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, 2001 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, 2002: $67,613,000.
Number of shares of registrant's Common Stock outstanding as of March 15, 2002:
21,042,868. (If the Series B Preferred Stock had converted into Common Stock as
of such date, there would be 23,998,240 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 May 31, 2002 have
been incorporated by reference into Part III hereof.
TABLE OF CONTENTS
DESCRIPTION
Item Page
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PART I
Item 1. Business 3
General 3
Technology 3
Strategy 5
Products and Product Development Activities 6
Marketing 10
Sources of Materials 10
Government Regulation 11
Research and Development 14
Patents, Proprietary Information & Trademarks 15
Competition 15
Employees 16
Risk Factors 16
Special Note Regarding Forward-Looking Statements 23
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4 Submission of Matters to a Vote of Security Holders 24
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 25
Dividend Policy 25
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
General and Background 27
Critical Accounting Policies 27
Results of Operations 27
Liquidity and Capital Resources 29
Item 7A Quantitative and Qualitative Disclosure About Market Risk 31
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes and Disagreements with Accountants on Accounting
and Financial Disclosure 31
PART III
Item 10. Directors and Executive Officers of the Registrant 32
Item 11. Executive Compensation 32
Item 12. Security Ownership of Certain Beneficial Owners and Management 32
Item 13. Certain Relationships and Related Transactions 32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 33
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
We develop and market biologically based solutions for the repair and
replacement of damaged or inadequate human tissue in numerous different clinical
applications. Our core tissue matrix 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 four human tissue based products: 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;
Repliform(TM), a version of AlloDerm(R) for urology and gynecology procedures;
and cryopreserved allograft skin for use as a temporary wound dressing in the
treatment of burns. Our development programs include the potential application
of our tissue matrix technology to vascular, nerve and orthopedic tissues;
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
To date 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 MATRIX TECHNOLOGY
Our tissue matrix technology removes antigenic cells from the tissue matrix
to eliminate the potential for specific rejection of the transplanted tissue.
Our tissue matrix 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.
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Soft tissue transplants from one part of the patient's body to another
("autograft") generally are successful; however, the procedure results in the
creation of an additional wound site. Historically, the ability to transplant
tissue from one person to another ("allograft") has been limited because the
donor's cells within the transplanted tissue may trigger an immune response,
resulting in rejection of the transplanted tissue. We believe that previous
attempts to remove cells from soft tissue grafts before performing an allograft
transplant have resulted in disruption or damage of the tissue matrix, causing
an inflammatory response and rejection of the tissue following transplantation.
We believe our tissue matrix technology offers the following important
benefits:
Natural Tissue Regeneration. Tissue grafts produced with our tissue
matrix technology retain the structural and biochemical properties that
stimulate normal cell repopulation and normal soft tissue regeneration. In
addition, in our clinical studies with dermis and preliminary animal
studies with heart valve leaflets, nerve connective tissue grafts, and
vascular grafts processed using our technology we have shown 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 matrix
technology has the potential to generate additional products with multiple
applications. In addition to the current commercial applications of
AlloDerm, Repliform and Cymetra, we believe that these products may provide
additional benefits in other clinical applications. We also are evaluating
the applicability of our technology to process other human tissues and are
conducting pre-clinical studies with vascular and orthopedic tissues.
Safety. Our tissue matrix technology yields products that can
revascularize and integrate into the body's own tissues thereby allowing
the patient's immune cells 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 nine years and
over 200,000 tissue grafts processed and distributed to date.
Prolonged Shelf Life. Our tissue matrix 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. Cymetra is stored at
normal refrigerated temperatures for up to one year.
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 and cells 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 spontaneous clotting. When blood
cells are removed from the body for storage, these stabilizing influences are
absent and result in the destabilization and/or irreversible spontaneous
clotting 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.
Through our research efforts, we have developed cell preservation
technology mimics the stabilizing influences 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.
4
STRATEGY
Our strategy is to be a leader in developing and marketing biologically
based solutions for the repair and replacement of damaged or inadequate human
tissue in numerous clinical applications. 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 reconstructive procedures and general surgery. We see great
opportunity for revenue growth in this area, in which AlloDerm is used as an
alternative to the current standard of care, autografts. We have initiated
numerous programs to achieve this goal. These include:
- conducting additional clinical studies to demonstrate the benefits of
AlloDerm compared to autografts;
- supporting publications in leading scientific journals describing the
uses and benefits of AlloDerm;
- utilizing our direct sales and marketing organization 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 head and neck and plastic
reconstructive procedures, burn surgery and general surgery in domestic markets
through our own direct 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 OMP,
Inc., initiated the full commercial launch of Cymetra to office-based plastic
surgeons and dermatologists.
LEVERAGING OUR TECHNOLOGY PLATFORMS TO DEVELOP NEW PRODUCTS
We continue to investigate the application of our matrix technology to the
regeneration of other human tissues including vascular, orthopedic and nerve
tissues.
The application of our tissue matrix technology to vascular tissues has
shown promise in pre-clinical feasibility studies. In October 2001, we received
final approval for a $2.1 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 vascular and nerve tissues.
We retain all rights to commercialize products resulting from this
collaboration. We are commencing pre-clinical studies focused on using umbilical
vessels as the source graft. Upon successful completion of these studies, we
plan to commence our first clinical evaluation using a human tissue based
vascular graft.
Pre-clinical studies conducted by us suggest that our acellular tissue
matrix may also remodel into tendons, cartilage and bone. In October 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
5
investigate the application of our technology to the regeneration of orthopedic
tissues. We retain all rights to commercialize products resulting from this
collaboration. In 2001, we commenced pre-clinical studies to investigate the
ability of acellular tissue matricies to remodel into various orthopedic
tissues. Upon successful completion of these studies, we plan to commence our
first clinical evaluation using human tissue based grafts.
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. In February 2002, we received final approval of an $824,000
research grant from the Office of Naval Research to investigate the potential to
preserve red blood cells through freeze drying. We retain all rights to
commercialize products resulting from this collaboration. Additionally, we may
decide to establish collaborative out-licensing arrangements with appropriate
partners to fund the development and commercialization of certain of these
products.
PRODUCTS AND PRODUCT DEVELOPMENT ACTIVITIES
ACELLULAR TISSUE PRODUCTS
ALLODERM
AlloDerm is acellular tissue processed with our tissue matrix technology
using donated human cadaveric skin. We believe that AlloDerm is the only human
tissue product on the market today that supports the regeneration of normal
human soft tissue. Following transplant, our 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 procedures, burn surgery, periodontal surgery and general
surgery.
We receive donated human cadaveric skin from tissue banks and organ
procurement organizations 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 and organ procurement organizations
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 human 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 cadaveric skin will be sufficient to meet
our demand.
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 in various head and neck and
reconstructive surgeries, cancer reconstruction, scar revision and oral cavity
reconstruction 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.
In these procedures, the greatest competitive pressures to AlloDerm are
from autologous tissue and synthetic and biosynthetic materials. We believe 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. Additionally, we believe 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.
6
BURNS. During 1994, we commenced marketing of AlloDerm for use in the
treatment of third-degree and deep second-degree burns requiring skin grafting.
Skin is the body's largest organ and is the first line of defense against
invasion of foreign substances. It contains two functional layers, the upper
surface consisting primarily of cells (epidermis) and an underlying foundational
layer consisting primarily of extracellular matrix proteins and collagen
(dermis). The epidermis functions as a water barrier and maintains hydration.
The dermis provides other important skin properties including tensile strength,
durability and elasticity. Dermis, like many other tissues of the body, is not
capable of de novo regeneration. The most conservative and common surgical
treatment of third-degree and deep second-degree burns use split-thickness skin
autografts (the epidermal layer and a portion of the dermis) taken from
uninjured areas of the patient's body. The surgical procedure when using
AlloDerm in treating these patients is to place AlloDerm where the patient is
missing dermis and cover the AlloDerm with an ultra-thin split-thickness skin
autograft (the epidermal layer and a much thinner portion of the dermis). This
procedure has produced comparable results to normal thickness 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.
PERIODONTAL SURGERY. We began marketing AlloDerm to periodontists in
September 1995. BioHorizons Implant Systems, Inc. is our exclusive distributor
of AlloDerm for use in periodontal applications in the United States and certain
international markets. 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
conducted by us have indicated that AlloDerm and Cymetra may have the potential
to remodel into certain types of orthopedic tissues. Based on these preliminary
results, we commenced a product development program for orthopedic applications
of AlloDerm and Cymetra and we intend to conduct additional studies
investigating the potential of these tissue products to remodel into orthopedic
tissues such as tendon, ligament, cartilage, meniscus and bone. We are also
investigating the potential of applying our tissue matrix technology to certain
orthopedic tissues such as tendons and ligaments.
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.
Fewer than half of the individuals affected by urinary incontinence seek
treatment due to the combined factors of embarrassment and a lack of acceptable
therapeutic options for some types of incontinence. Some forms of female stress
7
urinary incontinence can be treated with a sling procedure, which involves
lifting and supporting the bladder neck to provide urethral support and
compression.
Cystocele, rectocele and other pelvic floor conditions also occur
frequently in women and require soft tissue surgical repair. These conditions
are particularly common after multiple vaginal births and cause significant
discomfort to the patient. It is common that these conditions exist with or
cause urinary incontinence. Therefore, it is becoming the current standard of
care to correct pelvic floor conditions at the same time as a sling or
suspension procedure to ensure that there are no conditions that can adversely
affect patient outcome.
Currently, materials used for slings and pelvic floor repair surgeries
include autologous tissue, synthetic materials and cadaveric fascia. The
autologous tissue often is taken from the patient's thigh or abdomen resulting
in a painful donor site. The greatest drawback of using synthetic materials is
the occurrence of erosion through the urethra or vaginal wall causing pain and
infection, necessitating repeat surgery. 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.
MICRONIZED ALLODERM(R) PRODUCTS
CYMETRA
Cymetra, the brand name for Micronized AlloDerm(R) is made from AlloDerm
sheets that are micronized at a low temperature 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.
In June 2000, we, in conjunction with OMP, Inc., initiated the full
commercial launch of Cymetra to office-based plastic surgeons and
dermatologists.
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 tissue classified as human tissue for
transplantation to be commercially distributed without obtaining prior FDA
approval. In 1996, AlloDerm was 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 in urological and gynecological surgery. Cymetra is Alloderm
that has been micronized at a low temperature 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. 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 satisfy the requirements of human tissue for
transplantation. In February 2001, we provided a detailed submission responding
to the FDA's request. In June 2001, we received a letter from the FDA indicating
that Repliform and Cymetra, as currently marketed, meet the definition of
human tissue for transplantation.
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CARDIOVASCULAR TISSUE PRODUCTS
We are commencing pre-clinical studies to evaluate human tissue based
small-diameter vascular graft products for potential use in cardiovascular
surgery. If successfully developed, a human tissue based 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 and
published articles, annually in the United States replacement vascular conduits
are required for 375,000 coronary artery bypass surgeries and 230,000
peripheral vascular reconstructions. 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 and arteries 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, we believe 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.
We have demonstrated in a pre-clinical study that a graft processed by us
had 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. We are currently conducting additional
pre-clinical studies.
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 was performed which involved a "standard of care"
transfusion of ThromboSol cryopreserved platelets into oncology patients. This
study was completed in 2001 and demonstrated that Thrombosol preserved platelets
performed equivalent to fresh platelets. Further clinical evaluation is
continuing. Any product developed will require extensive regulatory approvals
prior to marketing in the United States. Our development efforts to date have
primarily been funded through research grant funds from the Department of
Defense.
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.
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.
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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, burn and general surgical applications through our network of
direct technical marketing representatives. In March 1999, we entered into an
exclusive agreement with Boston Scientific Corporation for the worldwide
marketing of Repliform for use in urology and gynecology. In February 2000, we
entered into an exclusive agreement with OMP, 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 domestic 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
domestic distributors except for the distribution of AlloDerm for periodontal
applications.
As of March 1, 2002, we had sales and marketing staff of 37 persons,
including 28 domestic sales personnel, and 9 domestic marketing and other
personnel. Our sales representatives are responsible for interacting with ear,
nose and throat surgeons, plastic surgeons, burn surgeons and general 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 2001, we obtained all of our donated human cadaveric tissue from 23
tissue banks and organ procurement organizations in the United States. We
estimate that there are at least 100 tissue banks and organ procurement
organizations in the United States. In January 2002, we entered into an
agreement with LifeNet, the largest organ procurement based tissue bank in the
United States. Under the terms of the agreement, LifeNet will supply donated
human cadaveric skin tissue to us for processing into cryopreserved skin and
AlloDerm tissue products on a priority basis for burn victims.
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 donated
cadaveric skin tissue, there is risk that the future availability of donated
human skin will not be sufficient to meet our demand. We compete with 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 cryopreserved skin as a temporary wound dressing.
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.
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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, medical devices or
biologics. A fundamental difference in the treatment of products under these
various classifications is that the FDA generally permits human tissue for
transplantation to be commercially distributed without premarket approval. In
contrast, products regulated as medical devices or biologics usually require
such approval. The process of obtaining premarket approval for a medical device
or biologic is often expensive, lengthy and uncertain.
Once on the market, all of our human tissue 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 range of enforcement sanctions if we
fail to comply, including:
- fines,
- injunctions,
- civil penalties,
- recall or seizure of our products,
- total or partial suspension of production,
- refusal of the government to authorize the marketing of new products
or to allow us to enter into supply contracts, and
- criminal prosecution.
Tissue Regulation
In 1996, correspondence from the FDA stated that AlloDerm used for the
replacement or repair of damaged or inadequate integumental tissue would be
regulated as human tissue under an interim regulation governing human tissue for
transplantation then in effect. This letter reversed the FDA's initial position
that AlloDerm for these indications should be regulated as a medical device. In
1997, the FDA issued a final regulation that became effective in 1998 regulating
"human tissue." The rule defines human tissue as any tissue derived from a human
body which is (i) intended for administration to another human for the
diagnosis, cure, mitigation, treatment or prevention of any condition or disease
and (ii) recovered, processed, stored or distributed by methods not intended to
change tissue function or characteristics. The FDA definition excludes, among
other things, tissue that currently is regulated as a human drug, biological
product or medical device and excludes vascularized human organs.
The final tissue rule requires establishments engaged in the procurement,
processing, and distribution of human tissue to conduct donor screening and
infectious disease testing and to maintain records available for FDA inspection
documenting that the procedures were followed. The rule also provides the FDA
with authority to conduct inspections of tissue establishments and to detain,
recall, or destroy tissue where the procedures were not followed or appropriate
documentation of the procedures is not available.
Relying on the 1996 letter, we have not obtained prior FDA approval for
commercial distribution of AlloDerm for use in the treatment of burns, 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 used for these
indications. Therefore, we continue to believe that AlloDerm for these uses is
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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.
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 at low temperature to create a particulate form of AlloDerm
suitable for injection. 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.
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. In June 2001, we received a letter from the FDA indicating that
Repliform and Cymetra, as currently marketed, meet the definition of
human tissue for transplantation.
In January 2001, the FDA issued a final rule requiring registration of
tissue banking establishments and the listing of tissue products. These
requirements became 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.
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 (and some class I
devices) generally 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 I or 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
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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 and we submitted a 510(k) application. In March 1999,
we withdrew this 510(k) submission with the intent to submit a new 510(k)
submission after we have addressed several issues raised by the FDA. We have not
determined if we will submit a new 510(k) submission for NeoDura.
Based upon relevant precedents, it is not clear whether the FDA will
regulate our vascular and orthopedic products now in development as medical
devices requiring 510(k) clearance or PMA approval or as human tissue for
transplantation.
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
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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, the applicant 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 human tissue 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 human
tissue for transplantation 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 and Cymetra are currently distributed in several countries
internationally. Additionally, we are pursuing clearance to distribute AlloDerm
and Cymetra in certain other countries. 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.
RESEARCH AND DEVELOPMENT
We have historically funded the development of our human tissue products
and blood cell preservation products primarily through external sources,
including a corporate alliance and government grants, as well as through the
proceeds from equity offerings. Our research and development costs in 1999, 2000
and 2001 for all programs were approximately $3.9 million, $4.5 million and
$4.4 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 in
excess of $10 million through 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.
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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,
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 generally conduct a cursory review of issued patents prior to engaging
in research or development activities. If others already have issued patents
covering new products that we develop, we may be required to obtain a license
from others to commercialize such future products. 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,
AlloDerm(R), which concerns our commercial acellular dermal graft product and
Micronized AlloDerm(R), the particulate form of AlloDerm. We have filed
trademark applications for the protection of the phrases, Cymetra(TM) the brand
name for Micronized AlloDerm(R), 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., Cook, Inc. and its
affiliates, Cryolife, Inc., Organogenesis, Inc., Advance Tissue Sciences, Inc.
and Integra Life Sciences Holdings Corporation, and academic institutions,
15
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, 2002, we had 138 employees of which 37 were employed in sales
and marketing, 58 in production and quality assurance, 22 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.
Since our inception in 1986, we have generated only limited revenues from
product sales and have incurred substantial net losses of approximately:
- $9.2 million for the year ended December 31, 1999;
- $7.1 million for the year ended December 31, 2000; and
- $2.1 million for the year ended December 31, 2001.
At December 31, 2001, we had an accumulated deficit of approximately $65.8
million. In the fourth quarter of 2001 we had net income of $102,000.
Additionally, we generated positive cash flow from operations in the third and
fourth quarter of 2001. Our ability to maintain profitability and generate
positive cash flows from operations in the future will depend on:
- continued market acceptance and sales of AlloDerm, Repliform and
Cymetra; and
- commercialization of products under development.
We may not be profitable and generate positive cash flows from operations
in the future.
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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.
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 UNITED STATED 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 human tissue for transplantation to be
commercially distributed without obtaining prior FDA approval of the product.
In contrast, products regulated as medical devices or biologics usually must
undergo a lengthy, uncertain and expensive approval process. 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.
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In 1999, we began marketing the following products as human tissue:
- 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. 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. In June 2001, we received a letter from the FDA indicating that
each of these products, as currently marketed, meet the definition of
transplanted human tissue.
We cannot assure that products we develop in the future will similarly be
regulated as human tissue. The regulation of each new product we develop will
be decided by the FDA on a case-by-case basis. If the FDA chooses to regulate
any of our future products as a medical device or biologic, the process of
obtaining FDA approval would be expensive, lengthy and unpredictable. We
anticipate that it could take from one to three years or longer to obtain such
approval. We do not know if such approval could be obtained in a timely
fashion, or at all. Such approval process would almost certainly include a
requirement to provide extensive supporting clinical data.
In addition, the FDA requires that devices and biologics be produced in
accordance with the Quality System Regulation for medical devices or Good
Manufacturing Practice regulation for biologics. As a result, our manufacturing
and compliance costs would increase and any such future device and biologic
products would be subject to more comprehensive development, testing, monitoring
and validation standards.
A few states impose their own regulatory requirements on transplanted human
tissue. We believe that we are in compliance with such regulations. 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 THE 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:
- Donor screening and infectious disease testing; and
- Stringent record keeping.
As a result, our involvement in the processing and distribution of human tissue
for transplantation 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.
The FDA has issued proposed rules that would impose additional donor
suitability and Current Good Tissue Practice requirements on manufacturers of
tissue-based products. If these or similar requirements actually become law, we
will likely incur additional manufacturing and compliance costs for our
tissue-based products, including AlloDerm, Repliform and Cymetra.
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.
18
THE NATIONAL ORGAN TRANSPLANT ACT ("NOTA") COULD BE INTERPRETED IN A WAY THAT
COULD REDUCE OUR REVENUES AND INCOME IN THE FUTURE.
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
tissue, including skin. We reimburse tissue banks for expenses incurred that
are associated with the recovering and transportation of donated cadaveric human
skin that we process into AlloDerm, Repliform, Cymetra and cryopreserved skin as
a temporary wound dressing. In addition to amounts paid to tissue banks to
reimburse them for their expenses associated with the procurement and
transportation of human skin, 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.
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 also are potentially subject to
enforcement sanctions if we are found to have violated NOTA's prohibition on the
sale of human tissue.
WE ARE SUBJECT TO VARYING AND EXTENSIVE REGULATION BY FOREIGN GOVERNMENTS WHICH
CAN BE COSTLY, TIME CONSUMING AND SUBJECT US TO UNANTICIPATED DELAYS.
We distribute some of our products in countries outside the United States.
The regulation of our products in these countries varies. 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.
The uncertainty of the regulations in each country may delay or impede the
marketing of our products in these countries in the future or impede our ability
to negotiate distribution arrangements on favorable terms. Certain foreign
countries have laws similar to National Organ Transplant Act. 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 generate net income 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.
19
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:
- unanticipated technical or other problems;
- manufacturing difficulties; and
- the possibility of insufficient funds for the completion of such
development.
WE ARE HIGHLY DEPENDENT UPON SALES OF OUR PRODUCTS THROUGH BOSTON SCIENTIFIC,
OMP INC. AND DISTRIBUTORS 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
- OMP Inc. 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. For the year ended
December 31, 2001, sales of our products through Boston Scientific Corporation,
OMP Inc. and our distributors represented approximately 35%, 9% and 10%,
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 OMP Inc., 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 CADAVERIC 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 cadaveric
tissue. We currently receive human tissue from approximately 23 United States
tissue banks / organ procurement organizations. We estimate that there are at
least 100 tissue banks / organ procurement organizations 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 human tissue products in the
foreseeable future, we cannot be sure that donated human cadaveric 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 cadaveric tissue or
our requirements for human cadaveric tissue exceed their current capacity, we
may not be able to locate other sources. Any significant interruption in the
availability of human cadaveric tissue would likely cause us to slow down the
processing and distribution of our human tissue products.
20
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 human tissue 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., 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.
Some or all of these competitors 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 human tissue for
transplantation to be commercially distributed without obtaining prior FDA
approval of the product. In contrast, products regulated as medical devices or
biologics 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.
21
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
- have several 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.
We generally conduct a cursory review of issued patents prior to engaging
in research or development activities. If others already have issued patents
covering new products that we develop, we may be required to obtain a license
from them to commercialize such new products. 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.
22
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 be
certain that:
- our insurance will provide adequate coverage against potential
liabilities;
- adequate product liability insurance will continue to be
available in the future; or
- 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.
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 and "Critical Accounting Policies" in "Managements Discussion and
Analysis of Financial Condition and Results of Operations".
23
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. We believe that our current laboratory,
production and office space will be sufficient to meet our anticipated needs for
the next several years.
ITEM 3. LEGAL PROCEEDINGS
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 LifeCell, make profits from the storing, processing, and distribution
of human tissue in contravention of California law. The Company is 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 Regner complaint, and the two
cases have been combined. 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. During
2001, the plaintiffs in the combined action have agreed to dismiss all claims
against LifeCell, while we promise not to sue plaintiffs for malicious
prosecution. A court order embodying this settlement, consented to by all
parties of the suit, is currently before the Court, but has not yet been signed.
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.
24
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, 2002, the last reported sale price for our Common Stock on
the Nasdaq National Market was $3.60 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.
Price Range
--------------------
High Low
--------- ---------
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
2001 First Quarter $ 2.81 $ 1.47
Second Quarter 2.57 1.25
Third Quarter 2.64 1.54
Fourth Quarter 2.66 1.64
As of February 28, 2002, there were approximately 372 holders of record of
shares of Common Stock and 39 holders of record of shares of Series B Preferred
Stock. We estimate that there are in excess of 8,000 beneficial holders of
Common Stock.
In November 2001, we issued an additional 478,001 shares of Common Stock to
an investor, without additional consideration, pursuant to the terms of an
investment made in November 1999. 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.
Holders of Series B Preferred Stock were entitled to receive dividends
through September 30, 2001 at the per share 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 were payable quarterly, 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. On February 15 and May 15, 2000 we paid $1.51 and $1.49, respectively,
per share dividend in cash to the holders of shares of Series B Preferred Stock.
On August 15 and November 15, 2000, February 15, May 15, August 15 and November
15, 2001, we paid dividends in additional shares of our Series B Preferred Stock
equivalent to $1.49, $1.51, $1.51, $1.48, $1.50 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.
25
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, 2001, 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,
-------------------------------------------------------------------------
1997 1998 1999 2000 2001
------------- ------------- ------------- ------------- -------------
Operations Statement Data:
- -------------------------
Revenues:
Product revenues $ 4,905,000 $ 7,245,000 $ 11,912,000 $ 21,330,000 $ 26,560,000
Research grant revenues 1,075,000 747,000 764,000 1,442,000 1,209,000
------------- ------------- ------------- ------------- -------------
Total revenues 5,980,000 7,992,000 12,676,000 22,772,000 27,769,000
------------- ------------- ------------- ------------- -------------
Costs and expenses:
Costs of products sold 2,541,000 2,837,000 3,452,000 6,949,000 8,862,000
Research and development 2,007,000 3,376,000 3,871,000 4,523,000 4,351,000
General and administrative 3,081,000 3,484,000 4,840,000 6,180,000 4,098,000
Selling and marketing 4,956,000 6,500,000 7,236,000 11,779,000 11,978,000
Relocation costs -- -- 2,937,000 -- --
------------- ------------- ------------- ------------- -------------
Total costs and expenses 12,585,000 16,197,000 22,336,000 29,431,000 29,289,000
Loss from operations (6,605,000) (8,205,000) (9,660,000) (6,659,000) (1,520,000)
Interest and other income
(expense), net 466,000 864,000 468,000 (479,000) (550,000)
------------- ------------- ------------- ------------- -------------
Net loss (6,139,000) (7,341,000) (9,192,000) (7,138,000) (2,070,000)
Preferred stock and deemed
dividends(1) (962,000) (723,000) (710,000) (593,000) (1,591,000)
------------- ------------- ------------- ------------- -------------
Net loss to common
shareholders $ (7,101,000) $ (8,064,000) $ (9,902,000) $ (7,731,000) $ (3,661,000)
============= ============= ============= ============= =============
Loss per share- basic and
diluted $ (1.04) $ (0.72) $ (0.83) $ (0.54) $ (0.20)
============= ============= ============= ============= =============
Shares used in computing loss
per share-basic and diluted 6,820,000 11,229,000 11,938,000 14,372,000 18,240,000
============= ============= ============= ============= =============
As of December 31,
-------------------------------------------------------------------------
1997 1998 1999 2000 2001
------------- ------------- ------------- ------------- -------------
Balance Sheet Data:
- ------------------
Cash, cash equivalents and
short-term investments $ 20,781,000 $ 12,026,000 $ 5,052,000 $ 5,535,000 $ 4,900,000
Working capital 20,516,000 12,597,000 2,542,000 5,330,000 8,851,000
Total assets 24,156,000 17,031,000 18,083,000 25,410,000 23,131,000
Notes payable and term debt -- -- 2,792,000 6,285,000 2,197,000
Accumulated deficit (36,411,000) (44,476,000) (54,378,000) (62,109,000) (65,770,000)
Common Stock, subject to
redemption(2) -- -- 3,885,000 3,885,000 1,935,000
Total stockholders' equity(2) 20,260,000 14,261,000 5,364,000 8,904,000 14,833,000
(1) Includes preferred stock dividends in each year and a deemed dividend of $1,151,000 in 2001 resulting
from the issuance of additional shares of common stock in November 2001 to an investor pursuant to the
terms of an investment in 1999.
(2) Revised to reflect the reclassification of certain shares from stockholders' equity to common stock,
subject to redemption.
26
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" and "Business-Risk Factors." In the following
discussions, most percentages and dollar amounts have been rounded to aid the
presentation. As a result, all such figures are approximations.
GENERAL AND BACKGROUND
We develop and market biologically based solutions for the repair and
replacement of damaged or inadequate human tissue in numerous different clinical
applications. Our core tissue matrix 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 four human tissue based products: 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;
Repliform(TM), a version of AlloDerm(R) for urology and gynecology procedures;
and cryopreserved allograft skin for use as a temporary dressing in the
treatment of burns. Our development programs include the potential application
of our tissue matrix technology to vascular, nerve and orthopedic tissue;
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.
CRITCAL ACCOUNTING POLICIES
We have identified the policies below as critical to the understanding of
our financial statements. The application of these polices requires management
to make estimates and assumptions that affect the valuation of assets and
expenses during the reporting period. There can be no assurance that actual
results will not differ from these estimates. The impact and any associated
risks related to these policies on our business operations are discussed below.
For a detailed discussion on the application of these and other accounting
policies, see Note 2 in the Notes to the Financial Statements in Item 14 of this
Annual Report on Form 10-K, beginning on page F-6.
Accounts receivable. We maintain a provision for estimated bad debt losses
on our accounts receivables based upon our historical experience and any
specific customer collection issues that we have identified. In addition, we
perform ongoing credit evaluations and monitor collections and payments from our
customers. Since our accounts receivable are not concentrated within a
relatively few number of customers, a significant change in the liquidity or
financial position of any one of these customers will not have a material
adverse impact on the collectability of our accounts receivables and our future
operating results. While losses depend to a large degree on future economic
conditions, management does not forecast significant bad debt losses in 2002.
Inventories. We value our inventory at the lower of cost or market, with
cost being determined on a first-in, first-out basis. We record a provision for
excess and obsolete inventory based primarily on inventory quantities on hand,
our historical product sales, estimated forecast of product demand and
production requirements. Although we believe current inventory reserves are
adequate, any significant unanticipated changes in demand or technological
developments could have a significant impact on the value of our inventory and
our future operating results.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
Total revenues for the year ended December 31, 2001 increased 22% to $27.8
million compared to $22.8 million in 2000. The increase was principally
attributable to a 25% increase in product revenues to $26.6 million in the
current year as compared to $21.3 million in the prior year. The increase in
product revenues was largely due to increased demand for Repliform and AlloDerm.
27
Repliform revenues increased 56% to $9.3 million in the year ended December 31,
2001 compared to $5.9 million for the same period in 2000. AlloDerm revenues
increased 21% to $12.7 million in the year ended December 31, 2001 compared to
$10.5 million in the same period in 2000. Cymetra revenues contributed $4.0
million in 2001 compared to $4.1 million in 2000. Cymetra unit demand increased
slightly, however revenues decreased due to a reduction in the average per unit
selling price.
Boston Scientific Corporation is our exclusive worldwide sales and
marketing representative for Repliform for use in the urology and gynecology
markets and OMP, Inc. is the exclusive sales and marketing representative of
Cymetra for office-based dermatologists and plastic surgeons. During 2001, sales
of our products through Boston Scientific Corporation and OMP represented 35%
and 9%, respectively, of our total product revenues compared to 28% and 13%,
respectively, in 2000. Both Boston Scientific and OMP are paid agency fees based
on the amount of product revenues they generate for us. Such fees are recorded
as selling and marketing expenses.
Total revenue was also impacted by a 16% decrease in funded research grant
revenues which totaled $1.2 million in 2001 compared to $1.4 million in 2000.
This decrease was primarily due to a decrease in research spending on projects
funded by research grants, since research grant revenues are recognized as
qualified expenses are incurred. During 2001, we were awarded two grants from
the Department of Defense totaling $4.4 million to investigate the application
of our acellular tissue matrix technology to the regeneration of orthopedic,
vascular and nerve tissues. As of December 31, 2001, approximately $3.7 million
of approved grant funding was available to fund further research and development
expenses through 2003.
Cost of products sold for the year ended December 31, 2001 was $8.9
million, or 33% of product revenues, compared to cost of products sold of $6.9
million, or 33% for the same period in 2000. The cost of products sold as a
percentage of sales remained unchanged for the year. Certain efficiencies
realized in manufacturing cost, as a result of volume increases and process
improvements, were offset by a reduction in the average selling price of
Cymetra.
Total research and development expenses decreased 4% to $4.4 million for
the year ended December 31, 2001 compared to $4.5 million in 2000. The decrease
was due primarily to a reduction in expenditures for Cymetra product development
related to the product launch in 2000.
General and Administrative expenses decreased 34% to $4.1 million for the
year ended December 31, 2001 compared to $6.2 million in 2000. General and
administrative expenses were higher in 2000 because they included recruiting
expenses and other employee related costs associated with hiring new employees
in conjunction with our relocation from Texas to New Jersey and settlement costs
and legal fees associated with the settlement of litigation with Inamed
Corporation.
Selling and marketing expenses increased 2% to $12.0 million for the year
ended December 31, 2001 compared to $11.8 million in the same period in 2000.
The increase in 2001 compared to 2000 was primarily attributable to an increase
in agency fees earned by our independent marketing agents for the distribution
of Repliform and Cymetra, partially offset by a reduction in promotion expenses.
Interest and other income (expense), net increased $71,000 for the year
ended December 31, 2001 compared to 2000. The net increase was due to a $14,000
increase in interest expense and a $57,000 decline in interest income resulting
from lower average interest rates during the period.
The net loss for the year ended December 31, 2001 decreased 71% to $2.1
million compared to $7.1 million in 2000. The decrease in net loss in 2001
compared to 2000 was principally due to higher product revenues and the decrease
in general and administrative expenses discussed above.
Preferred stock and deemed dividends increased 150% to $1.6 million for the
year ended December 31, 2001 compared to $0.6 million in 2000. Preferred stock
dividends decreased in 2001 to $440,000 from $636,000 as Series B Preferred
Stockholders were entitled to receive dividends through September 30, 2001. In
2001, the Company recorded a non-cash deemed dividend of $1.2 million in
connection with issuance of additional shares and repricing of warrants to an
investor pursuant to the terms of an investment in 1999.
YEARS ENDED DECEMBER 31, 2000 AND 1999
Total revenues for the year ended December 31, 2000 increased 80% to $22.8
million compared to $12.7 million in 1999. The increase was primarily
attributable to a 79% increase in product revenues to $21.3 million in 2000 as
compared to $11.9 million in 1999. The increase in product revenues was largely
due to the full commercial launch of Repliform in January 2000 and Cymetra in
28
June 2000. Repliform and Cymetra product sales contributed $5.9 million and
$4.1 million, respectively, in 2000. Total revenue was further impacted by an
89% increase in funded research grant revenues of $1.4 million from $764,000 in
1999. This increase was primarily due to an increase in research grant funding
available.
Cost of products sold for the year ended December 31, 2000 was $6.9
million, or 33% of product revenues, compared to cost of goods sold of $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 2000 related to the scale-up of Cymetra production.
Total research and development expenses increased 17% to $4.5 million for
the year ended December 31, 2000 compared to $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 $6.2 million for the
year ended December 31, 2000 compared to $4.8 million in 1999. The increase was
principally due to a combination of increased 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 $11.8 million for the year
ended December 31, 2000 compared to $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
OMP.
During the year ended December 31, 1999, in connection with the relocation
of our operations from Texas to New Jersey, we incurred $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 $7.1
million compared to $9.2 million in 1999. As discussed above, the net loss in
the prior year included $2.9 million of expenses associated with our relocation
from Texas to New Jersey.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, we had cash and cash equivalents and short-term
investments of $4.9 million compared to $5.5 million at the end of 2000. In
July 2001, we received $5.9 million in net proceeds from the private placement
of 3,125,000 shares of our common stock and warrants to purchase 1,750,000
shares of our common stock. Approximately $3.0 million of the net proceeds
were used to satisfy the entire outstanding balance on our revolving loan
facility. In addition, a portion of the proceeds were used to fund the
operating loss for the year ended December 31, 2001, reduce accounts payable and
accrued liabilities, acquire capital assets and service debt. Working capital
increased to $8.9 million at December 31, 2001 from $5.3 million at December 31,
2000. The increase resulted principally from decreases in notes payable,
accounts payable, and accrued liabilities net of decreases in cash and accounts
receivable.
Our operating activities used net cash of $1.7 million for the year ended
December 31, 2001 to fund our operating loss for the period, net of non-cash
charges, and decreases in accounts payable and accrued liabilities.
Our investing activities used net cash of $629,000 for the year ended
December 31, 2001 for the purchase of capital equipment and additions to
patents.
29
Our financing activities provided net cash of $1.7 million for the year
ended December 31, 2001. In July 2001, we completed the private placement of
3,125,000 shares of our common stock and warrants to purchase 1,750,000 shares
of our common stock. Net proceeds from the offering were $5.9 million. We used
$3.0 million of the proceeds to satisfy the entire outstanding balance on our
revolving loan facility. During 2001, we also used $1.2 million in cash to
reduce the principal balance on our term debt. The following table reflects a
summary of our contractual cash obligations as of December 31, 2001:
Payments Due by Period
-----------------------------------------------------------------------------
Less than one
Total year 1 to 3 years 4 to 5 years After 5 years
-------------- -------------- ------------- -------------- --------------
Long-term debt(1) $ 2,197,000 $ 1,334,000 $ 394,000 $ 129,000 $ 340,000
Operating leases 6,498,000 833,000 1,666,000 1,778,000 2,221,000
-------------- -------------- ------------- -------------- --------------
Total contractual
cash obligations $ 8,695,000 $ 2,167,000 $ 2,060,000 $ 1,907,000 $ 2,561,000
============== ============== ============= ============== ==============
(1) Under our debt agreements, the maturity of our outstanding debt could be accelerated if we do not
maintain certain covenants.
We believe that our current cash resources together with anticipated
product revenues and committed research and development grant funding will be
sufficient to finance our planned operations, research and development programs
and fixed asset requirements through 2002. However, there can be no assurance
that such sources of funds will be sufficient to meet our needs and as a result,
we may need additional funding. In August 2001, we voluntarily terminated our
$3.0 million revolving loan facility and currently we have no additional
borrowing availability through our existing credit facilities or commitments for
any future funding. 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 research and 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".
At December 31, 2001, there were 460,636 shares of common stock outstanding
that are subject to redemption by us under certain conditions. These shares were
issued to one investor in a private placement in November 1999. Pursuant to the
terms of the purchase agreement, if we do not maintain a listing on or quotation
of our shares of common stock on a U.S. stock exchange or market system we will
be required to redeem such shares at $4.20 per share or $1.9 million in the
aggregate.
We have incurred losses since our inception and therefore have not been
subject to federal income taxes. As of December 31, 2001, we had net operating
loss ("NOL") and research and development tax credit carryforwards for federal
income tax purposes of $57.4 million and $747,000, 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 $36.6 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 $7.0 million, available to reduce future state income
taxes. In March 2002, the Company realized $248,000 through the sale and
transfer of $3.2 million of state tax net operating losses. The sale and
transfer was made through the Technology Business Tax Certificate Program
sponsored by the New Jersey Economic Development Authority.
30
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, 2001.
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
31
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 May 31, 2002, 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 May 31, 2002, 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 May 31, 2002, 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 May 31, 2002, under the caption "Certain Relationships
and Related Transactions," and such information is incorporated herein by
reference.
32
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, 2000 and 2001 . . . . . . . . . . . . . . .F-2
Statements of Operations for the years ended
December 31, 1999, 2000 and 2001. . . . . . . . . . . . . . . . . . . . . .F-3
Statements of Stockholders' Equity for the years
ended December 31, 1999, 2000 and 2001. . . . . . . . . . . . . . . . . . .F-4
Statements of Cash Flows for the years ended
December 31, 1999, 2000 and 2001. . . . . . . . . . . . . . . . . . . . . .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:
None
(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.
33
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 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).
10.4 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).
10.5 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).
10.6 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).
10.7 Stock Purchase Warrant dated November 18, 1996, issued to Gruntal &
Co., Incorporated (incorporated by reference to Exhibit 10.19 to
Amendment No. 1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 on Form 10-K/A).
10.8+ 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).
10.9+ 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).
10.10+ 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.)
10.11+ 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.)
34
10.12 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.)
10.13 Amendment dated September 21, 1999 to Lease Agreement by and between
Maurice M. Weill, Trustee for Branchburg Property and LifeCell
Corporation (incorporated by reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000).
10.14 Amendment dated April 7, 2000 to Lease Agreement by and between
Maurice M. Weill, Trustee for Branchburg Property and LifeCell
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, 2000).
10.15 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).
10.16 Stock Purchase Warrant dated November 17, 1999, issued to The Tail
Wind Fund, Ltd. (incorporated by reference to Exhibit 4.4 to the
Company's Registration Statement on Form S-3 (Registration No.
333-94715) filed with the Commission on January 14, 2000.)
10.17 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).
10.18 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).
10.19 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).
10.20 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).
10.21 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).
10.22 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).
10.23+ Form of Change in Control Agreement (incorporated by reference to
Exhibit 10.26 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000).
10.24 Stock Purchase Warrant dated October 31, 2000, issued to Prudential
Securities Incorporated (incorporated by reference to Exhibit 10.27
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000).
10.25 Stock Purchase Warrant dated October 31, 2000, issued to Gruntal &
Co., L.L.C. (incorporated by reference to Exhibit 10.28 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000).
10.26 Form of Purchase Agreement dated June 29, 2001 between LifeCell
Corporation and Certain Investors (incorporated by reference to
Exhibit 10.29 of the Company's Form 8-K filed with the Commission on
July 11, 2001).
35
10.27 Form of Purchase Agreement dated June 29, 2001 between LifeCell
Corporation and Certain Investors (incorporated by reference to
Exhibit 10.30 of the Company's Form 8-K filed with the Commission on
July 11, 2001).
10.28 Form of Warrants dated July 10, 2001 between LifeCell Corporation
and Certain Investors (incorporated by reference to Exhibit 10.31 of
the Company's Form 8-K filed with the Commission on July 11, 2001).
10.29* Amendment dated as of May 1, 2001 to the Loan Agreement dated May
31, 2000 between LifeCell Corporation and Public Service Millennium
Economic Development Fund L.L.C.
10.30* Amendment (Second) dated as of February 15, 2002 to the Loan
Agreement dated May 31, 2000 between LifeCell Corporation and Public
Service Millennium Economic Development Fund L.L.C.
10.31* Waiver Agreement dated as of March 11, 2002 among the Company and
certain holders of the Series B preferred stock
23.1* Consent of Arthur Andersen LLP.
99.1* Representation letter dated March 22, 2002 regarding audit performed
by Arthur Andersen.
36
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 22, 2002.
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 22, 2002
- ----------------------- Officer (Principal Executive Officer)
Paul G. Thomas
/s/ Steven T. Sobieski Vice President and Chief Financial March 22, 2002
- ----------------------- Officer (Principal Financial Officer)
Steven T. Sobieski )
/s/ Bradly C. Tyler Controller March 22, 2002
- ----------------------- (Principal Accounting Officer)
Bradly C. Tyler
/s/ Michael A. Cahr Director March 22, 2002
- -----------------------
Michael A. Cahr
/s/ Peter D. Costantino Director March 22, 2002
- -----------------------
Peter D. Costantino
/s/ James G. Foster Director March 22, 2002
- -----------------------
James G. Foster
/s/ David Fitzgerald Director March 22, 2002
- -----------------------
David Fitzgerald
/s/ Stephen A. Livesey Director March 22, 2002
- -----------------------
Stephen A. Livesey
37
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, 2000 and 2001, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. 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.
As more fully described in Note 8 to the financial statements, the Company
has revised the balance sheet as of December 31, 2000 and the statement of
stockholders' equity for the years ended December 31, 1999 and 2000 to reflect
the reclassification of common stock, subject to redemption from stockholders'
equity.
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, 2000 and 2001, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
February 25, 2002
F-1
LIFECELL CORPORATION
BALANCE SHEETS
DECEMBER 31,
----------------------------
2000 2001
------------- -------------
Assets
Current assets
Cash and cash equivalents $ 5,220,000 $ 4,650,000
Short-term investments 315,000 250,000
Accounts and other receivables, net of allowance for doubtful
accounts of $170,000 in 2000 and $114,000 in 2001 4,287,000 3,799,000
Inventories 4,711,000 4,691,000
Prepayments and other 269,000 319,000
------------- -------------
Total current assets 14,802,000 13,709,000
Fixed assets, net 9,991,000 8,728,000
Other assets, net 617,000 694,000
------------- -------------
Total assets $ 25,410,000 $ 23,131,000
============= =============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 2,434,000 $ 792,000
Accrued liabilities 3,025,000 2,732,000
Notes payable 2,859,000 -
Current portion of long-term debt 1,154,000 1,334,000
------------- -------------
Total current liabilities 9,472,000 4,858,000
------------- -------------
Deferred revenue 794,000 572,000
------------- -------------
Long-term debt 2,272,000 863,000
------------- -------------
Other long-term liabilities 83,000 70,000
------------- -------------
Commitments and contingencies
Temporary equity
Common stock, subject to redemption, $.001 par value, shares
issued and outstanding 925,000 in 2000 and 460,636 in 2001 3,885,000 1,935,000
Stockholders' equity
Series B preferred stock, $.001 par value, 182,205 shares
authorized; shares issued and outstanding 95,931 in 2000 and
101,726 in 2001 (liquidation preference at December 31, 2001 of
$ 10,173,000) - -
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 15,784,368 in 2000 and 19,851,868
in 2001 16,000 20,000
Warrants outstanding to purchase shares of common stock
3,370,298 in 2000 and 2,284,211 in 2001 1,269,000 4,002,000
Additional paid-in capital 69,728,000 76,581,000
Accumulated deficit (62,109,000) (65,770,000)
------------- -------------
Total stockholders' equity 8,904,000 14,833,000
------------- -------------
Total liabilities and stockholders' equity $ 25,410,000 $ 23,131,000
============= =============
The accompanying notes are an integral part of these financial statements.
F-2
LIFECELL CORPORATION
STATEMENTS OF OPERATIONS
For the Year Ended December 31,
----------------------------------------
1999 2000 2001
------------ ------------ ------------
Revenues:
Product revenues $11,912,000 $21,330,000 $26,560,000
Research grant revenues 764,000 1,442,000 1,209,000
------------ ------------ ------------
Total revenues 12,676,000 22,772,000 27,769,000
------------ ------------ ------------
Costs and Expenses:
Cost of products sold 3,452,000 6,949,000 8,862,000
Research and development 3,871,000 4,523,000 4,351,000
General and administrative 4,840,000 6,180,000 4,098,000
Selling and marketing 7,236,000 11,779,000 11,978,000
Relocation costs 2,937,000 - -
------------ ------------ ------------
Total costs and expenses 22,336,000 29,431,000 29,289,000
------------ ------------ ------------
Loss From Operations (9,660,000) (6,659,000) (1,520,000)
Interest and other income (expense), net 468,000 (479,000) (550,000)
------------ ------------ ------------
Net Loss (9,192,000) (7,138,000) (2,070,000)
Preferred Stock and Deemed Dividends (710,000) (593,000) (1,591,000)
------------ ------------ ------------
Net Loss Applicable to Common Stockholders $(9,902,000) $(7,731,000) $(3,661,000)
============ ============ ============
Loss Per Share of Common Stock-Basic and Diluted $ (0.83) $ (0.54) $ (0.20)
============ ============ ============
Shares Used in Computing Loss Per
Common Share-Basic and Diluted 11,937,532 14,372,083 18,240,431
============ ============ ============
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
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
Balance at December 31, 1998 119,084 $ - 11,611,852 $12,000 3,182,188 $ 298,000
Stock options exercised - - 219,764 - - -
Warrants issued - - - - 284,211 590,000
Conversion of Series B preferred stock (1,068) - 34,450 - - -
Common Stock issued - - 1,033,577 1,000 - -
Dividends on Series B preferred stock - - - - - -
Net Loss - - - - - -
-------------------------------------------------------------------
Balance at December 31, 1999, as previously
reported 118,016 - 12,899,643 13,000 3,466,399 888,000
Reclassification of common stock, subject to
redemption to temporary equity (See Note 8) - - (925,000) (1,000) - -
-------------------------------------------------------------------
Balance at December 31, 1999, revised 118,016 - 11,974,643 12,000 3,466,399 888,000
Stock options exercised - - 206,311 - - -
Warrants exercised - - 299,324 - (327,896) (26,000)
Warrants expired - - - - (60,000) -
Warrants issued - - - - 291,795 407,000
Conversion of Series B preferred stock (24,927) - 804,090 1,000 - -
Common stock issued - - 2,500,000 3,000 - -
Dividends on Series B preferred stock 2,842 - - - - -
Net Loss - - - - - -
-------------------------------------------------------------------
Balance at December 31, 2000 95,931 - 15,784,368 16,000 3,370,298 1,269,000
Stock options exercised - - 135 - - -
Warrants issued - - - - 2,224,030 3,231,000
Warrants expired - - - - (3,310,117) (498,000)
Common stock issued - - 3,125,000 4,000 - -
Reclassification of common stock, subject to
redemption - - 464,364 - - -
Dividends on Series B preferred stock 5,795 - - - - -
Deemed dividend recorded in connection with
issuance of additional shares of common stock
and warrant re-pricing - - 478,001 - - -
Net Loss - - - - - -
-------------------------------------------------------------------
Balance at December 31, 2001 101,726 $ - 19,851,868 $20,000 2,284,211 $ 4,002,000
===================================================================
ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
CAPITAL DEFICIT EQUITY
--------------------------------------------
Balance at December 31, 1998 $58,427,000 $(44,476,000) $ 14,261,000
Stock options exercised 670,000 - 670,000
Warrants issued (382,000) - 208,000
Conversion of Series B preferred stock - - -
Common Stock issued 4,011,000 - 4,012,000
Dividends on Series B preferred stock - (710,000) (710,000)
Net Loss - (9,192,000) (9,192,000)
--------------------------------------------
Balance at December 31, 1999, as previously
reported 62,726,000 (54,378,000) 9,249,000
Reclassification of common stock, subject to
redemption to temporary equity (See Note 8) (3,884,000) - (3,885,000)
--------------------------------------------
Balance at December 31, 1999, revised 58,842,000 (54,378,000) 5,364,000
Stock options exercised 726,000 - 726,000
Warrants exercised 1,227,000 - 1,201,000
Warrants expired - - -
Warrants issued (407,000) - -
Conversion of Series B preferred stock 1,000 - 2,000
Common stock issued 9,055,000 - 9,058,000
Dividends on Series B preferred stock 284,000 (593,000) (309,000)
Net Loss - (7,138,000) (7,138,000)
--------------------------------------------
Balance at December 31, 2000 69,728,000 (62,109,000) 8,904,000
Stock options exercised - - -
Warrants issued (3,231,000) - -
Warrants expired 498,000 - -
Common stock issued 5,906,000 - 5,910,000
Reclassification of common stock, subject to
redemption 1,950,000 - 1,950,000
Dividends on Series B preferred stock 579,000 (440,000) 139,000
Deemed dividend recorded in connection with
issuance of additional shares of common stock
and warrant re-pricing 1,151,000 (1,151,000) -
Net Loss - (2,070,000) (2,070,000)
--------------------------------------------
Balance at December 31, 2001 $76,581,000 $(65,770,000) $ 14,833,000
============================================
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,
----------------------------------------
1999 2000 2001
------------ ------------ ------------
Cash Flows from Operating Activities:
Net loss $(9,192,000) $(7,138,000) $(2,070,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 411,000 1,290,000 1,761,000
Provision for bad debts 344,000 150,000 (15,000)
Loss on asset disposals 335,000 - -
Accretion of debt discount and financing cost - 69,000 192,000
Change in assets and liabilities:
(Increase) decrease in accounts and other receivables (1,517,000) (1,880,000) 503,000
(Increase) decrease in inventories (1,453,000) (1,509,000) 20,000
Increase in prepayments and other (152,000) (115,000) (50,000)
Increase (decrease) in accounts payable and
accrued liabilities 2,688,000 (141,000) (1,791,000)
Increase (decrease) in deferred revenues 405,000 389,000 (222,000)
Increase (decrease) increase in other liabilities - 83,000 (13,000)
------------ ------------ ------------
Net cash used in operating activities (8,131,000) (8,802,000) (1,685,000)
------------ ------------ ------------
Cash Flows from Investing Activities:
Capital expenditures (5,885,000) (4,681,000) (458,000)
Additions to patents (109,000) (99,000) (171,000)
Purchase of short-term investments (315,000) - -
Sales of short-term investments 4,001,000 - 65,000
------------ ------------ ------------
Net cash used in investing activities (2,308,000) (4,780,000) (564,000)
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of stock and warrants 4,682,000 10,987,000 5,910,000
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) (1,229,000)
Payments on notes payable - (2,000) (2,998,000)
Cash dividends paid (531,000) (346,000) (4,000)
------------ ------------ ------------
Net cash provided by financing activities 7,151,000 14,065,000 1,679,000
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (3,288,000) 483,000 (570,000)
Cash and cash equivalents at beginning of period 8,025,000 4,737,000 5,220,000
------------ ------------ ------------
Cash and cash equivalents at end of period $ 4,737,000 $ 5,220,000 $ 4,650,000
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ - $ 683,000 $ 581,000
============ ============ ============
Supplemental Disclosure of Non-cash Financing Activities:
Series B preferred stock issued as payment of dividends $ - $ 284,000 $ 579,000
============ ============ ============
Deemed dividends $ - $ - $ 1,151,000
============ ============ ============
Fair value of warrants issued in connection with:
Notes payable $ 208,000 $ - $ -
============ ============ ============
Common stock $ - $ 407,000 $ 3,231,000
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-5
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. ORGANIZATION
LifeCell Corporation ("LifeCell" or "the Company") develops and
markets biologically based solutions for the repair and replacement of damaged
or inadequate human tissue. The Company's tissue based products are subject to
regulation by the United States Food and Drug Administration as human tissue for
transplantation. 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.
2. ACCOUNTING POLICIES
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.
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. Inventories on hand include the cost
of materials, freight, direct labor and manufacturing overhead.
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.
The Company evaluates the recoverability of its long-lived assets
which include property and equipment and deferred patent costs whenever events
or changes in circumstance indicate that the carrying amount may not be
recoverable. If indications are that the carrying amount of the asset is not
recoverable, the Company will estimate the future cash flows expected to result
from use of the asset and its eventual disposition. If the sum of the expected
future cash flows (non-discounted and without interest charges) is less than the
carrying amount of the asset, the Company would recognize an impairment loss.
The impairment loss recognized would be measured as the amount by which the
carrying amount of the asset exceeds its fair value. As of December 31, 2001,
management believes that no impairment losses are required.
F-6
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2001
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. For the years ended December 31,
1999, 2000 and 2001, amortization expense relating to deferred patent costs was
$20,000, $52,000 and $40,000, respectively.
Revenue Recognition
Product revenues are recognized when the product is shipped to the
customer. 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 Share of Common Stock
Loss per share of common stock has been computed by dividing net loss,
increased by stated dividends on Series B preferred stock and deemed dividends
(see Note 8), 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 share of common stock is the same as basic loss per
share of common stock in all years. The Company's common stock equivalents were
not included in the loss per share calculation as the impact would be
antidilutive. At December 31, 2001, common stock equivalents which could
potentially dilute earnings per share in the future consisted of 101,726 shares
of issued and outstanding Series B preferred stock which are convertible into
3,685,736 shares of common stock, outstanding warrants to purchase 2,284,211
shares of common stock at exercise prices ranging from $1.92 to $5.00 and
outstanding options to purchase 3,280,269 shares of common stock at exercise
prices ranging from $1.64 to $11.00.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, short-term
investment, accounts receivable, accounts payable, debt and certain current
liabilities. Management believes 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.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under the asset-and-liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
F-7
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2001
Stock-based Compensation
The Company follows Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for equity-based awards issued to employees and directors. Under APB
No. 25, if the exercise price of the award equals or exceeds the fair value of
the underlying stock on the measurement date, no compensation expense is
recognized. The measurement date is the date on which the final number of shares
and exercise price are known and is generally the grant date for awards to
employees and directors. If the exercise price of the award is below the fair
value of the underlying stock on the measurement date, compensation expense is
recorded, using the intrinsic value method, and is recognized in the statement
of operations over the vesting period of the award. The Company also follows the
disclosure requirement of SFAS No. 123, "Accounting for Stock-based
Compensation."
The Company accounts for stock-based compensation to non-employees in
accordance with SFAS No. 123 and EITF Issue 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction With Selling, Goods and Services." Under SFAS No. 123 and EITF
96-18, the Company accounts for equity awards issued to non-employees based on
the fair value of the award on the measurement date.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term 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.
Additions
Balance at Charged to Deductions Balance at
Beginning of Costs and From End of
Allowance for Doubtful Accounts Period Expenses Allowance Period
------------- ------------ ------------ -----------
December 31, 1999 $ 6,000 $ 344,000 $ (175,000) $ 175,000
December 31, 2000 175,000 150,000 (155,000) 170,000
December 31, 2001 170,000 (15,000) (41,000) 114,000
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141 "Business Combinations"
("SFAS 141") and SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS
142"). These pronouncements change the accounting for business combinations,
goodwill and intangible assets. SFAS 141 eliminates the pooling-of-interests
method of accounting for business combinations and further clarifies the
criteria to recognize intangible assets separately from goodwill. The
requirement of SFAS 141 is effective for any business combination accounted for
by the purchase method that is completed after June 30, 2001. SFAS 142 states
that goodwill and indefinite lived intangible assets are no longer amortized,
but are reviewed for impairment annually (or more frequently if impairment
indicators arise). The amortization provisions of SFAS 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, companies are required to
adopt the pronouncement in their fiscal year beginning after December 15, 2001.
Management believes that the adoption of these statements will not have any
effect on the Company's financial statements.
F-8
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2001
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" that applies to legal obligations associated with the
retirement of a tangible long-lived asset that results from the acquisition,
construction, or development and/or the normal operation of a long-lived asset.
Companies are required to adopt the pronouncement in their fiscal year beginning
after June 15, 2002. Management believes that adoption of this Statement will
not have any impact on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions" for the disposal of a
segment of a business. This Statement also amends Accounting Research Bulletin
No. 51, "Consolidated Financial Statements," to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. This
Statement provides guidance on financial accounting and reporting for the
impairment or disposal of long-lived assets. Companies are required to adopt the
pronouncement in their fiscal year beginning after December 15, 2001. Management
believes that adoption of this Statement will not have any impact on the
Company's financial statements.
3. INVENTORIES
Inventories consist of the following at December 31,:
2000 2001
------------ ------------
Tissue and materials $ 929,000 $ 1,314,000
Tissue products in-process 2,259,000 1,307,000
Finished tissue products 1,523,000 2,070,000
------------ ------------
Total inventories $ 4,711,000 $ 4,691,000
============ ============
4. FIXED ASSETS
Fixed assets consist of the following at December 31,:
2000 2001
------------ ------------
Machinery and equipment $ 3,540,000 $ 3,668,000
Leasehold improvements 7,368,000 7,446,000
Office equipment, furniture and fixtures 1,912,000 2,165,000
------------ ------------
12,820,000 13,279,000
Accumulated depreciation and amortization (2,829,000) (4,551,000)
------------ ------------
Fixed assets, net $ 9,991,000 $ 8,728,000
============ ============
For the years ended December 31, 1999, 2000 and 2001 the depreciation
and amortization expense related to fixed assets was $391,000, $1,238,000 and
$1,722,000, respectively.
F-9
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2001
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31,:
2000 2001
------------ ------------
Tissue inventory purchases $ 748,000 $ 922,000
Employee compensation and benefits 323,000 911,000
Marketing and distribution fees 777,000 777,000
Operating expenses and other 1,177,000 122,000
------------ ------------
Total accrued liabilities $ 3,025,000 $ 2,732,000
============ ============
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 $1.0 million less offering costs of $100,000 (see Note
8).
In February 2000, the Company entered into a co-promotion agreement
with OMP, Inc. relating to the marketing and distribution of the Company's
Cymetra(TM) product. Pursuant to the terms of the agreement, OMP 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 provided for a revolving loan of
$3.0 million and a term loan of $2.5 million. In December 1999, the Company
borrowed $3.0 million on the revolving loan and in February 2000, the Company
borrowed $2.5 million under the term loan. In August 2001, the Company satisfied
the entire outstanding balance on the revolving loan facility using proceeds
from a private placement of common stock and warrants completed in July 2001
(see Note 8) and voluntarily terminated this revolving loan facility. The
revolving loan required monthly interest payments based on an annual interest
rate of prime rate plus 3%, which approximated 11.0% during 2001 and 12.5%
during 2000. 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, intangible 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 is accreted over the term of the loan agreement as additional interest
expense. The balance outstanding on the term loan was $1,278,000 at December 31,
2001.
F-10
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2001
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, inventories and
fixed assets. The balance outstanding on this loan was $294,000 at December 31,
2001.
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. The balance
outstanding on the note was $625,000 at December 31, 2001.
Interest expense for the years ended December 31, 1999, 2000 and 2001
was $15,000, $683,000 and $697,000, respectively.
Long-term borrowings have the following scheduled maturities:
Years ended December 31:
2002 $1,334,000
2003 337,000
2004 57,000
2005 62,000
2006 and beyond 407,000
----------
Total $2,197,000
==========
8. CAPITAL STOCK, OPTIONS AND WARRANTS
Common stock, subject to redemption
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. Pursuant to the terms of the purchase
agreement, the Company is required to issue additional shares to the investor if
the market price of the Company's common stock is below a fixed amount per share
on the first, second and/or third anniversary of the date of issuance of the
common stock. If sufficient additional shares are not available for such
issuance, a cash payment may be required at 105 percent of the fair value of the
additional shares to be issued. In November 2000, the first anniversary, the
market price was above the fixed amount and accordingly no additional shares
were issued. In November 2001, the Company issued 478,001 additional shares of
common stock to the investor, without additional consideration, pursuant to the
terms of this agreement. In connection with the issuance, the Company recorded a
deemed dividend of $1,037,000 equal to the fair value of shares issued. An
additional deemed dividend of $114,000 was recorded in 2001 in connection with
the repricing of certain warrants that were issued as part of the private
placement. The Company will be required to issue additional shares in November
2002 if the market price of the Company's common stock is below $1.96 on the
third anniversary.
F-11
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2001
The shares of common stock originally issued in 1999 are redeemable at
$4.20 per share by the Company if it does not maintain a listing or a quotation
of its shares of common stock on a U.S. stock exchange or market system. Given
this requirement is beyond the Company's control, the remaining outstanding
shares held by this investor are considered to be temporary equity. Such shares
were originally recorded in 1999 as common stock within stockholders' equity. In
connection with the preparation of the Company's financial statements for the
year ended December 31, 2001, the Company deemed it more appropriate to reflect
such shares as temporary equity - common stock, subject to redemption. The
balance sheet as of December 31, 1999 and 2000 has been revised to reflect the
reclassification of the $3.9 million of common stock, subject to redemption from
stockholders' equity. The reclassification had no impact on the Company's
previously reported results of operations. In the fourth quarter of 2001, the
Company received notification that the investor sold 464,364 shares of the
original 925,000 shares and accordingly, $1.9 million of the amount was
reclassified to stockholders' equity - common 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 convertible at any time at the option of the
holder into approximately 36.232 shares of common stock (3,685,736 shares of
common stock at December 31, 2001), subject to adjustment for dilutive issuances
of securities. The Series B preferred stock has a liquidation preference of $100
per share, or $10,173,000 as of December 31, 2001, 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. 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.
The Series B preferred stock paid cumulative dividends quarterly,
through September 30, 2001, at an annual rate of $6.00 per share. Dividends were
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. 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, 2000 and 2001, the Company
paid cash dividends on the Series B preferred stock of $531,000, $346,000 and
$4,000, respectively. Additionally, the Company paid dividends equivalent to
$284,000 through the issuance of 2,842 shares of Series B preferred stock in
2000 and $579,000 through the issuance of 5,795 shares of Series B preferred
stock in 2001.
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 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.
In July 2001, the Company issued 3,125,000 shares of common stock in a
private placement at a price of $1.92 per share. The proceeds of the offering
were approximately $6.0 million before deducting placement agent fees and
offering costs of $90,000.
F-12
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2001
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 stock 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.
A summary of stock option activity for the years ended December 31,
1999, 2000 and 2001 is as follows:
1992 2000 Director Weighted
Stock Stock Stock Total Average
Option Option Option Stock Exercise
Plan Plan Plan Options Price ($)
---------- -------- --------- ---------- ---------
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
Granted 342,050 243,000 65,000 650,050 2.23
Exercised (135) -- -- (135) 0.73
Forfeited (332,019) (15,050) -- (347,069) 4.16
---------- -------- --------- ----------
Balance at December 31, 2001 2,204,769 745,500 220,000 3,170,269 3.77
========== ======== ========= ==========
Available for future grant at
December 31, 2001 1,022 754,500 440,000 1,195,522
F-13
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2001
A summary of stock options outstanding under the three plans combined at
December 31, 2001 is as follows:
Options Outstanding Options Exercisable
--------------------------------------- -------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 2001 Life (Years) Price 2001 Price
- ------------------ -------------- ------------ --------- -------------- ---------
$1.64 to $ 1.99 43,000 7.2 $ 1.73 125 $ 1.78
2.00 to 2.99 1,023,400 8.7 2.27 223,850 2.39
3.00 to 3.99 1,034,969 5.7 3.76 871,969 3.75
4.00 to 4.99 436,050 7.2 4.26 245,600 4.26
5.00 to 5.99 385,700 7.0 5.39 170,738 5.45
6.00 to 6.99 221,400 6.2 6.62 166,725 6.63
7.00 to 11.00 25,750 5.2 10.32 13,938 10.69
-------------- ------------ --------------
$1.64 to $ 11.00 3,170,269 7.1 $ 3.77 1,692,944 $ 4.15
============== ============ ==============
In addition to the amounts set forth in the tables 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. During 2000, directors exercised options to
purchase 110,000 shares of common stock pursuant to these grants. At December
31, 2001, 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 3.4 years as of December
31, 2001.
The Company accounts for its employee stock-based compensation plans
under APB No. 25 and its related interpretations. Had compensation expense been
determined by the Company based on the fair value as of the grant dates for
awards in 1999, 2000 and 2001 consistent with SFAS No. 123, the Company's net
loss and loss per share would have been increased to the following pro forma
amounts:
1999 2000 2001
------------- ------------ ------------
Net Loss:
As reported $ (9,192,000) $(7,138,000) $(2,070,000)
============= ============ ============
Pro forma $(11,158,000) $(8,921,000) $(4,012,000)
============= ============ ============
Loss Per Share of Common Stock-
(Basic and Diluted):
As reported $ (0.83) $ (0.54) $ (0.20)
============= ============ ============
Pro forma $ (0.99) $ (0.67) $ (0.31)
============= ============ ============
Under the provisions of SFAS No. 123, the weighted average fair value
of options granted in 1999, 2000, and 2001 was $2.64, $2.62 and $1.57 per share,
respectively, under the 1992 Plan. The weighted average fair value of options
granted in 2000 and 2001 was $2.68 and $1.57 per share, respectively, under the
2000 Plan. The weighted average fair value of options granted in 1999, 2000, and
2001 was $2.76, $3.71 and $1.47 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 1999, 2000 and 2001, 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.
F-14
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2001
Warrants
As of December 31, 2000 and 2001, warrants to acquire a total of
3,370,298 and 2,284,211 shares, respectively, of common stock were outstanding
as set forth below.
During 1996, in conjunction with the sale of the Series B preferred
stock, the Company issued warrants to acquire 3,158,264 shares of common stock.
During November 2001, all of the warrants expired.
During November 1999, in conjunction with the sale of common stock,
the Company issued warrants, with an initial exercise price of $5.46 per share,
to acquire 200,000 shares of common stock. These warrants expire in November
2004. These warrants have provisions for adjustment of the exercise price under
certain conditions. In November 2001, the exercise price of the warrants was
adjusted to $1.96. In connection with the re-pricing adjustment the Company
recorded a deemed dividend of $114,000. Subsequent adjustments will only occur
if the market price of the common stock is below $1.96 in November 2003.
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.
During October 2000, in connection with the sale of common stock, the
Company issued warrants, at an exercise price of $5.00 per share, to acquire
250,000 shares of its common stock to the placement agents. These warrants
expire in October 2005.
During July 2001, in connection with the sale of common stock, the
Company issued warrants to the investors, at an exercise price of $1.92 per
share, to acquire 1,750,000 shares of its common stock. These warrants expire in
July 2006.
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.
F-15
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2001
In June 1999, the Company recorded a charge of approximately $335,000
representing the net book value of assets that Texas. The Company occupied
rented office and manufacturing space in Texas pursuant to a lease that extended
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.
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 are fully vested after one year of
employment. Total Company contributions during 1999, 2000 and 2001 were $23,000,
$31,000 and $34,000, respectively.
The Company also maintains 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 1999, 2000, and 2001 were $14,000, $7,000 and $13,000,
respectively.
11. INCOME TAXES
As of December 31, 2001, the Company has a net operating loss
carryforward ("NOL") for federal income tax purposes of approximately $57.4
million, subject to the limitations described below, expiring as follows:
Year Expires
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
2013 8,200,000
2019 7,700,000
2020 7,700,000
2021 2,600,000
-----------
$57,400,000
===========
F-16
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2001
Additionally, the Company has approximately $747,000 of and
development tax credit carryforwards for federal income tax purposes which will
expire in varying amounts commencing in 2002. 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, 2001, is approximately $36.6
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.
At December 31, 2001, the Company also had a net operating loss
carryforward for state income tax purposes of approximately $10.2 million which
expire in varying amounts commencing in 2006.
For financial reporting purposes, a valuation allowance of $21,646,000
has been recorded as of December 31, 2001, to fully offset the deferred tax
asset related to these carryforwards. The principal components of the deferred
tax asset as of December 31, 2000 and 2001, assuming a 34% federal tax rate, are
as follows:
2000 2001
------------- -------------
Temporary differences:
Deferred revenue $ 270,000 $ 190,000
Uniform capitalization of inventory costs 160,000 90,000
Other items 210,000 160,000
------------- -------------
Total temporary differences 640,000 440,000
Federal tax losses and credits not currently utilizable 19,320,000 20,290,000
State tax losses and credits not currently utilizable 685,000 916,000
------------- -------------
Total deferred tax assets 20,645,000 21,646,000
Less valuation allowance (20,645,000) (21,646,000)
------------- -------------
Net deferred tax asset $ -- $ --
============= =============
The net increase in the deferred tax valuation allowance for 2000 and
2001 was $3,022,000 and $715,000, 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 1999, 2000 and 2001.
12. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is 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 the Company, make profits from the storing, processing, and
distribution of human tissue in contravention of California law. The Company is
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 Regner complaint, and the two
cases have been combined. 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
F-17
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2001
having the power to award injunctive relief and disgorgement of all profits from
the alleged illegal practices. As of December 31, 2001, the plaintiffs have
agreed to dismiss all claims against the Company, while the Company promises not
to sue plaintiffs for malicious prosecution. A court order embodying this
settlement, consented to by all parties of the suit, is currently before the
Court, but has not yet been signed.
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. ("Gruntal")
and Prudential Securities, Inc. ("Prudential"). The complaint alleged that the
Company, 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
sought damages in an unspecified amount. Gruntal and Prudential's Vector
Healthcare Group acted as placement agents in the Company's private placement
that closed in October 2000. In March 2001, the Company filed a motion for
dismissal. In July 2001, the plaintiffs withdrew their complaint and released
the Company and the other defendants from all claims related to the Company's
October 2000 private placement.
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.
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 OMP, Inc. as its exclusive sales and
marketing representative of Cymetra for office-based dermatologists and plastic
surgeons. During 1999, 2000 and 2001, sales of products through Boston
Scientific Corporation represented approximately 4%, 28% and 35%, respectively,
of total product revenues. During 1999, 2000 and 2001, sales of products OMP
represented approximately 0%, 13% and 9%, respectively, of total product
revenues. The Company expects sales of products through such marketing agents to
continue to increase as a percentage of total revenues. Both Boston Scientific
and OMP 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, 2001, were as follows:
2002 $ 833,000
2003 833,000
2004 833,000
2005 889,000
2006 and beyond 3,110,000
----------
Total $6,498,000
==========
Rental expense was $501,000, $565,000 and $872,000 for the years ended
December 31, 1999, 2000, and 2001, respectively.
F-18
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2001
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 for the years ended December 31, 1999. 2000
and 2001, are summarized as follows:
1999 2000 2001
----------- ----------- -----------
United States $11,065,000 $20,219,000 $24,939,000
Other countries 847,000 1,111,000 1,621,000
----------- ----------- -----------
Total Product Revenues $11,912,000 $21,330,000 $26,560,000
=========== =========== ===========
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, 2000 and 2001:
First Second Third Fourth
(In thousands except per share amounts) Quarter Quarter Quarter Quarter
--------- --------- --------- -----------
2000
Total Revenues. . . . . . . . . . . . . . . . . . . $ 4,816 $ 5,862 $ 6,235 $ 5,859
Product Revenues. . . . . . . . . . . . . . . . . . 4,438 5,387 5,919 5,586
Cost of Products Sold . . . . . . . . . . . . . . . 1,188 1,912 1,693 2,156
Net Loss. . . . . . . . . . . . . . . . . . . . . . (1,156) (2,149) (1,649) (2,184)
Net Loss to Common Shareholders . . . . . . . . . . (1,318) (2,294) (1,791) (2,328)
Loss Per Share of Common Stock - Basic and Diluted. (0.10) (0.16) (0.13) (0.15)
2001
Total Revenues. . . . . . . . . . . . . . . . . . . $ 6,771 $ 7,451 $ 6,654 $ 6,893
Product Revenues. . . . . . . . . . . . . . . . . . 6,424 7,011 6,454 6,671
Cost of Products Sold . . . . . . . . . . . . . . . 2,495 2,358 1,949 2,060
Net Income (Loss) . . . . . . . . . . . . . . . . . (1,316) (657) (199) 102
Net Loss to Common Shareholders . . . . . . . . . . (1,459) (804) (349) (1,049)(1)
Loss Per Share of Common Stock - Basic and Diluted. (0.09) (0.05) (0.02) (0.05)
(1) Includes a deemed dividend of $1,151,000 resulting from the issuance of additional shares of common
stock in November 2001 to an investor pursuant to the terms of an investment in 1999.
F-19