SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
- --- EXCHANGE ACT OF 1934
For the quarterly period ended December 27, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
- --- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 000-20198
CHOLESTECH CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3065493
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
3347 INVESTMENT BOULEVARD, HAYWARD, CA 94545
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (510) 732-7200
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 and 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
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At December 27, 1996, 11,204,397 shares of no par common stock of the Registrant
were outstanding.
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CHOLESTECH CORPORATION
PART I
FINANCIAL INFORMATION
PAGE
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ITEM 1. FINANCIAL STATEMENTS.
Condensed Balance Sheets 3
Condensed Statements of Operations 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. 8
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 13
SIGNATURES 14
2
CHOLESTECH CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
December 27, 1996 March 29, 1996 (1)
----------------- -----------------
Current assets:
Cash and cash equivalents $ 6,944 $ 361
Marketable securities 4,011 --
Restricted marketable securities -- 3,750
Accounts receivable 1,722 1,107
Inventories 2,545 1,910
Prepaid expenses and other assets 188 167
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Total current assets 15,410 7,295
Property and equipment, net 2,410 2,041
Marketable securities 2,785 --
Other assets, net 218 309
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$ 20,823 $ 9,645
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings $ -- $ 250
Accounts payable and accrued expenses 1,657 1,614
Accrued payroll and benefits 238 253
Product warranty 212 187
Current portion of long-term debt -- 499
Other liabilities 48 50
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Total current liabilities 2,155 2,853
Long-term debt, less current portion -- 799
Other liabilities 20 11
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Total liabilities 2,175 3,663
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Shareholders' equity:
Preferred stock -- --
Common stock 69,121 55,644
Accumulated deficit (50,473) (49,662)
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Total shareholders' equity 18,648 5,982
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$ 20,823 $ 9,645
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(1) The information in this column was derived from the Company's audited
financial statements for the fiscal year ended March 29, 1996.
See accompanying notes to condensed financial statements.
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CHOLESTECH CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
Thirteen weeks ended Thirty-nine weeks ended
-------------------- -----------------------
12/27/96 12/29/95 12/27/96 12/29/95
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Revenues:
Domestic $ 2,942 $ 1,188 $ 8,085 $ 3,601
International 227 428 900 949
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3,169 1,616 8,985 4,550
Cost of products sold 1,662 1,041 4,931 2,900
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Gross profit 1,507 575 4,054 1,650
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Operating expenses:
Sales and marketing 989 806 2,858 2,206
Research and development 365 149 818 539
General and administrative 495 336 1,374 1,053
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Total operating expenses 1,849 1,291 5,050 3,798
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Loss from operations (342) (716) (996) (2,148)
Other income, net 179 17 185 155
Net loss $ (163) $ (699) $ (811) $(1,993)
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Net loss per share $ (0.01) $ (0.09) $ (0.08) $ (0.25)
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Weighted average common
shares 11,176,669 8,040,082 10,103,329 8,021,074
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See accompanying notes to condensed financial statements.
4
CHOLESTECH CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Thirty-nine weeks ended
------------------------------------
December 27, 1996 December 29, 1995
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Cash flows from operating activities:
Net loss $ (811) $(1,993)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 597 457
Deferred revenue 2 (20)
Compensation expense relating to
stock options issued below market -- 30
Forgiveness of note receivable -- 36
Changes in assets and liabilities:
Accounts receivable (615) (62)
Inventories (635) (322)
Prepaid expenses and other assets (21) (18)
Other assets (18) --
Accounts payable and accrued expenses 43 380
Accrued payroll and benefits (15) (141)
Product warranty 25 --
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Net cash used in operating activities (1,448) (1,653)
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Cash flows from investing activities:
Purchase of marketable securities (181,410) --
Proceeds from the sale of marketable securities 178,364 --
Purchases of property and equipment (811) (213)
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Net cash used in investing activities (3,857) (213)
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Cash flows from financing activities:
Proceeds from long-term debt -- 1,500
Repayment of long-term debt (1,298) (99)
Proceeds from short-term bank borrowing 800 --
Repayment of short-term bank borrowing (1,050) --
Principal payments on capital leases (41) (75)
Issuance of common stock 13,477 96
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Net cash provided by financing activities 11,888 1,422
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Net change in cash and cash equivalents 6,583 (444)
Cash and cash equivalents at beginning of period 361 1,230
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Cash and cash equivalents at end of period $ 6,944 $ 786
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Supplemental disclosures of non-cash financing
and investing activities:
Capital lease obligations incurred for
acquisition of property and equipment $ 46 $ --
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See accompanying notes to condensed financial statements.
5
CHOLESTECH CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. The interim unaudited financial information of Cholestech Corporation (the
"Company") is prepared in conformity with generally accepted accounting
principles and such principles are applied on a basis consistent with the
audited financial information contained in the Annual Report on Form 10-K
filed with the Securities and Exchange Commission on June 25, 1996.
However, certain information or footnote disclosure normally included in
financial statements prepared in accordance with generally accepted
accounting principles has been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission. The financial
information included herein has been prepared by management, without audit
by independent accountants who do not express an opinion thereon, and
should be read in conjunction with the audited financial statements
contained in the Annual Report on Form 10-K. The condensed balance sheet
as of March 29, 1996 has been derived from, but does not include all the
disclosures contained in, the audited financial statements for the year
ended March 29, 1996. The information furnished includes all adjustments
and accruals consisting only of normal recurring accrual adjustments that
are, in the opinion of management, necessary for a fair presentation of
results for the interim periods.
2. The foregoing interim results are not necessarily indicative of the results
of operations for the full fiscal year ending March 28, 1997.
3. The components of inventories are as follows (in thousands):
DECEMBER 27, 1996 MARCH 29, 1996
----------------- --------------
Raw materials $ 648 $ 875
Work-in-process 783 380
Finished goods 1,114 655
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$2,545 $1,910
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4. Net loss per share is computed by dividing the net loss by the weighted
average number of common and common equivalent shares outstanding during
each period. Common equivalent shares are included in determining net loss
per share, to the extent they are dilutive, using the treasury stock
method.
5. In May 1996, the Company entered into a development, marketing and license
agreement (the "Agreement") with Metra Biosystems, Inc. ("Metra
Biosystems") to develop an immunoassay test cassette incorporating Metra
Biosystems' bone resorption technology to be used with the Cholestech
L-D-X-REGISTERED TRADEMARK- System. Pursuant to the Agreement, Metra
Biosystems purchased 39,526 shares of the Company's common stock for an
aggregate purchase price of $250,000 ($6.325 per share) and is obligated to
purchase $750,000 of additional shares of common stock upon the completion
of specified development milestones by the Company.
6. On June 28, 1996, the Company successfully completed a public offering and
issued 2,500,000 shares of common stock at $5.00 per share. On July 9,
1996, the underwriters for the public offering exercised an over allotment
option to purchase an additional 375,000 shares of Cholestech common stock
at $5.00 per share. Aggregate proceeds to the Company from the public
offering and over allotment option (collectively the "Public Offering")
were $12.9 million, net of underwriting discounts and commissions and
offering expenses. A portion of the proceeds was used to repay the
outstanding balances of the Company's (a) bank line of credit of
approximately $1.0 million and (b) a long-term note of approximately $1.2
million.
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CHOLESTECH CORPORATION
7. On December 20, 1996, the Company entered into an agreement with a
bank for a $3 million revolving line-of-credit ("line of credit").
While the agreement is in effect, the Company is required to maintain on
deposit assets with collective value, as defined in the line of credit
agreement, equivalent to no less than 100% of the outstanding principle
balance under the line-of-credit. The principle amounts outstanding
under the line-of-credit will bear interest at a rate per annum equal to
the bank's prime rate in effect from time to time. The Company is not
required to pay any commitment fees on the unused available credit. The
commitment by the bank expires on November 30, 1997 and is renewable.
As of December 27, 1996, there were no borrowings outstanding under the
line-of-credit.
8. In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for
Stock-Based Compensation." Effective March 30, 1996, the Company adopted
FAS 123 and elected to continue to measure compensation cost for its
employee stock compensation plans using the intrinsic value-based method of
accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Annual proforma disclosure of
net earnings and net earnings per share will reflect the difference between
compensation cost included in net earnings and the related costs measured
by the fair value-based method defined in FAS 123, including tax effects,
that would have been recognized in the statement of operations if the fair
value-based method had been used.
7
CHOLESTECH CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS DISCUSSED HEREIN, UNDER "GENERAL" AND "FACTORS AFFECTING FUTURE
OPERATING RESULTS." THESE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT
LIMITED TO, THE STATEMENT UNDER "GENERAL" REGARDING THE COMPANY'S EXPECTATION
OF CONTINUING TO INCUR OPERATING LOSSES AS WELL AS NEGATIVE CASH FLOWS, THE
STATEMENT UNDER "SALES AND MARKETING" REGARDING THE COMPANY'S ANTICIPATION
THAT SALES AND MARKETING EXPENSES WILL INCREASE, THE STATEMENT UNDER
"RESEARCH AND DEVELOPMENT" REGARDING THE COMPANY'S ANTICIPATION THAT RESEARCH
AND DEVELOPMENT EXPENDITURES WILL INCREASE AND THE STATEMENT IN THE THIRD
PARAGRAPH UNDER "LIQUIDITY AND CAPITAL RESOURCES" REGARDING THE LENGTH OF
TIME THAT THE COMPANY'S RESOURCES WILL BE SUFFICIENT TO MEET ITS CAPITAL
REQUIREMENTS.
GENERAL
The Company develops, manufactures and markets a proprietary platform
technology - Cholestech L-D-X-REGISTERED TRADEMARK- System - whose first
applications in the point of care market measures specific analytes to detect
various diseases and disorders within five minutes using a single drop of whole
blood. The Company has experienced significant operating losses since inception
and, as of December 27, 1996, had an accumulated deficit of $50.5 million. The
Company has not generated significant revenues to date, and there can be no
assurance that significant revenues will ever be achieved. The Company is
developing certain additional tests designed to extend the L-D-X System's
capabilities. The Company believes that its future growth will depend, in part,
upon its ability to complete development and successfully introduce these new
tests. The Company expects to continue to incur operating losses as well as
negative cash flows from operations as it expands product research and
development efforts for new test panels, pursues regulatory clearances and
approvals, expands sales and marketing activities to address the monitoring
market, and develops and expands manufacturing capacity for existing and new
test panels. The development and commercialization of the new tests will require
additional development, sales and marketing, manufacturing and other
expenditures. The required level and timing of such expenditures will have an
impact on the Company's ability to achieve profitability and positive cash flows
from operations.
RESULT OF OPERATIONS
THIRTEEN WEEKS ENDED DECEMBER 27, 1996 VS. THIRTEEN WEEKS ENDED DECEMBER 29,
1995
AND
THIRTY-NINE WEEKS ENDED DECEMBER 27, 1996 VS. THIRTY-NINE WEEKS ENDED DECEMBER
29, 1995
REVENUES. During the thirteen weeks ended December 27, 1996,
revenues increased $1.6 million (96%) to $3.2 million from $1.6 million
in the thirteen weeks ended December 29, 1995. Domestic revenues
increased $1.7 million (148%) to $2.9 million from $1.2 million in the
thirteen weeks ended December 27, 1996. During the first thirty-nine
weeks of fiscal 1997, revenues increased $4.4 million (97%) to $9
million from $4.6 million in the first thirty-nine weeks of fiscal 1996.
Domestic revenues increased $4.5 million (125%) to $8.1 million from
$3.6 million in the first thirty-nine weeks of fiscal 1996. These
increases in revenues reflect a continuing increase in unit sales of the
disposable test cassettes and the L-D-X System to hospitals, managed
care organizations, public health departments, corporations and other
health care providers in the screening and monitoring markets. As of
December 27, 1996, there were approximately 1,231 active health promotion
accounts, 27% increase from the number of accounts for twenty-six weeks
ended September 27, 1996. In April 1996 the Company launched its CLIA
waived product line into the physician office laboratory ("POL") market.
The Company has shipped
8
CHOLESTECH CORPORATION
approximately 924 Cholestech L-D-X Systems-REGISTERED TRADEMARK-into the
POL market as of December 27, 1996. The Company is represented in the
monitoring market by Physician Sales and Service, Inc. and General
Medical, two of the largest distributors in the POL market.
During the thirteen weeks ended December 27, 1996, international
revenues decreased $201,000 (47%) to $227,000 from $428,000 in the
thirteen weeks ended December 29, 1995. During the first thirty-nine
weeks of fiscal 1997, international revenues decreased $49,000 (5%) to
$900,000 from $949,000 in the first thirty-nine weeks of fiscal 1996.
These decreases reflect the shipment of an unusal number of L-D-X
Systems to Europe in the thirty-nine weeks ended December 29, 1995.
COST OF PRODUCTS SOLD. Cost of products sold during the thirteen
weeks ended December 27, 1996 increased $621,000 (60%) to $1.7 million
from $1 million in the thirteen weeks ended December 29, 1995, as unit
sales of disposable test cassettes and the Cholestech L-D-X Systems increased.
Gross margin was 48% and 36% in the thirteen weeks ended December 27, 1996 and
December 29, 1995, respectively. The improvement in the gross margin was
primarily attributable to improved cassette manufacturing yields, growth in
the volume of units sold and improved quality assurance procedures.
During the first thirty-nine weeks of fiscal 1997, cost of products
sold increased $2 million (70%) to $4.9 million from $2.9 million in the
first thirty-nine weeks of fiscal 1996, as unit sales of disposable test
cassettes and the L-D-X Systems increased. Gross margin was 45% and 36%
in the first thirty-nine weeks of fiscal 1997 and 1996, respectively.
The improvement in the gross margin was primarily attributable to
improved cassette manufacturing yields, growth in the volume of units
sold and improved quality assurance procedures.
The Company has obtained rights to use certain technology in the
manufacturing of certain of its products. The related agreements, which expire
at various times in calendar 1997 through 2006, provide for the Company to pay
royalties ranging from 0.6% to 6.0% of net sales of the applicable products.
Total royalty expense in the thirteen weeks ended December 27, 1996 and December
29, 1995 was $149,000 and $72,000, respectively, and was charged to cost of
products sold. Total royalty expense for first thirty-nine weeks of fiscal 1997
and 1996 was $386,000 and $160,000, respectively, and was charged to cost of
products sold.
SALES AND MARKETING. Sales and marketing expenses in the thirteen weeks
ended December 27, 1996 were $989,000 compared to $806,000 for the same period
in fiscal 1996, and $2.9 million for the first thirty-nine weeks of fiscal 1997
compared to $2.2 million for the same period in fiscal 1996. These increases in
sales and marketing expenses were primarily attributable to continued expansion
of the Company's domestic direct sales and marketing organization, increased
expenses related to the penetration in the monitoring market, increased
commissions associated with increased revenues and, to a lesser extent,
participation in domestic conferences and trade shows. Sales and marketing
expenses as a percentage of revenues decreased to 31% for the thirteen weeks
ended December 27, 1996 from 50% for the same period in fiscal 1996, and
decreased to 32% for the first thirty-nine weeks of fiscal 1997 from 48% for the
same period in fiscal 1996. The Company currently anticipates that sales and
marketing expenses will continue to increase in absolute dollars in future
periods as the Company expands sales and marketing activities to address the
monitoring market, in particular the POL segment.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
thirteen weeks ended December 27, 1996 were $365,000 compared to $149,000 for
the same period in fiscal 1996, and $818,000 for the first thirty-nine weeks of
fiscal 1997 compared to $539,000 for the same period in fiscal 1996. The
Company is currently developing additional tests to detect disease states such
as metabolic bone diseases and disorders, prostate cancer and diabetes. Each of
these new tests is at an early stage of development and the Company will be
required to undertake time consuming and costly development activities and seek
regulatory approval for these new tests. Research and development expenses as a
percentage of revenues increased to
9
CHOLESTECH CORPORATION
12% for the thirteen weeks ended December 27, 1996 from 9% for the
thirteen weeks ended December 29, 1995. This increase as a percentage
of revenues resulted primarily from product development and
manufacturing scale-up efforts for new tests. Research and development
expenses as a percentage of revenues decreased to 9% for the first
thirty-nine weeks of fiscal 1997 from 12% for the same period in fiscal
1996. This decrease as a percentage of revenues resulted from faster
revenue growth than the Company's ability to responsibly build
infrastructure. The Company currently anticipates that research and
development expenditures will increase significantly in future periods
as product development and manufacturing scale-up efforts for new tests
increase continues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for
the thirteen weeks ended December 27, 1996 were $495,000 compared to
$336,000 for the same period in fiscal 1996 and $1.4 million for the
first thirty-nine weeks of fiscal 1997 compared to $1.1 million for the
same period in fiscal 1996. These increases in general and
administrative expenses resulted primarily from higher professional fees
relating to recruitment and retention of new Chief Financial Officer,
legal fees relating to business development efforts, and an increased
investment in the Company's information systems. General and
administrative expenses as a percentage of revenues decreased to 16% for
the thirteen weeks ended December 27, 1996 from 21% for the same period
in fiscal 1996, and decreased to 15% for the first thirty-nine weeks of
fiscal 1997 from 23% for the same period in fiscal 1996. These
decreases as a percentage of revenues occurred due to a faster revenue
growth than the Company's ability to responsibly build infrastructure.
OTHER INCOME , NET. For the thirteen and thirty-nine weeks ended
December 27, 1996 and for the same periods of the prior year, other
income, net generally consists of interest income earned on investment
of cash and marketable security balances, offset in part by interest
expense incurred on capital lease financing, and for all periods other
then the thirteen weeks ended December 27, 1996, other borrowings of the
Company. The increase in other income, net in the first thirteen and
thirty-nine weeks of fiscal 1997, as compared to the same periods of
fiscal 1996, primarily reflects higher interest income earned on
investment of cash balances generated from the Company's Public Offering
of common stock in June 1996.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company may experience significant fluctuations in revenues and
results of operations on a quarter to quarter basis in the future.
Quarterly operating results will fluctuate due to numerous factors, such
as (i) the timing and level of market acceptance of the Cholestech
L-D-X-REGISTERED TRADEMARK-System, particularly with respect to the
monitoring market; (ii) the timing of introduction and availability of
new tests; (iii) the timing and level of expenditures associated with
new product development activities; (iv) the timing and level of
expenditures associated with expansion of sales and marketing activities
and overall operations; (v) the Company's ability to cost-effectively
expand cassette manufacturing capacity and maintain consistently
acceptable yields in the manufacture of disposable test cassettes; (vi)
the timing of establishment of strategic distribution arrangements and
success of the activities conducted under such arrangements; (vii)
variations in manufacturing efficiencies; (viii) changes in demand for
its products based on changes in third party reimbursement, competition,
changes in government regulation and other factors; (ix) the timing of
significant orders from and shipments to customers; and (x) general
economic conditions. These factors are difficult to forecast, and these
or other factors could have a material adverse effect on the Company's
business, financial condition and results of operations. Fluctuations in
quarterly demand for products and order cancellations may adversely
affect the continuity of the Company's manufacturing operations,
increase uncertainty in operational planning, affect cash flow from
operations. The Company's expenses are based in part on the Company's
expectations as to future revenue levels and to a large extent are fixed
in the short-term. If actual revenues do not meet expectations, the
Company's business, financial condition and results of operations could
be materially adversely affected.
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CHOLESTECH CORPORATION
The Company has generated only limited revenues to date, primarily from
sales of the Cholestech L-D-X-REGISTERED TRADEMARK-System to hospitals, public
health departments, corporate wellness programs, health promotion service
providers, managed care organizations, community health centers, the military
and others in the screening market. In order for the Company to increase
revenues and achieve profitability and maintain positive cash flows from
operations, the L-D-X System must achieve a significant degree of market
acceptance among health care providers in the monitoring market, particularly
POLs. Physicians and other health care providers are not likely to use the
L-D-X System unless they determine that it is an attractive alternative to other
means of screening or monitoring blood detected diseases. Even if the
advantages of the L-D-X System in diagnosing and monitoring patients with blood
detected diseases are established, physicians, medical clinics, pharmacists and
other health care providers may elect not to purchase and use the L-D-X System
for any number of reasons. As a result, there can be no assurance that demand
for the L-D-X System, particularly in the monitoring market, will be sufficient
to allow for profitable operations.
The Company is in the early stages of developing tests designed to extend
the L-D-X System's capability to include additional tests useful to health care
providers, particularly POLs. The Company believes that its revenue growth and
profitability will depend, in part, upon its ability to complete development of
and successfully introduce these new tests. The Company will be required to
undertake time-consuming and costly development activities and seek regulatory
approval for these new tests. There can be no assurance that the Company will
not experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new tests, that regulatory
clearance or approval of any new tests will be granted by the United States Food
and Drug Administration on a timely basis, if at all, or that the new tests will
adequately meet the requirements of the applicable market or achieve market
acceptance. If the Company is unable for technological or other reasons to
complete the development, introduction and scale up of manufacturing of any new
tests or if such new tests do not achieve a significant level of market
acceptance, the Company's business, financial condition and results of
operations could be materially adversely affected.
The Company internally manufactures all of the disposable test
cassettes that are components of the L-D-X System. The manufacture of
disposable test cassettes is a highly complex and precise process. To
the extent the Company does not achieve acceptable manufacturing yields
of test cassettes or experiences product shipment delays, the Company's
business, financial condition and results of operations would be
materially adversely affected.
The test market in which the Company competes is intensely competitive.
The Company's competition consists mainly of independent clinical laboratories
and hospital-based laboratories, as well as manufacturers of bench top and other
point of care analyzers. In order to achieve market acceptance for the L-D-X
System, the Company will be required to demonstrate that the L-D-X System is an
attractive alternative to the clinical laboratory and hospital-based laboratory,
as well as bench top and other point of care analyzers. This will require
physicians to change their established means of having such tests performed.
There can be no assurance that the L-D-X System will be able to compete with the
testing services provided by these laboratories and analyzers.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the sale of
equity securities and, to a lesser extent, through capital lease financing and a
long-term note payable. Through December 27, 1996, the Company had raised
approximately $69 million in net proceeds from equity financings. As of December
27, 1996, the Company had approximately $6.9 million of cash and cash
equivalents and $6.8 million in marketable securities. In addition, the Company
has a $3 million revolving bank line of credit. While the agreement is in
effect, the Company is required to maintain on deposit assets with collective
value, as defined in the line of credit
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CHOLESTECH CORPORATION
agreement, equivalent to no less than 100% of the outstanding principle
balance under the line-of-credit. The principle amounts outstanding
under the line-of-credit will bear interest at a rate per annum equal to
the bank's prime rate in effect from time to time. The Company is not
required to pay any commitment fees on the unused available credit. The
commitment by the bank expires on November 30, 1997 and is renewable.
As of December 27, 1996, there were no borrowings outstanding under the
line-of-credit.
Net cash used in operating activities was approximately $1.5 million
and $1.7 million in the first thirty-nine weeks of fiscal 1997 and 1996,
respectively. Cash used in operating activities resulted primarily from
net losses and increases in inventory. In the first thirty-nine weeks
of fiscal 1997, increases in accounts receivable also contributed to net
cash used in operating activities. In the first thirty-nine weeks of
fiscal 1996, increases in accounts payable and accrued expenses were due
to the timing of payments partially offset the cash used in operating
activities. Net cash used in investing activities of approximately $3.9
million in the first thirty-nine weeks of fiscal 1997 resulted from the
Company's net purchases of marketable securities and property and
equipment, while in the same period of fiscal 1996 net cash used in
investing activities in the amount of $213,000, reflects purchases of
property and equipment. Net cash provided by financing activities in
the first thirty-nine weeks of fiscal 1997 was $11.9 million, reflecting
issuance of Common Stock, primarily from the Public Offering, offset in
part by principal payments on capital leases, repayment of long-term
debt and repayment of short-term bank borrowings. The net cash provided
by financing activities in the first thirty-nine weeks of fiscal 1996
reflected proceeds from the long-term debt and issuance of Common Stock.
The Company intends to expend substantial funds for product research and
development, expansion of sales and marketing activities, expansion of
manufacturing capacity and other working capital and general corporate purposes.
Although the Company believes that its unrestricted cash and marketable security
balances, internally generated funds, available bank borrowings under an
existing line of credit and proceeds from issuance of Common Stock to Metra
Biosystems, will be sufficient to meet its capital requirements for the
foreseeable future, there can be no assurance that the Company will not require
additional financing. The Company's actual liquidity and capital requirements
will depend upon numerous factors, including the costs and timing of expansion
of manufacturing capacity, the number and type of new tests the Company seeks to
develop, the costs and timing of expansion of sales and marketing activities,
the extent to which the Company's existing and new products gain market
acceptance, competing technological and market developments, the progress of
commercialization efforts of the Company's distributors, the costs involved in
preparing, filing, prosecuting, maintaining and enforcing patent claims and
other intellectual property rights, developments related to regulatory and third
party reimbursement matters and CLIA, and other factors. In the event that
additional financing is needed, the Company may seek to raise additional funds
through public or private financing, collaborative relationships or other
arrangements. Any additional equity financing may be dilutive to shareholders,
and debt financing, if available, may involve restrictive covenants.
Collaborative arrangements, if necessary to raise additional funds, may require
the Company to relinquish its rights to certain of its technologies, products or
marketing territories. The failure of the Company to raise capital when needed
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that such
financing, if required, will be available on satisfactory terms, if at all.
12
CHOLESTECH CORPORATION
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
10.10.4 Letter Agreement effective December 20, 1996
by and between Wells Fargo Bank and the
Registrant.
10.10.5 Revolving Line of Credit Note effective
December 20, 1996 by and between Wells Fargo
Bank and the Registrant.
10.10.6 General Pledge Agreement effective December
20, 1996 by and between Wells Fargo Bank and
the Registrant.
27.1 Financial Data Schedule.
b. Reports on Form 8-K. No reports on Form 8-K were filed during
the thirteen weeks ended December 27, 1996.
13
CHOLESTECH CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHOLESTECH CORPORATION
Date February 10, 1997 /s/ Warren E. Pinckert II
------------------------------- -------------------------------------
Warren E. Pinckert II
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Andrea J. Tiller
-------------------------------------
Andrea J. Tiller
Vice President of Finance and Chief
Financial Officer
(Principal Financial and Accounting
Officer)