UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 0-19890
LIFECELL CORPORATION
A DELAWARE IRS EMPLOYER IDENTIFICATION
CORPORATION NO. 76-0172936
3606 RESEARCH FOREST DRIVE
THE WOODLANDS, TEXAS 77381
Telephone Number (281) 367-5368
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.001 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock (Common Stock and Series B
Preferred Stock, assuming conversion of such Preferred Stock into Common Stock
at the current conversion rate) held by non-affiliates of registrant as of March
23, 1999: $58,934,467.
Number of shares of registrant's Common Stock outstanding as of March 23, 1999:
11,638,092. (If the Series B Preferred Stock had converted into Common Stock as
of such date, there would be 15,458,221 shares of Common Stock outstanding.)
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of registrant's proxy statement relating to the 1999 annual
meeting of stockholders have been incorporated by reference into Part III
hereof.
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TABLE OF CONTENTS
DESCRIPTION
Item Page
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PART I 3
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Technology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Products and Product Development Activities . . . . . . . . . . . . . . . . . . . . . . . 5
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Sources of Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Research and Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Patents, Proprietary Information and Trademarks . . . . . . . . . . . . . . . . . . . . . 16
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Special Note Regarding Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . 18
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 25
PART II 25
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters . . . . . . . . 25
Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . 27
General and Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 7A. Quantitative and Qualitative Disclosure About Market Risk . . . . . . . . . . . . . . . . 30
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . 30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . 30
PART III 31
Item 10. Directors and Executive Officers of the Registrant. . . . . . . . . . . . . . . . . . . . 31
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . 31
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . . . . . . . . . . . . . 31
PART IV 31
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. . . . . . . . . . . . . 31
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PART I
This Annual Report on Form 10-K contains, in addition to historical
information, "forward-looking statements" (within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended) that involve risks and uncertainties. See
"Business-Special Note Regarding Forward-Looking Statements."
ITEM 1. BUSINESS
GENERAL
LifeCell Corporation ("LifeCell" or the "Company") is a bioengineering
company engaged in the development and commercialization of tissue regeneration
and cell preservation products. The Company's patented tissue processing and
cell preservation technologies serve as platforms for a broad range of potential
products addressing significant clinical needs in multiple markets. The
Company's first commercial product is AlloDerm , a tissue processing technology
that provides a graft ("AlloDerm") consisting of an extracellular tissue matrix
that retains the essential biochemical and structural composition of human
dermis. The Company believes that AlloDerm is the only commercially available
tissue transplant product that provides a complete template for the regeneration
of normal human soft tissue. AlloDerm currently is being marketed in the United
States and internationally for use in reconstructive plastic, dental and burn
surgery applications. The Company estimates that AlloDerm has been transplanted
in more than 40,000 patients. LifeCell also is developing several additional
products, including a micronized form of AlloDerm ("Micronized AlloDerm "),
vascular grafts, nerve connective tissue grafts, and ThromboSolTM platelet
storage solutions ("ThromboSol").
LifeCell was incorporated in the State of Delaware in 1992 as the successor
to a Delaware corporation that was incorporated in 1986.
TECHNOLOGY
The Company's product development programs have been generated from the
following proprietary technologies:
- a method for producing an extracellular tissue matrix by removing
antigenic cellular elements while stabilizing the matrix against
damage;
- a method for cell preservation by manipulating cells through signal
transduction (i.e., manipulation of cellular metabolism) to protect
cells during prolonged storage; and
- a method for freeze-drying biological cells and tissues without the
damaging effects of ice crystals.
Tissue Processing Technology
LifeCell's tissue processing technology removes antigenic cells from the
tissue matrix to eliminate the potential for specific rejection of the
transplanted tissue. The Company's tissue processing technology also (i)
stabilizes the tissue matrix by preserving its natural structure and biochemical
properties that promote cell repopulation and (ii) allows for extended storage
by freeze-drying the tissue matrix without significant ice crystal damage thus
avoiding a non-specific immune response upon transplantation.
Soft tissue contains a complex, three-dimensional structure consisting of
multiple forms of collagen, elastin, proteoglycans, other proteins, growth
factors and blood vessels (the "tissue matrix"). Together, the tissue matrix
and the cells that populate it form the soft tissues of the body, such as
dermis, heart valves, blood vessels, nerve connective tissue, and other tissue
types. As part of the body's natural remodeling process, cells within a tissue
continuously degrade and, in the process, replace the tissue matrix. However,
in the event that a large portion of the tissue matrix is destroyed or lost as a
result of trauma or surgery, the body cannot regenerate the damaged portion.
The only method of replacing large sections of the tissue matrix is through
transplantation.
Soft tissue transplants from one part of the patient's body to another
(autograft) generally are successful; however, the procedure results in the
creation of an additional wound site. Historically, the ability to transplant
tissue from one person to another (allograft) has been limited because the
donor's cells within the transplanted tissue may trigger an immune response,
resulting in rejection of the transplanted tissue. The Company believes that
previous attempts to remove cells from soft tissue grafts before performing an
allograft transplant have resulted in disruption or damage of the tissue matrix,
causing an inflammatory response and rejection of the tissue following
transplantation.
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LifeCell believes its tissue processing technology offers the following
important benefits:
Natural Tissue Regeneration. Tissue grafts produced with LifeCell's
tissue processing technology retain the structural and biochemical
properties that stimulate normal cell repopulation and normal soft tissue
regeneration. In addition, the Company's clinical studies with dermis and
preliminary animal studies with heart valve leaflets, nerve connective
tissue grafts, and vascular grafts processed with the Company's technology
indicate that such tissues can be remodeled by the recipient's own cells
and eventually become the recipient's own tissue.
Multiple Potential Applications. The Company believes that its tissue
processing technologies have the potential to generate additional products
with multiple applications. In addition to the current commercial
applications of AlloDerm (i.e., reconstructive plastic, dental and burn
surgery), the Company believes that AlloDerm may provide additional
benefits in neurosurgery, urological surgery, gynecological surgery and
orthopedic surgery. The Company also is evaluating the applicability of its
technologies to other tissues and is conducting animal studies with nerves
and blood vessels processed with the Company's technology.
Safety. The Company's tissue processing technology is designed to
produce products that will revascularize and integrate into the body's own
tissues. The patient's immune cells also are able to penetrate into the
transplanted tissue and thus aid in preventing infections. In contrast,
certain synthetic implants do not allow penetration of the patient's immune
cells, thereby compromising the body's natural ability to fight infections.
Prolonged Shelf-Life. The Company's proprietary tissue processing
technology allows extended storage and ease of transportation of products.
AlloDerm is validated for storage at normal refrigerated temperatures for
up to two years. In contrast, traditionally processed skin allografts
require low temperature (-80 C) storage and shipping with dry ice.
Compatibility with Other Technologies. Several types of tissues
processed with the Company's technology retain important biochemical
components, such as proteoglycans including hyaluronic acid. These
biochemical components bind growth factors that stimulate tissue
regeneration. As a result, the Company believes it may be possible to
utilize its technology to develop tissue-based delivery vehicles for these
factors and cells.
Cell Preservation Technology
Blood cells circulating within the body are exposed to multiple factors
which maintain their stability and prevent activation. When blood cells are
removed from the body for storage, these stabilizing influences are absent and
results in the destabilization and irreversible activation of the cells. These
damaging events currently limit the shelf life of transfusable red blood cells
to 42 days under refrigeration and blood platelets to five days at room
temperature.
LifeCell's cell preservation technology mimics the stabilizing influences
that are present in the body through manipulation of signal transduction
mechanisms that control cellular metabolism, combined with either low
temperature storage or the Company's patented freeze-drying technology. If
successfully implemented, LifeCell's cell preservation technology could result
in multiple products for the preservation of directly transfusable blood cells
with extended shelf life which could be stored in a manner consistent with
current blood banking practices.
STRATEGY
LifeCell's objective is to be a leader in the research, development,
manufacturing, sales and marketing of tissue regeneration and cell preservation
products. The Company's primary focus is on the broad commercialization of its
first product, AlloDerm. LifeCell's strategy includes the following principal
elements:
EXPANDING PENETRATION OF ALLODERM INTO CURRENT TARGET MARKETS
The Company intends to expand the penetration of its AlloDerm products into
certain target markets. The Company currently markets AlloDerm for use in
reconstructive plastic, dental and burn surgery in domestic and selected
international markets through its own sales force and through distributors.
LifeCell intends to increase the penetration of AlloDerm into these markets by
(i) conducting additional clinical studies to demonstrate the benefits of
AlloDerm compared to other current therapies, (ii) supporting publications in
leading scientific journals describing the uses and benefits of AlloDerm, (iii)
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utilizing the Company's expanded sales and marketing staff to call on a broader
audience of hospital-based surgeons, (iv) strengthening the Company's current
specialty distributor relationship with Lifecore Biomedical, Inc., ("Lifecore
Biomedical"), the Company's exclusive distributor in the United States for
periodontal applications of AlloDerm, and building new relationships with
potential distributors for other specialty fields of use, and (v) participating
at trade shows and sponsoring educational and surgical training workshops on the
use of AlloDerm.
EXPANDING THE USE OF ALLODERM INTO NEW APPLICATIONS
LifeCell intends to expand the use of AlloDerm into the fields of
neurology, urology and gynecology. In these markets, surgeons have used
AlloDerm as implants and grafts for dura mater replacements, bladder slings and
pelvic floor repair. In March 1999, LifeCell signed an agreement with Boston
Scientific Corporation ("Boston Scientific") for the exclusive worldwide
distribution of its AlloDerm processed acellular tissue matrix for use in
urology and gynecology. LifeCell is evaluating the use of its tissue matrix in
each of these procedures in animal and clinical studies.
LEVERAGING TECHNOLOGY PLATFORMS TO DEVELOP NEW PRODUCTS
The Company plans to broaden the use and application of its tissue
processing and cell preservation technologies to develop new products. The
Company currently is developing Micronized AlloDerm, a micronized form of
AlloDerm that it believes may be useful in dermatological and reconstructive
applications as well as in the treatment of urinary incontinence. In addition,
the Company intends to apply its tissue processing technology in the development
of products based on other tissues, including vascular grafts, and nerve
connective tissues. The Company also is utilizing its proprietary cell
preservation technology in the development of solutions that would extend the
shelf-life of platelets and red blood cells. LifeCell plans to establish
collaborative out-licensing arrangements with appropriate partners to fund the
development and commercialization of certain of these products.
PRODUCTS AND PRODUCT DEVELOPMENT ACTIVITIES
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The following table sets forth information about AlloDerm and the Company's products
under development.
CURRENT USES OF ALLODERM APPLICATIONS (1) STATUS (2)
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Reconstructive Plastic Surgery Soft tissue repair and replacement Commercial
Periodontal Surgery Gingival grafts, root coverage, ridge augmentation Commercial
Burns Dermal grafts Commercial
POTENTIAL NEW USES OF ALLODERM PRODUCTS APPLICATIONS (1) STATUS (2)
Urological and Gynecological Surgery Bladder sling Near-commercial
Pelvic floor repair Near-commercial
Neurosurgery (NeoDura ) Duraplasty Near-commercial
Micronized AlloDermTM Plastic and reconstructive procedures Near-commercial
Urinary incontinence Development
General Surgery Abdominal wall closure Development
Prevention of surgical adhesions Development
Orthopedic Surgery Capsular ligament reinforcement Development
Tendon, meniscus, cartilage repair Research
ADDITIONAL PRODUCTS APPLICATIONS (1) STATUS (2)
Vascular Grafts Coronary artery bypass Development
Below-knee peripheral bypass Pre-clinical
Arterial-venous fistula Pre-clinical
Nerve Connective Tissue Nerve regeneration Pre-clinical
ThromboSol Platelet storage solution Clinical Feasibility
Red Blood Cell Preservation Extended storage of red blood cells Research
<FN>
(1) LifeCell markets AlloDerm for the repair or replacement of damaged or
inadequate integumental tissue. LifeCell may not promote AlloDerm for certain
uses without approval of the United States Food and Drug Administration (the
"FDA"). Products other than AlloDerm may require separate filings with and
approvals of the FDA. While some of these products may be commercialized at this
time, there can be no assurance that the FDA will not require pre-market
clearance or approval in the future or take other regulatory action. See
"-Government Regulation."
(2) "Research" indicates a project in which proof-of-concept has not yet
been established. "Preclinical" indicates a project in which animal studies have
been conducted, are being conducted or are planned. "Development" indicates
projects in which proof-of-concept has been established through in vitro or
early-stage animal studies or post-market clinical use and the Company is
conducting or intends to conduct further animal studies and clinical studies.
"Clinical feasibility" indicates early-stage trials in humans are being
conducted. "Near-Commercial" indicates applications that LifeCell expects will
be commercially available in 1999. "Commercial" indicates applications for which
surgeons currently are using the product. However, commercial does not
necessarily indicate that all factors, such as long-term efficacy, have been
determined.
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The products or products under development listed in the preceding table
are in various stages of research, development or commercialization. There can
be no assurance that the products under development will be successfully
developed or manufactured. Certain of the products under development will
require regulatory approval before commercialization. Additionally, the
regulatory status of AlloDerm when promoted for certain uses is currently
uncertain. There can be no assurance that any product or product under
development will receive regulatory approval if required, meet price or
performance objectives, be developed on a timely basis or prove to be as
effective or as well received as competing products. See "-Government
Regulation."
ALLODERM PRODUCTS
AlloDerm is an cellular tissue matrix graft processed with LifeCell's
proprietary a tissue processing technology from donated human (cadaveric) skin.
The Company believes that AlloDerm is the only transplant tissue product on the
market today that promotes the regeneration of normal human soft tissue.
Following transplant, the AlloDerm graft becomes repopulated with the patient's
own cells and is revascularized (i.e., blood supply is restored), becoming
engrafted into the patient. AlloDerm has multiple surgical applications and is
currently used predominately in reconstructive plastic, periodontal and burn
surgery. There are additional applications for AlloDerm, such as urological,
gynecological, neurological and general surgery, for which LifeCell is pursuing
market entry and penetration.
LifeCell receives donated human skin from unaffiliated and independent
tissue banks in the United States. LifeCell requires the tissue banks supplying
the Company with tissue to comply with the FDA's human tissue regulations. In
addition, the Company requires supplying tissue banks to comply with procedural
guidelines outlined by the American Association of Tissue Banks. LifeCell
conducts microbiological and other quality assurance testing before AlloDerm
tissue products are released for shipment. See "-Government Regulation."
LifeCell has established what we believe to be adequate sources of donated
skin tissue at acceptable costs to satisfy the foreseeable demand for AlloDerm
tissue products. However, there can be no assurance that the future
availability of donated human skin will be sufficient to meet LifeCell's demand
for such materials. AlloDerm is shipped at ambient temperature by overnight
delivery services and has a two-year refrigerated shelf-life. See
"-Sources of Materials."
RECONSTRUCTIVE PLASTIC SURGERY. In November 1995, LifeCell began marketing
AlloDerm to reconstructive plastic surgeons for use as a soft tissue implant to
repair or replace tissue deficits, as an interpositional graft for tissue
closure or repair, as a graft or implant for scar revision, as a protective
sheath covering nerves and tendons and as a sling to support tissue following
nerve or muscle damage.
Based on industry sources, LifeCell estimates there are approximately 1
million reconstructive surgical procedures performed annually in the United
States in which AlloDerm could be used. The Company estimates that its target
market for sheet AlloDerm is 241,000 procedures. These procedures include
various head and neck aesthetic surgeries, cancer reconstruction, scar revision
and oral cavity reconstruction. In these procedures, the greatest competitive
pressures to AlloDerm are from autologous tissue, synthetic and biosynthetic
materials. The disadvantages of using autologous tissue is the creation of a
separate donor site wound and the associated pain, healing, and scarring from
this additional wound. The disadvantages of using synthetic materials are the
susceptibility of synthetics to infection, the graft moving away from the
transplanted area (mobility), and erosion of the graft through the skin
(extrusion). Additionally, some biosynthetic materials may include bovine
collagen, which requires patient sensitivity testing.
PERIODONTAL SURGERY. LifeCell began marketing AlloDerm to periodontists in
September 1995. Since June 1997, Lifecore Biomedical, Inc. has served as the
Company's exclusive distributor in the United States of AlloDerm for use in
periodontal applications. Periodontal surgeons use AlloDerm to increase the
amount of attached gum tissue supporting the teeth. Until the development of
AlloDerm, these procedures were predominately performed with autologous tissue
excised from the roof of the patient's mouth and then transplanted to the gum.
AlloDerm also is used in periodontal procedures for covering exposed tooth
roots. This procedure involves placing AlloDerm underneath gum tissue, which is
then lifted up to cover the exposed root. AlloDerm allows for the coverage of
multiple exposed roots in a single surgery without being limited by the
availability of autologous palatal tissue. AlloDerm has been evaluated in a
clinical study of 50 patients in which AlloDerm proved equivalent to autologous
connective tissue grafts for covering roots. The patients were also spared the
pain and discomfort associated with the excision of the palatal autograft.
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In mid 1998, LifeCell and Lifecore Biomedical began marketing AlloDerm for
use in root coverage procedures. Based on industry sources, the Company
estimates 250,000 root coverage procedures in which AlloDerm could be used are
performed annually in the United States.
AlloDerm tissue products also are used as barrier membranes in guided bone
regeneration. In this function, the AlloDerm tissue serves as a barrier over
allograft bone grafts or bone substitutes, which are used to restore degenerated
alveolar bone.
According to the most recently published data from the American Dental
Association, there were approximately 480,000 soft tissue grafts and 230,000
bone-related grafts performed in 1990 in the United States. Competitive
procedures use autologous tissue as well as synthetic material. The Company
believes that AlloDerm has advantages over autologous tissue because of the
reduced trauma to the patient, and over certain non-resorbable synthetic
materials because it integrates into the patient and does not require a separate
procedure for removal.
BURNS. During 1994, LifeCell began commercial sales of AlloDerm for use in
the treatment of third-degree and deep second-degree burns requiring skin
grafting. Skin is the body's largest organ and is the first line of defense
against invasion of foreign substances. It contains two functional layers, the
upper surface consisting primarily of cells (epidermis) and an underlying
foundational layer consisting primarily of extracellular matrix proteins and
collagen (dermis). The epidermis functions as a water barrier and maintains
hydration. The dermis provides other important skin properties including
tensile strength, durability and elasticity. Dermis, like many other tissues of
the body, is not capable of de novo regeneration. The most conservative and
common surgical treatment of third-degree and deep second-degree burns use
split-thickness skin autografts (the epidermal layer and a portion of the
dermis) taken from uninjured areas of the patient's body. The surgical
procedure when using AlloDerm in treating these patients is to place AlloDerm
where the patient is missing dermis and cover the AlloDerm with an ultra-thin
split-thickness skin autograft (the epidermal layer and a much thinner portion
of the dermis). This procedure has produced comparable results to normal
autografts while significantly reducing donor site trauma.
The use of AlloDerm in burn grafting has clinically shown performance
equivalent to autograft in reducing the occurrence and effects of scar
contracture. Scar contracture is a progressive tightening of scar tissue which
can cause skin and joint immobility. Severe scar contracture can limit the use
and function of all mobile joints, such as the arms, legs, feet, hands and neck.
Burn patients commonly undergo or need repetitive reconstructive surgeries for
scar contracture. LifeCell believes that AlloDerm provides significant
therapeutic value when used in burn grafting over a patient's mobile joints.
Based on industry sources, the Company estimates that approximately 75,000
people are hospitalized each year in the United States due to burns and that
more than 20,000 of such patients are admitted with major burns requiring skin
grafts. LifeCell believes AlloDerm could be used effectively with all of these
patients.
NEUROSURGERY. Dura mater, the protective tissue lining of the brain and
spinal cord, can become damaged by trauma, disease, or as a result of a surgical
procedure. Since 1996, surgeons have used AlloDerm as a replacement for dura
mater for patients undergoing brain or spinal surgeries. During a two year
period from June 1996 to March 1998, an independent hospital used and evaluated
AlloDerm as a dura graft in over 200 patients. The patients experienced no known
complications as a result of the AlloDerm graft.
The competitive products to NeoDura (AlloDerm for dura mater replacement
surgery) are autologous tissue, allograft dura mater and bovine pericardium.
The use of allograft dura mater and bovine products has declined because of
concerns over disease transmission. The Company believes that NeoDura may be
preferred over allograft dura mater because certain neurological diseases, such
as Creutzfeld Jacob Disease, have not been documented to occur in dermis, the
source material for NeoDura. The Company believes that NeoDura has an advantage
over autologous tissue because of the elimination of the autologous tissue donor
site trauma.
The FDA currently regulates allograft dura mater as a medical device and
thus is subject to premarket notification requirements. In December 1997, the
FDA notified the Company that AlloDerm, when labeled and promoted for use in
dura mater replacement procedures, also will be classified as a Class II medical
device. LifeCell has submitted a 510(k) premarket notification to the FDA for a
dura mater substitute. Regulatory clearance time for products for similar
indications have ranged from three to nine months. However, there can be no
assurance that this product will receive 510(k) clearance on a timely basis, if
at all.
UROLOGY AND GYNECOLOGY SURGERY. Since 1997, surgeons have used AlloDerm in
urological and gynecological procedures in the treatment of urinary incontinence
and to repair damaged or inadequate female pelvic tissues. Urinary incontinence
affects approximately 13 million Americans, 85% of whom are women. Fewer than
half of these individuals currently seek treatment due to combined factors of
embarrassment and a lack of acceptable therapeutic options for some types of
incontinence. Some forms of urinary incontinence can be treated with a sling,
which involves lifting and supporting the bladder neck to provide urethral
support and compression.
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Cystocele, rectocele and other pelvic floor conditions also occur
frequently in women and require soft tissue surgical repair. These conditions
are particularly common after multiple vaginal births and cause significant
discomfort to the patient. It is common that these conditions exist with or
cause urinary incontinence. Therefore, it is becoming the current standard of
care to correct pelvic floor conditions at the same time as a sling or
suspension procedure to ensure that there are no conditions that can adversely
affect patient outcome.
Currently, materials used for slings and pelvic floor repair surgeries
include autologous tissue, synthetic materials and cadaveric fascia. The
autologous tissue often is taken from the patient's thigh or abdomen resulting
in a painful donor site. The greatest drawback of using synthetic materials is
the occurrence of erosion through the urethra or vaginal wall causing pain and
infection, necessitating repeat surgery. Cadaveric fascia commonly is used with
minimal complications but currently is undergoing supply constraints. LifeCell
believes that its acellular tissue matrix as a sling provides a safe and
effective alternative that eliminates the need for a donor site, will repopulate
as the patient's own tissue, will not erode through the soft pelvic tissues, and
is available in adequate supply.
Annually in the United States, there are approximately 190,000 retropubic
suspensions, bladder neck suspensions, and sling procedures performed of which
approximately 50,000 are bladder slings that could use LifeCell's acellular
tissue matrix as the sling material. Also, there are approximately 215,000
pelvic floor procedures performed annually in the United States of which 180,000
could utilize LifeCell's acellular tissue matrix for the soft tissue repair.
LifeCell's acellular tissue matrix has already been used in over 300 patients
for the treatment of incontinence and various pelvic floor repair surgeries.
LifeCell believes that the use of its acellular tissue matrix in slings and
pelvic floor repair falls within the FDA classification of "human tissue"
intended for transplantation. However, there can be no assurance that the FDA
would agree. See "-Government Regulation."
In March 1999, LifeCell and Boston Scientific entered into an agreement
pursuant to which Boston Scientific will act as the Company's exclusive
distributor worldwide for the Company's acellular tissue matrix for use in
urology and gynecology.
POTENTIAL ORTHOPEDIC APPLICATIONS OF ALLODERM. The Company has been advised
that a small number of surgeons have used AlloDerm to reinforce the capsular
ligament surrounding certain joints. Based on preliminary results of these
procedures reported to the Company by these surgeons, the Company intends to
explore the use of AlloDerm to repair several defects associated with joints.
These procedures may include capsular ligament reinforcement, ligament repair
and articular and meniscal cartilage repair. See "-Government Regulation."
FDA STATUS OF ALLODERM. The FDA has notified the Company that the use of
AlloDerm for replacement or repair of damaged or inadequate integumental tissue
is "human tissue" within the meaning of the human tissue for transplantation
regulations. The FDA has notified the Company that AlloDerm should be regulated
as a Class II medical device when it is labeled and promoted as a dura mater
replacement. However, it is unclear whether the FDA would agree that the
following indications for which AlloDerm has been used by physicians (and for
which the Company may want to promote AlloDerm in the future) is human tissue or
whether the FDA would regulate AlloDerm under its medical device authorities for
these indications: (i) graft for guided bone regeneration; (ii) oncological
reconstruction; (iii) urological and gynecological applications; (iv) orthopedic
surgeries; and (v) general surgeries. There can be no assurance that the FDA
will not require the submission of premarket approval applications supported by
extensive clinical data for some or all of these products. See "-Government
Regulation."
MICRONIZED ALLODERM(TM)
LifeCell is developing a micronized form of AlloDerm (AlloDerm reduced to
the size necessary for delivery by a needle) for use in multiple applications,
including urological, dermatological, and reconstructive applications. The
Company has conducted various animal studies and is conducting clinical studies
to evaluate the safety and efficacy of a micronized form of AlloDerm. Based on
the information from these studies to date, the Company is developing the
product manufacturing processes and intends to start commercial sale of the
product during 1999. A micronized form of AlloDerm would allow for delivery of
AlloDerm through the use of a syringe, rather than a surgical incision. LifeCell
believes that the delivery of AlloDerm by injection would create additional
market opportunities that are impenetrable by the sheet form of AlloDerm.
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The Company believes that two principal urological uses of Micronized
AlloDerm may be for the treatment of urethral sphincter deficiency, a common
cause of urinary incontinence, and vesicoureteric reflux, which is the most
common cause of renal failure in children. One treatment for these conditions
has been injecting bovine collagen to bulk the sphincter muscle or to recreate
the proper angle of the urethra or the ureter. Based on an independent market
research report, the Company estimates there were approximately 118,000
injections of bovine collagen in 1996 to treat urinary conditions for 33,000
individuals in the United States. A significant drawback of bovine collagen in
these procedures is that the body recognizes the bovine collagen as a foreign
material and eventually resorbs the injected material requiring repeated
injections to maintain continence or reflux correction. LifeCell currently is
testing the persistence of Micronized AlloDerm in animals for the treatment of
urological disorders.
Micronized AlloDerm may also be useful in plastic reconstructive and
dermatological procedures, such as correction of facial and body soft tissue
deficits, the revision of acne scars and wrinkle correction. Some of these
procedures currently use bovine collagen injections. LifeCell's target market in
plastic and reconstructive procedures is approximately 240,000 dermal grafts
currently performed annually in the United States. The greatest competitive
pressure will be from injectable bovine collagen. The disadvantages of bovine
collagen include the requirement for pre-procedural sensitivity testing and its
limited persistence over time due to resorption, generally requiring additional
injections after two to 12 months. The Company believes that Micronized
AlloDerm will not require sensitivity testing and may potentially persist longer
than bovine collagen, possibly reducing the requirement for patients to have
multiple injections.
The FDA regulatory status of Micronized AlloDerm in the United States is
uncertain. Although the Company believes that this form of AlloDerm should be
classified as human tissue intended for transplantation, there can be no such
assurance that the FDA would agree. Additionally, even if some configurations
or uses of Micronized AlloDerm are classified as human tissue, other
configurations such as those packaged to facilitate use by the physician, as
well as certain clinical applications may be regulated by the FDA as a medical
device. If the product is classified as a device by the FDA, extensive delays
may be encountered before the time, if ever, that the product may be
commercially distributed. See "-Government Regulation."
CARDIOVASCULAR TISSUE PRODUCTS
LifeCell is conducting animal studies to evaluate small-diameter vascular
graft products for potential use in cardiovascular and vascular surgery. If
successfully developed, a vascular graft could be used in coronary artery bypass
procedures or used to restore peripheral blood circulation in patients with
vascular insufficiency, such as below-knee bypass procedures. Approximately
200,000 coronary artery bypass procedures are performed annually in the United
States, according to an independent market research report. LifeCell currently
is using allograft blood vessels for this development project. See
"-Government Regulation."
In 1994, LifeCell and Medtronic, Inc. ("Medtronic") entered into a license
and development agreement for the development and potential commercialization of
xenograft and allograft heart valves processed with LifeCell's technology. In
December 1998, LifeCell and Medtronic mutually agreed to terminate this license
and development agreement. This allowed LifeCell to regain all rights to its
cardiovascular technology and to focus on the more near-term opportunities of
this technology. See "-Research and Development."
Based on early-stage research, the Company believes that it may be possible
to develop porcine heart valves based on the same technology that the Company
uses to produce AlloDerm tissue products. However, due to the long-term process
required to develop and commercialize a xenograft heart valve product, LifeCell
is shifting its cardiovascular technology resources from heart valves to
vascular grafts.
NERVE CONNECTIVE TISSUE
LifeCell is conducting research for the development of nerve matrix grafts
using the Company's proprietary technology. If successfully developed, such
products would provide the template for nerve regeneration following trauma. The
Company's research program seeks to determine whether nerve tissue processed
with the Company's technology to preserve significant biochemical or other
matrix-based characteristics will enhance or promote the regeneration of nerves.
See "-Government Regulation."
BLOOD CELL PRESERVATION
LifeCell is developing ThromboSol platelet storage solution to extend the
shelf life of transfusable platelets and other methods to extend the shelf life
of red blood cells, white blood cells and stem cells.
THROMBOSOL. LifeCell is developing ThromboSol, a patented biochemical
formulation designed to protect transfusable platelets from damage during
storage at low temperatures. The expected use of the product would be by blood
banks to increase the safety and extend the shelf-life of transfusable
platelets, thereby increasing the supply of available platelets, as well as to
store autologous platelets in advance for individuals expecting to undergo
surgery or chemotherapy. There were approximately 7.9 million platelet units
transfused in the United States in 1994, according to an industry survey.
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Platelets are blood cells that initiate clotting. Untreated platelets are
sensitive to storage at low temperatures and cannot be effectively refrigerated.
Presently, platelets are stored at room temperature and, due to the risk of
microbial contamination, have a limited shelf-life of five days. LifeCell has
shown in laboratory tests that the addition of ThromboSol solution preserves the
in vitro functional aspects of refrigerated platelets for up to nine days and
frozen platelets for more than one year.
LifeCell currently is conducting biocompatability testing on the ThromboSol
solutions that it expects to complete in 1999. A pilot clinical study under a
physician-sponsored Investigational New Drug ("IND") was conducted during 1998
and the study found that ThromboSol treated cryopreserved platelets performed
better than standard cryopreserved platelets. LifeCell currently is conducting a
second ThromboSol pilot clinical study to test the performance of refrigerated
platelets that it expects to complete in mid 1999. LifeCell intends to license
this product to major pharmaceutical and or other companies for commercial
development. See "-Government Regulation."
RED BLOOD CELLS. LifeCell is conducting research to develop procedures to
freeze and freeze-dry red blood cells. Such technology would be used by blood
banks for long-term storage of donated units of red blood cells, extending the
available blood supply, and for storage of autologous red blood cells for
individuals expecting to require blood transfusions as part of planned surgery.
Approximately 13 million units of blood are donated each year in the United
States. Red blood cells currently may be stored up to 42 days under
refrigeration. Current procedures to freeze red blood cells require the use of
cryoprotectant solutions that are toxic to the recipient and must be removed by
washing the cells prior to transfusion. This removal procedure is
labor-intensive and requires the immediate transfusion of the thawed and washed
blood. The Company believes that the successful development of non-toxic low
temperature methods of storage could simplify the use of frozen blood and
potentially allow widespread storage of autologous blood.
Numerous companies are attempting to develop blood substitute products and
others are developing simple closed loop cell washing methods or developing
technologies to inactivate bacterial or viral contaminants in donated blood.
Successful development of these products could affect the demand for any
products developed by LifeCell. Any product developed will require extensive
regulatory approvals, including approval of an IND by the FDA to conduct
clinical trials. See "-Government Regulation."
CRYOPRESERVED ALLOGRAFT SKIN
In April 1995, LifeCell began processing and distributing cryopreserved
allograft skin for use as a temporary or transitional covering for severe burn
wounds. For patients with extensive burns, allograft skin assists in stabilizing
the patient and preparing the wound bed for a permanent graft. Revenues from the
sale of cryopreserved allograft skin were approximately $403,000, $470,000, and
$601,000 during 1996, 1997 and 1998, respectively.
MARKETING
The Company currently distributes AlloDerm in the United States for
reconstructive plastic and burn surgical applications through the Company's
network of direct technical sales representatives. Periodontal applications of
AlloDerm in the United States are marketed through LifeCell's exclusive United
States distributor, Lifecore Biomedical, Inc. In March 1999, LifeCell and
Boston Scientific entered into an exclusive distribution agreement for the
worldwide distribution of its AlloDerm processed acellular tissue matrix for use
in urology and gynecology. For several years prior to 1999, LifeCell utilized a
network of regional and international distributors to augment the Company's
sales efforts. LifeCell currently maintains a network of international
distributors, but in December 1998, the Company began eliminating the use of
domestic distributors in favor of using distributors only on an exclusive field
of use basis. The Company currently intends to develop and commercialize
additional tissue products processed from cardiovascular, neurological and other
tissues in conjunction with corporate marketing partners.
As of March 23, 1999, LifeCell had a sales and marketing staff of 36
persons, including 24 domestic sales personnel, two international sales and
marketing personnel, and ten domestic marketing and other personnel. The
Company's sales representatives are responsible for interacting with surgeons,
primarily plastic surgeons and burn surgeons, and educating them regarding the
use and anticipated benefits of AlloDerm tissue grafts. LifeCell also
participates in national and international conferences and trade shows,
participates in or funds certain educational symposia or fellowship programs and
advertises in industry trade publications.
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SOURCES OF MATERIALS
LifeCell pays a procurement fee to and obtains allograft skin and other
tissues from contracted tissue banks in the United States. LifeCell is
expanding its current procurement of skin and other tissues to include any of
approximately 150 tissue banks, including approximately 36 skin banks.
Procurement of certain human organs and tissue for transplantation is subject to
the restrictions of the National Organ Transplant Act, which prohibits purchase
and sale of human organs, skin, and related tissue for "valuable consideration."
See "-Government Regulation."
Pursuant to contractual arrangements LifeCell reimburses tissue banks for
expenses incurred that are associated with the recovering and shipping of
donated human skin suitable for processing into AlloDerm and allograft skin as a
temporary wound dressing. In obtaining such tissues, LifeCell competes with
treatment centers that use donated skin for temporary wound dressings.
The Company has established what it believes to be adequate sources of
donor skin at acceptable costs to satisfy the foreseeable demand for AlloDerm
products during 1999. Although the Company has not experienced any material
difficulty in procuring adequate supplies of donor skin, there can be no
assurance that the future availability of donated human skin will be sufficient
to meet LifeCell's demand for such materials. Any supply shortage of available
tissues in the future would have a material adverse effect on LifeCell's
financial condition and results of operations.
The Company currently does not have procurement arrangements for other
tissues related to products under development, and does not intend to develop
such arrangements until such time as the products approach commercialization.
In November 1997, LifeCell became accredited by the American Association of
Tissue Banks ("AATB"). The AATB is recognized for the development of industry
standards and its program of inspection and accreditation. The AATB provides a
standards-setting function similar to the FDA's quality system regulations for
medical device companies, and has procedures for accreditation similar to the
International Standards Organization ("ISO") standards. LifeCell began the
accreditation process in 1995. The AATB decision was made after a detailed
audit of LifeCell's operations and procedures. The accreditation must be
renewed every three years and is for the processing, storage and distribution of
tissue used in AlloDerm and allograft skin.
Government Regulation
OVERVIEW
Government regulation, both domestic and foreign, is a significant factor
in the manufacture and marketing of LifeCell's current and developing products.
In the United States, the Company's currently marketed human skin allograft and
AlloDerm products are subject to regulation by the United States Food and Drug
Administration (the "FDA"). The United States Food, Drug and Cosmetics Act (the
"FDC Act"), the Public Health Service Act (the "PHS Act") and other federal
statutes and regulations govern or influence the testing, manufacture, labeling,
storage, record keeping, approval, advertising and promotion of such products.
Non-compliance with applicable requirements can result in fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, refusal of the government to authorize the marketing of new products
or to allow the Company to enter into supply contract, and criminal prosecution.
Any such enforcement action could have a material adverse affect on the
Company's financial condition and results of operations.
The FDA applies varying levels of regulation to human tissues and products
derived from human tissue. Such products may be regulated as biologics, medical
devices, or transplanted human tissue. As discussed more fully below, a
fundamental difference between the regulatory treatment of these products is
that transplanted human tissue generally may be commercially distributed without
premarket clearance or approval from the FDA, while products regulated as
devices or biologics usually require such approval. The process of obtaining
premarket clearance or approval is often expensive, lengthy and uncertain.
Frequently, the necessary filings must be supported by extensive clinical data,
and no assurance can be given that premarket clearance or approval can be
obtained on a timely basis, or at all.
At present, the FDA has indicated that AlloDerm is considered transplanted
human tissue when it is used for reconstructive plastic surgery, periodontal
surgery and burn grafts. However, the FDA's regulatory approach to tissue
products continues to evolve. No assurance can be given that the FDA will not
in the future choose to regulate this product as a medical device subject to
premarket clearance or approval requirements. The FDA has determined that
NeoDura (AlloDerm for dura mater replacement surgery) will be regulated as a
medical device requiring premarket clearance. The Company's position is that
the following products should be regulated as transplanted human tissue: (i)
AlloDerm for general and orthopedic surgical uses (abdominal wall closure,
prevention of surgical adhesions, and capsular ligament reinforcement), (ii)
AlloDerm for urological and gynecological surgery (bladder sling; pelvic floor
repair), (iii) Micronized AlloDerm for urinary incontinence and plastic and
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reconstructive procedures, and (iv) the vascular grafts and nerve connective
tissue products under development. The Company has not discussed its position
with the FDA; no assurance can be given that the FDA would not determine that
any or all of these products are medical devices rather than transplanted human
tissue. The Company has begun commercial distribution of some of these
products, including AlloDerm for urological and gynecological surgery. If the
FDA were to classify products already on the market as medical devices, no
assurances can be given that the FDA would not order the cessation of marketing
until premarket approval is obtained, or order the recall of product already
marketed. The Company's proposed blood cell preservation products (ThromboSol;
Red Blood Cell Preservation) will be regulated as biologics requiring premarket
approval.
TISSUE REGULATION
In July 1997, the FDA published a final rule that became effective in
January 1998 regulating "human tissue." The rule clarified and modified an
earlier interim rule and defines human tissue as any tissue derived from a human
body which is (i) intended for administration to another human for the
diagnosis, cure, mitigation, treatment or prevention of any condition or disease
and (ii) recovered, processed, stored or distributed by methods not intended to
change tissue function or characteristics. The FDA definition excludes, among
other things, tissue that currently is regulated as a human drug, biological
product or medical device and excludes kidney, liver, heart, lung, pancreas or
any other vascularized human organ. Unlike certain drugs, biologicals and
medical devices, human tissue is not subject to premarket notification or
approval by the FDA.
The final tissue rule requires establishments engaged in the procurement,
processing, and distribution of human tissue to conduct donor screening and
infectious disease testing and to maintain records available for FDA inspection
documenting that the procedures were followed. The rule also provides the FDA
with authority to conduct inspections of tissue establishments and to detain,
recall, or destroy tissue where the procedures were not followed or appropriate
documentation of the procedures is not available. Noncompliance with applicable
requirements can result in enforcement actions that could have a material
adverse effect on the Company's financial condition and results of operations.
In September 1996, the Company received a letter from the FDA to the effect
that AlloDerm intended for use for replacement or repair of damaged or
inadequate integumental tissue is human tissue within the meaning of the interim
final rule. This FDA position reversed the preliminary agency determination
that AlloDerm should be regulated under the medical device authorities. The
provisions of the interim rule relied upon by the FDA in the September 1996
letter were unchanged in the final rule. Consequently, AlloDerm is not subject
to premarket notification or approval by the FDA and the Company may promote and
sell AlloDerm for use in the treatment of wounds, such as third-degree burns, in
periodontal surgical procedures, such as free-gingival grafting and guided
tissue regeneration, and in reconstructive plastic surgery procedures, such as
contracture release grafting and scar revision. The agency also informed the
Company that this decision applies only to AlloDerm when it is intended for use
in transplantation, and the regulatory status of the product when it is promoted
for other uses, such as a void filler for soft tissue, for cosmetic augmentation
or as a wound healing agent (the "Additional Indications"), would need to be
determined by the FDA on a case-by-case basis. The Micronized AlloDerm for
plastic and reconstructive procedures can be used for cosmetic augmentation and
as a void filler for soft tissue, both of which would fall within the Additional
Indications.
While the Company's marketing efforts had not previously focused on the
Additional Indications, as a follow-up to its September 1996 letter, the FDA
informed the Company that AlloDerm for Additional Indications would have to be
formally presented to the FDA to determine if, with these indications, AlloDerm
would continue to fall within the scope of the interim rule for human tissue and
thus not require premarket clearance as a medical device. The Company was asked
to indicate what changes in advertisement and promotion it would make for
AlloDerm. The Company responded to the FDA letter in October 1996, and informed
the agency that the Company believes that the distinctions drawn regarding the
definition of transplantation and human tissue and between integumental tissue
and all other tissue in the September 1996 letter were fairly novel and ones for
which the Company would require clarification from the FDA as it goes forward.
The Company believes that AlloDerm, when used for cosmetic augmentation and as a
void filler, may still qualify as human tissue. Similarly, the Company advised
the FDA that since almost every replacement or repair of damaged or inadequate
tissue involves a cosmetic aspect, the Company believes that many cosmetic uses
of AlloDerm are within the purview of human tissue. Nevertheless, the Company
informed the FDA that it intends to follow the agency's decision and, until this
matter is clarified on a case-by-case basis, will not promote AlloDerm for the
Additional Indications.
In February 1997, the FDA issued a comprehensive "proposed approach" to the
regulation of cellular and tissue-based products, other than human tissue for
transplantation. The FDA proposal set forth a tiered approach to cell and
tissue regulation that ranges from no regulatory requirements for cells or
tissue that are removed and transplanted into the same patient in a single
surgical procedure to full premarket approval requirements for biologics and
medical devices that raise potential health, safety or efficacy concerns.
Although the FDA notified the Company in September 1996 that AlloDerm is not
considered a medical device subject to premarket clearance or approval when
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indicated for reconstructive plastic surgery, periodontal surgery, and burn
grafts, there can be no assurance that the FDA will not impose additional or
different regulatory requirements on AlloDerm after the agency finalizes its
approach to the regulation of cellular and tissue-based products.
In May 1998, the FDA issued a proposed rule that, if finalized in its
current form, would require certain manufacturers of human cellular and
tissue-based products to register with the agency and list their products. A
tissue product manufacturer would be subject to the proposed rule if its product
is (i) minimally manipulated (i.e., tissue processing does not alter original
characteristics relevant to the tissue's utility), (ii) not promoted or labeled
for use other than a homologous use (i.e., tissue has the same basic function as
in its native state and, for structural tissue, has the same location); (iii) is
not combined with or modified by the addition of any noncellular or nontissue
component that is a drug or device; and (iv) does not have a system effect,
except in cases of autologous use, transplantation into a first-degree blood
relative, or reproductive use. The FDA has indicated that this proposed rule is
a first step toward instituting the comprehensive "proposed approach" set forth
in February 1997.
The National Organ Transplant Act ("NOTA") prohibits the acquisition,
receipt or transfer of certain human organs, including skin and heart valves and
vascular grafts, for "valuable consideration", but permits the payment of
"reasonable" expenses associated with the removal, transportation, processing,
preservation, quality control and storage of human tissue and skin. There can
be no assurance that NOTA will not be applied to those LifeCell products that
are regulated as transplanted human tissue, or that it will not be interpreted
to limit the prices that LifeCell may charge for processing and transporting
such products. LifeCell includes in its AlloDerm pricing structure certain of
its educational costs associated with the processing and transportation of human
tissue. Although LifeCell believes that recovery of educational costs is
permitted under NOTA, a future inability of LifeCell to pass these costs on to
purchasers of its products could adversely affect LifeCell's financial condition
and results of operations. There can be no assurance that the government will
not adopt interpretations of NOTA that would adversely affect LifeCell's pricing
structure or otherwise call into question one or more aspects of LifeCell's
method of operation. Certain states and foreign countries have laws similar to
NOTA. These laws may restrict the amount that the Company can charge for
AlloDerm, and may restrict the importation or distribution of AlloDerm to
licensed not-for-profit organizations.
The FDA has stated that it will propose additional requirements for human
tissue. Additional requirements could include registration of tissue banking
establishments and tissue listing with the FDA If significant additional
regulatory requirements were to be established, the Company could incur
significant additional costs in order to comply with such requirements.
MEDICAL DEVICE REGULATION
A medical device generally may be marketed in the United States only with
the FDA's prior authorization. Devices classified by the FDA as posing less
risk are placed in class I or class II and require the manufacturer to seek
"510(k) clearance" from the FDA prior to marketing, unless exempted from this
requirement by regulation. Such clearance generally is granted when submitted
information establishes that a proposed device is "substantially equivalent" in
intended use and safety and effectiveness to a "predicate device", which is a
legally marketed class I or class II device, or a "preamendment" (in commercial
distribution before May 28, 1976) class III device for which the FDA has not
called for PMA applications (defined below). The FDA in recent years has been
requiring a more rigorous demonstration of substantial equivalence than in the
past, including in some cases requiring clinical trial data. The Company
believes that it usually takes from four to 12 months from the date of
submission to obtain 510(k) clearance, but it may take longer, and there can be
no assurance that 510(k) clearance will ever be obtained. During this process,
the FDA may determine that it needs additional information or that a proposed
device is precluded from receiving clearance because it is not substantially
equivalent to a predicate device. After a device receives 510(k) clearance, any
modification that could significantly affect its safety or effectiveness, or
that would constitute a major change in the intended use of the device, will
require a new 510(k) submission. There can be no assurance that any of the
Company's devices will receive 510(k) clearance in a timely fashion, or at all.
Delays in market introduction resulting from the 510(k) clearance process could
materially adversely affect the Company's financial condition and results of
operations.
A medical device that does not qualify for 510(k) clearance is placed in
class III, which is reserved for devices classified by the FDA as posing the
greatest risk (e.g., life-sustaining, life-supporting or implantable devices, or
devices that are not substantially equivalent to a predicate device). A class
III device generally must undergo the premarket approval ("PMA") process, which
requires the manufacturer to prove the safety and effectiveness of the device to
the FDA's satisfaction. A PMA application must provide extensive preclinical
and clinical trial data and also information about the device and its components
regarding, among other things, manufacturing, labeling and promotion. As part
of the PMA review, the FDA will inspect the manufacturer's facilities for
compliance with the Quality System Regulation ("QSR"), which includes elaborate
testing, control, documentation and other quality assurance procedures.
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Upon submission, the FDA determines if the PMA application is sufficiently
complete to permit a substantive review, and, if so, the application is accepted
for filing. The FDA then commences an in-depth review of the PMA application,
which the Company believes typically takes one to three years, but may take
longer. The review time is often significantly extended as a result of the FDA
asking for more information or clarification of information already provided.
The FDA also may respond with a "not approvable" determination based on
deficiencies in the application and require additional clinical trials that are
often expensive and time consuming and can delay approval for months or even
years. In recent years, the FDA has heightened its scrutiny of clinical data
submitted in support of PMA applications. During the review period, an FDA
advisory committee, typically a panel of clinicians, likely will be convened to
review the application and recommend to the FDA whether, or upon what
conditions, the device should be approved. Although the FDA is not bound by the
advisory panel decision, the panel's recommendation is important to the FDA's
overall decision making process.
If the FDA's evaluation of the PMA application is favorable, the FDA
typically issues an "approvable letter" requiring the applicant's agreement to
comply with specific conditions (e.g., changes in labeling) or to supply
specific additional data (e.g., longer patient follow up) or information (e.g.,
submission of final labeling) in order to secure final approval of the PMA
application. Once the approvable letter is satisfied, the FDA will issue a PMA
order for the approved indications, which can be more limited than those
originally sought by the manufacturer. The PMA order can include postapproval
conditions that the FDA believes necessary to ensure the safety and
effectiveness of the device including, among other things, restrictions on
labeling, promotion, sale and distribution. Failure to comply with the
conditions of approval can result in enforcement action, including withdrawal of
the approval. The PMA process can be expensive and lengthy, and no assurance
can be given that any PMA application will ever be approved for marketing. Even
after approval of a PMA, a new PMA or PMA supplement is required in the event of
a modification to the device. There can be no assurance that a PMA application
will be submitted for any of the Company's class III devices or that, once
submitted, the PMA application will be accepted for filing, found approvable,
or, if found approvable, will not take longer than expected to obtain or include
unfavorable restrictions.
A clinical study in support of a PMA application or 510(k) submission for a
"significant risk" device requires an Investigational Device Exemption ("IDE")
application approved in advance by the FDA for a limited number of patients.
The IDE application must be supported by appropriate data, such as animal and
laboratory testing results. The clinical study may begin if the IDE application
is approved by the FDA and the appropriate institutional review board ("IRB") at
each clinical study site. If the device presents a "nonsignificant risk" to the
patient, a sponsor may begin the clinical study after obtaining IRB approval
without the need for FDA approval. In all cases, the clinical study must be
conducted under the auspices of an IRB pursuant to FDA's regulatory requirements
intended for the protection of subjects and to assure the integrity and validity
of the data. The Company's failure to adhere to regulatory requirements
generally applicable to clinical studies or to any conditions of IDE approval
could result in a material adverse affect on the Company's financial condition
and results of operations, including a refusal by the FDA to grant marketing
clearance or approval for the Company's products. There can be no assurance
that any clinical study proposed by the Company will be approved by the FDA,
will be completed or, if completed, will provide data and information that
support PMA approval or 510(k) clearance or that support authorization for
additional clinical investigations of the type necessary to obtain approval or
clearance.
In December 1997, the FDA told the Company that AlloDerm for use in dura
mater replacement procedures would be classified as a medical device requiring
510(k) clearance or PMA approval. In March 1999, the Company submitted a 510(k)
notification for NeoDura. Although the Company has sought 510(k) clearance for
NeoDura, there can be no assurance that NeoDura, or any other device the Company
wishes to market, will be found substantially equivalent and receive 510(k)
clearance in a timely fashion, or at all. Delays in market introduction
resulting from the 510(k) clearance process could materially adversely affect
the Company's financial condition and results of operations. No assurance can
be given that FDA will not require NeoDura, or the Company's other products, to
follow the more rigorous PMA approval path to market. Nor can assurance be
given that PMA approval for any product will be obtained in a timely fashion, or
at all.
Devices manufactured or distributed by the Company pursuant to FDA
clearance or approval are subject to pervasive and continuing regulation by the
FDA and certain state agencies. The Company will be subject to inspection by
the FDA and such state agencies, and will have to comply with the host of
regulatory requirements that usually apply to medical devices marketed in the
United States, including the FDA's labeling regulations, the QSR, the Medical
Device Reporting ("MDR") regulations (which require that a manufacturer report
to the FDA certain types of adverse events involving its products), and the
FDA's general prohibitions against promoting products for unapproved or
"off-label" uses. In addition, class II devices can be subject to additional
special controls (e.g., performance standards, postmarket surveillance, patient
registries, and FDA guidelines) that do not apply to class I devices. The
Company's failure to comply with applicable regulatory requirements could result
in enforcement action by the FDA, which could have a material adverse effect on
the Company's financial condition and results of operations.
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The export by the Company of devices that have not yet been cleared or
approved for domestic distribution may be subject to FDA export restrictions.
There can be no assurance that the Company will receive on a timely basis, if at
all, any United States export approvals necessary for the marketing of its
products abroad.
BIOLOGICS REGULATION
Biologic products are regulated under the FDC Act and the Section 351(a) of
the PHS Act. The PHS Act imposes special additional licensing requirements,
known as Establishment Licenses and Product Licenses, or a new substitute for
those two, called a Biologic License. These licenses impose very specific
requirements upon the facility and the manufacturing and marketing of licensed
products to assure their safety, purity, and potency. Some licensed biological
products are also subject to batch release by the FDA. That is, the products
from a newly manufactured batch cannot be shipped until the FDA has evaluated
either a sample or the specific batch records and given permission to ship the
batch of product. The PHS Act also grants the FDA authority to impose mandatory
product recalls and provides for civil and criminal penalties for violations.
Before conducting the required clinical testing of a biological product, an
applicant must submit an investigational new drug application ("IND") to the
FDA, containing preclinical data demonstrating the safety of the product for
human investigational use, information about the manufacturing processes and
procedures and the proposed clinical protocol. Clinical trials of biological
products typically are conducted in three sequential phases, but may overlap.
Phase I trials test the product in a small number of healthy subjects, primarily
to determine its safety and tolerance at one or more doses. In Phase II, in
addition to safety, the efficacy, optimal dose and side effects of the product
are evaluated in a patient population somewhat larger than the Phase I trial.
Phase III involves further safety and efficacy testing on an expanded patient
population at geographically dispersed test sites. All clinical studies must be
conducted in accordance with FDA approved protocols and are subject to the
approval and monitoring of one or more Institutional Review Boards. In
addition, clinical investigators must adhere to good clinical practices.
Completion of all three phases of clinical studies may take several years, and
the FDA may temporarily or permanently suspend a clinical study at any time.
Upon completion and analysis of clinical trials, the applicant assembles and
submits a Product License Application and an Establishment License Application
or a Biologic License Application containing, among other things, a complete
description of the manufacturing process. Before the licenses can be granted,
the Company or its designee must undergo a successful establishment inspection.
FDA review and approval of a biological product can take several years. There
can be no assurance that LifeCell will obtain the required approvals for
ThromboSol platelet storage solution or any of its proposed biological products.
All biologic products marketed by LifeCell pursuant to the above-described
approvals will be subject to pervasive and continuing regulation by the FDA.
Products must be produced in accordance with the FDA's Good Manufacturing
Practice ("GMP") requirements for biologics, which impose elaborate testing,
control, documentation and other quality assurance procedures. There are
post-marketing surveillance and adverse event reporting requirements.
Manufacturing facilities and processes are subject to FDA inspection. Labeling
and advertising are also subject to scrutiny by the FDA, and, in certain
instances, the Federal Trade Commission. The export of biologics is also
subject to regulation and may require prior FDA approval. No assurance can be
given that the Company will receive such approval on a timely basis, or at all.
OTHER REGULATION
LifeCell is subject to various federal, state and local laws, regulations
and recommendations relating to such matters as safe working conditions,
laboratory and manufacturing practices, and the use, handling and disposal of
hazardous or potentially hazardous substances used and produced in connection
with LifeCell's research and development work. See "-Environmental Matters".
There can be no assurance that the Company will not incur significant additional
costs to comply with these laws or regulations in the future.
INTERNATIONAL REGULATION
Sales of medical devices and biological products outside the United States
are subject to foreign regulatory requirements that vary widely from country to
country. Approval of a product by comparable regulatory authorities of foreign
countries must be obtained prior to commercialization of the product in those
countries. Certain countries regulate AlloDerm as a pharmaceutical product,
requiring extensive filings and regulatory approvals to market the product.
Certain countries classify AlloDerm as "human tissue" but may restrict its
import or sale. Other countries have no applicable regulations regarding the
import or sale of products similar to AlloDerm, creating uncertainty regarding
the import or sale of the product. The inability to classify AlloDerm as a
medical device has restricted LifeCell's ability to obtain an appropriate
regulatory designation for the product for Western Europe, which would provide a
clearer marketing path in the European Union. The time required to obtain
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foreign approvals may be longer or shorter than that required for FDA approval
and there can be no assurance that approvals would be obtained for any of the
Company's products. AlloDerm currently is being marketed in certain foreign
countries, and LifeCell is actively pursuing clearance to market AlloDerm in
certain additional countries. There can be no assurance that the uncertainty of
regulations in each country will not delay or impede the marketing of AlloDerm
or impede the ability of LifeCell to negotiate distribution arrangements on
favorable terms.
RESEARCH AND DEVELOPMENT
LifeCell has historically funded the development of its tissue products and
blood cell preservation products primarily through external sources, including a
corporate alliance and government grants and contracts, as well as through the
proceeds from equity offerings. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources."
LifeCell's research and development costs in 1996, 1997 and 1998 for all
programs, including those programs funded through corporate and government
support, were approximately $1.6 million, $2.0 million and $3.4 million,
respectively.
The Company has received a substantial portion of its government grant
funding pursuant to the United States government's Small Business Innovation
Research ("SBIR") program. The SBIR grant program provides funding to evaluate
the scientific and technical merit and feasibility of an idea. To date, LifeCell
has been awarded approximately $5.2 million through 15 approved SBIR program
awards and Department of Defense contracts. LifeCell intends to continue to seek
funding through the SBIR programs, as well as to pursue additional government
grant and contract programs. Generally, LifeCell has the right to patent any
technologies developed from government grants and contract funding, subject to
the United States government's right to receive a royalty-free license for
federal government use and to require licensing to others in certain
circumstances.
In 1994, LifeCell and Medtronic entered into a license and development
agreement for the development and potential commercialization of xenograft heart
valves processed with LifeCell's technology. As part of the agreement,
LifeCell granted Medtronic certain rights of first refusal to evaluate
technology and negotiate license and development agreements for vascular graft
products. In December 1998, LifeCell and Medtronic mutually agreed to terminate
this agreement thus allowing LifeCell to regain all rights to its cardiovascular
technology.
PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS
LifeCell's ability to compete effectively with other companies is dependent
materially upon the proprietary nature of its technologies. LifeCell relies
primarily on patents, trade secrets and confidentiality agreements to protect
its technologies. LifeCell currently licenses the exclusive right to nine
United States patents and related foreign patents and the non-exclusive right to
14 United States patents. In addition, LifeCell has been issued four United
States utility patents, one United States design patent and has seven pending
United States patent applications.
The Company's technology is protected by three primary families of patents
and patent applications. One United States patent covers methods of producing
the Company's tissue-based products. Two United States patents and three
pending patent applications cover methods of extending the shelf-life of
platelets, red blood cells and other blood cells. Nine additional United States
patents supplement the Company's other patents and cover methods of
freeze-drying without the damaging effects of ice crystal formation.
LifeCell also has applied for patent protection in several foreign
countries. Because of the differences in patent laws and laws concerning
proprietary rights, the extent of protection provided by United States patents
or proprietary rights owned by or licensed to LifeCell may differ from that of
their foreign counterparts.
During April 1998, the Company entered into an agreement settling its
pending litigation with Integra LifeSciences Corporation and its affiliate
("Integra") and the Massachusetts Institute of Technology ("MIT"). During
November 1997, Integra and MIT had alleged that the Company infringed two
patents licensed by MIT to Integra (the "Integra Patents"). Under the terms of
the settlement agreement, Integra and MIT agreed not to assert the Integra
Patents against current or future products produced using LifeCell's current
technology. LifeCell also obtained the right to develop and commercialize
future products using Integra's technology through a license to certain of
Integra's patents.
In general, the patent position of biotechnology and medical product firms
is highly uncertain and involves complex legal, scientific and factual
questions. There can be no assurance that any other patents will be granted
with respect to the patent applications filed by the Company. Furthermore,
there can be no assurance that any patents issued or licensed to the Company
will provide commercial benefit to the Company or will not be infringed,
invalidated or circumvented by others. The United States Patent and Trademark
Office currently has a significant backlog of patent applications, and the
approval or rejection of patents may take several years. Prior to actual
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issuance, the contents of United States patent applications are generally not
made public. Once issued, such a patent would constitute prior art from its
filing date, which might predate the date of a patent application on which the
Company relies. Conceivably, the issuance of such a patent, or the discovery of
"prior art" of which the Company is currently unaware, could invalidate a patent
of the Company or its licensor or prevent commercialization of a product
disclosed therein.
No assurances may be given that the Company's products or planned products
may not be the subject of additional infringement actions by third parties. Any
successful patent infringement claim relating to any products or planned
products could have a material adverse effect on the Company's financial
condition and results of operations. Further, there can be no assurance that
any patents or proprietary rights owned by or licensed to LifeCell will not be
challenged, invalidated, circumvented, or rendered unenforceable based on, among
other things, subsequently discovered prior art, lack of entitlement to the
priority of an earlier, related application or failure to comply with the
written description, best mode, enablement or other applicable requirements.
The Company conducts a cursory review of issued patents prior to engaging
in research or development activities. Accordingly, the Company may be required
to obtain a license from others to commercialize any of its products under
development. There can be no assurance that any such license that may be
required could be obtained on favorable terms or at all.
LifeCell may decide for business reasons to retain certain knowledge that
it considers proprietary as confidential and elect to protect such information
as a trade secret, as business confidential information, or as know-how. In
that event, LifeCell must rely upon trade secrets, know-how and continuing
technological innovation to maintain its competitive position. There can be no
assurance that others will not independently develop substantially equivalent
proprietary information or otherwise gain access to or disclose such
information.
LifeCell has federal trademark or service mark registrations that it
currently uses for LifeCell , which concerns processing and preserving tissue
samples, and AlloDerm , which concerns LifeCell's commercial acellular dermal
graft product. The Company has filed trademark applications for the protection
of the phrases Mirconized AlloDerm , the particulate form of AlloDerm, and for
NeoDura , the AlloDerm product designed for neurosurgery.
COMPETITION
The biomedical field is undergoing rapid and significant technological
change. LifeCell's success depends upon its ability to develop and
commercialize its technology. There are many companies and academic
institutions that are capable of developing products based on similar
technology, and that have developed and are capable of developing products based
on other technologies, which are or may be competitive with LifeCell's products.
Many of those companies and academic institutions are well-established, have
substantially greater financial and other resources, research and development
capabilities and more experience in conducting clinical trials, obtaining
regulatory approvals, manufacturing and marketing than LifeCell. These
companies and academic institutions may succeed in developing competing products
that are more effective than LifeCell's products or that receive government
approvals more quickly than LifeCell's products, which may render the Company's
products or technology uncompetitive, uneconomical or obsolete.
For most current applications of AlloDerm, the principal form of
competition is with the use of the patient's autologous tissue. LifeCell
anticipates direct competition for AlloDerm tissue products and all of its
proposed transplantable tissue products, as well as indirect competition from
advances in therapeutic agents, such as growth factors now used to enhance wound
healing. LifeCell believes that therapeutic growth factors may be used in
conjunction with its proposed products and may potentially enhance the products'
efficacy. LifeCell is not aware of any person or entity currently marketing
transplantable tissue products with features similar to AlloDerm or LifeCell's
other proposed transplantable products. There can be no assurance, however,
that LifeCell will be able to compete effectively with other commercially
available products or that development of other technologies will not
detrimentally affect LifeCell's commercial opportunities or competitive
advantage.
ENVIRONMENTAL MATTERS
LifeCell's research and development and processing techniques generate
waste that is classified as hazardous by the United States Environmental
Protection Agency and the Texas Natural Resources Commission. LifeCell
segregates such waste and disposes of it through a licensed hazardous waste
transporter. Although LifeCell believes it is currently in compliance in all
material respects with applicable environmental regulations, its failure to
comply fully with any such regulations could result in the imposition of
penalties, fines or sanctions that could have an adverse effect on LifeCell's
financial condition and results of operations.
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EMPLOYEES
At March 23, 1999, the Company had 109 full-time and two part-time
employees of which 36 were employed in sales and marketing, 39 in engineering,
production and quality assurance, 19 in research and development and clinical
studies, and 15 in administration and accounting. Also, at such date, the
Company employed, full-time, two persons with M.D. degrees and eight persons
with Ph.D. degrees.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Act of 1934, as amended. All statements other
than statements of historical facts included herein, including, without
limitation, statements regarding the Company's financial position, business
strategy, products, products under development, markets, budgets, plans and
objectives of management for future operations and Year 2000 Readiness, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. Important factors
that could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") are disclosed under "Risk Factors" and
elsewhere herein, including, without limitation, in conjunction with the
forward-looking statements included herein. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary Statements.
RISK FACTORS
In addition to the other information in this Annual Report on Form 10-K,
the following factors should be considered carefully in evaluating the Company.
Special Note: Certain statements set forth below constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
See "-Special Note Regarding Forward-Looking Statements."
HISTORY OF OPERATING LOSSES; SUBSTANTIAL ACCUMULATED EARNINGS DEFICIT
Since its inception in 1986, the Company has generated only limited
revenues from product sales and has incurred substantial losses, including
losses of approximately $4.1 million, $6.1 million, and $7.3 million for the
years ended December 31, 1996, 1997, and 1998, respectively. At December 31,
1998, the Company had an accumulated deficit of approximately $44.5 million.
The Company expects to incur additional operating losses as well as negative
cash flow from operations at least through 1999 as it continues to use
substantial resources to expand its marketing efforts with respect to AlloDerm
and to expand its product development programs. There can be no assurance that
the Company will ever become profitable. The Company's ability to increase
revenues and achieve profitability and positive cash flows from operations will
depend on increased market acceptance and sales of AlloDerm and
commercialization of products under development. There can be no assurance that
the Company will be successful in expanding AlloDerm sales or that the Company's
development efforts will result in commercially available products, that the
Company will obtain required regulatory clearances or approvals for any new
products in a timely manner, or at all, that the Company will be successful in
introducing any new products or that any new products will achieve a significant
level of market acceptance. The development and commercialization of new
products will require additional development, sales and marketing, manufacturing
and other expenditures. The required level and timing of such expenditures will
affect the Company's ability to achieve profitability and positive cash flows
from operations. There can be no assurance that the Company will ever achieve
higher levels of revenues or a profitable level of operations or that
profitability, if achieved, can be sustained on an ongoing basis.
NO ASSURANCE OF ADDITIONAL NECESSARY CAPITAL
The Company intends to expend substantial funds for product research and
development, expansion of sales and marketing activities, expansion of
manufacturing capacity, product education efforts, and other working capital and
general corporate purposes. Although the Company believes that its existing
resources and anticipated cash flows from operations will be sufficient to
satisfy its capital needs through at least 2000, there can be no assurance that
the Company will not require additional financing before that time. The
Company's actual liquidity and capital requirements will depend upon numerous
factors, including the costs and progress of the Company's research and
development efforts; the number and types of product development programs
undertaken; the costs and timing of expansion of sales and marketing activities;
the costs and timing of expansion of manufacturing capacity; the amount of
revenues from sales of the Company's existing and new products; changes in,
termination of, and the success of existing and new distribution arrangements;
the cost of maintaining, enforcing and defending patents and other intellectual
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property rights; competing technological and market developments; developments
related to regulatory and third-party reimbursement matters; and other factors.
In the event that additional financing is needed, the Company may seek to raise
additional funds through public or private financing, collaborative
relationships or other arrangements. Any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
significant restrictive covenants. Collaborative arrangements, if necessary to
raise additional funds, may require the Company to relinquish its rights to
certain of its technologies, products or marketing territories. Failure to
raise capital when needed could have a material adverse effect on the Company's
financial condition and results of operations. There can be no assurance that
such financing, if required, will be available on terms satisfactory to the
Company, if at all. If adequate funds are not available, the Company expects it
will be required to delay, scale back or eliminate one or more of its product
development programs.
GOVERNMENT REGULATION-UNITED STATES
Government regulation, both domestic and foreign, is a significant factor
in the manufacture and marketing of LifeCell's current and developing products.
In the United States, the Company's currently marketed human skin allograft and
AlloDerm products are subject to regulation by the United States Food and Drug
Administration (the "FDA"). The United States Food, Drug and Cosmetics Act (the
"FDC Act"), the Public Health Service Act (the "PHS Act") and other federal
statutes and regulations govern or influence the testing, manufacture, labeling,
storage, record keeping, approval, advertising and promotion of such products.
Non-compliance with applicable requirements can result in fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, refusal of the government to authorize the marketing of new products
or to allow the Company to enter into supply contracts, and criminal
prosecution. Any such enforcement action could have a material adverse effect
on the Company's financial condition and results of operations. Unanticipated
changes in existing FDA regulatory requirements, failure of the Company to
comply with such requirements or adoption of new requirements could have a
material adverse affect on the Company's business, financial condition and
results of operations.
Products regulated as transplanted human tissue generally may be
commercially distributed without premarket clearance or approval from the FDA,
but establishments engaged in the procurement, processing, and distribution of
human tissue must conduct donor screening and infectious disease testing and
maintain records available for FDA inspection documenting that the procedures
were followed. The FDA has authority to conduct inspections of tissue
establishments and to detain, recall, or destroy tissue where the procedures
were not followed or appropriate documentation of the procedures is not
available. Non-compliance with applicable requirements can result in
enforcement actions that could have a material adverse affect on the Company's
financial condition and results of operations. At present, the FDA has
indicated that AlloDerm is considered transplanted human tissue when it is used
for reconstructive plastic surgery, periodontal surgery and burn grafts.
However, the FDA's regulatory approach to tissue products continues to evolve.
No assurance can be given that the FDA will not in the future choose to regulate
this product as a medical device subject to premarket clearance or approval
requirements.
The National Organ Transplant Act ("NOTA") prohibits the acquisition,
receipt or transfer of certain human organs, including skin and heart valves and
vascular grafts, for "valuable consideration", but permits the payment of
"reasonable" expenses associated with the removal, transportation, processing,
preservation, quality control and storage of human tissue and skin. There can
be no assurance that NOTA will not be applied to those LifeCell products that
are regulated as transplanted human tissue, or that it will not be interpreted
to limit the prices that LifeCell may charge for processing and transporting
such products. LifeCell includes in its AlloDerm pricing structure certain of
its educational costs associated with the processing and transportation of human
tissue. Although LifeCell believes that recovery of educational costs is
permitted under NOTA, a future inability of LifeCell to pass these costs on to
purchasers of its products could adversely affect LifeCell's financial condition
and results of operations. There can be no assurance that the government will
not adopt interpretations of NOTA that would adversely affect LifeCell's pricing
structure or otherwise call into question one or more aspects of LifeCell's
method of operation. Certain states and foreign countries have laws similar to
NOTA. These laws may restrict the amount that the Company can charge for
AlloDerm, and may restrict the importation or distribution of AlloDerm to
licensed not-for-profit organizations.
The Company's position is that the following products should be regulated
as transplanted human tissue: (i) AlloDerm for general and orthopedic surgical
uses (abdominal wall closure, prevention of surgical adhesions, and capsular
ligament reinforcement), (ii) AlloDerm for urological and gynecological surgery
(bladder sling; pelvic floor repair), (iii) Micronized AlloDerm for urinary
incontinence and plastic and reconstructive procedures, and (iv) the vascular
grafts and nerve connective tissue products under development. The Company has
not discussed its position with the FDA; no assurance can be given that the FDA
would not determine that any or all of these products are medical devices rather
than transplanted human tissue. If these products are regulated as medical
devices, the Company would be prohibited from marketing them in the United
States without either 510(k) clearance or PMA approval from the FDA. The
Company believes that it usually takes from four to 12 months from submission to
obtain 510(k) clearance, but can take longer. The process of obtaining PMA
approval is much more costly, lengthy and uncertain. The Company believes that
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the FDA's review of a PMA application after filing can last from one to three
years, or even longer. No assurance can be given that FDA would not require
these products to follow the more rigorous PMA approval path to market. Nor can
assurance be given that 510(k) clearance or PMA approval will be obtained in a
timely fashion, or at all.
The Company has begun commercial distribution of AlloDerm for urological
and gynecological surgery. If FDA were to classify AlloDerm for these
indications as a medical device, no assurance can be given that FDA would not
order the cessation of marketing until premarket clearance or approval is
obtained, or order the recall of product already marketed.
In December 1997, the FDA told the Company that AlloDerm for use in dura
mater replacement procedures would be classified as a medical device requiring
510(k) clearance or PMA approval. In March 1999, the Company submitted a 510(k)
premarket notification for NeoDura. Although the Company has sought 510(k)
clearance for NeoDura, there can be no assurance that NeoDura, or any other
device the Company wishes to market, will be found substantially equivalent and
receive 510(k) clearance in a timely fashion, or at all. Delays in market
introduction resulting from the 510(k) clearance process could materially
adversely affect the Company's financial condition and results of operations.
No assurance can be given that the FDA will not require NeoDura, or the
Company's other products, to follow the more rigorous PMA approval path to
market. Nor can assurance be given that PMA approval for any product will be
obtained in a timely fashion, or at all.
The export by the Company of devices that have not yet been cleared or
approved for domestic distribution may be subject to FDA export restrictions.
There can be no assurance that the Company will receive on a timely basis, if at
all, any United States export approvals necessary for the marketing of its
products abroad.
The Company's proposed blood cell preservation products will be subject to
regulation as biologics. Such products require FDA premarket licensing prior to
commercialization in the United States. To obtain licensing approval for these
products, the Company must submit proof of their safety, purity and potency.
Testing, preparation of necessary applications and processing of those
applications by the FDA is expensive and time consuming. There can be no
assurance that the FDA will act favorably or quickly in making such reviews, and
significant difficulties or costs may be encountered by the Company in its
efforts to obtain FDA licenses that could delay or preclude the Company from
marketing any biologic product it may develop. The FDA may also place
conditions on clearances that could restrict commercial applications of such
products. Product approvals may be withdrawn if compliance with regulatory
standards is not maintained or if problems occur following initial marketing.
Delays imposed by the FDA licensing process may materially reduce the period
during which the Company has the exclusive right to commercialize patented
products.
Products marketed by LifeCell pursuant to FDA or foreign approval will be
subject to pervasive and continuing regulation. In the United States, devices
and biologics must be manufactured in registered establishments and must be
produced in accordance with the QSR or medical devices or "Good Manufacturing
Practices" ("GMP") regulations for biologics. Manufacturing facilities and
processes are subject to periodic FDA inspection. Labeling and promotional
activities are also subject to scrutiny by the FDA and, in certain instances, by
the Federal Trade Commission. The export of devices and biologics is also
subject to regulation and may require FDA approval. From time to time, the FDA
may modify such requirements, imposing additional or different requirements.
Failure to comply with any applicable FDA requirements could result in civil and
criminal enforcement actions and other penalties that would have a material
adverse effect on the Company. In addition, there can be no assurance that the
various states in which LifeCell's products are sold will not impose additional
regulatory requirements for marketing impediments.
LifeCell is subject to various federal, state and local laws, regulations
and recommendations relating to such matters as safe working condition,
laboratory and manufacturing practices, and the use, handling and disposal of
hazardous or potentially hazardous substances used and produced in connections
with LifeCell's research and development work. There can be no assurance that
the Company will not incur significant additional costs to comply with these
laws or regulations in the future.
FOREIGN REGULATORY STATUS OF ALLODERM
The regulation of AlloDerm outside the United States varies by country.
Certain countries regulate AlloDerm as a pharmaceutical product, requiring
extensive filings and regulatory approvals to market the product. Certain
countries classify AlloDerm as a transplant tissue but may restrict its import
or sale. Other countries have no applicable regulations regarding the import or
sale of products similar to AlloDerm, creating uncertainty regarding the import
or sale of the product. There can be no assurance that the various foreign
countries in which LifeCell's products are sold will not impose additional
regulatory requirements.
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AlloDerm currently is being marketed in certain foreign countries, and
LifeCell is pursuing clearance to market AlloDerm in additional countries.
There can be no assurance that the uncertainty of regulations in each country
will not delay or impede the marketing of AlloDerm or impede the ability of
LifeCell to negotiate distribution arrangements on favorable terms. Certain
foreign countries have laws similar to the United States' National Organ
Transplant Act. These laws may restrict the amount that the Company can charge
for AlloDerm and may restrict the importation or distribution of AlloDerm to
licensed not-for-profit organizations.
UNCERTAINTY OF MARKET ACCEPTANCE
Much of the Company's ability to increase revenues and to achieve
profitability and positive cash flow will depend on expanding the use and market
penetration of its AlloDerm products and the successful introduction of its
products in development. Products based on the Company's technologies represent
new methods of treatment. Physicians will not use the Company's products unless
they determine that the clinical benefits to the patient are greater than those
available from competing products or therapies. Even if the advantage of the
Company's products is established as clinically significant, physicians may not
elect to use such products for any number of reasons. As such, there can be no
assurance that any of the Company's AlloDerm products or products under
development will gain any significant degree of market acceptance among
physicians, health care payers and patients. Broad market acceptance of the
Company's products may require the training of numerous physicians and
clinicians, as well as conducting or sponsoring clinical studies to demonstrate
the benefits of such products. The amount of time required to complete such
training and studies could result in a delay or dampening of such market
acceptance. Moreover, health care payers' approval of reimbursement for the
Company's products in development will be an important factor in establishing
market acceptance.
DELAYED OR UNSUCCESSFUL PRODUCT DEVELOPMENT
The Company's growth and profitability will depend, in part, upon its
ability to complete development of and successfully introduce new products. The
Company may be required to undertake time-consuming and costly development
activities and seek regulatory clearance or approval for new products. Although
the Company has conducted animal studies on many of its products under
development which indicate that the product may be feasible for a particular
application, there can be no assurance that the results obtained from expanded
studies will be consistent with earlier trial results or be sufficient for the
Company to obtain any required regulatory approvals or clearances. There can be
no assurance that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of new
products, that regulatory clearance or approval of these or any new products
will be granted on a timely basis, if ever, or that the new products will
adequately meet the requirements of the applicable market or achieve market
acceptance. The completion of the development of any of the Company's products
under development remains subject to all the risks associated with the
commercialization of new products based on innovative technologies, including
unanticipated technical or other problems, manufacturing difficulties and the
possible insufficiency of the funds allocated for the completion of such
development, which could result in a change in the design, delay in the
development or the abandonment of such products. Consequently, there can be no
assurance that any of the Company's products under development will be
successfully developed or manufactured or, if developed and manufactured, that
such products will meet price or performance objectives, be developed on a
timely basis or prove to be as effective as competing products. The inability
to complete successfully the development of a product or application, or a
determination by the Company, for financial, technical or other reasons, not to
complete development of any product or application, particularly in instances in
which the Company has made significant capital expenditures, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON DISTRIBUTOR SALES
The Company has engaged Lifecore Biomedical, Inc. as the exclusive
distributor for AlloDerm for periodontal applications in the United States, and
Boston Scientific Corporation as the exclusive worldwide distributor for its
AlloDerm processed acellular tissue matrix for use in urology and gynecology.
Other distributors also may be granted exclusive distribution rights. To the
extent any exclusive distributor fails adequately to promote, market and sell
the Company's products, the Company may not be able to secure a replacement
distributor until after the term of the distribution contract is complete or
until such contract can otherwise be terminated.
DEPENDENCE ON CERTAIN SOURCES OF MATERIALS
The Company's business will be dependent on the availability of donated
human skin, cardiovascular tissue and other tissues. A finite supply of donated
tissue is available. Although the Company has established what it believes to
be adequate sources of donated human skin to satisfy the expected demand for
AlloDerm during 1999, LifeCell has not yet developed a supply of other tissues
and there can be no assurance that the availability of donated human skin and
other tissues will be sufficient to meet LifeCell's demand for such materials.
Any significant interruption in supply of such tissue would likely have a
material adverse effect on the Company's financial condition and results of
operations.
21
<PAGE>
The Company acquires donated human skin from various non-profit
organizations which procure skin and other donated human tissue. The
procurement of skin generally constitutes a small portion of the operating funds
for such non-profit organizations. The development of products that replace the
need for donated tissue, such as the development of synthetic bone substitutes
to replace allograft bone procured by the organizations, could threaten the
existence of the non-profit organizations and, therefore, adversely affect the
supply of donated human skin to LifeCell or increase the required payments from
LifeCell.
The Company has performed limited activities to develop products using
porcine dermis and other animal tissues as a substitute for donated human skin.
If successfully developed, animal tissue could replace the need for human tissue
as a raw material. There can be no assurance that such animal tissue products
can be successfully developed, that such development and required regulatory
approvals could result in timely replacement of human tissue used by LifeCell in
the event of a reduced supply of human tissue or that the cost of such animal
tissue would not materially adversely affect the business, financial condition
and results of operations of the Company.
Donors of organs and tissues, including donated human skin, have various
motivations. Although LifeCell does not promote the use of AlloDerm for
cosmetic applications, AlloDerm has been used by surgeons in a variety of
applications that may be considered "cosmetic." Knowledge of such use by
potential donors could impact their willingness to donate skin for such uses.
DEPENDENCE ON KEY MANAGEMENT AND PERSONNEL
The success of LifeCell will be dependent largely on the efforts of its
executive officers, including Paul G. Thomas, President and Chief Executive
Officer of the Company, and Stephen A. Livesey, M.D., Ph.D., Executive Vice
President and Chief Science Officer and a director of the Company. The loss of
Mr. Thomas's and Dr. Livesey's services may have a material adverse affect on
LifeCell's financial condition and results of operations. LifeCell has obtained
"keyman" life insurance on Dr. Livesey of $3.0 million. Further the success of
LifeCell is also dependent upon its ability to hire and retain qualified
operating, marketing and technical personnel. The competition for qualified
personnel in the biochemical industry is intense, and accordingly, there can be
no assurance that LifeCell will be able to hire or retain such personnel.
TECHNOLOGICAL CHANGE AND COMPETITION
The biomedical field is undergoing rapid and significant technological
change. LifeCell's success depends upon its ability to develop and
commercialize efficient and effective products based on its technology. There
are many companies and academic institutions that are capable of developing
products based on similar technology, and that have developed and are capable of
developing products based on other technologies, which are or may be competitive
with LifeCell's products. Many of these companies and academic institutions are
well-established, have substantially greater financial and other resources,
research and development capabilities and more experience in conducting clinical
trials, obtaining regulatory approvals, manufacturing and marketing than
LifeCell. These companies and academic institutions may succeed in developing
competing products that are more effective than LifeCell's products, or that
receive government approvals more quickly than LifeCell's products, which may
render the Company's products or technology uncompetitive, uneconomical or
obsolete.
LIMITED THIRD-PARTY REIMBURSEMENT
Generally, hospitals, physicians and other health care providers purchase
products, such as the products being sold or developed by LifeCell, for use in
providing care to their patients. These parties typically rely on third-party
payers, including Medicare, Medicaid, private health insurance and managed care
plans, to reimburse all or part of the costs of acquiring those products and
costs associated with the medical procedures performed with those products.
Cost control measures adopted by third-party payers in recent years have had and
may continue to have a significant effect on the purchasing practices of many
health care providers, generally causing them to be more selective in the
purchase of medical products. Significant uncertainty exists as to the
reimbursement status of newly approved health care products. The Company
believes that certain third-party payers provide reimbursement for medical
procedures at a specified rate without additional reimbursement for products,
such as those being sold or developed by LifeCell, used in such procedures.
There can be no assurance that adequate third-party payer reimbursement will be
available for the Company to maintain price levels sufficient for realization of
an appropriate return on its investment in developing new products. In
addition, government and other third-party payers continue to refuse, in some
cases, to provide any coverage for uses of approved products for indications for
which the FDA has not granted marketing approval. Many uses of AlloDerm have
not been granted such marketing approval and there can be no assurance that any
such uses will be approved. Further, certain of the Company's products are used
in medical procedures that typically are not covered by third-party payers, such
as "cosmetic" procedures, or for which patients sometimes do not obtain
coverage, such as dental procedures. These and future changes in third-party
payer reimbursement practices regarding the procedures performed with LifeCell's
products could adversely affect the market acceptance of LifeCell's products.
22
<PAGE>
DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS
LifeCell's ability to compete effectively with other companies is
materially dependent upon the proprietary nature of its technologies. LifeCell
relies primarily on patents and trade secrets to protect its technologies.
LifeCell currently licenses the exclusive right to nine United States patents
and related foreign patents and non-exclusive rights to 14 patents. In
addition, LifeCell has been issued three United States utility patents, one
United States design patent and has seven pending United States patent
applications. There can be no assurance that LifeCell will obtain any
additional patents or other protection, that the patents currently applied for
will be granted, that, if the patents currently applied for are granted, the
claims allowed will be sufficient to protect LifeCell's technology, or that
existing patents or proprietary rights owned by or licensed to LifeCell will
provide significant commercial benefits. Further, there can be no assurance
that any patents or proprietary rights owned by or licensed to LifeCell will not
be challenged, invalidated, circumvented, or rendered unenforceable based on,
among other things, subsequently discovered prior art, lack of entitlement to
the priority of an earlier, related application or failure to comply with the
written description, best mode, enablement or other applicable requirements.
The invalidation, circumvention or unenforceability of key patents or
proprietary rights owned by or licensed to LifeCell could have a material
adverse effect on LifeCell and on its business, financial condition and results
of operations.
LifeCell's success will depend in part on its ability to maintain and
obtain patent protection for its technology both in the United States and other
countries. Other companies and research and academic institutions may have
developed technologies, filed patent applications or received patents on various
technologies that may be related to LifeCell's business. Some of these patent
applications, patents or technologies may conflict with LifeCell's patent
applications, patents or technologies. Any such conflict could invalidate or
limit the scope of LifeCell's patents or could result in denial of LifeCell's
patent applications.
In general, the patent position of biotechnology and medical product firms
is highly uncertain and involves complex legal, scientific and factual
questions. There can be no assurance that any other patents will be granted
with respect to the patent applications filed by the Company. Furthermore,
there can be no assurance that any patents issued or licensed to the Company
will provide commercial benefit to the Company or will not be infringed,
invalidated or circumvented by others. The United States Patent and Trademark
Office currently has a significant backlog of patent applications, and the
approval or rejection of patents may take several years. Prior to actual
issuance, the contents of United States patent applications are generally not
made public. Once issued, such a patent would constitute prior art from its
filing date, which might predate the date of a patent application on which the
Company relies. Conceivably, the issuance of such a patent, or the discovery of
"prior art" of which the Company is currently unaware, could invalidate a patent
of the Company or its licensor or prevent commercialization of a product
disclosed therein.
The Company generally conducts a cursory review of issued patents prior to
engaging in research or development activities. Accordingly, the Company may be
required to obtain a license from others to commercialize any of its products
under development. There can be no assurance that any such license that may be
required could be obtained on favorable terms or at all.
In addition, if patents that cover LifeCell's existing activities are
issued to other companies, there can be no assurance that LifeCell would be able
to obtain licenses to such patents at a reasonable cost, if at all, or be able
to develop or obtain alternative technology. Any of the foregoing matters could
have a material adverse effect on the Company's financial condition and results
of operations. In addition, the Company may be required to obtain a license
under one or more patents prior to commercializing any heart valve or vascular
product, if developed. There can be no assurance that such a license will be
available, or if available, that a license will be granted on terms which are
commercially acceptable to the Company.
During April 1998, the Company entered into an agreement settling its
pending litigation with Integra LifeSciences Corporation and its affiliate
("Integra") and the Massachusetts Institute of Technology ("MIT"). During
November 1997, Integra and MIT had alleged that the Company infringed two
patents licensed by MIT to Integra (the "Integra Patents"). Under the terms of
the settlement agreement, Integra and MIT agreed not to assert the Integra
Patents against current or future products produced using LifeCell's current
technology. LifeCell also obtained the right to develop and commercialize
future products using Integra's technology through a license to certain of
23
<PAGE>
Integra's patents. For a further discussion of the settlement terms, see "Legal
Proceedings." There can be no assurances that the Company's existing or
proposed products or processes will not be subject to infringement claims by
others. Any successful infringement claim relating to any patent could have a
material adverse effect on the Company's financial condition and results of
operations.
There can be no assurance that LifeCell will not be required to resort to
litigation to protect its patented technologies or other proprietary rights or
that the Company will not be the subject of additional patent litigation to
defend its existing or proposed products or processes against claims of patent
infringement or other intellectual property claims. Any of such litigation
could result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's financial condition and results of
operations.
LifeCell also has applied for patent protection in several foreign
countries. Because of the differences in patent laws and laws concerning
proprietary rights, the extent of protection provided by United States patents
or proprietary rights owned by or licensed to LifeCell may differ from that of
their foreign counterparts.
LifeCell may decide for business reasons to retain certain knowledge that
it considers proprietary as confidential and elect to protect such information
as a trade secret, as business confidential information or as know-how. In that
event, LifeCell must rely upon trade secrets, know-how and continuing
technological innovation to maintain its competitive position. There can be no
assurance that others will not independently develop substantially equivalent
proprietary information or otherwise gain access to or disclose such
information. The independent development or disclosure of LifeCell's trade
secrets could have a material adverse effect on the Company's financial
condition and results of operations.
PRODUCT LIABILITY AND INSURANCE
The Company's business exposes it to potential product liability risks
which are inherent in the testing, manufacturing and marketing of medical
products. Although the Company has product liability insurance coverage with an
aggregate limit of $8.0 million and a per occurrence limit of $6.0 million,
there can be no assurance that such insurance will provide adequate coverage
against potential liabilities, that adequate product liability insurance will
continue to be available in the future or that it can be maintained on
acceptable terms. The obligation to pay any product liability claim in excess
of whatever insurance the Company is able to acquire could have a material
adverse effect on the business, financial condition and results of operations of
the Company. The Company uses donated human skin as the raw material for
AlloDerm. The non-profit organizations that supply such skin are required to
follow FDA regulations and guidelines published by the American Association of
Tissue Banks to screen donors for potential disease transmission. Such
procedures include donor testing for certain viruses, including HIV. The
Company's manufacturing process also has been demonstrated to inactivate
concentrated suspensions of HIV in tissue. While the Company believes such
procedures are adequate to reduce the threat of disease transmission, there can
be no assurance that AlloDerm products will not be associated with transmission
of disease or that a patient otherwise infected with disease would not
erroneously assert a claim that the use of AlloDerm resulted in the disease
transmission. Any such transmission or alleged transmission could have a
material adverse effect on the Company's ability to manufacture or market its
products or could otherwise have a material adverse effect on the Company's
financial condition or results of operations. See "-Risk Factors-Dependence on
Certain Sources of Materials."
LIMITATION ON THE USE OF NET OPERATING LOSSES AND RESEARCH AND DEVELOPMENT
TAX CREDITS
As of December 31, 1998, LifeCell had accumulated net operating loss
("NOL") carryforwards for federal income tax purposes of approximately $40.5
million and research and development tax credits of approximately $395,000 and
may continue to incur NOL carryforwards. United States tax laws provide for an
annual limitation on the use of NOL carryforwards following certain ownership
changes and also limit the time during which NOL and tax credit carryforwards
may be applied against future taxable income and tax liabilities. The sale of
the Company's Common Stock in a public offering completed in December 1997
resulted in an ownership change for federal income tax purposes. The Company
estimates that the amount of its NOL carryforwards and the credits available to
offset taxable income as of December 31, 1998 is approximately $14.0 million on
a cumulative basis. Accordingly, if LifeCell generates taxable income in any
year in excess of the then cumulative limitation, the Company may be required to
pay federal income taxes even though it has unexpired NOL carryforwards.
DISPOSAL OF HAZARDOUS MATERIALS
LifeCell's research and development and processing techniques generate
waste that is classified as hazardous by the United States Environmental
Protection Agency and the Texas Natural Resources Commission. LifeCell
segregates such waste and disposes of it through a licensed hazardous waste
transporter. Although LifeCell believes it is currently in compliance in all
material respects with applicable environmental regulations, its failure to
comply fully with any such regulations could result in the imposition of
penalties, fines or sanctions that could have a material adverse effect on
LifeCell's financial condition and results of operations.
24
<PAGE>
ITEM 2. PROPERTIES
LifeCell leases approximately 27,000 square feet of laboratory, office and
warehouse space at its facilities in The Woodlands, Texas, under lease
agreements that expire in January 2001. The Company's monthly rental obligation
for its facilities is approximately $30,000.
ITEM 3. LEGAL PROCEEDINGS
During April 1998, the Company entered into an agreement settling its
pending litigation with Integra LifeSciences Corporation and its affiliate
("Integra") and the Massachusetts Institute of Technology ("MIT"). During
November 1997, Integra and MIT had alleged that the Company infringed two
patents licensed by MIT to Integra (the "Integra Patents"). During December
1997, the Company filed a separate lawsuit against Integra and MIT alleging that
they tortiously interfered with certain of LifeCell's business relationships,
including relationships with investors and potential investors in LifeCell's
recent public offering. The lawsuit also alleged anticompetitive acts and
business disparagement. Under the terms of the settlement agreement, Integra
and MIT agreed not to assert the Integra Patents against current or future
products produced using LifeCell's current technology. LifeCell also obtained
the right to develop and commercialize future products using Integra's
technology through a license to certain of Integra's patents. As an additional
condition of the settlement, Integra purchased from LifeCell 65,600 shares of
LifeCell Common Stock for a purchase price of $500,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is listed on the Nasdaq National Market under
the symbol "LIFC." On March 23, 1999, the last reported sale price for the
Company's Common Stock on The Nasdaq National Market was $3.81 per share. The
following table sets forth the high and low sales information for the Company's
Common Stock for the periods indicated, as reported by The Nasdaq Stock Market.
<TABLE>
<CAPTION>
High Low
<C> <S> <C> <C>
1997 First Quarter $8.88 $3.06
Second Quarter 7.13 4.63
Third Quarter 8.38 4.81
Fourth Quarter 8.25 3.50
1998 First Quarter $5.19 $4.50
Second Quarter 8.03 5.03
Third Quarter 6.50 3.75
Fourth Quarter 5.50 3.31
</TABLE>
As of February 28, 1999, there were approximately 336 holders of record of
shares of Common Stock and 38 holders of record of shares of Series B Preferred
Stock. The Company estimates that there are in excess of 4,000 beneficial
holders of Common Stock.
During 1998, the Company issued 4,965 shares of Common Stock in exchange
for a warrant to purchase 11,290 shares of Common Stock. In June 1998, the
Company issued 65,600 shares of Common Stock for consideration of $500,000 to a
third party in settlement of litigation. In December 1998, the Company issued
310,771 shares of Common Stock to Medtronic upon conversion of a $1.5 million
license fee paid in 1994. In March 1999, the Company issued 108,577 shares of
Common Stock for consideration of $1 million to Boston Scientific as part of the
distribution agreement signed in March 1999. None of such issuances involved
underwriters. The Company considers these securities to have been offered and
sold in transactions not involving a public offering and, therefore, to be
exempted from registration under Section 4(2) of the Securities Act of 1933, as
amended.
25
<PAGE>
DIVIDEND POLICY
LifeCell has not paid a cash dividend to holders of shares of Common Stock
and does not anticipate paying cash dividends to the holders of its Common Stock
in the foreseeable future. Pursuant to the terms of the Company's Series A
Preferred Stock, on (i) March 26, 1997, the Company paid a per share dividend of
$0.50 in shares of Common Stock to the holders of the Series A Preferred Stock;
and (ii) March 26, 1997, the Company paid a per share dividend of $0.25 in cash
to such security holders. Also on March 26, 1997, in accordance with the terms
of the Series A Preferred Stock, the Company redeemed all of the outstanding
shares of the Series A Preferred Stock through the conversion of such shares
into shares of Common Stock. Accordingly, no further dividends are payable in
respect of the Series A Preferred Stock.
On February 15, 1997, May 15, 1997, August 15, 1997, and November 17, 1997,
the Company paid a per share dividend in shares of its Series B Preferred Stock
equivalent to $1.17, $2.41, $1.50 and $1.51, respectively, to the holders of
shares of Series B Preferred Stock. On February 17, 1998, May 15, 1998, August
15, 1998 and November 15, 1998, and February 15, 1999, the Company paid a $1.51,
$1.48, $1.50, $1.51, and $1.51, respectively, per share dividend in cash to the
holders of shares of Series B Preferred Stock. The Series B Preferred Stock
bears dividends per share at the annual rate of the greater of (i) $6.00
(subject to adjustment in certain events) and (ii) the per annum rate of
dividends per share paid, if applicable, by the Company, on the Common Stock.
The dividends may be paid, at the Company's option, in cash or shares of Series
B Preferred Stock or in a combination of cash and shares of Series B Preferred
Stock. Dividends on the Series B Preferred Stock accrue and are paid quarterly.
The Series B Preferred Stock ceases bearing dividends on September 30, 2001.
Under the General Corporation Law of the State of Delaware, a corporation's
board of directors may declare and pay dividends only out of surplus, including
additional paid in capital, or current net profits.
26
<PAGE>
Item 6. SELELECTED FINANCIAL DATA
The following table sets forth certain selected financial data of LifeCell
for each of the years in the five-year period ended December 31, 1998, derived
from the Company's audited financial statements. This information should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and notes thereto
included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1995 1996 1997 1998
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Operations Statement Data:
- - --------------------------------
Revenues:
Product sales $ 93,940 $ 742,238 $ 2,012,205 $ 4,904,971 $ 7,245,102
Research funded by others 722,675 1,064,337 933,365 1,074,954 746,789
------------- ------------- ------------- ------------- -------------
Total revenues 816,615 1,806,575 2,945,570 5,979,925 7,991,891
------------- ------------- ------------- ------------- -------------
Costs and expenses:
Cost of goods sold 515,500 925,174 1,281,353 2,540,644 2,837,037
Research and development 2,085,851 2,169,764 1,588,186 2,007,062 3,375,545
General and administrative 1,381,470 1,422,588 1,911,254 3,081,512 3,484,460
Selling and marketing 727,615 1,475,296 2,389,573 4,955,597 6,500,000
------------- ------------- ------------- ------------- -------------
Total costs and expenses 4,710,436 5,992,822 7,170,366 12,584,815 16,197,042
------------- ------------- ------------- ------------- -------------
Loss from operations (3,893,821) (4,186,247) (4,224,796) (6,604,890) (8,205,151)
------------- ------------- ------------- ------------- -------------
Interest income and other, net 167,300 280,843 135,082 466,255 863,837
------------- ------------- ------------- ------------- -------------
Net loss $ (3,726,521) $ (3,905,404) $ (4,089,714) $ (6,138,635) $ (7,341,314)
============= ============= ============= ============= =============
Loss per share(1)-basic and
diluted $ (0.90) $ (1.10) $ (1.14) $ (1.04) $ (0.72)
============= ============= ============= ============= =============
Shares used in computing loss
per share-basic and diluted 4,294,179 4,313,366 4,542,519 6,820,122 11,228,912
============= ============= ============= ============= =============
As of December 31,
1994 1995 1996 1997 1998
------------- ------------- ------------- ------------- -------------
Balance Sheet Data:
- - --------------------------------
Cash and cash equivalents $ 1,877,295 $ 3,015,332 $ 10,748,250 $ 20,781,026 $ 8,025,415
Short-term investments 5,154,824 - - - 4,000,745
Working capital 6,613,304 2,888,048 10,884,779 20,515,559 12,596,612
Total assets 7,997,404 4,376,039 12,890,015 24,155,598 17,030,699
Deferred credit 1,500,000 1,500,000 1,500,000 1,500,000 --
Accumulated deficit (20,678,402) (24,774,753) (29,310,934) (36,411,480) (44,475,992)
Total stockholders' equity 5,743,127 2,093,906 10,197,104 20,259,603 14,260,638
<FN>
(1) Includes effect of accounting treatment of preferred stock and warrants of $0.03, $0.19, $0.24,
$0.14 and $0.07 in 1994, 1995, 1996, 1997 and 1998, respectively.
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RUSULTS
OF OPERATIONS
The following discussion of operations and financial condition of LifeCell
should be read in conjunction with the Financial Statements and Notes thereto
included elsewhere in this Annual Report on Form 10-K.
Special Note: Certain statements set forth below constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. See "Business-Special Note Regarding
Forward-Looking Statements."
27
<PAGE>
GENERAL AND BACKGROUND
LifeCell was organized in 1986 and, since its inception, has been financed
through the public and private sale of equity securities, through product sales,
through a corporate alliance with Medtronic and through the receipt of
government grants and contracts.
LifeCell began the sale of AlloDerm grafts as a dermal replacement in the
grafting of third-degree burns in December 1993 and commenced commercial
activities in 1994. LifeCell commenced the sale of AlloDerm for periodontal
surgery in September 1995 and for reconstructive plastic surgery in November
1995. To date, proceeds from the sale of AlloDerm products have not been
sufficient to fund in full the Company's operating activities.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 AND 1997
The net loss for the year ended December 31, 1998, increased 20% to
approximately $7.3 million compared to approximately $6.1 million for 1997. The
increase was principally attributable to higher costs associated with the
Company's increased marketing activities for its AlloDerm products, increased
investment in the Company's product development programs, increased expenditures
for the infrastructure to support these activities and severance costs related
to changes in executive management. The increase in net loss was offset
partially by increased product sales, as well as higher interest income from
investments.
Total revenues for the year ended December 31, 1998, increased 34% to
approximately $8.0 million compared to approximately $6.0 million for 1997. An
approximately $2.4 million increase in sales of products was the result of
expanded sales and marketing activities, and increased distribution activities
during 1998. This increase was offset in part by an approximately $328,000
decrease in revenues from funded research and development. The research and
development funding available to the Company through grants and alliances was
lower during 1998 than in 1997. Amounts recognized as revenues under such
cost-reimbursement arrangements are for expenses incurred during the periods.
Cost of goods sold for the year ended December 31, 1998, was approximately $2.8
million, resulting in a gross margin of approximately 61%. The gross margin for
the year ended December 31, 1997, was approximately 48%. The increase in gross
margin was principally attributable to the implementation of certain production
efficiencies, the allocation of fixed costs to higher volumes of products, an
increase in sales of certain higher-margin AlloDerm products and an increase in
the price of certain AlloDerm products in 1998.
Research and development expenses for the year ended December 31, 1998,
increased 68% to approximately $3.4 million compared to approximately $2.0
million for 1997. The increase in research and development expense was
primarily attributable to increased animal and clinical studies for the
expanding uses for AlloDerm . In addition, the Company dedicated increased
resources to product development programs such as Micronized AlloDerm .
General and administrative expenses for the year ended December 31, 1998,
increased 13% to approximately $3.5 million compared to approximately $3.1
million for 1997. The increase was primarily attributable to severance costs
related to a change in executive management.
Selling and marketing expenses increased 31% to $6.5 million for the year
ended December 31, 1998, compared to approximately $5.0 million for 1997. The
increase was primarily attributable to the addition of domestic sales and
marketing personnel, expansion of marketing activities as well as severance
costs related to changes in executive marketing personnel.
Interest income and other, net increased 85% to approximately $864,000 for
the year ended December 31, 1998, compared to approximately $466,000 for 1997.
The increase was principally attributable to higher funds available for
investment during the current period as a result of the $16.0 million net
proceeds received from the public offering of Common Stock in December 1997.
YEARS ENDED DECEMBER 31, 1997 AND 1996
The net loss for the year ended December 31, 1997, increased 50% to
approximately $6.1 million compared to approximately $4.1 million for the same
period of 1996. The increase was principally attributable to costs associated
with expanding the sales of AlloDerm, including the development of sales and
marketing programs, recruitment and retention of staff and the related
infrastructure necessary to support such activities.
Total revenues for the year ended December 31, 1997, increased 103% to
approximately $6.0 million compared to approximately $2.9 million for the same
period of 1996. Approximately $2.9 million of such increase was attributable to
28
<PAGE>
increases in sales of products, which were the result of expanded sales and
marketing activities and increased distribution activities during the 1997
period. The remaining $142,000 increase in revenues was the result of increased
research activities under funding arrangements; amounts recognized as revenues
under such cost-reimbursement arrangements are for the associated expenses
incurred during the periods.
Cost of goods sold for the year ended December 31, 1997, was approximately
$2.5 million, resulting in a gross margin of approximately 48%. The gross
margin for the year ended December 31, 1996, was approximately 36%. The
increase in gross margin was principally attributable to the implementation of
certain production efficiencies, the allocation of fixed costs to higher volumes
of products, an increase in sales of certain higher-margin AlloDerm products and
an increase in the price of certain AlloDerm products in 1997.
Research and development expenses for the year ended December 31, 1997,
increased 26% to approximately $2.0 million compared to approximately $1.6
million for 1996. Of such increase, approximately $142,000 was attributable to
increased activities related to research funded by others. Such activities
increased in 1997 as a result of the receipt during 1996 of three contracts with
government agencies to fund research and development activities. The remaining
$277,000 increase in research and development expense was attributable to
increased production of products for clinical and research activities as well as
higher allocations of resources to certain proprietary research and development
programs.
General and administrative expenses for the year ended December 31, 1997,
increased 61% to approximately $3.1 million compared to approximately $1.9
million for 1996. Such increase was principally attributable to legal fees
accrued for the defense of the patent infringement lawsuit, increased staff
levels, recruiting fees and other professional fees related to the Company's
expansion of the infrastructure to support its increased sales activities.
Selling and marketing expenses increased 107% to approximately $5.0 million
for the year ended December 31, 1997, compared to approximately $2.4 million for
1996. The increase was primarily attributable to increased promotional
activities as well as the addition of sales personnel related to AlloDerm
marketing.
Interest income and other, net increased 245% to approximately $466,000 for
the year ended December 31, 1997, compared to approximately $135,000 for 1996.
The increase was principally attributable to higher funds available for
investment during the current period as a result of the sale of Series B
Preferred Stock in November 1996 and the proceeds received from the public
offering of Common Stock in December 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, LifeCell's principal sources of funds have been equity
offerings, product sales, external funding of research activities and interest
on investments. LifeCell has historically funded research and development
activities for products other than AlloDerm primarily with external funds from
its corporate alliance with Medtronic and government grants. In August 1996,
LifeCell was awarded a two year $300,000 National Science Foundation grant
related to its keratinocytes program. In December 1996, LifeCell was awarded a
two-year contract of approximately $1.1 million from the United States Army to
support the development of vascular graft and other products. In June 1998,
LifeCell was awarded a $600,000 contract from the United States Navy related to
the development and clinical research of ThromboSol .
In 1994, LifeCell entered into an agreement with Medtronic pursuant to
which Medtronic paid LifeCell a license fee of $1.5 million and agreed, subject
to certain rights to terminate at Medtronic's discretion, to fund certain costs
of the research and development of LifeCell's proprietary tissue processing
technology in the field of heart valves. Through December 31, 1998, LifeCell
has recognized approximately $2.0 million in revenues for development funding,
excluding the initial license fee, for this program In December 1998, LifeCell
and Medtronic mutually agreed to terminate their early stage license and
development agreement related to heart valves in order to focus on near-term
opportunities. LifeCell regained all rights to its cardiovascular technology.
As a result of terminating the agreement, the $1.5 million up-front licensing
fee paid by Medtronic to LifeCell in 1994 converted into 310,771 shares of
Common Stock.
In December 1997, LifeCell received net proceeds of approximately $16.0
million pursuant to a public offering of 4 million shares of Common Stock.
In March 1999, the Company received proceeds of $1 million from the sale of
108,577 shares of the Company's Common Stock to Boston Scientific in connection
with the agreement for worldwide distribution of its proprietary acellular
tissue matrix for applications in urology and gynecology.
LifeCell expects to incur substantial expenses in connection with its
efforts to expand sales and marketing of AlloDerm, develop expanded uses for
AlloDerm, conduct the Company's product development programs (including costs of
clinical studies), prepare and make any required regulatory filings, introduce
products, participate in technical seminars and support ongoing administrative
and research and development activities. The Company currently intends to fund
29
<PAGE>
these activities from its existing cash resources, sales of products and
research and development funding received from others. While the Company
believes that its existing available funds will be sufficient to meet its
present operating and capital requirements through at least 2000, there can be
no assurance that such sources of funds will be sufficient to meet these future
expenses. If adequate funds are not available, the Company expects it will be
required to delay, scale back or eliminate one or more of its product
development programs. The Company's need for additional financing will be
principally dependent on the degree of market acceptance achieved by the
Company's products and the extent to which the Company can achieve substantial
growth in product sales during 1999 and 2000, as well as the extent to which the
Company may decide to expand its product development efforts. There can be no
assurance that the Company will be able to obtain any such additional financing
on acceptable terms, if at all.
LifeCell has had losses since its inception and therefore has not been
subject to federal income taxes. As of December 31, 1998, LifeCell had net
operating loss ("NOL") and research and development tax credit carryforwards for
income tax purposes of approximately $40.5 million and $395,000, respectively,
available to reduce future income tax and tax liabilities. Federal tax laws
provide for a limitation on the use of NOL and tax credit carryforwards
following certain ownership changes that could limit LifeCell's ability to use
its NOL and tax credit carryforwards. The Company's sale of Common Stock in the
1997 public offering resulted in an ownership change for federal income tax
purposes. The Company estimates that the amount of NOL carryforwards and the
credits available to offset taxable income as of December 31, 1998 is
approximately $14.0 million on a cumulative basis. Accordingly, if LifeCell
generates taxable income in any year in excess of its then cumulative
limitation, the Company may be required to pay federal income taxes even though
it has unexpired NOL carryforwards.
YEAR 2000 COMPLIANCE
In recent years, the Company has been replacing and enhancing its
information systems to gain operational efficiencies and keep pace with the
Company's growth. In conjunction with these activities, the Company has been
preparing its information systems for the year 2000.
The Company has completed a comprehensive assessment of the impact of the
year 2000 on its internal information systems and applications and intends to
make the necessary revisions or upgrades to its systems to render them year 2000
compliant. The Company is also focusing on compliance attainment efforts and
key interfaces with vendors. To date, all of the Company's critical software
applications have been certified Year 2000 compliant. The Company's computer
hardware is in the process of final testing, and the Company expects that it
will be compliant by the first quarter of 1999. Notwithstanding the Company's
efforts, the Company could experience disruptions to some aspects of its
activities and operations as a result of non-compliant systems utilized by the
Company or unrelated third parties. The Company is, therefore, developing
contingency plans to mitigate the extent of any such potential disruption to
business operations. The Company does not expect that the costs of addressing
potential year 2000 issues will have a material adverse impact on the Company's
results of operations or financial position.
There can be no assurances that the efforts or the contingency plans
related to the Company's systems, or those of others relied upon by the Company,
will be successful or that any failure to convert, upgrade or plan appropriately
for contingencies would not have a material adverse effect on the Company.
The foregoing statements are intended to be and are hereby designated "Year
2000 Readiness Disclosure" statements within the meaning of the Year 2000
Information and Readiness Disclosure Act.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information required
to be filed under this Item are presented commencing on page F-1 of this Annual
Report on Form 10-K, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be set forth in the Registrant's
Proxy Statement relating to the annual meeting of the Registrant's stockholders
scheduled to be held June 3, 1999, under the captions "Election of Directors"
and "Executive Compensation," and such information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be set forth in the Registrant's
Proxy Statement relating to the annual meeting of the Registrant's stockholders
scheduled to be held June 3, 1999, under the caption "Executive Compensation,"
and such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be set forth in the Registrant's
Proxy Statement relating to the annual meeting of the Registrant's stockholders
scheduled to be held June 3, 1999, under the caption "Security Ownership of
Certain Beneficial Owners and Management," and such information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be set forth in the Registrant's
Proxy Statement relating to the annual meeting of the Registrant's stockholders
scheduled to be held June 3, 1999, under the caption "Certain Relationships and
Related Transactions," and such information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(A) DOCUMENTS INCLUDED IN THIS REPORT:
1. FINANCIAL STATEMENTS PAGE
----
<S> <C>
Report of Independent Public Accountants F-1
Balance Sheets as of December 31, 1997 and 1998 F-2
Statements of Operations for the years ended December 31, 1996, 1997 and 1998 F-3
Statements of Stockholders' Equity for the years ended December 31, 1996, 1997 and 1998 F-4
Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 F-6
Notes to Financial Statements F-7
</TABLE>
(B) REPORTS ON FORM 8-K:
None.
(C) EXHIBITS:
Exhibits designated by the symbol * are filed with this Annual Report on
Form 10-K. All exhibits not so designated are incorporated by reference to a
prior filing as indicated.
Exhibits designated by the symbol + are management contracts or
Compensatory plans or arrangements that are required to be filed with this
Report pursuant to this Item 14.
LifeCell undertakes to furnish to any stockholder so requesting a copy of
any of the following exhibits upon payment to the Company of the reasonable
costs incurred by Company in furnishing any such exhibit.
31
<PAGE>
3.1 Restated Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1998, filed with the Securities and
Exchange Commission ("the Commission") on August 10, 1998).
3.2 Amended and Restated By-laws (incorporated by reference to Exhibit 3.2
to the Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1996, filed with the Commission on August 14, 1996.)
10.1+ LifeCell Corporation Amended and Restated 1992 Stock Option Plan, as
amended (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 1998,
filed with the Commission on August 10, 1998).
10.2+ LifeCell Corporation Second Amended and Restated 1993 Non-Employee
Director Stock Option Plan, as amended (incorporated by reference to
Exhibit 10.4 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, filed with the Commission on
March 31, 1997).
10.3 Form of Confidentiality/Non-Compete Agreement (incorporated by
reference to Exhibit 10.28 to the Company's Registration Statement on
Form S-1, Registration No. 33-44969, filed with the Commission on
January 9, 1992).
10.4 Lease Agreement dated December 10, 1986, between the Registrant and
The Woodlands Corporation, Modification and Ratification of Lease
Agreement dated April 11, 1988, between the Registration and The
Woodlands Corporation Modification and Ratification of Lease dated
August 1, 1992, between the Company and The Woodlands Corporation and
Modification, Extension and Ratification of Lease dated March 5, 1993,
between the Registrant and The Woodlands Corporation, and Modification
and Ratification of Lease Agreement dated December 21, 1995, between
the Company and The Woodlands Office Equities -- '95 Limited
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1996).
10.5 Lease Agreement dated September 1, 1988, between the Registrant and
The Woodlands Corporation, and Modification of Lease Agreement dated
March 5, 1993, between the Registrant and The Woodlands Corporation
(incorporated by reference to Exhibit 10.22 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992).
10.6 Securities Purchase Agreement dated November 18, 1996, between
LifeCell Corporation and the Investors named therein (incorporated by
reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996).
10.7 Voting Agreement dated November 18, 1996, among LifeCell Corporation
and certain stockholders named therein (incorporated by reference to
Exhibit 10.16 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996).
10.8 Registration Rights Agreement dated November 18, 1996, between
LifeCell Corporation and certain stockholders named therein
(incorporated by reference to Exhibit 10.17 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996).
10.9 Form of Stock Purchase Warrant dated November 18, 1996, issued to each
of the warrant holders named on Schedule 10.18 attached thereto
(incorporated by reference to Exhibit 10.18 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996).
10.10 Stock Purchase Warrant dated November 18, 1996, issued to Gruntal &
Co., Incorporated (incorporated by reference to Exhibit 10.19 to
Amendment No. 1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 on Form 10-K/A).
10.11+Agreement dated August 19, 1998, between LifeCell Corporation and
Paul M. Frison (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the period ended September
30, 1998 filed with the Commission on November 13, 1998).
10.12+Agreement dated July 1, 1997, between LifeCell Corporation and
Stephen A. Livesey. (incorporated by reference to Exhibit 10.20 to the
Company's Registration Statement No. 333-37123 on Form S-2 filed with
the Commission on October 3, 1997).
32
<PAGE>
10.13+Agreement dated October 5, 1998 between LifeCell Corporation and Paul
G. Thomas (incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q filed with the Commission on November
13, 1998.)
10.14+Letter agreement dated September 8, 1998 between LifeCell Corporation
and Paul G. Thomas, as amended by letter agreements dated September 9,
1998 and September 29, 1998 (incorporated by reference to Exhibit 10.3
to the Company's Quarterly Report on Form 10-Q filed with the
Commission on November 13, 1998.)
23.1* Consent of Arthur Andersen LLP.
27.1+ Financial data schedule.
33
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LIFECELL CORPORATION
(Registrant)
By: /s/ Paul G. Thomas
-----------------------------------------------------
Paul G. Thomas, President and Chief Executive Officer
Dated: March 25, 1999.
In accordance with the Securities Exchange Act of 1934, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Paul G. Thomas President and Chief Executive March 25, 1999
- - --------------------- Officer (Principal Executive Officer)
(Paul G. Thomas)
/s/ Lynne P. Hohlfeld Controller March 25, 1999
- - ------------------------ (Principal Accounting Officer)
(Lynne P. Hohlfeld)
/s/ Paul M. Frison Director and Chairman March 25, 1999
- - --------------------- of the Board
(Paul M. Frison)
/s/ Michael E. Cahr Director March 25, 1999
- - ----------------------
(Michael E. Cahr)
/s/ James G. Foster Director March 25, 1999
- - ----------------------
(James G. Foster)
/s/ Lori G. Koffman Director March 25, 1999
- - ----------------------
(Lori G. Koffman)
/s/ Stephen A. Livesey Director March 25, 1999
- - ------------------------
(Stephen A. Livesey)
/s/ K. Flynn McDonald Director March 25, 1999
- - ------------------------
(K. Flynn McDonald)
/s/ David A. Thompson Director March 25, 1999
- - ------------------------
(David A. Thompson)
34
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To LifeCell Corporation:
We have audited the accompanying balance sheets of LifeCell Corporation (a
Delaware corporation) as of December 31, 1997 and 1998, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LifeCell Corporation as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 12, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
LIFECELL CORPORATION
BALANCE SHEETS
DECEMBER 31,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 20,781,026 $ 8,025,415
Short-term investments --- 4,000,745
Accounts and other receivables, net . . . . . . . . . . . . . . . . . 1,095,904 1,383,920
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 936,398 1,749,023
Prepayments and other . . . . . . . . . . . . . . . . . . . . . . . . 98,226 207,570
------------- -------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . 22,911,554 15,366,673
Furniture and Equipment, net. . . . . . . . . . . . . . . . . . . . . . 864,058 1,388,339
Intangible Assets, net. . . . . . . . . . . . . . . . . . . . . . . . . 379,986 275,687
------------- -------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,155,598 $ 17,030,699
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 780,393 $ 704,938
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 1,556,083 2,065,123
Deferred revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 59,519 --
------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 2,395,995 2,770,061
Deferred Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000 --
Commitments and Contingencies
Stockholders' Equity
Series B preferred stock, $.001 par value, 182,205 shares
authorized, 125,441and 119,084 issued and outstanding . . . . . . . . 125 119
Undesignated preferred stock, $.001 par value 1,817,795
shares authorized, none issued and outstanding. . . . . . . . . . . . -- --
Common stock, $.001 par value, 25,000,000 and 48,000,000 shares
authorized, respectively, 11,012,906 and 11,612,852 shares issued and
outstanding, respectively . . . . . . . . . . . . . . . . . . . . . . 11,013 11,612
Warrants outstanding to purchase 3,163,478 and 3,182,188
shares of common stock, respectively. . . . . . . . . . . . . . . . . 299,480 298,344
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . 56,360,465 58,426,555
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (36,411,480) (44,475,992)
------------- -------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . 20,259,603 14,260,638
------------- -------------
Total liabilities and stockholders' equity. . . . . . . . . . . . . $ 24,155,598 $ 17,030,699
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
LIFECELL CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Product sales . . . . . . . . . . . . $ 2,012,205 $ 4,904,971 $ 7,245,102
Research funded by others . . . . . . 933,365 1,074,954 746,789
------------ ------------ ------------
Total revenues. . . . . . . . . . . 2,945,570 5,979,925 7,991,891
------------ ------------ ------------
Costs and Expenses
Cost of goods sold. . . . . . . . . . 1,281,353 2,540,644 2,837,037
Research and development. . . . . . . 1,588,186 2,007,062 3,375,545
General and administrative. . . . . . 1,911,254 3,081,512 3,484,460
Selling and marketing . . . . . . . . 2,389,573 4,955,597 6,500,000
------------ ------------ ------------
Total costs and expenses. . . . . . 7,170,366 12,584,815 16,197,042
------------ ------------ ------------
Loss From Operations. . . . . . . . . . (4,224,796) (6,604,890) (8,205,151)
------------ ------------ ------------
Interest income and other, net. . . . 135,082 466,255 863,837
------------ ------------ ------------
Net Loss. . . . . . . . . . . . . . . . $(4,089,714) $(6,138,635) $(7,341,314)
Loss Per Common Share-Basic and Diluted $ (1.14) $ (1.04) $ (0.72)
Shares Used in Computing Loss Per
Common Share-Basic and Diluted. . . . 4,542,519 6,820,122 11,228,912
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
LIFECELL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------------ -------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995. . . . . . . . . . 264,500 $ 5,496,793 -- $ -- 4,403,658 $ 4,404
Stock options exercised . . . . . . . . . . . -- -- -- -- 6,062 6
Warrants exercised. . . . . . . . . . . . . . -- -- -- -- 339,066 339
Expiration of warrants. . . . . . . . . . . . -- -- -- -- -- --
Conversion of preferred stock . . . . . . . . (4,500) (90,000) -- -- 30,104 30
Common stock issued as dividends
on Series A preferred stock . . . . . . . . -- (415,920) -- -- 121,054 121
Earned portion of restricted stock. . . . . . -- -- -- -- -- --
Stock options issued for services . . . . . . -- -- -- -- -- --
Series B preferred stock and common
stock warrants issued for cash. . . . . . . -- -- 124,157 124 -- --
Dividends accrued on preferred stock. . . . . -- 300,600 -- 2 -- --
Net Loss. . . . . . . . . . . . . . . . . . . -- -- -- -- -- --
---------- ------------ ---------- -------- ---------- -------
Balance at December 31, 1996. . . . . . . . . . 260,000 5,291,473 124,157 126 4,899,944 4,900
Stock options exercised . . . . . . . . . . . -- -- -- -- 47,987 48
Warrants exercised. . . . . . . . . . . . . . -- -- -- -- 76,813 77
Expiration of warrants. . . . . . . . . . . . -- -- -- -- -- --
Redemption of Series A preferred stock. . . . (260,000) (5,200,000) -- -- 1,739,128 1,739
Conversion of Series B preferred stock. . . . -- -- (6,688) (7) 215,729 216
Common stock and cash issued as dividends
on Series A preferred stock . . . . . . . . -- (195,000) -- -- 33,305 33
Common stock sold in public offering. . . . . -- -- -- -- 4,000,000 4,000
Stock options issued for services . . . . . . -- -- -- -- -- --
Series B preferred stock issued as
dividends on Series B preferred stock . . . -- -- 7,972 6 -- --
Dividends accrued on Series B preferred stock -- 103,527 -- -- -- --
Net Loss. . . . . . . . . . . . . . . . . . . -- -- -- -- -- --
---------- ------------ ---------- -------- ---------- -------
Balance at December 31, 1997. . . . . . . . . . -- -- 125,441 125 11,012,906 11,013
Stock options exercised . . . . . . . . . . . -- -- -- -- 12,550 13
Warrants exercised. . . . . . . . . . . . . . -- -- -- -- 4,965 5
Expiration of warrants. . . . . . . . . . . . -- -- -- -- -- --
Warrants issued to purchase Common Stock. . . -- -- -- -- -- --
Conversion of Series B preferred stock. . . . -- -- (6,357) (6) 205,060 205
Common stock issued for cash, and . . . . . . -- -- -- -- 376,371 376
conversion of license fee
Stock options issued for services . . . . . . -- -- -- -- -- --
Dividends paid on Series B preferred stock. . -- -- -- -- -- --
Dividends accrued on Series B preferred stock -- -- -- -- -- --
Net Loss. . . . . . . . . . . . . . . . . . . . -- -- -- -- -- --
---------- ------------ ---------- -------- ---------- -------
Balance at December 31, 1998. . . . . . . . . . -- $ -- 119,084 $ 119 11,611,852 $11,612
</TABLE>
(continued)
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
LIFECELL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY-(CONTINUED)
UNEARNED
PORTION OF
WARRANTS TO PURCHASE RESTRICTED STOCK ADDITIONAL TOTAL
COMMON STOCK COMPENSATION PAID-IN ACCUMULATED
------------------------
SHARES AMOUNT AND WARRANTS CAPITAL DEFICIT
------------ ---------- ------------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995. . . . . . . . . . 574,066 $ 226,560 $ (19,906) $21,160,808 $(24,774,753)
Stock options exercised . . . . . . . . . . . -- -- -- 17,274 --
Warrants exercised. . . . . . . . . . . . . . (339,066) (104,300) -- 1,155,617 --
Expiration of warrants. . . . . . . . . . . . (15,000) (6,000) -- 6,000 --
Conversion of preferred stock . . . . . . . . -- -- -- 89,970 --
Common stock issued as dividends
on Series A preferred stock . . . . . . . . -- -- -- 409,700 --
Earned portion of restricted stock. . . . . . -- -- 19,906 -- --
Stock options issued for services . . . . . . -- -- -- 150,000 --
Series B preferred stock and common
stock warrants issued for cash. . . . . . . 3,158,264 306,958 -- 10,653,087 --
Dividends accrued on preferred stock. . . . . -- -- -- 145,865 (446,467)
Net Loss. . . . . . . . . . . . . . . . . . . -- -- -- -- (4,089,714)
------------ ---------- ------------------ ------------ -------------
Balance at December 31, 1996. . . . . . . . . . 3,378,264 423,218 -- 33,788,321 (29,310,934)
Stock options exercised . . . . . . . . . . . -- -- -- 128,719 --
Warrants exercised. . . . . . . . . . . . . . (89,786) (123,738) -- 432,527 --
Expiration of warrants. . . . . . . . . . . . (125,000) -- -- -- --
Redemption of Series A preferred stock . . . -- -- -- 5,198,261 --
Conversion of Series B preferred stock. . . . -- -- -- (209) --
Common stock and cash issued as dividends
on Series A preferred stock . . . . . . . . -- -- -- 129,919 --
Common stock sold in public offering. . . . . -- -- -- 16,018,766 --
Stock options issued for services . . . . . . -- -- -- 12,834 --
Series B preferred stock issued as
dividends on Series B preferred stock . . . -- -- -- 651,327 (669,749)
Dividends accrued on Series B preferred stock -- -- -- -- (292,162)
Net Loss. . . . . . . . . . . . . . . . . . . -- -- -- -- (6,138,635)
------------ ---------- ------------------ ------------ -------------
Balance at December 31, 1997. . . . . . . . . . 3,163,478 299,480 -- 56,360,465 (36,411,480)
Stock options exercised . . . . . . . . . . . -- -- -- 43,416 --
Warrants exercised. . . . . . . . . . . . . . (11,290) (1,136) -- 1,125 --
Expiration of warrants. . . . . . . . . . . . (20,000) -- -- -- --
Warrants issued to purchase common stock. . . 50,000 -- -- -- --
Conversion of Series B preferred stock. . . . -- -- -- (199) --
Common stock issued for cash, and
conversion of license fee . . . . . . . . . -- -- -- 1,999,929 --
Stock options issued for services . . . . . . -- -- -- 21,819 --
Dividends paid on Series B preferred stock. . -- -- -- -- (542,998)
Dividends accrued on Series B preferred stock -- -- -- -- (180,200)
Net Loss. . . . . . . . . . . . . . . . . . . -- -- -- -- (7,341,314)
------------ ---------- ------------------ ------------ -------------
Balance at December 31, 1998. . . . . . . . . . 3,182,188 $ 298,344 $ -- $58,426,555 $(44,475,992)
STOCKHOLDERS'
EQUITY
---------------
<S> <C>
Balance at December 31, 1995. . . . . . . . . . $ 2,093,906
Stock options exercised . . . . . . . . . . . 17,280
Warrants exercised. . . . . . . . . . . . . . 1,051,656
Expiration of warrants. . . . . . . . . . . . --
Conversion of preferred stock . . . . . . . . --
Common stock issued as dividends
on Series A preferred stock . . . . . . . . (6,099)
Earned portion of restricted stock. . . . . . 19,906
Stock options issued for services . . . . . . 150,000
Series B preferred stock and common
stock warrants issued for cash. . . . . . . 10,960,169
Dividends accrued on preferred stock. . . . . --
Net Loss. . . . . . . . . . . . . . . . . . . (4,089,714)
---------------
Balance at December 31, 1996. . . . . . . . . . 10,197,104
Stock options exercised . . . . . . . . . . . 128,767
Warrants exercised. . . . . . . . . . . . . . 308,866
Expiration of warrants. . . . . . . . . . . . --
Redemption of Series A preferred stock . . . --
Conversion of Series B preferred stock. . . . --
Common stock and cash issued as dividends
on Series A preferred stock . . . . . . . . (65,048)
Common stock sold in public offering. . . . . 16,022,766
Stock options issued for services . . . . . . 12,834
Series B preferred stock issued as
dividends on Series B preferred stock . . . (18,416)
Dividends accrued on Series B preferred stock (188,635)
Net Loss. . . . . . . . . . . . . . . . . . . (6,138,635)
---------------
Balance at December 31, 1997. . . . . . . . . . 20,259,603
Stock options exercised . . . . . . . . . . . 43,429
Warrants exercised. . . . . . . . . . . . . . (6)
Expiration of warrants. . . . . . . . . . . . --
Warrants issued to purchase common stock. . . --
Conversion of Series B preferred stock. . . . --
Common stock issued for cash, and
conversion of license fee . . . . . . . . . 2,000,305
Stock options issued for services . . . . . . 21,819
Dividends paid on Series B preferred stock. . (542,998)
Dividends accrued on Series B preferred stock (180,200)
Net Loss. . . . . . . . . . . . . . . . . . . (7,341,314)
---------------
Balance at December 31, 1998. . . . . . . . . . $ 14,260,638
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
LIFECELL CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . $(4,089,714) $(6,138,635) $ (7,341,314)
Adjustments to reconcile net loss to net cash used in
operating activities -
Depreciation and amortization. . . . . . . . . . . . . 229,237 225,092 495,523
Stock and warrant compensation expense . . . . . . . . 169,906 12,834 21,819
Change in assets and liabilities -
Increase in accounts and other receivables . . . . . . (185,330) (659,065) (288,016)
Increase in inventories. . . . . . . . . . . . . . . . (488,319) (96,576) (812,625)
Increase in prepayments and other. . . . . . . . . . . (942) (45,446) (109,344)
Increase in accounts payable and accrued
liabilities. . . . . . . . . . . . . . . . . . . . . 450,988 1,282,357 253,384
(Decrease) in deferred revenues. . . . . . . . . . . . (40,210) (79,273) (59,519)
------------ ------------ -------------
Total adjustments. . . . . . . . . . . . . . . . . . . . . 135,330 639,923 (498,778)
------------ ------------ -------------
Net cash used in operating activities. . . . . . . . (3,954,384) (5,498,712) (7,840,092)
------------ ------------ -------------
Cash Flows from Investing Activities
Capital expenditures . . . . . . . . . . . . . . . . . . (278,673) (597,685) (831,982)
Intangible assets. . . . . . . . . . . . . . . . . . . . (57,032) (59,129) (83,524)
Purchases of short-term investments. . . . . . . . . . . -- -- (4,000,745)
------------ ------------ -------------
Net cash used in investing activities. . . . . . . . (335,705) (656,814) (4,916,251)
------------ ------------ -------------
Cash Flows from Financing Activities
Proceeds from issuance of stock and exercise of warrants 12,029,105 16,460,399 543,730
Proceeds from issuance of notes payable. . . . . . . . . 370,000 -- --
Dividends paid . . . . . . . . . . . . . . . . . . . . . (6,098) (272,097) (542,998)
Payments of notes payable. . . . . . . . . . . . . . . . (370,000) -- --
------------ ------------ -------------
Net cash provided by financing activities. . . . . . 12,023,007 16,188,302 732
------------ ------------ -------------
Net Increase (Decrease) in Cash and Cash Equivalents . . . 7,732,918 10,032,776 (12,755,611)
Cash and Cash Equivalents at Beginning of Year . . . . . . 3,015,332 10,748,250 20,781,026
------------ ------------ -------------
Cash and Cash Equivalents at End of Year . . . . . . . . . $10,748,250 $20,781,026 $ 8,025,415
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for interest . . . . . . . . . $ 13,766 $ 4,583 $ 1,769
Supplemental Schedule of Noncash Financing Activities:
Common Stock issued as payment of dividends. . . . . . . $ 415,920 $ 195,000 $ --
Series B Preferred stock issued as payment of dividends. $ -- $ 797,200 $ --
Common Stock issued in exchange for deferred credit. . . $ -- $ -- $ 1,500,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION:
LifeCell Corporation, a Delaware corporation ("LifeCell" or "the Company"),
is a bioengineering company engaged in the development and commercialization of
tissue regeneration and cell preservation products. The Company was
incorporated on January 6, 1992 for the purpose of merging with its predecessor
entity, which was formed in 1986. LifeCell began commercial sales of its first
product, AlloDerm acellular dermal graft, during 1994. The future operating
results of the Company will be principally dependent on the market acceptance of
its current product, development of and market acceptance of future products,
competition from other products or technologies, protection of the Company's
proprietary technology, and access to funding as required. Accordingly, there
can be no assurance of the Company's future success. See "Business-Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" elsewhere herein.
2. ACCOUNTING POLICIES:
Cash and Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Investments
with longer maturities that the Company intends to hold to maturity are
classified as either current or non-current assets based on the maturity date of
the security. As of December 31, 1997 and 1998, the Company held $20,427,627
and $11,734,522, respectively, of interest-bearing money market accounts and
A1/P1 commercial paper which were classified as "held to maturity" securities.
The carrying basis of these investments approximated fair value and amortized
cost.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out (FIFO) basis.
Furniture and Equipment
Furniture and equipment are stated at cost. Maintenance and repairs that
do not improve or extend the life of the assets are expensed as incurred.
Expenditures for renewals and improvements are capitalized. The cost of assets
retired and the related accumulated depreciation are removed from the accounts
and any gain or loss is included in the results of operations. Depreciation of
furniture and equipment is provided on the straight-line method based on the
estimated useful lives of the assets of five years. Leasehold improvements are
depreciated over the life of the lease.
Intangible Assets
Intangible assets primarily consist of the costs of obtaining patents for
the proprietary technology owned by or licensed to the Company. These costs are
being amortized over the lesser of the legal (generally 17 years) or the
estimated economic life of the patent. Accumulated amortization at December 31,
1997 and 1998, amounted to $66,673 and $18,660, respectively.
Allowance for Doubtful Accounts
The Company provides an allowance based upon the estimated collectibility
of its accounts receivable. The balance of the allowance at December 31, 1997
and 1998, was $83,690 and $5,915, respectively.
Revenue Recognition
Product sales are recognized as revenue when the product is shipped to fill
customer orders. Revenues from research funded by others are recognized as
the work is performed unless the Company has continuing performance obligations,
in which case revenue is recognized upon the satisfaction of such obligations.
Revenue received, but not yet earned, is classified as deferred revenue.
F-7
<PAGE>
Research and Development Expense
Research and development costs are expensed when incurred. The Company
performs research funded by others, as well as its own independent proprietary
research, development and clinical testing of its products.
Sales and Marketing Expense
Sales and marketing costs include salaries, commissions, advertising and
promotional costs related to the sale of the Company's products. Advertising
costs are expensed as incurred. The cost of promotional activities, including
free goods, product samples and promotional allowances, are expensed as
incurred.
Loss Per Common Share
Loss per Common share has been computed by dividing net loss, which has
been increased for periodic accretion and imputed and stated dividends on
outstanding Preferred Stock and the discount offered on warrant exercises
induced during 1996, by the weighted average number of shares of Common Stock
outstanding during each period. In all applicable years, all Common Stock
equivalents, including the Series A Preferred Stock and the Series B Preferred
Stock, were antidilutive and, accordingly, were not included in the computation.
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," and all prior periods have been
retroactively adjusted to conform to this statement. The implementation of
Statement 128 had no effect on the Company's presentation of earnings per share
due to the antidilutive nature of all of the Company's Common Stock equivalents.
Basic loss per Common share was calculated as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net Loss. . . . . . . . . . . . . . . . . . . . . . . . $(4,089,714) $(6,138,635) $(7,341,314)
Less: Preferred dividends, accretion of preferred stock
and warrant exercises . . . . . . . . . . . . . . . . (1,071,035) (961,911) (723,198)
------------ ------------ ------------
Net Loss available to common shareholders-basic . . . . $(5,160,749) $(7,100,546) $(8,064,512)
============ ============ ============
Weighted average shares outstanding-basic . . . . . . . 4,542,519 6,820,122 11,228,912
============ ============ ============
Loss per Common share-basic . . . . . . . . . . . . . . $ (1.14) $ (1.04) $ (0.72)
============ ============ ============
</TABLE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. INVENTORIES:
Inventories consist of products in various stages produced for sale and
includes the costs of raw materials, labor, and overhead. A summary of
inventories is as follows:
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Raw materials used in production $428,406 $ 723,921
Work-in-process. . . . . . . . . 228,071 423,839
Finished goods . . . . . . . . . 279,921 601,263
-------- ----------
Total inventories. . . . . . . $936,398 $1,749,023
======== ==========
</TABLE>
F-8
<PAGE>
4. FURNITURE AND EQUIPMENT:
A summary of furniture and equipment is as follows:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Office furniture and fixtures . . . . . . $ 120,548 $ 709,412
Machinery and equipment . . . . . . . . . 1,748,956 1,853,164
Leasehold improvements. . . . . . . . . . 334,282 465,924
------------ ------------
2,203,786 3,028,500
Accumulated depreciation and amortization (1,339,728) (1,640,161)
------------ ------------
Net furniture and equipment . . . . . . $ 864,058 $ 1,388,339
============ ============
</TABLE>
5. ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Employee compensation and benefits. . . . $ 399,498 $ 403,633
Severance expense . . . . . . . . . . . . -- 608,789
Operating expenses and other. . . . . . . 468,670 1,052,701
Litigation costs. . . . . . . . . . . . . 374,635 --
Public offering costs . . . . . . . . . . 313,280 --
---------- ----------
Total accrued liabilities . . . . . . . $1,556,083 $2,065,123
========== ==========
</TABLE>
6. CAPITAL STOCK:
Series A Preferred Stock
During November 1994, the Company issued 264,500 shares of Series A
Convertible Preferred Stock (Series A Preferred Stock) and warrants to acquire
264,500 shares of Common Stock for gross proceeds of approximately $5.3 million
in a private placement. Each share of Series A Preferred Stock was convertible
at any time at the option of the holder into 6.69 shares of Common Stock.
During 1996, 4,500 shares of Series A Preferred Stock were converted into 30,104
shares of Common Stock.
The Series A Preferred Stock bore dividends at annual rates of $1.20,
$1.60, and $2.00 per share for each of the first, second and third years,
respectively, after the date of original issuance. Dividends were payable in
cash, Common Stock, or any combination of cash and Common Stock at the Company's
discretion. The Series A Preferred Stock had no ordinary voting rights. During
1996, the Company paid 415,920 in dividends on the Series A Preferred Stock by
issuing 121,054 shares of Common Stock. During 1997, the Company paid $195,000
in dividends by issuing 33,305 shares of Common Stock and paying a cash dividend
of $65,000.
The preferred stock was automatically convertible into Common Stock on
November 9, 1997, and could be redeemed sooner by the Company if, after November
9, 1995, the closing bid price of the Company's Common Stock averaged or
exceeded $5.17 per share for 20 consecutive days. Pursuant to such provisions,
during February 1997, the Company called for conversion of all outstanding
shares of Series A Preferred Stock. During March 1997 the Company issued
1,739,128 shares of Common Stock to redeem the Series A Preferred Stock.
Series B Preferred Stock
During November 1996, the Company issued 124,157 shares of Series B
Preferred Stock ("Series B Preferred Stock") and warrants to acquire 2,803,530
shares of Common Stock for gross proceeds of approximately $12.4 million in a
private placement. Each share of Series B Preferred Stock is initially
convertible at any time at the option of the holder into approximately 32.26
shares of Common Stock (3,841,650 shares of Common Stock at December 31, 1998),
subject to adjustment for dilutive issuances of securities. The Series B
Preferred Stock has a liquidation preference of $100 per share, or $11,908,400
as of December 31, 1998, and shares ratably in any residual assets after payment
of such liquidation preference.
F-9
<PAGE>
The Series B Preferred Stock bears cumulative dividends, payable quarterly,
for five years at the greater of the annual rate of $6.00 per share or the rate
of any dividends paid on other series of stock (effectively $10 per share until
the Series A Preferred Stock was redeemed in March 1997). Dividends may be paid
in cash, in additional shares of Series B Preferred Stock based on the stated
value of $100 per share, or any combination of cash and Series B Preferred Stock
at the Company's option. On all matters for which the Company's stockholders
are entitled to vote, each share of Series B Preferred Stock will entitle the
holder to one vote for each share of Common Stock into which the share of Series
B Preferred Stock is then convertible. Additionally, the holders of Series B
Preferred Stock have the right to elect up to two directors to the Board of
Directors of the Company. While the preferred shares are outstanding or any
dividends are owned thereon, the Company may not declare or pay cash dividends
on its Common Stock. During 1998, the Company paid cash dividends on the Series
B Preferred Stock of $542,998. The Company has accrued dividends at December
31, 1998, of $180,200.
The preferred stock will be automatically converted into Common Stock if
(i) the closing price of the Company's Common Stock averages or exceeds $9.30
per share for 30 consecutive trading days.
Common Stock
In December 1997, the Company issued 4,000,000 shares of Common Stock
in a public offering at a price of $4.50 per share. The proceeds of the
offering were approximately $16.7 million before deducting offering costs of
approximately $717,000.
During 1996 and 1997, respectively, the Company issued 121,054 shares and
33,305 shares of Common Stock as payment of accrued dividends on Series A
Preferred Stock. Additionally, during 1996, the Company induced the exercise of
warrants by temporarily lowering exercise prices and issued 339,066 shares of
Common Stock at a weighted average price of $3.10 upon exercise of certain
warrants.
During 1997, the Company issued 74,786 shares of Common Stock upon exercise
of certain warrants and 2,027 shares of Common Stock upon the net exercise of
warrants to acquire 15,000 shares of Common Stock.
During 1998, the Company issued 4,965 shares of Common Stock upon the net
exercise of warrants to acquire 11,290 shares of Common Stock, the Company
issued 65,600 shares of Common Stock to an unaffiliated party in connection with
the settlement of prior litigation and the Company issued 310,771 shares of
Common Stock as a result of the mutually agreed upon termination of the license
and development agreement relating to heart valves.
In 1992, the Company adopted a Restricted Stock Plan and issued 241,372
shares of Common Stock to employees, a director and a consultant of the Company
for $.001 per share. The restricted stock vested over a four year period.
Deferred compensation expense totaling $965,000 was expensed over the vesting
period of the grants. The non-cash charge related to these stock grants was
$20,000 for 1996.
Options
The Company's Amended and Restated 1992 Stock Option Plan, as amended
in 1998 (the "1992 Plan"), provides for the grant of options to purchase up to
2,500,000 shares of Common Stock. Granted options generally become exercisable
over a four year period, 25 percent per year beginning on the first anniversary
of the date of grant. To the extent not exercised, options generally expire on
the tenth anniversary of the date of grant, except for employees who own more
than 10 percent of all the voting shares of the Company, in which event the
expiration date is the fifth anniversary of the date of grant. All options
granted under the plan have exercise prices equal to the fair market value at
the dates of grant.
The Second Amended and Restated 1993 Non-Employee Director Stock Option
Plan, as amended ("Director Plan") was adopted in 1993. A total of 750,000
shares of Common Stock are available for grant under the Director Plan. Upon
amendment of the Director Plan in 1996, options to purchase 50,000 shares of
Common Stock were granted to each then-current non-employee director of the
Company at an exercise price equal to the fair market value of a share of Common
Stock on the date of the Director Plan. Options to purchase 25,000 shares of
Common Stock will be granted to newly elected directors at an exercise price
equal to the fair market value of a share of Common Stock on such election date.
The provisions of the Director Plan provide for an annual grant of an option to
purchase 10,000 shares of Common Stock to each non-employee director. Options
under the Director Plan generally vest one year after date of grant and expire
after 10 years.
F-10
<PAGE>
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
1992 Stock Option Plan Director Plan
------------------------ ------------------------
Weighted Weighted
Avg. Exercise Avg. Exercise
Option Price($) Options Price($)
---------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 . . 454,195 2.63 60,000 8.29
Granted. . . . . . . . . . . . . 558,000 3.80 240,000 3.07
Exercised. . . . . . . . . . . . (1,062) 2.74 (5,000) 2.88
Forfeited. . . . . . . . . . . . (42,313) 3.18 -- --
Reissue -- -- (220,000) 4.14
---------- ---------
Balance at December 31, 1996 . . 968,820 3.28 75,000 4.11
Granted. . . . . . . . . . . . . 131,050 5.21 70,000 5.10
Exercised. . . . . . . . . . . . (47,987) 2.68 -- --
Forfeited. . . . . . . . . . . . (14,563) 3.75 -- --
---------- ---------
Balance at December 31, 1997 . . 1,037,320 3.54 145,000 4.59
Granted. . . . . . . . . . . . . 936,700 5.04 30,000 6.69
Exercised. . . . . . . . . . . . (12,550) 3.49 -- --
Forfeited. . . . . . . . . . . . (141,767) 5.65 -- --
---------- ---------
Balance at December 31, 1998 . . 1,819,703 4.15 175,000 4.95
========== =========
Exercisable at December 31, 1996 255,429 2.61 15,000 8.29
Exercisable at December 31, 1997 484,427 3.02 100,000 4.05
Exercisable at December 31, 1998 701,528 3.21 145,000 4.59
</TABLE>
At December 31, 1998, 617,299 and 570,000 options were available for
future grant under the 1992 Plan and the Director Plan, respectively. The
exercise prices of options outstanding under the 1992 Plan and the Director Plan
at December 31, 1998, range from $0.07 to $6.75 and $2.75 to $11.00,
respectively. The weighted average contractual life of options outstanding at
December 31, 1998, was 8.25 years for the 1992 Plan and 7.7 years for the
Director Plan.
In addition to the amounts set forth in the table above, during 1996 the
Company granted options to purchase 220,000 shares of Common Stock to directors
who resigned upon the closing of the sale of the Series B Preferred Stock in
exchange for options previously granted under the Director Plan. These options
have provisions identical to the options previously granted under the Director
Plan, including exercise prices and vesting periods. The weighted average
exercise price of the options granted was $4.14. The weighted average remaining
contractual life of the grants was 6.8 years as of December 31, 1998. The
Company expensed $150,000, which was the difference between the market price and
the option price on the date of the grant, during 1996 related to this
reissuance.
The Company accounts for its employee stock-based compensation plans under
APB No. 25 and its related interpretations. Accordingly, deferred compensation
expense is recorded for stock options based on the excess of the market value of
the common stock on the date the options were granted over the aggregate
exercise price of the options. This deferred compensation is amortized over the
vesting period of each option. As the exercise price of options granted under
the 1992 Plan and the Director Plan has been equal to or greater than the market
price of the Company's stock on the date of grant, no compensation expense
related to these plans has been recorded. Had compensation expense for its 1992
Plan and Director Plan been determined consistent with SFAS No. 123, the
Company's net loss and loss per share would have been increased to the following
pro forma amounts:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net Loss:
As reported. . . . . . . . . . . . . $(4,089,714) $(6,138,635) $(7,341,314)
Pro forma. . . . . . . . . . . . . . $(5,372,049) $(7,058,879) $(9,103,482)
Loss Per Share (Basic and Diluted):.
As reported. . . . . . . . . . . . . $ (1.14) $ (1.04) $ (0.72)
Pro forma. . . . . . . . . . . . . . $ (1.42) $ (1.18) $ (0.81)
</TABLE>
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
F-11
<PAGE>
Under the provisions of SFAS No. 123, the weighted average fair value of
options granted in 1996, 1997, and 1998 was $3.21, $4.24, and $3.99 per share,
respectively, under the 1992 Plan. The weighted average fair value of options
granted in 1996, 1997, and 1998 was $2.40, $4.08, and $5.33 per share,
respectively, under the Director Plan. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants in 1996, 1997 and
1998, respectively: a weighted average risk-free interest rate of approximately
6 percent for all years; no expected dividend yield during the expected life of
the option; expected lives of 5 years for each grant and expected volatility
between 97 and 113 percent.
The stock options issued to retiring directors in 1996 had a weighted
average fair value of $2.57. The fair values of such options are estimated on
the date of grant using Black-Scholes option price model with the following
assumptions used: a weighted average risk-free interest rate of 6 percent,
expected lives of 3 to 5 years, expected volatility of 99 percent and no
expected dividends.
Warrants
As of December 31, 1998, warrants to acquire a total of 3,182,188 shares of
Common Stock were outstanding as set forth below.
During 1996, the Company issued warrants to acquire 2,803,530 shares of
Common Stock in conjunction with the sale of the Series B Preferred Stock (the
"1996 Warrants"). The 1996 Warrants are exercisable at an exercise price of
$4.13 per share. The warrants expire on the fifth anniversary of the date of
grant, are callable if the average closing price of the Company's Common Stock
for 30 trading days equals or exceeds three times the then-exercise price, and
allow cashless exercise. The warrants also have provisions for adjustment of
the exercise price and number of shares for below-exercise price issuance of
securities. During 1998, warrants to acquire 4,965 shares of Common Stock were
exercised. As of December 31, 1998, the 1996 warrants to acquire 2,717,454
shares of Common Stock were outstanding.
Additionally, the Company issued warrants to acquire 354,734 shares of
Common Stock to the placement agent for the Series B Preferred Stock ("Agent
Warrant"). The Agent Warrants are exercisable at an exercise price of $4.50 per
share. The warrants expire on the fifth anniversary of the date of grant and
allows cashless exercise. The warrant also has provisions for adjustment of the
exercise price and number of shares for below-exercise price issuance of
securities.
In connection with the sale of the Series A Preferred Stock, the Company
issued warrants to acquire 264,500 shares of Common Stock at exercise prices of
$3.26 per share during the first year and $3.54 per share during the second
year. Additionally, the placement agent was issued a warrant to purchase 90,816
shares of Common Stock at $6.00 per share. A total of 339,066 warrants were
exercised during 1996 through inducement of exercise by lowering the exercise
price to $3.10 per share. The difference between the market price on the date
of inducement and the induced exercise price has been deducted from net income
to determine loss per Common share. A total of 20,000 warrants expired
unexercised.
As of December 31, 1998, additional warrants to acquire 110,000 shares of
Common Stock were outstanding with exercise prices ranging from $2.50 to $8.00.
Such warrants expire during periods ranging from April 5, 2000, to February 1,
2001.
7. EMPLOYEE BENEFIT PLANS:
The Company maintains a retirement savings plan as described in Section
401(k) of the Internal Revenue Code of 1986, as amended. The Company may, at
its discretion, contribute amounts not to exceed each employee's contribution.
During January 1997, February 1998, and February 1999, the Company made total
contributions of $8,187, $13,088, and $21,387 to the plan for a partial matching
of employee contributions during 1996, 1997, and 1998, respectively.
During 1996, the Company established an Employee Stock Purchase Plan to
allow for the purchase of the Company's Common Stock on the open market using
employee and any employer matching contributions. During 1996, 1997, and 1998,
the Company contributed $1,328, $7,631, and $13,661, to this plan, respectively.
F-12
<PAGE>
8. FEDERAL INCOME TAXES:
The Company has not made any income tax payments since inception. As of
December 31, 1998, the Company has a net operating loss (NOL) carryforward for
federal income tax purposes of approximately $40.5 million, subject to the
limitations described below, expiring as follows:
<TABLE>
<CAPTION>
Year Expires
- - ------------
<S> <C>
2001 . . . . . . . . . . . . . . . . $ 500,000
2002 . . . . . . . . . . . . . . . . 1,500,000
2003 . . . . . . . . . . . . . . . . 2,800,000
2004 . . . . . . . . . . . . . . . . 2,200,000
2005 . . . . . . . . . . . . . . . . 1,700,000
2006 . . . . . . . . . . . . . . . . 1,400,000
2007 . . . . . . . . . . . . . . . . 2,400,000
2008 . . . . . . . . . . . . . . . . 3,000,000
2009 . . . . . . . . . . . . . . . . 2,500,000
2010 . . . . . . . . . . . . . . . . 4,000,000
2011 . . . . . . . . . . . . . . . . 4,000,000
2012 . . . . . . . . . . . . . . . . 5,700,000
2013 . . . . . . . . . . . . . . . . 8,800,000
-----------
$40,500,000
-----------
</TABLE>
Additionally, the Company has approximately $395,000 of research and
development tax credit carryforwards which will expire in varying amounts
commencing in 2001. Federal tax laws provide for a limitation on the use of NOL
and tax credit carryforwards following certain ownership changes that could
limit LifeCell's ability to use its NOL and tax credit carryforwards. The sale
of Common Stock in the public offering in December 1997 resulted in an ownership
change for federal income tax purposes. The Company estimates that the amount
of NOL carryforwards and the credits available to offset taxable income at
December 31, 1998, is approximately $14.0 million on a cumulative basis.
Accordingly, if LifeCell generates taxable income in any year in excess of its
then cumulative limitation, the Company may be required to pay federal income
taxes even though it has unexpired NOL carryforwards.
For financial reporting purposes, a valuation allowance of $14,251,000 has
been recorded as of December 31, 1998, to fully offset the deferred tax asset
related to these carryforwards. The principal components of the deferred tax
asset as of December 31, 1997 and 1998, assuming a 34% federal tax rate, are as
follows:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Temporary differences:
Deferred revenue. . . . . . . . . . . . . $ 530,000 $ --
Restricted stock compensation . . . . . . -- --
Uniform capitalization of inventory costs 45,000 70,000
Other items . . . . . . . . . . . . . . . (58,000) 16,000
------------- -------------
Total temporary differences . . . . . . . 517,000 86,000
Federal net operating loss carryforwards. 11,309,000 14,165,000
------------- -------------
Total deferred tax assets. . . . . . . . . . 11,826,000 14,251,000
Less valuation allowance. . . . . . . . . (11,826,000) (14,251,000)
------------- -------------
Net deferred tax asset . . . . . . . . . . . $ -- $ --
------------- -------------
</TABLE>
The net increase in the deferred tax valuation allowance for 1997 and 1998
was $1,929,000, and $2,425,000, respectively. Other than the net operating loss
and tax credit carryforwards, there is no significant difference between the
statutory federal income tax rate and the Company's effective tax rate during
1996, 1997 and 1998.
9. COLLABORATIONS AND CORPORATE ALLIANCES:
Medtronic Collaboration
During March 1994, the Company entered into a license and Development
agreement with Medtronic, Inc. ("Medtronic") to develop jointly the Company's
heart valve products. Pursuant to the agreement, Medtronic paid the Company an
initial $1.5 million license fee. Medtronic funded in part the cost of research
and development under a mutually agreed upon budget, had theexclusive right to
market any resulting commercial products and must pay theCompany royalties on
sales of products covered by the agreement. LifeCell's research and development
funding by Medtronic in 1996, 1997, and 1998 were $546,460, $217,854 and
$59,519. Royalties payable to the Company under the agreement were limited to
an aggregate maximum of $25.0 million. In December 1998 LifeCell and Medtronic
mutually agreed to terminate their early stage license and development agreement
related to heart valves to focus onnear-term opportunities. LifeCell regained
all rights to its cardiovascular technology, which may be applied to its more
advanced program in vascular grafts for bypass procedures. As a result of
terminating the agreement, the $1.5 million up-front licensing fee paid by
Medtronic to LifeCell in 1994 and recorded as a deferred credit, converted into
310,771 shares ofnewly issued LifeCell Common Stock, at the price of $4.83 per
share whichwas determined by the agreement.
F-13
<PAGE>
Other Product Sales Arrangements
The Company has negotiated other distribution or sales Collaboration
arrangements with various parties with exclusive regional or International
territories under each agreement. The agreements generally provide that the
distributor must meet certain performance measures or the agreement may be
terminated by the Company.
10. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is subject to numerous risks and uncertainties and from time to
time may be subject to various claims in the ordinary course of its operations.
The Company maintains insurance coverage for events and in amounts that it deems
appropriate. There can be no assurance that the level of insurance maintained
will be sufficient to cover any claims incurred by the Company or that the type
of claims will be covered by the terms of insurance coverage.
During April 1998, the Company entered into an agreement settling its
pending litigation with Integra LifeSciences Corporation and its affiliate
("Integra") and the Massachusetts Institute of Technology ("MIT"). During
November 1997, Integra and MIT had alleged that the Company infringed two
patents licensed by MIT to Integra (the "Integra Patents"). During December
1997, the Company filed a separate lawsuit against Integra and MIT alleging that
they tortiously interfered with certain of LifeCell's business relationships,
including relationships with investors and potential investors in LifeCell's
recent public offering. The lawsuit also alleged anticompetitive acts and
business disparagement. Under the terms of the settlement agreement, Integra
and MIT agreed not to assert the Integra Patents against current or future
products produced using LifeCell's current technology. LifeCell also obtained
the right to develop and commercialize future products using Integra's
technology through a license to certain of Integra's patents. In June 1998,
LifeCell received proceeds of $500,000 from the sale of the Company's Common
Stock to Integra in connection with the settlement of this litigation. The
selling price, as determined by the settlement agreement, was $7.62 per share.
External Funding for Research
Certain of the Company's research programs have been funded by Small
Business Innovation Research (SBIR) grants and other direct federal government
funding contracts. The grants and contracts generally obligate the company to
perform specified research activities in return for such funding, and the
utilization of funds under the grants is subject to audit by the appropriate
governmental agencies.
License Agreements
The Company has entered into several license agreements, both exclusive
and nonexclusive in conjunction with its business. The Company is required to
pay royalties on net sales of products encompassing the licensed technologies.
For the years ended December 31, 1996, 1997, and 1998, $18,630, $141,539,
and $10,248 of expenses were incurred under these agreements, respectively.
Leases
The Company leases approximately 27,000 square feet for office and
laboratory space and has various other operating leases. The future minimum
lease payments under noncancelable lease terms in excess of one year as of
December 31, 1998, were as follows:
<TABLE>
<CAPTION>
<S> <C>
1999. . . . . . . . . . . . . . . . . . . . . . . . . . 371,194
2000. . . . . . . . . . . . . . . . . . . . . . . . . . 361,008
2001. . . . . . . . . . . . . . . . . . . . . . . . . . 37,636
2002. . . . . . . . . . . . . . . . . . . . . . . . . . --
-------
Total. . . . . . . . . . . . . . . . . . . . . . . . $769,838
========
</TABLE>
F-14
<PAGE>
Employment and Severance Agreements
In 1998, the Company entered into an agreement related to the employment of
its new President and Chief Executive Officer, which provides for a one year
severance agreement of one year of the employee's base salary.During 1998, the
Company entered into various severance arrangements related to the termination
of several executive officers of the Company. Severance expense in the amount
of approximately $680,000 was recognized related to these agreements in 1998.
11. SEGMENT AND MAJOR CUSTOMER DATA
THE COMPANY OPERATES PRINCIPALLY IN ONE BUSINESS SEGMENT - THE SALE OF
ALLODERM. PRODUCT SALES BY GEOGRAPHIC AREA ARE SUMMARIZED AS FOLLOWS:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ---------
<S> <C> <C> <C>
United States. . . . . . . . . . . . . . . . . $1,967,406 $4,401,351 $6,575,206
Other foreign countries. . . . . . . . . . . . 44,799 503,620 669,896
---------- ---------- ----------
TOTAL PRODUCT SALES . . . . . $2,012,205 $4,904,971 $7,245,102
========== ========== ==========
</TABLE>
During 1998, two customers comprised 22.3% and 11.0% of total product
sales. During 1997, two customers comprised 18.8% and 13.8% of total product
sales. During 1996, one customer comprised 19.9% of total product sales.
12. TRANSACTIONS WITH RELATED PARTIES:
As of December 31, 1998, the Company had notes receivable totaling $95,060
from participants, two of whom are directors and officers of the Company, in a
previous restricted stock plan. Such notes represent loans of federal income
tax amounts payable by the individuals as a result of grants under the plan.
13. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following table presents summary unaudited financial data for the years
ended December 31, 1997 and 1998. The Company believes that this information
reflects all adjustments, consisting of only normal recurring items, considered
necessary for a fair presentation of the quarterly financial information
presented. The operating results for any quarterly period are not necessarily
indicative of the results that may be expected for future periods.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
1997
Product Sales . . . . . . . . . . . . . $ 821 $ 1,007 $ 1,410 $ 1,667
Total Revenues. . . . . . . . . . . . . $ 1,111 $ 1,273 $ 1,634 $ 1,962
Gross Margin on Product Sales . . . . . $ 331 $ 487 $ 715 $ 831
Net Loss. . . . . . . . . . . . . . . . $(1,650) $(1,573) $(1,393) $(1,523)
Loss Per Common Share-Basic and Diluted $ (0.41) $ (0.25) $ (0.23) $ (0.20)
1998
Product Sales . . . . . . . . . . . . . $ 1,815 $ 2,003 $ 2,007 $ 1,419
Total Revenues. . . . . . . . . . . . . $ 1,957 $ 2,172 $ 2,220 $ 1,643
Gross Margin on Product Sales . . . . . $ 973 $ 1,298 $ 1,276 $ 860
Net Loss. . . . . . . . . . . . . . . . $(1,802) $(1,530) $(1,316) $(2,696)
Loss Per Common Share-Basic and Diluted $ (0.18) $ (0.15) $ (0.13) $ (0.25)
</TABLE>
F-15
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statements File No. 33-90740 and File No. 333-20093.
ARTHUR ANDERSEN LLP
Houston, Texas
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8025415
<SECURITIES> 4000745
<RECEIVABLES> 1389835
<ALLOWANCES> (5915)
<INVENTORY> 1749023
<CURRENT-ASSETS> 15366673
<PP&E> 3028500
<DEPRECIATION> (1640161)
<TOTAL-ASSETS> 17030699
<CURRENT-LIABILITIES> 2770061
<BONDS> 0
<COMMON> 11612
0
119
<OTHER-SE> 298344
<TOTAL-LIABILITY-AND-EQUITY> 17030699
<SALES> 7245102
<TOTAL-REVENUES> 8855728
<CGS> 2837037
<TOTAL-COSTS> 16197042
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7341314)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7341314)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7341314)
<EPS-PRIMARY> (.72)
<EPS-DILUTED> (.72)
</TABLE>
