<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
OR
[_] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO
______________.
COMMISSION FILE NO. 0-21371
APPLIED IMAGING CORP.
(Exact name of registrant as specified in its charter)
Delaware 77-0120490
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2380 WALSH AVENUE, BUILDING B
SANTA CLARA, CALIFORNIA 95051
(Address of principal executive offices, including zip code)
(408) 562-0250
(Registrant's telephone number, including area code)
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 (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
--- ---
As of September 30, 1997, 7,641,472 shares of the Registrant's Common Stock were
outstanding.
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APPLIED IMAGING CORP.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1997 and December 31, 1996............................ 3
Condensed Consolidated Statements of Operations
Three and nine months ended September 30, 1997 and 1996............. 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996....................... 5
Notes to Interim Condensed Consolidated Financial Statements........ 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 8-10
PART II. OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K............................... 11
Signatures.......................................................... 12
2
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PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
APPLIED IMAGING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September December
30, 31,
1997 1996
--------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,238 $ 12,318
Short-term investments 3,815 -
Trade accounts receivable, net 2,350 1,454
Inventories 1,154 831
Prepaid expenses and other assets 252 336
--------- --------
Total current assets 13,809 14,939
Property and equipment, net 1,755 1,234
Other assets, net 301 300
--------- --------
TOTAL ASSETS $ 15,865 $ 16,473
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of bank debt $ 65 $ 33
Accounts payable 1,464 1,679
Accrued expenses 1,834 1,304
Deferred revenue 1,196 1,223
--------- --------
Total current liabilities 4,559 4,239
Long-term obligations 291 229
--------- --------
Total liabilities 4,850 4,468
Stockholders' equity:
Preferred stock - -
Common stock 8 7
Additional paid-in capital 29,552 25,569
Accumulated deficit (17,282) (12,021)
Deferred stock compensation (896) (1,183)
Cumulative translation adjustment (367) (367)
--------- --------
Total stockholders' equity 11,015 12,005
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,865 $ 16,473
========= ========
See accompanying notes to condensed consolidated financial statements.
3
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APPLIED IMAGINING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
-------------------- ---------------------
1997 1996 1997 1996
-------- ------- -------- --------
Revenues $ 2,750 $ 2,707 $ 9,641 $ 8,702
Cost of revenues 1,315 1,322 4,466 4,444
-------- ------- -------- --------
Gross profit 1,435 1,385 5,175 4,258
Operating expenses:
Research and development 2,267 838 5,519 2,536
Sales and marketing 1,061 774 2,767 2,250
General and administrative 622 453 2,408 1,402
-------- ------- -------- --------
Total operating expenses 3,950 2,065 10,694 6,188
-------- ------- -------- --------
Operating loss (2,515) (680) (5,519) (1,930)
Other income/(expense), net 90 (9) 258 6
-------- ------- -------- --------
Net loss $ (2,425) $ (689) $ (5,261) $ (1,924)
======== ======= ======== ========
Net loss per share $ (0.32) $ (0.73)
======== ========
Pro forma net loss per share $ (0.12) $ (0.34)
======= ========
Weighted average
shares outstanding 7,634 5,755 7,209 5,708
======== ======= ======== ========
See accompanying notes to condensed consolidated financial statements.
4
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APPLIED IMAGING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine months ended
September 30,
-------------------------
1997 1996
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (5,261) $ (1,924)
Adjustments to reconcile net loss to
net cash provided (used) by operating
activities:
Depreciation & Amortization 500 580
Compensation expense on stock options 287 194
Loss provision on sale of property 29 -
Unrealized exchange gain or (loss) 4 -
Changes in operating assets and liabilities:
Accounts receivable, net (896) (317)
Inventories (323) 64
Prepaid expenses and other assets 84 (374)
Accounts payable (215) 358
Accrued expenses 470 (76)
Unearned revenue (27) (323)
--------- --------
Net cash used by operating activities: (5,348) (1,818)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (916) (518)
Purchase of marketable securities (3,815) -
Sales of marketable securities - 1,972
Other assets (1) 73
--------- --------
Net cash provided/(used) by
investing activities: (4,732) 1,527
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank loan payments (43) (181)
Proceeds from issuance of common stock 4,043 160
Other assets - (387)
--------- --------
Net cash provided/(used) by
financing activities: 4,000 (408)
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,080) (699)
Cash and cash equivalents at beginning of period 12,318 2,159
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,238 $ 1,460
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during period $ 32 $ 63
========= ========
DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
A capital lease obligation of $135 was incurred
when the Company entered into a lease for new
equipment.
See accompanying notes to condensed consolidated financial statements.
5
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APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - BASIS OF PRESENTATION
- ------------------------------
The accompanying condensed consolidated financial statements include the
accounts of Applied Imaging Corp. and subsidiaries (the "Company") for the three
and nine months ended September 30, 1997 and 1996. These financial statements
are unaudited and reflect all adjustments, consisting only of normal recurring
adjustments, which are, in the opinion of management, necessary for a fair
presentation of the Company's financial position, operating results and cash
flows for those interim periods presented. The results of operations for the
three and nine months ended September 30, 1997 are not necessarily indicative
of results to be expected for the fiscal year ending December 31, 1997. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto, for the year ended
December 31, 1996.
NOTE 2 - INVENTORIES (IN THOUSANDS)
- -----------------------------------
Balances as of September 30, 1997 December 31, 1996
------------------ -----------------
Raw materials $ 935 $ 759
Work in process 174 46
Finished goods 45 26
------ -----
Total $1,154 $ 831
====== =====
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS
- --------------------------------------
The Financial Accounting Standards Board (FASB) recently issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share." FAS No. 128
requires the presentation of basic earnings per share ("EPS") and, for companies
with complex capital structures (or potentially dilutive securities, such as
convertible debt, options and warrants), diluted EPS. FAS No. 128 is effective
for annual and interim periods ending after December 31, 1997. The Company does
not expect that basic EPS will differ from primary earnings per share.
In June 1997, the FASB issued FAS 130, "Reporting Comprehensive Income".
This Statement establishes standards for reporting and displaying comprehensive
income and its components in the financial statements. It requires that a
company classify items of other comprehensive income, as defined by accounting
standards, by their nature (e.g. unrealized gains or losses on securities) in a
financial statement, but does not require a specific format for that statement.
The Company is in the process of determining its preferred format. The
accumulated balance of other comprehensive income is to be displayed separately
from retained earnings and additional paid in capital in the equity section of
the balance sheet.
This Statement is effective with fiscal 1998 financial statements.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
6
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NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS -- CONTINUED
- ---------------------------------------------------
In June 1997, the FASB issued FAS 131, "Disclosures about Segments of an
Enterprise and Related Information". The Statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments on the basis that is used internally for
evaluating segment performance and deciding how to allocate resources to
segments.
This Statement is effective with fiscal 1998 financial statements.
Comparative information for interim periods in the initial year of application,
1998, is to be reported in financial statements for the interim periods in the
second year of application, 1999.
NOTE 4 - PRO FORMA NET LOSS PER SHARE
- -------------------------------------
Pro forma net loss per share amounts are based on the weighted average
number of common shares outstanding during the three month and nine month
periods ended September 30, 1996. As net losses have been reported during these
periods, common stock equivalents arising from outstanding stock options are
excluded in that they are anti-dilutive. For purposes of computing pro forma
net loss per share, all preferred stock outstanding and common stock equivalents
issued within twelve months of the initial registration filing have been assumed
to be converted into common stock. This recapitalization has been retroactively
reflected in all periods for which pro forma net loss per share has been
presented. (See Exhibit 11.01)
NOTE 5 - RELATED PARTY TRANSACTION
- ----------------------------------
On May 22, 1997, the Company consummated a private sale of 796,020 shares
of its Common Stock to certain partnerships affiliated with New Enterprise
Associates, a principal owner of the Company, at the purchase price of $5.025
per share. The price per share was calculated as the average of the closing
prices of the Company's Common Stock as reported on the Nasdaq National Market
System for the previous five trading days prior to the day of the transaction
closing date. Thomas C. McConnell, a director of the Company, is an affiliate
of New Enterprise Associates. In connection with this transaction, the Company
also issued warrants, which may be exercised within a three-year period ending
May 21, 2000 to acquire an aggregate of 173,010 shares of the Company's Common
Stock at a purchase price of $5.78 per share.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the fiscal year
ended December 31, 1996.
The information set forth below contains forward-looking statements,
(designated by an * ), and the Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth below under "Factors That May Affect
Future Results" and those set forth under "Item One" in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
RESULTS OF OPERATIONS
Revenues. The Company's revenues are derived primarily from the sale of
products and related software maintenance and instrument service contracts.
Revenues for the quarter and nine months ended September 30, 1997 were $2.8
million and $9.6 million, respectively, compared to $2.7 million and $8.7
million in the corresponding prior year periods. The 2% and 11% increases over
the prior year third quarter and nine-month periods, respectively, are primarily
attributable to increased sales of the company's cytogenetic instrumentation
products.
Cost of revenues. Cost of revenues includes direct material and labor costs,
manufacturing overhead, installation costs, warranty related expenses and post-
warranty service and application support expenses. Costs of revenues, as a
percentage of total revenues, for the quarter and nine months ended September
30, 1997 were 48% and 46%, respectively, compared to 49% and 51%, respectively,
in the corresponding prior year periods. The decreases are primarily
attributable to lower service costs and reduced product component costs. In
addition, the prior year nine-month period included an inventory provision
related to a component upgrade.
Research and development expenses. Research and development expenses consist of
research and development relating to new products as well as software
development costs to upgrade existing products. Research and development
expenses for the quarter and nine months ended September 30, 1997 were $2.3
million and $5.5 million, respectively, compared to $838,000 and $2.5 million in
the corresponding prior year periods. The 171% and 118% increases over the
corresponding prior year third quarter and nine month period, respectively,
resulted primarily from increased expenditures for the development of the
Company's prenatal screening system, clinical site contracts and regulatory
filings. Such expenses increased as a percentage of revenues to 82% and 57% for
the quarter and nine months ended September 30, 1997, respectively, from 31% and
29% in the corresponding prior year periods.
8
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Sales and marketing expenses. Sales and marketing expenses consist primarily of
salaries, commissions and related travel expenses of the Company's direct sales
force, as well as commissions paid to independent international sales agents.
Sales and marketing expenses for the quarter and nine months ended September 30,
1997 were $1.1 million and $2.8 million, respectively, compared to $774,000 and
$2.3 million, respectively, in the corresponding prior year periods. As a
percentage of revenues, sales and marketing expenses increased to 39% and 29% in
the third quarter and first nine months of 1997, respectively, from 29% and 26%
in the corresponding prior year periods. The increase is primarily attributable
to additional marketing and sales management personnel, and the associated
recruitment and relocation costs.
General and administrative expenses. General and administrative expenses
consist primarily of payroll costs associated with the Company's management and
administrative personnel, travel expenses, and legal and accounting fees.
General and administrative expenses for the quarter and nine months ended
September 30, 1997 were $622,000 and $2.4 million, respectively, compared to
$453,000 and $1.4 million, respectively, in the corresponding prior year
periods. General and administrative expenses, as a percentage of revenues,
increased to 23% and 25% for the third quarter and first nine months of 1997,
respectively, from 17% and 16%, respectively, in the corresponding prior year
periods. The increase general and administrative expenses are primarily due to
increased administrative staff and associated costs related to public company
reporting requirements and management infrastructure in anticipation of future
growth.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's operating results may vary significantly depending on certain
factors, including the effect of delays in its research and development program,
adverse results in its clinical studies, delay in the introduction or shipment
of new products, increased competition, adverse changes in the economic
conditions in any of the several countries in which the Company does business, a
slower growth rate in the Company's target markets, order deferrals in
anticipation of new product releases, lack of market acceptance of new products,
the uncertainty of FDA or other domestic and international regulatory clearances
or approvals, and the factors set forth under the Company's annual report on
form 10-K for the fiscal year ended December 31, 1996.
Due to the factors noted above, as well as the relatively small size of the
Company's initial public offering completed in November, 1996, the Company's
future earnings and stock price may be subject to significant volatility,
particularly on a quarterly basis. Any shortfall in revenues or earnings from
levels expected by security analysts could have an immediate and significant
adverse effect on the trading price of the Company's common stock.
9
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LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had cash, cash equivalents and short-
term investments of $10.1 million and working capital of $9.3 million, compared
to $12.3 million and $10.7 million, respectively, at December 31, 1996. For the
nine months ended September 30, 1997, cash used by operations totaled $5.3
million, compared to $1.8 million for the corresponding prior year period. The
increase in cash used by operations was primarily attributable to increased
operating expenses associated with the Company's fetal cell screening program,
increased general and administrative expenses to support future growth and
public company reporting and compliance requirements, and a $579,000 increase in
accounts receivable. In addition, the Company consumed $916,000 in cash for
purchases of capital equipment for the nine months ended September 30, 1997,
compared to $518,000 for the comparable prior year period. Cash consumption
from operations and property and equipment purchases was $6.3 million for the
nine months ended September 30, 1997,and was partially offset by cash generated
from financing activities totaling $4.0 million, primarily due to a $4.0 million
private equity placement in May, 1997.
The Company expects negative cash flow from operations to continue into at
least 1999, as it continues the development of its fetal cell technology,
conducts clinical trials required for FDA clearance of the DNA probe portion of
that technology, expands its marketing, sales and customer support capabilities,
and adds administrative infrastructure *. The Company currently estimates that
its capital resources will enable it to sustain operations into the second half
of 1998 *. There can be no assurance, however, that the Company will not be
required to seek capital at an earlier date. The timing and amount of spending
of such capital resources cannot be accurately determined at this time and will
depend on several factors, including but not limited to, the progress of its
research and development efforts and clinical investigations, the timing of
regulatory approvals or clearances, competing technological and market
developments, commercialization of products currently under development, and
market acceptance and demand for the Company's products. In addition, as
opportunities arise, proceeds may also be used to acquire businesses,
technologies or products that complement the business of the Company, although
the Company is not currently in negotiations regarding any such acquisitions *.
The Company may seek to obtain additional funds through equity or debt
financing, collaborative or other arrangements with other companies, and from
other sources *. No assurance can be given that additional financing will be
available when needed or on terms acceptable to the Company. If adequate funds
are not available, the Company could be required to delay development or
commercialization of certain products, to license to third parties the rights to
commercialize certain products or technologies that the Company would otherwise
seek to commercialize itself, or to reduce the marketing, customer support, or
other resources devoted to certain products *.
10
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PART II - OTHER INFORMATION
- -----------------------------
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a)
Exhibit
-------
Exhibit 11.01 Computation of Pro Forma Net Loss Per Share
Exhibit 27.1 Financial Data Schedule
There were no reports on Form 8-K during the quarter ended September 30,
1997.
11
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APPLIED IMAGING CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APPLIED IMAGING CORP.
(Registrant)
Date: November 10, 1997 By: /S/ JACK GOLDSTEIN
-------------------------
Jack Goldstein
President and
Chief Executive Officer
By: /S/ NEIL WOODRUFF
------------------------
Neil Woodruff
Chief Financial Officer
12
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EXHIBIT 11.01
APPLIED IMAGING CORP. AND SUBSIDIARIES
COMPUTATION OF PRO FORMA NET LOSS PER SHARE
(Unaudited, in thousands, except per share data)
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1996
---------- -----------
Weighted average common shares outstanding 1,152,964 1,107,588
Preferred Stock (1) 2,939,006 2,939,006
Common stock equivalents accounted for
under Staff Accounting Bulletin No. 83:
Preferred stock 1,106,217 1,106,217
Employee stock options 217,140 217,140
Preferred stock warrants 340,010 340,010
---------- -----------
Total weighted average common
shares outstanding 5,755,337 5,709,961
========== ===========
Net loss (689,000) (1,924,000)
========== ===========
Pro forma net loss per share $ (0.12) $ (0.34)
========== ===========
(1) Includes convertible preferred stock and 110,416 preferred stock warrants
converted into 85,388 shares of common stock, under the treasury-stock
method.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> SEP-30-1996 SEP-30-1997
<CASH> 1,460 6,238
<SECURITIES> 1,025 3,815
<RECEIVABLES> 2,033 2,541
<ALLOWANCES> 215 191
<INVENTORY> 816 1,154
<CURRENT-ASSETS> 5,633 13,809
<PP&E> 3,324 4,325
<DEPRECIATION> 2,067 2,570
<TOTAL-ASSETS> 7,581 15,865
<CURRENT-LIABILITIES> 4,216 4,559
<BONDS> 0 0
0 0
4 0
<COMMON> 1 8
<OTHER-SE> 3,139 11,007
<TOTAL-LIABILITY-AND-EQUITY> 7,581 15,865
<SALES> 6,717 7,615
<TOTAL-REVENUES> 8,702 9,641
<CGS> 3,308 3,630
<TOTAL-COSTS> 4,444 4,466
<OTHER-EXPENSES> 6,188 10,694
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (1,924) (5,261)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,924) (5,261)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,924) (5,261)
<EPS-PRIMARY> (.34) (.73)
<EPS-DILUTED> 0 0
</TABLE>
