<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For The Quarterly Period Ended March 31, 1995 Commission File Number 0-18170
-------------- -------
CRYOMEDICAL SCIENCES, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3076866
-------- ----------
(State of Incorporation) (IRS Employer I.D. Number)
1300 Piccard Drive
Suite 102
Rockville, Maryland 20850
--------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (301) 417-7070
--------------
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
---- -----
24,845,431 shares of Cryomedical Sciences, Inc. Common Stock, par value $.001
per share, were outstanding as of April 30, 1995.
<PAGE> 2
CRYOMEDICAL SCIENCES, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 1995
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page No.
--------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at
March 31, 1995 and
June 30, 1994 3
Consolidated Statements of
Operations for the Three Months
and Nine Months ended March 31,
1995 and 1994. 4
Consolidated Statements of
Cash Flows for the Nine
Months ended March 31,
1995 and 1994. 5
Notes to Consolidated Condensed
Financial Statements 6-10
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 11-15
Part II. Other Information
Item 1. Legal Proceedings 16-17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
<PAGE> 3
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
1995 1994
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,480,300 $ 2,426,467
Short-term investments 100,310 97,424
Receivables 3,428,480 2,969,837
Inventories 2,460,970 2,131,289
Prepaid expenses and other 372,553 291,031
------------- ------------
TOTAL CURRENT ASSETS 7,842,613 7,916,048
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - less accumulated
depreciation and amortization of $907,062 and $593,030 1,162,305 1,171,651
OTHER ASSETS 18,727 18,727
------------- ------------
$ 9,023,645 $ 9,106,426
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,236,120 $ 1,823,298
Accrued vacation 179,095 153,941
Customer deposits 50,000 60,000
Warranty reserves 282,000 245,800
Extended warranties - current 781,250 507,750
Current portion of capital lease obligations
and notes payable 33,583 9,014
------------- ------------
TOTAL CURRENT LIABILITIES 3,562,048 2,799,803
EXTENDED WARRANTIES 959,521 934,371
DEFERRED RENT 19,966 18,161
CAPITAL LEASE OBLIGATIONS AND NOTES
PAYABLE, net of current portion 37,438 30,598
------------- ------------
TOTAL LIABILITIES 4,578,973 3,782,933
------------- ------------
COMMITMENTS AND CONTINGENCIES:
9% SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK,
Par value $.001, liquidation value $.50 per share;
authorized, 621,000 shares; issued and outstanding, none - -
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.001;
authorized, 9,379,000 shares; issued and outstanding, none - -
Common Stock, par value $.001; authorized,
50,000,000 shares; issued and outstanding,
24,845,431 and 24,427,009 shares 24,845 24,427
Additional paid-in capital 25,898,566 25,358,302
Accumulated deficit (21,437,737) (20,019,640)
Notes receivable from officers, including accrued interest (41,002) (39,596)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 4,444,672 5,323,493
------------- ------------
$ 9,023,645 $ 9,106,426
============= ============
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
-------------------------------------- -------------------------------------
1995 1994 1995 1994
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SALES & OTHER REVENUES $ 3,025,520 $ 2,798,643 $ 10,921,890 $ 9,883,810
COST OF SALES 1,222,422 1,525,893 5,042,619 5,484,802
------------ ------------- ------------- -------------
GROSS PROFIT 1,803,098 1,272,750 5,879,271 4,399,008
------------ ------------- ------------- -------------
OPERATING EXPENSES:
Research and development 682,383 549,963 2,288,630 1,946,554
Sales and marketing 1,003,525 912,312 2,812,246 2,498,004
General and administrative 766,080 1,007,915 2,229,250 2,292,781
------------- ------------- ------------- -------------
TOTAL OPERATING EXPENSES 2,451,988 2,470,190 7,330,126 6,737,339
------------- ------------- ------------- -------------
OPERATING LOSS (648,890) (1,197,440) (1,450,855) (2,338,331)
INTEREST INCOME, net of
interest expense 3,571 824 32,759 22,264
------------ ------------ ------------- ------------
NET LOSS $ (645,319) $ (1,196,616) $ (1,418,096) $ (2,316,067)
============ ============ ============= ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 24,833,633 22,673,442 24,659,112 22,572,151
=========== ============ ============= ============
NET LOSS PER SHARE $ ( 0.03) $ (0.05) $ (0.06) $ (0.10)
============ ============ ============= ============
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE> 5
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
March 31,
------------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,418,096) $(2,316,067)
----------- -----------
Adjustments to reconcile net loss to
net cash used in operating activities:
Increase in warranty reserves 36,200 33,200
Depreciation and amortization 314,031 239,509
Changes in assets and liabilities:
(Increase) decrease in receivables (458,643) 40,952
Increase in inventories (329,681) (881,784)
Increase in prepaid expenses
and other assets (81,522) (116,207)
Increase in accounts payable,
accrued expenses, and deferred rent 439,781 422,623
Decrease in customer deposits (10,000) (40,000)
Increase in extended warranties 298,650 717,562
----------- -----------
Total Adjustments 208,816 415,855
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,209,280) (1,900,212)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (100,310) (97,424)
Maturities of short-term investments 97,424 1,094,548
Purchase of equipment (304,686) (272,979)
----------- -----------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (307,572) 724,145
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes receivable from officers (1,406) (1,406)
Increase (decrease) of notes payable 31,409 (2,157)
Common stock issued for cash 110,692 122,140
Common stock issuance costs - (5,992)
Exercise of private placement unit purchase options - 121,500
Exercise of IPO Unit Purchase Options & underlying warrants 429,990 -
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 570,685 234,085
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (946,167) (941,982)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,426,467 1,976,784
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,480,300 $ 1,034,802
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 12,453 $ 6,720
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE> 6
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 1995 AND 1994
A. GENERAL
Cryomedical Sciences, Inc. ("CMS") and its wholly owned subsidiary Cryo
Instruments, Inc. ("CII"), collectively referred to as the "Company," is
engaged in the research, development, manufacturing and marketing of
products for use in the field of hypothermic (low-temperature) medicine.
The Consolidated Balance Sheet as of March 31, 1995, the Consolidated
Statements of Operations for the three and nine month periods ended March
31, 1995 and 1994, and the Consolidated Statements of Cash Flows for the
nine-month periods ended March 31, 1995 and 1994, have been prepared
without audit. In the opinion of management, all adjustments necessary
to present fairly the financial position, results of operations, and cash
flows at March 31, 1995, and for all periods then ended, have been made.
All adjustments made were of a normal recurring nature.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these consolidated financial statements be read in conjunction with
the financial statements and notes thereto for the fiscal year ended June
30, 1994 included in the Company's Annual Report on Form 10-K for the
year ended June 30, 1994.
The results of operations for the periods ended March 31, 1995 are not
necessarily indicative of the operating results anticipated for the
fiscal year ending June 30, 1995.
B. NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common
shares outstanding during the three months and nine months ended March
31, 1995 and 1994. No effect has been given to unexercised stock options
or warrants because the effect would be antidilutive.
C. CONTINGENCIES
In January 1994, the Company received correspondence from the Food and
Drug Administration (FDA) denying 510(k) premarket clearance for the CMS
Urethral Warmer (the "Warmer"), an optional cryosurgical accessory device
intended to
6
<PAGE> 7
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 1995 AND 1994
(continued)
C. CONTINGENCIES (continued)
protect the urethra from low temperature damage during urological
cryosurgery procedures. According to such correspondence, the Warmer
would require premarket approval ("PMA") prior to commencement of the
marketing thereof. Subsequently, the FDA indicated that it would
reconsider 510(k) clearance for the Warmer if the Company met certain
conditions.
On April 1, 1994, in accordance with one of the FDA conditions, the
Company submitted an Investigational Device Exemption ("IDE") application
for the Warmer. The Company received conditional approval from the FDA
for the IDE on May 2, 1994. Any investigational sites which were using
the Warmer pursuant to the prior "abbreviated" IDE and which are not part
of the current study under the IDE, cannot continue using the Warmer
unless and until CMS receives 510(k) clearance subsequent to the
completion of the current study.
The Company intends to complete the submission of a new 510(k)
application for the Warmer, another one of the FDA's conditions,
designating the Warmer as an "accessory" to the previously cleared CMS
AccuProbe System or other cryosurgical devices for use in general
urological procedures. Until regulatory clearance is received for the
Warmer, the Company will market the CMS AccuProbe System without
providing any such Warmers.
During the quarter ended March 31, 1994, in which quarter the Company
announced receipt of the correspondence from the FDA denying 510(k)
premarket clearance for the Warmer, CMS AccuProbe System sales in the
urological field slowed significantly. The Company believes that this
was due, in part, to the uncertainty regarding the status of the Warmer
and the availability of alternatives. For subsequent quarters since
March 31, 1994, sales of AccuProbe Systems for use in the urological
field have returned to higher levels. The Company believes that the use
of alternative warming methods has resulted in recent reports of
increased complications related to the urethral warming procedure. The
Company believes that these anecdotal reports of increased complications
may be affecting the rate of sales of AccuProbe Systems. In this regard,
the Company cannot predict the impact that alternative warming methods
may have on future sales of AccuProbe Systems. The Company also believes
that the lack of uniform medical insurance reimbursement policies, which
policies have not yet been established, was the most significant factor
affecting sales of AccuProbe Systems during the last twelve months.
7
<PAGE> 8
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 1995 AND 1994
(continued)
C. CONTINGENCIES (continued)
On March 31, 1994, the Company received a warning letter from the FDA
concerning promotional materials for the CMS AccuProbe System. The
letter stated that FDA "has determined that these materials contain
statements, suggestions, and implications which are misleading because
they promote the product beyond its intended use." The letter from the
FDA took issue with the promotion of the AccuProbe System specifically
for the "treatment" of "prostate cancer," and generally for the
"treatment" of "any specific disease state." The Company responded to
the FDA by notifying FDA that it did not promote the AccuProbe for the
"treatment" of any disease and that prior correspondence with FDA had led
the Company to believe that use of the words "prostate" and "cancer" were
permitted in this instance given the contents of the Company's original
510(k) submission, the nature of the predicate device upon which the
510(k) was based, and the fact that the device had received clearances in
the fields of urology and oncology. Nonetheless, the Company agreed to
modify its promotional materials in a way which it believes brings it
into compliance with the Agency's request. The Company does not believe
that any modifications to its promotional materials will have a
significant long term impact on future sales of the AccuProbe System.
In April 1994, present or former stockholders of the Company filed
several suits against the Company, its President and CEO and two other
directors in the United States District Court for the District of
Maryland. The suits were subsequently consolidated under Case No.
AW-94-873, and a consolidated amended complaint was filed. The
plaintiffs sought to have the consolidated action designated as a class
action on behalf of all persons who purchased the Company's stock between
September 13, 1991 and April 4, 1994. The plaintiffs claimed that,
during that period, the defendants violated the federal securities laws
and the common law by failing to make accurate public disclosures
regarding the need for, and status of, FDA clearance of the CMS Urethral
Warmer, an optional accessory device intended to protect the urethra
during urological cryosurgery procedures, and by failing to make accurate
public disclosures regarding the prospect that FDA would later take the
position that it was improper for the Company to promote the CMS
AccuProbe System for the "treatment" of "prostate cancer," and generally
for the "treatment" of "any specific disease state." The plaintiffs
claimed that the market price of the Company's stock was inflated as a
result of the defendants' alleged failure to make accurate public
disclosures. In addition, the plaintiffs asserted that the individual
defendants
8
<PAGE> 9
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 1995 AND 1994
(continued)
C. CONTINGENCIES (continued)
violated the federal securities laws by selling Company stock at inflated
prices during the alleged class period. The plaintiffs sought damages in
unspecified amounts, prejudgment interest, and an award of attorneys'
fees and experts' fees. On November 4, 1994, the defendants moved to
dismiss the consolidated amended complaint. On April 26, 1995, the Court
dismissed a major portion of the action. The Court dismissed the
plaintiffs' claims against the individual defendants in their entirety.
The Court also dismissed the plaintiffs' claims relating to the Company's
1991 and 1993 annual reports and dismissed the plaintiffs' state law
claims in their entirety. The Court ruled that the plaintiffs are
entitled to proceed solely with regard to the question of whether the
Company should have made a public disclosure in October 1992 when it
applied for FDA clearance for the CMS Urethral Warmer, and whether the
Company should have included a description in its 1992 annual report of
the relationship between the Urethral Warmer and the CMS AccuProbe. The
Company believes the suits are without merit and intends to defend its
position vigorously.
On April 26, 1995, the Company received notice that Cryogenic Technology
Limited ("Cryotech"), a competitor of the Company, had filed suit against
the Company in the United States District Court for the District of
Maryland, Civil Action No. JFM-95-1018. Cryotech seeks a declaration
that one of the Company's patents is invalid or that Cryotech
is not infringing any valid claims of the patent. The patent covers
certain aspects of the cryoprobes which are used with the CMS AccuProbe
System. The action was prompted by repeated correspondence from the
Company to Cryotech in which the Company asserted that the cryoprobes
which are used with Cryotech's cryosurgical system are infringing the
Company's patent. The Company believes that Cryotech's claims of
invalidity and lack of infringement are without merit. The Company
intends to defend the matter vigorously and to file a counterclaim
seeking damages for infringement.
D. TRANSACTIONS AFFECTING COMMON STOCK
In August 1994, warrants issued in 1989 in connection with the
acquisition of CII by CMS were exercised, resulting in the issuance of
75,000 shares of Common Stock. The Company also issued 7,500 shares of
Common Stock in August 1994 in connection with the exercise of 1,500 Unit
Purchase Options issued in 1989 in connection with the Company's initial
public offering.
9
<PAGE> 10
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 1995 AND 1994
(continued)
D. TRANSACTIONS AFFECTING COMMON STOCK (continued)
In October and November 1994, the Company issued 283,500 shares of Common
Stock in connection with the exercise of (i) 17,900 Unit Purchase Options
issued in 1989 in connection with the Company's initial public offering;
(ii) 97,000 Class A Warrants included in the Units and (iii) 97,000 Class
B Warrants issuable upon the exercise of the Class A Warrants.
In November 1994, warrants issued in 1991 in connection with a consulting
agreement were exercised, resulting in the issuance of 13,000 shares of
Common Stock.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company was incorporated on November 5, 1987. On August 31, 1989, it
completed the acquisition of Cryo Instruments, Inc. ("CII") and CII became a
wholly-owned subsidiary of the Company. CII has been inactive since June 30,
1990. All activities previously conducted by CII were transferred to CMS as of
July 1, 1990.
The Company is engaged in the research, development, manufacture and
marketing of products for use in the field of hypothermic (low-temperature)
medicine. The Company has developed a cryosurgical system, called the CMS
AccuProbe(R) System (the "AccuProbe"), which is a sophisticated cryosurgical
device designed to freeze and destroy unwanted (diseased) tissue. The initial
clinical focus of physicians with respect to the AccuProbe has been in the
fields of urology and general surgery, primarily to destroy tissue which cannot
be removed surgically or in which typical surgery offers extensive adverse side
effects. The Company plans to further test and market its AccuProbe in certain
of the various fields for which the device received clearance from the FDA in
April 1991. The CMS AccuProbe is cleared for marketing in the fields of
dermatology, general surgery, neurosurgery, thoracic surgery, ENT, gynecology,
oncology, proctology and urology.
RESULTS OF OPERATIONS
Sales and other operating revenues for the three and nine months ended
March 31, 1995 totaled $3,025,520 and $10,921,890, respectively, compared to
$2,798,643 and $9,883,810, respectively, for the comparable periods of the
prior fiscal year. The Company's operating revenues in the three months ended
March 31, 1995 included sales of 9 CMS AccuProbe Systems, disposable probes and
other accessories. Sales for the three months ended March 31, 1994 included 6
AccuProbe Systems, in addition to disposable probes and other accessory
products. Operating revenues for the nine months ended March 31, 1995 included
sales of 33 AccuProbe Systems, disposable probes and other accessories compared
to sales of 35 systems, disposable probes and other accessories in the
comparable period of the prior fiscal year. Revenues in the three and nine
month periods ended March 31, 1995 reflect increases in the prices of AccuProbe
Systems and single-use probes effective in the second quarter of fiscal 1994
and increases in warranty revenues due to the larger installed base of
AccuProbe Systems. Increases in revenues have been somewhat limited by a
decrease in average probe usage per AccuProbe System which the Company believes
is due to limited insurance reimbursement for cryosurgical procedures as
described below. Through March 31, 1995, the Company has sold a total of 114
AccuProbe Systems since the product was introduced in June 1992.
Included in sales and other operating revenues are ultrasound systems
produced by third party manufacturers and sold in conjunction with certain
AccuProbe Systems as a convenience to the customer. Ultrasound revenue for the
three and nine months ended
11
<PAGE> 12
March 31, 1995 totaled $59,900 and $732,188, respectively, compared to $160,100
for both comparable periods of the prior fiscal year.
Gross Profits for all products for the three months ended March 31, 1995
totaled $1,803,098, or 60% of sales, compared to gross profits of $1,272,750,
or 45% of sales, for the three months ended March 31, 1994. For the nine
months ended March 31, 1995 gross profits totaled $5,879,271, or 54% of sales,
compared to gross profits of $4,399,008, or 45% of sales, for the comparable
period of the prior fiscal year. Gross profit margins have increased as
manufacturing processes and service procedures were standardized and costs were
reduced. The increases in gross profit margin experienced in the periods ended
March 31, 1995 were also due in part to the manufacture of a greater number of
AccuProbe Systems than were sold in these periods and the capitalization into
inventory of the related costs of manufacture. In addition, beginning in July
1993, the Company instituted price increases and all sales since October 1,
1993 reflected increased prices. The Company does not anticipate further
increases in gross profits as a percent of sales during the year ending June
30, 1995.
Gross profits for the Company's products excluding ultrasound systems
("CMS Products") for the three months ended March 31, 1995 totaled $1,799,758,
or 61% of sales of CMS Products, compared to $1,387,249, or 53% of sales of CMS
Products, for the comparable period of the prior fiscal year. Gross profits
for CMS Products for the nine months ended March 31, 1995 totaled $5,832,569,
or 57% of sales of CMS Products, compared to $4,513,508, or 46% of sales of CMS
Products, in the comparable period of the prior fiscal year. Ultrasound gross
profits for the three and nine months ended March 31, 1995 totaled $3,340 and
$46,702, respectively, and averaged 6% of sales for both periods, compared to a
loss of $114,500 for the comparable periods of the prior fiscal year.
Research and development expenses for the three months ended March 31,
1995 totaled $682,383, an increase of 24% compared to $549,963 for the
comparable period of the prior fiscal year. Research and development expenses
increased for the three month period ended March 31, 1995 due to the awarding
by the Company of increased levels of research grants to outside facilities
pertaining to various CMS AccuProbe applications. Research and development
expenses for the nine months ended March 31, 1995 totaled $2,288,630, an
increase of 18% compared to $1,946,554 in the comparable period of the prior
fiscal year. Research and development expenses increased during the nine month
period ended March 31, 1995 due to increased product development expenses
incurred in connection with improvements in the single-use probe manufacturing
process and increased levels of research grants to outside facilities
pertaining to various CMS AccuProbe applications. The Company expects research
and development expenses to continue at a comparable level during the remainder
of the fiscal year ending June 30, 1995, and thereafter to decrease based upon
the cost reduction measures described below.
Sales and marketing expenses for the three months ended March 31, 1995
totaled $1,003,525, an increase of 10% compared to $912,312 for the comparable
period of the
12
<PAGE> 13
prior fiscal year. Sales and marketing expenses for the nine months ended
March 31, 1995 totaled $2,812,246, an increase of 13% compared to $2,498,004 in
the comparable period of the prior fiscal year. Sales and marketing expenses
increased in the more recent periods due to additional staffing and increased
marketing activity related to the CMS AccuProbe System. The Company expects
sales and marketing expenses to continue at a comparable level during the
remainder of the fiscal year ending June 30, 1995, and thereafter to decrease
based upon the cost reduction measures described below.
General and administrative expenses for three months ended March 31, 1995
totaled $766,080, a decrease of 24% compared to $1,007,915 for the comparable
period of the prior fiscal year. General and administrative expenses for the
nine months ended March 31, 1995 totaled $2,229,250, a decrease of 3% compared
to $2,292,781 for the comparable period of the prior fiscal year. General and
administrative expenses decreased in the more recent periods due to reduced
consulting and investor relations expenses. The Company expects general and
administrative expenses to continue to decrease based upon the cost reduction
measures described below.
As a result of the foregoing reductions in general and administrative
expenses and increased gross profits from sales, which were partially offset by
increases in Research and Development and Sales and Marketing expenses, the
Company sustained lower net losses of $645,319 and $1,418,096, respectively,
for the three and nine months ended March 31, 1995 compared to net losses of
$1,196,616 and $2,316,067, respectively, in the comparable periods of the prior
fiscal year.
Sales of the AccuProbe are affected by the level of reimbursement by
public and private insurers in connection with procedures in which the
AccuProbe is utilized. The availability of consistent, uniform insurance
reimbursement guidelines for hospitals and physicians is an important factor
often considered by potential customers when making a decision regarding the
purchase of any new medical device, including the AccuProbe System.
Reimbursement of hospitals and urologists by public and private insurers such
as Medicare and Blue Cross and Blue Shield is a necessary part of gaining
general acceptance for use of the AccuProbe for urological cryosurgery.
Currently Medicare considers urological cryosurgical procedures to be
investigational and excludes such procedures from reimbursement, although
Medicare carriers may pay for such procedures if the carriers decide that the
use of the AccuProbe is appropriate for the patients involved. No national
payment guidelines for such surgery have yet been established by either
Medicare's Health Care Financing Administration ("HCFA") or by the National
Blue Cross and Blue Shield Association. Therefore, insurer's reimbursement
decisions are made on an insurer-by-insurer or case-by-case basis. While
payments received by customers vary significantly by region and insurer,
widespread formal reimbursement acceptance has yet to be achieved. When
insurance coverage is not available, patients may either elect to pay for
cryosurgical procedures themselves or undergo traditional therapies which are
covered by their insurers. The Company cannot predict if or when national
coverage guidelines for Medicare, Blue Cross and Blue Shield or any other
insurance carriers will be instituted for this form of surgery. The
uncertainty and added efforts required for the
13
<PAGE> 14
Company's customers to secure payment may be impacting sales growth and
utilization of AccuProbe Systems to some degree and, if so, may continue to do
so unless and until formal national coverage guidelines are established. In
this respect, the number of single-use probes sold in the nine months ended
March 31, 1995 increased 7% compared with the number of probes sold in the
comparable period of the prior fiscal year. However, the cumulative number of
systems sold since the introduction of the AccuProbe increased 63% from 70 at
March 31, 1994 to 114 at March 31, 1995, which could indicate a significantly
reduced rate of probe usage per system on average. The Company believes such
reduced rate of probe usage is likely due to the lack of uniform medical
insurance reimbursement policies. Changes in probe inventories maintained by
hospitals using AccuProbe Systems may influence the rate of sales of single-use
probes, but the Company is usually not aware of such changes in hospital probe
inventories.
In view of the operating losses suffered by the Company and the level of the
Company's current liquid resources (see "Liquidity and Capital Resources"
below), in May 1995 the Company undertook certain actions to reduce expense
levels. Such actions include staff reductions of approximately 20%, salary
reductions and other cost control measures. Such other cost control measures
include a reduction in the amount of leased office space, reductions in the
levels of research grants to outside facilities and reductions in other
overhead expenses. The goal of these cost reduction measures is to reduce
operating expenses to a level whereby the Company can achieve operating profits
and a positive cash flow from operations, for which there can be no assurance
of achieving. It is possible, however, that such expense reductions will be
partially offset by increased legal and consulting expense in connection with
the lawsuits included in Part II, Item I of this Form 10-Q and the FDA issues
included in the Notes to the Consolidated Condensed Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1995, the Company had cash, cash equivalents, and short-term
investments totaling $1,580,610 and working capital of $4,280,565, as compared
to $2,523,891 and $5,116,245, respectively, at June 30, 1994. The Company's
cash and working capital positions decreased from June 30, 1994 due primarily
to the net loss of $1,418,096 sustained by the Company for the nine months
ended March 31, 1995.
In August 1994, warrants issued in 1989 in connection with the
acquisition of CII by CMS were exercised, resulting in the issuance of 75,000
shares of Common Stock and net proceeds to the Company of $56,250. The Company
also issued 7,500 shares of Common Stock in August 1994 in connection with the
exercise of 1,500 Unit Purchase Options issued in 1989, resulting in net
proceeds to the Company of $9,750.
In October and November 1994, the Company issued 283,500 shares of Common
Stock in connection with the exercise of (i) 17,900 Unit Purchase Options
issued in 1989 in connection with the Company's initial public offering, (ii)
97,000 Class A Warrants included in the Units, and (iii) 97,000 Class B
Warrants issuable upon the exercise of the Class A Warrants, resulting in gross
proceeds to the Company of $420,240. In
14
<PAGE> 15
November 1994, warrants issued in 1991 in connection with a consulting
agreement were exercised, resulting in issuance of 13,000 shares of Common
Stock and gross proceeds to the Company of $25,610.
Capital expenditures for leasehold improvements, furniture and equipment
totaled $304,686 in the nine months ended March 31, 1995, compared to $272,979
in the comparable period of the prior fiscal year. The Company expects to
spend an additional $60,000 in the balance of the year ending June 30, 1995 for
equipment. The Company does not expect significant capital expenditures for
the fiscal year ending June 30, 1996, unless revenues increase significantly
from current levels.
The Company expects to incur substantial expenditures over the remainder
of fiscal 1995 and in fiscal 1996 related to research, development,
manufacturing and testing of its products and for sales and marketing efforts
and other operating expenses. The Company's management believes that its
current cash and working capital position will be sufficient to fund the
operations of the Company for the next 12 months dependent, in part, on the
level of sales revenues achieved, the level of sales and marketing activity
engaged in by the Company, and the amounts of research funded by the Company.
However, the Company expects to pursue various forms of short term financing to
supplement working capital during fiscal 1995 and 1996 and possibly additional
equity financing. Except for the sale of its products, the Company has no
other major sources of liquidity and has no commitments with regard to
obtaining any additional funds.
15
<PAGE> 16
CRYOMEDICAL SCIENCES, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In April 1994, present or former stockholders of the Company
filed several suits against the Company, its President and CEO
and two other directors in the United States District Court for
the District of Maryland. The suits were subsequently
consolidated under Case No. AW-94-873, and a consolidated amended
complaint was filed. The plaintiffs sought to have the
consolidated action designated as a class action on behalf of all
persons who purchased the Company's stock between September 13,
1991 and April 4, 1994. The plaintiffs claimed that, during that
period, the defendants violated the federal securities laws and
the common law by failing to make accurate public disclosures
regarding the need for, and status of, FDA clearance of the CMS
Urethral Warmer, an optional accessory device intended to protect
the urethra during urological cryosurgery procedures, and by
failing to make accurate public disclosures regarding the
prospect that FDA would later take the position that it was
improper for the Company to promote the CMS AccuProbe System for
the "treatment" of "prostate cancer," and generally for the
"treatment" of "any specific disease state." The plaintiffs
claimed that the market price of the Company's stock was inflated
as a result of the defendants' alleged failure to make accurate
public disclosures. In addition, the plaintiffs asserted that
the individual defendants violated the federal securities laws by
selling Company stock at inflated prices during the alleged class
period. The plaintiffs sought damages in unspecified amounts,
prejudgment interest, and an award of attorneys' fees and
experts' fees. On November 4, 1994, the defendants moved to
dismiss the consolidated amended complaint. On April 26, 1995,
the Court dismissed a major portion of the action. The Court
dismissed the plaintiffs' claims against the individual
defendants in their entirety. The Court also dismissed the
plaintiffs' claims relating to the Company's 1991 and 1993 annual
reports and dismissed the plaintiffs' state law claims in their
entirety. The Court ruled that the plaintiffs are entitled to
proceed solely with regard to the question of whether the Company
should have made a public disclosure in October 1992 when it
applied for FDA clearance for the CMS Urethral Warmer, and
whether the Company should have included a description in its
1992 annual report of the relationship between the Urethral
Warmer and the CMS AccuProbe. The Company believes the suits are
without merit and intends to defend its position vigorously.
On April 26, 1995, the Company received notice that Cryogenic
Technology Limited ("Cryotech"), a competitor of the Company, had
filed suit against the Company in the United States District
Court for the District of Maryland, Civil Action No. JFM-95-1018.
Cryotech seeks a declaration that one of the Company's patents is
invalid or that Cryotech is not infringing any valid claims
16
<PAGE> 17
of the patent. The patent covers certain aspects of the
cryoprobes which are used with the AccuProbe System. The action
was prompted by repeated correspondence from the Company to
Cryotech in which the Company asserted that the cryoprobes which
are used with Cryotech's cryosurgical system are infringing the
Company's patent. The Company believes that Cryotech's claims of
invalidity and lack of infringement are without merit. The
Company intends to defend the matter vigorously and to file a
counterclaim seeking damages for infringement.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule.
(99) Complaint by Cryogenic Technology Limited
against Cryomedical Sciences, Inc., dated
April 5, 1995.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended March 31, 1995.
17
<PAGE> 18
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.
Cryomedical Sciences, Inc.
--------------------------------------
(Registrant)
Date: May 15, 1995 /s/J. J. Finkelstein
--------------------------------------
J. J. Finkelstein
President and Chief
Executive Officer
(Principal Executive Officer)
/s/Theodore D. Pennington
--------------------------------------
Theodore D. Pennington
Vice President
Finance and Administration
(Principal Financial Officer and
Principal Accounting Officer)
18
<PAGE> 1
EXHIBIT 99
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
CRYOGENIC TECHNOLOGY LIMITED CIVIL ACTION NO. JFM-95-1018
Cryotech House
Goods Road
Belper, Derbyshire DE56 1UU
UNITED KINGDOM,
PLAINTIFF
VS. SUMMONS
CRYOMEDICAL SCIENCES, INC. IN CIVIL ACTION
1300 Piccard Drive, Suite 102
Rockville, Maryland 20850-4303
SERVE ON RESIDENT AGENT:
Leatha V. Poon
908 Kings Valley Drive
Mitchellville, MD 20716,
DEFENDANT
TO THE ABOVE NAMED DEFENDANT:
YOU ARE HEREBY SUMMONED AND REQUIRED TO SERVE UPON Thomas D. Washburne
PLAINTIFF'S ATTORNEY WHOSE ADDRESS IS Ober, Kaler, Grimes & Shriver, 120 East
Baltimore Street, Baltimore, Maryland 21202-1643 AN ANSWER TO THE COMPLAINT
WHICH IS HEREWITH SERVED UPON YOU, WITHIN 20 DAYS AFTER SERVICE OF THIS SUMMONS
UPON YOU, EXCLUSIVE OF THE DAY OF SERVICE. IF YOU FAIL TO DO SO, JUDGMENT BY
DEFAULT WILL BE TAKEN AGAINST YOU FOR THE RELIEF DEMANDED IN THE COMPLAINT.
JOSEPH A. HAAS
------------------------
CLERK OF COURT
/s/ JOANN PARTEE
------------------------
DEPUTY CLERK
DATE: April 6, 1995
NOTE: THIS SUMMONS IS ISSUED PURSUANT TO RULE 4 OF THE FEDERAL RULES OF CIVIL
PROCEDURE.
<PAGE> 2
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
CRYOGENIC TECHNOLOGY LIMITED )
Cryotech House )
Goods Road )
Belper, Derbyshire DE56 1UU )
UNITED KINGDOM, )
)
a corporation of )
the United Kingdom )
)
Plaintiff, ) Civil Action No. JFM-95-1018
)
v. ) COMPLAINT
)
CRYOMEDICAL SCIENCES, INC. )
1300 Piccard Drive, Suite 102 )
Rockville, Maryland 20850-4303 )
)
SERVE ON RESIDENT AGENT: )
)
Leatha V. Poon )
908 Kings Valley Drive )
Mitchellville, Maryland 20716, )
)
a Delaware corporation )
)
Defendant. )
_______________________________________________)
Plaintiff, Cryogenic Technology Limited (hereinafter "CRYOTECH") for its
complaint against the Defendant, Cryomedical Sciences, Inc. (hereinafter
"CMS"), alleges as follows:
THE PARTIES
1. Plaintiff, CRYOTECH, is a corporation organized and existing under the
laws of the United Kingdom, and having a principal place of business at
Cryotech House, Goods Road, Belper, Derbyshire, DE56 1UU, United Kingdom.
2. Upon information and belief, the Defendant, CMS, is a corporation
organized and existing under the laws of Delaware, and
<PAGE> 3
having a principal place of business in this judicial district at 1300 Piccard
Drive, Suite 102, Rockville, Maryland 20850-4303.
JURISDICTION AND VENUE
3. This action arises under the laws of the United States Title 35, United
States Code and is based, inter alia, upon an actual controversy between the
parties with respect to the validity, enforceability and infringement of U.S.
Patent No. 4,254,116 ("the `116 patent"). Jurisdiction is conferred on this
court by 28 U.S.C. Sections 1338(a), 2201(a) and 2202. Venue is proper under
28 U.S.C. Section 1391(b),(c).
BACKGROUND
4. CRYOTECH is in the business of manufacturing and selling, inter alia,
cryogenic probes.
5. Upon information and belief, CMS is also in the business of
manufacturing and selling cryogenic probes.
6. CMS has asserted that it is the owner of the `116 patent, that
CRYOTECH's products infringe the `116 patent, and that CMS intends to
vigorously enforce its patent rights.
7. As a consequence of CMS's actions, threats and assertions, CRYOTECH is
in apprehension of suit, should they continue the sale of the accused products
in the United States.
COUNT I
DECLARATORY JUDGMENT
8. The allegations of paragraphs 1-7, above are realleged and incorporated
herein by reference.
2
<PAGE> 4
9. Each claim of the `116 patent is invalid under 35 U.S.C. Sections 102,
103 and 112.
10. The products manufactured and sold by CRYOTECH do not infringe any
valid claims of the `116 patent.
11. Accordingly, an actual controversy exists between the parties as to the
validity and infringement of the `116 patent.
WHEREFORE, CRYOTECH requests that this Court enter Judgment:
A. Declaring that the `116 patent is invalid under 35 U.S.C. Sections
102, 103 and 112;
B. Declaring that the cryogenic probes sold by CRYOTECH in the United
States do not infringe any claims of the `116 patent.
C. Awarding CRYOTECH its attorneys' fees and costs incurred in this action;
and
D. Granting CRYOTECH such other and further relief as this Court deems just
and proper.
CRYOGENIC TECHNOLOGY LIMITED
Dated: 4/5/95 /s/ THOMAS D. WASHBURNE
--------------------------
Thomas D. Washburne, Esq.
Trial Bar No. 00708
OBER, KALER, GRIMES & SHRIVER
A Professional Corporation
120 East Baltimore Street
Baltimore, Maryland 21202-1643
(410) 658-1120
Attorneys for Plaintiff
3
<PAGE> 5
Of Counsel:
Paul J. Hayes, Esq.
Victor B. Lebovici, Esq.
WEINGARTEN, SCHURGIN, GAGNEBIN & HAYES
Ten Post Office Square
Boston, MA 02109
(617) 542-2290
367570
4
<PAGE> 6
ALL PROCEEDINGS
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
:
:
v. : CIVIL NO.
:
:
:
...oOo...
GENERAL CONSENT TO PROCEED BEFORE A UNITED STATES MAGISTRATE JUDGE
In accordance with the provisions of Title 28 U.S.C. Section 636 (c), the
parties to the above-captioned civil matter hereby voluntarily waive their
rights to proceed before a United States District Judge and consent to have a
United States Magistrate Judge conduct any and all further proceedings in the
case, including trial, and order the entry of a final judgment.
Date:
- - - - - - - -------------------------------------- -------------------------
Date:
- - - - - - - -------------------------------------- -------------------------
ELECTION OF APPEAL TO DISTRICT JUDGE
(DO NOT execute this portion of the consent form if the parties desire that the
appeal lie directly to the Court of Appeals).
In accordance with the provisions of Title 28 U.S.C. Section 636(c)(4), the
parties elect to take any appeal in this case to a District Judge.
Date:
- - - - - - - -------------------------------------- -------------------------
Date:
- - - - - - - -------------------------------------- -------------------------
ORDER OF REFERENCE
IT IS HEREBY ORDERED this ______ day of _________________________, 1995,
that the above-captioned matter be referred to United States Magistrate Judge
_____________________________, for all proceedings and the entry of judgment in
accordance with Title 28 U.S.C. Section 636(c) and the foregoing consent of the
parties.
----------------------------------
United States District Judge
<PAGE> 7
1/90
UNITED STATES DISTRICT COURT
DISTRICT OF MARYLAND
OFFICE OF THE CLERK
101 W. LOMBARD STREET
BALTIMORE, MARYLAND 21201-2691
Joseph A. Haas (301) 962-2
Clerk FTS 922-2
TO: Party or Counsel
FROM: Clerk of Court CIVIL NO.
SUBJECT: Disclosure of Corporate Interest
DATE:
Within ten (10) days of this notice please advise the Clerk, in writing, of
the presence, if any, of any undisclosed corporate interest pursuant to Local
Rule 103.3, which, for your convenience, has been printed on the reverse side
of this memo.
If there is no such interest, state this matter in writing. This can be
done simply by completing and signing the note below. If there is such an
interest, set it forth in detail in writing.
This information is required to inform the Judge, to whom this case is
assigned, of any possible need for disqualification from hearing this case.
Very truly Yours,
JOSEPH A. HAAS, CLERK
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Mr. Clerk CIVIL NO. __________
I certify, as a party/counsel in the case noted above that
___________________ is not an affiliate or parent of any corporation, and no
(party)
corporation, unincorporated association, partnership or other business entity,
not a party to the case, has a financial interest in the outcome of this
litigation as set forth Local Rule 103.3.
PLEASE INCLUDE CASE NUMBER
<PAGE> 8
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
LOCAL RULE 103.3
3. Disclosure of Affiliations and Financial Interest
When filing an initial pleading or promptly after learning of the
information to be disclosed, counsel shall submit to the Clerk two copies of a
written statement (separate from any pleading) containing the following
information:
a. Corporate affiliations. The identity of any parent or other affiliate
of a corporate party and the description of the relationship between the party
and such affiliates.
b. Financial interests in the outcome of the litigation. The identity of
any corporation, unincorporated association, partnership or other business
entity, not a party to the case, which may have any financial interest
whatsoever in the outcome of litigation and the nature of its financial
interest. The term "financial interest in the outcome of the litigation"
includes a potential obligation of an insurance company or other person to
represent or to indemnify any party to the case. Any notice given to the Clerk
under this Rule shall not be considered as an admission by the insurance
company or other person that it does in fact have an obligation to defend the
litigation or to indemnify a party or as a waiver of any rights that it might
have in connection with the subject matter of the litigation.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> MAR-31-1995
<CASH> 1,580,610
<SECURITIES> 0
<RECEIVABLES> 3,428,480
<ALLOWANCES> 0
<INVENTORY> 2,460,970
<CURRENT-ASSETS> 7,842,613
<PP&E> 2,069,367
<DEPRECIATION> 907,062
<TOTAL-ASSETS> 9,023,645
<CURRENT-LIABILITIES> 3,562,048
<BONDS> 0
<COMMON> 24,845
0
0
<OTHER-SE> 4,419,827
<TOTAL-LIABILITY-AND-EQUITY> 9,023,645
<SALES> 10,921,890
<TOTAL-REVENUES> 10,921,890
<CGS> 4,398,186
<TOTAL-COSTS> 5,042,619
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,453
<INCOME-PRETAX> (1,418,096)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,418,096)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,418,096)
<EPS-PRIMARY> (0.06)
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