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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: June 30, 2003
Commission File Number: 0-16375
THERMOGENESIS CORP.
(Exact name of registrant as specified in its charter)
Delaware 94-3018487
(State of incorporation) (I.R.S. Employer Identification No.)
2711 Citrus Road
Rancho Cordova, California 95742
--------------------------------
(Address of principal executive offices) (Zip Code)
(916) 858-5100
--------------
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $0.001
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 twelve 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K, is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [ ] Yes [X] No
Aggregate Market Value of the voting stock held by non-affiliates of the
registrant based on the closing sale price on December 31, 2002 was $71,121,372.
As of September 11, 2003, 39,459,894 shares of the Registrant's Common Stock
were outstanding.
Documents incorporated by reference: Portions of the registrant's proxy
statement for its 2003 Annual Meeting of Stockholders are incorporated by
reference into Part III hereof.
TABLE OF CONTENTS
Page Number
Part I
ITEM 1. Business........................................................3
(A) Overview of Business........................................3
(B) Market Overview.............................................4
(C) Clinical Summary Status....................................15
(D) Competition................................................17
(E) Research and Development...................................19
(F) Description of Device Manufacturing........................20
(G) Government Regulation......................................21
(H) Patents and Proprietary Rights.............................22
(I) Factors Affecting Future Results...........................23
(J) Licenses and Distribution Rights...........................26
(K) Employees..................................................27
ITEM 2. Properties.....................................................28
ITEM 3. Legal Proceedings..............................................28
ITEM 4. Submission of Matters to a Vote of Security Holders............28
Part II
ITEM 5. Market for the Registrant's Common Stock and Related
Stockholder Matters..........................................29
ITEM 6. Selected Financial Data........................................30
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................31
(A) Overview...................................................31
(B) Results of Operations......................................32
(C) Liquidity and Capital Resources............................35
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.....36
ITEM 8. Financial Statements and Supplementary Data....................37
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.....................................62
ITEM 9A. Controls and Procedures........................................62
Part III
ITEM 10. Directors and Executive Officers of the Registrant.............62
ITEM 11. Executive Compensation.........................................62
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.62
ITEM 13. Certain Relationships and Related Transactions.................62
ITEM 14. Principal Accounting Fees and Services.........................62
Part IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form
8-K............................................................63
(A) Financial Statements.......................................63
(B) Reports on Form 8-K........................................63
(C) Exhibits...................................................63
PART I
ITEM 1. BUSINESS
(A) Overview of Business
--------------------
THERMOGENESIS CORP. ("the Company", "we", "our") incorporated in Delaware in
July 1986, designs, manufactures and distributes Food and Drug Administration
("FDA") and ISO 9001 Compliant blood processing systems---CryoSeal(R) Fibrin
Sealant ("FS") System and BioArchive(R) System and their companion products---
that enable the manufacturer of cell therapy drugs from donor blood. These
"enabling technologies" are sold into two distinct markets: Blood Banks and
Hospital/Wound Care centers. Both the CryoSeal and BioArchive systems consist of
an automated blood processing device, and dedicated sterile single-use
disposables that our customers use to manufacture cell therapy and products
sourced from single units of blood. These products include hematopoietic stem
cells from placental/cord blood for bone marrow rescue transplants and blood
derived proteins and wound healing growth factors that provide surgeons with a
means of arresting bleeding and/or bonding excised tissue together thereby
initiating cellular repair of the excised tissues. These growth factors are also
reported to accelerate the healing of damaged bones and chronic dermal wounds.
Short-Term Objectives
- ---------------------
In January 2003, the Company hired Kevin Simpson as President and Chief
Operating Officer. Mr. Simpson has over 20 years of life science experience and
12 years of senior management experience within medical equipment and
disposables businesses. He has a B.S. in mechanical engineering from Purdue and
an MBA from Harvard Business School. Mr. Simpson has been charged with
restructuring the Company and leading the transition from an R&D enterprise to a
profitable entity with significant revenue and gross profit margin growth. The
execution of the plan calls for the following:
1. A significant reduction in manufacturing overhead costs and a
consolidation of operations from three buildings into one 28,000 sq.
ft. facility to increase the total efficiency of all operations.
2. Outsource medical disposables for projected high growth product lines
to low cost, high quality Contract Manufacturers.
3. Strengthen marketing, manufacturing, and engineering management to
ensure the achievement of the company's near term objectives.
4. Focus marketing efforts on the sale of currently available products in
countries where regulatory approval has been obtained and identifying
niche markets where those products have the greatest competitive
advantage.
5. Shift our future revenues from a reliance on the sales of capital
equipment to one dominated by high margin, recurring, disposables
sales.
The Company is required to file annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and other information with the
Securities and Exchange Commission ("SEC"). The public can obtain copies of
these materials by visiting the SEC's Public Reference Room at 450 Fifth Street,
NW, Washington, D.C. 20549, by calling the SEC at 1-800-SEC-0330, or by
accessing the SEC's website at www.sec.gov. In addition, as soon as reasonably
practicable after these materials are filed with or furnished to the SEC, the
Company will make copies available to the public free of charge through its
website, www.thermogenesis.com. The information on the Company's website is not
incorporated into, and is not part of, this annual report.
(B) Market Overview
- ------------------------
The Company anticipates significant growth in the following markets during the
next several years as a result of the demand for cell therapy and blood products
including stem cells, surgical sealants, thrombin and platelet derived growth
factor products each sourced from individual units of donated whole blood.
Except for stem cells, the standard industry practice sources these biological
elements from pools of thousands of units of bovine or human blood that have
been purchased on the open market which inherently have a higher risk of
contamination. Management believes that if the market for cell therapy expands
as anticipated, the market for its BioArchive System, including its related
sterile disposables (e.g. cell storage containers and bag sets for cell
collection, selection and transplantation), will also expand.
I. Blood Bank Market
-----------------
(i) Cell Therapy
------------
Cell therapy is uniquely "personalized" medicine where therapeutic cells
will be either sourced directly from the patient (autologous) and then
modified and returned or sourced from a single Human Leukocyte Antigen
("HLA")-matched donor. These cell populations are used to replace, repair,
augment, and/or regulate the biological function of tissues damaged by
trauma, disease processes, or genetic abnormalities. This is in contrast to
"batch" produced drugs where one drug is designed to treat all people
suffering from one disease.
The emerging cell therapy market is driven by recently developed enabling
technologies that provide viable cell populations for specific therapies.
a. Rapid, automated, low cost selection and isolation of viable red cells
and platelets from peripheral blood and hematopoietic stem cells from
placental/cord blood.
b. Automated cryopreservation archiving and retrieval of stem cells without
the loss of cell viability due to imprecise freezing rates and Transient
Warming Events (TWE's)
c. Automated harvesting and concentration of healing proteins and growth
factors and the activating enzyme thrombin from patient blood plasma
This new strategy for curing disease has dramatically changed the landscape
of new drug development from that of protein-based (recombinant and
fractionated proteins) to one that is cell-based. Because of the serious
potential risk of graft vs. host disease ("GVHD"), the overwhelming
majority of these cell preparations will be individual-specific doses
derived from single units of autologous or an HLA matched single donor
blood. The chart below provides an overview of the emerging cell therapy
market.
Cell Therapy Market
Currently Licensed Nearing FDA Clinical Research in Progress
Licensing
--------------------- -------------------- --------------------- --------------------- -------------------
Tissue Regeneration
Stem Cells, Growth Immune Cells
Cell Therapy RBC's, Platelets Hematopoietic Stem Factors & Platelet (T-Cells
Products and Plasma Cells Gel Dendritic Cells)
--------------------- -------------------- --------------------- --------------------- -------------------
Treatments Platelet Leukemias Parkinson's HIV
for: Deficiencies Lymphomas DiseaseMultiple Solid Tumor
Red Cell Genetic Diseases Sclerosis Cancers
Deficiencies Spinal Cord Hepatitis
Plasma Protein Stroke Damage Malaria
Deficiencies Dermal Ulcers
Bleeding
Surgeries
Patient/Donor 42,000,000 100,000+ 1,000,000+ 1,000,000+
Population
Current Prices per $150 - $450 $22,000 - $30,000 TBD TBD
Dose
--------------------- -------------------- --------------------- --------------------- -------------------
The most common form of cell therapy practiced today is the transfusion of
red blood cells or platelets to surgical or transplant patients in need.
This form of cell therapy has been practiced for more than 40 years.
With the new and future forms of cell therapy transferred cells will be the
patient-derived (autologous) or from a single HLA-typed blood donor
(allogeneic), and be capable of generation of multiple cell types
(pluripotent stem cells) or tissue specific precursors (progenitor cells).
In many cases, cells will be isolated, grown to larger numbers,
physiologically stimulated and/or genetically modified outside the body (ex
vivo) prior to their therapeutic transfer to the patient. Alternatively,
unmodified cells may be transferred to the desired site of action and
treated with drugs, biopharmaceuticals, or gene products delivered locally
(in situ) to stimulate the cells to grow, differentiate, secrete or
otherwise provide the desired cell function (excrete insulin for example).
In some cases, the organization of cells into tissues is facilitated by
biological gels which are gradually eliminated over time (absorbable,
biodegradable) and replaced by normal tissue. In all cases, the goal is to
provide an appropriate mix of functionally differentiated cells in
sufficient numbers and quality to improve the targeted immune system, gene
activity or restore the targeted tissue function(s).
Clinical Value of Placental/Cord Blood Stem Cells in Bone Marrow Rescue
The Company's BioArchive System has been adopted by most of the world's
leading Cord Blood Stem Cell Banks. The clinical value of transplanting the
hematopoietic stem cells found in placental/cord blood has been well
documented in the bone marrow rescue treatment of leukemias, lymphomas,
diverse inherited anemias, and hypoproliferative stem cell disorders have
been reported in the following peer review journal articles by our
scientific and clinical collaborators - Dr. Pablo Rubinstein and Dr. Joanne
Kurtzberg:
o Rubinstein, P. "Placental Blood-Derived Hematopoietic Stem Cells for
Unrelated Bone Marrow Reconstruction." Journal of Hematotherapy. Vol.
2, 1993; 207-210.
o Rubinstein, P et al. "Review: Stored Placental Blood for Unrelated
Bone Marrow Reconstitution." Blood. Vol. 81, No. 7, April 1, 1993;
1679-1690.
o Kurtzberg, J et al. "The Use of Umbilical Cord Blood in mismatched
Related and Unrelated hematopoietic Stem Cell Transplantation." Blood
Cells. Vol. 20, 1994; 275-283.
o Rubinstein, P et al. "Unrelated Placental Blood for Bone Marrow
Reconstitution: Organization of the Placental Blood Program." Blood
Cells. Vol. 20, 1994; 587-600.
o Rubinstein, P et al. "Processing and Cryopreservation of Placental /
Umbilical Cord Blood for Unrelated Bone Marrow Reconstitution."
Proceedings of the National Academy of Sciences. Vol. 92, 1995;
10119-10122.
o Kurtzberg, J et al. "Placental Blood as a Source of Hematopoietic Stem
Cells for Transplantation into Unrelated Recipients." New England
Journal of Medicine. Vol. 335, 1996; 157-166.
o Rubinstein, P et al. "Initial Results of the Placental /Umbilical Cord
Blood Program for Unrelated Bone Marrow Reconstitution." New England
Journal of Medicine. Vol. 339, 1998; 1565-1577.
o Rubinstein et al. "Outcomes among 562 recipients of placental-blood
transplants from unrelated donors." The New England Journal of
Medicine. Vol. 339, No. 22, November 26, 1998; 1565-1577.
o Kurtzberg J et al. "Hematopoietic Engraftment and Survival in Adult
Recipients of Umbilical-Cord Blood From Unrelated Donors." New England
Journal of Medicine. Vol. 344, 2001; 1815-1822.
Clinical outcome data for the use of cord blood stem cell therapies
support the following conclusions:
o Cord blood stem cell transplants regularly engraft, produce low rates
of GVHD and achieve survival rates comparable or superior to those
from unrelated bone marrow transplants.
o Cell dose/Kg patient weight is important for timing and incidence of
engraftment
o HLA compatibility is important for engraftment and survival.
o Cord blood stem cells can be collected without risk to any donor, HLA
typed, cryopreserved and archived in banks for extended lengths of
time and be immediately delivered to patients in need, thereby
avoiding the delays inherent in sourcing stem cells from the bone
marrow of potential donors whose names are listed in a registry and
must be located and caused to endure painful procedures to perform the
harvest.
In conclusion, the Company believes that thousands of patients' lives can
be saved each year if a significant inventory of placental cord blood units
is cryo-preserved and archived, ready for immediate transplant as soon as
the patient is diagnosed. Estimates vary, but there is some consensus that
a cryopreserved placental cord blood inventory of 2 million (less than 25%
of the 8.0 million potential bone marrow donors currently in the
international bone marrow registries) would provide excellent HLA matches
(6 of 6 or 5 of 6) and high cell doses (greater than 2.5 X 107 cells/Kg
body mass) to the tens of thousands of patients annually which physicians
wish to treat with a stem cell transplant.
An equally important benefit of this large-standing inventory is that it
would allow the exploration of the treatment of other major diseases that
may well be cured by stem cell transplants, such as sickle-cell anemia
(80,000 patients per year)1, AIDS (200,000 patients per year)2 and
thalassemia (600,000 patients per year3. A recent clinical study reported
an 81% cure rate for treating sickle cell anemia with a cord blood stem
cell transplant.
Placental/Cord Blood vs. Other Sources of Hematopoietic Stem Cells
There are two typical sources of hematopoietic stem cells currently
utilized in bone marrow rescue therapy: 1) adult stem cells sourced
invasively from the donors bone marrow or peripheral blood, and 2) neonatal
stem cells sourced from placental cord blood. Clinical consensus is
building that placental/cord blood is the best source of hematopoietic stem
cells.
-----------------------------------------------------------------------------------------------------------------
Source Advantages Disadvantages
-----------------------------------------------------------------------------------------------------------------
-Tolerance of mismatches
-no risk to donor
-no donor addtrition
Neonatal Stem Cells -grafts available on short notice -Number of cells limited by
Placental Cord Blood -less latent viral infection volume of collected blood
-less immune reaction against (~80 ml)
recipient (lower GVHD)
-----------------------------------------------------------------------------------------------------------------
-Pain and risk to donor during
extraction
-greater risk of viral infection
Adult Stem Cells -large number of potential donors -higher chronic and acute GVHD
-adjustable number of cells -grafts take months or more
to locate and collect
-----------------------------------------------------------------------------------------------------------------
One of the major advantages with placental/cord blood stem cells is that
they are harvested from the placental cord after birth of a baby and until
recently, is normally discarded as biologic waste. Without risk or pain to
the donor, harvests can take place in all hospitals in which babies are
born. They can be banked in large numbers throughout the ethnic populations
of the world to optimize the probability of finding an HLA match for every
patient soon after diagnosis.
----------------------
1 "Sickle Cell Anemia. " National Heart, Lung and Blood Institute (NIH),
NIH Publication No. 96-4057, November 1996; p.2
2 "Surveillance for AIDS-defining Opportunistic Illnesses, 1992-1997."
Morbidity and Mortality Weekly Report; CEC Surveillance Summaries.
Volume 48, No. SS-2, Aril 16, 1999
3 "Thalassemia (Cooley's Anemia) Clinical Research Network." National
Heart, Lung and Blood Institute (NIH), RFA HL-99-016, March 11, 1999
The Market Need for Placental/Cord Blood Stem Cell Banks
The Company believes the market for the BioArchive System will be
predominately driven by the demand for placental/cord blood stem cell
donations to build an HLA diverse inventory sufficient to service the
transplants needed for bone marrow rescue therapy. More recently,
placental/cord blood has been reported to contain additional stem cells
which may have advantages over embryonic stem cells as a means of producing
highly valuable cell populations to treat many previously incurable lethal
diseases such as Parkinson's disease, Alzheimer's disease and diabetes.
This is a new and still emerging market.
Placental cord blood samples are collected by draining blood from the
placenta which previously had been considered medical waste. The stem cells
are then concentrated within a final volume of 20 ml. typically using the
Company's proprietary sterile disposable processing bag sets.
In order to achieve an optimum tissue match with patients of diverse ethnic
backgrounds, a large number of placental/cord blood samples must be banked,
catalogued, and available for retrieval. Statistical analysis suggests that
two million samples, harvested throughout the world, will provide
sufficient volume and diversity to produce a high cell dose and an
excellent tissue match for 90% of the world's patients who may require a
transplant. These two factors, individually, and especially in combination,
significantly increase the likelihood of patient survival. The Company is
aware that the health authorities in most industrialized countries have
already or intend to establish placental/cord blood stem cell banks, which
are building towards this sample inventory. Additional sales are expected
from the Private Cord Blood sector, which is driven by the demand for
equipment for storage of placental/cord blood for personal use.
Enabling Technologies for the Cell Therapy Marketplace
The primary driver in cell therapy research will be the development of
critical enabling technologies that advance the science and remove the
limitations of the current cell processing techniques. These enabling
technologies will transform therapies that were experimental, expensive,
and inefficient into a well-structured, attainable, cost effective
alternative to the current protein based treatments.
There are four critical enabling technologies: (1)
cryopreservation/archiving, (2) cell selection, (3) cell expansion and (4)
cell modification, that can best be understood by examining a typical
production cycle for a cell therapy product.
Cell Therapy Product Production Cycle
-------------------------------------
------------------------------------------------------------------------------------------------------------
Harvest Select Cryopreserve/ Manipulate Cryopreserve/ Thaw/Transfuse
Archiving Archiving
------------------------------------------------------------------------------------------------------------
1 2 3 4 5 6
------------------------------------------------------------------------------------------------------------
1. Cryopreservation/Archiving
The ability to deliver high cell dose, viable populations at the time a
patient is optimally prepared to receive them will be a critical factor in
successful cellular therapy. This will only happen with two precision
cryopreservation/archiving steps in the production cycle.
Compared to proteins that can be lyophilized and stored at room temperature
for long periods of time without loss of function, the viability of cells
at room temperature and even at refrigerated temperature is short and
fragile. The BioArchive technology enables the processing, cryopreservation
and archiving of single unit patient cell specimens in liquid nitrogen
(-196 degree centigrade) without harmful TWE's. This should be beneficial
for the logistical flexibility and therapeutic efficacy needed to ensure
the future growth of the industry.
2. Cell Selection
The major objective of any cell selection or purification system is the
recovery of a pure, viable cell population without significant loss of
target cells. The current BioArchive method of cell selection is to remove
excess red cells and plasma leaving all the mononuclear cells (which
includes the hematopoietic stem cells) and is embodied in the Company's
sterile, single use cell processing bag sets that are being sold to cord
blood banks through out the world directly and under license agreements.
This method requires two centrifugation steps and about 40 minutes of
manual labor to process each unit. In contrast the "Smart" stem cell
selection system currently in final stages of development is designed to
provide an automated means for selecting and isolating cells from six cord
blood units simultaneously in less than 40 minutes.
3. Cell Expansion
The major challenge for clinical application of hematopoietic stem cells
from cord blood is ex vivo expansion. Expansion of rare cells is an
attractive strategy to ensure that there are enough stem cells for rapid
engraftment, even in large adults, when the initial numbers collected from
a unit of cord blood or a donor are too small to achieve the required
therapeutic benefit.
Although there has been recent progress toward development of clinically
useful protocols for stem cell expansion, there is to date no clinical
trials that confirm the efficacy of such procedures. Stable in vitro
maintenance of the stem cell characteristic over many doublings of the
population would also allow for genetic manipulation. The Company's
proprietary freezer bag which is currently sold worldwide directly and
under license agreements is specifically designed to address this
potential.
4. Cell Modification
Cell modification includes the technologies required for: a) stimulating
stem cells to differentiate into the various cell types required for use as
regenerative therapies; b) activating antigens to immune cells to achieve
the desired therapeutic effect; and c) the insertion of a functional gene
to correct the function of an aberrant gene in the patient.
(iii) The Ultra Rapid Freezer Market
---------------------------------------
Blood banks preserve blood and plasma products by freezing them in sterile
plastic bags and then thawing them before use. Blood centers separate whole
blood collected from donors into its components, which include: erythrocyte
concentrates, platelet concentrates, fresh frozen plasma and
Cryoprecipitated Antihemophilic Factor ("AHF"). Fresh frozen plasma ("FFP")
contains the labile as well as the stable components of the coagulation,
fibrinolytic, and complement systems; the proteins that maintain pressure
and modulate immunity; and other proteins that have diverse activities. At
specialized plasma fractionation facilities, frozen plasma is further
processed into plasma derivatives for use in component therapy, such as
albumin, Factor VIII and IX, antithrombin III and immunoglobulins. The
typical uses for FFP are for direct transfusion, and as a source of
material for the preparation of Cryoprecipitated AHF. The use of FFP in the
U.S. has reached almost 2 million units annually in the USA. One reason for
the growth is the widespread acceptance of the concept of specialized
component therapy, which is replacing the transfusion of whole blood.
A unit of plasma is defined as the fluid portion of one unit of human blood
that has been centrifuged to segregate and concentrate the red blood cells
("RBC") and platelets. The plasma fraction is then moved to a satellite bag
and frozen solid at -18 degrees centigrade (or colder) within six hours of
collection. Upon freezing, this plasma is labeled FFP. Ultra-rapid freezing
through the point of fusion provides for optimum recovery of the labile
Factor VIII proteins within FFP.
Conventional freezing systems rely on air blast freezing; however, this
method requires a considerable length of time (90 ~ 120 minutes) to
thoroughly freeze a unit of FFP.
Rapid freezing is one of the easiest steps that a blood bank or center can
take to dramatically improve the quality of their processed plasma. Studies
at blood centers in the Hague (the Netherlands) and Hokkaido (Japan) showed
that the Factor VIII protein yield from cryoprecipitate from plasma could
be increased by as much as 18 to 32% by using the Company's Ultra Rapid
Plasma Freezer instead of air blast freezers.
The market for Ultra Rapid Plasma Freezers is concentrated within the blood
banks, blood transfusion centers, and plasma collection centers around the
world. The Company believes that a blood bank would typically require two
to six Freezers depending on facility size and the level of redundant
freezing capacity desired. The Company estimates that there are about 750
blood bank or plasma fractionation facilities that could require a Plasma
Freezer in the developed world; these facilities would utilize an installed
base of about 2,500 units. Assuming an eight-year life cycle for a Freezer,
the available annual market is about 312 units or 12.5% of those in the
field.
Another category of customer is the facilities where plasma fractionators
collect blood plasma from paid donors. These customers require large,
high-capacity Freezers. There are approximately 330 such facilities in the
U.S. and Canada. During fiscal year 2002 Aventis BioServices, one of the
world's largest fully integrated plasma collection companies, acquired 30
MP2200 and 9 MP1100 MicroCascade Freezers for use in several of its newly
acquired facilities. In fiscal year 1996 and 1997, Aventis purchased 76
MP2000 Freezers from the Company for their 32 domestic facilities.
(iv) The Ultra Rapid Thawer Market
-----------------------------------
Stored Frozen RBC or FFP require thawing before their transfusion. A
process of rapid homogenous thawing of frozen plasma or red blood cells is
desirable so that emergency transfusions can be quickly administrated.
Rapid thawing also reduces the time available for loss of labile proteins
(i.e.--FVIII) or growth of bacteria that may have contaminated the unit
during phlebotomy. Conventional thawing methods often utilize simple 37
degrees centigrade open air water baths which thaw frozen plasma slowly
(i.e. ~30 minutes), and were susceptible to contamination by airborne
bacteria requiring repeated decontamination of the water to maintain an
acceptable environment and conditions for thawing. With the advent of the
Company's Thawer product, which utilize sealed, membrane pocket Thawers,
the hospital blood bank can thaw frozen blood plasma in approximately
twelve minutes with substantially reduced maintenance requirements.
Since the market for Thawers is essentially all hospitals that perform
surgery, the number of potential Thawer customers is significantly larger
than the number of potential Freezer customers, however, the average sale
price for a Thawer is roughly 1/10th of a typical Ultra Rapid Plasma
Freezer. The Company believes that there are 5,000 potential Thawer
customers in the United States and another 9,000 customers around the
world. The typical Thawer customer has two Thawers on site.
II. Hospital/Wound Care Market
(i) The Commercial Fibrin Sealant (Glue) Market
Fibrin sealants are a type of protein gel used by surgeons as hemostatic
agents (material used to control or stop bleeding) or to glue tissue
together during surgery. While sutures and staples will bring tissue edges
together very effectively, they do not have inherent sealing and clotting
activity.
Fibrin sealant is a gel typically formed by mixing purified fibrinogen and
thrombin. Fibrin is completely reabsorbed by the body. Its
physical/mechanical properties enable it to serve both as a hemostatic
(clot-forming) agent and sealant (biologic glue). The formation of a fibrin
clot is a natural wound healing mechanism of the body, and therefore
completely natural - it is the body's own acute tissue adhesive. Fibrin
dissolves over the four weeks following surgery in such a way as to allow
blood to provide nutrients and healing factors to the cut tissue edge, and
nothing else in the surgeon's armamentarium provides this capability.
Conventional "first generation" fibrin sealants sourced from "pools" of
thousands of purchased units of plasma are used today for a wide variety of
surgical procedures. These include the major blood-loss surgeries of the
cardiovascular, pulmonary, and liver regions. Fibrin sealants are used to
seal needle holes, pulmonary leaks, and to seal slow oozing wounds. Fibrin
sealants provide excellent adhesion for skin graft, plastic surgery
procedures, and sealing the dura to prevent cerebral spinal fluid leaks.
Current Market Spending for Fibrin Sealants
The March 2002 MedMarket Diligence-Worldwide Wound Sealant Market Report
estimated the 2001 worldwide revenue for fibrin sealants to be
approximately $460 million. calendar year 1999 was the first full year in
which commercial fibrin sealants (Tisseel (Baxter) and HemaSeal (HemaCure)
were sold in the United States. With the expected FDA clearance/approvals
of new products and continued educational efforts by existing fibrin
sealant suppliers driving growth in the number of surgical procedures using
fibrin sealant in the U.S. market, the Company believes worldwide revenues
should grow to over $600 million by 2007.
In Europe and Japan, these "first generation" fibrin sealants, sourced from
pooled blood plasma, have enjoyed a long-term presence and represent about
90% of the procedures utilizing surgical sealants in those markets. The
cost of these fibrin sealants range between $45 and $65 per ml delivered to
the wound site depending on the country and the purchasing plan. Given
their cost they are typically purchased in smaller volumes of about 5 ml
per procedure. Management believes that commercial fibrin sealants are used
in about 300,000 European and 530,000 Japanese surgical procedures.
Baxter's Tissucol (a pre-frozen version of Tisseel) has the largest share
of the European market and Aventis's Beriplast has the largest share of the
Japanese market.
The Need for Biomaterials Prepared From Single Units of Blood - The
automated manufacturing of biological products, such as fibrin sealants,
platelet gels, platelet derived growth factors ("PDGF"), thrombin and
cryoprecipitate from individual units of blood or blood plasma, is a
technology pioneered by the Company and possesses significant advantages in
the marketplace. For example, conventional "first generation" fibrin
sealant is prepared from units of plasma purchased from more than 10,000
individuals and combined in a single pool. The risk of viral or prion
transmission by blood products continues to increase each year as new
infectious viruses or other pathogens are discovered. This risk rises
dramatically when the source plasma is a pool of 10,000 units rather than a
single unit. The potential for transmission of pathogens has now been
documented in the literature.
o "Epidemiologic evidence suggests that more than 20% of uninfected
persons were subsequently infected with Human Parvo Virus ("HPV") B19
by use of fibrin sealant (commercial pooled) during surgery." Annals
Thoracic Surgery 2002; 73:1098-100.
o With this recent knowledge comes concerns for the overall safety of
all blood products in particular those that are pooled. For example,
the sometimes lethal West Nile River Encephalitis virus transmitted by
mosquitoes has now spread throughout most of the United States. The
Center for Disease Control ("CDC") has now confirmed that our blood
supply is being contaminated by unwitting blood donors who only
experienced a flu like effect. Further, Transfusion Transmitted Virus
("TTV") is thought to be a form of hepatitis yet to be characterized
and along with Parvovirus B19, is resistant to the most commonly used
solvent detergent ("SD") viral inactivation technology. Prions,
infectious protein particles which cause spongiform encephalopathies
in cows (Mad Cow Disease) and humans (new variant Creutzfelt Jacob
Disease or nvCJD), are 100% lethal to infected patients, resistant to
all known forms of viral inactivation technology, elude all forms of
rapid detection, and cannot be diagnosed in patients except through a
biopsy of the dead victim's brain.
o Blood products sourced from pools of human plasma often contain
additional proteins, and possibly viruses derived from animals such as
cows (bovine lung aprotinin and bovine thrombin are ingredients of
currently available commercial sealants) or snakes (batroxibin, which
is sourced from snake venom is used as a substitute for human thrombin
by one sealant currently being marketed in Europe). Animal proteins
may provide a vehicle for the contamination of pooled plasma products
by viruses or prions (several cases have been documented where victims
contracted nvCJD as a result of taking growth hormones containing
bovine substances).
o In addition, it has been reported that animal proteins in bovine
source collagen have triggered allergic reactions leading to
anaphylactic shock in exposed patients. Also, Factor V-based bleeding
disorders have occurred in patients exposed to bovine Factor V present
in commercial preparations of bovine thrombin.
o Government restrictions on allowable blood donors has led to a
shortage in the nation's blood supply. The August 1999 ruling by the
FDA preventing anyone who had spent extended amounts of time in the
United Kingdom between the years 1980 and the present from donating
blood in U.S. blood centers, was estimated at having eliminated
approximately 500,000 donors from the U.S. donor pool. This ruling was
recently expanded to a two step increase in restrictions, narrowing
the window of visiting the U.K. to 3 months from 6 months, and
expanding the restricted donor list to U.S. personnel stationed at
military bases in Europe, and ultimately expanding the restrictions to
anyone who has lived anywhere in Europe for five or more years. These
restrictions can only increase the magnitude of the nation's current
blood shortage. Concurrent to the ever increasing shortage of blood
donors is a corresponding increase in the demand for autologous blood
products, and/or products which can reduce the need for allogeneic
blood products.
o As a consequence of the increase in the demand for autologous blood
products the CryoSeal FS Platform is designed to provide a "second
generation" fibrin sealant sourced from a single unit of autologous or
allogeneic plasma, and with a protein composition enriched in the
additional wound healing proteins fibronectin, Factor VIII, Factor
XIII and von Willebrands factor.
Listed below and by market, are products with regulatory status and sterile
blood processing disposables that enable low cost, high quality production and
market penetration for each of the cell therapy products.
Product Strategy
I. Blood Bank products
A. BioArchive System
Function: Processing, Cryopreservation and Archiving of blood components
units
Proprietary Sterile Disposables: Freezer Bag, Processing set, Storage
Canisters, Processing Reagents
The BioArchive System, introduced in 1998, has been purchased by 48 cord blood
stem cell banks in 21 countries to process, cryopreserve and archive therapeutic
populations of hematopoietic stem cell units harvested from human placentas/cord
blood. These stem cells are used to replace the hematopoietic system of patients
suffering from leukemia, lymphoma and various genetic diseases like sickle cell
anemia and thalassemia. These neonatal stem cells are free of the ethical issues
surrounding embryonic stem cells. To date the Company's sales of BioArchive
Systems to cord blood stem cell banks has established an available inventory
capacity of more than 230,000 stem cell units. The Company estimates that
globally, more than 2,000,000 stem cell units will be accumulated over the next
five years in order to make available the HLA diversity required to meet the
world's need for this important new life giving therapy. More than five years
after the initial launch of the BioArchive System, it remains the only, totally
integrated, stem cell processing and automated cryo-preservation system
available to cord blood banks. During fiscal 2003, the Company joined efforts to
promote federal legislation bill, HR2852, created to finance a National Cord
Blood Stem Cell Bank Network designed to manufacture and maintain an inventory
of 150,000 units of human cord blood stem cells for the treatment of patients,
and to support peer-reviewed research using such cells.
Regulatory Status: Currently sold in the USA to Cord Blood Banks operating under
Investigational New Drug Exemption ("IND") and research facilities; CE Mark has
been obtained for sales in Europe and Asia have commenced FDA submission filing
for Processing, Storage, and Archiving Cord Blood Stem Cells is projected for
late 2003
B. "Smart" Blood Components Selection System
Function: Separation from blood
Proprietary Sterile Disposables: Smart Bag Processing Kit
The Blood Selection System is an innovative method of automating and speeding up
the selection of stem cells from cord blood. The "Smart" processing device can
be loaded with a unit of cord blood contained within the proprietary 3 bag cell
selection set and is small enough to be inserted into each of the 6 cups of a
standard blood bank certifuge, thus allowing up to six cord blood units to be
processed simultaneously. During the centrifugation the cells are automatically
isolated into a 20 ml. volume of plasma, white cells and red cells and
transferred to the freezing bag. In this same automated process the excess red
cells are transferred to the third bag and the left over plasma is retained in
the original bag that initially contained the blood.
Regulatory Status: FDA 510(K) application for the "Smart" system as a device
which separates blood cells from cord blood is projected to be filed in late
2003
C. ThermoLine Products: Plasma Freezers and Thawers
Function: Rapid Plasma Freezing or Thawing
From 1987 to 1998, the Company's primary revenues were from sales of ThermoLine
products which are Ultra Rapid Blood Plasma Freezers and Thawers. These high
performance devices are sold directly by the Company to hospitals, blood banks,
blood transfusion centers, and plasma collection centers in the United States
under FDA licensed facilities and through distributors in foreign countries.
These ThermoLine products feature innovative hardware and software, but no
processing disposables.
Regulatory Status: The Freezers are exempt from submission of a 510(K)
Application. The Thawers are submitted and cleared through a 510(K) Application.
II "Hospital/Wound Care Center" Products:
1. CryoSeal System
Function: Selecting clotting & wound healing proteins & thrombin from blood
plasma
Proprietary Sterile Disposables: CP-3 Protein Sealant Processing Kit,
Autologous Thrombin Processing Device, Reagents, Surgical Dispensing
Applicator Tips
The CryoSeal FS System, that produces and dispenses a two-component fibrinogen
and fibronectin rich protein sealant for surgical hemostasis and tissue
adhesives has CE Mark approval in the European community, Canadian MHW approval
and registration in Brazil, thus allowing sales and marketing activities to
begin in each of these important markets. The Company has executed contracts
with strategic medical device distributors and has commenced market launch for
each of the European, Canadian and most recently in Brazilian geographies.
In addition, the Company finalized agreements with eight (8) US teaching
hospitals with large liver resection practices in an effort to complete its FDA
Phase III clinical trial utilizing CryoSeal sealant to achieve hemostasis on the
resectioned liver surfaces. Human clinical trials are underway in Japan with
expected completion in December 2003. Application for Japan MHLW (Ministry of
Health, Labour and Welfare) approval will be made for both products approval and
reimbursement for use by its surgeons.
Regulatory Status: A Premarket Application ("PMA") is expected to be filed with
the FDA in the third quarter of fiscal 2004 and approval anticipated within
calendar year 2004.
2. Thrombin Processing Device ("TPD")
Function: Selecting activated thrombin from blood plasma
Proprietary Sterile Disposables: Thrombin Processing Kit, Reagents, Whole
Blood Processing Kits
Thrombin is an enzyme that acts on fibrinogen in blood causing it to clot. The
TPD is a unique, sterile single use disposable, in that it can produce
approximately 8 ml of activated thrombin from a 10 ml aliquot of the patients
blood. Thrombin is used as a general hemostatic agent by surgeons to suppress
light "oozing" bleeding.
Regulatory Status
A Substantially Equivalent 510K is estimated to be filed by the fourth quarter
of fiscal 2004.
(C) CLINICAL SUMMARY STATUS
- --------------------------------
CryoSeal FS System:
(1) As of July 15, 2001 the Company successfully completed the
pre-clinical studies designed to characterize CryoSeal Fibrin Sealant
for our Investigational Device Exemption ("IDE") submission to the
FDA:
o Chemical Characterization of the Thrombin and Fibrinogen and
Protein-rich Cryoprecipitate. In vitro assays were performed to
demonstrate the reproducibility of the system and its performance
across a significant sampling of donor plasmas, the impact of
system variables on system performance, including fresh vs.
frozen plasma, starting plasma volume and the type of
anticoagulant present, the protein composition as well as the
short and long term stability of the final thrombin and
cryoprecipitate preparations.
o Determination of Tensile Strength of the Thrombin and
Fibrinogen-rich Cryoprecipitate. In vitro tensile (mechanical)
strength measurements were performed on CryoSeal Fibrin Sealant,
as well as a commercial fibrin sealant, using equipment designed
for such purpose.
o Demonstration of Pre-Clinical Efficacy of CryoSeal Fibrin Sealant
during Pig Liver Resectioning. An in vivo animal model, pig liver
resectioning, was performed to refine the technique of applying
the CryoSeal Fibrin Sealant to the surgical site, determination
of the time to hemostasis.
(2) In March of 2001, CE Mark approval was granted by the European
community, thus approving the CryoSeal FS System for commercial
activities within the European Community. A number of European
clinical studies are planned during the fiscal year 2004 to
demonstrate the product's efficacy with a wide array of surgical
procedures.
(3) In May of 2001, a license was granted by the Canadian government
approving the CryoSeal FS System for commercialization within Canada.
A number of Canadian clinical studies are planned during the fiscal
year 2003 to demonstrate the product's efficacy with a number of
different surgical procedures.
(4) In August 2001, an IDE was filed with the FDA requesting approval to
initiate phase III human clinical trials for liver resectioning. The
filing and the approval of the results of the phase III clinical
trials will enable the Company to immediately initiate commercial
activities for the CryoSeal FS System in the United States.
(5) On July 31, 2002, the Company announced that an independent Data
Safety Monitoring Board ("DSMB"), comprised of surgeons, a
biostatician and an ethicist, recommended proceeding with the
multi-center pivotal trial for the CryoSeal FS System. Other than
initial filing of applications and final agency approval of such
applications, the Company does not comment on the day-to-day details
of ongoing clinical activities.
(6) As of July 31, 2003, the Company is enrolling patients or actively
seeking to enroll patients into our Phase III clinical study: The
University of Miami - Sylvester Cancer Center, Johns Hopkins Cancer
Center, Mount Sinai Medical Center, St. Vincent Medical Center,
University of California Los Angeles Dumont Liver Cancer Center, The
University of Chicago Medical Center, and The University of Southern
California.
(7) As of August 31, 2003 Status of CryoSeal Launch in Europe The launch
of CryoSeal in Italy has been quicker than other European countries
due to a easier validation and licensure process. We are in the early
stages of starting validation trials in other European countries
outside of Italy. ThermoGenesis and its distributor are combining its
marketing efforts to accelerate the autologous and homologous CryoSeal
products in those countries that best fit each model. We are
initiating the regulatory activities required to enter those countries
that require additional trials, clinical studies and/or laboratory
studies to characterize the FS product. Many of these countries also
require that the plasma used to produce the FS either be autologous or
virally inactivated homologous.
(D) Competition
- ----------------
Blood Bank
(i) Cord Blood Banking and Cell Therapy
The Company believes that the competition for selling equipment and
disposables to the cell therapy market, as well as the commercial and
public placental/cord blood stem cell banking market is limited to
manufacturers of individual cryogenic components (dewars, controlled rate
freezers, etc.) of conventional systems, such as Taylor Wharton and MVE.
Five years after initiating commercial activities with the first totally
integrated cryopreservation system (BioArchive System) for placental/cord
blood stem cell banking, the competition is the same: manufacturers of
individual conventional cryogenic equipment such as dewars, controlled rate
freezers, etc. The vast majority of cell therapy companies rushing to
initiate human clinical trials are utilizing a variety of existing cell
selection and cryogenic manufacturing and delivery processes that limit
their attractiveness with regards to product expiration dating, patient
scheduling and actual product design. The Company anticipates greater
demand for the BioArchive System and compatible disposables as cell therapy
companies work to develop products that are more end user friendly and
provide the manufacturer with greater logistical flexibility. This could
lead to other competitors emerging to provide various products which
deliver one or more of the needed enabling technologies for the future
growth of the cell therapy industry.
(ii) Freezers: North American Competitors
In North America, the three major manufacturers of plasma freezers are the
Company, SPX/SGA Division and Forma Scientific. ThermoGenesis Corp.
utilizes a liquid heat transfer freezing method while Forma Scientific and
SPX use an air blast freezing method.
(iii) Thawers: North American Competitors
In North America, the four major manufacturers of plasma thawers are the
Company, Helmer, Cytotherm and Genesis. Management's view of the relative
technologies follows:
----------------------------------------------------------------------------------------------------------------------
Company Thawing Method Advantage Limitations
----------------------------------------------------------------------------------------------------------------------
THERMOGENESIS CORP. o Membrane pockets o Rapid thaw o Unit capacity
and semi-closed o Low maintenance limited to number of
system o Plasma is contained pockets
o Heat transfer fluid in membrane pocket
----------------------------------------------------------------------------------------------------------------------
Helmer o Water bath o Contamination of
o Open air system water
o Frequent water
changes
o Longer thaw period
----------------------------------------------------------------------------------------------------------------------
Cytotherm-Water Bath o Water bath o Same as Helmer
o Open air system
Cytotherm-Dry System o Hot Water bladders o Plasma is not o Unit Capacity
o Sequential exposed to water o Longer thaw period
compression
----------------------------------------------------------------------------------------------------------------------
Genesis o Water Bath o Same as Helmer
o Open Air System
----------------------------------------------------------------------------------------------------------------------
Hospital/Wound Care Market
- --------------------------
(i) Commercial Fibrin Sealants
The Company is aware of six companies which have developed or are
developing commercial fibrin glues: Baxter, Hemacure, Aventis, Vivolution
and Omrix Pharmaceuticals. To date, only Baxter, Hemacure, and Omrix have
received FDA approval to market their products in the US. In addition,
Cohesion Medical and Fusion Technologies produce similar products that are
biological sealants, but are not true fibrin sealants in that they do not
provide concentrated fibrinogen to the wound site, which significantly
reduces their visco-elastic and burst strength relative to fibrin sealants.
Furthermore, both products contain bovine thrombin and bovine collagen,
which increase the risk of transmission of non-human viruses and prions. In
addition, Focal's FocalSeal-L a synthetic sealant made from polyethyl
glycol ("PEG"), received FDA approval in May 2000 for sealing air leaks in
lungs.
(E) Research and Development
-------------------------------
The future R&D activities of the Company will be devoted to the completion
of the CryoSeal FS System's human clinical trial for the control of
bleeding during liver resectioning surgery, and as listed below 1) an
investigation of the use of the CryoSeal FS product to include preterm
premature rupture of membranes ("PPROM"), 2) the development of an
automated cell separation system derived from the BioArchive research
program, and 3) producing and marketing a TPD for preparation of Thrombin
for use in Platelet Gels.
1) Preterm Premature Rupture Of Membranes, ("PPROM") The goal of the PPROM
project is to develop a disposable which would provide fibrin glue to the
site of the membrane rupture. This would allow expectant mothers to carry
the babies longer. PPROMS may be responsible for 30% to 40% of pre-term
births, with an overall perinatal mortality rate approaching 60%. Recent
interventions attempting to reseal ruptured membranes using conventional or
surgeon-prepared "Fibrin Glues" show promising preliminary results. The aim
of the PPROM project is to produce preliminary data on the effectiveness of
the CryoSeal's Fibrin Sealant in this application for submittal of a NIH
grant.
2) The "Smart" Automated Cell Separation System (Smart Set) is a new platform
technology which features improved recovery and viability of hematopoietic
stem cell ("HSCs") and progenitor cells isolated from placental/cord blood
("UCB") and RBC, platelets and plasma from whole blood. The device and
disposable processing set are designed to separate blood components and
meter them into separate containers all during the centrifugation process.
The device will contain a sensor with microprocessor controlled
intelligence to differentiate blood components (e.g., plasma, red blood
cells, white blood cells, including stem cells) for the separation process,
and will fit into existing customer processing centrifuges. The automated
process will reduce production time, give consistent yields, and improve
stem cell recovery. The Smart Bag will be targeted at existing BioArchive
customers.
3) Upgraded Freezer Bag for BioArchive is produced through a proprietary
manufacturing process that allows for a more reliable and less expensive
freezer bag for Mononuclear Cells ("MNC") storage.
4) The Thrombin Processing Device ("TPD") Currently the Company produces a
stand-alone TPD for Interpore Cross for spinal surgery. The goal of the TPD
project is to develop a disposable that various customers will use to
product active thrombin from a single unit of blood plasma for orthopedic,
cardiovascular, gastrointestinal, and neurological markets. Thrombin is
also a key ingredient in the preparation of platelet gels commonly used for
chronic dermal wound therapy.
The Company has incurred R&D expenses of $2,937,000, $2,283,000 and $1,782,000
for fiscal years ending June 30, 2003, 2002 and 2001, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(F) Description of Device Manufacturing
- --------------------------------------------
The Company is currently manufacturing all major instruments and equipment sold
by the Company, as well as manufacturing a limited number of its disposable
products (Thrombin Reagent and the BioArchive Overwrap Bag). The manufacturing
site is compliant to the FDA's Quality System Regulations ("QSR"), the European
ISO 9001 and ISO 13485. The Company believes that vendors used by the Company
are capable of producing sufficient quantities of all required components.
Products manufactured or sold by the Company are warranted against defect in
manufacture for major instrument equipment for a period of 12 months from
shipment or installation, as applicable, when used for the equipment's intended
purpose, which warranties exclude consequential damages to the extent allowed by
law.
Instrument Manufacturing- The Company manufactures the BioArchive
instrument, the Auto-Expressor, CS-1 instrument, Ultra Rapid Plasma
Freezers and Ultra Rapid Plasma Thawers at its ISO 9001 and FDA Compliant
Rancho Cordova, CA facility. The Company assembles the hardware from
multiple subassemblies supplied by a wide base of skilled suppliers.
However, the Company manufactures certain sub-assemblies, e.g., the
BioArchive robotic, barcode-reading periscope, in their entirety at the
Rancho Cordova facility. All parts and subassemblies are procured from
qualified suppliers. Trained ThermoGenesis employees inspect incoming parts
and sub-assemble products and perform final QC release based on performance
criteria. All processes are procedurized and either verified or validated
to ensure products meet specification.
Disposables Manufacturing- The Company utilizes contract, manufacturers
with FDA registered facilities that we believe have the technical
capability, production capacity to manufacture our CryoSeal and BioArchive
disposables.
Thrombin Reagent and BioArchive Overwrap Bag Manufacturing- The
manufacturing process for the Thrombin Reagent occurs at two different
facilities, THERMOGENESIS CORP. and at a contract manufacturer. We perform
the initial manufacturing processes at our manufacturing facilities. After
filling and stoppering of the syringes, the syringes are shipped to our
contract manufacturer where they are terminally sterilized, individually
labeled and packaged. Our Quality Assurance Department is responsible for
final product release. All processes associated with the manufacture of the
BioArchive overwrap bag occur at the Company's manufacturing facility.
The majority of the materials used to produce the Company's products are readily
available from various sources. Based upon current information from
manufacturers, the Company does not anticipate any shortage of supply. In the
event that it becomes necessary for us to obtain raw materials from an
alternative supplier, we would first be required to qualify their quality
assurance systems and product of that alternative supplier.
We, as well as any contract manufacturers of our products, are subject to
inspections by the FDA and other regulatory agencies for compliance with
applicable good manufacturing practices, codified in the Quality System
Regulation, or Quality Systems Regulation ("QSR's"), which include requirements
relating to manufacturing conditions, extensive testing, control documentation
and other quality assurance procedures. Our facilities have undergone an ISO
9001 and ISO 13485 and Medical Device Directives ("MDD") inspection, in
preparation for obtaining a CE Mark on our products, in addition to annual FDA
renewal and a State Food and Drug inspection. However, the new facility the
Company moved into in July 2003 has not yet been inspected. Failure to obtain or
maintain necessary regulatory approval to market our products would have a
material adverse impact on our business. See "Factors Affecting Operating
Results."
(G) Government Regulation
- -----------------------------
The product development, pre-clinical and clinical testing, manufacturing,
labeling, distribution, sales, marketing, advertising and promotion of the
Company's research, investigational, and medical devices are subject to
extensive government regulation in the United States, and also in other
countries. These national agencies and other federal, state and local entities
regulate, among other things, development activities and the testing (in vitro
and in clinical trials), manufacture, safety, effectiveness, labeling, storage,
record keeping, approval, advertising and promotion of our products.
The extent of the process required by the FDA before a medical device may be
marketed in the United States depends on the classification of device. If the
medical device is a Class III such as the CryoSeal FS System, the process
includes the following:
o Extensive pre-clinical laboratory and animal testing;
o Submission and approval of an IDE application;
o Human clinical trials to establish the safety and efficacy of the medical
device for the intended indication; and
o Submission and approval to the FDA for approval of a PMA.
Pre-clinical tests include laboratory evaluation of product
chemistry/biochemistry and animal studies to assess the potential efficacy of
the product. Safety testing includes tests such as biocompatibility, package
integrity and stability. Pre-clinical tests must be performed by laboratories
that comply with the FDA's Good Laboratory Practices ("GLP's") regulations. The
results of the pre-clinical tests are submitted to the FDA as part of an IDE
application and are reviewed by the FDA before human clinical trials can begin.
Human clinical trials can begin when IDE approval is granted.
Clinical trials involve the application of the medical device or biologic
produced by the medical device to patients by a qualified medical investigator
according to an approved protocol and approval from an Institutional Review
Board IRB. Clinical trials are conducted in accordance with FDA regulations and
an approved protocol that detail the objectives of the study, the parameters to
be used to monitor participant safety and efficacy or other criteria to be
evaluated. Each protocol is submitted to the FDA as part of the IDE. Each
clinical study is conducted under the approval of an IRB. The IRB considers,
among other things, ethical factors, the potential risks to subjects
participating in the trial and the possible liability of the institution. The
IRB also approves the consent form signed by the trial participants.
Medical device clinical trials are typically conducted as a phase III clinical
trial. A safety pilot trial may be performed prior to initiating the phase III
clinical trial to determine the safety of the product for specific targeted
indications to determine dosage tolerance, optimal dosage and means of
application and identify possible adverse effects and safety risks. Phase III
trials are undertaken to confirm the clinical efficacy and safety of the product
within an expanded patient population at geographically dispersed clinical study
sites. The FDA, the clinical trial sponsor, the investigators or the IRB may
suspend clinical trials at any time if any one of them believe that study
participants are being exposed to an unacceptable health risk.
The results of product development, pre-clinical studies and clinical studies
are submitted to the FDA as a PMA for approval of the marketing and commercial
shipment of the medical device. The FDA may deny a PMA if applicable regulatory
criteria are not satisfied or may require additional clinical testing. Even if
the appropriate data is submitted, the FDA may ultimately decide the PMA does
not satisfy the criteria for approval. Product approvals, once obtained, may be
withdrawn if compliance with regulatory standards are not maintained or if
safety concerns arise after the product reaches the market. The FDA may require
post-marketing testing and surveillance programs to monitor the effect of the
medical devices that have been commercialized and has the power to prevent or
limit future marketing of the product based on the results of such programs.
Each domestic manufacturing establishment in California must be registered with
by the FDA and the California State Food and Drug Branch. Domestic manufacturing
establishments are subject to biennial inspections by the FDA and annual
inspections by the State of California for compliance with the QSRs. We are also
subject to U.S. federal, state, and local regulations regarding workplace
safety, environmental protection and hazardous materials and controlled
substance regulations, among others. The Company has a California Environmental
Protection Agency Identification number for the disposal of bio-hazardous waste
from its research and development biological lab.
Some of our products which have a lower potential safety risk to the intended
user or patient, and which have similar, competitive products previously cleared
by the FDA for the same intended indication, may utilize a simpler and shorter
regulatory path called a Premarket Notification or a 510(k) application to gain
commercial access to the marketplace. This regulatory process requires that the
Company demonstrate substantial equivalence to a product which was on the market
prior to May 29, 1976, or which has been found substantially equivalent after
that date.
Some of our products that have minimal risk to the intended user and do not
involve direct patient interaction may be deemed by the FDA as being exempt from
FDA review. These products still require compliance with QSRs.
Failure to comply with applicable FDA requirements can result in fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, distribution, sales and marketing, or refusal of the
FDA to grant clearance of a PMA or clearance of a 510(k). Actions by the FDA
might also include withdrawal of marketing clearances and criminal prosecution.
Such actions could have a material adverse effect on the Company's business,
financial condition, and results of operation.
(H) Patents and Proprietary Rights
- ---------------------------------------
The Company believes that patent protection is important for products and
potential segments of its current and proposed business. In the United States,
the Company currently holds 19 patents, and has seven (7) patents pending to
protect the designs of products which the Company intends to market. There can
be no assurance, however, as to the breadth or degree of protection afforded to
the Company or the competitive advantage derived by the Company from current
patents and future patents, if any. Although the Company believes that its
patents and the Company's existing and proposed products do not infringe upon
patents of other parties, it is possible that the Company's existing patent
rights may be challenged and found invalid or found to violate proprietary
rights of others. In the event any of the Company's products are challenged as
infringing, the Company would be required to modify the design of its product,
obtain a license or litigate the issue. There is no assurance that the Company
would be able to finance costly patent litigation, or that it would be able to
obtain licenses or modify its products in a timely manner. Failure to defend a
patent infringement action or to obtain a license or implementation of
modifications would have a material adverse effect on the Company's continued
operations.
While patents have been issued or are pending, the Company realizes (a) that the
Company will benefit from patents issued only if it is able to market its
products in sufficient quantities of which there is no assurance; (b) that
substitutes for these patented items, if not already in existence, may be
developed; (c) that the granting of a patent is not a determination of the
validity of a patent, such validity can be attacked in litigation or the Company
or owner of the patent may be forced to institute legal proceedings to enforce
validity; and (d) that the costs of such litigation, if any, could be
substantial and could adversely affect the Company.
(I) Factors Affecting Future Results
- ------------------------------------------
We Have Incurred Net Losses since Our Inception and Expect Losses to Continue.
Except for net income of $11,246 for fiscal 1994, we have not been profitable
since our inception. For the fiscal year ended June 30, 2003, we had a net loss
of $5,603,000, and an accumulated deficit at June 30, 2003, of $54,713,000. The
report of independent auditors on our June 30, 2003, financial statements
includes an explanatory paragraph indicating there is substantial doubt about
our ability to continue as a going concern. Although we are executing on our
business plan to market launch new products, continuing losses will impair our
ability to fully meet our objectives for new product sales and will further
impair our ability to meet continuing operating expenses that may result in
staff reductions and curtailment of clinical trials currently planned. See Risk
Factor entitled " If We Are Unable to Raise Funds, Our Growth May Be Adversely
Affected" below.
If We Are Unable to Raise Funds, Our Growth May Be Adversely Affected.
Historically, we have had to seek capital for our growth and operations due to
lack of revenues. Based on net proceeds of approximately $5.3 million received
from our March 26, 2003 private placement, we believe that as of June 30, 2003,
we will have sufficient working capital to fund our operations for the next
twelve months. However, if actual sales do not meet expectations, or marketing,
production and clinical trial costs increase significantly, we will need
additional financing to complete and implement our long-term business
objectives. Further, delays in obtaining required governmental clearances for,
or additional testing requirements prior to, marketing our new products will
result in decreased revenues and increased costs that may require us to seek
additional financing. In the event that there is a cash shortage and we are
unable to obtain a debt financing, additional equity financing will be required,
which will have the effect of diluting the ownership of existing stockholders.
We Have Limited Testing Data and Must Complete Further Testing Successfully in
Order to Gain Food and Drug Administration Approval Required to Market our
CryoSeal Fibrin Sealant System in the United States. The Company is conducting
the pivotal trial of its CryoSeal FS System in the United States. While these
studies provide a basis to achieve regulatory permission to promote these
systems for some of the indications that management believes can be achieved,
they do not provide a basis to achieve all of the indications. Further clinical
studies must be performed. There can be no assurance that the clinical studies
can be successfully completed within the Company's expected time frame and
budget, or that the Company's products will prove effective in the required
clinical trials. If the Company is unable to conclude successfully the clinical
trials of its products in development, the Company's business, financial
condition and results of operations could be adversely affected.
Our Failure to Develop New Products Will Adversely Affect Our Future Growth.
Historically, substantially all of our sales have been from products related to
freezing, thawing, and storing of blood plasma. Because we expect this segment
of the blood plasma market to have limited growth potential, new products for
the biotechnology market will have to be successfully developed and marketed for
future growth. We are currently focused on marketing novel blood processing
systems such as the CryoSeal FS System for the automated production of
autologous or allogeneic blood components used as a fibrin sealant. Although
this product uses technology related to our core competence, it also represents
a departure from our former core blood plasma business. Further, although we
have had discussions with experts in areas of application for this product, it
is still in its development and/or initial market phase. No assurance can be
given that potential products can be successfully developed, and if developed,
that a market will also develop for them.
If We Fail to Maintain Our Listing, Liquidity of the Company's Stockholders Will
Be Adversely Affected. The Nasdaq SmallCap Market on which our common stock is
traded has established certain maintenance listing requirements that must be
satisfied in order for a company's shares to continue to be listed. Currently,
our common stock meets the Nasdaq SmallCap Market maintenance listing
requirements. However, if we continue to incur losses, this may affect our
ability to meet the stockholders' equity of $2.5 million requirement or minimum
Bid Price of $1 per share requirement as set by the Nasdaq SmallCap Market. We
cannot assure that we will always be able to meet the Nasdaq SmallCap Market
listing in the future. Failure to meet the Nasdaq SmallCap Market listing
requirements could result in the delisting of our common stock from the Nasdaq
SmallCap Market, which may adversely affect the liquidity of our shares.
Our Business is Heavily Regulated, Resulting in Increased Costs of Operations
and Delays in Product Sales. Most of our products require FDA approval to sell
in the U.S. FDA user fees for the review of applications and will require
clearance from comparable agencies to sell our products in foreign countries.
These clearances may limit the U.S. or foreign market in which our products may
be sold or circumscribe applications for U.S. or foreign markets in which our
products may be sold. The majority of our products related to freezing blood
components are currently exempt from the requirement to file a 510(k) pre-market
application. These products are currently marketed and sold worldwide. Further,
our products must be manufactured under principals of our quality system for
continued CE Marking that allows our products to be marketed and sold in Europe,
which are similar to the quality system regulations of both the FDA and
California Department of Health. Failure to comply with those quality system
requirements and regulations may subject the Company to delays in production
while it corrects any deficiency found by either the FDA, the State of
California or the Company's Notifying European Body during any audit of our
quality system. With limited working capital and resources there is no assurance
that we will not be found to be out of compliance, resulting in warning letters
or even temporarily shut down in manufacturing while the non-conformances are
rectified.
Influence By the Government and Insurance Companies May Adversely Impact Sales
of Our Products. Our business may be materially affected by continuing efforts
by government, third party payers such as Medicare, Medicaid, and private health
insurance plans, to reduce the costs of healthcare. For example, in certain
foreign markets the pricing and profit margins of certain healthcare products
are subject to government controls. In addition, increasing emphasis on managed
care in the U.S. will continue to place pressure on the pricing of healthcare
products. As a result, continuing effort to contain healthcare costs may result
in reduced sales or price reductions for our products. To date, we are not aware
of any direct impact on our pricing or product sales due to such efforts by
governments to contain healthcare costs, and we do not anticipate any immediate
impact in the near future.
Our Inability to Protect Our Patents, Trademarks, and Other Proprietary Rights
could Adversely Impact Our Competitive Position. We believe that our patents,
trademarks, and other proprietary rights are important to our success and our
competitive position. Accordingly, we devote substantial resources to the
establishment and protection of our patents, trademarks, and proprietary rights.
We currently hold patents for products, and have patents pending for additional
products that we market or intend to market. However, our actions to establish
and protect our patents, trademarks, and other proprietary rights may be
inadequate to prevent imitation of our products by others or to prevent others
from claiming violations of their trademarks and proprietary rights by us. If
our products are challenged as infringing upon patents of other parties, we will
be required to modify the design of the product, obtain a license, or litigate
the issues, all of which may have an adverse business effect on us.
Failure to Protect Our Trade Secrets May Assist Our Competitors. We use various
methods, including confidentiality agreements with employees, vendors, and
customers, to protect our trade secrets and proprietary know-how for our
products. However, such methods may not provide complete protection and there
can be no assurance that others will not obtain our know-how, or independently
develop the same or similar technology. We prepare and file for patent
protection on aspects of our technology which we think will be integrated into
final products early in design phases, thereby attempting to mitigate the
potential risks.
Competition in Our Industry is Intense and Will Likely Involve Companies with
Greater Resources than We Have. We hope to develop a competitive advantage in
the medical applications of our products, but there are many competitors that
are substantially larger and who possess greater financial resources and
personnel than we have. Our current principal market is the users of ultra-rapid
blood plasma freezing and thawing equipment. There are companies that sell
freezers to the blood plasma freezing industry that are larger and possess
greater financial and other resources than we do. The CryoSeal System may face
competition from major plasma fractionaters that currently sell fibrin glue
sourced from pooled plasma outside the U.S. With regard to the BioArchive
System, numerous larger and better-financed medical device manufacturers may
choose to enter this market as it develops.
We Have a Limited Marketing and Sales Force for New Products Which May Delay Our
Goal of Increased Sales Levels. We currently sell our existing medical devices
through a direct sales and marketing force, and our foreign distribution
network. Although we have entered into exclusive distribution agreements for our
two new platform products and we continue to seek strategic partners, there are
no assurances that the distributors will produce significant sales of the
systems.
Our Lack of Production Experience May Delay Producing Our New Products. We have
manufactured our blood plasma Thawers, Freezers and BioArchive Systems for a
number of years. Although we have redesigned our manufacturing facility to
accommodate the BioArchive System and the CryoSeal System, we do not have
significant experience in manufacturing the CryoSeal System or in the
manufacture of disposables. There can be no assurance that our current resources
and manufacturing facility could handle a significant increase in orders for
either the BioArchive System or the CryoSeal System. If we are unable to meet
demand for sales of the new systems, we would need to contract with third-party
manufacturers for the backlog, and no assurances can be made that such
third-party manufacturers can be retained, or retained on terms favorable to us
and our pricing of the equipment. Inability to have products manufactured by
third parties at a competitive price will erode anticipated margins for such
products, and negatively impact our profitability.
Our New Products Are at Initial Market Introduction, and We Are Not Sure the
Market Will Accept Them. The market acceptance of our new products in
development will depend upon the medical community and third-party payers
accepting the products as clinically useful, reliable, accurate, and cost
effective compared to existing and future products or procedures. Market
acceptance will also depend on our ability to adequately train technicians on
how to use the CryoSeal System and the BioArchive System. Even if our new
product systems are clinically adopted, the use may not be recommended by the
medical profession or hospitals unless acceptable reimbursement from health care
and third party payers is available. Failure of either of these new systems to
achieve significant market share could have material adverse effects on our long
term business, financial condition, and results of operation.
Failure to Keep Our Key Personnel May Adversely Affect Our Operations. Failure
to retain skilled personnel could hinder our operations. Our future success
partially depends upon the continued services of key technical and senior
management personnel. Our future success also depends on our continuing ability
to attract, retain and motivate highly qualified managerial and technical
personnel. The inability to retain or attract qualified personnel could have a
significant negative effect upon our efforts and thereby materially harm our
business and financial condition. We have entered into employment agreements
with each member of our senior management. Specifically, we are dependent upon
the experience and services of Philip H. Coelho, Chairman and Chief Executive
Officer, and Kevin Simpson, our President and Chief Operating Officer. We have
obtained key man life insurance covering Mr. Coelho in the amount of $2,000,000
as some protection against the risk.
Product Liability and Uninsured Risks May Adversely Affect the Continuing
Operations. We may be liable if any of our products cause injury, illness, or
death. We also may be required to recall certain of our products should they
become damaged or if they are defective. We are not aware of any material
product liability claim against us. Further, we maintain a general liability
policy that includes product liability coverage of $1,000,000 per occurrence and
$2,000,000 per year in the aggregate. However, a product liability claim against
us could have a material adverse effect on our business or financial condition.
Dependence on Suppliers for Custom Components may Impact the Production
Schedule. The Company obtains certain custom components from a limited number of
suppliers. If the supplier raises the price of the component or discontinues
production, the Company will have to find another qualified supplier to provide
the component. In the event that it becomes necessary for us to find another
supplier, we would first be required to qualify the quality assurance systems
and product of that alternative supplier. Any transfer between qualified
suppliers may impact the production schedule, thus delaying revenues, and may
cause the price of the key components to increase.
(J) Licenses and Distribution Rights
- ----------------------------------------
In January 2002, the Company entered into a five year OEM supply agreement with
Interpore Cross International ("ICI") for a modified version of the Thrombin
Activating Device ("TAD"). In accordance with the agreement, ICI paid the
Company $300,000 for worldwide license and distribution rights and development
fees. The Company will be the exclusive manufacturer of the modified TAD, which
will be used in conjunction with the ICI Autologous Growth Factors product.
In March 1997, the Company and NYBC, as licensors, entered into a license
agreement with Pall Medical, a subsidiary of Pall Corporation, as Licensees
through which Pall Medical became the exclusive world-wide manufacturer
(excluding Japan) for a system of sterile, disposable containers developed by
the Company and NYBC for the processing of hematpoietic stem cells sourced from
PCB. The system is designed to simplify and streamline the harvesting of stem
cell rich blood from detached placental/cords and the concentration,
cryopreservation (freezing) and transfusion of the PCB stem cells while
maintaining the highest stem cell population and viability from each PCB
donation. These units of PCB stem cells will be "banked" in frozen storage for
hematopoietic reconstitution of patients afflicted with such diseases as
aplastic anemia, hypoproliferative stem and progenitor cell disorders, leukemia,
lymphomas and gaucher disease. In May of 1999, the Company and Pall Medical
amended the original agreement, and the Company regained the rights to
distribute the bag sets outside North America & Europe under the Company's name,
and in May of 2000, the Company negotiated rights to directly co-market the bag
sets in Europe in exchange for an additional royalty fee, while continuing to
utilize Pall Europe's distribution centers.
In June 1995, the Company granted the Japanese distribution rights to its
BioArchive System to Air Water, Japan. The Company received $350,000 for the
distribution rights and access to the necessary technology. In May of 1999, the
Company granted development, manufacturing and distribution (Japan and Asia)
rights to Air Water for a downsized version of the BioArchive System. The
Company received $300,000 for the technology rights and retained the rights to
manufacture and sell the new "mini" BioArchive System in the non-Asia
marketplace.
(K) Employees
- ------------------
As of June 30, 2003, the Company had 63 employees, seven of whom were engaged in
research and new product development, seven in regulatory affairs, quality
assurance, clinical and scientific affairs, 23 in manufacturing, 16 in sales and
marketing and 10 in finance and administration. The Company also utilizes
temporary employees throughout the year to address business needs and
significant fluctuations in orders and product manufacturing. None of our
employees is represented by a collective bargaining agreement, nor have we
experienced any work stoppage.
FINANCIAL INFORMATION ON FOREIGN SALES AND OPERATIONS
- -----------------------------------------------------
The Company has no foreign manufacturing operations. For fiscal year 2003,
foreign sales were $6,162,000 or 60% of net revenues. For fiscal year 2002,
foreign sales were $3,930,000 or 41% of net revenues. For fiscal year 2001,
foreign sales were $2,603,000, or 45% of net revenues.
ITEM 2. PROPERTIES
The Company leased an approximately 11,000 square foot facility located in
Rancho Cordova, California. This facility was used for the manufacturing and
assembly of the Company's medical devices. The lease expired in July 2003.
The Company leased an approximately 17,400 square foot facility, also located in
Rancho Cordova, California, which was used as the main administrative and sales
office, and used as the Company's R&D engineering office. This lease expired in
July 2003.
The Company leased an approximately 4,000 square foot facility located near its
manufacturing facility in Rancho Cordova, California. The facility was used for
the manufacture and preparation of certain components and parts of the Company's
medical devices that were assembled at the main manufacturing facility. This
lease expired in July 2003.
The Company now leases one facility with approximately 28,000 square feet of
space located in Rancho Cordova, California to replace the existing leases that
expired in July 2003.
At fiscal year end, the Company did not own or lease any other facilities, with
the exception of short-term warehouse space leased and utilized from time to
time.
ITEM 3. LEGAL PROCEEDINGS
The Company and its property are not a party to any pending legal proceedings.
In the normal course of operations, the Company may have disagreements or
disputes with employees, vendors or customers. These disputes are seen by the
Company's management as a normal part of business, and there are no pending
actions currently or no threatened actions that management believes would have a
significant material impact on the Company's financial position, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to security holders during the fourth
quarter of its last fiscal year ended June 30, 2003.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock, $0.001 par value, is traded on the Nasdaq SmallCap
Market under the symbol KOOL. The following table sets forth the range of high
and low bid prices for the Company's common stock for the past two fiscal years
as reported by Nasdaq. The ranges listed represent actual transactions, without
adjustment for retail markups, markdowns or commissions, as reported by Nasdaq.
Fiscal 2003 High Low Fiscal 2002 High Low
- ----------------------------------------------------- ---------------------------------------------------
First Quarter (Sep. 30) $2.060 $1.450 First Quarter (Sep. 30) $2.420 $1.480
Second Quarter (Dec. 31) $2.050 $1.100 Second Quarter (Dec. 31) $2.410 $1.470
Third Quarter (Mar. 31) $2.100 $1.500 Third Quarter (Mar. 31) $2.930 $2.080
Fourth Quarter (June 30) $2.929 $1.910 Fourth Quarter (June 30) $2.500 $1.691
The Company has not paid cash dividends on its common stock and does not intend
to pay a cash dividend in the foreseeable future. There were approximately 508
stockholders of record on June 30, 2003 (not including street name holders).
The following table provides information for all of the Company's equity
compensation plans and individual compensation arrangements in effect as of June
30, 2003:
- ----------------------------------------------------------------------------------------------------------------------
Plan Category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights rights equity compensation plans
(excluding securities
reflected in column
(a))
(a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by securities holders 2,774,539 $1.88 1,581,934
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders 25,000 $1.57 --
- ----------------------------------------------------------------------------------------------------------------------
Total 2,799,539 1,581,934
- ----------------------------------------------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
THERMOGENESIS CORP.
Five-Year Review of Selected Financial Data
Year Ended June 30,
Summary of Operations 2003 2002 2001 2000 1999
- ------------------------------------- --------------- --------------- ------------------ ---------------- -----------------
Net revenues $10,187,000 $9,549,000 $5,792,000 $4,211,000 $5,108,000
Cost of revenues (7,900,000) (7,558,000) (5,012,000) (4,246,000) (4,435,000)
--------------- --------------- ------------------ ---------------- -----------------
Gross profit (loss) 2,287,000 1,991,000 780,000 (35,000) 673,000
Selling, general and
administration (5,014,000) (4,843,000) (3,889,000) (4,195,000) (4,668,000)
Research and development (2,937,000) (2,283,000) (1,782,000) (1,624,000) (2,061,000)
Interest and other income 74,000 110,000 130,000 77,000 81,000
Interest and other expense (13,000) (13,000) (1,110,000) (41,000) (123,000)
--------------- --------------- ------------------ ---------------- -----------------
Net loss before cumulative effect
of accounting change under
SAB 101 (5,603,000) (5,038,000) (5,871,000) (5,818,000) (6,098,000)
Cumulative effect of accounting
change under SAB 101 -- -- (282,000) -- --
--------------- --------------- ------------------ ---------------- -----------------
Net loss ($5,603,000) ($5,038,000) ($6,153,000) ($5,818,000) ($6,098,000)
=========================================================================================
Per share data:
Net loss before preferred stock
dividend or discount and
cumulative effect of accounting
change under EITF 00-27 ($5,603,000) ($5,038,000) ($6,153,000) ($5,818,000) ($6,098,000)
Preferred stock dividend or
discount -- -- (100,000) (905,000) (3,907,000)
Cumulative effect of accounting
change under EITF 00-27 -- -- (580,000) -- --
--------------- --------------- ------------------ ---------------- -----------------
Net loss to common stockholders ($5,603,000) ($5,038,000) ($6,833,000) ($6,723,000) ($10,005,000)
=============== =============== ================== ================ =================
Basic and diluted net loss per
share before cumulative effect
of accounting changes ($0.15) ($0.15) ($0.22) ($0.30) ($0.52)
Cumulative effect of accounting
change under SAB 101 -- -- (0.01) -- --
Cumulative effect of accounting
change under EITF 00-27 -- -- (0.02) -- --
--------------- --------------- ------------------ ---------------- -----------------
Basic and diluted net loss per
common share ($0.15) ($0.15) ($0.25) ($0.30) ($0.52)
=============== =============== ================== ================ =================
Pro Forma amounts assuming the
accounting change under SAB
101 is applied retroactively:
Net loss to common
stockholders ($5,603,000) ($5,038,000) ($6,551,000) ($6,299,000) ($10,255,000)
=============== =============== ================== ================ =================
Basic and diluted net loss
per share ($0.15) ($0.15) ($0.24) ($0.28) ($0.53)
=============== =============== ================== ================ =================
As Of June 30,
------------------------------------------------------------------------------------
Balance Sheet Data 2003 2002 2001 2000 1999
- ------------------------------------- --------------- --------------- --------------- -------------- --------------
Cash and short term investments $6,815,000 $6,726,000 $5,366,000 $2,550,000 $2,327,000
Working capital $10,126,000 $9,631,000 $7,098,000 $4,613,000 $5,085,000
Total assets $12,791,000 $12,239,000 $9,553,000 $6,735,000 $8,133,000
Total liabilities $2,217,000 $2,046,000 $1,621,000 $1,043,000 $1,413,000
Total stockholders' equity $10,574,000 $10,193,000 $7,932,000 $5,692,000 $6,720,000
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CERTAIN STATEMENTS CONTAINED IN THIS SECTION AND OTHER PARTS OF THIS REPORT
ON FORM 10-K WHICH ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS
AND ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS MAY DIFFER SIGNIFICANTLY FROM THE PROJECTED RESULTS DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT AFFECT ACTUAL RESULTS
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN ITEM 1 - BUSINESS -
UNDER THE SUBSECTION ENTITLED "FACTORS AFFECTING OPERATING RESULTS," AND
OTHER FACTORS IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S REPORTS FILED
WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION.
The following discussion should be read in conjunction with the Company's
financial statements contained in this report.
(a) Overview
The Company designs, manufactures and distributes medical devices and
companion sterile single use processing disposables that our customers use
to harvest or cryopreserve biomaterial products from single units of blood.
Initially, the Company focused efforts on developing medical devices for
ultra rapid freezing and thawing of blood components, which the Company
continues to manufactures and distributes to blood banks, hospitals and
plasma collection centers. All of the Company's products are medical
devices purchased as capital equipment or the related disposables.
The Company has incurred recurring operating losses and has an accumulated
deficit of $54,713,000, as of June 30, 2003. The report of independent
auditors on the Company's June 30, 2003 financial statements includes an
explanatory paragraph indicating there is substantial doubt about the
Company's ability to continue as a going concern. The Company believes that
it has developed a viable plan to address these issues and that its plan
will enable the Company to continue as a going concern for the next twelve
months. This plan includes the realization of revenues from the
commercialization of new products, the consummation of debt or equity
financing in amounts sufficient to fund further growth, and the reduction
of certain operating expenses as necessary. Although the Company believes
that its plan will be realized, there is no assurance that these events
will occur. The financial statements do not include any adjustments to
reflect the uncertainties related to the recoverability and classification
of assets or the amounts and classification of liabilities that may result
from the inability of the Company to continue as a going concern.
Critical Accounting Policies
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its financial
statements. The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. The Company provides for the estimated cost of
product warranties at the time revenue is recognized. While the Company engages
in extensive product quality programs and processes, including actively
monitoring and evaluating the quality of its component suppliers, the Company's
warranty obligation is affected by product failure rates, material usage and
service delivery costs incurred in correcting a product failure. Should actual
product failure rates, material usage or service delivery costs differ from the
Company's estimates, revisions to the estimated warranty liability would be
required. The Company writes down its inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
Effective July 1, 2000, the Company changed its method of accounting for revenue
recognition for BioArchive Systems and certain licensing agreements in
accordance with Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements". Previously, the Company recognized revenue for BioArchive
units upon the delivery of the equipment to the customers. The costs of training
and installation were accrued in the same period the installation and training
was performed and the related training and installation revenue was recognized.
Under the new accounting method for BioArchive Systems adopted retroactive to
July 1, 2000, the Company accounts for multiple element arrangements in
accordance with the provisions of SAB No. 101. Revenue is recognized as specific
elements indicated in sales contracts are executed. If an element is essential
to the functionality of an arrangement, the entire arrangement's revenue is
deferred until that essential element is delivered. The fair value of each
undelivered element that is not essential to the functionality of the system is
deferred until performance or delivery occurs. The fair value of an undelivered
element is based on vendor specific objective evidence or third party evidence
of fair value as appropriate. If an undelivered element exists, the Company will
determine the fair value of the undelivered element and subtract the fair value
of the undelivered element from the total consideration under the arrangement.
The residual amount is the Company's estimate of the fair value of the delivered
element. Costs associated with inconsequential or perfunctory elements in
multiple element arrangements are accrued at the time of revenue recognition.
The Company accounts for training and installation as a separate element of a
multiple element arrangement. The Company therefore recognizes the fair value of
training and installation services upon their completion when the Company is
obligated to perform such services. Previously, the Company recognized revenue
for licensing agreements upon receipt of the non-refundable fee. Under the new
accounting method which was adopted retroactive to July 1, 2000 for licensing
agreements pursuant to which the Company receives up-front licensing fees for
products or technologies that will be provided by the Company over the term of
the arrangements, the Company now defers the up-front fees and recognizes the
fees as revenue on a straight-line method over the term of the respective
contracts.
Revenues from the sale of the Company's CryoSeal and ThermoLine products are
recognized upon transfer of title. The Company generally ships products F.O.B.
shipping point at its office. There is no conditional evaluation on any product
sold and recognized as revenue. All foreign sales are denominated in U.S.
dollars. The Company's foreign sales are generally through distributors. There
is no right of return provided for distributors. For sales of products made to
distributors, the Company considers a number of factors in determining whether
revenue is recognized upon transfer of title to the distributor, or when the
distributor places the product with an end-user. These factors include, but are
not limited to, whether the payment terms offered to the distributor are
considered to be non-standard, the distributor history of adhering to the terms
of its contractual arrangements with the Company, the level of inventory
maintained by the distributor, whether the Company has a pattern of granting
concessions for the benefit of the distributor, or whether there are other
conditions that may indicate that the sale to the distributor is not
substantive. Shipping and handling fees billed to customers are included in
product and other revenues, while the related costs are included in cost of
product and other revenues. Service revenue is generally generated from
contracts for providing maintenance of equipment. Service revenue is recognized
at the time the service is completed. Amounts billed in excess of revenue
recognized are recorded as deferred revenue on the balance sheet.
(b) Results of Operations
The following is Management's discussion and analysis of certain significant
factors which have affected the Company's financial condition and results of
operations during the periods included in the accompanying financial statements.
Revenues:
Net revenues increased $638,000 or 7% from fiscal 2002 to 2003. BioArchive
revenues were $5,448,000 for the year ended June 30, 2003 compared to $3,043,000
for the year ended June 30, 2002, an increase of $2,405,000 or 79%. There were
20 BioArchive devices recognized in revenue in the year ended June 30, 2003
versus 14 for the previous year. BioArchive revenues also increased from
disposables due to the increased demand from private and public cord blood banks
in Asia. The increase in revenue