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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20459
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 27, 1998 Commission file number 0-18170
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CRYOMEDICAL SCIENCES, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 94-3076866
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(State of Incorporation) (IRS Employer I.D. Number)
1300 Piccard Drive
Suite L-105
Rockville, Maryland 20850
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(Address of principal executive offices)
Issuer's telephone number, including area code: (301) 417-7070
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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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33,454,302 shares of Cryomedical Sciences, Inc. Common Stock, par value $.001
per share, were outstanding as of October 31, 1998.
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CRYOMEDICAL SCIENCES, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 27, 1998
INDEX
Part I. Financial Information Page No.
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Item 1. Financial Statements
Consolidated Balance Sheets at September 27, 1998 (unaudited)
and December 28, 1997 3
Consolidated Statements of Operations for the thirteen and
thirty nine weeks ended September 27, 1998 and September 28, 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the thirty nine weeks ended
September 27, 1998 and September 28, 1997 (unaudited) 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 27, December 28,
1998 1997
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(unaudited)
ASSETS
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Current assets
Cash and cash equivalents $ 15,201 $ 124,000
Receivables, net allowance for doubtful accounts 714,741 989,908
of $656,828 and $569,000
Inventories 1,206,263 1,654,106
Prepaid expenses and other current assets 104,221 98,030
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Total current assets 2,040,426 2,866,044
Fixed assets, net accumulated depreciation and amortization 901,106 994,296
of $2,289,993 and $2,032,959
Other assets 18,727 18,727
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Total assets $ 2,960,259 $ 3,879,067
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities
Accounts payable $ 592,312 $ 533,674
Accrued expenses 395,922 428,324
Unearned revenues 76,672 135,262
Warranty reserves 7,992 50,598
Extended warranties - current portion 18,879 92,837
Line of credit 120,000 -
Capital leases - current portion 37,411 36,981
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Total current liabilities 1,249,188 1,277,676
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Extended warranties, net of current portion 16,583 4,500
Capital leases, net of current portion 77,328 103,106
Deferred rent 28,651 33,330
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Total liabilities 1,371,750 1,418,612
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Stockholders' equity
Preferred stock, $.001 par value per share,
9,378,800 authorized; no shares issued - -
Common stock, par value $.001 per share,
50,000,000 shares authorized; 33,454,302
issued and outstanding 33,454 33,454
Additional paid-in capital 30,551,263 30,551,263
Unearned compensation - (39,525)
Accumulated deficit (28,996,208) (28,084,737)
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Total stockholders' equity 1,588,509 2,460,455
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Total liabilities and stockholders' equity $ 2,960,259 $ 3,879,067
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See notes to consolidated financial statements
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CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Thirteen weeks ended Thirty nine weeks ended
September 27, September 28, September 27, September 28,
--------------------------------- -------------------------------------
1998 1997 1998 1997
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(unaudited) (unaudited)
Revenues $ 697,454 $ 691,948 $ 1,956,813 $ 2,539,258
Cost of sales 354,467 412,958 1,023,048 1,418,144
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Gross profit 342,987 278,990 933,765 1,121,114
Expenses
Research and development 74,640 187,759 600,794 782,177
Sales and marketing 101,058 171,102 382,885 620,209
General and administrative 261,234 179,013 843,104 781,596
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Total expenses 436,932 537,874 1,826,783 2,183,982
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Operating loss (93,945) (258,884) (893,018) (1,062,868)
Interest income, net of interest expense (5,111) (12,868) (18,453) 63,325
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Net loss $ (99,056) $ (271,752) $ (911,471) $ (999,543)
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Net loss per common share $ (0.00) $ (0.01) $ (0.03) $ (0.03)
============== ================ ================ ================
Weighted average number
of common shares outstanding 33,454,302 33,395,643 33,454,302 33,090,589
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See notes to consolidated financial statements
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CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty nine weeks ended
September 27, September 28,
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1998 1997
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(unaudited)
Cash flows from operating activities:
Net loss $ (911,471) $ (999,543)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 263,612 318,724
Provision for bad debt 87,828 -
Gain on disposal of fixed assets (2,951) -
Amortization of unearned compensation 39,525 (16,937)
Changes in operating assets and liabilities:
Decrease in receivables 187,339 369,021
Decrease (increase) in inventories 447,843 (76,957)
Increase in prepaid and other current assets (6,191) (137,923)
Decrease in accounts payable 58,638 (54,291)
Increase in accrued expenses (32,402) (272,778)
(Decrease) increase in unearned revenue (58,590) (2,629)
Decrease in warranty reserves (42,606) (65,800)
Decrease in extended warranties (61,875) (347,663)
(Decrease) increase in capital leases (25,348) 50,682
Decrease in deferred rent (4,679) (72,143)
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Net cash provided by (used in) operating activities (61,328) (1,308,237)
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Cash flows from investing activities:
Proceeds from disposal of fixed assets 46,636 -
Purchase of equipment (214,107) (275,030)
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Net cash used in investing activities (167,471) (275,030)
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Cash flows from financing activities:
Issuance of shares for employee stock purchase plan - 12,991
Issuance of warrants - 43,000
Line of credit 120,000 -
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Net cash provided by financing activities 120,000 55,991
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Net decrease in cash and cash equivalents (108,799) (1,527,276)
Cash and cash equivalents at beginning of period 124,000 1,769,243
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Cash and cash equivalents at end of period $ 15,201 $ 241,967
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Supplemental Cash Flow Information:
Cash paid for interest 20,954 18,766
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See notes to consolidated financial statements
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CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. GENERAL
Cryomedical Sciences, Inc. (the "Company") is engaged in the research,
development, marketing and manufacture of products for use in the field
of low-temperature medicine.
The Consolidated Balance Sheet as of September 27, 1998, the Consolidated
Statements of Operations for the thirteen and thirty nine week periods
ended September 27, 1998 and September 28, 1997, and the Consolidated
Statements of Cash Flows for the thirty nine week periods ended September
27, 1998 and September 28, 1997, have been prepared without audit. In the
opinion of management, all adjustments necessary to present fairly the
financial position, results of operations, and cash flows at September 27,
1998, and for all periods then ended, have been recorded. All adjustments
recorded were of a normal recurring nature.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these consolidated financial statements be read in conjunction with
the financial statements and notes thereto for the year ended December 28,
1997 included in the Company's Annual Report on Form 10-KSB/A for the year
ended December 28, 1997.
The results of operations for the thirteen and thirty-nine week periods
ended September 27, 1998 are not necessarily indicative of the operating
results anticipated for the full year.
B. NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common
shares outstanding during the thirteen and thirty nine week periods ended
September 27, 1998 and September 28, 1997. No effect has been given to
unexercised stock options or warrants because the effect would be
anti-dilutive.
C. INVENTORIES
Inventories consist of the following:
September 27, 1998 December 28, 1997
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Raw materials and purchased parts $ 709,090 $ 859,674
Work in process 72,451 243,431
Finished goods 468,467 594,746
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1,250,008 1,697,851
Less reserves (43,745) (43,745)
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$ 1,206,263 $ 1,654,106
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D. Contingencies
In November 1996, the Company filed suit against EndoCare, Inc.,
("EndoCare") and ZhaoHua Chang in the Circuit Court for Montgomery County,
Maryland (Case No. 161496). The lawsuit alleges, among other things, that
EndoCare misappropriated trade secrets of the Company, and that EndoCare
tortuously interfered with the Company's contracts, its relationships with its
employees, and the Company's contractual and potential business relationships
with customers. The lawsuit, which contains six counts, also alleges that Dr.
Chang and EndoCare engaged in unfair competition against the Company and civil
conspiracy, and that Dr. Chang, who was formerly employed as a Vice President
of Cryosurgical Engineering by the Company, breached contractual and fiduciary
obligations owed to the Company by his employment by EndoCare, his retention
and misuse of the Company's confidential information, and his improper
solicitation of the Company's employees to disclose trade secret information
and/or to become employed by EndoCare. EndoCare and Dr. Chang have denied the
allegations in the lawsuit. In March 1997, Dr. Chang filed a counter-suit in
the Circuit Court for Montgomery County, Maryland (Case No. 161496-V) regarding
numerous claims of a breach of contract by the Company. An agreement in
principle has been reached with Endocare to resolve this suit. The Company is
presently waiting for Endocare to communicate with Dr. Chang in regard to the
terms and conditions of settlement. If these mediation efforts fail, the
Company intends to pursue and defend this case vigorously.
In June 1997, Concept Group, Inc. ("Concept") filed suit against the
company in the United States District Court for the Eastern District of
Pennsylvania. The Company successfully transferred venue to the United States
District for the District of Maryland, Southern Division. The suit involves the
manufacture of cryosurgical probes allegedly developed by Concept which are
used in certain surgical procedures. Concept alleges that in December 1992 the
parties entered into a confidentiality agreement regarding certain proprietary
and technical information relating to the cryoprobe. Concept further alleges
that in January 1994 the parties entered into a Development and Manufacturing
Agreement ("Development Agreement") in which Concept was to perform vacuum
brazing on the cryoprobe according to a detailed set of design specifications.
After a dispute arose regarding defects in the vacuum brazing process performed
by Concept, the parties executed a release in August 1996 which discharged both
parties from all business obligations to each other. Concept alleges that the
Company violated the terms of the confidentiality agreement and the Development
Agreement by subsequently applying for and receiving a United States patent on
the cryoprobe. Concept contends it has a proprietary interest in the design of
the cryoprobe. Further, Concept alleges that the Company fraudulently induced
it into signing the release in order to secure the patent. Concept is demanding
$1,500,000 plus costs and interest it claims it expended manufacturing the
cryoprobes. The Company has denied all liability and damages, and intends to
defend this matter. After evidence was found to show that the plaintiff failed
to manufacture the probes in accordance with the design specification set out
in the agreement, the Company filed a counterclaim against Concept. The
counterclaim requests a judicial determination that the release was valid as
well as damages for repairs to the cryoprobes due to the Concept's failure to
conform with the design specifications set out in the agreement. Although the
Company believes it has meritorious defenses and that the counterclaim asserts
valid claims, no prediction concerning the ultimate outcome or amount or range
of damages, if any, can be made at this time.
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E. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" was issued, which is effective for fiscal years beginning
after December 15, 1997. The Company is complying with all requirements, but
has no items of comprehensive income.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's business activities focus primarily on the manufacturing and
marketing related to its cryosurgical systems. The CMS AccuProbe(R) System
Model 450 was cleared by the FDA in April 1991, the CMS AccuProbe(R) System
Models 530 and 550 were cleared in December 1995, the CMS AccuProbe(R) 600
series was cleared in March 1997 and the Cryo-lite(R) series was cleared in
July 1997. The Company plans to continue to market these systems in the
various fields for which they received clearance from the FDA. The Company
received clearance in November 1997 to expand its indications for use
(labeling) for the AccuProbe(R) system family. In September 1998 the Company
received FDA clearance for its AccuProbe(R) 800 series.
The Company is presently in the process of seeking funds for its wholly owned
subsidiary BioLife Technologies, Inc. ("BioLife") for the purpose of
commercializing its Hypothermosol(R) series of preservation solutions.
Although the Company has contacted a number of parties who have expressed an
interest in potentially providing such funding, there can be no assurance that
such funding will be obtained.
RESULTS OF OPERATIONS
Revenues for the thirteen week and thirty nine week periods ended September 27,
1998 totaled $697,454 and $1,956,813, respectively, compared to $691,948 and
$2,539,258, respectively, for the comparable periods of the prior year,
representing an increase of 1% and a decrease of 23%, respectively. The
decrease in revenues, for the recent thirty nine week period, reflect a decline
in the number of CMS AccuProbe(R) Systems and accessories sold. The Company
believes that this decline is due primarily to a lack of formal Medicare
reimbursement for prostate cryosurgery. The revenues of the Company have also
been negatively impacted by an FDA advisory that all companies involved in
thermal ablation can no longer advertise or promote uterine cryosurgical
applications, specifically endometrial ablation.
Gross profit for all products for the thirteen and thirty nine week periods
ended September 27, 1998 totaled $342,987 and $933,765, respectively, or 49%
and 48% of revenues, respectively, compared to gross profits of $278,990 and
$1,121,114, respectively, or 40% and 44% of revenues, respectively, for the
comparable periods of the prior year. Gross profit as a percent of revenues
increased in the thirteen and thirty nine week periods ended September 27, 1998
compared to the prior year periods due to changes in the mix of product sales
and a reduction in production personnel.
Research and development expenses for the thirteen and thirty nine week periods
ended September 27, 1998 totaled $74,640 and $600,794, respectively, a decrease
of 60% and 23%, respectively, compared to $187,759 and $782,177, respectively,
for the comparable periods of the prior year. Development expenses decreased
due to a reduction in personnel and a decrease in raw material inventory used
in R&D projects.
Sales and marketing expenses for the thirteen and thirty nine week periods
ended September 27, 1998 totaled $101,058 and $382,885, respectively, a
decrease of 41% and 38%, respectively,
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compared to $171,102 and $620,209, respectively, for the comparable periods of
the prior year. Sales and marketing expenses decreased over the comparable
periods of the previous year due to reduced commissions and a reduction in
travel and related expenses.
General and administrative expenses for the thirteen and thirty nine week
periods ended September 27, 1998 totaled $261,234 and $843,104, respectively, a
increase of 46% and 8%, respectively, compared to $179,013 and $781,596,
respectively, for the comparable periods of the prior year. General and
administrative expenses increased due to an increase in legal expenses.
Operating expenses for the thirteen and thirty nine week periods ended
September 27, 1998 totaled $436,932 and $1,826,783, respectively, a decrease of
19% and 16%, respectively, compared to $537,874 and $2,183,982, respectively,
for the comparable periods of the prior year. The Company sustained net losses
of $99,056 and $911,471, for the thirteen and thirty nine week periods ended
September 27, 1998 compared to net losses of $271,752 and $999,543 in the
comparable periods of the prior year. The Company is making reductions in all
discretionary expenses in an attempt to maintain its viability as an operating
entity.
Sales of the CMS AccuProbe(R) System are increasingly affected by the level of
reimbursement by public and private insurers in connection with procedures in
which the AccuProbe(R) is utilized. The availability of consistent, uniform
insurance reimbursement guidelines for hospitals and physicians is an important
factor often considered by some potential customers when making a decision
regarding the purchase of any new medical device, including the AccuProbe
System. Reimbursement of hospitals and urologists by public and private
insurers such as Medicare and Blue Cross and Blue Shield is a necessary part of
gaining general acceptance for use of the AccuProbe(R) for urological
cryosurgery. The Company was advised in October 1996 that HCFA is planning to
put into effect its Technology Advisory Committee's recommendation that a
national non-coverage policy be adopted in regard to cryoablation of the
prostate. In March 1997, HCFA announced that it had established a national
non-coverage policy for cryosurgery of the prostate. It is the Company's
understanding that HCFA continues to explore the possibility of working with
various agencies, including the American Urology Association, in establishing a
nationwide randomized prospective clinical study to collect data on a
comparative basis between cryosurgery and radiation therapies. The results of
this study will provide the basis on which a future determination regarding
Medicare reimbursement will be made. When insurance coverage is not available,
patients may either elect to pay for treatment themselves or undergo
traditional therapies that are covered by their insurers. Uncertainty and
added efforts required for the Company's customers, or potential customers, to
secure payment has constrained sales and utilization of AccuProbe systems to a
large degree and may continue to do so until formal national coverage
guidelines are established.
LIQUIDITY AND CAPITAL RESOURCES
At September 27, 1998, the Company had cash and cash equivalents totaling
$15,201 and working capital of $791,238, as compared to $124,000 and
$1,588,368, respectively, at December 28, 1997. The Company's cash and working
capital positions decreased from December 28, 1997 due primarily to the net
loss of $666,286 sustained by the Company in the thirteen-week period ended
March 29, 1998.
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Capital expenditures for equipment totaled $214,107, including $164,101 in
consignment and loaner CMS AccuProbe(R) Systems, in the thirty nine week period
ended September 27, 1998, compared to $275,030 and $135,426 respectively, in
the comparable period of the prior year. The Company does not expect to spend
more than $300,000 in total for equipment in the year ending December 27, 1998.
The Company expects to incur expenditures over the next twelve months related
to development, manufacturing and testing of its products and for sales and
marketing efforts and other operating expenses. The Company's management
assumes that sales for the remainder of the 1998 fiscal year may be less than
the level experienced in comparable prior year periods and believes that its
current cash and working capital position, together with potential financing
and possible additional cost cutting, will be sufficient to fund the operations
of the Company for the next twelve months, dependent, in part, on the level of
sales and marketing activity engaged in by the Company, and the amounts of
development funded by the Company. However, the Company expects to continue to
reduce expenditures if necessary and to pursue various forms of short term
financing to supplement working capital during the next twelve months and
possibly additional equity financing. In this connection, on September 30,
1998, the Company entered into a Stock Purchase Agreement with ValorInvest,
Ltd. ("ValorInvest"), a Geneva, Switzerland based investment bank, pursuant to
which, among other things, ValorInvest purchased securities from the Company
for $200,000 and agreed to purchase additional securities for $400,000. (See
Item 5 Other Information - Subsequent Event.) Except for the sale of its
products and the aforementioned sale to ValorInvest, the Company currently has
no other major sources of liquidity and has no commitments with regard to
obtaining any additional funds.
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CRYOMEDICAL SCIENCES, INC.
PART II - OTHER INFORMATION
Item 5. Other Information
Subsequent Event - On September 30, 1998, the Company entered into a stock
purchase agreement with ValorInvest, Ltd. ("ValorInvest"), a Geneva,
Switzerland based investment bank, pursuant to which, among other things,
ValorInvest (a) purchased from the Company 128 Series E Units for an aggregate
price of $200,000 and (b) agreed to purchase, on or before December 28, 1998,
an additional 256 Series E Units for an aggregate price of $400,000.
Information regarding such transaction was filed in a report on For 8-K filed
on October 13, 1998. A copy of the stock purchase agreement relating to such
transaction is being filed herewith is an Exhibit (a)(1) and is incorporated
herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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(1) Stock Purchase Agreement with ValorInvest, Ltd. Dated September 30, 1998
(27) Financial Data Schedule.
(b) Reports on Form 8-K: Filed on October 13, 1998, with respect to transaction on September 30, 1998, re. Item 9 -
sales of equity securities pursuant to Regulation S.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Cryomedical Sciences, Inc.
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(Registrant)
Date: November 9, 1998 /s/Richard J. Reinhart, Ph.D.
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Richard J. Reinhart, Ph.D
President and Chief Executive Officer
(Principal Executive Officer and
Principal Financial Officer)
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