The
mounting crisis of viral hepatitis B and hepatitis C is projected to
continue to
propel numbers of liver failure episodes as patients age and increasingly
suffer
hepatic decompensation. Approximately 3.9 million Americans are chronically
infected with the hepatitis C virus, and an estimated 25,000 people each
year
are infected in the United States each year with the hepatitis C virus.
At the
same time, 10,000 - 12,000 deaths have occurred annually in the United
States
due to hepatitis C virus infection, and the number is likely rising.
Hepatic
decompensation, as a result of chronic hepatitis C virus infection, is
now the
leading cause of liver transplantation in the United States. Despite
improved
rates of organ donation, increased utilization of deceased donor livers
and a
resurgence in living donor transplants, the number of liver transplants
performed yearly is now approximately 5,500. At the same time, in 2004
alone
there were more than 10,000 new waitlist registrations for liver replacement.
As
of March 6, 2006, the liver transplant waiting list contained 17,650
individuals. According
to National Institutes of Health and the American Association for the
Study of
Liver Diseases, 5,000 deaths occur annually as a consequence of hepatitis
B
virus infection.
Worldwide,
hepatitis B is the leading cause of liver failure. Of
the 2
billion people who have been infected with the
hepatitis B virus,
more
than 350 million are estimated to have chronic, or lifelong, infections.
These
chronically infected persons are at high risk of death from cirrhosis
of the
liver and liver cancer. The
World
Health Organization estimates very large numbers of deaths worldwide
from
hepatitis B virus infection -- an estimated 880,000 per year from liver
failure
and another 320,000 per year from liver cancer (some of whom may require
liver
support therapy before and/or after surgical resection of the cancer).
Infection
is most common in Asia, Africa and Middle East. Hepatitis
C is also a major cause of liver failure worldwide. According to the
World
Health Organization, globally, an estimated 170 million persons are chronically
infected with the hepatitis C virus. At the same time, an estimated 3
to 4
million persons are newly infected each year. Liver failure has recently
been
cast, worldwide, as the third leading cause of death. In
China
and other Asian countries, liver disease represents a pressing health
problem
and the need for an effective liver support therapy is more urgent than
in some
other markets. Although epidemiological data on hepatitis C virus and
hepatitis
B virus infection in China are not publicly available, we believe there
are
approximately 200 million carriers of the hepatitis virus B or C in China,
and
primary liver cancer is a common malignancy.
At
present, no direct treatment for liver failure is available and such
patients
must receive a liver transplant or endure prolonged hospitalization with
significant mortality. Moreover, no prognostic test is available that
would help
predict which liver failure patient is likely to survive on medical therapy
alone. Due to the critical nature of liver failure and the resulting
adverse
effects on other organs, the hospitalization costs can be as high as
$20,000 per
day. In fact, it is estimated that the in-patient cost of liver failure
treatment can reach $200,000 per episode without a transplant. While
liver
transplants have significantly increased the chances of survival for
patients
with liver failure, due to a severe shortage of donor livers, less than
10% of
liver failure patients received a transplant. Further, many liver failure
patients were excluded from the waiting list because of alcohol or drug
abuse,
cancer, cardiovascular disease or inadequate post-operative support by
family or
others.
At
this
time, based on the preliminary information available to us, we estimate
that the
cost to the provider of a single treatment with the SEPET™ therapy could be
within a $2,000 - $4,000 range and that the respective cost of the bioartificial
liver therapy could be approximately $20,000 in the United States. Pricing
in
other world regions will likely vary. We anticipate that SEPET™ and/or
bioartificial liver therapy may have to be repeated in some patients
up to an
average of five to seven times before a satisfactory clinical outcome
is
obtained, although fewer treatments per patient may be sufficient depending
on
the severity of disease. Based on these estimates and the above mentioned
projections, the potential U.S. market for SEPET™ and HepatAssist-2™ is
significant, with similar or possibly larger opportunities in some regions
outside North America. However, we have not confirmed the potential size
of
these markets through an independent marketing study.
If
we are
successful in demonstrating the clinical utility of one or both of our
products,
liver failure patients treated with our products may be spared liver
transplantation and the need for life-long immune-suppression. In addition,
these patients can be treated outside of the intensive care unit and
could be
discharged from the hospital after shorter stays, all of which would
reduce
costs for healthcare providers and generate a demand for the use of these
products.
Sales,
Marketing & Distribution
We
currently do not have any agreements in place to market any of our products
if
and when those products are commercially released, and we do not currently
expect to establish an in-house marketing and sales program to distribute
our
products in all regions of the world. We currently expect to outsource
at least
a portion of the sales, marketing and distribution of our products to
third
parties who specialize in the sales, marketing and distribution of medical
products. Alternatively, we may enter into strategic alliances with larger
medical companies or license the rights to our products to such larger
companies. We currently expect that our products will be marketed in
at least
North America, Europe and Asia.
Manufacturing
We
currently do not have a manufacturing arrangement for the cartridges
used in the
HepatAssist-2™ system. However, the HepatAssist-2™ cartridge is based on a
conventional single-bundle hollow-fiber technology and a number of third
party
manufacturers, including Spectrum Laboratories, could produce these cartridges
for us under contract.
With
respect to cartridges that we expect will be needed for SEPET™, we anticipate
that such cartridges will be commercially manufactured by either Spectrum
Laboratories or a manufacturer of clinical hemodialyzers. Additional
disposable
components, such as tubing kits, may also be manufactured by third party
subcontractors.
The
kidney dialysis hardware units that will be used as a platform for
SEPETTM
therapy
are not expected to require any technical adjustments. Since pressure
monitors
and hemoglobin detectors are standard in kidney dialysis systems, additional
safety features are not likely to be required. Since the existing kidney
dialysis units will not be affected, only the kidney dialysis cartridge
will be
replaced by a SEPETTM
cartridge, no consents will have to be obtained from the manufacturers
of those
units, and no additional insurance is expected to be required to use
those
units.
The
platform we currently expect to use for the HepatAssist-2™ bioartificial liver
therapy is a perfusion platform known as the PERFORMER. The PERFORMER
is a
multi-function integrated system capable of supporting extracorporeal
blood/plasma/fluid circulation therapies that is manufactured by RanD
S.r.l.
(Italy) and distributed by Medtronic, Inc. The PERFORMER may be equipped
with
proprietary software, which has already been developed by RanD for Arbios,
and a
tubing set for use with our HepatAssist-2™ system.
The
pig
liver cells will be harvested from young purpose-bred, pathogen-free,
vaccinated
pigs raised in a USDA certified facility specifically designed for biomedical
research purposes. The liver cells will be harvested and cryopreserved
under
aseptic conditions using our proprietary technology as well as commercially
available equipment.
With
regard to cell procurement and cryopreservation for bioartificial liver
use, we
do not yet own or lease our own specialized and certified bio-secure
porcine
liver cell manufacturing plant. Prior to of Phase III clinical testing
of
HepatAssist-2™, we will determine whether to build a cell procurement facility
to meet the expected requirements for commercial sales, which will require
a
substantial lease obligation and/or capital investment. This decision
will be
based on technical evaluation of the project as well as an economic evaluation
of company performance.
In
December 2001 we entered into a manufacturing and supply agreement with
Spectrum
Laboratories, Inc. for the future manufacture a portion of our LIVERAID™
product, a potential variation on the HepatAssist™ product design. The LIVERAID™
cartridge is a bioartificial liver similar to the HepatAssist cartridge
with the
exception of its fiber within a fiber design. Under that agreement, we
agreed
that Spectrum Laboratories will manufacture the hollow fiber cartridges
with
fiber-in-fiber geometry that we will need for the LIVERAID™ bioartificial liver.
The agreement provides that the price of the hollow fiber-in-fiber cartridges
to
be sold by Spectrum Laboratories to us will be determined by good faith
negotiations between the parties. We have agreed that we will not purchase
cartridges with fiber-in-fiber geometry from any other manufacturer unless
Spectrum Laboratories is either unable or unwilling to manufacture the
cartridges. The final step in manufacturing the LIVERAID™ cartridges is
completed manually, which has resulted in a high incidence of rejected
cartridges and a lengthy manufacturing period. These problems, if not
remedied,
may limit the amount and timeliness of cartridges that can be manufactured.
Spectrum Laboratories has informed us that it can, and is willing to,
acquire or
develop an automated manufacturing process for the LIVERAID™ cartridges.
However, since such an automated manufacturing process is expensive,
Spectrum
Laboratories has not yet undertaken to acquire or develop the necessary
equipment and technology. No assurance can be given that Spectrum Laboratories
will, in fact, be able to acquire or develop an automated manufacturing
process
or that Spectrum Laboratories will otherwise be able to satisfy our needs
for
the LIVERAID™ cartridges. In the event that Spectrum Laboratories is either
unable or unwilling to manufacture the amount of LIVERAID™ cartridges that we
need, we will have to find one or more alternative manufacturers for
the
cartridges. While we have identified other possible manufacturers of
the
LIVERAID™ cartridges, it is uncertain if any of those other companies would want
to manufacture the cartridges for us, and if so, on what terms. As such,
we have
decided to stop further development of the LIVERAIDTM
technology
indefinitely and focus on the HepatAssist-2TM
product.
Patents
and Proprietary Rights
Bioartificial
Liver Rights.
We
originally obtained exclusive, worldwide rights from Cedars-Sinai Medical
Center
and Spectrum Laboratories to seven issued U.S. patents protecting our
bioartificial liver technology and accompanying cell
procurement/cryopreservation technologies. One of the patents we licensed
from
Spectrum Laboratories, Inc., patent #5,015,585 “Method and Apparatus for
Culturing and Diffusively Oxygenating Cells on Isotropic Membranes” has expired.
The
founders of Arbios, Drs. Rozga and Demetriou, are co-inventors of both the
semi-automated methods for large-scale production of isolated pig/human
hepatocytes and cryopreservation of isolated pig/human hepatocytes. Currently,
the key proprietary bioartificial liver technologies that we intend to
use
include the following licensed patents:
(1) |
A
bioartificial liver system in which liver cell therapy and
blood
detoxification are integrated in a single fiber-in-fiber module
(US Patent
# 6,582,955 B2 for “Bioreactor With Application as Blood Therapy Device”
issued in June 2003). We have licensed this patent from Spectrum
Laboratories.
|
(2) |
Semi-automated
large-scale liver cell procurement technology (US Patent #5,888,409
for
“Methods for Cell Isolation and Collection” issued on March 30,
1999). We licensed this patent from Cedars-Sinai Medical
Center.
|
(3) |
Liver
cell procurement technology (US Patent #5,968,356 for “System for
Hepatocyte Cell Isolation and Collection” issued on October 19, 1999, and
related European Patent #0 830 099 for “Apparatus and Method for Cell
Isolation and Collection”). We licensed this patent from Cedars-Sinai
Medical Center.
|
(4) |
Liver
cell cryopreservation technology (US Patent #6,140,123 for
“Method for
Conditioning and Cryopreserving Cells” issued on October 31, 2000).
We licensed this patent from Cedars-Sinai Medical
Center.
|
Cedars-Sinai
Medical Center Licenses.
On June
19, 2001, Arbios entered into an agreement with Cedars-Sinai Medical
Center
pursuant to which Cedars-Sinai granted to Arbios exclusive and worldwide
rights
to patents (2)-(4) above and to certain other technical information.
These
rights are and remain exclusive over the legal life of the various patents
and
include, subject to limitations, the right to sublicense the patent rights
to
third parties. In order to maintain its rights under the license, Arbios
is
required to expend an aggregate amount of $1,760,000 in research and
development
expenses toward the development and promotion of products derived from
the
patents. As of the end of the fiscal year ended December 31, 2004, we
had
expended more than the minimum required $1,760,000 and have, therefore,
fully
satisfied the research and development expenditure requirement of this
license.
Cedars-Sinai Medial Center will have nonexclusive rights to any products
derived
from the patents. We will have to initially pay Cedars-Sinai Medical
Center
royalty fees equal to 1.5% of the gross sales price of royalty bearing
products.
From the third to tenth years of the license, the royalty fee percent
will phase
out evenly to 0%. Cedars-Sinai Medical Center is a stockholder of this
company.
See “Certain Relationships and Related Transactions.”
Spectrum
Laboratories License Agreement.
On
December 26, 2001, Arbios entered into a license agreement with Spectrum
Laboratories, pursuant to which Spectrum Laboratories granted to Arbios
an
exclusive, worldwide license to develop, make, use and distribute products
based
on Spectrum Laboratories’ hollow fiber-in-fiber technology, solely for
applications in Arbios’ liver assist devices. The license includes the rights to
two issued patents which have since expired. Provided that Arbios purchases
the
hollow fiber cartridges that it expects that it will need for its products
from
Spectrum Laboratories, Arbios will not have to pay a royalty for the
license. In
the event that Spectrum Laboratories is not the manufacturer of the hollow
fiber
cartridges, Arbios will have to pay Spectrum Laboratories a royalty for
the
license. Unless the Spectrum Laboratories license agreement is terminated
sooner
due to a breach of the license, the term of the license will continue
until the
expiration of the two patents. Spectrum Laboratories also agreed to grant
Arbios
a right of first refusal to obtain a license to make, use, develop or
distribute
products based on Spectrum Laboratories’ technology other than in liver assisted
products, provided that such other products are in the fields of artificial
blood therapy and bioprocessing and therapeutic devices. See “Certain
Relationships and Related Transactions.”
Circe
Biomedical Properties.
In April
2004, we acquired from Circe Biomedical a portfolio of intellectual properties,
including certain U.S. and foreign patents applicable to the HepatAssist
bioartificial liver that Circe Biomedical was developing, including various
patents related to the harvesting and handling of cells to be used in
the
bioartificial liver. We also acquired a number of other patents and rights
related to Circe Biomedical’s bioartificial liver program that we will not be
using, as well as patents on other technologies that we do not intend
to pursue
(such as patents to Circe Biomedical’s’s artificial pancreas system and three
patents for cholesterol removal membranes). The following is a list of
the
patents and patent applications that we acquired from Circe Biomedical
and that
we expect to maintain and use with our bioartificial liver systems:
(1) |
Apparatus
for Bioprocessing a Circulating Fluid. US Patent #5643794 (issued
on July
1, 1997).
|
(2) |
Cryopreserved
Hepatocytes and High Viability and Metabolic Activity. US Patent
#5795711
(issued on August 18, 1998).
|
(3) |
Closed
System for Processing Cells. US Patent #5858642 (issued on
January 12,
1999).
|
(4) |
Method
of Thawing Cryopreserved Cells. US Patent #5895745 (issued
on April 20,
1999).
|
(5) |
High
Flow Technique for Harvesting Mammalian Cells. US Patent #5912163
(issued
on June 15, 1999).
|
(6) |
Removal
of Agent From Cell Suspension. US Patent #6068775 (issued on
May 30,
2000).
|
(7) |
Method
for Cryopreserving Hepatocytes. US Patent #6136525 (issued
on October 24,
2000).
|
Patent
Applications
Patent No. |
|
Country |
|
Title of Patent
Application |
2216203 |
|
CA |
|
Method of Thawing Cryopreserved
Cells |
9-256534 |
|
JP |
|
Method of Thawing Cryopreserved
Cells |
97307459 |
|
EU |
|
Method of Thawing Cryopreserved
Cells |
99106212.6-2113 |
|
EU |
|
Removal of Agent From Cell
Suspension |
In
addition to the foregoing Circe Biomedical patents, we acquired other
rights to
Circe 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. 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.
In
connection with our acquisition of the foregoing patents, we also assumed
Circe
Biomedical’s obligations to make the following royalty payments:
(a) We
assumed the obligation to pay a royalty of 2% of “net sales” of any product that
utilizes or incorporates the bioartificial liver patents, technology,
inventions, and technical or scientific data that Circe Biomedical acquired
from
W.R. Grace & Co. pursuant to that certain Royalty Agreement, dated as of
January 29, 1999, between Circe Biomedical (as a wholly-owned subsidiary
of W.R.
Grace & Co.) and Circe Acquisition Corp., Since the assets that we acquired
from Circe Biomedical are expected to be used in the HepatAssist-2™ system, it
is likely that we will have to pay this royalty with respect of sales
of those
parts of our HepatAssist-2TM
Bioartificial
Liver System that incorporate the W.R. Grace & Co. technology. Net sales
include 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 ten years
after the
date on which we have obtained all required regulatory approvals and
have
received $100,000 of net sales.
(b) 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 pursuant to that certain Restated
License Agreement dated as of August 1, 1999 between Circe Biomedical
and
Cedars-Sinai Medical Center. Since our HepatAssist-2TM
Bioartificial Liver System may utilize this type of cartridge, we will
have to
pay this royalty with respect of sales of all cartridges used in our
bioartificial liver system. Our obligation to pay these royalties will
begin
with the first commercial sale of a bioartificial liver and continue
thereafter
for ten years.
Under
U.S. law, utility patents filed before June 8, 1995 are valid for 20
years from
the filing date, or 17 years from date of issuance, whichever period
is longer.
Patents filed on or after June 8, 1995 are good for 20 years from the
date of
filing.
SEPETTM
Rights.
Our
intellectual property rights relating to the SEPETTM
Liver
Assist Device 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 and subsequently in other countries and is currently
under
review for possible issuance.
We
have
filed for trademark protection for our product names, SEPET™ and HepatAssist-2™,
which marks may become registered only upon commercialization of
products.
Research
and Development
In
December 2001, Arbios and Spectrum Laboratories entered into a four-year
research agreement pursuant to which Arbios and Spectrum Laboratories
agreed to
combine their expertise and their respective technologies to enable Arbios
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 Arbios
during
product development, pre-clinical and clinical testing at no cost to
Arbios.
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 we may request, which additional future work will
be
provided by Spectrum Laboratories on terms upon which we may agree in
the
future.
We
spent
a total of $1,555,000 on research and development during the fiscal year
ended
December 31, 2005, $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, Spectrum Laboratories provided
research
and development services valued at $17,260 in 2003 for our liver assist
systems.
See, “Certain Relationships and Related Transactions.”
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 to and develop services for 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. The research agreement had a term of one year and
could be
extended by the parties. The cost of the research and development agreement
to
us during FY 2005 was approximately $100,000, and the agreement was terminated
In February 2006 for failure to meet the final milestone
objectives.
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 United States 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 and also
needed
for registration of the product in the United States.
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
in November 2004 in Boston.
In
patients with acute liver failure, treatment with ELAD®
had no
effect on survival when compared to patients receiving standard therapy.
In
January 2006, Vital Therapies, Inc. announced that it had received guidance
from
the FDA to allow it to begin shipment of its ELAD®
cartridges to China in anticipation of pivotal clinical trials scheduled
to
begin in China in early 2006.
Several
other technologies could potentially compete with our bioartificial liver
systems. These include xenotransplantation, which is the use of pig or
other
animal 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 take
a number
of years and involve the expenditure of substantial resources. After
laboratory
analysis and preclinical testing in animals, an IND 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 be substantial. No action can be taken
to
market any new drug or biologic product in the United States until an
appropriate marketing application has been approved by the FDA. Even
after
initial FDA approval has been obtained, further clinical trials may be
required
to provide additional data on safety and effectiveness and are required
to gain
clearance for the use of a product as a treatment for indications other
than
those initially approved. In addition, side effects or adverse events
that are
reported during clinical trials can delay, impede, or prevent marketing
approval. Similarly, adverse events that are reported after marketing
approval
can result in additional limitations being placed on the product’s use and,
potentially, withdrawal of the product from the market. Any adverse event,
either before or after marketing approval, can result in product liability
claims against us.
In
addition to regulating and auditing clinical trials, the FDA regulates
and
inspects equipment, facilities, and processes used in the manufacturing
and
testing of such products prior to providing approval to market a product.
If,
after receiving clearance from the FDA, a material change is made in
manufacturing equipment, location, or process, additional regulatory
review may
be required. We will also have to adhere to current Good Manufacturing
Practice
and product-specific regulations enforced by the FDA through its facilities
inspection program. The FDA also conducts regular, periodic visits to
re-inspect
equipment, facilities, laboratories, and processes following the initial
approval. If, as a result of these inspections, the FDA determines that
any
equipment, facilities, laboratories, or processes do not comply with
applicable
FDA regulations and conditions of product approval, the FDA may seek
civil,
criminal, or administrative sanctions and/or remedies against us, including
the
suspension of the manufacturing operations.
The
FDA
has separate review procedures for medical devices before such products
may be
commercially marketed in the United States. There are two basic review
procedures for medical devices in the United States. Certain products
may
qualify for a Section 510(k) procedure, under which the manufacturer
gives the
FDA a Pre-Market Notification, or 510(k) Notification, of the manufacturer's
intention to commence marketing of the product at least 90 days before
the
product will be introduced into interstate commerce. The manufacturer
must
obtain written clearance from the FDA before it can commence marketing
the
product. Among other requirements, the manufacturer must establish in
the 510(k)
Notification that the product to be marketed is "substantially equivalent"
to
another legally-marketed, previously existing product. If a device does
not
qualify for the 510(k) Notification procedure, the manufacturer must
file a
Pre-Market Approval Application. The Pre-Market Approval Application
requires
more extensive pre-filing testing than the 510(k) Notification procedure
and
involves a significantly longer FDA review process. We are currently
in the
process of designing clinical trials to demonstrate the safety and efficacy
of
SEPET™ in treating patients with chronic liver failure.
HepatAssist-2™
is classified by the FDA as a combination product comprising a biological
therapeutic and a Class III medical device. Accordingly, it is subject
to a
two-step approval process starting with a submission of an IND to conduct
human
studies followed by the submission of applications for Product Marketing
Approval (PMA) and Biologic License Approval (BLA). The steps required
before a
product such as HepatAssist-2™ 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 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 commence. 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. 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 6, 2006, we employed six full-time employees. We have also engaged
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 the 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.
Since
April 1, 2004, we have been leasing 1,700 square feet of administrative
office
space in a building across the street from our laboratories that are
located at
Cedars-Sinai Medical Center. Our office is located at 8797 Beverly Blvd.,
Suite
304, Los Angeles, California 90048. On September 1, 2005, we re-signed
the lease
for an additional two years. The office lease requires us to pay rent
of $5,777
per month. Since December 5, 2005, we have been leasing approximately
600 square
feet of administrative office space in Waltham, Massachusetts where some
of our
executive management are located. The new office lease, located at 1050
Winter
Street, Suite 1000, Waltham, Massachusetts 02154, requires us to pay
a total of
$18,040 for a period of seven months. We also lease an animal breeding
facility
in Woodstock, Connecticut which will be used to harvest porcine livers
for use
in our HepatAssist-2 product. The animal breeding facility lease in Connecticut
commenced on April 1, 2005 and has a term of two years which requires
us to pay
$12,009 per month for approximately 1,680 square feet of space.
ITEM
3. 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, 2005.
PART
II
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.” Prior 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.
The
following table sets forth the range of high and low bid information
for our
common stock for each quarter within the last two years, as reported
by Yahoo
Finance and Bigcharts from CBS Marketwatch.com. 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
|
|
March
31, 2004
|
|
$
|
3.50
|
|
$
|
3.40
|
|
June
30, 2004
|
|
$
|
4.25
|
|
$
|
2.75
|
|
September
30, 2004
|
|
$
|
5.15
|
|
$
|
4.00
|
|
December
31, 2004
|
|
$
|
2.68
|
|
$
|
2.65
|
|
|
|
|
|
|
|
|
|
March
31, 2005
|
|
$
|
1.66
|
|
$
|
1.60
|
|
June
30, 2005
|
|
$
|
2.20
|
|
$
|
2.10
|
|
September
30, 2005
|
|
$
|
1.90
|
|
$
|
1.80
|
|
December
30, 2005
|
|
$
|
1.80
|
|
$
|
1.74
|
|
____________________
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 6, 2006, there were 141 listed shareholders of record of our common
stock,
although we believe there may be substantially more shareholders who
hold our
common stock in street name.
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.
Issuer
Purchases of Equity Securities
We
did
not repurchase any of our common shares during fiscal year 2005.
Overview
On
October 30, 2003, we completed a reorganization (the “Reorganization”) in
which Arbios Technologies, Inc., or 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 our
name to
“Arbios Systems, Inc.” In the Reorganization, we also replaced our officers and
directors with those of ATI. 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 Systems,
Inc. has
conducted since its organization. In July 2005, we merged ATI into the
parent
company, Arbios Systems, Inc.
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. We submitted an
investigational device exemption, or IDE, application for SEPET™ in March 2005
and commenced clinical studies for SEPET™ in the third 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. 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, 2005. 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.
Short
Term Investments
Short-term
investments generally mature between three and twelve months. Short term
investments consist of U.S. government agency notes purchased at a discount
with
interest accruing to the notes full value at maturity. All of our
short-term investments are classified as available-for-sale and are carried
at
fair market value which approximates cost plus accrued interest.
Patents
In
accordance with FASB No. 2, the costs of intangibles that are purchased
from
others for use in research and development activities and that have alternative
future uses are capitalized and amortized. We capitalize certain patent
rights
that are believed to have future economic benefit. The licensed capitalized
patent costs were recorded based on the estimated value of the equity
security
issued by us to the licensor. The value ascribed to the equity security
took
into account, among other factors, our stage of development and the value
of
other companies developing extracorporeal bioartificial liver assist
devices.
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. The fair value of expensed
options
is estimated using the Black-Scholes option-pricing model. 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 reporting
periods that begin on January 1, 2006.
New
Accounting Pronouncements
In
December 2004, the FASB issued SFAS 123(R) (revised 2004), “Share-Based
Payment”. SFAS 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions
be
recognized in financial statements. That cost will be measured based
on the fair
value of the equity or liability instruments issued. SFAS 123(R) covers
a wide
range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation
rights, and
employee share purchase plans. SFAS 123(R) replaces SFAS No. 123, “Accounting
for Stock-Based Compensation”, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. SFAS 123, as originally issued in 1995, established
as preferable a fair-value-based method of accounting for share-based
payment
transactions with employees. However, SFAS 123(R) permitted entities
the option
of continuing to apply the guidance in APB Opinion 25, as long as the
footnotes
to financial statements disclosed what net income would have been had
the
preferable fair-value-based method been used. Our Company will be implementing
SFAS 123(R) as of January 1, 2006, and the projected additional expense
is
approximately $400,000 based upon options granted as of December 31,
2005.
In
March
2005, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 107 (SAB 107) regarding the Staff's interpretation of SFAS
123(R).
This interpretation expresses the views of the Staff regarding the interaction
between SFAS 123(R) and certain rules and regulations and provides the
Staff's
views regarding the valuation of share-based payment arrangements for
public
companies. In particular, this SAB provides guidance related to share-based
payment transactions with no employees, the transition from nonpublic
to public
entity status, valuation methods, the accounting for certain redeemable
financial instruments issued under share-based payment arrangements,
the
classification of compensation expense, non-GAAP financial measures,
first-time
adoption of SFAS 123(R) in an interim period, capitalization of compensation
cost related to share-based payment arrangements, the accounting for
income tax
effects of share-based payment arrangements upon adoption of SFAS 123(R),
the
modification of employee share options prior to adoption of Statement
123(R) and
disclosures in Management's Discussion and Analysis subsequent to adoption
of
SFAS 123(R). Our company will adopt SAB 107 in connection with its
adoption of SFAS 123(R).
In
May
2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections - a
replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 replaces
APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “Reporting
Accounting Changes in Interim Financial Statements” and changes the requirements
for the accounting for and reporting of a change in accounting principles.
This
statement applies to all voluntary changes in accounting principle. It
also
applies to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition
provisions.
When a pronouncement includes specific transition provisions, those provisions
should be followed. SFAS No. 154 is effective for accounting changes
and
corrections of errors made in fiscal years beginning after December 31,
2005.
In
February of 2006 the Financial Accounting Standards Board issued Statement
No.
155, "Accounting for Certain Hybrid Financial Instruments: an amendment of
FASB Statements Numbers 133 and 140". Management is currently evaluating
the effect, if any, that such pronouncement will have on accounting for
our
company's equity instruments which were issued with detachable
warrants.
Results
of Operations
Comparison
of Fiscal Year ended December 31, 2005 to Fiscal Year ended
December 31, 2004.
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 of $72,030 represent revenues recognized from government research
grants that we have received.
General
and administrative expenses of $2,394,546 and $1,988,763 were incurred
for the
years ended December 31, 2005 and 2004, respectively. For the year ended
December 31, 2005, the expenses include $745,000 in fees incurred to
outside
consultants, professionals and board member fees, $509,000 in payroll
and
payroll related costs, $477,000 in non-cash option and warrant charges
for
grants awarded to consultants, $187,000 in investor relation costs and
other
administrative expenses. 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. Professional
fees
increased in 2005 due to consulting services for marketing, recruiting
fees, and
board of directors fees. The reduction in non-cash option and warrant
charges
reflect the lower stock price in 2005 and fewer option and warrant grants
in
2005. The 2005 increase in payroll and payroll related expenses reflects
the
hiring of an interim and later a permanent Chief Executive Officer in
2005 and
employee bonuses.
Research
and development expenses of $1,554,509 and $1,426,379 were incurred for
the
years ended December 31, 2005 and 2004, respectively. Research and development
expenses for 2005 consist primarily of $414,000 in payroll and payroll
related
expenses, $362,000 in SEPETTM
development, manufacturing and clinical costs, $226,000 in consultant
costs
related to manufacturing, regulatory and product management, $141,000
in
employee costs from Cedars-Sinai and $108,000 in HepatAssist2™ facility costs.
Research and development expenses for the 2004 consist primarily of $450,000
of
purchased research and development from Circe Biomedical, Inc., $282,000
incurred for various research and development consultants for manufacturing,
regulatory and product management, $281,000 in employee costs from Cedars-Sinai,
$151,000 in SEPETTM
and
HepatAssist2™ development costs and $101,000 non cash option grant charges for
options awarded to scientific consultants. Research and development costs
increased by $128,130 from 2004 to 2005 and reflect increased expenditures
for
both the SEPETTM
and
HepatAssist2™ programs and increased payroll costs as we increased staff which
replaced employee costs from Cedars-Sinai and certain consulting costs
and the
write off of certain patents which have no future commercial use or economic
benefit to us.
Interest
income of $125,286 and $16,132 was earned for the years ended December
31, 2005
and 2004 respectively. The increase in interest income of $109,154 results
from
the increase in short term interest rates and higher cash balances maintained
in
2005. In January 2005, we raised gross proceeds of $6,611,905 in the
private
placement of our securities which resulted in the higher cash balances
in 2005.
Our net loss increased to $3,823,903 in 2005 from $3,327,827 in 2004.
The
increase in net loss is attributed to an increase in operating expenses
incurred
in the fiscal 2005 periods as compared to the same periods in 2004, without
an
increase in revenues.
Liquidity
and Capital Resources
As
of
December 31, 2005, we had cash of $2,379,738 and short term investments
of
$1,996,000. We do not have any bank credit lines. To date, we have funded
our
operations from the sale of debt and equity securities and from government
research grants.
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.
On
March
6, 2006, we completed a $1,350,000 private equity financing to a group
of
institutional investors and accredited investors. In the offering, we
sold
1,227,272 shares of our common stock at a price of $1.10 per share to
the
investors and issued to them warrants to purchase an additional 613,634
shares
of our common stock at an exercise price of $1.50 per share. The warrants
are
exercisable for a period of five years.
Based
on
our current plan of operations and the private placement we completed
on March
6, 2006, 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 2006, 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, 2005 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
and
|
Contractual
Obligations
|
|
Total
|
|
|
2006
|
|
2007
|
|
thereafter
|
Long-Term
Office Leases
|
|
|
$395,000
|
|
|
|
|
$286,000
|
|
|
|
$109,000
|
|
|
|
$-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.
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 derived from 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 company, 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 United States, our SEPET™ Liver Assist Device and our
HepatAssist-2TM
Bioartificial Liver System 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 HepatAssist-2TM
products
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 HepatAssist-2TM
bioartificial liver system, 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 our SEPET™ or HepatAssist-2™ products. 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™ and
approximately three to four years for HepatAssist-2™. The enrollment of patients
for the clinical study of our SEPETTM
cartridge has been slower than we anticipated. 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 amend
the
active Phase III IND to resume clinical testing of our HepatAssist-2™ product
and
complete the current feasibility clinical trial and file an investigational
drug
exemption, or IDE, amendment for SEPET™ with the FDA. Both 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 these applications, and there
can be no
assurance that we will have sufficient experimental, clinical
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 additional clinical data that will support the filing of the
FDA
applications for these products or the FDA’s approval of any product marketing
approval applications or biologic license approval application 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 of an amendment to the
Phase III
clinical study of the HepatAssist-2™ system. Such a request will require that we
supplement and/or amend the existing Phase III clinical protocol 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
clinical protocol 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 in addition to the
base cost
of operations of the Company. 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 clinical protocol.
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
clinical
protocol 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 system utilizes 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 possibly deadly to humans. For instance, all pig
cells
carry genetic material of the porcine endogenous retrovirus, or 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 produced 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 HepatAssist-2TM
bioartificial liver system 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
HepatAssist-2TM
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 $1.35 million private equity financing and current cash on
hand, 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 $5 million to $10 million, and the clinical cost
of
developing HepatAssist-2™ will be between $15 million and $20 million, in excess
of the cost of basic operations of the Company. 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 exclusive contract manufacturing arrangements 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
HepatAssist-2TM.
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 currently dependent on Spectrum Laboratories, Inc. as the manufacturer
of
our SEPET™ 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 for
our
fiber-within-fiber LIVERAID™ cartridges, which we no longer intend to pursue.
Although we have no agreement with Spectrum Laboratories for the manufacture
of
the SEPET™ cartridges, Spectrum Laboratories has also been providing us with
cartridges for prototypes of SEPET™ and has expressed an interest in
manufacturing the HepatAssist-2™ cartridge. Although Spectrum Laboratories has
agreed to transfer all of the know-how related to these products to any
other
manufacturer of our products if Spectrum Laboratories is unable to meet
its
contractual obligations to us, we may have difficulty in finding a replacement
manufacturer if we are unable to effectively transfer the Spectrum Laboratories
know-how to another manufacturer. We have no control over Spectrum Laboratories
or its suppliers, and if Spectrum Laboratories is unable to produce
SEPETTM
cartridges on a timely basis, our business may be adversely
affected.
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
HepatAssist-2TM,
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 our HepatAssist-2™ system. 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
PERFORMERS needed to ensure that HepatAssist-2 is commercially viable,
we would
not have an alternate platform immediately available for use, and the
development and sales of such a system would cease until an alternate
platform
is developed or 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 manufacturers who can develop and manufacture perfusion platforms
meeting the HepatAssist-2™ 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
seven 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 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 Arbios and
the Chairman of our Scientific Advisory Board. In addition, we are dependent
on
the services of our Chief Executive Officer, Walter C. Ogier, to provide
investor relations contacts, establish strategic relationships, and oversee
the
raising of capital for the Company. We do not have a long-term employment
contract with Dr. Rozga, Dr. Demetriou and Mr. Ogier, and the loss of
the
services of any 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 any 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 reimbursement guidelines with
Medicare, its counterparts in other countries, or any third-party payers
.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 or
other regulatory approval in foreign countries, 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.
If
we are not able to implement the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002 in a timely manner or with adequate compliance,
we
may be unable to provide the required financial information in a timely
and
reliable manner and may be subject to sanction to regulatory
authorities.
We
cannot
be certain at this time that we will have the expertise and resources
to be able
to comply with all of our reporting obligations and successfully complete
the
procedures, certification and attestation requirements of Section 404
of the
Sarbanes-Oxley Act of 202 by the time that we are required to do so.
If we fail
to comply with the requirements of Section 404, or if we or our independent
registered public accounting firm identifies any material weaknesses,
the
accuracy and timeliness of the filing of our annual and quarterly reports
may be
negatively affected and could cause investors to lose confidence in our
financial statements, impair our ability to obtain financing or result
in
regulatory sanctions. Remediating any material weakness could require
additional
management attention and increased compliance costs.
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.
If
we make any further acquisitions, we will incur a variety of costs and
might
never successfully integrate the acquired product or business into ours.
Following
on our acquisition of HepatAssist®
system
from Circe Biomedical, Inc., we might attempt to acquire products or
businesses
that we believe are a strategic complement to our business model. We
might
encounter operating difficulties and expenditures relating to integrating
HepatAssist®
or any
other an acquired product or business. These acquisitions might require
significant management attention that would otherwise be available for
ongoing
development of our business. In addition, we might never realize the
anticipated
benefits of any acquisition. We might also make dilutive issuances of
equity
securities, incur debt or experience a decrease in cash available for
our
operations, incur contingent liabilities and/or amortization expenses
relating
to goodwill and other intangible assets, or incur employee dissatisfaction
in
connection with future acquisitions.
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 certificate of incorporation could affect the value
of our
stock
Our
certificate 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 60,000,000 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.
|
Additionally,
some of our outstanding warrants to purchase common stock have anti-dilution
protection. This means that if we issue securities for a price less than
the
price at which the warrants are exercisable for shares of common stock,
the
warrants will become eligible to purchase more shares of common stock
at a lower
price, which will dilute the ownership of our common stockholders.
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 6, 2006, we had outstanding 17,460,181 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
5,972,272 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 5,972,272 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.
Not
applicable.
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, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial
Officer,
as appropriate, to allow timely decisions regarding required
disclosures.
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
Not
applicable.
PART
III
The
following table sets forth the name, age and position held by each of
our
directors and executive officers as of December 31, 2005. 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 2006)
at
which their successors are duly elected by the stockholders. Pursuant
to the
stock purchase agreement signed by the Company and investors during the
March 6,
2006 private equity financing, it was agreed upon that no more than nine
director nominees shall be elected at the next annual shareholders
meeting.
Name
|
Age
|
Position
|
|
|
|
Walter
C. Ogier
|
49
|
Director,
President and Chief Executive Officer
|
|
|
|
Jacek
Rozga, M.D., Ph.D.
|
56
|
Director,
Chief Scientific Officer
|
|
|
|
Roy
Eddleman
|
65
|
Director
|
|
|
|
Marvin
S. Hausman M.D.
|
64
|
Director
|
|
|
|
John
M. Vierling, M.D.
(2)
|
60
|
Chairman
of the Board
|
|
|
|
Jack
E. Stover
(1)
|
52
|
Director
|
|
|
|
Thomas
C. Seoh (1)(3)
|
48
|
Director
|
|
|
|
Thomas
M. Tully (1)(2)(3)
|
60
|
Director
|
|
|
|
Dennis
Kogod (2)(3)
|
46
|
Director
|
|
|
|
Richard
W. Bank, M.D.
|
72
|
Director
|
|
|
|
Amy
Factor
|
48
|
Director
|
|
|
|
Scott
L. Hayashi
|
33
|
Vice
President of Administration,
Chief Financial Officer
and Secretary
|
|
|
|
David
J. Zeffren
|
49
|
Vice
President of Product Development
|
|
|
|
Shawn
P. Cain
|
39
|
Vice
President of Operations
|
|
|
|
_________________________
(1) Member
of
Audit Committee.
(2) Member
of
Compensation Committee
(3)
Member
of
Nominating and Corporate Governance Committee.
Business
Experience and Directorships
The
following describes the backgrounds of current directors and the key
members of
the management team.
Walter
C. Ogier. Mr.
Ogier
was appointed President and Chief Executive Officer and a director of
Arbios in
November 2005 and has two decades of experience in the healthcare and
biotechnology industries. Prior to joining Arbios, Mr. Ogier was President
and
Chief Executive Officer of Genetix Pharmaceuticals Inc., which is active
in gene
therapy and functional genomics and was affiliated with Johnson & Johnson,
from December 2001 until November 2005. Prior to that, Mr. Ogier was
President
and Chief Executive Officer of Eligix, Inc., a Harvard University-affiliated
company engaged in monoclonal antibody-based therapies for stem cell
transplantation and immune therapy, from October 1997 through November
2001. Mr.
Ogier was also previously Vice President of Marketing for Aastrom Biosciences
and held various positions within Baxter Healthcare Corporation and its
Fenwal
and Immunotherapy divisions and with SRI International (formerly Stanford
Research Institute).
Jacek
Rozga, MD, Ph.D.
Dr. Rozga is a co-founder of Arbios and has been a director and Chief
Scientific Officer of Arbios since its organization in August 2000. Dr.
Rozga
served as President of Arbios from August 2000 until November 2005. From
October
2003 until March 2005, Dr. Rozga also acted as our Chief Financial Officer.
Dr.
Rozga is has been a director of Optical Imaging Systems, Inc., a publicly
held
Nevada corporation since February 2005 and Chairman of OncoTx, Inc.,
a private
California corporation since October 2005. Since 1992, Dr. Rozga has
been a
professor of Surgery at UCLA School of Medicine. Dr. Rozga was previously a
research scientist at Cedars-Sinai Medical Center from 1992 to 2005.
Roy
Eddleman.
Mr.
Eddleman has served as a director since March 2002. 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, M.D.
Dr.
Hausman has served as a director since February 2003. 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 stepped down
as the
Chairman of the Board of Directors of Axonyx, Inc. in June 2005.
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, M.D.,
FACP.
Dr.
Vierling has served as a director since February 2002. In April 2005,
Dr.
Vierling assumed the position of Professor of Medicine and Surgery, Director
of
Baylor Liver Health and Chief of Hepatology at the Baylor College of
Medicine
and Director, Advanced Liver Therapies at St. Luke’s Episcopal Hospital in
Houston, Texas. Dr. Vierling had 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 until 2004. Dr. Vierling is also
currently
the President 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 has served as a director since November 2004. Mr. Stover is also
a
director of PDI, Inc. and Antares Pharma, Inc. 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
President, CEO and was appointed as a director 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.
Thomas
C. Seoh. Mr.
Seoh
has served as a director since March 2005. Since February 2006, Mr. Seoh
has
served as Chief Executive Officer of Faust Pharmaceuticals S.A., a clinical
stage product company focused on drugs for neurological diseases and
conditions. From 2005 to 2006, Mr. Seoh was Managing Director of Beyond
Complexity Ventures, LLC, engaged in life science start-up and business
development consulting activities. From 1995 to 2005, Mr. Seoh was Senior
Vice
President, Corporate and Commercial Development, and previously Vice
President,
General Counsel and Secretary, with NASDAQ-listed Guilford Pharmaceuticals
Inc.,
engaged in research, development and commercialization of CNS, oncology
and
cardiovascular products. Previous positions included Vice President and
Associate General Counsel of ICN Pharmaceuticals, Inc., General Counsel
and
Secretary of Consolidated Press U.S., Inc. and corporate attorney in
the New
York City and London offices of Lord Day & Lord, Barrett Smith.
Thomas
M. Tully. Mr.
Tully
has served as a director since May 2005. Since January 2006, Mr. Tully
has
served as Chairman and Chief Executive Officer of IDev Technologies,
a medical
device company focused on the development and marketing of innovative
minimally
invasive devices for the treatment of peripheral vascular disease. From
August
2000 until April 2005, Mr. Tully was the President and Chief Executive
Officer
of Neothermia Corporation, a medical device company. Prior thereto, from
June
1995 to April 2000, Mr. Tully was the President and Chief Executive Officer
of
Nitinol Medical Technologies, Inc., a medical device company. Mr. Tully
was the
President of Organogenesis Inc., from 1991 to 1994, and the President
of
Schnieder (USA) Inc. from 1988 to 1991. From 1980 through 1988 he held
various
positions with Johnson & Johnson, including President, Johnson & Johnson
Interventional Systems and Vice President Marketing and Sales at the
Johnson
& Johnson Cardiovascular division.
Dennis
Kogod. Mr.
Kogod
has served as a director since May 2005. Mr. Kogod is Division President,
Western Group for Davita, Inc., a leading provider of dialysis services
for
patients suffering from chronic kidney failure. Mr. Kogod joined Davita
when
that company acquired Gambro Healthcare in October 2005. Prior to the
acquisition, Mr. Kogod was President and Chief Operating Officer of the
West
Division of Gambro Healthcare USA, which he joined in July 2000. Before
that,
Mr. Kogod spent 13 years with Teleflex Corporation, a NYSE-traded company.
While
there, he served as Division President of the Teleflex Medical Group
from
December 1999 to July 2000.
Richard
W. Bank, M.D. Dr.
Bank
has served as a director since January 2006 and was previously a director
from
December 2003 to January 2005. Dr.
Bank
has served as President and Managing Director of First-Tier Biotechnology
Partners since February of 1995. From
February 1995 through April 1996, Dr. Bank served as President and Secretary
of
Biomedical Sciences, Incorporated. He
has
also
served
as President and Secretary of BioVest Health Sciences, Incorporated since
its
organization in April 1996. Dr. Bank was Senior Research Analyst
Director/Biotechnology SBC Warburg Dillon Read from 1998 to 1999. He
was also
Entrepreneur-In- Residence in Life Sciences for Tucker Anthony Sutro
for 2000
through 2001. Dr. Bank has been Senior Portfolio Manager, Managing Director
and
Senior Vice President of LibertyView Capital Management-a Lehman Brothers
company from July 1, 2004 to present.
Amy
Factor Ms.
Factor was appointed as a director of Arbios in March 2005, and she was
the
interim Chief Executive Officer of Arbios from April 2005 until November
2005.
Prior to her term as the Chief Executive Officer, Ms. Factor provided
the
Company with strategic and financial consulting services from November
2003
until March 2005. Since 1999, Ms. Factor has been President of AFO Advisors,
LLC
and the President of AFO Capital Advisors, LLC since 1996. Ms. Factor
began her
career with the public accounting firm KPMG and has been involved in
the
biotechnology industry since 1988 serving as the CFO of a publicly traded
biotechnology company.
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
Cardinal
Health, Inc. from July 2000 to April 2002, Mr. Hayashi worked in finance,
mergers and acquisitions for Northrop Grumman Corporation from March
1997 to
July 2000 and Honeywell, Inc. from July 1994 to December 1996.
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, after which
he became
Vice President of Product 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 to 1999. 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.
Shawn
P. Cain
Mr. Cain joined the company as its Vice President of Operations in April
2005
and was previously employed by us as a part-time consultant from December
2003
to March 2005. From June 2003 to March 2005, Mr. Cain was employed at
Becton
Dickinson’s Discovery Labware, Biologics Business, where he was responsible for
the operation of two manufacturing facilities that produced over 900
biologics
products. From January 1997 through May 2003, Mr. Cain was the Vice
President of Operations for Circe Biomedical, Inc., where he was instrumental
in
the early development of the bioartificial liver technology, including
development the company’s HepatAssist® product.
There
are
no family relationships between any of the executive 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
consists of three persons and is currently composed of Mr. Stover, Mr.
Seoh and
Mr. Tully. 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.
Section
16(a) Beneficial Ownership Reporting Compliance
Our
records reflect that all reports which were required to be filed pursuant
to
Section 16(a) of the Exchange Act were filed on a timely basis, except
that 8
reports, covering an aggregate of 21 transactions, were filed late
by Thomas
Seoh, Marvin Hausman, M.D., John Vierling, M.D., Jack Stover, Roy Eddleman,
Thomas Tully, Jacek Rozga M.D., Ph.D., and Dennis Kogod.
An
Annual
Statement of Beneficial Ownership on Form 5 is not required to be filed
if there
are no previously unreported transactions or holdings to report. Nevertheless,
we are required to disclose the names of directors, officers and 10%
shareholders who did not file a Form 5 unless we have obtained a written
statement that no filing is required. We have received a written statement
from
each of our directors, officers and 10% shareholders stating that no
filing is
required.
Code
of Ethics
The
Board
of Directors adopted a Code of Ethics that 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.
A
copy of
our Code of Ethics will be furnished, without charge, to any person upon
written
request from any such person. Requests should be sent to: Secretary,
Arbios
Systems, Inc., 8797 Beverly Blvd., Suite 304, Los Angeles, California,
90048.
The
following table set forth certain information concerning the annual and
long-term compensation for services rendered to us in all capacities
for the
fiscal years ended December 31, 2005, 2004 and 2003 of (i) all persons
who
served as the Chief Executive Officer of this company during the fiscal
year
ended December 31, 2005 and (ii) each other person who was an executive
officer
on December 31, 2005 and whose total annual salary and bonus during the
fiscal
year ended December 31, 2005 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 such individual by both Arbios 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
|
|
All
Other
Compensation(10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Walter
C. Ogier,(1)
President
and Chief Executive Officer
|
|
|
2005
|
|
$
|
46,057
|
|
$
|
50,000
|
|
|
|
|
|
500,000
|
|
|
|
|
Amy
Factor(2)
|
|
|
2005
|
|
$
|
190,582
|
|
|
-
|
|
$
|
137,750(3)
|
|
|
300,000
|
|
$
|
1,125
|
|
Jacek
Rozga, M.D., Ph.D.,
Chief
Scientific Officer
|
|
|
2005
2004
2003
|
|
$
$
$
|
199,177
198,909
143,125
|
|
$
$
$
|
24,000
20,000
15,000
|
|
|
|
|
|
12,000
30,000
18,000(4)
|
|
$
|
2,750
|
|
Scott
L. Hayashi,
Vice
President of Administration, Chief Financial Officer and
Secretary
|
|
|
2005
2004(5)
|
|
$
$
|
102,291
80,000
|
|
$
$
|
9,450
12,000
|
|
$
|
8,000(6)
|
|
|
22,000
10,000
|
|
$
|
1,969
|
|
David
J. Zeffren,
Vice
President of Product Development
|
|
|
2005
2004(7)
|
|
$
$
|
114,346
120,000
|
|
$
|
5,400
|
|
|
|
|
|
12,000
10,000
|
|
$
|
2,080
|
|
Shawn
P. Cain,(8)
Vice
President of Operations
|
|
|
2005
|
|
$
|
110,000
|
|
$
|
12,000
|
|
$
|
3,465(9)
|
|
|
30,000
|
|
$
|
3,000
|
|
_________________________
(1) Mr.
Ogier
was appointed our President and Chief Executive Officer in November
2005.
(2) From
January 2005 to March 2005, Ms. Factor was employed by Arbios Systems,
Inc. as a
consultant and was subsequently appointed as the Chief Executive Officer
from
April 2005 until November 2005.
(3) Represents
compensation paid to Ms. Factor for the period from January 2005 until
March
2005.
(4) Represents
options granted to Jacek
Rozga, M.D., Ph.D by ATI, which options were assumed by this company
in the
Reorganization.
(5) Mr.
Hayashi joined Arbios in February 2004.
(6) Represents
cash payments made to Mr. Hayashi for health and other benefits in
2004
(7) 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.
(8) Mr.
Cain
was employed by Arbios Systems, Inc. as a consultant from January 2005
to March
2005 and subsequently was appointed an executive officer in April 2005.
(9) Represents
compensation paid to Mr. Cain for the period from January 2005 to March
2005.
(10) Represents
company matching contributions in the Arbios 401(k) Plan.
Stock
Option Grants
The
following table contains information concerning grants of stock options
during
the fiscal year ended December 31, 2005 by us to the Named Executive
Officers. We have not granted any stock appreciation rights.
Option
Grants in Fiscal Year Ended December 31, 2005
|
|
|
|
Individual
Grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
|
|
%
of Total Options
|
|
|
|
|
|
|
|
Securities
Underlying
|
|
Granted
to Employees
|
|
Exercise |
|
Expiration |
|
Name
|
|
Options
Granted
|
|
In
Fiscal Year
|
|
Price |
|
Date |
|
|
|
|
|
|
|
|
|
|
|
Walter
C. Ogier
|
|
|
500,000
(1
|
)
|
|
57
|
%
|
$
|
1.85
|
|
|
November
8, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
%
|
$
|
1.65
|
|
|
April
1, 2010
|
|
Amy
Factor
|
|
|
97,000(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
103,000(2
|
)
|
|
|
|
$
|
1.65
|
|
|
April
1, 2010
|
|
|
|
|
25,000(2
|
)
|
|
|
|
$
|
1.85
|
|
|
November
8, 2010
|
|
|
|
|
75,000(2
|
)
|
|
|
|
$
|
2.90
|
|
|
March
1, 2010
|
|
|
|
|
200,000(3
|
)
|
|
|
|
$
|
2.90
|
|
|
February
1, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jacek
Rozga, M.D., Ph.D.
|
|
|
12,000(4
|
)
|
|
2
|
%
|
$
|
2.22
|
|
|
July
7, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott
L. Hayashi
|
|
|
12,000(4
|
)
|
|
3
|
%
|
$
|
2.90
|
|
|
March
1, 2010
|
|
|
|
|
10,000(5
|
)
|
|
|
|
$
|
1.85
|
|
|
March
24, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
J. Zeffren
|
|
|
12,000(4
|
)
|
|
1
|
%
|
$
|
2.90
|
|
|
March
1, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shawn
P. Cain
|
|
|
30,000(6
|
)
|
|
3
|
%
|
$
|
1.65
|
|
|
March
31, 2010
|
|
(1) One
half
of these options will vest on the one year anniversary of the date of
grant, and
the balance will monthly in monthly increments during the second year
following
the date of grant.
(2)
All
of
the options were vested upon Ms. Factor’s resignation from the Company per the
terms of her employment agreement.
(3) Represents
a warrant for 200,000 shares of common stock issued to Ms. Factor.
(4) The
options vest in monthly increments over the first twelve months following
the
date of grant.
(5)
One
half of these options vest immediately on the date of grant, and the
balance
vests on the one year anniversary of the date of grant.
(6) The
options vest in monthly increments over the first twenty four months
following
the date of grant.
Aggregated
Option Exercises in Last Fiscal Year
The
following table sets forth the number and value of unexercised options
held by
the Named Executive Officers as of December 31, 2005. There were no
exercises of options by the Named Executive Officers in fiscal year 2005.
Aggregated
Option Exercises in Fiscal Year Ended December 31, 2005
and
FY-End Option Values
Name
|
|
Shares
Acquired
on
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)
|
|
Walter
C. Ogier
|
|
|
-
|
|
|
-
|
|
|
0/500,000
|
|
|
-
|
|
Amy
Factor
|
|
|
-
|
|
|
-
|
|
|
475,000/0
|
|
$
|
170,000/0
|
|
Jacek
Rozga, M.D., Ph.D
|
|
|
-
|
|
|
-
|
|
|
71,000/7,000
|
|
$
|
44,100/0
|
|
Scott
Hayashi
|
|
|
-
|
|
|
-
|
|
|
27,000/5,000
|
|
|
-
|
|
David
J. Zeffren
|
|
|
-
|
|
|
-
|
|
|
20,000/2,000
|
|
|
-
|
|
Shawn
P. Cain
|
|
|
-
|
|
|
-
|
|
|
11,250/18,750
|
|
$
|
1,688/2,813
|
|
_________________________
(1) Dollar
amounts reflect the net values of outstanding stock options computed
as the
difference between $1.80 (the last reported sale on December 30, 2005) and
the exercise price of the options.
Compensation
of Board of Directors
On
March
24, 2005, the Board of Directors approved a plan for compensating the
company’s
directors. On May 16, 2005, the Board amended the plan for the 2005 fiscal
year
and later renewed the plan on January 11, 2006 for FY 2006. The plan
consists of
the following:
Non-employee
Directors will receive annual grants of stock options to purchase 15,000
shares
of the company’s common stock. The options will be granted on January 1 of each
year. The options will have a term of seven years and will have an exercise
price equal to the market price on the trading day preceding the grant
date. The
options will vest in equal monthly installments over the 12-month period
following the grant date.
Upon
election to the Board of Directors, each new Director will be granted
a stock
option to purchase 30,000 shares of the company’s common stock. The option will
have a term of seven years and will have an exercise price equal to the
market
price on the trading day preceding 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 date.
On
January 1 of each year, committee members will receive an annual grant
of a
stock option to purchase 5,000 shares of common stock for each committee
for
which they are a member. The option will have a term of seven years and
will
have an exercise price equal to the market price on the trading day preceding
the grant date. The option will vest in equal monthly installments over
the
12-month period following the grant date.
Cash
Compensation
Effective
March 24, 2005, all non-employee directors will receive a cash payment
of $1,500
for each day they attend a Board of Directors meeting in person ($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). The company will also reimburse
all
directors for any expenses incurred by them in attending meetings of
the Board
of Directors.
During
the fiscal year ended December 31, 2005, each of our directors was granted
an annual grant of stock options to purchase 15,000 shares of common
stock at an
exercise price of $2.48 per share. All director options are granted at
the
market price on the date of grant and have a term of seven years and
vest on a
monthly basis from the date of grant.
Employment
Contracts and Termination of Employment, and Change-In-Control
Arrangements
We
entered into an agreement with David Zeffren, dated December 30, 2004,
pursuant
to which Mr. Zeffren has served as Vice President of Operations. The
agreement
provides for a salary of $120,000 per year that is subject to annual
review and
adjustment. The agreement provides that Mr. Zeffren’s employment is “at will”
and can be terminated at any time. Mr. Zeffren’s title and responsibilities were
changed in March 2005 to Vice President Product Development.
We
have
entered into an agreement with Scott Hayashi, dated March 29, 2005, pursuant
to
which Mr. Hayashi serves as Chief Financial Officer. The agreement provides
for
a salary of $105,000 per year that is subject to annual review and adjustment.
Mr. Hayashi is eligible to receive an annual discretionary bonus of up
to 15% of
his salary based on achieving certain goals. The agreement also offered
Mr.
Hayashi a five-year qualified stock option to purchase 10,000 shares
of our
common stock. The shares are exercisable at $1.85 per share; 50% of the
shares
vested immediately and 50% of the shares vest one year from the grant
date of
the option. The agreement provides that Mr. Hayashi’s employment is “at will”
and can be terminated at any time.
We
have
entered into an agreement with Shawn Cain, dated March 22, 2005, pursuant
to
which Mr. Cain serves as Vice-President of Operations. The agreement
provides
for a salary of $160,000 per year. The agreement also offered Mr. Cain
a
five-year incentive stock option to purchase 30,000 shares of our common
stock.
The options have an exercise price of $1.65 per share and vest in monthly
installments of 1,250 shares commencing on May 1, 2005. The agreement
also
provides that we will match Mr. Cain’s contributions to a 401(k) plan at a rate
of 50% up to 6% of total compensation per year. The agreement also offers
to pay
Mr. Cain’s COBRA costs for an 18-month period commencing on the April 15, 2005.
Mr. Cain is also eligible to receive an annual discretionary cash bonus
of up to
15% of his base annual salary. The agreement provides that Mr. Cain’s employment
is “at will” and can be terminated at any time. During Mr. Cain’s first year of
employment, he will receive six months’ notice if we wish to terminate his
employment, during the second year he will receive four months’ notice and
during the third year he will receive three months’ notice. If we fail to
provide the required notice, upon termination, we will pay Mr. Cain the
salary
equivalent of the notice of the shortened notice period.
We
have
entered into an agreement with Dr. Jacek Rozga, dated July 28, 2005,
pursuant to
which Dr. Rozga has served as President and Chief Scientific Officer.
The
agreement provides for a salary of $200,000 per year that is subject
to review
and adjustment by the Board of Directors. Dr. Rozga is eligible to receive
a
discretionary annual bonus of up to 20% of his salary as determined by
the Board
of Directors. The agreement provides that Dr. Rozga’s employment is “at will”
and can be terminated at any time. Dr. Rozga’s title of President was
transferred to Walter Ogier upon his hiring in November 2005. Dr. Rozga
continues to serve as Chief Scientific Officer.
On
March
31, 2005, we entered into an employment agreement with Amy Factor pursuant
to
which Ms. Factor was appointed as our interim Chief Executive Officer.
Under the
agreement, Ms. Factor was hired to be our Chief Executive Officer until
the
hiring of a permanent Chief Executive Officer. The employment agreement
was
terminable by either Ms. Factor or by us at any time upon 30 day’s prior written
notice. Under the agreement, we agreed to pay Ms. Factor a base salary
at a
monthly rate of $25,000 (which is equivalent to $300,000 on an annualized
basis)
and to issue to Ms. Factor five-year non-qualified stock options to purchase
an
aggregate of 200,000 shares of common stock. The options are exercisable
at
$1.65 per share (the closing market price of the common stock on March
31,
2005). Options to purchase 80,000 shares vested on March 31, 2005, and
the
options for the remaining 120,000 shares will vest in monthly installments
of
6,000 shares commencing on April 1, 2005. The vesting of these options
was to be
accelerated to be immediately and fully vested when we hire a permanent
Chief
Executive Officer, which has subsequently occurred. If Ms. Factor terminated
the
employment agreement for any reason other than our breach, or if we terminate
the agreement “for cause” (as defined in the agreement) before all of the
remaining 120,000 options have vested, all unvested options would have
been
forfeited. If we had terminated the employment agreement for any reason
other
than cause, the options would thereupon immediately and fully (100%)
vest. In
November 2005, Ms. Factor resigned her position as the interim Chief
Executive
Officer upon the hiring of Walter C. Ogier, and we terminated her employment
agreement with the Company at such time.
We
entered into an agreement with Walter C. Ogier, dated October 17, 2005,
pursuant
to which Mr. Ogier will serve as Chief Executive Officer commencing November
7,
2005. The agreement provides for an annual initial base salary of $300,000
that
is subject to review and adjustment on an annual basis in accordance
with the
procedures established by the Board of Directors. Mr. Ogier is eligible
to
receive a discretionary annual cash bonus equal to up to 50% of his annual
base
salary. The agreement provides that upon commencement of employment,
Mr. Ogier
received an option to purchase 500,000 shares of our common stock, which
will
vest 250,000 shares on the one year anniversary of the date Mr. Ogier’s
employment commences and 250,000 shares will vest ratably at the end
of each of
the twelve months of the second year of his employment. If there is a
liquidation or change-in-control of the Company and in connection with
such
transaction Mr. Ogier is terminated other than for cause or is no longer
President and Chief Executive Officer of the surviving corporation, then
all
options shares granted to Mr. Ogier in connection with his employment
will
immediately and fully vest. Additionally, if Mr. Ogier terminates his
employment
for good reason or is terminated in anticipation of such a transaction,
then all
option shares granted to Mr. Ogier in connection with his employment
will
immediately and fully vest. The agreement provides that Mr. Ogier’s employment
is “at will” and can be terminated at any time. Mr. Ogier is entitled to 12
months of salary if the Company terminates him without cause or he terminates
his employment for defined good reason.
None.
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED
STOCKHOLDER MATTERS.
Equity
Compensation Plan Information
The
following table summarizes as of December 31, 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 under
equity
compensation plans (excluding securities reflected in column
(a))
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Equity
compensation plans approved by security holders(1)
|
|
|
2,100,000
|
|
$
|
1.62
|
|
|
1,900,000
|
|
Equity
compensation plans not approved by security holders
|
|
|
475,000(2
|
)
|
$
|
1.15
|
|
|
-0-
|
|
Total
|
|
|
2,575,000
|
|
$
|
1.54
|
|
|
1,900,000
|
|
(1) These
plans consist of our 2001 Stock Option Plan and 2005 Stock Incentive
Plan.
(2) Represents
warrants to purchase shares of our common stock issued to our
consultants.
Security
Ownership of Certain Beneficial Owners
The
following table sets forth certain information regarding beneficial ownership
of
our common stock as of March 6, 2006 (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 6, 2006 there were
17,460,181
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 304, Los Angeles, California, 90048.
Name
and Address of Beneficial Owner
|
|
Shares
Beneficially Owned (1)
|
|
Percentage
of Class
|
|
Jacek
Rozga, M.D., Ph.D.
|
|
|
2,319,000
|
(2)
|
|
13.2
|
%
|
Achilles
A. Demetriou, M.D., Ph.D and Kristin P. Demetriou
|
|
|
2,500,000
|
(3)
|
|
14.3
|
%
|
John
M. Vierling, M.D.
|
|
|
147,667
|
(4)
|
|
*
|
|
Walter
C. Ogier
|
|
|
-0-
|
|
|
*
|
|
Roy
Eddleman
|
|
|
444,919
|
(5)
|
|
2.5
|
%
|
Marvin
S. Hausman, M.D.
|
|
|
655,750
|
(6)
|
|
3.7
|
%
|
Jack
E. Stover
|
|
|
61,667
|
(7)
|
|
*
|
|
Amy
Factor |
|
|
901,250 |
(8) |
|
4.9 |
% |
Thomas
C. Seoh |
|
|
36,440 |
(7) |
|
* |
|
Dennis
Kogod |
|
|
28,334 |
(7) |
|
* |
|
Thomas
Tully |
|
|
38,750 |
(7) |
|
* |
|
Richard
W. Bank, M.D. |
|
|
308,851 |
(9) |
|
1.7 |
% |
Scott
L. Hayashi |
|
|
27,000 |
(7) |
|
* |
|
David
J. Zeffren |
|
|
72,000 |
(10) |
|
* |
|
Shawn
P. Cain |
|
|
11,250 |
(7) |
|
* |
|
Gary
Ballen 140 Burlingame, Los Angeles, California 90049 |
|
|
1,139,222 |
(11) |
|
6.3 |
% |
LibertyView
Funds, LP
111
River Street – Suite 1000
Hoboken,
NJ 07030-5776
|
|
|
1,521,892
|
(12)
|
|
8.5
|
%
|
LibertyView
Special Opportunities Fund, LP
111 River Street -- Suite
1000
Hoboken,
NJ 07030-5776
|
|
|
2,339,444
|
(13)
|
|
12.9
|
%
|
Neuberger
Berman LLC
111
River Street – Suite 1000
Hoboken,
NJ 07030-5776
|
|
|
4,384,388
|
(14)
|
|
23.5
|
%
|
All
executive officers and directors as a group (14 persons)
|
|
|
5,052,878
|
(15)
|
|
26.1
|
%
|
* 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 74,000 shares of
common stock.
|
(3) |
Consists
of 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.
|
(4) |
Consists
of currently exercisable options to purchase 147,667 shares
of common
stock.
|
(5) |
Consists
of currently exercisable options to purchase 82,250 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 124,250 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) |
Consists
of (i) currently exercisable options to purchase 486,250 shares
of common
stock, (ii) warrants to purchase 200,000 shares exercisable
by AFO
Advisors, LLC, (iii) warrants to purchase 100,000 shares exercisable
by
AFO Capital Advisors, LLC, (iv) 5,000 shares owned by the Jay
H. Oyer and
Amy Factor Foundation, (v) 5,000 shares owned by the Melissa
H. Oyer
Trust, (vi) 5,000 shares owned by the Zachary D. Oyer Trust,
and (vii)
100,000 shares owned by AFO Capital Advisors, LLC. Amy Factor
is the owner
and President of AFO Capital Advisors, LLC and AFO Advisors,
LLC. She is
also the trustee of The Jay H. Oyer and Amy Factor Family Foundation,
The
Melissa H. Oyer Trust, and The Zachary D. Oyer Trust and has
voting and
investment control of the securities of these
entities.
|
(9) |
Consists
of (i) currently exercisable options to purchase 115,00 shares
of common
stock, (ii) a warrant to purchase 40,000 shares of common stock
exercisable by Richard W. Bank, M.D. (iii) 40,000 shares of
common stock
owned by Richard W. Bank. M.D., (iv) 13,851 shares of common
stock held by
LibertyView Health Sciences Fund, LP, and (iv) a warrant to
purchase
100,000 shares of common stock exercisable by LibertyView Health
Sciences
Fund, LP. Dr. Bank is the Senior Portfolio Manager, Managing
Director and
Senior Vice President of LibertyView Capital Management, a
division of
Neuberger Berman, LLC, which is affiliated with the General
Partner of the
LibertyView Health Sciences Fund,
LP.
|
(10) |
Consists
of (i) 25,000 shares owned by Mira Zeffren, David Zeffren’s wife, (ii)
warrants to purchase 25,000 shares registered in the name of
Mira Zeffren,
and (iii) currently exercisable options held by David Zeffren
for the
purchase of 22,000 shares of common
stock.
|
(11) |
Consists
of (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.
|
(12) |
Consists
of (i) 1,100,619 shares of common stock and (ii) currently
exercisable
warrants to purchase 421,273 shares of common stock. LibertyView
Funds,
LP, LibertyView Special Opportunities Fund, LP and Trust D
for a Portion
of the Assets of the Kodak Retirement Income Plan have a common
investment
advisor, Neuberger Berman, LLC, that has voting and dispositive
power over
the shares held by them, which is exercised by Richard A. Meckler.
Since
they have hired a common investment advisor, these entities
are likely to
vote together. Additionally, there may be common investors
within the
different accounts managed by the same investment advisor.
The General
Partner of LibertyView Special Opportunities Fund, LP and LibertyView
Funds, LP is Neuberger Berman Asset Management, LLC, which
is affiliated
with Neuberger Berman, LLC, a registered broker-dealer. LibertyView
Capital Management, a division of Neuberger Berman, LLC, is
affiliated
with the General Partner of the LibertyView Health Sciences
Fund, LP. The
shares were purchased for investment in the ordinary course
of business
and at the time of purchase, there were no agreements or understandings,
directly or indirectly, with any person to distribute the shares.
Trust D
for a Portion of the Assets of the Kodak Retirement Income
Plan is not in
any way affiliated with a broker-dealer.
|
(13) |
Consists
of (i) 1,724,169 shares of common stock and (ii) currently
exercisable
warrants to purchase 615,275 shares of common stock. LibertyView
Special
Opportunities Fund, LP, LibertyView Funds, LP and Trust D for
a Portion of
the Assets of the Kodak Retirement Income Plan have a common
investment
advisor, Neuberger Berman, LLC, that has voting and dispositive
power over
the shares held by them, which is exercised by Richard A. Meckler.
Since
they have hired a common investment advisor, these entities
are likely to
vote together. Additionally, there may be common investors
within the
different accounts managed by the same investment advisor.
The General
Partner of LibertyView Special Opportunities Fund, LP and LibertyView
Funds, LP is Neuberger Berman Asset Management, LLC, which
is affiliated
with Neuberger Berman, LLC, a registered broker-dealer. LibertyView
Capital Management, a division of Neuberger Berman, LLC, is
affiliated
with the General Partner of the LibertyView Health Sciences
Fund, LP. The
shares were purchased for investment in the ordinary course
of business
and at the time of purchase, there were no agreements or understandings,
directly or indirectly, with any person to distribute the shares.
Trust D
for a Portion of the Assets of the Kodak Retirement Income
Plan is not in
any way affiliated with a
broker-dealer.
|
(14) |
Includes
shares of common stock and currently exercisable warrants to
purchase
shares of common stock held by Liberty Funds, LP and LibertyView
Special
Opportunities Fund, LP (see footnotes 12 and 13). Also includes
(i)
386,689 shares of common stock held by Trust D for a Portion
of the Assets
of the Kodak Retirement Income Fund and (ii) currently exercisable
warrants to purchase 136,363 shares of common stock held by
Trust D for a
Portion of the Assets of the Kodak Retirement Income Plan.
LibertyView
Funds, LP, LibertyView Special Opportunities Fund, LP and Trust
D for a
Portion of the Assets of the Kodak Retirement Income Plan have
a common
investment advisor, Neuberger Berman, LLC, that has voting
and dispositive
power over the shares held by them, which is exercised by Richard
A.
Meckler. Since they have hired a common investment advisor,
these entities
are likely to vote together. Additionally, there may be common
investors
within the different accounts managed by the same investment
advisor. The
General Partner of LibertyView Special Opportunities Fund,
LP and
LibertyView Funds, LP is Neuberger Berman Asset Management,
LLC, which is
affiliated with Neuberger Berman, LLC, a registered broker-dealer.
LibertyView Capital Management, a division of Neuberger Berman,
LLC, is
affiliated with the General Partner of the LibertyView Health
Sciences
Fund, LP. The shares were purchased for investment in the ordinary
course
of business and at the time of purchase, there were no agreements
or
understandings, directly or indirectly, with any person to
distribute the
shares. Trust D for a Portion of the Assets of the Kodak Retirement
Income
Plan is not in any way affiliated with a broker-dealer.
|
(15) |
Includes
currently exercisable options and warrants to purchase 1,907,358
shares of
common stock.
|
ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On
December 26, 2001, Arbios entered into various agreements with Spectrum
Laboratories, Inc. Concurrently with these agreements, Spectrum Laboratories
also purchased 362,669 shares of our common stock. Mr. Eddleman, one
of the
members of our Board of Directors, is the Chairman and Chief Executive
Officer
of Spectrum Laboratories. The three principal agreements entered into
by Arbios
and Spectrum Laboratories in December 2001 are the following:
A. License
Agreement.
Spectrum
Laboratories granted to Arbios an exclusive, worldwide license to develop,
make,
use and distribute products based on two Spectrum Laboratories patents.
Provided
that Arbios purchases the hollow fiber cartridges that it expects that
it will
need for its products from Spectrum Laboratories, Arbios 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, Arbios will have to pay Spectrum Labs
a royalty
for the license (see, “Business--Manufacturing and Supply Agreement”). Spectrum
Labs also agreed to grant Arbios 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.
Arbios
and Spectrum Laboratories also entered into a four-year research agreement
pursuant to which Arbios and Spectrum Laboratories agreed to combine
their
expertise and their respective technologies to enable Arbios 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 toward the development of hollow fiber-in-fiber
modules for Arbios’s liver assist systems during product development,
pre-clinical and clinical testing at no cost to Arbios. Spectrum Laboratories
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, Arbios and Spectrum Laboratories agreed
that
Spectrum Laboratories has now satisfied its research and development
obligations, that ATI owed Spectrum Laboratories an additional $54,960
for
services provided by Spectrum Laboratories (which amount was paid in
full in
2004), and that the 362,669 shares of Arbios common stock previously
issued to
Spectrum Laboratories are now fully vested. Spectrum Laboratories has
agreed to
perform additional research and development work as may be requested
by Arbios
on such terms as the parties may agree to in good faith
negotiations.
C. Manufacturing
and Supply Agreement.
Arbios
and Spectrum Laboratories have also entered into an agreement pursuant
to which
the parties have agreed that Spectrum Laboratories will manufacture for
Arbios
the hollow fiber cartridges with fiber-in-fiber geometry for its LIVERAID™
device. The agreement provides that the price of the hollow fiber-in-fiber
cartridges to be sold by Spectrum Laboratories to Arbios will be determined
by
good faith negotiations between the parties. Arbios has agreed that it
will not
purchase cartridges with fiber-in-fiber geometry from any other manufacturer
unless Spectrum Laboratories is either unable or unwilling to manufacture
the
cartridges. In the event that Spectrum Laboratories is unwilling to manufacture
the fiber-in-fiber cartridges for Arbios, Arbios shall have the right
to have a
third party manufacture the cartridges for it, in which case Arbios will
pay
Spectrum Laboratories a royalty for the license granted to Arbios by
Spectrum
Laboratories 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.
Agreement
with Marvin Hausman, M.D.
On
October 17, 2005, we entered into a Consulting Agreement with Marvin
S. Hausman,
M.D. Dr. Hausman is a member of our Board of Directors. Under the Consulting
Agreement, Dr. Hausman agreed to provide us with consulting services
in support
of our SEPET clinical trial program. We agreed to pay Dr. Hausman a $10,000
monthly retainer for a period of three months for his consulting services
and
granted a five-year non-qualified stock option to purchase 30,000 shares
of our
common stock under our 2005 Stock Incentive Plan, of which 25,000 shares
were
ultimately awarded to him based on certain terms of the Consulting Agreement.
The exercise price of the foregoing options is $1.80 per share and vest
on a
monthly basis for a period of one year beginning January 1, 2006.
Agreement
with AFO Advisors, LLC
Pursuant
to a verbal arrangement with AFO Advisors, LLC, we engaged Amy Factor
to provide
investor relations services to support our fundraising efforts as well
as
provide strategic and financial advice. Ms. Factor is a member of our
Board of
Directors and is the President of AFO Advisors, LLC. Under the arrangement,
we
agreed to pay Ms. Factor a $7,500 monthly retainer for a period of three
months
commencing January 1, 2006 to March 31, 2006 and granted a five year
non-qualified stock option to purchase 30,000 shares of our common stock
under
our 2005 Stock Incentive Plan. The exercise price of the foregoing options
is
$1.80 per share and vest on a monthly basis during for a period of three
months
beginning January 1, 2006.
Warrant
to Adam Hausman
On
February 17, 2004, we issued 7,500 shares of common stock and a warrant
to
purchase 7,500 shares of common stock to Adam Hausman, who is the son
of Marvin
S. Hausman, M.D., a member of our Board of Directors, as compensation
for
finder’s fees related to the October 2003 financing. The warrant has a
three-year life and is exercisable at $2.50 per share.
ITEM
13. EXHIBITS.
The
following exhibits are filed as part of this report:
Exhibit
Number
|
Description
|
2.1
|
Agreement
and Plan of Reorganization, dated October 20, 2003, between
the
Registrant, Arbios Technologies, Inc., HAUSA Acquisition, Inc.,
Cindy
Swank and Raymond Kuh (1)
|
3.1
|
Certificate
of Incorporation filed with the Secretary of State of the State
of
Delaware on June 3, 2005
|
3.2
|
Certificate
of Correction filed with the Secretary of State of the State
of Delaware
on July 6, 2005
|
3.3
|
Certificate
of Ownership and Merger filed with the Secretary of State of
the State of
Delaware on July 25, 2005
|
3.4
|
Certificate
of Ownership and Merger filed with the Secretary of State of
the State of
Delaware on July 26, 2005
|
3.5
|
Bylaws
|
4.1
|
Form
of Common Stock certificate
|
4.2
|
Form
of Warrant for the Purchase of Shares of Common Stock issued
by the
Registrant upon the assumption of the Arbios Technologies,
Inc.
outstanding Warrant (3)
|
4.3
|
Common
Stock Purchase Warrant, dated April 1, 2004, issued to Wolfe
Axelrod
Weinberger Associates LLC (4)
|
4.4
|
Form
of Warrant to Purchase Common Stock of Arbios Systems, Inc.,
dated January
11, 2005, issued to investors and placement agent (5)
|
10.1
|
Form
of 2001 Stock Option Plan (2)*
|
10.2
|
Facilities
Lease, entered into as of June 30, 2001, by and between Cedars-Sinai
Medical Center and Arbios Technologies, Inc. (3)
|
10.3
|
Standard
Multi-Tenant Office Lease, dated as of August 16, 2005, by
and between
Beverly Robertson Design Plaza and Arbios Systems, Inc.
|
10.4
|
Employee
Loan-Out Agreement, entered into effective as of July 1, 2001,
by and
between Cedars-Sinai Medical Center and Arbios Technologies,
Inc.
(3)
|
10.5
|
Second
Amendment to Employee Loan-Out Agreement, entered into effective
as of May
7, 2003, by and between Cedars-Sinai Medical Center and Arbios
Technologies, Inc. (3)
|
10.6
|
License
Agreement, entered into as of June 2001, by and between Cedars-Sinai
Medical Center and Arbios Technologies, Inc. (3)
|
10.7
|
Spectrum
Labs License Agreement (3)
|
10.8
|
Third
Amendment to Employee Loan-Out Agreement, entered into effective
as of
June 21, 2004, by and between Cedars-Sinai Medical Center and
Arbios
Systems, Inc. (4)
|
10.9
|
Asset
Purchase Agreement among Circe Biomedical, Inc., a Delaware
corporation,
Arbios Technologies, Inc., and Arbios Systems, Inc., dated
as of April 7,
2004(4)
|
10.10
|
Manufacturing
and Supply Agreement, dated as of December 26, 2001, between
Spectrum
Laboratories, Inc. and Arbios Technologies, Inc. (4)
|
10.11
|
Research
Agreement, dated as of December 26, 2001, between Spectrum
Laboratories,
Inc. and Arbios Technologies, Inc. (4)
|
10.12
|
First
Amendment to Research Agreement, dated as of October 14, 2002,
between
Spectrum Laboratories, Inc. and Arbios Technologies, Inc.
(4)
|
10.13
|
Third
Amendment to Facilities Lease, entered into effective as of
June __, 2004,
by and between Cedars-Sinai Medical Center and Arbios Technologies,
Inc.
(4)
|
10.14
|
Form
of Purchase Agreement, dated as of January 11, 2005, by and
among Arbios
Systems, Inc. and the Investors named therein. (5)
|
10.15
|
Form
of Registration Rights Agreement, dated as of January 11, 2005,
by and
among Arbios Systems, Inc. and the Investors named
therein.(5)
|
10.16
|
Omnibus
Stockholders’ Agreement, dated as of October 24, 2003, by and among Arbios
Technologies, Inc., Historical Autographs U.S.A., Inc., Spectrum
Laboratories, Inc., Cedars-Sinai Medical Center, Achilles A.
Demetriou,
M.D., Ph.D. and Kristin P. Demetriou, as Trustees of the A
& K
Demetriou Family Trust created on November 13, 2000, and Jacek
Rozga,
M.D., Ph.D. and Joanna Rozga.
|
10.17
|
Employment
Offer Letter, dated December 30, 2004, between Arbios Systems,
Inc. and
David Zeffren.*
|
10.18
|
Employment
Offer Letter, dated March 25, 2005, between Arbios Systems,
Inc. and Shawn
Cain.*
|
10.19
|
Employment
Offer Letter, dated March 29, 2005, between Arbios Systems,
Inc. and Scott
Hayashi.*
|
10.20
|
Employment
Agreement, entered into between Arbios Systems, Inc. and Amy
Factor,
effective as of March 31, 2005 (6)*
|
10.21
|
Employment
Offer Letter, dated July 28, 2005, between Arbios Systems,
Inc. and Jacek
Rozga, M.D., Ph.D. (7)*
|
10.22
|
2005
Stock Incentive Plan (8)*
|
10.23
|
Form
of Stock Option Agreement for the 2005 Stock Incentive Plan
(8)*
|
10.24
|
Employment
Offer Letter, dated October 17, 2005, between Arbios Systems,
Inc. and
Walter C. Ogier. (9)*
|
10.25
|
Consulting
Agreement, dated October 1, 2005, between Arbios Systems, Inc.
and Marvin
S. Hausman, M.D. (9)
|
10.26
|
Form
of Lease, dated April 1, 2005, between Arbios Technologies,
Inc. and
American Integrated Biologics, Inc.
(7)
|
31.1
|
Certification
of Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
31.2
|
Certification
of Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
32.1
|
Certification
of Principal Executive Officer Pursuant to 18 U.S.C. Section
1350
|
32.2
|
Certification
of Principal Financial Officer Pursuant to 18 U.S.C. Section
1350
|
________________________________
* Denotes
a
management contract or compensatory plan or arrangement.
(1) Previously
filed as an exhibit to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 14, 2003, which exhibit
is hereby
incorporated herein by reference.
(2) Previously
filed as an exhibit to the Company’s Current Report on Form 10-SB filed with the
Securities and Exchange Commission on April 26, 2001, which exhibit is
hereby
incorporated herein by reference.
(3) Previously
filed as an exhibit to the Company’s Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on March 30, 2004, which exhibit is
hereby
incorporated herein by reference.
(4) Previously
filed as an exhibit to the Company’s Registration Statement on Form SB-2/A filed
with the Securities and Exchange Commission on September 10, 2004, which
exhibit
is hereby incorporated herein by reference.
(5) Previously
filed as an exhibit to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 14, 2005, which exhibit
is hereby
incorporated herein by reference.
(6) Previously
filed as an exhibit to the Company’s Quarterly Report on Form 10-QSB filed with
the Securities and Exchange Commission on May 16, 2005, which exhibit
is hereby
incorporated herein by reference.
(7) Previously
filed as an exhibit to the Company’s Quarterly Report on Form 10-QSB filed with
the Securities and Exchange Commission on August 15, 2005, which exhibit
is
hereby incorporated herein by reference.
(8) Previously
filed as an exhibit to the Company’s Quarterly Report on Form S-8 filed with the
Securities and Exchange Commission on August 31, 2005, which exhibit
is hereby
incorporated herein by reference.
(9) Previously
filed as an exhibit to the Company’s Quarterly Report on Form 10-QSB/A filed
with the Securities and Exchange Commission on March 22, 2006, which
exhibit is
hereby incorporated herein by reference.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit
Fees
The
aggregate fees we paid Stonefield Josephson, Inc. during the fiscal year
ended
December 31, 2005 and 2004 for professional services for the audit of our
financial statements and the review of financial statements included
in our
Forms 10-QSB and SEC filings were $53,083 and $52,769
respectively.
Audit-Related
Fees
Stonefield
Josephson, Inc. did not provide and did not bill and it was not paid
any fees
for, audit-related services in the fiscal years ended December 31, 2005 and
2004.
Tax
Fees
Stonefield
Josephson, Inc. did not provide, and did not bill and was not paid any
fees for,
tax compliance, tax advice, and tax planning services for the fiscal
years ended
December 31, 2005 and December 31, 2004.
All
Other Fees
Stonefield
Josephson, Inc. did not provide, and did not bill and were not paid any
fees
for, any other services in the fiscal years ended December 31, 2005 and
2004.
Audit
Committee Pre-Approval Policies and Procedures
Consistent
with SEC policies, the Audit Committee charter provides that the Audit
Committee
shall pre-approve all audit engagement fees and terms and pre-approve
any other
significant compensation to be paid to the independent registered public
accounting firm. The Audit Committee pre-approved all services performed
by
Stonefield Josephson, Inc. during 2004 and 2005.
ADDITIONAL
INFORMATION
We
are
subject to the informational requirements of the Exchange Act and, in
accordance
with the rules and regulations of the Securities and Exchange Commission;
we
file reports, proxy statements and other information. You may inspect
such
reports, proxy statements and other information at public reference facilities
of the Commission at Judiciary Plaza, 450 Fifth Street N.W., Washington
D.C.
20549; Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago,
Illinois 60661; and 5670 Wilshire Boulevard, Los Angeles, California
90036.
Copies of such material can be obtained from the Public Reference Section
of the
Commission at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C.
20549, at
prescribed rates. For further information, the SEC maintains a website
that
contains reports, proxy and information statements, and other information
regarding reporting companies at http://www.sec.gov or call (800)
SEC-0330.
INDEX
TO FINANCIAL STATEMENTS
Independent
Registered Public Accounting Firm Report
|
|
|
F-1
|
|
Balance
Sheet - As of December 31, 2005 and 2004
|
|
|
F-2
|
|
Statement
of Operations - For the Years Ended December 31, 2005, 2004
and
Period From August 23, 2000 (Inception) to December 30,
2005
|
|
|
F-3
|
|
Statement
of Cash Flows - For the Years Ended December 31, 2005, 2004
and
Period From August 23, 2000 (Inception) to December 30,
2005
|
|
|
F-4
|
|
Statements
of Change in Stockholders’ Equity - For the Years Ended
December 31,
2005, 2004 and Period From August 23, 2000 (Inception)
to December 30,
2005
|
|
|
F-5
|
|
Notes
to Financial Statements
|
|
|
F-9
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors
Arbios
Systems, Inc.
Los
Angeles, California
We
have
audited the accompanying balance sheets of Arbios Systems, Inc. as
of December
31, 2005 and 2004 and the related statements of operations, stockholders’ equity
and cash flows for the years then ended, and from August 23, 2000 (inception)
to
December 31, 2005. These financial statements are the responsibility
of the
Company's management. Our responsibility is to express an opinion on
these
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public
Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the
financial statements are free of material misstatement. We were not
engaged to perform an audit of the Company's internal control over
financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that
are
appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company's internal control over
financial
reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts
and
disclosures in the finacial statements, assessing the accounting principles
used
and significant estimates made by mangement, as well as evaluating
the overall
statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly,
in all
material respects, the financial position of Arbios Systems, Inc. as
of December
31, 2005 and 2004 and the results of its operations and cash flows
for the years
ended December 31, 2005 and 2004, and from August 23, 2000 (inception)
to
December 31, 2005, in conformity with accounting principles generally
accepted
in the United States of America.
Certified
Public Accountants
Los
Angeles, California
March
2,
2006
ARBIOS
SYSTEMS, INC.
|
|
(A
development stage company)
|
|
BALANCE
SHEETS
|
|
December
31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
ASSETS
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,379,738
|
|
$
|
1,501,905
|
|
Short
term investments
|
|
$
|
1,996,000
|
|
|
|
|
Prepaid
expenses
|
|
|
195,841
|
|
|
97,653
|
|
Total
current assets
|
|
$
|
4,571,579
|
|
$
|
1,599,558
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
101,629
|
|
|
107,789
|
|
Patent
rights, net of accumulated amortization of $93,418
for 2005 & $105,457
for 2004
|
|
|
173,249
|
|
|
294,543
|
|
Other
assets
|
|
|
55,773
|
|
|
33,164
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
4,902,230
|
|
$
|
2,035,054
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
160,649
|
|
$
|
92,304
|
|
Accrued
expenses
|
|
|
152,362
|
|
|
121,460
|
|
Contract
commitment
|
|
|
|
|
|
250,000
|
|
Current
portion of capitalized lease obligation
|
|
|
|
|
|
5,341
|
|
Total
current liabilities
|
|
|
313,011
|
|
|
469,105
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value; 5,000,000 shares authorized: none
issued and outstanding
|
|
|
|
|
|
|
|
Common
stock, $.001 par value; 60,000,000 and 25,000,000 shares authorized
as
of 2005 and 2004; 16,232,909 and 13,216,097 shares issued and
outstanding
in 2005 and 2004, respectively
|
|
|
16,233
|
|
|
13,216
|
|
Additional
paid-in capital
|
|
|
13,352,217
|
|
|
6,508,061
|
|
Deficit
accumulated during the development stage
|
|
|
(8,779,231
|
)
|
|
(4,955,328
|
)
|
Total
stockholders' equity
|
|
|
4,589,219
|
|
|
1,565,949
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
4,902,230
|
|
$
|
2,035,054
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
ARBIOS
SYSTEMS, INC.
|
(A
development stage company)
|
STATEMENTS
OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
For
the years ended December 31,
|
|
Inception,
Aug.
23, 2000 to
|
|
|
|
2005
|
|
2004
|
|
Dec.
31, 2005
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
$
|
72,030
|
|
$
|
320,966
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
2,394,546
|
|
|
1,988,763
|
|
|
5,006,915
|
|
Research
and development
|
|
|
1,554,509
|
|
|
1,426,379
|
|
|
3,990,562
|
|
Total
operating expenses
|
|
|
3,949,055
|
|
|
3,415,142
|
|
|
8,997,477
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before other income (expense)
|
|
|
(3,949,055
|
)
|
|
(3,343,112
|
)
|
|
(8,676,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
125,286
|
|
|
16,132
|
|
|
141,418
|
|
Interest
expense
|
|
|
(134
|
)
|
|
(847
|
)
|
|
(244,138
|
)
|
Total
other income (expense)
|
|
|
125,152
|
|
|
15,285
|
|
|
(102,720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,823,903
|
)
|
$
|
(3,327,827
|
)
|
$
|
(8,779,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.24
|
)
|
$
|
(0.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares:
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
16,137,676
|
|
|
13,199,325
|
|
|
|
|
The
accompanying notes are an integral part of these
financial statements.
The
accompanying notes are an integral part of these
financial statements.
ARBIOS
SYSTEMS, INC.
|
(A
Development Stage Company)
|
STATEMENT
OF STOCKHOLDERS' EQUITY
|
PERIOD
FROM AUGUST 23, 2000 (INCEPTION) TO DECEMBER 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
During
the
|
|
|
|
|
|
Preferred Stock
|
|
Common Stock
|
|
Paid-In
|
|
Deferred
|
|
Development
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Costs
|
|
Stage
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
August 23,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000
(inception) restated
|
|
|
|
|
|
|
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
$
|
-
|
|
for
effect of reverse merger
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
with
Historical Autographs U.S.A. Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issuance in exchange for cash
|
|
|
|
|
|
|
|
|
5,000,000
|
|
|
50 |
|
|
4,950
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,454
|
)
|
|
(9,454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000,
as restated
|
|
|
-
|
|
|
-
|
|
|
5,000,000
|
|
|
50
|
|
|
4,950
|
|
|
-
|
|
|
(9,454
|
)
|
|
(4,454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of junior preferred stock for cash of $250,000 and in exchange
for $400,000 in patent rights, research
and development costs, and
employee loanout costs less issuance
expenses of
$11,268, June 29, 2001
|
|
|
681,818
|
|
|
7 |
|
|
|
|
|
|
|
|
958,278
|
|
|
(343,553
|
) |
|
|
|
|
614,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
in exchange for
patent rights and deferred
research and
development costs
|
|
|
|
|
|
|
|
|
362,669 |
|
|
4 |
|
|
547,284
|
|
|
|
|
|
|
|
|
547,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(550,000
|
)
|
|
|
|
|
(550,000
|
)
|
The
accompanying notes are an integral part of these financial
statements.
ARBIOS
SYSTEMS, INC.
|
(A
Development Stage Company)
|
STATEMENT
OF STOCKHOLDERS' EQUITY
|
PERIOD
FROM AUGUST 23, 2000 (INCEPTION) TO DECEMBER 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
During
the
|
|
|
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Paid-In
|
|
Deferred
|
|
Development
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Costs
|
|
Stage
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loan-out
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
receivable
earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,888
|
|
|
|
|
|
82,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(237,574
|
)
|
|
(237,574
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2001
|
|
|
681,818
|
|
|
7
|
|
|
5,362,669
|
|
|
54
|
|
|
1,510,512
|
|
|
(810,665
|
)
|
|
(247,028
|
)
|
|
452,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amendment
of December
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,
2001 agreement for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the
issuance of common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
agreement in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exchange
for research
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(495,599
|
)
|
|
550,000
|
|
|
|
|
|
54,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loan-out
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
receivable
earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171,776
|
|
|
|
|
|
171,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
for compensation
|
|
|
|
|
|
|
|
|
70,000
|
|
|
1
|
|
|
10,499
|
|
|
|
|
|
|
|
|
10,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
for cash
|
|
|
|
|
|
|
|
|
999,111
|
|
|
9
|
|
|
149,857
|
|
|
|
|
|
|
|
|
149,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(494,780
|
)
|
|
(494,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2002
|
|
|
681,818
|
|
|
7
|
|
|
6,431,780
|
|
|
64
|
|
|
1,175,269
|
|
|
(88,889
|
)
|
|
(741,808
|
)
|
|
344,643
|
|
The
accompanying notes are an integral part of these financial
statements.
|
|
|
|
|
|
|
|
|
|
|
ARBIOS
SYSTEMS, INC.
|
(A
Development Stage Company)
|
STATEMENT
OF STOCKHOLDERS' EQUITY
|
PERIOD
FROM AUGUST 23, 2000 (INCEPTION) TO DECEMBER 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
During
the
|
|
|
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Paid-In
|
|
Deferred
|
|
Development
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Costs
|
|
Stage
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
for cash less
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issuance
expense of $2,956
|
|
|
|
|
|
|
|
|
417,000
|
|
|
417
|
|
|
246,827
|
|
|
|
|
|
|
|
|
247,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
private placement for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cash
less issuance expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
$519,230
|
|
|
|
|
|
|
|
|
4,000,000
|
|
|
4,000
|
|
|
3,476,770
|
|
|
|
|
|
|
|
|
3,480,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
convertible debenture less
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issuance
expense of $49,500
|
|
|
|
|
|
|
|
|
400,000
|
|
|
400
|
|
|
350,100
|
|
|
|
|
|
|
|
|
350,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in connection with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition
of Historical Autographs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.A.,
Inc. on October 30, 2003
|
|
|
|
|
|
|
|
|
1,220,000
|
|
|
8,263
|
|
|
(8,263
|
)
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
of warrants and beneficial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion
feature of bridge loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244,795
|
|
|
|
|
|
|
|
|
244,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loan-out
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
receivable
earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,889
|
|
|
|
|
|
88,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock converted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
Common Stock
|
|
|
(681,818
|
)
|
|
(7
|
)
|
|
681,818
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(885,693
|
)
|
|
(885,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2003
|
|
|
-
|
|
|
-
|
|
|
13,150,598
|
|
|
13,151
|
|
|
5,485,498
|
|
|
-
|
|
|
(1,627,501
|
)
|
|
3,871,148
|
|
The
accompanying notes are an integral part of these financial
statements.
ARBIOS
SYSTEMS, INC.
|
(A
Development Stage Company)
|
STATEMENT
OF STOCKHOLDERS' EQUITY
|
PERIOD
FROM AUGUST 23, 2000 (INCEPTION) TO DECEMBER 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
During
the
|
|
|
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Paid-In
|
|
Deferred
|
|
Development
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Costs
|
|
Stage
|
|
Total
|
|
Issuance
of common stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
warrants for compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
972,430
|
|
|
|
|
|
|
|
|
972,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of common stock options
|
|
|
|
|
|
|
|
|
18,000
|
|
|
18
|
|
|
2,682
|
|
|
|
|
|
|
|
|
2,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of securities for payable
|
|
|
|
|
|
|
|
|
47,499
|
|
|
47
|
|
|
47,451
|
|
|
|
|
|
|
|
|
47,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,327,827
|
)
|
|
(3,327,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
|
-
|
|
|
-
|
|
|
13,216,097
|
|
|
13,216
|
|
|
6,508,061
|
|
|
-
|
|
|
(4,955,328
|
)
|
|
1,565,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
private placement for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cash
less issuance expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
$384,312
|
|
|
|
|
|
|
|
|
2,991,812
|
|
|
2,992
|
|
|
6,224,601
|
|
|
|
|
|
|
|
|
6,227,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
warrants for compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
557,080
|
|
|
|
|
|
|
|
|
557,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of common stock options
|
|
|
|
|
|
|
|
|
25,000
|
|
|
25
|
|
|
62,475
|
|
|
|
|
|
|
|
|
62,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,823,903
|
)
|
|
(3,823,903
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
|
-
|
|
|
-
|
|
|
16,232,909
|
|
$
|
16,233
|
|
$
|
13,352,217
|
|
|
-
|
|
|
($8,779,231
|
)
|
$
|
4,589,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of these financial statements.
(1) |
Summary
of Significant Accounting
Policies:
|
General:
Arbios
Systems, Inc., a Delaware corporation (the “Company”), seeks to develop,
manufacture and market liver assist devices to meet the urgent need for
therapy
of liver failure. On July 25, 2005, Arbios Systems, Inc. changed its
state of
incorporation from Nevada to Delaware. On July 26, 2005, Arbios Technologies,
Inc., the wholly-owned subsidiary of Arbios Systems, Inc., merged with
and into
Arbios Systems, Inc. Unless the context indicates otherwise, references
herein
to the “Company” during periods prior to July 26, 2005 include Arbios Systems,
Inc., a Nevada corporation and Arbios Technologies, Inc.
The
Company’s two products that are currently under development are SEPET™, which is
a blood purification therapy device for patients with liver failure and
HepatAssist-2 ™, which is a bioartificial liver system.
On
October 30, 2003, Historical Autographs U.S.A., Inc. and Arbios Technologies,
Inc. consummated a reverse merger, in which Arbios Technologies, Inc.
became the
wholly owned subsidiary of Historical Autographs U.S.A., Inc. Concurrently
with
the merger, Historical Autographs U.S.A., Inc. changed its named to Arbios
Systems, Inc. and is herein referred to as ”Arbios Systems”. The stockholders of
Arbios Technologies, Inc. transferred ownership of one hundred percent
of all
the issued and outstanding shares of their capital stock of Arbios Technologies,
Inc. in exchange for 11,930,598 newly issued shares, or approximately
91%, of
the common stock, $.001 par value, of Arbios Systems. At that time, the
former
management of Arbios Systems resigned and was replaced by the same persons
who
served as officers and directors of Arbios Technologies, Inc. Inasmuch
as the
former owners of Arbios Technologies, Inc. controlled the combined entity
after
the merger, the combination was accounted for as a purchase by Arbios
Technologies, Inc. as acquirer, for accounting purposes in accordance
with
Statement of Financial Accounting Standards No. 141 using reverse merger
accounting, and no adjustments to the carrying values of the assets or
liabilities of the acquired entity were required. Proforma operating
results, as
if the acquisition had taken place at the beginning of the period, have
not been
presented as the operations of the acquiree were negligible. The financial
position and results of operations of Arbios Systems is included in the
statements of the Company from the date of acquisition.
Development
Stage Enterprise:
The
Company is a development stage enterprise as defined in Statement of
Financial
Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by Development
Stage Enterprises.” The Company is devoting substantially all of its present
efforts to establish a new business. Its planned principal operations
have not
yet commenced, with the exception of research and development, which
were
initiated in 2000 and are being vigorously pursued. All losses accumulated
since
inception have been considered as part of the Company’s development stage
activities.
(1) |
Summary
of Significant Accounting
Policies:
|
Use
of Estimates:
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management
to make
estimates and assumptions that affect the reported amounts of assets
and
liabilities and disclosure of contingent assets and liabilities at the
date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Federal
Government Grants:
The
Company has been partially funded by certain governmental grants. Payments
received under contracts to fund certain research activities are recognized
as
revenue in the period in which the research activities are performed.
Payments
received in advance that are related to future performance are deferred
and
recognized as revenue when the research projects are performed. Reimbursements
recorded under these grants are subject to governmental audit. Management
believes that subsequent audits will not result in material adjustments
to the
costs reflected in the accompanying financial statements, and that the
Company
has utilized all remaining government grant funds in accordance with
their
intended use.
Comprehensive
Income:
SFAS
No.
130, "Reporting Comprehensive Income", establishes standards for the
reporting
and display of comprehensive income and its components in the financial
statements. As of December 31, 2005 and 2004, the Company has no items
that
represent comprehensive income and therefore, the Company has not included
a
schedule of comprehensive income in the financial statements.
Property
and Equipment:
Property
and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets of
five to
seven years.
Patent
Rights:
In
accordance with FASB No. 2, the costs of intangibles that are purchased
from
others for use in research and development activities and that have alternative
future uses are capitalized and amortized. We capitalize certain patent
rights
that are believed to have future economic benefit. The licensed capitalized
patents costs were recorded based on the estimated value of the equity
security
issued by us to the licensor. The value ascribed to the equity security
took
into account, among other factors, our stage of development and the value
of
other companies developing extracorporeal bioartificial liver assist
devices.
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.
(1) |
Summary
of Significant Accounting
Policies:
|
Patent
Rights,
Continued:
We
periodically evaluate whether events or circumstances have occurred that
may
affect the estimated useful lives or the recoverability of the remaining
balance
of the patents. Impairment of the assets is triggered when the estimated
future
undiscounted cash flows do not exceed the carrying amount of the intangible
assets. If the events or circumstances indicate that the remaining balance
of
the assets may be permanently impaired, such potential impairment will
be
measured based upon the difference between the carrying amount of the
assets and
the fair value of such assets, determined using the estimated future
discounted
cash flows generated.
Fair
Value of Financial Instruments:
The
Company’s financial instruments include cash, short-term investments, accounts
payable and accrued expenses, and have carrying amounts which approximate
fair
value due to their short maturities.
Cash
and Cash Equivalents:
The
Company considers highly liquid debt instruments with original maturities
of 90
days or less to be cash equivalents.
Short
Term Investments:
Short-term
investments generally mature between three and twelve months. Short-term
investments consist of U.S. Government Agency Notes purchased at a discount
with
interest accruing to the notes full value at maturity. All of the
Company’s short-term investments are classified as available-for-sale and are
carried at fair market value which approximates cost plus accrued interest.
Income
Taxes:
Deferred
income taxes will be recognized for the tax consequences in future years
of
temporary differences, if any, between the tax bases of assets and liabilities
and their financial reported amounts at each period end, based on enacted
tax
laws and statutory tax rates applicable to the period in which the differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected
to be
realized. The provision for income taxes represents the tax payable for
the
period, if any, and the change during the period in deferred tax assets
and
liabilities.
Stock-Based
Compensation:
SFAS
123,
"Accounting for Stock-Based Compensation," establishes and encourages
the use of
the fair value based method of accounting for stock-based compensation
arrangements under which compensation cost is determined using the fair
value of
stock-based compensation determined as of the date of grant and is recognized
over the periods in which the related services are rendered. The statement
also
permits companies to elect to continue using the current intrinsic
(1) |
Summary
of Significant Accounting
Policies:
|
Stock-Based
Compensation, Continued:
Value
accounting method specified in Accounting Principles Board ("APB") Opinion
No.
25, "Accounting for Stock Issued to Employees," to account for stock-based
compensation.
The
Company has elected to use the intrinsic value based method and has disclosed
the pro forma effect of using the fair value based method to account
for its
stock-based compensation issued to employees. For non-employee stock
based
compensation the Company recognizes an expense in accordance with SFAS
123 and
values the equity securities based on the fair value of the security
on the date
of grant with subsequent adjustments based on the fair value of the equity
security as it vests. The fair value of expensed options is estimated
using the
Black Scholes option-pricing model.
In
December 2004, the FASB issued SFAS 123(R) (revised 2004), “Share-Based
Payment”. SFAS 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. SFAS 123(R) replaces SFAS 123
and supersedes APB Opinion No. 25. As a small business issuer, we will be
applying SFAS Statement 123(R) to reporting periods that begin on January
1, 2006.
The
fair
value of each option is estimated on the date of grant using the Black
Scholes
option-pricing model. The significant assumptions used in applying the
Black
Scholes option-pricing model were the following:
|
|
For
the year ended
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
3.77%-4.45%
|
|
3.53%-3.0%
|
|
Expected
dividend yield
|
|
0%
|
|
0%
|
|
Expected
life
|
|
5-7
years
|
|
3-7
years
|
|
Volatility
|
|
.83
- .72
|
|
.86
- .96
|
|
Weighted
average grant-date fair value of options granted during the
period
(including non-employees)
|
|
$1.31
|
|
$2.07
|
|
These
same assumptions are also used in applying the Black Scholes option-pricing
model for stock based option and warrant compensation paid to
non-employees.
If
the
Company had elected to recognize compensation cost for its stock options
and
warrants for employees based on the fair value at the grant dates, in
accordance
with SFAS 123, the pro forma net loss and losses per share would have
been as
listed in the following table.
(1) |
Summary
of Significant Accounting
Policies:
|
Stock-Based
Compensation, Continued:
|
|
December
31,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Net
loss as reported
|
|
$
|
(3,823,903
|
)
|
$
|
(3,327,827
|
)
|
Compensation
recognized under APB 25
|
|
|
-
|
|
|
-
|
|
Compensation
recognized under SFAS 123
|
|
|
(984,514
|
)
|
|
(471,437
|
)
|
|
|
|
|
|
|
|
|
Proforma
|
|
$
|
(4,808,417
|
)
|
$
|
(3,799,264
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.24
|
)
|
$
|
(0.25
|
)
|
Proforma
|
|
$
|
(0.30
|
)
|
$
|
(0.29
|
)
|
Net
Loss Per Common Share:
The
Company utilizes SFAS 128, “Earnings per Share.” Basic loss per share is
computed by dividing loss available to common shareholders by the
weighted-average number of common shares outstanding. Diluted loss per
share is
computed similar to basic loss per share except that the denominator
is
increased to include the number of additional common shares that would
have been
outstanding if the potential common shares had been issued and if the
additional
common shares were dilutive. The
computation of diluted loss per share does not assume conversion, exercise
or
contingent exercise of securities that would have an anti-dilutive effect
on
losses. For the years ended December 31, 2005 and 2004, potential common
shares
aggregating 9,345,000 and 6,404,000, respectively, were excluded in computing
the per share amounts.
Presentation:
Certain
prior year amounts have been reclassified to conform with current year
presentation.
Recent
Accounting Pronouncements:
In
December 2004, the FASB issued SFAS 123(R) (revised 2004), “Share-Based
Payment”. SFAS 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions
be
recognized in financial statements. That cost will be measured based
on the fair
value of the equity or liability instruments issued. SFAS 123(R) covers
a wide
range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation
rights, and
employee share purchase plans. SFAS 123(R) replaces SFAS No. 123, “Accounting
for Stock-Based Compensation”, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. SFAS 123, as originally issued in 1995, established
as preferable a fair-value-based method of accounting for share-based
payment
transactions with employees.
(1) |
Summary
of Significant Accounting
Policies:
|
Recent
Accounting Pronouncements:
However,
SFAS 123(R) permitted entities the option of continuing to apply the
guidance in
APB Opinion 25, as long as the footnotes to financial statements disclosed
what
net income would have been had the preferable fair-value-based method
been used.
Our Company will be implementing SFAS 123(R) as of January 1, 2006, and
the
projected additional expense is approximately $400,000 based upon options
granted as of December 31, 2005.
In
March
2005, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 107 (SAB 107) regarding the Staff's interpretation of SFAS
123(R).
This interpretation expresses the views of the Staff regarding the interaction
between SFAS 123(R) and certain rules and regulations and provides the
Staff's
views regarding the valuation of share-based payment arrangements for
public
companies. In particular, this SAB provides guidance related to share-based
payment transactions with no employees, the transition from nonpublic
to public
entity status, valuation methods, the accounting for certain redeemable
financial instruments issued under share-based payment arrangements,
the
classification of compensation expense, non-GAAP financial measures,
first-time
adoption of SFAS 123(R) in an interim period, capitalization of compensation
cost related to share-based payment arrangements, the accounting for
income tax
effects of share-based payment arrangements upon adoption of SFAS 123(R),
the
modification of employee share options prior to adoption of Statement
123(R) and
disclosures in Management's Discussion and Analysis subsequent to adoption
of
SFAS 123(R). Our company will adopt SAB 107 in connection with its
adoption of SFAS 123(R).
In
May
2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections - a
replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 replaces
APB Opinion No. 20, “Accounting Changes,” and FASB Statement No. 3, “Reporting
Accounting Changes in Interim Financial Statements” and changes the requirements
for the accounting for and reporting of a change in accounting principles.
This
statement applies to all voluntary changes in accounting principle. It
also
applies to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition
provisions.
When a pronouncement includes specific transition provisions, those provisions
should be followed. SFAS No. 154 is effective for accounting changes
and
corrections of errors made in fiscal years beginning after December 31,
2005.
In
February of 2006 the Financial Accounting Standards Board issued Statement
No.
155, "Accounting for Certain Hybrid Financial Instruments: an amendment of
FASB Statements Numbers 133 and 140". Management is currently evaluating
the effect, if any, that such pronouncement will have on accounting for
our
company's equity instruments which were issued with detachable
warrants.
(2) |
Property
and Equipment
|
Property
and equipment consisted of the following:
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
Office
equipment
|
|
$
|
8,589
|
|
$
|
2,154
|
|
Office
furniture
|
|
|
7,297
|
|
|
7,217
|
|
Computer
equipment
|
|
|
42,468
|
|
|
31,545
|
|
Medical
equipment
|
|
|
107,993
|
|
|
101,943
|
|
|
|
|
166,347
|
|
|
142,859
|
|
Less:
accumulated depreciation
|
|
|
(64,718
|
)
|
|
(35,070
|
)
|
|
|
$
|
101,629
|
|
$
|
107,789
|
|
|
|
|
|
|
|
|
|
Depreciation
expense was $29,649, $18,589 and $64,718 for the years ended December
31, 2005
and 2004, and the period from August 23, 2000 (inception) to December
31, 2005,
respectively.
In
June
2001, the Company received exclusive rights to five existing patents,
at which
time the aggregate value of these rights was $400,000. At December 31,
2005 and
2004, the accumulated amortization of these rights was $93,418 and $105,457,
and
the estimated remaining life was 6 years. Amortization expense was $29,602
in
each of the years ended December 31, 2005 and 2004 and $135,057 for the
period
from August 23, 2000 (inception) to December 31, 2005,
respectively.
In
conjunction with the preparation of the December 31, 2005 financial statements,
and in accordance with FASB 144 “Accounting for the impairment or disposal of
long-lived assets,” management reviewed the portfolio of capitalized patent
rights and determined that two patents related to the LIVERAID membrane
technology would not have future commercial uses or have economic benefit
to the
Company and concluded that the carrying value of the two patents is not
recoverable. The two patents had a combined original value of $133,333,
with
$41,639 in amortized expense through December 31, 2005, resulting in
a current
expense charge of $91,694, representing the remaining unamortized balance
as of
December 31, 2005.
Future
estimated amortization expense in each of the years from 2006 through
2010 is
$20,476, and $70,869 thereafter.
In
conjunction with certain patents rights described above, the Company
committed
to the licensor to spend a total of $1,760,000 in research and development
expenses toward the development and promotion of products, commencing
from the
acquisition date until June 30, 2008. The Company has made expenditures
to date
to satisfy the entire research and development costs obligation of the
agreement.
(3) |
Patent
Rights, continued:
|
The
Company is also subject to paying royalty fees to the licensor initially
equal
to 1.5% of the gross sales price of royalty bearing products. From year
three to
the tenth year of the license, the royalty fee percent will phase out
evenly to
0%. As of December 31, 2005 and 2004, the Company had not paid any royalty
fees
since it did not have any sales of royalty bearing products.
In
April
2004, the Company purchased patents and other selected assets from Circe
Biomedical, Inc. In connection with the acquisition of these patents,
the
Company assumed a Royalty Agreement dated as of January 29, 1999, between
Circe
Biomedical, Inc. and Circe Acquisition Corp. The Company assumed the
obligation
to pay a royalty of 2% of “net sales” of any product that utilizes or
incorporates the bioartificial liver patents, technology, inventions,
and
technical or scientific data that the Company acquired from Circe Biomedical.
As
of December 31, 2005 and 2004, the Company had not paid any royalty fees
to
Circe Biomedical Inc. since it did not have any sales of royalty bearing
products.
(4) |
Deferred
Employee Loan-Out Costs:
|
In
June
2001, the Company received a commitment from a shareholder in the Company
for
the loan-out of certain employees over a two-year period in exchange
for junior
preferred stock (see Note 7). The Company deferred the estimated loan-out
costs
over the two-year period. The loan-out costs were expensed as the services
were
performed. At the expiration of the two-year period, the Company received
an
extension of the employee loan-out agreement for an additional two years.
The
employee loan out agreement expired on June 30, 2005. For the years ended
December 31, 2005 and 2004, the employee loan out costs were $140,524
and
$281,048, respectively. The employee loan out costs from inception to
December
31, 2005 were $905,649.
(5) |
Convertible
Promissory Notes:
|
In
September 2003, the Company issued units of convertible subordinated
notes and
warrants, consisting of convertible promissory notes (the “Notes”) for an
aggregate principal amount of $400,000 and warrants for the purchase
of 300,000
shares of the Company’s common stock at $1 per share. The Notes bore interest at
7% per annum and were due on the earlier of March 31, 2004 or upon the
occurrence of various other events or conditions set forth in the Notes.
Under the terms of the Notes, the holders retained the right, subject
to certain
exceptions, to convert all or any part of the principal outstanding under
the
Notes into (i) shares of the Company’s Common Stock at a conversion price per
share equal to $1 and (ii) warrants for the purchase of the Company’s common
stock at $2.50 per share. For each share issued upon the conversion of
the note,
each noteholder received additional warrants for the purchase of common
stock.
The conversion price was subject to adjustment in the event of a stock
split,
combination or like transaction. The warrant price was subject to adjustment
in
the event of a stock split, combination or like transaction. The fair
value of
the warrants was determined using the Black Scholes option pricing model
using
the following assumptions: dividend yield 0%, volatility 233%, risk free
interest rate 5.5% and expected life of three years.
(5) |
Convertible
Promissory Notes,
continued:
|
The
Company recorded the Notes, net of a discount equal to the relative fair
value
allocated to the warrants issued of $122,390. The Notes also contained a
beneficial conversion feature, which resulted in an additional debt discount
of
$122,390. The beneficial conversion amount was measured using the
intrinsic value method of accounting, i.e. the excess of the aggregate
fair
value of the common stock into which the debt is convertible over the
proceeds
allocated to the security.
In
October 2003, the Notes were converted into 400,000 shares of common
stock at $1
per share. The Company recognized interest expense totaling $224,401
for the
unamortized warrants and beneficial conversion feature discount in accordance
with Emerging Issues Task Force 00-27.
(6) |
Commitments
and Contingencies:
|
Description
of Property
Since
April 1, 2004, the Company has leased 1,700 square feet of executive
and
administrative office space in a building across the street from its
laboratories. In September 2005, the Company leased an additional 300
square
feet of space for a total of 2,000 square feet. The rent for this space
is
$5,777 per month and the lease has a term of two years commencing September
2005.
The
Company leased an animal breeding facility in Connecticut at $12,009
per month
for two years commencing April 2005.
In
December 2005, the Company entered into a lease agreement for executive
office
space in Waltham, Massachusetts through June 30, 2006 at a total cost
for the
lease period of $18,040.
Future
minimum lease payments required under the operating leases for non-cancelable
lease terms in excess of one year are $285,850 for 2006 and $109,432
for
2007.
Rent
expense was $121,000, $105,509, and $292,589 for the years ended December
31,
2005 and 2004, and the period from August 23, 2000 (inception) to December
31,
2005, respectively.
(6) |
Commitments
and Contingencies,
continued:
|
Agreements
On
December 26, 2001, the Company received the exclusive worldwide rights
and
license to use certain proprietary rights from Spectrum Laboratories,
Inc.
(“Spectrum”), partially in exchange for 362,669 shares of common stock (see Note
8). The license grants the Company the right to use Spectrum’s technology and to
exploit such rights to develop and distribute products solely for use
in the
Company’s liver-assist devices.
In
addition, the Company entered into a manufacturing and supply agreement
with
Spectrum for LIVERAID, one of the Company’s bioartificial liver devices. The
agreement stipulates that the Company will contract with Spectrum for
the
manufacture and supply of LIVERAID cartridges.
In
April
2004, the Company purchased certain assets of Circe Biomedical, Inc.
including
Circe’s patent portfolio, rights to a bioartificial liver
(HepatAssistTM),
a
Phase III investigational drug application, selected equipment, clinical
and
marketing data, and over 400 standard operating procedures and clinical
protocols previously reviewed by the Food and Drug Administration. In
exchange
for these assets, the Company paid a $200,000 upfront payment and committed
to
make a $250,000 payment due the earlier of April 12, 2006 or when the
Company
had raised accumulated gross proceeds of $4 million from the issuance
of debt or
equity securities.
The
Company raised in excess of $4 million in its January 2005 equity financing
and
on January 18, 2005, the Company paid the $250,000 contractual commitment
to
Circe Biomedical, Inc. The Company expensed the cost of the acquisition
in the
fiscal quarter ended June 30, 2004 as part of acquired research and development
costs, as the underlying rights have not yet reached the stage at which
their
commercial feasibility can be established.
On
January 15, 2005, the Company entered into a research and development
agreement
(the “Development Agreement”) with Warsaw University of Technology (the
“University”) in Warsaw, Poland to develop a proprietary membrane for the SEPET™
product. During 2005, the Company was obligated to make scheduled milestone
payments totaling up to $166,000. During fiscal year 2005, $100,000 of
research
and development costs were incurred and paid. The Development Agreement
was
terminated for failure to meet the final milestone with no further amounts
payable under the agreement.
The
Company entered into a clinical study agreement with Albert Einstein
Medical
Center in Philadelphia, Pennsylvania in August 2005 and with Cedars-Sinai
Medical Center in Los Angeles, California in September 2005 for the Company’s
feasibility clinical trial for SEPETTM.
The estimated cost to conduct the clinical trial is $530,000 and is based
upon a
total enrollment of 15 patients at the two medical centers. Additionally,
the Company anticipates expenditures of approximately $309,000 for expenses
associated with the clinical trial including data safety monitoring board
fees,
database design and analysis of clinical results and clinical trial insurance.
(7) |
Stockholders’
Equity:
|
Preferred
Stock
The
Company has 5,000,000 shares of preferred stock authorized. There are
no shares
of preferred stock issued or outstanding. The Board of Directors has
the
authority to set by resolution the particular designation, preferences
and other
special rights and qualification of preferred stock.
Junior
Preferred Stock
In
June
2001, Arbios Technologies, Inc. issued 681,818 shares of junior preferred
stock,
in exchange for $250,000 in cash, exclusive rights to certain patents
and one
pending patent valued at $400,000 (see Note 3), and future services of
certain
employees valued at $319,553 (see Note 4). In October 2003, all issued
and
outstanding shares of the junior preferred stock were converted into
681,818
shares of common stock.
Common
Stock
In
August
2000, Arbios Technologies, Inc. issued 5,000,000 shares of common stock,
$0.001
par value, to the Company’s two founders in exchange for $5,000 in
cash.
In
December 2001, Arbios Technologies, Inc. issued 362,669 shares of common
stock
in exchange for future research costs valued at $550,000, an exclusive
license
(see Note 8), a manufacturing and supply agreement (see Note 8), and
exclusive
rights to two patents.
In
June
2002, Arbios Technologies, Inc. issued 70,000 shares of common stock
to a Board
member as compensation for services rendered valued at $10,500.
In
July
2002, Arbios Technologies, Inc. issued 999,111 shares of common stock
to
investors in exchange for $149,866 in cash, or $0.15 per share.
In
July
2002, Arbios Technologies, Inc. issued options to purchase 18,000 shares
of
common stock to each of its five Board members for services rendered.
The
options are exercisable at $0.15 per share. The options vested 50% in
six months
and 50% in 12 months from the beginning date of service provided by the
respective Board members.
In
July
2002, Arbios Technologies, Inc. issued a warrant to purchase 100,000
shares of
common stock to a Board member for services rendered to the Company.
The warrant
is exercisable at $0.15 per share and has a 7-year life. The warrant
also has
conversion rights in lieu of payment of the exercise price and is not
transferable.
In
January 2003, Arbios Technologies, Inc. issued 417,000 shares of common
stock
and a three year warrant to purchase 600,000 shares of common stock at
an
exercise price of $1.00 per share to an investor in exchange for $250,200
in
cash. The Company recognized $2,956 in stock issuance costs. The warrant
expiration date of January 23, 2006 was extended to September 2006 in
exchange
for the investor’s agreement to not sell his Company stock holdings during the
extension period.
(7) |
Stockholders’
Equity, Continued:
|
Common
Stock
In
July
2003, Arbios Technologies, Inc. issued a warrant to purchase 50,000 shares
of
common stock to a Board member for services rendered to the Company.
The warrant
is exercisable at $1.00 per share and has a five-year life. The warrant
grant
resulted in a non-cash charge of $7,180 determined utilizing the Black
Scholes
pricing model and the following economic assumptions: dividend yield
0%,
volatility .05, risk free interest rate 3% and an expected life of 5
years.
In
September 2003, convertible promissory notes totaling $400,000 were converted
into 400,000 shares of the Company’s common stock. The Company also issued
warrants to purchase 300,000 shares of common stock. The warrants are
exercisable at $1.00 per share and have a three-year life.
In
September and October 2003, Arbios Technologies, Inc, issued 4,000,000
shares of
common stock and warrants to purchase 4,000,000 shares of common stock
at an
exercise price of $2.50 in exchange for $4,000,000 in cash. The Company
recognized $519,230 in stock issuance costs, which was comprised of $505,500
in
third party fees and $13,730 in related legal fees. These costs were
charged
against additional paid in capital.
In
October 2003, Arbios Technologies, Inc. entered into a reorganization
transaction wherein the stockholders of Arbios Systems retained 1,220,000
shares
of the reorganized entity after the transaction. Since Arbios Systems
was
treated as the acquiree for accounting purposes, those shares were accounted
for
as being issued as of that date.
In
January 2004, Arbios Systems, Inc. issued 40,000 shares of common stock
and
warrants to purchase 40,000 shares of common stock to a director as compensation
for finder’s fees. The warrant has a three-year life and is exercisable at $2.50
per share. The warrant grant resulted in a non-cash charge of $16,000
determined
utilizing the Black Scholes pricing model and the economic assumptions
listed in
Note 1, Stock Based Compensation.
In
February 2004, Arbios Systems, Inc. issued 7,500 shares of common stock
and a
warrant to purchase 7,500 shares of common stock to a son of a director
as
compensation for finder’s fees. The warrant has a three-year life and is
exercisable at $2.50 per share. The warrant grant resulted in a non-cash
charge
of $11,000 determined utilizing the Black Scholes pricing model and the
economic
assumptions listed in Note 1, Stock Based Compensation.
(7) |
Stockholders’
Equity, Continued:
|
Common
Stock
In
March
2004, Arbios Systems, Inc. entered into a retainer agreement with an
investor
relations firm and issued a warrant to purchase 150,000 shares of common
stock
as compensation. The warrant has a five year life and is exercisable
at $3.40
per share. Pursuant to the terms of the warrant, the number of shares
that can
be purchased under the warrant was reduced in December 2004 to 75,000
shares.
The warrant grant resulted in a non-cash charge of $203,000 determined
utilizing
the Black Scholes pricing model and the economic assumptions listed in
Note 1,
Stock Based Compensation.
In
July
2004, Arbios Systems, Inc. entered into an agreement with an investor
relations
firm based in Switzerland to perform investor relation services for the
Company
in Europe. The Company issued two warrants to purchase an aggregate of
100,000
shares of common stock. The first warrant for 50,000 shares vested immediately
with an exercise price of $1.50 per share and has a five-year expiration
term.
The second warrant for 50,000 shares vested ratably each month over one
year
with an exercise price of $3.50 per share and has a five-year expiration
term.
The warrant grants resulted in a non-cash charge of $298,000 determined
utilizing the Black Scholes pricing model and the economic assumptions
listed in
Note 1, Stock Based Compensation.
In
October 2004, an option holder exercised his option to purchase 18,000
shares of
common stock at an exercise price of $0.15 per share.
In
January 2005, the Company completed a $6,611,905 private equity financing
to a
group of institutional investors and accredited investors. In the offering,
2,991,812 shares of the Company’s common stock was sold, at a price of $2.21 per
share and the investors also received 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 the
Company
after January 11, 2007 if the average trading price of our common stock
for 20
consecutive trading days is equal to or greater than $5.80 and the average
trading volume of the common stock is at least 100,000 shares during
those 20
days. The placement agent in the offering was issued warrants to purchase
114,404 shares of common stock.
The
Company also entered into a Registration Rights Agreement with the investors
in
the January 2005 private placement pursuant to which the Company agreed
to
register and to maintain an effective registration statement for the
shares of
common stock issued in the private placement and for the common stock
to be
issued upon the exercise of warrants issued in the transaction. The Registration
Rights Agreement provides for liquidated damages of 1.5% of the aggregate
purchase price for each 30 day period, with a maximum of eight 30 day
periods
(12% maximum liquidating damages), if the Company fails to maintain the
effectiveness of such registration statement. In accordance with “EITF 00-19:
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock” and other authoritative literature, it was
determined that the warrants issued in the January 2005 private placement
and
the Registration Rights Agreement are free standing derivative financial
instruments as defined in EITF 00-19. Further, as of the closing date
of the
private placement, and as of March 31, 2005, June 30, 2005, September
30, 2005,
and December 31, 2005 the warrants meet the requirements of equity
classification as specified in EITF 00-19 since the maximum amount of
liquidating damages was less than the value ascribed to the difference
between
the fair value of registered versus unregistered common stock.
(7) |
Stockholders’
Equity, Continued:
|
In
accordance with EITF 00-19, the value and balance sheet classification
of the
warrants will be reviewed each reporting period and, if the
warrants should be classified as a liability in the future, any
changes in the value of the warrants on a re-measurement date will be
recorded
in the Statement of Operations.
In
February 2005, Arbios Systems, Inc issued a warrant to purchase 200,000
shares
of common stock to a consultant in connection with the January 2005 private
equity financing. The warrant has a 5 year life and is exercisable at
$2.90 per
share.
In
March
2005, a warrant holder exercised his option to purchase 25,000 shares
of common
stock at an exercise price of $2.50 per share
Warrants
At
December 31, 2005, outstanding warrants to acquire shares of the Company's
common stock are as follows:
|
Number
of
|
|
Exercise
|
|
|
|
|
Shares
|
|
Price
|
|
Expiration
date
|
|
|
|
100,000
|
|
$
|
0.15
|
|
|
August
18, 2009
|
|
|
|
600,000
|
|
|
1.00
|
|
|
January
23, 2006
|
|
|
|
50,000
|
|
|
1.00
|
|
|
July
3, 2008
|
|
|
|
700,000
|
|
|
1.00
|
|
|
September
30, 2006
|
|
|
|
3,975,000
|
|
|
2.50
|
|
|
October
29, 2006
|
|
|
|
47,500
|
|
|
2.50
|
|
|
January
5, 2007
|
|
|
|
75,000
|
|
|
3.40
|
|
|
April
1, 2009
|
|
|
|
50,000
|
|
|
1.50
|
|
|
August
4, 2009
|
|
|
|
50,000
|
|
|
3.50
|
|
|
August
4, 2009
|
|
|
|
200,000
|
|
|
2.90
|
|
|
February
1, 2010
|
|
|
|
1,610,310
|
|
|
2.90
|
|
|
January
11, 2010
|
|
|
|
7,457,810
|
|
|
|
|
|
|
|
The
warrant expiration date of January 23, 2006 noted in the above table
was
extended to September 2006 in exchange for the investor’s agreement to not sell
Company stock holdings during the extension period.
The
weighted average exercise price of warrants outstanding at December 31,
2005 was $2.30 and the weighted average remaining contractual life of
the
warrants was 1.65 years.
(7) |
Stockholders’
Equity,
Continued:
|
Warrant
transactions are summarized as follows:
|
|
For
the year ended December 31,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
at beginning of year
|
|
|
5,672,500
|
|
$
|
2.11
|
|
|
5,450,000
|
|
$
|
2.09
|
|
Warrants
issued
|
|
|
1,810,310
|
|
$
|
2.90
|
|
|
297,500
|
|
$
|
2.95
|
|
Warrants
exercised
|
|
|
(25,000
|
)
|
$
|
2.50
|
|
|
|
|
$
|
0.15
|
|
Warrants
forfeited
|
|
|
|
|
|
|
|
|
(75,000
|
)
|
$
|
3.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
at end of year
|
|
|
7,457,810
|
|
$
|
2.30
|
|
|
5,672,500
|
|
$
|
2.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
In
February 2005 we issued a warrant to purchase 200,000 shares of our common
stock
to an advisor 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.
2001
Stock Option Plan
In
2001,
Arbios Systems, Inc. adopted the 2001 Stock Option Plan (the “2001 Plan”) for
the purpose of granting incentive stock options and/or non-statutory
stock
options to employees, consultants, directors and others. Under the 2001
Plan,
the Company is authorized to grant options to purchase up to 1,000,000
shares.
The 2001 Plan is administered by the Board of Directors of the Company
or by a
committee of the Board. However, in connection with the reorganization
transaction between Arbios Systems and Arbios Technologies, Inc. in October
2003, Arbios Systems assumed all of the 314,000 outstanding options granted
by
Arbios Technologies, Inc. under its existing stock option plan and the
options
previously issued under that plan were cancelled. None of the terms of
the
assumed options were changed. The options assumed under the Company Plan
are
identical to the options that were previously granted under the Arbios
Technologies, Inc. Plan.
2005
Stock Incentive Plan
In
2005,
Arbios Systems, Inc. adopted the 2005 Stock Incentive Plan (the “2005 Plan”) for
the purpose of granting incentive stock options and/or non-statutory
stock
options to employees, consultants, directors and others. Under the 2005
Plan,
the Company is authorized to grant options to purchase up to 3,000,000
shares.
The Company Plan is administered by the Board of Directors of the Company
or by
a committee of the Board.
For
the
years ended December 31, 2005 and 2004, the Company granted 60,000 and
140,000 options, respectively, to consultants and recorded expenses of
$58,000
and $555,000 for the years ended December 31, 2005 and 2004 relating to the
vested portion of these options.
(7) |
Stockholders’
Equity,
Continued:
|
Stock
Options (Continued)
Transactions
under the 2001 Plan during the year ended December 31, 2005 and 2004
are
summarized as follows:
|
|
For
the year ended December 31,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
Options
at beginning of year
|
|
|
731,000
|
|
$
|
1.79
|
|
|
314,000
|
|
$
|
0.78
|
|
Options
issued
|
|
|
266,000
|
|
$
|
2.12
|
|
|
510,000
|
|
$
|
2.29
|
|
Options
exercised
|
|
|
|
|
|
|
|
|
(18,000
|
)
|
$
|
0.15
|
|
Options
forfeited
|
|
|
(15,000
|
)
|
$
|
2.25
|
|
|
(75,000
|
)
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
at end of year
|
|
|
982,000
|
|
$
|
1.88
|
|
|
731,000
|
|
$
|
1.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at end of year
|
|
|
935,000
|
|
$
|
1.87
|
|
|
513,500
|
|
$
|
1.49
|
|
As
of
December 31, 2005, no options were available for future grant under the
2001
Stock Option Plan.
Transactions
under the 2005 Plan during the year ended December 31, 2005 are summarized
as
follows:
|
|
For
the year ended December 31, 2005
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
Price
|
|
|
|
|
|
|
|
Options
at beginning of year
|
|
-
|
|
|
|
Options
issued
|
|
|
910,000
|
|
$
|
1.98
|
|
Options
exercised
|
|
|
|
|
|
|
|
Options
forfeited
|
|
|
(5,000
|
)
|
$
|
1.80
|
|
|
|
|
|
|
|
|
|
Options
at end of year
|
|
|
905,000
|
|
$
|
1.98
|
|
|
|
|
|
|
|
|
|
Options
exercisable at end of year
|
|
|
284,000
|
|
$
|
2.17
|
|
As
of
December 31, 2005, 2,095,000 options were available for future grant
under the
2005 Stock Option Plan.
(7) |
Stockholders’
Equity,
Continued:
|
Stock
Options (Continued)
Additional
information with respect to option activity is summarized as
follows:
|
|
December
31, 2005
|
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Remaining
|
|
Average
|
|
|
|
Average
|
|
Range
of
|
|
|
|
Contractually
|
|
Exercise
|
|
|
|
Exercise
|
|
Exercise
Prices
|
|
Shares
|
|
(in
years)
|
|
Price
|
|
Shares
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.15
|
|
|
54,000
|
|
|
6.56
|
|
$
|
0.15
|
|
|
54,000
|
|
$
|
0.15
|
|
$1.00
- $1.85
|
|
|
1,117,000
|
|
|
4.35
|
|
|
1.58
|
|
|
523,000
|
|
|
1.29
|
|
$2.00
- $2.97
|
|
|
706,000
|
|
|
5.51
|
|
|
2.59
|
|
|
632,000
|
|
|
2.61
|
|
$3.40
|
|
|
10,000
|
|
|
3.32
|
|
|
3.40
|
|
|
10,000
|
|
|
3.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,887,000
|
|
|
4.84
|
|
|
1.92
|
|
|
1,219,000
|
|
|
1.94
|
|
On
December
26,
2001, the Company received a commitment for research costs in the amount
of
$550,000 from Spectrum Laboratories, Inc. (“Spectrum”), partially in exchange
for 362,669 shares of common stock (See Note 6). Spectrum was required
to expend
at least $137,500 per year toward the development of the Company’s liver-assist
devices.
In
July
2002, the original agreement was amended. The Company and Spectrum agreed
that,
since the prototype system had been delivered early, all 362,669 shares
issued
to Spectrum on December 26, 2001, were deemed fully vested and any future
obligations related to the $550,000 research cost commitment was deemed
fulfilled. In addition, any additional research and development work
requested
from Spectrum by the Company and the cost of such work will be negotiated
in
good faith before the work is initiated. Furthermore, the Company agreed
that
billings of $109,360, through September 29, 2002, were due for research
costs
already provided, in addition to the $550,000 obligation. This amount
was
reduced by $54,400 in payment for the 362,669 shares previously received,
and
the Company paid the balance of $54,960 to Spectrum in cash in monthly
payments
over an 18-month period starting November 1, 2002. As of May 1, 2004,
the
Company has fulfilled its obligation to pay the $54,960 cash payment
to
Spectrum.
The
following table presents the current and deferred tax provision for (benefit
from) federal and state income taxes for the years ended December 31,
2005 and
2004:
Current
|
|
2005
|
|
2004
|
|
Federal
|
|
|
-
|
|
|
-
|
|
State
|
|
|
-
|
|
|
- |
|
Total
Current Liability
|
|
|
-
|
|
|
- |
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,010,000
|
)
|
|
(707,000
|
)
|
State
|
|
|
(289,000
|
)
|
|
(202,000
|
)
|
Total
Deferred Liability
|
|
|
(1,299,000
|
)
|
|
(909,000
|
)
|
|
|
|
|
|
|
|
|
Valuation
Allowance
|
|
|
1,299,000
|
|
|
909,000
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
-
|
|
|
-
|
|
At
December 31, 2005, components of net deferred tax assets (liabilities)
in the
accompanying balance sheet include the following amounts of deferred
tax
liabilities:
Deferred
Tax Assets (Liability)
|
|
2005
|
|
2004
|
|
Current
|
|
|
|
|
|
Interest
|
|
$
|
105,000
|
|
$
|
105,000
|
|
Intangible
|
|
$
|
193,000
|
|
$
|
193,000
|
|
Net
Operating Loss
|
|
$
|
2,706,000
|
|
$
|
1,323,000
|
|
Deferred
State Tax
|
|
|
($211,000
|
)
|
|
($113,000
|
)
|
Other
|
|
$
|
103,000
|
|
$
|
58,000
|
|
|
|
|
|
|
|
|
|
Non-Current
|
|
|
|
|
|
|
|
Depreciation-Amortization
|
|
|
($58,000
|
)
|
|
($27,000
|
)
|
Net
Deferred Tax Assets
|
|
$
|
2,838,000
|
|
$
|
1,539,000
|
|
Less
Valuation Allowance
|
|
|
($2,838,000
|
)
|
|
($1,539,000
|
)
|
|
|
|
|
|
|
|
|
Net
Deferred Tax Assets (Liability)
|
|
|
-
|
|
|
-
|
|
As
of December 31, 2005, the Company has
approximately $6,339,000 and $6,234,000 of Net Operating Losses (“NOL”) for
federal and state purposes which begin to expire between 2022 and 2025
for
federal and 2012 and 2015 for state purposes respectively. The utilization
of NOL carryforwards may be limited under the provisions of Internal
Revenue
Code Section 382 and similar state provisions
Section
382 of the Internal Revenue Code of 1986 generally imposes an annual
limitation
on the amount of NOL carryforwards that may be used to offset taxable
income
where a corporation has undergone significant changes in its stock
ownership.
(9) |
Income
Taxes, continued:
|
The
income tax expense differs from the amounts computed by applying the
United
States federal income tax rate of 34% to income taxes as a result of
the
following for the years ended December 31, 2005 and 2004:
|
|
2005
|
|
2004
|
|
Federal
tax benefit on pretax losses at statutory rates
|
|
$ |
(1,300,000
|
)
|
$ |
(1,131,000
|
)
|
State
tax, net of federal benefit
|
|
$ |
(191,000
|
)
|
$ |
(133,000
|
)
|
Other
|
|
$
|
192,000
|
|
$
|
356,000
|
|
Valuation
Allowance
|
|
$
|
1,299,000
|
|
$
|
908,000
|
|
Total
|
|
|
-
|
|
|
- |
|
(10) |
Related
Party Transactions:
|
In
2001,
the Company received the exclusive worldwide rights and a license to
use certain
proprietary rights from Spectrum Laboratories, Inc. (“Spectrum”), partially in
exchange for 362,669 shares of common stock. The Chairman of the Board
of
Spectrum (“Spectrum Chairman”) is one of the majority stockholders of Spectrum
Laboratories, Inc. and also currently serves as a Director of the Company.
In
2002, the Spectrum Chairman received stock options to purchase 18,000
shares of
common stock at an exercise price of $0.15 per share as compensation
as a
Director of the Company. In 2003, the Spectrum Chairman received stock
options
to purchase 18,000 shares of common stock at an exercise price of $1.00
per
share as compensation as a Director of the Company. In 2004, the Spectrum
Chairman received options to purchase 30,000 shares of common stock at
an
exercise price of $2.25 per share as compensation as a Director of the
Company.
In 2005, the Spectrum Chairman received options to purchase 15,000 shares
of
common stock at an exercise price of $2.48 per share as compensation
as a
Director of the Company.
In
2003,
a Director received warrants to purchase 50,000 shares of common stock
exercisable at $1 per share as a finder’s fee.
In
2004,
the son of a Director received 7,500 shares of common stock valued at
$1 per
share and warrants to purchase 7,500 shares of common stock exercisable
at $2.50
per share as a finder’s fee.
In
2004,
a Director received common stock valued at $1.00 per share and warrants
to
purchase 40,000 shares of common stock exercisable at $2.50 per share
as a
finder’s fee.
In
2005,
a Director received cash compensation totaling $23,687 and a 5 year option
to
purchase 30,000 shares of common stock at $1.80 per share for consulting
services.
(11) |
Employee
Benefit Plan:
|
In
May
2005, the Company adopted a 401-K defined contribution profit-sharing
plan
covering its employees. Contributions to the plan are based on employer
contributions as determined by the Company and allowable discretionary
contributions, as determined by the Company’s Board of Directors, subject to
certain limitations. Contributions by the Company to this plan amounted
to
$10,924 for 2005.
On
March
6, 2006, the Company completed a $1,350,000 private equity financing
with a
group of institutional investors and an accredited investor. In the offering,
1,227,272 shares of the Company’s common stock were sold, at a price of $1.10
per share and the investors also received warrants to purchase an additional
613,634 shares of our common stock at an exercise price of $1.50 per
share. The
warrants are exercisable for five years. The proceeds of the private
equity
financing will be used to fund general working capital needs and the
further
development of the Company products.
The
Company also entered into a Registration Rights Agreement with the investors
in
the March 2006 private placement pursuant to which the Company agreed
to
register and to maintain an effective registration statement for the
shares of
common stock issued in the private placement and for the common stock
to be
issued upon the exercise of warrants issued in the transaction. The Registration
Rights Agreement provides for liquidated damages of 1.5% of the aggregate
purchase price for each 30 day period, with a maximum of eight 30 day
periods
(12% maximum liquidating damages), if the Company fails to maintain the
effectiveness of such registration statement. In accordance with “EITF 00-19:
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock” and other authoritative literature, it was
determined that the warrants issued in the March 2006 private placement
and the
Registration Rights Agreement are free standing derivative financial
instruments
as defined in EITF 00-19. In accordance with EITF 00-19, the value and
balance
sheet classification of the warrants will be reviewed each reporting
period
and, if the warrants should be classified as a liability, any
changes in the value of the warrants on a re-measurement date will be
recorded
in the Statement of Operations.
On
January 1, 2006 the Company verbally entered into a consulting arrangement
with
a director to provide investor relations services for a three month term
for
$22,500 and a non qualified stock option grant to purchase 30,000 shares
at
$1.80 per share with a 5 year term. The options vest on a monthly basis
over the
3 month term of the agreement.
On
March
22, 2006, the Company entered into a clinical trial agreement with the
University of California, San Diego Medical Center to serve as an additional
clinical site for the Company’s FDA-approved Phase I clinical feasibility trial
for SEPET™. The Company does not anticipate that the addition of this site will
materially affect the overall budgeted amount for the SEPETTM
clinical
feasibility trial.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly
authorized.
|
|
|
|
ARBIOS
SYSTEMS, INC. |
|
|
|
Date: March 31,
2006 |
By: |
/s/ WALTER
C.
OGIER |
|
Walter
C. Ogier, President and Chief Executive Officer
|
|
|
In
accordance with the Exchange Act, this report has been signed below by
the
following persons on behalf of the registrant and in the capacities and
on the
dates indicated.
Signature
|
Title
|
Date
|
|
|
|
/s/
WALTER C. OGIER
|
President
and Chief Executive Officer (principal executive officer)
|
March 31,
2006
|
Walter
C. Ogier |
|
|
|
|
|
/s/
SCOTT L. HAYASHI
|
Chief
Financial Officer (principal financial officer and principal
accounting
officer)
|
March 31,
2006
|
Scott
L. Hayashi |
|
|
|
|
|
/s/
JACEK ROZGA,
MD, PhD
|
Director
|
March 31,
2006
|
Jacek
Rozga, MD, PhD |
|
|
|
|
|
/s/
JOHN M.VIERLING, MD
|
Chairman
of the Board, and Director
|
March 31,
2006
|
John
M. Vierling, MD |
|
|
|
|
|
/s/
JACK E. STOVER
|
Director
|
March 31,
2006
|
Jack
E. Stover |
|
|
|
|
|
/s/
ROY EDDLEMAN
|
Director
|
March 31,
2006
|
Roy
Eddleman |
|
|
|
|
|
/s/MARVIN
S. HAUSMAN, MD
|
Director
|
March 31,
2006
|
Marvin
S. Hausman
MD |
|
|
|
|
|
/s/
THOMAS C. SEOH
|
Director
|
March 31,
2006
|
Thomas
C. Seoh |
|
|
|
|
|
/s/
THOMAS M. TULLY
|
Director
|
March 31,
2006
|
Thomas
M. Tully |
|
|
|
|
|
/s/
AMY FACTOR
|
Director
|
March 31,
2006
|
Amy
Factor |
|
|
|
|
|
/s/
DENNIS KOGOD
|
Director
|
March 31,
2006
|
Dennis
Kogod |
|
|
|
|
|
/s/
RICHARD W. BANK, MD
|
Director
|
March 31,
2006
|
Richard
W. Bank, MD |
|
|
INDEX
TO
EXHIBITS
Exhibit
Number
|
Description
|
2.1
|
Agreement
and Plan of Reorganization, dated October 20, 2003, between
the
Registrant, Arbios Technologies, Inc., HAUSA Acquisition, Inc.,
Cindy
Swank and Raymond Kuh (1)
|
|
|
3.1
|
Certificate
of Incorporation, dated June 3, 2005
|
|
|
3.2
|
Certificate
of Correction, dated July 6, 2005
|
|
|
3.3
|
Certificate
of Ownership and Merger, dated July 25, 2005
|
|
|
3.4
|
Certificate
of Ownership and Merger, dated July 26, 2005
|
|
|
3.5
|
Bylaws
|
|
|
4.1
|
Form
of Common Stock certificate
|
|
|
4.2
|
Form
of Warrant for the Purchase of Shares of Common Stock issued
by the
Registrant upon the assumption of the Arbios Technologies,
Inc.
outstanding Warrant (3)
|
|
|
4.3
|
Common
Stock Purchase Warrant, dated April 1, 2004, issued to Wolfe
Axelrod
Weinberger Associates LLC (4)
|
|
|
4.4
|
Form
of Warrant to Purchase Common Stock of Arbios Systems, Inc.,
dated January
11, 2005, issued to investors and placement agent (5)
|
|
|
10.1
|
Form
of 2001 Stock Option Plan (2)*
|
|
|
10.2
|
Facilities
Lease, entered into as of June 30, 2001, by and between Cedars-Sinai
Medical Center and Arbios Technologies, Inc. (3)
|
|
|
10.3
|
Standard
Multi-Tenant Office Lease, dated as of August 16, 2005, by
and between
Beverly Robertson Design Plaza and Arbios Systems, Inc.
|
|
|
10.4
|
Employee
Loan-Out Agreement, entered into effective as of July 1, 2001,
by and
between Cedars-Sinai Medical Center and Arbios Technologies,
Inc.
(3)
|
|
|
10.5
|
Second
Amendment to Employee Loan-Out Agreement, entered into effective
as of May
7, 2003, by and between Cedars-Sinai Medical Center and Arbios
Technologies, Inc. (3)
|
|
|
10.6
|
License
Agreement, entered into as of June 2001, by and between Cedars-Sinai
Medical Center and Arbios Technologies, Inc. (3)
|
|
|
10.7
|
Spectrum
Labs License Agreement (3)
|
|
|
10.8
|
Third
Amendment to Employee Loan-Out Agreement, entered into effective
as of
June 21, 2004, by and between Cedars-Sinai Medical Center and
Arbios
Systems, Inc. (4)
|
|
|
10.9
|
Asset
Purchase Agreement among Circe Biomedical, Inc., a Delaware
corporation,
Arbios Technologies, Inc., and Arbios Systems, Inc., dated
as of April 7,
2004(4)
|
|
|
10.10
|
Manufacturing
and Supply Agreement, dated as of December 26, 2001, between
Spectrum
Laboratories, Inc. and Arbios Technologies, Inc. (4)
|
|
|
10.11
|
Research
Agreement, dated as of December 26, 2001, between Spectrum
Laboratories,
Inc. and Arbios Technologies, Inc. (4)
|
|
|
10.12
|
First
Amendment to Research Agreement, dated as of October 14, 2002,
between
Spectrum Laboratories, Inc. and Arbios Technologies, Inc.
(4)
|
|
|
10.13
|
Third
Amendment to Facilities Lease, entered into effective as of
June __, 2004,
by and between Cedars-Sinai Medical Center and Arbios Technologies,
Inc.
(4)
|
|
|
10.14
|
Form
of Purchase Agreement, dated as of January 11, 2005, by and
among Arbios
Systems, Inc. and the Investors named therein. (5)
|
|
|
10.15
|
Form
of Registration Rights Agreement, dated as of January 11, 2005,
by and
among Arbios Systems, Inc. and the Investors named
therein.(5)
|
|
|
10.16
|
Omnibus
Stockholders’ Agreement, dated as of October 24, 2003, by and among Arbios
Technologies, Inc., Historical Autographs U.S.A., Inc., Spectrum
Laboratories, Inc., Cedars-Sinai Medical Center, Achilles A.
Demetriou,
M.D., Ph.D. and Kristin P. Demetriou, as Trustees of the A
& K
Demetriou Family Trust created on November 13, 2000, and Jacek
Rozga,
M.D., Ph.D. and Joanna Rozga.
|
|
|
10.17
|
Employment
Offer Letter, dated December 30, 2004, between Arbios Systems,
Inc. and
David Zeffren.*
|
|
|
10.18
|
Employment
Offer Letter, dated March 22, 2005, between Arbios Systems,
Inc. and Shawn
Cain.*
|
|
|
10.19
|
Employment
Offer Letter, dated March 29, 2005, between Arbios Systems,
Inc. and Scott
Hayashi.*
|
|
|
10.20
|
Employment
Agreement, entered into between Arbios Systems, Inc. and Amy
Factor,
effective as of March 31, 2005 (6)*
|
|
|
10.21
|
Employment
Offer Letter, dated July 28, 2005, between Arbios Systems,
Inc. and Jacek
Rozga, M.D., Ph.D. (7)*
|
|
|
10.22
|
2005
Stock Incentive Plan (8)*
|
|
|
10.23
|
Form
of Stock Option Agreement for the 2005 Stock Incentive Plan
(8)*
|
|
|
10.24
|
Employment
Offer Letter, dated October 17, 2005, between Arbios Systems,
Inc. and
Walter C. Ogier. (9)*
|
|
|
10.25
|
Consulting
Agreement, dated October 1, 2005, between Arbios Systems, Inc.
and Marvin
S. Hausman, M.D. (9)
|
|
|
10.26
|
Form
of Lease, dated April 1, 2005, between Arbios Technologies,
Inc. and
American Integrated Biologics, Inc. (7)
|
|
|
31.1
|
Certification
of Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
31.2
|
Certification
of Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
32.1
|
Certification
of Principal Executive Officer Pursuant to 18 U.S.C. Section
1350
|
|
|
32.2
|
Certification
of Principal Financial Officer Pursuant to 18 U.S.C. Section
1350
|
________________________________
* Denotes
a
management contract or compensatory plan or arrangement.
(1) Previously
filed as an exhibit to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 14, 2003, which exhibit
is hereby
incorporated herein by reference.
(2) Previously
filed as an exhibit to the Company’s Current Report on Form 10-SB filed with the
Securities and Exchange Commission on April 26, 2001, which exhibit is
hereby
incorporated herein by reference.
(3) Previously
filed as an exhibit to the Company’s Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on March 30, 2004, which exhibit is
hereby
incorporated herein by reference.
(4) Previously
filed as an exhibit to the Company’s Registration Statement on Form SB-2/A filed
with the Securities and Exchange Commission on September 10, 2004, which
exhibit
is hereby incorporated herein by reference.
(5) Previously
filed as an exhibit to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 14, 2005, which exhibit
is hereby
incorporated herein by reference.
(6) Previously
filed as an exhibit to the Company’s Quarterly Report on Form 10-QSB filed with
the Securities and Exchange Commission on May 16, 2005, which exhibit
is hereby
incorporated herein by reference.
(7) Previously
filed as an exhibit to the Company’s Quarterly Report on Form 10-QSB filed with
the Securities and Exchange Commission on August 15, 2005, which exhibit
is
hereby incorporated herein by reference.
(8) Previously
filed as an exhibit to the Company’s Quarterly Report on Form S-8 filed with the
Securities and Exchange Commission on August 31, 2005, which exhibit
is hereby
incorporated herein by reference.
(9) Previously
filed as an exhibit to the Company’s Quarterly Report on Form 10-QSB/A filed
with the Securities and Exchange Commission on March 22, 2006, which
exhibit is
hereby incorporated herein by reference.