<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from _______________ to _______________
Commission file number: 0-27840
CELL ROBOTICS INTERNATIONAL, INC.
----------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Colorado 84-1153295
- ---------------------------------- ----------------------------------
(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification number
2715 Broadbent Parkway N.E., Albuquerque, New Mexico 87107
------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(505) 343-1131
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of July 31, 1998, 5,192,434 shares of Common Stock of the Registrant were
outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE>
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at June 30, 1998 (unaudited) and
December 31, 1997 (audited)
Consolidated Statement of Operations for the Three Months ended
June 30, 1998 and June 30, 1997 (unaudited)
Consolidated Statement of Operations for the Six Months ended
June 30, 1998 and June 30, 1997 (unaudited)
Consolidated Statement of Cash Flows for the Six Months ended
June 30, 1998 and June 30, 1997 (unaudited)
Notes to Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operation
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
--------------------
The interim unaudited consolidated financial statements have been
prepared by Cell Robotics International, Inc. ("Cell" or the "Company") and,
in the opinion of management, reflect all material adjustments which are
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented. Such adjustments
consisted only of normal recurring items. Certain information and footnote
disclosure made in the Company's last annual report on Form 10-KSB have been
condensed or omitted for the interim statements. These statements should be
read in conjunction with the financial statements and notes thereto included
in the Company's Form 10-KSB for the year ended December 31, 1997. The
results of the interim periods are not necessarily indicative of results which
may be expected for any other interim period or for the full year.
Forward-Looking Statements
- --------------------------
In addition to historical information, this Quarterly Report contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, and are thus prospective. The forward-looking
statements contained herein are subject to certain risks and uncertainties
that could cause actual results to differ materially from those reflected in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, competitive pressures, changing economic
conditions, those discussed in the Section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and other
factors, some of which will be outside the control of the Company. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking statements
to reflect events or circumstances that arise after the date hereof. Readers
should refer to and carefully review the information in future documents the
Company files with the Securities and Exchange Commission.
<PAGE>
<PAGE>
CELL ROBOTICS INTERNATIONAL, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of As of
6-30-98 12-31-97
------------- -------------
(UNAUDITED)
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 2,095,748 $ 623,572
Accounts receivable, net of allowance
for doubtful accounts of $1,841 343,286 223,856
Inventory 561,266 586,033
Other 83,191 36,089
------------- -------------
Total current assets 3,083,491 1,469,550
Property and equipment, net 181,761 194,654
Deferred offering costs 0 248,372
Other assets, net 52,951 67,271
------------- -------------
Total assets $ 3,318,203 $ 1,979,847
============= =============
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 257,281 $ 603,153
Payroll related liabilities 147,375 149,726
Royalties payable 186,106 193,150
Other current liabilities 30,109 88,941
------------- -------------
Total current liabilities 620,871 1,034,970
Short-term loan refinanced subsequent to
balance sheet date 0 500,000
------------- -------------
Total liabilities 620,871 1,534,970
------------- -------------
Stockholders' equity:
Preferred stock, $.04 par value.
Authorized 2,500,000 shares, 502,033
and no shares issued and outstanding
at June 30, 1998 and December 31, 1997,
respectively 20,081 0
Common stock, $.004 par value.
Authorized 12,500,000 shares, 5,192,434
and 5,245,414 shares issued and
outstanding at June 30, 1998 and
December 31, 1997, respectively 20,770 20,982
Additional paid-in capital 17,328,999 14,037,243
Accumulated deficit (14,672,518) (13,613,348)
------------- -------------
Total stockholders' equity 2,697,332 444,877
------------- -------------
$ 3,318,203 $ 1,979,847
============= =============
</TABLE>
See accompanying notes to consolidated financial statements<PAGE>
<PAGE>
CELL ROBOTICS INTERNATIONAL, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
UNAUDITED
Three Months Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Product sales $ 244,375 $ 278,325
Research and development grants 83,243 0
------------- -------------
Total revenues 327,618 278,325
------------- -------------
Product cost of goods sold (160,093) (184,947)
SBIR direct expenses (83,243) 0
------------- -------------
Total cost of goods sold (243,336) (184,947)
------------- -------------
Gross profit 84,282 93,378
------------- -------------
Operating expenses:
General and administrative 216,951 197,026
Marketing & Sales 201,090 159,140
Research and development 219,748 371,652
------------- -------------
Total operating expenses 637,789 727,818
------------- -------------
Loss from operations (553,507) (634,440)
------------- -------------
Other income (deductions):
Interest income 26,889 10,876
Interest expense (340) (37)
Other 0 4,600
------------- -------------
Total other income 26,549 15,439
------------- -------------
Net loss $ (526,958) $ (619 ,001)
============= =============
Weighted average common shares
outstanding, basic and diluted 5,089,147 5,013,414
============= =============
Net loss per common share,
basic and diluted $ (0.10) $ (0.12)
============= =============
</TABLE>
See accompanying notes to consolidated financial statements<PAGE>
<PAGE>
CELL ROBOTICS INTERNATIONAL, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
UNAUDITED
Six Months Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Product sales $ 658,650 $ 534,843
Research and development grants 125,062 0
------------- -------------
Total revenues 783,712 534,843
------------- -------------
Product cost of goods sold (382,532) (357,397)
SBIR direct expenses (125,062) 0
------------- -------------
Total cost of goods sold (507,594) (357,397)
------------- -------------
Gross profit 276,118 177,446
------------- -------------
Operating expenses:
General and administrative 429,606 361,006
Marketing & Sales 358,078 318,317
Research and development 355,512 642,720
------------- -------------
Total operating expenses 1,143,196 1,322,043
------------- -------------
Loss from operations (867,078) (1,144,597)
------------- -------------
Other income (deductions):
Interest income 45,816 26,830
Interest expense (408) (473)
Other 0 11,800
------------- -------------
Total other income 45,408 38,157
------------- -------------
Net loss $ (821,670) $(1,106 ,440)
============= =============
Weighted average common shares
outstanding, basic and diluted 5,192,434 5,009,105
============= =============
Net loss per common share,
basic and diluted $ (0.16) $ (0.22)
============= =============
</TABLE>
See accompanying notes to consolidated financial statements<PAGE>
<PAGE>
CELL ROBOTICS INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
UNAUDITED
Six Months Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
- -------------------------------------
Net loss $ (821,670) $ (1,106,440)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 62,866 63,789
Amortization of options issued
for service 31,081 0
Increase in accounts receivable (119,430) (359,428)
Decrease in inventory 24,767 47,698
Increase in other current assets (31,562) (52,043)
Increase (decrease) in current
liabilities (190,727) 200,964
------------- -------------
Net cash used in operating activities (1,044,675) (1,205,460)
------------- -------------
Cash flows from investing activities:
- -------------------------------------
Purchase of Fixed Assets (35,653) (15,524)
------------- -------------
Net Cash Used by Investing Activities (35,653) (15,524)
------------- -------------
Cash flows from financing activities:
- -------------------------------------
Proceeds from Sale of Units,
Net of Offering Costs 3,052,504 0
Proceeds from issuance of common stock 0 17,500
Repayment of short term loan (500,000) 0
------------- -------------
Net cash provided by financing activities 2,552,504 17,500
------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS: 1,472,176 (1,203,484)
Cash and cash equivalents:
Beginning of Period 623,572 1,724,671
------------- -------------
End of Period $ 2,095,748 $ 521,187
============= =============
Supplemental information:
- -------------------------
Exchange of Units for common stock --
increase to accumulated deficit 237,500 0
Options issued for services to be
rendered 46,621 0
Interest paid $ 408 $ 473
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<PAGE>
CELL ROBOTICS INTERNATIONAL, INC.
Notes to Unaudited Consolidated Financial Statements
June 30, 1998
1. Presentation of Unaudited Consolidated Financial Statements
-----------------------------------------------------------
These unaudited consolidated financial statements have been prepared in
accordance with the rules of the Securities and Exchange Commission and,
therefore, do not include all information and footnotes otherwise necessary
for a fair presentation of financial position, results of operations and cash
flows, in conformity with generally accepted accounting principles. However,
the information furnished, in the opinion of management, reflects all
adjustments necessary to present fairly the financial position, results of
operations and cash flows. The results of operations are not necessarily
indicative of results which may be expected for any other interim period or
for the year as a whole.
2. Issuance of Equity Securities
-----------------------------
In February, 1998, the Company sold 460,000 Units (including
Underwriter's "Over-Allotment Option", which consisted of 60,000 Units), each
Unit consisting of one share of Series A Convertible Preferred Stock (the
"Preferred Stock"), convertible into four Common Shares, and two common stock
purchase warrants (the "Warrants"), in a registered offering to the public.
Each Unit was sold at a price to the public of $8.25 resulting in gross
proceeds of $3,795,000. After consideration of the Underwriter's commission
and discount and other offering costs, net proceeds to the Company were
approximately $3.0 million. The Company utilized $500,000 to repay a short-
term loan concurrent with the offering. Accordingly, such short-term loan has
been reclassified from current liabilities at December 31, 1997.
The Preferred Stock is convertible at any time at the option of the
holder. The Preferred Stock converts automatically upon the earlier of
February 2001 or the date upon which the sum of the closing bid prices of the
Preferred Stock and the Warrants included in the Units has been at least
$12.375 for ten consecutive trading dates. The Preferred Stock has a
liquidation preference of $8.25 per share and is entitled to a semiannual
dividend of four-tenths of one share of Common Stock for each share of
Preferred Stock.
Each Warrant entitles the holder thereof to purchase at any time prior to
February 2003, one share of Common Stock at a price of $2.40 per share. The
Warrants may be redeemed by the Company for a redemption price of $0.25 per
Warrant under certain conditions.
In connection with the offering, the Company issued options to purchase,
in the aggregate, 450,000 shares of the Company's Common Stock at an exercise
price of $2.0625 per share to the Chief Executive Officer of the Company. The
options are subject to vesting. Specifically, 150,000 options vested and
became exercisable on the closing of the offering and the balance will vest on
November 30, 2002; provided, however, (i) 150,000 options will vest and become
exercisable thirty days after the end of any quarter in which the Company
reports pre-tax income of at least $50,000; and (ii) 150,000 options shall
vest and become exercisable upon the Company reporting its first fiscal year
with net income of at least $500,000. The options are exercisable for a period
of 36 months from each respective vesting date, but in no event later than
December 31, 2002. Additionally, the Company granted the Underwriters a five-
year warrant that entitles the Underwriters to purchase up to 40,000 Units at
an exercise price of $9.90 per Unit.
In connection with the offering, the Company entered into a multi-year
employment agreement with the chief executive officer of the Company.
Finally, in February 1998, the Company allowed certain shareholders who
acquired 200,000 shares of Common Stock in August 1997 for $650,000 to
exchange such shares for 78,788 Units. In connection herewith, a charge to
accumulated deficit of $237,500 was recognized.
3. Earning Per Share
-----------------
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share"
in 1997. SFAS No. 128 establishes new standards for computing and presenting
earnings per share ("EPS"). Specifically, SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS, requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures, and requires a reconciliation of
the numerator and denominator of basic and diluted EPS computations to the
financial statements. Upon adoption, SFAS No.128 requires restatement of prior
period EPS information presented. As such, the EPS information for the 1997
periods presented has been restated. Adoption of SFAS No. 128 did not have a
material effect on the Company's consolidated financial statements.
Options to purchase 1,290,905 and 991,000 shares of common stock were
outstanding at June 30, 1998 and 1997, respectively. Preferred Stock
convertible into 2,008,132 shares of common stock and warrants to purchase
1,077,576 shares of common stock were outstanding at June 30, 1998. These
potentially dilutive securities were not considered in the computation of
diluted loss per share as the effect would have been anti-dilutive because of
the net losses incurred in the periods ended June 30, 1998 and 1997.
4. Contingency
-----------
In October 1997, a competitor filed a civil suit against the Company
claiming that one of the Company's medical devices, the Lasette(-TM-),
infringes a U.S. patent underlying its competitive laser skin perforator. The
Company and its patent counsel have conducted a comprehensive investigation of
the basis of the claims underlying such litigation, and believe that the
Lasette does not infringe upon such competitor's U.S. patent or any of its
related foreign patents. In March 1998, the Company's Motion to Dismiss for
lack of personal jurisdiction was granted. The competitor has appealed that
decision. The Company intends to vigorously defend any future claims asserted
in such litigation. Accordingly, while there can be no assurance of the
ultimate outcome of the litigation, the Company does not, at this time,
believe the claims will have a material adverse impact on the Company's
business, results of operations or financial condition.
5. Reclassification
----------------
Certain 1997 amounts have been reclassified to conform to the 1998
presentation.<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CELL ROBOTICS INTERNATIONAL, INC.
The following discussion and analysis should be read in conjunction with
the Financial Statements and Notes thereto appearing elsewhere in this report.
Liquidity and Capital Resources - June 30, 1998 compared to December 31, 1997
- -----------------------------------------------------------------------------
In February, 1998, the Company sold 460,000 Units (including the
Underwriter's "Over-Allotment Option", which consisted of 60,000 Units), each
Unit consisting of one share of Series A Convertible Preferred Stock (the
"Preferred Stock"), convertible into four Common Shares, and two common stock
purchase warrants (the "Warrants"), in a registered offering to the public
(the "Offering"). Each Unit was sold at a price to the public of $8.25
resulting in gross proceeds of $3,795,000. After consideration of the
Underwriter's commission and discount and other offering costs, net proceeds
to the Company were approximately $3.0 million. (See Note 2 of the Notes to
Unaudited Consolidated Financial Statements)
Primarily as a result of the foregoing, the Company's liquidity and
capital resources remained strong during the six month period ended June 30,
1998.
The Company's current ratio at December 31, 1997, was 1.4:1, compared to
a current ratio of 5.0:1 on June 30, 1998. This increase in liquidity is
primarily due to capital raised from the Offering. Total assets increased from
$1,979,847 at December 31, 1997 to $3,318,203 at June 30, 1998, an increase of
$1,338,356, or 67.6%.
The increase in the Company's current assets of $1,613,941, or 109.8%,
was driven by net offering proceeds of approximately $3.0 million. Cash and
cash equivalents therefore increased $1,472,176, or 236.1%. Accounts
receivable increased $119,430, or 53.4%, resulting from increased sales during
the six month period. Also resulting from the increased sales was a decrease
in inventory of $24,767, or 4.2%. Other current assets also increased, from
$36,089 to $83,191 an increase of 130.5%.
Property and equipment, net, decreased $12,893, or 6.6%, as a result of
depreciation, slightly offset by new fixed asset purchases of $35,653. Other
assets decreased from $67,271 to $52,951, or 21.3%.
During the six month period ended June 30, 1998, the Company's total
liabilities materially decreased from $1,534,970 to $620,871, or 59.6%. This
reduction was accomplished by applying net offering proceeds against
outstanding vendor payables and repaying a $500,000 short-term note. The
Company did not have any long term liabilities at June 30, 1998.
The Company's working capital increased from $434,580 at December 31,
1997 to $2,462,620 at June 30, 1998, an increase of $2,028,040, due almost
exclusively to the completion of the Offering.
Cash used in operations for the six month periods ended June 30, 1998 and
1997 was $1,044,675 and $1,205,460, respectively. The primary reason for the
decrease in cash used in operations during this period, as compared to the
prior period, was the decrease in operating expenses.
On July 30, 1998, the Company signed an agreement with Chronimed, Inc.
for worldwide distribution of its Lasette(-TM-) laser finger perforator for
the blood sampling for glucose testing market. The agreement includes a two-
year, multi-million dollar minimum purchase commitment by Chronimed as well as
a capital investment consisting of a staged purchase of $600,000 of the
Company's common stock, contingent upon achievement of certain milestones.
Chronimed's capital investment will be used for the development of a second
generation, smaller Lasette to meet the needs of the home blood sampling for
glucose testing market. The worldwide diabetic market is very large and
continues to grow, but there can be no assurance the Lasette product will
achieve market acceptance.
The Company expects that its cash used in operating activities will
continue at the current level through the remainder of 1998. The timing of
the Company's future capital requirements, however, cannot accurately be
predicted. The Company's capital requirements depend upon numerous factors,
including, most notably, the market acceptance of its new laser-based medical
devices. If capital requirements vary materially from those currently
planned, the Company may require additional financing, including but not
limited to, the sale of equity or debt securities. The Company has no
commitments for any additional financing and there can be no assurance that
such commitments can be obtained. Any additional equity financing may be
dilutive to the Company's existing stockholders and debt financing, if
available, may involve pledging some or all the Company's assets and may
contain restrictive covenants with respect to raising future capital and other
financial and operational matters. If the Company is unable to obtain
additional financing as needed, the Company may be required to reduce the
scope of its operations, which could have a material adverse effect upon the
Company's business, financial condition and results of operation. The Company
believes that the net proceeds from the Offering will be sufficient to meet
the Company's working capital requirements for at least the next nine months,
although there can be no assurance in this regard.
Other than the foregoing, management knows of no other trend, or other
demands, commitments, events or uncertainties that will result in, or that are
reasonably likely to result in, a material impact on the liquidity and capital
resources of the Company.
Results of Operations - Three months ended June 30, 1998 compared to the three
months ended June 30, 1997
- ------------------------------------------------------------------------------
The Company's total revenue increased $49,293, or 17.7% from $278,325 to
$327,618 for the three month period ended June 30, 1997 and 1998,
respectively. Revenues from the sale of products during the three months
ended June 30, 1998, were $244,375, as compared to $278,325 during the
comparable period in 1997. This represents a decrease in sales of 12.2% while
gross margin realized on product sales during this period improved slightly
from 33.5% in 1997, to 34.5% during 1998.
The Company also recognized $83,243 of revenue from "Small Business
Innovative Research" (SBIR) grants during the three months ended June 30,
1998. These SBIR grants have been issued by the National Institutes of Health
(NIH), an agency of the U.S. Department of Health and Human Services. The
highly competitive grants provide financial assistance for approved tasks of
high-risk research that can lead to future products for small businesses.
Normally, awards do not exceed $750,000 for a period ordinarily not to exceed
two years. The Company's current Phase II grant is scheduled to expire on
March 31, 1999. Additional Phase II grant applications will be submitted to
continue research efforts initiated in previously awarded Phase I grants.
The Company's loss from operations incurred during the three months ended
June 30, 1998, was $553,507, as compared to an operating loss of $634,440
incurred during the same period in 1997. Total operating expenses decreased
$90,029, or 12.4%, from $727,818 to $637,789. Research and development type
expenses accounted for the majority of this decrease, a reduction of $151,904
or 40.9%. General and administrative expenses increased $19,925, or 10.1%,
reflecting an increase in legal, accounting and insurance fees. Marketing and
sales expenses increased 26.4%, or $41,950, primarily due to efforts to
identify a marketing partner for the new laser-based medical products, obtain
regulatory clearances and secure distribution channels.
During the three months ended June 30, other income and expenses
increased from a $15,439 net contribution to income during the period in 1997,
to a $26,549 net contribution to income during the period in 1998.
As a result of the foregoing, the Company's net loss for the three months
ended June 30, 1998 was $526,958, as compared to a net loss of $619,001
incurred during the comparable period of 1997. On a per share basis, this
amounts to a $0.10 loss per weighted average outstanding share during the
second quarter of 1998, compared to a $0.12 loss per weighted average
outstanding share during the second quarter of 1997.
Results of Operations - Six months ended June 30, 1998 compared to the six
months ended June 30, 1997
- --------------------------------------------------------------------------
Total revenue increased $248,869, or 46.5%, during the six months ended
June 30, 1998 as compared to the same period in 1997. Revenues from the sale
of products during the six months ended June 30, 1998, were $658,650, as
compared to $534,843 during the comparable period in 1997. This represents an
increase of 23.1%. The Company also recognized $125,062 of revenue from
research and development grants during the six months ended June 30, 1998.
The gross margin realized on product sales during this period improved from
33.2% in 1997, to 41.9% during 1998.
The Company's loss from operations incurred during the six months ended
June 30, 1998, was $867,078, as compared to an operating loss of $1,144,597
incurred during the same period in 1997. Total operating expenses decreased
$178,847, or 13.5%, from $1,322,043 to $1,143,196. Research and development
type expenses accounted for the majority of this decrease, a reduction of
$287,208 or 44.7%. Principal development expenses associated with the FDA-
cleared RevitaLase(-TM-), an erbium:YAG laser for use in dermatological
applications, were incurred in the previous fiscal year. R&D efforts
associated with the development of the next generation Lasette, or Lasette II,
began in the later part of the second quarter. These scaled down development
activities for the first six months of 1998, combined with low first quarter
cash reserves, led to the reduction in research and development expenses.
General and administrative expenses increased $68,600, or 19.0%, reflecting an
increase in legal and accounting fees and the addition of Director and Officer
Liability Insurance. Marketing and sales expenses slightly increased 12.5%,
or $39,761, primarily due to the Company's efforts to identify a marketing
partner and secure worldwide distribution channels for its laser-based medical
products, as well as enhanced product literature and advertising expenses.
During the six months ended June 30, other income and expenses slightly
increased from a $38,157 net contribution to income during the period in 1997,
to a $45,408 net contribution to income during the period in 1998.
As a result of the foregoing, the Company's net loss for the six months
ended June 30, 1998 was $821,670, as compared to a net loss of $1,106,440
incurred during the comparable period of 1997. On a per share basis, this
amounts to a $0.16 loss per weighted average outstanding share during the
first six months of 1998, compared to a $0.22 loss per weighted average
outstanding share during the first six months of 1997.
The Company developed the FDA-cleared RevitaLase(-TM-), and Erbium:YAG
laser for use in dermatological applications, based on a letter of intent that
was signed with Laser Industries, Ltd. (a major medical laser company).
However, before the agreement was finalized, ESC Medical Lasers, Ltd. acquired
Laser Industries. Since ESC already had its own Erbium:YAG laser, the new
combined company did not honor the letter of intent. Because the dermatology
laser market is quite crowded, the Company has decided not to market the
RevitaLase without a marketing partner. Discussions continue with other laser
marketing companies; however, no additional capital is being spent on the
product at this time.
Other than the foregoing, management knows of no trends, or other
demands, commitments, events or uncertainties that will result in, or are
reasonably likely to result in, a material impact on the Company's results of
operations.
Year 2000 Issue
- ---------------
THE PROBLEM. The Year 2000 Issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
As a result, any of the Company's computer programs that have date sensitive
software may recognize a date using "00" as the year 1900 rather than the
year 2000, which, in turn, could result in system failures or miscalculations
causing disruptions in the operations of the Company and its suppliers and
customers.
THE COMPANY'S STATE OF READINESS. The Company has instituted a Year 2000
Project. As part of the Company's Year 2000 Project, the Company has
completed its initial evaluation of current computer systems, software and
embedded technologies. The evaluation revealed that the Company's network
hardware and operating system, voice mail system, e-mail system, and
accounting and manufacturing software are the major resources that do have
Year 2000 compliance issues. These resources will need to be either replaced
or upgraded. Fortunately, the identified systems and/or programs are "off-
the-shelf" products with Year 2000 compliant versions now available. The
Company's network, e-mail system and accounting and manufacturing software are
scheduled for upgrade by the end of September, 1998. The Company's voice mail
system is scheduled to be replaced during the first quarter of 1999. All
other relevant programs, including Microsoft Windows95(-Registered Mark-)
operating system, are scheduled for upgrade by the end of December, 1998.
The Company has determined that there should be no Year 2000 Issues for
the products it has already sold, excluding issues associated with the
Microsoft Windows95(-Registered Mark-) operating system which is incorporated
into the Company's Workstation products. Customers who have purchased the
Company's Workstation products will be notified about Microsoft Windows95(-
Registered Mark-) and problems will be addressed as incurred.
As part of the Company's Year 2000 Project, the Company has also
contacted its significant suppliers and large customers to determine the
extent to which the Company is vulnerable to those third parties' failure to
remediate their Year 2000 compliance issues. To date, approximately ten
percent (10%) of the entities contacted have responded, and of those
responding, half have indicated that they have remediated their Year 2000
compliance issues. The Company will continue to contact its significant
suppliers and large customers as part of its Year 2000 Project. However,
there can be no guarantee that the systems of other companies on which the
Company's business relies will be timely converted or that failure to convert
by another company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company and its
operations.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. Expenditures in
1997 for the Year 2000 Project amounted to less than $7,500.00. Management
expects that completion of its Year 2000 Project may result in additional
expenditures of approximately $35,000.00
THE RISKS ASSOCIATED WITH THE COMPANY'S YEAR 2000 ISSUES. The Company's
failure to resolve Year 2000 Issues on or before December 31, 1999 could
result in system failures or miscalculations causing disruption in operations,
including, among other things, a temporary inability to process transactions,
send invoices, send and/or receive e-mail and voice mail, or engage in similar
normal business activities. Additionally, failure of third parties upon whom
the Company's business relies to timely remediate their Year 2000 Issues could
result in disruptions in the Company's supply of parts and materials, late,
missed or unapplied payments, temporary disruptions in order processing and
other general problems related to the Company's daily operations. While the
Company believes its Year 2000 Project will adequately address the Company's
internal Year 2000 issues, until the company receives responses from a more
significant number of the Company's suppliers and customers, the overall risks
associated with the Year 2000 Issue remain difficult to accurately describe
and quantify, and there can be no guarantee that the Year 2000 Issue will not
have a material adverse effect on the Company and its operations.
THE COMPANY'S CONTINGENCY PLAN. The Company has not, to date,
implemented a Year 2000 Contingency Plan. It is the Company's goal to have
the major Year 2000 Issues resolved by the end of fiscal 1998, with the
exception of the Company's voice mail system which will be replaced during the
first quarter of fiscal 1999. As part of the Company's Year 2000 Project, the
Company plans to retain the services of an outside consultant to verify and
validate the Company's Year 2000 compliance. Final Year 2000 verification and
validation is scheduled to occur by the end of March, 1999. However, the
Company will develop and implement a contingency plan by the end of November,
1998, in the event the Company's Year 2000 Project should fall behind
schedule.
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As disclosed in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1997, in October 1997, a civil action was brought by
Venisect, Inc. ("Venisect") against the Company in the United States District
Court of the Eastern District of Arkansas, Case No. LR-C-97-877 (the "Venisect
Litigation") in which Venisect claims that the Company's Lasette(-TM-) product
infringes a U.S. patent, underlying its competitive laser skin perforator. The
Company and its advisors, including patent counsel, have conducted a
comprehensive investigation of the basis of the claims underlying the Venisect
Litigation and believe that the Lasette does not infringe upon the Venisect
U.S. patent or any of its related foreign patents. In March 1998, the Court
granted the Company's Motion to Dismiss for lack of jurisdiction. Venisect has
filed a notice that it will appeal that decision.
Item 2. Change in Securities
None.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
Exhibit 10.1 Development and Distribution Agreement
Exhibit 27 Financial Data Schedule
Reports on Form 8-K:
None.
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this annual report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CELL ROBOTICS INTERNATIONAL, INC.
Dated: August 14, 1998 By: /s/ Ronald K. Lohrding
--------------- ----------------------------------------
Ronald K. Lohrding, President & CEO
Dated: August 14, 1998 By: /s/ Jean M. Scharf
--------------- ----------------------------------------
Jean M. Scharf, Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 4-7 OF THE COMPANY'S FORM 10-QSB FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,095,748
<SECURITIES> 0
<RECEIVABLES> 345,127
<ALLOWANCES> 1,841
<INVENTORY> 561,266
<CURRENT-ASSETS> 3,083,491
<PP&E> 788,036
<DEPRECIATION> 606,275
<TOTAL-ASSETS> 3,318,203
<CURRENT-LIABILITIES> 620,871
<BONDS> 0
0
20,081
<COMMON> 20,770
<OTHER-SE> 2,656,481
<TOTAL-LIABILITY-AND-EQUITY> 3,318,203
<SALES> 658,650
<TOTAL-REVENUES> 783,712
<CGS> 382,532
<TOTAL-COSTS> 507,594
<OTHER-EXPENSES> 1,143,196
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 408
<INCOME-PRETAX> (821,670)
<INCOME-TAX> 0
<INCOME-CONTINUING> (821,670)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (821,670)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
<PAGE>
EXECUTION COPY 7/30/98
DEVELOPMENT
AND
DISTRIBUTION AGREEMENT
AGREEMENT entered by and between Chronimed Inc., a Minnesota corporation
("CHMD") and Cell Robotics International, Inc., a Colorado corporation
("CRII") executed and deemed effective July 30th, 1998.
WHEREAS, CRII has developed a first generation laser finger perforator
device known as the Lasette I, and intends to develop with CHMD a second
generation laser finger perforator device known as the Lasette II, and
WHEREAS, CHMD and CRII intend that CRII will grant to CHMD and CHMD will
exploit to the parties' mutual benefit the worldwide right to distribute,
market and sell the Lasette I and Lasette II devices, and
WHEREAS, CHMD and CRII intend that CRII will license to CHMD the
worldwide, exclusive right to manufacture, distribute, market and sell certain
disposable elements of Lasette I and Lasette II devices;
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties herein contained, the parties hereby agree as
follows:
1. DEFINITIONS
-----------
1.1 The term "Lasette I" shall be used generally to mean the laser
finger perforator device intended for human use, to be utilized by health care
providers in clinical settings, and designed and constructed to incorporate
and exploit the patents, know-how, and engineering technologies more
specifically defined in Schedule 1.1 hereto.
1.2 The term "Lasette II" shall be used generally to mean the laser
finger perforator device intended for human use, to be utilized by consumers
in non-clinical settings, and designed and constructed to incorporate and
exploit the patents, know-how, and engineering technologies more specifically
defined in Schedule 3.1 hereto.
1.3 The terms "Lasette I Disposable Lens Shield" and "Lasette II
Disposable Lens Shield" (sometimes collectively referred to as "Lasette
Disposables") shall mean devices designed and constructed to protect the
Lasette unit laser lenses from vapor and particulate caused as a by-product of
the laser finger perforation, incorporating and exploiting the patents, know-
how, and engineering technologies more specifically defined in Schedules 1.3
and 3.1 hereto.
1.4 The terms Lasette I, Lasette II, and Lasette Disposables shall
include all existing products, patents, processes, plans, specifications,
know-how and technologies pertaining to the Lasette I, Lasette II, and Lasette
Disposables.
2. GRANT OF DISTRIBUTION RIGHTS AND LICENSE
----------------------------------------
2.1 Subject to the terms and conditions stated herein, CRII grants to
CHMD an exclusive, worldwide right to distribute, market and sell the Lasette
I and Lasette II products for human applications.
2.2 Subject to the terms and conditions stated herein, CRII grants to
CHMD an exclusive, worldwide license to make, have made, use, distribute and
sell the Lasette Disposables.
2.3 Subject to the terms and conditions stated herein, CRII grants to
CHMD an exclusive, worldwide license to use the trademark "Lasette" in
conjunction with CHMD's performance of its rights and obligations under this
Agreement. CHMD's use of such trademarks shall be discretionary and it will
have no obligation to use the Lasette trademark. In the event CHMD elects,
to use, distribute, or sell the Lasette I or Lasette II devices under any
names or marks other than Lasette, CHMD shall have exclusive ownership of and
rights to such other names or marks and such ownership and rights shall
survive termination of this Agreement for any reason.
2.4 During the term of CHMD's rights of exclusivity herein, CRII
shall not, for human applications, market, sell or distribute Lasette I,
Lasette II, Lasette Disposables or substantially similar products to any third
party or grant to a third party any rights with respect to any of the forgoing
products in contradiction of any of the rights granted CHMD in this Agreement.
During the term of CHMD's rights of exclusivity herein, CRII shall not, for
non-human applications, market, sell or distribute Lasette I, Lasette II,
Lasette Disposables or substantially similar products to any third party or
grant to a third party any rights with respect to any of the foregoing
products without the prior consent of CHMD, such consent to be reasonably
given if such marketing, sale or distribution would not result in, or have the
possibility of resulting in, the impairment of any of the rights granted CHMD
in this Agreement.
2.5 Subject to CHMD's performance of its obligations under this
Agreement, CRII grants to CHMD the further right to sublicense or assign any
CHMD rights licensed or granted in this Section 2; provided, however, that
such sublicense or assignment shall be solely for the purpose of permitting
CHMD to engage the services of Lasette Disposables manufacturers, sales
representatives, dealers and other persons to assist CHMD in its performance
under this agreement. Under no circumstances shall CHMD have the right to
assign to any third party the exclusive right or non-exclusive rights granted
herein without the express written consent of CRII.
2.6 CRII and CHMD agree that CHMD receives no licenses or rights
whatsoever, by implication or otherwise, with respect to any other CRII
patents, patent rights, patent applications trademarks, technology or other
intellectual property except as specifically granted herein; and upon
termination of this Agreement, other than as to inventory in CHMD's possession
at the time of termination, CHMD shall have no further right to distribute,
market or sell the Lasette I, Lasette II or Lasette Disposables. Upon
termination of this Agreement, CHMD shall retain the sole ownership of and
rights to any manufacturing technologies, know-how, processes, or devices
related to Lasette Disposables production independently developed by CHMD
during the term of this Agreement.
2.7 CRII shall promptly notify CHMD in writing of any new, enhanced,
derivative or similar products (for human-use in performing laser perforation
for drawing capillary blood) it develops or acquires related to laser
perforator devices or material components thereof, and CHMD shall have a first
right of refusal with respect to the exclusive rights to distribute, market
and sell non-disposable any such products and devises, and to manufacture,
market, distribute and sell any such disposable products and devices according
to the terms herein. Upon receipt of such notification from CRII, CHMD shall
have a period of 60 days in which CHMD has the exclusive right to negotiate
with CRII in mutual good faith an agreement by which CRII conveys the above
stated rights on terms generally consistent with those contained in this
Agreement.
3. DEVELOPMENT OF LASETTE II
-------------------------
3.1 The parties agree that the Lasette II will be developed generally
in accordance with the plans, specifications and timetables attached hereto as
Exhibit 3.1 and deemed a part hereof. Any material deviation from such plans,
specifications and timetables shall require the mutual consent of the parties.
4. LASETTE PRODUCTION AND PURCHASE COMMITMENTS
-------------------------------------------
4.1 Subject to the various terms, conditions, and timetables provided
in this Section 4, CRII will produce and sell to CHMD and CHMD will purchase
from CRII all the Lasette I and Lasette II products CHMD may require.
4.2 CHMD's obligation to purchase the stated minimum number of
Lasette I units herein is conditioned upon attainment of and ongoing adherence
to Lasette I product quality standards, and CHMD's obligation to purchase the
stated minimum number of Lasette II units herein is conditioned upon
attainment of and ongoing adherence to Lasette II product quality standards,
all of which will be documented upon establishment. In the event the parties
are unable to agree in good faith that the established product quality
standards have been achieved in the production of the Lasette I within sixty
days following the execution of this Agreement, or in the production of the
Lasette II within sixty days following commencement of Selling Year Two, as
defined below, then either CRII or CHMD shall have the right to terminate this
Agreement, upon 30 days written notice to the other, pursuant to the terms of
Section 11.4.
4.3 CHMD shall have the right to receive and CRII shall promptly
provide to CHMD all communications between CRII and the FDA involving or
affecting the products subject to this Agreement. CHMD shall have the right
to communicate directly with the FDA, with the participation of a CRII
representative, regarding any of the matters addressed herein.
4.4 CHMD will purchase from CRII a minimum of 1,500 Lasette I units
during Selling Year One, as defined in Section 4.6. CRII will charge CHMD a
Lasette I price per unit equal to the lesser of $1,170.00 or 1.5 times CRII's
unit production cost. CRII shall establish cost standards for the purpose of
determining interim unit production costing which shall be reconciled
quarterly to actual costs. Unit production costs incurred by CRII shall also
be subject to increases from time to time upon 90 days prior written notice to
CHMD to reflect actual increases in costs incurred by CRII for raw material,
component parts and other costs associated with the production of product
hereunder. Such cost increases will include, without limitation, any
increases in the cost of the Erbium:YAG laser rod currently supplied by CRII's
Russian supplier. CRII's notification of cost increase to CHMD shall identify
the overall elements CRII's production costs and those elements subject to
increase. CHMD's initial and ongoing obligation to purchase Lasette products
under this Section 4.4 shall be subject to the conditions provided in Section
4.2.
4.5 Notwithstanding the provisions of Section 4.4 to the contrary, in
the event the price charged to CHMD for the Lasette I pursuant to the
provisions of Section 4.4 is less than 1.20 times CRII's unit production cost,
the parties agree to negotiate in good faith a new price per unit and, in the
event the parties are unable to agree on a modified price per unit within
thirty days, either party shall have the right to terminate this Agreement,
upon 30 days written notice to the other.
4.6 CHMD may, in its discretion, purchase Lasette II units in
substitution of any or all of the Lasette I units to be purchased pursuant to
Section 4.4. In the event of such substitution, the total dollar value of
combined Lasette I and Lasette II units purchased by CHMD shall be equal to
the total dollar value of 1,500 Lasette I units as determined in Section 4.4.
4.7 Subject to the conditions identified in Section 4.2, CHMD's
commitment to purchase the 1,500 Lasette I (or dollar equivalent Lasette I and
II units) will commence upon the later of (i) the development of a production-
ready process for production of the Lasette I Disposable Lens Shield, or (ii)
the achievement of the Lasette I quality standards identified in Section 4.2,
and continue for a period of one year thereafter ("Selling Year One"). CRII
will ship product on an approximate 125 unit per month basis and invoice CHMD
upon shipment. Pricing terms will be net 30 days following date of invoice.
CRII will maintain a 45 day inventory of Lasette I units during Selling Year
One as determined by the average, rolling consumption rate during the
preceding 90 day period. CHMD will provide CRII with a monthly, twelve month
rolling forecast of Lasette I units.
4.8 CHMD will purchase from CRII a minimum of 5,000 Lasette II units
during Selling Year Two. CRII will charge CHMD a Lasette II price per unit
equal to 1.9 times CRII's unit production cost. CRII shall establish cost
standards for the purpose of determining interim unit production costing which
shall be reconciled quarterly to actual costs. Unit production costs incurred
by CRII shall also be subject to increases from time to time upon 90 days
advance written notice to CHMD to reflect actual increases in costs incurred
by CRII for raw material, component parts and other costs associated with the
production of product hereunder. Such cost increases will include, without
limitation, any increases in the cost of the Erbium:YAG laser rod currently
supplied by CRII's Russian supplier. CRII's notification of cost increase to
CHMD shall identify the overall elements CRII's production costs and those
elements subject to increase. CHMD's initial and ongoing obligation to
purchased Lasette products under this Section 4.8 shall be subject to the
conditions provided in Section 4.2.
4.9 In the event CRII's price to CHMD for the Lasette II shall exceed
.70 times the established retail market price for Lasette II units, the
parties shall negotiate in good faith a new price per unit and, in the event
the parties are unable to agree on a modified price per unit within thirty
days, either party shall have the right to terminate this Agreement upon 30
days written notice to the other.
4.10 CHMD may, in its discretion, purchase Lasette I units in
substitution for any or all of the Lasette II units to be purchased pursuant
to Section 4.8. In the event of such substitution, the total dollar value of
combined Lasette I and Lasette II units purchased by CHMD shall be equal to
the total dollar value of 5,000 Lasette II units as determined in 4.8.
4.11 CHMD's obligation to purchase Lasette II units under Section 4.8
shall commence upon expiration of Selling Year One, and continue for one year
thereafter ("Selling Year Two"). In the event the conditions identified in
Section 4.2 have not occurred with respect to the Lasette II prior to
commencement of Selling Year Two, CRII will have 60 days to achieve the
Lasette II standards identified in Section 4.2, during which time CHMD shall
have no minimum purchase obligation with respect to Lasette I or Lasette II
products. CRII's failure to achieve the necessary Lasette II standards
identified in Section 4.2 within such 60 day period shall be grounds for
termination of this Agreement by either party, upon 30 days written notice to
the other.
4.12 CHMD will provide CRII with a twelve month Lasette II order
forecast 90 days prior to the commencement of Selling Year Two. CRII will
ship Lasette II products on an approximate 417 units per month during Selling
Year Two and pricing terms will be net 30 days following invoice date.
Following commencement of Selling Year Two, and on an ongoing basis
thereafter, CHMD will provide CRII with a monthly, twelve month rolling
forecast of Lasette II unit orders. CRII will provide all Lasette II ordered
units on a ninety-day shipment schedule. CRII will maintain a 30 day inventory
of Lasette II units during Selling Year Two as determined by the average,
rolling consumption rate during the preceding 90 day period. The rolling
forecast and shipment schedule processes established in this Section shall
apply to any annual purchase periods following Selling Year Two.
4.13 The parties shall meet 120 days prior to the end of the Selling
Year Two, and any annual purchase period thereafter, to establish mutually
acceptable pricing and targeted production and order volumes to apply to the
next following annual purchase period. In the event the parties are unable to
agree to pricing and targeted production and order volumes before ninety days
prior to the end of the then current purchase period, then (i) CHMD shall have
the right to require CRII to produce and sell to CHMD up to 125% times the
average monthly volume of Lasette II units (or dollar equivalent of combined
Lasette I and Lasette II units) purchased by CHMD during the then ending
selling year, and (ii) CRII shall have the right to require CHMD to purchase
not less than 75% times the average monthly volume of Lasette II units (or
dollar equivalent of combined Lasette I and Lasette II units) sold to CHMD
during the then ending selling year.
4.14 CRII shall provide CHMD with initial training, technical
assistance, information and support without charge to facilitate the marketing
and sale of the Lasette I, Lasette II, and Lasette Disposables products. CRII
will provide CHMD with additional technical support and participate in market
development activities beneficial to CRII's continuing enhancement of Lasette
products, all as CHMD may reasonably request. CHMD shall be responsible for
the costs of any ongoing training requested by CHMD.
4.15 CRII shall provide CHMD bench testing station capable of testing
Lasette I and Lasette II units to assess product compliance with
specifications and quality standards. CHMD may reject or return to CRII any
Lasette I or Lasette II products which fail to be in saleable condition or
which are returned by customers and subsequently determined by CHMD to be
defective. CHMD shall notify CRII of any defective product returned by
customers, or otherwise determined by CHMD not to be saleable, within 30 days
following such return or determination. CHMD shall have no obligation to pay
CRII for defective or non-saleable products unless or until such products
shall have been replaced or repaired by CRII, with the costs of shipping,
replacement or repair to be born by CRII.
4.16 In the event any Lasette I or Lasette II products shall be
recalled due to violation of any law, rule, or FDA standard, or due to any
defect in design or manufacture, CRII shall bear all costs and expenses of
recall including, without limitation, shipping expenses and purchaser
notification. The occurrence of any such recall shall be deemed a failure to
maintain the quality standards required under Section 4.2.
4.17 CHMD shall use its best efforts to distribute and market the
Lasette I and Lasette II in a high quality, technically correct manner and in
such a way as to not detract from the image and reputation of CRII, and to
protect CRII's proprietary rights therein. All marketing of the Lasette I and
Lasette I shall include appropriate copyright, trademark and proprietary mark
notices.
4.18 CHMD shall furnish to each customer CRII's "standard warranty"
covering the Lasette I and Lasette II and Lasette Disposables design and
materials. Such standard warranty shall contain a statement to the effect
that no one is authorized to make any warranty or representation other than
set forth in the standard warranty and that the customer may not rely on any
other warranty or representation. CHMD shall make no representation regarding
the Lasette I or Lasette II except as provided in product descriptions, user
manuals or promotional materials provided by CRII. CHMD warrants that it will
make no false or misleading claims or commitments concerning the performance
or capabilities of the Lasette I or Lasette II. CHMD agrees to indemnify,
defend and hold harmless CRII from any and all losses incurred by CRII as a
result of any false or misleading claims or commitments by CHMD. It is
expressly understood that CRII shall have no obligation or liability
whatsoever to any customer or end user of the Lasette I or Lasette II except
for breaches of any express or implied warranty given by CRII and except as
may be provided for by the express terms of this Agreement.
4.19 In connection with the manufacture and sale of Lasette
disposables, CHMD shall provide customers with a standard warranty which will
provide, at a minimum, that such products are warranted against defect in
workmanship for a period of not less than 90 days following the date of sale.
CHMD shall make no warranty regarding Lasette Disposables design or materials.
Except as to design and materials, CHMD shall be solely and exclusively liable
for any and all warranty claims made or asserted in connection with the
manufacture or sale of the Lasette Disposables and agrees to indemnify, defend
and hold harmless CRII from any liability or obligation with respect thereto.
4.20 During the term of this Agreement, CHMD covenants to and with
CRII, its successors and assigns, that it will not directly or indirectly
engage or become interested financially or otherwise in any business which
manufactures, markets, distributes or sells a laser skin perforator or any
other laser product that is competitive with the Lasette I or Lasette II; nor
shall CHMD directly or indirectly conduct research or development on its own
behalf or on behalf of any third party related to the development of any laser
inventions or products which are substantially the same as or competitive with
the Lasette I or Lasette II; nor shall CHMD directly or indirectly engage in
the manufacture, marketing or sale of any laser product which is substantially
the same as, similar or competitive to the Lasette I or Lasette II, unless or
until CRII conveys non-exclusive rights to any such products to a third party
pursuant to the terms of Section 2.7, in which case CHMD shall be entitled to
compete with any products for which rights have been conveyed. This Section
4.20 shall not preclude CHMD subsidiary or affiliated companies from selling
solely at retail stores products which may be deemed competitive with the
Lasette or similar laser products.
5. LASETTE DISPOSABLE ROYALTIES
-----------------------------
5.1 CHMD shall pay to CRII a royalty on all CHMD sales of Lasette
Disposables Film. CHMD's royalty payment shall be equal to 8% of Net Revenues
derived from Lasette I Disposable Lens Shield. Royalties shall be due only on
Lasette I Disposables manufactured using multiple cavity molds. Lasette
Disposables "Net Revenues" shall be defined as gross sales minus any
discounts, rebates, allowances or returns. All royalties shall be paid
quarterly on or before the last day of the month following the end of a
royalty quarter. Royalties shall be deemed earned upon receipt of customer
payment by CHMD. Due to unknown parameters associated with production costs,
marketing and sales strategy, the royalty payment for the Lasette II
Disposable will be decided within 60 days following the parties' determination
of their respective production costs of the Lasette II and Lasette II
Disposable. The Lasette II Disposable royalty rate to be agreed upon shall be
no greater than 15% nor less than 5%. Considerations of the rate will include
sales volume, profits on the Lasette II, and profits on the Lasette II
Disposable.
5.2 CHMD shall furnish CRII, with each royalty payment, a statement
specifying the total Lasette Disposables unit sales for which royalties have
been earned during the royalty quarter and the corresponding royalties paid.
CHMD will at all times keep and maintain complete and accurate books of
accounting containing records of Lasette Disposables Film sales, billing, and
accounts receivable data in sufficient detail to enable royalties payable to
be computed and verified. CHMD will permit CRII or its representatives to
inspect such records upon reasonable notice to CHMD.
6. ACQUISITION OF STOCK
--------------------
6.1 Upon execution of this Agreement, CHMD shall pay into escrow
Three Hundred Thousand Dollars ($300,000.00) and CRII shall endorse for
transfer and deposit into escrow shares of fully paid and non-assessable CRII
common stock, according to the various terms herein. The CHMD escrowed funds
shall be released to CRII, and the CRII escrowed stock shall be released to
CHMD, upon the achievement of the Lasette I quality standards as established
and required under Section 4.2. The price per share of the CRII stock to be
escrowed and subsequently issued to CHMD shall be equal to the lesser of $2.06
or the closing price per share of CRII stock as publicly quoted on the date of
execution of this Agreement.
6.2 Concurrent with execution of this Agreement, in consideration of
the various covenants and agreements of CHMD provided herein, CRII and CHMD
shall enter into a subscription agreement whereby CHMD will agree to acquire
additional CRII common stock having a total value of $300,000.00. Upon
successful completion of the Lasette II Beta prototype, CHMD will acquire an
additional $150,000.00 worth of CRII Rule 144 stock. Upon successful
completion of the development phase (defined as FDA clearance of a Chronimed
accepted product), CHMD will acquire an additional $150,000.00 worth of CRII
Rule 144 stock. The form of the subscription agreement to be executed and
delivered, establishing the parties' various rights and obligations associated
therewith, is attached as Schedule 6.2 hereto, is incorporated herein and
deemed a part hereof.
6.3 All of the funds paid by CHMD to CRII under Section 6.1, and any
funds received by CRII as a result of CHMD's performance of the subscription
agreement under Section 6.2, shall be dedicated and applied by CRII to the
development of the Lasette II device according to the development plans and
schedules established in Section 3. CHMD shall have the right, upon
reasonable notice, to inspect CRII's financial records evidencing receipt,
management and expenditure of the above funds.
6.4 The shares of CRII common stock issued to CHMD shall be subject
to transfer by CHMD only in accordance with the restrictions stated herein and
applicable securities laws. CHMD may not transfer such shares unless or until
(i) there is an effective registration covering the issued shares under the
Securities Act of 1933 and any applicable state securities laws, (ii) CRII
receives an opinion of counsel, acceptable to its board of directors or
agents, stating that the proposed transfer is exempt from registration under
the Securities Act of 1933 and any applicable state securities laws, or (iii)
the transfer is made pursuant to Rule 144 of the Securities Act of 1933. Upon
written request of CHMD, to occur on no more than one occasions, CRII will
cause shares of the stock held by CHMD to be registered under the Securities
Act of 1933. CHMD may request additional registration(s), in which case CRII
assist in and CHMD shall bear the costs of such registration(s).
6.5 Upon CRII's issuance to CHMD of the shares identified in Section
6.1, and upon CHMD's request, CRII's directors shall appoint a CHMD designated
representative as a director of CRII. Upon the next following election by
CRII shareholders of CRII directors, and during the term of this Agreement so
long as CHMD owns at least 150,000 shares of CRII stock at every subsequent
election of CRII directors, CRII shall nominate and recommend such CHMD
representative for election by the CRII shareholders to the CRII board. In
the event CHMD does not request a board seat or the CRII shareholders fail to
elect the CHMD representative to serve as a director, CRII shall, until a CHMD
representative is elected or re-elected, permit the CHMD representative to
audit all CRII board of director and board committee functions, including but
not limited to attendance at and participation in all meetings, receipt of all
notices directed to directors and committee members, and receipt of all
information, reports, data, and the like provided to directors and committee
members. Any representative designated by CHMD for such participation shall
be subject to reasonable approval by CRII and both CHMD and the designated
representative shall enter into any appropriate agreements protecting
confidential or proprietary information for the benefit of CRII or third
parties.
7. CRII COVENANTS, REPRESENTATIONS, AND WARRANTIES
-----------------------------------------------
7.1 CRII has not knowingly withheld from CHMD, during the course of
CHMD's due diligence investigation of CRII or at any other time, any material
facts relating to the Lasette I, Lasette II, or Lasette Disposables products
or technologies, CRII's business, operations, financial condition or
prospects. No representation or warranty in this Agreement or in any
certificate, exhibit, schedule, statement or other agreement instrument or
document furnished by CRII under or in connection with this Agreement contains
or will contain any untrue statement of a material fact or omits to state any
material fact necessary to make the statements herein or therein not
misleading.
7.2 CRII is and will remain the record and beneficial owner or
exclusive licensee of all right, title and interest in and to any patents,
copyrights, mask works, trademarks, service marks, trade names, logos, trade
secrets, know-how, inventions, designs, processes, computer programs,
technical data and other intellectual property, whether registered or
unregistered, and all registrations and applications for any of the foregoing,
relating to the Lasette I, Lasette II, and Lasette Disposables , without any
conflict with the industrial or intellectual property rights of others and
free and clear of all liens, security interests, charges, encumbrances,
equities and other adverse claims. The provisions of this Section 7.2 shall
not be construed to constitute a representation or warranty by CRII that the
manufacture, distribution and sale of the Lasette I, Lasette II and Lasette
Disposables either are or will be subject to protection under any applicable
patent, copyright, trademark or other laws applicable to intellectual property
and unfair competition. CRII expressly disclaims any such representation or
warranty, now or in the future. In the event any of the Lasette I, Lasette
II, Lasette Disposables or components thereof are or become capable of
protection under any applicable patent, copyright, trademark or other laws
applicable to intellectual property and unfair competition, CRII in the case
of intellectual property rights owned or to be owned by CRII, and CHMD in the
case of intellectual property rights owned or to be owned by CHMD will obtain
such protection or enforce its proprietary rights with respect thereto.
7.3 The use, license or sale of the Lasette I, Lasette II, and
Lasette Disposables products and technologies, as intended herein, to the
best of CRII's knowledge does not infringe, induce or contribute to the
infringement of, violate or otherwise conflict with any patent, trademark,
copyright or trade secret or intellectual property right belonging to any
other person in either the U.S. or any other country.
7.4 The Lasette I and Lasette II products shall be (i) manufactured
consistent with the standards established in Section 4.2 and in accordance
with high quality control standards and procedures appropriate for medical
devices of this nature, (ii) free from all material defects in design,
workmanship and materials, of merchantable quality, fit for the particular
purpose intended, and (iii) manufactured in accordance with all applicable
federal, state, laws, rules, or regulations including, but not limited to, FDA
requirements.
7.5 The execution and delivery by CRII of this Agreement and any
other documents contemplated hereby, and the performance by CRII of any of its
obligations herein will not conflict with, result in a breach or violation of
the terms or conditions of, or constitute a default under any contract or
agreement of CRII, its Articles of Incorporation or By-laws, or any order,
judgment, statute, rule or regulation to which CRII is subject.
7.6 The execution, delivery, and performance of this Agreement have
been duly authorized and approved by the board of directors of CRII and this
Agreement constitutes a valid and binding agreement of CRII in accordance with
its terms.
8. CHMD COVENANTS, REPRESENTATIONS, AND WARRANTIES
-----------------------------------------------
8.1 CHMD has not knowingly withheld from CRII, during the course of
CRII's due diligence investigation of CHMD or at any other time, any material
facts relating to CHMD's business, operations, financial condition or
prospects. No representation or warranty in this Agreement or in any
certificate, exhibit, schedule, statement or other agreement, instrument or
document furnished by CHMD under or in connection with this Agreement contains
or will contain any untrue statement of a material fact or omits to state any
material fact necessary to make the statements herein or therein not
misleading.
8.2 CHMD has the ability to distribute, market and sell the Lasette I
and II and Lasette Disposables worldwide and will diligently pursue same.
8.3 The Lasette Disposables shall be (i) manufactured in accordance
with high quality control standards and procedures appropriate for medical
devices of this nature, (ii) free from all defects in workmanship, of
merchantable quality, fit for the particular purpose intended, and (iii)
manufactured in accordance with all applicable federal, state, laws, rules, or
regulations including, but not limited to, FDA requirements.
8.4 The execution and delivery by CHMD of this Agreement and any
other documents contemplated hereby, and the performance by CHMD of any of its
obligations herein will not conflict with, result in a breach or violation of
the terms or conditions of, or constitute a default under any contract or
agreement of CHMD, its Articles of Incorporation or By-laws, or any order,
judgment, statute, rule or regulation to which CHMD is subject.
8.5 The execution, delivery, and performance of this Agreement have
been duly authorized and approved by the board of directors of CHMD and this
Agreement constitutes a valid and binding Agreement of CHMD in accordance with
its terms.
9. INDEMNIFICATION
---------------
9.1 CRII indemnifies and holds CHMD harmless from and against any and
all liabilities, losses, damages, claims, deficiencies, costs and expenses
(including, without limitation, reasonable attorney fees and other costs and
expenses) incident to any suit, action or proceeding arising out of or
resulting from:
(a) Notwithstanding the terms of Section 7.3, any action, proceeding,
or claim involving an express or implied allegation that the parties'
exploitation of any of the rights granted or licensed by CRII to CHMD herein
constitutes infringement of intellectual property rights belonging to another
person;
(b) The existence, operation or use of the Lasette I or Lasette II
products, based upon alleged defects in design, material, or workmanship;
(c) The breach or inaccuracy of any warranty or representation by
CRII herein;
(d) Any breach or failure to perform by CRII of any material term,
covenant, or condition herein;
(e) Any act or omission of CRII, its officers, employees, or agents
in the performance of its obligations or conduct of its business whether under
this Agreement or otherwise; or
(f) Any costs and expenses of an FDA recall including, without
limitation, shipping expenses and purchaser notification.
9.2 CHMD indemnifies and holds CRII harmless from and against any and
all liabilities, losses, damages, claims, deficiencies, costs and expenses
(including, without limitation, reasonable attorney fees and other costs and
expenses) incident to any suit, action or proceeding arising out of or
resulting from:
(a) The breach or inaccuracy of any warranty or representation by
CHMD herein;
(b) Any breach or failure to perform by CHMD of any material term,
covenant, or condition herein;
(c) Any act or omission of CHMD, its officers, employees, or agents
in the performance of its obligations or conduct of its business whether under
this Agreement or otherwise; or
(d) The existence, operation or use of the Lasette Disposables based
upon defects in workmanship.
9.3 CRII and CHMD mutually shall have the right to institute action
against third persons alleging infringement of any patent or patent rights
incorporated in the Lasette Disposables products. Any action so instituted by
the parties shall name both parties as plaintiffs or claimants and the parties
shall contribute and participate equally in the expense of suit and
distribution of any damages recovered. In the event the parties do not
mutually agree to institute any such action, either party may institute action
in its name only and the instituting party shall bear the expense of
litigation and shall be entitled to retain all damages recovered in such
action. Any commencement of action solely by CHMD alleging infringement of
patents or patent rights conveyed to CHMD herein shall not cause a waiver or
forfeiture of any other claim or remedy CHMD may have against CRII under
CRII's representations, warranties, covenants, or obligations herein.
10. INSURANCE
---------
10.1 CRII agrees to keep in force throughout the duration of this
Agreement Directors & Officers and General Commercial Liability, including
product liability coverage, insurance coverage in the following amounts:
Directors and Officers insurance of $2,000,000, and General Commercial
Liability insurance of $2,000,000, with a $10,000,000 umbrella. CRII's Product
Liability policy shall name CHMD as an additional insured. CRII shall provide
CHMD with current certificates of insurance evidencing such coverages. CRII
will provide CHMD with at least 30 days written notice of any cancellation,
non-renewal or amendment of such policies.
10.2 CHMD agrees to keep in force throughout the duration of this
Agreement Product Liability and Property Damage insurance coverage in amounts
equivalent to coverages maintained by CRII. CHMD's Product Liability policy
shall name CRII as an additional insured. CHMD shall provide CRII with current
certificates of insurance evidencing such coverages. CHMD will provide CRII
with at least 30 days written notice of any cancellation, non-renewal or
amendment of such policies.
11. TERM & TERMINATION
------------------
11.1 This Agreement shall have an initial term of three years
following the effective date and, unless either party provides the other
written notice of intent not to renew at least ninety days prior to the last
day of the initial or any renewal term, this Agreement shall automatically
renew for successive one year terms.
11.2 Except as provided for in Section 11.3, either party shall have
the right to terminate this Agreement in the event of any of the following:
(a) party breaches the Agreement and does not cure such breach
within 30 days after notice from the non-breaching party specifying the nature
of such breach.
(b) The dissolution, insolvency, bankruptcy or appointment of a
trustee or receiver for a party, whether voluntary or involuntary.
11.3 In addition to the other provisions of this Agreement, in the
event CHMD shall fail to purchase the minimum number of Lasette I and Lasette
II units required under Sections 4.4 and 4.8, and such failure shall continue
after 30 days' written notice, CRII shall have the right, at its sole
election, to either (i) terminate this Agreement or (ii) modify the rights
granted to CHMD under this Agreement from exclusive to non-exclusive. CRII's
failure to reasonably meet minimum production volumes, product quality
standards and timely shipping requirements, after 30 days written notice,
shall be grounds for termination pursuant to this Section 11.3 In the event
this Agreement is terminated pursuant to this Section 11.3, then CHMD may
sell, and in which case CRII shall purchase, at fair market value within 30
days following termination, all manufacturing equipment, devices, materials,
inventory, processes, know-how, and any other property owned by CHMD and
applied to the production of Lasette Disposables.
11.4 Termination of this Agreement for any reason shall not relieve a
party of any obligation owing at the time of termination.
12. CONFIDENTIALITY
---------------
12.1 The parties acknowledge that the transactions herein will require
the exchange of information which is or may be confidential or proprietary.
As used herein, the term "Confidential Information" shall mean (i) proprietary
information of any of the parties; (ii) information marked or designated by
any of the parties as confidential; (iii) information, whether or not in
written form and whether or not designated as confidential, which is known to
a party as being treated as confidential by the other party; and (iv)
information provided to any party by third parties which any party is
obligated to keep as confidential. Confidential Information includes, but is
not limited to, discoveries, ideas, designs, specifications, drawings,
techniques, models, data, programs, documentation, processes, know-how,
customer lists, marketing plans, and financial and technical information.
Confidential Information shall not include any information of a party now or
hereafter voluntarily disseminated by that party to the public, or which
otherwise becomes part of the public domain through lawful means.
12.2 Each party hereby acknowledges that each party's Confidential
Information is and shall continue to be the exclusive property of such party,
whether or not disclosed or entrusted to the under this Agreement. Each party
agrees to exercise the highest degree of care in safeguarding the Confidential
Information of the other party against loss, theft, or other inadvertent
disclosure, and agrees generally to take all steps necessary to ensure the
maintenance of confidentialityb12.3 Upon termination of this Agreement, or as
otherwise reasonably requested, each party agrees to deliver promptly to the
owning party all Confidential Information of the owning party, in all forms
and copies, that may be in the non-owning party's possession or under its
control.
12.4 Each party acknowledges that any disclosure of Confidential
Information in violation of this Agreement will cause irreparable harm to the
owning party. If a party fails to abide by the requirements of this Section
12, the other party will be entitled to specific performance immediate
issuance of a temporary restraining order or preliminary injunction, and to
judgment for any damages caused by such breach, as well as expenses and
reasonable attorneys fees incurred in enforcement of these rights, in addition
to and not to the exclusion of any other remedies provided in equity or at
law.
12.5 The terms of this Section 12, and the rights and obligations
created herein, shall survive the termination of this Agreement for any
reason.
13. MISCELLANEOUS
-------------
13.1 This Agreement shall be binding upon and inure to the benefit of
the parties and their legal representatives, successors, and assigns. Subject
to Section 2.4, this Agreement and the various rights and obligations herein
may not be assigned without the mutual written consent of the parties.
13.2 Any notices permitted or required under this Agreement shall be
deemed given upon the date of personal delivery, 24 hours after deposit with
an overnight express delivery service, or 72 hours after deposit in the United
States mail, postage fully prepaid, addressed to the respective party:
If to CHMD:
Chronimed Inc.
10900 Red Circle Drive
Minnetonka, MN 55343-9126
Attn: President
With copy to:
Chronimed Inc.
10900 Red Circle Drive
Minnetonka, MN 55343-9126
Attn: General Counsel
If to CRII:
Cell Robotics International, Inc.
2715 Broadbent Parkway, NE
Albuquerque, NM 87107
Attn: President
With copy to:
Clifford L. Neuman, Esq.
Neuman, Drennen & Stone, LLC
1507 Pine Street
Boulder, CO 80302
or at any other address as any party may, from time to time, designate by
notice given in compliance with this Section.
13.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of Minnesota without regard to its choice of law
provisions.
13.4 This Agreement contains the entire understanding between the
parties with respect to the subject matter herein and supercedes any prior
understandings and agreements among them regarding the same.
13.5 In the event of any action by a party under this Agreement to
enforce any of its terms, it is agreed that the prevailing party shall be
entitled to recovery of its costs and reasonable attorneys fees in bringing or
defending such action.
13.6 This Agreement or any section hereof shall not be construed
against a party due to the fact that the Agreement or any section was drafted
by that party.
13.7 If any provision of this Agreement or application of a provision
is held to be invalid or unenforceable, the remainder of this Agreement and
the enforceability thereof shall not be affected by such determination.
13.8 Any failure or delay by a party to enforce this Agreement or any
right herein shall not constitute in any instance a waiver of such right or
ability to obtain a permitted remedy.
13.9 This Agreement may not be amended or supplemented except by a
written instrument signed by the parties. Any action by a party contrary to
or in modification of the terms of this Agreement shall not create a new
agreement among the parties unless specifically consented to in writing by the
non-acting parting.
CHRONIMED INC. CELL ROBOTICS INTERNATIONAL, INC.
By: By:
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Its: Its:
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