Filed pursuant to Rule 424(b)(1)
of the Securities Act of 1933, as
amended
File No. 333-128991
[HUMAN BIOSYSTEMS LOGO]
20,000,000 Shares
Common Stock
$0.50 Per Share
Human BioSystems is offering 20,000,000 shares of common stock at a price of
$0.50 per share. These shares are being offered by us, using certain of our
executive officers, directors and broker- dealers, on a self-underwritten, best
efforts basis. There is no minimum amount of securities that we must sell in
order to receive any subscription. We may receive little or no funds from this
offering. The funds that we receive from this offering will not be placed into
an escrow account. We are not engaging underwriters for this offering. Our
common stock is listed on the NASD O-T-C Market Bulletin Board (the "OTCBB")
under the symbol "HBSC.OB." On January 26, 2006, the last sale price of our
common stock on the OTCBB was $ 0.53 per share.
______________________
See "Risk Factors" beginning on page 5 for a discussion of material issues to
consider before purchasing our common stock.
_______________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
<page>1
The date of this prospectus is January 26, 2006.
TABLE OF CONTENTS
Page
Prospectus Summary 2
Risk Factors 5
Use of Proceeds 11
Market for Common Equity and Related Shareholder Matters 12
Capitalization 13
Selected Financial Data 14
Management's Discussion and Analysis or Plan of Operation 15
Business 26
Management 40
Related Party Transactions 46
Principal Shareholders 46
Description of Capital Stock 48
Shares Eligible for Future Sale 49
Plan of Distribution 49
Legal Matters 50
Experts 50
Where You Can Find Additional Information 50
Index to Financial Statements F-1
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock. In this
prospectus, "Human BioSystems," the "Company," "HBS," "we," "us" and "our" refer
to Human BioSystems, a California corporation.
All trademarks, service marks or tradenames referred to in this prospectus are
the property of their respective owners.
PROSPECTUS SUMMARY
This summary highlights information described more fully elsewhere in this
prospectus. You should read the entire prospectus carefully.
<page>2
HUMAN BIOSYSTEMS
Our Business: We are a development stage company whose principal business
objective is to develop and provide economical, non-toxic methods of extending
the shelf life and improving the quality of blood platelets, donor organs and
other biological material.
THE OFFERING
We may offer and sell shares of our common stock under this prospectus.
Common stock offered 20,000,000 shares of
common stock, no par value.
Price $0.50 per share.
Common stock to be outstanding after this 84,196,000 shares, excluding an
Offering aggregate of 2,064,000 shares
reserved for issuance upon the
exercise of outstanding stock
options and warrants.
Use of proceeds Proceeds we receive from the
issuance of the shares will
be used for working capital
and general corporate purposes.
O-T-C Market Bulletin Board symbol: "HBSC.OB"
<page>3
SUMMARY FINANCIAL DATA
<table>
<caption>
<s> <c> <c>
Nine Months Ended September 30, Years Ended December 31,
2005 2004 2004 2003
(unaudited) (unaudited)
-------------- ------------- ------------ -------------
Statements of Operations Data:
Revenue $ -- $ -- $ -- $ --
Operating expenses:
General and administrative:
Stock based compensation 450,300 329,700 347,500 251,800
Public relations 3,202,600 -- -- --
Other general and administrative
expenses 788,800 467,900 760,900 1,292,200
------------- ----------- ------------ -----------
Total general and administrative 4,441,700 797,600 1,108,400 1,544,000
Research and development 138,300 154,600 218,500 394,300
Sales and marketing 25,400 93,900 146,400 219,300
------------- ----------- ------------ -----------
Total operating expenses 4,605,400 1,046,100 1,473,300 2,157,600
------------- ----------- ------------ -----------
Loss from operations (4,605,400) (1,046,100) (1,473,300) (2,157,600)
Other income (expense):
Bad debt related to other
receivables -- -- -- (398,300)
Forgiveness of debt 80,100 -- -- --
Loss on investment in
marketable securities -- -- (762,600) --
Interest expense -- (366,200) (366,400) (7,100)
------------- ------------ ------------- -------------
Loss before provision for income taxes (4,525,900) (1,412,300) (2,602,300) (2,563,000)
Provision for income taxes 1,600 -- (800) (800)
------------- ------------ ------------- -------------
Net loss (4,526,300) (1,412,300) (2,603,100) (2,563,800)
Other comprehensive loss, net of tax:
Unrealized loss on investment
in marketable securities (2,000) -- (9,800) --
-------------- ------------ ------------- -------------
Total comprehensive loss ($4,528,900) ($1,412,300) ($2,612,900) ($2,563,800)
============== ============= ============= =============
Basic and diluted loss per share $ (0.08) $ (0.04) $ (0.07) $ (0.10)
============== ============= ============= =============
Basic and diluted weighted-average
common shares outstanding 56,261,437 35,614,160 39,795,100 26,814,100
============== ============= ============= =============
<page>4
September 30, 2005 December 31, 2004
------------------ -----------------
Balance Sheet Data:
Cash $ 60,100 $ 278,700
Working capital (deficit) $ (844,100) $ (313,800)
Total stockholders' deficit $ (834,100) $ (313,600)
</table>
RISK FACTORS
Our business, financial condition or results of operations could be materially
and adversely affected by any of the following risks:
WE HAVE A HISTORY OF LOSSES, AND OUR INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
HAVE RAISED DOUBTS ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
Since our inception in 1998, we have incurred substantial losses from
operations, resulting primarily from costs related to research and development
and building our infrastructure. Because of our status as a development stage
company and the need to conduct additional research and development prior to
introducing products and services to the market, we expect to incur net losses
for the foreseeable future. If our growth is slower than we anticipate or our
operating expenses exceed our expectations, our losses will be significantly
greater. We may never achieve profitability. Primarily as a result of these
recurring losses, our independent certified public accountants modified their
report on our December 31, 2004 financial statements to include an uncertainty
paragraph wherein they expressed substantial doubt about our ability to continue
as a going concern.
We are in the eighth year of research and development, with an accumulated loss
during the development stage (through September 30, 2005) of $19,185,500. We
currently do not know when our research and development will be completed, or if
a product will ever result from this research and development activity. We
anticipate that the funds spent on research and development activities will need
to increase significantly prior to completion of research and development and
commercialization of a product. Additionally, we may not be able to secure
funding in the future necessary to complete our intended research and
development activities. In 2003, we scaled back our research and development
activities significantly, due to our lack of capital. In February 2005, we
resumed certain research and development projects on a limited basis, but cannot
predict when we will be able to maintain a complete research and development
program.
<page>5
These conditions give rise to substantial doubt about our ability to continue as
a going concern. Our financial statements do not include adjustments relating to
the recoverability and classification of reported asset amounts or the amount
and classification of liabilities that might be necessary should we be unable to
continue as a going concern. Our continuation as a going concern is dependent
upon our ability to obtain additional financing from the sale of our securities,
as may be required, and ultimately to attain profitability.
WE REQUIRE IMMEDIATE ADDITIONAL CAPITAL.
Our operating plan for calendar years 2005 and 2006 is focused on development of
our products. It is our estimate that a cash requirement of $2.5 million is
required to support this plan for the next twelve months. During the year ended
December 31, 2004, we received an aggregate of $999,400 from the issuance of
common stock, compared to an aggregate of approximately $905,400 received in the
year ended December 31, 2003 and approximately $2,151,300 received in the year
ended December 31, 2002. During the nine months ended September 30, 2005, we
received an aggregate of $795,100 from the issuance of common stock, including
$225,600 from our agreement with Dutchess Private Equities Fund II ("Dutchess").
We are actively seeking additional funding. There can be no assurance that
the required additional financing will be available on terms favorable to
us or at all. Although we have entered into certain agreements with Dutchess
and other prospective funding sources, there can be no assurance that we will
be successful in raising any additional capital pursuant to the Dutchess
agreement or these other agreements.
Obtaining capital will be challenging in a difficult environment, due to the
slow recovery from the downturn in the United States economy and current world
instability. We currently have no commitments for any funding, and there can be
no assurance that we will be able to obtain additional funding in the future
from either debt or equity financings, bank loans, collaborative arrangements or
other sources on terms acceptable to us, or at all. If our human infusion
studies are successful, we believe that we will be able to obtain additional
funding through a license agreement with one or more of the potential strategic
partners with whom we have had discussions to date, thereby satisfying our
financial needs for at least 2006; however, we currently do not have the capital
to complete our infusion studies and there can be no assurance that we will
achieve successful results in our human infusion studies or that we can enter
into a license agreement or agreements providing adequate financing for 2005 and
beyond.
If adequate funds are not available or are not available on acceptable terms
when required, we may be required to significantly curtail our operations or may
not be able to fund expansion, take advantage of unanticipated acquisition
opportunities, develop or enhance services or products or respond to competitive
pressures. Such inability could have a material adverse effect on our business,
results of operations and financial condition. If additional funds are raised
through the issuance of equity or convertible debt securities, the percentage
ownership of our shareholders will be reduced, shareholders may experience
additional dilution, and such securities may have rights, preferences and
privileges senior to those of our common stock.
<page>6
WE AND OUR CHIEF EXECUTIVE OFFICER ARE THE SUBJECT OF SEC AND JUSTICE DEPARTMENT
PROCEEDINGS FOR SECURITIES FRAUD.
On August 7, 2002, the United States Attorney for the Eastern District of New
York and the Securities and Exchange Commission announced that they were
bringing securities fraud charges against Harry Masuda, our Chief Executive
Officer, for allegedly paying an unregistered broker an undisclosed commission
in September 1999 and February 2000 private placements. The allegations
generally charge Mr. Masuda with the failure to adequately disclose to
investors in this private placement a commission agreement with Larry Bryant,
an unlicensed broker-dealer. Remedies sought in these proceedings include
criminal penalties and a bar from service as an officer or director of a
publicly-traded company. The SEC also brought securities fraud charges against
us for the same transactions, and these charges are still pending.
In June 2000, we undertook a rescission offer to those shareholders who had
purchased an aggregate of 427,300 shares of common stock and warrants in the
private placements for aggregate proceeds of $640,950. Holders of 222,900
shares of common stock accepted the rescission offer. The other shareholders
elected not to rescind their stock purchases. We paid an aggregate of
approximately $300,000 in cash to rescinding shareholders, but could not afford
to pay the balance of the rescission offer in cash. Instead, we issued
promissory notes, with interest at the rate of 10% per annum, payable upon the
earlier of (i) one year from the date of the note or (ii) our receipt of
funding sufficient to permit repayment of the principal and interest on the
notes. In 2000 and 2001, holders of $67,500 in principal and interest in the
above-referenced promissory notes elected to convert their notes to an
aggregate of 206,700 shares of our common stock. The remainder of the
rescinding holders were paid in full in cash prior to December 31, 2002. As
all of the shareholders electing to rescind have now been paid in full (whether
in cash or in shares of common stock), we believe that the issues raised by the
alleged failure to disclose have been fully resolved. Although we believe that
the charges are unwarranted there can be no assurance that Mr. Masuda will be
able to continue to serve as our Chief Executive Officer in the event that the
Securities and Exchange Commission receives the remedies that it seeks. In
January 2005, the United States Government and Mr. Masuda entered into a
deferred prosecution agreement which should lead to a dismissal of all charges
against Mr. Masuda at the end of the 18-month deferred prosecution term. The
civil case against us has been stayed at the request of the U.S. Attorney
pending completion of the deferred prosecution term.
WE ARE A DEVELOPMENT STAGE COMPANY, AND HAVE A LIMITED OPERATING HISTORY ON
WHICH TO EVALUATE OUR POTENTIAL FOR FUTURE SUCCESS.
We are a development stage company, and have yet to produce or sell any products
or services. We have only a limited operating history upon which you can
evaluate our business and prospects, and have yet to develop sufficient
experience regarding actual revenues to be received from our products and
services. You must consider the risks and uncertainties frequently encountered
by early stage companies in new and rapidly evolving markets. If we are
unsuccessful in addressing these risks and uncertainties, our business, results
of operations and financial condition will be materially and adversely affected.
OUR FUTURE REVENUES ARE UNPREDICTABLE AND OUR QUARTERLY OPERATING RESULTS MAY
FLUCTUATE SIGNIFICANTLY.
We have a very limited operating history, and have no revenue to date. We cannot
forecast with any degree of certainty whether any of our products or services
will ever generate revenue or the amount of revenue to be generated by any of
our products or services. In addition, we cannot predict the consistency of our
quarterly operating results. Factors which may cause our operating results to
fluctuate significantly from quarter to quarter include:
<page>7
- - our ability to attract new and repeat customers;
- - our ability to keep current with the evolving requirements of our target
market;
- - our ability to protect our proprietary technology;
- - the ability of our competitors to offer new or enhanced products or
services; and
- - unanticipated delays or cost increases with respect to research and
development.
Because of these and other factors, we believe that quarter-to-quarter
comparisons of our results of operations are not good indicators of our future
performance. If our operating results fall below the expectations of securities
analysts and investors in some future periods, then our stock price may decline.
ESTABLISHING OUR REVENUES AND ACHIEVING PROFITABILITY WILL DEPEND ON OUR ABILITY
TO DEVELOP AND COMMERCIALIZE OUR PRODUCTS.
Much of our ability to establish revenues and to achieve profitability and
positive cash flows from operations will depend on the successful introduction
of our products in development. Products based on our technologies will
represent new methods of treatment and preservation. Our prospective customers,
including blood banks, hospitals and clinics, will not use our products unless
they determine that the benefits provided by these products are greater than
those available from competing products. Even if the advantage from our planned
products is clinically established, prospective customers may not elect to use
such products for a variety of reasons.
We may be required to undertake time-consuming and costly development activities
and seek regulatory clearance or approval for new products. The completion of
the development and commercialization of any of our products under development
remains subject to all of the risks associated with the commercialization of new
products based on innovative technologies, including unanticipated technical or
other problems, manufacturing difficulties and the possible insufficiency of the
funds allocated for the completion of such development.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
As a development stage company, we are entering a biological material
preservation market that is presently addressed by large companies with
extensive financial resources. Those companies include DuPont and Baxter, among
others. Additionally, smaller companies with which we may compete include
LifeCell Corporation for platelet preservation, Cerus for viral inactivation of
platelets and other blood products and Cryo Life for preserving heart valves by
cryo-preservation. These companies are active in research and development of
biological material preservation. We have limited funds with which to develop
products and services. These companies are active in research and development
of biological material preservation, and we do not know the current status of
their development efforts. Most of the above competitors have significantly
greater financial resources, technical expertise and managerial capabilities
than we currently possess.
<page>8
WE MAY FAIL TO OBTAIN GOVERNMENT APPROVAL OF OUR PROCESSES
The FDA regulates the commercial distribution and marketability of medical
solutions and equipment. In the event that we determine that these regulations
apply to our proposed products, we will need to obtain FDA approval for such
distribution. The process of obtaining FDA approval may be expensive, lengthy
and unpredictable. We have not developed our products to the level where these
approval processes can be started. We do not know if such approval could be
obtained in a timely fashion, if at all. In the event that we do not receive
any required FDA approval for certain products, we would not be able to sell
such products in the United States.
The regulation of our processes and products outside the United States will vary
by country. Noncompliance with foreign country requirements may include some or
all of the risks associated with noncompliance with FDA regulation as well as
other risks.
ACTS OF TERRORISM, RESPONSES TO ACTS OF TERRORISM AND ACTS OF WAR MAY IMPACT OUR
BUSINESS AND OUR ABILITY TO RAISE CAPITAL.
Future acts of war or terrorism, national or international responses to such
acts, and measures taken to prevent such acts may harm our ability to raise
capital or our ability to operate, especially to the extent we depend upon
activities conducted in foreign countries, such as Russia where we currently
maintain a branch office. In addition, the threat of future terrorist acts or
acts of war may have effects on the general economy or on our business that are
difficult to predict. We are not insured against damage or interruption of our
business caused by terrorist acts or acts of war.
WE MAY FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS.
We believe that the establishment of strategic partnerships will greatly benefit
the growth of our business, and we intend to seek out and enter into strategic
alliances. We may not be able to enter into these strategic partnerships on
commercially reasonable terms, or at all. Even if we enter into strategic
alliances, our partners may not attract significant numbers of customers or
otherwise prove advantageous to our business. Our inability to enter into new
distribution relationships or strategic alliances could have a material and
adverse effect on our business.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE.
To date, we have had a very limited trading volume in our common stock. As long
as this condition continues, the sale of a significant number of shares of
common stock at any particular time could be difficult to achieve at the market
prices prevailing immediately before such shares are offered. In addition,
sales of substantial amounts of common stock, including shares issued upon the
exercise of outstanding options and warrants, under Securities and Exchange
Commission Rule 144, or otherwise could adversely affect the prevailing market
price of our common stock and could impair our ability to raise capital at that
time through the sale of our securities. A number of our employees and
consultants have elected to convert a portion of their compensation to shares of
our common stock, and these shares have been registered for resale to the
public.
<page>9
OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE; OUR COMMON STOCK IS
"PENNY STOCK."
The market price of our common stock is likely to be highly volatile as the
stock market in general, and the market for technology companies in particular,
has been highly volatile. The trading prices of many technology companies'
stocks have recently been highly volatile and have recorded lows well below
historical highs.
Factors that could cause such volatility in our common stock may include, among
other things:
- actual or anticipated fluctuations in our quarterly operating results;
- announcements of technological innovations;
- changes in financial estimates by securities analysts;
- conditions or trends in our industry; and
- changes in the market valuations of other comparable companies.
In addition, our stock is currently traded on the OTCBB and it is uncertain that
we will be able to successfully apply for listing on the AMEX, the NASDAQ
National Market (the "NMS"), or the NASDAQ SmallCap Market (the "SmallCap
Market") in the foreseeable future due to the trading price of our common stock,
our working capital and revenue history. Failure to list our shares on the
AMEX, the NMS, or the SmallCap Market will impair the liquidity of our common
stock.
The Securities and Exchange Commission has adopted regulations which generally
define a "penny stock" to be any security that 1) is priced under five dollars,
2) is not traded on a national stock exchange or on NASDAQ, 3) may be listed in
the "pink sheets" or the OTCBB, and 4) is issued by a company that has less than
$5 million in net tangible assets and has been in business less than three
years, or by a company that has under $2 million in net tangible assets and has
been in business for at least three years, or by a company that has revenues of
less than $6 million for three years.
Penny stocks can be very risky, as they are low-priced shares of small companies
not traded on an exchange or quoted on NASDAQ. Prices often are not available.
Investors in penny stocks are often unable to sell stock back to the dealer that
sold them the stock. Thus an investor may lose his/her investment. Our common
stock is a penny stock and thus is subject to rules that impose additional sales
practice requirements on broker/dealers who sell such securities to persons
other than established customers and accredited investors, unless the common
stock is listed on the SmallCap Market. Consequently, the penny stock rules may
restrict the ability of broker/dealers to sell our securities, and may adversely
affect the ability of holders of our common stock to resell their shares in the
secondary market.
<page>10
SOME OF THE INFORMATION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS.
Some of the information in this prospectus contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect," "intend,"
"anticipate," "believe," "estimate," "continue" or similar words. You should
read statements that contain these words carefully because they:
- discuss our expectations about our future performance;
- contain projections of our future operating results or of our future
financial condition; or
- state other "forward-looking" information.
We believe it is important to communicate our expectations to our shareholders.
There may be events in the future, however, that we are not able to predict
accurately or over which we have no control. The risk factors listed in this
section, as well as any cautionary language in this prospectus, provide examples
of risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Before you invest in our common stock, you should be aware that the occurrence
of any of the events described in these risk factors and elsewhere in this
prospectus could have a material and adverse effect on our business, results of
operations and financial condition and that upon the occurrence of any of these
events, the trading price of our common stock could decline and you could lose
all or part of your investment.
USE OF PROCEEDS
Proceeds we receive pursuant to the issuance of the shares will be used for
working capital and general corporate purposes.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock has been traded on the OTCBB since May 18, 1999. Prior to that
date, our common stock was not actively traded in the public market. Our common
stock is listed on the OTCBB under the symbol "HBSC.OB." Since October 2001,
our common stock has also been traded on the Frankfurt Stock Exchange under the
symbol "HYT." The following table sets forth, for the periods indicated, the
high and low bid prices for our common stock on the OTCBB as reported by various
Bulletin Board market makers. The quotations do not reflect adjustments for
retail mark-ups, mark-downs, or commissions and may not necessarily reflect
actual transactions.
<page>11
Period Low Bid High Bid
-------- --------
2005
Fourth Quarter(through November 14,2005) $ 0.54 $ 0.83
Third Quarter $ 0.51 $ 1.03
Second Quarter $ 0.27 $ 0.59
First Quarter $ 0.05 $ 0.28
<page>12
2004
Fourth Quarter $ 0.05 $ 0.15
Third Quarter $ 0.07 $ 0.19
Second Quarter $ 0.14 $ 0.21
First Quarter $ 0.11 $ 0.25
2003
Fourth Quarter $ 0.12 $ 0.25
Third Quarter $ 0.14 $ 0.34
Second Quarter $ 0.10 $ 0.30
First Quarter $ 0.10 $ 0.27
On January 26, the high and low bid prices of our common stock on the OTCBB
were $ 0.57 and $ 0.50 per share, respectively, and there were approximately 254
holders of record of our common stock.
To date, we have never declared or paid any cash dividends on our capital stock.
We currently intend to retain any future earnings for funding growth and
therefore, do not expect to pay any dividends in the foreseeable future. Payment
of future dividends, if any, will be at the discretion of our Board of Directors
after taking into account various factors, including our financial condition,
operating results, current and anticipated cash needs and plans for expansion.
<page>12
CAPITALIZATION
The following table sets forth, as of September 30, 2005, our capitalization on
an actual basis as adjusted to reflect the issuance of common stock offered by
this prospectus. This information should be read in conjunction with our
Financial Statements and the related Notes appearing elsewhere in this
prospectus.
September 30, 2005
------------------
Actual As Adjusted (1)
------------- ----------------
Stockholders' equity
Preferred stock; no par or stated value;
5,000,000 shares authorized, no shares
issued or outstanding $ -- $ --
Common stock, no par or stated value;
145,000,000 shares authorized; 64,885,300
shares issued and 64,196,000 shares outstanding;
84,885,300 shares issued and 84,196,000 shares
outstanding as adjusted 18,431,000 28,431,000
Investment in marketable securities held
in escrow (67,800) (67,800)
Accumulated other comprehensive loss (11,800) (11,800)
Accumulated deficit during development
stage (19,185,500) (19,185,500)
------------- ------------
Total stockholders' equity (deficit) (834,100) 9,165,900
------------- ------------
Total capitalization $ (834,100) $ 9,165,900
__________________________ ============= =============
(1) Reflects the issuance and sale of the 20,000,000 shares of common stock
included in this prospectus, at an offering price of $0.50 per share.
<page>13
SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 2004 and 2003, and for
each of the respective years then ended, are derived from our financial
statements, which have been audited by L.L. Bradford & Company, LLC, independent
auditors, and are included elsewhere in this prospectus. The following selected
financial data as of September 30, 2005 and for the nine-month periods ended
September 30, 2005 and 2004, are derived from unaudited financial statements
that, in our opinion, reflect all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the financial position as of
such date and results of operations for these periods. Operating results for the
nine-month period ended September 30, 2005 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 2005. The
data set forth below should be read in conjunction with our Financial Statements
and Notes thereto included elsewhere in this prospectus and with "Management's
Discussion and Analysis or Plan of Operation."
<table>
<caption>
<s> <c> <c>
Nine Months Ended September 30, Years Ended December 31,
2005 2004 2004 2003
(unaudited) (unaudited)
-------------- ------------- ------------ -------------
Statements of Operations Data:
Revenue $ -- $ -- $ -- $ --
Operating expenses:
General and administrative:
Stock based compensation 450,300 329,700 347,500 251,800
Public relations 3,202,600 -- -- --
Other general and administrative
expenses 788,800 467,900 760,900 1,292,200
------------- ----------- ------------ -----------
Total general and administrative 4,441,700 797,600 1,108,400 1,544,000
Research and development 138,300 154,600 218,500 394,300
Sales and marketing 25,400 93,900 146,400 219,300
------------- ----------- ------------ -----------
Total operating expenses 4,605,400 1,046,100 1,473,300 2,157,600
------------- ----------- ------------ -----------
Loss from operations (4,605,400) (1,046,100) (1,473,300) (2,157,600)
Other income (expense):
Bad debt related to other
receivables -- -- -- (398,300)
Forgiveness of debt 80,100 -- -- --
Loss on investment in
marketable securities -- -- (762,600) --
Interest expense -- (366,200) (366,400) (7,100)
------------- ------------ ------------- -------------
Loss before provision for income taxes (4,525,300) (1,412,300) (2,602,300) (2,563,000)
Provision for income taxes 1,600 -- (800) (800)
------------- ------------ ------------- -------------
Net loss (4,526,900) (1,412,300) (2,603,100) (2,563,800)
Other comprehensive loss, net of tax:
Unrealized loss on investment
in marketable securities (2,000) -- (9,800) --
-------------- ------------ ------------- -------------
Total comprehensive loss ($4,528,900) ($1,412,300) ($2,612,900) ($2,563,800)
============== ============= ============= =============
Basic and diluted loss per share $ (0.08) $ (0.04) $ (0.07) $ (0.10)
============== ============= ============= =============
Basic and diluted weighted-average
common shares outstanding 56,261,437 35,614,160 39,795,100 26,814,100
============== ============= ============= =============
<page>14
September 30, 2005 December 31, 2004
------------------ -----------------
Balance Sheet Data:
Cash $ 60,100 $ 278,700
Working capital (deficit) $ (844,100) $ (313,800)
Total stockholders' deficit $ (834,100) $ (313,600)
</table>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING OUR
EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE
WORDS "EXPECTS," "ANTICIPATES," "INTENDS," "BELIEVES," OR SIMILAR LANGUAGE.
THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS, UNCERTAINTIES AND OTHER FACTORS.
ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS ARE BASED ON
INFORMATION AVAILABLE TO US ON THE DATE HEREOF AND SPEAK ONLY AS OF THE DATE
HEREOF. THE FACTORS DISCUSSED ABOVE UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS ARE AMONG THOSE FACTORS THAT IN SOME CASES HAVE AFFECTED OUR RESULTS
AND COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN
THE FORWARD-LOOKING STATEMENTS.
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto.
Overview
We are a developmental stage company, and have a very limited operating history
and no revenue to date. Our prospects must be considered in light of the risks
and uncertainties encountered by companies in an early stage of development
involving new technologies and overcoming regulatory approval process
requirements before any revenue is possible.
We have experienced operating losses since our inception. These losses have
resulted from the significant costs incurred in the development of our
technology and the establishment of our research and development facility.
Expenditures will increase in all areas in order to execute our business plan,
particularly in research and development and in gaining regulatory approval to
market our products in the U.S. and abroad.
In 2003, we experienced increased difficulty in raising outside capital. This
difficulty continued through the third quarter of 2004. Although research
continued in organ preservation, we were forced to suspend animal testing and
human infusion testing due to a lack of funds. Our employees accepted a
temporary 50% salary reduction in January 2004 to conserve cash, and several of
these employees as well as certain of our outside consultants elected to convert
a portion of their deferred compensation to shares of our common stock. On
September 1, 2004, we restored all employee salaries; however, employees
received 50% of their salaries in stock and 50% in shares of restricted common
stock as an accrual. In March 2005, we made the decision to pay all of these
accrued salaries in cash rather than in stock. In February 2005, we changed our
overall compensation structure to reduce recurring payroll expenses in non-
critical areas in order to provide additional resources for the completion of
our scientific objectives.
<page>15
During the year ended December 31, 2004, we pursued various alternatives for
raising capital, including but not limited to transactions with Dutchess,
Langley Park Investments PLC ("Langley") and Pini Ben David ("Ben David"). In
2004 and 2005, we also raised funds through the sales of our capital stock
through Regulation S under the Securities Act. In October 2005, we entered into
an agreement with Ascendiant Capital to assist in the capital-raising process
(see "Liquidity and Capital Resources" below for detailed descriptions of all
of the above transactions). To date, we continue to seek alternative sources
for capital.
Our principal business objective is to develop and provide economical, non-toxic
methods of extending the shelf life and improving the quality of blood
platelets, donor organs and other biological material. We have been successful
in preserving blood platelets for ten days under refrigeration while maintaining
cell structure and some morphology, which has never been done before to our
knowledge. We had originally contemplated submitting our findings to the FDA in
the first half of 2003; however, additional pre-human infusion tests were
necessary to address certain aspects of our findings. We believe that we have
now satisfactorily resolved all issues raised by these findings, and resumed the
process of our human infusion tests in February 2005. Some delays have been
encountered at the centers conducting the tests, as it was necessary for the
centers to repeat our in-vitro (test tube) tests prior to proceeding to the
actual human tests. Internal approval for starting the pre-human infusion
studies had to be secured, which is now in place. Additional approvals to
commence human in-vivo studies will be required from the internal review board
and possibly from the FDA. We currently anticipate that these tests will be
completed within the next four to six months.
We began research on kidney preservation in 2002 and have developed what we
believe is a solution that will operate under refrigerated temperature storage
conditions for over 30 hours, allowing organ preservation beyond current
capabilities. In our most recent preliminary tests, we successfully transplanted
a rat kidney that had been frozen at a temperature of negative 80 degrees
Centigrade for three months in our patent-pending HBS sub-zero solution. In
October 2005, we successfully completed the initial phase of our survival
studies of animals with transplanted kidneys preserved using our HBS organ
preservation solution, and were able to preserve a rat's kidney at negative 196
degrees Centigrade for up to five days while maintaining some functionality when
transplanted back into the animal, evidenced by urine production. We previously
preserved rats' kidneys at negative 20 and negative 80 degrees Centigrade. We
will continue to conduct further tests on a larger animal sample size, and
conduct histology and survival studies as well. Our goal is to extend the kidney
shelf life for up to 72 to 96 hours at above freezing temperatures and even
longer at sub-zero temperatures. We believe that the extended shelf life should
enable better matching of donor kidneys to recipients. In the third quarter of
2005, we also purchased a special freezer and equipment used to conduct
experiments at negative 80 degrees Centigrade.
In July 2002, we received our first patent on our technology and methodology for
preserving blood platelets. We filed a provisional patent application in June
2001 to cover our improved platelet preservation methods. In August 2003, we
filed another patent application covering improved platelet preservation
methods. We will seek strategic alliances with companies that have the
capability to provide technical and clinical expertise as well as financial and
marketing expertise to leverage our current expertise in these areas.
<page>16
In addition to our attempts to raise outside capital, we have pursued
opportunities to acquire existing products and businesses that currently
produce, or have the potential to produce, revenue. In September 2003, we
signed a binding letter of intent to acquire all rights to a cream product with
potential skin healing and antibacterial properties. The purpose of the
acquisition is to develop a product to generate revenues while our blood
platelet preservation technology is awaiting human infusion tests. During 2004,
using minimal funding, we were able to reformulate the cream for better
appearance and use. We then tested the reformulated cream for safety at an
independent laboratory, and received positive results. We are now seeking a
business partner to produce and market the cream. There is no guarantee that we
will be able to develop a marketable product based on the cream. If we are able
to develop a marketable product, it will require additional research and
development as well as additional capital. At this time, we do not have an
estimate of the time or the amount of funds that would be required to produce
and market such a product.
Results of Operations
Nine Months Ended September 30, 2005 Compared With Nine Months Ended September
30, 2004
Revenues. We did not generate any revenue in either of the nine-month periods
ended September 30, 2005 or 2004, and we have not generated revenues since our
inception in February 1998, as our focus to date has been on the research and
development of products. We are a development stage company in the eighth year
of research and development activities, and do not anticipate receiving revenue
until we complete product development and clinical testing.
General and Administrative Expenses. Total general and administrative expenses
in the nine months ended September 30, 2005 were $4,441,700, an increase from
$797,600 for the nine months ended September 30, 2004. This increase was
primarily due to a significant increase in public relations expenses, which
equaled $3,202,600 for the nine months ended September 30, 2005. We did not
incur public relations expenses for the comparable period in 2004. These
expenses stem from a public relations agreement with Abernathy Mendelson &
Associates ("Abernathy") pursuant to which we provide shares of common stock as
payment for advertising and promotional services. Our original agreement with
Abernathy, entered into in March 2005 and subsequently amended in April 2005,
provided that Abernathy would promote us to the investment community and the
general public through press releases and other communications, all of which we
must approve in advance. The term of the Abernathy agreement was six months,
subject to prior termination. In consideration for the public relations
services, we were required to issue compensation shares to Abernathy equal to
30% of the increase in buy volume of our common stock that is directly
attributable to Abernathy. In addition, we were required to issue bonus shares
to Abernathy equal to 10% of the increase in buy volume in the event that the
sales price of our common stock as quoted on the OTCBB equaled or exceeded $0.25
per share. We were required to place an aggregate of 3,000,000 free trading
shares of common stock in escrow in advance of the services under the Abernathy
agreement. Through September 30, 2005, we issued an aggregate of 1,580,245 of
these shares of common stock to Abernathy.
In June 2005, we entered into a second agreement with Abernathy for additional
public relations consulting services and issued an additional 750,000 shares of
free trading shares of common stock for these services, valued at $247,500. We
also became obligated to issue an additional 899,500 shares to Abernathy as a
bonus under this second agreement. These shares will be issued at a future date.
The increase in general and administrative expenses was also partly due to an
increase in stock-based compensation in the nine months ended September 30, 2005
to $450,300, from $329,700 for the three months ended September 30, 2004. From
time to time, our staff has worked for under market rate compensation or has had
to accrue pay for extended periods of time when financing was not available. We
<page>17
have granted stock options to certain employees in partial consideration for
salary reductions, and certain employees have elected to receive stock in lieu
of compensation. Our employees accepted a temporary 50% salary reduction in
January 2004 to conserve cash, and several of these employees as well as certain
of our outside consultants elected to convert a portion of their deferred
compensation to shares of our common stock. On September 1, 2004, we restored
all employee salaries; however, employees received 50% of their salaries in cash
and 50% in shares of restricted common stock as an accrual. We subsequently
made the decision to pay all of these accrued salaries in cash. In February
2005, we changed our overall compensation structure to reduce recurring payroll
expenses in non-critical areas in order to provide additional resources for the
completion of our scientific objectives. In addition, we had an increase in
other general and administrative expenses, from $467,900 for the nine months
ended September 30, 2004 to $788,800 for the nine months ended September 30,
2005. This increase stemmed from additional legal and professional fees and
other expenses due to the obligations of being a public company.
Research and Development. Our research and development expenses were $138,300
for the nine months ended September 30, 2005, a decrease from $154,600 for the
comparable period in 2004. This decrease was primarily due to a slowdown in
research and development activity beginning in the fourth quarter of 2003 and
continuing into 2004, reflecting our funding shortfall. In 2003 we suspended
human infusion studies and animal testing pending receipt of funding, and this
suspension remained in place for all of 2004 and the first half of the first
quarter of fiscal 2005. In February 2005, however, we resumed our infusion
studies and organ preservation research and in the near future plan to double
the number of animal organ preservation experiments as compared to the current
schedule. We believe that recent payroll reductions should allow us to maintain
and possibly accelerate our scientific program.
Sales and Marketing Expenses. Our sales and marketing expenses for the nine
months ended September 30, 2005 equaled $25,400, a decrease from $93,900 for the
comparable period in 2004. We recently eliminated payroll in the sales and
marketing area in order to give priority to the completion of our scientific
objectives - to complete human infusion studies for platelets and move closer to
human testing utilizing our organ preservation technology.
Forgiveness of Debt. In the three months ended September 30, 2005, we recorded
forgiveness of debt from a vendor in the amount of $80,100, based upon the
vendor's realization of additional funds from the sale of common stock issued in
satisfaction of that debt. No such forgiveness was recorded in the comparable
period in 2004.
Interest Income and Expense. We did not incur any interest expense during the
nine months ended September 30, 2005, as compared to interest expense of
$366,200 for the same period in 2004. The 2004 expense was due primarily to
interest on certain accrued wages, vacation and accounts payable converted to
common stock during the first quarter of 2004.
Net Loss. As a result of the foregoing factors, our net loss increased to
$4,526,900 for the nine months ended September 30, 2005 from a net loss of
$1,412,300 for the nine months ended September 30, 2004. The 2005 loss includes
an unrealized loss of $2,000 on our investment in Langley securities, resulting
in a total comprehensive loss of $4,528,900 for the period. Our net loss per
share was $0.08 for the nine months ended September 30, 2005 and $0.04 for the
comparable period in 2004.
<page>18
Year Ended December 31, 2004 Compared To Year Ended December 31, 2003
Revenues. We did not generate any revenue in the years ended December 31, 2004
and 2003, and have not generated revenues since our inception in February 1998,
as our focus to date has been on the research and development of products. We
are a development stage company in the seventh year of research and development
activities, and do not anticipate receiving revenue until we complete product
development and clinical testing. We have had to curtail development activities
due to inadequate capital, and therefore there can be no assurance that we will
ever receive revenues or reach profitability.
General and Administrative Expenses. General and administrative expenses in the
year ended December 31, 2004 were $1,108,400, a decrease from $1,544,000 for the
year ended December 31, 2003. The decrease was due primarily to reductions in
salaries, marketing expenses and fees for professional services due to our
shortfall in capital, offset by an increase in stock-based compensation. From
time to time, our staff has worked for under market rate compensation or has had
to accrue pay for extended periods of time when financing was not available. We
have granted stock options to certain employees in partial consideration for
salary reductions, and certain employees have elected to receive stock in lieu
of compensation. Our employees accepted a temporary 50% salary reduction in
January 2004 to conserve cash, and several of these employees as well as certain
of our outside consultants elected to convert a portion of their deferred
compensation to shares of our common stock. On September 1, 2004, we restored
all employee salaries; however, employees received 50% of their salaries in
stock and 50% in shares or restricted common stock. As a result of these
factors, stock-based compensation increased to $347,500 in the year ended
December 31, 2004, from $251,800 for the year ended December 31, 2003. Based on
our ongoing cash shortage, we anticipate that stock-based compensation will
continue to increase in 2005. In February 2005, we changed our overall
compensation structure to reduce recurring payroll expenses in non-critical
areas in order to provide additional resources for the completion of our
scientific objectives.
Research and Development. Our research and development expenses were $218,500
for the year ended December 31, 2004, a decrease from $394,300 for the year
ended December 31, 2003. This decrease was primarily due to a slowdown in
research and development activity beginning in the fourth quarter of 2003,
reflecting our funding shortfall. In 2003, we suspended human infusion studies
and animal testing pending receipt of funding. In February 2005, however, we
resumed our infusion studies and organ preservation research and accelerated the
number of animal organ preservation experiments as compared to the prior
schedule. We believe that recent reduced payroll reductions should allow us to
maintain and possibly accelerate our scientific program.
Sales and Marketing Expenses. Our sales and marketing expenses for the year
ended December 31, 2004 decreased to $146,400, compared to $219,300 for the year
ended December 31, 2003. We recently reduced payroll in the sales and marketing
area in order to give priority to the completion of our scientific objectives -
to complete human infusion studies for platelets and move closer to human
testing utilizing our organ preservation technology.
<page>19
Interest Income and Expense. We incurred interest expense of $366,400 during
the year ended December 31, 2004, as compared to interest expense of $7,100 in
the year ended December 31 2003. The substantial increase was due primarily to
interest on certain accrued wages, vacation and accounts payable converted to
common stock during the first quarter of 2004. We did not receive interest
income in either of the years ended December 31, 2003 or 2004. We recognized a
$762,600 loss on investment in market securities in the year ended December 31,
2004, reflecting a decline in the market value of the Langley ordinary shares
held by us. We also recorded an unrealized loss of $9,800 in the year ended
December 31, 2004 to reflect the Langley ordinary shares at fair value as of
that date. In the year ended December 31, 2003, we wrote off bad debt of
$398,300 based on our determination as to the uncertain collectibility of a
receivable for 510,000 outstanding shares of our common stock to certain former
consultants.
Net Loss. As a result of the foregoing factors, our net loss increased slightly
to $2,603,100 for the year ended December 31, 2004, from a net loss of
$2,563,800 for the year ended December 31, 2003. Our net loss per share
decreased to $0.07 for the year ended December 31, 2004, from $0.10 for the year
ended December 31, 2003, due to an increase in 2004 in the number of shares of
common stock outstanding.
Liquidity and Capital Resources
Our operating plan for calendar years 2005 and 2006 is focused on continued
development of our products. It is our estimate that a cash requirement of $2.5
million is required to support this plan for the next twelve months. Since our
inception, we have financed our operations through private and public equity
placements. During the year ended December 31, 2004, we received an aggregate of
$999,400 from the issuance of common stock, compared to an aggregate of
approximately $905,400 received in the year ended December 31, 2003 and
approximately $2,151,300 received in the year ended December 31, 2002. During
the first nine months of 2005, we have received an aggregate of $795,100 from
the issuance of common stock, including approximately $225,600 from our
agreement with Dutchess. We are actively seeking additional funding. Once we
receive the required additional financing, we anticipate continued growth in our
operations and a corresponding growth in our operating expenses and capital
expenditures. We do not anticipate any revenue from operations for the next two
or three years. Therefore, our success will be dependent on funding from private
placements of equity securities. Although we have entered into certain
agreements with Dutchess, there can be no assurance that we will be successful
in raising any capital pursuant to this agreement. At the present time, we have
no other agreements or arrangements for any private placements.
<page>20
In 2003, we experienced increased difficulty in raising outside capital. This
difficulty continued through the third quarter of 2004. Although research
continued in organ preservation, we were forced to suspend animal testing and
human infusion testing due to a lack of funds. Our employees accepted a
temporary 50% salary reduction in January 2004 to conserve cash, and several of
these employees as well as certain of our outside consultants elected to convert
a portion of their deferred compensation to shares of our common stock. On
September 1, 2004, we restored all employee salaries; however, employees
received 50% of their salaries in stock and 50% in shares of restricted common
stock. In February 2005, we changed our overall compensation structure to reduce
recurring payroll expenses in non-critical areas in order to provide additional
resources for the completion of our scientific objectives. In March 2005, we
made the decision to pay all of the accrued salaries in cash rather than in
stock.
We are in the eighth year of research and development, with an accumulated loss
during the development stage of $19,185,500. As of September 30, 2005, we are
uncertain as to the completion date of our research and development, or if
products will ever be completed as a result of this research and development
activity. We anticipate that the funds spent on research and development
activities will need to increase prior to completion of a product. Additionally,
we may not be able to secure funding in the future necessary to complete our
intended research and development activities.
These conditions give rise to substantial doubt about our ability to continue as
a going concern. Our financial statements do not include adjustments relating to
the recoverability and classification of reported asset amounts or the amount
and classification of liabilities that might be necessary should we be unable to
continue as a going concern. Our continuation as a going concern is dependent
upon our ability to obtain additional financing from the sale of our common
stock, as may be required, and ultimately to attain profitability. The report
of our independent certified public accountants, included in this prospectus,
contains a paragraph regarding our ability to continue as a going concern.
In the nine months ended September 30, 2005, we continued to spend cash to fund
our operations. Cash used by operating activities for the nine months ended
September 30, 2005 equaled $783,600, and consisted principally of our net loss
of $4,526,900, a decrease in other liabilities of $175,000, depreciation of
$1,200, a decrease in accounts payable of $160,300, and a change in prepaid
expenses of $6,200, offset by $3,202,600 in public relations expenses paid or to
be paid in common stock, $450,300 provided by stock- based compensation, a
decrease in accrued liabilities of $600 and an increase in pre-paid expenses of
$6,200. For the comparable period in 2004, cash used by operating activities
equaled $571,300, and consisted of our net loss of $1,412,300 offset by $365,300
provided by interest expense paid in shares of our common stock, $329,700
provided by stock-based compensation, an increase in accounts payable of
$90,600, a decrease of $14,100 in prepaid expenses and other assets, $1,100 in
depreciation and an increase in other liabilities of $40,200.
<page>21
There was $11,000 used in investing activities for the nine months ended
September 30, 2005. The increase was due to the purchase of a special freezer
for conducting our organ preservation experiments. We did not utilize or receive
cash from investment activities during the comparable period in 2004.
Cash flow from financing activities for the nine months ended September 30, 2005
produced a net increase in cash of $576,000, consisting principally of $795,100
from the issuance of common stock, offset by a decrease of $219,100 in
stockholder payables. Cash flow from financing activities for the nine months
ended September 30, 2004 produced a net increase in cash of $564,200, which
resulted from $252,100 in proceeds from the issuance of common stock and a
$312,100 increase in stockholder payables.
As of September 30, 2005, we had cash and cash equivalents amounting to $60,100,
a decrease of $218,600 from the balance at December 31, 2004. Our working
capital deficit increased to $844,100 at September 30, 2005, from $650,300 at
June 30, 2005 and $313,800 at December 31, 2004. The increase in this deficit is
from the resources used in our operations, as explained above. There are no
material commitments for capital expenditures at September 30, 2005.
During the year ended December 31, 2004, we pursued various alternatives for
raising capital. We entered into an Investment Agreement (the "Investment
Agreement") with Dutchess effective June 28, 2004. Pursuant to the terms of the
Investment Agreement, we may offer, through a series of puts, and Dutchess must
purchase from time to time, up to a maximum of 38,000,000 shares of our common
stock, provided that Dutchess shall not be required to purchase shares of our
stock with an aggregate purchase price in excess of $5,000,000. The purchase
price of shares purchased under the Investment Agreement shall be equal to 95%
of the lowest closing "best bid" price (the highest posted bid price) of the
common stock during the five consecutive trading days immediately following the
date of our notice to Dutchess of our election to put shares pursuant to the
Investment Agreement. The dollar value that we will be permitted to put pursuant
to the Investment Agreement will be either: (A) 200% of the average daily volume
in the US market of the common stock for the ten trading days prior to the
notice of our put, multiplied by the average of the three daily closing bid
prices immediately preceding the date of the put, or (B) $10,000. No single put
can exceed $1,000,000. We filed a registration statement on Form SB-2 in July
2004 to register for resale an aggregate of 38,000,000 shares of common stock
issuable under the Investment Agreement; this registration statement was
declared effective on August 23, 2004. In April 2005, we issued 30,000 shares of
common stock to Dutchess pursuant to our first put under the Investment
Agreement, and received approximately $16,800 in proceeds. In October 2005, we
issued an aggregate of 108,605 common stock to Dutchess pursuant to our sixth
put under the Investment Agreement,and received proceeds of $65,000.
<page>22
In July 2004, we entered into a Stock Purchase Agreement (the "Stock Purchase
Agreement"), whereby we would sell shares of our restricted common stock for
shares in Langley, a London-based institutional investment trust. Langley was
formed in February 2004 to invest in a diverse portfolio of U.S. small-cap
companies (defined by Langley management as those public companies having a
market capitalization of less than U.K. $100 million). Although Langley's
investments are not limited to specific sectors, it has concentrated on mining,
oil and gas, energy-related and technology companies since it commenced
operations in February 2004. Langley's stated investment objective is to
achieve long-term capital growth. The Langley ordinary shares are registered as
a unit investment trust on the London Stock Exchange ("LSE"). The trading symbol
for the ordinary shares is LSE:LPI. The Langley Investment Trust consists of a
portfolio of the common stock of 23 U.S. publicly traded small cap companies.
Langley purchased 7,000,000 shares of our restricted stock at a price of
$930,999, or approximately $0.13 per share. The shares issued to Langley
constituted 17.9% of our outstanding common stock at July 31, 2004. In lieu of
cash, Langley issued to us an aggregate of 512,665 Langley ordinary shares at a
price of U.K. $1.00 per share (one British Pound Sterling = US $1.8160 on July
30, 2004). The Langley ordinary shares issued to us constituted less than one
percent of Langley's issued and outstanding ordinary shares at September 30,
2004. The total sales price of $930,999 was determined by multiplying the
7,000,000 shares by the average of the closing bid price of our common stock
during the ten trading days preceding the date of the Agreement. The 512,665
shares in Langley received as consideration was calculated by dividing the total
sales price by the conversion rate of the British Pound Sterling to the U.S.
dollar as of the close of business on July 26, 2004. Upon the closing of this
transaction, Langley and we were required to issue our respective shares into an
escrow account, whereby we could immediately liquidate up to 50% of the Langley
shares. We and the other portfolio companies have received one-half of the free-
trading Langley ordinary shares sold to us under the Stock Purchase Agreement.
The remaining 50% of the free-trading Langley ordinary shares will be held in
escrow for two years as a downside price protection against our shares issued to
Langley. In the event of a decline in the market price of our common stock at
the end of two years, we will be required to sell to Langley the amount of our
Langley shares equal to (i) the original number of Langley shares issued as
consideration under the Stock Purchase Agreement multiplied by (ii) the
percentage decrease in the market price of our common stock. If at the end of
the two-year period the trading price of our common stock falls below $0.065, we
will have to sell back to Langley all the escrowed Langley shares. If at the
end of the trading period the trading price of our common stock is more than
$0.065 but less than $0.13, we will need to sell back to Langley only a
proportionate amount of our Langley ordinary shares. We have no obligation to
register for resale our shares that are held by Langley.
<page>23
On November 14, 2005, Langley had a net asset value for its underlying portfolio
of U.K. $0.57 per ordinary share, or an aggregate net asset value of U.K.
$42,508,790 (U.S. $73,756,479, based on U.K. $1.00 = U.S. $1.735 on November 14,
2005). Assuming that the downside protection (or "claw-back rights") had been
exercised by Langley, this would represent a net asset value per ordinary share
of U.K. $0.37, or an aggregate net asset value of U.K.$ 27,593,425 (U.S.
$47,869,223). We had anticipated that the trust would traditionally trade at a
discount to its net asset value; however, the discount has been more significant
than we expected. To date, due to the low trading price of the Langley stock on
the London Stock Exchange (U.K. $0.135 per ordinary share on November 14, 2005),
we have not sold any of our Langley ordinary shares.
The rights of holders of Langley ordinary shares are set forth in Langley's
Memorandum of Association. In general, each holder of Langley ordinary shares
has one vote for every ordinary share held. Unless Langley's directors decide
otherwise, a holder of ordinary shares may not vote, either personally or by
proxy, unless all calls and other amounts payable with respect to the ordinary
shares have been paid. Holders of ordinary shares may receive dividends in
Langley as and when declared by the directors. In the event of a liquidation of
Langley, holders of ordinary shares may receive their pro rata share of any
remaining assets. In the event that Langley has more than one class of shares,
the rights of the holders of any one class of shares may be varied only with the
written consent of holders of three-fourths of the nominal value of the issued
shares of that class, or with the sanction of an extraordinary resolution passed
at a separate general meeting of such holders.
We considered a variety of possible financing options prior to entering into the
transaction with Langley. In the past year, it has become more difficult for us
to effect equity placements on terms and conditions satisfactory to us and our
shareholders. We were approached by a number of private investors who sought to
purchase common stock at significant discounts to market and other potential
investors who wanted to receive common stock in advance of forwarding
consideration for the stock to us. None of these alternatives were acceptable to
management. We selected Langley after due diligence on Langley and its
management, including but not limited to a review of a prior fund with similar
structure and investment strategies, assembled by the founders of Langley.
Effective October 28, 2004, we entered into a loan agreement (the "Loan
Agreement") with Pini Ben David (Grunspan), an individual who lives in
Switzerland ("Ben David"). Ben David is not, and has not been during the past
two years, an affiliate of us or any of our current or former affiliates. The
Loan Agreement called for Ben David to loan us an aggregate of Euros $2,300,000
(the "Loan"). The Loan was to bear interest at the rate of three percent per
annum, with payments of interest due monthly and all principal plus accrued but
unpaid interest due and payable on November 1, 2007. Repayment of the Loan was
secured by 23,000,000 shares of our common stock (the "Shares") issuable
pursuant to Regulation S under the Securities Act. Pursuant to the Loan
Agreement and an Escrow Agreement between Ben David and us, a certificate
representing the Shares (the "Certificate"), containing a legend restricting
transfer, was delivered to Ben David to hold until funds for repayment of the
Loan were delivered to the escrow agent. We believe that the parties intended
that when the loan funds were delivered by Ben David to the escrow agent, Ben
David would also deliver the stock certificate to the escrow agent, who would
disburse the funds and the certificates to the appropriate parties. The Loan
Agreement also provided that it would terminate, and the Shares immediately
returned to us, in the event that the Loan funds were not delivered to us by the
15th calendar day following the date of the Loan Agreement (November 13, 2004).
Pursuant to Ben David's request, we extended the date for receipt of Loan funds
to December 23, 2004 and exchanged the certificate for three certificates (one
to Ben David and one to each of two affiliates); however, no Loan funds were
received by that date. On January 11, 2005, we instructed our transfer agent to
cancel the Certificates, and notified Ben David that the Loan Agreement was
cancelled and of no further force or effect. We did not incur any early
termination penalties in connection with the cancellation of the Loan Agreement.
In the second quarter of 2005, it came to our attention that shares of our
common stock (the "Reg S Stock") may have been sold in Germany without our
authorization, possibly in connection with the canceled Ben David certificates
in order to halt these unauthorized issuances, we commenced an exchange offer
(the "Offer") in July 2005 to exchange one share of our common stock (the "New
Stock") for each share of Reg S Stock outstanding before or upon the delisting
date (the "Record Date") when the Reg S Stock is no longer tradable. The offer
covers 10,000,000 shares of our common stock, and is intended to reduce
potential liability for the unauthorized issuances. Each share of New Stock will
be registered no later than six months from the initial date of the Offer for
trading on the OTCBB. The Exchange Offer was scheduled to expire on December 29,
2005. However, on January 11, 2006, we extended the Exchange Offering dealine
to January 31, 2006, due to delays encountered in the early confusion regarding
procedures and subsequent changes to those procedures. Any shares of Reg S
Stock not tendered for exchange by January 31, 2006, will no longer be
exchangeable for New Stock and will no longer be tradable on any German stock
exchange. To date, holders of an aggregate of 9,591,592 shares of the Reg S
stock have forwarded certificates and required documents, leaving an aggregate
of 408,408 shares outstanding.
In March 2005, we entered into an agreement with Abernathy (which was
subsequently amended in April 2005). The Abernathy agreement provided that
Abernathy would promote us to the investment community and the general public
through press releases and other communications, all of which we must approve in
advance. The term of the Abernathy agreement was six months, subject to prior
termination. In consideration for the public relations services, we were
required to issue compensation shares to Abernathy equal to 30% of the increase
in buy volume of our common stock that was directly attributable to Abernathy.
In addition, we were required to issue bonus shares to Abernathy equal to 10% of
the increase in buy volume in the event that the sales price of our common stock
as quoted on the OTC Bulletin Board equaled or exceeded $0.25 per share. We
were required to place an aggregate of 3,000,000 free trading shares of common
stock in escrow in advance of the services under the Abernathy agreement.
Through September 30, 2005, we issued an aggregate of 1,580,245 of these shares
of common stock to Abernathy.
<page>24
In June 2005, we entered into a second agreement with Abernathy for
additional public relations consulting services and issued an additional 750,000
shares of free trading shares of common stock for these services. We also became
obligated to issue an additional 899,500 shares to Abernathy as a bonus under
this second agreement. These shares will be issued at a future date.
In October 2005, we entered into an agreement with Ascendiant Securities, LLC
("Ascendiant") providing that Ascendiant would act on a best-efforts basis as
our financial advisor and non-exclusive placement agent in connection with the
structuring, issuance and sale of our debt and equity securities for financing
purposes. The agreement, which has a term of six months, requires us to pay
Ascendiant a cash success fee and warrants for completed transactions that we
approve. The success fee is equal to ten percent of the gross proceeds from
the sale of our securities; in addition, for transactions generating gross
proceeds of $2,000,000 or more, we must issue Ascendiant 175,000 shares of our
restricted common stock. To date, no transactions have been presented to us by
Ascendiant.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires us
to make judgments, assumptions and estimates that affect the amounts reported.
Note 1 of Notes to Financial Statements describes the significant accounting
policies used in the preparation of the financial statements. Certain of these
significant accounting policies are considered to be critical accounting
policies, as defined below.
A critical accounting policy is defined as one that is both material to the
presentation of our financial statements and requires management to make
difficult, subjective or complex judgments that could have a material effect on
our financial condition and results of operations. Specifically, critical
accounting estimates have the following attributes: 1) we are required to make
assumptions about matters that are highly uncertain at the time of the estimate;
and 2) different estimates we could reasonably have used, or changes in the
estimate that are reasonably likely to occur, would have a material effect on
our financial condition or results of operations.
Estimates and assumptions about future events and their effects cannot be
determined with certainty. We base our estimates on historical experience and on
various other assumptions believed to be applicable and reasonable under the
circumstances. These estimates may change as new events occur, as additional
information is obtained and as our operating environment changes. These changes
have historically been minor and have been included in the consolidated
financial statements as soon as they became known. Based on a critical
assessment of our accounting policies and the underlying judgments and
uncertainties affecting the application of those policies, management believes
that our financial statements are fairly stated in accordance with accounting
principles generally accepted in the United States, and present a meaningful
presentation of our financial condition and results of operations.
<page>25
In preparing our financial statements to conform to accounting principles
generally accepted in the United States, we make estimates and assumptions that
affect the amounts reported in our financial statements and accompanying notes.
These estimates include useful lives for fixed assets for depreciation
calculations and assumptions for valuing options and warrants. Actual results
could differ from these estimates.
We consider that the following are critical accounting policies:
Research and Development Expenses
All research and development costs are expensed as incurred. The value of
acquired in-process research and development is charged to expense on the date
of acquisition. Research and development expenses include, but are not limited
to, payroll and personnel expense, lab supplies, preclinical studies, raw
materials to manufacture our solution, manufacturing costs, consulting, legal
fees and research-related overhead. Accrued liabilities for raw materials to
manufacture our solution, manufacturing costs, and patent legal fees are
included in accrued liabilities and included in research and development
expenses.
Employee Stock Plans
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," we
elected to continue to apply the provisions of APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
our employee stock option and stock purchase plans. We are generally not
required under APB Opinion No. 25 and related interpretations to recognize
compensation expense in connection with our employee stock option and stock
purchase plans. We are required by SFAS No. 123 to present, in the Notes to
Financial Statements, the pro forma effects on reported net income and earnings
per share as if compensation expense had been recognized based on the fair value
method of accounting prescribed by SFAS No. 123.
BUSINESS
Background
Human BioSystems was incorporated on February 26, 1998, in the State of
California under the name "HyperBaric Systems." In November of 2002, we changed
our name to Human BioSystems. We are a development stage company whose principal
business objective is to develop and provide economical, non-toxic methods of
extending the shelf life and improving the quality of blood platelets, donor
organs and other biological material. We have been successful in preserving
blood platelets for ten days under refrigeration while maintaining cell
structure and morphology, which has never been done before to our knowledge. We
had originally contemplated submitting our findings to the U.S. Food and Drug
Administration ("FDA") in the first half of 2003; however, additional pre-human
infusion tests were necessary to address certain aspects of our findings. We
believe that we have now satisfactorily resolved all issues raised by these
findings, and resumed our human infusion tests in February 2005. Some delays
have been encountered at the centers conducting the tests, as it was necessary
for the centers to repeat our in-vitro (test tube) tests prior to proceeding to
the actual human tests. Internal approval for starting the pre-human infusion
studies had to be secured, which is now in place. Additional approvals to
commence human in-vivo studies will be required from the internal review board
and possibly from the FDA. We currently anticipate that these tests will be
completed within the next four to six months.
Our potential customers include blood banks, hospitals, clinics, and similar
organizations. We have no revenue from product sales or services to date. Our
development efforts and operations have been funded through equity infusions
from investors and loans from shareholders.
<page>26
In 2003, we experienced increased difficulty in raising outside capital. This
difficulty continued through the third quarter of 2004. Although research
continued in organ preservation, we were forced to suspend animal testing and
human infusion testing due to a lack of funds. Our employees accepted a
temporary 50% salary reduction in January 2004 to conserve cash, and several of
these employees as well as certain of our outside consultants elected to convert
a portion of their deferred compensation to shares of our common stock. On
September 1, 2004, we restored all employee salaries; however, employees
received 50% of their salaries in stock and 50% in shares of restricted common
stock. In February 2005, however, we changed our overall compensation structure
to reduce recurring payroll expenses in non-critical areas in order to provide
additional resources for the completion of our scientific objectives. Pursuant
to this change, we terminated the employment of Robert Strom, our Vice President
of Marketing and Sales, Rocky Umar, our Vice President, Strategic Planning, and
Victor Ivashin, our Chief Technology Officer. Messrs. Umar and Ivashin were
later engaged by us in an advisory capacity. In March 2005, we made the decision
to pay all of these accrued salaries in cash.
During the year ended December 31, 2004, we pursued various alternatives for
raising capital. We entered into the Investment Agreement with Dutchess
effective June 28, 2004. Pursuant to the terms of the Investment Agreement, we
may offer, through a series of puts, and Dutchess must purchase from time to
time, up to a maximum of 38,000,000 shares of our common stock, provided that
Dutchess shall not be required to purchase shares of our stock with an aggregate
purchase price in excess of $5,000,000. The dollar value that we will be
permitted to put pursuant to the Investment Agreement will be either: (A) 200%
of the average daily volume in the US market of the common stock for the ten
trading days prior to the notice of our put, multiplied by the average of the
three daily closing bid prices immediately preceding the date of the put, or (B)
$10,000. No single put can exceed $1,000,000. We filed a registration
statement on Form SB-2 in July 2004 to register for resale an aggregate of
38,000,000 shares of common stock issuable under the Investment Agreement; this
registration statement was declared effective on August 23, 2004. In April
2005, we issued 30,000 shares of common stock to Dutchess pursuant to our first
put under the Investment Agreement, and received approximately $16,800 in
proceeds. In October 2005, we issued an aggregate of 108,605 shares of common
stock to Dutchess pursuant to our sixth put and received proceeds of $65,000.
In July 2004, we entered into a Stock Purchase Agreement, whereby we would sell
shares of our restricted common stock for shares in Langley, a London-based
institutional investment trust. Langley was formed in February 2004 to invest in
a diverse portfolio of U.S. small-cap companies (defined by Langley management
as those public companies having a market capitalization of les than U.K. $100
million). Langley purchased 7,000,000 shares of our restricted stock at a price
of $930,999, or approximately $0.13 per share. The shares issued to Langley
constituted 17.9% of our outstanding common stock at July 31, 2004. In lieu of
cash, Langley issued to us an aggregate of 512,665 Langley ordinary shares at a
price of U.K. $1.00 per share (one British Pound Sterling = US $1.8160 on July
30, 2004). The Langley ordinary shares issued to us constituted less than one
percent of Langley's issued and outstanding ordinary shares at September 30,
2004. Upon the closing of this transaction, Langley and we were required to
issue our respective shares into an escrow account, whereby we could immediately
liquidate up to 50% of the Langley shares. The remaining 50% will be held in
escrow for two years as a downside price protection against our shares issued to
Langley. In the event of a decline in the market price of our common stock at
the end of two years, we will be required to sell to Langley the amount of our
Langley shares equal to (i) the original number of Langley shares issued as
consideration under the Stock Purchase Agreement multiplied by (ii) the
percentage decrease in the market price of our common stock. To date, due to the
low trading price of the Langley stock on the London Stock Exchange (U.K. $0.185
per ordinary share on August 15, 2005), we have not sold any of our Langley
shares.
<page>27
Effective October 28, 2004, we entered into the Loan Agreement with Ben David.
The Loan Agreement called for Ben David to loan us an aggregate of euros
$2,300,000 (the "Loan"). The Loan was to bear interest at the rate of three
percent per annum, with payments of interest due monthly and all principal plus
accrued but unpaid interest due and payable on November 1, 2007. Repayment of
the Loan was secured by 23,000,000 shares of our common stock (the "Shares")
issuable under Regulation S under the Securities Act of 1933, as amended (the
"Securities Act"). Pursuant to the Loan Agreement and an Escrow Agreement
between Ben David and us, a certificate representing the Shares (the
"Certificate"), containing legend restricting transfer, was delivered to Ben
David to hold until funds for repayment of the Loan were delivered to the escrow
agent. We believe that the parties intended that the loan funds when delivered
by Ben David to the escrow agent, Ben David would also deliver the stock
certificate to the escrow agent who would disburse the funds and the certificate
to the appropriate parties. The Loan Agreement also provided that it would
terminate, and the Shares immediately returned to us, in the event that the Loan
funds were not delivered to us by the 15th calendar day following the date of
the Loan Agreement (November 13, 2004). Pursuant to Ben David's request, we
extended the date for receipt of Loan funds to December 23, 2004; and exchanged
the certificate for three certificates (one to Ben David and one to each of two
affiliates); however, no Loan funds were received by that date. On January 11,
2005, we instructed our transfer agent to cancel the Certificates, and notified
Ben David that the Loan Agreement was cancelled and of no further force or
effect. We did not incur any early termination penalties in connection with the
cancellation of the Loan Agreement.
In the second quarter of 2005, it came to our attention that shares of our
common stock (the "Reg S Stock") may have been sold in Germany without our
authorization, possibly in connection with the canceled Ben David certificates.
In order to halt these unauthorized issuances, we commenced an exchange offer
(the "Offer") in July 2005 to exchange one share of our common stock (the "New
Stock") for each share of Reg S Stock outstanding before or upon the delisting
date (the "Record Date") when the Reg S Stock is no longer tradable. The offer
covers 10,000,000 shares of our common stock and is intended to reduce the
Company's potential liability for the unauthorized issuances. Each share of New
Stock will be registered no later than six months from the initial date of the
Offer for trading on the OTCBB. The Exchange Offer was scheduled to expire on
December 29, 2005. However, on January 11, 2006, we extended the Exchange
Offering deadline to January 31, 2006, due to delays encountered in the early
confusion regarding procedures and subsequent changes to those procedures. Any
shares of Reg S Stock not tendered for exchange by January 31, 2006, will no
longer be exchangeable for New Stock and will no longer be tradable on any
German stock exchange. To date, holders of an aggregate of 9,591,592 shares of
Reg S stock have forwarded certificates and required documents, leaving an
aggregate of 408,408 shares outstanding.
In addition to our attempts to raise outside capital, we have pursued
opportunities to acquire existing products and businesses that currently
produce, or have the potential to produce, revenue. In September 2003 we signed
a binding letter of intent to acquire all rights to a cream product with
potential skin healing and antibacterial properties. The purpose of the
acquisition is to develop a product to generate revenues while our blood
platelet preservation technology is awaiting human infusion tests. During 2004,
using minimal funding, we were able to reformulate the cream for better
appearance and use. We then tested the reformulated cream for safety at an
independent laboratory, and received positive results. We are now seeking a
business partner to produce and market the cream. There is no guarantee that we
will be able to develop a marketable product based on the cream. If we are able
to develop a marketable product, it will require additional research and
development as well as additional capital. At this time, we do not have an
estimate of the time or the amount of funds that would be required to produce
and market such a product.
The HBS System for Preservation of Platelets
Blood platelets are a component of whole blood that is responsible for the
clotting process of blood and used by the body when a person has an open wound
from injury or surgery. The majority of platelets, however, are required by
cancer patients who have undergone chemotherapy treatments, a process that
destroys platelets. In order to restore the platelets, continuous transfusions
are given to patients until the body is able to restore normal platelet counts.
It is therefore desirable to have platelets that circulate for more than a few
hours after transfusion.
<page>28
Current blood platelet storage practices used in blood banks promote bacteria
growth and the quality degrades over time because platelets are stored at room
temperature. Using these practices, platelets can be preserved for only five
days.
One test marker used to predict platelet survival after infusion is the
morphology or the platelet shape. Platelets that maintain their discoid shape
are more likely to survive longer after transfusion than platelets that change
their shape. Historically, platelets stored at refrigerated temperatures for
more than a few hours change their shape from discoid to spherical. It has been
found that such platelets are removed from circulation by the body within hours
after a transfusion and thus are not acceptable for cancer patients who have
undergone chemotherapy.
We are developing a process whereby platelets are refrigerated at slightly above
the freezing point of water and stored there until needed. Initial tests showed
that up to 68% of the starting population of platelets remain discs after 24
hours of refrigeration. We have successfully stored blood platelets for ten
days under refrigeration while maintaining cell structure and morphology, which
has never been done before to our knowledge. We had originally contemplated
submitting our findings to the FDA in the first half of 2003; however,
additional pre-human infusion tests were necessary to address certain aspects of
our findings. We believe that we have now satisfactorily resolved all issues
raised by these findings, and resumed our human infusion tests in February 2005.
We currently anticipate that these tests will be completed within the next four
to six months.
Using our Platelet Preservation System, blood platelet preservation is achieved
by storing the platelets under refrigeration utilizing a proprietary process and
solution to maintain cell function viability and morphology. The objective of
our technology is to maintain high quality platelets for a longer period of time
than is currently possible using conventional methods.
A patent covering the hardware design of the container, preservation
methodologies and processes was filed by us on October 31, 1998 followed by a
continuation-in-part (CIP), which was filed in February of 1999 covering our
solutions and other preservation methodologies.
We filed an international application with the Patent Cooperation Treaty based
on our U.S. patent application, designating all countries and regions, on
October 12, 1999. In addition, in June 2001, we filed a provisional patent
entitled "Preservation of Blood Platelets at Cold Temperatures" to cover our
improved platelet preservation methods. In August 2003, we filed another patent
application covering improved platelet preservation methods. We believe that
the patent and its extensions will protect the current core technology and
provide us with a long-term competitive advantage in the market.
In July 2002, we received our first patent on the technology and methodology for
preserving blood platelets. This patent, U.S. 6,413,713, B1, is titled "Method
for Preserving Blood Platelets". We applied for another patent in February
1999, covering processes and solutions to facilitate blood platelet
preservation. In June 2001, we filed a provisional patent entitled
"Preservation of Blood Platelets at Cold Temperatures" to cover our improved
platelet preservation methods, and in August 2003, we filed another patent
application covering improved platelet preservation methods. We anticipate
filing additional patent applications relating to platelet preservation in the
future, as soon as we have the capital to do so. We believe that these
additional patent applications, if and when filed, should strengthen our
competitive position in the platelet preservation marketplace. We will also
seek strategic alliances with companies that have the capability to provide
technical and clinical expertise as well as financial and marketing expertise to
leverage our current expertise in these areas.
<page>29
We intend to continue the development of our Platelet Preservation System, a
proprietary technology that extends the shelf life of blood platelets beyond the
current five-day period. It is our goal to increase this time from five to seven
or nine days and longer while preserving platelet quality and keeping bacterial
growth to a minimum. We believe that even longer platelet storage periods could
be achieved using hydrostatic pressure to prevent platelets from freezing under
sub-zero temperatures. Further research is required to establish the protocol
and storage times under these conditions. The storage and preservation of organs
such as the kidney, liver and heart will be considered using the same techniques
used in the preservation of platelets; however, we anticipate that the solution
and process will vary for each organ type.
The HBS System for Preservation of Organs
We believe that our basic approach used to store platelets can also be applied
to the preservation of organs such as the kidney, heart and liver. The
hyperbaric chamber could be an instrumental part of our ability to store organs
at sub-zero temperatures to prevent freezing even at freezing temperatures. We
began research on kidney preservation in 2002 and have developed what we
believe is a solution that will operate under refrigerated temperature storage
conditions for over 30 hours, allowing organ preservation beyond current
capabilities. In our most recent preliminary tests, we successfully
transplanted a rat kidney that had been frozen at a temperature of negative 80
degrees centigrade for three months in our patent-pending HBS sub-zero
solution. In October 2005, we successfully completed the initial phase of our
survival study of animals with transplanted kidneys using our HBS organ
preservation solution, and were able to preserve a rat's kidney at negative 196
degrees centigrade for up to five days while maintaining some functionality
when transplanted back into the animal, evidenced by urine production. We
previously preserved rats' kidneys at negative 20 and negative 80 degrees
centigrade. We will continue to conduct further tests on a larger animal sample
size, and conduct histology and survival studies as well. Our goal is to extend
the kidney shelf life for up to 72 to 96 hours at above freezing temperatures
and even longer at sub-zero temperatures. We believe that the extended shelf
life should enable better matching of donor kidneys to recipients. In 2003, we
suspended this animal testing pending receipt of funding; however, we recently
resumed our organ preservation research and accelerated the number of animal
organ preservation experiments as compared to the prior schedule. We also
purchased a special freezer and equipment used to conduct experiments at
negative 80 degrees centigrade.
Operations and Facilities
During the initial months following our incorporation, we recruited key members
of the management and technical team, conducted market research and established
our basic infrastructure and operating plan. At September 9, 2005, we had six
employees and consultants in the U.S. and five at our research facility in
Russia.
In August 1998, we established a branch office in Krasnoyarsk, Russia, where we
conduct research and development for platelet preservation. Krasnoyarsk was
chosen to take advantage of the availability of low cost technical expertise and
materials such as titanium, and also because two members of our team, Dr.
Vladimir Serebrennikov, Director of Research and Mr. Leonid Babak, Branch Chief
of Russian Operations, reside there.
The Russian government has placed no restrictions on our ability to operate our
business, hire employees in Russia, and freely transport our assets from Russia
to the U.S. without any assessment or payments to the Russian Federation. There
are no material restrictions or regulations to which we are subject in Russia as
a result of our activities there. Conducting operations in Russia does not
affect FDA approval or our proposed business activities in the United States,
because no clinical trials are or will be conducted there.
<page>30
When we enter the human infusion test phase in the United States, the priorities
at our Russian branch may be shifted from research to supporting other lab
operations and possibly to addressing other business opportunities where our
presence in Russia would be considered an advantage.
While limited platelet experiments have been conducted under contract at the
Sacramento Blood Foundation in California in prior years, we accelerated testing
efforts in 2001 to validate the results obtained at our Russian facility. In
September 2002, Puget Sound Blood Center agreed to conduct human blood platelet
research studies utilizing our platelet preservation technologies. The
preliminary studies leading to human infusion began in October of 2002, but were
suspended in the fourth quarter of 2003 due to a funding shortfall. We have
made certain changes in our solution in order to prepare for human infusion, and
resumed testing in February 2005. In vitro-test results obtained in September
2005, as part of the human infusion studies, supported our earlier test results
which we view as positive. The next step requires the infusion of platelets
into human test subjects, which may require an FDA license in addition to
internal approvals. See "Business - Test Results" for more information.
Research and Development
We have developed a research and development strategy that considers the FDA and
international approval processes and their impact on bringing a product to
market. Based on these constraints, we have developed a research and
development plan that requires multiple developments being conducted at the same
time.
We have developed a three-phase strategy, with estimated time requirements for
the research and development and market introduction of products. The first
phase starts with the creation of a platelet preservation product that will
store platelets under refrigeration for seven to nine days using our proprietary
solution by itself. The second phase is the market introduction of our
Platelet Preservation System utilizing our hyperbaric container if longer
preservation times are required. Our third phase is to find a viable alternative
to the current organ preservation methods with both solution under refrigeration
and a complete system at sub-zero temperatures. We are currently in the first
phase of our strategy, and are anticipating advancing through this phase for the
foreseeable future. The anticipated time spent in this phase has been extended
by our need for additional capital. We are now proceeding with organ
preservation research concurrently with our platelet studies.
Governmental approval for human testing will be required for each of these three
phases of development. Our plan is to obtain the necessary approvals for each
phase.
Platelet Preservation - Refrigeration
Our platelet preservation plan starts with a platelet preservation product using
our solution by itself. We have been able to successfully store platelets for
ten days at refrigerated temperatures, which is considered to be a major
milestone in the cold storage of platelets. Our technology has been validated by
an independent test facility in the U.S., and we began the process leading to
testing of human infusion in September 2002. Currently the industry stores
platelets at ambient temperature for a maximum of five days, an FDA-imposed
limit due to historic bacterial infection of the platelets. In July 2002, we
entered into a development and supply contract with MMR Technologies of Mountain
View, California, to build a computerized blood platelet cooling instrument. In
October 2002, we began preliminary tests of a prototype of this device, which is
designed to cool the platelets prior to storage to help extend the shelf life of
platelets for blood banks and hospitals. The prototype unit was delivered to us
in January 2003. Preliminary tests were conducted, and required modifications to
the systems have been noted. We have subsequently determined that this unit may
not be critical for platelet survival, and therefore have not conducted further
testing or development. We made the decision to use a standard cooling unit with
customized fixtures that are appropriate for platelet bags.
<page>31
Platelet Preservation - Sub-Zero Storage
This development is intended to result in longer storage times for platelets,
combining the use of proprietary solutions, sub-zero temperatures and high
pressure. It is our goal to develop a storage method that will preserve the
viability of platelets with little or no bacterial growth for a period greater
than 13 days. This will provide the medical community with a new and economical
method for long-term platelet storage, thereby reducing the current loss of
product. The successful implementation of refrigerated platelets at nine days
or beyond may eliminate the need for sub-zero stored platelets for most
commercial blood banking applications.
Organ Preservation
This effort will incorporate storage of organs involving experiments with animal
organs to demonstrate our ability to harvest, store and transplant organs that
have been preserved at various temperatures ranging from plus 4 degrees
Centigrade to sub-zero temperatures. The goal is to achieve a level of physical
condition and viability of these organs that is equal to or superior to present
storage methods and storage times. In addition, we plan to develop a process
that will reduce the need for anti-rejection drugs after transplantation. The
development process will include the development of proprietary solutions,
cooling methods and possibly the use of chambers to protect organs from freezing
at sub-zero storage temperatures.
Test Results
Non-clinical experiments and tests of platelet preservation and other research
and development activities were conducted in Russia and Vicksburg, Michigan
until the third quarter of 2003, when we developed a funding shortage. We
resumed testing in February 2005, and will continue to conduct experiments to
find the optimal conditions of storage at refrigerated temperatures. We have
been able to achieve up to 24 hours of refrigerated storage of platelets with up
to 68% retaining their original disc shape. Up to 13% of the platelets remain
discs after five days of storage. Subsequent tests indicated very little disc
loss after the first 24 hours of storage, where disc percentage remained
essentially constant for 72 hours, which was the limit of these particular
tests. We subsequently demonstrated that platelets stored using our technology
under refrigeration for ten days still remain functional, with a platelet
survival rate of up to 78% and 20% maintaining full functionality.
Our most recent test efforts were directed toward the refinement of our platelet
preservation technology before we commenced human studies and an application for
approval from the FDA. In October 2002, we began the preliminary studies
leading to human infusion. The preliminary studies were required to assure all
steps in the process are compatible with human infusion, including sterility and
safety.
We originally contemplated submission of our findings to the FDA in the first
half of 2003; however, additional pre-human infusion tests were necessary to
address certain aspects of our findings. First, changes to our solution were
required before commencing human infusion tests. These changes included the
need to sterilize our preservation solution using approved methods acceptable
for human infusion, and the removal of suspended particulants from our
preservation solution. The sterilization issue has been resolved. We were also
successful in the removal of particulants from our preservation solution after
procedures were implemented at another blood center in California used by us for
such experiments. We developed a new solution that appears to have improved
results over past formulations without the need to clarify the solution for
particulants. We have also determined that the special cooling unit originally
designed to facilitate the storage process at refrigerated temperatures may not
be critical for platelet survival. In addition, tests conducted in the United
States during 2002 were not able to verify results obtained at our Russian
research facilities. In the first half of 2003, however, we were able to
correlate the test results from our Russian research facilities with tests
conducted by United States research facilities.
<page>32
We believe that we have now satisfactorily resolved all issues raised by these
findings, and resumed our human infusion tests in February 2005. In vitro-test
results obtained in September 2005, as part of the human infusion studies,
supported our earlier test results which we view as positive. The next step
requires the infusion of platelets into human test subjects, which may require
an FDA license in addition to internal approvals. We currently anticipate that
these tests will be completed within the next four to six months.
We began research on kidney preservation in 2002 and have developed what we
believe is a solution that will operate under refrigerated temperature storage
conditions for over 30 hours, allowing organ preservation beyond current
capabilities. In our most recent preliminary tests, we successfully
transplanted a rat kidney that had been frozen at a temperature of negative 80
degrees centigrade for three months in our patent-pending HBS sub-zero
solution. In October 2005, we successfully completed the initial phase of our
survival study of animals with transplanted kidneys using our HBS organ
preservation solution, and we were able to preserve a rat's kidney at negative
196 degrees Centigrade for up to five days while maintaining some functionality
when transplanted back into the animal, evidenced by urine production. We
previously preserved rats' kidneys at negative 20 and negative 80 degrees
Centigrade. We will continue to conduct further tests on a larger animal sample
size, and conduct histology and survival studies as well. Our goal is to extend
the kidney shelf life for up to 72 to 96 hours at above freezing temperatures
and even longer at sub-zero temperatures. We believe that the extended shelf
life should enable better matching of donor kidneys to recipients. In 2003, we
suspended this animal testing pending receipt of funding; however, we recently
resumed our organ preservation research and accelerated the number of animal
organ preservation experiments as compared to the prior schedule. We also
purchased a special freezer and equipment used to conduct experiments at
negative 80 degrees Centigrade.
Product Development
We have engaged Quintiles, Inc., an international regulatory consulting firm, to
assist with planning and managing the regulatory approval process. This firm
specializes in the design and implementation of regulatory strategies, including
experiment design and monitoring. We have used their services from time to
time, but thus far we have used Quintiles only on a limited basis, as we have
not yet started clinical trials. We anticipate that Quintiles' participation
will increase as we meet with the FDA to proceed with clinical trials.
As an overall strategy, we intend to apply for approval for our products while
limiting the system claims for our Platelet Preservation System and to
progressively expand them as FDA and/or EU approval is granted for each
succeeding claim. Our intention is to apply for approval in the U.S., Western
European countries and Japan as the primary markets for our platelet
preservation product. However, we believe that our first product sales efforts
will be directed towards countries in South America, Mexico and other countries
that have fewer regulatory restrictions than the U.S, so as to provide a shorter
time to market.
Distribution, Sales and Customers
It is our intent to market our platelet preservation products to blood centers
and hospitals through established medical specialty dealers and distributors or
strategic partners who manufacture and market products to blood centers and
hospitals. Similar strategies will be employed for other future preservation
products. As we are in the development stage of operations, we currently have
no customers and dependency on particular customers cannot be anticipated at
this time.
Sources and Availability of Raw Materials
Since we are in the development stage, we have not yet begun to manufacture our
products. Our products, as manufactured, should not use any exotic or hard to
find raw materials and we believe that suppliers can be identified. We are
constantly reviewing the materials used in the development process, with
particular attention to availability and future cost. We cannot currently
anticipate what the availability of materials and suppliers will be at the time
our products enter production.
<page>33
Our Disposable Phemtest Test System
On September 1, 1998, we entered into a purchase agreement with Paul Okimoto,
one of our officers and directors, acquiring all patent rights owned by Mr.
Okimoto to a disposable vaginal disease test device called Phemtest. As
consideration for the assignment of these patent rights, we paid $1,375 to a law
firm as a patent maintenance fee to ensure that the patents would remain in
force. We also agreed to pay Mr. Okimoto royalties of 5% of gross sales of
Phemtest for the next five years. The first $16,000 in royalty payments are to
be paid to a law firm to be designated by Mr. Okimoto, the next $75,000 in
royalties are to be paid to Mr. Okimoto in shares of our common stock, valued at
$2.00 per share, and the remaining royalties to be paid to Mr. Okimoto, if any,
are to be paid in cash. To date, no royalties have been earned or paid for
Phemtest. Our product development efforts remain focused on our platelet and
organ preservation systems. Therefore we intend to find a suitable licensee who
is capable of completing the steps necessary to manufacture and market the
Phemtest product. To date, we have not located such a licensee, and there can
be no assurance that a licensee will be obtained, or that we can negotiate a
license on favorable terms. FDA approval of the Phemtest product will also be
required; we have not commenced the testing process required for such approval.
As of September 30, 2005, we have not signed any agreement with any potential
licensee, as our focus remains on our core business of preserving blood
platelets and organs.
Other Product Development Efforts
In addition to our attempts to raise outside capital, we have pursued
opportunities to acquire existing products and businesses that currently
produce, or have the potential to produce, revenue. In September 2003 we signed
a binding letter of intent to acquire all rights in a cream product with
potential skin healing and antibacterial properties. The purpose of the
acquisition is to develop a product to generate revenues while our blood
platelet preservation technology is undergoing human infusion tests. During
2004, using minimal funding, we were able to reformulate the cream for better
appearance and use. We then tested the reformulated cream for safety at an
independent laboratory, and received positive results. We are now seeking a
business partner to produce and market the cream. There is no guarantee that we
will be able to develop a marketable product based on the cream. If we are able
to develop a marketable product, it will require additional research and
development as well as additional capital. At this time, we do not have an
estimate of the time or funding that will be required to produce and market such
a product.
<page>34
Competition
As a development stage company, we are entering a biological material
preservation market that is presently addressed by large companies with
extensive financial resources. Those companies include DuPont and Baxter, among
others. Additionally, smaller companies with which we may compete include
LifeCell Corporation for platelet preservation, Cerus Corporation for viral
inactivation for platelets and other blood products and Cryo Life for preserving
heart valves by cryo-preservation. We believe that these companies are active in
research and development of biological material preservation; however, we do not
know the current status of their development efforts. Most of the above
competitors have significantly greater financial resources, technical expertise
and managerial capabilities than we currently possess.
LifeCell Corporation has developed technology for preserving a variety of cell
types including platelets and red blood cells, and is attempting to obtain FDA
approval for extending the storage time of blood platelets using cryo-
preservatives. Cerus Corporation has developed a viral inactivation product for
platelets that is intended to eliminate or reduce viral testing requirements.
This product is now in clinical trials. These products if approved could have a
material adverse impact on the market for extending platelet storage times using
our technology. We believe that most, if not all, of our competitors use toxic
chemicals such as Dimethyl Sulfoxide (DMSO) to preserve platelets, and store
organs and other biologic material. It is our intent to achieve longer
preservation of such material and provide higher quality material by using non-
toxic solutions and by storing the biologic material at refrigerated
temperatures for moderate storage times and below the freezing point of water,
without destroying the cellular integrity of the material, for longer storage
times. We also believe that our approach will be inexpensive in comparison to
alternative preservation methods because the toxic solutions used by our
competition must be removed from the material before use in most cases. The
solution we use for platelet preservation is intended to be directly usable.
Intellectual Property
We consider our intellectual property to be a key cornerstone and asset of our
business. As such, the intellectual property, which consists of patents, patent
applications, trade secrets, copyrights and know-how, will be both developed and
protected. We plan to gain wide protection for our intellectual property
worldwide by patent and trademark filings in major foreign markets as well as
the careful protection of trade secrets through contracts and procedures.
Prior to the formation of our company, Vladimir Serebrennikov, our Technical
Director of Research and Development, conducted independent research over a ten-
year period, involving research concerning the preservation of biologic material
using high pressure. After we were formed on February 26, 1998, the knowledge
he gained was applied to the preservation of blood platelets, our primary market
focus. New methods were developed in the container hardware design, processes
and solutions for platelets, which continue to evolve as we continue our
research and development efforts.
<page>35
On June 1, 1998, we were assigned the entire worldwide right, title and interest
in a preservation technology applicable to, but not limited to platelets (a
blood component), red blood cells, heart valves, tissue and organs. This
technology concerned all of the discoveries, concepts and ideas whether
patentable or not, invented and developed by Messrs. Leonid Babak and Vladimir
Serebrennikov. The assignment was in exchange for our issuance of 877,500 shares
of common stock to each of Messrs. Babak and Serebrennikov, valued at the time
of issuance at $0.0025 per share.
Since this assignment, we have been performing further research and development
on the technology assigned, and have filed two patent applications, as described
elsewhere herein. We anticipate filing additional patents on other aspects of
the technology assigned by Messrs. Babak and Serebrennikov as additional
inventions are reduced to practice.
A patent covering the hardware design of the container, preservation
methodologies and processes was filed by us on October 31, 1998 followed by a
continuation-in-part (CIP), which was filed in February of 1999 covering our
solutions and other preservation methodologies. In July 2002, we received our
first patent on the technology and methodology for preserving blood platelets.
This patent, U.S. 6,413,713, B1, is titled "Method for Preserving Blood
Platelets". We expect that additional patents will follow for organ preservation
and other biologic material as such systems are developed.
We filed an international application with the Patent Cooperation Treaty based
on our U.S. patent application, designating all countries and regions, on
October 12, 1999. In addition, in June 2001, we filed a provisional patent
entitled "Preservation of Blood Platelets at Cold Temperatures" to cover our
improved platelet preservation methods. In August 2003, we filed another patent
application covering improved platelet preservation methods. We believe that
the patent and its extensions will protect the current core technology and
provide us with a long-term competitive advantage in the market.
Although we believe that our methods for preserving platelets are patentable,
there can be no assurance that we will be granted a patent beyond the one
granted in July 2002. If additional patents are not granted, this could have a
material adverse effect on our ability to compete with other companies that have
much greater financial and technical resources than we currently possess.
We purchased the patents for a vaginal disease test product titled Phemtest from
Paul Okimoto, an officer and director, on September 1, 1998. The patents
"VAGINAL TESTING APPLICATOR AND METHOD", Patent Number 4,784,158, was issued
November 15, 1988, and "BODY CAVITY SPECIMEN COLLECTING AND TESTING APPARATUS,"
Patent Number 4,945,921, was issued August 7, 1990. Pursuant to the purchase
agreement for the patents, we paid $1,375 to the law firm of Flehr, Hohbach,
Test and Herbert as a patent maintenance fee to assure that the patents would
remain in force. We also agreed to pay Mr. Okimoto a royalty payment of 5% of
gross sales of Phemtest for five years. The first $16,000 in royalty payments,
if any, are to be paid to a law firm to be designated by Mr. Okimoto, the next
$75,000 in royalties are to be paid to Mr. Okimoto in shares of our common
stock, valued at $2.00 per share, and the remaining royalties to be paid to Mr.
Okimoto, are to be paid in cash. To date, no royalties have been earned or paid
for Phemtest. Our product development efforts remain focused on our Platelet
Preservation System. Therefore we intend to find a suitable licensee who is
capable of completing the steps necessary to manufacture and market the Phemtest
product. To date, we have not located such a licensee, and there can be no
assurance that a licensee will be obtained, or that we can negotiate a license
on favorable terms. FDA approval of the Phemtest product will also be required;
we have not commenced the testing process required for such approval. As of
March 31, 2005, we have not signed any agreement with any potential licensee, as
our focus remains on our core business of preserving blood platelets and organs.
<page>36
Government Regulation
The FDA and the European Union ("EU") have regulations governing the
marketability of medical solutions and equipment. We have not developed our
products to the level where these approval processes can be started.
We believe that all of the products currently in development will require FDA
approval prior to marketing. Our initial products are at the prototype
development stage and preclinical testing. We intend to submit our initial
Investigational New Drug Exemption ("IND") and Investigational Device Exemption
("IDE") as soon as sufficient preclinical data is obtained. Both the IND and IDE
must be filed with the FDA prior to conducting clinical trials on human
subjects. The successful completion of clinical trials is the final step toward
receiving FDA approval of our product for marketing.
Our anticipated first product is a set of solutions and process to be used by
blood centers to store platelets at refrigerated temperatures. As such, we must
obtain regulatory approval from the FDA to market the solutions and process. In
addition, if a device is required in the processing or storage of platelets, we
must obtain regulatory approval from the FDA to market the device and the
platelet product to be stored in our device.
We intend to pursue 510(k) approval from the FDA for our storage device,
although there is a possibility that the FDA could determine that an application
for a new device may be required. A 510(k) submission will require a showing of
"substantial equivalence" to one or more legally marketed devices. Regulatory
review of a 510(k) application should take a few months less than that for a new
device application. We believe that in either case the data required would be
approximately the same preclinical and clinical data demonstrating safety and
efficacy.
In order for us to receive FDA 510(k) approval, we believe that we will need to
show that platelets stored utilizing our device are equivalent to platelets
stored using currently approved methods. We would do this by utilizing
laboratory tests of platelet function and results of a clinical trial. If we
determine that we will pursue new claims for platelets stored using our device,
more extensive clinical trials would be necessary. We do not expect to pursue
new claims initially, even if we believe that some may be supported by our
research.
We currently do not have an estimate of when we will file our initial IND/IDE.
The filing date will depend on when we obtain the required capital to conduct
our pre-clinical human studies, and whether such studies are successful.
Depending on the outcome of clinical trials and the claims submitted for
approval, we believe that it could take as long as two to four years to obtain
needed data, submit requests for marketing approval, and obtain regulatory
approval or denial.
<page>37
Russian regulations governing patents and procedures for ownership of patents
are similar to those in the U.S., as they state that any patentable products or
ideas developed through the branch personnel will be our property as long as an
agreement with employees and outside sub-contract personnel stipulate that such
inventions shall be assigned to us. This is similar to U.S. law. It is our
practice to require that all personnel and outside contractors sign such an
agreement.
The assignment of products developed or patents granted prior to any payment by
us for the development of a product would require approval by the Russian
government. Even though Mr. Serebrennikov holds some patents individually which
could relate to our technology, we have elected not to purchase these existing
patents because they have become public domain outside of Russia, and because we
do not feel that they are important to our business.
As an approved medical device, our storage product must be manufactured
according to Quality Systems Regulations ("QSR") and Good Manufacturing
Practices ("GMP"). We intend to be in compliance with these regulations during
product development. It is our plan to manufacture devices through contract
manufacturers experienced in the FDA regulations and familiar with QSR
requirements and whose facilities are in compliance with QSR. We intend to audit
all contract manufacturers to help assure proper compliance. Components of our
device are comprised of usual metals, plastics, and electronic parts and should
generate no unusual disposal streams.
Employees
As of September 30, 2005, we had an aggregate of 12 employees and key
consultants. Our employees are currently not represented by a collective
bargaining agreement, and we believe that our relations with our employees are
good.
Properties
We currently own no real property. Our principal address as reported herein is
the residence of one of our employees. In August 2002, we opened scientific
research offices in San Ramon, California for our engineering, scientific, and
planning personnel, but due to financial constraints we closed this office in
January 2004. Although the real estate leasehold market in California is
highly competitive, we believe that as we require facilities in California we
will be able to find available facilities at a reasonable cost.
<page>38
Our primary research and development effort, which has been conducted at our
facility in Kransnoyark, Russia, has been transferred to the United States. We
currently continue to employ five people at that facility in Russia, including
administration and support personnel. We also have one employee and one
consultant at our Michigan research facility conducting organ preservation
studies.
Legal Proceedings
On December 10, 2001, we filed a complaint entitled HyperBaric v. John A.
Mattera, in the United States District Court, Northern Division, Case No.
C01-21142. This is an action against John A. Mattera ("Mattera") for breach of
contract; breach of the implied covenant of good faith and fair dealing; fraud;
securities fraud; and constructive trust in connection with a stock purchase
agreement that we entered into with Mattera in April 2001. Pursuant to the
agreement, Mattera was to wire transfer the sum of $104,000 within 72 hours of
receipt of 400,000 free trading shares of our stock to be deposited with a
clearing agent designated by Mattera. Mattera failed to pay and refused to pay
for the shares of stock; however, the shares were cleared and released to
Mattera by the clearing agent without confirmation that payment had been
received by us. Thereafter, the transfer agent refused to cancel the transfer
or return the shares without a court order. We are seeking damages; interest
allowable by law; rescission of the agreement and return of the shares;
attorneys' fees and costs incurred for the suit; punitive damages; and a
preliminary injunction preventing the transferring of the shares and/or disposal
of the proceeds until termination of the litigation. The complaint was served on
Mattera in Florida on December 28, 2001, but to date no response has been filed.
A judgment was entered against Mattera in the amount of $117,447.28 on November
15, 2002, and we are attempting to execute on this judgment; however, there can
be no assurance that we will be able to recover any of this amount.
On August 7, 2002, the United States Attorney for the Eastern District of New
York and the Securities and Exchange Commission announced that they were
bringing securities fraud charges against Harry Masuda, our Chief Executive
Officer, for allegedly paying an unregistered broker an undisclosed commission
in September 1999 and February 2000 private placements. The allegations
generally charge Mr. Masuda with the failure to adequately disclose to
investors in this private placement a commission agreement with Larry Bryant,
an unlicensed broker- dealer. Remedies sought in these proceedings include
criminal penalties and a bar from service as an officer or director of a
publicly-traded company. The SEC also brought securities fraud charges against
us for the same transactions, and these charges are still pending.
In June 2000, we undertook a rescission offer to those shareholders who had
purchased an aggregate of 427,300 shares of common stock and warrants in the
private placements for aggregate proceeds of $640,950. Holders of 222,900
shares of common stock accepted the rescission offer. The other shareholders
elected not to rescind their stock purchases. We paid an aggregate of
approximately $300,000 in cash to rescinding shareholders, but could not afford
to pay the balance of the rescission offer in cash. Instead, we issued
promissory notes, with interest at the rate of 10% per annum, payable upon the
earlier of (i) one year from the date of the note or (ii) our receipt of
funding sufficient to permit repayment of the principal and interest on the
notes. In 2000 and 2001, holders of $67,500 in principal and interest in the
above-referenced promissory notes elected to convert their notes to an
aggregate of 206,700 shares of our common stock. The remainder of the
rescinding holders were paid in full in cash prior to December 31, 2002. As
all of the shareholders electing to rescind have now been paid in full (whether
in cash or in shares of common stock), we believe that the issues raised by the
alleged failure to disclose have been fully resolved. Although we believe that
the charges are unwarrantedthere can be no assurance that Mr. Masuda will be
able to continue to serve as our Chief Executive Officer in the event that the
Securities and Exchange Commission receives the remedies that it seeks. In
January, 2005, the United States Government and Mr. Masuda entered into a
deferred prosecution agreement which should lead to a dismissal of all charges
against Mr. Masuda at the end of the 18-month deferred prosecution term. The
civil case against us has been stayed at the request of the U.S. Attorney
pending completion of the deferred prosecution term.
<page>39
MANAGEMENT
The following table sets forth the names and positions of our directors and
executive officers and other key personnel as of September 30, 2005:
Name Age Position
- ---------- ---- --------------
Harry Masuda 61 Chief Executive Officer and a
Director
Dr. David Winter 71 President
Paul Okimoto 70 Chairman of the Board, Secretary
and Executive Vice President
Dr. Luis Toledo 61 Chief Medical Officer
Dr. Larry McCleary 56 Director
Victor Ivashin 58 Chief Technology Officer (1)
_______________________________
(1) Terminated by the Company and engaged as an advisor in February 2005.
There is no family relationship between any of our directors and executive
officers.
Each Director holds office until the next annual meeting of the shareholders or
until his successor is elected and duly qualified. Executive officers are
appointed by and serve at the pleasure of the Board of Directors. The following
sets forth biographical information concerning our directors, executive officers
and key personnel for at least the past five years:
Harry Masuda has served since February 1998 as our Chief Executive Officer and a
Director. He also served as our President from February 1998 through August
2005. Mr. Masuda is the former president of several high tech companies
including Piiceon, Inc., a manufacturer of computer peripheral products for
microcomputers. Mr. Masuda also founded HK Microwave; a manufacturer of high
frequency phase locked oscillators used in cellular telephone base stations,
later acquired by Dynatech Corporation. Mr. Masuda received his BSEE and MSEE
from San Jose State University. From October 1997 to February 1998, Mr. Masuda
was a business consultant, and he served as President of International Web
Exchange from July 1995 to October 1997.
David Winter, M.D. joined us in September 2005 as President. Dr. Winter has over
20 years' experience in the pharmaceutical industry. Since January 2004, he has
served as CEO of TriMed Research, Inc., a joint venture of the University of
Nebraska Medical Center, UNeMED Corporation and Tridelta Development, Ltd.
formed to research and commercially develop therapeutic products related to
TriMed's proprietary mammary gland protein. Since January 2002, he has also
served as Medical Director of CTI, a contract research organization. From
February 2001 to December 2003, he was President of Winter Consulting. He
served as President and Chief Operating Officer of SangStat Medical Corporation,
a pharmaceutical company making drugs used in transplantation, from March 1995
to June 1998, and as President and Chief Executive Officer of Human Organ
Sciences, Inc., a subsidiary of SangStat, from July 1998 to 2001.
Paul Okimoto joined us in February 1998 as Executive Vice President and a
Director. He became our Secretary in August of 2002. Mr. Okimoto served as
President of Sanhill Systems, a research and development company involved in the
signal processing medical field, from 1991 to January 1998.
<page>40
Luis Toledo, M.D., PhD. became our Chief Medical Officer in March 2000. Dr.
Toledo is an internationally recognized authority on organ transplantation and
preservation. He has authored 10 books on transplantation and related subjects,
authored or co-authored 500 scientific publications, and contributed to chapters
of 77 books. Dr. Toledo has held many medical staff positions including: Co-
Chief, Transplantation and Director, Surgical Research at the Henry Ford
Hospital and Chief, Transplantation and Director, Research at Mount Carmel Mercy
Hospital. He is also currently the Director of Research at the Borgess Medical
Center and is Director of the Michigan Transplant Institute. He also serves as
Professor of Surgery and Director, Experimental Research Program at Michigan
State University.
Larry McCleary, M.D. joined us in September 2005 as a Director. Dr. McCleary
filled the vacancy created by the resignation of George Tsukuda. Dr. McCleary
has spend the last seven years serving as Director of Human Research for
Advanced Metabolic Research Group, LLC, headquartered in Henderson, Nevada. Dr.
McCleary served on our Advisory Board from 2002 until his appointment to our
Board of Directotrs.
Victor Ivashin joined us in December 2001 as our Chief Technology Officer. He
received a BSEE and MSEE from the University of Nevada and was awarded a Ph.D.
from the University of Poznan in Poland. Dr. Ivashin has received patents in
mechanisms and fiber optics. He has 25 years of combined managerial, research
and practical experience in electronics development and design and in department
and company management. Dr. Ivashin speaks fluent Russian. In February 2005,
we terminated Mr. Ivashin's employment but retained him as an advisor.
Committees of the Board of Directors
We do not currently have an Audit Committee, Compensation Committee or any other
committee of the Board of Directors. The responsibilities of these Committees
are fulfilled by our Board of Directors. In addition, we do not currently have
an "audit committee financial expert" as such term is defined in the Securities
Act, as our financial constraints have made it extremely difficult to attract
and retain qualified outside Board members. We hope to add qualified
independent members of our Board of Directors later in 2005, depending upon our
ability to reach and maintain financial stability.
Directors' Compensation
Directors who are also our employees receive no additional cash compensation for
serving on the Board. We have issued stock options to our Board members in the
past, and will continue to do so for the foreseeable future. We reimburse non-
employee Directors for all travel and other expenses incurred in connection with
attending meetings of the Board of Directors.
<page>41
Compensation Committee Interlocks and Insider Participation
We did not have a Compensation Committee or any other committee of the Board of
Directors performing similar functions during the years ended December 31, 2004
and 2003. Mr. Harry Masuda, our Chief Executive Officer, participated in
deliberations of the Board of Directors relating to his compensation.
Section 16(a) Beneficial Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
officers and Directors, and persons who own more than ten percent of a class of
our capital stock, to file reports of ownership and changes in their ownership
with the Securities and Exchange Commission. These persons are required to
furnish us with copies of all Section 16(a) forms they file. Based solely on a
review of the copies of such forms received by us, we believe that during the
year ended December 31, 2004, Mr. Larry McCleary did not timely file certain
Form 4s.
Executive Compensation
The following table sets forth information concerning compensation for services
in all capacities awarded to, earned by or paid to our Chief Executive Officer
(the "Named Executive Officer") during the years ended December 31, 2004, 2003
and 2002. No other executive officer received cash compensation in excess of
$100,000 during these years.
Summary Compensation Table (1)
Annual Compensation
Year Salary
----- --------
H. Masuda, Chief Executive Officer 2004 $ 23,500
2003 $ 68,825
2002 $214,126 (2)
________________________
(1) The columns for "Bonus", "Other Annual Compensation", "Restricted Stock
Awards", "Securities underlying Options/SARs", "LTIP Payouts" and "All
Other Compensation" have been omitted because there is no compensation
required to be reported.
(2) Includes $55,126 accrued in 2001 but not paid until 2002.
<page>42
Option/SAR Grants in Last Fiscal Year
The following table sets forth information regarding options and stock
appreciation rights granted to the Named Executive Officer during the year ended
December 31, 2004:
Number of % of Total
Securities Options
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date
- ---------------------------------------------------------------------------
Harry Masuda 150,000 (1) 15% $0.11 2/12/09
- ---------------------------------------------------------------------------
(1) Options to purchase 45,000 shares are exercisable immediately, with options
to purchase 45,000 shares exercisable one year form the date of grant and
options to purchase 60,000 shares exercisable two years from the date of
grant.
Option Exercises and Year-End Option Values
No options were exercised by the Named Executive Officer during the year ended
December 31, 2004. The following table sets forth information regarding options
held by the Named Executive Officer at December 31, 2004:
<table>
<caption>
<s> <c> <c>
Aggregated Options Exercises and Year End Option Values in 2004
- ----------------------------------------------------------------------------------
Name Shares Value Number of Shares of Value of Unexpired
Acquired Realized Common Stock Underlying In-the-Money
On ($) Unexercised Options at Options at Year End ($)
Exercise Year End (#)
- ---------------------------------------------------------------------------------------
Exercisable/Unexercisable Exercisable/Unexercisable
-----------------------------------------------------
Harry Masuda -- -- 95,000/105,000 -0-
</table>
<page>43
Employment Agreements; Termination of Employment and Change of Control
Arrangements
In March 2000, we entered into an employment agreement with Dr. Luis Toledo,
employing him as our Chief Medical Officer for a minimum term of one year. The
agreement provides for a base salary of $6,000 per month, which may be adjusted
based on our ability to raise defined amounts of capital. In addition, we
granted to Dr. Toledo an option to purchase 75,000 shares of our common stock at
an exercise price of $1.50 per share, and continued in effect options granted
pursuant to a consulting agreement that we entered into in May 1998 with Dr.
Toledo. In June 2001, we granted Dr. Toledo options to purchase 75,000 shares
of common stock at an exercise price of $0.28 per share. In January 2002, we
granted Dr. Toledo options to purchase 75,000 shares of common stock at an
exercise price of $0.54 per share, and in February 2004, we granted Dr. Toledo
options to purchase 150,000 shares of common stock at an exercise price of $0.11
per share. This option vested with respect to 30% of the shares on the date of
grant; an additional 30% one year after the date of grant, and the remainder
will vest two years from the date of grant. We entered into a new employment
agreement with Dr. Toledo effective April 1, 2005, providing for a base salary
of $10,000 per month (subject to adjustment based on our financial situation and
performance). On March 15, 2005, we granted Dr. Toledo options to purchase an
additional 150,000 shares of common stock at an exercise price of $0.11 per
share. This option vested with respect to 30% of the shares on the date of
grant; an additional 30% will vest one year after the date of grant, and the
remainder will vest on two years from the date of grant.
In December 2001, we hired Victor Ivashin to serve as our Chief Technical
Officer for Hardware and Software. Dr. Ivashin received a starting salary of
$8,500 per year, and was granted an option to purchase an aggregate of 75,000
shares of our common stock with an exercise price equal to the fair market value
of the stock on the date of grant. Dr. Ivashin's employment was terminated on
February 1, 2005, and his status changed to advisor.
On August 29, 2005, we entered into an Executive Consulting Agreement with Dr.
David Winter. Pursuant to the agreement, Dr. Winter will serve as our
President. In that capacity, he will oversee our platelet and organ development
programs and supervise negotiations with potential alliance partners. In
consideration of these services, Dr. Winter will receive a monthly retainer of
$3,000. He will also receive options to purchase 96,000 shares of our common
stock, at an exercise price of $0.73 per share. The options will vest over a 12-
month period, at the rate of 8,000 shares per month. During the term of the
Agreement, Dr. Winter will also be eligible to receive a performance bonus in
the maximum amount of 100,000 shares of our common stock, upon reaching certain
performance targets established by our Board of Directors. Either party may
terminate the agreement prior to the end of the term with 30 days prior written
notice.
<page>44
Limitation of Liability and Indemnification
Our Articles of Incorporation and By-laws provide for indemnification of our
officers and directors to the fullest extent permissible under California law.
Additionally, we have entered into indemnification agreements with each of our
officers and Directors, and therefore purchasers of these securities may have a
more limited right of action than they would have except for this limitation in
the Articles of Incorporation and By-laws. These agreements provide, in
general, that we shall indemnify and hold harmless such directors and officers
to the fullest extent permitted by law against any judgments, fines, amounts
paid in settlement, and expenses, including attorneys' fees and disbursements,
incurred in connection with, or in any way arising out of, any claim, action or
proceeding against, or affecting, such directors and officers resulting from,
relating to or in any way arising out of, the service of such persons as our
directors and officers.
On August 7, 2002, the United States Attorney for the Eastern District of New
York and the Securities and Exchange Commission announced that they were
bringing securities fraud charges against Harry Masuda, our Chief Executive
Officer, for allegedly paying an unregistered broker an undisclosed commission
in a 1999 and 2000 private placement. The allegations generally charge Mr.
Masuda with the failure to adequately disclose to investors in this private
placement a commission agreement with Larry Bryant, an unlicensed broker-dealer.
Remedies sought in these proceedings include criminal penalties and a bar from
service as an officer or director of a publicly-traded company. Although we
believe that the charges are unwarranted, and that the issues involved in this
matter were resolved over two years ago to the full satisfaction of all
investors, there can be no assurance that Mr. Masuda will be able to continue to
serve as our Chief Executive Officer in the event that the Securities and
Exchange Commission receives the remedies that it seeks. In December 2002, we
filed motions to proceed with the civil case and to change the venue for these
proceedings from New York to Northern California. As of March 2005, we had not
been informed of any rulings on these motions. However, the United States
government and Mr. Masuda have entered into a deferred prosecution agreement
which should lead to a dismissal of all charges against Mr. Masuda at the end of
the 18-month deferred prosecution term.
We have directors' and officers' liability insurance to defend and indemnify
directors and officers who are subject to claims made against them for their
actions and omissions as directors and officers.
To the extent provisions of our articles of incorporation provide for
indemnification of directors for liabilities arising under the Securities Act of
1933 or the Securities Exchange Act of 1934, those provisions are, in the
opinion of the Securities and Exchange Commission, against public policy and
therefore are unenforceable.
<page>45
RELATED PARTY TRANSACTIONS
The following describes transactions, in addition to the employment and
consulting agreements described above, to which we were or are a party and in
which any of our directors, officers, or significant stockholders, or members of
the immediate family of any of the foregoing persons, had or has a direct or
indirect material interest.
We purchased the patents for a disposable vaginal disease test product titled
Phemtest from Paul Okimoto, an officer and director, on September 1, 1998. The
patents "VAGINAL TESTING APPLICATOR AND METHOD", Patent Number 4,784,158, was
issued November 15, 1988, and "BODY CAVITY SPECIMEN COLLECTING AND TESTING
APPARATUS", Patent Number 4,945,921, was issued August 7, 1990. Pursuant to the
purchase agreement for the patents, we paid $1,375 to the law firm of Flehr,
Hohbach, Test and Herbert as a patent maintenance fee to assure that the patents
would remain in force. We also agreed to pay Mr. Okimoto a royalty payment of
5% of gross sales of Phemtest for the next five years. The first $16,000 in
royalty payments are to be paid to a law firm to be designated by Mr. Okimoto,
the next $75,000 in royalties are to be paid to Mr. Okimoto in shares of our
common stock, valued at $2.00 per share, and the remaining royalties to be paid
to Mr. Okimoto, if any, are to be paid in cash.
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of September 30, 2005, by each person or group
of affiliated persons who we know beneficially owned 5% or more of our common
stock, each of our directors, and all of our directors and executive officers as
a group. All of the share numbers are calculated to include the effect of a one
to four stock split, effective July 21, 1998. Unless set forth to the contrary
below, the address for all persons is c/o Human BioSystems, 1127 Harker Avenue,
Palo Alto, CA 94301.
Unless otherwise indicated in the footnotes to the table, the following
individuals have sole vesting and sole investment control with respect to the
shares they beneficially own. The amount of shares owned by each shareholder in
the following table was calculated pursuant to Rule 13d-3(d) of the Exchange
Act. Under Rule 13d-3(d), shares not outstanding which are subject to options,
warrants, rights or conversion privileges exercisable within 60 days are deemed
outstanding for the purpose of calculating the number and percentage owned by
each other person listed. The total number of outstanding shares of common
stock at September 30, 2005, was 64,196,000.
<page>46
Name and Address of Number of Shares Owned Percent of Shares
Principal Shareholders Outstanding
- ----------------------- -------------------------- --------------------
Harry Masuda 3,008,089 (1) 4.68%
YN Faarkaghyn Shiaght Lorne;
House Trust Limited
669 35th Street
Richmond, CA 94805 877,500 (2) 1.37%
Paul Okimoto
669 35th Street
Richmond, CA 94805 1,749,699 (2) 2.73%
Dr. David Winter 46,000 (3) *
Larry McCleary
418 Alpine Drive
Incline Valley, NV 89451 5,308,228 (4) 8.27%
Meiswinkel Investment Group, L.P.
2060 Newcomb Avenue
San Francisco, CA 94124 6,843,452 10.7%
Langley Park Investments, PLC
One Great Cumberland Place
6th Floor
London, England W1H7AL 7,000,000 11.0%
All Officers and Directors as
a Group (six persons) 10,989,516 (1), (2), (3), (4) 17.1%
____________________________________
(1) Includes options to purchase 95,000 shares of common stock exercisable
within 60 days of August 31, 2005.
(2) Paul Okimoto, an officer and director of the Company, acted as Trustee in
receiving and forwarding an aggregate of 877,500 shares to YN Faarkaghyn
Shiaght Lorne House Trust Limited, for the benefit of Mark Tameichi Okimoto,
Michael Akira Okimoto, Eric Yoshiro Okimoto, Daryl Takashi Okimoto, Mary T.
Hernandez and Betty Yamaguchi. The permanent Trustee is Ronald Buchanan of
Lorne House Management Ltd. Mr. Okimoto expressly disclaims beneficial
ownership of said shares.
(3) Includes options to purchase 16,000 shares of common stock exercisable
within 60 days of August 31, 2005.
(4) Includes options to purchase 15,000 shares of common stock exercisable
within 60 days of August 31, 2005.
As indicated in the table above, our executive officers and directors
beneficially own, in the aggregate, 17.1% of our outstanding common stock. As a
result these stockholders may, as a practical matter, be able to influence all
matters requiring stockholder approval including the election of directors,
merger or consolidation and the sale of all or substantially all of our assets.
This concentration of ownership may delay, deter or prevent acts that would
result in a change of control, which in turn could reduce the market price of
our common stock.
<page>47
DESCRIPTION OF CAPITAL STOCK
The descriptions in this section and in other sections of this prospectus of our
securities and various provisions of our articles of incorporation and our
bylaws are descriptions of the material terms of our securities. Our articles
of incorporation and bylaws have been filed with the Securities and Exchange
Commission as exhibits to this registration statement of which this prospectus
forms a part.
Common Stock. Our authorized capital stock consists of 145,000,000 shares of
common stock, no par value per share. The holders of common stock (i) have equal
ratable rights to dividends from funds legally available therefore, when, as and
if declared by the Board of Directors of the Company; (ii) are entitled to share
ratably in all of the assets of the Company available for distribution or
winding up of the affairs of the Company; (iii) do not have preemptive
subscription or conversion rights and there are no redemption rights applicable
thereto; and (iv) are entitled to cumulative voting on all matters which
shareholders may vote on at all meetings of shareholders. The holders of shares
of our common stock have cumulative voting rights pursuant to the California
General Corporation Law. Upon the effective election of cumulative voting by any
shareholder, each shareholder entitled to vote at any election of directors may
cumulate such shareholder votes and give one candidate a number of votes equal
to the number of directors to be elected multiplied by the number of votes to
which the shareholder's shares are normally entitled, or distribute the
shareholder's votes on the same principle among as many candidates as the
shareholder sees fit.
To date, we have not paid or declared any dividends and we have no intention of
declaring or paying any dividends in the foreseeable future. If we decide to pay
dividends, that decision will be made by our Board of Directors, which will
likely consider, among other things, our earnings, our capital requirements and
our financial condition, as well as other relevant factors.
Preferred Stock. Our authorized capital stock consists of 5,000,000 shares of
preferred stock. Our board of directors has the authority to determine the
rights, preferences and privileges of any series or class of preferred stock. At
this time, we have no shares of preferred stock issued and outstanding, and we
have no plans to issue any preferred stock at this time.
Transfer Agent and Registrar
We have engaged the services of First American Stock Transfer as our transfer
agent and registrar.
<page>48
SHARES ELIGIBLE FOR FUTURE SALE
On September 30, 2005, 64,196,100 shares of our common stock were outstanding,
and 2,064,000 shares of common stock were subject to outstanding warrants and
options granted under our Stock Option Plans and otherwise. Of the outstanding
shares, 50,692,902 shares of common stock are immediately eligible for sale in
the public market without restriction or further registration under the
Securities Act unless purchased by or issued to any "affiliate" of ours, as that
term is defined in Rule 144 promulgated under the Securities Act. All other
outstanding shares of our common stock are "restricted securities" as such term
is defined under Rule 144, in that such shares were issued in private
transactions not involving a public offering and may not be sold in the absence
of registration other than in accordance with Rules 144, 144(k) or 701
promulgated under the Securities Act or another exemption from registration.
In general, under Rule 144 as currently in effect, a person, including an
affiliate, who has beneficially owned shares for at least one year is entitled
to sell, within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed one percent of the then
outstanding shares of our common stock, subject to various restrictions. In
addition, a person who is not deemed to have been an affiliate of ours at any
time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years would be entitled to sell
those shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from an affiliate, such person's
holding period for the purpose of effecting a sale under Rule 144 commences on
the date of transfer from the affiliate.
There has been very limited trading volume in our common stock to date. Sales of
substantial amounts of our common stock under Rule 144, this prospectus or
otherwise could adversely affect the prevailing market price of our common stock
and could impair our ability to raise capital through the future sale of our
securities.
PLAN OF DISTRIBUTION
We are offering 20,000,000 shares of common stock, using certain of our
executive officers, directors and broker-dealers, on a self-underwritten, best-
efforts basis. There is no minimum amount of securities that we must sell in
order to receive any subscriptions. The common stock will be offered at a price
of $0.50 per share. From time to time, we may offer discounts to purchasers of
large amounts of our common stock. Our offering will commence on the date of
this prospectus and will continue until the earlier of December 31, 2006,
all of the shares offered are sold, or we otherwise terminate the offering.
If you decide to subscribe for any shares in this offering, you must execute and
deliver a subscription agreement and deliver a check or certified funds in U.S.
dollars to us for acceptance or rejection. Please contact Harry Masuda,
President and Chief Executive Officer, at (650) 323-0943 for more information.
<page>49
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be passed
upon for us by Silicon Valley Law Group, San Jose, California.
EXPERTS
The financial statements at December 31, 2004, and for the two years then ended,
included in this prospectus have been audited by L.L. Bradford & Company, LLC,
independent certified public accountants, to the extent and for the periods set
forth in their report, which contains an explanatory paragraph regarding our
ability to continue as a going concern, appearing elsewhere herein and in the
registration statement, and are included in reliance upon such report given upon
the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2. This prospectus, which is a part of the registration
statement, does not contain all of the information included in the registration
statement. Some information is omitted, and you should refer to the registration
statement and its exhibits. With respect to references made in this prospectus
to any contract, agreement or other document of ours, such references are not
necessarily complete and you should refer to the exhibits attached to the
registration statement for copies of the actual contract, agreement or other
document. You may review a copy of the registration statement, including
exhibits, at the Securities and Exchange Commission's public reference room at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 or Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
The public may obtain information on the operation of the public reference room
by calling the Securities and Exchange Commission at 1-800-SEC-0330.
We will also file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any reports, statements or other information on file at the public
reference rooms. You can also request copies of these documents, for a copying
fee, by writing to the Securities and Exchange Commission.
Our Securities and Exchange Commission filings and the registration statement
can also be reviewed by accessing the Securities and Exchange Commission's
Internet site at http://www.sec.gov, which contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission.
You should rely only on the information provided in this prospectus or any
prospectus supplement. We have not authorized anyone else to provide you with
different information. We are not making an offer to sell, nor soliciting an
offer to buy, these securities in any jurisdiction where that would not be
permitted or legal. Neither the delivery of this prospectus nor any sales made
hereunder after the date of this prospectus shall create an implication that the
information contained herein or our affairs have not changed since the date
hereof.
<page>50
- ---------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
Page
Unaudited Financial Statements at September 30, 2005 and for the
Nine Months Then Ended
Balance Sheet (unaudited) F-2
Statements of Operations (unaudited) F-3
Statement of Stockholders' Deficit (unaudited) F-4
Statements of Cash Flows (unaudited) F-7
Notes to Financial Statements (unaudited) F-8
Financial Statements at December 31, 2004 and for the
Two Years Then Ended
Report of Independent Registered Public Accountanting Firm F-12
Balance Sheet F-13
Statements of Operations F-14
Statement of Stockholders' Equity F-15
Statements of Cash Flow F-16
Notes to Financial Statements F-18
<page>F-1
====================================================================
HUMAN BIOSYSTEMS
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEET
SEPTEMBER 30, 2005
(UNAUDITED)
ASSETS
Current assets
Cash $ 60,100
Prepaid expenses 6,200
Investment in marketable securities 67,800
----------
Total current assets 134,100
Fixed assets, net 10,000
----------
Total assets $ 144,100
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 142,700
Accrued liabilities 62,300
Other liabilities 175,000
Public relations payable 442,300
Due to stockholders 155,900
----------
Total current liabilities 978,200
----------
Total liabilities 978,200
Commitments and contingencies --
Stockholders' equity
Preferred stock; no par or stated value; 5,000,000 shares
authorized, no shares issued or outstanding --
Common stock; no par or stated value; 145,000,000 shares
authorized, 64,885,300 shares issued
and 64,196,000 shares outstanding 18,431,000
Investment in marketable securities held in escrow (67,800)
Accumulated other comprehensive loss (11,800)
Accumulated deficit during development stage (19,185,500)
------------
Total stockholders' deficit (834,100)
------------
Total liabilities and stockholders' deficit $ 144,100
============
See Accompanying Notes To Financial Statements
<page>F-2
HUMAN BIOSYSTEMS
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended February 26, 1998
September 30, September 30, (Inception) Through
2005 2004 2005 2004 September 30, 2005
-------------- ----------- ------- ------- -----------------
Revenue $ -- $ -- $ -- $ -- $ --
Operating expenses
General and administrative
Stock based compensation 167,900 54,500 450,300 329,700 4,124,100
Public relations 2,084,300 -- 3,202,600 -- 3,202,600
Other general and administrative expenses 290,100 202,400 788,800 467,900 6,358,400
----------- ----------- ---------- --------- -----------
Total general and administrative 2,542,300 256,900 4,441,700 797,600 13,685,100
Research and development 42,300 42,300 138,300 154,600 2,067,100
Sales and marketing -- 35,500 25,400 93,900 820,800
----------- ----------- ----------- ---------- -----------
Total operating expenses 2,584,600 334,700 4,605,400 1,046,100 16,573,000
----------- ----------- ----------- ---------- -----------
Loss from operations (2,584,600) (334,700) (4,605,400) (1,046,100) (16,573,000)
Other income (expense)
Loan fees -- -- -- -- (750,000)
Bad debt related to other receivable -- -- -- -- (502,300)
Loss on investment in marketable securities -- -- -- -- (762,600)
Forgiveness of debt 80,100 -- 80,100 -- 80,100
Interest income -- -- -- -- 2,700
Interest expense -- (100) -- (366,200) (673,200)
----------- ----------- ----------- ----------- ------------
Loss before provision for income taxes (2,504,500) (334,800) (4,525,300) (1,412,300) (19,178,300)
Provision for income taxes -- -- 1,600 -- 7,200
----------- ----------- ----------- ----------- ------------
Net loss (2,504,500) (334,800) (4,526,900) (1,412,300) (19,185,500)
------------ ----------- ----------- ----------- ------------
Other comprehensive income(loss), net tax
Unrealized gain(loss) on investment in
marketable securities 25,200 -- (2,000) -- (11,800)
----------- ------------ ------------ ------------ -------------
Total comprehensive loss $(2,479,300) $ (334,800) $(4,528,900) $(1,412,300) $(19,197,300)
=========== ============ ============= ============ ==============
Basic and diluted loss per common share $ (0.04) $ (0.01) $ (0.08) $ (0.04) $ (1.01)
=========== ============ ============= ============ ==============
Basic and diluted weighted average
common shares outstanding 60,871,400 38,412,316 56,261,437 35,614,160 18,926,650
=========== ============ ============= ============ ==============
See Accompanying Notes To Financial Statements
</table>
<page>F-3
HUMAN BIOSYSTEMS
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIT
(UNAUDITED)
<table>
<caption>
<s> <c> <c> <c> <c>
Investment
in Accumulated Accumulated
Common Marketable Other Deficit During Total
---------------------- Securities Comprehensive Development Stockholders'
Shares Amount Investments PLC Loss Stage Deficit
---------- ---------- --------------- -------------- ------------- -------------
Balance December 31, 2004 51,447,000 $14,423,600 $ (68,800) $ (9,800) $(14,658,600) $ (313,600)
Issuance of common stock for cash (net of
offering costs of $1,539,900),weighted
average price of $0.09 5,697,100 486,300 -- -- -- 486,300
Issuance of common stock for cash related
to Investment Agreement, weighted
average price of $0.71 315,600 225,600 -- -- -- 225,600
Issuance of common stock for services,
weighted average price of $0.57 762,200 431,200 -- -- -- 431,200
Issuance of common stock for public
relations, $0.33 750,000 247,500 -- -- -- 247,500
Issuance of common stock for bonus shares
related to public relations agreement,
weight average price $0.59 4,239,900 2,512,800 -- -- -- 2,512,800
Issuance of common stock in satisfaction
of account payable, $0.32 5,300 1,700 -- -- -- 1,700
Stock based compensation related to
granting of options -- 19,100 -- -- -- 19,100
Stock options and warrants exercised,
weighted average price of $0.09 908,400 83,200 -- -- -- 83,200
Cashless exercise of stock options by
consultant 70,500 -- -- -- -- --
Comprehensive loss, net of tax
Net loss -- -- -- -- (4,526,900) (4,526,900)
Unrealized loss on investment in
marketable securities -- -- 1,000 (2,000) -- (1,000)
------------
Total comprehensive loss -- -- -- -- -- (4,527,900)
---------- ---------- ------------- ------------ ------------- ------------
Balance September 30, 2005(Unaudited) 64,196,000 $ 18,431,000 $ (67,800) $ (11,800) $(19,185,500) $ (834,100)
========== =========== ============= ============ ============= ============
See Accompanying Notes To Financial Statements
</table>
<page>F-4
HUMAN BIOSYSTEMS
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<table>
<caption>
<s> <c> <c> <c>
Nine months Nine months February 26, 1998
ended ended (Inception)
September 30, September 30, Through
2005 2004 September 30, 2005
------- ------- ------------------
Cash flows from operating activities:
Net loss $(4,526,900) $(1,412,300) $ (19,185,500)
Adjustments to reconcile net loss to net
cash used by operating activities:
Stock based compensation 450,300 329,700 4,124,100
Public relations-paid or to be paid in common stock 3,202,600 -- 3,202,600
Depreciation 1,200 1,100 10,800
Forgiveness of debt 80,100 -- 80,100
Deemed interest expense -- -- 92,800
Interest expense paid in common stock -- 365,300 487,800
Amortization of discount and loan fees on notes payable -- -- 774,800
Loss on investment in markertable securities -- -- 762,600
Bad debt related to other receivables -- -- 502,300
Changes in operating assets and liabilities:
Change in prepaid expenses (6,200) 14,100 (6,200)
Change in accounts payable (160,300) 90,600 148,700
Change in accrued liabilities 600 -- 171,700
Changes in other liabilities 175,000 40,200 175,000
--------- ---------- -----------
Net cash used by operating activities (783,600) (571,300) (8,658,400)
Cash flows from investing activities:
Purchase of fixed assets (11,000) -- (20,800)
--------- --------- -----------
Net cash used by investing activities (11,000) -- (20,800)
Cash flows from financing activities:
Change in due to stockholders (219,100) 312,100 1,017,800
Proceeds from issuance of common stock 795,100 252,100 7,587,300
Proceeds from borrowing on notes payable -- -- 323,100
Principal payments on notes payable -- -- (97,400)
Principal payments on stock subject to rescission -- -- (41,500)
Change in other receivables -- -- (50,000)
--------- ---------- -----------
Net cash provided by financing activities 576,000 564,200 8,739,300
--------- ---------- -----------
Net increase (decrease) in cash (218,600) (7,100) 60,100
Cash, beginning of period 278,700 7,400 --
--------- ---------- -----------
Cash, end of period $ 60,100 $ 300 $ 60,100
========= ========== ===========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 1,600 $ -- $ 6,400
========= ========== ===========
Cash paid for interest $ -- $ -- $ 12,900
========= ========== ===========
Schedule of non-cash financing activities:
Issuance of common stock in satisfaction of
accounts payable (excluding interest of $26,600) $ -- $ 48,600 $ 48,600
========== ========== ===========
Issuance of common stock in satisfaction of
accrued liabilities (excluding interest of $20,000) $ -- $ 36,700 $ 36,700
========== ========== ===========
Issurance of common stock to employees of Russian
Branch for accrued liabilities (excluding services of
($28,500) $ -- $ 30,400 $ 30,400
========== ========== ===========
Issuance of common stock in satisfaction of due to
stockholders (excluding interest of $318,700) $ -- $ 594,400 $594,400
========== ========== ===========
Issuance of common stock in satisfaction of accounts
payable $ 1,700 $ -- $ 1,700
========== ========== ===========
See Accompanying Notes To Financial Statements
</table>
<page>F-5
HUMAN BIOSYSTEMS
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Human BioSystems (hereinafter referred to as the "Company") is a development
stage company incorporated on February 26, 1998 under the laws of the state of
California. The business purpose of the Company is to develop the technology
for preservation of certain biologic material, including platelets (a blood
component), red blood cells, heart valves, tissue and organs. The Company is in
the seventh year of its research and development activities. The Company's goal
is to develop the technology to extend and maintain functionality of these
materials for much longer periods of time than is currently possible.
The accompanying unaudited condensed financial statements have been prepared in
accordance with Securities and Exchange Commission requirements for interim
financial statements. Therefore, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. The financial statements should be
read in conjunction with the Form 10-KSB for the year ended December 31, 2004 of
Human BioSystems (the "Company").
The interim financial statements present the condensed balance sheet, statements
of operations, stockholders' deficit and cash flows of Human BioSystems. The
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States.
The interim financial information is unaudited. In the opinion of management,
all adjustments necessary to present fairly the financial position of the
Company as of September 30, 2005 and the results of operations and cash flows
presented herein have been included in the financial statements. Interim
results are not necessarily indicative of results of operations for the full
year.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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. Actual results could differ from those estimates.
<page>F-6
2. STOCK-BASED EMPLOYEE COMPENSATION
The Company applies Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and Related Interpretations, in
accounting for stock options issued to employees. Under APB No. 25, employee
compensation cost is recognized when the estimated fair value of the underlying
stock on date of the grant exceeds the exercise price of the stock option. For
stock options and warrants issued to non-employees, the Company applies SFAS No.
123, Accounting for Stock-Based Compensation, which requires the recognition of
compensation cost based upon the fair value of stock options at the grant date
using the Black-Scholes option pricing model.
The following table represents the effect on net loss and loss per share if the
Company had applied the fair value based method and recognition provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", to stock-based employee compensation:
Nine months ended Sept 30,
2005 2004
------------- ---------------
Net loss, as reported $(4,526,900) $(1,412,300)
Add: Stock-based employee compensation
expense included in reported loss,
net of related tax effects -- 20,000
Deduct: Total stock-based employee
compensation expense determined under
fair value based methods for all awards,
net of related tax effects (21,900) (84,700)
-------------- ------------
Pro forma net loss $(4,548,800) $(1,477,000)
============== ============
Net loss per common share
Basic and diluted loss, as reported $ (0.08) $ (0.04)
============== ============
Basic and diluted loss, pro forma $ (0.08) $ (0.04)
============= ============
<page>F-7
3. OTHER LIABILITIES
Other liabilities consist of deposits from investors for which the Company owes
500,000 shares of common stock totaling $175,000 as of September 30, 2005.
4. RELATED PARTY TRANSACTIONS
Due to stockholders consist of the following as of September 30, 2005:
Wages payable to stockholder employees $ 142,000
Accrued vacation for stockholder employees 13,900
-----------
$ 155,900
===========
5. COMMON STOCK
During the first quarter 2005, the Company issued 1,746,100 shares of common
stock for cash totaling $262,200 (including offering costs of $609,900).
During the first quarter 2005, the Company issued 282,200 shares of common stock
for services totaling $31,600.
During the first quarter 2005, the Company issued 111,100 shares of common stock
in relation to the exercise of warrants for cash totaling $1,100.
During the second quarter 2005, the Company issued 3,951,000 shares of common
stock for cash totaling $229,800 (including offering costs of $924,300).
During the second quarter 2005, the Company issued 300,000 shares of common
stock pursuant to a termination agreement with a consultant totaling $249,000.
During the second quarter 2005, the Company issued 487,300 shares of common
stock in relation to the exercise of options and warrants for cash totaling
$42,800.
During the third quarter 2005, the Company issued 310,000 shares of common stock
in relation to the exercise of options and warrants for cash totaling $39,300.
During the third quarter 2005, the Company issued 70,500 shares of common stock
in relation to a cashless exercise of options. In order to initiate the
exercise, the holder gave up options to purchase 29,500 shares of the Company's
common stock as consideration for the exercise in place of cash. The 29,500
shares was the equivalent of the cash the Company would have received under the
terms of the option agreement.
<page>F-8
During the third quarter 2005, the Company recognized offering costs totaling
$5,700 due to a foreign currency translation loss recognized in relation to cash
received during the second quarter for the sale of common stock.
During the third quarter 2005, the Company issued 5,300 shares of common stock
in satisfaction of accounts payable totaling $1,700.
During the third quarter 2005, the Company issued 180,000 shares of common stock
for services totaling $150,600.
Loan Agreement - During October 2004, the Company entered into a Loan Agreement
(the "Loan Agreement") with an unaffiliated individual (the "Lender"). The Loan
Agreement called for the Lender to loan an aggregate of Euros 2,300,000 to the
Company (the "Loan") with interest at the rate of three percent per annum,
payments of interest due monthly and all principal plus accrued but unpaid
interest due and payable on November 1, 2007. Repayment of the Loan was to be
secured by 23,000,000 shares of the Company's common stock issuable under
Regulation S under the Securities Act of 1933, as amended (the "Shares").
Pursuant to the Loan Agreement and an Escrow Agreement between the Lender and
the Company, the 23,000,000 Shares were issued during October 2004 and were
delivered to the Lender to hold until funds for repayment of the Loan have been
delivered to the escrow agent. The Loan Agreement was declared in default, with
the Shares to be immediately returned to the Company, as the Loan funds were not
delivered by the 15th calendar day following the date of the Loan Agreement
(November 13, 2004). The shares were cancelled during February and March 2005.
Accordingly, the Company did not record the shares as outstanding prior to the
cancellation.
Public Relations Agreement - During March 2005, and subsequently amended during
April 2005, the Company entered into an agreement with a public relations and
promotions services company for consulting services. The public relations and
promotions services company will promote the Company to the investment community
and the general public through press releases and other communications, all of
which must be approved in advance by the Company. The term of the agreement is 6
months, subject to prior termination. In consideration of the services being
performed, the Company will issue compensation shares equal to 30% of the
increase in buy volume of the Company's common stock directly attributable to
the public relations and promotions services company, as defined in the
agreement. The Company will also issue bonus shares of 10% of the increase in
buy volume of the Company's common stock in the event the sales price of the
Company's common stock equals or exceeds $0.25 per share. Additionally, the
Company has agreed to issue 6.0 million shares of common stock to be held by an
escrow agent. Through September 30, 2005 the Company released 4,239,900 shares
of common stock totaling $2,512,800 in consideration of this agreement.
Additionally, the Company recorded public relations payable for approximately
899,500 additional shares to be released at a future date valued at $442,300.
<page>F-9
During June 2005, the Company entered into a second agreement with the public
relations and promotions services company for additional consulting services in
exchange for 750,000 shares of the Company's common stock valued at $247,500.
The Company issued the shares in June 2005.
Investment Agreement - During June 2004, the Company entered into an Investment
Agreement (the "Investment Agreement") with Dutchess Private Equities Fund II,
LP ("Dutchess") effective June 28, 2004. Pursuant to the terms of the
Investment Agreement, the Company may offer, through a series of puts, and
Dutchess must purchase up to 38,000,000 shares of the Company's common stock
with an aggregate purchase price up to $5,000,000. Pursuant to the Investment
Agreement, Dutchess acquired 30,000 shares of the Company's common stock in
exchange for approximately $16,800 during April 2005, 229,600 shares for
approximately $158,900 during August 2005 and 56,000 shares for approximately
$49,900 during September 2005.
Shares held in escrow - As of September 30, 2005, approximately 690,000 shares
of the Company's common stock are issued and held in trust accounts. The trust
accounts were set up to receive and hold cash from investors in exchange for
shares of common stock. These shares will be recognized as outstanding upon
receipt of cash or other consideration.
6. OTHER ITEMS
Executive Consulting Agreement - During August 2005, the Company entered into an
Executive Consulting Agreement with Dr. David Winter. Pursuant to the
agreement, Dr. Winter will serve as President of the Company. In that capacity,
he will oversee the Company's platelet and organ development programs and
supervise negotiations with the Company's alliance partners. Dr. Winter
succeeds Harry Masuda who will continue as the Company's Chief Executive
Officer.
In consideration for these services, Dr. Winter will receive a monthly retainer
of $3,000. The Company also granted options to purchase 96,000 shares of the
Company's common stock, at an exercise price of $0.73 per share. The options
vest monthly for twelve months beginning with the date of grant, and expire in
five years. The shares are valued at $44,600 using the Black Scholes model and
will be expensed through the vesting period.
<page>F-10
Board appointment - During September 2005, the Company appointed Dr. Larry
McCleary to fill a vacancy created by Dr. George Tsukuda's resignation in
September 2005. The Company granted Dr. McCleary options to purchase 50,000
shares of the Company's common stock, at an exercise price of $0.73 per share.
The options vest annually for three years at 30%, 30% and 40% beginning with the
date of grant, and expire in five years. The shares are valued at $30,100 using
the Black Scholes model and will be expensed through the vesting period.
Forgiveness of debt - During the third quarter 2005 the Company recorded
forgiveness of debt from a vendor totaling $80,100. The vendor had previously
received shares of the Company's common stock in satisfaction of certain
invoices. However, due to additional realization by that vendor upon the sale
of the common stock, the vendor forgave additional invoices totaling $80,100.
7. GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company is in the development
stage, has no operating revenue and incurred a net loss of $4,526,900 for the
nine months ended September 30, 2005. The Company is in the eighth year of
research and development, with an accumulated loss during the development stage
of $19,185,500. As of September 30, 2005, management is uncertain as to the
completion date or if any of the Company's products will be completed at all.
Management's plan, in this regard, is to raise financing of approximately
$2,500,000 through a combination of equity and debt financing. Management
believes this amount will be sufficient to finance the continuing research for
the next twelve months. However, there is no assurance that the Company will be
successful in raising such financing.
These conditions give rise to substantial doubt about the Company's ability to
continue as a going concern. These financial statements do not include
adjustments relating to the recoverability and classification of reported asset
amounts or the amount and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to obtain
additional financing or sale of its common stock as may be required and
ultimately to attain profitability.
On July 19, 2005, Human BioSystems ("HBS") issued an Exchange Offer to its Reg S
stockholders in Germany to exchange one share of HBS common stock for each of
the shares of Reg S Stock outstanding before or upon the de-listing date when
the Reg S Stock is no longer tradable. This Exchange Offer is only applicable
to HBS Reg S stockholders in Germany and expires in December 2005.
8. SUBSEQUENT EVENTS
During October, 2005, the Company issued a put notice to Dutchess Private
Equities Fund, II, LP and received the amount of $65,000 for which the Company
issued 108,605 shares of unrestricted common shares pursuant to the agreement
signed between the Company and Dutchess during June, 2004.
In October, 2005, the Company increased the number of shares allocated under the
public relations agreement signed between the Company and a public relations
firm in March, 2005 to 7 million shares. The agreement was also extended an
additional six months from September 2005 to March, 2006.
In October, 2005, the Company initiated the transfer of 1 million shares of
Company common shares to the Company's escrow account for the purpose of
satisfying any stock payments due under the terms of the agreement signed
between the Company and the public relations firm. The transfer is pending as of
November 8, 2005.
During October, 2005, the Company entered into a non-exclusive consulting and
capital raising agreement with an investment banking firm to assist the Company
raise capital on a success fee basis. The agreement calls for a cash fee and
warrants based on the capital raised. The term of the agreement is 6 months.
<page>F-11
- -----------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders Human BioSystems (A Development Stage
Company) Palo Alto, California
We have audited the accompanying balance sheet of Human BioSystems (A
Development Stage Company) as of December 31, 2004, and the related statements
of operations, stockholders' deficit, and cash flows for the years ended
December 31, 2004 and 2003 and for the period from February 26, 1998 (Inception)
through December 31, 2004. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over the
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Human BioSystems as of December
31, 2004, and the results of its operations and cash flows for the years ended
December 31, 2004 and 2003 and for the period from February 26, 1998 (Inception)
through December 31, 2004 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered losses from operations and
current liabilities exceed current assets, all of which raise substantial doubt
about its ability to continue as a going concern. Management's plans in regards
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/
L.L. Bradford & Company, LLC
February 5, 2005
(except for Note 10, as to which the date is March 2, 2005)
Las Vegas, Nevada
F-12
HUMAN BIOSYSTEMS
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
December 31, 2004
ASSETS
Current assets
Cash $ 278,700
Prepaid expenses and other current assets 68,800
----------
Total current assets 347,500
Fixed assets, net 200
----------
Total assets $ 347,700
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 224,600
Accrued liabilities 61,700
Stockholder payables 375,000
----------
Total current liabilities 661,300
----------
Total liabilities 661,300
Commitments and contingencies --
Stockholders' equity
Preferred stock; no par or stated value; 5,000,000 shares
authorized, no shares issued or outstanding --
Common stock; no par or stated value; 145,000,000 shares
authorized, 80,457,7000 shares
and 51,447,000 issued and outstanding 14,423,600
Investment in marketable securities held in escrow (68,800)
Accumulated other comprehensive loss (9,800)
Accumulated deficit during development stage (14,658,600)
----------
Total stockholders' deficit (313,600)
----------
Total liabilities and stockholders' equity $ 347,700
==========
See Accompanying Notes To Financial Statements
F-13
HUMAN BIOSYSTEMS
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
Year ended Year ended February 26, 1998
December 31, December 31, (Inception) Through
2004 2003 December 31, 2004
--------------- ----------- -----------------
Revenue $ -- $ -- $ --
Operating expenses
General and administrative
Stock based compensation 347,500 251,800 3,673,800
Other general and administrative expenses 760,900 1,292,200 5,569,600
----------- ----------- ----------
Total general and administrative 1,108,400 1,544,000 9,243,400
Research and development 218,500 394,300 1,928,800
Sales and marketing 146,400 219,300 795,400
----------- ----------- ----------
Total operating expenses 1,473,300 2,157,600 11,967,600
----------- ----------- ----------
Loss from operations (1,473,300) (2,157,600) (11,967,600)
Other income (expense)
Loan fees -- -- (750,000)
Bad debt related to other receivable -- (398,300) (502,300)
Loss on investment in marketable securities (762,600) -- (762,600)
Interest income -- -- 2,700
Interest expense (366,400) (7,100) (673,200)
----------- ----------- ------------
Loss before provision for income taxes (2,602,300) (2,563,000) (14,653,000)
Provision for income taxes 800 800 5,600
----------- ----------- ------------
Net loss (2,603,100) (2,563,800) (14,658,600)
----------- ------------ ------------
Other comprehensive loss, net of tax
Unrealized loss on investment in marketable securities (9,800) -- (9,800)
----------- ----------- -------------
Total comprehensive loss $ (2,612,900) $ (2,563,800) $(14,668,400)
=========== =========== =============
Basic and diluted loss per common share $ (0.07) $ (0.10) $ (0.92)
=========== =========== =============
Basic and diluted weighted average
common shares outstanding 39,795,100 26,814,100 15,899,300
=========== =========== =============
See Accompanying Notes To Financial Statements
F-14
HUMAN BIOSYSTEMS
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
Loan Fees
Common Stock Related to Options Prepaid Consulting
---------------------------------- to Purchase Services Paid in
Shares Amount Common Stock Common Stock
---------------------------------- ------------------ ------------------
Balance at February 26, 1998
(Date of inception) -- $ -- $ -- $ --
Issuance of common stock for
services, weighted average price
of $0.00 4,058,000 10,200 -- --
Issuance of common stock for cash
(net of offering cost of
$149,000),$0.12 1,013,600 119,000 -- --
Issuance of common stock in
September 1998 in Reg. D
offering,(net of offering
cost of $10,600), $0.24 1,000,000 239,400 -- --
Net loss -- -- -- --
---------- --------- -------- ----------
Balance, December 31, 1998 6,071,600 368,600 -- --
Issuance of common stock and
warrants for cash during 1999
from Reg. D offering dated
September 1, 1999, (net of
offering costs of $163,000), $1.32 287,200 379,500 -- --
Stock options and warrants exercise
price of $0.01 31,000 400 -- --
Issuance of common stock for
services, weighted average price
of $1.50 5,200 7,800 -- --
Issuance of warrants in
connection with debt
securities -- 24,800 -- --
Stock based compensation
related to granting options and
warrants -- 296,500 -- --
Net loss -- -- -- --
---------- --------- -------- ----------
Balance, December 31, 1999 6,395,000 1,077,600 -- --
Issuance of common stock and
warrants for cash during 2000
from Reg. D offering dated
September 1, 1999,(net of
offering costs of $25,800),$1.32 140,100 184,400 -- --
Issuance of common stock and
warrants for cash during 2000
from Reg. D offering dated
February 2, 2000,(net of
offering costs of $28,100),$1.38 224,500 308,700 -- --
Issuance of common stock for
cash, $0.30 81,200 24,400 -- --
Stock options and warrants exercise
price of $0.07 390,600 28,900 -- --
Issuance of common stock in
satisfaction of promissory
note issued as a result of
rescission offering,$0.33 206,700 67,500 -- --
Rescission of common stock
related to Reg. D offering
dated September 1, 1999 and
February 2, 2000 (222,900) (334,400) -- --
Issuance of common stock in
satisfaction of promissory
note payable, $0.37 13,500 5,000 -- --
Issuance of common stock for
prepaid consulting services,
$0.37 907,500 335,100 -- (335,100)
Amortization of prepaid
consulting services -- -- -- 139,900
Stock based compensation
related to options and
warrants -- 1,334,300 -- --
Loan fees related to options
to purchase common stock -- 750,000 (750,000) --
Deemed interest expense
related to conversion
feature of note payable -- 37,100 -- --
Current period amortization
of loan fees related to
options to purchase common
stock -- -- 93,800 --
Net loss -- -- -- --
---------- --------- -------- ----------
Balance, December 31, 2000 8,136,200 3,818,600 (656,200) (195,200)
F-15
Issuance of common stock
for cash (net of offering
costs of $111,300,$0.40 3,224,900 1,293,100 -- --
Stock options and warrants
exercised,weighted average
exercise price of $0.19 844,600 158,300 -- --
Issuance of common stock
in satisfaction of
accounts payable, $0.37 67,600 24,800 -- --
Satisfaction of accrued
liabilities related to
granting of warrants -- 18,100 -- --
Satisfaction of stockholder
payables related to
granting of warrants -- 274,000 -- --
Issuance of common stock in
satisfaction of promissory
note issued as a result of
rescission offering
(including interest of
$34,600),$0.51 416,600 212,800 -- --
Issuance of common stock in
satisfaction of convertible
note payable - related
party (including interest
of $82,700),$1.06 257,300 272,700 -- --
Amortization of prepaid
consulting services -- -- -- 195,200
Issuance of common stock
for services, weighted average
price of $0.64 154,600 98,500 -- --
Stock based compensation
related to granting of
warrants and options -- 416,600 -- --
Deemed interest expense
related to conversion
feature of note payable -- 55,700 -- --
Current period amortization
of loan fees related to
options to purchase common
stock -- -- 656,200 --
Issuance of common stock
for other receivable, $0.13 800,000 104,000 -- --
Common shares due as a
result of terminated
consulting agreement,$0.78 510,000 398,300 -- --
Issuance of common stock in
exchange for termination
of consulting agreement,$1.18 150,000 177,000 -- --
Bad debt related to other
receivable -- -- -- --
Net loss -- -- -- --
------------- ----------- ------- -------
Balance, December 31, 2001 14,561,800 7,322,500 -- --
Issuance of common stock for cash
(net of offering costs of
$159,900), $0.27 7,809,400 2,147,300 -- --
Stock options and warrants exercised,
weighted average exercise price
of $0.01 280,000 4,000 -- --
Issuance of common stock in satisfaction
of promissory note issued as a result of
rescission offering (including accrued
interest of $7,200),$0.75 72,100 54,300 -- --
Issuance of common stock for services,
weighted average price of $0.76 397,700 300,900 -- --
Stock based compensation related to granting
of warrant and options -- 97,600 -- --
Issuance of common stock in satisfaction of
accrued liabilities, $0.31 54,100 17,000 -- --
Common shares due from stockholder -- -- -- --
Common shares received from stockholder
and cancelled, $(0.47) (106,400) (50,000) -- --
Net loss -- -- -- --
-------------- ------------ ------------ --------------
Balance December 31, 2002 23,068,700 9,893,600 -- --
Issuance of common stock for cash
(net of offering costs of $223,000),
$0.16 5,562,700 905,400 -- --
Issuance of common stock for services,
weighted average price of $0.20 777,700 157,900 -- --
Issuance of common stock in satisfaction
of stockholder payables (including
interest of $5,200) 163,700 29,400 -- --
Stock based compensation related to
granting of warrants and options -- 93,900 -- --
Cancellation of common stock (50,000) -- -- --
Bad debt related to other receivable -- -- -- --
Net loss -- -- -- --
---------- ------------ ---------- --------------
Balance December 31, 2003 29,522,800 11,080,200 -- --
Issuance of common stock for cash (net
of offering costs of $846,500),
weighted average price of $0.15 6,757,500 999,400 -- --
Issuance of common stock for services,
weighted average price of $0.16 1,716,300 274,200 -- --
Issuance of common stock to employees
of Russian Branch for services
(including accrued liabilities of
$30,400), $0.49 130,000 64,000 -- --
Issuance of common stock for investment
in marketable securities, $0.13 7,000,000 910,000 -- --
Stock based compensation related to
granting of options -- 39,700 -- --
Common stock issued in satisfaction of
accounts payble (including interest of
$26,000), $0.15 592,700 86,300 -- --
Common stock issued in satisfaction of
due stockholders (including interest
of $20,000), $0.17 333,400 56,700 -- --
Common stock issued in satisfaction of
due to stockholders (including interest
of $318,700), $0.17 5,394,300 913,100 -- --
Loss on investment in marketable
securities -- -- -- --
Comprehensive loss, net of tax:
Net Loss -- -- -- --
Unrealized loss on investment in
marketable securities -- -- -- --
Total Comprehensive loss -- -- -- --
-------------- ------------ ----------- --------------
Balance Decemeber 31, 2004 51,447,000 $ 14,423,600 $ -- $ --
============== ============ =========== ==============
See Accompanying Notes To Financial Statements
</table>
F-16
HUMAN BIOSYSTEMS
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (Continued)
Investment
in Accumulated Accmulated
Marketable Other Deficit During Total
Other Securities Comprehensive Development Stockholders'
Receivable PLC Loss Stage Deficit
---------- ------------- -------------- ------------- ----------------
Balance at February 26, 1998
(Date of inception) $ -- $ -- $ -- $ -- $ --
Issuance of common stock for
services, weighted average price
of $0.00 -- -- -- -- 10,200
Issuance of common stock for cash
(net of offering cost of $149,000),$0.12 -- -- -- -- 119,000
Issuance of common stock in
September 1998 in Reg. D
offering,(net of offering
cost of $10,600), $0.24 -- -- -- -- 239,400
Net loss -- -- -- (272,000) (272,000)
---------- ----------- -------------- ---------- --------
Balance, December 31, 1998 -- -- -- (272,000) 96,600
Issuance of common stock and
warrants for cash during 1999
from Reg. D offering dated
September 1, 1999,( net of
offering costs of $163,000), $1.32 -- -- -- -- 379,500
Stock options and warrants exercise
price of $0.01 -- -- -- -- 400
Issuance of common stock for
services, weighted average price
of $1.50 -- -- -- -- 7,800
Issuance of warrants in
connection with debt
securities -- -- -- -- 24,800
Stock based compensation
related to options and
warrants -- -- -- -- 296,500
Net loss -- -- -- (1,098,200) (1,098,200)
---------- ---------- --------- ----------- ------------
Balance, December 31, 1999 -- -- -- (1,370,200) (292,600)
Issuance of common stock and
warrants for cash during 2000
from Reg. D offering dated
September 1, 1999,(net of
offering costs of $25,800),$1.32 -- -- -- -- 184,400
Issuance of common stock and
warrants for cash during 2000
from Reg. D offering dated
February 2, 2000,(net of
offering costs of $28,100),$1.38 -- -- -- -- 308,700
Issuance of common stock for
cash, $0.30 -- -- -- -- 24,400
Stock options and warrants exercise
price of $0.07 -- -- -- -- 28,900
Issuance of common stock in
satisfaction of promissory
note issued as a result of
rescission offering,$0.33 -- -- -- -- 67,500
Rescission of common stock
related to Reg. D offering
dated September 1, 1999 and
February 2, 2000 -- -- -- -- (334,400)
Issuance of common stock in
satisfaction of promissory
note -- -- -- -- 5,000
Issuance of common stock for
prepaid consulting services,
$0.37 -- -- -- -- --
Amortization of prepaid
consulting services -- -- -- -- 139,900
Stock based compensation
related to options and
warrants -- -- -- -- 1,334,300
Loan fees related to options
to purchase common stock -- -- -- -- --
Deemed interest expense
related to conversion
feature of note payable -- -- -- -- 37,100
Current period amortization
of loan fees related to
options to purchase common
stock -- -- -- -- 93,800
Net loss -- -- -- (2,635,700) (2,635,700)
---------- --------- --------- ---------- -----------
Balance, December 31, 2000 -- -- -- (4,005,900) (1,038,700)
Issuance of common stock
for cash (net of offering
costs of $111,300),$0.40 -- -- -- -- 1,293,100
Stock options and warrants
exercised,weighted average
exercise price of $0.19 -- -- -- -- 158,300
Issuance of common stock
in satisfaction of
accounts payable,$0.37 -- -- -- -- 24,800
Satisfaction of accrued
liabilities related to
granting of warrants -- -- -- -- 18,100
Satisfaction of stockholder
payables related to
granting of warrants -- -- -- -- 274,000
Issuance of common stock in
satisfaction of promissory
note issued as a result of
rescission offering
(including interest of
$34,600),$0.51 -- -- -- -- 212,800
Issuance of common stock in
satisfaction of convertible
note payable - related
party (including interest
of $82,700),$1.06 -- -- -- -- 272,700
Amortization of prepaid
consulting services -- -- -- -- 195,200
Issuance of common stock
for services, weighted average
price of $0.64 -- -- -- -- 98,500
Stock based compensation
related to granting of
warrants and options -- -- -- -- 416,600
Deemed interest expense
related to conversion
feature of note payable -- -- -- -- 55,700
Current period amortization
of loan fees related to
options to purchase common
stock -- -- -- -- 656,200
Issuance of common stock
for other receivable, $0.13 (104,000) -- -- -- --
Common shares due as a
result of terminated
consulting agreement, $0.78 (398,300) -- -- -- --
Issuance of common stock in
exchange for termination
of consulting agreement, $1.18 -- -- -- -- 177,000
Bad debt related to other
receivable 104,000 -- -- -- 104,000
Net loss -- -- -- (2,971,500) (2,971,500)
------------ ----------- ----------- ----------- -----------
Balance, December 31, 2001 (398,300) -- -- (6,977,400) (53,200)
Issuance of common stock for cash
(net of offering costs of
$159,900), $0.27 -- -- -- -- 2,147,300
Stock options and warrants exercised,
weighted average exercise
price of $0.01 -- -- -- -- 4,000
Issuance of common stock in satisfaction
of promissory note issued as a result of
rescission offering (including accrued
interest of $7,200),$0.75 -- -- -- -- 54,300
Issuance of common stock for services,
weighted average price of $0.76 -- -- -- -- 300,900
Stock based compensation related to
granting of warrant -- -- -- -- 97,600
Issuance of common stock in satisfaction
of accrued liabilities, $0.31 -- -- -- -- 17,000
Common shares due from stockholder (50,000) -- -- -- (50,000)
Common shares received from stockholder
and cancelled,$(0.47) 50,000 -- -- -- --
Net loss -- -- -- (2,514,300) (2,514,300)
-------------- ---------- --------- ----------- -----------
Balance December 31, 2002 (398,300) -- -- (9,491,700) 3,600
F-17
Issuance of common stock for cash
(net of offering costs of $223,000),
$0.16 -- -- -- -- 905,400
Issuance of common stock for services,
weighted average price of $0.20 -- -- -- -- 157,900
Issuance of common stock in satisfaction
of stockholder payables (including
interest of 5,200) -- -- -- -- 29,400
Stock based compensation related to
granting of warrants and options -- -- -- -- 93,900
Cancellation of common stock -- -- -- -- --
Bad debt related to other receivables 398,300 -- -- -- 398,300
Net loss -- -- -- (2,563,800) (2,563,800)
----------- ----------- --------- ------------ -----------
Balance, December 31, 2003 -- -- -- (12,055,500) (975,300)
Issuance of common stock for cash (net
of offering costs of $846,500),
weighted average price of $0.15 -- -- -- -- 999,400
Issuance of common stock for services,
weighted average price of $0.16 -- -- -- -- 274,200
Issuance of common stock to employees
of Russian Branch for services
(including accrued liabilities of
$30,400), $0.49 -- -- -- -- 64,000
Issuance of common stock for investment
in marketable securities, $0.13 -- (455,000) -- -- 455,000
Stock based compensation related to
granting of options -- -- -- -- 39,700
Common stock issued in satisfaction of
accounts payble (including interest of
$26,000), $0.15 -- -- -- -- 86,300
Common stock issued in satisfaction of
due stockholders (including interest
of $20,000), $0.17 -- -- -- -- 56,700
Common stock issued in satisfaction of
due to stockholders (including interest
of $318,700), $0.17 -- -- -- -- 913,100
Loss on investment in marketable
securities -- 381,300 -- -- 381,300
Comprehensive loss, net of tax:
Net Loss -- -- -- (2,603,100) (2,603,100)
Unrealized loss on investment in
marketable securities -- 4,900 (9,800) -- (4,900)
Total Comprehensive loss -- -- -- -- (2,608,000)
----------- ---------- ---------- ------------ -----------
Balance December 31, 2004 $ -- $ 68,800 $ (9,900) $(14,658,600) $ (313,600)
=========== ========== ========== ============= ===========
See Accompanying Notes To Financial Statements
</table>
F-18
HUMAN BIOSYSTEMS
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
February 26, 1998
Year ended Year ended (Inception) Through
December 31, 2004 December 31, 2003 December 31, 2004
----------------- ----------------- -----------------
Cash flows from operating activities:
Net loss $ (2,603,100) $ (2,563,800) $ (14,658,600)
Adjustments to reconcile net loss to net
cash used in operating activities:
Stock based compensation 347,500 251,800 3,673,800
Depreciation 1,400 1,900 9,600
Deemed interest expense -- -- 92,800
Interest expense paid in common stock 365,300 5,200 487,800
Amortization of discount and loan fees
on notes payable -- -- 774,800
Loss on investment in marketable securities 762,600 -- 762,600
Bad debt related to other receivables -- 398,300 502,300
Changes in operating assets and liabilities:
Change in prepaid expenses and other assets 18,400 21,000 --
Change in accounts payable 19,500 185,500 309,000
Change in accrued liabilities (45,400) 152,100 172,100
----------- ----------- -----------
Net cash used by operating activities (1,133,800) (1,548,000) (7,874,800)
Cash flows from investing activities:
Purchase of fixed assets -- -- (9,800)
----------- ----------- -----------
Net cash provided by investing activities -- -- (9,800)
Cash flows from financing activities:
Change in stockholder payables 405,700 505,300 1,236,900
Proceeds from issuance of common stock 999,400 905,400 6,792,200
Proceeds from borrowing on notes payable -- -- 323,100
Principal payments on notes payable -- -- (97,400)
Principal payments on stock subject to rescission -- -- (41,500)
Change in other receivables -- -- (50,000)
----------- ----------- -----------
Net cash provided by financing activities 1,405,100 1,410,700 8,163,300
----------- ----------- -----------
Net increase (decrease) in cash 271,300 (137,000) 278,700
Cash, beginning of period 7,400 144,700 --
----------- ----------- -----------
Cash, end of period $ 278,700 $ 7,400 $ 278,700
=========== =========== ===========
F-19
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ -- $ 800 $ 4,800
=========== =========== ===========
Cash paid for interest $ -- $ 1,200 $ 12,900
=========== =========== ===========
Schedule of non-cash financing activities
Issuance of warrants in connection
with debt securities $ -- $ -- $ 24,800
=========== =========== ===========
Principal payments on notes payable through the
issuance of common stock $ -- $ -- $ 5,000
=========== =========== ===========
Rescission of common stock related to Reg D
offering dated September 1, 1999 and
February 2, 2000 $ -- $ -- $ 344,400
=========== =========== ===========
Issuance of common stock in satisfaction of
promissory note issued as a result of rescission
offering $ -- $ -- $ 67,500
=========== =========== ===========
Issuance of common stock for prepaid
consulting services $ -- $ -- $ 335,100
=========== =========== ===========
Loan fees related to options to purchase
common stock $ -- $ -- $ 750,000
=========== =========== ===========
Issuance of common stock in exchange for termination
of consulting agreement $ -- $ -- $ 398,300
=========== =========== ===========
Issuance of common stock in exchange for
other receivable $ -- $ -- $ 104,000
=========== =========== ===========
Issuance of common stock in satisfaction of
accounts payable $ -- $ -- $ 24,800
=========== =========== ===========
Satisfaction of accrued liabilities related
to granting of warrants $ -- $ -- $ 18,100
=========== =========== ===========
Satisfaction of stockholder payables related
to granting of warrants and options $ -- $ -- $ 274,000
=========== =========== ===========
Issuance of common stock in satisfaction of
convertible note payable - related party
(excluding interest of $82,700) $ -- $ -- $ 190,000
=========== =========== ===========
Issuance of common stock in satisfaction of
promissory note issued as a result of
rescission offering(excluding interest of $34,600) $ -- $ -- $ 178,200
=========== =========== ===========
Issuance of common stock in satisfaction of
promissory note issued as a result of rescission
offering (including accrued interest of $7,200) $ -- $ -- $ 54,300
=========== =========== ===========
Issuance of common stock in satisfaction of accrued
liabilities $ -- $ -- $ 17,000
=========== =========== ===========
Issuance of common stock in satisfaction of
stockholder payables (excluding interest
of $5,200) $ -- $ 24,200 $ 24,200
=========== =========== ===========
Issuance of common stock to employees
of Russian Branch for accrued liabilities
(excluding servise of$33,600) $ 30,400 $ -- $ 30,400
=========== =========== ===========
Issuance of common stock in satisfaction of
accounts payble (excluding interest of $26,000)
$ 59,700 $ -- $ 59,700
=========== =========== ===========
Issuance of common stock in satisfaction of
accrued liabilities (excluding interest
of $20,000) $ 36,700 $ -- $ 36,700
=========== =========== ===========
Issuance of common stock issued in satisfaction of
due to stockholders (excluding interest
of $318,700) $ 594,400 $ -- $ 594,400
=========== =========== ===========
See Accompanying Notes To Financial Statements
</table>
F-20
1. DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES
Description of business - Human BioSystems (formerly known as HyperBaric
Systems) (hereinafter referred to as the "Company") is a development stage
company incorporated on February 26, 1998 under the laws of the state of
California. The business purpose of the Company is to develop the technology
for preservation of certain biologic material, including platelets (a blood
component), red blood cells, heart valves, tissue and organs. The Company is in
the seventh year of its research and development activities. The Company's goal
is to develop the technology to extend and maintain functionality of these
materials for much longer periods of time than is currently possible. The
Company's research facility is located in Krasnoyarsk, Russia.
Going concern - The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company is in
the development stage, has no operating revenue and incurred a net loss of
approximately $2,603,000 for the year ended December 31, 2004. The Company is
in the seventh year of research and development, with an accumulated loss during
the development stage of approximately $14,659,000. As of December 31, 2004,
management is uncertain as to the completion date or if the product will be
completed at all.
These conditions give rise to substantial doubt about the Company's ability to
continue as a going concern. These financial statements do not include
adjustments relating to the recoverability and classification of reported asset
amounts or the amount and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to obtain
additional financing or sale of its common stock as may be required and
ultimately to attain profitability.
Management's plan, in this regard, is to raise financing of approximately
$2,500,000 through a combination of equity and debt financing. Management
believes this amount will be sufficient to finance the continuing research for
the next twelve months. However, there is no assurance that the Company will be
successful in raising such financing.
Stock split - On July 21, 1998, the Company completed a four for one stock
split. All shares and per share data have been restated to reflect the stock
split.
Amended Articles of Incorporation - In October 2002, a Certificate of Amendment
to the Articles of Incorporation changed the name of the Company to Human
BioSystems. The Certificate of Amendment to the Articles of Incorporation also
changed the number of authorized shares of common stock from 50,000,000 to
45,000,000. Further, the Certificate of Amendment to the Articles of
Incorporation authorized 5,000,000 shares of preferred stock, with preferences
and rights to be set by the Board of Directors.
F-21
In October 2003, a Certificate of Amendment to the Articles of Incorporation
changed the number of authorized shares of common stock from 45,000,000 to
145,000,000.
Use of estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Cash - The Company places its cash with high quality institutions. Accounts at
each institution are insured up to $100,000 by the Federal Deposit Insurance
Corporation. As of December 31, 2004, the Company's uninsured cash balance
totaled $187,000.
Fixed assets - Fixed assets are stated at cost less accumulated depreciation.
Depreciation is provided principally on the straight-line method over the
estimated useful lives of the assets. The cost of repairs and maintenance is
charged to expense as incurred. Expenditures for property betterments and
renewals are capitalized. Upon sale or other disposition of a depreciable
asset, cost and accumulated depreciation are removed from the accounts and any
gain or loss is reflected in other income (expense).
The Company periodically evaluates whether events and circumstances have
occurred that may warrant revision of the estimated useful life of fixed assets
or whether the remaining balance of fixed assets should be evaluated for
possible impairment. The Company uses an estimate of the related undiscounted
cash flows over the remaining life of the fixed assets in measuring their
recoverability.
Marketable securities - The Company classifies marketable securities as
"available for sale" which are carried on the financial statements at fair
market value. Realized gains and losses are included in earnings while
unrealized holding gains and losses are reported as a separate component of
stockholders' deficit. Certain securities obtained through the issuance of the
Company's common stock are held in escrow and cannot be sold until a future
time. Accordingly, the Company classifies such securities in the stockholders'
deficit.
Research and development costs - Research and development expenditures are
charged to expenses as incurred.
F-22
Advertising and marketing costs - The Company recognizes advertising and
marketing costs in accordance with Statement of Position 93-7 "Reporting on
Advertising Costs." Accordingly, the Company expenses the costs of producing
advertisements at the time production occurs, and expenses the costs of
communication advertising in the period in which the advertising space or
airtime is used. Advertising costs of approximately $1,500 and $18,000 were
incurred for the years ended December 31, 2004 and 2003, respectively.
Income taxes - The Company accounts for its income taxes in accordance with
Statement of Financial Accounting Standards No. 109, which requires recognition
of deferred tax assets and liabilities for future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
As of December 31, 2004, the Company has available net operating loss
carryforwards that will expire in various periods through 2024. Such losses may
not be fully deductible due to the significant amounts of non-cash service costs
and the change in ownership rules under Section 382 of the Internal Revenue
Code. The Company has established a valuation allowance for the full tax
benefit of the operating loss carryovers due to the uncertainty regarding
realization.
Stock-based compensation - The Company applies Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees, and Related
Interpretations", in accounting for stock options issued to employees. Under
APB No. 25, employee compensation cost is recognized when estimated fair value
of the underlying stock on date of the grant exceeds exercise price of the stock
option. For stock options and warrants issued to non-employees, the Company
applies SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No 123
requires the recognition of compensation cost using a fair value based method
whereby compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period, which is usually the
vesting period. The Company uses the Black-Scholes pricing model to calculate
the fair value of options and warrants issued to non-employees. Stock issued
for compensation is valued using the market price of the stock on the date of
the related agreement.
F-23
Stock-based compensation (continued) - The following table represents the effect
on net loss and loss per share if the Company had applied the fair value based
method and recognition provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation", to stock-based
employee compensation:
2004 2003
---------------------------
Net loss, as reported $(2,603,100) $(2,563,800)
Add: Stock-based employee compensation
expense included in reported loss,
net of related tax effects 20,000 --
Deduct: Total stock-based employee
compensation expense determined under
fair value based methods for all awards,
net of related tax effects (102,100) (23,200)
------------- ------------
Pro forma net loss $(2,685,200) $(2,587,000)
============= ============
Net loss per common share
Basic and diluted loss, as reported $ (0.07) $ (0.10)
============= ============
Basic and diluted loss, pro forma $ (0.07) $ (0.10)
============= ============
As required, the pro forma disclosures above include options granted since
February 26, 1998 (Inception).
Fair values of financial instruments - The carrying amounts of accounts payable,
accrued liabilities, stockholder payables and other receivable approximate fair
value because of the short-term maturity of these instruments.
Net loss per common share - The Company computes net loss per share in
accordance with SFAS No. 128, Earnings per Share (SFAS 128) and SEC Staff
Accounting Bulletin No. 98 (SAB 98). Under the provisions of SFAS 128 and SAB
98, basic net loss per share is computed by dividing the net loss available to
common stockholders for the period by the weighted average number of shares of
common stock outstanding during the period. The calculation of diluted net loss
per share gives effect to common stock equivalents, however, potential common
shares are excluded if their effect is antidilutive. For the years ended
December 31, 2004 and 2003, options and warrants to purchase 3,277,400 and
3,168,100 shares of common stock, respectively, were excluded from the
computation of diluted earnings per share because their effect would be
antidilutive.
Foreign currency transactions - Gains or losses resulting from foreign currency
transactions have been insignificant and are included in the statement of
operations when incurred.
New accounting pronouncements - Financial Accounting Standards Board
Interpretation No. 46, Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, addresses consolidation by business enterprises of variable interest
entities. It is effective immediately for variable interest entities created
after January 31, 2003. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities acquired before
February 1, 2003. The implementation of Interpretation No. 46 did not have a
material effect on the Company's financial statements.
F-24
In April 2003, the FASB issued SFAS No. 149, Amendment of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149
amends SFAS No. 133 for decisions made (1) as part of the Derivatives
Implementation Group process that effectively required amendments to SFAS No.
133, (2) in connection with other Board projects dealing with financial
instruments, and (3) in connection with implementation issues raised in relation
to the application of the definition of a derivative. The Statement clarifies
under what circumstances a contract with an initial net investment meets the
characteristics of a derivative discussed in paragraph 6(b) of SFAS No. 133,
clarifies when a derivative contains a financing component, amends the
definition of underlying to conform it to language used in FASB Interpretation
No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, and amends certain
other existing pronouncements. Those changes will result in more consistent
reporting of contracts as either derivatives or hybrid instruments. This
statement is effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The
implementation of SFAS No. 149 did not have a material effect on the Company's
financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. In
addition, the statement requires an issuer to classify certain instruments with
specific characteristics described in it as liabilities. This statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The implementation of SFAS No. 150 did not have a
material effect on the Company's financial statements.
In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets, an
amendment of APB No. 29, Accounting for Nonmonetary Transactions. SFAS 153
requires exchanges of productive assets to be accounted for at fair value,
rather than at carryover basis, unless (1) neither the asset received nor the
asset surrendered has a fair value that is determinable within reasonable limits
or (2) the transactions lack commercial substance. SFAS 153 is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. The Company does not expect the adoption of this standard to have a
material effect on its financial position, results of operations or cash flows.
In December 2004, the FASB issued Statement 123 (revised 2004) which is a
revision of FASB Statement No. 123, Accounting for Stock-Based Compensation.
This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance. This Statement establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity's equity instruments or that may be
settled by the issuance of those equity instruments. This Statement focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. This Statement requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award--the
requisite service period (usually the vesting period). The Company files as a
small business issuer and must meet the requirements of this Statement for
accounting periods after December 15, 2005. The Company is evaluating SFAS 123R
and believes it may have a material effect on the Company's financial
statements.
F-25
2. FIXED ASSETS
A summary of fixed assets as of December 31, 2004 is as follows:
Equipment $ 9,800
Less: accumulated depreciation 9,600
---------
$ 200
=========
3. INVESTMENT IN MARKETABLE SECURITIES
On July 29, 2004, the Company entered into a Stock Purchase Agreement (the
"Purchase Agreement") with Langley Park Investments, PLC ("Langley"), a London
Investment Company, to issue 7,000,000 shares of the Company's common stock to
Langley in return for 512,665 shares of Langley. The Company issued the
7,000,000 shares during August 2004. Fifty percent of Langley shares issued to
the Company under this agreement will be held in escrow for two years as a
downside price protection against 7,000,000 shares issued to Langley. In the
event of a decline in the market price of the Company's common stock at the end
of two years, the Company will be required to sell to Langley the amount of
Langley shares held in escrow equal to (i) the original number of Langley shares
issued as consideration under the Purchase Agreement multiplied by (ii) the
percentage decrease in the market price of the Company's common stock. The
Company's shares are to be held by Langley for a period of at least two years.
The Purchase Agreement became effective during October 2004 when Langley was
approved for trading by the UK Listing Authority and Langley shares began
trading.
The Company recorded a loss on investment in marketable securities totaling
$762,700 due to a permanent decline based on the market value of the Langley
shares. Additionally, the Company recorded an unrealized loss totaling $9,800
to reflect the securities at fair value as of December 31, 2004, which has been
reported as other comprehensive income.
Cost and fair value of marketable securities as of December 31, 2004 are as
follows:
<table>
<caption>
<s> <c> <c>
Permanent Fair Value at
Decline in Unrealized December 31,
Cost Fair Value Loss 2004
---------------------------------------------------
Securities available for sale:
Langley Park Investments PLC $ 455,000 $ (381,300) $ (4,900) $ 68,800
Securities held in escrow:
Langley Park Investments PLC 455,000 (381,300) (4,900) 68,800
--------- ---------- ----------- -----------
$ 910,000 $ (762,700) $ (9,800) $ 137,600
========= ========== =========== ===========
</table>
F-26
4. RELATED PARTY TRANSACTIONS
On February 26, 1998, the Company issued 877,500 shares of common stock valued
at $0.0025 per share to an officer and director of the Company for services
rendered. On July 18, 1998, this officer purchased 40,000 additional shares of
common stock for $0.25 per share.
On February 26, 1998, the Company issued 877,500 shares of common stock valued
at $0.0025 per share to an officer and director of the Company for services
rendered.
On February 26, 1998, the Company issued 60,000 shares of common stock valued at
$0.0025 per share to a director of the Company for services rendered in
organizing meetings with potential business partners and providing general
business consultation services. On April 6, 1998, this director purchased
60,000 additional shares of common stock for $0.25 per share and was issued a
warrant to purchase 50,000 shares of restricted common stock at $0.375 through
March 24, 2000. In July 1998, this director purchased 73,600 additional shares
of common stock for $0.25 per share and was issued an option to purchase 20,000
shares of common stock at $0.025 per share pursuant to the Company's Non-
Statutory Incentive Stock Option Plan. In May 1999, this director purchased
3,000 additional shares of common stock for $1.50 per share. In August 1999,
this director exercised the vested portion of this stock option and purchased
6,000 shares of common stock.
On February 26, 1998, the Company issued 488,000 shares of common stock valued
at $0.0025 per share to three consultants for technical, translation and
business consultation services rendered.
On June 1, 1998, the Company entered into an Agreement of Assignment of Patent
and Technology with Leonid Babak and Vladimir Serebrennikov whereby these
individuals assigned to the Company the entire worldwide right, title and
interest in and to their invention of technology for preserving and transporting
biologic and non-biologic material and in and to all of the discoveries,
concepts and ideas whether patentable or not. Pursuant to this Agreement of
Assignment of Patent and Technology, each individual received 877,500 shares of
the Company's common stock with an ascribed value of $2,200, determined at the
time of issuance on February 26, 1998 at $0.0025 per share, which has been
expensed as research and development.
In September 1998, the Company issued 600,000 shares of common stock to its
legal counsel at their fair market value of $0.25 per share for services
rendered in connection with a private placement and $600 cash for an aggregate
value of $150,000. Since the services related to the offering, the $149,400 cost
has been recorded as a cost of the offering. There was no effect on operations.
During fiscal year 2000, a stockholder relinquished 320,000 shares of the
Company's common stock held by this stockholder to three consultants to satisfy
outstanding amounts due to them. The stockholder subsequently received 330,000
shares of the Company's common stock from the Company to replace shares
relinquished to these consultants. The value of the shares relinquished and
10,000 additional shares issued to the stockholder by the Company, have been
allocated between stock based compensation approximating $56,400 and prepaid
consulting services related to issuance of common stock approximating $48,300 as
of December 31, 2000.
F-27
In July 2001, the Company granted warrants to purchase 608,900 shares of common
stock at $0.01 per share in satisfaction of stockholder's accrued wages of
$274,000.
During fiscal year 2002, the CEO and director exercised options to purchase
260,000 shares for $2,600. Further, the Company sold 109,000 shares to a
director of the Company for $24,000 at approximately $2,000 below fair value.
During April 2003, the Company issued 74,200 shares of common stock to a
stockholder and director of the Company in satisfaction of $10,000 in principal
of a promissory note and $4,700 in interest.
During May 2003, the Company issued 38,400 shares of common stock to a
stockholder and director of the Company in satisfaction of $5,000 in principal
of a promissory note and $400 in interest.
During July 2003, the Company issued 51,100 share of common stock to a
stockholder and director of the Company in satisfaction of $9,200 in principal
of a promissory note and $100 in interest.
During February 2004, the Company granted options to purchase 1,000,000 shares
of common stock at $0.11 per share to various employees and directors. The
options vest 30% upon grant, 30% after one year, and 40% after two years and
were valued at $20,000 per APB No. 25.
Due to stockholders consist of the following as of December 31, 2004:
Wages payable to stockholder employees $ 357,500
Accrued vacation payable to stockholder employees 17,200
Accrued interest related to promissory note payable 300
---------------
$ 375,000
===============
During March 2004, the Company issued 5,266,900 shares of the Company's common
stock to various stockholder employees and directors of the Company in
satisfaction of $579,400 (excluding interest of $316,000) in accrued wages and
vacation. Additionally, during the nine months ended September 30, 2004, the
Company issued 127,400 shares of common stock to a stockholder and director in
satisfaction of $15,000 (excluding interest of $2,700) in principal of a
promissory note payable.
F-28
5. COMMON STOCK
The Company undertook an offering, under Regulation D, Rule 504 pursuant to
which it sold 1,000,000 shares of common stock at $0.25 per share to raise
$250,000 via an Offering Memorandum dated August 15, 1998 (the "Offering"). The
Offering commenced on August 15, 1998 and terminated on September 4, 1998. The
transfer of 42,800 of the 1,000,000 shares is limited under the provisions of
Rule 144(e) because these shares were issued to affiliates or control persons
and are therefore control stock. The remaining 957,200 of the 1,000,000 shares
were issued to non-affiliates and are therefore unrestricted.
All of the 1,000,000 shares were issued in reliance on the Federal exemption
from registration under Rule 504 of Regulation D and a Form D relating to these
shares was filed with the U.S. Securities and Exchange Commission (the SEC) on
September 9, 1998.
On June 21, 1999, the stockholders approved an increase in the authorized number
of shares of common stock from 10,000,000 to 50,000,000 shares.
During fiscal year 1999, the Company undertook a private placement, under
Regulation D, Rule 505 pursuant to which it offered to sell 2,000,000 shares of
common stock at $1.50 per share under an Offering Memorandum dated September 1,
1999 and was effectively terminated on June 15, 2000. Each two shares had a
two-year warrant to purchase an additional share of common stock at $2.50 per
share. During the year ended December 31, 2000 and 1999, 140,100 and 287,200
shares of common stock, respectively, were sold under the terms of this private
placement. Except for the exercise of stock options, all other stock sales in
1999 were to various individuals at $1.50 per share.
In May and December 1999, the Company issued 5,200 shares valued at $1.50 per
share to two unrelated parties for services rendered.
During fiscal year 2000, the Company undertook a private placement, under
Regulation D, Rule 506 pursuant to which it offered to sell 2,000,000 shares of
common stock at $1.50 per share under an Offering Memorandum dated February 2,
2000 and was effectively terminated on June 15, 2000. Each two shares had a
two-year warrant to purchase an additional share of common stock at $2.50 per
share. During the year ended December 31, 2000, 224,500 shares of common stock
were sold under the terms of this private placement.
The Company issued 206,700 shares of common stock during fiscal year 2000
related to conversion of promissory notes, totaling $67,500 resulting from the
June 15, 2000 Rescission Offer.
F-29
During the third and fourth quarters of 2000, the Company issued 907,500 shares
with a weighted average fair value of $0.37 per share to seven unrelated parties
for services to be rendered with terms up to 12 months. As of December 31, 2002
and 2001, $0.00 and $195,200 has been recorded as stock based compensation for
the services.
During the second and third quarters of 2001, the Company issued 67,600 shares
with a weighted average fair value of $0.37 per share to five unrelated parties
in satisfaction of outstanding accounts payable totaling $24,800.
The Company issued 257,300 shares of common stock in September 2001 related to
the conversion of a promissory note totaling $272,000.
During the third and fourth quarter of 2001, the Company issued 135,000 and
19,600 shares, respectively, of common stock with a weighted average fair value
of $0.64 per share to five unrelated parties for services rendered totaling
$98,500.
The Company issued 416,600 shares of common stock during the first quarter of
2001 related to conversion of promissory notes, totaling $218,800 resulting from
the June 15, 2000 Rescission Offer.
The Company issued 800,000 shares of common stock in April 2001 related to a
stock purchase agreement totaling $104,000.
The Company issued 510,000 shares of common stock in January 2001 for a
consulting agreement that was terminated in August 2001, as discussed in Note 8.
The Company issued 150,000 shares of common stock in September 2001 in exchange
for a termination of a consulting agreement, as discussed in Note 8..
The Company issued 72,100 shares of common stock in January 2002 related to the
conversion of a promissory note totaling $54,300, including accrued interest of
$7,200.
During the first and second quarters of 2002, the Company issued 317,500 shares
with a weighted average fair value of $0.76 per share to eight unrelated parties
recorded as stock based compensation totaling $264,000.
During the third and fourth quarters of 2002, the Company issued 80,200 shares
with a weighted average fair value of $0.46 per share to four unrelated parties
recorded as stock based compensation totaling $36,900.
The Company issued 54,100 shares of common stock in July 2002 with a weighted
average fair value of $0.31 per share to eight unrelated parties in satisfaction
of accrued liabilities totaling $17,000.
F-30
In April 2002, a check received from a stockholder for stock issued in 2001 was
returned by the bank due to insufficient funds. The stockholder agreed to
return approximately 106,400 shares of the Company's common stock. The Company
recorded a stock receivable totaling $50,000 as Other receivables. In August
2002, the 106,400 shares of common stock were returned to the Company and
cancelled.
During the first and second quarters of 2003, the Company issued 299,700 shares
with a weighted average fair value of $0.20 per share to 19 unrelated parties
recorded as stock based compensation totaling $61,300.
During the third and forth quarters of 2003, the Company issued 478,000 shares
with a weighted average fair value of $0.14 per share to 10 unrelated parties
recorded as stock based compensation totaling $96,600.
During the first quarter 2004, the Company issued 512,900 shares of common stock
for cash totaling $114,400 (including offering costs of $66,500).
During the first quarter 2004, the Company issued 840,600 shares of common stock
for services totaling $153,400.
During the first quarter 2004, the Company issued 124,500 shares of common stock
in satisfaction of accounts payable totaling $21,200 (including interest of
$7,500).
During the first quarter 2004, the Company issued 233,500 shares of common stock
in satisfaction of accrued liabilities totaling $39,700 (including interest of
$14,000).
During the second quarter 2004, the Company issued 469,600 shares of common
stock for cash totaling $69,100 (including offering costs of $36,300).
During the second quarter 2004, the Company issued 412,000 shares of common
stock for services totaling $67,500.
During the second and forth quarter 2004, the Company issued 130,000 shares of
common stock to certain employees of the Russian Branch for services totaling
$64,000 (including accrued liabilities of $30,400).
During the second quarter 2004, the Company issued 318,200 shares of common
stock in satisfaction of accounts payable totaling $54,100 (including interest
of $19,100).
During the second quarter 2004, the Company issued 99,900 shares of common stock
in satisfaction of accrued liabilities totaling $17,000 (including interest of
$6,000).
F-31
During the third quarter 2004, the Company issued 450,800 shares of common stock
for services totaling $52,100.
During the third quarter 2004, the Company issued 600,900 shares of common stock
for cash totaling $68,600 (including offering costs of $73,400).
During the fourth quarter 2004, the Company issued 5,174,100 shares of common
stock for cash totaling $747,300 (including offering costs of $670,300).
During the forth quarter 2004, the Company issued 12,900 shares of common stock
for services totaling $1,200.
During the first quarter 2004, the Company issued 150,000 shares of common stock
in satisfaction of accounts payable totaling $11,000.
Loan Agreement - During October 2004, the Company entered into a Loan Agreement
(the "Loan Agreement") with an unaffiliated individual (the "Lender"). The Loan
Agreement called for the Lender to loan an aggregate of 2,300,000 Euros to the
Company (the "Loan") with interest at the rate of three percent per annum,
payments of interest due monthly and all principal plus accrued but unpaid
interest due and payable on November 1, 2007. Repayment of the Loan was to be
secured by 23,000,000 shares of the Company's common stock issuable under
Regulation S under the Securities Act of 1933, as amended (the "Shares").
Pursuant to the Loan Agreement and an Escrow Agreement between the Lender and
the Company, the 23,000,000 Shares were issued during October 2004 and were
delivered to the Lender to hold until funds for repayment of the Loan have been
delivered to the escrow agent. The Loan Agreement was declared in default, with
the Shares to be immediately returned to the Company, as the Loan funds were not
delivered by the 15th calendar day following the date of the Loan Agreement
(November 13, 2004). As discussed in Note 10, the shares were cancelled during
February and March 2005. Accordingly, the Company has not recorded the shares
as outstanding.
Shares held in escrow - As of December 31, 2004, 6,010,700 shares of the
Company's common stock are issued and held in trust accounts. The trust
accounts were set up to receive and hold cash from investors in exchange for
shares of common stock. These shares will be recognized as outstanding upon
receipt of cash or other consideration.
6. STOCK OPTION PLANS AND WARRANTS
The Company adopted the following plans during 1998:
Statutory Incentive Stock Option Plan
The purpose of this plan is to strengthen the Company by providing incentive
stock options as a means to attract, retain and motivate corporate personnel.
The options may not be granted to employees who own stock possessing more than
10% of the total combined voting power of the stock of the Company. As of
December 31, 2004, 600,000 shares have been authorized for option grants.
F-32
A summary of the status of this plan as of December 31, 2004, and changes during
the period from February 26, 1998 (date of inception) to December 31, 2004 is
presented in the following table:
<table>
<s> <c> <c> <c>
Shares Weighted
Available for Options Average
Grant Outstanding Price
------------- ----------- --------
Authorized, February 26, 1998
(date of inception) 600,000 -- $ --
Granted (250,000) 250,000 0.07
--------- -------- ------
Balance, December 31, 1998 350,000 250,000 0.07
Granted (325,000) 325,000 0.58
Forfeited 75,000 (75,000) 0.50
--------- -------- ------
Balance, December 31, 1999 100,000 500,000 0.34
Granted (75,000) 75,000 1.50
Exercised -- (152,000) 0.03
Forfeited -- -- --
--------- -------- ------
Balance, December 31, 2000 25,000 423,000 0.67
Granted (150,000) 150,000 0.23
Forfeited 150,000 (150,000) 0.72
--------- -------- ------
Balance, December 31, 2001 25,000 423,000 0.53
Granted -- -- --
Forfeited -- -- --
--------- -------- ------
Balance, December 31, 2002 25,000 423,000 0.53
Granted -- -- --
Forfeited 150,000 (150,000) 0.50
Expired 48,000 (48,000) 0.03
----------- --------- --------
Balance, December 31, 2003 223,000 225,000 0.65
Granted -- -- --
Forfeited -- -- --
Expired -- -- --
----------- --------- ---------
Balance, December 31, 2004 223,000 225,000 $ 0.65
</table>
The weighted-average fair value of statutory stock options granted during 2004
and 2003 was $0.00 and $0.00, respectively.
The following table summarizes information about statutory stock options
outstanding as of December 31, 2004:
<table>
<s> <c> <c>
Options Outstanding Options Exercisable
- ----------------------------------------- ----------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise as of Contractual Exercise as of Exercise
Prices 12/31/04 Life Price 12/31/04 Price
- -------- ----------- ----------- --------- ---------- --------
0.23 - 0.50 150,000 1.2 years 0.23 150,000 0.23
1.50 75,000 0.2 years 1.50 75,000 1.50
--------- --------- --------- -------
225,000 $ 0.65 225,000 $ 0.65
========= ========= ========= =======
</table>
F-33
Compensation expense under APB No. 25 relating to statutory options that became
exercisable in 2004 and 2003 was $0.00 and $0.00, respectively.
Employees may exercise their options to purchase their shares according to the
following schedule:
Rocky Umar All others
---------- -----------
at inception 20% -
after 1st year 24% 30%
after 2nd year 32% 30%
after 3rd year 24% 40%
Non-Statutory Incentive Stock Options Plans
The purpose of this plan is to promote the interest of the Company by providing
a method whereby non-employees, advisory board members, members of the board of
directors, consultants and independent contractors, who provide valuable
services to the Company, may be offered incentives as rewards which will
encourage them to acquire a proprietary interest in the Company. As of December
31, 2004, 2,000,000 shares have been authorized for option grants.
A summary of the status of this plan as of December 31, 2004 and changes during
the period from February 26, 1998 (date of inception) to December 31, 2004 is
presented in the following table:
Weighted
Shares Average
Available Options Exercise
For Grant Outstanding Price
----------- ------------ ---------
Authorized, February 26, 1998,
(date of inception) 2,000,000 -- $ --
Granted (800,000) 800,000 0.24
---------- -------- -----
Balance, December 31, 1998 1,200,000 800,000 0.24
Granted (142,500) 142,500 0.32
Exercised -- (31,000) 0.01
Forfeited 350,000 (350,000) 0.50
---------- -------- -----
Balance, December 31, 1999 1,407,500 561,500 0.12
Granted (382,500) 382,500 0.84
Exercised -- (197,000) 0.06
Forfeited -- -- --
---------- -------- -----
Balance, December 31, 2000 1,025,000 747,000 0.40
Granted (300,000) 300,000 0.29
Exercised -- (249,000) 0.05
Forfeited -- -- --
---------- -------- -----
Balance, December 31, 2001 725,000 798,000 0.56
Granted -- -- --
Exercised -- (20,000) 0.07
Forfeited -- -- 0.03
---------- -------- -----
Balance, December 31, 2002 725,000 778,000 0.58
Granted -- -- --
Forfeited 75,000 (75,000) 0.32
Expired 73,000 (73,000) 0.03
------------ --------- ------
Balance, December 31, 2003 873,000 630,000 0.67
Granted -- -- --
Forfeited -- -- --
Expired 132,500 (132,500) 0.33
------------ ---------- -------
Balance, December 31, 2004 1,005,500 497,500 $ 0.67
============ ========== =======
F-34
The weighted-average fair value of non-statutory stock options granted during
2004 and 2003 was $0.00 and $0.00, respectively.
The following table summarizes information about the non-statutory stock options
outstanding as of December 31, 2004:
Options Outstanding Options Exercisable
- ----------------------------------------- -----------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise as of Contractual Exercise as of Exercise
Prices 12/31/04 Life Price 12/31/04 Price
- -------- ----------- ----------- --------- ---------- --------
$ 0.01 - 0.25 40,000 0.9 years $ 0.05 40,000 $ 0.09
0.28 225,000 0.8 years 0.28 225,000 0.28
0.30 - 0.54 30,000 0.6 years 0.30 30,000 0.44
1.50 202,500 0.1 years 1.50 202,500 1.50
---------- --------- -------- -------
497,000 $ 0.76 497,000 $ 0.76
========== ========= ======== =======
Compensation expense under SFAS No. 123 relating to non-statutory stock options
that became exercisable in 2004 and 2003 was $0.00 and $0.00, respectively.
The Company adopted the following plan during 2001:
Stock Options Plan
The purpose of this plan is to encourage selected officers and key employees to
accept or continue employment with the Company, increase the interest of
selected officers, directors, key employees and consultants in the Company's
welfare through the participation in the growth in value of the common stock of
the Company. As of December 31, 2004, 5,000,000 shares have been authorized for
option grants. The Company grants both statutory and non-statutory stock
options under this plan. During 2004 and 2003, the Company granted 1,000,000
and 0.00 statutory options, respectively, and 0.00 and 305,000 non-statutory
options, respectively. As of December 31, 2004, outstanding statutory and non-
statutory options total 1,399,000 and 400,000, respectively.
F-35
A summary of the status of this plan as of December 31, 2004 and changes during
the period from August 4, 2001 (date of option plan inception) to December 31,
2004 is presented in the following table:
Weighted
Shares Average
Available Options Exercise
For Grant Outstanding Price
----------- ------------ ---------
Authorized, August 4, 2001,
(date of inception) 1,585,500 -- $ --
Granted (225,000) 225,000 0.35
Forfeited -- -- --
--------- ------- -----
Balance, December 31, 2001 1,360,500 225,000 0.35
Granted (569,000) 569,000 0.41
Forfeited 75,000 (75,000) 0.85
--------- ------- -----
Balance, December 31, 2002 866,500 719,000 0.41
Granted (305,000) 305,000 0.15
Forfeited 75,000 (75,000) 0.54
Expired 150,000 (150,000) 0.13
Authorization of additional shares 3,414,500 -- --
--------- --------- -------
Balance, December 31, 2003 4,201,000 799,000 0.41
Granted (1,000,000) 1,000,000 0.11
Forfeited -- -- --
Expired -- -- --
--------- --------- -------
Balance, December 31, 2004 3,201,000 1,799,000 $ 0.21
========= ========== ======
The weighted-average fair value of non-statutory stock options granted during
2004 and 2003 was $0.00 and $0.07, respectively. The weighted-average fair
value of statutory stock options granted during 2004 and 2003 was $0.02 and
$0.00, respectively.
F-36
The following table summarizes information about the non-statutory and statutory
stock options outstanding as of December 31, 2004:
<table>
<s> <c> <c>
Options Outstanding Options Exercisable
- ----------------------------------------- -----------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise as of Contractual Exercise as of Exercise
Prices 12/31/04 Life Price 12/31/04 Price
- -------- ----------- ----------- --------- ---------- --------
$ 0.10 - 0.17 1,305,000 3.8 years $ 0.11 540,000 $ 0.12
0.34 - 0.54 494,000 3.2 years 0.48 441,600 0.47
--------- --------- ------ ------- -------
1,799,000 $ 0.21 981,600 $ 0.28
========= ====== ======= =======
</table>
The Company estimates the fair value of non-statutory stock options by using the
Black-Scholes option pricing-model with the following weighted-average
assumptions used for grants in 2004 and 2003; no dividend yield; expected
volatility of 0% and 121%, risk free interest rates of 0% and 1.5%, expected
lives of 0.0 and 1.0 years for all plan options.
The following table summarizes information about statutory stock options granted
during the year ended December 31, 2004:
Exercise price
Equals,
Exceeds or is
Number of Less Than
Options Mkt. Price of Weighted- Range of Weighted-
Granted Stock on Average Exercise Average Fair
During 2004 Grant Date Exercise Price Prices Value
- ----------- -------------- -------------- ---------- -----------
-- Equals $ -- $ -- $ --
-- Exceeds -- -- --
1,000,000 Less Than 0.11 0.11 0.02
- --------- ---------- --------------- ---------- --------------
1,000,000 $ 0.11 $ 0.02
========= =============== ==============
Compensation expense under SFAS No. 123 relating to these stock options that
became exercisable in 2004 and 2003 was $10,100 and $12,400, respectively.
Compensation expense under APB No. 25 relating to these stock options that
became exercisable in 2004 and 2003 was $20,000 and $0.00, respectively.
F-37
Stock Purchase Warrants
In connection with certain business transactions and debt or equity offerings,
the Company has granted various warrants to purchase common stock. The
following table summarizes activity relating to outstanding warrants from
February 26, 1998 (date of inception) to December 31, 2004:
Weighted
Average
Warrants Exercise
Outstanding Price
------------- ------------
Balance, February 26, 1998
(date if inception) - $ -
Granted 100,000 0.38
---------- ------
Balance, December 31, 1998 100,000 0.38
Granted 942,800 1.62
---------- ------
Balance, December 31, 1999 1,042,800 1.50
Granted 1,398,600 1.20
Exercised (41,600) 0.34
Expired (900,000) 1.38
Forfeited (75,800) 2.50
---------- ------
Balance, December 31, 2000 1,424,000 2.36
Granted 995,500 0.25
Exercised (595,600) 0.24
Expired (20,000) 1.50
Forfeited (35,600) 2.50
---------- ------
Balance, December 31, 2001 1,768,300 0.99
Granted 80,000 0.72
Exercised (260,000) 0.01
Expired (200,000) 2.42
Forfeited -- --
---------- ------
Balance, December 31, 2002 1,388,300 0.95
Granted 580,000 0.17
Expired (165,000) 0.87
----------- ------
Balance, December 31, 2003 1,803,300 0.71
Granted 60,000 0.16
Expired (290,000) 0.42
----------- ------
Balance, December 31, 2003 1,573,300 $ 0.74
=========== ======
The weighted average fair value of warrants granted during 2004 and 2003 was
$0.16 and $0.16, respectively.
F-38
The following table summarizes information about warrants outstanding at
December 31, 2004:
Weighted
Number Average Number
Range of Outstanding Remaining Exercisable
Exercise as of Contractual as of
Prices 12/31/04 Life 12/31/04
- -------- ----------- ----------- ----------
$ 0.01 233,300 1.5 years 233,300
0.15 450,000 0.3 years 450,000
0.21 - 0.72 330,000 1.4 years 330,000
1.50 700,000 5.0 years 710,000
----------- ----------
1,573,300 1,573,300
=========== ==========
The following table summarizes information about warrants granted during the
year ended December 31, 2004:
Exercise price
Equals,
Exceeds or is
Number of Less Than
Options Mkt. Price of Weighted- Range of Weighted-
Granted Stock on Average Exercise Average Fair
During 2004 Grant Date Exercise Price Prices Value
- ----------- -------------- -------------- ---------- -----------
-- Equals $ -- $ -- $ --
30,000 Exceeds 0.17 0.17 0.15
30,000 Less Than 0.14 0.14 0.17
- ---------- --------- ------ ----------- -----------
60,000 $ 0.16 $ 0.16
========== ======== ===========
The Company estimates the fair value of warrants at the grant date by using the
Black-Scholes option pricing-model with the following weighted-average
assumptions used for grants in 2004 and 2003; no dividend yield; expected
volatility of 263% and 259%; risk free interest rates of 2.5% and 1.3%; and
expected lives of 2.0 and 1.1 years. Compensation expense relating to warrants
granted for services in 2004 and 2003 was $9,600 and $81,500.
7. INVESTMENT AGREEMENT
In June 2004, the Company entered into an Investment Agreement (the "Investment
Agreement") with Dutchess Private Equities Fund II, LP ("Dutchess") effective
June 28, 2004. Pursuant to the terms of the Investment Agreement, the Company
may offer, through a series of puts, and Dutchess must purchase up to 38,000,000
shares of the Company's common stock with an aggregate purchase price up to
$5,000,000. The purchase price of the shares is equal to 95% of the lowest
closing "best bid" price (the highest posted bid price) during the five trading
days immediately following the date of put. The value that the Company will be
permitted to put pursuant to the Investment Agreement will be either: (A) 200%
of the average daily volume in the US market of the common stock for the ten
trading days prior to the notice of put multiplied by the average of the three
daily closing bid prices immediately preceding the date of the put, or (B)
$10,000. No single put can exceed $1,000,000.
F-39
8. OTHER RECEIVABLES, NET
Termination agreement - In January 2001, the Company entered into a Financial
Consulting Services Agreement with an entity whereby the entity agreed to
provide financial consulting services for one year in exchange for 200,000
restricted shares of the Company's common stock. In conjunction with that
agreement, the Company also entered into a second Financial Consulting Services
Agreement with three individuals whereby the individuals agreed to provide
financial consulting services for one year in exchange for 510,000 unrestricted
shares of the Company's common stock. These two agreements will hereafter be
collectively referred to as the "Consulting Agreements" while both the entity
and individuals will hereafter be collectively referred to as the "Consultants".
In January 2001, the Company issued 710,000 shares of the Company's common stock
as pertaining to the Consulting Agreements.
In August 2001, the Company entered into a Termination Agreement (the
"Termination") with the Consultants, whereby both parties agreed to terminate
the Consulting Agreements. As a material inducement to the Company and
Consultants to enter into the Termination, the Consultants agreed to return all
710,000 shares of the Company's common stock in exchange for 150,000 shares of
the Company's common stock with a fair value totaling $177,000.
In August 2001, the Company received and cancelled 200,000 shares from the
Consultant, while the remaining 510,000 shares remain outstanding. The 710,000
shares were originally expensed in the amount of $554,500 as stock based
compensation in January 2001. As no services were performed by the Consultants,
the Company reversed the entire expense of $554,500 while recording an other
receivable of $398,300 for the 510,000 outstanding shares. As the collection of
the shares is uncertain, the Company has fully allowed for the $398,300 as of
December 31, 2003.
9. COMMITMENTS AND CONTINGENCIES
Legal proceedings - On August 7, 2002, the United States Attorney for the
Eastern District of New York and the Securities and Exchange Commission
announced they were bringing securities fraud charges against the Company and
Harry Masuda, the Company's Chief Executive Officer, for allegedly paying an
unregistered broker an undisclosed commission in a 1999 and 2000 private
placement. The allegations generally charge the Company and Mr. Masuda with the
failure to adequately disclose to investors in these private placements a
commission agreement with Larry Bryant, an unlicensed broker-dealer. Remedies
sought in these proceedings include criminal penalties and a bar from service as
an officer or director of a publicly-traded company. The Company believes the
charges are unwarranted, and that the issues involved in this matter were
resolved during 2000 to the full satisfaction of all investors. There can be no
assurance that Mr. Masuda will be able to continue to serve as our Chief
Executive Officer in the event that the Securities and Exchange Commission
receives the remedies that it seeks.
10. SUBSEQUENT EVENTS
Common stock - During January 2005, the Company issued 300,000 shares of common
stock to an individual for services totaling $22,500.
Employees - During February 2005, two employees of the Company agreed to work on
a consulting basis with a $500 per month retainer, reducing monthly salary
expense by approximately $17,000.
Cancellation of common stock - As discussed in Note 5, during February and March
2005 the Company received and cancelled 23,000,000 shares previously issued in
October 2004 related to a Loan Agreement with an unaffiliated individual.
F-40
- ------------------------------------------------------------------------------
HUMAN BIOSYSTEMS
20,000,000 Shares of
Common Stock
________________________
PROSPECTUS
________________________
January 26, 2006