ITEM 1. BUSINESS
CERTAIN TECHNICAL TERMS USED IN THIS ITEM ARE DESCRIBED OR DEFINED IN THE GLOSSARY COMMENCING ON PAGE 33 OF THIS ANNUAL REPORT ON FORM 10-K.
GENERAL
LifeCell Corporation ("LifeCell" or the "Company") develops and commercializes universal tissue grafts and blood cell preservation products.
The Company's universal tissue grafts are derived from a patented platform technology for processing and preserving human (allograft) and animal (xenograft) tissues to preclude rejection of transplanted foreign tissues by the human body. LifeCell removes cells that cause tissue rejection while preserving the extracellular tissue matrix and its essential biochemical and structural composition. This matrix does not cause an immune rejection response and has been clinically proven to function as a natural template or scaffold into which a patient's own cells will migrate following transplantation for effective tissue engraftment.
The clinical use of a preserved tissue matrix as a natural template for tissue regeneration has been established by others through the use of processed, freeze-dried allograft bone for orthopedic and periodontal procedures. LifeCell's expertise is the ability to preserve the more delicate and sophisticated tissue matrix of soft tissues, which would otherwise be destroyed by the allograft bone process.
AlloDerm(R) processed universal dermal tissue graft ("AlloDerm") is LifeCell's first commercial application of its technology. Additional universal tissue products under development include composite skin graft, XenoDermTM processed porcine dermis, heart valves for replacement surgeries and vascular conduits for bypass procedures.
Using its core preservation technology, LifeCell is also developing products and patented formulations to facilitate storage, transportation and delivery of transfusable blood cells. The Company is developing ThromboSolTM platelet storage solution to permit refrigerated storage of transfusable blood platelets and intends to develop other potential preservation technologies for red blood cells and other mammalian cells.
LifeCell was organized in 1986 to commercialize its core preservation technology, a process developed by The University of Texas Health Science Center in Houston and exclusively licensed from The Board of Regents of the University of Texas System involving ultra-rapid cooling and ultra-low temperature freeze-drying of biological cells and tissues.
PRODUCTS
ALLODERM
AlloDerm is human donor (allograft) dermis that has been processed using LifeCell's patented technology. The AlloDerm process removes the cells from donated human (allograft) skin and preserves the critical structural and biochemical components of the dermal matrix which are key to the eventual engraftment of the dermal matrix.
The AlloDerm process preserves an immunologically inert human dermal matrix which is freeze-dried and packaged for distribution to end-users. AlloDerm grafts are rehydrated in the operating room in a ten-minute
procedure prior to grafting. The intact human dermal matrix functions as a graft or implant, permanently integrating and guiding the reconstitution of dermal tissue.
AlloDerm grafts consist entirely of and are intended to perform the same function as human dermis. As a result, the Company believes AlloDerm tissue products are not subject to the lengthy United States Food and Drug Administration ("FDA") approval or clearance process associated with medical devices or drugs. See "--Government Regulation" and "--Risk Factors--FDA Regulatory Status of AlloDerm". LifeCell procures human skin through sources that screen donors to meet all FDA requirements for banked human tissue and conduct blood testing recommended by the Centers for Disease Control and Prevention. Additionally, the AlloDerm process includes de-cellularization (extraction of living cells from human tissue matrix) and viral inactivation (the treatment of the tissue with a documented anti-viral agent). The AlloDerm process has been independently validated to inactivate concentrated suspensions of HIV, the virus that causes AIDS.
LifeCell procures allograft skin from unaffiliated tissue banks. To date, the Company has not experienced any material difficulty in procuring adequate supplies of cadaveric skin. Additionally, LifeCell believes it has established what it believes to be adequate sources of cadaveric skin at acceptable costs to satisfy the foreseeable demand for AlloDerm tissue products.
AlloDerm products address multiple clinical markets including the treatment of third-degree burns, periodontal surgery and plastic and reconstructive surgery. Since its commercial introduction, AlloDerm has been used as a dermal graft or transplant to treat over 5,000 patients.
THIRD-DEGREE BURNS. AlloDerm grafts may be used in the treatment of any and all burns that require skin grafts. The Company estimates that approximately 55,000 people are hospitalized each year in the United States due to burns and that approximately 20,000 patients are admitted with major burns. LifeCell began marketing AlloDerm for use in the treatment of third-degree burns in December 1993. To date, AlloDerm grafts have been used to treat third-degree burn patients at approximately 60 of the 140 burn centers in the United States.
Skin is the body's largest organ and is the first line of defense against invasion of foreign substances. It contains two functional layers, the upper surface consisting primarily of cells (epidermis) and an underlying foundational layer of extracellular matrix proteins and collagen (dermis). The epidermis functions as a water barrier and maintains hydration. The dermis provides other important skin properties including tensile strength, durability and elasticity.
Third-degree burns and other acute full-thickness skin wounds destroy both the epidermis and the dermis. Destruction of dermis is of particular concern because the body has lost the framework, I.E., the extracellular matrix, to guide and support the regrowth of new cells and blood vessels. Like most organs of the body, the skin can perform some repairs but it cannot regenerate its basic structure. Instead, damaged or missing dermis is replaced with scar tissue, which lacks the important elastic and tensile properties of skin. Scar tissue also is disfiguring and can cause restricted mobility of limbs and body areas near joints. For this reason, full-thickness burns are treated with split-thickness skin grafts of the patient's own skin (autograft) taken from an uninjured area of the body. This procedure is painful and causes an additional wound at the autograft donor site. Autografts that include the dermal layer generate relatively deep donor sites which can cause medical complications including infection and hypertrophic scarring. Autografts that are too thin (containing minimal dermis) typically result in poor wound healing quality, with scarring and contracture at the wound site. AlloDerm grafts are used in conjunction with thin autografts to supply an adequate dermal layer for optimum healing of the wound. The use of AlloDerm reduces the thickness of split-thickness grafts required from the patient in treating such wounds, thereby minimizing the substantial donor site trauma associated with taking such grafts.
PERIODONTAL SURGERY. LifeCell began marketing AlloDerm to periodontists in September 1995. LifeCell estimates that there are in excess of 4,000 periodontal surgeons in the United States. Periodontal surgeons use AlloDerm tissue in free-gingival grafting, a procedure used to increase the amount of attached gum tissue supporting tooth roots. This procedure previously required the use of autograft tissue, which was excised from the roof of the patient's mouth and then transplanted to the gum. In several clinical case studies, AlloDerm grafts functioned as well or better than the patient's own (autologous) graft, spared the patient the pain and discomfort associated with
the excision of the autograft, reduced surgical time and eliminated the cost of the dressing that was needed for the autograft donor site.
AlloDerm tissue products are also used as barrier membranes in guided tissue regeneration. In this function, the AlloDerm tissue serves as a barrier membrane over allograft bone grafts, which are used to restore a degenerated jaw bone and surrounding gingival tissue. The AlloDerm tissue barrier engrafts over the bone, preventing the cells of the surrounding soft tissue from extruding the bone graft during the normal healing process. Jaw bones restored by this procedure were suitable for supporting artificial tooth implants.
PLASTIC AND RECONSTRUCTIVE SURGERY. In November 1995, LifeCell began marketing AlloDerm to plastic and reconstructive surgeons. The Company estimates that there are approximately 8,000 physicians practicing plastic surgery in the United States. Plastic surgeons use AlloDerm tissue as a graft to release contractures and revise scarring resulting from previously grafted burn wounds, and as an implant to correct soft tissue (dermal) defects and to revise scars resulting from trauma or surgical excisions.
TEMPORARY WOUND COVERAGE--CRYOPRESERVED ALLOGRAFT SKIN
In April 1995, LifeCell began processing and distributing cryopreserved allograft skin for use as a temporary or transitional covering for severe burn wounds. For patients with extensive burns, allograft skin assists in stabilizing the patient and preparing the wound bed for a permanent graft.
PRODUCT DEVELOPMENT
In addition to AlloDerm tissue products, the Company is developing composite skin grafts, XenoDerm porcine dermis, universal cardiovascular products (heart valves and vascular conduits) and blood cell preservation products.
COMPOSITE SKIN GRAFTS. LifeCell intends to develop a composite, full-thickness skin replacement tissue product containing an AlloDerm dermal layer and an epidermis consisting of keratinocytes (epidermal cells) isolated from the patient and expanded under cell culture conditions. Successfully developed, a composite skin graft product would effectively eliminate the requirement of taking an autologous skin graft from burn patients.
In 1994, LifeCell received and completed a Phase I, Small Business Innovative Research (SBIR) grant from the National Science Foundation ("NSF") to assess the feasibility of a co-cultured composite skin product. In 1996, LifeCell received a Phase II SBIR grant from the NSF to continue the development of and initiate animal studies with this composite skin graft product. Also in 1996, LifeCell received a two-year Cooperation Agreement award from the U.S. Army Medical Research and Material Command to support the development of a composite skin graft product using AlloDerm and biopsy-sized microskin grafts from the burn patient.
XENODERM TISSUE PRODUCTS. LifeCell is developing XenoDermTM processed porcine dermis, which is processed in a manner similar to the AlloDerm process to remove the targets for immune rejection and preserve the dermal matrix. Animal studies by LifeCell indicate that XenoDerm tissue does not cause a significant immune response when transplanted cross-species. Animal studies conducted by unaffiliated laboratories have shown that XenoDerm tissue is potentially as effective as AlloDerm tissue in treating full-thickness skin loss. LifeCell believes that, if successfully developed, the XenoDerm tissue products would have the advantage of a potentially increased raw material supply base and could facilitate distribution to certain international markets. See "--Sources of Materials". The Company currently plans to begin clinical testing of XenoDerm tissue products in 1997.
HEART VALVES. LifeCell is applying its universal tissue processing and preservation technology to porcine heart valves intended for replacement procedures. In 1994, LifeCell and Medtronic, Inc. ("Medtronic") entered into a license and development agreement for the potential development and commercialization of heart valves processed with LifeCell's technology. Since that time, pursuant to the agreement, LifeCell and Medtronic have been engaged in a development program for heart valves that is funded fully by Medtronic. See "--Corporate Alliance".
LifeCell's heart valves are based on its patented universal tissue processing and preservation technology that the Company uses to process AlloDerm tissue products. The Company processes heart valves harvested from pigs to remove the cells that would be recognized by the body as foreign. By making the transplanted heart valves non-immunogenic, LifeCell believes that the new valve will last longer, become part of the body and perhaps last the patient's lifetime.
Tissue heart valves on the market today have limited life spans of 10 to 18 years after transplantation as a result of progressive calcification. Mechanical heart valves last longer but lack the blood flow dynamics of tissue valves and require the patient to remain on anticoagulants for life to prevent strokes. Human donor (allogeneic) valves are used in a limited number of the procedures, but there is limited donor availability and, therefore, a limited market.
Preliminary animal studies conducted by LifeCell have shown that the LifeCell heart valves transplanted in the thoracic descending aorta become populated with the recipient's own cells; I.E., they have not been rejected by the recipient. Other animal studies conducted by LifeCell have shown that the valves do not undergo significant calcification. Extensive FDA regulatory involvement in both human and xenograft heart valves may significantly delay product entry into this market. See "--Government Regulation".
VASCULAR CONDUITS. LifeCell is developing vascular conduit products for arterial bypass as a treatment for atherosclerosis, a progressive, degenerative disease characterized by a build-up of fats, cholesterol and other material within the lining of arterial blood vessels located throughout the body. This build-up is called plaque, and leads to reduced blood flow through the arteries, and eventually, may result in serious arterial blockage that can cause tissue damage and death.
Minimally invasive surgical devices are currently available for opening blocked or occluded arteries, including balloon angioplasty to dilate mechanically and thereby open the vessel, and atherectomy devices and lasers that physically remove plaque from the vessel wall. These procedures, however, are not recommended when the patient displays extensive deposits of atherosclerotic plaque throughout the length of one or more vessels, which makes it impractical to attempt the opening of the occluded arteries due to the procedural time involved. In these cases, a more extreme and invasive surgical procedure called arterial bypass is indicated, in which one or more of the patient's own veins (usually the saphenous veins from the legs) are transplanted to an arterial position to divert blood flow around the blockage. Arterial bypass is also used when the blockage is in a critical location or when the surgeon is unable to access the blockage safely.
Coronary bypass procedures, which involve replacement of vessels supplying blood to the heart, typically use the patient's own veins or arteries. The trauma endured from the vessel removal is often more extensive than that of the bypass procedure itself. Even though immune response is not an issue with these self-derived (autologous) vessels, long-term patency (greater than five years) is limited due to eventual blockage from progressive wall thickening and thrombosis.
Repeat arterial bypass procedures may be difficult due to depletion of the available supply of autologous vessels. The use of synthetic arterial substitutes has been attempted, but these devices occlude even more rapidly in the coronary and below-knee positions, which require a small diameter (6 millimeter) graft. The synthetic conduit has been used more successfully in above-the-knee peripheral procedures, but is still associated with infections, leaking and blockage.
LifeCell currently is developing vascular conduit products using allograft blood vessels and plans to extend the technology to xenografts. These potential products utilize LifeCell's ability to process vascular tissue and remove cells that would be recognized by the host as foreign and trigger an immune response. Early preclinical studies conducted by LifeCell with its vascular conduits show that they become re-populated with new host cells after grafting and show no sign of rejection.
As part of the Company's agreements with Medtronic for the development of heart valves, LifeCell granted Medtronic certain rights of first refusal to evaluate technology and negotiate license and development agreements for vascular conduit products utilizing LifeCell's technology. In December 1996, LifeCell received a two-year
Cooperative Agreement award from the U.S. Army Medical Research and Material Command to support the development of vascular graft products.
BLOOD CELL PRESERVATION PRODUCTS
LifeCell is developing proprietary technology to extend the shelf life of transfusable platelets, red blood cells and other mammalian cells. This technology differs from the universal tissue graft applications in that cell viability is crucial to successful processing.
THROMBOSOL PLATELET STORAGE SOLUTION. LifeCell is developing a proprietary biochemical formulation called ThromboSol platelet storage solution to protect transfusable platelets from damage at low temperatures. Platelets are blood cells that control clotting. Untreated platelets are sensitive to low temperatures and cannot be effectively refrigerated. Presently, platelets are stored at room temperature and, due to the risk of microbial contamination, have a limited shelf life of three to five days. LifeCell has shown in laboratory tests that the addition of ThromboSol solution preserves the functional aspects of refrigerated platelets for up to ten days and frozen platelets for more than six months. LifeCell initiated toxicity studies for ThromboSol platelet storage solution in late 1994 and began preclinical animal studies in 1995. LifeCell intends to license this product to major pharmaceutical and other appropriate companies.
The ThromboSol development program has been funded through a Phase I and II SBIR contract with the United States Army. In April 1996, the Company received additional contract funding of $613,000 for this program from the United States Navy.
FREEZE-DRIED RED BLOOD CELLS. LifeCell previously has been funded by the United States Navy to develop directly transfusable freeze-dried red blood cells. The need for immediately available, screened blood units is of particular importance to the United States Armed Services because a substantial number of combat deaths have resulted from hemorrhaging due to the lack of availability of on-site transfusable blood. In addition, freeze-dried red blood cells potentially will allow for widespread autologous transfusion, thereby preventing transfusion related complications, including disease transmission.
The fear of acquiring transmittable diseases such as AIDS and hepatitis from donated blood units has created a growing market for blood recycling units, preservation of autologous blood, blood cell growth stimulating factors, and blood substitutes. Freeze-dried blood can eliminate the concern of disease transmission by the patient donating his or her own blood to be freeze-dried prior to the anticipated need for transfusable blood.
The Company is seeking additional funds from various government granting agencies and potential corporate partners to continue this program and intends to license this technology to third-parties at a later stage of development.
CORPORATE ALLIANCE
In 1994, LifeCell entered into a license and development agreement with Medtronic to develop jointly the Company's heart valve products. Pursuant to the agreement, Medtronic paid LifeCell an initial $1.5 million license fee. The agreement also provides that Medtronic will fund all costs of research and development, including clinical trials, receive the exclusive right to market any resulting commercial products and pay LifeCell royalties of up to $25 million on sales of products covered by the agreement. Medtronic may terminate the agreement at any time if in its sole business judgment it deems the development and commercialization of products thereunder not to be in its best interests or otherwise to be imprudent. In such event, and if the agreement is terminated under certain other circumstances, Medtronic has the option to convert the $1.5 million license fee into shares of Common Stock, subject to certain limitations, at the then current market price.
In 1994, Medtronic also made a $500,000 equity investment in LifeCell by purchasing approximately 64,000 shares of Common Stock at $7.77 per share in exchange for rights of first refusal to negotiate licenses to LifeCell universal vascular conduit products.
MARKETING
LifeCell currently markets AlloDerm grafts and cryopreserved allograft skin to United States burn treatment centers and other potential customers through its direct sales force. LifeCell has a sales and marketing staff consisting of a vice president of sales and marketing, a director of international sales and marketing, a national manager, a product manager, nine field technical representatives, a clinical specialist, a customer service representative, two marketing coordinators, and an international customer service assistant. The field technical representatives and clinical specialists are responsible for interacting with treatment physicians, primarily burn surgeons and plastic surgeons at burn treatment centers, and educating them regarding the use and anticipated benefit of AlloDerm tissue grafts. LifeCell also participates in national and international conferences and trade shows for burns and wound healing.
The Company has engaged specialty distributors to market and sell AlloDerm tissue for plastic surgery indications. The Company has reached agreement with 11 such companies and plans to add additional distributors to cover the entire United States. The Company has nine field technical representatives, who are responsible for promoting the use of AlloDerm tissue products in plastic and reconstructive surgery and supporting regional distributors of the product.
In June 1996, LifeCell engaged DENTSPLY International, Inc. (DENTSPLY) to distribute AlloDerm grafts for periodontal surgery on a worldwide basis. In March 1997, however, DENTSPLY advised LifeCell that it intends to discontinue operations of the division with responsibility for distributing AlloDerm. Accordingly, LifeCell expects that it will terminate the agreement with DENTSPLY and in the near future will resume marketing AlloDerm for periodontal applications through its direct sales force.
PROCESSING
LifeCell procures human skin and other tissues from unaffiliated tissue banks. See "--Sources of Materials". LifeCell provides tissue banks and their procurement agents with specific procurement protocols, which are required for the optimum removal and transportation of tissues. Tissues are transported to LifeCell in accordance with standard industry practices and are identified on delivery to LifeCell with a unique identification number that allows tracing to a specific donor. This unique identification number accompanies each processed tissue to its destination. It then becomes the responsibility of the recipient treatment center, hospital or surgeon to return a self-addressed patient tracking card (included with all LifeCell tissues) to LifeCell for donor and recipient tracking.
LifeCell begins aseptic processing of donor tissue within 12 days post-mortem. Processing includes any required sizing and trimming, treatment to remove cells from the dermal matrix, which is then preserved by proprietary cryoprotection, packaging and freeze-drying. Microbiological and other quality assurance testing is conducted before AlloDerm tissue products are released for shipment to customers. Customers typically order the AlloDerm product on a just-in-time basis. The product is shipped at ambient temperature by overnight delivery services.
Cryopreserved allograft skin is processed by a standard industry protocol and stored at LifeCell's premises until requisitioned by a customer. Cryopreserved allograft skin is transported to the customer on dry ice by overnight delivery.
SOURCES OF MATERIALS
LifeCell procures allograft skin from unaffiliated tissue banks. LifeCell is expanding its current procurement of skin and other tissues to include any of approximately 100 major national tissue banks, including approximately 35 skin banks. Procurement of certain human organs and tissue for transplantation is subject to the restrictions of the National Organ Transplant Act ("NOTA"), which prohibits purchase and sale of human organs and related tissue for "valuable consideration". See "--Government Regulation". LifeCell pays a procurement fee to the tissue bank, which covers the cost of recovering the tissue, conducting donor testing for communicable diseases, including AIDS and hepatitis tests recommended by the Centers for Disease Control and Prevention.
Pursuant to contractual arrangements, LifeCell reimburses tissue banks for recovering and delivering to LifeCell cadaveric skin suitable for transplantation. In procuring such tissues, LifeCell competes with treatment centers that use cadaveric skin for temporary wound dressings.
LifeCell has entered into allograft skin procurement service agreements with certain tissue banks that, prior to these agreements, did not recover skin from consented tissue donors. Pursuant to these agreements, LifeCell accepts from these tissue banks all skin tissue that meets LifeCell's allograft skin procurement specifications, the requirements of the FDA and the procedural guidelines outlined by the American Association of Tissue Banks. Allograft skin tissue that is procured in excess of that required to meet the demand for AlloDerm tissue products is processed by conventional cryopreservation and distributed to burn treatment centers and hospitals for use as a temporary or transitional wound dressing. See "--Products--Temporary Wound Coverage - --Cryopreserved Allograft Skin".
The Company has established what it believes to be adequate sources of cadaveric skin at acceptable costs to satisfy the foreseeable demand for AlloDerm tissue products. Although to date the Company has not experienced any material difficulty in procuring adequate supplies of cadaveric skin, there can be no assurance that the future availability of human skin will be sufficient to meet LifeCell's demand for such materials. Any supply shortage of available tissues in the future would have a material adverse effect on LifeCell's business. Different grades or thicknesses of material are required for different surgical uses. There can be no assurances that imbalances in demand will not result in shortages of desired materials and simultaneous increases in inventoried materials.
GOVERNMENT REGULATION
Government regulation, both domestic and foreign, is a significant factor in the manufacture and marketing of LifeCell's current and developing products. In the United States, the Company's currently marketed human skin allograft and AlloDerm products are subject to regulation by the FDA. The United States Food, Drug and Cosmetics Act (the "FDC Act"), the Public Health Service Act (the "PHS Act") and other federal statutes and regulations govern or influence the testing, manufacture, labeling, storage, record keeping, approval, advertising and promotion of such products. Noncompliance with applicable requirements can result in fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to authorize the marketing of new products or to allow the Company to enter into supply contracts and criminal prosecution.
In December 1993, the FDA published an interim rule regulating "banked human tissue". The rule defines banked human tissue as any tissue derived from a human body which is (i) intended for administration to another human for the diagnosis, cure, mitigation, treatment or prevention of any condition or disease and (ii) recovered, processed, stored or distributed by methods not intended to change tissue function or characteristics. The FDA definition excludes, among other things, tissue that currently is regulated as a human drug, biological product or medical device and kidney, liver, heart, lung, pancreas or any other vascularized human organ. Banked human tissue is regulated by the FDA in a manner the agency has deemed necessary to protect the public health from the transmission of HIV infection and hepatitis infection through transplantation of tissue from donors with or at risk of these diseases. Under the FDA regulations, all facilities engaged in the procurement, processing, storage or distribution of human tissue intended for transplant are required to assure that certain infectious disease testing and donor screening is performed and that records documenting such testing for each tissue are available for inspection by the FDA. The regulations also provide authority for the FDA to conduct inspections of banked human tissue facilities and to detain, recall or destroy tissue for which appropriate documentation is not available. Banked human tissue, however, is not subject to premarket notification or approval by the FDA as are certain drugs, biologicals and medical devices.
In December 1991, the Company first contacted the FDA regarding the regulatory status of AlloDerm and was advised in May 1992 that the FDA had not made a final determination on the status of intact processed human cadaver skin, that the agency currently was studying the issue and that these products may at some future time be subject to FDA regulation. The FDA sent the Company a copy of the December 1993 publication of the FDA's banked human tissue regulations shortly after its release of such regulations and inspected the Company for compliance with those regulations in July 1994. For these reasons, the Company believed that AlloDerm was covered by the FDA's definition of banked human tissue and that the product would not be regulated as a medical device.
In November 1995, following LifeCell's commercial introduction of AlloDerm for periodontal applications, the Company received a letter from the FDA, stating that it considered AlloDerm to be a "device" as defined by the FDC Act, and that a 510(k) premarket notification was required to be submitted and cleared by the FDA in order to market the product. Following several months of correspondence and discussions with the FDA, the Company received a letter from the agency dated September 17, 1996, to the effect that, after considering the information and views that the Company submitted at a May 1996 meeting with agency officials and in subsequent correspondence, the FDA agrees with the Company's position that AlloDerm intended for use for replacement or repair of damaged or inadequate integumental tissue, including gingival dermis, is banked human tissue within the meaning of the interim final rule. Consequently, AlloDerm is not subject to premarket notification or approval by the FDA and the Company may continue to promote and sell AlloDerm for use in the treatment of wounds, such as third-degree burns, in periodontal surgical procedures, such as free-gingival grafting and guided tissue regeneration, and in plastic and reconstructive surgery procedures, such as contracture release grafting and scar revision. The agency also informed the Company that this decision applies only to AlloDerm when it is intended for use in transplantation, and the regulatory status of the product when it is promoted for other uses, such as a void filler for soft tissue, for cosmetic augmentation or as a wound healing agent (the "Additional Indications"), would need to be determined by the FDA on a case by case basis.
While the Company's marketing efforts had not previously focused on the Additional Indications, as a follow-up to its September 17 letter, the FDA, by letter dated September 23, 1996, informed the Company that indications for Additional Indications would have to be formally presented to the FDA to determine if, with these indications, AlloDerm would continue to fall within the scope of the interim rule for banked human tissue and thus not require premarket clearance. The Company was asked to indicate what changes in advertisement and promotion it would make for AlloDerm in response to the September 23, 1996 letter. The Company responded to the FDA letter in October 1996, and informed the agency that the Company believes that the distinctions drawn regarding the definition of transplantation and banked human tissue and between integumental tissue and all other tissue in the September 17 opinion were fairly novel and ones for which the Company would require clarification from the FDA as it goes forward. The Company believes that AlloDerm, when used for augmentation and as a void filler, still qualifies as banked human tissue. Similarly, the Company advised the FDA that since almost every replacement or repair of damaged or inadequate tissue involves a cosmetic aspect, the Company believes that many cosmetic uses of AlloDerm are within the purview of banked human tissue.
Nevertheless, the Company informed the FDA that it intends to follow the agency's decision and, until this matter is clarified on a case by case basis, will not promote AlloDerm for the Additional Indications. The Company also advised the FDA that it would present its arguments to the agency as to why it believes that these uses fall within the definition of banked human tissue. There can be no assurance that the FDA will not finally conclude that use of AlloDerm for the Additional Indications should be regulated as a medical device and require a 510(k) premarket notification or premarket approval ("PMA") for AlloDerm for such indications. If the FDA were to conclude definitively that the Company is required to obtain agency clearance of a 510(k) notification or approval of a PMA for AlloDerm for the Additional Indications, the FDA may require the Company to conduct laboratory testing and preclinical and clinical studies of AlloDerm to support a marketing application. Testing, preparation of necessary applications and processing of those applications by the FDA is expensive and any required laboratory testing or preclinical or clinical studies that the Company were required to conduct could take several years to complete. There can be no assurance that any required testing could be completed successfully, or that if successfully completed, would provide sufficient data and information to enable the FDA to determine, on a timely basis, if at all, that when AlloDerm is used for the Additional Indications, it is substantially equivalent to a legally marketed predicate device or is safe and effective for the Additional Indications and permit the product to be marketed for such uses. Failure of the Company to receive any required FDA clearance or approval of AlloDerm for the Additional Indications on a timely basis would preclude promotion of AlloDerm for the Additional Indications and could have a material adverse effect on the Company's business, financial condition and results of operation. See "--Risk Factors--Regulatory Status of AlloDerm".
The FDA's banked human tissue regulation requires establishments engaged in the procurement, processing, and distribution of human tissue to conduct and maintain records of tissue donor screening procedures and blood testing. In addition, tissue processing establishments are periodically inspected by the FDA to ensure compliance with these requirements. If at any time the FDA determines that a banked human tissue product is not
procured, processed or distributed in accordance with these requirements (E.G., there is a question about the source of the tissue, the adequacy of the testing or the adequacy of donor selection), the agency may order the recall and destruction of the product. The failure of a tissue processing establishment to adhere to the FDA's requirements could subject the establishment and its principals to civil and criminal prosecution. LifeCell believes that the Company's operations substantially comply with the requirements of the FDA's interim rule.
LifeCell requires that the tissue banks supplying the Company with tissue comply with the FDA's banked human tissue regulation. In addition, the Company requires supplying tissue banks to comply with procedural guidelines outlined by the American Association of Tissue Banks (the "AATB"). Since 1976, the AATB has administered a voluntary accreditation system for skin and orthopedic tissue banks. The AATB evaluates tissue banks for compliance with a rigorous set of standards through site inspections and document review. The AATB's standards apply to the procurement, processing, preservation, storage and labeling of tissue and include requirements for disease screening through donor testing and review of donor medical histories. Although the Company requires its supplying tissue banks to comply with the FDA's requirements and the AATB's standards, there can be no assurance that these tissue banks are in full compliance with these requirements. The failure of a tissue bank to comply with regulatory requirements with respect to tissue provided to the Company could have a material adverse effect on the Company.
In its interim rule on banked human tissue, the FDA stated that it would propose additional requirements for such products. Additional requirements may include registration of tissue banking establishments with the FDA, donor-recipient tracking and clinical evaluation of tissues that are determined to have undergone other than "minimal processing". To date, the FDA has not proposed additional requirements; however, if significant additional regulatory requirements were to be established, the Company could incur significant additional costs in order to comply with such requirements.
LifeCell's proposed human and xenograft heart valve products and its proposed xenograft tissue transplantation products including XenoDerm tissue and xenograft vascular conduits will be subject to regulation by the FDA as medical devices, although the FDA has proposed classifying human heart valves as banked human tissue. LifeCell's proposed blood cell additives, including ThromboSol platelet storage solution, will be subject to regulation as biologics. Accordingly, such products will require FDA premarket approval or clearance prior to commercialization. To obtain FDA approval or clearance for these products, the Company must submit proof of the safety and efficacy of these products. In most cases, this entails extensive pre-clinical and clinical testing. Such testing must be performed in accordance with the FDA's regulations. The testing, preparation of necessary applications and processing of those applications by the FDA is expensive and time consuming and will take several years to complete. There is no assurance that the FDA will act favorably or quickly in making such reviews, and significant difficulties or costs may be encountered by the Company in its efforts to obtain the FDA approvals or clearances that could delay or preclude the Company from marketing any product it may develop. The FDA may also require post-market testing and surveillance to monitor the effects of approved products, and may place conditions on approvals that could restrict commercial applications of such products. Product marketing approvals or clearances may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. In addition, delays imposed by the governmental approval process may materially reduce the period during which the Company may have the exclusive right to commercialize patented products.
The FDA reviews medical devices for marketing approval or clearance through two different procedures, the 510(k) premarket notification process and the PMA process. LifeCell will need to pursue one of these routes with respect to each of its proposed medical device products. The determination of which process will be required for any particular product will depend in part upon how the FDA has regulated similar products by the time LifeCell is ready to pursue its own approvals or clearances.
Under the 510(k) premarket notification procedure, the applicant or "sponsor" submits an application containing data that demonstrate the "substantial equivalence" of the product to a device marketed prior to the enactment of the Medical Device Amendments of 1976 or to a device legally marketed thereafter pursuant to a 510(k). The FDA may require a 510(k) applicant to submit additional, and possibly extensive, clinical data establishing the safety and effectiveness of the product for each proposed medical use. Prior to conducting the necessary clinical trials, an applicant may be required to submit an investigational device ("IDE") protocol to the FDA for approval. An IDE application typically contains data from laboratory and animal testing demonstrating
that the product is sufficiently safe for study in humans as well as a description of the proposed study methods and protocol. Clinical studies must be conducted according to a written protocol and pursuant to the approval and oversight of one or more Institutional Review Boards. In addition, clinical investigators must adhere to good clinical practices. The FDA may order the temporary or permanent discontinuation of a clinical trial at any time for non-compliance with its regulations, because of safety issues or for other reasons. The collection of data and preparation of a 510(k) application can be costly and time consuming, and a 510(k) applicant may not market the product until a favorable decision is received from the FDA. The FDA review of a 510(k) premarket notification can take anywhere from a few months to several years. There can be no assurance that marketing clearance ultimately will be obtained for any of LifeCell's products that are the subject of 510(k) premarket notifications.
The PMA process is significantly more complex, costly and time consuming than the 510(k) clearance procedure. To obtain premarket approval, the applicant is required to submit extensive preclinical and clinical data to the FDA. An IDE may be required to conduct the clinical trials. Upon completion and analysis of clinical studies, the applicant assembles and submits a PMA application setting forth the preclinical, clinical, manufacturing and other data. Typically, the FDA will also inspect the manufacturing facility for compliance with Good Manufacturing Practice ("GMP") regulations. The FDA review and approval of a PMA can take several years. There can be no assurance that PMA approvals will be obtained for any of LifeCell's proposed products.
With respect to LifeCell's proposed biological products, the Company or its contracted designee must obtain both a product license and an establishment license from the FDA prior to marketing. A product and license application ("PLA") and establishment license application ("ELA") must be submitted and supported by extensive data, including preclinical and clinical data that demonstrate that the manufactured product meets prescribed standards of safety and efficacy. Before conducting the required clinical testing of a biological product, an applicant must submit an investigational new drug ("IND") application to the FDA. Similar to the IDE for testing of devices, the IND application must contain preclinical data demonstrating the safety of the product for human investigational use, information about the manufacturing processes and procedures, and the proposed clinical protocol. Clinical trials of biological products are typically conducted in three sequential phases, but may overlap. Phase I trials test the product in a small number of healthy subjects, primarily to determine its safety and tolerance at one or more doses. In Phase II, in addition to safety, the efficacy, optimal dose and side effects of the product are evaluated in a patient population somewhat larger than the Phase I trial. Phase III involves further safety and efficacy testing on an expanded patient population at geographically dispersed test sites. All clinical studies must be conducted in accordance with FDA approved protocol and are subject to the approval and monitoring of one or more Institutional Review Boards. In addition, clinical investigators must adhere to good clinical practices. Completion of all three phases of clinical studies may take several years, and the FDA may temporarily or permanently suspend a clinical study at any time. Upon completion and analysis of clinical trials, the applicant assembles and submits a PLA and an ELA. The ELA contains a complete description of the manufacturing process. Before the licenses can be granted, the Company or its designee must undergo a successful establishment inspection. The FDA review and approval of a biological product can take several years. There can be no assurance that LifeCell will obtain the required approvals for any of its proposed biological products.
All products marketed by LifeCell pursuant to the above-described approvals and clearances will be subject to pervasive and continuing regulation by the FDA. Products must be manufactured in registered establishments and must be produced in accordance with GMP regulations. There are post-marketing surveillance and reporting requirements. Manufacturing facilities and processes are subject to periodic FDA inspection. Labeling and promotional activities are also subject to FDA scrutiny and, in certain instances, by the Federal Trade Commission. The export of devices and biologics is also subject to regulation and may require prior FDA clearance. From time to time, the FDA may modify such regulations and impose additional or different requirements. It is impossible to predict how such revisions would affect the Company's operations. Failure to comply with any applicable FDA requirements could result in civil and criminal enforcement actions and penalties.
Sales of medical device and biological products outside the United States are subject to foreign regulatory requirements that vary widely from country to country. Approval of a product by comparable regulatory authorities of foreign countries must be obtained prior to commercialization of the product in those countries. The time required to obtain such foreign approval may be longer or shorter than that required for FDA approval and there can be no assurance that approvals would be obtained for any of the Company's products.
In addition, NOTA prohibits the acquisition, receipt or transfer of certain human organs, including skin and heart valves and vascular conduits for "valuable consideration", but permits the payment of reasonable expenses associated with the removal, transportation, processing, preservation, quality control and storage of human tissue and skin. Assuming that NOTA applies to LifeCell's products, it may be interpreted to limit the prices that LifeCell may charge for processing and transporting such human tissue products. LifeCell includes in its AlloDerm pricing structure certain of its educational costs associated with the processing and transportation of human tissue. Although LifeCell believes that recovery of educational costs is permitted under NOTA, a future inability of LifeCell to pass these costs on to purchasers of its products could adversely affect LifeCell's business and prospects. Assuming that NOTA applies to LifeCell's products, LifeCell intends to comply with NOTA, but there can be no assurance that the government will not adopt interpretations of NOTA that would adversely affect LifeCell's pricing structure or otherwise call into question one or more aspects of LifeCell's method of operation.
LifeCell is also subject to various federal, state and local laws, regulations and recommendations relating to such matters as safe working conditions, laboratory and manufacturing practices, and the use, handling and disposal of hazardous or potentially hazardous substances used and produced in connection with LifeCell's research and development work. See "--Environmental Matters". Although LifeCell believes it is in compliance in all material respects with these laws and regulations, there can be no assurance that the Company will not incur significant additional costs to comply with environmental laws or regulations in the future.
RESEARCH AND DEVELOPMENT
LifeCell currently uses funds received primarily through external sources, including corporate alliances and government grants and contracts, to fund the development of additional universal tissue products and products for blood cell preservation.
LifeCell plans to continue to develop its non-AlloDerm technology through an ongoing research and product development program. To date, its research has been funded primarily through government SBIR grants, Department of Defense (DOD) contracts and the proceeds from various offerings of its equity securities. LifeCell's research and development costs in 1994, 1995 and 1996 for all programs, including those programs funded through corporate and government support, were approximately $2.1 million, $2.2 million and $1.6 million, respectively. The development of LifeCell heart valves is currently being funded by Medtronic. The 1996 funding of this program was approximately $546,000. See "--Corporate Alliance".
The SBIR grant program provides funding for two phases of awards. Phase I is to evaluate the scientific and technical merit and feasibility of an idea. Awards are up to $100,000 with a period of performance normally not to exceed six months. Phase II is to expand on the results of and pursue the development of Phase I. Awards are up to $750,000, with a period of performance normally not to exceed two years. To date, LifeCell has been awarded approximately $4.6 million through 14 approved SBIR program awards and Department of Defense contracts.
In 1996, LifeCell received a two-year Phase II SBIR grant award from the NSF in the amount of $300,000 to support the composite skin graft program, a one-year U.S. Navy contract in the amount of approximately $613,000 to support the ThromboSol program and a two-year Collaborative Agreement with the U.S. Army in the amount of approximately $1,069,000 to support investigation of AlloDerm grafts to repair dura mater, the membrane lining of the brain, the use of AlloDerm grafts in conjunction with microskin grafting in burn wounds and the development of vascular graft products.
LifeCell intends to continue to seek funding through the SBIR programs, as well as to pursue additional government grant and contract programs. Generally, LifeCell has the right to patent any technologies developed from government grants and contract funding, subject to the United States government's right to receive a royalty-free license for federal government use and to require licensing to others in certain circumstances.
PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS
LifeCell's ability to compete effectively with other companies is materially dependent upon the proprietary nature of its technologies. LifeCell relies primarily on patents and trade secrets to protect its technologies. LifeCell currently has the exclusive right to eight patents through a license agreement with the Board of Regents of the
University of Texas System. In addition, LifeCell has been issued three patents and has five pending United States patent applications.
LifeCell has also applied for patent protection in several foreign countries. Because of the differences in patent laws and laws concerning proprietary rights, the extent of protection provided by United States patents or proprietary rights owned by or licensed to LifeCell may differ from that of their foreign counterparts.
LifeCell believes that it owns or has the right to use all knowledge necessary to manufacture and market its current products and planned products without infringing any existing patent or proprietary rights of others such that it would be liable for damages or prevented from manufacturing or marketing its products. No assurances may be given, however, that the Company's patents or other proprietary rights may not be the subject of an infringement or other claim that could invalidate to some extent its patents or other rights. Any successful patent infringement claim relating to any patent could have a material adverse effect on the Company. See "-- Risk Factors--Patents and Proprietary Rights".
LifeCell may decide for business reasons to retain certain knowledge that it considers proprietary as trade secrets. In that event, or if patent protection is unattainable, LifeCell must rely upon trade secrets, know-how and continuing technological innovation to maintain its competitive position. Employees and consultants of LifeCell who have access to proprietary information have signed confidentiality agreements. It is LifeCell's policy to require any new employee to sign similar confidentiality agreements.
LifeCell has federal trademark or service mark registrations that it currently uses for LifeCell(R) and LifeCell Process(R), which cover processing and preserving tissue samples, and AlloDerm(R), which covers LifeCell's commercial dermal skin graft product.
COMPETITION
UNIVERSAL TISSUE GRAFTS
LifeCell anticipates direct competition for AlloDerm tissue products and all of its proposed transplantable tissue products, as well as indirect competition from advances in therapeutic agents, such as growth factors now used to enhance wound healing. LifeCell believes that therapeutic growth factors may be used in conjunction with its proposed products and may potentially enhance the products' efficacy. LifeCell is not aware of any person or entity currently marketing transplantable tissue products with features similar to AlloDerm and LifeCell's other proposed transplantable products. There can be no assurance, however, that LifeCell will be able to compete effectively with other commercially available products or that development of other technologies will not detrimentally affect LifeCell's commercial opportunities or competitive advantage.
ALLODERM TISSUE PRODUCTS--BURNS. LifeCell believes that the AlloDerm process is the only technology that consistently and effectively eliminates the targets of rejection and permits permanent transplantation of human dermal tissue. Competitive commercial products are currently in clinical trials that claim to provide permanent full-thickness wound coverage. In most cases, these products contain a "dermal equivalent", which is usually a processed animal collagen gel or a bioabsorbable synthetic material in which human cells that produce collagen (fibroblasts) are usually seeded. The fibroblasts secrete dermal-like proteins and are intended to support a split-skin graft. In comparison to these products, LifeCell has focused its product development on the extracellular matrix, and not the cell population of dermis.
Advanced Tissue Sciences, Inc. and Organogenesis, Inc. each has developed or is developing such dermal equivalent products. In early 1997, Advanced Tissue Sciences received a PMA from the FDA to market a temporary wound covering. LifeCell does not believe that this product will directly compete with AlloDerm, which is a permanent graft.
LifeCell believes that these "dermal equivalent products" lack important dermal components and will encounter difficulty in adequately anchoring the vital surface epithelial cells. LifeCell's primary objectives in processing AlloDerm tissue include the preservation of important dermal components, including a basement membrane complex. The Company believes this structure not only is essential for sufficient anchoring of epidermal
cells, but also determines the degree of differentiation of these cells, an aspect that has direct bearing on the skin's vital water barrier function. LifeCell has demonstrated by electron microscopy that its processing technology has produced preserved dermis with an intact basement membrane complex. LifeCell has further demonstrated that a human epidermal cell population (keratinocytes) will attach and differentiate into the stratified layers typical of normal skin, on both human and porcine processed dermis. The AlloDerm process also preserves the basement membrane of the vascular channels and capillaries within the dermal matrix. LifeCell has demonstrated in animal studies that these vascular channels become repopulated with host cells that normally line blood vessels and ultimately restore a normal blood supply to the tissue graft. LifeCell believes this aspect of its technology is fundamental to the ability of the transplanted tissue to engraft permanently (integrate) into host tissue and that it is its principal competitive advantage.
Integra LifeSciences Corporation received a PMA in 1996 from the FDA to market two-layer wound dressings that include a biosynthetic dermal equivalent and a silicone membrane. Integra's product is currently restricted to treatment of life-threatening burns in cases where autologous tissue is not available. This treatment requires that the patient's autograft be applied in a subsequent surgery approximately two weeks later.
LifeCell believes that AlloDerm grafts will effectively compete with Integra's product in the treatment of burns based on superior product performance and because AlloDerm grafts can be applied simultaneously with the patient's autograft in a single procedure as opposed to an additional subsequent procedure, thereby reducing surgical costs.
COMPOSITE SKIN GRAFT. Genzyme Tissue Repair has developed technology for culturing autologous keratinocytes (epidermal) cells for commercial distribution. LifeCell believes that these cultured epidermal cell sheets alone are not optimum as a permanent skin replacement for full-thickness skin injury. This product does not contain a dermal layer, and in some clinical cases this type of treatment for a full-thickness wound has resulted in fragility with severe blistering and loss of grafts. The fragile nature of the product usually requires that it be hand-carried to the hospital. In some cases, this product has been used by burn surgeons in conjunction with AlloDerm grafts in an attempt to improve the quality of healing with these cultured cell sheets.
LifeCell believes that its composite skin product will compete effectively with currently available cultured cell sheets because it will contain a dermal layer, which should improve the take rate and reduce the fragility currently associated with these products.
ALLODERM TISSUE PRODUCTS--PERIODONTAL SURGERY. AlloDerm grafts used in free-gingival graft procedures compete with procedures using the patient's own tissue, removed from the roof of the mouth or from another area of the patient's skin, such as the leg, and freeze-dried allograft skin, procured from tissue banks. LifeCell believes it competes with procedures using the patient's own tissue by eliminating the need for a donor site and the resulting trauma. The Company believes it competes with freeze-dried allograft skin because of AlloDerm's higher biocompatability and reduced immune response.
AlloDerm grafts used as barrier membranes for guided tissue regeneration compete with several commercial products, including "Gore-Tex", manufactured by W.L. Gore & Associates, Inc. Gore-Tex is nonabsorbable and must be removed by the periodontist several months following the initial surgery. LifeCell believes that AlloDerm grafts compete with Gore-Tex by eliminating the need for a second surgical procedure for removal of the membrane. The Company is aware of other barrier membrane products that are absorbed by the body and, therefore, do not have to be removed, including products manufactured by Guidor and Integra LifeSciences Corporation. LifeCell believes that AlloDerm grafts will compete with absorbable membrane products through more effective performance and versatility of use.
ALLODERM TISSUE PRODUCTS--PLASTIC AND RECONSTRUCTIVE SURGERY. When used during reconstructive surgery as a graft to release burn wound contractures, AlloDerm competes with the patient's own tissue and potentially with the products described above intended for burn wound grafting. For the repair and replacement of damaged or inadequate integumental tissue, AlloDerm competes with injectable collagen products, such as those manufactured by Collagen Corporation, and bovine synthetic products such as Gore-Tex. LifeCell believes that AlloDerm will compete with these products because of AlloDerm's high biocompatibility and reduced immune response.
CRYOPRESERVED ALLOGRAFT SKIN (TEMPORARY WOUND COVERAGE). LifeCell competes with regional tissue banks for the distribution of cryopreserved allograft skin for temporary wound coverage. The Company believes that it can compete successfully with these tissue banks by offering customized products and services, such as pre- meshing of the grafts, which save time in the operating room reducing surgery costs.
Advanced Tissue Sciences, Inc. has received a PMA from the FDA for a biosynthetic wound dressing consisting of a commercially available wound dressing in which human neonatal fibroblasts are cultured and then covered with a thin synthetic covering to prevent fluid loss. LifeCell believes that its cryopreserved allograft skin product will compete successfully with this product primarily because the application of cryopreserved allograft skin is considered the clinically preferred procedure for temporary wound coverage.
HEART VALVES. Three current types of replacement heart valves are commercially available, mechanical valves, chemically processed animal valves and human allograft valves. Mechanical valves require the patient to be maintained on lifelong anticoagulant therapy to prevent blood clotting and subsequent complications of stroke. There also are published reports of sudden catastrophic failure of these valves, resulting in patient death. Animal valves calcify or harden over time and usually require replacement within ten to 18 years. Human allograft valves are in short supply. Major manufacturers and suppliers of mechanical and animal heart valve products include Medtronic, St. Jude Medical, Inc. and the Edwards Division of Baxter Healthcare Corporation. Human tissue valves are procured and processed and distributed by Cryolife, Inc. and non-profit tissue banks, including the American Red Cross.
LifeCell's preclinical data has indicated that its processed porcine valve tissue undergoes reduced calcification compared to chemically processed porcine valves and reduced immune response compared to fresh or cryopreserved heart valve tissue. LifeCell believes that its processed heart valve, currently under development with Medtronic, will minimize complications associated with commercially available valves.
VASCULAR CONDUITS. Medical treatment for cardiovascular disease, including atherosclerosis, is a highly competitive industry. Significant technological progress has been made with respect to the development of minimally invasive devices for dilation of blocked vessels and devices for physically removing the plaque from the vessel wall. Additionally, drugs are being developed to prevent or reverse atherosclerosis. Bypass surgery, however, is generally performed when the patient displays extensive deposits of plaque throughout the length of one or more vessels, when the blockage is in a critical position or when the blockage site cannot be safely accessed.
The two current clinically preferred methods for coronary arterial bypass procedure are transposing available arteries and using an autologous vein from another area in the patient's body. The second procedure induces trauma to the area of vein harvest and has shown evidence of failure or occlusion after five to ten years. There are commercially available synthetic vascular conduit substitutes, but these products also show evidence of occlusion and the increased potential for leaking and infection. LifeCell believes that its processing technology will reduce the causes and, accordingly, the potential for vessel occlusion, leakage and infection.
BLOOD CELL PRESERVATION PRODUCTS
LifeCell currently is not aware of any product or developing product that it anticipates will compete with the products it is developing for blood cell preservation; however, technological competition in the blood banking field is intense. Several companies with significantly greater financial resources than LifeCell are developing blood substitute products. Additionally, several commercially available blood recycling units are currently used in some surgical procedures, and growth factors are being developed that are intended to increase the body's capacity for producing blood cells. LifeCell believes that its planned freeze-dried blood products and mammalian cells will successfully compete with these technologies on the basis of cost and convenience.
ENVIRONMENTAL MATTERS
LifeCell's research and development and processing techniques generate waste that is classified as hazardous by the United States Environmental Protection Agency and the Texas Natural Resources Commission. LifeCell segregates such waste and disposes of it through a licensed hazardous waste transporter. Although LifeCell believes it is currently in compliance in all material respects with applicable environmental regulations,
its failure to comply fully with any such regulations could result in the imposition of penalties, fines or sanctions that could have an adverse effect on LifeCell's business.
EMPLOYEES
At March 26, 1997, the Company had 73 full-time and two part-time employees of which 23 were employed in processing and support, 18 in sales and marketing, 17 in research and development and 17 in administration and accounting. As of March 26, 1997, the Company employed, full time, two persons with M.D. degrees and six persons with Ph.D. degrees.
RISK FACTORS
THE COMPANY'S EXPECTATIONS WITH RESPECT TO FUTURE RESULTS OF OPERATIONS THAT MAY BE EMBODIED IN ORAL AND WRITTEN FORWARD-LOOKING STATEMENTS, INCLUDING ANY FORWARD-LOOKING STATEMENTS THAT MAY BE CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K, ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT MUST BE CONSIDERED WHEN EVALUATING THE LIKELIHOOD OF THE COMPANY'S REALIZATION OF SUCH EXPECTATIONS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW.
NO ASSURANCE OF ADDITIONAL NECESSARY CAPITAL
LifeCell expects to incur substantial expenses for AlloDerm marketing and the Company's product development programs (including costs of clinical studies), production, sales and marketing, product introduction, technical seminars, support of ongoing administrative activities and research and development activities, such as regulatory and quality assurance programs and continuing applications for patent protection for the proprietary aspects of its technology. The Company currently intends to fund these activities from its existing cash resources, sales of products, and research and development funding received from others. There can be no assurance that such sources of funds will be sufficient to meet these future expenses. The Company's need for additional financing will be principally dependent on the degree of market acceptance achieved by the Company's products and the extent to which the Company can achieve substantial growth in product sales during 1997 and 1998 as well as the extent to which the Company may decide or may be required to use its own resources, in addition to external funding, to expand its product development efforts. There can be no assurance that the Company will be able to obtain any such additional financing on acceptable terms.
HISTORY OF OPERATING LOSSES
The Company has incurred substantial losses since inception in January 1986, including losses of approximately $3.7 million, $3.9 million and $ 4.1 million for the years ended December 31, 1994, 1995, and 1996, respectively, and had an accumulated deficit of approximately $29.3 million at December 31, 1996. There can be no assurance that the Company will ever become profitable.
FDA REGULATORY STATUS OF ALLODERM
In December 1993, the FDA published an interim rule regulating "banked human tissue". The rule defines banked human tissue as any tissue derived from a human body which is (i) intended for administration to another human for the diagnosis, cure, mitigation, treatment or prevention of any condition or disease and (ii) recovered, processed, stored or distributed by methods not intended to change tissue function or characteristics. The FDA definition excludes, among other things, tissue that currently is regulated as a human drug, biological product or medical device and kidney, liver, heart, lung, pancreas or any other vascularized human organ. Banked human tissue is regulated by the FDA in a manner the agency has deemed necessary to protect the public health from the transmission of HIV infection and hepatitis infection through transplantation of tissue from donors with or at risk of these diseases. Under the FDA regulations, all facilities engaged in the procurement, processing, storage or distribution of human tissue intended for transplant are required to assure that certain infectious disease testing and donor screening is performed and that records documenting such testing for each tissue are available for inspection by the FDA. The regulations also provide authority for the FDA to conduct inspections of banked human tissue facilities and to detain, recall or destroy tissue for which appropriate documentation is not available. Banked human
tissue, however, is not subject to premarket notification or approval by the FDA as are certain drugs, biologicals and medical devices.
In December 1991, the Company first contacted the FDA regarding the regulatory status of AlloDerm and was advised in May 1992 that the FDA had not made a final determination on the status of intact processed human cadaver skin, that the agency currently was studying the issue and that these products may at some future time be subject to FDA regulation. The FDA sent the Company a copy of the December 1993 publication of the FDA's banked human tissue regulations shortly after its release of such regulations and inspected the Company for compliance with those regulations in July 1994. For these reasons, the Company believed that AlloDerm was covered by the FDA's definition of banked human tissue and that the product would not be regulated as a medical device.
In November 1995, following LifeCell's commercial introduction of AlloDerm for periodontal applications, the Company received a letter from the FDA, stating that it considered AlloDerm to be a "device" as defined by the FDC Act, and that a 510(k) premarket notification was required to be submitted and cleared by the FDA in order to market the product. Following several months of correspondence and discussions with the FDA, the Company received a letter from the agency dated September 17, 1996, to the effect that, after considering the information and views that the Company submitted at a May 1996 meeting with agency officials and in subsequent correspondence, the FDA agrees with the Company's position that AlloDerm intended for use for replacement or repair of damaged or inadequate integumental tissue, including gingival dermis, is banked human tissue within the meaning of the interim final rule. Consequently, AlloDerm is not subject to premarket notification or approval by the FDA and the Company may continue to promote and sell AlloDerm for use in the treatment of wounds, such as third-degree burns, in periodontal surgical procedures, such as free-gingival grafting and guided tissue regeneration, and in plastic and reconstructive surgery procedures, such as contracture release grafting and scar revision. The agency also informed the Company that this decision applies only to AlloDerm when it is intended for use in transplantation, and the regulatory status of the product when it is promoted for other uses, such as the Additional Indications, would need to be determined by the FDA on a case by case basis. To date, a minimal amount of LifeCell's aggregate product sales are attributable to the Additional Indications.
While the Company's marketing efforts had not previously focused on the Additional Indications, as a follow-up to its September 17 letter, the FDA, by letter dated September 23, 1996, informed the Company that indications for Additional Indications would have to be formally presented to the FDA to determine if, with these indications, AlloDerm would continue to fall within the scope of the interim rule for banked human tissue and thus not require premarket clearance. The Company was asked to indicate what changes in advertisement and promotion it would make for AlloDerm in response to the September 23, 1996 letter. The Company responded to the FDA letter in October 1996, and informed the agency that the Company believes that the distinctions drawn regarding the definition of transplantation and banked human tissue and between integumental tissue and all other tissue in the September 17 opinion were fairly novel and ones for which the Company would require clarification from the FDA as it goes forward. The Company believes that AlloDerm, when used for augmentation and as a void filler, still qualifies as banked human tissue. Similarly, the Company advised the FDA that since almost every replacement or repair of damaged or inadequate tissue involves a cosmetic aspect, the Company believes that many cosmetic uses of AlloDerm are within the purview of banked human tissue.
Nevertheless, the Company informed the FDA that it intends to follow the agency's decision and, until this matter is clarified on a case-by-case basis, will not promote AlloDerm for the Additional Indications. The Company also advised the FDA that it would present its arguments to the agency as to why it believes that these uses fall within the definition of banked human tissue. There can be no assurance that the FDA will not finally conclude that use of AlloDerm for the Additional Indications should be regulated as a medical device and require a 510(k) premarket notification or PMA for AlloDerm for such indications. If the FDA were to conclude definitively that the Company is required to obtain agency clearance of a 510(k) notification or approval of a PMA for AlloDerm for the Additional Indications, the FDA may require the Company to conduct laboratory testing and preclinical and clinical studies of AlloDerm to support a marketing application. Testing, preparation of necessary applications and processing of those applications by the FDA is expensive and any required laboratory testing or preclinical or clinical studies that the Company were required to conduct could take several years to complete. There can be no assurance that any required testing could be completed successfully, or that if successfully completed, would provide sufficient data and information to enable the FDA to determine, on a timely basis, if at all, that when AlloDerm is used for the
Additional Indications, it is substantially equivalent to a legally marketed predicate device or is safe and effective for the Additional Indications and permit the product to be marketed for such uses. Failure of the Company to receive any required FDA clearance or approval of AlloDerm for the Additional Indications on a timely basis would preclude promotion of AlloDerm for the Additional Indications and could have a material adverse effect on the Company's business, financial condition and results of operation. See "--Government Regulation--Proposed Products".
GOVERNMENT REGULATION--PROPOSED PRODUCTS
Many if not all of LifeCell's products under development will require regulatory approval or clearance prior to commercialization. Human therapeutic products are subject to rigorous preclinical and clinical testing as a condition of approval by the FDA and by similar regulatory authorities in foreign countries. The lengthy process of obtaining these approvals and clearances and the ongoing process of compliance with applicable federal statutes and regulations will require the expenditure of substantial resources, and there can be no assurance that the FDA or foreign approvals will be obtained for any of the Company's proposed products.
LifeCell's proposed human and xenograft heart valve products and its proposed xenograft tissue transplantation products will be subject to regulation as medical devices. The Company's proposed blood cell additives will be subject to regulation as biologics. Such products require FDA premarket clearance prior to commercialization in the United States. To obtain FDA approval for these products, the Company must submit proof of their safety and efficacy. Testing, preparation of necessary applications and processing of those applications by the FDA is expensive and time consuming. There can be no assurance that the FDA will act favorably or quickly in making such reviews, and significant difficulties or costs may be encountered by the Company in its efforts to obtain FDA clearances that could delay or preclude the Company from marketing any product it may develop. The FDA may also place conditions on clearances that could restrict commercial applications of such products. Product marketing approvals or clearances may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. Delays imposed by the governmental clearance process may materially reduce the period during which the Company has the exclusive right to commercialize patented products.
Products marketed by LifeCell pursuant to FDA or foreign approval will be subject to pervasive and continuing regulation. In the United States, devices and biologics must be manufactured in registered establishments and must be produced in accordance with GMP regulations. Manufacturing facilities and processes are subject to periodic FDA inspection. Labeling and promotional activities are also subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. The export of devices and biologics is also subject to regulation and may require FDA approval. From time to time, the FDA may modify such requirements, imposing additional or different requirements. Failure to comply with any applicable FDA requirements could result in civil and criminal enforcement actions and other penalties. In addition, there can be no assurance that the various states and foreign countries in which LifeCell's products are sold will not impose additional regulatory requirements or marketing impediments.
NOTA prohibits the acquisition, receipt or transfer of certain human organs, including skin, heart valves and vascular conduits, for "valuable consideration". NOTA permits the payment of reasonable expenses associated with the removal, transportation, processing, preservation, quality control and storage of human tissue and skin. NOTA may be interpreted to limit the prices that LifeCell may charge for processing and transporting its human tissue products. This could result in limited revenues which could adversely affect LifeCell's business and prospects.
DEPENDENCE ON KEY MANAGEMENT AND PERSONNEL
The success of LifeCell will be dependent largely on the efforts of Paul M. Frison, Chairman of the Board, President and Chief Executive Officer of the Company, and Stephen A. Livesey, M.D., Ph.D., Executive Vice President, Chief Scientific Officer and a director of the Company. The loss of either person's services would have a material adverse effect on LifeCell's business and prospects. Dr. Livesey, a citizen of Australia, has received an extension of an "H-1B" visa to work in the United States that currently expires in June 1997, and he is in the process of applying for permanent residence status in the United States. There can be no assurance that he will be able to
obtain such status. Further, the success of LifeCell is also dependent upon its ability to hire and retain suitable operating, marketing and technical personnel. The competition for qualified personnel in the biomedical industry is intense and, accordingly, there can be no assurance that LifeCell will be able to hire or retain necessary personnel.
TECHNOLOGICAL CHANGE AND COMPETITION
The biomedical field is undergoing rapid and significant technological change. LifeCell's success depends upon its ability to develop and commercialize its technology. There are many companies and academic institutions that are capable of developing products based on similar technology, and that have developed and are capable of developing products based on other technologies, which are or may be competitive with LifeCell's products. Many of those companies and academic institutions are well-established, have substantially greater financial and other resources than LifeCell and have established reputations for success in the development, sale and service of products. These companies and academic institutions may succeed in developing competing products that are more effective than LifeCell's products or that receive government approvals more quickly than LifeCell's products.
AVAILABILITY OF MATERIALS
The Company's business will be dependent on the availability of human cadaveric skin and cardiovascular tissue to the extent that LifeCell is unable successfully to develop products using animal tissue. A limited supply of donated skin is available. Although the Company has established what it believes to be an adequate source of cadaveric skin to satisfy the expected demand for AlloDerm, there can be no assurance that the availability of human skin and cardiovascular tissue will be sufficient to meet LifeCell's demand for such materials.
UNCERTAINTY OF MARKET ACCEPTANCE
Achieving broad market acceptance for AlloDerm and LifeCell's proposed products will require substantial additional marketing efforts. There can be no assurance that AlloDerm or any of LifeCell's proposed products ultimately will achieve widespread commercial acceptance.
PATENTS AND PROPRIETARY RIGHTS
LifeCell's ability to compete effectively with other companies is materially dependent upon the proprietary nature of its technologies. LifeCell relies primarily on patents and trade secrets to protect its technologies. LifeCell currently has the exclusive right to eight patents through a license agreement with the Board of Regents of the University of Texas System. In addition, LifeCell has been issued three patents and has five pending United States patent applications. There can be no assurance that LifeCell will obtain any additional key patents or other protection, that the patents currently applied for will be granted, that existing patents or proprietary rights owned by or licensed to LifeCell will not be invalidated or that patents will provide significant commercial benefits. The invalidation of key patents or proprietary rights owned by or licensed to LifeCell could have a material adverse effect on LifeCell and on its business prospects.
LifeCell believes that it owns or has the right to use all knowledge necessary to manufacture and market its current products and planned products without infringing any existing patent or proprietary rights of others such that it would be liable for damages or prevented from manufacturing or marketing its products. No assurances may be given, however, that the Company's patents or other proprietary rights may not be the subject of an infringement or other claim that could invalidate to some extent its patents or other rights. Any successful patent infringement claim relating to any patent could have a material adverse effect on the Company.
There can be no assurance that LifeCell will not be required to resort to litigation to protect its patents or other proprietary rights or that the Company may be the subject of patent litigation to defend its patents or other rights against claims of infringement or other intellectual property claims. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's financial condition and results of operations.
LifeCell has also applied for patent protection in several foreign countries. Because of the differences in patent laws and laws concerning proprietary rights, the extent of protection provided by United States patents or proprietary rights owned by or licensed to LifeCell may differ from that of their foreign counterparts.
LIMITED THIRD-PARTY REIMBURSEMENT
Generally, hospitals, physicians and other health care providers purchase products, such as the products being sold or developed by LifeCell, for use in providing care to their patients. These parties typically rely on third-party payors, including Medicare, Medicaid, private health insurance and managed care plans, to reimburse all or part of the costs of acquiring those products and costs associated with the medical procedures performed with those products. Cost control measures adopted by third-party payors in recent years have had and may continue to have a significant effect on the purchasing practices of many health care providers, generally causing them to be more selective in the purchase of medical products. These and future changes in third-party payor reimbursement practices regarding the procedures performed with LifeCell's products may adversely affect LifeCell's business.
PRODUCT LIABILITY AND INSURANCE
The Company's business will expose it to potential product liability risks which are inherent in the testing, manufacturing and marketing of medical products. Although the Company has product liability insurance coverage with an aggregate limit of $5 million, there can be no assurance that such insurance will provide adequate coverage against potential liabilities or that adequate product liability insurance will continue to be available in the future or that it can be maintained on acceptable terms.
LIMITATION ON THE USE OF NET OPERATING LOSSES AND RESEARCH AND DEVELOPMENT TAX CREDITS
As of December 31, 1996, LifeCell had accumulated net operating loss ("NOL") carryforwards for federal income tax purposes of approximately $26 million and research and development tax credits of approximately $385,000 since its inception, and may continue to incur NOL carryforwards. United States tax laws provide for an annual limitation on the use of NOL carryforwards following certain ownership changes and also limit the time during which NOL and tax credit carryforwards may be applied against future taxable income and tax liabilities. Accordingly, LifeCell may not be able to take full advantage of its NOL carryforwards and tax credits for federal income tax purposes.
DISPOSAL OF HAZARDOUS MATERIALS
LifeCell's research and development and processing techniques generate waste that is classified as hazardous by the United States Environmental Protection Agency and the Texas Natural Resources Commission. LifeCell segregates such waste and disposes of it through a licensed hazardous waste transporter. Although LifeCell believes it is currently in compliance in all material respects with applicable environmental regulations, its failure to comply fully with any such regulations could result in the imposition of penalties, fines or sanctions that could have an adverse effect on LifeCell's business.
ITEM 2.

ITEM 2. PROPERTIES
LifeCell leases approximately 20,000 square feet of laboratory, office and warehouse space at its facilities in The Woodlands, Texas, under lease agreements that expire in January 2001. The Company's monthly rental obligation for its facilities is approximately $18,000.
ITEM 3.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None. PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR THE COMMON STOCK
The Company's Common Stock is listed on the Nasdaq SmallCap Market under the symbol "LIFC". The table below sets forth the high and low sales prices of the Common Stock for each quarter of 1995 and 1996, as reported by The Nasdaq Stock Market. The quotations reflect inter-dealer prices, without retail mark-down or commission, and may not represent actual transactions.
1995 1996 Price Range Price Range ----------------- ------------------
High Low High Low ----------------- ------------------
First Quarter $4 $1 5/8 $6 $2 1/4
Second Quarter 5 1/2 2 1/8 5 3 3/4
Third Quarter 4 3/4 3 3/8 5 7/8 3 5/8
Fourth Quarter 4 2 4 1/4 2 7/8
As of March 26, 1997, the last sales price per share of LifeCell's Common Stock, as reported by The Nasdaq Stock Market, was $7.00.
At March 26, 1997, the Company's 6,754,761 shares of Common Stock outstanding were held by approximately 250 stockholders of record and the Company estimates that there are in excess of 1,500 beneficial owners. At March 26, 1977, the Company's 125,583 shares of Series B Preferred Stock outstanding were held by 52 stockholders of record.
DIVIDEND POLICY
LifeCell has not paid a cash dividend to its holders of Common Stock and does not anticipate paying cash dividends to the holders of its Common Stock in the foreseeable future.
Pursuant to the terms of the Company's Series A Preferred Stock, on December 6, 1996, the Company paid a per share dividend of $1.60 in shares of Common Stock to the holders of the Series A Preferred Stock, on March 26, 1997, the Company paid a per share dividend of $.50 in shares of its Common Stock to such security holders, and on March 26, 1997, the Company paid a per share dividend of $.25 in cash to such security holders. Also on March 26, 1997, in accordance with the terms of the Series A Preferred Stock, the Company redeemed all of the outstanding shares of the Series A Preferred Stock through the conversion of such shares into shares of Common Stock. Accordingly, no further dividends are payable in respect of the Series A Preferred Stock.
On February 15, 1997, the Company paid a per share dividend of $1.17 in shares of Series B Preferred Stock to the holders of Series B Preferred Stock. The Series B Preferred Stock bears dividends at the annual rate of (i) $6.00 (subject to adjustment in certain events) and (ii) the per annum rate of dividends per share paid, if applicable, by the Company, on the Common Stock. The dividends may be paid, at the Company's option, in cash or shares of Series B Preferred Stock or in a combination of cash and shares of Series B Preferred Stock.
The dividends will accrue and be paid quarterly. Under the General Corporation Law of the State of Delaware, a corporation's board of directors may declare and pay dividends only out of surplus or current net profits.
RECENT SALES OF UNREGISTERED SECURITIES
During November 1996, the Company completed a private placement of 124,157 shares of its Series B Preferred Stock and stock purchase warrants to purchase an aggregate of 2,803,530 shares of Common Stock for a total purchase price of $12,415,700. The Series B Preferred Stock and warrants were sold to accredited investors. Each share of Series B Preferred Stock is convertible at any time into approximately 32.26 shares of Common Stock, subject to adjustment in certain events. The placement agent for the private placement received a stock purchase warrant to purchase an aggregate of 354,734 shares of Common Stock.
From January 1, 1996 through September 13, 1996, the Company issued a total of 5,000 shares of Common Stock for an aggregate consideration of $14,375 to a director of the Company pursuant to the exercise of options granted under the Company's non-employee director stock option plan. Also in 1996, the Company issued a total of 247,000 shares of Common Stock for an aggregate consideration of $765,700 to certain holders of the Company's Series A Preferred Stock pursuant to the exercise of certain stock purchase warrants.
The Company considers the above-described securities to have been offered and sold in transactions not involving a public offering and, therefore, to be exempted from registration under Section 4(2) or Regulation D of the Securities Act of 1933, as amended.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data of LifeCell for each of the years in the five-year period ended December 31, 1996, derived from the Company's audited financial statements. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
(1) Includes effect of accounting treatment of preferred stock of $0.03, $0.19 and $0.24 in 1994, 1995 and 1996, respectively.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.
GENERAL AND BACKGROUND
LifeCell was organized in 1986 and since inception has been financed through the public and private sale of equity securities to individuals, venture capital firms and corporations, product sales, its corporate alliance with Medtronic and the receipt of government grants and contracts.
In December 1993, LifeCell began commercial distribution of AlloDerm human dermal grafts. The initial AlloDerm product was used as a dermal replacement in the grafting of third-degree burns. LifeCell commenced commercial sales of AlloDerm for periodontal surgery in September 1995 and for plastic and reconstructive surgery uses in June 1995. The Company reported total product sales of approximately $94,000, $742,000 and $2,012,000 in 1994, 1995 and 1996, respectively.
In 1994, LifeCell entered into an agreement with Medtronic pursuant to which Medtronic agreed (subject to certain rights to terminate at Medtronic's discretion) to fund the development of LifeCell's proprietary tissue processing technology in the field of heart valves. Additionally, LifeCell's research and development of blood cell products has been substantially funded through government grants and contracts.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
Total revenues for 1996 were approximately $2.9 million compared to approximately $1.8 million for 1995. As a result of increased marketing activities, expansion of distribution channels and expanded uses of the Company's AlloDerm product, product sales for the year increased $1.3 million from 1995. Corporate alliance revenue decreased from $825,000 in 1995 to $546,000 in 1996 as a result of certain non-recurring revenue received by LifeCell in the first quarter of 1995 under the Medtronic agreement and the timing of planned activities performed by LifeCell related to the progress of the project. The corporate alliance revenue is recorded based on the costs of the work performed under the agreement. During 1996, the Company recognized $387,000 in revenue from its government grants and contracts, or an increase of $148,000 over 1995, as a result of additional governmental awards received during 1996 for the Company's ThromboSol and keratinocyte development programs.
Total costs and expenses for 1996 were $7.2 million, an increase of $1.2 million compared to the same period of the prior year principally as a result of expanded sales and marketing activities for the Company's products and costs related to such expanded activities. Cost of goods sold for 1996 were $1.3 million compared to $925,000 in the same period of 1995. This increase was due to an increase in product sales and the shift from the development of AlloDerm to processing, consistent with taking a product to market. The cost of funded research and development declined from $1.1 million in 1995 to $933,000 in 1996 as a result of the timing of planned activities as well as the funding available, as such costs are reimbursed by others. Proprietary research and development expense decreased to $655,000 for the 1996 from $1.1 million in 1995 primarily due to the shift in the Company's focus from the development of AlloDerm to processing. General and administrative expense increased to $1.9 million for the year ended December 31, 1996 from $1.4 million in the same period of 1995 principally as a result of expanded administrative activities as the Company increased its product sales and marketing activities as well as certain administrative expenses recognized in conjunction with its 1996 financing activities and non-cash charges related to the reissuance of certain stock options. Selling and marketing expenses increased to $2.4 million for 1996 from $1.5 million in 1995 primarily due to the addition of sales personnel and promotional activities related to AlloDerm marketing and expanded distribution activities.
Interest income and other decreased by $146,000 from 1995 to 1996 as a result of the decrease in funds available for investment prior to the receipt of funds from an equity financing in late 1996, as well as lower interest rates in 1996.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Total revenues for 1995 were $1.8 million compared to approximately $817,000 for 1994. This increase was primarily due to increased product sales and increased activities in the corporate alliance with Medtronic. Product sales increased to $742,000 in 1995 from $94,000 in 1994, due to greater market acceptance and additional sales efforts. The corporate alliance revenues increased to $825,000 in 1995 from $358,000 in 1994 due to a full year of activity in 1995 and increased heart valve development activities. In 1995, revenues included amounts recorded from one Small Business Innovative Research ("SBIR") contract of approximately $239,000, compared to $364,000 from two SBIR contracts in 1994. During 1995, research and development contracts and grants revenue consisted of $239,000 pursuant to the second year of a 1993 award of a Phase II $740,000 SBIR contract from the United States Army for the prolonged storage of platelets. Interest income increased to $281,000 in 1995 from $167,000 in 1994 due to an increase in average funds available for investment in 1995 as compared to 1994.
Cost of goods sold for product sales increased $409,000 while revenues increased $648,000 during 1995 as compared to 1994. During 1994, the "start up" phase of manufacturing was still underway and the Company had excess capacity. This resulted in higher amounts of unabsorbed overhead costs in 1994 than in 1995.
Proprietary research and development expense decreased to $1.1 million in 1995 from $1.4 million in 1994 primarily as a result of the transfer of AlloDerm related activities from proprietary research and development to processing (cost of goods sold). These costs previously were recorded in research and development expense.
General and administrative expenses remained relatively consistent with the prior year. Selling and marketing expenses increased to $1.5 million in 1995 from $728,000 in 1994 primarily due to the addition of sales personnel, increased promotional activities related to AlloDerm marketing activities and commercial introduction of the AlloDerm graft in the periodontal surgery market.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, LifeCell's principal sources of funds have been equity offerings, product sales, the Medtronic corporate alliance, government grants and contracts and interest on investments.
LifeCell primarily funds research and development activities for products other than AlloDerm with external funds from its corporate alliance and government grants. In April 1996, LifeCell was awarded a one-year $613,000 contract from the U.S. Navy related to the development of ThromboSol. In August 1996, LifeCell was awarded a two-year $300,000 National Science Foundation Phase II grant related to its keratinocytes program. In December 1996, LifeCell was awarded a two-year contract from the U.S. Army to support the development of vascular graft products.
In 1994, LifeCell entered into agreements with Medtronic pursuant to which Medtronic paid LifeCell a license fee of $1.5 million and agreed, subject to certain rights to terminate at Medtronic's discretion, to fund the development of LifeCell's proprietary tissue processing technology in the field of heart valves. Through December 31, 1996, LifeCell has recognized approximately $1.7 million in revenues for development funding, excluding the initial license fee, for this program.
In January 1996, LifeCell borrowed $120,000 from a bank for working capital purposes. The loan was secured by cash, required monthly payments of $2,000, plus interest, matured December 31, 1996, and bore interest at a rate equal to 6.05% per annum. In August 1996, LifeCell borrowed $250,000 from the same bank for working capital purposes. This loan was secured by accounts and other receivables, matured in December 1996, and bore interest at a rate equal to prime plus .25% per annum. The notes were paid in full November 1996.
In November 1996, LifeCell received net proceeds of approximately $10.9 million pursuant to the private sale of shares of Series B Preferred Stock and warrants exercisable for the purchase of Common Stock.
In June 1996, LifeCell engaged DENTSPLY to distribute AlloDerm grafts for periodontal surgery on a worldwide basis. In March 1997, however, DENTSPLY advised LifeCell that it intends to discontinue operations of the division with responsibility for distributing AlloDerm. Accordingly, LifeCell expects that it will terminate the
agreement with DENTSPLY and in the near future will resume marketing AlloDerm for periodontal applications through its direct sales force. While the Company anticipates that the termination of the DENTSPLY agreement may have some impact on revenues attributable to sales of AlloDerm for periodontal applications during this transition, LifeCell believes that it will not materially affect the Company's overall revenues attributable to AlloDerm sales.
LifeCell expects to incur substantial expenses for AlloDerm marketing and the Company's product development programs (including costs of clinical studies), production, sales and marketing, product introduction, technical seminars, support of ongoing administrative activities and research and development activities, such as regulatory and quality assurance programs and continuing applications for patent protection for the proprietary aspects of its technology. The Company currently intends to fund these activities from its existing cash resources, sales of products, and research and development funding received from others. There can be no assurance that such sources of funds will be sufficient to meet these future expenses. The Company's need for additional financing will be principally dependent on the degree of market acceptance achieved by the Company's products and the extent to which the Company can achieve substantial growth in product sales during 1997 and 1998 as well as the extent to which the Company may decide or may be required to use its own resources, in addition to external funding, to expand its product development efforts. There can be no assurance that the Company will be able to obtain any such additional financing on acceptable terms.
LifeCell has had losses since inception and therefore has not been subject to federal income taxes. As of December 31, 1996, LifeCell had NOL and research and development tax credit carryforwards for income tax purposes of approximately $26 million and $385,000, respectively, available to reduce future income tax and tax liabilities. Federal tax laws provide for a limitation on the use of NOL and tax credit carryforwards following certain ownership changes that could limit LifeCell's ability to use its NOL and tax credit carryforwards. A recapitalization effected by LifeCell in 1992, the issuance of additional capital stock pursuant to its initial public offering in 1992 and its sales of equity securities in 1994 and 1996 may cause a "more than 50 percent change in ownership" as defined in the applicable tax laws. Accordingly, LifeCell's ability to use its NOL and tax credit carryforwards to reduce future taxable income may be restricted.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information required to be filed under this Item are presented commencing on page of this Annual Report on Form 10-K, and are incorporated herein by reference.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be set forth in the Registrant's Proxy Statement relating to the annual meeting of the Registrant's stockholders scheduled to be held June 19, 1997, under the captions "Election of Directors" and "Executive Compensation", and such information is incorporated herein by reference.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be set forth in the Registrant's Proxy Statement relating to the annual meeting of the Registrant's stockholders scheduled to be held June 19, 1997, under the caption "Executive Compensation", and such information is incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be set forth in the Registrant's Proxy Statement relating to the annual meeting of the Registrant's stockholders scheduled to be held June 19, 1997, under the caption "Security Ownership of Certain Beneficial Owners and Management", and such information is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be set forth in the Registrant's Proxy Statement relating to the annual meeting of the Registrant's stockholders scheduled to be held June 19, 1997, under the caption "Executive Compensation", and such information is incorporated herein by reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS INCLUDED IN THIS REPORT:
1. FINANCIAL STATEMENTS PAGE ---- Report of Independent Public Accountants........................... Balance Sheets as of December 31, 1995 and 1996.................... Statements of Operations for the years ended December 31, 1994, 1995 and 1996................................... Statements of Stockholders' Equity for the years ended December 31, 1995 and 1996............................. Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996................................... Notes to Financial Statements......................................
(B) REPORTS ON FORM 8-K:
During the quarter ended December 31, 1996, the Company filed (i) on November 27, 1996, a Current Report on Form 8-K dated as of November 18, 1996, to report the private placement of equity securities of the Company; and (ii) on December 31, 1996, a Current Report on Form 8-K dated as of December 27, 1996, at the request of The Nasdaq Stock Market. The latter report included the Company's balance sheet as of November 30, 1996, and was filed to evidence the Company's compliance with The Nasdaq Stock Market's continuing listing requirements for SmallCap issuers
(C) EXHIBITS:
Exhibits designated by the symbol * are filed with this Annual Report on Form 10-K. All exhibits not so designated are incorporated by reference to a prior filing as indicated.
Exhibits designated by the symbol + are management contracts or compensatory plans or arrangements that are required to be filed with this report pursuant to this Item 14.
EXHIBIT NO. DESCRIPTION - ---------- ----------- LifeCell undertakes to furnish to any stockholder so requesting a copy of any of the following exhibits upon payment to the Company of the reasonable costs incurred by Company in furnishing any such exhibit.
3.1 Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated November 18, 1996).
3.2 Amended and Restated By-laws (incorporated by reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1996).
4.1* Form of Series B Preferred Stock Certificate.
4.2* See Exhibit 10.21 -- Voting Agreement dated November 18, 1996, among LifeCell Corporation and certain stockholders named therein.
10.1+ Employment Agreement and accompanying Confidentiality, Inventions and Discoveries and Non- Competition Agreement dated January 28, 1992, by and between the Registrant and Paul M. Frison (incorporated by reference to Exhibit 10.19 to Amendment No. 2 to the Registrant's Registration Statement on Form S-1, Registration No. 33-44969, filed with the Commission on February 10, 1992).
10.2+ Employment Agreement and accompanying Confidentiality, Inventions and Discoveries and Non- Competition Agreement dated January 28, 1992, by and between the Registrant and Stephen A. Livesey (incorporated by reference to Exhibit 10.20 to Amendment No. 2 to the Registrant's Registration Statement on Form S-1, Registration No. 33-44969, filed with the Commission on February 10, 1992).
10.3*+ LifeCell Corporation Second Amended and Restated 1992 Stock Option Plan, as amended.
10.4*+ LifeCell Corporation Second Amended and Restated 1993 Non-Employee Director Stock Option Plan, as amended.
10.5 Form of Confidentiality/Non-Compete Agreement (incorporated by reference to Exhibit 10.28 to the Registrant's Registration Statement on Form S-1, Registration No. 33-44969, filed with the Commission on January 9, 1992).
10.6 Exclusive License Agreement dated June 6, 1986, between the Registrant and The Board of Regents of The University of Texas System (incorporated by reference to Exhibit 10.29 to the Registrant's Registration Statement on Form S-1, Registration No. 33-44969, filed with the Commission on January 9, 1992).
10.7+ Amended and Restated Registration Rights Agreement dated February 26, 1992, by and between the Registration and the stockholders named therein (incorporated by reference to Exhibit 10.40 to Amendment No. 3 to the Registrant's Registration Statement on Form S-1, Registration No. 33- 44969, filed with the Commission on February 27, 1992).
10.8 Underwriter's Warrant Agreement dated March 6, 1992, between the Registrant and Robert Todd Financial Corporation, and First Amendment to Underwriter's Warrant Agreement dated January 26, 1993, between the Registrant and Robert Todd Financial Corporation (incorporated by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).
EXHIBIT NO. DESCRIPTION - ---------- -----------
10.9 Lease Agreement dated December 10, 1986, between the Registrant and The Woodlands Corporation, Modification and Ratification of Lease Agreement dated April 11, 1988, between the Registration and The Woodlands Corporation Modification and Ratification of Lease dated August 1, 1992, between the Company and The Woodlands Corporation and Modification, Extension and Ratification of Lease dated March 5, 1993, between the Registrant and The Woodlands Corporation, and Modification and Ratification of Lease Agreement dated December 21, 1995, between the Company and The Woodlands Office Equities--'95 Limited (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1996).
10.10 Lease Agreement dated September 1, 1988, between the Registrant and The Woodlands Corporation, and Modification of Lease Agreement dated March 5, 1993, between the Registrant and The Woodlands Corporation (incorporated by reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).
10.11 Stock Purchase Warrant dated January 26, 1993, issued to Strategem of Alabama, Inc. (incorporated by reference to Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992).
10.12 License and Development Agreement dated March 3, 1994, between the Registrant and Medtronic, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated March 3, 1994).
10.13 Investment Agreement dated March 3, 1994, between the Registrant and Medtronic, Inc. (incorporated by reference to Exhibit 10.2 to Registrant's Current Report on Form 8-K dated March 3, 1994).
10.14 Lease Agreement between LifeCell Corporation and Unichem, dated August 1, 1994 (incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1994).
10.15* Securities Purchase Agreement dated November 18, 1996, between LifeCell Corporation and the Investors named therein.
10.16* Voting Agreement dated November 18, 1996, among LifeCell Corporation and certain stockholders named therein.
10.17* Registration Rights Agreement dated November 18, 1996, between LifeCell Corporation and certain stockholders named therein.
10.18* Form of Stock Purchase Warrant dated November 18, 1996, issued to each of the warrant holders named on Schedule 10.19 attached thereto.
10.19* Stock Purchase Warrant dated November 18, 1996, issued to Gruntal & Co., Incorporated.
11.1* Statement Regarding Computation of Per Share Earnings.
23.1* Consent of Arthur Andersen LLP.
27.1* Financial Data Schedule.
GLOSSARY
THE FOLLOWING GLOSSARY IS INTENDED TO PROVIDE THE READER WITH AN EXPLANATION OF CERTAIN TECHNICAL TERMS USED IN CERTAIN SECTIONS OF THIS ANNUAL REPORT ON FORM 10-K:
ALLOGRAFT......................... Graft derived from one individual and transplanted to another of the same species (E.G., human to human).
ANCHORING FIBRIL.................. A specialized collagen thread that attaches to both epidermal cells of skin and to the dermal basement membrane complex, bonding them together.
ASEPTIC PROCESSING................ Processing in a sterile work environment using special procedures to keep the tissue free from exposure to infectious material.
AUTOGRAFT......................... Graft derived from one part of an individual's body and transplanted to another location in the same individual.
BASEMENT MEMBRANE COMPLEX.......................... A highly specialized surface structure of dermis that separates and anchors a layer of epithelial cells to the underlying dermis.
CALCIFICATION..................... Abnormal deposition of calcium salts within a tissue, leading to hardening.
CELL CULTURE...................... The maintenance and growth of living cells outside of the body, typically in glass or plastic containers containing nutrients and other supportive substances.
CHEILOPLASTY...................... Surgical lip augmentation.
CLINICAL TRIAL.................... An evaluation or experiment to test safety and therapeutic value of a device or substance in humans.
COLLAGEN.......................... A specialized group of proteins which form fibers and comprise the structural support for numerous tissues of the body (including dermis, blood vessels, heart valves, ligaments, and tendons).
CONTRACTURE RELEASE............... A surgical procedure to remove scar tissue that is preventing free movement of muscles, tendons or joints.
CORONARY BYPASS................... A surgically established shunt of blood flow from the aorta (main artery) to the blood vessels of the heart (coronary arteries), bypassing an obstruction in the coronary artery.
CRYOPRESERVATION.................. The preservation of a biological cell or tissue by the use of freezing and low temperature storage.
CRYOPROTECTION.................... The use of chemical substances that reduce ice crystal damage associated with freezing.
DERMIS............................ The inner layer of skin, composed of extracellular protein matrix, collagen and fibroblasts, which provides strength and durability.
DIFFERENTIATION................... The developmental process whereby an immature primary cell divides and acquires properties required for its specialized function.
ELA............................... Establishment License Application; filed with the FDA Center for Biologic Evaluation and Research to obtain approval to manufacture a biological product at a facility.
ENDOTHELIAL CELLS................. Thin flattened cells that line body cavities, including the inside surface of blood vessels.
EPIDERMIS......................... The outermost superficial layer of skin composed of epithelial cells (keratinocytes) and pigment cells, which overlies the dermis and is responsible for water barrier function and pigmentation.
EPITHELIAL CELLS.................. Sheets of cells that cover exposed surfaces of the body (including skin) and serve especially to close and protect other parts of the body.
EXTRACELLULAR MATRIX.............. A proteinaceous substance of lattice, secreted by cells, which forms connective tissue and serves as structural support for certain tissues or organs of the body. (See Dermis).
FIBROBLAST........................ A cell that secretes collagen and other proteins involved in the formation of connective tissue.
FREEZE-DRY........................ To dry a sample in a frozen state under high vacuum especially for preservation.
FULL-THICKNESS WOUND.............. A skin injury that results in the loss of all skin components, including epidermis and dermis (E.G., third-degree burn).
GLABELLAR CONTOURING.............. A surgical procedure to restore the smooth appearance of the forehead between the eyebrows by filling in the depression created by frown lines.
GRAFT............................. To surgically bond tissues that are normally separate, or the tissue used in a grafting procedure.
HEMORRHAGE........................ To undergo heavy or uncontrolled bleeding.
HOMOLOGOUS CELLS.................. Cells from another person which, when transplanted, can be recognized by the body as foreign and thus provoke an immune response.
IDE APPLICATION................... Investigational Device Exemption allows a company to conduct clinical studies with an investigational medical device.
IMMUNE RESPONSE................... An inflammatory reaction of the body's immune cells to a transplanted tissue or organ, leading to its destruction.
IMMUNOSUPPRESSIVE................. That which suppresses the body's natural immune response, preventing the destruction or rejection of a transplanted tissue or organ.
IND............................... An Investigational New Drug application (IND) is usually the first step in the process of obtaining FDA approval to commercially distribute a new drug. Under an IND, a sponsor can use the drug with human subjects during and in connection with clinical investigations.
The clinical trials generally consist of three Phases.
Phase I, involves the study of a drug's safety in a small number of normal healthy volunteers.
Phase II, involves the assessment of a drug's effectiveness (efficacy) in a larger group of volunteer patients with the condition for which the drug is directed.
Phase III, involves close monitoring of a larger number of patients with the condition for which the drug is directed in order to ascertain the drug's effectiveness and to identify any adverse reactions.
IN-VITRO.......................... A biological process conducted outside of the body, as in a laboratory flask.
KERATINOCYTE...................... Primary epithelial cells of the skin which have the ability to differentiate to full-thickness when associated with a dermal basement membrane complex.
MOLECULAR DISTILLATION DRY......... To dry a sample containing unstable frozen water under conditions of vacuum and temperature such that ice crystallization and subsequent damage to the sample does not occur.
NASAL SEPTAL DEFECT............... An imperfection of the membrane inside the nose that separates the nostrils.
NDA............................... A New Drug Approval application is an application to the FDA for approval to market a drug.
ORTHOPEDIC........................ Pertaining to the restoration of function following injury to, and the correction of deformities of, the skeletal system, its joints and associated structures.
PERIPHERAL BYPASS................. An arterial bypass procedure in an area away from the heart, usually in a limb.
PLA............................... A Product License Application (PLA) is an application to the FDA for approval to market a biological product.
PMA............................... A Pre-market Approval Application (PMA) is an application to the FDA for approval to market a medical device for human therapeutic use.
PORCINE........................... Derived from pigs.
PRECLINICAL TRIALS................ Trials related to experimentation to test safety and therapeutic value of a device or product in living animals, prior to testing in humans.
PREMARKET APPROVAL................ An approved premarket approval application (PMA) is required for new types of Class III medical devices prior to commercialization.
REJECTION......................... Destruction of a transplanted tissue or organ by the host's immune cells.
RHINOPLASTY....................... Plastic surgical operation on the nose.
RHYTIDECTOMY...................... Removal of skin to eliminate wrinkles.
SAPHENOUS VEIN.................... Either of the two chief superficial veins of the legs, commonly used for coronary bypass procedures.
SPLIT-SKIN GRAFT.................. Skin containing both epidermis and dermis which is excised from healthy sites and transplanted to a full-thickness wound on some other area of the body.
TAKE RATE......................... The percentage of the total graft area in which the graft has adhered and vascularized.
THIRD-DEGREE BURN................. Full-thickness injury of the skin, with loss of both the epidermal and dermal components.
VASCULAR CONDUIT.................. A tubular structure through which blood flows (i.e., blood vessel, artery or vein).
VENOUS STASIS ULCERS.............. Skin ulcers resulting from the slowing or stoppage of normal blood flow because of deteriorating valves in the veins.
XENOGRAFT......................... A tissue graft derived from one species and transplanted to a different species (e.g., animal to human).
510(K) (REVIEW)................... A process which enables a manufacturer to demonstrate to the FDA that a proposed product is "substantially equivalent" to another product that was in commercial distribution in the United States before May 28, 1976, or has subsequently been cleared
Page ---- AUDITED FINANCIAL STATEMENTS Report of Independent Public Accountants ................................. Balance Sheets as of December 31, 1995 and 1996 .......................... Statements of Operations for the years ended December 31, 1994, 1995 and 1996 ................................... Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996 ............................. Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 ................................... Notes to Financial Statements ............................................
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To LifeCell Corporation:
We have audited the accompanying balance sheets of LifeCell Corporation (a Delaware corporation) as of December 31, 1995 and 1996, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of LifeCell Corporation as of December 31, 1995 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas March 26, 1997
LIFECELL CORPORATION
BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
LIFECELL CORPORATION
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
LIFECELL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these financial statements.
LIFECELL CORPORATION
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION:
LifeCell Corporation, a Delaware corporation (LifeCell or the Company), is engaged in the research, development and commercialization of transplantable tissue and transfusable blood products. The Company was incorporated on January 6, 1992 for the purpose of merging with its predecessor entity, which was formed in 1986. LifeCell commercially introduced its first transplantable tissue product, AlloDerm(R), during December 1993. Sales of AlloDerm to date have not been sufficient to fund the Company's operations, and the Company expects continued operating losses during 1997. The future operating results of the Company will be principally dependent on the market acceptance of its current and future products, competition from other products or technologies, protection of the Company's proprietary technology, and access to funding as required. Accordingly, there can be no assurance of the Company's future success. See "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" elsewhere herein.
2. ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Investments that the Company intends to hold to maturity are classified as either current or non-current assets based on the maturity date of the security. As of December 31, 1995 and 1996, the Company held $3,009,376 and $10,638,981, respectively, of interest bearing money market accounts and A1/P1 commercial paper which were classified as "held to maturity" securities. The carrying basis of these investments approximated fair value and amortized cost. The securities held at December 31, 1996 matured prior to March 31, 1997.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out (FIFO) basis.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Maintenance and repairs that do not improve or extend the life of the assets are expensed as incurred. Expenditures for renewals and betterments are capitalized. The cost of assets retired and the related accumulated depreciation are removed from the accounts and any gain or loss is included in the results of operations.
Depreciation of furniture and equipment is provided on the straight-line method based on the estimated useful lives of the assets of five years. Leasehold improvements are depreciated over the life of the lease.
INTANGIBLE ASSETS
Intangible assets primarily consist of the costs of obtaining patents for the proprietary technology owned by or licensed to the Company. These costs are being amortized over the lesser of the legal (generally 17 years) or economic life of the patent. Accumulated amortization at December 31, 1995 and 1996, amounted to $39,933 and $53,033, respectively.
REVENUE RECOGNITION
Product sales are recognized as revenue when the product is shipped to fill customer orders. Revenues from corporate alliances and from government grants and contracts are recognized as the work is performed unless the Company has continuing performance obligations, in which case revenue is recognized upon the satisfaction of such obligations. Revenue received, but not yet earned, is classified as deferred revenue.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed when incurred. The Company performs research funded by others, including research funded through the corporate alliance with Medtronic (see Note 8), as well as its own independent proprietary research, development and clinical testing of its products. Externally funded research consists of direct costs associated with specific projects as well as an allocation of overhead associated with administering these activities.
LOSS PER SHARE
Loss per share has been computed by dividing net loss, which has been increased for periodic accretion and imputed and stated dividends on outstanding Preferred Stock and the discount offered on warrant exercises induced during 1996, by the weighted average number of shares of Common Stock outstanding during the periods. In all applicable years, all Common Stock equivalents, including the Series A Preferred Stock and the Series B Preferred Stock, were antidilutive and, accordingly, were not included in the computation.
In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Statement 128 establishes standards for computing and presenting earnings per share (EPS). This statement simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, EARNINGS PER SHARE, and makes them comparable to international EPS standards. The statement also retroactively revises the presentation of earnings per share in the financial statements. The Company will adopt this Standard for the year ended December 31, 1997, and has not currently quantified the effect of applying the new Standard.
STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation pursuant to the provisions of Accounting Principles Board Opinion No. 25. Compensation expense for stock options issued to employees and directors is generally recorded at the intrinsic value (the discount, if any, of the option price from the market price of the Common Stock under option) of the option at the date of grant. Subsequent changes in the market price of the underlying stock do not affect the accounting treatment of the option. Options granted to others are accounted for under the provisions of Statement of Financial Accounting Standards No. 123, which requires that the option be recorded at its estimated fair value using option-pricing formulas used in the financial markets.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
3. INVENTORIES:
Inventories consist of products in various stages produced for sale and includes the costs of raw materials, labor, and overhead. A summary of inventories is as follows:
1995 1996 -------- -------- Raw Materials ................ $ 29,171 $ 52,738 Work-In-Process .............. 107,988 437,221 Finished Goods ............... 214,343 349,862 -------- -------- $351,502 $839,821 ======== ========
4. FURNITURE AND EQUIPMENT: A summary of furniture and equipment is as follows:
1995 1996 ---------- ---------- Office furniture and fixtures .............. $ 57,636 $ 61,130 Machinery and equipment .................... 1,097,480 1,342,243 Leasehold improvements ..................... 189,877 220,293 ---------- ---------- 1,344,993 1,623,666 Less - Accumulated depreciation and amortization 929,430 1,145,568 ---------- ---------- Net furniture and equipment .......... $ 415,563 $ 478,098 ========== ==========
5. CAPITAL STOCK:
AUTHORIZED CAPITAL STOCK
As of December 31, 1996, the authorized capital of the Company consisted of 25,000,000 shares of Common Stock, $.001 par value, and 2,000,000 shares of Preferred Stock, $.001 par value, of which 300,000 shares were designated as Series A Convertible Preferred Stock and 182,205 shares were designated as Series B Preferred Stock. As of December 31, 1996, there were 4,899,944 shares of Common Stock, 260,000 shares of Series A Convertible Preferred Stock and 124,157 shares of Series B Preferred Stock outstanding. During March 1997, all outstanding shares of Series A Convertible Preferred Stock and a portion of the accrued dividends were converted into 1,772,433 shares of Common Stock.
SERIES A PREFERRED STOCK
During November 1994, the Company issued 264,500 shares of Series A Convertible Preferred Stock (Series A Preferred Stock) and warrants to acquire 264,500 shares of Common Stock for gross proceeds of approximately $5.3 million in a private placement. Each share of Series A Preferred Stock was convertible at any time at the option of the holder into 6.69 shares of Common Stock. During 1996, 4,500 shares of Series A Preferred Stock were converted into 30,104 shares of Common Stock. The Series A Preferred Stock had a liquidation preference of $20 per share, or $5,200,000 as of December 31, 1996.
The Series A Preferred Stock bore dividends at annual rates of $1.20, $1.60, and $2.00 per share for each of the first, second and third years, respectively, after the date of original issuance. Dividends were payable in cash, Common Stock, or any combination of cash and Common Stock at the Company's discretion. The Series A Preferred Stock had no ordinary voting rights. While the preferred shares were outstanding or any dividends were owed thereon, the Company could not declare or pay cash dividends on its Common Stock. During 1995 and 1996, respectively, the Company paid $317,400 and $415,920 in accrued dividends on the Series A Preferred Stock by issuing 103,816 shares and 121,054 shares of Common Stock.
The preferred stock was automatically convertible into Common Stock on November 9, 1997 and could be redeemed sooner by the Company if, after November 9, 1995, the closing bid price of the Company's Common Stock averaged or exceeded $5.17 per share for 20 consecutive days. Pursuant to such provisions, during February 1997, the Company called for redemption all outstanding shares of Series A Preferred Stock. During March 1997 the Company issued 1,739,128 shares of Common Stock to redeem the Series A Preferred Stock and paid a cash dividend of $65,000 and issued an additional 33,305 shares of Common Stock for dividends accrued through the date of redemption.
The carrying amount of the Series A Preferred Stock was increased for accrued and unpaid stated dividends plus periodic accretion, using the effective interest method, such that the carrying amount equaled the redemption amount on November 9, 1995. In November 1994, the Series A Preferred Stock was also increased by imputed dividends resulting from the increasing dividend rates.
SERIES B PREFERRED STOCK
During November 1996, the Company issued 124,157 shares of Series B Preferred Stock (Series B Preferred Stock) and warrants to acquire 2,803,530 shares of Common Stock for gross proceeds of approximately $12.4 million in a private placement. Each share of Series B Preferred Stock is initially convertible at any time at the option of the holder into approximately 32.26 shares of Common Stock (or 4,005,064 shares of Common Stock at December 31, 1996), subject to adjustment for dilutive issuances of securities. The Series B Preferred Stock has a liquidation preference of $100 per share, or $12,415,700 as of December 31, 1996, and shares ratable in any residual assets after payment of such liquidation preference.
The Series B Preferred Stock bears cumulative dividends, payable quarterly, for five years at the greater of the annual rate of $6.00 per share or the rate of any dividends paid on the Series A Preferred Stock (effectively $10 per share until the Series A Preferred Stock was redeemed in March 1997). Dividends may be paid in cash, in additional shares of Series B Preferred Stock based on the stated value of $100 per share, or any combination of cash and Series B Preferred Stock at the Company's option. On all matters for which the Company's stockholders are entitled to vote, each share of Series B Preferred Stock will entitle the holder to one vote for each share of Common Stock into which the share of Series B Preferred Stock is then convertible. Additionally, the holders of Series B Preferred Stock have the right to elect up to three directors to the Board of Directors of the Company. While the preferred shares are outstanding or any dividends are owned thereon, the Company may not declare or pay cash dividends on its Common Stock. During 1996 the Company declared accrued dividends on the Series B Preferred Stock of $145,867 payable through the issuance of 1,426 additional shares of Series B Preferred Stock on February 15, 1997.
The preferred stock will be automatically converted into Common Stock if (i) the closing price of the Company's Common Stock averages or exceeds $9.30 per share for 30 consecutive trading days and (ii) the Company conducts an underwritten public offering of newly issued Common Stock with gross proceeds, net of underwriting discounts and commissions, exceeding $20 million. Additionally, the preferred stock will be automatically converted into Common Stock if the Company conducts an underwritten public offering of newly issued Common Stock with gross proceeds, net of underwriting discounts and commissions, exceeding $20 million and the price per share in such offering equals or exceeds $9.30.
COMMON STOCK
During February 1994, all previously outstanding shares of Class I Common Stock were automatically converted into 2,803,812 shares of Common Stock and the Class I Common Stock was eliminated during June 1995.
During 1995 and 1996, respectively, the Company issued 103,816 shares and 121,054 shares of Common Stock as payment of accrued dividends on Series A Preferred Stock. Additionally, during 1996, the Company induced the exercise of warrants by temporarily lowering exercise prices and issued 339,066 shares of Common Stock at a weighted average price of $3.10 upon exercise of certain warrants.
During March 1997, the Company issued 1,739,128 shares of Common Stock to redeem all outstanding shares of the Series A Preferred Stock and paid a cash dividend of $65,000 and issued an additional 33,305 shares of Common Stock for dividends accrued through the date of redemption.
During 1994, the Company purchased 43,965 shares of Common Stock from several employees, including officers and directors, for the purpose of satisfying their income tax liabilities for shares and options previously granted under a deferred compensation arrangement. These treasury shares were subsequently reissued during 1994.
In 1992, the Company adopted a Restricted Stock Plan and issued 241,372 shares of Common Stock to employees, a director and a consultant of the Company for $.001 per share. The restricted stock vested over a four year period. Deferred compensation expense totaling $965,000 was expensed over the vesting period of the grants. The non-cash charge related to these stock grants was $239,000 for 1994 and 1995 and $20,000 for 1996.
OPTIONS
The Company's 1992 Stock Option Plan, as amended (1992 Plan), provides for the grant of options to purchase up to 1,000,000 shares of Common Stock. Granted options generally become exercisable over a four year period, 25 percent per year beginning on the first anniversary of the date of grant. To the extent not exercised, options generally expire on the tenth anniversary of the date of grant, except for employees who own more than 10 percent of all the voting shares of the Company, in which event the expiration date is the fifth anniversary of the date of grant. All options granted under the plan have exercise prices equal to the fair market value at the dates of grant.
The 1993 Non-Employee Director Stock Option Plan (Director Plan) was adopted in 1993 and amended during 1996. A total of 750,000 shares of Common Stock are available for grant under the Director Plan. Upon amendment of the Director Plan in 1996, options to purchase 50,000 shares of Common Stock were granted to each then-current non-employee director of the Company at an exercise price equal to the fair market value of a share of Common Stock on the date of the Director Plan. Options to purchase 25,000 shares of Common Stock will be granted to newly elected directors at an exercise price equal to the fair market value of a share of Common Stock on such election date. The provisions of the Director Plan provide for an annual grant of an option to purchase 10,000 shares of Common Stock to each non-employee director. Options under the Director Plan generally vest one year after date of grant and expire after 10 years.
A summary of stock option activity is as follows:
At December 31, 1996, 28,718 and 670,000 options were available for future grant under the 1992 Plan and the Director Plan, respectively. The exercise prices of options outstanding under the 1992 Plan and the Director Plan at December 31, 1996 range from $0.07 to $4.375 and $2.75 to $11.00, respectively. The weighted average contractual life of options outstanding at December 31, 1996 was 9.1 years for the 1992 Plan and 7.8 years for the Director Plan.
In addition to the amounts set forth in the table above, during 1996, the Company granted options to purchase 220,000 shares of Common Stock to directors who resigned upon the closing of the sale of the Series B Preferred Stock in exchange for options previously granted under the Director Plan. These options have provisions identical to the options previously granted under the Director Plan, including exercise prices and vesting periods. The weighted average exercise price of the options granted was $4.14. The weighted average remaining contractual life of the grants was 8.8 years as of December 31, 1996. The Company expensed $150,000, which was the difference between the market price and the option price on the date of the grant, during 1996 related to this reissuance.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123 "Accounting for Stock-Based Compensation" which, if fully adopted, requires the Company to record stock-based compensation at fair value. The Company has adopted the disclosure requirements of SFAS No. 123 and has elected to record employee compensation expense in accordance with Accounting Principles Board Opinion (APB) No. 25.
The Company accounts for its employee stock-based compensation plans under APB No. 25 and its related interpretations. Accordingly, deferred compensation expense is recorded for stock options based on the excess of the market value of the common stock on the date the options were granted over the aggregate exercise price of the options. This deferred compensation is amortized over the vesting period of each option. As the exercise price of options granted under the 1992 Plan and the Director Plan has been equal to or greater than the market price of the Company's stock on the date of grant, no compensation expense related to these plans has been recorded. Had compensation expense for its 1992 Plan and Director Plan been determined consistent with SFAS No. 123, the Company's net loss and loss per share would have been increased to the following pro forma amounts:
1995 1996 ---- ---- Net Loss: As reported $3,905,404 $4,089,714 Pro forma $3,940,041 $5,372,049 Loss Per Share: As reported $1.10 $1.14 Pro forma $1.10 $1.42
Because the Statement 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years.
Under the provisions of SFAS No. 123, the weighted average fair value of options granted in 1995 and 1996 was $1.88 and $3.21, respectively, under the 1992 Plan. The weighted average fair value of options granted in 1995 and 1996 was $2.21 and $2.40, respectively, under the Director Plan. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1995 and 1996, respectively: a weighted average risk-free interest rate of 6 percent for both years; no expected dividend yields for both years; expected lives of 3 years for both years and expected volatility between 96 and 100 percent.
The stock options issued to retiring directors in 1996 had a weighted average fair value of $2.57. The fair values of such options are estimated on the date of grant using Black-Scholes option price model with the following assumptions used: a weighted average risk-free interest rate of 6 percent, expected lives of 3 to 5 years, expected volatility of 99 percent and no expected dividends.
During 1995, options to purchase 225,917 shares of Common Stock at exercise prices of $9.00 and $14.50 were canceled and reissued at substantially the same terms, but with an exercise price equal to the then current market price of $2.50.
WARRANTS
As of December 31, 1996, warrants to acquire a total of 3,378,264 shares of Common Stock were outstanding as set forth below.
During 1996, the Company issued warrants to acquire 2,803,530 shares of Common Stock in conjunction with the sale of the Series B Preferred Stock (the 1996 Warrants). The 1996 Warrants are exercisable at an exercise price of $4.13 per share. The warrants expire on the fifth anniversary of the date of grant, are callable if the average closing price of the Company's Common Stock for 30 trading days equals or exceeds three times the then-exercise price, and allow cashless exercise. The warrants also have provisions for adjustment of the exercise price and number of shares for below-exercise price issuance of securities.
Additionally, the Company issued a warrant to acquire 354,734 shares of Common Stock to the placement agent for the Series B Preferred Stock (Agent Warrant). The Agent Warrant is exercisable at an exercise price of $4.50 per share. The warrant expires on the fifth anniversary of the date of grant and allows cashless exercise. The warrant also has provisions for adjustment of the exercise price and number of shares for below-exercise price issuance of securities.
In connection with the sale of the Series A Preferred Stock, the Company issued warrants to acquire 264,500 shares of Common Stock at exercise prices of $3.26 per share during the first year and $3.54 per share during the second year. Additionally, the placement agent was issued a warrant to purchase 90,816 shares of Common Stock at $6.00 per share. A total of 339,066 warrants were exercised during 1996 through inducement of exercise by lowering the exercise price to $3.10 per share. The difference between the market price on the date of inducement and the induced exercise price has been deducted from net income to determine loss per Common share. A total of 15,000 warrants expired unexercised.
As of December 31, 1996, additional warrants to acquire 100,000 shares of Common Stock were outstanding with exercise prices ranging from $2.50 to $11.05. Such warrants expire during periods ranging from December 31,
1997 to December 13, 2000. Additionally, as of December 31, 1996, warrants to acquire 120,000 shares of Common Stock were outstanding but expired unexercised on February 27, 1997.
6. EMPLOYEE BENEFIT PLANS:
The Company maintains a retirement savings plan as described in Section 401(k) of the Internal Revenue Code of 1986. The Company may, at its discretion, contribute amounts not to exceed each employee's contribution. During January 1996 and January 1997, the Company made total contributions of $5,292 and $8,187 to the plan for a partial matching of employee contributions during 1995 and 1996, respectively.
During 1996, the Company established an Employee Stock Purchase Plan to allow for the purchase of the Company's Common Stock on the open market using employee and any employer matching contributions. During 1996, the Company contributed $1,328 to this plan.
7. FEDERAL INCOME TAXES:
The Company has not made any income tax payments since inception. As of December 31, 1996, the Company has a net operating loss (NOL) carryforward for federal income tax purposes of approximately $26 million, subject to the limitations described below, expiring as follows:
YEAR EXPIRES 2001.................................. $ 500,000 2002.................................. 1,500,000 2003.................................. 2,800,000 2004.................................. 2,200,000 2005.................................. 1,700,000 2006.................................. 1,400,000 2007.................................. 2,400,000 2008.................................. 3,000,000 2009.................................. 2,500,000 2010.................................. 4,000,000 2011.................................. 4,000,000 ----------- $26,000,000 ===========
Additionally, the Company has approximately $385,000 of research and development tax credit carryforwards which will expire in varying amounts commencing in 2001. The Company's ability to utilize its tax loss and credit carryforwards to reduce future taxable income may be limited by either the prior expiration of such loss or credit or by the occurrence of a "change in ownership," as such term is defined by federal income tax laws and regulations. A change in ownership may occur upon the sale of additional equity securities by the Company, conversion of existing shares of Series B Preferred Stock or by sales of stock by existing stockholders. In the event of a change in ownership, the amount of the tax loss and credit carryforwards that may be utilized to offset taxable income in any year may be limited and result in the payment of federal income taxes that otherwise would be offset by such tax losses or credits.
For financial reporting purposes, a valuation allowance of $9,897,000 has been recorded as of December 31, 1996 to fully offset the deferred tax asset related to these carryforwards. The principal components of the deferred tax asset as of December 31, 1995 and 1996, assuming a 34% federal tax rate, are as follows:
1995 1996 ---------- ---------- Temporary differences: Deferred revenue ........................ 582,000 510,000 Restricted stock compensation............ (196,000) 154,000 Uniform capitalization of inventory costs ...................... 160,000 37,000 Other items ............................. 66,000 (29,000) ---------- ---------- Total temporary differences ............. 612,000 672,000 Federal tax losses and credits not currently utilizable ............. 7,845,000 9,225,000 ---------- ---------- Total deferred tax assets ................... 8,457,000 9,897,000 Less valuation allowance ................ (8,457,000) (9,897,000) ---------- ---------- Net deferred tax asset ...................... -- -- ========== ==========
The net increase in the deferred tax valuation allowance for 1995 and 1996 was $1,691,000, and $1,440,000, respectively. Other than the net operating loss and tax credit carryforwards, there is no significant difference between the statutory federal income tax rate and the Company's effective tax rate during 1994, 1995 and 1996.
8. COLLABORATIONS AND CORPORATE ALLIANCES
MEDTRONIC CARDIOVASCULAR COLLABORATION
During March 1994, the Company entered into a collaboration with Medtronic, Inc. (Medtronic) for the development and commercialization of universal tissue heart valves engineered with LifeCell's proprietary technology. Medtronic paid the Company an initial licensing fee of $1,500,000, agreed to fund development of heart valve products, and acquired $500,000 of the Company's Common Stock at a price of $7.77 per share. Medtronic is obligated to pay royalties, up to a maximum of $25,000,000, on any product sales . Medtronic was also granted a right of first refusal to evaluate technology and negotiate license and development agreements for vascular conduit products utilizing the Company's technology. In the event Medtronic terminates funding of the heart valve program, Medtronic may convert its initial $1.5 million license fee into newly issued shares of the Company's Common Stock at the then-current market price. Accordingly, the Company has deferred recognition of the initial license fee and recorded a $1.5 million deferred credit in the accompanying balance sheet. Medtronic also has the right, subject to certain restrictions, to purchase additional shares of the Company's Common Stock, to have the Company register the resale of any Common Stock acquired from it, and to appoint one member of the Board of Directors of the company through March 1999.
OTHER PRODUCT SALES ARRANGEMENTS
The Company has negotiated other distribution or sales collaboration arrangements with various parties with exclusive regional or international territories under each agreement. The agreements generally provide that the distributor must meet certain performance measures or the agreement may be terminated by the Company. The markets served by these arrangements include plastic and reconstructive surgery.
9. COMMITMENTS AND CONTINGENCIES:
EXTERNAL FUNDING FOR RESEARCH
Certain of the Company's research programs have been funded by Small Business Innovation Research (SBIR) grants and other direct federal government funding contracts. The grants and contracts generally obligate the Company to perform specified research activities in return for such funding, and the utilization of funds under the grants is subject to audit by the appropriate governmental agencies. At December 31, 1996, the Company had received $138,792 of deferred revenue, including advance payments from a corporate alliance, for research to be
conducted during 1997. Additionally, as of December 31, 1996, the Company has unfunded awards totaling $1,597,000 for research that is expected to occur and be funded during 1997 and 1998.
EXCLUSIVE LICENSE AGREEMENT
The Company has an exclusive license agreement with the Board of Regents of the University of Texas System (Board) to technology and patents related to the analysis or preservation of certain cells or tissues. The Company is required to pay the Board royalties on net sales of products encompassing the licensed technologies. For the periods ended December 31, 1994, 1995 and 1996 no significant royalties were paid under the agreement.
LEASES
The Company leases approximately 20,000 square feet for office and laboratory space. The future minimum lease payments under noncancelable lease terms in excess of one year as of December 31, 1996 were as follows:
1997................................... $ 218,028 1998................................... 221,320 1999................................... 221,320 2000................................... 221,320 2001................................... 18,443 --------- Total........................ $ 900,431 ==========
10. TRANSACTIONS WITH RELATED PARTIES:
The Company leases office space from an affiliate of a stockholder of the Company. The Company paid rent expense of approximately $139,000, $129,000 and $142,000 during 1994, 1995, and 1996 respectively, related to this lease.
The Company paid consulting fees and expenses to an affiliate of a stockholder and a former director of the Company, totaling approximately $96,000, $91,000 and $80,000 during the years ended December 31, 1994, 1995 and 1996 respectively, pursuant to a consultant agreement.
As of December 31, 1996, the Company has notes receivable totaling $95,060 from participants, two of whom are directors of the Company, in a previous deferred compensation plan. Such notes represent loans of federal income tax amounts payable by the individuals as a result of grants under the plan.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summary unaudited financial data for the years ended December 31, 1995 and 1996. The Company believes that this information reflects all adjustments, consisting of only normal recurring items, considered necessary for a fair presentation of the quarterly financial information presented. The operating results for any quarterly period are not necessarily indicative of the results that may be expected for future periods.
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (In thousands except per share amounts)
Product Sales ............ $ 98 $ 130 $ 251 $ 263 Total Revenues ........... $ 430 $ 399 $ 514 $ 464 Gross Margin ............. $ (5) $ (52) $ (7) $ (119) Net loss ................. $(958) $(1,016) $ (867) $(1,064) Loss per share ........... $(0.27) $ (0.29) $ (0.25) $ (0.29)
Product Sales ............ $ 421 $ 429 $ 561 $ 602 Total Revenues ........... $ 576 $ 678 $ 816 $ 876 Gross Margin ............. $ 149 $ 157 $ 205 $ 220 Net loss ................. $(949) $ (909) $(1,023) $(1,209) Loss per share ........... $(0.25) $ (0.24) $ (0.33) $ (0.32)
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LIFECELL CORPORATION (Registrant)
By: /s/ PAUL M. FRISON Paul M. Frison, President and Chief Executive Officer and Chairman of the Board of Directors Dated: March 26, 1997.
In accordance with the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
/S/ PAUL M. FRISON Chairman of the Board, March 26, 1997 (Paul M. Frison) President and Chief Executive Officer (Principal Executive Officer)
/S/ J. DONALD PAYNE Vice President, Secretary March 26, 1997 (J. Donald Payne) and Chief Financial Officer (Principal Financial and Accounting Officer)
/S/ MICHAEL E. CAHR Director March 26, 1997 (Michael E. Cahr)
/S/ JAMES G. FOSTER Director March 26, 1997 (James G. Foster)
/S/ LORI KOFFMAN Director March 26, 1997 (Lori Koffman)
/S/ STEPHEN A. LIVESEY Director March 26, 1997 (Stephen A. Livesey)
/S/ K. FLYNN MCDONALD Director March 26, 1997 (K. Flynn McDonald)