<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 June 28, 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 July 15, 1998.
<PAGE> 2
CRYOMEDICAL SCIENCES, INC.
FORM 10-QSB
QUARTER ENDED JUNE 28, 1998
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page No.
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at
June 28, 1998 (unaudited) and
December 28, 1997 3
Consolidated Statements of
Operations for the thirteen and
twenty-six weeks ended June 28,
1998 and June 29, 1997
(unaudited) 4
Consolidated Statements of Cash
Flows for the twenty-six weeks
ended June 28, 1998 and June 29,
1997 (unaudited) 5
Notes to Consolidated 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>
2
<PAGE> 3
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 28, December 28,
1998 1997
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 46,766 $ 124,000
Receivables, net allowance for doubtful 547,978 989,908
accounts of $625,527 and $569,000
Inventories 1,290,475 1,654,106
Prepaid expenses and other current assets 98,076 98,030
---------- ------------
Total current assets 1,983,295 2,866,044
Fixed assets, net accumulated depreciation 1,020,832 994,296
and amortization of $2,210,267 and $2,032,959
Other assets 21,346 18,727
---------- ------------
Total assets $3,025,473 $ 3,879,067
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 503,099 $ 533,674
Accrued expenses 507,282 428,324
Unearned revenues 120,356 135,262
Warranty reserves 17,394 50,598
Extended warranties - current portion 21,579 92,837
Capital leases - current portion 37,411 36,981
---------- ------------
Total current liabilities 1,207,121 1,277,676
---------- ------------
Extended warranties, net of current 19,071 4,500
portion
Capital leases, net of current portion 80,298 103,106
Deferred rent 31,418 33,330
---------- ------------
Total liabilities 1,337,908 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 (28,897,152) (28,084,737)
---------- ------------
Total stockholders' equity 1,687,565 2,460,455
---------- ------------
Total liabilities and stockholders'
equity $3,025,473 $ 3,879,067
========== ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Thirteen weeks ended Twenty six weeks ended
June 28, June 29, June 28, June 29,
-------------------------------------- -----------------------------------
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 720,842 $ 860,462 $ 1,259,359 $ 1,847,310
Cost of sales 337,111 660,694 668,581 1,005,186
-------------------- --------------- ---------------- ---------------
Gross profit 383,731 199,768 590,778 842,124
Expenses
Research and development 123,088 318,638 526,154 594,418
Sales and marketing 151,000 245,957 281,827 449,107
General and administrative 249,860 332,884 581,870 602,583
-------------------- --------------- ---------------- ---------------
Total expenses 523,948 897,479 1,389,851 1,646,108
-------------------- --------------- ---------------- ---------------
Operating loss (140,217) (697,711) (799,073) (803,984)
Interest income, net of interest expense (5,912) 60,220 (13,342) 76,193
-------------------- --------------- ---------------- ---------------
Net loss $ (146,129) $ (637,491) $ (812,415) $ (727,791)
==================== =============== ================ ===============
Net loss per common share $ (0.00) $ (0.02) $ (0.02) $ (0.02)
==================== =============== ================ ===============
Weighted average number
of common shares outstanding 33,454,302 33,190,094 33,454,302 32,702,041
==================== =============== ================ ===============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Twenty six weeks ended
June 28, June 29,
------------------------- -------------------------
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (812,415) $ (727,791)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 181,220 210,528
Provision for bad debt 56,527 -
Gain on disposal of fixed assets (285) -
Amortization of unearned compensation 39,525 26,062
Changes in operating assets and liabilities:
Decrease in receivables 385,403 237,003
Decrease (increase) in inventories 363,631 (71,196)
Increase in prepaid and other current assets (46) (90,408)
Increase in other assets (2,619) -
Decrease in accounts payable (30,575) (224,677)
Increase in accrued expenses 78,958 39,200
Decrease (increase) in unearned revenue (14,906) 28,070
Decrease in warranty reserves (33,204) (22,085)
Decrease in extended warranties (56,687) (252,476)
Decrease (increase) in capital leases (22,378) 51,164
Decrease in deferred rent (1,912) (72,093)
------------------------- -------------------------
Net cash provided by (used in) operating activities 130,237 (868,699)
------------------------- -------------------------
Cash flows from investing activities:
Proceeds from disposal of fixed assets 6,636 -
Purchase of equipment (214,107) (139,604)
------------------------- -------------------------
Net cash used in investing activities (207,471) (139,604)
------------------------- -------------------------
Cash flows from financing activities:
Issuance of shares for employee stock purchase plan - 12,991
------------------------- -------------------------
Net cash provided by financing activities - 12,991
------------------------- -------------------------
Net decrease in cash and cash equivalents (77,234) (995,312)
Cash and cash equivalents at beginning of period 124,000 1,769,243
------------------------- -------------------------
Cash and cash equivalents at end of period $ 46,766 $ 773,931
========================= =========================
Supplemental Cash Flow Information:
Cash paid for interest 15,228 1,392
------ -----
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 June 28, 1998, the Consolidated
Statements of Operations for the thirteen and twenty-six week periods ended
June 28, 1998 and June 29, 1997, and the Consolidated Statements of Cash
Flows for the twenty-six week periods ended June 28, 1998 and June 29,
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 June 28, 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/A for the year ended December
28, 1997.
The results of operations for the thirteen week period ended June 28, 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 thirteen and twenty-six week periods ended June 28,
1998 and June 29, 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>
June 28, 1998 December 28, 1997
------------- -----------------
<S> <C> <C>
Raw materials and purchased parts $ 710,748 $ 859,674
Work in process 203,984 243,431
Finished goods 419,488 594,746
----------- -----------
1,334,220 1,697,851
Less reserves (43,745) (43,745)
----------- -----------
$ 1,290,475 $ 1,654,106
=========== ===========
</TABLE>
6
<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 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.
7
<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 is complying with all requirements, but has
no items of comprehensive income.
8
<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 and twenty six week periods ended June 28, 1998
totaled $720,842 and $1,259,359, respectively, compared to $860,462 and
$1,847,310, respectively, for the comparable periods of the prior year,
representing decreases of 16% and 32%, respectively. The decreases 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 also 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 and twenty six week periods ended
June 28, 1998 totaled $383,731 and $590,778, respectively, or 53% and 47% of
revenues, respectively, compared to gross profits of $199,768 and $842,124,
respectively, or 23% and 46% of revenues, respectively, for the comparable
periods of the prior year. Gross profit as a percent of revenues increased in
the thirteen and twenty six week periods ended June 28, 1998 compared to the
prior year periods due to changes in the mix of product sales and a reduction in
production personnel.
Research and development expenses for the thirteen and twenty six week periods
ended June 28, 1998 totaled $123,088 and $526,154, respectively, a decrease of
61% and 11%, respectively, compared to $318,638 and $594,418, respectively, for
the comparable periods of the prior year. Development expenses decreased due to
a reduction in personnel, a decrease in raw material inventory used in R&D
projects, and a reduction in the salary of the Senior Vice President of R&D.
Sales and marketing expenses for the thirteen and twenty six week periods ended
June 28, 1998 totaled $151,000 and $281,827, respectively, a decrease of 39% and
37%, respectively, compared to $245,957 and $449,107, respectively, for the
comparable periods of the prior year. Sales and marketing expenses decreased
over the comparable periods of the previous year due to reduced commissions and
a reduction in travel and related expenses.
9
<PAGE> 10
General and administrative expenses for the thirteen and twenty six week periods
ended June 28, 1998 totaled $249,860 and $581,870, respectively, a decrease of
25% and 3%, respectively, compared to $332,884 and $602,583, respectively, for
the comparable periods of the prior year. General and administrative expenses
decreased due to a reduction in legal expenses, consulting fees, and a reduction
in the salary of the CEO.
Operating expenses for the thirteen and twenty six week periods ended June 28,
1998 totaled $523,948 and $1,389,851, respectively, a decrease of 42% and 16%,
respectively, compared to $897,479 and $1,646,108, respectively, for the
comparable periods of the prior year. The Company sustained net losses of
$146,129 and $812,415, for the thirteen and twenty six week periods ended June
28, 1998 compared to net losses of $637,491 and $727,791 in the comparable
periods of the prior year. The Company is making reductions in all discretionary
expenses 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.
LIQUIDITY AND CAPITAL RESOURCES
At June 28, 1998, the Company had cash and cash equivalents totaling $46,766 and
working capital of $776,174, 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 equipment totaled $214,107, including $164,101 in
consignment and loaner CMS AccuProbe(R) Systems, in the twenty six week period
ended June 28, 1998, compared
10
<PAGE> 11
to $275,030 and $135,426 respectively, in the comparable period of the prior
year. The Company does not expect to spend more than $300,000 in total for
equipment in the year ending December 27, 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.
11
<PAGE> 12
CRYOMEDICAL SCIENCES, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<S> <C>
(a) Exhibits
(27) Financial Data Schedule.
(b) Reports on Form 8-K: none.
</TABLE>
12
<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: July 22, 1998 /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> 6-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-29-1997
<PERIOD-END> JUN-28-1998
<CASH> 46,766
<SECURITIES> 0
<RECEIVABLES> 1,173,505
<ALLOWANCES> (625,527)
<INVENTORY> 1,290,475
<CURRENT-ASSETS> 1,983,295
<PP&E> 3,231,099
<DEPRECIATION> (2,210,267)
<TOTAL-ASSETS> 3,025,473
<CURRENT-LIABILITIES> 1,207,121
<BONDS> 80,298
0
0
<COMMON> 33,454
<OTHER-SE> 1,654,111
<TOTAL-LIABILITY-AND-EQUITY> 3,025,473
<SALES> 704,118
<TOTAL-REVENUES> 1,259,357
<CGS> 329,165
<TOTAL-COSTS> 668,576
<OTHER-EXPENSES> 1,389,853
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (13,343)
<INCOME-PRETAX> (812,415)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (812,415)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
