<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
<TABLE>
<S> <C>
For The Quarterly Period Ended September 30, 1995 Commission File Number 0-18170
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CRYOMEDICAL SCIENCES, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3076866
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(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
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24,854,383 shares of Cryomedical Sciences, Inc. common stock, par value $.001
per share, were outstanding as of November 3, 1995.
<PAGE> 2
CRYOMEDICAL SCIENCES, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1995
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page No.
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<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 1995 and
June 30, 1995 3
Consolidated Statements of
Operations for the Three Months ended
September 30, 1995 and 1994. 4
Consolidated Statements of
Cash Flows for the Three
Months ended September 30,
1995 and 1994. 5
Notes to Consolidated Condensed
Financial Statements 6-9
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 10-12
Part II. Other Information
Item 1. Legal Proceedings 13-14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
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2
<PAGE> 3
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1995 1995
---------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,083,696 1,117,383
Short-term investments 100,310 100,310
Receivables- net of allowance for doubtful accounts
of $78,209 and $78,209 2,407,010 3,178,032
Inventories 2,637,096 2,628,532
Prepaid expenses and other 220,410 297,984
-------------- ------------
Total current assets 6,448,522 7,322,241
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - less accumulated
depreciation and amortization of $1,118,810 and $1,010,209 978,063 1,061,935
OTHER ASSETS 18,727 18,727
-------------- ------------
$ 7,445,312 $ 8,402,903
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,705,169 $ 2,096,696
Accrued settlement of stockholder class action suit 100,000 100,000
Accrued vacation 156,582 177,831
Customer deposits 50,000 50,000
Warranty reserves 214,600 248,000
Extended warranties - current 860,850 842,738
Current portion of capital lease obligations and notes payable 21,833 31,083
-------------- ------------
Total current liabilities 3,109,034 3,546,348
EXTENDED WARRANTIES 674,925 848,286
DEFERRED RENT 9,309 3,690
CAPITAL LEASE OBLIGATIONS AND NOTES PAYABLE,
net of current portion 22,654 22,654
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Total liabilities 3,815,922 4,420,978
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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 $.001; authorized,
50,000,000 shares; issued and outstanding,
24,854,383 and 24,845,631 shares 24,854 24,846
Additional paid-in capital 26,269,568 26,248,915
Accumulated deficit (22,623,092) (22,250,365)
Notes receivable from officers, including
accrued interest (41,940) (41,471)
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Total stockholders' equity 3,629,390 3,981,925
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$ 7,445,312 $ 8,402,903
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</TABLE>
See notes to consolidated condensed financial statements.
3
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CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
September 30,
-----------------------------------------
1995 1994
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<S> <C> <C>
SALES & OTHER REVENUES $ 2,019,422 $ 3,305,957
COST OF SALES 907,522 1,619,853
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GROSS PROFIT 1,111,900 1,686,104
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OPERATING EXPENSES:
Research and development 362,052 878,081
Sales and marketing 631,977 742,781
General and administrative 492,376 559,570
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TOTAL OPERATING EXPENSES 1,486,405 2,180,432
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OPERATING LOSS (374,505) (494,328)
INTEREST INCOME, net of interest
expense 1,778 10,541
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NET LOSS $ (372,727) $ (483,787)
=========== =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 24,854,064 24,457,254
=========== =============
NET LOSS PER SHARE $(0.01) $(0.02)
=========== =============
See notes to consolidated condensed financial statements.
</TABLE>
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CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
---------------------------------------
1995 1994
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (372,727) $ (483,787)
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Adjustments to reconcile net loss to
net cash used in operating activities:
(Decrease) increase in warranty reserves (33,400) 21,800
Depreciation and amortization 108,601 133,518
Changes in assets and liabilities:
Decrease in receivables 771,022 294
(Increase) decrease in inventories (8,564) 5,853
Decrease in prepaid expenses and other assets 77,574 48,439
(Decrease) increase in accounts payable,
accrued expenses, and deferred rent (416,407) 32,209
(Decrease) increase in extended warranties (155,249) 162,250
Increase in customer deposits - 30,900
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Total Adjustments 343,577 435,263
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NET CASH USED IN OPERATING ACTIVITIES (29,150) (48,524)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (24,729) (83,759)
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NET CASH USED IN INVESTING ACTIVITIES (24,729) (83,759)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes receivable from officers (469) (469)
Repayment of notes payable - (412)
Exercise of warrants - 56,250
Exercise of unit purchase options - 9,750
Employee Stock Purchase 20,661 -
------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 20,192 65,119
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NET DECREASE IN CASH AND CASH EQUIVALENTS (33,687) (67,164)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,117,383 2,426,467
------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,083,696 $ 2,359,303
============= ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 5,483 $ 2,561
============= ============
</TABLE>
See notes to consolidated condensed financial statements.
5
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CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED SEPTEMBER 30, 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 September 30, 1995, the
Consolidated Statements of Operations for the three month periods
ended September 30, 1995 and 1994, and the Consolidated Statements of
Cash Flows for the three-month periods ended September 30, 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 September 30, 1995, and for
all periods then ended, have been recorded. All adjustments recorded
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, 1995 included in the Company's Annual Report on Form
10-K for the Year Ended June 30, 1995.
The results of operations for the period ended September 30, 1995 are
not necessarily indicative of the operating results anticipated for
the fiscal year ending June 30, 1996.
B. NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common
shares outstanding during the three month periods ended September 30,
1995 and 1994. No effect has been given to unexercised stock options
or warrants because the effect would be antidilutive.
C. CONTINGENCIES
On October 26, 1995, the Company received 510(k) marketing clearance
from the FDA for its CMS Urethral Warmer System ("Warmer") clearing
the product for marketing in the United States.
6
<PAGE> 7
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 of 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 the quarter ended
June 30, 1994, sales of AccuProbe Systems in the urological field
returned to more normal levels and continued at these levels
throughout fiscal 1995. The Company believes that the use of
alternative warming methods has resulted in recent reports of
increased complications related to the urethral warming procedures.
The Company believes that these anecdotal reports of increased
complications may have affected the rate of sales of AccuProbe Systems
during the period ended September 30, 1995. 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 in recent months.
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 would bring 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
7
<PAGE> 8
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 assert
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 were 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. In September 1995, the parties reached an
agreement in principle to settle the case. The agreement provides
that a class consisting of all persons who purchased the Company's
stock between September 13, 1991 and April 4, 1994 will be certified
solely for settlement purposes. In return for a general release of
all claims which members of the class may have against the Company and
its past and present officers, directors, employees and other agents,
the Company will pay $100,000 and issue shares of common stock of the
Company with a market value of $350,000, based on the average closing
price on the ten trading days prior to district court approval of the
settlement. The Company has accrued the entire $450,000 settlement
cost of the stockholder class action suit as of June 30, 1995. The
$350,000 of common stock to be issued has been recorded as additional
paid in capital at June 30, 1995. The plaintiffs' counsel intend to
apply to the Court for an award of fees equal to approximately one
third of the gross amount of the settlement proceeds, as well as for
reimbursement of the out of pocket expenses they incurred during the
course of litigation. The remainder of the settlement proceeds, minus
the costs of administering the settlement, including the costs of
notice to the class, will be distributed to those members of the class
who submit timely claims, in proportion to the investment losses they
have suffered on shares they purchased during the class period. The
settlement is subject to approval by the Court after notice to the
class. The Company has settled the litigation solely to avoid the
expenses that would be involved in defending the suit between now and
its conclusion. Those expenses were expected to exceed the amount of
the cash consideration being paid in the settlement. The defendants
have admitted no liability and continue to believe that the suits are
without merit. In the event that the settlement is not finally
approved, the Company will continue 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
8
<PAGE> 9
the United States District Court for the District of Maryland, Civil
Action No. JFM-95-1018. CryoTech sought a declaration that one of the
Company's patents is invalid or that CryoTech was 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 were infringing the Company's patent.
The Company believes that CryoTech's claims of invalidity and lack of
infringement were without merit. On or about May 30, 1995, the
Company filed a counterclaim for infringement against CryoTech and
Candela Laser Corporation ("Candela"), which the Company believed was
the exclusive distributor of CryoTech's surgical systems and probes.
The Company sought a declaration that the Company's patent is valid
and that CryoTech and Candela were infringing the patent, an
injunction barring CryoTech and Candela from infringing the patent,
and an award of damages and attorneys' fees. In mid-July 1995, the
Company was informed that CryoTech had been placed in receivership in
the United Kingdom, that its business was being sold to another,
unrelated entity and that the new entity would be using a new design
for its cryoprobes that, it was asserted, would not involve any
infringement of the Company's patents. Based on the information that
the Company received, the Company agreed with CryoTech that the
litigation pending between them would be discontinued. As for
Candela, it formally notified the Company that it had discontinued
purchasing or selling the allegedly infringing cryoprobes. Candela
also notified the Company that, by October 17, 1995, it would
discontinue all use of the allegedly infringing probes for
promotional, marketing and demonstration purposes or as replacement
parts for any customers returning defective probes. Based on this
information, the patent litigation between the Company and Candela was
discontinued.
D. TRANSACTIONS AFFECTING COMMON STOCK
In July and August 1995, the Company issued 8,752 shares of Common
Stock, 8,552 shares in connection with the Employee Stock Purchase
Plan and 200 shares in connection with the exercise options from the
Employee Stock Option Plan.
If and when the settlement described above is approved by the Court,
the Company will issue shares of Common Stock in connection with the
shareholders suit, with the market value of $350,000 based on the
average closing price on the ten trading days prior to district court
approval of the settlement.
9
<PAGE> 10
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 months ended
September 30, 1995 totaled $2,019,422 as compared to $3,305,957 for the
comparable period of the prior fiscal year, a decrease of 39%. The Company's
operating revenues in the three months ended September 30, 1994 included sales
of 10 CMS AccuProbe Systems, disposable probes and other accessories. Sales
for the three months ended September 30, 1995 included 6 AccuProbe Systems, in
addition to disposable probes and other accessory products. The Company
believes revenues in the more recent quarter reflect a decline in the number of
AccuProbe systems sold and fewer procedures performed using single-use
AccuProbe accessories due primarily to lack of formal Medicare reimbursement
for urologic cryosurgery. Through September 30, 1995, the Company has sold a
total of 128 AccuProbe Systems since the product was introduced in June 1992.
Gross profits for the three months ended September 30, 1995 totaled
$1,111,900, or 55% of sales, compared to a gross profit of $1,686,104, or 51%
of sales, for the period ended September 30, 1994. Gross profits as a percent
of sales increased in the three months ended September 30, 1995 as compared to
the comparable period of the prior fiscal year as cost reduction measures were
continued by the Company.
Research and development expenses for the three-month period ended
September 30, 1995 totaled $362,052, a decrease of 59% compared to $878,081 for
the comparable period of the prior fiscal year. Research and development
expenses decreased due to a reduction in staffing and the temporary suspension
of research grants pertaining to outside facilities for development of the
Company's proposed hypothermic solutions, reflecting cost reduction measures
effected by the Company.
10
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Sales and marketing expenses totaled $631,977 in the three months
ended September 30, 1995, a decrease of 15% compared to $742,781 for the
comparable period in the prior fiscal year. Sales and marketing expenses
decreased over the comparable period of the previous year due to a reduction in
staffing and decreased marketing activity related to the CMS AccuProbe System.
The Company expects sales and marketing expenses to decrease during the fiscal
year ending June 30, 1996, as the full impact of the cost reductions is
realized.
General and administrative expenses for the three months ended
September 30, 1995 totaled $492,376, a decrease of 12% compared to $559,570 for
the comparable period of the prior fiscal year. General and administrative
expenses decreased due to a reduction in staffing and reduced professional
fees.
As a result of the foregoing decreases in operating expenses, which
more than offset decreased gross profits from sales, the Company sustained a
net loss of $372,727 for the quarter ended September 30, 1995 compared to a net
loss of $483,787 in the comparable period of the prior fiscal year.
Sales of the AccuProbe are effected 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 some 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 Company
believes the uncertainty and added efforts required for the Company's customers
to secure payment is 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 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 and October 1995 the Company undertook certain actions to reduce
expense levels. Such actions included staff reductions, salary reductions and
other cost control measures.
11
<PAGE> 12
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 obtaining consistent, uniform insurance
reimbursement guidelines for public and private insurers in connection with
procedures in which the AccuProbe is utilized.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1995, the Company had cash, cash equivalents, and
short-term investments totaling $1,184,006 and working capital of $3,339,488,
as compared to $1,217,693 and $3,775,893, respectively, at June 30, 1995. The
Company's cash and working capital positions decreased from June 30, 1995 due
to the net loss of $372,727 sustained by the Company in the quarter ended
September 30, 1995.
Capital expenditures for leasehold improvements, furniture and
equipment totaled $24,729 in the quarter ended September 30, 1995, compared to
$83,759 for the comparable quarter. The Company has budgeted $485,000 for
additional equipment and furniture in the year ending June 30, 1996.
The Company expects to incur substantial expenditures over the next 12
months related to research, development, manufacturing and testing of its
products and for sales and marketing efforts and other operating expenses. The
Company's management assumes that fiscal 1996 sales may be less than the level
experienced in fiscal 1995 and 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 continue to reduce expenditures if necessary and to pursue various
forms of short term financing to supplement working capital during fiscal 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.
12
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
In April 1994, present or former stockholders of the Company
filed 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 assert 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 were 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. In September 1995, the parties
reached an agreement in principle to settle the case. The
agreement provides that a class consisting of all persons who
purchased the Company's stock between September 13, 1991 and
April 4, 1994 will be certified solely for settlement purposes.
In return for a general release of all claims which members of
the class may have against the Company and its past and present
officers, directors, employees and other agents, the Company will
pay $100,000 and issue shares of common stock of the Company with
a market value of $350,000, based on the average closing price on
the ten trading days prior to district court approval of the
settlement. The Company has accrued the entire $450,000
settlement cost of the stockholder class action suit as of June
30, 1995. The plaintiffs' counsel intend to apply to the Court
for an award of fees equal to approximately one third of the
gross amount of the settlement proceeds, as well as for
reimbursement of the
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<PAGE> 14
out of pocket expenses they incurred during the course of
litigation. The remainder of the settlement proceeds, minus the
costs of administering the settlement, including the costs of
notice to the class, will be distributed to those members of the
class who submit timely claims, in proportion to the investment
losses they have suffered on shares they purchased during the
class period. The settlement is subject to approval by the Court
after notice to the class. The Company has settled the
litigation solely to avoid the expenses that would be involved in
defending the suit between now and its conclusion. Those
expenses were expected to exceed the amount of the cash
consideration being paid in the settlement. The defendants have
admitted no liability and continue to believe that the suits are
without merit. In the event that the settlement is not finally
approved, the Company will continue 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 sought a declaration that one of the Company's patents
is invalid or that CryoTech was 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 were
infringing the Company's patent. The Company believes that
CryoTech's claims of invalidity and lack of infringement were
without merit. On or about May 30, 1995, the Company filed a
counterclaim for infringement against CryoTech and Candela Laser
Corporation ("Candela"), which the Company believed was the
exclusive distributor of CryoTech's surgical systems and probes.
The Company sought a declaration that the Company's patent is
valid and that CryoTech and Candela were infringing the patent,
an injunction barring CryoTech and Candela from infringing the
patent, and an award of damages and attorneys' fees. In mid-July
1995, the Company was informed that CryoTech had been placed in
receivership in the United Kingdom, that its business was being
sold to another, unrelated entity and that the new entity would
be using a new design for its cryoprobes that, it was asserted,
would not involve any infringement of the Company's patents.
Based on the information that the Company received, the Company
agreed with CryoTech that the litigation pending between them
would be discontinued. As for Candela, it formally notified the
Company that it had discontinued purchasing or selling the
allegedly infringing cryoprobes. Candela also notified the
Company that, by October 17, 1995, it would discontinue all use
of the allegedly infringing probes for promotional, marketing and
demonstration purposes or as replacement parts for any customers
returning defective probes. Based on this information, the
patent litigation between the Company and Candela was
discontinued.
14
<PAGE> 15
Item 5. Other Information
On October 26, 1995, the Company received 510(k) marketing
clearance from the FDA for its CMS Urethral Warmer System
clearing the product for marketing in the United States.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule.
(b): No reports on Form 8-K were filed during the quarter
ended September 30, 1995.
15
<PAGE> 16
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: November 14, 1995 /s/J.J. Finkelstein
------------------------------
J.J. Finkelstein
President and Chief
Executive Officer
(Principal Executive Officer and
Principal Financial Officer)
16
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