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| HPLF.OB > SEC Filings for HPLF.OB > Form 10-K on 31-Mar-2009 | All Recent SEC Filings |
31-Mar-2009
Annual Report
Discussion and Analysis
The following discussion and analysis is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, and should be read in conjunction with our financial statements and related notes. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. In addition, the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, including, but not limited to, those discussed in "Forward Looking Statements," and elsewhere in this Form 10-K.
Overview
We are a development stage biotechnology company focusing on the development of a cell-based bioartficial liver system, HepaMate(TM), as a potentially lifesaving treatment for liver failure patients. The technology has previously been successfully tested in a clinical phase I study. As an extracorporeal cell-based bioartificial liver system, HepaMate(TM) is designed to combine blood detoxification with liver cell therapy to provide whole liver function in patients with the most severe forms of liver failure.
On October 3, 2008, in order to enhance and strengthen our pre-existing bioartificial liver development program, we acquired HepaAssist Related Assets from Arbios Systems, Inc. ("Arbios"), which assets included over 12 patents and patent licenses; miscellaneous scientific equipment; FDA Investigative New Drug (IND) application, including orphan drug and fast track designation; Phase I and Phase II/III clinical protocols and clinical data; and standard operating procedures for manufacturing and quality control. The acquired assets relate to a bioartificial liver device formerly known as "HepatAssist." HepatAssist passed clinical Phase I studies was evaluated in the largest-ever Phase II/III clinical study (prospective, randomized, multicenter, controlled trial involving over 170 patients) to test the safety and efficacy of a bioartificial liver assist device. The clinical data was published in 2004 and showed for bioartificial liver device treated patients in fulminant and sub-fulminant hepatic failure a significant survival advantage compared with the patient control group receiving standard-of-care treatment.
We are working towards optimizing the former HepatAssist bioartificial liver device for utilization in a new, successful clinical Phase II/III study followed by commercialization upon final regulatory approval.
Previously we focused our research, development and commercialization efforts on the development of a porcine stem cell line, and subclones thereof, which we refer to as the "PICM-19 cell line" for use in a bioartificial liver and in-vitro toxicology testing, and on the commercialization of a chicken cell line, and subclones thereof, which we refer to as the "PBS-1 cell line." The PBS-1 cell line was developed for potential use in cell-based vaccine production and was exclusively licensed from Michigan State University in June 2006.
The PICM-19 cell line was developed for potential use in a bioartificial liver device and in-vitro toxicology platforms and was exclusively licensed from USDA Agricultural Research Service on November 2007. In September 2008 the license was amended for the expanded field-of-use as in-vitro infection host systems for viral and protozoan agents such as malaria.
On May 23, 2008, we completed a private placement of securities for an aggregate purchase price of $4,530,800. Simultaneously with the completion of the private placement, we converted our outstanding note payable of $877,800 into equity and the note holder agreed to accept $150,000 in full payment and satisfaction of the accrued and unpaid interest on the loan in the amount of $249,945.
Asset Purchase Agreement
On October 3, 2008, the Company entered into and consummated the transactions contemplated by a purchase agreement with Arbios. Pursuant to the purchase agreement, the Company, in order to enhance and strengthen its current PICM-19 porcine liver cell line based bioartifical liver technology, purchased certain specified assets of Arbios relating to the pig cell based liver device technology that was being developed by Arbios.
The purchase price of the acquired assets consisted of: $450,000 in cash, of
which $250,000 was paid at the closing and $200,000 has been deferred for up to
18 months; a Series D Stock Purchase Warrant to purchase up to 750,000 shares of
the Company's common stock at an exercise price of $0.35 per share for a period
of 5 years. The deferred $200,000 payment is due and payable on the earlier of
(i) the date on which we consummate one or more debt or equity financings in
which the gross proceeds received in the aggregate equal or exceed $4,000,000,
or (ii) the eighteen month anniversary of the closing date.
The issuance of the Series D Warrant was deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act in that the issuance did not involve a public offering. We granted Arbios certain registration rights, as more fully set forth in the Registration Rights Agreement dated October 3, 2008 between the Company and Arbios, with respect to the shares of the Company's common stock issuable upon exercise of the Series D warrant. Pursuant to the Registration Rights Agreement, if we have not filed with, and have declared effective by, the Securities and Exchange Commission, a registration statement within nine months of October 3, 2008, Arbios, to the extent applicable, will be entitled to utilize the cashless exercise provisions of the Series D Warrant.
May 2008 Private Placement
On May 23, 2008, we completed a private placement (May 2008 Private Placement) pursuant to which we sold 10,660,705 units (Units) at a price of $0.425 per Unit or $4,530,800 in the aggregate. Each Unit consists of one share of the Company's common stock (the "Unit Shares") and one Series C stock purchase warrant (Series C warrant) to purchase a share of common stock at the initial exercise price of $0.55 per share for a period of two years from the date of issuance. In conjunction with our completion of the acquisition of the HepatAssist related assets in October 2008, we reduced the initial exercise price of the Series C warrants to $0.34 per share. We also issued an additional 263,713 Units in payment of placement and legal fees relating to this transaction. We have agreed to register for resale the Unit Shares and the shares of our common stock issuable upon exercise of our common stock.
Loan Conversion
Simultaneously with the completion of the May 2008 Private Placement, we entered into an agreement with Mr. Harmel S. Rayat, the Company's former Chief Financial Officer, Director and Controlling Shareholder, pursuant to which Mr. Rayat (i) converted the entire outstanding principal amount ($877,800) of his loan to the Company into an aggregate of 2,065,412 Units, each Unit consisting of one share of the Company's common stock and one Series C warrant, at a conversion price of $0.425 per Unit and (ii) agreed to accept $150,000 in full payment and satisfaction of the accrued and unpaid interest on the loan in the amount of $249,945.
Warrants
As of December 31, 2008, the following warrants were outstanding: 12,989,830 Series C warrants with an exercise price of $0.34 per share exercisable into common stock until May 23, 2010; 750,000 Series D warrants with an exercise price of $0.35 per share exercisable into common stock until October 3, 2013; and 737,000 warrants with an exercise price of $1.50 per share exercisable into common stock until May 11, 2012.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosures. We review our estimates on an ongoing basis.
We consider an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made; and changes in the estimate or different estimates that could have been made could have a material impact on our results of operations or financial condition. While our significant accounting policies are described in more detail in the notes to our financial statements included in this prospectus, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements:
Research and Development Expenses
Research and development expenses represent costs incurred to develop our technology, as well as purchased in-process research and development programs. Until October 2008, the majority of costs incurred were pursuant to our CRADA with the USDA's Agricultural Research Service and pursuant to our sponsored research agreement with MSU. Third-party costs paid by us relating to these agreements include salaries and benefits for research and development personnel, allocated overhead and facility occupancy costs, contract services and other applicable costs. In addition, costs may include third party laboratory work. We charge all research and development expenses to operations as they are incurred, including internal costs, costs paid to sponsoring organizations, and purchased in-process research and development programs. We do not track research and development expenses by project.
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel related costs, legal costs, including intellectual property that is expensed when incurred, investor relations costs, stock based compensation costs, accounting costs, and other professional and administrative costs.
Stock-Based Compensation Expense
On January 1, 2006, we adopted Statement of Financial Accounting Standards No.
123 (revised 2004), "Share-Based Payment," (SFAS 123R), which requires the
measurement and recognition of compensation expense for all share-based payment
awards made to employees and directors based on estimated fair values. Our
consolidated financial statements reflect the impact of SFAS 123(R) from the
date of adoption.
Results of Operations
We have yet to establish any history of profitable operations and our
accumulated deficit from inception through December 31, 2008 is $19.3 million.
We have not generated any revenues from operations during the past five years
and do not expect to generate any revenues for the foreseeable future. We expect
that our future revenues will not be sufficient to sustain our operations for
the foreseeable future. Our profitability will require the successful completion
of our research and development programs, and the subsequent commercialization
of the results or of products derived from such research and development
efforts. No assurances can be given when this will occur or that we will ever be
profitable.
We expect to continue to incur losses from business operations and we believe our cash and cash equivalents balances, anticipated cash flows from operations, and other external sources of credit will be sufficient to meet our cash requirements through March 2010. The future of the Company after March 2010 will depend in large part on our ability to successfully raise capital from external sources to pay for planned expenditures and to fund operations.
Results of Operations for Years Ended December 31, 2008 and 2007
We had no revenues in 2008 and 2007.
Operating expenses were $2,961,820 for the year ended December 31, 2008, an increase of $280,707 or 10.5%, from $2,681,113 during the same period in 2007. The increase was due to the following: a $719,853 or 417.2% increase in research and development costs primarily relating to the effective purchase price of $548,325 of in-process research and development, as well as an increase in costs resulting from the renegotiation of the CRADA agreement in November 2007; and an increase in legal and accounting expenses of $104,529 or 104.6% due to increased activity. These increases were offset by a net decrease of $355,737 or 23.5% in salaries and benefits cost due to the closing of the administration office in Canada and the refocus of our technology efforts resulting in the termination of certain employees, as well as a $191,120 or 35.4% decrease in investor relations expenses. Shareholder and investor relations expenses include a $170,000 charge that was settled by issuing 400,000 common stock shares at an effective price of $0.425 per share.
Interest income decreased 21.8% to $30,831 in 2008 from $39,451 in 2007 resulting from a substantially lower interest rate environment during 2008. The net of interest expense and amortization of both debt discount and deferred financing costs decreased $1,063,039 or 59.2% from $1,796,535 to $733,496 due to the conversion of debt to equity during 2007 with the remainder in 2008.
We recorded a loss on disposal of fixed assets of $3,061 in 2008 as a result of removing the cost and related accumulated depreciation of equipment that was either no longer in service or deemed obsolete. Substantially all of this equipment was located at the Company's administrative office in Vancouver, British Columbia, Canada, which, effective September 1, 2008, was closed.
Our net loss to common stockholders for 2008 decreased 17.4% to $3,667,547 from $4,438,197 in 2007. On a basic and diluted per share basis, the net loss to common stockholders improved from $0.06 per share net loss in 2007 to $0.04 per share net loss in 2008. As of December 31, 2008, we have an accumulated deficit of $19,321,616. We may incur substantial operating losses in future periods.
Liquidity and Capital Resources
We had cash and cash equivalents of $3,084,155 and $534,113 as of December 31, 2008 and, 2007, respectively. Net cash provided by financing activities was $4,530,800 for the year ended December 31, 2008 from a private placement of securities of 10,660,705 units, with each unit consisting of one share of common stock and one common stock warrant. For the year ended December 31, 2007, net cash provided by financing activities was $2,259,276 from the purchase of 891,019 shares of common stock by Fusion Capital for total proceeds of $495,001 and proceeds of $2,125,000 from the issuance of convertible notes (which have been converted to equity in their entirety as of December 31, 2008), offset by $132,200 repayment of promissory notes and $228,525 amortization of deferred financing costs.
Net cash flow used in operating activities was $1,984,149 for the year ended December 31, 2008, compared to net cash flow used of $1,895,400 for the same period in 2007. We have financed operations primarily from cash on hand and through private placements of securities, as well as through the issuance of convertible debt. The accompanying financial statements have been prepared assuming we will continue as a going concern. We incurred cumulative losses of $19,321,616 from inception through December 31, 2008. Additionally, we have expended a significant amount of cash in developing our technology. We expect to continue to incur losses from business operations and we believe our cash and cash equivalents balances, anticipated cash flows from operations, and other external sources of credit will be sufficient to meet our cash requirements through March 2010. The future of the Company after March 2010 will depend in large part on our ability to successfully raise capital from external sources to pay for planned expenditures and to fund operations.
At this time, we have no agreements or understandings with any third party regarding any financings.
Related Party Transactions
Director and Management Fees: For the year ended December 31, 2008, we incurred $19,343 in board fees for non-employee directors of the Company. In addition, during June and September 2008, we granted stock options to purchase 50,000 shares each for a total of 200,000 shares of common stock to non-employee board members. For the year ended December 31, 2008, we recorded $12,541 as stock compensation expense relating to these stock grants. During the year ended December 31, 2007, we paid management fees of $4,900 to the directors. There is no management or consulting agreements in effect.
Legal Fees: In relation to our May 2008 Private Placement, we settled $21,250 in legal costs by issuing 50,000 Units to our attorney who also serves as a board member. Legal fees expensed for the year ended December 31, 2008 that were paid or were due to this attorney total $111,150.
Notes Payable and Accrued Interest: On May 23, 2008, we reached an agreement with Mr. Harmel Rayat pursuant to which Mr. Rayat (i) converted the entire outstanding principal amount ($877,800) of his loan to the Company into an aggregate of 2,065,412 Units, each Unit consisting of one share of the Company's common stock and one Series C warrant, at a conversion price of $0.425 per Unit and (ii) agreed to accept $150,000 in full payment and satisfaction of the accrued and unpaid interest on the loan in the amount of $249,945.
Rent: Until August 31, 2008, our administrative office was located at 1628 West 1st Avenue, Suite 216, Vancouver, British Columbia, Canada, V6J 1G1. This premise is owned by a private corporation controlled by Mr. Rayat. We paid rent of $26,866 for the year ended December 31, 2008 (2007: $35,740). Effective September 1, 2008, we closed this administrative office, terminating all of our employees at this location. There were no severance arrangements with any of the terminated employees.
Mr. Harmel S. Rayat was an officer and director of the Company until September 12, 2008 and a majority stockholder of the Company until September 9, 2008. All related party transactions are recorded at the exchange amount established and agreed to between related parties and are in the normal course of business.
Off Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Recent Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements in this Form 10-K.
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