Form 10KSB for HUMAN BIOSYSTEMS INC
--------------------------------------------------
14-Apr-2004
Annual Report
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS
REGARDING OUR EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE
SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES", OR
SIMILAR LANGUAGE. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS, UNCERTAINTIES
AND OTHER FACTORS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS
ARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE HEREOF AND SPEAK ONLY AS OF
THE DATE HEREOF. THE FACTORS DISCUSSED BELOW UNDER "RISK FACTORS" AND ELSEWHERE
IN THIS ANNUAL REPORT ARE AMONG THOSE FACTORS THAT IN SOME CASES HAVE AFFECTED
OUR RESULTS AND COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS.
The following discussion should be read in conjunction with the Financial Statements and Notes thereto.
Overview
We are a developmental stage company, and have a very limited operating history and no revenue to date. Our prospects must be considered in light of the risks and uncertainties encountered by companies in an early stage of development involving new technologies and overcoming regulatory approval process requirements before any revenue is possible.
We have experienced operating losses since our inception. These losses have resulted from the significant costs incurred in the development of our technology and the establishment of our research and development facility. Expenditures will increase in all areas in order to execute our business plan, particularly in research and development and in gaining regulatory approval to market our products in the U.S. and abroad.
In 2003, we experienced increased difficulty in raising outside capital. Although research continued in organ preservation, we were forced to suspend animal testing and human infusion testing due to a lack of funds. Our employees accepted a temporary 50% salary reduction in January 2004 to conserve cash, and several of these employees as well as certain of our outside consultants elected to convert a portion of their deferred compensation to shares of our common stock.
Our principal business objective is to develop and provide economical, non-toxic methods of extending the shelf life and improving the quality of blood platelets and other biological material. We have been successful in preserving blood platelets for ten days under refrigeration while maintaining cell structure and morphology, which has never been done before to our knowledge. We had originally contemplated submitting our findings to the FDA in the first half of 2003; however, additional pre-human infusion tests were necessary to address certain aspects of our findings. We believe that we have now satisfactorily resolved all issues raised by these findings, and that human infusion tests will commence once we have obtained the required funding.
We began research on kidney preservation in 2002 and have developed what we believe is a solution that will operate under refrigerated temperature storage conditions for over 30 hours, allowing organ preservation beyond current capabilities. In our most recent preliminary tests, we were able to preserve a rat's kidney at negative 20 degrees Centigrade for 48 hours. Our next step will be to continue our tests to progressively longer periods of time using this solution. Our goal is to extend the kidney shelf life for from up to 72 to 96 hours. We believe that the extended shelf life should enable better matching of donor kidneys to recipients. Due to a lack of additional capital, we have temporarily discontinued efforts to test methods of preserving organs. However, we continue to conduct organ preservation research.
In July 2002, we received our first patent on our technology and methodology for preserving blood platelets. We filed a provisional patent application in June 2001 to cover our improved platelet preservation methods. In August 2003, we filed another patent application covering improved platelet preservation methods. We will seek strategic alliances with companies that have the capability to provide technical and clinical expertise as well as financial and marketing expertise to leverage our current expertise in these areas.
In addition to our attempts to raise outside capital, we have pursued opportunities to acquire existing products and businesses that currently produce, or have the potential to produce, revenue. In September 2003 we signed a binding letter of intent to acquire all rights to a cream product with potential skin healing and antibacterial properties. The purpose of the acquisition is to develop a product to generate revenues while our blood platelet preservation technology is awaiting human infusion tests. The beneficial properties of the cream product have not been verified by scientific tests, and there is no guarantee that we will be able to develop a marketable product based on the cream. If we are able to develop a marketable product, it will require additional research and development as well as additional capital. At this time, we do not have an estimate of the time or the amount of funds that would be required to develop such a product.
Results of Operations
Year Ended December 31, 2003 Compared To Year Ended December 31, 2002
Revenues. We did not generate any revenue in the years ended December 31, 2003 and 2002, and have not generated revenues since our inception in February 1998, as our focus to date has been on the research and development of products. We are a development stage company in the fifth year of research and development activities, and do not anticipate receiving revenue until we complete product development and clinical testing. We have had to curtail development activities due to inadequate capital, and therefore there can be no assurance that we will ever receive revenues or reach profitability.
General and Administrative Expenses. General and administrative expenses in the year ended December 31, 2003 were $1,544,000, a decrease from $1,863,700 for the year ended December 31, 2002. The decrease was due primarily to reductions in marketing expenses and fees for professional services due to our shortfall in capital, offset by increases in salaries. In the past, most of our staff worked for under market rate compensation or had to accrue pay for extended periods of time when financing was not available. In the year ended December 31, 2002, however, we had raised salaries to what we believed to be levels close to competitive salaries in the industry, based on outside funding received during that year. Stock-based compensation also decreased in the year ended December 31, 2003, as we retained fewer consultants and a smaller number of our employees elected to receive stock in lieu of compensation. Based on our ongoing cash shortage, however, we anticipate that stock-based compensation will increase in 2004. In the first quarter of 2004, certain of our employees and consultants elected to convert a portion of their cash compensation to stock. In addition, in February 2004, we instituted a temporary 50% salary reduction for all United States employees and granted additional stock options to our employees in partial consideration for this salary reduction.
Research and Development. Our research and development expenses were $394,300 for the year ended December 31, 2003, a decrease from $430,400 for the year ended December 31, 2002 This decrease was primarily due to a slowdown in research and development activity in the fourth quarter of 2003, reflecting our funding shortfall. For the first three quarters of 2003, however, research and development expenses were higher than during the comparable period in 2002 due to our transition from conducting research and development activity in Russia to conducting research at independent blood centers in the United States and increased activity conducted at our Michigan facility in the area of organ preservation.
Sales and Marketing Expenses. Our sales and marketing expenses for the year ended December 31, 2003 remained relatively level at $219,300, compared to $218,700 for the year ended December 31, 2002. We continue to develop our sales and marketing efforts, but intend to expand at a measured pace until our products are ready for introduction into the market.
Interest Income and Expense. We incurred interest expense of $7,100 during the year ended December 31, 2003, as compared to interest expense of $900 in the year ended December 31 2002. The increase was due primarily to interest on promissory notes payable to one of our directors and shareholders. We also had interest income of $200 in the year ended December 31, 2002, due to cash on deposit during that year. In the year ended December 31, 2003, we wrote off bad debt of $398,300 based on our determination as to the uncertain collectibility of the receivable for 510,000 outstanding shares of our common stock to certain former consultants. For more information, see "Item 3. Legal Proceedings."
Net Loss. As a result of the foregoing factors, our net loss decreased to $2,563,800 for the year ended December 31, 2003, from a net loss of $2,514,300 for the year ended December 31, 2002. Our net loss per share decreased to $0.10 for the year ended December 31, 2003, from $0.14 for the year ended December 31, 2002, due to an increase in 2003 in the number of shares of common stock outstanding.
Liquidity and Capital Resources
Our operating plan for calendar year 2004 is focused on continued development of our products. It is our estimate that a cash requirement of $2.5 million is required to support this plan for the next twelve months. Since our inception, we have financed our operations through private and public equity placements During the year ended December 31, 2003, we received an aggregate of $905,400 from the issuance of common stock, compared to an aggregate of approximately $2,147,300 received in the year ended December 31, 2002. We are actively seeking additional funding. There can be no assurance that the required additional financing will be available on terms favorable to us or at all.
In 2003, we experienced increased difficulty in raising outside capital. Although research continued in organ preservation, we were forced to suspend animal testing and human infusion testing due to a lack of funds. Our employees accepted a temporary 50% salary reduction in January 2004 to conserve cash, and several of these employees as well as certain of our outside consultants elected to convert a portion of their deferred compensation to shares of our common stock.
Once we receive the required additional financing, we anticipate continued growth in our operations and a corresponding growth in our operating expenses and capital expenditures. We do not anticipate any revenue from operations for the next two or three years. Therefore, our success will be dependent on funding from private placements of equity securities. At the present time however, we have no agreements or other arrangements for any such private placements.
We are in the sixth year of research and development, with an accumulated loss during the development stage of $12,055,500. As of December 31, 2003, we are uncertain as to the completion date of our research and development, or if products will ever be completed as a result of this research and development activity. We anticipate that the funds spent on research and development activities will need to increase prior to completion of a product. Additionally, we may not be able to secure funding in the future necessary to complete our intended research and development activities.
These conditions give rise to substantial doubt about our ability to continue as a going concern. Our financial statements do not include adjustments relating to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might be necessary should we be unable to continue as a going concern. Our continuation as a going concern is dependent upon our ability to obtain additional financing from the sale of our common stock, as may be required, and ultimately to attain profitability.
The report of our independent certified public accountants, included in this Annual Report on Form 10-KSB, contains a paragraph regarding our ability to continue as a going concern.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions and estimates that affect the amounts reported. Note 1 of Notes to Financial Statements describes the significant accounting policies used in the preparation of the financial statements. Certain of these significant accounting policies are considered to be critical accounting estimates, as defined below.
A critical accounting estimate is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: 1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and 2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.
Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our financial statements are fairly stated in accordance with accounting principles generally accepted in the United States, and present a meaningful presentation of our financial condition and results of operations.
In preparing our financial statements to conform with accounting principles generally accepted in the United States, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. These estimates include useful lives for fixed assets for depreciation calculations and assumptions for valuing options and warrants. Actual results could differ from these estimates.
We consider that the following are critical accounting policies:
Research and Development Expenses
All research and development costs are expensed as incurred. The value of acquired in-process research and development is charged to expense on the date of acquisition. Research and development expenses include, but are not limited to, payroll and personnel expense, lab supplies, preclinical studies, raw materials to manufacture our solution, manufacturing costs, consulting, legal fees and research-related overhead. Accrued liabilities for raw materials to manufacture our solution, manufacturing costs, and patent legal fees are included in accrued liabilities and included in research and development expenses.
Employee Stock Plans
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," we elected to continue to apply the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for our employee stock option and stock purchase plans. We are generally not required under APB Opinion No. 25 and related interpretations to recognize compensation expense in connection with our employee stock option and stock purchase plans. We are required by SFAS No. 123 to present, in the Notes to Financial Statements, the pro forma effects on reported net income and earnings per share as if compensation expense had been recognized based on the fair value method of accounting prescribed by SFAS No. 123.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure". SFAS No. 148 amends the transition and disclosure provisions of SFAS No. 123. We are currently evaluating SFAS No. 148 to determine if we will adopt SFAS No. 148 to account for employee stock options using the fair value method and, if so, when to begin the transition to that method.
