As
filed with the Securities and Exchange Commission on June 1,
2007
Registration
No. 333-__________
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
SB-2
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF 1933
(Amendment
No. ___)
Arbios
Systems, Inc.
(Name
of
small business issuer in its charter)
Delaware
|
3841
|
91-1955323
|
(State
or jurisdiction of
incorporation
or organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.R.S.
Employer
Identification
No.)
|
1050
Winter Street, Suite 1000
Waltham,
MA 02451
(781)
839-7293
(Address
and telephone number of principal executive offices and principal place of
business)
Walter
C. Ogier
President
and Chief Executive Officer
1050
Winter Street, Suite 1000
Waltham,
MA 02451
(781)
839-7293
(Name,
address and telephone number of agent for service)
Copy
to:
William
T. Whelan, Esq.
Daniel
T. Kajunski, Esq.
Mintz,
Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One
Financial Center
Boston,
Massachusetts 02111
(617)
542-6000
Approximate
date of proposed sale to the public: From time to time after the date this
registration statement becomes effective.
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. o
CALCULATION
OF REGISTRATION FEE
|
|
|
|
Title
of each class of securities to be registered
|
|
Amount
to be
registered
|
|
Proposed
maximum offering price per unit(1)
|
|
Proposed
maximum aggregate offering price(1)
|
|
Amount
of registration fee(1)
|
|
Common
stock, par value $0.001
|
|
|
746,602
(2
|
)
|
$
|
0.84
|
|
$
|
627,145.68
|
|
$
|
19.25
|
|
(1)
|
The
price is estimated in accordance with Rule 457(c) under the Securities
Act
of 1933, as amended, solely for the purpose of calculating the
registration fee and represents the average of the bid and asked
prices of
the common stock on May 29, 2007, as reported on the OTC Bulletin
Board.
|
|
|
(2)
|
The
shares are currently unissued shares of common stock to be offered
for
resale by selling stockholders following issuance upon exercise of
outstanding warrants. In addition to the shares set forth in the
table,
the amount to be registered includes an indeterminate number of shares
issuable upon exercise of the warrants, as such number may be adjusted
as
a result of stock splits, stock dividends and similar transactions
in
accordance with Rule 416. Does not include (i) 2,134,942 shares previously
registered on Registration Statement No. 333-133577, for which a
registration fee was previously paid, and (ii) 15,874,131 shares
previously registered on Registration Statement Nos. 333-116439 and
333-122655, for which a registration fee was previously paid. See
Explanatory Note.
|
The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
EXPLANATORY
NOTE
Arbios
Systems, Inc. has previously filed Registration Statement Nos. 333-116439,
333-122655 and 333-133577 to register shares of its common stock, as well as
shares of common stock issuable upon the exercise of outstanding warrants,
held
by certain selling stockholders. Pursuant to Rule 429 of the Securities Act,
as
amended, this registration statement shall act, upon effectiveness, as a
post-effective amendment to those prior registration statements (Registration
Statement Nos. 333-116439, 333-122655 and 333-133577).
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these securities
in
any state where the offer or sale is not permitted.
SUBJECT
TO COMPLETION, DATED JUNE 1, 2007
PROSPECTUS
ARBIOS
SYSTEMS, INC.
18,715,675
Shares of Common Stock
This
prospectus relates to the sale or other disposition of up to 9,993,593 shares
of
our currently outstanding shares of common stock that are owned by some of
our
stockholders, and 8,722,082 shares of our common stock issuable upon the
exercise of currently outstanding common stock purchase warrants held by some
of
our stockholders. For a list of the selling stockholders, please refer to the
“Selling Stockholders” section of this prospectus. We are not selling any shares
of common stock in this offering and therefore will not receive any proceeds
from this offering. We will, however, receive the exercise price of the warrants
if and when those warrants are exercised by the selling stockholders. None
of
the warrants have been exercised as of the date of this prospectus. We will
pay
the expenses of registering these shares.
Our
common stock is traded in the over-the-counter market and is quoted on the
OTC
Bulletin Board under the symbol ABOS. On May 31, 2007 the closing
price of our common stock was $0.88 per share.
The
shares included in this prospectus may be disposed of on any stock exchange,
market or trading facility on which the shares are traded or in private
transactions. These dispositions may be at fixed prices, at prevailing market
prices at the time of sale, at prices related to the prevailing market price,
at
varying prices determined at the time of sale, or at negotiated prices. We
will
not control or determine the price at which a selling stockholder decides to
sell or otherwise dispose of its shares. Brokers or dealers effecting
transactions in these shares should confirm that the shares are registered
under
applicable state law or that an exemption from registration is available.
You
should understand the risks associated with investing in our common stock.
Before making an investment, please read the “Risk Factors” section of this
prospectus, which begins on page 3.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of the prospectus. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus is , 2007.
TABLE
OF
CONTENTS
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Page
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Prospectus
Summary
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1
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Risk
Factors
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3
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Forward-Looking
Statements
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13
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Use
of Proceeds
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14
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Market
Price of Common Stock and Other Shareholder Matters
|
14
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Management’s
Discussion and Analysis or Plan of Operation
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16
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Business
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23
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Directors,
Executive Officers, Promoters and Control Persons
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42
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Executive
and Director Compensation
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46
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Security
Ownership of Certain Beneficial Owners and Management
|
51
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Selling
Stockholders
|
54
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Plan
of Distribution
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64
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Certain
Relationships and Related Transactions
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66
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Description
of Securities
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66
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Interests
of Named Experts and Counsel
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70
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Disclosure
of Commission Position on Indemnification for Securities Act
Liabilities
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70
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Legal
Matters
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71
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Where
You Can Find More Information
|
71
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Index
to Financial Statements
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F-1
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PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus; it does
not contain all of the information you should consider before investing in
our
common stock. Read the entire prospectus before making an investment
decision.
Throughout
this prospectus, the terms “we,” “us,” “our,” and “our company” refer to Arbios
Systems, Inc., a Delaware corporation.
A
glossary of certain terms used in this prospectus is contained on page 40 under
“Glossary of Terms.”
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 FDA 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.
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.
The
Offering
Common stock covered
hereby |
|
18,715,675
shares, consisting of 9,993,593 outstanding shares owned by selling
stockholders and 8,722,082 shares issuable to selling stockholders
upon
exercise of outstanding warrants.
|
|
|
|
Common stock currently outstanding |
|
25,144,086 shares (1) |
|
|
|
Common
stock to be outstanding assuming the
sale of all shares covered hereby and assuming
no exercise of the warrants for the
shares covered by this prospectus
|
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25,144,086 shares
(1)
|
|
|
|
Common
stock to be outstanding assuming the
sale of all shares covered hereby and assuming
the exercise of all warrants for the
shares covered by this prospectus
|
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33,866,168 shares (1) |
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OTC
Bulletin Board Trading Symbol
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ABOS |
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Risk Factors |
|
An investment in our common stock involves
significant risks. See “Risk Factors” beginning on page
3. |
(1)
In
addition to these outstanding shares of common stock, as of April 30, 2007,
there were outstanding (i) options and restricted stock to purchase 2,881,677
shares of our common stock (with exercise prices ranging from $0.15 per share
to
$3.40 per share), and (ii) warrants (other than the warrants owned by the
selling stockholders covered by this prospectus) to purchase 8,430,074 shares
of
our common stock (with exercise prices ranging from $0.65 per share to $3.50
per
share).
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below and the other information contained
in this prospectus and in the documents incorporated by reference before
deciding to invest in our company. If any of the following risks actually occur,
our business, financial condition or operating results and the trading price
or
value of our securities could be materially adversely affected.
Risks
Related to Our Business
We
are an early-stage company subject to all of the risks and uncertainties of
a
new business, including the risk that we may never market any products or
generate revenues.
We
are an
early-stage company that has not generated any operating revenues to date (our
only revenues were from two government research grants). Accordingly, while
we
have been in existence for over five years, 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
revenues from the sale of any of our products for at least one to two years.
Before
we can market any of our products, we must obtain governmental approval for
each
of our products, the application and receipt of which is time-consuming, costly
and uncertain.
The
development, production and marketing of our products are subject to extensive
regulation by government authorities in the United States and other countries.
In the United States, our SEPET™ Liver Assist Device and our
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 cell-based liver support 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 the SEPET™ liver assist device or our
HepatAssistTM
cell-based liver support system. 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 the SEPET™ liver assist device and three to four years
for the HepatAssist™ cell-based liver support system. 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 our
HepatAssist™ cell-based liver support system, we will need to amend our active
Phase III IND to resume clinical testing, which application 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.
Because of the early stage of development of each of our products, we do not
know if we will be able to generate clinical data that will support the filing
of the FDA applications for these products or the FDA’s approval of any product
marketing approval application or IND that we do file.
The
cost of conducting pivotal clinical studies for the SEPETTM
liver
assist device and HepatAssist™ cell-based liver support system exceeds our
current financial resources. Accordingly, we will not be able to conduct such
studies until we obtain additional funding.
If
the
feasibility clinical trial for the SEPETTM
liver
assist device is successful, we will have to obtain the FDA’s approval to
conduct a pivotal trial. We have not yet established with the FDA the nature
and
number of additional clinical trials that the FDA may require in connection
with
its review and approval of the SEPET™ liver assist device. Based on our internal
projections of our operating costs and the costs normally associated with
pivotal trials, we do not believe that we currently have sufficient funds to
conduct any such pivotal trial(s) nor have we identified any sources for
obtaining the required funds.
We
have
considered requesting FDA approval to commence a Phase III clinical trial of
the
HepatAssist™ cell-based liver support 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. 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 clinical
trial in the manner that we currently contemplate is uncertain and could vary
significantly, if that Phase III clinical trial is authorized by the FDA, we
currently estimate that the cost of conducting that study would approximately
be
between $10 million and $15 million, excluding the manufacturing infrastructure.
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 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™ cell-based liver support system, we will not be able to conduct any
clinical trials until we raise substantial amounts of additional
financing.
Our
cell-based liver support system utilizes a biological component obtained from
pigs that could prevent or restrict the release and use of those
products.
Use
of
liver cells harvested from pig livers carries a risk of transmitting viruses
harmless to pigs but potentially deadly to humans. For instance, all pig cells
carry genetic material of the porcine endogenous retrovirus (“PERV”), but its
ability to infect people is unknown. Repeated testing, including a 1999 study
of
160 xenotransplantion (transplantation from animals to humans) patients and
the
Phase II/III testing of the HepatAssistTM
cell-based liver support system by Circe Biomedical, Inc., has produced no
sign
of the transmission of PERV to humans. Still, no one can prove that PERV or
another virus would not infect bioartificial liver-treated patients and cause
potentially serious disease. This may result in the FDA or other health
regulatory agencies not approving our 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
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.
We
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, the Company estimates that it has
cash to operate through the second quarter of calendar year 2008, and therefore
will need to obtain significant additional funds during the first half of 2008.
The clinical development expenses of our products will be very substantial.
Based on our current assumptions, we estimate that the clinical cost of
developing the SEPET™ liver assist device will be approximately $5 million to
$10 million, and the clinical cost of developing the HepatAssist™ cell-based
liver support system will be between $10 million and $15 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
be
required to (i) obtain additional debt or equity financing in order to fund
the further development of our products and working capital needs, and/or
(ii) enter into a strategic alliance with a larger pharmaceutical or
biomedical company to provide its required funding. The amount of funding needed
to complete the development of one or both of our products will be very
substantial and may be in excess of our ability to raise capital.
We
have
not identified the sources for the additional financing that we will require,
and we do not have commitments from any third parties to provide this financing.
There can be no assurance that sufficient funding will be available to us at
acceptable terms or at all. If we are unable to obtain sufficient financing
on a
timely basis, the development of our products could be delayed and we could
be
forced to reduce the scope of our pre-clinical and clinical trials or otherwise
limit or terminate our operations altogether. Any equity additional funding
that
we obtain will reduce the percentage ownership held by our existing security
holders.
As
a new small company that will be competing against numerous large, established
companies that have substantially greater financial, technical, manufacturing,
marketing, distribution and other resources than us, we will be at a competitive
disadvantage.
The
pharmaceutical, biopharmaceutical and biotechnology industry is characterized
by
intense competition and rapid and significant technological advancements. Many
companies, research institutions and universities are working in a number of
areas similar to our primary fields of interest to develop new products, some
of
which may be similar and/or competitive to our products. Furthermore, many
companies are engaged in the development of medical devices or products that
are
or will be competitive with our proposed products. Most of the companies with
which we compete have substantially greater financial, technical, manufacturing,
marketing, distribution and other resources than us.
We
will need to outsource and rely on third parties for the clinical development
and manufacture and marketing of our products.
Our
business model calls for the outsourcing of the clinical development,
manufacturing and marketing of our products in order to reduce our capital
and
infrastructure costs as a means of potentially improving the profitability
of
these products for us. We have not yet entered into any strategic alliances
or
other licensing or contract manufacturing arrangements (except for the
contractual manufacturing of LIVERAID™ modules by Spectrum Laboratories which we
have indefinitely placed on hold) 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 the SEPET™ liver assist device and/or
our HepatAssistTM
cell-based liver support system. 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 or institutions to manage the conduct
of
our clinical trials and to manufacture or market our products, we will be
dependent on the timeliness and effectiveness of their efforts. If the clinical
research management organization that we utilize is unable to allocate
sufficient qualified personnel to our studies or if the work performed by them
does not fully satisfy the rigorous requirement of the FDA, we may encounter
substantial delays and increased costs in completing our clinical trials. If
the
manufacturers of the raw material and finished product for our clinical trials
are unable to meet our time schedules or cost parameters, the timing of our
clinical trials and development of our products may be adversely affected.
Any
manufacturer that we select may encounter difficulties in scaling-up the
manufacture of new products in commercial quantities, including problems
involving product yields, product stability or shelf life, quality control,
adequacy of control procedures and policies, compliance with FDA regulations
and
the need for further FDA approval of any new manufacturing processes and
facilities. Should our manufacturing or marketing company encounter regulatory
problems with the FDA, FDA approval of our products could be delayed or the
marketing of our products could be suspended or otherwise adversely
affected.
Because
we are currently dependent on Spectrum Laboratories, Inc. as the manufacturer
of
our SEPET™ cartridges, any failure or delay by Spectrum Laboratories to
manufacture the cartridges will negatively affect our future
operations.
We
have
an exclusive manufacturing arrangement with Spectrum Laboratories for our
fiber-within-fiber LIVERAID™ cartridges, the development of which we have placed
on indefinite hold. 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 the SEPET™ liver assist device
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™ cell-based liver support system. While we believe there are several
potential contract manufacturers who can produce these cartridges, there can
be
no assurance that we will be able to enter into such an arrangement on
commercially favorable terms, or at all.
Because
we are dependent on Medtronic, Inc. for the perfusion platform used in our
HepatAssistTM
cell-based liver support system, 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™ cell-based liver support system. The PERFORMER has
been equipped with proprietary software and our tubing in order to enable the
machine to work with our HepatAssistTM
cell-based liver support system. A limited number of the PERFORMER units have
been manufactured to date. The PERFORMER is being manufactured by RanD, S.r.l.
(Italy) and marketed by Medtronic, Inc. We currently do not have an agreement
to
purchase the PERFORMER from Medtronic or any other source. In the event that
RanD and Medtronic are either unable or unwilling to manufacture the number
of
PERFORMERS needed to ensure that the HepatAssistTM
cell-based liver support system 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™ cell-based liver support system functional and operational
characteristics, there can be no assurance that we will be able to enter into
such an arrangement on commercially favorable terms, or at all. In addition,
we
may encounter substantial delays and increased costs in completing our clinical
trials if we have difficulty in finding a replacement platform or if we are
required to develop a new platform for bioartificial liver use.
We
may not have sufficient legal protection of our proprietary rights, which could
result in the use of our intellectual properties by our
competitors.
Our
ability to compete successfully will depend, in part, on our ability to defend
patents that have issued, obtain new patents, protect trade secrets and operate
without infringing the proprietary rights of others. We currently own four
U.S. and five foreign patents on our liver support products, have two patent
applications pending, and are the licensee of twelve additional liver support
patents. We have relied substantially on the patent legal work that was
performed for our assignors and licensors with respect to all of these patents,
application and licenses, and have not independently verified the validity
or
any other aspects of the patents or patent applications covering our products
with our own patent counsel. For example, we have recently received from the
European Patent Office references to certain issued patents that may represent
prior art in the field of large-pore hemofiltration. This prior art may prevent
us from obtaining sufficient legal protection of our proprietary rights to
our
SEPET liver assist device.
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.
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 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 senior personnel, our overhead expenses for salaries and related
items will increase substantially from current levels.
The
market success of our products will be dependent in part upon third-party
reimbursement policies that have not yet been established.
Our
ability to successfully penetrate the market for our products may depend
significantly on the availability of reimbursement for our products from
third-party payers, such as governmental programs, private insurance and private
health plans. We have not yet established with Medicare or any third-party
payers what level of reimbursement, if any, will be available for our products,
and we cannot predict whether levels of reimbursement for our products, if
any,
will be high enough to allow us to charge a reasonable profit margin. Even
with
FDA approval, third-party payers may deny reimbursement if the payer determines
that our particular new products are unnecessary, inappropriate or not cost
effective. If patients are not entitled to receive reimbursement similar to
reimbursement for competing products, they may be unwilling to use our products
since they will have to pay for the unreimbursed amounts, which may well be
substantial. The reimbursement status of newly approved health care products
is
highly uncertain. If levels of reimbursement are decreased in the future, the
demand for our products could diminish or our ability to sell our products
on a
profitable basis could be adversely affected.
We
may be subject to product liability claims that could have a material negative
effect on our operations and on our financial condition.
The
development, manufacture and sale of medical products expose us to the risk
of
significant damages from product liability claims. We have obtained clinical
trial insurance for our SEPET™ trials. 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 continue to secure such
insurance for clinical trials for either of our two current products under
development. 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 our 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 by 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
our acquisition of the HepatAssistTM
cell-based liver support 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 the HepatAssistTM
cell-based liver support system 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.
If
we are unable to comply with the terms of registration rights agreements to
which we are a party, we may be obligated to pay liquidated damages to some
of
our stockholders and recharacterize outstanding warrants as
debt.
We
are a
party to registration rights agreements with some of our stockholders. The
registration rights agreements provide, among other things, that we register
shares of our common stock held by those stockholders within a specified period
of time and that we keep the registration statement associated with those shares
continuously effective. If we are unable to comply with these provisions
of the registration rights agreements, we may be obligated to pay those
stockholders liquidated damages. Because of the potential operation of
these provisions of our registration rights agreements, we have booked an
estimated accrual of $180,000 to the balance sheet as of March 31, 2007 to
estimate the contingent liability related to the probability of registration
rights payments. These penalty provisions may also force us to re-characterize
some of our other outstanding warrants from equity to debt. If we have to make
this re-characterization, our liabilities would increase and our financial
statements would be negatively impacted.
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) and
a
two business day “cooling off period” before brokers and dealers can effect
transactions in penny stocks. Such rules impose various sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors (generally defined as an investor
with a net worth in excess of $1,000,000 or annual income exceeding $200,000
individually or $300,000 together with a spouse). For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser’s written consent to the
transaction prior to the sale. The broker-dealer also must disclose the
commissions payable to the broker-dealer, current bid and offer quotations
for
the penny stock and, if the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer’s presumed control
over the market. Such information must be provided to the customer orally or
in
writing before or with the written confirmation of trade sent to the customer.
Monthly statements must be sent disclosing recent price information for the
penny stock held in the account and information on the limited market in penny
stocks. The additional burdens imposed upon broker-dealers by such requirements
could discourage broker-dealers from effecting transactions in our common stock,
which could severely limit the market liquidity of the common stock and the
ability of holders of the common stock to sell their shares.
Anti-takeover
provisions in our certificate of incorporation could affect the value of our
stock.
Our
certificate of incorporation contains certain provisions that could be an
impediment to a non-negotiated change in control. In particular, without
stockholder approval we can issue up to 5,000,000 shares of preferred stock
with
rights and preferences determined by the board of directors. These provisions
could make a hostile takeover or other non-negotiated change in control
difficult, so that stockholders would not be able to receive a premium for
their
common stock.
Potential
issuance of additional common and preferred stock could dilute existing
stockholders.
We
are
authorized to issue up to 60,000,000 shares of common stock. To the extent
of
such authorization, our board of directors has the ability, without seeking
stockholder approval, to issue additional shares of common stock in the future
for such consideration as the board of directors may consider sufficient. The
issuance of additional common stock in the future will reduce the proportionate
ownership and voting power of the common stock offered hereby. We are also
authorized to issue up to 5,000,000 shares of preferred stock, the rights and
preferences of which may be designated in series by the board of directors.
Such
designation of new series of preferred stock may be made without stockholder
approval, and could create additional securities which would have dividend
and
liquidation preferences over the common stock offered hereby. Preferred
stockholders could adversely affect the rights of holders of common stock
by:
· |
exercising
voting, redemption and conversion rights to the detriment of the
holders
of common stock;
|
· |
receiving
preferences over the holders of common stock regarding or surplus
funds in
the event of our dissolution or
liquidation;
|
· |
delaying,
deferring or preventing a change in control of our company;
and
|
· |
discouraging
bids for our common stock.
|
Additionally,
some of our outstanding warrants to purchase common stock have anti-dilution
protection. This means that if we issue securities for a price less than the
price at which the warrants are exercisable for shares of common stock, the
warrants will become eligible to purchase more shares of common stock at a
lower
price, which will dilute the ownership of our common stockholders.
Substantial
number of shares of common stock may be released onto the market at any time,
and the sales of such additional shares of common stock could cause stock price
to fall.
As
of
April 30, 2007, we had outstanding 25,144,086 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. As of June 2006, the resale of a total of 8,015,480 shares of
our
common stock issuable upon the exercise of outstanding warrants were registered
on a registration statement on Form SB-2. Since June 2006, a warrant to
purchase 40,000 shares of our common stock has been cancelled. This warrant
was
issued to our former director, Richard Bank, as compensation for fundraising
on
behalf of the Company and expired in January 2007. We are also registering
an
additional 746,602 shares of our common stock issuable upon exercise of
outstanding warrants on the registration statement on From SB-2 of which the
prospectus forms a part. 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, 8,722,082 additional shares could be
released onto the trading market at any time. Because of the limited trading
volume, the sudden release of 8,722,082 additional freely trading shares onto
the market, or the perception that such shares will come onto the market, could
have an adverse affect on the trading price of the stock. In addition, there
are
currently 5,972,272 shares of unregistered, restricted stock that are currently
eligible for public resale under Rule 144 promulgated under the Securities
Act,
some of which shares also may be offered and sold on the market from time to
time and an additional 11,311,751 shares that are issuable upon the exercise
of
outstanding options and other warrants. No prediction can be made as to the
effect, if any, that sales of the 8,722,082 registered warrant shares, or the
sale of any of the 5,972,272 shares subject to Rule 144 sales or the 11,311,751
shares issuable upon the exercise of outstanding options and other warrants
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; and
|
· |
general
economic, political and market conditions and other factors, and
the
occurrence of any of the risks described in this
prospectus.
|
FORWARD-LOOKING
STATEMENTS
The
Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for
forward-looking statements. This document contains forward-looking statements,
which reflect the views of our management with respect to future events and
financial performance. These forward-looking statements are subject to a number
of uncertainties and other factors that could cause actual results to differ
materially from such statements. Forward-looking statements are identified
by
words such as “anticipates,” “believes,” “estimates,” “expects,” “plans,”
“projects,” “targets” and similar expressions. Readers are cautioned not to
place undue reliance on these forward-looking statements, which are based on
the
information available to management at this time and which speak only as of
this
date. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
For a discussion of some of the factors that may cause actual results to differ
materially from those suggested by the forward-looking statements, please read
carefully the information under “Risk Factors” beginning on page 3.
The
identification in this document of factors that may affect future performance
and the accuracy of forward-looking statements is meant to be illustrative
and
by no means exhaustive. All forward-looking statements should be evaluated
with
the understanding of their inherent uncertainty. You may rely only on the
information contained in this prospectus.
We
have
not authorized anyone to provide information different from that contained
in
this prospectus. Neither the delivery of this prospectus nor the sale of common
stock means that information contained in this prospectus is correct after
the
date of this prospectus. This prospectus is not an offer to sell or solicitation
of an offer to buy these securities in any circumstances under which the offer
or solicitation is unlawful.
USE
OF PROCEEDS
We
will
not receive any proceeds from the sale or other disposition of the common stock
covered hereby by the selling stockholders pursuant to this prospectus. However,
we may receive the sale price of any common stock we sell to the selling
stockholders upon exercise of the warrants. If all warrants included in this
prospectus are exercised for cash (and not pursuant to the cashless exercise
feature included in the warrants), the total amount of proceeds we would receive
is $20,044,723. We expect to use the proceeds we receive from the exercise
of
warrants, if any, for general working capital purposes. We will pay the expenses
of registration of these shares, including legal and accounting
fees.
MARKET
PRICE OF COMMON STOCK
AND
OTHER SHAREHOLDER MATTERS
Market
Information
Our
common stock has been traded on the OTC Bulletin Board over-the-counter market
since March 18, 2004 under the symbol “ABOS.” From the Reorganization until
March 18, 2004, our common stock was listed on the Pink Sheets over-the-counter
electronic trading system under the symbol “ABOS.” Before 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 high and low bid information for our common
stock
for each quarter within the last two fiscal years, as reported by Bloomberg
L.P.
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
|
|
|
|
|
|
|
|
|
|
March
31, 2007
|
|
$
|
0.65
|
|
$
|
0.43
|
|
Holders
As
of
April 30, 2007, there were 125 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.
Equity
Compensation Plan Information
The
following table summarizes as of December 31, 2006, the number of securities
to
be issued upon the exercise of outstanding derivative securities (options,
warrants, and rights); the weighted-average exercise price of the outstanding
derivative securities; and the number of securities remaining available for
future issuance under our equity compensation plans.
Plan
Category
|
|
|
Number
of securities to be issued upon exercise of outstanding options,
warrants,
and rights
|
|
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity
compensation plans approved by security holders(1)
|
|
|
2,628,876
|
|
$
|
1.50
|
|
|
1,371,124
|
|
Equity
compensation plans not approved by security holders
|
|
|
637,000
|
(2)
|
$
|
2.41
|
|
|
-0-
|
|
Total
|
|
|
3,265,876
|
(3)
|
$
|
1.69
|
|
|
1,371,124
|
|
(1) These
plans consist of our 2001 Stock Option Plan and 2005 Stock Incentive
Plan.
(2) Represents
warrants to purchase shares of our common stock issued to our
consultants.
(3) Includes
restricted stock grants totaling 172,199 shares of common
stock.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 for securities issued
in the transaction. We have been accounting for the warrants in accordance
with
Emerging Issues Task Force Issue No. EITF 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a
Company’s Own Stock,
or EITF
0019. 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,
we
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 ending June 30 and September 30, 2006, changes to the accrued
liability were reported in our statement of operations. However, we have
determined that we 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-dilution provisions for the filed financial statements
included in our Quarterly Reports on Form 10-QSB for the quarters ended March
31, 2006, June 30, 2006 and September 30, 2006. Therefore, we restated 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 ending 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. The following table shows the effect
of the restatements on net loss, accrued warrant liability and additional
paid-in-capital for the periods indicated.
|
|
Three
months ended
March
31, 2006
|
|
Three
months
ended
June
30, 2006
|
|
Six
months
ended
June
30, 2006
|
|
Three
months
ended
Sept.
30, 2006
|
|
Nine
months
ended
Sept.
30, 2006
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
As
originally reported
|
|
$
|
(1,069,468
|
)
|
$
|
(837,202
|
)
|
$
|
(1,906,670
|
)
|
$
|
(1,081,410
|
)
|
$
|
(2,988,080
|
)
|
Adjustment
|
|
|
0
|
|
|
(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
prospectus, and the description of our results of operations and financial
condition, reflect (i) the operations of ATI alone prior to the Reorganization,
and (ii) the combined results of this company and ATI since the Reorganization.
No goodwill was recorded as a result of the Reorganization.
Since
the
formation of ATI in 2000, our efforts have been principally devoted to research
and development activities, raising capital, and recruiting additional
scientific and management personnel and advisors. To date, we have not marketed
or sold any product and have not generated any revenues from commercial
activities, and we do not expect to generate any revenues from commercial
activities during the next 12 months. Substantially all of the revenues that
we
have recognized to date have been Small Business Innovation Research grants
(in
an aggregate amount of $321,000) that we received from the United States Small
Business Administration.
Our
current plan of operations for the next 12 months primarily involves research
and development activities, including 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 twelve
months from the date of this prospectus; however, we are seeking additional
investment from various investors, but currently have no agreements or
commitments in this regard to fund future development of our
products.
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.
In
April
2004 we purchased certain assets of Circe Biomedical including a portfolio
of
patents, rights to a bioartificial liver (HepatAssist), a Phase III IND,
selected equipment, clinical and marketing data, and over 400 standard operating
procedures and clinical protocols that have previously been reviewed
by
the
FDA. The purchase price paid for these assets was $450,000, which amount has
now
been fully paid.
Critical
Accounting Policies
Management’s
discussion and analysis of our financial condition and results of operations
are
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, management evaluates its estimates, including
those related to revenue recognition, impairment of long-lived assets, including
finite lived intangible assets, accrued liabilities and certain expenses. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may
differ materially from these estimates under different assumptions or
conditions.
Our
significant accounting policies are summarized in Note 1 to our audited
financial statements for the year ended December 31, 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, or FASB, Statement of Financial Accounting Standards, or 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 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 SFAS No. 2, Accounting
for Research and Development Costs,
the
costs of intangibles purchased from others for use in research and development
activities and that have alternative future uses are capitalized and amortized.
We capitalize certain patent rights that are believed to have future economic
benefit. The licensed capitalized patents costs were recorded based on the
estimated value of the equity security issued by us to the licensor. The value
ascribed to the equity security took into account, among other factors, our
stage of development and the value of other companies developing extracorporeal
bioartificial liver assist devices. These patent rights are amortized using
the
straight-line method over the remaining life of the patent. Certain patent
rights received in conjunction with purchased research and development costs
have been expensed. Legal costs incurred in obtaining, recording and defending
patents are expensed as incurred.
Stock-Based
Compensation
Commencing
January 1, 2006, we adopted SFAS No. 123R, “Share Based Payment”, or 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, we 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.” We have 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 FASB issued SFAS No. 156, Accounting
for Servicing of Financial Assets, an amendment of FASB Statement No.
140,
or 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,
or
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 SFAS No. 109, Accounting
for Income Taxes. The
interpretation clearly scopes out income tax positions related to SFAS 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,
or 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 SFAS No. 157, Fair
Value Measurements,
or 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 SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans -- An
Amendment of FASB Statements No. 87, 88, 106, and 132R,
or SFAS
158. SFAS 158 does not apply as the Company does not have a defined benefit
pension or any other post retirement plan.
In
December 2006, the FASB issued FASB Staff Position, or 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.
Comparison
of Quarter ended March 31, 2007 to Quarter ended March 31,
2006.
General
and administrative expenses of $676,000 and $744,000 were incurred for the
three
months ended March 31, 2007 and 2006, respectively. General and administrative
expenses for the three months ended March 31, 2007 and 2006 decreased by $68,000
over the prior year level. The decrease is primarily attributed to decreases
in
investor relation costs of $50,000, Board of Director costs of $33,000, non-cash
option charges of $57,000 and a decline in other general and administrative
expenses offset in part by $59,000 increase in warrant charges due to warrant
extensions granted in connection with expiring warrants.
Research
and development expenses of $1,031,000 and $366,000 were incurred for the three
months ended March 31, 2007 and 2006, respectively. The research and development
expenses for the three months ended March 31, 2007 increased by $665,000 over
the comparable prior year levels primarily as a result of $425,000 in costs
related to the patent portfolio acquisition in March 2007 and an increase of
$241,000 in SEPET™ program costs which reflect the increased number of patients
enrolled in the SEPET™ clinical trial.
An
equity
offerings contingency for $180,000 was accrued for potential subscription
agreement obligations. Interest income of $18,000 and $41,000 was earned for
the
three months ended March 31, 2007 and 2006, respectively. The decrease in
interest income primarily reflects declining cash and cash equivalent balances
in 2007 from prior year levels.
Our
net
loss was $1,868,000 and $1,069,000 for the three months ended March 31, 2007
and
2006, respectively. The increase in net loss for the quarter ended March 31,
2007 compared to the comparable period in 2006 is attributable to the increase
in research and development expenses and potential subscription agreement
obligations.
Liquidity
and Capital Resources
As
of
March 31, 2007, we had cash of $1,345,000 and $998,000 of current liabilities.
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.
On
April
23, 2007, we completed a $4,861,000 private equity financing to a group of
current and new accredited investors. In the offering, we sold 3,739,231 Units.
Each Unit was sold at a price of $1.30 per Unit. Each Unit consists of: i)
two
shares of our common stock, ii) one warrant to purchase one share of our common
stock exercisable for a period of 2.5 years at an exercise price of $1.00 (“A
Warrants”) and iii) one warrant to purchase one share of our common stock
exercisable for a period of 5 years at an exercise price of $1.40 (“B
Warrants”), comprising a total of 7,478,462 shares of our common stock and
warrants to purchase 7,478,462 shares of our common stock. The warrants have
no
provision for cashless exercise and, subject to certain requirements, may be
called by us provided that our common stock trades above $1.50 for the A
Warrants and above $2.80 for the B Warrants for a specified time period.
Based
on
our current plan and the above private placement, we believe that our current
cash balances will be sufficient to fund our operations through for the next
twelve months from the date of this report.
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.
The
following is a summary of our contractual cash obligations for the following
fiscal years:
Contractual
Obligations
|
|
Total
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Long-Term
Leases
|
|
$
|
41,000
|
|
$
|
41,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
License
Agreement
|
|
|
300,000
|
|
|
|
|
|
50,000
|
|
|
100,000
|
|
|
150,000
|
|
Total
|
|
$
|
341,000
|
|
$
|
41,000
|
|
$
|
50,000
|
|
$
|
100,000
|
|
$
|
150,000
|
|
We
do not
believe that inflation has had a material impact on our business or
operations.
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.
Off-
Balance Sheet Arrangements
We
are
not a party to any off-balance sheet arrangements.
BUSINESS
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 cell-based liver support 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 tested in Phase II/III clinical trials approved by the FDA in patients
with
fulminant and subfulminant liver failure and primary non-function following
liver transplantation. These trials of the original HepatAssist® system were the
first large (171 patients) prospective, randomized, controlled multi-center
trial demonstrating a survival advantage for an extracorporeal liver assist
system utilizing pig liver cells. Although treated fulminant/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
(survival at 30 days post-transplantation) was not achieved. Accordingly, the
HepatAssistTM
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 $18,000,000 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 intend to apply for additional
SBIR grants to fund a portion of our research expenditures. However, whether
or
not we receive additional SBIR grants, we will have to raise substantial
additional proceeds to fund our future clinical development expenses and our
on-going working capital needs.
Our
research offices and laboratories are located at Cedars-Sinai Medical Center
(“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 new
potential opportunities for the development of a bioartificial liver. The Circe
Biomedical bioartificial liver device that we acquired consisted of the
following four distinct components that we believe may be useful to the
development of our bioartificial liver products:
|
(1) |
FDA-approved
standard operating procedures.
These are standard operating procedures for production of porcine
cells
including harvesting, freezing, storing, shipping and processing
by the
end user (thawing, washing) of the cells. These procedures and protocols
have been reviewed by the FDA.
|
|
(2) |
The
cartridge used in the Phase III trial of HepatAssistTM.
We intend to use the existing, FDA-approved cartridge, and intend
to seek
the FDA’s approval to increase the number of porcine cells that the
cartridge could contain, which increase we believe will improve the
functionality of the system.
|
|
(3) |
An
FDA reviewed 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 platform.
The HepatAssist perfusion platform is Circe Biomedical’s specially
designed machine that pumped the patient’s plasma through the HepatAssist
cartridge. This machine was used in the Phase II/III trial of
HepatAssistTM.
|
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. Our management believes that
treatments with currently available technologies such as blood detoxification
methods are short-term measures, and none of them has achieved wide clinical
use
or ability to arrest or reverse liver failure and improve survival. As a
consequence, liver failure patients must still either undergo liver
transplantation or endure 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 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 patients.
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 livers using viable
isolated liver cells, or hepatocytes, can provide whole liver functions.
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, porcine hepatocyte therapy should be combined
with blood purification or detoxification.
Our
cell-based liver support system, the HepatAssist™ Cell-Based Liver Support
System, was designed to become an advanced effective application of the basic
bioartificial liver concept. In the Cell-Based Liver Support System, liver
cell
therapy in the form of porcine hepatocytes, is combined with blood
detoxification, in the form of sorbent based plasma therapy. 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. While the
HepatAssistTM’s
predecessor HepatAssist Phase II/III clinical trial demonstrated an increase
in
patient survival in patients with viral and drug-induced fulminant/subfulminant
hepatic failure, a new Phase III clinical trial will be needed before our
HepatAssist™ system, which is an enhanced version of the original HepatAssist
system, can be used by human patients. Pre-clinical data for our
HepatAssistTM
Cell-Based Liver Support System indicates that this system can improve heart
rate and blood pressure and provide clearance of ammonia and indocyanine green
(ICG), which is a liver function test.
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 (a “bridge” to liver
regeneration);
|
|
· |
support
patients during periods of functional recovery and regeneration after
extensive removal due to liver trauma and/or
cancer;
|
|
· |
accelerate
recovery from acute exacerbation of chronic liver
disease;
|
|
· |
shorten
length of stay in intensive care
units;
|
|
· |
reduce
the cost of care; and
|
|
· |
reduce
intractable itching associated with severe
jaundice.
|
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. However, final proof
of
clinical benefit in patients is lacking at this time, and the clinical utility
of these products still needs to be demonstrated in patients with acute liver
failure.
We
own
certain technologies and rights related to our products, and have licensed
certain other technologies. See “- Patents and Proprietary Rights” below for a
description of the rights that we own and have licensed.
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 sieving substances with molecular weight of up to 100 kilodaltons,
or
kDa. The importance of using fibers with this sieving characteristic, which
is
larger than for conventional renal dialysis cartridges, is that most hepatic
failure toxins as well as mediators of inflammation and inhibitors of hepatic
regeneration have a molecular weight that is less than 100 kDa, while “good”
blood components, for the most part, have molecular weight greater than 100
kDa.
At present, Spectrum Laboratories is the manufacturer of these disposable
cartridges. See “— Manufacturing” below. The SEPET™ system is designed for use
with any commercially available kidney dialysis unit or other similar machines
that utilize hollow-fiber cartridges. Accordingly, no specialized apparatus
needs to be developed or manufactured for SEPET™. Accessory components for the
SEPET™ system such as disposable tubings 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 with molecular weight of 100 kDa or less 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 cell-based liver support system under development 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 Cell-Based
Liver Support System is designed to lower the levels of pathological blood
components (through activated charcoal or other purification
sorbents).
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 storage of the liver cells, (iv) the proprietary 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-2™ system. The following addresses our current plans and procedures
regarding viable liver cells (hepatocytes).
Hepatocyte
donors. Ideally,
human hepatocytes should be used in a bioartificial liver. However, there is
a
shortage of organ donors and published data demonstrating 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.
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. Cryopreservation also
provides greater protection from bacterial and viral contamination because
frozen cells can be stored until microbiologic testing is completed and cells
are then released for clinical use. Prior to use, cells are rapidly thawed
and
their viability is tested. The patented hepatocyte cryopreservation technology
is now owned by us and by Cedars-Sinai Medical Center, 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 the United States Department of Agriculture, or the
USDA, certified facility specifically for biomedical research purposes. Each
batch of cryopreserved pig liver cells will be released for clinical use only
after proper verification of biosafety and viability/functionality of the cells.
We acquired all of the required laboratory and quality assurance protocols
from
Circe Biomedical, which protocols were previously reviewed by the FDA and deemed
to be in compliance with FDA requirements. We are currently leasing facilities
in which we will be able to house and maintains pigs and surgically acquire
their livers. The facilities, which are still under development, would be used
to monitor the health of these pigs and to assure that the pigs and cells remain
free from infection and meet specific FDA requirements and to harvest the pig
livers. We believe that once suitable modifications and FDA approved leasehold
improvements are implemented and completed, these facilities will be suitable
to
meet our near-term goals for maintaining and harvesting the number of pig livers
that we expect to need until the commercial viability of our products is
established.
HepatAssist™
is designed to be used in the same manner as any other plasma therapy device.
In
a typical clinical procedure, the operator will install bioartificial liver
components 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 platform will be attached to the patient and the cell-based liver support
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
modules.
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:
|
· |
Ease
of use.
The systems bring user friendliness (e.g., pump integration, automation
and an intuitive user interface) to traditionally complex liver support
procedures.
|
|
· |
Simplicity.
Kidney dialysis systems are routinely used 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.
|
|
· |
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.
|
|
· |
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 cell-based liver support 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 $20,000
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 and 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
cell-based liver support 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 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 cell-based liver support 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 cell-based liver support systems will continue
for at
least ten years after the date on which we have obtained all required
regulatory approvals and have received $100,000 of net sales.
|
|
(b) |
We
are obligated to make royalty payments equal to 1% of the “net sales”
price for that portion of a liver assist system sold by us or any
of our
sublicensees that comprises or incorporates a cartridge having a
combination of porcine hepatocytes with hollow fiber membranes pursuant
to
that certain Restated License Agreement dated as of August 1, 1999
between
Circe Biomedical and Cedars-Sinai Medical Center. Since our
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 cell-based liver support system. Our obligation to pay these
royalties will begin with the first commercial sale of a bioartificial
liver and continue thereafter for ten
years.
|
Under
U.S. law, utility patents filed before June 8, 1995 are valid for 20 years
from
the filing date, or 17 years from date of issuance, whichever period is longer.
Patents filed on or after June 8, 1995 are good for 20 years from the date
of
filing.
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’
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 cell-based liver support
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 amendments 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 cell-based liver support 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
April 30, 2007, we employed seven full-time employees. 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.
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.
Legal
Proceedings
We
may
occasionally become subject to legal proceedings and claims that arise in the
ordinary course of our business. It is impossible for us to predict with any
certainty the outcome of pending disputes, and we cannot predict whether any
liability arising from pending claims and litigation will be material in
relation to our consolidated financial position or results of
operations.
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS
AND
CONTROL PERSONS
Directors
and Executive Officers of Arbios Systems, Inc.
The
following table sets forth the name, age and position held by each of our
directors and executive officers as of April 30, 2007. Directors are elected
at
each annual meeting and thereafter serve until the next annual meeting
(currently expected to be held during the third calendar quarter of 2007) at
which their successors are duly elected by the stockholders. Pursuant to the
stock purchase agreement signed by the Company and investors in connection
with
the March 6, 2006 financing, it was agreed upon that no more than nine director
nominees shall be elected at the next annual shareholders meeting.
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Walter
C. Ogier
|
|
50
|
|
Director,
President and Chief Executive Officer
|
|
|
|
|
|
John
M. Vierling, M.D.
(2)(4)
|
|
61
|
|
Director,
Chairman of the Board
|
|
|
|
|
|
Dennis
Kogod (2)(3)(4)
|
|
47
|
|
Director
|
|
|
|
|
|
Thomas
C. Seoh (1)(3)(4)
|
|
49
|
|
Director
|
|
|
|
|
|
Jack
E. Stover
(1)(4)
|
|
54
|
|
Director
|
|
|
|
|
|
Thomas
M. Tully (1)(2)(3)(4)
|
|
61
|
|
Director
|
|
|
|
|
|
Shawn
P. Cain
|
|
40
|
|
Vice
President of Operations
|
|
|
|
|
|
Scott
L. Hayashi
|
|
35
|
|
Vice
President of Administration,
Chief Financial Officer
and Secretary
|
|
|
|
|
|
Jacek
Rozga, M.D., Ph.D.
|
|
58
|
|
Chief
Scientific Officer
|
|
|
|
|
|
David
J. Zeffren
|
|
50
|
|
Vice
President of Product Development
|
(1)
|
Member
of Audit Committee.
|
(2) |
Member
of Compensation Committee
|
(3) |
Member
of Nominating and Corporate Governance
Committee.
|
(4) |
Independent
director. Independence has been determined by our Board of Directors
based
on the definition promulgated by the NASDAQ Stock Market.
|
Business
Experience and Directorships
The
following describes the backgrounds of the members of the management team and
current directors.
Walter
C. Ogier Mr.
Ogier
was appointed President and Chief Executive Officer and a director of Arbios
in
November 2005 and has two decades of experience in the healthcare and
biotechnology industries. Prior to joining Arbios, Mr. Ogier was President
and
Chief Executive Officer of Genetix Pharmaceuticals Inc., which is developing
gene therapies for major genetic diseases and was affiliated with Johnson &
Johnson, from December 2001 until November 2005. Prior to that, Mr. Ogier was
President and Chief Executive Officer of Eligix, Inc., a Harvard
University-affiliated company engaged in monoclonal antibody-based therapies
for
stem cell transplantation and cell therapies for cancer, from October 1997
through November 2001. Mr. Ogier was also previously Vice President of Marketing
for Aastrom Biosciences and held various positions in marketing and business
development within Baxter Healthcare Corporation and its Blood Therapy Group
and
was an industrial economist with SRI International (formerly Stanford Research
Institute).
John
M. Vierling, M.D.,
FACP
Dr.
Vierling has served as a director since February 2002. In April 2005, Dr.
Vierling assumed the position of Professor of Medicine and Surgery, Director
of
Baylor Liver Health and Chief of Hepatology at the Baylor College of Medicine
and Director, Advanced Liver Therapies at St. Luke’s Episcopal Hospital in
Houston, Texas. Dr. Vierling had been a Professor of Medicine at the David
Geffen School of Medicine at UCLA from 1996 to 2005 and was the Director of
Hepatology and Medical Director of Multi-Organ Transplantation Program at
Cedars-Sinai Medical Center from 1990 until 2004. Dr. Vierling is also currently
the President of
the
American Association for the Study of Liver Diseases. Dr. Vierling was the
Chairman
of the Board of the American Liver Foundation from 1994 to 2000, and the
President of the Southern California Society for Gastroenterology from 1994
to
1995. Dr. Vierling has also been a member of numerous National Institutes
of Health study sections and advisory committees, including the NIDDK Liver
Tissue Procurement and Distribution Program. He is currently Chairman of
the Data Safety Monitoring Board for the National Institute of Health, NIDDK
ViraHep C Multicenter Trial. Dr. Vierling’s research has focused on
the immunological mechanisms of liver injury caused by hepatitis B and C viruses
and autoimmune and alloimmune diseases.
Dennis
Kogod Mr.
Kogod
has served as a director since May 2005. Mr. Kogod is Division President,
Western Group for Davita, Inc., a leading provider of dialysis services for
patients suffering from chronic kidney failure. Mr. Kogod joined Davita when
that company acquired Gambro Healthcare in October 2005. Prior to the
acquisition, Mr. Kogod was President and Chief Operating Officer of the West
Division of Gambro Healthcare USA, which he joined in July 2000. Before that,
Mr. Kogod spent 13 years with Teleflex Corporation, a NYSE-traded company.
While
there, he served as Division President of the Teleflex Medical Group from
December 1999 to July 2000.
Thomas
C. Seoh Mr.
Seoh
has served as a director since March 2005. Since February 2006, Mr. Seoh has
served as Chief Executive Officer of Faust Pharmaceuticals S.A., a clinical
stage product company focused on drugs for neurological diseases and
conditions. From 2005 to 2006, Mr. Seoh was Managing Director of Beyond
Complexity Ventures, LLC, engaged in life science start-up and business
development consulting activities. From 1995 to 2005, Mr. Seoh was Senior Vice
President, Corporate and Commercial Development, and previously Vice President,
General Counsel and Secretary, with NASDAQ-listed Guilford Pharmaceuticals
Inc.,
engaged in research, development and commercialization of CNS, oncology and
cardiovascular products. Previous positions included Vice President and
Associate General Counsel of ICN Pharmaceuticals, Inc., General Counsel and
Secretary of Consolidated Press U.S., Inc. and corporate attorney in the New
York City and London offices of Lord Day & Lord, Barrett Smith.
Jack
E. Stover
Mr.
Stover has served as a director since November 2004. Mr. Stover is also a
director of PDI, Inc. and Antares Pharma, Inc. Mr. Stover was elected the
President and Chief Operating Officer of Antares Pharma, Inc., (a public
specialty pharmaceutical company) in July 2004. In September 2004, he was named
President, CEO and was appointed as a director of that company. Prior thereto,
for approximately two years Mr. Stover was Executive Vice President, Chief
Financial Officer and Treasurer of SICOR, Inc., a NASDAQ traded injectable
pharmaceutical company that was acquired by Teva Pharmaceutical Inc. Prior
to
that, Mr. Stover was Executive Vice President and Director for Gynetics, Inc.,
a
private women’s drug company, and the Senior Vice President, Chief Financial
Officer, Chief Information Officer and Director for B. Braun Medical, Inc.,
a
private global medical device and pharmaceutical company. For over 16 years,
Mr.
Stover was an employee and then a partner with PricewaterhouseCoopers, working
in their bioscience industry division. Mr. Stover is also a CPA.
Thomas
M. Tully Mr.
Tully
has served as a director since May 2005. Since January 2006, Mr. Tully has
served as Chairman and Chief Executive Officer of IDev Technologies, a medical
device company focused on the development and marketing of innovative minimally
invasive devices for the treatment of peripheral vascular disease. From August
2000 until April 2005, Mr. Tully was the President and Chief Executive Officer
of Neothermia Corporation, a medical device company. Prior thereto, from June
1995 to April 2000, Mr. Tully was the President and Chief Executive Officer
of
Nitinol Medical Technologies, Inc., a medical device company. Mr. Tully was
the
President of Organogenesis Inc., from 1991 to 1994, and the President of
Schnieder (USA) Inc. from 1988 to 1991. From 1980 through 1988, he held various
positions with Johnson & Johnson, including President, Johnson & Johnson
Interventional Systems and Vice President Marketing and Sales at the Johnson
& Johnson Cardiovascular division.
Shawn
P. Cain
Mr. Cain joined the company as its Vice President of Operations in April 2005
and was previously employed by us as a part-time consultant from December 2003
to March 2005. From June 2003 to March 2005, Mr. Cain was employed at Becton
Dickinson’s Discovery Labware, Biologics Business, where he was responsible for
the operation of two manufacturing facilities that produced over 900 biologics
products. From January 1997 through May 2003, Mr. Cain was the Vice
President of Operations for Circe Biomedical, Inc., where he was instrumental
in
the early development of the bioartificial liver technology, including
development the company’s HepatAssistTM
product.
Scott
L. Hayashi Mr.
Hayashi joined the company as its Chief Administrative Officer in February
2004,
became the Secretary of the company in July 2004 and was appointed as the Vice
President of Administration in November 2004. In March 2005, Mr. Hayashi assumed
the role as our Chief
Financial Officer. Prior
to
joining Arbios, Mr. Hayashi was a Manager of Overseas Development for Cardinal
Health, Inc. from July 2000 to April 2002, Mr. Hayashi worked in finance,
mergers and acquisitions for Northrop Grumman Corporation from March 1997 to
July 2000 and Honeywell, Inc. from July 1994 to December 1996.
Jacek
Rozga, M.D., Ph.D.
Dr. Rozga is a co-founder of Arbios and has been Chief Scientific Officer
of Arbios since its organization in August 2000. Dr. Rozga served as President
of Arbios from August 2000 until November 2005. From October 2003 until March
2005, Dr. Rozga also acted as our Chief Financial Officer. Dr. Rozga is Chairman
and Chief Executive Officer of OncoTx, Inc., a private California corporation
since October 2005. Since 1992, Dr. Rozga has been a professor of Surgery at
UCLA School of Medicine. Dr. Rozga was previously a research scientist at
Cedars-Sinai Medical Center from 1992 to 2005.
David
J. Zeffren
Mr.
Zeffren was first employed by us as a consultant in February 2004, before being
appointed Vice President of Operations in November 2004, after which he became
Vice President of Product Development in March 2005. Prior to joining Arbios,
Mr. Zeffren had been the Chief Operating Officer of Skilled Health Systems,
L.C., a healthcare technology and clinical research organization from 1999
to
2004. Mr. Zeffren was also Chief Operating Officer of Physician Care Management
from 1996 to 1999. Mr. Zeffren was a Corporate Director, Business Development
& Division Manager at INFUSX, Inc., a subsidiary of Salick Health Care, Inc.
from 1993-1996. Mr. Zeffren has over 20 years of experience working in the
healthcare and medical device industries.
There
are
no family relationships between any of the executive officers and directors.
Key
Employees and Consultants
Ulrich
Baurmeister, Ph.D.
Dr. Baurmeister has been Chief Technology Officer of Arbios since November,
2006. He is an expert in the field of semi-permeable polymer membrane
development. From 1982 until 2000, Dr. Baurmeister served in various senior
research and development, marketing and business development roles at Membrana
GmbH, a leading supplier of semi-permeable membranes for dialysis and water
purification, and its parent companies, Akzo Nobel and Acordis AG. He was most
recently Managing Director, Business Development, overseeing Membrana’s
extension into new areas of business and technology. From 2000 to 2004, he
continued at Membrana while also serving as Chief Executive Officer of MAT
Adsorption Technologies GmbH & Co. KG, a Membrana spin-off venture that
developed selective adsorption membrane technology. Dr. Baurmeister serves
Arbios on a half-time contractor basis, alongside his role as Advisor and Senior
Visiting Scientist at the University Hospital Charite in Berlin, Germany. He
also serves on the boards of the Society of Artificial Organs, the International
Society of Blood Purification, and the International Society for Apheresis,
and
he participates in various working groups in the fields of biocompatibility
of
materials and organ failure. Dr. Baurmeister works for Arbios on a part-time
consulting basis.
Jan
Stange, M.D.
Prof.
Stange has been Senior Clinical Advisor to Arbios since early 2006 and he is
currently overseeing the Company’s clinical development program. He is an expert
in the clinical development of products for the treatment of liver failure,
having managed pivotal phase, multi-center clinical trials for various liver
failure indications in both the U.S. and Europe. From 2000 to 2005, he was
a
founder and the Medical Director of Teraklin GmbH, where he directed clinical
trials of that company’s MARS Liver Assist system, currently owned by Gambro AS.
Since 1992, Dr. Stange has held academic, clinical and research positions at
the
University of Rostock, Germany and the University of California, San Diego
and
has founded other medical products companies in addition to Teraklin. He is
currently Professor of Bioartificial Therapies at the University of Rostock.
He
serves on the board of directors of Forum Liver Dialysis. Dr. Stange serves
Arbios on a part-time contractor basis.
Audit,
Compensation and Nominating Committees
In
February 2004, our Board of Directors established an Audit Committee. The Board
of Directors has instructed the Audit Committee to meet periodically with the
company’s management and independent accountants to, among other things, review
the results of the annual audit and quarterly reviews and discuss the financial
statements, recommend to the Board the independent accountants to be retained,
and receive and consider the accountants’ comments as to controls, adequacy of
staff and management performance and procedures in connection with audit and
financial controls. The Audit Committee is also authorized to review related
party transactions for potential conflicts of interest. The Audit Committee
consists of three persons and is currently composed of Mr. Stover, Mr. Seoh
and
Mr. Tully. Each of these individuals is a non-employee director and, in the
opinion of our Board, is independent as defined under the NASDAQ Stock Market’s
listing standards. Mr. Stover is our “audit committee financial expert” as
defined under Item 401(e) of Regulation S-B of the Securities Exchange Act
of
1934, as amended. The Audit Committee operates under a formal charter that
governs its duties and conduct. In November 2004, we established a Compensation
Committee and a Nomination Committee. The Compensation Committee is authorized
to review and make recommendations to the full Board of Directors relating
to
the annual salaries and bonuses of our senior executive officers. The Nomination
Committee assists the Board in identifying qualified candidates, selecting
nominees for election as directors at meetings of stockholders and selecting
candidates to fill vacancies on our Board, and developing criteria to be used
in
making such recommendations.
EXECUTIVE
AND DIRECTOR COMPENSATION
Summary
Compensation Table
The
following table sets forth certain information concerning the annual and
long-term compensation for services rendered to us in all capacities for the
fiscal years ended December 31, 2006, 2005, and 2004 of (i) all persons who
served as the Chief Executive Officer of this company during the fiscal year
ended December 31, 2006 and (ii) each other person who was an executive officer
on December 31, 2006 and whose total annual salary and bonus during the fiscal
year ended December 31, 2006 exceeded $100,000. (The Chief Executive Officer
and
the other named officers are collectively referred to as the “Named Executive
Officers.”) The information set forth below includes all compensation paid to
the Named Executive Officers by ATI before the Reorganization by ATI, and all
compensation paid to such individual by both Arbios and ATI since the
Reorganization.
Name
and Principal Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Option
Awards
|
|
Non-Equity
Incentive Plan Compensation
|
|
All
Other
Compensation(6)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Walter
C. Ogier,(1)
President
and Chief Executive Officer
|
|
|
2006
2005
|
|
$
$
|
300,000
46,057
|
|
$
|
-
50,000
|
|
$
|
-
578,227
|
|
|
-
-
|
|
$
|
7,980
-
|
|
$
$
|
307,980
674,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jacek
Rozga, M.D., Ph.D. (2)
Chief
Scientist
|
|
|
2006
2005
2004
2003
|
|
$
$
$
$
|
183,333
199,177
198,909
143,125
|
|
|
-
-
-
-
|
|
$
$
$
|
-
15,150
55,123
3,461
|
|
$
$
$
|
-
24,000
20,000
15,000
|
|
$
$
|
6,220
2,750
-
-
|
|
$
$
$
$
|
189,553
241,077
274,032
161,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott
L. Hayashi,
Vice
President of Administration, Chief Financial Officer and
Secretary
|
|
|
2006
2005
2004
|
(3)
|
$
$
$
|
109,167
102,291
80,000
|
|
$ |
-
-
12,000
|
|
$
$
$
|
25,103
23,636
16,598
|
|
$
|
-
9,450
-
|
|
$
$
$
|
3,759
2,120
8,000
|
|
$
$
$
|
138,029
137,497
116,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
J. Zeffren,
Vice
President of Product Development
|
|
|
2006
2005
2004
|
(4)
|
$
$
$
|
117,000
114,346
120,000
|
|
|
-
-
-
|
|
$
$
|
-
23,636
26,130
|
|
$
|
-
5,400
-
|
|
$
$
|
3,479
2,404
-
|
|
$
$
$
|
120,479
145,786
146,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shawn
P. Cain,(5)
Vice
President of Operations
|
|
|
2006
2005
|
|
$
$
|
160,000
110,000
|
|
|
-
-
|
|
$
$
|
43,930
33,788
|
|
$ |
-
12,000
|
|
$
$
|
5,505
259
|
|
$
$
|
209,435
156,047
|
|
(1)
|
Mr.
Ogier was appointed our President and Chief Executive Officer in
November
2005.
|
(2) |
Dr.
Rozga resigned as a full-time employee and executive officer in November
2006 and works for the Company as a part-time employee currently.
|
(3) |
Mr.
Hayashi joined Arbios in February 2004. Mr. Hayashi received $8,000
in
cash payments for health and benefits in
2004.
|
(4) |
Mr.
Zeffren joined Arbios Systems, Inc. in February 2004 as a consultant
before becoming an executive officer of this company in November
2004. The
compensation shown includes amounts paid both as a consultant and
as an
officer of the Company.
|
(5) |
Mr.
Cain was employed by Arbios Systems, Inc. as a consultant from January
2005 to March 2005 and subsequently was appointed an executive officer
in
April 2005. Mr. Cain received $3,000 in consulting fees for the period
from January 2005 to March 2005.
|
(6) |
Includes
company matching contributions in the Arbios 401(k) Plan and group
life
insurance premium gross ups.
|
Aggregated
Option Exercises in Last Fiscal Year and Outstanding Equity Awards at Year-End
The
following table sets forth the number and value of unexercised options held
by
the Named Executive Officers as of December 31, 2006. There were no
exercises of options by the Named Executive Officers in fiscal year 2006.
Name
|
|
Number
of Securities Underlying Unexercised Options Exercisable
|
|
Number
of Securities Underlying Unexercised Options Unexercisable
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
|
|
Option
Exercise Price
|
|
Option
Expiration
Date
|
|
Walter
C. Ogier
|
|
|
291,666
|
|
|
208,334
|
|
|
500,000(1
|
)
|
$
|
1.85
|
|
|
11/8/2010
|
|
Jacek
Rozga, M.D., Ph.D.
|
|
|
12,000
30,000
18,000
18,000
|
|
|
-
-
-
-
|
|
|
12,000(2
30,000(3
18,000(4
18,000(5
|
)
)
)
)
|
$
$
$
$
|
2.22
2.25
0.15
1.00
|
|
|
7/7/2012
2/9/2011
7/23/2012
4/20/2010
|
|
Scott
L. Hayashi
|
|
|
4,165
10,000
12,000
10,000
|
|
|
35,835
-
-
-
|
|
|
40,000(6
10,000(7
12,000(8
10,000(9
|
)
)
)
)
|
$
$
$
$
|
0.85
1.85
2.90
2.25
|
|
|
7/31/2013
3/24/2010
3/1/2010
2/9/2009
|
|
David
J. Zeffren
|
|
|
12,000
10,000
|
|
|
-
-
|
|
|
12,000(8
10,000(10
|
)
)
|
$
$
|
2.90
2.00
|
|
|
3/1/2010
2/9/2009
|
|
Shawn
P. Cain
|
|
|
7,290
28,750
|
|
|
62,710
1,250
|
|
|
70,000(11
30,000(12
|
)
)
|
$
$
|
0.85
1.65
|
|
|
7/31/2013
3/31/2010
|
|
(1) |
The
option to purchase 500,000 shares of common stock was granted on
11/08/2005 and vests according to the following schedule: 50% of
the
option shall vest on the one year anniversary 11/08/2006, the remaining
50% shall vest on a monthly basis during the second year following
the
date of grant.
|
(2) |
The
option to purchase 12,000 shares of common stock was fully vested
on
07/07/2006.
|
(3) |
The
option to purchase 30,000 shares of common stock was fully vested
on
02/11/2005.
|
(4) |
The
option to purchase 18,000 shares of common stock was fully vested
on
02/15/2003.
|
(5) |
The
option to purchase 18,000 shares of common stock was fully vested
on
04/21/2004.
|
(6) |
The
option to purchase 40,000 shares of common stock was granted on 07/31/2006
and vests on a monthly basis for a period of 48 months from the grant
date.
|
(7) |
The
option to purchase 10,000 shares of common stock was fully vested
on
03/24/2006.
|
(8) |
The
option to purchase 12,000 shares of common stock was fully vested
on
03/01/2006.
|
(9) |
The
option to purchase 10,000 shares of common stock was fully vested
on
02/11/2005.
|
(10) |
The
option to purchase 10,000 shares of common stock was fully vested
on
02/11/2005.
|
(11) |
The
option to purchase 70,000 shares of common stock was granted on 07/31/2006
and vests on a pro-rata monthly basis for a period of 48 months from
the
date of grant.
|
(12) |
The
option to purchase 30,000 shares of common stock was granted on 03/31/2005
and vests on a pro-rata monthly basis for a period of 24 months from
the
date of grant.
|
Compensation
of Board of Directors
On
March
24, 2005, the Board of Directors approved a plan for compensating the company’s
directors. On May 16, 2005, the Board amended the plan for the 2005 fiscal
year
and later renewed the plan on January 11, 2006 for FY 2006. The plan consists
of
the following:
Non-employee
Directors will receive annual grants of stock options to purchase 15,000 shares
of the company’s common stock. The options will be granted on January 1 of each
year. The options will have a term of seven years and will have an exercise
price equal to the market price on the trading day preceding the grant date.
The
options will vest in equal monthly installments over the 12-month period
following the grant date.
Upon
election to the Board of Directors, each new Director will be granted a stock
option to purchase 30,000 shares of the company’s common stock. The option will
have a term of seven years and will have an exercise price equal to the market
price on the trading day preceding the date of grant. One half of the options
will vest on the date of grant, and the balance will vest on the first
anniversary of the grant date.
On
January 1 of each year, committee members receive an annual grant of a stock
option to purchase 5,000 shares of common stock for each committee for which
they are a member of. The option will have a term of seven years and will have
an exercise price equal to the market price on the trading day preceding the
grant date. The option will vest in equal monthly installments over the 12-month
period following the grant date.
Cash
Compensation
Effective
March 24, 2005, all non-employee directors were paid $1,500 for each day they
attend a Board of Directors meeting in person ($1,000 if they attend a meeting
by telephone), and $500 for each telephonic Board meeting ($1,000 for each
telephonic meeting if the meeting lasts longer than two hours). In addition,
the
Chairman of the Board and Chairman of the Audit Committee would receive $25,000
annually (payable quarterly), and the Chairman of the Nomination Committee
and
the Chairman of the Compensation Committee would receive $10,000 annually
(payable quarterly). Effective June 30, 2006, this policy was amended and the
company terminated all cash compensation payments to non-employee directors.
The
company does reimburse all directors for any expenses incurred by them in
attending meetings of the Board of Directors.
During
the fiscal year ended December 31, 2006, each of our directors was granted
an annual grant of stock options to purchase 15,000 shares of common stock
at an
exercise price of $1.66 per share. In addition, board committee members received
an annual grant of stock options to purchase 5,000 shares of common stock at
an
exercise price of $1.66 per share for each committee they are a member. All
director and committee member options are granted at the market price on the
day
preceding the date of grant and have a term of seven years and vest on a monthly
basis from the date of grant. On June 30, 2006, the Board resolved to issue
restricted stock instead of paying cash compensation to independent members
in order to help the Company maintain its cash reserves. In November 2006,
members of the Board of Directors received a total of 89,845 shares of
restricted stock in lieu of cash compensation for services rendered during
the
period July 1, 2006 to December 31, 2006.
Director
Compensation Table
Name
|
|
Fees
Earned or Paid in Cash
|
|
Stock
Awards
|
|
Option
Awards
|
|
Total
|
|
John
M. Vierling(1)
|
|
$
|
17,500
|
|
$
|
16,819
|
|
$
|
33,704
|
|
$
|
68,023
|
|
Jack
E. Stover(2)
|
|
$
|
17,500
|
|
$
|
16,819
|
|
$
|
33,704
|
|
$
|
68,023
|
|
Thomas
C. Seoh(3)
|
|
$
|
10,000
|
|
$
|
9,399
|
|
$
|
34,664
|
|
$
|
54,063
|
|
Thomas
M. Tully(4)
|
|
$
|
9,500
|
|
$
|
9,399
|
|
$
|
40,858
|
|
$
|
59,758
|
|
Dennis
Kogod(5)
|
|
$
|
1,500
|
|
$
|
4,452
|
|
$
|
31,586
|
|
$
|
37,538
|
|
The
following notes describe stock option and restricted stock grants during FY
2006. The fair value of the stock options was determined using the Black Scholes
option pricing model in accordance with SFAS 123R as described in Note 1 of
the
financial notes.
(1) |
John
M. Vierling, M.D. received 1) an option to purchase 44,957 shares
of
common stock with a fair value of $33,704, and 2) a restricted stock
grant
of 26,563 shares with a fair value of
$16,819.
|
(2) |
Jack
E. Stover received 1) an option to purchase 44,957 shares of common
stock
with a fair value of $33,704, and 2) a restricted stock grant of
26,563
shares with a fair value of $16,819.
|
(3) |
Thomas
C. Seoh received 1) an option to purchase 37,856 shares of common
stock
with a fair value of $34,664, and 2) a restricted stock grant of
14,844
shares with a fair value of $9,399.
|
(4) |
Thomas
M. Tully received 1) an option to purchase 28,613 shares of common
stock
with a fair value of $40,858 and 2) a restricted stock grant of 14,844
shares with a fair value of $9,399.
|
(5) |
Dennis
Kogod received 1) an option to purchase 30,294 shares of common stock
with
a fair value of $31,586 and 2) a restricted stock grant of 7,031
shares
with a fair value of $4,452.
|
Employment
Contracts and Termination of Employment, and Change-In-Control
Arrangements
We
entered into an agreement with David Zeffren, dated December 30, 2004, pursuant
to which Mr. Zeffren has served as Vice President of Operations. The agreement
provides for a salary of $120,000 per year that is subject to annual review
and
adjustment. The agreement provides that Mr. Zeffren’s employment is “at will”
and can be terminated at any time. Mr. Zeffren’s title and responsibilities were
changed in March 2005 to Vice President Product Development.
We
have
entered into an agreement with Scott Hayashi, dated March 29, 2005, pursuant
to
which Mr. Hayashi serves as Chief Financial Officer. The agreement provides
for
a salary of $105,000 per year that is subject to annual review and adjustment.
Mr. Hayashi is eligible to receive an annual discretionary bonus of up to 15%
of
his salary based on achieving certain goals. The agreement also offered Mr.
Hayashi a five-year qualified stock option to purchase 10,000 shares of our
common stock. The shares are exercisable at $1.85 per share; 50% of the shares
vested immediately and 50% of the shares vest one year from the grant date
of
the option. The agreement provides that Mr. Hayashi’s employment is “at will”
and can be terminated at any time.
We
have
entered into an agreement with Shawn Cain, dated March 22, 2005, pursuant to
which Mr. Cain serves as Vice-President of Operations. The agreement provides
for a salary of $160,000 per year. The agreement also offered Mr. Cain a
five-year incentive stock option to purchase 30,000 shares of our common stock.
The options have an exercise price of $1.65 per share and vest in monthly
installments of 1,250 shares commencing on May 1, 2005. The agreement also
provides that we will match Mr. Cain’s contributions to a 401(k) plan at a rate
of 50% up to 6% of total compensation per year. The agreement also offers to
pay
Mr. Cain’s COBRA costs for an 18-month period commencing on the April 15, 2005.
Mr. Cain is also eligible to receive an annual discretionary cash bonus of
up to
15% of his base annual salary. The agreement provides that Mr. Cain’s employment
is “at will” and can be terminated at any time. Under the agreement, we must
provide Mr. Cain three months’ notice if we wish to terminate his employment. If
we fail to provide the required notice, upon termination, we will pay Mr. Cain
the salary equivalent of the shortened notice period.
We
entered into an agreement with Walter C. Ogier, dated October 17, 2005, pursuant
to which Mr. Ogier will serve as Chief Executive Officer commencing November
7,
2005. The agreement provides for an annual initial base salary of $300,000
that
is subject to review and adjustment on an annual basis in accordance with the
procedures established by the Board of Directors. Mr. Ogier is eligible to
receive a discretionary annual cash bonus equal to up to 50% of his annual
base
salary. The agreement provides that upon commencement of employment, Mr. Ogier
received an option to purchase 500,000 shares of our common stock, which will
vest 250,000 shares on the one year anniversary of the date Mr. Ogier’s
employment commences and 250,000 shares will vest ratably at the end of each
of
the twelve months of the second year of his employment. If there is a
liquidation or change-in-control of the Company and in connection with such
transaction Mr. Ogier is terminated other than for cause or is no longer
President and Chief Executive Officer of the surviving corporation, then all
options shares granted to Mr. Ogier in connection with his employment will
immediately and fully vest. Additionally, if Mr. Ogier terminates his employment
for good reason or is terminated in anticipation of such a transaction, then
all
option shares granted to Mr. Ogier in connection with his employment will
immediately and fully vest. The agreement provides that Mr. Ogier’s employment
is “at will” and can be terminated at any time. Mr. Ogier is entitled to 12
months of salary if the Company terminates him without cause or he terminates
his employment for defined good reason.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information regarding beneficial ownership
of
our common stock as of April 30, 2007 (a) by each person known by us to own
beneficially 5% or more of any class of our common stock, (b) by each of our
Named Executive Officers and our directors and (c) by all executive officers
and
directors of this company as a group. As of April 30, 2007, there were
25,144,086 shares of our common stock issued and outstanding. Unless otherwise
noted, we believe that all persons named in the table have sole voting and
investment power with respect to all the shares beneficially owned by them.
Except as otherwise indicated, the address of each stockholder is c/o the
company at 1050 Winter Street, Suite 1000, Waltham, Massachusetts
02451.
Name
and Address of Beneficial Owner
|
|
Shares
Beneficially Owned (1)
|
|
Percent
of Class
|
|
|
|
|
|
|
|
|
|
Jacek
Rozga, M.D., Ph.D.
|
|
|
2,228,000
|
(2)
|
|
8.8
|
%
|
|
|
|
|
|
|
|
|
Achilles
A. Demetriou, M.D., Ph.D. and Kristin P. Demetriou
|
|
|
2,500,000
|
(3)
|
|
9.9
|
%
|
|
|
|
|
|
|
|
|
John
M. Vierling, M.D.
|
|
|
225,853
|
(4)
|
|
*
|
|
|
|
|
|
|
|
|
|
Walter
C. Ogier
|
|
|
421,667
|
(5)
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
Jack
E. Stover
|
|
|
140,853
|
(6)
|
|
*
|
|
|
|
|
|
|
|
|
|
Thomas
C. Seoh
|
|
|
108,117
|
(7)
|
|
*
|
|
|
|
|
|
|
|
|
|
Dennis
Kogod
|
|
|
102,742
|
(8)
|
|
*
|
|
|
|
|
|
|
|
|
|
Thomas
Tully
|
|
|
130,957
|
(9)
|
|
*
|
|
|
|
|
|
|
|
|
|
Scott
L. Hayashi
|
|
|
44,167
|
(10)
|
|
*
|
|
|
|
|
|
|
|
|
|
David
Zeffren
|
|
|
72,000
|
(11)
|
|
*
|
|
|
|
|
|
|
|
|
|
Shawn
Cain
|
|
|
46,042
|
(12)
|
|
*
|
|
|
|
|
|
|
|
|
|
Gary
Ballen
|
|
|
1,139,222
|
(13)
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
LibertyView
Funds, LP
111
River Street - Suite 1000
Hoboken,
NJ 07030-5776
|
|
|
1,701,968
|
(14)
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
LibertyView
Special Opportunities Fund, LP
111
River Street - Suite 1000
Hoboken,
NJ 07030-5776
|
|
|
2,474,752
|
(15)
|
|
9.6
|
%
|
|
|
|
|
|
|
|
|
Neuberger
Berman LLC
111
River Street - Suite 1000
Hoboken,
NJ 07030-5776
|
|
|
4,805,931
|
(16)
|
|
18.1
|
%
|
|
|
|
|
|
|
|
|
All
executive officers and directors as a group (10 persons)
|
|
|
3,520,397
|
(17)
|
|
14.0
|
%
|
* Less
than
1%.
(1) |
Beneficial
ownership is determined in accordance with the rules of the Securities
and
Exchange Commission and generally includes voting or investment power
with
respect to securities. Shares of common stock subject to options,
warrants
and convertible securities currently exercisable or convertible,
or
exercisable or convertible within 60 days, are deemed outstanding,
including for purposes of computing the percentage ownership of the
person
holding such option, warrant or convertible security, but not for
purposes
of computing the percentage of any other
holder.
|
(2) |
Includes
currently exercisable options to purchase 78,000 shares of common
stock.
|
(3) |
Consists
of 2,500,000 shares owned by the A & K Demetriou Family Trust, of
which Achilles A. Demetriou, M.D., Ph.D. and Kristin P. Demetriou
each are
co-trustees with the right to vote or dispose of the trust’s
shares.
|
(4) |
Consists
of i) currently exercisable options to purchase 199,290 shares of
common
stock, ii) 26,563 shares of restricted common
stock.
|
(5) |
Consists
of i) currently exercisable options to purchase 416,667 shares of
common
stock and ii) 5,000 shares of common stock.
|
(6) |
Consists
of i) currently exercisable options to purchase 113,290 shares of
common
stock ii) 26,563 shares of restricted common stock and iii)1,000
shares of
common stock.
|
(7) |
Consists
of i) currently exercisable options to purchase 93,273 shares of
common
stock, ii) 14,844 shares of restricted common
stock.
|
(8) |
Consists
of i) currently exercisable options to purchase 85,711 shares of
common
stock, ii) 7,031 shares of restricted common stock, and iii) 10,000
shares
of common stock.
|
(9) |
Consists
of i) currently exercisable options to purchase 116,113 shares of
common
stock, ii) 14,844 shares of restricted common
stock.
|
(10) |
Consists
of i) currently exercisable options to purchase 41,167 shares of
common
stock, ii) 3,000 shares of common
stock.
|
(11) |
Consists
of i) 25,000 shares owned by Mira Zeffren, David Zeffren’s wife, (ii)
warrants to purchase 25,000 shares registered in the name of Mira
Zeffren,
and (iii) currently exercisable options held by David Zeffren for
the
purchase of 22,000 shares of common
stock.
|
(12) |
Consists
of currently exercisable options to purchase 46,042 shares of common
stock.
|
(13) |
Consists
of (i) 417,000 shares of common stock registered in Mr. Ballen’s name,
(ii) currently exercisable warrants to purchase 600,000 shares of
common
stock owned by Mr. Ballen, and (iii) 122,222 shares registered in
the name
of American Charter & Marketing LLC, over which Mr. Ballen has voting
and investment control.
|
(14) |
Consists
of (i) 1,162,157 shares of common stock and (ii) currently exercisable
warrants to purchase 539,811 shares of common stock. LibertyView
Funds,
LP, LibertyView Special Opportunities Fund, LP and Trust D for a
Portion
of the Assets of the Kodak Retirement Income Plan have a common investment
advisor, Neuberger Berman, LLC, that has voting and dispositive power
over
the shares held by them, which is exercised by Richard A. Meckler.
Since
they have hired a common investment advisor, these entities are likely
to
vote together. Additionally, there may be common investors within
the
different accounts managed by the same investment advisor. The General
Partner of LibertyView Special Opportunities Fund, LP and LibertyView
Funds, LP is Neuberger Berman Asset Management, LLC, which is affiliated
with Neuberger Berman, LLC, a registered broker-dealer. LibertyView
Capital Management, a division of Neuberger Berman, LLC, is affiliated
with the General Partner of the LibertyView Health Sciences Fund,
LP. The
shares were purchased for investment in the ordinary course of business
and at the time of purchase, there were no agreements or understandings,
directly or indirectly, with any person to distribute the shares.
Trust D
for a Portion of the Assets of the Kodak Retirement Income Plan is
not in
any way affiliated with a broker-dealer.
|
(15) |
Consists
of (i) 1,770,323 shares of common stock and (ii) currently exercisable
warrants to purchase 704,429 shares of common stock. LibertyView
Special
Opportunities Fund, LP, LibertyView Funds, LP and Trust D for a Portion
of
the Assets of the Kodak Retirement Income Plan have a common investment
advisor, Neuberger Berman, LLC, that has voting and dispositive power
over
the shares held by them, which is exercised by Richard A. Meckler.
Since
they have hired a common investment advisor, these entities are likely
to
vote together. Additionally, there may be common investors within
the
different accounts managed by the same investment advisor. The General
Partner of LibertyView Special Opportunities Fund, LP and LibertyView
Funds, LP is Neuberger Berman Asset Management, LLC, which is affiliated
with Neuberger Berman, LLC, a registered broker-dealer. LibertyView
Capital Management, a division of Neuberger Berman, LLC, is affiliated
with the General Partner of the LibertyView Health Sciences Fund,
LP. The
shares were purchased for investment in the ordinary course of business
and at the time of purchase, there were no agreements or understandings,
directly or indirectly, with any person to distribute the shares.
Trust D
for a Portion of the Assets of the Kodak Retirement Income Plan is
not in
any way affiliated with a
broker-dealer.
|
(16) |
Includes
shares of common stock and currently exercisable warrants to purchase
shares of common stock held by Liberty Funds, LP and LibertyView
Special
Opportunities Fund, LP (see footnotes 14 and 15). Also includes (i)
432,843 shares of common stock held by Trust D for a Portion of the
Assets
of the Kodak Retirement Income Fund and (ii) currently exercisable
warrants to purchase 182,517 shares of common stock held by Trust
D for a
Portion of the Assets of the Kodak Retirement Income Plan. LibertyView
Funds, LP, LibertyView Special Opportunities Fund, LP and Trust D
for a
Portion of the Assets of the Kodak Retirement Income Plan have a
common
investment advisor, Neuberger Berman, LLC, that has voting and dispositive
power over the shares held by them, which is exercised by Richard
A.
Meckler. Since they have hired a common investment advisor, these
entities
are likely to vote together. Additionally, there may be common investors
within the different accounts managed by the same investment advisor.
The
General Partner of LibertyView Special Opportunities Fund, LP and
LibertyView Funds, LP is Neuberger Berman Asset Management, LLC,
which is
affiliated with Neuberger Berman, LLC, a registered broker-dealer.
LibertyView Capital Management, a division of Neuberger Berman, LLC,
is
affiliated with the General Partner of the LibertyView Health Sciences
Fund, LP. The shares were purchased for investment in the ordinary
course
of business and at the time of purchase, there were no agreements
or
understandings, directly or indirectly, with any person to distribute
the
shares. Trust D for a Portion of the Assets of the Kodak Retirement
Income
Plan is not in any way affiliated with a broker-dealer.
|
(17) |
Includes
currently exercisable options and warrants to purchase 1,326,397
shares of
common stock.
|
SELLING
STOCKHOLDERS
Selling
Stockholder Table
The
shares to be offered by the selling stockholders are “restricted” securities
under applicable federal and state securities laws and are being registered
under the Securities Act of 1933, as amended, or the Securities Act, to give
the
selling stockholders the opportunity to publicly sell or otherwise dispose
of
those shares. The registration of these shares does not require that any of
the
shares be offered or sold by the selling stockholders. The shares included
in
this prospectus may be disposed of by the selling stockholders or their
transferees on any stock exchange, market, or trading facility on which the
shares are traded or in private transactions. These dispositions may be at
fixed
prices, at prevailing market prices at the time of sale, at prices related
to
the prevailing market price, at varying prices determined at the time of sale,
or at negotiated prices. We will not control or determine the price at which
a
selling stockholder decides to dispose of its shares.
No
estimate can be given as to the amount or percentage of our common stock that
will be held by the selling stockholders after any sales or other dispositions
made pursuant to this prospectus because the selling stockholders are not
required to sell any of the shares being registered under this prospectus.
The
following table assumes that the selling stockholders will sell all of the
shares listed in this prospectus. The percentages in the following table are
based on 25,144,086 shares of our common stock issued and outstanding as of
April 30, 2007.
The
following table sets forth the beneficial ownership of the selling
stockholders:
|
|
Beneficial
Ownership
Before
Offering(1)
|
|
Number
of
|
|
Beneficial
Ownership
After
Offering(1)
|
|
Selling
Stockholder
|
|
Number
of
Shares
|
|
Percent
|
|
Shares
Being Offered
|
|
Number
of
Shares
|
|
Percent
|
|
AFO
Capital Advisors, LLC(2)
|
|
|
200,000
|
|
|
*
|
|
|
200,000
|
|
|
|
|
|
*
|
|
AFO
Advisors, LLC(2)
|
|
|
200,000
|
|
|
*
|
|
|
200,000
|
|
|
|
|
|
*
|
|
The
Jay H. Oyer and Amy Factor Family Foundation(2)
|
|
|
5,000
|
|
|
*
|
|
|
5,000
|
|
|
|
|
|
*
|
|
The
Melissa H. Oyer Trust(2)
|
|
|
5,000
|
|
|
*
|
|
|
5,000
|
|
|
|
|
|
*
|
|
The
Zachary D. Oyer Trust(2)
|
|
|
5,000
|
|
|
*
|
|
|
5,000
|
|
|
|
|
|
*
|
|
American
Charter & Marketing LLC(3)
|
|
|
122,222
|
|
|
*
|
|
|
122,222
|
|
|
|
|
|
*
|
|
Alexander
Angerman & Judith Angerman Trustees for the Angerman Family
Trust(4)
|
|
|
337,500
|
|
|
1.3
|
%
|
|
337,500
|
|
|
|
|
|
*
|
|
Gary
Ballen
|
|
|
1,017,000
|
|
|
4.0
|
%
|
|
1,017,000
|
|
|
|
|
|
*
|
|
Mulberry
Development S.A., Panama(5)
|
|
|
25,000
|
|
|
*
|
|
|
25,000
|
|
|
|
|
|
*
|
|
Richard
W. Bank
|
|
|
160,000
|
|
|
*
|
|
|
40,000
|
|
|
120,000
|
|
|
*
|
|
H.
Gerald Bidwell Revocable Trust(6)
|
|
|
100,000
|
|
|
*
|
|
|
100,000
|
|
|
|
|
|
*
|
|
Walter
C. Bowen
|
|
|
100,000
|
|
|
*
|
|
|
100,000
|
|
|
|
|
|
*
|
|
Jacqueline
B. Brandwynne
|
|
|
200,000
|
|
|
*
|
|
|
200,000
|
|
|
|
|
|
*
|
|
Brender
Services Limited(7)
|
|
|
222,222
|
|
|
*
|
|
|
222,222
|
|
|
|
|
|
*
|
|
Gosse
Bruinsma
|
|
|
100,000
|
|
|
*
|
|
|
100,000
|
|
|
|
|
|
*
|
|
Robert
G. Burford & Martha Burford JTTEN
|
|
|
50,000
|
|
|
*
|
|
|
50,000
|
|
|
|
|
|
*
|
|
Cedars-Sinai
Medical Center(8)
|
|
|
681,818
|
|
|
2.7
|
%
|
|
681,818
|
|
|
|
|
|
*
|
|
John
A. Combias
|
|
|
100,000
|
|
|
*
|
|
|
100,000
|
|
|
|
|
|
*
|
|
Citigroup
Global Markets Inc. Roth IRA custodian Louis G. Cornacchia
|
|
|
100,000
|
|
|
*
|
|
|
100,000
|
|
|
|
|
|
*
|
|
Dalworth
Capital Ltd.(9)
|
|
|
200,000
|
|
|
*
|
|
|
200,000
|
|
|
|
|
|
*
|
|
Joseph
R. Edington IV(10)
|
|
|
68,750
|
|
|
*
|
|
|
68,750
|
|
|
|
|
|
*
|
|
Triax
Capital Management, Inc.(10)
|
|
|
244,000
|
|
|
*
|
|
|
244,000
|
|
|
|
|
|
*
|
|
EPM
AG(11)
|
|
|
25,000
|
|
|
*
|
|
|
25,000
|
|
|
|
|
|
*
|
|
EPM
Holding AG(11)
|
|
|
50,000
|
|
|
*
|
|
|
50,000
|
|
|
|
|
|
*
|
|
Richard
I. Fedder
|
|
|
200,000
|
|
|
*
|
|
|
200,000
|
|
|
|
|
|
*
|
|
Michael
Feves
|
|
|
100,000
|
|
|
*
|
|
|
100,000
|
|
|
|
|
|
*
|
|
Larry
S. Flax Revocable Trust
|
|
|
100,000
|
|
|
*
|
|
|
100,000
|
|
|
|
|
|
*
|
|
Steven
Brown
|
|
|
50,000
|
|
|
*
|
|
|
50,000
|
|
|
|
|
|
*
|
|
Eric
Hutchings
|
|
|
50,000
|
|
|
*
|
|
|
50,000
|
|
|
|
|
|
*
|
|
Darren
Abe
|
|
|
50,000
|
|
|
*
|
|
|
50,000
|
|
|
|
|
|
*
|
|
James
Sandberg
|
|
|
50,000
|
|
|
*
|
|
|
50,000
|
|
|
|
|
|
*
|
|
John
Flugum
|
|
|
50,000
|
|
|
*
|
|
|
50,000
|
|
|
|
|
|
*
|
|
Ernest
F. Fox, Jr. TTEE for the Fran Fox Trust(12)
|
|
|
60,000
|
|
|
*
|
|
|
60,000
|
|
|
|
|
|
*
|
|
Mary
Lou Fox
|
|
|
20,000
|
|
|
*
|
|
|
20,000
|
|
|
|
|
|
*
|
|
Marc
Gelman
|
|
|
237,500
|
|
|
*
|
|
|
237,500
|
|
|
|
|
|
*
|
|
Manuel
P. Graiwer
|
|
|
337,500
|
|
|
1.3
|
%
|
|
337,500
|
|
|
|
|
|
*
|
|
Granadilla
Holdings Ltd.(13)
|
|
|
200,000
|
|
|
*
|
|
|
200,000
|
|
|
|
|
|
*
|
|
Adam
Hausman
|
|
|
15,000
|
|
|
*
|
|
|
15,000
|
|
|
|
|
|
*
|
|
Jonathan
Hausman
|
|
|
68,750
|
|
|
*
|
|
|
68,750
|
|
|
|
|
|
*
|
|
Marvin
S. Hausman TTEE for the Marvin S. Hausman Revocable Trust(14)
|
|
|
237,500
|
|
|
*
|
|
|
237,500
|
|
|
|
|
|
*
|
|
Northwest
Medical Research Inc.(14)
|
|
|
244,000
|
|
|
*
|
|
|
244,000
|
|
|
|
|
|
*
|
|
Heinz
Hofliger
|
|
|
50,000
|
|
|
*
|
|
|
50,000
|
|
|
|
|
|
*
|
|
Sanford
J. Hillsberg(15)
|
|
|
49,833
|
|
|
*
|
|
|
49,833
|
|
|
|
|
|
*
|
|
The
Hillsberg Foundation(15)
|
|
|
5,000
|
|
|
*
|
|
|
5,000
|
|
|
|
|
|
*
|
|
William
D. Huyette & Shirley A. Huyette JTWROS
|
|
|
60,000
|
|
|
*
|
|
|
60,000
|
|
|
|
|
|
*
|
|
Heather
Ann Huyette Ochoa
|
|
|
20,000
|
|
|
*
|
|
|
20,000
|
|
|
|
|
|
*
|
|
Jason
Daniel Huyette
|
|
|
20,000
|
|
|
*
|
|
|
20,000
|
|
|
|
|
|
*
|
|
Ben
Jakobovits
|
|
|
100,000
|
|
|
*
|
|
|
100,000
|
|
|
|
|
|
*
|
|
Gary
Kaplan & Susan Kaplan Family Trust
|
|
|
100,000
|
|
|
*
|
|
|
100,000
|
|
|
|
|
|
*
|
|
Ron
S. Kaufman
|
|
|
50,000
|
|
|
*
|
|
|
50,000
|
|
|
|
|
|
*
|
|
Philip
Klein
|
|
|
500,000
|
|
|
2.0
|
%
|
|
500,000
|
|
|
|
|
|
*
|
|
Charles
F. Kivowitz & Alexandra Kivowitz Co-Trustees for the Kivowitz Family
Trust(16)
|
|
|
100,000
|
|
|
*
|
|
|
100,000
|
|
|
|
|
|
*
|
|
Elena
Konstat
|
|
|
50,000
|
|
|
*
|
|
|
50,000
|
|
|
|
|
|
*
|
|
Howard
Lifshutz & Esther Lifshutz JTTEN
|
|
|
115,000
|
|
|
*
|
|
|
115,000
|
|
|
|
|
|
*
|
|
Livorno
Latin America Promotions B.V.(17)
|
|
|
300,000
|
|
|
1.2
|
%
|
|
300,000
|
|
|
|
|
|
*
|
|
P.
Dennis & Barbara Lowry JTTEN
|
|
|
100,000
|
|
|
*
|
|
|
100,000
|
|
|
|
|
|
*
|
|
Norbert
V. Mang
|
|
|
50,000
|
|
|
*
|
|
|
50,000
|
|
|
|
|
|
*
|
|
Scott
Thomas McKillip
|
|
|
50,000
|
|
|
*
|
|
|
50,000
|
|
|
|
|
|
*
|
|
Manfred
Mosk(18)
|
|
|
151,333
|
|
|
*
|
|
|
151,333
|
|
|
|
|
|
*
|
|
Technomedics
Management Systems, Inc.(18)
|
|
|
228,750
|
|
|
*
|
|
|
228,750
|
|
|
|
|
|
*
|
|
Norman
J. Nemoy & Carole Curb-Nemoy TENCOM
|
|
|
100,000
|
|
|
*
|
|
|
100,000
|
|
|
|
|
|
*
|
|
Arthur
C. Piculell, Jr. & Dee W. Piculell JTTEN
|
|
|
237,500
|
|
|
*
|
|
|
237,500
|
|
|
|
|
|
*
|
|