<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 March 31, 2000
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 Number: 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 90 days. Yes [X] No [ ]
As of April 27, 2000, 13,370,195 shares of the Registrant's Common Stock were
outstanding.
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APPLIED IMAGING CORP.
INDEX
<TABLE>
<CAPTION>
Page
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PART I. FINANCIAL INFORMATION
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<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 31, 2000 and December 31, 1999...................................... 3
Condensed Consolidated Statements of Operations and Comprehensive Loss
Three months ended March 31, 2000 and 1999................................ 4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2000 and 1999................................ 5
Notes to Condensed Consolidated Financial Statements...................... 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................... 8-10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk Derivatives and Financial Instruments........................... 11
PART II. OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K............................................ 12
Signatures.................................................................. 13
</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)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,036 $ 2,832
Short term investments 3,976 5,574
Trade accounts receivable, net 5,844 6,187
Related party receivables -- 143
Inventories 1,363 1,369
Prepaid expenses and other assets 455 187
--------- ---------
Total current assets 14,674 16,292
Property and equipment, net 1,022 1,014
Intangibles 2,296 2,358
Other assets, net 70 80
--------- ---------
Total assets $ 18,062 $ 19,744
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of bank debt $ 1,168 $ 1,743
Current portion of related party notes payable 500 500
Current portion of capital lease obligation 34 -
Accounts payable 1,949 2,226
Accrued expenses 2,810 3,166
Deferred revenue 1,783 1,525
--------- ---------
Total current liabilities 8,244 9,160
Bank debt, less current portion 1,000 1,167
Related party notes payable, less current portion 250 250
Deferred revenue 474 518
Capital lease obligations, less current portion 31 37
--------- ---------
Total liabilities 9,999 11,132
--------- ---------
Stockholders' equity:
Common stock 13 13
Additional paid-in capital 43,730 43,034
Deferred compensation -- (43)
Accumulated other comprehensive income (384) (379)
Accumulated deficit (35,296) (34,013)
--------- ---------
Total stockholders' equity 8,063 8,612
--------- ---------
Total liabilities and stockholders' equity $18,062 $19,744
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
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APPLIED IMAGING CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share data)
(Unaudited)
Three months ended
March 31,
---------------------
2000 1999
------- -------
Revenues $ 3,681 $ 2,665
Cost of revenues 1,774 1,314
------- -------
Gross profit 1,907 1,351
------- -------
Operating expenses:
Research and development 880 1,131
Sales and marketing 1,470 1,061
General and administrative 679 720
Amortization of intangibles 63 --
Restructuring costs -- 224
------- -------
Total operating expenses 3,092 3,136
------- -------
Operating loss (1,185) (1,785)
Other income/(expense), net (97) (21)
------- -------
Net loss $(1,282) $(1,806)
Other comprehensive loss, net of tax
Change in unrealized loss on short
term investments (3) --
Other unrealized gain (loss) (2) --
------- -------
Comprehensive loss $ 1,287 $ 1,806
======= =======
Net loss per share - basic and diluted $ (0.10) $ (0.16)
======= =======
Weighted average shares outstanding 13,189 11,530
======= =======
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
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APPLIED IMAGING CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------------
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,282) $ (1,806)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and Amortization 229 230
Amortization related to employee deferred
stock compensation 43 95
Loss on sale of fixed and other assets - 68
Changes in operating assets and liabilities:
Trade accounts and related party receivable 486 (159)
Inventories 6 80
Prepaid expenses and other assets (268) 126
Accounts payable (277) (309)
Accrued expenses (356) (70)
Deferred revenue 213 (21)
-------- --------
Net cash used in operating activities: (1,206) (1,766)
-------- --------
Cash flows from investing activities:
Proceeds from sale and maturities of investments 1,593 500
Purchases of equipment (175) (179)
Other assets 10 8
-------- --------
Net cash provided by investing activities: 1,428 329
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock 696 -
Bank and other loan proceeds/(payments)-net (714) (168)
-------- --------
Net cash used by financing activities: (18) (168)
-------- --------
Net increase (decrease) in cash and cash equivalents 204 (1,605)
Cash and cash equivalents at beginning of period 2,832 5,480
-------- --------
Cash and cash equivalents at end of period $ 3,036 $ 3,875
======== ========
Supplemental disclosure of cash flow information:
Interest paid during the period $ 73 $ 22
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited 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
months ended March 31, 2000 and 1999. 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 months ended
March 31, 2000 are not necessarily indicative of results to be expected for the
fiscal year ending December 31, 2000. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, for the year ended December 31, 1999, contained in
the Company's 1999 annual report on Form 10K.
NOTE 2 - Inventories (in thousands)
- -----------------------------------
<TABLE>
<CAPTION>
Balance as of March 31, 2000 December 31, 1999
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<S> <C> <C>
Raw materials $ 1,288 $ 1,300
Work in process 75 13
Finished goods - 56
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Total $ 1,363 $ 1,369
============= ==============
</TABLE>
NOTE 3 - Loss per share
- ------------------------
The Company has reported losses per share in accordance with the Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards,
(SFAS) No. 128 "Earnings Per Share." SFAS 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.
There were no reconciling items of the numerators and denominators of the
basic and diluted EPS computation. Securities excluded from the computation of
EPS because their effect on EPS was antidilutive, but could dilute basic EPS in
future periods are as follows:
<TABLE>
<CAPTION>
Balance as of March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Options 1,667,531 1,740,124
Warrants 313,010 577,909
-------------- -------------
Total 1,980,541 2,318,033
============== =============
</TABLE>
6
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NOTE 4 - Recent Accounting Pronouncements
- -----------------------------------------
In December 1999, the Securities and Exchange Commission Issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for revenue recognition under certain
circumstances. The Company is currently evaluating the impact of SAB 101 on its
financial statements and related disclosures. The accounting and disclosures
prescribed by SAB 101 will be effective for the fiscal year ended December 31,
2000.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
133 requires that all derivatives be recognized at fair value in the statement
of financial position, and that the corresponding gains and losses be reported
either in the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. SFAS 133 will be
effective for fiscal quarters beginning after June 15, 2000. The Company is
currently evaluating the impact of the requirements of SFAS 133 and the effects
if any on its financial statements and does not expect any material impact from
its application. The Company does not currently hold derivative instruments or
engage in hedging activities.
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, 1999.
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 under "Item one" in the Company's
annual report on form 10-K for the fiscal year ended December 31, 1999.
Results of Operations
Revenues. The Company's revenues are derived primarily from the sale of
products, instrument service contracts and grant revenues. Revenues for the
three months ended March 31, 2000 were $3.7 million compared to $2.7 million for
the corresponding period in the prior year. This 38% increase in revenues in
the quarter was due to sales of two new products, the MDS(TM) and Genus(TM)
systems, as well as increases in sales of existing products and services.
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 months ended March 31, 2000 were 48%
compared to 49% for the corresponding prior year. The decrease is primarily due
to lower costs for raw materials and increased average instrument selling
prices.
Research and development expenses. Research and development expenses for the
three months ended March 31, 2000 were $880,000 or 24% of total revenues
compared to $1.1 million or 42% of total revenues for the comparative prior year
period. The decrease over the prior year period is primarily due to the
decreased expenditures for salaries and consulting costs associated with the
fetal cell isolation program.
Sales and marketing expenses. Sales and marketing expenses for the three
months ended March 31, 2000 were $1.5 million, increasing $0.4 million over the
corresponding prior year period. The increase is primarily related to higher
commission expense as a result of increased sales and increased sales personnel.
The increase in marketing expenses was related primarily to the Genus(TM) and
MDS(TM) product promotions. As a percentage of revenues, sales and marketing
expenses were 40% of total revenues for the three months ended March 31, 2000,
which is the same as in the corresponding prior year period.
General and administrative expenses. General and administrative expenses for
the three months ended March 31, 2000 were $742,000, including amortization of
$63,000, compared to $720,000 for the three months ended March 31, 1999.
Excluding the effect of the amortization expenses in 2000, general and
administrative expenses were $41,000 lower than 1999 due to the favorable
effects of the restructuring put in place last year. As a percentage of revenue,
general and administrative costs, including amortization, were 20% of total
revenues for the three months ended March 31, 2000 compared to 27% for the
corresponding prior period.
Restructuring Costs. A restructuring charge of $224,000 was accrued for during
the quarter ended March 31, 1999. The charge reflected the severance costs for
fifteen employees in both the United States and United Kingdom facilities.
There were no restructuring charges during the three months ended March 31,2000.
Other income (expense) net. Other expenses for the quarter were primarily
related to the interest expense associated with bank debt and higher exchange
losses due to the strengthening of the dollar against the pound
8
<PAGE>
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, 1999.
Due to the factors noted above, 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
At March 31, 2000, the Company had cash, cash equivalents and securities
available for sale of $7.0 million and working capital of $6.4 million. Cash
used by operations for the three months ended March 31, 2000 was $1.2 million
compared to $1.8 million for the corresponding prior year period. The decrease
in cash used in operations is primarily due to lower losses as explained above
and reduced balances of accounts payable and accruals. In addition, the Company
had the following investing and financing activities in the quarter. The Company
consumed $175,000 for purchases of capital equipment. The Company also used
approximately $0.8 million to pay down its bank debt.
The Company expects negative cash flow from operations to continue through
at least 2000, as it continues the research and development of its MDS System,
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 through 2000.*
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 investigation, the timing of regulatory
approvals or clearances, competing technologies or potential acquisitions.* 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. In addition, as opportunities arise, funds may also
be used to acquire businesses, technologies or products that complement 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.
9
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Year 2000 Compliance
The Company is knowledgeable of the issues associated with programming code
in existing computer systems that may have created potential incompatibilities
in computer systems beginning in the Year 2000. The Company began a Year 2000
problem assessment in 1997, establishing its Year 2000 Company Policy and
initiating product upgrade plans. The Company completed an assessment of its
internal Year 2000 risks and developed a series of upgrade and contingency
plans. No significant problems were encountered with the Company's products or
its internal business systems with the advent of Year 2000.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for revenue recognition under certain
circumstances. The Company is currently evaluating the impact of SAB 101 on its
financial statements and related disclosures. The accounting and disclosures
prescribed by SAB 101 will be effective for the fiscal year ended December 31,
2000.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
133 requires that all derivatives be recognized at fair value in the statement
of financial position, and that the corresponding gains and losses be reported
either in the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. SFAS 133 will be
effective for fiscal quarters beginning after June 15, 2000. The Company is
currently evaluating the impact of the requirements of SFAS 133 and the effects
if any on its financial statements and does not expect any material impact from
its application. The Company does not currently hold derivative instruments or
engage in hedging activities.
10
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Derivatives and Financial Instruments.
For the quarter ended March 31, 2000, there were no material changes
from the disclosures made in the Company's form 10-K for the year ended December
31, 1999.
11
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PART II - OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K.
(a)
Exhibit
-------
Exhibit 27.1 - Financial Data Schedule
There were no reports on Form 8-K during the quarter ended March 31,
2000
12
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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: May 8, 2000 By: /s/ JACK GOLDSTEIN
-------------------------
Jack Goldstein
Chief Executive Officer
Chairman of the Board
By: /s/ BARRY HOTCHKIES
-------------------------
Barry Hotchkies
Vice President, Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3036
<SECURITIES> 3976
<RECEIVABLES> 5844
<ALLOWANCES> 0
<INVENTORY> 1363
<CURRENT-ASSETS> 14674
<PP&E> 4825
<DEPRECIATION> (3803)
<TOTAL-ASSETS> 18062
<CURRENT-LIABILITIES> 8244
<BONDS> 0
0
0
<COMMON> 43743
<OTHER-SE> (35680)
<TOTAL-LIABILITY-AND-EQUITY> 18062
<SALES> 3155
<TOTAL-REVENUES> 3681
<CGS> 1429
<TOTAL-COSTS> 1774
<OTHER-EXPENSES> 3116
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73
<INCOME-PRETAX> (1282)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1282)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1282)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
