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UNITED STATES
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 DECEMBER 31, 1999 COMMISSION FILE NUMBER 0-19890
LIFECELL CORPORATION
A DELAWARE IRS EMPLOYER IDENTIFICATION
CORPORATION NO. 76-0172936
ONE MILLENNIUM WAY
BRANCHBURG, NEW JERSEY 08876
Telephone Number (908) 947-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.001 Par Value
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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock (Common Stock and Series B Preferred
Stock, assuming conversion of such Preferred Stock into Common Stock at the
current conversion rate) held by non-affiliates of registrant as of March 17,
2000: $117,282,428.
Number of shares of registrant's Common Stock outstanding as of March 17, 2000:
13,667,361. (If the Series B Preferred Stock had converted into Common Stock as
of such date, there would be 17,089,973 shares of Common Stock outstanding.)
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of registrant's proxy statement relating to the June 2, 2000
annual meeting of stockholders have been incorporated by reference into Part III
hereof.
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TABLE OF CONTENTS
DESCRIPTION
Item Page
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PART I 3
Item 1. Business 3
General 3
Technology 3
Strategy 4
Products and Product Development Activities 5
Marketing 10
Sources of Materials 10
Government Regulation 10
Research and Development 14
Competition 15
Environmental Matters 16
Employees 16
Special Note Regarding Forward-Looking Statements 16
Risk Factors 16
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 23
PART II 24
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 24
Dividend Policy 24
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 26
General and Background 26
Results of Operations 26
Liquidity and Capital Resources 28
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 29
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure 29
PART III 29
Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation 29
Item 12. Security Ownership of Certain Beneficial Owners and Management 29
Item 13. Certain Relationships and Related Transactions 30
PART IV 30
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 30
2
PART I
This Annual Report on Form 10-K contains, in addition to historical
information, "forward-looking statements" (within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended) that involve risks and uncertainties. See
"Business-Special Note Regarding Forward-Looking Statements."
ITEM 1. BUSINESS
GENERAL
LifeCell Corporation is a bioengineering company engaged in the development
and commercialization of tissue regeneration and cell preservation products.
Our core preservation technology produces an acellular tissue matrix, which
retains the essential biochemical and structural components necessary for normal
tissue regeneration. We currently market three products based on this
technology: AlloDerm(R) for the reconstructive plastic, burn and dental markets;
Cymetra(TM), micronized AlloDerm tissue for the reconstructive plastic and
dermatology markets; and Repliform(TM)acellular tissue for the urology and
gynecology market. We believe that our products are the only commercially
available tissue transplant products that provide a complete template for the
regeneration of normal human soft tissue. We estimate that AlloDerm has been
transplanted in more than 50,000 patients. We also are developing several
additional products, including small diameter vascular grafts as an alternative
to autografted blood vessels, orthopedic applications of our acellular tissue
matrix, and ThromboSol(TM), a formulation for extended storage of platelets
("ThromboSol".)
We were incorporated in the State of Delaware in 1992 as the successor to a
Delaware corporation that was incorporated in 1986.
TECHNOLOGY
Our product development programs have been generated from the following
proprietary technologies:
- a method for producing an extracellular tissue matrix by removing
antigenic cellular elements while stabilizing the matrix against
damage;
- a method for cell preservation by manipulating cells through signal
transduction (i.e., manipulation of cellular metabolism) to protect
cells during prolonged storage; and
- a method for freeze-drying biological cells and tissues without the
damaging effects of ice crystals.
TISSUE PROCESSING TECHNOLOGY
Our tissue processing technology removes antigenic cells from the tissue
matrix to eliminate the potential for specific rejection of the transplanted
tissue. Our tissue processing technology also
- stabilizes the tissue matrix by preserving its natural structure
and biochemical properties that promote cell repopulation and
- allows for extended storage by freeze-drying the tissue matrix
without significant ice crystal damage thus avoiding a non-specific
immune response upon transplantation.
Soft tissue contains a complex, three-dimensional structure consisting of
multiple forms of collagen, elastin, proteoglycans, other proteins, growth
factors and blood vessels (the "tissue matrix"). Together, the tissue matrix
and the cells that populate it form the soft tissues of the body, such as
dermis, heart valves, blood vessels, nerve connective tissue, and other tissue
types. As part of the body's natural remodeling process, cells within a tissue
continuously degrade and, in the process, replace the tissue matrix. However,
in the event that a large portion of the tissue matrix is destroyed or lost
because of trauma or surgery, the body cannot regenerate the damaged portion.
The only method of replacing large sections of the tissue matrix is through
transplantation.
Soft tissue transplants from one part of the patient's body to another
(autograft) generally are successful; however, the procedure results in the
creation of an additional wound site. Historically, the ability to transplant
tissue from one person to another (allograft) has been limited because the
donor's cells within the transplanted tissue may trigger an immune response,
resulting in rejection of the transplanted tissue. We believe that previous
attempts to remove cells from soft tissue grafts before performing an allograft
transplant have resulted in disruption or damage of the tissue matrix, causing
an inflammatory response and rejection of the tissue following transplantation.
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We believe our tissue processing technology offers the following important
benefits:
Natural Tissue Regeneration. Tissue grafts produced with our tissue
processing technology retain the structural and biochemical properties that
stimulate normal cell repopulation and normal soft tissue regeneration. In
addition, our clinical studies with dermis and preliminary animal studies
with heart valve leaflets, nerve connective tissue grafts, and vascular
grafts processed with our technology indicate that such tissues can be
remodeled by the recipient's own cells and eventually become the
recipient's own tissue.
Multiple Potential Applications. We believe that our tissue processing
technologies have the potential to generate additional products with
multiple applications. In addition to the current commercial applications
of AlloDerm (i.e., reconstructive plastic, dental and burn surgery),
Repliform and Cymetra, we believe that our acellular tissue matrix may
provide additional benefits in neurosurgery and orthopedic surgery. We also
are evaluating the applicability of our technologies to other tissues and
are conducting animal studies with blood vessels processed with our
technology.
Safety. Our tissue processing technology is designed to produce
products that will revascularize and integrate into the body's own tissues.
The patient's immune cells also are able to penetrate into the transplanted
tissue and thus aid in preventing infections. In contrast, certain
synthetic implants do not allow penetration of the patient's immune cells,
thereby compromising the body's natural ability to fight infections.
AlloDerm has a proven safety record of over seven years and over 50,000
grafts have been transplanted to date.
Prolonged Shelf Life. Our proprietary tissue processing technology
allows extended storage and ease of transportation of products. AlloDerm
and Repliform are validated for storage at normal refrigerated temperatures
for up to two years. In contrast, traditionally processed skin allografts
require low temperature (-80 C) storage and shipping with dry ice.
Compatibility with Other Technologies. Several types of tissues
processed with our technology retain important biochemical components, such
as proteoglycans including hyaluronic acid. These biochemical components
bind growth factors that stimulate tissue regeneration. Therefore, we
believe it may be possible to use our technology to develop tissue-based
delivery vehicles for these factors and cells.
CELL PRESERVATION TECHNOLOGY
Blood cells circulating within the body are exposed to multiple factors
that maintain their stability and prevent activation. When blood cells are
removed from the body for storage, these stabilizing influences are absent and
result in the destabilization and irreversible activation of the cells. These
damaging events currently limit the shelf life of transfusable red blood cells
to 42 days under refrigeration and blood platelets to five days at room
temperature.
Our cell preservation technology mimics the stabilizing influences that are
present in the body through manipulation of signal transduction mechanisms that
control cellular metabolism, combined with either low temperature storage or our
patented freeze-drying technology. If successfully implemented, our cell
preservation technology could result in multiple products for the preservation
of directly transfusable blood cells with extended shelf life, which could be
stored in a manner consistent with current blood banking practices.
STRATEGY
Our vision is to be a leader in the emerging field of regenerative
medicine, by developing and marketing biologic solutions for the repair,
replacement and preservation of human cells and tissue. Our strategy includes
the following principal elements:
EXPANDING PENETRATION OF ALLODERM(R) INTO CURRENT TARGET MARKETS
Our direct marketing effort focuses on the use of AlloDerm(R) in head and
neck, and plastic and reconstructive procedures. We see great opportunity for
sales growth in this area, in which AlloDerm is used as an alternative to the
current standard of care, autografts. We have initiated numerous programs to
achieve this goal. These include:
- conducting additional clinical studies to demonstrate the benefits
of AlloDerm(R) compared to autografts;
- supporting publications in leading scientific journals describing the
uses and benefits of AlloDerm;
- utilizing our expanded sales and marketing staff to call on a broader
audience of hospital-based surgeons;
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- participating at trade shows and sponsoring educational and surgical
training workshops on the use of AlloDerm.
We currently market AlloDerm for use in reconstructive plastic and burn
surgery in domestic markets through our own sales force. For dental
applications and selected international markets, we market through distributors.
FULL LAUNCH OF REPLIFORM IN UROGYNECOLOGY MARKET
Repliform , introduced in 1999, is the application of our matrix technology
within the urology and gynecology market. We market Repliform through our
partnership with Boston Scientific, a worldwide developer, manufacturer and
marketer of medical devices with a well-established marketing presence in the
urology field.
In February 2000, we, in conjunction with Boston Scientific, initiated the
full launch of Repliform following the successful completion of a targeted
introduction of the product to thought leaders in the United States. We intend
to increase the penetration of Repliform in this market by demonstrating the
benefits of Repliform compared to other products when used as a bladder sling
for the treatment of urinary incontinence.
LAUNCH CYMETRA(TM) IN RECONSTRUCTIVE PLASTIC AND DERMATOLOGY MARKETS
In December 1999, we introduced Cymetra, a micronized AlloDerm tissue to
selected plastic and reconstructive surgeons. In February 2000, we announced a
co-promotion agreement with Obagi Medical Products ("Obagi") that granted Obagi
exclusive promotion rights to market to office-based plastic surgeons and
dermatologists. Our sales force will focus its efforts on hospital-based
reconstructive plastic surgeons.
LEVERAGING TECHNOLOGY PLATFORMS TO DEVELOP NEW PRODUCTS
Research continues into uses of our technology in vascular grafts and
orthopedics. Our vascular graft research has shown promise in pre-clinical
feasibility studies. We intend to seek a corporate partner for the further
development and commercialization of this product during 2000.
Pre-clinical studies suggest that our acellular tissue matrix may also
remodel into tendons, cartilage and bone. We intend to investigate further the
use of our acellular tissue and micronized acellular tissue for use in
orthopedics.
We are using our proprietary cell preservation technology in the development of
solutions that would extend the shelf life of platelets and red blood cells. We
plan to establish collaborative out-licensing arrangements with appropriate
partners to fund the development and commercialization of certain of these
products.
PRODUCTS AND PRODUCT DEVELOPMENT ACTIVITIES
ACELLULAR TISSUE PRODUCTS
ALLODERM(R)
AlloDerm(R) is acellular tissue processed with our proprietary tissue
processing technology using donated human (cadaveric) skin. We believe that
AlloDerm is the only transplant tissue product on the market today that promotes
the regeneration of normal human soft tissue. Following transplant, the
AlloDerm graft becomes repopulated with the patient's own cells and is
revascularized (i.e., blood supply is restored), becoming engrafted into the
patient. AlloDerm is a versatile tissue and has multiple surgical applications.
AlloDerm is predominately used in reconstructive plastic, periodontal and burn
surgery.
We receive donated human skin from tissue banks in the United States that
comply with the FDA's human tissue regulations. In addition, we require
supplying tissue banks to comply with procedural guidelines outlined by the
American Association of Tissue Banks. We conduct microbiological and other
rigorous quality assurance testing before our acellular tissue products are
released for shipment. AlloDerm has a proven safety record of over seven years
and over 50,000 grafts have been transplanted to date. AlloDerm is shipped at
ambient temperature by overnight delivery services and has a two-year
refrigerated shelf life.
We have established what we believe to be adequate sources of donated skin
tissue at acceptable costs to satisfy the foreseeable demand for all of our
commercialized tissue products. However, there can be no assurance that the
future availability of donated human skin will be sufficient to meet our demand
for such materials.
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RECONSTRUCTIVE PLASTIC SURGERY. AlloDerm is marketed to reconstructive
plastic surgeons as an "off-the-shelf" alternative to autograft. Within
reconstructive plastic surgery, AlloDerm is used primarily in the following
types of surgical procedures:
- as an implant for soft tissue reconstruction or tissue deficit
correction;
- as an interpositional graft for tissue coverage or closure;
- as a graft or implant for scar revision or the dermal component of a
skin graft; and
- as a sling to support tissue following nerve or muscle damage.
Based on industry sources, we estimate there are approximately one million
reconstructive surgical procedures performed annually in the United States in
which AlloDerm could be used. We estimate that our target market for sheet
AlloDerm is 241,000 procedures. These procedures include various head and neck
aesthetic and reconstructive surgeries, cancer reconstruction, scar revision and
oral cavity reconstruction. In these procedures, the greatest competitive
pressures to AlloDerm are from autologous tissue, synthetic and biosynthetic
materials. The disadvantages of using autologous tissue is the creation of a
separate donor site wound and the associated pain, healing, and scarring from
this additional wound. The disadvantages of using synthetic materials are the
susceptibility of synthetics to infection, the graft moving away from the
transplanted area (mobility), and erosion of the graft through the skin
(extrusion). Additionally, some biosynthetic materials may include bovine
collagen, which requires patient sensitivity testing.
PERIODONTAL SURGERY. We began marketing AlloDerm to periodontists in
September 1995. Lifecore Biomedical, Inc. is our exclusive distributor in the
United States and select international markets of AlloDerm for use in
periodontal applications. Periodontal surgeons use AlloDerm to increase the
amount of attached gum tissue supporting the teeth. Until the development of
AlloDerm, these procedures were predominately performed with autologous tissue
excised from the roof of the patient's mouth and then transplanted to the gum.
AlloDerm also is used in periodontal procedures for covering exposed tooth
roots. This procedure involves placing AlloDerm underneath gum tissue, which is
then lifted up to cover the exposed root. AlloDerm allows for the coverage of
multiple exposed roots in a single surgery without being limited by the
availability of autologous palatal tissue. AlloDerm has been evaluated in a
clinical study of 50 patients in which AlloDerm proved equivalent to autologous
connective tissue grafts for covering roots. The patients were also spared the
pain and discomfort associated with the excision of the palatal autograft.
In mid 1998, in association with Lifecore Biomedical, we began marketing
AlloDerm for use in root coverage procedures. Based on industry sources, we
estimate 250,000 root coverage procedures in which AlloDerm could be used are
performed annually in the United States.
AlloDerm tissue products also are used as barrier membranes in guided bone
regeneration. In this function, the AlloDerm tissue serves as a barrier over
allograft bone grafts or bone substitutes, which are used to restore degenerated
alveolar bone.
According to the most recently published data from the American Dental
Association, there were approximately 480,000 soft tissue grafts and 230,000
bone-related grafts performed in 1990 in the United States. Competitive
procedures use autologous tissue as well as synthetic material. We believe that
AlloDerm has advantages over autologous tissue because of the reduced trauma to
the patient, and over certain non-resorbable synthetic materials because it
integrates into the patient's tissue and does not require a separate procedure
for removal.
BURNS. During 1994, we began commercial sales of AlloDerm for use in the
treatment of third-degree and deep second-degree burns requiring skin grafting.
Skin is the body's largest organ and is the first line of defense against
invasion of foreign substances. It contains two functional layers, the upper
surface consisting primarily of cells (epidermis) and an underlying foundational
layer consisting primarily of extracellular matrix proteins and collagen
(dermis). The epidermis functions as a water barrier and maintains hydration.
The dermis provides other important skin properties including tensile strength,
durability and elasticity. Dermis, like many other tissues of the body, is not
capable of de novo regeneration. The most conservative and common surgical
treatment of third-degree and deep second-degree burns use split-thickness skin
autografts (the epidermal layer and a portion of the dermis) taken from
uninjured areas of the patient's body. The surgical procedure when using
AlloDerm in treating these patients is to place AlloDerm where the patient is
missing dermis and cover the AlloDerm with an ultra-thin split-thickness skin
autograft (the epidermal layer and a much thinner portion of the dermis). This
procedure has produced comparable results to normal autografts while
significantly reducing donor site trauma.
6
The use of AlloDerm in burn grafting has clinically shown performance
equivalent to autograft in reducing the occurrence and effects of scar
contracture. Scar contracture is a progressive tightening of scar tissue that
can cause skin and joint immobility. Severe scar contracture can limit the use
and function of all mobile joints, such as the arms, legs, feet, hands and neck.
Burn patients commonly undergo or need repetitive reconstructive surgeries for
scar contracture. We believe that AlloDerm provides significant therapeutic
value when used in burn grafting over a patient's mobile joints.
Based on industry sources, we estimate that approximately 80,000 people are
hospitalized each year in the United States due to burns and that more than
20,000 of such patients are admitted with major burns requiring skin grafts. We
believe AlloDerm could be used effectively with all of these patients.
POTENTIAL ORTHOPEDIC APPLICATIONS OF ALLODERM. We have been advised that a
small number of surgeons have used AlloDerm to reinforce the capsular ligament
surrounding certain joints. Based on these surgeons' preliminary results, a
product development plan has been implemented for orthopedic uses of AlloDerm.
We intend to conduct pre-clinical studies investigating the potential of our
acellular tissue matrix to remodel into orthopedic tissues such as tendon,
ligament, cartilage, meniscus and bone.
If successfully developed, an acellular tissue product for orthopedics
could be used in more than 620,000 procedures.
REPLIFORM(TM)
UROLOGY AND GYNECOLOGY SURGERY. Since 1997, surgeons have used Repliform or
AlloDerm in urological and gynecological procedures in the treatment of urinary
incontinence and to repair damaged or inadequate female pelvic tissues. Since
March 1999, Boston Scientific has been our exclusive worldwide sales and
marketing representative for Repliform for use in urology and gynecology.
Urinary incontinence affects approximately 13 million Americans, 85% of
whom are women. Fewer than half of these individuals seek treatment due to the
combined factors of embarrassment and a lack of acceptable therapeutic options
for some types of incontinence. Some forms of urinary incontinence can be
treated with a sling procedure, which involves lifting and supporting the
bladder neck to provide urethral support and compression.
Cystocele, rectocele and other pelvic floor conditions also occur
frequently in women and require soft tissue surgical repair. These conditions
are particularly common after multiple vaginal births and cause significant
discomfort to the patient. It is common that these conditions exist with or
cause urinary incontinence. Therefore, it is becoming the current standard of
care to correct pelvic floor conditions at the same time as a sling or
suspension procedure to ensure that there are no conditions that can adversely
affect patient outcome.
Currently, materials used for slings and pelvic floor repair surgeries
include autologous tissue, synthetic materials and cadaveric fascia. The
autologous tissue often is taken from the patient's thigh or abdomen resulting
in a painful donor site. The greatest drawback of using synthetic materials is
the occurrence of erosion through the urethra or vaginal wall causing pain and
infection, necessitating repeat surgery. Cadaveric fascia commonly is used with
minimal complications but currently is undergoing supply constraints. We believe
that Repliform used as a sling provides a safe and effective alternative that
eliminates the need for a donor site, will repopulate as the patient's own
tissue, will not erode through the soft pelvic tissues, and is available in
adequate supply.
Annually in the United States, there are approximately 190,000 retropubic
suspensions, bladder neck suspensions, and sling procedures performed of which
approximately 75,000 are bladder slings that could use Repliform as the sling
material. Also, there are approximately 240,000 pelvic floor procedures
performed annually in the United States of which 200,000 could use Repliform for
the soft tissue repair. Repliform has already been used in over 300 patients for
the treatment of incontinence and various pelvic floor repair surgeries. We
believe that the use of Repliform in slings and pelvic floor repair falls within
the FDA classification of "human tissue" intended for transplantation. However,
there can be no assurance that the FDA would agree.
FDA STATUS OF ALLODERM. The FDA has notified us that the use of AlloDerm
for replacement or repair of damaged or inadequate integumental tissue is "human
tissue" within the meaning of the human tissue for transplantation regulations.
The FDA has notified us that AlloDerm should be regulated as a Class II medical
device when it is labeled and promoted as a dura mater replacement. However, it
is unclear whether the FDA would agree that the following indications for which
AlloDerm has been used by physicians (and for which we may want to promote
AlloDerm in the future) is human tissue or whether the FDA would regulate
AlloDerm under its medical device authorities for these indications:
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- graft for guided bone regeneration;
- oncological reconstruction;
- urological and gynecological applications;
- orthopedic surgeries; and
- general surgeries.
There is risk that the FDA will require the submission of premarket
approval applications supported by extensive clinical data for the marketing and
promotion of some or all of these indications.
MICRONIZED ALLODERM PRODUCTS
CYMETRA(TM)
We have developed Cymetra, the brand name for Micronized AlloDerm(TM) (a
particulate form of AlloDerm) for use in multiple applications, including
reconstructive and dermatological applications. We believe that the delivery of
Cymetra non-surgically will create additional market opportunities that are
impenetrable by AlloDerm or Repliform. We have conducted various animal and
clinical studies aimed at demonstrating the efficacy and safety of Cymetra. We
began marketing Cymetra on a limited basis to thought leaders in the field of
reconstructive and facial plastic surgery in December 1999.
In February 2000, we signed an agreement granting Obagi Medical Products
the exclusive right to promote Cymetra to office-based dermatologists and
plastic surgeons. We will market and distribute Cymetra directly to hospitals
and a subset of private office accounts through our own sales force.
Cymetra offers a new non-surgical alternative in reconstructive plastic and
dermatological procedures, such as correction of facial and body soft tissue
deficits, the revision of acne scars and wrinkle correction. Unlike intradermal
fillers such as bovine and human collagen, Cymetra is delivered subdermally to
replace tissue that has been lost or eroded for various reasons. Some of these
procedures currently use bovine collagen injections. In 1998 there were over
400,000 collagen injection procedures performed in the United States. This
represents a significant market opportunity for Cymetra. The greatest
competitive pressure will be from injectable bovine collagen. The disadvantages
of bovine collagen include the requirement for pre-procedural sensitivity
testing and its limited persistence of two to three months due to resorption.
Cymetra will not require sensitivity testing and may potentially persist longer
than bovine collagen, offering greater patient and surgeon satisfaction.
MICRONIZED ALLODERM(TM)
In addition to the applications targeted by Cymetra, we believe that
micronized AlloDerm may have urological uses such as for the treatment of
urethral sphincter deficiency, a common cause of urinary incontinence, and
vesicoureteric reflux, which is the most common cause of renal failure in
children. One treatment for these conditions has been injecting bovine collagen
to bulk the sphincter muscle or to recreate the proper angle of the urethra or
the ureter. Based on an independent market research report, we estimate there
were approximately 118,000 injections of bovine collagen in 1996 to treat
urinary conditions for 33,000 individuals in the United States. A significant
drawback of bovine collagen in these procedures is that the body recognizes the
bovine collagen as a foreign material and eventually resorbs the injected
material requiring repeated injections to maintain continence or reflux
correction. We currently are testing the persistence of micronized acellular
tissue in animals for the treatment of urological disorders.
The FDA regulatory status of micronized acellular tissue in the United
States is uncertain. Although we believe that this form of AlloDerm should be
classified as human tissue intended for transplantation, there can be no
assurance that the FDA would agree. Additionally, even if some configurations or
uses of micronized acellular tissue are classified as human tissue, other
configurations such as those packaged to facilitate use by the physician, as
well as certain clinical applications, may be regulated by the FDA as a medical
device. If the product is classified as a device by the FDA, extensive delays
may be encountered before the time, if ever, that the product may be
commercially distributed.
CARDIOVASCULAR TISSUE PRODUCTS
We are conducting pre-clinical studies to evaluate small-diameter vascular
graft products for potential use in cardiovascular and vascular surgery. If
successfully developed, a vascular graft could be used in coronary artery bypass
procedures or used to restore peripheral blood circulation in patients with
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vascular insufficiency, such as below-knee bypass procedures. According to an
independent market research report, replacement vascular conduits are required
for the 320,000 coronary artery bypass surgeries and 250,000 peripheral vascular
reconstructions that are performed annually in the United States. There are
additional requirements for construction of arterio-venous (A-V) fistulas for
venous access in hemodialysis, patches for closure following carotid
endarterectomy and microvascular conduits for microsurgical repair techniques.
Veins harvested from the patient for use as a replacement graft continue to
be the mainstay of therapy, yet these vessels are frequently donor site limited
as a result of the condition of the patient. When available, autologous vessel
harvest leads to significant patient discomfort and an increase in risk for
complications. To address these drawbacks, there is a severe requirement for an
"off-the-shelf" small diameter vascular graft, which is non-immunogenic,
non-thrombotic and has compliance characteristics and handling properties
equivalent to native vessels.
Our processed grafts are decellularized to circumvent an immune response,
and they are freeze-dried to allow shelf storage for immediate use. Handling
characteristics and physical properties are equivalent to the native vessel. A
pre-clinical study has demonstrated our processed graft has an equivalent
patency to the animal's autologous vein. This study also showed the graft was
repopulated with the animal's own cells and hence, remodeled into the animal's
own tissue.
BLOOD CELL PRESERVATION
We are developing ThromboSol platelet storage solution to extend the shelf
life of transfusable platelets and other methods to extend the shelf life of red
blood cells, white blood cells and stem cells.
THROMBOSOL(TM) . We are developing ThromboSol; a patented biochemical
formulation designed to protect transfusable platelets from damage during
storage at low temperatures. The expected use of the product would be by blood
banks to increase the safety and extend the shelf-life of transfusable
platelets, thereby increasing the supply of available platelets, as well as to
store autologous platelets in advance for individuals expecting to undergo
surgery or chemotherapy. There were approximately 7.9 million platelet units
transfused in the United States in 1994, according to an industry survey.
Platelets are blood cells that initiate clotting. Untreated platelets are
sensitive to storage at low temperatures and cannot be refrigerated effectively.
Presently, platelets are stored at room temperature and, due to the risk of
microbial contamination, have a limited shelf life of five days. We have shown
in laboratory tests that the addition of ThromboSol solution preserves the in
vitro functional aspects of refrigerated platelets for up to nine days and
frozen platelets for more than one year.
During 1999, we successfully completed biocompatability testing on the
ThromboSol solutions. A pilot clinical study under a physician-sponsored
Investigational New Drug ("IND") was conducted during 1998 and the study found
that ThromboSol treated cryopreserved platelets performed better than standard
cryopreserved platelets. A second physician-sponsored IND has been initiated
which involves a "standard of care" transfusion of ThromboSol cryopreserved
platelets into oncology patients. This study should be completed in 2000. We
intend to license this product to major pharmaceutical and or other companies
for commercial development.
RED BLOOD CELLS. We are conducting research to develop procedures to freeze
and freeze-dry red blood cells. Such technology would be used by blood banks for
long-term storage of donated units of red blood cells, extending the available
blood supply, and for storage of autologous red blood cells for individuals
expecting to require blood transfusions as part of planned surgery.
Approximately 13 million units of blood are donated each year in the United
States. Red blood cells currently may be stored up to 42 days under
refrigeration. Current procedures to freeze red blood cells require the use of
cryoprotectant solutions that are toxic to the recipient and must be removed by
washing the cells prior to transfusion. This removal procedure is
labor-intensive and requires the immediate transfusion of the thawed and washed
blood. We believe that the successful development of non-toxic low temperature
methods of storage could simplify the use of frozen blood and potentially allow
widespread storage of autologous blood.
Numerous companies are attempting to develop blood substitute products and
others are developing simple closed loop cell washing methods or developing
technologies to inactivate bacterial or viral contaminants in donated blood.
Successful development of these products could affect the demand for any
products developed by us. Any product developed will require extensive
regulatory approvals, including approval of an IND by the FDA to conduct
clinical trials.
9
MARKETING
We currently distribute AlloDerm in the United States for reconstructive
plastic and burn surgical applications through our network of direct technical
sales representatives. Periodontal applications of AlloDerm in the United
States are marketed through our exclusive United States distributor, Lifecore
Biomedical, Inc. In March 1999, we entered an exclusive agreement with Boston
Scientific for the worldwide sales and marketing of Repliform for use in urology
and gynecology. In February 2000, we entered an agreement with Obagi Medical
Products granting them the exclusive right for promotion of Cymetra to
office-based dermatologists and plastic surgeons.
For several years before 1999, we used a network of regional and
international distributors to augment our sales efforts. We currently maintain a
network of international distributors, but during the first quarter of 1999, we
eliminated the use of regional distributors in favor of using distributors only
on an exclusive field of use basis. We currently intend to develop and
commercialize additional tissue products processed from cardiovascular,
neurological and other tissues in conjunction with corporate marketing partners.
As of March 6, 2000, we had a sales and marketing staff of 39 persons,
including 25 domestic sales personnel, and 14 domestic marketing and other
personnel. Our sales representatives are responsible for interacting with
surgeons, primarily plastic surgeons and burn surgeons and educating them
regarding the use and anticipated benefits of AlloDerm. We also participate in
national and international conferences and trade shows, participate in or fund
certain educational symposia or fellowship programs and advertise in industry
trade publications.
SOURCES OF MATERIALS
We pay a procurement fee to obtain allograft skin and other tissues from
contracted tissue banks in the United States. We are expanding our current
procurement of skin and other tissues to include any of approximately 150 tissue
banks, including approximately 36 skin banks. Procurement of certain human
organs and tissue for transplantation is subject to the restrictions of the
National Organ Transplant Act, which prohibits purchase and sale of human
organs, skin, and related tissue for "valuable consideration."
Pursuant to contractual arrangements, we reimburse tissue banks for
expenses incurred that are associated with the recovering and shipping of
donated human skin suitable for processing into AlloDerm, Repliform, Cymetra and
allograft skin as a temporary wound dressing. In obtaining such tissues, we
compete with treatment centers that use donated skin for temporary wound
dressings.
We believe we have established adequate sources of donor skin at acceptable
costs to satisfy the foreseeable demand for AlloDerm products during 2000.
Although we have not experienced any material difficulty in procuring adequate
supplies of donor skin, there is risk that the future availability of donated
human skin will not be sufficient to meet our demand for such materials. Any
supply shortage of available tissues in the future would likely have a material
adverse effect on our financial condition and results of operations.
We currently do not have procurement arrangements for other tissues related
to products under development, and do not intend to develop such arrangements
until the products approach commercialization.
We are accredited by the American Association of Tissue Banks ("AATB"). The
AATB is recognized for the development of industry standards and its program of
inspection and accreditation. The AATB provides a standards-setting function
similar to the FDA's quality system regulations for medical device companies,
and has procedures for accreditation similar to the International Standards
Organization ("ISO") standards. The license was granted to us in 1997 following
a detailed audit by the AATB of our operations and procedures. The accreditation
must be renewed every three years and is for the processing, storage and
distribution of tissue used in AlloDerm, Repliform, Cymetra and allograft skin.
GOVERNMENT REGULATION
Overview
Government regulation, both domestic and foreign, is a significant factor
in the manufacturing and marketing of our current and developing products. In
the United States, our AlloDerm products are subject to regulation by the United
States Food and Drug Administration (the "FDA"). The FDA applies the Federal
Food, Drug, and Cosmetics Act (the "FDC Act") and the Public Health Service Act
(the "PHS Act"). These rules provide the regulations which apply to the testing,
manufacture, labeling, storage, record keeping, approval, advertising and
promotion of our products.
The FDA does not apply a single regulatory scheme to human tissues and
products derived from human tissue. On a case by case basis, FDA may choose to
regulate such products as transplanted human tissue, biologics or medical
10
devices. A fundamental difference in the treatment of products under these
various classifications is that the FDA generally permits transplanted human
tissue to be commercially distributed without premarket approval. In contrast,
products regulated as devices or biologics usually require such approval. The
process of obtaining premarket approval for a device or biologic is often
expensive, lengthy and uncertain.
Once on the market, all of our products are subject to pervasive and
continuing regulation by the FDA. We are subject to inspection at any time by
the FDA and state agencies for compliance with regulatory requirements. FDA may
impose a wide of range of enforcement sanctions if we fail to comply, including:
- fines,
- injunctions,
- civil penalties,
- recall or seizure of our products,
- total or partial suspension of production,
- refusal of the government to authorize the marketing of new products
or to allow us to enter into supply contracts, and
- criminal prosecution.
Tissue Regulation
In 1996, correspondence from the FDA stated that AlloDerm used for the
replacement or repair of damaged or inadequate integumental tissue would be
regulated as human tissue under an interim regulation governing human tissue for
transplantation then in effect. This letter reversed the FDA's initial position
that AlloDerm for these indications should be regulated as a medical device. In
1997, the FDA issued a final regulation that became effective in 1998 regulating
"human tissue." The rule defines human tissue as any tissue derived from a human
body which is (i) intended for administration to another human for the
diagnosis, cure, mitigation, treatment or prevention of any condition or disease
and (ii) recovered, processed, stored or distributed by methods not intended to
change tissue function or characteristics. The FDA definition excludes, among
other things, tissue that currently is regulated as a human drug, biological
product or medical device and excludes vascularized human organs.
The final tissue rule requires establishments engaged in the procurement,
processing, and distribution of human tissue to conduct donor screening and
infectious disease testing and to maintain records available for FDA inspection
documenting that the procedures were followed. The rule also provides the FDA
with authority to conduct inspections of tissue establishments and to detain,
recall, or destroy tissue where the procedures were not followed or appropriate
documentation of the procedures is not available.
Relying on the 1996 letter, we have not obtained prior FDA approval for
commercial distribution of AlloDerm for use in the treatment of burns,
periodontal surgical procedures (such as free-gingival grafting and guided
tissue regeneration), and reconstructive plastic surgery procedures (such as
atrophic lip reconstruction and scar revision). We believe that the final tissue
regulation did not alter the provisions of the interim regulation that was the
foundation of the FDA's decision not to regulate AlloDerm as a device when sold
for these indications. Therefore, we continue to believe that AlloDerm for these
uses is regulated as human tissue. However, because the FDA's approach to tissue
regulation is evolving, we cannot assure you that FDA will adhere to this
position. In the future, the FDA could choose to impose device regulation on
AlloDerm for these indications.
The FDA also stated in the 1996 letter that their decision applied only to
AlloDerm when intended for use in transplantation to repair or replace damaged
or inadequate integumental tissue and that the regulatory status of the product
when it is promoted for other uses, such as a void filler for soft tissue, for
cosmetic augmentation or as a wound healing agent, would be determined on a
case-by-case basis. After the initial 1996 letter, additional FDA
correspondence stated that we would need to seek a regulatory status
determination on AlloDerm for any other uses.
We recently began marketing Cymetra (a micronized version of AlloDerm) for
plastic reconstructive procedures. We also are marketing Repliform (an acellular
tissue matrix) for urological and gynecological surgery (bladder sling; pelvic
floor repair). We believe that these products all meet the regulatory definition
11
of human tissue, and therefore, have not sought guidance from the FDA. The FDA
could choose to regulate any or all of these uses under the device regulations,
requiring us to cease marketing and/or recall product already sold until 510(k)
clearance or PMA approval is obtained. The FDA also could impose sanctions for
our failure to obtain premarket clearance or approval.
In May 1998, the FDA issued a proposed rule requiring registration of
tissue banking establishments and the listing of tissue products. This proposal
(which has not been finalized) may be a first step toward imposing significant
additional regulatory requirements upon tissue products. Such requirements could
cause us to incur significant additional costs.
The National Organ Transplant Act ("NOTA") prohibits the acquisition,
receipt or transfer of certain human organs, including skin and heart valves and
vascular grafts, for "valuable consideration", but permits the payment of
"reasonable" expenses associated with the removal, transportation, processing,
preservation, quality control and storage of human tissue and skin. We cannot
assure you that NOTA will not be interpreted to limit the prices that we may
charge for processing and transporting such products.
Our pricing structure for AlloDerm, Repliform and Cymetra also includes
certain educational costs associated with the processing and transportation of
human tissue. Although we believe that recovery of educational costs is
permitted under NOTA, a future inability to pass these costs on could adversely
affect our financial condition and operations. We cannot assure you that the
government will not adopt interpretations of NOTA that would adversely affect
our pricing structure or otherwise call into question one or more aspects of our
method of operation. Certain states and foreign countries have laws similar to
NOTA. These laws may restrict the amount that we can charge for our products,
and may restrict the importation or distribution of AlloDerm, Repliform and
Cymetra to licensed not-for-profit organizations.
In 1997, the FDA also issued a comprehensive "proposed approach" to the
regulation of cellular and tissue-based products, including human tissue for
transplantation. The FDA proposal set forth a tiered approach to cell and tissue
regulation that ranges from no regulatory requirements for cells or tissue that
are removed and transplanted into the same patient in a single surgical
procedure to full premarket approval requirements as biologics and medical
devices for products that raise potential health, safety or efficacy concerns.
Thus, FDA's approach to the regulation of tissue continues to evolve.
Medical Device Regulation
A medical device generally may be marketed in the United States only with
the FDA's prior authorization. Devices classified by the FDA as posing less risk
are placed in class I or class II. Class II devices require the manufacturer to
seek "510(k) clearance" from the FDA prior to marketing through the filing of a
"premarket notification," unless exempted from this requirement by regulation.
Such clearance generally is granted based upon a finding that a proposed device
is "substantially equivalent" in intended use and safety and effectiveness to a
"predicate device," which is a legally marketed class II device that already has
510(k) clearance or a "preamendment" class III device (in commercial
distribution prior to May 28, 1976) for which the FDA has not called for PMA
applications (defined below). We believe that it usually takes from four to 12
months from the date of submission to obtain 510(k) clearance, but it may take
longer. No assurance can be given that any 510(k) submission will ever receive
clearance. After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in the intended use of the device, will require a new 510(k)
submission.
A medical device that does not qualify for 510(k) clearance is placed in
class III, which is reserved for devices classified by the FDA as posing the
greatest risk (e.g., life-sustaining, life-supporting or implantable devices, or
devices that are not substantially equivalent to a predicate device). A class
III device generally must undergo the premarket approval ("PMA") process, which
requires the manufacturer to prove the safety and effectiveness of the device to
the FDA's satisfaction. A PMA application must provide extensive preclinical and
clinical trial data and information about the device and its components
regarding, manufacturing, labeling and promotion. As part of the PMA review, the
FDA will inspect the manufacturer's facilities for compliance with the Quality
System Regulation ("QSR"), which includes elaborate testing, control,
documentation and other quality assurance procedures. Upon submission, the FDA
determines if the PMA application is sufficient to permit a substantive review,
and, if so, the application is accepted for filing. The FDA then commences an
in-depth review of the PMA application, which we believe typically takes one to
three years, but may take longer.
If the FDA's evaluation of the PMA application is favorable, the FDA
typically issues an "approval letter" requiring the applicant's agreement to
comply with specific conditions (e.g., changes in labeling) or to supply
specific additional data (e.g., longer patient follow up) or information (e.g.,
submission of final labeling) in order to secure final approval of the PMA
application. Once the approval letter is satisfied, the FDA will issue a PMA
order for the approved indications, which can be more limited than those
originally sought by the manufacturer. The PMA order can include postapproval
conditions that the FDA believes necessary to ensure the safety and
effectiveness of the device including, restrictions on labeling, promotion, sale
and distribution. Failure to comply with the conditions of approval can result
12
in enforcement action, including withdrawal of the approval. The PMA process can
be expensive and lengthy, and no assurance can be given that any PMA application
will ever be approved for marketing. Even after approval of a PMA, a new PMA or
PMA supplement is required in the event of a modification to the device.
A clinical study in support of a PMA application or 510(k) submission for a
"significant risk" device requires an Investigational Device Exemption ("IDE")
application approved in advance by the FDA for a limited number of patients. The
IDE application must be supported by appropriate data, such as animal and
laboratory testing results. The clinical study may begin if the FDA and the
appropriate institutional review board ("IRB") at each clinical study site
approve the IDE application. If the device presents a "nonsignificant risk" to
the patient, a sponsor may begin the clinical study after obtaining IRB approval
without the need for FDA approval. In all cases, the clinical study must be
conducted under the auspices of an IRB pursuant to FDA's regulatory requirements
intended for the protection of subjects and to assure the integrity and validity
of the data.
Once on the market, our medical device products will be subject to
pervasive and continuing regulation. We will have to comply with these
requirements, including the FDA's labeling regulations, the QSR, the Medical
Device Reporting ("MDR") regulations (which require that a manufacturer report
to the FDA certain types of adverse events involving its products), and the
FDA's general prohibitions against promoting products for unapproved or
"off-label" uses. In addition, class II devices can be subject to additional
special controls (e.g., performance standards, postmarket surveillance, patient
registries, and FDA guidelines) that do not apply to class I devices.
In 1997, the FDA told us that NeoDura (an acellular tissue matrix) for use
in dura mater replacement procedures would be classified as a medical device
requiring 510(k) clearance. In March 1999, we withdrew this 510(k) submission
with the intent to submit a new 510(k) notification after we have addressed
several issues raised by the FDA. We cannot assure you that we will submit a new
510(k) notice for NeoDura or that it will ultimately receive 510(k) clearance.
Based upon relevant precedents, it is not clear whether the FDA will
regulate our vascular products now in development as medical devices requiring
510(k) clearance or PMA approval or as human tissue. However, we will seek to
persuade the FDA that our vascular products should be regulated as human tissue
similar to other vascular products previously marketed.
Biologics Regulation
Biologic products are regulated under the FDC Act and the Section 351(a) of
the PHS Act. The PHS Act imposes a special additional licensing requirement,
known as a Biologic License. This license imposes very specific requirements
upon the facility and the manufacturing and marketing of licensed products to
assure their safety, purity, and potency. Some licensed biological products are
also subject to batch release by the FDA. That is, the products from a newly
manufactured batch cannot be shipped until the FDA has evaluated either a sample
or the specific batch records and given permission to ship the batch of product.
The PHS Act also grants the FDA authority to impose mandatory product recalls
and provides for civil and criminal penalties for violations.
Before conducting the required clinical testing of a biological product, an
applicant must submit an investigational new drug application ("IND") to the
FDA, containing preclinical data demonstrating the safety of the product for
human investigational use, information about the manufacturing processes and
procedures and the proposed clinical protocol. Clinical trials of biological
products typically are conducted in three sequential phases, but may overlap.
Phase 1 trials test the product in a small number of healthy subjects, primarily
to determine its safety and tolerance at one or more doses. In Phase 2, in
addition to safety, the efficacy, optimal dose and side effects of the product
are evaluated in a patient population somewhat larger than the Phase 1 trial.
Phase 3 involves further safety and efficacy testing on an expanded patient
population at geographically dispersed test sites.
All clinical studies must be conducted in accordance with FDA approved
protocols and are subject to the approval and monitoring of one or more
Institutional Review Boards. In addition, clinical investigators must adhere to
good clinical practices. Completion of all three phases of clinical studies may
take several years, and the FDA may temporarily or permanently suspend a
clinical study at any time.
Upon completion and analysis of clinical trials, the applicant assembles
and submits a Product License Application and an Establishment License
Application or a Biologic License Application containing, among other things, a
complete description of the manufacturing process. Before the licenses can be
granted, we must undergo a successful establishment inspection. FDA review and
13
approval of a biological product can take several years. We cannot assure you
that we will obtain the required approval for ThromboSol platelet storage
solution or any other proposed biological products.
Other Regulation
We are subject to various federal, state and local laws, regulations and
recommendations relating to such matters as safe working conditions, laboratory
and manufacturing practices, and the use, handling and disposal of hazardous or
potentially hazardous substances used and produced in connection with our
research and development work. We cannot assure you that we will not incur
significant additional costs to comply with these laws or regulations in the
future.
International Regulation
Sales of medical devices and biological products outside the United States
are subject to foreign regulatory requirements that vary widely from country to
country. Approval of a product by comparable regulatory authorities of foreign
countries must be obtained prior to commercialization of the product in those
countries. Certain countries regulate AlloDerm as a pharmaceutical product,
requiring extensive filings and regulatory approvals to market the product.
Certain countries classify AlloDerm as "human tissue transplant" which may
restrict its commercialization. Other countries have no applicable regulations
regarding the commercialization of products similar to AlloDerm, creating
uncertainty about the import or sale of the product.
The inability to classify AlloDerm as a medical device has restricted our
ability to obtain an appropriate regulatory designation for the product for
Western Europe, which would provide a clearer marketing path in the European
Union. The time required to obtain foreign approvals may be longer or shorter
than that required for FDA approval and there can be no assurance that approvals
would be obtained for any of our products. AlloDerm currently is being marketed
in certain foreign countries, and we are actively pursuing clearance to market
AlloDerm in certain additional countries. There can be no assurance that the
uncertainty of regulations in each country will not delay or impede the
marketing of AlloDerm or impede our ability to negotiate distribution
arrangements on favorable terms.
RESEARCH AND DEVELOPMENT
We have historically funded the development of our tissue products and
blood cell preservation products primarily through external sources, including a
corporate alliance and government grants and contracts, as well as through the
proceeds from equity offerings. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources."
Our research and development costs in 1997, 1998 and 1999 for all programs,
including those programs funded through corporate and government support, were
approximately $2.0 million $3.4 million and $3.9 million respectively.
We have received a substantial portion of our government grant funding from
the United States government's Small Business Innovation Research ("SBIR")
program. The SBIR grant program provides funding to evaluate the scientific and
technical merit and feasibility of an idea. To date, we have been awarded
approximately $6.3 million through 15 approved SBIR program awards and
Department of Defense contracts. We intend to continue to seek funding through
the SBIR programs, as well as to pursue additional government grant and contract
programs. Generally, we have the right to patent any technologies developed
from government grants and contract funding, subject to the United States
government's right to receive a royalty-free license for federal government
use and to require licensing to others in certain circumstances.
PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS
Our ability to compete effectively with other companies is dependent
materially upon the proprietary nature of our technologies. We rely primarily
on patents, trade secrets and confidentiality agreements to protect our
technologies. We currently license the exclusive right to nine United States
patents and related foreign patents and the non-exclusive right to 14 United
States patents. In addition, we have been issued five United States utility
patents, one United States design patent and have seven pending United States
patent applications.
Our technology is protected by three primary families of patents and patent
applications. One United States patent covers methods of producing our
tissue-based products. Two United States patents and two pending patent
applications cover methods of extending the shelf-life of platelets, red blood
cells and other blood cells. Nine additional United States patents supplement
our other patents and cover methods of freeze-drying without the damaging
effects of ice crystal formation.
14
We also have applied for patent protection in several foreign countries.
Because of the differences in patent laws and laws concerning proprietary
rights, the extent of protection provided by United States patents or
proprietary rights owned by or licensed to us may differ from that of their
foreign counterparts.
In general, the patent position of biotechnology and medical product firms
is highly uncertain and involves complex legal, scientific and factual
questions. There is risk that other patents may not be granted with respect to
the patent applications filed by us. Furthermore, there is risk that one or more
patents issued or licensed to the Company will not provide commercial benefit to
us or will be infringed, invalidated or circumvented by others. The United
States Patent and Trademark Office currently has a significant backlog of patent
applications, and the approval or rejection of patents may take several years.
Prior to actual issuance, the contents of United States patent applications are
generally not made public. Once issued, a patent would constitute prior art from
its filing date, which might predate the date of a patent application on which
we rely. Conceivably, the issuance of such a prior art patent, or the discovery
of "prior art" of which we are currently unaware, could invalidate a patent of
ours or our licensor or discourage commercialization of a product claimed within
such patent.
No assurances may be given that our products or planned products may not be
the subject of additional infringement actions by third parties. Any successful
patent infringement claim relating to any products or planned products could
have a material adverse effect on our financial condition and results of
operations. Further, there can be no assurance that any patents or proprietary
rights owned by or licensed to us will not be challenged, invalidated,
circumvented, or rendered unenforceable based on, among other things,
subsequently discovered prior art, lack of entitlement to the priority of an
earlier, related application or failure to comply with the written description,
best mode, enablement or other applicable requirements.
We conduct a cursory review of issued patents prior to engaging in research
or development activities. Accordingly, we may be required to obtain a license
from others to commercialize any of our products under development. There can be
no assurance that any such license that may be required could be obtained on
favorable terms or at all.
We may decide for business reasons to retain certain knowledge that we
consider proprietary as confidential and elect to protect such information as a
trade secret, as business confidential information, or as know-how. In that
event, we must rely upon trade secrets, know-how and continuing technological
innovation to maintain our competitive position. There can be no assurance that
others will not independently develop substantially equivalent proprietary
information or otherwise gain access to or disclose such information.
We have federal trademark or service mark registrations that we currently
use for LifeCell , which concerns processing and preserving tissue samples, and
AlloDerm , which concerns our commercial acellular dermal graft product. We have
filed trademark applications for the protection of the phrases Micronized
AlloDerm , the particulate form of AlloDerm, Cymetra , the brand name for
Micronized AlloDerm, Repliform , the AlloDerm product designed for urology and
gynecology and for NeoDura , the AlloDerm product designed for neurosurgery.
COMPETITION
The biomedical field is undergoing rapid and significant technological
change. Our success depends upon our ability to develop and commercialize our
technology. There are many companies and academic institutions that are capable
of developing products based on similar technology, and that have developed and
are capable of developing products based on other technologies, which are or may
be competitive with our products. Many of those companies and academic
institutions are well-established, have substantially greater financial and
other resources, research and development capabilities and more experience in
conducting clinical trials, obtaining regulatory approvals, manufacturing and
marketing than us. These companies and academic institutions may succeed in
developing competing products that are more effective than our products or that
receive government approvals more quickly than our products, which may render
our products or technology uncompetitive, uneconomical or obsolete.
For most current applications of AlloDerm and Repliform, the principal form
of competition is with the use of the patient's autologous tissue. We anticipate
direct competition for AlloDerm tissue products and all of our proposed
transplantable tissue products, as well as indirect competition from advances in
15
therapeutic agents, such as growth factors now used to enhance wound healing. We
believe that therapeutic growth factors may be used in conjunction with our
proposed products and may potentially enhance the products' efficacy. There can
be no assurance that we will be able to compete effectively with other
commercially available products or that development of other technologies will
not detrimentally affect our commercial opportunities or competitive advantage.
ENVIRONMENTAL MATTERS
Our research and development and processing techniques generate waste that
is classified as hazardous by the United States Environmental Protection Agency,
the Texas Natural Resources Commission and the New Jersey Department of
Environmental Protection. We segregate such waste and dispose of it through
licensed hazardous waste transporters. Although we believe we are currently in
compliance in all material respects with applicable environmental regulations,
our failure to comply fully with any such regulations could result in the
imposition of penalties, fines or sanctions that could have an adverse effect on
our financial condition and results of operations.
EMPLOYEES
At March 14, 2000, we had 154 full-time and 12 part-time employees of which
39 were employed in sales and marketing, 85 in engineering, production and
quality assurance, 17 in research and development and clinical studies, and 25
in administration and accounting. Also, at such date, we employed, full-time, 3
persons with M.D. degrees and 9 persons with Ph.D. degrees.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Act of 1934, as amended. All statements other
than statements of historical facts included herein, including, without
limitation, statements regarding our financial position, business strategy,
products, products under development, markets, budgets, plans and objectives of
management for future operations and Year 2000 Readiness, are forward-looking
statements. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to be correct. Important factors that could cause
actual results to differ materially from our expectations ("Cautionary
Statements") are disclosed under "Risk Factors" and elsewhere herein, including,
without limitation, in conjunction with the forward-looking statements included
herein. All subsequent written and oral forward-looking statements attributable
to us or persons acting on our behalf are expressly qualified in their entirety
by the Cautionary Statements.
RISK FACTORS
In addition to the other information in this Annual Report on Form 10-K,
the following factors should be considered carefully in evaluating the Company.
Special Note: Certain statements set forth below constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
WE HAVE A HISTORY OF OPERATING LOSSES AND A SUBSTANTIAL ACCUMULATED
EARNINGS DEFICIT
Since our inception in 1986, we have generated only limited revenues from
product sales and have incurred substantial losses, including losses of
approximately $6.1 million, $7.3 million and $9.2 million for the years ended
December 31, 1997, 1998, and 1999, respectively. At December 31, 1999, we had
an accumulated deficit of approximately $54.4 million. We expect to incur
additional operating losses as well as negative cash flow from operations
through the middle of 2000 as we continue to use substantial resources to expand
our marketing efforts with respect to AlloDerm and to expand our product
development programs. Our ability to increase revenues and achieve profitability
and positive cash flows from operations will depend on increased market
acceptance and sales of AlloDerm, Repliform and Cymetra and commercialization of
products under development.
WE MAY NEED ADDITIONAL CAPITAL TO MARKET ALLODERM AND DEVELOP NEW PRODUCTS
The development and commercialization of new products will require
additional development, sales and marketing, manufacturing and other
expenditures. We intend to expend substantial funds for:
- product research and development,
- expansion of sales and marketing activities,
- expansion of manufacturing capacity,
- product education efforts, and
- other working capital and general corporate purposes.
16
We may need additional capital, depending on:
- the costs and progress of our research and development efforts;
- the number and types of product development programs undertaken;
- the costs and timing of expansion of sales and marketing activities;
- the costs and timing of expansion of manufacturing capacity;
- the amount of revenues from sales of our existing and new products;
- changes in, termination of, and the success of existing and new
distribution arrangements;
- the cost of maintaining, enforcing and defending patents and other
intellectual property rights;
- competing technological and market developments;
- developments related to regulatory and third-party reimbursement
matters; and
- other factors.
Any additional equity financing may be dilutive to stockholders, and debt
financing, if available, may involve significant restrictive covenants.
Collaborative arrangements, if necessary to raise additional funds, may require
us to relinquish our rights to certain of our technologies, products or
marketing territories. If adequate funds are not available, we expect that we
will be required to delay, scale back or eliminate one or more of our product
development programs.
OUR FAILURE TO COMPLY WITH APPLICABLE REGULATION COULD LEAD THE FDA TO
IMPOSE ENFORCEMENT SANCTIONS.
Significant government regulation, both domestic and foreign, applies to
the manufacturing and marketing of our current and developing products. In the
United States, our AlloDerm products are subject to regulation by the United
States Food and Drug Administration. Noncompliance with the FDA's requirements
can result in:
- fines,
- injunctions,
- civil penalties,
- recall or seizure of products,
- total or partial suspension of production,
- refusal of the government to authorize the marketing of new products
or allow us to enter into supply contracts, and
- criminal prosecution.
THE FDA MAY DECIDE TO IMPOSE MEDICAL DEVICE REGULATION RULES UPON
ALLODERM'S CURRENT TISSUE PRODUCTS FOR RECONSTRUCTIVE PLASTIC SURGERY,
PERIODONTAL SURGERY AND BURN GRAFTS, WHICH WOULD REQUIRE US TO OBTAIN
510(K) CLEARANCE OR PMA APPROVAL.
The FDA generally permits transplanted human tissue to be commercially
distributed without 510(k) clearance or PMA approval. In contrast, products
regulated as medical devices usually require such approval. In 1996, the FDA
determined that AlloDerm used for the repair or replacement of damaged or
inadequate integumental tissue, including gingiva, would be regulated as
transplanted human tissue. On that basis, we began commercial distribution of
17
this product for reconstructive plastic surgery, periodontal surgery and burn
grafts without 510(k) clearance or PMA approval from the FDA. However, the FDA's
regulatory approach to tissue products continues to evolve. There is a risk that
the FDA could alter its regulatory approach and decide that this product is more
appropriately regulated as a medical device. If so, the FDA could require us to
obtain 510(k) clearance or PMA approval for these products. The process of
obtaining 510(k) clearance or PMA approval may be expensive, lengthy and
unpredictable and/or may require collection of extensive clinical data.
THE FDA MAY DECIDE TO REGULATE ALLODERM FOR OTHER USES, INCLUDING
MICRONIZED ALLODERM, AS A MEDICAL DEVICE AND COULD ORDER US TO CEASE
MARKETING AND/OR RECALL PRODUCT ALREADY SOLD UNTIL 510(K) CLEARANCE OR PMA
APPROVAL IS OBTAINED; THE FDA ALSO COULD IMPOSE ENFORCEMENT SANCTIONS FOR
MARKETING THESE PRODUCTS WITHOUT CLEARANCE OR APPROVAL.
Although the FDA determined that AlloDerm used for the repair or
replacement of damaged or inadequate integumental tissue, including gingiva, is
regulated as tissue, the agency stated in that decision that the regulatory
status of any different uses would need to be determined on a case-by-case
basis. In recent months, we began marketing Cymetra (a micronized version of
AlloDerm) for plastic and reconstructive procedures. We also began marketing
Repliform (an acellular tissue matrix) for urological and gynecological surgery
(bladder sling; pelvic floor repair) procedures.
Because we believe that these products meet the regulatory definition of
human tissue, we have not sought a determination of this question from the FDA.
There is a risk that FDA could determine that AlloDerm for one or more of these
new uses is more appropriately regulated as a medical device. Pursuant to such a
decision, the FDA could require us to cease marketing and/or recall product
already sold until 510(k) clearance or PMA approval is obtained. We do not know
if such clearance or approval could be obtained in a timely fashion, or at all,
or if the FDA would require extensive clinical data to support clearance or
approval. The FDA also could seek to impose enforcement sanctions for marketing
these products without 510(k) clearance or PMA approval.
IF WE DO NOT PASS THE FDA'S INSPECTIONS OF OUR TISSUE FACILITIES, FDA COULD
REQUIRE THE RECALL OR DESTRUCTION OF OUR TISSUE PRODUCTS.
Our involvement in the processing and distribution of human tissue requires
us to ensure that proper donor screening and infectious disease testing is done
appropriately and conducted under strict procedures. In addition, we must
maintain records, which are available for FDA inspectors documenting that the
procedures were followed. The FDA has authority to conduct inspections of tissue
establishments and to detain, recall, or destroy tissue if the procedures were
not followed or appropriate documentation is not available.
THERE IS A RISK THAT LAWS WILL LIMIT OUR ABILITY TO SELL OUR PRODUCTS AT A
PROFIT.
The National Organ Transplant Act prohibits the acquisition, receipt or
transfer of certain human organs, including skin and heart valves and vascular
grafts, for valuable consideration, but permits the payment of reasonable
expenses associated with the removal, transportation, processing, preservation,
quality control and storage of human tissue and skin. We include in our
AlloDerm, Repliform and Cymetra pricing structure certain of its educational
costs and reasonable processing expenses. There is a risk that NOTA payment
allowances may be interpreted differently in the future for our products, and if
it is, it would limit profits, by limiting recovery of educational costs and
processing expenses.
18
OUR PRODUCTS MAY BE SUBJECT TO EXPORT RESTRICTIONS.
FDA export restrictions may apply to our products that have not yet been
cleared or approved for domestic distribution. There can be no assurance that we
will receive on a timely basis, if at all, any FDA export approvals necessary
for the marketing of our products abroad.
OUR PROPOSED BLOOD CELL PRESERVATION PRODUCTS WILL BE SUBJECT TO REGULATION
AS BIOLOGICS.
Biologic products require FDA premarket licensing prior to
commercialization in the United States. To obtain licensing approval for these
products, we must submit proof of their safety, purity and potency. Testing,
preparation of necessary applications and the processing of those applications
by the FDA is expensive and time consuming. We do not know if the FDA will act
favorably or quickly in making such reviews and significant difficulties or
costs may be encountered by us in our efforts to obtain FDA licenses. The FDA
may also place conditions on clearances that could restrict commercial
applications of such products. Product approvals may be withdrawn if compliance
with regulatory standards are not maintained or if problems occur following
initial marketing. Delays imposed by the FDA licensing process may materially
reduce the period during which we have the exclusive right to commercialize
patented products.
OUR PRODUCTS ARE SUBJECT TO PERVASIVE AND CONTINUING REGULATION.
Products marketed by us pursuant to FDA or foreign approval will be subject
to pervasive and continuing regulation. In the United States, devices and
biologics must be manufactured in registered establishments and must be produced
in accordance with the Quality System Regulation for medical devices or Good
Manufacturing Practices regulations for biologics. Tissue establishments must
engage in donor screening, infectious disease testing and stringent record
keeping. Our facilities and processes are subject to periodic FDA inspection for
compliance with all requirements. Labeling and promotional activities are also
subject to scrutiny by the FDA and, in certain instances, by the Federal Trade
Commission. From time to time, the FDA may modify such requirements, imposing
additional or different requirements. Failure to comply with any applicable FDA
requirements could result in civil and criminal enforcement actions and other
penalties that would have a material adverse effect on us. In addition, there
can be no assurance that the various states in which our products are sold will
not impose additional regulatory requirements or marketing impediments.
We are subject to various federal, state and local laws, regulations and
recommendations relating to such matters as safe working condition, laboratory
and manufacturing practices, and the use, handling and disposal of hazardous or
potentially hazardous substances used and produced in connections with our
research and development work. We may incur significant additional costs to
comply with these laws or regulations in the future.
WE ARE SUBJECT TO VARYING AND EXTENSIVE REGULATION BY FOREIGN GOVERNMENTS.
The regulation of AlloDerm outside the United States varies by country.
Certain countries regulate AlloDerm as a pharmaceutical product, requiring
extensive filings and regulatory approvals to market the product. Certain
countries classify AlloDerm as a transplant tissue but may restrict its import
or sale. Other countries have no applicable regulations regarding the import or
sale of products similar to AlloDerm, creating uncertainty regarding the import
or sale of the product.
AlloDerm currently is being marketed in certain foreign countries, and we
are pursuing clearance to market AlloDerm in additional countries. The
19
uncertainty of the regulations in each country may delay or impede the marketing
of AlloDerm or impede our ability to negotiate distribution arrangements on
favorable terms. Certain foreign countries have laws similar to the United
States' National Organ Transplant Act. These laws may restrict the amount that
we can charge for AlloDerm and may restrict the importation or distribution of
AlloDerm to licensed not-for-profit organizations.
OUR PRODUCTS REPRESENT NEW METHODS OF TREATMENT WHICH MAY NOT BE ACCEPTED
BY DOCTORS.
Much of our ability to increase revenues and to achieve profitability and
positive cash flow will depend on expanding the use and market penetration of
our AlloDerm products and the successful introduction of our products in
development. Products based on our technologies represent new methods of
treatment. Physicians will not use our products unless they determine that the
clinical benefits to the patient are greater than those available from competing
products or therapies. Even if the advantage of our products is established as
clinically significant, physicians may not elect to use such products for any
number of reasons. As such, there can be no assurance that any of our AlloDerm
products or products under development will gain any significant degree of
market acceptance among physicians, health care payers and patients. Broad
market acceptance of our products may require the training of numerous
physicians and clinicians, as well as conducting or sponsoring clinical studies
to demonstrate the benefits of such products. The amount of time required to
complete such training and studies could result in a delay or dampening of such
market acceptance. Moreover, health care payers' approval of reimbursement for
our products in development may be an important factor in establishing market
acceptance.
WE WILL NEED TO DEVELOP NEW PRODUCTS TO BE SUCCESSFUL.
Our growth and profitability will depend, in part, upon our ability to
complete development of and successfully introduce new products. We may be
required to undertake time-consuming and costly development activities and seek
regulatory clearance or approval for new products. Although we have conducted
animal studies on many of our products under development which indicate that the
product may be feasible for a particular application, results obtained from
expanded studies may not be consistent with earlier trial results or be
sufficient for us to obtain any required regulatory approvals or clearances. We
may experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products. Regulatory clearance or
approval of these or any new products may not be granted on a timely basis, if
ever, and the new products may not adequately meet the requirements of the
applicable market or achieve market acceptance. The completion of the
development of any of our products under development remains subject to all the
risks associated with the commercialization of new products based on innovative
technologies, including:
- unanticipated technical or other problems,
- manufacturing difficulties, and
- the possible insufficiency of the funds allocated for the completion
of such development.
The inability to complete successfully the development of a product or
application, or a determination by us, for financial, technical or other
reasons, not to complete development of any product or application, particularly
in instances in which we have made significant capital expenditures, could have
a material adverse effect on our business.
WE ARE DEPENDENT ON AGENT AND DISTRIBUTOR SALES.
We have engaged Lifecore Biomedical, Inc. as the exclusive distributor for
AlloDerm for periodontal applications in the United States; Boston Scientific
Corporation as our exclusive worldwide sales and marketing representative for
Repliform for use in urology and gynecology; and Obagi Medical Products as the
exclusive sales and marketing representative of Cymetra for office-based
dermatologists and plastic surgeons. Other distributors also may be granted
exclusive distribution rights. To the extent any exclusive distributor fails
adequately to promote, market and sell our products, we may not be able to
secure a replacement distributor until after the term of the distribution
contract is complete or until such contract can otherwise be terminated.
WE ARE DEPENDENT ON CERTAIN SOURCES OF MATERIALS.
Our business is dependent on the availability of donated human skin and
other tissues. A finite supply of donated tissue is available. Although we have
established what we believe to be adequate sources of donated human skin to
satisfy the expected demand for AlloDerm during in the foreseeable future, we
have not yet developed a supply of other tissues and there can be no assurance
that the availability of donated human skin and other tissues will be sufficient
to meet our demand for such materials. Any significant interruption in supply of
such tissue would likely have a material adverse effect on our financial
condition and results of operations.
20
We acquire donated human skin from various non-profit organizations which
procure skin and other donated human tissue. The procurement of skin generally
constitutes a small portion of the operating funds for such non-profit
organizations. The development of products that replace the need for donated
tissue, such as the development of synthetic bone substitutes to replace
allograft bone procured by the organizations, could threaten the existence of
the non-profit organizations and, therefore, adversely affect the supply of
donated human skin to us or increase the required payments from us.
We have performed limited activities to develop products using porcine
dermis and other animal tissues as a substitute for donated human skin. If
successfully developed, animal tissue could replace the need for human tissue as
a raw material. There can be no assurance that such animal tissue products can
be successfully developed, that such development and required regulatory
approvals could result in timely replacement of human tissue used by us in the
event of a reduced supply of human tissue or that the cost of such animal tissue
would not materially adversely affect our business, financial condition and
results of operations.
Donors of organs and tissues, including donated human skin, have various
motivations. Although we do not promote the use of AlloDerm for cosmetic
applications, AlloDerm has been used by surgeons in a variety of applications
that may be considered "cosmetic." Knowledge of such use by potential donors
could impact their willingness to donate skin for such uses.
WE ARE DEPENDENT ON KEY MANAGEMENT AND PERSONNEL.
We are dependent in large part on the efforts of our executive officers,
including Paul G. Thomas, President and Chief Executive Officer of the Company,
and Stephen A. Livesey, M.D., Ph.D., Executive Vice President and Chief Science
Officer and a director of the Company. We have obtained "keyman" life insurance
on Dr. Livesey of $3.0 million. Further, our success is also dependent upon our
ability to hire and retain qualified operating, marketing and technical
personnel. The competition for qualified personnel in the biochemical industry
is intense, and accordingly, there can be no assurance that we will be able to
hire or retain such personnel.
THE BIOMEDICAL FIELD WHICH WE ARE IN IS PARTICULARLY SUSCEPTIBLE TO RAPID
CHANGE.
The biomedical field is undergoing rapid and significant technological
change. Our success depends upon our ability to develop and commercialize
efficient and effective products based on our technology. There are many
companies and academic institutions that are capable of developing products
based on similar technology, and that have developed and are capable of
developing products based on other technologies, which are or may be competitive
with our products. Many of these companies and academic institutions are
well-established, have substantially greater financial and other resources,
research and development capabilities and more experience in conducting clinical
trials, obtaining regulatory approvals, manufacturing and marketing than us.
These companies and academic institutions may succeed in developing competing
products that are more effective than our products, or that receive government
approvals more quickly than our products, which may render our products or
technology uncompetitive, uneconomical or obsolete.
THE ABILITY TO OBTAIN THIRD-PARTY REIMBURSEMENT FOR THE COSTS OF NEW
MEDICAL TECHNOLOGIES LIKE OURS IS LIMITED.
Generally, hospitals, physicians and other health care providers purchase
products, such as the products being sold or developed by us, for use in
providing care to their patients. These parties typically rely on third-party
payers, including Medicare, Medicaid, private health insurance and managed care
plans, to reimburse all or part of the costs of acquiring those products and
costs associated with the medical procedures performed with those products. Cost
control measures adopted by third-party payers in recent years have had and may
continue to have a significant effect on the purchasing practices of many health
care providers, generally causing them to be more selective in the purchase of
medical products. Significant uncertainty exists as to the reimbursement status
of newly approved health care products. We believe that certain third-party
payers provide reimbursement for medical procedures at a specified rate without
additional reimbursement for products, such as those being sold or developed by
us, used in such procedures. Adequate third-party payer reimbursement may not be
available for us to maintain price levels sufficient for realization of an
appropriate return on our investment in developing new products. In addition,
government and other third-party payers continue to refuse, in some cases, to
provide any coverage for uses of approved products for indications for which the
FDA has not granted marketing approval. Many uses of AlloDerm have not been
granted such marketing approval and there can be no assurance that any such uses
will be approved. Further, certain of our products are used in medical
procedures that typically are not covered by third-party payers, such as
cosmetic procedures, or for which patients sometimes do not obtain coverage,
such as dental procedures. These and future changes in third-party payer
reimbursement practices regarding the procedures performed with our products
could adversely affect the market acceptance of our products.
21
WE ARE DEPENDENT ON PATENTS AND PROPRIETARY RIGHTS.
Our ability to compete effectively with other companies is materially
dependent upon the proprietary nature of our technologies. We rely primarily on
patents and trade secrets to protect our technologies. We currently license the
exclusive right to nine United States patents and related foreign patents and
non-exclusive rights to 14 patents. In addition, we have been issued five United
States utility patents, one United States design patent and have seven pending
United States patent applications. We may not obtain additional patents or other
protection. The claims allowed under those patents will be sufficient to protect
our technology. Further, any patents or proprietary rights owned by or licensed
to us may be challenged, invalidated, circumvented, or rendered unenforceable
based on, among other things:
- subsequently discovered prior art,
- lack of entitlement to the priority of an earlier, related
application, or
- failure to comply with the written description, best mode, enablement
or other applicable requirements. -
The invalidation, circumvention or unenforceability of key patents or
proprietary rights owned by or licensed to the Company could have a material
adverse effect on us.
PATENT PROTECTION IN THE BIOTECHNOLOGY FIELD IS HIGHLY UNCERTAIN.
In general, the patent position of biotechnology and medical product firms
is highly uncertain, still evolving and involves complex legal, scientific and
factual questions. We are at risk that:
- other patents may be granted with respect to the patent applications
filed by us.
- any patents issued or licensed to us will provide commercial benefit
to us or will not be infringed, invalidated or circumvented by others.
The United States Patent and Trademark Office currently has a significant
backlog of patent applications, and the approval or rejection of patents may
take several years. Prior to actual issuance, the contents of United States
patent applications are generally not made public. Once issued, such a patent
would constitute prior art from its filing date, which might predate the date of
a patent application on which we rely. Conceivably, the issuance of such a prior
art patent, or the discovery of "prior art" of which we are currently unaware,
could invalidate a patent of ours or our licensor or prevent commercialization
of a product claimed therby.
We generally conduct a cursory review of issued patents prior to engaging
in research or development activities. Accordingly, we may be required to obtain
a license from others to commercialize any of our products under development.
There can be no assurance that any such license that may be required could be
obtained on favorable terms or at all.
In addition, if patents that cover our existing activities are issued to
other companies, there can be no assurance that we would be able to obtain
licenses to such patents at a reasonable cost, if at all, or be able to develop
or obtain alternative technology. Any of the foregoing matters could have a
material adverse effect on us. In addition, we may be required to obtain a
license under one or more patents prior to commercializing any new products
developed. Such a license may not be available, or if available, the terms may
not be commercially acceptable to the Company.
There can be no assurance that we will not be required to resort to
litigation to protect our patented technologies or other proprietary rights or
that we will not be the subject of additional patent litigation to defend our
existing or proposed products or processes against claims of patent infringement
or other intellectual property claims. Any of such litigation could result in
substantial costs and diversion of resources.
We also have applied for patent protection in several foreign countries.
Because of the differences in patent laws and laws concerning proprietary
rights, the extent of protection provided by United States patents or
proprietary rights owned by or licensed to us may differ from that of their
foreign counterparts.
We may decide for business reasons to retain certain knowledge that we
consider proprietary as confidential and elect to protect such information as a
trade secret, as business confidential information or as know-how. In that
event, we must rely upon trade secrets, know-how and continuing technological
innovation to maintain our competitive position. There can be no assurance that
others will not independently develop substantially equivalent proprietary
information or otherwise gain access to or disclose such information. The
independent development or disclosure of our trade secrets could have a material
adverse effect on our financial condition and results of operations.
22
OUR PRODUCT LIABILITY INSURANCE MAY BE INADEQUATE.
Our business exposes us to potential product liability risks which are
inherent in the testing, manufacturing and marketing of medical products.
Although we have product liability insurance coverage with an aggregate limit of
$8.0 million and a per occurrence limit of $6.0 million, there can be no
assurance that such insurance will provide adequate coverage against potential
liabilities, that adequate product liability insurance will continue to be
available in the future or that it can be maintained on acceptable terms. The
obligation to pay any product liability claim in excess of whatever insurance we
are able to acquire could have a material adverse effect on our business,
financial condition and results of operations. We use donated human skin as the
raw material for our acellular tissue products. The non-profit organizations
that supply such skin are required to follow FDA regulations and guidelines
published by the American Association of Tissue Banks to screen donors for
potential disease transmission. Such procedures include donor testing for
certain viruses, including HIV. Our manufacturing process also has been
demonstrated to inactivate concentrated suspensions of HIV in tissue. While we
believe such procedures are adequate to reduce the threat of disease
transmission, there can be no assurance that our products will not be associated
with transmission of disease or that a patient otherwise infected with disease
would not erroneously assert a claim that the use of our acellular tissue
products resulted in the disease transmission. Any such transmission or alleged
transmission could have a material adverse effect on our ability to manufacture
or market our products or could otherwise have a material adverse effect on our
financial condition or results of operations.
WE ARE LIMITED ON THE USE OF OUR NET OPERATING LOSSES AND RESEARCH AND
DEVELOPMENT TAX CREDITS.
As of December 31 1999, we had accumulated net operating loss ("NOL")
carryforwards for federal income tax purposes of approximately $48.5 million and
research and development tax credits of approximately $533,000 and may continue
to incur NOL carryforwards. United States tax laws provide for an annual
limitation on the use of NOL carryforwards following certain ownership changes
and also limit the time during which NOL and tax credit carryforwards may be
applied against future taxable income and tax liabilities. The sale of our
common stock in a public offering completed in December 1997 resulted in an
ownership change for federal income tax purposes. We estimate that the amount
of its NOL carryforwards and the credits available to offset taxable income as
of December 31, 1999 is approximately $22 million on a cumulative basis.
Accordingly, if we generate taxable income in any year in excess of the then
cumulative limitation, we may be required to pay federal income taxes even
though we have unexpired NOL carryforwards.
WE ARE SUBJECT TO EXTENSIVE REGULATION REGARDING DISPOSAL OF HAZARDOUS
MATERIALS.
Our research and development and processing techniques generate waste that
is classified as hazardous by the United States Environmental Protection Agency,
the Texas Natural Resources Commission and the New Jersey Natural Resources
Commission. We segregate such waste and dispose of it through licensed
hazardous waste transporters. Although we believe we are currently in
compliance in all material respects with applicable environmental regulations,
our failure to comply fully with any such regulations could result in the
imposition of penalties, fines or sanctions that could have a material adverse
effect on our financial condition and results of operations.
ITEM 2. PROPERTIES
We lease approximately 60,000 square feet of laboratory, production and
office space in Branchburg, New Jersey. In addition we lease 27,000 square feet
of laboratory, office and warehouse facilities in The Woodlands, Texas, under
lease agreements that expire in January 2001. We are currently in the process
of shutting down The Woodlands facility and consolidating operations in the
newly completed Branchburg facility. Our monthly rental obligation for
facilities is approximately $58,000.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
23
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Common Stock is listed on the Nasdaq National Market under the symbol
"LIFC." On March 22, 2000, the last reported sale price for the Company's
Common Stock on The Nasdaq National Market was $8.13 per share. The following
table sets forth the high and low sales information for our Common Stock for the
periods indicated, as reported by The Nasdaq Stock Market.
High Low
1998 First Quarter $5.19 $4.50
Second Quarter 8.03 5.03
Third Quarter 6.50 3.75
Fourth Quarter 5.50 3.31
1999 First Quarter $4.63 $3.38
Second Quarter 5.50 3.81
Third Quarter 7.25 4.00
Fourth Quarter 6.94 4.19
As of February 29, 2000, there were approximately 362 holders of record of
shares of Common Stock and 30 holders of record of shares of Series B Preferred
Stock. We estimate that there are in excess of 4,000 beneficial holders of
Common Stock.
In March 1999, we issued 108,577 shares of Common Stock for consideration
of $1 million to Boston Scientific as part of the agreement signed in March
1999. In November 1999, we issued 925,000 shares of Common Stock pursuant to a
private placement transaction. None of such issuances involved underwriters.
We consider these securities to have been offered and sold in transactions not
involving a public offering and, therefore, to be exempted from registration
under Section 4(2) of the Securities Act of 1933, as amended.
DIVIDEND POLICY
We have not paid a cash dividend to holders of shares of Common Stock and
do not anticipate paying cash dividends to the holders of our Common Stock in
the foreseeable future
On February 17, 1998, May 15, 1998, August 15, 1998, and November 15, 1998,
the Company paid a per share dividend in shares of its Series B Preferred Stock
equivalent to $1.51, $1.48, $1.50 and $1.51, respectively, to the holders of
shares of Series B Preferred Stock. On February 15, 1999, May 15, 1999, August
15, 1999 and November 15, 1999, and February 15, 2000, the Company paid a $1.51,
$1.48, $1.50, $1.51, and $1.51, respectively, per share dividend in cash to the
holders of shares of Series B Preferred Stock. The Series B Preferred Stock
bears dividends per share at the annual rate of the greater of (i) $6.00
(subject to adjustment in certain events) and (ii) the per annum rate of
dividends per share paid, if applicable, by the Company, on the Common Stock.
The dividends may be paid, at the Company's option, in cash or shares of Series
B Preferred Stock or in a combination of cash and shares of Series B Preferred
Stock. Dividends on the Series B Preferred Stock accrue and are paid quarterly.
The Series B Preferred Stock ceases bearing dividends on September 30, 2001.
Under the General Corporation Law of the State of Delaware, a corporation's
board of directors may declare and pay dividends only out of surplus, including
additional paid in capital, or current net profits.
24
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data of LifeCell
for each of the years in the five-year period ended December 31, 1999, derived
from the Company's audited financial statements. This information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and notes
thereto included elsewhere in this Annual Report on Form
10-K.
Year Ended December 31,
1995 1996 1997 1998 1999
------------- ------------- ------------- ------------- -------------
Operations Statement Data:
- ------------------------------
Revenues:
Product sales . . . . . . . $ 742,238 $ 2,012,205 $ 4,904,971 $ 7,245,102 $ 11,911,497
Research funded by others . 1,064,337 933,365 1,074,954 746,789 764,322
------------- ------------- ------------- ------------- -------------
Total revenues . . . . . . 1,806,575 2,945,570 5,979,925 7,991,891 12,675,819
------------- ------------- ------------- ------------- -------------
Costs and expenses:
Cost of goods sold . . . . . 925,174 1,281,353 2,540,644 2,837,037 3,452,329
Research and development . . 2,169,764 1,588,186 2,007,062 3,375,545 3,871,062
General and administrative . 1,422,588 1,911,254 3,081,512 3,484,460 4,839,536
Selling and marketing. . . . 1,475,296 2,389,573 4,955,597 6,500,000 7,236,022
Relocation costs . . . . . . -- -- -- -- 2,936,645
------------- ------------- ------------- ------------- -------------
Total costs and expenses . 5,992,822 7,170,366 12,584,815 16,197,042 22,335,594
------------- ------------- ------------- ------------- -------------
Loss from operations . . . . . (4,186,247) (4,224,796) (6,604,890) (8,205,151) (9,659,775)
Interest income and other, net 280,843 135,082 466,255 863,837 467,579
------------- ------------- ------------- ------------- -------------
Net loss . . . . . . . . . . . $ (3,905,404) $ (4,089,714) $ (6,138,635) $ (7,341,314) $ (9,192,196)
Loss per share(1)-basic and
diluted. . . . . . . . . . . $ (1.10) $ (1.14) $ (1.04) $ (0.72) $ (0.83)
Shares used in computing loss
per share-basic and diluted 4,313,366 4,542,519 6,820,122 11,228,912 11,937,532
============= ============= ============= ============= =============
As of December 31,
1995 1996 1997 1998 1999
------------- ------------- ------------- ------------- -------------
Balance Sheet Data:
- ------------------------------
Cash and cash equivalents. . . $ 3,015,332 $ 10,748,250 $ 20,781,026 $ 8,025,415 $ 4,736,877
Short-term investments . . . . - - - 4,000,745 315,244
Working capital . . . . . . . 2,888,048 10,884,779 20,515,559 12,596,612 2,541,469
Total assets . . . . . . . . . 4,376,039 12,890,015 24,155,598 17,030,699 18,083,431
Accumulated deficit. . . . . . (24,774,753) (29,310,934) (36,411,480) (44,475,992) (54,378,000)
Total stockholders' equity . . 2,093,906 10,197,104 20,259,603 14,260,638 9,248,381
(1) Includes effect of accounting treatment of preferred stock and warrants of $0.19, $0.24, $0.14,
$0.07 and $0.07 in 1995, 1996, 1997, 1998 and 1999, respectively.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of operations and financial condition of LifeCell
should be read in conjunction with the Financial Statements and Notes thereto
included elsewhere in this Annual Report on Form 10-K.
Special Note: Certain statements set forth below constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. See "Business-Special Note Regarding Forward-Looking
Statements."
GENERAL AND BACKGROUND
LifeCell Corporation is a bioengineering company engaged in the development
and commercialization of tissue regeneration and cell preservation products. Our
core preservation technology produces an acellular tissue matrix, which retains
the essential biochemical and structural components necessary for normal tissue
regeneration. We currently market three products based on this technology:
AlloDerm(R) for the reconstructive plastic, burn and dental markets; Cymetra(TM)
a micronized version of AlloDerm for the reconstructive plastic and dermatology
markets; and Repliform(R) acellular tissue for the urology and gynecology
market. We believe that our products are the only commercially available tissue
transplant products that provide a complete template for the regeneration of
normal human soft tissue. We estimate that AlloDerm has been transplanted in
more than 50,000 patients. We also are developing several additional products,
including small diameter vascular grafts as an alternative to autografted blood
vessels, orthopedic applications of our acellular tissue matrix, and
ThromboSol(TM) a formulation for extended storage of platelets.
We were incorporated in the State of Delaware in 1992 as the successor to a
Delaware corporation that was incorporated in 1986.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
The net loss for the year ended December 31, 1999, increased 26% to
approximately $9.2 million compared to approximately $7.3 million for 1998. The
increase was principally attributable to higher costs associated with the
Company's increased marketing activities for its AlloDerm products, increased
investment in the Company's product development programs, increased expenditures
for the infrastructure to support these activities and relocation costs related
to the Company's move to New Jersey. The increase in net loss was offset
partially by increased product sales.
Total revenues for the year ended December 31, 1999, increased 59% to
approximately $12.7 million compared to approximately $8.0 million for 1998. An
approximately $4.7 million increase in sales of products was the result of
expanded sales and marketing activities and increased distribution activities
during 1999. Amounts recognized as revenues under such cost-reimbursement
arrangements are for expenses incurred during the respective periods. Cost of
goods sold for the year ended December 31, 1999, was approximately $3.5 million,
resulting in a gross margin of approximately 71%. The gross margin for the year
ended December 31, 1998, was approximately 61%. The increase in gross margin was
principally attributable to an increase in sales of certain higher-margin
AlloDerm products and an increase in the price of certain AlloDerm products in
1999.
Research and development expenses for the year ended December 31, 1999,
increased 15% to approximately $3.9 million compared to approximately $3.4
million for 1998. The increase in research and development expense was primarily
attributable to increased animal and clinical studies for the expanding uses for
AlloDerm . In addition, the Company dedicated increased resources to product
development programs such as Micronized AlloDerm(TM).
General and administrative expenses for the year ended December 31, 1999,
increased 39% to approximately $4.8 million compared to approximately $3.5
million for 1998. The increase was attributable to recruiting and staffing costs
incurred in connection with the recruitment of new key members of senior
management and professional fees incurred in relation to a distribution
agreement entered into during 1999.
26
Selling and marketing expenses increased 11% to $7.2 million for the year
ended December 31, 1999, compared to approximately $6.5 million for 1998. The
increase was primarily attributable to the addition of domestic sales and
marketing personnel and the expansion of marketing activities during 1999.
Relocation expenses for the year ended December 31, 1999 were $2.9 million.
These costs related to the relocation of the Company's operations from The
Woodlands, Texas to Branchburg, New Jersey and included a non-cash charge to
abandon assets related to the Company's Texas facility, costs of non-relocating
employee retention benefits and the costs of relocating key employees and
transporting certain assets to New Jersey.
Interest income and other, net decreased 46% to approximately $468,000 for
the year ended December 31, 1999, compared to approximately $864,000 for 1998.
The decrease was principally attributable to a reduction of funds available for
investing activities during 1999.
YEARS ENDED DECEMBER 31, 1998 AND 1997
The net loss for the year ended December 31, 1998, increased 20% to
approximately $7.3 million compared to approximately $6.1 million for 1997. The
increase was principally attributable to higher costs associated with the
Company's increased marketing activities for its AlloDerm products, increased
investment in the Company's product development programs, increased expenditures
for the infrastructure to support these activities and severance costs related
to changes in executive management. The increase in net loss was offset
partially by increased product sales, as well as higher interest income from
investments.
Total revenues for the year ended December 31, 1998, increased 34% to
approximately $8.0 million compared to approximately $6.0 million for 1997. An
approximately $2.4 million increase in sales of products was the result of
expanded sales and marketing activities, and increased distribution activities
during 1998. This increase was offset in part by an approximately $328,000
decrease in revenues from funded research and development. The research and
development funding available to the Company through grants and alliances was
lower during 1998 than in 1997. Amounts recognized as revenues under such
cost-reimbursement arrangements are for expenses incurred during the periods.
Cost of goods sold for the year ended December 31, 1998, was approximately $2.8
million, resulting in a gross margin of approximately 61%. The gross margin for
the year ended December 31, 1997, was approximately 48%. The increase in gross
margin was principally attributable to the implementation of certain production
efficiencies, the allocation of fixed costs to higher volumes of products, an
increase in sales of certain higher-margin AlloDerm products and an increase in
the price of certain AlloDerm products in 1998.
Research and development expenses for the year ended December 31, 1998,
increased 68% to approximately $3.4 million compared to approximately $2.0
million for 1997. The increase in research and development expense was primarily
attributable to increased animal and clinical studies for the expanding uses for
AlloDerm. In addition, the Company dedicated increased resources to product
development programs such as Micronized AlloDerm .
General and administrative expenses for the year ended December 31, 1998,
increased 13% to approximately $3.5 million compared to approximately $3.1
million for 1997. The increase was primarily attributable to severance costs
related to a change in executive management.
Selling and marketing expenses increased 31% to $6.5 million for the year
ended December 31, 1998, compared to approximately $5.0 million for 1997. The
increase was primarily attributable to the addition of domestic sales and
marketing personnel, expansion of marketing activities as well as severance
costs related to changes in executive marketing personnel.
Interest income and other, net increased 85% to approximately $864,000 for
the year ended December 31, 1998, compared to approximately $466,000 for 1997.
The increase was principally attributable to higher funds available for
investment during the current period as a result of the $16.0 million net
proceeds received from the public offering of Common Stock in December 1997.
27
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, LifeCell's principal sources of funds have been equity
offerings, debt, product sales, external funding of research activities and
interest on investments. LifeCell has historically funded research and
development activities for products other than AlloDerm primarily with external
funds from its corporate alliance with Medtronic and government grants. In
December 1996, LifeCell was awarded a two-year contract of approximately $1.1
million from the United States Army to support the development of vascular graft
and other products. In June 1998, LifeCell was awarded a $600,000 contract from
the United States Navy related to the development and clinical research of
ThromboSol . In September and November 1999, LifeCell was awarded two contracts
from the United States Navy related to the preservation of human platelets. Such
grants total approximately $1.2 million.
In 1994, LifeCell entered into an agreement with Medtronic pursuant to
which Medtronic paid LifeCell a license fee of $1.5 million and agreed, subject
to certain rights to terminate at Medtronic's discretion, to fund certain costs
of the research and development of LifeCell's proprietary tissue processing
technology in the field of heart valves. Through December 31, 1998, LifeCell had
recognized approximately $2.0 million in revenues for development funding,
excluding the initial license fee, for this program. In December 1998, LifeCell
and Medtronic mutually agreed to terminate their early stage license and
development agreement related to heart valves in order to focus on near-term
opportunities. LifeCell regained all rights to its cardiovascular technology. As
a result of terminating the agreement, the $1.5 million up-front licensing fee
paid by Medtronic to LifeCell in 1994 converted into 310,771 shares of Common
Stock.
In December 1997, LifeCell received net proceeds of approximately $16.0
million pursuant to a public offering of 4 million shares of Common Stock.
In March 1999, the Company received net proceeds of approximately $900,000
from the sale of 108,577 shares of the Company's Common Stock to Boston
Scientific in connection with the agreement for worldwide marketing and
distribution of its proprietary acellular tissue matrix for applications in
urology and gynecology.
In November 1999, LifeCell received net proceeds of approximately $3.6
million pursuant to a private placement of 925,000 shares of Common Stock. Also,
in December 1999, the Company closed on a debt financing of approximately $6.0
million. As of December 31, 1999, the Company has drawn down $3.0 million of
this facility.
In February 2000, the company drew-down an additional $2.5 million on the
debt facility.
LifeCell expects to incur substantial expenses in connection with its
efforts to expand sales and marketing of AlloDerm, develop expanded uses for
AlloDerm, conduct the Company's product development programs (including costs of
clinical studies), prepare and make any required regulatory filings, introduce
products, participate in technical seminars and support ongoing administrative
and research and development activities. The Company currently intends to fund
these activities from its existing cash resources, sales of products and
research and development funding received from others. While the Company
believes that its existing available funds will be sufficient to meet its
present operating and capital requirements through 2000, there can be no
assurance that such sources of funds will be sufficient to meet these future
expenses. If adequate funds are not available, the Company expects it will be
required to delay, scale back or eliminate one or more of its product
development programs. The Company's need for additional financing will be
principally dependent on the degree of market acceptance achieved by the
Company's products and the extent to which the Company can achieve substantial
growth in product sales during 2000 and 2001, as well as the extent to which the
Company may decide to expand its product development efforts. There can be no
assurance that the Company will be able to obtain any such additional financing
on acceptable terms, if at all.
LifeCell has had losses since its inception and therefore has not been
subject to federal income taxes. As of December 31, 1999, LifeCell had net
operating loss ("NOL") and research and development tax credit carryforwards for
income tax purposes of approximately $48.5 million and $533,000, respectively,
available to reduce future income tax and tax liabilities. Federal tax laws
provide for a limitation on the use of NOL and tax credit carryforwards
following certain ownership changes that could limit LifeCell's ability to use
its NOL and tax credit carryforwards. The Company's sale of Common Stock in the
1997 public offering resulted in an ownership change for federal income tax
purposes. The Company estimates that the amount of NOL carryforwards and the
credits available to offset taxable income subsequent to the offering will be
approximately $22 million on a cumulative basis. Accordingly, if LifeCell
generates taxable income in any year in excess of its then cumulative
limitation, the Company may be required to pay federal income taxes even though
it has unexpired NOL carryforwards.
28
YEAR 2000 COMPLIANCE
The Year 2000 issues related to the possibility that computer programs and
embedded computer chips might be unable to accurately process data with year
dates of 2000 and beyond.
Prior to December 31, 1999, LifeCell made the necessary revisions or
upgrades to its systems to render them year 2000 compliant. Subsequent to
December 31, 1999, the Company experienced no significant events, nor received
any significant reports indicating any material year 2000 issues. The costs
incurred in 1999 to address potential year 2000 issues were not material. We are
unaware of any uncorrected problems regarding the year 2000 issue at this time,
but will continue to monitor for any potential problems throughout 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to certain market risks associated with interest
rates. The Company's revolving loan and term loan borrowings bear interest at
variable rates and therefore, changes in U.S interest rates, affect interest
expense incurred thereon. Based on debt outstanding at December 31, 1999, a 10%
increase in variable interest rates would not have a material adverse effect on
the Company's future operations or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information required
to be filed under this Item are presented commencing on page F-1 of the Annual
Report on Form 10-K, and are incorporated herein by reference.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be set forth in the Registrant's
Proxy Statement relating to the annual meeting of the Registrant's stockholders
scheduled to be held June 2, 2000, under the captions "Election of Directors"
and "Executive Compensation," and such information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be set forth in the Registrant's
Proxy Statement relating to the annual meeting of the Registrant's stockholders
scheduled to be held June 2, 2000, under the caption "Executive Compensation,"
and such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be set forth in the Registrant's
Proxy Statement relating to the annual meeting of the Registrant's stockholders
scheduled to be held June 2, 2000, under the caption "Security Ownership of
Certain Beneficial Owners and Management," and such information is incorporated
herein by reference.
29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be set forth in the Registrant's
Proxy Statement relating to the annual meeting of the Registrant's stockholders
scheduled to be held June 2, 2000, under the caption "Certain Relationships and
Related Transactions," and such information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS INCLUDED IN THIS REPORT:
1. FINANCIAL STATEMENTS PAGE
----
Report of Independent Public Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Balance Sheets as of December 31, 1998 and 1999 . . . . . . . . . . . . . . . . . . . . . . F-2
Statements of Operations for the years ended December 31, 1997, 1998 and 1999 . . . . . . . F-3
Statements of Stockholders' Equity for the years ended December 31, 1997, 1998 and 1999 . . F-4
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999 . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
2. FINANCIAL STATEMENT SCHEDULES
All other schedules are omitted because they are not applicable, not
required, or because the required information is contained in the Company's
financial statements and the notes thereto.
(B) REPORTS ON FORM 8-K:
During the quarter ended December 31, 1999, the Company filed (i) on
November 30, 1999, a Current Report on Form 8-K dated as of November 22,
1999, to report the private placement of equity securities of the Company.
EXHIBITS:
Exhibits designated by the symbol * are filed with this Annual Report on Form 10-K. All exhibits not so
designated are incorporated by reference to a prior filing as indicated.
Exhibits designated by the symbol + are management contracts or compensatory plans or arrangements that are
required to be filed with this report pursuant to this Item 14.
LifeCell undertakes to furnish to any stockholder so requesting a copy of any of the following exhibits upon
payment to the Company of the reasonable costs incurred by Company in furnishing any such exhibit.
3.1 Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the period ended June 30, 1998, filed with the Securities and
Exchange Commission ("the Commission") on August 10, 1998).
3.2 Amended and Restated By-laws (incorporated by reference to Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1996, filed with the Commission on August 14, 1996.)
10.1+ LifeCell Corporation Amended and Restated 1992 Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1998,
filed with the Commission on August 10, 1998).
10.2+ LifeCell Corporation Second Amended and Restated 1993 Non-Employee Director Stock Option Plan,
as amended (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, filed with the Commission on March 31, 1997).
30
10.3 Form of Confidentiality/Non-Compete Agreement (incorporated by reference to Exhibit 10.28 to the
Company's Registration Statement on Form S-1, Registration No. 33-44969, filed with the Commission on
January 9, 1992).
10.4 Lease Agreement dated December 10, 1986, between the Registrant and The Woodlands Corporation,
Modification and Ratification of Lease Agreement dated April 11, 1988, between the Registration and The
Woodlands Corporation Modification and Ratification of Lease dated August 1, 1992, between the Company and
The Woodlands Corporation and Modification, Extension and Ratification of Lease dated March 5, 1993,
between the Registrant and The Woodlands Corporation, and Modification and Ratification of Lease Agreement
dated December 21, 1995, between the Company and The Woodlands Office Equities -- '95 Limited
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended
March 31, 1996).
10.5 Lease Agreement dated September 1, 1988, between the Registrant and The Woodlands Corporation,
and Modification of Lease Agreement dated March 5, 1993, between the Registrant and The Woodlands
Corporation (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992).
10.6 Securities Purchase Agreement dated November 18, 1996, between LifeCell Corporation and the
Investors named therein (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996).
10.7 Voting Agreement dated November 18, 1996, as amended as of April 15, 1999 among LifeCell
Corporation and certain stockholders named therein (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q filed with the Commission on May 17, 1999).
10.8 Registration Rights Agreement dated November 18, 1996, between LifeCell Corporation and certain
stockholders named therein (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996).
10.9 Form of Stock Purchase Warrant dated November 18, 1996, issued to each of the warrant holders
named on Schedule 10.18 attached thereto (incorporated by reference to Exhibit 10.18 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996).
10.10 Stock Purchase Warrant dated November 18, 1996, issued to Gruntal & Co., Incorporated (incorporated
by reference to Exhibit 10.19 to Amendment No. 1 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996 on Form 10-K/A).
10.11+ Agreement dated August 19, 1998, between LifeCell Corporation and Paul M. Frison (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30,
1998 filed with the Commission on November 13, 1998).
10.12+ Agreement dated July 1, 1997, between LifeCell Corporation and Stephen A. Livesey. (incorporated by
reference to Exhibit 10.20 to the Company's Registration Statement No. 333-37123 on Form S-2 filed with the
Commission on October 3, 1997).
10.13+ Agreement dated October 5, 1998 between LifeCell Corporation and Paul G. Thomas (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the Commission on
November 13, 1998.)
10.14+ Letter agreement dated September 8, 1998 between LifeCell Corporation and Paul G. Thomas, as amended by
letter agreements dated September 9, 1998 and September 29, 1998 (incorporated by reference to Exhibit 10.3 to
the Company's Quarterly Report on Form 10-Q filed with the Commission on November 13, 1998.)
10.15 Lease Agreement by and between Maurice M. Weill, Trustee for Branchburg Property and LifeCell
Corporation dated June 17, 1999 (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report
on Form 10-Q filed with the Commisssion on November 15, 1999)
10.16 Stock Purchase Warrant dated November 17, 1999, issued to The Tail Wind Fund, Ltd (incorporated by
reference to Exhibit 4.4 to the Company's Registration Statement on Form S-3 (Registration No. 333-94715)
filed with the Commission on January 14, 2000.)
31
10.17* Loan Agreement dated December 6, 1999 between LifeCell Corporation and Transamerica Business
Credit Corporation.
10.18* Stock Purchase and Registration Rights Agreements dated November 17, 1999 between LifeCell
Corporation and The Tail Wind Fund, Ltd.
23.1* Consent of Arthur Andersen LLP.
27.1* Financial data schedule.
32
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LIFECELL CORPORATION
(Registrant)
By: /s/ Paul G. Thomas
------------------------
Paul G. Thomas, President, Chief
Executive Officer and Chairman
of the Board of Directors
Dated: March 24, 2000.
In accordance with the Securities Exchange Act of 1934, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------ ----------------------------------------------- --------------
/s/ Paul G. Thomas President and Chief Executive March 24, 2000
- ------------------------ Officer (Principal Executive Officer)
(Paul G. Thomas)
/s/ Fenel M. Eloi Sr. Vice President and Chief Financial Officer March 24, 2000
- ------------------------ (Principal Financial Officer)
(Fenel M. Eloi)
/s/ David B. Platt Controller March 24, 2000
- ------------------------ (Principal Accounting Officer)
(David B. Platt)
/s/ Michael E. Cahr Director March 24, 2000
- ------------------------
(Michael E. Cahr)
/s/ Peter D. Costantino Director March 24, 2000
- ------------------------
(Peter D. Costantino)
/s/ James G. Foster Director March 24, 2000
- ------------------------
(James G. Foster)
/s/ Stephen A. Livesey Director March 24, 2000
- ------------------------
(Stephen A. Livesey)
/s/ K. Flynn McDonald Director March 24, 2000
- ------------------------
(K. Flynn McDonald)
/s/ David A. Thompson Director March 24, 2000
- ------------------------
(David A. Thompson)
33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To LifeCell Corporation:
We have audited the accompanying balance sheets of LifeCell Corporation (a
Delaware corporation) as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our 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 LifeCell Corporation as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
February 9, 2000
F-1
LIFECELL CORPORATION
BALANCE SHEETS
DECEMBER 31,
-----------------------------
1998 1999
-------------- -------------
Assets
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 8,025,415 $ 4,736,877
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . 4,000,745 315,244
Accounts and other receivables, net of allowance for doubtful accounts
$5,915 and $174,578, respectively . . . . . . . . . . . . . . . . . . 1,383,920 2,557,337
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,749,023 3,202,271
Prepayments and other . . . . . . . . . . . . . . . . . . . . . . . . . 207,570 159,664
-------------- -------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . 15,366,673 10,971,393
Fixed assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,388,339 6,547,863
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275,687 564,175
-------------- -------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,030,699 $ 18,083,431
============== =============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 704,938 $ 741,375
Accrued liablities. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,065,123 4,896,090
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 2,792,459
-------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 2,770,061 8,429,924
-------------- -------------
Deferred Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 405,126
-------------- -------------
Commitments and Contingencies (Note 12)
Stockholders' Equity
Series B preferred stock, $.001 par value, 182,205 shares
authorized, 119,084 and 118,016 issued and outstanding (liquidation
preference at December 31, 1999 of $11,801,600) . . . . . . . . . . . 119 118
Undesignated preferred stock, $.001 par value 1,817,795
shares authorized, none issued and outstanding . . . . . . . . . . . . -- --
Common stock, $.001 par value, 48,000,000 shares
authorized, respectively, 11,611,852 and 12,899,643 shares issued and
outstanding, respectively . . . . . . . . . . . . . . . . . . . . . . . 11,612 12,900
Warrants outstanding to purchase 3,182,188 and 3,466,399
shares of common stock, respectively. . . . . . . . . . . . . . . . . . 298,344 887,812
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 58,426,555 62,725,551
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . (44,475,992) (54,378,000)
-------------- -------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . 14,260,638 9,248,381
-------------- -------------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . $ 17,030,699 $ 18,083,431
============== =============
The accompanying notes are an integral part of these financial statements.
F-2
LIFECELL CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
Revenues:
Product sales . . . . . . . . . . . . . $ 4,904,971 $ 7,245,102 $11,911,497
Research funded by others. . . . . . . . 1,074,954 746,789 764,322
------------ ------------ ------------
Total revenues . . . . . . . . . . . . 5,979,925 7,991,891 12,675,819
------------ ------------ ------------
Costs and Expenses:
Cost of goods sold . . . . . . . . . . . 2,540,644 2,837,037 3,452,329
Research and development . . . . . . . . 2,007,062 3,375,545 3,871,062
General and administrative . . . . . . . 3,081,512 3,484,460 4,839,536
Selling and marketing. . . . . . . . . . 4,955,597 6,500,000 7,236,022
Relocation costs . . . . . . . . . . . . -- -- 2,936,645
------------ ------------ ------------
Total costs and expenses . . . . . . . 12,584,815 16,197,042 22,335,594
------------ ------------ ------------
Loss From Operations . . . . . . . . . . . (6,604,890) (8,205,151) (9,659,775)
Interest income and other, net . . . . . 466,255 863,837 467,579
------------ ------------ ------------
Net Loss . . . . . . . . . . . . . . . . . (6,138,635) (7,341,314) (9,192,196)
Preferred Stock Dividends. . . . . . . . . (961,911) (723,198) (709,812)
------------ ------------ ------------
Net Loss Applicable to Common Stockholders $(7,100,546) $(8,064,512) $(9,902,008)
============ ============ ============
Loss Per Common Share-Basic and Diluted. . $ (1.04) $ (0.72) $ (0.83)
============ ============ ============
Shares Used in Computing Loss Per
Common Share-Basic and Diluted . . . . 6,820,122 11,228,912 11,937,532
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-3
LIFECELL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
----------------------- ------------------ -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------------ -------- -------- ---------- -------
Balance at December 31, 1996 . . . . . . . . . 260,000 $ 5,291,473 124,157 $ 126 4,899,944 $ 4,900
Stock options exercised . . . . . . . . . . . -- -- -- -- 47,987 48
Warrants exercised . . . . . . . . . . . . . -- -- -- -- 76,813 77
Expiration of warrants . . . . . . . . . . . -- -- -- -- -- --
Redemption of Series A preferred stock. . . . (260,000) (5,200,000) -- -- 1,739,128 1,739
Conversion of Series B preferred stock. . . . -- -- (6,688) (7) 215,729 216
Common stock and cash issued as dividends . .
on Series A preferred stock . . . . . . . . -- (195,000) -- -- 33,305 33
Common stock sold in public offering. . . . . -- -- -- -- 4,000,000 4,000
Stock options issued for services . . . . . . -- -- -- -- -- --
Series B preferred stock issued as. . . . . .
dividends on Series B preferred stock . . . -- -- 7,972 6 -- --
Dividends accrued on Series B preferred stock -- 103,527 -- -- --
Net Loss -- -- -- -- -- --
--------- ------------ -------- -------- ---------- -------
Balance at December 31, 1997 . . . . . . . . . -- -- 125,441 125 11,012,906 11,013
Stock options exercised . . . . . . . . . . . -- -- -- -- 12,550 13
Warrants exercised . . . . . . . . . . . . . -- -- -- -- 4,965 5
Expiration of warrants. . . . . . . . . . . . -- -- -- -- -- --
Warrants issued to purchase Common Stock. . . -- -- -- -- -- --
Conversion of Series B preferred stock. . . . -- -- (6,357) (6) 205,060 205
Common stock issued for cash, and . . . . . . -- -- -- -- 376,371 376
conversion of license fee
Stock options issued for services . . . . . . -- -- -- -- -- --
Dividends paid on Series B preferred stock. . -- -- -- -- -- --
Dividends accrued on Series B preferred stock -- -- -- -- -- --
Net Loss -- -- -- -- -- --
--------- ------------ -------- -------- ---------- -------
Balance at December 31, 1998. . . . . . . . . . -- -- 119,084 119 11,611,852 11,612
Stock options exercised . . . . . . . . . . . -- -- -- -- 219,764 220
Warants issued to purchase Common Stock . . . -- -- -- -- -- --
Conversion of Series B preferred stock . . . -- -- (1,068) (1) 34,450 34
Common stock issued for cash. . . . . . . . . -- -- -- -- 1,033,577 1,034
Dividends paid on Series B preferred stock. . -- -- -- -- -- --
Dividends accrued on Series B preferred stock -- -- -- -- -- --
Net Loss . . . . . . . . . . . . . . . . . . -- -- -- -- -- --
--------- ------------ -------- -------- ---------- -------
Balance at December 31, 1999. . . . . . . . . . -- $ -- 118,016 $ 118 12,899,643 $12,900
========= ============ ======== ======== ========== =======
(continued)
The accompanying notes are an integral part of these financial statements.
F-4
LIFECELL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY-(CONTINUED)
WARRANTS TO PURCHASE
COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- ---------- ------------ ------------- ------------
Balance at December 31, 1996 . . . . . . . . . 3,378,264 $ 423,218 $33,788,321 $(29,310,934) $10,197,104
Stock options exercised . . . . . . . . . . -- -- 128,719 -- 128,767
Warrants exercised . . . . . . . . . . . . . (89,786) (123,738) 432,527 -- 308,866
Expiration of warrants. . . . . . . . . . . . (125,000) -- -- -- --
Redemption of Series A preferred stock . . . -- -- 5,198,261 -- --
Conversion of Series B preferred stock. . . . -- -- (209) -- --
Common stock and cash issued as dividends . .
on Series A preferred stock . . . . . . . . -- -- 129,919 -- (65,048)
Common stock sold in public offering. . . . . -- -- 16,018,766 -- 16,022,766
Stock options issued for services . . . . . . -- -- 12,834 -- 12,834
Series B preferred stock issued as . . . . .
dividends on Series B preferred stock . . . -- -- 651,327 (669,749) (18,416)
Dividends accrued on Series B preferred stock -- -- -- (292,162) (188,635)
Net Loss -- -- -- (6,138,635) (6,138,635)
---------- ---------- ------------ ------------- ------------
Balance at December 31, 1997 3,163,478 299,480 56,360,465 (36,411,480) 20,259,603
Stock options exercised -- -- 43,416 -- 43,429
Warrants exercised (11,290) (1,136) 1,125 -- (6)
Expiration of warrants (20,000) -- -- -- --
Warrants issued to purchase common stock 50,000 -- -- -- --
Conversion of Series B preferred stock -- -- (199) -- --
Common stock issued for cash, and
conversion of license fee . . . . . . . . . -- -- 1,999,929 -- 2,000,305
Stock options issued for services -- -- 21,819 -- 21,819
Dividends paid on Series B preferred stock -- -- -- (542,998) (542,998)
Dividends accrued on Series B preferred stock -- -- -- (180,200) (180,200)
Net Loss -- -- -- (7,341,314) (7,341,314)
---------- ---------- ------------ ------------- ------------
Balance at December 31, 1998. 3,182,188 298,344 58,426,555 (44,475,992) 14,260,638
Stock options exercised -- -- 670,035 -- 670,255
Warrants issued to purchase common stock 284,211 589,468 (381,927) -- 207,541
Conversion of Series B preferred stock -- -- (33) -- --
Common stock issued for cash -- -- 4,010,921 -- 4,011,955
Dividends paid on Series B preferred stock -- -- -- (531,300) (531,300)
Dividends accrued on Series B preferred stock -- -- -- (178,512) (178,512)
Net Loss -- -- -- (9,192,196) (9,192,196)
---------- ---------- ------------ ------------- ------------
Balance at December 31, 1999 3,466,399 $ 887,812 $62,725,551 $(54,378,000) $ 9,248,381
========== ========== ============ ============= ============
The accompanying notes are an integral part of these financial statements.
F-5
LIFECELL CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
------------ ------------- ------------
Cash Flows from Operating Activities:
- ---------------------------------------------------------
Net Loss $(6,138,635) $ (7,341,314) $(9,192,196)
Adjustments to reconcile net loss to net cash used in
operating activities -
Depreciation and amortization 225,092 495,523 411,321
Provision for bad debt 83,690 5,915 174,578
Stock and warrant compensation expense 12,834 21,819 --
Loss on asset disposals -- -- 334,874
Change in assets and liabilities -
Increase in accounts and other receivables (742,755) (293,931) (1,347,995)
Increase in inventories (96,576) (812,625) (1,453,248)
Increase in prepayments and other (45,446) (109,344) (152,225)
Increase in accounts payable and accrued
liabilities 1,282,357 253,384 2,688,892
Increase (Decrease) in deferred revenues (79,273) (59,519) 405,126
------------ ------------- ------------
Net cash used in operating activities (5,498,712) (7,840,092) (8,130,873)
------------ ------------- ------------
Cash Flows from Investing Activities:
Capital expenditures (597,685) (831,982) (5,885,494)
Additions to patents (59,129) (83,524) (108,582)
Purchase of short-term investments -- (4,000,745) (315,244)
Sales of short-term investments -- -- 4,000,745
------------ ------------- ------------
Net cash used in investing activities (656,814) (4,916,251) (2,308,575)
------------ ------------- ------------
Cash Flows from Financing Activities:
Proceeds from issuance of stock and warrants 16,460,399 543,730 4,682,210
Proceeds from issuance of notes payable -- -- 3,000,000
Dividends paid (272,097) (542,998) (531,300)
------------ ------------- ------------
Net cash provided by financing activities 16,188,302 732 7,150,910
------------ ------------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents 10,032,776 (12,755,611) (3,288,538)
Cash and Cash Equivalents at Beginning of Year 10,748,250 20,781,026 8,025,415
------------ ------------- ------------
Cash and Cash Equivalents at End of Year $20,781,026 $ 8,025,415 $ 4,736,877
============ ============= ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 4,583 $ 1,769 $ --
============ ============= ============
Supplemental Disclosure of Noncash Financing Activities:
Common Stock issued as payment of dividends $ 195,000 $ -- $ --
============ ============= ============
Series B Preferred stock issued as payment of dividends $ 797,200 $ -- $ --
============ ============= ============
Common Stock issued in exchange for deferred credit $ -- $ 1,500,000 $ --
============ ============= ============
Fair value of warrants issued in connection with
Notes payable $ -- $ -- $ 207,541
============ ============= ============
The accompanying notes are an integral part of these financial statements.
F-6
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION:
LifeCell Corporation, a Delaware corporation ("LifeCell" or "the Company"),
is a bioengineering company engaged in the development and commercialization of
tissue regeneration and cell preservation products. The Company was
incorporated on January 6, 1992 for the purpose of merging with its predecessor
entity, which was formed in 1986. LifeCell began commercial sales of its first
product, AlloDerm(R) cellular dermal graft, during 1994. The future operating
results of the Company will be principally dependent on the market acceptance of
its current product, development of and market acceptance of future products,
competition from other products or technologies, protection of the Company's
proprietary technology, and access to funding as required. Accordingly, there
can be no assurance of the Company's future success.
LifeCell expects to incur substantial expenses in connection with its
efforts to expand sales and marketing of AlloDerm, develop expanded uses for
AlloDerm, conduct the Company's product development programs (including costs of
clinical studies), prepare and make any required regulatory filings, introduce
products, participate in technical seminars and support ongoing administrative
and research and development activities. The Company currently intends to fund
these activities from its existing cash resources, sales of products and
research and development funding received from others. While the Company
believes that its existing available funds will be sufficient to meet its
present operating and capital requirements through 2000, there can be no
assurance that such sources of funds will be sufficient to meet these future
expenses. If adequate funds are not available, the Company expects it will be
required to delay, scale back or eliminate one or more of its product
development programs. The Company's need for additional financing will be
principally dependent on the degree of market acceptance achieved by the
Company's products and the extent to which the Company can achieve substantial
growth in product sales during 2000 and 2001, as well as the extent to which the
Company may decide to expand its product development efforts. There can be no
assurance that the Company will be able to obtain any such additional financing
on acceptable terms, if at all.
2. ACCOUNTING POLICIES:
Cash and Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Investments
with longer maturities that the Company intends to hold to maturity are
classified as either current or non-current assets based on the maturity date of
the security. As of December 31, 1998 and 1999, the Company held $11,734,522
and $4,736,877 respectively, of interest-bearing money market accounts and A1/P1
commercial paper which were classified as "hold to maturity" securities. The
carrying basis of these investments approximated fair value and amortized cost.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out (FIFO) basis.
Fixed Assets
Fixed Assets are stated at cost. Maintenance and repairs that do not
improve or extend the life of the assets are expensed as incurred. Expenditures
for renewals and improvements are capitalized. The cost of assets retired and
the related accumulated depreciation are removed from the accounts and any gain
or loss is included in the results of operations. Depreciation of furniture and
equipment is provided on the straight-line method based on the estimated useful
lives of the assets of five years. Leasehold improvements are depreciated over
the life of the lease.
F-7
Accounts Receivable
As of December 31, 1997, 1998 and 1999, the allowance for doubtful accounts
was $83,690, $5,915 and $174,578 respectively. In 1997, 1998 and 1999,
approximately $83,690, $5,915 and $168,663 of write-offs were charged to this
allowance in each of the respective years . During 1998, $83,690 was deducted
from this allowance.
Revenue Recognition
Product sales are recognized as revenue when the product is shipped to fill
customer orders. Revenues from research funded by others are recognized as the
work is performed unless the Company has continuing performance obligations, in
which case revenue is recognized upon the satisfaction of such obligations.
Revenue received, but not yet earned, is classified as deferred revenue.
Research and Development Expense
Research and development costs are expensed when incurred. The Company
performs research funded by others, as well as its own independent proprietary
research, development and clinical testing of its products.
Loss Per Common Share
Loss per Common share has been computed by dividing net loss, which has
been increased for periodic accretion and imputed and stated dividends on
outstanding Preferred Stock, by the weighted average number of shares of Common
Stock outstanding during each period. In all applicable years, all Common Stock
equivalents, including the stock options and warrants, Series A Preferred Stock
and the Series B Preferred Stock, were antidilutive and, accordingly, were not
included in the computation.
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share,". The implementation of Statement 128
had no effect on the Company's presentation of earnings per share due to the
antidilutive nature of all of the Company's Common Stock equivalents.
Diluted loss per Common share is the same as basic loss per share due to
the antidilutive nature of all of the Company's Common Stock equivalents.
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). The bulletin draws on existing accounting rules and provides specific
guidance on how those accounting rules should be applied, and specifically
addresses revenue recognition for non-refundable technology access fees in the
biotechnology industry. SAB 101 is effective for fiscal years beginning after
December 15, 1999. The Company is evaluating SAB 101 and the effect it may have
on its financial statements. At this time, the Company believes that SAB 101
will not have a material impact on its financial position or results of
operations.
3. INVENTORIES:
Inventories consist of products in various stages produced for sale and
includes the costs of raw materials, labor, and overhead. A summary of
inventories is as follows:
F-8
1998 1999
------------ ------------
Raw materials used in production. . . . . . . $ 723,921 $ 1,081,449
Work-in-process . . . . . . . . . . . . . . . 423,839 1,214,619
Finished goods. . . . . . . . . . . . . . . . 601,263 906,203
------------ ------------
Total inventories . . . . . . . . . . . . . $ 1,749,023 $ 3,202,271
4. FIXED ASSETS:
A summary of fixed assets is as follows:
1998 1999
------------ ------------
Machinery and equipment . . . . . . . . . . . $ 1,853,164 $ 2,303,100
Leasehold improvements. . . . . . . . . . . . 465,924 4,966,944
Office furniture and fixtures . . . . . . . . 709,412 869,429
------------ ------------
3,028,500 8,139,473
Accumulated depreciation and amortization . . (1,640,161) (1,591,610)
------------ ------------
Net fixed assets. . . . . . . . . . . . . . $ 1,388,339 $ 6,547,863
5. ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
1998 1999
------------ ------------
Employee compensation and benefits. . . . . . $ 403,633 $ 1,094,382
Operating expenses and other. . . . . . . . . 1,052,701 2,484,123
Relocation costs. . . . . . . . . . . . . . . -- 1,079,362
Severance expense . . . . . . . . . . . . . . 608,789 238,223
------------ ------------
Total accrued liabilities . . . . . . . . . $ 2,065,123 $ 4,896,090
============ ============
F-9
6. DEFERRED REVENUE
In March 1999, in conjunction with the signing of a sales and marketing
agreement, the Company issued 108,577 shares of Common Stock at a premium of
154% over the then-prevailing market price. This premium was equal to $506,408
and is being recognized over the 5-year term of the agreement The total equity
investment was valued at $1 million less offering costs of $100,000 (see Note
8).
7. NOTES PAYABLE
On December 6, 1999 the Company entered into a $6 million credit facility
with a financial institution. The loan provides for a revolving portion (the
"Revolving Loan") not to exceed $3 million and a term portion (the "Term Loan")
not to exceed $3 million. The Revolving Loan bears interest at a rate of prime
plus 3% (11.5% at December 31, 1999) with a minimum rate of 9% and matures on
December 30, 2000 with provisions for automatic renewal for additional terms of
one year each. As of December 31, 1999, $3,000,000 was outstanding on the
Revolving Loan. As of December 31, 1999, $15,335 of interest expense has been
accrued on the Revolving Loan. The Term Loan bears interest at a rate of 13.23%
and is payable in 30 equal monthly installments of principal and interest
beginning June 1, 2000 and continuing through and including November 1, 2002. At
December 31, 1999, no amounts were outstanding under the Term Loan. This credit
facility is secured by assets of the Company and the New Jersey Economic
Development Authority Guaranty and the New Jersey Economic Development Authority
Participation. In conjunction with this credit facility, the Company also
issued warrants to purchase 84,211 shares of the Company's Common Stock at a
price of $4.75 per share (see Note 8). The warrants expire on December 6, 2004.
The warrants are valued at $207,541 and is recorded in the balance sheet as a
reduction of debt outstanding. The value of the warrant will be accreted over
the term of the loan agreement as additional interest expense.
8. CAPITAL STOCK:
Series A Preferred Stock
During November 1994, the Company issued 264,500 shares of Series A
Convertible Preferred Stock ("Series A Preferred Stock") and warrants to acquire
264,500 shares of Common Stock for gross proceeds of approximately $5.3 million
in a private placement. Each share of Series A Preferred Stock was convertible
at any time at the option of the holder into 6.69 shares of Common Stock.
During 1997, the Company paid $195,000 in dividends by issuing 33,305 shares of
Common Stock and paying a cash dividend of $65,000.
Pursuant to provisions in the agreement, during February 1997, the Company
called for redemption of all outstanding shares of Series A Preferred Stock.
During March 1997 the Company issued 1,739,128 shares of Common Stock to redeem
the Series A Preferred Stock.
Series B Preferred Stock
During November 1996, the Company issued 124,157 shares of Series B
Preferred Stock ("Series B Preferred Stock") and warrants to acquire 2,803,530
shares of Common Stock for gross proceeds of approximately $12.4 million in a
private placement. Each share of Series B Preferred Stock is initially
convertible at any time at the option of the holder into approximately 32.26
shares of Common Stock (3,807,196 shares of Common Stock at December 31, 1999),
subject to adjustment for dilutive issuances of securities. The Series B
Preferred Stock has a liquidation preference of $100 per share, or $11,801,600
as of December 31, 1999, and shares ratably in any residual assets after payment
of such liquidation preference.
The Series B Preferred Stock bears cumulative dividends, payable quarterly,
for five years at the greater of the annual rate of $6.00 per share or the rate
of any dividends paid on other series of stock (effectively $10 per share until
the Series A Preferred Stock was redeemed in March 1997). Dividends may be paid
in cash, in additional shares of Series B Preferred Stock based on the
liquidation value of $100 per share, or any combination of cash and Series B
Preferred Stock at the Company's option. On all matters for which the Company's
stockholders are entitled to vote, each share of Series B Preferred Stock will
entitle the holder to one vote for each share of Common Stock into which the
share of Series B Preferred Stock is then convertible. Additionally, the holders
of Series B Preferred Stock have the right to elect up to two directors to the
Board of Directors of the Company. While the preferred shares are outstanding or
F-10
any dividends are owned thereon, the Company may not declare or pay cash
dividends on its Common Stock. During 1999, the Company paid cash dividends on
the Series B Preferred Stock of $531,300. The Company has accrued a dividend at
December 31, 1999, of $178,512.
The preferred stock will be automatically converted into Common Stock if
(i) the closing price of the Company's Common Stock averages or exceeds $9.30
per share for 30 consecutive trading days.
Common Stock
In December 1997, the Company issued 4,000,000 shares of Common Stock in a
public offering at a price of $4.50 per share. The proceeds of the offering
were approximately $16.7 million before deducting offering costs of
approximately $717,000.
During 1997, the Company issued 33,305 shares of Common Stock as payment of
accrued dividends on Series A Preferred Stock.
During 1997, the Company issued 74,786 shares of Common Stock upon exercise
of certain warrants and 2,027 shares of Common Stock upon the net exercise of
warrants to acquire 15,000 shares of Common Stock.
In December 1998, as a result of terminating a license and development
agreement, the $1.5 million up-front licensing fee paid by Medtronic Inc. to
LifeCell in 1994 converted into 310,771 shares of newly issued LifeCell Common
Stock.
During 1998, the Company issued 4,965 shares of Common Stock upon the net
exercise of warrants to acquire 11,290 shares of Common Stock, the Company
issued 65,600 shares of Common Stock to an unaffiliated party in connection with
the settlement of prior litigation and the Company issued 310,771 shares of
Common Stock as a result of the mutually agreed upon termination of the license
and development agreement relating to heart valves.
In March 1999, the Company issued 108,577 shares of Common Stock in
connection with the signing of a distribution agreement at a price of $9.21 per
share which represents a 154% premium over the then-prevailing market price. The
premium is being recognized over the term of the agreement (see Note 6). The
proceeds of this offering were $1,000,000 before deduction offering costs of
approximately $100,000. During November 1999 the Company issued 925,000 shares
of Common Stock in a private placement at a price of $4.20 per share. The
proceeds of the offering were approximately $3.9 million before deducting
offering costs of approximately $267,000.
Options
The Company's Amended and Restated 1992 Stock Option Plan, as amended in
1998 (the "1992 Plan"), provides for the grant of options to purchase up to
2,500,000 shares of Common Stock. Granted options generally become exercisable
over a four year period, 25 percent per year beginning on the first anniversary
of the date of grant. To the extent not exercised, options generally expire on
the tenth anniversary of the date of grant, except for employees who own more
than 10 percent of all the voting shares of the Company, in which event the
expiration date is the fifth anniversary of the date of grant. All options
granted under the plan have exercise prices equal to the fair market value at
the dates of grant.
The Second Amended and Restated 1993 Non-Employee Director Stock Option
Plan, as amended ("Director Plan") was adopted in 1993. A total of 750,000
shares of Common Stock are available for grant under the Director Plan. Upon
amendment of the Director Plan in 1996, options to purchase 50,000 shares of
Common Stock were granted to each then-current non-employee director of the
Company at an exercise price equal to the fair market value of a share of Common
Stock on the date of the Director Plan. Options to purchase 25,000 shares of
Common Stock will be granted to newly elected directors at an exercise price
equal to the fair market value of a share of Common Stock on such election date.
The provisions of the Director Plan provide for an annual grant of an option to
purchase 10,000 shares of Common Stock to each non-employee director. Options
under the Director Plan generally vest one year after date of grant and expire
after 10 years.
F-11
A summary of stock option activity is as follows:
1992
Stock Option Plan Director Plan
-------------------- ------------------
Weighted- Weighted-
Avg. Exercise Avg. Exercise
Options Price($) Options Price($)
---------- -------- -------- --------
Balance at December 31, 1996 968,820 3.28 75,000 4.11
Granted. . . . . . . . . . . . 131,050 5.21 70,000 5.10
Exercised. . . . . . . . . . . (47,987) 2.68 -- --
Forfeited. . . . . . . . . . . (14,563) 3.75 -- --
---------- --------
Balance at December 31, 1997 1,037,320 3.54 145,000 4.59
Granted. . . . . . . . . . . . 936,700 5.04 30,000 6.69
Exercised. . . . . . . . . . . (12,550) 3.49 -- --
Forfeited. . . . . . . . . . . (141,767) 5.65 -- --
---------- --------
Balance at December 31, 1998 1,819,703 4.15 175,000 4.95
Granted. . . . . . . . . . . . 695,000 4.09 80,000 4.22
Exercised. . . . . . . . . . . (154,764) 3.05 (65,000) 3.05
Forfeited. . . . . . . . . . . (158,468) 5.21 -- --
---------- --------
Balance at December 31, 1999 2,201,471 4.13 190,000 5.29
========== ========
Exercisable at December 31, 1997 484,427 3.02 100,000 4.05
Exercisable at December 31, 1998 701,528 3.21 145,000 4.59
Exercisable at December 31, 1999 940,958 3.74 110,000 6.07
At December 31, 1999, 80,767 and 490,000 options were available for future
grant under the 1992 Plan and the Director Plan, respectively. The exercise
prices of options outstanding under the 1992 Plan and the Director Plan at
December 31, 1999, range from $0.07 to $6.75 and $2.75 to $11.00, respectively.
The weighted average contractual life of options outstanding at December 31,
1999, was 7.91 years for the 1992 Plan and 8.15 years for the Director Plan.
In addition to the amounts set forth in the table above, during 1996 the
Company granted options to purchase 220,000 shares of Common Stock to directors
who resigned upon the closing of the sale of the Series B Preferred Stock in
exchange for options previously granted under the Director Plan. These options
have provisions identical to the options previously granted under the Director
Plan, including exercise prices and vesting periods. The weighted average
exercise price of the options granted was $4.14. The weighted average remaining
contractual life of the grants was 5.82 years as of December 31, 1999.
The Company accounts for its employee stock-based compensation plans under
APB No. 25 and its related interpretations. Accordingly, deferred compensation
expense is recorded for stock options based on the excess of the market value of
the common stock on the date the options were granted over the aggregate
exercise price of the options. This deferred compensation is amortized over the
vesting period of each option. As the exercise price of options granted under
the 1992 Plan and the Director Plan has been equal to or greater than the market
price of the Company's stock on the date of grant, no compensation expense
related to these plans has been recorded. Had compensation expense for its 1992
Plan and Director Plan been determined consistent with SFAS No. 123, the
Company's net loss and loss per share would have been increased to the following
pro forma amounts:
1997 1998 1999
------------ ------------ -------------
Net Loss:
As reported . . . . . . . . . . . . $(6,138,635) $(7,341,314) $ (9,192,196)
Pro forma . . . . . . . . . . . . . $(7,058,879) $(9,103,482) $(11,145,590)
Loss Per Share (Basic and Diluted):
As reported . . . . . . . . . . . . $ (1.04) $ (0.72) $ (0.83)
Pro forma . . . . . . . . . . . . . $ (1.18) $ (0.81) $ (0.99)
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
F-12
Under the provisions of SFAS No. 123, the weighted average fair value of
options granted in 1997, 1998, and 1999 was $4.24, $3.99, and $2.64 per share,
respectively, under the 1992 Plan. The weighted average fair value of options
granted in 1997, 1998, and 1999 was $4.08, $5.33, and $2.76 per share,
respectively, under the Director Plan. 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 used for grants in 1997, 1998 and
1999, respectively: a weighted average risk-free interest rate of approximately
4% - 6% percent for all years; no expected dividend yield during the expected
life of the option; expected lives of 5 to 6 years for each grant and expected
volatility between 64 and 64 and 112 percent.
The stock options issued to retiring directors in 1996 had a weighted
average fair value of $2.57. The fair values of such options are estimated on
the date of grant using Black-Scholes option price model with the following
assumptions used: a weighted average risk-free interest rate of 6 percent,
expected lives of 3 to 5 years, expected volatility of 99 percent and no
expected dividends.
Warrants
As of December 31, 1999, warrants to acquire a total of 3,466,399 shares of
Common Stock were outstanding as set forth below.
During 1999, the Company issued warrants to acquire 200,000 shares of
Common Stock in conjunction with the sale of the Company's Common Stock at an
exercise price of $5.46. These warrants expire on the fourth anniversary of the
date of grant. Also, during 1999 the Company issued warrants to acquire 84,211
shares of Common Stock in conjunction with the issuance of notes payable (see
Note 7). These warrants are exercisable at a price of $4.75 per share and expire
on the fifth anniversary of the date of grant
During 1996, the Company issued warrants to acquire 2,803,530 shares of
Common Stock in conjunction with the sale of the Series B Preferred Stock (the
"1996 Warrants"). The 1996 Warrants are exercisable at an exercise price of
$4.13 per share. The warrants expire on the fifth anniversary of the date of
grant, are callable if the average closing price of the Company's Common Stock
for 30 trading days equals or exceeds three times the then-exercise price, and
allow cashless exercise. The warrants also have provisions for adjustment of the
exercise price and number of shares for below-exercise price issuance of
securities. As of December 31, 1999, the 1996 warrants to acquire 2,717,454
Shares of Common Stock were outstanding.
Additionally, the Company issued warrants to acquire 354,734 shares of
Common Stock to the placement agent for the Series B Preferred Stock ("Agent
Warrant"). The Agent Warrants are exercisable at an exercise price of $4.50 per
share. The warrants expire on the fifth anniversary of the date of grant and
allows cashless exercise. The warrant also has provisions for adjustment of the
exercise price and number of shares for below-exercise price issuance of
securities.
As of December 31, 1999, additional warrants to acquire 110,000 shares of
Common Stock were outstanding with exercise prices ranging from $2.50 to $8.00.
Such warrants expire during periods ranging from April 5, 2000, to February 1,
2001.
9. RELOCATION COSTS:
In June 1999, management approved plans to relocate the Company's
operations from The Woodlands, Texas to Branchburg, New Jersey. Costs charged
to operations during the year ended December 31, 1999 included the cost of
non-relocating employee benefits, a charge to abandon assets related to the
Company's Texas facility and the costs of relocating key employees to New
Jersey. The Company anticipates the relocation to be completed by May 31, 2000.
Costs recorded during the year ended December 31, 1999 classified as
relocation costs in the Statement of Operations are as follows:
F-13
Non-relocating employee benefits $ 516,381
Asset abandonment costs. . . . . 334,875
Relocation costs . . . . . . . . 2,085,389
----------
Total relocation costs . . . . $2,936,645
==========
10. EMPLOYEE BENEFIT PLANS:
The Company maintains a retirement savings plan as described in Section
401(k) of the Internal Revenue Code of 1986, as amended. The Company may, at
its discretion, contribute amounts not to exceed each employee's contribution.
During February 1998, February 1999 and February 2000, the Company made total
contributions of $13,088, $21,387, and $22,955 to the plan for a partial
matching of employee contributions during 1997, 1998, and 1999, respectively.
During 1996, the Company established an Employee Stock Purchase Plan to
allow for the purchase of the Company's Common Stock on the open market using
employee and any employer matching contributions. During 1997, 1998, and 1999,
the Company contributed $7,631, $13,661, and $13,962, to this plan,
respectively.
11. FEDERAL INCOME TAXES:
The Company has not made any income tax payments since inception. As of
December 31, 1999, the Company has a net operating loss (NOL) carryforward for
federal income tax purposes of approximately $48.5 million, subject to the
limitations described below, expiring as follows:
YEAR EXPIRES
-------------
2001. . . . $ 500,000
2002. . . . 1,500,000
2003. . . . 2,800,000
2004. . . . 2,200,000
2005. . . . 1,700,000
2006. . . . 1,400,000
2007. . . . 2,400,000
2008. . . . 3,000,000
2009. . . . 2,500,000
2010. . . . 4,000,000
2011. . . . 4,000,000
2012. . . . 5,700,000
2018. . . . 8,200,000
2019. . . . 8,600,000
-------------
48,500,000
Additionally, the Company has approximately $533,000 of research and
development tax credit carryforwards which will expire in varying amounts
commencing in 2001. Federal tax laws provide for a limitation on the use of NOL
and tax credit carryforwards following certain ownership changes that could
limit LifeCell's ability to use its NOL and tax credit carryforwards. The sale
of Common Stock in the public offering in December 1997 resulted in an ownership
change for federal income tax purposes. The Company estimates that the amount
of NOL carryforwards and the credits available to offset taxable income at
December 31, 1999, is approximately $22 million on a cumulative basis.
Accordingly, if LifeCell generates taxable income in any year in excess of its
then cumulative limitation, the Company may be required to pay federal income
taxes even though it has unexpired NOL carryforwards.
For financial reporting purposes, a valuation allowance of $16,938,000 has
been recorded as of December 31, 1999, to fully offset the deferred tax asset
related to these carryforwards. The principal components of the deferred tax
asset as of December 31, 1998 and 1999, assuming a 34% federal tax rate, are as
follows:
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1998 1999
------------- -------------
Temporary differences:
Deferred revenue. . . . . . . . . . . . . . . . . . . . $ -- $ 138,000
Restricted stock compensation . . . . . . . . . . . . . -- --
Uniform capitalization of inventory costs . . . . . . . 70,000 147,000
Other items . . . . . . . . . . . . . . . . . . . . . . 16,000 140,000
------------- -------------
Total temporary differences . . . . . . . . . . . . . . 86,000 425,000
Federal tax losses and credits not currently utilizable 14,301,000 16,513,000
------------- -------------
Total deferred tax assets 14,387,000 16,938,000
Less valuation allowance. . . . . . . . . . . . . . . . (14,387,000) (16,938,000)
------------- -------------
Net deferred tax asset . . . . . . . . . . . . . . . . . $ -- $ --
============= =============
The net increase in the deferred tax valuation allowance for 1998 and 1999
was $2,561,000, and $2,551,000 respectively. Other than the net operating loss
and tax credit carryforwards, there is no significant difference between the
statutory federal income tax rate and the Company's effective tax rate during
1997, 1998 and 1999.
12. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is subject to numerous risks and uncertainties and from time to
time may be subject to various claims in the ordinary course of its operations.
The Company maintains insurance coverage for events and in amounts that it deems
appropriate. There can be no assurance that the level of insurance maintained
will be sufficient to cover any claims incurred by the Company or that the type
of claims will be covered by the terms of insurance coverage.
License Agreements
The Company has entered into several license agreements, both exclusive and
nonexclusive in conjunction with its business. The Company is required to pay
royalties on net sales of products encompassing the licensed technologies. For
the years ended December 31, 1997, 1998, and 1999, $141,539, $10,248, and
$17,311 of expenses were incurred under these agreements, respectively.
Leases
The Company leases approximately 85,000 square feet for office and
laboratory space and has various other operating leases. The future minimum
lease payments under noncancelable lease terms in excess of one year as of
December 31, 1999, were as follows:
2000. . . . . . . $ 896,944
2001. . . . . . . 573,572
2002. . . . . . . 535,936
2003. . . . . . . 535,936
2004 and beyond 3,490,825
----------
Total . . . . . $6,033,213
==========
F-15
13. SEGMENT AND MAJOR CUSTOMER DATA
The Company has principally one business segment related to the sale
of AlloDerm. Product Sales by geographic area are summarized as follows:
1997 1998 1999
---------- ---------- -----------
United States $4,401,351 $6,575,206 $11,065,008
Other foreign countries $ 503,620 $ 669,896 $ 846,489
---------- ---------- -----------
Total Product Sales $4,904,971 $7,245,102 $11,911,497
========== ========== ===========
During 1999 LifeCell had one customer who comprised greater than 10% of the
Company's net product sales. Sales during 1999 to this customer were $1,238,139.
14. SUBSEQUENT EVENT
In February 2000, LifeCell entered into a marketing and distribution rights
agreement with Obagi Medical Products (OMP). Under the terms of the agreement,
OMP will pay a $1 million up-front fee to LifeCell for the licensed marketing
and distribution rights. For its efforts, OMP will receive a co-promotion fee
based upon a percentage of net sales. LifeCell and OMP will jointly oversee the
development and implementation of marketing programs.
F-16