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 June 30, 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
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CHROMAVISION MEDICAL SYSTEMS, INC.
----------------------------------
(Exact name of registrant as specified
in its charter)
DELAWARE 75-2649072
-------- ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
33171 PASEO CERVEZA
SAN JUAN CAPISTRANO, CA 92675
----------------------- -----
(Address of principal executive offices) (Zip code)
(714) 443-3355
--------------
(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 August 5, 1998 there were 17,261,441 shares outstanding of the
Issuer's Common Stock, $.01 par value.
2
CHROMAVISION MEDICAL SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Balance Sheets as of June 30, 1998 (unaudited) and December 31, 1997 3
Statements of Operations (unaudited) for the three and six months ended 4
June 30, 1998 and 1997; and the period from April 1, 1993
(Inception) through June 30, 1998
Statements of Cash Flows (unaudited) for the six months ended June 30, 1998 5
and 1997; and the period from April 1, 1993 (Inception) through
June 30, 1998
Notes to Financial Statements 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 7
CONDITION AND RESULTS OF OPERATIONS
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS 9
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
ITEM 5 OTHER INFORMATION 9
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 9
SIGNATURES 10
3
PART I - ITEM 1
CHROMAVISION MEDICAL SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
JUNE 30, DECEMBER 31,
1998 1997
---- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents................................ $ 7,752,526 $ 12,926,398
Short-term investments................................... 2,677,318 1,344,534
Note receivable - affiliate.............................. 5,000,000 5,000,000
Other current assets..................................... 152,305 263,422
----------- ------------
Total current assets................................ 15,582,149 19,534,354
Long-term investments....................................... 508,120 1,061,544
Deposits.................................................... 68,465 55,791
Property and equipment, net................................. 2,397,896 1,597,327
----------- ------------
Total assets........................................ $ 18,556,630 $ 22,249,016
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... 520,166 310,161
Accrued liabilities:
Salaries and benefits.................................. 274,870 219,730
Other.................................................. 336,329 348,829
------------ ------------
Total current liabilities............................ 1,131,365 878,720
Commitments and contingencies
Stockholders' equity:
Series A convertible preferred stock, $.01 par value,
authorized 7,246,000 shares, none issued and outstanding -0- -0-
1998 and 1997..........................................
Series B convertible preferred stock, $.01 par value,
authorized 221,850 shares, none issued and outstanding in -0- -0-
1998 and 1997..........................................
Common stock $.01 par value, authorized 50,000,000 shares,
issued and outstanding 17,240,191 shares in 1998 and
17,173,629 in 1997..................................... 172,402 171,736
Additional paid-in capital............................... 36,418,588 36,348,507
Deficit accumulated during the development stage......... (19,165,725) (15,149,947)
------------ ------------
Total stockholders' equity........................... 17,425,265 21,370,296
------------ ------------
Total liabilities and stockholders' equity.................. $ 18,556,630 $ 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 SIX MONTHS ENDED (Inception)
JUNE 30, JUNE 30, THROUGH
JUNE 30, 1998
1998 1997 1998 1997 1998
---- ---- ---- ---- ----
Revenue................................ $ -0- $ -0- $ -0- $ -0- $ 1,240,386
Cost of revenue........................ -0- -0- -0- -0- 542,739
----------- ------------ ----------- ----------- -------------
Gross profit........................ -0- -0- -0- -0- 697,647
----------- ------------ ----------- ----------- -------------
Operating expenses:
Selling, general and administrative. 1,121,707 1,080,774 2,011,449 1,816,204 10,199,390
Research and development............ 1,207,253 853,480 2,251,490 1,502,470 10,715,984
Legal settlement.................... -0- -0- 300,000 -0- 300,000
----------- ------------ ----------- ----------- -------------
Total operating expenses.......... (2,328,960) (1,934,254) (4,562,939) (3,318,674) (21,215,374)
----------- ------------ ----------- ----------- -------------
Loss from operations.............. (2,328,960) (1,934,254) (4,562,939) (3,318,674) (20,517,727)
----------- ------------ ----------- ----------- -------------
Other income (expense):
Interest income (expense)........... 259,858 (54,485) 547,161 (76,763) 928,477
Other income........................ -0- -0- -0- -0- 423,525
----------- ------------ ----------- ----------- -------------
Total other income (expense)...... 259,858 (54,485) 547,161 (76,763) 1,352,002
----------- ------------ ----------- ----------- -------------
Loss before income taxes.......... (2,069,102) (1,988,739) (4,015,778) (3,395,437) (19,165,725)
Income taxes........................... -0- -0- -0- -0- -0-
----------- ------------ ----------- ----------- -------------
Net loss.......................... $(2,069,102) $ (1,988,739) $(4,015,778) $(3,395,437) $ (19,165,725)
=========== ============ =========== =========== =============
Basic and diluted net loss per common
share .............................. $ (.12) $ (.18) $ (.23) $ (.31)
=========== ============ =========== ===========
Weighted average number of common
shares outstanding.................. 17,230,150 11,127,393 17,203,233 11,127,393
=========== ============ =========== ===========
See accompanying notes to financial statements.
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5
CHROMAVISION MEDICAL SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
PERIOD
FROM APRIL
1, 1993
SIX MONTHS ENDED (Inception)
JUNE 30, THROUGH JUNE 30,
1998 1997 1998
---- ---- ----
Cash flows from development stage activities:
Net loss......................................... $(4,015,778) $(3,395,437) $(19,165,725)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............... 270,435 66,376 542,171
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........................ 111,117 10,822 (152,305)
Deposits ................................... (12,674) (66,808) (68,465)
Accounts payable............................ 210,005 330,950 520,166
Accrued liabilities......................... 42,640 29,756 611,199
----------- ----------- ------------
Net cash used in operating activities....... (3,394,255) (3,024,341) (16,902,767)
----------- ----------- ------------
Cash flows from investing activities:
Note receivable from affiliate................... -0- -0- (5,000,000)
Note receivable.................................. -0- -0- (825,000)
Collections on notes receivable.................. -0- -0- 785,000
Purchases of investments......................... (779,360) -0- (3,185,438)
Purchases of property and equipment.............. (1,071,004) (480,693) (2,940,067)
----------- ----------- ------------
Net cash used in investing activities..... (1,850,364) (480,693) (11,165,505)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from exercise of stock options.......... 70,747 -0- 91,747
Sale of common stock............................. -0- -0- 30,115,450
Borrowings under revolving line of credit........ -0- 3,320,000 -0-
Sale of preferred stock.......................... -0- 998,325 7,363,196
Offering costs................................... -0- (743,560) (1,749,595)
----------- ----------- ------------
Net cash provided by financing activities. 70,747 3,574,765 35,820,798
----------- ----------- ------------
Net increase (decrease) in cash and cash (5,173,872) 69,731 7,752,526
equivalents...................
Cash and cash equivalents beginning of period.... 12,926,398 124,092 -0-
----------- ----------- ------------
Cash and cash equivalents end of period.......... $ 7,752,526 $ 193,823 $ 7,752,526
=========== =========== ============
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. 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.
Potentially dilutive securities 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 ("IDEA Research") 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. In April 1998, the $300,000 up front
payment was paid to IDEA Research and included in legal settlement charges on
the statement of operations.
(5) LINE OF CREDIT
On June 9, 1998, the Company entered into an agreement with its
principal bank for a $5,000,000 revolving line of credit. The line expires May
30, 2000. At the Company's option, the interest rate is either prime less .25%
or LIBOR plus 1.75%. There were no borrowings outstanding under the line of
credit during the period. Any borrowings outstanding under the line of credit
are collateralized by the Company's investment held by the principal bank having
a market value equal to 111% of the principal balance of the loans.
(6) ASSET BASED FINANCING
On May 15, 1998, the Company entered into a $1 million asset based
financing agreement. Fundings up to $750,000 will occur on or before May 12,
1999. Fundings in excess of $750,000 will not occur until at least twelve months
from the date of the first funding and after various conditions are met. All
funding under this facility will be at a 12.6% interest rate.
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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(TM)") 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(TM) 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(TM) 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 adapted for use with different reagents to
identify a broad range of targeted cellular conditions. The Company seeks to
establish the ChromaVision ACIS(TM) as the preferred platform for multiple
diagnostic applications.
RESULTS OF OPERATIONS
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 for the three and six months ended June 30, 1998 increased
approximately 4% and 11%, respectively, over the comparable periods in 1997.
These increases are 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. These increases were partially offset by relocation
costs incurred in 1997 for moving the Company to California. 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 for the three and six months ended June 30, 1998 increased
approximately 41% and 50%, respectively, over the comparable periods in 1997.
These increases are 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(TM).
-7-
8
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. In April 1998, the $300,000 up front payment was paid to IDEA
Research and included in legal settlement charges on the accompanying statement
of operations for the first quarter of 1998.
OTHER INCOME (EXPENSE)
Interest income for the three and six months ended June 30, 1998 was
approximately $260,000 and $547,000, respectively, resulting from the investment
of the Company's initial public offering net proceeds in interest bearing
securities. For the comparable periods in 1997, interest expense of
approximately $55,000 and $77,000, respectively, resulting 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 "IPO"). The Company received net proceeds
of approximately $28.4 million after deducting underwriting discounts and
offering expenses. Prior to this IPO, 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 IPO were used for repayment of the bank line of credit
indebtedness and reduction of an inter-company payable to XL Vision, Inc., an
affiliate of the Company. The bank line of credit expired January 31, 1998. In
June 1998, the Company entered into another $5 million line of credit which is
collaterized by the market value of the Company's investments held by its
principal bank. The line expires May 30, 2000. At June 30, 1998, the Company had
approximately $15.9 million of cash and cash equivalents, note receivables and
investments, working capital of approximately $14.5 million and no long-term
debt.
Capital expenditures for the six months ended June 30, 1998 were
approximately $1.1 million and related primarily to the manufacture of the
ChromaVision ACIS(TM) systems used in research and development. Capital
expenditures are expected to be approximately $3 million in 1998, of which
approximately $1 million is expected to be primarily related to the manufacture
of the ChromaVision ACIS(TM) for clinical trial purposes. The expenditures will
be funded by current cash reserves. Approximately $1.5 million is expected to be
incurred due to the manufacture of ChromaVision ACIS(TM) systems as
"fee-per-use" systems 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. To partially offset the significant cash
outlays, the Company has arranged for third-party asset based financing for
these instruments totaling $1 million.
The Company anticipates that the net proceeds of the IPO will be
sufficient to satisfy its operating cash needs for the next twelve months.
Management expects that losses from operations and increases in working capital
requirements will produce significant negative cash flows from operations for at
least the next twelve months and beyond. 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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9
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. In April 1998, the $300,000 up front payment was paid to IDEA
Research and included in legal settlement charges on the accompanying statement
of operations for the first quarter of 1998.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on June 3, 1998. At
the meeting, the stockholders voted in favor of electing as directors the five
nominees named in the Proxy Statement dated April 28, 1998 and in favor of
approving the amended and restated 1996 Equity Compensation Plan.
The number of votes were as follows:
I. Election of Directors
For Against Withheld
---------- ------- --------
John S. Scott, Ph.D. 11,651,847 --- 33,192
Douglas S. Harrington, M.D. 11,650,287 --- 34,752
Christopher Moller, Ph.D. 11,651,967 --- 33,072
Richard C. E. Morgan 11,652,027 --- 33,012
Charles A. Root 11,645,299 --- 39,740
II. Amended and Restated 1996 Equity Compensation Plan
For Against Withheld
---------- ------- --------
11,240,158 418,930 25,951
ITEM 5 OTHER INFORMATION
Stockholders intending to present proposals at the next Annual Meeting
of Stockholders to be held in 1999 must notify the Company of the proposal no
later than January 1, 1999 if they wish to include the proposal on the
Company's proxy card and, along with any supporting statement, in the Company's
proxy statement. As to any proposal presented by a stockholder at the
Annual Meeting of Stockholders that has not been included in the Proxy
Statement, the management proxies will be allowed to use their discretionary
voting authority unless notice of such proposal is received by the Company no
later than March 14, 1999.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Description
------ -----------
10.1 Settlement and License Agreement dated April 21, 1998
between ChromaVision Medical Systems, Inc. and IDEA
Research LLC (1)
10.2 Business Loan Agreement and Security Agreement dated June
9, 1998 between ChromaVision Medical Systems, Inc. (the
"Borrower") and Bank of America National Trust and Savings
Association (the "Lender").*
10.3 Asset Based Financing Agreement dated May 11, 1998 between
ChromaVision Medical Systems, Inc. (the "Lessee") and DVI
Financial Services, Inc. (the "Lessor").*
27 Financial Data Schedule (electronic filing only) *
(b) Report on Form 8-k
None
- -----------------
* FILED HEREWITH
(1) Incorporated by reference from registrant's Form 10-Q for the quarter ended
March 31, 1998 dated May 13, 1998 and made a part hereof by such reference.
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10
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: August 14, 1998 BY: /s/ Douglas S. Harrington, M.D.
-------------------- --------------------------------
Douglas S. Harrington, M.D.
Chief Executive Officer
DATE: August 14, 1998 BY: /s/ Kevin C. O'Boyle
-------------------- ---------------------
Kevin C. O'Boyle
Vice President, Chief Financial
Officer
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EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.1 Settlement and License Agreement dated April 21, 1998
between ChromaVision Medical Systems, Inc. and IDEA
Research LLC (1)
10.2 Business Loan Agreement and Security Agreement dated June
9, 1998 between ChromaVision Medical Systems, Inc. (the
"Borrower") and Bank of America National Trust and Savings
Association (the "Lender").*
10.3 Asset Based Financing Agreement dated May 11, 1998 between
ChromaVision Medical Systems, Inc. (the "Lessee") and DVI
Financial Services, Inc. (the "Lessor").*
27 Financial Data Schedule (electronic filing only) *
* FILED HEREWITH
(1) Incorporated by reference from registrant's Form 10-Q for the quarter ended
March 31, 1998 dated May 13, 1998 and made a part hereof by such reference.