Medical Device Daily National Editor

Aesthetics products developer Artes Medical (San Diego) might well acknowledge the frequent truth of that otherwise over-used cliché, "When it rains, it pours," as it faces, but promises to address, an expanding array of issues.

In a press statement paralleling a recent filing with the Securities & Exchange Commission, the company yesterday listed the following: that it has filed suit against two of its founders and former executives; that it is in a proxy fight with a disenchanted shareholder; that it has received a Nasdaq delisting notice; and that it is looking at "strategic alternatives," this latter coming with other boilerplate language commonly used to acknowledge significant management difficulties.

Artes said in its statement that it will provide the necessary discussion and explanation concerning these issues at its annual meeting Oct. 30.

But wait, there's one more item to be added to the above list:

Following the release of the Artes statement, Dr. H. Michael Shack, the dissident shareholder and self-described "proxy organizer," issued a statement saying it reflects the view of other "dissatisfied shareholders" that his proxy group has designated William Kachioff as the "future" CFO of Artes.

The statement describes Kachioff as having "extensive operational, financial and management experience, including 18 years in life science companies," listing five of those companies, including Abbott Laboratories (Abbott Park, Illinois), from 1998 to 2001.

Artes, developer and marketer of the recently FDA-approved injectable filler Artefill, a treatment designed to smooth "smile-line" wrinkles, has failed to soar into the profit stratosphere this year. It reported a profit of $865,000 last quarter, putting it far short of a projected profit in the several millions for 2008, and clearly prompting Shack's proxy feud (Medical Device Daily, Aug. 13, 2008). He is proposing a list of five alternates as nominees to the company's board.

The company said that it filed suit this past Friday against Stefan Lemperle and Gottfried Lemperle company co-founders who had served in top executive positions and as directors charging breach of contract, fraudulent inducement and interference with the company's operations. Artes is seeking compensatory damages, punitive damages and injunctive relief.

The Lemperles were ousted from the company in 2006 and provided with what Artes terms, in its SEC filing, as "substantial severance packages in exchange for their complete disassociation from the company," along with an agreement to refrain from interfering in its business.

The agreement with Stefan Lemperle, it said, specifically prohibited him from "encouraging stockholders to challenge management or decisions of the company's board" through November 2009. But Artes said that the Lemperles never intended to comply with these terms and that they have "conspired" to undermine its operations in order to regain control of the firm.

Artes connects this charge with the proxy fight that has been launched by Shack.

Artes says that Shack's five nominees if selected, becoming a majority of the board have been "hand-picked" by the Lamperles.

It says that two of Shack's nominees, Terry Knapp and Charles Schliebs, were recommended to be company directors by Stefan Lemperle in June 2006. And two others, Barry Vogel and Robert Binkele, "have close ties with and were introduced to the company by Stefan Lemperle and a former officer of the company ..."

The lawsuit also alleges that the Lemperles shared proprietary information about the company, and that they "communicated this confidential or proprietary information to other stockholders of the company, including Shack [and] the Lemperle nominees," thus violating their separation agreements.

Additionally, the company has challenged Shack's attempt to have shareholders vote on his nominees, saying that they are not legally eligible for selection at the meeting. It contends that Shack did not notify the company concerning his proposals, as required by the company's bylaws and that it has received a legal opinion backing that view.

Other issues that the company says it will address at its annual meeting:

It will discuss its response to a delisting notice received from the Nasdaq Aug. 19, the Nasdaq saying that its stockholders' equity at June 30 was less than $10 million, thus falling below the requirement for continued listing.

It will seek stockholder approval for a fund-raising effort via sale of company stock.

It will discuss a range of other alternatives it is considering, including the possibility of a "change of control" or sale of the company. Artes says that its current market value is under-valued and that, while exploring these alternatives, including the expansion of its portfolio through the purchase of additional "medical and aesthetics products."

In the statement from Shack's proxy group designating Kachioff as future CFO of the company, Kachioff says, "[G]iven my professional background combined with the strong attributes and market potential of ArteFill, I believe that along with a new management team and sufficient capital, Artes Medical can regain full compliance with Nasdaq continued listing standards and become a profitable company in a relatively short amount of time.

"I expect the combination of these two events will be highly important to building value in Artes and something the marketplace will recognize once confidence is restored. It is critical that Artes Medical immediately rationalize expenditures, increase profit margins, refocus on increasing market share and pursue additional medical indications for its unique platform technology, as well as align its personnel structure with its financial goals in order to achieve profitability as soon as possible."

The proxy group also said that it continues to hear from "concerned shareholders" of Artes "calling for a change in management because they strongly believe in ... ArteFill and its future potential as a platform technology for the treatment of various medical conditions."

The statement is accompanied by testimonials from three plastic surgeons concerning the value of Artefill in their practices.

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