<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
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 June 30, 2000
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 (IRS Employer
--------------------------------- ----------------------
of incorporation or organization) Identification Number)
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 August 7, 2000 there were 19,518,948 shares outstanding of the Issuer's
Common Stock, $.01 par value.
<PAGE> 2
CHROMAVISION MEDICAL SYSTEMS, INC.
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2000 and 1999 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 Disclosure about Market Risk 9
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 10
Item 6 Exhibits and Reports on Form 8-K 10
SIGNATURES
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<PAGE> 3
PART I - ITEM 1
CHROMAVISION MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 8,288,286 $ 11,802,668
Short-term investments ......................................... 1,954,730 5,822,451
Other .......................................................... 747,481 257,577
------------ ------------
Total current assets ..................................... 10,990,497 17,882,696
Other ............................................................. 456,417 207,268
Property and equipment, net ....................................... 4,459,010 4,344,891
------------ ------------
Total assets ............................................. $ 15,905,924 $ 22,434,855
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 457,003 $ 578,961
Accrued liabilities ............................................ 1,217,485 735,836
------------ ------------
Total current liabilities ................................. 1,674,488 1,314,797
Commitments and contingencies ..................................... -- --
Stockholders' equity:
Series A convertible preferred stock, $.01 par value, authorized
7,246,000 shares, none issued and outstanding ................ -0- -0-
Series B convertible preferred stock, $.01 par value, authorized
221,850 shares, none issued and outstanding .................. -0- -0-
Series C convertible preferred stock, $.01 par value, authorized
200,000 shares, none issued and outstanding .................. -0- -0-
Common stock $.01 par value, authorized 50,000,000 shares,
issued and outstanding 19,518,948 shares in 2000 and
19,488,629 in 1999 ........................................... 195,189 194,886
Additional paid-in capital ..................................... 55,757,302 55,742,904
Accumulated deficit ............................................ (41,679,615) (34,789,102)
Accumulated other comprehensive loss ........................... (41,440) (28,630)
------------ ------------
Total stockholders' equity ................................ 14,231,436 21,120,058
------------ ------------
Total liabilities and stockholders' equity ........................ $ 15,905,924 $ 22,434,855
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE> 4
CHROMAVISION MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue ................................... $ 337,822 $ 48,362 $ 541,718 $ 64,147
Cost of revenue ........................... 113,762 25,082 181,037 34,076
------------ ------------ ------------ ------------
Gross profit ....................... 224,060 23,280 360,681 30,071
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative .... 2,302,302 1,438,665 4,258,582 2,673,715
Research and development ............... 1,801,696 1,570,443 3,421,177 2,819,378
------------ ------------ ------------ ------------
Total operating expenses ........... 4,103,998 3,009,108 7,679,759 5,493,093
------------ ------------ ------------ ------------
Loss from operations ................ (3,879,938) (2,985,828) (7,319,078) (5,463,022)
------------ ------------ ------------ ------------
Other income .............................. 180,481 111,818 428,565 249,465
------------ ------------ ------------ ------------
Loss before income taxes ............ (3,699,457) (2,874,010) (6,890,513) (5,213,557)
Income taxes .............................. -0- -0- -0- -0-
------------ ------------ ------------ ------------
Net loss ............................ $ (3,699,457) $ (2,874,010) $ (6,890,513) $ (5,213,557)
============ ============ ============ ============
Basic and diluted net loss per common share $ (.19) $ (.16) $ (.35) $ (.30)
============ ============ ============ ============
Weighted average number of common shares
outstanding ............................ 19,507,545 17,570,397 19,501,366 17,526,654
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 5
CHROMAVISION MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
2000 1999
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................. $ (6,890,513) $(5,213,557)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ........................ 893,712 614,522
Changes in operating assets and liabilities:
Other assets ......................................... (741,677) (330,268)
Accounts payable ..................................... (121,292) 188,534
Accrued liabilities .................................. 485,345 (312,074)
------------ -----------
Net cash used in operating activities ................ (6,374,425) (5,052,843)
------------ -----------
Cash flows from investing activities:
Collections on note receivable from affiliate............... -0- 5,000,000
Maturities of investments .................................. 7,754,170 2,719,698
Purchases of investments ................................... (3,886,449) -0-
Additions to property and equipment ........................ (1,007,969) (1,049,178)
------------ -----------
Net cash provided by investing activities ............ 2,859,752 6,670,520
------------ -----------
Cash flows from financing activities:
Proceeds from exercise of stock options .................... 145,501 496,372
Offering costs ............................................. (130,800) -0-
------------ -----------
Net cash provided by financing activities ............ 14,701 496,372
------------ -----------
Effect of exchange rate changes on cash and cash equivalents (14,410) -0-
Net increase (decrease) in cash and cash equivalents . (3,514,382) 2,114,049
Cash and cash equivalents beginning of period .............. 11,802,668 2,853,546
------------ -----------
Cash and cash equivalents end of period .................... $ 8,288,286 $ 4,967,595
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-5-
<PAGE> 6
CHROMAVISION MEDICAL SYSTEMS, INC.
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 1999 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 2,336,156 and 2,029,387 shares of common stock were
outstanding at June 30, 2000 and 1999, respectively, and were excluded from the
computation of diluted net loss per share as the effect would be antidilutive.
(3) CURRENCY TRANSLATION
The financial position and results of operations of our foreign subsidiaries
are generally determined using the local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at the exchange rate
in effect at each quarter-end. Income statement accounts are translated at the
average rate of exchange prevailing during the period.
(4) COMPREHENSIVE LOSS
Our total comprehensive loss is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $(3,699,457) $(2,874,010) $(6,890,513) $(5,213,557)
Foreign currency translation loss (26,762) -0- (12,810) -0-
----------- ----------- ----------- -----------
Comprehensive loss $(3,726,219) $(2,874,010) $(6,903,323) $(5,213,557)
=========== =========== =========== ===========
</TABLE>
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<PAGE> 7
(5) BUSINESS SEGMENTS
We operate primarily in one business segment engaged in the development,
manufacture and marketing of an Automated Cellular Imaging System (ACIS (TM))
designed to assist in the detection, diagnosis and treatment of cellular
disease.
The following table represents our business segment information by
geographic area:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales
United States $ 109,544 $ 48,362 $ 183,279 $ 64,147
Europe (a) 228,278 -0- 358,439 -0-
----------- ----------- ----------- -----------
Total net sales $ 337,822 $ 48,362 $ 541,718 $ 64,147
=========== =========== =========== ===========
Operating loss
United States $(3,809,909) $(2,930,976) $(7,198,484) $(5,408,170)
Europe (a) (70,029) (54,852) (120,594) (54,852)
----------- ----------- ----------- -----------
Total operating loss $(3,879,938) $(2,985,828) $(7,319,078) $(5,463,022)
=========== =========== =========== ===========
</TABLE>
June 30, 2000 December 31, 1999
------------- -----------------
Identifiable assets
United States $15,596,955 $22,283,123
Europe (a) 308,969 151,732
----------- -----------
Total assets $15,905,924 $22,434,855
=========== ===========
------------------
(a) European operations represent business activities conducted primarily in
France, Germany, Italy, Austria, Switzerland and Great Britain.
(6) NEW ACCOUNTING STANDARDS
In December 1999, the United States Securities and Exchange Commission
issued Staff Accounting Bulletin (SAB) No. 101-"Revenue Recognition in Financial
Statements," as amended, which for the Company is effective October 1, 2000. SAB
No. 101 summarizes certain of the staff's views on applying generally accepted
accounting principles to revenue recognition in financial statements. We believe
that implementation of SAB No. 101 will have no material impact on our financial
statements.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation-an Interpretation of APB 25." FIN 44 clarifies the
application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a non-compensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998 or January 12, 2000.
We do not expect that the adoption of FIN 44 will have a material effect on our
financial position or results of operations.
-7-
<PAGE> 8
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 medical insurance industry, which could be delayed or not
obtained; an inadequate supply of biological samples could delay completion of
the clinical trials; the clinical trials could fail to demonstrate the efficacy
of the ChromaVision Automated Cellular Imaging System ("ACIS") tests; new tests
may not be successfully developed; the ability to commercialize new tests 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 an automated cellular imaging system,
referred to as the ACIS, which is designed to perform a wide variety of
diagnostic tests to detect cellular disease, including cancer and infectious
disease. We designed the ACIS technology to serve as a tool to assist the
pathologist in generating accurate, quantitative and reproducible results,
eliminating the subjectivity associated with current manual methods. In July
1999, the FDA granted clearance for the use of the ACIS to perform a large
number of tests using a particular staining method based upon a master
validation protocol. The FDA clearance allows us to introduce new tests for the
ACIS using that particular staining method without applying for additional FDA
clearance. Our current test menu for the ACIS includes nine released tests with
additional tests in various stages of development.
From the inception of our business on April 1, 1993 to September 30, 1999,
our business was considered to be in the development stage as defined by
Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and
Reporting by Development Stage Enterprises". In the fourth quarter of 1999, we
exited the development stage as revenue was realized from planned operations.
RESULTS OF OPERATIONS
Revenue. Revenue for the three and six months ended June 30, 2000 increased
approximately $289,000 or 599% and $478,000 or 744%, respectively, over the
comparable periods in 1999. These increases are primarily due to sales of the
ACIS to research facilities in Europe and an increase from monthly rental
charges for usage of leased ACIS units. Through September 1999, we were a
development stage company and had no significant revenue. We anticipate
continued revenue growth in 2000 as we accelerate our commercialization
activities.
Selling, general and administrative expenses. Expenses for the three and six
months ended June 30, 2000 increased approximately $864,000 or 60% and
$1,585,000 or 59%, respectively, over the comparable periods in 1999. These
increases are primarily due to significant increases in our sales and marketing
staff and the expansion of commercial launch activities necessary to support the
commercialization of our tests. We anticipate selling, general and
administrative expenses to continue to increase in the near future as we further
penetrate the clinical and research laboratory markets.
Research and development expenses. Expenses for the three and six months ended
June 30, 2000 increased approximately $231,000 or 15% and $602,000 or 21%,
respectively, over the comparable periods in 1999. These increases are primarily
due to the addition of technical personnel to further develop our ACIS tests
that included six newly released tests in 2000 and increased clinical trial
costs related to the expansion of our test menu. We anticipate that research and
development expenses will continue to increase in the near future due to costs
related to the development of new tests, additional clinical trials and the
continuation of technological advances to the ChromaVision ACIS.
Other income. Other income for the three and six months ended June 30, 2000
increased approximately $69,000 or 61% and $179,000 or 72%, respectively, over
the comparable periods in 1999. The increase is attributable to the investment
of $18.5 million of net proceeds received from a private placement of 1,775,000
newly issued shares of common stock in October 1999. For the comparable period
in 1999, other income was lower due to lower cash balances.
LIQUIDITY AND CAPITAL RESOURCES
On August 13, 1997, we received net proceeds of approximately $28.4
million from our initial public offering of 6,020,000 shares of common stock. On
October 7, 1999, we completed a private placement of 1,775,000 shares of common
stock to selected
-8-
<PAGE> 9
institutional and other accredited investors. The net proceeds from the sale of
these shares were approximately $18.5 million. We have an agreement with a bank
for a $5.0 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 June 30, 2000, we had approximately $10.2
million of cash and cash equivalents and investments, working capital of
approximately $9.3 million and no long-term debt.
Capital expenditures for the six months ended June 30, 2000 were
approximately $1.0 million and related primarily to the manufacture of the ACIS
units placed with customers. Capital expenditures are expected to total
approximately $3.0 million in 2000, and are expected to be related primarily to
manufacturing 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 per-test fee for
each use of the instrument. The manufacture of these instruments will require a
significant outlay of cash for which revenues will be recognized over the lease
term. We intend to fund these expenditures with our current cash resources,
which may be partially supplemented by third party asset-based financing for
these instruments. We currently have an agreement for such financing totaling
$1.0 million.
We anticipate that existing cash resources and investments will be
sufficient to satisfy our operating cash needs through the end of 2000. We
expect that losses from operations and increases in working capital requirements
will produce significant negative cash flows from operations at least through
the end of 2000. 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 that would be
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.
UNCERTAINTIES AS TO FUTURE OPERATIONS
During 1999, we began the transition from being focused almost entirely on
the development of the ACIS system to focus more on marketing and sales of the
system, as tests performed with the ACIS became available for commercial
distribution. We still face significant uncertainties in this regard, including
our ability to establish an effective sales and marketing organization, to
achieve market acceptance of the ACIS, to manufacture the system in commercial
quantities and to achieve satisfactory reimbursement from third-party payers for
tests performed using the ACIS. While the information received from our
customers indicates that over 1,000 tests have been reimbursed at levels
consistent with our expectations and no reimbursements have been denied, our
reimbursement experience is limited to date. 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 higher priority, we can prioritize
accordingly.
Other uncertainties affecting our business include our ability to
collaborate successfully with other companies to develop 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 operations and our ability to generate
sufficient cash flow to fund operations.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We invest excess cash in short-term debt securities that are intended to be
held to maturity. These short-term investments have various maturity dates,
which do not exceed one year.
Two of the main risks associated with these investments are interest rate
risk and credit risk. Typically, when interest rates rise, there is a
corresponding decline in the market value of debt securities. Fluctuations in
interest rates would not have a material effect on our financial statements
because of the short-term nature of the securities in which we invest. Credit
risk refers to the possibility that the issuer of the debt securities will not
be able to make principal and interest payments. We have limited our investments
to investment grade or comparable securities and have not experienced any losses
on investments to date due to credit 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.
-9-
<PAGE> 10
PART II
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our Annual Meeting of Stockholders on June 7, 2000. At the meeting,
the stockholders voted in favor of electing as directors the seven nominees
named in the Proxy Statement dated April 28, 2000 and in favor of approving the
amended and restated 1996 Equity Compensation Plan.
The number of votes were as follows:
I. Election of Directors
For Withheld
---------- --------
John S. Scott, Ph.D. 17,654,345 113,758
Douglas S. Harrington, M.D. 17,648,825 119,278
Richard C. E. Morgan 16,916,860 851,243
Mary Lake Polan, M.D., Ph.D. 17,647,625 120,478
Charles A. Root 16,912,430 855,673
Thomas R. Testman 17,644,964 123,139
Jon R. Wampler 17,645,864 122,239
II. Amended and Restated 1996 Equity Compensation Plan
For Against Abstain
---------- --------- -------
15,766,727 1,895,208 106,168
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**
27 Financial Data Schedule*
(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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<PAGE> 11
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: August 10, 2000 BY: /s/ Douglas S. Harrington, M.D.
---------------------------------
Douglas S. Harrington, M.D.
President, Chief Executive Officer
DATE: August 10, 2000 BY: /s/ Kevin C. O'Boyle
----------------------------------
Kevin C. O'Boyle
Senior Vice President Operations,
Chief Financial Officer
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<PAGE> 12
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27 Financial Data Schedule
