| Patent
Applications |
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Patent
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of Patent Application |
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2216203 |
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CA |
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Method
of Thawing Cryopreserved Cells |
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9-256534 |
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Method
of Thawing Cryopreserved Cells |
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97307459 |
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Method
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99106212.6-2113 |
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EU |
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Removal
of Agent From Cell Suspension |
In
addition to the foregoing Circe Biomedical patents, we also acquired other
rights to Circe’s Biomedical'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. 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 technologytechnical or scientific data that
Circe Biomedical acquired from W.R. Grace & Co. Since the assets that we
acquired from Circe Biomedical 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. Net sales includes revenues received
from 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.
SEPET™
Rights. Our
intellectual property rights to SEPET™ consist
of a patent application and certain related trade secrets. Our patent
application regarding our selective plasma filtration therapy (SEPET™)
technology was filed in August 2002 with the United States Patent and Trademark
Office.
We have
filed for trademark protection in the U.S. for both SEPET™ and HepatAssist-2™.
We have not filed for any copyright or trademark protection
for LIVERAID™.
Research
and Development
In
December 2001, ATI and Spectrum Laboratories entered into a four-year research
agreement pursuant to which ATI and Spectrum Laboratories 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 Laboratories agreed
to perform certain research on liver assist devices for ATI during product
development, pre-clinical and clinical testing at no cost to ATI. Although all
of the obligations of the parties under that research and development agreement
were completed during the fiscal year ended December 31, 2004, Spectrum
Laboratories has agreed to perform such additional research and development work
as may we may request, which additional future work will be provided by Spectrum
Laboratories on terms that we may in the future agree to.
We spent
a total of $1,426,000 on research and development during the fiscal year ended
December 31, 2004 and $437,000 on research and development during the fiscal
year ended December 31, 2003. In addition, pursuant to our research agreement
with Spectrum Laboratories, that company provided research and development
services valued at $17,260 in 2003 for our liver assist systems. See, “Certain
Relationships and Related Transactions–Research Agreement.”
In
January 2005, we entered into a research and development agreement with the
Faculty of Chemical and Process Engineering of the Warsaw University of
Technology, in Warsaw, Poland. Pursuant to this agreement, Warsaw University
agreed to provide research and develop services to us in connection with the
development and manufacture of new membrane-based selective plasma filtration
technologies and new selective plasma filtration devices to be used with our
liver assist devices. Warsaw University also agreed to provide us with product
development, pre-clinical and clinical testing and regulatory approval
assistance. We will own all new technologies and procedures developed by the
Warsaw University under the research and development agreement other than
patentable technologies that Warsaw University develops without our assistance.
In the event that any new products or technologies developed under the agreement
use or rely on intellectual properties or technologies owned by the Warsaw
University, or if the Warsaw University patents any technologies that it
acquires while performing its services under the research agreement, the Warsaw
University has granted to us a perpetual, royalty-free license to use such
intellectual properties or technologies in our field of use, which includes
liver assist systems, bioartificial kidney, hemodialysis and/or hemofiltration
devices, and devices producing biologically active compounds. The research
agreement has a term of one year, but may be extended by the parties. We believe
that the cost of the research and development agreement to us during the first
year will be approximately $166,000.
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:
Gambro’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, and sorbent columns placed in a
dialysis circuit filled with 20% albumin solution. Albumin in the dialysate is
"regenerated" during continuous recirculation in the closed loop system through
sorbent columns (charcoal, resin). In addition, standard hemodialysis is
performed during MARS treatment. In Europe, initial results in patients with
acute liver failure were encouraging. In November 2004, 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 the MARS system and also combines albumin
dialysis with sorbent based blood detoxification and
dialysis. 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 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.
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 may 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
As of
March 15, 2005, we employed 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.
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.
ITEM
2. DESCRIPTION OF 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.
ITEM
3. LEGAL PROCEEDINGS.
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.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No
matters were submitted to a vote of security holders during the quarter ended
December 31, 2004.
PART
II
ITEM
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.
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
March 15, 2005, there were 160 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.
Repurchase
of Securities
We did
not repurchase any of our common shares during fiscal year 2004.
Recent
Sales of Unregistered 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 this company, as additional
compensation for services rendered to us during the past 15 months. The warrant
has a term of five years and 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
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
This
annual report contains forward-looking statements within the meaning of the
federal securities laws. These include statements about our expectations,
beliefs, intentions or strategies for the future, which we indicate by words or
phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,”
“the Company believes,” “management believes” and similar language. The
forward-looking statements are based on our current expectations and are subject
to certain risks, uncertainties and assumptions, including those set forth in
the discussion under “Description of Business,” including the “Risk Factors”
described in that section, and “Management’s Discussion and Analysis or Plan of
Operation.” Our actual results may differ materially from results anticipated in
these forward-looking statements. We base our forward-looking statements on
information currently available to us, and we assume no obligation to update
them.
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
Annual Report, 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 SEPET™, and the
preparation and submission of applications to the FDA. In March 2005 we
submitted an investigational new drug exemption ("IDE") application for SEPET™
and intend to commence conducting clinical studies for SEPET™ in the second
quarter of 2005. We also intend to reactivate work on the HepatAssist
bioartificial liver system by modifying the FDA-reviewed 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 next 12-month
period following the date of this Annual Report.
In April
2004 we purchased certain assets of Circe Biomedical 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, 2004. 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 Fiscal Year ended December 31, 2004 to Year ended December 31,
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 for fiscal
year 2004 ($72,000) and fiscal year 2003 ($138,000) represent revenues
recognized during those periods from two government research grants that we have
received.
General
and administrative expenses of $1,988,763 and $343,442 were incurred for years
ended December 31, 2004 and 2003. For the year ended December 31, 2004, the
expenses include $945,000 in non-cash option and warrant charges for grants
awarded to consultants, $587,000 in fees incurred to outside consultants and
professionals, and $179,000 in salaries and other administrative expenses. The
2003 expenses consist primarily of legal fees, audit fees and travel expenses.
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 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 $1,426,379 and $436,849 were incurred for the years
ended December 31, 2004 and 2003. Research and development expenses for the 2004
year increased by $989,530 over prior year levels primarily due to $450,000 of
purchased research and development from Circe Biomedical, Inc., $242,000
incurred for various research and development consultants regarding
manufacturing, regulatory and product management, $101,000 non cash option grant
charges for options awarded to scientific consultants, $52,000 in higher salary
costs for scientists and technicians, and $105,000 increase in preclinical
testing of SEPETTM and
LIVERAIDTM.
Interest
income of $16,132 was earned for the years ended December 31, 2004. In September
and October 2003, we raised gross proceeds of $4,400,000 in the private
placement of our securities. As a result, during 2004, we maintained cash
balances of between $3.5 million and $1.5 million. In addition, we used a
portion of the foregoing offering proceeds to repay all outstanding
indebtedness, thereby substantially decreasing our interest expense. Interest
expense decreased to $847 in fiscal 2004 from $243,230 in fiscal 2003 due to 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. The
$243,000 interest expense in fiscal 2003 represents 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 were converted in 2003, no additional interest accrued under
these notes during 2004.
Our net
loss increased to $3,327,827 in 2004 from $885,693 in 2003. The increase in net
loss is attributed to an increase in operating expenses incurred in the fiscal
2004 periods as compared to the same periods in 2003, without an increase in
revenues.
Liquidity
and Capital Resources
As of
December 31, 2004, we had cash of $1,501,905 and a total of $469,000 of total
indebtedness. We do not have any bank credit lines. To date, we have funded our
operations from the sale of debt and equity securities.
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. We also issued warrants
to purchase 114,404 shares of common stock to our placement agent in the
offering.
Based on
our current plan of operations and the private placement on January 11, 2005, we
believe that our current cash balances will be sufficient to fund our
foreseeable expenses for at least the next twelve months.
We do not
currently anticipate that we will derive any revenues from either product sales
or from governmental research grants during the current fiscal year. Although we
are planning to submit an application for an additional SBIR research grant
during 2004, no assurance can be given that the grant application will be
approved. Even if the grant is approved, it is unlikely that we would receive
any grant funds during the current fiscal year.
The 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. As a
result, we will have to obtain significant additional funds during the next
12-15 months. 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.
A summary
of our contractual cash obligations at December 31, 2004 is as
follows:
|
Contractual
Obligations |
|
Total |
|
2005 |
|
2006 |
|
2007 |
|
|
|
Long-Term
Office Leases |
|
$270,000 |
|
$139,000 |
|
$93,000 |
|
$38,000 |
|
$-0- |
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
Factors
that May Affect Future Results and Market Price of Our Stock
We face a
number of substantial risks. Our business, financial condition or results of
operations could be harmed by any of these risks. The trading price of our
common stock could decline due to any of these risks, and they should be
considered in connection with the other information contained in this Annual
Report on Form 10-KSB.
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 Annual Report. However, the
clinical development expenses of our products will be very substantial. Based on
our current assumptions, we estimate that the clinical cost of developing SEPET™
will be approximately $3 million to $4 million, the clinical cost of developing
HepatAssist-2™ will be between $15 million and $20 million, and the clinical
cost of developing LIVERAID™ 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 Laboratories) 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
LIVERAID™ 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 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.
Because
we are dependent on Medtronic, Inc. for the perfusion platform used in our
bioartificial liver products, any failure or delay by Medtronic to make the
perfusion platform commercially available will negatively affect our future
operations.
We
currently expect that a perfusion system known as the PERFORMER will become the
platform for both our HepatAssist-2™ and LIVERAID™
systems.
The PERFORMER has been equipped with proprietary software and our tubing in
order to enable the machine to work with our bioartificial liver products. A
limited number of the PERFORMER units have been manufactured to date. The
PERFORMER is being manufactured by RanD, S.r.l. (Italy) and marketed by
Medtronic, Inc. We currently do not have an agreement to purchase the PERFORMER
from Medtronic or any other source. In the event that RanD and Medtronic are
either unable or unwilling to manufacture the number of the PERFORMERS needed to
ensure that HepatAssist-2™ and LIVERAID™
are commercially viable, we would not have an alternate platform
immediately available for use, and the
development and sales of such systems would cease until an alternate platform is
found. We may have difficulty in finding a replacement platform and may be
required to develop a new platform in collaboration with a third party contract
manufacturer. While we believe there are several potential contract manufactures
who can develop and manufacture perfusion platforms meeting the HepatAssist-2™
and LIVERAID™ functional and operational characteristics, there can be no
assurance that we will be able to enter into such an arrangement on commercially
favorable terms, or at all. In addition, we may encounter substantial delays and
increased costs in completing our clinical trials if we have difficulty in
finding a replacement platform or if we are required to develop a new platform
for bioartificial liver use.
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 7
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
March 15, 2005, we had outstanding 16,207,909 shares of common stock. 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. In October 2004 and in February 2005, we registered a total of
7,208,000 shares of our common stock issuable upon the exercise of outstanding
warrants. The shares underlying the warrants have not yet been issued and will
not be issued until the warrants are exercised. Since the shares underlying
these warrants have been registered, they can be sold immediately following the
exercise. Accordingly, 7,208,000 additional shares could be released onto the
trading market at any time. Because of the limited trading volume, the sudden
release of 7,208,000 additional freely trading shares 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, 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 7,208,000
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 Annual
Report. |
ITEM
7. FINANCIAL STATEMENTS.
The
consolidated financial statements and the reports and notes, which are attached
hereto beginning at page F-1, are incorporated herein by reference.
ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
On
January 27, 2004, our board of directors, by unanimous written consent,
adopted resolutions to dismiss our former independent accountants, Williams
& Webster, P.S. (“Williams”). Williams’ report on our financial statements
for the past 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 most recent 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 Williams to make reference to the
subject matter of the disagreement in connection with its report. Williams
did not
advise this company of any of the events requiring reporting in a Form 8-K
under Item 304(a)(iv)(B).
On
January 27, 2004, our board of directors also approved, by unanimous
written consent, resolutions to engage Stonefield Josephson, Inc. (“Stonefield”)
as our independent accountants to audit our financial statements for the year
ending December 31, 2003, and to review our quarterly statements during
2004. Stonefield audited the financial statements of ATI for the past two fiscal
years. We did not consult with Stonefield 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.
ITEM
8A. CONTROLS AND PROCEDURES
As of the
end of the period covered by this report, our company conducted an evaluation,
under the supervision and with the participation of our chief executive officer
and chief financial officer, of our disclosure controls and procedures (as
defined in Rules 13a-15(e) of the Exchange Act). Based on this evaluation,
our chief executive officer and chief financial officer concluded that our
company’s disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms.
There was
no change in our internal controls, which are included within disclosure
controls and procedures, during our most recently completed fiscal quarter that
has materially affected, or is reasonably likely to materially affect, our
internal controls.
ITEM
8B. OTHER INFORMATION
On March
24, 2005, the Board of Directors approved an unwritten plan for compensating the
company’s directors. The plan consists of the following:
| · |
Directors
will receive annual grants of stock options to purchase 15,000 shares of
common stock. The options will be granted on the date of the annual
meeting of stockholders to those members of the Board who are elected at
that meeting. The options will have a term of seven years and will have an
exercise price equal to the market price on the date of grant. The options
will vest in equal monthly installments over the 12-month period following
the grant. |
| · |
New
directors who are elected by the Board or by our stockholders for the
first time, will be granted stock options to purchase 30,000 shares of
common stock at the time that the new directors join the Board. The
options will have a term of seven years and will have an exercise price
equal to the market price on the date of grant. One half of the options
will vest on the date of grant, and the balance will vest on the first
anniversary of the grant. |
| · |
All
non-employee directors will receive a cash payment of $1,500 for each day
that they attend a Board of Directors meeting ($1,000 if they attend a
meeting by telephone), and $500 for each telephonic Board meeting ($1,000
for each telephonic meeting if the meeting lasts longer than two hours).
In addition, the Chairman of the Board and Chairman of the Audit Committee
will each be paid $25,000 annually (payable quarterly), and the Chairman
of the Nomination Committee and the Chairman of the Compensation Committee
will each be paid $10,000 annually (payable quarterly). We will also
continue our policy of reimbursing all directors for any expenses incurred
by them in attending meetings of the Board of
Directors. |
PART
III
ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT.
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 third calendar quarter of 2005) at
which their successors are duly elected by the stockholders.
|
Name |
Age |
Position |
|
Jacek
Rozga, M.D., Ph.D. |
56 |
President
and Director |
|
Roy
Eddleman |
65 |
Director |
|
Marvin
S. Hausman M.D.
(2) |
63 |
Director |
|
John
M. Vierling, M.D.
(1) (2) |
59 |
Chairman
of the Board |
|
Jack
E. Stover
(1) (2) |
51 |
Director |
|
Scott
L. Hayashi |
33 |
Vice
President of Administration,
Chief Financial Officer,
and Secretary |
|
David
J. Zeffren |
48 |
Vice
President of Business Development |
(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 and the Chief Scientific Officer of this company since
October 30, 2003. From October 2003 until March 2005, Dr. Rozga also acted as
our Chief Financial Officer. 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
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. From
January 1997 until March 2005, Dr. Hausman was 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 is currently
the Chairman of the Board of Directors of Axonyx, Inc., a position he has held
since January 1997. 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 from 1996 to 2005 and was the Director of Hepatology and Medical
Director of Multi-Organ Transplantation Program at Cedars-Sinai Medical Center
from 1990-2004. In April 2005, he will assume the position of Professor of
Medicine and Surgery, Director of Baylor Liver Health and Chief of Hepatology at
the Baylor College of Medicine in Houston, Texas. 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 was elected the President and Chief Operating Officer of Antares
Pharma, Inc., (a public specialty pharmaceutical company) in 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 Nasdaq
traded injectable pharmaceutical company that was acquired by Teva
Pharmaceutical Inc. 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 pharmaceutical
company. For over 16 years, Mr. Stover was an employee and then a partner with
PricewaterhouseCoopers, working in their bioscience industry division.
Scott
L. 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. In March 2005, Mr. Hayashi assumed
the role as our Chief
Financial Officer. 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. Mr. Zeffren was Vice
President of Operations until he was appointed as Vice President of Business
Development in March 2005. 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.
Audit,
Compensation and Nominating 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 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.
ITEM
10. 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 other person who was an executive officer
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 |
|
|
2004 |
|
$ |
198,909 |
|
$ |
20,000 |
|
|
— |
|
|
30,000 |
|
| |
|
|
2003 |
(1) |
$ |
143,125 |
|
$ |
15,000 |
|
|
— |
|
|
18,000 |
(2) |
| |
|
|
2002 |
|
$ |
85,000 |
|
$ |
5,000 |
|
|
— |
|
|
18,000 |
(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.
Equity
Compensation Plan Information
The
following table summarizes as of March 15, 2005, the number of securities to be
issued upon the exercise of outstanding derivative securities (options,
warrants, and rights); the weighted-average exercise price of the outstanding
derivative securities; and the number of securities remaining available for
future issuance under our equity compensation plans.
|
Plan
Category |
Number
of securities to be issued upon exercise of outstanding options, warrants,
and rights |
Weighted
average exercise price of outstanding options, warrants and
rights |
Number
of securities remaining available for future issuance |
| |
(a) |
(b) |
(c) |
|
Equity
compensation plans approved by security holders(1) |
833,000 |
$2.04 |
167,000 |
|
Equity
compensation plans not approved by security holders |
536,904 |
$2.86 |
-0- |
|
Total |
1,369,904 |
$2.36 |
167,000 |
(1) The
compensation plan approved by the security holders is the company’s 2001 Stock
Option Plan.
Employment
Agreements
Dr.
Rozga, receives compensation from us in his capacity as the President and Chief
Scientific Officer of this company and in his capacity as President and Chief
Scientific Officer of ATI, our operating subsidiary. In his capacity as the
President and Chief Scientific 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.
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 and accelerated the vesting of his stock options. In
March 2005, the Board of Directors terminated the special investor relations
committee.
On March
24, 2005, the Board of Directors approved a new compensation plan for the
company’s directors. See, “Item 8B—Other Information.”
Code
of Ethics
The Board
of Directors adopted a Code of Ethics which covers all of our executive officers
and key employees. The Code of Ethics requires that senior management avoid
conflicts of interest; maintain the confidentiality of our confidential and
proprietary information; engage in transactions in our common stock only in
compliance with applicable laws and regulations and the requirements set forth
in the Code of Ethics; and comply with other requirements which are intended to
ensure that our officers conduct business in an honest and ethical manner and
otherwise act with integrity and in the best interest of this company.
All of
our executive officers are required to affirm in writing that they have reviewed
and understand the Code of Ethics.
The code
of ethics is filed as Exhibit 14.1 to this Annual Report on
Form 10-KSB.
A copy of
our Code of Ethics will be furnished to any person upon written request from any
such person. Requests should be sent to: Secretary, Arbios Systems, Inc., 8797
Beverly Blvd., Suite 206, Los Angeles, California, 90048.
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 incentive stock 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
incentive stock options are granted to a person who controls more than 10% of
our stock, then the exercise price of those incentive stock options 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 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
of an incentive stock option 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.
ITEM
11. 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 March 15, 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., Suite 206, 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)
|
15.6%
|
|
John
M. Vierling, MD
|
|
91,000(4)
|
*
|
|
Roy
Eddleman
|
|
428,669
(5)
|
2.6%
|
|
Marvin
S. Hausman MD
|
|
629,500(6)
|
3.9%
|
|
Jack
E. Stover
|
|
15,000(7)
|
*
|
|
Gary
Ballen (8)
140
Burlingame,
Los
Angeles, California 90049
|
|
1,139,222(8)
|
7.0%
|
|
Neuberger
Berman LLC
111
River Street - Suite 1000
Hoboken,
NJ 07030-5776(9)
|
|
2,440,199(9)
|
15.1%
|
|
LibertyView
Special Opportunities Fund, LP
111
River Street - Suite 1000
Hoboken,
NJ 07030-5776(10)
|
|
1,357,466(10)
|
8.
1%
|
|
All
executive officers and directors as a group (5 persons)
|
|
3,495,169
(11)
|
21.5%
|
* 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 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) |
Consists
of currently exercisable options. |
| (8) |
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. |
| (9) |
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. |
| (10) |
Consists
of (i) 904,977 shares of common stock, and (ii) currently exercisable
warrants to purchase 452,489 shares of common
stock. |
| (11) |
Includes
currently exercisable options and warrants to purchase 508,500 shares of
common stock. |
ITEM
12. 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 was paid in full in 2004), 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 40,000 shares of our common stock and 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.
ITEM
13. EXHIBITS AND REPORTS ON FORM 8-K.