UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM 10-QSB/A
(AMENDMENT NO. 1)
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-32603
------------------------
ARBIOS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Nevada 91-19553323
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation organization)
8797 Beverly Blvd., Los Angeles, California 90048
(Address of principal executive offices) (Zip Code)
(310) 657-4898
(Registrant's telephone number, including area code)
110 North George Burns Road, Suite D-4018 Los Angeles, CA 90048
(Former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_].
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. On August 9, 2004, there were
13,198,097 shares of common stock, $.001 par value, issued and outstanding.
1
ARBIOS SYSTEMS, INC.
FORM 10-QSB/A
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-QSB/A has been prepared to report the
issuance during the fiscal quarter ended June 30, 2004 of a warrant to purchase
up to 150,000 shares of the Company's common stock. As a result, this Amendment
No. 1 on Form 10-QSB/A (i) amends the unaudited Condensed Consolidated Balance
Sheets, Condensed Consolidated Statements of Operations and Condensed
Consolidated Statements of Cash Flows, (ii) amends and adds disclosure to Items
1 and 2 in Part I, and (iii) adds Item 2 to Part II. Except for the changes made
to the foregoing sections to reflect the issuance of the warrant, this report
does not reflect any events or circumstances occurring after August 13, 2004,
the original filing date of the Company's Form 10-QSB for the quarter ended June
30, 2004.
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet as
of June 30, 2004 (unaudited) and December 31, 2003 ...............3
Condensed Consolidated Statements of Operations for the three
months and six months ended June 30, 2004 and 2003 and from
inception to June 30, 2004 (unaudited) ..........................4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2004 and 2003 and from inception to
June 30, 2004 (unaudited).........................................5
Notes to Condensed Consolidated Financial Statements .............6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................8
Item 3. Controls And Procedures..................................................17
PART II. OTHER INFORMATION
Item 2. Changes In Securities And Small Business
Issuer Purchases Of Equity Securities....................................17
Item 5. Other Information........................................................18
Item 6. Exhibits and Reports on Form 8-K.........................................18
SIGNATURES..........................................................................19
CERTIFICATIONS......................................................................20
2
PART I
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ARBIOS SYSTEMS, INC. AND SUBSIDIARY
(A development stage company)
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS June 30, 2004 December 31, 2003
------
(Unaudited (Audited)
and restated)
Current assets
Cash $ 2,511,938 $ 3,507,086
Prepaid expenses 122,735 155,986
----------- -----------
Total current assets $ 2,634,673 $ 3,663,072
Net property and equipment 55,213 45,633
Patent rights, net of accumulated amortization of $90,656 309,344 324,145
Other assets 12,671 7,434
----------- -----------
Total assets $ 3,011,901 $ 4,040,284
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 40,082 $ 148,229
Accrued expenses 239,430
Current portion of capitalized lease obligation 8,907 8,526
----------- -----------
Total current liabilities 288,419 156,755
Long-term liabilities
Contract commitment 250,000
Capital lease obligation, less current portion 1,549 6,826
Other liabilities 5,555
----------- -----------
Total Long-term liabilities 251,549 12,381
Stockholders' equity
Preferred stock, $.001 par value;
5,000,000 shares authorized:
none issued and outstanding
Common stock, $.001 par value; 25,000,000
shares authorized; 13,198,097
and 13,150,598 shares issued and
outstanding in 2004 and 2003, respectively 13,199 13,151
Additional paid-in capital 5,832,054 5,485,498
Deficit accumulated during the development stage (3,373,320) (1,627,501)
----------- -----------
Total stockholders' equity 2,471,933 3,871,148
----------- -----------
Total liabilities and stockholders' equity $ 3,011,901 $ 4,040,284
=========== ===========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
ARBIOS SYSTEMS, INC. AND SUBSIDIARY
(A development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and restated)
For the three months For the six
ended June 30, months ended June 30,
---------------------------- ---------------------------- Inception to
2004 2003 2004 2003 June 30, 2004
------------ ------------ ------------ ------------ ------------
Revenues $ 33,810 $ 22,643 $ 33,810 $ 43,018 $ 282,746
------------ ------------ ------------ ------------ ------------
Operating expenses:
General and administrative 708,060 39,016 905,770 76,170 1,554,514
Research and development 728,334 95,685 880,506 181,076 1,858,675
------------ ------------ ------------ ------------ ------------
Total operating expenses 1,436,394 134,701 1,786,276 257,246 3,413,189
------------ ------------ ------------ ------------ ------------
Loss before other income (expense) (1,402,584) (112,058) (1,752,466) (214,228) (3,130,443)
------------ ------------ ------------ ------------ ------------
Other income (expense):
Interest income 4,385 9,707 12,263
Interest expense (223) (763) (485) (363) (246,198)
------------ ------------ ------------ ------------ ------------
Total other income (expense) 4,162 (763) 9,222 (363) (233,935)
------------ ------------ ------------ ------------ ------------
Loss before tax provision (1,398,422) (112,821) (1,743,244) (214,591) (3,364,378)
Provision for taxes 2,575 1,122 8,942
------------ ------------ ------------ ------------ ------------
Net loss $ (1,398,422) $ (112,821) $ (1,745,819) $ (215,713) $ (3,373,320)
============ ============ ============ ============ ============
Net earnings per share:
Basic and diluted $ (0.11) $ (0.02) $ (0.13) $ (0.03) $ (0.48)
Weighted-average shares:
Basic and diluted 13,198,097 6,848,780 13,194,760 6,784,272 7,009,972
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
ARBIOS SYSTEMS, INC. AND SUBSIDIARY
(A development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months
ended June 30,
-------------------------- Inception to
2004 2003 June 30, 2004
----------- ----------- -----------
(restated) (restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,745,819) $ (215,713) $(3,373,320)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of debt discount 244,795
Depreciation and amortization 21,994 19,791 114,331
Issuance of common stock and warrants
for compensation 525,848 536,348
Settlement of accrued expense 54,401
Deferred compensation costs 319,553
Research and Development 85,888
Changes in operating assets and liabilities:
Prepaid expenses 33,251 (65,377) (122,738)
Other Assets (5,237) (12,671)
Accounts payable and accrued expenses (47,960) 2,074 100,271
Other liabilities (5,556)
Contract obligation 250,000 250,000
----------- ----------- -----------
Net cash used in operating activities (973,479) (173,337) (1,889,030)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment (16,773) (18,717) (53,888)
----------- ----------- -----------
Net cash used in investing activities (16,773) (18,717) (53,888)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible debt 400,000
Proceeds from issuance of common stock 250,200 4,405,066
Proceeds from issuance of preferred stock 250,000
Payments on capital lease obligation, net (4,896) (3,907) (14,544)
Cost of issuance of preferred stock (11,268)
Cost of issuance of common stock (2,957) (574,398)
Restricted cash (7,500)
----------- ----------- -----------
Net cash provided by financing activities (4,896) 235,836 4,454,856
----------- ----------- -----------
Net (decrease) increase in cash (995,148) 43,782 2,511,938
Cash:
At beginning of period 3,507,086 27,849
----------- ----------- -----------
At end of period $ 2,511,938 $ 71,631 $ 2,511,938
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITY:
Issuance of Common Stock for payable $ 47,500 $ 47,500
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
ARBIOS SYSTEMS, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2004
(1) BASIS OF PRESENTATION:
In the opinion of the management of Arbios Systems, Inc. (the "Company"), the
accompanying unaudited condensed consolidated financial statements include all
normal adjustments considered necessary to present fairly the financial position
as of June 30, 2004, and the results of operations for the periods presented.
The unaudited condensed consolidated financial statements and notes are
presented as permitted by Form 10-QSB. These condensed financial statements have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted pursuant to
such SEC rules and regulations. These financial statements should be read in
conjunction with the Company's audited financial statements and the accompanying
notes included in the Company's Form 10-KSB for the year ended December 31,
2003, filed with the SEC. The results of operations for the three month and six
month periods ended June 30, 2004 are not necessarily indicative of the results
to be expected for any subsequent quarter or for the entire fiscal year.
(2) STOCK-BASED COMPENSATION:
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of grant and is
recognized over the periods in which the related services are rendered. The
statement also permits companies to elect to continue using the current
intrinsic value accounting method specified in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," to account
for stock-based compensation. The Company has elected to use the intrinsic value
based method and has disclosed the pro forma effect of using the fair value
based method to account for its stock-based compensation issued to employees.
For non-employee stock based compensation the Company recognizes an expense in
accordance with SFAS No. 123 and values the equity securities based on the fair
value of the security on the date of grant with subsequent adjustments based on
the fair value of the equity security as it vests.
If the Company had elected to recognize compensation cost for its stock options
and warrants for employees based on the fair value at the grant dates, in
accordance with SFAS 123, net earnings and earnings per share would have been as
follows:
6
Three Months Six Months
Ended June 30, Ended June 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net loss as reported $(1,398,422) $ (112,821) $(1,745,819) $ (215,713)
Compensation recognized under:
APB 25 -- -- -- --
SFAS 123 (143,673) (5,191) (161,819) (6,951)
----------- ----------- ----------- -----------
Proforma net loss $(1,542,095) $ (118,012) $(1,907,638) $ (222,664)
=========== =========== =========== ===========
Basic and diluted loss per common share:
As reported $ (0.11) $ (0.02) $ (0.13) $ (0.03)
Proforma $ (0.12) $ (0.02) $ (0.14) $ (0.03)
(3)SUBSEQUENT EVENTS
In July, 2004, the Company entered into an agreement with 4P Management Partners
S.A. of Zurich, Switzerland, to perform investor relations services for the
Company in Europe. The Company issued two warrants to 4P Management Partners
S.A. to purchase an aggregate of 100,000 shares of common stock. The first
warrant for 50,000 shares vests immediately with an exercise price of $1.50 per
share and a five year expiration term. The second warrant for 50,000 shares
vests ratably each month over one year with an exercise price of $3.50 per share
and a five year expiration term.
(4)RESTATEMENT
The financial statements for the three months and six month periods ended June
30, 2004 and from inception to June 30, 2004 have been restated to include the
changes to accrued liabilities, additional paid-in capital and general and
administrative expenses related to a warrant grant to a consultant in April
2004. The effect of this change to the June 30, 2004 financial statements is as
follows:
For the three months ended June 30, 2004
Condensed Consolidated
Statement of Operations Reported Adjustment Restated
-------- ---------- --------
Net loss $(1,274,150) $(124,272) $ (1,398,422)
=========== ========= =============
Net earnings per share - basic and diluted $ (0.10) $ (0.01) $ (0.11)
=========== ========= =============
For the six months ended June 30, 2004
Condensed Consolidated
Statement of Operations Reported Adjustment Restated
-------- ---------- --------
Net loss $(1,621,547) $(124,272) $ (1,745,819)
=========== ========= =============
Net earnings per share - basic and diluted $ (0.12) $ (0.01) $ (0.13)
=========== ========= =============
7
Inception to June 30, 2004
Condensed Consolidated
Statement of Operations Reported Adjustment Restated
-------- ---------- --------
Net loss $(3,249,048) $(124,272) $ (3,373,320)
=========== ========= =============
Net earnings per share - basic and diluted $ (0.46) $ (0.02) $ (0.48)
=========== ========= =============
June 30, 2004
Condensed Consolidated Balance Sheet Reported Adjustment Restated
-------- ---------- --------
Accrued expenses $ 188,140 $ 51,290 $ 239,430
=========== =========== ===========
Additional paid-in capital $ 5,759,072 $ 72,982 $ 5,832,054
=========== =========== ===========
Deficit accumulated during
the development stage $(3,249,048) $ (124,272) $(3,373,320)
=========== =========== ===========
(5) Contract Commitment
On April 19, 2004, the Company purchased certain assets of Circe Biomedical,
Inc. including Circe's patent portfolio, rights to a bioartificial liver
(HepatAssist)(TM), a Phase III Investigational New Drug application, selected
equipment, clinical and marketing data, and over 400 standard operating
procedures and clinical protocols previously reviewed by the Food and Drug
Administration. In exchange for these assets, the Company paid a $200,000
upfront payment and is committed to make a $250,000 deferred payment due the
earlier of April 12, 2006 or when the Company has raised accumulated gross
proceeds of $4 million from the issuance of debt or equity securities. The
Company expensed the cost of the acquisition in the fiscal quarter ended June
30, 2004 as part of acquired research and development costs, as the underlying
rights have not yet reached the stage at which their commercial feasibility can
be established.
(6) Warrant Issued
On March 30, 2004, the Company entered into a retainer agreement with Wolfe
Axelrod Weinberger Associates LLC, an investor relations firm, pursuant to which
Wolfe Axelrod agreed to provide the Company with the investor relations services
for a nine-months period ending December 31, 2004. At the Company's option the
agreement may be extended before December 31, 2004 for an additional nine
months. Under the agreement, the Company is required to pay $6,000 for these
services. In addition, a warrant to purchase 150,000 shares of Company's common
stock at a price of $3.40 was granted to Wolfe Axelrod Weinberger Associates LLC
in April of 2004. In the event that the Company does not extend the retainer
agreement beyond December 31, 2004, one half of the warrant will expire and be
terminated on December 31, 2004.
The fair value for the warrant was estimated at approximately $125,000 using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 2004: average risk-free interest rate of 3.72%; dividend yields
of 0%; volatility factors of the expected market price of the Company's common
stock of 94%; and a weighted average expected life of the option of 5 years.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT
In addition to historical information, the information included in this
Form 10-QSB contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), such as those pertaining to our capital resources, our ability to
complete the research and develop our products, and our ability to obtain
regulatory approval for our products. Forward-looking statements involve
numerous risks and uncertainties and should not be relied upon as predictions of
future events. Certain such forward-looking statements can be identified by the
use of forward-looking terminology such as "believes," "expects," "may," "will,"
"should," "seeks," "approximately," "intends," "plans," "pro forma,"
"estimates," or "anticipates" or other variations thereof or comparable
terminology, or by discussions of strategy, plans or intentions. Such
forward-looking statements are necessarily dependent on assumptions, data or
methods that may be incorrect or imprecise and may be incapable of being
realized. The following factors, among others, could cause actual results and
future events to differ materially from those set forth or contemplated in the
forward-looking statements: need for a significant amount of additional capital,
lack of revenue, uncertainty of product development, ability to obtain
regulatory approvals in the United States and other countries, and competition.
Readers are cautioned not to place undue reliance on forward-looking statements,
which reflect our management's analysis only. We assume no obligation to update
forward-looking statements.
OVERVIEW
On October 30, 2003, we completed a reorganization (the "Reorganization")
in which Arbios Technologies, Inc., 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 Arbios Technologies, Inc. Following the Reorganization,
we ceased our e-commerce business, closed our former offices, and moved our
offices to Los Angeles, California. We currently do not plan to conduct any
business other than the operations Arbios Technologies, Inc. has conducted since
its organization. Accordingly, since our prior operating results as an
e-commerce business are not indicative of, and have no relevance to, our current
or future operations or to our financial statement, all financial information
contained in the enclosed interim financial statements are those of Arbios
Technologies, Inc.
8
Although we acquired Arbios Technologies, Inc. in the Reorganization, for
accounting purposes, the Reorganization was accounted for as a reverse merger
since the stockholders of Arbios Technologies, Inc. acquired a majority of the
issued and outstanding shares of our common stock, and the directors and
executive officers of Arbios Technologies, Inc. became our directors and
executive officers. Accordingly, the financial statements attached as Item 1 in
Part I above, and the description of our results of operations and financial
condition, reflect (i) the operations of Arbios Technologies, Inc. alone prior
to the Reorganization, and (ii) the combined results of this company and Arbios
Technologies, Inc. since the Reorganization. No goodwill was recorded as a
result of the Reorganization.
Since the formation of Arbios Technologies, Inc. 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 $283,000)
that we received from the United States Small Business Administration.
Our current plan of operations for the next 12 months primarily involves
research and development activities, including clinical trials for at least one
of our two potential products, and the preparation and submission of
applications to the FDA. 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
research and development programs, the results of clinical studies, and the
timing and cost of regulatory submissions. However, based on our current
estimates, we believe that we have sufficient financial resources to conduct our
planned operations beyond the next 12 months.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States require management to make
estimates and assumptions that affect the reported assets, liabilities, sales
and expenses in the accompanying financial statements. Critical accounting
policies are those that require the most subjective and complex judgments, often
employing the use of estimates about the effect of matters that are inherently
uncertain. We do not believe that currently there are any alternative methods of
accounting for our operations that would materially affect our financial
statements.
PRESENTATION
Certain prior year amounts have been reclassified to conform with current
year presentation.
Results of Operations
Since we are still developing our products and do not have any products
available for sale, we have not yet generated any revenues from sales. Revenues
of $33,810 and $22,643 for the three-months ended June 30, 2004 and 2003, and
revenues of $33,810 and $43,018 for the six month periods ended June 30, 2004
and 2003 represent revenues recognized from a government research grant.
General and administrative expenses of $708,060 and $39,016 were incurred
for the three months ended June 30, 2004 and 2003. General and administrative
expenses of $905,770 and $76,170 were incurred for the six months ended June 30,
2004 and 2003. For the six months ended June 30, 2004, the significant expenses
consist of $460,000 in non-cash option and warrant charges for grants awarded to
consultants, $252,000 in fees incurred to outside consultants and professionals,
and $66,000 in salaries and other administrative expenses. The 2003 expenses
consist primarily of legal and audit fees incurred. Professional fees increased
due to the legal and accounting fees and expenses related to our status as a
public company and legal expenses associated with the acquisition of certain
assets from Circe Biomedical Inc. in April 2004. In 2004 we also incurred
additional consulting fees in connection with our investigation of the
suitability and advisability of submitting a Section 510(k) Pre-Market
Notification with the United States Food and Drug Administration ("FDA") for our
SEPETTM product. General and administrative expenses are expected to remain at a
significantly higher level than in past periods due to the lease of additional
office space (effective as of April 1, 2004), the addition of more employees and
consultants (primarily to assist with our financial controls and investor
relations strategies and to evaluate and prepare submissions to the FDA), and
additional professional and other fees related to being a public company.
9
Research and development expenses of $728,334 and $95,685 were incurred
for the three months ended June 30, 2004 and 2003. Research and development
expenses of $880,506 and $181,076 were incurred for the six months ended June
30, 2004 and 2003. Research and development expenses for the six months ended
June 30, 2004 increased by $699,430 over prior year levels primarily due to
$450,000 of purchased research and development from Circe Biomedical, Inc.,
$110,000 incurred for various research and development consultants regarding
manufacturing, regulatory and product management, $65,000 non cash option grant
charges for options awarded to scientific consultants, $54,000 in higher salary
costs for scientists and technicians, and $15,000 increase in preclinical
testing of SEPETTM and LIVERAIDTM. We expect our research and development
activities and expenses specifically related to regulatory and clinical trial
costs for SEPETTM to increase during the balance of the current fiscal year
ending December 31, 2004.
Interest income of $4,385 and $9,707 was earned for the three and six
months ended June 30, 2004. There was no interest income for the corresponding
2003 periods. In September and October 2003, we raised $4,400,000 in the private
placement of our securities. As a result, during the three and six month periods
ended June 30, 2004, we maintained cash balances of over $2.5 million. In
addition, we used a portion of the foregoing offering proceeds to repay all
outstanding indebtedness, thereby substantially decreasing our interest expense.
Our net loss was $1,398,422 and $112,821 for the three months ended June
30, 2004 and 2003. The net loss was $1,745,819 and $215,713 for the six months
ended June 30, 2004 and 2003. The increase in net loss is attributed to an
increase in operating expenses incurred in the fiscal 2004 periods as compared
to the same periods in 2003 as explained above without an increase in revenues.
Operating expenses are expected to further increase in the current fiscal year
compared to last year as we increase our operations, while revenues are not
currently anticipated.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2004, we had cash of $2,512,000 and $314,000 of total
indebtedness (both long-term and current liabilities reduced by non-cash
unvested option expense of $226,000). We do not have any bank credit lines. To
date, we have funded our operations primarily from the sale of debt and equity
securities and an SBIR government grant. During fiscal 2003, sales of our
securities consisted of the following: (i) $250,000 obtained in January 2003
from the sale of our common stock sold at a price of $0.60 per share; (ii)
$400,000 raised from the sale of subordinated convertible promissory notes
(which notes were converted in October 2003 into common stock and warrants at
$1.00 per share immediately prior to the Reorganization); (iii) $2,310,000
raised in a private offering of common stock and warrants sold at a price of
$1.00 per share; and (iv) $1,690,000 obtained immediately prior to the
Reorganization in an offering of common stock and warrants sold at a price of
$1.00 per share. We have not, however, raised any capital from financings since
the end of the fiscal year ended December 31, 2003. Of the 4.4 million warrant
shares issued in September and October, 2003 are exercisable at $2.50 per share
and are callable by the Company if the common stock trades at an average price
of $4 per share for 20 consecutive trading days.
10
In April 2004 we purchased certain assets of Circe Biomedical, Inc.
including Circe's patent portfolio, rights to a bioartificial liver
(HepatAssist)(TM), a Phase III Investigational New Drug application, selected
equipment, clinical and marketing data, and over 400 standard operating
procedures and technical validation protocols that have previously been reviewed
by the FDA. The purchase price paid for these assets consisted of $200,000 paid
at the closing and our agreement to make a second payment, in the amount of
$250,000, on the earlier of April 12, 2006 or when we have raised, on a
cumulative basis from April 12, 2004, gross proceeds of $4 million from the
issuance of debt or equity securities. We believe that the original
HepatAssist(TM) bioartificial liver that we acquired can be enhanced by, among
other things, increasing the number of pig cells used in the device and by using
a different perfusion platform. As a result, we have recently shifted our
emphasis from the development of LIVERAID(TM) to the further development of the
HepatAssist(TM) bioartificial liver (we refer to the enhanced version of this
bioartificial liver as our BAL 2004 system). Many of the standard operating
procedures and technical protocols that we acquired will be usable by us and
will eliminate the need for us to independently develop these procedures and
protocols.
We do not currently anticipate that we will derive any revenues from
either product sales or from additional governmental research grants during the
next twelve months (other than a $38,200 final payment from the prior research
grant expected to be received later this year).
Based on our current plan of operations, we believe that our current cash
balances will be sufficient to fund our foreseeable expenses for at least the
next twelve months. However, the estimated cost of completing the development of
our products and of obtaining all required regulatory approvals to market our
products is substantially greater than the amount of funds we currently have
available and substantially greater than the amount we could possibly receive
under any governmental grant program. As a result, we will have to obtain
significant additional funds during the next 12 months in order to fund our
operations after that period. We currently expect to attempt to obtain
additional financing through the sale of additional equity and possibly through
strategic alliances with larger pharmaceutical or biomedical companies. We
cannot be sure that we will be able to obtain additional funding from either of
these sources, or that the terms under which we obtain such funding will be
beneficial to this company.
The following is a summary of our contractual cash obligations at June 30,
2004 for the balance of this fiscal year and for the following fiscal years:
2007 AND
CONTRACTUAL OBLIGATIONS TOTAL 2004 2005 2006 THEREAFTER
Purchased Research & Development $250,000 $250,000
Long-Term Office Leases $428,000 $137,000 $137,000 $77,000 $77,000
We do not believe that inflation has had a material impact on our business
or operations.
We are not a party to any off-balance sheet arrangements, and we do not
engage in trading activities involving non-exchange traded contracts. In
addition, we have no financial guarantees, debt or lease agreements or other
arrangements that could trigger a requirement for an early payment or that could
change the value of our assets
FACTORS THAT MAY AFFECT OUR BUSINESS AND OUR FUTURE RESULTS
We face a number of substantial risks. Our business, financial condition,
results of operations and stock price could be harmed by any of these risks. The
following factors should be considered in connection with the other information
contained in this Quarterly Report on Form 10-QSB.
11
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 a start-up company that has not generated any operating revenues to
date (our only revenues were two government research grants). Accordingly, while
we have been in existence since November 1999, and Arbios Technologies, Inc.,
our operating subsidiary, has been in existence since 2000, we should be
evaluated as a new, start-up company, subject to all of the risks and
uncertainties normally associated with a new, start-up company. As a start-up
company, we expect to incur significant operating losses for the foreseeable
future, and there can be no assurance that we will be able to validate and
market products in the future that will generate revenues or that any revenues
generated will be sufficient for us to become profitable or thereafter maintain
profitability.
We have had no product sales to date, and we can give no assurance that there
will ever be any sales in the future.
All of our products are still in research or development, and no revenues
have been generated to date from product sales. There is no guarantee that we
will ever develop commercially viable products. To become profitable, we will
have to successfully develop, obtain regulatory approval for, produce, market
and sell our products. There can be no assurance that our product development
efforts will be successfully completed, that we will be able to obtain all
required regulatory approvals, that we will be able to manufacture our products
at an acceptable cost and with acceptable quality, or that our products can be
successfully marketed in the future. We currently do not expect to receive
significant revenues from the sale of any of our products for at least the next
few years.
Before we can market any of our products, we must obtain governmental approval
for each of our products, the application and receipt of which is
time-consuming, costly and uncertain.
The development, production and marketing of our products are subject to
extensive regulation by government authorities in the United States and other
countries. In the U.S., SEPET(TM) and our bioartificial liver systems will
require approval from the FDA prior to clinical testing and commercialization.
The process for obtaining FDA approval to market therapeutic products is both
time-consuming and costly, with no certainty of a successful outcome. This
process includes the conduct of extensive pre-clinical and clinical testing,
which may take longer or cost more than we currently anticipate due to numerous
factors, including without limitation, difficulty in securing centers to conduct
trials, difficulty in enrolling patients in conformity with required protocols
and/or projected timelines, unexpected adverse reactions by patients in the
trials to our products, 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(TM) or our bioartificial liver systems and
these requirements may be more costly or time-consuming than we currently
anticipate.
Each of our products in development is novel both in terms of its
composition and function. Thus, we may encounter unexpected safety, efficacy or
manufacturing issues as we seek to obtain marketing approval for products from
the FDA, and there can be no assurance that we will be able to obtain approval
from the FDA or any foreign governmental agencies for marketing of any of our
products. The failure to receive, or any significant delay in receiving, FDA
approval, or the imposition of significant limitations on the indicated uses of
our products, would have a material adverse effect on our business, operating
results and financial condition. Japan's health regulatory authority has
objected, and other countries' regulatory authorities could potentially object
to the marketing of any therapy that uses pig liver cells (which our
bioartificial liver systems are designed to utilize) due to safety concerns. If
Japan or other countries impose a ban on the use of therapies that incorporate
pig cells, such as our bioartificial liver systems, we would be prevented from
marketing our products in those countries. If we are unable to obtain the
approval of the health regulatory authorities in Japan or other countries, the
potential market for our products will be reduced.
12
Because our products are at an early stage of development and have never been
marketed, we do not know if any of our products will ever be approved for
marketing, and any such approval will take several years to obtain.
Before obtaining regulatory approvals for the commercial sale of our
products, significant and potentially very costly preclinical and clinical work
will be necessary. There can be no assurance that we will be able to
successfully complete all required testing of SEPET(TM) or our bioartificial
liver systems. While the time periods for testing our products and obtaining the
FDA's approval is dependent upon many future variable and unpredictable events,
we estimate that it could take between one to three years to obtain approval for
SEPET(TM), three to five years for LIVERAID(TM), and two to three years for BAL
2004. 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. We will
need to file an investigational new drug application ("IND") for LIVERAID(TM)
and an investigational drug exemption for SEPET(TM) with the FDA and have these
applications cleared by the FDA before we can begin clinical testing of these
two products, and the FDA may require significant revisions to our clinical
testing plans or require us to demonstrate efficacy endpoints that are more
time-consuming or difficult to achieve than what we currently anticipate. We
have not yet completed preparation of either the IND or the investigational drug
exemption application, and there can be no assurance that we will have
sufficient experimental data to justify the submission of said applications.
Because of the early stage of development of each of our products, we do not
know if we will be able to generate clinical data that will support the filing
of the FDA applications for these products or the FDA's approval of any product
marketing approval application or IND that we do file.
We need FDA approval before conducting clinical studies of BAL 2004, the cost of
which exceeds our current financial resources. Accordingly, we will not be able
to conduct such studies until we obtain additional funding.
We are currently considering requesting FDA approval for a Phase III
clinical study of the BAL 2004 system. Such a request will require that we
supplement and/or amend the existing Phase III IND that was approved by the FDA
for the original HepatAssist system on which the BAL 2004 is based. The
preparation of a modified or supplemented Phase III IND will be expensive and
difficult to prepare. Although the cost of completing the Phase III study in the
manner that we currently contemplate is uncertain, if that Phase III clinical
study is authorized by the FDA, we currently estimate that the cost of
conducting that study would be between $10 million and $12 million. We currently
do not have sufficient funds to conduct this study and have not identified any
sources for obtaining the required funds. In addition, no assurance can be given
that the FDA will accept our proposed changes to the previously approved Phase
III IND. The clinical tests that we would conduct under any FDA-approved
protocol are very expensive to conduct and will cost much more than our current
financial resources. Accordingly, even if the FDA approves the modified Phase
III IND that we submit for BAL 2004, we will not be able to conduct any clinical
trials until we raise substantial amounts of additional financing.
Our bioartificial liver systems utilize a biological component obtained from
pigs that could prevent or restrict the release and use of those products.
13
Use of liver cells harvested from pig livers carries a risk of
transmitting viruses harmless to pigs but deadly to humans. For instance, all
pig cells carry genetic material of the porcine endogenous retrovirus ("PERV"),
but its ability to infect people is unknown. Repeated testing, including a 1999
study of 160 xenotransplant (transplantation from animals to humans) patients
and recently completed Phase II/III testing of the HepatAssist system by Circe
Biomedical, Inc., has turned up no sign of the transmission of PERV to humans.
Still, no one can prove that PERV or another virus would not infect
bioartificial liver-treated patients and cause potentially serious disease. This
may result in the FDA or other health regulatory agencies not approving our
bioartificial liver systems or subsequently banning any further use of our
product should health concerns arise after the product has been approved. At
this time, it is unclear whether we will be able to obtain clinical and product
liability insurance that covers the PERV risk.
In addition to the potential health risks associated with the use of pig
liver cells, our use of xenotransplantation technologies may be opposed by
individuals or organizations on health, religious or ethical grounds. Certain
animal rights groups and other organizations are known to protest animal
research and development programs or to boycott products resulting from such
programs. Previously, some groups have objected to the use of pig liver cells by
other companies, including Circe Biomedical, Inc., that were developing
bioartificial liver support systems, and it is possible that such groups could
object to our bioartificial liver system. Litigation instituted by any of these
organizations, and negative publicity regarding our use of pig liver cells in a
bioartificial liver device, could have a material adverse effect on our
business, operating results and financial condition.
Because our products represent new approaches to treatment of liver disease,
there are many uncertainties regarding the development, the market acceptance
and the commercial potential of our products.
Our products will represent new therapeutic approaches for disease
conditions. We may, as a result, encounter delays as compared to other products
under development in reaching agreements with the FDA or other applicable
governmental agencies as to the development plans and data that will be required
to obtain marketing approvals from these agencies. There can be no assurance
that these approaches will gain acceptance among doctors or patients or that
governmental or third party medical reimbursement payers will be willing to
provide reimbursement coverage for our products. Moreover, we do not have the
marketing data resources possessed by the major pharmaceutical companies, and we
have not independently verified the potential size of the commercial markets for
any of our products. Since our products will represent new approaches to
treating liver diseases, it may be difficult, in any event, to accurately
estimate the potential revenues from our products, as there currently are no
directly comparable products being marketed.
Since we only have sufficient capital to conduct our operations for the next 12
months, we will need to obtain significant additional capital, which additional
funding may dilute our existing stockholders.
Based on our current proposed plans and assumptions, we anticipate that
our existing funds will only be sufficient to fund our operations and capital
requirements for approximately 12 months from the date of this prospectus.
Furthermore, the clinical development expenses of our products will be very
substantial. Based on our current assumptions, we estimate that the cost of
developing SEPET(TM) will be between $500,000 and $2 million, the cost of
developing BAL 2004 will be between $10 million and 12 million, and the cost of
developing LIVERAID(TM) will be between $15 million and $20 million. These
amounts are well in excess of the amount of cash that we currently have
available to us. Accordingly, we will have to (i) obtain additional debt or
equity financing during the next 12-month period 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.
14
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.
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(TM) modules by Spectrum Labs) and there
can be no assurance that we will be able to enter into satisfactory arrangements
for these services or the manufacture or marketing of our products. We will be
required to expend substantial amounts to retain and continue to utilize the
services of one or more clinical research management organizations without any
assurance that the products covered by the clinical trials conducted under their
management ultimately will generate any revenues for SEPET(TM) and/or our
bioartificial liver systems. Consistent with our business model, we will seek to
enter into strategic alliances with other larger companies to market and sell
our products. In addition, we may need to utilize contract manufacturers to
manufacture our products or even our commercial supplies, and we may contract
with independent sales and marketing firms to use their pharmaceutical sales
force on a contract basis.
To the extent that we rely on other companies to manage the conduct of our
clinical trials and to manufacture or market our products, we will be dependent
on the timeliness and effectiveness of their efforts. If the clinical research
management organization that we utilize is unable to allocate sufficient
qualified personnel to our studies or if the work performed by them does not
fully satisfy the rigorous requirement of the FDA, we may encounter substantial
delays and increased costs in completing our clinical trials. If the
manufacturers of the raw material and finished product for our clinical trials
are unable to meet our time schedules or cost parameters, the timing of our
clinical trials and development of our products may be adversely affected. Any
manufacturer that we select may encounter difficulties in scaling-up the
manufacture of new products in commercial quantities, including problems
involving product yields, product stability or shelf life, quality control,
adequacy of control procedures and policies, compliance with FDA regulations and
the need for further FDA approval of any new manufacturing processes and
facilities. Should our manufacturing or marketing company encounter regulatory
problems with the FDA, FDA approval of our products could be delayed or the
marketing of our products could be suspended or otherwise adversely affected.
15
Because we are dependent on Spectrum Laboratories, Inc. as the manufacturer of
our LIVERAIDTM cartridges, any failure or delay by Spectrum Laboratories to
manufacture the cartridges will impact future operations.
We have an exclusive manufacturing arrangement with Spectrum Laboratories,
Inc. for the fiber-within-fiber LIVERAID(TM) cartridges. Although we have no
agreement with Spectrum Laboratories, Inc. for the manufacture of the SEPET(TM)
cartridges, Spectrum Laboratories has also been providing us with cartridges for
prototypes of the SEPET(TM) and has expressed an interest in manufacturing the
BAL 2004 cartridge. Spectrum Laboratories, Inc. has encountered certain problems
manufacturing the LIVERAID(TM) and SEPET(TM) cartridges for us, which problems,
if not remedied, may limit the amount and timeliness of cartridges that can be
manufactured. There can be no assurance that we will not encounter delays or
other manufacturing problems with Spectrum Labs with respect to our clinical or
commercial supplies of LIVERAID(TM) (and/or our SEPET(TM) cartridges if we agree
to have Spectrum Laboratories manufacture the SEPET(TM) cartridges). Although
Spectrum Labs has agreed to transfer all of the know-how related to these
products to any other manufacturer of our products, if Spectrum Laboratories is
unable to meet its contractual obligations to us, we may have difficulty in
finding a replacement manufacturer or may be required to alter the design of the
LIVERAID (TM) cartridges if we are unable to effectively transfer the Spectrum
Labs know-how to another manufacturer.
We currently do not have a manufacturing arrangement for the cartridges
used in the BAL 2004 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.
We may not have sufficient legal protection of our proprietary rights, which
could result in the use of our intellectual properties by our competitors.
Our ability to compete successfully will depend, in part, on our ability
to defend patents that have issued, obtain new patents, protect trade secrets
and operate without infringing the proprietary rights of others. We currently
own 11 U.S. patents on our liver support products, three foreign patents, have
one patent application pending, and are the licensee of seven additional liver
support patents. We have relied substantially on the patent legal work that was
performed for our assignors and licensors with respect to all of these patents,
application and licenses, and have not independently verified the validity or
any other aspects of the patents or patent applications covering our products
with our own patent counsel.
Even when we have obtained patent protection for our products, there is no
guarantee that the coverage of these patents will be sufficiently broad to
protect us from competitors or that we will be able to enforce our patents
against potential infringers. Patent litigation is expensive, and we may not be
able to afford the costs. Third parties could also assert that our products
infringe patents or other proprietary rights held by them.
We will attempt to protect our proprietary information as trade secrets
through nondisclosure agreements with each of our employees, licensing partners,
consultants, agents and other organizations to which we disclose our proprietary
information. There can be no assurance, however, that these agreements will
provide effective protection for our proprietary information in the event of
unauthorized use of disclosure of such information.
16
The development of our products is dependent upon Dr. Rozga and certain other
persons, and the loss of one or more of these key persons would materially and
adversely affect our business and prospects.
We are highly dependent on Jacek Rozga, MD, PhD, our President and Chief
Scientific Officer. To a lesser extent, we also depend upon the medical and
scientific advisory services that we receive from the members of our Board of
Directors, all of whom have extensive backgrounds in medicine. However, each of
these individuals, except Dr. Rozga, works for us as an unpaid advisor only on a
part-time, very limited basis. We are also dependent upon the voluntary advisory
services of Achilles A. Demetriou, MD, PhD, FACS, the other co-founder of Arbios
Technologies, Inc. and the Chairman of our Scientific Advisory Board. We do not
have a long-term employment contract with Dr. Jacek Rozga, and the loss of the
services of either of the foregoing persons would have a material adverse effect
on our business, operations and on the development of our products. We do not
carry key man life insurance on either of these individuals.
As we expand the scope of our operations by preparing FDA submissions,
conducting multiple clinical trials, and potentially acquiring related
technologies, we will need to obtain the full-time services of additional senior
scientific and management personnel. Competition for these personnel is intense,
and there can be no assurance that we will be able to attract or retain
qualified senior personnel. As we retain full-time senior personnel, our
overhead expenses for salaries and related items will increase substantially
from current levels.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
Our management, under the supervision and with the participation of our
chief executive officer/ chief financial officer, conducted an evaluation of our
"disclosure controls and procedures" (as defined in the Securities Exchange Act
of 1934 Rules 13a-14(c)) as of the end of the June 30, 2004 fiscal quarter.
Based on their evaluation, our chief executive officer/chief financial officer
concluded that as of the evaluation date, our disclosure controls and procedures
are effective to ensure that all material information required to be filed in
this Quarterly Report on Form 10-QSB has been made known to him.
Changes in Internal Controls:
Our Board of Directors has adopted a Code of Ethics for its Chief
Executive Officer and Chief Financial Officer, as well as a Code of Ethics for
its employees. These Codes are intended to ensure compliance with rules and
regulations, promote honest and ethical behavior and to prevent wrongdoing.
Based on his evaluation as of June 30, 2004, the chief executive
officer/chief financial officer has concluded that there were no material
changes in the company's internal controls over financial reporting or in any
other areas that could materially affect the company's internal controls
subsequent to the date of his most recent evaluation, including corrective
actions with regard to significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
On March 30, 2004, we entered into a retainer agreement with Wolfe Axelrod
Weinberger Associates LLC, an investor relations firm, pursuant to which Wolfe
Axelrod agreed to provide us with investor relations services for a nine-month
period ending December 31, 2004. In accordance with the retainer agreement, on
April 1, 2004 we granted to Wolfe Axelrod Weinberger Associates LLC a warrant to
purchase 150,000 shares of our common stock at a price of $3.40 per share. In
the event that we do not extend the retainer agreement beyond December 31, 2004,
one half of the warrant (i.e. the right to purchase 75,000 shares) will expire
and be terminated on December 31, 2004. The warrant expires on April 1, 2009.
17
ITEM 5. OTHER INFORMATION
On June 14, 2004, we filed a registration statement on Form SB-2 with the
Securities and Exchange Commission to register 12,740,597 shares of our common
stock, consisting of 7,143,097 outstanding shares owned by certain existing
stockholders and 5,597,500 shares issuable to the selling stockholders upon
exercise of outstanding warrants. The registration statement has not been
declared effective by the Securities and Exchange Commission.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer and Chief Financial Officer
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
(b) Reports on Form 8-K
None
18
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report on Form 10-QSB/A for the
fiscal quarter ended June 30, 2004, to be signed on its behalf by the
undersigned, thereunto duly authorized the 8th day of September, 2004.
ARBIOS SYSTEMS, INC.
By: /S/ Jacek Rozga, M.D., Ph. D
----------------------------------------
Jacek Rozga, M.D., Ph. D
Chief Executive Officer and Chief Financial Officer
19