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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the transition period from ____________ to ______________
Commission file number: 0-27840
CELL ROBOTICS INTERNATIONAL, INC.
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(Name of Small Business Issuer in its Charter)
Colorado 84-1153295
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(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification number
2715 Broadbent Parkway N.E., Albuquerque, New Mexico 87107
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 505) 343-1131
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Title of Class
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Common Stock, $.004 par value
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 [
]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will 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. [ ]
The Issuer's total revenues for the fiscal year ended December 31, 1998 were
$1,429,001.
As of March 26, 1999, the aggregate market value of the Common Stock of the
Registrant based upon the closing bid price of the Common Stock as quoted on
the OTC Electronic Bulletin Board held by non-affiliates of the Issuer was
$9,264,713. As of March 31, 1999, 7,784,593 shares of Common Stock of the
Issuer were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant hereby incorporates herein by reference the following
documents:
Part III
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Item 9. Directors and Executive Officers of the Registrant.
Item 10. Executive Compensation.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Item 12. Certain Relationships and Related Transactions.
The foregoing are incorporated by reference from the Registrant's
definitive Proxy Statement relating to its annual meeting of stockholders,
which will be filed in an amendment within 120 days of December 31, 1998.
Part IV - Exhibits
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1. Incorporated by reference from the Company's Pre-Effective Amendment No.
2 to Registration Statement on Form SB-2 which was declared effective by
the Commission on February 2, 1998, SEC File No. 333-40895.
2. Incorporated by reference from the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996, as filed with the Commission
on April 15, 1997.
3. Incorporated by reference from the Company's Post-Effective Amendment No.
1 to Registration Statement on Form SB-2 filed with the Commission on
July 15, 1996, SEC File No. 33-80347.
4. Incorporated by reference from the Company's Pre-Effective Amendment No.
1 to Registration Statement on Form SB-2, which was declared effective by
the Commission on February 14, 1996, SEC File No. 33-80347.
5. Incorporated by reference from the Company's Current Report on Form 8-K
dated February 23, 1995, as filed with the Commission on March 10, 1995,
SEC File No. 33-26467.
6. Incorporated by reference from the Company's Pre-Effective Amendment No.
2 to Registration Statement on Form S-3, SEC File No. 333-55951, as filed
with the Commission on November 18, 1998.
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ITEM 1. BUSINESS
Overview
Cell Robotics International, Inc. is a medical products company striving
to enhance the quality-of-life through technology. In 1998, the Company
introduced to market all three of its product lines, achieved major regulatory
breakthroughs with both the FDA and the European Community, and greatly
enhanced its marketing and sales base through the execution of certain key
distribution and manufacturer's representatives agreements. The Company's
product lines are as follows:
1. The Lasette(-TM-), a compact, lightweight, portable skin perforator,
has been designed to permit nearly painless sampling of capillary blood in
both clinical and home settings for the purpose of subsequent glucose or all
other screening tests.
2. The (In-Vitro Fertilization) IVF Workstation which utilizes a
microscope, computer-controlled stages and a solid-state laser to perform
laser assisted hatching to enhance human assisted reproduction techniques
(currently undergoing clinical trials in the United States).
3. The Cell Robotics Workstation, a research instrument, that uses
laser light to transform a microscope from a viewing device into a tool for
physically manipulating and dissecting living cells in microspace.
History
Cell Robotics Inc. ("CRI") was organized in 1988 under the laws of the
State of New Mexico to develop and commercialize optical trapping technology.
The simplest optical trapping structure embodies the discoveries in the Lucent
Patent as well as related technologies (see "Intellectual Property-Patents and
Licenses"). In 1991, using funding provided by Mitsui Engineering &
Shipbuilding Co., Ltd. ("Mitsui"), a Japanese corporation, the Company
obtained a license covering the Lucent Patent and began developing instruments
using optical trapping technologies.
In February 1995, Intelligent Financial Corporation ("IFC"), the shares
of which were publicly traded, acquired 100% of the issued and outstanding
shares of Common Stock of CRI in a transaction treated as a reverse merger
(the Acquisition), and subsequently changed its name to
"Cell Robotics International, Inc."
Business Strategy
The Company's business strategy is to develop unique products using core
technology targeted at large markets in which the Company believes it can
compete effectively. The key components of this business strategy include:
DEVELOP UNIQUE TECHNOLOGY. Through its know-how and core technology, the
Company strives to stay ahead of its competition by always having the best
product within a given price range. The Company backs this aggressive
development strategy with patents, licenses and collaboration where
appropriate.
DEVELOP MARKET RECOGNITION. The Company plans to position its laser-based
medical devices as the preferred technological solution to clearly-defined
medical needs. The Company will further develop market recognition by using
trademarked product names that can be clearly recognized by customers, such as
Lasette(-TM-) and LaserTweezers(-Registered Mark-).
ESTABLISH EXCLUSIVE DISTRIBUTION CHANNELS. For high volume products such
as the Lasette, the Company seeks to enter into exclusive distribution
agreements with well-established distributors of medical products to take
advantage of existing distribution channels and name recognition. For low-
volume, high-valued products the Company uses direct distribution as well as
arrangements with international distributors and manufacturer's
representatives.
RAPIDLY EXPAND CAPACITY TO ASSEMBLE PRODUCTS. The Company is rapidly
expanding its manufacturing capacity to assemble all of its new laser-based
medical devices. An OEM (Original Equipment Manufacturer) relationship with
Big Sky Laser Technologies, Inc. will remain in place for production of the
Professional Lasette. All other products will be manufactured by the Company.
Through the implementation of the foregoing, the Company hopes to become
a leader in the development and sale of technologically unique medical devices
that respond to the rapidly increasing market demand for products that offer
more effective, safer and less painful solutions than conventional procedures.
Products
Lasette(-TM-)
DESCRIPTION. The Lasette(-TM-) is a compact, lightweight, portable skin
perforator that uses a laser to nearly painlessly pierce the skin on a
fingertip to permit the taking of capillary blood samples for the purpose of
subsequent glucose testing in the home-use market and all blood screening in
the clinical market. The current Professional Lasette is approximately the
size of a video cassette and consists of a battery-driven primary perforator
unit with a charger. The next generation Lasette, or Personal Lasette, is
currently under design and development and, when completed, will be
approximately the size of a handheld cellular telephone and weigh 8 ounces.
The Professional Lasette was introduced into the clinical market in
November 1998 and is a substitute for the stainless steel lancet now used for
capillary blood sampling. The Professional Lasette has received FDA clearance
for capillary blood sampling from all individuals, including diabetics, in
both clinical and home settings. The FDA clearance for home-use of the Lasette
for measuring glucose levels was granted on December 7, 1998. This was a
landmark FDA approval because it was the first time any medical laser had been
approved for home use. Although the current Professional Lasette can now be
sold for home use at this time, a smaller and less expensive Personal Lasette
is under development that more clearly focuses on the large home-use market.
Both the Personal and Professional Lasette require a disposable shield each
time the laser is used.
MARKETS-CLINICAL. The Lasette(-TM-) is a product that addresses the
collection of capillary blood from fingertips, which according to industry
data is a procedure that is performed approximately one billion times a year
in homes, hospitals, clinics and doctors' offices. Capillary blood sampling is
performed in virtually all clinical settings, including hospitals, dialysis
clinics, blood banks, nursing facilities, home health agencies and physicians'
offices. Data indicates that in the United States alone, there are 7,500
hospitals and 46,000 other clinical sites performing routine daily capillary
blood sampling. Currently the most commonly used device for capillary blood
sampling is the stainless steel lancet. In the hospital setting, inadvertent
transmission of disease from accidental lancet sticks is a recognized problem.
The Company believes that the Lasette can substantially reduce the pain and
trauma involved in this procedure and the risk of inadvertent cross-
contamination for both the clinician and the patient.
MARKETS-HOME-USE. While the Company believes that the potential clinical
market for the Lasette is significant, a substantially greater opportunity
lies in the worldwide home-use market of persons afflicted with diabetes.
Diabetics throughout the world are required to take capillary blood samples in
order to monitor their blood sugar levels on average four times per day. The
recurring finger sticks become painful and annoying when performed on a daily
basis, causing many patients to test less frequently than prescribed by their
physicians. In the United States alone, the American Diabetes Association
(ADA) estimates that there are 10.3 million diabetics with approximately 4.7
million diabetics that are required to test their blood glucose multiple times
per day. A one percent (1%) penetration rate of those diabetics would be
47,000 units, and a ten percent (10%) penetration rate would be 470,000 units.
The world market is much larger. The Company cannot predict what penetration
rate the Lasette product line will achieve.
MARKETING AND DISTRIBUTION. On July 30, 1998, the Company signed an
exclusive worldwide marketing and distribution agreement with Chronimed, Inc.
The agreement with Chronimed includes a two-year, multi-million dollar minimum
purchase commitment by Chronimed. The Chronimed agreement also requires
Chronimed to make a capital investment consisting of staged purchases of
$600,000 of the Company's common stock, contingent upon achievement of certain
milestones related to the development of the second generation Personal
Lasette device. In accordance with the terms and conditions of its agreement
with the Company, Chronimed made its first equity investment on September 11,
1998. The $300,000 investment was made in the form of a stock purchase of
200,000 shares of the Company's common stock. Chronimed's capital investment
is being used for the development of the second generation Lasette. The
worldwide diabetic market is very large and continues to grow, but there can
be no assurance the Lasette product will achieve market acceptance. A
significant decrease in purchases by Chronimed, or the failure of Chronimed to
comply with the terms of their agreements with the Company, could have a
material adverse effect on the Company's operations and future profitability.
MANUFACTURING. In August 1996, the Company established a strategic
development and production alliance with Big Sky Laser Technologies, Inc.
("BSLT"), an OEM manufacturer and developer of laser-based medical devices
based in Montana. BSLT is a recognized laser OEM manufacturer that complies
with FDA, ISO 9001 and other regulatory requirements.. The Company is relying
upon BSLT to manufacture the first generation Professional Lasette. To this
end, effective May 20, 1998, the Company entered into an OEM supplier
agreement with Big Sky. Under the terms of this agreement, Big Sky has the
exclusive manufacturing rights for the current model of the Professional
Lasette and the Company has exclusive distribution rights, subject to certain
minimum order requirements. Either party may terminate the agreement on 90
days written notice in the event of a material breach that is not cured within
30 days of receipt of notice. Otherwise, if not earlier terminated, the
agreement terminates five years after execution. The Personal Lasette will be
manufactured by the Company at its Albuquerque, New Mexico facility. The
Company has instituted the record keeping, quality control, and production
procedures needed to meet the requirements of the FDA MDQSR, ISO 9001, and EN
46001. The disposables for both the Personal and Professional Lasettes will be
manufactured by Chronimed.
COMPETITION. The Lasette(-TM-) represents a technological alternative to
the traditional stainless steel lancet for routine capillary blood sampling.
It eliminates the risk of cross-contamination and attendant indirect costs,
and has been designed to reduce the pain, fear and anxiety associated with
blood sampling. It also eliminates the cost and risk of lancet waste disposal.
While each stainless steel lancet costs only pennies, the Company
believes that by eliminating the associated indirect costs of their use
described above, the Lasette(-TM-) can be successfully marketed by Chronimed
at a retail price of $2,000 per unit. The Company plans to introduce a second
generation Personal Lasette(-TM-) at a retail price of $1,000.
The only other commercialized approach to laser-based capillary blood
sampling that has come to the attention of the Company is a laser skin
perforator developed by Transmedica (formerly Venisect). The Company is aware
from industry sources, however, that the Transmedica laser is substantially
larger than the Lasette(-TM-) and more costly (see "Legal Proceedings").
The development of new advanced technologies for determining and/or
controlling glucose levels in diabetic patients is a focus of many corporate
research and development efforts throughout the world. Several companies are
developing glucose testing products based on non-invasive technologies, using
skin patches and diode-pumped lasers. To the Company's knowledge, none of
these products has received FDA clearance for sales in the United States.
However, if these products are cost effective and approved for sale and become
commercially available in the United States in the future, they could have a
material adverse effect on sales of the Lasette(-TM-) and, as a result, on the
business and financial condition of the Company.
REGULATORY STATUS. The following regulatory clearances were obtained for
the Lasette:
Date Clearance
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August 7, 1997 Clearance for testing glucose and hematocrit in healthy
adult patients in a clinical setting
October 28, 1997 Clearance for testing glucose and hematocrit in
diabetic adult patients in a clinical setting
May 15, 1998 CE Mark testing complete for Lasette
June 29, 1998 Clearance for testing glucose and hematocrit in all
juveniles patients in a clinical setting
September 12, 1998 ISO 9001 / EN 46001 / Medical Device Directive
Certification
September 24, 1998 Clearance for use of all glucose meters with the
Lasette
October 30, 1998 Variance for Personal Lasette design
December 7, 1998 Clearance for home-use of the Lasette for glucose
monitoring
December 16, 1998 FDA agrees with Personal Lasette safety and efficacy
January 15, 1999 Clearance for all screening blood tests in a clinical
setting
March 5, 1999 Personal Lasette passed testing for CE Mark
In Vitro Fertilization Workstation
DESCRIPTION. The IVF Workstation has three basic applications: first, to
measure, assess and store in computer memory the various properties of a human
egg to assess its suitability for fertilization; second, to mechanically
inject sperm into an egg with a third party micro-manipulator; and third, to
score the outer shell of a fertilized egg with a laser to facilitate
"hatching" and promote embryo development and successful pregnancy. In the
United States, FDA clearance is required for sale of the IVF Workstation.
Clinical trials are underway under an approved investigational device
exemption (IDE) from the FDA. In September 1998, the Company's representatives
met with the FDA to discuss a reduction in the size of the clinical trial. In
March 1999, the FDA approved the Company's request for a smaller clinical
trial. The Company expects that the clinical trials could take a year or more
to complete, with no assurance that once completed the product will ever
receive FDA clearance for sale in the United States. In May 1998, the Company
received the CE Mark for this product, allowing the IVF Workstation to be
marketed and sold in the European Community. Starting in November 1998 several
systems have been sold outside the United States.
The IVF Workstation is a computer-controlled multi-functional workstation
that combines, for the first time, a technological solution to both the
functional and informational requirements of clinicians working in the IVF
environment. Utilizing a microscope, computer-controlled motorized stage,
video camera, sophisticated laser-based technology and data storage and
retrieval systems, the IVF Workstation permits standardized evaluation,
measurement and diagnosis of eggs and embryos, sperm injection and
laser-assisted embryo hatching in one integrated system. With its computer
hardware and software, the IVF Workstation also permits the detailed
cataloguing and documentation of each IVF procedure and the organization and
retrieval of data and other information. The Company offers the IVF
Workstation in various configurations.
In vitro fertilization is a rapidly-growing area of human fertility
treatment. However, success rates with current procedures vary significantly
from clinic to clinic. The IVF Workstation is designed to improve success
rates for clinics and IVF patients.
MARKETS. The market for the IVF Workstation consists of the more than
1,300 clinics worldwide that treat infertility, approximately 300 of which are
located in the United States. Worldwide these clinics conduct approximately
100,000 IVF treatment cycles a year. At an average cost of $5,000 per
treatment cycle, it is estimated that over $500 million is spent annually for
IVF procedures. It is believed that the IVF Workstation will substantially
increase success rates and reduce the time and cost required to successfully
complete a fertility treatment cycle, thereby increasing profits and revenue
to the clinician.
MARKETING AND DISTRIBUTION. The IVF Workstation received the CE Mark on
May 15, 1998. The Company hopes that the improved success rate experienced by
foreign clinics will have the effect of stimulating interest in the product in
domestic markets.
Sales, service and installation of the IVF Workstation will be handled
directly by the Company's staff and manufacturers representatives. Currently,
distribution agreements are in place covering Switzerland, Germany, Denmark,
Spain, Sweden, the United Kingdom, South Korea, and Brazil. Since November
1998, several systems have been sold outside the United States.
MANUFACTURING. The Company manufactures the IVF Workstation at its
Albuquerque, New Mexico facility. The Company anticipates that it will be able
to assemble and ship sufficient units to satisfy demand for the product. The
Company has also instituted the record keeping, quality control, and
production procedures needed to meet the requirements of the FDA MDQSR, ISO
9001, and EN 46001.
COMPETITION. The Company is not aware of any other product that combines
all of the features and performance specifications of the IVF Workstation.
Fertilase, a company in Switzerland, has introduced a product that provides
laser-assisted hatching, but which does not offer all of the features found in
the IVF Workstation. In addition, a German company, P.A.L.M., offers a system
but it is thought that they use a different wavelength of laser light for
laser assisted hatching.
REGULATORY STATUS. Sales in Europe and other international markets began
in November 1998 after the Company received the CE Mark for this product. The
only functional component of the IVF Workstation that requires FDA clearance
is the laser module used for laser-assisted hatching. Clinical trials of the
IVF Workstation have begun under an FDA-approved Investigational Device
Exemption (IDE. There can be no assurance when, if ever, FDA clearance for
sales in the United States will be obtained.
Scientific Research Instruments
APPLICATIONS OF THE RESEARCH INSTRUMENTS. The Company's microrobotic
technology allows scientists to manipulate objects in microspace, upgrading
the microscope from simply an instrument for observation to an interactive
micro-laboratory. The scientific research instruments are designed to enhance
the usefulness and importance of the conventional laboratory microscope as a
tool in medical, biological and genetic applications in the life sciences. The
technology can be used for cell separation, cell-cell interaction,
microdissection, and intercellular manipulation of living cells. The Company
has either demonstrated itself that its products can be used for, or is aware
of others using its products in, cancer research and immunology, neurobiology,
assisted reproductive techniques and genome research.
DESCRIPTION. In 1996, the Company introduced the computer-controlled Cell
Robotics Workstations for optical trapping, micromanipulation and
microsurgery. These workstations are based on the Company's core
LaserTweezers(-Registered Mark-), LaserScissors(-TM-), CellSelector(-TM-) and
SmartStage(-Registered Mark-) technologies. The functionality of the Cell
Robotics Workstations has been improved through the addition of computer
control, providing more powerful and user-friendly features such as
interactive software with mouse or keyboard control, unique motorized stage
and motorized focus drive providing motion in three directions. The Cell
Robotics Workstation integrates the Company's research instruments into a
complete computer-controlled optical trapping and ablation workstation.
MARKETS. Principal markets for the Company's research instruments are
colleges, universities, research laboratories, biotechnology and
pharmaceutical companies, and commercial laboratories currently conducting
biological research. The Company's marketing strategy is to identify key
scientists who are engaged in specific research applications for which the
Company's instruments are particularly well suited.
In the United States, the research market consists of approximately
108,000 research biologists working in 2,400 institutions. The Company
specifically targets users of inverted microscopes, for which there were
approximately 10,000 existing users in 1996 and approximately 1,000 new
purchases made annually in the United States and Canada. Worldwide, the
installed base of inverted microscopes was approximately 33,000 in 1996, with
3,000 additional new sales annually.
MARKETING AND DISTRIBUTION. While the Company intends to focus its
marketing efforts on the distribution and sale of its laser-based medical
devices, it will continue to promote and market its scientific instruments
through direct sales, dealers, representatives and distribution arrangements.
The Company also has a distribution agreement with Mitsui granting Mitsui
exclusive distribution rights for the Company's products in Japan for a term
of ten years expiring in September, 2005. The Company also expanded its
domestic and international distribution channels, and now distributors in 17
countries are starting to sell the research instruments.
MANUFACTURING. The Company's manufacturing approach for the Cell Robotics
Workstation attempts to minimize the capital outlay by outsourcing parts to
machine shops and circuit board companies, but completing all final assembling
and testing at the Company's Albuquerque, New Mexico facility, to ensure the
quality of the final products. The Company plans to continue to use this
approach with its new and current products. The Company began work on ISO
compliance in January 1998 and received its ISO 9001 certification in November
1998.
COMPETITION. Competitors for the Cell Robotic Workstation include
P.A.L.M., a German company making both laser trapping and laser cutting
instruments, S&L Microtest, a German company making multi-trap and custom
trapping instruments, and Sigma Koki, a Japanese company. The Company believes
that its Cell Robotics Workstation offers more features at a better price than
any of these competitors.
REGULATORY STATUS. The Company received the CE Mark for its research
instruments in September 1997. This product line does not currently require
other regulatory clearances.
RevitaLase(-TM-)
The Company developed the FDA-cleared RevitaLase(-TM-), an 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.
Competition in General
The industry in which the Company competes with its laser-based medical
devices is characterized by rapidly evolving technology and intense
competition. Many companies of all sizes, including both large organizations
as well as several specialized laser-based medical device companies are
engaged in activities similar to that of the Company. In addition, colleges,
universities, governmental agencies and other public and private research
institutions will continue to conduct research and to protect technologies
that they have developed, some of which will be directly competitive with that
of the Company. All of the Company's competitors have substantially greater
financial, research and development, human and other resources than the
Company.
The Company believes it has certain technological advantages in producing
the compact, low-cost laser design utilized in the Lasette(-TM-). However,
part of the Company's cost advantage is dependent in part upon its ability to
maintain its relationship with the supplier of the crystals used in the
manufacture of its lasers. Alternative sources of supply for the crystals,
while available, would increase the production cost of the Company's product
and reduce its competitive advantage.
The development of new advanced technologies for determining and/or
controlling glucose levels in diabetic patients is a focus of many corporate
research and development efforts throughout the world. Several companies are
developing glucose testing products based on non-invasive technologies, using
skin patches and diode-pumped lasers. To the Company's knowledge, none of the
products have been successfully commercialized or received FDA clearance for
sales in the United States. However, if these products are approved for sale
and become commercially available in the United States in the future, they
could have a material adverse effect on sales of the Lasette(-TM-), and, as a
result, on the business and financial condition of the Company.
The Company believes that its success is highly dependent upon its
ability to obtain distribution agreements for the sale of its new laser-based
medical devices and create additional internal sales and marketing resources.
Although several distribution agreements are in place, there can be no
assurance that the Company can achieve these goals.
The Company believes that the principal factor affecting its competitive
position is the suitability of its instruments for, and performance in, a
particular application. Because of the highly specialized nature of its
markets, such traditional competitive factors as price, delivery,
upgradability and support are less significant. The Company faces potential
competition from a number of established domestic and international companies,
all of which have vastly greater engineering, manufacturing, marketing and
financial capabilities than the Company. The ability of the Company to compete
successfully in existing and future markets will depend on elements both
within and outside its control, including, but not limited to, its success in
market penetration, protection of its products by effective utilization of
intellectual property laws, including full exercise of its patent rights,
improvements in product quality and reliability, ease of use, price, diversity
of product line, efficiency of production, the rate at which customers
incorporate the Company's instruments into their products, product
introductions by the Company's competitors and general domestic and
international economic conditions.
Intellectual Property
The Company relies primarily on the ability to rapidly develop new
generations of technology from its core technology and a combination of
patent, trade secret, copyright and trademark laws, confidentiality procedures
and other intellectual property protection methods to protect its proprietary
technology. The Company's laser-based medical devices currently have little
patent protection and its scientific research instruments have only limited
patent protection. Since there is no patent protection currently afforded the
Company's medical laser products, there can be no assurance that other patent
holders or other third parties will not claim infringement by the Company or
its licensors with respect to current and future technology. Because Untied
States patent applications are held and examined in secrecy, it is also
possible that presently pending United States patent applications will
eventually issue with claims that might be infringed by the Company's
products. There can be no assurance that additional competitors, in the United
States and in foreign countries, many of which have substantially greater
resources than the Company, and have made substantial investments in competing
technologies, will not apply for and obtain patents that will prevent, limit
or interfere with the Company's ability to make and sell its products. The
Company is aware of several patents held by third parties that relate to
certain aspects of the Company's products. There can be no assurance that
these patents would not be used as a basis to challenge the Company's current
or future patents, to limit the scope of the Company's patent rights or to
limit the Company's ability to obtain additional or broader patent rights.
A United States patent concerning the use of a laser for blood sample
collection is held by a former employee of the Russian Academy of Science now
residing in San Diego (the "Tankovich Patent", US 5165418, issued 24 Nov. 92,
priority date 02 Mar. 92). Becton Dickinson Corporation, a leading producer of
blood collection products, had licensed this patent in December of 1995.
Becton Dickinson has participated with a San Diego laser technology company,
JMAR, in the reportedly now abandoned development of a product for laser skin
perforation. The Company has acquired a formal legal opinion, which finds the
Tankovitch Patent invalid and unenforceable due to public disclosure of the
laser perforation concept in the international scientific literature, as well
as public commercialization of primitive perforator products in the former
USSR, as early as October 1990. The Tankovitch Patent is the subject of formal
re-examination in the United States Patent and Trademark Office as the result
of a petition made by Transmedica in August 1996. No results of the
re-examination case have been published to date.
The Lasette(-TM-) product was originally developed using the multifaceted
crystal resonator ("MCR") technology acquired from Tecnal Products, as more
fully described below. Subsequently, the Company has advanced the laser design
employed in this product and has sought, or is preparing to seek,
continuations of existing patents and/or new patents protecting those designs.
One result of this effort has been the receipt of a Notice of Allowance from
the United States Patent and Trademark Office ("PTO") of a new patent for
certain advantageous modifications of the laser beam used in skin perforators,
such as the Lasette(-TM-). This patent will cover proprietary aspects of both
current and projected future models of the Lasette(-TM-). Generally, receipt
of Notice of Allowance means that examination on the merits of the application
is concluded, the examining attorney has identified allowable claims in the
application, and the application is passed to allowance in anticipation of
assignment of a patent number and issue date. However, no enforceable patent
rights exist until the patent is actually issued, and there can be no
assurance when, or if, the patent will issue. This patent, if issued, will
cover proprietary aspects of both current and projected future models of the
Lasette. Patents covering other aspects of the Lasette(-TM-) are currently
pending in the PTO and World Patent Office.
The IVF Workstation is not currently protected by any specific issued
patents; however, the Company has submitted an application to the PTO and
World Patent Office seeking protection for certain laser design aspects of the
system. The Company will also seek to protect certain data-processing aspects
of the system.
The commercial success of the Company's laser-based medical devices will
depend, in part, upon the Company's ability to protect and defend its
intellectual property rights and the competitive advantages that those rights
offer to its products. There can be no assurance that the Company will be
successful in these efforts.
Patents and Licenses
In 1991, the Company obtained a non-exclusive license covering the Lucent
Patent and, using funding provided by Mitsui, , began developing instruments
using those technologies. In 1994, the license with Lucent was converted from
non-exclusive to exclusive. To reduce the minimum payments required under the
Lucent agreement, in 1998, that agreement was converted back to non-exclusive.
The LaserTweezers(-Registered Mark-) application of the Cell Robotics
Workstation was based upon an exclusive patent license from AT&T, now known as
Lucent Technologies, Inc. At least two European companies have developed and
are marketing products which the Company believes violate Lucent's patents. To
date, Lucent has elected not to pursue patent infringement claims against
these companies and their distributors, and under the terms of the original
Lucent license, the Company cannot compel Lucent to initiate any proceedings.
As a result of the foregoing, as of June 30, 1998, the Company and Lucent
agreed to amend the Lucent license. Specifically, the Lucent license was
changed from an exclusive to non-exclusive license with the royalty payments
increasing from five percent (5%) to seven percent (7%) of the value of each
product sold utilizing the patented technology. However, the minimum annual
royalties under the Lucent license will be reduced to a flat $35,000 per year
for the term of the Lucent license. Notwithstanding the foregoing amendments
to the Lucent license, there can be no assurance that the Company will be able
to increase sales of the Cell Robotics workstation to a level that renders the
product economically viable.
TECNAL PATENTS. On January 10, 1996, the Company acquired from Tecnal
Products, Inc., a subsidiary of Lovelace Scientific Resources, Inc., one (1)
United States patent known as the Multifaceted Crystal Resonator patent, ("MCR
Patent"), which expires March 1, 2014, one (1) patent application pursuant to
which a patent was subsequently issued, which patent expires August 29, 2014,
and one foreign patent application and a strategic license. These acquisitions
comprised a package of technological assets covering two laser products: a
low-cost, high-power solid-state laser that eliminates many of the delicate
optical components required by conventional solid-state lasers, and a laser
perforator. The MCR Patent was originally developed under the license
agreement with NTEC of Russia. The advanced laser design of the MCR Patent and
other related technology developments can be used in a variety of laser-based
applications, including skin resurfacing (facial wrinkle removal), laser
dentistry, eye surgery and other medical and industrial procedures. While
these technologies were used in early versions of the Lasette(-TM-) and the
RevitaLase(-TM-), the Company has now developed its own technology for these
products.
The Company acquired the MCR Patent and other technological assets in
consideration of cash payments in the amount of approximately $15,000, the
issuance of an aggregate of 17,500 shares of Common Stock and the grant of 1%
royalty on future net revenue based upon the technology, with a lifetime
maximum royalty of $20,000. An ongoing obligation in the form of a 2% royalty
payable to NTEC on all Lasette(-TM-) sales for perforation know-how also
exists.
OTHER PATENTS. The Company has also been issued two (2) United States
patents related to its Cell Robotics Workstation, but which the Company does
not currently use. These patents expire July 23, 2012. One patent covers three
dimensional mechanical staging and the other a specialized chamber for the
LaserTweezers(-Registered Mark-), neither of which is used in the Cell
Robotics Workstation. In addition, the Company is in the process of preparing,
and will be submitting, applications for design patents related to the
RevitaLase(-TM-) as well as applications for patents associated with the IVF
Workstation. However, neither the RevitaLase nor the IVF Workstation is
currently covered by any of the Company's existing patents.
Because of rapid technological developments in the industries in which
the Company competes and the broad and rapidly developing patent coverage, the
patent position of the Company is subject to various uncertainties and may
involve complex legal and factual issues. Consequently, although the Company
holds certain patents, is licensed under other patents and is currently
prosecuting additional patent applications, there can be no assurance that
patents will be issued from any pending or future applications or that claims
allowed by any existing or future patents issued or licensed to the Company
will not be challenged, invalidated or circumvented, or that any rights
granted thereunder will provide adequate protection to the Company. Moreover,
the Company may be required to participate in interference proceedings to
determine the priority of inventions, which could result in substantial costs
to the Company. Further, while the Company believes, based upon its research
and investigations, as well as those of its advisors, including patent
counsel, that none of its products infringe upon the domestic or foreign
patent rights, or other intellectual property rights, of third parties, there
can be no assurance that the Company will not be required to defend against
future infringement claims of third parties. Such additional litigation could
represent a substantial commitment of the Company's limited capital resources,
including both funds and human resources, without any assurance that the
Company will ultimately prevail on the merits. As a result, the potential of
such litigation could represent a material adverse effect upon the Company's
future financial condition and results of operations.
Other Intellectual Property
In addition to its patent rights, the Company relies upon certain
proprietary know-how in its product development and manufacturing process and
has entered into employee and third party nondisclosure agreements to protect
its proprietary technology. In addition, the Company has developed distinctive
trademarks for both its laser-based medical devices and its scientific
research instruments which it believes constitute valuable intellectual
property rights. The Company has obtained federal registrations for
LaserTweezers(-Registered Mark-) and SmartStage(-Registered Mark-), both
modules of its Cell Robotics Workstation. The Company has not obtained federal
registrations for Lasette(-TM-), LaserScissors(-TM-), CellSelector(-TM-),
RevitaLase(-TM-), or IVF Workstation. While it intends to apply for these
registrations, to date it has made application only for Lasette(-TM-) and
LaserScissors(-TM-). However, there can be no assurance that federal
registrations for these trademarks will be issued or, if issued, the degree of
protection that they will afford. In the absence of federal registration, the
Company relies on common law rights for its trademarks.
Research and Development
The Company's success will depend in large part upon its ability to
enhance existing products and to continue developing new products
incorporating the latest improvements in laser technology. Accordingly, the
Company is committed to investing significant resources in research and
development activities.
During the years ended December 31, 1998, and December 31, 1997, the
Company spent approximately $849,166 and $1,245,125, respectively, on internal
research and development programs. As of December 31, 1998, four of the
Company's scientists and engineers were engaged primarily in research and
development activities. The majority of funds expended by the Company for its
internal research and development activities was derived from sales of capital
stock and short-term borrowings from its principal stockholder, Mitsui, and
the sale of securities in 1995, 1996, 1997 and 1998. The Company does not have
any research arrangements with outside R&D firms and does not anticipate
entering into development arrangements with third parties in the foreseeable
future. The Company does not currently perform any research and development
under contract to third parties except for Small Business Innovative Research
("SBIR") grants from the federal government. These include a Phase II grant
from the National Cancer Institute (NCI) of the National Institutes of Health
(NIH). The award funds two years of development of a proprietary laser
instrument for semi-automated single cell sorting. The total award over two
years is approximately $727,000, of which approximately $399,671 has been
received to date. The receipt of this award should facilitate the Company's
goal of developing a single cell analysis workstation which could aid in the
understanding of cancer cells and viruses. Proceeds from this award will be
used to expand the current capabilities of the Cell Robotics Workstation and
LaserTweezers(-Registered Mark-) technology.
While the Company is actively engaged in the development of potential
future products from its core technology, these products are essentially
extensions of the current product lines. There can be no assurance that any of
these programs will be continued or completed. Even if these products are
successful, the Company does not expect to introduce any resulting new
products for at least six months, and there can be no assurance that any such
products will be commercially successful.
Government Regulation-Product Approval Process
The Company is subject to a variety of government regulations pertaining
to various aspects of its marketing, sales and manufacturing processes. The
Company has been successful in obtaining many of the regulatory clearances
that are required to market and sell its products, however additional
clearance for broader markets will be required, of which there can be no
assurance.
For research applications, the Company's products are subject only to
safety regulations by the FDA. However, the European Community ("EC") has
recently required that the research instruments receive the CE Mark before
they can be exported to the EC. The Company received the CE Mark for its Cell
Robotics Workstation and all of its modules in September 1997. The Company has
also received the CE Mark for its Lasette and IVF Workstation.
In the United States, the Company's medical instruments are subject to
rigorous regulation under federal and state statutes and regulations governing
the testing, manufacture, safety and efficacy, labeling, record keeping,
approval, advertising and promotion of the Company's products. Product
development and approval within this regulatory framework may take many months
and may involve the expenditure of substantial resources. In addition to
obtaining FDA clearances for each product, each manufacturing establishment
must be registered with, and approved by the FDA and be certified to meet ISO
9001 and EN 46001 requirements.
The FDA has separate review processes for medical devices that must be
followed before such products can be commercially marketed in the United
States. There are two basic review procedures for medical devices in the
United States. Certain products may qualify for a Section 510(k) procedure,
under which the manufacturer gives the FDA a Pre-Market Notification ("510(k)
Notification") of the manufacturer's intention to commence marketing of the
product at least 90 days before the product will be introduced for clinical
use. The company must then wait for the FDA to clear the device for marketing.
Among other things, the manufacturer must establish in the 510(k) Notification
that the product to be marketed is "substantially equivalent" to another
legally-marketed, previously existing product. If a device does not qualify
for the 510(k) procedure, the manufacturer must file a Pre-Market Approval
Application ("PMA"). The PMA requires more extensive pre-filing testing than
the 510(k) procedure and involves a significantly longer FDA review process.
As Class II devices, both RevitaLase(-TM-) and Lasette(-TM-) were
eligible to qualify under the Section 510(k) procedure. The RevitaLase
received FDA clearance within a few months without clinical trials. The
Lasette, on the other hand, required approximately one year to obtain its
first FDA clearance, limited to clinical use with healthy adults, due to the
required extensive clinical trials. FDA clearance for use of the Lasette for
adult diabetics in clinical settings was issued in October 1997, for use by
juveniles in clinical settings was issued in June 29, 1998, for home use for
testing glucose on December 7, 1998 and for all blood screening tests used in
a clinical setting on January 15, 1999. Thus the Company can now market the
Lasette for essentially all applications in the United States which require
capillary blood for blood screening. The IVF Workstation, as a Class III
device insofar as laser-assisted hatching is concerned, was not eligible for
the Section 510(k) procedure and requires complete Pre-Market Approval. The
IVF Workstation was granted an Investigational Device Exemption (IDE) and is
in the process of completing detailed clinical trials, which may take more
than two years in their entirety. However, while marketing in the United
States must await FDA clearance which is likely not to occur for at least one
year, the Company has the right to market the IVF Workstation in Europe and
most foreign countries since it is not deemed a medical device in these
jurisdictions. Nevertheless, as an electronic laser-based product, actual
shipments of the IVF Workstation to the EC require the CE Mark which the
Company received in 1998.
For marketing outside of the United States, the Company or its
prospective licensees will be subject to foreign regulatory requirements
governing clinical trials and marketing approval for the products. The
requirements governing the conduct of clinical trials, product licensing,
pricing, and reimbursement vary widely from country to country. Although the
Company does have employees experienced in the EC and other regulatory
procedures, it does not currently have any facilities or employees outside of
the United States. In some cases the Company will rely on its strategic
partners in foreign markets to satisfy the regulatory requirements imposed by
those jurisdictions.
Employees
At March 31, 1999, the Company had 18 full-time employees and 3 part-time
employees. Of the full-time employees, 4 were principally engaged in product
development, 6 in manufacturing, including quality control, 4 in marketing and
sales and the balance in administration and finance. None of the Company's
employees are represented by a labor union or covered by a collective
bargaining agreement. The Company has experienced no work stoppages and
believes that its employee relations are good. The Company believes that its
success will depend, in part, on its continuing ability to attract and retain
qualified technical, marketing and management personnel.
<PAGE>
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company's facilities are located in approximately 12,000 square feet
in Albuquerque, New Mexico. This facility contains the Company's executive and
administrative offices, as well as facilities for the performance of its
assembly, production, testing, storage and inventory functions. The lease
covering the facility requires monthly payments of $8,409, subject to a 3%
annual increase, and has recently been renegotiated to terminate in 2002. The
Company believes that this facility is adequate for its present and near-term
requirements. The equipment, fixtures and other assets of the Company located
within the facility are insured against loss.
ITEM 3. LEGAL PROCEEDINGS
In October 1997, Transmedica, Inc. (formerly "Venisect") commenced a
patent infringement action (the "Venisect Litigation") in which it claimed the
Lasette(-TM-) infringed the United States patent underlying Transmedica's
competitive skin perforator. In March, 1998, the United States District Court
for the Eastern District of Arkansas (the "Court") subsequently dismissed the
Venisect Litigation, without prejudice, due to lack of personal jurisdiction
and improper venue. This ruling was appealed by Transmedica in the United
States Court of Appeals for the Federal Circuit in Washington, D.C. However,
on December 1, 1998, Transmedica withdrew their appeal. The Court's ruling and
Transmedica's withdrawal of their appeal of this ruling does not prevent
Transmedica from re-filing in a proper jurisdiction at a later date. The
Company has investigated the Transmedica patent with its advisors, and
believes that no basis for any infringement claim exists. Accordingly, while
there can be no assurance regarding any future litigation, the Company does
not believe that any future Transmedica litigation will have a material
adverse effect upon the Company's business, results of operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its security holders
during the fourth quarter of its fiscal year ended December 31, 1998.
<PAGE>
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Price Range of Common Stock
The Company's Common Stock is traded over-the-counter and quoted on the
OTC Electronic Bulletin Board ("Bulletin Board") on a limited and sporadic
basis under the symbol "CRII." The reported high and low bid and asked prices
for the Common Stock are shown below for the period through March 31, 1999.
The prices presented are bid and asked prices which represent prices between
broker-dealers and do not include retail mark-ups and mark-downs or any
commission to the broker-dealer. The prices do not necessarily reflect actual
transactions.
<TABLE>
<CAPTION>
Bid Ask
------------ ------------
Low High Low High
----- ----- ----- -----
<S> <C> <C> <C> <C>
1997
First Quarter $ 1.875 $2.813 $ 2.00 $ 3.00
Second Quarter 1.938 3.375 2.00 3.50
Third Quarter 2.938 4.000 3.063 4.063
Fourth Quarter 2.75 3.750 2.875 3.938
1998
First Quarter $ 1.938 $2.797 $1.938 $ 3.00
Second Quarter 1.375 2.469 1.391 2.75
Third Quarter 0.844 1.625 0.844 1.75
Fourth Quarter 0.688 3.00 0.766 3.844
1999
First Quarter
(through 3/31/99) $ 1.813 $2.813 $1.938 $3.125
</TABLE>
The bid and ask prices of the Common Stock on March 31, 1999 were, $1.94
and $1.97 respectively, as quoted on the Bulletin Board. As of April 1, 1999
there were approximately 178 stockholders of record of the Common Stock.
Dividends
The Company has not paid any dividends on its Common Stock and does not
expect to do so in the foreseeable future. It is anticipated that any earnings
generated from operations of the Company will be used to finance its ongoing
operations. No restrictions exist upon the Company's ability to pay dividends.
On September 2, 1998, the Company paid its first scheduled dividend to
shareholders of record for the Preferred Stock totaling 169,298 shares of
common stock.
Subsequent Events
The Company's Series A Convertible Preferred Stock (the "Preferred
Stock") automatically converted into shares of Common Stock in January 1999,
when the sum of closing bid prices of the Preferred Stock and two Warrants was
at least $12.375 for ten consecutive days. Due to the automatic conversion, a
final dividend in the form of shares of the Company's Common Stock was accrued
for all shareholders of record on February 2, 1999.
In accordance with the terms of the exclusive distribution agreement with
Chronimed, Inc., the Company met its second milestone by shipping prototype
units of the Personal Lasette to Chronimed, Inc. Chronimed will in turn make
the second of three equity investments in the Company in the amount of
$150,000.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Financial Statements and Notes thereto appearing elsewhere in this Report.
Plan of Operation-Overview
In 1995, the Company introduced its laser-based scientific research
instruments, which in 1996 were refined and redesigned into the modularized
Cell Robotics Workstation. Sales of these scientific instruments during 1996
and 1995 were disappointing, resulting in significant operating losses in both
periods. Given the limited market for the scientific research instruments, the
Company acquired technology in January 1996 (see Business --"Intellectual
Property-Patents and Licenses"), which it has used to develop laser-based
medical devices for the clinical and consumer markets.
Results of Operations - Year ended December 31, 1998 compared to the Year
ended December 31, 1997
During the year ended December 31, 1998 the Company's operating
activities were limited to continuing efforts to complete the development of
its laser-based medical devices and marketing of the Lasette. Product sales
for the period were generated from sales of its scientific research
instruments and its clinical laser-based medical products. Total revenues from
product sales and grant revenue increased 37.7% from $1,037,723 during the
1997 period to $1,429,001 during 1998. Research and development grant revenue
increased from $158,233 during 1997 to $179,298 during 1998, an increase of
13.3%. The gross profit realized by the Company on revenues generated during
fiscal 1998 was $401,463, or 28.1% compared to a gross profit of $279,518, or
26.9%, realized during fiscal 1997.
The Company believes that its increased product sales were driven by its
successful introduction and subsequent market acceptance of its scientific
research instruments and its new laser-based medical devices.
Operating expenses incurred during fiscal 1998 were $2,269,263, a
decrease of $526,228, or 18.8%, below fiscal 1997 operating expenses of
$2,795,491. This decrease was principally attributable to a reduction in
research and development expenses and marketing expenses associated with a new
product launch.
Research and development expenses decreased by $395,959, or 31.8%, due
primarily to a reduction in professional design and engineering consulting
fees required by the Company's new medical products currently under
development. Marketing and sales related expenses incurred during fiscal 1998
were $609,288, a decrease of $259,524, or 29.9%, below fiscal 1997 marketing
and sales expenses of $868,812. Expenses related to the marketing of the
Company's Lasette line decreased as a result of the exclusive distribution
agreement signed with Chronimed.
General and administrative expenses associated with the conduct of the
Company's business increased, from $681,554 during the year ended December 31,
1997 to $810,809 for the year ended December 31, 1998, an increase of $129,255
or 19%. This increase was driven by the effort of the Company to obtain ISO
9001 certification, increased product liability premiums and enhanced investor
relations activities.
During the fiscal period ended December 31, 1998, other income and
expenses increased from a $43,081 net contribution to income for the year
ended December 31, 1997 to a $84,454 net contribution to income. This increase
was due almost exclusively to interest earned on funds raised during a
secondary public offering completed by the Company in February 1998.
As a result of the foregoing, the Company's net loss applicable to common
shareholders for the year ended December 31, 1998 decreased by $415,319, or
16.8%, from a net loss applicable to common shareholders of $2,472,892 for the
year ended December 31, 1997 to a net loss applicable to common shareholders
of $2,057,573 for the comparable period ended December 31, 1998. This resulted
in a net loss of $0.39 per share on 5,278,347 weighted average shares
outstanding for the year ended December 31, 1998 compared to a net loss of
$0.48 per share on 5,100,032 weighted average shares outstanding for the
comparable period ended December 31, 1997.
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.
Liquidity and Capital Resources
Since its inception, the Company has relied principally upon the proceeds
of both debt and equity financings to provide working capital for its product
development and marketing activities and, to a lesser extent, the proceeds of
two small SBIR grants. The Company has not been able to generate sufficient
cash from operations and, as a consequence, additional financings have been
required to fund ongoing operations. Initially, the Company relied upon one
investor, Mitsui, a Japanese corporation, which provided, through a series of
loans and stock purchases, in excess of $7 million in working capital. In
1995, the Company completed a private offering of equity in which it raised
approximately $2.875 million. As part of that private offering, the Company
issued a series of warrants, whose exercise during the third quarter of 1996
resulted in an additional capital infusion of approximately $2 million. In
connection with that private offering, the Company issued to Paulson
Investment Company, Inc., who served as placement agent, warrants exercisable
for a period of five years to purchase 11.5 units at a price of $25,000 per
unit, each unit consisting of 20,000 shares of Common Stock and 10,000 Class A
Warrants. In August 1997, the Company completed a private sale of 200,000
shares of Common Stock for gross proceeds of $650,000. The Company agreed to
exchange the 200,000 shares of Common Stock for 78,788 of the Units as offered
in the secondary offering (the "Secondary Offering") completed in
February 1998. In December 1997, the Company obtained a short-term loan from
Paulson in the principal amount of $500,000 which was repaid, without
interest, out of the proceeds of the Secondary Offering.
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.
Each Unit was sold at a price to the public of $8.25. The Units were traded
over-the-counter and quoted on the Bulletin Board under the symbol "CRIIU" for
a period of thirty (30) days through March 4, 1998 (the "Unit Trading
Period"). At the end of the Unit Trading Period, the Units automatically
separated and, as a result, the Preferred Stock and Warrants traded separately
over-the-counter, and were quoted on the Bulletin Board under the symbols
"CRIIP" and "CRIIW," respectively.
Cash used in operations for the years ended December 31, 1998 and 1997
were $ 1,935,800, and $2,253,941 respectively. The primary reason for the
decrease in cash used in operations during the year ended December 31, 1998,
as compared to the prior period, is the decrease in product development and
marketing expenses during that period.
Cash provided by financing activities for the years ended December 31,
1998 and 1997 were $2,852,504 and $1,185,539 respectively. These figures
reflect the equity financings discussed above.
The Company's liquidity and capital resources continued to decrease
during the year ended December 31, 1998, due primarily to the Company's
ongoing operating losses.
The Company's current ratio at December 31, 1998 was 4.3:1, compared to a
current ratio of 1.4:1 on December 31, 1997. This increase in liquidity is
primarily due to the proceeds from the Secondary Offering completed in
February 1998. Total assets increased from $1,979,847 at December 31, 1997 to
$2,583,052 at December 31, 1998, an increase of $603,205 or 30.5%.
The increase in the Company's current assets of $802,118, or 54.6 %, was
the result of an increase in cash and cash equivalents which rose from
$623,572 at December 31, 1997, to $1,375,575 at December 31, 1998, an increase
of $752,003 or 120.6%. This increase in cash and cash equivalents was
primarily the result of the Secondary Offering completed in February 1998. An
increase in accounts receivable of $22,717, from $223,856 at the end of 1997,
to $246,573 at December 31, 1998 was primarily due to increased sales during
1998, but also reflects a more timely accounts receivable collection process.
Inventory decreased in the amount of $59,784 or 10.2%, due to the increased
workstation sales and laser-based medical devices.
At December 31, 1998, the Company's total current liabilities decreased
$501,641, from $1,034,970 at December 31, 1997 to $533,329 at December 31,
1998. Decreases in accounts payable of $275,467, or 45.7%, and royalties
payable of $159,640, or 82.7 %, were directly related to payment of accounts
payable from 1997 with the proceeds of the offering and renegotiated royalty
agreements.
As a result of the foregoing, the Company's working capital increased
from $434,580 at December 31, 1997 to $1,738,339 at December 31, 1998, an
increase of $1,303,759. This increase was due almost exclusively to the
Company's equity financings discussed above.
The Company expects that its cash used in operating activities will be
similar to cash used in 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 is currently reviewing a proposed term sheet for
additional equity financing; however, there can be no assurance that this
commitment 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 of the Company's assets and may contain
restrictive covenants with respect to raising future capital and other
financial and operational matters. The Company is currently in discussion with
a local financial institution regarding a commercial line of credit. At this
time, the Company does not have available other sources of capital to satisfy
its cash requirements until revenues from operations can be realized through
future product sales. 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 anticipates that its
current working capital, increased product sales, and the two remaining equity
investments per the Chronimed stock purchase agreement are sufficient to meet
the Company's operational deficits through fiscal 1999.
Net Operating Loss Carryforwards
At December 31, 1998, the Company had a net operating loss carryforward
for income tax purposes of approximately $14,000,000, which expires beginning
in 2006. Under the Tax Reform Act of 1986, the amounts of and the benefits
from net operating loss carryforwards are subject to certain limitations in
the amount of net operating losses that the Company may utilize to offset
future taxable income. The ownership changes in 1995 in connection with the
Acquisition will limit the use of this net operating loss carryforward under
applicable Internal Revenue Service Regulations.
The 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 the operations of 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 and network operating system has been replaced. The
e-mail system and accounting and manufacturing software has been installed and
implementation has begun. The Company's voice mail system is scheduled to be
replaced during the second quarter of 1999. All other relevant programs,
including Microsoft Windows95(-Registered Mark-) operating system, are
scheduled for upgrade by the end of June, 1999.
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 seventy
two percent (72%) of the entities contacted have responded, and of those
responding, fifty four percent (54%) 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. Expenditures in 1998
were approximately $16,000. Management expects that completion of its Year
2000 Project may result in additional expenditures of approximately $25,000
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, developed
and implemented a Year 2000 contingency plan. It is the Company's goal to have
the major Year 2000 Issues resolved by the end of the second 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 July 1999. The Company will develop and implement a
contingency plan be at that time should it appear the Company's Year 2000
Project has not been satisfactorily completed.
Subsequent Events
In January 1999, the Preferred Stock automatically converted when the sum
of the closing bid prices of the Preferred Stock and two Warrants, which were
included in the Units sold in February 1998, was at least $12.375 for ten
consecutive trading dates.
As a result of the automatic conversion of the Preferred Stock in
January, an additional 25,000 options exercisable at $2.00 vested. These
options were issued by the Company during 1998 to obtain an investor relations
services contract. In connection with this service contract, in March 1999, an
additional 15,000 options exercisable at $2.00 vested as a result of continued
representation beyond the initial six month contract term.
Finally, in March 1999, the Company shipped prototypes of the Personal
Lasette to Chronimed. On delivery Chronimed will make an additional $150,000
equity investment in the Company, which will represent the second of three
equity investments that Chronimed could make in the Company as part of the
exclusive distribution agreement entered into by the companies in August 1998.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are filed as a separate section of
this Report and attached hereto:
1. Independent Auditors' Report;
2. Consolidated Balance Sheets - December 31, 1998 and December 31,
1997;
3. Consolidated Statements of Operations - for the years ended December
31, 1998 and 1997;
4. Consolidated Statements of Stockholders' Equity - for the years
ended December 31, 1998 and 1997;
5. Consolidated Statements of Cash Flows - for the years ended December
31, 1998 and 1997; and
6. Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
<PAGE>
PART III
Part III, Items 9, 10, 11 and 12 are incorporated herein by reference
from the Registrant's definitive proxy statement relating to its Annual
Meeting of Shareholders which will be filed in an amendment within 120 days of
December 31, 1998.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
** 3.2 Amended and Restated Bylaws
*** 3.3(a) Amended and Restated Articles of Incorporation
** 3.3(b) Amended and Restated Articles of Incorporation dated May
23, 1995
** 4.1 Specimen Certificate of Common Stock
***** 4.2 Representatives' Common Stock Purchase Warrant
**** 4.3 Warrant Agreement
**** 4.3.1 Warrant Agreement (revised)
***** 4.4 Lohrding Option Agreement
***** 4.5 Certificate of Designation of Rights and Preferences of
Series A Convertible Preferred Stock
***** 4.6 Specimen Certificate of Series A Preferred Stock
***** 4.7 Specimen Unit Certificate
***** 4.8 Specimen Common Stock Purchase Warrant Certificate
* 10.1 Agreement and Plan of Reorganization between and among
Cell Robotics, Inc., Intelligent Financial Corporation,
MiCel, Inc., Bridgeworks Investors I, L.L.C., and Ronald
K. Lohrding
* 10.2 Employment Agreement of Ronald K. Lohrding
* 10.3 Employment Agreement of Craig T. Rogers
**** 10.4 Employment Agreement of Travis Lee
* 10.5 Financing and Capital Contribution Agreement between and
among Cell Robotics, Inc., Intelligent Financial
Corporation, MiCel, Inc., and Bridgeworks Investors I,
L.L.C.
* 10.6 Irrevocable Appointment of Voting Rights by Dr. Lohrding
to MiCel, Inc.
* 10.7 Stock Pooling and Voting Agreement
** 10.8 Royalty Agreement dated September 11, 1995 between the
Registrant, Cell Robotics, Inc., and Mitsui Engineering &
Shipbuilding Co., Ltd.
** 10.9 Agreement of Contribution and Mutual Comprehensive Release
dated September 11, 1995 between the Company, Cell
Robotics, Inc. and Mitsui Engineering & Shipbuilding Co.,
Ltd.
** 10.10 Distribution Agreement dated April 6, 1995, between Carl
Zeiss, Inc. and the Registrant
** 10.11 Distribution Agreement dated December 15, 1994, between
MiCel, Inc. and the Registrant
** 10.12 Revised License Agreement dated January 5, 1996 between
the Registrant and the Regents of the University of
California
** 10.13 Purchase Agreement with Tecnal Products, Inc.
** 10.14 License Agreement with NTEC
*** 10.15 License Agreement dated May 13, 1996, between the
Registrant and GEM Edwards, Inc.
***** 10.16 Termination Agreement and Release between the Registrant
and GEM Edwards, Inc.
******* 10.17 Employment Agreement of Dr. Ronald K. Lohrding dated
February 2, 1998
****** 10.18 Patent License Agreement between American Telephone and
Telegraph Company and Cell Robotics, Inc.
****** 10.19 Amendment to AT&T License Agreement
****** 10.20 Manufacturing Agreement between Big Sky Laser
Technologies, Inc. and Cell Robotics International, Inc.
dated May 20, 1998.
** 21.0 Subsidiaries
******** 23.0 Consent of KPMG LLP
- ----------------------------
* Incorporated by reference from the Registrant's Current Report on
Form 8-K dated February 23, 1995, as filed with the Commission on
March 10, 1995.
** Incorporated by reference from the Registrant's Pre-Effective
Amendment No. 1 to Registration Statement on Form SB-2, which was
declared effective by the Commission on February 14, 1996.
*** Incorporated by reference from the Registrant's Post-Effective
Amendment No. 1 to Registration Statement on Form SB-2, filed with
the Commission on July 15, 1996.
**** Incorporated by reference from the Company's Annual Report on Form
10-KSB, for the fiscal year ended December 31, 1996, as filed with
the Commission on April 15, 1997.
***** Incorporated by reference from the Company's Pre-Effective Amendment
No. 2 to Registration Statement on Form SB-2 which was declared
effective by the Commission on February 2, 1998, SEC File No. 333-
40895.
****** Incorporated by reference from the Company's Pre-Effective Amendment
No. 2 to Registration Statement on Form S-3, SEC File No. 333-55951,
as filed with the Commission on November 18, 1998
******* Incorporated by reference from the Company's Annual Report on Form
10-KSB, for the fiscal year ended December 31, 1997, as filed with
the Commission on May 2, 1998.
******** Filed herewith
Current Reports on Form 8-K
The Company did not file any Current Report on Form 8-K during the
quarter ended December 31, 1998.
<PAGE>
<PAGE>
KPMG PEAT MARWICK
6565 AMERICAS PARKWAY N.E., SUITE 700
ALBUQUERQUE, NM 87190
(505) 884-3939 (telephone) (505) 884-8348 (facsimile)
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholders
Cell Robotics International, Inc.
We have audited the accompanying consolidated balance sheets of Cell Robotics
International, Inc. and subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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 financial position of Cell
Robotics International, Inc. and subsidiary as of December 31, 1998 and 1997,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
Albuquerque, New Mexico
March 24, 1999
<PAGE>
<PAGE>
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 1,375,575 $ 623,572
Accounts receivable, net of
allowance for doubtful
accounts of $1,841 in 1998
and 1997 246,573 223,856
Inventory 526,249 586,033
Other 123,271 36,089
----------- -----------
Total current assets 2,271,668 1,469,550
Property and equipment, net
(note 3) 272,894 194,654
Deferred offering costs
(note 9) 0 248,372
Other assets, net (note 4) 38,490 67,271
----------- -----------
Total assets $ 2,583,052 $1,979,847
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 327,686 $ 603,153
Payroll related liabilities 144,188 149,726
Royalties payable 33,510 193,150
Other current liabilities 27,945 88,941
----------- -----------
Total current liabilities 533,329 1,034,970
Short-term loan refinanced
subsequent to balance sheet
date (note 9) 0 500,000
----------- -----------
Total liabilities 533,329 1,534,970
----------- -----------
Stockholders' equity (notes
5 and 9):
Preferred stock, $.04 par
value. Authorized 2,500,000
shares, 465,533 and zero
shares issued and outstand-
ing at December 31, 1998
and 1997, respectively 18,622 0
Common stock, $.004 par value.
Authorized 12,500,000 shares,
5,739,248 and 5,245,414 shares
issued and outstanding at
December 31, 1998 and 1997,
respectively 22,957 20,982
Additional paid-in capital 17,916,565 14,037,243
Accumulated deficit (15,908,421) (13,613,348)
----------- -----------
Total stockholders'
equity 2,049,723 444,877
----------- -----------
Commitments (notes 6 and8)
$ 2,583,052 $1,979,847
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<PAGE>
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
Consolidated Statements of Operations
For the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Product sales $ 1,249,703 $ 879,490
Research and development grants 179,298 158,233
----------- -----------
Total revenues 1,429,001 1,037,723
----------- -----------
Product cost of goods sold (848,240) (599,153)
SBIR direct expenses (179,298) (159,052)
----------- -----------
Total cost of goods sold (1,027,538) (758,205)
----------- -----------
Gross profit 401,463 279,518
----------- -----------
Operating expenses:
General and administrative 810,809 681,554
Marketing & Sales 609,288 868,812
Research and development 849,166 1,245,125
----------- -----------
Total operating expenses 2,269,263 2,795,491
Loss from operations (1,867,800) (2,515,973)
----------- -----------
Other income (deductions):
Interest income 85,429 32,004
Interest expense (975) (723)
Other 0 11,800
----------- -----------
Total other income 84,454 43,081
----------- -----------
Net loss (1,783,346) (2,472,892)
----------- -----------
Preferred stock dividends (274,227) 0
----------- -----------
Net loss applicable to common
shareholders $(2,057,573) $(2,472,892)
=========== ===========
Weighted average common shares
outstanding, basic and diluted 5,278,347 5,100,032
=========== ===========
Net loss applicable to common
shareholders per common share,
basic and diluted $ (0.39) $ (0.48)
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Preferred Stock Common Stock Paid-in Accumulated
---------------------- ----------------------
Shares Amount Shares Amount Capital Deficit
---------- ---------- --------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996 - $ - 5,003,414 $ 20,014 $13,327,672 $(11,140,456)
Issuance of shares at $3.25,
Less costs of offering - - 200,000 800 629,700 -
Exercise of stock options - - 42,000 168 79,871 -
Net loss for 1997 - - - - - (2,472,892)
---------- ---------- ---------- ----------- ----------- -----------
Balance at December
31, 1997 - - 5,245,414 20,982 14,037,243 (13,613,348)
Issuance of units at
$8.25, less costs of
offering 460,000 18,400 - - 3,009,104 -
Exchange of outstanding
common shares for units 78,788 3,152 (200,000) (800) 235,148 (237,500)
Options issued for services - - - - 60,688 -
Conversion of series A
preferred stock (73,255) (2,930) 293,020 1,172 1,758 -
Stock dividend paid on
series A preferred stock - - 200,614 803 273,424 (274,227)
Issuance of shares at $1.50 - - 200,000 800 299,200 -
Net loss for 1998 - (1,783,346)
---------- ---------- ---------- ----------- ----------- -----------
Balance at December 31,
1998 465,533 $ 18,622 5,739,248 $ 22,957 $17,916,565 $(15,908,421)
========== ========= ========= ============ =========== =============
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<PAGE>
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,783,346) $(2,472,892)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 115,242 119,914
Amortization of options issued
for service 53,409 0
Increase in accounts receivable (22,717) (154,011)
Decrease(increase) in inventory 59,784 (177,860)
Increase in other current assets (79,903) (16,968)
Increase (decrease) in accounts
payable and payroll related
liabilities (57,633) 239,751
Increase (decrease) in other
current liabilities and
royalties payable (220,636) 208,125
------------ ------------
Net cash used in operating
activities (1,935,800) (2,253,941)
------------ ------------
Cash flows from investing
activities - purchase of
property and equipment (164,701) (32,697)
------------ ------------
Cash flows from financing
activities:
Proceeds from sale of units, net
of offering costs 3,052,504 0
Proceeds from (repayment of) loans (500,000) 500,000
Proceeds from issuance of common
stock 300,000 730,039
Costs of offering common stock 0 (19,500)
Deferred offering costs 0 (25,000)
------------ ------------
Net cash provided by financing
activities 2,852,504 1,185,539
------------ ------------
Net increase (decrease) in cash
and cash equivalents: 752,003 (1,101,099)
Cash and cash equivalents:
Beginning of year 623,572 1,724,671
------------ ------------
End of year $ 1,375,575 $ 623,572
============ ============
Supplemental information:
Stock options issued in exchange
for services $ 60,688 $ 0
============ ============
Exchange of common stock for
units $ 237,500 $ 0
============ ============
Stock dividends on Series A
Preferred Stock $ 274,227 $ 0
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.<PAGE>
<PAGE>
CELL ROBOTICS INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Business and Activities
The Company has developed and is manufacturing and marketing a series of
laser-based medical devices with applications in the blood sample and
glucose collection and in vitro fertilization markets. Currently, the
Company also develops, produces and markets a line of advanced scientific
instruments which increase the usefulness and importance of the
conventional laboratory microscope. The Company markets its scientific
instruments in both domestic and international markets. In 1998,
approximately 61 percent of the Company's product sales were in the
United States, with Germany, Asia, Australia, and Canada being the
Company's principal international markets.
The Company's customers consist primarily of research institutes,
universities, fertility clinics, and distributors.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements include the accounts of Cell
Robotics International, Inc. and its wholly owned subsidiary (the
Company). All significant intercompany accounts and transactions
have been eliminated in consolidation.
(b) Financial Statement 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, and disclosure of contingent 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.
(c) Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers
all short-term investments with original maturities of three months
or less to be cash equivalents.
(d) Inventory
Inventory is recorded at the lower of cost, determined by the first-
in, first-out method, or market.
Inventory at December 31 consists of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Finished goods $ 3,003 $40,452
Parts and components 394,215 443,424
Sub-assemblies 129,031 102,157
--------- ---------
$526,249 $586,033
========= =========
</TABLE>
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation is
calculated on a straight-line basis over the estimated useful lives
of the assets, which range from five to seven years. Leasehold
improvements are amortized over the life of the lease.
(f) Earnings Per Share
Basic loss per share is computed on the basis of the weighted
average number of common shares outstanding during the year.
Diluted loss per share which is computed on the basis of the
weighted average number of common shares and all potentially
dilutive common shares outstanding during the year, is the same as
basic loss per share for 1998 and 1997, as all potentially dilutive
securities were anti-dilutive.
Options to purchase 1,631,820 and 1,000,905 shares of common stock
were outstanding at December 31, 1998 and 1997, respectively.
Additionally, warrants to purchase 1,662,576 and 345,000 shares of
common stock were outstanding at December 31, 1998 and 1997,
respectively. These were not included in the computation of diluted
earnings per share as the exercise of these options and warrants
would have been anti-dilutive because of the net losses incurred in
1998 and 1997.
(g) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable, royalties payable, accrued liabilities
and short-term loan in the consolidated financial statements
approximate fair value because of the short-term maturity of these
instruments.
(h) Income Taxes
The Company follows the asset and liability method for accounting
for income taxes whereby deferred income taxes are recognized for
the tax consequences of "temporary differences" by applying enacted
statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax basis
of existing assets and liabilities.
(i) Revenue
The Company recognizes revenue on sales of its products when the
products are shipped from the plant and ownership is transferred to
the customer.
(j) Research and Development
Research and development costs related to both present and future
products are expensed as incurred. Research and development costs
consist primarily of salaries, materials and supplies.
(k) Warranties
The Company warrants their products against defects in materials and
workmanship for one year. The warranty reserve is reviewed
periodically and adjusted based upon the Company's historical
warranty costs and its estimate of future costs.
(l) Stock Option Plan
The Company accounts for its stock option plan in accordance with
the provisions of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense is recorded on the
date of grant only if the current market price of the underlying
stock exceeds the exercise price. SFAS No. 123, "Accounting for
Stock Based Compensation," permits entities to recognize as an
expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
(m) Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 130, "Reporting Comprehensive Income." The Company adopted the
provisions of SFAS No. 130 during 1998. The Company had no items of
other comprehensive income during 1998 and 1997.
(n) Reclassification
Certain 1997 amounts have been reclassified to conform with the 1998
presentation.
(3) Property and Equipment
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Furniture and fixtures $ 9,279 $ 8,028
Computers 344,059 320,572
Equipment 517,843 378,691
Leasehold improvements 48,961 48,150
--------- ---------
920,142 755,441
Accumulated depreciation (647,248) (560,787)
--------- ---------
Net property and equipment $272,894 $194,654
========= =========
</TABLE>
(4) Other Assets
Other assets consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Software development costs $ 59,019 $59,019
Patents 48,246 48,246
Noncompete agreements 8,116 8,116
--------- ---------
115,381 115,381
Accumulated amortization (76,891) (48,110)
--------- ---------
Net other assets $ 38,490 67,271
========= =========
</TABLE>
During 1998 and 1997, the Company recorded $21,247 and $17,706
respectively, of software development costs amortization as cost of goods
sold.
(5) Stock Options and Warrants
(a) Stock Options
The Company has adopted a Stock Incentive Plan (the Plan) pursuant
to which the Company's Board of Directors may grant to eligible
participants options in the form of Incentive Stock Options (ISO's)
under Section 422 of the Internal Revenue Code of 1986, as amended,
or options which do not qualify as ISO's (Non-Qualified Stock
Options or NQSO's). An aggregate of 1,500,000 shares of the
Company's common stock is reserved for issuance under the Plan.
Generally, stock options granted under the Plan have five-year terms
and become fully exercisable after three or four years from the date
of grant.
Following is a summary of activity in the Company's options for
employees, directors, outside consultants, and technical advisors:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1998 1997
-------------------- ---------------------
Weighted- Weighted-
average average
exercise exercise
price Number price Number
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year $ 2.03 1,000,905 $ 1.91 885,826
Issued 2.11 745,000 2.59 175,174
Exercised - - 1.91 (42,000)
Forfeited 2.50 (75,000) 2.22 (18,095)
Expired 1.78 (39,085) - -
Repriced 2.16 (500,850) - -
Repriced 1.38 500,850 - -
Outstanding at end of
year $ 1.81 1,631,820 $ 2.03 1,000,905
Exercisable at end of
year $ 1.72 994,595 $ 1.83 696,856
</TABLE>
The following summarizes certain information regarding outstanding stock
options at December 31, 1998:
<TABLE>
<CAPTION>
Total Exercisable
---------------------------------- -----------------------
Weighted-
Weighted- average Weighted-
average remaining average
Exercise exercise contractual exercise
price Number price life (years) price Number
---------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 1.000 35,000 $ 1.60 4.7 $ 1.00 35,000
1.375 505,850 1.375 3.2 1.375 321,958
1.750 433,970 1.750 3.1 1.750 428,970
1.875 25,000 1.875 3.0 1.875 16,667
2.000 40,000 2.000 4.7 2.000 -
2.063 450,000 2.063 4.5 2.063 150,000
2.500 75,000 2.500 4.7 2.500 -
2.810 46,000 2.810 2.3 2.810 32,250
3.563 21,000 3.563 2.8 3.563 9,750
---------- ---------- ---------- ----------- ---------- ----------
Total 1,631,820 $ 1.81 3.6 $ 1.720 994,595
========== ========== ========== =========== ========== ==========
</TABLE>
During 1998, the Company granted 675,000 options outside of the
Plan, for the purchase of the Company's common stock to an officer
and providers of investment relations services for the Company. Such
options are included in the above table. Of the options, 450,000
options were issued to an officer, of which 150,000 options vested
in 1998 upon the closing of the offering described in Note 9, and
the remaining 300,000 options vest on November 30, 2002, provided,
however, (i) 150,000 options will vest and become exercisable thirty
days after any quarter in which the Company reports pre-tax income
of at least $50,000; and (ii) 150,000 options will 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. The remaining options of
225,000 were issued to providers of investment relation services, of
which 75,000 options had been forfeited by December 31, 1998. The
remaining 150,000 options vest upon the occurrence of certain events
and performance of measure being acheived, and the fair value of
these performance based options will be measured upon vesting and be
charged to operations at such time.
At December 31, 1998, there were 416,180 additional shares available
for grant under the Plan. The fair value of stock options granted
and modified during 1998 and 1997 was $403,428 and $257,594,
respectively, on the date of grant or amendment using the Black
Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Expected dividend yield 0.0% 0.0%
Risk-free interest rate 4.767% 6.5%
Expected life of option 4 years 4 years
Expected volatility 75.2% 75.2%
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its Plan
and, accordingly, no compensation cost has been recognized for its
employee stock options in the consolidated financial statements. Had
the Company determined compensation cost based on the fair value at
the date of grant for its employee stock options under SFAS No. 123,
the Company's net loss would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Reported net loss applicable
to common shareholders $(2,057,573) $(2,472,892)
Pro forma net loss applicable
to common shareholders (2,461,001) (2,671,309)
Pro forma net loss per share
applicable to common
shareholders - basic and
diluted $ (.47) $ (.52)
============ ============
</TABLE>
(b) Warrants
The Company has a Placement Agent's Warrant outstanding that was
granted to an underwriter. The Placement Agent's Warrant is
exercisable through September 30, 2000 to acquire up to 11.5 private
units at a price of $25,000 per unit. Each unit consists of 20,000
shares of the Company's common stock. The Placement Agent's Warrant
also includes 115,000 Class A Common Stock Purchase Warrants
exercisable through December 31, 2000 to purchase115,000 shares of
common stock for a price of $1.75 per share.
The Company also has a Representative's Warrant outstanding that was
granted to the same underwriter. The Representative's Warrant is
exercisable through February 2, 2002 to purchase 160,000 shares of
common stock at a price of $2.35 per share. The Representative's
Warrant also includes 80,000 Common Stock Purchase Warrants
exercisable through February 2, 2003 to purchase 80,000 shares of
common stock for a price of $2.40 per share.
Finally, in conjunction with the Offering completed in February
1998, and the exchange of common shares for Units in February 1998,
the Company has an additional 1,077,576 warrants outstanding
exercisable through February 2, 2003 to purchase 1,077,576 shares
of common stock for a price of $2.40 per share.
The board of directors and stockholders have approved an Employee
Stock Purchase Plan (ESPP). As of December 31, 1998 and 1997, no
shares of common stock have been issued under the ESPP and there
have been no subscriptions of employees to participate in the ESPP.
(6) Royalty Agreements
The Company is party to several royalty agreements under which it must
make payments to the original holders of patents on components used in
its products. Such royalties, equal to 1 to 2 percent of the net sales of
the products containing patented components, are generally due upon sale
of the products.
Additionally, one royalty agreement requires a royalty payment equal to 7
percent of revenue generated from sales of the Company's products and
pertains to the Company's worldwide, non-exclusive license agreement
which continues until March 31, 2016. Beginning with the year 1999, the
minimum royalty payable each year is $35,000 payable as follows: $17,500
sixty days after the end of each semiannual period ending June 30th and
December 31st.
(7) Income Taxes
No provision for federal or state income tax expense has been recorded
due to the Company's losses. The Company has net operating loss
carryforwards and temporary differences that give rise to the following
deferred tax assets and liabilities:
<TABLE>
<CAPTION>
December 31,
1998 1997
------------ -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry-
forwards $ 4,825,000 4,118,000
Inventory capitalization 97,000 197,000
Vacation and sick leave
payable 30,000 28,000
Allowance for doubtful
accounts - 625
Depreciation 18,000 -
Accrued expenses 48,000 -
------------ -----------
5,018,000 4,343,625
Less valuation allowance (4,986,000) (4,318,625)
------------ -----------
Net deferred tax asset $ 32,000 25,000
============ ===========
Deferred tax liabilities:
Amortization $ 32,000 8,000
Depreciation - 17,000
------------ -----------
Net deferred income taxes $ - -
============ ===========
</TABLE>
The net deferred taxes have been fully offset by a valuation allowance
since the Company cannot currently conclude that it is more likely than
not that the benefits will be realized. The net operating loss
carryforward for income tax purposes of approximately $14,000,000 expires
beginning in 2006 through 2018. Ownership changes resulting from the
Company's reorganization in 1995 will limit the use of this net operating
loss under applicable Internal Revenue Service regulations.
(8) Commitments
The Company is obligated under a noncancellable operating lease for
building facilities which is subject to 3 percent annual increases and
expires on November 30, 2002. Rent expense for 1998 and 1997 was $105,987
and $106,893, respectively. Minimum annual lease commitments for all
building facilities at December 31, 1998 are: $99,129for 1999; $102,162
for 2000; $_105,195 for 2001; and $98,977 for 2002
(9) Equity Transactions
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 each exercisable to acquire one share of
common stock at an exercise price of $2.40 per share (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. The Unit Price
of $8.25 per Unit was based on the public trading price of the four
shares of Common Stock issuable upon conversion of the Preferred Stock,
which, on the effective date of the Registration Statement, was $1.938
per share, or $7.75, with each Warrant being valued at $0.25 per Warrant,
resulting in the Unit price of $8.25. The value of each Warrant was
determined by the underwriter and was based on the difference between the
public trading price of four shares of Common Stock on the Friday
preceding the effective date of the Registration Statement, which was
$7.75, resulting in a Warrant value of $0.25 each. 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 was convertible at any time at the option of the
holder. The Preferred Stock converted 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 had been at
least $12.375 for ten consecutive trading dates (See Note 11) The
Preferred Stock had a liquidation preference of $8.25 per share and was
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 February 1998, the Company allowed a principal shareholder 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.
In September 1998, the Company sold 200,000 shares of common stock for
$300,000 to Chronimed, Inc. This investment by Chronimed was made as part
of the exclusive distribution agreement entered into by the companies in
August 1998. In March 1999, the Company shipped prototypes of the
Personal Lasette to Chronimed. As part of the exclusive distribution
agreement, Chronimed is obligated to make an additional $150,000
investment in the Company upon acceptance of the prototypes. An
additional equity investment of $150,000 could be made based on the
Company meeting certain future conditions.
(10) Capital Resources
Since inception, the Company has incurred operating losses and other
equity charges which have resulted in an accumulated deficit of
$15,908,421 and operations using net cash of $1,935,800 in 1998.
The Company's ability to improve cash flow and ultimately achieve
profitability will depend on its ability to significantly increase sales.
Accordingly, the Company is manufacturing and marketing a series of
laser-based medical devices which leverage the Company's existing base of
patented technology. The Company believes the markets for these new
products are broader than that of the scientific instrumentation market
and, as such, offer a greater opportunity to significantly increased
sales. In addition, the Company is pursuing development and marketing
partners for several of its new medical products. These partnerships will
enhance the Company's ability to rapidly ramp-up its marketing and
distribution strategy, and possibly offset the products' development
costs.
Although the Company has begun manufacturing and marketing its laser-
based medical devices and continues to market its scientific instrument
line, it does not anticipate achieving profitable operations during
fiscal 1999. As a result, the Company's working capital surplus is
expected to erode over the next twelve months. Nevertheless, the Company
expects that its present working capital surplus, increased sales, and
the proceeds from the Chronimed stock purchase and commitment will be
sufficient to cover its expected operational deficits through 1999.
(11) Subsequent Events
In January 1999, the Preferred Stock automatically converted when the sum
of the closing bid prices of the Preferred Stock and two Warrants, which
were included in the Units sold in February 1998, reached $12.375 for ten
consecutive trading dates.
As a result of the automatic conversion of the Preferred Stock in
January, an additional 25,000 options exercisable at $2.00 vested. These
options were issued by the Company during 1998 to obtain an investor
relations services contract. In connection with this service contract, in
March 1999, an additional 15,000 options exercisable at $2.00 vested as a
result of continued representation beyond the initial six month contract
term.
Finally, in March 1999, the Company shipped prototypes of the Personal
Lasette to Chronimed. On delivery Chronimed will make an additional
$150,000 equity investment in the Company, which will represent the
second of three equity investments that Chronimed could make in the
Company as part of the exclusive distribution agreement entered into by
the companies in August 1998.
(12) Operating segments
The Company has two operating segments: scientific research instruments
and laser-based medical devices. The scientific research instruments
segment produces research instruments for sale to universities, research
institutes, and distributors. The laser-based medical devices segment
produces medical devices for sale to fertility clinics and to
distributors.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
segment performance based on profit or loss from operations prior to the
consideration of unallocated corporate general and administration costs.
The Company does not have intersegment sales or transfers.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because
each business utilizes different technologies and marketing strategies.
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------
Scientific Laser-Based
Research Medical
Instruments Devices Corporate Total
---------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues from customers $ 895,993 353,710 - 1,249,703
Research and development
grants 179,298 - - 179,298
Profit (loss) from opera-
tions 226,921 (1,311,430) (783,291) (1,867,800)
Segment assets 465,564 307,258 1,804,230 2,583,052
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------
Scientific Laser-Based
Research Medical
Instruments Devices Corporate Total
---------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues from customers 879,490 - - 879,490
Research and development
grants 158,233 - - 158,233
Loss from operations (124,376) (1,713,075) (678,522) (2,515,973)
Segment assets 223,856 - 1,755,991 1,979,847
</TABLE>
Segment assets for scientific research instruments and laser-based
medical devices represent accounts receivable and inventory. The
remaining assets are not allocated among the segments, as there is no
practical method to allocate those assets between the segments.
The Company has no foreign operations. However, total export sales,
primarily to Germany, Asia, Australia, and Canada were $490, 892 and
$410,483 for the years ended December 31, 1998 and 1997, respectively.
Export sales are attributed to the country where the product is shipped.
Sales revenue to individual customers, each of which accounted for 10
percent or more of total sales, are as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Customer A, a related party - 112,000
Customer B - 114,623
Customer C - 125,941
Customer D - 93,100
Customer E, a related party 234,800 -
Customer F 195,518 -
</TABLE>
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Registrant: CELL ROBOTICS INTERNATIONAL, INC.
Dated: April 8, 1999 By: /s/ Ronald K. Lohrding
-----------------------------------
Ronald K. Lohrding, President
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.
Dated: April 8, 1999 /s/ Ronald K. Lohrding
----------------------------------------
Ronald K. Lohrding, Chairman of the Board,
President, and Chief Executive Officer
Dated: April 8, 1999 /s/ Jean Scharf
----------------------------------------
Jean Scharf, Chief Financial Officer, Chief
Accounting Officer and Controller
Dated: April 8, 1999 /s/ Craig T. Rogers
----------------------------------------
Craig T. Rogers, Director
Dated: April 8, 1999 /s/ Mark Waller
----------------------------------------
Mark Waller, Director
Dated: April 8, 1999 /s/ Raymond Radosevich
----------------------------------------
Raymond Radosevich, Director
Dated: April 8, 1999 /s/ Debra Bryant
----------------------------------------
Debra Bryant, Director
<PAGE>
KPMG PEAT MARWICK
6565 AMERICAS PARKWAY N.E., SUITE 700
ALBUQUERQUE, NM 87190
(505) 884-3939 (telephone) (505) 884-8348 (facsimile)
Independent Auditors' Consent
-----------------------------
The Board of Directors and Shareholders
Cell Robotics International, Inc.:
We consent to incorporation by reference in the registration statement No.
333-55951 on Form S-3 of Cell Robotics International, Inc. of our report dated
March 24, 1999, relating to the consolidated balance sheets of Cell Robotics
International, Inc. and subsidiary as of December 31, 1998, and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the two-year period ended December 31, 1998,
which report appears in the December 31, 1998, annual report on Form 10-KSB of
Cell Robotics International, Inc.
Albuquerque, New Mexico
April 6, 1999
[ARTICLE] 5
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENT OF OPERATIONS FOUND ON
PAGES F-2 AND F-3 OF THE COMPANY'S FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
[/LEGEND]
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-END] DEC-31-1998
[CASH] 1,375,575
[SECURITIES] 0
[RECEIVABLES] 248,414
[ALLOWANCES] (1,841)
[INVENTORY] 526,249
[CURRENT-ASSETS] 2,271,668
[PP&E] 920,142
[DEPRECIATION] (647,248)
[TOTAL-ASSETS] 2,583,052
[CURRENT-LIABILITIES] 533,329
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 18,622
[COMMON] 22,957
[OTHER-SE] 2,008,144
[TOTAL-LIABILITY-AND-EQUITY] 2,583,052
[SALES] 1,249,703
[TOTAL-REVENUES] 1,429,001
[CGS] 848,240
[TOTAL-COSTS] 1,027,538
[OTHER-EXPENSES] 2,269,263
[LOSS-PROVISION] (1,867,800)
[INTEREST-EXPENSE] (975)
[INCOME-PRETAX] (1,783,346)
[INCOME-TAX] 0
[INCOME-CONTINUING] (1,783,346)
[DISCONTINUED] 0
[EXTRAORDINARY] (274,227)
[CHANGES] 0
[NET-INCOME] (2,057,573)
[EPS-PRIMARY] (.34)
[EPS-DILUTED] (.39)
</TABLE>
