<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, 1996 Commission File Number 0-18170
------------------ -------
</TABLE>
CRYOMEDICAL SCIENCES, INC.
--------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-3076866
-------- ----------
(State of Incorporation) (IRS Employer I.D. Number)
</TABLE>
1300 Piccard Drive
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
----- -----
26,880,050 shares of Cryomedical Sciences, Inc. common stock, par value $.001
per share, were outstanding as of November 1, 1996.
<PAGE> 2
CRYOMEDICAL SCIENCES, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1996
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page No.
--------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 1996 and
June 30, 1996 3
Consolidated Statements of
Operations for the Three Months ended
September 30, 1996 and 1995. 4
Consolidated Statements of
Cash Flows for the Three
Months ended September 30,
1996 and 1995. 5
Notes to Consolidated Condensed
Financial Statements 6-7
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 8-10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
2
<PAGE> 3
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
------------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,533,808 $ 1,250,871
Short-term investments 105,071 105,071
Receivables - net of allowance for doubtful accounts
of $40,385 and $48,304 936,976 1,566,064
Subscription receivable 349,970 -
Inventories 2,034,269 1,990,548
Prepaid expenses and other 132,973 187,269
----------- -----------
Total current assets 6,093,067 5,099,823
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Less accumulated
depreciation and amortization of $1,494,055 and $1,408,503 694,457 695,065
OTHER ASSETS 18,727 18,727
----------- -----------
$ 6,806,251 $ 5,813,615
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,210,958 $ 1,635,140
Accrued vacation 105,898 120,233
Customer deposits 24,119 10,000
Deferred revenue 95,555 58,823
Warranty reserves 61,000 100,000
Extended warranties - current 527,999 624,575
Current portion of capital lease obligations and notes payable 11,082 18,023
----------- ------------
Total current liabilities 2,036,611 2,566,794
EXTENDED WARRANTIES 136,026 231,212
DEFERRED RENT 157,980 161,546
CAPITAL LEASE OBLIGATIONS AND NOTES PAYABLE,
net of current portion 956 4,632
----------- ------------
Total liabilities 2,331,573 2,964,184
----------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $ .001; authorized,
9,378,800 shares; issued and outstanding, none - -
Series D redeemable convertible preferred stock,
Par value $.001, liquidation value $10,000 per share; authorized,
200 and 0 shares; issued and outstanding, 196 and 0 shares 1,959,935 -
Common stock, par value $ .001; authorized,
50,000,000 shares; issued and outstanding,
26,880,050 and 26,873,026 shares 26,880 26,873
Additional paid-in capital 28,535,693 28,520,203
Accumulated deficit (26,004,327) (25,654,612)
Notes receivable from officers, including accrued interest (43,503) (43,033)
----------- ------------
Total stockholders' equity 4,474,678 2,849,431
----------- ------------
$ 6,806,251 $ 5,813,615
=========== ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
September 30,
--------------------------------------------
1996 1995
----------------- -----------------
<S> <C> <C>
SALES & OTHER REVENUES 954,106 2,019,422
COST OF SALES 471,787 907,522
----------- -----------
GROSS PROFIT 482,319 1,111,900
----------- -----------
OPERATING EXPENSES:
Research and development 258,968 362,052
Sales and marketing 274,642 631,977
General and administrative 300,699 492,376
----------- -----------
TOTAL OPERATING EXPENSES 834,309 1,486,405
----------- -----------
OPERATING LOSS (351,990) (374,505)
INTEREST INCOME, net of interest
expense 2,275 1,778
----------- -----------
NET LOSS $ (349,715) $ (372,727)
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 26,674,501 24,854,064
=========== ===========
NET LOSS PER SHARE $(0.01) $(0.01)
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE> 5
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
-----------------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (349,715) $ (372,727)
------------ ------------
Adjustments to reconcile net loss to
net cash used in operating activities:
Decrease in warranty reserves (39,000) (33,400)
Depreciation and amortization 103,222 108,601
Loss on disposal of fixed assets 2,824 -
Changes in assets and liabilities:
Decrease in receivables 279,118 771,022
Increase in inventories (43,721) (8,564)
Decrease in prepaid expenses and other assets 54,296 77,574
Decrease in accounts payable,
accrued expenses, and deferred rent (415,968) (416,407)
Decrease in extended warranties (191,762) (155,249)
Increase in customer deposits 14,119 -
------------ ------------
Total Adjustments (236,872) 343,577
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (586,587) (29,150)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (105,438) (24,729)
------------
NET CASH USED IN INVESTING ACTIVITIES (105,438) (24,729)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes receivable from officers (470) (469)
Preferred stock issued for cash 1,959,935 -
Issuance of shares for employee stock purchase plan 15,498 20,661
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,974,963 20,192
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,282,937 (33,687)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,250,871 1,117,383
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,533,808 $ 1,083,696
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 3,362 $ 5,483
============ ============
</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 SEPTEMBER 30, 1996 AND 1995
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, manufacture and
marketing of products for use in the field of low temperature
medicine.
The Consolidated Balance Sheet as of September 30, 1996, the
Consolidated Statements of Operations for the three month periods
ended September 30, 1996 and 1995, and the Consolidated Statements of
Cash Flows for the three-month periods ended September 30, 1996 and
1995, 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, 1996, 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, 1996 included in the Company's Form 10-K for the Year
Ended June 30, 1996.
The results of operations for the period ended September 30, 1996 are
not necessarily indicative of the operating results anticipated for
the twenty-six week transition period ending December 29, 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,
1996 and 1995. No effect has been given to unexercised stock options
or warrants because the effect would be antidilutive.
C. CONTINGENCIES
Prior to September 30, 1996, the Company secured $1,959,935 of
financing related to a convertible Preferred Stock sale to one
foreign individual and four foreign entities. As of September 30,
1996 the Company had received proceeds of $1,609,965 related to the
Regulation "S" financing and the remaining $349,970 of the
transaction was recorded as a subscription receivable. On October 1,
1996, subsequent to the quarter ended September 30, 1996, the Company
received the outstanding $349,970 representing the subscription
receivable. According to the terms of the
6
<PAGE> 7
convertible Series D Preferred Stock, investors may convert one-third
of their shares into Common Stock forty days subsequent to the October
2, 1996 closing date at a conversion rate determined equal to 82.5% of
the average closing bid prices for five days immediately preceding the
date the holder notifies the Company of their intention to convert
preferred shares into common shares (the "Conversion Formula").
Investors may convert an additional one-third of the Series D
Preferred Stock into Common Stock seventy-five days after the Closing
Date, and the balance thereof may be converted into shares of Common
Stock one hundred days after the Closing Date in each case utilizing
the Conversion Formula. Any share of Series D Preferred Stock
outstanding on October 2, 1998 shall automatically be converted into
Common Stock.
D. TRANSACTIONS AFFECTING COMMON STOCK
On July 1, 1996, the Company issued 7,024 shares of Common Stock in
connection with the Employee Stock Purchase Plan.
E. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Raw materials and purchased parts $ 1,081,207 $ 1,578,095
Work in process 181,556 493,243
Finished goods 756,049 681,063
Consignment inventory 195,457 53,706
----------- -----------
2,214,269 2,806,107
Less reserves (180,000) (169,011)
----------- -----------
$ 2,034,269 $ 2,637,096
=========== ===========
</TABLE>
F. NEW ACCOUNTING PRONOUNCEMENTS
As discussed in Note 2 to the Company's 1996 financial statements,
Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation" was issued in 1995 and is
effective for fiscal years beginning after December 15, 1996. SFAS
No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require)
compensation cost to be measured based on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to
apply APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
which recognizes compensation based on the intrinsic value of the
equity instrument awarded. The Company has elected to continue to
account for its stock-based compensation awards to employees under APB
No. 25 and will disclose the required pro forma effect on net income
and earnings per share in the Company's financial statements for the
twenty-six week transition period ending December 29, 1996.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cryomedical Sciences, Inc.'s business activities focus primarily on
development, manufacture and marketing related to its cryosurgical systems.
The Company plans to continue to market its AccuProbe Systems in the various
fields for which the original 400 series device received clearance from the FDA
in April 1991 and the 500 series AccuProbe received FDA clearance in December
1995. The CMS AccuProbe Systems are 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, 1996 totaled $954,106 as compared to $2,019,422 for the
comparable period of the prior fiscal year, a decrease of 53%. The Company's
operating revenues in the three months ended September 30, 1995 included sales
of six CMS AccuProbe Systems, disposable probes and other accessories. Sales
for the three months ended September 30, 1996 included one AccuProbe System, in
addition to the rental of two AccuProbe Systems, sales of disposable probes and
other accessory products. The Company believes the reduced 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, 1996, the Company has sold a total of 140 AccuProbe
Systems since the product was introduced in June 1992.
Gross profits for the three months ended September 30, 1996 totaled
$482,319, or 51% of sales, compared to a gross profit of $1,111,900, or 55% of
sales, for the period ended September 30, 1995. Gross profits as a percent of
sales decreased in the three months ended September 30, 1996 as compared to the
comparable period of the prior fiscal year due to a change in the mix in
product sales.
Research and development expenses for the three-month period ended
September 30, 1996 totaled $258,968, a decrease of 28% compared to $362,052
for the comparable period of the prior fiscal year. Development expenses
decreased due to a reduction in staffing and reductions in the availability of
grant funding.
Sales and marketing expenses totaled $274,642 in the three months
ended September 30, 1996, a decrease of 57% compared to $631,977 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, decreased marketing activity related to the CMS AccuProbe System, and
reduced consulting fees.
General and administrative expenses for the three months ended
September 30, 1996 totaled $300,699 a decrease of 39% compared to $492,376 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 $349,715 for the
8
<PAGE> 9
quarter ended September 30, 1996 compared to a net loss of $372,727 in
the comparable period 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 some potential customers when making a decision regarding
the purchase of any new medical device, including the AccuProbe system.
Reimbursement of hospitals and physicians 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 cryosurgery. Until recently,
no national payment guidelines for urological cryosurgery had 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 were made on an insurer-by-insurer on a case-by-case
basis. When insurance coverage is not available, patients may either elect to
pay for treatments themselves or undergo traditional therapies which are
covered by their insurers. The uncertainty and added efforts required for the
Company's customers or potential customers to secure payment has constrained
sales and utilization of AccuProbe systems to a large degree and may continue
to do so into the foreseeable future. Recently, the American Urological
Association ("AUA") reversed a previous position by the organization
classifying cryosurgery in the field of urology as an experimental or
investigational type surgery. The AUA now terms the use of cryosurgery in
urology as "one of the methods of management of adenocarcinoma of the
prostate." All references to the procedure as experimental and investigational
have been removed. On October 17, 1996, the Company was advised that HCFA was
planning to put into effect its technology advisory committee's recommendation
that a national non-coverage policy be adopted in regard to cryoablation of the
prostate. The acceptance of this policy by HCFA would continue Medicare's
practice of non-reimbursement for urological cryosurgeries. HCFA's non-payment
policy has no impact on the ability of doctors and hospitals to use the
procedure or the ability of private insurers or providers to provide coverage
for urological procedures or the ability of patients desiring the procedure to
pay for it themselves. However, the Company will continue its efforts to expand
cryosurgery into other previously cleared fields. In response to continued
reductions in revenue, the Company has taken certain cost control measures,
including 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.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had cash, cash equivalents, and
short-term investments totaling $2,638,879 and working capital of $4,056,456,
as compared to $1,355,942 and $2,533,029, respectively, at June 30, 1996. The
Company's cash and working capital positions increased from June 30, 1996 due
to a $1,959,935 Regulation "S" financing transaction from which the Company
received the majority of proceeds in late September and closed the transaction
on October 2, 1996. The cash and working capital increased despite a net loss
of $349,715 sustained by the Company in the quarter ended September 30, 1996.
9
<PAGE> 10
Capital expenditures for leasehold improvements and equipment totaled
$105,438 in the quarter ended September 30, 1996, compared to $24,729 for the
comparable quarter. The Company does not expect to spend more than $200,000 in
total for additional equipment in the transition period ending December 29,
1996.
The Company expects to incur expenditures over the next 12 months
related to development, manufacturing and testing of its products and for sales
and marketing efforts and other operating expenses. The Company's management
assumes that sales for the comparable periods may be less than the level
experienced in fiscal 1996 and 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 and
marketing activity engaged in by the Company, and the amounts of development
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 the transition period 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.
10
<PAGE> 11
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated October
2, 1996. Item: Announcement of convertible
preferred stock sale to several foreign investors.
The Company filed a report on Form 8-K dated July 25,
1996. Item: Announcement by the Company to designate
December 29, 1996 as the end of a short period,
twenty-six week fiscal year. Each fiscal year
thereafter will consist of a period of fifty-two
weeks coinciding with the calendar year.
11
<PAGE> 12
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, 1996 /s/Richard J. Reinhart, Ph.D.
------------------------------------------
Richard J. Reinhart, Ph.D.
President and Chief
Executive Officer
(Principal Executive Officer and
Principal Financial Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-29-1996
<CASH> 2,533,808
<SECURITIES> 105,071
<RECEIVABLES> 1,327,331
<ALLOWANCES> (40,385)
<INVENTORY> 2,034,269
<CURRENT-ASSETS> 6,093,067
<PP&E> 2,188,512
<DEPRECIATION> 1,494,055
<TOTAL-ASSETS> 6,806,251
<CURRENT-LIABILITIES> 2,036,611
<BONDS> 0
1,959,935
0
<COMMON> 26,880
<OTHER-SE> 4,474,678
<TOTAL-LIABILITY-AND-EQUITY> 6,806,251
<SALES> 714,642
<TOTAL-REVENUES> 954,106
<CGS> 337,824
<TOTAL-COSTS> 471,787
<OTHER-EXPENSES> 828,672
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,362
<INCOME-PRETAX> (349,715)
<INCOME-TAX> 0
<INCOME-CONTINUING> (349,715)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (349,715)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
