SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended June 30, 1998 Commission File Number: 0-16375
THERMOGENESIS CORP.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3018487
(State of Incorporation) (I.R.S. Employer
Identification No.)
3146 GOLD CAMP DRIVE
RANCHO CORDOVA, CA 95670
(916) 858-5100
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, $.001 Par Value Nasdaq SmallCap Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes <checked-box> No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment of this Form 10-K. <checked-box>
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing sale price on September 17, 1998, was
$27,638,010.
The number of shares of the registrant's common stock, $.001 par value,
outstanding on September 17, 1998 was 18,952,669.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the registrant's annual meeting of stockholders to be held on
December 11, 1998.
<PAGE>
TABLE OF CONTENTS
PAGE NUMBER
ITEM 1. Business...................................................... 1
(a) General and Historical Development of Business.... 1
(b) Factors Affecting Operating Results.................... 6
(c) Description of the Business............................ 7
ITEM 2. Description of Properties..................................... 22
ITEM 3. Legal Proceedings............................................. 23
ITEM 4. Submission of Matters to a Vote of Security Holders.... 23
ITEM 5. Market for the Registrant's Common Stock and Related
Stockholder Matters.......................................... 24
ITEM 6. Selected Financial Data...................................... 25
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................ 26
(a) Overview................................................. 26
(b) Results of Operations.................................... 27
(c) Liquidity and Capital Resources.......................... 30
ITEM 8. Financial Statements and Supplementary Data.................. 32
ITEM 9. Changes in and Disagreements with Accountants on Accounting
And Financial Disclosure..................................... 52
ITEM 10. Directors and Executive Officers of the Registrant.......... 52
ITEM 11. Executive Compensation...................................... 52
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 52
ITEM 13. Certain Relationships and Related Transactions............... 52
ITEM 14. Exhibits..................................................... 53
(a) Financial Statements.................................. 53
(b) Reports on Form 8-K..................................... 53
(c) Exhibits............................................... 53
<PAGE> (i)
PART I
ITEM 1. BUSINESS
(A) GENERAL AND HISTORICAL DEVELOPMENT OF BUSINESS
The company was incorporated in Delaware in July 1986 as InstaCool Inc. of
North America, and subsequently merged with Refrigeration Systems
International, Inc., a California corporation. In January of 1995, the Company
changed its name to THERMOGENESIS CORP. ("Company") to better reflect the
thermodynamic blood processing segment of the biotechnology industry that it
hopes to service through development of new products. The Company designs,
develops, manufactures, and sells products and devices which utilize its
proprietary thermodynamic technology for the processing of biological
substances including the cryopreservation, thawing, and harvesting of blood
components.
Historically, the Company's primary revenues were from sales of ultra rapid
blood plasma freezers and thawers to hospitals, blood banks and blood
transfusion centers. Currently, the Company is manufacturing several
categories of thermodynamic devices which are being sold to the blood plasma
industry under US Food & Drug Administration ("FDA") permission to market in
the United States. Other potential applications and markets for the Company's
proprietary thermodynamic technology include medical and pharmaceutical
applications, and industrial applications. During the fiscal years 1988
through 1995, the Company focused its efforts on research, development and
refinement of product design for its blood plasma freezers and thawers. During
that period, the Company continuously sought new applications for its
technology, including the design of micro-manufacturing systems which utilize
the Company's thermodynamic competence in new medical and pharmaceutical
applications.
Beginning in late 1993, and with accelerated research and development efforts
from 1996 to date totaling approximately $9 million, the Company completed
development of two new technology platforms, each of which will give rise to
multiple medical devices targeted at a number of different medical and surgical
applications. These two technology platforms are viewed by the Company as
micro-manufacturing platforms that produce biopharmaceutical drugs composed of
stem cells, proteins, enzymes or other blood components that have therapeutic
applications for treatment of human disease. The technology platforms are
generically referred to as the BioArchive<trademark> Platform and the
CryoSeal<trademark> Platform. The first product developed under the BioArchive
Platform, the BioArchive Stem Cell System, was launched in the fourth quarter
of fiscal 1998, and the first product developed under the CryoSeal Platform,
the CryoSeal AHF System, is expected to launch in the second quarter of fiscal
1999.
In addition to the significant research and development costs associated with
completing both new platform technologies, the Company has incurred significant
expenses during fiscal year 1998 for upgrades to the entire manufacturing
operation which now provides the capability to produce these new FDA Class II
technology platforms to the demands of FDA good manufacturing practices
("cGMP") and ISO 9003. These upgrade expenses were absorbed into the cost of
sales for fiscal year 1998 sales and account for a significant portion of the
reduction in gross profit from fiscal year 1997 sales. Finally, the Company
devoted higher than usual expenses to general and administrative operations as
it restructured senior management including recruiting a senior leadership team
highly experienced in manufacturing and marketing sophisticated FDA class II
medical devices in order to properly transition the Company from its research
and development phase to an organization that effectively manufactures,
launches and supports these new products in the marketplace.
<PAGE> 1
Following successful product launch of the first product derived from each of
the two new platforms in fiscal year 1999, the Company intends to initiate
specific clinical trials to provide substantiation for additional indications
from the FDA for two systems derived from the CryoSeal technology platform.
Although research and development continues in fiscal year 1999, the expenses
will significantly diminish as a direct result of the core platform technology
development having been completed. The Company anticipates that future products
developed under each platform will occur at a significantly reduced rate of
research and development investment.
CORPORATE STRATEGY
The Company's strategy with its initial products, blood plasma freezers and
thawers, focused on developing superior blood processing devices for the niche
blood processing markets where new products could quickly establish credibility
for the Company's proprietary thermodynamic technology. The Company believed
that by concentrating its products to serve the blood plasma industry, many
customers, such as the American Red Cross or other blood transfusion societies
of various countries, would validate the Company's proprietary thermodynamic
technology for rapid freezing of biological substances, more specifically blood
plasma. Early products were designed for blood banks and hospitals, received
rapid 510(k) permission to market, and the Company sells directly and through
its distribution network in 32 countries.
In 1994, the Company recognized that the blood plasma freezing market was
limited in size, and also perceived that the Company's proprietary
thermodynamic technology could have significant application in processing
specific bio-pharmaceutical products derived from single units of human blood
that would compete in significantly larger markets. After initial research,
the Company began to focus its technology development towards harvesting
fibrinogen rich cryoprecipitate from blood plasma for use as one of two
components in fibrin glue, a hemostatic agent and tissue adhesive for surgical
use. Simultaneously, the Company embarked on extensive research and
development efforts, in conjunction with The New York Blood Center,("NYBC") to
develop systems and processes to harvest, cryoprotect, store and archive
therapeutic units of stem and progenitor cells from umbilical cord blood
(donated following the birth of an infant.) Like bone marrow, stem cells from
umbilical cord blood can be used to reconstitute a person's hematopoietic and
immune system which may have been destroyed as a result of intensive
chemotherapy and radiation or as a result of a disease, such as leukemia.
In order to effect the new strategic direction, the Company needed to spend
significant amounts of money in order to fund the research and development, and
to build a solid infrastructure and management team needed to move the Company
through its next stage of growth. The Company, with only limited revenues
generated from operations in the blood plasma freezer and thawer industry, was
forced to seek financing through equity transactions on several occasions in
order to fully fund the research and development efforts and the infrastructure
needed to manufacture FDA class II medical devices which utilized single use
sterile disposables to process blood. Research and development on the first
two platform technologies, and development of the first two products under
those platforms, was completed by the end of fiscal year 1998. During fiscal
year 1998, the Company also significantly restructured its operations and
management in order to prepare and execute product market launches for the
CryoSeal AHF System, the CyroSeal AFG System, and the BioArchive Stem
Cells System in order to compete in new markets where annual world-wide
revenues exceed $400 million.
<PAGE> 2
By June 30, 1998, the Company completed development and embarked on the market
launch in six countries of the BioArchive Stem Cell System. The CryoSeal
System, for producing Antihemophilic Factor VIII (AHF) for the
treatment ofhemophilia, is currently under FDA review and will be introduced
into a number
of key international markets during fiscal year 1999. The development of the
CryoSeal System for producing autologous fibrin glue (AFG), and the CryoSeal
System for producing autologous platelet derived growth factors (APDGF), are
also completed and ready for clinical trials in the U.S.A. However, the
significant research and development expenses and general operating expenses
required to develop the new technology platforms and prepare to manufacture and
launch them has significantly diminished the Company's working capital.
Following product launch, the Company will need to financially bridge the
product launch of those new products and the receipt of significant revenues
from the sale and distribution of those products. It is not uncommon for new
medical technologies to take up to one full year to gain full market
acceptance, and the Company will need to either significantly reduce its
infrastructure and management functions during that period, or find additional
sources of capital to allow it to continue with its business plan.
MEDICAL NEEDS DRIVING DEVELOPMENT OF NEW PRODUCTS
Many surgical applications and medical therapeutic practices require proteins
and cellular components contained within blood plasma. Pharmaceutical drug
companies use fractionated blood components in the manufacture of various
drugs, as prescribed by the FDA, in the treatment of numerous ailments. These
Pharmaceutical drug companies obtain the protein and enzyme rich plasma from
collection centers where the plasma has been separated out from whole blood.
The typical process for manufacturing the biopharmaceutical drugs using these
blood components involves the mixing (pooling) of thousands of donated
units of plasma, followed by heat
treatment and solvent detergent methods of viral inactivation, in an effort to
eliminate the risk of contamination from various blood borne diseases, such as
human immune deficiency ("HIV"), and numerous stereotypes of the Hepatitis
virus. Although the processes used to inactivate viruses are intended to
insure safety of the end product, history has revealed that, at best, the only
defenses that can be erected are those against "known" pathogens.
In the 1970's, the hepatitis contamination of the blood supply was an
unmistakable warning of the risks associated with blood borne pathogens. In
response to the outbreak of hepatitis, new methods for killing the virus (e.g.
heat inactivation) in the blood supply were developed and deployed by blood
plasma fractionaters. Subsequently, the regulatory authorities once again began
to grant clearance to plasma-derivative products sourced from "pooled" plasma
based upon clinical results suggesting acceptable levels of safety from viral
contamination.
In the 1980's, however, the HIV contamination of Factor VIII blood protein
products resulted in worldwide deaths of hemophiliacs treated with those
products. The deaths, followed by lawsuits, demonstrated the ability of new
pathogens to survive the previous safety measures implemented to combat
hepatitis. Fear about the world's blood supply resurfaced and additional more
sophisticated viral defenses (e.g. solvent detergent inactivation) were
deployed by blood plasma fractionaters, and again regulatory authorities began
granting product clearances based on clinical data that once again suggested
the products were both safe and effective.
In the late 1990's, yet another new and deadly infectious agent appeared
(prions) which is responsible for Creutzfeldt-Jakob Disease ("CJD") and a new
variant of that disease ("nvCJD") - the human counterpart of Mad Cow Disease.
Because of this infectious agent, the European Community, in specific, and the
medical industry in general, have become increasingly concerned with the safety
of blood products sourced from pooled plasma as well as bovine derived
products. There is currently no routine diagnostic screening test for CJD or
nvCJD, (post-mortem pathology is currently the only definitive diagnostic test)
and there is no current process to inactivate the pathogen in contaminated
blood donations.
<PAGE> 3
In response to current manufacturing processes that utilize proteins and other
components of blood plasma, such as Factor VIII and fibrinogen and thrombin
that are fractionated from thousand of donations of blood plasma, the Company
embarked upon the development of two new technology platforms that serve as
micro-manufacturing systems to harvest and concentrate these blood plasma
components, from a patient's own blood. "Micro-manufacturing" is defined as a
process by which a raw material e.g. a bag of blood plasma, is loaded onto the
Company's medical device, such as the CryoSeal CS-1, and connected to a
proprietary processing disposable (CP-2),and in less than 60-minutes a
biopharmaceutical drug such as fibrin glue (composed of fibrinogen and
thrombin) is automatically produced. By using a patient's own blood
(autologous donation) there is no risk of contaminating the blood with
infectious agents from pooled blood. Similarly, in situations where another
donor's blood is required to obtain the necessary components - such as
obtaining Antihemophilic Factor VIII (AHF) for treating hemophiliacs who are
deficient in Factor VIII - a single, directed donor whose medical history is
known, is a safer alternative than biopharmaceutical drugs manufactured from
"pooled" plasma.
The Company strongly feels that its portable micro-manufacturing platforms,
which produce biopharmaceutical drugs in less than one hour will replace the
past paradigm for old style autologous donations from that of inconvenience to
patient and physician, high cost and risk of sample mishandling, to a new
paradigm of a convenient, cost effective, safe source of Biopharmaceutical
drugs.
CLINICAL DATA
(I) BioArchive Stem Cell System
IN VITRO TESTS The PCB stem and progenitor cell processing bag sets
were tested at the Placental Blood project at NYBC, the world's largest PCB
Bank, where progenitor cell recoveries were recorded and submitted to the FDA.
The Company believes that the ninety-five percent progenitor cell recoveries
achieved utilizing the bag sets are the highest of any processing system
available today.
IN VIVO TESTS Patient outcome data derived from patients receiving
PCB transplants prepared with these processing bag sets will be provided to the
FDA by the PCB banks in the United States utilizing the Company's proprietary
bag sets, including the New York Blood Center, the NIH PCB banks at Duke
University Medical Center, Georgetown University Medical Center, and the UCLA
Medical Center.
Similar patient outcome data will be provided to the appropriate regulatory
authorities directly by the PCB Banks in each foreign country in which the
BioArchive systems are in operation. As of June 30, 1998 those countries
included Finland, Germany, Japan, Spain, and Taiwan.
(II) CryoSeal AHF System
IN VITRO TESTS Since AHF is an FDA licensed blood component product
for the intravenous treatment of Hemophilia the clinical data required by the
FDA is the IN VITRO protein assays of the AHF produced by the CryoSeal AHF
system to assure that it meets or exceeds the FDA minimum standards of 80
IU/FVIII and 150 mg FBG per unit of plasma. The Company has submitted data to
the FDA in which the AHF produced by the CryoSeal System averages 186 IU/FVIII
& 231 mg FBG per unit of plasma comfortably greater than FDA minimum
requirements. The submission is pending review.
<PAGE> 4
(III) CryoSeal AFG
IN VITRO TESTS
<circle>Comparison of the tensile strength of CryoSeal AFG fibrin glue and
Tisseel{R} fibrin glue, on porous (Dermal) and slippery (Epidermal)
surfaces. (Performed at BioAdhesives Laboratory, University of
Illinois, Chicago) indicates an overall performance of the CryoSeal
AFG System comparable to commercially available fibrin glue.
DERMAL SKIN EPIDERMAL SKIN
Tisseel{R} FG 1000 gm/cm{2} 233 g/cm{2}
CryoSeal AFG 887 gm/cm{2} 336 g/cm{2}
<circle>Tissue Sealing tests were performed at the UCLA Medical School,
Department of Vascular Surgery, in which 18 gauge holes on the
peripheral surface of sheep lungs were created to mimic the air leak
defect caused by the surgical removal of tumors. These holes (125)
were sealed with CryoSeal AFG and tested to a pressure of 25mm Hg -
a pressure significantly greater than normal conditions. Of 125
experimental air leaks treated with AFG, 111 (88.8%) sealed
following the first applications and 122 (97.6%) were sealed with
one to three applications indicating that CryoSeal AFG is highly
effective in closure of pulmonary parenchymal air leaks.
<circle>Spinal Cord Repair tests were performed at St. Louis University
School of Medicine, Department of Neurobiology in which CryoSeal AFG
was utilized as a matrix for implanting Schwann cells into partially
injured adult rat spinal cords. The degree and orientation of the
resulting axonal growth suggests that AFG supports Schwann cell
survival and axonal growth.
IN VIVO TESTS
<circle>Repair of Cerebral Spinal Fluid (CSF) leak in the dura surrounding
the brain of a woman involved in an automobile collision was
accomplished at the University of Illinois, Medical School,
Department of Otolaryngology in a minimally invasive procedure
through the nasal passage, sparing the patient from craniotomy
surgery and indicating the efficacy of CryoSeal AFG System in this
delicate procedure.
<circle>The CryoSeal AFG System was utilized in nine total hip replacement
surgeries at Instituto Ortopedico Pini - Milan, Italy, to determine
if a reduction in blood loss would occur in comparison to the
standard of care. The red blood cell loss was reduced by thirty
percent and the salvaged blood forty percent in an indication of
better intra and post-operating hemostasis.
The Company currently operates in one industry segment, and reports the results
of its operations for only one industry segment.
<PAGE> 5
(B) FACTORS AFFECTING OPERATING RESULTS
BASIS OF PRESENTATION. The Company has incurred recurring operating losses and
has an accumulated deficit of $20,739,545 as of June 30, 1998. The report of
independent auditors on the Company's June 30, 1998 financial statements
includes an explanatory paragraph indicating there is substantial doubt about
the Company's ability to continue as a going concern. The Company believes that
it has developed a viable plan to address these issues and that its plan will
enable the Company to continue as a going concern through the end of fiscal
year 1999. This plan includes the realization of revenues from the
commercialization of new products, the consummation of debt or equity financing
in amounts sufficient to fund further growth, and the reduction of certain
operating expenses as necessary. Although the Company believes that its plan
will be realized, there is no assurance that these events will occur. The
financial statements do not include any adjustments to reflect the
uncertainties related to the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the inability of
the Company to continue as a going concern.
DEPENDENCE UPON NEW PRODUCTS FOR FUTURE GROWTH. Historically, substantially
all of the Company's revenue has been from sales of a core line of products
which freeze, thaw or store blood plasma. Because the Company expects this
portion of the blood plasma market to have limited growth, the future success
of the Company will be dependent upon new applications of its technology. The
Company intends to concentrate on developing and marketing novel FDA Class II
thermodynamic blood processing systems such as: (1) CryoSeal AHF System; (2)
CryoSeal AFG System; (3) Cryofactor APDGF System (4) BioArchive Stem Cell
System; (5) BioArchive Tissue System; (6) Cryoplatelet System. Although these
six products use technology evolved from the Company's core competence,
developepresents a departure from the Company's current core business. No
assurance can be given that all of these potential products can be successfully
developed, and if developed, that a market will develop for them.
NEED FOR ADDITIONAL FINANCING. In light of delays in new product launches
during fiscal year 1998, and in the event actual sales of the Company's
products do not meet the Company's expectations in any given period, or
development and production costs increase significantly, the Company will need
to secure additional financing to complete and fully implement its business
objectives. Although the Company has developed relationships with investment
banking firms and certain institutional investors, no assurance can be given
that debt or equity financing will ultimately be available if needed, and if
available, that it will be obtained on terms favorable to the Company.
LACK OF TESTING DATA. The Company has completed certain in vitro and in vivo
testing of its CryoSeal AFG Systems and is currently performing in vivo
clinicals in otolaryngology under Investigational Review Board ("IRB") approval
at the University of Illinois, Chicago, and further clinical studies are to
begin in the near future in Italy, Japan, Canada, and the United States with
the CryoSeal AFG System. Other in vitro studies have occurred with the
BioArchive Stem Cell System. However, all of these studies, do not provide a
basis to achieve regulatory permission to promote these systems for all the
indications that management believes can be achieved. Further clinical studies
must be performed. There can be no assurance that the clinical studies can be
successfully completed within the Company's expected time frame and budget, or
that the Company's products will prove effective in the required clinical
trials. If the Company is unable to conclude successfully the clinical trials
of its products in development, the Company's business, financial condition and
results of operation could be adversely affected.
<PAGE> 6
GOVERNMENT REGULATION ASSOCIATED WITH PRODUCTS. The majority of the Company's
products require clearance to market from the FDA for sale in the United States
and from comparable agencies in foreign countries, which may limit or
circumscribe applications for U.S. or foreign markets in which the Company's
products may be sold. Further, if the Company cannot establish that its
product is substantially equivalent, or superior, in safety and efficacy to a
previously approved product in the United States, delays may result in final
clearance from the FDA for marketing its products. No assurance can be given
that FDA clearance to market in the United States will be obtained, or that
regulatory approval will be received in all foreign countries. Although the
standards established by the FDA are generally more encompassing, the Company's
products may also be required to meet certain additional criteria or receive
certain approvals from other foreign governments for marketing and sales.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon the experience and
services of Philip H. Coelho, Chairman and Chief Executive Officer, and James
H. Godsey, Ph.D., President and Chief Operating Officer. The loss of any of
these persons would adversely affect the Company's operations. The Company has
obtained key man life insurance covering Mr. Coelho in the amount of $1,000,000
as some protection against this risk.
Year 2000 Compliance. Based upon information currently available, management
does not anticipate that the Company will incur material costs to update its
computer software programs and applications to be "Year 2000" compliant. The
Year 2000 problem which is common to most corporations concerns the inability
of information systems, primarily computer software programs, to properly
recognize and process date sensitive information as the year 2000 approaches.
The Company has completed an assessment of its internal systems and has
developed a work plan to address this issue. In addition, the Company has
relationships with vendors, customers
and other third parties who rely on computer software that may not be Year 2000
compliant. Many of these third parties, operate outside of the U.S. in
countries where compliance programs may be less further along than in the U.S.
However, the Company has formed a task force to identify and address potential
year 2000 issues with significant vendors, customers and other third parties.
(C) DESCRIPTION OF THE BUSINESS
CORE LINE PRODUCTS - ULTRA RAPID PLASMA FREEZERS AND THAWERS
The Company's ultra rapid blood plasma freezers use heat transfer liquids,
rather than gases like air, carbon dioxide or nitrogen, to transfer heat to and
from a plasma. From 1988 to 1992, the Company's devices utilized heat transfer
technology which involved direct contact between the heat transfer fluid and
the plastic sealed biological substances. However, since these liquids
contained a CFC chemical, an improved heat transfer method was developed and
patented which automatically interposed thin flexible plastic membranes between
the heat transfer liquid and the plasma bags. This flexible membrane allowed
the use of silicone and water based heat transfer liquids allowing the Company
to produce CFC-free devices.
<PAGE> 7
The Company's blood plasma thawers utilize water as the heat transfer medium
and the patented flexible membrane system. In tests performed by the Company's
research and development personnel, the Company compared the rate and
homogenous quality of temperature rise in four bags of frozen plasma in the
Company's plasma thawer and a microwave oven. The Company found that the frozen
plasma in the Company's thawer rose to a transfusible temperature (20{o}C)
faster than the frozen plasma in the microwave and that the plasma in the
Company's thawer had less temperature variation throughout its volume than the
plasma thawed in the microwave oven.
The Company currently manufactures the following Core Line freezing and thawing
equipment:
TABLE I CORE LINE MEDICAL DEVICES
<TABLE>
<CAPTION>
MODEL CAPACITY APPLICATION TARGET MARKET
<S> <C> <C> <C>
MP2000 168 Plasma Bags/Hr. Freeze Blood Plasma Blood Banks,
Transfusion Boards,
Red Crosses
MP1000 64 Plasma Bags/Hr.
MP750 32 Plasma Bags/Hr.
MP500 24 Plasma Bags/Hr.
MT202 2 Plasma Bags/12 Min. Thaw Blood Plasma Blood Banks, Hospitals
MT204 4 Plasma Bags/12 Min.
MT210 10 Plasma Bags/12 Min.
</TABLE>
The freezers differ in size and capacity and the price also varies within each
model depending upon configuration and accessory equipment purchased. From time
to time the Company offers discounts from its list price to meet competitive
conditions.
BIOARCHIVE PLATFORM PRODUCTS
The BioArchive Stem Cell System was the first product developed under the
BioArchive System technology platform. In collaboration with The New
York Blood
Center, the Company developed a sterile method for collecting, concentrating
and cryopreserving stem and progenitor cells contained in placental/cord blood
("PCB"). These life giving stem and progenitor cells are targeted for
therapeutic use in patients who suffer from malignancies and genetic diseases
of the blood and immune system such as leukemia, lymphomas, diverse inherited
anemias, immunodeficiencies, acquired aplastic anemia and hypoproliferative
disorders.
The BioArchive Stem Cell System utilizes a robotic system that automatically
freezes, archives and manages an inventory of up to 3,626 PCB units of stem and
progenitor cells for transplant. The proprietary computer-driven, four axis
robotics system further enables the BioArchive System to control and validate
the freezing profile of each PCB donation in nitrogen vapor, after which the
PCB unit is stored at a specified indexed location in liquid nitrogen. The
BioArchive System tracks each donation address and allows a specific PCB stem
and progenitor cell sample to be retrieved when selected for a human transplant
recipient without exposing the other archived samples to detrimental warming
effects. The PCB stem and progenitor cell donations are collected, processed,
cryopreserved and transfused utilizing three proprietary sterile disposable bag
sets developed jointly by NYBC and the Company and licensed to MedSep Division
of Pall Corp. for manufacturing and distribution.
<PAGE> 8
PCB stem and progenitor cell transplants are a viable and preferable treatment
to bone marrow transplants. Extraction of bone marrow is expensive, painful and
time consuming for the donor. More significantly, there are an estimated 10,000
to 15,000 patients turned away for transplants each year due to an inability to
find a suitably matched bone marrow donor. Further, there is a significant risk
that a bone marrow transplant will cause a condition in the transplant patient
called Graft vs. Host Disease ("GVHD"). The immature nature of stem cells from
umbilical cord blood appear to result in a reduced rate of GVHD and allow
engraftment with less than perfect donor matches. The donation itself (the
cells are harvested from the umbilical cord after a healthy birth) does not
involve either the mother or the infant, and converts what once was treated as
biological waste in to a life giving therapy. The success of PCB stem cell
transplant procedures utilizing units from the NYBC PCB Bank under the
direction of Dr. Pablo Rubinstein, one of the world's foremost experts in the
area of PCB stem cell transplants, has been well documented by articles in the
New England Journal of Medicine.
The National Institute of Health, (NIH), through the National Heart, Lung &
Blood Institution, (NHLBI), has sponsored a $30 million program to advance PCB
stem cell banking in the United States and has chosen to exclusively utilize
the sterile, disposable collection, processing, freezing and transfusion bag
sets. These processing and freezing bag sets are designed for use with the
BioArchive Stem Cell System. Currently, two of the three NHLBI PCB Banks, Duke
University Medical Center and Georgetown University, have acquired the
BioArchive System.
During the fourth quarter of fiscal 1998, eight BioArchive Systems were sold to
PCB Banks in Japan(2), Taiwan(1), Spain(2), Finland(1), Germany(1) and one unit
was placed in a U.S. site under the Investigational Device Exemption
Regulations (1), bringing the total cluding NYBC and Duke University). Based
on preliminary market data available in this newly emerging market, the Company
estimates that as many as 100 PCB banks will form over the next four to five
years. It is currently anticipated that a typical PCB bank could purchase and
operate two to three BioArchive Stem Cell Systems.
An additional customer base for the BioArchive System is expected to be the
approximately 400 centers in the United States which collect and cryopreserve
autologous stem and progenitor cells sourced from the peripheral blood ("PSC")
of patients with solid tumors, such as breast cancer, who will subsequently
undergo chemotherapy and radiation. After this treatment, the rescued cells
are returned to the patient to reconstitute and reinforce the hematopoietic
system. The BioArchive Stem Cell System is suited for use with peripheral stem
cells as well.
<PAGE> 9
BIOARCHIVE NON-STEM CELL SYSTEM PRODUCTS
The Company believes that with minimal modifications, the BioArchive System and
dedicated disposables can be easily reconfigured to process and store
biological substances such as heart valves, sperm cells, human eggs, virus
samples, biopsy specimens, cell lines, blood tissue, and saliva samples for DNA
matching. FDA clearance is not required in order to market the BioArchive
System for the processing and cryopreservation of non-transfused biological
substances.
BIOARCHIVE PLATFORM DISPOSABLES
In addition to the three bag sets utilized to collect, process, and transfuse
PCB Stem Cells which are manufactured and distributed under license by MedSep
Corp., (the Company receives a royalty on the sale of these disposables) the
Company manufactures and sells three additional disposables which the Company
believes will provide an ongoing revenue stream. It is anticipated that each
new BioArchive market will result in additional high margin disposables
dedicated to the new biological applications -- e.g. storage of sperm cells.
(I) CANISTERS
The freezing bag is placed in the canister before it is frozen and it remains
in the canister while it is stored in liquid nitrogen. The thermal properties
of the canister augment heat transfer during freezing and physically protect
the unit when it is removed from the BioArchive System.
(II) CANISTER SLEEVE
The insulated canister sleeve is inserted into the sample retrieval cartridge
prior to a specimen retrieval. During the retrieval process, the canister is
automatically inserted within the insulated canister sleeve; where it protects
the contents of the canister from warming and cushions the canister from
physical shocks.
(III) OVERWRAP BAG
The overwrap bag is formed from -200{<circle>}C glass transition plastic and
provides a possible secondary barrier against potential contamination by
pathogens as a result of a leaking or an otherwise contaminated freeze bag also
stored in the BioArchive System.
CRYOSEAL PLATFORM PRODUCTS
Patients who suffer from wounds or other medical conditions which require
proteins, enzymes or growth factors sourced from pooled plasma for treatment,
have legitimate concerns regarding the contamination of such products by blood
borne viruses (HIV, Hepatitis A-H, etc.), bacteria (e.g., Staphylococcus
aureus, Yersinia enterocolitica, etc.) and prions (e.g. Creutzfeldt-Jakob
Disease -- CJD and nvCJD).
Recent technologies that seek to manufacture these same proteins, enzymes and
growth factors through recombinant production processes rather than "pooled"
plasma have their own manufacturing and allergic reaction safety risks.
The Company believes that the CryoSeal Platform products provide a superior and
safer approach to producing therapeutic doses of these proteins, enzymes and
growth factors. Each CryoSeal System is a micro-manufacturing platform which
harvests and concentrates these therapeutic blood components from the patient's
own blood, or in the case of such medical conditions as hemophilia, from a
directed donor.
<PAGE> 10
CRYOSEAL AHF SYSTEM. The CryoSeal AHF System mates the CryoSeal device
with proprietary computer software and a dedicated blood processing container
(CP-1) to harvest cryoprecipitated AHF in less than one hour. AHF is an FDA
licensed blood product for the intravenous treatment of hemophilia and is
currently manufactured by blood banks over a period of two to four days using
four separate pieces of equipment. The CryoSeal System automatically produces
AHF, with concentrations of clotting and adhesive proteins significantly higher
than federal standards for cryoprecipitated AHF, in less than one hour. Market
research indicates that approximately 1.1 million units of cryoprecipitated AHF
are produced annually by blood banks in the United States. While recombinant
products are prevalent in the United States, 80% of the world's hemophiliacs
go untreated in their lifetime and die at a young age. The Company believes
that the CryoSeal AHF System is perfectly positioned to serve this enormous
ignored market.
CRYOSEAL AFG SYSTEM. The CryoSeal AFG System mates the CryoSeal device
with proprietary computer software, and a dedicated processing disposable (CP-
2) to produce autologous fibrin glue (fibrin glue consists of two components;
both fibrinogen and thrombin) from the surgical patient's own blood in less
than 60 minutes. Surgical applicators are provided which allow the surgeon to
precisely administer the autologous fibrin glue to the internal wound site to
control surface bleeding, bond tissues and augment or replace sutures.
Autologous fibrin glue contains the adhesive and/or clotting proteins -
fibrinogen, fibronectin, von Willebrand's Factor, Factor VIII and clot
stabilizing proteins, Factor XIII, as well as platelet derived growth factors
which the Company believes provide competitive efficacy to commercial fibrin
glues sourced from blood plasma pooled from thousands of donors. Outside of the
United States, commercial fibrin glues have annual sales in excess of $400
million. Because of the concern of viral contamination from the source pooled
plasma it was only recently (May 1998) that the FDA granted its first clearance
to a commercial fibrin glue, Baxter's fibrin glue.
Commercial fibrin glues traditionally used bovine-derived thrombin in their
kits to initiate clot formation. Bovine-derived thrombin was both readily
available and inexpensive. With the emergence of CJD and nvCJD, the European
Community has prohibited the use of bovine-derived thrombin in commercial
fibrin glues. In response, the Company has recently completed development of a
novel proprietary methodology and disposable kit for preparing autologous
thrombin ("ATAK<trademark>") from an 8ml aliquot of the patient's plasma in as
little time as 30 minutes. Furthermore, the kit is fully integrated into a new
proprietary processing disposable, the CP-2, insuring that the autologous
thrombin preparation will be simultaneously prepared from the same unit of
plasma used to prepare autologous fibrinogen rich cryoprecipitate on the
CryoSeal AFG System. The Company expects that sales of the new CP-2 disposable
could occur in Euorpe as early as fiscal year 2000.
CRYOFACTOR APDGF SYSTEM. The CryoFactor APDGF System is intended to
harvest a full array of autologous platelet derived growth factors immersed in
a solution of adhesive proteins from a patient's own blood donation for the
treatment of chronic skin ulcers such as diabetic, bed sores (decubitus) and
venous stasis skin ulcers. This product consists essentially of the CryoSeal
Platform device (CS-1) with modified software and disposable processing
containers. Although not fully released as a product, the Company anticipates
that research and development efforts and product validation will not encompass
significant time or resources and, therefore, completion of research and
development should occur in the short term. Nevertheless, formal clinical
trials and FDA clearance will be required to market the product in the United
States. The Company anticipates moving to clinical trials on this product as
soon as possible during fiscal year 1999, with market launch outside of the
United States in late fiscal year 2000.
<PAGE> 11
CRYOSEAL SYSTEM DISPOSABLES
Each CryoSeal System requires the use of disposables which the Company believes
will provide a long term revenue stream for the Company.
(I) CRYOSEAL AHF CP-1
The CP-1 is the primary disposable of the CryoSeal System used for the
preparation of cryoprecipitate. The CP-1 contains the plasma throughout the
freezing, thawing and rocking procedures during which the cryoprecipitate
separates from the cryo-poor plasma and then concentrates, followed by the
cryo-poor plasma transferring back to the transfer pack.
The CP-1 received clearance for sale in Canada by Health Canada in 1998.
(II) CRYOSEAL AFG CP-2
The CP-2 is the primary disposable for simultaneously preparing both components
(fibrinogen and thrombin) of the autologous fibrin glue prepared by the
CryoSeal AFG System. The CP-2 is similar to the CP-1, with the addition of
the disposable components of the autologous thrombin activation kit (used for
the extraction and processing of autologous thrombin).
(III) LIQUID MEDICATION DISPENSERS
The Liquid Medication Dispensers were designed for use in surgery to apply two
medications, such as thrombin and fibrinogen, to a surgical site simultaneously
and in equal volumetric proportions.
The Liquid Medication Dispensers received 510(k) clearance for marketing from
the FDA in 1996 and clearance for sale in Canada from Health Canada in 1998.
(IV) CRYOFACTOR APDGF CP-3
The CP-3 is the primary disposable for preparing platelet derived growth
factors from platelet rich plasma.
The CP-3, like the CP-2 and systems dedicated for their use, will require FDA
clearance to market in the United States.
(V) CRYOFACTOR PATIENT KIT
The Patient Kit will be the means by which the therapeutic CryoFactor APDGF
preparation is aliquoted into individual dosages for application by the patient
or home care specialist. The design is not at this time finalized. Final
Research and development of this product will be dependent on cash flows during
fiscal year 1999.
<PAGE> 12
MATERIALS USED IN MANUFACTURE OF PRODUCTS
Materials used to produce the Company's products are readily available from
numerous sources. Based upon current information from manufacturers, the
Company does not anticipate any shortage of supply. In 1992 the Company
introduced a replacement heat transfer liquid and refrigerant which is free of
chlorofluoro-carbons (CFC) for use in the Company's proprietary process. The
replacement chemicals are readily available and the Company does not anticipate
any shortages or constraints on supplies.
In May 1998, the Company was audited by TUV Rheinland of North America The
Plasma Freezers and the CryoSeal System CS-1 instrument were recommended for
certification under prEN46003 the Medical Device Directive ("MDD") and ISO
9003, with the Plasma Thawers and Liquid Medicine Dispensers deemed exempt.
The certification attests to the Company's quality management system and
permits the Company to place the CE mark on its medical devices reviewed during
the audit. The CE mark is essential to continued sale and distribution of the
Company's products in the European Community. The CryoSeal CP-1 disposable
technical file was reviewed in May, but will not be recommended for
certification until its sterilization validation study is completed (which was
received September 22, 1998) and is transmitted to TUV Rheinland for review.
BACKGROUND OF MARKETS
(I)BLOOD PLASMA FREEZERS AND THAWERS
The initial market thrust of the Company was to penetrate the blood processing
industry. The Company targeted the major blood fractionation manufacturers,
American Red Cross facilities, hospitals and independent blood collection
facilities as its primary market. The Company's blood plasma freezers and
thawers were marketed on the basis of speed of operation, energy savings,
precision of temperature control and the increased yields of important blood
proteins. The Company expects limited growth in the market for blood plasma
freezers and thawers.
(II)WOUND CARE MARKETS
The wound care market is divided into two major market segments that address
either acute or chronic wounds. Acute wounds are the result of trauma or most
often incision as part of surgical procedures. Regardless of the cause, acute
wounds require immediate closure which is typically facilitated via surgical
sutures, staples or gauze applied with pressure. Acute wounds may occur on the
external surface of the skin, or internally, such as those that occur during
the surgical reconstruction of a major organ. Over the past 20 years a number
of technologies have appeared which offer the surgeon alternatives, as well as
advantages to the practiced "standard of care" (e.g. sutures). Among the most
exciting of these inovations has been biological sealants referred to in
certain instances as fibrin glue. Fibrin glue is comprised of two of the
body's naturally occurring wound healing proteins and enzymes - fibrinogen and
thrombin. Although the thrombin component is typically derived from bovine
sources, more recently purified human thrombin has been used. Fibrin glue can
be used as either a hemostatic agent or a sealant, dependant upon the
application and desired result. Fibrin glues have been sold commercially in
Japan and Europe for over 10 years. Those two geographical markets currently
represent an approximately $400 million dollar annual market for fibrin glue
uses. Due to concerns of viral contamination in pooled plasma products, a
process typically used in the manufacture of the commercial fibrin glues, the
FDA refused to grant clearances for commercial fibrin glue until May 1998 when
the Baxter Tisseel{R} fibrin glue product was approved.
<PAGE> 13
In contrast to acute wounds, chronic wounds are those which take up to one year
to heal. Because the open wound is continuously exposed, bacterial infection
can result in failure of the wound to properly heal, requiring amputation of
the infected limb for significant numbers of affected patients. Furthermore,
since many chronic wounds occur as chronic skin ulcers on soles of the feet,
the patient is either immobilized and they are prevented from pursuing a
productive life. Chronic wounds typically fall into three groups: bed sores
(decubitis); diabetic skin ulcers; and venous stasis ulcers. The standard of
care for treating chronic skin ulcers is nursing care, rinsing with sterile
saline and debridement to remove dead (necrotic) tissue from the wound site.
Recently two new types of biotech products have received FDA clearance for
indications to treat chronic wounds. These products are: (i) Chiron's
Regranex<reg-trade-mark>, an ointment comprised of a hydrogel (application
cream or ointment) and a single recombinant platelet derived growth factor; and
(ii) Organogenesis' and Advanced Tissue Sciences' artificial skin. Of these
two biotechnologies, only Chiron's Regranex appears to be successful. Thus
far, the initial success appears to be based on the fact that Regranex is sold
in a tube and can easily be applied at home by the patient on a daily basis.
In contrast, artificial skin must be prescribed and applied by a physician in a
hospital or wound care center.
A number of companies, including THERMOGENESIS CORP., are developing products
for the chronic wound care market, a market currently estimated to be
approximately $6.5 billion annually and growing at an estimated rate of ten
percent per year; this growth is fueled in significant part by the ever growing
population of Americans over the age of fifty. The new chronic wound therapy
technologies have created what the Company terms a new market segment for
chronic wound treatment called "topical therapy for chronic skin ulcers." 1998
domestic sales revenue for this new market may reach $50 to $100 million,
driven almost entirely by the success of Chiron's Regranex product. A
reasonable estimate of market growth as new indications and products arrive in
the marketplace would be in excess of $500 million annually by the year 2003.
The Company believes that the most cost effective and successful treatments
will focus on growth factor based therapies. The Company is pursuing the
Regranex model with its current CryoFactor System as a means to rapidly and
successfully enter this new market.
MARKETING, SALES AND DISTRIBUTION
The Company sells its medical products to blood banks and hospitals in 32
countries including the Red Cross or Blood Transfusion agencies of the United
States, Australia, Belgium, Canada, Denmark, France, Germany, Japan, Korea, the
Netherlands, Sweden, and Switzerland. The following describes briefly the
channels of distribution and marketing strategy employed by the Company.
(I)BLOOD PLASMA FREEZERS AND THAWERS
The Company has primarily targeted the blood processing industry which consists
of approximately 7,000 hospitals and blood collection centers in the United
States and approximately 20,000 hospitals and blood collection centers in the
industrial nations outside the United States. The Company formulated the
following marketing strategy for the distribution and sale of its blood plasma
freezers and thawers: the United States accounts are serviced either by
employees of the Company or a manufacturing representative and internationally
by regional manufacturing representatives or distributors. The primary thrust
of the Company's marketing efforts focused on hospitals and blood banks such as
the Red Cross or blood transfusion agencies in the United States, Australia,
Belgium, Canada, Denmark, France, Germany, Japan, Korea, Netherlands, Sweden,
and Switzerland.
<PAGE> 14
(II)CRYOSEAL AHF AND AFG SYSTEMS
The Company's strategy for entering each of the key markets for fibrin glue has
been to align itself with a larger corporate partner with established
distribution channels in the geographically targeted areas for market
penetration. Asahi Medical Co., Ltd. was selected for the Japan fibrin glue
market, and Dideco S.p.A. was selected for the European fibrin glue market.
The Company is currently initiating efforts to align itself with a domestic
partner that would allow aggressive market penetration in the United States
through that company's distribution network and channels in the surgical arena.
Unless an existing or prospective corporate partner can supply a complete
network of global distribution channels, sales into other regions of the world
will be handled by local distributors, many of whom the Company has existing
relationships for other products.
(III) CRYOFACTOR APDGF SYSTEM
Again, the sales and marketing strategy will focus on distribution through
corporate partners on a broad geographical basis. Such a partner would be
required to demonstrate established distribution and support channels capable
of reaching the hundreds of independent wound care centers in the United
States, as well as the hospitals, primary care centers and general physicians.
A single U.S. partner may be more conducive to marketing both the CryoSeal and
CryoFactor Systems to access acute and chronic wound care facilities in the
United States, but further evaluation of market channels for those products
must first be completed by the Company. Foreign markets will be addressed
similar to the domestic market. As of June 30, 1998, there were no formal
arrangements in any market for this product.
(IV)BIOARCHIVE SYSTEM
The Company has established formal relationships with the Medsep Division of
Pall Corporation for the manufacture and distribution of the disposable bag
sets that are designed for use with the BioArchive Stem Cell System, and
cooperates with Medsep on marketing efforts and strategy for all markets
excluding Japan. The Company previously licensed the manufacture and
distribution of the bag sets in Japan to Nissho Corporation, and also appointed
Daido Hoxan as its exclusive distributor for service and sales of the
BioArchive System in Japan. The Company markets the BioArchive System through
distributors internationally and directly in the domestic markets through
contacts developed early on during the initial efforts in stem cell research
and the subsequent movement to create cord blood stem cell banks.
For non-stem cell applications, the Company has partnered with one of North
America's largest distributors of liquid nitrogen and other gases to conduct an
extensive marketing study to evaluate the BioArchive Platform's application to
the cryopreservation of biological tissue such as sperm, saliva, heart valves,
etc.
<PAGE> 15
RESEARCH AND DEVELOPMENT
As of June 30, 1998, the Company had completed development of two innovative
technology platforms under development, each of which will give rise to three
unique Class II medical systems. These systems feature not only a
thermodynamic platform to process blood products in a closed system, but use of
various sterile, disposable plastic containers and applicators that come into
direct contact with the blood products. These disposables must be discarded
after each use, transforming each sale of the system into a higher margin
revenue stream stretching into the future. The Company completed development
of the first products under each of its two new technology platforms - CryoSeal
AHF System, CryoSeal AFG System, and BioArchive Stem Cell System -- during the
year, as well as the market launch of the BioArchive Stem Cell System in the
fourth quarter. The CryoSeal AHF System is expected to gain FDA clearance
during the third or fourth quarter of fiscal year 1999, based on current
Company information. The Company formed strategic business relationships with
major medical companies to assist its manufacturing and marketing efforts. The
following is a brief summary of the additional Class II medical systems in
development.
CRYOFACTOR APDGF SYSTEM. The CryoFactor APDGF System is intended to
harvest a full array of autologous platelet derived growth factors immersed in
a solution of adhesive proteins from a patient's own blood donation for the
treatment of chronic wounds such as diabetic, decubitus and venous stasis skin
ulcers. This system is expected to enter formal clinical trials during fiscal
year 1999.
CRYOSEAL AFG SYSTEM/AUTOLOGOUS THROMBIN. The Company announced the
successful development of technology that enables the simultaneous production
of thrombin and fibrinogen from a single autologous donation of plasma. A
patent application has been filed covering the thrombin discovery, and the
Company refers to it as ATAK. The CryoSeal AFG System will thus be upgraded to
utilize the new CP-2 processing disposable which will process and collect both
components of fibrin glue. A formal FDA clinical trial for this 100%
autologous fibrin glue will be initiated during fiscal year 1999, based on
available financial resources. Clinical studies will also be performed in
Europe so that the enhanced CryoSeal AFG System can be introduced during fiscal
year 2000.
MICROSEAL<trademark> SYSTEM. MicroSeal is a bench top system that
requires less than 50 ml of blood, drawn in a syringe to harvest up to 1 ml of
CryoSealant for the hundreds of thousands of microsurgeries that occur each
year that could benefit from a safe, effective biological tissue sealant or
hemostatic agent, such as: closing macular holes in the eye, minimizing
scarring in fallopian tube surgery, sealing excised cataract wounds, bonding
skin flaps in minor cosmetic surgery, and repairing ruptured eardrums. This
system represents a miniaturization of the technologies that comprise the
CryoSeal Platform, and is not yet an active program.
CRYOPLATELET<trademark> SYSTEM. The CryoPlatelet System is intended to
cryopreserve blood platelets which retain their viability when thawed utilizing
novel freezing rates, proprietary disposable containers and transfusable,
biodegradable cryoprotectants. Currently, platelets cannot successfully be
frozen and remain viable, and, unfrozen, have a shelf life of only five (5)
days. As a result, 400,000 bags (10% of total bags produced in the United
States) are discarded annually due to outdating. This system is currently in
the applied research phase of product development.
<PAGE> 16
MANUFACTURING
The Company has in-house manufacturing capabilities and is currently
manufacturing approximately seventy to eighty percent of its products for sale.
The Company believes that vendors used by the Company are capable of producing
sufficient quantities of all required components. The Company moved to a
larger 11,000 square foot facility in July 1994 where it has since consolidated
its manufacturing assembly activities. In February 1997, the Company moved its
sales, marketing and administrative functions, and its research and development
engineering offices into a 17,400 square foot facility, thereby dedicating the
11,000 square foot and two additional 5,000 square foot facilities to
manufacturing and manufacturing engineering.
Products manufactured or sold by the Company are warranted against defects in
manufacture for a period of 12 months from delivery when used for the
equipment's intended purpose, which warranties exclude consequential damages to
the extent allowed by law.
LICENSES AND DISTRIBUTION RIGHTS
In June 1995, the Company granted the Japanese distribution rights to its
BioArchive System and the Vial BioArchive System to Daido-Hoxan, Japan. The
Company received $350,000 for the distribution rights and access to the
necessary technology.
In June 1996, the Company entered into an exclusive manufacturing license and
distribution agreement for the CryoSeal System for the country of Japan to
Asahi Medical Co., Ltd., of Japan, a division of Asahi Chemical. Asahi Medical
is a leading supplier of artificial kidneys, blood purification systems and
leukocyte removal systems, with annual revenues of $270 million. Asahi will
manufacture the CP-1 disposable bag set, purchase the CryoSeal System
thermodynamic processing device (CS-1) and SA-1 and DA-1 surgical applicators
from the Company, and market the CryoSeal System in Japan in return for a
$400,000 license fee, a commitment to purchase the CS-1 device and related
surgical applicators from the Company and a 10% royalty on the sale of the
sterile bag set. The Company recognized $400,000 of revenue for the license fee
in fiscal 1996.
In March 1997, the Company and NYBC, as licensors, entered into a license
agreement with Pall Corporation and Medsep Corporation, a subsidiary of Pall
Corporation, as Licensees through which Pall Medsep became the exclusive world-
wide manufacturer (excluding Japan) for a system of sterile, disposable
containers developed by the Company and NYBC for the processing of
hematopoietic stem cells sourced from placental/umbilical cord blood ("PCB").
The system is designed to simplify and streamline the harvesting of stem cell
rich blood from detached placenta/umbilical cords and the concentration,
cryopreservation (freezing) and transfusion of the PCB stem cells while
maintaining the highest stem cell population and viability from each PCB
donation. These units of PCB stem cells will be "banked" in frozen storage for
hematopoietic reconstitution of patients afflicted with such diseases as
aplastic anemia, hypoproliferative stem and progenitor cell disorders,
leukemia, lymphomas and gaucher disease.
In February 1998, the Company entered into an Exclusive European Distribution
Agreement with Dideco, S.p.A., a former subsidiary of Fiat and now a $200
million division of one of Italy's first public companies. As distributor,
Dideco was granted exclusive distribution and service rights for the CryoSeal
System in Europe and certain countries East of the Ural Mountains that formerly
comprised parts of the Union of Soviet Socialist Republics. Under the
agreement, the Company will manufacture and sell the CryoSeal System and its
accessories to Dideco for distribution in the European Community.
<PAGE> 17
COMPETITION
The Company hopes to develop a competitive advantage in the medical
applications of its thermodynamic technology, but it realizes that there are
many companies engaged in related areas which are substantially larger and
possess greater financial resources and personnel which could compete with the
Company. There are approximately 13 companies with sales in excess of
$50,000,000 which manufacture blast air chillers and freezers or liquid
nitrogen and carbon dioxide systems.
The Company's original market is the users of ultra-rapid blood plasma freezing
and thawing equipment. Based upon attendance at trade shows and discussions
with customers and potential customers, management has identified four
companies which sell freezers in the industry: Revco, a division of Rheem
Manufacturing, Forma Scientific, a division of Mallinckrodt, Inc., Harris
Corporation, and the Company. The Company is unable to ascertain its specific
competitive position within the blood plasma freezer industry and management
has no knowledge of whether Harris Corporation is a subsidiary of another
Company. The Company competes primarily based on performance of its products.
Based upon conversations with customers and potential customers and attendance
at trade shows, management believes that the Company's products are in some
instances more expensive than its competitors, ranging in price from $2,000 to
$65,000 for the Company's products compared to $2,000 to $16,000 for competing
products. The Company believes the higher average selling price of its
products is justified by their ability to freeze and thaw plasma faster then
the competition.
WOUND CARE MARKET COMPETITION
(I)ACUTE WOUND CARE (FIBRIN GLUE MARKET)
This market is populated by a number of companies that have been actively
involved in the market over a number of years, most of which are also of a size
larger than the Company. These companies include: Baxter/Immuno; Centeon;
Tyco/US Surgical/Vitex; Haemacure; and the Convatec division of Bristol-Meyers
Squibb. Baxter, and Haemacure through its license with Baxter, received FDA
approval in May 1998 for the Tisseel{R} product, and became the first two
entrants into the domestic market for fibrin glue. The only autologous fibrin
glue on the horizon (other than the THERMOGENESIS CORP. CryoSeal System) is the
Convatec system which initiated Phase I clinical trials in Europe recently.
Some related companies offering synthetic products which in certain
applications may compete with fibrin glue include the cyanoacrylate-based
product made by Closure Medical, as well as other products made by companies
such as Cohesion, Fusion, and a few others.
(ii) CHRONIC WOUND CARE (TOPICAL THERAPY FOR CHRONIC SKIN ULCERS)
This newly formed segment of the wound care market consists of participants
representing two different technologies, e.g. (i) platelet derived growth
factors and salves or ointments; and (ii) artificial skin. The sole
participant currently in the platelet derived growth factor-based product is
Chiron's Regranex, a product distributed by Johnson & Johnson's Ortho McNeil
division. Companies comprising the artificial skin sector include
Organogenesis and Advanced Tissue Sciences, both of whom have FDA cleared
products, as well as Ortec and Integra Life Sciences.
<PAGE> 18
CELLULAR THERAPY MARKET COMPETITION
The Company is not aware of any comparable system to its BioArchive System and,
except for current standards practiced manually in the applicable industries,
does not anticipate extensive competition.
PATENTS
The Company believes that patent protection is important for products and
potential segments of its current and proposed business. The Company currently
holds nine (9) patents, and has ten (10) patents pending to protect the designs
of an additional four (4) products which the Company intends to market. There
can be no assurance, however, as to the breadth or degree of protection
afforded to the Company or the competitive advantage derived by the Company
from current patents and future patents, if any. Although the Company believes
that its patents and the Company's existing and proposed products do not
infringe upon patents of other parties, it is possible that the Company's
existing patent rights may be challenged and found invalid or found to violate
proprietary rights of others. In the event any of the Company's products are
challenged as infringing, the Company would be required to modify the design of
its product, obtain a license or litigate the issue. There is no assurance
that the Company would be able to finance costly patent litigation, or that it
would be able to obtain licenses or modify its products in a timely manner.
Failure to defend a patent infringement action or to obtain a license or
implementation of modifications would have a material adverse effect on the
Company's continued operations.
The tables below identify and discuss the status of the Company's patents
covering its products:
CORE LINE PRODUCT PATENT PORTFOLIO
<TABLE>
<CAPTION>
PATENT DESCRIPTION U.S. STATUS PCT STATUS
<S> <C> <C>
Flexible Membrane Heat Transfer 1993 N/A
Flexible Membrane Heat Transfer (div.) 1996 N/A
Blood Component Thawing Device 1993 N/A
</TABLE>
CRYOSEAL PLATFORM PATENT PORTFOLIO
<TABLE>
<CAPTION>
PATENT DESCRIPTION U.S. STATUS PCT STATUS
<S> <C> <C>
Device for fractionating constituent components of a Issued: 1993 N/A
substance using cryoprecipitation
Fibrinogen processing apparatus method and container Issued: 1996 Pending
Fibrinogen processing apparatus method and container Issued: 1998 Pending
(div.)
Fibrin glue spray dispenser Issued: 1998 Pending
Fibrinogen processing apparatus method and container Pending Pending
(div.)
Fibrinogen processing apparatus method and container Pending Pending
(div.)
Fibrin glue dot and line dispenser Pending Not yet filed
Process for extracting autologous thrombin from plasma Pending Not yet filed
</TABLE>
<PAGE> 19
BIOARCHIVE PLATFORM PATENT PORTFOLIO
<TABLE>
<CAPTION>
PATENT DESCRIPTION U.S. STATUS PCT STATUS
<S> <C> <C>
Method and apparatus for cryogenic storage of Issued: 1997 N/A
thermolabile products
High concentration of white cells, a method of Issued: 1998 Pending
agglomeration ... and bag set
Freezing and thawing bag, mold apparatus and method Pending Pending
Method and apparatus for cryogenic storage of Pending Not yet filed
thermolabile products
Method and apparatus for cyrogenic storage of Pending Not yet filed
thermolabile products (div.)
Method and apparatus for altering osmotic pressure of Pending Not yet filed
cryopreserved white stem cells and the product formed
Freezing and thawing bag, mold, apparatus and method Pending Not yet filed
(div.)
Improved bag design and centrification apparatus Pending Not yet filed
</TABLE>
While patents have been issued or are pending, the Company realizes (a) that
the Company will benefit from patents issued, if any, only if it is able to
market its products in sufficient quantities of which there is no assurance;
(b) that substitutes for these patented items, if not already in existence, may
be developed; (c) that the granting of a patent is not determinative of the
validity of a patent; such validity can be attacked in litigation or the
Company or owner of the patent may be forced to institute legal proceedings to
enforce validity; and (d) that the costs of such litigation, if any, could be
substantial and could adversely affect the Company.
<PAGE> 20
REGULATION OF BUSINESS
The FDA regulations govern the Company's operations at its facilities in
connection with the manufacture of its products, and govern the sale and
distribution of those products. Essentially, all medical devices marketed
after May 28, 1976, the date of the Medical Device Amendments to the Food, Drug
and Cosmetic Act ("FDCA"), must receive clearance or approval from the FDA,
unless exempt by regulation, prior to the marketing or sale of such products or
distribution in interstate commerce. Most of the Company's products require
FDA clearance through a premarket notification process ("510(k) submission").
This regulatory process requires that the Company demonstrate substantial
equivalence to a product which was on the market prior to May 28, 1976, or
which has been found substantially equivalent after that date. Today, the
process of obtaining FDA clearance can be lengthy, expensive, and generally
requires submission of extensive preclinical data and, in certain cases, in-use
or clinical data, to support a finding of substantial equivalence.
Under FDA regulations, medical devices are classified in one of three
categories: Class I, Class II or Class III devices, based on the health risk
posed by such device. Each class of device must comply with certain regulatory
requirements established by the FDA in order to ensure the safe and effective
use of the devices. Class I devices are subject to General Controls, which
includes a cGMP quality system, labeling, and in some instance 510(k)
submissions. Class II devices are also subject to the General Controls, and in
addition must comply with Special Controls established at the discretion of the
FDA. Special Controls may include application of performance and safety
standards, product type standards, clinical or in-use studies, post-market
surveillance and reporting, and other FDA guidelines established at the time of
product submission review. Class III devices are higher risk devices that are
generally associated with invasive procedures and must receive FDA pre-market
application ("PMA") approval prior to distribution.
The product development, preclinical and clinical testing, manufacturing,
labeling, distribution, sales, marketing, advertising and promotion of the
Company's research, investigational, and medical devices are subject to
extensive government regulation in the United States, and also in other
countries. Products manufactured in the United States which have not been
cleared by the FDA through a 510(k) submission, or which have not been approved
through the PMA process, must comply with the requirements of Section 801 of
the FDCA prior to export. Class I and Class II devices which are capable of
being cleared by the FDA under a 510(k) submission do not require FDA clearance
for export; however, the Company's products must still comply with certain
safety and quality system requirements.
Non-compliance with applicable FDA requirements can result in fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, distribution, sales and marketing, or refusal of the
FDA to grant approval of a PMA or clearance of a 510(k). Actions by the FDA
might also include withdrawal of marketing approvals and criminal prosecution.
Such actions could have a material adverse effect on the Company's business,
financial condition, and results of operation.
ENVIRONMENTAL MATTERS
The Company has a California Environmental Protection Agency Identification
number for the disposal of biohazardous waste from its research and development
biolab. The Company does not anticipate that compliance with federal, state
and local environmental protection laws will have a material impact on the
Company or require any material capital expenditures under present regulation.
<PAGE> 21
EMPLOYEES
As of June 30, 1998, the Company had 89 full time employees. The Company also
utilizes temporary employees throughout the year to address significant
fluctuations in orders and product manufacturing. The Company has a full time
human resources manager and considers its employee relations to be good.
Following fiscal year end and certification under prEN46003 and the Medical
Device Directive for CE (ISO 9003), the Company continued its restructuring of
several departments, such as research and development, as the Company continues
to cut costs and move towards operational profitability. Following preliminary
restructuring, which in some instances included reassigning people within the
Company, and management of some attrition, the Company currently has 82 full
time employees.
FINANCIAL INFORMATION ON FOREIGN SALES AND DOMESTIC OPERATIONS AND EXPORT
SALES
The Company has no foreign manufacturing operations. For fiscal year 1998,
foreign sales were approximately $2,198,000, or fifty percent of total sales.
For fiscal year 1997, foreign sales were approximately $1,024,000, or fifteen
percent of total sales for the year.
ITEM 2. DESCRIPTION OF PROPERTIES
In July 1994, the Company leased an approximately 11,000 square foot facility
located in Rancho Cordova, California. This facility is used for the
manufacturing assembly of the Company's medical devices, and was upgraded
during fiscal 1997 as part of the Company's efforts to obtain ISO 9000
certification. In August 1997, the Company extended that lease for 26 months,
and it will expire in January 2002. Annual lease expense is $52,860 for this
facility.
In December 1996, the Company leased an approximately 17,400 square foot
facility, also located in Rancho Cordova, California, which is used as the main
administrative and sales office, and used as the Company's research and
development engineering office. This lease expires in December 2001, and the
annual lease expense is $153,7leased an approximately 5,000 square foot
facility located adjacent to its manufacturing facility in Rancho Cordova,
California. This facility is used for the manufacture and preparation of
certain components and parts of the Company's medical devices that are
assembled at the main manufacturing facility. The lease expires in June 2000,
and the average annual lease expense is $21,756 for this facility.
In April 1998, the Company leased an approximately 2,600 square foot facility
located adjacent to other manufacturing operations in Rancho Cordova,
California, to accommodate the manufacture and assembly of the BioArchive
Systems. The lease was for an initial term of one year, and will continue on a
month to month basis thereafter. The average monthly lease expense is $1,285
for this facility.
At fiscal year end, the Company did not own or lease any other facilities and,
with the exception of short term warehouse space leased and utilized from time
to time, management believes that current facilities are adequate to handle
current and expected operations, including future growth in the number of
products manufactured. Nevertheless, the Company desires to consolidate
operations in an effort to achieve efficiencies that are lost through
operations being conducted in several buildings, and has engaged Collier's
International to assist in securing a build-to-suit facility that will allow
the Company to consolidate all operations under one roof and permit future
inter-connected expansion over the next five to ten years as new product
revenues increase. A national developer has given preliminary agreement to
construct an approximately 60,000 square foot facility to accommodate the
Company's needs, and the Company is in discussions on the feasibility of the
proposal. Current forecasts by the Company indicate that such a move would
have a positive impact on cash flows in future years, and most likely have only
a minimal immediate negative impact on cash flows. Since discussions are
preliminary, there are no assurances that the Company will find the proposal
ultimately feasible, or that final terms will not materially impact short term
cash flows.
<PAGE> 22
ITEM 3. LEGAL PROCEEDINGS
The Company and its property are not a party to any pending legal proceedings.
In the normal course of operations, the Company may have disagreements or
disputes with vendors over the quality or conformance of products manufactured
for the Company. These disputes are seen as a normal part of business, and
there are no currently threatened actions that would have a significant
material impact on the Company's financial position, results of operations, or
cash flows.
The Company's products are relied upon by medical personnel and lab technicians
as part of blood collection processes from a donor, and in some instances
treatment of a patient. If injury were to result from the operation of the
equipment, the Company, along with others, may be sued and, whether or not the
Company is found liable, it may incur legal expenses associated with defending
such actions. The Company carries product liability insurance in the amount of
$2,000,000, with an umbrella policy of $2,000,000, to help insulate against
such risk. While management of the Company believes that current insurance
coverage is sufficient, there can be no assurance that such coverage will
ultimately be adequate to cover liabilities which may occur. Moreover, the
Company may be unable to obtain product liability inss that it finds favorable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to security holders during the fourth
quarter of its last fiscal year ended June 30, 1998.
EXECUTIVE OFFICERS OF THE CORPORATION
The information concerning the Company's Officers required by this Item is
incorporated by reference to the section in Part III of this report entitled
"Directors and Executive Officers of the Registrant".
<PAGE> 23
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock, $.001 par value, is traded on the Nasdaq SmallCap
Market under the symbol KOOL. The following table sets forth the range of high
and low bid prices for the Company's common stock for the past two fiscal years
as reported by Nasdaq. The ranges listed represent actual transactions,
without adjustment for retail markups, markdowns or commissions, as reported by
Nasdaq.
<TABLE>
<CAPTION>
High Low High Low
<S> <C> <C> <C> <C> <C>
Fiscal 1998: Fiscal 1997:
First Quarter (Sept. $3.5626 $3.3750 First Quarter (Sept. $4.2500 $4.0625
30) 30)
Second Quarter (Dec. $3.1250 $2.9688 Second Quarter (Dec. $3.8750 $3.6875
31) 31)
Third Quarter (Mar. 31) $2.7500 $2.6250 Third Quarter (Mar. $3.0625 $2.8750
31)
Fourth Quarter (June $2.2500 $2.0940 Fourth Quarter (June $2.7813 $2.7813
30) 30)
</TABLE>
The Company has not paid cash dividends on its common stock and does not
intend to pay a cash dividend in the foreseeable future. There were
approximately 540 stockholders of record on June 30, 1998 (not including
street name holders).
<PAGE> 24
ITEM 6. SELECTED FINANCIAL DATA
THERMOGENESIS CORP.
FIVE-YEAR REVIEW OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
SUMMARY
<S> <C> <C> <C> <C> <C>
OF OPERATIONS 1998 1997 1996 1995 1994
Net sales $4,396,891 $6,614,044 $4,124,634 $3,311,880 $2,678,192
Cost of sales (5,523,496) (4,326,964) (1,759,659) (2,096,116) (1,454,727)
Gross profit (1,126,605) 2,287,080 2,364,975 1,215,764 1,223,465
General and
administrative (2,132,985) (1,370,401) (426,318) (334,028) (300,379)
Selling and
marketing (2,369,010) (2,143,523) (1,173,254) (827,269) (781,603)
Research and
development (3,858,077) (3,562,280) (1,317,330) (446,780) (391,794)
Other income 69,509 114,372 84,847 304,017 265,028
Other expense (133,627) (131,070) (101,454) - (3,471)
Net loss ($9,550,795) ($4,805,822) ($568,534) ($88,296) $11,246
Basic and diluted net
loss per share ($0.54) ($0.32) ($0.05) ($0.01) $0.00
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Cash $1,975,042 $3,510,861 $1,243,079 $ 325,965 $ 347,769
Working capital 3,723,317 6,407,237 3,589,057 1,413,156 1,438,579
Total assets 7,799,242 10,287,726 5,937,140 2,662,839 2,500,399
Total liabilities 2,226,350 2,163,084 1,562,829 662,256 429,762
Total shareholders'
equity 5,572,892 8,024,642 4,374,311 2,000,583 2,070,637
</TABLE>
<PAGE> 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CERTAIN STATEMENTS CONTAINED IN THIS SECTION AND OTHER PARTS OF THIS
REPORT ON FORM 10-K WHICH ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE PROJECTED RESULTS
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT AFFECT
ACTUAL RESULTS INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN ITEM 1 -
- - BUSINESS -- UNDER THE SUBSECTION ENTITLED "FACTORS AFFECTING OPERATING
RESULTS" BEGINNING ON PAGE 4, AND OTHER FACTORS IDENTIFIED FROM TIME TO
TIME IN THE COMPANY'S REPORTS FILED WITH THE U.S. SECURITIES AND EXCHANGE
COMMISSION.
The following discussion should be read in conjunction with the Company's
financial statements contained in this report.
(A)OVERVIEW
The Company's core business was principally the sale of ultra-rapid blood
plasma freezing and thawing systems, until the fourth quarter of this
fiscal year when the Company launched its BioArchive Stem Cell System.
The BioArchive Stem Cell System accounted for thirty percent of the net
sales for the year. The Company's revenues previously have been from sales
of its core line blood plasma freezers to blood banks and blood plasma
thawers to hospitals and transfusion centers. In addition to blood plasma
thawers and freezers, the Company received minor revenues from the sale of
related blood processing products in the same market. All core line blood
plasma freezer and thawer products are FDA Class I medical devices
purchased as capital equipment. Newer products being prepared for market
launch will include Class II designation under applicable FDA regulations,
and the Company incurred additional expense in the last fiscal year to
continue efforts to establish the required infrastructure to support
manufacture of those systems.
At the start of fiscal 1996 (July 1995), management initiated a three-year
plan to develop the new category of platform products, products from which
would require consumable disposable components, and each of which will
compete in markets that exceed $100 million annually. These new products
would all be based on the proprietary thermodynamic technology developed
and refined during the previous seven years. To achieve completion of the
development, and restructuring of the Company to add experienced executive
talent to launch the products and move the Company to new levels of growth
and revenues, considerable capital resources were used. The Company will
most likely need to seek additional short term capital to fully execute on
its business plan pending significant revenue recognition from the new
products.
The Company has incurred recurring operating losses and has an accumulated
deficit of $20,739,545 as of June 30, 1998. The report of independent
auditors on the Company's June 30, 1998 financial statements includes an
explanatory paragraph indicating there is substantial doubt about the
Company's ability to continue as a going concern. The Company believes that
it has developed a viable plan to address these issues and that its plan
will enable the Company to continue as a going concern through the end of
fiscal year 1999. This plan includes the realization of revenues from the
commercialization of new products, the consummation of debt or equity
financing in amounts sufficient to fund further growth, and the reduction
of certain operating expenses as necessary. Although the Company believes
that its plan will be realized, there is no assurance that these events
will occur. The financial statements do not include any adjustments to
reflect the uncertainties related to the recoverability and classification
of assets or the amounts and classification of liabilities that may result
from the inability of the Company to continue as a going concern.
<PAGE> 26
Management does not anticipate that the Company will incur any material
costs to be "Year 2000" compliant. The Year 2000 problem which is
common to most corporations
concerns the inability of information systems, primarily computer software
programs, to properly recognize and process date sensitive information at
year 2000. The Company has completed an assessment of its internal systems
and products and determined that substantially all of the Company's systems
and products operate using third party software that is compliant, or
operate using Company product software which is Year 2000 compliant. The
Company has formed a task force to identify and address potential year 2000
issues with significant vendors, customers and other third parties.
The Company intends to complete its Year 2000 assessments and any required
remediation programs by the third quarter of fiscal 1999. The costs of the
project are anticipated to be immaterial, and the date on which the Company
believes it will complete its assessment and remediation, if required, are
based on management's best estimates, which are derived using assumptions
of future events, including continued availability of certain resources,
third party certification of any modifications to third party software, and
other factors. There can be no guarantee that these estimates will be
achieved and actual results or costs could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate, identify and correct all
relevant computer codes, and similar uncertainties.
(B)RESULTS OF OPERATIONS
THE YEARS ENDED JUNE 30, 1997 AND 1998:
The following is Management's discussion and analysis of certain
significant factors which have affected the Company's financial condition
and results of operations during the periods included in the accompanying
financial statements.
SALES AND REVENUES:
Net sales increased from fiscal 1996 to fiscal 1997 by 60%, primarily from
an approximately $4 million sale of human blood plasma freezers to Centeon
under a single one-time purchase.
Net sales decreased from fiscal 1997 to fiscal 1998 by 34%, primarily
attributable directly to slower than expected introduction of new products
in fiscal year 1998, most notably the CyroSeal AHF System and the
BioArchive System, and due to the significant increase in fiscal year 1997
sales due to the one time Centeon order of approximately $4-million. The
Company has entered into a service contract with Centeon covering the blood
plasma freezers sold to it in fiscal 1997. Revenues for the service
contract, which was entered into in March 1998, accounted for
approximately 2% of sales in fiscal 1998. Additionally, fiscal 1998 marked
the first year of BioArchive System sales. Ten BioArchive Systems
comprising 30% of net sales were shipped in the second and fourth quarters.
Of the ten systems, three were sold in the United States, four in Europe
and three in Asia.
<PAGE> 27
COST OF SALES:
The increase in cost of sales as a percent of sales from 43% in fiscal 1996
to 65% in fiscal 1997 was primarily attributable to increases in
manufacturing overhead and lower than anticipated margins on the Company's
$4 million sale to Centeon, due principally to additional installation
costs. In addition, manufacturing expanded facilities and added expanded
quality control and document control functions in anticipation of producing
the BioArchive and CryoSeal Systems.
The increase in cost as a percent of sales from 65% in fiscal 1997 to 126%
in fiscal 1998 was primarily attributable to the following factors: 1)
Labor costs incurred to ensure the Company meets ISO 9003 quality
standards; 2) Labor costs for the start-up production of the CryoSeal
System and the BioArchive System. The CryoSeal System generated no
revenues in this fiscal year; 3) Production labor diverted to the upgrading
of the manufacturing facility; 4) Higher warranty reserves for Pipe Line
Products used in clinical studies; and 5) Significant overhead costs
incurred in building and maintaining an infrastructure that is required to
meet FDA regulatory requirements and standards for production of Class II
medical devices. Cost of sales peaked in second quarter of fiscal 1998 at
170%, declined to 120% for the third quarter of fiscal 1998 and again
declined to 98% in the fourth quarter of fiscal 1998 with the launch of the
BioArchive Stem Cell System.
The Company uses discount programs to induce customers to purchase the
Company's freezers over competing freezers. The Company plans to continue
these programs only as long as market conditions dictate such programs are
necessary. The Company is not aware of any specific industry-wide
practices utilizing discount programs. Sales discounts for fiscal 1998 were
approximately $831,000, for fiscal 1997 were approximately $288,000, and
for fiscal 1996 were approximately $6,000.
GENERAL AND ADMINISTRATIVE EXPENSES:
This expense category includes Business Development, Finance,
Administration and General Support departments.
Fiscal 1997 general and administrative expenses increased by 221% over
those of fiscal 1996. This increase was due to expansion of facilities and
management required of a company preparing to manufacture and market Class
II medical systems, such as the BioArchive and CryoSeal Systems. With the
addition of a human resources department and business development
department, as well as the full allocation of the salaries for
President/CEO and Vice President/COO instead of partially allocating them
to the R&D department and the Sales & Marketing department, the fiscal 1997
general and administrative salaries increased more than 400% over those of
fiscal 1996. In addition, professional fees for management information
systems and other management services increased by approximately $230,000
in fiscal 1997 over fiscal 1996.
<PAGE> 28
General and administrative expenses increased in fiscal 1998 by 56% or
$762,584 over those of fiscal 1997. In November 1997, the Company made
significant changes in senior management to improve operations, replacing
the Chief Operating Officer and the Director of Manufacturing.
Approximately $200,000 of the increase in fiscal 1998 was due to accrual of
severance payments to departing executives and signing bonuses for the new
President and the new Vice President of Manufacturing Operations. The
additional increase is also attributable to expansion of facilities,
personnel and additions to management that are required for the Company to
manufacture and market Class II medical devices and achieve ISO 9003
certification.
SELLING AND MARKETING EXPENSES:
This expense category includes Sales & Marketing and Customer Service
Departments. Selling and marketing expenses
increased in fiscal 1997 by 83% over fiscal 1996. Increases were due to an
88% increase in salaries to add new personnel to plan and implement the
market introduction of the N{2} BioArchive System and the CryoSeal System,
and addition of personnel for customer service to meet the needs of the new
products. The Company also added new expanded facilities to meet the growth
needs of the added personnel. Additionally, the Company incurred $250,000
for market research associated with the introduction of the CryoSeal
System.
Fiscal 1998 selling and marketing expenses increased by 11% over those of
fiscal 1997. This increase was due to increased salaries from personnel
added during fiscal 1997 and the first half of fiscal 1998. Restructuring
of sales and marketing during fiscal year 1998 was designed to bring these
expenses in line proportionately with sales levels as well as to increase
the focus on the marketing skills needed for successful launch of new
products.
RESEARCH AND DEVELOPMENT EXPENSES:
This expense category includes R&D, Regulatory Affairs and Manufacturing
Engineering departments. Research and development expenses increased in
fiscal 1997 by 170% from fiscal 1996. This reflects substantially
accelerated development of the above projects. At fiscal 1997 year end, the
Company: (i) had delivered five Japanese Vial BioArchive Systems in January
1997 for expanded field trials in Hokaido which are currently under way,
(ii) began the first pre-production run of the CryoSeal System and was
awaiting FDA permission to market the device in the United States, (iii)
began clinical trials of the CryoSeal System in Canada and the United
States, (iv) arranged for trial of the CryoSeal System in Sweden and Italy
to initiate European distribution, (v) completed prototype development of
the N{2} BioArchive System and began a production run, (vi) received orders
for four N{2} BioArchive Systems, (vii) began preparing the 510(k) for the
N{2} BioArchive System. This increased development and product launch
activity in 1997 led to the addition of new facilities and engineering
staff, as well as the hiring of a Vice President of Regulatory Affairs and
Quality Systems.
Research and development expenses increased in fiscal 1998 by only 8% from
fiscal 1997. This significantly smaller increase is attributable to the
completion of final design and initial transfer of two new products from
research and development to manufacturing towards the end of fiscal year
1998.
Currently the Company's primary R&D efforts are focused on ongoing product
development, refinement, of existing Core Line Products, preparation of
FDA applications for the pipeline products, and the initiation of clinical
trials for the CryoSeal and BioArchive Systems in fiscal 1999.
<PAGE> 29
Management believes that product development and refinement is essential to
maintaining the Company's market position. Therefore, the Company considers
these costs as continuing costs of doing business. No assurances can be
given that the products or markets under development will be successful.
ISSUANCE OF STOCK OPTIONS FOR SERVICES:
In fiscal year 1996, the Company recorded $60,000 for consulting expense
relating to the issuance of stock options with exercise prices equal to the
market value on the date of grant for financial consulting services to
BioVest Research, Inc. While the $60,000 is a non-monetary transaction, the
Company recorded the estimated "fair value" under generally accepted
accounting principles. BioVest assists the Company in financial public
relations and potential equity investments.
The Company recorded $56,000 and $64,000 in fiscal 1997 and fiscal 1998,
respectively, for consulting expense relating to the issuance of stock
options with exercise prices equal to the market value on the date of
grant for technical assistance from two researchers in Canada and the
United States for the development of the CryoSeal System. While the expense
is a non-monetary transaction, the Company recorded the estimated "fair
value" under generally accepted accounting principles.
(C)LIQUIDITY AND CAPITAL RESOURCES
The Company has consumed significant cash resources for operating
activities since its formation in 1987, and more rapidly in the last two
fiscal years primarily to develop new products and markets. Cash resources
were significantly diminished at the end of fiscal year 1998, and remaining
resources at year end are insufficient to permit the Company to fully
execute on its business plan to move towards FDA clinical trials on new
products, and may be insufficient to maintain the infrastructure and
management that the Company deems necessary to launch the new products and
move the Company to its new growth levels. The Company has undertaken
efforts to locate and secure adequate resources to allow it to fully
execute on its plan, including possible equity and debt financing.
In fiscal 1997, the Company raised net proceeds in the aggregate of
approximately $7,882,000 from a warrant exercise and a private placement.
The Company used the proceeds to expand the Company's facilities,
regulatory and manufacturing control functions, and to fund continued R&D.
Although the Company believes that Core Line product operations might have
resulted in a nominal profit if R&D expenses and marketing expenses
associated with the new FDA Class II products were eliminated, the Company
believes that the significantly increased expenses for the new products,
which are directed at new and larger markets, is essential to future growth
and long term profitability of the Company.
In fiscal 1998, the Company raised net proceeds in the aggregate of
approximately $6,433,000 net of expenses from private placements of equity.
The Company used the proceeds to complete design validation, manufacturing
transfer, and restructuring to accommodate new product launches.
Management believes that the losses sustained in the current fiscal year
ended were prudent and necessary for the Company to realize the significant
future revenue prospects. Significantly, the large losses and operatio
reverse beginning in the third quarter of this fiscal year as the Company
initiated transfer to manufacturing and product launch for the BioArchive
System in the fourth quarter.
<PAGE> 30
The Company does not require extensive capital equipment to produce or sell
its current products. However, when significant capital equipment is
required, the Company purchases from a vendor base or is pursuing strategic
partners. Production of the Company's blood plasma freezer and thawer
products are more labor intensive due to the small production runs and,
therefore, manufacturing expenditures for capital equipment have not been
material during fiscal years 1995 and 1996. However, in expanding the
Company's R&D efforts for fiscal year 1996, the Company expended
approximately $450,000 on state of the art engineering design computer
systems for its expanded engineering staff. In fiscal 1997, the Company
expended $873,000 for the purchase of capital equipment and expansion of
facilities for operations. In fiscal 1998, the Company expended $449,092,
the majority of which was for certain test equipment and leasehold
improvements for the launch of the BioArchive and CryoSeal Systems.
Although future capital expenditures may be anticipated, the Company does
not believe that the amounts expended will approach the past two years.
The Company continues to search for further funding and new products that
may provide future growth opportunities and is currently evaluating
financing options to provide working capital to fund expected growth in
fiscal year 1999 with further product launches. The Company has no
significant outstanding capital commitments at June 30, 1998.
Currently, the Company is contemplating additional equity financing to fund
the product launch of the CryoSeal System, and to initiate and complete
clinical trials and FDA submissions for the CryoFactor System and expanded
claims on the CryoSeal System. There can be no assurances that adequate
financing will be available on satisfactory terms, if at all. The Company
anticipates that
it will need additional financing to meet short term obligations, or it
will be required to further reduce operating expenses and possibly certain
management processes established during the past year. Such reductions
could significantly impair future prospects, and no assurances can be made
that adequate capital resources will be made available to the Company in a
time frame that will not impair current infrastructure.
Working capital decreased from $6,407,237 at June 30, 1997 to $3,723,317
primarily due to expenses incurred in developing and preparing the
BioArchive and CryoSeal Systems for market launch.
Management does not believe that inflation has had a significant impact on
the Company's results of operations.
<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE NUMBER
Report of Ernst & Young LLP,Independent Auditors.............. 33
Balance Sheets at June 30, 1998 and 1997...................... 34
Statements of Operations for the years ended June 30, 1998,
1997, and 1996............................................ 36
Statements of Shareholders' Equity for the years ended June 30,
1998, 1997 and 1996.................................... 37
Statements of Cash Flows for the years ended June 30, 1998,
1997 and 1996 ........................................ 38
Notes to Financial Statements.................................. 39
<PAGE> 32
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
THERMOGENESIS CORP.
We have audited the accompanying balance sheets of THERMOGENESIS CORP. as
of June 30, 1998 and 1997, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the
period ended June 30, 1998. Our audits also included the financial
statement schedule listed in the Index at Item 14.(a)(2). These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of THERMOGENESIS CORP. at
June 30, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended June 30, 1998, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that
THERMOGENESIS CORP. will continue as a going concern. As more fully
described in Note 1, the Company has incurred recurring operating losses
and has an accumulated deficit of $20,739,545 as of June 30, 1998.
These conditions raise
substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments to
reflect the uncertainties related to the recoverability and classification
of assets or the amounts and classification of liabilities that may result
from the outcome of this uncertainty.
ERNST & YOUNG LLP
Sacramento, California
August 17, 1998
<PAGE> 33
THERMOGENESIS CORP.
Balance Sheets
ASSETS JUNE 30, 1998 JUNE 30, 1997
<TABLE>
<CAPTION>
Current Assets:
<S> <C> <C>
Cash and cash equivalents $1,975,042 $3,510,861
Accounts receivable, net of allowance for
doubtful accounts of $97,910 ($97,913 at June
30, 1997) 1,280,327 2,067,990
Inventory 2,456,565 2,579,368
Other current assets 180,214 247,819
Total current assets 5,892,148 8,406,038
Equipment, at cost less accumulated
depreciation of $861,750 ($670,269 at June 30, 1,679,201 1,358,747
1997)
Prepaid royalties, net of accumulated
amortization of $443,637 ($388,185 110,863 166,315
at June 30, 1997)
Other assets 117,030 256,626
$7,799,242 $10,187,726
</TABLE>
See accompanying notes.
<PAGE> 34
THERMOGENESIS CORP.
Balance Sheets (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
JUNE 30, 1998 JUNE 30, 1997
<TABLE>
<CAPTION>
Current liabilities:
<S> <C> <C>
Accounts payable $1,301,141 $1,437,548
Accrued payroll and related expenses 345,875 274,008
Accrued warranty reserves 237,440 43,194
Current portion of capital lease 105,151 151,836
obligations 179,224 92,215
Other current liabilities
Total current liabilities 2,168,831 1,998,801
Long-term portion of capital lease
obligations 57,519 164,283
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.001 par value;
2,000,000 shares authorized; no shares
issued and outstanding - -
Common stock, $.001 par value;
50,000,000 shares authorized:
18,925,669 issued and outstanding
(15,865,305 at June 30, 1997) 18,926 15,866
Paid in capital in excess of par 26,293,511 19,197,526
Accumulated deficit (20,739,545) (11,188,750)
Total shareholders' equity 5,572,892 8,024,642
$7,799,242 $10,187,726
</TABLE>
See accompanying notes.
<PAGE> 35
THERMOGENESIS CORP.
Statements of Operations
Years ended June 30,
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
Net sales $4,396,891 $6,614,044 $4,124,634
Cost of sales 5,523,496 4,326,964 1,759,659
Gross profit (loss) (1,126,605) 2,287,080 2,364,975
Development and distribution fees - - 60,000
Expenses:
General and administrative 2,132,985 1,370,401 426,318
Selling and marketing 2,369,010 2,143,523 1,173,254
Research and development 3,858,077 3,562,280 1,317,330
Issuance of stock options for
services 64,000 56,000 60,000
Interest and other 69,627 75,070 41,454
Total expenses 8,493,699 7,207,274 3,018,356
Interest income 69,509 114,372 24,847
Net loss ($9,550,795) ($4,805,822) ($568,534)
Per share data:
Basic and diluted net loss per share ($0.54) ($0.32) ($0.05)
Shares used in computing per share 17,629,876 14,805,000 11,491,000
data
</TABLE>
See accompanying notes.
<PAGE> 36
THERMOGENESIS CORP.
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Paid in Total
capital in Accumulated Shareholders'
COMMON STOCK EXCESS OF PAR DEFICIT EQUITY
Balance at June 30, 1995 $10,178 $7,804,799 $ (5,814,394) $2,000,583
Issuance of 5,000 common
shares for exercise of 5 5,295 - 5,300
options
Issuance of 2,200,000 common
shares in private placement 2,200 1,896,012 - 1,898,212
Issuance of 326,250 common
shares for exercise of warrants 326 978,424 - 978,750
Issuance of options for services - 60,000 - 60,000
Net loss - - (568,534) (568,534)
Balance at June 30, 1996 12,709 10,744,530 (6,382,928) 4,374,311
Issuance of 217,500 common
shares for exercise of warrants 218 607,318 - 607,536
Issuance of 37,250 common
shares for exercise of 37 73,783 - 73,820
options
Issuance of 145,586 common
shares for inventory 146 444,151 - 444,297
Issuance of 2,756,002 common
Shares in private placement 2,756 7,271,744 - 7,274,500
Amortization of options issued
previously for services - 56,000 - 56,000
Net loss - - (4,805,822) (4,805,822)
Balance at June 30, 1997 15,866 19,197,526 (11,188,750) 8,024,642
Issuance of 5,625 common
shares for exercise of 5 6,744 - 6,749
warrants
Issuance of 268,025 common
shares for exercise of options 268 595,109 - 595,377
Issuance of 2,786,714 common
shares in private placement 2,787 6,430,132 - 6,432,919
Amortization of options issued
previously for services - 64,000 - 64,000
Net loss - - (9,550,795) (9,550,795)
Balance at June 30, 1998 $18,926 $26,293,511 ($20,739,545) $5,572,892
</TABLE>
See accompanying notes.
<PAGE> 37
THERMOGENESIS CORP.
Statements of Cash Flows
Years ended June 30,
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
Cash flows from operating activities:
Net loss $(9,550,795) ($4,805,822) ($568,534)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 440,454 312,077 190,356
Issuance of common stock for inventory - 444,297 -
Amortization of stock options issued
for services 64,000 56,000 60,000
Net changes in operating assets and
liabilities
Accounts receivable 787,663 (626,842) (765,908)
Inventory (79,436) (442,170) (1,122,889)
Other current assets 13,480 (203,642) (34,466)
Other assets 139,596 (116,645) 497
Accounts payable (136,407) 579,651 449,865
Accrued payroll and related 71,867 89,348 129,314
expenses
Accrued warranty reserves 194,246 14,827 3,367
Other current liabilities 87,009 7,279 (28,942)
Deferred revenue - - (60,000)
Net cash used in operating activities (7,968,323) (4,691,642) (1,747,340)
Cash flows from investing activities:
Capital expenditures (449,092) (873,582) (152,547)
Net cash used in investing activities (449,092) (873,582) (152,547)
Cash flows from financing activities:
Principal payments on long-term lease (153,449) (122,850) (65,261)
obligations
Exercise of stock options and warrants 602,126 681,356 -
Issuance of common stock 6,432,919 7,274,500 2,882,262
Net cash provided by financing 6,881,596 7,833,006 2,817,001
activities
Net increase (decrease) in cash and cash (1,535,819) 2,267,782 917,114
equivalents
Cash and cash equivalents at beginning of year 3,510,861 1,243,079 325,965
Cash and cash equivalents at end of year $1,975,042 $3,510,861 $1,243,079
Supplemental cash flow information:
Cash paid during the year for interest $47,511 $75,070 $41,454
Supplemental non-cash flow information:
Equipment acquired by capital lease $ - $32,000 $472,000
obligations
</TABLE>
See Accompanying Notes.
<PAGE> 38
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
THERMOGENESIS CORP. ("the Company") was incorporated in Delaware in July
1986. The Company designs and sells devices which utilize its proprietary
technology for the processing of biological substances including the
cryopreservation, thawing and harvesting of blood components (Proprietary
Technology). Currently, the Company is manufacturing six core line, FDA
class I thermodynamic devices which are being sold to the blood collection
industry with FDA approval. Other potential applications for the
technology include medical and pharmaceutical uses. During fiscal 1988
through 1998, the Company has focused on refining product design of the
core line products and developing a pipeline of two technology platforms
and derivative products which utilize sterile disposable containers for
processing blood components.
BASIS OF PRESENTATION
The Company has incurred recurring operating losses and has an accumulated
deficit of $20,739,545 as of June 30, 1998. The report of independent
auditors on the Company's June 30, 1998 financial statements includes an
explanatory paragraph indicating there is substantial doubt about the
Company's ability to continue as a going concern. The Company believes that
it has developed a viable plan to address these issues and that its plan
will enable the Company to continue as a going concern through the end of
fiscal year 1999. This plan includes the realization of revenues from the
commercialization of new products, the consummation of debt or equity
financings in amounts sufficient to fund further growth, and the reduction
of certain operating expenses as necessary. Although the Company believes
that its plan will be realized, there is no assurance that these events
will occur. The financial statements do not include any adjustments to
reflect the uncertainties related to the recoverability and classification
of assets or the amounts and classification of liabilities that may result
from the inability of the Company to continue as a going concern.
Use of Estimates
The Preparation of FINANCIAL STATEMENTS IN CONFORMITY WITH GENERALLY
ACCEPTED
ACCOUNTING PRINCIPLES REQUIRES MANAGEMENT TO MAKE ESTIMATES AND ASSUMPTIONS
THAT AFFECT THE REPORTED AMOUNTS OF ASSETS AND LIABILITIES AT THE DATE OF
THE FINANCIAL STATEMENTS AND THE REPORTED AMOUNTS OF REVENUES AND EXPENSES
DURING THE REPORTING PERIOD. ACTUAL RESULTS COULD DIFFER FROM THOSE
ESTIMATES.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
<PAGE> 39
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventory is stated at the lower of cost or market and includes the cost of
material, labor and manufacturing overhead. Cost is determined on the
first-in, first-out basis.
EQUIPMENT
Depreciation is computed under the straight-line method over the useful
lives of 5 years.
PREPAID ROYALTIES
Prepaid royalties are amortized on a straight-line basis over an estimated
useful life of 10 years.
REVENUE RECOGNITION
Revenues from the sale of the Company's products are recognized at the time
of shipment. All foreign sales are denominated in U.S. dollars.
CREDIT RISK
The Company manufactures and sells thermodynamic devices principally to the
blood component processing industry and performs ongoing evaluations of the
credit worthiness of its customers. The Company believes that adequate
provisions for uncollectible accounts have been made in the accompanying
financial statements.
INCOME TAXES
The liability method is used for accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. The Company
used the flow-through method to account for income tax credits.
<PAGE> 40
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
Net loss per share is computed by dividing the net loss by the weighted
average number of common shares outstanding. Common stock equivalents have
not been included because the effect would be anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" (SFAS 128). SFAS 128 replaced the previously
reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. SFAS 128 was adopted during the year ended June 30,
1998 and had no impact on the basic and diluted net loss per share for the
years ended June 30, 1997 and 1996.
STOCK-BASED COMPENSATION
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123),
which became effective for the Company in fiscal 1997. SFAS 123 requires
that employee stock-based compensation be recorded or disclosed at its fair
value. The Company has elected to adopt the disclosure provision for
stock-based compensation, but continue to account for such items using the
intrinsic value method as outlined under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25).
Consequently, SFAS 123 did not have any impact on the financial position or
results of operations of the Company but pro forma disclosures of net loss
and basic and diluted loss per share have been provided in Note 5 as if the
fair value method had been applied.
COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" (SFAS 130) which establishes standards for reporting disclosure of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. SFAS 130,
which is effective for fiscal years beginning after December 15, 1997,
requires reclassification of financial statements for earlier periods to be
provided for comparative purposes. The Company anticipates that
implementing the provisions of SFAS 130 will not have a significant impact
on the Company's existing disclosures.
<PAGE> 41
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT DISCLOSURE
In June 1997, the FASB issued Statement No. 131, "Disclosure about Segments
of an Enterprise Related Information" (SFAS 131) which establishes
standards for the way that public business enterprises report information
about operating segments. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. SFAS 131 is effective for fiscal years beginning after December
31, 1997. In the initial year of application, comparative information for
earlier years must be restated. The Company anticipates that implementing
the provisions of SFAS 131 will not have a significant impact on the
Company's existing disclosures.
RECLASSIFICATIONS
Certain amounts in the prior years financial statements have been
reclassified to conform with the 1998 presentation.
2. INVENTORY
Inventory consisted of the following at June 30:
1998 1997
Raw materials $1,313,792 $1,574,388
Work in process 282,946 525,067
Finished goods 859,827 479,913
$2,456,565 $2,579,368
3. EQUIPMENT
Equipment consisted of the following at June 30:
1998 1997
Office equipment $ 368,248 $453,257
Computers and purchased software 1,051,974 916,469
Machinery and equipment 841,407 537,494
Leasehold improvements 279,322 121,796
2,540,951 2,029,016
Less accumulated depreciation
and amortization (861,750) (670,269)
$1,679,201 $1,358,747
<PAGE> 42
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
4. COMMITMENTS AND CONTINGENCIES
ROYALTY COMMITMENT
In July 1990 the Company acquired the Proprietary Technology including but
not limited to all patents, drawings, know-how, trademarks and trade names
and prepaid all future royalties for a total consideration which was
recorded at $554,500. This amount represents the present value of the
future royalty payment obligation. The consideration was comprised of
$50,000 cash, a 10% four year convertible note for $200,000 and 900,000
shares of the Company's common stock. The transaction has been accounted
for as a prepayment of future royalties and is being amortized on a
straight line basis over an estimated useful life of 10 years.
OPERATING LEASES
The Company leases its manufacturing and corporate facilities and certain
equipment pursuant to operating leases. The annual future cash obligations
under these leases are as follows:
1999 $ 262,818
2000 228,678
2001 185,034
2002 97,890
Total $ 774,420
Rent expense was $275,076, $221,986, and $78,587 for the years ended June
30, 1998, 1997, and 1996.
CAPITAL LEASES
The Company leases certain equipment under capital leases. The following
amounts are included in equipment as assets under these capital leases as
of June 30:
1998 1997
Cost $520,140 $526,713
Less: accumulated amortization 248,280 119,587
Net assets under capital leases $271,860 $407,126
<PAGE> 43
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CAPITAL LEASES (CONTINUED)
The future minimum lease payments under these capital leases along with the
present value of the minimum lease payments as of June 30, 1998 are as
follows:
1999 $ 142,928
2000 38,994
2001 37,337
2002 2,349
Total minimum lease payments 221,608
Less amount representing interest 58,938
Present value of minimum lease payments 162,670
Less current portion of capital lease obligations 105,151
Long-term capital lease obligations $ 57,519
CONTINGENCIES
The Company is not engaged in any legal actions, and although the Company
may have disputes with its vendors during the normal course of business,
the Company believes that any such disputes will not materially affect the
financial position of the Company or its cash flows or results of
operations.
5. SHAREHOLDERS' EQUITY
COMMON STOCK
The Company completed a private financing on December 31, 1997 in which it
received $6,432,919 net of expenses. The proceeds from the offering were
received from the sale of 2,786,714 shares of common stock at $2.50 per
share and issued three year warrants to the purchasers representing the
right to acquire an additional 278,100 shares in the aggregate, at an
exercise price of $3.00 per share. No warrants have been exercised as of
June 30, 1998.
The Company completed a minimum equity offering of units in a private
placement on November 27, 1996, in which it received proceeds of
$7,274,500, net of expenses. The proceeds from the offering were received
from the sale of 1,378,001 units at $6.00 per unit. Each unit consisted of
two shares of common stock and a seven year warrant representing the right
to acquire one additional share of common stock at an exercise price of
$3.885 per share. No warrants have been exercised as of June 30,1998.
<PAGE> 44
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
5. SHAREHOLDERS' EQUITY (CONTINUED)
COMMON STOCK (CONTINUED)
On July 30, 1996, the Company entered into an agreement with a vendor to
produce up to $2,500,000 of product for the Company. Under the terms of
the agreement, the vendor can elect to receive payment in restricted common
stock of the Company at a 25% discount from the market price on the date
the election to receive stock is made. During fiscal 1997, the Company
issued 145,586 shares of common stock for this product, and recorded these
transactions at the estimated fair value of $444,297 on the date of the
transaction and recorded the 25% discount from market price as operating
expense. The Company is not obligated to purchase product that is not
required or at a price that is not competitive and built to all required
standards.
On May 29, 1996, the Company's Board of Directors approved to amend the
Certificate of Incorporation to effect a one-for-two reverse stock split
which was effective on June 14,1996 to holders of record on June 14,1996.
The authorized shares of common stock was unchanged and remained at
50,000,000. All share and per share data have been restated for all
periods presented to reflect the reverse stock split.
The Company completed a private placement of 2,200,000 common shares on
December 9, 1995 and received $1,898,212 net of expenses. The placement
consisted of 88 units. Each unit consisted of 25,000 common shares and
6,250 warrants to purchase common shares at $3.00 per share for six months.
The Company filed a registration statement covering the shares issued
within 90 days of completion of the offering as required by the terms of
the financing. During the years ended June 30, 1996 and 1997, warrants to
purchase 506,250 shares of common stock were exercised, and the remaining
warrants expired.
As of June 30, 1998, the Company had 5,233,867 shares of common stock
reserved for issuance under options and warrants.
WARRANTS
As part of the placement agent's compensation in the 1995 private placement
of units, additional warrants to purchase 8.8 units at an expense price of
$60,000 per unit were also issued, each unit consisting of twenty-five
thousand (25,000) shares of common stock. The warrants expire in December
2000.
In conjunction with the placement of Series C Preferred stock in 1993, the
placement agent, Paradise Valley Securities, received warrants to purchase
shares of the Company's common stock at $1.20 per share. There were 5,625
and 37,500 warrants converted in fiscal 1998 and 1997, respectively.
<PAGE> 45
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
5. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS
On July 31, 1996 and May 29, 1996, the Company issued options to purchase
200,000 and 100,000 shares, respectively, of the Company's common stock
for consulting services. The exercise price is equal to the fair market
value as determined by the closing bid price for the Company's common stock
on the date of grant. The Company has recorded stock compensation expense
recognizing the estimated fair value of the options of $64,000, $56,000 and
$60,000 for the years ended June 30, 1998, 1997 and 1996, respectively.
The Company has issued options to purchase shares of common stock pursuant
to its Amended 1994 Stock Option Plan (1994 Plan), under which a maximum of
1,450,000 options may be granted. Options are granted at prices which are
equal to 100% of the fair market value on the date of grant, and expire
over a term not to exceed ten years. Options generally vest ratable over a
three year period. During fiscal 1998, the Stockholders of the Company
approved the 1998 Employee Equity Incentive Plan ("1998 Plan") with 798,000
shares underlying that plan. No shares to date have been issued under the
1998 Plan, and no options have been granted pursuant to that plan.
The Company has also issued options to directors, employees and consultants
as compensation for services. These options vest and are exercisable over
a variety of periods as determined by the Company's Board of Directors.
A summary of stock option activity for the three years ended June 30, 1998
follows:
Number of Weighted-Average
Options Exercise
OUTSTANDING PRICE PER SHARE
Balance at June 30, 1995 867,500 $1.88
Options granted 606,000 2.14
Options canceled (304,167) 1.06
Options exercised (5,000) 1.06
Balance at June 30, 1996 1,164,333 2.23
Options granted 1,184,000 3.16
Options canceled (344,501) 3.31
Options exercised (37,250) 1.98
Balance at June 30, 1997 1,966,582 2.61
Options granted 509,000 3.01
Options canceled (232,225) 3.09
Options exercised (268,025) 2.22
Balance at June 30, 1998 1,975,332 2.71
<PAGE> 46
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
5. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options outstanding
at June 30, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Range of Number Weighted Weighted Number Weighted
Exercise Outstanding Average Average Exercisable Average
Prices Remaining Exercise Exercise
Contractual Price Price
Life
$1.64-$2.32 967,332 2.03 years $2.25 894,232 $2.25
$2.41-$3.25 822,000 2.81 years $2.96 322,918 $2.94
$3.31-$4.50 186,000 3.31 years $3.96 161,334 $3.88
Total 1,975,332 2.47 years $2.71 1,378,484 $2.60
SFAS 123 requires the use of option valuation models to provide
supplemental information regarding options granted after June 30, 1995.
Pro forma information regarding net loss and net loss per share shown below
was determined as if the Company had accounted for its employee stock
options under the fair value method of that statement.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options. The Company's employee stock
options have characteristics significantly different from those of traded
options such as vesting restrictions and extremely limited transferability.
In addition, the assumptions used in option valuation models (see below)
are highly subjective, particularly the expected stock price volatility of
the underlying stock. Because changes in these subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not provide a reliable single measure of
the fair value of its employee stock options.
<PAGE> 47
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
5. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The pro forma
effect on net loss for fiscal 1996 through 1998 is not representative of
the pro forma effect on operations in future years because it does not take
into consideration pro forma compensation expense related to grants made
prior to July 1, 1995. The Company's pro forma information is as follows
for the years ended June 30:
1998 1997 1996
Net loss
As reported ($9,550,795) ($4,805,822) ($568,534)
Pro forma (10,217,657) (5,325,270) (1,764,651)
Net loss per share
As reported ($0.54) ($0.32) ($0.05)
Pro Forma (0.58) (0.36) (0.15)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: expected volatility of 85%; an expected life of 2.8 years; a
risk-free interest rate of 5.46% and no expected dividends. The weighted
average grant date fair value of options granted during the years ended
June 30, 1998, 1997 and 1996 was $1.69, $1.80 and $1.79, respectively.
6. MAJOR CUSTOMERS AND FOREIGN SALES
During the fiscal year ended June 30, 1998 there was no single customer
which represented 10% of net sales; foreign sales were approximately 50% of
net sales. During the fiscal year ended June 30, 1997, sales from a
significant customer totaled $4,044,489 or 61% of net sales and foreign
sales were 15% of net sales. During the fiscal year ended June 30, 1996,
sales to two significant customers each represented 10% of the Company's
net sales and foreign sales were 41% of net sales.
<PAGE> 48
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
7. SALE OF LICENSE RIGHTS FOR CRYOSEAL SYSTEM
In June 1996, the Company entered into an exclusive manufacturing and
distribution agreement for the territory of Japan for the CryoSeal System
with Asahi Medical Co., Ltd., of Japan, a division of Asahi Chemical.
Asahi Medical is a leading supplier of artificial kidneys, blood
purification systems and leukocyte removal systems. Under the terms of the
agreement, Asahi will manufacture the CP-1 disposal processing container,
purchase the CS-1 device and SA-1 and DA-1 surgical applicators from the
Company, and market the CryoSeal System in Japan. The Company received a
$400,000 license fee, a commitment from Asahi to purchase the CryoSeal
System and related fibrin applicators from the Company and a 10% royalty on
the sale of the CP-1 container. The Company recognized $400,000 of revenue
for the license fee in fiscal 1996.
8. INCOME TAXES
The reconciliation of federal income tax attributable to operations
computed at the federal statutory tax rates of 34% to income tax expense is
as follows for the years ended June 30:
1998 1997 1996
Statutory federal income tax benefit $(3,290,000) $(1,630,000) $(197,000)
Net operating loss with no tax benefit 3,290,000 1,630,000 197,000
Total federal income tax $ - $ - $ -
At June 30, 1998, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $19,667,000 and
$7,115,000 respectively, that are available to offset future income. The
federal and state loss carryforwards expire between the years 2002 and
2013, and 2000 and 2003, respectively.
At June 30, 1998, the Company has research and experimentation credit
carryforwards of approximately $63,000 for federal tax purposes that expire
between the years 2002 and 2008 and $39,000 for state income tax purposes
that do not have an expiration date.
<PAGE> 49
THERMOGENESIS CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
8. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes are as follows:
JUNE 30, 1998 JUNE 30, 1997
Deferred tax assets:
Net operating loss carryforwards $7,109,000 $3,897,000
Research credits 102,000 102,000
Other 374,000 164,000
Total deferred taxes 7,585,000 4,163,000
Valuation allowance (7,585,000) (4,163,000)
Net deferred taxes $ - $ -
Because of the "change of ownership" provisions of the Tax Reform Act of
1986, a portion of the Company's federal net operating loss and credit
carryovers may be subject to an annual limitation regarding their
utilization against taxable income in future periods.
9. EMPLOYEE RETIREMENT PLAN
The Company sponsors an Employee Retirement Plan, generally available to
all employees, in accordance with Section 401(k) of the International
Revenue Code. Employees may elect to contribute up to the International
Revenue Service annual contribution limit. Under this Plan, at the
discretion of the Board of Directors, the Company may match a portion of
the employees' contributions. No Company contributions have been made to
the Plan as of June 30, 1998.
<PAGE> 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for in Item 10 of Part III is incorporated by
reference from the definitive proxy statement of the Company to be filed
with the Securities and Exchange Commission within 180 days from fiscal
year end.
ITEM 11. EXECUTIVE COMPENSATION
The information called for in Item 11 of Part III is incorporated by
reference from the definitive proxy statement of the Company to be filed
with the Securities and Exchange Commission within 180 days from fiscal
year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for in Item 12 of Part III is incorporated by
reference from the definitive proxy statement of the Company to be filed
with the Securities and Exchange Commission within 180 days from fiscal
year end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1997, the Company loaned $88,281 to Charles de B. Griffiths, the
Company's Vice President of Marketing and Sales and a director of the
Company, to assist with the purchase and renovation of a residence in
connection with Mr. Griffiths relocation to the Company's Rancho Cordova
office from France, where he previously resided. The loan bears simple
interest at the annual rate of eight percent, and was due and payable in
February 1998. The loan was fully secured by 25,000 shares of common stock
held by Mr. Griffiths at the time of the loan. In February 1998, the
Company extended the repayment terms under the promissory note until June
30, 1999 and received a right of full offset against Mr. Griffiths'
employment agreement in the event of any missed payment. As of June 30,
1998, Mr. Griffiths had made required payments and the balance of principal
and interest at that date was $94,100.
<PAGE> 51
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report on Form 10-K.
PAGE NUMBER
(A) (1)FINANCIAL STATEMENTS
Report of Independent Auditors..................... 33
Balance Sheet at June 30, 1998 and 1997 .......... 34
Statements of Operations for the years
ended June 30, 1998, 1997, and 1996............... 36
Statements of Shareholders' Equity for
the years ended June 30, 1998, 1997, and 1996..... 37
Statements of Cash Flows for the
years ended June 30, 1998, 1997, and 1996......... 38
Notes to Financial Statements.................... 39
(A) (2)FINANCIAL STATEMENT SCHEDULES
Schedule II, Valuation and Qualifying Accounts... 55
(B)REPORTS ON FORM 8-K
1) Current Report on Form 8-K for the event date December 2, 1997,
and for the event date December 31, 1997 (announcing closing of
equity financings)
2) Current Report on Form 8-K for the event date February 16, 1998
(announcing distribution agreement with Dideco S.p.A.)
(C)EXHIBITS
Exhibits required by Item 601 of Regulation S-K are listed in the
Exhibit Index on the next page, which is incorporated herein by this
reference.
<PAGE> 52
EXHIBIT INDEX
EXHIBIT DESCRIPTION
3.1 (a) Amended and Restated Certificate of Incorporation. {(5)}
(b) Amended Bylaws. {(5)}
10.1 (a) Letter of Agreement between Liquid Carbonic, Inc. Canada and
THERMOGENESIS. {(2)}
(b) Letter of Agreement between Fujitetsumo USA and THERMOGENESIS.{
(2)}
(c) Letter of Agreement between Fujitetsumo Japan and
THERMOGENESIS.{ (2)}
(d) License Agreement between Stryker Corp. and THERMOGENESIS.
{(7)}
(e) Lease of Office and Mfg. Space{ (5)}
(f) Executive Development and Distribution Agreement between
THERMOGENESIS and Daido Hoxan Inc. {(4)}
(g) Administrative Office Lease {(8)}
(h) Employment Agreement for Philip H. Coelho {(9)}
(i) Employment Agreement for Charles de B. Griffiths {(9)}
(j) Employment Agreement for Walter Ludt {(9)}
(k) Employment Agreement for David C. Adams {(11)}
(l) Employment Agreement for James H. Godsey
(m) Employment Agreement for Sam Acosta
(n) Manufacturing and License Agreement between On-Time
Manufacturing and THERMOGENESIS {(9)}
(o) License and Distribution Agreement between Asahi Medical and
THERMOGENESIS. {(10)}
(p) License Agreement between Medsep Corporation and THERMOGENESIS
{(12)}
(q) Distribution Agreement between Dideco S.p.A. and THERMOGENESIS
{(13)}
23.1 Consent of Independent Auditors
27 Financial Data Schedule
FOOTNOTES TO INDEX
{(2)} Incorporated by reference to Registration Statement No. 33-37242 of
THERMOGENESIS, CORP. filed on Feb. 7, 1991.
{(3)} Incorporated by reference to Form 8-K for July 19, 1993.
{(4)} Incorporated by reference to Form 8-K for June 9, 1995.
{(5)} Incorporated by reference to Form 10-KSB for the year ended June 30,
1994.
{(6)} Incorporated by reference to Form 10-KSB for the year ended June 30,
1995.
{(7)} Incorporated by reference to Form 8-K for September 27, 1995.
{(8)} Incorporated by reference to Form 10-QSB for the quarter ended
December 31, 1995.
{(9)}Incorporated by reference to Form 10-KSB for the year ended June 30,
1996.
{(10)}Incorporated by reference to Form 8-K for event dated May 29, 1996.
{(11)}Incorporate by reference to Form 10-K for the year ended June 30,
1997.
{(12)}Incorporate by reference to Form 8-K for event dated March 27, 1997.
{(13)}Incorporate by reference to Form 8-K for event dated February 16,
1998.
<PAGE> 53
THERMOGENESIS CORP.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
THERMOGENESIS CORP.
By: s/Philip H. Coelho
Chairman & CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: s/Philip H. Coelho Dated: September 28, 1998
Chief Executive
Officer and Chairman of the Board
(Principal Executive Officer)
By: s/Renee M. Ruecker Dated: September 28, 1998
V.P. Finance
(Principal Financial and Accounting
Officer)
By: s/James H. Godsey Dated: September 28, 1998
President/COO
and Director
By: s/Hubert Huckel Dated: September 28, 1998
Director
By: s/Patrick McEnany Dated: September 28, 1998
Director
<PAGE> 54
SCHEDULE II
THERMOGENESIS CORP.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Costs Write-offs (Net Balance at End of
Beginning of and Expenses of Recoveries) Period
period
<S> <C> <C> <C> <C>
ALLOWANCE OF DOUBTFUL ACCOUNTS
For the year ended June 30, 1998 $97,913 $52,424 $52,427 $97,910
For the year ended June 30, 1997 97,913 --- --- 97,913
For the year ended June 30, 1996 72,913 25,000 --- 97,913
</TABLE>
<PAGE> 55
THERMOGENESIS CORP.
EMPLOYMENT AGREEMENT
FOR
SAM ACOSTA
THERMOGENESIS CORP. ("Employer"), and Sam Acosta, ("Employee"), agree
as follows:
1. EMPLOYMENT. Employer employs Employee and Employee accepts employment
with Employer on the terms and conditions set forth in this Employment
Agreement ("Agreement").
2. POSITION; SCOPE OF EMPLOYMENT. Employee shall have the position of
Vice President of Manufacturing for Employer, and shall have the duties and
authority set forth below, and as detailed on the position description
attached as EXHIBIT "A", which duties and authority may be modified from
time to time by Employer. As Vice President of Manufacturing, Employee
shall report directly to the Employer's President.
2.1. ENTIRE TIME AND EFFORT. Employee shall devote Employee's full
working time, attention, abilities, skill, labor and efforts to the
performance of his employment. Employee shall not, directly or indirectly,
alone or as a member of a partnership or other organizational entity, or as
an officer of any corporation (other than any which are owned by or
affiliated with Employer) (i) be substantially engaged in or concerned with
any other commercial duties or pursuits, (ii) engage in any other business
activity that will interfere with the performance of Employee's duties
under this Agreement, except with the prior written consent of Employer, or
(iii) join the board of directors of any other corporation; PROVIDED,
however, that Employee may join the board of directors of no more than two
unaffiliated corporations so long as such corporations are not competitive
to the current or future operations of Employer and those corporations
offer some synergistic prospects or other support for the Employer's goals.
2.2. RULES AND REGULATIONS. Employee agrees to observe and comply
with Employer's rules and regulations as provided by Employer and as may be
amended from time to time by Employer and will carry out and perform
faithfully such orders, directions and policies of Employer. To the extent
any provision of this Agreement is contrary to an Employer rule or
regulation, as such may be amended from time to time, the terms of this
Agreement shall control.
2.3. LIMITATIONS UPON AUTHORITY TO BIND EMPLOYER. Employee shall not
engage in any of the following actions on behalf of Employer without the
prior approval of Employer: (i) borrow or obtain credit in any amount or
execute any guaranty, except for items purchased from vendors in the
ordinary course of Employer's operations; (ii) expend funds for capital
equipment in excess of expenditures expressly budgeted by Employer, if
applicable, or in the event not budgeted, not to exceed the amounts set
forth in subparagraph (iii); (iii) sell or transfer capital assets
exceeding Ten Thousand dollars ($10,000) in market value in any single
transaction or exceeding Fifty Thousand Dollars ($50,000) in the aggregate
during any one fiscal year; (iv) execute any lease for real or personal
property; or (v) exercise any authority or control over the management of
any employee welfare or pension benefit plan maintained by Employer or over
the disposition of the assets of any such plan.
3. TERM. The term of this Agreement shall be for a period of three (3)
years which shall commence on December 8, 1997 and end on December 7, 2000;
unless terminated earlier as provided below in section 5.
4. COMPENSATION. Employer shall pay to or provide compensation to
Employee as set forth in this section 4. All compensation of every
description shall be subject to the customary withholding tax and other
employment taxes as required with respect to compensation paid to an
employee.
4.1. BASE SALARY. Employer shall pay Employee a base salary of One-
Hundred Thirty-Five Thousand dollars ($135,000) per year commencing on
December 8, 1997 ("Base Salary"). Employee's Base Salary shall be payable
in accordance with Employer's regular pay schedule, but not less frequently
than twice per month.
4.2. ANNUAL REVIEW. On the date of the Employer's annual meeting of
shareholders, or within thirty (30) days thereafter, and on each subsequent
annual meeting of shareholders during the term of this Agreement, Employer
shall review the previous year's performance of Employee for the purpose of
making reasonable increases to Employee's Base Salary; PROVIDED that
Employer shall not be required to increase Employee's Base Salary, but may
do so at its discretion.
4.3. CASH BONUSES. In addition to the Base Salary provided for in
sections 4.1 and 4.2, Employee is eligible to receive bonuses based on
Employer performance and Employee's attainment of objectives periodically
established by Employer. Annual bonuses to be provided to Employee shall
not exceed thirty-five percent (35%) of Employee's Base Salary then in
effect in any given year.
4.4. STOCK OPTION GRANTS. In addition to Base Salary provided for in
sections 4.1 and 4.2, Employee is eligible to receive, in addition to any
cash bonus provided for in section 4.3, an award of stock options as may be
determined from time to time by Employer's Compensation Committee which
consists of disinterested directors who administer Employer's Amended 1994
Stock Option Plan. In connection with the employment hereunder, Employee
shall receive an initial grant of 132,000 options, vesting over three
years, which options will be priced on the closing price for the Employer's
common stock as quoted on the Nasdaq market on the date of grant.
4.5. ENGAGEMENT BONUS. As part of the inducement for employment with
Employer, Employer shall also pay Employee a sum equal to Ten Thousand
dollars ($10,000) on the first day of employment under this Agreement.
4.6. VACATION AND SICK LEAVE. Employee shall be entitled to accrue up
to four (4) weeks vacation annually; provided, however, that vacation time
may not accrue beyond two weeks of accrued and unused time. Vacation pay
shall not accrue beyond two (2) weeks at any given time. Employee shall be
entitled to sick leave in accordance with Employer's sick leave policy, as
amended from time to time. At the end of each anniversary of this
Agreement, subject to the limit on two weeks accrued and unused vacation,
all such unused and accrued vacation time shall be paid in cash.
4.7. OTHER FRINGE BENEFITS. Employee shall participate in all of
Employer's fringe benefit programs in substantially the same manner and to
substantially the same extent as other similar employees of Employer,
excluding only those benefits expressly modified by the terms hereof.
4.8. EXPENSES. Employee shall be reimbursed for his reasonable
business expenses; subject to the presentation of evidence of such expenses
in accordance with established policies adopted by Employer from time to
time.
4.9. COMPENSATION FROM OTHER SOURCES. Any proceeds that Employee
shall receive by virtue of qualifying for disability insurance, disability
benefits, or health or accident insurance shall belong to Employee.
Employee shall not be paid Base Salary in any period in which he receives
benefits as determined and paid under Employer's long-term disability
policy. Benefits paid to Employee under Employer's short-term disability
policy shall reduce, by the same amount, Base Salary payable to Employee
for such period.
5. EARLY TERMINATION. Employee's employment with Employer may be
terminated prior to the expiration of the term of this Agreement, upon any
of the following events: (i) the mutual agreement of Employer and Employee
in writing; (ii) the disability of Employee, which shall, for the purposes
of this Agreement, mean Employee's inability, for a period exceeding three
(3) months as determined by a qualified physician, and which qualifies
Employee for benefits under Employer's long-term disability policy, to
perform in the usual manner the material duties usually and customarily
pertaining to Employee's long-term employment; (iii) Employee's death;
(iv) notice of termination by Employer for cause; (v) Employer's cessation
of business; (vi) written notice of termination by Employer without cause
upon fourteen (14) days' notice, subject to the provisions for compensation
upon early termination in section 5.3(b); or (vii) upon a Change in Control
(as defined below) of Employer (as defined in and under the circumstances
described in section 5.4).
5.1. DEFINITION OF CAUSE. For purposes of this Agreement, any of the
following shall constitute cause: (i) willful or habitual breach of
Employee's duties; (ii) fraud or intentional material misrepresentation by
Employee to Employer or any others; (iii) theft or conversion by Employee;
(iv) unauthorized disclosure or other use of Employer's trade secrets,
customer lists or confidential information; (v) habitual misuse of alcohol
or any nonprescribed drug or intoxicant; or (vi) willful violation of any
other standards of conduct as set forth in Employer's employee manual.
5.2. DAMAGES. If Employer terminates Employee for cause, Employer
shall be entitled to damages and all other remedies to which Employer may
otherwise be entitled.
5.3. COMPENSATION UPON EARLY TERMINATION.
(a) If Employee resigns during the term of this Agreement, or if this
Agreement is terminated by Employer for cause, Employee shall be
entitled to all accrued but unpaid Base Salary and vacation pay
accrued through the date of delivery of notice of termination.
(b) If Employee is terminated without cause, Employer shall pay to
Employee as liquidated damages and in lieu of any and all other
claims which Employee may have against Employer the greater of
(i) six (6) months of Employee's salary excluding any amounts for
benefits; or (ii) an amount equal to the then current per month
Base Salary multiplied by the number of calendar months remaining
of the term of this Agreement. Employer's payment pursuant to
this subparagraph shall fully and completely discharge any and
all obligations of Employer to Employee arising out of or related
to this Agreement and shall constitute liquidated damages in lieu
of any and all claims which Employee may have against Employer
not including any obligation under the workers' compensation laws
including Employer's liability provisions.
Initials: Employee _________ Employer _________
(c) If Employee's employment is terminated as a result of death or
total disability, Employee shall be entitled to accrued but
unpaid Base Salary to date of termination. The date of
termination shall be deemed the date of death or, in the event of
disability, the date Employee qualified for total disability
payments under Employer's long-term disability plan.
(d) If Employee's employment is terminated as a result of a Change in
Control of Employer, Employee shall be entitled to a lump-sum
payment equal to three times Employee's Base Salary at the time.
A "Change in Control" shall mean an event involving one
transaction or a related series of transactions in which one of
the following occurs: (i) Employer issues securities equal to
33% or more of Employer's issued and outstanding voting
securities, determined as a single class, to any individual,
firm, partnership or other entity, including a "group" within the
meaning of section 13(d)(3) of the Securities Exchange Act of
1934; (ii) Employer issues securities equal to 33% or more of the
issued and outstanding common stock of Employer in connection
with a merger, consolidation or other business combination;
(iii) Employer is acquired in a merger or other business
combination transaction in which Employer is not the surviving
company; or (iv) all or substantially all of Employer's assets
are sold or transferred.
(e) Except as expressly provided in paragraph (d) above, all
compensation described in this section 5.3 shall be due and
payable in installments at least bi-weekly or at the time of the
delivery of notice of termination, at Employer's discretion.
6. CONFIDENTIAL INFORMATION OF CUSTOMERS OF EMPLOYER. Employee during
the course of his duties will be handling financial, accounting,
statistical, marketing and personnel information of customers of Employer.
All such information is confidential and shall not be disclosed, directly
or indirectly, or used by Employee in any way, either during the term of
this Agreement or at any time thereafter except as required in the course
of Employee's employment with Employer.
7. UNFAIR COMPETITION. During the term of this Agreement, Employee shall
not, directly or indirectly, whether as a partner, employee, creditor,
shareholder, or otherwise, promote, participate, or engage in any activity
or other business which is competitive in any way with Employer's business.
The obligation of the Employee not to compete with the Employer shall not
prohibit the Employee from owning or purchasing any corporate securities
that are regularly traded on a recognized stock exchange or on over-the-
counter market. In order to protect the trade secrets of Employer, after
the term, or upon earlier termination of this Agreement, the Employee shall
not, directly or indirectly, either as an employee, employer, consultants,
agent, principal, partner, stockholder, corporate officer, director, or any
other individual or representative capacity, engage or participate in any
business that is in direct competition with the business of the Employer
for a period of one (1) year from the date of the expiration of this
Agreement in the areas related to blood processing equipment or procedures.
8. TRADE SECRETS. Employee shall not disclose to any others, or take or
use for Employee's own purposes or purposes of any others, during the term
of this Agreement or at any time thereafter, any of Employer's trade
secrets, including without limitation, confidential information, customer
lists, computer programs or computer software of Employer. Employee agrees
that these restrictions shall also apply to (i) trade secrets belonging to
third parties in Employer's possession and (ii) trade secrets conceived,
originated, discovered or developed by Employee during the term of this
Agreement. Information of Employer shall not be considered a trade secret
if it is lawfully known outside of Employer by anyone who does not have a
duty to keep such information confidential.
8.1 INVENTIONS; OWNERSHIP RIGHTS. Employee agrees that all ideas,
techniques, inventions, systems, formulas, discoveries, technical
information, programs, prototypes and similar developments ("Developments")
developed, created, discovered, made, written or obtained by Employee in
the course of or as a result, directly or indirectly, of performance of his
duties hereunder, and all related industrial property, copyrights, patent
rights, trade secrets and other forms of protection thereof, shall be and
remain the property of Employer. Employee agrees to execute or cause to be
executed such assignments and applications, registrations and other
documents and to take such other action as may be requested by Employer to
enable Employer to protect its rights to any such Developments. If
Employer requires Employee's assistance under this section 8.1 after
termination of this Agreement, Employee shall be compensated for his time
actually spent in providing such assistance at an hourly rate equivalent to
the prevailing rate for such services and as agreed upon by the parties.
9. ARBITRATION. Any disputes regarding the rights or obligations of the
parties under this Agreement shall be conclusively determined by binding
arbitration. Any controversy or claim arising out of or relating to this
contract, or the breach thereof, shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association, and judgment upon the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof.
10. ACTIONS CONTRARY TO LAW. Nothing contained in this Agreement shall be
construed to require the commission of any act contrary to law, and
whenever there is any conflict between any provision of this Agreement and
any statute, law, ordinance, or regulation, contrary to which the parties
have no legal right to contract, then the latter shall prevail; but in such
event, the provisions of this Agreement so affected shall be curtailed and
limited only to the extent necessary to bring it within legal requirements.
11. MISCELLANEOUS.
11.1. NOTICES. All notices and demands of every kind shall be
personally delivered or sent by first class mail to the parties at the
addresses appearing below or at such other addresses as either party may
designate in writing, delivered or mailed in accordance with the terms of
this Agreement. Any such notice or demand shall be effective immediately
upon personal delivery or three (3) days after deposit in the United States
mail, as the case may be.
EMPLOYER: THERMOGENESIS CORP.
11431 Sunrise Gold Circle, Suite A
Rancho Cordova, California 95742
EMPLOYEE: Sam Acosta
2380 Telegraph Hill
El Dorado Hills, CA 95630
11.2. ATTORNEYS' FEES; PREJUDGMENT INTEREST. If the services of an
attorney are required by any party to secure the performance hereof or
otherwise upon the breach or default of another party to this Agreement, or
if any judicial remedy or arbitration is necessary to enforce or interpret
any provision of this Agreement or the rights and duties of any person in
relation thereto, the prevailing party shall be entitled to reasonable
attorneys' fees, costs and other expenses, in addition to any other relief
to which such party may be entitled. Any award of damages following
judicial remedy or arbitration as a result of the breach of this Agreement
or any of its provisions shall include an award of prejudgment interest
from the date of the breach at the maximum amount of interest allowed by
law.
11.3. CHOICE OF LAW, JURISDICTION, VENUE. This Agreement is drafted to
be effective in the State of California, and shall be construed in
accordance with California law. The exclusive jurisdiction and venue of
any legal action by either party under this Agreement shall be the County
of Sacramento, California.
11.4. AMENDMENT, WAIVER. No amendment or variation of the terms of
this Agreement shall be valid unless made in writing and signed by Employee
and Employer. A waiver of any term or condition of this Agreement shall
not be construed as a general waiver by Employer. Failure of either
Employer or Employee to enforce any provision or provisions of this
Agreement shall not waive any enforcement of any continuing breach of the
same provision or provisions or any breach of any provision or provisions
of this Agreement.
11.5. ASSIGNMENT; SUCCESSION. It is hereby agreed that Employee's
rights and obligations under this Agreement are personal and not
assignable. This Agreement contains the entire agreement and understanding
between the parties to it and shall be binding on and inure to the benefit
of the heirs, personal representatives, successors and assigns of the
parties hereto.
11.6. INDEPENDENT COVENANTS. All provisions herein concerning unfair
competition and confidentiality shall be deemed independent covenants and
shall be enforceable without regard to any breach by Employer unless such
breach by Employer is willful and egregious.
11.7. ENTIRE AGREEMENT. This document constitutes the entire agreement
between the parties, all oral agreements being merged herein, and
supersedes all prior representations. There are no representations,
agreements, arrangements, or understandings, oral or written, between or
among the parties relating to the subject matter of this Agreement that are
not fully expressed herein.
11.8. SEVERABILITY. If any provision of this Agreement is held by a
court of competent jurisdiction to be invalid or unenforceable, the
remainder of the Agreement which can be given effect without the invalid
provision shall continue in full force and effect and shall in no way be
impaired or invalidated.
11.9. CAPTIONS. All captions of sections and paragraphs in this
Agreement are for reference only and shall not be considered in construing
this Agreement.
EMPLOYER: THERMOGENESIS CORP.
By:_______________________________________________
(Philip H. Coelho, Chief Executive Officer)
By:_______________________________________________
(Hubert Huckel, Chairman Compensation Committee)
EMPLOYEE: By:______________________________________________
(Sam Acosta)
h:thermo\acosta.con(s_lindle)
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 333-28653, 333-08661, and 333-45532) pertaining
to the THERMOGENESIS CORP. Amended 1994 Stock Option Plan, (Form S-8 No.
333-46911) pertaining to the THERMOGENESIS CORP. 1998 Employee Equity
Incentive Plan, and (Form S-3 Nos. 333-23097, 333-1479, 33-63676, and
333-44151) of THERMOGENESIS CORP. and in the related Prospectuses of our
report dated August 17, 1998, with respect to the financial statements and
schedule of THERMOGENESIS CORP. included in the Annual Report (Form 10-K)
for the year ended June 30, 1998.
ERNST & YOUNG LLP
Sacramento, California
September 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10K FOR FISCAL YEAR ENDED JUNE 30 1998, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,975,042
<SECURITIES> 0
<RECEIVABLES> 1,378,237
<ALLOWANCES> 97,910
<INVENTORY> 2,456,565
<CURRENT-ASSETS> 5,892,148
<PP&E> 2,540,951
<DEPRECIATION> 861,750
<TOTAL-ASSETS> 7,799,242
<CURRENT-LIABILITIES> 2,168,831
<BONDS> 0
0
0
<COMMON> 18,926
<OTHER-SE> 5,553,966
<TOTAL-LIABILITY-AND-EQUITY> 7,799,242
<SALES> 4,396,891
<TOTAL-REVENUES> 4,466,400
<CGS> 5,523,496
<TOTAL-COSTS> 5,523,496
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 52,424
<INTEREST-EXPENSE> 47,511
<INCOME-PRETAX> (9,550,795)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,550,795)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,550,795)
<EPS-PRIMARY> (.54)
<EPS-DILUTED> (.54)
</TABLE>
THERMOGENESIS CORP.
EMPLOYMENT AGREEMENT
FOR
JAMES H. GODSEY, PHD
THERMOGENESIS CORP. ("Employer"), and James H. Godsey, PhD,
("Employee"), agree as follows:
1. EMPLOYMENT. Employer employs Employee and Employee accepts employment
with Employer on the terms and conditions set forth in this Employment
Agreement ("Agreement").
2. POSITION; SCOPE OF EMPLOYMENT. Employee shall have the position of
President, Chief Operating Officer for Employer, and shall have the duties
and authority set forth below, and as detailed on the position description
attached as EXHIBIT "A", which duties and authority may be modified from
time to time by Employer. As President, Chief Operating Officer, Employee
shall report directly to the Employer's Chief Executive Officer, and to the
Board of Directors.
2.1. ENTIRE TIME AND EFFORT. Employee shall devote Employee's full
working time, attention, abilities, skill, labor and efforts to the
performance of his employment. Employee shall not, directly or indirectly,
alone or as a member of a partnership or other organizational entity, or as
an officer of any corporation (other than any which are owned by or
affiliated with Employer) (i) be substantially engaged in or concerned with
any other commercial duties or pursuits, (ii) engage in any other business
activity that will interfere with the performance of Employee's duties
under this Agreement, except with the prior written consent of Employer, or
(iii) join the board of directors of any other corporation; PROVIDED,
however, that Employee may join the board of directors of no more than two
unaffiliated corporations so long as such corporations are not competitive
to the current or future operations of Employer and those corporations
offer some synergistic prospects or other support for the Employer's goals.
2.2. RULES AND REGULATIONS. Employee agrees to observe and comply
with Employer's rules and regulations as provided by Employer and as may be
amended from time to time by Employer and will carry out and perform
faithfully such orders, directions and policies of Employer. To the extent
any provision of this Agreement is contrary to an Employer rule or
regulation, as such may be amended from time to time, the terms of this
Agreement shall control.
2.3. LIMITATIONS UPON AUTHORITY TO BIND EMPLOYER. Employee shall not
engage in any of the following actions on behalf of Employer without the
prior approval of Employer: (i) borrow or obtain credit in any amount or
execute any guaranty, except for items purchased from vendors in the
ordinary course of Employer's operations; (ii) expend funds for capital
equipment in excess of expenditures expressly budgeted by Employer, if
applicable, or in the event not budgeted, not to exceed the amounts set
forth in subparagraph (iii); (iii) sell or transfer capital assets
exceeding twenty-five thousand dollars ($25,000) in market value in any
single transaction or exceeding Two Hundred and Fifty Thousand Dollars
($250,000) in the aggregate during any one fiscal year; (iv) execute any
lease for real or personal property; or (v) exercise any authority or
control over the management of any employee welfare or pension benefit plan
maintained by Employer or over the disposition of the assets of any such
plan.
3. TERM. The term of this Agreement shall be for a period of three (3)
years which shall commence on November 23, 1997 and end on November 22,
2000; unless terminated earlier as provided below in section 5.
4. COMPENSATION. Employer shall pay to or provide compensation to
Employee as set forth in this section 4. All compensation of every
description shall be subject to the customary withholding tax and other
employment taxes as required with respect to compensation paid to an
employee.
4.1. BASE SALARY. Employer shall pay Employee a base salary of One-
Hundred Sixty Thousand dollars ($160,000) per year commencing on November
23, 1997 ("Base Salary"). Employee's Base Salary shall be payable in
accordance with Employer's regular pay schedule, but not less frequently
than twice per month. In addition to the Base Salary provided herein, the
Employee shall also be paid a car allowance of Five-Hundred dollars ($500)
per month commencing on December 1, 1997, and continuing during the term of
this agreement.
4.2. ANNUAL REVIEW. On the date of the Employer's annual meeting of
shareholders, or within thirty (30) days thereafter, and on each subsequent
annual meeting of shareholders during the term of this Agreement, Employer
shall review the previous year's performance of Employee for the purpose of
making reasonable increases to Employee's Base Salary; PROVIDED that
Employer shall not be required to increase Employee's Base Salary, but may
do so at its discretion.
4.3. CASH BONUSES. In addition to the Base Salary provided for in
sections 4.1 and 4.2, Employee is eligible to receive bonuses based on
Employer performance and Employee's attainment of objectives periodically
established by Employer. Employee shall receive an initial bonus of
$60,000 at the end of the first anniversary of this Agreement, and
thereafter annual bonuses to be provided to Employee shall not exceed
thirty-five percent (35%) of Employee's Base Salary then in effect in any
given year.
4.4. STOCK OPTION GRANTS. In addition to Base Salary provided for in
sections 4.1 and 4.2, Employee is eligible to receive, in addition to any
cash bonus provided for in section 4.3, an award of stock options as may be
determined from time to time by Employer's Compensation Committee which
consists of disinterested directors who administer Employer's Amended 1994
Stock Option Plan. In connection with the employment hereunder, Employee
shall receive an initial grant of 200,000 options, vesting over three
years, which options will be priced on the closing price for the Employer's
common stock as quoted on the Nasdaq market on the date of grant.
4.5. ENGAGEMENT BONUS. As part of the inducement for employment with
Employer, Employer shall also pay Employee a sum equal to $50,000 on the
first day of employment under this Agreement.
4.6. VACATION AND SICK LEAVE. Employee shall be entitled to accrue up
to four (4) weeks vacation annually; provided, however, that vacation time
may not accrue beyond two weeks of accrued and unused time. Vacation pay
shall not accrue beyond two (2) weeks at any given time. Employee shall be
entitled to sick leave in accordance with Employer's sick leave policy, as
amended from time to time. At the end of each anniversary of this
Agreement, subject to the limit on two weeks accrued and unused vacation,
all such unused and accrued vacation time shall be paid in cash.
4.7. OTHER FRINGE BENEFITS. Employee shall participate in all of
Employer's fringe benefit programs in substantially the same manner and to
substantially the same extent as other similar employees of Employer,
excluding only those benefits expressly modified by the terms hereof.
4.8. EXPENSES. Employee shall be reimbursed for his reasonable
business expenses; subject to the presentation of evidence of such expenses
in accordance with established policies adopted by Employer from time to
time.
4.9. COMPENSATION FROM OTHER SOURCES. Any proceeds that Employee
shall receive by virtue of qualifying for disability insurance, disability
benefits, or health or accident insurance shall belong to Employee.
Employee shall not be paid Base Salary in any period in which he receives
benefits as determined and paid under Employer's long-term disability
policy. Benefits paid to Employee under Employer's short-term disability
policy shall reduce, by the same amount, Base Salary payable to Employee
for such period.
5. EARLY TERMINATION. Employee's employment with Employer may be
terminated prior to the expiration of the term of this Agreement, upon any
of the following events: (i) the mutual agreement of Employer and Employee
in writing; (ii) the disability of Employee, which shall, for the purposes
of this Agreement, mean Employee's inability, for a period exceeding three
(3) months as determined by a qualified physician, and which qualifies
Employee for benefits under Employer's long-term disability policy, to
perform in the usual manner the material duties usually and customarily
pertaining to Employee's long-term employment; (iii) Employee's death;
(iv) notice of termination by Employer for cause; (v) Employer's cessation
of business; (vi) written notice of termination by Employer without cause
upon fourteen (14) days' notice, subject to the provisions for compensation
upon early termination in section 5.3(b); or (vii) upon a Change in Control
(as defined below) of Employer (as defined in and under the circumstances
described in section 5.4).
5.1. DEFINITION OF CAUSE. For purposes of this Agreement, any of the
following shall constitute cause: (i) willful or habitual breach of
Employee's duties; (ii) fraud or intentional material misrepresentation by
Employee to Employer or any others; (iii) theft or conversion by Employee;
(iv) unauthorized disclosure or other use of Employer's trade secrets,
customer lists or confidential information; (v) habitual misuse of alcohol
or any nonprescribed drug or intoxicant; or (vi) willful violation of any
other standards of conduct as set forth in Employer's employee manual.
5.2. DAMAGES. If Employer terminates Employee for cause, Employer
shall be entitled to damages and all other remedies to which Employer may
otherwise be entitled.
5.3. COMPENSATION UPON EARLY TERMINATION.
(a) If Employee resigns during the term of this Agreement, or if this
Agreement is terminated by Employer for cause, Employee shall be
entitled to all accrued but unpaid Base Salary and vacation pay
accrued through the date of delivery of notice of termination.
(b) If Employee is terminated without cause, Employer shall pay to
Employee as liquidated damages and in lieu of any and all other
claims which Employee may have against Employer the greater of
(i) six (6) months of Employee's salary excluding any amounts for
benefits or automobile allowance; or (ii) an amount equal to the
then current per month Base Salary multiplied by the number of
calendar months remaining of the term of this Agreement.
Employer's payment pursuant to this subparagraph shall fully and
completely discharge any and all obligations of Employer to
Employee arising out of or related to this Agreement and shall
constitute liquidated damages in lieu of any and all claims which
Employee may have against Employer not including any obligation
under the workers' compensation laws including Employer's
liability provisions.
Initials: Employee _________ Employer _________
(c) If Employee's employment is terminated as a result of death or
total disability, Employee shall be entitled to accrued but
unpaid Base Salary to date of termination. The date of
termination shall be deemed the date of death or, in the event of
disability, the date Employee qualified for total disability
payments under Employer's long-term disability plan.
(d) If Employee's employment is terminated as a result of a Change in
Control of Employer, Employee shall be entitled to a lump-sum
payment equal to three times Employee's Base Salary at the time.
A "Change in Control" shall mean an event involving one
transaction or a related series of transactions in which one of
the following occurs: (i) Employer issues securities equal to
33% or more of Employer's issued and outstanding voting
securities, determined as a single class, to any individual,
firm, partnership or other entity, including a "group" within the
meaning of section 13(d)(3) of the Securities Exchange Act of
1934; (ii) Employer issues securities equal to 33% or more of the
issued and outstanding common stock of Employer in connection
with a merger, consolidation or other business combination;
(iii) Employer is acquired in a merger or other business
combination transaction in which Employer is not the surviving
company; or (iv) all or substantially all of Employer's assets
are sold or transferred.
(e) Except as expressly provided in paragraph (d) above, all
compensation described in this section 5.3 shall be due and
payable in installments at least bi-weekly or at the time of the
delivery of notice of termination, at Employer's discretion.
6. CONFIDENTIAL INFORMATION OF CUSTOMERS OF EMPLOYER. Employee during
the course of his duties will be handling financial, accounting,
statistical, marketing and personnel information of customers of Employer.
All such information is confidential and shall not be disclosed, directly
or indirectly, or used by Employee in any way, either during the term of
this Agreement or at any time thereafter except as required in the course
of Employee's employment with Employer.
7. UNFAIR COMPETITION. During the term of this Agreement, Employee shall
not, directly or indirectly, whether as a partner, employee, creditor,
shareholder, or otherwise, promote, participate, or engage in any activity
or other business which is competitive in any way with Employer's business.
The obligation of the Employee not to compete with the Employer shall not
prohibit the Employee from owning or purchasing any corporate securities
that are regularly traded on a recognized stock exchange or on over-the-
counter market. In order to protect the trade secrets of Employer, after
the term, or upon earlier termination of this Agreement, the Employee shall
not, directly or indirectly, either as an employee, employer, consultants,
agent, principal, partner, stockholder, corporate officer, director, or any
other individual or representative capacity, engage or participate in any
business that is in direct competition with the business of the Employer
for a period of one (1) year from the date of the expiration of this
Agreement in the areas related to blood processing equipment or procedures.
8. TRADE SECRETS. Employee shall not disclose to any others, or take or
use for Employee's own purposes or purposes of any others, during the term
of this Agreement or at any time thereafter, any of Employer's trade
secrets, including without limitation, confidential information, customer
lists, computer programs or computer software of Employer. Employee agrees
that these restrictions shall also apply to (i) trade secrets belonging to
third parties in Employer's possession and (ii) trade secrets conceived,
originated, discovered or developed by Employee during the term of this
Agreement. Information of Employer shall not be considered a trade secret
if it is lawfully known outside of Employer by anyone who does not have a
duty to keep such information confidential.
8.1 INVENTIONS; OWNERSHIP RIGHTS. Employee agrees that all ideas,
techniques, inventions, systems, formulas, discoveries, technical
information, programs, prototypes and similar developments ("Developments")
developed, created, discovered, made, written or obtained by Employee in
the course of or as a result, directly or indirectly, of performance of his
duties hereunder, and all related industrial property, copyrights, patent
rights, trade secrets and other forms of protection thereof, shall be and
remain the property of Employer. Employee agrees to execute or cause to be
executed such assignments and applications, registrations and other
documents and to take such other action as may be requested by Employer to
enable Employer to protect its rights to any such Developments. If
Employer requires Employee's assistance under this section 8.1 after
termination of this Agreement, Employee shall be compensated for his time
actually spent in providing such assistance at an hourly rate equivalent to
the prevailing rate for such services and as agreed upon by the parties.
9. ARBITRATION. Any disputes regarding the rights or obligations of the
parties under this Agreement shall be conclusively determined by binding
arbitration. Any controversy or claim arising out of or relating to this
contract, or the breach thereof, shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association, and judgment upon the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof.
10. ACTIONS CONTRARY TO LAW. Nothing contained in this Agreement shall be
construed to require the commission of any act contrary to law, and
whenever there is any conflict between any provision of this Agreement and
any statute, law, ordinance, or regulation, contrary to which the parties
have no legal right to contract, then the latter shall prevail; but in such
event, the provisions of this Agreement so affected shall be curtailed and
limited only to the extent necessary to bring it within legal requirements.
11. MISCELLANEOUS.
11.1. NOTICES. All notices and demands of every kind shall be
personally delivered or sent by first class mail to the parties at the
addresses appearing below or at such other addresses as either party may
designate in writing, delivered or mailed in accordance with the terms of
this Agreement. Any such notice or demand shall be effective immediately
upon personal delivery or three (3) days after deposit in the United States
mail, as the case may be.
EMPLOYER: THERMOGENESIS CORP.
11431 Sunrise Gold Cir., Suite A
Rancho Cordova, California 95742
EMPLOYEE: James H. Godsey, Ph.D.
101 Summer Shade Court
Folsom, CA 95630
11.2. ATTORNEYS' FEES; PREJUDGMENT INTEREST. If the services of an
attorney are required by any party to secure the performance hereof or
otherwise upon the breach or default of another party to this Agreement, or
if any judicial remedy or arbitration is necessary to enforce or interpret
any provision of this Agreement or the rights and duties of any person in
relation thereto, the prevailing party shall be entitled to reasonable
attorneys' fees, costs and other expenses, in addition to any other relief
to which such party may be entitled. Any award of damages following
judicial remedy or arbitration as a result of the breach of this Agreement
or any of its provisions shall include an award of prejudgment interest
from the date of the breach at the maximum amount of interest allowed by
law.
11.3. CHOICE OF LAW, JURISDICTION, VENUE. This Agreement is drafted to
be effective in the State of California, and shall be construed in
accordance with California law. The exclusive jurisdiction and venue of
any legal action by either party under this Agreement shall be the County
of Sacramento, California.
11.4. AMENDMENT, WAIVER. No amendment or variation of the terms of
this Agreement shall be valid unless made in writing and signed by Employee
and Employer. A waiver of any term or condition of this Agreement shall
not be construed as a general waiver by Employer. Failure of either
Employer or Employee to enforce any provision or provisions of this
Agreement shall not waive any enforcement of any continuing breach of the
same provision or provisions or any breach of any provision or provisions
of this Agreement.
11.5. ASSIGNMENT; SUCCESSION. It is hereby agreed that Employee's
rights and obligations under this Agreement are personal and not
assignable. This Agreement contains the entire agreement and understanding
between the parties to it and shall be binding on and inure to the benefit
of the heirs, personal representatives, successors and assigns of the
parties hereto.
11.6. INDEPENDENT COVENANTS. All provisions herein concerning unfair
competition and confidentiality shall be deemed independent covenants and
shall be enforceable without regard to any breach by Employer unless such
breach by Employer is willful and egregious.
11.7. ENTIRE AGREEMENT. This document constitutes the entire agreement
between the parties, all oral agreements being merged herein, and
supersedes all prior representations. There are no representations,
agreements, arrangements, or understandings, oral or written, between or
among the parties relating to the subject matter of this Agreement that are
not fully expressed herein.
11.8. SEVERABILITY. If any provision of this Agreement is held by a
court of competent jurisdiction to be invalid or unenforceable, the
remainder of the Agreement which can be given effect without the invalid
provision shall continue in full force and effect and shall in no way be
impaired or invalidated.
11.9. CAPTIONS. All captions of sections and paragraphs in this
Agreement are for reference only and shall not be considered in construing
this Agreement.
EMPLOYER: THERMOGENESIS CORP.
By:_______________________________________________
(Philip H. Coelho, Chief Executive Officer)
By:_______________________________________________
(Hubert Huckel, Chairman Compensation Committee)
EMPLOYEE: By:______________________________________________
(James H. Godsey, Ph.D.)
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