U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996.
___ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____ to _____.
Commission file number 0-20652
ACCUMED INTERNATIONAL, INC.
_________________________________________________________________
(Exact name of small business issuer as specified in its charter)
DELAWARE 36-4054899
________________________________ _______________________
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
900 N. FRANKLIN ST., SUITE 401, CHICAGO, IL 60610
___________________________________________________
(Address of principal executive offices)
(312) 642-9200
________________
(Issuer's telephone number)
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.
Yes X No
--- ---
The number of shares of Common Stock outstanding
as of September 25, 1996: 18,934,710
__________
Transitional Small Business Disclosure Format (check one):
Yes No X
---- ----
ACCUMED INTERNATIONAL, INC.
INDEX
Page
Number
PART I Financial Information
1. Consolidated Financial Statements
Consolidated Balance Sheets -
June 30, 1996 (unaudited) and December 31, 1995 . . . 1
Consolidated Statements of Operations-
Six Months Ended June 30, 1996 and 1995 and
Three Months Ended June 30, 1996 and 1995 (unaudited). 2
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1996 and 1995 (unaudited). . 3
Notes to Consolidated Financial Statements. . . . . . . . . 4
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . 6
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
ACCUMED INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
_______________
JUNE 30 DECEMBER 31,
1996 1995
------------ ------------
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 595,265 $ 180,508
Restricted cash $ 0 363,000
Accounts receivable 1,405,486 874,712
Prepaid expenses and deposits 231,194 124,836
Production inventory 1,513,760 1,143,120
------------ ------------
Total current assets 3,745,705 2,686,176
------------ ------------
Fixed Assets, Net 401,970 528,402
------------ ------------
Intangible assets 4,403,677 2,644,556
Other assets 168,402 115,069
------------ ------------
$ 8,719,754 $ 5,974,203
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,242,433 $ 2,005,861
Other current liabilities 772,465 870,313
Deferred revenue 35,358 1,454,450
Notes payable 37,497 726,514
Capital lease obligations due within one year 86,067 88,270
------------ ------------
Total current liabilities 3,173,820 5,145,408
------------ ------------
Long-term portion of capital lease obligation 45,243 89,810
Deferred rent 13,393 10,278
Stockholders' equity:
Common stock, $0.01 par value, 30,000,000 shares
authorized, 17,525,748 shares issued and outstanding
at June 30, 1996 and 15,571,184 at December 31, 1995 175,257 155,712
Additional paid-in capital 32,694,471 23,334,495
Cummulative translation adjustment (2,236) --
Accumulated deficit (27,220,237) (22,761,500)
Less treasury stock, 26,270 shares at June 30, 1996
and 0 shares December 31, 1995 (159,957) --
------------ ------------
Total stockholders' equity 5,487,298 728,707
------------ ------------
$ 8,719,754 $ 5,974,203
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
-1-
ACCUMED INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
_______________
Six Months Ended June 30, Three Months Ended June 30,
------------------------ ---------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Sales $ 2,312,094 $ 320,505 $ 1,124,393 $ 148,660
Less cost of sales (1,465,457) (471,065) (870,247) (251,617)
------------ ------------ ------------ ------------
Gross profit (loss) 846,637 (150,560) 254,146 (102,957)
------------ ------------ ------------ ------------
Operating expenses:
General and administrative 1,791,534 860,253 877,477 585,426
Research and development 4,789,412 139,842 714,626 70,907
Sales and marketing 841,565 74,959 448,388 46,853
------------ ------------ ------------ ------------
Total operating expenses 7,422,511 1,075,054 2,040,491 703,186
------------ ------------ ------------ ------------
Operating loss (6,575,874) (1,225,614) (1,786,345) (806,143)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 11,460 2,693 5,623 2,516
Interest expense (437,986) (25,973) (111,155) (14,445)
Other 2,554,513 100,050 82,261 100,050
------------ ------------ ------------ ------------
Total other income 2,117,987 74,612 (23,271) 88,121
------------ ------------ ------------ ------------
Loss before income taxes (4,457,887) (1,151,002) (1,809,616) (718,022)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Income tax expense 850 400 0 200
------------ ------------ ------------ ------------
Net loss ($ 4,458,737) ($ 1,151,402) ($ 1,809,616) ($ 718,222)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per share ($ 0.27) ($ 0.20) ($ 0.11) ($ 0.11)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average common shares outstanding 16,319,105 5,653,437 16,843,050 6,349,139
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements.
-2-
ACCUMED INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
_______________
Six Months Ended June 30,
1996 1995
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss ($4,458,737) ($1,151,402)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 704,465 123,066
Write-off of in-process research and development 3,499,727 --
Expenses paid with issuance of common stock 101,094 --
Expenses paid with issuance of warrants 1,184,390 --
Shares received for litigation settlement (159,957) --
Loss (gain) on disposal of assets 74,706 (19,810)
Changes in assets and liabilities:
Restricted cash 363,000 --
Accounts receivable (531,403) 121,650
Prepaid expenses and deposits (106,358) 14,606
Production inventory (371,877) 86,740
Other assets (57,584) (63,728)
Accounts payable 237,548 93,535
Other liabilities (94,588) 4,970
Deferred revenue (1,419,092) --
---------- ----------
Net cash used in operating activities (1,034,666) (790,373)
---------- ----------
Cash used in investing activities:
Purchase of fixed assets (202,010) (1,354)
Proceeds from refundable deposits --- 400,000
---------- ----------
Net cash provided by (used in) investment activities (202,010) 398,646
---------- ----------
Cash flows from financing activities:
Proceeds from issuances of common stock 2,338,711 1,438,099
Notes receivable issued -- (350,000)
Payment of capital lease obligation (46,770) (34,340)
Proceeds from issuance of notes payable 250,000 --
Payments of notes payable (889,017) --
---------- ----------
Net cash provided by financing activities 1,652,924 1,053,759
---------- ----------
Effect of exchange rate changes on cash (1,491) --
---------- ----------
Net increase in cash and cash equivalents 414,757 662,032
Cash and cash equivalents at beginning of period 180,508 42,173
---------- ----------
Cash and cash equivalents at end of period $595,265 $704,205
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
-3-
ACCUMED INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. PREPARATION OF INTERIM FINANCIAL STATEMENTS: The accompanying consolidated
financial statements have been prepared in accordance with the instructions
to Form 10-QSB and, therefore, do not include all information and footnotes
necessary for a presentation of financial position, results of operations
and cash flows in conformity with generally accepted accounting principles.
In the opinion of management, such consolidated financial statements
reflect all normal and recurring adjustments necessary for a fair
presentation of the results of operations and financial position for the
interim periods presented. Operating results for the six month and the
three month periods ended June 30, 1996 are not necessarily indicative of
the results that may be expected for the fiscal year ending December 31,
1996.
These consolidated financial statements should be read in conjunction with
the Company's audited financial statements and notes thereto for the three
months ended December 31, 1995, included in the Company's Transition Report
on Form 10-KSB for the period ended December 31, 1995.
2. DEFERRED REVENUE: At December 31, 1995, the Company had deferred revenue
of $1,454,450 pending resolution of certain lawsuits. Upon settlement of
these lawsuits in February 1996, the Company received an additional
$2,000,000 from Becton Dickinson & Co., $1,000,000 each in February and
March 1996, per the terms of a worldwide license agreement executed on
October 10, 1995. Total income recognized for the six month period ended
June 30, 1996 per the terms of this agreement was $3,454,450 and has been
reflected as other income in the consolidated statement of operations.
3. MERGER TRANSACTION: On December 29, 1995, the Company acquired all of the
common stock of AccuMed, Inc. and its wholly-owned subsidiary. Pursuant to
the terms of the merger agreement, 1,881,910 shares of common stock and
126,945 warrants were issued to AccuMed, Inc. shareholders which were
contingent and subject to forfeiture if specified performance goals were
not achieved by the merged entity. The contingency associated with 940,955
shares of common stock and 63,472 warrants was resolved (performance goal
achieved) in March 1996 resulting in contingent consideration of
$5,430,326. Such amount has been allocated to identifiable intangibles of
acquired proprietary technology ($1,930,599) and in-process research and
development ($3,499,727). The acquired proprietary technology is being
amortized over the expected period to be benefited of ten years, with the
in-process research and development charged to operations during the six
months ended June 30, 1996.
4. WARRANTS: In January 1996, the Company granted to an individual warrants to
purchase 100,000 shares of common stock at a price of $2.125 per share.
These warrants expire in January 2001. The fair market value of these
warrants of $230,000 has been recorded as issuance of common stock warrants
with an offsetting charge reflected as administration expense in the
consolidated statement of operations for the six month period ended June
30, 1996. In March 1996, the Company granted to certain investors in a
related party warrants to purchase 687,500 shares of common stock at a
price of $3.42 to $3.87 per share. These
-4-
warrants expire in March 1999. The fair market value of these warrants of
$852,390 has been recorded as issuance of common stock warrants with an
offsetting charge reflected as otherexpense in the consolidated statement
of operations for the six month period ended June 30, 1996.
5. ISSUANCE OF COMMON STOCK: During the second quarter, ended June 30, 1996
the Company issued 255,000 shares in private placements with net proceeds
of $1,409,665. In May 1996 the Company issued 3,750 shares of the
companies common stock at a price of $8.13 per share to an existing
shareholder. Other expenses in the amount of $30,469 have been reflected in
the consolidated statements of operations for the six months ended June 30,
1996.
6. WARRANT EXERCISE: During the second quarter, ended June 30, 1996 134,000
warrants with exercise prices between $0.25 and $3.87 were exercised.
7. SHARES ISSUED TO A RELATED PARTY: In June 1996 166,586 shares of common
stock were issued to a related party pursuant to an agreement requiring
conversion of the outstanding principal and unpaid interest totaling
$78,125 into 68,500 shares of common stock of AccuMed prior to the
merger with the Company.
8. STOCK OPTION PLAN: For the three month period ended June 30, 1996, the
Company granted options to purchase 391,500 shares at prices of $6.25 to
$8.38 per share, 361,378 options for shares were exercised at prices
of $0.63 to $1.39 per share and options to purchase 50,069 shares were
canceled.
9. NOTE PAYABLE: In January 1996, the Company received $250,000 cash in
exchange for a note payable bearing interest at 11% due in April 1996, and
warrants to purchase 160,000 shares of common stock at $1.25 per share. The
total proceeds received of $250,000 were allocated to the warrants based on
their estimated fair value of $352,000. The difference of $102,000 has
been reflected as other expense in the consolidated statement of operations
for the six month period ended June 30, 1996. The original issue discount
of $250,000 relating to the notes payable will be amortized over the term
of the note with $166,000 reflected as interest expense in the consolidated
statement of operations for the three month period ended June 30, 1996.
10. ACQUISITION OF ACCRURON: In April 1996, the Company agreed to acquire the
assets of Accuron Corporation, an Ohio corporation ("Accuron"), in
consideration for the issuance of 100,000 share of Common Stock, a value
of approximately $600,000. The assets to be acquired consist largely of
U.S. and foreign patents in the areas of image analysis and automated
cytopathology. The Company will not assume any liabilities of Accuron.
11. LITIGATION SETTLEMENT: In April 1996, the Company entered into a
settlement agreement with several stockholders. Under the terms of this
agreement, 26,270 shares of common stock held by these stockholders with a
fair value of $159,957 were returned to the Company and are being held as
treasury stock. An additional 11,786 shares of common stock contingent and
subject to forfeiture if specified performance goals are not achieved in
1997 were also returned to the Company.
12. SUBSEQUENT EVENTS: In July 1996, the Company signed a letter of intent
to acquire a two-thirds interest in Oncometrics Imaging Corp.
("Oncometrics") for a total purchase of approximately $4.0 million which
includes approximately $2.0 million to be used solely as working capital
for Oncometrics.
In July 1996, the Company signed a letter of intent to acquire the
remaining 90% interest in RADCO Ventures, Inc. ("RADCO"), for approximately
$1.4 million in cash.
In July 1996, the Company signed a letter of intent with a distributor to
outsource the manufacturing of one of the Company's microbiology product
lines.
-5-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Effective December 29, 1995, AccuMed, Inc. was merged with and into the
Company (the "Merger"). The results of operations reflected in the Company's
consolidated statement of operations for the quarter and six-months ended June
30, 1996 include the operations of the two merged businesses, whereas results of
operations from prior periods and years reflect the operations and sales of the
Alamar microbiology product line only. The historical results of operations of
the Company presented herein are not necessarily indicative of future results of
operations of the company.
The Merger has been accounted for as a purchase, which resulted in certain
changes. The value of the securities not subject to contingencies issued by the
Company upon consummation of the Merger exceeded the value of the assets
acquired by $6.6 million. At December 31, 1995, $4.0 million of such amount was
allocated to acquired in-process research and development and written off
immediately as a non-cash charge against operations. The remaining $2.6 million
was booked as purchased technology and is being amortized over ten years
beginning December 31, 1995. Certain of the securities issued by the Company
upon consummation of the Merger were subject to forfeiture if specified earnings
per share or stock price performance goals were not met following the Merger.
During the quarter ended March 31, 1996, the contingencies were satisfied with
respect to a portion of such securities having a then current fair market value
of $5.4 million. Of such amount, $3.5 million was allocated to acquired in-
process research and development and written off immediately as a non-cash
charge against operations. The remaining $1.9 million was booked as purchased
technology and is being amortized over ten years beginning March 31, 1996. If
specified contingencies applicable to the remaining 940,955 shares of Common
Stock and warrants to purchase up to 63,473 shares of Common Stock issued in the
Merger are met during 1997, an amount equal to the fair market value of such
securities at the time such contingencies are satisfied will be recorded as
goodwill. It is anticipated that such goodwill will be amortized over ten years
and that the Company will continue to assess the recoverability of such asset as
prescribed by the Company's current accounting policies.
Pending consummation of the Merger, the Company took various actions to
streamline and relocate its operations. The Company's manufacturing facility in
Sacramento, California was closed in August 1995, and all obligations under its
lease were satisfied during the second quarter of 1996. During the summer and
fall of 1995, the Company terminated the employment of all its employees, other
than two officers. From July 1, 1995 until consummation of the Merger, the
Company's manufacturing, marketing, sales distribution and research and
development functions were performed by AccuMed, Inc. under contracts. After
consummation of the Merger, the Company resumed research and development,
manufacturing and marketing and sales activities, and hired a significant number
of employees.
At June 30, 1996, the Company had an accumulated deficit of $27,220,237.
On December 31, 1995, the Company changed its fiscal year end from September 30
to December 31.
-6-
Revenues from sales for the quarter ended June 30, 1996 increased to
$1,124,000 compared to $149,000 for the quarter ended June 30, 1995, and revenue
from sales increased to $2,312,000 in the six months ended June 30, 1996
compared to $321,000 for the comparable 1995 period, in each case due primarily
to the inclusion of sales of the Sensititre product line as a result of the
acquisition of the Sensititre business at the end of 1995 and initial sales of
the Company's cytopathology products.
Cost of sales increased from $252,000 in the second quarter of 1995 to
$870,000 in the second quarter of 1996, and from $471,000 for the six months
ended June 30, 1995 to $1,465,000 for comparable 1996 period, in each case due
to the additional cost of sales of the microbiology product line and initial
cytopathology instrument sales.
General and administrative expenses increased from $585,000 in the second
quarter of 1995 to $877,000 in the comparable 1996 quarter, and from $860,000
for the six months ended June 30, 1995 to $1,792,000 for the comparable 1996
period, in each case primarily due to (i) recognition of a non-cash charge
attributable to the issuance of warrants to purchase an aggregate of $100,000
shares of Common Stock at an exercise price of $2.125 per share as compensation
for consulting services, (ii) costs of consolidating staff and relocating
operations, and (iii) increased investor relations efforts.
Research and development expenses increased from $71,000 in the second
quarter of 1995 to $715,000 in the second quarter of 1996 due primarily to
resumption of research and development activities after the Merger. Research
and development expenses increased from $140,000 for the six months ended June
30, 1995 to $4,789,000 for the comparable 1996 period, primarily due to a non-
cash charge against operations of $3.5 million representing the write-off of in-
process research and development acquired in connection with the Merger, and
resumption of research and development activities following the Merger.
Sales and marketing expenses increased from $47,000 in the second quarter
of 1995 to $448,000 in the second quarter of 1996, and from $75,000 for the six
months ended June 30, 1995 to $842,000 for the comparable 1996 period, in each
case due to reinstatement of domestic sales and marketing efforts which had been
suspended during the 1995 periods.
For the six-month period, other income increased by $2,409,000 compared
to the first six months of 1995 principally due to payments of $3,500,000
from Becton Dickinson and Company ("Becton") pursuant to a license agreement.
At December 31, 1995, $1.4 million of such payments had been recorded as
deferred revenues pending resolution of subsequently resolved litigation.
Offsetting such income was $954,000 of expense during the first quarter of
1996 recorded as a non-cash charge representing the fair market value of
warrants issued. Of such amount, (i) $852,000 is attributable to warrants to
purchase an aggregate of 687,500 shares of Common Stock, with a weighted
average exercise price of $3.73 per share, issued to investors in connection
with the initial capitalization of RADCO Ventures, Inc. (a joint venture
formed by the Company and certain investors) ("RADCO"), and (ii) $102,000 is
attributable to warrants to purchase an aggregate of 100,000 shares of Common
Stock, at an exercise price of $1.25 per share, issued in consideration of a
loan to the Company of $250,000 from the warrantholder.
-7-
Net loss increased from $718,000 for the second quarter of 1995 to
$1,810,000 for the second quarter of 1996, due principally to increased
operating expenses of the Company after the Merger. Net loss per share
remained constant at $0.11 for the quarters ended June 30, 1996 and 1995.
For the six months ended June 30, 1996, net loss was $4,459,000 as compared
to $1,151,000 for the comparable 1995 period. The increase in the latter period
was primarily attributable to the non-cash charge against operations relating to
the write-off of in-process research and development and the fair value of
warrants issued, as described above. The net loss per share for the first six
months of 1996 was $.27 compared to $.20 for the comparable 1995 period. The
increased net loss was somewhat diluted by an increase in the weighted average
shares outstanding.
The Company's accounts receivable were $1,405,000 as of June 30, 1996, an
increase of $530,000 from December 31, 1995, due primarily to sales of the
Company's initial cytopathology products and varying payments terms of the
Company's international microbiology distributors.
The Company's production inventory was $1,514,000 as of June 30, 1996, an
increase of $371,000 from December 31, 1995, as a result of increased levels of
raw materials and finished goods inventories acquired to support sales of the
Company's initial cytopathology products.
The Company's accounts payable were $2,242,000 as of June 30, 1996, an
increase of $236,000 from December 31, 1995, due primarily to support the
increase in inventories described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has been substantially dependent on the private placements of
its debt and equity securities and the proceeds of its initial public offering
of securities consummated in October 1992 to fund its cash requirements. From
the initial public offering through June 30, 1996, the Company has raised
approximately $11,302,000 in aggregate net proceeds from the initial public
offering and such private placements. The Company's most recent private
placements were closed in May and June 1996, resulting in the issuance of an
aggregate of 255,000 shares of Common Stock for net proceeds of approximately
$1,400,000. During the second quarter of 1996, the Company expected to receive
$2,000,000 in cash consideration for a debenture that was to have been issued
effective April 30, 1996; however, such consideration was not received and such
debenture was not issued. During the second quarter of 1996, the Company
received an aggregate of $471,000 upon the exercise of certain stock options and
an aggregate of $441,000 upon the exercise of certain warrants.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-2 with respect to a proposed
underwritten public offering (the "Proposed Public Offering") of 4,750,000
shares of the Company's Common Stock (assuming no exercise of the underwriters'
overallotment option). Of such shares, it is currently contemplated that
2,750,000 shares will be offered by the Company and 2,000,000
-8-
shares will be offered by certain selling stockholders. The registration
statement has not been declared effective by the Commission and there can be no
assurance that the Proposed Public Offering will be consummated in its current
form or at all.
In connection with the Company's initial public offering and certain
private placements, the Company issued warrants to purchase an aggregate of
2,702,905 shares of Common Stock (the "Redeemable Warrants"). If the closing
price per share of Common Stock exceeds $7.50 (subject to adjustment) per share
for a minimum of 20 consecutive trading days, the Company would have the right
to redeem the Redeemable Warrants, upon notice of not less than 60 days given to
holders within three days following any such 20 day period, at a redemption
price of $0.25 per underlying share. The exercise price of the Redeemable
Warrants, which expire October 1, 1997, is $5.00 per share. If all Redeemable
Warrants were exercised, of which there can be no assurance, the Company would
receive approximately $13.5 million in gross proceeds. If the Proposed Public
Offering is completed, the Company has agreed with the underwriters not to
redeem the Redeemable Warrants, without the underwriters' consent, prior to one
year following the date of the prospectus relating to the Proposed Public
Offering.
Pursuant to the License Agreement entered into between the Company and
Becton in October 1995 (the "License Agreement"), Becton has a semi-exclusive,
worldwide license to the Company's alamarBlue technology for a specific field of
use. Becton was obligated to pay $3.5 million in cash for use of the
technology, of which $1.5 million was received during 1995 and $2.0 million was
received during the first quarter of 1996. Of such amount, $500,000 will be
creditable against future royalty payments, if any. Becton is obligated to pay
the Company royalties on net sales of products incorporating the technology
licensed under the License Agreement during its five-year term. As of the date
of this report, there have been no sales of products incorporating such
technology.
At June 30, 1996, the Company had $2,242,000 of accounts payable, of which
approximately $1,700,000 was past the respective original due dates. In late
1995 and early 1996, the Company reached agreements with certain vendors
providing for the extended repayment of amounts owed by the Company to such
vendors. At June 30, 1996, pursuant to such agreements, approximately $522,000
remained payable by the Company to such vendors in scheduled monthly
installments through the remainder of 1996. Other amounts owed to various
vendors and suppliers may be subject to late charges of up to 1.5% per month.
The Company intends to expend substantial funds for research and product
development, possible acquisitions, scale-up of manufacturing capacity,
reduction of accounts payable and other working capital and general corporate
purposes, dependent in part of the success of the Proposed Public Offering.
Although the Company believes that the net proceeds of the Proposed Public
Offering, together with interest thereon, existing cash balances and internally
generated funds will be sufficient to finance the Company's projected operations
through at least the next twelve months, there can be no assurance to that
effect. In the event the Proposed Public Offering does nor occur, on a timely
basis or at all, the Company will be required to seek additional financing. The
Company's future liquidity and capital requirements will depend upon numerous
factors, including the costs and timing of expansion of manufacturing capacity,
the costs, timing and success of the Company's product development efforts, the
costs and timing of acceptance, competing technological and market developments,
the progress of
-9-
commercialization efforts of the Company and its distributors, the costs
involved in preparing, filing, prosecuting, maintaining, enforcing and defending
patent claims and other intellectual property rights, developments related to
regulatory and third party reimbursement matters, and other factors. If
additional financing is needed, the Company may seek to raise additional funds
through public or private financings, collaborative relationships or other
arrangements.
The Company currently has no commitments with respect to sources of
additional financing, and there can be no assurance that any such financing
sources, if needed, would be available to the Company or that adequate funds for
the Company's operations, whether form the Company's revenues, financial
markets, collaborative or other arrangements with corporate partners or from
other sources, will be available when needed or on terms satisfactory to the
Company. The failure of the Company to obtain adequate additional financing may
require the Company to delay, curtail or scale back some or all of its studies
and regulatory activities and, potentially, to cease its operations. Any
additional equity financing may involve substantial dilution to the Company's
then-existing stockholders.
POTENTIAL IMPACT OF ACQUISITION OF INTEREST IN ONCOMETRICS
The Company intends to acquire a two-thirds equity interest, on a fully-
diluted basis, in Oncometrics Imaging Corp. ("Oncometrics") for aggregate cash
consideration of $4,000,000. Of such consideration, $2,000,000 would be paid to
Xillix Technologies Corp. (the parent company of Oncometrics) for currently
outstanding Oncometrics stock, and $2,000,000 would be paid to Oncometrics for
newly issued Oncometrics stock. It is anticipated that such transaction would
be accounted for under the purchase method of accounting, resulting in
approximately $1,600,000 of acquired in-process research and development and
approximately $1,100,000 of purchased technology. Amounts recorded as acquired
in-process research and development would be written off as a charge to earnings
in the period of acquisition. Amounts recorded as purchased technology would be
amortized over the expected useful life of such technology, currently
anticipated to be ten years. Furthermore, at May 31, 1996, Oncometrics had
approximately $234,000 in long-term, third party debt, including the current
portion of long-term debt, which the Company would assume if the Oncometrics
Acquisition is consummated. Consummation of the transaction is contingent on
completion of the Proposed Public Offering.
POTENTIAL IMPACT OF ACQUISITION OF RADCO
The Company is negotiating to acquire common stock of RADCO for an
aggregate purchase price of approximately $1,400,000 in cash. It is
anticipated that such transaction would be accounted for under the purchase
method of accounting, resulting in approximately $630,000 of acquired
in-process research and development. Such amount is expected to be
written-off as a charge to earnings in the period of the RADCO Acquisition.
Consummation of the transaction is contingent on completion of the Proposed
Public Offering.
-10-
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. A number of
uncertainties exist that could affect the Company's future operating results,
including, without limitation, the factors set forth below and in the Company's
most recent Annual Report on Form 10-KSB.
The Company has a limited relevant operating history upon which an
evaluation of its prospects can be made. Such prospects must be considered in
light of the risks, expenses and difficulties frequently encountered in
establishing a new business in a continually evolving industry with an
increasing number of market entrants and intense competition as well as the
risks, expenses and difficulties encountered in the shift from development to
commercialization of new products based on innovative technology.
The Company has incurred significant net operating losses in each fiscal
quarter since its inception. As of June 30, 1996, the company had an
accumulated deficit of approximately $27,220,000. Losses are expected to
continue for the foreseeable future until such time, if ever, as the Company is
able to attain sales levels sufficient to support its operations. There can be
no assurance that the Company will be able to implement successfully its
operating strategy, generate increased revenues or ever achieve profitable
operations.
The Company has generated limited revenues from the sale of its
cytopathology products to date. The Company's success, growth and profitability
will depend primarily on market acceptance of its cytopathology products for use
in connection with cervical cancer screening by cytopathology laboratories.
There can be no assurance that the Company can demonstrate that the high initial
cost of equipping existing laboratories with its products will be offset by a
reduction in costs associated with increased efficiency and decreased
malpractice liability risks resulting from more accurate diagnosis, better data
management capability and better documentation of slide review procedures.
Due in part to a recent trend toward consolidation of clinical
laboratories, the Company expects that the number of potential domestic
customers for its cytopathology products will decrease. The Company will need
to foster an awareness of and acceptance by its potential customers of the
benefits of the Company's systems over current methods. The Company's
dependence on sales to large laboratories may strengthen the purchasing leverage
of these potential customers. There can be no assurance that the Company will
be successful in selling its products, or that any such sales will result in
sufficient revenue to allow the Company to become profitable.
The Company's growth and profitability will depend, in part, upon its
ability to complete development of and successfully introduce new products. The
Company will likely be required to undertake time-consuming and costly
development activities and seek regulatory approval for new products. There can
be no assurance that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of new
products, that regulatory clearance or approval of these or any new products
will be granted on a timely
-11-
basis, if ever, or that the new products will adequately meet the requirements
of the applicable market or achieve market acceptance.
The Company has only limited experience marketing and selling its
cytopathology products. The Company intends to distribute its cytopathology
products primarily through a limited number of distributors. The Company has
only recently entered into its only current cytopathology distribution
arrangement. The Company will be required to enter into additional distribution
arrangements in order to achieve broad distribution of its cytopathology
products. There can be no assurance that the Company will be able to maintain
its current distribution arrangement or that the company will be able to enter
into and maintain arrangements with additional distributors on acceptable terms,
or on a timely basis, if at all.
The Company's products face competition from companies that may be
developing competing systems. The Company believes that many of the Company's
existing and potential competitors possess substantially greater financial,
marketing, sales, distribution and technical resources than the Company, and
more experience in research and development, clinical trials, regulatory
matters, manufacturing and marketing. The medical diagnostics industry is
characterized by rapid product development and technological advances. There
can be no assurance that other technologies or products that are functionally
similar to those of the Company are not currently available or under
development, or that other companies with expertise and resources that would
encourage them to attempt to develop and market competitive products will not
develop new products directly competitive with the Company's products.
The Company expects that its operating results will fluctuate significantly
from quarter to quarter and will depend on various factors, many of which are
outside the Company's control. These factors include the success of the
marketing efforts of necessary regulatory clearances or approval, the timing and
level of expenditures associated with expansion of sales and marketing
activities and overall operations, the Company's ability to cost effectively
expand manufacturing capacity and maintain consistently acceptable yields, the
timing of establishment of strategic distribution arrangements and the success
of the activities conducted under such changes in government regulation and
other factors, the timing of significant orders from and shipments to customers,
and general economic conditions. These or other factors could have a material
adverse effect Company's business, financial condition and results of
operations.
If specified earnings per share or stock price performance thresholds are
met during 1997, contingencies will be satisfied with respect to 940,955 shares
of Common Stock and warrants to purchase 63,472 shares of common Stock issued in
connection with the Merger and an amount equal to the fair market value of such
securities at the date on which such contingencies are satisfied is expected to
be recorded as goodwill and amortized over ten years.
There can be no assurance that the Company's personnel, systems, procedures
and controls will be adequate to support the Company's future operations. Any
failure to implement and improve the Company's operational, financial and
management systems or to expand, train, motivate or manage employees as required
by future growth, if any, could have a material adverse effect on the Company's
business, financial condition and results of operations
-12-
Certain key components and raw materials used in the manufacturing of the
Company's products are currently obtained from single vendors. Although the
Company believes that alternative sources for such components and raw materials
are available, any supply interruption in a single-sourced component or raw
material would have a material adverse effect on the Company's ability to
manufacture products until a new source of supply were qualified. There can be
no assurance that the Company would be successful in qualifying additional
sources on a timely basis, if ever. failure to do so would have a material
adverse effect on the Company's business, financial condition and results of
operations.
International sales and operations may be limited or disrupted by the
imposition of government controls, export license requirements, political
instability, trade restrictions, changes in tariffs or difficulties in staffing
and managing international operations. Foreign regulatory agencies often
establish product standards different from those in the United States and any
inability to obtain foreign regulatory approvals on a timely basis could have a
material adverse effect on the Company's international business operations.
Additionally, the Company's business, financial condition and results of
operations may be adversely affected by increases in duty rates and difficulties
in obtaining required licenses and permits. There can be no assurance that the
Company will be able to successfully commercialize its products, or any future
product, in any foreign market.
The market price of the shares of the Company's Common Stock has in the
past been and is likely in the future to continue to be, highly volatile.
Factors such as fluctuations in the Company's operating results, announcements
of technological innovations or new commercial products by the Company or
competitors, government regulation, changes in the current structure of the
health care financing and payment systems, developments in or disputes regarding
patent or other proprietary rights, economic and other external factors and
general market conditions may have a significant effect on the market price of
the common Stock. Moreover, the stock market has from time to time experienced
extreme price fluctuations which have particularly affected the market prices
for medical products and high technology companies and which have often been
unrelated to the operating performance of such companies. These broad market
fluctuations, as well as general economic, political and market conditions, may
adversely affect the market price of the Company's Common Stock. In the past,
following periods of volatility in the market price of a Company's common stock,
securities class action litigations have occurred against the issuing Company.
There can be no assurance that such litigation will not occur in the future with
respect to the Company.
-13-
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Amendment No. 1 to its Report on
Form 10-QSB to be signed on its behalf by the undersigned thereunto authorized.
ACCUMED INTERNATIONAL, INC.
/s/ Leonard R. Prange Date: September 26, 1996
- ------------------------------ ------------------
Leonard R. Prange
Chief Financial Officer
-14-