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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 June 27,1999 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
- --
33,454,302 shares of Cryomedical Sciences, Inc. Common Stock, par value $.001
per share, were outstanding as of August 2, 1999.
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CRYOMEDICAL SCIENCES, INC.
FORM 10-QSB
QUARTER ENDED JUNE 27, 1999
INDEX
Part I. Financial Information Page No.
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Item 1. Financial Statements
Consolidated Balance Sheets at June 27, 1999 (unaudited) and
December 27, 1998 3
Consolidated Statements of Operations for the twenty-six weeks
ended June 27, 1999 and June 28, 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the twenty-six weeks
ended June 27, 1999 and June 28, 1998 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 7-9
Part II. Other Information
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
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CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 27, December 27,
1999 1998
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(unaudited)
ASSETS
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Current assets
Cash and cash equivalents $ 3,275 $ 135,183
Receivables, net allowance for doubtful accounts 361,712 486,773
of $510,165 and $677,634
Inventories 1,193,725 1,225,982
Prepaid expenses and other current assets 137,100 80,510
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Total current assets 1,695,812 1,928,448
Fixed assets, net accumulated depreciation and amortization 624,203 780,307
of $2,406,487 and $2,334,375
Intangible assets 173,257 -
Other assets 18,727 18,727
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Total assets $ 2,511,999 $ 2,727,482
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Accounts payable $ 465,592 $ 593,021
Accrued expenses 356,526 367,104
Short-term credit facility 120,000 120,000
Unearned revenues 28,791 60,839
Warranty reserves 1,600 11,400
Extended warranties - current portion 9,949 16,179
Capital leases - current portion 37,285 37,285
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Total current liabilities 1,019,743 1,205,828
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Extended warranties, net of current portion 9,121 14,096
Capital leases, net of current portion 30,356 50,035
Deferred rent 18,495 25,884
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Total liabilities 1,077,715 1,295,843
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Stockholders' equity
Preferred stock, $.001 par value per share,
9,378,800 authorized; 384 and 128 shares issued, respectively - -
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 31,151,263 30,751,263
Accumulated deficit (29,750,433) (29,353,078)
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Total stockholders' equity 1,434,284 1,431,639
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Total liabilities and stockholders' equity $ 2,511,999 $ 2,727,482
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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 Twenty-six weeks ended
June 27, June 28, June 27, June 28,
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1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
Revenues $ 450,294 $ 720,842 $ 841,124 $ 1,259,359
Cost of sales 244,003 337,111 544,147 668,581
----------------- ---------------- ------------------- -----------------
Gross profit 206,291 383,731 296,977 590,778
Expenses
Research and development 67,282 123,088 123,451 526,154
Sales and marketing 77,543 151,000 145,459 281,827
General and administrative 139,425 249,860 411,169 581,870
----------------- ---------------- ------------------- -----------------
Total expenses 284,250 523,948 680,079 1,389,851
----------------- ---------------- ------------------- -----------------
Operating loss (77,959) (140,217) (383,102) (799,073)
Interest income, net of interest expense (6,577) (5,912) (14,253) (13,342)
----------------- ---------------- ------------------- -----------------
Net loss $ (84,536) $ (146,129) $ (397,355) $ (812,415)
================= ================ =================== =================
Net loss per common share $ (0.00) $ (0.00) $ (0.01) $ (0.02)
================= ================ =================== =================
Weighted average number
of common shares outstanding 33,454,302 33,454,302 33,454,302 33,454,302
================= ================ =================== =================
See notes to consolidated financial statements
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CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-six weeks ended
June 27, June 28,
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1999 1998
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(unaudited)
Cash flows from operating activities:
Net loss $ (397,355) $ (812,415)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 141,556 181,220
Provision for bad debt 55,858 56,527
Write off of accounts receivable (219,444) -
Sale of rental equipment 14,548 -
Gain on disposal of fixed assets - (285)
Amortization of unearned compensation - 39,525
Changes in operating assets and liabilities:
Decrease in receivables 288,647 385,403
Decrease in inventories 32,257 363,631
Increase in prepaid and other current assets (56,590) (46)
Increase in intangible assets (173,257) -
Increase in other assets - (2,619)
Decrease in accounts payable (127,429) (30,575)
(Decrease) increase in accrued expenses (10,578) 78,958
Decrease in unearned revenue (32,048) (14,906)
Decrease in warranty reserves (9,800) (33,204)
Decrease in extended warranties (11,205) (56,687)
Decrease in capital leases (19,679) (22,378)
Decrease in deferred rent (7,389) (1,912)
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Net cash (used in) provided by operating activities (531,908) 130,237
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Cash flows from investing activities:
Proceeds from disposal of fixed assets - 6,636
Purchase of equipment - (214,107)
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Net cash used in investing activities - (207,471)
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Cash flows from financing activities:
Issuance of Preferred Stock 400,000 -
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Net cash provided by financing activities 400,000 -
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Net decrease in cash and cash equivalents (131,908) (77,234)
Cash and cash equivalents at beginning of period 135,183 124,000
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Cash and cash equivalents at end of period $ 3,275 $ 46,766
===================== ====================
Supplemental Cash Flow Information:
Cash paid for interest $ 16,590 $ 15,228
===================== ====================
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 June 27, 1999, the Consolidated
Statements of Operations for the thirteen and twenty-six week periods
ended June 27, 1999 and June 28, 1998, and the Consolidated Statements
of Cash Flows for the twenty-six week periods ended June 27, 1999 and
June 28, 1998, 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 June 27, 1999, 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
27, 1998 included in the Company's Annual Report on Form 10-KSB for the
year ended December 27, 1998.
The results of operations for the thirteen and twenty-six week periods
ended June 27, 1999 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 twenty-six week periods ended
June 27, 1999 and June 28, 1998. 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:
June 27, 1999 December 27, 1998
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Raw materials and purchased parts $ 639,846 $ 702,758
Work in process 164,576 111,140
Finished goods 389,303 412,084
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$ 1,193,725 $ 1,225,982
D. 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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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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. There can
be no assurance that such funding will be obtained.
RESULTS OF OPERATIONS
Revenues for the thirteen and twenty-six week periods ended June 27, 1999
totaled $450,294 and $841,124, respectively, compared to $720,842 and $1,259,359
respectively, for the comparable periods of the prior year, representing
decreases of 38% and 33%, respectively. The decreases in revenues reflects a
decline in the number of CMS AccuProbe(R) Systems and accessories sold. The
Company believes that this decline continues to be due primarily to a lack of
the establishment of formal Medicare reimbursement for prostate cryosurgery. In
February 1999 HCFA announced a new national coverage policy for cryosurgery of
the prostate for patients with localized prostate cancer. It is anticipated that
such a coverage policy will provide the Company with an opportunity to realize
revenues from cryosurgical operations of the prostate, but there can be no
assurance that such revenues will be realized. In April 1999 HCFA announced that
it had established two reimbursement codes for cryosurgery of the prostate and
that all covered procedures performed after July 1, 1999 would be considered for
reimbursement. There has been no indication from HCFA regarding the
reimbursement levels for the two procedural codes. The Company believes that
upon the issuance of the reimbursement levels for cryosurgery of the prostate,
it may realize additional revenues from cryosurgical operations subsequent to
July 1, 1999. There can be no assurance that such revenues will be realized. An
increase in revenues will be, to a large extent, dependent upon the levels of
reimbursement established by HCFA for cryosurgery of the prostate, as these
levels will influence both patients and physicians in regard to their choice of
cryosurgery as opposed to other modalities that may be used to treat prostate
cancer. 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 twenty-six week periods ended
June 27, 1999 totaled $206,291 and $296,977, respectively, or 46% and 35% of
revenues respectively, compared to gross profits of $383,731 and $590,778,
respectively, or 53% and 47% of revenues, respectively
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for the comparable periods of the prior year. Gross profit as a percent of
revenues dereased compared to the prior year periods due to changes in the mix
of product sales.
Research and development expenses for the thirteen and twenty-six week periods
ended June 27, 1999 totaled $67,282 and $123,451, respectively, compared to
$123,088 and $526,124, respectively, for the comparable periods of the prior
year, representing a decrease of 45% and 77%, respectively, from the respective
prior year periods. Research and 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 twenty-six week periods ended
June 27, 1999 totaled $77,543 and $145,459, respectively, compared to $151,000
and $281,827, respectively, for the comparable periods of the prior year,
representing a decrease of 49% and 48%, respectively, from the prior year
periods. Sales and marketing expenses decreased over the comparable periods of
the previous year due to reduced commissions, reduced number of personnel, and a
reduction in travel and related expenses.
General and administrative expenses for the thirteen and twenty-six week periods
ended June 27, 1999 totaled $139,425 and $411,169, respectively, and $249,860
and $581,870, respectively, for the comparable periods of the prior year,
representing a decrease of 44% and 29%, respectively, from the prior year
periods. General and administrative expenses decreased due to general cut backs
in discretionary expenses, reduction in legal fees expensed, and a reduction in
the amount of leased space.
Operating expenses for the thirteen and twenty-six week periods ended June 27,
1999 totaled $284,250 and $680,079, respectively, and $523,948 and $1,389,851,
respectively, for the comparable periods of the prior year, representing a
decrease of 46% and 51%, respectively, from the prior year periods. The Company
sustained net losses of $84,536 and $397,355 for the thirteen and twenty-six
week period ended June 27, 1999, respectively, compared to net losses of
$146,129 and $812,415, respectively, for the comparable periods of the prior
year. The Company is continuing to make reductions in all discretionary expenses
in an attempt to maintain its viability as an operating entity.
LIQUIDITY AND CAPITAL RESOURCES
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 subsequently purchased additional securities for
$400,000 in the first quarter of the 1999 fiscal year.
At June 27, 1999, the Company had cash and cash equivalents totaling $3,275 and
working capital of $676,069, as compared to $135,183 and $722,620, respectively,
at December 27, 1998. The Company's cash decreased from December 27, 1998 due
primarily to the net loss of $397,355 sustained by the Company in the twenty-six
period ended June 27, 1999. The Company's working capital position decreased
from December 27, 1998 due to the 1999 year to date operating loss net of the
infusion of capital from ValorInvest.
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Capital expenditures for equipment totaled $0, including $0 in consignment and
loaner CMS AccuProbe(R) Systems, in the twenty-six week period ended June 27,
1999, compared to $214,107 and $164,101 respectively, in the comparable period
of the prior year. The Company does not expect to spend more than $200,000 in
total for equipment in the year ending December 26, 1999.
The Company has reduced expenditures in order to ensure its viability in light
of its limited cash and cash equivalents on hand. Although the Company believes
that it can continue to operate if additional cost cutting steps are
implemented, additional financing is needed if the Company wants the
opportunity to grow. The Company believes that sales for the remainder of the
1999 fiscal year may be greater than the level experienced in the comparable
prior year periods due to the favorable reimbursement environment created by
HCFA's new coverage policy. However, the level of increased sales, if any, will
depend in part on the Company's ability to finance the development,
manufacturing and testing of its products, its sales and marketing efforts, and
its education and retraining programs. If funds are raised by issuing equity
securities, it may result in substantial dilution to existing stockholders. If
capital is raised through a debt financing with financial institutions, the
Company would likely become subject to restrictive covenants relating to its
operations and finances. The Company currently has no commitments for obtaining
any additional funds, and the sale of its products represents its only current
source of liquidity. There can be no assurance that a financing will be
consummated on reasonable terms or at all.
YEAR 2000 ISSUE
Many computer systems record years in a two-digit format. Such systems, if not
modified will be unable to recognize and properly process information with dates
beyond the year 1999. The potential problems arising out of this inability
commonly are referred to as the "Year 2000 Issue".
The Company believes that the computers and software programs currently utilized
by the Company are Year 2000 ready. To date, no assessment has been made as to
the effect, if any, third party non-compliance will have on the Company's
operations. However, given the large number of suppliers available to the
Company and its ability, if necessary, to manufacture its products totally in
house, the Company does not believe that third party non-compliance would have a
material impact on the Company's operations.
FORWARD LOOKING INFORMATION
This Report contains certain forward-looking statements made in reliance upon
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements, including statements regarding Medicare
reimbursement, the Company's liquidity and capital resources, and its ability to
continue its operations in the absence of additional financing, are based on
current expectations that involve numerous risks and uncertainties. Actual
results could differ materially from those anticipated in such forward-looking
statements as a result of various known and unknown factors including, without
limitation, future economic, competitive, regulatory, and market conditions,
future business decisions, the receipt of financing, market acceptance of the
Company's products, and those factors discussed in this Report. Words such as
"believes," "anticipates," "expects," "intends," "may," and similar expressions
are intended to identify forward-looking statements, but are not the exclusive
means of identifying such statements. The Company undertakes no obligation to
revise any of these forward-looking statements.
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CRYOMEDICAL SCIENCES, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In February, 1999, Alan A. Rich, formally Vice President of Sales and Marketing
for the Company, filed a suit against the Company in the Superior Court of the
Commonwealth of Massachusetts, Middlesex County, for breach of contract, breach
of the covenant of good faith and fair dealing, promissory estoppel and
violation of the Maryland Wage Payment and Collection Law based upon the
allegation that the Company constructively discharged the plaintiff from his
employment with the Company. The complaint seeks appropriate damages. The suit
has been removed to the Federal District Court. Although the Company believes it
has meritorious defenses to such allegations, no prediction concerning the
ultimate outcome or amount of damages, if any, can be made at this time. On July
12, 1999, the complaint was amended to include two additional causes of action,
one relating to a breach of Rich's stock option agreement and another relating
to a failure to issue a COBRA notice. The complaint seeks appropriate damages
and statutory penalties, respectively, on these causes of action. The Company
believes there is not merit to the first claim and that it has meritorious
defenses to the second claim.
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 tin December 1992 the parities entered
into a confidentiality agreement regarding certain proprietary and technical
information relating to the cryoprobe and in January, 1994 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 release in August 1996 which
discharged both parties from all business obligation to each other. Concept
alleges that the Company violated the terms of the confidentially 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.
On July 12, 1999 the Company entered into a Settlement Agreement with Concept,
pursuant to which the Company agreed to (a) issue to Concept and its attorney an
aggregate of 400,000 shares of its common stock, (the "Initial Shares"), (b) if
the aggregate average cash value (as defined in the Settlement Agreement) of the
Initial Shares is less than $550,000 one year from the execution of the
Settlement Agreement, issue such additional shares of Common Stock (up to a
maximum of 600,000 shares) ("Contingent Shares") such that the total shares
issued (Initial Shares plus Contingent Shares) shall be worth not less than
$550,000, and (c) grant to Concept a world-wide, non-transferable, royalty-free
license to make, have made, sell, use, import, manufacture, produce and/or
market cryogenic surgical instruments based upon the techniques and
specifications as described and detailed in U.S. Patent Number 5,573,532.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule.
(b) Reports on Form 8-K: none
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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: August 10, 1999 /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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