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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year enCommission File Number: 0-16375
THERMOGENESIS CORP.
(Exact name of Registrant as specified in its charter)
Delaware 94-3018487
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(State of Incorporation) (I.R.S. Employer
Identification No.)
3146 Gold Camp Drive
Rancho Cordova, CA 95670
(916) 858-5100
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(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock Nasdaq SmallCap Market
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 __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment of this Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing sale price on September 15, 2000, was
$77,874,670.
The number of shares of the registrant's common stock, $.001 par value,
outstanding on September 15, 2000 was 26,231,026.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the registrant's annual meeting of stockholders to be held on
December 14, 2000.
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TABLE OF CONTENTS
Page Number
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ITEM 1. Business...............................................................3
(A) General and Historical Development of Business......................3
(B) Description of the Business.........................................5
(C) Factors Affecting Operating Results.................................17
ITEM 2. Description of Properties ............................................35
ITEM 3. Legal Proceedings ....................................................35
ITEM 4. Submission of Matters to a Vote of Security Holders ..................35
ITEM 5. Market for the Registrant's Common Stock
and Related Stockholder Matters ......................................35
ITEM 6. Selected Financial Data ..............................................36
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ...............................................37
(a) Overview ........................................................37
(b) Results of Operations ...........................................37
(c) Liquidity and Capital Resources .................................39
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk............39
ITEM 8. Financial Statements and Supplementary Data ..........................40
ITEM 9. Changes in and Disagreements with Accountants on Accounting
And Financial Disclosure ............................................60
ITEM 10. Directors and Executive Officers of the Registrant ...................60
ITEM 11. Executive Compensation ...............................................60
ITEM 12. Security Ownership of Certain Beneficial Owners and Management .......60
ITEM 13. Certain Relationships and Related Transactions .......................60
ITEM 14. Exhibits..............................................................61
(a) Financial Statements ..............................................61
(b) Reports on Form 8-K ...............................................61
(c) Exhibits ..........................................................61
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PART I
ITEM 1. BUSINESS
(A) General and Historical Development of Business
The Company was incorporated in Delaware in July 1986 as InstaCool Inc. of North
America, and subsequently merged with Refrigeration Systems International, Inc.,
a California corporation. In January of 1995, the Company changed its name to
THERMOGENESIS CORP. ("Company") to better reflect the thermodynamic blood
processing segment of the biotechnology industry that it intended to service
through development of new products. The Company designs, manufactures and
distributes equipment to process therapeutically valuable blood components
including stem cells and surgical sealants. Initially, the Company developed
medical devices for ultra rapid freezing and thawing of blood components, which
we manufacture and distribute in the niche markets in the blood banks of 32
countries.
Historically, the Company's primary revenues were from sales of ultra rapid
blood plasma freezers and thawers to hospitals, blood banks, blood transfusion
centers, and plasma collection centers under US Food & Drug Administration
("FDA") clearance to market in the United States. These product lines consist of
hardware and software, but no disposables.
Beginning in late 1993, and with accelerated research and development efforts
from 1996 to 1999, the Company completed development of two new technology
platforms, each of which will give rise to multiple medical devices targeted at
a number of different medical and surgical applications. These two technology
platforms are viewed by the Company as micro-manufacturing platforms that
produce biopharmaceutical drugs composed of stem cells, proteins, enzymes or
other blood components that have therapeutic applications for treatment of human
disease. The technology platforms are generically referred to as the
BioArchive(R) Platform and the CryoSeal(R) Platform. The first product developed
under the BioArchive platform, the BioArchive Stem Cell System, was launched in
the fourth quarter of fiscal year (FY) 1998, and the first product developed
under the CryoSeal Platform, the CryoSeal AHF System received FDA premarket
clearance in February 1999.
The Company's completion and transfer of those two new technology platforms to
manufacturing allowed a significant reduction in research and development
expenses in FY1999 over FY1998, a trend that continued through FY2000. Research
and development efforts in FY2000 focused on the development and manufacturing
transfer of the next generation of the CryoSeal Platform, the CryoSeal FS System
("FS" refers to Fibrin Sealant, a two-component biopharmaceutical drug which can
be used to control or minimize bleeding during surgery and as a tissue
adhesive/sealant).
Much of the research and development resources for FY2000 were dedicated to two
disposables associated with the CryoSeal platform. The CP-2, plasma processing
disposable, is used to harvest both components of Fibrin Sealant from a single
unit of autologous or allogeneic plasma when loaded into the CS-1 device. The
CP-2 plasma processing disposable includes a new device for the preparation of
Thrombin, the Thrombin Activation Device (TAD). This unique marriage of
technology enables the CP-2 to simultaneously produce both components of a
Fibrin Sealant (Cryoprecipitate and Thrombin) from a single unit of plasma.
The Company continued with its efforts to gain FDA clearance for the CryoSeal FS
System for which the pivotal milestone was finalization of the design of the
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CP-2 plasma processing disposable and successful manufacturing transfer to the
OEM. Initial pilot manufacturing lots were utilized to initiate safety testing
as well as to validate the sterilization of the CP-2 disposable in its final
packaging configuration. Subsequent lots, whose production was initiated during
FY2000, are expected to be used to perform a three site pre-clinical trial in
the first half of FY2001. The Company plans to execute a pivotal clinical trial
to demonstrate the safety and efficacy of Fibrin Sealant produced by the
CryoSeal FS System as a hemostatic agent used to control bleeding during liver
resectioning surgery.
Corporate Strategy
The Company's strategy with its blood plasma freezers and thawers, was to
develop superior blood processing devices for the niche blood processing markets
where new products could quickly establish credibility for the Company's
proprietary thermodynamic technology. The Company believed that by concentrating
its products to serve the blood component production industry, many customers,
such as the Community Blood Centers, the American Red Cross or other blood
transfusion societies of various countries, would validate the Company's
proprietary thermodynamic technology for rapid freezing of blood plasma to
achieve higher yield of the FVIII protein. These products received 510(k)
clearance to market, and are sold to hospitals and blood component production
facilities through a telemarketing staff in the United States and through
distributors in 32 countries.
In 1994, the Company recognized that the blood plasma freezing and thawing
markets were limited in size, and also perceived the Company's proprietary
thermodynamic technology could have significant application in processing
specific bio-pharmaceutical products derived from single units of human blood
that would compete in significantly larger markets. After initial research, the
Company began to focus its technology development towards harvesting Factor VIII
and fibrinogen rich cryoprecipitate from blood plasma for use as an intravenous
treatment for hemophilia and as one of two components in fibrin sealant, a
hemostatic agent and tissue adhesive for surgical use. Simultaneously, the
Company embarked on extensive research and development efforts, in conjunction
with The New York Blood Center ("NYBC") Placental Blood Program to develop
systems and processes to harvest, concentrate, cryopreserve and archive
therapeutic units of hematopoietic stem and progenitor cells from
placental/umbilical cord blood ("PCB") (donated following the birth of an
infant). Like bone marrow, stem cells from umbilical cord blood can be used to
reconstitute a person's hematopoietic and immune system which has been destroyed
as a result of intensive chemotherapy and radiation resulting from the treatment
of diseases, such as leukemia lymphomas and various genetic disorders.
In order to effect the new strategic direction, the Company needed to spend
significant amounts of money in order to fund the research and development of
these two technology platforms, and to build a solid infrastructure and
management team to move the Company through its next stage of growth. The
Company, with only limited revenues generated from operations in the blood
plasma freezer and thawer industry, was forced to seek financing through equity
transactions on several occasions in order to fully fund the research and
development efforts and the infrastructure needed to manufacture medical devices
under FDA requirements. Research and development on the first two platform
technologies, and development of the first two products under those platforms,
was completed by the end of FY1998.
During FY1999, the Company continued to significantly restructure its operations
and management in order to prepare for the anticipated regulatory clearance in
the United States of the CryoSeal AHF System. This process continued in FY2000
as the Company hired three additional sales personnel and a laboratory
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application specialist capable of selling and technically supporting both of the
Company's new platforms. Simultaneously, the Company focused on driving cost of
sales down, and significantly cutting administration expenses. The impact over
the last 2.5 years has been to reduce the number of fulltime employees in the
Company by 50%. The management team has closed its third fiscal year as a
strong, cohesive leadership team, and more importantly, an infrastructure of
experienced middle management has been put in place in all functions. Management
believes the company is now positioned to move quickly toward profitability as
revenues from new products begin to materialize.
For four consecutive fiscal years, the Company invested significant research and
development expenses and general operating expenses required to manufacture,
validate and launch the BioArchive and CryoSeal technology platforms, while
building and maintaining an ISO 9000/FDA compliant business environment. During
May 2000, the Company retained UBS Warburg as its investment bank and
immediately initiated a number of activities aimed at significantly increasing
its market capitalization and market coverage. The Company, with the assistance
of UBS Warburg, is pursuing strategic alliance partners with considerably
greater financial and marketing resources than the Company in order to maximize
the commercial value of the CryoSeal and BioArchive platforms.
(B) Description of the Business
Overview of the Ultra Rapid Heat Transfer Technology
The Company's Ultra Rapid freezers and thawers use heat transfer liquids, rather
than gases such as air, carbon dioxide or nitrogen to transfer heat to and from
a biological substance. The Company's patented thin flexible plastic membrane
system is automatically interposed between the heat transfer liquid and the
container housing the blood component. While flash-freezing blood plasma, this
flexible membrane allows the use of a non-toxic, low-viscosity silicone heat
transfer liquid to be refrigerated to -40C and pumped into the freezing chamber
in order to achieve a rapid transfer of heat without leaving a residue on the
exterior surface of the blood container. Tests of the technology performed by
the Hague Center of the Netherlands Red Cross reports that 300 ml bags of plasma
were core frozen in 30 minutes versus 90-120 minutes in air blast freezers which
resulted in 18 to 32% more factor VIII in the cryoprecipitate from the frozen
plasma.
Further, the flexible membrane freezing technology also allows the plasma bag to
freeze in a vertical position causing air bubbles to rise to the top surface of
the bag, so that plasma, when frozen, does not get trapped in the ports and lost
when separated from the bags at the plasma fractionaters -- a notable advantage
over conventional freeze methods which require the bags to lay on trays and
freeze on their sides.
In late FY1999 the Company's MP1100 MicroCascade ultra rapid plasma freezer, the
first major upgrade of the plasma freezer line, was introduced to the
marketplace. During FY2000, unit sales of the MP1100 reached 18 units, 16 of
which were domestic sales. In contrast, FY1999 sales of the MP1000, the model
replaced by the MP1100, equaled six, all of which were sold internationally
(four units of the MP1100 were sold domestically in the 4th quarter of FY1999).
The MicroCascade is a breakthrough new refrigeration technology that provides
radically accelerated freezing performance. The small, lightweight (<100 lbs)
integrated MicroCascade compressor/condenser utilizing compact, light weight
Schroll compressors provides refrigeration capacity equivalent to a bulky, heavy
eight horse power conventional remote compressor/condenser. The advantage of the
MicroCascade technology is that expensive and inflexible remote condenser
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installations are not required. This flexibility allows laboratories to quickly
start up or modify their production routing by rolling in the MP1100, plugging
it into the electrical outlet and immediately begin flash freezing plasma. The
MP 1100 freezer was designed to meet unprecedented performance standards:
- - Produce fresh frozen Plasma (FFP) Core Temperature of -30oC in less than 20
minutes, 33% faster than previous ThermoGenesis' freezers and five times
faster than competitive air blast freezers.
- - Operate at a noise level less than 85 decibels.
Management believes the MP1100 MicroCascade is currently the fastest method of
freezing plasma available to blood component manufacturing centers.
The Company's plasma and red blood cell thawers utilize algecide treated water
to rapidly transfer heat through the patented flexible membrane system into the
frozen blood product. In thawing tests performed by Company engineers, which
compared the performance of the Company's thawer versus a microwave thawer, it
was demonstrated that frozen plasma rose to a transfusible temperature (20oC)
faster and more homogeneously in the ThermoGenesis thawer than when thawed in
the microwave thawer.
The Company's Ultra Rapid Freezers and Thawers are the premium performance
products in the market offering to customers clinically significant improvements
in their plasma products. The Company pioneered the use of liquid heat transfer
media in the blood bank industry over ten years ago. This was followed in 1993
by the development of the "flexible membrane pocket" as a means to improve the
safety and convenience of the technology by eliminating direct contact of the
heat transfer fluid with the plasma bag.
Today, the Company still maintains the premier technology position in the plasma
freezing market segment, with competitors offering primarily 30-year-old blast
freezing (forced air) technology. A direct result of this advantage was the
Company's success in establishing a significant market position in transfusion
societies and blood banks around the globe.
Freezers
The Company has four models of freezers which vary primarily by capacity
and condenser type. The MP 2000 and MP 1100 are suited for large
laboratories running approximately 750 bags of plasma per day. The MP 750
and MP 500 are suited for medium sized labs running 250 to 749 bags per
day.
Thawers
The Company has three models of thawers. They vary primarily by capacity:
The MT202 thaws two bags simultaneously, and the MT204 and the MT210 four
and ten bags respectively.
BioArchive Platform Products
The BioArchive Stem Cell System was the first product developed under the
BioArchive System technology platform. In collaboration with the NYBC, the
Company developed a disposable blood processing bag set which provides a sterile
method for collecting, concentrating and cryopreserving stem and progenitor
cells contained in PCB. These life giving stem and progenitor cells are targeted
for therapeutic use in patients who suffer from malignancies and genetic
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diseases of the blood and immune system such as leukemia, lymphomas, diverse
inherited anemias, immunodeficiencies, acquired aplastic anemia and
hypoproliferative disorders.
The BioArchive Stem Cell System features a robotic cryogenic device that
automatically freezes, archives and manages an inventory of up to 3,626 PCB
units of stem and progenitor cells for transplant. The proprietary device also
controls and records the freezing profile of each PCB donation in nitrogen
vapor, after which the PCB unit is robotically transferred to a specified
indexed location in liquid nitrogen. The BioArchive System tracks the storage
address of each PCB stem cell unit and assures that only the specifically
chosen, Human Leukocyte Antigen (HLA) matched PCB unit is retrieved when
selected for a human transplant recipient without exposing the other archived
samples to detrimental warming effects. The PCB stem and progenitor cell
donations are collected, processed, cryopreserved and transfused utilizing three
proprietary sterile disposable bag sets developed jointly by NYBC and the
Company and licensed to Pall Medical Corporation, a Division of Pall Corp. for
manufacturing and distribution in North America & Europe. The Company
re-acquired the rights to distribute the bag sets under its own name throughout
the rest of the world, except Japan.
PCB stem and progenitor cell transplants are a viable and preferable treatment
to bone marrow transplants. Extraction of bone marrow is expensive, painful and
time consuming for the donor. More significantly, there are an estimated 10,000
to 15,000 patients turned away for transplants each year due to an inability to
find a suitably matched bone marrow donor. Further, there is a significant risk
that a bone marrow transplant will cause a condition in the transplant patient
called Graft vs. Host Disease ("GVHD"). The immature nature of stem cells from
umbilical cord blood appear to result in a reduced rate of GVHD and allow
engraftment with less than perfect donor matches. The collecting of the donated
blood (the cells are harvested from the placenta and umbilical cord after a
healthy birth) does not risk either the mother or the infant, and converts what
once was treated as biological waste into a life giving therapy. The success of
PCB stem cell transplant procedures utilizing units from the NYBC PCB Bank under
the direction of Dr. Pablo Rubinstein, one of the world's foremost experts in
the area of PCB stem cell transplants, has been well documented by articles in
the New England Journal of Medicine (NEJM), the Proceedings of the National
Academy of Science (PNAS) and other peer review journals.
The National Institute of Health, (NIH), through the National Heart, Lung &
Blood Institute, (NHLBI), has sponsored a $30 million program to advance PCB
stem cell banking in the United States and has chosen to exclusively utilize the
BioArchive sterile, disposable collection, processing, freezing and transfusion
bag sets. These processing and freezing bag sets are designed for use with the
BioArchive Stem Cell System. Two of the three NHLBI PCB Banks, Duke University
Medical Center and Georgetown University, purchased the BioArchive robotic
archive device.
This global standardization is critical to the Company's marketing plan because
it drives repeat purchases as each cord blood bank expands its inventory, and it
ensures that second and third tier purchasers and academic researchers also
purchase BioArchive Systems.
During FY2000, Duke University continued its efforts to validate and utilize the
BioArchive System in the cryopreservation of peripheral blood (PB) stem cells,
an endeavor that could significantly expand the potential market for the
BioArchive System. This clinical study received IRB clearance at Duke in August
1999 and is expected to be completed in early FY2001.
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Key milestones in cord blood stem cell therapy during FY2000 included: (a) the
first cure of a sickle cell anemia patient, (b) the first cure of a thalasemia
patient, (c) documentation of transplants in over 1,000 patients from the NYBC
PCB inventory, (d) treatment of the Japan nuclear accident victim with stem
cells from cord blood, and (e) a joint research program between NYBC and the
Company successfully documented the loss of viability of stem cells subjected to
Transient Warming Effects ("TWE"). The BioArchive System, by virtue of its
integrated design, reduces TWEs by a factor of ten or more over conventional
cryogenic equipment. This data was presented at the Fourth International
Symposium of Hematopoietic Stem Cell Transplantation in Tokyo, Japan on July 6,
2000 and also presented at the FDA/NHLBI's Unrelated Allogeneic Cord Blood
Banking & Transplant Forum in Bethesda, Maryland on August 14 & 15, 2000.
Conclusions were: (a) TWEs can cause measurable decreases of cell viability, (b)
The damage encountered in these experiments appears to depend on the magnitude
of warming and to be cumulative when the TWE is repeated five times, and (c) The
nature and extent of TWE-caused damage on frozen hematopoietic cell function
needs to be assessed further to establish optimal storage and transportation
conditions.
Equally important was the fact that the scientific journal, SCIENCE, nominated
Stem Cells as the "1999 Breakthrough of the Year" based not on their amazing
ability to reconstitute the immune system of a human being, but their unbridled
promise to serve as the basis for tissue and organ regeneration. Management
believes the inventory needed for this rapidly growing area of research could
very well be stored in our BioArchive Systems.
During FY2000, six (6) more BioArchive Systems were placed, bringing the global
total of units placed to 25 systems. PCB Banks acquiring the BioArchive Stem
Cell System in FY 2000 included: Hyogo Cord Blood Bank in Kobe City, Japan;
Centro Nacional de la Transfusion Sanguinea Blood Bank in Mexico City, Mexico;
Blood Transfusion & Hematology Center in Ho Chi Minh City, Vietnam; Coriell
Institute for Medical Research, Camden, New Jersey; Liege Cord Blood Bank, at
the University Hospital in Liege, Belgium; and NYBC, New York, NY (third unit).
Based on preliminary market data available in this newly emerging market, the
Company estimates that if the FDA licenses PCB stem cells in Year 2001 as
anticipated, and new disease categories such as sickle cell anemia, thalassemia
and solid tumor cancers begin to be treated with PCB stem cell, then as many as
100 PCB banks will form over the next four years and a typical PCB bank could
purchase and operate two to four BioArchive Stem Cell Systems.
An additional customer base for the BioArchive System is expected to be the
approximately 400 centers in the United States which collect and cryopreserve
autologous hematopoietic stem and progenitor cells sourced from the peripheral
blood (PB) of patients with solid tumors, such as breast cancer, who will
subsequently undergo chemotherapy and radiation. After this treatment, the
previously harvested and stored cells are returned to the patient to
reconstitute their hematopoietic system. Duke University's acquisition of a
second BioArchive System for the purpose of validating the system's capabilities
for cryopreserving PB stem cells places the Company on the verge of opening up a
significant new segment of this emerging cellular therapy market.
BioArchive Clinical Data
In Vitro Tests The Placental Cord Blood (PCB) stem and progenitor cell
processing bag sets were tested at the Placental Blood project at the New York
Blood Center (NYBC), the world's largest PCB Bank, where progenitor cell
recoveries were recorded. The Company believes that the ninety-five percent
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progenitor cell recoveries reported by NYBC utilizing the bag sets are the
highest of any cord blood stemcell processing system available today.
In Vivo Tests It is expected that patient outcome data derived from patients
receiving PCB transplants prepared with these processing bag sets will be
provided to the FDA by the PCB banks in the United States. These centers include
the New York Blood Center, the NIH PCB banks at Duke University Medical Center,
Georgetown University Medical Center, and the UCLA Medical Center.
It is anticipated that similar patient outcome data will be provided to the
appropriate regulatory authorities directly by the PCB Banks in each foreign
country in which the BioArchive Systems are in operation. As of June 30, 2000
those countries included Finland, United Kingdom, Germany, Japan, Spain,
Belgium, The People's Republic of China, and Taiwan.
BioArchive System for Other Biological Products
The Company believes that with minimal modifications, the BioArchive System and
dedicated disposables can be easily reconfigured to process and store other
biological substances such as heart valves, sperm cells, human eggs, virus
samples, biopsy specimens, cell lines, blood tissue, and saliva samples for DNA
matching. The Company has completed conceptual design of a system to hold 53,000
two-milliliter cryovials, the most common storage container cryogenic in use
around the world. The Company has initiated a market research program expected
to be completed by mid-FY2000 and finalize customer requirements for this larger
market opportunity. FDA clearance is not required in order to market the
BioArchive System for the processing and cryopreservation of non-transfused
biological substances.
BioArchive Platform Disposables
In addition to the three bag sets utilized to collect, process, and transfuse
PCB Stem Cells which are manufactured and distributed under license by Pall
Medical Corporation (Europe and North America) and Nissho Corp (Japan), the
Company manufactures and sells three additional disposables for the protection
of the PCB units during inter-laboratory transfers and shipment to the
transplant centers which the Company believes will provide an ongoing revenue
stream.
(a) Canisters
The freezing bag is placed in the canister before it is frozen and it remains in
the canister while it is stored in liquid nitrogen. The thermal properties of
the canister augment heat transfer during freezing and physically protect the
unit when it is removed from the BioArchive System.
(b) Canister Sleeve
The insulated canister sleeve is inserted into the retrieval cartridge prior to
a specimen retrieval. During the retrieval process, the canister is
automatically inserted into the insulated canister sleeve; where it protects the
contents of the canister from warming and cushions the canister from physical
shocks.
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(c) Overwrap Bag
The overwrap bag is formed from -200(degree)C glass transition plastic and
provides a possible secondary barrier against potential contamination by
pathogens as a result of a leaking or an otherwise contaminated freeze bag also
stored in the BioArchive System.
CryoSeal Platform Products
Patients who suffer from wounds or other medical conditions which are treated by
proteins, enzymes or growth factors commonly sourced from plasma pooled from
thousands of paid individuals have legitimate concerns regarding their risk of
infection by blood borne viruses, and prions (e.g. Creutzfeldt-Jakob Disease or
CJD and nvCJD). Currently available viral inactivation technologies are capable
of inactivating only those viral pathogens previously known to infect humans.
The larger the population used to create a pooled plasma blood product, the
greater the chances that one of the donors will cross contaminate the entire
pool.
The Ever Growing Risks from Non-Autologous Blood Products
Blood-derived products have saved many lives; however, they have also caused the
transmission of many infections. Blood component manufacturers and regulators
face the constant threat of new diseases which can evade current blood
purification techniques. The Company believes that sharing of human blood is by
its nature risky and it is a risk worth taking only if there are no appropriate
alternatives.
Mad Cow Disease
Recent publications in Lancet demonstrate that the rate of deaths due to nvCJD
(the human counterpart to Mad Cow Disease) has almost doubled (14 during the
first six months) in the year 2000 versus 1999 (18 for the entire year). While
the number of deaths are still quite small, if the rate of increase were to
continue for the next 12 years, then the death rate would surpass 100,000 in the
UK alone. National governments are extremely concerned about the future of this
disease because: (a) the mortality rate for nvCJD approaches 100%, the disease
may lie dormant for 10 years before it manifests itself, (b) there is today no
rapid diagnostic test for screening for nvCJD and (c) to date, all means of
viral inactivation fail to rid plasma samples of this deadly pathogen.
Additionally, the origin of the nvCJD in the UK has been traced back from man to
cow to sheep. Scrapie is the name of the disease manifested in sheep. The CJD
spongiform is thought to have jumped species from sheep to cows, which were in
turn fed to humans, when in the late 1980's the new variant (nv) CJD emerged in
humans. In August of 1999, the FDA placed a ban on blood donation on any
American who had spent a significant amount of time living in the UK. This ban
eliminated approximately 500,000 donors from the US donor pool, a pool already
experiencing a shortage of approximately 300,000 donors. There may be a point in
time where the shortage of US donors will dictate that new methods capable of
producing autologous blood products, such as the CryoSeal FS System, be utilized
in US blood centers. In June 2000, another ominous milestone occurred in the US
livestock industry, when the first herd of sheep in the U.S. suspected of being
infected with scrapie was ordered destroyed by the United States Department of
Agriculture. In Sept. 2000 it was reported by researchers in England that prions
in sheep blood could be transferred by blood transfusions.
Hepatitis B and C
An example of blood-borne disease transmission is described in the May 1999
issue of International Blood/Plasma News. It provides a brief report on the
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incidence of liver cancer in Japan that bluntly portrays the long range "time
bomb" nature of blood borne pathogens, with stark similarities to the nvCJD
story above:
"Some 32,000 people suffering from liver cancer die every year in Japan,
representing the highest per capita rate of any industrialized country,
according to the Japan Society of Hepatology. Hepatitis B or hepatitis C
accounts for 90% of Japanese cases of liver cancer, with an average 30-year
span between infection and manifestation of the cancer. The rise in liver
cancer incidence is largely attributable to hepatitis C contracted from
blood transfusions, which can be traced to the establishment of commercial
blood banks after World War II, as well as extensive blood-requiring
surgeries to treat pulmonary tuberculosis. Liver cancer represents the
second biggest killer among various types of tumors affecting Japanese men.
While transmission of hepatitis C from infected blood products has become
almost 100% preventable, the number of liver cancer cases is projected to
increase over the next decade among patients already long-infected with
hepatitis virus." (El-Serag H and Mason A. "Rising Incidence of
Hepatocellular Carcinoma in the United States." The New England Journal of
Medicine. Volume 340, No. 10, March 11, 1999; pp. 745-750. Editorial: pp.
798-799)
What should be remembered is that blood donations were not routinely screened
for hepatitis C until 1992, and, until then the regulatory authorities were
proclaiming the blood supply safe. What is clear from this simple incident is
that the guardians of the public health can be tragically misinformed with
deadly consequences that can span a half century.
More recently a number of thoughtful articles by research scientists have
appeared in clinical journals that predict that germs will be discovered to be
the primary cause of certain diseases not conventionally believed to be
connected to infectious pathogens. Specifically, a number of cancers as well as
heart disease have been linked to prior infections (often asymptomatic) by
various viral and bacterial agents.
The Company also believes that while current and future viral inactivation
technologies do offer a high degree of safety from "known" viral pathogens,
autologous blood products are the only absolute means of preventing the
infection tragedies detailed above, while still delivering care that can often
only be achieved through blood- based products. Should an autologous donation
not be feasible for any reason, the Company strongly believes that blood
products prepared from a single unit of allogeneic plasma dramatically reduces
the odds of blood product contamination versus those blood products prepared
from pools of thousands of individual donors. Both of these overriding safety
principles are resident in the capabilities of the CryoSeal FS System.
The Company believes that the CryoSeal Platform products provide a superior and
safer approach to producing therapeutic doses of these proteins, enzymes and
growth factors. Each CryoSeal System is a micro- manufacturing platform which
harvests and concentrates these therapeutic blood components from a single unit
of plasma (allogeneic or autologous), or in the case of such medical conditions
as hemophilia, from a directed donor.
(a) CryoSeal AHF System
The CryoSeal AHF System mates the CryoSeal device with the Company's
proprietary computer software and a dedicated blood processing container (CP-1)
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to harvest cryoprecipitated AHF in less than one hour. Cryoprecipitated AHF is a
FDA licensed blood product for the intravenous treatment of hemophilia and is
currently manufactured from single units of plasma by blood banks over a period
of two to four days using four separate pieces of equipment. The CryoSeal AHF
System automatically produces cryoprecipitated AHF from a single unit of
allogeneic plasma, with concentrations of clotting and adhesive proteins
significantly higher than federal standards, in approximately one hour.
(b) CryoSeal FS System
Commercial fibrin sealants originally used bovine-derived thrombin to initiate
clot formation. Bovine-derived thrombin was both readily available and
inexpensive. With the emergence of nvCJD in humans in the late 1980's, the
European Community has now prohibited the use of bovine-derived thrombin in
commercial fibrin sealants. Consequently, commercial fibrin sealant
manufacturers began introducing thrombin sourced from pooled human plasma, which
also introduces risk of contamination from these same infectious CJD prions as
well as infectious bacteria and viruses known to reside in human blood. In order
to provide a safer alternative, during FY1999 the Company developed a new
proprietary technology for preparing thrombin from a small aliquot of the
donor's plasma in as little as 50 minutes. The Company's product strategy was to
combine the Thrombin Activation Device (TAD) with the original CP-1 plasma
processing disposable to create the first medical disposable (CP-2) capable of
simultaneously preparing both components of Fibrin Sealant (Cryoprecipitate and
Thrombin) from a single unit of plasma.
By June 30, 1999, the Company completed proof of concept of TAD (formerly
referred to as the Autologous Thrombin Activation Kit or ATAK. Following this
development, the Company executed a license agreement with its strategic
partner, ASAHI MEDICAL CO. LTD. in Japan. The Company now believes it is the
only competitor in the $400 million fibrin sealant industry to develop a 100%
single donor fibrin sealant, meaning that it contains only those proteins
present in the original donor's plasma. The Company's competitors utilize viral
inactivated plasma sourced from thousands of individuals paid for their plasma
and subsequently combined with bovine aprotinin, or they utilize autologous
plasma, without concentrated fibrinogen, combined with bovine collagen and
bovine thrombin. Due to the absence of concentrated fibrinogen, this latter
category of "biological sealants" lacks the viscoelastic, burst strength, and
resistance to arterial pressure typically associated with fibrin sealants.
While the Company has not moved from its original position that the safest blood
product is an autologous blood product (sourced from the patient's own blood),
the Company's market research determined that many US and European surgeons
trust single donor, viral screened allogeneic products such as red cells,
platelets, plasma or Cryoprecipitated AHF more than any blood product sourced
from "pools" of blood from thousands of paid individuals. These large pools,
however, are the source of proteins for the commercially available fibrin
sealants. As a result of these findings, the Company expanded its original
Autologous Fibrin Glue ("AFG") strategy to include the product of autologous and
single donor allogeneic Fibrin Sealant (FS). The Company now believes that the
risks associated with blood products can be mitigated to various levels as
desired by the patient and their surgeon/physician. Foremost on the list of safe
blood products are those prepared from the patients own blood i.e. autologous
blood products. However, the Company also believes that the odds of contracting
a viral infection from a blood product prepared from a single unit of plasma are
far less than if that blood product was prepared from a large pool (thousands of
paid donors) of plasma. Should that plasma be screened for all known viral
pathogens as is required by the FDA, then the odds are again substantially
decreased. Should that screened plasma be held frozen for six months until the
13
donor could return be screened again to see if any antibodies to viral pathogens
had appeared in the donor's blood during the six month "quarantine period", then
the risk is again substantially reduced. The CryoSeal FS System products patient
and surgeon a conscious choice to use either single donor viral screened
allogeneic plasma or autologous plasma as the source material for the
preparation of Fibrin Sealant to be used in that patient's surgery.
This new marketing strategy significantly increases the market potential of the
CryoSeal FS System in that only 10% of blood products used in US surgeries are
autologous.
Financial Model for Blood Center Adoption of CrySeal FS System
In recent years, many US blood centers are operating at a loss. The reasons
behind this financial downturn are many, including: capitation of prices on
blood products by managed care providers, increased competition among blood
centers for regional markets, forcing blood products to be priced as
commodities, and the upward spiral of technology used to produce safer blood
products e.g. leukocyte reduction filtration, viral detection and inactivation,
etc, often at significantly greater costs. The Company sees a major opportunity
to create Fibrin Sealants, a new licensed blood product, that provides the blood
center the opportunity to convert a low profit commodity such as FFP into a
highly profitable product, Fibrin Sealant. The CryoSeal FS System is intended to
be operated by blood centers to manufacture Fibrin Sealant Kits, frozen and
ready for use by the surgeon. The CP-3 was designed with a cost structure which
allows both the Company and the blood center to make an attractive gross profit
while presenting extremely competitive pricing to the end user, the
hospital-based surgeon.
In order to maximize the cost effective utilization of CryoSeal fibrin sealant
production runs, the CP-2's large individual storage containers for the final
Thrombin and Cryoprecipitate preparations were modified so that four smaller
aliquots could be prepared from a single fibrin sealant harvest and used in four
different surgeries. This design change resulted in a dramatic reduction in the
cost per ml of the Fibrin Sealant to the hospital/surgeon/patient for the
surgeries which require only these small volumes. The Company believes that
Fibrin Sealant prepared by the CryoSeal FS System may provide lower costs than
the commercial fibrin sealants available today. The above design change was
implemented by successfully designing a Sealant Aliqoting System (SAS) that
enables the operator to create individual sterile overwrapped Fibrin Sealant
(FS) Kits of between 1 ml to 6 ml of Fibrin Sealant already loaded into the 3ml
syringes used in the Company's proprietary Fibrin Sealant Applicators (each kit
has one 3ml syringe for Thrombin and a second 3 ml syringe for Cryoprecipitate).
The individual FS Kits are stored frozen for up to 90 days at -20oC or lower
(the Company has studies underway designed to extend this frozen shelf life to
as much as 6 months at -20oC or -70 oC). An individual FS Kit can be removed
from the freezer and thawed at 37oC in ~10 minutes. The thawed FS Kit is easily
transferred to the sterile field via a tear-away feature of the sterile overwrap
bag, and immediately assembled into a Fibrin Sealant applicator ready for use in
surgery. Minimization of preparation labor and time of commercial Fibrin
Sealants is one of the features most strongly requested from the market research
conducted by the Company. A ten-minute preparation time should provide the basis
to explore future applications of FS Kits in Emergency Room trauma cases, a
currently unserved market for all commercial Fibrin Sealants.
The third powerful attribute of the CryoSeal FS System is that the above method
of Fibrin Sealant production fits perfectly with the established model of blood
component manufacturing in Blood Centers. The CryoSeal FS System offers the
Blood Center a perfect opportunity to produce a new licensed and highly
14
profitable blood product to sell to its existing customer base, the hospitals.
Marketing to the 150 US Blood Centers rather than the 4000 US hospitals,
dramatically reduces the Company's dependency on the establishment of a
strategic partner with distribution channels to the latter. The Company has
effectively sold to Blood Centers on a global basis since its inception.
CRYOSEAL Clinical Data
Fibrin glue prepared from cryoprecipitate harvested by the CryoSeal System from
single units of blood plasma has undergone ex vivo and in vivo testing
throughout its development in order to prepare for our pivotal clinical trials
for that indication. The system is currently not approved by the FDA for uses
other than the automated production of Cryoprecipitated AHF for the treatment of
hemophiliacs.
Ex vivo assays were performed to fully characterize the CryoSeal
cryoprecipitate of Factor VIII fibrinogen and other clotting and adhesive
proteins which determine the tensile and adhesive strength of the resulting
clot. These assays of fibrinogen, Factor VIII and other proteins exceeded
AABB standards for Cryoprecipitated AHF and, as a result, the Company
received 510(k) clearance to market the CryoSeal AHF for manufacture of the
licensed blood product, cryoprecipitated AHF, for the intravenous treatment
of hemophilia.
Ex vivo animal tests were performed to determine if the tensile and adhesive
strength of the CryoSeal fibrin clot, when activated with thrombin, was
comparable to competitive fibrin glues on both porous and non- porous tissue
surfaces. Further, in sealing parenchymal air leaks in swine lungs, CryoSeal
fibrin glue compared favorably to cyanoacrylate glue.
In vivo animal surgery was performed on pigs to implant skin grafts which
demonstrated that CryoSeal fibrin glue was fully comparable to competitive
fibrin glues in bonding the graft to the wound site and achieving graft
survival through rapid re-vascularization of the graft. Additional in vivo
surgeries were performed in rats in which CryoSeal fibrin glue was
demonstrated to be superior to matrigel as a fixation media for Scwhann
cells to stimulate axonal growth in the severed spinal cords.
Finally, CryoSeal fibrin glue was utilized in 34 in vivo human surgeries at
three different hospitals, in the U.S., Italy and Canada (orthopedic, neuro,
liver, spine), which demonstrated results comparable to currently available
fibrin glues in regards to tissue adhesion and hemostasis.
(c) CryoFactor APDGF System
The CryoFactor APDGF System is intended to harvest a full array of autologous
platelet derived growth factors immersed in a solution of adhesive proteins from
a patient's own blood donation for the treatment of chronic dermal wounds such
as diabetic, decubitus and venous stasis skin ulcers. This growth factor
solution is produced by the CryoSeal Platform device (CS-1) with specified
software and disposable processing containers. Formal clinical trials and FDA
clearance will be required to market the product in the United States.
(d) MicroSeal System
MicroSeal is a bench top system that is intended to prepare up to 1 ml of Fibrin
Sealant from only 35 cc of patient blood. This volume of Fibrin Sealant is
15
sufficient for the many thousands of microsurgeries that occur each year that
could benefit from a safe, effective biological tissue sealant or hemostatic
agent, such as: closing macular holes in the eye, minimizing scarring in
fallopian tube surgery, sealing excised cataract wounds, bonding skin flaps in
minor cosmetic surgery, repairing ruptured eardrums, sealing vascular stents and
providing hemostatis in oral surgeries. This system represents a miniaturization
of the technologies that comprise the CryoSeal FS System.
CryoSeal System Disposables
Each CryoSeal System requires the use of single disposables which the Company
believes will provide a long term revenue stream for the Company.
(i) CryoSeal AHF CP-1
The CP-1 is the primary disposable of the CryoSeal System used for the
preparation of cryoprecipitated AHF. The CP-1 contains the plasma throughout the
freezing, thawing and rocking procedures during which the cryoprecipitated AHF
separates from the cryo-poor plasma. Upon separating the Cryoprecipitate is
followed by the cryo-poor plasma been transferring back to the transfer pack by
peristaltic pumping.
The CP-1 received 510(K) clearance from the US FDA in February 1999 and from the
Canadian MH Win in October 1998.
(ii) CryoSeal FS CP-2
The CP-2 plasma processing disposable is used to simultaneously harvest and
concentrate both components (Cryoprecipitate and Thrombin) of the Fibrin Sealant
prepared by the CryoSeal FS System. The CP-2 is similar to the CP-1, except that
it also includes the Thrombin Activation Device (TAD) used for the extraction
and concentration of thrombin. The final Cryoprecipitate preparation is stored
in the over wrapped Cryoprecipitate Storage Tube and the final thrombin
preparation is stored in the over wrapped thrombin storage syringe.
(iii) CryoSeal FS CP-3
Like the CP-2, the CP-3 plasma processing disposable simultaneously harvest and
concentrates both components (Cryoprecipitate and Thrombin) of the Fibrin
Sealant prepared by the CryoSeal FS System. The CP-3 is similar to the CP-2,
except, it has a Sealant Alliquoting System attached which consists of four FS
Kits, each made up of a pair of 3ml plastic syringes, overwrapped in a sterile
closed overwrap bag. Each pair of syringes is filled simultaneously by the
operator with the Thrombin and Cryoprecipitate preparations. The operator may
choose to fill each syringe with 0.5 ml of fluid up to 3 ml of fluid, thus
enabling them to prepare Fibrin Sealant Kits from 1 ml to 6 ml in volume. After
preparation of each individual kit, the kit is sterilely disconnected using an
RF sealer and placed in storage at a temperature of -20oC or-70oC until use.
16
(iv) Liquid Medication Dispensers
The Liquid Medication Dispensers were designed for use in surgery to apply two
medications to a surgical site simultaneously and in equal volumetric
proportions. The Liquid Medication Dispensers consist of a Handle that enables
precise metered application of the preparation (200 microliters per trigger
pull), a Drop Tip which delivers individual drops of a preparation or a
continuous line of the preparation, and a Spray Tip that produces two
overlapping spray patterns of the two preparations, with mixing occurring at the
site of application, rather than inside the spray nozzle.
The Liquid Medication Dispensers received 510(k) clearance for marketing from
the FDA in 1996 and clearance for sale in Canada from Health Canada in 1998.
(v) Fibrin Sealant Applicators
The Fibrin Sealant Applicators are based on the design of the Liquid
Medication Dispensers except that they will be marketed as part of the CryoSeal
FS System and cleared by the FDA for the purpose of applying Fibrin Sealant
prepared by the CryoSeal FS System during liver resectioning surgery. The number
of tips has been expanded to three to include a new Fast Clotting Spray Tip
designed specifically to deliver a homogeneous layer of Fibrin Sealant which
clots instantly on contact with the target tissue. Furthermore, a new
Non-Metered applicator model has been developed which eliminates the use of the
Handle, thus enabling a continuous spray to be established by merely pressing on
a cap that connects the two plungers of the 3 ml syringes containing the
Cryoprecipitate and the Thrombin.
(vi) CryoFactor APDGF CP-4
The CP-4 is the primary disposable for harvesting and concentrating solutions of
platelet derived growth factors from platelet rich plasma. The CP-4, like its
predecessors, will require FDA clearance to market in the United States.
Research and development of this product will be dependent on cash flows during
FY2001.
(vii) CryoFactor Patient Kit
The Patient Kit will be the means by which the therapeutic CryoFactor APDGF
solution is aliquotted into individual dosages for application by the patient or
home care specialist. The design is not at this time finalized. Final Research
and development of this product will be dependent on cash flows during FY2000.
Service Revenue
The Company's service revenues are generated primarily from a maintenance
service contract on the 76 MP2000 freezers sold to Aventis in fiscal 1996 and
fiscal 1997. The Company has performed maintenance for these freezers since the
end of their 12 month warranty period. Additionally, the Company offers
installation services to BioArchive system customers. The separate fee charged
for installation service is included in service revenues.
17
(C) FACTORS AFFECTING OPERATING RESULTS
We Have Incurred Net Losses Since Our Inception and Expect Losses to Continue.
Except for net income of $11,246 for fiscal 1994, we have not been profitable
since our inception. For the fiscal year ended June 30, 2000, we had a net loss
of $5,818,000, and an accumulated deficit at June 30, 2000, of $37,339,000. The
report of independent auditors on our June 30, 2000, financial statements
include an explanatory paragraph indicating there is substantial doubt about our
ability to continue as a going concern. Although we are executing on our
business plan to market launch new products, continuing losses will impair our
ability to fully meet our objectives for new product sales and will further
impair our ability to meet continuing operating expenses that may result in
staff reductions and curtailment of clinical trials currently planned. See Risk
Factor entitled "If We Are Unable to Raise Funds Our Growth May Be Adversely
Affected" below.
If We Are Unable to Raise Funds Our Growth May Be Adversely Affected.
Historically, we have had to seek capital for our growth and operations due to
lack of revenues. Based on proceeds of approximately $3.7 million received in
our most recent private placement, we believe we will have sufficient working
capital for our 2001 fiscal year operations. However, if actual sales do not
meet expectations, or marketing, production and clinical trial costs increase
significantly, we will need additional financing to complete and implement our
long-term business objectives. Further, delays in obtaining required
governmental clearances for, or additional testing requirements prior to,
marketing our new products will result in decreased revenues and increased costs
that may require us to seek additional financing. In the event that there is a
cash shortage and we are unable to obtain a debt financing, additional equity
financing will be required which will have the effect of diluting the ownership
of existing stockholders.
Our Failure to Develop New Products Will Adversely Effect Our Future Growth.
Historically, substantially all of our sales have been from products related to
the freezing, thawing, and storing of blood plasma. Because we expect this
segment of the blood plasma market to have limited growth, new products for the
biotechnology market will have to be successfully developed and marketed for
future growth. We are currently focusing on developing and marketing novel blood
processing systems such as: (1) the CryoSeal AHF System for automated production
of Cyroprecipitated AHF; (2) the CryoSeal FS System for the automated production
of autologous or allogeneic blood components used as a surgical glue; (3) a
MicroSeal AFG system; (4) a CryoFactor APDGF System for automated concentration
of growth factors from blood; and (5) the BioArchive System for collecting,
processing, controlled-rate freezing, and inventory management of blood products
in liquid nitrogen utilizing disposable containers. Although these products use
technology related to our core competence, they also represent a departure from
our former core blood plasma business. Further, although we have had discussions
with experts in areas of application for these products, these products are
still in their development and/or initial market phase. No assurance can be
given that all of these potential products can be successfully developed, and if
developed, that a market will also develop for them.
If We Fail to Maintain Our Nasdaq Listing, Liquidity of the Company's
Stockholders Will Be Adversely Affected. The Nasdaq SmallCap Market on which our
common stock is traded has established certain maintenance listing requirements
that must be satisfied in order for a company's shares to continue to be listed.
Currently, our common stock meets the Nasdaq SmallCap Market maintenance listing
requirements. However, if we continue to incur losses, this may affect our
ability to meet the net tangible assets of $2 million requirement or minimum Bid
Price of $1 per share requirement as set by the Nasdaq SmallCap Market. We
cannot assure that we will always be able to meet the Nasdaq SmallCap Market
listing requirements in the future. Failure to meet the Nasdaq SmallCap Market
listing requirements could result in the delisting of our common stock from the
Nasdaq SmallCap Market which may adversely affect the liquidity of our shares.
18
Our Business is Heavily Regulated, Resulting in Increased Costs of Operations
and Delays in Product Sales. Most of our products require FDA clearance to sell
in the U.S. and will require clearance from comparable agencies to sell our
products in foreign countries. These clearances may limit the U.S. or foreign
market in which our products may be sold or circumscribe applications for U.S.
or foreign markets in which our products may be sold. The majority of our
products related to freezing blood components are currently exempt from the
requirement to file a 510(k) pre-market application, and our CryoSeal AHF System
received clearance from the FDA in February 1999. These products are currently
marketed and sold worldwide. Further, our products must be manufactured under
principals of our quality system for continued Certificate European (CE) marking
that allows our products to be marketed and sold in Europe, which are similar to
the quality system regulations of both the FDA and California Department of
Health. Failure to comply with those quality system requirements and regulations
may subject the Company to delays in production while it corrects any deficiency
found by either the FDA or the State of California during any audit of our
quality system. With limited working capital and resources, there is no
assurance that we will not be found to be out of compliance, resulting in
warning letters or, in worst case, temporary shut down of manufacturing while
the non-conformances are rectified.
Influence By the Government and Insurance Companies May Adversely Impact Sales
of Our Products. Our business may be materially affected by continuing efforts
by government, and third party payors such as medicare, medicaid, and private
health insurance plans, to reduce the costs of healthcare. For example, in
certain foreign markets the pricing and profit margins of certain healthcare
products are subject to government controls. In the U.S., we expect that there
will continue to be a number of federal and state proposals to implement similar
government control. In addition, increasing emphasis on managed care in the U.S.
will continue to place pressure on the pricing of healthcare products. As a
result, continuing effort to contain healthcare costs may result in reduced
sales or price reductions for our products. To date, we are not aware of any
direct impact on our pricing or product sales due to such efforts by governments
to contain healthcare costs, and we do not anticipate any immediate impact in
the near future.
Our Inability to Protect Our Patents, Trademarks, and Other Proprietary Rights
Could Adversely Impact Our Competitive Position. We believe that our patents,
trademarks, and other proprietary rights are important to our success and our
competitive position. Accordingly, we devote substantial resources to the
establishment and protection of our patents, trademarks, and proprietary rights.
We currently hold patents for products, and have patents pending for additional
products that we market or intend to market. However, our actions to establish
and protect our patents, trademarks, and other proprietary rights may be
inadequate to prevent imitation of our products by others or to prevent others
from claiming violations of their trademarks and proprietary rights by us. If
our products are challenged as infringing upon patents of other parties, we will
be required to modify the design of the product, obtain a license, or litigate
the issue, all of which may have an adverse business effect on us.
Failure to Protect Our Trade Secrets May Assist Our Competitors. We use various
methods, including the use of confidentiality agreements with employees,
vendors, and customers, to protect our trade secrets and proprietary know-how
for our products. However, such methods may not provide complete protection and
there can be no assurance that others will not obtain our know-how, or
independently develop the same or similar technology. We prepare and file for
patent protection on aspects of our technology which we think will be integrated
into final products early in design phases, thereby limiting the potential
risks.
19
Competition in Our Industry is Intense and Will Likely Involve Companies With
Greater Resources Than We Have. We hope to develop a competitive advantage in
the medical applications of our products, but there are many competitors that
are substantially larger and who possess greater financial resources and
personnel than we have. Our current principal market is the users of ultra-rapid
blood plasma freezing and thawing equipment. There are four companies that sell
freezers to the blood plasma freezing industry which are larger and possess
greater financial and other resources than we do. The CryoSeal System may face
competition from major plasma fractionaters that currently sell fibrin glue
sourced from pooled plasma outside the U.S. With regard to the BioArchive
System, numerous larger and better-financed medical device manufacturers may
choose to enter this market as it develops.
We Have a Limited Marketing and Sales Force for New Products Which May Delay Our
Goal of Increased Sales Levels. We currently sell our existing medical devices
through a direct sales and marketing force, and our foreign distribution
network. Although we have entered into exclusive distribution agreements for the
area of the two new platform products and we continue to seek strategic
partners, there are no assurances that the distributors will produce significant
sales of the systems.
Our Lack of Production Experience May Delay Producing Our New Products. We
currently manufacture our blood plasma thawers and freezers that are less
technologically sophisticated products. Although we have redesigned our
manufacturing facility to accommodate the BioArchive System and the CryoSeal
System, we do not have significant experience in manufacturing those more
complex medical devices or in the manufacture of disposables. Furthermore, there
can be no assurance that our current resources and manufacturing facility could
handle a significant increase in orders for either the BioArchive System or the
CryoSeal System. If we are unable to meet demand for sales of the new systems,
we would need to contract with third-party manufacturers for the backlog, and no
assurances can be made that such third-party manufacturers can be retained, or
retained on terms favorable to us and our pricing of the equipment. Inability to
have products manufactured by third parties at a competitive price will erode
anticipated margins for such products, and negatively impact our profitability.
Our New Products Are at Initial Market Introduction, and We Are Not Sure the
Market Will Accept Them. The market acceptance of our new products in
development will depend upon the medical community and third- party payers
accepting the products as clinically useful, reliable, accurate, and cost
effective compared to existing and future products or procedures. Market
acceptance will also depend on our ability to adequately train technicians on
how to use the CryoSeal System and the BioArchive System. Even if our new
product systems are clinically adopted, the use may not be recommended by the
medical profession or hospitals unless acceptable reimbursement from health care
and third party payers is available. Failure of either of these new systems to
achieve significant market share could have material adverse effects on our long
term business, financial condition, and results of operation.
Failure to Keep Our Senior Management Team May Adversely Affect Our Operations.
We are dependent upon the experience and services of Philip H. Coelho, Chairman
and Chief Executive Officer, and James H. Godsey, President and Chief Operating
Officer. The loss of either person would adversely affect our operations. We
have obtained key man life insurance covering Mr. Coelho in the amount of
$2,000,000 as some protection against this risk.
Product Liability and Uninsured Risks May Adversely Affect Continuing
Operations. We may be liable if any of our products cause injury, illness, or
20
death. We also may be required to recall certain of our products should they
become damaged or if they are defective. We are not aware of any material
product liability claim against us. Further, we maintain a general liability
policy that includes product liability coverage of $1,000,000 per occurrence and
$2,000,000 per year in the aggregate. However, a product liability claim against
us could have a material adverse effect on our business or financial condition.
Our Products May Contain Software Defects Which Will Adversely Affect Our
Products and Sales. Our CryoSeal System and BioArchive System rely on computer
software components that direct the harvesting process of the CryoSeal System,
and the controlled-rate freezing, storage and retrieval robotics of the
BioArchive System. The software program for these products, including updated
versions in the future, may contain undetected errors or failures. Despite
testing by us and our customers, there can be no assurance that errors will not
be found in the software during continuous use. Unfound errors may result in
loss or delay in market acceptance, which could have an adverse material effect
on our business, financial condition, and results of operations.
The Market Price for Our Common Stock May Fall if Selling Stockholders or Other
Security Holders Sell A Substantial Amount of Their Stock. Under an agreement
with the holders of the Series B preferred stock, we registered for resale
shares of common stock to be issued upon the conversion of the Series B
preferred stock and upon the exercise of the warrants. We have also registered
additional shares of common stock that may be issued upon conversion of the
preferred stock if we elect to add accrued dividends to the conversion value of
the preferred stock. Further, if a substantial decline in the average market
price of our common stock were to occur, the conversion price would be set at a
lower price and additional shares may also be issued. Because the trading price
for our common stock may be affected by the number of shares available for
resale, the market price of our common stock could drop as a result of sales of
a large number of shares of our common stock in the market after this offering,
or due to the perception that such sales could occur.
We May Have to Register Additional Shares of Common Stock Underlying the Series
B Preferred Stock Which May Adversely Affect the Market Price for Our Common
Stock. We believe that we have registered a sufficient number of shares of
common stock underlying the Series B preferred stock. However, because the
Series B preferred stock contains a conversion provision that is subject to
readjustment, a continued decrease in the price of our common stock may require
us to register additional shares of common stock underlying the Series B
preferred stock. The additional issuance of these shares of common stock and
their subsequent sale could result in a substantial decrease in the price for
our common stock.
We Could Be Required to Redeem Our Series B Convertible Preferred Stock at a
Premium Which Would Require a Large Expenditure of Capital and Could Have a
Material Adverse Affect on Our Financial Condition. The holders of our Series B
convertible preferred stock have the right to force us to repurchase their
Series B convertible preferred stock at a premium if the Company takes certain
action, deemed to be solely within the Company's control such as, causing the
Company to be delisted from the Nasdaq Market, or taking other defined action
detrimental to the Series B preferred stockholders. The repurchase of our Series
B convertible preferred stock would require a large expenditure of capital and
we may not have sufficient funds to satisfy the redemption. In addition, you
could face further dilution of your ownership percentage as a result of a
decline in the market price of our common stock or in the event of certain
defaults which would result in an increase in the number of shares of common
stock issuable upon conversion of the Series B convertible preferred stock. Any
such event could adversely affect the price of our stock and our ability to
raise additional capital. We have no intention of taking action that would
require such an event.
21
We Do Not Pay Cash Dividends. To date, we have not paid any cash dividends, and
we do not expect to pay any cash on our common stock in the foreseeable future.
The Series B convertible preferred stock carries a mandatory 6% dividend, paid
quarterly, out of funds legally available. At our election, that dividend may be
accrued to the conversion value of that series of stock in lieu of any cash
payment. With our current cash needs, we do not anticipate that the dividend
will be paid in cash and, therefore, additional shares of common stock may be
issued upon conversion.
The Conversion Price of the Series B Preferred Stock is Subject to Readjustment
That May Adversely Affect the Market Price For a Share of Common Stock. As of
June 30, 2000, the Series B preferred stock may be converted into shares of
common stock at $1.6425 per share. However, on December 22, 2000, the conversion
price will be adjusted on such date and every six months thereafter to be the
lesser of (a) 130% of the fixed conversion price of $2.2719 or (b) 90% of the
average market price for the ten days prior to such adjustment. In a declining
market, this conversion feature may have the effect of creating additional
downward pressure on the price of our common stock.
The Holders of the Series B Preferred Stock May Deliver Registered Shares of
Common Stock Against Short Positions Which May Put Downward Pressure on the
Price of a Share of Our Common Stock. The holders of the Series B preferred
stock may deliver registered common stock against a short position. Because the
conversion price represents a discount of the current trading price of a share
of common stock, a large number of sales of common stock by, or coverage of a
large short position by, the Selling Stockholder will have an adverse effect on
the price of our common stock. The Series B preferred stockholders have agreed
that they will not engage in any open market transactions in our securities,
including any short sales, during the 20 trading day period prior to any
conversion price re-set date.
PRODUCT AND PROGRAM MARKET INFORMATION
THE MARKET NEED FOR FREEZERS
Blood banks preserve blood and plasma products by freezing them in sterile
plastic bags and then thawing them before use. Whole blood collected from donors
is seperated into its components:at Blood Centers. Erythrocyte concentrates,
platelet concentrates, fresh frozen plasma and Cryoprecipitated AHF. Fresh
frozen plasma (FFP) contains the labile as well as the stable components of the
coagulation, fibrinolytic, and complement systems; the proteins that maintain
pressure and modulate immunity; and other proteins that have diverse activities.
At specialized plasma fractionation facilities, frozen plasma is further
processed into plasma derivatives for use in component therapy, such as albumin,
factor VIII and IX, antithrombin III, immunoglobulins, etc. The typical uses for
FFP are for direct transfusion, and as a source of material the for the
preparation of Cryoprecipitated AHF. The use of FFP in the U.S. has reached
almost 2 million units annually in the USA. One reason for the growth is the
widespread acceptance of the concept of specialized component therapy which is
replacing the transfusion of whole blood.
A unit of plasma is defined as the fluid portion of one unit of human blood that
has been centrifuged to segregate and concentrate the red blood cells (RBC) and
platelets. The plasma fraction is then moved to a satellite bag and frozen solid
at -18(degree)C (or colder) within 6 hours of collection. Upon freezing, this
plasma is labeled FFP. Ultra-rapid freezing through the point of fusion provides
for optimum recovery of labile proteins within FFP.
22
Conventional freezing systems rely on air blast freezing; however, this method
requires a considerable length of time (90-120 minutes) to thoroughly freeze a
unit of FFP. Rapid freezing is one of the easiest steps that a blood bank or
center can take to dramatically improve the quality of their processed plasma.
Studies at blood centers in the Hague (the Netherlands) and Hokkaido (Japan)
showed that the Factor VIII protein yield from cryoprecipitate from plasma could
be increased by as much as 18-32% by using the Company's ultra-rapid freezer
instead of the air blast freezers.
Freezer Market
The market for Ultra Rapid freezers is concentrated within the blood banks,
blood transfusion centers, and plasma collection centers around the world.
The Company believes that a blood bank would typically require 2-6 freezers
depending on facility size and the level of redundant freezing capacity desired.
The Company estimates that there are about 750 blood bank or plasma
fractionation facilities that could require a plasma freezer in the developed
world; these facilities would utilize an installed base of about 2,500 units.
Assuming an eight-year life cycle for a freezer, the available annual market is
about 312 units or 12.5% of those in the field.
Another category of customer is the facilities where plasma fractionators
collect blood plasma from paid donors. These customers require large,
high-capacity freezers. There are approximately 330 such facilities in the US
and Canada. In FY1996 and 1997 Aventis (formerly known as Centeon), the world's
largest fractionator, purchased 76 MP2000 freezers from the Company for their 32
domestic facilities. During FY2000 Aventis acquired one MP2000 and eleven of the
new MP1100 MicroCascade freezers for use in several of its newly acquired
facilities.
Thawer Market
Stored Frozen RBC or FFP require thawing before their transfusion. A process of
rapid homogenous thawing is desirable so that emergency uses can be quickly met.
Rapid thawing also reduces the time available for loss of labile proteins (i.e.
- -- FVIII) or growth of bacteria that may have contaminated the unit during the
phlebotomy. Conventional thawing methods often utilize simple 37(degree)C open
air water baths which thaw frozen plasma slowly (i.e. ~30 minutes), and were
susceptible to contamination by airborne bacteria requiring repeated
decontamination of the water to maintain acceptable environment and conditions
for thawing. With the advent of the THERMOGENESIS CORP. sealed, membrane pocket
thawers, the hospital blood bank can thaw frozen blood plasma in approximately
ten minutes with substantially reduced maintenance requirements.
Thawers are sold to a wider market than freezers; all hospitals which perform
surgery. The Company believes that there are 5,000 potential thawer customers in
the United States and another 9,000 customers around the world. The typical
thawer customer has two thawers on site.
THE MARKET NEED FOR THE BIOARCHIVE SYSTEM
The BioArchive System has been designed as a special-purpose cryo-preservation
system for stem cell units sourced from PCB or PB. The Company believes the
market for these storage systems will be predominantly driven by the demand for
23
PCB stem cell donations and transplants in the future. This is a new and still
emerging market.
Clinical Value of PCB Stem Cells.
The clinical value of PCB hematopoietic stem cells has been well documented in
the treatment of leukemias, lymphomas, diverse inherited anemias, and
hypoproliferative stem cell disorders. (Rubinstein et al. "Outcomes among 562
recipients of placental-blood transplants from unrelated donors." The New
England Journal of Medicine. Volume 339, No. 22, November 26, 1998; pp.
1565-1577). Dr. Rubinstein's benchmark article analyzes the outcomes of 562
post-100 day placental cord blood PCB transplant recipients and concludes the
following:
o PCB transplants regularly engraft, produce low rates of GvHD and
achieve survival rates comparable to those from unrelated BMT.
o Cell dose / Kg patient weight is important for timing and incidence of
engraftment; and
o HLA compatibility was important for engraftment and survival.
These clinical results make clear that thousands of patients' lives can be saved
each year if a significant inventory of PCB units is cryo-preserved and
archived, ready for immediate transplant as soon as the patient is diagnosed.
Estimates vary, but there is some consensus that a cryopreserved PCB inventory
of 1 million (less than 20% of the 5.6 million potential bone marrow donors
currently in the international bone marrow registries) would provide excellent
Human Leukocyte Antigen (HLA) matches (6-of-6 or 5-of-6) and high cell doses (>
100 x 109/Kg body mass) to the tens of thousands of patients annually which
physicians wish to treat with a stem cell transplant.
Transplant candidates also include the patients undergoing autologous stem cell
transplants to treat solid tumor cancers (-e.g. breast cancer). Unfortunately,
autologous transplant outcomes have not been superior to patientsreceiving only
chemotherapy and radiation. This patient population would now have access to a
well-matched unrelated PCB unit which could establish a new, rather than
previously-defeated, immune system to resist the re-emergence of cancer cells
not killed by the chemotherapy and radiation treatment.
An equally important benefit of this large-standing inventory is that it would
allow the exploration of the treatment of other major diseases that may well be
cured by stem cell transplants, such as sickle-cell anemia (80,000 patients per
year) ("Sickle Cell Anemia." National Heart, Lung, and Blood Institute (NIH),
NIH Publication No. 96-4057, November 1996; p. 2), AIDS (200,000 patients per
year) ("Surveillance for AIDS-defining Opportunistic Illnesses, 1992-1997."
Morbidity and Mortality Weekly Report: CDC Surveillance Summaries. Volume 48,
No. SS-2, April 16, 1999) and thalassemia (600,000 patients per year)
("Thalassemia (Cooley's Anemia) Clinical Research Network." National Heart,
Lung, and Blood Institute (NIH), RFA HL-99-016, March 11, 1999). An exploratory
clinical study reported an 81% cure rate for treating sickle cell anemia with a
stem cell transplant.
24
PCB Stem Cell Banking
PCB samples are collected by draining blood from the placenta and umbilical
cord, which previously had been considered medical waste, the stem cells are
then concentrated within in a final volume of 20 ml with the use of the
company's proprietary processing bag sets.
In order to achieve an optimum tissue match with patients of diverse ethnic
backgrounds, a large number of PCB samples must be banked, catalogued, and
available for retrieval. Statistical analysis suggests that 1 million samples
will provide sufficient volume and diversity to produce a high cell dose and an
excellent tissue match for 95% of the world's patients who may require a
transplant. These two factors, individually, and especially in combination,
significantly increase the likelihood of patient survival.
The Company expects that the health authorities in most countries will establish
PCB stem cell banks in order to help build this 1 million sample inventory. The
Company is aware that more than 14 PCB banks already exist in the United States
and expect more to initiate operation over the next five years.
The Company believes that most collected PCB samples will be stored in the
Company's BioArchive Systems. Given that each BioArchive System holds 3,626
samples, approximately 275 Systems will be required to serve the full
implementation of the projected storage program.
The Company expects that within five years more than 10,000 patients each year
will seek PCB transplants from the global network of PCB banks utilizing the
BioArchive Stem Cell System. These patients will be drawn from the following
patient populations (Scientific American. "Twelve Major Cancers." September,
1996):
LEUKEMIAS:
Acute Myelogenous Leukemia (AML)
Acute Lymphoblastic Leukemia (ALL)
Chronic Myelogenous Leukemia (CML)
ANEMIAS:
Sickle Cell Anemia
Aplastic Anemia
Thalassemia
Fanconi's Anemia
Congenital Hypoplastic Anemia (Diamond Blackfan Anemia)
LYMPHOMAS:
Non-Hodgkin's Lymphoma
Hodgkin's Lymphoma
SOLID TUMORS:
Ovarian Cancer
Small Cell Lung Cancer
Breast Cancer
Medulloblastoma
Testicular Cancer
Ewing's Sarcoma
Currently, the total number of hematopoietic stem cell transplants performed
annually in the US and Europe is estimated to be about 30,000 (Time Magazine.
"Heroes of Medicine". Fall 1997 Special Issue. pp. 69- 70), and the total number
25
of people who die while waiting for a bone marrow transplant is about 60,000
(Time Magazine. "Heroes of Medicine". Fall 1997 Special Issue. pp. 69-70).
In addition to those diseases listed above for which hematopoietic stem cell
transplants are already being used for treatment, stem cell therapy is being
investigated as a possible treatment for the following diseases (Time Magazine.
"Heroes of Medicine". Fall 1997 Special Issue. pp. 69-70):
IMMUNE DISEASES:
Hemoglobinopathies (variety)
Wiskott-Aldrich Syndrome
Severe Combined Immunodeficiency Disease
Agranulocytosis (Kostmann's Syndrome)
HIV
MISCELLANEOUS:
Reticular dysgenesis
Neuroblastoma
GERM CELL TUMORS:
Multiple Myeloma
Myelodysplasia
Rheumatoid Arthritis
Gaucher's Disease
Hurler's Syndrome
PCB vs. other sources of stem cells
There are three practical sources of hematopoietic stem cells for reconstitution
of the blood manufacturing ability of the human body: bone marrow, peripheral
blood, and placental cord blood. Clinical consensus is building that placental
cord blood (PCB) is the best source. See following chart comparing the three
sources:
Source of Stem Cells Advantages Disadvantages
- ---------------------- ---------------------------- ---------------------------
Bone Marrow - Established process - Required near-perfect
- Established registry HLA match
- High cell numbers collected - Experimental procedure
- Donor requires
hospitalizatin and
anesthesia
- Donor pain
- 25K-30K cost
- Unavailable when
needed
- ---------------------- ---------------------------- ---------------------------
26
Peripheral Blood - Anesthesia not required of - Apheresis requires three
donor collections (4 hours
- High cell numbers collected each)
- Experimental procedure
- Donor pain
- Autologous stem cell
units retain cancer cells
- ---------------------- ---------------------------- ---------------------------
Placental/cord Blood - Convert what was - Limited volume of
previously biologic waste placental blood (average
into cell therapy 80 ml)
- No donor pain - Experimental procedure
- Cryopreservation for stored
inventory
- Requires only four out of six
HLA matching
- Immediately available
- Reduced GvHD
- Higher concentrations of
stem cells
- Expected licensure by FDA
in 2000
One of the major advantages with PCB stem cells is that they are harvested from
the placenta and umbilical cord, a normally-discarded tissue. Without risk or
pain to any donor, consequently, harvests can take place in all hospitals in
which babies are born. They can be banked in large numbers for use whenever a
patient is diagnosed. Currently every industrialized country has announced plans
to operate a PCB bank to provide stem cell therapies for their citizens.
BioArchive Customers
- ----------------------------------------------------------------------
PCB Customers Placed Units
- ----------------------------------------------------------------------
New York Blood Center, 3
USA
- ----------------------------------------------------------------------
Duke University Medical 1
Center, USA
- ----------------------------------------------------------------------
Finnish Red Cross, 1
Finland
- ----------------------------------------------------------------------
27
PCB Customers Placed Units
- ----------------------------------------------------------------------
Hokkaido Red Cross, 1
Japan
- ----------------------------------------------------------------------
Centro de Transfusion, 1
Spain
- ----------------------------------------------------------------------
University of Tokyo, 1
Japan
- ----------------------------------------------------------------------
Barcelona CB Bank, 1
Spain
- ----------------------------------------------------------------------
Tzu-Chi Foundation, 1
Taiwan
- ----------------------------------------------------------------------
University of Dusseldorf, 1
Germany
- ----------------------------------------------------------------------
Georgetown Univ. Med. 1
Center*, USA
- ----------------------------------------------------------------------
San Diego Blood Center, 1
USA
- ----------------------------------------------------------------------
Nihon University, Japan 1
- ----------------------------------------------------------------------
GHStem Cell Therapy 1
Center, PRC
- ----------------------------------------------------------------------
Tianjin, PRC 1
- ----------------------------------------------------------------------
London Cord Blood 1
Bank, England
- ----------------------------------------------------------------------
Leuven University, 1
Belgium
- ----------------------------------------------------------------------
Liege University, 1
Belgium
- ----------------------------------------------------------------------
Corielle Research 1
Institute, USA
- ----------------------------------------------------------------------
Hyogo Cord Blood 1
Bank, Japan
- ----------------------------------------------------------------------
Blood Transfusion & 1
Hematology Center,
Vietnam
- ----------------------------------------------------------------------
Centro Nacional de la 1
Transfusion Sanguinea
Blood Bank, Mexico
- ----------------------------------------------------------------------
TOTAL 23
- ----------------------------------------------------------------------
* Relocated to Duke University Medical Center
- ---------------------------------------------------------------------
PB Customers Placed Units
- ---------------------------------------------------------------------
Duke University Medical 1
Center, USA
- ---------------------------------------------------------------------
28
THE MARKET NEED FOR THE CRYOSEAL FS SYSTEM
Fibrin sealants are used by surgeons as hemostatic agents (material used to
control or stop bleeding) or to seal tissue together during surgery. While
sutures and staples will bring tissue edges together very effectively, they do
not have inherent sealing and clotting activity. A 1990 review article in the
journal Transfusion described the motivation behind the Company's development of
its fibrin sealant production system:
"Despite the development of modern surgical techniques and improvement
in intraoperative hemostasis, the search for the perfect hemostatic
agent continues. Technological advances have included improved suture
materials, metallic staples and clips, and a variety of natural and
synthetic hemostasis agents including collagen products (i.e.,
collagen fleece), absorbable gelatin sponges, oxidized cellulose, and
synthetic cyanoacrylate-based glues. Fibrin glue (fibrin sealant) has
been advocated by many surgeons as the material that best approaches
the ideal operative sealant. Abundant reports have appeared, touting
its beneficial properties.
As a naturally occurring and ... human-derived product, the material
appears to have no tissue toxicity, promotes a firm seal in seconds to
minutes, is reabsorbed in days to weeks following application, and
appears to promote local tissue growth and repair. The use of this
material outside of the United States, particularly in Europe, has
flourished. Its use within the United States has lagged more than a
decade behind that of Europe, largely because of the lack of ready
access to commercially prepared materials." (Transfusion, J.W. Gibble
and P.M. Ness, "Fibrin flue: The Perfect Operative Sealant," Volume
30:8. 1990)
The fibrin clot is formed by mixing fibrinogen-rich cryoprecitpitate and
thrombin. Fibrin is completely biodegradable. It's physical/mechanical
properties enable it to serve both as a hemostatic (clot-forming) agent and a
sealant (biologic glue). The formation of a fibrin clot is a natural defensive
mechanism of the body, and therefore completely natural - it is the body's own
acute tissue adhesive. Fibrin dissolves over the four weeks following surgery in
such a way as to allow blood to provide nutrients and healing factors to the cut
tissue edge, and nothing else in the surgeon's armamentarium provides this
capability
Fibrin sealants are used today for a wide variety of surgical procedures. These
include the major blood-loss surgeries of the cardiovascular, pulmonary, and
liver regions. Fibrin sealants are used to seal needle holes, pulmonary leaks,
and to seal slow oozing wounds. Fibrin sealants provide excellent adhesion for
skin graft, plastic surgery procedures, and sealing the dura to prevent cerebral
spinal fluid leaks.
Current Market Spending on Fibrin Sealants
Calendar year 1999 was the first full year in which Tisseel (Baxter) and
HemaSeal (HemaCure) marketed. The Company estimates current worldwide revenue
for fibrin sealants to be between $300 and $400 million. With recent and
expected FDA clearance of new products and the continued growth of the US
market, worldwide revenues are expected to grow to over $700 million by 2005.
In Europe and Japan, approved commercial fibrin sealants sourced from pooled
blood plasma have enjoyed a long-term presence and represent about 90% of the
procedures utilizing surgical sealants in that market. These commercial fibrin
29
glues cost generally $50 to $80 per ml delivered to the wound site. Given their
cost they are typically purchased in smaller volumes of about 5 ml per
procedure. Management believes that commercial fibrin sealants are used in about
300,000 European and 330,000 Japanese surgical procedures. Baxter's Tissucol (a
pre-frozen version of Tisseel) has the largest share of the European market and
Aventis's Beriplast has the largest share of the Japanese market.
Competition
i) Freezers: North American Competitors
In North America, the four major manufacturers of plasma freezers are the
Company, Revco, Forma Scientific and Harris. The chart below lists management's
view of the relative technologies.
Competitor Technology
- --------------------- --------------------
THERMOGENESIS CORP. Liquid heat transfer
- --------------------- --------------------
Forma Scientific Air blast
- --------------------- --------------------
SPX/SGA Division Air blast
- --------------------- --------------------
ii) Thawers: North American Competitors
In North America, the three major manufacturers of plasma thawers are the
Company, Helmer and Cytotherm. The chart below lists management's view of the
relative technologies.
Competitor Technology Advantage Limitations
- -------------- ------------------------- ----------------------- -------------------------
THERMOGENESIS - Membrane pockets - Rapid Thaw - Unit capacity limited
CORP. and semi-closed - Low maintenance to number of
system - Plasma is contained pockets
- Heat transfer fluid in membrane pocket
- -------------- ------------------------- ----------------------- --------------------------
Helmer - Water bath - Contamination
- Open air system of water.
- Frequent water
changes
- Longer thaw
period
- -------------- ------------------------- ----------------------- --------------------------
Cytotherm - Water bath - Same as Helmer
- Open air system
Fibrin Sealants
Many companies seek to take advantage of the surgeon's desire for an
internal surgical sealant that will solve the limitations of today's products.
The Company is aware of five other companies which have developed or are
developing commercial fibrin glues, these include Baxter, HemaCure, Aventis,
30
Bristol Myers Squibb and OMRIX Pharmaceuticals. To date, Baxter and HemaCure
have received FDA clearance to market their products in the US. In addition,
Cohesion Medical and Fusion Technologies produce similar products which are
biological sealants, but are not true fibrin sealants in that they do not
provide concentrated fibrinogen to the wound site. The absence of concentrated
fibrinogen significantly reduces their visco-elastic and burst strength relative
to fibrin sealant. Furthermore, both products contain Bovine thrombin and Bovine
collagen, which increase the risk of transmission of non-human viruses and
prions. A number of companies are also exploring synthetic glues for internal
use. The first of these, Focal's FocalSeal-L, received FDA clearance in May 2000
for sealing air leaks in lungs. The remainder of these products are at various
phases of development.
Cord Blood Banking
The Company believes that the competition for the public cord blood banking
market is limited to manufacturers of individual Cryogenic components (dewars,
controlled rate freezers, LN2, etc.) of conventional systems, such as Taylor
Warton and MVI.
RESEARCH AND DEVELOPMENT
The future R&D activities of the Company will be devoted to the rapid and
successful completion of the CryoSeal FS System's pivotal clinical trial for the
control of bleeding during liver resectioning surgery, and the development of
two new products derived from the CryoSeal FS System research programs.
The MicroSeal(TM) System is a miniaturized version of the CryoSeal FS
System designed for the treatment of outpatient (ambulatory) acute wound
care, which requires only small volumes of Fibrin Sealant. Beginning with
the reforms in Medicare in the early 1980s and accelerating with the
efforts to reduce healthcare costs in the early 1990s and the substantial
advances in minimally invasive surgery techniques, the incidences of
outpatient surgeries have grown dramatically. According to Center for
Disease Control and Prevention (CDC) data, annual outpatient surgeries in
the U.S.A. have grown from less than 2 million in 1981 to 31.5 million in
1996. Each year, surgeries of the nervous system (1.2 million), eyes (5.3
million), ears (0.8 million), nose, mouth, and pharynx (2 million),
respiratory system (4.3 million), cardiovascular system (0.9 million),
digestive system (6.9 million), urinary system (1.4 million), female
genital organs (1.9 million), musculoskeletal system (4.2 million), and
integumentary system (2.3 million) are occurring with the surgical incision
and subsequent bleeding reduced sufficiently to allow the patient to go
home the same day. In the United States these surgeries take place in
approximately 5,000 hospital based surgicenters and 1,700 stand-alone
surgicenters, as well as the 9,000 offices of plastic surgeons, oral and
maxillofacial surgeons, reproductive surgeons and podiatric surgeons. The
Company has targeted development of its MicroSeal System for these
minimally invasive surgical theatres.
When development is completed, the Company intends that the MicroSeal
System will be a small bench top device with small processing and
applicating disposables that will require less than 35 ml of blood drawn in
a syringe to harvest 1 ml of Fibrin Sealant. There are millions of
micro-surgeries that occur each year that could benefit from a safe,
effective biological tissue sealant or hemostatic agent, such as:
hemostasis in endoscopic surgeries, sealing arterial catherizations,
closing macular holes in the eye, minimizing scarring in fallopian tube
31
surgery, sealing excised cataract wounds, bonding skin flaps in minor
cosmetic surgery, and repairing ruptured eardrums.
The CryoFactorTM System relies upon the CryoSeal Platform thermodynamic
processing device and a modified software and blood processing disposable
to harvest and concentrate autologous platelet derived growth factors
(APDGF). The Company intends that the CryoFactor System will be a product
targeted for sale, through distributors, to the chronic wound care centers
in hospitals, stand alone wound care centers, and long term care facilities
for the treatment of chronic dermal wounds such as diabetic, decubitus and
venous stasis ulcers. During FY2000, the CryoFactor System completed the
first of a number of planned pre-clinical animal studies designed to
optimize the concentration, as well as characterize the growth factors
produced in an single cycle of the CryoFactor instrument.
The Company has incurred research and development expenses of $1,624,000,
$2,061,000 and $3,922,000 for fiscal years ending June 30, 2000, 1999 and 1998,
respectively.
DISTRIBUTION CHANNELS
The Company sells its medical products to blood banks and hospitals in
32 countries including the Red Cross or Blood Transfusion agencies of the United
States, Australia, Belgium, Canada, Denmark, France, Germany, Japan, Korea, the
Netherlands, Sweden, and Switzerland. The following describes briefly the
channels of distribution and marketing strategy employed by the Company.
(i) Blood Plasma Freezers and Thawers
The Company has primarily targeted the blood processing industry which consists
of approximately 5,000 hospitals and blood collection centers in the United
States and approximately 20,000 hospitals and blood collection centers in the
industrial nations outside the United States. The Company formulated the
following marketing strategy for the distribution and sale of its blood plasma
freezers and thawers: the United States accounts are serviced either by
employees of the Company or a manufacturing representative and internationally
by regional manufacturing representatives or distributors. The primary thrust of
the Company's marketing efforts focused on hospitals, blood banks such as the
Red Cross, blood transfusion agencies in the United States, Australia, Belgium,
Canada, Denmark, France, Germany, Japan, Korea, Netherlands, Sweden, and
Switzerland and plasma fractionators, such as Aventis.
(ii) CryoSeal FS Systems
The Company's strategy for entering each of the key markets for fibrin sealant
has been to align itself with a larger corporate partner with established
distribution channels in the geographically targeted areas for market
penetration. Asahi Medical Co., Ltd. was selected for the Japan fibrin sealant
market. With the change in strategy associated with the CryoSeal FS System, the
Company is currently reexamining its relationships for US and European
distribution, searching for a partner with strengths in the Blood Banking
community rather than hospital/surgical distribution. Furthermore, during FY2000
the Company crosstrained its senior sales executives on all product lines
(BioArchive, CryoSeal and ThermoLine) and restructured the sales force by key
geography targets. Outside of the U.S., CryoSeal FS System direct sales will be
handled by local distributors, many of whom the Company has existing
relationships with for other products.
32
(iii) CryoFactor APDGF System
The sales and marketing strategy will focus on distribution through corporate
partners on a broad geographical basis. Such a partner would be required to
demonstrate established distribution and support channels capable of reaching
the hundreds of independent wound care centers in the United States, as well as
the hospitals, primary care centers and general physicians. A single U.S.
partner may be more conducive to marketing both the CryoSeal and CryoFactor
Systems to access acute and chronic wound care facilities in the United States,
but further evaluation of market channels for those products must first be
completed by the Company. Foreign markets will be addressed similar to the
domestic market. As of June 30, 2000, there were no formal arrangements in any
market for this future product.
(iv) BioArchive System
The Company has established formal relationships with Pall Medical, a Division
of Pall Corporation for the manufacture and distribution of the disposable bag
sets that are designed for use with the BioArchive Stem Cell System, and
cooperates with Pall Medical on marketing efforts and strategy for all markets
excluding Japan. This arrangement was amended in May 1999 granting the Company
the right to distribute the disposable bag sets outside of North America &
Europe under the Company's name, and again in May of 2000, to directly market
the bag sets in Europe in exchange for an additional royalty fee from Pall
Medical and the continued use of Pall Europe's distribution centers. The Company
previously licensed the manufacture and distribution of the bag sets in Japan to
Nissho Corporation, and also appointed Air Water (formerly known as Daido Hoxan)
as its exclusive distributor for service and sales of the BioArchive System in
Japan. The Company markets the BioArchive System either directly or through
distributors internationally and directly in the domestic markets through
contacts developed early on during the initial efforts in stem cell research and
the subsequent movement to create cord blood stem cell banks.
For non-stem cell applications, the Company ended its market research
relationship with one of North America's largest distributors of liquid nitrogen
and is proceeding to initiate a follow on marketing study designed to finalize
the marketing requirements for a new 53,000 capacity, cryovial-based design for
the BioArchive Platform's application to the cryopreservation of biological
tissue such as sperm, saliva, heart valves, rare cell lines, fertilized human
eggs etc.
MANUFACTURING
The Company has in-house manufacturing capabilities and is currently
manufacturing approximately seventy to eighty percent of its products for sale.
The Company believes that vendors used by the Company are capable of producing
sufficient quantities of all required components. The Company moved to a larger
11,000 square foot facility in July 1994 where it has since consolidated its
manufacturing assembly activities. In February 1997, the Company moved its
sales, marketing and administrative functions, and its research and development
engineering offices into a 17,400 square foot facility.
The Company assembles the BioArchive hardware from multiple subassemblies
supplied by a wide base of skilled vendors. However, the Company manufactures
the robotic, barcode-reading periscope in its entirety at the Rancho Cordova
33
facility. The BioArchive overwrap bag is also manufactured by the Company while
the canister and foam canister sleeve are supplied by OEM vendors.
The CryoSeal Platform requires three patented disposables, all of which must be
delivered to the customer sterilized and ready for use. The Company currently
uses OEM manufacturers to produce these products.
Products manufactured or sold by the Company are warranted against defects in
manufacture for a period of 12 months from shipment when used for the
equipment's intended purpose, which warranties exclude consequential damages to
the extent allowed by law.
MATERIALS USED IN MANUFACTURE OF PRODUCTS
Materials used to produce the Company's products are readily available from
numerous sources. Based upon current information from manufacturers, the Company
does not anticipate any shortage of supply. In 1992 the Company introduced a
replacement heat transfer liquid and refrigerant which is free of
chlorofluoro-carbons (CFC) for use in the Company's proprietary process. The
replacement chemicals are readily available and the Company does not anticipate
any shortages or constraints on supplies.
LICENSES AND DISTRIBUTION RIGHTS
In June 1995, the Company granted the Japanese distribution rights to its
BioArchive System and the Vial BioArchive System to Air Water (formerly known as
Daido Hoxan), Japan. The Company received $350,000 for the distribution rights
and access to the necessary technology. In May of 1999, the Company granted
development, manufacturing and distribution (Japan and Asia) rights to Air Water
for a downsized version of the BioArchive System. The Company received $300,000
for the technology rights and the rights to manufacture and sell the new "mini"
BioArchive in the non-Japan and non-Asia marketplace.
In June 1996, the Company entered into an exclusive manufacturing license and
distribution agreement in Japan for the CryoSeal System (including the ATAK
technology) with Asahi Medical Co., Ltd., of Japan, a division of Asahi
Chemical. Asahi Medical is a leading supplier of artificial kidneys, blood
purification systems and leukocyte removal systems, with annual revenues of $270
million. Asahi will manufacture the CP-1 disposable bag set, purchase the
CryoSeal System thermodynamic processing device (CS-1) and ST-1 and DT-1
surgical applicators from the Company, and market the CryoSeal System in Japan
in return for a license fee, a commitment to purchase the CS-1 device and
related surgical applicators from the Company and a 10% royalty on the sale of
the sterile bag set. The Company recognized $400,000 of revenue for the license
fee in FY1996 and more recently, an additional licensing fee was recognized as
revenue for amending the original contract to include the ATAK technology.
Furthermore, Asahi Medical took a significant equity position in the Company as
part of the ATAK licensing agreement.
In March 1997, the Company and NYBC, as licensors, entered into a license
agreement with Pall Medical, a subsidiary of Pall Corporation, as Licensees
through which Pall Medical became the exclusive world-wide manufacturer
(excluding Japan) for a system of sterile, disposable containers developed by
the Company and NYBC for the processing of hematopoietic stem cells sourced from
PCB. The system is designed to simplify and streamline the harvesting of stem
cell rich blood from detached placenta/umbilical cords and the concentration,
cryopreservation (freezing) and transfusion of the PCB stem cells while
34
maintaining the highest stem cell population and viability from each PCB
donation. These units of PCB stem cells will be "banked" in frozen storage for
hematopoietic reconstitution of patients afflicted with such diseases as
aplastic anemia, hypoproliferative stem and progenitor cell disorders, leukemia,
lymphomas and gaucher disease. In May of 1999, the Company and Pall Medical
amended the original agreement, and the Company regained the rights to
distribute the bag sets outside North America & Europe under the Company's name,
and in May of 2000, the Company negotiated rights to directly market the bag
sets in Europe in exchange for an additional royalty fee, while continuing to
utilize Pall Europe's distribution centers.
In February 1998, the Company entered into an Exclusive European Distribution
Agreement with Dideco, S.p.A., a former subsidiary of Fiat and now a $200
million division of one of Italy's first public companies. As distributor,
Dideco was granted exclusive distribution and service rights for the CryoSeal
System in Europe and certain countries East of the Ural Mountains that formerly
comprised parts of the Union of Soviet Socialist Republics. Under the agreement,
the Company was to manufacture and sell the CryoSeal System and its accessories
to Dideco for distribution in the European Community. The Company has recently
ended this relationship as it prepares to establish a partnership in Europe
designed to strategically position the CryoSeal FS System in Blood Centers
rather than hospitals.
PATENTS
The Company believes that patent protection is important for products and
potential segments of its current and proposed business. The Company currently
holds fifteen (15) patents, and has eight (8) patents pending to protect the
designs of products which the Company intends to market. There can be no
assurance, however, as to the breadth or degree of protection afforded to the
Company or the competitive advantage derived by the Company from current patents
and future patents, if any. Although the Company believes that its patents and
the Company's existing and proposed products do not infringe upon patents of
other parties, it is possible that the Company's existing patent rights may be
challenged and found invalid or found to violate proprietary rights of others.
In the event any of the Company's products are challenged as infringing, the
Company would be required to modify the design of its product, obtain a license
or litigate the issue. There is no assurance that the Company would be able to
finance costly patent litigation, or that it would be able to obtain licenses or
modify its products in a timely manner. Failure to defend a patent infringement
action or to obtain a license or implementation of modifications would have a
material adverse effect on the Company's continued operations.
While patents have been issued or are pending, the Company realizes (a) that the
Company will benefit from patents issued only if it is able to market its
products in sufficient quantities of which there is no assurance; (b) that
substitutes for these patented items, if not already in existence, may be
developed; (c) that the granting of a patent is not determinative of the
validity of a patent; such validity can be attacked in litigation or the Company
or owner of the patent may be forced to institute legal proceedings to enforce
validity; and (d) that the costs of such litigation, if any, could be
substantial and could adversely affect the Company.
REGULATION OF BUSINESS
The FDA regulations govern the Company's operations at its facilities in
connection with the manufacture of its products, and govern the sale and
distribution of those products. Essentially, all medical devices marketed after
May 28, 1976, the date of the Medical Device Amendments to the Food, Drug and
Cosmetic Act ("FDCA"), must receive clearance or clearance from the FDA, unless
exempt by regulation, prior to the marketing or sale of such products or
distribution in interstate commerce. Most of the Company's products require FDA
clearance through a premarket notification process ("510(k) submission"). This
regulatory process requires that the Company demonstrate substantial equivalence
to a product which was on the market prior to May 28, 1976, or which has been
found substantially equivalent after that date. Today, the process of obtaining
FDA clearance can be lengthy, expensive, and generally requires submission of
extensive preclinical data and, in certain cases, in-use or clinical data, to
support a finding of substantial equivalence.
The product development, preclinical and clinical testing, manufacturing,
labeling, distribution, sales, marketing, advertising and promotion of the
Company's research, investigational, and medical devices are subject to
extensive government regulation in the United States, and also in other
countries. Products manufactured in the United States which have not been
cleared by the FDA through a 510(k) submission, or which have not been approved
through the PMA process, must comply with the requirements of Section 801 of the
FDCA prior to export. These devices which are capable of being cleared by the
FDA under a 510(k) submission do not require FDA clearance for export; however,
the Company's products must still comply with certain safety and quality system
requirements.
Non-compliance with applicable FDA requirements can result in fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, distribution, sales and marketing, or refusal of the
FDA to grant clearance of a PMA or clearance of a 510(k). Actions by the FDA
might also include withdrawal of marketing clearances and criminal prosecution.
Such actions could have a material adverse effect on the Company's business,
financial condition, and results of operation.
35
ENVIRONMENTAL MATTERS
The Company has a California Environmental Protection Agency Identification
number for the disposal of biohazardous waste from its research and development
biolab. The Company does not anticipate that compliance with federal, state and
local environmental protection laws will have a material impact on the Company
or require any material capital expenditures under present regulation.
EMPLOYEES
As of June 30, 2000, the Company had 55 full time employees. The Company also
utilizes temporary employees throughout the year to address business needs and
significant fluctuations in orders and product manufacturing. The Company has a
full time human resources specialist and considers its employee relations to be
good.
FINANCIAL INFORMATION ON FOREIGN SALES AND OPERATIONS
The Company has no foreign manufacturing operations. For FY2000, foreign sales
were approximately $1,618,000, or 38% of net revenues. For FY1999, foreign sales
were approximately $2,475,000, or 48% of net revenues. For FY1998, foreign sales
were approximately $2,264,000, or 51% of net revenues.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company leases an approximately 11,000 square foot facility located in
Rancho Cordova, California. This facility is used for the manufacturing and
assembly of the Company's medical devices. The lease expires in January 2002.
The Company leases an approximately 17,400 square foot facility, also located in
Rancho Cordova, California, which is used as the main administrative and sales
office, and used as the Company's research and development engineering office.
This lease expires in December 2001.
Through June 2000, the Company also leased an approximately 5,000 square foot
facility located adjacent to its manufacturing facility in Rancho Cordova,
California. This facility was used for the manufacture and preparation of
certain components and parts of the Company's medical devices that are assembled
at the main manufacturing facility.
At fiscal year end, the Company did not own or lease any other facilities and,
with the exception of short term warehouse space leased and utilized from time
to time, management believes that current facilities are adequate to handle
current and expected operations through fiscal 2001.
ITEM 3. LEGAL PROCEEDINGS
The Company and its property are not a party to any pending legal proceedings.
In the normal course of operations, the Company may have disagreements or
disputes with vendors over the quality or conformance of products manufactured
for the Company. These disputes are seen by the Company's management as a normal
part of business, and there are no currently threatened actions that management
believes would have a significant material impact on the Company's financial
position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to security holders during the fourth
quarter of its last fiscal year ended June 30, 2000.
Executive Officers of the Corporation
The information concerning the Company's Officers required by this Item is
incorporated by reference to the section in Part III of this report entitled
"Directors and Executive Officers of the Registrant".
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock, $.001 par value, is traded on the Nasdaq SmallCap
Market under the symbol KOOL. The following table sets forth the range of high
and low bid prices for the Company's common stock for the past two fiscal years
as reported by Nasdaq. The ranges listed represent actual transactions, without
adjustment for retail markups, markdowns or commissions, as reported by Nasdaq.
36
High Low High Low
- --------------------------- -------- -------- -------------------------- ------- ----------
Fiscal 2000: Fiscal 1999:
- --------------------------- -------- -------- -------------------------- ------- ----------
First Quarter (Sept. 30) $2.156 $1.125 First Quarter (Sept. 30) $2.344 $0.938
- --------------------------- -------- -------- -------------------------- ------- ----------
Second Quarter (Dec. 31) $2.750 $1.500 Second Quarter (Dec. 31) $2.688 $0.688
- --------------------------- -------- -------- -------------------------- ------- ----------
Third Quarter (Mar. 31) $4.125 $2.219 Third Quarter (Mar. 31) $3.313 $1.625
- --------------------------- -------- -------- -------------------------- ------- ----------
Fourth Quarter (June 30) $2.375 $1.563 Fourth Quarter (June 30) $1.750 $0.938
- ---------------------------- -------- -------- -------------------------- ------- ----------
The Company has not paid cash dividends on its common stock and does not intend
to pay a cash dividend in the foreseeable future. There were approximately 461
stockholders of record on June 30, 2000 (not including street name holders).
ITEM 6. SELECTED FINANCIAL DATA
THERMOGENESIS CORP.
FIVE-YEAR REVIEW OF SELECTED FINANCIAL DATA
Summary
of Operations 2000 1999 1998 1997 1996
- ------------------------ --------------- --------------- --------------- ------------- -------------
Net revenues $ 4,211,000 $ 5,108,000 $ 4,482,000 $ 6,614,000 $ 4,125,000
Cost of revenues (4,246,000) (4,435,000) (5,608,000) (4,327,000) (1,760,000)
--------------- --------------- --------------- ------------- -------------
Gross profit (loss) (35,000) 673,000 (1,126,000) 2,287,000 2,365,000
General and
administrative (2,092,000) (2,924,000) (2,133,000) (1,370,000) (426,000)
Selling and
service (2,103,000) (1,744,000) (2,369,000) (2,144,000) (1,173,000)
Research and
development (1,624,000) (2,061,000) (3,922,000) (3,618,000) (1,377,000)
Other income 77,000 81,000 70,000 114,000 85,000
Other expense (41,000) (123,000) (70,000) (75,000) (41,000)
--------------- --------------- --------------- ------------- -------------
Net loss ($5,818,000) ($6,098,000) ($9,550,000) ($4,806,000) ($567,000)
=============== =============== =============== ============= =============
Basic and diluted net
loss per share ($0.30) ($0.52) ($0.54) ($0.32) ($0.05)
=============== =============== =============== ============= =============
Balance Sheet Data 2000 1999 1998 1997 1996
- ------------------------- --------------- ------------- -------------- ------------ ------------
Cash and short term
investments $ 2,550,000 $ 2,327,000 $ 1,975,000 $ 3,511,000 $ 1,243,000
Working capital 4,613,000 5,085,000 3,666,000 6,407,000 3,589,000
Total assets 6,735,000 8,133,000 7,799,000 10,188,000 5,937,000
Total liabilities 1,043,000 1,413,000 2,226,000 2,163,000 1,563,000
Total shareholders'
equity 5,692,000 6,720,000 5,573,000 8,025,000 4,374,000
37
ITEM.7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CERTAIN STATEMENTS CONTAINED IN THIS SECTION AND OTHER PARTS OF THIS REPORT ON
FORM 10-K WHICH ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS AND ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY
DIFFER SIGNIFICANTLY FROM THE PROJECTED RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT AFFECT ACTUAL RESULTS INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN ITEM 1- BUSINESS - UNDER THE SUBSECTION ENTITLED
"FACTORS AFFECTING OPERATING RESULTS", AND OTHER FACTORS IDENTIFIED FROM TIME TO
TIME IN THE COMPANY'S REPORTS FILED WITH THE U.S. SECURITIES AND EXCHANGE
COMMISSION.
The following discussion should be read in conjunction with the Company's
financial statements contained in this report.
(a) Overview
The Company's core business was principally the sale of ultra-rapid blood plasma
freezing and thawing systems, until the fourth quarter of fiscal 1998 when the
Company launched its BioArchive Stem Cell System. The Company's revenues
previously have been from sales of its core line blood plasma freezers to blood
banks and blood plasma thawers to hospitals and transfusion centers. All core
line blood plasma freezer and thawer products are medical devices purchased as
capital equipment. In the third quarter of fiscal 1999, the Company received
clearance from the FDA on the 510(K) of the CryoSeal AHF System. The Company has
incurred additional expense in the last three fiscal years to establish the
required infrastructure to support the manufacturing of those systems.
Beginning in late 1993, the Company completed development of the BioArchive and
CryoSeal technology platforms, each of which will give rise to multiple medical
devices targeted at a number of different medical and surgical applications. To
achieve completion of the development and add experienced executive talent to
launch the products and move the Company to new levels of growth and revenues,
considerable capital resources were used. The Company is currently seeking
strategic alliance partners with substantially greater financial and marketing
resources than the Company in order to maximize the commercial value of the
CryoSeal and BioArchive platform products. To assist in these efforts, the
Company recently engaged Warburg Dillon Read LLC as financial advisors, chosen
for their superior investment banking experience and analyst coverage in the
field of Biomaterials.
The Company has incurred recurring operating losses and has an accumulated
deficit of $37,339,000 as of June 30, 2000. The report of independent auditors
on the Company's June 30, 2000 financial statements includes an explanatory
paragraph indicating there is substantial doubt about the company's ability to
continue as a going concern. The Company believes that it has developed a viable
plan to address these issues and that its plan will enable the Company to
continue as a going concern through the end of fiscal year 2001. This plan
includes the realization of revenues from the commercialization of new products,
the consummation of debt or equity financing in amounts sufficient to fund
further growth, and the reduction of certain operating expenses as necessary.
Although the Company believes that its plan will be realized, there is no
assurance that these events will occur. The financial statements do not include
any adjustments to reflect the uncertainties related to the recoverability of
assets or the amounts and classification of liabilities that may result from the
inability of the Company to continue as a going concern.
The Company made the transition to the calendar year 2000 without "Year 2000"
interruptions. The Company did not incur any material costs to be "Year 2000"
compliant.
(b) Results of Operations
The Years Ended June 30, 2000 and 1999:
The following is Management's discussion and analysis of certain significant
factors which have affected the Company's financial condition and results of
operations during the periods included in the accompanying financial statements.
Revenues:
Net revenues decreased from fiscal 1999 to fiscal 2000 by $897,000 or 18%.
Non-refundable licensing fees decreased $338,000 as only $121,000 was received
in fiscal 2000 from the BioArchive distributor in Japan. BioArchive product line
revenues decreased by $498,000 from fiscal 1999 sales as the number of units
placed fell from nine to six. The technical and regulatory hurdles within each
country that are required to authorize this new medical therapy, prepare the
Cord Blood Bank site and obtain the necessary budget allocations are more time
consuming and complex than originally estimated by the Company. Thus, customers
did not move quickly through the sales pipeline. The Company added more
resources during fiscal 2000 in order to accelerate this process in fiscal 2001.
Net revenues increased from fiscal 1998 to fiscal 1999 by $626,000 or 14%.
BioArchive product line revenues increased 16% or $217,000 from fiscal 1998
primarily due to fulfilling the backlog of disposables and accessories
associated with the BioArchive Systems which were shipped in fiscal 1998.
Non-refundable licensing fees generated $459,000 in revenues in fiscal 1999 from
38
the Japanese distributors of the BioArchive and CryoSeal systems. No such
licensing fees were generated in fiscal 1998. The fiscal 1999 CryoSeal product
line revenues, $112,000, were primarily due to the purchase of units and
disposables by the Company's key distributors in Europe and Japan to initiate
fibrin glue evaluations. There were no CryoSeal sales in fiscal 1998.
Cost of Revenues:
As a percentage of revenues, the Company's cost of revenues increased to 101% in
fiscal 2000 from 87% in fiscal 1999. This percentage increase is due to the
decrease in licensing fee revenue from fiscal 2000 to fiscal 1999 which has no
associated cost of revenue and the lower sales volume in the BioArchive product
line.
As a percentage of revenues, the Company's cost of revenues significantly
decreased from 125% in fiscal 1998 to 87% in fiscal 1999. The Company attributes
this significant improvement in gross profit to extensive efforts to remove
excess capacity from the manufacturing process and focused efforts on the cost
of procurement of raw materials through improved forecasting and planning.
Additionally, the impact of the mix of products sold during the year ended June
30, 1999 was more favorable in that both BioArchive disposables and thermoline
spare parts revenues generate higher gross profit margins than margins
historically seen from sales of the freezers and thawers.
General and Administrative expenses:
This expense category includes Finance, Administration and General Support
departments.
General and administrative expenses decreased $832,000 or 28% from fiscal 1999
to fiscal 2000. The expense decrease was due to company wide cost cutting
measures which were implemented in prior years and continued in fiscal 2000.
Specifically, the decrease was due to personnel reductions and transferring or
allocating personnel to other functions, namely sales and marketing and research
and development. Additionally, in fiscal 2000 there was no contingent liability
accrual, compared to $83,000 in fiscal 1999 associated with software licensing,
for executive bonuses (cash or stock) of $245,000 in fiscal 1999.
General and administrative expenses increased 37% or $791,000 in fiscal 1999.
The increase was driven almost entirely by the Company's efforts to build an
organization which is able to manufacture, sell and service medical devices.
Incremental expenses were attributed to the following: a) reclassification of
executive salaries from manufacturing and sales of $128,000; b)an $83,000
accrual for a contingent liability associated with software licensing; c)
executive bonuses (cash and stock) of $245,000, d) increase in aggregate
salaries and benefits of $100,000 primarily due to the fact that two of the
current executives were only present for a portion of fiscal 98, and e) patent
legal fees and governmental registration fees of $90,000 which were reclassed
from R&D reflecting the transfer of the BioArchive and CryoSeal systems to
manufacturing.
Sales and Service expenses:
This expense category includes Sales & Marketing and Field and Customer service
departments.
Sales and Service expenses increased $359,000 or 21% from fiscal 1999 to fiscal
2000. The increased sales and marketing resources were dedicated to expanding
the global sales force for BioArchive systems from one to three. The additional
resources are further expanding the efforts to satisfy the customers' needs for
technical support to satisfy scientific and regulatory requirements for
establishing Cord Blood banks in their respective countries, thus accelerating
their process through the sales pipeline.
Sales and Service expenses decreased 26% or $625,000 from fiscal 1998 to fiscal
1999. The expense decrease was due to management's efforts to align sales and
marketing investments with product availability and launch dates, which in the
case of the CryoSeal AHF European launch, were delayed significantly. During the
year, the department was restructured to alter the skill mix in an effort to
increase the focus on marketing, as well as field service related activities.
Expenses were ramped up during the third and fourth quarters of fiscal 1999 in
anticipation of the domestic launch of the CryoSeal AHF System and a greater
focus on international BioArchive sales during early fiscal 2000.
39
Research and Development expenses:
Research and Development expenses were reduced $437,000 or 21% in fiscal 2000.
This decrease was due to a continuing reduction in personnel due to the transfer
of the BioArchive and CryoSeal platforms to manufacturing. Even with these
reductions, R&D personnel made significant advancements in finalizing the
manufacturing transfer of two disposables associated with the CryoSeal platform,
the CP-2 and the Thrombin Activation Device. Management expects the research and
development line item to increase during the completion of the CryoSeal FS pre
clinical trials.
Research and Development was cut 48% in fiscal 1999. This significant decrease
reflects the fact that both technology platforms were completed during the prior
year and transferred to manufacturing. The primary focus of R&D in fiscal 1999
was the completion of the product development phase and initiation of
manufacturing transfer phase of the 100% autologous fibrin glue technology.
Management believes that product development and refinement is essential to
maintaining the Company's market position. Therefore, the Company considers
these costs as continuing costs of doing business. No assurances can be given
that the products or markets recently developed or under development will be
successful.
(c) Liquidity and Capital Resources
The Company has consumed significant cash resources for operating activities
since its formation in 1987, and more rapidly in the last four fiscal years
primarily to develop new products and markets. Cash resources were diminished at
the end of fiscal year 2000. The Company's operating plan for fiscal 2001
demonstrates that the Company will be able to sustain operations through the end
of the fiscal year, with no outside financing. However, the operating plan is
dependent on an increase in revenues from the BioArchive and CryoSeal platforms
and includes expenses only for the CryoSeal FS pre-clinical trials. The Company
has undertaken efforts to locate and secure adequate resources to ensure
adequate funding for the CryoSeal FS clinical trials and to avoid any disruption
to operations due to new product revenue fluctuations. However, there can be no
assurance that this funding will be received or that the Company will be able to
execute on this plan.
In fiscal 2000, the Company raised net proceeds of $3,686,000 through the
private placement of 4,040 shares of Series B Convertible Preferred Stock.
Additionally, the Company received $1,026,000 from the exercise of stock options
and warrants. To date, the Company has used the proceeds to finalize the
manufacturing transfer of the CP-2 and thrombin activation device (TAD), begin
development of the CryoSeal CP-3 disposable, prepare for the European market
launch of the CP-2 and continue the preparation for the fibrin glue pre clinical
trials. Management believes that the losses sustained were necessary for the
Company to progress on its strategic direction and to realize significant future
revenues. However, the Company continued to reduce expenses during fiscal 2000,
as evidenced by the $1 million reduction in the operating expenses from fiscal
1999 to fiscal 2000.
The Company does not require extensive capital equipment to produce or sell its
current products. However, when significant capital equipment is required, the
Company purchases from a vendor base. In fiscal 1998, the Company expended
$449,000, the majority of which was for certain test equipment and leasehold
improvements for the launch of the BioArchive and CryoSeal Systems. In fiscal
1999, the Company spent $115,000 primarily for test equipment associated with
the BioArchive and CryoSeal systems and to build a clean room to manufacture the
BioArchive periscope. In fiscal 2000, the Company spent $145,000 primarily for
tooling and molds for the production of the CP-2 and TAD and software licenses
to ensure compliance with licensing requirements. Although future capital
expenditures may be anticipated, the Company believes that the amounts expended
will be consistent with, or lower than fiscal 2000. The Company has no
significant outstanding capital commitments at June 30, 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All sales, domestic and foreign, are made in U.S. dollars and therefore currency
fluctuation are believed to have no impact on the company's net revenues. The
Company has no long-term investments or debt, other than capital lease
obligations, and therefore is not subject to interest rate risk. Management does
not believe that inflation has had a significant impact on the Company's results
of operations.
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Number
------
Report of Ernst & Young LLP, Independent Auditors ...................41
Balance Sheets at June 30, 2000 and 1999 .............................42
Statements of Operations for the years
ended June 30 2000, 1999, and 1998 .................................44
Statements of Shareholders' Equity for
the years ended June 30, 2000, 1999 and 1998........................45
Statements of Cash Flows for the
years ended June 30, 2000, 1999 and 1998 ...........................46
Notes to Financial Statements ........................................47
41
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders THERMOGENESIS CORP.
We have audited the accompanying balance sheets of THERMOGENESIS CORP. as of
June 30, 2000 and 1999, and the related statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended June 30,
2000. Our audits also included the financial statement schedule listed in the
Index at Item 14(a)(2). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of THERMOGENESIS CORP. at June 30,
2000 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended June 30, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
The accompanying financial statements have been prepared assuming that
THERMOGENESIS CORP. will continue as a going concern. As more fully described in
Note 1, the Company has incurred recurring operating losses and has an
accumulated deficit of $37,339,000 as of June 30, 2000. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments to reflect the uncertainties
related to the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/s/ ERNST & YOUNG LLP
Sacramento, California
August 18, 2000
42
THERMOGENESIS CORP.
Balance Sheets
ASSETS June 30,2000 June 30, 1999
-------------- --------------
Current Assets:
Cash and cash equivalents $ 810,000 $2,327,000
Short term investments 1,740,000 --
Accounts receivable, net of allowance for
doubtful accounts of $84,000 ($95,000 at
June 30, 1999) 627,000 1,204,000
Inventory 2,275,000 2,717,000
Other current assets 150,000 222,000
-------------- --------------
Total current assets 5,602,000 6,470,000
Equipment, at cost less accumulated depreciation
of $1,506,000 ($1,216,000 at June 30, 1999) 1,080,000 1,457,000
Other assets 53,000 206,000
-------------- --------------
$6,735,000 $8,133,000
============== ==============
See accompanying notes.
43
THERMOGENESIS CORP.
Balance Sheets (Continued)
LIABILITIES AND SHAREHOLDERS'EQUITY June 30, 2000 June 30, 1999
--------------- ---------------
Current liabilities:
Accounts payable $ 512,000 $ 639,000
Accrued payroll and related expenses 132,000 236,000
Accrued liabilities 345,000 510,000
--------------- ---------------
Total current liabilities 989,000 1,385,000
Long-term portion of capital lease obligations 54,000 28,000
Commitments and contingencies
Shareholders' equity:
Series B convertible preferred stock, 4,080 shares
authorized, 4,040 issued and outstanding ($4,168,000
aggregate involuntary liquidation
value at June 30, 2000) - -
Series A convertible preferred stock, 1,200,000
shares authorized; 166,000 issued and outstanding
(884,000 at June 30, 1999) ($1,162,000 aggregate
involuntary liquidation value at June 30, 2000) - 1,000
Preferred stock, $.001 par value; 795,920 shares
authorized; no shares issued and outstanding - -
Common stock, $.001 par value;
50,000,000 shares authorized: 24,804,056
issued and outstanding (20,597,532 at
June 30, 1999) 26,000 21,000
Paid in capital in excess of par 43,005,000 37,442,000
Accumulated deficit (37,339,000) (30,744,000)
--------------- ---------------
Total shareholders' equity 5,692,000 6,720,000
--------------- ---------------
$ 6,735,000 $ 8,133,000
=============== ===============
See accompanying notes.
44
THERMOGENESIS CORP.
Statements of Operations
Years ended June 30,
2000 1999 1998
--------------- --------------- ---------------
Revenues:
Product and other revenues $ 3,696,000 $ 4,703,000 $ 4,282,000
Service revenues 515,000 405,000 200,000
--------------- --------------- ---------------
Net revenues 4,211,000 5,108,000 4,482,000
--------------- --------------- ---------------
Costs of revenues:
Costs of product and other revenues 3,782,000 4,114,000 5,512,000
Costs of service revenues 464,000 321,000 96,000
--------------- --------------- ---------------
Total costs of revenues 4,246,000 4,435,000 5,608,000
--------------- --------------- ---------------
Expenses:
General and administrative 2,092,000 2,924,000 2,133,000
Selling and service 2,103,000 1,744,000 2,369,000
Research and development 1,624,000 2,061,000 3,922,000
Interest and other 41,000 123,000 70,000
--------------- --------------- ---------------
Total expenses 5,860,000 6,852,000 8,494,000
Interest and other income 77,000 81,000 70,000
--------------- --------------- ---------------
Net loss ($5,818,000) ($6,098,000) ($9,550,000)
=============== =============== ===============
Per share data:
Net loss ($5,818,000) ($6,098,000) ($9,550,000)
Preferred stock discount and dividends 905,000 3,907,000 --
--------------- --------------- ---------------
Net loss to common stockholders ($6,723,000) ($10,005,000) ($9,550,000)
=============== =============== ===============
Basic and diluted net loss per share ($0.30) ($0.52) ($0.54)
=============== =============== ===============
Shares used in computing per share
data 22,288,912 19,242,310 17,629,876
=============== =============== ===============
See accompanying notes.
45
THERMOGENESIS CORP.
Statements of Shareholders' Equity
Series A Series B Paid in Total
Preferred Preferred Common capital in Accumulated shareholders'
Stock Stock Stock excess of par deficit equity
---------- ---------- ----------- -------------- ------------- -------------
Balance at June 30, 1997 $ 16,000 $ 19,198,000 $(11,189,000) $ 8,025,000
Issuance of 273,650 common shares for
exercise of warrants and options -- 602,000 -- 602,000
Issuance of 2,786,714 common
shares in private placement 3,000 6,430,000 -- 6,433,000
Amortization of options issued
previously for services -- 64,000 -- 64,000
Net loss -- -- (9,550,000) (9,550,000)
----------- -------------- ------------- -------------
Balance at June 30, 1998 19,000 26,294,000 (20,739,000) 5,574,000
Issuance of 1,750 common shares for exercise
of options -- 4,000 -- 4,000
Issuance of 1,077,540 convertible preferred
shares in private placement $ 1,000 -- 6,226,000 -- 6,227,000
Convertible preferred stock discount -- -- 3,605,000 (3,605,000) --
Amortization of options issued previously for
services -- -- 56,000 -- 56,000
Issuance of 142,413 common shares for
services -- -- 187,000 -- 187,000
Issuance of 90,000 common stock warrants -- -- 70,000 -- 70,000
Convertible preferred stock accretion -- -- 302,000 (302,000) --
Issuance of 967,700 common shares upon
conversion of preferred stock -- 1,000 (1,000) -- --
Issuance of 560,000 common shares -- 1,000 699,000 -- 700,000
Net loss -- -- -- (6,098,000) (6,098,000)
---------- ----------- -------------- ------------- -------------
Balance at June 30, 1999 1,000 21,000 37,442,000 (30,744,000) 6,720,000
Issuance of 4,040 Series B Preferred Stock -- $ -- -- 3,686,000 -- 3,686,000
Issuance of 595,322 shares for exercise of
options and warrants -- -- 1,000 1,025,000 -- 1,026,000
Convertible preferred stock discount -- -- -- 777,000 (777,000) --
Issuance of 21,202 common shares for services -- -- -- 18,000 -- 18,000
Amortization of options issued previously for
services -- -- -- 60,000 -- 60,000
Issuance of 3,590,000 common shares upon
conversion of Series A preferred stock (1,000) -- 4,000 (3,000) -- --
Net loss -- -- -- -- (5,818,000) (5,818,000)
---------- ---------- ----------- -------------- ------------- -------------
Balance at June 30, 2000 $ -- $ -- $ 26,000 $ 43,005,000 ($37,339,000) $ 5,692,000
========== ========== =========== ============== ============= =============
See accompanying notes.
46
THERMOGENESIS CORP.
Statements of Cash Flows
Years ended June 30,
2000 1999 1998
------------- -------------- --------------
Cash flows from operating activities:
Net loss ($5,818,000) ($6,098,000) ($9,550,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 617,000 548,000 440,000
Issuance of common stock for services 18,000 257,000 --
Amortization of stock options issued for services 60,000 56,000 64,000
Loss on sale of equipment 25,000
Net changes in operating assets and liabilities
and liabilities
Accounts receivable 577,000 77,000 788,000
Inventory 442,000 (416,000) (79,000)
Other current assets 72,000 (42,000) 13,000
Other assets 98,000 (34,000) 140,000
Accounts payable (127,000) (661,000) (136,000)
Accrued payroll and related expenses (104,000) (110,000) 72,000
Accrued liabilities (172,000) (13,000) 279,000
------------- -------------- --------------
Net cash used in operating activities (4,312,000) (6,436,000) (7,969,000)
------------- -------------- --------------
Cash flows from investing activities:
Purchases of short-term investments (1,740,000) -- --
Capital expenditures (145,000) (115,000) (449,000)
------------- -------------- --------------
Net cash used in investing activities (1,885,000) (115,000) (449,000)
------------- -------------- --------------
Cash flows from financing activities:
Exercise of stock options and warrants 1,026,000 4,000 602,000
Issuance of convertible preferred stock 3,686,000 6,227,000 --
Payments on capital lease obligations (32,000) (28,000) (153,000)
Issuance of common stock -- 700,000 6,433,000
------------- -------------- --------------
Net cash provided by financing activities 4,680,000 6,903,000 6,882,000
Net increase (decrease) in cash and cash equivalents (1,517,000) 352,000 (1,536,000)
Cash and cash equivalents at beginning of year 2,327,000 1,975,000 3,511,000
------------- -------------- --------------
Cash and cash equivalents at end of year $ 810,000 $ 2,327,000 $ 1,975,000
============= ============== ==============
Supplemental cash flow information:
Cash paid during the year for interest $ 13,000 $ 32,000 $ 48,000
============= ============== ==============
Supplemental non-cash flow information:
Equipment acquired by capital lease obligations $ 65,000 $ -- $ --
============= ============== ==============
See accompanying notes.
47
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization and Business
THERMOGENESIS CORP. ("the Company") was incorporated in Delaware in July 1986.
The Company designs, manufactures and distributes equipment to process
therapeutically valuable blood components including stem cells and surgical
sealants. Initially the Company developed medical devices for ultra rapid
freezing and thawing of blood components, which the Company manufactures and
distributes in their respective niche markets in blood banks and hospitals.
Basis of Presentation
The Company has incurred recurring operating losses and has an accumulated
deficit of $37,339,000 as of June 30, 2000. The report of independent auditors
on the Company's June 30, 2000 financial statements includes an explanatory
paragraph indicating there is substantial doubt about the Company's ability to
continue as a going concern. The Company believes that it has developed a viable
plan to address these issues and that its plan will enable the Company to
continue as a going concern through the end of fiscal year 2001. This plan
includes the realization of revenues from the commercialization of new products,
the consummation of debt or equity financings in amounts sufficient to fund
further growth, and the reduction of certain operating expenses as necessary.
Although the Company believes that its plan will be realized, there is no
assurance that these events will occur. The financial statements do not include
any adjustments to reflect the uncertainties related to the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the inability of the Company to continue as a going concern.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of 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.
Cash, Cash Equivalents and Short Term Investments
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Short term investments are
certificates of deposit with maturities greater than 90 days, but not exceeding
six months.
Fair Value of Financial Instruments
Carrying amounts of financial instruments held by the Company, which include
cash equivalents, short term investments, accounts receivable, accounts payable
and accrued liabilities, approximate fair value due to their short duration.
Inventory
Inventory is stated at the lower of cost or market and includes the cost of
material, labor and manufacturing overhead. Cost is determined on the first-in,
first-out basis.
Equipment
Depreciation is computed under the straight-line method over the useful lives of
2-10 years.
48
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
Stock Based Compensation
The Company has adopted the disclosure provision for stock-based compensation of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", but continues to account for such items using the intrinsic value
method as outlined under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees".
The Company uses the Black-Scholes option pricing model to measure the fair
value of the equity instruments issued (which were determined to be more
reliably measurable than the fair value of consideration received) using the
stock price and other measurement assumptions as of the date a commitment for
performance by the counterparty to earn the equity instrument was reached. The
fair value of the equity instruments issued is recognized in the same period as
if the Company had paid cash for the services.
Revenue Recognition
Revenues from the sale of the Company's products are recognized at the time of
shipment. The Company ships all products F.O.B. shipping point at its office.
There is no formal acceptance by any customer, nor conditional evaluation on any
product sold and recognized as revenue. All foreign sales are denominated in
U.S. dollars. The Company's foreign sales are generally through distributors.
There is no right of return provided for distributors. Revenues from licensing
agreements are recognized when payment is received and the Company has performed
all services required under the agreement. Service revenue is generated from the
installation of equipment and contracts for providing maintenance of equipment.
Service revenue is recognized at the time the service is completed.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). The
SAB states that all registrants are expected to apply the accounting and
disclosures described in it. The SEC staff, however, will not object if
registrants that have not applied this accounting do not restate prior financial
statements provided they report a change in accounting principle in accordance
with APB Opinion No. 20, Accounting Changes, by cumulative catch-up adjustment
no later than the fourth fiscal quarter of the fiscal year beginning after
December 15, 1999. The Company is currently evaluating the impact, if any, of
SAB 101 on its financial statements.
Credit Risk
The Company manufactures and sells thermodynamic devices principally to the
blood component processing industry and performs ongoing evaluations of the
credit worthiness of its customers. The Company believes that adequate
provisions for uncollectible accounts have been made in the accompanying
financial statements.
Income Taxes
The liability method is used for accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. The Company used the flow-through method to account for
income tax credits.
Net Loss per Share
Net loss per share is computed by dividing the net loss to common stockholders
by the weighted average number of common shares outstanding. Common stock
equivalents have not been included because the effect would be anti- dilutive.
49
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
Reclassifications
Certain amounts in the prior years financial statements have been reclassified
to conform with the 2000 presentation.
2. Inventory
Inventory consisted of the following at June 30:
2000 1999
----------- ----------
Raw materials $1,051,000 $1,330,000
Work in process 295,000 363,000
Finished goods 929,000 1,024,000
----------- ----------
$2,275,000 $2,717,000
=========== ==========
3. Equipment
Equipment consisted of the following at June 30:
2000 1999
---------- ------------
Construction in progress $ - $ 49,000
Office equipment 361,000 294,000
Computers and purchased software 776,000 1,001,000
Machinery and equipment 1,154,000 1,043,000
Leasehold improvements 295,000 286,000
----------- ------------
2,586,000 2,673,000
Less accumulated depreciation and amortization (1,506,000) (1,216,000)
----------- ------------
$1,080,000 $1,457,000
=========== ============
50
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
4. Accrued Liabilities
Accrued liabilities consisted of the following at June 30:
2000 1999
--------- ---------
Accrued warranty reserves $173,000 $163,000
Accrued legal reserves - 228,000
Capital lease obligations 37,000 29,000
Other accrued liabilities 135,000 90,000
--------- ---------
$345,000 $510,000
========= =========
5. Commitments and Contingencies
Operating Leases
The Company leases its manufacturing and corporate facilities and certain
equipment pursuant to operating leases. The annual future cash obligations under
these leases are as follows:
2001 $246,000
2002 136,000
2003 9,000
--------
Total $391,000
========
Rent expense was $297,000, $310,000 and $275,000 for the years ended
June 30, 2000, 1999 and 1998.
Capital Leases
The Company leases certain equipment under capital leases. The following amounts
are included in equipment as assets under these capital leases as of June 30:
2000 1999
--------- ----------
Cost $199,000 $ 520,000
Less: accumulated amortization 112,000 356,000
--------- ----------
Net assets under capital leases $ 87,000 $ 164,000
========= ==========
51
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
5. Commitments and Contingencies (continued)
Capital Leases (continued)
The future minimum lease payments under capital leases are as follows:
Years ending June 30:
2001 $ 52,000
2002 23,000
2003 22,000
2004 22,000
2005 17,000
--------
Total minimum lease payments 136,000
Less amount representing interest (45,000)
--------
Present value of minimum lease payments 91,000
Less current portion (37,000)
---------
Long term portion $ 54,000
=========
Contingencies
The Company and its property are not a party to any pending legal proceedings.
In the normal course of operations, the Company may have disagreements or
disputes with vendors over the quality or conformance of products manufactured
for the Company. These disputes are seen by the Company's management as a normal
part of business, and there are no currently threatened actions that management
believes would have a significant material impact on the Company's financial
position, results of operations or cash flow.
6. Shareholders' Equity
Series B Convertible Preferred Stock
On December 22, 1999, and January 4, 2000 the Company completed a private
placement of 4,040 shares of Series B Convertible Preferred Stock ("Series B")
raising an aggregate of $4,040,000, before direct expenses. The purchasers of
the Series B also received five year warrants representing the right to acquire
444,562 common shares at an exercise price of $2.72628. Warrants to purchase
40,000 shares of common stock at $2.72628 per share were issued to the placement
agent. The significant features of the Series B are as follows:
Voting Rights - The holders of shares of Series B have no general voting
rights other than as accorded by law under certain circumstances that
effect Series B holders.
Liquidation Rights - In the event of liquidation or dissolution of the
Company, the Series B stockholders are entitled to priority over common
stockholders and in parity with Series A holders with respect to
distribution of Company assets or payments to stockholders. The
liquidation distribution is equal to $1,000 per share plus any
accumulated and unpaid dividends.
Dividends - Dividends at the rate of $60 per annum per share of Series B
are payable in cash or, at the Company's option, may be added to the
value of the Series B subject to conversion and to the $1,000 per share
liquidation preference. No dividends have been declared as of June 30,
2000. The accumulated amount of the dividend, $128,000, has been
included in the preferred stock discount for calculating net loss per
share for the year ended June 30, 2000.
52
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Shareholders' Equity (continued)
Series B Convertible Preferred Stock (continued)
Conversion Rights - The Series B is currently limited in conversion to
a maximum of 4,236,000 shares. However, the current conversion price
is a fixed conversion price of $1.6425 which represents the average
market price of the Company's common stock for the ten days prior to
the initial reset date of June 22, 2000. Thereafter, the conversion
price will be adjusted every six months to be the lesser of (a) 130%
of the fixed conversion price of $2.2719, or (b) 90% of the average
market price for the ten days prior to such adjustment date. The
conversion price is subject to further adjustment under certain other
circumstances. The value assigned to the Beneficial Conversion
Feature, determined using 90% of the average market price for the ten
days prior to the date the Series B was sold, compared to quoted
market price of the Company's common stock on the date the Series B
was sold, amounted to $777,000. The preferred stock discount for the
year ended June 30, 2000 includes $777,000 of amortization. Subsequent
to June 30, 2000, 2,032 shares of Series B have been converted into
1,289,229 shares of common stock.
Redemption - If the Company is in compliance with the terms of the
Series B agreements, the Company has the right at any time to redeem
the Series B at a premium (generally, 120% of the $1,000 per share
liquidation value plus accumulated and unpaid dividends), and under
certain circumstances, at the market value of the common stock into
which the Series B would otherwise be convertible. Assuming the
Company is in compliance with such agreements, after the third
anniversary of issuance, the Company may redeem the Series B at its
liquidation value plus accumulated and unpaid dividends.
If certain events occur which are solely within the Company's control,
the holders of the Series B have the right to request that the Company
repurchase all or some of their Series B at the greater of the premium
or converted market value. These events include the following:
There is no closing bid price reported for the Company's common
stock for five consecutive trading days;
The Company's common stock ceases to be listed for trading on the
Nasdaq SmallCap Market;
The holders of the Seris B are unable, for 30 or more days
(whether or not consecutive) to sell their common stock issuable
upon conversion of the Series B preferred stock pursuant to an
effective registration statement;
The Company defaults under any of the agreements relating to the
sale of the Series B;
Certain business combination events;
The adoption of any amendment to the Company's Certificate of
Incorporation materially adverse to the holders of the Series B
without the consent of the holders of a majority of the Series B;
and
53
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Shareholders' Equity (continued)
Series B Convertible Preferred Stock (continued)
The holders of the Series B are unable to convert all of their
shares because of limitations under exchange or market rules that
require stockholder approval of certain stock issuances and the
Company fails to obtain such approval.
However, if any of these events occur which are not solely within the
Company's control, the Company can give a Control Notice to the Series B
shareholders which provides for certain adjustments to the conversion
price, in lieu of the Company repurchasing the Series B shares.
In addition, preferred shares are subject to certain transfer
restrictions and are entitled to certain registration rights.
Series A Convertible Preferred Stock
In January 1999 the Company completed a private placement of 1,077,540 shares of
Series A Convertible Preferred Stock ("Series A"), raising $6,227,000, net of
commissions and direct expenses. Commissions of 7% of the gross proceeds and
warrants to purchase 200,000 shares of common stock at $1.70 per share were
issued to the placement agent. The significant features of the Series A are as
follows:
Voting Rights - The holders of shares of Series A are entitled to voting
rights equal to the number of shares of common stock to be issued upon
conversion of the Series A.
Liquidation Preferences - In the event of liquidation or dissolution of
the Company, the Series A stockholders are entitled to priority over
common stockholders with respect to distribution of Company assets or
payments to stockholders. The liquidation preference is equal to $6.25
per share compounded annually at 8% per share per year.
Redemption - When issued, the Series A contained redemption rights which
allowed the Series A to be redeemable upon the request of any holder at
any time following the fifth anniversary of the date of issuance. The
redemption price shall be the liquidation preference as stated above.
However, on July 30, 1999, the common stockholders voted to remove the
redemption rights associated with the Series A. Removal of the
redemption rights allows the Series A to be included as Stockholders
Equity. The excess of the Series A's redemption price over its carrying
value was accreted by periodic charges to accumulated deficit from the
date of issuance thru July 30, 1999.
Conversion Rights - Holders of the Series A have the right to convert
the Series A at the option of the holder, at any time, into shares of
common stock of the Company at the conversion rate of one preferred
share for five shares of common stock. The conversion rate is subject to
adjustment for changes in the Company's capital structure which would
otherwise have a dilutive effect on the conversion rate. The value
assigned to the Beneficial Conversion Feature, as determined using the
quoted market price of the Company's common stock on the date the Series
A was sold, amounted to $3,605,000, which represents a discount to the
value of the Series A. As of June 30, 2000, 911,540 shares of Series A
have been converted.
54
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Shareholders' Equity (continued)
Series A Convertible Preferred Stock (continued)
Automatic Conversion - At the option of the Company, each share of
Series A may be converted into shares of Common Stock at the conversion
rate of 1:5 provided that the shares of the Company's common stock trade
at an average price equal to or greater than $5 per share for 30
consecutive trading days.
Dividends - The holders of Series A shall be entitled to receive
dividends at the same rate and at the same time as any dividends
declared on the Company's common stock.
In addition, preferred shares are subject to certain transfer restrictions and
are entitled to certain registration rights.
Common Stock
The Company completed a private financing on December 31, 1997 in which it
received $6,433,000 net of expenses. The proceeds from the offering were
received from the sale of 2,786,714 shares of common stock at $2.50 per share
and issued three year warrants to the purchasers representing the right to
acquire an additional 278,100 shares in the aggregate, at an exercise price of
$3.00 per share. No warrants have been exercised as of June 30, 2000.
As of June 30, 2000, the Company had 10,848,467 shares of common stock reserved
for future issuance.
Warrants
As part of the placement agent's compensation in the 1999 private placement of
Series A convertible preferred stock, warrants to purchase 200,000 shares of
common stock at an exercise price of $1.70 were issued. The warrants were fully
vested upon issuance. There were 100,000 warrants exercised in fiscal 2000. The
warrants expire in January 2004.
As part of a short-term debt agreement entered into in November 1998, the
Company issued warrants to purchase 90,000 shares of common stock at an exercise
price of $1.50. The warrants were fully vested upon issuance. The warrants
expire in November 2001. The estimated fair value of the warrants on the date of
issue, $70,000, has been included in interest expense for the year ending June
30, 1999. There were 64,738 warrants exercised in fiscal 2000.
55
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Shareholders' Equity (Continued)
Warrants (continued)
As part of the placement agent's compensation in the 1997 private financing,
warrants to purchase 258,100 shares of common stock at an exercise price of
$3.00 were issued. The warrants were fully vested upon issuance. The warrants
expire in December 2000. No warrants have been exercised as of June 30, 2000.
In conjunction with a private placement in November 1996, seven year warrants
were issued, representing the right to acquire 1,478,001 shares of common stock
at an exercise price of $3.10 per share. The warrants were fully vested upon
issuance. No warrants have been exercised as of June 30, 2000.
As part of the placement agent's compensation in the 1995 private placement of
units, additional warrants to purchase 8.8 units at an exercise price of $60,000
per unit were also issued, each unit consisting of twenty-five thousand (25,000)
shares of common stock. There were 50,000 warrants converted in fiscal 2000. The
warrants expire in December 2000.
Stock Options
On July 31, 1996 and May 29, 1996, the Company issued options to purchase
200,000 and 100,000 shares, respectively, of the Company's common stock for
consulting services. The exercise price is equal to the fair market value as
determined by the closing bid price for the Company's common stock on the date
of grant. The Company has recorded stock compensation expense recognizing the
estimated fair value of the options of $60,000, $56,000 and $64,000 for the
years ended June 30, 2000, 1999 and 1998, respectively.
The Amended 1994 Stock Option Plan (1994 Plan) permits the grant of stock or
options to employees, directors and consultants. A total of 1,450,000 shares
were approved by the stockholders for issuance under the 1994 Plan. Options are
granted at prices which are equal to 100% of the fair market value on the date
of grant, and expire over a term not to exceed ten years. Options generally vest
ratable over a five year period, unless otherwise determined by the Board of
Directors.
The Amended 1998 Stock Option Plan (1998 Plan) permits the grant of stock or
options to employees, directors and consultants. A total of 798,000 shares were
approved by the stockholders for issuance under the 1998 Plan. An additional
1,000,000 shares were approved by the stockholders in December 1999. Options are
granted at prices which are equal to 100% of the fair market value on the date
of grant, and expire over a term not to exceed ten years. Options generally vest
ratable over a three year period, unless otherwise determined by the Board of
Directors.
The Company has also issued options to directors, employees and consultants as
compensation for services. These options vest and are exercisable over a variety
of periods as determined by the Company's Board of Directors.
56
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Shareholders' Equity (Continued)
Stock Options (Continued)
A summary of stock option activity for the three years ended June 30, 2000
follows:
Number of Weighted-Average
Options Exercise
Outstanding Price Per Share
------------ ----------------
Balance at June 30, 1997 1,966,582 2.61
Options granted 509,000 3.01
Options canceled (232,225) 3.09
Options exercised (268,025) 2.22
------------
Balance at June 30, 1998 1,975,332 2.71
Options granted 178,500 2.30
Options canceled (530,332) 2.41
Options exercised (1,750) 2.08
-----------
Balance at June 30, 1999 1,621,750 2.76
Options granted 938,745 1.34
Options canceled (247,416) 2.09
Options exercised (380,584) 1.85
-----------
Balance 1,932,495 2.33
===========
The following table summarizes information about stock options outstanding at
June 30, 2000:
Options Outstanding Options Exercisable
Weighted Weighted
Weighted-Average Average Average
Range of Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
- ----------------- ----------- ------------------ ---------- ------------- ----------
$1.13-$1.13 501,000 2.08 years $ 1.13 306,000 $ 1.13
$1.16-$1.84 32,500 2.17 years $ 1.57 19,500 $ 1.51
$1.97-$2.91 633,995 1.48 years $ 2.20 473,395 $ 2.26
$2.97-$3.0 400,000 0.73 years $ 2.98 360,000 $ 2.98
$3.13-$4.50 365,000 1.1 years $ 3.57 355,000 $ 3.58
----------- -----------
Total 1,932,495 1.42 years $ 2.33 1,513,895 $ 2.50
=========== ===========
SFAS 123 requires the use of option valuation models to provide supplemental
information regarding options granted after June 30, 1995. Pro forma information
regarding net loss and net loss per share shown below was determined as if the
Company had accounted for its employee stock options under the fair value method
of that statement.
57
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Shareholders' Equity (Continued)
Stock Options (Continued)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options. The Company's employee stock options have
characteristics significantly different from those of traded options such as
vesting restrictions and extremely limited transferability. In addition, the
assumptions used in option valuation models (see below) are highly subjective,
particularly the expected stock price volatility of the underlying stock.
Because changes in these subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not provide
a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the options' vesting periods. The Company's pro forma
information is as follows for the years ended June 30:
Net Loss 2000 1999 1998
------------- ------------ -------------
As reported ($5,818,000) ($6,098,000) ($9,550,000)
Pro Forma (6,542,000) (6,594,000) (10,218,000)
Net loss per share
As reported ($0.30) ($0.52) ($0.54)
Pro Forma ($0.34) ($0.55) ($0.58)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: expected volatility of 1.02%; an expected life of 3 years; a
risk-free interest rate of 6.31% and no expected dividends. The weighted average
grant date fair value of options granted during the years ended June 30, 2000,
1999 and 1998 was $0.88, $1.70 and $1.69, respectively.
7. Major Customers and Foreign Sales
During the fiscal year ended June 30, 2000, revenues from a significant customer
totaled $1,089,000 or 26% of net revenues. During the fiscal year ended June 30,
1999, revenues from a significant customer totaled $525,000 or 10% of net
revenues. During the fiscal year ended June 30, 1998 there was no single
customer which represented 10% of net revenues.
58
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
7. Major Customers and Foreign Sales (continued)
The Company had sales to customers outside the United States as follows for the
years ended June30:
2000 1999 1998
----------- ----------- ----------
Europe $820,000 $1,114,000 $1,648,000
Asia 590,000 1,178,000 505,000
Other 208,000 183,000 111,000
----------- ---------- ----------
$1,618,000 $2,475,000 $2,264,000
=========== ========== ==========
8. Income Taxes
The reconciliation of federal income tax attributable to operations computed at
the federal statutory tax rates of 34% to income tax expense is as follows for
the years ended June 30:
2000 1999 1998
------------- ------------- ------------
Statutory fedeal income tax benefit $(1,971,000) $(2,074,000) $(3,290,000)
Net operating loss with no tax benefit 1,971,000 2,074,000 3,290,000
------------- ------------- ------------
Total federal income tax $ - $ - $ -
============= ============= ============
At June 30, 2000, the Company had net operating loss carryforwards for federal
and state income tax purposes of approximately $31,395,000 and $10,001,000
respectively, that are available to offset future income. The federal and state
loss carryforwards expire in various years between 2002 and 2020, and 2000 and
2005, respectively.
At June 30, 2000, the Company has research and experimentation credit
carryforwards of approximately $291,000 for federal tax purposes that expire in
various years between 2002 and 2020 and $186,000 for state income tax purposes
that do not have an expiration date. In addition, the Company has approximately
$34,000 in other state tax credits.
Significant components of the Company's deferred tax assets and liabilities for
federal and state income taxes are as follows:
June 30, 2000 June 30, 1999
-------------- -------------
Deferred tax assets:
Net operating loss carryforwards $ 11,268,000 $ 9,145,000
Income tax credits 413,000 418,000
Capitalized research costs 412,000 292,000
Other 266,000 358,000
------------ ------------
Total deferred taxes 12,359,000 10,213,000
Valuation allowance (12,359,000) (10,213,000)
------------ ------------
Net deferred taxes $ - $ -
============ ============
59
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
8. Income Taxes (continued)
Because of the "change of ownership" provisions of the Tax Reform Act of 1986, a
portion of the Company's federal net operating loss and credit carryovers may be
subject to an annual limitation regarding their utilization against taxable
income in future periods.
9. Employee Retirement Plan
The Company sponsors an Employee Retirement Plan, generally available to all
employees, in accordance with Section 401(k) of the Internal Revenue Code.
Employees may elect to contribute up to the Internal Revenue Service annual
contribution limit. Under this Plan, at the discretion of the Board of
Directors, the Company may match a portion of the employees' contributions. No
Company contributions have been made to the Plan as of June 30, 2000.
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for in Item 10 of Part III is incorporated by reference
from the definitive proxy statement of the Company to be filed with the
Securities and Exchange Commission within 180 days from fiscal year end.
ITEM 11. EXECUTIVE COMPENSATION
The information called for in Item 11 of Part III is incorporated by reference
from the definitive proxy statement of the Company to be filed with the
Securities and Exchange Commission within 180 days from fiscal year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information called for in Item 12 of Part III is incorporated by reference
from the definitive proxy statement of the Company to be filed with the
Securities and Exchange Commission within 180 days from fiscal year end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1997, the Company loaned $88,281 to Charles de B. Griffiths, the
Company's Vice President of Marketing and Sales and a director of the Company,
to assist with the purchase and renovation of a residence in connection with Mr.
Griffiths relocation to the Company's Rancho Cordova office from France, where
he previously resided. During the year ended June 30, 2000, Mr. Griffiths repaid
the loan and all accrued interest.
61
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report on Form 10-K.
Page
Number
------
Report of Ernst & Young LLP, Independent Auditors ...................41
Balance Sheets at June 30, 2000 and 1999 .............................42
Statements of Operations for the years
ended June 30 2000, 1999, and 1998 .................................44
Statements of Shareholders' Equity for
the years ended June 30, 2000, 1999 and 1998........................45
Statements of Cash Flows for the
years ended June 30, 2000, 1999 and 1998 ...........................46
Notes to Financial Statements ........................................47
(a)(2) Financial Statement Schedules
Schedule II, Valuation and Qualifying Accounts ......................67
(b) Reports on Form 8-K
None
(c) Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the
Exhibit Index on the next page, which is incorporated herein by
this reference.
62
Exhibit Description
3.1 (a) Amended and Restated Certificate of Incorporation(4)
(b) Revised Bylaws (4)
4.1 Certificate of Designation Series A Convertible Redeemable
Preferred Stock (12)
4.2 Certificate of Designation of Series B Convertible
Preferred Stock (16)
4.3 Warrant [form] (16)
4.4 Registration Rights Agreement Dated Dec. 22, 1999 [form] (16)
5.1 Opinion of David C. Adams, General Counsel to the registrant
10.1 (a) Letter of Agreement with Liquid Carbonic, Inc. (1)
(b) Letter of Agreement with Fujitetsumo USA (1)
(c) Letter of Agreement with Fujitetsumo Japan (1)
(d) License Agreement between Stryker Corp. and THERMOGENESIS CORP.,
Corp.(5)
(e) Lease of Office and Mfg. Space (4)
(f) Executive Development and Distribution Agreement
between THERMOGENESIS CORP. and Daido Hoxan Inc. (3)
(g) Administrative Office Lease (6)
(h) Employment Agreement for David C. Adams (11)
(i) Employment Agreement for James H. Godsey (11)
(j) Employment Agreement for Sam Acosta (11)
(k) Licensing/Manufacturing Agreement with On-Time Mfg. (8)
(l) License Agreement and distribution with Asahi Medical (9)
(m) License Agreement with Pall/Medsep Corporation (10)
(n) Distribution Agreement with Dideco S.P.A. (13)
(o) Employment Agreement for Philip H. Coelho (15)
(p) Employment Agreement for Renee Ruecker (15)
(q) Amendment to License Agreement with Asahi Medical (15)
(r) Subscription Agreement dated Dec. 22, 1999 [form] (16)
(s) Employment Agreement for Dan Segal *
23.2 Consent of Ernst & Young LLP, independent auditors
27.1 Financial Data Schedule
Footnotes to Index
* Filed herewith:
(1) Incorporated by reference to Registration Statement No. 33-37242 of
THERMOGENESIS CORP., Corp. filed on February 7, 1991.
(2) Incorporated by reference to Form 8-K for July 19, 1993.
(3) Incorporated by reference to Form 8-K for June 9, 1995.
(4) Incorporated by reference to Form 10-KSB for the year ended June 30, 1994.
(5) Incorporated by reference to Form 8-K for September 27, 1995.
(6) Incorporated by reference to Form 10-QSB for the quarter ended December 31,
1995.
(7) Incorporated by reference to Form 8-K for November 27, 1996.
(8) Incorporated by reference to Form 10-KSB for the year ended June 30, 1996.
(9) Incorporated by reference to Form 8-K for May 29, 1996.
(10) Incorporated by reference to Form 8-K for March 27, 1997.
(11) Incorporated by reference to Form 10-K for the year ended June 30, 1997.
(12) Incorporated by reference to Form 8-K for January 14, 1998.
(13) Incorporated by reference to Form 8-K for February 16, 1998.
(14) Incorporated by reference to Form 10-K for the year ended June 30, 1998.
(15) Incorporated by reference to Form 10-K for the year ended June 30, 1999.
(16) Incorporated by reference to Form 8-K for December 23, 1999.
63
GLOSSARY OF CERTAIN TECHNICAL TERMS
510(k): formal notification to the Food and Drug Administration ("FDA") obtain
clearance to market the medical device. The device must be substantially
equivalent to devices manufactured prior to 1976.
AUTOLOGOUS: autogenous; related to self; originating within an organism itself,
as obtaining blood from the patient for use in the same patient.
COAGULATION: (1) the process of clot formation; (2) in surgery, the disruption
of tissue by physical means to form a blockage or clot.
THERMO LINE PRODUCTS: (1) device for the ultra-rapid freezing of human blood
plasma; (2) portable device for the ultra-rapid freezing of human blood plasma;
(3) device for the rapid thawing of frozen plasma for hospital patient care; (4)
device for the hermetic sealing of blood tissue containers.
CRYOPRECIPITATE: any precipitate (substance that is separated out of a solution
of plasma) that results from cooling, as cryoglobulin or antihemophilic factor.
When used in the context of the CryoSeal FS system, cryoprecipitate means a
"fibrinogen-rich" cryoprecipitate.
CRYOPRECIPITATED AHF: a preparation of antihemophilic factor, which is obtained
from a single unit of plasma collected and processed in a closed system.
CRYOPRESERVATION: maintaining the life of excised tissue or organs by freezing
and storing at very low temperatures.
CRYOSEAL(TM): system for harvesting fibrinogen-rich cryoprecipitate from a
donor's blood plasma, a blood component that is currently licensed by the FDA
for the treatment of clotting protein deficient patients.
DEWAR: container that keeps its contents at a constant and generally low
temperature by means of two external walls between which a vacuum is maintained.
FACTOR VIII: antihemophilic factor (AHF): a factor or component of blood
participating only in blood coagulation. Deficiency of this factor, when
transmitted as a sex-linked recessive trait, causes classical hemophilia
(hemophilia A).
FACTOR XIII: fibrin stabilizing factor (FSF): a factor that chemically joins
fibrin strands so that they become stable and insoluble in urea, thus enabling
fibrin to form a firm blood clot.
FIBRONECTIN: an adhesive compound of protein and carbohydrate: one form
circulates in plasma, another is a cell-surface protein which mediates cellular
adhesive interactions. Fibronectins are important in connective tissue, and they
are also involved in aggregation of platelets.
FIBRINOGEN: a blood protein that is converted to fibrin in the clotting of
blood.
64
HEMATOLOGY: that branch of medical science, which treats blood and blood forming
tissues.
HEMOSTATIC: (1) checking the flow of blood; (2) an agent that stops the flow of
blood.
PLATELET DERIVED GROWTH FACTOR (PDGF): a substance contained in platelets and
capable of inducing proliferation of vascular cells, vascular smooth muscle
cells; its action contributes to the repair of damaged vascular walls.
PROGENITOR: a parent or ancestor.
THERMOLABILE: easily altered or decomposed by heat.
65
THERMOGENESIS CORP.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
THERMOGENESIS CORP.
By: /s/ PHILIP H. COELHO
---------------------------------
Philip H. Coelho, Chairman & CEO
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 the capacities and on the dates indicated.
By: /s/ PHILIP H. COELHO Dated: September 22, 2000
-----------------------------------------
Philip H. Coelho, Chief Executive
Officer and Chairman of the Board
(Principal Executive Officer)
By: /s/ RENEE M. RUECKER Dated: September 22, 2000
------------------------------------------
Renee M. Ruecker, V.P. Finance
(Principal Financial and Accounting
Officer)
By: /s/ JAMES H. GODSEY Dated: September 22, 2000
--------------------------------------------
James H. Godsey, President/COO
and Director
By: /s/ HUBERT HUCKEL Dated: September 22, 2000
--------------------------------------------
Hubert Huckel, Director
66
By: /s/ PATRICK MCENANY Dated: September 22, 2000
--------------------------------------------
Patrick McEnany, Director
By: /s/ DAVID HOWELL Dated: September 22, 2000
-------------------------------------------------
David Howell, Director
67
SCHEDULE II
THERMOGENESIS CORP.
VALUATION AND QUALIFYING ACCOUNTS
Charged to Write-offs Balance at
Balance at costs and (net of end of
beginning of period expenses recoveries) period
--------------------- ----------- ------------- -----------
Allowance of Doubtful Accounts:
For the year ended June 30, 2000 $95,000 $43,000 $54,000 $84,000
For the year ended June 30, 1999 97,910 46,877 49,787 95,000
For the year ended June 30, 1998 97,913 52,424 52,427 97,910