed by sorbents. Blood
detoxification is believed to protect the liver, brain and other organs against
further injury, accelerate healing of the native liver and improve its residual
functions. Decreased blood toxicity is also expected to prolong the life and
metabolic activity of pig hepatocytes in the bioartificial liver
modules.
Product
Advantages
We
believe that SEPET™ as a blood purification therapy will be more effective than
sorbent-based devices (e.g., charcoal, resin, silica, etc.) and whole plasma
exchange therapy because only the plasma fraction containing known
toxins
of hepatic failure
is being removed and discarded during SEPET™ therapy. In contrast, sorbent-based
blood purification is not toxin-specific, and
in the case of charcoal
sorption is limited because of the protective coating of the charcoal particles.
Once development of SEPET™ is completed and its use is approved, we believe that
it will be able to be used with currently available hospital kidney dialysis
systems to provide selective plasma filtration therapy, which may offer the
following advantages:
· |
Ease
of use.
The systems bring user friendliness (e.g., pump integration, automation
and an intuitive user interface) to traditionally complex liver support
procedures. |
· |
Simplicity.
Kidney dialysis systems are routinely used and, therefore, there may be no
need for extensive personnel training for use of these similar systems in
the SEPET™. |
· |
Low
cost.
The cost of therapy is expected to be lower than with any other liver
assist device that is currently under development because the machine to
which the SEPET™ cartridge can be attached to a standard machine (such as
a kidney dialysis machine) with commercially available tubing. Therefore,
unlike other devices, no special equipment is
required. |
· |
No
Intensive Care Unit needed to provide treatment.
SEPET™ may become available for treatment of patients with lower degree of
liver failure outside of intensive care unit settings. We do not believe
that any changes will have to be made to SEPET™ or the dialysis system in
order for SEPET™ to become available outside of intensive care unit
settings. |
To
our knowledge, LIVERAID™ and HepatAssist-2™ are the only liver assist devices
under development that are capable of providing both liver cell functions and
blood purification either simultaneously or sequentially in a versatile and
customized manner depending on the cause and severity of liver
failure.
Drs.
Demetriou and Rozga, the founders of ATI and the principal stockholders of this
company, have previously demonstrated that cryopreserved pig hepatocytes remain
alive (>80% viability) after thawing. Moreover, they quickly aggregate,
forming liver-like 3-D units, and resume basic functions (e.g., drug metabolism)
at levels comparable to those seen in intact livers. Drs. Demetriou and Rozga
have also reported that treatment of animals and patients with fulminant hepatic
failure with a bioartificial liver loaded with freshly thawed pig hepatocytes
prolonged life, alleviated intracranial hypertension and improved blood
chemistry. In addition, in experimental animals bioartificial liver therapy
improved native liver function and triggered mechanisms regulating liver
regeneration. In addition, treatment with either of our two bioartificial liver
systems can be commenced with 2-3 hours of patient preparation, thereby making
bioartificial liver therapy available on demand. In contrast, we believe other
liver
assist devices
under development require longer time for preparation prior to patient treatment
(up to several days in some instances).
Clinical
Utility
The
clinical performance of the SEPET™ and LIVERAID™ has not been assessed yet.
However,
in vivo
large animal studies have provided proofs of feasibility and clinical efficacy
for LIVERAID™. Additionally, virtually all basic aspects of these new
technologies (effect of blood purification, liver cell function, utility of
hollow-fiber membranes, performance of a design incorporating both pig liver
cells and sorbent) have been validated in the past by Drs. Demetriou and Rozga,
the founders of ATI, and other investigators. Furthermore, the animal and
clinical data generated and published to date on the first-generation
bioartificial liver, indicate that the basic concept of a bioartificial liver
utilizing cryopreserved pig liver cells and blood detoxification, is valid and
that repeated 6-hour bioartificial liver treatments are safe and yield
measurable therapeutic benefits. Accordingly, we believe that our novel,
next-generation products will represent improvements and/or enhancements of
earlier technologies.
Our
HepatAssist-2™ system is an enhanced version of the original HepatAssist system.
The safety and efficacy of the original HepatAssist were evaluated in a
prospective, randomized, controlled, multi-center FDA-approved clinical trial. A
total of 171 patients, 86 in the control group, and 85 bioartificial liver
group, were enrolled. Patients with fulminant/subfulminant hepatic failure and
primary non-function following liver transplantation were included. Data were
analyzed with and without accounting for the following confounding factors:
liver transplantation, time to transplant, cause of the disease or condition,
disease severity, and treatment site. For the entire patient population,
survival at 30 days was 71% for bioartificial liver vs. 62% for the control
group. When survival was analyzed accounting for confounding factors (e.g.,
liver transplantation, survival prior to transplantation), in the entire patient
population, there was no difference between the two groups. However, survival in
147 fulminant/subfulminant hepatic failure patients was significantly higher in
the bioartificial liver compared to the control group. Thus, this was the first
prospective, randomized, controlled trial of an extracorporeal liver support
system that demonstrated safety and improved survival in patients with
fulminant/subfulminant hepatic failure.
Market
Opportunity
There
is an urgent need for artificial means of liver replacement and/or assistance to
facilitate recovery from liver failure without a transplant. An effective liver
assist device could also help maintain liver failure patients alive until an
organ becomes available for transplantation. The SEPET™ and
LIVERAID™/HepatAssist-2™ systems are designed to treat patients with liver
failure of all causes and severity, including acute exacerbation of chronic
liver disease.
The
patient and market opportunity is substantial and underserved. According to the
American Liver Foundation, 25,000,000 Americans - one in every 10 - are or have
been suffering from liver and biliary diseases. According to the National Center
For Health Statistics published for 2000, there were 360,000 hospital discharges
for patients with chronic liver disease or cirrhosis. Of those, 27,035 died
(10th
leading cause of death in males and 12th
in females; 4th
cause of death in persons aged 45 - 54 years) because no donor liver was found
or because they had contraindications to transplantation. During 2001 alone,
12,207 people died in the United States due to alcoholic liver disease and 5,652
individuals died as a consequence of other diseases of liver (inflammatory,
drug-induced, acute hepatitis, unspecified, etc.). Approximately
3.9 million Americans are chronically infected with the hepatitis C virus and an
estimated 25,000 people each year are infected with the hepatitis C virus. At
the same time, 10,000 - 12,000 deaths occur annually due to hepatitis C virus
infection. Hepatic decompensation, as a result of chronic hepatitis C virus
infection, is the leading cause of liver transplantation. In 2002, there were
only 4,200 liver donations in the United States versus 6,900 additions to the
waiting list. As of September 1, 2004, the liver transplant waiting list
contained 17,485 individuals. According
to National Institutes of Health and the American Association for the Study of
Liver Diseases, 5,000 deaths occur annually as a consequence of hepatitis B
virus infection.
Based
on these data, we estimate that more than 200,000 extracorporeal liver support
treatments may be needed annually in the United States alone to help keep liver
failure patients alive until either an organ becomes available for
transplantation or the native liver recovers from injury. We believe that SEPET™
and our bioartificial liver systems may address this demand.
At
present no direct treatment for liver failure is available and such patients
must receive a liver transplant or endure prolonged hospitalization with
significant mortality. Moreover, no prognostic test is available that would help
predict which liver failure patient is likely to survive on medical therapy
alone. Due to the critical nature of liver failure and the resulting adverse
effects on other organs, the hospitalization costs can be as high as $20,000 per
day. In fact, it is estimated that the in-patient cost of liver failure
treatment can reach $200,000 per episode without a transplant. While liver
transplants have significantly increased the chances of survival for patients
with liver failure, due to a severe shortage of donor livers, less than 10% of
liver failure patients received a transplant. Further, many liver failure
patients were excluded from the waiting list because of alcohol or drug abuse,
cancer, cardiovascular disease or inadequate post-operative support by family or
others.
At
this time, based on the preliminary information available to us, we estimate
that the cost of a single treatment with the SEPET™ therapy could be within a
$2,000 - $4,000 range and that cost of the bioartificial liver therapy could be
approximately $20,000. We anticipate that SEPET™ and/or bioartificial liver
therapy will have to be repeated up to 5-7 times before a satisfactory clinical
outcome is obtained. Based on these estimates and the above mentioned
projections, the potential U.S. market for SEPET™ and bioartificial liver is
significant, with similar opportunities in countries outside the U.S. However,
we have not confirmed the potential size of these markets through an independent
marketing study.
If
we are successful in demonstrating the clinical utility of one or both of our
products, liver failure patients treated with our products may be spared liver
transplantation and the need for life long immune-suppression. In addition,
these patients can be treated outside of the intensive care unit and could be
discharged from the hospital after shorter stays, all of which would reduce
costs for healthcare providers and generate a demand for the use of these
products.
In
addition to the U.S., the potential market for our products includes Europe and
Asia. According to World Health Organization, globally, an estimated 170 million
persons are chronically infected with the hepatitis C virus (8.9 million in
Europe, 32.3 million in South-East Asia, 62.2 million in Western Pacific). At
the same time, an estimated 3 to 4 million persons are newly infected each year.
Hepatitis B virus infection
causes nearly 1,000,000 deaths annually. It is most common in Asia, Africa and
Middle East. Of the 2 billion people who have been infected with the
hepatitis B virus,
more than 350 million have chronic (lifelong) infections. These chronically
infected persons are at high risk of death from cirrhosis of the liver and liver
cancer. In
China, liver disease represents a pressing health problem and the need for an
effective liver support therapy is more urgent than in most other markets.
Although epidemiological data on hepatitis C virus and hepatitis B virus
infection in China are not publicly available, we believe there are
approximately 200 million carriers of the hepatitis virus B or C in China, and
primary liver cancer is a common malignancy.
Sales,
Marketing & Distribution
We
currently do not have any agreements in place to market any of our products if
and when those products are commercially released, and we do not currently
expect to establish an in-house marketing and sales program to distribute our
products. We currently expect to outsource the sales, marketing and distribution
of our products to third parties who specialize in the sales, marketing and
distribution of medical products. Alternatively, we may enter into strategic
alliances with larger medical companies or license the rights to our products to
such larger companies. We currently expect that our products will be marketed in
the U.S., Europe and Asia.
Manufacturing
In
December 2001 we entered into a manufacturing and supply agreement with Spectrum
Laboratories, Inc. for the future manufacture of our LIVERAID™ cartridges. Under
that agreement, we agreed that Spectrum Labs will manufacture the hollow fiber
cartridges with fiber-in-fiber geometry that we will need for the LIVERAID™
bioartificial liver. The agreement provides that the price of the hollow
fiber-in-fiber cartridges to be sold by Spectrum Labs to us will be determined
by good faith negotiations between the parties. We have agreed that we will not
purchase cartridges with fiber-in-fiber geometry from any other manufacturer
unless Spectrum Labs is either unable or unwilling to manufacture the
cartridges. To date, Spectrum Labs has manufactured all of the LIVERAID™
cartridges that we have been using in the development of that bioartificial
liver device. Currently, the final step in manufacturing the LIVERAID™
cartridges is completed manually, which has resulted in a high incidence of
rejected cartridges and a lengthy manufacturing period. These problems, if not
remedied, may limit the amount and timeliness of cartridges that can be
manufactured. Spectrum Labs has informed us that it can, and is willing to
acquire or develop an automated manufacturing process for the LIVERAID™
cartridges. However, since such an automated manufacturing process is expensive,
Spectrum Labs has not yet undertaken to acquire or develop the necessary
equipment and technology. No assurance can be given that Spectrum Labs will, in
fact, be able to acquire or develop an automated manufacturing process or that
Spectrum Labs will otherwise be able to satisfy our needs for the LIVERAID™
cartridges. In the event that Spectrum Labs is either unable or unwilling to
manufacture the amount of LIVERAID™ cartridges that we need, we will have to
find one or more alternative manufacturers for the cartridges. While we have
identified other possible manufacturers of the LIVERAID™ cartridges, it is
uncertain if any of those other companies would want to manufacture the
cartridges for us, and if so, on what terms.
We
currently do not have a manufacturing arrangement for the cartridges used in the
HepatAssist-2™ system. However, the HepatAssist-2™ cartridge is based on a
conventional single-bundle hollow-fiber technology and a number of third party
manufacturers, including Spectrum Laboratories, Inc. can produce these
cartridges.
With
respect to cartridges that we expect will be needed for SEPET™, we anticipate
that such cartridges will be commercially manufactured by either Spectrum Labs
or a manufacturer of clinical hemodialyzers. Additional disposable components
(tubing kits) may also be manufactured by third party
subcontractors.
The
kidney dialysis unit that will be used as a platform for SEPETTM
therapy is not expected to require any technical adjustments. Since pressure
monitors and hemoglobin detectors are standard in kidney dialysis systems,
additional safety features may not be required. Since the existing kidney
dialysis units will not be affected, only the kidney dialysis cartridge will be
replaced by a SEPETTM
cartridge, no consents will have to be obtained from the manufacturers of those
units, and no additional insurance is expected to be required to use those
units. Blood
oxygenator/heat exchangers are available from third party vendors who sell these
products.
The
platform we currently expect to use for LIVERAID™
will be an existing instrument manufactured and marketed by an unaffiliated
medical device manufacturer. The instrument we expect to use has been certified
and approved in Europe for bioartificial liver use. However, in order to use
this existing platform for bioartificial
liver therapy,
the instrument must be outfitted with customized software and with hook-ups and
components (tubing set) that are specifically designed for use with LIVERAID™
and HepatAssist-2™.
The
pig liver cells will be harvested from young purpose-bred, pathogen-free,
vaccinated pigs raised in an USDA certified facility specifically for biomedical
research purposes. We have identified a facility that currently breeds pigs that
meet the FDA’s requirements. The liver cells will be harvested and cryopreserved
under aseptic conditions using our proprietary technology as well as
commercially available equipment.
As
regards to cell procurement/cryopreservation for bioartificial liver use, we do
not yet own our own specialized and certified bio-secure porcine liver cell
manufacturing plant. Currently, we expect to subcontract the manufacture of the
bioartificial liver porcine liver cells needed to conduct clinical trials and
during early stages of commercialization from one or more third parties who
already manufacture such cells. At the conclusion of Phase II/III clinical
testing of the LIVERAID™ or Phase III clinical testing of HepatAssist-2™ (if we
obtain FDA approval to conduct such studies under a modified version of the
FDA-approved Phase III IND protocol), we will have to determine whether to build
a cell procurement facility to meet the expected requirements for commercial
sales, which will require a substantial capital investment, or to continue to
purchase such cells from third parties. This decision will be based on technical
evaluation of the project as well as an economic evaluation of company
performance.
Patents
and Proprietary Rights
Bioartificial
Liver Rights.
Our subsidiary, ATI, has obtained exclusive, worldwide rights from Cedars-Sinai
Medical Center and Spectrum Labs to seven issued U.S. patents protecting
LIVERAIDTM
and accompanying cell procurement/cryopreservation technologies. The founders of
ATI (Dr. Rozga and Dr. Demetriou) are co-inventors of both the
semi-automated methods for large-scale production of isolated pig/human
hepatocytes and cryopreservation of isolated pig/human hepatocytes. Our key
proprietary LIVERAIDTM
technologies include the following licensed patents:
(1) A
hollow fiber module with unique fiber-in-fiber geometry (US Patent #5,015,585
“Method and Apparatus for Culturing and Diffusively Oxygenating Cells on
Isotropic Membranes” issued on May 14, 1991). We have licensed this patent
from Spectrum Labs.
(2) A
bioartificial liver system in which liver cell therapy and blood detoxification
are integrated in a single fiber-in-fiber module (US Patent # 6,582,955 B2 for
“Bioreactor With Application as Blood Therapy Device” issued in June 2003). We
have licensed this patent from Spectrum Labs.
(3) Semi-automated
large-scale liver cell procurement technology (US Patent #5,888,409 for “Methods
for Cell Isolation and Collection” issued on March 30, 1999). We licensed
this patent from Cedars-Sinai Medical Center.
(4) Liver
cell procurement technology (US Patent #5,968,356 for “System for Hepatocyte
Cell Isolation and Collection” issued on October 19, 1999, and related European
Patent #0 830 099 for “Apparatus and Method for Cell Isolation and Collection”).
We licensed this patent from Cedars-Sinai Medical Center.
(5) Liver
cell cryopreservation technology (US Patent #6,140,123 for “Method for
Conditioning and Cryopreserving Cells” issued on October 31, 2000). We
licensed this patent from Cedars-Sinai Medical Center.
(6) A
bioartificial liver device with integrated tubes (“Bioreactor and Related
Method” US Patent #6,242,248 B1 issued on June 5, 2001). We licensed this
patent from Cedars-Sinai Medical Center.
(7) A
bioartificial liver device (“Bioreactor and Related Method” US Patent #6,207,448
B1 issued on March 27, 2001). We licensed this patent from Cedars-Sinai
Medical Center.
Cedars-Sinai
Medical Center Licenses.
On June 19, 2001, ATI entered into an agreement with Cedars-Sinai Medical Center
pursuant to which Cedars-Sinai granted to ATI exclusive and worldwide rights to
the foregoing five patents and to certain other technical information. These
rights are and remain exclusive over the legal life of the various patents and
include, subject to limitations, the right to sublicense the patent rights to
third parties. In order to maintain its rights under the license, ATI is
required to expend an aggregate amount of $1,760,000 in research and development
expenses toward the development and promotion of products derived from the
patents. ATI’s research and development commitment remains in full force and
effect until June 30, 2008. Under the terms of the license, ATI is obligated to
meet expenditure milestones per annum through 2008 in order to reach the
required $1,760,000. If ATI expenditures exceed a given year’s milestone,
however, such excess may be carried over to the following year. To date, we have
spent approximately $1,010,000 towards the fulfillment of this obligation.
Additionally, Cedars-Sinai Medial Center will have nonexclusive rights to any
products derived from the patents. We will have to pay Cedars-Sinai Medical
Center royalty fees equal to 1.5% of the gross sales price of royalty bearing
products. From the third to tenth years of the license, the royalty fee percent
will phase out evenly to 0%. Cedars-Sinai Medical Center is a stockholder of
this company. See “Certain Relationships and Related Transactions.”
Spectrum
Labs License Agreement.
On December 26, 2001, ATI entered into a license agreement with Spectrum Labs,
pursuant to which Spectrum Labs granted to ATI an exclusive, worldwide license
to develop, make, use and distribute products based on Spectrum Labs’ hollow
fiber-in-fiber technology, solely for applications in ATI’s liver assist
devices. The license includes the rights to the two issued patents referred to
above. Provided that ATI purchases the hollow fiber cartridges that it expects
that it will need for its products from Spectrum Labs, ATI will not have to pay
a royalty for the license. In the event that Spectrum Labs is not the
manufacturer of the hollow fiber cartridges, ATI will have to pay Spectrum Labs
a royalty for the license (see, “Business--Manufacturing,” above). Unless the
Spectrum Labs license agreement is terminated sooner due to a breach of the
license, the term of the license will continue until the expiration of the two
patents. Spectrum Labs also agreed to grant ATI a right of first refusal to
obtain a license to make, use, develop or distribute products based on Spectrum
Labs’ technology other than in liver assisted products, provided that such other
products are in the fields of artificial blood therapy and bioprocessing and
therapeutic devices. See “Certain Relationships and Related
Transactions.”
In
addition, in April 2004, we acquired from Circe Biomedical, Inc,. a portfolio of
intellectual properties, including certain U.S. and foreign patents, applicable
to (i) the HepatAssist bioartificial liver that Circe was developing, including
various patents related to the harvesting and handling of cells to be used in
the bioartificial liver, and (ii) Circe’s artificial pancreas system. We do not
intend to use or maintain certain of the bioartificial liver patents or any of
the artificial pancreas patents. The following is a list of the patents and
patent applications that we acquired from Circe Biomedical and that we expect to
maintain and use with our bioartificial liver system:
|
(1)
|
Process
for preparing isotropic microporous polysulfone membranes.US Patent
#4970034 (issued on November 13, 1990).
|
|
(2)
|
Continuous
Spinning of Hollow-Fiber Membranes Using Solvent Mixture as Precipitation
Medium. US Patent #5151227 (issued on September 29, 1992).
|
|
(3)
|
Method
and Apparatus for Casting Hollow Fiber Membranes. US Patent #5298206
(issued on March 29, 1994).
|
|
(4)
|
Apparatus
for Bioprocessing a Circulating Fluid. US Patent #5643794 (issued on July
1, 1997).
|
|
(5)
|
Dual
Fiber Bioreactor. US Patent #5712154 (issued on January 27, 1998).
|
|
(6)
|
Cryopreserved
Hepatocytes and High Viability and Metabolic Activity. US Patent #5795711
(issued on August 18, 1998).
|
|
(7)
|
Closed
System for Processing Cells. US Patent #5858642 (issued on January 12,
1999).
|
|
(8)
|
Method
of Thawing Cryopreserved Cells. US Patent #5895745 (issued on April 20,
1999).
|
|
(9)
|
High
Flow Technique for Harvesting Mammalian Cells. US Patent #5912163 (issued
on June 15, 1999).
|
|
(10)
|
Removal
of Agent From Cell Suspension. US Patent #6068775 (issued on May 30,
2000).
|
|
(11)
|
Method
for Cryopreserving Hepatocytes. US Patent #6136525 (issued on October 24,
2000).
|
Patent
Applications
Patent
No. |
Country |
Title
of Patent Application |
2216203 |
CA |
Method
of Thawing Cryopreserved Cells |
9-256534 |
JP |
Method
of Thawing Cryopreserved Cells |
99106212.6-2113 |
EU |
Removal
of Agent From Cell Suspension |
In
addition to the foregoing Circe Biomedical patents, we also acquired other
rights to Circe’s HepatAssist bioartificial liver and related technologies, such
as clinical and marketing data and over 400 manufacturing and quality
assurance/control standard operation protocols that the FDA had previously
reviewed. In addition to being necessary for the HepatAssist system,
the
manufacturing standard operating procedures for harvesting and cryopreservation
of hepatocytes are directly applicable to, and important to the development of
our LIVERAID™ and HepatAssist-2™ systems. The Phase I - III clinical data that
we acquired is expected to be useful in the preparation of future FDA
submissions, since the data is based on pig liver cells from the same source
that we currently intend to use for our bioartificial liver systems. We also
acquired an FDA Phase III IND for an enhanced version of the HepatAssist system.
We are currently evaluating the possibility of conducting clinical studies of
the HepatAssist-2™ system under a modified version of the FDA- approved Phase
III IND protocol that we acquired. The various protocols may also offer us an
opportunity to expedite an IND submission for our LIVERAID™ system and to
shorten the regulatory timeline for FDA approval of our two bioartificial liver
systems.
In
connection with our acquisition of the foregoing patents, we also assumed Circe
Biomedical’s obligations to make the following royalty payments:
(a)
Pursuant
to that certain Royalty Agreement, dated as of January 29, 1999, between Circe
Biomedical, Inc. (as a wholly-owned subsidiary of W.R. Grace & Co.) and
Circe Acquisition Corp., we assumed the obligation to pay a royalty of 2% of
“net sales” any product that utilizes or incorporates the bioartificial liver
patents, technology, inventions, and technical or scientific data that Circe
Biomedical acquired from W.R. Grace & Co. Since the assets that we acquired
from Circe are expected to be used in either the LIVERAID™ or the HepatAssist-2™
systems, it is likely that we will have to pay this royalty with respect of
sales of those parts of our bioartificial liver systems that incorporate the
W.R. Grace & Co. technology. Net sales includes revenues received from by us
or our licensees and sublicensees from third parties. The obligation to pay
royalties on the net sales of certain parts of our bioartificial liver systems
will continue for at least 10 years after the date on which we have obtained all
required regulatory approvals and have received $100,000 of net sales.
(b)
Pursuant
to that certain Restated License Agreement dated as of August 1, 1999 between
Circe Biomedical, Inc. and Cedars-Sinai Medical Center, we are obligated to make
royalty payments equal to 1% of the "net sales" price for that portion of a
liver assist system sold by us or any of our sublicensees that comprises or
incorporates a cartridge having a combination of porcine hepatocytes with hollow
fiber membranes. Since both of our bioartificial liver systems will utilize this
type of cartridge, we will have to pay this royalty with respect of sales of all
cartridges used in either of our bioartificial liver systems. Our obligation to
pay these royalties will begin with the first commercial sale of a bioartificial
liver and continue thereafter for ten years.
Under
U.S. law, utility patents filed before June 8, 1995 are valid for 20 years from
the filing date, or 17 years from date of issuance, whichever period is longer.
Patents filed on or after June 8, 1995 are good for 20 years from the date of
filing.
SEPETTM
Rights.
Our intellectual property rights to SEPETTM
consist of patent application and certain related trade secrets. Our patent
application regarding our selective plasma filtration therapy (SEPET™)
technology was filed in August 2002.
We
have not filed for any copyright or trademark protection to date.
Research
and Development
ATI
and Spectrum Labs also entered into a four-year research agreement pursuant to
which ATI and Spectrum Labs agreed to combine their expertise and their
respective technologies to enable ATI to (i) develop liver assist systems, (ii)
conduct pre-clinical and Phase I-III clinical testing, (iii) obtain regulatory
approvals and (iv) commercialize such liver assist systems. Under the terms of
the agreement, Spectrum Labs agreed to perform certain research on liver assist
devices for ATI during product development, pre-clinical and clinical testing at
no cost to ATI. Spectrum Labs also agreed to pay for all costs and expenses in
connection with the research program and agreed to allocate a total of $550,000
to the program during the research term. ATI and Spectrum Labs have recently
agreed that Spectrum Labs has now satisfied its obligations to develop and
manufacture clinical-grade, second-generation liver assist devices and that we
will pay Spectrum Labs an additional $54,960 over an 18-month period. Spectrum
Labs has agreed to perform additional research and development work as may we
may request, which additional future work will be provided by Spectrum Labs on
terms that we may in the future agree to.
We
have spent a total of $437,000 on research and development during the fiscal
year ended December 31, 2003 and $431,000 for the fiscal year ended December 31,
2002. In addition, pursuant to our research agreement with Spectrum Labs, that
company provided research and development services valued at approximately
$117,379 in 2002 and $17,260 in 2003 for our liver assist systems. See, “Certain
Relationships and Related Transactions - Research Agreement.”
Competition
Our
products will compete with numerous other products and technologies that are
currently used or are being developed by companies, academic medical centers and
research institutions. These competitors consist of both large established
companies as well as small, single product development stage companies. We
expect substantial competition from these companies as they develop different
and/or novel approaches to the treatment of liver disease. Some of these
approaches may directly compete with the products that we are currently
developing.
Other
therapies currently available include whole plasma exchange therapy, a procedure
involving massive plasma transfusions that is being used primarily for
correction of coagulopathy in patients with severe acute liver failure. In
addition, two extracorporeal blood detoxification systems are currently
available in the U.S. for treatment of liver failure: (1) the Adsorba column
(Gambro, Hechingen, Germany) which contains activated charcoal and (2) the
BioLogic-DT system (HemoCleanse, West Lafayette, Indiana) utilizing a mixture of
charcoal, silica and exchange resins.
Published
data indicate that in limited, uncontrolled clinical trials utilizing these
systems, only a transient improvement in neurological status was observed with
no effect on patients survival.
Other
technologies offered by competing companies include the following:
Teraklin’s
MARS system (molecular adsorbents recirculating system) combines the specific
removal of the toxins of liver failure (albumin bound toxins) using a
hollow-fiber cartridge impregnated with albumin, which is also added to the
dialysate solution. Albumin in the dialysate is "regenerated" during continuous
recirculation in the closed loop system through adsorbents (charcoal, resin). In
addition, standard hemodialysis is performed during MARS treatment. In Europe,
initial results in patients with acute liver failure were encouraging. In
September 2004 Gambro GmbH (Lund, Sweden) announced that it had acquired assets
of Teraklin. In November 2004, Teraklin and Gambro announced that in a recently
completed Phase II controlled study, which was conducted in 79 patients with
acute exacerbation of chronic liver disease, MARS treatment improved hepatic
encephalopathy and lowered blood levels of certain toxins implicated in the
pathophysiology of liver failure.
Fresenius’s
PROMETHEUS system is a variant of Teraklin’s MARS system and also combines
albumin dialysis with sorbent based plasma detoxification
and hemodialysis.
In Europe, initial results in a small group of patients with acute exacerbation
of chronic liver failure appeared encouraging. Controlled clinical trials are
needed to establish if the technology has any therapeutic value.
Vital
Therapies, Inc. uses technology developed and marketed by Hepatix and VitaGen,
Inc. Its bioartificial liver (ELAD) utilizes a cell line derived from human
liver cancer tissue and a conventional hollow fiber bioreactor. A Phase I
clinical study of the newest ELAD version was recently
reported at the annual meeting of the American Association for the Study of
Liver Disease. (November 2004, Boston).
In patients with acute liver failure, treatment with ELAD had no effect on
survival when compared to patients receiving standard therapy.
Several
other technologies could potentially compete with our bioartificial liver
systems. These include xenotransplantation (use of pig organs in humans),
transplantation of isolated hepatocytes and ex
vivo
whole liver perfusions. While major progress has been made in the area of
xenotransplantation and transgenic pigs are now available, attempts at
xenotransplantation have resulted only in short-term survival of grafted organs.
Ex
vivo
whole liver perfusion is impractical because it is cumbersome and requires
maintenance of multiple pathogen-free pig colonies due to direct cell-cell
contact between pig liver and human blood cells. Although transplantation of
hepatocytes showed great promise in animal models of liver failure, there is no
adequate supply source of human cells due to shortage of organ donors.
Government
Regulation
In
order to clinically test, manufacture, and market products for therapeutic use,
we will have to satisfy mandatory procedures and safety and effectiveness
standards established by various regulatory bodies. In the United States, the
Public Health Service Act and the Federal Food, Drug, and Cosmetic Act, as
amended, and the regulations promulgated thereunder, and other federal and state
statutes and regulations govern, among other things, the testing, manufacture,
labeling, storage, record keeping, approval, advertising, and promotion of our
products. Product development and approval within this regulatory framework
takes a number of years and involves the expenditure of substantial resources.
After laboratory analysis and preclinical testing in animals, an investigational
new drug application is filed with the FDA to begin human testing. Typically, a
three-phase clinical testing program is then undertaken. In phase 1, small
clinical trials are conducted to determine the safety of the product. In phase
2, clinical trials are conducted to assess safety and gain preliminary evidence
of the efficacy of the product. In phase 3, clinical trials are conducted to
provide sufficient data for the statistically valid proof of safety and
efficacy. The time and expense required to perform this clinical testing can
vary and is substantial. No action can be taken to market any new drug or
biologic product in the United States until an appropriate marketing application
has been approved by the FDA. Even after initial FDA approval has been obtained,
further clinical trials may be required to provide additional data on safety and
effectiveness and are required to gain clearance for the use of a product as a
treatment for indications other than those initially approved. In addition, side
effects or adverse events that are reported during clinical trials can delay,
impede, or prevent marketing approval. Similarly, adverse events that are
reported after marketing approval can result in additional limitations being
placed on the product’s use and, potentially, withdrawal of the product from the
market. Any adverse event, either before or after marketing approval, can result
in product liability claims against us.
In
addition to regulating and auditing clinical trials, the FDA regulates and
inspects equipment, facilities, and processes used in the manufacturing and
testing of such products prior to providing approval to market a product. If
after receiving clearance from the FDA, a material change is made in
manufacturing equipment, location, or process, additional regulatory review may
be required. We will also have to adhere to current Good Manufacturing Practice
and product-specific regulations enforced by the FDA through its facilities
inspection program. The FDA also conducts regular, periodic visits to re-inspect
equipment, facilities, laboratories, and processes following the initial
approval. If, as a result of these inspections, the FDA determines that any
equipment, facilities, laboratories, or processes do not comply with applicable
FDA regulations and conditions of product approval, the FDA may seek civil,
criminal, or administrative sanctions and/or remedies against us, including the
suspension of the manufacturing operations.
The
FDA has separate review procedures for medical devices before such products may
be commercially marketed in the United States. There are two basic review
procedures for medical devices in the United States. Certain products may
qualify for a Section 510(k) procedure, under which the manufacturer gives the
FDA a Pre-Market Notification, or 510(k) Notification, of the manufacturer's
intention to commence marketing of the product at least 90 days before the
product will be introduced into interstate commerce. The manufacturer must
obtain written clearance from the FDA before it can commence marketing the
product. Among other requirements, the manufacturer must establish in the 510(k)
Notification that the product to be marketed is "substantially equivalent" to
another legally-marketed, previously existing product. If a device does not
qualify for the 510(k) Notification procedure, the manufacturer must file a
Pre-Market Approval Application. The Pre-Market Approval Application requires
more extensive pre-filing testing than the 510(k) Notification procedure and
involves a significantly longer FDA review process. We are currently in the
process of designing clinical trials to demonstrate the safety and efficacy of
SEPET™ in treating patients with chronic liver failure. We have submitted to the
FDA a draft clinical study protocol and are preparing an IDE for SEPET™ for
submission to the FDA.
HepatAssist-2™
and LIVERAID™ are classified by the FDA as biological therapeutics and Class III
medical devices. Accordingly, they are subject to a two-step approval process
starting with a submission of an investigational new drug application (an “IND”)
to conduct human studies followed by the submission of a Product Marketing
Approval and a new drug application. The steps required before a product such as
HepatAssist-2™ or LIVERAID™ may be approved by the FDA for marketing in the
United States generally include (i) preclinical laboratory and animal tests;
(ii) the submission to the FDA of an IND for human clinical testing, which must
become effective before human clinical trials may commence; (iii) adequate and
well- controlled human clinical trials to establish the safety and efficacy of
the product; and (iv) the submission to the FDA of either a product application.
Preclinical tests include laboratory evaluation of the product, as well as
animal studies to assess the potential safety and efficacy of the product. The
results of the preclinical tests, together with analytical data, are submitted
to the FDA as part of an IND, which must become effective before human clinical
trials may be commenced. The sponsor and the FDA must resolve any outstanding
concerns before clinical trials can proceed. Human clinical trials typically
involve three sequential phases. Each trial must be reviewed and approved by the
FDA before it can begin. Phase I involves the initial introduction of the
experimental product into human subjects to evaluate its safety and, if
possible, to gain early indications of efficacy. Phase II usually involves a
trial in a limited patient population to (i) evaluate preliminarily the efficacy
of the product for specific, targeted indications; (ii) determine dosage
tolerance and optimal dosage; and (iii) identify possible adverse effects and
safety risks. Phase III typically involves further evaluation of clinical
efficacy and testing of product safety of a product in final form within an
expanded patient population. The results of preclinical testing and clinical
trials, together with detailed information on the manufacture and composition of
the product, are submitted to the FDA in the form of an application requesting
approval to market the product. In the case of HepatAssist2™, the product will
be available for Phase III testing once the new platform to provide therapy
(which we currently believe will be the PERFORMER) is found to be equivalent as
a plasma perfusion apparatus to the original platform used in previous Phase
I/II/III studies, and the FDA agrees to amend the previous IND to use the
PERFORMER in a new Phase III clinical study. No assurance can be given that the
results of the equivalency studies will show that the PERFORMER is a suitable
platform for the HepatAssist-2™ bioartificial liver. In the case of LIVERAID™,
only preclinical efficacy study has been completed and an IND application to
conduct Phase I clinical study needs to be prepared and submitted to the FDA.
Finally, we will also have to re-establish an approved cell manufacturing
capability or engage an approved third party provider of pig cells.
In
addition to obtaining FDA approval, we will have to obtain the approval of the
various foreign health regulatory agencies of the foreign countries in which we
may wish to market our products. Certain health regulatory authority (including
those of Japan, France and the United Kingdom) have objected, and other
countries regulatory authorities could potentially object to the marketing of
any therapy that uses pig liver cells (which our bioartificial liver systems are
expected to utilize) due to safety concerns. If we are unable to obtain the
approval of the health regulatory authorities in any country, the potential
market for our products will be reduced.
Employees
We
currently employ six full-time employees, one part-time employee, and six
independent contractors who provide services to us on a part-time basis. Of the
foregoing employees and contractors, five are primarily engaged in
administration/management, and remaining seven persons are involved in
scientific research, product development and/or regulatory compliance matters.
Our employees are not represented by a labor organization or covered by a
collective bargaining agreement. We have not experienced work stoppages and we
believe that our relationship with our employees is good.
Property
We
currently maintain our laboratory and office space at Cedars-Sinai Medical
Center in Los Angeles, California, which facilities we lease under a three-year
lease that expires on June 30, 2007. We currently pay rent of $6,441 per
month for the 1,008 square foot facility under the lease. Cedars-Sinai Medical
Center is a stockholder of our company and was one of the initial stockholders
of ATI. See “Certain Relationships and Related Transactions.”
Since
April 1, 2004, we have been leasing 1,700 square feet of additional
administrative office space in a building across the street from our
laboratories that are located at Cedars-Sinai Medical Center. Our new offices
are located at 8797 Beverly Blvd., Suite 206, Los Angeles, California 90048 and
are our new executive offices. The new office lease requires us to pay rent of
$5,000 per month and has a term of two years.
Legal
Proceeding
We
are not a party to any material legal proceedings.
We
may occasionally become subject to legal proceedings and claims that arise in
the ordinary course of our business. It is impossible for us to predict with any
certainty the outcome of pending disputes, and we cannot predict whether any
liability arising from pending claims and litigation will be material in
relation to our consolidated financial position or results of operations.
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS
Directors
and Executive Officers of Arbios Systems, Inc.
The
following table sets forth the name, age and position held by each of our
executive officers and directors as of December 31, 2004. Directors are elected
at each annual meeting and thereafter serve until the next annual meeting
(currently expected to be held during the first calendar quarter of 2005) at
which their successors are duly elected by the stockholders.
Name |
Age |
Position |
Jacek
Rozga, M.D., Ph.D. |
55 |
President,
Chief Financial Officer, and Director |
Roy
Eddleman |
64 |
Director |
Marvin
S. Hausman M.D. (2) |
63 |
Director |
John
M. Vierling, M.D.
(1) (2) |
58 |
Chairman
of the Board and Director |
Jack
E. Stover
(1) (2) |
51 |
Director |
Scott
L. Hayashi |
33 |
Vice
President of Administration and Secretary |
David
J. Zeffren |
48 |
Vice
President of Operations |
_________________________
(1)
Member
of our Audit Committee.
(2)
Member
of Nominating Committee and Compensation Committee.
Business
Experience and Directorships
The
following describes the backgrounds of current directors and the key members of
the management team. All of our officers and directors also currently hold the
same offices with ATI.
Jacek
Rozga, MD, PhD.
Dr. Rozga is a co-founder of ATI and has been a director and the President
of that company since its organization in August 2000. Dr. Rozga has been a
director, the President, the Chief Financial Officer and the Chief Scientific
Officer of this company since October 30, 2003. Since 1992, Dr. Rozga has been a
professor of Surgery at UCLA School of Medicine. Dr. Rozga has also been a
research scientist at Cedars-Sinai Medical Center since 1992.
Roy
Eddleman.
Mr. Eddleman has been the Chairman of the Board and Chief Executive Officer
of Spectrum Laboratories, Inc. since July 1982. Spectrum Laboratories, Inc. is a
public company in the business of developing and commercializing proprietary
tubular membranes and membrane devices for existing and emerging life sciences
applications. Mr. Eddleman also has been the founder and/or principal and
Director of each of (i) Spectrum Separations, Inc., now a part of UOP/Hitachi,
(ii) ICM, Inc., now a part of Perstorf/Perbio, (iii) Facilichem, Inc., a joint
venture with SRI International, (iv) Nuclepore, Inc., now a part of Corning and
Whatman, and (v) Inneraction Chemical, Inc., now a part of Merck Darmstadt. He
is the founder and a benefactor of the Roy Eddleman Research Museum of Chemistry
and the Chemical Heritage Foundation in Philadelphia.
Marvin S.
Hausman, MD.
Dr. Hausman has, since January 1997, been the President and Chief Executive
Officer of Axonyx, Inc., a public company engaged in the business of acquiring
and developing novel post-discovery central nervous system drug candidates,
primarily in areas of memory and cognition. Dr. Hausman has 30 years of
drug development and clinical care experience at various pharmaceutical
companies, including working in conjunction with Bristol-Meyers International,
Mead-Johnson Pharmaceutical Co., and E.R. Squibb. He was a co-founder of Medco
Research Inc., a NYSE-traded biopharmaceutical company which was acquired by
King Pharmaceuticals, Inc. Dr. Hausman has been the President of Northwest
Medical Research Partners, Inc. since 1995 and previously served as a member of
the Board of Directors of Regent Assisted Living, Inc. from 1996 through
2001.
John
M. Vierling, MD,
FACP.
Dr. Vierling has been a Professor of Medicine at the David Geffen School of
Medicine at UCLA since 1996 and was the Director of Hepatology and Medical
Director of Multi-Organ Transplantation Program at Cedars-Sinai Medical Center
from 1990-2004. He is also currently the President Elect of
the American Association for the Study of Liver Diseases. Dr. Vierling was the
Chairman
of the Board of the American Liver Foundation from 1994 to 2000, and the
President of the Southern California Society for Gastroenterology from 1994 to
1995. Dr. Vierling has also been a member of numerous National Institutes
of Health study sections and advisory committees, including the NIDDK Liver
Tissue Procurement and Distribution Program. He is currently Chairman of
the Data Safety Monitoring Board for the National Institute of Health, NIDDK
ViraHep C Multicenter Trial. Dr. Vierling’s research has focused on
the immunological mechanisms of liver injury caused by hepatitis B and C viruses
and autoimmune and alloimmune diseases.
Jack
E. Stover
Mr. Stover was elected as a director of this company in November 2004. Mr.
Stover has been the President and Chief Operating Officer of Antares Pharma,
Inc., an emerging public pharmaceutical company since July 2004. In September
2004, he was named Chief Executive Officer and President of that company. Prior
thereto, for approximately two years Mr. Stover was Executive Vice President,
Chief Financial Officer and Treasurer of SICOR, Inc., a public injectable
pharmaceutical company that was acquired by Teva Pharmaceutical Industries.
Prior to that, Mr. Stover was Executive Vice President and Director for
Gynetics, Inc., a proprietary women’s drug company, and the Senior Vice
President, Chief Financial Officer, Chief Information Officer and Director for
B. Braun Medical, Inc., a private global medical device and product company. For
over 16 years, Mr. Stover was an employee and then a partner with
PricewaterhouseCoopers, working in their bioscience industry division in New
Jersey.
Scott
Hayashi Mr.
Hayashi joined the company as its Chief Administrative Officer in February 2004,
became the Secretary of the company in July 2004 and was appointed as the Vice
President of Administration in November 2004. Prior to joining Arbios, Mr.
Hayashi was a Manager of Overseas Development for Syncor International, Inc. a
subsidiary of Cardinal Health, Inc. for three years. Before joining Syncor
International, Mr. Hayashi worked in finance, mergers and acquisitions for
Litton Industries, Inc., now a part of Northrop Grumman Corporation and
AlliedSignal, Inc., now a part of Honeywell, Inc.
David
J. Zeffren
Mr. Zeffren was first employed by us as a consultant in February, 2004, before
being appointed Vice President of Operations in November 2004. Prior to joining
Arbios, Mr. Zeffren had been the Chief Operating Officer of Skilled Health
Systems, L.C., a healthcare technology and clinical research organization from
1999 to 2004. Mr. Zeffren was also Chief Operating Officer of Physician Care
Management from 1996 to1999. Mr. Zeffren was a Corporate Director, Business
Development & Division Manager at INFUSX, Inc., a subsidiary of Salick
Health Care, Inc. from 1993-1996. Mr. Zeffren has over 15 years of experience
working in the healthcare and medical device industries.
There
are no family relationships between any of the officers and directors.
Committees
In
February 2004, our Board of Directors established an Audit Committee. The Board
of Directors has instructed the Audit Committee to meet periodically with the
company’s management and independent accountants to, among other things, review
the results of the annual audit and quarterly reviews and discuss the financial
statements, recommend to the Board the independent accountants to be retained,
and receive and consider the accountants’ comments as to controls, adequacy of
staff and management performance and procedures in connection with audit and
financial controls. The Audit Committee is also authorized to review related
party transactions for potential conflicts of interest. The Audit Committee
consisted of two persons and is currently composed of Dr. Vierling and Mr.
Stover. Each of these individuals is a non-employee director and, in the opinion
of our Board, is independent as defined under the Nasdaq Stock Market’s listing
standards. Mr. Stover is our “audit committee financial expert” as defined under
Item 401(e) of Regulation S-B of the Securities Exchange Act of 1934,
as amended. The Audit Committee operates under a formal charter that governs its
duties and conduct.
In November 2004, we established a Compensation Committee and a
Nomination Committee. The Compensation Committee is authorized to review
and make recommendations to the full Board of Directors relating to the annual
salaries and bonuses of our senior executive officers. The Nomination
Committee assists the Board in identifying qualified director candidates,
selecting nominees for election as directors at meetings of stockholders and
selecting candidates to fill vacancies on our Board, and developing criteria to
be used in making such recommendations.
EXECUTIVE
COMPENSATION
The
following tables set forth certain information concerning the annual and
long-term compensation for services rendered to us (and ATI) in all capacities
for the fiscal years ended December 31, 2004, 2003, and 2002 of (i) all persons
who served as the Chief Executive Officer of this company during the fiscal year
ended December 31, 2004 and (ii) each of the other person who was an executive
officers on December 31, 2004 and whose total annual salary and bonus during the
fiscal year ended December 31, 2004 exceeded $100,000. (The Chief Executive
Officer and the other named officers are collectively referred to as the "Named
Executive Officers.") The information set forth below includes all compensation
paid to the Named Executive Officers by ATI before the Reorganization by ATI,
and all compensation paid to him by both this company and ATI since the
Reorganization.
Summary
Compensation Table
|
|
|
Annual
Compensation |
|
|
Long-Term Compensation Awards |
|
Name
and Principal Position |
|
|
Year |
|
|
Salary |
|
|
Bonus |
|
|
Other
Annual
Compensation |
|
|
Securities Underlying Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jacek Rozga, M.D., Ph.D |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Executive
Officer, Chief Financial Officer, and
Chief
Scientific
Officer |
|
|
2004
2003
2002 |
(1) |
$
$
$ |
198,909
143,125
85,000 |
|
$ $ |
—
15,000
5,000 |
|
|
—
—
— |
|
|
30,000
18,000
18,000 |
(2)
(2)
|
Scott
L. Hayashi |
|
|
2004 |
(3) |
$ |
80,000 |
|
$ |
12,000 |
|
$ |
8,000 |
(4) |
|
10,000 |
|
David
J. Zeffren |
|
|
2004 |
(5) |
$ |
120,000 |
|
|
|
|
|
|
|
|
10,000 |
|
_________________________
(1) |
The
compensation set forth for 2003 includes amounts paid to Jacek Rozga,
M.D., Ph.D by both ATI and Arbios Systems, Inc. |
(2) |
Represents
options granted to Jacek
Rozga, M.D., Ph.D by ATI, which options were assumed by this company in
the Reorganization. |
(3) |
Mr.
Hayashi joined Arbios Systems, Inc. in February 2004. |
(4) |
Represents
cash payments made to Mr. Hayashi for health and other
benefits. |
(5) |
Mr.
Zeffren joined Arbios Systems, Inc. in February 2004 as a consultant
before becoming an executive officer of this company in November 2004. The
compensation shown includes amounts paid both as a consultant and as an
officer of the company. |
During
the three years prior to the Reorganization, Raymond H. Kuh was the President of
HAUSA. During the last three years, HAUSA did not pay Mr. Kuh, or any other
executive officer, any salary or bonus, and Mr. Kuh was not granted any options.
Accordingly, no information is provided regarding Mr. Kuh or any other former
executive officer of HAUSA.
Stock
Option Grants
The
following table contains information concerning grants of stock options during
the fiscal year ended December 31, 2004 by us (including ATI) to the Named
Executive Officers (HAUSA did not grant any options). In the Reorganization, all
of the option granted by ATI were assumed by HAUSA and now represent options to
purchase shares of our common stock. We have not granted any stock appreciation
rights.
Option
Grants in Fiscal Year Ended December 31, 2004
Individual
Grants |
Name |
Number
of
Shares
Underlying
Options
Granted |
%
of Total Options
Granted
to Employees
In
Fiscal Year |
Exercise
Price |
Market Price on Date of Grant |
Expiration Date |
|
|
|
|
|
|
Jacek
Rozga, M.D., Ph.D |
30,000(1) |
60% |
$2.25 |
$2.25 |
February
2, 2011 |
Scott
L. Hayashi |
10,000(2) |
20% |
$2.25 |
$2.25 |
February
2, 2009 |
David
J. Zeffren |
10,000(3) |
20% |
$2.00 |
$2.25 |
February
2, 2009 |
_________________________
(1) |
One
half of these options vested six months after the date of grant, and the
balance will vest twelve months following the date of
grant. |
(2) |
The
options vest in monthly increments over the first twelve months following
the date of grant. |
(3) |
The
options vest in monthly increments over the first six months following the
date of grant. |
Aggregate
Options
The
following table sets forth the number and value of unexercised options held by
the Named Executive Officers as of December 31, 2004. There were no
exercises of options by the Named Executive Officers in fiscal year
2004.
Aggregated
Option Exercises in Fiscal Year Ended December 31, 2004
and
FY-End Option Values
Name |
Shares
Acquired
in
Exercise |
Value
Realized |
Number
of Securities Underlying Unexercised Options at FY-End
(#) Exercisable/ Unexercisable |
Value
of Unexercised In-the-Money Options at FY-End (#)
Exercisable/ Unexercisable(1) |
Jacek
Rozga, M.D., Ph.D |
— |
— |
51,000/15,000 |
$82,230/$6,450 |
Scott
Hayashi |
— |
— |
8,333/1,667 |
$3,583/$717 |
David
J. Zeffren |
— |
— |
10,000/0 |
$6,800/0 |
_________________________
(1) |
Dollar
amounts reflect the net values of outstanding stock options computed as
the difference between $2.68 (the last reported sale on December 31,
2004) and the exercise price of the options.
|
Employment
Agreements
Dr.
Rozga, receives compensation from us in his capacity as the President and Chief
Financial Officer of this company and in his capacity as President and Chief
Financial Officer of ATI, our operating subsidiary. In his capacity as the
President and Chief Financial Officer of this company, Dr. Rozga earns an annual
salary of $65,000. In addition, Dr. Rozga and three of ATI’s other employees
provide services to ATI pursuant to that certain Employee Loan-Out Agreement,
dated July 1, 2001, as amended, between ATI and Cedars-Sinai Medical Center. Dr.
Rozga and the other employees are technically employed and paid by Cedars-Sinai
Medical Center. Under the terms of the Loan-Out Agreement, the medical center
permits Dr. Rozga to provide services to ATI, and ATI pays Cedars-Sinai Medical
Center an amount equal to Dr. Rozga’s salary plus an amount equal to the cost of
fringe benefits and Cedars-Sinai Medical Center pays to Dr. Rozga. Through this
arrangement, Dr. Rozga earns an annual salary of $135,000 (which amount is paid
through Cedar-Sinai but funded by ATI). The Loan-Out Agreement expires on June
30, 2005, and may be terminated by either party upon notice of breach of the
agreement, for cause, or breach of the facilities agreement pursuant to which
the Company leases its laboratories from Cedars-Sinai, provided that the parties
have an opportunity to cure the breach. Dr. Rozga has no obligations to
Cedars-Sinai other than the services he is providing to this company. Other than
the Loan-Out Agreement, Dr. Rozga does not have an employment contract with
Cedar Sinai Medical Center.
Compensation
of Board of Directors
During
the fiscal year ended December 31, 2004, each of our directors was granted
stock options to purchase 30,000 shares of common stock at an exercise price of
$2.25 per share. All director options are granted at the market price on the
date of grant and have a term of seven years. Providing that the directors still
are on the board at that time, one half of the options vest six months after the
date of grant, and the remaining options vest on the first anniversary of the
grant. We currently also reimburse all directors for any expenses incurred by
them in attending meetings of the board of directors.
In
2004 the Board of Directors also established a special investor relations
committee and appointed Dr. Richard Bank as the chairman of that committee. In
consideration for his services as committee chairman, Dr. Bank was granted a
seven-year stock option to purchase 100,000 shares of our common stock at a
price of $2.97 per share (the market price on the date of grant). The option
provided that it will expire 30 days after Dr. Bank ceases to be a director.
Effective January 15, 2005, Dr. Bank resigned from our Board of Directors. Upon
his resignation, the Board has extended the exercise period of Dr. Bank’s
options to January 15, 2006.
Stock
Option Plan
In
2001, we adopted our “2001 Stock Option Plan,” pursuant to which the Board of
Directors has the authority to grant options to purchase up to a total of
1,000,000 shares of our common stock to our directors, officers, consultants and
employees. Awards under the plan may be either non-qualified options or options
intended to qualify as “Incentive Stock Options” under Section 422 of the
Internal Revenue Code of 1986, as amended.
The
exercise price of options granted under the plan may not be less than 100% of
the fair market value of the common stock on the day of grant. If options are
granted to a person who controls more than 10% of our stock, then the exercise
price may not be less than 110% of the fair market value on the day of the
grant. The purchase price and method of exercise of each nonqualified option
granted to officers and other key employees shall be determined by the Board of
Directors. The purchase price is payable in full by cash. However, the Board of
Directors may accept payment for the purchase price of the shares of common
stock acquired upon exercise of an option, by optionee’s tendering outstanding
shares of our common stock owned by the optionee, or by other so-called cashless
exercises as permitted by law, or any combination of cash, check, shares and
cashless exercises.
Options
granted under the stock option plan become exercisable and shall expire on such
dates as determined by the Board of Directors, provided, however, that no term
may exceed ten years from the date of grant, or five years from the date of
grant in the case of any optionee holding more than 10 percent of the combined
voting power of all classes of our capital stock as of the date of grant. After
options become exercisable they may be exercised at any time or from time to
time as to any part thereof.
Options
are not transferable except by will or by the laws of descent and distribution;
during the life of the person to whom the option is granted, that person alone
may exercise them. All rights to exercise options terminate 90 days after the
date a grantee ceases to be an employee of this company or any subsidiary for
any reason other than death or disability.
SECURITY
OWNERSHIP OF CERTAIN
BENEFICIAL
OWNERS AND MANAGEMENT
The
following table sets forth certain information regarding beneficial ownership of
our common stock as of January 31, 2005 (a) by each person known by us to own
beneficially 5% or more of any class of our common stock, (b) by each of our
Named Executive Officers and our directors and (c) by all executive officers and
directors of this company as a group. As of January 31, 2005 there were
16,207,909 shares of our common stock issued and outstanding. Unless otherwise
noted, we believe that all persons named in the table have sole voting and
investment power with respect to all the shares beneficially owned by them.
Except as otherwise indicated, the address of each stockholder is c/o the
company at 8797 Beverly Blvd., Los Angeles, California, 90048.
Name
and Address of Beneficial Owner |
|
|
Shares Beneficially Owned
(1) |
|
Percentage
of Class |
|
|
|
|
|
|
|
|
|
Jacek
Rozga, M.D., Ph.D. |
|
|
2,
331,000(2 |
) |
|
14.3% |
|
Achilles
A. Demetriou, M.D., Ph.D and Kristin P. Demetriou |
|
|
2,536,000(3 |
) |
|
15.4% |
|
John
M. Vierling, MD |
|
|
91,000(4 |
) |
|
* |
|
Roy
Eddleman |
|
|
428,669
(5 |
) |
|
2.6% |
|
Marvin
S. Hausman MD |
|
|
629,500(6 |
) |
|
3.8% |
|
Gary
Ballen (7)
140
Burlingame, Los
Angeles, California 90049 |
|
|
1,139,222(7 |
) |
|
6.8% |
|
Neuberger
Berman LLC 111
River Street - Suite 1000 Hoboken,
NJ 07030-5776(8) |
|
|
2,440,199(8 |
) |
|
14.4% |
|
LibertyView
Special Opportunities Fund, LP 111
River Street - Suite 1000 Hoboken,
NJ 07030-5776(9) |
|
|
1,357,466(9 |
) |
|
8.1% |
|
All
executive officers and directors as a group (5 persons) |
|
|
3,480,169
(10 |
) |
|
20.8% |
|
(1)
|
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of common stock subject to options, warrants
and convertible securities currently exercisable or convertible, or
exercisable or convertible within 60 days, are deemed outstanding,
including for purposes of computing the percentage ownership of the person
holding such option, warrant or convertible security, but not for purposes
of computing the percentage of any other holder.
|
(2)
|
Includes
currently exercisable options to purchase 66,000 shares of common stock.
|
(3)
|
Consists
of (i) 2,500,000 shares owned by the A & K Demetriou Family Trust, of
which Achilles A. Demetriou, M.D., Ph.D. and Kristin P. Demetriou each are
co-trustees with the right to vote or dispose of the trust’s shares, and
(ii) currently exercisable options to purchase 36,000 shares of common
stock issued to Kristin P. Demetriou.
|
(4)
|
Consists
of currently exercisable options to purchase 91,000 shares of common
stock.
|
(5)
|
Consists
of currently exercisable options to purchase 66,000 shares of common
stock, and 362,669 shares of common stock owned by Spectrum Laboratories,
Inc. Mr. Eddleman is the Chairman of the Board and Chief Executive Officer
of Spectrum Laboratories, Inc.
|
(6)
|
Consists
of (i) currently exercisable options to purchase 98,000 shares of common
stock, (ii) currently exercisable warrants to purchase 187,500 shares of
common stock, (iii) 100,000 shares owned by the Marvin Hausman Revocable
Trust, and (iv) 244,000 shares owned by Northwest Medical Research, Inc.
Dr. Hausman is the trustee of the Marvin Hausman Revocable Trust and the
Chief Executive Officer and principal stockholder of Northwest Medical
Research, Inc.
|
(7)
|
Includes
(i) 417,000 shares of common stock registered in Mr. Ballen’s name, (ii)
currently exercisable warrants to purchase 600,000 shares of common stock
owned by Mr. Ballen, and (iii) 122,222 shares registered in the name of
American Charter & Marketing LLC, over which Mr. Ballen has voting and
investment control.
|
(8)
|
Neuberger
Berman LLC is the investment adviser to, and Neuberger Berman Asset
Management, LLC, is the general partner of LibertyView Special
Opportunities Fund, LP, LibertyView Funds, LP and LibertyView Health
Sciences Fund, LP, which collectively own 1,661,466 shares of common
stock and warrants to purchase 778,733 additional shares of common stock.
|
(9)
|
Consists
of (i) 904,977 shares of common stock, and (ii) currently exercisable
warrants to purchase 452,489 shares of common stock.
|
(10)
|
Includes
currently exercisable options and warrants to purchase 508,500 shares of
common stock.
|
SELLING
STOCKHOLDERS
Selling
Stockholder Table
The
shares to be offered by the selling stockholders are "restricted" securities
under applicable federal and state securities laws and are being registered
under the Securities Act of 1933, as amended (the “Securities Act”), to give the
selling stockholders the opportunity to publicly sell or otherwise dispose of
those shares. The registration of these shares does not require that any of the
shares be offered or sold by the selling stockholders. The shares included in
this prospectus may be disposed of by the selling stockholders or their
transferees on any stock exchange, market, or trading facility on which the
shares are traded or in private transactions. These dispositions may be at fixed
prices, at prevailing market prices at the time of sale, at prices related to
the prevailing market price, at varying prices determined at the time of sale,
or at negotiated prices. We will not control or determine the price at which a
selling stockholder decides to dispose of its shares.
No
estimate can be given as to the amount or percentage of our common stock that
will be held by the selling stockholders after any sales or other dispositions
made pursuant to this prospectus because the selling stockholders are not
required to sell any of the shares being registered under this prospectus. The
following table assumes that the selling stockholders will sell all of the
shares listed in this prospectus.
The
following table sets forth the beneficial ownership of the selling
stockholders:
|
|
Beneficial
Ownership Before Offering(1) |
|
Beneficial
Ownership After Offering(1) |
|
|
|
|
|
Selling stockholder |
|
Number
of Shares |
Percent |
Number
of Shares Being
Offered |
Number
of Shares |
Percent |
|
|
|
|
|
|
|
4
P Management Partners, S.A.(2) |
|
37,500(3) |
* |
37,500 |
|
* |
Bristol
Investment Fund, Ltd.(4) |
|
169,683(5) |
1.04% |
169,683 |
|
* |
Brookstone
Biotech Ventures, LP(6) |
|
135,747(7) |
* |
135,747 |
|
* |
Cranshire
Capital, L.P.(8) |
|
112,500(9) |
* |
112,500 |
|
* |
Crescent
International Ltd.(10) |
|
150,000(11) |
* |
150,000 |
|
* |
Dr.
Susanne Schoen |
|
15,000(12) |
* |
15,000 |
|
* |
Heinz
Hoefliger |
|
37,500(13) |
* |
37,500 |
|
* |
Arnd
Wolpers |
|
15,000(14) |
* |
15,000 |
|
* |
Hilary
Lea Shane |
|
152,500(15) |
* |
112,500 |
40,000 |
* |
LibertyView
Funds, LP(16) |
|
678,733(17) |
4.13% |
678,733 |
|
* |
LibertyView
Special Opportunities Fund, LP(18) |
|
1,357,466(19) |
8.15% |
1,357,466 |
|
* |
Lindsey
A. Rosenwald |
|
169,683(20) |
1.04% |
169,683 |
|
* |
Nite
Capital LP(21) |
|
101,811(22) |
* |
101,811 |
|
* |
Omicron
Master Trust(23) |
|
169,683(24) |
1.04% |
169,683 |
|
* |
Prolate
LLC(25) |
|
101,811(26) |
* |
101,811 |
|
* |
Portside
Growth and Opportunity Fund(27) |
|
339,368(28) |
2.08% |
339,368 |
|
* |
SIBEX
Capital Fund Inc.(29) |
|
339,366(30) |
2.08% |
339,366 |
|
* |
TCMP3
Partners(31) |
|
105,000(32) |
* |
105,000 |
|
* |
Truk
International Fund, LP(33) |
|
6,108(34) |
* |
6,108 |
|
* |
Truk
Opportunity Fund, LLC(35) |
|
95,703(36) |
* |
95,703 |
|
* |
Vicis
Capital Master Fund(37) |
|
67,873(38) |
* |
67,873 |
|
* |
Whalehaven
Capital Fund Limited(39) |
|
169,683(40) |
1.04% |
169,683 |
|
* |
Rodman
& Renshaw, LLC(41) |
|
114,404(42) |
* |
114,404 |
|
* |
|
|
|
|
|
|
|
_________________________ |
|
|
|
|
|
|
*
Less than 1% |
|
|
|
|
|
|
(1) |
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of common stock subject to options, warrants
and convertible securities currently exercisable or convertible, or
exercisable or convertible within 60 days, are deemed outstanding,
including for purposes of computing the percentage ownership of the person
holding the option, warrant or convertible security, but not for purposes
of computing the percentage of any other holder. |
(2) |
Konrad
Meyer has voting and investment control of the securities held by 4 P
Management Partners, S.A. |
(3) |
Includes
currently exercisable warrants to purchase 12,500 shares of common
stock. |
(4) |
Paul
Kessler, manager of Bristol Capital Advisors LLC, the investment advisor
to Bristol Investment Fund, Ltd., has voting and investment control of the
securities held by Bristol Investment Fund, Ltd. Paul Kessler disclaims
beneficial ownership of these securities. |
(5) |
Includes
currently exercisable warrants to purchase 56,561 shares of common
stock. |
(6) |
Robert
L. Carver, President of Brookstone Capital, Inc., General Partner of
Brookstone Biotech Ventures, LP, has voting and investment control of the
securities held by Brookstone Biotech Ventures, LP. |
(7) |
Includes
currently exercisable warrants to purchase 45,249 shares of common
stock. |
(8) |
Mitchell
Koein, President of Downsview Capital, Inc., the General Partner of
Cranshire Capital, L.P., has voting and investment control of the
securities held by Cranshire Capital, L.P. |
(9) |
Includes
currently exercisable warrants to purchase 37,500 shares of common
stock. |
(10) |
Mel
Craw and Maxi Brezzi, managers of GreenLight (Switzerland) SA, the
investment advisor to Crescent International Ltd., have voting and
investment control of the securities held by Crescent International Ltd.
Mel Craw and Maxi Brezzi disclaim beneficial ownership of these
securities. |
(11) |
Includes
currently exercisable warrants to purchase 50,000 shares of common
stock. |
(12) |
Includes
currently exercisable warrants to purchase 5,000 shares of common
stock. |
(13) |
Includes
currently exercisable warrants to purchase 12,500 shares of common
stock. |
(14) |
Includes
currently exercisable warrants to purchase 5,000 shares of common
stock. |
(15) |
Includes
currently exercisable warrants to purchase 37,500 shares of common
stock. |
(16) |
Neuberger
Berman Asset Management, LLC is the general partner of LibertyView Funds,
LP. Neuberger Berman LLC is the investment adviser to Neuberger Berman
Asset Management, LLC and is responsible for the selection, acquisition
and disposition of the portfolio securities by this fund. LibertyView
Funds, LP is an affiliate of a registered broker-dealer. We have been
informed by LibertyView Funds, LP that it acquired the securities offered
by this prospectus for its own account in the ordinary course of business,
and that, at the time it acquired such securities, it had no agreement or
understanding, direct or indirect, with any person to distribute such
securities. |
(17) |
Includes
currently exercisable warrants to purchase 226,244 shares of common
stock. |
(18) |
Neuberger
Berman Asset Management, LLC is the general partner of LibertyView Special
Opportunities Fund, L.P. Neuberger Berman LLC is the investment adviser to
Neuberger Berman Asset Management, LLC and is responsible for the
selection, acquisition and disposition of the portfolio securities by this
fund. LibertyView Special Opportunities Fund, LP is an affiliate of a
registered broker-dealer. We have been informed by LibertyView Special
Opportunities Fund, LP that it acquired the securities offered by this
prospectus for its own account in the ordinary course of business, and
that, at the time it acquired such securities, it had no agreement or
understanding, direct or indirect, with any person to distribute such
securities. |
(19) |
Includes
currently exercisable warrants to purchase 452,489 shares of common
stock. |
(20) |
Includes
currently exercisable warrants to purchase 56,561 shares of common
stock. |
(21) |
Keith
Goodman has voting and investment control of the securities held by Nite
Capital LP. |
(22) |
Includes
currently exercisable warrants to purchase 33,937 shares of common
stock. |
(23) |
Omicron
Capital, L.P., a Delaware limited partnership (“Omicron Capital”), serves
as investment manager to Omicron Master Trust, a trust formed under the
laws of Bermuda (“Omicron”), Omicron Capital, Inc., a Delaware corporation
(“OCI”), serves as general partner of Omicron Capital, and Winchester
Global Trust Company Limited (“Winchester”) serves as the trustee of
Omicron. By reason of such relationships, Omicron Capital and OCI may be
deemed to share dispositive power over the shares of our common stock
owned by Omicron, and Winchester may be deemed to share voting and
dispositive power over the shares of our common stock owned by Omicron.
Omicron Capital, OCI and Winchester disclaim beneficial ownership of such
shares of our common stock. Omicron Capital has delegated authority from
the board of directors of Winchester regarding the portfolio management
decisions with respect to the shares of common stock owned by Omicron and,
as of the date of this prospectus, Mr. Olivier H. Morali and
Mr. Bruce T. Bernstein, officers of OCI, have delegated authority
from the board of directors of OCI regarding the portfolio management
decisions of Omicron Capital with respect to the shares of common stock
owned by Omicron. By reason of such delegated authority, Messrs. Morali
and Bernstein may be deemed to share dispositive power over the shares of
our common stock owned by Omicron. Messrs. Morali and Bernstein
disclaim beneficial ownership of such shares of our common stock and
neither of such persons has any legal right to maintain such delegated
authority. No other person has sole or shared voting or dispositive power
with respect to the shares of our common stock being offered by Omicron,
as those terms are used for purposes under Regulation 13D-G of the
Securities Exchange Act of 1934, as amended. Omicron and Winchester are
not “affiliates” of one another, as that term is used for purposes of the
Securities Exchange Act of 1934, as amended, or of any other person named
in this prospectus as a selling stockholder. No person or “group” (as that
term is used in Section 13(d) of the Securities Exchange Act of 1934, as
amended, or the SEC’s Regulation 13D-G) controls Omicron and
Winchester. |
(24) |
Includes
currently exercisable warrants to purchase 56,561 shares of common
stock. |
(25) |
S.
Donald Sussman has voting and investment control of the securities held by
Prolate LLC. |
(26) |
Includes
currently exercisable warrants to purchase 33,937 shares of common
stock. |
(27) |
Peter
A. Cohen, Morgan B. Stark, Thomas W. Strauss and Jeffrey M. Solomon, the
managing members of C4S & Co., LLC, the managing member of Ramius
Capital Group, LLC, the investment adviser of Portside Growth and
Opportunity Fund, have voting and investment control of the securities
held by Portside Growth and Opportunity Fund. Peter A. Cohen, Morgan B.
Stark, Thomas W. Strauss and Jeffrey M. Solomon disclaim beneficial
ownership of these securities. |
(28) |
Includes
currently exercisable warrants to purchase 113,123 shares of common
stock. |
(29) |
Viacheslav
Chebotarevich and Oleg S. Krasnoshchek share voting and investment control
of the securities held by SIBEX Capital Fund Inc. |
(30) |
Includes
currently exercisable warrants to purchase 113,122 shares of common
stock. |
(31) |
Steven
Slawson and Walter Schecter have voting and investment control of the
securities held by TCMP3 Partners. |
(32) |
Includes
currently exercisable warrants to purchase 35,000 shares of common
stock. |
(33) |
Michael
E. Fein and Stephen E. Saltzstein, as principals of Atoll Asset
Management, LLC, the managing member of Truk International Fund, LP, have
voting and investment control of the securities held by Truk International
Fund, LP. Michael E. Fein and Stephen E. Saltzstein disclaim beneficial
ownership of these securities. |
(34) |
Includes
currently exercisable warrants to purchase 2,036 shares of common
stock. |
(35) |
Michael
E. Fein and Stephen E. Saltzstein, as principals of Atoll Asset
Management, LLC, the managing member of Truk Opportunity Fund, LLC, have
voting and investment control of the securities held by Truk Opportunity
Fund, LLC. Michael E. Fein and Stephen E. Saltzstein disclaim beneficial
ownership of these securities. |
(36) |
Includes
currently exercisable warrants to purchase 31,901 shares of common
stock. |
(37) |
Richard
Han has voting and investment control of the securities held by Vicis
Capital Master Fund. |
(38) |
Includes
currently exercisable warrants to purchase 22,624 shares of common
stock. |
(39) |
Evan
Schemenaur, Arthur Jones and Jennifer Kelly have voting and investment
control of the securities held by Whalehaven Capital Fund
Limited. |
(40) |
Includes
currently exercisable warrants to purchase 56,561 shares of common
stock. |
(41) |
Thomas
G. Pinou, Chief Financial Officer of Rodman & Renshaw, LLC has voting
and investment control of the securities held by Rodman & Renshaw,
LLC. |
(42) |
Consists
of shares issuable upon the exercise of currently exercisable warrants to
purchase shares of common stock. |
|
|
Relationships
with Selling Stockholders
Other
than Rodman & Renshaw LLC, all of the selling stockholders are investors who
purchased their securities from us in the $6,611,905 private placement that was
completed on January 11, 2005. Except as set forth below, none of the selling
stockholders has held any position or office with us or any of our affiliates,
or has had any other material relationship (other than as purchasers of
securities) with us or any of our affiliates, within the past three years.
Dr.
Richard Bank was a member of this company’s Board of Directors from December
2003 through January 15, 2005. Dr. Bank is a Senior Vice President of Neuberger
Berman, LLC, the parent company of the LibertyView funds, including LibertyView
Special Opportunities Fund, LP and LibertyView Funds, LP, and is the portfolio
manager of LibertyView Health Sciences Fund, LP.
Rodman
& Renshaw to act as our placement agent in the January 11, 2005 private
placement. We paid Rodman & Renshaw a cash fee of $252,833 at the closing
and issued to Rodman & Renshaw warrants to purchase 114,404 shares of our
common stock, which shares are included in this prospectus. The warrants issued
to Rodman & Renshaw have the same terms and conditions as the warrants
issued to the investors in the private placement. In addition, we paid Rodman
& Renshaw $25,000 as a reimbursement the out-of-pocket expenses it incurred
in the offering.
4P
Management Partners S.A. of Zurich, Switzerland has been our investor relations
service company in Europe since July, 2004. In connection with retaining 4P
Management, we issued two warrants to 4P Management Partners S.A. to purchase an
aggregate of 100,000 shares of common stock. The securities of 4P Management
included in this prospectus were purchased for cash by 4P Management in the
January 11, 2005 private placement.
The
information in the above table is as of the date of this prospectus. Information
concerning the selling stockholders may change from time to time and any such
changed information will be described if and when necessary in supplements to
this prospectus or, if appropriate, a post-effective amendment to the
registration statement of which this prospectus is a part.
PLAN
OF DISTRIBUTION
The
selling stockholders, which as used herein includes donees, pledgees,
transferees or other successors-in-interest selling shares of common stock or
interests in shares of common stock received after the date of this prospectus
from a selling stockholder as a gift, pledge, partnership distribution or other
transfer, may, from time to time, sell, transfer or otherwise dispose of any or
all of their shares of common stock or interests in shares of common stock on
any stock exchange, market or trading facility on which the shares are traded or
in private transactions. These dispositions may be at fixed prices, at
prevailing market prices at the time of sale, at prices related to the
prevailing market price, at varying prices determined at the time of sale, or at
negotiated prices.
The
selling stockholders may use any one or more of the following methods when
disposing of shares or interests therein:
—
ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
—
block trades in which the broker-dealer will attempt to sell the shares as
agent, but may position and resell a portion of the block as principal to
facilitate the transaction;
—
purchases by a broker-dealer as principal and resale by the broker-dealer for
its account;
—
an exchange distribution in accordance with the rules of the applicable
exchange;
—
privately negotiated transactions;
—
short sales effected after the date the registration statement of which this
prospectus is a part is declared effective by the SEC;
—
through the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
—
broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share;
—
a combination of any such methods of sale; and
—
any other method permitted pursuant to applicable law.
The
selling stockholders may, from time to time, pledge or grant a security interest
in some or all of the shares of common stock owned by them and, if they default
in the performance of their secured obligations, the pledgees or secured parties
may offer and sell the shares of common stock, from time to time, under this
prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus. The selling stockholders also may
transfer the shares of common stock in other circumstances, in which case the
transferees, pledgees or other successors in interest will be the selling
beneficial owners for purposes of this prospectus.
In
connection with the sale of our common stock or interests therein, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
aggregate proceeds to the selling stockholders from the sale of the common stock
offered by them will be the purchase price of the common stock less discounts or
commissions, if any. Each of the selling stockholders reserves the right to
accept and, together with their agents from time to time, to reject, in whole or
in part, any proposed purchase of common stock to be made directly or through
agents. We will not receive any of the proceeds from this offering. Upon any
exercise of the warrants by payment of cash, however, we will receive the
exercise price of the warrants.
The
selling stockholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act of 1933,
provided that they meet the criteria and conform to the requirements of that
rule.
The
selling stockholders and any underwriters, broker-dealers or agents that
participate in the sale of the common stock or interests therein may be
"underwriters" within the meaning of Section 2(11) of the Securities Act. Any
discounts, commissions, concessions or profit they earn on any resale of the
shares may be underwriting discounts and commissions under the Securities Act.
Selling stockholders who are "underwriters" within the meaning of Section 2(11)
of the Securities Act will be subject to the prospectus delivery requirements of
the Securities Act.
To
the extent required, the shares of our common stock to be sold, the names of the
selling stockholders, the respective purchase prices and public offering prices,
the names of any agents, dealer or underwriter, any applicable commissions or
discounts with respect to a particular offer will be set forth in an
accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this
prospectus.
In
order to comply with the securities laws of some states, if applicable, the
common stock may be sold in these jurisdictions only through registered or
licensed brokers or dealers. In addition, in some states the common stock may
not be sold unless it has been registered or qualified for sale or an exemption
from registration or qualification requirements is available and is complied
with.
We
have advised the selling stockholders that the anti-manipulation rules of
Regulation M under the Exchange Act may apply to sales of shares in the market
and to the activities of the selling stockholders and their affiliates. In
addition, we will make copies of this prospectus (as it may be supplemented or
amended from time to time) available to the selling stockholders for the purpose
of satisfying the prospectus delivery requirements of the Securities Act. The
selling stockholders may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against certain liabilities,
including liabilities arising under the Securities Act.
We
have agreed to indemnify the selling stockholders against liabilities, including
liabilities under the Securities Act and state securities laws, relating to the
registration of the shares offered by this prospectus.
We
have agreed with the selling stockholders to keep the registration statement of
which this prospectus constitutes a part effective until the earlier of (1) such
time as all of the shares covered by this prospectus have been disposed of
pursuant to and in accordance with the registration statement or (2) the date on
which the shares may be sold pursuant to Rule 144(k) of the Securities
Act.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions
Between Us and Our Affiliates
On
December 26, 2001, ATI entered into various agreements with Spectrum
Laboratories, Inc. (“Spectrum Labs”). Concurrently with these agreements,
Spectrum Labs also purchased 362,669 shares of ATI’s common stock. Mr. Eddleman,
one of the members of our Board of Directors, is the Chairman and CEO of
Spectrum Labs. The three principal agreements entered into by ATI and Spectrum
Labs in December 2001 are the following:
A. License
Agreement. Spectrum Labs granted to ATI an exclusive, worldwide
license to develop, make, use and distribute products based on two Spectrum Labs
patents. Provided that ATI purchases the hollow fiber cartridges that it expects
that it will need for its products from Spectrum Labs, ATI will not have to pay
a royalty for the license. In the event that Spectrum Labs is not the
manufacturer of the hollow fiber cartridges, ATI will have to pay Spectrum Labs
a royalty for the license (see, “Business--Manufacturing and Supply Agreement”).
Spectrum Labs also agreed to grant ATI a right of first refusal to obtain a
license to make, use, develop or distribute products based on Spectrum Labs’
technology other than in liver assisted products, provided that such other
products are in the fields of artificial blood therapy and bioprocessing and
therapeutic devices.
B. Research
Agreement. ATI and Spectrum Labs also entered into a four-year
research agreement pursuant to which ATI and Spectrum Labs agreed to combine
their expertise and their respective technologies to enable ATI to (i) develop
liver assist systems, (ii) conduct pre-clinical and Phase I-III clinical
testing, (iii) obtain regulatory approvals and (iv) commercialize such liver
assist systems. Under the terms of the agreement, Spectrum Labs agreed to
perform certain research toward the development of hollow fiber-in-fiber modules
for ATI’s liver assist systems during product development, pre-clinical and
clinical testing at no cost to ATI. Spectrum Labs also agreed to pay for all
costs and expenses in connection with the research program and agreed to
allocate a total of $550,000 to the program during the research term. In October
2002, ATI and Spectrum Labs agreed that Spectrum Labs has now satisfied its
research and development obligations, that ATI owed Spectrum Labs an additional
$54,960 for services provided by Spectrum Labs (which amount has been paid in
full), and that the 362,669 shares of ATI common stock previously issued to
Spectrum Labs are now fully vested. Spectrum Labs has agreed to perform
additional research and development work as may be requested by ATI on such
terms as the parties may agree to in good faith negotiations.
C. Manufacturing
and Supply Agreement. ATI and Spectrum Labs have also entered
into an agreement pursuant to which the parties have agreed that Spectrum Labs
will manufacture for ATI the hollow fiber cartridges with fiber-in-fiber
geometry that ATI intends to use for its LIVERAID™ device. The agreement
provides that the price of the hollow fiber-in-fiber cartridges to be sold by
Spectrum Labs to ATI will be determined by good faith negotiations between the
parties. ATI has agreed that it will not purchase cartridges with fiber-in-fiber
geometry from any other manufacturer unless Spectrum Labs is either unable or
unwilling to manufacture the cartridges. In the event that Spectrum Labs is
unwilling to manufacture the fiber-in-fiber cartridges for ATI, ATI shall have
the right to have a third party manufacture the cartridges for it, in which case
ATI will pay Spectrum Labs a royalty for the license granted to ATI by Spectrum
Labs under the License Agreement. The royalty shall be equal to 3% of the net
sales (total sales less taxes, returns, transportation, insurance, and handling
charges) attributed solely to the fiber-in-fiber cartridges.
In
July 2003, ATI granted Dr. Marvin Hausman a five-year warrant to purchase 50,000
shares of common stock, at an exercise price of $1.00 per share, in
consideration for Dr. Hausman’s efforts in introducing ATI to an investor who
made a $250,000 investment in ATI. Dr. Hausman is a member of this company’s
Board of Directors and a member of ATI’s Board of Directors.
Dr.
Richard Bank received a warrant to purchase 40,000 shares of our common stock as
a fee for introducing certain investors to this company in September 2003. The
warrant is exercisable at any time until January 5, 2007 at an exercise price of
$2.50 per share. At the time of the warrant issuance, Dr. Bank was a director of
this company.
DESCRIPTION
OF SECURITIES
We
are presently authorized to issue 25,000,000 shares of $.001 par value common
stock and 5,000,000 shares of $0.001 par value preferred stock. As of the date
of this prospectus, we had 16,207,909 shares of common stock issued and
outstanding and no preferred stock issued and outstanding.
Common
Stock
The
holders of our common stock are entitled to equal dividends and distributions
per share with respect to the common stock when, as and if declared by the board
of directors from funds legally available therefore. No holder of any shares of
common stock has a preemptive right to subscribe for any of our securities, nor
are any common shares subject to redemption or convertible into other
securities. Upon liquidation, dissolution or winding-up of our company, and
after payment of creditors and preferred stockholders, if any, the assets will
be divided pro rata on a share-for-share basis among the holders of the shares
of common stock. All shares of common stock now outstanding are fully paid,
validly issued and non-assessable. Each share of our common stock is entitled to
one vote with respect to the election of any director or any other matter upon
which stockholders are required or permitted to vote.
Preferred
Stock
Under
our articles of incorporation, the board of directors has the power, without
further action by the holders of the common stock, to designate the relative
rights and preferences of the preferred stock, and to issue the preferred stock
in one or more series as designated by the board of directors. The designation
of rights and preferences could include preferences as to liquidation,
redemption and conversion rights, voting rights, dividends or other preferences,
any of which may be dilutive of the interest of the holders of the common stock
or the preferred stock of any other series. The issuance of preferred stock may
have the effect of delaying or preventing a change in control of the company
without further stockholder action and may adversely affect the rights and
powers, including voting rights, of the holders of the common
stock.
Registration
Rights
In
2003 we entered into registration rights agreements with the investors who, in
the aggregate, purchased 4,400,000 units. Each unit consisted of one share our
common stock and one common stock purchase warrant. In those registration rights
agreements, we agreed to file a registration statement, at our expense, to
register the resale of the 4,400,000 shares of our common stock that are
issuable upon the exercise of the warrants held by those investors. Our Board of
Directors has also approved the registration of the 4,400,000 shares that were
included in the units. The registration statement is required to be filed after
January 31, 2004 if (i) requested in writing by the holders of a majority of the
then outstanding warrants (including any shares previously issued upon the
exercise of the warrants), and
(ii) the closing price of our common stock has exceeded $2.50 for 20 consecutive
trading days. The shares that we are obligated to register under the foregoing
registration rights agreements have been registered in a prior registration
statement.
The
warrant that we issued to Wolfe Axelrod Weinberger Associates LLC for the
purchase of 75,000 shares of our common stock granted the holder of that warrant
“piggyback registration” rights. Under the piggyback registration provisions, we
are required, subject to certain limited exceptions, to register the 75,000
shares of our common stock in any registration statement that we file. All of
the shares issuable to Wolfe Axelrod Weinberger Associates LLC have already been
included in a prior registration statement. Accordingly, unless that prior
registration statement is withdrawn prior to the time that Wolfe Axelrod
Weinberger Associates LLC sells its warrant shares under that registration
statement, we will have no further obligation to register and of these warrant
shares under the registration rights provision of the warrant.
In
connection with the organization and initial capitalization of ATI, we also
granted certain “piggy-back” registration rights to The A & K Demetriou
Family Trust, Jacek Rozga, and Cedars-Sinai Medical Center, our initial three
stockholders. Under these agreements, subject to certain customary conditions
and exceptions, the foregoing three stockholders have the right to include in
any future registration statement filed by this company some or all of their
shares of the common stock. The shares of common stock owned by Cedars-Sinai
Medical Center have been included in a prior, currently effective, registration
statement. Accordingly, unless that prior registration statement is withdrawn a
before Cedars-Sinai its shares under that registration statement, we will have
no further obligation to register the shares of Cedars-Sinai. The A & K
Demetriou Family Trust, Jacek Rozga have waived their rights to have their
shares included in this prospectus.
On
January 11, 2005, we sold 2,991,812 shares of our common stock and issued
warrants to purchase 1,495,906 shares of our common stock. In connection with
the sale of these securities, we entered into a registration rights agreement
with the investors pursuant to which we agreed to file a registration statement,
at our expense, to register the resale of the foregoing 2,991,812 shares of our
common stock as well as the 1,495,906 shares of our common stock that are
issuable upon exercise of the stock purchase warrants. The registration
statement is required to be prepared and filed no later than the 30th day
immediately following the closing date of private placement.
This
prospectus includes 4,488,718 shares that we are obligated to register under the
foregoing registration rights agreement. We are required to use commercially
reasonable efforts to have the registration statement declared effective by the
SEC as soon as practicable. If the registration statement is not declared
effective within 90 days of the closing date of the private placement (or 120
days if the registration statement is subjected to a full review by the SEC), we
will be subject to the payment of liquidated damages to the investors as
described in the registration rights agreement. In addition, if after
the registration statement has been declared effective by the SEC, sales cannot
be made by the investors under this prospectus for any reason (including without
limitation by reason of a stop order, or our failure to update the prospectus)
for 20 consecutive days (or 45 days during any 12-month period), then
we will be required to pay each investor, as liquidated damages and not as a
penalty, an amount equal to 1.5% of the aggregate purchase price paid by such
investor for his shares for each 30-day period or a pro rata payment for any
portion thereof following the date by which this prospectus should have been
effective
Shares
Eligible For Future Sale
As
of the date of this prospectus, we had 16,207,909 shares of common stock
outstanding. That number does not include (i) the 743,000 shares that are
reserved for issuance under outstanding options and that may be issued if and
when the options are exercised, or (ii) 7,282,810 shares that may be issued upon
the exercise of currently outstanding warrants (including the warrants to
purchase 1,810,310 shares that are owned by the selling stockholders listed in
this prospectus).
Freely
Tradeable Shares After Offering.
As of the date of this prospectus, excluding the shares that are covered by this
prospectus, 8,363,097 shares of our 16,207,909 currently outstanding shares can
be publicly resold. Upon the re-sale of the 2,991,812 currently outstanding
shares covered by this prospectus, and the exercise and sale of the 1,610,310
warrant shares included in this prospectus, all of these 4,602,122 shares will
also be freely tradable without restriction or limitation under the Securities
Act. As a result, after the completion of this offering, there will be a total
of 12,765,219 shares of our common stock that will be tradable without
restriction under the Securities Act. In addition, we have also previously
registered 5,597,500 additional shares of our common stock that can be issued
upon the exercise of outstanding warrants and can also be immediately resold
pursuant to that prior registration statement..
Rule
144.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned restricted securities shares
for at least one year, including persons who may be deemed our “affiliates,” as
that term is defined under the Securities Act, would be entitled to sell within
any three month period a number of shares that does not exceed the greater of 1%
of the then outstanding shares (approximately 162,079 shares if the currently
outstanding warrants and options are not exercised, or 180,182 shares if all
outstanding options and warrants are exercised) or the average weekly trading
volume of shares during the four calendar weeks preceding such sale. Sales under
Rule 144 are subject to certain manner-of-sale provisions, notice requirements
and the availability of current public information about the company. A person
who has not been our affiliate at any time during the three months preceding a
sale, and who has beneficially owned his shares for at least two years, would be
entitled under Rule 144(k) to sell such shares without regard to any volume
limitations under Rule 144.
Currently,
there are 4,900,500 unregistered shares outstanding, of which 4,835,000 are
currently eligible for public resale under Rule 144. The remaining 65,500 shares
will become eligible for public resale under Rule 144 at various times in 2005.
The future availability of Rule 144 to our holders of restricted securities
would be conditioned on, among other factors, the availability of certain public
information concerning the company.
Form
S-8 Registration of Options.
We intend to file a registration statement on Form S-8 covering the shares of
common stock that have been reserved for issuance under our stock option plan,
which would permit the resale of such shares in the public
marketplace.
Transfer
Agent
Our
transfer agent currently is The Nevada Agency and Trust Company, 50 West Liberty
Street, Suite 880, Reno, Nevada 89501.
CHANGE
OF ACCOUNTANTS
On
January 27, 2004, our board of directors approved, by unanimous written consent,
resolutions to dismiss our former independent accountants, Williams and Webster,
P.S. (“Williams”). Williams’ report on our financial statements for the prior
two years did not contain an adverse opinion or disclaimer of opinion, and was
not modified as to uncertainty, audit scope, or accounting principles, except
that there was an explanatory paragraph relating to our ability to continue as a
going concern.
During
the two prior fiscal years, we had no disagreements with Williams, whether or
not resolved, on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which, if not resolved to
Williams’ satisfaction, would have caused it to make reference to the subject
matter of the disagreement in connection with its report. Williams did
not advise us of any of the events requiring reporting under the Commission’s
rules.
On
January 27, 2004, our board also approved, by unanimous written consent,
resolutions to engage Stonefield Josephson, Inc. as our independent accountants
to audit our financial statements for the year ending December 31, 2003, and for
quarterly statements during 2004. Stonefield Josephson, Inc. audited the
financial statements of our Arbios Technologies, Inc. subsidiary for the fiscal
year ended December 31, 2002. We did not consult with Stonefield Josephson, Inc.
regarding the application of accounting principles to a specific, completed or
contemplated transaction, or the type of audit opinion that might be rendered on
our financial statements prior to the engagement.
INTERESTS
OF NAMED EXPERTS AND COUNSEL
No
expert or counsel was hired on a contingent basis that will receive a direct or
indirect interest in our business that is valued at greater than
$50,000.
The
financial statements for the years ended December 31, 2003 and 2002 included in
this prospectus have been audited by Stonefield Josephson, Inc. to the extent
and for the periods indicated in their report thereon. Such financial statements
have been included in this prospectus and registration statement in reliance
upon the report of Stonefield Josephson, Inc. and upon the authority of such
firm as experts in auditing and accounting.
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION
FOR
SECURITIES ACT LIABILITIES
Our
Articles of Incorporation provide that no officer or director shall be
personally liable to this corporation or its stockholders for monetary damages
except as provided pursuant to Nevada Revised Statutes. Our bylaws and Articles
of Incorporation also provide that we shall indemnify and hold harmless each
person who serves at any time as a director or officer of Arbios Systems, Inc.
from and against any and all claims, judgments and liabilities to which such
person shall become subject by reason of the fact that he is or was a director
or officer of Arbios Systems, Inc., and shall reimburse such person for all
legal and other expenses reasonably incurred by him or her in connection with
any such claim or liability. We also have the power to defend such person from
all suits or claims in accord with the Nevada Revised Statutes. The rights
accruing to any person under our bylaws and Articles of Incorporation do not
exclude any other right to which any such person may lawfully be entitled, and
we may indemnify or reimburse such person in any proper case, even though not
specifically provided for by the bylaws and Articles of
Incorporation.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
LEGAL
MATTERS
Troy
& Gould Professional Corporation, Los Angeles, California, has rendered an
opinion with respect to the validity of the shares of common stock covered by
this prospectus. Attorneys at Troy & Gould Professional Corporation
collectively own 75,000 shares of our common stock.
WHERE
YOU CAN FIND MORE INFORMATION
We
have filed with the Securities and Exchange Commission a registration statement
on Form SB-2 under the Securities Act for the common stock offered under this
prospectus. We are subject to the informational requirements of the Exchange
Act, and file annual reports, quarterly reports, special reports, proxy
statements and other information with the Commission. These reports, proxy
statements and other information filed by Arbios Systems, Inc. can be inspected
and copied at the public reference facilities of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of these materials can be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a Web
site that contains reports, proxy statements, information statements and other
information concerning Arbios Systems, Inc. at the site located at
http://www.sec.gov. This prospectus does not contain all the information in the
registration statement and its exhibits, which we have filed with the Commission
under the Securities Act and to which reference is made.
GLOSSARY
OF TERMS
“Dialysate”
is a cleansing liquid used in the two forms of dialysis—hemodialysis and
peritoneal dialysis.
“Dialysis”
is
the process of cleaning wastes from the blood artificially. This job is normally
done by the kidney and liver.
“Extracorporeal”
means situated or occurring outside the body.
“Ex
vivo”
pertains to a biological process or reaction taking place outside of a living
cell or organism.
“Fulminant”
means
occurring suddenly, rapidly, and with great severity or intensity.
“Hemodialysis”
pertains
to the use of a machine to clean wastes from blood after the kidneys have
failed. The blood flows through a device called a dialyzer, which removes the
wastes. The cleaned blood then flows back into the body.
“Hemofiltration/
Hemofiltrate
"Hemofiltration" is a continuous dialysis therapy in which blood is pumped
through a hollow-fiber cartridge and the liquid portion of blood containing
substances are removed into the sink compartment. The liquid portion of the
blood ("hemofiltrate") is discarded.
“Hepatitis”
is
an inflammation of the liver caused by infectious or toxic agents.
“Hepatocytes”
are
the organ tissue cells of the liver.
“kDa”
is
a measure of molecular weight using “Daltons” (abbreviated as “Da”). One “Da” is
1/12 of the weight of an atom carbon 12C.
“kDa” is a kilodalton, or a 1,000 Daltons.
“IND”
means Investigational New Drug application.
“In
vitro”
pertains to a biochemical process or reaction taking place in a test-tube (or
more broadly, in a laboratory) as opposed to taking place in a living cell or
organism.
“In
vivo”
pertains to a biological process or reaction taking place in a living cell or
organism.
“PERV”
means the porcine endogenous retrovirus.
“Plasma”
is the clear, yellowish fluid portion of blood. Plasma differs from serum in
that it contains fibrin and other soluble clotting elements.
“Porcine”
means
of or pertaining to swine; characteristic of the hog.
“Regeneration”
means
regrowth of lost or destroyed parts or organs.
“Sorbent”
means
to take in and adsorb or absorb.
INDEX
TO FINANCIAL STATEMENTS
INDEX
TO AUDITED
FINANCIAL
STATEMENTS FOR
ARBIOS
SYSTEMS, INC.
INDEPENDENT
AUDITORS REPORT |
|
F-1 |
CONSOLIDATED
FINANCIAL STATEMENTS: |
|
|
|
CONSOLIDATED
BALANCE SHEET |
|
F-2 |
|
CONSOLIDATED
STATEMENTS OF OPERATIONS |
|
F-3 |
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY |
|
F-4 |
|
CONSOLIDATED
STATEMENTS OF CASH FLOW |
|
F-7 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS |
|
F-8 |
INDEX
TO UNAUDITED QUARTERLY
FINANCIAL
STATEMENTS FOR
ARBIOS
SYSTEMS, INC.
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS: |
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEET |
|
F-21 |
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS |
|
F-22 |
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOW |
|
F-23 |
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
|
F-24 |
AUDITED
FINANCIAL
STATEMENTS
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors
Arbios
Systems, Inc. and Subsidiary
Beverly
Hills, California
We have
audited the accompanying consolidated balance sheet of Arbios Systems, Inc. and
Subsidiary as of December 31, 2003 and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended December 31,
2003 and 2002, and from August 23, 2000 (inception) to December 31, 2003. These
consolidated 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 auditing 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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 Arbios Systems, Inc. and Subsidiary
as of December 31, 2003 and the results of their operations and cash flows for
the years ended December 31, 2003 and 2002, and from August 23, 2000 (inception)
to December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
/s/
STONEFIELD JOSEPHSON, INC.
CERTIFIED
PUBLIC ACCOUNTANTS
Santa
Monica, California
March 9,
2004
ARBIOS
SYSTEMS, INC. AND SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
BALANCE SHEET - DECEMBER 31, 2003
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
|
|
$ |
3,507,086 |
|
|
|
|
|
|
|
Prepaid expenses |
|
|
|
|
|
|
|
|
155,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,663,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PATENT RIGHTS, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
324,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEPOSITS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,040,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
|
|
|
|
|
$ |
148,229 |
|
|
|
|
|
|
|
Current maturities of capital lease
obligation |
|
|
|
|
|
|
|
|
8,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
156,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligation, less current
maturities |
|
|
|
|
|
|
|
|
6,826 |
|
|
|
|
|
|
|
Other liabilities |
|
|
|
|
|
|
|
|
5,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value,
5,000,000 shares authorized none issued and outstanding |
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
Common stock, $0.001 par value; 25,000,000
sharesauthorized; 13,150,598 shares issued and outstanding |
|
|
|
|
|
|
|
|
13,151 |
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
5,485,498 |
|
|
|
|
|
|
|
Deficit accumulated during the
development stage |
|
|
|
|
|
|
|
|
(1,627,501 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity |
|
|
|
|
|
|
3,871,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,040,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes form an integral part of these consolidated financial
statements.
ARBIOS
SYSTEMS, INC. AND SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Year ended December 31, 2003 |
|
|
Year ended December 31, 2002 |
|
|
|
August 23, 2000 (Inception) to Period Ended December
31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES |
|
$ |
137,828 |
|
|
|
$ |
111,108 |
|
|
|
$ |
248,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative |
|
|
340,067 |
|
|
|
|
172,737 |
|
|
|
|
617,239 |
|
Research and
development |
|
|
436,849 |
|
|
|
|
431,199 |
|
|
|
|
1,009,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses |
|
|
776,916 |
|
|
|
|
603,936 |
|
|
|
|
1,626,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE OTHER EXPENSE |
|
|
(639,088 |
) |
|
|
|
(492,828 |
) |
|
|
|
(1,377,977 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(243,230 |
) |
|
|
|
(830 |
) |
|
|
|
(243,157 |
) |
INTEREST EXPENSE, NET |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE PROVISION FOR INCOME TAXES |
|
|
(882,318 |
) |
|
|
|
(493,658 |
) |
|
|
|
(1,621,134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES |
|
|
3,375 |
|
|
|
|
1,122 |
|
|
|
|
6,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS |
|
$ |
(885,693 |
) |
|
|
$ |
(494,780 |
) |
|
|
$ |
(1,627,501 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED LOSS PER SHARE |
|
$ |
(0.11 |
) |
|
|
$ |
(0.08 |
) |
|
|
$ |
(0.27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED WEIGHTED AVERAGE |
|
|
|
|
|
|
COMMON SHARES OUTSTANDING |
|
|
7,887,237 |
|
|
|
|
5,897,225 |
|
|
|
|
6,091,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes form an integral part of these consolidated financial
statements.
ARBIOS
SYSTEMS, INC. AND SUBSIDIARY
(A
Development Stage Company)
CONSOLIDATED
STATEMENT OF STOCKHOLDER'S EQUITY
PERIOD
FROM AUGUST 23, 2000 (INCEPTION) TO DECEMBER 31, 2003
|
|
Preferred Stock |
Common Stock |
Additional |
|
|
|
|
|
|
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, August 23, 2000 (inception) restated for effect of
reverse merger with Historical Autographs U.S.A., Inc. |
|
|
|
|
|
|
|
|
— |
|
$ |
— |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issuance in exchange for cash |
|
|
|
|
|
|
|
|
5,000,000 |
|
|
50 |
|
|
4,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2000, as restated |
|
|
— |
|
|
— |
|
|
5,000,000 |
|
|
50 |
|
|
4,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of junior preferred stock for cash of $
250,000 and in exchange for patent rights,research and development
costs, and employee loan-out costs less issuance expenses of $11,268, June
29, 2001 |
|
|
681,818 |
|
|
7 |
|
|
|
|
|
|
|
|
958,278 |
|
|
|
Deferred Costs |
|
|
Deficit Accumulated During
the Development Stage |
|
|
Total |
|
|
|
|
|
|
|
|
|
Balance, August 23, 2000 (inception) restated for effect of
reverse merger with Historical Autographs U.S.A., Inc. |
|
|
|
|
|
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
Stock issuance in exchange for cash |
|
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
(9,454 |
) |
|
(9,454 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,2000, as restated |
|
|
— |
|
|
(9,454 |
) |
|
(4,454 |
) |
|
|
|
|
|
|
|
|
|
|
|
Issuance of junior preferred stock for cash of $250,000 and in
exchange for patent rights, research and development costs, and employee
loan-out costs less issuance expenses of $11,268, June 29, 2001 |
|
|
(343,553 |
) |
|
|
|
|
614,732 |
|
The
accompanying notes form an integral part of these consolidated financial
statements.
ARBIOS
SYSTEMS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD
FROM AUGUST 23, 2000 (INCEPTION) TO DECEMBER 31, 2003
|
|
Preferred Stock |
|
Common Stock |
|
Additional
Paid-In |
|
Deferred |
|
Development |
|
|
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Capital |
|
Costs |
|
Stage |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exchange for patent rights and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deferred research and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development costs |
|
|
|
|
|
362,669 |
|
4 |
|
547,284 |
|
|
|
|
|
547,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(550,000 |
) |
|
|
|
|
550,000 |
) |
Deferred employee |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loan-out costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
receivable earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,888 |
|
|
|
|
|
82,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(237,574 |
) |
|
(237,574 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2001 |
|
|
681,818 |
|
|
7 |
|
|
5,362,669 |
|
|
54 |
|
|
1,510,512 |
|
|
(810,665 |
) |
|
(247,028 |
) |
|
452,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amendment of December |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31, 2001 agreement for the issuance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of common stock agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in exchange for research and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(495,599 |
) |
|
550,000 |
|
|
|
|
|
54,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred employee |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loan-out costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
receivable earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171,776 |
|
|
|
|
|
171,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock for compensation |
|
|
|
|
|
|
|
|
70,000 |
|
|
1 |
|
|
10,499 |
|
|
|
|
|
|
|
|
10,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock for cash |
|
|
|
|
|
|
|
|
999,111 |
|
|
9 |
|
|
149,857 |
|
|
|
|
|
|
|
|
149,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARBIOS
SYSTEMS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD
FROM AUGUST 23, 2000 (INCEPTION) TO DECEMBER 31, 2003
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Deficit |
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Accumulated |
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Additional |
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During the |
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Preferred Stock |
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Common Stock |
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Paid-In |
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Deferred |
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Development |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Costs |
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Stage |
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Total |
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Net loss |
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(494,780 |
) |
(494,780 |
) |
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Balance, December 31, 2002 |
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681,818 |
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$ |
7 |
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6,431,780 |
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$ |
64 |
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$ |
1,175,269 |
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$ |
(88,889 |
) |
$ |
(741,808 |
) |
$ |
344,643 |
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Issuance of common stock for |
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cash less issuance expense of |
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$2,956 |
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417,000 |
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417 |
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246,827 |
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247,244 |
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Issuance of common stock for |
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convertible debenture less |
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issuance expense of $519,230 |
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4,000,000 |
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4,000 |
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3,476,770 |
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3,480,770 |
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Issuance of common stock for |
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convertible debenture less |
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issuance expense of $49,500 |
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400,000 |
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400 |
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350,100 |
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350,500 |
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Shares issued in connection with |
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acquisition of Historical |
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Autographs U.S.A., Inc. on |
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October 30, 2003 |
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1,220,000 |
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8,263 |
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(8,263 |
) |
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— |
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Value of warrants and beneficial |
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conversion feature of bridge |
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loan |
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244,795 |
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244,795 |
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Deferred employee |
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loan-out costs |
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receivable earned |
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88,889 |
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88,889 |
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Preferred Stock converted |
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to Common Stock |
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(681,818 |
) |
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(7 |
) |
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681,818 |
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7 |
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Net loss |
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(885,693 |
) |
|
(885,693 |
) |
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Balance, December 31, 2003 |
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— |
|
$ |
— |
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|
13,150,598 |
|
$ |
13,151 |
|
$ |
5,485,498 |
|
|
— |
|
$ |
(1,627,501 |
) |
$ |
3,871,148 |
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ARBIOS
SYSTEMS, INC. AND SUBSIDIARY
(A
Development Stage Company)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year ended December 31, 2003 |
|
Year ended December 31, 2002 |
|
Period from August 23, 2000 (Inception) to Period Ended
December 31, 2003 |
|
CASH FLOWS USED FOR OPERATING ACTIVITIES: |
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Net loss |
|
$ |
(885,693 |
) |
$ |
(494,780 |
) |
$ |
(1,627,501 |
) |
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ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES: |
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Amortization
of debt discount |
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|
244,795 |
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|
— |
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|
244,795 |
|
Depreciation
and amortization |
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|
40,243 |
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|
33,774 |
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|
92,337 |
|
Issuance
of common stock for compensation |
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|
— |
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|
10,500 |
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|
10,500 |
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Settlement
of accrued expense |
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— |
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|
54,401 |
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|
54,401 |
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Deferred
compensation costs |
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|
88,889 |
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|
171,776 |
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|
319,553 |
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CHANGES IN ASSETS AND LIABILITIES: |
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(INCREASE) DECREASE IN
ASSETS: |
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Prepaid
expenses |
|
|
(135,177 |
) |
|
8,798 |
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|
(155,988 |
) |
Deposit |
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— |
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— |
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(7,434 |
) |
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INCREASE (DECREASE) IN LIABILITIES: |
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Accrued liabilities |
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|
78,411 |
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|
53,817 |
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|
148,230 |
|
Other |
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— |
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|
5,556 |
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|
5,556 |
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Total
adjustments |
|
|
317,161 |
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|
338,622 |
|
|
711,950 |
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|
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Net cash used for operating activities |
|
|
(568,532 |
) |
|
(156,158 |
) |
|
(915,551 |
) |
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CASH FLOWS USED FOR INVESTING ACTIVITIES - |
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purchase of property and equipment |
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|
(23,470 |
) |
|
(6,340 |
) |
|
(37,115 |
) |
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CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES: |
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Proceeds from convertible promissory note |
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|
400,000 |
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|
— |
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|
400,000 |
|
Proceeds from issuance of preferred stock |
|
|
— |
|
|
— |
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|
250,000 |
|
Proceeds from issuance of common stock |
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|
4,250,200 |
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|
149,866 |
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|
4,405,066 |
|
Payments on capital lease obligations,
net |
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|
(7,275 |
) |
|
(2,373 |
) |
|
(9,648 |
) |
Cost of issuance of preferred stock |
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|
— |
|
|
— |
|
|
(11,268 |
) |
Cost of issuance of common stock |
|
|
(571,686 |
) |
|
— |
|
|
(574,398 |
) |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
4,071,239 |
|
|
147,493 |
|
|
4,459,752 |
|
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|
|
|
|
|
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|
NET INCREASE (DECREASE) IN CASH |
|
|
3,479,237 |
|
|
(15,005 |
) |
|
3,507,086 |
|
CASH, beginning of period |
|
|
27,849 |
|
|
42,854 |
|
|
— |
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|
CASH, end of year |
|
$ |
3,507,086 |
|
$ |
27,849 |
|
$ |
3,507,086 |
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
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Interest paid |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
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|
Income taxes paid |
|
$ |
— |
|
$ |
800 |
|
$ |
2,992 |
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SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING |
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INFORMATION: |
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During the year ended December 31, 2003, $400,000 of
convertible promissory notes were converted into 400,000 shares of common
stock and 681,818 shares of preferred stock were converted into common
shares. |
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See Note
(1) regarding the transaction with Historical Autographs, U.S.A. Inc. The
accompanying notes form an integral part of these consolidated financial
statements.
ARBIOS
SYSTEMS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED DECEMBER 31, 2003 AND 2002
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
Arbios
Systems, Inc. and its wholly owned subsidiary (collectively, the "Company") are
engaged in developing and marketing liver-assist devices to meet the urgent need
for therapy that facilitates recovery from liver failure. The Company's products
in development are called SEPET(TM), which is a blood purification therapy
device for patients with liver failure, and LIVERAID(TM), which is a
bioartificial liver.
On
October 30, 2003, Historical Autographs U.S.A., Inc. and Arbios Technologies,
Inc. consummated a reverse merger, in which Arbios Technologies, Inc. became the
wholly owned subsidiary of Historical Autographs U.S.A., Inc. Concurrently with
the merger, Historical Autographs U.S.A., Inc. changed its named to Arbios
Systems, Inc. and is herein referred to as "Systems". The shareholders of Arbios
Technologies, Inc. transferred ownership of one hundred percent of all the
issued and outstanding shares of their capital stock of Arbios Technologies,
Inc. in exchange for 11,930,598 newly issued shares, or approximately 91%, of
the common stock, $0.001 par value, of Systems. At that time, the former
management of Systems resigned and was replaced by the same persons who serve as
officers and directors of Arbios Technologies, Inc. Inasmuch as the former
owners of Arbios Technologies, Inc. controlled the combined entity after the
merger, the combination was accounted for as a purchase by Arbios Technologies,
Inc. as acquirer, for accounting purposes in accordance with Statement of
Financial Accounting Standards No. 141 using reverse merger accounting, and no
adjustments to the carrying values of the assets or liabilities of the acquired
entity were required. Proforma operating results, as if the acquisition had
taken place at the beginning of the period, have not been presented as the
operations of the acquiree were negligible. The financial position and results
of operations of Systems is included in the consolidated statements of the
Company from the date of acquisition.
DEVELOPMENT
STAGE ENTERPRISE:
The
Company is a development stage enterprise as defined in Statement of Financial
Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development
Stage Enterprises." The Company is devoting substantially all of its present
efforts to establish a new business. Its planned principal operations have not
yet commenced, with the exception of research and development, which were
initiated in 2000 and are being vigorously pursued. All losses accumulated since
inception have been considered as part of the Company's development stage
activities. Payments received under contracts to fund certian research
activities are recognized in the period on which the reserach activities are
performed. Payments received in advance that are related to future performance
will be deferred and recognized as revenue when the research projects are
performed.
PRINCIPLES
OF CONSOLIDATION:
The
accompanying consolidated financial statements include the accounts of the
Systems and its wholly owned subsidiary, Arbios Technologies, Inc. All material
intercompany accounts have been eliminated in consolidation.
ARBIOS
SYSTEMS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED
DECEMBER 31, 2003 AND 2002
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
USE OF
ESTIMATES:
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FEDERAL
GOVERNMENT GRANTS:
The
Company is partially funded by certain governmental grants. Payments received
under contracts to fund certain research activities are recognized as revenue in
the period in which the research activities are performed. Payments received in
advance that are related to future performance will be deferred and recognized
as revenue when the research project are performed. Reimbursements recorded
under these grants are subject to governmental audit. Management believes that
material adjustments will not result from subsequent audits, if any, of costs
reflected in the accompanying financial statements.
COMPREHENSIVE
INCOME:
SFAS No.
130, "Reporting Comprehensive Income", establishes standards for the reporting
and display of comprehensive income and its components in the financial
statements. As of December 31, 2003 and 2002, the Company has no items that
represent comprehensive income and therefore, the Company has not included a
schedule of comprehensive income in the financial statements.
PROPERTY
AND EQUIPMENT:
Property
and equipment are stated at cost. Depreciation is provided using the
straight-line method over estimated useful lives of the assets of five
years.
PATENT
RIGHTS:
The
Company purchased the exclusive right to certain patents (see Note 3). These
patents are recorded at fair market value as of the date of purchase. They are
amortized over the estimated useful life or remaining legal life at the date of
purchase, whichever is shorter.
DEFERRED
EMPLOYEE LOAN-OUT COSTS RECEIVABLE:
The
Company purchased the loan-out of certain employees in exchange for junior
preferred stock (see Note 4). These loan-out costs are expensed as the employee
services are performed.
ARBIOS
SYSTEMS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER
31, 2003 AND 2002
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
FAIR
VALUE OF FINANCIAL INSTRUMENTS:
The
Company's financial instruments, none of which are held for trading purposes,
include cash and accounts payable and accrued expenses, have carrying amounts
which approximate fair value due to their short maturities.
INCOME
TAXES:
Deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reported amounts at each period end, based on enacted tax laws and statutory tax
rates applicable to the period in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The provision for
income taxes represents the tax payable for the period, if any, and the change
during the period in deferred tax assets and liabilities.
STOCK-BASED
COMPENSATION:
SFAS No.
123, "Accounting for Stock-Based Compensation," establishes and encourages the
use of the fair value based method of accounting for stock-based compensation
arrangements under which compensation cost is determined using the fair value of
stock-based compensation determined as of the date of grant and is recognized
over the periods in which the related services are rendered. The statement also
permits companies to elect to continue using the current intrinsic value
accounting method specified in Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," to account for stock-based
compensation. The Company has elected to use the intrinsic value based method
and has disclosed the pro forma effect of using the fair value based method to
account for its stock-based compensation issued to employees. For non-employee
stock based compensation the Company recognizes an expense in accordance with
SFAS No. 123 and values the equity securities based on the fair value of the
security on the date of grant.
ARBIOS
SYSTEMS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER
31, 2003 AND 2002
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
STOCK-BASED
COMPENSATION, CONTINUED:
If
the Company had elected to recognize compensation cost for its stock options and
warrants based on the fair value at the grant dates, in accordance with SFAS
123, net earnings and earnings per share would have been as follows:
|
|
|
|
|
|
December 31, 2003 |
|
December 31, 2002 |
|
|
|
|
|
|
Net loss as reported |
$ |
(885,693 |
) |
$ |
(494,780 |
) |
Compensation recognized under APB 25 |
|
— |
|
|
— |
|
Compensation recognized under SFAS 123 |
|
(12,710 |
) |
|
(18,042 |
) |
|
|
|
|
|
Proforma |
$ |
(898,403 |
) |
$ |
(512,822 |
) |
|
|
|
|
|
Basic and diluted loss per common share: |
|
|
|
|
|
|
As reported |
$ |
(0.11 |
) |
$ |
(0.08 |
) |
|
|
|
|
|
Proforma |
$ |
(0.11 |
) |
$ |
(0.09 |
) |
|
|
|
|
|
The fair
value of each option is estimated on the date of grant using the Black Scholes
option-pricing model. The following weighted-average assumptions were used in
the Black Scholes option-pricing model; dividend yield nil, expected volatility
0.05%, risk free interest rate 3.0% and expected life of 7 years.
LOSS
PER SHARE:
The
Company utilizes SFAS No. 128, "Earning per Share." Basic loss per share is
computed by dividing loss available to common shareholders by the
weighted-average number of common shares outstanding. Diluted loss per share is
computed similar to basic loss per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. The computation of diluted loss per share does not
assume conversion, exercise or contingent exercise of securities that would have
an anti-dilutive effect on losses.
ARBIOS
SYSTEMS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED
DECEMBER 31, 2003 AND 2002
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
RECENT
ACCOUNTING PRONOUNCEMENTS:
During
April 2003, the FASB issued SFAS 149 - "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities", effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. In addition, except as stated
below, all provisions of this Statement should be applied prospectively. The
provisions of this Statement that relate to Statement 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, paragraphs 7(a) and 23(a), which relate to forward purchases
or sales of when-issued securities or other securities that do not yet exist,
should be applied to both existing contracts and new contracts entered into
after Ju ne 30, 2003. The Company does not participate in such transactions,
however, is evaluating the effect of this new pronouncement, if any.
During
May 2003, the FASB issued SFAS 150 - "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a freestanding financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
Some of the provisions of this Statement are consistent with the current
definition of liabilities in FASB Concepts Statement No. 6, Elements of
Financial Statements. The Company has implemented this pronouncement and has
concluded that the adoption has no material impact to the financial
statements.
In
December 2003, the FASB issued a revised SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" which replaces the previously
issued Statement. The revised Statement increases the existing disclosures for
defined benefit pension plans and other defined benefit postretirement plans.
However, it does not change the measurement or recognition of those plans as
required under SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." Specifically, the
revised Statement requires companies to provide additional disclosures about
pension plan assets, benefit obligations, cash flows, and benefit costs of
defined benefit pension plans and other defined benefit postretirement plans.
Also, companies are required to provide a breakdown of plan assets by category,
such as debt, equity and real estate, and to provide certain expected rates of
return and target allocation percentages for these asset categories. The Company
has implemented this pronouncement and has concluded that the adoption has no
material impact to the financial statements.
ARBIOS SYSTEMS, INC. AND SUBSIDIARY
(A DEVELOPMENT
STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND
2002
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
RECENT
ACCOUNTING PRONOUNCEMENTS, CONTINUED:
In
January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities." Interpretation 46 changes the criteria by which one company
includes another entity in its consolidated financial statements. Previously,
the criteria were based on control through voting interest. Interpretation 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. A company that consolidates a variable interest entity is
called the primary beneficiary of that entity. In December 2003 the FASB
concluded to revise certain elements of FIN 46, which will be issued shortly.
The FASB also modified the effective date of FIN 46. For all entit ies that were
previously considered special purpose entities, FIN 46 should be applied in
periods ending after December 15, 2003. Otherwise, FIN 46 is to be applied for
registrants who file under Regulation S-X in periods ending after March 15,
2004, and for registrants who file under Regulation SB, in periods ending after
December 15, 2003. The Company does not expect the adoption to have a material
impact on the Company's financial position or results of operations. (2)
PROPERTY AND EQUIPMENT: Property and equipment consisted of the following:
|
December 31, |
|
|
2003 |
|
|
|
|
Office equipment |
$ |
866 |
|
Computer equipment |
|
23,277 |
|
Medical equipment |
|
37,971 |
|
|
|
|
|
|
62,114 |
|
|
|
|
|
Less accumulated depreciation |
|
16,481 |
|
|
|
|
|
$ |
45,633 |
|
|
|
|
Depreciation
expense was $10,641, $4,172, and $16,481 for the year ended December 31, 2003
and 2002, and the period from August 23, 2000 (inception) to December 31, 2003,
respectively.
ARBIOS SYSTEMS, INC. AND SUBSIDIARY
(A DEVELOPMENT
STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND
2002
(3)
PATENT RIGHTS:
In June
2001, the Company received exclusive rights to four existing patents and one
pending patent. At the date of exchange, the aggregate value of these rights was
$400,000. At December 31, 2003 and 2002, the accumulated amortization of these
rights was $75,856 and $46,253, and the estimated remaining life was 8 years.
Amortization expense was $29,602, $29,602, and $75,856 for the years ended
December 31, 2003 and 2002 and the period from August 23, 2000 (inception) to
December 31, 2003, respectively. Future estimated amortization expense is as
follows:
Year ending December 31, |
|
|
|
|
2004 |
|
$ |
29,602 |
|
2005 |
|
|
29,602 |
|
2006 |
|
|
29,602 |
|
2007 |
|
|
29,602 |
|
2008 |
|
|
29,602 |
|
Thereafter |
|
|
176,135 |
|
|
|
|
|
|
|
$ |
324,145 |
|
|
|
|
|
In
conjunction with the patents rights described above, the Company committed to
the licensor to spend a total of $1,760,000 in research and development expenses
toward the development and promotion of products, commencing from the
acquisition date until June 30, 2008. Future remaining minimum payments under
this agreement were as follows:
Year ending December 31, |
|
|
|
|
2004 |
|
$ |
150,000 |
|
2005 |
|
|
200,000 |
|
2006 |
|
|
300,000 |
|
2007 |
|
|
400,000 |
|
2008 |
|
|
500,000 |
|
|
|
|
|
|
|
$ |
1,550,000 |
|
|
|
|
|
In the
event the Company expends more than the minimum annual amount in any year, the
excess may be carried over to the subsequent year. For the years ended December
31, 2003 and 2002, and the period from August 23, 2000 (inception) to December
31, 2003, the research and development costs incurred were $436,849, $431,199,
and $1,009,674, respectively. As of December 31, 2003, the Company had a
$799,674 as carryforward to apply to future years.
The
Company is subject to paying royalty fees to the licensor, who is a shareholder,
equal to 1.5% of the gross sales price of royalty bearing products. From year
three to the tenth year of the license the royalty fee percent will phase out
evenly to 0%. As of December 31, 2003 and 2002, the Company had not paid any
royalty fees since it did not have any sales of royalty bearing
products.
ARBIOS SYSTEMS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND
2002
(4)
DEFERRED EMPLOYEE LOAN-OUT COSTS:
In June
2001, the Company received a commitment for the loan-out of certain employees
over a two-year period in exchange for junior preferred stock (see note 8). The
Company has deferred the estimated loan-out costs over the two-year period. The
loan-out costs are expensed as the services are performed. At the date of the
exchange, the cost of the employee loan-out over the two-year period was
$319,553.
In
December 2001, the Company paid $24,000 to purchase additional employee loan-out
costs. For the years ended December 31, 2003 and 2002, and the period from
August 23, 2000 (inception) to December 31, 2003, the amortized employee
loan-out costs were $88,889, $171,776, and $343,553, respectively.
(5)
CONVERTIBLE PROMISSORY NOTES:
In
September 2003, the Company issued units of convertible subordinated notes and
warrants, consisting of convertible promissory notes (the "Notes") for an
aggregate principal amount of $400,000 and warrants for the purchase 300,000
shares of the Company's common stock at $1 per share. The Notes bore interest at
7% per annum and were due on the earlier of March 31, 2004 or upon the
occurrence of various other events or conditions set forth in the Notes. Under
the terms of the Notes, the holders retained the right, subject to certain
exceptions, to convert all or any part of the principal outstanding under the
Notes into (i) shares of the Company's Common Stock at a conversion price per
share equal to $1 and (ii) warrants for the purchase of Company's common stock
at $2.50 per share.
The
conversion price was subject to adjustment in the event of a stock split,
combination or like transaction. The warrant price was subject to adjustment in
the event of a stock split, combination or like transaction.The Company recorded
the Notes net of a discount equal to the fair value allocated to the warrants
issued of $122,390. The Notes also contained a beneficial conversion feature,
which resulted in additional debt discount of $122,390. The beneficial
conversion amount was measured using the accounting intrinsic value, i.e. the
excess of the aggregate fair value of the common stock into which the debt is
conver tible over the proceeds allocated to the security.
In October 2003, the Notes were converted into 400,000 shares of
common stock at $1 per share. The Company recognized interest expense totaling
$224,401 for the unamortized warrants and beneficial conversion feature discount
in accordance with Emerging Issues Task Force 00-27.
ARBIOS SYSTEMS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 2003 AND
2002
(6) COMMITMENTS AND CONTINGENCIES:
Commitments
The Company leases office facilities and equipment under
noncancellable operating leases, which require monthly payments of $6,441 and
expire in June 2004. The Company is required to pay for taxes, insurance, and
maintenance. The Company is subleasing lab space for $2,777 per month. Rent
expense was $77,202, $71,736, and $187,080 for the years ended December 31, 2003
and 2002, and the period from August 23, 2000 (inception) to December 31, 2003,
respectively.
Agreements
On December 26, 2001, the Company received the exclusive worldwide
rights and license to use certain proprietary rights from Spectrum Laboratories,
Inc. ("Spectrum") partially in exchange for 362,669 shares of common stock (see
note 8). The license grants the Company the right to use Spectrum's technology
and to exploit such rights to develop and distribute products solely for use in
the Company's liver-assist devices.In addition, the Company entered into a
manufacturing and supply agreement with Spectrum. The agreement stipulates that
the Company must contract with Spectrum for the manufacture and supply of
certain products used in the liver-assist devices.
(7) STOCKHOLDERS' EQUITY:
Preferred Stock
The Company has 5,000,000 shares of preferred stock authorized. There
are no shares of preferred stock issued or outstanding. The board of directors
has the authority to set by resolution the particular designation, preferences
and other special rights and qualification of preferred stock.
Junior Preferred Stock
In June 2001, Arbios Technologies, Inc. issued 681,818 shares of
junior preferred stock, in exchange for $250,000 in cash, exclusive rights to
certain patents and one pending patent valued at $400,000 (see Note 3), and
future services of certain employees valued at $319,553 (see Note 4).
ARBIOS SYSTEMS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 2003 AND
2002
(7) STOCKHOLDERS' EQUITY, CONTINUED:
Junior Preferred Stock (Continued)
In October 2003, all issued and outstanding shares of the junior
preferred stock were converted into 681,818 shares of common stock.
Common Stock
In August 2000, Arbios Technologies, Inc. issued 5,000,000 shares of
common stock, $0.001 par value, to the Company's two officers in exchange for
$5,000 in cash.
In December 2001, Arbios Technologies, Inc. issued 362,669 shares of
common stock in exchange for future research costs valued at $550,000, an
exclusive license (see Note 8), a manufacturing and supply agreement (see Note
8), and exclusive rights to one patent and one pending patent.
In June 2002, Arbios Technologies, Inc. issued 70,000 shares of
common stock to a Board member as compensation for services rendered valued at
$10,500.
In July 2002, Arbios Technologies, Inc. issued 999,111 shares of
common stock to investors in exchange for $149,866 in cash, or $.15 per
share.
In July 2002, Arbios Technologies, Inc. issued options to purchase
18,000 shares of common stock to each of its five Board members for services
rendered. The options are exercisable at $0.15 per share. The options vest 50%
in six months and 50% in 12 months from the beginning date of service provided
by the respective Board members.
In July 2002, Arbios Technologies, Inc. issued a warrant to purchase
100,000 shares of common stock to a Board member for services rendered to the
Company. The warrant is exercisable at $0.15 per share and has a 7-year life.
The warrant also has conversion rights in lieu of payment of the exercise price
and is not transferable.
In January 2003, Arbios Technologies, Inc. issued 417,000 shares of
common stock and warrants to purchase 600,000 shares of common stock at an
exercise price of $1.00 per share to an investor in exchange for $250,200 in
cash. The Company recognized $2,956 in stock issuance expense.
In September and October 2003, Arbios Technologies, Inc, issued
4,000,000 shares of common stock and warrants to purchase 4,000,000 shares of
common stock at an exercise price of $2.50 in exchange for $4,000,000 in cash.
The Company recognized $519,230 in stock issuance expense.
ARBIOS SYSTEMS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 2003 AND
2002
(7) STOCKHOLDERS' EQUITY, CONTINUED:
Common Stock (Continued)
In September 2003, convertible promissory notes totaling $400,000
were converted into 400,000 shares of Company's common stock.
In October 2003, Arbios Technologies, Inc. entered into a
reorganization transaction wherein the shareholders of Systems retained
1,220,000 shares of the reorganized entity after the transaction. Since Systems
was treated as the acquiree for accounting purposes, those shares were accounted
for as being issued as of that date. Stock Option Plan
In 2001, Systems adopted the 2001 Stock Option Plan (the "Company
Plan") for the purpose of granting incentive stock options and/or non-statutory
stock options to employees, consultants, directors and others. Under the Company
Plan, the Company is authorized to grant options to purchase up to 1,000,000
shares. The Company Plan is administered by the Board of Directors of the
Company or by a committee of the Board. However, in connection with the
reorganization transaction between Systems and Arbios Technologies, Inc. in
October 2003, Systems assumed all of the 314,000 outstanding options granted by
Arbios Technologies, Inc. under its existing stock option plan and the options
previously issued under that plan were cancelled. None of the terms of the
assumed options were changed, the options assumed under the Company Plan are
identical to the options that were previously granted under the Technologies
Plan.
Transactions under the Plan during the year ended December 31, 2003
and 2002 are summarized as follows:
|
|
|
Weighted |
|
|
Stock |
|
Average |
|
|
Option |
|
Exercise |
|
|
Plan |
|
Price |
|
|
|
|
|
|
|
Balance, December 31, 2001 |
— |
|
$ |
— |
|
Granted |
90,000 |
|
$ |
0.15 |
|
Canceled |
— |
|
$ |
— |
|
|
|
|
|
|
|
Balance, December 31, 2002 |
90,000 |
|
$ |
0.15 |
|
Granted |
233,000 |
|
$ |
1.00 |
|
Canceled |
9,000 |
|
$ |
0.15 |
|
|
|
|
|
|
|
Balance, December 31, 2003 |
314,000 |
|
$ |
0.78 |
|
|
|
|
|
|
|
Options exercisable, December 31, 2003 |
194,000 |
|
$ |
0.61 |
|
|
|
|
|
|
|
ARBIOS SYSTEMS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE
COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
(7) STOCKHOLDERS' EQUITY, CONTINUED:
Warrants:
As of December 31, 2003, warrants to purchase 5,050,000 shares of
common stock at prices ranging from $0.15 to $2.50 were outstanding. All
warrants are exercisable as of December 31, 2003 and expire at various dates
through 2008.
(8) RESEARCH COSTS:
On December 26, 2001, the Company received a commitment for research
costs in the amount of $550,000 from Spectrum Laboratories, Inc. ("Spectrum")
partially in exchange for 362,669 shares of common stock (See Note 6). Spectrum
was required to expend at least $137,500 per year toward the development of the
Company's liver-assist devices. The original agreement was to expire on November
30, 2005 and stipulated the following yearly minimum research costs expenditures
by Spectrum:
Year ending December 31, |
|
|
|
2002 |
$ |
148,958 |
|
2003 |
|
137,500 |
|
2004 |
|
137,500 |
|
2005 |
|
126,042 |
|
|
|
|
|
$ |
550,000 |
|
|
|
|
In the event Spectrum expended more than the minimum annual amount in
any year, the excess was carried over to the subsequent year. For the years
ended December 31, 2003 and 2002, and the period from August 23, 2000
(inception) to December 31, 2003, the research and development costs incurred by
Spectrum was $0, respectively. The Company may repurchase a portion of the
foregoing shares for nominal consideration if less than the specified amounts
are expended by Spectrum.
In July 2002, the original agreement was amended. The Company and
Spectrum agreed that, since the prototype system had been delivered early, all
362,669 shares issued to Spectrum on December 26, 2001, were deemed fully vested
and any future obligations of $550,000 research cost commitment was deemed
fulfilled. In addition, any additional research and development work requested
from Spectrum by the Company and the cost of such work will be negotiated in
good faith before the work is initiated and that the Company will pay for such
work in 36 monthly cash installments. Furthermore, the Company agreed that
billings of $109,360, through September 29, 2002, were due for research costs
already provided, in lieu of the original $550,000 obligation. This amount was
reduced by $54,400 in payment for the 362,669 shares previously received, and
the Company shall pay the balance of $54,960 to Spectrum in cash in monthly
payments over an 18-month period starting November 1, 2002.
ARBIOS SYSTEMS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE
COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003 AND 2002
(9) INCOME TAXES:
The actual tax benefits differ from the expected tax benefit computed
by applying the United States federal corporate tax rate of 34% to loss before
income taxes as follows for the years ended December 31, 2003 and 2002, and the
period from August 23, 2000 (inception) to December 31, 2003:
|
|
|
|
|
|
|
Period from |
|
|
|
|
|
|
|
|
|
August 23, 2000 |
|
|
|
Year Ended |
|
Year Ended |
|
(inception) to |
|
|
|
December 31, |
|
December 31, |
|
December 31, |
|
|
|
2003 |
|
2002 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
Expected tax benefit |
$ |
(301,136 |
) |
$ |
(168,226 |
) |
$ |
(553,562 |
) |
|
State income taxes, net of federal benefit |
|
(49,767 |
) |
|
(28,867 |
) |
|
(76,191 |
) |
|
Other |
|
— |
|
|
(20,979 |
) |
|
(20,979 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Changes in valuation allowance |
$ |
350,903 |
|
$ |
218,072 |
|
|
650,732 |
|
|
|
|
|
|
|
|
|
|
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
The following table summaries the significant components of the
Company's deferred tax asset at December 31, 2003:
|
|
December 31, 2003 |
|
|
|
|
|
|
Deferred tax asset arising from |
|
|
|
|
net operating loss carryforward |
|
$ |
650,732 |
|
Less valuation allowance |
|
|
(650,732 |
) |
|
|
|
|
|
Net deferred tax asset |
|
$ |
— |
|
|
|
|
|
The Company recorded a valuation allowance of 100% for its net
operating loss carryforward due to the uncertainty of its realization.
For the year ended December 31, 2003, the Company had an operating
loss carryforward of approximately $1,627,000, which begins expiring in
2016.
(10) RELATED PARTY TRANSACTION:
In 2003, the son of a director received 7,500 shares of common stock
valued at $1 per share as a finder's fee.
UNAUDITED
FINANCIAL
STATEMENTS
ARBIOS SYSTEMS, INC. AND SUBSIDIARY
(A development stage company)
CONDENSED CONSOLIDATED BALANCE
SHEET
|
|
|
|
|
|
ASSETS |
|
September 30, 2004 |
|
December 31, 2003 |
|
|
|
(Unaudited) |
|
(Audited) |
|
Current assets |
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,005,557 |
|
$ |
3,507,086 |
|
Prepaid expenses |
|
|
87,359 |
|
|
155,986 |
|
Total current assets |
|
$ |
2,092,916 |
|
$ |
3,663,072 |
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
|
110,625 |
|
|
45,633 |
|
Patent rights, net of accumulated amortization of
$98,057 |
|
|
301,943 |
|
|
324,145 |
|
Other assets |
|
|
12,421 |
|
|
7,434 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,517,905 |
|
$ |
4,040,284 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
Accounts payable |
|
$ |
69,644 |
|
$ |
148,229 |
|
Accrued expenses |
|
|
251,416 |
|
|
|
|
Current portion of capitalized lease
obligation |
|
|
8,291 |
|
|
8,526 |
|
Total current liabilities |
|
|
329,351 |
|
|
156,755 |
|
Long-term liabilities |
|
|
|
|
|
|
|
Contract commitment |
|
|
250,000 |
|
|
|
|
Capital lease obligation, less current
portion |
|
|
|
|
|
6,826 |
|
Other liabilities |
|
|
|
|
|
5,555 |
|
Total long-term
liabilities |
|
|
250,000 |
|
|
12,381 |
|
Stockholders' equity |
|
|
|
|
|
|
|
Preferred stock, $.001 par value; 5,000,000
shares authorized: |
|
|
|
|
|
|
|
none issued and outstanding |
|
|
|
|
|
|
|
Common stock, $.001 par value; 25,000,000
shares authorized; 13,198,097 |
|
|
|
|
|
|
|
and 13,150,598 shares issued and
outstanding in 2004 and 2003, respectively |
|
|
13,199 |
|
|
13,151 |
|
Additional paid-in capital |
|
|
6,333,900 |
|
|
5,485,498 |
|
Deficit accumulated during the development stage |
|
|
(4,408,545 |
) |
|
(1,627,501 |
) |
Total stockholders' equity |
|
|
1,938,554 |
|
|
3,871,148 |
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders' equity |
|
$ |
2,517,905 |
|
$ |
4,040,284 |
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
ARBIOS SYSTEMS, INC. AND SUBSIDIARY
(A development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
|
|
For the three months ended Sept. 30, |
|
For the nine months ended Sept. 30, |
|
Inception to |
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
Sept. 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
38,220 |
|
$ |
84,810 |
|
$ |
72,030 |
|
$ |
127,828 |
|
$ |
320,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
774,062 |
|
|
17,449 |
|
|
1,679,832 |
|
|
93,619 |
|
|
2,328,576 |
|
Research and development |
|
|
302,860 |
|
|
129,582 |
|
|
1,183,366 |
|
|
310,658 |
|
|
2,161,535 |
|
Total operating expenses |
|
|
1,076,922 |
|
|
147,031 |
|
|
2,863,198 |
|
|
404,277 |
|
|
4,490,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before other income (expense) |
|
|
(1,038,702 |
) |
|
(62,221 |
) |
|
(2,791,168 |
) |
|
(276,449 |
) |
|
(4,169,145 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
3,660 |
|
|
|
|
|
13,367 |
|
|
|
|
|
15,923 |
|
Interest expense |
|
|
(183 |
) |
|
(20,710 |
) |
|
(668 |
) |
|
(21,073 |
) |
|
(246,381 |
) |
Total other income
(expense) |
|
|
3,477 |
|
|
(20,710 |
) |
|
12,699 |
|
|
(21,073 |
) |
|
(230,458 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax provision |
|
|
(1,035,225 |
) |
|
(82,931 |
) |
|
(2,778,469 |
) |
|
(297,522 |
) |
|
(4,399,603 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for taxes |
|
|
|
|
|
|
|
|
2,575 |
|
|
1,122 |
|
|
8,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,035,225 |
) |
$ |
(82,931 |
) |
$ |
(2,781,044 |
) |
$ |
(298,644 |
) |
$ |
(4,408,545 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.08 |
) |
$ |
(0.01 |
) |
$ |
(0.21 |
) |
$ |
(0.04 |
) |
$ |
(0.60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
13,198,097 |
|
|
6,848,780 |
|
|
13,195,881 |
|
|
6,806,011 |
|
|
7,389,764 |
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
ARBIOS SYSTEMS, INC. AND SUBSIDIARY
(A development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited)
|
|
For the nine months ended September 30, |
|
Inception to |
|
|
|
2004 |
|
2003 |
|
September 30, 2004 |
|
Cash flows from operating
activities: |
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,781,044 |
) |
$ |
(298,644 |
) |
$ |
(4,408,545 |
) |
Adjustments to reconcile net loss to net
cash |
|
|
|
|
|
|
|
|
|
|
used in operating activities: |
|
|
|
|
|
|
|
|
|
|
Amortization of debt
discount |
|
|
|
|
|
20,400 |
|
|
244,795 |
|
Depreciation and
amortization |
|
|
36,098 |
|
|
29,686 |
|
|
128,435 |
|
Issuance of securities for
compensation |
|
|
1,026,668 |
|
|
|
|
|
1,037,168 |
|
Settlement of accrued
expense |
|
|
|
|
|
|
|
|
54,401 |
|
Deferred compensation
costs |
|
|
|
|
|
88,889 |
|
|
319,553 |
|
Research and development |
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and
liabilities: |
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses |
|
|
68,627 |
|
|
(103,791 |
) |
|
(87,360 |
) |
Other assets |
|
|
(4,987 |
) |
|
|
|
|
(12,421 |
) |
Accounts payable and
accrued expenses |
|
|
(5,387 |
) |
|
(19,567 |
) |
|
142,843 |
|
Other
liabilities |
|
|
(5,555 |
) |
|
30,000 |
|
|
— |
|
Contract
obligation |
|
|
250,000 |
|
|
|
|
|
250,000 |
|
Net cash used in operating activities |
|
|
(1,415,580 |
) |
|
(253,027 |
) |
|
(2,331,131 |
) |
Cash flows from investing
activities: |
|
|
|
|
|
|
|
|
|
|
Additions of property and equipment |
|
|
(78,888 |
) |
|
(18,717 |
) |
|
(116,003 |
) |
Net cash used in investing activities |
|
|
(78,888 |
) |
|
(18,717 |
) |
|
(116,003 |
) |
Cash flows from financing
activities: |
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible
debt |
|
|
|
|
|
400,000 |
|
|
400,000 |
|
Advance payments from stock
subscription |
|
|
|
|
|
2,310,000 |
|
|
— |
|
Proceeds from issuance of common stock
|
|
|
|
|
|
250,200 |
|
|
4,405,066 |
|
Proceeds from issuance of preferred
stock |
|
|
|
|
|
|
|
|
250,000 |
|
Payments on capital lease obligation,
net |
|
|
(7,061 |
) |
|
(5,242 |
) |
|
(16,709 |
) |
Cost of issuance of preferred stock |
|
|
|
|
|
|
|
|
(11,268 |
) |
Cost of issuance of common stock |
|
|
|
|
|
(2,961 |
) |
|
(574,398 |
) |
Net cash provided by (used for) financing
activities |
|
|
(7,061 |
) |
|
2,951,997 |
|
|
4,452,691 |
|
Net (decrease) increase in cash |
|
|
(1,501,529 |
) |
|
2,680,253 |
|
|
2,005,557 |
|
Cash: |
|
|
|
|
|
|
|
|
|
|
At beginning of period |
|
|
3,507,086 |
|
|
27,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At end of period |
|
$ |
2,005,557 |
|
$ |
2,708,102 |
|
$ |
2,005,557 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash financing
activity |
|
|
|
|
|
|
|
|
|
|
Issuance of securities for
payable |
|
$ |
47,500 |
|
|
|
|
$ |
47,500 |
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Arbios Systems, Inc. and Subsidiary (A Development Stage
Company)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Nine Months Ended September 30, 2004
(1)
BASIS OF PRESENTATION:
In the
opinion of the management of Arbios Systems, Inc. (the "Company"), the
accompanying unaudited condensed consolidated financial statements include all
normal adjustments considered necessary to present fairly the financial position
as of September 30, 2004, and the results of operations for the periods
presented.
The
unaudited condensed consolidated financial statements and notes are presented
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been omitted pursuant to such SEC rules and regulations. These
financial statements should be read in conjunction with the Company's audited
financial statements and the accompanying notes for the year ended December 31,
2003 included in this prospectus. The results of operations for the three month
and nine month periods ended September 30, 2004 are not necessarily indicative
of the results to be expected for any subsequent quarter or for the entire
fiscal year.
(2) Stock-Based Compensation:
SFAS No. 123, "Accounting for Stock-Based Compensation,"
establishes and encourages the use of the fair value based method of accounting
for stock-based compensation arrangements under which compensation cost is
determined using the fair value of stock-based compensation determined as of the
date of grant and is recognized over the periods in which the related services
are rendered. The statement also permits companies to elect to continue using
the current intrinsic value accounting method specified in Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," to
account for stock-based compensation. The Company has elected to use the
intrinsic value based method and has disclosed the pro forma effect of using the
fair value based method to account for its stock-based compen sation issued to
employees. For non-employee stock based compensation the Company recognizes an
expense in accordance with SFAS No. 123 and values the equity securities based
on the fair value of the security on the date of grant with subsequent
adjustments based on the fair value of the equity security as it vests.
If the Company had elected to recognize compensation cost for its
stock options and warrants for employees based on the fair value at the grant
dates, in accordance with SFAS 123, net earnings and earnings per share would
have been as follows:
|
|
Three Months Ended Sept. 30, |
|
Nine Months Ended Sept. 30, |
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
Net loss as reported |
|
$ |
(1,035,225 |
) |
$ |
(82,931 |
) |
$ |
(2,781,044 |
) |
$ |
(298,644 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation recognized under: |
|
|
|
|
|
|
|
|
|
|
|
|
|
APB 25 |
|
|
—
|
|
|
— |
|
|
—
|
|
|
—
|
|
SFAS 123 |
|
|
(52,384 |
) |
|
(5,191 |
) |
|
(214,203 |
) |
|
(12,142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma net loss |
|
$ |
(1,087,609 |
) |
$ |
(88,122 |
) |
$ |
(2,995,247 |
) |
$ |
(310,786 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.08 |
) |
$ |
(0.01 |
) |
$ |
(0.21 |
) |
$ |
(0.04 |
) |
Proforma |
|
$ |
(0.08 |
) |
$ |
(0.01 |
) |
$ |
(0.23 |
) |
$ |
(0.05 |
) |
(3) Contract Commitment
On April 19, 2004, the Company purchased certain assets of Circe
Biomedical, Inc. including Circe's patent portfolio, rights to a bioartificial
liver (HepatAssist) ™, a Phase III Investigational Drug application,
selected equipment, clinical and marketing data, and over 400 standard
operating procedures and clinical protocols previously reviewed by the Food and
Drug Administration. In exchange for these assets, the Company paid a $200,000
upfront payment and is committed to make a $250,000 deferrred payment due the
earlier of April 12, 2006 or when the Company has raised accumulated gross
proceeds of $4 million from the issuance of debt or equity securities. The
Company expensed the cost of the acquisition in the fiscal quarter ended
June 30, 2004 as part of acquired research and development costs , as the
underlying rights have not yet reached the stage at which their commercial
feasibility can be established.
PART II - INFORMATION NOT REQUIRED IN
PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND
OFFICERS
Nevada law provides that Nevada corporations may include within their
articles of incorporation provisions eliminating or limiting the personal
liability of their directors and officers in shareholder actions brought to
obtain damages for alleged breaches of fiduciary duties, as long as the alleged
acts or omissions did not involve intentional misconduct, fraud, a knowing
violation of law or payment of dividends in violation of the Nevada statutes.
Nevada law also allows Nevada corporations to include in their articles of
incorporation or bylaws provisions to the effect that expenses of officers and
directors incurred in defending a civil or criminal action must be paid by the
corporation as they are incurred, subject to an undertaking on behalf of the
officer or director that he or she will repay such expenses if it is ultimately
determined by a court of competent jurisdiction that such officer or director is
not entitled to be indemnified by the corporation because such officer or
director did not act in good faith and in a manner reasonably believed to be in
or not opposed to the best interests of the corporation.
Nevada law also provides that Nevada corporations may eliminate or
limit the personal liability of its directors and officers.
Our Articles of Incorporation provide that no officer or director
shall be personally liable to this corporation or its shareholders for monetary
damages for breach of fiduciary duty as a director or officer of this
corporation. Our bylaws and Articles of Incorporation also provide that we
shall, to the maximum extent and in the manner permitted by the Nevada Revised
Statutes, indemnify each person who serves at any time as a director or officer
of Arbios Systems, Inc. from and against any and all expenses, judgments, fines,
settlements and other amounts actually and reasonable incurred in connection
with any proceeding arising by reason of the fact that he is or was an agent of
Arbios Systems, Inc.. We also have the power to defend such person from all
suits or claims in accord with the Nevada Revised Statutes. The rights accruing
to any person under our bylaws and Articles of Incorporation do not exclude any
other right to which any such person may lawfully be entitled, and we may
indemnify or reimburse such person in any proper case, even though not
specifically provided for by the bylaws and Articles of Incorporation.
Insofar as indemnification for liabilities for damages arising under
the Securities Act of 1933, (the “Act”) may be permitted to our directors,
officers, and controlling persons pursuant to the foregoing provision, or
otherwise, we have been advised that in the opinion of the Security and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND
DISTRIBUTION
We estimate that expenses in connection with the distribution
described in this registration statement (other than brokerage commissions,
discounts or other expenses relating to the sale of the shares by the selling
stockholders) will be as set forth below. We will pay all of the expenses with
respect to the distribution, and such amounts, with the exception of the
Securities and Exchange Commission registration fee, are estimates.
SEC registration fee |
|
$ |
1,597.93 |
|
Accounting fees and expenses |
|
$ |
2,000 |
|
Legal fees and expenses |
|
$ |
25,000 |
|
Printing and related expenses |
|
|
1,000 |
|
Transfer agent fees and expenses |
|
|
-0- |
|
Miscellaneous |
|
$ |
3,402.07 |
|
Total |
|
$ |
33,000 |
|
ITEM 26. RECENT SALES OF UNREGISTERED
SECURITIES
In June 2001, Arbios Technologies, Inc. sold 681,818 shares of its
Junior Preferred Stock to Cedars-Sinai Medical Center for $250,000. Concurrently
and in connection with the foregoing issuance of Junior Preferred Stock,
Cedars-Sinai Medical Center granted to Arbios Technologies, Inc. an exclusive,
worldwide license to five patents and other technical information. The foregoing
shares were sold pursuant to an exemption available under Section 4(2) of the
Securities Act of 1933 (the “Securities Act”) because the issuance did not
involve any public offering.
In December 2001, Arbios Technologies, Inc. sold 362,669 shares of
common stock to Spectrum Laboratories, Inc. In connection with the sale of the
362,669 shares of common stock, Arbios Technologies, Inc. and Spectrum
Laboratories, Inc. entered into a License Agreement, a Research Agreement, and a
Manufacturing and Supply Agreement. In addition, the total amount of cash
consideration paid by Spectrum Laboratories, Inc. for the shares is $54,400. The
foregoing shares were sold to Spectrum Laboratories, Inc. pursuant to an
exemption available under Section 4(2) of the Securities Act.
In August 2002, Arbios Technologies, Inc. sold 999,111 shares of
common stock at a price of $0.15 per share to six accredited investors. The
foregoing securities were sold pursuant to an exemption available under Section
4(2) of the Securities Act.
In August 2002, Arbios Technologies, Inc. issued a warrant to
purchase 100,000 shares of common stock to Technomedics Management and Systems,
Inc. for services rendered to Arbios Technologies, Inc. The warrant enables the
holder to purchase up to 100,000 shares of common stock at an exercise price of
$0.15 per share until August 18, 2009. The foregoing warrant was issued pursuant
to an exemption available under Section 4(2) of the Securities Act.
In January 2003, Arbios Technologies, Inc. sold (i) 417,000 shares of
common stock, and (ii) warrants to purchase 600,000 shares of common stock to
one accredited investor for an aggregate purchase price of $250,000. The
warrants are exercisable through January 28, 2007 at a price of $1.00 per share.
The foregoing securities were sold pursuant to an exemption available under
Section 4(2) of the Securities Act.
In September 2003, Arbios Technologies, Inc., sold 2,310,000 Units,
at a price of $1.00 per Unit, to a total of 41 investors. All investors were
accredited investors. Each unit consisted of one share of Arbios Technologies,
Inc.’s common stock and one common stock purchase warrant, that is exercisable
at $2.50 per share for a period of three years. The offering was effected
pursuant to an exemption available under Section 4(2) of the Securities Act and
Rule 506 promulgated thereunder. No underwriters were involved in the offering,
although Arbios Technologies, Inc. did pay a placement agent fee to Spencer
Edwards, Inc..
In October 2003, Arbios Technologies, Inc., sold 1,690,000 Units, at
a price of $1.00 per Unit, to a total of 24 investors. All investors were
accredited investors. Each unit consisted of one share of Arbios Technologies,
Inc.’s common stock and one common stock purchase warrant, that is exercisable
at $2.50 per share for a period of three years. The offering was effected
pursuant to an exemption available under Section 4(2) of the Securities Act and
Rule 506 promulgated thereunder.
In December, 2003, we issued to (i) Richard W. Bank 40,000 shares of
common stock, and a warrant to purchase 40,000 additional shares of common stock
at an exercise price of $2.50 per share, and (ii) Adam Hausman 7,500 shares of
common stock, and a warrant to purchase 7,500 additional shares of common stock
at an exercise price of $2.50 per share. The foregoing shares and warrants were
issued as consideration for the services rendered by Dr. Bank and Mr. Hausman to
Arbios Systems, Inc. Dr. Bank is a member of the Board of Directors of Arbios
Systems, Inc., and Mr. Hausman is the son of Marvin S. Hausman, a member of the
Board of Directors of Arbios Systems, Inc. The foregoing securities were sold
pursuant to an exemption available under Section 4(2) of the Securities Act.
In connection with our acquisition of Arbios Technologies, Inc. by
merger on October 30, 2003, Arbios Systems, Inc. issued 11,930,598 shares of our
common stock to the 72 former stockholders of Arbios Technologies, Inc. in
exchange for all of their shares of Arbios Technologies, Inc. All of the 72
former Arbios Technologies, Inc. stockholders were “accredited investors.” The
shares were issued pursuant to an exemption available under Section 4(2) of the
Securities Act.
In September 2003, we sold 16 units of convertible promissory notes
and warrants (the “Bridge Units”), at a price of $25,000 per Bridge Unit, to ten
accredited investors. Each Bridge Unit consisted of (i) a $25,000 principal
amount convertible, subordinated promissory note of Arbios Technologies, Inc.
and (ii) three-year warrants to purchase 18,750 shares of Arbios Technologies,
Inc.’s common stock at an exercise price of $1.00 per share. The notes bore
interest at 7% per annum and, unless converted, were payable on March 31, 2004.
In 2004, all ten holders of outstanding convertible promissory notes of Arbios
Technologies, Inc. converted their notes, in accordance with the terms of those
notes, into 400,000 shares of common stock, and warrants to purchase an
additional 400,000 shares at an exercise price of $2.50 per share.. The Bridge
Units were issued pursuant to an exemption available under Section 4(2) of the
Securities Act, and the issuance of the common stock and additional warrants
upon the conversion of the notes was exempt pursuant to Section 3(a)(9) of the
Securities Act. No commissions were paid, and no underwriter was involved in the
sale of the Bridge Units or the conversion of the promissory notes.
Since the acquisition of Arbios Technologies, Inc., Arbios Systems,
Inc. has issued options to purchase shares of common stock from time to time
under the 2003 Stock Option Plan. The stock option grants were exempt from
registration pursuant to Section 4(2) of the Securities Act, since they were
made to a small number of informed executive officers of the company or
consultants who had access to all information relevant to their investment
decisions. In addition, pursuant to the acquisition of Arbios Technologies,
Inc., Arbios Systems, Inc. assumed all outstanding options under Arbios
Technologies, Inc.'s Stock Option Plan (on the same terms and conditions as in
effect prior to the merger), which were granted by Arbios Technologies, Inc.
without registration pursuant to the exemption from registration available under
Rule 701 under the Securities Act. Arbios Systems, Inc. plans to register under
the Securities Act the offering of common stock pursuant to all options granted
or which may be granted in the future under the 2003 Stock Option Plan
(including the Arbios Technologies, Inc. options assumed in the
acquisition).
On March 30, 2004, Arbios Systems, Inc. entered into a retainer
agreement with Wolfe Axelrod Weinberger Associates LLC, an investor relations
firm. Pursuant to that agreement, we granted to Wolfe Axelrod Weinberger
Associates LLC a warrant to purchase 150,000 shares of our common stock at a
price of $3.40 per share. The warrant expires on April 1, 2009. Pursuant to the
terms of that warrant, the number of shares that can be purchased under that
warrant was reduced in December 2004 to 75,000 shares. The warrant was issued
pursuant to an exemption available under Section 4(2) of the Securities
Act.
In July, 2004, the Company entered into an agreement with 4P
Management Partners S.A. of Zurich, Switzerland, to perform investor relations
services for the Company in Europe. The Company issued two warrants to 4P
Management Partners S.A. to purchase an aggregate of 100,000 shares of common
stock. The first warrant for 50,000 shares vests immediately with an exercise
price of $1.50 per share and a five year expiration term. The second warrant for
50,000 shares vests ratably each month over one year with an exercise price of
$3.50 per share and a five year expiration term. The shares were issued pursuant
to an exemption available under Section 4(2) of the Securities Act.
In October 2004, an option holder exercised his option to purchase
18,000 shares of our common stock at an exercise price of $1.00 per share. The
shares were issued pursuant to an exemption available under Section 4(2) of the
Securities Act.
On January 11, 2005, the Company sold to 16 institutional investors,
two U.S. accredited persons, and four foreign accredited persons 2,991,812
shares of its common stock and warrants to purchase 1,495,906 shares of common
stock. The aggregate purchase price of the securities sold in the private
placement was $6,611,905.65. The shares were sold at a price of $2.21 per share.
The warrants are exercisable at an initial cash exercise price of $2.90 per
share (subject to adjustment), and expire on January 11, 2010. The shares and
warrants were sold in reliance upon the exemption from registration contained in
Section 4(2) of the Securities Act and Regulation D promulgated
thereunder because, among other things, the transaction did not involve a public
offering, all of the investors were accredited individuals or institutional
buyers, the investors had access to information about the Company, the investors
represented that they are purchasing the securities for investment and not
resale, and the Company has taken appropriate measures to restrict the transfer
of the securities.
On February 1, 2005 we issued a warrant to purchase 200,000 shares of
our common stock to AFO Advisors LLC, an advisor to the Company, as additional
compensation for services rendered to the Company during the past 15 months. The
warrants have a term of five years and have an exercise price of $2.90 per share
(the closing trading price of our common stock on the OTC Bulletin Board on the
date of grant). The warrant was issued pursuant to an exemption available under
Section 4(2) of the Securities Act.
ITEM 27. EXHIBITS
Exhibit
Number |
|
Description |
2.1 |
|
Agreement and Plan of Reorganization, dated October 20, 2003,
between the Registrant, Arbios Technologies, Inc., HAUSA Acquisition,
Inc., Cindy Swank and Raymond Kuh (1) |
|
|
|
3.1 |
|
Articles of Incorporation of Historical Autographs U.S.A.,
Inc.(2) |
|
|
|
3.2 |
|
Certificate of Amendment of Articles of Incorporation
(1) |
|
|
|
3.3 |
|
Bylaws (2) |
|
|
|
4.1 |
|
Revised form of Common Stock certificate(4) |
|
|
|
4.2 |
|
Form of Warrant for the Purchase of Shares of Common Stock
issued by the Registrant upon the assumption of the Arbios Technologies,
Inc. outstanding Warrant(4) |
|
|
|
4.3 |
|
Common Stock Purchase Warrant, dated April 1, 2004, issued to
Wolfe Axelrod Weinberger Associates LLC(5) |
|
|
|
4.4 |
|
Form of Warrant to Purchase Common Stock of Arbios Systems,
Inc. , dated January 11, 2005, issued to investors and placement agent
(6) |
|
|
|
5.1 |
|
Opinion of counsel as to legality of securities being
registered. |
10.1 |
|
Form of 2001 Stock Option Plan (2) |
|
|
|
10.2 |
|
Facilities Lease, entered into as of June 30, 2001, by and
between Cedars-Sinai Medical Center and Arbios Technologies(4) |
|
|
|
10.3 |
|
Standard Multi-Tenant Office Lease, dated as of February 13,
2004, by and between Beverly Robertson Design Plaza and Arbios Systems,
Inc.(4) |
|
|
|
10.4 |
|
Employee Loan-Out Agreement, entered into effective as of July
1, 2001, by and between Cedars-Sinai Medical Center and Arbios
Technologies, Inc.(4) |
|
|
|
10.5 |
|
Second Amendment to Employee Loan-Out Agreement, entered into
effective as of May 7, 2003, by and between Cedars-Sinai Medical Center
and Arbios Technologies, Inc.(4) |
|
|
|
10.6 |
|
License Agreement, entered into as of June 2001, by and between
Cedars-Sinai Medical Center and Arbios Technologies, Inc.(4) |
|
|
|
10.7 |
|
Spectrum Labs License Agreement(4) |
|
|
|
10.8 |
|
Third Amendment to Employee Loan-Out Agreement, entered into
effective as of June 21, 2004, by and between Cedars-Sinai Medical Center
and Arbios Systems, Inc. (5) |
|
|
|
10.9 |
|
Asset Purchase Agreement among Circe Biomedical, Inc., a
Delaware corporation, Arbios Technologies, Inc., and Arbios Systems, Inc.,
dated as of April 7, 2004(5) |
|
|
|
10.10 |
|
Manufacturing and Supply Agreement, dated as of December 26,
2001, between Spectrum Laboratories, Inc. and Arbios Technologies, Inc.
(5) |
|
|
|
10.11 |
|
Research Agreement, dated as of December 26, 2001, between
Spectrum Laboratories, Inc. and Arbios Technologies, Inc. (5) |
|
|
|
10.12 |
|
First Amendment to Research Agreement, dated as of October 14,
2002, between Spectrum Laboratories, Inc. and Arbios Technologies, Inc.
(5) |
|
|
|
10.13 |
|
Third Amendment to Facilities Lease, entered into effective as
of June __, 2004, by and between Cedars-Sinai Medical Center and Arbios
Technologies, Inc. (5) |
|
|
|
10.14 |
|
Form of Purchase Agreement, dated as of January 11, 2005, by
and among Arbios Systems, Inc. and the Investors named therein.
(6) |
|
|
|
10.15 |
|
Form of Registration Rights Agreement, dated as of January 11,
2005, by and among Arbios Systems, Inc. and the Investors named
therein.(6) |
|
|
|
14.1 |
|
Arbios Systems, Inc. Code of Business Conduct and Ethics
Adopted by the Board of Directors on January 15, 2004(4) |
|
|
|
16.1 |
|
Letter on Change in Certifying Accountant (3) |
|
|
|
21.1 |
|
List of Subsidiaries(4) |
|
|
|
23.1 |
|
Consent of Stonefield Josephson, Inc., independent
auditors |
|
|
|
23.2 |
|
Consent of Troy & Gould Professional Corportion (reference
is made to Exhibit 5.1) |
|
|
|
24.1 |
|
Power of Attorney (reference is made to the signature
page) |
________________________________
(1) Previously filed as an exhibit to the Company’s
Current Report on Form 8-K on October 14, 2003, which exhibit is hereby
incorporated herein by reference.
(2) Previously filed as an exhibit to the Company’s
Registration Statement Form 10-SB filed April 26, 2001, which exhibit is hereby
incorporated herein by reference.
(3) Previously filed as an exhibit to the Company’s
Current Report on Form 8-K on January 30, 2004, which exhibit is hereby
incorporated herein by reference.
(4) Previously filed as an exhibit to the Company’s
Annual Report on Form 10-KSB on March 30, 2004, which exhibit is hereby
incorporated herein by reference.
(5) Previously filed as an exhibit to the Company’s
Registration Statement on Form SB-2 filed on June 14, 2004, as amended, which
exhibit is hereby incorporated herein by reference.
(6) Previously filed as an exhibit to the Company’s
Current Report on Form 8-K on January 14, 2004, which exhibit is hereby
incorporated herein by reference.
ITEM 28. UNDERTAKINGS
A. Rule
415 Offering
We hereby undertake:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933.
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the effective
registration statement.
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the Company pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
B. Request
for Acceleration of Effective Date
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in Los Angeles,
California, on February 7, 2005.
|
|
|
|
ARBIOS SYSTEMS, INC. |
|
|
|
Date: February 7, 2005 |
By: |
/s/ JACEK ROZGA, M.D., PH.D |
|
Jacek Rozga, M.D., Ph.D |
|
President, and Chief Financial Officer |
POWER OF ATTORNEY
The officers and directors of Arbios Systems, Inc., whose signatures
appear below, hereby constitute and appoint Jacek Rozga, M.D., Ph.D and Scott
Hayashi and each of them, their true and lawful attorneys and agents, each with
power to act alone, to sign, execute and cause to be filed on behalf of the
undersigned any amendment or amendments, including post-effective amendments, to
this registration statement of Arbios Systems, Inc. on Form SB-2. Each of the
undersigned does hereby ratify and confirm all that said attorneys and agents
shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
|
|
|
|
/s/ JACEK ROZGA |
|
President (principal executive |
|
February 7, 2005 |
Jacek Rozga, M.D., Ph.D |
|
officer) and Chief Financial
Officer (principal financial
officer and principal accounting
officer) |
|
|
|
|
|
|
|
|
|
|
|
|
/s/ JOHN M. VIERLING |
|
Chairman of the Board, and |
|
February 7, 2005 |
John M. Vierling, MD |
|
Director |
|
|
|
|
|
|
|
|
|
|
|
|
/s/ ROY EDDLEMAN |
|
Director |
|
February 7, 2005 |
Roy Eddleman |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ MARVIN S. HAUSMAN |
|
Director |
|
February 7, 2005 |
Marvin S. Hausman MD |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ JACK E. STOVER |
|
Director |
|
February 7, 2005 |
Jack E. Stover |
|
|
|
|
EXHIBIT INDEX
Exhibit Number |
|
Description |
2.1
|
|
Agreement and Plan of Reorganization, dated October 20, 2003,
between the Registrant, Arbios Technologies, Inc., HAUSA Acquisition,
Inc., Cindy Swank and Raymond Kuh (1)
|
3.1 |
|
Articles of Incorporation of Historical Autographs U.S.A.,
Inc.(2) |
3.2 |
|
Certificate of Amendment of Articles of Incorporation
(1) |
3.3 |
|
Bylaws (2) |
4.1 |
|
Revised form of Common Stock certificate(4) |
4.2
|
|
Form of Warrant for the Purchase of Shares of Common Stock
issued by the Registrant upon the assumption of the Arbios Technologies,
Inc. outstanding Warrant(4)
|
4.3
|
|
Common Stock Purchase Warrant, dated April 1, 2004, issued to
Wolfe Axelrod Weinberger Associates LLC(5)
|
4.4
|
|
Form of Warrant to Purchase Common Stock of Arbios Systems,
Inc., dated January 11, 2005, issued to investors and placement agent
(6)
|
5.1
|
|
Opinion of counsel as to legality of securities being
registered.
|
10.1 |
|
Form of 2001 Stock Option Plan (2) |
|
|
|
10.2 |
|
Facilities Lease, entered into as of June 30, 2001, by and
between Cedars-Sinai Medical Center and Arbios Technologies(4) |
|
|
|
10.3 |
|
Standard Multi-Tenant Office Lease, dated as of February 13,
2004, by and between Beverly Robertson Design Plaza and Arbios Systems,
Inc.(4) |
|
|
|
10.4 |
|
Employee Loan-Out Agreement, entered into effective as of July
1, 2001, by and between Cedars-Sinai Medical Center and Arbios
Technologies, Inc.(4) |
|
|
|
10.5 |
|
Second Amendment to Employee Loan-Out Agreement, entered into
effective as of May 7, 2003, by and between Cedars-Sinai Medical Center
and Arbios Technologies, Inc.(4) |
|
|
|
10.6 |
|
License Agreement, entered into as of June 2001, by and between
Cedars-Sinai Medical Center and Arbios Technologies, Inc.(4) |
|
|
|
10.7 |
|
Spectrum Labs License Agreement(4) |
|
|
|
10.8 |
|
Third Amendment to Employee Loan-Out Agreement, entered into
effective as of June 21, 2004, by and between Cedars-Sinai Medical Center
and Arbios Systems, Inc. (5) |
|
|
|
10.9 |
|
Asset Purchase Agreement among Circe Biomedical, Inc., a
Delaware corporation, Arbios Technologies, Inc., and Arbios Systems, Inc.,
dated as of April 7, 2004(5) |
|
|
|
10.10 |
|
Manufacturing and Supply Agreement, dated as of December 26,
2001, between Spectrum Laboratories, Inc. and Arbios Technologies, Inc.
(5) |
|
|
|
10.11 |
|
Research Agreement, dated as of December 26, 2001, between
Spectrum Laboratories, Inc. and Arbios Technologies, Inc. (5) |
|
|
|
10.12 |
|
First Amendment to Research Agreement, dated as of October 14,
2002, between Spectrum Laboratories, Inc. and Arbios Technologies, Inc.
(5) |
|
|
|
10.13 |
|
Third Amendment to Facilities Lease, entered into effective as
of June __, 2004, by and between Cedars-Sinai Medical Center and Arbios
Technologies, Inc. (5) |
|
|
|
10.14 |
|
Form of Purchase Agreement, dated as of January 11, 2005, by
and among Arbios Systems, Inc. and the Investors named therein.
(6) |
|
|
|
10.15 |
|
Form of Registration Rights Agreement, dated as of January 11,
2005, by and among Arbios Systems, Inc. and the Investors named
therein.(6) |
|
|
|
14.1 |
|
Arbios Systems, Inc. Code of Business Conduct and Ethics
Adopted by the Board of Directors on January 15, 2004(4) |
|
|
|
|
|
|
16.1 |
|
Letter on Change in Certifying Accountant (3) |
|
|
|
21.1 |
|
List of Subsidiaries(4) |
|
|
|
23.1 |
|
Consent of Stonefield Josephson, Inc., independent
auditors |
|
|
|
23.2 |
|
Consent of Troy & Gould Professional Corportion (reference
is made to Exhibit 5.1) |
|
|
|
24.1 |
|
Power of Attorney (reference is made to the signature
page) |
|
|
|
________________________________
(1) Previously filed as an exhibit to the Company’s
Current Report on Form 8-K on October 14, 2003, which exhibit is hereby
incorporated herein by reference.
(2) Previously filed as an exhibit to the Company’s
Registration Statement Form 10-SB filed April 26, 2001, which exhibit is hereby
incorporated herein by reference.
(3) Previously filed as an exhibit to the Company’s
Current Report on Form 8-K on January 30, 2004, which exhibit is hereby
incorporated herein by reference.
(4) Previously filed as an exhibit to the Company’s
Annual Report on Form 10-KSB on March 30, 2004, which exhibit is hereby
incorporated herein by reference.
(5) Previously filed as an exhibit to the Company’s
Registration Statement on Form SB-2 filed on June 14, 2004, as amended, which
exhibit is hereby incorporated herein by reference.
(6) Previously filed as an exhibit to the Company’s
Current Report on Form 8-K on January 14, 2004, which exhibit is hereby
incorporated herein by reference.