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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
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EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
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EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 000-20198
CHOLESTECH CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3065493
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3347 INVESTMENT BOULEVARD, HAYWARD, CA 94545
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (510) 732-7200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for 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
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At June 28, 1996, 10,701,383 shares of common stock of the Registrant were
outstanding.
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CHOLESTECH CORPORATION
PART I
FINANCIAL INFORMATION
Page
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ITEM 1. FINANCIAL STATEMENTS.
Condensed Balance Sheets 3
Condensed Statements of Operations 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. 7
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS. 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 11
SIGNATURES 12
2
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CHOLESTECH CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
(In thousands)
ASSETS
June 28, 1996 March 29, 1996
(Unaudited)
Current assets:
Cash and cash equivalents $ 409 $ 361
Stock subscription receivable, net 13,369 --
Restricted marketable securities 3,750 3,750
Accounts receivable 1,417 1,107
Inventories 2,132 1,910
Other current assets 587 167
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Total current assets 21,664 7,295
Property and equipment, net 2,098 2,041
Other assets 268 309
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$ 24,030 $ 9,645
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings $ 1,050 $ 250
Accounts payable 2,063 1,614
Accrued stock offering expenses 500 --
Accrued payroll and benefits 223 253
Product warranty 187 187
Current portion of long-term debt 476 499
Other Liabilities 34 50
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Total current liabilities 4,533 2,853
Long-term debt, less current portion 715 799
Other liabilities 10 11
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Total liabilities 5,258 3,663
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Shareholders' equity:
Preferred stock -- --
Common stock 68,845 55,644
Accumulated deficit (50,073) (49,662)
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Total shareholders' equity 18,772 5,982
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$ 24,030 $ 9,645
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See Notes to Condensed Financial Statements
3
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CHOLESTECH CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Thirteen weeks ended
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June 28, 1996 June 30, 1995
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Net sales
Domestic $2,473 $1,070
International 287 299
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2,760 1,369
Cost of product sales 1,643 878
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Gross profit (loss) 1,117 491
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Operating expenses
Research and development 184 224
Sales and marketing 906 669
General and administrative 415 354
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Total operating expenses 1,505 1,247
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Loss from operations (388) (756)
Interest income/(expense), net (23) 85
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Net Loss $ (411) $ (671)
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Net loss per share $(0.05) $(0.08)
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Weighted average common shares 8,161,721 8,000,632
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See Notes to Condensed Financial Statements
4
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CHOLESTECH CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Thirteen weeks ended
---------------------
June 28, 1996 June 30, 1995
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Cash flows from operating activities:
Net loss $ (411) $ (671)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 150 156
Deferred revenue (2) (23)
Compensation expense relating to
stock options issued below market -- 11
Forgiveness of note receivable -- 36
Changes in assets and liabilities:
Accounts receivable (304) (174)
Inventories (222) (77)
Other current assets (421) (281)
Accounts payable 449 252
Other current liabilities (30) (57)
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Net cash used in operating activities (791) (828)
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Cash flows from investing activities:
Sale of marketable securities -- --
Purchases of marketable securities -- --
Purchases of property and equipment (171) (31)
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Net cash used in investing activities (171) (31)
Cash flows from financing:
Principal payments on long-term debt (107) --
Proceeds from short-term bank borrowing 800 --
Principal payments on capital leases (14) (34)
Issuance of common stock 13,200 --
Accrued stock offering expenses 500 --
Stock subscription receivable (13,369) --
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Net cash provided by (used in)
financing activities 1010 (34)
Net change in cash and cash equivalents 48 (893)
Cash and cash equivalents at beginning of period 361 1,230
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Cash and cash equivalents at end of period $ 409 $ 337
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See Notes to Condensed Financial Statements
5
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CHOLESTECH CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. The financial information of Cholestech Corporation (the "Company") is
prepared in conformity with generally accepted accounting principles and
such principles are applied on a basis consistent with the audited
financial information contained in the Annual Report on Form 10-K filed
with the Securities and Exchange Commission on June 25, 1996. The
financial information included herein, other than the condensed balance
sheet as of March 29, 1996, has been prepared by management without audit
by independent accountants who do not express an opinion thereon and should
be read in conjunction with the audited financial statements contained in
the Annual Report on Form 10-K. The condensed balance sheet as of March
29, 1996 has been derived from, but does not include all the disclosures
contained in, the audited financial statements for the year ended March 29,
1996. The information furnished includes all adjustments and accruals
consisting only of normal recurring accrual adjustments which are, in the
opinion of management, necessary for a fair presentation of results for the
interim periods.
2. The foregoing interim results are not necessarily indicative of the results
of operations for the full fiscal year ending March 28, 1997.
3. The components of inventories are as follows (in thousands):
JUNE 28, 1996 MARCH 29, 1996
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Raw materials $ 687 $ 875
Work in progress 705 380
Finished goods 740 655
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$ 2,132 $1,910
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4. Net loss per share is computed by dividing the net loss by the weighted
average number of common and common equivalent shares outstanding during
the period. Common equivalent shares are included in the computation of
net loss per share, to the extent they are dilutive.
5. In May 1996, the Company entered into a development, marketing and license
agreement (the "Agreement") with Metra Biosystems, Inc. ("Metra
Biosystems") to develop an immunoassay test cassette incorporating Metra
Biosystems' bone restoration technology to be used with the Cholestech
L-D-X-Registered Trademark- System. Pursuant to the Agreement, Metra
Biosystems purchased 39,526 shares of the Company's common stock for an
aggregate purchase price of $250,000 ($6.325 per share) and is obligated to
purchase $750,000 of additional shares of common stock upon the completion
of specified development milestones by the Company.
6. On June 28, 1996, the Company successfully completed a public offering and
issued 2,500,000 shares of common stock at $5.00 per share. Net proceeds
to the Company from the public offering of $11.6 million will be used to
(i) repay the outstanding balances of the Company's (a) bank line of credit
of approximately $1.0 million and (b) a long-term note of approximately
$1.2 million and (ii) develop new products. The net proceeds due
Cholestech and an estimate of the expenses of the offering are included in
the June 28, 1996 interim balance sheet.
On July 9, 1996, the underwriters for the Company exercised an over
allotment option to purchase an additional 375,000 shares of Cholestech
common stock at $5.00 per share. Net proceeds to the Company were
$1.7 million.
6
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CHOLESTECH CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THE THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS DISCUSSED HEREIN.
GENERAL
The Company develops, manufactures and markets a proprietary point of care
diagnostic system which measures specific analytes to detect various diseases
and disorders within five minutes using a single drop of whole blood. The
Company has experienced significant operating losses since inception and, as of
June 28, 1996, had an accumulated deficit of $50 million. The Company has not
generated significant revenues to date, and there can be no assurance that
significant revenues will ever be achieved. The Company is developing certain
additional tests designed to extend the L-D-X System's capabilities. The Company
believes that its future growth will depend, in part, upon its ability to
complete development and successfully introduce these new tests. The Company
expects to continue to incur operating losses as well as negative cash flows
from operations as it expands product research and development efforts for new
test panels, pursues regulatory clearances and approvals, expands sales and
marketing activities to address the monitoring market, and develops and expands
manufacturing capacity for existing and new test panels. The development and
commercialization of the new tests will require additional development, sales
and marketing, manufacturing and other expenditures. The required level and
timing of such expenditures will impact the Company's ability to achieve
profitability and positive cash flows from operations.
RESULT OF OPERATIONS
THIRTEEN WEEKS ENDED JUNE 28, 1996 VS. THIRTEEN WEEKS ENDED JUNE 30, 1995
REVENUES. The Company's revenues increased by 102% from $1.4 million in
the first quarter of fiscal 1996 to $2.8 million in the first quarter of fiscal
1997. Domestic revenues increased by 131% from $1.1 million in the first quarter
of fiscal 1996 to $2.5 million in the first quarter of fiscal 1997 while
international revenues remained relatively constant from $299,000 in the first
quarter of fiscal 1996 to $287,000 in the first quarter of fiscal 1997. The
increase in revenues reflected increased unit sales of the L-D-X System to
hospitals, managed care organizations, public health departments, corporations
and other health care providers in the screening market. During the
first quarter of fiscal 1997, approximately 18% of the domestic revenues were to
the monitoring market. The Company expects that international revenues will
continue to decline as a percentage of total revenues in future periods as the
Company increases sales and marketing efforts in the monitoring market in the
United States.
As of June 28, 1996, there were approximately 200 L-D-X Systems installed
in the physician office laboratory ("POL") market, and there were approximately
290 active health promotion accounts.
7
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CHOLESTECH CORPORATION
COST OF PRODUCTS SOLD. Cost of products sold increased 87% from $878,000
in the first quarter of fiscal 1997 to $1.6 million in the first quarter of
fiscal 1996, as unit sales of the L-D-X Analyzer and test cassettes increased.
Gross margin was 36% and 40% in the first quarter fiscal 1996 and 1997,
respectively. The improvement in the gross margin was primarily attributable to
growth in the volume of units sold.
The Company has obtained rights to use certain technology in the
manufacturing of certain of its products. The related agreements, which expire
in various years ranging from 1997 through 2006, provide for
the Company to pay royalties ranging from 0.6% to 6.0% of net sales of the
applicable products. Total royalty expense in the first quarter of fiscal 1996
and 1997 was $36,000 and $111,000, respectively, and was charged to costs of
products sold.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased by
18% from $224,000 in the first quarter of fiscal 1996 to $184,000 in the first
quarter of fiscal 1997 as a result of the Company's decision to concentrate
available resources on expansion of sales and marketing activities for existing
test panels. However, the Company believes that its future revenue growth and
profitability will depend, in part, upon its ability to complete development and
successfully introduce new test panels designed to extend the L-D-X System's
capabilities to include additional tests useful in the screening and monitoring
markets. The Company is currently developing additional tests to detect disease
states such as metabolic bone diseases and disorders, prostate cancer and
diabetes. Each of these new tests is at an early stage of development and the
Company will be required to undertake time consuming and costly development
activities and seek regulatory approval for these new tests. As a result, the
Company currently anticipates that research and development expenditures will
increase significantly in future periods as product development and
manufacturing scale-up efforts for new tests increase.
SALES AND MARKETING. Sales and marketing expenses increased 35% from
$669,000 in the first quarter of fiscal 1996 to $906,000 in the first quarter of
fiscal 1997. The increase in sales and marketing expenses was primarily
attributable to expansion of the Company's domestic direct sales and marketing
organization, training of Physician Sales and Services Inc. 700 person sales
force for the POL launch, increased commissions associated with increased
product sales and, to a lesser extent, participation in domestic conferences
and trade shows. The Company currently anticipates that sales and marketing
expenses will increase in future periods as the Company expands sales and
marketing activities to address the monitoring market, in particular the POL
segment of the monitoring market.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
17% from $354,000 in the first quarter of fiscal 1996 to $415,000 in the first
quarter of fiscal 1997. The increase in general and administrative expenses was
primarily a result of higher legal fees relating to business development
efforts.
INTEREST INCOME (EXPENSE), NET. Interest income was earned on investment
of cash balances generated from prior equity financings of the Company. Interest
expense was incurred on capital lease financings, the bank line of credit and
long-term debt obtained by the Company.
8
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CHOLESTECH CORPORATION
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company may experience significant fluctuations in revenues and results
of operations on a quarter to quarter basis in the future. Quarterly operating
results will fluctuate due to numerous factors, such as (i) the timing and level
of market acceptance of the L-D-X System, particularly with respect to the
monitoring market; (ii) the timing of introduction and availability of new
tests; (iii) the timing and level of expenditures associated with new product
development activities; (iv) the timing and level of expenditures associated
with expansion of sales and marketing activities and overall operations; (v) the
Company's ability to cost-effectively expand cassette manufacturing capacity and
maintain consistently acceptable yields in the manufacture of cassettes; (vi)
the timing of establishment of strategic distribution arrangements and success
of the activities conducted under such arrangements; (vii) variations in
manufacturing efficiencies; (viii) changes in demand for its products based on
changes in third party reimbursement, competition, changes in government
regulation and other factors; (ix) the timing of significant orders from and
shipments to customers; and (x) general economic conditions. These factors are
difficult to forecast, and these or other factors could have a material adverse
effect on the Company's business, financial condition and results of operations.
Fluctuations in quarterly demand for products and order cancellations may
adversely affect the continuity of the Company's manufacturing operations,
increase uncertainty in operational planning, disrupt cash flow from operations
and contribute to the volatility of the Company's stock price. The Company's
expenses are based in part on the Company's expectations as to future revenue
levels and to a large extent are fixed in the short-term. If actual revenues do
not meet expectations, the Company's business, financial condition and results
of operations could be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the sale of
equity securities and, to a lesser extent, through capital lease financings and
a long term note payable. Through June 28, 1996, the Company had received
approximately $68.8 million in net proceeds from equity financings. As of June
28, 1996, the Company had approximately $409,000 of cash and cash equivalents
and $13.4 million of stock subscription receivable from the recent public
offering. In addition, the Company had $3.8 million of restricted marketable
securities that currently secure a $3.0 million revolving bank line of credit.
While the line of credit is in effect, the Company is required to maintain on
deposit with the bank $3.8 million of restricted marketable securities or a
$3.0 million certificate of deposit as pledged collateral, restricted as to use
when the Company has outstanding borrowings under the agreement. The line of
credit expires on October 31, 1996. As of June 28, 1996, borrowings under the
line of credit totaled $1.1 million. If the Company's cash and restricted
marketable securities were to fall below $3.0 million, the Company would be
required to either renegotiate the terms or cancel the revolving line of credit.
At June 28, 1996, the Company also had approximately $1.2 million outstanding
under a long-term note. The note contains various provisions including
requirements that the Company maintain at least $3.0 million in cash and
restricted marketable securities and a security deposit in the amount of
$150,000 payable to the lender in the event of a default on the note. If the
Company's cash and restricted marketable securities were to fall below $3.0
million, the Company would be required to deposit with the lender an additional
$200,000 as a security deposit. Net proceeds of the public offering of $13.4
million will be used to (i) repay the outstanding balances of the Company's
(a) bank line of credit of approximately $1.0 million and (b) a long-term
note of approximately $1.2 million and (ii) develop new products.
Net cash used in operating activities was approximately $2.0 million,
$828,000 and $721,000 in the first quarter of fiscal 1995, 1996 and 1997,
respectively. Cash used in operating activities resulted primarily from net
losses. Net cash used by investing activities in the first quarter of fiscal
1996 and 1997 resulted primarily from Company's purchases of property and
equipment. Net cash used in financing activities in the first quarter of fiscal
1996 reflected the
9
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CHOLESTECH CORPORATION
repayment of capital lease obligations, while the net cash provided by financing
activities in the first quarter of fiscal 1997 reflected borrowing under the
line of credit and issuances of Common Stock.
The Company intends to expend substantial funds for product research and
development, expansion of sales and marketing activities, expansion of
manufacturing capacity and other working capital and general corporate purposes.
Although the Company believes that the net proceeds of $13.4 million from public
offering, together with its unrestricted cash balances, internally generated
funds, bank borrowings under existing lines of credit and proceeds from
issuances of Common Stock to Metra Biosystems, will be sufficient to meet its
capital requirements for the foreseeable future, there can be no assurance that
the Company will not require additional financing. The Company's actual
liquidity and capital requirements will depend upon numerous additional factors,
including the costs and timing of expansion of manufacturing capacity, the
number and type of new tests the Company seeks to develop, the costs and timing
of expansion of sales and marketing activities, the extent to which the
Company's existing and new products gain market acceptance, competing
technological and market developments, the progress of commercialization efforts
of the Company's distributors, the costs involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims and other intellectual
property rights, developments related to regulatory and third party
reimbursement matters and CLIA, and other factors. In the event that additional
financing is needed, the Company may seek to raise additional funds through
public or private financing, collaborative relationships or other arrangements.
Any additional equity financing may be dilutive to shareholders, and debt
financing, if available, may involve restrictive covenants. Collaborative
arrangements, if necessary to raise additional funds, may require the Company to
relinquish its rights to certain of its technologies, products or marketing
territories. The failure of the Company to raise capital when needed could have
a material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that such financing, if
required, will be available on satisfactory terms, if at all.
10
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CHOLESTECH CORPORATION
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders during the
quarter ended June 28, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27.1 Financial Data Schedule.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ended June 28, 1996.
11
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CHOLESTECH CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHOLESTECH CORPORATION
Date August 12, 1996 /s/ Warren E. Pinckert II
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Warren E. Pinckert II
President and Chief Executive Officer
(Principal Executive Officer and
Principal Financial and Accounting
Officer)
12
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<PERIOD-END> JUN-28-1996
<CASH> 409
<SECURITIES> 3,750
<RECEIVABLES> 14,864
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<INVENTORY> 2,132
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<PP&E> 5,986
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