<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 JUNE 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 June 30, 1997, 7,634,219 shares of the Registrant's Common Stock were
outstanding.
<PAGE>
APPLIED IMAGING CORP.
INDEX
PART I. FINANCIAL INFORMATION
------------------------------
<TABLE>
<CAPTION>
PAGE
----
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets
June 30, 1997 and December 31, 1996....................................... 3
Condensed Consolidated Statements of Operations
Three and six months ended June 30, 1997 and 1996......................... 4
Condensed Consolidated Statements of Cash Flows
Six months ended June 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
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
APPLIED IMAGING CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- -----------
<S> <C> <C>
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,954 $ 12,318
Short-term investments 4,785 -
Trade accounts receivable, net 2,898 1,454
Inventories 1,079 831
Prepaid expenses and other assets 533 336
-------- --------
Total current assets 16,249 14,939
Property and equipment, net 1,682 1,234
Other assets, net 280 300
Total assets $ 18,211 $ 16,473
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of bank debt $ 66 $ 33
Accounts payable 1,447 1,679
Accrued expenses 1,742 1,304
Deferred revenue 1,302 1,223
-------- --------
Total current liabilities 4,557 4,239
Long-term obligations 309 229
-------- --------
Total liabilities 4,866 4,468
Stockholders' equity:
Preferred stock - -
Common stock 8 7
Additional paid-in capital 29,552 25,569
Accumulated deficit (14,857) (12,021)
Deferred stock compensation (991) (1,183)
Cumulative translation adjustment (367) (367)
-------- --------
Total stockholders' equity 13,345 12,005
-------- --------
Total liabilities and stockholders' equity $18,211 $ 16,473
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
APPLIED IMAGING CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------- -------------------------
1997 1996 1997 1996
----------------------- -------------------------
<S> <C> <C> <C> <C>
Revenues $ 3,169 $ 3,038 $ 6,891 $ 5,995
Cost of revenues 1,508 1,566 3,151 3,122
-------- ------- -------- --------
Gross profit 1,661 1,472 3,740 2,873
Operating expenses:
Research and development 1,668 801 3,252 1,698
Sales and marketing 874 751 1,706 1,476
General and administrative 1,098 489 1,786 949
-------- ------- -------- --------
Total operating expenses 3,640 2,041 6,744 4,123
-------- ------- -------- --------
Operating loss (1,979) (569) (3,004) (1,250)
Other income/(expenses), net 87 (6) 168 15
-------- ------- -------- --------
Net loss $ (1,892) $ (575) $ (2,836) $ (1,235)
======== ======= ======== ========
Net loss per share $ (0.26) $ (0.41)
======== ========
Pro forma net loss per share $ (0.10) $ (0.22)
======= ========
Weighted average shares outstanding 7,164 5,692 6,995 5,687
======== ======= ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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APPLIED IMAGING CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Unaudited
Six months ended June 30,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (2,836) $ (1,235)
Adjustments to reconcile net loss to
net cash provided (used) by operating activities:
Depreciation & Amortization 307 341
Compensation expense on stock options 192 96
Unrealized exchange gain or (loss) (6) 7
Changes in operating assets and liabilities: - _
Accounts receivable, net (1,444) (570)
Inventories (248) 131
Prepaid expenses and other assets (197) (293)
Accounts payable (232) (217)
Accrued expenses 378 (14)
Unearned revenue 79 (97)
-------- --------
Net cash used by operating activities: (4,007) (1,851)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (620) (300)
Purchase of marketable securities (4,785) -
Sales of marketable securities - 972
Other assets 20 48
-------- --------
Net cash provided/(used) by investing activities: (5,385) 720
-------- --------
Cash flows from financing activities:
Bank loan proceeds/(payments), net (15) 143
Proceeds from issuance of common stock 4,043 40
-------- --------
Net cash provided/(used) by financing activities: 4,028 183
-------- --------
Net decrease in cash and cash equivalents (5,364) (948)
Cash and cash equivalents at beginning of period 12,318 2,159
-------- --------
Cash and cash equivalents at end of period $ 6,954 $ 1,211
======= =======
Supplemental disclosure of cash flow information:
Interest paid during period $ 16 $ 64
======= =======
Disclosure of non-cash financing activities:
</TABLE>
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 six months ended June 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 six months ended June 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 ($000'S)
- -----------------------------
Balances as of June 30, 1997 December 31, 1996
------------- -----------------
Raw Materials $1,022 $759
Work in process 57 46
Finished goods - 26
------------- -----------------
Total $1,079 $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 PRONOUCEMENTS--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 sixth month
periods ended June 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
<PAGE>
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,
-------------------------------------------------------------------
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 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 software maintenance and instrument service contracts. Revenues
for the three and six months ended June 30, 1997 were $3.2 million and $6.9
million respectively compared to $3.0 million and $6.0 million for the
corresponding periods in the prior year. The 15% increase over the prior year
quarter is 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 three and six months ended June 30, 1997
were 48% and 46% respectively, compared to 52% for the corresponding periods of
the prior year. The decreases are primarily due to lower service costs. In
addition, the prior period included an inventory provision relating 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 three and six months ended June 30, 1997 were $1,668,000 and
$3,252,000 respectively, increasing $867,000 and $1,554,000 over the
corresponding prior year periods. Such expenses increased to 53% and 47% of
total revenues for the three and six months ended June 30, 1997 respectively,
from 26% and 28% in the corresponding prior year periods. These increases over
the corresponding prior year periods are primarily due the increased
expenditures for staffing, clinical studies and regulatory costs associated with
the development of the Company's prenatal screening products and increased
research and development costs for the Company's instrument business.
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 three and six months ended June 30, 1997
were $874,000 and $1,706,000 respectively, increasing $123,000 and $230,000 over
the corresponding prior year periods. These increases are attributable to
relative increases in sales volume and additions to the sales force staff. As a
percentage of revenues, sales and marketing expenses were 28% and 25% of total
revenues for the three and six months ended June 30, 1997 compared to 25% in the
corresponding prior year periods.
8
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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, accounting and compliance
costs. General and administrative expenses increased to $1,098,000 for the
three months ended June 30, 1997, increasing $609,000 over the three months
ended June 30, 1996. For the six months ended June 30, 1997 general and
administrative costs increased to $1,786,000 increasing $837,000 over the six
months ended June 30, 1996. The increase is primarily due to increases in the
Company's infrastructure to support the continued growth and public company
reporting and compliance requirements and additional staffing and associated
recruitment and relocation expenses.
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, delays 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 in 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company strengthened it financial position during the quarter
ended June 30, 1997 by raising $4,000,000 of additional equity via a private
placement of its Common Stock. At June 30, 1997, the Company had cash, cash
equivalents and securities available for sale of $11.7 million and working
capital was $11.7 million. Cash used by operations for the six months ended June
30, 1997 was $4,007,000 compared to $1,851,000 for the corresponding prior year
period. The increase in cash used in operations is primarily due to increases in
accounts receivable, spending attributable to the Company's development of
prenatal screening products and the building of its infrastructure to support
continued growth and public company reporting and compliance requirements.
The Company expects negative cash flow from operations to continue
into at least 1999, as it continues the development of its fetal cell screening
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 existing 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
9
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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. During the second half of 1998, the Company will likely need to
raise additional funds through public or private financings. 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 of its
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 of its products.
10
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PART II - OTHER INFORMATION
- -----------------------------
ITEM 5: OTHER INFORMATION
On April 17, 1997, the Company announced the election of Jack
Goldstein, Ph.D. as Chief Executive Officer, President and Director of the
Company.
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
The following report on Form 8-K was filed during the period for
which this report is filed:
(b) Reports on Form 8-K
-------------------
Date of Report Items Required
-------------- --------------
May 22, 1997 Item 2. Acquisition or Disposition of Assets
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: August 11, 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)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1996 June 30, 1996
--------------- ---------------
<S> <C> <C>
Weighted average common shares outstanding 1,089,745 1,084,210
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 5,692,118 5,686,583
=========== ==========
Net loss (575,000) (1,235,000)
=========== ==========
Pro forma net loss per share $ (0.10) $ (0.22)
=========== ==========
</TABLE>
(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> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> JUN-30-1996 JUN-30-1997
<CASH> 1,211 6,954
<SECURITIES> 2,025 4,785
<RECEIVABLES> 2,281 3,149
<ALLOWANCES> 210 251
<INVENTORY> 749 1,079
<CURRENT-ASSETS> 1,271 16,249
<PP&E> 3,106 4,058
<DEPRECIATION> 1,835 2,376
<TOTAL-ASSETS> 8,089 18,211
<CURRENT-LIABILITIES> 4,251 4,557
<BONDS> 0 0
0 0
4 0
<COMMON> 1 8
<OTHER-SE> 3,610 13,337
<TOTAL-LIABILITY-AND-EQUITY> 8,089 18,211
<SALES> 4,662 5,522
<TOTAL-REVENUES> 5,995 6,891
<CGS> 2,340 2,596
<TOTAL-COSTS> 3,122 3,151
<OTHER-EXPENSES> 4,123 6,744
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (1,235) (2,829)
<INCOME-TAX> 0 7
<INCOME-CONTINUING> (1,235) (2,836)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,235) (2,836)
<EPS-PRIMARY> (.22) (.41)
<EPS-DILUTED> 0 0
</TABLE>
