SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 1999
Commission file number: 0-19866
CELOX LABORATORIES, INC.
(Name of small business issuer in its charter)
Minnesota 36-3384240
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1311 Helmo Avenue, St. Paul, Minnesota 55128
(Address of principal executive offices)
Issuer's telephone number: (651) 730-1500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. _X_ Yes ___ No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [ ]
The registrant's sales for its most recent fiscal year were $198,142.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing price of the Common Stock on October
31, 1999 as reported on the Over-the-Counter Market, was approximately $616,431.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded from this
number, as such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of October 31, 1999, the registrant had outstanding 2,909,169 shares
of Common Stock.
Transitional Small Business Disclosure Format. ___ Yes _X_ No
Exhibit Index is located on page 18.
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PART I
ITEM 1 - BUSINESS
In fiscal 1995, Celox Corporation changed its name to Celox
Laboratories, Inc. The Company is a cell technology company formed in 1985 that
researches, develops, manufactures, and markets cell biology products that are
used in the propagation of cells derived from mammals, including humans, and
other species. (In fiscal 1993, the Company changed its reporting status from a
development stage enterprise to a regular operating corporation.) These
specialized cell growth products are used primarily in academic, pharmaceutical
and other commercial laboratories to improve the growth, productivity and
quality of cell-derived medical and other biological products such as vaccines,
monoclonal antibodies, interferons, and human growth factor. Since its
inception, the Company has pursued a strategy of developing non-serum based
products for the growth of human and other mammalian cells which management
believes will have significant commercial potential.
In February, 1999 the Company announced the formation of Protide
Pharmaceuticals, Inc., (Protide), a wholly owned subsidiary. Celox owns all of
the four million outstanding shares of Protide. Protide was formed in connection
with the further development of ViaStem(TM) and other clinically related cell
therapy and transfusion medicine products.
FORWARD LOOKING INFORMATION
Information contained in this Form 10-K contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which can be identified by the use of forward-looking terminology such
as "may", "will", "expect", "plan", "anticipate", "estimate" or "continue" or
the negative thereof or other variations thereon or comparable terminology.
There are certain important factors that could cause results to differ
materially from those anticipated by some of these forward-looking statements.
Investors are cautioned that all forward-looking statements involve risks and
uncertainty. The factors, among others, that could cause actual results to
differ materially include the Company's ability to execute its business plan,
uncertainties relating to clinical trials, dependence on third parties and
future capital needs.
BACKGROUND
To date, the Company has focused its efforts on commercial applications
of cell biology -- the science of life processes at the cellular level. Cell
biology involves the study of the molecular, physical, nutritional, and hormonal
needs of cells. The cell is the basic sub-unit of every living system and thus
exerts a significant influence on the functioning of the entire organism. Cells
are complex, having their own power supplies, digestive systems, communication
networks, and centers for producing biological products. The cell holds the key
to solving major health problems such as cancer, Acquired Immune Deficiency
Syndrome ("AIDS"), atherosclerosis, genetic disorders, diabetes, and mental
illness. Having accumulated information concerning cells and cellular functions,
scientists are able to manipulate cells outside the body in their efforts to
address these major health problems.
The development of genetic engineering and the use of mammalian cells
for the production of biological products has advanced cell culturing to new
levels. The manipulation or culturing of cells for production of diagnostic and
therapeutic products is an area of significant commercial growth for
biotechnology companies and pharmaceutical firms. Products currently subject to
research efforts include products to treat and detect AIDS, cancer, growth
disorders, and cardiovascular disease. The medical community now has access to
once unavailable cellular products, such as monoclonal antibodies, interferons,
and human growth factors. As a result, more emphasis is being placed on the
development of cell culturing technology.
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Culturing of mammalian cells, tissues, and bacteria is now a widely
used technique in the biological sciences, from the basic sciences of cell and
molecular biology to the rapidly evolving area of biotechnology. The advent of
growing cells IN VITRO (i.e., in cultures or outside the organism) has permitted
extensive studies of specific human and other mammalian cellular functions.
Isolated cells are being used increasingly in the study of biological phenomena
such as chemical toxicity of therapeutic drugs, cancer cell growth and
regulation, and for the production of cell-derived biological products. The
types of cells that can be grown IN VITRO include muscle, cartilage, liver,
lung, breast, skin, bladder, kidney, pancreatic islet cells, and genetically
altered cells producing biological products.
Recreating IN VIVO (i.e., in the organism) interactions in an IN VITRO
environment requires special nutrients conducive to cell growth. Once the cells
are separated from the complex tissue organization in which they normally
thrive, cell biologists, using a cell growth medium as a base, can optimize the
IN VITRO nutritional, hormonal, and physical factors that promote propagation.
Culturing of human and other mammalian cells requires the use of a
nutrient source of cell growth medium. Typically this growth medium includes a
mixture of 80% to 90% basal medium that consists of amino acids, sugar, salts,
vitamins, and 10% to 20% serum. Serum is derived from the whole blood of humans
and other species and provides growth factors necessary for cells to continue to
divide in culture. Although serum provides various proteins, enzymes, hormones,
trace elements, and undefined regulators for cell growth, accumulated evidence
suggests that many of these components are extraneous and may complicate the
purification of cell-derived medical and biological products. Serum availability
and pricing are volatile and serum can exhibit significant biological
variability, including contaminants, thereby affecting researchers' experimental
results and commercial manufacturers' budgeting and product consistency.
Accordingly, if users are unable to purchase a project's entire serum
requirement from the same lot, they may be required to test the quality of the
serum throughout the duration of the project.
Based on research conducted by the Company and its experience with the
disadvantages of cell growth media containing human serum, fetal calf serum,
horse or other animal serum, the Company developed serum-free supplements that
optimize the growth of a variety of cell types. These supplements contain known
concentrations of identified components that remain constant from production lot
to lot and can eliminate potential contaminants such as viruses and bacteria.
PRODUCTS AND SERVICES
The Company markets over 25 different products. The Company's
proprietary products consist of six different serum-free supplements: TCM(TM),
TM-235(TM), TCH(TM), Nephrigen(TM), HemaPro(TM) and VaxMax(TM) and two cell
freezing solutions, Cellvation(TM) and a newly introduced product, pZerve(TM).
VaxMax(TM), introduced in September of 1993, was developed specifically for use
in the production of veterinary vaccines. Nephrigen(TM) was introduced in fiscal
1998 and is a serum-free growth medium developed specifically for the culturing
of Human Embryonic Kidney (293) cells. As part of the Nephrigen(TM) system, the
Company also introduced a non-enzymatic dissociation solution that is used
instead of an enzyme such as trypsin. HemaPro(TM) was also introduced in fiscal
1998 and is a low protein, serum-free medium for clonogenic assays or EX VIVO
expansion of human progenitor cells. The Company intends to obtain IN VITRO
diagnostic status for HemaPro(TM). pZerve(TM) was introduced in 1999 and is used
primarily for cryopreserving human cells. pZerve(TM) is used as a research
product only, it is not for human use. An additional proposed clinical product,
ViaStem(TM), has completed preclinical testing. This product was developed to
improve the preservation of critical cells (e.g., stem cells), which are
required for bone marrow transplantation. Additional uses for ViaStem(TM)
include cryopreservation of cord blood and platelets.
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SERUM-FREE SUPPLEMENTS
The Company has developed six technically advanced serum-free
supplements to address the inadequacies of serum-based media. The Company's
defined basal media supplements, TCM(TM), TM-235(TM), TCH(TM), Nephrigen(TM),
HemaPro(TM) and VaxMax(TM) are fortified, low-protein, multipurpose serum-free
supplements formulated for the long-term culturing of a wide variety of cell
types. These supplements contain chemically-defined, growth-promoting factors
that enhance the growth, productivity, and purity of highly specialized cells
that secrete biological products such as monoclonal antibodies, interferons,
human growth factor, insulin, tissue, plasminogen, enzymes, and vaccines. These
supplements also improve the biochemical analysis of nutrient and hormonal
effects on the differentiation and function of cells.
TCM(TM) was formulated as a general serum replacement for a variety of
cell types from species including rodent, dog, cat, rabbit, pig, monkey, and
human. This product was designed for cost-effective use. TCM(TM) is not highly
specific to a single cell type and is therefore effective in many research and
manufacturing situations. TCM(TM) has a Drug Master File classification from the
Food and Drug Administration (FDA), which makes it suitable for the
manufacturing of biologicals (e.g., vaccines, monoclonal antibodies, etc.).
TM-235(TM) is similar to TCM(TM), but contains additional proprietary
components. This product was developed for cell lines that require more than 10%
fetal calf serum and is slightly more expensive than TCM(TM). A Drug Master File
(DMF) is being prepared for TM-235(TM).
TCH(TM) was developed specifically for human hybridomas (cell secreting
monoclonal antibodies) and other human cells of lymphoid origin (originating in
the lymphatic or immune system). TCH(TM) contains no animal proteins and is
compatible for use in the production of human biological products. A Drug Master
File (DMF) is being prepared for TCH(TM).
Nephrigen(TM) was developed specifically for the culturing of Human
Embryonic Kidney (293) cells. It is a cost-effective, low protein medium which
provides the optimum growth conditions for high density, long-term culturing.
Human embryonic kidney cells are frequently used for human adenovirus
production, drug screening, toxicity testing and the production of recombinant
proteins. Nephrigen(TM) is sold in a kit format with 2 x 500ml bottles of basal
media along with a 20ml supplement. As part of the Nephrigen(TM) system, a
non-enzymatic dissociation solution was introduced to be used instead of an
enzyme such as trypsin.
HemaPro(TM) was developed as a serum-free medium for use in clonogenic
assays OR EX Vivo expansion of human progenitor cells. HemaPro(TM) does not
contain erythropoietin, recombinant growth factors, human serum or fetal bovine
serum, thereby making it effective in studying stimulatory factors under
controlled conditions.
VaxMax(TM) is a cost effective serum reducer specifically designed for
use by manufacturers of veterinary vaccines. It was formulated to provide
optimal cell growth and virus production. VaxMax(TM) has been used by veterinary
vaccine manufacturers to enhance production while lowering overall costs.
The Company sells TCM(TM), TM-235(TM), TCH(TM), Nephrigen(TM),
HemaPro(TM) and VaxMax(TM) at prices competitive with serum and other serum-free
supplements. (See "Business -- Competition.") The reliability and rigorous
quality control involved in manufacturing TCM(TM), TM-235(TM), TCH(TM),
Nephrigen(TM), HemaPro(TM) and VaxMax(TM) allow researchers to purchase as
little as a one-week supply of supplements rather than enough for an entire
project as is often necessary with serum-based media. The consistency of
TCM(TM), TM-235(TM), TCH(TM), Nephrigen(TM), HemaPro(TM) and VaxMax(TM) reduces
the need to qualify the supplements prior to each use. TCM(TM), TM-235(TM),
TCH(TM), Nephrigen(TM) and HemaPro(TM) are concentrated to a level of fifty
times in small-volume packages for easier shipment and storage than comparable
amounts of serum, which are typically sold in non-concentrated form. VaxMax(TM)
is concentrated to a level of one hundred times.
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CELLVATION(TM)
Cellvation(TM) is a cryopreservative, or cell freezing medium, used in
the storage of cells at ultra-low temperatures. Cellvation(TM) does not contain
any type of serum or dimethyl sulfoxide, both of which have traditionally been
used in cell freezing. Although the Company believes Cellvation(TM) is ideal for
cells grown without serum, it may also be used for cells cultivated in serum.
PZERVE(TM)
pZerve(TM) was introduced in 1999 and is used primarily for
cryopreserving human cells. pZerve(TM) also does not contain any type of serum
or dimethyl sulfoxide. pZerve(TM) is used as a research product only, it is not
for human use.
VIASTEM(TM)
ViaStem(TM) is a cell solution that was developed as a new technology
for ultra-low temperature preservation of critical cells like those required for
bone marrow transplantations. The Company believes that ViaStem(TM) has the
potential of preventing certain complications associated with current
procedures, such as toxicity and nausea. Preliminary data indicates that
ViaStem(TM) increases the viability and preservation of critical cells. Other
potential applications for ViaStem(TM) include preservation of umbilical cord
cells, platelets, and red blood cells. ViaStem(TM) has completed pre-clinical
testing and the Company anticipates beginning human trials during fiscal 2000.
BASAL MEDIA FORMULATIONS
The Company manufactures eleven products based on standard published
formulations. Liquid basal media contains ultra-filtered water, essential and
non-essential amino acids, vitamins, and inorganic and organic components.
Generally, the basal medium plus a serum-free supplement provides the complete
growth medium.
BUFFERED SALINE SOLUTIONS
The Company manufactures six standard formulations, of which one
product is available at standard concentration levels of one and ten times.
Applications include cell rinsing, short-term storage, and washing solution for
diagnostic tests.
MARKETS AND MARKETING
The Company sells its products primarily to academic, pharmaceutical,
and other commercial laboratories. In addition, the Company markets its products
through distributors, direct mail, the Internet, new product releases, and
advertisements in trade publications and scientific journals. The Company has
distribution agreements for the sale of its products worldwide including the
USA, Europe, Canada, Japan, Latin America, and the Pacific Rim.
The Company has a non-exclusive world-wide distribution agreement with
ICN Pharmaceuticals, Inc. (NYSE:ICN), Costa Mesa, CA. Under the agreement, ICN
is marketing Celox' TCM(TM), TCH(TM), TM-235(TM) serum replacement products as
well as Cellvation(TM). The Company has also entered into an agreement with ICN
to custom manufacture certain of the Company's basal media and balanced salt
solutions to ICN for worldwide distribution. ICN manufactures and markets a
broad range of prescription and over-the-counter pharmaceuticals, medical
diagnostic products and biotechnology research products in North and Latin
America, Eastern and Western Europe and the Pacific Rim countries.
In 1997, the Company began providing its proprietary products to Sigma
Chemical Company (NASDAQ:SIAL), St. Louis, MO. under a private label
distribution agreement.
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In 1997, the Company entered into a non-exclusive distribution
agreement with TaKaRa Shuzo Co., Ltd., Biomedical Group, Kyoto, Japan. Under the
agreement, TaKaRa will initially market Celox' proprietary product
Cellvation(TM). TaKaRa's Biomedical Group leads the industry in several areas
owing to the international scope of its research operations which span from the
People's Republic of China to North America and Europe. TaKaRa will market
Cellvation(TM) in Japan, Taiwan, Korea and People's Republic of China.
The Company also has distribution of its products in Japan through
Funakoshi Co., LTD, a well established Japanese distributor.
YEAR 2000 ISSUES
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
Year 2000. The Year 2000 issue affects virtually all companies and
organizations.
Management has been evaluating its reliance on both internal and
external systems with respect to the Year 2000 issues. The Company has
determined that some of the older financial reporting systems software
recognizes the use of "00" to represent the year 1900 rather than 2000. In order
to correct these problems, it will be necessary for the Company to purchase
commercially available upgrades of the current systems.
The Company determined that certain of its computer hardware was not
year 2000 compliant. As a result, in fiscal 1999, capital expenditures included
replacement computers. The Company does not anticipate any disruption to its
internal manufacturing processes. However, there can be no assurance that all
Company vendors will be Year 2000 compliant. The Company intends to utilize a
select number of vendors in order to minimize this potential problem.
At this time, Year 2000 issues are not expected to materially affect
the Company's products, services or competitive condition, based on the current
evaluations. The anticipated cost to the Company to become Year 2000 compliant
is $20,000 or less.
CUSTOMERS
The Company markets its products to academic, pharmaceutical,
biotechnology and diagnostic companies. The Company's two largest customers
accounted for 23% of the Company's revenues during fiscal 1999. One of these
customers accounted for more than 10% of the Company's revenue for the past
fiscal year. The loss of either one would have a material adverse, short-term
effect on the Company. (See Note 6 of Notes to Financial Statements.)
RESEARCH AND DEVELOPMENT
Although the Company has completed the research and development of its
current products, the Company intends to refine these products, as necessary, to
meet customer requirements and to take advantage of technological changes.
Additionally, the Company intends to continue to identify factors that affect
the growth, differentiation, and replication of cells, particularly human cells.
In fiscal 1999 the Company introduced a new product--pZerve(TM). This
product is primarily used for cryopreserving human cells. It is intended to be
used as a research product only, it is not for human use.
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For the years ended August 31, 1998 and 1999, the Company spent approximately
$104,309 and $167,061, respectively, on research and development. During fiscal
year 1999, the Company's primary research and development efforts continued to
focus on the completion of pre-clinical testing of ViaStem(TM)and development of
other products utilized in stem cell therapy. The pre-clinical testing of
ViaStem(TM) was accomplished at the University of Minnesota. Research and
developmental expenses will fluctuate based on the status of pre-clinical and
clinical trials for ViaStem(TM).
MANUFACTURING
The manufacture of the Company's products requires sterilization of
glassware and packaging, assembly of the chemical components, mixing, sterile
filtration, aseptic packaging of the final product, and quality control testing.
The assembly, mixing, filtration, and packaging take approximately two to three
days, after which the supplements are quarantined for a minimum of three weeks
until quality control testing has been completed. The Company tests its
supplements for cell growth potential, purity, sterility, uniformity, and
integrity.
The materials used in the Company's products are available from many
sources, although the Company utilizes a select group of vendors to ensure
consistency. However, due to industry consolidation, there can be no assurance
that the Company will continue to receive the material necessary for the
production of its proprietary products that meets the specifications of the
Company, USDA and the FDA, in the quantities needed or at competitive prices.
The manufacturing process requires biological, chemical, and packaging supplies
and equipment that are generally available from several suppliers.
The Company packages and ships its products from its facility in St.
Paul, Minnesota. The Company generally ships within 24 hours after receiving a
purchase order. (See "Item 2 - Properties" for further discussion of Company
facilities.)
COMPETITION
Competition in the biotechnology industry is intense and comes form
independent cell biology companies, major pharmaceutical firms, and
university-affiliated entities both in the United States and in foreign
countries. Certain of these companies have extensive experience in the
biotechnology industry and most have substantially greater financial, technical,
marketing, and management resources than the Company. A significant amount of
cell biology activity is carried out at universities and other non-profit
research organizations. These entities are becoming increasingly aware of the
commercial value of their findings and are becoming more active in seeking
protection for their technology and products. These institutions also compete
with the Company in recruiting highly trained personnel.
The Company's defined serum-free supplements compete with serum and
serum-free growth media products from a number of companies, including
Gibco/Life Technologies, Inc.; Irvine Scientific, Inc.; and Boehringer Mannheim
Corporation. The principal competitive factors for these products are
performance, price, reliability, quality and packaging. The Company's products
compete on the basis of all five factors, although management believes its
principal competitive advantages are quality and performance. The Company's
defined basal media supplements also compete with serum products, which have
traditionally dominated the market for cell growth media. Manufacturers of these
products include Gibco/Life Technologies, Inc.; J.R.H. Biosciences, Inc.;
Hyclone Laboratories, Inc.; and Sigma Chemical Company. The Company believes
that its products have a competitive advantage over serum-based products on the
basis of performance, packaging, and price stability. Many of the same
manufacturers also produce products that compete with the Company's basal media
formulations, buffered saline solutions, and other cell biology reagents.
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TRADE SECRETS AND PROPRIETARY TECHNOLOGY
The Company's ability to compete effectively with other producers may
be materially dependent on the proprietary nature of its technologies. The
Company pursues a policy of protecting its technological position through the
use of trade secrets. Because patenting requires disclosure of technology to the
public, and because the nature of certain technology renders policing of
infringement difficult, the Company believes its proprietary technology is
generally better protected by maintaining strict security and secrecy than by
obtaining patents. There can be no assurance, however, that competitors will not
independently develop substantially the equivalent information or techniques, or
otherwise gain access to the Company's know-how, such as through the employment
of scientific personnel who previously worked for the Company.
To protect its trade secrets, the Company marks all of its proprietary
documents confidential, distributes confidential information on a "need-to-know"
basis only and uses employee confidentiality agreements. All of the Company's
employees have signed, and future employees and consultants will sign,
confidentiality agreements under which they agree not to use or disclose the
Company's proprietary information. The Company intends to vigorously enforce
those agreements. There can be no assurance, however, that these confidentiality
agreements will be honored or that others will not independently develop similar
technology. To the extent that such consultants apply technical information
independently developed by them to projects undertaken by the Company, disputes
may arise as to the proprietary rights to such information. The Company will
also require that vendors, licensees, and joint venturers sign confidentiality
agreements whenever appropriate.
The Company believes that it owns or has the right to use all
proprietary technology necessary to license, manufacture, and market its current
cell biology products. It is possible that with respect to other applications of
the Company's technology still being evaluated, licenses under patents held by
others may be required and there can be no assurance that, if required, such
licenses will be available to the Company on acceptable terms.
VIASTEM(TM) PATENTS
In March 1995, the Company filed a patent application for ViaStem(TM)
in the U.S. Patent and Trademark Office. The Company received the U.S. Patent in
early December 1996. This patent provides protection of the Company's
ViaStem(TM) technology through March of 2015. A second U.S. Patent was received
in August, 1998. This second patent broadened the patented uses of ViaStem(TM)
in bone marrow transplantation and related therapies. The Company has also filed
the documents needed for an International Patent Application as required by the
Patent Cooperation Treaty. In October, 1998 the Company received notice from the
New Zealand and Australian Patent Office that a patent on ViaStem(TM) had been
granted by each of the respective countries. The Company received notice from
the Russian Patent Office in April, 1999 that a patent for ViaStem(TM) had been
granted. Initial reports from other countries that have reviewed the
international patent application have been positive. Due to the unique nature of
ViaStem(TM), the Company pursued the patent process for this product.
GOVERNMENT REGULATIONS
Regulation by governmental authorities in the United States and other
countries is a significant factor affecting the success of products resulting
from biotechnological research. The Company is required to conform its
operations to the FDA's "Good Manufacturing Practice" regulations. The FDA
requires pre-manufacturing approval for certain new medical devices, drugs, or
vaccines. This approval generally requires an unequivocal demonstration of the
safety and efficacy of a new device, drug, or vaccine. The FDA approval process
is generally costly and time-consuming. Because the Company does not currently
produce or sell medical devices, drugs, or vaccines, it is not directly affected
by these regulations. However, if the Company's customers incorporate the
Company's products into products that are medical devices, drugs, or vaccines,
such customers will generally be required to obtain such approvals.
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During the second quarter of 1994, the Company received its first Drug
Master File Classification from the FDA for the Company's TCM(TM) product. This
classification will expedite the FDA approval process for customers who want to
use the Company's TCM(TM) product in the manufacture of drugs or drug substances
for human use. The Company is in the process of gaining this status for its
other proprietary products.
Although the Company's present products are not subject to regulations
by the FDA or other governmental agencies, it is probable that future products
such as ViaStem(TM) may be subject to such regulations. To the extent that the
Company is dependent upon new product development, delays in obtaining any
required FDA or other governmental approval may adversely affect the Company.
The Company applied to the FDA for reclassification as a medical device
company so that the Company's products may be used in wider commercial
applications, particularly for the human health care market. In March 1993, the
Company received this registration.
Compliance with federal, state, and local laws, including environmental
laws, does not require any material expenditures by the Company, and the Company
does not believe that such laws have any material impact on the Company's
operations of financial conditions.
EMPLOYEES
As of October 31, 1999, the Company employed a total of four (4)
persons on a full-time basis, of whom two were involved in technical capacities
and two in administrative functions, as well as part time and temporary
employees. During the next 12 months, the Company anticipates hiring additional
business development representatives, technical personnel, and other employees,
as needed, based on growth and the introduction of new products. The Company
also intends to continue to utilize temporary employees, as needed, in
administrative and general laboratory positions.
ITEM 2 - PROPERTIES
The Company's executive offices and laboratories are located in a new
facility in St. Paul, Minnesota. The Company leases approximately 9,500 square
feet of office, laboratory, and warehouse space in this facility. The Company
moved into the St. Paul facility during March 1997.
ITEM 3 - LEGAL PROCEEDINGS
The Company is not presently involved in any material legal
proceedings.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. MARKET INFORMATION
The Company's Common Stock had been traded on the National Association
of Securities Dealers Automated Quotation System since March 9, 1992. Prior to
this, there was no public market for the Company's Common Stock. Beginning
August 15, 1996, the Company's Common Stock began trading on the
Over-the-Counter (OTC) Market. Due to a failure to meet a NASDAQ requirement of
at least $2,000,000 in net tangible assets, the Company was delisted from the
NASDAQ Small Cap Market. The following table sets forth the range of high and
low bid quotations of the Company's Common Stock as reported by the OTC. The
quotes represent inter-dealer prices on the OTC Market. The OTC Market
quotations reflect inter-dealer prices, without retail mark-up or commission and
may not necessarily represent actual transactions.
STOCK PRICES
HIGH LOW
FISCAL YEAR 1998
November 30, 1997 (1st Quarter).............. $1.13 $0.34
February 28, 1998 (2nd Quarter).............. 0.63 0.34
May 31, 1998 (3rd Quarter)................... 0.41 0.25
August 31, 1998 (4th Quarter)................ 0.38 0.15
FISCAL YEAR 1999
November 30, 1998 (1st Quarter).............. 0.44 0.30
February 28, 1999(2nd Quarter)............... 0.38 0.15
May 31, 1999 (3rd Quarter)................... 0.25 0.15
August 31, 1999(4th Quarter)................. 0.25 0.15
FISCAL YEAR 2000
September 1, 1999 through
October 31, 1999............................. $0.25 $0.20
B. HOLDERS
As of October 31, 1999, there were approximately 600 holders of the
Company's Common Stock.
C. DIVIDENDS
The Company has not paid any dividends on its Common Stock to date and
anticipates that, for the foreseeable future, it will follow a policy of
retaining earnings in order to finance the expansion and development of its
business.
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ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following pertains to the results of operations and financial
position of the Company for the two fiscal years ended August 31, 1998, and
August 31, 1999, and should be read in conjunction with the financial statements
included elsewhere herein.
RESULTS OF OPERATIONS
The Company had a net loss of $363,965 in fiscal 1999 compared to net
loss of $302,604 in fiscal 1998. Reduced sales and increased research and
development expenses contibuted to the increased loss for fiscal 1999.
Net sales decreased 25% or $67,551 to $198,142 in 1999 from $265,693 in
1998, primarily due to the timing of orders received from a manufacturing
customer and the amount and timing of distributors orders. Additionally, the
Company eliminated certain products, both standard formulations and custom
products. One customer accounted for sales of more than 10% of the Company's
annual sales in 1999 compared to three customers in 1998.
(See Note 6 of Notes to Financial Statements.)
The Company also received interest income of $28,748 in 1999 compared
to $48,666 in 1998. This is primarily due to the Company's cash position as a
result of its March 1992 initial public offering. The decrease between years is
due to the use of cash in operations.
A portion of the proceeds from the March, 1992 initial public offering
had been invested in the Piper Jaffray Institutional Government Income Fund. Due
to an unexpected decline in value of the Fund, which was attributed to the
purchase of derivatives, class action litigation by investors began in 1994. In
February 1995, Piper Jaffray Companies Inc. announced a $70 million (less
attorney fees) settlement to settle such litigation, subject to court approval
and acceptance of the settlement by a large percentage of the Funds'
shareholders. In August 1995, a federal judge gave preliminary approval to this
settlement, which would be a combination of $20 million in cash and $50 million
in 8% notes payable. Litigation by investors against auditors of the Fund
related to Fund losses has not yet been resolved.
Based upon the final loss calculation approved by the court a
receivable for litigation settlement in the amount of $133,000 was set up at
August 31, 1995. During fiscal 1996, the Company received payments totaling
$53,226 plus interest on this receivable. During fiscal 1997, the Company
received payments totalling $57,328 plus interest under the settlement
agreement. As of August 31, 1997, the balance remaining in the settlement
receivable was $22,446. In fiscal 1998 the Company received payment for the
balance of $22,446 plus interest. The total payments received exceeded the
estimated recovery of $133,000 and the excess was credited to other income in
fiscal 1998. In September, 1998 a final check in the amount of $5,682 was
received. This payment represented a residual distribution of unclaimed funds
and money previously reserved for potential income tax liability on behalf of
the settlement fund.
Marketing and general and administrative expenses decreased by 13% or
$52,398 from $398,465 in fiscal 1998 to $346,067 in fiscal 1999. The decrease
between the respective periods was due to the amount and timing of advertising
and promotional materials as well as reduced salaries and wages. General and
administrative expenses were comparable between periods.
Cost of goods sold decreased by $46,191 from fiscal 1998, and
represented 42% of sales in 1999 compared to 49% of sales in 1998. The decrease
in the cost of goods sold as a percentage of sales results from the mix of
products sold during the comparable periods.
11
<PAGE>
Research and development expenses increased by 60% or $62,752 to
$167,061 in 1999. The increase between years results from the timing and amount
of professional fees and other costs associated with the patent filing for
ViaStem(TM) as well as salaries and wages related to advancing ViaStem(TM)
through pre-clinical and clinical trials. Professional fees for research and
development in fiscal 1999 included a Market Survey for the Company's
ViaStem(TM) product. The Company added a new product in fiscal 1999, pZerve(TM).
The Company presently has over 25 products.
The basic and diluted loss per common share was ($0.13) in fiscal 1999
compared to ($0.11) in fiscal 1998.
In 2000, the Company will continue its efforts to increase sales volume
through focused marketing activities and through sales of the newly introduced
products. The sales and marketing activities will consist of seeking further
relationships with independent sales organizations and distributors, expanding
its distribution activities with ICN Pharmaceuticals, and the Sigma Chemical
Company. Newly introduced products will be marketed by the Company and
potentially will be made available to one or more distributors. In addition, the
Company will continue to focus on the sales of its proprietary products, which
have better margins than the basal media and balanced salt solutions. The
Company expects operating costs to increase in 2000 due to the expected costs of
the clinical tests for ViaStem(TM). However, there can be no assurance that
sales will increase or that the Company will be profitable in the future.
Management does not expect to realize an operating profit in fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
During 1999, the Company's capital expenditures totaled $5,228. The
Company anticipates that capital expenditures for 2000 will be approximately
$50,000 to fund additional sales, research and development, and manufacturing
growth. This amount does not include any expenditures for clinical
investigation.
At August 31, 1999, the Company had cash and short-term investments
totaling $529,338. This cash and short-term investment position is from the
proceeds of the Company's March 1992 initial public offering. Management
believes that these funds will be sufficient to fund operating losses and
capital expenditures for fiscal 2000.
The Company is leasing approximately 9,500 square feet of office,
laboratory and warehouse space in St. Paul, MN under a seven year lease. The
Company moved into the new facility during March, 1997. As partial payment for
tenant improvements in the new facility, the Company borrowed $100,000 from a
local bank. The loan is secured by a certificate of deposit at the bank. The
interest rate for this loan (currently at 5.6%) is tied to the certificate of
deposit rate. The loan was renewed for a one year term with a maturity in
February, 2000. The balance of the tenant improvements over this amount was paid
with Company funds.
During fiscal 1999 the Company raised $59,400 in additional capital by
selling 55,000 units at $1.00 per unit to five accredited investors through a
private placement. Each unit consisted of one share of common stock and a
warrant to purchase an additional two shares of common stock at an exercise
price of $0.04 per share. The units were sold at a premium to the share price on
the OTC Bulletin Board at the time of the placement. The additional funds raised
were primarily used for advancing ViaStem(TM) through the necessary testing
before FDA approval can be obtained. The Company intends to raise additional
capital in fiscal 2000 through a private placement, subject to prevailing market
conditions. There is no guarantee however, that the Company will be able to
successfully raise these additional funds. In addition, there can be no
assurance that the Company will be able to obtain the necessary FDA approvals
for ViaStem(TM).
At this time, management is not aware of any factors that would have a
materially adverse impact on cash flow beyond 2000, other than the potential for
continuing losses and the potential expenses associated with clinical trials for
ViaStem(TM). Management expects operating losses to continue in 2000.
12
<PAGE>
EFFECTS OF INFLATION
The Company believes inflation is not expected to have a significant
impact on the Company's operations.
SEASONALITY
The Company's operations are not subject to seasonal fluctuations.
ITEM 7 - FINANCIAL STATEMENTS
The information required by this item is incorporated by reference to
the financial statements, reports, and notes beginning on page F-1.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 12, 1999 a Form 8-K was filed reflecting a change in
accounting firms from Boulay, Heutmaker, Zibell & Co. P.L.L.P. to Arthur
Andersen LLP. The Form 8-K was amended in certain respects on August 24, 1999.
The change in accountants was not due to a disagreement in accounting
procedures or principles.
13
<PAGE>
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth certain information regarding the
director and executive officer of the Company as of October 31, 1999. Directors
hold office until the next Annual Shareholder's meeting.
NAME AGE POSITION
---- --- --------
Milo R. Polovina 43 Chairman of the Board, President
Chief Executive Officer,
Treasurer, and Secretary
MILO R. POLOVINA has been President, Chief Executive Officer,
Treasurer, and Secretary of the Company and has served as a director since 1985.
During the last week of October, 1997, the Chairman of the Board of
Directors requested and received resignations from the Company's three outside
directors. These resignations had been requested by the Chairman based upon the
strategic focus of the Company and the need for expertise in the bio medical
field. As a result, the Company does not have any outside directors. The Company
intends to identify and interview qualified candidates for the open director
positions as soon as practical.
SCIENTIFIC ADVISORY BOARD
Although the Company has a Scientific Advisory Board established to
advise the Company on product opportunities and certain advances in
biotechnology, the Company intends to establish a Scientific Advisory Board
specifically dedicated to ViaStem(TM). The Company is currently seeking
qualified applicants with backgrounds in transplantation medicine to serve on
the ViaStem(TM) Advisory Board.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership on Form 3 and changes in Ownership on Forms 4 or 5 with the Securities
and Exchange Commission (SEC). Such officers, directors, and ten percent
shareholders are also required by SEC rules to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons that no Forms 5 were
required for such persons, the Company believes that, during the fiscal year
ended August 31, 1999, all Section 16(a) filing requirements applicable to its
officers, directors, and ten percent stockholders were complied with.
14
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation for
each of the last three fiscal years awarded to or earned by the Chief Executive
Officer of the Company, the only officer whose annual compensation exceeded
$100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- ------------
Name and Fiscal Salary Bonus Compensation Options
Principal Position Year $ $ $(1) #
------------------ ------ ------ ----- ------------ -------
<S> <C> <C> <C> <C> <C>
Milo R. Polovina 1999 135,838 0 -- 0
President, Chief 1998 138,998 0 -- 40,000
Executive Officer, 1997 135,600 15,000 -- 0
Treasurer, and Secretary
</TABLE>
(1) The total amount of personal benefits paid to Mr. Polovina for
fiscal 1999 was less than the lesser of (i) $50,000 or (ii) 10% of
his total reported salary and bonus.
No options were granted to Milo R. Polovina during fiscal 1999. No
executive officer exercised options during fiscal 1999. The following table sets
forth, for the Chief Executive Officer, the number and year-end value of
unexercised options. (All such options were granted at the fair market value of
the underlying shares as of the respective grant dates.)
OPTION EXERCISES AND VALUE OF OPTIONS AT END OF FISCAL 1999
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at End of In-the-Money Options
Fiscal 1999 at End of Fiscal 1999(1)
--------------------- ------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Milo R. Polovina 160,000 ---- $7,000 ----
</TABLE>
(1) Calculated on the basis of the fair market value of the underlying
securities at August 31, 1999, ($0.30) minus the exercise price per
share (ranging from $0.125 to $1.50).
STOCK OPTIONS AND WARRANTS
The Company has issued certain Common Stock warrants and has a stock
option plan which permits the granting of incentive stock options or
non-qualified options to key employees and outside directors. Options are
granted at 100 percent of the market value at the date of grant and are
exercisable over periods up to ten years from grant date in various stages. A
stock option plan, initiated prior to the Company's initial public offering
(IPO), reserved 200,000 shares of Common Stock available for future issuance.
Additionally, certain options that were issued prior to the IPO are currently
outstanding. No options or warrants have been exercised under the plan at August
31, 1999. During 1998 options totaling 2,000 were exercised.
At August 31, 1999 and 1998, options and warrants for 212,000 and 284,000
shares, respectively, were exercisable. The total options outstanding at August
31, 1999 are 212,000, with exercise prices of $0.125 to $1.50 per share.
15
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
In January 1995, the Company entered into a revised employment
agreement with Mr. Milo R. Polovina. The agreement provides that Mr. Polovina
will serve as Chairman of the Board, Chief Executive Officer, and President of
the Company for a period of ten years and will receive a minimum annual base
salary of $126,000. The agreement automatically extends for an additional period
of one year on each anniversary of the agreement; provided, however, that if the
agreement is terminated for any reason other than (i) a change in control, (ii)
voluntary resignation, (iii) death, (iv) disability, (v) retirement, or (vi)
cause, Mr. Polovina will be entitled to receive his annual base salary and
related benefits for a period of five calendar years following the termination.
Mr. Polovina is also eligible for an annual bonus, determined in the
discretion of the Board of Directors, which shall in no event exceed one-half of
his annual salary. This agreement also contains a provision relating to
compensation in the event of a change in control of the Company followed by a
termination of Mr. Polovina's employment. A "Change in Control" will occur if
any person, other than Mr. Polovina, becomes the beneficial owner of securities
representing 30% or more of the combined voting power of the outstanding
securities of the Company, the stockholders of the Company approve a definitive
agreement to merge or consolidate the Company with or into another corporation,
or if the persons who were directors of the Company immediately prior to the
change in control cease to constitute a majority of the Board of the Directors
of the Company or of its successor. Upon a change in control, if Mr. Polovina's
employment is terminated by the Company for reasons other than disability or
cause (as defined), he will receive his annual composition pursuant to the
agreement for the ten year term then remaining. In addition, in such a
situation, Mr. Polovina will be entitled to require the Company to purchase his
shares in the Company at their then fair market value.
DIRECTOR COMPENSATION
Non-employee directors receive reimbursement for travel expenses
related to each Board of Directors meeting attended, and for each committee
meeting held at a date other than a date on which a Board meeting is held.
Under the Company's Director Stock Option Program (the "Program"), the
Company has granted stock options to non-employee directors and intends to
continue to grant stock options to attract additional directors. Under the
Program, each non-employee director is granted an initial option for 15,000
shares of Common Stock for serving on the Board of Directors. These options vest
at 5,000 shares per year for three years commencing one year from the date of
grant. The exercise price of any options granted will be not less than the fair
market value of the underlying Common Stock on the date of grant. Directors are
also eligible to receive supplemental options on an annual basis.
16
<PAGE>
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of October 31, 1999 by:
(i) each director of the Company, (ii) all directors and executive officers as a
group, (iii) the Chief Executive Officer, and (iv) each shareholder who own more
than 5% of the outstanding shares of Common Stock. Except as otherwise
indicated, the Company believes each person listed below possesses sole voting
and investment power with respect to the shares indicated. Beneficial ownership
means the shareholder has voting or investment power with respect to the shares.
Shares of Common Stock subject to options or warrants currently exercisable or
exercisable within 60 days are deemed outstanding for computing the percentage
of the person holding such options or warrants, but are not deemed outstanding
for computing the percentage of any other person.
NAME AND ADDRESS SHARES BENEFICIALLY OWNED
OF BENEFICIAL OWNER NUMBER PERCENT
------------------- ------ -------
DIRECTORS AND EXECUTIVE OFFICERS
Milo R. Polovina 756,600(1) 24.4
1311 Helmo Avenue
St. Paul, MN 55128
All directors and executive officers 756,600 24.4
as a group (1 person)
PRINCIPAL HOLDERS
Arnold & Joy Ann Espeseth 191,800 6.6
Winger, MN 56592
--------------------------
(1) Includes (a) 559,100 shares of stock owned by Mr. Polovina; (b)
2,500 shares owned by Mr. Polovina's wife, an employee of the
Company; (c) 3,000 shares owned beneficially for Mr. Polovina's
children; (d) options granted to Mr. Polovina for exercise within 60
days to purchase 160,000 shares; and (e) options granted to Mr.
Polovina's wife for exercise within 60 days to purchase 32,000
shares. (Mr. Polovina's spouse was granted the options while an
employee of the Company but prior to her marriage to Mr. Polovina.)
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Polovina has an employment agreement with the Company. (See
"Executive Compensation -- Executive Employment Agreement".)
17
<PAGE>
PART IV
ITEM 13 - EXHIBITS, AND REPORTS ON FORM 8-K
A. Documents filed:
1. FINANCIAL STATEMENTS. The following documents are filed as part
of this report on Form 10-KSB:
PAGE
----
Report of Independent Auditors............................ F-1
Balance Sheet -- August 31, 1999 and 1998................. F-2
Statement of Operations -- Years ended
August 31, 1999 and 1998................................ F-3
Statement of Changes in Shareholders' Equity --
Years ended August 31, 1999 and 1998.................... F-4
Statement of Cash Flows -- Years ended
August 31, 1999 and 1998................................ F-5
Notes to Financial Statements............................. F-6
2. EXHIBITS.
3.1 Articles of Incorporation*
3.2 By-Laws*
10.1 Lease Agreement with R.L. Johnson for premises located at
856 South Fifth Street, Hopkins, Minnesota, dated May 9,
1991*
10.2 Employment Agreement with Milo R. Polovina dated September
25, 1991*
10.3 Stock Plan*
10.4 Director Stock Option Program*
10.5 Employee Stock Purchase Plan+
10.6 Lease agreement with Oakdale Properties LLC located at 1311
Helmo Avenue, St. Paul, Minnesota, dated December 6, 1996**
10.7 Revised employment agreement with Milo R. Polovina dated
January, 1995+
25 Power of Attorney (included on signature page)
27 Financial Data Schedule
-----------------
* Incorporated by reference to the Company's Registration
Statement on Form S-18 (No. 33-42573C), which became
effective on March 9, 1992.
+ Incorporated by reference to Company's Form 10-KSB dated
8/31/95.
** Incorporated by reference to Company's Form 10-QSB dated
2/28/97.
B. Reports on Form 8-K:
On August 12, 1999 a Form 8-K was filed reflecting a change in
accounting firms from Boulay, Heutmaker, Zibell & Co. P.L.L.P. to
Arthur Andersen LLP. The Form 8-K was amended in certain respects on
August 24, 1999.
The change in accountants was not due to a disagreement in accounting
procedures or principles.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CELOX LABORATORIES, INC.
By: /s/ Milo R. Polovina
------------------------------
Milo R. Polovina
Chairman of the Board
and President and CEO
Date: November 22, 1999
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Milo R. Polovina as attorney-in-fact for him in
any and all capacities, to sign any amendments to this Report on Form 10-KSB and
to file the same, with exhibits thereto and other documents in connections
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact, may do or cause to be done by virtue
of hereof.
Pursuant to the requirements of the Exchange Act, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Milo R. Polovina Chairman of the Board, November 22, 1999
- -------------------------- President, CEO and Director
Milo R. Polovina (principal executive officer
and principal financial officer)
19
<PAGE>
CELOX LABORATORIES, INC.
Financial Statements as of
August 31, 1999 and 1998
Together With Report of
Independent Public Accountants
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Celox Laboratories, Inc.:
We have audited the accompanying balance sheet of Celox Laboratories, Inc. (a
Minnesota corporation) as of August 31, 1999, and the related statements of
operations, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of Celox Laboratories, Inc. as of August 31,
1998 were audited by other auditors whose report dated September 28, 1998
expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides 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 Celox Laboratories, Inc. as of
August 31, 1999, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Minneapolis, Minnesota,
September 30, 1999
F-1
<PAGE>
CELOX LABORATORIES, INC.
Balance Sheets
As of August 31
<TABLE>
<CAPTION>
1999 1998
----------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 150,824 $ 350,120
Short-term investments, including $125,000 restricted for note payable
378,514 459,436
Trade accounts receivable 20,653 18,849
Related-party receivable 9,124 --
Inventories-
Raw materials 42,447 32,350
Finished goods 15,459 12,725
Other 5,801 12,390
----------- -----------
Total current assets 622,822 885,870
----------- -----------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Laboratory and production equipment 219,724 219,724
Office furniture and equipment 93,359 88,131
Leasehold improvements 138,426 138,426
Less- Accumulated depreciation (321,410) (274,597)
----------- -----------
Net equipment and leasehold improvements 130,099 171,684
PATENTS, net 55,356 58,860
----------- -----------
$ 808,277 $ 1,116,414
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILTIES:
Note payable $ 75,745 $ 82,139
Trade accounts payable 12,828 10,326
Accrued expenses 28,066 27,746
----------- -----------
Total current liabilities 116,639 120,211
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 4,000,000 shares authorized; 2,909,169 and
2,744,169 shares issued and outstanding 29,092 27,442
Additional paid-in capital 5,312,486 5,254,736
Accumulated deficit (4,649,940) (4,285,975)
----------- -----------
Total shareholders' equity 691,638 996,203
----------- -----------
$ 808,277 $ 1,116,414
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-2
<PAGE>
CELOX LABORATORIES, INC.
Statements of Operations
For the Years Ended August 31
1999 1998
----------- -----------
NET SALES $ 198,142 $ 265,693
COST OF SALES 82,936 129,127
----------- -----------
Gross profit 115,206 136,566
----------- -----------
OPERATING EXPENSES:
Research and development 167,061 104,309
Marketing and sales 116,861 168,218
General and administrative 229,206 230,247
----------- -----------
Total operating expenses 513,128 502,774
----------- -----------
OPERATING LOSS (397,922) (366,208)
OTHER INCOME, net 33,957 63,604
----------- -----------
NET LOSS $ (363,965) $ (302,604)
=========== ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.13) $ (0.11)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,827,347 2,742,843
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CELOX LABORATORIES, INC.
Statements of Shareholders' Equity
For the Years Ended August 31
<TABLE>
<CAPTION>
Common Stock Additional
--------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
--------- ------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE,
August 31, 1997 2,742,169 $27,422 $5,251,756 $(3,983,371) $1,295,807
Options exercised 2,000 20 2,980 - 3,000
Net loss - - - (302,604) (302,604)
--------- ------- ---------- ----------- ----------
BALANCE,
August 31, 1998 2,744,169 27,442 5,254,736 (4,285,975) 996,203
Shares issued 165,000 1,650 57,750 - 59,400
Net loss - - - (363,965) (363,965)
--------- ------- ---------- ----------- ----------
BALANCE,
August 31, 1999 2,909,169 $29,092 $5,312,486 $(4,649,940) $ 691,638
========= ======= ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CELOX LABORATORIES, INC.
Statements of Cash Flows
For the Years Ended August 31
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(363,965) $(302,604)
Adjustments to reconcile to net cash used for operating activities-
Depreciation and amortization 50,317 48,167
Changes in other operating elements:
Trade accounts receivable (1,804) 7,713
Inventories (12,831) 1,780
Other current assets 6,589 5,624
Trade accounts payable 2,502 (15,995)
Accrued expenses 320 (3,500)
--------- ---------
Net cash used for operating activities (318,872) (258,815)
--------- ---------
INVESTING ACTIVITIES:
Sale of short-term investments, net 80,922 277,683
Proceeds from investor settlements -- 22,446
Investment in patents -- (42,651)
Advances to related party, net (9,124) --
Purchases of equipment and leasehold improvements (5,228) (47,077)
--------- ---------
Net cash provided by investing activities 66,570 210,401
--------- ---------
FINANCING ACTIVITIES:
Payments of note payable (6,394) (12,740)
Proceeds from issuance of common stock 59,400 3,000
--------- ---------
Net cash provided by (used for) financing activities 53,006 (9,740)
--------- ---------
Net decrease in cash and cash equivalents (199,296) (58,154)
CASH AND CASH EQUIVALENTS, beginning of year 350,120 408,274
--------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 150,824 $ 350,120
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CELOX LABORATORIES, INC.
Notes to Financial Statements
August 31, 1999 and 1998
1. NATURE OF BUSINESS:
Celox Laboratories, Inc. (the Company) is a cell technology company incorporated
under the laws of the state of Minnesota. The Company researches, develops,
manufactures and markets cell biology products that are used in the propagation
of cells derived from mammals, including humans and other species. These
specialized cell growth products are used primarily in academic, pharmaceutical
and other commercial laboratories to improve the growth productivity and quality
of cell-derived medical and other biological products.
The Company has experienced recurring losses since inception and has an
accumulated deficit of approximately $4,650,000 at August 31, 1999. The Company
expects to incur a loss in fiscal year 2000 which will be funded using existing
cash and short-term investments.
Current and anticipated projects require additional capital. The Company may
require funds to conduct marketing, research, preclinical studies, clinical
trials and other such activities relating to the commercialization of potential
products. However, the Company's access to capital funding is uncertain. If
adequate funds are not available, the Company may be required to:
a. Delay or reduce the scope of, or eliminate, one or more programs.
b. Obtain funds from collaborative partners, or others, that may require the
Company to relinquish technologies, product candidates or products that the
Company would otherwise seek to develop or commercialize.
c. If the Company raises additional capital by issuing equity securities,
further dilution to stockholders may result and new investors could have
rights superior to existing stockholders.
If any required future financing is unavailable for any reason, the Company may
be forced to discontinue operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
RELATED-PARTY RECEIVABLE
The Company advanced $11,000 under a promissory note to the president of the
Company during 1999 at an interest rate of 6%, payable upon demand. The balance
outstanding at August 31, 1999 is reflected as related-party receivable in the
accompanying balance sheet.
F-6
<PAGE>
INVENTORIES
Inventories are valued at the lower of first-in, first-out cost or market and
include cost of materials, labor and overhead.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are recorded at cost and depreciated on a
straight-line basis over their estimated useful lives, which range from five to
seven years.
INTANGIBLE ASSETS
Costs associated with obtaining patents have been capitalized and are being
amortized on the straight-line method over the patents' estimated useful life of
17 years. Capitalized patent costs are shown net of amortization of $6,083 and
$2,580 as of August 31, 1999 and 1998.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically assesses the potential for impairment of its long-lived
assets (primarily property, plant and equipment and patents). If any such
impairment exists, the related assets will be written down to fair value. This
policy is in accordance with Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." No impairment losses have been incurred through
August 31, 1999.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of SFAS
No. 109, "Accounting for Income Taxes." SFAS No. 109 requires an asset and
liability approach for financial accounting and reporting for income taxes with
deferred taxes determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of currently enacted tax laws.
USE OF ESTIMATES
The preparation of financial statements in accordance 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.
Ultimate results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized when product is shipped to the customer. Bill and hold
sales, in which delivery is delayed at the customer's request, are recognized
when conditions for such revenue recognition are met, principally when the
completed product is ready for delivery and transfer of the risks and rewards of
ownership to the buyer has occurred.
BASIC AND DILUTED LOSS PER COMMON SHARE
Basic loss per common share is computed based upon the weighted average number
of common shares outstanding during the year, while diluted loss per share
considers the effect of
F-7
<PAGE>
common stock equivalents. Basic and diluted loss per share are the same since
all common stock equivalents are antidilutive.
RECLASSIFICATIONS
Certain reclassifications were made to the prior year financial statements to
conform to the current year presentation. The reclassifications had no effect on
previously reported net income or shareholders' equity.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying values of cash and cash equivalents, short-term investments and the
short-term note payable approximate fair values due to the short-term nature of
these investments.
4. NOTE PAYABLE:
The Company has a line of credit from a bank expiring in February 2000 under
which it may borrow up to $125,000. The line of credit is secured by a
certificate of deposit held at the same bank. The line of credit incurs interest
at 2% over the interest rate of the securing certificate of deposit. The
interest rate was 5.6% as of August 31, 1999. The terms of the agreement require
the Company to maintain certain financial covenants and ratios and restrict the
Company from incurring additional debt. The Company is in compliance with all
such covenants.
5. SHAREHOLDERS' EQUITY:
STOCK OPTIONS AND WARRANTS
The Company had granted options to purchase 349,300 shares of common stock. The
Company has also adopted a stock option plan under which 200,000 shares of
common stock have been reserved for future issuance.
Options granted, exercised and forfeited during 1999 and 1998 are as follows:
Weighted
Average Exercise
Shares Price Per Share
------- ----------------
BALANCE, August 31, 1997 264,000 $0.81 to $1.50
Granted 40,000 0.125
Exercised (2,000) 1.50
Canceled or expired (18,000) 0.875 to 1.00
-------
BALANCE, August 31, 1998 284,000 0.125 to 1.50
Canceled or expired (72,000) 0.875 to 1.50
-------
BALANCE, August 31, 1999 212,000 0.125 to 1.50
=======
The Company follows the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock option plan. Accordingly, no compensation cost has been
recognized since the grant price is equal to fair value at the grant dates. Had
compensation cost been determined pursuant to
F-8
<PAGE>
SFAS No. 123, "Accounting for Stock-Based Compensation," there would be no
significant effect on net loss or on the basic and diluted loss per common
share.
The weighted average fair value of options granted in 1998 was $0.11. The fair
value of each option is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions: risk-free
interest rate of 5.4% and expected option life of ten years.
COMMON STOCK
The Company sold 55,000 shares of common stock at $1.00 per share to existing
shareholders in a private offering in February 1999. In connection with the
private offering, warrants were issued to purchase an additional 110,000 shares
of common stock at an exercise price of $.04 per share. All warrants were
exercised immediately for proceeds of $4,400.
6. CONCENTRATION OF CREDIT RISK:
During fiscal year 1999, sales to four customers were approximately 40% of net
sales, while during fiscal year 1998, sales to three customers were
approximately 39% of net sales.
At August 31, 1999, three customers comprised 35% of the total accounts
receivable balance, while at August 31, 1998, three customers comprised 40% of
the total accounts receivable balance. Accounts receivable from foreign sales
were 6% and 11% at August 31, 1999 and 1998.
7. INCOME TAXES:
The differences between the income tax benefit at the federal statutory rate and
the recorded benefit are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Amount using the federal statutory rate $(124,000) $(103,000)
Increase (decrease) in taxes resulting from:
State taxes, net of federal benefit - (11,000)
Valuation allowance provided 124,000 112,000
Other - 2,000
--------- ---------
Total benefit $ - $ -
========= =========
</TABLE>
Deferred income tax assets consist of the following at August 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net operating loss carryforwards $1,398,000 $1,274,000
Capital loss carryforwards 316,000 316,000
Tax credit carryforwards 40,000 40,000
Valuation allowance (1,754,000) (1,630,000)
---------- ----------
Net deferred tax assets $ - $ -
========== ==========
</TABLE>
F-9
<PAGE>
Due to the Company's loss experience, a valuation allowance has been established
to offset all future tax benefits resulting from operating and other income tax
carryforwards.
The Company's net operating loss carryforwards and tax credit carryforwards
expire in various amounts through 2014. The capital loss carryforward expires in
2001.
8. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases its office facility under an operating lease agreement
expiring in January 2004 with an option for two five-year renewals. The lease
requires payment for certain operating costs. Rent expense was $93,800 and
$80,100 during fiscal years 1999 and 1998.
Future minimum lease payments are as follows at August 31, 1999:
2000 $ 73,700
2001 73,700
2002 73,700
2003 73,700
2004 30,700
--------
$325,500
========
LEGAL PROCEEDINGS
The Company, in the normal course of business, has commitments, lawsuits,
contingent liabilities and claims; however, the Company does not expect that the
resolution of any of these matters will have a material adverse effect on its
financial position or results of operations.
EXECUTIVE EMPLOYMENT AGREEMENT
The Company has entered into an employment agreement with its chief executive
officer for a period of ten years providing for an annual base salary of not
less than $126,000, an annual bonus (not to exceed one half annual salary) and
performance stock options awarded at the discretion of the board of directors.
No bonus was authorized in fiscal years 1999 and 1998. No performance stock
options were issued during fiscal year 1999. During fiscal year 1998, 40,000
performance stock options were issued at an option price of $0.125.
F-10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> AUG-31-1999
<CASH> 158,824
<SECURITIES> 378,514
<RECEIVABLES> 20,653
<ALLOWANCES> 0
<INVENTORY> 57,906
<CURRENT-ASSETS> 622,822
<PP&E> 459,509
<DEPRECIATION> 331,410
<TOTAL-ASSETS> 808,277
<CURRENT-LIABILITIES> 116,639
<BONDS> 0
0
0
<COMMON> 29,092
<OTHER-SE> 691,638
<TOTAL-LIABILITY-AND-EQUITY> 808,277
<SALES> 198,142
<TOTAL-REVENUES> 198,142
<CGS> 82,936
<TOTAL-COSTS> 199,797
<OTHER-EXPENSES> 396,267
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,267
<INCOME-PRETAX> (363,965)
<INCOME-TAX> 0
<INCOME-CONTINUING> (363,965)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (363,965)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
