Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
(Mark
One)
x |
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the
fiscal year ended December 31, 2006
o |
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the
transition period from _________ to _________
Commission
File Number: 000-32603
ARBIOS
SYSTEMS, INC.
(Name
of
small business issuer in its charter)
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
91-1955323
(I.R.S.
Employer
Identification
No.)
|
1050
Winter Street, Suite 1000,
Waltham,
MA
(Address
of principal executive offices)
|
02451
(Zip
Code)
|
Issuer’s
Telephone Number:
781-839-7293
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $.001 par value
(Title
of
class)
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. o
Check
whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.Yes x
No o
Check
if
there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to the best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o
No x
Issuer’s
revenues for its most recent fiscal year: None
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was
sold, or the average bid and asked price of such common equity, as of March
29,
2007 was approximately $7,659,000
based on the closing sales price reported by the OTC Bulletin Board on such
date.
There
were 17,460,181 shares of the Company’s common stock outstanding on March 29,
2007.
DOCUMENTS
INCORPORATED BY REFERENCE:
None.
Transitional
Small Business Disclosure Format (check one): YES o NO x
TABLE
OF CONTENTS
Part
I
|
|
1.
|
|
Description
of Business
|
|
1
|
2.
|
|
Description
of Property
|
|
20
|
3.
|
|
Legal
Proceedings
|
|
21
|
4.
|
|
Submission
of Matters to a Vote of Security Holders
|
|
21
|
|
|
|
|
|
Part
II
|
|
5.
|
|
Market
for Common Equity and Related Stockholder Matters and
Small Business
Issuer
Purchases of Equity Securities
|
|
21
|
6.
|
|
Management’s
Discussion and Analysis or Plan of Operation
|
|
22
|
7.
|
|
Financial
Statements
|
|
38
|
8.
|
|
Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure
|
|
39
|
8A.
|
|
Controls
and Procedures
|
|
|
8B.
|
|
Other
Information
|
|
|
|
|
|
|
|
Part
III
|
|
9.
|
|
Directors,
Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act
|
|
40
|
10.
|
|
Executive
Compensation
|
|
44
|
11.
|
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
|
50
|
12.
|
|
Certain
Relationships and Related Transactions
|
|
54
|
13.
|
|
Exhibits
|
|
54
|
14.
|
|
Principal
Accountant Fees and Services
|
|
57
|
Introductory
Comment
Throughout
this Annual Report on Form 10-KSB, the terms “we,” “us,” “our,” and “our
company” refer to Arbios Systems, Inc., a Delaware corporation.
Forward
Looking Statements
The
Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for
forward-looking statements. This annual report contains forward-looking
statements within the meaning of the federal securities laws. These include
statements about our expectations, beliefs, intentions or strategies for the
future, which we indicate by words or phrases such as “anticipate,” “expect,”
“intend,” “plan,” “will,” “we believe,” “the company believes,” “management
believes” and similar language. The forward-looking statements are based on our
current expectations and are subject to certain risks, uncertainties and
assumptions, including those set forth in the discussion under “Description of
Business” and “Management’s Discussion and Analysis or Plan of Operation -
Factors that May Affect Future Results and Market Price of Our Stock.” Our
actual results may differ materially from results anticipated in these
forward-looking statements. We base our forward-looking statements on
information currently available to us, and we assume no obligation to update
them. For a discussion of some of the factors that may cause actual results
to
differ materially from those suggested by the forward-looking statements, please
read carefully the information under “Management’s Discussion and Analysis or
Plan of Operation -
Factors
that May Affect Future Results and Market Price of Our Stock.”
Restatement
of Financial Statements
In
January 2005 and March 2006 we closed financing transactions that included
the
issuance of warrants and the grant of registration rights. The Company
has been
accounting for the warrants in accordance with pronouncement EITF 00-19.
Beginning in the quarter ended March 31, 2006 for the warrants issued in
the
January 2005 financing and in the quarter ended September 30, 2006 for
the
warrants issued in the March 2006 financing, in accordance with EITF 00-19,
the
Company recorded the fair value of these warrants as an accrued warrant
liability and reduced additional paid-in capital by the amount of the recorded
liability. In the quarters ended June 30, and September 30, 2006 changes
to the
accrued liability were reported in the Company’s statement of operations.
However, the Company has determined that it should have included in the
calculation of the fair value of the warrant the value of the anti-dilution
provisions contained in the warrant agreements. The calculations of the
fair
value of the warrants did not include the value of the anti-dilutions provision
for the filed financial statements included in our Form 10-QSB for the
quarters
ended March 31, 2006, June 30, 2006, and September 30, 2006. Therefore,
we
restate our financial statements for these periods as follows: 1) for the
three
month period ended March 31, 2006, additional paid in capital is decreased
by $271,000 with a corresponding increase in the accrued warrant liability,
2)
for the three and six month periods ended June 30, 2006,
other expense is increased by $63,000 with a
corresponding increase in the accrued warrant liability, and 3) for the
three month period ended September 30, 2006, additional paid in capital is
decreased by $114,000 and other expense is increased by $49,000 with a
corresponding increase in the accrued warrant liability of $163,000. For
the
nine month period ended September 30, 2006 additional paid-in capital is
decreased by $385,000, other expense is increased by $112,000, and the
accrued warrant liability is increased by
$497,000.
|
|
Three
months
|
|
Three
months
|
|
Six
months
|
|
Three
months
|
|
Nine
months
|
|
|
|
ended
|
|
ended
|
|
ended
|
|
ended
|
|
ended
|
|
|
|
March
31, 2006
|
|
June
30, 2006
|
|
June
30, 2006
|
|
Sept.
30, 2006
|
|
Sept.
30, 2006
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
originally reported
|
|
$
|
(1,069,468
|
)
|
$
|
(837,202
|
)
|
$
|
(1,906,670
|
)
|
$
|
(1,081,410
|
)
|
$
|
(2,988,080
|
)
|
Adjustment
|
|
|
|
|
|
(63,000
|
)
|
|
(63,000
|
)
|
|
(49,000
|
)
|
|
(112,000
|
)
|
As
adjusted
|
|
$
|
(1,069,468
|
)
|
$
|
(900,202
|
)
|
$
|
(1,969,670
|
)
|
$
|
(1,130,410
|
)
|
$
|
(3,100,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
warrant liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
originally reported
|
|
$
|
680,841
|
|
|
|
|
$
|
407,717
|
|
|
|
|
$
|
524,172
|
|
Adjustment
|
|
|
271,000
|
|
|
|
|
|
334,000
|
|
|
|
|
|
497,000
|
|
As
adjusted
|
|
$
|
951,841
|
|
|
|
|
$
|
741,717
|
|
|
|
|
$
|
1,021,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
originally reported
|
|
$
|
14,190,980
|
|
|
|
|
$
|
14,296,357
|
|
|
|
|
$
|
14,307,052
|
|
Adjustment
|
|
|
(271,000
|
)
|
|
|
|
|
(271,000
|
)
|
|
|
|
|
(385,000
|
)
|
As
adjusted
|
|
$
|
13,919,980
|
|
|
|
|
$
|
14,025,357
|
|
|
|
|
$
|
13,922,052
|
|
Company
Overview
Arbios
Systems, Inc., or Arbios, is a Delaware corporation based in Waltham,
Massachusetts and Los Angeles, California. We seek to develop, manufacture
and
market liver assist therapies to meet the urgent need for medical treatment
of
liver failure.
We
are a
medical device and cell-therapy company that is focusing on the development
of
products for the treatment of liver failure. Our lead products under development
currently consist of a novel extracorporeal blood purification therapy called
the SEPET™ Liver Assist Device and an extracorporeal, bioartificial liver
therapy
referred
to as the HepatAssist™ Cell-Based Liver Support System
that
incorporate porcine pig liver cells. We currently own five issued U.S. patents
and six issued foreign patents, and are the licensee of sixteen other issued
U.S. patents, as well as the owner or licensee of eight patent applications
and
numerous related trade secrets.
In
April
2005, we received permission from the United States Food and Drug
Administration, or the FDA, to commence a 15 to 20 patient feasibility clinical
study of our SEPET™ Liver Assist Device, targeted for the treatment of acute
episodes of chronic liver disease. We have currently enrolled 15 patients and
are thus in the final stages of completing the feasibility study. We are
currently completing the monitoring and analysis of the data from the 15
enrolled patients. We are encouraged by the preliminary data and intend to
submit it to the Food and Drug Administration in preparation for a pivotal
trial
for SEPETTM.
We
further intend to use the data, once our analysis is complete, in support of
gaining the CE Mark for SEPET™ in Europe.
Our
HepatAssist™
Cell-Based Liver Support System is an enhanced version of a
product
system which we acquired in 2003 from another company, Circe Biomedical, Inc.,
which had tested HepatAssist™ in an unsuccessful Phase II/III pivotal
clinical trial. We currently hold a Phase III investigational new drug
application, or IND, for conducting an additional pivotal clinical trial of
the
HepatAssist™ system. Our current plan is to focus on reintroducing this
important liver assist technology into clinical development in the U.S. and
in
Asia to the extent that we obtain additional funding for this program from
a
potential corporate marketing partner. We are currently seeking such a
partnership.
A
glossary of certain terms used in this Annual Report is contained on page 18
below.
Company
History.
Arbios
Systems, Inc. was originally incorporated in February 1999 as Historical
Autographs U.S.A., Inc., or HAUSA. Until October 2003, HAUSA was an e-commerce
based company engaged in the business of acquiring and marketing historical
documents. On October 30, 2003, HAUSA completed a reorganization (the
“Reorganization”) in which HAUSA, through its wholly-owned subsidiary, acquired
all of the outstanding shares of Arbios Technologies, Inc., or ATI, in exchange
for 11,930,598 shares of HAUSA common stock. As a result of the Reorganization,
ATI became the wholly-owned subsidiary of HAUSA. After the Reorganization,
HAUSA
changed its name to “Arbios Systems, Inc.,” replaced its officers and directors
with those of ATI, closed its offices, ceased its e-commerce business, and
moved
its offices to Los Angeles, California. On July 25, 2005, Arbios Systems, Inc.
completed its reincorporation as a Delaware corporation by merging with and
into
Arbios Systems, Inc., a Delaware corporation. The foregoing merger was approved
by the Company’s stockholders at the annual meeting of stockholders held on July
7, 2005. In order to consolidate the functions and operations of Arbios and
ATI,
on July 26, 2005, ATI merged into Arbios. As a result, Arbios now owns all
of
the assets of ATI and all of the operations of the two companies have been
consolidated into Arbios.
Our
principal operations and executive offices are located at 1050 Winter Street,
Suite 1000, Waltham, Massachusetts 02451 and our telephone number is
781-839-7293. We also maintain corporate offices at 8797 Beverly Blvd., Suite
304, Los Angeles, California 90048 and our telephone number is (310) 657-4898.
We also maintain a web site at www.arbios.com. The information on our web site
is not, and you should not consider such information to be, a part of this
filing.
Products
Overview
We
currently have one product under active development; a novel extracorporeal
blood purification therapy called the SEPET™ Liver Assist Device. We also have
an additional product which is an extracorporeal, bioartificial liver
therapy
referred
to as the HepatAssist™ Cell-Based Liver Support System that
incorporates pig liver cells, or porcine hepatocytes. We have postponed further
clinical development of our HepatAssist™ program until we are able to secure
additional funding for this project from a potential corporate partner.
SEPET™
is
a single-use disposable plastic cartridge that contains specially designed
microporous tubes called hollow fibers. When a patient’s blood is pumped through
these hollow fibers, substances normally metabolized by the liver and
accumulated in the blood during liver failure are transported convectively
across the porous fiber wall and are discarded. As a result of this blood
purification, or detoxification, process, we believe that the levels of
pathological blood components will move toward normal ranges, leading to
amelioration of liver failure and stabilization or improved function of a
patient’s liver. Our belief is based on the encouraging preliminary results of
the SEPET™ feasibility clinical trial, which is being conducted at prominent
liver disease treatment hospitals in the U.S. The data, which remains subject
to
monitoring and analysis, is preliminary and reflects numerous apparent responses
of hepatic encephalopathy associated with acute-on-chronic liver failure to
SEPET™ treatment as well as a favorable safety profile to date. These results,
if demonstrated by the final data from this study, will need to be statistically
proven in a further, randomized, controlled clinical trial and reviewed by
the
FDA and other regulatory agencies. SEPET™ is designed for use with commercially
available kidney hemodialysis systems and/or blood plasma apheresis systems
that
utilize hollow-fiber cartridges for dialysis and related hemoperfusion
procedures.
In
April
2004, we acquired from Circe Biomedical, Inc., an unaffiliated biomedical
company, the rights to a bioartificial liver, known as the
HepatAssistTM
Cell-Based Liver Support System. Certain technologies included in the
HepatAssistTM
bioartificial liver were designed and tested in pre-clinical and early clinical
studies by Drs. A. A. Demetriou and J. Rozga, who later founded Arbios
Systems, Inc. Our HepatAssistTM
Cell-Based Liver Support System utilizes a single-use cartridge that contains
pig liver cells
plus
columns that contain
certain
chemical particles referred to as sorbents. When a patient’s blood is pumped
through the bioartificial liver system, substances normally metabolized by
the
liver and accumulated in the blood during liver failure move across the porous
fiber walls into two sequential plasma compartments; one compartment is filled
with pig liver cells and the other compartment incorporates
columns
that contain sorbents.
The exposure of the viable pig liver cells to patient plasma causes toxic
substances contained in the plasma to be metabolized, thereby reducing their
concentration level. At the same time, substances produced by pig liver cells
move in reverse across the porous wall back into the blood compartment. In
addition, the sorbents lower the level of other pathological blood components,
such as ammonia. As a result of these two processes (provision of whole liver
functions by the pig liver cells and removal of toxins by the sorbents) we
believe the levels of pathological and normal blood components will move toward
normal ranges in the patient’s body. Our belief is supported by the results of
tests performed during clinical trials using the HepatAssistTM
system.
Our
HepatAssist™ Cell-Based
Liver Support System
is
similar to the earlier HepatAssistTM
system,
and we have subsequently enhanced it by employing a larger quantity of pig
cells, a change which has been authorized by the U.S. FDA for use in a new
pivotal clinical trial. We do not anticipate that HepatAssist™ will use the
Circe-designed proprietary perfusion platform, which is a machine through which
the patient’s blood is circulated, that was originally developed for the
HepatAssistTM
system.
Instead, we have validated a perfusion platform known as the PERFORMER for
use
as the platform to provide bioartificial liver therapy. The PERFORMER is a
multi-function integrated system capable of supporting extracorporeal
blood/plasma/fluid circulation therapies that is manufactured by RanD S.r.l.
(Italy) and distributed world-wide by Medtronic, Inc. The PERFORMER has been
equipped with proprietary software and a specialized tubing set for use with
our
HepatAssist™ Cell-Based Liver Support System.
Both
SEPET™ and HepatAssist™ rely on single-use disposable cartridges that are placed
on a blood perfusion apparatus that is attached to the patient's blood
circulation system. Following treatments with any of our products, the
disposable cartridges are discarded, and new cartridges are used for the next
therapy.
Background
of our Company
Arbios
Technologies, Inc., our former operating subsidiary, was formed in August of
2000 by Drs. Achilles A. Demetriou and Jacek Rozga, two leaders in the
field of artificial liver therapy, to develop extracorporeal therapies for
the
treatment of liver failure. As former employees of Cedars-Sinai Medical Center,
Drs. Demetriou and Rozga previously were involved in the development of a first
generation bioartificial liver known as HepatAssistTM
that was
licensed by Cedars-Sinai Medical Center in 1994 to W.R. Grace & Co. and then
subsequently transferred to Circe Biomedical, Inc. The prior owners of this
technology spent millions of dollars on the research and development of the
original HepatAssistTM
system,
the perfusion platform and on the related technologies and operating procedures
necessary to bring the product to market. The original HepatAssistTM
system
was most recently tested in a Phase II/III clinical trials authorized by
the FDA in patients with fulminant and subfulminant liver failure and primary
non-function following liver transplantation, i.e. closely related acute liver
failure indications. These trials of the original HepatAssistTM
system
were the first and amongst the largest (171 patients) prospective, randomized,
controlled multi-center trials of a liver assist technology, and the only such
trial to have been successful in demonstrating a survival advantage for an
extracorporeal liver assist technology, albeit via a retrospective analysis.
Although treated fulminant/subfulminant hepatic failure patients with viral
and
drug-induced liver injury retrospectively demonstrated improved survival
compared to controls when adjusted for the effect of confounding factors (such
as liver transplantation), the prospective primary clinical end point in the
overall study population (overall comparison of survival at 30 days
post-transplantation) was not achieved. Accordingly, the HepatAssist™ system was
not approved for marketing, and the FDA requested that a new Phase III clinical
study be performed. A new Phase III protocol was prepared and reviewed by the
FDA. However in 2003, before these new studies could be undertaken, Circe
Biomedical ceased its operations. In April 2004, we purchased the remaining
assets of Circe Biomedical that related to its bioartificial liver operations,
including rights to the original HepatAssistTM
system,
the new Phase III protocol that had been reviewed by the FDA, and over 400
manufacturing and quality control and quality assurance standard operation
protocols previously reviewed by FDA. In July 2005, we merged Arbios
Technologies, Inc. into the parent company, Arbios Systems, Inc.
To
date,
we have funded our operations from the gross proceeds of funds we raised from
the sale of over $13,100,000 of our equity securities and $321,000 of Small
Business Innovation Research, or SBIR, grants that have been awarded by the
United States Small Business Administration. We will have to raise substantial
additional proceeds to fund our future clinical development expenses and our
on-going working capital needs.
Our
research offices and laboratories are located at Cedars-Sinai Medical Center
(“Cedars-Sinai”), Los Angeles, California. Cedars-Sinai Medical Center is also
one of the clinical testing sites for our SEPETTM
clinical
testing program. Under our lease agreement and other arrangements with
Cedars-Sinai, we have access to their development resources of that leading
medical center, including animal facilities, surgical facilities and clinical
laboratories. The Hospital has informed us that they do not intend to renew
the
lease when it expires on June 30, 2007, and we intend to seek a new laboratory
facility for testing our device. We are currently seeking to identify
replacement laboratory space in eastern Massachusetts. We also lease
administrative office space in Waltham, Massachusetts and Los Angeles,
California.
Two
members of our management team, Dr. Ulrich Baurmeister, Ph.D., Chief Technology
Officer, and Prof. Jan Stange, M.D., Senior Clinical Advisor, are engaged under
consulting agreements and are based in Germany (Wuppertal and Rostock,
respectively). Their work is divided between their homes, clinical sites and
product development sites under contract with the Company.
We
have
also entered into various agreements with Spectrum Laboratories, Inc., including
research and development agreements and manufacturing agreements. Spectrum
Laboratories is a company that specializes in the development and manufacture
of
innovative molecular separation products for the research community and is
a
supplier of dialysis and ultrafiltration membranes used for biomedical research,
molecular biology and clinical diagnostics throughout the world.
Strategy
We
believe that the clinical testing and regulatory approval periods for the SEPET™
Liver Assist Device will be shorter than our HepatAssistTM
Cell-Based Liver Support System because SEPET™ may be evaluated as a medical
device that does not contain biological components such as the pig cells that
are an integral part of our HepatAssistTM
product.
Accordingly, because
of the shorter regulatory period and the ability of SEPET™ to operate through
the use of a standard, currently available kidney dialysis instrument, we expect
that the development of SEPET™ will be completed before the development of
HepatAssist™ is completed.
We
have
already performed in
vitro
and
in
vivo
testing
of the SEPET™ prototype device and commenced clinical testing of SEPET™ in late
2005. To date, 15 patients suffering from acute-on-chronic liver failure with
hepatic encephalopathy have been enrolled in the U.S. clinical feasibility
trial
of SEPET™. Our strategy for realizing sales revenue for the Company is to seek
the first commercialization of SEPET™ under the CE Mark in Europe, which we
believe may be possible by 2008. It may also be possible to commercialize SEPET™
in Asia in that same timeframe, although we do not yet have assurance of
regulatory pathways in that region. Commercialization of SEPET™ in the US may
follow completion of a pivotal clinical trial of SEPET™ intended for U.S. FDA
market approval of the product. Our ability to successfully market SEPET™ in
these various regions will depend on a number of factors including regulatory
approvals, marketing and sales partnerships, and patents protection which is
not
yet issued outside the United States.
We
are
currently evaluating the possibility of conducting clinical studies of the
HepatAssist™ system under a modified version of the FDA-reviewed Phase III IND
protocol that we acquired in March 2004 from Circe Biomedical. Since we are
still currently developing our clinical and regulatory strategies for the
HepatAssistTM
Cell-Based Liver Support System, and since our continual development of this
product depends on our securing a corporate collaboration and associated
funding, we cannot estimate when an application requesting marketing approval
of
that system will be filed.
The
April
2004 acquisition of the assets of Circe Biomedical has provided us with
opportunities for the development of a bioartificial liver. The Circe Biomedical
bioartificial liver device assets that we acquired consist of the following
four
distinct elements:
|
(1) |
FDA-authorized
standard operating procedures.
These are standard operating procedures for production of porcine
cells
including harvesting, freezing, storing, shipping and processing
by the
end user (thawing, washing) of the cells. These procedures and protocols
have been reviewed by the FDA for use in a pivotal phase clinical
trial.
|
|
(2) |
The
cartridge to be used in the Phase III trial of
HepatAssistTM.
We intend to use the existing, FDA-approved cartridge housing, and
we have
obtained FDA authorization to increase the number of porcine hepatocyte
cells that the cartridge would contain, which increase we believe
will
improve the functionality of the system with no adverse impact on
safety.
|
|
(3) |
An
FDA reviewed, authorized Phase III protocol acquired from Circe
Biomedical.
We will likely further modify this protocol, according to the
retrospective analysis of the original Phase II-III clinical trial
published in the Annals
of Surgery
in
2004 (by A.A. Demetriou et al), and submit the modified protocol
to the
FDA for approval.
|
|
(4) |
The
HepatAssistTM
perfusion instrument platform.
The HepatAssist™ perfusion platform is Circe Biomedical’s specially
designed machine that pumped the patient’s plasma through the cartridge.
This machine was used in the Phase II/III trial of
HepatAssist™.
|
Rather
than using Circe Biomedical’s specially designed machine, we intend to use the
PERFORMER, a commercially available machine that is distributed by Medtronic,
Inc. We believe that the PERFORMER may become the platform for our HepatAssist™
Cell-Based Liver Support System.
We
are
currently in the process of designing further clinical trials to demonstrate
the
safety and tolerability of SEPET™ in treating patients with acute exacerbation
of chronic liver failure. In April 2005 we received permission from the FDA
to
commence a 15 to 20 patient clinical feasibility study for SEPET™. We have
enrolled 15 patients in our SEPET™ feasibility clinical trial and are currently
monitoring and analyzing the trial results for these first 15 patients. Based
on
our current analysis of the data in preliminary form, we plan to submit the
fully monitored and analyzed data to the FDA in the next several months along
with a protocol summary for a proposed, randomized, controlled pivotal trial
to
further test the efficacy of the device for purposes of product approval in
the
U.S. Based on our current assumptions regarding clinical trial sizes and other
factors, we estimate that the future clinical cost of developing SEPET™ will be
approximately $5 million to $10 million and the future clinical cost of
developing HepatAssist™ will be between $15 million and $20 million. These
amounts, which could vary substantially if our assumptions are not correct,
are
well in excess of the amount of cash that we currently have available to us.
See
“Management’s Discussion and Analysis or Plan of Operation -
Factors
that May Affect Future Results and Market Price of Our Stock.”
Liver
Function Background
The
liver
controls, or affects, almost every aspect of metabolism and most physiologic
regulatory processes, including protein synthesis, sugar and fat metabolism,
blood clotting, the immune system, detoxification of alcohol, chemical toxins,
and drugs, and waste removal. Loss of liver function is a devastating and life
threatening condition. Liver failure affects all age groups and may be due
to
many causes, including viral infection, hepatitis, ingestion of common
medications, alcohol, and surgical liver removal for trauma and
cancer.
Currently,
there is no direct treatment for liver failure, except a successful liver
transplant. There is, however, a current scarcity of donor livers, and
approximately two thousand patients on the waiting list for donor livers die
annually before receiving liver transplants. We believe that treatments with
currently available technologies such as blood detoxification methods are
short-term measures, and none of them has achieved wide-spread clinical use
or
demonstrated ability in randomized, controlled clinical trials to arrest or
reverse liver failure and improve survival. As a consequence, liver failure
patients must still either undergo liver transplantation or endure the
probability of prolonged hospitalization with a low probability of survival.
In
addition, many patients do not qualify for transplantation or live in regions
of
the world where transplantation is not readily available. Still others do not
recover after transplantation because of irreversible brain damage or other
organ damage caused by liver failure. Although the liver has a remarkable
capacity for regeneration, the repair process after massive liver damage is
markedly impaired by the continued presence of toxins, inflammatory cytokines
and other inhibitors of liver organ regeneration still present in the blood
of
patients.
In
liver
failure patients, there is a need for an effective blood purification therapy
that will clear the blood of toxins, mediators of inflammation and inhibitors
of
hepatic growth. SEPET™ is a novel form of such therapy developed by us in which
the plasma fraction containing substances that are toxic to the brain, the
liver
and other internal organs and tissues are removed from patient blood and
replaced with normal human plasma. We have demonstrated an extension of survival
in large animal model testing of SEPET™, which results have led to the
initiation of a clinical feasibility trial in human subjects.
There
is
a further need to develop artificial means of liver replacement with the aim
of
either supporting patients with borderline functional liver cell mass until
their liver regenerates or until a donor liver becomes available for
transplantation. Such an “artificial liver” should also support patients during
recovery after transplantation with marginal livers and after extended liver
resections for trauma or cancer. To achieve these effects, effective liver
support systems should be able to lower blood levels of substances toxic to
the
brain and liver and to provide whole liver functions, which are impaired or
lost.
The
founders of this Company as well as investigators not associated with this
Company have demonstrated in
vitro
and in
animal models of liver failure that cell-based bioartificial liver systems
using
viable isolated liver cells, or hepatocytes, can provide whole liver functions,
to varying degrees depending on the technology approach. However, only a few
bioartificial livers have been tested in humans and it remains to be seen
whether systems utilizing hepatocytes as the only means of liver support are
effective. We believe that in order to provide the maximum support for the
failing liver, primary porcine hepatocyte therapy should be combined with blood
purification or detoxification using sorbent technology.
Our
bioartificial liver system, the HepatAssist™ Cell-Based Liver Support System,
was designed to become an advanced, effective application of the basic
bioartificial liver concept. In this bioartificial liver system, liver cell
therapy in the form of primary (i.e. living, non-cell line derived) porcine
hepatocytes, is combined with blood detoxification, in the form of sorbent
based plasma treatment.
Depending on the cause of liver disease, severity of illness and deficiency
of
specific liver functions, the
bioartificial liver mode of therapy can be provided individually, simultaneously
or sequentially. Because of these features, we believe our bioartificial liver
technology is well suited to treat patients with liver failure of all causes
and
severity, including those requiring maximum liver support. Pre-clinical data
for
the HepatAssistTM
Cell-Based Liver Support System indicated that this system could improve heart
rate and blood pressure and provide clearance of ammonia and indocyanine green
(ICG), which is a liver function test. The original HepatAssistTM
Phase
II/III clinical trial demonstrated a retrospective, statistically significant
increase in patient survival in patients with viral and drug-induced
fulminant/subfulminant (i.e. acute) hepatic failure. However, a new Phase III
clinical trial will be needed before our HepatAssist™ system, which is an
enhanced version of the original HepatAssist™ system, can be commercialized.
The
Products We Are Developing
We
currently are developing novel treatments for acute and chronic liver failure.
We believe that our SEPET™ Liver Assist Device and our HepatAssistTM
Cell-Based Liver Support System may:
|
· |
help
keep liver failure patients alive and neurologically intact before,
during
and immediately after
transplantation;
|
|
· |
allow
other patients to recover liver functionality and to survive without
a
transplant (act as a “bridge” to liver
regeneration);
|
|
· |
support
patients during periods of functional recovery and regeneration
after
liver removal due to liver trauma and/or
cancer;
|
|
· |
accelerate
recovery from acute exacerbation of chronic liver
disease;
|
|
· |
shorten
length of stay in intensive care
units;
|
|
· |
shorten
hospital stay; and
|
|
· |
reduce
the cost of care.
|
We
believe that our SEPET™ Liver Assist Device and HepatAssist™ Cell-Based Liver
Support System can achieve these effects because they can lower blood levels
of
substances that are toxic to both the brain and liver. We have obtained
preliminary results in the U.S. feasibility clinical trial of SEPET™, and have
results from Circe’s Phase II-III clinical trial of HepatAssist™. However, final
proof of clinical benefit in patients is lacking at this time, and the clinical
utility of these products still needs to be conclusively demonstrated in
patients with liver failure via randomized, controlled clinical trials of each
therapy.
We
own
certain technologies and rights related to our products, and have licensed
certain other technologies. See “- Patents and Proprietary Rights” below for a
description of the rights that we own and have licensed.
SEPET™
We
are
developing the SEPET™ Liver Assist Device as a blood purification measure to
provide temporary liver support during acute liver failure and acute
exacerbation of chronic liver disease. SEPET™ therapy will be provided through
the sale of our single-use, disposable cartridge that contains a bundle of
hollow fibers made of bio- and hemo-compatible material
capable of filtering a portion of the substances in the patent’s blood including
albumin-bound toxins, inflammatory disease mediators, and soluble toxins. The
importance of using fibers with this sieving characteristic, which allows
filtration of moledules larger than for conventional renal dialysis cartridges,
is that known hepatic failure toxins as well as mediators of inflammation and
inhibitors of hepatic regeneration have low-to-medium sized molecular weights
while “good” blood components, for the most part, have relatively high
molecular. At present, Spectrum Laboratories is the manufacturer of these
disposable cartridges. See “Manufacturing” below. The SEPET™ system is designed
for use with commercially available kidney dialysis instruments or other similar
machines that utilize disposable hollow-fiber cartridges. Accordingly, no
specialized apparatus needs to be developed or manufactured for SEPET™.
Accessory components for the SEPET™ system such as disposable tubing sets and
connectors will mostly consist of standard components that are currently used
in
renal dialysis and provided by manufacturers of those systems. We expect that
any new accessory components that may be required will be manufactured for
us by
third-party vendors.
During
SEPETTM
therapy,
an ultrafiltrate containing toxins, inhibitors of hepatic growth and mediators
of inflammation will be removed from the patient’s blood stream by exiting from
the side port of the cartridge, while at the same time, intravenous electrolyte
solutions, albumin solution, fresh frozen plasma,
or a
combination thereof will
be
administered to the patient. We believe that as a result of these two processes,
the levels of pathological and normal blood components present in the patient’s
circulation will move toward normal ranges, thereby facilitating recovery from
liver failure. Based on published medical literature, rapid and efficient blood
detoxification is expected to protect the liver, brain and other organs against
further injury, accelerate healing of the native liver and improve its residual
functions. Preliminary results of the SEPET™ U.S. feasibility clinical trial
encourage us that these expectations may be realized in human therapy using
SEPET™, but these results need to be further monitored, analyzed and finalized,
and then will be acquired in a further, randomized, controlled pivotal trial.
HepatAssist™
Cell-Based Liver Support System
Our
current bioartificial liver system is the HepatAssistTM
Cell-Based
Liver Support System. We have designed our
HepatAssist™ Cell-Based
Liver Support System to provide temporary liver support during acute liver
failure and acute exacerbation of chronic liver disease. The HepatAssist™
Cell-Based Liver Support System incorporates several proprietary components
and
technologies into an integrated liver assist system, including a hollow fiber
cartridge with porcine hepatocytes and a plasma re-circulation
circuit
that
incorporates a cell cartridge and sorbents.
The
HepatAssistTM
Cell-Based Liver Support System is designed to (i) provide liver cell functions
by utilizing viable pig liver cells that are housed in specially designed
cartridges and (ii) detoxify blood. Since it has been scientifically established
that pig liver cells perform liver functions when maintained in specially
designed cartridges outside of the human body, our bioartificial liver cartridge
is designed to bring human plasma into contact with viable pig liver cells
in a
manner similar to that observed in the normal human liver inside the body in
order to provide liver functions to the patient. In addition, our bioartificial
liver system is designed to lower the levels of pathological blood components
(through activated charcoal or other purification sorbents). We have postponed
further clinical development of our HepatAssist™ program until we are able to
secure additional funding for this project from a potential corporate
partner.
Critical
to the HepatAssist™ technology is (i) the source and method of procurement of
liver cells, (ii) the cryopreservation, or freezing, of the liver cells, (iii)
the frozen storage of the liver cells, (iv) the proprietary high speed plasma
re-circulation loop incorporating the cell cartridge and sorbents, and (v)
the
standard operating procedure protocols and quality control and programs related
to the foregoing. We currently own or have licensed numerous proprietary
technologies and methods for sourcing and using hepatocytes, which technologies
and methods apply to our HepatAssist™ system and should provide competitive
protection for the product. The following addresses our current plans and
procedures regarding viable liver cells (hepatocytes).
Hepatocyte
donors. Ideally,
human hepatocytes should be used in a bioartificial liver. However, there is
a
shortage of organ donors, and thus human hepatocytes of adequate quality.
Published data demonstrate that pig liver cells can outperform other animal
and
human liver cell lines, including those derived from liver cancers. In addition,
use of human cancer-derived cells raises safety concerns. At this time, we
intend to utilize pig liver cells, which we believe to be the currently optimal
source of living, functional hepatocytes.
Hepatocyte
harvest. The
founders of Arbios and Circe Biomedical developed certain semi-automated methods
for large-scale harvest of pig hepatocytes. The methods of harvesting and
collecting liver cells are covered by four patents, which patents we either
have
acquired from Circe Biomedical and now own or have licensed from Cedars-Sinai
Medical Center.
Hepatocyte
storage. Hepatocyte
storage, quality control and shipment of cells to treatment sites are best
achieved by use of cell freezing, or cryopreservation; other methods allow
cells
to lose viability (i.e. die) as well as physical integrity of their contents
(DNA, organelles, etc.). Cryopreservation also provides greater protection
from
bacterial and viral contamination because frozen cells can be stored until
microbiologic testing is completed and cells are then released for clinical
use.
Prior to use, cells are rapidly thawed and their viability is tested. Important,
patented hepatocyte cryopreservation technology is now owned by us and by
Cedars-Sinai Medical Center, which has licensed this technology to us.
The
pig
liver cells are expected to be harvested from young, purpose-bred,
pathogen-free, vaccinated pigs raised in a facility to be certified specifically
by the United States Department of Agriculture (USDA) for biomedical research
purposes. Each batch of cryopreserved pig liver cells will be released for
clinical use only after proper verification of biosafety and viability and
functionality of the cells. We acquired all of the required laboratory and
quality assurance protocols from Circe Biomedical, which protocols were
previously reviewed by the FDA and deemed to be in compliance with FDA
requirements.
HepatAssist™
is designed to be used in the same manner as any other blood plasma therapy
device. In a typical clinical procedure, the operator will install bioartificial
liver components consisting of the cell cartridge, oxygenator, sorbent
detoxification column(s), and tubing kit, into the blood/plasmaperfusion
platform.
Approximately 15 billion viable pig hepatocytes will be seeded into the
extra-fiber space through the cartridge side ports. At the start of treatment,
the disposable tubing set will be attached to the patient and the bioartificial
liver system will
be
perfused with the patient’s oxygenated plasma. At the end of treatment, the
disposables will be discarded in the normal manner that all other biohazardous
waste products (such as syringes and bandages) are handled and disposed. No
special governmental regulations have been required, or are expected, to dispose
of the used cartridges and disposable products.
We
expect
to demonstrate that during HepatAssist™ therapy, substances normally metabolized
by the liver and accumulated in the blood during liver failure will diffuse
freely across the porous membrane into the compartment containing pig liver
cells. At the same time, products of pig liver cell metabolism will diffuse
back
into the plasma compartment and then into the blood circuit. It is anticipated
that as a result of these two processes, the levels of pathological and normal
blood components present in the patient’s circulation will move toward normal
ranges, thereby facilitating recovery from liver failure. Additional therapeutic
benefits may be provided by blood
purification, or detoxification, therapy. In
this
mode of therapy, small and large protein-bound toxins, which accumulate in
the
blood during liver failure, are expected to be
removed by sorbents. Blood
detoxification is believed to protect the liver, brain and other organs against
further injury, accelerate healing of the native liver and improve its residual
functions. Decreased blood toxicity is also expected to prolong the life and
metabolic activity of pig hepatocytes in the bioartificial liver cartridge.
We
have postponed further clinical development of our HepatAssist™ program until we
are able to secure additional funding for this project from a potential
corporate partner.
Product
Advantages
We
believe that SEPET™ as a blood purification therapy will be more effective than
sorbent-based devices such as charcoal, resin and silica, and more effective
than whole plasma exchange therapy, because only the plasma fraction containing
known toxins
of
hepatic failure
is being
removed and discarded during SEPET™ therapy. In contrast, sorbent-based blood
purification is not toxin-specific, and
in the
case of charcoal
sorption
it is limited because of the protective coating of the charcoal particles.
It
also fails to remove most mediators of inflammation and protein bound toxins
from the blood which have been associated with liver failure. Subject to the
successful completion of clinical trials and FDA or other regulatory approval,
we believe that SEPET™ will be able to be used with currently available hospital
kidney dialysis systems, which may offer the following advantages:
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·
|
Ease
of use.
The systems bring user friendliness (e.g., pump integration, automation
and an intuitive user interface) to traditionally complex liver
support
procedures.
|
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·
|
Simplicity.
Kidney dialysis systems are routinely used in hospitals and outpatient
clinics and, therefore, there may be a reduced need for extensive
personnel training for use of these similar systems with SEPET™. They are
commonly available in intensive care units and related settings
where
SEPET™ may be initially used for treating acute episodes of chronic liver
failure
|
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·
|
Reduced
cost.
The cost of therapy is expected to be lower than with other liver
assist
devices that are currently under development because the machine
to which
the SEPET™ cartridge can be attached is a standard machine (such as a
kidney dialysis machine) with commercially available tubing. Therefore,
unlike other devices, no special equipment is
required.
|
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·
|
No
Intensive Care Unit needed to provide treatment.
SEPET™ may become available for treatment of patients with a lower degree
of liver failure outside of the intensive care unit setting. We
do not
believe that any changes will have to be made to SEPET™ or the dialysis
system in order for SEPET™ to become available outside of intensive care
unit settings. However further (e.g. Phase IV) clinical trials
will likely
be necessary to fully develop these additional indications for
SEPET™.
|
We
believe that HepatAssist™ is the only liver assist device under development that
is capable of providing both liver cell functions and blood purification either
simultaneously or sequentially in a versatile and customized manner depending
on
the cause and severity of liver failure. Drs. Demetriou and Rozga, the founders
of Arbios and the major stockholders of the company, have previously
demonstrated that cryopreserved pig hepatocytes can remain alive (e.g. >80%
viability) after freezing and thawing using carefully developed, patented
procedures. Moreover, the hepatocytes quickly aggregate, forming liver-like
3-dimensional cellular units, and resume basic functions (e.g., drug metabolism)
at levels comparable to those seen in intact livers. Drs. Demetriou and Rozga
have also reported that treatment of animals and patients with fulminant hepatic
failure with a bioartificial liver loaded with freshly thawed pig hepatocytes
prolonged life, alleviated intracranial hypertension and improved blood
chemistry. In addition, in experimental animals, bioartificial liver therapy
improved native liver function and triggered mechanisms regulating liver
regeneration. In addition, because porcine hepatocytes can be stored frozen
at a
clinical site, treatment with our bioartificial liver system can be commenced
within two to three hours of patient consent and product preparation, thereby
making this bioartificial liver therapy available on demand. In instances of
liver failure, this rapid availability of therapy should be a critical
competitive advantage. In contrast, we believe other liver
assist devices
under development require longer time for preparation prior to patient treatment
(up to several days in some instances, including cumbersome means of shipment
to
the clinical site).
While
these projected advantages appear supported by the clinical trial data evidence
to date, some of these product functions may need to be tested in head-to-head
trials with competitive approaches.
Clinical
Utility
Our
SEPET™ Liver Assist Device is currently undergoing human testing in an IDE
clinical feasibility trial in the US, with patients suffering acute exacerbation
of chronic liver failure with hepatic encephalopathy. This 15 to 20 patient
clinical trial was authorized by the FDA in 2005, and we have currently enrolled
15 patients in the trial. Based upon our preliminary review of data in the
first
ten patients enrolled in the trial, a favorable safety profile was established
and a majority of patients accomplished a two stage grade improvement in hepatic
encephalopathy severity, the clinical effectiveness endpoint of the trial.
We
have recently announced preliminary results with 15 patients enrolled in the
clinical trial, which further bear out these earlier published results. We
further plan to request a meeting with the FDA to review the data and to propose
a design for a randomized, controlled, pivotal clinical trial of SEPET™ intended
to be sufficient for FDA allowance of a future pre-market approval application
by the Company and to confirm and prove what we believe to be encouraging
results of the current single arm, uncontrolled feasibility clinical
trial.
Our
HepatAssist™ Cell-Based Liver Support System is an enhanced version of the
original HepatAssistTM
system.
Overall, we believe that the animal and human clinical data generated and
published to date on the original HepatAssistTM
system
indicate that the basic concept of a bioartificial liver utilizing cryopreserved
pig liver cells and blood detoxification is valid and that repeated six-hour
bioartificial liver treatments are safe and yield measurable therapeutic
benefits. Accordingly, we believe that our novel, next-generation products
will
represent improvements and/or enhancements over earlier
technologies.
The
safety and efficacy of the original HepatAssistTM
system
were evaluated in a prospective, randomized, controlled, multi-center
FDA-approved clinical trial. A total of 171 patients, 86 in the control group,
and 85 in the bioartificial liver group, were enrolled. Patients with fulminant
and subfulminant hepatic failure and primary non-function following liver
transplantation were included. Data were analyzed with and without accounting
for the following confounding factors: liver transplantation during the survival
endpoint period, time to liver transplant, cause of the disease or condition,
disease severity, and treatment site. For the entire patient population,
survival at 30 days was 71% for bioartificial liver compared to 62% for the
control group. When survival was analyzed accounting for confounding factors
such as liver transplantation and survival prior to transplantation, across
the
entire patient population, there was thus a trend towards improved survival
but
not a statistically significant difference between the two groups. However,
survival in the 147 fulminant and subfulminant hepatic failure patients (i.e.
excluding the primary non-function patients) was significantly higher in the
HepatAssist™ Cell-Based Liver Support System group compared to the control
group. Furthermore, HepatAssist™ therapy reduced the risk of pre-transplant
death by 67% in patients with drug and chemical toxicity (p<0.0140) and by
47% in patients with rapid onset of fulminant hepatic failure (n=121;
p<0.0428) To our knowledge, this was the first prospective, randomized,
controlled trial of an extracorporeal liver support system that demonstrated
safety and improved survival in patients with fulminant and subfulminant hepatic
failure.
Market
Opportunity
Based
on
the number of patients with liver diseases and lack of alternative direct
therapy other than liver transplantation, we believe that there is an urgent
need for artificial means of liver replacement and/or assistance to facilitate
recovery from liver failure without a transplant. Effective liver support
therapies could also help maintain liver failure patients’ lives until an organ
becomes available for transplantation. The SEPET™ Liver Assist Device and
HepatAssist™ Cell-Based Liver Support System are designed to treat patients with
liver failure across a wide range of causes and severity, including acute
exacerbation of chronic liver disease as well as acute liver failure in patients
without history of chronic disease.
Arbios
believes that the patient and market opportunity is substantial and underserved.
According to the American Liver Foundation, 25,000,000 persons in the United
States, nearly one in every ten persons, are or have been suffering from liver
and biliary diseases. According to the National Center for Health Statistics
data published for 2004, there were over 500,000 hospital discharges for
patients with chronic liver disease and/or cirrhosis plus additional patients
categorized as suffering from other forms of liver failure. Liver failure is
reported as the tenth leading cause of death in the U.S., and fourth leading
cause of death in persons aged 45 - 54 years) because no donor liver was found
or because they had contraindications to transplantation.
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 4 million Americans are chronically
infected with the hepatitis C virus, and an estimated 25,000 people each year
are newly 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. Hepatitis
B is less prevalent in the U.S. than hepatitis C - a situation that is
dramatically reversed in other parts of the world where chronic hepatitis B
infection is endemic or pandemic; however, 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 the 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 most urgent. 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 dependable 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 $10,000
per
day. While liver transplants have significantly increased the chances of
survival for patients with liver failure, due to a severe shortage of donor
livers, far 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 HepatAssist™
therapy could be approximately $15,000 to $20,000 in the United States. Pricing
in other world regions will likely vary. We anticipate that SEPET™ and/or
HepatAssist™ therapy may have to be repeated up to an average of three to five
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™ 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. Our direct marketing and sales operations may, in these cases,
eventually be directed towards supporting sales and distribution activities
of
any future partner. We currently expect that our products will be marketed
in at
least North America and Europe, and possibly in Asia. We are currently seeking
a
commercialization partner for HepatAssist™ and plan to do the same for SEPET™,
for some world regions, in the next two years.
Manufacturing
We
currently do not have a finalized manufacturing arrangement for the cartridges
used in the HepatAssist™ system, although our plan is to hopefully establish
such relationship(s) in the near future. The HepatAssist™ cartridge is based on
a conventional single-bundle hollow-fiber technology and a number of third
party
manufacturers 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, which are cartridges
containing porous membranes used to filter blood. Spectrum Laboratories, Inc.
is
a provider of hemodialysis products and is based in Los Angeles, California.
Additional disposable components, such as tubing kits, may also be manufactured
by third party subcontractors.
The
kidney dialysis systems 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 instruments will not be affected, only the kidney dialysis cartridge
will be replaced by a SEPETTM
cartridge, we do not anticipate that 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. Nevertheless, manufacturers of such instruments
may
in the future have incentives to form partnerships with us for marketing and
distribution of disposables, either as stand-alone products or as integrated
systems of disposables for use on their instruments.
The
platform we currently expect to use for the HepatAssist™ 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™ 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 Phase III clinical testing of
HepatAssist™, we will determine whether to build a cell procurement facility to
meet the expected requirements for commercial sales, which will likely 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.
Patents
and Proprietary Rights
Liver
Assist Device Rights.
Our
intellectual property rights relating to the SEPETTM
Liver
Assist Device consist of a U.S. patent application plus pending foreign
counterpart applications, a family of in-licensed U.S. patents plus foreign
counterparts and pending patent applications, and certain related trade
secrets.
Our
U.S.
patent application and foreign counterparts regarding our selective plasma
filtration therapy (SEPET™) technology was filed in August 2002 with the United
States Patent and Trademark Office and European Patent Office and subsequently
in other countries and is currently under review for possible issuance. The
applications contain claims for the use of various hemofiltration apparatus
to
treat liver failure and related diseases, as well as claims covering the
hemofiltration apparatus itself.
In
March
2007, we in-licensed a family of issued U.S. patents and various U.S. and
foreign patent applications which include broad claims for methods of treating
liver failure, multi-organ failure, multi-organ dysfunction syndrome, sepsis,
septic shock, systemic inflammatory response syndrome, and related inflammatory
disorders by selective blood filtration. The patents and applications relate
to
the use of blood filtration devices which remove, from the blood of patients
with the above disease conditions, a broad spectrum of inflammatory and other
disease mediators ranging from small molecules through intermediate size blood
proteins with molecular weights up to the size of beneficial immunoglobulins.
Such devices are capable of removing known “bad actor” compounds associated with
liver failure, multi-organ failure and sepsis while preserving critical
immunogloblins, clotting factors, lipids, and other beneficial large proteins
in
the circulating blood of afflicted patients. The patents and/or applications
also relate to the combined use of replacement fluids including human serum
albumin or combined uses of secondary selective plasma adsorption devices and/or
certain classes of anti-inflammatory therapeutic drugs, and to apparatus
suitable for the above uses.
Included
in this in-licensed family are five issued U.S. patents, four pending U.S.
patents, and two pending European patents. We will owe royalties on net sales
of
products which are covered by the license, including potentially the SEPET™
Liver Assist Device. We will also owe maintenance fees and certain other minimum
spending obligations under the license and may owe contingent milestone fees.
Our fixed obligations under the license will total less than $500,000 over
the
next 4 years, a portion of which includes spending on future product development
possibly leading to future sales revenues for Arbios. Our contingent obligations
under the license will total less than $500,000 over approximately the same
period (however dependent on the pace of potential future patent
issuances).
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 Medical 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 also a stockholder
of this company. See Note 7, “Junior Preferred Stock” of the financial
statements.
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
HepatAssistTM
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 U.S.
patents and patent applications that we acquired from Circe Biomedical and
that
we expect to maintain and use with our bioartificial liver system:
|
(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)
|
Cell
Innoculation Device. US Patent #5,891,713 (issued on April 6, 1999).
|
|
(5)
|
Method
of Thawing Cryopreserved Cells. US Patent #5895745 (issued on April
20,
1999).
|
|
(6)
|
High
Flow Technique for Harvesting Mammalian Cells. US Patent #5912163
(issued
on June 15, 1999).
|
|
(7)
|
Removal
of Agent From Cell Suspension. US Patent #6068775 (issued on May
30,
2000).
|
|
(8)
|
Method
for Cryopreserving Hepatocytes. US Patent #6136525 (issued on October
24,
2000).
|
Many
of
these issued U.S. patents have issued foreign counterparts including in Europe
and in Japan.
Pending
Patent Applications
Patent
No.
|
|
Country
|
|
Title
of Patent Application
|
|
|
|
|
|
515326/97
|
|
JP
|
|
Cryopreserved
Hepatocytes & High Viability and Metabolic
Activity
|
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™ system under a modified version
of the FDA-approved Phase III IND protocol that we acquired, but must raise
additional funds for this project. 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™ system, it is
likely that we will have to pay this royalty with respect of sales of those
parts of our HepatAssistTM
Cell-Based
Liver Support 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 and will expire after the ten year period or
last
patent right has terminated.
(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 HepatAssistTM
Cell-Based Liver Support 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. The royalty obligations expire after the ten year period has
elapsed.
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.
We
have
filed for trademark protection for our product names, SEPET™ and HepatAssist™,
which marks may become registered only upon commercialization of
products.
Research
and Development
We
spent
a total of $1,823,000 on research and development during the fiscal year ended
December 31, 2006, $1,555,000 on research and development during the fiscal
year
ended December 31, 2005 and $1,426,000 on research and development during the
fiscal year ended December 31, 2004. 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.”
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 predecessor companies 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 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. This trial has been reported to be initiated
with
no results yet formally reported, although the company has issued favorable
press releases regarding progress and preliminary results of the
trial.
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 IDE (in the case of a medical
device such as SEPET™) or an IND (in the case of a drug or a combination product
such as HepatAssist™) is filed with the FDA to begin human testing. Typically, a
two-phase (for devices) or a three-phase (for drugs) clinical testing program
is
then undertaken. In phase 1 or feasibility phase, small clinical trials are
conducted to determine the safety of the product. In phase 2 (typically not
required for devices), clinical trials are conducted to assess safety and gain
preliminary evidence of the efficacy of the product. In phase 3 or pivotal
phase, clinical trials are conducted to provide sufficient data for the
statistically valid proof of safety and efficacy. Variations on these paths
can
also occur, and repetition of particular phases may be required.
The
time
and expense required to perform this clinical testing can vary and be very
substantial. No action can be taken to market any new device, drug or
combination 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
usually 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 (PMA) Application
requires more extensive pre-filing testing than the 510(k) Notification
procedure and involves a significantly longer FDA review process, although
the
process is typically less than for a new drug or combination product (in part
because of the two-phase vs. three-phase clinical trial process described
above).
SEPET™
may be regulated in the U.S. as a Class III medical device requiring a PMA
review process, similar to medical devices for conducting plasma exchange;
however, the FDA may classify it as a Class II device suitable for Section
510(k) approval (described above). We are currently in the process of designing
a clinical trial to demonstrate the safety and efficacy of SEPET™ in treating
patients with chronic liver failure, which we believe will be required for
FDA
approval of SEPET™ in case of either a PMA or a 510(k) review process.
Accordingly, it is likely to be subject to a two-step approval process starting
with a submission of an IDE and subsequent amendements to conduct human studies,
followed by the submission of an application for Product Marketing Approval
(PMA). The steps required before a product such as SEPET™ is likely to 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
IDE 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
IDE, 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 two sequential phases.
Each
trial must be reviewed and approved by the FDA before it can begin. The
feasibility phase involves the initial introduction of the experimental product
into human subjects to evaluate its safety and, if possible, to gain early
indications of efficacy. The pivotal phase 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.
HepatAssist™
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™ 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 HepatAssist™, 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™ Cell-Based Liver Support System. 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. In Europe, we plan on seeking approval to
market SEPET™ under the CE Mark and related device regulations which often
require less clinical testing than comparable approval processes in the U.S.
Label claims for medical devices marketed under the CE Mark are restricted
to
what has been proven in clinical trials, so initial efficacy claims are
typically limited vs. those in the U.S. This can have an adverse impact on
marketability of 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 system is expected to utilize) due to safety
concerns relating to porcine endogenous viruses. 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, 2007, we employed six full-time employees and one part-time
employee. We have also engaged seven independent contractors under
consulting agreements who provide services to us on a substantial part-time
basis. Of the foregoing employees and contractors, four are primarily
engaged in administration or management, and the remaining ten persons are
involved in scientific research, product development, clinical development,
manufacturing 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 our
corporate headquarters and some of our executive management are located. The
office lease, located at 1050 Winter Street, Suite 1000, Waltham, Massachusetts
02154, required us to pay a total of $18,040 for a period of seven months
through June 30, 2006. The lease was extended in October 2006 at a rate of
$5,102 per month, and is on a month to month basis.
We
have
also leased an animal breeding facility in Woodstock, Connecticut, originally
intended to be used to harvest porcine livers for use in our HepatAssist™
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. We do not intend to renew the lease
for this facility when the term ends on March 31, 2007 and will likely not
enter
into any lease for replacement of this facility until additional funds are
raised for the HepatAssistTM
program.
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, 2006.
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.OB”. 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.OB” 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, 2005
|
|
$
|
1.66
|
|
$
|
1.60
|
|
June
30, 2005
|
|
$
|
2.20
|
|
$
|
2.10
|
|
September
30, 2005
|
|
$
|
1.90
|
|
$
|
1.80
|
|
December
31, 2005
|
|
$
|
1.80
|
|
$
|
1.74
|
|
|
|
|
|
|
|
|
|
March
31, 2006
|
|
$
|
1.85
|
|
$
|
0.65
|
|
June
30, 2006
|
|
$
|
1.25
|
|
$
|
0.90
|
|
September
30, 2006
|
|
$
|
0.92
|
|
$
|
0.42
|
|
December
31, 2006
|
|
$
|
0.79
|
|
$
|
0.46
|
|
Holders
As
of
March 6, 2007, there were 107 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 2006.
Restatement
of Financial Statements
In
January 2005 and March 2006 we closed financing transactions that included
the
issuance of warrants and the grant of registration rights. The Company has
been
accounting for the warrants in accordance with pronouncement EITF 00-19.
Beginning in the quarter ended March 31, 2006 for the warrants issued in
the
January 2005 financing and in the quarter ended September 30, 2006 for the
warrants issued in the March 2006 financing, in accordance with EITF 00-19,
the
Company recorded the fair value of these warrants as an accrued warrant
liability and reduced additional paid-in capital by the amount of the recorded
liability. In the quarters ended June 30, and September 30, 2006 changes
to the
accrued liability were reported in the Company’s statement of operations.
However, the Company has determined that it should have included in the
calculation of the fair value of the warrant the value of the anti-dilution
provisions contained in the warrant agreements. The calculations of the fair
value of the warrants did not include the value of the anti-dilutions provision
for the filed financial statements included in our Form 10-QSB for the quarters
ended March 31, 2006, June 30, 2006, and September 30, 2006. Therefore, we
will
restate our financial statements for these periods as follows: 1) for the
three
month period ended March 31, 2006, additional paid in capital is decreased
by $271,000 with a corresponding increase in the accrued warrant liability
2)
for the three and six month periods ended June 30, 2006,
other expense is increased by $63,000 with a corresponding increase in
the accrued warrant liability, and 3) for the three month period ended September
30, 2006, additional paid in capital is decreased by $114,000 and
other expense is increased by $49,000 with a corresponding increase in
the accrued warrant liability of $163,000. For the nine month period ended
September 30, 2006 additional paid-in capital is decreased by $385,000,
other expense is increased by $112,000, and the accrued warrant
liability is increased by $497,000.
|
|
Three
months
|
|
Three
months
|
|
Six
months
|
|
Three
months
|
|
Nine
months
|
|
|
|
ended
|
|
ended
|
|
ended
|
|
ended
|
|
ended
|
|
|
|
March
31, 2006
|
|
June
30, 2006
|
|
June
30, 2006
|
|
Sept.
30, 2006
|
|
Sept.
30, 2006
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
originally reported
|
|
$
|
(1,069,468
|
)
|
$
|
(837,202
|
)
|
$
|
(1,906,670
|
)
|
$
|
(1,081,410
|
)
|
$
|
(2,988,080
|
)
|
Adjustment
|
|
|
|
|
|
(63,000
|
)
|
|
(63,000
|
)
|
|
(49,000
|
)
|
|
(112,000
|
)
|
As
adjusted
|
|
$
|
(1,069,468
|
)
|
$
|
(900,202
|
)
|
$
|
(1,969,670
|
)
|
$
|
(1,130,410
|
)
|
$
|
(3,100,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
warrant liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
originally reported
|
|
$
|
680,841
|
|
|
|
|
$
|
407,717
|
|
|
|
|
$
|
524,172
|
|
Adjustment
|
|
|
271,000
|
|
|
|
|
|
334,000
|
|
|
|
|
|
497,000
|
|
As
adjusted
|
|
$
|
951,841
|
|
|
|
|
$
|
741,717
|
|
|
|
|
$
|
1,021,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
originally reported
|
|
$
|
14,190,980
|
|
|
|
|
$
|
14,296,357
|
|
|
|
|
$
|
14,307,052
|
|
Adjustment
|
|
|
(271,000
|
)
|
|
|
|
|
(271,000
|
)
|
|
|
|
|
(385,000
|
)
|
As
adjusted
|
|
$
|
13,919,980
|
|
|
|
|
$
|
14,025,357
|
|
|
|
|
$
|
13,922,052
|
|
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 additional clinical trials for SEPET™ both
domestically and internationally, and the preparation and submission of
applications to 1) a Notified Body in Europe to secure CE Mark approval to
market our SEPET™ Liver Assist Device in CE countries and 2) the FDA to commence
a pivotal trial of SEPET™ targeted for subsequent FDA approval of SEPET™ in the
U.S. 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. Based on our current estimates, we currently
have sufficient cash to conduct our plan of operations for the next six months
from the date of this report; however, we are seeking additional investment
from
various investors, but currently have no firm agreements or commitments in
this
regard to fund future development of our products.
In
April
2004 we purchased certain assets of Circe Biomedical including a portfolio
of
patents, rights to a bioartificial liver (HepatAssistTM),
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, 2006. 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
Commencing
January 1, 2006 the Company adopted Statement of Financial Accounting Standard
(“SFAS”) No. 123R, “Share Based Payment (“SFAS 123R”), which requires all
share-based payments, including grants of stock options, to be recognized in
the
income statement as an operating expense, based on fair values. Prior to
adopting SFAS 123R, the Company accounted for stock-based employee compensation
under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued
to Employees,” as allowed by SFAS No. 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”). The Company has applied the modified prospective
method in adopting SFAS 123R. Accordingly, periods prior to adoption have not
been restated.
New
Accounting Pronouncements
In
March
2006, the Financial Accounting Standards Board (“FASB”) issued Statement No.
156, Accounting
for Servicing of Financial Assets, an amendment of FASB Statement No.
140
(“SFAS
156”), which clarifies when servicing rights should be separately accounted for,
requires companies to account for separately recognized servicing rights
initially at fair value, and gives companies the option of subsequently
accounting for those servicing rights at either fair value or under the
amortization method. SFAS 156 is effective for fiscal years beginning after
September 15, 2006. The Company does not expect SFAS 156 to affect the Company's
financial condition or results of operations.
In
July
2006, the FASB issued FASB Interpretation Number 48, Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No.
109,
(“FIN48”). FIN 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
in a tax return. The Company must determine whether it is “more-likely-than-not”
that a tax position will be sustained upon examination, including resolution
of
any related appeals or litigation processes, based on the technical merits
of
the position. Once it is determined that a position meets the
more-likely-than-not recognition threshold, the position is measured to
determine the amount of benefit to recognize in the financial statements. FIN
48
applies to all tax positions related to income taxes subject to FASB Statement
No. 109, Accounting
for Income Taxes. The
interpretation clearly scopes out income tax positions related to FASB Statement
No. 5, Accounting
for Contingencies.
We do
not anticipate that the adoption of this statement will have a material effect
on our financial position or results of operations.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
("SAB
108"), to address diversity in practice in quantifying financial statement
misstatements. SAB 108 requires that we quantify misstatements based on their
impact on each of our financial statements and related disclosures. SAB 108
is
effective as of the end of our 2006 fiscal year, allowing a one-time
transitional cumulative effect adjustment to retained earnings as of January
1,
2006 for errors that were not previously deemed material, but are material
under
the guidance in SAB 108. We adopted provisions
of SAB 108
in the
quarter ended December 31, 2006 without any impact on our financial
statements.
In
September 2006, the FASB issued Statement No. 157, Fair
Value Measurements
("SFAS
157"). SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 with earlier application
encouraged. We are evaluating the impact of adopting SFAS 157 on our financial
statements.
In
September 2006, the FASB issued Statement No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans -- An
Amendment of FASB Statements No. 87, 88, 106, and 132R
(SFAS
158). SFAS 158 does not apply as the Company does not have a defined benefit
pension or another post retirement plan.
In
December 2006, the FASB issued FASB Staff Position ("FSP") EITF 00-19-2,
Accounting
for Registration Payment Arrangements.
This
FSP addresses how to account for registration payment arrangements and clarifies
that a financial instrument subject to a registration payment arrangement should
be accounted for in accordance with other generally accepted accounting
principles without regard to the contingent obligation to transfer consideration
pursuant to the registration payment arrangement. This accounting pronouncement
further clarifies that a liability for liquidated damages resulting from
registration statement obligations should be recorded in accordance with SFAS
No. 5, Accounting
for Contingencies,
when
the payment of liquidated damages becomes probable and can be reasonably
estimated. This FSP shall be effective immediately for registration payment
arrangements and the financial instruments subject to those arrangements that
are entered into or modified subsequent to the date of issuance of this FSP.
For
registration payment arrangements and financial instruments subject to those
arrangements that were entered into prior to the issuance of this FSP, this
guidance shall be effective for financial statements issued for fiscal years
beginning after December 15, 2006, and interim periods within those fiscal
years. The Company is currently assessing the impact that this FSP may have
in
its financial statements.
Results
of Operations
Comparison
of Fiscal Year ended December 31, 2006 to Fiscal Year ended
December 31, 2005.
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 from periods
prior to 2005 represent revenues recognized from government research grants
that
we have received.
General
and administrative expenses of $3,315,174 and $2,394,546 were incurred for
the
years ended December 31, 2006 and 2005, respectively. For the year ended
December 31, 2006, the expenses include $662,000 in fees incurred to outside
consultants, professionals and board member fees, $549,000 in payroll and
payroll related costs, $1,076,000 in non-cash option and warrant charges,
$239,000 in investor relation costs and other administrative expenses. 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. Professional fees decreased in 2006 due to a one time
executive search recruitment fee incurred in 2005. The increase in non-cash
option and warrant charges reflects the employee option grant charges recorded
in the financial statements due to the adoption of SFAS 123(R) effective January
1, 2006 and the warrant charges incurred due to the warrant exercise term
modifications granted to certain warrants expiring in 2006. The 2006 increase
in
payroll and payroll related expenses reflects, in part, the employment for
the
full year in 2006 as compared to nine months in 2005 of a Chief Executive
Officer.
Research
and development expenses of $1,822,614 and $1,554,507 were incurred for the
years ended December 31, 2006 and 2005, respectively. Research and development
expenses for 2006 consist primarily of $570,000 in payroll and payroll related
expenses, $486,000 in SEPETTM
development, manufacturing and clinical costs, $380,000 in consultant costs
related to manufacturing, regulatory and product management, and $144,000 in
HepatAssist™ facility costs. 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 HepatAssist™ facility costs.
Research and development costs increased by $268,107 from 2005 to 2006 and
reflect increased expenditures for both the SEPETTM
and
HepatAssist™ programs. Payroll cost increases reflect 2006 full year salaries
for employees that were hired in 2005, increased staff which replaced employee
costs from Cedars-Sinai and the addition of new position for clinical research
management. The increase in consulting costs reflects outsourced service costs
incurred related to the SEPETTM
Phase I
trial.
The
change in fair value of warrant liability reflects the net decline in the
warrant liability valuation resulting in a non-cash benefit of
$521,187.
Interest
income of $154,697 and $125,286 was earned for the years ended December 31,
2006
and 2005 respectively. The increase in interest income of $29,411 results from
the increase in short term interest offset, in part, by declining cash balances
maintained in 2006.
Our
net
loss increased to $4,461,904 in 2006 from $3,823,903 in 2005. The increase
in
net loss is attributed to an increase in operating expenses incurred in the
fiscal 2006 periods as compared to the same periods in 2005, without an increase
in revenues.
Liquidity
and Capital Resources
As
of
December 31, 2006, we had cash of $2,054,280. 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 estimates, we currently have sufficient cash to conduct our plan
of
operations for the next six months from the date of this report; however, we
are
seeking additional investment from various investors, but currently have no
firm
agreements or commitments in this regard to fund future development of our
products.
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.
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, 2006 is as
follows:
Contractual
Obligations
|
|
Total
|
|
2007
|
|
2008
and
thereafter
|
|
|
|
|
|
|
|
|
|
Short-Term
Office Leases
|
|
$
|
107,000
|
|
$
|
107,000
|
|
$
|
-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. We have postponed further clinical development of our HepatAssist™
program until we are able to secure additional funding for this project from
a
potential corporate partner.
Despite
our prior private equity financings 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 not be sufficient to fund our operations and capital requirements
for
at least the 12-month period following the date of this Annual Report. We are
seeking additional cash resources from interested investors; however, we can
make no assurances that these funds will be raised in a timely manner.
Additionally, 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™ 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.
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
HepatAssistTM
Cell-Based Liver Support 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 HepatAssistTM
products
and these requirements may be more costly or time-consuming than we currently
anticipate.
SEPETTM
and
HepatAssistTM
are both
novel in terms of their 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
HepatAssistTM
Cell-Based Liver Support 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™ 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™. 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™ 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™ and SEPETTM
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™ 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™ 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™, we will not be able to conduct any
clinical trials until we raise substantial amounts of additional financing.
Additionally, we will need to raise additional funds to fund the pivotal
clinical trial for our SEPETTM
product
domestically and abroad, since we do not have sufficient funds to cover the
costs of these trials.
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 the potential 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 demonstrated 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
HepatAssistTM
Cell-Based Liver Support 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
HepatAssistTM
Cell-Based Liver Support 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.
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
HepatAssistTM.
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.
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™ 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™ system. While we believe there are several potential contract
manufactures who can produce these cartridges, and we have taken substantial
steps towards qualifying such a manufacturer, 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
HepatAssistTM,
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™ 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. In the event that RanD and Medtronic
are
either unable or unwilling to manufacture the number of PERFORMERS needed to
ensure that HepatAssistTM
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™ functional and operational
characteristics, and there may be further platforms already developed which
can
meet those 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 five
issued U.S. patents on our liver support products, six issued foreign patents,
have two patent applications pending, and are the licensee of sixteen additional
issued U.S. liver support patents and the licensee of six additional liver
support patent applications pending. 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 while we have sought to
independently verify aspects of the validity or other aspects of some of the
patents or patent applications covering our products with our own patent counsel
and with patent counsel for investors in our Company, there can be no assurance
that such verifications have been accurate or exhaustive.
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 certain key persons, and the
loss
of one or more of these key persons would materially and adversely affect our
business and prospects.
We
are
dependent upon our business and scientific personnel. We also depend upon the
medical and scientific advisory services that we receive from the members of
our
Board of Directors and Scientific Advisory Board, many of whom have extensive
backgrounds in the biomedical industry We do not carry key man life insurance
on
any of these individuals. On November 9, 2006, our Chief Scientific Officer,
Jacek Rozga, M.D., Ph.D., announced his resignation from the Company as a
full-time employee. The Company has agreed to retain Dr. Rozga as a consultant
and will draw upon Dr. Rozga’s expertise from time-to-time as needed.
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
un-reimbursed 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 2002 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.
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 the HepatAssistTM
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
HepatAssistTM
or any
other 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.
Our
ability to continue as a going concern is dependent on future
financing.
Our
independent registered public accounting firm, has included an explanatory
paragraph in its report on our financial statements for the fiscal year ended
December 31, 2006, which expresses substantial doubt about our ability to
continue as a going concern. The inclusion of a going concern explanatory
paragraph in our accountant’s report on our financial statements could have a
detrimental effect on our stock price and our ability to raise additional
capital.
Our
financial statements have been prepared on the basis of a going concern, which
contemplates the realization of assets and the satisfaction of liabilities
in
the normal course of business. We have not made any adjustments to the financial
statements as a result of the outcome of the uncertainty described above.
Accordingly, the value of the Company in liquidation may be different from
the
amounts set forth in our financial statements.
Our
continued success will depend on our ability to continue to raise capital in
order to fund the development and commercialization of our products. Failure
to
raise additional capital may result in substantial adverse circumstances,
including our inability to continue the development of our products and our
liquidation.
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. The
anti-dilution provision embedded in the warrants may also result in additional
non-cash charges to our earnings, the extent of which is dependent on the size
of future offerings and the market price of our common stock at the time of
offering.
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, 2007, 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, February 2005, and June 2006 we registered
a
total of 8,015,480 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, 8,015,480 additional shares could be
released onto the trading market at any time. Because of the limited trading
volume, the sudden release of 8,015,480 additional freely trading shares onto
the market, or the perception that such shares will come onto the market, could
have an adverse affect on the trading price of the stock. In addition, there
are
currently 4,660,000 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
8,015,480 registered warrant shares, or the sale of any of the 4,660,000 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.
INDEX
TO FINANCIAL STATEMENTS
Independent
Registered Public Accounting Firm Report
|
F-1
|
Balance
Sheet - As of December 31, 2006 and 2005
|
F-2
|
Statement
of Operations - For the Years Ended December 31, 2006,
2005
|
|
and
Period From August 23, 2000 (Inception) to December 31,
2006
|
F-3
|
Statement
of Cash Flows - For the Years Ended December 31, 2006,
2005
|
|
and
Period From August 23, 2000 (Inception) to December 31,
2006
|
F-4
|
Statements
of Change in Stockholders’ Equity - For the Years Ended
|
|
|
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, 2006 and 2005 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, 2006. 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 audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 financial statements, assessing
the accounting principles used and significant estimates made by management,
as
well as evaluating the overall financial statement presentation. We believe
that
our audits provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Arbios Systems, Inc. as of December
31, 2006 and 2005 and the results of its operations and its cash flows for
the
years ended December 31, 2006 and 2005, and from August 23, 2000 (inception)
to
December 31, 2006, in conformity with accounting principles generally accepted
in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 of the financial
statements, the Company has suffered recurring losses from operations and has
an
accumulated deficit, and has been dependent on outside equity to finance
operations, all of which raise substantial doubt about its ability to continue
as a going concern. Management’s plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
As
discussed in Note 1 to the consolidated financial statements, in 2006 the
Company adopted Statement of Financial Accounting Standards No. 123 (Revised
2004), Share-Based Payments.
/s/Stonefield
Josephson, Inc.
Certified
Public Accountants
Los
Angeles, California
April
13,
2007
ARBIOS
SYSTEMS, INC.
(A
development stage company)
BALANCE
SHEETS
December
31, 2006 and 2005
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,054,280
|
|
$
|
2,379,738
|
|
Short
term investments
|
|
|
-
|
|
|
1,996,000
|
|
Prepaid
expenses
|
|
|
147,163
|
|
|
195,841
|
|
Total
current assets
|
|
|
2,201,443
|
|
|
4,571,579
|
|
|
|
|
|
|
|
|
|
Net
property and equipment
|
|
|
73,110
|
|
|
101,629
|
|
Patent
rights, net of accumulated amortization of $113,894 and $93,418,
respectively
|
|
|
152,773
|
|
|
173,249
|
|
Other
assets
|
|
|
62,827
|
|
|
55,773
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,490,153
|
|
$
|
4,902,230
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
310,162
|
|
$
|
160,649
|
|
Accrued
expenses
|
|
|
132,073
|
|
|
152,362
|
|
Total
current liabilities
|
|
|
442,235
|
|
|
313,011
|
|
|
|
|
|
|
|
|
|
Accrued
warrant liability
|
|
|
763,654
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value; 5,000,000 shares authorized:
|
|
|
|
|
|
|
|
none
issued and outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, $.001 par value; 60,000,000 shares authorized; 17,460,181
and
16,232,909
|
|
|
|
|
|
|
|
shares
issued and outstanding at December 31, 2006 and 2005
respectively
|
|
|
17,460
|
|
|
16,233
|
|
Additional
paid-in capital
|
|
|
14,507,939
|
|
|
13,352,217
|
|
Deficit
accumulated during the development stage
|
|
|
(13,241,135
|
)
|
|
(8,779,231
|
)
|
Total
stockholders' equity
|
|
|
1,284,264
|
|
|
4,589,219
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
2,490,153
|
|
$
|
4,902,230
|
|
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
to
|
|
|
|
2006
|
|
2005
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
$
|
-
|
|
$
|
320,966
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
3,315,174
|
|
|
2,394,546
|
|
|
8,322,089
|
|
Research
and development
|
|
|
1,822,614
|
|
|
1,554,509
|
|
|
5,813,176
|
|
Total
operating expenses
|
|
|
5,137,788
|
|
|
3,949,055
|
|
|
14,135,265
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before other income (expense)
|
|
|
(5,137,788
|
)
|
|
(3,949,055
|
)
|
|
(13,814,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of warrant liability
|
|
|
521,187
|
|
|
-
|
|
|
521,187
|
|
Interest
income
|
|
|
154,697
|
|
|
125,286
|
|
|
296,115
|
|
Interest
expense
|
|
|
-
|
|
|
(134
|
)
|
|
(244,138
|
)
|
Total
other income (expense)
|
|
|
675,884
|
|
|
125,152
|
|
|
573,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(4,461,904
|
)
|
$
|
(3,823,903
|
)
|
$
|
(13,241,135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.26
|
)
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares:
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
17,244,988
|
|
|
16,137,676
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
ARBIOS
SYSTEMS, INC.
(A
development stage company)
STATEMENTS
OF CASH FLOWS
|
|
For
the year ended December 31,
|
|
Inception
to
|
|
|
|
2006
|
|
2005
|
|
December
31, 2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(4,461,904
|
) |
$ |
(3,823,903
|
) |
$ |
(13,241,135 |
) |
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
|
|
|
Amortization
of debt discount
|
|
|
-
|
|
|
-
|
|
|
244,795
|
|
Depreciation
and amortization
|
|
|
52,442
|
|
|
59,249
|
|
|
252,219
|
|
Change
in fair value of warrant liability
|
|
|
(521,187
|
)
|
|
-
|
|
|
(521,187
|
)
|
Patent
rights impairment
|
|
|
-
|
|
|
91,694
|
|
|
91,694
|
|
Interest
earned on discounted short term investments
|
|
|
8,652
|
|
|
(8,652
|
)
|
|
-
|
|
Issuance
of common stock, options & warrants for compensation
|
|
|
1,186,803
|
|
|
557,079
|
|
|
2,799,934
|
|
Settlement
of accrued expense
|
|
|
-
|
|
|
-
|
|
|
54,401
|
|
Deferred
compensation costs
|
|
|
-
|
|
|
-
|
|
|
319,553
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
|
48,678
|
|
|
(98,188
|
)
|
|
(147,165
|
)
|
Other
assets
|
|
|
(7,054
|
)
|
|
(22,609
|
)
|
|
(62,827
|
)
|
Accounts
payable and accrued expenses
|
|
|
129,224
|
|
|
34,552
|
|
|
348,733
|
|
Other
liabilities
|
|
|
-
|
|
|
64,695
|
|
|
64,695
|
|
Contract
obligation
|
|
|
-
|
|
|
(250,000
|
)
|
|
-
|
|
Net
cash provided by operating activities
|
|
|
(3,564,346
|
)
|
|
(3,396,083
|
)
|
|
(9,796,290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Additions
of property and equipment
|
|
|
(3,447
|
)
|
|
(23,489
|
)
|
|
(144,796
|
)
|
Purchase
of short term investments
|
|
|
(12,889,073
|
)
|
|
(8,977,714
|
)
|
|
(21,866,787
|
)
|
Maturities
of short term investments
|
|
|
14,876,421
|
|
|
6,990,366
|
|
|
21,866,787
|
|
Net
cash provided by and (used in) investing activities
|
|
|
1,983,901
|
|
|
(2,010,837
|
)
|
|
(144,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of convertible debt
|
|
|
-
|
|
|
-
|
|
|
400,000
|
|
Proceeds
from common stock option/warrant exercise
|
|
|
-
|
|
|
62,500
|
|
|
65,200
|
|
Net
proceeds from issuance of common stock and warrants
|
|
|
1,254,987
|
|
|
6,227,594
|
|
|
11,313,249
|
|
Net
proceeds from issuance of preferred stock
|
|
|
-
|
|
|
-
|
|
|
238,732
|
|
Payments
on capital lease obligation, net
|
|
|
-
|
|
|
(5,341
|
)
|
|
(21,815
|
)
|
Net
cash provided by financing activities
|
|
|
1,254,987
|
|
|
6,284,753
|
|
|
11,995,366
|
|
Net
(decrease) increase in cash
|
|
|
(325,458
|
)
|
|
877,833
|
|
|
2,054,280
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
2,379,738
|
|
|
1,501,905
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$
|
2,054,280
|
|
$
|
2,379,738
|
|
$
|
2,054,280
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of non-cash financing activity
|
|
|
|
|
|
|
|
|
|
|
Issuance
of securities for obligation related to finder's fees
|
|
|
-
|
|
|
-
|
|
$
|
47,500
|
|
Accrued
warrant liability
|
|
$
|
763,654
|
|
|
-
|
|
$
|
763,654
|
|
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,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
During
the
|
|
|
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Paid-In
|
|
Deferred
|
|
Development
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Costs
|
|
Stage
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
-
|
|
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, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
During
the
|
|
|
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Paid-In
|
|
Deferred
|
|
Development
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Costs
|
|
Stage
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|