SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended September 30, 2005
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
000-29819
(Commission File Number)
HEPALIFE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Florida
(State or other jurisdiction of incorporation)
58-2349413
(I.R.S. Employer Identification No.)
1628 West 1st Avenue, Suite 216, Vancouver, British Columbia, V6J 1G1
(Address of principal executive offices)
(800) 518-4879
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 70,064,430 shares of Common Stock, par value $.001, were outstanding on November 8, 2005.
TABLE OF CONTENTS
HEPALIFE TECHNOLOGIES, INC.
FORM 10-Q, QUARTER ENDED SEPTEMBER 30, 2005
PART I FINANCIAL INFORMATION
Interim Unaudited Balance Sheets
3
Interim Unaudited Statements of Operations
4
Interim Unaudited Statement of Stockholders Deficiency
5
Interim Unaudited Statements of Cash Flows
8
Notes to Interim Unaudited Financial Statements
9
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operation
14
Item 3. Quantitative and Qualitative Disclosures About Market Risk
22
Item 4. Controls and Procedures
22
PART II OTHER INFORMATION
Item 1. Legal Proceedings
23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
23
Item 3. Defaults Upon Senior Securities
23
Item 4. Submission of Matters to a Vote of Security Holders
23
Item 5. Other Information
23
Item 6. Exhibits and Reports on Form 8-K
23
Signatures
24
Certifications
25
PART I FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited financial statements included in this Form 10-Q reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the periods are presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.
HEPALIFE TECHNOLOGIES, INC. | ||
(A Development Stage Company) | ||
INTERIM BALANCE SHEETS | ||
September 30, 2005 and December 31, 2004 | ||
(Unaudited) | ||
(Basis of Presentation - Note 1) | ||
(Expressed in U.S. Dollars) | September 30, 2005 | December 31, 2004 |
ASSETS | ||
Current assets | ||
Cash | $50,203 | $613,523 |
Total current assets | 50,203 | 613,523 |
Equipment, net (Note 6) | 436 | 828 |
Total assets | $50,639 | 614,351 |
LIABILITIES | ||
Current | ||
Accounts payable and accrued liabilities | $202,054 | $100,243 |
Accounts payable - related parties (Note 4) | 82,603 | 53,059 |
Notes payable - related party (Note 4) | 950,000 | 1,000,000 |
Total liabilities | 1,234,657 | 1,153,302 |
STOCKHOLDERS' DEFICIENCY | ||
Stockholders' Deficiency | ||
Preferred stock: $0.10 par value; Authorized: 1,000,000 | ||
Issued and outstanding: none | - | - |
Common stock: $0.001 par value; Authorized: 300,000,000 | ||
Issued and outstanding: 70,024,430 (2004: 67,817,832) | 70,025 | 67,818 |
Additional paid-in capital | 3,736,495 | 3,141,002 |
Loss accumulated during the development stage | (4,990,538) | (3,747,771) |
Total stockholders' deficiency | (1,184,018) | (538,951) |
Total liabilities and stockholders' deficiency | $50,639 | $614,351 |
(The accompanying notes are an integral part of these interim unaudited financial statements) |
HEPALIFE TECHNOLOGIES, INC. | |||||
(A Development Stage Company) | |||||
INTERIM STATEMENTS OF OPERATIONS | |||||
for the three and nine months ended September 30, 2005 and 2004 | |||||
and from Inception (October 21, 1997) to September 30, 2005 | |||||
(Unaudited) | |||||
From Inception | |||||
(October 21, 1997) | |||||
Three months ended September 30, | Nine months ended September 30, | to September 30, | |||
(Expressed in U.S. Dollars) | 2005 | 2004 | 2005 | 2004 | 2005 |
Revenue | $- | $- | $- | $- | - |
Expenses | |||||
Management and consulting fees (Note 4) | $15,714 | $5,080 | $26,765 | $5,080 | 936,079 |
Investors relations | 26,115 | 107,531 | 705,330 | 248,131 | 2,801,749 |
Other operating expenses | 167,830 | 82,936 | 318,053 | 161,447 | 807,980 |
Research and development expenses | 65,423 | - | 196,269 | 20,700 | 480,715 |
|
|
|
|
| |
| 275,082 | 195,547 | 1,246,417 | 435,358 | 5,026,523 |
Operating Loss | (275,082) | (195,547) | (1,246,417) | (435,358) | (5,026,523) |
Other income and expenses | |||||
Interest income | 1,427 | 301 | 3,650 | 1,181 | 35,985 |
| 1,427 | 301 | 3,650 | 1,181 | 35,985 |
Net loss available to common shareholders | (273,655) | (195,246) | (1,242,767) | (434,177) | (4,990,538) |
Loss per share - basic and diluted (Note 3) | $(0.004) | $(0.003) | $(0.018) | $(0.007) | $(0.108) |
Weighted average number of common shares outstanding - basic and diluted | 69,941,739 | 64,612,517 | 69,063,819 | 64,415,011 | 46,387,894 |
(The accompanying notes are an integral part of these interim unaudited financial statements) |
HEPALIFE TECHNOLOGIES, INC. | |||||
(A Development Stage Company) | |||||
INTERIM STATEMENT OF STOCKHOLDERS' DEFICIENCY | |||||
from Inception (October 31, 1997) to September 30, 2005 | |||||
(Unaudited) | |||||
Loss accumulated | Total | ||||
Common Stock | Additional | during development | Stockholders' | ||
(Expressed in U.S. Dollars) | Shares | Amount | paid-in capital | stage | equity (deficiency) |
Common stock issued for service rendered | |||||
at $0.00025 per share, October 21, 1997 | 12,000,000 | $12,000 | $(9,000) | $- | $3,000 |
Common stock issued for cash | |||||
at $0.0625 per share during 1997 | 1,200,000 | 1,200 | 73,800 | - | 75,000 |
Comprehensive income | |||||
Income from inception | |||||
(October 21, 1997) to December 31, 1997 | - | - | - | 42 | 42 |
Balance, December 31, 1997 | 13,200,000 | 13,200 | 64,800 | 42 | 78,042 |
Common stock issued for service rendered | |||||
at $0.025 per share, December 15, 1998 | 16,000,000 | 16,000 | 384,000 | - | 400,000 |
Comprehensive income (loss) | |||||
Net loss | - | - | - | (471,988) | (471,988) |
Balance, December 31, 1998 | 29,200,000 | 29,200 | 448,800 | (471,946) | 6,054 |
Common stock issued for cash | |||||
at $0.025 per share, March 1999 | 12,000,000 | 12,000 | 288,000 | - | 300,000 |
Comprehensive income (loss) | |||||
Net loss | - | - | - | (121,045) | (121,045) |
Balance, December 31, 1999 | 41,200,000 | 41,200 | 736,800 | (592,991) | 185,009 |
Comprehensive income (loss) | |||||
Net loss | - | - | - | (80,608) | (80,608) |
Balance, December 31, 2000 | 41,200,000 | 41,200 | 736,800 | (673,599) | 104,401 |
Conversion of debt to equity at $0.015 | |||||
per share, July 31, 2001 | 8,933,332 | 8,933 | 125,067 | - | 134,000 |
Comprehensive income (loss) | |||||
Net loss | - | - | - | (160,364) | (160,364) |
Balance, December 31, 2001 | 50,133,332 | 50,133 | 861,867 | (833,963) | 78,037 |
Common stock issued for services | |||||
at $0.06 per share, April 23, 2002 | 10,000 | 10 | 590 | - | 600 |
Conversion of debt to equity at $0.05 | |||||
per share, April 26, 2002 | 2,160,000 | 2,160 | 105,840 | - | 108,000 |
Common stock issued for investor | |||||
relations services at $0.05 per share, | |||||
July 25, 2002 | 2,390,000 | 2,390 | 117,110 | - | 119,500 |
Conversion of debt to equity at $0.05 per | |||||
share, December 18, 2002 | 1,920,000 | 1,920 | 94,080 | - | 96,000 |
Comprehensive income (loss) | |||||
Net loss | - | - | - | (375,472) | (375,472) |
Balance, December 31, 2002 | 56,613,332 | 56,613 | 1,179,487 | (1,209,435) | 26,665 |
Common stock issued pursuant to | |||||
exercise of stock options during the | |||||
year at between $0.07 to $2.11 per share | 282,500 | 283 | 398,317 | - | 398,600 |
Common stock issued pursuant to | |||||
exercise of share purchase warrants | |||||
in November 2003 at $0.025 per share | 7,300,000 | 7,300 | 175,200 | - | 182,500 |
Comprehensive income (loss) | |||||
Net loss | - | - | - | (1,102,723) | (1,102,723) |
Balance, December 31, 2003 | 64,195,832 | 64,196 | 1,753,004 | (2,312,158) | (494,958) |
Common stock issued pursuant | |||||
to exercise of stock options during | |||||
the year between $0.07 to $2.11 per share | 1,622,000 | 1,622 | 1,339,998 | - | 1,341,620 |
Common stock issued pursuant | |||||
to exercise of share purchase warrants in | |||||
December 2004 at $0.025 per share | 2,000,000 | 2,000 | 48,000 | - | 50,000 |
Comprehensive income (loss) | |||||
Net loss | - | - | - | (1,435,613) | (1,435,613) |
Balance, December 31, 2004 | 67,817,832 | 67,818 | 3,141,002 | (3,747,771) | (538,951) |
Common stock issued pursuant to | |||||
exercise of stock options at $3.10 per share | 50,000 | 50 | 154,950 | - | 155,000 |
Common stock issued pursuant to | |||||
exercise of stock options at $2.11 per share | 195,000 | 195 | 411,255 | - | 411,450 |
Common stock issued pursuant to | |||||
exercise of share purchase warrants | |||||
at $0.025 per share | 1,250,000 | 1,250 | 30,000 | - | 31,250 |
Restricted common stock issued pursuant | |||||
to share purchase agreement | 711,598 | 712 | (712) | - | (0) |
Comprehensive income (loss) | |||||
Net loss | - | - | - | (1,242,767) | (1,242,767) |
Balance, September 30, 2005 | 70,024,430 | $70,025 | $ 3,736,495 | $ (4,990,538) | $ (1,184,018) |
(The accompanying notes are an integral part of these interim unaudited financial statements) |
HEPALIFE TECHNOLOGIES, INC. | ||||||
(A Development Stage Company) | ||||||
INTERIM STATEMENTS OF CASH FLOWS | ||||||
for the nine months ended September 30, 2005 and 2004 | ||||||
and from Inception (October 21, 1997) to September 30, 2005 | ||||||
(Unaudited) | ||||||
From Inception | ||||||
(October 21, 1997) | ||||||
Nine months ended September 30, | to September 30, | |||||
(Expressed in U.S. Dollars) |
| 2005 |
| 2004 |
| 2005 |
Cash flows from (used in) operating activities | ||||||
Net loss for the period | $(1,242,767) | $(434,177) | $(4,990,538) | |||
Adjustments for items not involving cash: | ||||||
Depreciation | 392 | 131 | 4,124 | |||
Common stock issued for services | - | - | 523,100 | |||
Conversion of debt to equity | - | - | 338,000 | |||
Change in non cash working capital items: | ||||||
Increase (decrease) in accounts payable | 131,355 | (28,148) | ||||
Net cash flows used in operating activities | (1,111,020) | (462,194) | (3,840,657) | |||
Cash flows used in investing activities | ||||||
Purchase of property and equipment | - | (1,090) | (4,560) | |||
Net cash flows used in investing activities | - | (1,090) | (4,560) | |||
Cash flows from financing activities | ||||||
Proceed from issuance of common stock | 597,700 | 595,650 | 2,945,420 | |||
Proceed from promissory notes - related party | - | 300,000 | - | |||
Proceed (repayment) from promissory notes | (50,000) | (650,000) | 950,000 | |||
Net cash flows provided by financing activities | 547,700 | 245,650 | 3,895,420 | |||
Increase (decrease) in cash | (563,320) | (217,634) | 50,203 | |||
Cash, beginning of period | 613,523 | 312,201 | - | |||
Cash, end of period | $50,203 | $ 94,567 | $50,203 | |||
Supplemental disclosure of cash flow information: | ||||||
Interest paid in cash | $- | $- | $51,909 | |||
Income tax paid in cash | $- | $- | $ - | |||
Non-cash Investing and Financing Activities: | ||||||
Conversion of debt to equity | $- | $- | $338,000 | |||
Common stock issued for services | $- | $- | $523,100 | |||
(The accompanying notes are an integral part of these interim unaudited financial statements) |
HEPALIFE TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(Unaudited)
(Expressed in US Dollars)
NOTE 1 BASIS OF PRESENTATION GOING CONCERN UNCERTAINITIES
The Company has incurred net operating losses since inception. The Company faces all the risks common to companies in their early stages of development, including under capitalization and uncertainty of funding sources, high initial expenditure levels, uncertain revenue streams, and difficulties in managing growth. The Companys recurring losses raise substantial doubt about its ability to continue as a going concern. The Companys financial statements do not reflect any adjustments that might result from the outcome of this uncertainty. The Company expects to incur losses from its business operations and will require additional funding during 2005. The satisfaction of our cash hereafter will depend in large part on the Companys ability to successfully raise capital from external sources to pay for planned expenditures and to fund operations.
To meet these objectives, the Company has arranged a Common Stock Purchase Agreement with Fusion Capital Fund II, LLC to purchase from the Company up to $15,000,000 of the Companys common stock over a thirty month period (Note 10). Management believes that its current and future plans enable it to continue as a going concern. The Company's ability to achieve these objectives cannot be determined at this time. These financial statements do not give effect to any adjustments which would be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in the accompanying financial statements.
NOTE 2 STATEMENT OF INFORMATION FURNISHED
The accompanying unaudited interim financial statements have been prepared in accordance with Form 10-Q instructions and in the opinion of management contains all adjustments necessary to present fairly the financial position as of September 30, 2005 and December 31, 2004, and the results of operations for three and nine months ended September 30, 2005 and 2004 and cash flows for the nine months ended September 30, 2005 and 2004. These results have been determined on the basis of generally accepted accounting principles and practices in the United States and applied consistently with those used in the preparation of the Company's 2004 Annual Report on Form 10-KSB.
Certain information and footnote disclosure normally included in the financial statements presented in accordance with generally accepted accounting principles in the United States have been condensed or omitted. It is suggested that the accompanying financial statements be read in conjunction with the accompanying financial statements and notes thereto incorporated by reference in the Company's 2004 Annual Report on Form 10-KSB.
NOTE 3 - LOSS PER SHARE
Basic earnings or loss per share is based on the weighted average number of common shares outstanding. Diluted earnings or loss per share is based on the weighted average number of common shares outstanding and dilutive common stock equivalents. The computation of earnings (loss) per share is net loss available to common stockholders (numerator) divided by the weighted average number of common shares outstanding (denominator) during the periods presented. All earnings or loss per share amounts in the financial statements are basic earnings or loss per share, as defined by SFAS No. 128, Earnings Per Share. Diluted loss per share does not differ materially from basic loss per share for all periods presented. Convertible securities that could potentially dilute basic loss per share in the future are not included in the computation of diluted loss per share because to do so would be antidilutive. All per share and per share information are adjusted retroactively to reflect stock splits and changes in par value, when applicable.
The computation of basic and diluted loss per share is as follows:
Cumulative from | ||||||
Three months ended | Nine months ended | inception | ||||
September 30, |
| September 30, | (October 21, 1997) | |||
2005 | 2004 | 2005 | 2004 | to September 30, 2005 | ||
Numerator - net loss available to common stockholders | $(273,655) | $(195,246) | $(1,242,767) | $(434,177) | $(4,990,538) | |
Denominator - weighted average number of common shares outstanding | 69,941,739 | 64,612,517 | 69,063,819 | 64,415,011 | 46,387,894 | |
Basic and diluted loss per common shares | $(0.004) | $(0.003) | $(0.018) | $(0.007) | $(0.108) |
NOTE 4 RELATED PARTY TRANSACTIONS
Management Fees: During the three months ended September 30, 2005 and 2004, the Company paid management fees of $7,500 and $3,800 to the directors respectively. During the nine months ended September 30, 2005 and 2004, the Company paid management fees of $11,300 and $3,800 to the directors respectively. As of September 30, 2005, the Company included $27,000 in the accounts payable as management fees payable to a director for his services. There is no management or consulting agreement in effect nor is there an agreement in place to convert debt to equity.
Notes Payable and Accrued Interest: As of September 30, 2005, notes payable of $950,000 was made up from unsecured loans of $250,000 and $700,000, both bearing interest at the rate of 8.50%, due to a director and major shareholder of the Company. The entire amounts of principal and interest accrued are due and payable on demand. Accrued and unpaid interest on these notes during the three and nine month period ended September 30, 2005, amounted to $20,353 and $57,847 respectively.
Properties: The Company's office is located at Suite 216, 1628 West 1st Avenue, Vancouver, BC, V6J 1G1. These premises are owned by a private corporation controlled by a director and majority shareholder of the Company. At present, the Company pays no rent. The fair value of the rent has not been included in the financial statements because the amount involved is immaterial.
NOTE 5 COOPERATIVE AGREEMENT
On November 1, 2002, the Company entered into a Cooperative Research and Development Agreement (the Agreement) with the United States Department of Agricultures (USDA) Agricultural Research Service (ARS), and committed a total payment of $292,727 to ARS over two year period, ending February 19, 2005.
On May 24, 2004, the Agreement was extended to September 30, 2007 and the required total payments to ARS were amended to $807,828. The revised schedule of payments is as follows:
- $65,422.80 on or before 8/1/04 (paid in 2004);
- $65,422.80 on or before 11/1/04 (paid in June 2005);
- $65,422.80 on or before 2/1/05 (paid in August 2005);
- $65,422.80 on or before 5/1/05 (included in accounts payable);
- $65,422.80 on or before 8/1/05 (included in accounts payable);
- $65,422.80 on or before 11/1/05;
- $65,422.80 on or before 2/1/06;
- $65,422.80 on or before 5/1/06;
- $65,422.80 on or before 8/1/06; and
- $65,422.80 on or before 11/1/06.
As of September 30, 2005, total payments of $480,715 have been paid/accrued.
As amended, the Company, instead of ARS as in the original agreement, has the first option to prepare and prosecute patent or Plant Variety Protection Certificate applications, foreign and domestic, on subject invention owned or co-owned by the U.S Government, subject to certain conditions.
The agreement is for the purpose of funding salaries, equipment, travel and other indirect costs of one post-doctoral researcher, one support scientist, and one technician. The terms of the agreement require the interaction of the Company with ARS personnel on the technical details involved with pig liver cell culture development, providing the necessary funds for the purpose above, preparing and filing any patent applications, and reviewing reports and implementing procedures for the development of an artificial liver device utilizing the pig liver cell line. ARSs responsibilities include hiring the post-doctoral research associate for a two-year period, providing laboratory and office space for the research associate, providing experimental animals (pigs) and slaughter facilities, conducting the research, preparing progress reports on project objectives, and preparing and submitting technical reports for publication.
All rights, title, and interest in any subject invention made solely by ARS employees are owned by ARS, solely by the Company are owned by the Company, and owned jointly between the Company and ARS if made jointly by ARS and the Company. The Company is granted an option to negotiate an exclusive licence in each subject invention owned or co-owned by ARS for one or more field (s) of use encompassed by the Agreement. The option terminates when the Company fails to (1) submit a complete application for an exclusive licence within sixty days of being notified by ARS of an inventions availability for licensing or (2) submit a good faith written response to a written proposal of licensing terms within forty five days of such proposal.
The Agreement, or parts thereof, is subject to termination at any time by mutual consent. Either party may unilaterally terminate the entire Agreement at any time by giving the other party written notice not less than sixty calendar days prior to the desired termination date.
NOTE 6 EQUIPMENT
September 30, 2005 | December 31, 2004 | ||||
Computer equipment | $3,471 | $3,471 | |||
furniture and fixtures | 1,089 |
| 1,089 | ||
4,560 | 4,560 | ||||
Less: accumulated depreciation | (4,124) | (3,732) | |||
$436 |
| $828 |
Depreciation expenses charged to operations for the three-month and nine-month periods ended September 30, 2005 were $131 (2004: $131) and $392 (2004: $131) respectively.
NOTE 7 COMMON STOCK
During the quarter ended September 30, 2005, the Company issued 691,598 shares of its common stock to Fusion Capital Fund II, LLC according to the Common Stock Purchase Agreement . The Company had issued 20,000 shares of its common stock to Fusion Capital in June 2005. See Note 10 for further details.
NOTE 8 WARRANTS
The movement of share purchase warrants can be summarized as follows:-
Number of warrants | Weighted average exercise price | |
Balance, December 31, 2003 | 4,700,000 | $0.025 |
Exercised | (2,000,000) | 0.025 |
Balance, June 30, 2005 and December 31, 2004 | 2,700,000 | 0.025 |
Exercised | (1,250,000) | 0.025 |
Expired | (1,450,000) | 0.025 |
Balance, September 30, 2005 | - |
As of September 30, 2005, there are no outstanding share purchase warrants.
NOTE 9 - STOCK OPTIONS
On July 12, 2001, the shareholders of the Company approved the Companys 2001 Stock Option Plan which has 40,000,000 shares reserved for issuance thereunder, all of which are registered under Form S-8 on May 8, 2003. The objective of this plan is to attract and retain the best personnel, providing for additional performance incentives, and promoting the success of the Company by providing individuals the opportunity to acquire common stock.
In the nine-month period ended September 30, 2005, the Company granted an aggregate of 6,000,000 stock options to employees, with exercise prices from $2.38 to $3.10 per share, expiring 10 years from the date of grant, being vested immediately.
Had compensation expense for the Companys stock-based compensation plans been determined under SFAS No. 123, based on the fair market value at the grant dates, the Companys pro-forma net loss and pro-forma net loss per share would have been reflected as follows:-
Three months ended | Nine months ended | |||||
September 30, | September 30, | |||||
2005 | 2004 | 2005 | 2004 | |||
Net loss as reported: | $(273,655) | $(195,246) | $(1,242,767) | $(434,177) | ||
Stock-based employee compensation expense as determined under the fair value based method | - | - | (10,320,000) | (901,242) | ||
Pro-forma net loss | $(273,655) | $(195,246) | $(11,562,767) | $(1,335,419) | ||
Net loss per share - basic and diluted: | ||||||
As reported | $(0.004) | $ (0.003) | $(0.018) | $ (0.007) | ||
Pro-forma | $(0.004) | $ (0.003) | $(0.167) | $(0.021) |
The weighted average fair value of options granted in the nine-month period ended September 30, 2005 was estimated at $1.72 by using the Black-Scholes Option Pricing Model with the following weighted average assumptions: dividend yield of 0%, expected volatility of 93%, risk-free interest rate of 3.5% and expected lives of three years.
The movement of stock options can be summarized as follows:
Number of options | Weighted average exercise price | |||
Balance, December 31, 2003 | 12,755,000 | $0.520 | ||
Exercised | (1,622,000) | 0.830 | ||
Balance, December 31, 2004 | 11,133,000 | 0.476 | ||
Granted | 6,000,000 | 2.860 | ||
Balance, September 30, 2005 | 17,133,000 | 1.311 |
No options were granted, cancelled or exercised during the three-month period ended September 30, 2005.
The weighted average remaining contractual life of the outstanding stock options at September 30, 2005 is 8.16 years.
NOTE 10 COMMITMENTS
On July 8, 2005, the Company entered into a Common Stock Purchase Agreement (Purchase Agreement) and a Registration Rights Agreement (Registration Agreement) with Fusion Capital Fund II, LLC (Fusion Capital). Pursuant to the terms of the Purchase Agreement, the Company issued to Fusion Capital 711,598 shares of its common stock, which Fusion Capital has agreed to hold for thirty months. Fusion Capital has agreed to purchase from the Company up to $15,000,000 of the Companys shares of common stock over a thirty month period. Pursuant to the terms of the Registration Agreement, the Company has filed a registration statement (the Registration Statement) with the Securities and Exchange Commission covering shares which may be purchased by Fusion Capital under the Purchase Agreement.
Once the Registration Statement has been declared effective, each trading day during the term of the Purchase Agreement the Company has the right to sell to Fusion Capital $25,000 of the Companys common stock at a purchase price equal to the lower of (a) the lowest sale price of the common stock on such trading day and (b) the arithmetic average of the three lowest closing sale prices for the common stock during the twelve consecutive trading days immediately preceding the date of purchase. At the Companys option, Fusion Capital can be required to purchase fewer or greater amounts of common stock each month. The Company has the right to control the timing and the number of shares sold to Fusion Capital.
This offering was made pursuant to an exemption from registration provided by Section 4(2) of the Securities Act, 1933, as amended.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995:
Except for the historical information presented in this document, the matters discussed in this Form 10-Q for the three and nine months ending September 30, 2005, and specifically in the items entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations", or otherwise incorporated by reference into this document, contain "forward-looking statements" (as such term is defined in the Private Securities Litigation Reform Act of 1995). These statements are identified by the use of forward-looking terminology such as "believes", "plans", "intend", "scheduled", "potential", "continue", "estimates", "hopes", "goal", "objective", expects", "may", "will", "should" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. The safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, apply to forward-looking statements made by the Company.
The reader is cautioned that no statements contained in this Form 10-Q should be construed as a guarantee or assurance of future performance or results. These forward-looking statements involve risks and uncertainties, including those identified within this Form 10-Q. The actual results that the Company achieves may differ materially from any forward-looking statements due to such risks and uncertainties. These forward-looking statements are based on current expectations, and the Company assumes no obligation to update this information. Readers are urged to carefully review and consider the various disclosures made by the Company in this Form 10-Q and in the Company's other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business.
Overview
We are an early stage, research based biotechnology company focused on the identification, development and eventual commercialization of technologies and products for liver toxicity detection and the treatment of various forms of liver dysfunction and disease. Currently, we are concentrating our efforts on developing an artificial liver device and in-vitro toxicology and pre-clinical drug testing platforms. Our sponsored research is being conducted pursuant to a Cooperative Research and Development Agreement, or CRADA, with the USDA's Agricultural Research Service.
Artificial Liver Device
We are working towards optimizing the hepatic functionality of a porcine cell line, which we refer to as the PICM-19 Cell Line. The PICM-19 Cell Line was developed and patented by USDAs Agricultural Research Service scientists. The hepatic characteristics of the PICM-19 Cell Line have been demonstrated to have potential application in the production of an artificial liver device.
In-Vitro Toxicology Testing
The PICM-19 Cell Line, grown in vitro, can synthesize liver specific proteins such as albumin and transferrin and display enhanced liver-specific functions, such as ureagenesis (conversion to ammonia to urea) and cytochrome P450 activity. Consequently, we believe the PICM-19 Cell Line could be an important element in developing in vitro toxicological and pre-clinical drug testing platforms that could more accurately determine the potential toxicity and metabolism of new pharmacological compounds in the liver.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosures. We review our estimates on an ongoing basis.
We consider an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made; and changes in the estimate or different estimates that could have been made could have a material impact on our results of operations or financial condition. While our significant accounting policies are described in more detail in the notes to our financial statements included in this prospectus, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel related costs, legal costs, including intellectual property, investor relations, accounting costs, and other professional and administrative costs.
Research and Development Costs
Most of our operating costs to date have been for research and development activities. Research and development costs represent costs incurred to develop our technology incurred pursuant to our CRADA with the USDAs Agricultural Research Service and include salaries and benefits for research and development personnel, allocated overhead and facility occupancy costs, contract services and other costs. We charge all research and development expenses to operations as they are incurred. We do not track research and development expenses by project.
Cooperative Agreement
On November 1, 2002, the Company entered into a Cooperative Research and Development Agreement (CRADA) with the United States Department of Agricultures (USDA) Agricultural Research Service (ARS), and committed a total payment of $292,727 to ARS over a two year period.
On May 24, 2004, HepaLife Technologies, Inc. agreed to extend its CRADA with the USDAs ARS for an additional three years through September 30, 2007.
ARS will receive a total of $807,828.00 in funds to study experimental culture conditions for the ARS-PICM-19 cell line, its derivative cell lines, or other pig epiblast-derived liver cell lines (as described under ARS patent #5,532,156, Hepatocyte Cell Line Derived from the Epiblast of Pig Blastocysts) so as to optimize their hepatocyte functions for use as an in vitro liver model, for their use in an artificial liver device, and for their use in the in vitro assay of metabolic, toxic, or carcinogenic responses.
Hepalife Technologies will provide funds for the salary of one post-doctoral researcher, one support scientist, and one technician for a period of three years and funds for the associated laboratory supplies and professional activities involved with conducting the CRADA objectives under the following payment schedule:
(1)
$65,422.80 on or before August 1, 2004;
(2)
$65,422.80 on or before November 1, 2004;
(3)
$65,422.80 on or before February 1, 2005;
(4)
$65,422.80 on or before May 1, 2005;
(5)
$65,422.80 on or before August 1, 2005;
(6)
$65,422.80 on or before November 1, 2005;
(7)
$65,422.80 on or before February 1, 2006;
(8)
$65,422.80 on or before May 1, 2006;
(9)
$65,422.80 on or before August 1, 2006;
(10)
$65,422.80 on or before November 1, 2006
All rights, title, and interest in any subject invention made solely by ARS employees are owned by ARS, solely by the Company are owned by the Company, and owned jointly between the Company and ARS if made jointly by ARS and the Company. The Company is granted an option to negotiate an exclusive license in each subject invention owned or co-owned by ARS for one or more field (s) of use encompassed by the agreement. Option terminates when the Company fails to (1) submit a complete application for an exclusive license within sixty days of being notified by ARS of an Inventions availability for licensing or (2) submit a good faith written response to a written proposal of licensing terms within forty five days of such proposal.
Results of Operation
The Company has yet to establish any history of profitable operations. The Company has incurred operating losses of $273,655 and $195,246 for the three months ended September 30, 2005 and September 30, 2004, respectively.
For the nine months ended September 30, 2005 and September 30, 2004, the Company has incurred operating losses of $1,242,767 and $434,177, respectively. As a result, at September 30, 2005, the Company has an accumulated deficit of $4,990,538.
We expect that our revenues will not be sufficient to sustain our operations for the foreseeable future. Our profitability will require the successful completion of our research and development programs, and the subsequent commercialization of the results or of products derived from such research and development efforts. No assurances can be given when this will occur or that we will ever be profitable.
Three and Nine Months Ended September 30, 2005 and 2004
We had no revenues in the three and nine months ended September 30, 2005 and 2004. Our general and administrative expenses increased 41% to $275,082 in the three months ended September 30, 2005, from $195,547 in the same period in 2004. This increase was primarily attributable to an increase of $65,423 in our research and development costs.
Our general and administrative expenses increased 186% to $1,246,417 in the nine months ended September 30, 2005, from $435,358 in the same period in 2004. This increase was primarily attributable to an increase of $457,199 in investor relations costs and also had an increase of $175,569 in our research and development costs.
Interest income increased 374% to $1,427 in the three months ended September 30, 2005, from $301 during the same period in 2004, reflecting higher than average cash balances maintained during most of the second quarterly period in 2005. For the nine months ended September 30, 2005 and in the same period in 2004, interest income has increased 209% to $3,650 from $1,181, reflecting higher than average cash balances maintained during most of the first three fiscal quarterly periods in 2005.
We incurred net losses of $273,655 and $195,246 during the three months ended September 30, 2005 and in the same period in 2004, respectively, and we also incurred net losses of $1,242,767 and $434,177 for the three and nine months ended September 30, 2005 from the same period in 2004, respectively, was principally caused by the increase in our investor relations costs and an increase in research and development costs during the periods.
Liquidity and Capital Resources
As at September 30, 2005, the Company had a cash balance of $50,203. The Company has financed its operations primarily through cash on hand during the nine month period ending September 30, 2005.
Net cash flows used in by operating activities was $1,111,020 for the nine month period ending September 30, 2005, compared to net cash flows used of $462,194 for the same period in 2004, primarily due to an increase in net loss.
Net cash provided by financing activities was $547,700 for the nine months period ending September 30, 2005 compared to $245,650 for the same period in 2004. The Company has financed its operations primarily from cash on hand, loans from shareholders and proceeds from stock option exercises. The Company intends to pay the debentures owed to Mr. Harmel Rayat from the funds that are to be received from the recently announced funding.
The Company's future funding requirements will depend on numerous factors. These factors include the Company's ability to operate its business profitably in the future, recruit and train qualified management, technical and sales personnel, and the Company's ability to compete against other, better-capitalized corporations. The Company has adequate cash to satisfy its cash requirements over the next twelve months. The Company may raise additional funds through private or public equity investment in order to expand the range and scope of its business operations. There is no assurance that such additional funds will be available for the Company to finance its operations on acceptable terms, if at all.
Related Party Transactions
Management Fees: During the three months ended September 30, 2005 and 2004, the Company paid management fees of $7,500 and $3,800 to the directors respectively. During the nine months ended September 30, 2005 and 2004, the Company paid management fees of $11,300 and $3,800 to the directors respectively. As of September 30, 2005, the Company included $27,000 in the accounts payable as management fees payable to a director for his services. There is no management or consulting agreement in effect nor is there an agreement in place to convert debt to equity.
Notes Payable and Accrued Interest: As of September 30, 2005, notes payable of $950,000 was made up from unsecured loans of $250,000 and $700,000, both bearing interest at the rate of 8.50%, due to a director and major shareholder of the Company. The entire amounts of principal and interest accrued are due and payable on demand. Accrued and unpaid interest on these notes during the three and nine month period ended September 30, 2005, amounted to $20,353 and $57,847 respectively.
Properties: The Company's office is located at Suite 216, 1628 West 1st Avenue, Vancouver, BC, V6J 1G1. These premises are owned by a private corporation controlled by a director and majority shareholder of the Company. At present, the Company pays no rent. The fair value of the rent has not been included in the financial statements because the amount involved is immaterial.
Off Balance Sheet Arrangements
We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
Recent Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 replaces APB Opinion No. 20 Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 requires retrospective application to prior periods financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The adoption of SFAS No. 154 will not have any impact on the Companys consolidated financial statements.
Risk Factors
We have sought to identify what we believe to be the most significant risks to our business. However, we cannot predict whether, or to what extent, any of such risks may be realized nor can we guarantee that we have identified all possible risks that might arise. Investors should carefully consider all of such risk factors before making an investment decision with respect to our Common Stock. We provide the following cautionary discussion of risks, uncertainties and possible inaccurate assumptions relevant to our business. These are factors that we think could cause our actual results to differ materially from expected results. Other factors besides those listed here could adversely affect us.
We will continue to incur operating losses.
Our business operations began in 1997 and we have a limited operating history. We may encounter delays, uncertainties and complications typically encountered by development stage biotechnology businesses. We have generated no revenues, are not profitable and have incurred an accumulated deficit of $4,990,538 since our inception. The Company's current ability to generate revenues and to achieve profitability and positive cash flow will depend on the successful commercialization of our products currently under development. However, even if we eventually generate revenues from sales of our products currently under development, we expect to incur significant operating losses over the next several years. Our ability to become profitable will depend, among other things, on our (1) successful research outcomes and eventual development of our proposed products, (2) obtaining of regulatory approvals of our proposed products on a timely basis and (3) success in joint venture partnerships, manufacturing, distributing and marketing our proposed products.
We may never receive material revenues from product sales or if we do generate revenues, such revenues may not be sufficient to continue or expand our research or development activities and otherwise sustain our operations.
Our business is at an early stage of development.
Our business is at an early stage of development. Our ability to produce a product that progresses to and through clinical trials is subject to numerous uncertainties, including but not limited to, the continued success of our research and development efforts, our ability to finance the Companys ongoing research and development operations, our ability to attract and retain appropriate personnel and attaining appropriate regulatory approvals. Our efforts may not result in a product that can be marketed or manufactured in commercial quantities at an acceptable cost. Because of the significant scientific, regulatory and commercial milestones that must be reached in order to be successful, we may abandon any product, even after significant resources have been expended.
We are vulnerable to volatile market conditions.
The market prices for securities of developmental stage biotechnology companies, including ours, are highly volatile and, from time to time, experience significant price and volume fluctuations that are unrelated to the operating performance of particular companies. In addition, future announcements, such as the results of our research, media coverage, testing and clinical trials, the status of our relationships with third-party collaborators, technological innovations or new products, services or drugs, legislation and governmental regulation, developments in patent or other proprietary rights, litigation or public concern as to the safety of products developed by us or others and general market conditions, concerning us, our competitors or other companies, may have a significant effect on the market price of our common stock.
Liquidity of Shares in Market Place
As of November 8, 2005 one of our directors beneficially owns approximately 66% of the Companys outstanding common stock, which could affect the liquidity of the companys shares in the market.
We face intense competition.
We face intense competition from a wide range of pharmaceutical, biopharmaceutical, biotechnology and medical device companies, as well as academic and research institutions and government agencies. Our competitors include organizations that are pursuing the same or similar technologies as us and organizations that are pursuing products that are competitive with our potential product. To the extent that these technologies or products address the problems associated with liver disease on which we have focused, they may represent significant competition.
Many of the organizations competing against us have financial and other resources substantially greater than our own. In addition, many of our competitors have significantly greater experience in research and development, obtaining FDA and other regulatory approvals, and commercializing and selling products for use in health care. Accordingly, our competitors may succeed more rapidly than we will in completing clinical trials, obtaining various regulatory approvals or achieving market penetration for products. Some of these products may have an entirely different approach or means of accomplishing the desired therapeutic effect than our products and may be more effective and less costly. If we commence significant commercial sales of our products, we will also be competing with respect to manufacturing efficiency and marketing capabilities, areas in which we have limited or no experience.
We may not obtain additional financing.
While we anticipate that our existing funds will be sufficient to fund our operating and research requirements as currently planned into the second quarter of 2007, we cannot guarantee that this will be sufficient. We expect to use, rather than generate, funds from operations for the foreseeable future, and as a result, we will need significant funding to pursue our research, development and commercialization plans. The actual amount of funds we will require will be determined by a number of factors, many of which are beyond our control, including continued scientific progress in our research and development programs, magnitude and scope of our research and development programs, costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims and the potential development of new technologies and products.
If we cannot raise more funds, we could be required to scale back or abandon our research and product development activities, reduce our workforce and license to others products or technologies we would otherwise seek to commercialize ourselves. Our products under development will require significant time-consuming and costly research and development, clinical testing, regulatory approval and significant additional investment prior to their commercialization. There can be no assurance that (1) the research and development activities we conduct will be successful, (2) current or future products or technologies under development will prove to be safe and effective, (3) any of the clinical development work will be completed, or (4) the anticipated products or technologies will be commercially viable or successfully marketed. Commercial sales of our products cannot begin until we receive final FDA approval.
We will seek additional funding through collaborative arrangements, by borrowing money or by selling additional equity securities. Any sales of additional equity securities are likely to result in further dilution to our then existing stockholders. Further, if we issue additional equity securities, the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. We may also borrow money from conventional lenders, possibly at high interest rates and on other terms that are unfavorable to us, which will increase the risk of your holdings. Despite our efforts, additional funding may not be available to us at all or only on terms that are unacceptable to us. We also could be required to seek funds through arrangements with collaborative partners or others that may require us to relinquish rights to our technologies, product candidates or products which we would otherwise pursue on our own
We may not be able to protect our intellectual property.
The Company relies on a combination of copyright law, trade secret protection, confidentiality agreements and other contractual arrangements with employees, vendors and others to protect its rights to intellectual property. These measures, however, may be inadequate to deter misappropriation of proprietary information. Failure to adequately protect its intellectual property could harm the Company, devalue its proprietary content and affect the Company's ability to compete effectively.
We may lose important research and invention licenses.
We are a party to a Cooperative Research and Development Agreement with the United States Department of Agricultures Agricultural Research Service which grants the Company an option to negotiate an exclusive license to any invention or other intellectual property conceived or reduced to practice under the Agreement which is patentable or otherwise protectable under Title 35 of the United States Code or under the patent laws of a foreign country. There can be no assurance that such a license will be granted to us or that we can obtain a license on terms favorable to us. If we do not obtain an exclusive license, our ability to generate revenue would be adversely affected.
We expect to enter into additional research agreements and licenses in the future that relate to important technologies that may be necessary for the development and commercialization of related and unrelated products. These agreements and licenses may impose various commercialization, indemnification, royalty, insurance and other obligations on us, which, if we fail to comply may result in the termination of these agreements and licenses or make the agreements and licenses non-exclusive, which could affect our ability to exploit important technologies that are required for successful development of our products.
We may not be able to obtain patent protection and may infringe upon the property rights of others.
Our success depends in significant part on our ability to obtain important research and invention licenses, obtain patents, protect trade secrets, operate without infringing upon the proprietary rights of others and prevent others from infringing on our proprietary rights.
If we do obtain patents, the claims allowed may not be sufficiently broad to protect our technology. In addition, issued patents that we own or license may be challenged, invalidated or circumvented. Our patents also may not afford us protection against competitors with similar technology. Because patent applications in the United States are maintained in secrecy until patents issue, third parties may have filed or maintained patent applications for technology used by us or covered by our pending patent applications without our being aware of these applications.
We may not hold proprietary rights to all of the patents related to our proposed products or services. These patents may be owned or controlled by third parties. As a result, we or our collaborative partners may be required to obtain licenses under third-party patents to market our proposed products or services. If licenses are not available on acceptable terms, we or our collaborative partners will not be able to market these products or services.
You may lack an effective vote on corporate matters due to control by management.
You may lack an effective vote on corporate matters and management may be able to act contrary to your objectives. As of November 8, 2005, our officers and board members own 66% of the 70,064,430 outstanding common shares, not including stock options and warrants. If management votes together, it could influence the outcome of corporate actions requiring shareholder approval, including the election of directors, mergers and asset sales. As a result, new stockholders may lack an effective vote with respect to the election of directors and other corporate matters. Therefore, it is possible that management may take actions with respect to its ownership interest, which may not be consistent with your objectives or desires.
We may experience significant fluctuations in quarterly results.
Significant variations in our quarterly operating results may adversely affect the market price of our common stock. Our operating results have varied on a quarterly basis during our limited operating history, and we expect to experience significant fluctuations in future quarterly operating results. These fluctuations have been and may in the future be caused by numerous factors, many of which are outside of our control. We believe that period-to-period comparisons of our results of operations will not necessarily be meaningful and that you should not rely upon them as an indication of future performance. Also, it is likely that our operating results could be below the expectations of public market analysts and investors. This could adversely affect the market price of our common stock.
We depend on our key executive officers and technical personnel.
The success of our business plan depends on attracting qualified technical, scientific and other knowledgeable personnel, and failure to retain the necessary personnel could adversely affect our business. Competition for qualified personnel is intense, and we may need to pay premium wages to attract and retain personnel. Attracting and retaining qualified personnel is critical to our business. Inability to attract and retain the qualified personnel necessary would limit our ability to implement our business plan successfully.
We may not have a majority of independent directors.
We cannot guarantee our Board of Directors will have a majority of independent directors in the future. In the absence of a majority of independent directors, our executive officers, who are also principal stockholders and directors, could establish policies and enter into transactions without independent review and approval thereof. This could present the potential for a conflict of interest between the Company and its stockholders generally and the controlling officers, stockholders or directors.
Our Articles and By-Laws indemnify our officers and directors.
Our officers and directors are required to exercise good faith and high integrity in our management affairs. Our Articles of Incorporation and By Laws provide, however, that our officers and directors shall have no liability to our shareholders for losses sustained or liabilities incurred which arise from any transaction in their respective managerial capacities unless they violated their duty of loyalty, did not act in good faith, engaged in intentional misconduct or knowingly violated the law, approved an improper dividend or stock repurchase, or derived an improper benefit from the transaction. Our Articles and By-Laws also provide for the indemnification by us of the officers and directors against any losses or liabilities they may incur as a result of the manner in which they operate our business or conduct the internal affairs, provided that in connection with these activities they act in good faith and in a manner they reasonably believe to be in, or not opposed to, the best interests of the Company, and their conduct does not constitute gross negligence, misconduct or breach of fiduciary obligations.
Large sales of common stock could adversely affect our common stock and our ability to raise capital.
Future sales of our common stock by existing stockholders pursuant to Rule 144 under the Securities Act, or following the exercise of outstanding options and warrants, could adversely affect the market price of our common stock. Substantially all of the outstanding shares of our common stock are freely tradable, without restriction or registration under the Securities Act, other than the sales volume restrictions of Rule 144 applicable to shares held beneficially by persons who may be deemed to be affiliates. Our directors and executive officers and their family members are not under lockup letters or other forms of restriction on the sale of their common stock. The issuance of any or all of these additional shares upon exercise of options or warrants or conversion of preferred stock will dilute the voting power of our current stockholders on corporate matters and, as a result, may cause the market price of our common stock to decrease. Further, sales of a large number of shares of common stock in the public market could adversely affect the market price of the common stock and could materially impair our future ability to generate funds through sales of common stock or other equity securities.
We are considered a penny stock.
The Company's stock differs from many stocks, in that it is a "penny stock." The Securities and Exchange Commission has adopted a number of rules to regulate "penny stocks." These rules include, but are not limited to, Rules 3a5l-l, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6 and 15g-7 under the Securities and Exchange Act of 1934, as amended.
Because our securities probably constitute "penny stock" within the meaning of the rules, the rules would apply to us and our securities. The rules may further affect the ability of owners of our stock to sell their securities in any market that may develop for them. There may be a limited market for penny stocks, due to the regulatory burdens on broker-dealers. The market among dealers may not be active. Investors in penny stock often are unable to sell stock back to the dealer that sold them the stock. The mark-ups or commissions charged by the broker-dealers may be greater than any profit a seller may make. Because of large dealer spreads, investors may be unable to sell the stock immediately back to the dealer at the same price the dealer sold the stock to the investor. In some cases, the stock may fall quickly in value. Investors may be unable to reap any profit from any sale of the stock, if they can sell it at all.
Stockholders should be aware that, according to the Securities and Exchange Commission Release No. 34- 29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. These patterns include:
-Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
-Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
-"Boiler room" practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;
-Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
-The wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
Furthermore, the "penny stock" designation may adversely affect the development of any public market for the Company's shares of common stock or, if such a market develops, its continuation. Broker-dealers are required to personally determine whether an investment in "penny stock" is suitable for customers.
Penny stocks are securities (i) with a price of less than five dollars per share; (ii) that are not traded on a "recognized" national exchange; (iii) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must still meet requirement (i) above); or (iv) of an issuer with net tangible assets less than $2,000,000 (if the issuer has been in continuous operation for at least three years) or $5,000,000 (if in continuous operation for less than three years), or with average annual revenues of less than $6,000,000 for the last three years.
Section 15(g) of the Exchange Act, and Rule 15g-2 of the Commission require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor's account. Potential investors in the Company's common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be "penny stock."
Rule 15g-9 of the Commission requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor's financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for the Company's stockholders to resell their shares to third parties or to otherwise dispose of them.
We will be subject to approval by regulatory authorities and are subject to government regulation.
Some of our products will be subject to regulation in the United States by the Food and Drug Administration and by comparable regulatory authorities in foreign jurisdictions. The Companys artificial liver device will be classified as a "biologic" regulated under the Public Health Service Act and the Food, Drug and Cosmetic Act. Development of a therapeutic product for human use is a multi-step process. First, animal and in vitro testing must establish the potential safety and efficacy of the experimental product for a given disease. Once the product is found to be reasonably safe and potentially efficacious in animals, suggesting that human testing would be appropriate, an Investigational New Drug ("IND") application is submitted to the FDA. FDA approval, which may in some circumstances involve substantial delays, is necessary before commencing clinical investigations.
Clinical investigations typically involve three phases. Phase I is conducted to evaluate the safety of the experimental product in humans, and if possible to obtain early evidence of effectiveness. Phase I studies also evaluate various routes, dosages and schedules of product administration. The demonstration of therapeutic benefit is not required in order to complete Phase I successfully. If acceptable product safety is demonstrated, the Phase II studies are initiated, which are designed to evaluate the effectiveness of the product in the treatment of a given disease and typically, are well controlled and closely monitored studies in a relatively small number of patients. Phase II studies determine the optimal routes and schedules of administration.
If Phase II trials are successfully completed, Phase III studies will commence. Phase III studies are expanded controlled and uncontrolled trials which are intended to gather additional information about safety and efficacy in order to evaluate the overall risk and/ or benefit relationship of the experimental product and provide an adequate basis for physician labeling. These studies also may compare the safety and efficacy of the experimental device with currently available products. While it is not possible to estimate the amount of time or money that will be required to complete Phase I, II and III studies, this process often lasts several years.
Following the successful completion of these clinical investigations, the preclinical and clinical evidence that has been accumulated is submitted to the FDA as part of a product license application ("PLA"). Approval of the PLA or IND is necessary before a company may market the product. The approval process can be very lengthy and depends upon the time it takes to review the submitted data and the FDAs comments on the application, and the time required to provide satisfactory answers or additional clinical data when requested.
We must be compliant with environmental matters and regulations.
We are subject to regulation under state and federal law, including requirements regarding occupational safety, laboratory practices, the use, handling and disposition of radioactive materials, environmental protection and hazardous substance control, and may be subject to other present and possible future local, state, federal and foreign regulation, including future regulation of the biotechnology field. The Company believes it conducts its business in compliance with all environmental laws presently applicable to its facilities. To date, there have been no expenses incurred by the Company related to environmental issues.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk is confined to our cash equivalents and short-term investments. We invest in high-quality financial instruments; primarily money market funds, federal agency notes, and US Treasury obligations, with the effective duration of the portfolio within one year which we believe are subject to limited credit risk. We currently do not hedge interest rate exposure. Due to the short-term nature of our investments, we do not believe that we have any material exposure to interest rate risk arising from our investments.
ITEM 4. Controls and Procedures
a. Evaluation of Disclosure Controls and Procedures:
Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.
b. Changes in Internal Control over Financial Reporting:
There were no changes in the Company's internal control over financial reporting identified in connection with the Company evaluation of these controls as of the end of the period covered by this report that could have significantly affected those controls subsequent to the date of the evaluation referred to in the previous paragraph, including any correction action with regard to significant deficiencies and material weakness.
PART II Other Information
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)
31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
32.1
Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification by the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
July 13, 2005: On July 8, 2005, HepaLife Technologies, Inc. (the Company) entered into a Common Stock Purchase Agreement (Purchase Agreement) and a Registration Rights Agreement (Registration Agreement) with Fusion Capital Fund II, LLC (Fusion Capital).
August 16, 2005: On August 12, 2005, Mr. Harmel S. Rayat, a current director, was appointed to the position of president and chief executive officer of HepaLife Technologies, Inc. Mr. Rayat, a majority shareholder, will also assume the position of Chief Financial Officer and Principal Accounting Officer. Mr. Arian Soheili, the Companys former president and CEO, will remain on as a director, secretary and treasurer.
September 23, 2005: On September 19, 2005, HepaLife Technologies, Inc. issued a news release to announce that its collaborating USDA scientist, Dr. Ayesha Mahmood, will be presenting important room temperature storage research results at an upcoming Biomedical Engineering Society Meeting.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15 (d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 8th day of November, 2005.
HepaLife Technologies, Inc.
/s/ Harmel S. Rayat
Harmel S. Rayat
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in capacities and on the dates indicated.
Signature
Title
Date
/s/ Harmel S. Rayat
President, Chief Executive Officer
November 8, 2005
Harmel S. Rayat
Principal Financial Officer, Director
/s/ Arian Soheili
Director, Secretary/Treasurer
November 8, 2005
Arian Soheili
/s/ Jasvir Kheleh
Director
November 8, 2005
Jasvir Kheleh
Exhibit 31.1
CERTIFICATION
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Harmel Rayat, certify that:
(1)
I have reviewed this quarterly report on Form 10-Q of HepaLife Technologies, Inc. (the registrant);
(2)
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4)
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
(5)
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 8, 2005
By:
/s/ Harmel Rayat
Harmel Rayat
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Harmel Rayat certify that:
(1)
I have reviewed this quarterly report on Form 10-Q of HepaLife Technologies, Inc. (the registrant);
(2)
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4)
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
(5)
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 8, 2005
By:
/s/ Harmel Rayat
Harmel Rayat
Principal Financial Officer
Exhibit 32.1
Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of HepaLife Technologies, Inc. (the Company) on the Form 10-Q for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Harmel Rayat, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that:
(i)
the Report filed by the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(ii)
The information contained in that Report fairly presents, in all material respects, the financial condition and results of operations of the Company on the dates and for the periods presented therein.
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Date: November 8, 2005 |
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This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Certification by the Chief Financial Officer pursuant to 18 U.S.C. 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of HepaLife Technologies, Inc. (the Company) on the Form 10-Q for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Harmel Rayat, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that:
(i)
the Report filed by the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(ii)
The information contained in that Report fairly presents, in all material respects, the financial condition and results of operations of the Company on the dates and for the periods presented therein.
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Date: November 8, 2005 |
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| /s/ Harmel Rayat |
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| Harmel Rayat Principal Financial Officer |
This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.