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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 ended June 30, 1999 Commission File Number: 0-16375
THERMOGENESIS CORP.
(Exact name of Registrant as specified in its charter)
Delaware 94-3018487
(State of Incorporation) (I.R.S. Employer Identification No.)
3146 Gold Camp Drive
Rancho Cordova, CA 95670
(916) 858-5100
(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:
Title of each class Name of each exchange on which registered
----------------------------- -----------------------------------------
Common Stock, $.001 Par Value 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 17, 1999 was
$45,567,219.
The number of shares of the registrant's common stock, $.001 par value,
outstanding on September 17, 1999 was 20,803,032.
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 16, 1999.
ii
TABLE OF CONTENTS
Page
Number
-------
ITEM 1. Business................................................................................... 1
(a) General and Historical Development of Business ..................................... 1
(b) Factors Affecting Operating Results ................................................ 7
(c) Description of the Business ........................................................ 9
ITEM 2. Description of Properties ................................................................ 30
ITEM 3. Legal Proceedings ........................................................................ 30
ITEM 4. Submission of Matters to a Vote of Security Holders ...................................... 31
ITEM 5. Market for the Registrant's Common Stock
and Related Stockholder Matters .......................................................... 32
ITEM 6. Selected Financial Data .................................................................. 33
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................................... 34
(a) Overview .......................................................................... 34
(b) Results of Operations ............................................................. 35
(c) Liquidity and Capital Resources ................................................... 38
ITEM 8. Financial Statements and Supplementary Data .............................................. 40
ITEM 9. Changes in and Disagreements with Accountants on Accounting
And Financial Disclosure ............................................................. 56
ITEM 10. Directors and Executive Officers of the Registrant ....................................... 56
ITEM 11. Executive Compensation ................................................................... 56
ITEM 12. Security Ownership of Certain Beneficial Owners and Management ........................... 56
ITEM 13. Certain Relationships and Related Transactions ........................................... 56
ITEM 14. Exhibits.................................................................................. 57
(a) Financial Statements ............................................................. 57
(b) Reports on Form 8-K .............................................................. 57
(c) Exhibits ......................................................................... 57
1
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 hopes to service
through development of new products. The Company currently designs, develops,
manufactures, and sells products and devices which utilize its proprietary
thermodynamic technology for the processing of biological substances including
the cryopreservation, thawing, and harvesting of blood components.
Historically, the Company's primary revenues were from sales of ultra rapid
blood plasma freezers and thawers to hospitals, blood banks and blood
transfusion centers and plasma collection centers under US Food & Drug
Administration ("FDA") clearance to market in the United States. During the
fiscal years 1988 through 1995, the Company focused research and development
efforts on the refinement of product design for its blood plasma freezers and
thawers. During that period, the Company also sought new applications for its
technology, including the design of micro-manufacturing systems for
biopharmaceutical drugs which utilize the Company's thermodynamic competence in
new medical therapies.
With accelerated research and development efforts from 1996 to date totaling
approximately $10 million, 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
capable of producing biopharmaceutical drugs composed of stem cells, proteins,
enzymes or other blood components that have therapeutic applications for
treatment of human disease. The two technology platforms are referred to as the
BioArchive(TM) Platform and the CryoSeal(TM) Platform. The first product
developed under the BioArchive Platform, the BioArchive Stem Cell System, was
launched in May 1998, and the first product developed under the CryoSeal
Platform, the CryoSeal AHF System, was launched in September 1999.
The Company's completion and transfer of those two new technology platforms to
manufacturing resulted in a significant reduction in research and development
expenses in FY1999 over FY1998. Continued research and development efforts in
early FY2000 will be principally focused on finalizing design of the Company's
autologous thrombin activation kit (ATAK) for use as a stand-alone product and
as an integral part of the CryoSeal Platform. Additional efforts were also made
to optimize the manufacturing process and to cut overhead expenses.
In February of 1999, following FDA 510(K) clearance of the CryoSeal AHF System
which micro-manufactures cryoprecipitated anti-hemophilic factors
(cryoprecipitated AHF) from single units of plasma for the intravenous treatment
of hemophiliacs, the Company prepared to initiate clinical trials for an
autologous fibrin glue (AFG) indication for the CryoSeal Platform technology.
These activities included hiring C L McIntosh as the Clinical Research
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Organization to lead the clinical trial effort and preparing the initial draft
of a clinical protocol for an I.D.E. approved pivotal trial utilizing the
Company's autologous fibrin glue as a hemostatic agent in 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 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.
Early products received rapid 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 its distribution network 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 glue, 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") to develop systems and processes to
harvest, concentrate, cryopreserve and archive therapeutic units of
hematopoietic stem and progenitor cells from umbilical cord blood (donated
following the healthy 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 FDA class II
medical devices. 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 fiscal year 1998. During fiscal year 1999, the
Company continued to significantly restructure its operations and management in
order to prepare for the market launch in the United States of the CryoSeal AHF
System in 1st Quarter of FY2000, and the European Market launch of the CryoSeal
AFG System in 2nd half of FY2000, in order to compete in new markets where
annual world-wide revenues are estimated at approximately $400 million.
By June 30, 1999, the Company completed development of its autologous thrombin
activation kit, called ATAK, which will serve as both a stand-alone product and
also an integrated component of the CryoSeal AFG System's CP-2 processing
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disposable to enable the CP-2 to perform simultaneous harvesting of both
fibrinogen and thrombin from a unit of donor blood to create an autologous
fibrin glue (AFG). 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 glue
industry to develop a totally autologous fibrin glue system. The CryoSeal AFG
System and ATAK product are in final design phase, and must be approved through
the pre-market approval (PMA) process at the FDA, which will include clinical
trials.
The CryoSeal AHF System, which produces Antihemophiliac Factor VIII
(Cryoprecipitated AHF) for the treatment of hemophilia, received FDA 510(K)
clearance in February of 1999. Formal sales activities were initiated in
September 1999.
Finally, the Company developed the first major upgrade to its Ultra Rapid
Freezer line with the introduction of the MicroCascade(TM) MP1100 integral
freezer that further raised the bar of rapid plasma freezing performance across
the transfusion industry. The enhanced performance is expected to stimulate
upgrade sales in the domestic ultra rapid plasma freezer market.
Following the successful launch of the BioArchive Stem Cell System in May 1998,
the Company placed an additional nine (9) systems during Fiscal Year 1999,
bringing its total to 18 systems operating in 9 countries around the globe, and
one (1) additional system at Daido Hoxan used for research. Notable among the
current year sales were the London Cord Blood Bank, the Leuven Cord Blood Bank,
Belgium, the Institute of Hematology, Tianjin, China, and Nihon University
Medical Center, Japan. Important developments in this new market included the
validation and production startup at key centers such as the New York Blood
Center, Duke's Carolinas Cord Blood Bank, Barcelona's Institut de Recerca
Oncologica, Georgetown University Medical Center, University of Dusseldorf, and
the Finnish Red Cross. Also of importance was Duke University's acquisition of a
second BioArchive System in order to validate and utilize the 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 approval at Duke in August 1999 and is expected to
be completed by February 2000.
The Company is now actively pursuing strategic alliance partners with
considerably greater financial and marketing resources than the Company in order
to maximize the commercial value of ATAK, CryoSeal and BioArchive products. If
the Company is successful in entering into one or more strategic partnerships,
the future R&D activities of the Company will be devoted to the development of
two new products derived from the CryoSeal and ATAK research programs: First is
the MicroSeal AFG System which is a miniaturized version of the CryoSeal AFG
System for the treatment of outpatient (ambulatory) wound care. 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 standalone surgicenters, as well as the
4
9,000 offices of plastic surgeons, oral and maxillofacial surgeons, reproductive
surgeons and podiatric surgeons. The Company has targeted development of its
MicroSeal(TM) System for these minimally invasive surgical theatres.
When development is completed, the Company intends that the MicroSeal AFG 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 Autologous Fibrin Glue (AFG) for the millions of microsurgeries
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 surgery, sealing excised cataract wounds, bonding
skin flaps in minor cosmetic surgery, and repairing ruptured eardrums.
Second is the CryoFactor System which 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. The CryoFactor System completed the first of a number of planned
pre-clinical tests designed to optimize the concentration of growth factors in
order to prepare the product for final design future clinical trials.
The significant research and development expenses and general operating expenses
required to support the manufacture, validation and launch of the BioArchive and
CryoSeal technology platforms have significantly diminished the Company's
working capital. The Company will need to financially bridge operating expenses
until it receives significant revenues from the sale and distribution of the new
products. It is not uncommon for new medical technologies to take up to one year
to gain full market acceptance, and the Company will need to either
significantly reduce its infrastructure and management functions during this
period of time, or find additional sources of capital to allow it to continue
with its business plan. The Company is now actively pursuing strategic alliance
partners of considerably greater marketing and financial resources than the
Company in order to maximize the commercial value of these recently completed
ATAK, CryoSeal and BioArchive products as a means of supporting full scale
operations.
Medical Needs Driving Development of New Products
The 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. Sharing of human blood is by its nature risky -- and it
is a risk worth taking only if there are no appropriate alternatives.
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
incidence of liver cancer in Japan that bluntly portrays the long range "time
bomb" nature of blood borne pathogens:
5
"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 industry authorities were
proclaiming the blood supply safe. What is clear from this simple incident is
that it is apparent that guardians of the public health can be tragically
misinformed with deadly consequences that can span a half century.
The hepatitis C outbreak of the 70's and 80's and HIV's devastating impact in
the 80's have taught the medical community that the world's blood supply may
always be at risk to the emergence of a yet to be discovered deadly pathogen.
The 90's witnessed the emergence of numerous new serotypes of hepatitis and HIV,
including anti-viral resistance strains. During the 90's, the prion infectious
agent of Creutzfeldt-Jakob Disease (CJD) was comprehensively identified as a
pathogen of the deadliest nature (100% mortality rate). More ominously, new
variant of CJD (nvCJD) appeared in the early 90's which attacks young adults
rather than the elderly, and has a drawn out clinical cycle of several months
rather than a few weeks. Animal models have shown that nvCJD can be transmitted
via B lymphocytes isolated from the tonsils and a recent publication in the
medical journal, Lancet, has shown that the rate of confirmed deaths due to
nvCJD appeared to rise significantly at the end of 1998. There is no known
diagnostic screening test for nvCJD, and the incubation period may be as long as
10 years. Unfortunately, if health officials ultimately confirm that this deadly
pathogen has made its way into the world's blood supply and is transferring the
disease to patients receive the infected blood products, it will already be too
late. (Will et al. "Deaths from Variant Creutzfeldt-Jakob Disease." The Lancet
Interactive (on-line). Volume 353, No. 9157, March 20, 1999)
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 believes that 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.
6
CLINICAL DATA
I. CRYOSEAL PLATFORM
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.
o Ex-vivo assays were performed to fully characterize the CryoSeal
cryoprecipitate of Factor VIII and fibrinogen-rich 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 the intravenous treatment of hemophilia.
o Ex-vivo animal tests were performed to determine if the tensile and
adhesive strength of the CryoSeal fibrin clot, when activated with
thrombin, which was comparable to competitive fibrin glues on both
porous and non-porous tissue surfaces. Further, parenchymal air leaks
in swine lungs were sealed with CryoSeal fibrin glue compared with a
cyanoacrylate glue.
o 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.
o Finally, CryoSeal fibrin glue was utilized in 34 in vivo human
surgeries at three different hospitals, in Italy and Canada
(orthopedic, neuro, liver, spine), which demonstrated comparable
results compared to currently available fibrin glues in regards to
tissue adhesion and hemostasis.
II. BIOARCHIVE PLATFORM
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 progenitor cell recoveries reported by NYBC utilizing the bag sets
are the highest of any processing system available today.
In Vivo Tests 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.
7
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, 1999 those countries
included Finland, United Kingdom, Germany, Japan, Spain, Belgium, China and
Taiwan.
(b) FACTORS AFFECTING OPERATING RESULTS
Basis of Presentation. The Company has incurred recurring operating losses and
has an accumulated deficit of $30,745,189 as of June 30, 1999. The report of
independent auditors on the Company's June 30, 1999 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
2000. This plan includes the pursuit of increased revenues from the
commercialization of new products, the consummation of debt or equity financing
or cash infusion through strategic partnerships in amounts sufficient to fund
further growth, the receipt of license fees from strategic alliance partners 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.
Dependence Upon New Products for Future Growth. Historically, substantially all
of the Company's revenue has been from sales of core line products which freeze
or thaw blood plasma. Because the Company expects this portion of the blood
plasma market to have limited growth, the future success of the Company will be
dependent upon new applications of its technology. The Company intends to
concentrate on developing and marketing novel thermodynamic blood processing
systems such as: (1) CryoSeal AHF System; (2) CryoSeal AFG System; (3) MicroSeal
AFG System, (4) CryoFactor APDGF System (5) BioArchive Stem Cell System; (6)
BioArchive Tissue System. Although these six products use technology evolved
from the Company's core competence, development of these new products represents
a departure from the Company's current core business. No assurance can be given
that all of these potential products can be successfully developed and, if
developed, that a market will develop for them.
Need for Additional Financing. In light of delays in new product launches during
fiscal year 1999, and in the event actual sales of the Company's products do not
meet the Company's expectations in any given period, or development and
production costs increase significantly, the Company will need to secure
additional financing to complete and fully implement its business objectives.
Although the Company has developed relationships with investment banking firms
and certain institutional investors, no assurance can be given that debt or
equity financing will ultimately be available if needed, and if available, that
it will be obtained on terms favorable to the Company.
Lack of Testing Data. The Company has completed certain in vitro and in vivo
testing of its CryoSeal AFG Systems, and further clinical studies are to begin
in the near future in Italy, Japan, Canada, and the United States with the
CryoSeal AFG System. Other in vitro studies have occurred with the BioArchive
Stem Cell System. However, all of these studies, do not provide a basis to
achieve regulatory permission to promote these systems for all the indications
that management believes can be achieved. Further clinical studies must be
performed. There can be no assurance that the clinical studies can be
successfully completed within the Company's expected time frame and budget, or
that the Company's products will prove effective in the required clinical
trials. If the Company is unable to conclude successfully the clinical trials of
its products in development, the Company's business, financial condition and
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results of operation could be adversely affected.
Government Regulation Associated with Products. The majority of the Company's
products require clearance to market from the FDA for sale in the United States
and from comparable agencies in foreign countries, which may limit or
circumscribe applications for U.S. or foreign markets in which the Company's
products may be sold. Further, if the Company cannot establish that its product
is substantially equivalent, or superior, in safety and efficacy to a previously
approved product in the United States, delays may result in final clearance from
the FDA for marketing its products. No assurance can be given that FDA clearance
or permission to market in the United States will be obtained, or that
regulatory approval will be received in all foreign countries. Although the
standards established by the FDA are generally more encompassing, the Company's
products may also be required to meet certain additional criteria or receive
certain approvals from other foreign governments for marketing and sales.
Dependence on Key Personnel. The Company is dependent upon the experience and
services of Philip H. Coelho, Chairman and Chief Executive Officer, and James H.
Godsey, Ph.D., President and Chief Operating Officer. The loss of either person
would adversely affect the Company's operations. The Company has obtained key
man life insurance covering Mr. Coelho in the amount of $1,000,000 as some
protection against this risk.
Year 2000 Compliance. Based upon information currently available, management
does not anticipate that the Company will incur material costs to update its
computer software programs and applications to be "Year 2000" compliant. The
Year 2000 problem which is common to most corporations concerns the inability of
information systems, primarily computer software programs, to properly recognize
and process date sensitive information as the year 2000 approaches. The Company
has completed an assessment of its internal systems and has developed a plan to
address any issues that may arise. In addition, the Company has relationships
with vendors, customers and other third parties who rely on computer software
that may not be Year 2000 compliant. Many of these third parties, operate
outside of the U.S. in countries where compliance programs may be less further
along than in the U.S. However, the Company has formed a task force to identify
and address potential year 2000 issues with significant vendors, customers and
other third parties. In August 1999, a third party subcontractor to the FDA
examined the Company's Year 2000 preparedness and noted no areas of significant
concern.
Possible Loss of Nasdaq SmallCap Market Eligibility. While the Company's Common
Stock is included on the Nasdaq SmallCap market, its continued inclusion will
depend on the Company's ability to meet certain eligibility requirements
established for the Nasdaq system. If the Company's Common Stock is ineligible
for trading on the Nasdaq market, such Common Stock may be subject to a rule
under the Securities Exchange Act of 1934 that imposes additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally institutions with
assets in excess of $5,000,000 or individuals with a net worth in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their
spouse). For transactions covered by the rule, the broker-dealer must make a
special suitability determination for the purchaser and receive that purchase's
written consent to the transaction prior to the sale. The rule may adversely
affect the ability of broker-dealers to sell the Company's Common Stock, and
9
consequently may limit the public market for and the trading price of the Common
Stock.
(C) 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 -40(Degree)C 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 Fiscal Year 1999 THE COMPANY'S MP1100 MicroCascade, the first major
upgrade of the plasma freezer line was introduced. 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 8hp conventional remote
compressor/condenser. The advantage of the MicroCascade technology is that
expensive and inflexible remote condenser 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 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 DbA.
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
10
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 five models of freezers which vary primarily by capacity
and condenser type. The MP 2000 and MP 1000/1100 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
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, 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 Medsep
Corporation, a Division of Pall Corp. for manufacturing and distribution in
11
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, have already purchased the BioArchive
robotic archive device.
During Fiscal Year 1999, nine (9) more BioArchive Systems were placed, bringing
the global total of units placed to 19 systems. PCB Banks acquiring the
BioArchive Stem Cell System in Fiscal Year 1999 included: Nihon University
Medical Center, Japan; GHStem Cell Therapy Center, Guangzhou, China, Institute
of Hematology, Tianjin, China; London Cord Blood Bank, England; Leuven Cord
Blood Bank, Belgium. Based on preliminary market data available in this newly
emerging market, the Company estimates that if the FDA licenses PCB stem cells
in Year 2000 as anticipated, and new disease categories such as sickle cell
anemia and thalyssemia 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 three 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
rescued 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.
12
(i) 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
2 ml 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.
(ii) 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 Medsep
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.
(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.
(iii) 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 (HIV, Hepatitis A-H, etc.), bacteria (e.g.,
Staphylococcus aureus, Yersinia enterocolitica, etc.) and prions (e.g.
Creutzfeldt-Jakob Disease -- CJD and nvCJD).
13
Recent technologies that seek to manufacture these same proteins, enzymes and
growth factors through recombinant production processes rather than "pooled"
plasma have their own manufacturing and allergic reaction safety risks.
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 the patient's
own blood, 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 proprietary
computer software and a dedicated blood processing container (CP-1) to
harvest cryoprecipitated AHF in less than one hour. 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 System automatically produces cryoprecipitated
AHF from a single unit of plasma, with concentrations of clotting and
adhesive proteins significantly higher than federal standards, in
approximately one hour. Internal management estimates indicate that
approximately up to 1 million units of cryoprecipitated AHF are
produced annually by blood banks in the United States. While
recombinant blood protein products are prevalent in the United States,
80% of the world's hemophiliacs cannot afford these expensive proteins
and, consequently, go untreated in their lifetime and die at a young
age ("Blood Transfusion Industry." SG Cowen, October 1998). The Company
believes that the CryoSeal AHF System may provide a lower cost source
of these clotting proteins and is positioned to serve this ignored
market.
(b) CryoSeal AFG System
The CryoSeal AFG System mates the CryoSeal device with proprietary
computer software, and a dedicated processing disposable (CP-2) to
produce autologous fibrin glue (AFG) from the surgical patient's own
blood in less than one hour. Fibrin glue results from combining
thrombin enzyme with fibrinogen clotting protein. Surgical applicators
allow the surgeon to precisely administer the AFG to the internal wound
site to control surface bleeding, bond tissues and augment or replace
sutures. Autologous fibrin glue contains the adhesive and/or clotting
proteins - fibrinogen, fibronectin, von Willebrand's Factor, Factor
VIII and the clot stabilizing protein Factor XIII, as well as platelet
derived growth factors (PDGF) which the Company believes provide
competitive efficacy to commercial fibrin glues sourced from blood
plasma pooled from thousands of paid individuals. Outside of the United
States, commercial fibrin glues have annual sales in excess of $400
million. Because of the concern of viral contamination from the source
pooled plasma it was only recently (May 1998) that the FDA granted its
first clearance to the commercial fibrin glue, Tisseel(R), marketed by
Baxter.
(c) ATAK (Autologous Thrombin Activation Kit)
Commercial fibrin glues, used bovine-derived thrombin to initiate clot
formation. Bovine-derived thrombin was both readily available and
inexpensive. With the emergence of nvCJD which is believed to have
passed to humans who consume beef from cattle infected by mad cow
14
disease, the European Community has now prohibited the use of
bovine-derived thrombin in commercial fibrin glues. Consequently, those
fibrin glue manufacturers have begun introducing thrombin sourced from
pooled human plasma, which also introduces risk of contamination from
these same infectious CJD prions as well as lethal human viruses. To
order to provide a safer alternative, the Company has recently
completed development of a proprietary disposable kit for preparing 8
ml of autologous thrombin ("ATAK") from a ~10ml aliquot of the
patient's plasma in as little as 40 minutes. The Company intends ATAK
to become a stand-alone product, as well as an integrated part of the
CP-2. Consequently autologous thrombin will be simultaneously prepared
from the same unit of plasma used to prepare autologous fibrinogen rich
cryoprecipitate on the CryoSeal AFG System.
The Company announced the licensing of the ATAK technology for
exclusive use in Japan to ASAHI MEDICAL CO. LTD. The Company as well as
ASAHI both expect to initiate clinical trials during fiscal year 2000.
The Company also expects that sales of the new CP-2 disposable could
occur in Europe in fiscal year 2000. The Company believes it is the
only competitor to develop a 100% autologous fibrin glue and therefore
will possess a significant competitive advantage in a market soon to be
crowded with numerous pooled plasma-based competitors.
(d) 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 is produced by the CryoSeal Platform
device (CS-1) with modified software and disposable processing
containers. Formal clinical trials and FDA clearance will be required
to market the product in the United States.
(e) MicroSeal AFG System
MicroSeal AFG is a bench top system that is intended to prepare up to 1
ml of AFG from only 35 cc of patient blood. This volume of AFG is
sufficient for the hundreds of 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 AFG System.
(iv) 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.
(a) 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
15
the cryoprecipitated AHF separates from the cryo-poor plasma and then
concentrates, followed by the cryo-poor plasma transferring back to the
transfer pack.
The CP-1 received 510(K) clearance for marketing from the US FDA in
February 1999 and clearance for sale in Canada in 1998.
(b) CryoSeal AFG CP-2
The CP-2 is the primary disposable for simultaneously preparing both
components (fibrinogen and thrombin) of the autologous fibrin glue
prepared by the CryoSeal AFG System. The CP-2 is similar to the CP-1,
with the addition of the disposable components of the autologous
thrombin activation kit (ATAK) used for the extraction and processing
of autologous thrombin.
(c) ATAK
ATAK is the stand-alone-handheld processing disposable with proprietary
reagents for harvesting 8 ml of autologous thrombin from 10 ml of
patient plasma.
(d) 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 received 510(k) clearance for
marketing from the FDA in 1996 and clearance for sale in Canada from
Health Canada in 1998.
(e) CryoFactor APDGF CP-3
The CP-3 is the primary disposable for harvesting and concentrating
solutions of platelet derived growth factors from platelet rich plasma.
The CP-3, like the CP-2 and systems dedicated for their use, will
require FDA clearance to market in the United States. Final Research
and development of this product will be dependent on cash flows during
Fiscal Year 2000.
(f) CryoFactor Patient Kit
The Patient Kit will be the means by which the therapeutic CryoFactor
APDGF solution is aliquoted 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 Fiscal Year 2000.
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
16
replacement chemicals are readily available and the Company does not anticipate
any shortages or constraints on supplies.
In July 1999, TUV Rheinland of North America performed its annual surveillance
audit of the Company pursuant to prEN46003, ISO 9003 and the Medical Device
Directive ("MDD"). The re-certification attests to the Company's quality
management system and permits the Company to place the CE mark on its medical
devices reviewed during the audit. The CE mark is essential to continued sale
and distribution of the Company's products in the European Community. The
CryoSeal CP-1 disposable and BioArchive System technical files were reviewed and
certified in January 1999. The Plasma Thawers and Liquid Medication Dispensers
were deemed exempt.
THE MARKET FOR THE ULTRA RAPID LINE PRODUCTS
The Market Need for Freezers and Thawers
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 further fractioned into its components: 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 onoctic
pressure and modulate immunity; and other proteins that have diverse activities.
At specialized plasma fractionation facilities, FFP is further processed into
plasma derivatives for use in component therapy, such as albumin, factor VIII
and IX, antithrombin III, iv immunoglobulins, etc. The typical uses for FFP are
for direct transfusion, and in the preparation of Cryoprecipitated AHF. The use
of FFP has increased tenfold within the past 10 years and 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 rather than
transfusing whole blood. In fact the use of whole blood is decreasing.
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.
Conventional freezing systems rely on air blast freezing; however, this method
requires a considerable length of time (90-120 minutes) to 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 a the Company's ultra-rapid freezer instead of the
air blast freezers.
Freezer Market Data
The market for Ultra Rapid freezers is concentrated within the blood banks,
blood transfusion centers, and plasma collection centers around the world.
17
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 fiscal year 1996/7 Centeon, the world's largest fractionator,
purchased 76 MP2000 freezers from the Company for their 32 domestic facilities.
Thawer Market Data
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.
Competition
Freezers: North America
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
----------------------------------------- ------------------------------
THERMO-GENESIS CORP. Liquid heat transfer
----------------------------------------- ------------------------------
Forma Scientific Air blast
----------------------------------------- ------------------------------
Harris Air blast
----------------------------------------- ------------------------------
18
Thawers:
------------------------ ----------------------------- ---------------------------- -----------------------------
Competitor Technology Advantage Limitations
------------------------ ----------------------------- ---------------------------- -----------------------------
THERMOGENESIS CORP. o Membrane pockets o Rapid Thaw o Unit capacity
and semi-closed system o Low maintenance limited to number of
o Heat transfer fluid o Plasma is pockets
contained in membrane
pocket
------------------------ ----------------------------- ---------------------------- -----------------------------
Helmer o Water bath o Contamination of
o Open air system water.
o Frequent water
changes
o Longer thaw period
------------------------ ----------------------------- ---------------------------- -----------------------------
Cytotherm o Water bath o Same as above
o Open air system
------------------------ ----------------------------- ---------------------------- -----------------------------
The Market 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
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 most recent 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.
19
Transplant candidates could 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 untreated patients.
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.
PCB Stem Cell Banking
PCB samples are collected by seeking donations from parents at the time of
childbirth. The placenta and umbilical cord, which previously had been
considered medical waste, is drained of blood through the umbilical vein, and
stem cells are concentrated from the placental blood.
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, 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 a dozen 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 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):
20
LEUKEMIAS:
Acute Myelogenous Leukemia (AML)
Acute Lymphoblastic Leukemia (ALL)
Chronic Myelogenous Leukemia (CML)
ANEMIAS:
Aplastic Anemia
Thalassemia
Sickle Cell Anemia
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
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
21
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 o Established process o Require near-perfect HLA match
o Established registry o Experimental procedure
o High cell numbers collected o Donor requires hospitalization and
anesthesia
o Donor pain
o $25K -30K cost
o Unavailability when needed
- ---------------------------- ------------------------------------------ ------------------------------------------------
Peripheral Blood o Anesthesia not required of donor o Apheresis requires three collections
o High cell numbers collected (4 hours each)
o Experimental procedure
o Donor pain
o Autologous stem cell units retain
cancer cells
- ---------------------------- ------------------------------------------ ------------------------------------------------
Placental/cord Blood o Use of waste product o New technology and not yet as
o No donor pain established as bone marrow
o Cryopreservation for stored o Limited volume of placental blood
inventory (~80 ml)
o Requires only four out of six o Experimental procedure
HLA matching
o Immediately available
o Reduced GvHD
o Higher concentrations of stem
cells
o Expected licensure by FDA in
2000
- ---------------------------- ------------------------------------------ ------------------------------------------------
One of the major advantages with PCB stem cells is that they are harvested
without pain to the donor from the placenta and umbilical cord, a
normally-discarded tissue. 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.
22
BioArchive Customers
-------------------------------------------------- ----------------------
PCB Customers Placed Units
-------------------------------------------------- ----------------------
New York Blood Center, USA 2
-------------------------------------------------- ----------------------
Duke University Medical Center, USA 1
-------------------------------------------------- ----------------------
Finnish Red Cross, Finland 1
-------------------------------------------------- ----------------------
Hokkaido Red Cross, Japan 1
-------------------------------------------------- ----------------------
Centro de Transfusion, Spain 1
-------------------------------------------------- ----------------------
University of Tokyo, Japan 1
-------------------------------------------------- ----------------------
Barcelona CB Bank, Spain 1
-------------------------------------------------- ----------------------
Tzu-Chi Foundation, Taiwan 1
-------------------------------------------------- ----------------------
University of Dusseldorf, Germany 1
-------------------------------------------------- ----------------------
Georgetown Univ. Med. Center, USA 1
-------------------------------------------------- ----------------------
San Diego Blood Center, USA 1
-------------------------------------------------- ----------------------
Nihon University, Japan 1
-------------------------------------------------- ----------------------
GHStem Cell Therapy Center, PRC 1
-------------------------------------------------- ----------------------
Tainjin, PRC 1
-------------------------------------------------- ----------------------
London Cord Blood Bank, England 1
-------------------------------------------------- ----------------------
Leuven University, Belgium 1
-------------------------------------------------- ----------------------
TOTAL 17
-------------------------------------------------- ----------------------
-------------------------------------------------- ----------------------
PB Customers Placed Units
-------------------------------------------------- ----------------------
Duke University Medical Center, USA 1
-------------------------------------------------- ----------------------
THE MARKET FOR THE CRYOSEAL AFG SYSTEM
Fibrin glues are used by surgeons to seal internal wounds and to generate
hemostasis 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 glue 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
23
and P.M. Ness, "Fibrin flue: The Perfect Operative Sealant," Volume
30:8. 1990)
Formed by combining fibrinogen and thrombin, fibrin is completely biodegradable.
It is both a hemostatic (clot-forming) agent and a glue. Fibrin is also
completely natural - it is the body's own acute tissue cohesive. 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 glues 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 glues are used to seal needle holes, pulmonary leaks, and
to seal slow oozing wounds. Fibrin glues provide excellent adhesion for skin
graft, plastic surgery procedures, and sealing the dura to prevent cerebral
spinal fluid leaks.
Current Market Spending on Fibrin Glues
Accurate data on the current use of fibrin glues is difficult to obtain, since
much of the US market is in the form of "home brew" glues. Since these are
non-commercial, "off-label" products, there is little formal information about
the topic.
In Europe and Japan, approved commercial fibrin glues 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
glues cost generally estimates $60 to $80 per ml delivered to the wound site.
Given their cost they are typically purchased in smaller volumes of about 6 ml
per procedure. Management believes that commercial fibrin glues are used in
about 300,000 European and 330,000 Japanese procedures, with total commercial
spending on fibrin glues equal to $350 million. Baxter's Tisseel has the largest
share of the European market and Centeon's Beriplast has the largest share of
the Japanese market.
Competition
Many companies seek to take advantage of the surgeon's desire for an internal
surgical glue that will solve the limitations of today's products. The Company
is aware of nine other companies which have developed or are developing
commercial fibrin glues. A number of companies are also exploring synthetic
glues for internal use. Most of these products are at various phases of
development, and most have not received regulatory approval to market in the
United States.
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.
24
(i) Blood Plasma Freezers and Thawers
The Company has primarily targeted the blood processing industry which consists
of approximately 7,000 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 and blood banks such as the
Red Cross or blood transfusion agencies in the United States, Australia,
Belgium, Canada, Denmark, France, Germany, Japan, Korea, Netherlands, Sweden,
and Switzerland.
(ii) CryoSeal AHF and AFG Systems
The Company's strategy for entering each of the key markets for fibrin glue 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 glue
market, and Dideco S.p.A. was selected for the European fibrin glue market. The
Company has initiated efforts to align itself with a domestic partner that would
allow aggressive market penetration in the United States and the rest of the
world through that company's distribution network and channels in the surgical
arena following FDA approval of expanded chains for use as fibrin glue.
Furthermore, the Company has taken an interim step to begin staffing a small
direct sales force to initiate the market launch of CryoSeal AHF in the domestic
market for treatment of hemophilia. Sales into other regions of the world will
be handled by local distributors, many of whom the Company has existing
relationships for other products.
(iii) CryoFactor APDGF System
Again, 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, 1999, there were no formal arrangements in any
market for this future product.
(iv) BioArchive System
The Company has established formal relationships with Medsep Corporation, 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 Medsep on marketing efforts and strategy for all
markets excluding Japan. This arrangement was amended in May of FY99 granting
the Company the right to distribute the disposable bag sets outside of North
America & Europe under the Company's name. The Company previously licensed the
manufacture and distribution of the bag sets in Japan to Nissho Corporation, and
also appointed Daido Hoxan as its exclusive distributor for service and sales of
the BioArchive System in Japan. The Company markets the BioArchive System
through distributors internationally and directly in the domestic markets
25
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 (the Stem Cell system has a
capacity of 3,626 cord blood specimens/canisters) 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.
RESEARCH AND DEVELOPMENT
As of June 30, 1999, the Company had completed development of two innovative
technology platforms, each of which will give rise to multiple products and
medical systems. These systems feature a thermodynamic platform and companion
sterile, disposable plastic containers and applicators that come into direct
contact with the blood products. These disposables must be discarded after each
use, transforming each sale of the system into a higher margin revenue stream
stretching into the future. In FY1999 the Company completed development of three
products derived from its two new technology platforms - CryoSeal AHF System,
CryoSeal AFG System, and BioArchive Stem Cell System. The CryoSeal AHF System
gained FDA clearance of its 510(K) in February 1999. The Company has incurred
$2,004,798, $3,858,077, and $3,562,280 for fiscal years ending June 30, 1999,
1998 and 1997, respectively. The following is a brief summary of the additional
medical products in development.
ATAK. The autologous thrombin activation kit is a small hand-held
disposable which harvests 8 ml of thrombin with anticipated concentration of
approximately 80 I.U./ml from 10 ml of patient plasma. Currently the only
thrombin available in the United Status is derived from "pooled" bovine blood
which, due to Factor V impurities, has been responsible for numerous severe,
bleeding episodes in patients and also suffers from physician concerns about
possible contamination by infectious prions or viruses. The Company estimates
that thrombin is used by surgeons about a million times annually to spray on
bleeding tissue to "dry the field" by clotting residual fibrinogen. This is
separate from the more well known use of thrombin to combine with concentrated
fibrinogen in cryoprecipitated AHF to form a hospital prepared fibrin glue for
more powerful hemostasis and tissue adhesion. The Company announced the
licensing of the ATAK technology to ASAHI MEDICAL CO. LTD. for use in the
CryoSeal AFG System. Additional patent applications have been filed covering the
thrombin technology. The CryoSeal AFG System will thus be upgraded to utilize
the new CP-2 processing disposable which will process and collect both
components of fibrin glue.
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 wounds such as diabetic, decubitus and venous stasis skin
ulcers. Initial pre-clinical trials were performed during Fiscal Year 1999 and
continue into Fiscal Year 2000. This process led to the formation of extensive
relationships with the leading researchers in what is an emerging fast growing
wound care marketplace - the topical treatment of chronic dermal wounds. This
system is expected to enter formal clinical trials in Fiscal Year 2001.
26
The MicroSeal AFG System. MicroSeal will be a miniaturization of the
CryoSeal AFG System. MicroSeal AFG is a bench top device with small processing
and applicating disposables that requires less than 50 ml of blood, drawn in a
syringe to harvest up to 1 ml of Autologous Fibrin Glue (AFG) for the millions
of microsurgeries 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 surgery, sealing excised cataract wounds,
bonding skin flaps in minor cosmetic surgery, and repairing ruptured eardrums.
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 its Ultra Rapid Plasma Freezers and Thawers at its
facility in Rancho Cordova, CA. The company has 5,000 square feet dedicated to
the Ultra Rapid line. The Company believes that this capacity is capable of
manufacturing 500 units per year on a single shift basis. The Company has
initiated outsourcing of certain of the assembly tasks it now does itself in the
production of the Ultra Rapid line.
ThermoGenesis Corp. 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 facility. The Company believes that it has the capacity to
manufacture 48 Systems per year on a single shift basis. The BioArchive overwrap
bag is manufactured by the Company and the canister and foam canister sleeve are
supplied by OEM vendors.
The Company has 3,664 square feet dedicated to the manufacturing of the CryoSeal
CS-1 instrument. The current allocated manufacturing space can manufacture (96)
ninety six CS-1 units per year or 8 per month. That space could easily be
expanded to provide a two-fold increase in capacity, and 1 to 2 shifts added to
provide a 4-8 fold increase in capacity. All key sub-assemblies are purchased
from a local supplier base which could ramp up production to meet the various
levels of capacity required by the Company.
The CryoSeal Platform requires three patented disposables, both 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.
27
LICENSES AND DISTRIBUTION RIGHTS
In June 1995, the Company granted the Japanese distribution rights to its
BioArchive System and the Vial BioArchive System to 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 Daido Hoxan for a
downsized version of the BioArchive System. The Company is entitled to receive
$300,000, of which $135,000 was received in fiscal 1999, 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 fiscal 1996 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 Corporation and Medsep Corporation, a subsidiary of Pall
Corporation, as Licensees through which Pall Medsep 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 placental/umbilical cord blood ("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 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 Medsep amended the original agreement, and the
Company regained the rights to distribute the bag sets outside North America &
Europe under the Company's name.
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 will manufacture and sell the CryoSeal System and its accessories to
Dideco for distribution in the European Community.
PATENTS
The Company believes that patent protection is important for products and
potential segments of its current and proposed business. The Company currently
holds nine (9) patents, and has ten (10) patents pending to protect the designs
28
of an additional four (4) 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, if any, 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 approval 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.
Under FDA regulations, medical devices are classified in one of three
categories: Class I, Class II or Class III devices, based on the health risk
posed by such device. Each class of device must comply with certain regulatory
requirements established by the FDA in order to ensure the safe and effective
use of the devices. Class I devices are subject to General Controls, which
includes a cGMP quality system, labeling, and in some instance 510(k)
submissions. Class II devices are also subject to the General Controls, and in
addition must comply with Special Controls established at the discretion of the
FDA. Special Controls may include application of performance and safety
standards, product type standards, clinical or in-use studies, post-market
surveillance and reporting, and other FDA guidelines established at the time of
product submission review. Class III devices are higher risk devices that are
generally associated with invasive procedures and must receive FDA pre-market
application ("PMA") approval prior to distribution.
29
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. Class I and Class II 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 approval of a PMA or clearance of a 510(k). Actions by the FDA
might also include withdrawal of marketing approvals and criminal prosecution.
Such actions could have a material adverse effect on the Company's business,
financial condition, and results of operation.
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, 1999, the Company had 74 full time employees. The Company also
utilizes temporary employees throughout the year to address 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 Domestic Operations and Export Sales
The Company has no foreign manufacturing operations. For fiscal year 1999,
foreign sales were approximately $2,000,000, or 44% percent of net revenues. For
fiscal year 1998, foreign sales were approximately $2,198,000, or fifty percent
of total revenues for the year. For fiscal year 1997, foreign sales were
approximately $1,024,000, or fifteen percent of total revenues for the year.
ITEM 2. DESCRIPTION OF PROPERTIES
In July 1994, the Company leased an approximately 11,000 square foot facility
located in Rancho Cordova, California. This facility is used for the
manufacturing assembly of the Company's medical devices, and was upgraded during
fiscal year 1997 as part of the Company's efforts to obtain ISO 9003
30
certification. In August 1997, the Company extended that lease for 26 months,
and it will expire in January 2002. Annual lease expense including common area
maintenance charges is $62,000 for this facility.
In December 1996, the Company leased 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, and the
annual lease expense including common area maintenance charges is $192,000 for
this facility.
In May 1997, the Company also leased an approximately 5,000 square foot facility
located adjacent to its manufacturing facility in Rancho Cordova, California.
This facility is used for the manufacture of the ultra rapid product line. The
lease expires in June 2000, and the average annual lease expense including
common area maintenance charges is $27,000 for this facility.
In April 1998, the Company leased an approximately 2,600 square foot facility
located adjacent to other manufacturing operations in Rancho Cordova,
California, to accommodate the manufacture and assembly of the BioArchive
Systems. The average annual lease expense is $17,000 for this facility. The
lease was for an initial term of one year, and continues on a month to month
basis thereafter. The Company intends to end its lease of this facility during
the 1st Quarter of FY2000.
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, including future growth in the number of
products manufactured.
ITEM 3. LEGAL PROCEEDINGS
In December 1998, the Company was served with a civil action entitled
Metropolitan Creditors Service of Sacramento vs. THERMOGENESIS CORPORATION,
Sacramento Superior Court No. 98-AS-05815. The action allegedly arises from the
Company's vendor relationship with On-Time Manufacturing, Inc., and relates to
several invoices totaling approximately $90,000 in the aggregate which On-Time
Manufacturing, Inc. claimed were owing, and which were allegedly assigned to
Metropolitan Creditors Service of Sacramento. The Company disputes the claims
and filed an answer to the complaint in December 1998. In August 1999,
Metropolitan Creditors Service of Sacramento sought to amend the Complaint to
include additional claims for breach of contract, seeking compensatory and
consequential damages in excess of $1-million. The Company proceeded to
arbitration on the claims, including the breach of contract claims, and the
arbitrator issued an award of $2,625 to Metropolitan Creditors Association on
one invoice not encompassed by the contract, and ruled in the Company's favor on
all other claims. If Metropolitan Creditors Service of Sacramento rejects the
arbitrator's award and elects to proceed to trial in Superior Court, the Company
will vigorously defend the action as baseless, and seek recovery of attorney's
fees and costs in defending the action.
The Company's products are relied upon by medical personnel and lab technicians
as part of blood collection processes from a donor, and in some instances
treatment of a patient. If injury were to result from the operation of the
31
equipment, the Company, along with others, may be sued and, whether or not the
Company is found liable, it may incur legal expenses associated with defending
such actions. The Company carries product liability insurance in the amount of
$2,000,000, with an umbrella policy of $2,000,000, to help insulate against such
risk. While management of the Company believes that current insurance coverage
is sufficient, there can be no assurance that such coverage will ultimately be
adequate to cover liabilities which may occur. Moreover, the Company may be
unable to obtain product liability insurance in amounts and on terms that it
finds favorable.
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, 1999. However, the Company did
call a Special Meeting of Shareholders during the first quarter of the current
fiscal year. The Company submitted 3 proposals to the Shareholders. Proposal 1
approved an amendment to the Certificate of Incorporation eliminating the
repurchase rights of the Series A Convertible Preferred Share Holders. Proposal
2 approved an amendment to the Certificate of Incorporation allowing the Board
to effect a one-for two share consolidation. Proposal 3 approved an amendment to
the Certificate of Incorporation allowing the Board to effect a one-for-four
share consolidation. Proposal 1 was passed by the Shareholders on July 30, 1999.
Proposals 2 and 3 were passed by the Shareholders on August 13, 1999. The Board
has not acted on Proposals 2 and 3, and there is no current intention to effect
either of those proposals.
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".
32
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.
- ---------------------------------- ----------- ------------ ------------------------------- ------------ -----------
High Low High Low
- ---------------------------------- ----------- ------------ ------------------------------- ------------ -----------
Fiscal 1999: Fiscal 1998
- ---------------------------------- ----------- ------------ ------------------------------- ------------ -----------
First Quarter (Sept. 30) $2.344 $0.938 First Quarter (Sept. 30) $3.5626 $3.3750
- ---------------------------------- ----------- ------------ ------------------------------- ------------ -----------
Second Quarter (Dec. 31) $2.688 $0.688 Second Quarter (Dec. 31) $3.1250 $2.9688
- ---------------------------------- ----------- ------------ ------------------------------- ------------ -----------
Third Quarter (Mar. 31) $3.313 $1.625 Third Quarter (Mar. 31) $2.7500 $2.6250
- ---------------------------------- ----------- ------------ ------------------------------- ------------ -----------
Fourth Quarter (Jun. 30) $1.750 $0.938 Fourth Quarter (Jun. 30) $2.2500 $2.0940
- ---------------------------------- ----------- ------------ ------------------------------- ------------ -----------
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 513
stockholders of record on June 30, 1999 (not including street name holders).
On June 21, 1999, the Company sold 560,000 shares of restricted common stock for
an aggregate purchase price of $700,000 to Asahi Medical Co., Ltd., a Japanese
corporation. The restricted securities are subject to Rule 144 for resale.
33
ITEM 6. SELECTED FINANCIAL DATA
THERMOGENESIS CORP.
FIVE-YEAR REVIEW OF SELECTED FINANCIAL DATA
Summary
of Operations 1999 1998 1997 1996 1995
- -------------------- ---------------- -------------- -------------- --------------- --------------
Net revenues $5,004,890 $4,396,891 $6,614,044 $4,124,634 $3,311,880
Cost of revenues (4,325,228) (5,523,496) (4,326,964) (1,759,659) (2,096,116)
Gross profit 679,662 (1,126,605) 2,287,080 2,364,975 1,215,764
General and
administrative (2,924,090) (2,132,985) (1,370,401) (426,318) (334,028)
Selling and
marketing (1,750,972) (2,369,010) (2,143,523) (1,173,254) (827,269)
Research and
development (2,004,798) (3,858,077) (3,562,280) (1,317,330) (446,780)
Other income 80,527 69,509 114,372 84,847 304,017
Other expense (179,233) (133,627) (131,070) (101,454) -
Net loss ($6,098,904) ($9,550,795) ($4,805,822) ($568,534) ($88,296)
================ ============== ============== =============== ==============
Basic and diluted net
loss per share ($0.50) ($0.54) ($0.32) ($0.05) ($0.01)
================ ============== ============== =============== ==============
Balance Sheet Data 1999 1998 1997 1996 1995
- ---------------------- -------------- ------------- ------------- -------------- -------------
Cash $2,327,165 $1,975,042 $3,510,861 $1,243,079 $ 325,965
Working capital 5,054,940 3,665,798 6,407,237 3,589,057 1,413,156
Total assets 8,133,264 7,799,242 10,187,726 5,937,140 2,662,839
Total liabilities 1,414,620 2,226,350 2,163,084 1,562,829 662,256
Total shareholders'
equity 6,718,644 5,572,892 8,024,642 4,374,311 2,000,583
34
ITEM 7. MANAGEMENT'S 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" BEGINNING ON PAGE 4, 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 FDA Class I 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. This
System has a Class II designation under applicable FDA regulations, and the
Company has incurred additional expense in the last two fiscal years to
establish the required infrastructure to support manufacture of those systems.
Beginning in late 1993, and with accelerated research and development efforts
from 1996 to date totaling approximately $10 million, 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. Also, the Company spent approximately an
additional $1 million on improvements, upgrades, additional accessories, and
beta test site support for the new products. 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 will most likely need to seek additional short term
capital to fully execute on its business plan pending significant revenue
recognition from the new products.
The Company has incurred recurring operating losses and has an accumulated
deficit of $30,745,189 as of June 30, 1999. The report of independent auditors
on the Company's June 30, 1999 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 2000. This plan
35
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 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.
Management does not anticipate that the Company will incur any material costs to
be "Year 2000" compliant. The Year 2000 problem which is common to most
corporations concerns the inability of information systems, primarily computer
software programs, to properly recognize and process date sensitive information
at year 2000. The Company has completed an assessment of its internal systems
and products and determined that substantially all of the Company's systems and
products operate using third party software that is compliant, or operate using
Company product software which is Year 2000 compliant. The Company has formed a
task force to identify and address potential year 2000 issues with significant
vendors, customers and other third parties. To date, no significant issues have
been identified. In August 1999, a third party subcontractor to the FDA examined
the Company's Y2K preparedness and noted no areas of significant concern.
The Company has substantially completed its Year 2000 assessments and will
contact the few remaining vendors by the end of 1999. The costs of the project
are anticipated to be immaterial, and the date on which the Company believes it
will complete its assessment and remediation, if required, are based on
management's best estimates, which are derived using assumptions of future
events, including continued availability of certain resources, third party
certification of any modifications to third party software, and other factors.
There can be no guarantee that these estimates will be achieved and actual
results or costs could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate, identify and correct all relevant computer codes, and similar
uncertainties.
(b) Results of Operations
The Years Ended June 30, 1999 and 1998:
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 increased from fiscal 1998 to fiscal 1999 by $608,000 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
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 primairly due to the purchase of units and
disposables by the Company's key distributors in Europe and Japan to initiate
36
fibrin glue evaluations. There were no CryoSeal sales in fiscal 1998.
Although revenues generated by the BioArchive product line were higher, the
number of BioArchive units placed fell by one (10 versus 9) from fiscal 1998 to
fiscal 1999. This lack of unit sales growth is attributable to a number of key
factors, including the lengthy capital equipment procurement process,
governmental decision making and setting global standards related to government
driven cord blood banking programs in major countries. Setting global standards
was time consuming due to the number and complexity of the procedures that
needed to be validated in order to begin routine use of stem cells harvested and
preserved for therapeutic use. Most notable in this analysis is the fact that
ThermoGenesis Corp. did not lose a single potential customer from its sales
pipeline as a result of the longer than expected purchase timeframe.
Net revenues decreased from fiscal 1997 to fiscal 1998 by 34%, primarily
attributable directly to slower than expected introduction of new products in
fiscal year 1998, most notably the CyroSeal AHF System and the BioArchive
System, and due to the one time Centeon order of approximately $4-million in
fiscal 1997. The Company has entered into a service contract with Centeon
covering the blood plasma freezers sold to it in fiscal 1997. Revenues for the
service contract, which was entered into in March 1998, accounted for
approximately 2% of sales in fiscal 1998. Additionally, fiscal 1998 marked the
first year of BioArchive System sales. Ten BioArchive Systems comprising 30% of
net sales were shipped in the second and fourth quarters. Of the ten systems,
three were placed in the United States pursuant to IRB approvals, four in Europe
and three in Asia.
Cost of Revenues:
As a percentage of revenues, the Company's cost of revenues significantly
decreased from 126% in fiscal 1998 to 86% 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 coreline
spare parts revenues generate higher gross profit margins than margins
historically seen from sales of the freezers and thawers.
The increase in cost as a percent of sales from 65% in fiscal 1997 to 126% in
fiscal 1998 was primarily attributable to the following factors: 1) Labor costs
incurred to ensure the Company meets ISO 9003 quality standards for CE approval;
2) Labor costs for the start-up production of the CryoSeal System and the
BioArchive System; 3) Production labor diverted to the continued upgrade of the
manufacturing process; and 4) Higher warranty reserves for Pipe Line Products
used in clinical studies. Cost of sales peaked in second quarter of fiscal 1998
at 170%, declined to 120% for the third quarter of fiscal 1998 and again
declined to 98% in the fourth quarter of fiscal 1998 with the launch of the
BioArchive Stem Cell System.
37
General and Administrative expenses:
This expense category includes Regulatory, Finance, Administration and General
Support departments.
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 class II 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 FY98, and e) patent
legal fees of $90,000 which were reclassed from R&D reflecting the transfer of
the BioArchive and CryoSeal systems to manufacturing.
General and administrative expenses increased in fiscal 1998 by 56% or $762,584
over those of fiscal 1997. In November 1997, the Company made significant
changes in senior management to improve operations, replacing the Chief
Operating Officer and the Director of Manufacturing. Approximately $200,000 of
the increase in fiscal 1998 was due to accrual of severance payments to
departing executives and signing bonuses for the new President and the new Vice
President of Manufacturing Operations. The additional increase is also
attributable to expansion of facilities, personnel and additions to management
that are required for the Company to manufacture and market Class II medical
devices and achieve ISO 9003 certification.
Selling and Marketing expenses:
This expense category includes Sales & Marketing and Customer service
departments.
Selling and Marketing expenses decreased 26% or $618,000 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 FY2000.
Fiscal 1998 selling and marketing expenses increased by 11% over those of fiscal
1997. This increase was due to increased salaries from personnel added during
fiscal 1997 and the first half of fiscal 1998. Restructuring of sales and
marketing during fiscal year 1998 was designed to bring these expenses in line
proportionately with sales levels as well as to increase the focus on the
marketing skills needed for successful launch of new products.
Research and Development expenses:
Research and Development was cut 48% in fiscal 1999. This significant decrease
reflects the fact that both technology platforms were completed during
38
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.
Research and development expenses increased in fiscal 1998 by only 8% from
fiscal 1997. This significantly smaller increase is attributable to the
completion of final design and initial transfer of two new products from
research and development to manufacturing towards the end of fiscal year 1998.
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 three fiscal years
primarily to develop new products and markets. Cash resources were significantly
diminished at the end of fiscal year 1999, and remaining resources at year end
are insufficient to permit the Company to fully execute on its business plan to
move towards FDA clinical trials on new products, and may be insufficient to
maintain the infrastructure and management that the Company deems necessary to
launch the new products and move the Company to its new growth levels. The
Company has undertaken efforts to locate and secure adequate resources to allow
it to fully execute on its plan, including possible equity and debt financing.
In fiscal 1997, the Company raised net proceeds in the aggregate of
approximately $7,956,000 from a warrant exercise and a private placement. The
Company used the proceeds to expand the Company's facilities, regulatory and
manufacturing control functions, and to fund continued R&D. Although the Company
believes that Core Line product operations might have resulted in a nominal
profit if R&D expenses and marketing expenses associated with the new FDA Class
II products were eliminated, the Company believes that the significantly
increased expenses for the new products, which are directed at new and larger
markets, is essential to future growth and long term profitability of the
Company.
In fiscal 1998, the Company raised net proceeds in the aggregate of
approximately $6,433,000 net of expenses from private placements of equity. The
Company used the proceeds to complete design validation, manufacturing transfer,
and restructuring to accommodate new product launches. Management believes that
the losses sustained in the current fiscal year ended were prudent and necessary
for the Company to realize the significant future revenue prospects.
Significantly, the large losses and operating expense trends began to reverse
beginning in the third quarter of this fiscal year as the Company initiated
transfer to manufacturing and product launch for the BioArchive System in the
fourth quarter.
In fiscal 1999, the Company raised net proceeds of $6,227,000 through the
private placement of 1,077,540 shares of Series A Convertible Preferred Stock.
The Company used the proceeds to prepare for the domestic market launch of the
39
CryoSeal AHF System, develop the 100% autologous fibrin glue technology and
bring in the resources necessary to prepare 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 was focused on reducing expenses during
fiscal 1999, as evidenced by the $3.5 million reduction in the net loss from
fiscal 1998 to fiscal 1999.
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 or is pursuing strategic partners. In
fiscal 1997, the Company expended $873,582 for the purchase of capital equipment
and expansion of facilities for operations. In fiscal 1998, the Company expended
$449,092, 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 $115,372 primarily for test equipment associated with
the BioArchive and CryoSeal systems and to build a cleanroom to manufacture the
BioArchive periscope. Although future capital expenditures may be anticipated,
the Company believes that the amounts expended will be consistent with, or lower
than fiscal 1999.
The Company continues to search for further funding and new products that may
provide future growth opportunities and is currently evaluating financing
options to provide working capital to fund expected growth in fiscal year 2000
with the domestic launch of the CryoSeal AHF System. The Company has no
significant outstanding capital commitments at June 30, 1999.
Currently, the Company is contemplating additional equity financing to fund the
product launch of the CryoSeal AHF System, and to initiate and complete clinical
trials and FDA submissions for the CryoSeal AFG System. There can be no
assurances that adequate financing will be available on satisfactory terms, if
at all. The Company anticipates that it will need additional financing to meet
short term obligations, or it will be required to further reduce operating
expenses and possibly certain management processes established during the past
year. Such reductions could significantly impair future prospects, and no
assurances can be made that adequate capital resources will be made available to
the Company in a time frame that will not impair current infrastructure.
Working capital increased from $3,666,000 at June 30, 1998 to $5,055,000
primarily due to the cost reduction efforts the Company implemented in fiscal
1999.
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, 1999 and 1998 ......................................42
Statements of Operations for the years
ended June 30, 1999, 1998, and 1997 .........................................44
Statements of Shareholders' Equity for
the years ended June 30, 1999, 1998 and 1997.................................45
Statements of Cash Flows for the
years ended June 30, 1999, 1998 and 1997 ....................................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, 1999 and 1998, and the related statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended June 30,
1999. 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 generally accepted auditing
standards. 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,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended June 30, 1999, in conformity with generally
accepted accounting principles. 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 $30,745,189 as of June 30, 1999. 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.
ERNST & YOUNG LLP
Sacramento, California
August 13, 1999
42
THERMOGENESIS CORP.
Balance Sheets
ASSETS June 30, 1999 June 30, 1998
------------- -------------
Current Assets:
Cash and cash equivalents $2,327,165 $1,975,042
Accounts receivable, net of allowance for
doubtful accounts of $95,000 ($97,910 at
June 30, 1998) 1,203,539 1,280,327
Inventory 2,716,927 2,456,565
Other current assets 221,929 180,214
--------- ---------
Total current assets 6,469,560 5,892,148
Equipment, at cost less accumulated depreciation
of $1,216,253 ($861,750 at June 30, 1998) 1,457,459 1,679,201
Prepaid royalties, net of accumulated amortization
of $499,089 ($443,637 at June 30, 1998) 55,411 110,863
Other assets 150,834 117,030
----------- -----------
$8,133,264 $7,799,242
=========== ===========
See accompanying notes.
43
THERMOGENESIS CORP.
Balance Sheets (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY June 30, 1999 June 30, 1998
------------- -------------
Current liabilities:
Accounts payable $639,649 $1,301,141
Accrued payroll and related expenses 236,317 345,875
Accrued liabilities 538,654 579,334
------- -------
Total current liabilities 1,414,620 2,226,350
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, $.001 par value,
1,200,000 shares authorized; 884,000 issued
and outstanding ($5,746,000 aggregate -
involuntary liquidation value at June 30, 1999) 884
Preferred stock, $.001 par value;
800,000 shares authorized; no shares issued
and outstanding - -
Common stock, $.001 par value;
50,000,000 shares authorized: 20,597,532
issued and outstanding (18,925,669 at
June 30, 1998) 20,598 18,926
Paid in capital in excess of par 37,442,351 26,293,511
Accumulated deficit (30,745,189) (20,739,545)
------------- -------------
Total shareholders' equity 6,718,644 5,572,892
--------- ---------
$8,133,264 $7,799,242
=========== ===========
See accompanying notes.
44
THERMOGENESIS CORP.
Statements of Operations
Years ended June 30,
1999 1998 1997
---- ---- ----
Net revenues $5,004,890 $4,396,891 $6,614,044
Cost of revenues 4,325,228 5,523,496 4,326,964
--------- ---------- ---------
Gross profit (loss) 679,662 (1,126,605) 2,287,080
Expenses:
General and administrative 2,924,090 2,132,985 1,370,401
Selling and marketing 1,750,972 2,369,010 2,143,523
Research and development 2,004,798 3,858,077 3,562,280
Issuance of stock options for
services 56,000 64,000 56,000
Interest and other 123,233 69,627 75,070
---------- ----------- ----------
Total expenses 6,859,093 8,493,699 7,207,274
Interest and other income 80,527 69,509 114,372
----------- ----------- -----------
Net loss ($6,098,904) ($9,550,795) ($4,805,822)
============ ============ ============
Per share data:
Net loss (6,098,904) (9,550,795) (4,805,822)
Convertible preferred stock discount 3,604,740 -- --
--------- -- --
Net loss to common stockholders ($9,703,644) ($9,550,795) ($4,805,822)
============ ============ ============
Basic and diluted net loss per share ($0.50) ($0.54) ($0.32)
============ =============== ============
Shares used in computing per share data 19,242,310 17,629,876 14,805,000
============ =============== ============
See accompanying notes.
45
THERMOGENESIS CORP.
Statements of Shareholders' Equity
Paid in Total
Preferred Common capital in Accumulated shareholders'
Stock Stock excess of par deficit equity
-------- --------- ------------- -------------- ---------------
Balance at June 30, 1996 $12,709 $ 10,744,530 ($6,382,928) $4,374,311
Issuance of 254,750 common shares for
exercise of warrants and options 255 681,101 - 681,356
Issuance of 145,586 common
shares for inventory 146 444,151 - 444,297
Issuance of 2,756,002 common
shares in private placement 2,756 7,271,744 - 7,274,500
Amortization of options issued
previously for services - 56,000 - 56,000
Net loss - - (4,805,822) (4,805,822)
--------------------------------------- -----------
Balance at June 30, 1997 15,866 19,197,526 (11,188,750) 8,024,642
Issuance of 273,650 common shares for
exercise of warrants and options 273 601,853 - 602,126
Issuance of 2,786,714 common
shares in private placement 2,787 6,430,132 - 6,432,919
Amortization of options issued
previously for services - 64,000 - 64,000
Net loss - - (9,550,795) (9,550,795)
-------------------------- ----------- -----------
Balance at June 30, 1998 18,926 26,293,511 (20,739,545) 5,572,892
Issuance of 1,750 common shares for
exercise of options 2 4,189 - 4,191
Issuance of 1,077,540 convertible
preferred shares in private placement $1,078 - 6,226,264 - 6,227,342
Convertible preferred stock discount - - 3,604,740 (3,604,740) -
Amortization of options issued
previously for services - - 56,000 - 56,000
Issuance of 142,413 common shares
for services - 142 186,981 - 187,123
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 (194) 968 (774) - -
Issuance of 560,000 common shares - 560 699,440 - 700,000
Net loss - - - (6,098,904) (6,098,904)
------ ---------- --------------- ------------ -----------
Balance at June 30, 1999 $884 $20,598 $37,442,351 ($30,745,189) $6,718,644
==== ======= =========== ============= ==========
See accompanying notes.
46
THERMOGENESIS CORP.
Statements of Cash Flows
Years ended June 30,
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net loss ($6,098,904) ($9,550,795) ($4,805,822)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 548,472 440,454 312,077
Issuance of common stock for services 257,123 - -
444,297
Issuance of common stock for inventory - - 444,297
Amortization of stock options issued
for services 56,000 64,000 56,000
Net changes in operating assets
and liabilities
Accounts receivable 76,788 787,663 (626,842)
Inventory (416,268) (79,436) (442,170)
Other current assets (41,715) 13,480 (203,642)
(203,642)
Other assets (33,804) 139,596 (116,645)
Accounts payable (661,492) (136,407) 579,651
Accrued payroll and related expenses (109,558) 71,867 89,348
Accrued liabilities (40,680) 127,806 (100,744)
----------- -------------- ---------
Net cash used in operating activities (6,464,038) (8,121,772) (4,814,492)
----------- ------------- ----------
Cash flows from investing activities:
Capital expenditures (115,372) (449,092) (873,582)
--------- ------------- ---------
Net cash used in investing activities (115,372) (449,092) (873,582)
--------- ------------- ---------
Cash flows from financing activities:
Exercise of stock options and warrants 4,191 602,126 681,356
- ------------------------------------------
Issuance of convertible preferred stock 6,227,342 - -
- -------------------------------------------
Issuance of common stock 700,000 6,432,919 7,274,500
- ---------------------------- ------- ------------ -------------
Net cash provided by financing activities 6,931,533 7,035,045 7,955,856
--------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 352,123 (1,535,819) 2,267,782
Cash and cash equivalents at beginning of year 1,975,042 3,510,861 1,243,079
--------- --------- -------------
Cash and cash equivalents at end of year $2,327,165 $1,975,042 $3,510,861
========== ========== ==========
Supplemental cash flow information:
Cash paid during the year for interest $31,968 $47,511 $75,070
========== =========== ==========
Supplemental non-cash flow information:
Equipment acquired by capital lease obligations $ - $ - $32,000
============ =========== ==========
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 and sells devices which utilize its proprietary
thermodynamic technology for the processing of biological substances including
the cryopreservation, thawing and harvesting of blood components. During fiscal
1988 through 1999, the Company has focused on refining product design of the
core line products and developing a pipeline of two technology
platforms(BioArchive and CrySeal Systems) and derivative products which utilize
sterile disposable containers for processing blood components. The BioArchive
system was launched in fiscal 1998.
Basis of Presentation
The Company has incurred recurring operating losses and has an accumulated
deficit of $30,745,189 as of June 30, 1999. The report of independent auditors
on the Company's June 30, 1999 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 2000. 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 and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
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.
Prepaid Royalties
Prepaid royalties are amortized on a straight-line basis over an estimated
useful life of 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".
Revenue Recognition
Revenues from the sale of the Company's products are recognized at the time of
shipment. All foreign sales are denominated in U.S. dollars.
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 by the weighted average
number of common shares outstanding. Common stock equivalents have not been
included because the effect would be anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" (SFAS 128). SFAS 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. SFAS 128 was
adopted during the year ended June 30, 1998 and had no impact on the basic and
diluted net loss per share for the years ended June 30, 1997 and 1996.
Comprehensive Income
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" (SFAS 130) which establishes standards for reporting disclosure of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS 130, which is
effective for fiscal years beginning after December 15, 1997, requires
reclassification of financial statements for earlier periods to be provided for
comparative purposes. SFAS 130 was adopted during the year ended June 30, 1999
and did not have a significant impact on the Company's existing disclosures.
49
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
Segment Disclosure
In June 1997, the FASB issued Statement No. 131, "Disclosure about Segments of
an Enterprise and Related Information" (SFAS 131) which establishes standards
for the way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS 131 was adopted during
the year ended June 30, 1999 and did not have a significant impact on the
Company's existing disclosures.
Reclassifications
Certain amounts in the prior years financial statements have been reclassified
to conform with the 1999 presentation.
2. Inventory
Inventory consisted of the following at June 30:
1999 1998
---- ----
Raw materials $1,329,457 $1,313,792
Work in process 363,331 282,946
Finished goods 1,024,139 859,827
---------- ---------
$2,716,927 $2,456,565
=========== ==========
3. Equipment
Equipment consisted of the following at June 30:
1999 1998
---- ----
Construction in progress $ 48,903 $ -
Office equipment 294,198 368,248
Computers and purchased software 1,001,405 1,051,974
Machinery and equipment 1,043,661 841,407
Leasehold improvements 285,545 279,322
--------- ----------
2,673,712 2,540,951
Less accumulated depreciation and amortizati (1,216,253) (861,750)
----------- ---------
$ 1,457,459 $ 1,679,201
============= ============
50
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
4. Accrued Liabilities
Accrued liabilities consisted of the following at June 30:
1999 1998
---- ----
Accrued warranty reserves $162,992 $237,440
Accrued legal reserves 228,328 76,500
Capital lease obligations 56,738 162,670
Other accrued liabilities 90,596 102,724
------ -------
$538,654 $579,334
======== ========
5. Commitments and Contingencies
Royalty Commitment
In July 1990 the Company acquired the Proprietary Technology including but not
limited to all patents, drawings, know-how, trademarks and trade names and
prepaid all future royalties for a total consideration which was recorded at
$554,500. This amount represents the present value of the future royalty payment
obligation. The consideration was comprised of $50,000 cash, a 10% four year
convertible note for $200,000 and 900,000 shares of the Company's common stock.
The transaction has been accounted for as a prepayment of future royalties and
is being amortized on a straight line basis over an estimated useful life of 10
years.
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:
2000 268,921
2001 247,302
2002 134,213
-------
Total $ 650,436
=========
Rent expense was $310,381, $275,076 and $221,986 for the years ended June 30,
1999, 1998 and 1997.
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:
1999 1998
---- ----
Cost $520,140 $520,140
Less: accumulated amortization 356,055 248,280
------- -------
Net assets under capital leases $164,085 $271,860
=========== =========
The future minimum lease payments under these capital leases are $72,640, less
amount representing interest of $15,902 as of June 30, 1999.
51
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
5. Commitments and Contingencies (continued)
Contingencies
The Company is presently engaged in various legal actions arising in the
ordinary course of its business. In the opinion of management, the Company has
adequate reserves with respect to these matters so that the ultimate resolution
will not have a material adverse effect on the financial position of the Company
or its results of operations.
6. Shareholders' Equity
Convertible Preferred Stock
In January 1999 the Company completed a private placement of 1,077,540 shares of
Convertible Preferred Stock ("Preferred Stock"), raising $6,227,342, 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 Preferred Stock
are as follows:
Voting Rights - The holders of shares of Preferred Stock are entitled to
voting rights equal to the number of shares of common stock to be issued
upon conversion of the Preferred Stock. Additionally, so long as in
excess of 35% of the original amount of Preferred Stock remains
outstanding, the holders of the Preferred Stock shall be entitled,
voting as a separate class, to elect one director, who shall be one of
the authorized number of directors of the Corporation.
Liquidation Preferences - In the event of liquidation or dissolution of
the Company, the preferred 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 Preferred Stock contained redemption
rights which allowed the Preferred Stock 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
Preferred Stock. Removal of the redemption rights allows the Preferred
Stock to be included as Stockholders Equity. The excess of the Preferred
Stock's redemption price over its carrying value is being accreted by
periodic charges to accumulated deficit from the date of issuance thru
July 30, 1999.
Conversion Rights - Holders of the Preferred Stock have the right to
convert the preferred stock ("Beneficial Conversion Feature")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. As of June 30, 1999, 193,540
shares of Preferred Stock have been converted.
Beneficial Conversion Feature - 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 Preferred Stock was sold,
amounted to $3,604,740, which represents a discount to the value of the
Preferred Stock.
52
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Shareholders' Equity (Continued)
Convertible Preferred Stock (continued)
Automatic Conversion - At the option of the Company, each share of
Preferred Stock 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 Preferred Stock 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 $6,432,919 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, 1999.
The Company completed a minimum equity offering of units in a private placement
on November 27, 1996, in which it received proceeds of $7,274,500, net of
expenses. The proceeds from the offering were received from the sale of
1,378,001 units at $6.00 per unit. Each unit consisted of two shares of common
stock and a seven year warrant representing the right to acquire one additional
share of common stock at an exercise price of $3.885 per share. No warrants have
been exercised as of June 30,1999.
On July 30, 1996, the Company entered into an agreement with a vendor to produce
up to $2,500,000 of product for the Company. Under the terms of the agreement,
the vendor can elect to receive payment in restricted common stock of the
Company at a 25% discount from the market price on the date the election to
receive stock is made. During fiscal 1997, the Company issued 145,586 shares of
common stock for this product, and recorded these transactions at the estimated
fair value of $444,297 on the date of the transaction and recorded the 25%
discount from market price as operating expense. The Company is not obligated to
purchase product that is not required or at a price that is not competitive and
built to all required standards.
As of June 30, 1999, the Company had 9,339,429 shares of common stock reserved
for future issuance.
Warrants
As part of the placement agent's compensation in the 1999 private placement of
convertible preferred stock, warrants to purchase 200,000 shares of common stock
at an exercise price of $1.70 were issued. 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 expire in November 2001. The estimated fair value
of the warrants on the date of issue, $70,000, has been included in interest
expense.
53
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Shareholders' Equity (Continued)
Warrants (continued)
As part of the placement agent's compensation in a 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. The warrants expire in December 2000.
In conjunction with the placement of Series C Preferred stock in 1993, the
placement agent, Paradise Valley Securities, received warrants to purchase
shares of the Company's common stock at $1.20 per share. There were 5,625 and
37,500 warrants converted in fiscal 1998 and 1997, respectively.
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 $56,000, $64,000 and $56,000 for the
years ended June 30, 1999, 1998 and 1997, respectively.
The Company has issued options to purchase shares of common stock pursuant to
its Amended 1994 Stock Option Plan (1994 Plan), under which a maximum of
1,450,000 options may be granted. 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. During fiscal 1998, the Stockholders of the Company approved the 1998
Employee Equity Incentive Plan ("1998 Plan") with 798,000 shares underlying that
plan.
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.
A summary of stock option activity for the three years ended June 30, 1999
follows:
Number of Weighted-Average
Options Exercise
Outstanding Price Per Share
------------ ----------------
Balance at June 30, 1996 1,164,333 $ 2.23
Options granted 1,184,000 3.16
Options canceled (344,501) 3.31
Options exercised (37,250) 1.98
----------
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
=========
54
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Shareholders' Equity (Continued)
Stock Options (Continued)
The following table summarizes information about stock options outstanding at
June 30, 1999:
Options Outstanding Options Exercisable
Range of Number Weighted Average Weighted Weighted
Exercise Outstanding Exercise Contractual Average Number Average
Prices Remaining Life Exercise Price Exercisable Price
------------ ----------- --------------------- -------------- ------------- --------
$1.16-$1.90 7,750 2.01 years $1.65 6,750 $1.61
$2.13-$3.00 1,234,000 1.80 years $2.52 959,609 $2.47
$3.13-$4.50 380,000 2.11 years $3.56 315,333 $3.63
----------- ---------
Total 1,621,750 1.87 years $2.76 1,281,692 $2.75
=========== =========
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.
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 pro forma effect on net loss
for fiscal 1997 through 1999 is not representative of the pro forma effect on
operations in future years because it does not take into consideration pro forma
compensation expense related to grants made prior to July 1, 1995. The Company's
pro forma information is as follows for the years ended June 30:
Net Loss 1999 1998 1997
---- ---- ----
As reported ($6,098,904) ($9,550,795) ($4,805,822)
Pro Forma (6,594,368) (10,217,657) (5,325,270)
Net loss per share
As reported ($0.50) ($0.54) ($0.32)
Pro Forma ($0.53) (0.58) (0.36)
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 92%; an expected life of 3 years; a
risk-free interest rate of 5.62% and no expected dividends. The weighted average
grant date fair value of options granted during the years ended June 30, 1999,
1998 and 1997 was $1.70, $1.69 and $1.80, respectively.
55
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
7. Major Customers and Foreign Sales
During the fiscal year ended June 30, 1999, sales from a significant customer
totaled $524,837 or 12% of net sales; foreign sales were approximately 44% of
net sales. During the fiscal year ended June 30, 1998 there was no single
customer which represented 10% of net sales; foreign sales were approximately
50% of net sales. During the fiscal year ended June 30, 1997, sales from a
significant customer totaled $4,044,489 or 61% of net sales and foreign sales
were 15% of net sales.
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:
1999 1998 1997
---- ---- ----
Statutory federal income tax benefit $(2,074,000) $(3,290,000) $(1,630,000)
Net operating loss with no tax benefit 2,074,000 3,290,000 1,630,000
----------- ------------ -----------
Total federal income tax $ $ - $ -
============ ============ ===========
At June 30, 1999, the Company had net operating loss carryforwards for federal
and state income tax purposes of approximately $25,585,000 and $7,500,000
respectively, that are available to offset future income. The federal and state
loss carryforwards expire in various years between 2002 and 2019, and 2000 and
2004, respectively.
At June 30, 1999, the Company has research and experimentation credit
carryforwards of approximately $293,000 for federal tax purposes that expire in
various years between 2002 and 2019 and $174,000 for state income tax purposes
that do not have an expiration date. In addition, the Company has approximately
$15,000 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, 1999 June 30, 1998
-------------- --------------
Deferred tax assets:
Net operating loss carryforwards $ 9,145,000 $7,109,000
Income tax credits 418,000 102,000
Capitalized research costs 292,000 -
Other 358,000 374,000
---------- ----------
Total deferred taxes 10,213,000 7,585,000
Valuation allowance (10,213,000) (7,585,000)
----------- -----------
Net deferred taxes $ $ -
============ ===========
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 is
subject to an annual limitation regarding their utilization against taxable
income in future periods.
56
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, 1999.
57
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. The loan bears simple interest at the annual rate of
eight percent, and was due and payable in February 1998. The loan was fully
secured by 25,000 shares of common stock held by Mr. Griffiths at the time of
the loan. In February 1998, the Company extended the repayment terms under the
promissory note until June 30, 1999 and received a right of full offset against
Mr. Griffiths' employment agreement in the event of any missed payment. As of
June 30, 1999, Mr. Griffiths had not made the final required payment and the
balance of principal and interest still owing was $33,000.
58
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
(a) (1) Financial Statements
Report of Independent Auditors ........................... 41
Balance Sheet at June 30, 1999 and 1998 .................. 42
Statements of Operations for the years
ended June 30, 1999, 1998, and 1997 .................... 44
Statements of Shareholders' Equity for
the years ended June 30, 1999, 1998, and 1997............45
Statements of Cash Flows for the
years ended June 30, 1999, 1998, and 1997................46
Notes to Financial Statements .............................47
(a) (2) Financial Statement Schedules
Schedule II, Valuation and Qualifying Accounts ............61
(b) Reports on Form 8-K
1) Current Report on Form 8-K for the event date January 14, 1999
(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.
59
EXHIBIT INDEX
Exhibit Description
3.1 (a) Amended and Restated Certificate of Incorporation.
(b) Amended Bylaws.(5)
10.1 (a) Letter of Agreement between Liquid Carbonic, Inc. Canada and THERMOGENESIS.(2)
(b) Letter of Agreement between Fujitetsumo USA and THERMOGENESIS. (2)
(c) Letter of Agreement between Fujitetsumo Japan and THERMOGENESIS. (2)
(d) License Agreement between Stryker Corp. and THERMOGENESIS. (7)
(e) Lease of Office and Mfg. Space (5)
(f) Executive Development and Distribution Agreement between THERMOGENESIS and Daido Hoxan Inc. (4)
(g) Administrative Office Lease (8)
(h) Employment Agreement for Philip H. Coelho (9)
(i) Employment Agreement for Charles de B. Griffiths (9)
(j) Employment Agreement for Walter Ludt (9)
(k) Employment Agreement for David C. Adams (11)
(l) Employment Agreement for James H. Godsey
(m) Employment Agreement for Sam Acosta
(n) Manufacturing and License Agreement between On-Time Manufacturing and THERMOGENESIS (9)
(o) License and Distribution Agreement between Asahi Medical and THERMOGENESIS. (10)
(p) License Agreement between Medsep Corporation and THERMOGENESIS (12)
(q) Distribution Agreement between Dideco S.p.A. and THERMOGENESIS (13)
(r) Employment Agreement for Philip H. Coelho
(s) Employment Agreement for Renee Ruecker
(t) Amended License Agreement between Asahi Medical Co. Ltd. And ThermoGenesis Corp. (portions omitted
pursuant to a request for confidential treatment)
23.1 Consent of Independent Auditors
27 Financial Data Schedule
Footnotes to Index
(2) Incorporated by reference to Registration Statement No. 33-37242 of
THERMOGENESIS, CORP. filed on Feb. 7, 1991.
(3) Incorporated by reference to Form 8-K for July 19, 1993.
(4) Incorporated by reference to Form 8-K for June 9, 1995.
(5) Incorporated by reference to Form 10-KSB for the year ended June 30, 1994.
(6) Incorporated by reference to Form 10-KSB for the year ended June 30, 1995.
(7) Incorporated by reference to Form 8-K for September 27, 1995.
(8) Incorporated by reference to Form 10-QSB for the quarter ended
December 31, 1995.
60
(9) Incorporated by reference to Form 10-KSB for the year ended June 30, 1996.
(10) Incorporated by reference to Form 8-K for event dated May 29, 1996. (11)
Incorporate by reference to Form 10-K for the year ended June 30, 1997. (12)
Incorporate by reference to Form 8-K for event dated March 27, 1997. (13)
Incorporate by reference to Form 8-K for event dated February 16, 1998.
60
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 __, 1999
-------------------------------------------------
Philip H. Coelho, Chief Executive
Officer and Chairman of the Board
(Principal Executive Officer)
By: /s/ RENEE M. RUECKER Dated: September __, 1999
--------------------------------------------------
Renee M. Ruecker, V.P. Finance
(Principal Financial and Accounting
Officer)
By: /s/ JAMES H. GODSEY Dated: September __, 1999
-------------------------------------------------
James H. Godsey, President/COO
and Director
By: /s/ HUBERT HUCKEL Dated: September __, 1999
--------------------------------------------------
Hubert Huckel, Director
By: /s/ PATRICK MCENANY Dated: September __, 1999
-------------------------------------------------
Patrick McEnany, Director
By: /s/ DAVID HOWELL Dated: September __, 1999
-------------------------------------------------
David Howell, Director
62
SCHEDULE II
THERMOGENESIS CORP.
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Costs Write-offs Balance at End
Beginning of and Expenses (Net of of Period
period Recoveries)
Allowance of Doubtful Accounts
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
For the year ended June 30, 1997 97,913 --- --- 97,913
- ------------------------------------------ ------------------ ------------------- ---------------- -----------------