ITEM 1.
BUSINESS
Overview
Human BioSystems was incorporated on February 26, 1998, in the State of California under the name "HyperBaric Systems." In November of 2002, we changed our name to Human BioSystems. We are a developer of preservation platforms for organs and other biomaterials, specializing in the development of proprietary above zero (HBS-AZ) and below zero (HBS-BZ) organ and issue preservation systems and methods for preserving blood platelets. We are also involved in the alternative energy industry through an investment into a company that is involved in the conversion of bio-waste to energy.
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 have completed in-vitro tests using our proprietary systems at two independent laboratories that specialize in platelet testing with results that we believe justify proceeding to human infusion (in-vivo) tests. After discussions with the U.S. Food and Drug Administration (“FDA”), we elected to first pursue animal and human studies in Mexico. We have located facilities in Mexico where we intend to pursue these studies; however, due to a lack of funding we suspended these efforts in July 2007.
Our potential customers include blood banks, hospitals, clinics, and similar organizations. We have no revenue from product sales or services to date. Our development efforts and operations have been funded through equity infusions from investors and loans from shareholders and institutions.
In August 2006, we entered the renewable energy market through the formation of our wholly-owned subsidiary, HBS BioEnergy (“HBS Bio”). Although at that time, HBS Bio intended to identify, secure and develop suitable sites for the production of ethanol and biodiesel fuel for the U.S. market using innovative methods to improve the efficiency and cost of producing biofuels, we made the decision in July 2007 to suspend all ethanol and bio-fuels business activities and in October 2007 we decided to continue our efforts in the renewable energy market by focusing on the waste to energy segment of that market using animal and other waste products to produce electrical energy to be sold to utilities versus ethanol and biodiesel fuel production.
Since October 2007, the focus in the Company’s renewable fuels segment of the business has been addressed as an investment through ownership of common shares of Environmental BioMass Energy Inc. (EBE) which is in the business of converting bio-waste to electrical energy. Under this investment, HBS initially received approximately 49% of EBE common stock in exchange for releasing its interest in a property purchase agreement that was held through HBS Bio known as HBS Corcoran. All operations and management functions of EBE are performed by EBE employees.
The Company currently holds slightly less than 30% of EBE common stock as of December 31, 2008 due to the conversion of certain Company liabilities to equity in EBE. The Company holds shares of EBE as an investment and is not directly involved in management or funding of its business.
From time to time since 2003, we have experienced increased difficulty in raising outside capital. In January 2008, all members of our management team agreed to a 50% reduction in salary to conserve cash. We further eliminated salaries of certain management team members and consultants in July 2008 because of lack of funding and closed our Russian Branch office in August 2008. We have pursued various alternatives for raising capital over the prior three fiscal years, and continue to seek sources of additional capital or potential merger candidates
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 while our blood platelet preservation technology is awaiting commercialization. For example, in 1998 we purchased the patents for a vaginal disease test product titled Phemtest, and 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. There is no guarantee that we will be able to develop a marketable product based on either the test product or the cream. Development of either product 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 produce and market either product. We have decided for now to allocate our resources to the development of our preservation systems for donor organs and platelets, and to participate in the waste to energy market through ownership of common stock of EBE. We are also actively pursuing possible merger candidates that will have immediate revenue generation.
Our Platelet and Organ Preservation Business
The HBS System for Preservation of Platelets
Blood platelets are a component of whole blood that is responsible for the clotting process of blood and used by the body when a person has an open wound from injury or surgery. The majority of platelets, however, are required by cancer patients who have undergone chemotherapy treatments, a process that destroys platelets. In order to restore the platelets, continuous transfusions are given to patients until the body is able to restore normal platelet counts. It is therefore desirable to have platelets that circulate for more than a few hours after transfusion. Current blood platelet storage practices used in blood banks promote bacteria growth and the quality degrades over time because platelets are stored at room temperature. Using these practices, platelets can be preserved for only five days.
One test marker used to predict platelet survival after infusion is the morphology or the platelet shape. Platelets that maintain their discoid shape are more likely to survive longer after transfusion than platelets that change their shape. Historically, platelets stored at refrigerated temperatures for more than a few hours change their shape from discoid to spherical. It has been found that such platelets are removed from circulation by the body within hours after a transfusion and thus are not acceptable for cancer patients who have undergone chemotherapy. Other test markers have been employed in in-vitro tests conducted in 2006 to further predict survival after transfusion.
We are developing a process whereby platelets are refrigerated at slightly above the freezing point of water and stored there until needed. Recent tests show that up to 68% of the starting population of platelets remains discs after 24 hours of refrigeration.
Using our Platelet Preservation System, blood platelet preservation is achieved by storing the platelets under refrigeration utilizing a proprietary process and solution to maintain cell function viability and morphology. The objective of our technology is to maintain high quality platelets for a longer period of time than is currently possible using conventional methods to decrease outdating and improve availability of product to a broad geographic area.
In July 2002, we received our first patent on the 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. In April 2006, the U.S. Patent Office issued our patent for organ preservation entitled “Methods and Solutions for Storing Donor Organs”, U.S. Patent No. 7,029,839. As of March 2009, the U.S. Patent Office has granted us six patents for our organ, cell and platelet preservation technologies. We currently do not anticipate filing additional patent applications relating to platelet or organ preservation in the future due to our lack of capital We are also seeking 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, but have been unsuccessful to date We are also seeking possible merger candidates with revenue and potential profits.
In 2007, we suspended development of our Platelet Preservation System, a proprietary technology, that extends the shelf life of blood platelets beyond the current five-day period, due to lack of funding. It has been our goal to increase this time from five to seven or nine days and longer while preserving platelet quality and keeping bacterial growth to a minimum. Although we believe that even longer platelet storage periods could be achieved using hydrostatic pressure to prevent platelets from freezing under sub-zero temperatures, we have focused on the refrigeration of platelets because blood centers typically are limited in space and budget, and our market studies show that most platelets used commercially would be consumed within the limits of our refrigeration preservation technology.
The HBS System for Preservation of Organs
Although we believe that our basic approach used to store platelets could also be applied to the preservation of organs such as the kidney, heart and liver, we have developed a new approach to preserving donor organs independent of our platelet preservation technology. 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 successfully transplanted a rat kidney that had been frozen at a temperature of negative 80 degrees centigrade for three months in our patent-pending HBS sub-zero solution.
In October 2005, we successfully completed the initial phase of our survival study of animals with transplanted kidneys using our HBS organ preservation solution, and were able to preserve a rat's kidney at negative 196 degrees Centigrade for up to five days while maintaining some functionality when transplanted back into the animal, evidenced by urine production. We previously preserved rats' kidneys at negative 20 and negative 80 degrees Centigrade. We will continue to conduct further tests on a larger animal sample size, and conduct histology and survival studies as well. Our goal is to extend the kidney shelf life for up to 72 to 96 hours at above freezing temperatures and even longer at sub-zero temperatures. We believe that the extended shelf life should enable better matching of donor kidneys to recipients. In the third quarter of 2005, we purchased a special freezer and equipment used to conduct experiments at negative 80 degrees Centigrade. Recent survival studies on animals with kidneys stored in the HBS-AZ solution for 14 days showed an 83% survival rate versus 42% and 10% for the respective UW and HTK (European) solutions. Further recent studies using biochemical test markers have corroborated these studies. In 2008, we sought opportunities to license our organ preservation technology for storage at temperatures above zero degrees Centigrade and continue freezing experiments on organs and islet cells. We have not been able to secure any license agreements or strategic partners in 2008. We suspended all laboratory experiments and development efforts recently due to lack of capital.
Our Alternative Energy Business
In August 2006, we entered the renewable energy market through the formation of our wholly-owned subsidiary, HBS BioEnergy (“HBS Bio”). Although at that time, HBS Bio intended to identify, secure and develop suitable sites for the production of ethanol and biodiesel fuel for the U.S. market using innovative methods to improve the efficiency and cost of producing biofuels, we made the decision in July 2007 to suspend all ethanol and bio-fuels business activities and in October 2007 we decided to continue our efforts in the renewable energy market by focusing on the waste to energy segment of that market using animal and other waste products to produce electrical energy to be sold to utilities versus ethanol and biodiesel fuel production.
Since October 2007, the focus in the Company’s renewable fuels segment of the business has been addressed as an investment through ownership of common shares of Environmental BioMass Energy Inc. (EBE) which is in the business of converting bio-waste to electrical energy. Under this investment, HBS initially received approximately 49% of EBE common stock in exchange for releasing its interest in a property purchase agreement that was held through HBS Bio known as HBS Corcoran. All operations and management functions of EBE are performed by EBE employees.
The Company currently holds slightly less than 30% of EBE common stock as of December 31, 2008 due to the conversion of certain Company liabilities to equity in EBE. The Company holds shares of EBE as an investment and is not directly involved in management or funding of its business.
Strategy
In 2006 when we formed our alternative energy business, our strategy was to first raise capital to cover the initial cost of developing our first ethanol energy production facility. We suspended all operations related to ethanol and bio-fuels business in July, 2007 due to increasing feed stock costs and other business considerations, and made the decision to focus on the waste to energy business through an investment in a company involved in the waste to energy business. We do not plan to be actively involved in this business in the foreseeable future.
Termination of Agreements with EXL III Group Corporation
On January 5, 2008, we entered into a Mutual Termination Agreement (the “Termination Agreement”) with HBS Bio, HBS Corcoran, The EXL III Group Corporation (“EXL”), and Claude Luster III (“Luster”). The Termination Agreement terminates, effective August 22, 2007, the following three agreements (referenced herein as the “EXL Agreements”) were entered into in September 2006:
(1)
the Asset Purchase Agreement by and between HBS, HBS Bio, and EXL;
(2)
the Consulting Services Agreement by and between HBS Bio and EXL; and
(3)
the Escrow Agreement by and between HBS Bio, EXL, and Silicon Valley Law Group, a California law corporation.
The principal purpose of the EXL Agreements was for HBS Bio and EXL to work together to develop and construct ethanol production facilities. HBS Bio and EXL have since decided to pursue separately their respective business interests. HBS Corcoran is a party to the Termination Agreement because it was involved in developing ethanol production facilities with HBS Bio and EXL.
Under the Termination Agreement: (i) all purported transfers of assets and liabilities under the Asset Purchase Agreement referenced above were deemed null and void and of no effect; (ii) the parties confirmed that the total amount of consulting fees owed by HBS Bio to EXL under the Consulting Services Agreement was $16,583.32 and was to be paid within two weeks following the effective date of the Termination Agreement; and (iii) all shares of common stock of HBS held in escrow under the Escrow Agreement are to be cancelled and are to be released to HBS.
HBS Bio incurred costs developing plans to create an ethanol production facility in the Port of Morrow located in the State of Oregon. Under the Termination Agreement, if EXL or Luster decides to continue to develop or pursue such facility, EXL has agreed to reimburse HBS Bio for such costs that were incurred by HBS Bio.
The Termination Agreement confirms that, as of August 22, 2007, Luster no longer serves as the president of HBS Bio or as a member or Board of Managers of HBS Corcoran. Finally, the Termination Agreement contains certain representations, warranties and releases by certain parties thereto.
The description above of the Termination Agreement does not purport to be complete and is qualified in its entirety by reference to the complete text of the Agreement itself, a copy of which is filed as Exhibit 10.17 to this annual report and incorporated herein by reference.
Operations and Facilities
Platelet and Organ Preservation
During the initial months following our incorporation, we recruited key members of the management and technical team, conducted market research and established our basic infrastructure and operating plan.
In August 1998, we established a branch office in Krasnoyarsk, Russia, where we conduct research and development for platelet preservation. Krasnoyarsk was chosen to take advantage of the availability of low cost technical expertise and materials such as titanium, and also because two members of our team, Dr. Vladimir Serebrennikov, Director of Research and Mr. Leonid Babak, Branch Chief of Russian Operations, reside there.
The Russian government has placed no restrictions on our ability to operate our business, hire employees in Russia, and freely transport our assets from Russia to the U.S. without any assessment or payments to the Russian Federation. There are no material restrictions or regulations to which we are subject in Russia as a result of our activities there. Conducting operations in Russia does not affect FDA approval or our proposed business activities in the United States, because no clinical trials are or will be conducted there.
It was anticipated that when we entered the human infusion test phase, the priorities at our Russian branch would be shifted from research to supporting other lab operations and possibly to addressing other business opportunities where our presence in Russia would be considered an advantage. Since we have completed the in-vitro studies some time ago and have already entered the human infusion test phase, our Russian branch had been assigned to pursue those opportunities until September 2008 when the Russian Branch was closed due to limited funds.
After discussions with the FDA, we have elected to pursue animal and human studies in Mexico but are currently on hold due to lack of funds to perform those studies. See "Business - Research and Development" for more information.
Alternative Energy Business
We initially assembled a team of industry professionals with strong track records in all strategic and tactical aspects such as facility location and logistics, plant construction and operations, raw material and energy procurement, and biofuel sales but we dismissed all personnel after the decision was made to suspend all business activities in the bio-fuels business in July 2007.
In February 2007, HBS Bio formed a joint venture with Visalia-based Dairy Development Group, LLC and Agrimass Enviro-Energy, Inc. to build an energy park in the San Joaquin Valley of California. Pursuant to this joint venture, the parties formed HBS Corcoran. HBS Bio was to provide or secure all development capital for the energy park pursuant to an agreed-upon budget, while the other parties will provide all management and other services as well as technology required for the energy park.
In April 2007, HBS Corcoran entered into an agreement for the purchase of approximately 922 acres of property in Tulare County, California for an aggregate purchase price of approximately $12 million. HBS Corcoran is required to make deposits of up to $690,000 in escrow within 18 months from April 17, 2007. During the year ended December 31, 2007, HBS Bio deposited an aggregate of $389,700 into escrow. The deposits are nonrefundable except under certain conditions, are to be applied to the purchase price, and will constitute liquidated damages in the event of HBS Corcoran’s default under the purchase agreement. HBS Corcoran will have 18 months to review the suitability of the property for its planned uses. The balance of the purchase price must be deposited in escrow within 30 days after completion of the feasibility review or the end of the feasibility period, whichever occurs first.
In July 2007,we suspended all bio-fuels production plans, and in March 2008 (made effective October 2007) we released our interest in the property purchase agreement described above known as Corcoran to Environmental BioMass Energy, Inc. (“EBE”), a company involved in the bio-waste to energy business, in return for approximately 49% stake in that company. The Company currently owns approximately 30% stake in EBE.
All operations and management functions of EBE are performed by EBE employees. The Company holds shares of EBE as an investment and is not directly involved in management or funding of its business.
Research and Development
Platelet and Organ Preservation Business
We have developed a research and development strategy that considers the FDA and international approval processes and their impact on bringing a product to market. Based on these constraints, we have developed a research and development plan that requires multiple developments being conducted at the same time. During the year ended December 31, 2008, we spent $140,000 on research and development, compared to $282,500 for the comparable period in 2007. None of these costs were borne directly by customers.
We have previously developed a three-phase strategy, with estimated time requirements for the research and development and market introduction of products, but have now compressed that into two phases. The first phase starts with the creation of a platelet preservation product that will store platelets under refrigeration for seven to nine days using our proprietary solution by itself. The second phase is the market introduction of our Platelet Preservation System utilizing our freezing technology being developed for the preservation of organs and cells now being tested at our Michigan research facility. We are currently in the first phase of our strategy for platelets and the second phase for donor organs. The anticipated time spent in this phase has been extended by our need for additional capital. We are now proceeding with organ preservation research concurrently with platelet studies. All scientific development work has been suspended pending the infusion of capital, licensing of technology, strategic partnership or merger.
Governmental approval for human testing will be required for each of these phases of development.
Platelet Preservation - Refrigeration
Our platelet preservation plan starts with a platelet preservation product using our solution by itself. We have been able to successfully store platelets for ten days at refrigerated temperatures, which is considered to be a major milestone in the cold storage of platelets. Our technology has been validated by an independent test facility in the U.S., and we began the process leading to testing of human infusion in September 2002. Currently the industry stores platelets at ambient temperature for a maximum of five days, an FDA-imposed limit due to historic bacterial infection of the platelets. In July 2002, we entered into a development and supply contract with MMR Technologies of Mountain View, California, to build a computerized blood platelet cooling instrument. In October 2002, we began preliminary tests of a prototype of this device, which is designed to cool the platelets prior to storage to help extend the shelf life of platelets for blood banks and hospitals. The prototype unit was delivered to us in January 2003. Preliminary tests were conducted, and required modifications to the systems have been noted. We have subsequently determined that this unit may not be critical for platelet survival, and therefore have not conducted further testing or development. We made the decision to use a standard cooling unit with customized fixtures that are appropriate for platelet bags.
Platelet Preservation - Sub-Zero Storage
This development is intended to result in longer storage times for platelets, combining the use of proprietary solutions, sub-zero temperatures and high pressure. It is our goal to develop a storage method that will preserve the viability of platelets with little or no bacterial growth for a period greater than 13 days. This will provide the medical community with a new and economical method for long-term platelet storage, thereby reducing the current loss of product. The successful implementation of refrigerated platelets at nine days or beyond may eliminate the need for sub-zero stored platelets for most commercial blood banking applications.
Organ Preservation
This effort will incorporate storage of organs involving experiments with animal organs to demonstrate our ability to harvest, store and transplant organs that have been preserved at various temperatures ranging from plus 4 degrees Centigrade to sub-zero temperatures. The goal is to achieve a level of physical condition and viability of these organs that is equal to or superior to present storage methods and storage times. In addition, we plan to develop a process that will reduce the need for anti-rejection drugs after transplantation. The development process will include the development of proprietary solutions, cooling methods to protect organs from freezing at sub-zero storage temperatures.
Test Results
Non-clinical experiments and tests of platelet preservation and other research and development activities were conducted in Russia and Vicksburg, Michigan until the third quarter of 2003, when we developed a funding shortage. We resumed testing in February 2005, and will continue to conduct experiments to find the optimal conditions of storage at refrigerated temperatures. We have been able to achieve up to 24 hours of refrigerated storage of platelets with up to 68% retaining their original disc shape. Up to 13% of the platelets remain discs after five days of storage. Subsequent tests indicated very little disc loss after the first 24 hours of storage, where disc percentage remained essentially constant for 72 hours, which was the limit of these particular tests. We subsequently demonstrated that platelets stored using our technology under refrigeration for ten days still remain functional, with a platelet survival rate of up to 78% and 20% maintaining full functionality.
Our most recent test efforts were directed toward the refinement of our platelet preservation technology before we commenced human studies and an application for approval from the FDA. However, after discussions with the FDA, we elected to first pursue animal and human studies in Mexico. We have located facilities in Mexico where we intend to pursue these studies; however, due to a lack of funding we suspended these efforts in July 2007.
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. We successfully transplanted a rat kidney that had been frozen at a temperature of negative 80 degrees centigrade for three months in our patent-pending HBS sub-zero solution. In October 2005, we successfully completed the initial phase of our survival study of animals with transplanted kidneys using our HBS organ preservation solution, and we were able to preserve a rat's kidney at negative 196 degrees Centigrade for up to five days while maintaining some functionality when transplanted back into the animal, evidenced by urine production. We previously preserved rats' kidneys at negative 20 and negative 80 degrees Centigrade. We plan to continue to conduct further tests on a larger animal sample size, and conduct histology and survival studies as well. Our goal is to extend the kidney shelf life for up to 72 to 96 hours at above freezing temperatures and even longer at sub-zero temperatures. We believe that the extended shelf life should enable better matching of donor kidneys to recipients. In 2003, we suspended this animal testing pending receipt of funding; however, we resumed our organ preservation research in 2005 and accelerated the number of animal organ preservation experiments as compared to the prior schedule. We also purchased a special freezer and equipment used to conduct experiments at negative 80 degrees Centigrade. Recent survival studies on animals with kidneys stored in the HBS-AZ solution showed an 80% survival rate versus 10% for the HTK (European solution). Further recent studies using biochemical test markers have corroborated these studies. We moved into our new research facility in March 2007 and have acquired more space and specialized equipment to conduct freezing tests on organs and islet cells. We were forced to suspend our organ preservation testing in January 2008 due to lack of funds.
Alternative Energy Business
We are no longer directly involved in the alternative energy business. In July 2007,we suspended all bio-fuels production plans, and in March 2008 (made effective October 2007) we released our interest in the property purchase agreement described above known as Corcoran to Environmental BioMass Energy, Inc. (“EBE”), a company involved in the bio-waste to energy business, in return for approximately 49% stake in that company. The Company currently owns approximately 30% stake in EBE.
All operations and management functions of EBE are performed by EBE employees. The Company holds shares of EBE as an investment and is not directly involved in management or funding of its business.
Product Development
Platelet and Organ Preservation Business
We previously engaged Quintiles, Inc., an international regulatory consulting firm, to assist with planning and managing the regulatory approval process. This firm specializes in the design and implementation of regulatory strategies, including experiment design and monitoring. Our use of their services has been limited, however, since we have not yet started clinical trials. We currently are not using their services, but anticipate re-engaging Quintiles or another qualified firm if we proceed with FDA clinical trials.
As an overall strategy, we intend to apply for approval for our products while limiting the system claims for our Platelet Preservation System and to progressively expand them as FDA and/or European Union approval is granted for each succeeding claim. Our intention is to apply for approval in the U.S., Western European countries and Japan as the primary markets for our platelet preservation product. However, we believe that our first product sales efforts will be directed towards countries in South America, Mexico and other countries that have fewer regulatory restrictions than the U.S., so as to provide a shorter time to market.
Alternative Energy Business
We are no longer directly involved in the alternative energy business. In July 2007,we suspended all bio-fuels production plans, and in March 2008 (made effective October 2007) we released our interest in the property purchase held by HBS Bio in the property known as Corcoran to Environmental BioMass Energy, Inc. (“EBE”), a company involved in the bio-waste to energy business, in return for approximately 49% stake in that company. The Company currently owns approximately 30% stake in EBE.
All operations and management functions of EBE are performed by EBE employees. The Company holds shares of EBE as an investment and is not directly involved in management or funding of its business.
Distribution, Sales and Customers
Platelet and Organ Preservation Business
It is our intent to market our platelet preservation products to blood centers and hospitals through established medical specialty dealers and distributors or strategic partners who manufacture and market products to blood centers and hospitals. We also will consider licensing and strategic partnering as a means to distribute our preservation products. Similar strategies will be employed for other future preservation products. As we are in the development stage of operations, we currently have no customers and dependency on particular customers cannot be anticipated at this time.
Alternative Energy Business
We are no longer directly involved in the alternative energy business. In July 2007,we suspended all bio-fuels production plans, and in March 2008 (made effective October 2007) we released our interest in the property purchase held by HBS Bio in the property known as Corcoran to Environmental BioMass Energy, Inc. (“EBE”), a company involved in the bio-waste to energy business, in return for approximately 49% stake in that company. The Company currently owns approximately 30% stake in EBE.
All operations and management functions of EBE are performed by EBE employees. The Company holds shares of EBE as an investment and is not directly involved in management or funding of its business.
Sources and Availability of Raw Materials
Platelet and Organ Preservation Business
Since we are in the development stage, we have not yet begun to manufacture our products. Our products, as manufactured, should not use any exotic or hard to find raw materials and we believe that suppliers can be identified. We are constantly reviewing the materials used in the development process, with particular attention to availability and future cost. We cannot currently anticipate what the availability of materials and suppliers will be at the time our products enter production.
Alternative Energy Business
We are no longer directly involved in the alternative energy business. In July 2007,we suspended all bio-fuels production plans, and in March 2008 (made effective October 2007) we released our interest in the property purchase held by HBS Bio in the property known as Corcoran to Environmental BioMass Energy, Inc. (“EBE”), a company involved in the bio-waste to energy business, in return for approximately 49% stake in that company. The Company currently owns approximately 30% stake in EBE.
All operations and management functions of EBE are performed by EBE employees. The Company holds shares of EBE as an investment and is not directly involved in management or funding of its business.
Competition
Platelet and Organ Preservation Business
As a development stage company, we are entering a biological material preservation market that is presently addressed by large companies with extensive financial resources. Those companies include DuPont and Baxter, among others. Additionally, smaller companies with which we may compete include LifeCell Corporation for platelet preservation, Cerus Corporation for viral inactivation for platelets and other blood products and Cryo Life for preserving heart valves by cryo-preservation. We believe that some of these companies remain active in research and development of biological material preservation; however, we do not know the current status of their development efforts. Most of the above competitors have significantly greater financial resources, technical expertise and managerial capabilities than we currently possess.
LifeCell Corporation has developed technology for preserving a variety of cell types including platelets and red blood cells, and is attempting to obtain FDA approval for extending the storage time of blood platelets using cryo- preservatives. Cerus Corporation has developed a viral inactivation product for platelets that is intended to eliminate or reduce viral testing requirements. To our knowledge, this product is no longer being pursued as a platelet product in the U.S. These products if approved could have a material adverse impact on the market for extending platelet storage times using our technology. We believe that most, if not all, of our competitors use toxic chemicals such as Dimethyl Sulfoxide (DMSO) to preserve platelets, and store organs and other biologic material. It is our intent to achieve longer preservation of such material and provide higher quality material by using non-toxic solutions and by storing the biologic material at refrigerated temperatures for moderate storage times and below the freezing point of water, without destroying the cellular integrity of the material, for longer storage times. We also believe that our approach will be inexpensive in comparison to alternative preservation methods because the toxic solutions used by our competition must be removed from the material before use in most cases. The solution we use for platelet preservation is intended to be directly usable.
Solutions used for storing organs, such as the HTK and UW solutions, have long been established in Europe and the U.S. Although we believe that our directly competitive solution, the HBS-AZ, has shown better results using animals as test subjects, we cannot be assured of the same results in humans. However we have good initial success with our freezing technology, which has not been duplicated to our knowledge.
Alternative Energy Business
We are no longer directly involved in the alternative energy business. In July 2007,we suspended all bio-fuels production plans, and in March 2008 (made effective October 2007) we released our interest in the property purchase held by HBS Bio in the property known as Corcoran to Environmental BioMass Energy, Inc. (“EBE”), a company involved in the bio-waste to energy business, in return for approximately 49% stake in that company. The Company currently owns approximately 30% stake in EBE.
All operations and management functions of EBE are performed by EBE employees. The Company holds shares of EBE as an investment and is not directly involved in management or funding of its business.
Intellectual Property
Platelet and Organ Preservation Business
We consider our intellectual property to be a key cornerstone and asset of our business. As such, the intellectual property, which consists of patents, patent applications, trade secrets, copyrights and know-how, will be both developed and protected. We plan to gain wide protection for our intellectual property worldwide by patent and trademark filings in major foreign markets as well as the careful protection of trade secrets through contracts and procedures.
Prior to the formation of our company, Vladimir Serebrennikov, our Technical Director of Research and Development, conducted independent research over a ten-year period, involving research concerning the preservation of biologic material using high pressure. After we were formed on February 26, 1998, the knowledge he gained was applied to the preservation of blood platelets, our primary market focus. New methods were developed in the container hardware design, processes and solutions for platelets, which continue to evolve as we continue our research and development efforts.
On June 1, 1998, we were assigned the entire worldwide right, title and interest in a preservation technology applicable to, but not limited to platelets (a blood component), red blood cells, heart valves, tissue and organs. This technology concerned all of the discoveries, concepts and ideas whether patentable or not, invented and developed by Messrs. Leonid Babak and Vladimir Serebrennikov. The assignment was in exchange for our issuance of 877,500 shares of common stock to each of Messrs. Babak and Serebrennikov, valued at the time of issuance at $0.0025 per share.
Since this assignment, we have been performing further research and development on the technology assigned, and have filed two patent applications, as described elsewhere herein. We anticipate filing additional patents on other aspects of the technology assigned by Messrs. Babak and Serebrennikov as additional inventions are reduced to practice.
A patent covering the hardware design of the container, preservation methodologies and processes was filed by us on October 31, 1998 followed by a continuation-in-part (CIP), which was filed in February of 1999 covering our solutions and other preservation methodologies. We filed an international application with the Patent Cooperation Treaty based on our U.S. patent application, designating all countries and regions, on October 12, 1999. In addition, in June 2001, we filed a provisional patent entitled "Preservation of Blood Platelets at Cold Temperatures" to cover our improved platelet preservation methods. In August 2003, we filed another patent application covering improved platelet preservation methods.
In July 2002, we received our first patent on the technology and methodology for preserving blood platelets. This patent, U.S. 6,413,713, B1, is titled "Method for Preserving Blood Platelets". We expect that additional patents will follow for organ preservation and other biologic material as such systems are developed. We subsequently allowed this particular patent to expire as we decided to concentrate our efforts on refrigeration of platelets without the use of a container.
We filed an international application with the Patent Cooperation Treaty based on our U.S. patent application, designating all countries and regions, on October 12, 1999. In addition, in June 2001, we filed a provisional patent entitled "Preservation of Blood Platelets at Cold Temperatures" to cover our improved platelet preservation methods. In August 2003, we filed another patent application covering improved platelet preservation methods.
Although we believe that our methods for preserving platelets are patentable, there can be no assurance that we will be granted a patent beyond the one granted in July 2002. If additional patents are not granted, this could have a material adverse effect on our ability to compete with other companies that have much greater financial and technical resources than we currently possess.
As of December 2008, the U.S. Patent Office has granted us six patents for our organ, cell and platelet preservation technologies. We believe that our patents and their extensions will protect the current core technology and provide us with a long-term competitive advantage in the market.
We purchased the patents for a vaginal disease test product titled Phemtest from Paul Okimoto, an officer and director, on September 1, 1998. The patent "VAGINAL TESTING APPLICATOR AND METHOD", Patent Number 4,784,158, was issued November 15, 1988, and "BODY CAVITY SPECIMEN COLLECTING AND TESTING APPARATUS", Patent Number 4,945,921, was issued August 7, 1990. Pursuant to the purchase agreement for the patents, we paid $1,375 to the law firm of Flehr, Hohbach, Test and Herbert as a patent maintenance fee to assure that the patents would remain in force. We also agreed to pay Mr. Okimoto a royalty payment of 5% of gross sales of Phemtest for five years. The first $16,000 in royalty payments, if any, are to be paid to a law firm to be designated by Mr. Okimoto, the next $75,000 in royalties are to be paid to Mr. Okimoto in shares of our common stock, valued at $2.00 per share, and the remaining royalties to be paid to Mr. Okimoto, are to be paid in cash. To date, no royalties have been earned or paid for Phemtest.
Our product development efforts remain focused on our Platelet Preservation System. Therefore we intend to find a suitable licensee who is capable of completing the steps necessary to manufacture and market the Phemtest product. To date, we have not located such a licensee, and there can be no assurance that a licensee will be obtained, or that we can negotiate a license on favorable terms. FDA approval of the Phemtest product will also be required; we have not commenced the testing process required for such approval. As of December 31, 2008, we have not signed any agreement with any potential licensee, as our focus remains on our core businesses of preserving blood platelets and organs
Government Regulation
Platelet and Organ Preservation Business
The FDA and the European Union have regulations governing the marketability of medical solutions and equipment. We have not developed our products to the level where these approval processes can be started.
We believe that all of the products currently in development will require FDA approval prior to marketing in the U.S. Our initial products are at the prototype development stage and preclinical testing. We intend to submit our initial Investigational New Drug Exemption ("IND") and Investigational Device Exemption ("IDE") as soon as sufficient preclinical data is obtained. Both of the IND and IDE must be filed with the FDA prior to conducting clinical trials on human subjects. The successful completion of clinical trials is the final step toward receiving FDA approval of our product for marketing.
Our anticipated first product is a set of solutions and process to be used by blood centers to store platelets at refrigerated temperatures. As such, we must obtain regulatory approval from the FDA to market the solutions and process in the U.S. In addition, if a device is required in the processing or storage of platelets, we must obtain regulatory approval from the FDA to market the device and the platelet product to be stored in our device.
We currently do not have an estimate of when we will file our initial IND/IDE. The filing date will depend on when we obtain the required approval to conduct our pre-clinical human studies, and whether such studies are successful. Depending on the outcome of clinical trials and the claims submitted for approval, we believe that it could take as long as two to four years to obtain needed data, submit requests for marketing approval, and obtain regulatory approval or denial.
Russian regulations governing patents and procedures for ownership of patents are similar to those in the U.S., as they state that any patentable products or ideas developed through the branch personnel will be our property as long as an agreement with employees and outside sub-contract personnel stipulates that such inventions shall be assigned to us. This is similar to U.S. law. It is our practice to require that all personnel and outside contractors sign such an agreement.
The assignment of products developed or patents granted prior to any payment by us for the development of a product would require approval by the Russian government. Even though Mr. Serebrennikov holds some patents individually which could relate to our technology, we have elected not to purchase these existing patents because they have become public domain outside of Russia, and because we do not feel that they are important to our business.
Alternative Energy Business
We are no longer directly involved in the alternative energy business. In July 2007,we suspended all bio-fuels production plans, and in March 2008 (made effective October 2007) we released our interest in the property purchase held by HBS Bio in the property known as Corcoran to Environmental BioMass Energy, Inc. (“EBE”), a company involved in the bio-waste to energy business, in return for approximately 49% stake in that company. The Company currently owns approximately 30% stake in EBE.
All operations and management functions of EBE are performed by EBE employees. The Company holds shares of EBE as an investment and is not directly involved in management or funding of its business.
Other Product Development Efforts
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 2003 we signed a binding letter of intent to acquire all rights in 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 undergoing human infusion tests. During 2004, we reformulated the cream for better appearance and use. We then tested the reformulated cream for safety at an independent laboratory, and received positive results. However, after searching unsuccessfully for a business partner to produce and market the cream, we have ceased all marketing and development activities of the cream. We currently have no plans to further market or develop this cream.
Employees
As of December 31, 2008 we had an aggregate of 3 employees and key consultants. Our employees are currently not represented by a collective bargaining agreement, and we believe that our relations with our employees are good.
ITEM 1A.
ITEM 1A.
RISK FACTORS
Not Applicable
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None
ITEM 2.
ITEM 2.
PROPERTIES
We currently own no real property. Our principal address as reported herein is the residence of one of our employees. We do not pay any rent for the use of our principal executive offices; however we pay our Chief Executive Officer $200 per month for the use of his personal residence and facilities for conducting Company business. Although the real estate leasehold market in California is highly competitive, we believe that as we require facilities in California we will be able to find available facilities at a reasonable cost.
Our primary research and development effort, which has been conducted at our facility in Kransnoyark, Russia, has been transferred to the United States. In September 2008, we closed operations in Russia because no further market information was required of the office. In January 2008 our employee at our Michigan research facility, conducting organ preservation studies was furloughed due to lack of funds. We signed a five year lease on a new facility in Michigan in the last quarter of 2006, and moved into the new space in March 2007, to accommodate needed equipment to conduct islet cell and organ freezing studies we had to suspend experiments there because we did not have sufficient operating capital to continue. The monthly rent on this facility is $1,100 plus expenses of $370 per month. We are currently making payment arrangement with the landlord to cancel the lease as we have no employees working at that facility at this time.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
On December 10, 2001, we filed a complaint entitled HyperBaric v. John A. Mattera, in the United States District Court, Northern Division, Case No. C01-21142. This is an action against John A. Mattera ("Mattera") for breach of contract; breach of the implied covenant of good faith and fair dealing; fraud; securities fraud; and constructive trust in connection with a stock purchase agreement that we entered into with Mattera in April 2001. Pursuant to the agreement, Mattera was to wire transfer the sum of $104,000 within 72 hours of receipt of 5,000 free trading shares of our stock to be deposited with a clearing agent designated by Mattera. Mattera failed to pay and refused to pay for the shares of stock; however, the shares were cleared and released to Mattera by the clearing agent without confirmation that payment had been received by us. Thereafter, the transfer agent refused to cancel the transfer or return the shares without a court order. We are seeking damages; interest allowable by law; rescission of the agreement and return of the shares; attorneys' fees and costs incurred for the suit; punitive damages; and a preliminary injunction preventing the transferring of the shares and/or disposal of the proceeds until termination of the litigation. The complaint was served on Mattera in Florida on December 28, 2001, but to date no response has been filed. A judgment was entered against Mattera in the amount of $117,447.28 on November 15, 2002, and we have attempted to execute on this judgment. There can be no assurance that we will be able to recover any of this amount.
In August of 2002, the United States Attorney for the Eastern District of New York and the Securities and Exchange Commission brought securities fraud charges against Harry Masuda, our Chief Executive Officer, for allegedly paying an unregistered broker an undisclosed commission in a September 1999 and February 2000 private placement. The allegations generally charge Mr. Masuda with the failure to adequately disclose to investors in this private placement a commission agreement with Larry Bryant, an unlicensed broker-dealer. Remedies sought in these proceedings include criminal penalties and a bar from service as an officer or director of a publicly-traded company. The SEC also brought fraud charges against us for the same transactions.
In June 2000, we undertook a rescission offer to those shareholders who had purchased an aggregate of 5,300 shares of common stock and warrants in the private placements for aggregate proceeds of $640,950. Holders of 2,800 shares of common stock accepted the rescission offer. The other shareholders elected not to rescind their stock purchases. We paid an aggregate of approximately $300,000 in cash to rescinding shareholders, but could not afford to pay the balance of the rescission offer in cash. Instead, we issued promissory notes, with interest at the rate of 10% per annum, payable upon the earlier of (i) one year from the date of the note or (ii) our receipt of funding sufficient to permit repayment of the principal and interest on the notes. In 2000 and 2001, holders of $67,500 in principal and interest in the above-referenced promissory notes elected to convert their notes to an aggregate of 2,600 shares of our common stock. The remainder of the rescinding holders was paid in full in cash prior to December 31, 2002.
Since all of the shareholders electing to rescind were paid in full (whether in cash or in shares of common stock), we believed that the issues raised by the alleged failure to disclose were fully resolved. In January of 2005, the United States Government and Mr. Masuda entered into a deferred prosecution agreement which led to a dismissal of all charges against Mr. Masuda at the end of the 18-month deferred prosecution term, which ended in July 2006.
The civil case by the SEC against us and Mr. Masuda had been stayed at the request of the U.S. Attorney pending completion of the deferred prosecution term. On March 14, 2008, Final Consent Judgments as to us and Mr. Masuda were entered in the civil case in the United States District Court for the Eastern District of New York. Pursuant to the Final Consent Judgments, we and Mr. Masuda are permanently enjoined and restrained from, directly or indirectly, violating Sections 5(a) or 5(c) of the Securities Act, Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated under the Exchange Act. Mr. Masuda was further ordered to pay a civil penalty in the amount of $25,000.
We are not engaged in any other litigation, and we are unaware of any claims or complaints that could result in future litigation. We will seek to minimize disputes with our customers and vendors, but realize the inevitability of legal action in today’s business environment as an unfortunate cost of conducting business.
In November, 2008, an equipment supplier filed a complaint for non-payment in the amount of $11,000 plus attorneys fees of $2,500 in the Santa Clara County Superior Court. We are currently negotiating a settlement or payment plan with their collection attorney.
ITEM 4.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual meeting of stockholders at our Headquarters offices at 1127 Harker Avenue, PaloAlto, CA 94301 on January 16, 2009 which was originally scheduled for November 14, 2008 but was recessed until a quorum could be reached to hold a meeting . At the annual meeting, our shareholders were asked to vote on the following proposals:
·
To elect three persons to our board of directors for the following year. Management has nominated Harry Masuda, Paul Okimoto and Larry McCleary, M.D.
·
Approve the reverse split of the issued and outstanding shares of the issued and outstanding shares of the Company on the basis of one post-consolidated share for each 80 pre-consolidated shares to occur immediately after the action described herein; and
·
Approve the selection of L.L. Bradford & Company, LLC as the Company’s independent public accountants for the fiscal year ending December 31, 2008.
1,190,137 of the 2,356,100 shares of issued and outstanding common stock were represented at the annual meeting.
The proposals were voted on as follows:
1.
Election of the following persons to our Board of Directors:
Nominee
Votes For
Votes Against
Votes
Withheld/Abstained
Harry Masuda
1,137,796
9,732
18,216
Paul Okimoto
1,140,058
11,232
14,453
Larry McCleary
1,149,798
10,273
5,672
2.
Proposal to approve the reverse split of the issued and outstanding shares of the issued and outstanding shares of the Company on the basis of one post-consolidated share for each 80 pre-consolidated shares to occur immediately after the action described herein
For:1,103,604
Against:
43,316
Abstain/Withhold:18,823
3.
Proposal to approve the selection of L.L. Bradford & Company, LLC as the Company’s independent public accountants for the fiscal year ending December 31, 2008
For: 1,146,682
Against: 2,653
Abstain: 16,409
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES
Our common stock has been traded on the OTCBB since May 18, 1999. Prior to that date, our common stock was not actively traded in the public market. Our common stock is listed on the OTCBB under the symbol "HBSC.OB". Our common stock is also traded on the Stuttgart Stock Exchange under the WKN #157049.
The following table sets forth, for the periods indicated, the high and low bid prices for our common stock on the OTCBB as reported by various Bulletin Board market makers. The quotations do not reflect adjustments for retail mark-ups, mark-downs, or commissions and may not necessarily reflect actual transactions.
As of February 23, 2009, there were approximately 244 holders of record of our common stock.
To date, we have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings for funding growth and therefore, do not expect to pay any dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion.
Recent Sales of Unregistered Securities
Set forth below is information regarding shares of common stock issued and options and warrants and other convertible securities granted by us during the year ended December 31, 2008, and not previously disclosed in our quarterly reports on Form 10-Q for the respective quarterly periods ended March 31, June 30 and September 30, 2008. Also included is the consideration, if any, received by us for such shares, options and warrants, and information relating to the section of the Securities Act, or the rule of the Securities and Exchange Commission, under which an exemption from registration was claimed.
In the fourth quarter of 2008, we issued 0 shares of restricted common stock.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
Not Applicable
ITEM 7.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This annual report contains forward-looking statements including 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 annual report are based on information available to us on the date hereof and speak only as of the date hereof. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. The factors discussed above 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 our consolidated financial statements and related notes included elsewhere in this annual report.
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, new lines of business and 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, the establishment of our research and development facility and the launch of our alternative energy business. Expenditures will increase in all areas in order to execute our business plan, particularly in research and development, gaining regulatory approval to market our products in the U.S. and abroad, but will be eliminated in our alternative energy business because of its restructuring in 2007 and 2008
From time to time since 2003, we have experienced increased difficulty in raising outside capital. We have pursued various alternatives for raising capital over the prior three fiscal years (see “Liquidity and Capital Resources” below for detailed descriptions of our capital-raising transactions). To date, we continue to seek alternative sources for capital including licensing of technology, strategic alliances and mergers with a revenue producing company.
Platelet and Organ Preservation Business
We are a developer of preservation platforms for organs and other biomaterials, specializing in the development of proprietary above zero (HBS-AZ) and below zero (HBS-BZ) organ and tissue preservation systems and methods for preserving blood platelets. 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 have completed in-vitro tests using our proprietary systems at two independent laboratories that specialize in platelet testing with results that we believe justify proceeding to human infusion (in-vivo) tests. However, after discussions with the FDA, we elected to first pursue animal and human studies in Mexico. We have located facilities in Mexico where we intend to pursue these studies; however, due to a lack of funding we suspended these efforts in July 2007.
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. We successfully transplanted a rat kidney that had been frozen at a temperature of negative 80 degrees Centigrade for three months in our patent-pending HBS sub-zero solution. In October 2005, we successfully completed the initial phase of our survival studies of animals with transplanted kidneys preserved using our HBS organ preservation solution, and were able to preserve a rat's kidney at negative 196 degrees Centigrade for up to five days while maintaining some functionality when transplanted back into the animal, evidenced by urine production. We previously preserved rats' kidneys at negative 20 and negative 80 degrees Centigrade. We will continue to conduct further tests on a larger animal sample size, and conduct histology and survival studies as well. Our goal is to extend the kidney shelf life for up to 72 to 96 hours at above freezing temperatures and even longer at sub-zero temperatures. We believe that the extended shelf life should enable better matching of donor kidneys to recipients.
In the third quarter of 2005, we also purchased a special freezer and equipment used to conduct experiments at negative 80 degrees Centigrade. Recent survival studies on animals with kidneys stored in the HBS-AZ solution for 14 days showed an 83% survival rate versus 42% and 10% for the respective UW and HTK (European) solutions. Further recent studies using biochemical test markers have corroborated these studies. In 2007 and 2008, we sought possible opportunities to license our organ preservation technology for storage at temperatures above zero degrees Centigrade without success. We plan to continue seeking opportunities to licensee our technology in 2009.
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. In May 2006, the U.S. Patent Office approved our patent for organ preservation entitled “Methods and Solutions for Storing Donor Organs”, U.S. Patent No. 7,029,839. 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.
Alternative Energy Business
In August 2006, we entered the renewable energy market through the formation of our wholly-owned subsidiary, HBS BioEnergy (“HBS Bio”). Although at that time, HBS Bio intended to identify, secure and develop suitable sites for the production of ethanol and biodiesel fuel for the U.S. market using innovative methods to improve the efficiency and cost of producing biofuels.
During April 2007, HBS Bio entered into a lease for approximately 90 acres of property in Morrow County, Oregon for a period of 20 years, with the option to renew the lease for 10 consecutive terms of five years each. HBS Bio paid $15,000 upon execution of the lease for a three month review period. HBS Bio extended the review period for an additional three months by payment of an additional $15,000. This lease expired on October 3, 2007, as a result of the decision by HBS Bio to refocus its efforts in the renewable energy market.
In addition, during April 2007, HBS Corcoran, a joint venture in which HBS Bio owns an interest, entered into an agreement for the purchase of approximately 922 acres of property in Tulare County, California for an aggregate purchase price of approximately $12 million. HBS Corcoran is required to make deposits of up to $690,000 in escrow within 18 months from April 17, 2007. During the year ended December 31, 2007, HBS Bio deposited an aggregate of $389,700 into escrow. The deposits are nonrefundable except under certain conditions, are to be applied to the purchase price, and will constitute liquidated damages in the event of HBS Corcoran’s default under the purchase agreement. HBS Corcoran will have 18 months to review the suitability of the property for its planned uses. The balance of the purchase price must be deposited in escrow within 30 days after completion of the feasibility review or the end of the feasibility period, whichever occurs first.
We made the decision in July 2007 to suspend all ethanol and bio-fuels business activities and in October 2007 we decided to continue our efforts in the renewable energy market by focusing on the waste to energy segment of that market using animal and other waste products to produce electrical energy to be sold to utilities versus ethanol and biodiesel fuel production
Since October 2007, the focus in the Company’s renewable fuels segment of the business has been addressed as an investment through ownership of common shares of Environmental BioMass Energy Inc. (EBE) which is in the business of converting bio-waste to electrical energy. Under this investment, HBS initially received approximately 49% of EBE common stock in exchange for releasing its interest in a property purchase agreement described above that was held through HBS Bio known as HBS Corcoran. All operations and management functions of EBE are performed by EBE employees.
The Company currently holds slightly less than 30% of EBE common stock as of December 31, 2008 due to the conversion of certain Company liabilities to equity in EBE. The Company holds shares of EBE as an investment and is not directly involved in management or funding of its business.
Results of Operations
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Revenues. We did not generate any revenue in the years ended December 31, 2008 and 2007, 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 tenth year of research and development activities,and do not anticipate receiving revenue until we complete product development and clinical testing.
General and Administrative Expenses. Total general and administrative expenses in the year ended December 31, 2008 were $883,400, a decrease from $1,676,700 for the year ended December 31, 2007. The decrease was due primarily to a significant decrease in public relations expenses to $44,000 from $409,300,a decrease in salaries to $181,000 from $334,000 and a decrease in professional outside services to $164,400 from $$319,500. This decrease is primarily due to the expiration and non-renewal of one large investor awareness program in 2007, the cutting of salaries and the closing of our offices in Russia and Michigan.
We experienced a decrease in stock-based compensation in the year ended December 31, 2008 to $4,100, from $31,200 for the year ended December 31, 2007. From time to time, our staff has worked for under market rate compensation or has had to accrue pay for extended periods of time when financing was not available. We have granted stock options to certain employees in partial consideration for salary reductions, and certain employees have elected to receive stock in lieu of compensation. The decrease in stock-based compensation in 2008 was primarily due to the decline in the use of options in lieu of cash compensation in that year.
We experienced a decrease in other general and administrative expenses to $835,300 for the year ended December 31, 2008 from $1,236,200 for the year ended December 31, 2007. This decrease was due primarily to a significant decrease in salaries to $181,000 from $334,000 and a decrease in professional outside services to $164,400 from $319,500.
Research and Development. Our research and development expenses were $140,000 for the year ended December 31, 2008, an decrease from $282,500 for the year ended December 31, 2007. This decrease was primarily due to the closing of our offices in Russia and Michigan.
Ethanol Development. We expended $62,800for the development of our ethanol business in the year ended December 31, 2008, compared to $934,700 in the year ended December 31, 2007. As noted above, we currently are no longer pursuing an ethanol production business.
Sales and Marketing Expenses. We had no sales and marketing expenses for the year ended December 31, 2008 or 2007. There may be sales and marketing expenses in 2009 if we are successful in our platelet or organ preservation studies that would justify the marketing of our technology or products though direct sales and marketing personnel.
Other Income and Expense. We incurred interest expense of $104,500 during the year ended December 31, 2008, compared to $454,800 in the year ended December 31, 2007 due primarily to the conversion of loans.
Net Loss. As a result of the foregoing factors, our net loss decreased to $1,191,500 for the year ended December 31, 2008, from a net loss of $3,351,900 for the year ended December 31, 2007.
Liquidity and Capital Resources
Our operating plan for 2009 is focused on development of our products. It is our estimate that a cash requirement of $4 million is required to support this plan for the next twelve months. During the year ended December 31, 2008, we received an aggregate of $352,800 from the issuance of common stock, including $129,900 from our agreement with Dutchess, compared to $1,534,200 received in the year ended December 31, 2007. We are actively seeking additional funding. 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. Although we have entered into certain agreements with Dutchess, Ascendiant Securities, LLC and other financing sources (see below), there can be no assurance that we will be successful in raising significant capital pursuant to any of these agreements. At the present time, we have no other agreements or arrangements for any private placements.
We are in the twelfth year of research and development, with an accumulated loss during the development stage of $27,761,200. As of December 31, 2008, 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 or other 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-K, contains a paragraph regarding our ability to continue as a going concern.
During the year ended December 31, 2008, we continued to spend cash to fund our operations. Cash used by operating activities for the year ended December 31, 2008 was $378,000, and consisted principally of our net loss of $1,191,500, an increase in accounts payable of $318,200 and an increase in interest and wages due to shareholders of $213,400, $44,000 in public relations expenses paid or to be paid in common stock, $4,100 provided by stock-based compensation, a change in accrued liabilities of $95,700, a change in prepaid expenses of $43,100, amortization of discount and loan fees on notes payable of $63,800, interest expense paid in common stock $1,600 , bank overdraft of $5,700 and $23,900 in depreciation. For the year ended December 31, 2007, cash used by operating activities was $1,965,800, and consisted principally of our net loss of $3,351,900, accrued liabilities of $130,000 , $269,300 in public relations expenses paid or to be paid in common stock, $31,200 provided by stock-based compensation, a change in accounts payable of $577,800, a change in prepaid expenses of $14,300, amortization of discount and loan fees on notes payable of $400,400, a loss on investment in marketable securities of $7,600 and $20,500 in depreciation, offset by an increase in other assets of $65,000.
We used $0 cash for investing activities for the year ended December 31, 2008, compared to $339,400 of cash used for investing activities for the year ended December 31, 2007. Cash flow from financing activities for the year ended December 31, 2008 produced a net increase in cash of $369,300, consisting of $352,800 from the issuance of common stock and an increase in $110,000 on amounts due to shareholders , offset by $57,400 in principal payments on notes payable and $36,100 in principal payments on a note payable for directors’ and officers’ liability insurance. Cash flow from financing activities for the year ended December 31, 2007 produced a net increase in cash of $1,700,300, consisting of $1,534,200 from the issuance of common stock and $431,400 from borrowing on notes payable and an increase in $939,300 on amounts due to shareholders .offset by $1,158,500 in principal payments on notes payable and $46,100 in principal payments on a note payable for directors’ and officers’ liability insurance.
As of December 31, 2008, we had a bank overdraft amounting to $5,700, a decrease from the balance of $8,700 at December 31, 2007. Our working capital deficit increased to $1,998,400 at December 31, 2008, from $1,745,800 at December 31, 2007. As of December 31, 2008, we had no commitments to purchase capital equipment.
Financing Activities
From 2004 through 2008, we pursued various alternatives for raising capital. We entered into the Investment Agreement with Dutchess effective June 28, 2004. Pursuant to the terms of the Investment Agreement, we may offer, through a series of puts, and Dutchess must purchase from time to time, up to a maximum of 475,000 shares of our common stock, provided that Dutchess shall not be required to purchase shares of our stock with an aggregate purchase price in excess of $5,000,000. The purchase price of shares purchased under the Investment Agreement shall be equal to 95% of the lowest closing "best bid" price (the highest posted bid price) of the common stock during the five consecutive trading days immediately following the date of our notice to Dutchess of our election to put shares pursuant to the Investment Agreement. The dollar value that we will be permitted to put pursuant to the Investment Agreement will be either: (A) 200% of the average daily volume in the US market of the common stock for the ten trading days prior to the notice of our put, multiplied by the average of the three daily closing bid prices immediately preceding the date of the put, or (B) $10,000. No single put can exceed $1,000,000. We filed a registration statement on Form SB-2 in July 2004 to register for resale an aggregate of 475,000 shares of common stock issuable under the Investment Agreement; this registration statement was declared effective on August 23, 2004. Pursuant to the Investment Agreement, Dutchess acquired a total of 5,400 shares of the Company's common stock for approximately $297,500 during the year ended December 31, 2005, 48,500 shares for approximately $643,700 during the year ended December 31, 2006 and an aggregate of 130,600 shares of the Company’s common stock for approximately $647,600 during the year ended December 31, 2007.
Because the registration of the 475,000 shares reserved for the Dutchess agreement was to expire in September, 2007, the Company registered 250,000 shares of the Company’s common stock in July, 2007 to allow continuation of the agreement with Dutchess. Dutchess acquired a total of 245,800 shares of the Company's common stock for approximately $321,100 during the year ended December 31, 2007, and 4,200 shares of the Company’s common stock in exchange for approximately $2,000 during January 2008.
Because the 250,000 shares reserved for the Dutchess agreement was sold, the Company registered an additional 211,500 shares of the Company’s common stock in February, 2008 to allow continuation of the agreement with Dutchess. Dutchess acquired all of these shares for approximately $127,928 during the year ended December 31, 2008.
In December 2008, we entered into the new Investment Agreement with Dutchess effective December 29, 2008. Pursuant to the terms of the new Investment Agreement, we may offer, through a series of puts, and Dutchess must purchase from time to time, up to a maximum of 458,400 shares of our common stock, provided that Dutchess shall not be required to purchase shares of our stock with an aggregate purchase price in excess of $10,000,000. The purchase price of shares purchased under this Investment Agreement shall be equal to 95% of the lowest closing "best bid" price (the highest posted bid price) of the common stock during the five consecutive trading days immediately following the date of our notice to Dutchess of our election to put shares pursuant to this Investment Agreement. The dollar value that we will be permitted to put pursuant to this Investment Agreement will be either: (A) 200% of the average daily volume in the US market of the common stock for the ten trading days prior to the notice of our put, multiplied by the average of the three daily closing bid prices immediately preceding the date of the put, or (B) $250,000. We filed a registration statement on Form S1 in January 2009 to register for resale an aggregate of 458,400 shares of common stock issuable under this Investment Agreement; this registration statement was declared effective on January 30, 2009.
In July 2004, we entered into the Stock Purchase Agreement, whereby we issued 87,500 shares of our restricted common stock for 512,665 shares in Langley, a London-based institutional investment trust formed in February 2004 to invest in a diverse portfolio of U.S. small-cap companies. Fifty percent of the free-trading Langley ordinary shares were held in escrow for two years as a downside price protection against our shares issued to Langley. In the event of a decline in the market price of our common stock at the end of two years, we would be required to sell to Langley the amount of our Langley shares equal to (i) the original number of Langley shares issued as consideration under the Stock Purchase Agreement multiplied by (ii) the percentage decrease in the market price of our common stock.
The Purchase Agreement became effective during October 2004 when Langley was approved for trading by the UK Listing Authority and Langley shares began trading. The holding period expired in October 2006 and Langley transferred the shares from escrow. A finder’s fee of 300 shares, valued at approximately $6,600, was paid for this transfer. As of December 31, 2006, we had a balance of 487,000 Langley shares, which were sold on January 30, 2007 for $140,700, for a net loss on investment of $7,600.
In October 2005, we entered into an agreement with Ascendiant Securities, LLC ("Ascendiant") providing that Ascendiant would act on a best-efforts basis as our financial advisor and non-exclusive placement agent in connection with the structuring, issuance and sale of our debt and equity securities for financing purposes. The agreement, which has a term of six months, requires us to pay Ascendiant a cash success fee and warrants for completed transactions that we approve. The success fee is equal to ten percent of the gross proceeds from the sale of our securities; in addition, for transactions generating gross proceeds of $2,000,000 or more, we must issue Ascendiant 2,200 shares of our restricted common stock. To date, no transactions have been presented to us by Ascendiant.
In March 2006, we entered into a loan agreement with an independent lender. The lender agreed to loan us an amount based on 50% of the value of a portfolio of 6,300 shares of our common stock (approximately $75,000). These shares are held as collateral only. The lender will receive a loan fee equal to five percent of the gross loan proceeds (approximately $3,700). We received net funds of $71,250 from this loan, which was based on a formula and pricing period following the agreement date. The agreement calls for interest at the annual rate of 4.99% of the loan amount, payable quarterly, for a period of three years. At maturity, we have the option to pay off the loan balance and receive the same number of shares pledged, sell the pledged shares under certain conditions, renew the loan under certain conditions, or forfeit the shares and not repay the loan. In January of 2007 an additional 2,100 shares of stock were issued for collateral. In December of 2007 we decided to forfeit all 8,300 shares as collateral and the loan was considered paid.
In November 2006, we entered into a loan transaction with Dutchess, and issued to Dutchess a promissory note (“First Dutchess Note”) with a face value of $1,200,000, with net proceeds to us from the transaction of $1,000,000 and an imputed annual rate of interest of 43.278%. The First Dutchess Note matured on August 31, 2007. Repayment of the face value will be made monthly in the amount of $120,000, plus 50% of any proceeds raised over $120,000 per month from puts issued by us as collateral under the Investment Agreement (discussed above). Thirty such puts were issued and are to be used only in the case of a default under the Investment Agreement. If the First Dutchess Note’s face value is not paid off by maturity, we will be required to pay an additional 10% on the face value of the First Dutchess Note, plus 2.5% per month, compounded daily, until the First Dutchess Note is paid off. We may be required to pay penalties if certain obligations under the First Dutchess Note are not met. If we raise financing of more than $2,000,000, Dutchess may require that we use the balance of any amount over $2,000,000 to pay any amounts due on the First Dutchess Note. We issued 6,300 Holder Shares, which will carry piggyback registration rights in our next registration statement. An additional 6,200 shares will be required each time an eligible registration statement is filed and the shares are not included. The balance payable on the First Dutchess Note as of December 31, 2008 was $236,400.
In March 2007, we entered into a loan agreement with Dr. Larry McCleary, a member of our Board of Directors. Dr. McCleary agreed to loan us the sum of $500,000 for a term of two years from March 21, 2007, with a closing cost of $1,717.95 to be added into the first month’s interest payment. The loan bears interest at the rate of 9.25% per annum and provides for interest-only monthly payments with a balloon payment at the end of the term for the principal amount. We issued 1,300 shares of restricted common stock and 11,200 warrants valued at $30,000 to the Dr. McCleary for loan fees. In February, 2008 the Company entered into an agreement to restructure this loan agreement with Dr. McCleary to transfer $300,000 of the original principal loan amount of $500,000 to a return formula from the Corcoran project and maintain $200,000 under the original terms of the loan agreement. The Director agreed to accept 26,300 shares of the Company’s common stock as payment of interest owed to Director through March, 2008 valued at approximately $27,000. In April, 2008, the Company entered into an addendum to the loan re-structuring agreement signed in February of 2008 that increases the shares to be issued under the addendum from 26,300 to 31,300 shares of the Company’s common stock to offset interest beyond March, 2008 until the value of the shares applied to the interest is consumed. The value of the 5,000 additional shares is $4,000. The 31,300 shares were issued on April 25, 2008. In November 2008, the same Dr. McCleary agreed to convert the total loan and investment amount of $500,000 to shares of Environmental BioMass Energy, Inc. (“EBE”) out of the shares owned by the Company. 2,000,000 shares of EBE common stock were issued to Dr. McCleary out of the shares owned by the Company.
In January 2008, the Company entered into an investment agreement with an officer. The officer agreed to invest $100,000 in the Company in exchange for a return on investment formula. The original investment is to be returned upon the Company receiving distribution from its proposed ownership of a waste to energy project being formalized at that time. An additional aggregate of three times the original investment is to be paid by the Company from future distributions to Company from operations. The Company will reserve 20% of distributions received by the Company from the waste to energy project for this purpose. See November 2008 item below.
In November 2008, the Company received a loan in the amount of $10,000 from the same officer of the Company that entered into an investment agreement with the Company in January 2008 for $100,000. He agreed to convert this loan amount of $10,000 and the $100,000 invested under the agreement made in November 2008 to common shares of Environmental BioMass Energy, Inc. (“EBE”)owned by the Company. 440,000 shares of EBE were issued to the officer out of the shares owned by the Company.
During April 2007, HBS Bio entered into an agreement for consulting services relating to raising capital for HBS Bio. Under the agreement HBS Bio will pay the consultant a consulting/finder’s fee of 4% of the units of the venture funded as a result of the consultant’s efforts and $500,000 with regard to the first $20 million or pro-rata amount thereof invested or loaned by a party introduced by the consultant and the lesser of 2.5% or $100,000 with regard to each subsequent $10 million invested or loaned by a party introduced by the consultant.
In April 2007, we also entered into a new agreement with Abernathy for providing investor relations and awareness services. Under this agreement, we will make cash payments to Abernathy equal to 35% of the buy volume of our common stock attributable to the agreement. Abernathy will promote us to the investment community and the general public through press releases and other communications, all of which we must approve in advance. We have paid $167,100 pursuant to this agreement through December 31, 2008.
In May 2007, we entered into a second loan transaction with Dutchess and issued to Dutchess a second promissory note (“Second Dutchess Note”) with a face value of $462,000, with net proceeds to us from the transaction of $350,000 and an imputed annual rate of interest of 63.108%. The Second Dutchess Note matures on April 15, 2008. Repayment of the face value will be made monthly in an amount of the greater of (i) 100% of the proceeds raised from puts given to Dutchess by us, exceeding $120,000 per month, or (ii) $51,333.
If we raise financing of more than $2,000,000, Dutchess may require that we use the balance of any amount over $2,000,000 to pay any amounts due on the Second Dutchess Note. If the Second Dutchess Note is not paid in full by the maturity date, the face value of the Second Dutchess Note will be increased by 10% as an initial penalty, and we will pay an additional 2.5% per month on the face value, compounded daily, until paid in full. In addition to the failure to pay the face value by the maturity date, the following events are also “Events of Default”: failure to make a payment within 10 calendar days of its due date; bankruptcy; our common stock is suspended or no longer listed on a recognized exchange; the registration statement for the underlying shares in the equity line is not effective and not cured within five days; we fail to carry out puts in a timely manner; any of our representations contained in the Agreement were false when made; or we breach the Second Dutchess Note.
Upon each and every Event of Default, Dutchess may elect to execute the puts in an amount that will repay it and fully enforce its rights under the Agreement. Dutchess may also increase the face value of the Second Dutchess Note by 10% and an additional 2.5% per month, compounded daily until the default is cured or the Second Dutchess Note is paid in full. Dutchess may also elect to stop any further funding (excluding the equity line of credit), or may switch any residual amount of the face value of the Second Dutchess Note not paid at maturity into a three-year convertible debenture. If Dutchess so chooses, we have 10 days to file a registration statement for the shares issuable upon conversion of the convertible debenture equal to 300% of the residual amount, plus interest and liquidated damages. If we do not file the registration statement within 10 days, or the registration statement is not declared effective within 60 days, the residual amount will be increased by $5,000 per day. Moreover, if we have an opportunity to accelerate the effectiveness of the registration statement but fail to do so, the residual amount will increase by $5,000 per day commencing the date the statement would have been declared effective. The conversion rate will be the lesser of 50% of the lowest closing bid price for the previous 15 days or 100% of the lowest bid price for the preceding 20 days. If Dutchess does not elect to convert the debenture into common stock prior to maturity, it will automatically be converted into shares upon maturity. Finally, Dutchess may increase the monthly payment amount to fulfill the repayment of the residual amount. If we do not cooperate, Dutchess may elect to increase the face value of the Note by 2.5% per day, compounded daily.
We have further agreed that we will not enter into any additional financing agreements without Dutchess’ express written consent. We may not file any registration statement which includes any of our common stock exceeding 12,500 shares, including those on Form S-8 exceeding 10,000 shares, until the Second Dutchess Note is paid in full or Dutchess gives written consent. Dutchess agrees to allow one registration statement on Form SB-2 (now Form S-1) not to exceed 312,500 shares as a shelf registration. If we issue any shares to a third party while the Second Dutchess Note is outstanding under terms Dutchess deems more favorable to the third party, Dutchess may elect to modify the terms to conform to the more favorable term or terms of the third party financing. We have issued 3,100 shares of unregistered restricted common stock to Dutchess as an incentive for entering into the Second Dutchess Note. The balance payable on the Second Dutchess Note as of December 31, 2008 was $86,000.
We are currently in default on the First Dutchess Note and Second Dutchess Note due to the non-payment or insufficient payment of the agreed monthly principal amounts due under the notes. We are currently negotiating a payment plan that is acceptable to Dutchess. Although we are in default on the two notes, Dutchess has not exercised its right to increase the face amount of the loans or the interest rates; however, Dutchess did exercise its right to convert 9,300 shares in January 2008 under the First Dutchess Note, and another 12,500 shares in January, 2009.
In June 2007, we entered into a representation and finder’s agreement to raise investment capital from potential Korean investment sources, including institutions and individual investors. The finder’s fee is set at 5% of capital raised and up to $10 million of capital raised. In addition, a warrant to purchase 12,500 shares of our common stock was granted, provided that for each $100,000 raised, 100 shares shall vest up to the maximum amount of 12,500 shares if the full $10 million of capital is raised. To date, no funds have been raised pursuant to this agreement.
In June 2007, we entered into a consulting and finder’s agreement to coordinate and support potential Korean investment opportunities. We will pay a cash fee of 5% of the capital raised up to $10 million. To date, no funds have been raised pursuant to this agreement.
We have also registered 250,000 shares of our common stock in January of 2006 for use in raising capital. Through December 31, 2008, we have issued 249,300 of these shares.
In December 2007, we commenced a private placement of 250,000 shares of common stock in Germany pursuant to Regulation S under the Securities Act. None of these shares were sold during the year ended December 31, 2007 and 255,300 shares were sold a during the year ended December 31, 2008 We increased the available private placement shares from 250,000 to 312,500 shares in June 2008.
In January 2008 the Company entered into a Trustee agreement with an individual to serve as the Trustee for accounts held in Europe by the Company. A 3% fee of shares transferred into the account is payable by the Company for such services.
Critical Accounting Policies
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 policies, as defined below.
A critical accounting policy 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 to 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.
Stock Compensation
On January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” requiring us to recognize expense related to the fair value of its employee stock option awards. We recognize the cost of all share-based awards on a graded vested basis over the vesting period of the award.
Prior to January 1, 2006, we accounted for our stock option plans under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation.” Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), using the modified-prospective-transition method. Under that transition method, compensation cost recognized in 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions on SFAS No. 123(R). Results for prior periods have not been restated.
Determining the appropriate fair value model and calculating the fair value of stock-based awards at the date of grant requires judgment. We use a modified Black-Scholes option pricing model to estimate the fair value of employee stock options under our stock option plans, consistent with the provisions of SFAS No. 123(R). Option pricing models, including the modified Black-Scholes model, also require the use of input assumptions, including expected stock price volatility, expected life, expected dividend rate and expected risk-free rate of return. Expected stock price volatility is based on the historical volatility of our common stock. We use historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
We will continue to review our input assumptions and make changes as deemed appropriate depending on new information that becomes available. Higher volatility and expected lives will result in a proportional increase to stock-based compensation determined at the date of grant. The expected dividend rate and expected risk-free rate of return would not have as significant an effect on the calculation of fair value.
In addition, SFAS No. 123(R) requires us to develop an estimate of the number of stock-based awards which will be forfeited due to employee turnover. Quarterly changes in the estimated forfeiture rate have an effect on reported stock-based compensation, as the effect of adjusting the rate for an expense amortization after January 1, 2006 is recognized in the period the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment will be made to decrease the estimated forfeiture rate, which will result in an increase to the expense recognized in the consolidated financial statements. The effect of forfeiture adjustments in fiscal 2007 was insignificant. The expense we recognize in future periods could also differ significantly from the current period and/or our forecasts due to adjustments in the assumed forfeiture rates.
ITEM 7A.
ITEM 7A.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We conduct all of our transactions, including those with foreign suppliers and customers, in U.S. dollars. We are therefore not directly subject to the risks of foreign currency fluctuations and do not hedge or otherwise deal in currency instruments in an attempt to minimize such risks. Demand from foreign customers and the ability or willingness of foreign suppliers to perform their obligations to us may be affected by the relative change in value of such customer or supplier's domestic currency to the value of the U.S. dollar. Furthermore, changes in the relative value of the U.S. dollar may change the price of our products relative to the prices of our foreign competitors.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet
Consolidated Statement of Operations
Consolidated Statement of Stockholders’ Deficit
Consolidated Statement of Cash Flows
Notes to Consolidted Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Human BioSystems
(A Development Stage Company)
Palo Alto, California
We have audited the accompanying consolidated balance sheets of Human BioSystems (A Development Stage Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years ended December 31, 2008 and 2007 and for the period from February 26, 1998 (Inception) through December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Human BioSystems as of December 31, 2008 and 2007, and the results of its activities and cash flows for the years ended December 31, 2008 and 2007 and for the period from February 26, 1998 (Inception) through December 31, 2008 in conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered losses from operations and current liabilities exceed current assets, all of which raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/S/ L.L. Bradford & Company, LLC
May 5, 2009
Las Vegas, Nevada
HUMAN BIOSYSTEMS
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business - Human BioSystems (hereinafter referred to as the "Company") is a development stage company incorporated on February 26, 1998 under the laws of the State of California under the name "HyperBaric Systems." In November of 2002, we changed our name to Human BioSystems. The business purpose of the Company is to develop the technology for preservation of certain biologic material, including platelets (a blood component), red blood cells, heart valves, tissue and organs. The Company is in the twelfth year of its research and development activities. The Company's goal is to develop the technology to extend and maintain functionality of these materials for much longer periods of time than is currently possible.
In August 2006, we entered the renewable energy market through the formation of our wholly-owned subsidiary, HBS BioEnergy (“HBS Bio”). Although at that time, HBS Bio intended to identify, secure and develop suitable sites for the production of ethanol and biodiesel fuel for the U.S. market using innovative methods to improve the efficiency and cost of producing biofuels, we made the decision in October 2007 to continue our efforts in the renewable energy market by focusing on the waste to energy segment of that market using animal and other waste products to produce electrical energy to be sold to utilities versus ethanol and biodiesel fuel production. The new focus in the Company’s renewable fuels segment of the business is being addressed through a partnership with Environmental BioMass Energy Inc. (EBE) which is in the business of converting biowaste to electrical energy. Under this partnership, HBS initially received approximately 49% of EBE common stock in exchange for releasing its interest in a property purchase agreement. All operations and management functions of EBE are performed by EBE employees. The Company currently holds slightly less than 30% of EBE common stock as of December 31, 2008 due to the conversion of certain Company liabilities to equity in EBE.
Going concern - The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is in the development stage, has no operating revenue and incurred a net loss of approximately $1,191,500 for the year ended December 31, 2008. The Company is in the twelfth year of research and development, with an accumulated loss during the development stage of approximately $27,761,200. As of December 31, 2008, management is uncertain as to the completion date or if the product will be completed at all.
These conditions give rise to substantial doubt about the Company's ability to continue as a going concern. These 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 the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to obtain additional financing or sale of its common stock as may be required and ultimately to attain profitability.
Management's plan has been to raise financing of approximately $4,000,000 through a combination of equity and debt financing or to seek merger partners to continue with the business or another business.
In this regard, in January 2009, the Company signed a letter of intent to acquire all of the shares of San West Inc. through a reverse merger agreement such that the San West shareholders and others would receive 85% of the combined company and the Company shareholders would retain 15% of the outstanding shares following the merger. The letter of intent calls for San West to pay $25,000 upon signing and another $26,000 upon the signing of a definitive agreement. San West is to assume the liabilities under an agreed discounted settlement agreement of certain liabilities. A definitive agreement was subsequently signed on April 3, 2009 with an effective date set for April 17, 2009 and extended to May 8, 2009 pending the completion of the final terms of the merger agreement. However there is no assurance that the Company will be successful in completing this merger.
On March 4, 2009 the Company completed a one for eighty reverse split. All shares and per share data have been restated to reflect the stock split. The number of authorized shares of common and preferred are not affected by the reverse split and will remain the same after the split as the number of authorized shares prior to the split.
Amended Articles of Incorporation - In October 2002, a Certificate of Amendment to the Articles of Incorporation changed the name of the Company to Human BioSystems. The Certificate of Amendment to the Articles of Incorporation also changed the number of authorized shares of common stock from 10,000,000 to 45,000,000. Further, the Certificate of Amendment to the Articles of Incorporation authorized 5,000,000 shares of preferred stock, with preferences and rights to be set by the Board of Directors.
In October 2003, a Certificate of Amendment to the Articles of Incorporation changed the number of authorized shares of common stock from 45,000,000 to 145,000,000.
In May 2007, a Certificate of Amendment to the Articles of Incorporation changed the number of authorized shares of common stock from 145,000,000 to 300,000,000. Further, the Certificate of Amendment of the Articles of Incorporation authorized 10,000,000 shares of preferred stock, with preference and rights to be set by the Board of Directors.
Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash - The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The Company places its cash with high quality institutions. Accounts at each institution are insured up to $250,000 by the Federal Deposit Insurance Corporation. As of December 31, 2008, the Company had no uninsured cash.
Fixed assets - Fixed assets are stated at cost less accumulated depreciation. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).
The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful life of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.
Research and development costs - Research and development expenditures are charged to expenses as incurred.
Advertising and marketing costs - The Company recognizes advertising and marketing costs in accordance with Statement of Position 93-7 "Reporting on Advertising Costs." Accordingly, the Company expenses the costs of producing advertisements at the time production occurs, and expenses the costs of communication advertising in the period in which the advertising space or airtime is used. Advertising costs of approximately $0 and $5,900 were incurred for the years ended December 31, 2008 and 2007, respectively.
Income taxes - The Company accounts for its income taxes in accordance with Statement of Financial Accounting Standards No. 109, which requires recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
As of December 31, 2008, the Company has available net operating loss carryforwards that will expire in various periods through 2028. Such losses may not be fully deductible due to the significant amounts of non-cash service costs and the change in ownership rules under Section 382 of the Internal Revenue Code. The Company has established a valuation allowance for the full tax benefit of the operating loss carryovers due to the uncertainty regarding realization.
Foreign currency transactions - Gains or losses resulting from foreign currency transactions have been insignificant and are included in the statement of operations when incurred.
New accounting pronouncements - In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material impact on the Company’s consolidated financial statements.
In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (SFAS 157). The standard provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS 157 must be adopted prospectively as of the beginning of the year it is initially applied. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS 157 did not have a material impact on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS 159 is effective for fiscal years beginning after November 15, 2007, and early application is allowed under certain circumstances. The adoption of SFAS 159 did not have a material impact on the Company’s consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141R) which replaces SFAS No. 141. SFAS 141R retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS 141R is effective for the Company beginning January 1, 2009 and will apply prospectively to business combinations completed on or after that date. The Company does not expect the adoption of SFAS 141R to have a material impact on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51” (SFAS 160) which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective for the Company beginning January 1, 2009 and will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. The Company does not expect the adoption of SFAS 160 to have a material impact on its consolidated financial statements.
In December 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 110 regarding the use of a simplified method, as discussed in SAB No. 107 (SAB 107), in developing an estimate of expected term of plain vanilla share options in accordance with SFAS No. 123 (R), Share-Based Payment. In particular, the staff indicated in SAB 107 that it will accept a company's election to use the simplified method, regardless of whether the company has sufficient information to make more refined estimates of expected term. At the time SAB 107 was issued, the staff believed that more detailed external information about employee exercise behavior (e.g., employee exercise patterns by industry and/or other categories of companies) would, over time, become readily available to companies. Therefore, the staff stated in SAB 107 that it would not expect a company to use the simplified method for share option grants after December 31, 2007. The staff understands that such detailed information about employee exercise behavior may not be widely available by December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. The Company currently uses the simplified method for “plain vanilla” share options and warrants, and will assess the impact of SAB 110 for fiscal year 2009. It is not believed that this will have an impact on the Company’s consolidated financial position, results of operations or cash flows.
In March 2008, the Financial Accounting Standards Board, or FASB, issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133. This standard requires companies to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company has not yet adopted the provisions of SFAS No. 161, but does not expect it to have a material impact on its consolidated financial position, results of operations or cash flows.
In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS No. 162 sets forth the level of authority to a given accounting pronouncement or document by category. Where there might be conflicting guidance between two categories, the more authoritative category will prevail. SFAS No. 162 will become effective 60 days after the SEC approves the PCAOB’s amendments to AU Section 411 of the AICPA Professional Standards. SFAS No. 162 has no effect on the Company’s financial position, statements of operations, or cash flows at this time.
2. STOCK COMPENSATION
On January 1, 2006 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” requiring the Company to recognize expense related to the fair value of its employee stock option awards. The Company recognizes the cost of all share-based awards on a graded vesting basis over the vesting period of the award. Total stock compensation expense recognized by the Company during the years ended December 31, 2008 and 2007 was $4,100 and $31,200, respectively.
The Company has estimated the fair value of its option awards granted after January 1, 2006 using a modified Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on the historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
Modified Black-Scholes-Based Option Valuation Assumptions
Fair value of options granted during the period
$ -
$ --
Expected term (in years)
-
-
Expected volatility
-
-
Weighted average volatility
-
-
Expected dividend yield
-
-
Risk-free rate
-
-
The following table summarizes the stock option transactions for the twelve months ended December 31, 2008:
Stock Options
Shares
Weighted
Average
Price
Aggregate
Intrinsic Value
Outstanding at January 1, 2008
13,950
$26,40
$6,200
Granted
-
-
-
Exercised
-
-
-
Expired
12.80
-
--------------
--------------
Outstanding at December 31, 2008
13,075
$24.00
$6,200
========
========
Exercisable at December 31, 2008
13,075
$24.00
$6,200
The following table summarizes the stock option transactions for the twelve months ended December 31, 2007:
Stock Options
Shares
Weighted
Average
Price
Aggregate
Intrinsic Value
Outstanding at January 1, 2007
18,550
$26.40
$6,200
Granted
-
-
-
Exercised
-
-
-
Expired
4,600
$36.80
-
--------------
--------------
Outstanding at December 31, 2007
13,950
$23.20
$6,200
========
========
Exercisable at December 31, 2007
12,275
$24.00
$6,200
The aggregate intrinsic value of options exercised during the twelve months ended December 31, 2008 and 2007 was zero and zero, respectively.
3. INVESTMENT IN MARKETABLE SECURITIES
On July 29, 2004, the Company entered into a Stock Purchase Agreement (the "Purchase Agreement") with Langley Park Investments, PLC ("Langley"), a London Investment Company, to issue 87,500 shares of the Company's common stock to Langley in return for 512,665 shares of Langley. The Company issued the 87,500 shares during August 2004. Fifty percent of Langley shares issued to the Company under this agreement were held in escrow for two years as a downside price protection against 87,500 shares issued to Langley. In the event of a decline in the market price of the Company's common stock at the end of two years, the Company would have been required to sell to Langley the amount of Langley shares held in escrow equal to (i) the original number of Langley shares issued as consideration under the Purchase Agreement multiplied by (ii) the percentage decrease in the market price of the Company's common stock. The Company's shares were to be held by Langley for a period of at least two years. The Purchase Agreement became effective during October 2004 when Langley was approved for trading by the UK Listing Authority and Langley shares began trading. The holding period expired in October 2006 and Langley transferred the shares from escrow. A finder’s fee of 320 shares, valued at approximately $6,600, was paid for this transfer. As of December 31, 2006 the Company had a balance of 487,000 Langley shares, which were sold on January 30, 2007 for $140,700, for a net loss on investment of $7,600.
4. FIXED ASSETS
A summary of fixed assets as of December 31 is as follows:
Depreciation expense for the years ended December 31, 2008 and 2007 was $23,900 and $20,500, respectively.
5. RELATED PARTY TRANSACTIONS
On February 26, 1998, the Company issued 11,000 shares of common stock valued at $.20 per share to an officer and director of the Company for services rendered. On July 18, 1998, this officer purchased 500 additional shares of common stock for $20,00 per share.
On February 26, 1998, the Company issued 11,000 shares of common stock valued at $.20 per share to an officer and director of the Company for services rendered.
On February 26, 1998, the Company issued 800 shares of common stock valued at $.20 per share to a director of the Company for services rendered in organizing meetings with potential business partners and providing general business consultation services. On April 6, 1998, this director purchased 700 additional shares of common stock for $20 per share and was issued a warrant to purchase 600 shares of restricted common stock at $30.00 through March 24, 2000. In July 1998, this director purchased 900 additional shares of common stock for $20.00 per share and was issued an option to purchase 300 shares of common stock at $2.00 per share pursuant to the Company's Non- Statutory Incentive Stock Option Plan. In May 1999, this director purchased 38 additional shares of common stock for $120.00 per share. In August 1999, this director exercised the vested portion of this stock option and purchased 700 shares of common stock.
On February 26, 1998, the Company issued 6,100 shares of common stock valued at $.20 per share to three consultants for technical, translation and business consultation services rendered.
On June 1, 1998, the Company entered into an Agreement of Assignment of Patent and Technology with Leonid Babak and Vladimir Serebrennikov whereby these individuals assigned to the Company the entire worldwide right, title and interest in and to their invention of technology for preserving and transporting biologic and non-biologic material and in and to all of the discoveries, concepts and ideas whether patentable or not. Pursuant to this Agreement of Assignment of Patent and Technology, each individual received 11,000 shares of the Company's common stock with an ascribed value of $2,200, determined at the time of issuance on February 26, 1998 at $0.20 per share, which has been expensed as research and development.
In September 1998, the Company issued 7,500 shares of common stock to its legal counsel at the fair market value of $20.00 per share for services rendered in connection with a private placement and $600 cash, for an aggregate value of $150,000. Since the services related to the offering, the $149,400 cost has been recorded as a cost of the offering. There was no effect on operations.
During fiscal year 2000, a stockholder relinquished 4,000 shares of the Company's common stock held by this stockholder to three consultants to satisfy outstanding amounts due to them. The stockholder subsequently received 4,100 shares of the Company's common stock from the Company to replace shares relinquished to these consultants. The value of the shares relinquished and 100 additional shares issued to the stockholder by the Company, have been allocated between stock based compensation approximating $56,400 and prepaid consulting services related to issuance of common stock approximating $48,300 as of December 31, 2000.
In July 2001, the Company granted warrants to purchase 7,600 shares of common stock at $0.80 per share in satisfaction of a stockholder's accrued wages of $274,000.
During fiscal year 2002, the CEO and director exercised options to purchase 3,300 shares for $2,600. Further, the Company sold 1,400 shares to a director of the Company for $24,000 at approximately $2,000 below fair value.
During April 2003, the Company issued 900 shares of common stock to a stockholder and director of the Company in satisfaction of $10,000 in principal of a promissory note and $4,700 in interest.
During May 2003, the Company issued 500 shares of common stock to a stockholder and director of the Company in satisfaction of $5,000 in principal of a promissory note and $400 in interest.
During July 2003, the Company issued 600 shares of common stock to a stockholder and director of the Company in satisfaction of $9,200 in principal of a promissory note and $100 in interest.
During February 2004, the Company granted options to purchase 12,500 shares of common stock at $8.80 per share to various employees and directors. The options vest 30% upon grant, 30% after one year, and 40% after two years and were valued at $20,000 per APB No. 25.
During March 2004, the Company issued 65,800 shares of the Company's common stock to various stockholder employees and directors of the Company in satisfaction of $579,400 (excluding interest of $316,000) in accrued wages and vacation. Additionally, during the nine months ended September 30, 2004, the Company issued 1,600 shares of common stock to a stockholder and director in satisfaction of $15,000 (excluding interest of $2,700) in principal of a promissory note payable.
During March 2005, the Company granted options to purchase 1,900 shares of common stock at $8.80 per share to an officer. The options vest 30% upon grant, 30% after one year, and 40% after two years and were valued at $0.00 under APB No. 25. The Company also granted options to purchase 600 shares of common stock at $18.40 per share to a former director. The options vest 30% after one year, 30% after two years, and 40% after three years and were valued at $0.00 under APB No. 25.
During August 2005, the Company granted options to purchase 600 shares of common stock at $58.40 per share to an officer and a director. The options vest 30% upon grant, 30% after one year, and 40% after two years or monthly over one year and were valued at $36,400 per FAS 123. For the year ended December 31, 2005, the Company expensed approximately $6,300 related to the vested portion of the options.
During August 2005, the Company granted options to purchase 1,200 shares of common stock at $58.40 per share to an officer and a director. The options vest at the rate of 100 shares per month over 12 months and were valued at $63,200 per FAS 123. For the year ended December 31, 2005, the Company expensed approximately $18,600 related to the vested portion of the options.
During March 2006, the Company granted options to purchase 1,300 shares of common stock at $18.40 per share to an officer. The options vest 30% upon grant, 30% after one year, and 40% after two years and were valued at $0.00 under FAS 123(R).
During August 2006, the Company issued 8,900 shares of the Company’s common stock for cash at $11.20 per share to an officer, at approximately $28,600 below fair market value. The discounted value was expensed.
During August 2006, the Company issued 2,200 shares of the Company’s common stock for cash at $11.20 per share to a director, at approximately $7,100 below fair market value. The discounted value was expensed.
During August 2006, the Company granted options to purchase 400 shares of common stock at $14.40 per share to an officer. The options vest 30% upon grant, 30% after one year, and 40% after two years and were valued at $0.00 under FAS 123(R).
During September 2006, the Company issued 600 shares of the Company’s common restricted stock to a corporation wholly owned by its principal, who became an officer of HBS Bio at the close of the transaction. The shares are for assets to be transferred to HBS Bio at close of escrow, and are considered issued but not outstanding.
During December 2006, the Company granted options to purchase 1,900 shares of common stock at $8.00 per share to an officer and employee. The options vest 30% upon grant, 30% after one year, and 40% after two years and were valued at $0.00 under FAS 123(R).
In March 2007, the Company entered into a loan agreement with a director. The director agreed to loan the Company $500,000 for a term of two years from March 21, 2007, with a closing cost of $1,718 to be added into the first month’s interest payment. The loan bears interest at the rate of 9.25% per annum and provides for interest-only monthly payments with a balloon payment at the end of the term for the principal amount. The Company issued1,200 shares of restricted common stock and 11,300 warrants valued at $30,000 to the lender for loan fees. The $30,000 loan discount is being accreted; $12,800 of this discount was accreted during the year ended December 31, 2008. In February, 2008 the Company entered into an agreement to restructure the loan agreement signed in March, 2007 with this Director of the Company to transfer $300,000 of the original principal loan amount of $500,000 to a return formula from the Corcoran project and maintain $200,000 under the original terms of the loan agreement. The Director agreed to accept 26,300 shares of the Company’s common stock as payment of interest owed to Director through March, 2008 valued at approximately $27,000. In April, 2008, the Company entered into an addendum to the loan re-structuring agreement signed in February of 2008 that increases the shares to be issued under the addendum from 26,300 to 31,300 shares of the Company’s common stock to offset interest beyond March, 2008 until the value of the shares applied to the interest is consumed. The value of the 5,000 additional shares is $4,000. The 31,300 shares were issued on April 25, 2008. In November 2008, the same Director agreed to convert the total loan and investment amount of $500,000 to shares of Environmental BioMass Energy, Inc. (“EBE”) out of the shares owned by the Company. 2,000,000 shares of EBE common stock were issued to the Director out of the shares owned by the Company. This conversion was recognized as additional paid in capital during the year ended December 31, 2008.
In June 2007, the Company issued 2,500 shares of restricted common stock to a director for services valued at $10,000.
In October 2007, the Company, HBS Bio and HBS Bio’s LLC partner entered into an investment agreement with an officer. The officer agreed to invest $150,000 into the LLC project in exchange for a return on investment formula. Under this formula, the original investment amount is to be returned to the investor on the earlier of the receipt of (i) long term funding the project or (ii) proceeds from the sale of the planned land parcels. The $150,000 was used by the LLC to make one of several deposits on real property located in Tulare County which the Company expects to use for its waste to energy business.
A 20% bonus ($30,000) of the investment amount is to be paid at the same time as the return of the original investment. Additionally, the investor is to be paid his pro rata share of 10% of net cash flow beginning the first year the investment project starts to produce revenue and thereafter until such time as the investor receives two times the original investment amount.
In January 2008, the Company entered into an investment agreement with an officer. The officer agreed to invest $100,000 in the Company in exchange for a return on investment formula. The original investment is to be returned upon the Company receiving distribution from its proposed ownership of a waste to energy project being formalized at that time. An additional aggregate of three times the original investment is to be paid by the Company from future distributions to Company from operations. The Company will reserve 20% of distributions received by the Company from the waste to energy project for this purpose. See November 2008 item below.
In November 2008, the Company received a loan in the amount of $10,000 from the same officer of the Company that entered into an investment agreement with the Company in January 2008 for $100,000. He agreed to convert this loan amount of $10,000 and the $100,000 invested under the agreement made in November 2008 to common shares of Environmental BioMass Energy, Inc. (“EBE”)owned by the Company. 440,000 shares of EBE were issued to the officer out of the shares owned by the Company. . This conversion was recognized as additional paid in capital during the year ended December 31, 2008.
Stockholder payables consist of the following as of December 31:
6. NOTES PAYABLE
In March 2006, the Company entered into a loan agreement with an independent lender. The lender agreed to loan the Company an amount based on 50% of the value of a portfolio of 6,300 shares of the Company’s common stock (approximately $75,000). These shares were held as collateral only. The lender received a loan fee equal to five percent of the gross loan proceeds (approximately $3,700). The conversion feature related to the note payable was recorded as a discount of $75,000; $19,800 of this discount was accreted during the year ended December 31, 2006 and $55,200 was accreted during the twelve months ended December 31, 2007. The agreement calls for interest payment of 4.99% annual rate of the loan amount payable quarterly for period three years. At maturity, the Company has the option to pay off the loan balance and receive the same number of shares pledged, sell the pledged shares under certain conditions or renew the loan under certain conditions, or forfeit the shares and not repay the loan. In January of 2007 an additional 2,100 shares of stock were issued for collateral. In December of 2007 the Company decided to forfeit all 8,300 shares held as collateral and the loan was considered paid.
In November 2006, the Company entered into a finance agreement for payment of its D&O insurance. The total amount financed was $53,700 at an annual percentage rate of 9.29%. The agreement calls for monthly payments of approximately $6,200 per month through July 2007. The balance payable as of December 31, 2007 was $0.
In November 2006, the Company entered into a loan transaction with Dutchess Private Equities, LP (“Dutchess”), and issued to Dutchess a Promissory Note (“First Dutchess Note”) with a face value of $1,200,000, with net proceeds to the Company from the transaction of $1,000,000 and an imputed annual rate of interest of 43.278%. The First Dutchess Note matured on August 31, 2007. Repayment of the face value will be made monthly in the amount of $120,000, plus 50% of any proceeds raised over $120,000 per month from Puts, issued by the Company as collateral. Thirty such Puts were issued and are to be used only in the case of a default under the terms of the loan agreement. If the First Dutchess Note’s face value is not paid off by maturity, the Company will be required to pay an additional 10% on the face value of the First Dutchess Note, plus 2.5% per month, compounded daily, until the First Dutchess Note is paid off. The Company may be required to pay penalties if certain obligations under the First Dutchess Note are not met. If the Company raises financing of more than $2,000,000, Dutchess may require that the Company use the balance of any amount over $2,000,000 to pay any amounts due on the First Dutchess Note. The Company issued 6,300 Holder Shares, which will carry piggyback registration rights in the next registration statement. An additional 6,200 shares will be required each time an eligible registration statement is filed and the shares are not included. The $200,000 loan discount is being accreted: $40,000 of this discount was accreted during the year ended December 31, 2006 and $160,000 was accreted during the year ended December 31, 2007. The balance payable as of December 31, 2008 was $236,400.
In May 2007, the Company entered into a loan transaction with Dutchess and issued to Dutchess a Promissory Note (“Second Dutchess Note”) with a face value of $462,000, with net proceeds to the Company from the transaction of $350,000 and an imputed annual rate of interest of 63.108%. The Second Dutchess Note matures on April 15, 2008. Repayment of the face value will be made monthly in an amount of the greater of 1) 100% of the proceeds raised from Puts given to Dutchess (as the “Investor” see note 8) by the Company, exceeding $120,000 per month (“Threshold Amount”) or 2) $51,333 per month. The lender received a loan fee of $25,000, payable in restricted stock. The $77,000 loan discount is being accreted; $52,500 of this discount was accreted during the year ended December 31, 2007 and $24,500 was accreted during the year ended December 31, 2008. The balance payable as of December 31, 2007 was $86,000.
The Company is currently in default on the First Dutchess Note and Second Dutchess Note due to the non-payment or insufficient payment of the agreed monthly principal amounts due under the notes. The Company is currently negotiating a payment plan that is acceptable to Dutchess. Although the Company is in default on the two notes, Dutchess has not exercised its right to increase the face amount of the loans or the interest rates, however Dutchess did exercise its right to convert 9,300 shares under the First Dutchess Note.
In November 2007, the Company entered into a finance agreement for payment of its D&O insurance. The total amount financed was $46,350 at an annual percentage rate of 9.41%. The agreement calls for monthly payments of approximately $5,400 per month through July 2008. The balance payable as of December 31, 2008 and 2007 was $0 and $36,100, respectively.
7. COMMON STOCK
The Company undertook an offering, under Regulation D, Rule 504 pursuant to which it sold 12,500 shares of common stock at $20.00 per share to raise $250,000 via an Offering Memorandum dated August 15, 1998 (the "Offering"). The Offering commenced on August 15, 1998 and terminated on September 4, 1998. The transfer of 500 of the 12,500 shares is limited under the provisions of Rule 144(e) because these shares were issued to affiliates or control persons and are therefore control stock. The remaining 12,000 of the 12,500 shares were issued to non-affiliates and are therefore unrestricted.
On June 21, 1999, the stockholders approved an increase in the authorized number of shares of common stock from 125,000 to 625,000 shares.
During fiscal year 1999, the Company undertook a private placement, under Regulation D, Rule 505 pursuant to which it offered to sell 25,000 shares of common stock at $120.00 per share under an Offering Memorandum dated September 1, 1999 and was effectively terminated on June 15, 2000. Each two shares were accompanied by a two-year warrant to purchase an additional share of common stock at $200.00 per share. During the year ended December 31, 2000 and 1999, 1,800 and 3,600 shares of common stock, respectively, were sold under the terms of this private placement. Except for the exercise of stock options, all other stock sales in 1999 were to various individuals at $120.00 per share.
In May and December 1999, the Company issued 100 shares valued at $120.00 per share to two unrelated parties for services rendered.
During fiscal year 2000, the Company undertook a private placement, under Regulation D, Rule 506 pursuant to which it offered to sell 25,000 shares of common stock at $120.00 per share under an Offering Memorandum dated February 2, 2000, which was effectively terminated on June 15, 2000. Each two shares were accompanied by a two-year warrant to purchase an additional share of common stock at $200.00 per share. During the year ended December 31, 2000, 2,800 shares of common stock were sold under the terms of this private placement.
The Company issued 2,600 shares of common stock during fiscal year 2000 related to conversion of promissory notes, totaling $67,500 resulting from the June 15, 2000 rescission offer.
During the third and fourth quarters of 2000, the Company issued 11,300 shares of common stock with a weighted average fair value of $29.60 per share to seven unrelated parties for services to be rendered with terms up to 12 months. As of December 31, 2002 and 2001, $0.00 and $195,200 has been recorded as stock based compensation for the services.
The Company issued 6,400 shares of common stock in January 2001 for a consulting agreement that was terminated in August 2001, as discussed in Note 8.
The Company issued 5,200 shares of common stock during the first quarter of 2001 related to conversion of promissory notes, totaling $218,800 resulting from the June 15, 2000 rescission offer.
The Company issued 10,000 shares of common stock in April 2001 related to a stock purchase agreement totaling $104,000.
During the second and third quarters of 2001, the Company issued 800 shares of common stock with a weighted average fair value of $29.60 per share to five unrelated parties in satisfaction of outstanding accounts payable totaling $24,800.
The Company issued 3,200 shares of common stock in September 2001 related to the conversion of a promissory note totaling $272,000.
During the third and fourth quarter of 2001, the Company issued 1,700 and 200 shares, respectively, of common stock with a weighted average fair value of $51.20 per share to five unrelated parties for services rendered totaling $98,500.
The Company issued 1,900 shares of common stock in September 2001 in exchange for a termination of a consulting agreement, as discussed in Note 8.
The Company issued 900 shares of common stock in January 2002 related to the conversion of a promissory note totaling $54,300, including accrued interest of $7,200.
During the first and second quarters of 2002, the Company issued 4,000 shares of common stock with a weighted average fair value of $60.80 per share to eight unrelated parties recorded as stock based compensation totaling $264,000.
In April 2002, a check received from a stockholder for stock issued in 2001 was returned by the bank due to insufficient funds. The stockholder agreed to return approximately 1,300 shares of the Company's common stock. The Company recorded a stock receivable totaling $50,000 as other receivables. In August 2002, the 1,300 shares of common stock were returned to the Company and cancelled.
The Company issued 700 shares of common stock in July 2002 with a weighted average fair value of $24.80 per share to eight unrelated parties in satisfaction of accrued liabilities totaling $17,000.
During the third and fourth quarters of 2002, the Company issued 1,000 shares of common stock with a weighted average fair value of $36.80 per share to four unrelated parties recorded as stock based compensation totaling $36,900.
During the first and second quarters of 2003, the Company issued 3,700 shares of common stock with a weighted average fair value of $16.00 per share to 19 unrelated parties recorded as stock based compensation totaling $61,300.
During the third and fourth quarters of 2003, the Company issued 6,000 shares of common stock with a weighted average fair value of $11.20 per share to 10 unrelated parties recorded as stock based compensation totaling $96,600.
During the first quarter of 2004, the Company issued 6,400 shares of common stock for cash totaling $114,400 (including offering costs of $66,500).
During the first quarter of 2004, the Company issued 10,500 shares of common stock for services totaling $153,400.
During the first quarter of 2004, the Company issued 1,600 shares of common stock in satisfaction of accounts payable totaling $21,200 (including interest of $7,500).
During the first quarter of 2004, the Company issued 2,900 shares of common stock in satisfaction of accrued liabilities totaling $39,700 (including interest of $14,000).
During the second quarter of 2004, the Company issued 5,900 shares of common stock for cash totaling $69,100 (including offering costs of $36,300).
During the second quarter of 2004, the Company issued 5,200 shares of common stock for services totaling $67,500.
During the second and fourth quarter of 2004, the Company issued 1,600 shares of common stock to certain employees of the Russian Branch for services totaling $64,000 (including accrued liabilities of $30,400).
During the second quarter of 2004, the Company issued 4,000 shares of common stock in satisfaction of accounts payable totaling $54,100 (including interest of $19,100).
During the second quarter of 2004, the Company issued 1,200 shares of common stock in satisfaction of accrued liabilities totaling $17,000 (including interest of $6,000).
During the third quarter of 2004, the Company issued 5,600 shares of common stock for services totaling $52,100.
During the third quarter of 2004, the Company issued 7,500 shares of common stock for cash totaling $68,600 (including offering costs of $73,400).
During the fourth quarter of 2004, the Company issued 64,700 shares of common stock for cash totaling $747,300 (including offering costs of $670,300).
During the fourth quarter of 2004, the Company issued 200 shares of common stock for services totaling $1,200.
During the fourth quarter of 2004, the Company issued 1,900 shares of common stock in satisfaction of accounts payable totaling $11,000.
During the first quarter of 2005, the Company issued 21,800 shares of common stock for cash totaling $262,200 (including offering costs of $609,900).
During the first quarter of 2005, the Company issued 3,500 shares of common stock for services totaling $31,600.
During the first quarter of 2005, the Company issued 1,400 shares of common stock in relation to the exercise of warrants for cash totaling $1,100.
During the second quarter of 2005, the Company issued 49,400 shares of common stock for cash totaling $178,700 (including offering costs of $975,400).
During the second quarter of 2005, the Company issued 3,800 shares of common stock pursuant to a termination agreement with a consultant totaling $249,000.
During the second quarter of 2005, the Company issued 6,100 shares of common stock in relation to the exercise of options and warrants for cash totaling $42,800.
During the second quarter of 2005, the Company received $226,100 in cash for 6,300 shares of free trading common stock. These shares have not been delivered. The $226,100 is classified as other liabilities as of December 31, 2005.
During the third quarter of 2005, the Company issued 3,900 shares of common stock in relation to the exercise of options and warrants for cash totaling $39,300.
During the third quarter of 2005, the Company issued 900 shares of common stock in relation to a cashless exercise of options. In order to initiate the exercise, the holder gave up options to purchase 400 shares of the Company's common stock as consideration for the exercise in place of cash. The 400 shares were the equivalent of the cash the Company would have received under the terms of the option agreement.
During the third quarter of 2005, the Company recognized offering costs totaling $5,700 due to a foreign currency translation loss recognized in relation to cash received during the second quarter for the sale of common stock.
During the third quarter of 2005, the Company issued 100 shares of common stock in satisfaction of accounts payable totaling $1,700.
During the third quarter of 2005, the Company issued 2,300 shares of common stock for services totaling $150,600.
During the fourth quarter of 2005, the Company issued 4,000 shares of common stock for services totaling $56,700.
During the fourth quarter of 2005, the Company issued 10 shares of common stock in satisfaction of accounts payable totaling $600.
During the fourth quarter of 2005, the Company issued 6,300 shares of common stock for cash totaling $182,700 (including offering costs of $136,700).
During the first quarter of 2006, the Company issued 4,400 shares of common stock for cash totaling $50,000 (including offering costs of $69,400).
During the second quarter of 2006, the Company issued 27,400 shares of common stock for cash totaling $414,200 (including offering costs of $227,000).
During the third quarter of 2006, the Company issued 11,400 shares of common stock for cash totaling $82,500 (including offering costs of $9,600).
During the fourth quarter of 2006, the Company issued 18,600 shares of common stock for cash totaling $97,300 (including offering costs of $54,500).
In the first quarter of 2006, the Company entered into agreements with various consultants for investor relations and investor awareness services in the United States and Europe. The Company paid for such services with a combination of $29,000 in cash, and 3,100 shares of free trading common stock valued at $82,100.
In the first quarter of 2006, the Company issued 600 shares of free trading common stock in satisfaction of accounts payable, valued at $15,800.
In the first quarter of 2006, the Company issued 200 shares of restricted common stock and 200 shares of free trading common stock valued at $10,000 for a public relations payable.
In the first quarter of 2006, the Company issued 1,600 shares of restricted common stock and 1,600 shares of free trading common stock valued at $90,000 for services related to public relations.
In the second quarter of 2006, the Company entered into agreements with various consultants for investor relations and investor awareness services in the United States and Europe. The Company paid for such services with a combination of $29,000 in cash and 7,700 shares of free trading common stock valued at $157,800.
In the second quarter of 2006, the Company issued 2,000 shares of restricted common stock and 2,000 shares of free trading common stock, valued at $83,200, for services related to public relations.
In the second quarter of 2006, the Company issued 200 shares of restricted common stock in satisfaction of accounts payable, valued at $5,300.
In the third quarter of 2006, the Company entered into agreements with various consultants for investor relations and investor awareness services in the United States and Europe. The Company paid for such services with 18,800 shares of free trading common stock valued at $241,000.
In the third quarter of 2006, the Company issued 2,600 shares of restricted common stock and 2,600 shares of free trading common stock, valued at $67,500, for services related to public relations.
In the third quarter of 2006, the Company issued 900 shares of restricted common stock, valued at $9,300, in satisfaction of accounts payable.
In the third quarter of 2006, the Company issued 1,300 shares of free trading common stock, valued at $11,000 in satisfaction of accounts payable.
In the third quarter of 2006, the Company issued 6,300 shares of free trading common stock, valued at $226,000, in satisfaction of liabilities.
In the third quarter of 2006, the Company issued 43,100 shares of the Company’s common stock to a corporation wholly owned by its principal, who became an officer of HBS BioEnergy at the close of the transaction. The shares were held in escrow to be released upon reaching certain performance milestones, and were considered issued but not outstanding.
In the fourth quarter of 2006, the Company issued 1,900 shares of restricted common stock and 1,900 shares of free trading common stock, valued at $37,800, for services related to public relations.
In the fourth quarter of 2006, the Company issued 100 shares of restricted common stock, valued at $1,200, in satisfaction of accounts payable.
In the fourth quarter of 2006, the Company entered into agreements with various consultants for investor relations and investor awareness services in the United States and Europe. The Company paid for such services with 5,800 shares of free trading common stock and 6,300 shares of restricted common stock, valued at $116,500.
In January 2007, the Company issued 300 shares of restricted common stock and 300 shares of free trading common stock valued at $5,700 for services related to public relations.
In January 2007, the Company issued 6,300 shares of free trading common stock valued at $35,000 for services related to investor awareness.
In February 2007, the Company entered into an addendum to a consulting agreement with a consultant for the sale of common stock in Europe pursuant to a trustee arrangement. The Company agreed to pay the consultant a commission equal to three percent of the proceeds from the sale of such shares. The Company issued 3,500 shares of free trading common stock during the first quarter of 2007, which were valued at $30,900 and included offering costs totaling $494,400.
In February 2007 the Company entered into an extension of an agreement signed in 2003 with the above-referenced consultant for services, including the coordination of investor relations in Europe. In consideration for such extension, the Company issued to the consultant an aggregate of 3,100 free trading shares of common stock valued at $30,000.
In February 2007, the Company issued 500 shares of restricted common stock and 500 shares of free trading common stock valued at $11,500 for services related to public relations.
In February 2007, the Company issued 100 shares of restricted common stock in satisfaction of accounts payable, valued at $1,200.
In March 2007, the Company issued 300 shares of restricted common stock and 300 shares of free trading common stock valued at $5,400 for services related to public relations.
In March 2007, the Company issued 600 shares of restricted common stock for $5,400 in cash.
In the first quarter of 2007, the Company issued 67,500 shares of free trading common stock in Europe for $119,800 cash (net of offering costs totaling $494,400).
In April 2007, the Company issued 1,200 shares of restricted common stock and warrants to purchase an aggregate of 11,300 shares of common stock, valued at $30,000, for loan fees (see note 5).
In April 2007, the Company issued 12,800 shares of free trading common stock valued at $85,500 for services related to investor awareness.
In April 2007, the Company issued 100 shares of restricted common stock in satisfaction of accounts payable, valued at $1,100.
In April 2007, the Company issued 600 shares of restricted common stock valued at $4,000 and 600 warrants valued at $4,000 for services related to a HBS Bio project.
In April 2007, the Company issued 300 shares of restricted common stock and 300 shares of free trading common stock valued at $4,000 for services related to public relations.
In May 2007, the Company issued 100 shares of restricted common stock in satisfaction of accounts payable, valued at $700.
In May 2007, the Company issued 3,100 shares of restricted common stock valued at $25,000 for loan fees.
In May 2007, the Company issued 500 shares of restricted common stock and 500 shares of free trading common stock valued at $8,400 for services related to public relations.
In May 2007, the Company issued 900 shares of free trading common stock valued at $7,900 for consultant services, including the coordination of investor relations in Europe.
In June 2007, the Company issued 200 shares of restricted common stock in satisfaction of accounts payable, valued at $1,300.
In June 2007, the Company issued 2,500 shares of restricted common stock to a director for services valued at $10,000.
In June 2007, the Company issued 600 shares of restricted common stock for $2,300 in cash.
In June 2007, the Company issued 300 shares of restricted common stock and 300 shares of free trading common stock valued at $3,500 for services related to public relations.
In June 2007, the Company issued warrants to purchase an aggregate of 1,100 shares of common stock, valued at $9,100, in satisfaction of accounts payable.
In the second quarter of 2007, the Company issued 63,200 shares of free trading common stock in Europe for $390,600 in cash (net of offering costs totaling $128,100).
In July 2007, the Company issued 300 shares of restricted common stock and 300 shares of free trading common stock valued at $3,100 for services related to public relations.
In July 2007, the Company issued 50shares of restricted common stock, valued at $300, in satisfaction of accounts payable.
In August 2007, the Company issued 5,600 shares of restricted common stock for $20,000.
In August 2007, the Company issued 200 shares of restricted common stock and 200 shares of free trading common stock valued at $1,800 for services related to public relations.
In August 2007, the Company issued 900 shares of restricted common stock, valued at $3,400, in satisfaction of accounts payable.
In September 2007, the Company issued 100 shares of restricted common stock and 100 shares of free trading common stock valued at $600 for services related to public relations.
In September 2007, the Company issued 100 shares of restricted common stock, valued at $500, in satisfaction of accounts payable.
In the third quarter of 2007, the Company issued 5,800 shares of free trading common stock in Europe for $19,300 in cash (net of offering costs totaling $9,100).
In October 2007, the Company issued 100 shares of restricted common stock and 100 shares of free trading common stock valued at $400, for services related to public relations.
In October 2007, the Company issued 300 shares of free trading common stock in Europe for ($400) cash (net of offering costs totaling $1,300).
In February 2008, the Company issued 7,500 shares of restricted common stock and 1,300 shares of free trading common stock valued at $14,000 for services related to public relations.
In March 2008, the Company issued 17,500 shares of restricted common stock valued at $14,000 for services related to public relations.
In the first quarter of 2008, the Company issued 12,500 shares of Reg S common stock in Europe, valued at $10,000, for services related to public relations.
In the first quarter of 2008, the Company issued 9,800 shares of restricted common stock and 10,600 shares of Reg S common stock for $3,000 in cash, net of offering costs totaling $45,600.
In April 2008, the Company issued 31,300 shares of restricted common stock, valued at $31,000, in satisfaction of accrued interest payable.
In May 2008, the Company issued 37,500 shares of restricted common stock valued at $39,000 per the Company’s joint venture agreement for the renewable energy segment of its business.
In May 2008, the Company issued 3,100 shares of restricted common stock valued at $3,300 for professional services.
In May 2008, the Company issued 3,300 shares of restricted common stock in satisfaction of accounts payable, valued at $3,400.
In June 2008, the Company issued 150,000 shares of restricted common stock valued at $120,000 for professional services.
In the second quarter of 2008, the Company issued 174,400 shares of Reg S common stock in Europe for $231,000 in cash, net of offering costs totaling $253,000.
In July 2008, the Company issued 6,900 shares of restricted common stock for $5,000 in cash.
In July 2008, the Company issued 2,300 shares of restricted common stock in satisfaction of accounts payable, valued at $1,800.
In August 2008, the Company issued 400 shares of restricted common stock in satisfaction of accounts payable, valued at $300.
In September 2008, the Company issued 500 shares of restricted common stock in satisfaction of accounts payable, valued at $400
In September 2008, the Company issued 12,500 shares of restricted common stock valued at $5,000 for legal services.
In the third quarter of 2008, the Company issued 50,800 shares of Reg S common stock in Europe for ($12,200) in cash, net of offering costs totaling $83,200. Some of the offering costs incurred in the second quarter were paid in the third quarter, resulting in a negative receipt of net cash for this quarter.
In August 2008, the Company commenced the process to reverse split its common stock on a one for eighty basis. The record date is set for September 1, 2008 and the annual meeting is set for November 14, 2008. The annual meeting has been recessed several times, until January 16, 2009. Although all resolutions have passed, including the reverse split, we are awaiting FINRA to approve the split. On March 4, 2009 the Company completed a one for eighty reverse split. All shares and per share data have been restated to reflect the stock split. The number of authorized shares of common and preferred are not affected by the reverse split and will remain the same after the split as the number of authorized shares prior to the split.
In the fourth quarter of 2008, the Company issued 7,000 shares of Reg S common stock in Europe for ($3,700) in cash, net of offering costs totaling $9,600. Some of the offering costs incurred in the second quarter were paid in the third and fourth quarters, resulting in a negative receipt of net cash for those quarters.
8. STOCK OPTION PLANS AND WARRANTS
The Company adopted the following plans during 1998:
Statutory Incentive Stock Option Plan
The purpose of this plan is to strengthen the Company by providing incentive stock options as a means to attract, retain and motivate corporate personnel. The options may not be granted to employees who own stock possessing more than 10% of the total combined voting power of the stock of the Company. As of December 31, 2008, 7,500 shares have been authorized for option grants.
A summary of the status of this plan as of December 31, 2008, and changes during the period from February 26, 1998 (date of inception) to December 31, 2008 is presented in the following table:
Shares Weighted
Available for Options Average
Grant Outstanding Price
------------- ------------ --------
Authorized, February 26, 1998
(date of inception) 7,500 -- $ --
Granted (3,100) 3,100 5.60
--------- -------- ------
Balance, December 31, 1998 4,400 3,100 5.60
Granted (4,100) 4,100 46.40
Forfeited 900 (900) 40.00
--------- -------- ------
Balance, December 31, 1999 12,000 6,300 27.20
Granted (-900) 900 120.00
Exercised -- (1,900) 2.40
Forfeited -- -- --
--------- -------- ------
Balance, December 31, 2000 300 5,300 53.60
Granted (-1,900) 1,900 18.40
Forfeited 1,900 (1,900) 57.60
--------- -------- ------
Balance, December 31, 2001 300 5,300 42.40
Granted -- -- --
Forfeited -- -- --
--------- -------- ------
Balance, December 31, 2002 300 5,300 42.40
Granted -- -- --
Forfeited 1,900 (1,900) 40.00
Expired 600 (600) 2.40
----------- -------- ------
Balance, December 31, 2003 2,800 2,800 52.00
Granted -- -- --
Forfeited -- -- --
Expired -- -- --
----------- -------- ------
Balance, December 31, 2004 2,800 2,800 52.00
Granted -- -- --
Forfeited 1,900 (1,900) 18.40
Expired 900 (900) 120.00
----------- -------- -------
Balance, December 31, 2005 5,600 -- --
Granted -- -- --
Forfeited -- -- --
Expired -- -- --
----------- -------- -------
Balance, December 31, 2006 5,600 -- --
Granted -- -- --
Forfeited -- -- --
Expired -- -- --
----------- -------- -------
Balance, December 31, 2007 5,600 -- --
Granted -- -- --
Forfeited -- -- --
Expired -- -- --
----------- -------- -------
Balance, December 31, 2008 5,600 -- $ --
========= ========= =======
The weighted-average fair value of statutory stock options granted during 2008 and 2007 was $0.00 and $0.00, respectively.
Compensation expense under FAS 123(R) in 2008 and in 2007 relating to statutory options that became exercisable in 2008 and 2007 was $0.00 and $0.00, respectively.
Non-Statutory Incentive Stock Options Plans
The purpose of this plan is to promote the interest of the Company by providing a method whereby non-employees, advisory board members, members of the board of directors, consultants and independent contractors, who provide valuable services to the Company, may be offered incentives as rewards which will encourage them to acquire a proprietary interest in the Company. As of December 31, 2008, 25,000 shares have been authorized for option grants.
A summary of the status of this plan as of December 31, 2008 and changes during the period from February 26, 1998 (date of inception) to December 31, 2008 is presented in the following table:
Weighted
Shares Average
Available Options Exercise
For Grant Outstanding Price
----------- ------------ ---------
Authorized, February 26, 1998,
(date of inception) 25,000 -- $ --
Granted (10,000) 10,000 19.20
---------- -------- -----
Balance, December 31, 1998 15,000 10,000 19.20
Granted (1,800) 1,800 25.60
Exercised -- (400) 0.80
Forfeited 4,400 (4,400) 40.00
---------- -------- -----
Balance, December 31, 1999 17,600 7,000 9.60
Granted (4,800) 4,800 67.20
Exercised -- (2,500) 4.80
Forfeited -- -- --
---------- -------- -----
Balance, December 31, 2000 12,800 9,300 32.00
Granted (3,700) 3,800 23.20
Exercised -- (3,100) 4.00
Forfeited -- -- --
---------- -------- -----
Balance, December 31, 2001 9,100 10,000 44.80
Granted -- -- --
Exercised -- (300) 5.60
Forfeited -- -- 2.40
---------- -------- -----
Balance, December 31, 2002 9,100 9,700 46.40
Granted -- -- --
Forfeited 900 (900) 25.60
Expired 900 (900) 2.40
------------ --------- ------
Balance, December 31, 2003 10,900 7,900 53.60
Granted -- -- --
Forfeited -- -- --
Expired 1,700 (1,700) 26.40
------------ ---------- -------
Balance, December 31, 2004 12,600 6,200 60.80
Granted -- -- --
Exercised -- (900) 22.40
Forfeited 900 (900) 12.00
Expired 2,800 (2,800) 108.00
------------ ---------- -------
Balance, December 31, 2005 16,300 1,600 22.40
Granted -- -- --
Exercised -- -- --
Forfeited -- -- --
Expired 1,600 (1,600) 22.40
------------ ---------- -------
Balance, December 31, 2006 17,900 -- 0.00
Granted -- -- --
Exercised -- -- --
Forfeited -- -- --
Expired -- -- --
------------ ---------- -------
Balance, December 31, 2007 17,900 -- 0.00
Granted -- -- --
Exercised -- -- --
Forfeited -- -- --
Expired -- -- --
------------ ---------- -------
Balance, December 31, 2008 17,900 -- $ 0.00
=========== ========== ======
The weighted-average fair value of non-statutory stock options granted during 2008 and 2007 was $0.00 and $0.00, respectively.
Compensation expense under SFAS No. 123 relating to non-statutory stock options that became exercisable in 2008 and 2007 was $0.00 and $0.00, respectively.
The Company adopted the following plan during 2001:
Stock Option Plan
The purpose of this plan is to encourage selected officers and key employees to accept or continue employment with the Company, increase the interest of selected officers, directors, key employees and consultants in the Company's welfare through the participation in the growth in value of the common stock of the Company. As of December 31, 2008, 62,500 shares have been authorized for option grants. The Company grants both statutory and non-statutory stock options under this plan. During 2008 and 2007, the Company granted 0 and 0 statutory options, respectively, and 0 and 0 non-statutory options, respectively. As of December 31, 2008, outstanding statutory and non- statutory options total 8,300 and 4,800, respectively.
A summary of the status of this plan as of December 31, 2008 and changes during the period from August 4, 2001 (date of option plan inception) to December 31, 2007 is presented in the following table:
Weighted
Shares Average
Available Options Exercise
For Grant Outstanding Price
----------- ------------ ---------
Authorized, August 4, 2001,
(date of inception) 19,800 -- $ --
Granted (2,800) 2,800 28.00
Forfeited -- -- --
--------- ------- -----
Balance, December 31, 2001 17,000 2,800 28.00
Granted (7,100) 7,100 32.80
Forfeited 900 (900) 68.00
--------- ------- -----
Balance, December 31, 2002 10,800 9,000 32.80
Granted (3,800) 3,800 12.00
Forfeited 900 (900) 43.20 Expired 1,900 (1,900) 10.40
Authorization of additional shares 42,700 -- --
--------- --------- -------
Balance, December 31, 2003 52,500 10,000 32.80
Granted (12,500) 12,500 8.80
Forfeited -- -- --
Expired -- -- --
--------- --------- -------
Balance, December 31, 2004 40,000 22,500 16.80
Granted (6,200) 6,200 38.40
Exercised -- (6,200) 8.80
Forfeited 7,500 (7,500) 16.00
Expired -- -- --
--------- --------- -------
Balance, December 31, 2005 41,300 15,000 29.60
Granted (3,600) 3,600 12.80
Exercised -- -- --
Forfeited -- -- --
Expired -- -- --
--------- --------- -------
Balance, December 31, 2006 37,700 18,600 26.40
Granted -- -- --Exercised -- -- --
Forfeited -- -- --
Expired 4,600 (4,600) 36.80
--------- --------- -------
Balance, December 31, 2007 42,300 14,000 23.20
Granted -- -- --Exercised -- -- --
Forfeited -- -- --
Expired 900 (900) 36.80
--------- --------- -------
Balance, December 31, 2008 43,200 13,100 $ 23.20
========= ======== ======
The weighted-average fair value of non-statutory stock options granted during 2008 and 2007 was $0.00 and $0.00, respectively. The weighted-average fair value of statutory stock options granted during 2008 and 2007 was $0.00 and $0.00, respectively.
The following table summarizes information about the non-statutory and statutory stock options outstanding as of December 31, 2008:
Options Outstanding Options Exercisable
------------------------------------------------------ -------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise as of Contractual Exercise as of Exercise
Prices 12/31/08 Life Price 12/31/08 Price
-------- ----------- ----------- --------- ---------- --------
$ 8.00 - 18.40 9,400 1.3 years $ 11.20 9,400 $ 11.20
54.40 - 58.40 3,700 1.7 years 56.00 3,700 56.00
--------- --------- ------ --------- -------
13,100 $ 23.20 12,300 $ 24.00
========= ====== ========= ========
The Company estimates the fair value of non-statutory stock options by using the Black-Scholes option pricing-model.
Compensation expense under SFAS No. 123 relating to these stock options that became exercisable in 2008 and 2007 was $4,100 and $31,200, respectively.
Stock Purchase Warrants
In connection with certain business transactions and debt or equity offerings, the Company has granted various warrants to purchase common stock. The following table summarizes activity relating to outstanding warrants from February 26, 1998 (date of inception) to December 31, 2008:
Weighted
Average
Warrants Exercise
Outstanding Price
------------- ------------
Balance, February 26, 1998
(date if inception) -- $ --
Granted 1,300 30.40
---------- ------
Balance, December 31, 1998 1,300 30.40
Granted 11,800 129.60
---------- ------
Balance, December 31, 1999 13,100 120.00
Granted 17,500 96.00
Exercised (500) 27.20
Expired (11,300) 110.40
Forfeited (900) 200.00
---------- ------
Balance, December 31, 2000 17,900 188.80
Granted 12,400 20.00
Exercised (7,400) 19.20
Expired (300) 120.00
Forfeited (400) 200.00
---------- ------
Balance, December 31, 2001 22,200 79.20
Granted 1,000 57.60
Exercised (3,300) .80
Expired (2,500) 193.60
Forfeited -- --
---------- ------
Balance, December 31, 2002 17,400 76.00
Granted 7,300 13.60
Expired (2,100) 69.60
----------- ------
Balance, December 31, 2003 22,600 56.80
Granted 800 12.80
Expired (3,600) 33.60
----------- ------
Balance, December 31, 2004 19,800 59.20
Granted 400 58.40
Exercised (5,200) 5.60
Expired (4,800) 13.60
----------- ------
Balance, December 31, 2005 10,200 107.20
Granted -- --
Exercised -- --
Expired -- --
----------- ------
Balance, December 31, 2006 10,200 107.20
Granted 38,000 12.80
Exercised -- --
Expired (1,400) 27.20
----------- ------
Balance, December 31, 2007 46,800 32.80
Granted -- --
Exercised -- --
Expired -- --
----------- ------
Balance, December 31, 2008 46,800 $ 32.80
=========== ======
The weighted average fair value of warrants granted during 2008 and 2007 was $0.00 and $0.03, respectively.
The following table summarizes information about warrants outstanding at December 31, 2008:
Weighted
Number Average Number
Range of Outstanding Remaining Exercisable
Exercise as of Contractual as of
Prices 12/31/08 Life 12/31/08
-------- ----------- ----------- ----------
$13.60 - 58.40 38,000 3.4 years 13,000
120.00 8,800 1.0 years 8,800
----------- ----------
46,800 21,800
=========== ==========
The Company estimates the fair value of warrants at the grant date by using the Black-Scholes option pricing-model with the following weighted-average assumptions used for grants in 2007; no dividend yield; expected volatility of 112%; risk free interest rates of 4.7%; and expected lives of 2.0 years for all warrants. Compensation expense relating to warrants granted for services in 2008 and 2007 was $0.00 and $0.00 respectively.
9. INVESTMENT AGREEMENTS
In June 2004, the Company entered into an Investment Agreement (the "Investment Agreement") with Dutchess effective June 28, 2004. Pursuant to the terms of the Investment Agreement, the Company may offer, through a series of puts, and Dutchess must purchase, up to 475,000 shares of the Company's common stock with an aggregate purchase price up to $5,000,000. The purchase price of the shares is equal to 95% of the lowest closing "best bid" price (the highest posted bid price) during the five trading days immediately following the date of put. The value that the Company will be permitted to put pursuant to the Investment Agreement will be either: (A) 200% of the average daily volume in the US market of the common stock for the ten trading days prior to the notice of put multiplied by the average of the three daily closing bid prices immediately preceding the date of the put, or (B) $10,000. No single put can exceed $1,000,000. Pursuant to the Investment Agreement, Dutchess acquired a total of 5,433 shares of the Company's common stock for approximately $297,500 during the year ended December 31, 2005, 48,500 shares for approximately $643,700 during the year ended December 31, 2006 and an aggregate of 130,600 shares of the Company’s common stock for approximately $647,600 during the nine months ended September 30, 2007.
Because the registration of the 475,000 shares reserved for the Dutchess agreement expired in September, 2007, the Company registered 250,000 shares of the Company’s common stock in July to allow continuation of the agreement with Dutchess. Dutchess acquired a total of 25,900 shares of the Company's common stock for approximately $43,200 during September 2007, 133,400 shares for approximately $211,800 during October 2007, 50,300 shares for approximately $43,100 during November 2007 and 36,200 shares for approximately $23,000 during December 2007
Because the 250,000 shares reserved for the Dutchess agreement was sold, the Company registered an additional 211,500 shares of the Company’s common stock in February, 2008 to allow continuation of the agreement with Dutchess. Dutchess acquired a total of 7,000 shares for approximately $6,900 during February 2008, 5,500 shares for approximately $5,400 during March 2008, 16,000 shares for approximately $13,400 during April 2008, 27,800 shares for approximately $23,600 during May 2008, 13,100 shares for approximately $9,900 during June 2008, 45,600 shares for approximately $27,300 during July 2008, 44,500 shares for approximately $22,100 during August 2008, 33,300 shares for approximately $14,800 during September 2008, 4,400 shares for approximately $1,600 during October 2008, 1,400 shares for approximately $300 during November 2008 and 12,900 shares for approximately $2,500 during December 2008.
Because the 250,000 shares reserved for the Dutchess agreement was sold, the Company registered an additional 211,500 shares of the Company’s common stock in February, 2008 to allow continuation of the agreement with Dutchess. Dutchess acquired all of these shares for approximately $127,928 during the year ended December 31, 2008.
In December 2008, we entered into the new Investment Agreement with Dutchess effective December 29, 2008. Pursuant to the terms of the new Investment Agreement, we may offer, through a series of puts, and Dutchess must purchase from time to time, up to a maximum of 458,400 shares of our common stock, provided that Dutchess shall not be required to purchase shares of our stock with an aggregate purchase price in excess of $10,000,000. The purchase price of shares purchased under this Investment Agreement shall be equal to 95% of the lowest closing "best bid" price (the highest posted bid price) of the common stock during the five consecutive trading days immediately following the date of our notice to Dutchess of our election to put shares pursuant to this Investment Agreement. The dollar value that we will be permitted to put pursuant to this Investment Agreement will be either: (A) 200% of the average daily volume in the US market of the common stock for the ten trading days prior to the notice of our put, multiplied by the average of the three daily closing bid prices immediately preceding the date of the put, or (B) $250,000. We filed a registration statement on Form S-1 in January 2009 to register for resale an aggregate of 458,400 shares of common stock issuable under this Investment Agreement; this registration statement was declared effective on January 30, 2009.
In June 2007, the Company entered into a representation and finder’s agreement to raise investment capital from potential Korean investment sources, including institutions and individual investors. The finder’s fee is set at 5% of capital raised and up to $10 million of capital raised. In addition, a warrant to purchase 12,500 shares of common stock of the Company is granted such that for each $100,000 raised, 10,000 shares shall vest up to the maximum amount of 12,500 shares if the full $10 million of capital is raised.
In June 2007, the Company entered into a consulting and finder’s agreement to coordinate and support potential Korean investment opportunities. The Company will pay a cash fee of 5% of the capital raised up to $10 million.
In September 2007, the Company entered into a finder’s fee agreement with a U.S. based firm to raise investment capital from U.S. and European investment sources. The finder’s fee is based on a sliding scale of funds raised starting at 10% and dropping to 1% after $5 million of capital is raised.
In January 2008 the Company entered into a Trustee agreement with an individual to serve as the Trustee for accounts held in Europe by the Company. A 3% fee of shares transferred into the account is payable by the Company for such services.
10. ETHANOL AGREEMENTS
In September 2006, the Company and its wholly owned subsidiary, HBS Bio, entered into an Asset Purchase Agreement with EXL III Group Corporation (“EXL”). EXL agreed to sell certain assets, including options to purchase certain property in Lumberton County, North Carolina, to HBS Bio.
In consideration for the options, HBS Bio issued six hundred (600) shares of the Company’s common stock to EXL, which shares were placed in escrow in October 2006, and reimbursed EXL $40,000 for expenses incurred with respect to the options and related proposed ethanol projects.
The Company and HBS Bio also entered into a Consulting Services Agreement with EXL. That agreement provides that EXL will supervise, manage, and coordinate the development, construction, and operation of up to three ethanol facilities. The term of the agreement is two years from the effective date, with an option to extend the term for two additional years by mutual written agreement.
In consideration for its consulting services, EXL will receive an annual consulting fee of $199,000. Upon the funding of the first ethanol facility, the annual consulting fee will increase to $224,000. The consulting fee will increase again to $324,000 upon the funding of the second ethanol facility, and to $424,000 in the event a third ethanol facility is funded.
EXL will also be entitled to 43,100 shares of the Company’s common stock, which was placed in escrow in October 2006. The Escrow Agreement provides that 12,500 shares of HBS common stock will be released to EXL upon the execution of certain agreements necessary for the development of the first ethanol facility, the submission of preliminary environmental and land use permits for the first ethanol facility, and the assignment and conveyance of the option to purchase the second facility. An additional 12,500 shares will be released to EXL upon the acquisition of certain permits for the first facility and the execution of certain agreements necessary for development of the first facility, as well as the submission of preliminary environmental and land use permits for the second facility. The 18,100 remaining shares will be released to EXL when a funding commitment for the first facility is obtained. In the event funding for the first facility is not obtained within four months from the date on which the funding commitment is received, any shares still in escrow will be dispersed to HBS Bio and any shares previously released to EXL will be returned to HBS Bio.
Under the Consulting Services Agreement, the facilities will be funded by the Company according to a schedule, with $300,000 due upon closing of the Asset Purchase Agreement and additional amounts upon completion of certain milestones thereafter. The Company will contribute $150,000 upon completing the following milestones: (1) raw product supply agreement for the first plant; (2) environmental services agreement for the first plant; (3) risk management agreement for the first plant; and (4) distilled grain marketing agreement for the first plant. The Company will contribute an additional $150,000 upon completing the following milestones: (1) ethanol off take agreement for the first plant; (2) preliminary engineering study for the first plant; (3) land use permit submittal for the first plant; (4) environmental permits submittal for the first plant; (5) financial advisory services agreement or letter of interest from financial entity; (6) land option agreement for the second plant; and (7) fuel supply agreement for the first plant. The Company will contribute an additional $400,000 upon reaching the following milestones: (1) utility services agreement for the first plant; (2) Phase I engineering and environmental for the first plant; (3) raw product supply agreement for the second plant; (4) environmental services agreement for the second plant; (5) risk management agreement for the second plant; and (6) distilled grain marketing agreement for the second plant. The Company will contribute an additional $450,000 upon reaching the following milestones: (1) EPC Agreement and Phase II engineering for the first plant; (2) fuel supply agreement for the second plant; (3) utility services agreement for the second plant; (4) ethanol off take agreement for the second plant; (5) environmental permits submittal for the second plant; (6) preliminary engineering study for the second plant; (7) land use permit submittal for the second plant; (8) Phase I engineering and environmental studies for the second plant; (9) long term equity commitment for first plant (10) long term debt commitment for the first plant; (11) issuance of authority to construct permits for the first plant; and (12) final funding documentation for the first plant. Finally, the Company will contribute $400,000 upon completing the following milestones: (1) EPC Agreement and Phase II engineering for the second plant; (2) long term equity commitment for the second plant; (3) long term debt commitment for the second plant; (4) final environmental permits for the second plant; (5) authority to construct permits for the second plant; and (6) final funding documentation for the second plant. See note 14.
In February 2007, HBS Bio formed a joint venture with Visalia-based Dairy Development Group and Agrimass Enviro-Energy to build an energy park in the San Joaquin Valley of California. Pursuant to this joint venture, the parties formed HBS BioEnergy DDG Corcoran, LLC (HBS Corcoran), a California limited liability company. HBS Bio will provide all development capital for the energy park pursuant to an agreed-upon budget, while the other parties will provide all management and other services as well as technology required for the energy park.
During April 2007, HBS Bio entered into a lease for approximately 90 acres of property in Morrow County, Oregon for a period of 20 years, with the option to renew the lease for 10 consecutive terms of five years each. HBS Bio paid $15,000 upon execution of the lease for a three month review period. HBS Bio extended the review period for an additional three months in July by the payment of an additional $15,000. The lease may be terminated at any time during the review periods. During the original 20 year term of the lease after the review periods the base rent will be $27,000 per month. On October 3, 2007 the lease expired as a result of the decision by HBS Bio to terminate that lease.
During April 2007, HBS Corcoran entered into an agreement for the purchase of approximately 922 acres of property in Tulare County, California for an aggregate purchase price of approximately $12 million. HBS Corcoran is required to make deposits of up to $690,000 in escrow within 18 months from April 17, 2007. The deposits are nonrefundable except under certain conditions, are to be applied to the purchase price, and will constitute liquidated damages in the event of HBS Corcoran’s default under the purchase agreement. HBS Corcoran will have 18 months to review the suitability of the property for its planned uses. The balance of the purchase price must be deposited in escrow within 30 days after completion of the feasibility review or the end of the feasibility period, whichever occurs first. An aggregate of $389,700 was deposited into escrow during the year ended December 31, 2007.
During April 2007, HBS Bio entered into an agreement for consulting services relating to raising capital for HBS Bio. Under the agreement HBS Bio will pay the consultant a consulting/finder’s fee of 4% of the units of the venture funded as a result of the consultant’s efforts and $500,000 with regard to the first $20 million or pro-rata amount thereof invested or loaned by a party introduced by the consultant and the lesser of 2.5% or $100,000 with regard to each subsequent $10 million invested or loaned by a party introduced by the consultant.
During May 2007, HBS Bio entered into ethanol merchandising, corn procurement and consulting services, and distiller’s grains marketing and consulting services agreements for the proposed California and Oregon ethanol facilities.
During May 2007, HBS Bio entered into a letter of intent to set out the remaining terms and move toward a formal process technology and equipment agreement to facilitate the production of a 100 million gallon facility for the proposed Oregon ethanol facility. A deposit payment of $250,000 was to be placed into escrow within seven days of the execution of the letter of intent. As of December 31, 2007, the deposit has not been paid pursuant to further discussions to finalize the agreement.
In April 2007, the Company entered into an agreement to render consultant services, including the providing of financial and business contacts in Korea. The Company granted 600 shares of restricted common stock, valued at $4,000, as compensation under this agreement. The agreement was amended in June 2007 to include additional services for which a warrant was granted to purchase 12,500 shares of common stock of the Company. The warrant vests as to 3,100 shares upon achieving a certain milestone and the balance of 9,400 vests upon the Company signing a definitive agreement with a certain Korean company. A consulting fee of $1,000 per day will be paid to the consultant for Company approved non-incidental projects.
In August 2007, HBS Bio notified EXL that no further expenditures on behalf of the Company were to be made unless approved by the Company’s CEO.
In January 2008 the Company and its subsidiary entered into a mutual termination agreement with Claude Luster and EXL to terminate all agreements signed between the parties in September 2006. Ethanol project expenditures and operations were suspended in July 2007 due to changes in the ethanol market and strategic decisions made by Company management. The final termination agreement required the return of 3.5 million shares of common stock held in escrow for Mr. Luster and EXL back to the Company, payment of remaining consulting fees of approximately $16,000 to EXL and provisions for the partial repayment of expenditures to the Company and HBS Bio if Mr. Luster or EXL pursues a particular project in the Northwest for ethanol production.
In August 2006, we entered the renewable energy market through the formation of our wholly-owned subsidiary, HBS BioEnergy (“HBS Bio”). Although at that time, HBS Bio intended to identify, secure and develop suitable sites for the production of ethanol and biodiesel fuel for the U.S. market using innovative methods to improve the efficiency and cost of producing biofuels, we made the decision in July 2007 to suspend all ethanol and bio-fuels business activities and in October 2007 we decided to continue our efforts in the renewable energy market by focusing on the waste to energy segment of that market using animal and other waste products to produce electrical energy to be sold to utilities versus ethanol and biodiesel fuel production.
Since October 2007, the focus in the Company’s renewable fuels segment of the business has been addressed as an investment through ownership of common shares of Environmental BioMass Energy Inc. (EBE) which is in the business of converting bio-waste to electrical energy. Under this investment, HBS initially received approximately 49% of EBE common stock in exchange for releasing its interest in a property purchase agreement that was held through HBS Bio known as HBS Corcoran. All operations and management functions of EBE are performed by EBE employees.
The Company currently holds slightly less than 30% of EBE common stock as of December 31, 2008 due to the conversion of certain Company liabilities to equity in EBE. The Company holds shares of EBE as an investment and is not directly involved in management or funding of its business.
EBE is a development stage company and had no operating revenue for the year ended December 31, 2008; therefore the value of the investment in EBE is shown as $0 as of December 31, 2008 per FAS 157. During the year ended December 31, 2008, the Company recorded the impairment of amounts invested in EBE net of liabilities owed to EBE shareholders totaling $66,700 net of a contribution by two of the Company’s shareholders of loans to the Company in exchange for EBE shares (see Note 5).
11. PUBLIC RELATIONS AGREEMENTS
During March 2005, and subsequently amended during April 2005, the Company entered into an agreement with a public relations and promotions services company for consulting services. The public relations and promotions services company will promote the Company to the investment community and the general public through press releases and other communications, all of which must be approved in advance by the Company. The term of the agreement is six months, subject to prior termination. In consideration of the services being performed, the Company will issue compensation shares equal to 30% of the increase in buy volume of the Company's common stock directly attributable to the public relations and promotions services company, as defined in the agreement. The Company will also issue bonus shares of 10% of the increase in buy volume of the Company's common stock in the event the sales price of the Company's common stock equals or exceeds $20.00 per share. Additionally, the Company has agreed to issue seven million shares of common stock to be held by an escrow agent.
During June 2005, the Company entered into a second agreement with the public relations and promotions services company for additional consulting services in exchange for 9,400 shares of the Company's common stock valued at $247,500. The Company issued the shares in June 2005.
During November 2005, the Company entered into a third agreement with the public relations and promotions services company for additional consulting services in exchange for 6,300 shares of the Company's common stock valued at $345,000. The Company issued the shares in November 2005.
Through December 31, 2005, the Company released 62,000 shares of common stock totaling $3,125,200 in consideration of these agreements. Additionally, the Company recorded a public relations payable for approximately 5,200 additional compensation and bonus shares, valued at $332,100, to be released at a future date. During the three months ended March 31, 2006, 2,500 shares valued at $134,200 were released in satisfaction of this payable. The agreement expired on March 22, 2006. Therefore, accrued potential shares were not paid because the price point was not reached and the agreement expired.
In October 2005, the Company entered into an agreement with Ascendiant Securities, LLC ("Ascendiant") providing that Ascendiant would act on a best-efforts basis as the Company’s financial advisor and non-exclusive placement agent in connection with the structuring, issuance and sale of the Company’s debt and equity securities for financing purposes. The agreement, which has a term of six months, requires the Company to pay Ascendiant a cash success fee and warrants for completed transactions that The Company approves. The success fee is equal to ten percent of the gross proceeds from the sale of the Company’s securities; in addition, for transactions generating gross proceeds of $2,000,000 or more, the Company must issue Ascendiant 2,200 shares of the Company’s restricted common stock. To date, no transactions have been presented to the Company by Ascendiant.
In January 2006, the Company entered into an addendum to a consulting agreement with a consultant for the sale of common stock in Europe pursuant to a trustee arrangement. The Company agreed to pay the consultant a commission equal to three percent of the proceeds from the sale of such shares.
On January 26, 2006, the Securities and Exchange Commission declared effective the Company’s Registration Statement on Form SB-2 (File No. 33-128991), registering an aggregate of 250,000 shares of the Company’s common stock for sale to the public. The Company intends to use the stock for raising capital, but to date has not entered into any arrangements for any such financing.
In February 2006, the Company entered into an extension of an agreement signed in 2003 with the above-referenced consultant for services including the coordination of investor relations in Europe. In consideration for such extension, the Company issued to the consultant an aggregate of 1,300 free trading shares and 2,500 restricted shares of common stock valued at $126,000.
In March 2006, the Company entered into a Securities Purchase Agreement (the “Agreement”) with La Jolla Cove Investors, Inc., a California corporation (“La Jolla Cove”). Pursuant to the Agreement, La Jolla Cove agreed to purchase from the Company a 6¾% Convertible Debenture in the aggregate principal amount of $30,000 (the “Debenture). Pursuant to the agreement terms, the Company received $30,000, the purchase price of the debenture.
In connection with the Debenture, the Company issued to La Jolla Cove a Warrant to Purchase Common Stock (the “Warrant”), dated as of March 7, 2006, to purchase an aggregate of 37,500 shares of common stock. Pursuant to the terms of the Warrant, the Company received $95,000 as a prepayment towards the future exercise of Warrant Shares.
In May 2006, the Company returned to La Jolla Cove the aggregate advances of $125,000. Management believed that due to substantially modified terms proposed for the transaction by La Jolla Cove, the parties failed to agree on the material terms and conditions of this proposed transaction. The Company and La Jolla Cove subsequently mutually agreed not to pursue this transaction.
During April 2007, the Company entered into an agreement for investor relations and awareness services under which the Company will make cash payments equal to 35% of the buy volume of the Company’s common stock attributable to the agreement during the six months commencing April 13, 2007. The public relations and promotion services company will promote the Company to the investment community and the general public through press releases and other communications, all of which must be approved in advance by the Company. The Company has paid $167,100 pursuant to this agreement.
During April 2007, the Company entered into agreements for investor relations services for $18,500 in cash.
During October 2007, the Company entered into agreements for investor relations services for $40,000 in cash.
In January 2008 the Company entered into a consulting agreement with a European entity to assist the Company in locating sales groups that will identify potential European investors to Reg S offering made by the Company. Compensation for services included a stock grant of 12,500 Reg S shares valued at $10,000, and 30% of funds received from Reg S investors.
In February, 2008 the Company entered into the extension of a consulting agreement with a consultant to extend an Agreement dated January 3, 2003 to assist the Company in its fund raising efforts in Europe, and in consideration for such extension, the Company issued to the consultant an aggregate of 1,300 free trading shares of common stock valued at $2,000 and 7,500 restricted shares of common shares valued at $12,000.
In March, 2008 the Company entered into a consulting services agreement with an investment relations firm to provide services to increase investor awareness for the Company for which the Company agreed to pay $10,000 and issue 17,500 in restricted stock valued at $14,000.
In June, 2008 the Company entered into an agreement with an investor relations firm to provide public relations services including serving as an investment banking liaison, obtaining write ups about the company and acting as an institutional public relations consultant for a six month period in consideration for 150,000 shares of restricted common stock valued at $120,000.
In June, 2008 the Company entered into an agreement with a management consulting firm to provide management consulting services in an effort to obtain capital from third parties for working capital in consideration of a success fee of 7% in cash of the amount of capital raised as a result of the efforts of the consulting firm.
12. LEGAL AGREEMENTS
In December, 2007 the Company entered into an agreement for legal services to write a Reg S offering memorandum that the Company plans to use for raising capital in Europe. Compensation is based on an hourly rate for services. The Company has also used this same firm and attorney from time to time throughout 2008 for other legal services such as for our annual meeting.
In September, 2008 the Company entered into an agreement for legal services with another firm to file a registration statement on Form S-1pursuant to a new investment agreement with Dutchess Private Equities, Ltd. We may use this firm in the future for other legal services.
13. SEGMENT INFORMATION
During 2007, the Company operated in two reportable segments, the development of technology for preservation of certain biologic material and the development of a renewable energy market, as defined by Statement of Financial Accounting Standards (SFAS) No. 131. Prior to 2007, the Company operated in only one segment, and therefore did not report segment information for the period ended December 31, 2006.
The Company currently operates in only one segment because the renewable energy market, formally addressed through its wholly owned subsidiary, HBS BioEnergy is now addressed through HBS’s 30% ownership of common stock of Environmental BioMass Energy, Inc., which is in the business of converting bio-waste to electrical energy. The decision to suspend the ethanol business activity in July 2007 and to discontinue its operations in 2008 was due to the increasing raw materials cost, making it difficult to obtain financing for the construction and operation of ethanol facilities.
Year ended December 31, 2007
BioMedical
BioEnergy
Total
Revenue
$
-
$
-
$
-
Operating expenses
Stock based comp
31,200
-
31,200
Public relations
409,300
-
409,300
Other general and administrative expenses
1,236,200
-
1,236,200
Total general and administrative
1,676,700
-
1,676,700
Research and development
282,500
934,700
1,217,200
Sales and marketing
-
-
-
Total operating expenses
1,959,200
934,700
2,893,900
Loss from operations
$
(1,959,200)
$
(934,700)
$
(2,893,900)
========
========
========
Year ended December 31, 2008
BioMedical
BioEnergy
Total
Revenue
$
-
$
-
$
-
Operating expenses
Stock based comp
4,100
-
4,100
Public relations
44,000
-
44,000
Other general and administrative expenses
835,300
-
835,300
Total general and administrative
883,400
-
883,400
Research and development
140,000
62,800
202,800
Sales and marketing
-
-
-
Total operating expenses
1,023,400
62,800
1,086,200
Loss from operations
$
(1,023,400)
$
(62,800)
$
(1,086,200)
========
========
========
.
14. SUBSEQUENT EVENTS
In January 2009, the Company held its annual meeting that was originally scheduled for November 14, 2008 but was recessed several times in order that the Company could reach a quorum. All resolutions put forth before shareholders passed which included a 1 for 80 reverse split of its issued and outstanding common stock, the continued appointment of the current Board of Directors, and the continued appointment of the Company’s audit firm of LL Bradford. On March 4, 2009 the Company completed a one for eighty reverse split.
In January 2009, the Company signed a letter of intent to acquire all of the shares of San West Inc. through a reverse merger agreement such that the San West shareholders and others would receive 85% of the combined company and the Company shareholders would retain 15% of the outstanding shares following the merger. The letter of intent calls for San West to pay $25,000 upon signing and another $26,000 upon the signing of a definitive agreement. San West is to assume the liabilities under an agreed discounted payment agreement.
In January 2009, the S-1 registration statement was declared effective by the Securities and Exchange Commission pursuant to the new Investment Agreement with Dutchess Private Equities made effective December 29, 2008.
In January 2009, the Company issued 12,500 shares of the Company’s common stock to Dutchess Private Equities Fund, Ltd. pursuant to the Conversion Notice provision of the Note of November 2006 with Dutchess Private Equities, Ltd.
In February, 2009, the Company entered into a debt conversion agreement to convert a payables amount of $10,000 for services provided to 40,000 shares of EBE common stock to be taken out of the shares held by HBS.
In February 2009, the Company sold 17,800 common shares for $2,705 through Dutchess Private Equities Fund, LTD, pursuant to an S-1 registration which became effective January 30, 2009.
In March 2009, the Company issued 9,260 common shares for consulting services.
In April 2009, the Company entered into a definitive plan and agreement of triangular merger between the Company, Human BioSystems Acquisition Company, and San West Inc. such that the San West shareholders and others would receive 85% of the combined company and the Company shareholders would retain 15% of the outstanding shares following the merger. The agreement calls for San West to pay $25,000 upon signing the letter of intent and another $26,000 upon the signing of a definitive agreement. San West is to assume the liabilities under an agreed discounted settlement agreement of certain liabilities. The definitive agreement was to become effective on April 17, 2009, but was extended to May 8, 2009 pending the completion of the final terms of the merger agreement.
In April 2009, the Company released 5 million shares for sale in Europe under Regulation S into an escrow account for subsequent sales to investors. The company also entered into a consulting agreement to place these shares and a trust declaration agreement to hold these shares for the Company in escrow.
In April 2009, the Company sold 420,000 shares of common stock for $21,000 to one investor and another 100,000 shares for $5,000.
In May 2009, the Company commenced negotiations with Dutchess Private Equities LP pursuant to a settlement on the liquidated damages associated with the Company’s default on the two Notes described in 6. Notes Payable above.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
See Item 9A(T) below.
ITEM 9A(T).
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our Chief Executive Officer and Acting Chief Financial Officer, our management evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2008. Based on this evaluation, our Chief Executive Officer and Acting Chief Financial Officer concluded that our disclosure controls and procedures were effective in gathering, analyzing and disclosing information needed to satisfy our disclosure obligations under the Exchange Act.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Acting Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on certain criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and preparation of the financial statements for external purposes in accordance with U.S. generally accepted accounting principals as of December 31, 2008.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. This management report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management's report in this annual report.
Changes in Internal Controls
There were no changes in our internal controls or in other factors during the period covered by this report that have materially affected or are likely to materially affect our internal controls over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth the names and positions of our directors and executive officers and other key personnel as of December 31, 2008:
Name
Age
Position
Harry Masuda
Chief Executive Officer, Acting Chief Financial Officer and Director
Dr. David Winter
President
Paul Okimoto
Chairman of the Board, Secretary and Vice President
Dr. Luis Toledo
Chief Medical Officer
Dr. Larry McCleary
Director
There is no family relationship between any of our directors and executive officers.
Each Director holds office until the next annual meeting of the shareholders or until his successor is elected and duly qualified. Executive officers are appointed by and serve at the pleasure of the Board of Directors. The following sets forth biographical information concerning our directors, executive officers and key personnel for at least the past five years:
Harry Masuda has served since February 1998 as our Chief Executive Officer and a Director. He is also currently serving as our Acting Chief Financial Officer. He also served as our President from February 1998 through August 2005. Mr. Masuda is the former president of several high tech companies including Piiceon, Inc., a manufacturer of computer peripheral products for microcomputers. Mr. Masuda also founded HK Microwave; a manufacturer of high frequency phase locked oscillators used in cellular telephone base stations, later acquired by Dynatech Corporation. Mr. Masuda received his BSEE and MSEE from San Jose State University. From October 1997 to February 1998, Mr. Masuda was a business consultant, and he served as President of International Web Exchange from July 1995 to October 1997. Commencing January 1, 2008, Mr. Masuda agreed to reduce his pay by 50% until the company’s financial situation improved. The pay has been at 50% through April, 2009.
David Winter, M.D. joined us in September 2005 as President. Dr. Winter has over 20 years' experience in the pharmaceutical industry. Since January 2004, he has served as CEO of TriMed Research, Inc., a joint venture of the University of Nebraska Medical Center, UNeMED Corporation and Tridelta Development, Ltd. formed to research and commercially develop therapeutic products related to TriMed's proprietary mammary gland protein. Since January 2002, he has also served as Medical Director of CTI, a contract research organization. From February 2001 to December 2003, he was President of Winter Consulting. He served as President and Chief Operating Officer of SangStat Medical Corporation, a pharmaceutical company making drugs used in transplantation, from March 1995 to June 1998, and as President and Chief Executive Officer of Human Organ Sciences, Inc., a subsidiary of SangStat, from July 1998 to 2001. Commencing January 1, 2008, Dr. Winter agreed to reduce his pay by 50% until the company’s financial situation improved. The pay has been at 50% through April, 2009.
Paul Okimoto joined us in February 1998 as Executive Vice President and a Director. He became our Secretary in August of 2002. Mr. Okimoto served as President of Sanhill Systems, a research and development company involved in the signal processing medical field, from 1991 to January 1998. Commencing January 2008, Mr. Okimoto agreed to reduce his pay by 50%. On July 1, 2008 Mr. Okimoto’s pay ceased but he continued in his capacity as V.P and paid on a consulting basis as needed. Mr. Okimoto continues to be the Company’s Chairman of the Board.Luis Toledo, M.D., PhD. became our Chief Medical Officer in March 2000. Dr. Toledo is an internationally recognized authority on organ transplantation and preservation. He has authored 10 books on transplantation and related subjects, authored or co-authored 500 scientific publications, and contributed to chapters of 77 books. Dr. Toledo has held many medical staff positions including: Co- Chief, Transplantation and Director, Surgical Research at the Henry Ford Hospital and Chief, Transplantation and Director, Research at Mount Carmel Mercy Hospital. He is also currently the Director of Research at the Borgess Medical Center and is Director of the Michigan Transplant Institute. He also serves as Professor of Surgery and Director, Experimental Research Program at Michigan State University. Commencing January 2008, Dr. Toledo agreed to reduce his pay by 50%. On July 1, 2008 Dr. Toledo’s pay ceased but he continued in his capacity as Chief Medical Officer and paid on a consulting basis as needed.
Larry McCleary, M.D. joined us in September 2005 as a Director. Dr. McCleary filled the vacancy created by the resignation of George Tsukuda. Dr. McCleary has spent the last seven years serving as Director of Human Research
for Advanced Metabolic Research Group, LLC, headquartered in Henderson, Nevada. Dr. McCleary served on our Advisory Board from 2002 until his appointment to our Board of Directors.
Committees of the Board of Directors
We do not currently have an Audit Committee, Compensation Committee, Nominating Committee, or any other committee of the Board of Directors. The responsibilities of these committees are fulfilled by our Board of Directors and all of our directors participate in such responsibilities. In addition, we do not currently have an "audit committee financial expert" as such term is defined in the Securities Act, as our financial constraints have made it extremely difficult to attract and retain qualified outside Board members. We hope to add qualified independent members of our Board of Directors in 2009, depending upon our ability to reach and maintain financial stability.
Compensation Committee Interlocks and Insider Participation
We did not have a Compensation Committee or any other committee of the Board of Directors performing similar functions during the years ended December 31, 2008 and 2007. Mr. Harry Masuda, our Chief Executive Officer, participated in deliberations of the Board of Directors relating to his compensation.
Compliance with Section 16 of the Exchange Act
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than ten percent of a class of our capital stock, to file reports of ownership and changes in their ownership with the Securities and Exchange Commission. These persons are required to furnish us with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms received by us, to our knowledge, no person has failed to timely file a Section 16(a) form during the year ended December 31, 2008.
Other Matters
We have not yet drafted and adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or person performing similar functions. We intend to do so once we reach and maintain greater financial stability.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Compensation Philosophy and Overall Objectives
We believe that the compensation program for our Chief Executive Officer, Chief Medical Officer and Chairman of the Board (collectively, the “Named Executive Officers”), should be designed to reward the achievement of specific annual, long-term and strategic goals, and should align executives’ interests with those of the stockholders by rewarding performance above established goals, with the ultimate objective of improving shareholder value. The compensation program should also be sufficient to attract and retain highly qualified leaders who can create value for us, as well as provide meaningful incentives for superior performance.
Setting Executive Compensation
Due to the unique nature of each Named Executive Officer’s duties, our criteria for assessing executive performance and determining the compensation in any given year are inherently subjective and are not based upon specific formulas or weighting of factors. We also use companies in similar industries as benchmarks when initially establishing Named Executive Officers’ compensation. However, we are a development stage company, and has limited operating history and no revenue to date. As a result, our compensation plan necessarily reflects our limitations in this respect.
Discussion of Specific Compensation Elements
Base Salary: We determine the base salaries for all Named Executive Officers by reviewing company and individual performance, the value each Named Executive Officer brings to us, and general labor market conditions. The base salary for each Named Executive Officer is determined on a subjective basis after consideration of these factors and is not based on target percentiles or other formal criteria. The base salaries of Named Executive Officers are reviewed on an annual basis, and any annual increase is the result of an evaluation of our performance and of the individual Named Executive Officer’s performance for the period. An increase or decrease in base pay may also result from a promotion or other significant change in a Named Executive Officer’s responsibilities during the year.
Performance-Based Incentive Compensation: We do not have a performance-based incentive compensation program at this time.
Long-Term Incentive Compensation: We provide long-term incentive compensation through awards of stock options, restricted stock, and/or stock awards. Our equity compensation program is intended to align the interests of the Named Executive Officers with those of our shareholders by creating an incentive for our officers to maximize shareholder value. The equity compensation program also is designed to encourage officers to remain employed with us despite a competitive labor market, and the fact that we are a development stage company and have a limited operating history and no revenue to date, and may not necessarily be able to sustain a market rate base salary. Stock options, stock grants, warrants and other incentives are based on combination of factors including the need and urgency for such an executive, the experience level of the executive and the balance of such incentives with a lower than market base salary or fees that is paid in cash. Employees and consultants are granted such incentives from time to time to maintain their continuing services, sometimes without increases in salaries or fees. Stock options are granted through the Amended and Restated Human BioSystems 2001 Stock Option Plan.
Deferred Compensation Benefits: We do not have a deferred compensation program at this time.
Retirement Benefits: We do not have a 401(k) plan or other retirement program at this time.
Executive Perquisites and Generally Available Benefits: We have no executive perquisite program at this time.
Tax and Accounting Implications
We review and consider the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, which provides that we may not deduct compensation of more than $1,000,000 that is paid to certain individuals. We believe that compensation paid under the management incentive plans are generally fully deductible for federal income tax purposes.
Role of Executive Officers in Compensation Decisions
Decisions as to the compensation of our executive officers are made by the Board of Directors. The executive officers who are also Board members participate in the discussion and determination of their compensation.
Summary Compensation Table
The following Summary Compensation Table sets forth all compensation earned, in all capacities, during the fiscal years ended December 31, 2008 and 2007 by our (i) Chief Executive Officer and (ii) executive officers, other than the Chief Executive Officer, whose salaries for the 2007 fiscal year as determined by Regulation S-B, Item 402, exceeded $100,000 (the individuals falling within categories (i) and (ii) are collectively referred to as the “Named Executive Officers”).
(1) Represents corporate office allowance of $800 per quarter for use of home and facilities for Company business.
(2) Represents corporate office allowance of $200 per month for use of home and facilities for Company business.
Employment Agreements; Termination of Employment and Change of Control Arrangements
In March 2000, we entered into an employment agreement with Dr. Luis Toledo, employing him as our Chief Medical Officer for a minimum term of one year. The agreement provides for a base salary of $6,000 per month, which may be adjusted based on our ability to raise defined amounts of capital. In addition, we granted to Dr. Toledo an option to purchase 900 shares of our common stock at an exercise price of $120 per share, and continued in effect options granted pursuant to a consulting agreement that we entered into in May 1998 with Dr. Toledo. In June 2001, we granted Dr. Toledo options to purchase 900 shares of common stock at an exercise price of $20 per share. In January 2002, we granted Dr. Toledo options to purchase 900 shares of common stock at an exercise price of $40 per share, and in February 2004, we granted Dr. Toledo options to purchase 1,900 shares of common stock at an exercise price of $9 per share. This option vested with respect to 30% of the shares on the date of grant; an additional 30% one year after the date of grant, and the remainder will vest two years from the date of grant. We entered into a new employment agreement with Dr. Toledo effective April 1, 2005, providing for a base salary of $10,000 per month (subject to adjustment based on our financial situation and performance). On March 15, 2005, we granted Dr. Toledo options to purchase an additional 1,900 shares of common stock at an exercise price of $9 per share. This option vested with respect to 30% of the shares on the date of grant; an additional 30% will vest one year after the date of grant, and the remainder will vest on two years from the date of grant. Dr. Toledo agreed to a 50% reduction in base salary to $5,000 per month starting January 1, 2008 and then to zero base salary starting July 1, 2008, due to the financial situation of the Company.
On August 29, 2005, we entered into an Executive Consulting Agreement with Dr. David Winter. Pursuant to the agreement, Dr. Winter will serve as our President. In that capacity, he will oversee our platelet and organ development programs and supervise negotiations with potential alliance partners. In consideration of these services, Dr. Winter will receive a monthly retainer of $3,000. He will also receive options to purchase 1,200 shares of our common stock, at an exercise price of $58 per share. The options will vest over a 12-month period, at the rate of 100 shares per month. During the term of the Agreement, Dr. Winter will also be eligible to receive a performance bonus in the maximum amount of 1,300 shares of our common stock, upon reaching certain performance targets established by our Board of Directors. Either party may terminate the agreement prior to the end of the term with 30 days prior written notice.
In December 1, 2006, Dr. Winter joined the Company as an employee with a monthly compensation of $10,000 and a stock option to purchase 1,900 shares at $8 per share. The option vests as to 30% immediately, another 30% after one year and the balance of 40% after the second year from the date of the option. Dr. winter agreed to a 50% reduction in base salary to $5,000 per month starting January 1, 2008 due to the financial situation of the Company.
Claude Luster III ceased serving as HBS Bio’s President effective August 2007. Mr. Luster was the principal of EXL III Group Corporation, which had entered into a set of agreements with HBS Bio. These agreements have been terminated effective January 5, 2008 pursuant to a Mutual Termination Agreement, which is discussed in detail in “Description of Business - Our Alternative Energy Business.”
Outstanding Equity Awards at Fiscal Year-End
The following tables provide information on outstanding equity awards during the year ended December 31, 2008 to the Named Executive Officers.
Option Awards
Number of Securities Underlying Unexercised Options (#) Exercisable
Number of Securities Underlying Unexercised Options (#) Unexercisable
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)
Option Exercise Price ($)
Option Expiration Date
H. Masuda, Chief Executive Officer
-
-
-
-
-
Stock Awards
Number of Shares or Units of Stock that Have Not Vested
Market Value of Shares or Units of Stock That Have Not Vested
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)
H. Masuda, Chief Executive Officer
-
-
-
-
Director Compensation
The following table sets forth information regarding compensation of our directors for the year ended December 31, 2008:
Director Compensation
Name
Fees Earned or Paid in Cash ($)
Stock Awards ($)
Option Awards ($)
Non-Equity Incentive Plan Compensation ($)
Nonqualified Deferred Compensation Earnings ($)
All Other Compensation ($)
Total ($)
H. Masuda
-
-
-
-
-
-
-
P. Okimoto
-
-
-
-
-
-
-
L. McCleary
-
-
-
-
-
-
-
Directors who are also our employees receive no additional cash compensation for serving on the Board. We have issued stock options to our Board members in the past, and will continue to do so for the foreseeable future. We reimburse non-employee Directors for all travel and other expenses incurred in connection with attending meetings of the Board of Directors.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of December 31, 2008 regarding equity compensation plans under which our common stock is authorized for issuance:
Plan Category
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
Weighted Average Exercise Price of Outstanding Options, Warrants and Rights
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
Equity compensation plans approved by security holders: (1)
13,100
$23
111,000
Equity compensation plans not approved by security holders: (2)
46,800
$33
-
Total
60,700
$30
111,000
(1) Represents options granted pursuant to the Company’s 1998 Statutory Incentive Stock Option Plan, Non-Statutory Incentive Stock Option Plan, and 2001 Stock Option Plan.
(2) Represents warrants to purchase Common Stock granted under plans not approved by the Company’s shareholders.
Beneficial Ownership of Common Stock of the Company
The following table sets forth certain information regarding the beneficial ownership of our common stock as of December 31, 2008, (i) by each director of the Company; (ii) by each person known by us to own beneficially more than five percent of our common stock; (iii) by the executive officer named in the Summary Compensation Table set forth in "Executive Compensation" and (iv) by all directors and executive officers of the Company as a group.
Unless otherwise indicated in the footnotes to the table, the following individuals have sole vesting and sole investment control with respect to the shares they beneficially own. Unless set forth to the contrary below, the address for all persons is c/o Human BioSystems, 1127 Harker Avenue, Palo Alto, CA 94301.
The number of shares beneficially owned by each shareholder is determined under rules promulgated by the Securities and Exchange Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting or investment power and also any shares that the individual has the right to acquire within 60 days of December 31, 2008. The inclusion herein of such shares, however, does not constitute an admission that the named shareholder is a direct or indirect beneficial owner of such shares. Unless otherwise indicated, each person named in the table has sole voting and investment power (or shares such power with his or her spouse) with respect to all shares of common stock listed as owned by such person. The total number of outstanding shares of common stock at December 31, 2008 is 2,359,900.
Name and Address of Principal Shareholders
Number of Shares Owned
Percent of Shares Outstanding
Harry Masuda
36,800 (1)
1.56%
Paul Okimoto
6115 Ralston Avenue
Richmond, CA 94805
22,000 (2)
0.93%
Dr. David Winter
2510 Bridle Path Drive
Gilroy, CA 95020
13,600 (3)
0.57%
Larry McCleary
418 Alpine Drive
Incline Village, NV 89451
140,000 (4)
5.94%
All Officers and Directors as a Group
(four persons)
212,400 (1) - (4)
9.01%
(1) Includes options to purchase 1,900 shares of common stock exercisable within 60 days of December 31, 2008.
(2) Includes options to purchase 800 shares of common stock exercisable within 60 days of December 31, 2008. Includes an aggregate of 11,000 shares of common stock for which Mr. Okimoto acted as Trustee in receiving and forwarding such shares to YN Faarkaghyn Shiaght Lorne House Trust Limited, for the benefit of Mark Tameichi Okimoto, Michael Akira Okimoto, Eric Yoshiro Okimoto and Daryl Takashi Okimoto. The permanent Trustee is
Ronald Buchanan of Lorne House Management Ltd. Mr. Okimoto expressly disclaims beneficial ownership of said shares.
(3) Includes options to purchase 2,500 shares of common stock exercisable within 60 days of December 31, 2008.
(4) Includes options and warrants to purchase 12,200 shares of common stock exercisable within 60 days of December 31, 2008.
As indicated in the table above, our executive officers and directors beneficially own, in the aggregate, 8.84% of our outstanding common stock. As a result these shareholders may, as a practical matter, be able to influence all matters requiring shareholder approval including the election of directors, merger or consolidation and the sale of all or substantially all of our assets. This concentration of ownership may delay, deter or prevent acts that would result in a change of control, which in turn could reduce the market price of our common stock.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The following describes transactions, in addition to the employment and consulting agreements described above, to which we were or are a party and in which any of our directors, officers, or significant shareholders, or members of the immediate family of any of the foregoing persons, had or has a direct or indirect material interest.
We purchased the patents for a disposable vaginal disease test product titled Phemtest from Paul Okimoto, an officer and director, on September 1, 1998. The patent "VAGINAL TESTING APPLICATOR AND METHOD", Patent Number 4,784,158, was issued November 15, 1988, and the patent "BODY CAVITY SPECIMEN COLLECTING AND TESTING APPARATUS", Patent Number 4,945,921, was issued August 7, 1990. Pursuant to the purchase agreement for the patents, we paid $1,375 to the law firm of Flehr, Hohbach, Test and Herbert as a patent maintenance fee to assure that the patents would remain in force. We also agreed to pay Mr. Okimoto a royalty payment of 5% of gross sales of Phemtest for the next five years. The first $16,000 in royalty payments are to be paid to a law firm to be designated by Mr. Okimoto, the next $75,000 in royalties are to be paid to Mr. Okimoto in shares of our common stock, valued at $160 per share, and the remaining royalties to be paid to Mr. Okimoto, if any, are to be paid in cash. No royalty payments have been made as of December 31, 2008.
In March 2007, we entered into a loan agreement with Dr. Larry McCleary, a member of our Board of Directors. Dr. McCleary agreed to loan us the sum of $500,000 for a term of two years from March 21, 2007, with a closing cost of $1,717.95 to be added into the first month’s interest payment. The loan bears interest at the rate of 9.25% per annum and provides for interest-only monthly payments with a balloon payment at the end of the term for the principal amount. We issued 1,300 shares of restricted common stock and 11,200 warrants valued at $30,000 to the Dr. McCleary for loan fees. In February, 2008 the Company entered into an agreement to restructure this loan agreement with Dr. McCleary to transfer $300,000 of the original principal loan amount of $500,000 to a return formula from the Corcoran project and maintain $200,000 under the original terms of the loan agreement. The Director agreed to accept 26,200 shares of the Company’s common stock as payment of interest owed to Director through March, 2008 valued at approximately $27,000. In April, 2008, the Company entered into an addendum to the loan re-structuring agreement signed in February of 2008 that increases the shares to be issued under the addendum from 26,200 to 31,200 shares of the Company’s common stock to offset interest beyond March, 2008 until the value of the shares applied to the interest is consumed. The value of the 5,000 additional shares is $4,000. The 31,200 shares were issued on April 25, 2008. In November 2008, the same Dr. McCleary agreed to convert the total loan and investment amount of $500,000 to shares of Environmental BioMass Energy, Inc. (“EBE”) out of the shares owned by the Company. 2,000,000 shares of EBE common stock were issued to Dr. McCleary out of the shares owned by the Company.
In January 2008, the Company entered into an investment agreement with an officer. The officer agreed to invest $100,000 in the Company in exchange for a return on investment formula. The original investment is to be returned upon the Company receiving distribution from its proposed ownership of a waste to energy project being formalized at that time. An additional aggregate of three times the original investment is to be paid by the Company from future
distributions to Company from operations. The Company will reserve 20% of distributions received by the Company from the waste to energy project for this purpose. See November 2008 item below.
In November 2008, the Company received a loan in the amount of $10,000 from the same officer of the Company that entered into an investment agreement with the Company in January 2008 for $100,000. He agreed to convert this loan amount of $10,000 and the $100,000 invested under the agreement made in November 2008 to common shares of Environmental BioMass Energy, Inc. (“EBE”)owned by the Company. 440,000 shares of EBE were issued to the officer out of the shares owned by the Company.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table shows the aggregate fees billed to us for professional services by L.L. Bradford & Company, LLC, our independent auditors, for the years ended December 31, 2008 and 2007.
Audit Fees
$30,500
$33,090
Audit-Related Fees*
$500
$2,250
Tax Fees
$2,250
$2,250
All Other Fees
$0
$0
Total
$33,250
$38,590
* Relates to the registrant’s registration statements on Form SB-2 and Form S-8.
Audit Fees. This category includes the aggregate fee billed for professional services rendered for the audits of our consolidated financial statements for the years ended December 31, 2008 and 2007, for the reviews of the financial statements included in our quarterly reports on Form 10-Q during 2008 and 2007, and for other services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for the relevant fiscal years.
Audit-Related Fees. This category includes the aggregate fees billed in each of the last two fiscal years for assurance and related services by the independent auditors that are reasonably related to the performance of the audits or reviews of the financial statements and are not reported above under "Audit Fees," and generally consist of fees for other engagements under professional auditing standards, accounting and reporting consultations, internal control-related matters, and audits of employee benefit plans.
Tax Fees. This category includes the aggregate fees billed in each of the last two fiscal years for professional services rendered by the independent auditors for tax compliance, tax planning and tax advice. Of these amounts, $4,500 was related to tax compliance services for review of federal and state tax returns for both 2008 and 2007.
All Other Fees. This category includes the aggregate fees billed in each of the last two fiscal years for products and services provided by the independent auditors that are not reported above under "Audit Fees," "Audit-Related Fees," or "Tax Fees."
In the past, our Board of Directors has reviewed and approved the fees to be paid to the auditors. Such fees have been based upon the complexity of the matters in question and the time incurred by the auditors. We believe that the fees negotiated in the past with the auditors were reasonable in the circumstances and would be comparable to fees charged by other auditors providing similar services.
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Exhibit
Number
Description
Location
3.1
Articles of Incorporation
Incorporated by reference from Human BioSystems’ Form 10-SB Registration Statement filed on December 8, 1999 (Ex. No. 2.1)
3.2
Bylaws
Incorporated by reference from Human BioSystems’ Form 10-SB Registration Statement filed on December 8, 1999 (Ex. No. 2.2)
4.1
Stock Purchase Agreement for Founders (Common Stock)
Incorporated by reference from Human BioSystems’ Form 10-SB Registration Statement filed on December 8, 1999 (Ex. No. 3.1)
4.2
Representation Letter for Founders
Incorporated by reference from Human BioSystems’ Form 10-SB Registration Statement filed on December 8, 1999 (Ex. No. 3.2)
4.3
Stock Purchase Agreement - Private Placement
Incorporated by reference from Human BioSystems’ Form 10-SB Registration Statement filed on December 8, 1999 (Ex. No. 3.3)
4.4
Subscription Agreement - Regulation D, Rule 504
Incorporated by reference from Human BioSystems’ Form 10-SB Registration Statement filed on December 8, 1999 (Ex. No. 3.4)
4.5
Subscription Agreement - Regulation D, Rule 506
Incorporated by reference from Human BioSystems’ Form 10-SB Registration Statement filed on December 8, 1999 (Ex. No. 3.5)
Voting trust agreement
Incorporated by reference from Human BioSystems’ Form 10-SB Registration Statement filed on December 8, 1999 (Ex. No. 5) and as amended January 25, 2000 (Ex. No. 9)
10.1
Assignment of Phemtest Patent and Technology
Incorporated by reference from Human BioSystems’ Form 10-SB Registration Statement filed on December 8, 1999 (Ex. No. 6.1) and as amended January 25, 2000, (Ex. No. 10.1)
10.1
Phemtest Patents, US 4,945,921 and US 4,787,158
Incorporated by reference from Human BioSystems’ Form 10-SB Registration Statement filed on December 8, 1999 (Ex. No. 6.2) and as amended January 25, 2000, (Ex. No. 10.2)
10.3
Assignment of Patent and Technology - Vladimir Serebrennikov
Incorporated by reference from Human BioSystems’ Form 10-SB Registration Statement filed on December 8, 1999 (Ex. No. 6.3) and as amended January 25, 2000, (Ex. No. 10.3)
10.4
Assignment of Patent and Technology - Leonid Babak
Incorporated by reference from Human BioSystems’ Form 10-SB Registration Statement filed on December 8, 1999 (Ex. No. 6.4) and as amended January 25, 2000, (Ex. No. 10.4)
10.5
Consultant Agreement - Dr. Luis Toledo
Incorporated by reference from Human BioSystems’ Form 10-SB Registration Statement filed on December 8, 1999 (Ex. No. 6.5) and as amended January 25, 2000, (Ex. No. 10.5)
10.6
Employment Contract - R. Umar
Incorporated by reference from Human BioSystems’ Form 10-SB Registration Statement filed on December 8, 1999 (Ex. No. 6.6) and as amended January 25, 2000, (Ex. No. 10.6)
10.7
Employment Contract - L. Bryant
Incorporated by reference from Human BioSystems’ Form 10-SB Registration Statement filed on December 8, 1999 (Ex. No. 6.7) and as amended January 25, 2000, (Ex. No. 10.7)
10.8
Non-Statutory Incentive Stock Option Plan
Incorporated by reference from Human BioSystems’ Form 10-SB Registration Statement filed on December 8, 1999 (Ex. No. 6.8) and as amended January 25, 2000, (Ex. No. 10.8)
10.9
Statutory Incentive Stock Option Plan
Incorporated by reference from Human BioSystems’ Form 10-SB Registration Statement filed on December 8, 1999 (Ex. No. 6.9) and as amended January 25, 2000, (Ex. No. 10.9)
10.10
Statutory Incentive Stock Option Grant - R. Umar, 5/10/98
Incorporated by reference from Human BioSystems’ Form 10-SB Registration Statement filed on December 8, 1999 (Ex. No. 6.10) and as amended January 25, 2000 (Ex. No. 10.10)
10.14
Indemnification Agreements of Directors and Officers
Incorporated by reference from Human BioSystems’ Form 10-SB Registration Statement filed on December 8, 1999 (Ex. Nos. 6.14 thru 6.19) and as amended January 25, 2000, (Ex. Nos. 10.14 thru 10.19)
10.15
Employment Agreement - Leonid Babak
Incorporated by reference from Human BioSystems’ Form 10-SB Registration Statement filed on December 8, 1999 and as amended January 25, 2000, (Ex. No. 10.20)
10.16
Employment Agreement - Vladimir Serebrennikov
Incorporated by reference from Human BioSystems’ Form 10-SB Registration Statement filed on December 8, 1999 and as amended January 25, 2000, (Ex. No. 10.21)
10.17
Mutual Termination Agreement
Filed herewith
10.18
Asset Purchase Agreement by and between Human BioSystems, HBS Bio, and EXL
Incorporated by reference from Human BioSystems’ current report on Form 8-K filed on September 29, 2006
10.19
Consulting Services Agreement by and between HBS Bio and EXL
Incorporated by reference from Human BioSystems’ current report on Form 8-K filed on September 29, 2006
10.20
Escrow Agreement by and between HBS Bio, EXL, and Silicon Valley Law Group
Incorporated by reference from Human BioSystems’ current report on Form 8-K filed on September 29, 2006
Subsidiaries of Human BioSystems
Filed herewith
Consent of experts and counsel
Filed herewith
Power of attorney
Included on the signature page of this annual report
31.1
Rule 13a-14(a)/15d-14(a) Certifications of Principal Executive Officer
Filed herewith
31.2
Rule 13a-14(a)/15d-14(a)
Certifications of Principal Financial
Officer
Filed herewith
32.1
Section 1350 Certifications of Principal Executive Officer
Filed herewith
32.2
Section 1350 Certifications of Principal Financial Officer
Filed herewith
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated May 8, 2009
Human BioSystems
By:
/s/ Harry Masuda
Harry Masuda
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below authorizes Harry Masuda to execute in the name of each such person who is then an officer or director of the registrant, and to file, any amendments to this Annual Report on Form 10-K necessary or advisable to enable the registrant to comply with the Securities Exchange Act of 1934 and any rules, regulations and requirements of the Securities and Exchange Commission in respect thereof, which amendments may make such changes in such Report as such attorney-in-fact may deem appropriate.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Harry Masuda
Harry Masuda
Chief Executive Officer,
Acting Chief Financial Officer
(Principal Accounting Officer)
and Director
May 8, 2009
/s/ Paul Okimoto
Paul Okimoto
Chairman of the Board and Executive Vice President
May 8, 2009
/s/ Dr. Larry McCleary
Dr. Larry McCleary
Director
May 8, 2009