ITEM 1. BUSINESS
We were founded in 2001 as "HemoBioTech, Inc.," a Texas corporation. In 2003, we incorporated a sister corporation named "HemoBioTech, Inc." in the State of Delaware. On December 1, 2003, HemoBioTech, Inc. (Texas) was merged with and into HemoBioTech, Inc. (Delaware) with HemoBioTech, Inc. (Delaware) as the surviving entity. Our principal executive offices are located at 5001 Spring Valley Road, Suite 1040-West, Dallas, TX 75244, and our telephone number is (972) 455-8950.
We are the exclusive licensee of what we believe is an innovative human blood substitute product, which we call "HemoTech". HemoTech is comprised of hemoglobin that has been isolated from bovine blood and then chemically altered to make the resulting product non-toxic. It is the combination of these elements that we believe makes HemoTech a novel product. HemoTech is intended to address an increasing, yet unmet, demand for safe and inexpensive blood in the United States and around the world. We believe HemoTech is non-toxic based on initial foreign clinical studies.
Dr. Mario Feola and Dr. Jan Simoni, Texas Tech University Health Science Center School of Medicine ("TTUHSC") researchers and recognized blood substitute authorities, developed HemoTech over 20 years of research. HemoTech has been tested in a European pre-clinical regulatory study conducted at the Research Toxicology Centre S.p.A. in Rome, Italy, in 1990 to 1992 and preclinical studies at ISI St. Antimo in Naples, Italy from 1989 to 1991 and a limited human clinical trial in Africa in 1990, with what we believe to be favorable results. These initial studies suggest, although no FDA approved studies have been undertaken and there can be no assurance that later stage trials will confirm these findings, that this novel red blood cell substitute:
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can act as a carrier of oxygen;
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produces no adverse toxicity of the kidneys, or the nervous system;
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produces no adverse inflammatory reactions;
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can dilate the blood vessels (which is called vasodilatory activity) and can reduce narrowing of blood vessels (or vasoconstriction) that follows hemorrhage;
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has erythropoietic activity (which is the production of red blood cells in the body);
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has lower oxygen affinity (which is how tightly oxygen binds to the hemoglobin) than other competing blood substitutes, approximating the oxygen affinity of native human red blood cells;
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has the ability to remain in the blood vessels; and can sustain a close-to-normal amount of plasma in the blood.
We have obtained an exclusive, worldwide license from Texas Tech University for the core patents covering certain key markets, including primary markets in North America, Europe and Asia. We also have a strategic partnership with TTUHSC that allows us to utilize research and production facilities at TTUHSC and TTUHSC scientists, surgeons and medical staff. Our relationship with TTUHSC is governed by license and research agreements that, among other things, grant us the exclusive
worldwide intellectual property rights to the HemoTech technology in exchange for equity ownership and payment of the fees associated with our use of TTUHSC facilities, materials and personnel.
We believe the structure of these license and research agreements could be attractive to potential pharmaceutical company partners and could be positive factors for the commercializing of HemoTech.
The FDA has cited the Adenosine/GSH modified hemoglobin strategy used in HemoTech as a viable strategy for a needed new generation red blood cell substitute. The FDA indicated at a meeting on April 29, 2008 the toxicity of previous first generation substitutes and the need for a new generation substitute. Our strategy for HemoTech is protected by issued patents in 21 countries.
On May 5, 2008 the Company agreed to license certain technology from TTUHSC titled Orthogonal Method for the Removal of Transmissible Spongiform Encephalopathy Agents from Biological Fluids (“ORTH Technology”). This is a technology that results in the removal and inactivation of infectious agents such as prions (which can cause Mad Cow Disease) and viruses. Such removal and inactivation is critical in the purification of animal products for human use. It can be used not only for HemoTech production but also has the potential for generating sublicensing revenue from pharmaceutical, biotechnology and the cosmetic industries. The term of the agreement extends to the full end of the term or terms for which patent rights have not expired or, if only technology rights are licensed and no patent rights are applicable, for a term of 15 years. The license agreement calls for a nonrefundable license documentation fee of $10,000 and 500,000 shares of the Company’s common stock. The price per share of the Company’s common stock on May 5, 2008 was $1.29 per share. Accordingly, the Company recorded a charge to research and development expense for $655,000. The agreement also contains an annual renewal fee of $10,000 per year and a royalty based on net sales of Licensed Products (as defined by the agreement) sold by the Company that contain the patented ORTH Technology. The royalty percentage will be lower if Licensed Products are not protected by a valid patent. The agreement calls for a minimum royalty beginning six months after approval of a Licensed Product by the FDA. No royalty applies to the embedded ORTH Technology in the sale of our HemoTech product. The Company is permitted to sublicense the ORTH Technology and TTUHSC will receive a portion of both cash and non cash remuneration received by the Company for a sublicense. Additionally, the Company will pay a portion of any royalty received to TTUHSC.
The Company has also agreed to issue up to 275,000 additional shares of the Company’s common stock in the event TTUHSC purchases certain equipment used in the HemoTech process. The equipment will be owned by TTUHSC, which will be used to further the development of HemoTech, among other possible research uses and will be charged to research and development expense when purchased. As of March 24, 2009, no such equipment has been purchased by TTUHSC.
The agreement may be terminated by either party by mutual written agreement upon 180 days notice, or by TTUHSC based on certain provisions relating to defaults according to the agreement.
The financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred cumulative losses of $15,323,000 from inception through December 31, 2008, has not generated any revenue, and has been dependent on funding operations through the private sale of convertible debt and equity securities. These conditions indicate that there is substantial doubt upon the Company’s ability to continue as a going concern. Management’s plans include continuing to fund operations through one or more public or private offerings of equity securities, although there is no assurance they will be able to do so in the future, and monitoring and reducing discretionary expenses.
Background
The development of HemoTech is based on the idea that free hemoglobin-based blood substitutes can no longer be considered simply vehicles for transporting oxygen and carbon dioxide. Rather, they should possess properties that diminish the intrinsic toxic effects of hemoglobin and help eliminate the abnormal reactions associated with the loss of blood pressure and the lowering of vital signs resulting from the loss of blood during hemorrhage. We believe we have a purification method necessary for the purity of our hemoglobin solutions. We believe this purification method will allow us to produce HemoTech in a cost-effective manner by avoiding many of the expensive and capital intensive purification methods used by some of our competitors.
We believe the potential market for red blood cell substitutes is large and growing. The Theta Reports indicate that each year in the United States, over four million patients receive transfusions of over 14 million units of red blood cells in HemoBioTech, Inc.'s targeted markets of acute anemia, cancer and ischemia (the inadequate flow of blood due to constriction or obstruction of blood supply).
In addition to peacetime need, emergencies typically add to the demand for blood substitutes. For many years, the U.S. military has had an interest in an effective blood substitute.
There are several critical factors shaping the U.S. blood market. The market is facing increasing demand while the available supply remains stagnant. Banked blood continues to increase in cost and still entails risks related to infection and immune response. A safe, cost effective blood substitute has numerous advantages over the current blood supply:
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minimize the risk of infections by infectious agents such as hepatitis and HIV (which causes AIDS) and adverse reactions in patients;
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be compatible with all blood types, allowing earlier administration, increasing survivability for trauma patients and preventing supply shortages related to specific blood types;
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possess a significantly longer shelf life (six months or greater) than that of donated red blood cells (42 days), allowing a wider range of administration and increased stockpiling; and
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derived from a potentially large supply, countering the critical shortage of banked human blood worldwide.
HemoBioTech, Inc.'s scientific team has delineated molecular mechanisms to explain both HemoTech's non-toxicity and pharmacological activities. This team first identified the factors that lead to toxicity. They then developed both an isolation method that ensures the purity of Hb solutions and a chemical modification method that results in the lack of intrinsic toxicity. This research led to the development of HemoTech, which, in addition to its physiological properties of Hb, has additional pharmacological activities that effectively eliminate blood vessel constriction, improve the release of oxygen into the body and produce an anti-oxidant and anti-inflammatory effect and induces erythropoiesis production (production of red blood cells).
HemoTech Description
Our product, HemoTech, is an oxygen-carrying solution that performs like red blood cells. It can address an increasing yet unmet demand for safe and inexpensive blood in the US and around the world. It also can address many of the medical, logistical and economical concerns associated with red blood cell transfusion.
HemoTech is created by reacting pure bovine hemoglobin with three chemicals: o-adenosine 5'-triphosphate ("o-ATP"), o-adenosine and reduced glutathione ("GSH"). These chemicals permit chemical modification of the hemoglobin to create the observed beneficial activities of HemoTech and introduce necessary changes to the hemoglobin that control oxygen affinity and other biological activities.
The use of o-adenosine has a number of biological benefits. First, it counteracts the properties of hemoglobin that cause narrowing of the blood vessels. Additionally, the o-adenosine reduces the potential of hemoglobin to cause inflammation in the body. HemoTech also relaxes hemorrhage-induced narrowing of the blood vessels. GSH permits the alteration of the surface charge of HemoTech, which is also an essential feature of our novel hemoglobin modification procedure. GSH also lowers oxygen affinity to a level that is near that of native red blood cells.
Bovine blood isolated and utilized for the commercial production of HemoTech will be taken only from healthy cows from a controlled herd with records over several generations and a controlled diet to protect against "BSE" (bovine spongiform encephalopathy, also known as mad cow disease). Immunological test for special proteins called prions which cause BSE can be utilized to test brain and spinal cord material.
We believe that blood substitutes currently undergoing FDA trials have limited potential for success in the broad human blood use market because they generate various levels of hemoglobin-based toxicity. A number of blood substitute candidates were developed before the intrinsic toxicity of hemoglobin was identified, and few companies have modified their approach to creating blood substitutes based on recent findings related to hemoglobin toxicity because of significant investments already made to advance lead compounds through FDA trials. Based on initial studies, we believe that HemoTech's primary benefits include:
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non-toxicity:
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an oxygen affinity that closely mimics that of human red blood cells and does not cause an adverse affect that results from excessive interaction with oxygen;
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the stimulation of the production of red blood cells in the body, which allows the body to replace its native blood supply in half the time it would otherwise take following a transfusion;
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a half life of approximately 24 hours, which is desirable given the body's ability to produce red blood cells, which allows the body to replace it with its own supply;
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high purification, which may eliminate the risk of infection and adverse immune reactions in patients;
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the ability to be stored at 4ºC (39ºF) for six months or more and for an extended period when frozen (compared to 42 days for banked blood at 4ºC), and the ability to be stockpiled easily;
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compatibility with all blood types and availability for administration within minutes;
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the ability to be produced from a ready and vast supply of cow blood; and
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the potential to be produced at a price competitive with current banked blood and other blood substitute products.
Clinical Status - HemoTech
HemoTech underwent foreign pre-clinical and human clinical testing in the late 1980's and early 1990's. Pre-clinical testing included research performed by TTUHSC at its laboratories in Lubbock, Texas in the mid to late 1980's, at ISI St. Antimo Laboratories in Naples, Italy from 1989 through 1991, and a European IND study conducted from 1990 through 1992 at the Research Toxicology Center S.p.A. (the "RTC") in Rome, Italy. This research was based on the following:
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in vivo animal studies; and
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in vitro testing using various human cell lines.
These tests focused on:
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toxicity;
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the way in which the product affects blood vessels;
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immunological and inflammatory activity, as well as the way in which HemoTech interacts with oxygen (which is called oxidative activity);
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stability; and
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therapeutic potential.
We believe the results of these pre-clinical tests support HemoTech's non-toxicity and biological activity, although there can be no assurance that future later stage trials will confirm these findings. These pre-clinical tests generated more than 80 abstracts and papers, and an official European IND report has been issued supporting the pre-clinical non-toxicity results in cell and animal studies.
The human non-FDA clinical trial was performed at the Institut de la Recherche en Sciences de la Sante, Centre de l'Anemie S. S. (Kinshasa, Zaire) in 1990. In that study, nine children suffering from sickle cell anemia received HemoTech in significant volumes (approximately 25% of total blood volume) over a two-hour period. These patients experienced significant near-term improvements as their general condition improved, episodes in which sickle cells block the blood vessels were reduced, pain was
quickly relieved, and blood vessel dilatation and better tissue oxygenation were indicated. The patients were monitored over a three-month period. These studies showed no toxicity and an induction of red blood cell production. These studies were published in the medical journal, Surgical Gynecology & Obstetrics, volume 174, number 5, pages 379-386 (1992). In addition to the clinical improvements in the patients, these initial studies indicate that HemoTech:
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produces no adverse kidney, nervous system, oxidative or inflammatory reactions in humans;
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can reduce the narrowing of blood vessels that follows hemorrhage;
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has low oxygen affinity and can work as a physiological oxygen carrier;
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induces red blood cells production in the body;
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has prolonged intravascular persistence; and
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can sustain a close-to-normal level of plasma in the blood.
The results of the HemoTech clinical studies have not demonstrated any negative side effects. Since the results of the HemoTech clinical studies showed that the product promotes vasodilation, rather than narrowing of the blood vessels, and that the product increases red blood cell production, the product has indicated, in such clinical studies, that it is non-toxic. However, the corporation that sponsored the European IND faced financial difficulties that were independent of the HemoTech program and therefore was unable to continue to sponsor the program. Accordingly, the HemoTech technology was returned to TTUHSC in 1995. TTUHSC subsequently constructed a production facility for HemoTech and attempted to raise money to support the research, development, testing and commercialization of HemoTech, but these activities were outside the scope of TTUHSC's expertise, so the university then sought to license the HemoTech technology. In 2002, we entered into our license agreement with TTUHSC.
We believe the results of the HemoTech clinical trials are significant because they represent a rare example of a non-toxic administration of a blood substitute product. Furthermore, this trial demonstrated in humans the pharmacological activity of HemoTech. There can be no assurance, however, that future later stage trials will support or confirm these findings.
The HemoBioTech team, under the direction of Dr. Simoni, is currently working on advanced research in the fields of toxicity and efficacy which will be funded by us, and expects to develop innovative modifications of the existing patented technology resulting in new clinical applications for HemoTech in the following areas:
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trauma and blood disorders;
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cardiopulmonary bypass surgery including angioplasty;
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organ and tissue transplantation; and
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oncology (the treatment of cancer).
One of the chief objectives of the team is to further evaluate the pharmacological effects of HemoTech. The proposed research is aimed at further understanding the vasodilatory and anti-inflammatory action of HemoTech at the molecular level. The team also is developing improved laboratory methods for the evaluation of clinical samples during HemoTech's human trials, which will be licensed by us.
ORTH Technology
Orthogonal Purification Technology makes use of a combination of techniques that include a series of steps to deactivate and clear transmissible spongiform encephalopathies (“TSE”) agents and viruses from animal fluids. This technology has first been applied to the production of bovine hemoglobin. Such a method does not affect the hemoglobin chemical structure and biochemical/physiological functions and preserves its value as a starting material in free hemoglobin-based blood substitute production. This combinational technique could apply towards purification of TSE agents from animal fluids for the production of hemoglobin and various plasma protein fractions of bovine and human origin. The novelty of this technology is to achieve more efficient elimination and inactivation of TSE based agents and viruses from hemoglobin solutions or various plasma protein fractions. This technology has been tested by a nationally recognized independent laboratory and has shown higher elimination rates than other technologies.
The pharmaceutical industry methods for TSE agent removal are based mainly on affinity and ion exchange chromatography and size-exclusion filtration. The existing industry methods are expensive and time consuming and use chemical treatment which is not applicable to unstable proteins like hemoglobin. The heme protein can easily dissociate into unstable dimers and oxidize thereby losing its ability to transport oxygen. Other industrial filtration methods are capable of reducing prion proteins less efficiently but do not inactivate infectious agents.
The ORTH Technology allows robust and reliable elimination of infectious agents, such as prions and viruses from the final product, using independent clearance steps, inactivation and removal. This is a critical purification process in enhancing the safety that is needed for approval to sell such products. HemoBioTech believes that the orthogonal approach may purify significantly more than the current governmental standard.
The ORTH Technology prevents the spread of transmissible spongiform encephalopathies (“TSE”), also know as prions or mad cow disease, as well as viruses. The Food and Drug Administration (“FDA”) strictly regulates medicinal products and cosmetics that contain ingredients from animals. The technology is being used in the manufacturing of HemoBioTech’s lead product, HemoTech, potentially the first viable substitute for human blood. HemoTech is composed of chemically modified bovine hemoglobin.
The ORTH Technology could allow robust and reliable elimination of infectious agents, such as prions and viruses from the final product, using independent clearance steps, inactivation and removal. This is a critical purification process in enhancing the safety that is needed for approval to sell such products. The market for pharmaceutical and cosmetic products for human use derived from animals (including human sources) is in excess of $7 billion. The ORTH Technology provides a significant improvement in the methods currently available to clear TSE/BSE.
Research and Development Activities
During the years ended December 31, 2008, and 2007, the Company's financial statements reflect, $1,540,000 and $998,000 respectively, charged to expense for research and development activities.
These expenses include the acquisition of a new technology, ORTH, that removes and inactivates infectious agents (which can cause Mad Cow disease) and viruses valued at $655,000 (See also Note D of the Company’s Notes to Financial Statements). Spending related to the Stage IV Sponsored Research Agreement with Texas Tech Health Sciences Center was higher in 2008 compared to the same period a year ago due to increased spending related to laboratory upgrades and costs associated with outside laboratory testing.
On January 22, 2002, the Company entered into an exclusive license agreement with TTUHSC with respect to receiving certain patented rights. The Company is committed to the exploitation of such patented rights. In consideration for entering into the agreement, the Company issued 678,820 shares of common stock to TTUHSC (subject to anti-dilution protection). In addition, the Company has agreed to fund, over a four-year period, $1.2 million to support efforts in incubating and commercializing other TTUHSC technologies. The funding of the $1.2 million is subject to the Company obtaining FDA approval of a blood substitute product. Under the agreement, the Company reserves the right of first refusal on licensing and commercializing other technology developed from such funding. The shares issued were valued at approximately $1,000, their estimated fair value, and charged to operations. As of December 31, 2008, such approval had not been obtained. In addition, the Company reimburses TTUHSC for all intellectual property protection costs and patent maintenance fees related to HemoTech. On May 20, 2004, TTUHSC agreed to waive its anti-dilution protection in exchange for 135,765 additional shares of common stock. Such shares were valued at approximately $115,000, their estimated fair value, and charged to operations.
In addition, in July 2002, the Company entered into a Sponsored Research Agreement (“SRA”) with TTUHSC for the period September 1, 2002 through August 31, 2006, subject to a two-year extension to be mutually agreed on by the parties in the second year of the agreement and prior to December 31, 2006. Our Stage III SRA was for the period January 1, 2006 through December 31, 2006. Through the SRA, the Company funds, on a yearly basis, costs associated with the further research of HemoTech conducted at TTUHSC. In December 2004 and January 2006, the Company paid approximately, $231,000 and $287,000 respectively, to fund the ongoing phases of research under the SRA.
In January 2007, the Company entered into a Stage IV SRA with TTUHSC for the period beginning January 1, 2007. In connection therewith, the Company made an initial payment of approximately $780,000. This amount will be charged to operations as incurred based on monthly reporting to the Company by TTUHSC. Additional payments may be made to TTUHSC under the agreement based on mutually agreed upon budgets. The SRA IV activities include maintaining the animal facility which houses a controlled herd of Hereford cows needed for the production of HemoTech and assistance in the implementation of FDA recommendations received at a Pre-IND meeting with the FDA in April 2006. The SRA IV activities also include the manufacture of HemoTech. The product will be made at the production facility at TTUHSC and will be used for pre-clinical and clinical studies upon acceptance of the IND. The agreement will also involve
further research and development with a focus on additional uses of HemoTech and expanded patent protection.
At December 31, 2008, approximately $215,000 remained as available funds at TTUHSC and are included in the company’s prepaid assets.
Intellectual Property
HemoTech
We have licensed from TTUHSC exclusive worldwide rights to HemoTech under a U.S. patent issued in August 1995. The patent, U.S. Patent No. 5,439,882, entitled "Blood Substitute," and its foreign counterparts, claim various alternative compositions of the novel blood substitute based on hemoglobin of both bovine and human origin as well as methods for its production and use. Protection under this U.S. patent expires on August 8, 2012.
Under the terms of the license agreement, in 2002 we issued to TTUHSC in lieu of any royalties, licensing fees, sublicensing fees and any other payments (other than certain patent maintenance costs), 678,820 shares (approximately 5% of our then-authorized common stock) to TTUHSC. These shares initially were subject to anti-dilution protection until such time as we expend at least $15,000,000 on the research, development, testing and commercialization of HemoTech. In connection with the issuance of units in our October 2004 Private Placement, in lieu of receiving the entire number of shares of common stock to which it would have been entitled as a result of our issuance of units, under the terms of a letter agreement with us, dated May 20, 2004, TTUHSC agreed to accept an additional 135,765 shares of our common stock and an aggregate payment of $60,000 (including payment of patent maintenance costs and expenses paid by TTUHSC) in exchange for removing the anti-dilution provision. We have not made any other payments to TTUHSC under the license agreement and we are not required to make any payments under the license agreement except as follows:
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to reimburse TTUHSC for certain patent maintenance costs of the HemoTech patent and any other patent that becomes covered by the license agreement, within 30 days of receiving notice from TTUHSC that such amounts are due;
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to pay prosecution costs and costs of foreign counterpart applications on all future "designated inventions," which includes patentable inventions created by TTUHSC's employees under the Sponsored Research Agreement; and
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cost to maintain our patent position in 21 foreign countries.
In May 2006 TTUHSC filed a new patent application to cover the induction of erythropoiesis (which is the increase of red blood cell production), which is a major activity of HemoTech. We have exercised our option to include this technology in our license agreement with TTUHSC. There can be no assurance that TTUHSC will be granted a new patent prior to expiration in August 2012 or at all. If issued, this new patent, exclusively owned by TTUHSC, could give us additional protection for the commercial use of HemoTech. Under the terms of our license agreement with TTUHSC, title to inventions made solely by inventive contributions of employees of TTUHSC shall be owned by TTUHSC; title to inventions made solely by inventive contributions of employees of HemoBioTech, shall be owned by HemoBioTech; and title to inventions
made by joint inventive contributions of employees of both TTUHSC and HemoBioTech shall be jointly owned by TTUHSC and HemoBioTech. In addition to the proposed erythropoiesis patent, the Company, working with TTUHSC, are developing a broad patent strategy that focuses on improvements in production and purification methods used in the manufacturing of HemoTech, use of HemoTech and other potential future product formulations for specific medical indications, formulaic modifications of HemoTech's platform technology and use of the platform technology for other targets.
In addition to our U.S. rights, we enjoy patent protection in several European and Asian nations as well as Australia and Canada. In all, our licensed foreign patents have been issued by or designated (in the case of patents issued by the European Patent Office) in 21 foreign nations. Furthermore, continued testing of HemoTech may, although there can be no assurance, result in refinements that are patentable, thereby extending patent protection for forthcoming HemoTech derivatives.
ORTH Technology
We have obtained an exclusive, worldwide license from Texas Tech University for commercialization of the ORTH technology. Our strategic partnership with TTUHSC allows us to utilize the research facilities at TTUHSC and TTUHSC scientists and research staff. Our relationship with TTUHSC is governed by license agreements that, among other things, grant us the exclusive worldwide intellectual property rights to the ORTH technology in exchange for equity ownership and payment of the fees associated with our use of TTUHSC facilities and personnel.
We believe the structure of these license agreements will assist us in obtaining sublicensing contracts with potential pharmaceutical, biotechnology and cosmetic companies and could be positive factors for the commercialization of the ORTH technology. In connection with our licensing agreement, a patent was filed for the ORTH technology in December 2007 covering the ORTH technology. If issued, this new patent, exclusively owned by TTUHSC could give us protection for the commercial use of the ORTH technology.
Supply and Demand
According to a 2008 World Health Organization (WHO) report, the shortage of safe blood is compounded by the shortage of donors in developing countries where blood is needed the most. Of the estimated 81 million units of blood donated every year around the world, only 39% comes from developing countries, contributing to a global blood shortfall of around 40 million units a year. Despite efforts to rectify this imbalance, the average number of blood donations has not improved significantly in developing countries - it remains around 12 times higher in industrialized countries than in developed countries.
Experts predict hospitals will see a 4 million unit-a-year blood shortage by 2030. Without an ample supply, doctors face tragedy in the operating room and soldiers face death on the battlefield. According to the New York Blood Center, 600,000 pints of blood are used each year in the metropolitan area for one million transfusions. Every day, 1,500 pints of blood must be collected to keep pace with demand. During a blood
shortage, deliveries of blood are cut back to local hospitals; a hospital may ask for 100 pints of blood and only receive 75 pints.
Increasing Cost
According to Tissue Link Medical, Technical Brief No. 305, the actual cost of a red blood cell transfusion has increased dramatically in recent years and currently ranges between $500-1,000 per unit of blood. The major factors contributing to this increase include additional costs related to testing, screening, processing, type matching and overhead. In light of recent stricter guidelines to ensure the safety of blood, such as more stringent screening for transmittable diseases and standard leukoreduction (eliminating the white blood cells that can carry infections), the cost of blood is expected to continue to rise.
Blood Supply Safety
Sensitive screening tests in the United States have greatly reduced the risk of infectious disease transmission in the domestic population, but unacceptable risks still remain. According to the American Red Cross, the risk of infection from, or adverse reaction to, a single blood transfusion is:
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1:1,000 - 3,000 for bacterial infections
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1:205,000 for Hepatitis B
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1:935,000 for Hepatitis C
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1:2,135,000 for HIV
These probabilities compound quickly, however, for major procedures, such as organ transplants and trauma, which require fifty units of blood on average. Even in minor surgeries, which require six to eight units of blood, the probabilities of contracting infections or experiencing adverse reactions are not insignificant.
We believe that our product's initial foreign clinical testing produced data that supported HemoTech's biological activity and non-toxicity in humans. Additionally, the product demonstrated anti-inflammatory and vasodilatory activity, as well as erythropoietic activity. No negative side effects have been seen to date, prompting more than 80 abstracts and papers, and an official European Investigational New Drug Application supporting the preclinical non-toxicity results in cell and animal studies. Subsequent to HemoTech's clinical studies, HemoBioTech's researchers delineated the molecular mechanisms of HemoTech. These data confirm the properties of HemoTech observed during clinical studies and constitute positive support for potential future FDA regulatory filings by HemoBioTech as well as valuable information for future product research and development.
Production and Material Supply
The Company's proprietary production method consists of reacting pure bovine hemoglobin with three chemicals--o-adenosine 5'-triphosphate (o-ATP), o-adenosine, and reduced glutathione (GSH)--chemically modifying the hemoglobin to create beneficial activities and effect changes that control oxygen affinity and other biological activities. A benefit of o-adenosine is that it counteracts the hemoglobin properties that cause the
narrowing of blood vessels. It also reduces the potential of hemoglobin to cause inflammation.
The preference for bovine hemoglobin as an erythrocyte substitute, first proposed by the TTUHSC researchers, was based on indications that bovine hemoglobin was more effective than isolated human hemoglobin at transporting oxygen; that bovine erythrocytes were widely available; and that human and bovine diseases transmissible by blood could be avoided by collecting erythrocytes exclusively from select healthy cattle. Bovine blood isolated and utilized for production of HemoTech is taken only from healthy cows, from a controlled herd.
HemoBioTech has the exclusive worldwide license from TTUHSC covering all intellectual property associated with HemoTech. The Company further has access to TTUHSC staff and equipment necessary to produce, test, and certify HemoTech, with access to University laboratory facilities and a blood substitute production facility TTUHSC has constructed on its campus specifically for the production of HemoTech. HemoBioTech has the right to assist in recruiting personnel, including student interns, and obtaining state and federal grants for its research, development, and manufacturing programs.
Business Strategies
We believe the most likely path to commercialization of HemoTech, if ever developed and approved for sale, will involve a partnership with a major pharmaceutical company. Because commercialization of a major pharmaceutical product requires a significant amount of capital, HemoBioTech will seek to identify and enter into partnership agreements with one or more pharmaceutical companies to partner in the late stages of clinical trials.
HemoBioTech's ability to research, develop, and successfully commercialize HemoTech is dependent upon its collaborative relationships with TTUHSC as well as outside consultants. Our outside consultants will collaborate on key projects and are assisting HemoBioTech in their creation and submission of the U.S. IND (Investigational New Drug) application, clinical trials and conducting additional research activities.
In order to achieve its goal, HemoBioTech has determined that it must meet the following objectives:
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Upgrade its Current Production Facilities. To produce HemoTech for Phase I U. S. clinical trials, HemoBioTech must complete upgrades to its current production facilities at TTUHSC. The initial phase of this plan was completed at the end of the second quarter of 2005. The second phase was completed during 2006. Financing the initial phase was included in HemoBioTech's Stage II Sponsored Research Agreement payment to TTUHSC in December 2004 and the additional upgrade is part of the Stage III sponsor agreement signed in 2006 as well as additional expenditures if necessary. Our Stage IV SRA includes upgrades to our production facilities based on FDA recommendations.
Preparation and Submission of U.S. IND Application. Under the terms of their Stage II sponsored research agreement, TTUHSC provided HemoBioTech support services for preparation of its U.S. IND application. This included conversion of data from European IND application into electronic format, summarization and analysis of its pre-clinical CMC ("Chemistry Manufacturing and Controls") data and analysis of its proposed Phase I U.S. clinical trial testing procedures. The Company expects to complete preparation of its U.S. IND application and is targeting to submit it to the FDA in late 2010. The estimated cost of submitting the application as well as the production of HemoTech is approximately $7,000,000 or greater.
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Phase I of our U.S. Clinical Trials. A Phase I U.S. clinical trial for HemoTech will commence subsequent to the acceptance of the IND application. We estimate that our Phase I clinical trials (including costs of doing additional research and development of HemoTech during our Phase I U.S. clinical trials and the operational and overhead costs that we will incur during our Phase I U.S. clinical trials) could cost approximately $10.0 million, although the final cost could be more or less than this estimate.
During June 2007 we engaged a U.S. based Clinical Research Organization to assist the Company in submitting technical information to the Drug Controller General of India (DCGI) for the purpose of obtaining regulatory authority to conduct clinical trials in India. A goal is to establish clinical trials in India and if successful commercialize HemoTech in India.
Competition
If approved for commercial manufacture and marketing, we believe HemoTech will have a unique competitive advantage over other products under testing or under development since we believe HemoTech is the only product that addresses all aspects of the intrinsic toxicity (vasoconstriction, oxidative stress and inflammatory reactions) of hemoglobin. We believe the lack of toxicity in HemoTech, based on studies to date, is due to the chemical modification of the hemoglobin in our product. Furthermore, we believe our bovine-derived red blood cell product provides HemoTech with an additional competitive edge over products developed from outdated human red blood cells or from perfluorochemicals (which are synthetic chemical blood substitutes), because bovine blood is safer, more readily available, more convenient and more cost effective.
Our key competitors include:
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Northfield Laboratories has been developing PolyHeme®, which is based on hemoglobin from what we believe to be outdated human blood. Although Northfield completed its Phase III U.S. clinical trials, in 2002 Northfield's product did not receive approval by the FDA for use in elective surgery due to results concerning safety and efficacy. Northfield has completed the PolyHeme(R) Phase III U.S. clinical trial for use in ambulatory trauma cases. Since Northfield's product has completed the Phase III U.S. clinical trial, it could be deemed to be at a more advanced trial stage than HemoTech, although their product was previously rejected by the FDA for use in elective surgery.
·
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Biopure Corporation has been developing Hemopure®, a bovine hemoglobin-based blood substitute. Although Biopure completed its Phase III U. S. clinical trials, Biopure's product failed to receive a biologic license application clearance from the FDA in 2003. The FDA has asked Biopure to perform additional safety testing on its product.
·
Sangart, Inc. has created a hemoglobin-based blood substitute, Hemospan. The product is in clinical testing in Europe.
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Synthetic Blood International, Inc. is a development stage company, developing biotechnology products. It specializes in creating pharmaceuticals and medical devices in the fields of liquid ventilation, oxygen therapeutics, implanted glucose sensing, and blood substitutes using flurocarbon-based technology. Prior flurocarbon-based technologies have suffered from toxicity.
Government Regulation
HemoBioTech, Inc.'s product, manufacturing activities, and proposed clinical trial of that product are subject to regulation by the United States Food and Drug Administration ("FDA") and by other federal, state, local and foreign authorities. Pursuant to the Food, Drug, and Cosmetic Act of 1938, as amended ("FD&C Act"), the Public Health Service Act ("PHS Act"), and the regulations promulgated thereunder, the FDA regulates the development, clinical testing, manufacture, packaging, labeling, storage, distribution and promotion of drugs and biologics, including blood and blood substitutes.
The FDA has expansive regulatory authority which may be enforced through product recalls, seizures and other civil and criminal sanctions. The FDA is considering changes to its approach to "follow-on biological" products (which are the biological product equivalent to generic pharmaceutical products). Changes that would facilitate the approval of such products could have an adverse impact on the Company's long term strategy to the extent that its product is deemed to be a biological product.
FDA APPROVAL PROCESS--PRECLINICAL AND CLINICAL TRIALS. A new drug or biologic cannot be distributed in the United States unless approved by the FDA; FDA approval of new drugs and biologics comes at end of a lengthy process and only after the FDA determines that the article at issue is safe and effective for its intended use or uses. Whether FDA approves a product is a function of the agency's discretion.
In order to gather sufficient data to demonstrate the safety and efficacy of a new drug or biologic, the manufacturer is usually required to sponsor clinical trials, i.e., trials in humans, under the jurisdiction of the FDA. In order to conduct or sponsor a clinical trial of a new drug or biologic, the manufacturer must submit an Investigational New Drug ("IND") application. The IND application must contain sufficient and specific animal test data, toxicological, pharmacological and other data to assure FDA that the initial clinical trial will not endanger the health of the patients or subjects involved. The Company has not submitted an IND to clinically test HemoTech but is targeting submitting its IND during late 2010. A Company may not begin clinically testing until its IND has been approved by the FDA or 30 days have elapsed since the filing and the FDA
has not objected. However, as a practical matter, few manufacturers will begin clinical testing if the FDA has expressed concern about the proposed study.
During June 2007 we engaged a U.S. based Clinical Research Organization to assist the Company in submitting technical information to the Drug Controller General of India (DCGI) for the purpose of obtaining regulatory authority to conduct clinical trials in India.
The FDA recognizes three clinical trial phases. A Phase I study is typically closely monitored and may be conducted in patients or volunteer subjects. These studies are designed, in part, to determine the metabolic and pharmacologic actions of the drug or biologic, the side effects associated with increasing doses, to gain early evidence, if possible, of its effectiveness, and gather sufficient information to permit the design of well-controlled, scientifically valid Phase II study. Usually, a Phase I study involves between 20 and 80 subjects or patients, as the case may be.
Phase II studies include controlled clinical studies to evaluate the effectiveness of the drug or biologic for a particular indication in patients with a given condition under study to determine the common short-term side effects and risks associated with the drug or biologic. Phase II studies are well controlled, closely monitored, and conducted on a relatively small cohort usually involving no more than several hundred patients.
Phase III studies are expanded, well controlled and closely monitored studies designed to provide sufficient data so that FDA can determine the product's effectiveness and safety and to provide adequate basis for physician labeling. Phase III studies usually include from several hundred to several thousand patients.
Research and development activities are costly, time-consuming, and may not be successful, and there can be no assurance that our product candidate, HemoTech, even if it is approved to enter Phase I clinical trials, will be approved to enter subsequent phases or will be approved for marketing by the FDA. Moreover, even after completion of a Phase III study, FDA may decline to approve the New Drug Application or Biologics License Application, as the case may be.
FDA REGULATION. The FDA closely regulates companies that sponsor clinical trials, that manufacture drugs or biologics that are being clinically tested or that manufacture approved products. The FDA may conduct an inspection of any Company facility and may take regulatory action if it believes that Company has violated the FD&C Act or PHS Act, including by way of example, issuing observational findings (FDA 483), issuing a Warning Letter, seizing products, placing a "hold" on an IND, revoking INDs, revoking approved NDAs or BLAs, or criminally prosecuting the Company or its employees. During clinical testing phases, FDA may inspect to ensure, among other things, that the health and welfare of the patients enrolled in clinical studies are being appropriately protected, that all subjects have executed informed consent forms approved by an Institutional Review Board, and that the product is being manufactured in a way that ensures that it is not adulterated. Post approval surveillance by the FDA is equally rigorous.
FDA GOOD MANUFACTURING PRACTICES AND REPORTING. The FDA requires drug and biologics manufacturers to comply with Good Manufacturing Practices
(“GMP”) regulations. The regulations require that manufacturers comply with various quality control requirements pertaining to design controls, purchasing contracts, organization and personnel, including manufacturing process design, buildings, environmental control, cleaning and sanitation; equipment and calibration of equipment; drug or biologics components or raw materials; manufacturing specifications and processes; labeling and packaging; in-process and finished product inspection and acceptance; and record keeping requirements. Generally, GMP status is necessary to manufacture products for human use.
Employees
As of March 24, 2009, the Company has four full-time employees and four employees through a contract with TTUHSC. Outside consultants are employed as needed to provide various services. We rely heavily on personnel employed by TTUHSC who provide services to us under the Sponsored Research Agreement. In addition, we also employ outside consultants from time to time to provide various services. We have experienced good employee relations and are not and never have been a party to a collective bargaining agreement.
The Company’s Executive Officers are as follows:
Name
Age
Position
Arthur P. Bollon, Ph.D.
Chairman of the Board of Directors, President and Chief Executive Officer
Mark J. Rosenblum, CPA
Chief Financial Officer and Secretary
Jan Simoni, PhD., DVM
Acting Vice President and Principal Investigator of Research and Development and Advisor
Mario Feola, M.D.
Chief Medical Officer
Arthur Bollon. Since April 8, 2003, Dr. Bollon has served on a full-time basis as our Chairman, President and Chief Executive Officer. In 1991, Dr. Bollon was a founder of Cytoclonal Pharmaceutics, Inc., a publicly traded biopharmaceutical company, and served as Chairman, President and Chief Executive between 1991 and 2002. In 1987 Dr. Bollon was a founder of Wadley Biosciences Inc. / LPL, a joint venture between Wadley Institute and Phillips Petroleum, and served as Chairman, President and Chief Executive Officer from 1987 to 1991.
Mark J. Rosenblum. Mr. Rosenblum has served as our Chief Financial Officer since April 1, 2005. From August 1985 through June 2003, Mr. Rosenblum was employed by Wellman, Inc., a public chemical manufacturer. Between 1996 and 2003, Mr. Rosenblum was the Chief Accounting Officer, Vice President and Controller at Wellman, Inc. Mr. Rosenblum is a certified public accountant.
Jan Simoni. Dr. Simoni has served as our Acting Vice President and Principal Investigator of Research and Development since 2002, through a Sponsored Research Agreement with Texas Tech University, where he is employed. Dr. Simoni has also served as an Advisor since July, 2005. Since 1993, Dr. Simoni has served as the Blood
Substitute Group Leader at TTUHSC and is an Professor of Research in the Department of Surgery at TTUHSC, where Dr. Simoni co-invented HemoTech.
Mario Feola. Dr. Feola has been our full-time Chief Medical Officer since November 1, 2004. From December 14, 2003 through October 31, 2004, Dr. Feola served as our Chief Medical Officer on a part-time basis. Dr. Feola has served as a Professor of Surgery at TTUHSC, where Dr. Feola co-invented HemoTech.
ITEM 1A.
ITEM 1A. RISK FACTORS
You should consider the following matters when reviewing the information contained in this document. You also should consider the other information incorporated by reference in this document.
We have a history of losses and our future profitability is uncertain.
The financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred cumulative losses of $15,323,000 from inception through December 31, 2008, and has not generated any revenue, and has been dependent on funding operations through the private sale of convertible debt and equity securities. These conditions indicate that there is substantial doubt that the Company will be able to continue as a going concern. The auditors have issued a “Going Concern” opinion for our 2008 financial statements.
We expect to continue to incur substantial losses and may not generate significant revenue, if any, for the foreseeable future. Our ability to generate revenue is dependent on obtaining additional financing for our planned operations. Our immediate planned operations for the next twelve months include the payment of our general and administrative expenses (including salaries, legal and other professional fees, consulting and advisory fees), the costs associated with making certain upgrades to the HemoTech production facility, to begin the production of HemoTech, conduct animal studies, including preparation of our U.S. IND application. At December 31, 2008, the Company had $443,000 in cash and cash equivalents. At March 31, 2009, it had $130,000. We believe that the cash available will not be sufficient to fund our current operations beyond six months. The Company recently significantly reduced its actual and projected expenses and plans to aggressively manage costs which can be reduced at management’s discretion based on the company’s available cash. The Company is exploring opportunities to raise additional capital.
We are a development stage company with no revenues or profits.
We are in the development stage and, through March 24, 2009, have generated no sales revenue and have no prospects for revenue in the foreseeable future. We currently have no source of operating revenue and there can be no assurance that we will be able to develop any revenue source or that our operations will become profitable, even if we are able to commercialize any products. Further, as a development stage company, we have a limited relevant operating history on which an evaluation of our prospects can be made. Such prospects must be considered in light of the risks, expenses and difficulties frequently encountered in establishing a new business in the evolving, heavily regulated
biotechnology industry, which is characterized by an increasing number of market entrants, intense competition and a high failure rate. In addition, significant challenges are often encountered by businesses shifting from developmental to commercial activities.
Following completion of our U.S. IND application, the next stage of our planned operations will include submission of our U.S. IND application to the FDA, and upon approval, commencement and completion of our Phase I U.S. clinical trials. Additional operations will include further research and development of HemoTech and payment of operational and overhead expenses that we will incur during our Phase I U.S. clinical trials as well as preparation for Phase II clinical trials, assuming Phase I clinical trials are successful. In order to complete these additional planned operations, we will need to raise additional capital. If we fail to generate enough cash resources, either from future equity or debt sales, exercise of our remaining warrants or revenue, our ability to implement our business plan and complete these planned operations will be materially affected, and you may lose all or substantially all of your investment.
We are reliant on the success of our two products which are in an early stage of product development and may never be successfully developed or, if successfully developed, may never become viable marketable products.
Our products are on early stage development and if we fail to successfully develop these products, we have no other products on which our business can be developed. There can be no assurance that our research and development activities will result in any commercially viable products. The development of our products will be subject to the risks of failure inherent in the development of products based on innovative technologies and the expense and difficulty of obtaining regulatory approvals. One of our products is a human blood substitute which is currently under development and will require significant additional research and development and pre-clinical testing and clinical testing prior to submission of any regulatory application for commercial use. There can be no assurance that our product development efforts will be successfully completed, that our products currently under development will be successfully transformed into marketable products, that required regulatory approvals can be obtained, that the products can be manufactured at acceptable cost in accordance with regulatory requirements or that any of the approved products can be successfully marketed or achieve customer acceptance.
We depend on key personnel, and the loss of such personnel could significantly impair our ability to further develop HemoTech, implement our business plan or continue operations.
Our success depends on the continued contributions of our executive officers and scientific and technical personnel and consultants. We are particularly dependent on Arthur P. Bollon, Ph.D., our Chairman, President and Chief Executive Officer, Dr. Mario Feola, our Chief Medical Officer, and Dr. Jan Simoni, our Acting Vice President and Principal Investigator or Research and Development and Advisor. Drs. Feola and Simoni are the two principal TTUHSC researchers who developed HemoTech. Drs. Feola and Simoni continue to be the two main developers of HemoTech. Dr. Simoni is an employee of TTUHSC and his services are made available to us under our Sponsored Research Agreement with TTUHSC. Dr. Simoni's activities related to research and development, production, regulatory and clinical testing of HemoTech are covered under the Sponsored
Research Agreement with TTUHSC, which may be terminated at any time by either party on 90 days' prior written notice.
We currently have four full-time employees including Drs. Bollon and Feola and Mr. Mark Rosenblum, our Chief Financial Officer. We have entered into an employment agreement with Dr. Bollon which expires in October 2010, and we have entered into an employment agreement with Dr. Feola, in which Dr. Feola agreed to serve as our Chief Medical Officer until such time as either party terminates Dr. Feola's employment agreement. We have also entered into an employment agreement with Mr. Rosenblum, which expires in April 2010. We do not maintain "key person" life insurance on the lives of any executive officer and their death or incapacity would have a material adverse effect on us. During our limited operating history, many of our key responsibilities have been assigned to a relatively small number of individuals. The competition for qualified personnel is intense, and the loss of services of certain key personnel could adversely affect our business, although we have not experienced problems attracting or retaining key personnel to date.
If our product offerings are not commercially successful, we will be unable to successfully generate revenue.
We expect significant amount of our revenues to come from the production and distribution of our products. The success of these offerings depends primarily on their acceptance by the public, the medical community, and other third-party consumers and payers, which is difficult to predict. The commercial success of our products depends on the availability of alternative forms of technology and general economic conditions and other tangible and intangible factors, all of which can change quickly. If we fail to produce these products with broad industry appeal, we will be unable to successfully generate revenue.
The market for our products is competitive and we may not be able to compete successfully against competitors that may be having substantially more development, marketing and sales resources than we do.
The market for our products is competitive and there can be no assurance that we will be able to compete successfully in these markets. We cannot be assured that some other competitive technologies have not been, or will not be, developed by either government, academic or private entities. Any competing technologies could make our technologies either obsolete or of lesser value. Many of our competitors have greater financial and other resources than we have, which may limit our ability to compete effectively. See “Competition” above.
Although the proposed products of our main competitors in the human blood substitute market have been rejected by the FDA, have been abandoned and are not yet ready to submit their applications to the FDA for approval of their products, many of these competitors are continuing to develop and test their respective products. There can be no assurance that one of all these products may be approved by the FDA before our blood substitute product, HemoTech, to the extent HemoTech ever receives FDA approval.
In addition, our competitors also may generally be able to respond more quickly to new or emerging technologies or changes in the regulatory requirements. These competitors may also:
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benefit from greater economies of scale;
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offer more aggressive pricing;
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devote greater resources to the promotion of their products; and
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be better positioned to develop future technologies.
We depend on, and will continue to depend on, collaboration with and licenses from third parties, and if we are not able to enter into such collaborations or licenses, or if these collaborations or licenses expire, terminate or fail, we may not be able to further develop our products or implement our business plan without substantial additional expenditures and delays, if at all.
In addition to maintaining our collaborative relationship with TTUHSC, our strategy for the development, clinical testing, manufacturing and commercialization of our proposed products includes entering into various collaborations with corporate partners, licensors, licensees and other third parties in the future, and is dependent on the subsequent success of these third parties in performing their responsibilities. We intend to seek to enter into additional arrangements with other collaborators, although there can be no assurance that we will be able to enter into such collaborations and licenses, or, to the extent that we do, that such collaborations will be successful. Further, there can be no assurance that any future arrangements we may enter into will lead to the development of our products with commercial potential, that we will be able to obtain proprietary rights or licenses for proprietary rights with respect to any technology developed in connection with these arrangements or that we will be able to insure the confidentiality of any proprietary rights and information developed in such collaborative arrangements or prevent the public disclosure thereof.
In general, collaborative agreements provide that they may be terminated under certain circumstances. There can be no assurance that we will be able to extend any of our product collaborative agreements on their termination or expiration, or that we will be able to enter into new collaborative agreements with existing or new partners in the future. To the extent we choose not to or are unable to establish any additional collaborative arrangements, it would require substantially greater capital to undertake research, development and marketing of our proposed products into certain markets or find that the development, manufacture or sale of our proposed products in such markets is adversely affected by the absence of such collaborative agreements.
The FDA regulatory process is costly, lengthy and requires specific expertise, and even if we invest the time and money and other resources required to advance through the FDA approval process, we may never receive FDA approval for our products.
We will rely initially on consultants with prior experience working with the FDA. We expect to hire experienced employees and consultants to analyze, prepare and present and IND application to the FDA for our blood substitute product. The process of obtaining regulatory approvals can be extremely costly and time consuming and there is no guarantee of success. If we do not receive approval of our IND application, we will not be able to proceed with Phase I U.S. clinical testing. In addition, clinical testing is not
predictable. Even if the FDA approves the IND application, we cannot guarantee that the FDA will approve our Phase I U.S. clinical results. Our failure to obtain required regulatory approvals would have a material adverse effect on our business, financial condition and results of operations and could require us to curtail or cease our operations.
Our newly licensed technology from TTUHSC titled Orthogonal Method for the Removal of Transmissible Spongiform Encephalopathy Agents from Biological Fluids (“ORTH Technology”) helps in the clearance and inactivation of infectious agents such as prions (which can cause Mad Cow Disease) and viruses. Such removal and inactivation is critical in the purification of animal products for human use. It can be used not only for HemoTech production but also has the potential for generating sublicensing revenue from pharmaceutical, biotechnology and the cosmetic industries. We will rely on internal personnel and external consultants to analyze and present this product for appropriate approval in order to market this product. There can be no assurance that regulatory approval for this product will be obtained on a timely basis. In addition, our competitors also may generally be able to respond more quickly to similar and new or emerging technologies or changes in the regulatory requirements and get an approval before us.
The FDA and comparable agencies in foreign countries impose substantial requirements on the introduction of therapeutic and diagnostic pharmaceutical and biological products through lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Satisfaction of these requirements typically takes several years or more and varies substantially based on the type, complexity and novelty of the product. The regulatory review may result in extensive delay in the regulatory approval process. Regulatory requirements ultimately imposed could adversely affect our ability to clinically test, manufacture or market potential products. Government regulation also applies to the manufacture and marketing of pharmaceutical and biological products. The effect of government regulation may be to delay marketing of new products for a considerable period of time, to impose costly procedures on our activities and to furnish a competitive advantage to larger companies that compete with us.
There can be no assurance that FDA or other regulatory approval for any products developed by us will be granted on a timely basis or at all. Any such delay in obtaining, or failure to obtain, such approvals would adversely affect the marketing of any contemplated products and the ability to earn product revenue. Further, regulation of manufacturing facilities by state, local and other authorities is subject to change. Any additional regulation could result in limitations or restrictions on our ability to utilize any of our technologies, thereby adversely affecting our operations.
We need to raise additional capital to continue our business.
We do not have sufficient funds to meet the costs of our immediate planned operations. To meet the costs of the next stage of its planned operations, including the cost of upgrades to the HemoTech production facility and conducting additional research and development, submission of its U.S. IND application, commencing and completing Phase I U.S. clinical trials, conducting additional research and development of HemoTech as Phase I U. S. clinical trials progress, and paying for operational and overhead costs that will be incurred during Phase I U.S. trials, we will need to raise additional capital. It is
likely that we will seek to meet these liquidity requirements through public or private equity offerings or debt financings. There can be no assurance that we will be able to secure additional financing or obtain favorable terms on such financing if it is available.
We plan to raise additional funds in the future by issuing additional shares of common stock or securities such as convertible notes, options, warrants or preferred stock that are convertible into common stock. Any such sale of common stock or other securities will lead to further dilution of the equity ownership of existing holders of our common stock.
We have no marketing experience, are dependent on third parties for marketing services, and we may never be able to successfully market HemoTech, even if it receives FDA approval.
We have no marketing and sales personnel and no experience with respect to marketing biochemical or pharmaceutical products. Significant additional expenditures and management resources would be required to develop an internal sales force, and there can be no assurance that such funds would be available. Further, there can be no assurance that, with such a sales force, we would be successful in penetrating the markets for any products developed. We will seek to enter a partnership to develop and market our product. Under certain of these agreements, our marketing partner may have the responsibility for all or a significant portion of the development and regulatory approval. In the event that the marketing and development partner fails to develop a marketable product or fails to market a product successfully, our business may be adversely affected. The sale of certain products outside the United States will also be dependent on the successful completion of arrangements with future partners, licensees or distributors in each territory. There can be no assurance that we will be successful in establishing any additional collaborative arrangements, or that, if established, such future partners will be successful in commercializing products.
We may be sued for product liability in the future, and since we currently maintain no product liability insurance, in the event of a successful suit against us, we may not be able to pay any awarded damages or, if we are able to do so, payment of any such awarded damages could significantly deplete our financial resources.
The use of our proposed HemoTech blood substitute product in clinical trials and the marketing of any product may expose us to product liability claims. We currently have no product liability insurance, but will, however, attempt to obtain such insurance prior to commencement of such trials, if any. We are required by our license agreement with TTUHSC to obtain such insurance. There can be no assurance that we will be able to obtain such insurance or, if obtainable, that such insurance can be acquired at a reasonable cost or will be sufficient to cover all possible liabilities. In the event of a successful suit against us, lack or insufficiency of insurance coverage could have a material adverse effect on us. Furthermore, certain distributors of pharmaceutical and biological products require minimum product liability insurance coverage as a condition precedent to purchasing or accepting products for distribution. Failure to satisfy such insurance requirements could impede our ability to achieve broad distribution of our proposed product, which would have a material adverse effect on our business and financial condition.
We currently use labs, equipment, personnel, research and development facilities and production facilities located at TTUHSC, and if we ever seek to or need to find or build alternate facilities, we may not be able to do so at all or, if we are, it will be costly and may cause significant delays in the development and commercialization of HemoTech, which could materially impair our operations.
We do not currently own, lease or operate any laboratory, research and development or manufacturing facilities. Our current plans include using labs, equipment, personnel and an upgraded blood substitute production facility located at TTUHSC for the production of HemoTech under our Sponsored Research Agreement. After the completion of Phase II U.S. clinical trials for HemoTech, if any, our Sponsored Research Agreement with TTUHSC contemplates that we may establish independent manufacturing facilities either alone or through partnering. Establishing our own facilities would result in significant additional expenses and may result in potential delays in testing and production. Building and operating our own production facilities would require substantial additional funds and other resources of which there can be no assurance that we will be able to secure nor can there be any assurance that we would be able to enter into any arrangement with third parties to manufacture our product, if any, on acceptable terms or at all. Certain products outside the United States will also be dependent on the successful completion of arrangements with future partners, licensees or distributors in each territory. There can be no assurance that we will be successful in establishing any additional collaborative arrangements, or that, if established, such future partners will be successful in commercializing products.
Uncertainty over proposed health care reforms and whether the costs of using our proposed product will be reimbursed to consumer health insurance companies could cause our product to become unmarketable, which would result in our inability to generate revenue.
Our success in generating revenue from sales of our proposed HemoTech blood substitute product may depend, in part, on the extent to which reimbursements for the costs of such a product and related treatments will be available from government health administration authorities, private health insurers and other organizations. Significant uncertainty exists as to the reimbursement status of newly-approved health care products. There can be no assurance that adequate third-party insurance coverage will be available for us to establish and maintain price levels sufficient for realization of an appropriate return on our investment in developing new products. Government and other third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement of new therapeutic and diagnostic products approved for marketing by the FDA and by refusing, in some cases, to provide any coverage of uses of approved products for disease indications for which the FDA has not granted marketing approval. If adequate coverage and reimbursement levels are not provided by government and third-party payors for uses of our product, then market acceptance of these products would be adversely affected.
Risks Related to Our Intellectual Property
Our success depends on our ability to protect our intellectual property.
We intend to protect our intellectual property through patents and trademarks. The patent positions of biotechnology companies generally are highly uncertain and involve complex legal and factual questions that will determine who has the right to develop a particular product or process. As a result, we cannot predict which of our patent applications will result in the granting of patents or the timing of the granting of the patents. Additionally, many of our competitors have significantly greater capital with which to pursue patent litigation. As of March 24, 2008, we have no threatened or pending intellectual property-related litigations, legal actions, investigations, court challenges, negotiations or similar activities. There can be no assurance that we would have the resources to defend our patents in the face of a lawsuit. Further, we rely on trade secrets, know-how and other proprietary information. We seek to protect this information, in part, through the use of confidentiality agreements with employees, consultants, advisors and others. Nonetheless, there can be no assurance that those agreements will provide adequate protection for our trade secrets, know-how or other proprietary information and prevent their unauthorized use or disclosure. There is also the risk that our employees, consultants, advisors or others will not maintain confidentiality of our trade secrets or proprietary information, or that this information may become known in some other way or be independently developed by our competitors. We may also be exposed to future litigation by third parties based on claims that our patents, products or activities infringe on the intellectual property rights of others or that we have misappropriated the trade secrets of others. Any litigation or claims against us, whether or not valid, could result in substantial costs, could place a significant strain on our financial and managerial resources, and could harm our reputation. In addition, intellectual property litigation or claims could force us to do one or more of the following, any of which could have a material adverse effect on us or cause us to curtail or cease our operations:
·
cease testing, developing, using and commercializing HemoTech;
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obtain a license from the holder of the infringed intellectual property right, which could also be costly or may not be available on reasonable terms; or
·
reformulate HemoTech, which may be impossible or too costly.
The patents underlying our products, may expire prior to our receipt, if ever, of FDA or foreign approval, to the extent such approval is granted at all.
We have obtained from TTUHSC exclusive worldwide rights to HemoTech under a U.S. patent issued in August 1995 as well as various foreign patents. The patent, U.S. Patent No. 5,439,882, entitled "Blood Substitute" and its foregoing counterparts claims various alternative compositions of the novel blood substitute based on hemoglobin of both bovine and human origin as well as methods for its production and use. Protection under the U.S. patent expires on August 8, 2012, which may coincide with or even precede our receipt of FDA approval of HemoTech; to the extent FDA approval is granted at all. The Japanese patent and certain of the European patents may also expire on or after August 8, 2012. If the U.S. patent expires before we are able to commercialize our proposed HemoTech product, then we could utilize new potential patents related to HemoTech, such as the proposed pending erythropoiesis patent, seek commercial exclusivity for a defined time with the FDA and utilize our trade secrets for manufacturing and use of
HemoTech. If we are unable to obtain additional patent coverage in advance of the time the existing patent expires or at all, and we fail to receive additional patents, then our competitive position and our ability to successfully commercialize or generate revenues from sales of HemoTech would be materially and adversely affected.
We have filed for a patent for our newly licensed technology from TTUHSC titled Orthogonal Method for the Removal of Transmissible Spongiform Encephalopathy Agents from Biological Fluids (“ORTH Technology”) although there can be no assurance that the patent would be successfully obtained. Our failure to obtain the patent would adversely affect the marketing of any contemplated products and the ability to earn product revenue. In addition, our competitors also may generally be able to get a patent approval before us for comparable technologies.
Risks Related to Our Common Stock
The public market for our common stock is thin and subject to manipulation.
The market price of our common stock, which is traded on the OTC Bulletin Board, may fluctuate significantly in response to the following factors, most of which are beyond our control:
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variations in our quarterly operating results;
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changes in securities analysts’ estimates of our financial performance;
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changes in general economic conditions and in the healthcare industry;
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changes in market valuations of similar companies;
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announcements by us or our competitors of significant new contracts with artists, acquisitions, strategic partnerships or joint ventures, or capital commitments;
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loss of a major customer, partner or joint venture participant; and
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the addition or loss of key managerial and collaborative personnel.
The equity markets have, on occasion, experienced significant price and volume fluctuations that have affected the market prices for many companies’ securities and that have often been unrelated to the operating performance of these companies. Any such fluctuations may adversely affect the market price of our common stock, regardless of our actual operating performance. As a result, stockholders may be unable to sell their shares, or may be forced to sell them at a loss.
Obtaining additional capital through the future sale of common stock and derivative securities will result in dilution of stockholder interests.
We plan to raise additional funds in the future by issuing additional shares of common stock or securities such as convertible notes, options, warrants or preferred stock that are convertible into common stock. Any such sale of common stock or other securities will lead to further dilution of the equity ownership of existing holders of our common stock.
We do not intend to pay cash dividends to our stockholders, so you will not receive any return on your investment in our company prior to selling your interest in HemoBioTech.
We have never paid any dividends to our stockholders. We currently intend to retain any future earnings for funding growth and, therefore, do not expect to pay any cash dividends in the foreseeable future. If we determine that we will pay cash dividends to the holders of our common stock, we cannot assure that such cash dividends will be paid on a timely basis. As a result, you will not receive any return on your investment prior to selling your shares in our company and, for the other reasons discussed in this “Risk Factors” section, you may not receive any return on your investment even when you sell your shares in our company.
We have agreed to indemnify our officers and directors and, if an indemnification claim is successfully made, we may be forced to use our working capital to pay our indemnification obligations, which could result in our inability to use such working capital for our operations.
Our certificate of incorporation includes certain provisions permitted under Delaware law allowing our officers and directors to be indemnified against certain liabilities. Our certificate of incorporation also limits, to the fullest extent permitted by Delaware law, a director’s liability for monetary damages for breach of fiduciary duty, including gross negligence, except liability for the following:
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breach of the director’s duty of loyalty;
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acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law;
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the unlawful payment of a dividend or unlawful stock purchase or redemption; and
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any transaction from which the director derives an improper personal benefit.
Delaware law does not eliminate a director’s duty of care and this provision has no effect on the availability of equitable remedies such as injunction or rescission based on a director’s breach of the duty of care. In December 2004, we purchased a $5.0 million insurance policy providing coverage for certain liabilities of our officers and directors. In addition, we have entered into separate director and officer indemnification agreements with each of Arthur Bollon, Ghassan Nino, Robert Baron, Bernhard Mittemeyer, Mark Rosenblum and Robert Comer, under which we agreed to indemnify and advance expenses to each of these directors and officers, as the case may be, against any losses arising out of or relating to any actual, alleged or suspected act or failure to act by such person in his capacity as a director, officer, employee or agent of HemoBioTech or any affiliated company, trust, joint venture, corporation, limited liability company or partnership for which such person was acting or had acted as a director, officer, employee or agent at HemoBioTech’s request. Further, in connection with Ghassan Nino’s resignation as an officer of HemoBioTech under an employment separation and release agreement dated as of July 15, 2004, we agreed to indemnify Mr. Nino and his heirs, executors, administrators and assigns, against all losses arising out of any claim made by a third party against Mr. Nino or HemoBioTech as a result of an action taken or not taken by Mr. Nino as an officer of HemoBioTech, so long as such actions or inactions were taken or not taken by Mr. Nino in good faith within the scope of his employment.
Our common stock is considered a “penny stock” and is subject to regulations that limit or restrict the potential market for our stock.
Our common stock is deemed to be “penny stock” (as that term is defined under the Securities Exchange Act of 1934, as amended) resulting in increased risk to our investors and certain requirements being imposed on some brokers who execute transactions in our common stock. In general, a penny stock is an equity security that:
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is priced under $5.00;
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is not traded on a national securities exchange, the Nasdaq Global Market or the Nasdaq Capital Market;
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may be listed in the “pink sheets” or the OTC Bulletin Board;
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is issued by a company that has less than $5.0 million in net tangible assets (if it has been in business less than three years) or has less than $2.0 million in net tangible assets (if it has been in business at least three years); and
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is issued by a company that has average revenues of less than $6.0 million for the past three years.
At any time the common stock qualifies as a penny stock, the following requirements, among others, will generally apply:
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certain broker-dealers who recommend penny stock to persons other than established customers and accredited investors must make a special written suitability determination for the purchaser and receive the purchaser’s written agreement to a transaction prior to sale.
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Prior to executing any transaction involving a penny stock, certain broker-dealers must deliver to certain purchasers a disclosure schedule explaining the risks involved in owning penny stock, the broker-dealer’s duties to the customer, a toll-free telephone number for inquiries about the broker-dealer’s disciplinary history and the customer’s rights and remedies in case of fraud or abuse in the sale.
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In connection with the execution of any transaction involving a penny stock, certain broker-dealers must deliver to certain purchasers the following:
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bid and offer price quotes and volume information;
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the broker-dealer’s compensation for the trade;
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the compensation received by certain salespersons for the trade;
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monthly accounts statements; and
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a written statement of the customer’s financial situation and investment goals.
Should a broker-dealer required to provide the above disclosure or fail to deliver such disclosure on the execution of any transaction involving a penny stock in violation of federal or state securities laws, you may be able to cancel your purchase and get your money back. In addition, if the stocks are sold in a fraudulent manner, you may be able to sue the persons and firms that caused the fraud for damages. If you have signed an arbitration agreement, however, you may have to pursue your claim through arbitration.
These requirements significantly add to the burden of the broker-dealer and limit the market for penny stocks. These regulatory burdens may severely affect our ability to create a market for our stock and the liquidity and market price for our common stock.
A significant number of our shares will be eligible for sale and their sale or potential sale may depress the market price of our common stock.
Sales of a significant number of shares of our common stock in the public market could harm the market price of our common stock. 20,642,125 shares of our common stock are currently outstanding, as of December 31, 2008. In addition, an aggregate of 4,236,447 shares of our common stock may be issued in the future upon exercise of currently outstanding warrants, and 1,668,031 shares of our common stock may be issued in the future upon exercise of stock options or other awards granted and available for grant under our 2003 Stock Option/Stock Issuance Plan. As additional shares of our common stock become available for resale in the public market, the supply of our common stock will increase, which could decrease its price. Some or all of the shares of common stock may be offered from time to time in the open market under Rule 144, and these sales may have a depressive effect on the market for our shares of common stock. In general, a non-affiliates who have held restricted shares for a period of six months may sell our common stock into the market.
Our management and principal stockholders own a substantial amount of our common stock and have effective control of HemoBioTech, which may not always be in the best interests of all of our stockholders.
Our officers, directors and principal stockholders control approximately 63% of our outstanding common stock as of March 24, 2009. If these stockholders act together, they will be capable of controlling our management and affairs requiring stockholder approval, including approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of our common stock. This concentration of ownership may not be in the best interests of all our stockholders.
Some provisions of our certificate of incorporation and bylaws may deter takeover attempts, which may limit the opportunity of our stockholders to sell their shares at a favorable price.
We are governed by the provisions of Section 203 of the General Corporation Law of the State of Delaware, an anti-takeover law enacted in 1988. In general, the law prohibits a public Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. “Business combination” is defined to include mergers, asset sales and certain other transactions resulting in a financial benefit to the stockholders. An “interested stockholder” is defined as a person who together with affiliates and associates, owns (or, within the prior three years, did own) 15% or more of a corporation’s voting stock. As a result of the application of Section 203, our potential acquirers may be discouraged from attempting to effect an acquisition transaction with us, thereby possibly depriving holders of our securities of certain opportunities to sell or otherwise dispose of such securities at above-market prices under such transaction.
Some provisions of our executive officers’ employment agreements contain obligations of the company to make salary payments.
In addition, certain provisions contained in the employment agreements with Dr. Bollon, our Chairman, President and Chief Executive Officer, and Mr. Rosenblum, our Chief Financial Officer, obligate us to make certain salary payments including if their employment is terminated without just cause or due to a disability. If Dr. Bollon’s employment is terminated without just cause or as a result of Dr. Bollon’s disability (which means Dr. Bollon’s inability to perform his duties under the agreement for three consecutive months due to injury, illness or disability (mental or physical), as determined by an independent physician selected by Dr. Bollon with our approval), we will be required to pay Dr. Bollon a severance payment equal to his base salary then in effect, payable in monthly installments until the expiration of the remainder of the term of his employment agreement or the expiration of 23 months, whichever is less. Dr. Bollon will be entitled to receive severance payments totaling not less than six months’ of his base salary. Similarly, if Mr. Rosenblum’s employment is terminated without just cause or as a result of Mr. Rosenblum’s disability, we will be required to pay Mr. Rosenblum a severance payment equal to his base salary then in effect, payable in monthly installments until the expiration of the remainder of the term of his employment agreement or the expiration of a fixed number of months, based on the number of years Mr. Rosenblum has been employed by us. Mr. Rosenblum will be entitled to receive severance payments totaling not less than six months’ of his base salary. The foregoing factors, together with the effective control of our outstanding common stock by our officers, directors and principal stockholders, may serve as an incentive for our officers and directors to discourage certain takeover transactions, possibly resulting in the entrenchment of management and consequently reducing the value of our common stock.
Anti-Takeover, Limited Liability and Indemnification Provisions
Certificate of Incorporation and By-laws. Under our certificate of incorporation, our
Board of Directors may issue additional shares of common or preferred stock. Any additional issuance of common stock could have the effect of impeding or discouraging the acquisition of control of us by means of a merger, tender offer, proxy contest or otherwise, including a transaction in which our stockholders would receive a premium over the market price for their shares, and thereby protects the continuity of our management. Specifically, if in the due exercise of its fiduciary obligations, the Board of Directors were to determine that a takeover proposal was not in our best interest, shares could be issued by our Board of Directors without stockholder approval in one or more transactions that might prevent or render more difficult or costly the completion of the takeover by:
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diluting the voting or other rights of the proposed acquirer or insurgent stockholder group,
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putting a substantial voting block in institutional or other hands that might undertake to support the incumbent Board of Directors, or
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effecting an acquisition that might complicate or preclude the takeover.
Our certificate of incorporation also allows our Board of Directors to fix the number of directors in the bylaws. Cumulative voting in the election of directors is specifically denied in our certificate of incorporation. The effect of these provisions may be to delay or prevent a tender offer or takeover attempt that a stockholder may determine to be in his
or its best interest, including attempts that might result in a premium over the market price for the shares held by the stockholders.
Delaware Anti-Takeover Law. We are subject to the provisions of Section 203 of the Delaware General Corporation Law concerning corporate takeovers. This section prevents many Delaware corporations from engaging in a business combination with any interested stockholder, under specified circumstances. For these purposes, a business combination includes a merger or sale of more than 10% of our assets, and an interested stockholder includes a stockholder who owns 15% or more of our outstanding voting stock, as well as affiliates and associates of these persons. Under these provisions, this type of business combination is prohibited for three years following the date that the stockholder became an interested stockholder unless:
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the transaction in which the stockholder became an interested stockholder is approved by the Board of directors prior to the date the interested stockholder attained that status;
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on consummation of the transaction that resulted in the stockholder’s becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction was commenced, excluding those shares owned by persons who are directors and also officers; or
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on or subsequent to that date, the business combination is approved by the Board of Directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder.
This statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us.
Limited Liability and Indemnification. Our certificate of incorporation eliminates the personal liability of our directors for monetary damages arising from a breach of their fiduciary duty as directors to the fullest extent permitted by Delaware law. This limitation does not affect the availability of equitable remedies, such as injunctive relief or rescission. Our certificate of incorporation requires us to indemnify our directors and officers to the fullest extent permitted by Delaware law, including in circumstances in which indemnification is otherwise discretionary under Delaware law.
Under Delaware law, we may indemnify our directors or officers or other persons who were, are or are threatened to be made a named defendant or respondent in a proceeding because the person is or was our director, officer, employee or agent, if we determine that the person:
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conducted himself or herself in good faith, reasonably believed, in the case of conduct in his or her official capacity as our director or officer, that his or her conduct was in our best interests, and, in all other cases, that his or her conduct was at least not opposed to our best interests; and
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in the case of any criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful.
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These persons may be indemnified against expenses, including attorneys fees, judgments, fines, including excise taxes, and amounts paid in settlement, actually and reasonably incurred, by the person in connection with the proceeding. If the person is found liable to the corporation, no indemnification will be made unless the court in which the action was brought determines that the person is fairly and reasonably entitled to indemnity in an amount that the court will establish. Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers or persons controlling us under the above provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
ITEM 2.
ITEM 2. PROPERTIES
We currently do not own any property. We currently operate out of an approximately 4,000 square foot facility provided to us by Texas Tech under the sponsored research agreement. This facility is located in Lubbock, Texas. In June 2007, we signed a five year lease, which is renewable for approximately 2,000 square feet of office space in Dallas, Texas at the Providence Towers, 5001 Spring Valley Road, Suite 1040 West, Dallas, Texas 75244, which we use as our corporate headquarters.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
As of March 31, 2009, we are not a party to any material litigation or threatened litigation.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock is quoted on the OTC Bulletin Board under the symbol “HMBT.OB.”
The range of high and low bid quotations for our common stock during each quarter of the fiscal years ended December 31, 2008 and 2007 is shown below. Prices are inter-dealer quotations as reported by the NASD and do not necessarily reflect transactions, retail markups, mark downs, or commissions.
HOLDERS OF RECORD
As of February 28, 2009, there were approximately 84 holders of record of our common stock.
DIVIDEND POLICY
We have never declared or paid dividends on our shares of common stock. We currently intend to retain future earnings for use in our business and, therefore, do not anticipate paying any cash dividends on our shares of common stock in the foreseeable future. Any future determination as to the payment of cash dividends on our common stock will be at the discretion of our Board of Directors and will depend on our earnings, operating and financial condition, capital requirements and other factors deemed relevant by our Board of Directors including the General Corporation Law of the State of Delaware, which provides that cash dividends are only payable out of retained earnings or if certain minimum ratios of assets to liabilities are satisfied. The declaration of cash dividends on our common stock also may be restricted by the provisions of credit agreements that we may enter into from time to time.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information regarding the status of our existing equity compensation plans at December 31, 2008:
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(1) Consists of our 2003 Stock Option/Stock Issuance Plan.
RECENT SALES OF UNREGISTERED SECURITIES
PRIVATE PLACEMENT
During December 2007 the Company circulated a Private Placement Term Sheet and Exhibits (“the 2007 Private Placement”) for the purpose of raising additional capital. Our Private Placement offering of units consisted of one share of HemoBioTech, Inc. common stock (“Share”) and one warrant (Warrant”) to purchase one share of common stock (collectively, the “Unit”) and resulted in raising $1,325,974 in gross proceeds. The purchase price per Unit was based on the average of the closing price of our common stock on the OTC bulletin Board for the ten trading days immediately preceding the date of the initial closing of the 2007 Private Placement, discounted by 20%. The price was $1.12 per share. Each Warrant is exercisable for the purchase of one share of our common stock at 150% ($1.68) of the per Unit price for a period of five years from the effective registration date of the shares underlying the Warrants. The warrants may be redeemed in whole or in part by the Company, upon 30 day’s written notice, at price of $.01 share, provided the weighted average closing price of the Common Stock exceeds 185% of the per-Unit purchase price for a period of 20 consecutive trading days ending within 15 days prior to the date on which the notice of redemption is given and the registration statement for underlying shares is effective. In addition, the Company is obligated to issue warrants to its placement agent in the amount of 30% of the total warrants issued to investors on essentially the same terms; however, these warrants are only callable when the Company provides a notice of redemption and a registration statement for the underlying shares is effective. Accordingly, the Company issued 355,171 warrants to the placement agent. This offering closed on October 31, 2008.
STOCK OPTION GRANTS
The Company granted 461,715 stock options for the year ended December 31, 2008 under its Stock Option/Stock Issuance Plan. Information pertaining to these options is as follows (see also Note F[3] to the accompanying financial statements):
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Not required.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PLAN OF OPERATIONS
We are primarily engaged in the research and development of human blood substitute technology exclusively licensed from Texas Tech University Health Sciences Center (“TTUHSC”). Since October 27, 2004 most of our working capital was used to pay for general and administrative costs, salaries, legal and accounting fees and the cost of raising money. After reviewing the blood substitute technology developed by researchers at Texas Tech, in January 2002 we licensed from Texas Tech the exclusive rights to various alternative compositions of HemoTech, a novel blood substitute that is based on hemoglobin (which is the key protein in red blood cells that carries oxygen) of both bovine (cow) and human origin, as well as methods for its production and use. What makes HemoTech a novel potential blood substitute product is the fact that it is comprised of hemoglobin that has been isolated from bovine blood and then chemically modified to make the product non-toxic. We also have an agreement with Texas Tech that any patent issued from its patent application relating to the induction of erythropoiesis (which is the production of red blood cells by the body) will be included under our exclusive license with Texas Tech. In addition to our license and patent agreement with Texas Tech, beginning in July 2002, we have entered into a series of Sponsored Research Agreements (“SRA”) with TTUHSC under which we are entitled to use certain of Texas Tech's production and research and development facilities in Lubbock, Texas.
In January 2007, the Company entered into a Stage IV SRA with TTUHSC for the period beginning January 1, 2007. In connection therewith, the Company made an initial payment of approximately $780,000. This amount will be charged to operations over the period of the research (see Note D to the Financial Statements). Additional payments may be made to TTUHSC under the agreement based on mutually agreed upon budgets. The SRA IV activities include maintaining the animal facility which houses a controlled herd of Hereford cows needed for the production of HemoTech and assistance in the implementation of FDA recommendations received at a Pre-IND meeting with the FDA in April 2006. The SRA IV activities also include the manufacture of HemoTech. The product will be made at the production facility at TTUHSC and will be used for pre-clinical and clinical studies upon acceptance of the IND. The agreement will also involve further research and development with a focus on additional uses of HemoTech and expanded patent protection.
At December 31, 2008, approximately $215,000 remained as available funds at TTUHSC and are included in the company’s prepaid assets.
During June 2007 we engaged a U.S. based Clinical Research Organization to assist the Company in submitting technical information to the Drug Controller General of India (DCGI) for the purpose of obtaining regulatory authority to conduct clinical trials in India. A goal is to establish clinical trials in India and if successful commercialize HemoTech in India.
Our goal is to address an increasing demand for a safe and inexpensive human blood substitute product in the United States and around the world through our licensed technology. We believe that certain initial pre-clinical and early stage human trials undertaken outside the U.S. by prior holders of this technology suggest that our licensed technology may possess properties that diminish the intrinsic toxic effects of hemoglobin and help reduce or eliminate the abnormal reaction associated with hemorrhagic shock (which is the loss of blood pressure and the lowering of vital signs resulting from the loss of blood).
We have a limited operating history, no customer base and no revenues to date. Our plan of operations for the next twelve months is focused primarily on the development of our licensed technology and business, production of our product, HemoTech, for use in Phase I U.S. clinical trials, filing of an IND with the FDA, continuing and enlarging the animal facility at Texas Tech University, upgrading our existing production facility based on FDA recommendations and furthering our intellectual property position through the introduction of additional patents and initiation of Phase I U.S. clinical studies if the IND is accepted.
We believe our cash available of $443,000 at December 31, 2008 and the cash generated by our Private Placement offering will not be sufficient to fund our immediate current operations beyond six months. At March 31, 2009, the Company had $130,000 in cash. The Company recently significantly reduced its actual and projected expenses and plans to aggressively manage cash costs. While the Company has been able to obtain such funding in the past, there can be no assurance that they will be able to do so in the future. Management's plans include continuing to finance operations through one or more private or public offerings of equity securities and monitoring and reducing discretionary expenditures. In order to complete our planned operations which includes implementing FDA recommendations necessary for submitting our IND to the FDA, upgrading the production facility, preparation for clinical trials, and the production of HemoTech; collectively at a cost ranging from $5,000,000 to $8,000,000, we will need to raise at least $7 million in the near term, although there can be no assurance that we can meet this timeframe. If we fail to generate enough working capital, either from future equity, or exercise of our Warrants, or revenue, we will have to curtail our planned operations.
The financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred cumulative losses of $15,323,000 from inception through December 31, 2008, has not generated any revenue, and has been dependent on funding operations through the private sale of convertible debt and equity securities. These conditions indicate that there is substantial doubt upon the company’s ability to continue as a going concern. Management’s plans include continuing to fund operations through one or more public or private offerings of equity securities, although there is no assurance they will be able to do so in the future, and monitoring and reducing discretionary expenses.
RECENT DEVELOPMENTS
(1) New Technology:
On May 5, 2008 the Company agreed to license certain technology from TTUHSC titled Orthogonal Method for the Removal of Transmissible Spongiform Encephalopathy Agents from Biological Fluids (“ORTH Technology”). This is a technology that results in the removal and inactivation of infectious agents such as prions (which can cause Mad Cow Disease) and viruses. Such removal and inactivation is critical in the purification of animal products for human use. It can be used not only for HemoTech production but also has the potential for generating sublicensing revenue from pharmaceutical, biotechnology and the cosmetic industries. The term of the agreement extends to the full end of the term or terms for which patent rights have not expired or, if only technology rights are licensed and no patent rights are applicable, for a term of 15 years. The license agreement calls for a nonrefundable license documentation fee of $10,000 and 500,000 shares of the Company’s common stock. The price per share of the Company’s common stock on May 5, 2008 was
$1.29 per share. Accordingly, the Company recorded a charge to research and development expense for $655,000. The agreement also contains an annual renewal fee of $10,000 per year and a royalty based on net sales of Licensed Products (as defined by the agreement) sold by the Company that contain the patented ORTH Technology. The royalty percentage will be lower if Licensed Products are not protected by a valid patent. The agreement calls for a minimum royalty beginning six months after approval of a Licensed Product by the FDA. No royalty applies to the embedded ORTH Technology in the sale of our HemoTech product. The Company is permitted to sublicense the ORTH Technology and TTUHSC will receive a portion of both cash and non cash remuneration received by the Company for a sublicense. Additionally, the Company will pay a portion of any royalty received to TTUHSC.
The Company has also agreed to issue up to 275,000 additional shares of the Company’s common stock in the event TTUHSC purchases certain equipment used in the HemoTech process. The equipment will be owned by TTUHSC, which will be used to further the development of HemoTech, among other possible research uses and will be charged to research and development expense when purchased. As of March 24, 2009, no such equipment has been purchased by TTUHSC.
The agreement may be terminated by either party by mutual written agreement upon 180 days notice, or by TTUHSC based on certain provisions relating to defaults according to the agreement.
(2) Private Placement:
Beginning December, 2007 through October 31, 2008, we completed our private placement of 1,183,904 units (the “Units”), each consisting of one share of our common stock (our “Common Stock”) and one warrant to purchase our Common Stock (a “Warrant”), resulting in gross proceeds of $1,326,000 based on a per-Unit price of $1.12. The Warrants have an exercise price of $1.68. The Warrants may be redeemed in whole or in part by us, upon 30 days’ written notice, at a price of $.01 per Warrant share, provided the weighted average closing price of our Common Stock exceeds 185% of the per-Unit purchase price for a period of 20 consecutive trading days ending within 15 days prior to the date on which the notice of redemption is given, and the registration statement for underlying shares is effective. Net of expenses, primarily to our financial advisor, we received net proceeds from this private placement of $1,098,000, which will be used for research and development activities, licensing and other general working capital purposes. In addition, 355,171 Warrants will be issued to our placement agent with essentially the same terms as our investor Warrants; however, these Warrants are only callable when we provide a notice of redemption and a registration statement for the underlying shares is effective (see Note G(3) to the Financial Statements).
The Units were offered in accordance with Regulation D (“Regulation D”) under the Securities Act of 1933, as amended (the “Securities Act”). Accordingly, each investor qualified as an “accredited investor” as defined in Regulation D in order to participate in these offerings, as determined by representations made by such investors prior to their participation. Additionally, each investor’s right to transfer the Shares and the shares of our common stock underlying the Warrants is restricted as provided in the Securities Act and the rules and regulations adopted thereunder, as well as pursuant to state securities laws.
RESEARCH AND DEVELOPMENT
We currently have two licensed technologies, “HemoTech” and “ORTH”. We expect that the remaining production, development, testing and FDA approval of HemoTech, could occur
over a period of approximately four years. Our ORTH technology is essentially ready for commercialization during 2009 and requires minimal additional research and development.
HemoTech must undergo several major stages of production, development, and clinical testing before being in a position to submit its New Drug Application (“NDA”) to the FDA, as follows:
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PRODUCTION OF HemoTech. In order to produce HemoTech for Phase I U.S. clinical trials, we must complete certain upgrades of the current HemoTech production facilities located at TTUHSC. A portion of these upgrades have been completed during 2006 and through 2007 and were based on recommendations from the FDA.
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PREPARATION AND SUBMISSION OF U.S. IND APPLICATION. We started preparing material for our U.S. IND application on December 13, 2004, when we entered into our Stage II Sponsored Research Agreement with TTUHSC. We are actively planning and implementing the FDA recommendations including upgrading the production facility, preparing for clinical trials and the production of HemoTech, collectively at a cost estimated to range from $5,000,000 to $8,000,000, which are necessary for submission of our U.S. IND application and production of the product, although there can be no assurance that we will be able to meet a specified timetable or budgeted amount. We currently do not have sufficient funds available to pay this amount. We will need to raise at least $7,000,000 in the near term in order to complete the above mentioned activities.
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INDIA STRATEGY. During June 2007 we engaged a U.S. based clinical research organization to assist the Company in submitting technical information to the Drug Controller General of India (DCGI) for the purpose of obtaining regulatory authority to conduct clinical trials in India. A goal is to establish clinical trials in India and if successful commercialize HemoTech in India.
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PHASE I OF OUR U.S. CLINICAL TRIALS. Once our U.S. IND application has been accepted by the FDA, we expect to be able to commence our Phase I U.S. clinical trials of HemoTech. Depending on whether the FDA accepts our U.S. IND application, we believe that we could begin Phase I U.S. clinical trials soon thereafter although there is no guarantee that we can meet this goal. We estimate that our Phase I U. S. clinical trials (including the costs of doing additional research and development of HemoTech during our Phase I U.S. clinical trials and the operational and overhead costs that we will incur during our Phase I U. S. clinical trials) could cost approximately $10.0 million, although the final cost could be more or less than this estimate, which includes the following:
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approximately $1.4 million for the production of HemoTech;
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approximately $1.6 million for the testing of HemoTech on humans;
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approximately $1.9 million for personnel, administrative, and operational expenses that we expect to incur during our Phase I U. S. clinical trials;
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approximately $1.7 million for legal, accounting, consulting, technical and other professional fees that we expect to incur during our Phase I U. S. clinical trials;
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approximately $1.6 million for research and development costs that we expect to incur during our Phase I U. S. clinical trials; and
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approximately $2.0 million for preparation of Phase II clinical trials.
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We expect that our Phase I U. S. clinical trials would take approximately six to nine months to complete from the date we start such trials, though such trials could take significantly longer to complete, depending on, among other things, the rate of production of HemoTech and the availability of patients. We estimate that we will be required to raise additional capital (although there can be no assurance that we can meet this timeframe) in order to fund our Phase I U.S. clinical trials, as well as preparation for Phase II clinical trials from start to finish and to cover the related expenses described above. If submission or acceptance of our U.S. IND application is delayed for any reason and if we are unable to raise such additional capital in a timely manner, commencement of our Phase I U. S. clinical trials would also be delayed.
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PHASE II OF OUR U.S. CLINICAL TRIALS. A Phase II clinical trial could commence subsequent to a successful Phase I trial. We estimate that our Phase II U.S. clinical trials (including the costs of doing additional research and development of HemoTech during our Phase II U.S. clinical trials and the operational and overhead costs that we will incur during our Phase II U.S. clinical trials) will cost approximately $20.0 million, which includes the following:
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further production of HemoTech;
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further testing of HemoTech and related activities;
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personnel, administrative, and operational expenses that we expect to incur during our Phase II U. S. clinical trials;
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legal, accounting, consulting, technical and other professional fees that we expect to incur during our Phase II U. S. clinical trials; and
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research and development costs that we expect to incur during our Phase II U. S. clinical trials.
The exact cost of each step will be determined in the future and will depend on various factors including FDA regulatory guidance and the availability of resources of TTUHSC.
We expect that our Phase II U.S. clinical trials could be completed within approximately one year from the date we start such trials, though such trials could take significantly longer to finish, depending on, among other things, the timely completion of necessary upgrades to the HemoTech production facility and the availability of patients. If commencement or completion of our Phase I U.S. clinical trials are delayed for any reason, or if we are unable to raise sufficient funds to begin our Phase II U.S. clinical trials immediately following completion of our Phase I U.S. clinical trials, our Phase II U.S. clinical trials will be delayed.
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PHASE III OF OUR U.S. CLINICAL TRIALS. If we are able to complete our Phase II U.S. clinical trials, we will seek approval from the FDA for our Phase III U. S. clinical trials soon thereafter.
At such time, and in order to cut the costs of conducting and completing our Phase III U.S. clinical trials, we anticipate that we will seek to enter into a partnership with a biopharmaceutical company that has expertise in the production and marketing of biological products, although there can be no assurance that we will be able to do so.
Alternatively, if we are not able to enter into such a partnership, we may seek to enter into a manufacturing arrangement with an experienced pharmaceutical manufacturer, under which such manufacturer would produce HemoTech, which would significantly reduce the costs of
our Phase III U.S. clinical trials by eliminating the need to build a production facility that meets the FDA's standards for Phase III U.S. clinical trials.
If we are not able to enter into a partnership or find a manufacturer that is willing to manufacture HemoTech for us, we may be required to perform all aspects of the Phase III U. S. clinical trials independently. In this case, we estimate that our Phase III U.S. clinical trials (including the costs of doing additional research and development of HemoTech during our Phase III U.S. clinical trials and the operational and overhead costs that we will incur during our Phase III U.S. clinical trials) could cost approximately $195.0 million, which includes the following:
·
approximately $100.0 million to build a production facility for HemoTech that is suitable for such advanced testing and that meets the standards of the FDA as a product testing facility;
·
approximately $70.0 million for the further testing and production of HemoTech;
·
approximately $10.0 million for personnel, administrative, and operational expenses that we expect to incur during our Phase III U.S. clinical trials;
·
approximately $5.0 million for legal, accounting, consulting , technical and other professional fees that we expect to incur during our Phase III U.S. clinical trials; and
·
approximately $5.0 million for research and development costs that we expect to incur during our Phase III U.S. clinical trials.
We expect that our Phase III U.S. clinical trials could be finished within fifteen to eighteen months from the date we start such trials, though such trials could take significantly longer to complete, depending on, among other things, the timely completion of a suitable production facility for HemoTech and the availability of patients. If we are unable to partner with a pharmaceutical company, we estimate that we will be required to raise the approximately $200 million (or such lesser amount as may be required if we are successfully able to enter into a partnership) that we will need in order to fund our Phase III U.S. clinical trials from start to finish and to cover the related expenses described above. If commencement or completion of our Phase II U.S. clinical trials are delayed for any reason, or if we are unable to raise sufficient funds to begin our Phase III U.S. clinical trials immediately following completion of our Phase II U.S. clinical trials, our Phase III U.S. clinical trials will be delayed.
The estimated costs of each of the phases of our clinical trials set forth above represent our best estimate of such expenses based on, among other things, current economic conditions and availability of materials and personnel. Since many of these phases will not even be commenced by us for another two to three years, we cannot offer any assurance that such estimates will reflect the actual amounts that we may be required to incur during each phase of our clinical trials based on, among other things, then-current economic conditions, availability of materials and personnel, and other factors that may be relevant at the time. The
amounts we may actually be required to expend during any phase of our clinical trials may be significantly more than the amounts estimated by us above.
If our clinical trials are successful and we are able to meet the timelines set forth above, it is possible that an NDA could be approved by the FDA as early as mid-2010, although there can be no assurance that an NDA would be approved by such time, if ever. There can also be no assurance that we will be able to complete our clinical trials under the schedule described above, or ever, or that we will be able to develop a viable and marketable human blood substitute, even if we are able to complete our clinical trials. Further, we do not expect to generate any revenues until after such time as HemoTech has received FDA approval, if ever.
Our ORTH technology can be used not only for HemoTech production but also has the potential for generating sublicensing revenue from pharmaceutical, biotechnology and the cosmetic industries. There can be no assurance that regulatory approval, if required, for this product will be obtained on a timely basis.
RESULTS OF OPERATIONS
We are a development stage company and have not generated any revenue from inception through December 31, 2008. To date, our efforts have been principally devoted to evaluating the HemoTech technology, negotiating and entering into our license agreement and Sponsored Research Agreements with TTUHSC, hiring employees and consultants, establishing our Board of Advisors, raising capital, and engaging in other organizational and infrastructure development. In addition, during 2007 the Company upgraded the production facility at Texas Tech University and maintained an animal donor facility. During 2007 we began examining a global strategy to include submission of technical information to the Drug Controller General of India (“DCGI”). We submitted this information in early April 2008 for the purpose of obtaining regulatory authority to conduct clinical trials in India.
Total expenses, and thus our losses, totaled $15,323,000 from October 3, 2001 (inception) through December 31, 2008.
FOR THE YEAR ENDED DECEMBER 31, 2008 COMPARED TO THE YEAR ENDED DECEMBER 31,
Total expenses, and thus our losses, for the year ended December 31, 2008, were $3,462,000 compared with $3,725,000 for the same period a year ago resulting from lower general and administrative costs more than offsetting higher research and development costs associated with the acquisition of a new technology.
Research and Development expenses were $1,540,000 for the 2008 period, increasing $542,000 from the $998,000 in the same period in 2007 resulting from the non cash acquisition of a new ORTH technology that removes and inactivates infectious agents (which can cause Mad Cow disease) and viruses valued at $655,000 (See also Note D of the Company’s Notes to Financial Statements); and from higher costs paid to outside laboratories and consultants. Cash spending related to the Stage IV Sponsored Research Agreement with Texas Tech Health Sciences Center was higher in the current period compared to the same period a year ago due to increased spending related to laboratory upgrades and costs associated with outside laboratory testing.
General and Administrative costs were $1,957,000 for the year ended December 31, 2008, a decrease of $886,000 from the prior year. Significantly lower non cash consulting fees for
our financial consultant and lower compensation costs accounted for almost all of the change from 2007 to 2008. The costs related to our financial services agreement were $61,000 for the current year compared to $850,000 in 2007 resulting from both the actual number of shares issued to the financial advisor (221,000 shares as of December 31, 2008) and lower share price and price per share being somewhat lower than the previously estimated number of shares (see Note G (3) to the Financial Statements).
Interest income decreased in the 2008 period due to lower cash balances and lower interest rates. Higher cash balances during the 2007 period resulted from the holders of our Class A Warrants exercising their warrants in 2006.
Liquidity and Capital Resources
During the twelve months ended December 31, 2008, net cash used in operating activities of $1,984,000 compared to $2,766,000 in the same period during 2007. During January, 2007 the company paid TTUHSC approximately $780,000 as an initial payment for its Stage IV Sponsored Research Agreement. At December 31, 2008, approximately $215,000 of the TTUHSC 2007 payment is included in prepaid expenses on our Balance Sheet. During May 2008, the Company purchased the ORTH technology from TTUHSC at a cost of 500,000 shares of the Company’s common stock valued at $1.29 per share and paid $10,000 cash for a total of $655,000.
Investing activities during 2007 include the maturation of a $1,000,000 short-term investment made in 2006 and the purchase of a certificate of deposit (restricted cash) in 2007 related to our current lease agreement.
During 2008 the Company closed on our Private Placement offering that was initiated during December, 2007. The Company received gross proceeds from investors of $534,000 during 2008 and after financing costs the Company received net proceeds of $412,000.
At March 31, 2009, the Company had $130,000 in cash and cash equivalents.. We believe that the cash available will not be sufficient to fund our current operations beyond six months. The Company recently significantly reduced its actual and projected expenses and plans to aggressively manage cash costs. While the Company has been able to obtain such funding in the past, there can be no assurance that they will be able to do so in the future. Management's plans include continuing to finance operations through one or more private or public offerings of equity securities and monitoring and reducing discretionary expenditures. In order to complete our planned operations which includes implementing FDA recommendations necessary for submitting our IND to the FDA, upgrading the production facility, preparation for clinical trials, submitting technical information to the Drug Controller General of India (“DCGI”) for the purpose of obtaining regulatory approval to conduct clinical trials in that country, and the production of HemoTech; collectively at a cost ranging from $5,000,000 to $8,000,000, we will need to raise at least $7 million in the near term, although there can be no assurance that we can meet this timeframe. If we fail to generate enough working capital, either from future equity, or exercise of our Warrants, or revenue, we will have to curtail our planned operations.
The financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred cumulative losses of $15,323,000 from inception through December 31, 2008, has not generated any revenue, and has been dependent on funding operations through the private sale of convertible debt and equity securities. These conditions indicate that the Company may not be able to continue as a going concern. Management’s plans include continuing to fund operations through one or more public or private offerings of equity securities, although there is no assurance they will be able to do so in the future, and monitoring and reducing discretionary expenses.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, our financial position is routinely subject to a variety of risks, including market risk associated with interest rate movement. We regularly assess these risks and have established policies and business practices intended to protect against these and other exposures. As a result, we do not anticipate material potential losses in these areas.
As of December 31, 2008, we had cash and cash equivalents of $443,000. Declines of interest rates over time will, however, reduce our interest income.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Index to Financial Statements appears on page, the Report of the Independent Registered Public Accounting Firm appears on page, and the Financial Statements and Notes to Financial Statements appear on pages to.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
None.
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES
The chief executive officer and the chief financial officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e); collectively, "Disclosure Controls") as of the end of the period covered by this annual report (the "Evaluation Date") have concluded that as of the Evaluation Date, our Disclosure Controls were not effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the SEC, and that material information relating to our company and any consolidated subsidiaries is made known to management, including the chief executive officer and chief financial officer, particularly during the period when our periodic reports are being prepared to allow timely decisions regarding required disclosure.
Management assessed the effectiveness of our internal control over financial reporting as of the Evaluation Date based on criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has determined that as of the Evaluation Date, there were material weaknesses in our internal control over financial reporting. The material weaknesses identified during management’s assessment were (i) a lack of sufficient internal accounting resources; and (ii) a lack of segregation of duties to ensure adequate review of financial statement preparation. In light of these material weaknesses, management has concluded that we did not maintain effective internal control over financial reporting at the Evaluation Date.
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. As defined by the Public Company Accounting Oversight Board Auditing Standard No. 5, a material weakness is a deficiency or a combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected. A clear and concise segregation of duties is important to maximize checks and balances so that no single individual has control over two or more phases of a transaction or operation. A strong segregation of duty also is critical to reduce effectively the risk of mistakes and inappropriate actions preventing fraud and discourages collusion. It can be difficult for small businesses to always have a clear separation of duties because there simply are not enough personnel to cover each and every process and procedure. Ultimately, checks and balances need to be in place as a supportive measure to the business operations, but also as a fraud prevention measure as well. Because we have limited financial personnel, and limited resources, compliance with segregation of duties and proper oversight of control requirements is extremely difficult
In connection with the evaluation referred to in the foregoing paragraph, we have identified no change in our internal control of financial reporting that occurred during the quarter ended December 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
We are a non-accelerated filer and are required to comply with the internal control reporting and disclosure requirements of Section 404 of the Sarbanes-Oxley Act for fiscal years ending December 31, 2009. Although we are working to comply with these requirements, we have limited financial personnel, making compliance with Section 404 - especially with segregation of duty control requirements - very difficult and cost ineffective, if not impossible. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Please see the discussion of our December 2007 Private Placement that appears under the heading “Recent Developments” in Item 7 of this Annual Report on Form 10-K.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CORPORATE GOVERNANCE.
The information called for by this item is incorporated by reference herein to the definitive Proxy Statement to be filed by the Company pursuant to Regulation 14A for the 2009 annual meeting of stockholders. Certain information with regard to the executive officers of the Company is contained in Item 1 hereof and is incorporated by reference in this Part III.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this item is incorporated herein by reference to the definitive Proxy Statement to be filed by the Company pursuant to Regulation 14A for the 2009 annual meeting of stockholders.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information called for by this item is incorporated herein by reference to the definitive Proxy Statement to be filed by the Company pursuant to Regulation 14A for the 2009 annual meeting of stockholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE.
The information called for by this item is incorporated herein by reference to the definitive Proxy Statement to be filed by the Company pursuant to Regulation 14A for the 2009 annual meeting of stockholders.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information called for by this item is incorporated herein by reference to the definitive Proxy Statement to be filed by the Company pursuant to Regulation 14A for the 2009 annual meeting of stockholders.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
EXHIBIT NO.
DESCRIPTION OF EXHIBIT
3.1
Certificate of Incorporation of HemoBioTech, Inc. (1)
3.2
Certificate of Amendment of the Certificate of Incorporation of HemoBioTech, Inc. (1)
3.3
By-Laws of HemoBioTech, Inc. (1)
4.1
Form of Warrant to Purchase Common Stock. (1)
4.2
Form of 10% Convertible Unsecured Promissory Note. (1)
9.1
Voting Agreement, dated as of July 15, 2004, by and among Ghassan Nino, Nino Partners, LLC and Biogress LLC, as acknowledged by HemoBioTech, Inc. and Arthur Bollon. (1)
10.1
Stock Option/Stock Issuance Plan. (1)
10.2
Registration Rights Agreement, dated as of October 27, 2004, between HemoBioTech, Inc. and Meyers Associates, L.P., as agent for the purchasers named therein. (1)
10.3
Employment Agreement, dated as of October 6, 2003, by and between Arthur Bollon and HemoBioTech, Inc., as amended by Letter Agreements, dated as of July 15, 2004, January 3, 2005, and April 6, 2005, by and between Arthur Bollon and HemoBioTech, Inc. (2)
10.4
Employment Agreement, dated as of December 14, 2003, by and between Mario Feola and HemoBioTech, Inc., as amended by a Letter Agreement, dated as of July 15, 2004, by and between Mario Feola and HemoBioTech, Inc. (1)
10.5
Employment Separation and Release Agreement, dated as of July15, 2004, by and between HemoBioTech, Inc. and Ghassan Nino. (1)
EXHIBIT NO.
DESCRIPTION OF EXHIBIT
10.6
Form of Director and Officer Indemnification Agreements with each of Arthur Bollon, Ghassan Nino, Walter Haeussler, Robert Baron, Bernhard Mittemeyer, Mark Rosenblum and Robert Comer. (1)
10.7
Stockholders Agreement, dated as of October 31, 2003, by and among HemoBioTech, Inc., Arthur Bollon, Ghassan Nino, Nino Partners, LLC and the other stockholders named therein. (1)
10.8
Service Agreements, dated November 23, 2004, by and between HemoBioTech, Inc. and JPM-CEO Partners, Ltd. (1)
10.9
Sponsored Research Agreement, dated July 18, 2002, by and between HemoBioTech, Inc. and Texas Tech University Health Sciences Center. (3)
+10.10
Stage II Sponsored Research Agreement, dated December 13, 2004, by and between HemoBioTech, Inc. and Texas Tech University Health Sciences Center. (3)
10.11
License Agreement, dated January 22, 2002, by and between HemoBioTech, Inc. and Texas Tech University System. (3)
+10.12
Letter Agreement, dated May 14, 2004, by and between HemoBioTech, Inc. and Texas Tech University Health Sciences Center. (3)
10.13
Consulting Agreement, dated October 14, 2004, by and between HemoBioTech, Inc. and Larry Helson. (1)
10.14
Service Agreement, dated as of May 25, 2004, by and between HemoBioTech, Inc. and BioLink Life Sciences, Inc. (1)
10.15
Employment Agreement, dated April 1, 2005, by and between HemoBioTech, Inc. and Mark J. Rosenblum. (2)
++10.16
Stage III Sponsored Research Agreement, effective as of January 1, 2006, by and between HemoBioTech, Inc. and Texas Tech University Health Sciences Center. (5)
++10.17
Advisory agreement dated July 13, 2005 by and between HemoBioTech and Dr. Jan Simoni. (4)
++10.18
Stage IV Sponsored Research Agreement, effective as of January 1, 2007, by and between HemoBioTech, Inc. and Texas Tech University Health Sciences Center.
10.19
Form of Subscription Agreement
10.20
Form of Registration Rights Agreement
10.21
Modification, Settlement and Release Agreement dated March 4, 2009 by and between Mark J. Rosenblum and HemoBioTech, Inc.(6)
21.1
Subsidiaries of HemoBioTech, Inc. (1)
31.1
Certification of Principal Executive Officer
31.2
Certification of Principal Financial Officer
32.1
Section 1350 Certification of Principal Executive Officer and Principal Financial Officer
+ Portions of this document have been omitted pursuant to an order granting confidential treatment issued by the Commission on May 11, 2005, under Rule 406 of the Securities Act of 1933, as amended.
++ Portions of this document have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
(1) Incorporated by reference to the Registrant's Registration Statement on Form SB-2 (Commission File No. 333-122097) filed with the Commission on January 18, 2005.
(2) Incorporated by reference to Amendment No. 1 to the Registrant's Registration Statement on Form SB-2 (Commission File No. 333-122097) filed with the Commission on April 15, 2005.
(3) Incorporated by reference to Amendment No. 2 to the Registrant's Registration Statement on Form SB-2 (Commission File No. 333-122097) filed with the Commission on May 13, 2005.
(4) Incorporated by reference to the Registrant’s Form 10-KSB for the year ended December 31, 2005.
(5) Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on January 20, 2006.
(6) Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on March 9, 2009.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1943, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HemoBioTech, Inc.
(Registrant)
By:
/s/ MARK J. ROSENBLUM
/s/ ARTHUR P. BOLLON, PH.D.
Mark J. Rosenblum
Arthur P. Bollon, Ph.D.
Chief Financial Officer and Secretary
Chairman of the Board, President and Chief Executive Officer
Principal Financial Officer
Principal Executive Officer
Dated: April 15, 2009
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.
Signatures
Title
Date
/s/ ARTHUR P. BOLLON, PH.D.
Chairman of the Board, President
April 15, 2009
Arthur P. Bollon, Ph.D.
and Chief Executive Officer
/s/ MARK J. ROSENBLUM
Chief Financial Officer and
April 15, 2009
Mark J. Rosenblum
Secretary
/s/ ROBERT BARON
Director
April 15, 2009
Robert Baron
/s/ ROBERT COMER
Director
April 15, 2009
Robert Comer
/s/ BERNHARD MITTEMEYER, M.D.
Director
April 15, 2009
Bernhard Mittemeyer, M.D.
/s/ GHASSAN NINO, C.P.A, CMA
Director
April 15, 2009
Ghassan Nino, C.P.A, CMA
/s/ ROBERT E. DRAGOO, JR.
Director
April 15, 2009
Robert E. Dragoo, Jr.
HEMOBIOTECH, INC.
(A DEVELOPMENT STAGE COMPANY)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
HemoBioTech, Inc.
We have audited the accompanying balance sheets of HemoBioTech, Inc. (a development stage company) as of December 31, 2008 and 2007, and the related statements of operations, changes in stockholders' equity (capital deficiency) and cash flows for each of the two years then ended and for the period from October 3, 2001 (inception) through December 31, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits include 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 financial statements enumerated above present fairly, in all material respects, the financial position of HemoBioTech, Inc. as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the two years then ended, and for the period from October 3, 2001 (inception) through December 31, 2008 in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note B to the financial statements, the Company has suffered recurring losses from operations, has had no revenue, has limited resources available to fund current operations and will require additional financing to continue to fund its research and developments activities. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note B. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Eisner LLP
New York, New York
April 15, 2009
HEMOBIOTECH, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 2008
[See accompanying notes to financial statements]
HEMOBIOTECH, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
[See accompanying notes to financial statements]
HEMOBIOTECH, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (CAPITAL DEFICIENCY) - NOTE F
[See accompanying notes to financial statements]
HEMOBIOTECH, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
[See accompanying notes to financial statements]
HEMOBIOTECH, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
NOTE A - THE COMPANY
We were founded in 2001 as “HemoBioTech, Inc.,” a Texas corporation. In 2003, we incorporated a sister corporation named “HemoBioTech, Inc.,” in the state of Delaware. On December 1, 2003, HemoBioTech, Inc. (Texas) was merged with and into HemoBioTech, Inc., (Delaware), with HemoBioTech, Inc. (Delaware) as the surviving entity. This entity is referred to herein as the “Company”.
The accompanying financial statements include the predecessor operations of the Texas corporation from its inception on October 3, 2001. The historical basis of accounting was carried over in the merger, including the deficit accumulated in the development stage. The Company is researching and developing human blood substitute patented technology licensed exclusively from Texas Tech University Health Services Center ("TTUHSC") (See Note D). The Company is in the development stage and its efforts have been principally devoted to capital raising, organizational infrastructure development and research and development.
NOTE B - BASIS OF PRESENTATION
The Company has incurred cumulative losses of $15,323,000 through the year ended December 31, 2008, and has been dependent on funding operations through the private sale of convertible debt and equity securities. At December 31, 2008, the Company had $443,000 in cash and cash equivalents. Management believes that current cash resources and cash received subsequent to the balance sheet date will not be sufficient to fund operations for the next twelve months. Management's plans include continuing to finance operations through one or more private or public offerings of equity securities and monitoring and reducing discretionary expenditures. See also Footnotes H(3) .
The financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred cumulative losses of $15,323,000 from inception through December 31, 2008, has not generated any revenue, and has been dependent on funding operations through the private sale of convertible debt and equity securities. These conditions indicate that there is substantial doubt upon the company’s ability to continue as a going concern. Management’s plans include continuing to fund operations through one or more public or private offerings of equity securities, although there is no assurance they will be able to do so in the future, and monitoring and reducing discretionary expenses. .
At December 31, 2008, the Company had $443,000 in cash and cash equivalents. As discussed in Note F, during the period January 1, 2008 through December 31, 2008, the Company received net proceeds of $412,000 through the Private Placement of equity securities. The accompanying financial statements do not include any adjustment that might be necessary if sufficient additional funding is not received so that the Company can continue its operations. While the Company has been able to obtain such funding in the past, there can be no assurance that they will be able to do so in the future. Management's plans include continuing to finance operations through one or more private or public offerings of equity securities and monitoring and reducing discretionary expenditures.
All amounts have been rounded to the nearest thousand.
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) RESEARCH AND DEVELOPMENT:
Research and development costs are charged to expense as incurred. Costs include the amortization of payments made to TTUHSC for the Sponsored Research Agreement, spending with outside laboratories and consultants, and purchase of equipment related to our research and development efforts and the purchase of certain technology from TTUHSC titled Orthogonal Method for the Removal of Transmissible Spongiform Encephalopathy Agents from Biological Fluids (“ORTH Technology”) during May, 2008. See also Note D - “Agreements with TTUHSC”
(2) LOSS PER COMMON SHARE:
Basic and diluted loss per common share is based on the net loss divided by the weighted average number of common shares outstanding during the period. No effect has been given to the following outstanding potential common shares such as options, warrants and outstanding shares subject to forfeiture issued to a financial services consultant during September 2006, as described in Note G(3) in the diluted computation as their effect would be antidilutive:
(1) Common shares not included in basic earnings per share since subject to forfeiture.
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying value of cash equivalents, accounts payable and accrued expenses approximates their fair value due to the short period to maturity of these instruments.
(4) USE OF ESTIMATES:
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 revenues and expenses during the reporting period. Such estimates include the selection of assumptions underlying the calculation of the fair value of options. Actual results could differ from those estimates.
(5) RECENT ACCOUNTING PRONOUNCEMENTS:
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles ("SFAS No. 162"). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP (the "GAAP hierarchy"). SFAS No. 162 makes the GAAP hierarchy explicitly and directly applicable to preparers of financial statements, a step that recognizes preparers' responsibilities for selecting the accounting principles for their financial statements, and sets the stage for making the framework of the FASB Concept Statements fully authoritative. The effective date for SFAS No. 162 is 60 days following the Security and Exchange Commission's approval of the Public Company Accounting Oversight Board's amendments to AU 411 “The meaning of present fairly in conformity with generally accepted accounting principles”. The adoption of SFAS No. 162 did not have a material impact on our financial statements and results of operations.
In December 2007, the EITF reached a consensus on EITF No. 07-1, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property, or EITF 07-1. EITF 07-1 discusses the appropriate income statement presentation and classification for the activities and payments between the participants in arrangements related to the development and commercialization of intellectual property.
The sufficiency of disclosure related to these arrangements is also specified. EITF 07-1 is effective for fiscal years beginning after December 15, 2008. As a result, EITF 07-1 is effective for us in the first quarter of fiscal 2009. We do not expect the adoption of EITF 07-1 to have a material impact on either our financial position or results of operations.
In February 2008, the FASB issued Staff Position 157-2 (“FSP 157-2”). FASB 157-2 permits delayed adoption of SFAS 157 for certain non-financial assets and liabilities, which are not recognized at fair value on a recurring basis, until fiscal years and interim periods beginning after November 15, 2008. As permitted by FSP 157-2, the Company has elected to delay the adoption of SFAS 157 for qualifying non-financial assets and liabilities, such as fixed assets and patents. The Company is in the process of evaluating the impact, if any, that the application of SFAS 157-2 to its non-financial assets will have on the Company’s consolidated results of operations or financial position.
In October 2008, the FASB issued FASB Staff Position FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3 clarified the application of FAS 157. FSP 157-3 demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The implementation of this standard did not have an impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No.159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits an entity to elect fair value as the initial and subsequent measurement attribute for many financial assets and liabilities. Entities electing the fair value option would be required to recognize changes in fair value in earnings. Entities electing the fair value option are required to distinguish, on the face of the statement of financial position, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. SFAS No. 159 became effective beginning January 1, 2008. The Company elected not to measure any eligible items using the fair value option in accordance with SFAS No. 159 and therefore, SFAS No. 159 did not have an impact on the Company’s financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R provides revised guidance on how acquirers recognize and measure the consideration transferred, identifiable assets required, liabilities assumed, noncontrolling interests, and goodwill acquired in a business combination. SFAS No. 141R also expands required disclosures surrounding the nature and financial effects of business combinations. SFAS No. 141R is effective, on a prospective basis, for us in the fiscal year beginning January 1, 2009. This statement will have no material effect on our financial position or results of operations, although it may have a material impact on accounting for business combinations in the future which cannot currently be determined.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” SFAS No. 160 establishes requirements for ownership interests in subsidiaries held by parties other than the Company (sometimes called “minority interests” be clearly identified, presented and disclosed in the consolidated statement of financial position within equity, but separate from the parent’s equity. All changes in the parent’s ownership interests are required to be accounted for consistently as equity transactions and any noncontrolling equity investments in deconsolidated subsidiaries must be measured initially at fair value. SFAS No. 160 is effective, on a prospective basis, for us in the fiscal year beginning January 1, 2009. However, presentation and disclosure requirements must be retrospectively applied to comparative financial statements. This statement will have no material effect on our financial position or results of operations.
In June 2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity's Own Stock" (EITF 07-5). EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock,
including evaluating the instrument's contingent exercise and settlement provisions. It also clarifies on the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact of EITF 07-5 on its consolidated financial position and results of operations.
(6) CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
The Company considered all highly liquid short-term investments purchased with an original maturity of three months or less to be cash equivalents. Restricted cash represents $55,000 of cash invested in a certificate of deposit which the Company is obligated to hold under the terms of their lease agreement.
(7) INCOME TAXES:
The Company accounts for income taxes using the asset and liability method described in SFAS No. 109, "Accounting For Income Taxes," the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax bases of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
We adopted the provisions of Financial Accounting Standards Board interpretation No. 48 Accounting for Uncertainty in Income Taxes (“FIN 48”) an interpretation of FASB Statement No. 109 (“SFAS 109”) on January 1, 2007. As a result of the implementation of FIN 48, we recognized no adjustment for uncertain tax provisions. At the adoption date of January 1, 2007, we had a deferred tax asset which was fully reserved by a valuation allowance to reduce the deferred tax asset to the amount that more likely than not to be realized.
We recognize interest and penalties related to uncertain tax positions in general and administrative expense. As of December 31, 2008, we have not recorded any provisions for accrued interest and penalties related to uncertain tax positions. At December 31, 2008, we had a deferred tax asset which was fully reserved by a valuation allowance to reduce the deferred tax asset to the amount that more likely than not to be realized
The tax years 2004 through 2008 remain open to examination by the major tax jurisdictions to which we are subject.
NOTE D - AGREEMENTS WITH TEXAS TECH UNIVERSITY HEALTH SCIENCES CENTER ("TTUHSC")
On January 22, 2002, the Company entered into an exclusive license agreement with TTUHSC with respect to receiving certain patented rights. The Company is committed to the exploitation of such patented rights.
In consideration for entering into the agreement, the Company issued 678,820 shares of common stock to TTUHSC (subject to anti-dilution protection). These shares issued were valued at approximately $1,000, their estimated fair value, and charged to operations. The Company has agreed to reimburse TTUHSC for all intellectual property protection costs and patent maintenance fees. On May 20, 2004, TTUHSC agreed to waive its anti-dilution protection in exchange for 135,765 additional shares of common stock. Such shares were valued at approximately $115,000, their estimated fair value, and charged to operations. In addition, subject to obtaining FDA approval of a blood substitute product, the Company has agreed to fund, over a four-year period, $1.2 million to support efforts in incubating and commercializing other TTUHSC technologies. As of December 31, 2008, such approval had not been obtained. Under the agreement, the Company reserves the right of first refusal on licensing and commercializing other technology developed from such funding. In addition, in July 2002, the Company entered into a Sponsored Research Agreement (“SRA”) with TTUHSC for the period September 1, 2002 through August 31, 2006. In December 2004, the Company paid a fee of approximately $231,000 to fund the next phase of its research under the SRA through December 31, 2005.
In January 2006, the Company entered into a Stage III SRA with TTUHSC for the period January 1, 2006, to December 31, 2006. In connection therewith, the Company made an initial payment of approximately $287,000 which was amortized during 2006.
In January 2007, the Company entered into a Stage IV SRA with TTUHSC for the period beginning January 1, 2007. In connection therewith, the Company made an initial payment of approximately $780,000. This amount will be charged to operations as incurred based on monthly reporting to the Company by TTUHSC. As of December 31, 2008, approximately $215,000 is included in prepaid expenses on the accompanying balance sheet. Additional payments may be made to TTUHSC under the agreement based on mutually agreed upon budgets.
On May 5, 2008 the Company agreed to license certain technology from TTUHSC titled Orthogonal Method for the Removal of Transmissible Spongiform Encephalopathy Agents from Biological Fluids (“ORTH Technology”). This is a technology that results in the removal and inactivation of infectious agents such as prions (which can cause Mad Cow Disease) and viruses. Such removal and inactivation is critical in the purification of animal products for human use. It can be used not only for HemoTech production but also has the potential for generating sublicensing revenue from pharmaceutical, biotechnology and the cosmetic industries.
The term of the agreement extends to the full end of the term or terms for which patent rights have not expired or, if only technology rights are licensed and no patent rights are applicable, for a term of 15 years. The license agreement calls for a nonrefundable license documentation fee of $10,000 and 500,000 shares of the Company’s common stock. The price per share of the Company’s common stock on May 5, 2008 was $1.29 per share. Accordingly, the Company recorded a charge to research and development expense for $655,000. The agreement also contains an annual renewal fee of $10,000 per year and a royalty based on net sales of Licensed Products (as defined by the agreement) sold by the Company that contain the patented ORTH Technology. The royalty percentage will be lower if Licensed Products are not protected by a valid patent. The agreement calls for a minimum royalty beginning six months after approval of a Licensed Product by the FDA. No royalty applies to the embedded ORTH Technology in the sale of our HemoTech product. The Company is permitted to sublicense the ORTH Technology and TTUHSC will receive a portion of both cash and non cash remuneration received by the Company for a sublicense. Additionally, the Company will pay a portion of any royalty received to TTUHSC.
The Company has also agreed to issue up to 275,000 additional shares of the Company’s common stock in the event TTUHSC purchases certain equipment used in the HemoTech process. The equipment will be owned by TTUHSC, will be used to further the development of HemoTech, and will be charged to research and development expense when purchased. As of December 31, 2008, no such equipment has been purchased by TTUHSC.
The agreement may be terminated by either party by mutual written agreement upon 180 days notice, or by TTUHSC based on certain provisions relating to defaults according to the agreement.
The Sponsored Research Agreements may be terminated by either party on 90 days written notice.
NOTE E - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
NOTE F - STOCKHOLDERS' EQUITY
(1) PRIVATE PLACEMENT:
During December 2007 the Company circulated a Private Placement Term Sheet and Exhibits (“the 2007 Private Placement”) for the purpose of raising additional capital. Our Private Placement offering of units consists of one share of HemoBioTech, Inc. common stock (“Share”) and one warrant (Warrant”) to purchase one share of common stock (collectively, the “Unit”) may result in up to $6,000,000 in gross proceeds, subject to an over-allotment option for up to an additional $1,000,000 in gross proceeds. The purchase price per Unit is based on the average of the closing price of our common stock on the OTC bulletin Board for the ten trading days immediately preceding the date of the initial closing of the 2007 Private Placement, discounted by 20%. Each Warrant is exercisable for the purchase of one share of our common stock at 150% ($1.68) of the per Unit price for a period of five years from the effective registration date of the shares underlying the Warrants. The warrants may be redeemed in whole or in part by the Company, upon 30 day’s written notice, at price of $.01 share, provided the weighted average closing price of the Common Stock exceeds 185% of the per-Unit purchase price for a period of 20 consecutive trading days ending within 15 days prior to the date on which the notice of redemption is given and the registration statement for underlying shares is effective.
In addition, the Company is obligated to issue warrants to its placement agent in the amount of 30% of the total warrants issued to investors on essentially the same terms; however, these warrants are only callable when the Company provides a notice of redemption and a registration statement for the underlying shares is effective. This offering closed on October 31, 2008.
On December 31, 2007 the Company completed an initial close of the 2007 Private Placement consisting of gross proceeds of approximately $792,000 at the per Unit price of $1.12. As a result of this closing 707,120 shares of our common stock was issued along with warrant agreements for the issuance of 707,120 additional shares upon exercise of the warrants at an exercise price of $1.68. Net of expenses, primarily to our financial advisor, the Company received net proceeds of $686,000. In addition, 212,136 warrants were issued to our placement agent with essentially the same terms as our investor warrants; however, these warrants are only callable when the Company provides a notice of redemption and a registration statement for the underlying shares is effective. The warrants were valued at December 31, 2007 using the Black-Scholes stock option valuation model and totaled $621,000 and $186,000 for the investors and placement agents respectively.
For the twelve months ended December 31, 2008, the Company raised additional funds associated with its December 2007 Private Placement consisting of gross proceeds of $534,000 at the per unit selling price of $1.12. As a result, 476,784 shares of our common stock were issued along with warrant agreements for the issuance of 476,784 additional shares upon exercise of the warrants at an exercise price of $1.68. Net of expenses, including $72,000 to a significant shareholder, the Company received net proceeds of $412,000. In addition, 143,035 warrants were issued to our placement agent, who is also a shareholder of the Company. The warrants were valued using the Black-Scholes stock option valuation model and totaled $301,000 and $90,000 for the investors and placement agents respectively.
On October 27, 2004, the Company completed a Private Placement (“the 2004 Private Placement”) of 45 units, priced at $100,000 per unit, and raised gross proceeds of $4,500,000. Each unit consists of a $50,000 unsecured convertible promissory note, 58,824 shares of common stock and 117,648 warrants. The notes bear interest at 10% per annum (an effective rate of 77%) and are convertible at the option of the holder into common stock or convertible securities to be sold by the Company in its next financing, as defined, at a conversion price equal to the per share offering price of such financing.
Based on negotiations with the placement agent, the Company agreed to a fair value for the common stock of $.85 per share and calculated the fair value of each warrant to be $.53 using the Black-Scholes option pricing model. Prior to the revision in the method of valuing the common stock, the Company used Black-Scholes to value both common stock and warrants. The gross proceeds from the sale of each unit were allocated based on the relative fair values to each of the components.
Based on the allocation of the relative fair values to the components of the 2004 Private Placement offering, the debt discount was calculated to be $855,000, which was amortized as expense to interest expense over the term of the notes.
The Company agreed to file a registration statement within 60 days of final closing of the 2004 Private Placement and to use commercially reasonable efforts to cause the registration statement to be effective within 120 days of final closing. In the event the registration statement was not filed and declared effective within the required time, the Company would incur liquidated damages of 2% per month based on the subscription amount of each purchaser in the Company October 2004 Private Placement. In connection therewith, during 2005, the Company incurred liquidating damages aggregating approximately $48,000. As of December 31, 2008, the Company owes $38,000 of such damages. (See Note E).
(2) CONVERTIBLE NOTES PAYABLE:
Through October 27, 2005, an aggregate of $1,540,000 principal amount of Notes and approximately $97,000 accrued but unpaid interest thereon were converted into an aggregate of 1,544,490 shares of the Company's common stock, at a negotiated conversion price of $1.06 per share, in accordance with amendments to the original terms of the Notes permitting such conversion. Effective October 27, 2005, holders of $337,000 aggregate principal amount of Notes agreed to extend the maturity date of such Notes from October 27, 2005 to April 27, 2006. Accordingly, the Company paid $372,000 aggregate principal amount of Notes, together with approximately $97,000 of accrued interest thereon, to holders of Notes that had not converted their Notes into shares of Company common stock or did not agree for extension of maturity date, on or prior to October 27, 2005.
For the period January 1, 2006 through April 27, 2006, an aggregate of $225,000 principal amount of Notes and approximately $18,000 accrued but unpaid interest thereon were converted into an aggregate of 142,812 shares of the Company’s common stock, at conversion prices ranging from $1.53 to $1.96 per share, in accordance with amendments to the original terms of the Notes permitting such conversion. In connection therewith, the Company recorded a charge of approximately $43,000 as interest expense representing the difference between the conversion price and the market price at date of conversion. On April 27, 2006, the Company paid the remaining outstanding Notes in an aggregate of $113,000 principal amount and accrued but unpaid interest thereon of approximately $13,000.
(3) STOCK WARRANTS:
In connection with the 2007 Private Placement, through December 31, 2008 the Company issued 1,183,904 Class A warrants to investors exercisable at $1.68 per share through the fifth anniversary of the effectiveness of a registration statement of shares underlying the warrants. The warrants are subject to redemption, at the Company’s sole option, after one year from the date of effectiveness of the registration statement of common stock underlying the warrants if the common stock price equaled or exceeded $2.07 for a period of at least 20 consecutive trading days at a redemption price of $.01 per warrant.
In addition, the Company issued to its placement agent warrants totaling 30% of the total warrants issued to investors. Accordingly, the Company issued 355,171 warrants to the placement agent through December 31, 2008.
During the fourth quarter 2007, the Company granted 120,000 warrants to a service provider as compensation. The warrants vest over a nine month period. In connection therewith, the Company valued 90,000 vested warrants using the Black-Scholes option pricing model and recorded a compensation charge of $57,000..
In May 2008, the Company granted 135,000 warrants at prices ranging from $1.60 to $2.50 to two service providers as compensation. These warrants vest over nine months beginning in November 2008. General and administrative expenses was charged $37,000 in 2008 related to these warrants.
The following assumptions were used for all compensatory warrants issued to service providers:
At December 31, 2008, the Company had the following warrants outstanding:
(1)
Subject to vesting.
(2)
Subject to redemption (see Note F(1)).
(4) COMMON STOCK
In connection with the initial capitalization of the Texas corporation, HemoBioTech, Inc. agreed to issue 1,982,157 Class A shares and 2,715,280 Class B shares between January 30, 2002 and January 20, 2003, and was valued at an aggregate of approximately $8,000. On October 31, 2003, the Texas corporation issued 108,613 Class A shares as an anti-dilutive issuance. On October 31, 2003, all the stockholders exchanged their Class A and B shares for 6,896,818 shares of common stock of the Company. The accompanying financial statements reflect the shares as outstanding from their dates of original issuance. Under an agreement dated July 15, 2004, a principal stockholder agreed to return 1,086,113 shares of common stock to the Company as an inducement to the placement agent to serve as agent in the proposed Private Placement (Note F(1)). The return of such shares was treated as a capital contribution.
(5) VOTING AND STOCKHOLDERS AGREEMENTS
On October 31, 2003, the Company entered into a stockholders agreement with certain stockholders (aggregating 6,217,996 shares of common stock) under whom the Company granted such stockholders a right of first offer with respect to future sales of common stock or convertible securities by the Company. In addition, the Company granted each of the stockholders “piggyback registration rights”. Each of these stockholders waived their right of first refusal in connection with the October 2004 Private Placement. In addition, each of these stockholders waived their piggyback registration rights in connection with the registration of the shares underlying the October 2004 Private Placement.
On July 15, 2004, certain stockholders (aggregating 4,154,383 shares of common stock) entered into a voting agreement whereby they agreed to vote all of their respective shares together with the majority-in-interest of stockholders who are also the Company’s executive officers on all matters submitted to a vote of the stockholders. The voting agreement expired on October 27, 2006.
(6) STOCK OPTION/STOCK ISSUANCE PLAN:
During 2003, the Board of Directors of the Company approved a Stock Option/Stock Issuance Plan (the "Old Plan") which provides for the granting of options or stock to purchase up to 1,629,168 shares of common stock, under which directors, employees and independent contractors are eligible to receive incentive and non-statutory stock options and common shares (employees). The Company's stockholders approved the Old Plan in August 2004. On June 9, 2006, the Company’s stockholders approved an increase of 1,500,000 shares of common stock from the 1,629,168 shares of common stock available to be granted under the Plan, increasing the number of shares to 3,129,168.
Additional information on shares subject to options is as follows:
At December 31, 2008, 780,463 options were available for grant under the Plan. The following tables present information relating to stock options under the Plan as of December 31, 2008.
As of December 31, 2008, 1,444,165 options were fully vested. A summary of the status of the Company’s nonvested options as of December 31, 2008 and changes during the years ended December 31, 2008 and 2007, is presented below.
The unrecognized compensation cost related to non vested employee and director share-based compensation granted under the Plan for the years ended December 31, 2008 and 2007 were $114,000 and $104,000 respectively. The cost expected to be recognized over a weighted -average period for the years ended December 31, 2008 and 2007 were 1.95 years and 1.88 years respectively.
The weighted-average fair values at date of grant for options granted during the years ended December 31, 2008 and 2007 were 0.92 and $0.94 respectively. The value of the options was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
On October 31, 2008, the Company’s chief executive officer exercised his options to acquire 651,668 shares of the Company's common stock at an exercise price of $0.20 per share or $130,334. In lieu of cash payment, the chief executive officer returned 130,334 shares of common stock valued at $130,334 to the Company for the exercise price of the options. No compensation expense was recorded as a result of this cashless transaction.
NOTE G - INCOME TAXES
The net deferred tax asset in the accompanying balance sheet includes the following amounts of deferred tax assets and liabilities.
The deferred tax assets represents the benefits of its net operating loss and certain expenses not currently deductible for tax purposes. The Company has provided a full valuation allowance for such deferred tax assets due to uncertainty to realize such benefits in the future.
At December 31, 2008 the Company had approximately $12,517,000 and $126,000 in net operating loss and research and development credit carryforwards for federal income tax purposes which expire as follows:
The difference between the statutory tax rate of 34% and the company's effective tax rate is primarily due to the increase in the valuation allowance of $1,155,000 (2008) and $1,257,000 (2007) and certain expenses not deductible for tax purposes.
NOTE H - COMMITMENTS AND OTHER MATTERS
(1) LEASES:
During February 2007 the Company moved into new office space and agreed to a sixty-six month office lease. The lease agreement includes rent abatement for approximately ten months during 2007 and 2008. Provisions of the lease include a security deposit of approximately $5,800 and a thirty six month letter of credit in the amount of approximately $55,000. In addition, if the Company cancels this lease after December, 2010, and prior to its full sixty-six month term, the Company will be obligated to pay a cancellation charge of approximately $46,000. The estimated minimum lease payments for the next five years are: In 2009 - $66,000; in 2010 - $67,000; in 2011 - $68,000; in 2012 - $70,000 and none thereafter.
(2) CONSULTING AGREEMENTS:
On October 14, 2004, the Company entered into an advisory agreement with a member of our scientific advisory board to receive technical advisory services. The agreement can be terminated by either party on 30 days' written notice. The agreement provides for $1,500 per month and the issuance of an option under the Plan to purchase 15,000 shares of common stock of the Company at an exercise price of $0.85 per share. In addition, at the end of each year of service on the advisory board, the company will grant an additional non-qualified stock option to purchase 5,000 shares of Common Stock at an exercise price equal to the then fair market value of the Common Stock. Such options vest 25% on the first anniversary and then monthly thereafter over a period of thirty six months. During the twelve months ended December 31, 2008 and 2007, $5,000 and $11,000 were charged to operations as stock based compensation respectively.
On July 13, 2005, the Company entered into an advisory agreement with its Acting Vice President and Principal Investigator of Research and Development to receive advisory services on technical, medical and market issues related to HemoBioTech, including its second generation blood substitute, HemoTech. The agreement provides for non-qualified stock options to purchase 271,528 shares of Common Stock of HemoBioTech at an exercise price per share of
$0.18, subject to vesting through July 13, 2009. In connection therewith, the Company recorded a charge of $35,000 and $59,000 for the years ended December 31, 2008 and 2007 respectively. As of December 31, 2008, 251,717 options had vested. The Company will record additional charges as and when the options vest at the then fair value.
On January 16, 2008, the Company granted stock options to two scientific consultants employed by TTUSHC. Each grant provides for 75,000 non-qualified stock options to purchase shares of the Company’s stock at an exercise price of $1.19 which was the fair market value of the Company’s shares on the grant date. The options vest 25% immediately and the remaining 75% vest monthly over the next 36 months. Accordingly, the Company recorded a charge of $68,000 to stock based compensation during the twelve months ended December 31, 2008.
(3) FINANCIAL ADVISOR AGREEMENT:
On September 12, 2006, the Company entered into a three year agreement with its placement agent and financial advisor for consulting services related to corporate finance and other financial services. The financial advisor is also a significant shareholder in the Company. The services shall include assisting the Company in evaluating and negotiating particular contracts or transactions, if requested to do so by the Company and to raise for the Company its next financing of up to $10 million with a minimum of $6 million in the next 18 months from the date of the agreement. As compensation for such services, the Company agreed to issue 1,500,000 shares of its common stock. The agreement states that 500,000 shares would vest to the consultant on the one year anniversary of the agreement. Accordingly, on September 12, 2007, 500,000 shares vested to the financial consultant. The remaining 1,000,000 shares are subject to forfeiture in the event that the consultant fails to achieve certain performance criteria, including assisting the Company in raising additional capital, set forth in the agreement. The December 2007 Private Placement closed on October 31, 2008. As of December 31, 2008, the financial advisor had helped the Company raise approximately $1,326,000.
As of December 31, 2008, the Company has agreed to award the financial advisor approximately 221,000 of the 1,000,000 shares that were subject to forfeiture. In addition, the agreement provides for a fee, paid in shares of the Company’s stock, if the financial advisor acts as a finder or financial consultant in various business transactions in which the Company may be involved such as mergers, acquisitions or joint ventures during the term of the agreement. Accordingly, the Company has recorded $61,000 in charges for the twelve months ended December 31, 2008 for the estimated cost of those financial services and $1,215,000 has been charged to operations since the inception of the agreement. The Company will record an additional expense over the service period related to this stock issuance as and when the performance criteria are met at the then market price of the stock. There are currently no contractual amounts due to the financial advisor.
NOTE I - SUBSEQUENT EVENT
During January 2009 the Company engaged the advisory services of a consultant for the purpose of assisting with press releases or announcements related to the Company, assist with telephone conferences with investor groups, and provide information in the industry in which the company conducts business. The agreement does not have a termination date and maybe terminated by either party with 30 days written notice. The consultant was required to sign a confidentiality agreement and was paid 20,000 shares of the Company’s unregistered common stock. The per share price of the Company’s common stock on the date of the agreement approximated $0.70 per share.
During February 2009 the Company engaged the advisory services of a consultant for the purpose of assisting with short and long term strategic needs of the Company, assist in the development of a business plan, provide general advice and assist in providing the capital structure of the Company, assist with staffing and recruiting, assist the Company in its effort to obtain equity investment and related financing, identify and help negotiate with potential strategic and joint venture partners, identify and assist in negotiations with potential acquisition and merger candidates. The agreement is for one year and may be terminated for cause by either party on 60 days written notice. The company has agreed to pay the consultant : (1) 100,000 shares of the Company’s common stock and has agreed to register these shares with the next registration statement of the Company, (2) the Company will provide to the consultant with five year warrants to purchase up to 100,000 shares of the Company’s common stock at $1.50 per share and 100,000 shares of the Company’s common stock at $2.25 per share, the Company has also agreed to reimburse the consultant on a monthly basis for its reasonable out of pocket expenses not to exceed $4,000 per month. The per share price of the Company’s common stock on the date of the agreement approximated $0.70 per share.
During February 2009 the Company announced that R.E. “Corky” Dragoo, Jr. has joined its Board of Directors. Mr. Dragoo is Executive Assistant to the Chancellor of Texas Tech University and is Director of Policy for Texas Tech University. Mr. Dragoo was formerly Ernst and Young National Director for the energy industry and was a Senior Partner of Ernst and Young’s Center for Business Innovation located in Cambridge, Massachusetts. Mr. Dragoo received 15,000 stock options upon joining our board and will receive compensation of $15,000 per year plus 7,000 options per quarter. All stock options vest immediately. Stock based compensation expense will be recorded in the company’s financial statement beginning March, 2009 using the Black Scholes option pricing model.
During March, 2009 the Company signed a Modification, Settlement and Release Agreement to amend the employment agreement of its Chief Financial officer and Secretary (the “Executive”). The agreement calls for a lump sum payment to the Executive of $25,000 and 65,000 shares of the Company’s common stock in exchange for a reduction to the Executive’s salary . If the Executive shall no longer be employed by the Company within one year of the agreement, unless the Company becomes bankrupt, insolvent or under certain terms of the employment agreement , the Executive would be obligated to refund the $25,000 and forfeit the 65,000 shares. If the company consummates a financing for gross proceeds of at least $3,000,000 within the twelve months following the agreement, the Executives’ salary would revert back to the amount in place prior to the salary reduction. If the company seeks to further reduce the Executives salary the Executive shall not be obligated to make the refund and the forfeiture of the 65,000 shares and the shares will vest immediately as liquidated damages in connection with such further reduction. The per share price of the Company’s common stock on the date of the agreement approximated $0.70 per share. The Company charged $71,000 to operations in 2008 related to this agreement.
During March, 2009 the Company agreed to add a new member to its Scientific Advisory Board. The terms of the agreement call for at least one year of service and may be terminated by either party at any time with 45 days notice. The advisor will provide the company services on technical and medical issues related to company matters. Upon signing the agreement the company granted 100,000 non qualified stock options at an exercise price per share of $0.51. The options will vest 25% immediately and the balance over twelve months. Stock based compensation expense will be recorded in the company’s financial statement beginning March, 2009 using the Black Scholes option pricing model.