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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
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<S> <C>
For The Quarterly Period Ended March 30, 1997 Commission File Number 0-18170
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CRYOMEDICAL SCIENCES, INC.
--------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-3076866
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(State of Incorporation) (IRS Employer I.D. Number)
</TABLE>
1300 Piccard Drive
Suite 102
Rockville, Maryland 20850
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(Address of principal executive offices)
Registrant's telephone number, including area code (301) 417-7070
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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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33,395,087 shares of Cryomedical Sciences, Inc. Common Stock, par value $.001
per share, were outstanding as of April 25, 1997.
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CRYOMEDICAL SCIENCES, INC.
FORM 10-Q
QUARTER ENDED MARCH 30, 1997
INDEX
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<CAPTION>
Part I. Financial Information Page No.
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Item 1. Financial Statements
Consolidated Balance Sheets at
March 30, 1997 and
December 29, 1996. 3
Consolidated Statements of
Operations for the Three Months
ended March 30, 1997 and
March 31, 1996. 4
Consolidated Statements of
Cash Flows for the Three Months
ended March 30, 1997 and
March 31, 1996. 5
Notes to Consolidated Condensed
Financial Statements 6-8
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 9-11
Part II. Other Information
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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2
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CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 30, December 29,
1997 1996
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,474,496 $ 1,769,243
Short-term investments 110,150 110,150
Receivables - net allowance for doubtful accounts of $250,173
and $246,908 1,182,670 1,374,814
Inventories 1,883,282 1,691,301
Prepaid expenses and other 159,666 66,395
------------- ------------
Total current assets 4,810,264 5,011,903
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - less accumulated
depreciation and amortization of $1,735,323 and $1,625,635 1,065,644 1,014,114
OTHER ASSETS 18,727 18,727
------------- ------------
$ 5,894,635 $ 6,044,744
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,149,113 $ 1,070,786
Accrued vacation 109,443 94,947
Customer deposits 10,000 10,000
Deferred revenue 127,083 144,210
Warranty reserves 85,143 97,600
Extended warranties - current 321,801 420,350
Current portion of capital lease obligations and notes payable 2,063 9,706
------------- ------------
Total current liabilities 1,804,646 1,847,599
EXTENDED WARRANTIES, net of current portion 55,899 97,338
DEFERRED RENT 102,349 105,524
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Total liabilities 1,962,894 2,050,461
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.001; authorized, 9,378,800
shares; issued and outstanding, none - -
Common Stock, par value $.001; authorized,
50,000,000 shares; issued and outstanding,
33,395,643 and 27,849,745 shares 33,396 27,850
Additional paid-in capital 30,512,709 30,483,765
Accumulated deficit (26,585,043) (26,494,744)
Unearned compensation (29,321) (22,588)
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Total stockholders' equity 3,931,741 3,994,283
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$ 5,894,635 $ 6,044,744
============= ============
</TABLE>
See notes to consolidated financial statements.
3
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CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Three months ended
March 30, 1997 March 31, 1996
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<S> <C> <C>
SALES & OTHER REVENUES $ 986,849 $ 2,026,593
COST OF SALES 344,492 1,014,103
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GROSS PROFIT 642,357 1,012,490
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OPERATING EXPENSES:
Research and development 275,780 313,027
Sales and marketing 203,151 592,954
General and administrative 269,698 522,974
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TOTAL OPERATING EXPENSES 748,629 1,428,955
------------ ------------
OPERATING LOSS (106,272) (416,465)
INTEREST INCOME, net of
interest expense 15,973 3,797
------------ ------------
NET LOSS $ (90,299) $ (412,668)
============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 32,213,987 25,040,724
============ ============
NET LOSS PER SHARE $ ( 0.00) $ (0.02)
============ ============
</TABLE>
See notes to consolidated financial statements.
4
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CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 30, March 31,
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (90,299) $ (412,668)
------------ -----------
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 109,688 105,916
Provision for bad debt 3,265 -
Amortization of unearned compensation 14,767 -
Changes in assets and liabilities:
Decrease (increase) in receivables 188,879 (853,079)
(Increase) decrease in inventories (286,068) 369,160
Increase in prepaid expenses
and other assets (93,271) (56,678)
Decrease in warranty reserves (12,457) (5,000)
Increase (decrease) in accounts payable, accrued
expenses, accrued vacation and deferred rent 64,876 (298,685)
Increase in customer deposits - 13,997
Decrease in extended warranties (139,988) ( 230,750)
------------ -----------
Total Adjustments (150,309) (955,119)
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NET CASH USED IN OPERATING ACTIVITIES (240,608) (1,367,787)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (67,130) (17,910)
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NET CASH USED FOR INVESTING ACTIVITIES (67,130) (17,910)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes receivable from officers - (781)
Common stock issued for cash - 1,910,000
Issuance of shares for employee stock purchase plan 12,991 14,195
Exercise of employee stock option - -
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NET CASH PROVIDED BY FINANCING ACTIVITIES 12,991 1,923,414
------------ -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (294,747) 537,717
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,769,243 728,040
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,474,496 $ 1,265,757
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest expense $ 746 $ 2,708
============ ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
Capitalization of inventories into equipment $ 94,087 $ -
============ ===========
</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 30, 1997 AND MARCH 31, 1996
A. GENERAL
Cryomedical Sciences, Inc. (the "Company") is engaged in the research,
development, marketing and manufacture of products for use in the field
of low-temperature medicine.
The Consolidated Balance Sheet as of March 30, 1997, the Consolidated
Statements of Operations for the three month periods ended March 30, 1997
and March 31, 1996, and the Consolidated Statements of Cash Flows for the
three month periods ended March 30, 1997 and March 31, 1996, 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 30, 1997, 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 six-month transistion
period ended December 29, 1996 included in the Company's Annual Report on
Form 10-K for the six-month transition period ended December 29, 1996.
The results of operations for the period ended March 30, 1997 are not
necessarily indicative of the operating results anticipated for the
fiscal year ending December 28, 1997.
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 March 30, 1997
and March 31, 1996. No effect has been given to unexercised stock
options or warrants because the effect would be antidilutive.
6
<PAGE> 7
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 30, 1997 AND MARCH 31, 1996
C. INVENTORIES
Inventories consist of the following:
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<CAPTION>
March 30, 1997 December 29, 1996
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Raw materials and purchased parts $ 1,233,201 $ 1,068,645
Work in process 184,336 216,254
Finished goods 645,745 586,402
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2,063,282 1,871,301
Less reserves (180,000) (180,000)
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$ 1,883,282 $ 1,691,301
=========== ============
</TABLE>
D. CONTINGENCIES
In November 1996, the Company filed suit against EndoCare, Inc. and
ZhoaHua Chang in the Circuit Court for Montgomery County, Maryland (Case
No. 161496). The lawsuit alleges, among other things, that EndoCare
misappropriated trade secrets of Cryomedical Sciences, Inc., and that
EndoCare tortiously interfered with the Company's contracts, its
relationships with employees, and Cryomedical Sciences, Inc.'s contractual
and potential business relationships with customers. The lawsuit, which
contains six counts, also alleges that Dr. Chang and EndoCare engaged in
unfair competition against the Company and civil conspiracy, and that Dr.
Chang, who was formerly employed as a Vice President of Cryosurgical
Engineering by Cryomedical Sciences, Inc., breached contractual and
fiduciary obligations owed to the Company by his employment by EndoCare,
his retention and misuse of Cryomedical Sciences' confidential
information, and his improper solicitation of the Company's employees to
disclose trade secret information and/or to become employed by EndoCare.
Cryomedical Sciences, Inc. has asserted that by accepting employment with
EndoCare, Dr. Chang violated the covenant not to compete contained in his
employment agreement with the Company. In an Order dated April 3, 1997,
the Circuit Court of Montgomery County, Maryland has ordered a hearing on
Cryomedical Sciences, Inc.'s motion seeking a preliminary injunction to
enforce the covenant not to compete contained in the employment agreement
between the Company and Dr. Chang. The hearing is scheduled for July 2,
1997, and the Court has ordered that certain limited discovery take place
prior to that hearing. EndoCare and Dr. Chang have denied allegations in
the lawsuit. In March 1997, Dr. Chang filed a counter-suit in the
Circuit Court for Montgomery County, Maryland (Case No. 161496-V)
regarding numerous claims of a breach of contract by the Company. The
Company intends to defend this case vigorously.
7
<PAGE> 8
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 30, 1997 AND MARCH 31, 1996
E. TRANSACTIONS AFFECTING COMMON STOCK
On January 2, 1997, the Company issued 37,730 shares of common stock, in
connection with the Employee Stock Purchase Plan.
In January 1997, the Company issued 5,508,168 shares of the Company's
common stock at an average weighted price of $0.283 per share in
connection with the completion of the October 2, 1996 sale of convertible
preferred stock to foreign investors, for which the Company received
$1,924,935 of net proceeds.
F. NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per
Share," was recently issued by the Financial Accounting Standards Board.
SFAS No. 128 is effective for periods ending after December 15, 1997 and
early adoption is not permitted.
SFAS No. 128 requires the company to compute and present a basic and
diluted earnings per share. Had the Company computed net loss per share
in accordance with SFAS No. 128 for the three months ended March 30, 1997,
there would be no difference in the reported net loss per share.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cryomedical Sciences, Inc.'s business activities focus primarily on
manufacture and marketing related to its cryosurgical systems (the
"AccuProbe"). 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 received FDA clearance in
December 1995. In March 1997 the Company received FDA clearance for the
AccuProbe 600 series and submitted a 510(k) application for the new
Cryo-lite(R) family of hand held cryosurgical products. 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 March 30,
1997 and March 31, 1996 totaled $986,849 and $2,026,593, respectively,
representing a decrease of 51%. The Company's operating revenues in the three
months ended March 30, 1997 included sales of 1 CMS AccuProbe System,
disposable probes and other accessories. During this period, the Company's
revenues also included the placement of 1 AccuProbe System through a
consignment agreement. Sales for the three months ended March 31, 1996
included 7 AccuProbe Systems, in addition to disposable probes and other
accessory products. The Company believes revenues in the three months ended
March 30, 1997 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. The Company
hopes that the FDA clearance of the CMS AccuProbe 600 series and the FDA 510(k)
submission of the Cryo-lite(R) hand-held cryosurgical products in March 1997
will increase system, disposable probe and other accessory revenue from current
levels, although there can be no assurance in this regard. Through March 30,
1997, the Company has placed a total of 148 AccuProbe Systems since the product
was introduced in June 1992.
Gross Profits for all products for the three months ended March 30, 1997
totaled $642,357, or 65% of sales, compared to gross profits of $1,012,490, or
50% of sales, for the three months ended March 31, 1996. The gross profit
percentage increased in the three months ended March 30, 1997, as compared to
the comparable period of the prior fiscal year, due to a reduction in field
service expenses and a favorable change in product mix.
Research and development expenses for the three months ended March 30,
1997 totaled $275,780, a decrease of 12% compared to $313,027 for the
comparable period of the prior fiscal year. Development expenses decreased due
to reduction in headcount and development of smaller, less expensive products.
Sales and marketing expenses for the three months ended March 30, 1997
totaled $203,151, a decrease of 66% compared to $592,954 for the comparable
period of the
9
<PAGE> 10
prior fiscal year. Sales and marketing expenses decreased over the comparable
period of the previous year due to reduced headcount and the associated
reduction in travel and entertainment expenses.
General and administrative expenses for three months ended March 30, 1997
totaled $269,698, a decrease of 48% compared to $522,974 for the comparable
period of the prior fiscal year. General and administrative expenses decreased
due to reductions in headcount, insurance premiums and the use of consultants.
Despite a reduction in revenues, compared to the prior year's comparable
period, the Company achieved decreases in operating expenses and increased
gross profits from product cost reductions. As a result the Company sustained
net losses of $90,299 for the three months ended March 30, 1997 compared to net
losses of $412,668 in the comparable period of the prior fiscal year.
Sales of the AccuProbe are increasingly 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 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.
Although no national payment guidelines for urological cryosurgery have been
established by Medicare's Health Care Financing Administration ("HCFA"), the
Company was advised in October 1996 that HCFA is planning to put into effect
its Technology Advisory Committee's recommendation that a national noncoverage
policy be adopted in regard to cryoablation of the prostate. It is the
Company's understanding that HCFA is exploring the possibility of working with
various agencies, including the American Urology Association, in establishing a
nationwide randomized prospective clinical study to collect data on a
comparative basis between cryosurgery and radiation therapies. The results of
this study will provide the basis on which a future determination regarding
Medicare reimbursement will be made. When insurance coverage is not available,
patients may either elect to pay for treatment themselves or undergo
traditional therapies which are covered by their insurers. 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 until formal national coverage
guidelines are established.
LIQUIDITY AND CAPITAL RESOURCES
At March 30, 1997, the Company had cash, cash equivalents, and short-term
investments totaling $1,584,646 and working capital of $3,047,057, as compared
to $1,879,393 and $3,164,304, respectively, at December 29, 1996. The
Company's cash and working capital positions decreased from December 29, 1996
due primarily to increases in inventory, purchases of equipment and the net
loss of $90,299 sustained by the Company in the quarter ended March 30, 1997.
10
<PAGE> 11
Capital expenditures for leasehold improvements, and equipment totaled
$161,217, including $94,087 in consignment and loaner AccuProbe Systems, in the
three months ended March 30, 1997, compared to $56,252 and $0 respectively, in
the comparable period of the prior fiscal year. The Company does not expect to
spend more than $750,000 in total for additional equipment in the year ending
December 28, 1997.
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 remainder of the quarterly periods in 1997 may be
less than the level experienced in comparable year ago periods 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 next 12 months
and possibly additional equity financing. Except for the sale of its products,
the Company currently has no other major sources of liquidity and has no
commitments with regard to obtaining any additional funds.
11
<PAGE> 12
CRYOMEDICAL SCIENCES, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In November 1996 the Company filed suit against EndoCare, Inc.
and ZhoaHua Chang in the Circuit Court for Montgomery County,
Maryland (Case No. 161496). The lawsuit alleges, among other
things, that EndoCare misappropriated trade secrets of
Cryomedical Sciences, Inc., and that EndoCare tortiously
interfered with the Company's contracts, its relationships with
employees, and Cryomedical Sciences, Inc.'s contractual and
potential business relationships with customers. The lawsuit,
which contains six counts, also alleges that Dr. Chang and
EndoCare engaged in unfair competition against the Company and
civil conspiracy, and that Dr. Chang, who was formerly employed
as a Vice President of Cryosurgical Engineering by Cryomedical
Sciences, Inc., breached contractual and fiduciary obligations
owed to the Company by his employment by EndoCare, his retention
and misuse of Cryomedical Sciences' confidential information, and
his improper solicitation of the Company's employees to disclose
trade secret information and/or to become employed by EndoCare.
Cryomedical Sciences, Inc. has asserted that by accepting
employment with EndoCare, Dr. Chang violated the covenant not to
compete contained in his employment agreement with the Company.
In an Order dated April 3, 1997, the Circuit Court of Montgomery
County, Maryland has ordered a hearing on Cryomedical Sciences,
Inc.'s motion seeking a preliminary injunction to enforce the
covenant not to compete contained in the employment agreement
between the Company and Dr. Chang. The hearing is scheduled for
July 2, 1997, and the Court has ordered that certain limited
discovery take place prior to that hearing. EndoCare and Dr.
Chang have denied allegations in the lawsuit. In March 1997, Dr.
Chang filed a counter-suit in the Circuit Court for Montgomery
County, Maryland (Case No. 161496-V) regarding numerous claims of
a breach of contract by the Company. The Company intends to
defend this case vigorously.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule.
12
<PAGE> 13
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 12, 1997 /s/Richard J. Reinhart, Ph.D.
---------------------------------------------------
Richard J. Reinhart, Ph.D.
President and Chief Executive Officer
(Principal Executive Officer and
Principal Financial Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> MAR-30-1997
<CASH> 1,474,496
<SECURITIES> 110,150
<RECEIVABLES> 1,432,843
<ALLOWANCES> 250,173
<INVENTORY> 1,883,282
<CURRENT-ASSETS> 4,810,264
<PP&E> 2,800,966
<DEPRECIATION> 1,735,323
<TOTAL-ASSETS> 5,894,635
<CURRENT-LIABILITIES> 1,804,646
<BONDS> 0
0
0
<COMMON> 27,888
<OTHER-SE> 3,903,853
<TOTAL-LIABILITY-AND-EQUITY> 5,894,635
<SALES> 819,862
<TOTAL-REVENUES> 986,849
<CGS> 308,360
<TOTAL-COSTS> 344,492
<OTHER-EXPENSES> 748,629
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 746
<INCOME-PRETAX> (90,299)
<INCOME-TAX> 0
<INCOME-CONTINUING> (90,299)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (90,299)
<EPS-PRIMARY> (.00)
<EPS-DILUTED> (.00)
</TABLE>
