UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THREE MONTH PERIOD ENDED MARCH 31, 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
of incorporation organization) Identification No.)
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 May 14, 2004, there were
13,198,097 shares of common stock, $.001 par value, issued and outstanding.
ARBIOS SYSTEMS, INC. AND SUBSIDIARY
FORM 10-QSB
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2004 (unaudited) and
December 31, 2003............................................................... 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2004 and 2003 and from inception to
March 31, 2004 (unaudited) ..................................................... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2004 and 2003 and from inception to
March 31, 2004 (unaudited)...................................................... 5
Notes to Condensed Consolidated Financial Statements............................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................... 7
Item 3. Controls And Procedures................................................................ 15
PART II. OTHER INFORMATION
Item 5. Other Information...................................................................... 16
Item 6. Exhibits and Reports on Form 8-K....................................................... 16
SIGNATURES......................................................................................... 17
2
ARBIOS SYSTEMS, INC. AND SUBSIDIARY
(A development stage company)
CONDENSED CONSOLIDATED BALANCE SHEETS
PART I
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ASSETS March 31, 2004 December 31, 2003
(Unaudited) (Audited)
Current assets
Cash $ 3,147,084 $ 3,507,086
Prepaid expenses 145,823 155,986
----------- -----------
Total current assets $ 3,292,907 $ 3,663,072
Net property and equipment 42,541 45,633
Patent rights, net of accumulated amortization of $83,256 316,744 324,145
Other assets 12,421 7,434
----------- -----------
Total assets $ 3,664,613 $ 4,040,284
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 75,227 $ 148,229
Current portion of capitalized lease obligation 7,988 8,526
----------- -----------
Total current liabilities $ 83,215 $ 156,755
Long-term liabilities
Capital lease obligation, less current portion 4,591 6,826
Other liabilities 5,556 5,555
----------- -----------
Total Long-term liabilities 10,147 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;
13,198,098 shares issued and outstanding 13,199 13,151
Additional paid-in capital 5,532,950 5,485,498
Deficit accumulated during the development stage (1,974,898) (1,627,501)
----------- -----------
Total stockholders' equity 3,571,251 3,871,148
----------- -----------
Total liabilities and stockholders' equity $ 3,664,613 $ 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)
For the three months
ended March 31,
-------------------------------- Inception to
2004 2003 March 31, 2004
------------ ------------ ------------
Revenues $ -- $ 20,375 $ 248,936
------------ ------------ ------------
Operating expenses:
General and administrative 229,215 36,354 846,454
Research and development 120,667 85,391 1,130,341
------------ ------------ ------------
Total operating expenses 349,882 121,745 1,976,795
------------ ------------ ------------
Loss before other income (expense) (349,882) (101,370) (1,727,859)
------------ ------------ ------------
Other income (expense):
Interest 5,060 (400) (238,097)
------------ ------------ ------------
Total other income (expense) 5,060 (400) (238,097)
------------ ------------ ------------
Loss before tax provision (344,822) (101,770) (1,965,956)
Provision for taxes 2,575 1,122 8,942
------------ ------------ ------------
Net loss $ (347,397) $ (102,892) $ (1,974,898)
============ ============ ============
Net earnings per share:
Basic $ (0.03) $ (0.02) $ (0.30)
Diluted $ (0.03) $ (0.02) $ (0.30)
Weighted-average shares used to
compute net earnings per share:
Basic 13,191,422 6,719,047 6,582,070
Diluted 13,191,422 6,719,047 6,582,070
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 three months
ended March 31,
------------------------------ Inception to
2004 2003 March 31, 2004
----------- ----------- -----------
Cash flows from operating activities:
Net loss $ (347,397) $ (102,892) $(1,974,898)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of debt discount -- -- 244,795
Depreciation and amortization 10,493 9,463 102,830
Issuance of common stock for compensation -- -- 10,500
Issuance of common stock for payable 47,500 -- 47,500
Settlement of accrued expense -- -- 54,401
Deferred compensation costs -- 319,553
Research and Development -- 42,945 --
Changes in operating assets and liabilities:
Prepaid expenses 10,163 1,194 (145,825)
Other Assets (4,987) (12,421)
Accrued liabilities (73,002) (16,687) 75,228
Other -- 5,556
----------- ----------- -----------
Net cash used in operating activities (357,230) (65,977) (1,272,781)
----------- ----------- -----------
Cash flows from investing activities:
Additions of property and equipment -- (5,746) (37,115)
----------- ----------- -----------
Net cash used in investing activities -- (5,746) (37,115)
----------- ----------- -----------
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 (2,772) (1,936) (12,420)
Cost of issuance of preferred stock -- -- (11,268)
Cost of issuance of common stock -- (2,957) (574,398)
----------- ----------- -----------
Net cash provided by (used for) financing activities (2,772) 245,307 4,456,980
----------- ----------- -----------
Net increase (decrease) in cash (360,002) 173,584 3,147,084
Cash:
At beginning of period 3,507,086 27,849 --
----------- ----------- -----------
At end of period $ 3,147,084 $ 201,433 $ 3,147,084
=========== =========== ===========
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)
(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 March 31, 2004 and the results of operation and cash flows for the three
month period ended March 31, 2004 and 2003.
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 periods
ended March 31, 2003 and March 31, 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 services on the date of grant.
If the Company had elected to recognize compensation cost for its stock options
and warrants 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:
Three Months
Ended March
2004 2003
--------- ---------
Net loss as reported $(347,397) $(102,892)
Compensation recognized under APB 25 -- --
Compensation recognized under SFAS 123 (18,146) $ (1,760)
--------- ---------
Proforma $(365,543) $(104,652)
========= =========
Basic and diluted loss per common share:
As reported $ (0.03) $ (0.02)
========= =========
Proforma $ (0.03) $ (0.02)
========= =========
6
The fair value of each option is estimated on the date of grant using the Black
Scholes option-pricing model. The following weighted-average assumptions were
used in the Black Scholes option-pricing model; dividend yield nil, expected
volatility 0.05%, risk free interest rate 3.0% and expected life ranging from 5
to 7 years.
(3) SUBSEQUENT EVENTS:
On April 1, 2004, the Company entered into a two-year agreement to lease an
additional 1,700 square feet of office space for administrative purposes. The
rent is approximately $60,000 per year including taxes and other fees.
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 will expense 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.
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.
7
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
its name to "Arbios Systems, Inc." In the Reorganization, we also replaced our
officers and directors with those of Arbios Technologies, Inc. Following the
Reorganization, we ceased our e-commerce business, closed our former offices,
and moved our offices to Los Angeles, California. We currently do not plan to
conduct any business other than the 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 for periods
prior to the Reorganization are those of Arbios Technologies, Inc.
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 $249,000)
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. Certain critical accounting policies, including the assumptions and
judgements underlying them, are disclosed in the Note 1 to the Consolidated
Financial Statements included in our Annual Report on Form 10-KSB. However, we
do not believe that there are any alternative methods of accounting for our
operations that would have a material affect on our financial statements.
8
RESULTS OF OPERATIONS
COMPARISON OF THREE-MONTH PERIOD ENDED MARCH 31, 2004 TO THREE-MONTH PERIOD
ENDED MARCH 31, 2003.
Since we are still developing our products and do not have any products
available for sale, we have not yet generated any revenues from sales. Revenues
for the three-month period ended March 31, 2003 ($20,000) represent revenues
recognized from a government research grant that we have received.
General and administrative expenses consist primarily of salaries
(including salaries indirectly paid under our existing loan-out agreement with
Cedars-Sinai Medical Center), office and equipment lease expenses, and
professional fees and expenses. All office expenses for the three months ended
March 31, 2004 and 2003 consisted solely of the expenses of our research offices
located in the Cedars-Sinai Medical Center. General and administrative expenses
for the three-month period ended March 31, 2004 increased by $193,000 to
$229,000 over the three month period ended March 31, 2003 due to an increase in
the number of employees and consultants employed and an increase in professional
fees. On March 31, 2003, we had only four employees and consultants, which
number increased to ten on March 31, 2004. In addition, professional fees
increased during the three month period ended March 31, 2004 as compared to the
same period in fiscal 2003 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., which transaction
closed in April 2004. During the 2004 quarter, 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 SEPET product.
General and administrative expenses are expected to remain at a significantly
higher level than in past periods due to the lease of additional office space
(effective as of April 1, 2004), the addition of more employees and consultants
(primarily to assist with our financial controls and investor relations
strategies and to evaluate and prepare submissions to the FDA), and additional
professional and other fees related to being a public company.
Research and development expenses consisted primarily of salaries for
our scientists and technicians, laboratory costs, and the cost of scientific
supplies. Research and development expenses for the three-month period ended
March 31, 2004 increased by $35,000 to $121,000, over the three-month period
ended March 31, 2003 because of preclinical testing of SEPET and LIVERAID. We
expect our research and development activities and expenses specifically related
to regulatory and clinical trial costs for SEPET to increase during the balance
of the current fiscal year ending December 31, 2004.
During the three-month period ended March 31, 2004 we earned $5,000 in
interest, compared to $400 of interest expense during the three-month period
ended March 31, 2003, as a result of the cash balances that we maintained during
the current fiscal quarter. In September and October 2003, we raised $4,400,000
in the private placement of our securities. As a result, during the current
fiscal quarter, we maintained cash balances of over $3 million. In addition, we
used a portion of the foregoing offering proceeds to repay all outstanding
indebtedness, thereby eliminating our interest expense.
Our net loss increased by $245,000 to $347,000 during the three-month
period ended March 31, 2004 due to the increased operating expenses incurred in
the fiscal 2004 period as compared to the same period in 2003. 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.
9
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2004, we had cash of $3,147,000 and only $93,000 of
total indebtedness (both long-term and current liabilities). 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. The 4.4 million warrant
shares issued in September and October, 2003 are exercisable at $2.50 per share
and are callable by us if the common stock trades at an average price of $4 per
share for 20 consecutive trading days.
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 clinical 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,
gross proceeds of $4 million from the issuance of debt or equity securities. The
purchase of these assets reduced our available cash funds by $200,000, and will
further reduce our available cash by $250,000 when the second payment is made.
However, we believe that these assets will significantly expedite the
development of LIVERAID, our bioartificial liver, and will lead to future cost
savings in excess of the amount paid to acquire the assets. Many of the standard
operating procedures and clinical 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 governmental research grants during the next twelve
months. Although we have applied for an additional SBIR research grant, no
assurance can be given that the grant application will be approved. Even if the
grant is approved, it is unlikely that we would receive any grant funds by the
end of 2004.
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 March
31, 2004 for the balance of this fiscal year and for the following fiscal years:
2007 AND
CONTRACTUAL OBLIGATIONS TOTAL 2004 2005 2006 THEREAFTER
------------------------------------------------------------------------------------------------------------
Long-Term Office Leases (1) $428,000 $137,000 $137,000 $77,000 $77,000
__________________
(1) Assumes that the current lease at Cedars-Sinai Medical Center will be
renewed in June 2004 for a three-year period on substantially the same terms as
currently in effect.
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
10
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.
WE ARE A DEVELOPMENT STAGE COMPANY SUBJECT TO ALL OF THE RISKS AND UNCERTAINTIES
OF A NEW BUSINESS.
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.
WE MUST OBTAIN GOVERNMENTAL APPROVAL FOR EACH OF OUR PRODUCTS, THE RECEIPT OF
WHICH IS 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., LIVERAID(TM) and SEPET(TM) will require FDA approval
prior to 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 LIVERAID(TM) 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 LIVERAID(TM),
SEPET(TM), and related 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. Japan's health regulatory
authority has, and other countries regulatory authorities could potentially
object to the marketing of any therapy that uses pig liver cells (which
LIVERAID(TM) is expected to utilize) due to safety concerns. 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.
11
OUR PRODUCTS ARE AT AN EARLY STAGE OF DEVELOPMENT AND HAVE NEVER BEEN COMPLETED
OR MARKETED.
Before obtaining regulatory approvals for the commercial sale of SEPET(TM)
and LIVERAID(TM), significant and potentially very costly preclinical and
clinical work will be necessary. We have completed only preclinical testing of
the LIVERAID(TM) utilizing sorbents. There can be no assurance that we will be
able to successfully complete preclinical testing of SEPET(TM) and LIVERAID(TM)
combining liver cell therapy with selective plasma exchange (which will take an
extended period of time). Therefore, proofs of concept and feasibility for both
SEPET(TM) and LIVERAID(TM) utilizing selective plasma exchange are still lacking
and there can be no assurance that we will be able to provide such proofs for
these two products. We have not independently confirmed any of the claims made
by the licensors of any of our products and technologies concerning the
potential safety or efficacy of these products and technologies. We will need to
file an IND for LIVERAID(TM) and an IDE 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 commenced preparation of either IND or IDE 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 result in the FDA's approval of any application that we may file.
OUR LIVERAIDTM PRODUCT UTILIZES A BIOLOGICAL COMPONENT OBTAINED FROM PIGS THAT
COULD PREVENT OR RESTRICT THE RELEASE AND USE OF THAT PRODUCT.
Use of liver cells harvested from pig livers carries a risk of
transmitting viruses harmless to pigs but deadly to humans. For instance, all
pigs carry porcine endogenous retrovirus ("PERV"), but its potential effects on
people are 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 LIVERAID(TM)-treated
patients and cause potentially serious disease. This may result in the FDA or
other health regulatory agencies not approving LIVERAID(TM) 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 LIVERAID(TM) product. Litigation instituted by any of these
organizations, and negative publicity regarding our use of pig liver cells in
LIVERAID(TM), could have a material adverse effect on our business, operating
results and financial condition.
UNCERTAIN DEVELOPMENT PATHS AND MARKETS FOR OUR PRODUCTS.
Our products will represent new therapeutic approaches for disease
conditions, which can be treated using standard methods. 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.
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WE WILL NEED SIGNIFICANT ADDITIONAL CAPITAL, WITHOUT WHICH WE WILL HAVE TO
CURTAIL OR CEASE OPERATIONS.
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. Furthermore, the clinical development
expenses for each of our products will be very substantial, i.e., well in excess
of the amount of cash that we currently still have. Accordingly, we will have to
either (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, 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 two current
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
additional equity funding that we obtain will reduce the percentage ownership
held by our existing security holders.
WE ARE SUBJECT TO SIGNIFICANT COMPETITION FROM NUMEROUS LARGE, WELL FUNDED
COMPANIES.
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 under
development. 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 Laboratories,
Inc.) 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 LIVERAID(TM). 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.
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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, obtaining FDA approval of our products could be delayed
or the marketing of our products could be suspended or otherwise adversely
affected.
WE ARE DEPENDENT ON SPECTRUM LABORATORIES, INC. AS THE MANUFACTURER OF
LIVERAIDTM AND SEPET(TM).
We have an exclusive manufacturing arrangement for LIVERAID(TM) devices
with Spectrum Laboratories, Inc., which also has been providing us with
cartridges for prototypes of the SEPET(TM). We have encountered certain delays
in the delivery of the LIVERAID(TM) and SEPET(TM) cartridges from Spectrum
Laboratories, Inc. In addition, the current model of the SEPET(TM) cartridge is
made of the semi-permeable membrane which needs to be modified to improve
sieving of protein-bound toxins. 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 SEPET(TM). There
can be no assurance that the SEPET(TM) cartridge allowing unrestricted passage
of albumin-bound toxins while retaining blood components with molecular weight
higher than 100 kDa will be developed. Although Spectrum Labs has agreed to
transfer their know-how to another manufacturer for us if they are unable to
meet their contractual obligations to us, we may have difficulty in finding a
replacement manufacturer or may be required to alter the design of LIVERAID (TM)
if we are unable to effectively transfer the Spectrum Labs know-how to another
manufacturer.
WE HAVE LIMITED PATENT PROTECTION AND MAY NOT BE ABLE TO PROTECT OUR PATENTS AND
PROPRIETARY RIGHTS.
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 right of others. We have relied
substantially on the patent legal work that was performed for our assignors and
licensors and have not, in some cases, 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.
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THE DEVELOPMENT OF OUR PRODUCTS IS DEPENDENT UPON DR. ROZGA AND CERTAIN OTHER
PERSONS. 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, and on several key members of our management, including,
John Vierling, MD, FACP, Chairman of the Board, Kristin P. Demetriou, Marvin S.
Hausman, MD, Richard W. Bank, MD, and Roy Eddleman who are members of our Board
of Directors. Each of these individuals, except Dr. Rozga, works for us only on
a part-time, very limited basis. We are also dependent upon 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 long-term
employment contracts with Drs. Jacek Rozga and Achilles A. Demetriou, and the
loss of the services of either of them would have a material adverse effect on
our business, operations and on the development of our products. We do not carry
key man life insurance on either of these individuals.
As we expand the scope of our operations by preparing FDA submissions,
conducting multiple clinical trials, and potentially acquiring related
technologies, we will need to obtain the full-time services of additional senior
scientific and management personnel. Competition for these personnel is intense,
and there can be no assurance that we will be able to attract or retain
qualified senior personnel. As we retain full-time senior personnel, our
overhead expenses for salaries and related items will increase substantially
from current levels.
THE MARKET SUCCESS OF OUR PRODUCTS WILL BE DEPENDENT IN PART UPON THIRD-PARTY
REIMBURSEMENT POLICIES.
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 SEPETTM or
LIVERAIDTM, 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.
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)) within 45 days of the filing date of this Quarterly
Report on Form 10-QSB. 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.
15
Based on his evaluation as of March 31, 2004, the chief executive
officer/chief financial officer has concluded that there were no significant
changes in the company's internal controls over financial reporting or in any
other areas that could significantly 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 5. OTHER INFORMATION
We recently engaged a regulatory consultant and an attorney to counsel us
with respect to the availability of a FDA Section 510 (k) Pre-Market
Notification for SEPET. These consultants have advised us that we should submit
a notification filing under Section 510 (k), and we currently expect to do so.
In pursuing the 510(k) with the FDA, we will have to, among other requirements,
establish that SEPET is "substantially equivalent" to at least one other
legally-marketed product that has been cleared for marketing by the FDA via a
510(k) submission. We believe that we have identified products that we can
demonstrate are "substantially equivalent" to SEPET. We are in the process of
compiling information to submit to the FDA prior to our commencement of a small
clinical trial for SEPET. No assurance can be given that we will, in fact,
submit a Section 510 (k) Pre-Market Notification for SEPET or that the FDA will
agree with us that this notification filing is available to us.
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
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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 for the
fiscal quarter ended March 31, 2004, to be signed on its behalf by the
undersigned, thereunto duly authorized the 14th day of May, 2004.
ARBIOS SYSTEMS, INC.
By: /S/ Jacek Rozga, M.D., Ph. D
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Jacek Rozga, M.D., Ph. D
Chief Executive Officer and Chief Financial Officer
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