-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QVmukK2tsO5NiDU58E7S8e99/fKCTmhHczCahIui6hURU8CY7K/tl2GvUe5KQL9d 2v/Q5+CGV3wG9i8QncltNA== 0000897101-99-001133.txt : 19991130 0000897101-99-001133.hdr.sgml : 19991130 ACCESSION NUMBER: 0000897101-99-001133 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990831 FILED AS OF DATE: 19991129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CELOX LABORATORIES INC CENTRAL INDEX KEY: 0000883720 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 363384240 STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-19866 FILM NUMBER: 99765644 BUSINESS ADDRESS: STREET 1: 1311 HELMO AVE CITY: ST PAUL STATE: MN ZIP: 55128 BUSINESS PHONE: 6127301500 MAIL ADDRESS: STREET 1: 1311 HELMO AVE CITY: ST PAUL STATE: MN ZIP: 55128 FORMER COMPANY: FORMER CONFORMED NAME: CELOX CORPORATION DATE OF NAME CHANGE: 19930328 10KSB 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 1999 Commission file number: 0-19866 CELOX LABORATORIES, INC. (Name of small business issuer in its charter) Minnesota 36-3384240 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1311 Helmo Avenue, St. Paul, Minnesota 55128 (Address of principal executive offices) Issuer's telephone number: (651) 730-1500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. _X_ Yes ___ No Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-KSB or any amendment to this Form 10-KSB. [ ] The registrant's sales for its most recent fiscal year were $198,142. The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of the Common Stock on October 31, 1999 as reported on the Over-the-Counter Market, was approximately $616,431. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded from this number, as such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of October 31, 1999, the registrant had outstanding 2,909,169 shares of Common Stock. Transitional Small Business Disclosure Format. ___ Yes _X_ No Exhibit Index is located on page 18. 1 PART I ITEM 1 - BUSINESS In fiscal 1995, Celox Corporation changed its name to Celox Laboratories, Inc. The Company is a cell technology company formed in 1985 that researches, develops, manufactures, and markets cell biology products that are used in the propagation of cells derived from mammals, including humans, and other species. (In fiscal 1993, the Company changed its reporting status from a development stage enterprise to a regular operating corporation.) These specialized cell growth products are used primarily in academic, pharmaceutical and other commercial laboratories to improve the growth, productivity and quality of cell-derived medical and other biological products such as vaccines, monoclonal antibodies, interferons, and human growth factor. Since its inception, the Company has pursued a strategy of developing non-serum based products for the growth of human and other mammalian cells which management believes will have significant commercial potential. In February, 1999 the Company announced the formation of Protide Pharmaceuticals, Inc., (Protide), a wholly owned subsidiary. Celox owns all of the four million outstanding shares of Protide. Protide was formed in connection with the further development of ViaStem(TM) and other clinically related cell therapy and transfusion medicine products. FORWARD LOOKING INFORMATION Information contained in this Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology such as "may", "will", "expect", "plan", "anticipate", "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. There are certain important factors that could cause results to differ materially from those anticipated by some of these forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty. The factors, among others, that could cause actual results to differ materially include the Company's ability to execute its business plan, uncertainties relating to clinical trials, dependence on third parties and future capital needs. BACKGROUND To date, the Company has focused its efforts on commercial applications of cell biology -- the science of life processes at the cellular level. Cell biology involves the study of the molecular, physical, nutritional, and hormonal needs of cells. The cell is the basic sub-unit of every living system and thus exerts a significant influence on the functioning of the entire organism. Cells are complex, having their own power supplies, digestive systems, communication networks, and centers for producing biological products. The cell holds the key to solving major health problems such as cancer, Acquired Immune Deficiency Syndrome ("AIDS"), atherosclerosis, genetic disorders, diabetes, and mental illness. Having accumulated information concerning cells and cellular functions, scientists are able to manipulate cells outside the body in their efforts to address these major health problems. The development of genetic engineering and the use of mammalian cells for the production of biological products has advanced cell culturing to new levels. The manipulation or culturing of cells for production of diagnostic and therapeutic products is an area of significant commercial growth for biotechnology companies and pharmaceutical firms. Products currently subject to research efforts include products to treat and detect AIDS, cancer, growth disorders, and cardiovascular disease. The medical community now has access to once unavailable cellular products, such as monoclonal antibodies, interferons, and human growth factors. As a result, more emphasis is being placed on the development of cell culturing technology. 2 Culturing of mammalian cells, tissues, and bacteria is now a widely used technique in the biological sciences, from the basic sciences of cell and molecular biology to the rapidly evolving area of biotechnology. The advent of growing cells IN VITRO (i.e., in cultures or outside the organism) has permitted extensive studies of specific human and other mammalian cellular functions. Isolated cells are being used increasingly in the study of biological phenomena such as chemical toxicity of therapeutic drugs, cancer cell growth and regulation, and for the production of cell-derived biological products. The types of cells that can be grown IN VITRO include muscle, cartilage, liver, lung, breast, skin, bladder, kidney, pancreatic islet cells, and genetically altered cells producing biological products. Recreating IN VIVO (i.e., in the organism) interactions in an IN VITRO environment requires special nutrients conducive to cell growth. Once the cells are separated from the complex tissue organization in which they normally thrive, cell biologists, using a cell growth medium as a base, can optimize the IN VITRO nutritional, hormonal, and physical factors that promote propagation. Culturing of human and other mammalian cells requires the use of a nutrient source of cell growth medium. Typically this growth medium includes a mixture of 80% to 90% basal medium that consists of amino acids, sugar, salts, vitamins, and 10% to 20% serum. Serum is derived from the whole blood of humans and other species and provides growth factors necessary for cells to continue to divide in culture. Although serum provides various proteins, enzymes, hormones, trace elements, and undefined regulators for cell growth, accumulated evidence suggests that many of these components are extraneous and may complicate the purification of cell-derived medical and biological products. Serum availability and pricing are volatile and serum can exhibit significant biological variability, including contaminants, thereby affecting researchers' experimental results and commercial manufacturers' budgeting and product consistency. Accordingly, if users are unable to purchase a project's entire serum requirement from the same lot, they may be required to test the quality of the serum throughout the duration of the project. Based on research conducted by the Company and its experience with the disadvantages of cell growth media containing human serum, fetal calf serum, horse or other animal serum, the Company developed serum-free supplements that optimize the growth of a variety of cell types. These supplements contain known concentrations of identified components that remain constant from production lot to lot and can eliminate potential contaminants such as viruses and bacteria. PRODUCTS AND SERVICES The Company markets over 25 different products. The Company's proprietary products consist of six different serum-free supplements: TCM(TM), TM-235(TM), TCH(TM), Nephrigen(TM), HemaPro(TM) and VaxMax(TM) and two cell freezing solutions, Cellvation(TM) and a newly introduced product, pZerve(TM). VaxMax(TM), introduced in September of 1993, was developed specifically for use in the production of veterinary vaccines. Nephrigen(TM) was introduced in fiscal 1998 and is a serum-free growth medium developed specifically for the culturing of Human Embryonic Kidney (293) cells. As part of the Nephrigen(TM) system, the Company also introduced a non-enzymatic dissociation solution that is used instead of an enzyme such as trypsin. HemaPro(TM) was also introduced in fiscal 1998 and is a low protein, serum-free medium for clonogenic assays or EX VIVO expansion of human progenitor cells. The Company intends to obtain IN VITRO diagnostic status for HemaPro(TM). pZerve(TM) was introduced in 1999 and is used primarily for cryopreserving human cells. pZerve(TM) is used as a research product only, it is not for human use. An additional proposed clinical product, ViaStem(TM), has completed preclinical testing. This product was developed to improve the preservation of critical cells (e.g., stem cells), which are required for bone marrow transplantation. Additional uses for ViaStem(TM) include cryopreservation of cord blood and platelets. 3 SERUM-FREE SUPPLEMENTS The Company has developed six technically advanced serum-free supplements to address the inadequacies of serum-based media. The Company's defined basal media supplements, TCM(TM), TM-235(TM), TCH(TM), Nephrigen(TM), HemaPro(TM) and VaxMax(TM) are fortified, low-protein, multipurpose serum-free supplements formulated for the long-term culturing of a wide variety of cell types. These supplements contain chemically-defined, growth-promoting factors that enhance the growth, productivity, and purity of highly specialized cells that secrete biological products such as monoclonal antibodies, interferons, human growth factor, insulin, tissue, plasminogen, enzymes, and vaccines. These supplements also improve the biochemical analysis of nutrient and hormonal effects on the differentiation and function of cells. TCM(TM) was formulated as a general serum replacement for a variety of cell types from species including rodent, dog, cat, rabbit, pig, monkey, and human. This product was designed for cost-effective use. TCM(TM) is not highly specific to a single cell type and is therefore effective in many research and manufacturing situations. TCM(TM) has a Drug Master File classification from the Food and Drug Administration (FDA), which makes it suitable for the manufacturing of biologicals (e.g., vaccines, monoclonal antibodies, etc.). TM-235(TM) is similar to TCM(TM), but contains additional proprietary components. This product was developed for cell lines that require more than 10% fetal calf serum and is slightly more expensive than TCM(TM). A Drug Master File (DMF) is being prepared for TM-235(TM). TCH(TM) was developed specifically for human hybridomas (cell secreting monoclonal antibodies) and other human cells of lymphoid origin (originating in the lymphatic or immune system). TCH(TM) contains no animal proteins and is compatible for use in the production of human biological products. A Drug Master File (DMF) is being prepared for TCH(TM). Nephrigen(TM) was developed specifically for the culturing of Human Embryonic Kidney (293) cells. It is a cost-effective, low protein medium which provides the optimum growth conditions for high density, long-term culturing. Human embryonic kidney cells are frequently used for human adenovirus production, drug screening, toxicity testing and the production of recombinant proteins. Nephrigen(TM) is sold in a kit format with 2 x 500ml bottles of basal media along with a 20ml supplement. As part of the Nephrigen(TM) system, a non-enzymatic dissociation solution was introduced to be used instead of an enzyme such as trypsin. HemaPro(TM) was developed as a serum-free medium for use in clonogenic assays OR EX Vivo expansion of human progenitor cells. HemaPro(TM) does not contain erythropoietin, recombinant growth factors, human serum or fetal bovine serum, thereby making it effective in studying stimulatory factors under controlled conditions. VaxMax(TM) is a cost effective serum reducer specifically designed for use by manufacturers of veterinary vaccines. It was formulated to provide optimal cell growth and virus production. VaxMax(TM) has been used by veterinary vaccine manufacturers to enhance production while lowering overall costs. The Company sells TCM(TM), TM-235(TM), TCH(TM), Nephrigen(TM), HemaPro(TM) and VaxMax(TM) at prices competitive with serum and other serum-free supplements. (See "Business -- Competition.") The reliability and rigorous quality control involved in manufacturing TCM(TM), TM-235(TM), TCH(TM), Nephrigen(TM), HemaPro(TM) and VaxMax(TM) allow researchers to purchase as little as a one-week supply of supplements rather than enough for an entire project as is often necessary with serum-based media. The consistency of TCM(TM), TM-235(TM), TCH(TM), Nephrigen(TM), HemaPro(TM) and VaxMax(TM) reduces the need to qualify the supplements prior to each use. TCM(TM), TM-235(TM), TCH(TM), Nephrigen(TM) and HemaPro(TM) are concentrated to a level of fifty times in small-volume packages for easier shipment and storage than comparable amounts of serum, which are typically sold in non-concentrated form. VaxMax(TM) is concentrated to a level of one hundred times. 4 CELLVATION(TM) Cellvation(TM) is a cryopreservative, or cell freezing medium, used in the storage of cells at ultra-low temperatures. Cellvation(TM) does not contain any type of serum or dimethyl sulfoxide, both of which have traditionally been used in cell freezing. Although the Company believes Cellvation(TM) is ideal for cells grown without serum, it may also be used for cells cultivated in serum. PZERVE(TM) pZerve(TM) was introduced in 1999 and is used primarily for cryopreserving human cells. pZerve(TM) also does not contain any type of serum or dimethyl sulfoxide. pZerve(TM) is used as a research product only, it is not for human use. VIASTEM(TM) ViaStem(TM) is a cell solution that was developed as a new technology for ultra-low temperature preservation of critical cells like those required for bone marrow transplantations. The Company believes that ViaStem(TM) has the potential of preventing certain complications associated with current procedures, such as toxicity and nausea. Preliminary data indicates that ViaStem(TM) increases the viability and preservation of critical cells. Other potential applications for ViaStem(TM) include preservation of umbilical cord cells, platelets, and red blood cells. ViaStem(TM) has completed pre-clinical testing and the Company anticipates beginning human trials during fiscal 2000. BASAL MEDIA FORMULATIONS The Company manufactures eleven products based on standard published formulations. Liquid basal media contains ultra-filtered water, essential and non-essential amino acids, vitamins, and inorganic and organic components. Generally, the basal medium plus a serum-free supplement provides the complete growth medium. BUFFERED SALINE SOLUTIONS The Company manufactures six standard formulations, of which one product is available at standard concentration levels of one and ten times. Applications include cell rinsing, short-term storage, and washing solution for diagnostic tests. MARKETS AND MARKETING The Company sells its products primarily to academic, pharmaceutical, and other commercial laboratories. In addition, the Company markets its products through distributors, direct mail, the Internet, new product releases, and advertisements in trade publications and scientific journals. The Company has distribution agreements for the sale of its products worldwide including the USA, Europe, Canada, Japan, Latin America, and the Pacific Rim. The Company has a non-exclusive world-wide distribution agreement with ICN Pharmaceuticals, Inc. (NYSE:ICN), Costa Mesa, CA. Under the agreement, ICN is marketing Celox' TCM(TM), TCH(TM), TM-235(TM) serum replacement products as well as Cellvation(TM). The Company has also entered into an agreement with ICN to custom manufacture certain of the Company's basal media and balanced salt solutions to ICN for worldwide distribution. ICN manufactures and markets a broad range of prescription and over-the-counter pharmaceuticals, medical diagnostic products and biotechnology research products in North and Latin America, Eastern and Western Europe and the Pacific Rim countries. In 1997, the Company began providing its proprietary products to Sigma Chemical Company (NASDAQ:SIAL), St. Louis, MO. under a private label distribution agreement. 5 In 1997, the Company entered into a non-exclusive distribution agreement with TaKaRa Shuzo Co., Ltd., Biomedical Group, Kyoto, Japan. Under the agreement, TaKaRa will initially market Celox' proprietary product Cellvation(TM). TaKaRa's Biomedical Group leads the industry in several areas owing to the international scope of its research operations which span from the People's Republic of China to North America and Europe. TaKaRa will market Cellvation(TM) in Japan, Taiwan, Korea and People's Republic of China. The Company also has distribution of its products in Japan through Funakoshi Co., LTD, a well established Japanese distributor. YEAR 2000 ISSUES Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. The Year 2000 issue affects virtually all companies and organizations. Management has been evaluating its reliance on both internal and external systems with respect to the Year 2000 issues. The Company has determined that some of the older financial reporting systems software recognizes the use of "00" to represent the year 1900 rather than 2000. In order to correct these problems, it will be necessary for the Company to purchase commercially available upgrades of the current systems. The Company determined that certain of its computer hardware was not year 2000 compliant. As a result, in fiscal 1999, capital expenditures included replacement computers. The Company does not anticipate any disruption to its internal manufacturing processes. However, there can be no assurance that all Company vendors will be Year 2000 compliant. The Company intends to utilize a select number of vendors in order to minimize this potential problem. At this time, Year 2000 issues are not expected to materially affect the Company's products, services or competitive condition, based on the current evaluations. The anticipated cost to the Company to become Year 2000 compliant is $20,000 or less. CUSTOMERS The Company markets its products to academic, pharmaceutical, biotechnology and diagnostic companies. The Company's two largest customers accounted for 23% of the Company's revenues during fiscal 1999. One of these customers accounted for more than 10% of the Company's revenue for the past fiscal year. The loss of either one would have a material adverse, short-term effect on the Company. (See Note 6 of Notes to Financial Statements.) RESEARCH AND DEVELOPMENT Although the Company has completed the research and development of its current products, the Company intends to refine these products, as necessary, to meet customer requirements and to take advantage of technological changes. Additionally, the Company intends to continue to identify factors that affect the growth, differentiation, and replication of cells, particularly human cells. In fiscal 1999 the Company introduced a new product--pZerve(TM). This product is primarily used for cryopreserving human cells. It is intended to be used as a research product only, it is not for human use. 6 For the years ended August 31, 1998 and 1999, the Company spent approximately $104,309 and $167,061, respectively, on research and development. During fiscal year 1999, the Company's primary research and development efforts continued to focus on the completion of pre-clinical testing of ViaStem(TM)and development of other products utilized in stem cell therapy. The pre-clinical testing of ViaStem(TM) was accomplished at the University of Minnesota. Research and developmental expenses will fluctuate based on the status of pre-clinical and clinical trials for ViaStem(TM). MANUFACTURING The manufacture of the Company's products requires sterilization of glassware and packaging, assembly of the chemical components, mixing, sterile filtration, aseptic packaging of the final product, and quality control testing. The assembly, mixing, filtration, and packaging take approximately two to three days, after which the supplements are quarantined for a minimum of three weeks until quality control testing has been completed. The Company tests its supplements for cell growth potential, purity, sterility, uniformity, and integrity. The materials used in the Company's products are available from many sources, although the Company utilizes a select group of vendors to ensure consistency. However, due to industry consolidation, there can be no assurance that the Company will continue to receive the material necessary for the production of its proprietary products that meets the specifications of the Company, USDA and the FDA, in the quantities needed or at competitive prices. The manufacturing process requires biological, chemical, and packaging supplies and equipment that are generally available from several suppliers. The Company packages and ships its products from its facility in St. Paul, Minnesota. The Company generally ships within 24 hours after receiving a purchase order. (See "Item 2 - Properties" for further discussion of Company facilities.) COMPETITION Competition in the biotechnology industry is intense and comes form independent cell biology companies, major pharmaceutical firms, and university-affiliated entities both in the United States and in foreign countries. Certain of these companies have extensive experience in the biotechnology industry and most have substantially greater financial, technical, marketing, and management resources than the Company. A significant amount of cell biology activity is carried out at universities and other non-profit research organizations. These entities are becoming increasingly aware of the commercial value of their findings and are becoming more active in seeking protection for their technology and products. These institutions also compete with the Company in recruiting highly trained personnel. The Company's defined serum-free supplements compete with serum and serum-free growth media products from a number of companies, including Gibco/Life Technologies, Inc.; Irvine Scientific, Inc.; and Boehringer Mannheim Corporation. The principal competitive factors for these products are performance, price, reliability, quality and packaging. The Company's products compete on the basis of all five factors, although management believes its principal competitive advantages are quality and performance. The Company's defined basal media supplements also compete with serum products, which have traditionally dominated the market for cell growth media. Manufacturers of these products include Gibco/Life Technologies, Inc.; J.R.H. Biosciences, Inc.; Hyclone Laboratories, Inc.; and Sigma Chemical Company. The Company believes that its products have a competitive advantage over serum-based products on the basis of performance, packaging, and price stability. Many of the same manufacturers also produce products that compete with the Company's basal media formulations, buffered saline solutions, and other cell biology reagents. 7 TRADE SECRETS AND PROPRIETARY TECHNOLOGY The Company's ability to compete effectively with other producers may be materially dependent on the proprietary nature of its technologies. The Company pursues a policy of protecting its technological position through the use of trade secrets. Because patenting requires disclosure of technology to the public, and because the nature of certain technology renders policing of infringement difficult, the Company believes its proprietary technology is generally better protected by maintaining strict security and secrecy than by obtaining patents. There can be no assurance, however, that competitors will not independently develop substantially the equivalent information or techniques, or otherwise gain access to the Company's know-how, such as through the employment of scientific personnel who previously worked for the Company. To protect its trade secrets, the Company marks all of its proprietary documents confidential, distributes confidential information on a "need-to-know" basis only and uses employee confidentiality agreements. All of the Company's employees have signed, and future employees and consultants will sign, confidentiality agreements under which they agree not to use or disclose the Company's proprietary information. The Company intends to vigorously enforce those agreements. There can be no assurance, however, that these confidentiality agreements will be honored or that others will not independently develop similar technology. To the extent that such consultants apply technical information independently developed by them to projects undertaken by the Company, disputes may arise as to the proprietary rights to such information. The Company will also require that vendors, licensees, and joint venturers sign confidentiality agreements whenever appropriate. The Company believes that it owns or has the right to use all proprietary technology necessary to license, manufacture, and market its current cell biology products. It is possible that with respect to other applications of the Company's technology still being evaluated, licenses under patents held by others may be required and there can be no assurance that, if required, such licenses will be available to the Company on acceptable terms. VIASTEM(TM) PATENTS In March 1995, the Company filed a patent application for ViaStem(TM) in the U.S. Patent and Trademark Office. The Company received the U.S. Patent in early December 1996. This patent provides protection of the Company's ViaStem(TM) technology through March of 2015. A second U.S. Patent was received in August, 1998. This second patent broadened the patented uses of ViaStem(TM) in bone marrow transplantation and related therapies. The Company has also filed the documents needed for an International Patent Application as required by the Patent Cooperation Treaty. In October, 1998 the Company received notice from the New Zealand and Australian Patent Office that a patent on ViaStem(TM) had been granted by each of the respective countries. The Company received notice from the Russian Patent Office in April, 1999 that a patent for ViaStem(TM) had been granted. Initial reports from other countries that have reviewed the international patent application have been positive. Due to the unique nature of ViaStem(TM), the Company pursued the patent process for this product. GOVERNMENT REGULATIONS Regulation by governmental authorities in the United States and other countries is a significant factor affecting the success of products resulting from biotechnological research. The Company is required to conform its operations to the FDA's "Good Manufacturing Practice" regulations. The FDA requires pre-manufacturing approval for certain new medical devices, drugs, or vaccines. This approval generally requires an unequivocal demonstration of the safety and efficacy of a new device, drug, or vaccine. The FDA approval process is generally costly and time-consuming. Because the Company does not currently produce or sell medical devices, drugs, or vaccines, it is not directly affected by these regulations. However, if the Company's customers incorporate the Company's products into products that are medical devices, drugs, or vaccines, such customers will generally be required to obtain such approvals. 8 During the second quarter of 1994, the Company received its first Drug Master File Classification from the FDA for the Company's TCM(TM) product. This classification will expedite the FDA approval process for customers who want to use the Company's TCM(TM) product in the manufacture of drugs or drug substances for human use. The Company is in the process of gaining this status for its other proprietary products. Although the Company's present products are not subject to regulations by the FDA or other governmental agencies, it is probable that future products such as ViaStem(TM) may be subject to such regulations. To the extent that the Company is dependent upon new product development, delays in obtaining any required FDA or other governmental approval may adversely affect the Company. The Company applied to the FDA for reclassification as a medical device company so that the Company's products may be used in wider commercial applications, particularly for the human health care market. In March 1993, the Company received this registration. Compliance with federal, state, and local laws, including environmental laws, does not require any material expenditures by the Company, and the Company does not believe that such laws have any material impact on the Company's operations of financial conditions. EMPLOYEES As of October 31, 1999, the Company employed a total of four (4) persons on a full-time basis, of whom two were involved in technical capacities and two in administrative functions, as well as part time and temporary employees. During the next 12 months, the Company anticipates hiring additional business development representatives, technical personnel, and other employees, as needed, based on growth and the introduction of new products. The Company also intends to continue to utilize temporary employees, as needed, in administrative and general laboratory positions. ITEM 2 - PROPERTIES The Company's executive offices and laboratories are located in a new facility in St. Paul, Minnesota. The Company leases approximately 9,500 square feet of office, laboratory, and warehouse space in this facility. The Company moved into the St. Paul facility during March 1997. ITEM 3 - LEGAL PROCEEDINGS The Company is not presently involved in any material legal proceedings. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 9 PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS A. MARKET INFORMATION The Company's Common Stock had been traded on the National Association of Securities Dealers Automated Quotation System since March 9, 1992. Prior to this, there was no public market for the Company's Common Stock. Beginning August 15, 1996, the Company's Common Stock began trading on the Over-the-Counter (OTC) Market. Due to a failure to meet a NASDAQ requirement of at least $2,000,000 in net tangible assets, the Company was delisted from the NASDAQ Small Cap Market. The following table sets forth the range of high and low bid quotations of the Company's Common Stock as reported by the OTC. The quotes represent inter-dealer prices on the OTC Market. The OTC Market quotations reflect inter-dealer prices, without retail mark-up or commission and may not necessarily represent actual transactions. STOCK PRICES HIGH LOW FISCAL YEAR 1998 November 30, 1997 (1st Quarter).............. $1.13 $0.34 February 28, 1998 (2nd Quarter).............. 0.63 0.34 May 31, 1998 (3rd Quarter)................... 0.41 0.25 August 31, 1998 (4th Quarter)................ 0.38 0.15 FISCAL YEAR 1999 November 30, 1998 (1st Quarter).............. 0.44 0.30 February 28, 1999(2nd Quarter)............... 0.38 0.15 May 31, 1999 (3rd Quarter)................... 0.25 0.15 August 31, 1999(4th Quarter)................. 0.25 0.15 FISCAL YEAR 2000 September 1, 1999 through October 31, 1999............................. $0.25 $0.20 B. HOLDERS As of October 31, 1999, there were approximately 600 holders of the Company's Common Stock. C. DIVIDENDS The Company has not paid any dividends on its Common Stock to date and anticipates that, for the foreseeable future, it will follow a policy of retaining earnings in order to finance the expansion and development of its business. 10 ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following pertains to the results of operations and financial position of the Company for the two fiscal years ended August 31, 1998, and August 31, 1999, and should be read in conjunction with the financial statements included elsewhere herein. RESULTS OF OPERATIONS The Company had a net loss of $363,965 in fiscal 1999 compared to net loss of $302,604 in fiscal 1998. Reduced sales and increased research and development expenses contibuted to the increased loss for fiscal 1999. Net sales decreased 25% or $67,551 to $198,142 in 1999 from $265,693 in 1998, primarily due to the timing of orders received from a manufacturing customer and the amount and timing of distributors orders. Additionally, the Company eliminated certain products, both standard formulations and custom products. One customer accounted for sales of more than 10% of the Company's annual sales in 1999 compared to three customers in 1998. (See Note 6 of Notes to Financial Statements.) The Company also received interest income of $28,748 in 1999 compared to $48,666 in 1998. This is primarily due to the Company's cash position as a result of its March 1992 initial public offering. The decrease between years is due to the use of cash in operations. A portion of the proceeds from the March, 1992 initial public offering had been invested in the Piper Jaffray Institutional Government Income Fund. Due to an unexpected decline in value of the Fund, which was attributed to the purchase of derivatives, class action litigation by investors began in 1994. In February 1995, Piper Jaffray Companies Inc. announced a $70 million (less attorney fees) settlement to settle such litigation, subject to court approval and acceptance of the settlement by a large percentage of the Funds' shareholders. In August 1995, a federal judge gave preliminary approval to this settlement, which would be a combination of $20 million in cash and $50 million in 8% notes payable. Litigation by investors against auditors of the Fund related to Fund losses has not yet been resolved. Based upon the final loss calculation approved by the court a receivable for litigation settlement in the amount of $133,000 was set up at August 31, 1995. During fiscal 1996, the Company received payments totaling $53,226 plus interest on this receivable. During fiscal 1997, the Company received payments totalling $57,328 plus interest under the settlement agreement. As of August 31, 1997, the balance remaining in the settlement receivable was $22,446. In fiscal 1998 the Company received payment for the balance of $22,446 plus interest. The total payments received exceeded the estimated recovery of $133,000 and the excess was credited to other income in fiscal 1998. In September, 1998 a final check in the amount of $5,682 was received. This payment represented a residual distribution of unclaimed funds and money previously reserved for potential income tax liability on behalf of the settlement fund. Marketing and general and administrative expenses decreased by 13% or $52,398 from $398,465 in fiscal 1998 to $346,067 in fiscal 1999. The decrease between the respective periods was due to the amount and timing of advertising and promotional materials as well as reduced salaries and wages. General and administrative expenses were comparable between periods. Cost of goods sold decreased by $46,191 from fiscal 1998, and represented 42% of sales in 1999 compared to 49% of sales in 1998. The decrease in the cost of goods sold as a percentage of sales results from the mix of products sold during the comparable periods. 11 Research and development expenses increased by 60% or $62,752 to $167,061 in 1999. The increase between years results from the timing and amount of professional fees and other costs associated with the patent filing for ViaStem(TM) as well as salaries and wages related to advancing ViaStem(TM) through pre-clinical and clinical trials. Professional fees for research and development in fiscal 1999 included a Market Survey for the Company's ViaStem(TM) product. The Company added a new product in fiscal 1999, pZerve(TM). The Company presently has over 25 products. The basic and diluted loss per common share was ($0.13) in fiscal 1999 compared to ($0.11) in fiscal 1998. In 2000, the Company will continue its efforts to increase sales volume through focused marketing activities and through sales of the newly introduced products. The sales and marketing activities will consist of seeking further relationships with independent sales organizations and distributors, expanding its distribution activities with ICN Pharmaceuticals, and the Sigma Chemical Company. Newly introduced products will be marketed by the Company and potentially will be made available to one or more distributors. In addition, the Company will continue to focus on the sales of its proprietary products, which have better margins than the basal media and balanced salt solutions. The Company expects operating costs to increase in 2000 due to the expected costs of the clinical tests for ViaStem(TM). However, there can be no assurance that sales will increase or that the Company will be profitable in the future. Management does not expect to realize an operating profit in fiscal 2000. LIQUIDITY AND CAPITAL RESOURCES During 1999, the Company's capital expenditures totaled $5,228. The Company anticipates that capital expenditures for 2000 will be approximately $50,000 to fund additional sales, research and development, and manufacturing growth. This amount does not include any expenditures for clinical investigation. At August 31, 1999, the Company had cash and short-term investments totaling $529,338. This cash and short-term investment position is from the proceeds of the Company's March 1992 initial public offering. Management believes that these funds will be sufficient to fund operating losses and capital expenditures for fiscal 2000. The Company is leasing approximately 9,500 square feet of office, laboratory and warehouse space in St. Paul, MN under a seven year lease. The Company moved into the new facility during March, 1997. As partial payment for tenant improvements in the new facility, the Company borrowed $100,000 from a local bank. The loan is secured by a certificate of deposit at the bank. The interest rate for this loan (currently at 5.6%) is tied to the certificate of deposit rate. The loan was renewed for a one year term with a maturity in February, 2000. The balance of the tenant improvements over this amount was paid with Company funds. During fiscal 1999 the Company raised $59,400 in additional capital by selling 55,000 units at $1.00 per unit to five accredited investors through a private placement. Each unit consisted of one share of common stock and a warrant to purchase an additional two shares of common stock at an exercise price of $0.04 per share. The units were sold at a premium to the share price on the OTC Bulletin Board at the time of the placement. The additional funds raised were primarily used for advancing ViaStem(TM) through the necessary testing before FDA approval can be obtained. The Company intends to raise additional capital in fiscal 2000 through a private placement, subject to prevailing market conditions. There is no guarantee however, that the Company will be able to successfully raise these additional funds. In addition, there can be no assurance that the Company will be able to obtain the necessary FDA approvals for ViaStem(TM). At this time, management is not aware of any factors that would have a materially adverse impact on cash flow beyond 2000, other than the potential for continuing losses and the potential expenses associated with clinical trials for ViaStem(TM). Management expects operating losses to continue in 2000. 12 EFFECTS OF INFLATION The Company believes inflation is not expected to have a significant impact on the Company's operations. SEASONALITY The Company's operations are not subject to seasonal fluctuations. ITEM 7 - FINANCIAL STATEMENTS The information required by this item is incorporated by reference to the financial statements, reports, and notes beginning on page F-1. ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On August 12, 1999 a Form 8-K was filed reflecting a change in accounting firms from Boulay, Heutmaker, Zibell & Co. P.L.L.P. to Arthur Andersen LLP. The Form 8-K was amended in certain respects on August 24, 1999. The change in accountants was not due to a disagreement in accounting procedures or principles. 13 PART III ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The following table sets forth certain information regarding the director and executive officer of the Company as of October 31, 1999. Directors hold office until the next Annual Shareholder's meeting. NAME AGE POSITION ---- --- -------- Milo R. Polovina 43 Chairman of the Board, President Chief Executive Officer, Treasurer, and Secretary MILO R. POLOVINA has been President, Chief Executive Officer, Treasurer, and Secretary of the Company and has served as a director since 1985. During the last week of October, 1997, the Chairman of the Board of Directors requested and received resignations from the Company's three outside directors. These resignations had been requested by the Chairman based upon the strategic focus of the Company and the need for expertise in the bio medical field. As a result, the Company does not have any outside directors. The Company intends to identify and interview qualified candidates for the open director positions as soon as practical. SCIENTIFIC ADVISORY BOARD Although the Company has a Scientific Advisory Board established to advise the Company on product opportunities and certain advances in biotechnology, the Company intends to establish a Scientific Advisory Board specifically dedicated to ViaStem(TM). The Company is currently seeking qualified applicants with backgrounds in transplantation medicine to serve on the ViaStem(TM) Advisory Board. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership on Form 3 and changes in Ownership on Forms 4 or 5 with the Securities and Exchange Commission (SEC). Such officers, directors, and ten percent shareholders are also required by SEC rules to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 5 were required for such persons, the Company believes that, during the fiscal year ended August 31, 1999, all Section 16(a) filing requirements applicable to its officers, directors, and ten percent stockholders were complied with. 14 ITEM 10 - EXECUTIVE COMPENSATION The following table sets forth the cash and non-cash compensation for each of the last three fiscal years awarded to or earned by the Chief Executive Officer of the Company, the only officer whose annual compensation exceeded $100,000. SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation Compensation ------------------- ------------ Name and Fiscal Salary Bonus Compensation Options Principal Position Year $ $ $(1) # ------------------ ------ ------ ----- ------------ ------- Milo R. Polovina 1999 135,838 0 -- 0 President, Chief 1998 138,998 0 -- 40,000 Executive Officer, 1997 135,600 15,000 -- 0 Treasurer, and Secretary
(1) The total amount of personal benefits paid to Mr. Polovina for fiscal 1999 was less than the lesser of (i) $50,000 or (ii) 10% of his total reported salary and bonus. No options were granted to Milo R. Polovina during fiscal 1999. No executive officer exercised options during fiscal 1999. The following table sets forth, for the Chief Executive Officer, the number and year-end value of unexercised options. (All such options were granted at the fair market value of the underlying shares as of the respective grant dates.) OPTION EXERCISES AND VALUE OF OPTIONS AT END OF FISCAL 1999
Number of Unexercised Value of Unexercised Options at End of In-the-Money Options Fiscal 1999 at End of Fiscal 1999(1) --------------------- ------------------------ Name Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ------------- ----------- ------------- Milo R. Polovina 160,000 ---- $7,000 ----
(1) Calculated on the basis of the fair market value of the underlying securities at August 31, 1999, ($0.30) minus the exercise price per share (ranging from $0.125 to $1.50). STOCK OPTIONS AND WARRANTS The Company has issued certain Common Stock warrants and has a stock option plan which permits the granting of incentive stock options or non-qualified options to key employees and outside directors. Options are granted at 100 percent of the market value at the date of grant and are exercisable over periods up to ten years from grant date in various stages. A stock option plan, initiated prior to the Company's initial public offering (IPO), reserved 200,000 shares of Common Stock available for future issuance. Additionally, certain options that were issued prior to the IPO are currently outstanding. No options or warrants have been exercised under the plan at August 31, 1999. During 1998 options totaling 2,000 were exercised. At August 31, 1999 and 1998, options and warrants for 212,000 and 284,000 shares, respectively, were exercisable. The total options outstanding at August 31, 1999 are 212,000, with exercise prices of $0.125 to $1.50 per share. 15 EXECUTIVE EMPLOYMENT AGREEMENT In January 1995, the Company entered into a revised employment agreement with Mr. Milo R. Polovina. The agreement provides that Mr. Polovina will serve as Chairman of the Board, Chief Executive Officer, and President of the Company for a period of ten years and will receive a minimum annual base salary of $126,000. The agreement automatically extends for an additional period of one year on each anniversary of the agreement; provided, however, that if the agreement is terminated for any reason other than (i) a change in control, (ii) voluntary resignation, (iii) death, (iv) disability, (v) retirement, or (vi) cause, Mr. Polovina will be entitled to receive his annual base salary and related benefits for a period of five calendar years following the termination. Mr. Polovina is also eligible for an annual bonus, determined in the discretion of the Board of Directors, which shall in no event exceed one-half of his annual salary. This agreement also contains a provision relating to compensation in the event of a change in control of the Company followed by a termination of Mr. Polovina's employment. A "Change in Control" will occur if any person, other than Mr. Polovina, becomes the beneficial owner of securities representing 30% or more of the combined voting power of the outstanding securities of the Company, the stockholders of the Company approve a definitive agreement to merge or consolidate the Company with or into another corporation, or if the persons who were directors of the Company immediately prior to the change in control cease to constitute a majority of the Board of the Directors of the Company or of its successor. Upon a change in control, if Mr. Polovina's employment is terminated by the Company for reasons other than disability or cause (as defined), he will receive his annual composition pursuant to the agreement for the ten year term then remaining. In addition, in such a situation, Mr. Polovina will be entitled to require the Company to purchase his shares in the Company at their then fair market value. DIRECTOR COMPENSATION Non-employee directors receive reimbursement for travel expenses related to each Board of Directors meeting attended, and for each committee meeting held at a date other than a date on which a Board meeting is held. Under the Company's Director Stock Option Program (the "Program"), the Company has granted stock options to non-employee directors and intends to continue to grant stock options to attract additional directors. Under the Program, each non-employee director is granted an initial option for 15,000 shares of Common Stock for serving on the Board of Directors. These options vest at 5,000 shares per year for three years commencing one year from the date of grant. The exercise price of any options granted will be not less than the fair market value of the underlying Common Stock on the date of grant. Directors are also eligible to receive supplemental options on an annual basis. 16 ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of October 31, 1999 by: (i) each director of the Company, (ii) all directors and executive officers as a group, (iii) the Chief Executive Officer, and (iv) each shareholder who own more than 5% of the outstanding shares of Common Stock. Except as otherwise indicated, the Company believes each person listed below possesses sole voting and investment power with respect to the shares indicated. Beneficial ownership means the shareholder has voting or investment power with respect to the shares. Shares of Common Stock subject to options or warrants currently exercisable or exercisable within 60 days are deemed outstanding for computing the percentage of the person holding such options or warrants, but are not deemed outstanding for computing the percentage of any other person. NAME AND ADDRESS SHARES BENEFICIALLY OWNED OF BENEFICIAL OWNER NUMBER PERCENT ------------------- ------ ------- DIRECTORS AND EXECUTIVE OFFICERS Milo R. Polovina 756,600(1) 24.4 1311 Helmo Avenue St. Paul, MN 55128 All directors and executive officers 756,600 24.4 as a group (1 person) PRINCIPAL HOLDERS Arnold & Joy Ann Espeseth 191,800 6.6 Winger, MN 56592 -------------------------- (1) Includes (a) 559,100 shares of stock owned by Mr. Polovina; (b) 2,500 shares owned by Mr. Polovina's wife, an employee of the Company; (c) 3,000 shares owned beneficially for Mr. Polovina's children; (d) options granted to Mr. Polovina for exercise within 60 days to purchase 160,000 shares; and (e) options granted to Mr. Polovina's wife for exercise within 60 days to purchase 32,000 shares. (Mr. Polovina's spouse was granted the options while an employee of the Company but prior to her marriage to Mr. Polovina.) ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Mr. Polovina has an employment agreement with the Company. (See "Executive Compensation -- Executive Employment Agreement".) 17 PART IV ITEM 13 - EXHIBITS, AND REPORTS ON FORM 8-K A. Documents filed: 1. FINANCIAL STATEMENTS. The following documents are filed as part of this report on Form 10-KSB: PAGE ---- Report of Independent Auditors............................ F-1 Balance Sheet -- August 31, 1999 and 1998................. F-2 Statement of Operations -- Years ended August 31, 1999 and 1998................................ F-3 Statement of Changes in Shareholders' Equity -- Years ended August 31, 1999 and 1998.................... F-4 Statement of Cash Flows -- Years ended August 31, 1999 and 1998................................ F-5 Notes to Financial Statements............................. F-6 2. EXHIBITS. 3.1 Articles of Incorporation* 3.2 By-Laws* 10.1 Lease Agreement with R.L. Johnson for premises located at 856 South Fifth Street, Hopkins, Minnesota, dated May 9, 1991* 10.2 Employment Agreement with Milo R. Polovina dated September 25, 1991* 10.3 Stock Plan* 10.4 Director Stock Option Program* 10.5 Employee Stock Purchase Plan+ 10.6 Lease agreement with Oakdale Properties LLC located at 1311 Helmo Avenue, St. Paul, Minnesota, dated December 6, 1996** 10.7 Revised employment agreement with Milo R. Polovina dated January, 1995+ 25 Power of Attorney (included on signature page) 27 Financial Data Schedule ----------------- * Incorporated by reference to the Company's Registration Statement on Form S-18 (No. 33-42573C), which became effective on March 9, 1992. + Incorporated by reference to Company's Form 10-KSB dated 8/31/95. ** Incorporated by reference to Company's Form 10-QSB dated 2/28/97. B. Reports on Form 8-K: On August 12, 1999 a Form 8-K was filed reflecting a change in accounting firms from Boulay, Heutmaker, Zibell & Co. P.L.L.P. to Arthur Andersen LLP. The Form 8-K was amended in certain respects on August 24, 1999. The change in accountants was not due to a disagreement in accounting procedures or principles. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CELOX LABORATORIES, INC. By: /s/ Milo R. Polovina ------------------------------ Milo R. Polovina Chairman of the Board and President and CEO Date: November 22, 1999 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Milo R. Polovina as attorney-in-fact for him in any and all capacities, to sign any amendments to this Report on Form 10-KSB and to file the same, with exhibits thereto and other documents in connections therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, may do or cause to be done by virtue of hereof. Pursuant to the requirements of the Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Milo R. Polovina Chairman of the Board, November 22, 1999 - -------------------------- President, CEO and Director Milo R. Polovina (principal executive officer and principal financial officer) 19 CELOX LABORATORIES, INC. Financial Statements as of August 31, 1999 and 1998 Together With Report of Independent Public Accountants REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Celox Laboratories, Inc.: We have audited the accompanying balance sheet of Celox Laboratories, Inc. (a Minnesota corporation) as of August 31, 1999, and the related statements of operations, shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Celox Laboratories, Inc. as of August 31, 1998 were audited by other auditors whose report dated September 28, 1998 expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Celox Laboratories, Inc. as of August 31, 1999, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Minneapolis, Minnesota, September 30, 1999 F-1 CELOX LABORATORIES, INC. Balance Sheets As of August 31
1999 1998 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 150,824 $ 350,120 Short-term investments, including $125,000 restricted for note payable 378,514 459,436 Trade accounts receivable 20,653 18,849 Related-party receivable 9,124 -- Inventories- Raw materials 42,447 32,350 Finished goods 15,459 12,725 Other 5,801 12,390 ----------- ----------- Total current assets 622,822 885,870 ----------- ----------- EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Laboratory and production equipment 219,724 219,724 Office furniture and equipment 93,359 88,131 Leasehold improvements 138,426 138,426 Less- Accumulated depreciation (321,410) (274,597) ----------- ----------- Net equipment and leasehold improvements 130,099 171,684 PATENTS, net 55,356 58,860 ----------- ----------- $ 808,277 $ 1,116,414 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILTIES: Note payable $ 75,745 $ 82,139 Trade accounts payable 12,828 10,326 Accrued expenses 28,066 27,746 ----------- ----------- Total current liabilities 116,639 120,211 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Note 8) SHAREHOLDERS' EQUITY: Common stock, $.01 par value, 4,000,000 shares authorized; 2,909,169 and 2,744,169 shares issued and outstanding 29,092 27,442 Additional paid-in capital 5,312,486 5,254,736 Accumulated deficit (4,649,940) (4,285,975) ----------- ----------- Total shareholders' equity 691,638 996,203 ----------- ----------- $ 808,277 $ 1,116,414 =========== ===========
The accompanying notes are an integral part of these balance sheets. F-2 CELOX LABORATORIES, INC. Statements of Operations For the Years Ended August 31 1999 1998 ----------- ----------- NET SALES $ 198,142 $ 265,693 COST OF SALES 82,936 129,127 ----------- ----------- Gross profit 115,206 136,566 ----------- ----------- OPERATING EXPENSES: Research and development 167,061 104,309 Marketing and sales 116,861 168,218 General and administrative 229,206 230,247 ----------- ----------- Total operating expenses 513,128 502,774 ----------- ----------- OPERATING LOSS (397,922) (366,208) OTHER INCOME, net 33,957 63,604 ----------- ----------- NET LOSS $ (363,965) $ (302,604) =========== =========== BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.13) $ (0.11) =========== =========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,827,347 2,742,843 =========== =========== The accompanying notes are an integral part of these financial statements. F-3 CELOX LABORATORIES, INC. Statements of Shareholders' Equity For the Years Ended August 31
Common Stock Additional --------------------- Paid-In Accumulated Shares Amount Capital Deficit Total --------- ------- ---------- ----------- ---------- BALANCE, August 31, 1997 2,742,169 $27,422 $5,251,756 $(3,983,371) $1,295,807 Options exercised 2,000 20 2,980 - 3,000 Net loss - - - (302,604) (302,604) --------- ------- ---------- ----------- ---------- BALANCE, August 31, 1998 2,744,169 27,442 5,254,736 (4,285,975) 996,203 Shares issued 165,000 1,650 57,750 - 59,400 Net loss - - - (363,965) (363,965) --------- ------- ---------- ----------- ---------- BALANCE, August 31, 1999 2,909,169 $29,092 $5,312,486 $(4,649,940) $ 691,638 ========= ======= ========== =========== ==========
The accompanying notes are an integral part of these financial statements. F-4 CELOX LABORATORIES, INC. Statements of Cash Flows For the Years Ended August 31
1999 1998 --------- --------- OPERATING ACTIVITIES: Net loss $(363,965) $(302,604) Adjustments to reconcile to net cash used for operating activities- Depreciation and amortization 50,317 48,167 Changes in other operating elements: Trade accounts receivable (1,804) 7,713 Inventories (12,831) 1,780 Other current assets 6,589 5,624 Trade accounts payable 2,502 (15,995) Accrued expenses 320 (3,500) --------- --------- Net cash used for operating activities (318,872) (258,815) --------- --------- INVESTING ACTIVITIES: Sale of short-term investments, net 80,922 277,683 Proceeds from investor settlements -- 22,446 Investment in patents -- (42,651) Advances to related party, net (9,124) -- Purchases of equipment and leasehold improvements (5,228) (47,077) --------- --------- Net cash provided by investing activities 66,570 210,401 --------- --------- FINANCING ACTIVITIES: Payments of note payable (6,394) (12,740) Proceeds from issuance of common stock 59,400 3,000 --------- --------- Net cash provided by (used for) financing activities 53,006 (9,740) --------- --------- Net decrease in cash and cash equivalents (199,296) (58,154) CASH AND CASH EQUIVALENTS, beginning of year 350,120 408,274 --------- --------- CASH AND CASH EQUIVALENTS, end of year $ 150,824 $ 350,120 ========= =========
The accompanying notes are an integral part of these financial statements. F-5 CELOX LABORATORIES, INC. Notes to Financial Statements August 31, 1999 and 1998 1. NATURE OF BUSINESS: Celox Laboratories, Inc. (the Company) is a cell technology company incorporated under the laws of the state of Minnesota. The Company researches, develops, manufactures and markets cell biology products that are used in the propagation of cells derived from mammals, including humans and other species. These specialized cell growth products are used primarily in academic, pharmaceutical and other commercial laboratories to improve the growth productivity and quality of cell-derived medical and other biological products. The Company has experienced recurring losses since inception and has an accumulated deficit of approximately $4,650,000 at August 31, 1999. The Company expects to incur a loss in fiscal year 2000 which will be funded using existing cash and short-term investments. Current and anticipated projects require additional capital. The Company may require funds to conduct marketing, research, preclinical studies, clinical trials and other such activities relating to the commercialization of potential products. However, the Company's access to capital funding is uncertain. If adequate funds are not available, the Company may be required to: a. Delay or reduce the scope of, or eliminate, one or more programs. b. Obtain funds from collaborative partners, or others, that may require the Company to relinquish technologies, product candidates or products that the Company would otherwise seek to develop or commercialize. c. If the Company raises additional capital by issuing equity securities, further dilution to stockholders may result and new investors could have rights superior to existing stockholders. If any required future financing is unavailable for any reason, the Company may be forced to discontinue operations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. RELATED-PARTY RECEIVABLE The Company advanced $11,000 under a promissory note to the president of the Company during 1999 at an interest rate of 6%, payable upon demand. The balance outstanding at August 31, 1999 is reflected as related-party receivable in the accompanying balance sheet. F-6 INVENTORIES Inventories are valued at the lower of first-in, first-out cost or market and include cost of materials, labor and overhead. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements are recorded at cost and depreciated on a straight-line basis over their estimated useful lives, which range from five to seven years. INTANGIBLE ASSETS Costs associated with obtaining patents have been capitalized and are being amortized on the straight-line method over the patents' estimated useful life of 17 years. Capitalized patent costs are shown net of amortization of $6,083 and $2,580 as of August 31, 1999 and 1998. IMPAIRMENT OF LONG-LIVED ASSETS The Company periodically assesses the potential for impairment of its long-lived assets (primarily property, plant and equipment and patents). If any such impairment exists, the related assets will be written down to fair value. This policy is in accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." No impairment losses have been incurred through August 31, 1999. INCOME TAXES The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires an asset and liability approach for financial accounting and reporting for income taxes with deferred taxes determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of currently enacted tax laws. USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate results could differ from those estimates. REVENUE RECOGNITION Revenues are recognized when product is shipped to the customer. Bill and hold sales, in which delivery is delayed at the customer's request, are recognized when conditions for such revenue recognition are met, principally when the completed product is ready for delivery and transfer of the risks and rewards of ownership to the buyer has occurred. BASIC AND DILUTED LOSS PER COMMON SHARE Basic loss per common share is computed based upon the weighted average number of common shares outstanding during the year, while diluted loss per share considers the effect of F-7 common stock equivalents. Basic and diluted loss per share are the same since all common stock equivalents are antidilutive. RECLASSIFICATIONS Certain reclassifications were made to the prior year financial statements to conform to the current year presentation. The reclassifications had no effect on previously reported net income or shareholders' equity. 3. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying values of cash and cash equivalents, short-term investments and the short-term note payable approximate fair values due to the short-term nature of these investments. 4. NOTE PAYABLE: The Company has a line of credit from a bank expiring in February 2000 under which it may borrow up to $125,000. The line of credit is secured by a certificate of deposit held at the same bank. The line of credit incurs interest at 2% over the interest rate of the securing certificate of deposit. The interest rate was 5.6% as of August 31, 1999. The terms of the agreement require the Company to maintain certain financial covenants and ratios and restrict the Company from incurring additional debt. The Company is in compliance with all such covenants. 5. SHAREHOLDERS' EQUITY: STOCK OPTIONS AND WARRANTS The Company had granted options to purchase 349,300 shares of common stock. The Company has also adopted a stock option plan under which 200,000 shares of common stock have been reserved for future issuance. Options granted, exercised and forfeited during 1999 and 1998 are as follows: Weighted Average Exercise Shares Price Per Share ------- ---------------- BALANCE, August 31, 1997 264,000 $0.81 to $1.50 Granted 40,000 0.125 Exercised (2,000) 1.50 Canceled or expired (18,000) 0.875 to 1.00 ------- BALANCE, August 31, 1998 284,000 0.125 to 1.50 Canceled or expired (72,000) 0.875 to 1.50 ------- BALANCE, August 31, 1999 212,000 0.125 to 1.50 ======= The Company follows the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized since the grant price is equal to fair value at the grant dates. Had compensation cost been determined pursuant to F-8 SFAS No. 123, "Accounting for Stock-Based Compensation," there would be no significant effect on net loss or on the basic and diluted loss per common share. The weighted average fair value of options granted in 1998 was $0.11. The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 5.4% and expected option life of ten years. COMMON STOCK The Company sold 55,000 shares of common stock at $1.00 per share to existing shareholders in a private offering in February 1999. In connection with the private offering, warrants were issued to purchase an additional 110,000 shares of common stock at an exercise price of $.04 per share. All warrants were exercised immediately for proceeds of $4,400. 6. CONCENTRATION OF CREDIT RISK: During fiscal year 1999, sales to four customers were approximately 40% of net sales, while during fiscal year 1998, sales to three customers were approximately 39% of net sales. At August 31, 1999, three customers comprised 35% of the total accounts receivable balance, while at August 31, 1998, three customers comprised 40% of the total accounts receivable balance. Accounts receivable from foreign sales were 6% and 11% at August 31, 1999 and 1998. 7. INCOME TAXES: The differences between the income tax benefit at the federal statutory rate and the recorded benefit are as follows:
1999 1998 --------- --------- Amount using the federal statutory rate $(124,000) $(103,000) Increase (decrease) in taxes resulting from: State taxes, net of federal benefit - (11,000) Valuation allowance provided 124,000 112,000 Other - 2,000 --------- --------- Total benefit $ - $ - ========= =========
Deferred income tax assets consist of the following at August 31:
1999 1998 ---------- ---------- Net operating loss carryforwards $1,398,000 $1,274,000 Capital loss carryforwards 316,000 316,000 Tax credit carryforwards 40,000 40,000 Valuation allowance (1,754,000) (1,630,000) ---------- ---------- Net deferred tax assets $ - $ - ========== ==========
F-9 Due to the Company's loss experience, a valuation allowance has been established to offset all future tax benefits resulting from operating and other income tax carryforwards. The Company's net operating loss carryforwards and tax credit carryforwards expire in various amounts through 2014. The capital loss carryforward expires in 2001. 8. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases its office facility under an operating lease agreement expiring in January 2004 with an option for two five-year renewals. The lease requires payment for certain operating costs. Rent expense was $93,800 and $80,100 during fiscal years 1999 and 1998. Future minimum lease payments are as follows at August 31, 1999: 2000 $ 73,700 2001 73,700 2002 73,700 2003 73,700 2004 30,700 -------- $325,500 ======== LEGAL PROCEEDINGS The Company, in the normal course of business, has commitments, lawsuits, contingent liabilities and claims; however, the Company does not expect that the resolution of any of these matters will have a material adverse effect on its financial position or results of operations. EXECUTIVE EMPLOYMENT AGREEMENT The Company has entered into an employment agreement with its chief executive officer for a period of ten years providing for an annual base salary of not less than $126,000, an annual bonus (not to exceed one half annual salary) and performance stock options awarded at the discretion of the board of directors. No bonus was authorized in fiscal years 1999 and 1998. No performance stock options were issued during fiscal year 1999. During fiscal year 1998, 40,000 performance stock options were issued at an option price of $0.125. F-10 EX-27 2 ARTICLE 5 - FINANCIAL DATA SCHEDULE
5 YEAR AUG-31-1999 AUG-31-1999 158,824 378,514 20,653 0 57,906 622,822 459,509 331,410 808,277 116,639 0 0 0 29,092 691,638 808,277 198,142 198,142 82,936 199,797 396,267 0 6,267 (363,965) 0 (363,965) 0 0 0 (363,965) (0.13) (0.13)
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