1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
COMMISSION FILE NUMBER 0-1000
CHROMAVISION MEDICAL SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 75-2649072
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(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
33171 PASEO CERVEZA
SAN JUAN CAPISTRANO, CA 92675
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(Address of principal executive offices) (Zip code)
(714) 443-3355
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(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
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, and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of May 1, 1998 there were 17,237,066 shares outstanding of the
Issuer's Common Stock, $.01 par value.
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CHROMAVISION MEDICAL SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997 3
Statements of Operations (unaudited) for the three months ended 4
March 31, 1998 and 1997; and the period from April 1, 1993
(Inception) through March 31, 1998
Statements of Cash Flows (unaudited) for the three months ended March 31, 1998 5
and 1997; and the period from April 1, 1993 (Inception) through
March 31, 1998
Notes to Financial Statements 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 8
CONDITION AND RESULTS OF OPERATIONS
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 9
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 9
SIGNATURES 10
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PART I - ITEM 1
CHROMAVISION MEDICAL SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents ........................................................... $ 11,716,962 $ 12,926,398
Short-term investments .............................................................. 719,415 1,344,534
Note receivable - affiliate ......................................................... 5,000,000 5,000,000
Other current assets ................................................................ 223,603 263,422
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Total current assets ......................................................... 17,659,980 19,534,354
Long-term investments ................................................................... 1,061,544 1,061,544
Deposits ................................................................................ 77,811 55,791
Property and equipment, net ............................................................. 1,921,090 1,597,327
------------ ------------
Total assets ................................................................. $ 20,720,425 $ 22,249,016
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................... 325,167 310,161
Accrued liabilities:
Salaries and benefits ............................................................ 266,260 219,730
Other ............................................................................ 681,878 348,829
------------ ------------
Total current liabilities ..................................................... 1,273,305 878,720
Commitments and contingencies
Stockholders' equity:
Series A convertible preferred stock, $.01 par value, authorized 7,246,000 shares,
none issued and outstanding 1998 and 1997 ........................................ -0- -0-
Series B convertible preferred stock, $.01 par value, authorized 221,850 shares, none
issued and outstanding in 1998 and 1997 .......................................... -0- -0-
Common stock $.01 par value, authorized 50,000,000 shares, issued and outstanding
17,203,004 shares in 1998 and 17,173,629 in 1997 ................................. 172,030 171,736
Additional paid-in capital .......................................................... 36,371,713 36,348,507
Deficit accumulated during the development stage .................................... (17,096,623) (15,149,947)
------------ ------------
Total stockholders' equity .................................................... 19,447,120 21,370,296
------------ ------------
Total liabilities and stockholders' equity .............................................. $ 20,720,425 $ 22,249,016
============ ============
See accompanying notes to financial statements.
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CHROMAVISION MEDICAL SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(UNAUDITED)
PERIOD FROM
APRIL 1, 1993
THREE MONTHS ENDED (Inception)
MARCH 31, THROUGH
----------------------------------- MARCH 31,
1998 1997 1998
------------ ------------ ------------
Revenue ............................................ $ -0- $ -0- $ 1,240,386
Cost of revenue .................................... -0- -0- 542,739
------------ ------------ ------------
Gross profit ................................... -0- -0- 697,647
------------ ------------ ------------
Operating expenses:
Selling, general and administrative ............ 889,742 735,430 9,077,683
Research and development ....................... 1,044,237 648,990 9,508,731
Legal settlement ............................... 300,000 -0- 300,000
------------ ------------ ------------
Total operating expenses .................... (2,233,979) (1,384,420) (18,886,414)
------------ ------------ ------------
Loss from operations ........................ (2,233,979) (1,384,420) (18,188,767)
------------ ------------ ------------
Other income (expense):
Interest income ................................. 287,303 -0- 833,398
Interest (expense) .............................. -0- (22,278) (164,779)
Other income .................................... -0- -0- 423,525
------------ ------------ ------------
Total other income (expense) ................ 287,303 (22,278) 1,092,144
------------ ------------ ------------
Loss before income taxes .................... (1,946,676) (1,406,698) (17,096,623)
Income taxes ....................................... -0- -0- -0-
------------ ------------ ------------
Net loss .................................... $ (1,946,676) $ (1,406,698) $(17,096,623)
============ ============ ============
Basic and diluted net loss per common share ........ $ (.11) $ (.13)
============ ============
Weighted average number of common shares outstanding 17,176,817 11,127,393
============ ============
See accompanying notes to financial statements.
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CHROMAVISION MEDICAL SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
PERIOD FROM
APRIL 1, 1993
THREE MONTHS ENDED (Inception)
MARCH 31, THROUGH
----------------------------------- MARCH 31,
1998 1997 1998
------------ ------------ ------------
Cash flows from development stage activities:
Net loss ...................................................... $ (1,946,676) $ (1,406,698) $(17,096,623)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .......................... 112,829 9,605 384,565
Non-cash issuance of preferred stock ................... -0- -0- 770,192
Write-off of note receivable ........................... -0- -0- 40,000
Changes in operating assets and liabilities:
Other current assets ................................... 39,819 (14,745) (223,603)
Deposits ............................................... (22,020) (35,682) (77,811)
Accounts payable ....................................... 15,006 191,165 325,167
Accrued liabilities .................................... 379,579 (628,302) 948,138
------------ ------------ ------------
Net cash used in operating activities .................. (1,421,463) (1,884,657) (14,929,975)
------------ ------------ ------------
Cash flows from investing activities:
Notes receivable from affiliate ............................... -0- -0- (5,000,000)
Note receivable ............................................... -0- -0- (825,000)
Collections on notes receivable ............................... -0- -0- 785,000
Proceeds from (purchases of) investments ...................... 625,119 -0- (1,780,959)
Purchases of property and equipment ........................... (436,592) (125,083) (2,305,655)
------------ ------------ ------------
Net cash provided by (used in) investing activities . 188,527 (125,083) (9,126,614)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options ....................... 23,500 -0- 44,500
Sale of common stock .......................................... -0- -0- 30,115,450
Borrowing (repayments) under revolving line of credit ......... -0- 1,152,423 -0-
Sale of preferred stock ....................................... -0- 998,325 7,363,196
Offering costs ................................................ -0- (200,000) (1,749,595)
------------ ------------ ------------
Net cash provided by financing activities ........... 23,500 1,950,748 35,773,551
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,209,436) (58,992) 11,716,962
Cash and cash equivalents beginning of period ................. 12,926,398 124,092 -0-
------------ ------------ ------------
Cash and cash equivalents end of period ....................... $ 11,716,962 $ 65,100 $ 11,716,962
============ ============ ============
See accompanying notes to financial statements.
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CHROMAVISION MEDICAL SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
It is suggested that these interim financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's 1997 annual report filed on Form 10-K with the Securities and
Exchange Commission.
The accompanying unaudited financial statements reflect all
adjustments which, in the opinion of management, are necessary for a fair
presentation of the financial position and the results of operations for the
interim periods presented. All such adjustments are of a normal, recurring
nature. Certain amounts have been reclassified to conform to the current period
presentation. The results of the Company's operations for any interim period are
not necessarily indicative of the results to be obtained for a full fiscal year.
(2) DEVELOPMENT STAGE
From the inception of ChromaVision on April 1, 1993, the Company was
considered to be in the development stage as defined by the Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by
Development Stage Enterprises". Until the Company begins to realize significant
revenue associated from its planned operations, the Company will be considered
in the development stage.
(3) NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share". Statement 128 supersedes Accounting
Principles Board Opinion No. 15, Earnings per Share (APB15), and specifies the
computation, presentation, and disclosure requirements for earnings per share
(EPS) for entities with publicly held common stock or potential common stock.
Statement 128 replaces the presentation of primary and fully diluted EPS with a
presentation of basic and diluted EPS respectively. In connection with Statement
128, the Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 98, requiring dilutive instruments issued for nominal consideration
during periods covered by an initial public offering registration statement, to
be retroactively reflected in the calculation of earnings per share for all
periods presented. All net loss per share amounts for all periods have been
restated to conform to Statement 128 and SAB 98 requirements.
Potential common stock shares were not included in the diluted
earnings per share calculation as they would be antidilutive.
(4) LEGAL SETTLEMENT
On April 21, 1998, the Company signed a settlement agreement with
Idea Research LLC related to litigation filed by the Company on November 10,
1997 involving, among other things, a claim by IDEA Research of patent
infringement against the Company. The agreement contemplates a collaboration
between both parties on a screening test for Down syndrome for a period of two
years and provides for the grant of a license to the Company under the patent,
an up front payment by the Company of $300,000 upon the signing of the
settlement agreement, a $150,000 payment if certain requirements with respect to
commercializing the Down syndrome screening test are met and a five percent
royalty payable to IDEA Research on net collectible revenues for each Down
syndrome screening test performed. As of March 31, 1998, $300,000 has been
accrued for the settlement.
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PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Statements in this report, including the following management's
discussion, describing the plans, goals, strategies, intentions, and
expectations of the Company and anticipated events are forward-looking
statements. Important factors which could cause actual results to differ
materially from those described in such forward-looking statements include the
following: an inadequate supply of biological samples could delay completion of
the clinical trials, the clinical trials could fail to demonstrate the efficacy
of the ChromaVision Automated Cellular Imaging System ("ACIS") applications: the
ability to commercialize the Company's products is dependent on obtaining
appropriate U.S. Food and Drug Administration (the "FDA") and foreign regulatory
approvals, which may not be obtained when anticipated or at all: manufacture of
the ACIS is subject to FDA regulation: commercialization of the Company's
products is dependent on acceptance by the medical community and medical
insurance industry, which acceptance could be delayed or not obtained.
OVERVIEW
ChromaVision is a laboratory medicine diagnostics company that
develops and manufactures an automated cellular imaging system for a wide
variety of clinical and research applications. The Company currently markets the
products to research centers and is previewing the system to university medical
centers and commercial laboratories in anticipation of receiving clearance from
the FDA based on two filings to be made in 1998, which could result in several
commercialized applications. The ChromaVision ACIS is designed to identify cells
with specific characteristics within a sample of cells on a microscope slide by
detecting color produced by the reaction between common laboratory reagents and
the cells of interest. The intelligent microscope platform automates the
scanning of up to 100 patient samples (slides) and uses proprietary imaging
software to capture digital images of the cell samples to detect the presence,
count the number and measure the intensity of targeted cells. The system offers
substantial flexibility because the software can be configured to identify
different stains and cellular staining characteristics, thereby allowing the
system to be adopted for use with different reagents to identify a broad range
of targeted cellular conditions. The Company seeks to establish the ChromaVision
ACIS as the preferred platform for multiple diagnostic applications.
REVENUE AND GROSS PROFITS
The Company is a development stage company and had no revenue or
gross profit for 1998 or 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Expenses increased $154,312 to $889,742 as compared to $735,430 for
the comparable period in 1997. This increase is due primarily to administrative
costs now being incurred related to the Company being a publicly traded
corporation in addition to the increase in management and administrative
personnel necessary to support the growth of the business. The Company
anticipates general and administrative expenses to increase in the near future
due to increases in selling and marketing expenditures necessary to support the
commercialization of its applications.
RESEARCH AND DEVELOPMENT EXPENSES
Expenses increased $395,247 to $1,044,237 as compared to $648,990 for
the comparable period in 1997. This increase is primarily attributable to the
costs of the current clinical trials for prenatal screening for Down syndrome
and cancer as well as the addition of technical personnel to further develop the
Company's applications. The Company anticipates that research and development
expenses will increase in the near future due to costs related to the
development of new applications, additional clinical trials and the continuation
of technological advances to the ChromaVision ACIS.
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LEGAL SETTLEMENT
On April 21, 1998, the Company signed a settlement agreement with
Idea Research LLC related to litigation filed by the Company on November 10,
1997 involving, among other things, a claim by IDEA Research of patent
infringement against the Company. The agreement contemplates a collaboration
between both parties on a screening test for Down syndrome for a period of two
years and provides for the grant of a license to the Company under the patent,
an up front payment by the Company of $300,000 upon the signing of the
settlement agreement, a $150,000 payment if certain requirements with respect to
commercializing the Down syndrome screening test are met and a five percent
royalty payable to IDEA Research on net collectible revenues for each Down
syndrome screening test performed. As of March 31, 1998, $300,000 has been
accrued for the settlement.
OTHER INCOME (EXPENSE)
In 1998, interest income of $287,303 resulted from the investment of
the Company's initial public offering net proceeds in interest bearing
securities. For the comparable period in 1997, interest expense of $22,278
resulted from borrowings on the Company's revolving line of credit before it was
paid off during the third quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
On August 13, 1997, the Company completed its initial public offering
of 6,020,000 shares of Common Stock. The Company received net proceeds of
approximately $28.4 million after deducting underwriting discounts and offering
expenses. Prior to this offering, the Company's primary source of financing was
a $5.0 million revolving line of credit and a $6.4 million private placement in
June 1996.
In August and September of 1997, approximately $5.5 million of net
proceeds from the initial public offering were used for repayment of the bank
line of credit indebtedness and reduction of an inter-company payable to XL
Vision, Inc. The bank line of credit expired January 31, 1998. At March 31,
1998, the Company had approximately $18.5 million of cash and cash equivalents,
note receivables and investments, working capital of approximately $16.4 million
and no long-term debt.
Capital expenditures for the period ended March 31, 1998 were
$436,592 and related primarily to the manufacture of the ChromaVision ACIS
systems used in research and development. Capital expenditures are expected to
be approximately $1 million in 1998, and are expected to be primarily related to
the manufacture of the ChromaVision ACIS for clinical trial purposes. The
expenditures will be funded by current cash reserves. An additional $2 million
is expected to be incurred due to the manufacture of the ChromaVision ACIS as a
"fee-per-use" system placed for commercial application. The Company's business
plan anticipates placing these instruments with users at no charge and charging
a "per click" fee for each use of the instrument. The manufacture of these
instruments will require a significant outlay of cash for which revenues will
not be recognized until future periods. As a result, the Company is currently
negotiating to arrange third-party financing for these instruments.
The Company anticipates that the net proceeds of the offering will be
sufficient to satisfy its operating cash needs for the foreseeable future.
Management expects that losses from operations and increases in working capital
requirements will produce significant negative cash flows from operations for
the foreseeable future. In addition, to support the Company's future cash needs
it intends to consider, but not be limited to, additional debt or equity
financing. However there can be no assurance that any such financing will be
available to the Company, or that adequate funds for the Company's operations
will be available when needed, or on terms attractive to the Company. If the
Company is unable to obtain sufficient additional funds, the Company may have to
delay, scale back or eliminate some or all of its development activities,
clinical studies and/or regulatory activities.
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PART II
ITEM 1, LEGAL PROCEEDINGS
On April 21, 1998, the Company signed a settlement agreement with
Idea Research LLC related to litigation filed by the Company on November 10,
1997 involving, among other things, a claim by IDEA Research of patent
infringement against the Company. The agreement contemplates a collaboration
between both parties on a screening test for Down syndrome for a period of two
years and provides for the grant of a license to the Company under the patent,
an up front payment by the Company of $300,000 upon the signing of the
settlement agreement, a $150,000 payment if certain requirements with respect to
commercializing the Down syndrome screening test are met and a five percent
royalty payable to IDEA Research on net collectible revenues for each Down
syndrome screening test performed. As of March 31, 1998, $300,000 has been
accrued for the settlement.
PART II
ITEM 6, EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Settlement and License Agreement dated April 21, 1998
between the Company and IDEA Research LLC*
27 Financial Data Schedule*
(b) Report on Form 8-k
None
* FILED HEREWITH
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHROMAVISION MEDICAL SYSTEMS, INC.
DATE: May 13, 1998 BY: /s/ Douglas S. Harrington, M.D.
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Douglas S. Harrington, M.D.
Chief Executive Officer
DATE: May 13, 1998 BY: /s/ Kevin C. O'Boyle
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Kevin C. O'Boyle
Vice President, Chief Financial Officer
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