1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
COMMISSION FILE NUMBER 0-1000
CHROMAVISION MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in
its charter)
DELAWARE 75-2649072
(State or other jurisdiction of incorporation or (IRS Employer Identification Number)
organization)
33171 PASEO CERVEZA
SAN JUAN CAPISTRANO, CA 92675
(Address of principal executive offices) (Zip code)
(949) 443-3355
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of May 8, 2001 there were 20,138,101 shares outstanding of the Issuer's
Common Stock, $.01 par value.
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CHROMAVISION MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000 ....... 3
Condensed Consolidated Statements of Operations for the three months ended
March 31, 2001 and 2000 ................................................................ 4
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2001 and 2000 ................................................................ 5
Notes to Condensed Consolidated Financial Statements ................................... 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................................... 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk ............................. 10
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K ....................................................... 10
SIGNATURES ............................................................................. 11
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PART I -- ITEM 1
CHROMAVISION MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 6,021,821 $ 9,797,698
Accounts receivable, net .......................................... 535,729 262,910
Other ............................................................. 483,161 153,522
------------ ------------
Total current assets ......................................... 7,040,711 10,214,130
Property and equipment, net .......................................... 4,344,930 4,453,881
Other ................................................................ 226,113 233,535
------------ ------------
Total assets ................................................. $ 11,611,754 $ 14,901,546
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 504,411 $ 352,447
Accrued payroll ................................................... 627,978 628,895
Accrued liabilities ............................................... 856,746 708,817
------------ ------------
Total current liabilities ..................................... 1,989,135 1,690,159
Commitments and contingencies
Stockholders' equity:
Series A convertible preferred stock, $.01 par value,
authorized 7,246,000 shares, none issued and outstanding ........ -- --
Series B convertible preferred stock, $.01 par value,
authorized 221,850 shares, none issued and outstanding .......... -- --
Common stock $.01 par value, authorized 50,000,000 shares,
issued and outstanding 20,109,553 shares in 2001 and
20,092,466 in 2000 .............................................. 201,096 200,925
Additional paid-in capital ........................................ 62,680,410 62,648,492
Accumulated deficit ............................................... (53,180,384) (49,541,578)
Accumulated other comprehensive loss .............................. (78,503) (96,452)
------------ ------------
Total stockholders' equity .................................... 9,622,619 13,211,387
------------ ------------
Total liabilities and stockholders' equity ........................... $ 11,611,754 $ 14,901,546
============ ============
See accompanying notes to condensed consolidated financial statements.
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CHROMAVISION MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2001 2000
------------ ------------
Revenue ............................................ $ 948,544 $ 203,896
Cost of revenue .................................... 205,728 67,275
------------ ------------
Gross profit .................................... 742,816 136,621
------------ ------------
Operating expenses:
Selling, general and administrative ............. 2,579,464 1,956,280
Research and development ........................ 1,917,339 1,619,481
------------ ------------
Total operating expenses ...................... 4,496,803 3,575,761
------------ ------------
Loss from operations .......................... (3,753,987) (3,439,140)
------------ ------------
Other income:
Interest income, net ............................ 112,274 232,727
Other income .................................... 2,907 15,357
------------ ------------
Total other income ............................ 115,181 248,084
------------ ------------
Loss before income taxes ...................... (3,638,806) (3,191,056)
Income taxes ....................................... -0- -0-
------------ ------------
Net loss ...................................... $ (3,638,806) $ (3,191,056)
============ ============
Basic and diluted net loss per common share ........ $ (.18) $ (.16)
============ ============
Weighted average number of common shares
outstanding ..................................... 20,104,622 19,495,226
============ ============
See accompanying notes to condensed consolidated financial statements.
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CHROMAVISION MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------------------------
2001 2000
----------- ------------
Cash flows from operating activities:
Net loss .............................................. $(3,638,806) $ (3,191,056)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .................... 533,267 427,597
Changes in operating assets and liabilities:
Other assets ..................................... (313,612) (354,160)
Accounts receivable .............................. (282,175) 7,345
Accounts payable ................................. 152,243 (142,644)
Accrued liabilities .............................. 149,228 (25,384)
----------- ------------
Net cash used in operating activities ............ (3,399,855) (3,278,302)
----------- ------------
Cash flows from investing activities:
Purchases of investments .............................. -- (971,642)
Maturities of investments ............................. -- 2,888,231
Additions to property and equipment ................... (424,358) (543,733)
----------- ------------
Net cash (used in) provided by investing
activities ................................... (424,358) 1,372,856
----------- ------------
Cash flows from financing activities:
Proceeds from exercise of stock options ............... 41,019 74,251
Offering costs ........................................ (8,930) (130,800)
----------- ------------
Net cash provided by (used in) financing
activities ................................... 32,089 (56,549)
----------- ------------
Effect of exchange rates changes on cash and cash
equivalents .................................. 16,247 12,300
----------- ------------
Net decrease in cash and cash equivalents ...... (3,775,877) (1,949,695)
Cash and cash equivalents beginning of period ......... 9,797,698 11,802,668
----------- ------------
Cash and cash equivalents end of period ............... $ 6,021,821 $ 9,852,973
=========== ============
See accompanying notes to condensed consolidated financial statements.
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CHROMAVISION MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
These interim condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in our 2000 annual report filed on Form 10-K with the Securities and
Exchange Commission.
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments which, in the opinion of management, are necessary for a
fair presentation of the financial position and the results of operations for
the interim periods presented. All such adjustments are of a normal, recurring
nature. Certain amounts have been reclassified to conform to the current period
presentation. The results of our operations for any interim period are not
necessarily indicative of the results to be obtained for a full fiscal year.
(2) NET LOSS PER SHARE
Options to purchase 2,752,250 and 2,279,881 shares of common stock were
outstanding at March 31, 2001 and 2000, respectively, and were excluded from the
computation of diluted net loss per share as the effect would be antidilutive.
(3) COMPREHENSIVE LOSS
Our total comprehensive loss is summarized as follows:
Three Months Ended March 31,
-----------------------------------
2001 2000
----------- -----------
Net loss $(3,638,806) $(3,191,056)
Foreign currency translation gain 17,949 13,952
----------- -----------
Comprehensive loss $(3,620,857) $(3,177,104)
=========== ===========
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(4) BUSINESS SEGMENTS
We operate primarily in one business segment engaged in the development,
manufacture and marketing of an automated cellular imaging system which is
designed to assist physicians in making medical decisions.
The following table represents business segment information by
geographic area:
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2001 2000
------------ ------------
Net sales:
United States $ 905,058 $ 73,735
Europe(a) 43,486 130,161
------------ ------------
Total net sales $ 948,544 $ 203,896
============ ============
Operating loss:
United States $ (3,576,032) $ (3,388,575)
Europe(a) (177,955) (50,565)
------------ ------------
Total operating loss $ (3,753,987) $ (3,439,140)
============ ============
Identifiable assets:
United States $ 11,491,765
Europe(a) 119,989
------------
Total assets $ 11,611,754
============
(a) European operations represent business activities conducted
primarily in Germany, Great Britain, Switzerland and France.
(5) STOCK TRANSACTIONS
In January 2001, we entered into a financing agreement with VennWorks
LLC providing for VennWorks to invest up to $5 million in our common stock at
various dates and in amounts selected by us from March 30, 2001 through December
28, 2001 (subject to certain limitations). The price per share is based upon the
average closing price of our common stock on the Nasdaq National Market during a
20-day trading period prior to our request to purchase, subject to a minimum of
$7 per share and a maximum of $14 per share. In April 2001, we requested a $2
million investment from VennWorks in our common stock subject to an amended
stock purchase agreement dated April 18, 2001. The agreement provides for the
issuance of shares beginning on April 20, 2001 and each week thereafter through
June 22, 2001 based on varying amounts of payments and subject to certain
interest calculations. As of May 14, 2001 VennWorks had invested approximately
$200,000 at an average price of $7 per share.
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PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Statements in this report describing our plans, goals, strategies,
intentions, expectations and anticipated events are forward-looking statements.
Important factors which could cause actual results to differ materially from
those described in such forward-looking statements include the following:
commercialization of our products is dependent on acceptance by the medical
community and receipt of satisfactory reimbursement from third-party payers,
which could be delayed or not obtained; any future success depends upon our
ability to establish an effective sales and marketing organization and to
successfully manufacture products in commercial quantities; we will require
additional financing for our business, and it is uncertain whether the financing
will be available on favorable terms or at all; our ability to develop new
applications depends on successful collaboration with third parties that we do
not control; an inadequate supply of biological samples could delay completion
of clinical trials for new applications for our Automated Cellular Imaging
System ("ACIS"); the clinical trials could fail to demonstrate the efficacy of
the ACIS for new applications; new applications may not be successfully
developed; the ability to commercialize new applications may be dependent on
obtaining appropriate U.S. Food and Drug Administration (the "FDA") and foreign
regulatory approvals, which may not be obtained when anticipated or at all; and
manufacture of the ACIS is subject to FDA regulation.
OVERVIEW
We develop, manufacture and market the ACIS(TM) automated cellular
imaging system, which is designed to substantially improve the accuracy,
sensitivity, and reproducibility of cell imaging. Unlike manual methods of
viewing and analysis, ACIS combines proprietary, color-based imaging technology
with automated microscopy to assist the pathologist to rapidly make critical
medical decisions. In July 1999, the FDA granted clearance for use of the ACIS
system to assist the pathologist to detect, count and classify cells of clinical
interest based on recognition of cellular objects of particular color, size, and
shape. Our current menu of capabilities for the ACIS system includes twelve
tests that are commercially available and numerous additional tests that are in
various stages of development.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2000
Revenue and Gross margin percentage. Revenue increased approximately
$745,000 or 365% over the comparable period in 2000 primarily due to an increase
in fee-per-use charges for the ACIS and sales of the ACIS to research
facilities. System sales contributed 54% and 50% to total revenue for 2000 and
2001, respectively. The number of ACIS in the field generating fee-per-use
charges increased 275% or 22 units from 8 to 30 systems over the comparable
period in 2000. We anticipate fee-per-use revenue to continue to increase during
2001 as we continue to increase the number of ACIS placements which will be
generating fee-per-use charges. The gross margin percentage increased to 78% as
compared to 67% in the same period in 2000. The gross margin percentage
increased due to increased usage and revenue per ACIS placement and higher ACIS
system sales prices.
Selling, general and administrative expenses. Expenses increased
approximately $623,000 or 32% over the comparable period in 2000. The increase
is primarily due to increases in our Sales and Marketing costs related to
increased staffing and continuation of our commercial launch activities for the
ACIS in both the European and U.S. markets. We anticipate selling, general and
administrative expenses to continue to increase in succeeding quarters as a
result of increased expenditures for personnel, commissions and costs to support
additional ACIS placements.
Research and development expenses. Expenses increased approximately
$298,000 or 18% over the comparable period in 2000. The increase is primarily
attributable to the addition of technical personnel to further develop and
release our menu of tests which increased from 7 to 12 over the comparable
period in 2000. We anticipate that research and development expenses for 2001
will be consistent with 2000 as we have achieved an appropriate level of
personnel to support the development of new system capabilities and the
continuation of technological advances to the ACIS.
Other income. Other income decreased approximately $133,000 or 54% over
the comparable period in 2000 due to a decrease in interest earned on our lower
cash balance for 2001. The lower cash balance is due to funding of operations.
UNCERTAINTIES AS TO FUTURE OPERATIONS
The year 2000 was our first full year of commercial activity in which we
focused more on marketing and sales of the ACIS system as our menu of
capabilities performed with the ACIS expanded and gained commercial acceptance.
We still face significant
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uncertainties including our ability to achieve market acceptance of the ACIS, to
manufacture the system in commercial quantities and to continue to achieve
satisfactory reimbursement from third-party payers for tests performed using the
ACIS. We also face uncertainties with respect to our ability to complete
development of additional tests for the ACIS. In order to mitigate the risk that
any one test will not be successfully developed, we maintain a pipeline of tests
in a prioritized queue so that if any one test is not successfully developed, or
market feedback on the pipeline suggests that a test should be given a lower
priority, we can move other tests up in priority.
Other uncertainties affecting our business include our ability to
collaborate successfully with other companies in the development of new tests,
initiate and complete clinical trials of new products and obtain governmental
approvals for the products. Lack of success in these efforts could have a
material adverse effect on the future results of our operation and our ability
to generate sufficient cash flow to fund operations. In November 2000, we
received a Warning Letter from FDA's Center for Devices and Radiological Health
(CDRH) which took issue with certain claims being made for our ACIS device. The
letter questioned the basis for certain claims and whether certain uses of the
device exceeded the scope of FDA's clearance of ACIS. We responded in writing to
this Warning Letter and are now currently in discussions with FDA to ensure that
our marketing claims are consistent with our clearance.
If FDA believes we are not in compliance with the Federal Food Drug and
Cosmetic Act and/or its regulations, it can take one or more of the following
actions: issue a warning letter; withdraw any cleared 510(k); require us to
notify users regarding any FDA-determined risks; order us to cease marketing
ACIS for uses not covered by our clearance; require that we repair, refund or
replace any of our devices that are faulty; request and/or, in some instances,
mandate corrective advertisements, formal recalls or temporary suspension of
marketing; refuse to review, approve or clear our applications or submissions to
market products in the United States; notify other government agency's as to our
non-compliance which can lead to suspension of reimbursement through the Federal
Health Care Financing Administration (HCFA); institute legal proceedings to
detain or seize products, enjoin future violations, or assess criminal or civil
penalties against us, our officers or employees. Any such action by FDA could
result in disruption of our operations. Various states in which our product may
be sold in the future may impose similar or additional regulatory requirements
and non-compliance with those requirements may result in actions which could
also result in disruption of our operations. Any failure to resolve FDA's
concerns could have a material adverse effect on our business.
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of power shortages,
California has implemented, and is expected in the future to continue to
implement, rolling blackouts throughout the State. Such blackouts are widely
being predicted for the summer of 2001 and before. We are currently in the
process of acquiring a backup generator to provide an alternate source of power
during these blackouts. We anticipate having the backup generator installed in
June 2001. However, prior to the installation of the backup generator or during
an extended blackout period that our generator is not adequate to handle, we
could experience a significant interruption in our operations. Any such
interruption in our ability to continue operations at our facility could have a
material adverse effect on our business.
LIQUIDITY AND CAPITAL RESOURCES
In September 2000, we completed the private placement of 560,693 shares
of common stock and warrants to purchase 56,070 additional shares of our common
stock to two institutional investors. The warrants have a term of five years and
are exercisable at the same $12.48 per share price. The net proceeds from the
sale of the shares were approximately $6.7 million. In January 2001, we entered
into a financing agreement with VennWorks LLC providing for VennWorks to invest
up to $5 million in our common stock at various dates and in amounts selected by
us from March 30, 2001 through December 28, 2001 (subject to certain
limitations). The price per share is based upon the average closing price of our
common stock on the Nasdaq National Market during a 20-day trading period prior
to our request to purchase, subject to a minimum of $7 per share and a maximum
of $14 per share. The sales of the shares are intended to be private placements
under the Securities Act of 1933, although VennWorks has the right to have the
shares registered under certain circumstances. The new agreement represents a
restructuring of a previously announced $5 million private placement of shares
with VennWorks. In April 2001, we requested a $2 million investment from
VennWorks in our common stock subject to an amended stock purchase agreement
dated April 18, 2001. The agreement provides for the issuance of shares
beginning on April 20, 2001 and each week thereafter through June 22, 2001 based
on varying amounts of payments and subject to certain interest calculations. As
of May 14, 2001 VennWorks had invested approximately $200,000 in our common
stock at an average price of $7 per share.
We have an agreement with a bank for a $5 million revolving line of
credit expiring May 30, 2002. The interest rate is prime less 0.25% or LIBOR
plus 1.75% at our option. Currently, there are no borrowings outstanding under
the line of credit. Any borrowings outstanding under the line of credit in the
future will be collateralized by our investment in securities held by the bank
having a market value equal to 111% of the principal balance of the loans. At
March 31, 2001 we had approximately $6 million of cash and cash equivalents,
working capital of approximately $5.1 million and no long-term debt.
Capital expenditures for the quarter ended March 31, 2001 were
approximately $424,000 and related primarily to the manufacture of the ACIS
systems placed with customers. Capital expenditures are expected to total
approximately $5 million in 2001 and are expected to be primarily related to the
manufacture of the ACIS for placements with customers, although our present
plans could change and this amount could be materially different. Our business
plan anticipates placing these instruments with users and charging a
"fee-per-use" for each use of the instrument. The manufacture of these
instruments will require a significant outlay of cash
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for which revenues will be recognized over the lease term. We intend to fund
these expenditures with our current cash resources and with additional financing
which may include the proceeds from the financing agreement with VennWorks.
We anticipate that existing cash resources, including proceeds available
from the financing agreement entered into in January and as amended in April
2001 will be sufficient to satisfy our operating cash needs through the end of
2001. We expect that losses from operations and increases in working capital
requirements will produce significant negative cash flows from operations for at
least the next twelve months. In addition, to support our future cash needs, we
intend to consider additional debt or equity financing. However there can be no
assurance that any such financing will be available when needed or on terms
attractive to us. If we are unable to obtain sufficient additional funds, we may
have to delay, scale back or eliminate some or all of our development
activities, clinical studies and/or regulatory activities or cease operations
entirely.
ITEM 3-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Changes in foreign exchange rates, and in particular a strengthening of
the U.S. dollar, may negatively affect our consolidated sales and gross margins
as expressed in U.S. dollars. To date, we have not entered into any foreign
exchange contracts to hedge our exposure to foreign exchange rate fluctuations.
However, as our international operations grow, we may enter into foreign
exchange contracts to manage our foreign exchange risk.
PART II
ITEM 6- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Company (as amended)**
3.2 By-laws of the Company, as amended**
10.1 Amendment to Stock Purchase Agreement, dated April 18, 2001 by
an among ChromaVision Medical Systems, Inc. and VennWorks LLC*
(b) Report on Form 8-K
None.
* Filed herewith.
** Filed on April 30, 1997 as an exhibit to the Company's Registration
Statement on Form S-1 (No. 333-26129) and incorporated by reference
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHROMAVISION MEDICAL SYSTEMS, INC.
DATE: May 15, 2001 BY: /s/ Douglas S. Harrington, M.D.
----------------- -------------------------------------------------
Douglas S. Harrington, M.D.
Chairman of the Board and Chief Executive Officer
DATE: May 15, 2001 BY: /s/ Kevin C. O'Boyle
----------------- -------------------------------------------------
Kevin C. O'Boyle
Executive Vice President of Operations and Chief
Financial Officer
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EXHIBIT INDEX
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation of the Company (as amended)**
3.2 By-laws of the Company, as amended**
10.1 Amendment to Stock Purchase Agreement, dated April 18, 2001 by
an among ChromaVision Medical Systems, Inc. and VennWorks LLC*
* Filed herewith.
** Filed on April 30, 1997 as an exhibit to the Company's Registration
Statement on Form S-1 (No. 333-26129) and incorporated by reference