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, 2002 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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
---
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 June
30, 2002: $46,013,000.
Number of shares of registrant's Common Stock outstanding as of March 21, 2003:
21,317,248. (As of March 21, 2003 there were 73,995 shares of Series B
Preferred Stock outstanding which are convertible into an additional 2,680,986
shares of Common Stock.)
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 30, 2003 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
Products and Product Development Activities 5
Marketing and Distribution 9
Sources of Materials 9
Government Regulation 10
Research and Development 14
Patents, Proprietary Information & Trademarks 14
Competition 15
Employees 15
Risk Factors 15
Special Note Regarding Forward-Looking Statements 23
Item 2. Properties 23
Item 3. Legal Proceedings 23
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 24
Dividend Policy 24
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 26
General and Background 26
Critical Accounting Policies 26
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 and 32
Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions 32
Item 14. Controls and Procedures 32
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 33
2
PART I
This Annual Report on Form 10-K contains, in addition to historical
information, "forward-looking statements" (within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended) that involve risks and uncertainties. See
"Business-Special Note Regarding Forward-Looking Statements."
ITEM 1. BUSINESS- LIFECELL CORPORATION
GENERAL
We develop and market biological products for the repair and replacement of
damaged or inadequate human tissue in numerous different clinical applications.
Our proprietary 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
proprietary human tissue based products: AlloDerm(R) for plastic reconstructive,
general surgical, burn and periodontal procedures; Cymetra(R) a version of
AlloDerm(R) in particulate form for non-surgical correction of soft tissue
defects; Repliform(R) for urologic and gynecologic procedures; and Graft
Jacket(TM), an acellular periosteum replacement graft. We also distribute
cryopreserved allograft skin for use as a temporary wound dressing in the
treatment of burns and we are the exclusive marketing agent for the
SmartPReP(TM) Platelet Concentration System in the United States to ENT (ear,
nose and throat), plastic reconstructive and general surgeons in hospitals. 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 One
Millennium Way, Branchburg, New Jersey 08876, our phone number is (908)
947-1100, and our website address is www.lifecell.com.
TECHNOLOGY
To date our product development programs have been generated from the
following proprietary technologies:
- methods for producing an acellular 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, such as dermis, heart valves, blood vessels and nerve
connective 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 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
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tissue matrix is destroyed or lost because of trauma or surgery, the body cannot
regenerate the damaged portion. The only method of replacing large sections of
the tissue matrix is through transplantation.
Soft tissue transplants from one part of the patient's body to another
("autograft") generally are successful, however, the procedure results in the
creation of an additional wound site. Historically, the ability to transplant
tissue from one person to another ("allograft") has been limited because the
donor's cells within the transplanted tissue may trigger an immune response,
resulting in rejection of the transplanted tissue. We believe that previous
attempts to remove cells from soft tissue grafts before performing an allograft
transplant have resulted in disruption or damage of the tissue matrix, causing
an inflammatory response and rejection of the tissue following transplantation.
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
clinical applications. In addition to the current commercial applications
of our proprietary tissue products, 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 ten years and
with over 400,000 tissue grafts processed and distributed to date.
Prolonged Shelf Life. Our tissue matrix technology allows extended
storage and ease of transportation of products. AlloDerm, Repliform and
Graft Jacket can be stored 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 can be
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 interact with cells that are involved in 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 that mimics the stabilizing influences present in the body. We
accomplish this through manipulation of signal transduction mechanisms that
control cellular metabolism and function, 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.
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PRODUCTS AND PRODUCT DEVELOPMENT ACTIVITIES
ACELLULAR TISSUE PRODUCTS
ALLODERM
AlloDerm is donated cadaveric skin that has been processed with our tissue
matrix technology. 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, AlloDerm 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 marketed to plastic reconstructive and general surgeons as an
"off-the-shelf" alternative to autograft. AlloDerm is predominately used in
plastic reconstructive, general surgical, burn and periodontal procedures:
- as an implant for soft tissue reconstruction or tissue deficit
correction;
- as an interpositional graft for tissue coverage or closure; and
- as a sling to support tissue following nerve or muscle damage.
In these procedures, alternatives to using AlloDerm include autologous
tissue, synthetic and biosynthetic materials. We believe the disadvantages of
using autologous tissue are the creation of a separate donor site wound and the
associated pain, morbidity and scarring from this additional wound.
Additionally, we believe the disadvantages of using synthetic materials are the
susceptibility of synthetics to infection, encapsulation (scaring), 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.
AlloDerm has been used in the treatment of third degree and deep
second-degree burns requiring skin grafting since 1994. 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 in 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.
AlloDerm is also used in general surgical procedures. For example, in
abdominal procedures, AlloDerm is used to replace tissue during hernia repair,
replacement of infected synthetic mesh and repair of the abdominal wall in
trauma cases.
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.
BioHorizons Implant Systems, Inc. is our exclusive distributor of AlloDerm and
AlloDerm(R)GBR(TM) for use in periodontal applications in the United States and
certain international markets.
5
Multiple independent prospective clinical trials have demonstrated that
AlloDerm is equivalent to autologous 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.
In periodontal surgery, alternatives to using AlloDerm include 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.
REPLIFORM TISSUE REGENERATION MATRIX
Repliform is the trade name for our proprietary tissue matrix product
intended for use in repairing damaged or inadequate integumental tissue in
urologic and gynecologic surgical procedures. Since 1997, surgeons have used
Repliform 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
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 together
with 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 for urinary incontinence or pelvic floor repair 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.
GRAFT JACKET PERIOSTEUM REPLACEMENT SCAFFOLD
Graft Jacket is the trade name for our proprietary tissue product intended
for use in repairing damaged or inadequate integumental tissue in orthopedic
surgical procedures. We introduced Graft Jacket in 2002 through Wright Medical
Technology, Inc., a developer, manufacturer and marketer of medical devices in
the orthopedic field.
CYMETRA MICRONIZED ALLODERM(R) TISSUE
Cymetra Micronized AlloDerm Tissue 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 other procedures to replace damaged or inadequate
integumental tissue, such as correction of soft tissue defects and depressed
scars or to replace integumental tissue lost through atrophy. Cymetra does not
require patient sensitivity testing and similar to AlloDerm promotes the
regeneration of normal human soft tissue.
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SMARTPREP PLATELET CONCENTRATION SYSTEM
We are the exclusive marketing agent for the SmartPReP(TM) Platelet
Concentration System in the United States to ENT, plastic reconstructive and
general surgeons in hospitals. The SmartPReP System is used for the preparation
and application of a biomaterial comprised of concentrations of plasma,
platelets and white blood cells from a small volume of a patient's own blood, at
the point-of-care, which can be applied to a wound or surgical site.
FDA STATUS OF OUR PRODUCTS
The United States Food and Drug Administration ("FDA") generally permits
tissue products 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 meet the definition of human tissue for
transplantation when intended for the replacement or repair of damaged or
inadequate integumental tissue, including gingival dermis. Repliform is the
trade name given to AlloDerm when it is labeled for the intended use of
repairing damaged or inadequate integumental tissue in urologic and gynecologic
procedures. 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 our belief that each of these products meet the
definition 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.
In 2002, we commenced commercial distribution of Graft Jacket. Graft Jacket
is the trade name given to AlloDerm when it is labeled for the intended use of
repairing damaged or inadequate integumental tissue in orthopedic surgery.
Relying on the FDA's findings with respect to AlloDerm, Repliform and Cymetra,
we believe that Graft Jacket meets the definition of human tissue for
transplantation and therefore we did not seek approval from FDA to market Graft
Jacket. In March 2003, the FDA contacted us and requested information supporting
our belief that Graft Jacket meets the definition of human tissue for
transplantation. We are currently preparing a response to the FDA's request.
There can be no assurance that the FDA will agree with us that Graft Jacket
meets the definition of human tissue for transplantation. If the FDA does not
agree, they may impose medical device regulation upon Graft Jacket. FDA could
also require us to cease marketing and/ or recall product already sold until FDA
approval is obtained and could seek to impose enforcement sanctions for
marketing this product without FDA approval.
The SmartPReP(TM) Platelet Concentration System is classified as a medical
device and Harvest Technologies Corporation, the manufacturer of the system, has
obtained 510K clearance from the FDA.
PRODUCT DEVELOPMENT ACTIVITIES
ORTHOPEDIC TISSUE PRODUCTS
We are evaluating potential orthopedic applications of our tissue matrix
technology. 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 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 matrices to remodel into
various 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. In 2002, we commenced development of a bone repair
product comprised of Micronized AlloDerm Tissue in combination with allograft
bone particles. We are also completing process development of applying our
7
tissue matrix technology to allograft tendons that would be used in ACL
("anterior cruciate ligament") repair procedures.
CARDIOVASCULAR TISSUE PRODUCTS
We are evaluating human tissue based small-diameter vascular graft products
for potential use in cardiovascular surgery. 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 have demonstrated in an animal study that tissue grafts
processed by us using our tissue matrix technology had an equivalent patency to
the animal's fresh autologous vein. This study also showed the graft
repopulated with the animal's own cells and hence, remodeled into the animal's
own tissue. We are conducted additional pre-clinical studies focused on testing
the suitability of a processed acellular umbilical vein as a potential graft for
vascular access in hemodialysis.
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 critical need 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.
BLOOD CELL PRESERVATION PRODUCTS
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
biocompatibility 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. 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
8
require blood transfusions as part of planned surgery. In February 2002, we
received final approval of an $824,000 research grant from the Department of
Defense to investigate the potential to preserve red blood cells through freeze
drying. We retain all rights to commercialize products resulting from this
collaboration.
Red blood cells currently may be stored up to 42 days under refrigeration.
Current procedures to freeze red blood cells require the use of cryoprotectant
solutions that are toxic to the recipient and must be removed by washing the
cells prior to transfusion. This removal procedure is labor-intensive and
requires the immediate transfusion of the thawed and washed blood. We believe
that the successful development of non-toxic low temperature methods of storage
could simplify the use of frozen blood and potentially allow widespread storage
of autologous blood.
Any product developed will require extensive regulatory approvals,
including approval of an IND by the FDA to conduct clinical trials. Our
development efforts to date have primarily been funded through research grant
funds from the Department of Defense. Additionally, we may decide to establish
collaborative out-licensing arrangements with appropriate partners to fund the
development and commercialization of certain of these products.
MARKETING AND DISTRIBUTION
We currently market AlloDerm in the United States for plastic
reconstructive, burn and general surgical applications through our direct sales
and marketing organization. Boston Scientific Corporation is our exclusive
worldwide sales and marketing agent for Repliform for use in urology and
gynecology. OMP, Inc. is our exclusive sales and marketing agent for promotion
of Cymetra to office-based dermatologists and plastic surgeons in the United
States and certain international markets. Our direct sales and marketing
representatives also market Cymetra to hospital based surgeons. BioHorizons
Implant Systems, Inc., is our exclusive distributor in the United States and
select international markets of AlloDerm for use in periodontal applications.
In April 2002, we entered into an exclusive agreement with Wright Medical
Technology, Inc., granting it distributor rights in the United States for Graft
Jacket.
As of March 1, 2003, we had sales and marketing staff of 43 persons,
including 32 domestic sales personnel, and 11 marketing and customer service
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,
Cymetra and the SmartPreP System. 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
We receive donated human cadaveric tissue from tissue banks and organ
procurement organizations in the United States that comply with 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.
In 2002, we obtained all of our donated human cadaveric tissue from 23
tissue banks and organ procurement organizations. We estimate that there are
approximately 100 tissue banks and organ procurement organizations in the United
States. We believe that 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 tissue, there is a risk that the future availability
of donated human tissue will not be sufficient to meet our demand.
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 their expenses incurred associated with the recovery, storage
and transportation of donated human skin that they provide to us for processing.
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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 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
covers the processing, storage and distribution of tissue used in AlloDerm,
Repliform, Cymetra, Graft Jacket and cryopreserved allograft skin.
GOVERNMENT REGULATION
Overview
Government regulation, both domestic and foreign, is a significant factor
in the processing, marketing and distribution of our current products and
products that we are developing. 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 statutes and implementing regulations govern 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 human tissue for transplantation, 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 clearance or
approval. In contrast, products regulated as medical devices or biologics
usually require such clearance or approval. The process of obtaining premarket
approval for a medical device or biologic is often expensive, lengthy and
uncertain.
Once on the market, 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 (i.e. "tissue
lining the surface of the body or a body cavity") would be regulated as human
tissue under an interim regulation governing human tissue for transplantation
then in effect. This letter reversed the FDA's initial position that AlloDerm
for these indications should be regulated as a medical device. In 1997, the FDA
issued a final regulation that became effective in 1998 regulating "human
tissue." The rule defines human tissue as any tissue derived from a human body
which is (i) intended for administration to another human for the diagnosis,
cure, mitigation, treatment or prevention of any condition or disease and (ii)
recovered, processed, stored or distributed by methods not intended to change
tissue function or characteristics. The FDA definition excludes, among other
things, tissue that currently is regulated as a human drug, biological product
or medical device and excludes vascularized human organs.
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The final 1997 tissue regulation 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 facial sling and scar revision),
periodontal surgical procedures (such as free-gingival grafting and guided
tissue regeneration) and general surgical procedures. 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 regulated as human tissue for transplantation. 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 2002, we commenced commercial distribution of Graft Jacket. Graft Jacket
is the trade name given to AlloDerm when it is labeled for the intended use of
repairing damaged or inadequate integumental tissue in orthopedic surgery.
Relying on the FDA's findings with respect to AlloDerm, Repliform and Cymetra,
we believe that Graft Jacket meets the definition of human tissue for
transplantation and therefore we did not seek approval from FDA to market Graft
Jacket. In March 2003, the FDA contacted us and requested information supporting
our belief that Graft Jacket meets the definition of human tissue for
transplantation. We are currently preparing a response to the FDA's request.
There can be no assurance that the FDA will agree with us that Graft Jacket
meets the definition of human tissue for transplantation. If the FDA does not
agree, they may impose medical device regulation upon Graft Jacket. FDA could
also require us to cease marketing and/ or recall product already sold until FDA
approval is obtained and could seek to impose enforcement sanctions for
marketing this product without FDA approval.
In January 2001, the FDA issued a final rule requiring registration of
tissue banking establishments and the listing of tissue products. These
requirements 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
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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 of the tissue.
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). No assurance can be given that any 510(k)
submission will ever receive clearance. After a device receives 510(k)
clearance, any modification that could significantly affect its safety or
effectiveness, or that would constitute a major change in the intended use of
the device, will require a new 510(k) submission.
A medical device that does not qualify for 510(k) clearance is placed in
class III, which is reserved for devices classified by the FDA as posing the
greatest risk (e.g., life-sustaining, life-supporting or implantable devices, or
devices that are not substantially equivalent to a predicate device). A class
III device generally must undergo the premarket approval ("PMA") process, which
requires the manufacturer to prove the safety and effectiveness of the device to
the FDA's satisfaction. A PMA application must provide extensive preclinical and
clinical trial data and information about the device and its components
regarding, manufacturing, labeling and promotion. As part of the PMA review, the
FDA will inspect the manufacturer's facilities for compliance with the Quality
System Regulation ("QSR"), which includes elaborate testing, control,
documentation and other quality assurance procedures. Upon submission, the FDA
determines if the PMA application is sufficient to permit a substantive review,
and, if so, the application is accepted for filing. The FDA then commences an
in-depth review of the PMA application, which we believe typically takes one to
three years, but may take longer.
If the FDA's evaluation of the PMA application is favorable, the FDA
typically issues an "approval letter" requiring the applicant's agreement to
comply with specific conditions (e.g., changes in labeling) or to supply
specific additional data (e.g., longer patient follow up) or information (e.g.,
submission of final labeling) in order to secure final approval of the PMA
application. Once the approval letter is satisfied, the FDA will issue a PMA
order for the approved indications, which can be more limited than those
originally sought by the manufacturer. The PMA order can include post approval
conditions that the FDA believes necessary to ensure the safety and
effectiveness of the device including, restrictions on labeling, promotion, sale
and distribution. Failure to comply with the conditions of approval can result
in enforcement action, including withdrawal of the approval. The PMA process can
be expensive and lengthy, and no assurance can be given that any PMA application
will ever be approved for marketing. Even after approval of a PMA, a new PMA or
PMA supplement is required in the event of a modification to the device.
A clinical study in support of a PMA application or 510(k) submission for a
"significant risk" device requires an Investigational Device Exemption ("IDE")
application approved in advance by the FDA for a limited number of patients. The
IDE application must be supported by appropriate data, such as animal and
laboratory testing results. The clinical study may begin if the FDA and the
appropriate Institutional Review Board ("IRB") at each clinical study site
approve the IDE application. If the device presents a "non-significant risk" to
the patient, a sponsor may begin the clinical study after obtaining IRB approval
without the need for FDA approval. In all cases, the clinical study must be
conducted under the auspices of an IRB pursuant to FDA's regulatory requirements
intended for the protection of subjects and to assure the integrity and validity
of the data.
If we market medical device products, we will be subject to pervasive and
continuing regulation. We will have to comply with these requirements, including
the FDA's labeling regulations, the QSR, the Medical Device Reporting ("MDR")
regulations (which require that a manufacturer report to the FDA certain types
of adverse events involving its products), and the FDA's general prohibitions
against promoting products for unapproved or "off-label" uses. In addition,
class II devices can be subject to additional special controls (e.g.,
performance standards, post market surveillance, patient registries, and FDA
guidelines) that do not apply to class I devices.
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In 1997, the FDA told us that one of our products, 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 voluntarily withdrew this 510(k)
submission and 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 Section 351(a) of the
PHS Act. The PHS Act imposes a special additional licensing requirement, known
as a Biologic License. This license imposes very specific requirements upon the
facility and the manufacturing and marketing of licensed products to assure
their safety, purity, and potency. Some licensed biological products are also
subject to batch release by the FDA. That is, the products from a newly
manufactured batch cannot be shipped until the FDA has evaluated either a sample
or the specific batch records and given permission to ship the batch of product.
The PHS Act also grants the FDA authority to impose mandatory product recalls
and provides for civil and criminal penalties for violations.
Before conducting the required clinical testing of a biological product, an
applicant must submit an IND to the FDA, containing preclinical data
demonstrating the safety of the product for human investigational use,
information about the manufacturing processes and procedures and the proposed
clinical protocol. Clinical trials of biological products typically are
conducted in three sequential phases, but may overlap. Phase 1 trials test the
product in a small number of healthy subjects, primarily to determine its safety
and tolerance at one or more doses. In Phase 2, in addition to safety, the
efficacy, optimal dose and side effects of the product are evaluated in a
patient population somewhat larger than the Phase 1 trial. Phase 3 involves
further safety and efficacy testing on an expanded patient population at
geographically dispersed test sites.
All clinical studies must be conducted in accordance with FDA approved
protocols and are subject to the approval and monitoring of one or more
Institutional Review Boards. In addition, clinical investigators must adhere to
good clinical practices. Completion of all three phases of clinical studies may
take several years, and the FDA may temporarily or permanently suspend a
clinical study at any time.
Upon completion and analysis of clinical trials, the applicant assembles
and submits a Biologic License Application containing, among other things, a
complete description of the manufacturing process. Before the licenses can be
granted, the applicant must undergo a successful establishment inspection. FDA
review and approval of a biological product is very onerous and 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.
Our human tissue products are currently distributed in several countries
internationally. Additionally, we are pursuing clearance to distribute our
products in certain other countries. The uncertainty of the regulations in each
country may delay or impede the marketing of our 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
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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 2000, 2001
and 2002 for all programs were approximately $4.5 million, $4.4 million and
$5.0 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.
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 eight United States
patents and related foreign patents and the non-exclusive right to 14 United
States patents. In addition, we have been issued eight United States utility
patents, one United States design patent and have five pending United States
patent applications.
Three primary families of patents and patent applications protect our
technology. One United States patent covers methods of producing our
tissue-based products. Nine additional United States patents and four pending
patent applications supplement this patent and cover methods and apparatus for
freeze-drying without the damaging effects of ice crystal formation. Six United
States patents and one pending patent application 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,
14
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,
Micronized AlloDerm(R), the particulate form of AlloDerm, Cymetra(R) the brand
name for Micronized AlloDerm(R) and Repliform(R), the version of AlloDerm for
urology and gynecology. We have filed trademark registrations for
ThromboSol(TM), a formulation for extended storage of platelets and
AlloDerm(R)GBR(TM), for use in periodontal applications. Graft Jacket(TM) is a
trademark of Wright Medical Technology, Inc. SmartPReP(TM) is a trademark of
Harvest Technologies Corporation.
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., Integra Life Sciences Holdings Corporation, Tissue
Science Laboratories, plc and academic institutions, including Rice University,
The University of Pittsburgh and Georgia Institute of Technology, that are
capable of developing products based on similar technology, and that have
developed and are capable of developing products based on other technologies,
which are or may be competitive with our products. Many of these companies and
academic institutions are well-established, and may 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.
We believe that for most current applications of our human tissue products,
the principal form of competition is with the use of the patient's own tissue.
We anticipate direct competition for our 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, 2003, we had 155 employees of which 43 were employed in sales
and marketing and customer service, 70 in production and quality assurance, 23
in research and development and 19 in administration and accounting. Also, at
such date, we employed, full-time, two with M.D. degrees and 11 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.
15
WE HAVE A HISTORY OF OPERATING LOSSES AND A SUBSTANTIAL ACCUMULATED EARNINGS
DEFICIT.
Since our inception in 1986 through 2001 we incurred substantial net
losses. At December 31, 2002, we had an accumulated deficit of approximately
$64.3 million. Our first profitable quarter was the fourth quarter of 2001 with
net income of $102,000. We were profitable each of the four quarters of 2002
with a total net income of $1.4 million. Additionally, we generated positive
cash flow from operations in every quarter since the third 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 revenues from our products; and
- commercialization of products under development.
We may not be profitable and generate positive cash flows from operations
in the future.
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 fixed
asset requirements and 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.
Although we believe that our current cash resources together with
anticipated cash from ongoing operating activities, committed research grant
funding and remaining availability under our credit facility will be sufficient
to fund our planned operations, research and development programs and fixed
asset additions in the foreseeable future, there can be no assurance that such
sources will be sufficient to meet our long-term needs and as a result we may
16
need additional funding. 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, 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 STATES FDA IMPOSES MORE STRINGENT TISSUE, 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 clearance or approval of
the product. In contrast, products regulated as medical devices or biologics
usually must undergo a lengthy, uncertain and expensive premarket review
process. In 1996, the FDA determined that AlloDerm used for the repair or
replacement of damaged or inadequate integumental tissue would be regulated as
transplanted human tissue. On that basis, we continued commercial distribution
of this product for plastic reconstructive, burn and periodontal surgery. In
its decision with respect to the regulation of AlloDerm, the FDA stated that the
regulatory status of any different uses, such as a void filler for soft tissue,
for cosmetic augmentation procedures or as a wound healing agent, would need to
be determined on a case-by-case basis.
In 1999, we began marketing the following products as human tissue:
- Repliform, a version of AlloDerm, for urologic and gynecologic
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.
In 2002, we commenced commercial distribution of Graft Jacket. Graft
Jacket is the trade name given to AlloDerm when it is labeled for the intended
use of repairing damaged or inadequate integumental tissue in orthopedic
surgery. Relying on the FDA's findings with respect to AlloDerm, Repliform and
Cymetra, we believe that Graft Jacket meets the definition of human tissue for
transplantation and therefore we did not seek approval from FDA to market Graft
Jacket. In March 2003, the FDA contacted us and requested information
supporting our belief that Graft Jacket meets the definition of human tissue for
transplantation. We are currently preparing a response to the FDA's request.
There can be no assurance that the FDA will agree with us that Graft Jacket
meets the definition of human tissue for transplantation. If the FDA does not
agree, they may impose medical device regulation upon Graft Jacket. FDA could
also require us to cease marketing and/ or recall product already sold until FDA
approval is obtained and could seek to impose enforcement sanctions for
marketing this product without FDA approval.
We cannot assure that Graft Jacket or other 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
17
at all. Such approval process would almost certainly include a requirement to
provide extensive supporting clinical testing data.
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.
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 find
that we are in compliance or 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.
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.
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.
18
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
criminal 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 THAT
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 human tissue for transplantation but
may restrict the 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 MAINTAINING 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 continue 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.
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.
19
WE ARE HIGHLY DEPENDENT UPON SALES AND MARKETING AGENTS 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;
- OMP Inc. as our exclusive sales and marketing representative for
Cymetra to office-based dermatologists and plastic surgeons;
- Biohorizons Implant Systems, Inc. as our exclusive distributor of
AlloDerm for periodontal applications in the United States and
select international markets; and
- Wright Medical Technology, Inc. as our exclusive distributor of
Graft Jacket in the United States.
Additionally, we utilize distributors in certain international markets and
may grant additional distribution rights in the future. For the year ended
December 31, 2002, our sales and marketing agents and distributors generated 48%
of our total product revenues. Boston Scientific Corporation and OMP Inc.
represented approximately 31% and 8%, respectively, of our total product
revenues. No other individual distributor generated more than 5% of our total
product revenues in 2002. If an exclusive marketing agent 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
approximately 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.
NEGATIVE PUBLICITY CONCERNING THE USE OF DONATED HUMAN TISSUE IN RECONSTRUCTIVE
COSMETIC PROCEDURES COULD REDUCE THE DEMAND FOR OUR PRODUCTS AND 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., Integra Life Sciences Holdings Corporation, Tissue
Science Laboratories, plc 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
20
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.
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 eight United States patents and related
foreign patents; and
- non-exclusive rights to 14 patents.
In addition, we:
- have been issued eight United States utility patents and one
United States design patent ; and
- have five 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;
21
- 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.
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, marketing and use 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.
22
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".
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
The previously reported 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. and Thacker, et al., on behalf of themselves and others
similarly situated, v. Inland Eye & Tissue Bank of Redlands, et al. was settled,
whereby the plaintiffs dismissed all claims against us and we agreed not to sue
the plaintiffs for malicious prosecution.
In June 2002, a complaint was filed in the Superior Court of California,
Los Angeles County, Central District, captioned Joan Savitt, individually and on
behalf of others similarly situated, v. Doheny Eye & Tissue Bank, et al. The
complaint alleges among other things, defendants, including LifeCell, by
engaging in the storing,
23
processing and distribution of human tissue, violate the public policy and laws
of the state of California in various ways. In March 2003, we filed our response
to the complaint and discovery has commenced. We believe that the claims against
LifeCell in this complaint are without merit and we intend to vigorously defend
against such action.
We do not expect the final resolution of this matter to have a material
impact on our financial position, results of operations, or cash flows.
However, there can be no assurance that the resolution of this matter will not
be material to LifeCell's financial position, results of operations, or cash
flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 21, 2003, the last reported sale price for our Common Stock on
the NASDAQ National Market was $2.52 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
---------- ---------
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
2002 First Quarter $ 3.82 $ 2.30
Second Quarter 3.54 2.26
Third Quarter 2.50 1.72
Fourth Quarter 3.28 1.70
As of February 28, 2003, there were approximately 360 holders of record of
shares of Common Stock and 35 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.
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. Additionally, pursuant to the terms of our debt
agreement we are restricted from paying dividends on our Common Stock.
Holders of our 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, May 15, August 15 and November 15, 2001, we paid
dividends in additional shares of our Series B Preferred Stock equivalent to
$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.
24
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain selected financial data of LifeCell
for each of the years in the five-year period ended December 31, 2002, 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,
-------------------------------------------------------------------------
1998 1999 2000 2001 2002
------------- ------------- ------------- ------------- -------------
Operations Statement Data:
- --------------------------
Revenues:
Product revenues $ 7,245,000 $ 11,912,000 $ 21,330,000 $ 26,560,000 $ 32,935,000
Research grant revenues 747,000 764,000 1,442,000 1,209,000 1,493,000
------------- ------------- ------------- ------------- -------------
Total revenues 7,992,000 12,676,000 22,772,000 27,769,000 34,428,000
------------- ------------- ------------- ------------- -------------
Costs and expenses:
Costs of products sold 2,837,000 3,452,000 6,949,000 8,862,000 10,134,000
Research and development 3,376,000 3,871,000 4,523,000 4,351,000 5,015,000
General and administrative 3,484,000 4,840,000 6,180,000 4,098,000 4,590,000
Selling and marketing 6,500,000 7,236,000 11,779,000 11,978,000 13,288,000
Relocation costs -- 2,937,000 -- -- --
------------- ------------- ------------- ------------- -------------
Total costs and expenses 16,197,000 22,336,000 29,431,000 29,289,000 33,027,000
------------- ------------- ------------- ------------- -------------
Income (loss) from operations (8,205,000) (9,660,000) (6,659,000) (1,520,000) 1,401,000
Interest and other income
(expense), net 864,000 468,000 (479,000) (550,000) (129,000)
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes (7,341,000) (9,192,000) (7,138,000) (2,070,000) 1,272,000
Income tax benefit, net -- -- -- -- 157,000
------------- ------------- ------------- ------------- -------------
Net income (loss) (7,341,000) (9,192,000) (7,138,000) (2,070,000) 1,429,000
Preferred stock and deemed
Dividends (723,000) (710,000) (593,000) (1,591,000) --
------------- ------------- ------------- ------------- -------------
Net income (loss) to common
Shareholders $ (8,064,000) $ (9,902,000) $ (7,731,000) $ (3,661,000) $ 1,429,000
============= ============= ============ ============= =============
Income (loss) per common share:
Basic $ (0.72) $ (0.83) $ (0.54) $ (0.20) $ 0.07
============= ============= ============ ============= =============
Diluted $ (0.72) $ (0.83) $ (0.54) $ (0.20) $ 0.06
============= ============= ============= ============= =============
Shares used in computing
income (loss) per share:
Basic 11,229,000 11,938,000 14,372,000 18,240,000 21,176,000
============= ============= ============ ============= =============
Diluted 11,229,000 11,938,000 14,372,000 18,240,000 24,696,000
============= ============= ============= ============= =============
As of December 31,
-------------------------------------------------------------------------
1998 1999 2000 2001 2002
------------- ------------- ------------- ------------- -------------
Balance Sheet Data:
- -------------------
Cash, cash equivalents and
short-term investments $ 12,026,000 $ 5,052,000 $ 5,535,000 $ 4,900,000 $ 5,458,000
Working capital 12,597,000 2,542,000 5,330,000 8,851,000 11,466,000
Total assets 17,031,000 18,083,000 25,410,000 23,131,000 24,116,000
Notes payable and term debt -- 2,792,000 6,285,000 2,197,000 863,000
Common stock, subject to
Redemption -- 3,885,000 3,885,000 1,935,000 478,000
Accumulated deficit (44,476,000) (54,378,000) (62,109,000) (65,770,000) (64,341,000)
Total stockholders' equity 14,261,000 5,364,000 8,904,000 14,833,000 17,719,000
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of operations and financial condition of LifeCell
should be read in conjunction with the Financial Statements and Notes thereto
included elsewhere in this Annual Report on Form 10-K.
Special Note: Certain statements set forth below constitute forward-looking
statements 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 biological products for the repair and replacement of
damaged or inadequate human tissue in numerous different clinical applications.
Our proprietary tissue matrix technology removes 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
proprietary human tissue based products: AlloDerm(R) for plastic reconstructive,
burn and periodontal procedures; Cymetra(R), a version of AlloDerm in
particulate form for non-surgical correction of soft tissue defects;
Repliform(R) for urologic and gynecologic procedures; and Graft Jacket(TM), an
acellular periosteum replacement graft. We also distribute cryopreserved
allograft skin for use as a temporary dressing in the treatment of burns and we
are the exclusive marketing agent for the SmartPReP(TM) Platelet Concentration
System in the United States to ear, nose and throat ("ENT"), plastic
reconstructive and general surgeons in hospitals. 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.
CRITICAL 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, including the impact of recent accounting pronouncement, see Note 2 in
the Notes to the Financial Statements in Part IV, Item. 15 of this Annual Report
on Form 10-K.
Revenue Recognition. We recognize revenue for product sales when title to
products and risk of loss are transferred to customers. Additional conditions
for recognition of revenue are that collection of sales proceeds is reasonably
assured and we have no further performance obligations. For products held by
our sales agents, Boston Scientific Corporation and OMP, Inc. we recognize
revenue when the products are delivered to the third-party customer, as this is
when title and risk of loss to the product transfers. Amounts billed to
customers for shipping and handling are included in revenue at the time the
related product revenue is recognized. Research grant revenues are recognized
as the work is performed, unless we have continuing performance obligations, in
which case revenue is recognized upon the satisfaction of such obligations.
Accounts receivable. We maintain an allowance for estimated bad debt
losses on our accounts receivable based upon our historical experience and any
specific customer collection issues that we have identified. In addition, we
monitor collections and payments from our customers and perform credit
evaluations of their financial condition. Since our accounts receivable are not
concentrated within a relatively few number of customers, we believe that a
significant change in the liquidity or financial position of any one customer
would not have a material adverse impact on the collectability of our accounts
receivable and therefore our future operating results. While bad debt losses
depend to a large degree on future economic conditions affecting our customers,
we do not anticipate significant bad debt losses in 2003.
26
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, and estimated forecast of future product demand
and production requirements. Although we believe that our current inventory
reserves are adequate, any significant change in demand or technological
developments could have a significant impact on the value of our inventory and
therefore our future operating results.
Income Taxes. We apply an asset and liability approach to accounting for
income taxes. Deferred tax liabilities and assets are recognized for the
expected future tax consequences of temporary differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The
recoverability of deferred tax assets is dependent upon our assessment of
whether it is more likely than not that sufficient future taxable income will be
generated to utilize the deferred tax asset. In the event we determine that
future taxable income will not be sufficient to utilize the deferred tax asset,
a valuation allowance is recorded. At December 31, 2002, we have provided for a
full valuation allowance against our deferred tax assets, which principally
relate to federal and state net operating loss and credit carryforwards. In the
event we determine that it is more likely than not that some or all of these
assets will be realized, the reversal of this valuation allowance would lead to
a significant tax benefit being recorded for financial reporting purposes in the
period of reversal.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 AND 2001
Total revenues for the year ended December 31, 2002 increased 24% to $34.4
million compared to $27.8 million in 2001. The increase was principally
attributable to a 24% increase in product revenues to $32.9 million in the
current year as compared to $26.6 million in the prior year. The increase in
product revenues was largely due to increased demand for our AlloDerm products.
AlloDerm revenues increased 35% to $17.1 million in the year ended December 31,
2002 compared to $12.7 million in the same period in 2001. Repliform revenues
increased 9% to $10.1 million in the year ended December 31, 2002 compared to
$9.3 million for the same period in 2001. Cymetra revenues decreased 5% to $3.8
million in 2002 compared to $4.0 million in 2001.
For the year ended December 31, 2002, our sales and marketing agents and
distributors generated 48% of our total product revenues. 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 our
exclusive sales and marketing representative for Cymetra to office-based
dermatologists and plastic surgeons. During 2002, sales of our products through
Boston Scientific Corporation and OMP, Inc. represented 31% and 8%,
respectively, of our total product revenues compared to 35% and 9%,
respectively, in 2001. 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. No other individual distributor generated
more than 5% of our total product revenues in 2002.
Total revenues were also favorably impacted by a 23% increase in research
grant revenues, which totaled $1.5 million in 2002 compared to $1.2 million in
2001. This increase was primarily due to an increase in research spending on
projects funded by research grants, since research grant revenues are recognized
as qualified expenses are incurred. During 2002, we were awarded grants from the
Department of Defense and the National Institute of Health totaling $927,000. As
of December 31, 2002, approximately $3.9 million of approved grant funding was
available to fund future research and development expenses through 2004.
Cost of products sold for the year ended December 31, 2002 was $10.1
million, or 31% of product revenues, compared to cost of products sold of $8.9
million, or 33% for the same period in 2001. The cost of products sold decreased
as a percentage of product revenues due to efficiencies realized in our
processing operation as a result of volume increases and process improvements.
Total research and development expenses increased 15% to $5.0 million in
2002 compared to $4.4 million in 2001. The increase was primarily associated
with higher spending on research focused on the potential application of our
tissue matrix technology to vascular tissue, which is funded through a grant
from the Department of Defense, and to increased spending on other product
development projects.
27
General and administrative expenses increased 12% to $4.6 million in 2002
compared to $4.1 million in 2001. The increase was primarily the result of
increased investor relations activities, higher recruiting expenses and payroll
related costs.
Selling and marketing expenses increased 11% to $13.3 million in 2002
compared to $12.0 million in the same period in 2001. The increase in 2002 was
primarily attributable to higher selling expense associated with the increase in
product revenues. Selling and marketing expenses decreased as a percentage of
product revenues from 45% in 2001 to 40% in 2002.
Interest and other income (expense), net decreased $421,000 in 2002
compared to 2001. The net decrease was due to a $517,000 decrease in interest
expense, resulting from a decrease in debt outstanding, partially offset by a
$96,000 decline in interest income resulting from lower average interest rates
during the period.
In the year ended December 31, 2002, we recorded a net tax benefit of
$155,000 consisting of a provision for state income taxes of $93,000, offset by
proceeds of $248,000 from the sale of state net operating losses. The sale was
made through the Technology Business Tax Certificate Program sponsored by the
New Jersey Economic Development Authority. No federal provision for income taxes
has been recorded as we intend to utilize net operating loss carryforwards to
offset our estimated federal tax liability of $492,000. We were unable to
utilize net operating loss carryforwards to offset our state tax liability in
2002 because the State of New Jersey enacted tax legislation during the year
suspending the use of loss carryforwards to offset taxable income in 2002 and
2003. We have provided a full valuation allowance against our deferred tax
assets based on the uncertainty as to whether it is more likely than not that we
will realize future benefit of these assets.
Net income for the year ended December 31, 2002 was $1.4 million,
representing a $3.5 million improvement from the $2.1 million loss for the same
period in 2001. The improvement in net income in 2002 was principally due to the
positive contribution from higher product revenues.
Preferred stock and deemed dividends totaled $1.6 million for the year
ended December 31, 2001 and consisted of preferred stock dividends, which ceased
accruing September 30, 2001, of $440,000 and a non-cash deemed dividend of $1.2
million recorded in connection with issuance of additional shares and the
repricing of warrants, pursuant to the terms of an investment made in 1999.
Basic net income per common share increased to $0.07 and diluted net income
per common share increased to $0.06 in the year ended December 31, 2002,
compared to $0.20 basic and diluted per share net loss in the same period in
2001. The net loss per common share in 2001 included $0.02 per share
attributable to dividends on preferred stock and $0.06 per share attributable to
the deemed dividend.
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.
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.
During the year ended December 31, 2001, sales of our products generated
through Boston Scientific Corporation and OMP, Inc. represented 35% and 9%,
respectively, of our total product revenues, compared to 28% and 13%,
respectively, for the same period in 2000.
Total revenue was also impacted by a 16% decrease in 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.
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
28
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 in
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 in 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 in 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 in 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, we recorded a non-cash deemed dividend of $1.2 million in connection with
the issuance of additional shares and repricing of warrants, pursuant to the
terms of an investment made in 1999.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, we had cash, cash equivalents and short-term
investments of $5.5 million compared to $4.9 million at the end of 2001.
Working capital increased to $11.5 million at December 31, 2002 from $8.9
million at December 31, 2001. The increase resulted principally from increases
in cash and investments, receivables and inventories, partially offset by
increases in accounts payable and accrued liabilities. Inventories and accounts
payable increased as a result of planned higher receipts of tissue from our
organ procurement organizations and tissue banks. Accounts receivable
increased as a result of higher sales in the fourth quarter of 2002 compared to
the same period in 2001. Accrued liabilities increased as a result of higher
fees owed to our sales agents based on revenue generated and higher employee
compensation accruals as a result of improved Company performance.
Our operating activities generated net cash of $2.5 million in 2002
compared to net cash used of $1.7 million for the same period in 2001. The
increase in 2002 resulted primarily from higher net income, partly offset by
increases in inventories and accounts receivable as discussed above.
Additionally, in 2001, we used $1.8 million in cash to reduce accounts payable
and accrued liabilities.
Our investing activities, which consist principally of purchases of capital
equipment in 2002, used net cash of $582,000 for the year ended December 31,
2002 compared to $564,000 for the same period in 2001. In 2003, we expect to
invest approximately $2.3 million for the purchase of capital equipment
principally related to the implementation of an Enterprise Resource Planning
(ERP) System and manufacturing equipment to support anticipated revenue growth.
Our financing activities used $1.3 million in 2002 for principal payments
on long-term debt. For the year ended December 31 2001, our financing activities
provided net cash of $1.7 million as the result of the receipt of $5.9 million
from the proceeds of a private placement of common stock, net of $4.2 million
used to reduce notes payable and long-term debt. At December 31, 2002, we had an
aggregate of $863,000 outstanding under our borrowing arrangements compared to
$2.2 million outstanding at December 31, 2001.
29
In January 2003, we secured a $4 million credit facility through a
financial institution. The credit facility consists of a $2 million revolving
line of credit due in January 2004 and an equipment line for up to an additional
$2 million due in January 2005. The credit facility is collateralized by our
accounts receivable, inventory, intellectual property, intangible and fixed
assets. The agreement contains certain financial covenants and a subjective
acceleration clause. The revolving line of credit bears interest at the bank
prime rate plus 0.75% and the equipment term note bears interest at the bank
prime rate plus 1.5% and requires equal monthly principal payments over a
twenty-four month term. In January 2003, we received proceeds of $880,000 under
the equipment line portion of the credit facility and used such proceeds to
repay all of our debt and accrued interest outstanding at December 31, 2002.
The balance of the equipment line is available to fund equipment purchases
through March 2003.
The following table reflects a summary of our contractual cash obligations
as of December 31, 2002, after giving effect to the refinancing of our
outstanding indebtedness:
Payments Due by Period
----------------------------------------------------------------------------
Less than one
Total year 1 to 3 years 4 to 5 years After 5 years
-------------- ------------- ------------- -------------- --------------
Long-term debt(1) $ 880,000 $ 440,000 $ 440,000 $ -- $ --
Operating leases 7,076,000 833,000 1,724,000 1,839,000 2,680,000
-------------- ------------- ------------- -------------- --------------
Total contractual
cash obligations $ 7,956,000 $ 1,273,000 $ 2,164,000 $ 1,839,000 $2,680,000
============== ============= ============= ============== ==============
(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, committed research and development grant funding and remaining
availability under our credit facility will be sufficient to finance our planned
operations, research and development programs and fixed asset requirements in
the foreseeable future. However, there can be no assurance that such sources of
funds will be sufficient to meet our long-term needs and as a result, we may
need additional funding. There can be no assurance that we will be able to
obtain additional funding from either debt or equity financing, collaborative
arrangements or other sources on terms acceptable to us, or at all. 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 action. For a
discussion of these matters see Note 12 of "Notes to Financial Statements" and
Part I., Item 3. "Legal Proceedings".
At December 31, 2002, there were 113,836 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 $478,000 in the
aggregate.
Since our inception in 1986 through 2001 we incurred net losses and
therefore have not been subject to federal income taxes. As of December 31,
2002, we had net operating loss ("NOL") and research and development tax credit
carryforwards for federal income tax purposes of $56.7 million and $1.0 million,
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. Our public offering of common
stock in 1997 resulted in an ownership change for federal income tax purposes,
and as a result we estimate that at December 31, 2002, $24.1 million of our
total federal NOL carryforwards is subject to an annual limitation. Accordingly,
if we generate taxable income in any year in excess of our limitation, we may be
required to pay federal income taxes even though we have unexpired NOL
carryforwards. In addition, we have $12.3 million of NOL's available to reduce
future state income taxes. In 2002, the State of New Jersey enacted tax
legislation suspending the use of loss carryforwards to offset taxable income in
2002 and 2003. Accordingly, if we generate taxable income for state income tax
purposes in 2003, we will be required to pay New Jersey income taxes even though
we have unexpired NOL carryforwards. In January 2003, we realized $235,000
through the sale and transfer of $3.0 million of state tax
30
net operating losses. The sale and transfer was made through the Technology
Business Tax Certificate Program sponsored by the New Jersey Economic
Development Authority.
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, 2002.
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 30, 2003, 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 30, 2003, under the caption "Executive
Compensation," and such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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 30, 2003, under the caption "Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters," 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 30, 2003, under the caption "Certain Relationships
and Related Transactions," and such information is incorporated herein by
reference.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Securities Exchange Act Rule 13a-14. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information relating to us required to be included in our
periodic SEC filings. There have been no significant changes in our internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
32
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS INCLUDED IN THIS REPORT:
2. FINANCIAL STATEMENT SCHEDULES
All other schedules are omitted because they are not applicable, not
required, or because the required information is contained in the Company's
financial statements and the notes thereto.
(B) REPORTS ON FORM 8-K:
On December 23, 2002, the Company announced the appointment of Lisa
Colleran to the position of Vice President - Marketing and Business
Development.
On January 15, 2003, the Company announced that it secured a $4,000,000
credit facility through Silicon Valley Bank.
On February 25, 2003, the Company announced that effective April 1, 2003,
Dr. Stephen Livesey will transition from Chief Scientific Officer to Chief
Scientist.
On March 3, 2003, the Company announced its fourth quarter and full year
2002 operating results as well as guidance for 2003. The Company also
announced that it planned to conduct a conference call to discuss the
operating results and related matters.
(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 15.
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).
33
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 between 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 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).
10.6 Waiver Agreement dated as of March 11, 2002 among the Company and certain holders of the Series B
preferred stock (incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 2001).
10.7 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).
10.8 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).
10.9 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).
10.10* 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).
10.11* 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).
10.12* 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.)
34
10.13* Letter agreement dated September 8, 1998 between LifeCell Corporation and Paul G. Thomas, as
amended by letter agreements dated September 9, 1998 and September 29, 1998 (incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed with the Commission on
November 13, 1998.)
10.14 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.)
10.15 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).
10.16 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).
10.17 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).
10.18 Stock Purchase Warrant dated November 17, 1999, issued to The Tail Wind Fund, Ltd. (incorporated by
reference to Exhibit 4.4 to the Company's Registration Statement on Form S-3 (Registration No. 333-
94715) filed with the Commission on January 14, 2000.)
10.19 Loan Agreement dated December 6, 1999 between LifeCell Corporation and Transamerica Business
Credit Corporation (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1999).
10.20 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).
10.21 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).
10.22 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. (incorporated by
reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001).
10.23 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. (incorporated
by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001).
10.24 Loan Agreement dated June 9, 2000 between LifeCell Corporation and The New Jersey Economic
Development Authority (incorporated by reference to Exhibit 10.3 of the Company's Quarterly Report on
Form 10-Q filed with the Commission on July 28, 2000).
10.25 Form of Purchase Agreement dated September 1, 2000 between LifeCell Corporation and Certain
Investors (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q
filed with the Commission on November 13, 2000).
35
10.26* 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).
10.27 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).
10.28 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).
10.29 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).
10.30 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).
10.31 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).
10.32 Loan and Security Agreement dated January 15, 2003 between LifeCell Corporation and Silicon Valley
Bank (incorporated by reference to Exhibit 10.32 of the Company's Form 8-K filed with the Commission
on February 14, 2003).
10.33 Revolving Promissory Note in the principal amount of $2,000,000 between LifeCell Corporation and
Silicon Valley Bank (incorporated by reference to Exhibit 10.33 of the Company's Form 8-K filed with
the Commission on February 14, 2003).
10.34 Equipment Term Note in the principal amount of $2,000,000 between LifeCell Corporation and Silicon
Valley Bank (incorporated by reference to Exhibit 10.34 of the Company's Form 8-K filed with the
Commission on February 14, 2003).
23.1 * Consent of PricewaterhouseCoopers LLP.
99.1 Representation letter dated March 22, 2002 regarding the audit performed by Arthur Andersen
(incorporated by reference to Exhibit 99.1 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2001).
99.2 * Certification of the Registrant's Chief Executive Officer, Paul G. Thomas, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.3 * Certification of the Registrant's Chief Financial Officer, Steven T. Sobieski, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
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 26, 2003.
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 26, 2003
- ------------------------ Officer (Principal Executive Officer) and
Paul G. Thomas Chairman of the Board of Directors
/s/ Steven T. Sobieski Vice President and Chief Financial March 26, 2003
- ------------------------ Officer (Principal Financial Officer)
Steven T. Sobieski
/s/ Bradly C. Tyler Controller March 26, 2003
- ------------------------ (Principal Accounting Officer)
Bradly C. Tyler
/s/ Michael E. Cahr Director March 26, 2003
- ------------------------
Michael E. Cahr
/s/ James G. Foster Director March 26, 2003
- ------------------------
James G. Foster
/s/ David Fitzgerald Director March 26, 2003
- ------------------------
David Fitzgerald
/s/ Stephen A. Livesey Executive Vice President, Chief Science Officer March 26, 2003
- ------------------------ Director
Stephen A. Livesey
/s/ Jonathan Silverstein Director March 26, 2003
- ------------------------
Jonathan Sliverstein
37
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Paul G. Thomas, certify that:
1. I have reviewed this annual report on Form 10-K of LifeCell Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Paul G. Thomas
- ------------------
Paul G. Thomas
Chairman of the Board
President and Chief Executive Officer
38
I, Steven T. Sobieski, certify that:
1. I have reviewed this annual report on Form 10-K of LifeCell Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Steven T. Sobieski
- ----------------------
Steven T. Sobieski
Vice President, Finance
Chief Financial Officer and Secretary
39
1. FINANCIAL STATEMENTS
PAGE
----
Reports of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . F-1
Balance Sheets as of December 31, 2001 and 2002 . . . . . . . . . . . . . . . . . . . . F-3
Statements of Operations for the years ended December 31, 2000, 2001 and 2002 . . . . . F-4
Statements of Stockholders' Equity for the years ended December 31, 2000, 2001 and 2002 F-5
Statements of Cash Flows for the years ended December 31, 2000, 2001 and 2002 . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders:
In our opinion, the accompanying balance sheet as of December 31, 2002 and
the related statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of LifeCell
Corporation at December 31, 2002, and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America. 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 audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. The financial statements of
LifeCell Corporation as of December 31, 2001, and for each of the two years in
the period ended December 31, 2001, were audited by other independent
accountants who have ceased operations. Those independent accountants expressed
an unqualified opinion on those financial statements in their report dated
February 25, 2002.
PRICEWATERHOUSECOOPERS, LLP
Florham Park, New Jersey
February 12, 2003
F - 1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.
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 - 2
LIFECELL CORPORATION
BALANCE SHEETS
DECEMBER 31,
----------------------------
2001 2002
------------- -------------
Assets
Current assets
Cash and cash equivalents $ 4,650,000 $ 5,202,000
Short-term investments 250,000 256,000
Receivables, less allowance for doubtful accounts of
114,000 in 2001 and $40,000 in 2002 3,799,000 4,332,000
Inventories 4,691,000 6,367,000
Prepayments and other 319,000 257,000
------------- -------------
Total current assets 13,709,000 16,414,000
Fixed assets, net 8,728,000 7,091,000
Other assets, net 694,000 611,000
------------- -------------
Total assets $ 23,131,000 $ 24,116,000
============= =============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 792,000 $ 1,438,000
Accrued liabilities 2,732,000 3,173,000
Current portion of long-term debt 1,334,000 337,000
------------- -------------
Total current liabilities 4,858,000 4,948,000
------------- -------------
Deferred revenue 572,000 351,000
------------- -------------
Long-term debt 863,000 526,000
------------- -------------
Other liabilities 70,000 94,000
------------- -------------
Commitments and contingencies
Temporary equity
Common stock, subject to redemption, $.001 par value, 460,636
and 113,836 shares issued and outstanding in 2001 and 2002 1,935,000 478,000
------------- -------------
Stockholders' equity
Series B preferred stock, $.001 par value, 182,205 shares authorized,
101,726 and 74,278 shares issued and outstanding in 2001 and 2002
(liquidation preference at December 31, 2002 of $7,428,000) - -
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;
19,851,868 and 21,193,159 shares issued and oustanding in
2001 and 2002 20,000 21,000
Warrants outstanding to purchase shares of common stock,
2,284,211 outstanding in 2001 and 2002 4,002,000 4,002,000
Additional paid-in capital 76,581,000 78,037,000
Accumulated deficit (65,770,000) (64,341,000)
------------- -------------
Total stockholders' equity 14,833,000 17,719,000
------------- -------------
Total liabilities and stockholders' equity $ 23,131,000 $ 24,116,000
============= =============
The accompanying notes are an integral part of these financial statements.
F - 3
LIFECELL CORPORATION
STATEMENTS OF OPERATIONS
For the Year Ended December 31,
----------------------------------------
2000 2001 2002
------------ ------------ -------------
Revenues:
Product revenues $21,330,000 $26,560,000 $32,935,000
Research grant revenues 1,442,000 1,209,000 1,493,000
------------ ------------ ------------
Total revenues 22,772,000 27,769,000 34,428,000
------------ ------------ ------------
Costs and expenses:
Cost of products sold 6,949,000 8,862,000 10,134,000
Research and development 4,523,000 4,351,000 5,015,000
General and administrative 6,180,000 4,098,000 4,590,000
Selling and marketing 11,779,000 11,978,000 13,288,000
------------ ------------ ------------
Total costs and expenses 29,431,000 29,289,000 33,027,000
------------ ------------ ------------
Income (loss) from operations (6,659,000) (1,520,000) 1,401,000
Interest and other income (expense), net (479,000) (550,000) (129,000)
------------ ------------ ------------
Income (loss) before income taxes (7,138,000) (2,070,000) 1,272,000
Income tax benefit, net -- -- 157,000
Net income (loss) (7,138,000) (2,070,000) 1,429,000
Preferred stock and deemed dividends (593,000) (1,591,000) --
------------ ------------ ------------
Net income (loss) applicable to
common stockholders $(7,731,000) $(3,661,000) $ 1,429,000
============ ============ ============
Net income (loss) per common share:
Basic $ (0.54) $ (0.20) $ 0.07
============ ============ ============
Diluted $ (0.54) $ (0.20) $ 0.06
============ ============ ============
Shares used in computing net income (loss)
per common share:
Basic 14,372,083 18,240,431 21,175,602
============ ============ ============
Diluted 14,372,083 18,240,431 24,696,376
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F - 4
LIFECELL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
SERIES B WARRANTS TO PURCHASE
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL
--------------------------------------------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------------------------------------------------------------------------------
Balance at December 31, 1999 118,016 - 11,974,643 12,000 3,466,399 888,000 58,842,000
Stock options exercised - - 206,311 - - - 726,000
Warrants exercised - - 299,324 - (327,896) (26,000) 1,227,000
Warrants expired - - - - (60,000) - -
Warrants issued - - - - 291,795 407,000 (407,000)
Conversion of Series B preferred stock (24,927) - 804,090 1,000 - - 1,000
Common stock issued for cash - - 2,500,000 3,000 - - 9,055,000
Dividends on Series B preferred stock 2,842 - - - - - 284,000
Net loss - - - - - - -
------------------------------------------------------------------------------
Balance at December 31, 2000 95,931 - 15,784,368 16,000 3,370,298 1,269,000 69,728,000
Stock options exercised - - 135 - - - -
Warrants issued - - - - 2,224,030 3,231,000 (3,231,000)
Warrants expired - - - - (3,310,117) (498,000) 498,000
Common stock issued for cash - - 3,125,000 4,000 - - 5,906,000
Reclassification of common stock, subject to
redemption - - 464,364 - - - 1,950,000
Dividends on Series B preferred stock 5,795 - - - - - 579,000
Deemed dividend recorded in connection with
issuance of additional shares of common stock
and warrant re-pricing - - 478,001 - - - 1,151,000
Net loss - - - - - - -
------------------------------------------------------------------------------
Balance at December 31, 2001 101,726 $ - 19,851,868 $20,000 2,284,211 $4,002,000 $76,581,000
Conversion of Series B preferred stock (27,448) - 994,491 1,000 - - (1,000)
Reclassification of common stock, subject to
redemption - - 346,800 - - - 1,457,000
Net income - - - - - - -
------------------------------------------------------------------------------
Balance at December 31, 2002 74,278 $ - 21,193,159 $21,000 2,284,211 $4,002,000 $78,037,000
==============================================================================
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
---------------------------
Balance at December 31, 1999 (54,378,000) 5,364,000
Stock options exercised - 726,000
Warrants exercised - 1,201,000
Warrants expired - -
Warrants issued - -
Conversion of Series B preferred stock - 2,000
Common stock issued for cash - 9,058,000
Dividends on Series B preferred stock (593,000) (309,000)
Net loss (7,138,000) (7,138,000)
---------------------------
Balance at December 31, 2000 (62,109,000) 8,904,000
Stock options exercised - -
Warrants issued - -
Warrants expired - -
Common stock issued for cash - 5,910,000
Reclassification of common stock, subject to
redemption - 1,950,000
Dividends on Series B preferred stock (440,000) 139,000
Deemed dividend recorded in connection with
issuance of additional shares of common stock
and warrant re-pricing (1,151,000) -
Net loss (2,070,000) (2,070,000)
---------------------------
Balance at December 31, 2001 $(65,770,000) $14,833,000
Conversion of Series B preferred stock - -
Reclassification of common stock, subject to
redemption - 1,457,000
Net income 1,429,000 1,429,000
---------------------------
Balance at December 31, 2002 $(64,341,000) $17,719,000
===========================
The accompanying notes are an integral part of these financial statements.
F - 5
LIFECELL CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
2000 2001 2002
------------ ------------ ------------
Cash Flows from Operating Activities:
Net income (loss) $(7,138,000) $(2,070,000) $ 1,429,000
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 1,290,000 1,761,000 2,296,000
Deferred revenues 389,000 (222,000) (221,000)
Provision for bad debts 150,000 (15,000) (56,000)
Accretion of debt discount and financing cost 69,000 192,000 -
Increase (decrease) in cash from working capital:
Receivables (1,880,000) 503,000 (477,000)
Inventories (1,509,000) 20,000 (1,676,000)
Prepayments and other (115,000) (50,000) 62,000
Accounts payable and accrued liabilities (141,000) (1,791,000) 1,087,000
Other liabilities 83,000 (13,000) 24,000
------------ ------------ ------------
Net cash provided by (used in) operating activities (8,802,000) (1,685,000) 2,468,000
------------ ------------ ------------
Cash Flows from Investing Activities:
Capital expenditures (4,681,000) (458,000) (576,000)
Additions to patents (99,000) (171,000) -
Purchase of short-term investments - - (6,000)
Sales of short-term investments - 65,000 -
------------ ------------ ------------
Net cash used in investing activities (4,780,000) (564,000) (582,000)
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of stock and warrants 10,987,000 5,910,000 -
Proceeds from issuance of long-term debt 3,653,000 - -
Principal payments on long-term debt (227,000) (1,229,000) (1,334,000)
Payments on notes payable (2,000) (2,998,000) -
Cash dividends paid (346,000) (4,000) -
------------ ------------ ------------
Net cash provided by (used in) financing activities 14,065,000 1,679,000 (1,334,000)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 483,000 (570,000) 552,000
------------ ------------ ------------
Cash and cash equivalents at beginning of period 4,737,000 5,220,000 4,650,000
------------ ------------ ------------
Cash and cash equivalents at end of period $ 5,220,000 $ 4,650,000 $ 5,202,000
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest $ 683,000 $ 581,000 $ 186,000
============ ============ ============
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:
Common stock $ 407,000 $ 3,231,000 $ -
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F - 6
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
1. ORGANIZATION
LifeCell Corporation ("LifeCell" or "the Company") develops and markets
biologically based products 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 1993.
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 three to 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.
Deferred Patent Costs
The Company capitalizes external legal costs associated with obtaining
patents. Net deferred patent costs amounted to $459,000 and are included in
other assets, net in the accompanying balance sheet. Such costs are amortized
to expense on a straight-line basis over the legal life of the patent. For the
years ended December 31, 2000, 2001 and 2002, amortization expense relating to
deferred patent costs was $52,000, $40,000 and $83,000, respectively.
F - 7
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets, which
include property and equipment and deferred patent costs, in accordance with the
provision of SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." Long-lived assets are reviewed for impairment 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) were 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, generally determined
using the sum of discounted expected future cash flows. During 2002, management
believes that no impairment reviews were required.
Revenue Recognition
Product revenues are recognized when title and risk of loss for the product
is transferred to the customer. Two of the Company's sales and marketing
agents, Boston Scientific and OMP, hold the Company's inventory on a consignment
basis. For products held by these agents, the Company recognizes revenue when
the product is delivered to the third-party customer, as this is when title and
risk of loss to the product transfers. Additionally, amounts billed to
customers for shipping and handling are included in revenue at the time the
related product revenue are recognized.
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.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, short-term
investments, 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.
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. No
stock-based compensation cost is reflected in net income, as all options granted
under the plans had an exercise price equal to the market value of the
underlying common stock on the date of grant.
F - 8
The following table illustrates the effect on net income and earnings per
share if the company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
compensation for the years ended December 31,:
2000 2001 2002
------------ ------------ ------------
Net income (loss), as reported $(7,138,000) $(2,070,000) $ 1,429,000
Less: Total stock-based compensation expense
determined under fair value based method
for all awards, net of related tax effects (1,783,000) (1,942,000) (1,223,000)
------------ ------------ ------------
Pro forma $(8,921,000) $(4,012,000) $ 206,000
============ ============ ============
Income (loss) per common share - basic
As reported $ (0.54) $ (0.20) $ 0.07
============ ============ ============
Pro forma $ (0.67) $ (0.31) $ 0.01
============ ============ ============
Income (loss) per common share - diluted
As reported $ (0.54) $ (0.20) $ 0.06
============ ============ ============
Pro forma $ (0.67) $ (0.31) $ 0.01
============ ============ ============
See Note 8 for additional information regarding the computations presented
above.
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.
Write-offs
Charge and
Balance at (Benefit) to Deductions Balance at
Allowance for Doubtful Accounts Beginning of Costs and From End of
Period Expenses Allowance Period
------------ ------------- -------------- --------------
December 31, 2000 $ 175,000 $ 150,000 $ 155,000) $ 170,000
December 31, 2001 170,000 (15,000) (41,000) 114,000
December 31, 2002 114,000 (56,000) (18,000) 40,000
New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). This standard provides the financial
accounting and reporting for the cost of legal obligations associated with the
retirement of tangible long-lived assets. In accordance with SFAS 143, asset
retirement obligations will be recorded at fair value in the period they are
incurred. When the liability is initially recorded, the cost is capitalized as
part of the related long-lived asset and subsequently depreciated over its
remaining useful life. Changes in the liability resulting from the passage of
time are recognized as operating expense. The Company will adopt SFAS 143
effective January 1, 2003 and does not expect the adoption to have a material
impact on its financial position or results of operations.
F - 9
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" ("SFAS 146"). SFAS 146 addresses significant issues
regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force ("EITF") set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3").
The scope of SFAS 146 also includes (1) costs related to terminating a contract
that is not a capital lease, (2) termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract and (3) costs to consolidate facilities or
relocate employees. SFAS 146 is effective for exit or disposal activities
initiated after December 31, 2002. The Company does not expect the adoption of
this statement to have a material impact on its financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FAS 123" ("SFAS
148"). SFAS 148 amends FASB Statement No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"), to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. This
statement is effective for the Company beginning in the year ended December 31,
2002. The Company has elected to apply the provisions of APB No. 25 to its
accounting for stock-based compensation to employees, and accordingly, has
adopted the disclosure provisions of SFAS 148 in its financial statements.
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," which expands previously issued accounting guidance and
disclosure requirements for certain guarantees. FIN 45 requires the recognition
of an initial liability for the fair value of an obligation assumed by issuing a
guarantee. The provision for initial recognition and measurement of the
liability will be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. The adoption of FIN 45 is not expected to
materially impact the Company's financial statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities -- an interpretation of ARB No. 51," which addresses
consolidation of variable interest entities. FIN 46 expands the criteria for
consideration in determining whether a variable interest entity should be
consolidated by a business entity, and requires existing unconsolidated variable
interest entities (which include, but are not limited to, Special Purpose
Entities, or SPEs) to be consolidated by their primary beneficiaries if the
entities do not effectively disperse risks among parties involved. This
interpretation also addresses the measurement of assets and liabilities of newly
consolidated variable interest entities and requires certain disclosures related
to the purpose, size, activities, and exposure to risk associated with variable
interest entities not requiring consolidation. This Interpretation applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after
June 15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. The adoption of FIN
46 is not expected to materially impact the Company's financial statements.
In January of 2003, the Emerging Issues Task Force of the FASB Issued EITF
00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." EITF
00-21 addresses certain aspects of the accounting by a vendor for arrangements
under which it will perform multiple revenue-generating activities, including
how to determine whether an arrangement involving multiple deliverables contains
more than one unit of accounting, and how arrangement consideration should be
measured and allocated to the separate units of accounting in the arrangement.
The guidance in EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003, and therefore is not expected to
have an impact on the Company's financial statements based on the nature of the
Company's current revenue arrangements.
F - 10
3. INVENTORIES
Inventories consist of the following at December 31,:
2001 2002
---------- ----------
Tissue and materials $1,314,000 $2,940,000
Tissue products in-process 1,307,000 1,446,000
Finished tissue products 2,070,000 1,981,000
---------- ----------
Total inventories $4,691,000 $6,367,000
========== ==========
4. FIXED ASSETS
Fixed assets consist of the following at December 31,:
2001 2002
------------ ------------
Machinery and equipment $ 3,668,000 $ 3,973,000
Leasehold improvements 7,446,000 7,486,000
Office equipment, furniture and fixtures 2,165,000 1,933,000
------------ -------------
13,279,000 13,392,000
Accumulated depreciation and amortization (4,551,000) (6,301,000)
------------ ------------
Fixed assets, net $ 8,728,000 $ 7,091,000
============ ============
For the years ended December 31, 2000, 2001 and 2002 the depreciation and
amortization expense related to fixed assets was $1,238,000, $1, 721,000 and
$2,213,000, respectively.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31,:
2001 2002
---------- ----------
Tissue inventory purchases $ 922,000 $1,025,000
Employee compensation and benefits 911,000 1,436,000
Marketing and distribution fees 777,000 601,000
Operating expenses and other 122,000 111,000
---------- ----------
Total accrued liabilities $2,732,000 $3,173,000
========== ==========
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.
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.
F - 11
7. FINANCING ARRANGEMENTS AND LONG-TERM DEBT
As of December 31, 2002, the Company had term debt facilities with three
financial institutions. These term notes consisted of the following:
(1) A three-year term loan bearing an interest rate of 14.2%, repayable in
monthly installments of principal and interest of $100,000 through and including
March 1, 2003. This credit facility is collateralized by the Company's accounts
receivable, inventory, intellectual property, intangible and fixed assets and is
guaranteed by the New Jersey Economic Development Authority. The balance
outstanding on the term loan was $1,278,000 at December 31, 2001 and $196,000 at
December 31, 2002.
(2) A three-year term loan bearing an interest rate of 6.5%, repayable in
monthly installments of principal and interest of $18,000 through and including
June 1, 2003. The loan is collateralized by the Company's accounts receivable,
inventories and fixed assets. The balance outstanding on this loan was $294,000
at December 31, 2001, and $89,000 at December 31, 2002.
(3) A ten-year term loan bearing an interest rate of 9.0%, repayable in
annual installments of principal and interest of $106,000 through and including
August 1, 2010. This loan is collateralized 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, and $578,000 at
December 3, 2002.
Interest expense for the years ended December 31, 2000, 2001 and 2002 was
$683,000, $697,000 and $180,000, respectively.
In January 2003, the Company secured a $4 million credit facility through a
financial institution. The credit facility consists of a $2 million revolving
line of credit due in January 2004 and an equipment line for up to an additional
$2 million due in January 2005. The credit facility is collateralized by the
Company's accounts receivable, inventory, intellectual property, intangible and
fixed assets. The agreement contains certain financial covenants and a
subjective acceleration clause. The revolving line of credit bears interest at
the bank prime rate plus 0.75%. The equipment term note bears interest at the
bank prime rate plus 1.5% and requires equal monthly principal payments over a
twenty-four month term. In January 2003, the Company received proceeds of
$880,000 under the equipment line portion of the credit facility and used these
proceeds to repay the debt and accrued interest outstanding at December 31,
2002. The balance of the equipment line is available to fund equipment purchases
through March 2003.
Long-term borrowings at December 31, 2002 and after giving effect to the
refinancing had the following scheduled maturities:
At December 31, 2002 Refinanced
-------------------- ----------
2003 $ 337,000 $ 440,000
2004 57,000 440,000
2005 62,000 0
2006 68,000 0
2007 and beyond 339,000 0
-------------------- ----------
Total $ 863,000 $ 880,000
==================== ==========
F - 12
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 was not required to issue additional shares in November
2002 because the market price of the Company's common stock was above $1.96 on
the third anniversary.
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. In the
fourth quarter of 2001 and 2002, the Company received notification that the
investor sold 464,364 and 346,800 shares, respectively, of the original 925,000
shares and accordingly, $1.9 million and $1.5 million, respectively, of the
original amount was reclassified to stockholders' equity - common stock.
Series B Preferred Stock
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 (2,691,240
shares of common stock at December 31, 2002), subject to adjustment for dilutive
issuances of securities. The Series B preferred stock has a liquidation
preference of $100 per share, or $7,428,000 as of December 31, 2002, 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
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
Common Stock
In October 2000, the Company issued 2,500,000 shares of common stock in a
private placement at a price of $4.00 per share. The proceeds of the offering
were approximately $10.0 million before deducting placement agent fees and
offering costs of $942,000.
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 - 13
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 through January 16, 2002. In June 2000, the stockholders of the Company
approved the Year 2000 Stock Option Plan (the "2000 Plan"), which provides for
the grant of options to purchase up to 1,500,000 shares of common stock through
March 1, 2010. Common stock authorized for issuance under the 1992 and 2000
Plans 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.
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, 2000,
2001 and 2002 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, 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
Granted 250 651,525 65,000 716,775 2.73
Forfeited (54,800) (34,075) (120,000) (208,875) 4.64
---------- ---------- --------- ----------
Balance at December 31, 2002 2,150,219 1,362,950 165,000 3,678,169 3.52
========== ========== ========= ==========
Available for future grant at
December 31, 2002 -- 137,050 495,000 632,050
F - 14
A summary of stock options outstanding under the three plans combined at
December 31, 2002 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 2002 Life (Years) Price 2002 Price
- --------------------- ------------- --------------- --------- ------------- --------------
$ 1.64 to $ 1.99 32,150 8.9 $ 1.73 20,500 $ 1.72
2.00 to 2.99 1,652,000 8.6 2.45 448,006 2.32
3.00 to 3.99 1,058,969 4.9 3.74 996,969 3.76
4.00 to 4.99 399,900 6.3 4.23 298,663 4.21
5.00 to 5.99 315,200 7.1 5.37 179,975 5.38
6.00 to 6.99 209,450 5.5 6.62 202,700 6.62
7.00 to 10.88 10,500 7.2 10.02 5,250 10.02
------------- --------------- -------------
$ 1.64 to $10.88 3,678,169 7.0 $ 3.52 2,152,063 $ 3.92
============= =============== =============
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, 2002, 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 2.4 years as of December 31, 2002.
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 2000, 2001 and 2002 consistent with SFAS No. 123, the Company would
have recorded stock-based compensation expense of $1,783,000, $1,942,000 and
$1,223,000 respectively. See Note 2 for the pro forma effect on net income.
Under the provisions of SFAS No. 123, the weighted average fair value of
options granted in 2000, 2001, and 2002 was $2.73, $1.56 and $2.22 per share,
respectively. 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 2000, 2001 and 2002, respectively: a
weighted average risk-free interest rate of approximately 3% - 7% percent for
all years; no expected dividend yield during the expected life of the option;
expected lives of 5 to 6 years for each grant and expected volatility between 64
and 112 percent.
Warrants
As of December 31, 2001 and 2002, warrants to acquire a total of 2,284,211
shares of common stock were outstanding as set forth below.
Warrants Outstanding to
Purchase Shares of Common
Stock at December 31,
--------------------
Exercise Price 2001 2002 Expiration Date
--------------- --------- --------- -----------------
$ 1.92 1,750,000 1,750,000 July 10, 2006
$ 1.96 200,000 200,000 November 16, 2004
$ 4.75 84,211 84,211 December 5, 2004
$ 5.00 250,000 250,000 October 27, 2005
--------- ---------
2,284,211 2,284,211
========= =========
F - 15
9. 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. Participant's 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 2000, 2001 and 2002 were
$31,000, $34,000 and $67,000, 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 2000, 2001, and 2002 were $7,000, $13,000 and $21,000, respectively.
10. INCOME TAXES
The Company has recorded a net tax benefit of $155,000 for the year ended
December 31, 2002, consisting of a provision for state taxes of $93,000 offset
by proceeds of $248,000 from the sale of state tax net operating losses. No
federal provision for income taxes has been recorded, as the Company plans to
utilize its federal net operating loss carryforwards to offset its estimated
federal tax liability of $ 492,000. Although the Company has approximately
$12.3 million of state tax net operating loss carryforwards, the utilization of
such carryforwards was suspended through 2003 by recently enacted tax
legislation. The Company's effective tax rate differs from the federal
statutory tax rate as a result of the following: the state tax provision, the
utilization of federal net operating loss carryforwards, and the proceeds from
the sale of the company's state tax net operating losses.
The principal components of the Company's deferred tax assets as of
December 31, 2001 and 2002, assuming a 34% federal tax rate, are as follows:
2001 2002
------------- -------------
Temporary differences:
Deferred revenue $ 190,000 $ 119,000
Uniform capitalization of inventory costs 90,000 113,000
Other items 160,000 (213,000)
------------- -------------
Total temporary differences 440,000 19,000
Federal tax losses and credits not currently utilizable 20,290,000 20,298,000
State tax losses and credits not currently utilizable 916,000 1,145,000
------------- -------------
Total deferred tax assets 21,646,000 21,462,000
Less valuation allowance (21,646,000) (21,462,000)
------------- -------------
Net deferred tax asset $ -- $ --
============= =============
As of December 31, 2002, the Company has a net operating loss carryforward
("NOL") for federal income tax purposes of approximately $56.7 million, subject
to the limitations described below, expiring as follows:
Year Expires
2003 $2,800,000
2004 2,200,000
2005 1,700,000
2006 1,400,000
2007 and beyond 48,600,000
-----------
$56,700,000
===========
F - 16
Under existing federal tax laws, Internal Revenue Code Sec. 382 provides
for an annual limitation on the utilization of federal net operating losses and
tax credit carryforwards generated prior to certain ownership changes. The sale
of common stock in the public offering in December 1997 resulted in an ownership
change for federal income tax purposes, and accordingly this could limit the
Company's ability to use its federal net operating loss and tax credit
carryforwards in future years. As of December 31, 2002, of the Company's total
net operating loss carryover of $56,700,000, approximately $24,100,000 is
subject to an annual limitation under Internal Revenue Code Section 382.
At December 31, 2002, the Company also had a net operating loss
carryforward for state income tax purposes of approximately $12.3 million, which
expire in varying amounts commencing in 2006.
Additionally, the Company has approximately $1,000,000 of research and
development tax credit carryforwards for federal and state income tax purposes,
which will expire in varying amounts commencing in 2003.
For financial reporting purposes, a valuation allowance of $ 21,462,000 has
been recorded as of December 31, 2002 to fully offset the Company's deferred tax
assets, including the federal and state net operating loss and credit
carryforwards. The net change in the deferred tax valuation allowance for 2001
and 2002 was an increase of $715,000 and a decrease of $184,000, respectively.
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. The amount was recorded when realized
and has been reflected as an income tax benefit in the statement of operations.
In January 2003, the Company sold an additional $3.0 million of state tax net
operating losses for $235,000, which will be recorded as a tax benefit in 2003.
11. NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the years ended December 31, 2000, 2001 and 2002:
For the Year Ended December 31,
---------------------------------------
2000 2001 2002
------------ ------------ -----------
Net income (loss) applicable to common stockholders $(7,731,000) $(3,661,000) $ 1,429,000
============ ============ ===========
Weighted average common shares outstanding 14,372,083 18,240,431 21,175,602
------------ ------------ -----------
Denominator for basic net income (loss) per share 14,372,083 18,240,431 21,175,602
------------ ------------ -----------
Effect of dilutive securities:
Series B preferred stock assuming conversion - - 2,822,635
Warrants - - 540,533
Common stock options - - 157,606
------------ ------------ -----------
Denominator for diluted net income (loss) per share 14,372,083 18,240,431 24,696,376
------------ ------------ -----------
Basic net income (loss) per share $ (0.54) $ (0.20) $ 0.07
============ ============ ===========
Diluted net income (loss) per share $ (0.54) $ (0.20) $ 0.06
============ ============ ===========
F - 17
The calculation of net loss per share for the years ended December 31, 2000
and 2001 excludes potentially dilutive common stock equivalents of 9,343,455 in
2000 and 9,250,216 in 2001. These common stock equivalents, which consisted of
convertible Series B preferred stock, warrants, and outstanding stock options,
were not included in the calculation of the net loss per share because their
inclusion would be antidilutive.
The calculation of net income per share for the year ended December 31,
2002 excludes potentially dilutive common stock equivalents consisting of
outstanding options to purchase 2,726,444 shares of common stock and warrants to
purchase 334,211 shares of common stock because their inclusion would be
antidilutive.
12. COMMITMENTS AND CONTINGENCIES
Litigation
In June 2002, a complaint was filed in the Superior Court of California,
Los Angeles County, Central District, captioned Joan Savitt, individually and on
behalf of others similarly situated, v. Doheny Eye & Tissue Bank, et al. The
complaint alleges among other things, the Company, by engaging in the storing,
processing and distribution of human tissue, violates the public policy and laws
of the state of California in various ways. In March 2003, the Company filed a
response to the complaint and discovery has commenced. The Company believes
that the claims against it in this complaint are without merit and intends to
vigorously defend against such action.
The Company does not expect the final resolution of this matter to have a
material impact on its financial position, results of operations, or cash flows.
However, there can be no assurance that the resolution of this matter will not
be material to the Company's financial position, results of operations, or cash
flows.
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 Agency Agreements
The Company has engaged Boston Scientific Corporation as its exclusive
worldwide sales and marketing agent for Repliform for use in the urology and
gynecology markets and OMP, Inc. as its exclusive sales and marketing agent for
Cymetra to office-based dermatologists and plastic surgeons. Boston Scientific
and OMP are paid agency fees based on the amount of product revenues they
generate for the Company. During 2000, 2001 and 2002, sales of products through
Boston Scientific Corporation represented approximately 28%, 35% and 31%,
respectively, of total product revenues. During 2000, 2001 and 2002, sales of
products OMP represented approximately 13%, 9% and 8%, respectively, of total
product revenues.
Both Boston Scientific and OMP hold Company inventory on a consignment
basis. The Company records revenues when products are delivered to third-party
customers.
In addition, the Company distributes products through several other
domestic and international distributors. These distributors take title to and
assume risk of loss for the Company's products upon shipment from the Company to
the distributor, and therefore the Company recognizes revenue upon shipment to
the distributor for these sales. None of these individual distributors
represented more than 5% of total product revenues in 2002.
F - 18
Leases
The Company leases approximately 90,000 square feet for office, production
and laboratory space in one building under a lease agreement that expires in
November 2010. The lease contains a renewal option for an additional two
successive five-year periods. In addition, the Company has various other
operating leases. The future minimum lease payments under noncancelable lease
terms in excess of one year as of December 31, 2002, were as follows:
2003 $ 833,000
2004 833,000
2005 891,000
2006 919,000
2007 and beyond 3,600,000
----------
Total $7,076,000
==========
Rental expense was $565,000, $872,000 and $949,000 for the years ended
December 31, 2000, 2001, and 2002, respectively.
13. SEGMENT 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, 2000. 2001 and 2002, are
summarized as follows:
2000 2001 2002
----------- ----------- -----------
United States $20,219,000 $24,939,000 $31,163,000
Other countries 1,111,000 1,621,000 1,772,000
----------- ----------- -----------
Total Product Revenues $21,330,000 $26,560,000 $32,935,000
=========== =========== ===========
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of unaudited quarterly results for the years ended
December 31, 2001 and 2002:
First Second Third Fourth
(In thousands except per share amounts) Quarter Quarter Quarter Quarter
--------- --------- --------- ------------
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)
2002
Total Revenues. . . . . . . . . . . . . . . . . . . $ 7,659 $ 8,394 $ 9,102 $ 9,273
Product Revenues. . . . . . . . . . . . . . . . . . 7,310 8,050 8,711 8,864
Cost of Products Sold . . . . . . . . . . . . . . . 2,396 2,513 2,642 2,583
Net Income. . . . . . . . . . . . . . . . . . . . . 436 214 344 435
Income Per Share of Common Stock - Diluted. . . . . 0.02 0.01 0.02 0.02
Income Per Share of Common Stock - Diluted. . . . . 0.02 0.01 0.01 0.02
(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