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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the year ended December 26, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-18170
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CRYOMEDICAL SCIENCES, INC.
( Name of Small Business Issuer in its Charter)
DELAWARE 94-3076866
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(State of Incorporation) (IRS Employer Identification Number)
1300 PICCARD DRIVE, ROCKVILLE, MARYLAND 20850
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(Address of principal executive offices) (Zip Code)
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Issuer telephone number, including area code: (301) 417-7070
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Securities registered under Section 12(b) of the Exchange Act:
None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
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Title of Class
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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
---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [X] .
Issuer's revenues for the fiscal year ended December 26, 1999 were
$1,776,553.
As of February 29, 2000, the aggregate market value of voting stock held
by nonaffiliates of the registrant was $16,927,151.
As of February 29, 2000, there were 33,854,302 shares of Common Stock
(par value $.001 per share) outstanding.
Documents Incorporated by Reference
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None
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Cryomedical Sciences, Inc. (the "Company") is engaged in the research,
development, manufacture and marketing of products for use in the field of
low-temperature medicine.
The Company has developed cryosurgical systems called the CMS
AccuProbe(R) System (the "AccuProbe"), the CMS Blizzard(TM) Series (the
"Blizzard"), and the Cryo-Lite(R) Series (the "Cryo-Lite"). The AccuProbe, the
Blizzard and the Cryo-Lite are sophisticated cryosurgical devices designed to
freeze and destroy diseased tissue. They are particularly applicable where
diseased tissue cannot be removed surgically or where surgery is likely to have
extensive adverse side effects. The Company plans to utilize its AccuProbe,
Blizzard and Cryo-Lite in the various fields for which the devices have received
clearance from the United States Food and Drug Administration (the "FDA").
The Company completed initial development of the AccuProbe in 1992 and
has marketed this system to hospitals, surgeons and radiologists in the United
States and abroad. In addition to the AccuProbe, the Company sells single use
probes and other disposables used with the AccuProbe and offers service warranty
contracts. Although the Cryo-Lite received FDA clearance in July 1997 and the
Blizzard received FDA clearance in February 1998, no Blizzard or Cryo-Lite
devices have been shipped for commercial sale. Sales and other revenues totaled
$1,776,553 and $2,369,748 for the twelve-month period ended December 26, 1999
and the twelve-month period ended December 27, 1998, respectively.
The Company is also attempting to develop and commercialize a series of
hypothermic preservative solutions (the "Solutions"). Some of these Solutions
are designed to maintain the fluid and chemical balances of human organs while
body temperature is significantly lowered. Other Solutions have been developed
that may be utilized in preserving certain cells and tissues utilized by
scientists in research labs and academic institutions. All of these Solutions
continue to be tested in laboratory settings. Commercialization of certain
Solutions is presently being pursued for those markets not subject to FDA
regulations through the Company's wholly-owned subsidiary, BioLife Solutions,
Inc. ("BioLife"), formed in 1998. At present, development of the Solutions for
human organ transplantation is in the laboratory and preclinical stage. The
Company is seeking funds from various government and non-government granting
agencies as well as third party investors to continue the development of the
Solutions.
The total research and development expenses of the Company for the
twelve-month period ended December 26, 1999 were $687,450. For the twelve-month
period ending December 27, 1998 total research and development expenses were
$674,160.
The Company was incorporated in Delaware in November 1987. BioLife was
incorporated in March of 1998. Unless the context requires otherwise, references
to the Company include BioLife. The Company's principal executive offices are
located at 1300 Piccard Drive, Rockville, Maryland 20850, and its telephone
number is (301) 417-7070.
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CMS CRYOSURGICAL SYSTEMS
BACKGROUND AND TECHNOLOGICAL OVERVIEW
Cryosurgery is a surgical procedure that uses freezing temperatures to
destroy unwanted tissue by circulating a refrigerant through the tip of a
cryoprobe (an instrument for applying extreme cold to tissue) applied directly
to the tissue to be destroyed.
Some surgeons have commenced targeting diseased tissue in the fields of
urology, general surgery, and gynecology by use of cryosurgery. The Company
believes that cryosurgery has a number of advantages over other options for
managing such diseased tissue. First, unlike surgical resection, cryosurgery
does not require removal of large volumes of healthy surrounding tissue. Second,
because freezing temperatures can be applied to certain areas and not others,
multiple diseased tissue sites can be targeted individually, leaving more
healthy tissue. However, many surgeons continue to use traditional methods
because of their belief that cryosurgery has not yet proved to be effective over
an extended period of time.
THE CMS ACCUPROBE SYSTEM, BLIZZARD SERIES AND CRYO-LITE SERIES
The Company has developed certain proprietary designs intended to make
its cryosurgical instrumentation more efficient and more precise than previous
cryosurgical instrumentation. The CMS AccuProbe System, the Blizzard Series, and
the Cryo-Lite Series are the Company's three cryosurgical instrument product
lines.
In April 1991, the FDA accepted the Company's 510(k) premarket
notification for the AccuProbe, thus allowing commercial marketing of the
product at the Company's discretion. See "Governmental Regulation." The
prototype of the CMS AccuProbe was first used on patients in October 1991. The
commercial development of the CMS AccuProbe was completed in 1992 and marketing
of the AccuProbe commenced. In addition, the Company markets a full complement
of accessory products for the AccuProbe which are being marketed along with the
AccuProbe system and single-use probes.
In July 1997 the Company received FDA clearance for its Cryo-Lite series
of cryosurgical instrumentation. The Cryo-Lite Series differs from the AccuProbe
Systems in that Cryo-Lite is a hand held device capable of utilizing cryogens
(refrigerants) other than liquid nitrogen. The AccuProbe was designed to use
only liquid nitrogen as a cryogen.
In February 1998 the Company received FDA clearance for its Blizzard
series of cryosurgical instrumentation. The Blizzard Series also differs from
the AccuProbe Systems in that Blizzard devices are capable of utilizing cryogens
(refrigerants) other than liquid nitrogen. The AccuProbe was designed to use
only liquid nitrogen as a cryogen.
The backlog of orders at December 26, 1999 totaled $24,860, as compared
to $14,560 at December 27, 1998. The Company expects all of December 26, 1999
back orders to generate revenues in the fiscal year ending December 2000.
A substantial portion of the Company's revenue in each quarter results
from orders received in that quarter. Generally, orders placed directly by
customers are shipped within 30 days of the order date.
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CMS HYPOTHERMIC PRESERVATIVE SOLUTIONS
BACKGROUND AND TECHNOLOGICAL OVERVIEW
Lowering body temperature during certain surgical procedures helps to
minimize the chance of damage to the patient's organs by reducing the patient's
metabolic rate, thereby decreasing the patient's needs during surgery for oxygen
and nutrients that normally flow through the blood. This is also true with
respect to the preservation of individual organs and tissues to be used in
transplant surgery during the interval between removal from the donor and
transplant into the recipient.
Grant subsidized research and development activities with respect to
development of the Solutions for cell and tissue preservation have previously
taken place at Allegheny-Singer Research Institute ("ASRI"), a subsidiary of
Allegheny Health Services, Pittsburgh Pennsylvania and State University of New
York at Binghamton ("SUNY"). The company continues to fund work at SUNY, but is
not currently funding research at ASRI.
The Solutions have not been fully tested nor has the regulatory clinical
testing and approval process begun for human organ transplantation. Accordingly,
there is no assurance that any of the proposed applications will prove viable in
human surgical procedures. The Company anticipates that upon successful
completion of funding of BioLife, for which there can be no assurance, clinical
trials will begin to support FDA approval of the Solutions for purposes of human
organ transplantation.
THE SOLUTIONS
The Solutions are complex synthetic, aqueous solutions containing, in
part, minerals and other elements found in human blood which are necessary to
maintain fluids and chemical balances throughout the body at near freezing
temperatures. The use of the fluid is limited to low temperature applications
because the Solutions do not carry sufficient oxygen to maintain organ integrity
at warm temperatures. At lower temperatures, scientists have determined that
human organs require less oxygen primarily because of the resulting reduced
metabolism. The products which may result from the development of the Solutions
include, but are not limited to media for preservation of organs used in human
transplantation procedures, cardioplegia (stopping of the heart) applications,
and media utilized in cell and tissue culture preservation. Additional
applications may include cryogenic preservation (-196 degrees Celsius) of
certain tissues and organs.
FUTURE PRODUCT DEVELOPMENT
The Company's primary focus has been on the development and marketing of
its cryosurgical instrumentation. The Company intends to continue development of
its cryosurgical instrumentation as well as the Solutions.
The Company contemplates that a variety of applications of hypothermic
preservative solutions, or other products for use in hypothermic or cryogenic
medical procedures, could ultimately be developed from the Solutions. The
Company expects that any significant funding activities with respect to the
Solutions would entail the sale of equity securities in BioLife, which there can
be no assurance of achieving.
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RESEARCH PROJECT AGREEMENTS
In January 1997, the Company entered into a Research Project Agreement
with Dr. Robert van Buskirk of SUNY, pursuant to which Dr. van Buskirk conducted
research at SUNY's Center for Cryobiological Research in Binghamton, New York,
with respect to the Solutions. In January 1998 the Agreement with Dr. Robert van
Buskirk was extended through September 1, 1999.
In March 1999, BioLife signed an Incubator Licensing Agreement with SUNY
whereby BioLife will conduct research and development in the field of cryogenic
science and in particular solution technology. The Company will pay the
University $1,005 per month during the five year term of the License and all
inventions conceived as a result of these research and development efforts will
belong to BioLife.
MARKETS AND MARKETING
The Company currently markets its AccuProbe system to hospitals,
surgeons, and radiologists through its own sales department. The Company has
signed contracts with independent contractors for purposes of selling and
distributing the Company's product lines of cryosurgical instrumentation. In
November 1998, the Company signed a distribution agreement with Sino America
Commerce Corporation for marketing, sales and distribution of its products in
mainland China and other far east countries. The Company may also arrange with
other third parties to market or distribute its products in the United States or
other countries.
The Company has expended significant resources educating surgeons and
healthcare professionals in formal training programs as to the uses and benefits
of the Company's cryosurgical instrumentation through both in-house educational
seminars and practical applications outside the Company's training facility.
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.
Medicare's Health Care Financing Administration ("HCFA") put into effect its
technology advisory committee's recommendation that a national non-coverage
policy be adopted in regard to cryoablation of the prostate. However, in
February 1999 HCFA announced that it was going to provide coverage for
cryosurgery of the prostate for localized prostate cancer effective July 1999.
Reimbursement codes and guidelines for cryosurgery of the prostate have
subsequently been issued by HCFA, however, the reimbursement levels for the
procedure have been left up to the individual regional agencies. At his time
HCFA has not established a national reimbursement level for the procedures
associated with cryosurgery of the prostate.
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 and may continue to do so until the completion of formal
national reimbursement levels are established by HCFA. There can be no assurance
as to when such national reimbursement levels will be established or, when
established, that reimbursement will be sufficient to encourage use of the
AccuProbe System by hospitals and physicians.
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MANUFACTURING
The Company's manufacturing operations are conducted at its facilities in
Rockville, Maryland, and consist primarily of the purchase and quality control
of materials, components and subassemblies, and the final assembly and testing
of products including the AccuProbe, the Blizzard, and the Cryo-Lite, single-use
probes and other accessory products. The Company presently uses third party
vendors to manufacture certain parts and subassemblies of the AccuProbe, the
Blizzard, the Cryo-Lite, single-use probes and other accessory products. While
the typical lead time required for suppliers varies depending upon the
components, the quantity required, and other factors, the lead times in some
cases can be as long as three months. However, because the Company typically
purchases components in advance in anticipation of future orders, the Company is
generally able to deliver AccuProbe systems within 30 days of its receipt of an
order, and single-use probes and other accessory products immediately upon
receipt of an order.
Although the Company generally uses standard parts and components for its
products, certain components, such as liquid nitrogen dewars and probe tips, are
currently available only from a limited number of sources. The Company does not
have long-term agreements with all of these suppliers. To date, the Company has
been able to obtain adequate supplies of such components in a timely manner from
its existing sources. Although the Company believes it could develop alternative
sources of supply for most of these components within a reasonable period of
time, the inability to develop alternative sources, or a reduction or
interruption in supply or a significant increase in the price of materials,
parts or components, could materially and adversely affect the Company's results
of operations. The Company also maintains an inventory of finished goods
consisting primarily of single-use probes and other accessory products in
anticipation of future orders. The Company believes it has sufficient capital to
manufacture and market future AccuProbe products in the quantities anticipated
over the next year. However, it is possible that additional capital may be
necessary to effectively carry out these objectives in the future, and there is
no assurance that such additional capital can be raised on favorable terms or at
all. To the extent that other parties are manufacturing parts or subassemblies
for the Company, the Company has less control over the quality of products and
timeliness of delivery than if manufactured by the Company.
GOVERNMENTAL REGULATION
The development, testing, manufacturing processes, record-keeping and
reporting and marketing of the AccuProbe, the Blizzard, the Cryo-Lite, the
Solutions, and related instrumentation are regulated by the FDA pursuant to the
federal Food, Drug and Cosmetic Act and in some instances, the Public Health
Service Act, and similar health authorities in foreign countries. Product
testing and marketing requires regulatory review and clearance or approval by
the FDA. Companies producing FDA-regulated products also are subject to FDA
inspection of records and manufacturing practices. Non-compliance with
applicable requirements of the FDA or other government authorities can result in
various administrative and legal remedies including fines, recalls, product
seizure, injunction, import or export restrictions, refusal by FDA to approve
product applications or to allow the Company to enter into government supply
contracts, withdrawal of previously approved applications and criminal
prosecution.
In April 1991, the FDA accepted the Company's 510(k) premarket
notification for the AccuProbe (400 Series), thus allowing commercial marketing
of the product. Any significant change or modification in the device could
require additional review and clearance by the FDA. The nature and extent of
regulation may differ with respect to other of the Company's products.
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There can be no assurance that regulatory approvals or clearances will be
obtained for any of the intended applications of the Company's proposed
technologies once developed or that the FDA will not impose additional
post-marketing requirements.
Accessory devices developed by the Company for use with the CMS AccuProbe
system may also require review and clearance or approval by the FDA.
In August, 1995, the Company submitted to the FDA 510(k) premarket
notification of two new models of the AccuProbe system (500 series). In December
1995, the Company received 510(k) marketing approval from the FDA for two new
models of the AccuProbe system (Model 530 and Model 550).
In October, 1996, the Company submitted to the FDA 510(k) premarket
notification of a new model of the AccuProbe System (the 600 series). The new
device represents evolutionary advances of the currently marketed AccuProbe,
incorporating numerous technical refinements. In March 1997, the Company
received 510(k) marketing approval from the FDA for the 600 series model of the
AccuProbe System and will continue to market it in accordance therewith in the
fields currently cleared by FDA.
In February, 1998 the Company submitted to the FDA 510(k) premarket
notification of a new series of cryosurgical instrumentation called the Blizzard
Series. The new device represents a series of devices that utilize cryogens
(refrigerants) other than liquid nitrogen. In June, 1998 the Company received
510(k) marketing approval from the FDA for the Blizzard Series and will market
it in accordance therewith in the fields currently cleared by FDA.
In June, 1998 the Company submitted to the FDA 510(k) premarket
notification of a new model of the AccuProbe System (the 800 series). The new
device represents evolutionary advances of the currently marketed AccuProbe,
incorporating numerous technical refinements. In September, 1998 the Company
received 510(k) marketing approval from the FDA for the 800 series model of the
AccuProbe System and will market it in accordance therewith in the fields
currently cleared by FDA.
In the event the Company intends to test clinically, produce or market
the Solutions for human organ transplantation, safety standards and mandatory
premarketing review and approval procedures established by the FDA for drugs,
medical devices, and biologicals must be satisfied. In general, manufacturers
must prove a product is safe and effective. Drugs must obtain approval by means
of a New Drug Application ("NDA"), biologicals by means of a Product License
Application ("PLA") and Establishment License Application ("ELA"), and medical
devices must obtain a marketing clearance. The use of Solutions for human organ
transplantation would, most likely, require a Premarket Approval ("PMA"). The
inability to obtain, or delays in obtaining, such approvals or clearances would
materially adversely affect the Company's ability to commence marketing any
products developed with this technology.
Congress enacted legislation on June 10, 1993, providing that the
Department of Health and Human Services (HHS) promulgate regulations defining
the circumstances that constitute financial interest in a project that may
create a bias for certain results. On June 28, 1994, the Public Health Service
(PHS) published a Notice of Proposed Rulemaking which would require institutions
that apply for research funding to ensure that the financial interests of
investigators do not compromise the objectivity of such research. The proposed
rules would apply to institutions applying for PHS grants or cooperative
agreements for research and to any significant financial interest, including
salary, consulting fees, equity interests such as stock or stock options, and
patent rights, of an investigator responsible for the design, conduct or
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reporting of research. The proposed rules would require that all such
significant financial interests be disclosed prior to applying for research
funding, that disclosures be updated, records be maintained, and that
institutions applying for such funding ensure that significant financial
interests of investigators be managed, reduced or eliminated, including the
divestiture of significant financial interests or the severance of relationships
that create actual or potential conflicts. Such rules, if adopted, may impact
any research funding the Company may obtain from the National Institutes of
Health (NIH). Additionally, institutions in which Company-sponsored research is
conducted may adopt similar rules, which could apply regardless of whether
federal funding is involved.
On September 22, 1994, FDA published a similar proposed regulation
requiring that the sponsor of any drug, biological or device submit information
concerning the compensation to, and financial interests of, any clinical
investigator conducting clinical studies involving human subjects or
establishing bioavailability or bioequivalence, for marketing approval. Under
FDA's proposed rule, sponsors would be required to submit a list of clinical
investigators and make one of two alternative submissions for each investigator
who is not a full-time employee of the sponsor at the time reports of clinical
studies are submitted to FDA. The alternative submissions would be:
(1) a certification that the clinical investigator has not entered
into any financial arrangement with the sponsoring company whereby
the value of compensation could be affected by the outcome of the
study, that the investigator has not received significant payments
of other sorts from the sponsor, such as grants, equipment,
retainers or honoraria; and that the investigator does not have
significant financial interests of any kind in the sponsor; or
(2) disclosure of the specific financial arrangements made with the
clinical investigator, the investigator's proprietary, patent and
equity interests in the tested product and the sponsoring company,
and a description of steps taken to minimize the potential for
bias in data submitted in support of the marketing application.
Both the PHS and FDA rules, if adopted, could require disclosure of, limit, or
in some cases, prohibit equity ownership by individuals conducting research for
the Company, including consultants, some of whom may have equity interests in
the Company. Such rules, if adopted, could have the effect of limiting such
research between the Company and individuals with equity interests in the
Company. The FDA rules, if adopted, could also impact product review and
approval, and in some cases, if the agency deems data are biased, FDA could
require that a study be repeated.
There can be no assurance that any required FDA or other regulatory
approval will be granted or, if granted, will not be withdrawn. Governmental
regulation may prevent or substantially delay the marketing of products, cause
the Company to undertake costly procedures, and thereby furnish a competitive
advantage to more substantially capitalized companies with which the Company may
compete.
In September 1997 the Company was advised by FDA that it could no longer
promote its products for gynecological applications which referenced endometrial
ablation. It is FDA's opinion that there is not enough clinical data to support
the use of cryosurgical techniques in the uterus, specifically endometrial
ablation. The Company is complying with this new FDA directive, even though it
does have intended use clearance in the field of gynecology.
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In November 1999 the Company was inspected by FDA in regard to compliance
with Good Manufacturing Practices and other regulations relevant to the
manufacturing of medical devices. The Company was cited for six instances of
irregularities, all of which were subsequently corrected. Included in these
irregularities the FDA requested that the Company file a Medical Device Report
(MDR) in regard to an incident that occurred in February 1998 in which a
hospital alleged that a patient my have been burned by a product of the Company
called a Urethrael Warmer. Although the Company did not feel that the submission
of such a report was warranted based upon the facts associated with the
incident, it did file an MDR as requested by the FDA. Also included in the list
of irregularities was an instance of the Company changing wires from an 18 gauge
wire to a 14 gauge wire in the Company's Accuprobe 530 series that was
considered by the FDA to fall within the definition of a product recall.
Although all of the wires had been changed in the field and no instruments had
to be returned, the Company provided the FDA with all relevant information
regarding this change in wiring. Upon receiving this information the Company
received notification from the FDA that the recall file had been closed in
regard to this incident.
PROPRIETARY RIGHTS
The Company relies on a combination of trade secret, patent and trademark
law, and confidentiality and non-disclosure agreements to establish and protect
its proprietary rights in its products. Despite these precautions, it may be
possible for unauthorized third parties to copy certain aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. The laws of some foreign countries in which the Company may sell
its products do not protect the Company's proprietary rights to the same extent
as do the laws of the United States.
In total, the Company owns ten issued U. S. patents and seven issued or
allowed foreign patents. At least one additional pending U. S. patent
application has been allowed or has been found to contain patentable subject
matter.
There can be no assurance that any additional patents will be granted. In
addition, to the extent that any unique applications of the Company's
technologies are developed by the Company's scientists, such applications or
procedures may not be subject to any protection. There can also be no assurance
that the Company will develop additional patentable processes or products or, if
developed, that the Company would be able to obtain patents with respect
thereto, or that others may not assert claims successfully with respect to such
patents or patent applications. Furthermore, the Company might not be able to
afford the expense of any litigation which might be necessary to enforce its
rights under any patents it may obtain, and there can be no assurance that the
Company would be successful in any such suit. There is also no assurance that
the Company's proposed products will not infringe patents owned by others,
licenses to which may not be available to the Company.
The Company intends to rely to a large extent on the technological
expertise of its scientific staff. There can be no assurance that others will
not independently develop such technological expertise or otherwise obtain
access to the Company's technological expertise.
COMPETITION
The medical products industry is highly competitive. Most of the
Company's potential competitors have considerably greater financial, technical,
marketing, and other resources than the Company.
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With respect to the Company's cryosurgical instrumentation, the Company
faces competition from other firms engaged in the business of developing or
marketing cryosurgical devices as well as other firms engaged in developing or
marketing medical devices that destroy diseased tissues by means other than
freezing. The Company is aware that cryogenic devices used to freeze tissue have
been available for at least 20 years, although with limited market acceptance.
Engaged in the business of developing, manufacturing and marketing of
instruments used to freeze tissue are Endocare, Inc. and Frigitronics
Incorporated, American companies; a German company, Erbe Incorporated; a Israeli
company, Galile; and Candela Laser Corporation, an American company which
distributes products manufactured by Spembly, an English company. The Company's
cryosurgical instrumentation also competes with other companies that employ
techniques for destroying diseased tissue by, but not limited to, radiofrequency
and thermal (hot) devices.
With respect to the Solutions, the Company also faces competition in the
overlapping areas of research with respect to blood substitutes, organ
preservation, and hypothermic medicine. Currently, there are four known organ
preservation solutions marketed as Viaspan, Collins Solutions, Euro Collins
Solutions, and Ringers Lactate solution. These solutions are marketed by DuPont
Co., Abbott Laboratories, Kendall-McGaw Laboratories, and Baxter, Inc.,
respectively. The Company understands that other groups or companies are also
researching and developing organ preservation techniques and solutions.
Scientists and doctors performing research as consultants can be expected
to publish in journals or otherwise publish information concerning applications
of the Company's technology. If it were determined that the Company's
cryosurgical instrumentation or the Solutions do not offer unique technologies
and that, in fact, the techniques employed by the Company's scientists were
responsible for results of the Company tests and not the technologies contained
in the Company's AccuProbe or the Solutions, then competitors of the Company who
have developed products with similar properties may be able to duplicate the
performance of the Company's cryosurgical instrumentation and Solutions by
applying similar techniques.
The Company expects competition to intensify with respect to the areas in
which it is involved as technical advances are made and become more widely
known.
EMPLOYEES
The Company's business is highly dependent upon its ability to attract
and retain qualified scientific, technical and management personnel. The Company
had 13 full-time employees at December 26, 1999. The Company is not a party to
any collective bargaining agreements.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's administrative, manufacturing and research and development
facilities consisted of approximately 21,000 square feet located in Rockville,
Maryland. In February 1999 the Company reduced its facilities space to
approximately 10,000 square feet. The Company rents these facilities under a
five-year lease that commenced in May 1995. Rental expense for facilities for
the 12-month period ended December 26, 1999 totaled $160,516. At December 26,
1999, the monthly rental was $12,071 net of subleases for space previously
occupied by the Company.
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The Company is presently in the process of moving its corporate
headquarters to New Jersey. Development work on cryosurgical instrumentation
will relocate to the State University of New York in Binghamton under an
incubator agreement presently being negotiated. It is anticipated that the
future manufacturing of the company's products will be done on a contract basis
with third parties. Such contracts are presently being negotiated.
ITEM 3. LEGAL PROCEEDINGS
In February, 1999, Alan A. Rich, formerly Vice President of Sales and
Marketing for the Company, filed a suit against the Company in the Superior
Court of the Commonwealth of Massachusetts, Middlesex County, for breach of
contract, breach of the covenant of good faith and fair dealing, promissory
estoppel and violation of the Maryland Wage Payment and Collection Law based
upon the allegation that the Company constructively discharged the plaintiff
from his employment with the Company. The complaint seeks appropriate damages.
The suit has been removed to the Federal District Court. Although the Company
believes it has meritorious defenses, no prediction concerning the ultimate
outcome or amount of damages, if any, can be made at this time. On July 12,
1999, the complaint was amended to include two additional causes of action, one
relating to a breach of Rich's stock option agreement and another relating to a
failure to issue a COBRA notice. The complaint seeks appropriate damages and
statutory penalties, respectively, on these causes of action. The Company
believes there is no merit to the first claim and that it has meritorious
defenses to the second claim.
In March, 1999, Endocare Inc. filed a suit against the Company, Dr.
Richard J. Reinhart, the Company's President and Chief Executive Officer, and
Dr. John G. Baust, the Company's Senior Vice President of Research and
Development, in the Superior Court of California, County of Orange (Case No.
806794), for libel, slander, trade libel, false advertising, and unfair business
practices based upon the alleged dissemination of information in press releases,
and otherwise, to the effect that Endocare's cryosurgical devices are unsafe and
have a history of putting patients, upon which the devices were used, in danger.
The Company has confirmed to Endocare that the device in question was not an
Endocare device, and the suit has been dismissed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock, par value $.001 per share, of the Company ("Common
Stock") is traded on the OTC Bulletin Board. The following table sets forth the
high and low closing prices for the Common Stock for the periods indicated.
<TABLE>
<CAPTION>
Price Range
-----------
High Low
---- ---
Quarter Ended:
--------------
<S> <C> <C>
March 28, 1999 1.0312 .0625
June 27, 1999 .7031 .2500
September 26, 1999 .4844 .2500
December 26, 1999 .5625 .1406
March 29, 1998 .4062 .1562
June 28, 1998 .4688 .1250
September 27, 1998 .3750 .0938
December 27, 1998 .1562 .0469
</TABLE>
HOLDERS
As of February 29, 2000, there were more than 1,000 holders of record of
the Common Stock.
DIVIDEND HISTORY AND POLICY
The Company has never paid cash dividends on its Common Stock and does
not anticipate that any cash dividends will be paid for the foreseeable future.
12
<PAGE> 13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company is engaged in the research, development, marketing and
manufacturing of products for use in the field of hypothermic (low-temperature)
medicine.
In March 1998 the Company created a wholly owned subsidiary, BioLife
Solutions, Inc for the purposes of commercializing the company's preservative
Solutions. The company is presently seeking funding for this subsidiary and
although it 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.
On July 25, 1996, the Board of Directors of the Company authorized a
change in the Company's fiscal year from a period beginning July 1 and ending on
June 30 to a variable period that usually ends on the last Sunday of the
calendar year. Such change was made to make the Company's year end consistent
with its quarterly accounting periods which, in the case of 52-week years,
consists of two four week and one five week periods per quarter ending on a
Sunday. In addition to conforming the Company's yearly and quarterly accounting
periods, the change in the Company's fiscal year conforms to an annual reporting
period more closely associated with the calendar year and, to the fiscal years
utilized by a majority of the public companies in the sales and manufacturing
industries.
RESULTS OF OPERATIONS
Through June 1999 the Company continued to have its revenues negatively
influenced by the lack of reimbursement by HCFA in regard to cryoablation of the
prostate. Effective July 1, 1999 HCFA formally authorized reimbursement and
published national guidelines regarding reimbursement for cryoablation of the
prostate. Although HCFA established reimbursement for cryoablation of the
prostate, the approximate three-year hiatus in non-reimbursement left many
hospitals and physicians unprepared to resume the procedure. In a large part
this unpreparedness was due to a lack of personnel available or trained to
operate the Accuprobe system and physicians who had not performed the procedure
in several years. Therefore, although formal reimbursement had been established
there was, and continues to be, a very slow start up in reestablishing
cryosurgical programs. This situation was compounded by the fact that the
Company did not have the financial resources to assist in the reestablishment of
the many cryosurgical programs it had originally started many years ago.
The revenues of the Company were also negatively impacted in 1999 by the
continuing FDA prohibition on the promotion of cryosurgical techniques that may
be used in the uterus, specifically endometrial ablation.
Throughout the past several years the company has made reductions in
expenses and personnel in an attempt to maintain its viability as an operating
entity.
Sales and other revenues for the year ended December 26, 1999 and the
year ended December 27, 1998 are $1,776,553 and $2,369,748, respectively. The
decrease in revenue results from a decline in the number of AccuProbe systems
sold and fewer procedures performed using single-use AccuProbe accessories due
primarily to the lack of formal Medicare reimbursement for prostate cryosurgery.
In view of the operating losses suffered by the Company and the level of
the Company's liquid resources (see "Liquidity and Capital Resources" below) the
Company undertook certain actions in 1999 to reduce expense levels. Such actions
included staff reductions, a reduction in
13
<PAGE> 14
the amount of leased office space, reductions in the levels of research grants
so outside facilities and reductions in other overhead expenses. The goal of
these cost reduction measures was to reduce operating expenses to a level
whereby the Company could achieve a positive cash flow from operations.
Gross profits for the year ended December 26, 1999 and the year ended
December 27, 1998 are $812,101 and $1,093,607, respectively. Gross profits as a
percentage of revenues in 1999 and 1998 were 46% and 46%, respectively. The
company can give no assurance that there will be stabilization in gross profits
as a percent of sales during the year ending December 31, 2000.
Research and development expenses for the year ended December 26, 1999
and fiscal year 1998 were $687,450 and $674,160, respectively. The research and
development expenses for 1999 were incurred primarily in the continuing
development of the Accuprobe 800 Series, the Blizzard Series, and other
non-liquid nitrogen based products.
Sales and marketing expenses for the year ended December 26, 1999 and
fiscal year 1998 were $355,864 and $548,480, respectively. The trend in reducing
sales and marketing expenses is primarily due to reduced number of sales and
marketing personnel, reduced participation in marketing and trade shows, and
general travel expenses.
General and administrative expenses for year ended December 26, 1999 and
fiscal year 1998 were $913,689 and $1,114,490, respectively. This trend in
reducing general and administrative expenses is primarily due to staff
reductions and reduced professional and consultants fees.
The Company sustained net losses for the year ended December 26, 1999 and
fiscal year 1998 in the amount of $1,175,722 and $1,268,341, respectively.
Although the Company continued to decrease its operating costs, the decrease in
gross profits, due to significantly lower revenues, has resulted in continued
annual net losses.
LIQUIDITY AND CAPITAL RESOURCES
On October 13, 1998 the Company entered into a Stock Purchase Agreement
with ValorInvest, Ltd. ("ValorInvest") a Geneva, Switzerland based corporation,
pursuant to which, among other things, ValorInvest (a) purchased from the
Company, 128 Series E Units at price of $1,562.50 per Unit (an aggregate of
$200,000), and (b) agreed to purchase an additional 256 Series E Units at a
price of $1,562.50 per Unit (an aggregate of $400,000), each Unit to consist of
one share of Series E Convertible Preferred Stock, convertible into 10,000
shares of Common Stock, and a warrant to purchase 5,000 shares of Common Stock
at $.25 per share, the exercise of which is subject to the consummation of a
public offering of the Company's securities on certain minimum terms and
conditions. ValorInvest completed the purchase of the additional 256 Series E
Units in February 1999.
At December 26, 1999 the Company had cash and cash equivalents totaling
$7,952 and working capital of $(33,207). The working capital of the Company was
$722,620 at December 27, 1998. The Company's working capital position decreased
in the year ended December 26, 1999 as a result of a 12 month net loss of
$1,175,722, net of the proceeds of $400,000 obtained from the ValorInvest equity
placement.
14
<PAGE> 15
Capital expenditures for leasehold improvements, furniture and equipment
totaled $0 in the year ended December 26, 1999 compared to $249,619 in fiscal
year 1998. The Company has budgeted $250,000 for additional capital expenditures
in the year ending December 31, 2000.
On February 25, 2000, the Company received $500,000 from the sale of
promissory notes to two individuals, each note being in the amount of $250,000
and bearing interest at the rate of 10% per annum. The notes are due and payable
three years from the date of issuance and, in the event they are outstanding at
the time of an equity financing which equals or exceeds $2,500,000 ( $500,000
under certain circumstances), together with accrued and unpaid interest,
automatically convert into equity securities of the Company on the same terms
and conditions provided for in such equity offering.
The Company expects to incur expenditures over the next 12 months related
to research and development, manufacturing and testing of its products, sales
and marketing efforts, and other operating expenses. The Company's management is
working under the assumption that fiscal 2000 sales may be less than the level
experienced in comparable periods in 1999, and believes that its current cash
and working capital position will be sufficient to fund the operations of the
Company for 12 months.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CRYOMEDICAL SCIENCES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Number
--------------------------------------------------------------------------
<S> <C>
Independent Auditor's Report 16
Balance Sheet 17
Consolidated Statements of Operations 18
Consolidated Statements of Cash Flows 19
Consolidated Statements of Changes in Stockholders' Equity 20
Notes to Consolidated Financial Statements 21 - 34
</TABLE>
15
<PAGE> 16
Independent Auditor's Report
To the Board of Directors and Stockholders of
CRYOMEDICAL SCIENCES, INC.
Rockville, MD
We have audited the accompanying Consolidated Balance Sheet of Cryomedical
Sciences, Inc. and Subsidiary as of December 26, 1999, and the related
Consolidated Statements of Operations, Cash Flows and Stockholders' Equity for
the years ended December 26, 1999 and December 27, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the consolidated financial position of
Cryomedical Sciences, Inc. and Subsidiary as of December 26, 1999, and the
results of their operations and their cash flows for the years ended December
26, 1999 and December 27, 1998, in conformity with generally accepted accounting
principles.
ARONSON, FETRIDGE & WEIGLE
Rockville, Maryland
February 23, 2000
16
<PAGE> 17
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 26,
1999
----
<S> <C>
ASSETS
Current assets
Cash and cash equivalents $ 7,952
Receivables, net allowance for doubtful accounts of $11,927 246,436
Inventories 952,298
Prepaid expenses and other current assets 79,372
----------------------------
Total current assets 1,286,058
Fixed assets, net accumulated depreciation and amortization of $2,592,074 494,452
Intangible assets, net amortization of $12,421 370,277
Other assets 8,328
----------------------------
Total assets $ 2,159,115
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 648,578
Accrued expenses 484,473
Short-term credit facility 120,000
Unearned revenues 19,608
Extended warranties - current portion 9,949
Long-term debt - current portion 36,657
----------------------------
Total current liabilities 1,319,265
----------------------------
Long term liabilities
Extended warranties, net of current portion 4,146
Long-term debt, net of current portion 9,908
Deferred rent 7,399
----------------------------
Total liabilities 1,340,718
----------------------------
Stockholders' equity
Preferred stock, $.001 par value per share,
9,378,800 authorized; 384 shares issued and outstanding -
Common stock, par value $.001 per share,
50,000,000 shares authorized; 33,854,302 issued and outstanding 33,854
Additional paid-in capital 31,313,343
Accumulated deficit (30,528,800)
----------------------------
Total stockholders' equity 818,397
----------------------------
Total liabilities and stockholders' equity $ 2,159,115
============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 18
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended
December 26, December 27,
--------------------------- -----------------------
1999 1998
---- ----
<S> <C> <C>
Revenues
Product sales $ 1,045,869 $ 1,461,942
Services and other 730,684 907,806
--------------------------- -----------------------
Total Revenue 1,776,553 2,369,748
Cost of sales
Product sales 585,047 821,247
Services and other 379,405 454,894
--------------------------- -----------------------
Total cost of sales 964,452 1,276,141
Gross profit 812,101 1,093,607
Expenses
Research and development 687,450 674,160
Sales and marketing 355,864 548,480
General and administrative 913,689 1,114,490
--------------------------- -----------------------
Total expenses 1,957,003 2,337,130
--------------------------- -----------------------
Operating loss (1,144,902) (1,243,523)
Interest income, net of interest expense (30,820) (24,818)
--------------------------- -----------------------
Net loss $ (1,175,722) $ (1,268,341)
=========================== =======================
Basic net loss per common share $ (0.03) $ (0.04)
=========================== =======================
Weighted average number
of common shares outstanding 33,643,891 33,454,302
=========================== =======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 19
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended
December 26, December 27,
------------------------- -------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,175,722) $ (1,268,341)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 283,728 342,288
Provision for bad debt 84,148 154,427
Write-off of accounts receivable (749,855) (45,793)
Sale of rental equipment 14,548 54,000
Loss on disposal of fixed assets, net - 22,394
Changes in operating assets and liabilities:
Decrease in receivables 906,044 394,501
Decrease in inventories 273,684 428,124
Decrease in prepaid and other current assets 1,138 17,520
Decrease in other assets 10,399 -
Increase in accounts payable 55,557 59,347
Increase (decrease) in accrued expenses 117,369 (61,220)
Decrease in unearned revenue (41,231) (74,423)
Decrease in warranty reserves (11,400) (39,198)
Decrease in extended warranties (16,180) (67,062)
Decrease in deferred rent (18,485) (7,446)
------------------------- -------------------------
Net cash (used in) operating activities (266,258) (90,882)
------------------------- -------------------------
Cash flows from investing activities:
Increase in intangibles (382,698) -
Proceeds from sale of fixed assets - 44,926
Purchase of fixed assets - (249,619)
------------------------- -------------------------
Net cash used in investing activities (382,698) (204,693)
------------------------- -------------------------
Cash flows from financing activities:
Issuance of preferred stock 400,000 200,000
Issuance of common stock 162,480 -
Decrease in unearned compensation - 39,525
Increase in short-term credit facility - 120,000
Proceeds from notes payable - 32,407
Principal payments on capital leases and notes payable (40,755) (85,174)
------------------------- -------------------------
Net cash provided by financing activities 521,725 306,758
------------------------- -------------------------
Net (decrease) increase in cash and cash equivalents (127,231) 11,183
Cash and cash equivalents at beginning of period 135,183 124,000
------------------------- -------------------------
Cash and cash equivalents at end of period $ 7,952 $ 135,183
========================= =========================
Supplemental Cash Flow Information:
Cash paid for interest $ 33,322 $ 28,278
========================= =========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE> 20
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock Convertible Preferred Stock
------------------------------------ -----------------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 28, 1997 33,454,302 $ 33,454 - -
Issuance of Series E Convertible Preferred Stock 128 -
Amortization of unearned compensation - - - -
Net loss - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 27, 1998 33,454,302 33,454 128 -
Issuance of Series E Convertible Preferred Stock 256 -
Issuance of common stock 400,000 400 - -
Net loss - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance December 26, 1999 33,854,302 $ 33,854 384 -
=================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Additional Total
paid-in Accumulated Unearned stockholders'
capital deficit Compensation equity
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 28, 1997 $ 30,551,263 $ (28,084,737) $ (39,525) $ 2,460,455
Issuance of Series E Convertible Preferred Stock 200,000 - - 200,000
Amortization of unearned compensation - - 39,525 39,525
Net loss - (1,268,341) - (1,268,341)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 27, 1998 30,751,263 (29,353,078) - 1,431,639
Issuance of Series E Convertible Preferred Stock 400,000 - - 400,000
Issuance of common stock 162,080 - - 162,480
Net loss - (1,175,722) - (1,175,722)
- -----------------------------------------------------------------------------------------------------------------------------
Balance December 26, 1999 $ 31,313,343 $ (30,528,800) $ - $ 818,397
=============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 21
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(A) Organization and condition of the Company
The Company was organized November 5, 1987, as a Delaware
corporation. On March 5, 1998, BioLife Technologies, Inc. (BioLife) was
incorporated under the laws of the State of Delaware and is wholly owned
by the Company.
Cryomedical Sciences, Inc. (the Company) is engaged in the
research and development of products for use in the field of hypothermic
(low-temperature) medicine by surgeons and radiologists in the United
States and abroad. The Company is engaged in the development,
manufacturing and marketing of cryosurgical devices used to freeze and
destroy diseased tissue through the application of subfreezing
temperatures. The first such device was shipped in June 1992. Hypothermic
blood substitute solutions, being developed by the Company's subsidiary,
may allow heretofore difficult or impossible surgical techniques to be
performed and may be useful in increasing the period in which organs may
be preserved for transplantation.
The Company has experienced recurring operating losses and
continuing negative cash flows from its business activities.
Additionally, past and expected future revenue is based upon cryomedical
devices used to freeze and destroy diseased tissue. There can be no
assurance that this technology will continue to be attractive to the
market or that procedures performed using the technology will be subject
to reimbursement by public and private insurers. The Company is currently
developing a market for its hypothermic blood substitute solutions and
has been awarded grants from two agencies of the United States
government. One grant for $113,566 was substantially funded and
recognized in 1999; the second grant was funded, in part, through
February 23, 2000. The Company anticipates additional grants to be
awarded. Except for the proceeds from the sale of its products, the
Company has no other major sources of liquidity. On February 10, 1999, an
investor purchased 256 units of the Company's Series E Convertible
Preferred Stock for an aggregate amount of $400,000. Additionally,
Management intends to fund its operations, including future research and
development, through the profitable sales of the Company's products and
services, and continues to search for additional financing, either in the
form of debt or the sale of equity securities.
Subsequent to December 31, 1999, the Company entered into two Note
Purchase Agreements with Subscribers wherein the Company issued to the
Subscribers promissory notes aggregating $500,000, bearing interest at
10% per annum, due and payable three years from the date of issuance,
February 25, 2000. The promissory notes automatically convert into equity
securities of the Company in the event that the Company receives any
additional financing equal to or exceeding $2,500,000 ($500,000 under
certain circumstances).
On April 10, 2000, the Company sold the equivalent of 2,000,000
units ("Units"), each Unit consisting of two shares of Common Stock and
one warrant to purchase a share of Common Stock at the equivalent of $.25
per share, to an investor at the equivalent of $.51 per Unit, for an
aggregate of $1,020,000. In connection with the sale of these Units,
outstanding promissory notes, dated February 25, 2000, in the principal
amount of $500,000, plus accrued interest theron, automatically were
converted into Units on the same terms and conditions as the Units sold
to the investor.
21
<PAGE> 22
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(A) Organization and condition of the Company (continued)
The Company has assessed its current position and has taken steps
to increase the utilization of its technology in areas other than
urology, including general surgery and gynecology. In attempting to
achieve this goal, the Company spends significant resources to educate
surgeons and healthcare professionals in formal training programs as to
the uses and benefits of the Company's cryomedical technology and has
developed focused technology for other cryosurgical applications. The
Company has no significant long-term debt outstanding.
These financial statements assume that the Company will be able to
continue as a going concern. If the Company is unable to continue as a
going concern, the Company may be unable to realize its assets and
discharge its liabilities in the normal course of business. The financial
statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or to amounts and
classification of liabilities that may be necessary should the entity be
unable to continue as a going concern.
(B) Principles of consolidation
The financial statements include the accounts of Cryomedical
Sciences, Inc., and its wholly owned subsidiary BioLife Technologies,
Inc. All significant intercompany accounts and transactions have been
eliminated in consolidation.
(C) Fiscal year
The Company and its subsidiary have adopted a 52-53 week year
ending on the Sunday nearest to December 31st for financial reporting
purposes.
(D) Basic net loss per share
The basic net loss per common share is computed by dividing the
net loss by the weighted average number of common shares outstanding
during the period. Because the Company has incurred losses, fully diluted
per share amounts are not presented.
(E) Cash equivalents
Cash equivalents consist primarily of interest-bearing money
market accounts. The Company considers all highly liquid debt instruments
purchased with an initial maturity of three months or less to be cash
equivalents. The Company maintains cash balances which may exceed
Federally insured limits. The Company does not believe that this results
in any significant credit risk.
22
<PAGE> 23
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out ("FIFO") method.
(G) Equipment and leasehold improvements
Furniture and equipment are stated at cost and are depreciated
using the straight-line method over estimated useful lives of three to
ten years. Leasehold improvements are stated at cost and are amortized
using the straight-line method over the lesser of the life of the asset
or the remaining term of the lease. Equipment also includes Accuprobe
Consoles on rent or on loan which are depreciated using the straight-line
method over an estimated useful life of five years.
(H) Revenue recognition
The Company receives revenue from sales of products, services and
from the rental of Accuprobe Consoles. The Company generally recognizes
revenue related to the sales of its products, primarily its Accuprobe
Consoles and disposable probes, at the time of shipment. Revenue from
extended warranties and service contracts is deferred and recognized on a
straight-line basis over the contract periods. Revenue from the lease of
Accuprobe Consoles is recognized over the course of the non-cancelable
lease term.
(I) Warranties
The Company generally warrants its Accuprobe Consoles for one
year. The estimated cost to repair or replace systems under warranty is
provided by charges to cost of sales in the period in which the system is
shipped.
(J) Income taxes
The Company accounts for income taxes using an asset and liability
method which generally requires recognition of deferred tax assets and
liabilities for the expected future tax effects of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are recognized for the future tax
effects of differences between tax bases of assets and liabilities, and
financial reporting amounts, based upon enacted tax laws and statutory
rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to amounts expected to be
realized (Note 5).
23
<PAGE> 24
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(K) Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(L) Employee stock options
The Company has chosen to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations. Accordingly, compensation cost for stock options
is measured as the excess, if any, of the quoted market price of the
company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
(M) Fair value of financial instruments
The fair value of the financial instruments included in the
consolidated financial statements, except as otherwise discussed in the
notes to financial statements, approximates their carrying value.
NOTE 2 - INVENTORIES
Inventories consist of the following at December 26, 1999:
<TABLE>
<S> <C>
Raw materials and purchased parts $ 653,529
Work in process 22,604
Finished goods 276,165
--------------------
$ 952,298
====================
</TABLE>
24
<PAGE> 25
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 26, 1999:
<TABLE>
<CAPTION>
<S> <C>
Leasehold improvements $ 201,521
Furniture and office equipment 766,150
Manufacturing and other equipment 2,118,855
---------------
3,086,526
Less accumulated depreciation and amortization (2,592,074)
$ 494,452
===============
</TABLE>
NOTE 4 - INTANGIBLE ASSETS
The Company perfected its rights to a patent on a cryoprobe during
1999. Legal and other costs associated with this action were capitalized and are
being amortized over the remaining life of the patent of 168 months (Note 11).
Intangible assets at December 26, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Patents $ 382,698
Less: Amortization (12,421)
---------------
$ 370,277
===============
</TABLE>
25
<PAGE> 26
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
NOTE 5 - INCOME TAXES
The Company has not realized any taxable income since its inception and
as of December 26, 1999, has net operating loss carryforwards for both federal
and state tax purposes and research and development tax credit carryforwards for
federal income tax purposes approximately as follows:
<TABLE>
<CAPTION>
Net R&D
Year of Operating Tax
Expiration Losses Credits
<S> <C> <C>
2003 $ 76,000 $ -
2004 472,000 20,000
2005 1,747,000 42,000
2006 2,523,000 88,000
2007 4,505,000 125,000
2008 5,893,000 150,000
2009 1,431,000 114,000
2010 1,562,000 145,000
2011 5,137,000 33,000
2012 1,570,000 -
2013 1,260,000 -
2014 1,175,000 -
--------------- ---------------
Total $ 27,351,000 $ 717,000
=============== ===============
</TABLE>
At December 26, 1999, the Company has a deferred tax asset related
primarily to the net operating loss carryforward and the R&D tax credit
carryforward of approximately $11,315,000, against which the Company has
provided an allowance for the full amount as management has determined that
there is doubt that the deferred tax asset will be realized.
In the event of a significant change in the ownership of the Company,
the utilization of such loss carryforward could be substantially limited.
NOTE 6 - STOCKHOLDERS' EQUITY
On October 20, 1998, the Company entered into an agreement for the
private placement of 384 Series E Units. Each Unit consists of one share of
Series E Convertible Preferred Stock (the "Series E Preferred Stock"),
convertible into 10,000 shares of Common Stock and a warrant to purchase 5,000
shares of common stock at $.25 per share, pursuant to Regulation S of the
Securities Act of 1933, as amended. The net proceeds of the offering is to total
$600,000, of which $200,000 was received in 1998 and the remaining $400,000 was
received on February 10, 1999 (Note 10).
26
<PAGE> 27
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
The Company has granted warrants to consultants and others who have
provided, or will provide, services to the Company, at an exercise price per
share equal to the market price of the common stock on the date of grant. The
terms of such warrants have ranged from three to ten years with various vesting
arrangements (see Note 8 regarding warrants granted to a director).
In August 1998, the Company granted warrants to two consultants to the
Company to purchase 6,480,000 shares of the Company's common stock at a price of
$.25. The fair value of the Company's common stock at the date of the grant was
$.1562. The warrants are exercisable immediately after issuance and until the
termination date of August 30, 2008.
In 1999, the Company granted warrants to purchase 1,920,000 shares of
the Company's common stock at a price of $.25. The warrants are contingent and
are exercisable only upon the grantee providing access to funding through a new
common stock offering. No funding was provided and the Company intends to cancel
the warrants. The Company also granted additional warrants to purchase 10,000
shares of the Company's common stock at a price of $.40 for prior work
performed. The market price of the Company's common stock at the date of the
grant was $.40. The warrants are exercisable 2,500 immediately, 5,000 in one
year and 2,500 in two years from the date of the grant.
The following table summarizes warrant activity for the years ended
December 26, 1999 and December 27, 1998, with respect to warrants granted.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 26, 1999 December 27, 1998
------------------------- ------------------------
Wgtd. Avg. Wgtd. Avg.
Exer. Exer.
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 6,785,000 $ .26 367,000 $ 3.66
Granted 1,930,000 .25 6,480,000 .25
Exercised - - - -
Expired and Extended - - 90,000 6.19
Terminated - - 152,000 5.66
Outstanding at end of year 8,715,000 .26 6,785,000 .26
Warrants exercisable at year end 6,787,500 .26 6,722,900 .26
</TABLE>
27
<PAGE> 28
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
Stock Compensation Plans
The Company's 1988 Stock Option Plan was approved and adopted by the
Board of Directors in July 1988 and had a term of ten years. The plan expired in
1998. The options are exercisable for up to ten years from the grant date.
During 1998, the Board of Directors adopted the 1998 Stock Option Plan,
and obtained approval of the shareholders at a special meeting held on December
16, 1998. Under the 1998 Stock Option Plan, an aggregate of 20,000,000 shares of
common stock are reserved for issuance upon the exercise of options granted
under the plan. The purchase price of the common stock underlying each option
may not be less than the fair market value at the date the option is granted
(110% of fair market value for optionees that own more than 10% of the voting
power of the Company). The options are exercisable for up to ten years from the
grant date. The plan expires August 30, 2008. The stock option agreements are
issued with immediate vesting or vesting provisions.
The following table provides information pertaining to stock options
under both plans:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 26, 1999 December 27, 1998
------------------------ -------------------------
Wgtd. Avg. Wgtd. Avg.
Exer. Exer.
Shares Price Shares Price
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 13,074,600 $ .45 1,843,600 $ 2.12
Granted 200,000 .25 11,525,000 .25
Exercised - - - -
Terminated (330,400) 1.70 (294,000) 3.00
Outstanding at end of year 12,944,200 .39 13,074,600 .45
Stock options exercisable at year end 12,084,200 .35 11,655,225 .40
</TABLE>
28
<PAGE> 29
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options
outstanding at December 26, 1999:
<TABLE>
<CAPTION>
Range of Number Weighted Average
Exercise Outstanding Remaining Weighted Average
Prices at December 26, 1999 Contractual Life Exercise Price
- ----------------------- -------------------- ------------------ ---------------
<S> <C> <C> <C>
$ .25 11,560,000 8.0 $ .25
.26 -3.00 1,380,500 6.4 1.71
3.01 -6.00 700 6.0 3.38
6.01 -9.25 3,000 4.0 7.38
------------ --- -----
12,944,200 7.84 .39
============ ==== =====
</TABLE>
<TABLE>
<CAPTION>
Number Exercisable at Weighted Average
December 26, 1999 Exercise Price
--------------------- ----------------
<S> <C> <C>
12,084,200 .35
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its employee stock option and purchase
plans. The compensation costs charged against income under the Company's plans
for the year ended December 26, 1999 and the year ended December 27, 1998 were
insignificant. Had compensation cost for the Company's stock option plans and
its stock purchase plan been determined based on the fair value at the grant
dates for awards under those plans consistent with the method of Financial
Accounting Standards Board Statement No. 123, the Company's net loss and loss
per share for the year ended December 26, 1999 and the year ended December 27,
1998 would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
Net loss to common shareholders
As reported $ (1,175,722) $ (1,268,341)
Pro forma (1,194,178) (2,704,067)
Net loss per basic common share
As reported (.03) (.04)
Pro forma (.03) (.08)
</TABLE>
29
<PAGE> 30
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
Stockholder Rights Plan - On August 21, 1995, the Board of Directors
declared a dividend of one preferred share purchase right (a "Right") for each
outstanding share of common stock for stockholders of record on September 11,
1995. Each Right entitles the holder to purchase from the Company one
one-hundredth of a share of Series B Junior Preferred Stock, par value $.001 per
share (the "Preferred Shares"), of the Company at a price of $10 per one
one-hundredth of a Preferred Share (the "Purchase Price"), subject to
adjustment. The Rights will be exercisable (i) 10 days following a public
announcement that a person or group acquires beneficial ownership of 20% or more
of the outstanding Common Stock of the Company (an "Acquiring Person"), or (ii)
10 business days (or later as determined by the Board of Directors) following
the commencement of, or an announcement of an intention to make a tender offer
or exchange offer, the consummation of which would result in the beneficial
ownership by a person or group of 20% or more of the outstanding Common Stock of
the Company (the earlier of such dates being called the "Distribution Date").
Until a Right is exercised, the holder thereof will have no rights as a
stockholder of the Company. Until the Distribution Date (or earlier redemption
or expiration of the Rights), the Rights will be transferred with and only with
the Common Stock.
In the event that any person or group becomes an Acquiring Person, each
holder of a Right, other than Rights beneficially owned by the Acquiring Person,
will thereafter have the right to receive upon exercise that number of shares of
Common Stock of the Company having a market value of two times the Purchase
Price, and in the event that the Company is acquired in a business combination
transaction or 50% or more of its assets are sold, each holder of a Right will
thereafter have the right to receive upon exercise that number of shares of
common stock of the acquiring company which at the time of the transaction will
have a market value of two times the Purchase Price.
At any time after any person becomes an Acquiring Person, and prior to
the acquisition by such person or group of 50% or more of the outstanding common
stock of the Company, the Board of Directors of the Company may cause the Rights
(other than Rights owned by such person or group) to be exchanged, in whole or
in part, for common stock at an exchange rate of one share of Common Stock per
Right. At any time prior to the acquisition by a person or group of beneficial
ownership of 20% or more of the outstanding common stock, the Board of Directors
of the Company may redeem the Rights in whole at a price of $.001 per Right. The
Rights have certain anti-takeover effects, in that they will cause substantial
dilution to a person or group that attempts to acquire a significant interest in
the Company on terms not approved by the Board of Directors.
At a special meeting of the stockholder on December 16, 1998, approval
was given to amend the Company's charter to reduce the number of authorized
shares of common stock of the Company from 50 million shares to 25 million
shares; reduce the number of authorized shares of preferred stock of the
Company, par value $.001 per share, from 9,378,800 shares to 1 million shares;
and authorized the Board of Directors to effect, at its option, a reverse stock
split of the Company's common stock of anywhere from one-for-five to
one-for-sixteen. The Company has not acted to amend its charter for the
reductions in the common and preferred stock as of February 23, 2000, and the
Board of Directors has taken no action to effect a reverse split as approved by
the stockholders.
30
<PAGE> 31
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
As of December 26, 1999, the Company does not have sufficient
authorized but unissued common stock to fulfill the requirements for issuance of
common stock under all of its outstanding options, warrants and conversion
provisions. The Company expects that after the Board of Directors selects and
effects the reverse stock split authorized that the Company will have sufficient
authorized and unissued shares to reserve for issuance under its outstanding
option, warrant and conversion obligations on a post reverse split basis.
NOTE 7 - EMPLOYEE BENEFIT PLAN
The Company established a 401(k) savings plan effective July 1,1992
covering all eligible employees. The plan was terminated June 30, 1998.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company incurred $49,985 and $58,793 in legal fees during the years
ended December 26, 1999 and December 27, 1998, respectively, to a law firm in
which a director and stockholder of the Company is a partner.
The Company incurred $34,750 of human resources consulting fees during
fiscal year 1999 for services provided by the wife of an officer, director, and
shareholder of the Company.
In August 1998, the Company granted warrants to entities in which a
director and stockholder of the Company owned an interest. The warrants allow
for the purchase of 6,480,000 shares of the Company's common stock at a price of
$.25. The fair value of the Company's common stock at the date of the grant was
$.1562. The warrants vest immediately and lapse after 10 years.
31
<PAGE> 32
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
NOTE 9 - LEASES
The Company rents office, lab and manufacturing space as lessee under a
five year operating lease that commenced May 1, 1995. Effective August 1996, the
Company entered into an addendum to the lease whereby the Company released a
portion of the space included in the lease which the landlord then relet to
another tenant. Under the letter agreement, the Company paid for certain
improvements required by the new tenant and is paying the landlord a $1 per
square foot differential rent charge over the term of the lease. In March 1997,
the Company agreed to release additional space covered by its lease to its
landlord who then relet the space to another tenant. The Company has guaranteed
the rental payments of the new tenant to the landlord for the remainder of the
term of the Company's lease. The Company is obligated for $71,015 in future
payments to the landlord.
Rental expenses for facilities and equipment for the year ended
December 26, 1999 and December 27, 1998, totaled $160,516 and $257,349,
respectively.
Effective February 1, 1999, the Company released 7,300 square feet of
space back to the Landlord and the Company was released from any obligation to
the landlord.
NOTE 10 - LONG-TERM DEBT
Long-term debt consisted of the following at December 26, 1999:
(A) Capital lease obligations
Two leases for equipment entered into in 1997 require
aggregate monthly payments of $2,955. The leased equipment is included
in property and equipment at a cost of $91,727 less accumulated
amortization of $48,454 at December 26, 1999 and $19,691 at December
27, 1998. A summary of future payments required under the leases and
the present value of the lease obligations based upon interest rates
ranging from 12 to 25% that are implicit in the leases are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C> <C>
2000 $ 26,595
Less: Imputed interest 876
---------------
Net obligations $ 25,719
===============
</TABLE>
(B) Note payable
The Company entered into a note agreement with a bank for
$32,407. The note is secured by an automobile and requires monthly
payment of $1,033. The note bears interest at 9.153% and matures
November 2001.
32
<PAGE> 33
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
NOTE 10 - LONG-TERM DEBT (CONTINUED)
(C) Future maturities
Future maturities of long-term debt is as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C> <C>
2000 $ 10,937
2001 9,909
---------------
Total $ 20,846
===============
</TABLE>
Interest expense for the years ending December 26, 1999 was $33,322 and
December 27, 1998 was $28,278, respectively.
NOTE 11 - SHORT-TERM CREDIT FACILITY
The Company entered into a short term credit facility agreement on May
18, 1998 for one year whereby the Company assigns and factors its accounts
receivable. Advances are made under the agreement at 65% of the invoice amount
and the credit facility bears interest at prime plus 11.5%. The facility
automatically renewed for an additional one year term on May 18, 1999.
NOTE 12 - LITIGATION
On July 12, 1999, the Company entered into a Settlement Agreement with
Concept Group, Inc. (Concept) in connection with a lawsuit filed in June 1997 by
Concept against the Company in the United States District Court for the Eastern
District of Pennsylvania. Pursuant to the Settlement Agreement, in addition to
granting to Concept a world-wide, non-transferable, royalty-free license to
make, have made, sell, use, import, manufacture, produce and/or market cryogenic
surgical instruments based upon the techniques and specifications as described
and detailed in U.S. Patent Number 5,573,532, the Company (a) issued to Concept
and its attorney an aggregate of 400,000 shares of the Company's common stock
(the Initial Shares), and (b) if the aggregate average cash value (as defined in
the Settlement Agreement) of the Initial Shares is less than $550,000 one year
from the execution of the Settlement Agreement, agreed to issue such additional
shares of Common Stock (up to a maximum of 600,000 shares) (Contingent Shares)
such that the total shares issued (Initial Shares plus Contingent Shares) shall
be worth not less than $550,000. The issuance of the shares of Common Stock was
exempt from the registration requirement of the Securities Act of 1933, as
amended, by virtue of Section 4(2) thereof and Rule 506 promulgated thereunder.
The legal costs incurred to perfect the patent rights have been
capitalized as an intangible asset on the Balance Sheet (Note 3).
33
<PAGE> 34
CRYOMEDICAL SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
NOTE 12 - LITIGATION (CONTINUED)
In February 1999, Alan A. Rich, formerly Vice President of Sales and
Marketing for the Company, filed a suit against the Company in the Superior
Court of the Commonwealth of Massachusetts, Middlesex County, for breach of
contract, breach of the covenant of good faith and fair dealing, promissory
estoppel and violation of the Maryland Wage Payment and Collection Law based
upon an allegation that the Company constructively discharged the plaintiff from
his employment with the Company. The complaint seeks appropriate damages. The
suit has been removed to the Federal District Court. Although the Company
believes it has meritorious defenses to the allegations, no prediction
concerning the ultimate outcome or amount of damages, if any, can be made at
this time. On July 12, 1999, the complaint was amended to include two additional
causes of action, one relating to a breach of Rich's stock option agreement and
another relating to a failure to issue a COBRA notice. The complaint seeks
appropriate damages and statutory penalties, respectively, on these causes of
action. The Company believes there is no merit to the first claim and that it
has meritorious defenses to the second claim.
In March 1999, EndoCare, Inc. ("EndoCare") filed a suit against the
Company, Dr. Richard J. Reinhart, the Company's President and Chief Executive
Officer and John G. Baust, the Company's Senior Vice President of Research and
Development in the Superior Court of California, County of Orange based upon the
alleged dissemination of information to the effect that EndoCare's cryosurgical
devices are unsafe and have a history of putting patients, upon which the
devices were used, in danger. The Company has confirmed to EndoCare that the
device in question was not an EndoCare device and the suit has been dismissed.
34
<PAGE> 35
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Position and Offices
Name Age With the Company
- ---- --- --------------------
<S> <C> <C>
Richard J. Reinhart, Ph.D. 58 President and Chief
Executive Officer and
Director
John G. Baust, Ph.D. 57 Senior Vice President
and Chief Scientific
Officer
Howard S. Breslow 60 Director, Secretary
</TABLE>
Set forth below is a biographical description of each of the directors
and executive officers identified above based on information supplied by them.
Richard J. Reinhart, Ph.D., has been President, Chief Executive Officer
and a director of the Company since May 1996. From 1994 to 1996, Dr. Reinhart
was a consultant to Medical Resources, Inc., a diagnostic imaging company, while
also working with several other health care companies. From 1988 to 1994, Dr.
Reinhart was Managing Director for Medical Resources, Inc. From 1981 through
1988, Dr. Reinhart was Chief Executive Officer of several small entrepreneurial
medical device and instrumentation companies. From 1969 to 1981, Dr. Reinhart
was employed by Roche Medical Electronics (a subsidiary of Hoffman La Roche)
where, after serving in several senior management positions, he became President
and Chief Executive Officer in 1978.
John G. Baust, Ph.D., has been Senior Vice President of the Company
since January 1995, Chief Scientific Officer since August 1993, served as Vice
President, Research and Development, of the Company from July 1990 to January
1995, and served as a consultant to the Company from April 1990 to July 1990.
Since 1987, Dr. Baust has also been a Professor and the Director of the Center
for Cryobiological Research at State University of New York at Binghamton, and
since July 1994, Dr. Baust has also been Adjunct Professor of Surgery, Medical
College of Pennsylvania. From 1984 to 1987, he was a Professor and the Director
of the Institute of Low Temperature Biology at the University of Houston.
35
<PAGE> 36
Howard S. Breslow has served as a director of the Company since July 1988. He
has been a practicing attorney in New York City for more than 30 years and is a
member of the law firm of Breslow & Walker, LLP, New York, New York, which firm
serves as general counsel to the Company. Mr. Breslow currently serves as a
director of Excel Technology, Inc., a publicly-held company engaged in the
development and sale of laser products; FIND/SVP, Inc., a publicly-held company
engaged in the development and marketing of information services and products;
Vikonics, Inc., a publicly-held company engaged in the design and sale of
computer-based security systems; and Lucille Farms, Inc., a publicly-held
company engaged in the manufacture and marketing of dairy products.
All directors of the Company hold office until the next annual meeting
of stockholders of the Company or until their successors are elected and
qualified. Executive officers hold office until their successors are elected and
qualified, subject to earlier removal by the Board of Directors.
No family relationship exists between any director or executive officer
and any other director or executive officer of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company's executive officers, directors, and beneficial owners of
more than 10% of any class of its equity securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934 (collectively, the "Reporting
Persons") are required to file reports of ownership and changes in beneficial
ownership of the Company's equity securities with the Securities Exchange
Commission. Copies of those reports also must be furnished to the Company. Based
solely on a review of copies of the reports furnished to the Company, the
Company believes that during the fiscal year ended December 27, 1998 all of
these filing requirements have been satisfied.
36
<PAGE> 37
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid by the Company to its Chief Executive Officer and to each of
its executive officers (other than the Chief Executive Officer) who received
salary and bonus payments in excess of $100,000 during the fiscal year ended
December 26, 1999 (collectively the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
---------------------------------------------------
Annual Compensation Awards Payouts
--------------------------------------------- ------------------------ -----------------------
Restricted
Other Annual Stock Options/ LTIP All Other
Name and Principal Fiscal Salary Bonus Compensation Award(s) SARs Payouts Compensation
Positions Year ($)(2) ($) ($) ($) (#)(1) ($) ($)
- ------------------ ---- ------ --- --- --- ------ --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard J. Reinhart, Ph.D. 1999 100,000 - 8,183 - - - -
President, Chief 1998 113,461 - 8,384 - 7,200,000 - -
Executive Officer and
Director
John G. Baust, Ph.D. 1999 100,000 - 6,377 - - - -
Senior Vice 1998 98,790 - 15,316 - 2,160,000 - -
President, Research
and Development
</TABLE>
(1) Options to acquire shares of Common Stock.
(2) Salaries for fiscal year 1999 reflect voluntary salary reductions by
Reinhart and Baust.
37
<PAGE> 38
OPTION/SAR GRANTS IN YEAR-ENDED DECEMBER 26, 1999
In 1999, the Company did not issue any options/SAR grants to purchase Common
Stock to any Executive Officers.
AGGREGATED OPTION/SAR EXERCISES DURING THE 1999 FISCAL YEAR
AND THE 1999 FISCAL YEAR OPTION/SAR VALUES
The following table provides information related to options exercised by each of
the Named Executive Officers during the 1999 fiscal year and the number and
value of options held at December 26, 1999. The Company does not have any
outstanding stock appreciation rights. None of the options were in the money at
year ended December 26, 1999.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised in the money
Options/SAR Options/SAR
At Fiscal Year End (#) At Fiscal Year End ($) (1)
--------------------------- ---------------------------
Shares Acquired Value
Name On Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---------- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard J. Reinhart, Ph.D. - - 7,650,000 450,000 - --
John G. Baust, Ph.D. - - 2,330,000 30,000 - --
</TABLE>
(1) The closing price for the Common Stock as reported on the OTC Bulletin
Board on December 26, 1999 was $0.155. Value is calculated on the basis of
the difference between the option exercise price and $0.155 multiplied
by the number of shares of Common Stock underlying the option.
EMPLOYMENT AGREEMENTS
The Company does not have any employment agreements between the Company
and any of its executive officers. Each officer has executed a Proprietary
Information and Inventions Agreement pursuant to which each agreed, among other
things, to keep the Company's information confidential and assigned all
inventions to the Company, except for certain personal inventions not related to
the Company's work, whether existing or later developed.
CONSULTANTS
At December 26, 1999, the various consultants to the Company held
exercisable warrants to purchase an aggregate of 6,787,500 shares of Common
Stock.
The Company has obtained the services of consultants to render advice with
respect to various areas of the Company's research. Each of the consultants has
entered into a one year consulting agreement with the Company with automatic one
year renewals (absent notice to the contrary by either party), and has either
received warrants to purchase Common Stock or is
38
<PAGE> 39
entitled to cash compensation. No consultant has agreed to devote any specified
amount of time to Company activities. The consultants of the Company (and the
commencement dates of their consulting agreements) are as follows:
Robert Van Buskirk, Ph.D. (January 1997), Associate Professor of
Biology, Binghamton University, advises the Company with respect to the use of
the Solutions.
David Olive, M.D. (November 1996), Director, Reproductive Endocrinology
and Infertility, Yale University School of Medicine in New Haven, Connecticut.
Thomas Rutherford, M.D. (November 1996), Assistant Professor,
Gynecologic Oncology, Yale University School of Medicine in New Haven,
Connecticut.
Jay Pashrica, M.D. (July 1997), Chairman and Professor of
Gastroenterology, University of Texas, Austin, Texas.
Anthony Kallo, M.D. (July 1997), Johns Hopkins School of Medicine,
Baltimore, Maryland.
Consultants to the Company may be employed by or have consulting
agreements with entities other than the Company, some of which may conflict or
compete with the Company, and the advisors and consultants are expected to
devote only a small portion of their time to the Company. Most are not expected
to actively participate in the Company's development. Certain of the
institutions with which the advisors and consultants are affiliated may have
regulations and policies which are unclear with respect to the ability of such
personnel to act as part-time consultants or in other capacities for a
commercial enterprise. Regulations or policies now in effect or adopted in the
future might limit the ability of the advisors and consultants to consult with
the Company. The loss of the services of certain of the advisors and consultants
could adversely affect the Company.
Furthermore, inventions or processes discovered by the advisors and
consultants will not, unless otherwise agreed, become the property of the
Company but will remain the property of such persons or of such persons'
full-time employers. In addition, the institutions with which the advisors and
consultants are affiliated may make available the research services of their
scientific and other skilled personnel, including the advisors and consultants,
to entities other than the Company. In rendering such services, such
institutions may be obligated to assign or license to a competitor of the
Company patents and other proprietary information which may result from such
services, including research performed by an advisor or consultant for a
competitor of the Company.
COMPENSATION OF DIRECTORS
There are no standard arrangements pursuant to which the directors are
compensated. In August 1998, each of the two outside directors was granted
options to purchase 720,000 shares of Common Stock at .25 per share. These
options vest immediately and expire in ten years.
39
<PAGE> 40
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of December 26, 1999, certain
information regarding beneficial ownership of Common Stock and Preferred Stock
by (i) all persons known by the Company to own beneficially more than 5% of the
outstanding shares of the Common Stock, (ii) each director, (iii) each Named
Executive Officer, and (iv) all executive officers and directors of the Company
as a group.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name (and Address of 5% Holder) Beneficial Ownership (1) of Class
------------------------------- ----------------------------------------------
<S> <C> <C>
Richard J. Reinhart.................... 8,260,000 (2) 19.6%
Howard S. Breslow...................... 7,493,000 (3) 18.1%
J. Donald Hill......................... 770,000 (4) 2.1%
John G. Baust.......................... 2,380,000 (5) 6.6%
ValorInvest, Ltd....................... 356 (7) 100%
All officers and directors
as a group (4 persons)................ 18,903,000 (6) 35.5%
</TABLE>
(1) Unless otherwise indicated below, all shares are owned
beneficially and of record.
(2) Includes an aggregate of 8,200,000 shares underlying stock
options.
(3) Includes an aggregate of 795,000 shares underlying stock
options and 6,480,000 shares underlying warrants owned
indirectly through Breslow & Walker, LLP and B&W Investments.
(4) Includes an aggregate of 770,000 shares underlying stock
options. Mr. Hill resigned as a director 12-31-99.
(5) Includes an aggregate of 2,360,000 shares underlying stock
options.
(6) Includes an aggregate 18,605,000 shares underlying options and
warrants.
(7) ValorInvest, Ltd., 29 Quai des Bergues, 1201 Geneva,
Switzerland, is the only holder of Preferred Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Howard S. Breslow, a director of the Company, is a member of Breslow &
Walker, LLP, general counsel to the Company. Mr. Breslow currently owns 218,000
shares of Common Stock of the Company and holds options to purchase an aggregate
of 7,275,000 additional shares pursuant to stock options and warrants issued to
him and/or affiliates. During the period ended December 1999, Breslow & Walker,
LLP billed the Company $40,985 for legal fees.
40
<PAGE> 41
PART IV
ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
The financial statements filed as part of this report
are listed in the Index to Consolidated Financial
Statements on page 18.
(2) Schedules
No Schedules are furnished as the information is
presented elsewhere in this document or is
inapplicable.
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Document
<S> <C>
3 (a) Certificate of Incorporation, as amended. (1)
(b) By-Laws(1), and amendment, dated March 19, 1990, thereto. (2)
4 (a) Specimen of Common Stock Certificate. (1)
10 (a) Stock Option Plan, dated July 7, 1988, and amendment, dated July 19, 1989. (1)
(b) 1998 Stock Option Plan (5)
(c) Form of Scientific Advisory Board Member Agreement (1)
(d) Lease Agreements, dated May 1, 1995, between Ward
Corporation and The Company, and addendum thereto
dated June 21, 1995, relating to the Company's
executive offices, laboratory facilities and
manufacturing facilities in Rockville, Maryland. (3)
(e) Stock Purchase Agreement dated September 30, 1998 between the Company and ValorInvest, LTD. (4)
21 BioLife Technologies, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
</TABLE>
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Reg. No. 33-31420) which became effective with the Securities
and Exchange Commission on November 22, 1989.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1990.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996.
(5) Incorporated by reference to the Company's Definitive Proxy Statement
for the special meeting of Stockholders held on December 16, 1998.
41
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: April , 2000 By: /s/Richard J. Reinhart
----------------------------------------
Richard J. Reinhart, Ph.D.
President and Chief Executive
Officer (Principal Executive
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: April , 2000 /s/Richard J. Reinhart
--------------------------------------
Richard J. Reinhart, Ph.D.
Director
Date: April , 2000 /s/Howard S. Breslow
--------------------------------------
Howard S. Breslow
Director
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> DEC-26-1999
<CASH> 7,952
<SECURITIES> 0
<RECEIVABLES> 258,363
<ALLOWANCES> 11,927
<INVENTORY> 952,298
<CURRENT-ASSETS> 1,286,058
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0
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<COMMON> 33,854
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<TOTAL-REVENUES> 1,776,553
<CGS> 585,047
<TOTAL-COSTS> 964,452
<OTHER-EXPENSES> 1,957,003
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<INCOME-PRETAX> (1,175,722)
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