<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20459
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 29, 1998 Commission file number 0-18170
-------------- -------
CRYOMEDICAL SCIENCES, INC.
--------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 94-3076866
-------- ----------
(State of Incorporation) (IRS Employer I.D. Number)
1300 Piccard Drive
Suite L-105
Rockville, Maryland 20850
-------------------------
(Address of principal executive offices)
Issuer's telephone number, including area code: (301) 417-7070
--------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
--- ---
33,454,302 shares of Cryomedical Sciences, Inc. Common Stock, par value $.001
per share, were outstanding as of May 13, 1998.
<PAGE> 2
CRYOMEDICAL SCIENCES, INC.
FORM 10-QSB
QUARTER ENDED MARCH 29, 1998
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page No.
--------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at March 29, 1998 (unaudited) and
December 28, 1997 3
Consolidated Statements of Operations for the three months ended
March 29, 1998 and March 30, 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the three months ended March 29,
1998 and March 30, 1997 (unaudited) 5
Notes to 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 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
<PAGE> 3
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 29, December 28,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets
Cash and cash equivalents $ 18,984 $ 124,000
Receivables, net allowance for doubtful accounts 550,764 989,908
of $608,791 and $569,000
Inventories 1,437,203 1,654,106
Prepaid expenses and other current assets 79,282 98,030
--------------- ----------------
Total current assets 2,086,233 2,866,044
Fixed assets, net accumulated depreciation and amortization 1,043,282 994,296
of $2,127,489 and $2,032,959
Other assets 18,727 18,727
--------------- ----------------
Total assets $ 3,148,242 $ 3,879,067
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Accounts payable $ 528,690 $ 533,674
Accrued expenses 441,658 428,324
Unearned revenues 111,105 135,262
Warranty reserves 17,596 50,598
Extended warranties - current portion 54,100 92,837
Capital leases - current portion 36,201 36,981
--------------- ----------------
Total current liabilities 1,189,350 1,277,676
--------------- ----------------
Extended warranties, net of current portion 1,800 4,500
Capital leases, net of current portion 90,118 103,106
Deferred rent 33,280 33,330
--------------- ----------------
Total liabilities 1,314,548 1,418,612
--------------- ----------------
Stockholders' equity
Preferred stock, $.001 par value per share,
9,378,800 authorized; no shares issued - -
Common stock, par value $.001 per share,
50,000,000 shares authorized; 33,454,302
issued and outstanding 33,454 33,454
Additional paid-in capital 30,551,263 30,551,263
Unearned compensation - (39,525)
Accumulated deficit (28,751,023) (28,084,737)
--------------- ----------------
Total stockholders' equity 1,833,694 2,460,455
--------------- ----------------
Total liabilities and stockholders' equity $ 3,148,242 $ 3,879,067
=============== ================
</TABLE>
<PAGE> 4
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
March 29, March 30,
----------------------------------------
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Revenues $ 538,517 $ 986,849
Cost of sales 331,470 344,492
---------------- -----------------
Gross profit 207,047 642,357
Expenses
Research and development 403,066 275,780
Sales and marketing 130,827 203,151
General and administrative 332,010 269,698
---------------- -----------------
Total expenses 865,903 748,629
---------------- -----------------
Operating loss (658,856) (106,272)
Interest income, net of interest expense (7,430) 15,973
---------------- -----------------
Net loss $ (666,286) $ (90,299)
================ =================
Net loss per common share $ (0.02) $ (0.00)
================ =================
Weighted average number
of common shares outstanding 33,454,302 32,213,987
================ =================
</TABLE>
<PAGE> 5
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
March 29, March 30,
------------- --------------
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (666,286) $ (90,299)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 95,612 109,688
Provision for bad debt 39,791 3,265
Gain on disposal of fixed assets (28) -
Amortization of unearned compensation 39,525 14,767
Changes in operating assets and liabilities:
Decrease in receivables 399,353 188,879
Decrease (increase) in inventories 216,903 (286,068)
Decrease (increase) in prepaid and other current assets 18,748 (93,271)
Decrease in accounts payable (4,984) (74,915)
Increase in accrued expenses 13,334 167,739
Decrease in unearned revenue (24,157) (17,128)
Decrease in warranty reserves (33,002) (12,457)
Decrease in extended warranties (41,437) (139,988)
Decrease in capital leases (13,768) (7,644)
Decrease in deferred rent (50) (3,176)
------------- --------------
Net cash provided by (used in) operating activities 39,554 (240,608)
------------- --------------
Cash flows from investing activities:
Proceeds from disposal of fixed assets 5,436 -
Purchase of equipment (150,006) (67,130)
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Net cash used in investing activities (144,570) (67,130)
------------- --------------
Cash flows from financing activities:
Issuance of shares for employee stock purchase plan - 12,991
------------- --------------
Net cash provided by financing activities - 12,991
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Net decrease in cash and cash equivalent (105,016) (294,747)
Cash and cash equivalents at beginning of period 124,000 1,769,243
------------- --------------
Cash and cash equivalents at end of period $ 18,984 $ 1,474,496
============= ==============
Supplemental Cash Flow Information:
Cash paid for interest 1,486 746
============= ==============
</TABLE>
<PAGE> 6
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 29, 1998, the Consolidated
Statements of Operations for the three month periods ended March 29, 1998
and March 30, 1997, and the Consolidated Statements of Cash Flows for the
three month periods ended March 29, 1998 and March 30, 1997, 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 29, 1998, 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 year ended December 28,
1997 included in the Company's Annual Report on Form 10-KSB for the year
ended December 28, 1997.
The results of operations for the three month period ended March 29, 1998
are not necessarily indicative of the operating results anticipated for
the full year.
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 29, 1998 and
March 30, 1997. No effect has been given to unexercised stock options or
warrants because the effect would be anti-dilutive.
C. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 29, 1998 March 30, 1997
-------------- --------------
<S> <C> <C>
Raw materials and purchased parts $ 728,239 $ 1,233,201
Work in process 176,531 184,336
Finished goods 576,188 645,745
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1,480,958 2,063,282
Less reserves (43,755) (180,000)
------- ---------
$ 1,437,203 $ 1,883,282
============ ============
</TABLE>
<PAGE> 7
D. Contingencies
In November 1996, the Company filed suit against EndoCare, Inc.,
("EndoCare") and ZhaoHua Chang in the Circuit Court for Montgomery County,
Maryland (Case No. 161496). The lawsuit alleges, among other things, that
EndoCare misappropriated trade secrets of the Company, and that EndoCare
tortuously interfered with the Company's contracts, its relationships with its
employees, and the Company'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 the Company, breached contractual and fiduciary
obligations owed to the Company by his employment by EndoCare, his retention
and misuse of the Company's confidential information, and his improper
solicitation of the Company's employees to disclose trade secret information
and/or to become employed by EndoCare. EndoCare and Dr. Chang have denied the
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. An agreement in
principle has been reached with Endocare to resolve this suit. The Company is
presently waiting for Endocare to communicate with Dr Chang in regard to the
terms and conditions of settlement. If these mediation efforts fail, the
Company intends to pursue and defend this case vigorously.
In June 1997, Concept Group, Inc. ("Concept") filed suit against the
company in the United States District Court for the Eastern District of
Pennsylvania. The Company successfully transferred venue to the United States
District for the District of Maryland, Southern Division. The suit involves the
manufacture of cryosurgical probes allegedly developed by Concept which are
used in certain surgical procedures. Concept alleges that in December 1992 the
parties entered into a confidentiality agreement regarding certain proprietary
and technical information relating to the cryoprobe. Concept further alleges
that in January 1994 the parties entered into a Development and Manufacturing
Agreement ("Development Agreement") in which Concept was to perform vacuum
brazing on the cryoprobe according to a detailed set of design specifications.
After a dispute arose regarding defects in the vacuum brazing process performed
by Concept, the parties executed a release in August 1996 which discharged both
parties from all business obligations to each other. Concept alleges that the
Company violated the terms of the confidentiality agreement and the Development
Agreement by subsequently applying for and receiving a United States patent on
the cryoprobe. Concept contends it has a proprietary interest in the design of
the cryoprobe. Further, Concept alleges that the Company fraudulently induced
it into signing the release in order to secure the patent. Concept is demanding
$1,500,000.00 plus costs and interest it claims it expended manufacturing the
cryoprobes. The Company has denied all liability and damages, and intends to
defend this matter. After evidence was found to show that the plaintiff failed
to manufacture the probes in accordance with the design specification set out
in the agreement, the Company filed a counterclaim against Concept. The
counterclaim requests a judicial determination that the release was valid as
well as damages for repairs to the cryoprobes due to the Concept's failure to
conform with the design specifications set out in the agreement. Although the
Company believes it has meritorious defenses and that the counterclaim asserts
valid claims, no prediction concerning the ultimate outcome or amount or range
of damages, if any, can be made at this time.
<PAGE> 8
E. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" was issued, which is effective for fiscal years beginning
after December 15, 1997. The Company will comply with all requirements no
later than fiscal year 1998.
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's business activities focus primarily on the manufacturing and
marketing related to its cryosurgical systems. The CMS AccuProbe(R) System
Model 450 was cleared by the FDA in April 1991, the CMS AccuProbe(R) System
Models 530 and 550 were cleared in December 1995, the CMS AccuProbe(R) 600
series was cleared in March 1997 and the Cryo-lite(R) series was cleared in
July 1997. The Company plans to continue to market these systems in the
various fields for which they received clearance from the FDA. The Company
received clearance in November 1997 to expand its indications for use
(labeling) for the AccuProbe(R) system family.
The Company is presently in the process of seeking funds for its wholly owned
subsidiary BioLife Technologies, Inc. ("BioLife") for the purpose of
commercializing its Hypothermosol(R) series of preservation solutions.
Although the Company has contacted a number of parties who have expressed an
interest in potentially providing such funding, there can be no assurance that
such funding will be obtained.
RESULTS OF OPERATIONS
Revenues for the thirteen week period ended March 29, 1998 totaled $538,517
compared to $986,849 for the comparable period of the prior year, representing a
decrease of 45%. The decrease in revenues reflect a decline in the number of
CMS AccuProbe(R) Systems and accessories sold. The Company believes that this
decline is due primarily to a lack of formal Medicare reimbursement for prostate
cryosurgery. The revenues of the Company have been negatively impacted by an FDA
advisory that all companies involved in thermal ablation can no longer advertise
or promote uterine cryosurgical applications, specifically endometrial ablation.
Gross profit for all products for the thirteen week period ended March 28, 1998
totaled $207,047, or 39% of revenues, compared to gross profit of $642,357, or
65% of revenues, for the thirteen week period ended March 30, 1997. Gross
profit as a percent of revenues changed in the thirteen week period ended March
29, 1998 compared to the prior year due to changes in the mix of product sales
and the non-absorption of fixed overhead over a lower revenue level.
Research and development expenses for the thirteen week period ended March 29,
1998 totaled $403,066, an increase of 46% compared to $275,780 for the
comparable period of the prior year. Development expenses increased due to the
recognition of expenses associated with warrants granted to consultants, and an
increase in raw material inventory used in R&D projects.
<PAGE> 10
Sales and marketing expenses for the thirteen week period ended March 29, 1998
totaled $130,827, a decrease of 36% compared to $203,151 for the comparable
period of the prior year. Sales and marketing expenses decreased over the
comparable period of the previous year due to reduced headcount, reduced
commissions, and the associated reduction in travel and related expenses.
General and administrative expenses for the thirteen week period ended March
29, 1998 totaled $332,010, an increase of 23% compared to $269,698 for the
comparable period of the prior year. General and administrative expenses
increased due to increased legal fees and the recognition of a one time credit
for insurance expense utilized in the comparable period of the prior year.
Operating expenses for the thirteen week period ended March 29, 1998 totaled
$865,903, an increase of 16% compared to $748,629 for the comparable period of
the prior year. The Company sustained a net loss of $666,286 for the thirteen
week period ended March 29, 1998 compared to net loss of $90,299 in the
comparable period of the prior year. The Company is making reductions in
expenses and personnel in an attempt to maintain its viability as an operating
entity.
Sales of the CMS AccuProbe(R) System are increasingly affected by the level of
reimbursement by public and private insurers in connection with procedures in
which the AccuProbe(R) 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(R) 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 non-coverage policy be adopted in regard to cryoablation of the
prostate. It is the Company's understanding that HCFA continues to explore 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 that 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.
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
At March 29, 1998, the Company had cash and cash equivalents totaling $18,984
and working capital of $896,883, as compared to $124,000 and $1,588,368,
respectively, at December 28, 1997. The Company's cash and working capital
positions decreased from December 28, 1997 due primarily to the net loss of
$666,286 sustained by the Company in the thirteen week period ended March 29,
1998.
Capital expenditures for leasehold improvements and equipment totaled $150,006,
including $100,000 in consignment and loaner CMS AccuProbe(R) Systems, in
thirteen week period ended March 29, 1998, compared to $161,217 and $94,087
respectively, in the comparable period of the prior year. The Company does not
expect to spend more than $200,000 in total for equipment in the year ending
December 29, 1998.
The Company expects to incur expenditures over the next twelve 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 1998 fiscal year may be less than
the level experienced in comparable year ago periods and believes that its
current cash and working capital position, together with potential financing
and possible additional cost cutting, will be sufficient to fund the operations
of the Company for the next twelve 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 twelve 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.
<PAGE> 12
CRYOMEDICAL SCIENCES, INC.
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: none.
<PAGE> 13
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Cryomedical Sciences, Inc.
--------------------------
(Registrant)
Date: May 18, 1998 /s/Richard J. Reinhart, Ph.D.
-----------------------------
Richard J. Reinhart, Ph.D
President and Chief Executive Officer
(Principal Executive Officer and
Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-29-1997
<PERIOD-END> MAR-29-1998
<CASH> 18,984
<SECURITIES> 0
<RECEIVABLES> 1,159,555
<ALLOWANCES> 608,791
<INVENTORY> 1,437,203
<CURRENT-ASSETS> 2,086,233
<PP&E> 3,170,771
<DEPRECIATION> 2,127,489
<TOTAL-ASSETS> 3,148,242
<CURRENT-LIABILITIES> 1,189,350
<BONDS> 0
0
0
<COMMON> 33,454
<OTHER-SE> 1,800,240
<TOTAL-LIABILITY-AND-EQUITY> 3,148,242
<SALES> 307,397
<TOTAL-REVENUES> 538,517
<CGS> 155,897
<TOTAL-COSTS> 331,470
<OTHER-EXPENSES> 865,903
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,042
<INCOME-PRETAX> (666,286)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (666,286)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
