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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, 2000 COMMISSION FILE NUMBER: 0-19890
LIFECELL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 76-0172936
(State or other jurisdiction of (I.R.S. employer
Incorporation or organization) identification no.)
ONE MILLENNIUM WAY
BRANCHBURG, NEW JERSEY 08876
(Address of principal executive offices, including zip code)
(908) 947-1100
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
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. [ ]
The 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
15, 2001: $38,289,936.
Number of shares of registrant's Common Stock outstanding as of March 15, 2001:
16,709,368. (If the Series B Preferred Stock had converted into Common Stock as
of such date, there would be 19,849,980 shares of Common Stock outstanding.)
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of registrant's definitive proxy statement to be issued in conjunction
with registrant's annual stockholders' meeting to be held on June 1, 2001 have
been incorporated by reference into Part III hereof.
TABLE OF CONTENTS
DESCRIPTION
Item Page
- ---------- ------------------------------------------------------------------------------------- ----
PART I
Item 1. Business 3
General 3
Technology 3
Strategy 4
Products and Product Development Activities 6
Marketing 10
Sources of Materials 10
Government Regulation 11
Research and Development 15
Competition 16
Employees 16
Risk Factors 16
Special Note Regarding Forward-Looking Statements 25
Item 2. Properties 25
Item 3. Legal Proceedings 25
Item 4 Submission of Matters to a Vote of Security Holders 26
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 27
Dividend Policy 27
Item 6. Selected Financial Data 28
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 29
General and Background 29
Results of Operations 29
Liquidity and Capital Resources 31
Item 7A Quantitative and Qualitative Disclosure About Market Risk 32
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure 32
PART III
Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Executive Compensation 33
Item 12. Security Ownership of Certain Beneficial Owners and Management 33
Item 13. Certain Relationships and Related Transactions 33
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 34
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 develops and markets biologic solutions for the
repair, replacement and preservation of human tissue. Our core technology
removes all cells from the tissue and preserves the tissue without damaging the
essential biochemical and structural components necessary for normal tissue
regeneration. We currently market three human tissue products based on this
technology: AlloDerm(R) for plastic reconstructive, burn and periodontal
procedures; Cymetra(TM), a version of AlloDerm(R) in particulate form for
non-surgical correction of soft tissue defects; and Repliform(TM), a version of
AlloDerm(R) for urology and gynecology procedures. Our development programs
include the application of our technology to process small diameter blood vessel
grafts as an alternative to blood vessel grafts taken from the patient,
investigation of potential orthopedic applications of our technology,
investigation of human tissues as carriers for therapeutics, ThromboSol(TM), a
formulation for extended storage of platelets and technologies to enhance the
storage of red blood cells for transfusion.
We were incorporated in the State of Delaware in 1992 as the successor to a
Delaware corporation that was incorporated in 1986. Our address is 1 Millennium
Way, Branchburg, New Jersey 08876 and our phone number is (908) 947-1100.
TECHNOLOGY
Our product development programs have been generated from the following
proprietary technologies:
- methods for producing an extracellular tissue matrix by removing
antigenic cellular elements while stabilizing the matrix against
damage;
- methods for cell preservation by manipulating cells through signal
transduction (i.e., manipulation of cellular metabolism) to protect
cells during prolonged storage; and
- methods 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,
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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.
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, 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. Our
processed human tissue products have a proven safety record of over eight
years and over 150,000 tissue grafts distributed to date.
Prolonged Shelf Life. Our proprietary tissue processing technology
allows extended storage and ease of transportation of products. AlloDerm
and Repliform have been tested 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. Human 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/or prevent activation. When blood cells are
removed from the body for storage, these stabilizing influences are absent and
result in the destabilization and/or 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 tissue. Our strategy includes the
following principal elements:
EXPANDING PENETRATION OF ALLODERM INTO CURRENT TARGET MARKETS
Our direct marketing effort focuses on the use of AlloDerm 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
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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 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;
- sponsoring educational and surgical training workshops on the use of
AlloDerm; and
- participating at trade shows.
We currently market AlloDerm for use in plastic reconstructive and burn
surgery in domestic markets through our own sales force. For periodontal
applications and selected international markets, we market through distributors.
EXPANDING PENETRATION OF REPLIFORM IN UROGYNECOLOGY MARKET
Repliform, introduced in 1999, is a version of AlloDerm for applications in
the urology and gynecology markets. We market Repliform through Boston
Scientific Corporation, 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 Corporation,
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 and for the repair of
pelvic floor defects.
EXPANDING PENETRATION OF CYMETRA IN RECONSTRUCTIVE PLASTIC AND DERMATOLOGY
MARKETS
In December 1999, we introduced Cymetra, a version of AlloDerm in a
particulate form for non-surgical correction of soft tissue defects, to selected
plastic and reconstructive surgeons. In June 2000, we, in conjunction with
Obagi Medical Products, Inc., initiated the full commercial launch of Cymetra to
office-based plastic surgeons and dermatologists. In August 2000, our sales
force launched Cymetra to hospital-based reconstructive plastic surgeons.
LEVERAGING TECHNOLOGY PLATFORMS TO DEVELOP NEW PRODUCTS
We continue to research 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 vascular graft products using our
technology.
Pre-clinical studies suggest that our acellular tissue matrix may also
remodel into tendons, cartilage and bone. In 2000, we received final approval
for a $2.3 million research grant from the Department of Defense, through the
U.S. Army Medical Research Acquisition Activity, to investigate the application
of our technology to the regeneration of orthopedic tissues. We retain all
rights to commercialize products resulting from this collaboration.
We are also using our proprietary cell preservation technology in the
development of solutions that would extend the shelf life of platelets and red
blood cells. Both of these development programs are also funded by the
Department of Defense. We plan to establish collaborative out-licensing
arrangements with appropriate partners to fund the development and
commercialization of certain of these products.
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PRODUCTS AND PRODUCT DEVELOPMENT ACTIVITIES
ACELLULAR TISSUE PRODUCTS
ALLODERM
AlloDerm 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 plastic reconstructive, burn and periodontal
surgery.
We receive donated human skin from tissue banks in the United States that
comply with the United States Food and Drug Administration (the "FDA") 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 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.
PLASTIC RECONSTRUCTIVE SURGERY. AlloDerm is marketed to plastic
reconstructive surgeons as an "off-the-shelf" alternative to autograft. Within
plastic reconstructive 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;
- as a sling to support tissue following nerve or muscle damage; and
- as a tissue patch to restore closure.
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 approximately 240,000 procedures performed annually. These
procedures include various head and neck and reconstructive surgeries, cancer
reconstruction, scar revision and oral cavity reconstruction. In these
procedures, the greatest competitive pressures to AlloDerm are from autologous
tissue and 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). Some biosynthetic materials
may include bovine collagen, which requires patient sensitivity testing.
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
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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.
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 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 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.
PERIODONTAL SURGERY. We began marketing AlloDerm to periodontists in
September 1995. BioHorizons Implant Systems, 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
connective tissue grafts excised from the roof of the patient's mouth and then
transplanted to the gum.
Multiple independent prospective clinical trials have demonstrated that
AlloDerm is equivalent to autologous connective tissue grafts for root coverage.
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 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.
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.
POTENTIAL ORTHOPEDIC APPLICATIONS OF ALLODERM. Pre-clinical studies have
indicated that AlloDerm may have the potential to remodel into certain types of
connective tissues. Based on these preliminary results, a product development
program has been implemented for orthopedic applications 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
UROLOGY AND GYNECOLOGY SURGERY. Repliform is the trade name given to
AlloDerm when it is labeled for the intended use of repairing damaged or
inadequate integumental connective tissue in urology and gynecology surgical
procedures. Since 1997, surgeons have used AlloDerm in urology and gynecology
procedures as a bladder sling in the treatment of urinary incontinence and for
the repair of pelvic floor defects. Boston Scientific Corporation is 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
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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 and will not erode through the soft pelvic tissues.
Annually in the United States, there are approximately 190,000 retropubic
suspensions, bladder neck suspensions, and sling procedures performed of which
approximately 95,000 are bladder slings that could use Repliform as the sling
material. Also, there are approximately 240,000 pelvic prolapse 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 14,000 patients
for the treatment of incontinence and various pelvic floor repair surgeries
MICRONIZED ALLODERM(TM) PRODUCTS
CYMETRA
Cymetra, the brand name for Micronized AlloDerm(TM), is made from AlloDerm
sheets that are micronized to create a particulate form of AlloDerm suitable for
injection. This form allows a non-surgical alternative in reconstructive
plastic and dermatological procedures to replace damaged or inadequate skin
tissue, such as correction of soft tissue defects and depressed scars or to
replace integumental tissue lost through atrophy. Cymetra has been clinically
evaluated in 300 patients.
In June 2000, we, in conjunction with Obagi Medical Products, Inc.,
initiated the full commercial launch of Cymetra to office-based plastic surgeons
and dermatologists. In August 2000, our sales force launched Cymetra to
hospital-based reconstructive plastic surgeons.
We believe that Cymetra offers a new non-surgical alternative in
reconstructive and plastic dermatological procedures. This represents a
significant market opportunity for Cymetra as it does not require sensitivity
testing and similar to AlloDerm promotes the regeneration of normal human soft
tissue.
We also 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. We currently are testing the persistence of
micronized acellular tissue in animals for the treatment of urological
disorders.
FDA STATUS OF ALLODERM, REPLIFORM AND CYMETRA
The FDA generally permits transplanted human tissue to be commercially
distributed without obtaining prior FDA approval. AlloDerm was previously
reviewed by the FDA and found to be human tissue for transplantation when
intended for the replacement or repair of damaged or inadequate integumental
tissue, including gingival dermis. On that basis, we continued commercial
distribution of AlloDerm for plastic reconstructive, burn, and periodontal
surgery. Repliform is the trade name given to AlloDerm when it is labeled for
the intended use of repairing damaged or inadequate integumental connective
tissue urological and gynecological surgery. Cymetra is Alloderm that has been
micronized into injectable powder form. This form of AlloDerm permits delivery
to subcutaneous locations by injection rather than open surgery to repair
damaged or inadequate integumental tissue. The micronized particles are
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biochemically identical to AlloDerm. We believe that Repliform and Cymetra
meet the FDA's definition of human tissue for transplantation and have not been
manipulated in such a way that would require regulation as a medical device. As
a result, we did not seek approval from the FDA to market these products. In
November 2000, the FDA wrote to us and requested detailed information about
Repliform and Cymetra, including copies of existing labeling and advertising, a
description of product composition and processing, and other information
supporting LifeCell's belief that each of these products are human tissue for
transplantation. In February 2001, we provided a detailed submission responding
to the FDA's request. Our understanding is that the FDA is reviewing this
information to determine whether they agree that these products are human
tissue. No assurance can be given that the FDA will agree that Repliform and
Cymetra are each human tissue. If the FDA does not agree, they may impose
medical device regulation upon Repliform and/or Cymetra. FDA also could require
us to cease marketing and/or recall product already sold until FDA approval is
obtained and could seek to impose enforcement sanctions for marketing these
products without FDA approval.
CARDIOVASCULAR TISSUE PRODUCTS
We are conducting pre-clinical studies to evaluate small-diameter vascular
graft products for potential use in cardiovascular 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 peripheral
vascular disease, 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
vascular 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 fresh 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 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.
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 two years. During 1999, we successfully
completed biocompatability testing on the ThromboSol solutions. A pilot
clinical study under a physician-sponsored Investigational New Drug Application
("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 is currently being performed which involves a
"standard of care" transfusion of ThromboSol cryopreserved platelets into
oncology patients. This study should be completed in 2001. Any product
developed will require extensive regulatory approvals prior to marketing in the
United States. We intend to license this product to major pharmaceutical and/or
other companies for commercial development. Our development efforts to date
have primarily been funded through research grant funds from the Department of
Defense.
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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.
Any product developed will require extensive regulatory approvals,
including approval of an IND by the FDA to conduct clinical trials. Our
development efforts to date have primarily been funded through research grant
funds from the Department of Defense.
MARKETING
We currently distribute AlloDerm in the United States for plastic
reconstructive and burn surgical applications through our network of direct
technical sales representatives. In March 1999, we entered into an exclusive
agreement with Boston Scientific Corporation for the worldwide sales and
marketing of Repliform for use in urology and gynecology. In February 2000, we
entered into an exclusive agreement with Obagi Medical Products, Inc. for
promotion of Cymetra to office-based dermatologists and plastic surgeons in the
United States and certain international markets. In August 2000, we entered
into an exclusive agreement with BioHorizons Implant Systems, Inc., granting
them distributor rights in the United States and select international markets of
AlloDerm for use in periodontal applications.
Prior to 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 1, 2001, we had sales and marketing staff of 40 persons,
including 27 domestic sales personnel, and 13 domestic marketing and other
personnel. Our sales representatives are responsible for interacting with ear,
nose and throat surgeons, plastic surgeons and burn surgeons and educating them
regarding the use and anticipated benefits of AlloDerm and Cymetra. We also
participate in numerous national fellowship programs, national and international
conferences and trade shows and participate in, or fund certain educational
symposia.
SOURCES OF MATERIALS
In 2000, we obtained all of our human tissue from 19 tissue banks in the
United States. We estimate that there are at least 100 tissue banks in the
United States. We believe we have established adequate sources of donated human
tissue to satisfy the expected demand for our products in the foreseeable
future. Although we have not experienced any material difficulty in procuring
adequate supplies of allograft skin tissue, there is risk that the future
availability of donated human skin will not be sufficient to meet our demand for
such materials. We compete with burn centers, tissue banks and other entities
that process and or distribute allograft skin and other human tissues.
Procurement of certain human organs and tissue for transplantation is
subject to the restrictions of the National Organ Transplant Act ("NOTA"), which
prohibits the acquisition of certain human organs, including skin and related
tissue for valuable consideration, but permits the payment of reasonable
expenses associated with the procurement, transportation, processing,
preservation, quality control and storage of human tissue and skin. We reimburse
tissue banks for expenses incurred that are associated with the recovering and
transportation of donated human skin that we process into AlloDerm, Repliform,
Cymetra and allograft skin as a temporary wound dressing.
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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. Our initial accreditation was granted in 1997
following a detailed audit by the AATB of our operations and procedures. The
accreditation, which was renewed in 2000, 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 human tissue products are subject to regulation by 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, manufacturing, 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, the FDA may choose
to regulate such products as transplanted human tissue, biologics or medical
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. The 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.
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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, plastic
reconstructive surgery procedures (such as atrophic lip reconstruction and scar
revision) and periodontal surgical procedures (such as free-gingival grafting
and guided tissue regeneration). 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.
In 1999, we began marketing two additional tissue products, Repliform and
Cymetra. Repliform is the trade name given to AlloDerm when it is labeled for
the intended use of repairing damaged or inadequate integumental connective
tissue in urological and gynecological surgery. Cymetra is Alloderm that has
been micronized into injectable powder form. This form of AlloDerm permits
delivery to subcutaneous locations by injection rather than open surgery to
repair damaged or inadequate integumental tissue. The micronized particles are
biochemically identical to AlloDerm.
We believe that Repliform and Cymetra meet the FDA's definition of human
tissue for transplantation. As a result, we did not seek a determination from
the FDA prior to marketing as to whether these products were human tissue or
medical devices. In November 2000, the FDA wrote to us and requested detailed
information about Repliform and Cymetra, including copies of existing labeling
and advertising, a description of product composition and processing, and other
information supporting our belief that each of these products is human tissue.
In February 2001, we provided a detailed submission responding to the FDA's
request. Our understanding is that the FDA is reviewing this information to
determine whether they agree that each of these products is human tissue. No
assurance can be given that the FDA will agree. If the FDA does not, they 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 FDA
approval is obtained. The FDA also could seek to impose enforcement sanctions
for marketing these products without FDA approval.
In January 2001, the FDA issued a final rule requiring registration of
tissue banking establishments and the listing of tissue products. These
requirements become effective on April 4, 2001. A proposed regulation pending
since September 1999 would require that most tissue donors be screened for
relevant communicable diseases. Another proposed regulation issued in January
2001 would require manufacturers of tissue products to follow proposed current
good tissue practices. These final and pending regulations demonstrate FDA's
increasingly proactive regulation of human tissue, which may lead to the
imposition of significant additional regulatory requirements upon tissue
products. Such requirements could cause us to incur significant additional
costs.
Procurement of certain human organs and tissue for transplantation is
subject to the restrictions of the NOTA, which prohibits the acquisition of
certain human organs, including skin and related tissue for valuable
consideration, but permits the payment of reasonable expenses associated with
the procurement, transportation processing, preservation, quality control and
storage of human tissue and skin. We reimburse tissue banks for expenses
incurred that are associated with the recovering and transportation of donated
human skin that we process into AlloDerm, Repliform, Cymetra and allograft skin
as a temporary wound dressing. We include in our pricing structure certain costs
associated with processing, preservation, quality control and storage of the
tissue, and marketing and medical education expenses in addition to amounts paid
to tissue banks to reimburse them for their expenses associated with the removal
and transportation.
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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 "pre-amendment" 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 4 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 post approval
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
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 "non-significant 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.
If we market medical device products, we 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, post market surveillance, patient registries, and FDA
guidelines) that do not apply to class I devices.
In 1997, the FDA told us that NeoDura(TM) (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
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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 as human tissue.
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 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 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
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
requirements 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
The regulation of our products outside the United States varies by country.
Certain countries regulate our products as a pharmaceutical product, requiring
us to make extensive filings and obtain regulatory approvals before selling our
product. Certain countries classify our products as transplant tissue but may
restrict its import or sale. Other countries have no applicable regulations
regarding the import or sale of products similar to our products, creating
uncertainty as to what standards we may be required to meet.
AlloDerm currently is being distributed in Brazil, Italy, Korea, Mexico,
Taiwan, the Netherlands and the United Kingdom and we are pursuing clearance to
distribute Cymetra in Brazil and Korea. The uncertainty of the regulations in
each country may delay or impede the marketing of AlloDerm or Cymetra and other
products in the future or impede our ability to negotiate distribution
arrangements on favorable terms. Certain foreign countries have laws similar to
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NOTA. These laws may restrict the amount that we can charge for our products
and may restrict our ability to export or distribute our products to licensed
not-for-profit organizations in those countries. Noncompliance with foreign
country requirements may include some or all of the risks associated with
noncompliance with FDA regulation as well as other risks.
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. Our research and development costs in 1998, 1999
and 2000 for all programs, including those programs funded through corporate and
government support, were approximately $3.4 million, $3.9 million and $4.5
million, respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources."
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 $8.5 million through 16 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. Nine additional United States patents supplement this
patent and cover methods of freeze-drying without the damaging effects of ice
crystal formation. 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.
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 us 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,
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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(R) , which concerns processing and preserving tissue samples,
and AlloDerm(R), which concerns our commercial acellular dermal graft product.
We have filed trademark applications for the protection of the phrases
Micronized AlloDerm(TM), the particulate form of AlloDerm, Cymetra(TM) the brand
name for Micronized AlloDerm, and Repliform(TM), the version of AlloDerm for
urology and gynecology.
COMPETITION
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 technologies. There are many
companies, including Regeneration Technologies, Inc., Collagenesis, Inc., Cook,
Inc. and its affiliates, Cryolife, Inc., Organogenesis, Inc., Advance Tissue
Sciences, Inc. and Integra Life Sciences Holdings Corporation, and academic
institutions, including Rice University, The University of Pittsburgh and
Georgia Institute of Technology, 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, and 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 we do.
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 our products, 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
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.
EMPLOYEES
At March 1, 2001, we had 157 employees of which 40 were employed in sales
and marketing, 71 in production and quality assurance, 25 in research and
development and clinical studies, and 21 in administration and accounting. Also,
at such date, we employed, full-time, one M.D. and 9 individuals with Ph.D.
degrees.
RISK FACTORS
You should carefully consider these risk factors in addition to our
financial statements. In addition to the following risks, there may also be
risks that we do not yet know of or that we currently think are immaterial that
may also impair our business operations. If any of the following risks occur,
our business, financial condition or operating results could be adversely
affected.
WE HAVE A HISTORY OF OPERATING LOSSES AND A SUBSTANTIAL ACCUMULATED EARNINGS
DEFICIT AND WE MAY CONTINUE TO INCUR LOSSES.
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Since our inception in 1986, we have generated only limited revenues from
product sales and have incurred substantial net losses of approximately:
- $7.3 million for the year ended December 31, 1998;
- $9.2 million for the year ended December 31, 1999;
- $7.1 million for the year ended December 31, 2000.
At December 31, 2000, we had an accumulated deficit of approximately $62.2
million. We expect to incur additional operating losses as well as negative
cash flow from operations in the short term as we continue to expand our
marketing efforts with respect to our current products and to continue 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 not achieve profitability and positive cash flows from operations.
WE MAY NEED ADDITIONAL CAPITAL TO MARKET OUR CURRENT PRODUCTS AND TO DEVELOP AND
COMMERCIALIZE NEW PRODUCTS AND IT IS UNCERTAIN WHETHER SUCH CAPITAL WILL BE
AVAILABLE.
We intend to expend funds for:
- product research and development;
- expansion of sales and marketing activities;
- product education efforts; and
- other working capital and general corporate purposes, including
potential acquisitions of complementary technologies or products.
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 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; and
- developments related to regulatory and third-party reimbursement
matters.
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We expect that our current resources will satisfy our cash needs for at
least the next 12 months. We are currently incurring negative cash flow from
operations but we expect such amounts to continue to decrease in the near
future. However, operating and other expenses incurred by us could increase
because of the factors set forth above. As a result, we may need additional
funding to operate our business. We have no commitments for any future funding
and there can be no assurance that we will be able to obtain additional
financing in the future from either debt or equity financings, bank loans,
collaborative arrangements or other sources on terms acceptable to us, or at
all. 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.
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 THE FDA IMPOSES MEDICAL DEVICE OR OTHER REGULATIONS THAT AFFECT OUR PRODUCTS,
THE COSTS OF DEVELOPING, MANUFACTURING AND MARKETING OUR PRODUCTS WILL BE
INCREASED.
The FDA generally permits transplanted human tissue to be commercially
distributed without obtaining prior FDA approval of the product. 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 (i.e. "tissue lining the surface of the body
or a body cavity") would be regulated as transplanted human tissue. On that
basis, we continued commercial distribution of this product for plastic
reconstructive, burn and periodontal surgery. In its decision with respect to
the regulation of AlloDerm, the FDA stated that the regulatory status of any
different uses, such as a void filler for soft tissue, for cosmetic augmentation
procedures or as a wound healing agent, would need to be determined on a
case-by-case basis.
In 1999, we began marketing:
- Repliform, a version of AlloDerm, for urological and gynecological
surgical procedures; and
- Cymetra, a version of AlloDerm in a particulate form, for non-surgical
correction of soft tissue defects.
Repliform is used as a bladder sling for the treatment of urinary
incontinence and for the repair of pelvic floor defects. Cymetra is used for the
correction of soft tissue deficits, such as acne or other depressed scars, and
to restore tissue loss from disease. We believe that Repliform and Cymetra meet
the FDA's definition of human tissue for transplantation. As a result, we did
not seek a determination from the FDA prior to marketing as to whether these
products were human tissue or medical devices. In November 2000, the FDA wrote
to us and requested detailed information about Repliform and Cymetra, including
copies of existing labeling and advertising, a description of product
composition and processing, and other information supporting our belief that
each of these products is human tissue. In February 2001, we provided a detailed
submission responding to the FDA's request. Our understanding is that the FDA is
reviewing this information to determine whether they agree that each of these
products is human tissue. No assurance can be given that the FDA will agree. If
the FDA does not, they 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; and/or
- seek to impose enforcement sanctions for marketing these products
without FDA approval.
The process of obtaining FDA approval, if required, may be expensive,
lengthy and unpredictable. We anticipate that it could take from one to three
years to obtain such approval. We do not know if such approval could be obtained
in a timely fashion, or at all, or if the FDA would require extensive supporting
clinical data.
In the United States, devices and biologics must be:
18
- manufactured in registered establishments; and
- produced in accordance with the Quality System Regulation for medical
devices or Good Manufacturing Practice regulation for biologics.
If any of our products are regulated as devices or biologics, we will be
required to comply with Quality System Regulation or Good Manufacturing Practice
regulation. We anticipate that it could take us up to one year, or longer, to
achieve compliance with these regulations during which time the FDA could
require us to cease marketing and/or recall product already sold. In addition,
our manufacturing facility:
- would need to be registered as a medical device manufacturing site
with the FDA; and
- would be subject to inspection by the FDA.
As a result, our manufacturing and compliance costs would increase and our
products would be subject to more comprehensive development, testing, monitoring
and validation standards.
The FDA requires producers of biologic products to obtain FDA 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 licenses that could restrict
commercial applications of such products. Product approvals may be withdrawn if
compliance with regulatory standards is 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.
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 on our products.
THE FDA CAN IMPOSE CIVIL AND CRIMINAL ENFORCEMENT ACTIONS AND OTHER PENALTIES ON
US IF WE FAIL TO COMPLY WITH STRINGENT FDA REGULATIONS AT OUR TISSUE FACILITIES.
Failure to comply with any applicable FDA requirements could result in
civil and criminal enforcement actions and other fines and penalties that would
increase our expenses and adversely affect our cash flows. Tissue
establishments must engage in:
- infectious disease testing; and
- stringent record keeping.
As a result, our involvement in the processing and distribution of human
tissue requires us to ensure that proper donor screening and infectious disease
testing are 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.
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
which may require us to alter our business methods.
NOTA COULD BE INTERPRETED IN A WAY THAT COULD REDUCE OUR REVENUES AND
PROFITABILITY.
Procurement of certain human organs and tissue for transplantation is
subject to the restrictions of NOTA, which prohibits the acquisition of certain
human organs, including skin and related tissue for valuable consideration, but
permits the payment of reasonable expenses associated with the procurement,
transportation, processing, preservation, quality control and storage of human
19
tissue and skin. We reimburse tissue banks for expenses incurred that are
associated with the recovering and transportation of donated human skin that we
process into AlloDerm, Repliform, Cymetra and allograft skin as a temporary
wound dressing. We include in our pricing structure certain costs associated
with processing, preservation, quality control and storage of the tissue, and
marketing and medical education expenses in addition to amounts paid to tissue
banks to reimburse them for their expenses associated with the procurement and
transportation. NOTA payment allowances may be interpreted to limit the amount
of costs and expenses that we may recover in our pricing for our products
thereby negatively impacting our revenues and profitability.
WE ARE SUBJECT TO VARYING AND EXTENSIVE REGULATION BY FOREIGN GOVERNMENTS WHICH
CAN BE COSTLY, TIME CONSUMING AND SUBJECT US TO UNANTICIPATED DELAYS.
The regulation of our products outside the United States varies by country.
Certain countries regulate our products as a pharmaceutical product, requiring
us to make extensive filings and obtain regulatory approvals before selling our
product. Certain countries classify our products as transplant tissue but may
restrict its import or sale. Other countries have no applicable regulations
regarding the import or sale of products similar to our products, creating
uncertainty as to what standards we may be required to meet.
AlloDerm currently is being distributed in Brazil, Italy, Korea, Mexico, Taiwan,
the Netherlands and the United Kingdom and we are pursuing clearance to
distribute Cymetra in Brazil and Korea. The uncertainty of the regulations in
each country may delay or impede the marketing of AlloDerm or Cymetra and other
products in the future or impede our ability to negotiate distribution
arrangements on favorable terms. Certain foreign countries have laws similar to
NOTA. These laws may restrict the amount that we can charge for our products
and may restrict our ability to export or distribute our products to licensed
not-for-profit organizations in those countries. Noncompliance with foreign
country requirements may include some or all of the risks associated with
noncompliance with FDA regulation as well as other risks.
INCREASING OUR REVENUES AND ACHIEVING PROFITABILITY WILL DEPEND ON OUR ABILITY
TO INCREASE MARKET PENETRATION OF OUR CURRENT PRODUCTS AND TO DEVELOP AND
COMMERCIALIZE NEW PRODUCTS.
Much of our ability to increase revenues and to achieve profitability and
positive cash flows from operations will depend on:
- expanding the use and market penetration of our current 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.
Consequently, physicians, health care payers and patients may not accept
our current products or products under development. 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 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. 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:
20
- unanticipated technical or other problems;
- manufacturing difficulties; and
- the possible insufficiency of the funds allocated for the completion
of such development.
WE ARE HIGHLY DEPENDENT UPON SALES OF OUR PRODUCTS THROUGH BOSTON SCIENTIFIC,
OBAGI MEDICAL PRODUCTS AND OUR OTHER INDEPENDENT AGENTS TO GENERATE OUR
REVENUES.
We have engaged:
- Boston Scientific Corporation as our exclusive worldwide sales and
marketing representative for Repliform for use in the urology and
gynecology markets; and
- Obagi Medical Products as the exclusive sales and marketing
representative of Cymetra for office-based dermatologists and plastic
surgeons.
Additionally, we have granted distributors exclusive distribution rights
and may grant additional distribution rights in the future. During 2000, sales
of our products through Boston Scientific Corporation, Obagi Medical Products
and our other distributors represented approximately 28%, 13% and 6%,
respectively, of our total product revenues. We expect sales of our products
through our marketing agents and distributors to continue to increase as a
percentage of total revenues. If an exclusive marketing agent, such as Boston
Scientific Corporation or Obagi Medical Products, or a distributor fails to
adequately promote, market and sell our products, our revenues could be
adversely affected until a replacement agent or distributor could be retained by
us. Finding replacement agents and distributors could be a time consuming
process during which our revenues could be negatively impacted.
WE DEPEND HEAVILY UPON A LIMITED NUMBER OF SOURCES OF HUMAN TISSUE AND ANY
INTERRUPTION IN THE AVAILABILITY OF HUMAN TISSUE WOULD INTERFERE WITH OUR
ABILITY TO PROCESS AND DISTRIBUTE OUR PRODUCTS.
Our business is dependent on the availability of donated human tissue. In
2000, we received human tissue from 19 United States tissue banks. We estimate
that there are at least 100 tissue banks in the United States. Although we have
established what we believe to be adequate sources of donated human tissue to
satisfy the expected demand for our products in the foreseeable future, we
cannot be sure that donated human tissue will continue to be available at
current levels or will be sufficient to meet our needs. If our current sources
can no longer supply human tissue or our requirements for human tissue exceed
their current capacity, we may not be able to locate other sources. Any
significant interruption in the availability of human tissue would likely cause
us to slow down the processing and distribution of our products.
NEGATIVE PUBLICITY CONCERNING THE USE OF DONATED HUMAN TISSUE IN RECONSTRUCTIVE
COSMETIC PROCEDURES COULD REDUCE THE DEMAND FOR OUR PRODUCTS AND MAY NEGATIVELY
IMPACT THE SUPPLY OF AVAILABLE DONOR TISSUE.
Although we do not promote the use of our products for cosmetic
applications, clinicians may use our products in applications or procedures that
may be considered "cosmetic." Negative publicity concerning the use of donated
human tissue in cosmetic procedures could reduce the demand for our products or
negatively impact the willingness of families of potential donors to agree to
donate tissue or tissue banks to provide tissue to us for processing.
THE BIOMEDICAL FIELD WHICH WE ARE IN IS HIGHLY COMPETITIVE AND SUSCEPTIBLE TO
RAPID CHANGE AND SUCH CHANGES COULD RENDER OUR PRODUCTS OBSOLETE.
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 technologies. There are many
companies, including Regeneration Technologies, Inc., Collagenesis, Inc., Cook,
Inc. and its affiliates, Cryolife, Inc., Organogenesis, Inc., Advance Tissue
21
Sciences, Inc. and Integra Life Sciences Holdings Corporation, and academic
institutions, including Rice University, The University of Pittsburgh and
Georgia Institute of Technology, 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, and 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 we do.
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 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.
Third-party payers have adopted cost control measures in recent years that 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. The FDA generally permits transplanted human tissue to
be commercially distributed without obtaining prior FDA approval of the product.
In contrast, products regulated as medical devices usually require such
approval. Certain government and other third-party payers refuse, in some cases,
to provide any coverage for uses of products for indications for which the FDA
has not granted marketing approval. Further, certain of our products are used
in medical procedures that typically are not covered by third-party payers or
for which patients sometimes do not obtain coverage. 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.
OUR SUCCESS DEPENDS ON THE SCOPE OF OUR INTELLECTUAL PROPERTY RIGHTS AND NOT
INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS. THE VALIDITY,
ENFORCEABILITY AND COMMERCIAL VALUE OF THESE RIGHTS ARE HIGHLY UNCERTAIN.
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 one United States design patent and five United
States utility patents, and
22
- have seven United States patent applications pending.
Third parties may seek to challenge, invalidate, circumvent or render
unenforceable any patents or proprietary rights owned by or licensed to us 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.
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; and
- any patents issued or licensed to us may 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, 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 thereby.
Although we generally conduct a cursory review of issued patents prior to
engaging in research or development activities, we may be required to obtain a
license from others to commercialize any of our new products under development.
If patents that cover our existing or new products are issued to other
companies, there can be no assurance that any necessary license could be
obtained on favorable terms or at all.
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 our 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.
WE ARE EXPOSED TO PRODUCT LIABILITY CLAIMS FOR WHICH OUR PRODUCT LIABILITY
INSURANCE MAY BE INADEQUATE.
Our business exposes us to potential product liability risks inherent in
the testing, manufacturing and marketing of medical products. We cannot assure
that:
- our insurance will provide adequate coverage against potential
liabilities;
- adequate product liability insurance will continue to be available in
the future; or
23
- our insurance can be maintained on acceptable terms.
The obligation to pay any product liability claim in excess of whatever
insurance we are able to acquire would increase our expenses.
We use donated human tissue as the raw material for our products. The
non-profit organizations that supply such tissue are required to follow FDA
regulations for screening 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. 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
- a patient otherwise infected with disease would not erroneously assert
a claim that the use of our 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 and could result in
litigation.
OUR FAILURE TO COMPLY WITH REGULATIONS REGARDING DISPOSAL OF HAZARDOUS MATERIALS
COULD RESULT IN THE IMPOSITION OF PENALTIES, FINES OR SANCTIONS.
Our research and development and processing techniques generate waste that
is classified as hazardous by the United States Environmental Protection Agency
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.
WE ARE A PARTY TO PENDING LITIGATION AND THE COST OF DEFENSE OR AN ADVERSE
OUTCOME COULD NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS OR LIQUIDITY AND
FINANCIAL RESOURCES.
We are a party to litigation in the Superior Court of California, Los
Angeles County, Central District, captioned Regner, et al., on behalf of
themselves and others similarly situated, v. Inland Eye & Tissue Bank of
Redlands, et al. The complaint alleges among other things, defendants,
including us, make profits from the storing, processing, and distribution of
human tissue in contravention of California law. We are also a party to
litigation in the Superior Court of California, Los Angeles County, Central
District, captioned Thacker, et al., on behalf of themselves and others
similarly situated, v. Inland Eye & Tissue Bank of Redlands, et al. This
complaint contains similar allegations to the Renger complaint. These actions
are not denominated class actions and do not involve tort theories.
Both actions were brought under a statute that allows individuals to sue on
behalf of the people of California for unfair business practices, with the court
having the power to award injunctive relief and disgorgement of all profits from
the alleged illegal practices. The plaintiffs in each of the actions are seeking
injunctive relief, disgorgement of illegal profits, restitution, statutory
penalties, fines and attorney's fees. We intend to vigorously defend such
actions, which we believe are without merit.
We are a party to litigation in the United States District Court for the
Southern District of New York captioned Special Situations Fund III, L.P., et
al., v. LifeCell Corporation, Gruntal & Co., L.L.C. and Prudential Securities,
Inc. The complaint alleges that LifeCell, Gruntal and Prudential violated
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder and were liable under New York common law by making purportedly false
and misleading statements to the plaintiffs in connection with LifeCell's
private placement of common stock and seeks damages in an unspecified amount.
Gruntal and Prudential's Vector Healthcare Group acted as placement agents in
LifeCell's private placement which closed in October, 2000. On March 15, 2001
we filed our motion for dismissal which is pending. We believe that the
complaint has no merit and intend to vigorously defend such action.
24
Litigation is subject to many uncertainties and management is unable to
predict the outcome of the pending actions. It is possible that the results of
operations or liquidity and capital resources of the Company could be adversely
affected by the ultimate outcome of the pending litigation or as a result of the
costs of contesting such actions.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements typically are identified by use
of terms such as "may," "will," "should," "plan," "expect," "anticipate,"
"estimate" and similar words, although some forward-looking statements are
expressed differently. Forward-looking statements represent our management's
judgment regarding future events. 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. All statements other
than statements of historical fact included in this prospectus regarding our
financial position, business strategy, products, products under development and
clinical trials, markets, budgets, plans, or objectives for future operations
are forward-looking statements. We cannot guarantee the accuracy of the
forward-looking statements, and you should be aware that our actual results
could differ materially from those contained in the forward-looking statements
due to a number of factors, including the statements under "Risk Factors" set
forth above.
ITEM 2. PROPERTIES
We lease approximately 90,000 square feet of laboratory, production and
office space in one building in Branchburg, New Jersey under a lease agreement
that expires in November 2010. The current monthly rental obligation under this
lease is approximately $69,000.
ITEM 3. LEGAL PROCEEDINGS
In May 2000, a complaint was filed in the Superior Court of California, San
Bernardino County, Central District, captioned Ann Regner et. al., on behalf of
themselves and others similarly situated, v. Inland Eye & Tissue Bank of
Redlands, et al. The complaint was brought as a class action on behalf of all
close family members of those deceased persons whose tissues were collected,
processed, stored or distributed in California. The complaint alleged that
tissue banks routinely fail to obtain proper informed consent from family
members when soliciting the donation of human tissue for transplant. The
complaint also alleged that the defendants, including us, make profits from the
storing, processing and distribution of human tissue in contravention of
California law. Plaintiffs' application for a preliminary injunction seeking to
enjoin the defendants, including us, from doing business in California was
denied in June 2000. In September 2000, a new complaint was filed in the
Superior Court of Los Angeles captioned Regner, et al., on behalf of themselves
and others similarly situated, v. Inland Eye & Tissue Bank of Redlands, et al.
The new complaint alleges among other things, defendants, including us, make
profits from the storing, processing, and distribution of human tissue in
contravention of California law. The new complaint is not denominated as a
class action and does not involve tort theories. The action was brought under a
statute which allows individuals to sue on behalf of the people of California
for unfair business practices, with the court having the power to award
injunctive relief and disgorgement of all profits from the alleged illegal
practices. The plaintiffs seek injunctive relief, disgorgement of illegal
profits, restitution, statutory penalties, fines and attorney's fees. In
January 2001, the May 2000 complaint was dismissed without prejudice. The
September 2000 complaint is still pending. We believe that the claims against
us in the new complaint are without merit and intend to vigorously defend
against such action.
In June 2000, a complaint was filed in the United States District Court,
District of New Jersey, entitled Inamed Corporation, McGhan Medical Corporation
and Collagen Aesthetics, Inc. vs. LifeCell Corporation and Obagi Medical
Products, Inc. The complaint alleged that we and Obagi, our marketing agent,
disseminated false advertisements with respect to the marketing of our Cymetra
product that misleadingly compared it to and unlawfully disparaged the bovine
collagen products of Inamed Corporation and its subsidiaries. In September
2000, we entered into a settlement agreement with Inamed Corporation. Under the
settlement agreement, we and Obagi agreed to discontinue certain comparative
marketing and promotion statements on the use of Cymetra for the reconstruction
of soft tissue deficits. We and Obagi also agreed to jointly make settlement
payments to Inamed Corporation totaling $300,000 over an eighteen-month period.
25
We recorded a charge of $150,000 in the third quarter of 2000, representing our
share of the settlement. The settlement allows us and Obagi to revise the
marketing and promotional statements for Cymetra commencing in January 2001, as
additional scientific data on the use of Cymetra is accumulated.
In December 2000, a complaint was filed in the Superior Court of
California, Los Angeles County, Central District, captioned Thacker, et al., on
behalf of themselves and others similarly situated, v. Inland Eye & Tissue Bank
of Redlands, et al. This complaint contains similar allegations to the Renger
complaint. This action is not denominated class action and does not involve
tort theories. The action was brought under a statute that allows individuals
to sue on behalf of the people of California for unfair business practices, with
the court having the power to award injunctive relief and disgorgement of all
profits from the alleged illegal practices. The plaintiffs are seeking
injunctive relief, disgorgement of illegal profits, restitution, statutory
penalties, fines and attorney's fees. We believe that the claims against us in
this complaint are without merit and intend to vigorously defend against such
action.
In January 2001, a complaint was filed in the United States District Court
for the Southern District of New York captioned Special Situations Fund III,
L.P., et al., v. LifeCell Corporation, Gruntal & Co., L.L.C. and Prudential
Securities, Inc. The complaint alleges that LifeCell, Gruntal and Prudential
violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder and were liable under New York common law by making
purportedly false and misleading statements to the plaintiffs in connection with
LifeCell's private placement of common stock and seeks damages in an unspecified
amount. Gruntal and Prudential's Vector Healthcare Group acted as placement
agents in LifeCell's private placement which closed in October 2000. On March
15, 2001, we filed our motion for dismissal which is pending. We believe that
the claims against us in this complaint are without merit and intend to
vigorously defend against such action.
Litigation is subject to many uncertainties and we are unable to predict
the outcome of the pending actions. It is possible that our results of
operations or liquidity and capital resources could be adversely affected by the
ultimate outcome of the pending litigation or as a result of the costs of
contesting such actions. From time to time we are party to various legal
proceedings incident to operating a company of our size which we do not deem to
be material to our business operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
26
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 15, 2001, the last reported sale price for our Common Stock on
the Nasdaq National Market was $2.25 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
------ -----
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
2000 First Quarter. $11.88 $4.63
Second Quarter 7.13 4.88
Third Quarter. 6.44 4.50
Fourth Quarter 4.75 1.50
As of February 28, 2001, there were approximately 368 holders of record of
shares of Common Stock and 31 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 October 2000, we issued 2,500,000 shares of Common Stock pursuant to a
private placement transaction without an underwriter. 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. Pursuant to the terms of one of our debt agreements we
are restricted from paying dividends on our Common Stock.
Our 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 us, on the
Common Stock. The dividends may be paid, at our 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. On February 15th, May 15th, August 15th and November 15, 1999 and on
February 15th and May 15, 2000 we paid a $1.51, $1.49, $1.50, $1.51, $1.51 and
$1.49, respectively, per share dividend in cash to the holders of shares of
Series B Preferred Stock. On August 15th and November 15, 2000 and February 15,
2001, we paid a dividend in shares of our Series B Preferred Stock equivalent to
$1.49, $1.51 and $1.51, respectively, per share to the holders of shares of
Series B Preferred Stock. 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.
27
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, 2000, derived
from the 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,
-------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------- ------------- ------------- ------------- -------------
Operations Statement Data:
- --------------------------
Revenues:
Product revenues $ 2,012,000 $ 4,905,000 $ 7,245,000 $ 11,912,000 $ 21,330,000
Research grant revenues 933,000 1,075,000 747,000 764,000 1,442,000
------------- ------------- ------------- ------------- -------------
Total revenues 2,945,000 5,980,000 7,992,000 12,676,000 22,772,000
------------- ------------- ------------- ------------- -------------
Costs and expenses:
Costs of products sold 1,281,000 2,541,000 2,837,000 3,452,000 6,949,000
Research and development 1,588,000 2,007,000 3,376,000 3,871,000 4,523,000
General and administrative 1,911,000 3,081,000 3,484,000 4,840,000 6,180,000
Selling and marketing 2,390,000 4,956,000 6,500,000 7,236,000 11,779,000
Relocation costs -- -- -- 2,937,000 --
------------- ------------- ------------- ------------- -------------
Total costs and expenses 7,170,000 12,585,000 16,197,000 22,336,000 29,431,000
Loss from operations (4,225,000) (6,605,000) (8,205,000) (9,660,000) (6,659,000)
Interest and other income (expense), net 135,000 466,000 864,000 468,000 (479,000)
------------- ------------- ------------- ------------- -------------
Net loss $ (4,090,000) $ (6,139,000) $ (7,341,000) $ (9,192,000) $ (7,138,000)
============= ============= ============= ============= =============
Loss per share(1)- basic and
diluted $ (1.14) $ (1.04) $ (0.72) $ (0.83) $ (0.54)
============= ============= ============= ============= =============
Shares used in computing loss
per share-basic and diluted 4,543,000 6,820,000 11,229,000 11,938,000 14,372,000
============= ============= ============= ============= =============
As of December 31,
-------------------------------------------------------------------------
1996 1997 1998 1999 2000
------------- ------------- ------------- ------------- -------------
Balance Sheet Data:
- -------------------
Cash and cash equivalents $ 10,748,000 $ 20,781,000 $ 8,025,000 $ 4,737,000 $ 5,220,000
Short-term investments -- -- 4,001,000 315,000 315,000
Working capital 10,885,000 20,516,000 12,597,000 2,542,000 5,330,000
Total assets 12,890,000 24,156,000 17,031,000 18,083,000 25,410,000
Accumulated deficit (29,311,000) (36,411,000) (44,476,000) (54,378,000) (62,153,000)
Total stockholders' equity 10,197,000 20,260,000 14,261,000 9,249,000 12,789,000
(1) Includes effect of preferred stock dividends of $0.24, $0.14, $0.07, $0.06 and $0.04 in 1996, 1997, 1998,
1999 and 2000, respectively.
28
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 made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. See "Business-Special Note Regarding
Forward-Looking Statements."
GENERAL AND BACKGROUND
We develop and market biologic solutions for the repair, replacement and
preservation of human tissue. Our core technology removes all cells from the
tissue and preserves the tissue without damaging the essential biochemical and
structural components necessary for normal tissue regeneration. We currently
market three products based on this technology: AlloDerm(R) for plastic
reconstructive, burn and periodontal procedures; Cymetra(TM), a version of
AlloDerm in particulate form for the correction of soft tissue defects; and
Repliform(TM), a version of AlloDerm for urology and gynecology procedures. Our
development programs include the application of our technology to process small
diameter blood vessel grafts as an alternative to blood vessel grafts taken from
the patient, investigation of potential orthopedic applications of our
technology, investigation of human tissues as carriers for therapeutics,
ThromboSol(TM), a formulation for extended storage of platelets and technologies
to enhance the storage of red blood cells for transfusion.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999
Total revenues for the year ended December 31, 2000 increased 80% to
approximately $22.8 million compared to approximately $12.7 million in 1999.
The increase was primarily attributable to a 79% increase in product revenues to
approximately $21.3 million in the current year as compared to approximately
$11.9 million in the prior year. The increase in product revenues was largely
due to the full commercial launch of two new products; Repliform, a version of
AlloDerm for urology and gynecology surgical procedures, and Cymetra, a version
of AlloDerm in particulate form for non-surgical plastic reconstructive
procedures. We initiated the full commercial launch of Repliform in January
2000 and Cymetra in June 2000. Repliform and Cymetra product sales contributed
approximately $5.9 million and approximately $4.1 million, respectively, in
2000. Total revenue was further impacted by an 89% increase in funded research
grant revenues of approximately $1.4 million from $764,000 in 1999. This
increase was primarily due to an increase in research grant funding available.
We have engaged Boston Scientific Corporation as our exclusive worldwide
sales and marketing representative for Repliform for use in the urology and
gynecology markets and Obagi Medical Products, Inc. as the exclusive sales and
marketing representative of Cymetra for office-based dermatologists and plastic
surgeons. During 2000, sales of our products through Boston Scientific
Corporation and Obagi Medical Products represented 28% and 13%, respectively, of
our total product revenues. We expect sales of our products through such
marketing agents to continue to increase as a percentage of total revenues. Both
Boston Scientific and Obagi Medical Products are paid fees based on the amount
of product revenues they generate for us. Such fees are recorded as selling and
marketing expenses.
Cost of products sold for the year ended December 31, 2000 was
approximately $6.9 million, or 33% of product revenues, compared to cost of
goods sold of approximately $3.5 million, or 29% for the same period in 1999.
The increase in costs as a percentage of product revenue was principally
attributable to increased costs associated with the expansion of tissue
processing capacity in our new facility and costs incurred in this year related
to the scale-up of Cymetra production.
Total research and development expenses increased 17% to approximately $4.5
million for the year ended December 31, 2000 compared to approximately $3.9
million in 1999. The increase was due primarily to higher expenditures for
Cymetra product development and technology transfer to commercial production and
increased spending on orthopedic program research, which is funded through a
research grant.
General and Administrative expenses increased 28% to approximately $6.2
million for the year ended December 31, 2000 compared to approximately $4.8
million in 1999. The increase was principally due to a combination of increased
29
professional fees, higher salary costs relating to the hiring of management
personnel during the second half of 1999 which continued for the full year 2000
and $355,000 of settlement costs and legal fees associated with the settlement
of the lawsuit with Inamed Corporation all of which were incurred in 2000.
Selling and marketing expenses increased 63% to approximately $11.8 million
for the year ended December 31, 2000 compared to approximately $7.2 million in
1999. The increase was primarily attributable to the hiring of additional sales
and marketing personnel during the second half of 1999 which continued for the
full year 2000, increased promotion expenses associated with the expansion of
marketing activities including the commercial launch of two new products and the
agency fees associated with the sales and marketing agreements with Boston
Scientific and Obagi Medical Products.
During the year ended December 31, 1999, in connection with the relocation
of our operations from Texas to New Jersey, we incurred approximately $2.9
million of relocation costs consisting principally of non-relocating employee
benefits, asset abandonment costs and costs to relocate key employees.
Relocation costs for the year ended December 31, 2000, were $140,000, consisting
of $60,000 of retention bonus and $80,000 of relocation costs, which were
included in cost of goods sold and general and administrative expenses,
respectively. The relocation from Texas to New Jersey was completed in June
2000.
Interest and other income (expense), net decreased $947,000 for the year
ended December 31, 2000 compared to 1999. The net decrease was due to a
$283,000 decline in interest income resulting from a lower cash balance
available for investment and a $664,000 increase in interest expense resulting
from an increase in revolving and long-term debt.
The net loss for the year ended December 31, 2000 decreased 22% to
approximately $7.1 million compared to approximately $9.2 million in 1999. As
discussed above, the net loss in the prior year included approximately $2.9
million of expenses associated with our relocation from Texas to New Jersey.
YEARS ENDED DECEMBER 31, 1999 AND 1998
Total revenues for the year ended December 31, 1999 increased 59% to
approximately $12.7 million compared to approximately $8.0 million in 1998.
Product revenues increased approximately $4.7 million as a result of expanded
sales and marketing activities and increased distribution activities during the
year. Funded research grant revenues remained consistent at $764,000 in 1999
compared to $747,000 in 1998.
Cost of products 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 in 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, we 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 in
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.
Selling and marketing expenses increased 11% to approximately $7.2 million
for the year ended December 31, 1999, compared to approximately $6.5 million in
1998. The increase was primarily attributable to the addition of domestic sales
and marketing personnel and the expansion of marketing activities during 1999.
In June 1999, we commenced relocation of our operations from Texas to New
Jersey and at June 30, 1999, had approximately 18 employees operating from
temporary offices in New Jersey. The original target completion date for the
relocation was December 31, 1999. All administrative functions including
accounting, customer service, information services, regulatory, marketing and
research and development functions were moved to New Jersey prior to December
31, 1999. We commenced processing operations in New Jersey during the first
quarter of 2000. Relocation costs of approximately $2.9 million charged to
operations for the year ended December 31, 1999, included the cost of
non-relocating employee benefits, asset abandonment and lease termination costs
30
related to our Texas facility, as well as the cost of relocating key employees
to New Jersey. In order to induce non-relocating employees to continue their
employment during the relocation process, employees were offered a retention
bonus, which was only payable, if they continued their employment until various
targeted dates during 1999. If the employee resigned prior to such date, they
forfeited their retention bonus. Such bonus payments were expensed at the time
that they were paid. During the fourth quarter of 1999, because all remaining
employees had continued employment through their targeted termination date, the
continuing employment condition was waived and we recorded a bonus accrual of
approximately $174,000 due to these employees as of December 31, 1999. Such
amounts were paid out in 2000. Additional retention bonuses of approximately
$60,000 paid in 2000 were expensed when incurred. In June 1999, we recorded a
charge of approximately $335,000 representing the net book value of assets that
were abandoned in the second quarter of 1999 when we vacated our administrative
offices located in Texas. In Texas we occupied rented office and manufacturing
space pursuant to a lease that extended through January 2001. During the fourth
quarter of 1999, we recorded a charge of approximately $617,000 representing
rent and other facility related expenses related to the termination of the Texas
lease. No charge was recorded prior to the fourth quarter of 1999, because we
had not committed to a specific course of action for exiting the lease of the
Texas facility and accordingly, such costs were not quantifiable. The costs of
relocating key employees to New Jersey were approximately $1.4 million in 1999
and consisted of home sale and purchase assistance, moving expense, travel and
temporary housing. We also incurred approximately $78,000 of non-employee
related moving costs.
Interest income and other, net decreased 46% to approximately $468,000 for
the year ended December 31, 1999, compared to approximately $864,000 in 1998.
The decrease was principally attributable to a reduction of funds available for
investing activities during 1999.
The net loss for the year ended December 31, 1999, increased 25% to
approximately $9.2 million compared to approximately $7.3 million for 1998. As
discussed above, the net loss in 1999 included approximately $2.9 million of
expenses associated with our relocation from Texas to New Jersey.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, we had cash and cash equivalents and short-term
investments of approximately $5.5 million compared to $5.1 million at December
31, 1999. The increase resulted principally from cash provided by a private
placement of 2.5 million shares of our Common Stock, debt financing and stock
option and warrant exercises offset by cash required to fund the operating loss
for the year ended December 31, 2000, increases in accounts receivable and
inventories and capital expenditures. Working capital increased to $5.3 million
at December 31, 2000 from $2.5 million at December 31, 1999. The increase
resulted principally from increases in cash and increases in accounts receivable
and inventories net of an increase in current maturities of long-term debt. In
October 2000, we completed a private placement of 2.5 million shares of our
common stock with selected accredited investors at a price of $4.00 per share.
The net proceeds of the private placement were approximately $9.0 million, after
deducting placement agent fees and offering costs.
Our operating activities used cash of $8.8 million for the year ended
December 31, 2000 to fund our operating loss for the period, net of non-cash
charges, and increases in inventories and accounts receivable. The increase in
inventories was primarily associated with the launch of Cymetra. The increase in
accounts receivable was related to the increase in revenues.
For the year ended December 31, 2000, our investing activities used cash of
approximately $4.8 million for the purchase of capital equipment and leasehold
improvements relating to the completion of the New Jersey facility.
Our financing activities provided $14.1 million for the year ended December
31, 2000, primarily from net proceeds of the private placement of approximately
$9.0 million, after deducting placement agent fees and offering costs, long-term
debt proceeds of $3.7 million and $2.0 million in proceeds from the exercise of
stock options and warrants. Such proceeds were partially offset by cash
dividends paid on the Series B Preferred Stock during the period and principal
payments on long-term debt. At December 31, 2000, we had an aggregate of
approximately $6.3 million outstanding under our borrowing arrangements,
including approximately $3.0 million outstanding under a revolving loan facility
which is due in January 2002. The term loans require aggregate principal
payments over the next 12 months of approximately $1.2 million. We currently
have no additional borrowing availability through our existing credit
facilities.
We expect to incur additional operating losses as well as negative cash
flow from operations in the short term as we continue to expand marketing
efforts with respect to our current products and to continue our product
development programs. Our ability to increase revenues and achieve
profitability and positive cash flows from operations will depend on increased
market acceptance of our current products and our ability to commercialize
products currently under development. We expect that our current resources,
together with anticipated product revenues and research and development grant
funding, will satisfy our cash needs for at least the next twelve months.
However, there can be no assurance that such sources of funds will be sufficient
31
to meet our needs and as a result, we may need additional funding to operate our
business. We have no commitments for any future funding and there can be no
assurance that we will be able to obtain additional funding from either debt or
equity financing, bank loans, collaborative arrangements or other sources on
terms acceptable to us, or at all. 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. 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.
It is possible that our results of operations or liquidity and capital
resources could be adversely affected by the ultimate outcome of pending
litigation or as a result of the cost of contesting such legal actions. For a
discussion of these matters see Note 12 of "Notes to Financial Statements" and
Part I., Item 3. "Legal Proceedings".
We have incurred losses since our inception and therefore have not been
subject to federal income taxes. As of December 31, 2000, we had net operating
loss ("NOL") and research and development tax credit carryforwards for federal
income tax purposes of approximately $55.0 million and $614,000, respectively,
available to reduce future federal income taxes. Federal tax laws provide for a
limitation on the use of NOL and tax credit carryforwards generated prior to
certain ownership changes that could limit our ability to use NOL and tax credit
carryforwards. Our public offering of Common Stock in 1997 resulted in an
ownership change for federal income tax purposes. We estimate that the amount
of NOL carryforwards and the credits available to offset federal taxable income
subsequent to the ownership change are approximately $31.1 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. In addition, we
have NOL's available for state income tax purposes of approximately $7.6
million, available to reduce future state income taxes.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to changes in interest rates primarily from our debt
arrangements and, secondarily, from our investments in certain securities.
Although our short-term investments are available for sale, we generally hold
such investments until maturity. We do not utilize derivative instruments or
other market risk sensitive instruments to manage exposure to interest rate
changes. We believe that a hypothetical 100 basis point adverse move in
interest rates along the entire interest rate yield curve would not materially
affect the fair value of our interest sensitive financial instruments at
December 31, 2000.
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
32
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 on June 1, 2001, 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 on June 1, 2001, 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 on June 1, 2001, under the caption "Security Ownership of
Certain Beneficial Owners and Management," and such information is incorporated
herein by reference.
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 on June 1, 2001, under the caption "Certain Relationships
and Related Transactions," and such information is incorporated herein by
reference.
33
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, 1999 and 2000. . . . . . . . . . . . . . F-2
Statements of Operations for the years ended
December 31, 1998, 1999 and 2000 . . . . . . . . . . . . . . . . . . . . . F-3
Statements of Stockholders' Equity for the years ended
December 31, 1998, 1999 and 2000 . . . . . . . . . . . . . . . . . . . . . F-4
Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000 . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . F-6
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:
On July 7, 2000, we filed a Current Report on Form 8-K to report that:
(i) a complaint was filed in alleging that tissue banks, including
LifeCell, routinely fail to obtain proper informed consent when soliciting
the donation of human tissue for transplant and make profits from the
storing, processing and distributing of human tissue in contravention of
California law, and (ii) a complaint was filed in New Jersey alleging that
LifeCell and Obagi, its marketing agent, disseminated false advertisements
with respect to the marketing of LifeCell's Cymetra product.
On September 6, 2000, we filed a Current Report on Form 8-K to report
that we had entered into purchase agreements for the private placement of
2,500,000 shares of our Common Stock with selected accredited investors at
a price of $4.00 per share.
On September 26, 2000, we filed a Current Report on Form 8-K to report
that we entered into a settlement agreement for a previously announced
lawsuit filed by Inamed Corporation against LifeCell and its co-promotion
partner, Obagi Medical Products.
On October 31, 2000, we filed a Current Report on Form 8-K to report
that we completed the private placement of 2,500,000 shares of our
Common Stock with selected accredited investors at a price of $4.00 per
share.
On January 5, 2001, we filed a Current Report on Form 8-K to report
that a complaint was filed in New York alleging that LifeCell, Gruntal &
Co., L.L.C. and Prudential Securities, Inc. violated Section 10(b) of the
Securities Exchange Act of 1934 by making purportedly false and misleading
statements in connection with LifeCell's private placement of Common Stock
in October 2000.
(C) 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.
34
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).
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).
35
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 Commission on November 15, 1999.)
10.16* Amendment dated September 21, 1999 to Lease Agreement by and between Maurice M. Weill, Trustee
for Branchburg Property and LifeCell Corporation.
10.17* Amendment dated April 7, 2000 to Lease Agreement by and between Maurice M. Weill, Trustee for
Branchburg Property and LifeCell Corporation.
10.18 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.)
10.19 Loan Agreement dated December 6, 1999 between LifeCell Corporation and Transamerica Business
Credit Corporation (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1999).
10.20 Stock Purchase and Registration Rights Agreements dated November 17, 1999 between LifeCell
Corporation and The Tail Wind Fund, Ltd. (incorporated by reference to Exhibit 10.18 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999).
10.21 Second Amended and Restated Voting Agreement dated as of April 13, 2000 among the Company and the
Series B Preferred Shareholders (incorporated by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q filed with the Commission on May 12, 2000).
10.22 LifeCell Corporation Year 2000 Stock Option Plan (incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q filed with the Commission on July 28, 2000).
10.23 Loan Agreement dated May 31, 2000 between LifeCell Corporation and Public Service Millennium
Economic Development Fund L.L.C. (incorporated by reference to Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q filed with the Commission on July 28, 2000).
10.24 Loan Agreement dated June 9, 2000 between LifeCell Corporation and The New Jersey Economic
Development Authority (incorporated by reference to Exhibit 10.3 of the Company's Quarterly Report on
Form 10-Q filed with the Commission on July 28, 2000).
10.25 Form of Purchase Agreement dated September 1, 2000 between LifeCell Corporation and Certain
Investors (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q
filed with the Commission on November 13, 2000).
36
10.26*+ Form of Change in Control Agreement
10.27* Stock Purchase Warrant dated October 31, 2000, issued to Prudential Securities Incorporated
10.28* Stock Purchase Warrant dated October 31, 2000, issued to Gruntal & Co., L.L.C.
23.1* Consent of Arthur Andersen LLP.
37
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 29, 2001.
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 29, 2001
- ----------------------- Officer (Principal Executive Officer)
Paul G. Thomas
/s/ Steven T. Sobieski Sr. Vice President and Chief Financial March 29, 2001
- ----------------------- Officer (Principal Financial Officer)
Steven T. Sobieski
/s/ Bradly C. Tyler Controller March 29, 2001
- ----------------------- (Principal Accounting Officer)
Bradly C. Tyler
/s/ Michael A. Cahr Director March 29, 2001
- -----------------------
Michael A. Cahr
/s/ Peter D. Costantino Director March 29, 2001
- -----------------------
Peter D. Costantino
/s/ James G. Foster Director March 29, 2001
- -----------------------
James G. Foster
/s/ Stephen A. Livesey Director March 29, 2001
- -----------------------
Stephen A. Livesey
/s/ David A. Thompson Director March 29, 2001
- -----------------------
David A. Thompson
38
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, 1999 and 2000, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2000. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LifeCell Corporation as of
December 31, 1999 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
March 27, 2001
F-1
LIFECELL CORPORATION
BALANCE SHEETS
DECEMBER 31,
----------------------------
1999 2000
------------- -------------
Assets
Current assets
Cash and cash equivalents $ 4,737,000 $ 5,220,000
Short-term investments 315,000 315,000
Accounts and other receivables, net of allowance for doubtful
accounts of $175,000 in 1999 and $170,000 in 2000 2,557,000 4,287,000
Inventories 3,202,000 4,711,000
Prepayments and other 160,000 269,000
------------- -------------
Total current assets 10,971,000 14,802,000
Fixed assets, net 6,548,000 9,991,000
Other assets, net 564,000 617,000
------------- -------------
Total assets $ 18,083,000 $ 25,410,000
============= =============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 741,000 $ 2,434,000
Accrued liabilities 4,896,000 3,025,000
Notes payable 2,792,000 2,859,000
Current portion of long-term debt - 1,154,000
------------- -------------
Total current liabilities 8,429,000 9,472,000
------------- -------------
Deferred revenue 405,000 794,000
------------- -------------
Long-term debt - 2,272,000
------------- -------------
Other long-term liabilities - 83,000
------------- -------------
Commitments and contingencies (Note 12)
Stockholders' equity
Series B preferred stock, $.001 par value, 182,205 shares
authorized; shares issued and outstanding 118,016 in 1999 and
95,931 in 2000 (liquidation preference at December 31, 2000 of
$ 9,593,000) - -
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;
shares issued and oustanding 12,899,643 in 1999 and 16,709,368
in 2000 13,000 17,000
Warrants outstanding to purchase 3,466,399 and 3,370,298
shares of common stock, respectively 888,000 1,269,000
Additional paid-in capital 62,726,000 73,612,000
Accumulated deficit (54,378,000) (62,109,000)
------------- -------------
Total stockholders' equity 9,249,000 12,789,000
------------- -------------
Total liabilities and stockholders' equity $ 18,083,000 $ 25,410,000
============= =============
The accompanying notes are an integral part of these financial statements.
F-2
LIFECELL CORPORATION
STATEMENTS OF OPERATIONS
For the Year Ended December 31,
----------------------------------------
1998 1999 2000
------------ ------------ ------------
Revenues:
Product revenues $ 7,245,000 $11,912,000 $21,330,000
Research grant revenues 747,000 764,000 1,442,000
------------ ------------ ------------
Total revenues 7,992,000 12,676,000 22,772,000
------------ ------------ ------------
Costs and Expenses:
Cost of products sold 2,837,000 3,452,000 6,949,000
Research and development 3,376,000 3,871,000 4,523,000
General and administrative 3,484,000 4,840,000 6,180,000
Selling and marketing 6,500,000 7,236,000 11,779,000
Relocation costs - 2,937,000 -
------------ ------------ ------------
Total costs and expenses 16,197,000 22,336,000 29,431,000
------------ ------------ ------------
Loss From Operations (8,205,000) (9,660,000) (6,659,000)
Interest and other income (expense), net 864,000 468,000 (479,000)
------------ ------------ ------------
Net Loss (7,341,000) (9,192,000) (7,138,000)
Preferred Stock Dividends (723,000) (710,000) (636,000)
------------ ------------ ------------
Net Loss Applicable to Common Stockholders $(8,064,000) $(9,902,000) $(7,774,000)
============ ============ ============
Loss Per Common Share-Basic and Diluted $ (0.72) $ (0.83) $ (0.54)
============ ============ ============
Shares Used in Computing Loss Per
Common Share-Basic and Diluted 11,228,912 11,937,532 14,372,083
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-3
LIFECELL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
SERIES B WARRANTS TO PURCHASE
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL
------------------------------------------------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
-----------------------------------------------------------------------------
Balance at December 31, 1997 125,441 $ - 11,012,906 $11,000 3,163,478 $ 299,000 $56,361,000
Stock options exercised - - 12,550 - - - 43,000
Warrants exercised - - 4,965 - (11,290) (1,000) 1,000
Expiration of warrants - - - - (20,000) - -
Warrants issued to purchase Common Stock - - - - 50,000 - -
Conversion of Series B preferred stock (6,357) - 205,060 - - - -
Common Stock issued for cash, and
conversion of license fee - - 376,371 1,000 - - 2,000,000
Stock options issued for services - - - - - - 22,000
Dividends paid on Series B preferred stock - - - - - - -
Dividends accrued on Series B preferred stock - - - - - - -
Net Loss - - - - - - -
-----------------------------------------------------------------------------
Balance at December 31, 1998 119,084 - 11,611,852 12,000 3,182,188 298,000 58,427,000
Stock options exercised - - 219,764 - - - 670,000
Warrants issued to purchase Common Stock - - - - 284,211 590,000 (382,000)
Conversion of Series B preferred stock (1,068) - 34,450 - - - -
Common Stock issued for cash - - 1,033,577 1,000 - - 4,011,000
Dividends paid on Series B preferred stock - - - - - - -
Dividends accrued on Series B preferred stock - - - - - - -
Net Loss - - - - - - -
-----------------------------------------------------------------------------
Balance at December 31, 1999 118,016 - 12,899,643 13,000 3,466,399 888,000 62,726,000
Stock options exercised - - 206,311 - - - 726,000
Warrants exercised - - 299,324 - (327,896) (26,000) 1,227,000
Expiration of warrants - - - - (60,000) - -
Warrants issued to purchase Common Stock - - - - 291,795 407,000 (407,000)
Conversion of Series B Preferred (24,927) - 804,090 1,000 - - 1,000
Common Stock issued for cash - - 2,500,000 3,000 - - 9,055,000
Dividends paid on Series B preferred stock 2,842 - - - - - 284,000
Dividends accrued on Series B preferred stock - - - - - - -
Net Loss - - - - - - -
-----------------------------------------------------------------------------
Balance at December 31, 2000 95,931 $ - 16,709,368 $17,000 3,370,298 $1,269,000 $73,612,000
=============================================================================
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
----------------------------
Balance at December 31, 1997 $(36,412,000) $20,259,000
Stock options exercised - 43,000
Warrants exercised - -
Expiration of warrants - -
Warrants issued to purchase Common Stock - -
Conversion of Series B preferred stock - -
Common Stock issued for cash, and
conversion of license fee - 2,001,000
Stock options issued for services - 22,000
Dividends paid on Series B preferred stock (543,000) (543,000)
Dividends accrued on Series B preferred stock (180,000) (180,000)
Net Loss (7,341,000) (7,341,000)
---------------------------
Balance at December 31, 1998 (44,476,000) 14,261,000
Stock options exercised - 670,000
Warrants issued to purchase Common Stock - 208,000
Conversion of Series B preferred stock - -
Common Stock issued for cash - 4,012,000
Dividends paid on Series B preferred stock (531,000) (531,000)
Dividends accrued on Series B preferred stock (179,000) (179,000)
Net Loss (9,192,000) (9,192,000)
---------------------------
Balance at December 31, 1999 (54,378,000) 9,249,000
Stock options exercised - 726,000
Warrants exercised - 1,201,000
Expiration of warrants - -
Warrants issued to purchase Common Stock - -
Conversion of Series B Preferred - 2,000
Common Stock issued for cash - 9,058,000
Dividends paid on Series B preferred stock (449,000) (165,000)
Dividends accrued on Series B preferred stock (144,000) (144,000)
Net Loss (7,138,000) (7,138,000)
---------------------------
Balance at December 31, 2000 $(62,109,000) $12,789,000
===========================
The accompanying notes are an integral part of these financial statements.
F-4
LIFECELL CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1999 2000
------------- ------------ ------------
Cash Flows from Operating Activities:
Net loss $ (7,341,000) $(9,192,000) $(7,138,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 495,000 411,000 1,290,000
Provision for bad debts 6,000 175,000 155,000
Stock and warrant compensation expense 22,000 - -
Loss on asset disposals - 335,000 -
Accretion of debt discount - - 69,000
Change in assets and liabilities:
Increase in accounts and other receivables (294,000) (1,348,000) (1,885,000)
Increase in inventories (813,000) (1,453,000) (1,509,000)
Increase in prepayments and other (109,000) (152,000) (115,000)
(Decrease) increase in accounts payable and
accrued liabilities 253,000 2,688,000 (141,000)
Increase (decrease) in deferred revenues (60,000) 405,000 389,000
Increase in other liabilities - - 83,000
------------- ------------ ------------
Net cash used in operating activities (7,841,000) (8,131,000) (8,802,000)
------------- ------------ ------------
Cash Flows from Investing Activities:
Capital expenditures (832,000) (5,885,000) (4,681,000)
Additions to patents (83,000) (109,000) (99,000)
Purchase of short-term investments (4,001,000) (315,000) -
Sales of short-term investments - 4,001,000 -
------------- ------------ ------------
Net cash used in investing activities (4,916,000) (2,308,000) (4,780,000)
------------- ------------ ------------
Cash Flows from Financing Activities
Proceeds from issuance of stock and warrants 544,000 4,682,000 10,987,000
Proceeds from issuance of notes payable - 3,000,000 -
Proceeds from issuance of long-term debt - - 3,653,000
Principal payments on long-term debt - - (227,000)
Payments on notes payable - - (2,000)
Cash dividends paid (543,000) (531,000) (346,000)
------------- ------------ ------------
Net cash provided by financing activities 1,000 7,151,000 14,065,000
------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents (12,756,000) (3,288,000) 483,000
Cash and cash equivalents at beginning of period 20,781,000 8,025,000 4,737,000
------------- ------------ ------------
Cash and cash equivalents at end of period $ 8,025,000 $ 4,737,000 $ 5,220,000
============= ============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 2,000 $ - $ 683,000
============= ============ ============
Supplemental Disclosure of Non-cash Financing Activities:
Series B preferred stock dividends $ - $ - $ 284,000
============= ============ ============
Common stock issued in exchange for deferred credit $ 1,500,000 $ - $ -
============= ============ ============
Fair value of warrants issued in connection with:
Notes payable $ - $ 208,000 $ -
============= ============ ============
Common stock $ - $ - $ 407,000
============= ============ ============
The accompanying notes are an integral part of these financial statements.
F-5
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. ORGANIZATION
LifeCell Corporation ("LifeCell" or "the Company") develops and
markets biologic solutions for the repair, replacement and preservation of human
tissue. The Company's tissue products are subject to regulation by the United
States Food and Drug Administration. LifeCell was incorporated in Delaware in
1992 for the purpose of merging with its predecessor entity, which was formed in
1986. The Company began commercial sales of its first tissue product during
1994.
LifeCell expects to incur operating losses as well as negative cash
flow from operations in the short-term in connection with expansion of its sales
and marketing efforts with respect to current products and to continue its
product development programs. The Company's ability to increase revenues and
achieve profitability and positive cash flows from operations will depend on
increased market acceptance of its current products and its ability to
commercialize products currently under development. The Company expects that its
current resources, together with anticipated product revenues and research and
development grant funding, will satisfy its cash requirements for at least the
next twelve months. However, there can be no assurance that such sources of
funds will be sufficient to meet its needs and as a result, LifeCell may need
additional funding to operate its business. The Company has no commitments for
any future funding and there can be no assurance that it will be able to obtain
additional funding from either debt or equity financing, bank loans,
collaborative arrangements or other sources on acceptable terms, or at all. 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.
2. ACCOUNTING POLICIES
Cash and Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with an original
maturity of three months or less, when purchased, to be cash equivalents.
Investments with maturities in excess of three months but less than one year are
classified as short-term investments and are stated at cost, net of any
unamortized premiums or discounts, which approximates fair value.
Inventories
Inventories are stated at the lower of cost or market, with cost
being determined on a first-in, first-out basis.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation. Major
expenditures that improve or extend the life of the assets are capitalized
whereas maintenance and repairs are expensed as incurred. 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
office equipment, furniture and fixtures is computed on the straight-line method
based on the estimated useful lives of the assets of five years. Depreciation of
machinery and equipment is computed on the straight-line method based on the
estimated useful lives of the assets of five to ten years. The cost of leasehold
improvements is depreciated over the shorter of the lease term or the estimated
useful life of the asset.
Whenever events and circumstances indicate that the value of a fixed
asset may not be recoverable, the Company reviews the recorded carrying value
for impairment. As of December 31, 2000, management believes that no reductions
to the remaining useful lives or write-downs of long-lived assets are required.
F-6
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2000
Deferred Patent Costs
The Company capitalizes external legal costs associated with obtaining
patents. Such costs are amortized to expense on a straight-line basis over the
legal life of the patent. Net deferred patent costs are included in Other
assets, net in the accompanying balance sheet.
Revenue Recognition
Product revenues are recognized when the product is shipped to fill
customer orders. Research grant revenues 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 recorded as deferred revenue.
Research and Development Expense
Research and development costs are expensed when incurred.
Loss Per Common Share
Loss per Common share has been computed by dividing net loss,
increased by stated dividends on Series B Preferred Stock, by the weighted
average number of shares of Common Stock outstanding during each year. In all
years, common stock equivalents, including stock options, warrants and the
Series B Preferred Stock, were antidilutive and, accordingly, were not included
in the computation.
Diluted loss per Common share is the same as basic loss per Common
share in all years due to the antidilutive nature 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.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts
receivable, accounts payable, debt and certain current liabilities. The carrying
amounts reported in the balance sheet for these items approximate fair value.
The carrying amount of long-term debt obligations approximates fair value at the
balance sheet date.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
investments and accounts receivable. The Company has investment policies that
limit investments of excess cash to investment grade securities. The Company
provides credit, in the normal course of business to hospitals, medical
professionals and distributors. The Company performs ongoing credit evaluations
of its customers' financial condition to minimize risk of loss. The Company
maintains an allowance for doubtful accounts and charges actual losses to the
allowance when incurred.
F-7
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2000
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". The
bulletin is based upon existing accounting rules and provides specific guidance
on how those accounting rules should be applied. SAB No. 101 is effective no
later than the fourth quarter of fiscal years beginning after December 15, 1999.
Management believes that its revenue recognition policies are in compliance with
the provisions of SAB No. 101, and therefore the adoption of SAB No. 101 on
January 1, 2000 had no impact on the Company's financial statements.
3. INVENTORIES
Inventories consist of the following at December 31,:
1999 2000
---------- ----------
Raw materials $1,081,000 $ 929,000
In-process 1,215,000 2,259,000
Finished goods 906,000 1,523,000
---------- ----------
Total inventories $3,202,000 $4,711,000
========== ==========
4. FIXED ASSETS
Fixed assets consist of the following at December 31,:
1999 2000
------------ ------------
Machinery and equipment $ 2,303,000 $ 3,540,000
Leasehold improvements 4,967,000 7,368,000
Office furniture and fixtures 869,000 1,912,000
------------ ------------
8,139,000 12,820,000
Accumulated depreciation and amortization (1,591,000) (2,829,000)
------------ ------------
Net fixed assets $ 6,548,000 $ 9,991,000
============ ============
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31,:
1999 2000
---------- ----------
Operating expenses and other $2,484,000 $1,925,000
Agency Fees - 777,000
Employee compensation and benefits 1,095,000 301,000
Relocation costs 1,079,000 -
Severance expense 238,000 22,000
---------- ----------
Total accrued liabilities $4,896,000 $3,025,000
========== ==========
F-8
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2000
6. DEFERRED REVENUE
In March 1999, in conjunction with the signing of a sales and
marketing agreement with Boston Scientific Corporation, the Company issued
108,577 shares of Common Stock at a premium of $506,000 over the closing market
price of the Company's Common Stock on the date of issuance. This premium, which
was recorded as deferred revenue and is being recognized over the five-year term
of the agreement, represented a payment for marketing rights. The total equity
investment was valued at $1 million less offering costs of $100,000 (see Note
8).
In February 2000, the Company entered into a co-promotion agreement
with Obagi Medical Products, Inc. relating to the marketing and distribution of
the Company's Cymetra(TM) product. Pursuant to the terms of the agreement, Obagi
Medical Products Inc. agreed to make a $600,000 payment in exchange for product
marketing rights. The payment, which was received in September 2000, has been
recorded as deferred revenue and is being recognized over the five-year term of
the agreement.
7. FINANCING ARRANGEMENTS AND LONG-TERM DEBT
In December 1999, the Company entered into a loan and security
agreement with a financial institution that provides for a revolving loan of $3
million and a term loan of $2.5 million. In December 1999, the Company borrowed
$3 million on the revolving loan and in February 2000, the Company borrowed $2.5
million under the term loan. The revolving loan requires monthly interest
payments based on an annual interest rate of prime rate plus 3%, which
approximated 12.5% during 2000. At December 31, 2000 the interest rate on the
revolving loan was 12.5%. The term loan bears interest at an annual rate of
14.2%. Interest only was payable monthly through and including September 1,
2000. Thereafter, the term loan is repayable in equal monthly installments of
principal and interest of $100,000, commencing October 1, 2000, and continuing
through and including March 1, 2003. This credit facility is secured by the
Company's accounts receivable, inventory, intellectual property, intangibles and
fixed assets and is guaranteed by the New Jersey Economic Development Authority.
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, which expire in December 2004, were valued at
$208,000 and recorded 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. In March 2001, the financial institution agreed to extend the
maturity date of the revolving loan through January 31, 2002. In consideration
for the one-year extension, the Company re-priced the exercise price on the
previously issued warrants to $2.00 per share. This change resulted in a $43,000
increase to the previously recorded value of the warrants which will be accreted
over the remaining term of the revolving loan as additional interest expense.
In June 2000, the Company entered into a term loan agreement with the
New Jersey Economic Development Authority to borrow $500,000. The loan bears an
interest rate of 6.5%. Interest only was payable monthly commencing on July 1,
2000 and continuing through and including December 1, 2000. Thereafter, the loan
is repayable in equal monthly installments of principal and interest of $18,000,
commencing January 1, 2001 and continuing through and including September 1,
2003. The loan is secured by the Company's accounts receivable, inventory and
fixed assets.
F-9
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2000
In June 2000, the Company entered into a term loan agreement with a
financial institution to borrow $653,000. The loan bears an interest rate of 9%
and is repayable in ten equal annual installments of principal and interest of
$106,000, commencing August 1, 2001 and continuing through and including August
1, 2010. This loan is secured by payments that the Company is entitled to
receive through a New Jersey Business Employment Incentive Grant. Such payments
have been assigned to the lender and will be used to satisfy the Company's
obligations under the loan agreement as they are received.
Long term borrowings have the following scheduled maturities:
2001 $1,154,000
2002 1,378,000
2003 505,000
2004 106,000
2005 and beyond 283,000
----------
Total $3,426,000
==========
8. CAPITAL STOCK
Series B Preferred Stock
During November 1996, the Company issued 124,157 shares of
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
(3,094,734 shares of Common Stock at December 31, 2000), subject to adjustment
for dilutive issuances of securities. The Series B Preferred Stock has a
liquidation preference of $100 per share, or $9,593,100 as of December 31, 2000,
and shares ratably in any residual assets after payment of such liquidation
preference. The Series B Preferred Stock will be automatically converted into
Common Stock if the closing price of the Company's Common Stock averages or
exceeds $9.30 per share for 30 consecutive trading days.
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. 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
any dividends are owned thereon, the Company may not declare or pay cash
dividends on its Common Stock. During 1999 and 2000, the Company paid cash
dividends on the Series B Preferred Stock of $531,000 and $346,000,
respectively. Additionally, in 2000 the Company paid dividends equivalent to
$284,000 through the issuance of 2,842 shares of Series B Preferred Stock. The
Company accrued dividends of $144,000 at December 31, 2000.
F-10
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2000
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 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.
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 representing a 154% premium over the then-prevailing market price. The
premium was recorded as deferred revenue and is being recognized over the term
of the agreement (see Note 6). The proceeds of this offering were $1,000,000
before deducting offering costs of approximately $100,000.
In 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. Pursuant to the terms of the purchase agreement, the Company will be
required to issue additional shares to the investor if the market price of the
Company's Common Stock is below $4.00 per share on the second and/or third
anniversary of the date of issuance of the Common Stock.
In October 2000, the Company issued 2,500,000 shares of Common Stock
in a private placement at a price of $4.00 per share. The proceeds of the
offering were approximately $10.0 million before deducting placement agent fees
and offering costs of $942,000.
Options
The Company's Amended and Restated 1992 Stock Option Plan (the "1992
Plan") provides for the grant of options to purchase up to 2,500,000 shares of
Common Stock. In June 2000, the stockholders of the Company approved the Year
2000 Stock Option Plan (the "2000 Plan") which provides for grants of incentive
stock options and non-qualified stock options. An aggregate of 1,500,000 shares
of common stock are authorized for issuance under the 2000 Plan, which amount is
subject to adjustment in the event of certain changes in the Company's
capitalization, a merger, or a similar transaction. Such shares may be treasury
shares or newly issued shares or a combination of both.
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 plans have
exercise prices equal to the fair market value at the date of grant.
The Second Amended and Restated 1993 Non-Employee Director Stock
Option Plan ("Director Plan") provides for the grant of options to purchase up
to 750,000 shares of Common to non-employee directors. The provisions of the
Director Plan provide for an initial grant of options to purchase 25,000 shares
of Common Stock for newly elected non-employee directors and an annual grant of
an option to purchase 10,000 shares upon re-election to the Company's Board.
Options under the Director Plan have exercise prices equal to the fair market
value at the date of grant, vest one year after date of grant and expire after
10 years.
F-11
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2000
A summary of stock option activity for the years 1998, 1999 and 2000
is as follows:
Weighted
1992 2000 Director Total Average
Stock Stock Stock Stock Exercise
Option Plan Option Plan Option Plan Options Price ($)
------------ ------------ --------- ---------- --------
Balance at December 31, 1997 1,037,320 -- 145,000 1,182,320 $ 3.67
Granted 946,700 -- 30,000 976,700 5.09
Exercised (12,550) -- -- (12,550) 3.49
Forfeited (141,767) -- -- (141,767) 5.65
------------ ------------ --------- ----------
Balance at December 31, 1998 1,829,703 -- 175,000 2,004,703 4.22
Granted 761,450 -- 80,000 841,450 4.17
Exercised (154,764) -- (65,000) (219,764) 3.05
Forfeited (160,468) -- -- (160,468) 5.21
------------ ------------ --------- ----------
Balance at December 31, 1999 2,275,921 -- 190,000 2,465,921 4.24
Granted 203,050 528,500 50,000 781,550 4.27
Exercised (76,311) -- (20,000) (96,311) 4.15
Forfeited (207,787) (10,950) (65,000) (283,737) 5.16
------------ ------------ --------- ----------
Balance at December 31, 2000 2,194,873 517,550 155,000 2,867,423 4.16
============ ============ ========= ==========
Exercisable at December 31, 1998 701,528 -- 145,000 846,528 $ 3.45
Exercisable at December 31, 1999 940,958 -- 110,000 1,050,958 3.98
Exercisable at December 31, 2000 1,258,348 31,250 115,000 1,404,598 4.04
Available for grant at
December 31, 2000 11,053 982,450 505,000 1,498,503
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted Number
Number Average Weighted Exercisable Weighted
Outstanding at Remaining Average at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 2000 Life (Years) Price 2000 Price
- -------------------- -------------- ------------ -------- ------------ --------
$ 0.73 to $ 1.99 1,041 5.3 $ 1.23 541 $ 0.73
2.00 to 2.99 453,850 8.0 2.26 198,850 2.44
3.00 to 3.99 1,054,119 4.6 3.76 745,719 3.73
4.00 to 4.99 669,763 4.3 4.19 225,301 4.17
5.00 to 5.99 414,750 8.6 5.37 89,063 5.25
6.00 to 6.99 245,750 7.5 6.62 135,125 6.63
7.00 to 11.00 28,150 6.5 10.30 10,000 11.00
-------------- ------------ -----------
$ 0.73 to $ 11.00 2,867,423 5.9 $ 4.16 1,404,598 $ 4.04
============== ============ ============
F-12
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2000
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 not
pursuant to a plan, to directors who resigned upon the closing of the sale of
the Series B Preferred Stock. At December 31, 2000, options to acquire 110,000
shares of Common Stock remained outstanding with a weighted average exercise
price of $5.30. The weighted average remaining contractual life of the
outstanding option grants was 4.4 years as of December 31, 2000.
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, the 2000 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, 2000 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:
1998 1999 2000
------------ ------------- ------------
Net Loss:
As reported $(7,341,000) $ (9,192,000) $(7,138,000)
Pro forma (9,105,000) (11,158,000) (8,921,000)
Loss Per Share (Basic and Diluted):
As reported (0.72) (0.83) (0.54)
Pro forma (0.88) (0.99) (0.67)
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.
Under the provisions of SFAS No. 123, the weighted average fair value
of options granted in 1998, 1999, and 2000 was $3.99, $2.64 and $2.62 per share,
respectively, under the 1992 Plan. The weighted average fair value of options
granted in 2000 was $2.68 per share under the 2000 Plan. The weighted average
fair value of options granted in 1998, 1999, and 2000 was $5.33, $2.76 and $3.71
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 1998,
1999 and 2000, respectively: a weighted average risk-free interest rate of
approximately 4% - 7% 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 112 percent.
Warrants
As of December 31, 2000, warrants to acquire a total of 3,370,298
shares of Common Stock were outstanding as set forth below.
During 1996, the Company issued warrants, with an exercise price of
$4.13 per share, to acquire 2,803,530 shares of Common Stock in conjunction with
the sale of the Series B Preferred Stock (the "1996 Warrants"). The warrants
expire in November 2001, are callable if the average closing price of the
Company's Common Stock for any 30 consecutive trading days equals or exceeds
three times the then-exercise price and allow cashless exercise. The 1996
Warrants also have provisions for adjustment of the exercise price and number of
shares for below-exercise price issuance of securities. In 2000, in connection
with the sale of its Common Stock at $4.00 per share, the Company adjusted the
exercise price of the 1996 Warrants to $4.07 per share and increased the number
of shares by 37,026. As of December 31, 2000, the 1996 Warrants to acquire
2,614,278 shares of Common Stock were outstanding.
F-13
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2000
Additionally, in 1996 the Company issued warrants, with an exercise
price of $4.50 per share, to acquire 354,734 shares of Common Stock to the
placement agent for the Series B Preferred Stock ("Agent Warrants"). The
warrants expire in November 2001 and allow cashless exercise. The Agent Warrants
also have provisions for adjustment of the exercise price and number of shares
for below-exercise price issuance of securities. In 2000, in connection with the
sale of its Common Stock at $4.00 per share, the Company adjusted the exercise
price of the Agent Warrants to $4.36 per share and increased the number of
shares by 4,769. As of December 31, 2000, Agent Warrants to acquire 196,809
shares of Common Stock were outstanding.
During November 1999, the Company issued warrants, with an exercise
price of $5.46 per share, to acquire 200,000 shares of Common Stock in
conjunction with the sale of Common Stock. These warrants expire in November
2004. These warrants have provisions for adjustment of the exercise price if the
market price of the Company's Common Stock is below $4.00 per share on the
second and/or third anniversary of the date of grant. Also, during December 1999
the Company issued warrants to acquire 84,211 shares of Common Stock at an
exercise price of $4.75 per share in conjunction with the issuance of notes
payable. These warrants expire in December 2004. In January 2001, in
consideration for a one-year extension of the maturity date of the revolving
loan, the Company adjusted the exercise price on the previously issued warrants
to $2.00 per share (see Note 7).
During October 2000, in connection with the sale of Common Stock, the
Company issued warrants to the placement agents at an exercise price of $5.00
per share, to acquire 250,000 shares of its Common Stock. These warrants expire
in October 2005.
As of December 31, 2000, additional warrants to acquire 25,000 shares
of Common Stock were outstanding with an exercise price of $8.00 per share. Such
warrants expired in February 2001.
9. RELOCATION COSTS
In June 1999, the Company commenced relocation of its operations from
Texas to New Jersey and at June 30, 1999, had approximately 18 employees
operating from temporary offices in New Jersey. The original target completion
date for the relocation was December 31, 1999. All administrative functions
including accounting, customer service, information services, regulatory,
marketing and research and development functions were moved to New Jersey prior
to December 31, 1999. The Company commenced processing operations in New Jersey
during the first quarter of 2000. A small manufacturing and quality assurance /
control group remained in Texas through June 2000.
Relocation costs charged to operations for the year ended December
31, 1999, included the cost of non-relocating employee benefits, asset
abandonment and lease termination costs related to the Company's Texas facility,
as well as the cost of relocating key employees to New Jersey. In order to
induce non-relocating employees to continue their employment during the
relocation process, employees were offered a retention bonus, which was only
payable if they stayed with the Company until various targeted dates during
1999. If employees resigned prior to such date, they forfeited their retention
bonus. Such bonus payments were expensed at the time that they were paid. During
the fourth quarter of 1999, because all remaining employees had continued
employment through their targeted termination date, the continuing employment
condition was waived and the Company recorded a bonus accrual of approximately
$174,000 due to these employees as of December 31, 1999. Such amounts were paid
out in 2000. Additional retention bonuses of approximately $60,000 paid in 2000
were expensed when incurred. In June 1999, the Company recorded a charge of
approximately $335,000 representing the net book value of assets that were
abandoned in the second quarter of 1999 when the Company vacated its
administrative offices located in Texas. The Company occupied rented office and
manufacturing space in Texas pursuant to a lease that extended
F-14
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2000
through January 2001. During the fourth quarter of 1999, the Company recorded a
charge of approximately $617,000 representing rent and other facility related
expenses related to the termination of the Texas lease. No charge was recorded
prior to the fourth quarter of 1999, because the Company had not committed to a
specific course of action for exiting the lease of the Texas facility and
accordingly, such costs were not quantifiable. The costs of relocating key
employees to New Jersey were approximately $1.4 million in 1999 and consisted of
home sale and purchase assistance, moving expense, travel and temporary housing.
The Company also incurred approximately $78,000 of non-employee related moving
costs.
At December 31, 1999, accrued relocation costs were approximately
$1.1 million consisting of approximately $617,000 for lease termination costs,
approximately $288,000 for home sale assistance and moving costs and
approximately $174,000 for retention payments payable to non-relocating
employees.
10. EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) retirement savings plan which covers
all full-time employees. The Company may, at its discretion, contribute amounts
not to exceed each employee's contribution. Participants contributions may not
exceed 15% of their annual compensation, subject to annual dollar limits set by
the Internal Revenue Service. Participants are always 100% vested in their
contributions. Company contributions vest on a graduated basis over five years.
Total Company contributions during 1998, 1999 and 2000 were $21,000, $23,000 and
$31,000, respectively.
During 1996, the Company established an Employee Stock Purchase Plan
to allow all full-time employees to purchase the Company's Common Stock on the
open market using employee and Company matching contributions. Total Company
contributions during 1998, 1999, and 2000 were $14,000, $14,000 and $7,000,
respectively.
11. INCOME TAXES
As of December 31, 2000, the Company has a net operating loss
carryforward ("NOL") for federal income tax purposes of approximately $55.0
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 7,700,000
2020 7,400,000
----------
55,000,000
==========
F-15
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2000
Additionally, the Company has approximately $614,000 of federal
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 generated prior to 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, 2000, is approximately $31.1 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.
The Company also has a net operating loss carryforward for state
income tax purposes of approximately $7.6 million which expire in varying
amounts commencing in 2006.
For financial reporting purposes, a valuation allowance of $19,960,000
has been recorded as of December 31, 2000, to fully offset the deferred tax
asset related to these carryforwards. The principal components of the deferred
tax asset as of December 31, 1999 and 2000, assuming a 34% federal tax rate, are
as follows:
1999 2000
------------- -------------
Temporary differences:
Deferred revenue $ 138,000 $ 270,000
Uniform capitalization of inventory costs 147,000 160,000
Other items 140,000 210,000
------------- -------------
Total temporary differences 425,000 640,000
Federal tax losses and credits not currently utilizable 16,513,000 19,320,000
State tax losses and credits not currently utilizable -- 685,000
------------- -------------
Total deferred tax assets 16,938,000 20,645,000
------------- -------------
Less valuation allowance (16,938,000) (20,645,000)
Net deferred tax asset $ -- $ --
============= =============
The net increase in the deferred tax valuation allowance for 1999 and
2000 was $2,551,000 and $3,022,000, 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 1998, 1999 and 2000.
12. COMMITMENTS AND CONTINGENCIES
Litigation
In May 2000, a complaint was filed in the Superior Court of
California, San Bernardino County, Central District, captioned Ann Regner et.
al., on behalf of themselves and others similarly situated, v. Inland Eye &
Tissue Bank of Redlands, et al. The complaint was brought as a class action on
behalf of all close family members of those deceased persons whose tissues were
collected, processed, stored or distributed in California. The complaint alleged
that tissue banks routinely fail to obtain proper informed consent from family
members when soliciting the donation of human tissue for transplant. The
complaint also alleged that the defendants, including the Company, make profits
from the storing, processing and distribution of human tissue in contravention
F-16
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2000
of California law. Plaintiffs' application for a preliminary injunction seeking
to enjoin the defendants, including the Company, from doing business in
California was denied in June 2000. In September 2000, a new complaint was filed
in the Superior Court of Los Angeles captioned Regner, et al., on behalf of
themselves and others similarly situated, v. Inland Eye & Tissue Bank of
Redlands, et al. The complaint alleges among other things, defendants, including
the Company, make profits from the storing, processing, and distribution of
human tissue in contravention of California law. The complaint is not
denominated as a class action and does not involve tort theories. The action was
brought under a statute that allows individuals to sue on behalf of the people
of California for unfair business practices, with the court having the power to
award injunctive relief and disgorgement of all profits from the alleged illegal
practices. The plaintiffs seek injunctive relief, disgorgement of illegal
profits, restitution, statutory penalties, fines and attorney's fees. The May
2000 complaint was dismissed without prejudice in January 2001. The September
2000 complaint is still pending. The Company believes that the claims against it
in the new complaint are without merit and intends to vigorously defend against
such action.
In June 2000, a complaint was filed in the United States District
Court, District of New Jersey, entitled Inamed Corporation, McGhan Medical
Corporation and Collagen Aesthetics, Inc. vs. LifeCell Corporation and Obagi
Medical Products, Inc. The complaint alleged that the Company and Obagi, its
marketing agent, disseminated false advertisements with respect to the marketing
of the Company's Cymetra product that misleadingly compared it to, and
unlawfully disparaged, the bovine collagen products of Inamed Corporation and
its subsidiaries. In September 2000, the Company entered into a settlement
agreement with Inamed Corporation. Under the settlement agreement, the Company
and Obagi agreed to discontinue certain comparative marketing and promotion
statements on the use of Cymetra for the reconstruction of soft tissue deficits.
The Company and Obagi also agreed to jointly make settlement payments to Inamed
Corporation totaling $300,000 over an eighteen-month period. The Company
recorded a charge of $150,000 in the third quarter of 2000, representing its
share of the settlement. The settlement allows the Company and Obagi to revise
the marketing and promotional statements for Cymetra commencing in January 2001,
as additional scientific data on the use of Cymetra is accumulated.
In December 2000, a complaint was filed in the Superior Court
of California, Los Angeles County, Central District, captioned Thacker, et al.,
on behalf of themselves and others similarly situated, v. Inland Eye & Tissue
Bank of Redlands, et al. This complaint contains similar allegations to the
Renger complaint. This action is not denominated as a class action and does not
involve tort theories. The action was brought under a statute that allows
individuals to sue on behalf of the people of California for unfair business
practices, with the court having the power to award injunctive relief and
disgorgement of all profits from the alleged illegal practices. The plaintiffs
are seeking injunctive relief, disgorgement of illegal profits, restitution,
statutory penalties, fines and attorney's fees. The Company believes that the
claims against it in this complaint are without merit and intends to vigorously
defend against such action.
In January 2001, a complaint was filed in the United States District
Court for the Southern District of New York captioned Special Situations Fund
III, L.P., et al., v. LifeCell Corporation, Gruntal & Co., L.L.C. and Prudential
Securities, Inc. The complaint alleges that LifeCell, Gruntal and Prudential
violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder and were liable under New York common law by making
purportedly false and misleading statements to the plaintiffs in connection with
LifeCell's private placement of common stock and seeks damages in an unspecified
amount. Gruntal and Prudential's Vector Healthcare Group acted as placement
agents in LifeCell's private placement which closed in October, 2000. On March
15, 2001, the Company filed a motion for dismissal which is pending. The Company
believes that the claims against it in this complaint are without merit and
intends to vigorously defend against such action.
F-17
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2000
Litigation is subject to many uncertainties and management is unable
to predict the outcome of the pending actions. It is possible that the results
of operations or liquidity and capital resources of the Company could be
adversely affected by the ultimate outcome of the pending litigation or as a
result of the costs of contesting such actions.
From time to time the Company is party to various legal proceedings
incident to operating a company of its size which are not deemed to be material
to its business operations or financial condition. 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, 1998, 1999, and 2000, $10,000,
$17,000 and $0 of expenses were incurred under these agreements, respectively.
Marketing Agreements
The Company has engaged Boston Scientific Corporation as its exclusive
worldwide sales and marketing representative for Repliform for use in the
urology and gynecology markets and Obagi Medical Products, Inc. as its exclusive
sales and marketing representative of Cymetra for office-based dermatologists
and plastic surgeons. During 1998, 1999 and 2000, sales of products through
Boston Scientific Corporation represented approximately 0%, 4% and 28%,
respectively, of our total product revenues. During 1998, 1999 and 2000, sales
of products through Obagi Medical Products represented approximately 0%, 0% and
13%, respectively, of our total product revenues. The Company expects sales of
its products through such marketing agents to continue to increase as a
percentage of total revenues. Both Boston Scientific and Obagi Medical Products
are paid agent fees based on the amount of product revenues they generate for
the Company.
Leases
The Company leases approximately 90,000 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, 2000, were as follows:
2001 $ 833,000
2002 833,000
2003 833,000
2004 833,000
2005 and beyond 3,999,000
----------
Total $7,331,000
==========
Rental expense was $376,000, $501,000 and $565,000 for the years ended December
31, 1998, 1999, and 2000, respectively.
F-18
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2000
13. SEGMENT AND MAJOR CUSTOMER DATA
The Company has one reportable business operating segment - the
processing and distribution of human tissue intended for transplantation.
Product revenues by geographic area are summarized as follows:
1998 1999 2000
---------- ----------- -----------
United States $6,575,000 $11,065,000 $20,219,000
Other foreign countries 670,000 847,000 1,111,000
---------- ----------- -----------
Total Product Revenues $7,245,000 $11,912,000 $21,330,000
========== =========== ===========
During 1999, LifeCell had one customer who comprised greater than 10%
of the Company's net revenues. Revenues from this customer were $1,238,000 in
1999.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results for the
years ended December 31, 1999 and 2000:
First Second Third Fourth
(In thousands except per share amounts) Quarter Quarter Quarter Quarter
--------- --------- -------- ---------
1999
Product Revenues . . . . . . . . . . . . $ 2,319 $ 2,956 $ 3,220 $ 3,417
Total Revenues . . . . . . . . . . . . . 2,606 3,245 3,346 3,479
Cost of Products Sold. . . . . . . . . . 807 764 886 995
Net Loss . . . . . . . . . . . . . . . . (2,084) (2,101) (1,521) (3,486)
Loss Per Common Share-Basic and Diluted. (0.19) (0.19) (0.14) (0.30)
2000
Product Revenues . . . . . . . . . . . . $ 4,438 $ 5,387 $ 5,919 $ 5,586
Total Revenues . . . . . . . . . . . . . 4,816 5,862 6,235 5,859
Cost of Products Sold. . . . . . . . . . 1,188 1,912 1,693 2,156
Net Loss . . . . . . . . . . . . . . . . (1,156) (2,149) (1,649) (2,184)
Loss Per Common Share-Basic and Diluted. (0.10) (0.16) (0.13) (0.15)
F-19