<PAGE> 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Period Ended June 30, 1996.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition Period From to
Commission file number 333-04461
VENTANA MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2976937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3865 NORTH BUSINESS CENTER DRIVE
TUCSON, ARIZONA 85705
(Address of principal executive offices) (Zip Code)
(520) 887-2155
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
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 Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods 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
--- ---
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes No
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $0.001 par value --- 10,701,428 shares as of July 26, 1996
<PAGE> 2
VENTANA MEDICAL SYSTEMS, INC.
INDEX TO FORM 10-Q
Part I. Financial Information:
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995
Consolidated Statements of Income
Three months ended June 30, 1995 and 1996
Six months ended June 30, 1995 and 1996
Consolidated Statement of Cash Flows
Six months ended June 30, 1995 and 1996
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
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PART I. FINANCIAL INFORMATION
VENTANA MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
Pro Forma
December 31, June 30, June 30,
1995 1996 1996
------------ ----------- -----------
(Note) (Unaudited) (Unaudited)
(Note 4)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,103 $ 3,197 $ 18,007
Accounts receivable 1,925 3,347 3,347
Inventories (Note 2 ) 1,767 2,787 2,787
Other 24 939 939
-------- -------- --------
Total current assets 4,819 10,270 25,080
Property and equipment, net 2,258 3,009 3,009
Intangibles, net 301 10,416 10,416
-------- -------- --------
Total assets $ 7,378 $ 23,696 $ 38,506
======== ======== ========
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED
STOCK, AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,061 $ 1,884 $ 1,884
Other current liabilities 993 6,785 6,785
-------- -------- --------
Total current liabilities 2,054 8,669 8,669
Long-term debt -- 16,064 14,064
Convertible redeemable preferred stock at aggregate mandatory
redemption value (Note 4) 35,180 36,941 --
Stockholders' equity (deficit)
Preferred stock --- $.001 par value; 5,000,000 shares authorized;
no shares issued or outstanding -- -- --
Common stock --- $.001 par value; 50,000,000 shares
authorized, 1,020,164; 2,093,524 and 10,701,428 shares issued
and outstanding at December 31, 1995, June 30, 1996 and pro
forma June 30, 1996 --- amount paid in (Note 4) 244 4,395 49,071
Accumulated deficit (29,980) (42,241) (33,167)
Cumulative foreign currency translation adjustment (120) (131) (131)
-------- -------- --------
Total stockholders' equity (deficit) (29,856) (37,978) 15,773
-------- -------- --------
Total liabilities, convertible redeemable preferred stock, and
stockholders' equity (deficit) $ 7,378 $ 23,696 $ 38,506
======== ======== ========
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
3
<PAGE> 4
VENTANA MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- ----------------------------
1995 1996 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales $ 2,401 $ 5,541 $ 4,603 $ 9,687
Cost of goods sold 1,004 2,129 1,940 3,561
1,397 3,412 2,663 6,126
---------- ---------- ---------- ----------
Operating expenses:
Research and development 548 754 1,104 1,367
Selling, general and administrative 1,756 2,994 3,350 5,367
Nonrecurring expenses -- 212 -- 10,194
Amortization of intangibles -- 134 -- 181
---------- ---------- ---------- ----------
Loss from operations (907) (682) (1,791) (10,983)
Interest income (expense) 38 (61) 87 (66)
---------- ---------- ---------- ----------
Net loss $ (869) $ (743) $ (1,704) $ (11,049)
========== ========== ========== ==========
Net loss per share, as adjusted (Notes 4 and 5)
Shares used in computing net loss per share $ (0.10) $ (0.08) $ (0.20) $ (1.23)
========== ========== ========== ==========
8,650,568 9,137,369 8,589,666 8,996,063
========== ========== ========== ==========
</TABLE>
See accompanying notes.
4
<PAGE> 5
VENTANA MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
----------------------------------------
Pro Forma
1995 1996 1996
------- -------- ---------
(Note 4)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,704) $(11,049) $(11,049)
Adjustments to reconcile net loss to net cash used in
operating activities:
Purchased in-process research and development
(Note 3) -- 7,900 7,900
Depreciation and amortization 444 747 747
Changes in operating assets and liabilities, net (267) (62) (62)
------- -------- --------
Net cash used in operating activities (1,527) (2,464) (2,464)
INVESTING ACTIVITIES:
Purchase of property and equipment, net (485) (1,484) (1,484)
Acquisition of BioTek Solutions, Inc. (Note 3) -- (2,500) (2,500)
------- -------- --------
Net cash (used in) provided by investing activities (485) (3,984) (3,984)
FINANCING ACTIVITIES:
Repayments of notes payable -- -- (2,000)
Issuance of debt (including amounts from related
parties) and stock (Note 4) 2,485 8,553 25,363
------- -------- --------
Net cash provided by financing activities 2,485 8,553 23,363
Effect of exchange rate change on cash -- (11) (11)
------- -------- --------
Net increase in cash and cash equivalents 473 2,094 16,904
Cash and cash equivalents, beginning of period 2,511 1,103 1,103
------- -------- --------
Cash and cash equivalents, end of period 2,984 3,197 18,007
======= ======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
VENTANA MEDICAL SYSTEMS, INC.
Notes to Consolidated Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES:
The accompanying financial statements are unaudited. They have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission and are subject to year-end audit by independent public accountants.
Certain information and footnote disclosure normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. It is suggested that the consolidated financial statements be read
in conjunction with the consolidated financial statements and notes included in
the Company's Registration Statement on Form S-1 and the related prospectus
dated July 26, 1996. The information furnished reflects all adjustments which,
in the opinion of management, are necessary for a fair presentation of results
for the interim periods. Such adjustments consisted only of normal recurring
items. It should also be noted that results for the interim periods are not
necessarily indicative of the results expected for the full year or any future
period.
The presentation of these consolidated 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
disclosures 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.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30 December 31
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Raw material and work-in-process $1,779 $1,265
Finished goods 1,008 502
------ ------
$2,787 $1,767
====== ======
</TABLE>
6
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3. ACQUISITION OF BIOTEK SOLUTIONS, INC.
The Company acquired BioTek Solutions, Inc. ("BioTek") for $18.8 million on
February 26, 1996. The acquisition has been accounted for as a purchase. The
composition of the consideration paid for BioTek and the allocation of the
purchase price is presented below:
<TABLE>
<S> <C>
The purchase price for BioTek consisted of:
Cash consideration $ 2,500
Stock issued to BioTek noteholders 3,007
Exchange Notes issued 8,978
Note payable - escrow for contingencies 234
Net historical liabilities acquired 4,044
-------
Total purchase price $18,763
The purchase price was allocated as follows:
Tangible net assets $ 2,288
In-process research and development 7,900
Goodwill and other intangibles 1,675
Developed technology 2,800
Customer base 4,100
-------
$18,763
=======
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 2 ("FAS 2"),
the Company charged to expense, at the date of the acquisition, $7.9 million
relating to the portion of the purchase price allocated to those in-process
research and development projects where technological feasibility had not yet
been established and where there are no alternative future uses.
The pro forma unaudited results of operations for the six months ended June 30,
1996 and 1995, assuming consummation of the purchase as of January 1, 1995 and
are adjusted to reflect the sale of 1,890,907 shares of Common Stock by the
Company and the application of the net proceeds therefrom, are as follows:
<TABLE>
<CAPTION>
Six months ended June 30
1996 1995
---- ----
(in thousands, except
per share data)
<S> <C> <C>
Net sales $10,769 $ 9,050
Net loss (1,153) (13,527)
Net loss per share $ (0.11) $ (1.29)
</TABLE>
4. INITIAL PUBLIC OFFERING:
On July 26, 1996, the Company sold, through an underwritten initial public
offering, 1,890,907 shares of its Common Stock at $10.00 per share. Upon closing
of the Company's initial public offering, all outstanding shares of its Series
A, C and D Redeemable Convertible Preferred stock were converted into 6,716,997
shares of Common Stock, after giving affect to the Company's 1 for 2.7059046
reverse stock split effected in July 1996. The unaudited Pro Forma Consolidated
Balance Sheet at June 30, 1996 and unaudited Pro Forma Consolidated Statement of
Cash
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<PAGE> 8
Flow for the six months ended June 30, 1996 reflect the impact of the initial
public offering, the conversion of the Redeemable Convertible Preferred stock
and the repayment of $2.0 million in bank term notes as if they had occurred as
of June 30, 1996. All share and per share amounts have been retroactively
adjusted to reflect the reverse stock split.
5. NET LOSS PER SHARE:
Net loss per share for is computed using the weighted average number of shares
of common stock outstanding, except as noted below. Common equivalent shares
from stock options and warrants are excluded from the computation as their
effect is antidilutive, except that pursuant to the Securities and Exchange
Commission Staff Accounting Bulletins and Staff policy, common and preferred
shares, options, and warrants issued during the period commencing 12 months
prior to the initial filing of the initial public offering at prices below the
public offering price are presumed to have been exercised in contemplation of
the public offering and have been included in the calculation as if they were
outstanding for all periods presented, determined using the treasury stock
method and the price from the initial public offering.
Net loss per share was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1995 1996 1995 1996
------------------- --------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net loss $ (869) $ (743) $(1,704) $(11,049)
Less accretion of preferred
stock redemption requirement (579) (604) (1,183) (1,219)
------- ------- ------- --------
Net loss applicable to common
stock $(1,448) $(1,347) $(2,887) $(12,268)
======= ======= ======= ========
Net loss per share $ (0.72) $ (0.54) $ (1.44) $ (5.24)
======= ======= ======= ========
Weighted average shares
outstanding 2,022 2,476 2,009 2,343
======= ======= ======= ========
</TABLE>
The as adjusted calculation of net loss per share presented in the consolidated
statements of operations has been computed as described above, but also gives
effect to the conversion of all outstanding shares of convertible redeemable
preferred stock into common stock upon closing of the Company's initial public
offering (determined using the if-converted method) and the assumed exercise of
warrants to purchase Series D preferred stock which would otherwise expire upon
completion of the offering.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
OVERVIEW
Ventana develops, manufactures and markets instrument/reagent systems that
automate immunohistochemistry ("IHC") and in situ hybridization ("ISH") tests
for the analysis of cells and tissues on microscope slides. The Company has two
categories of instrument systems: (i) the "patient priority" systems (the
Ventana ES and gen II) which perform multiple tests rapidly on a single patient
biopsy providing a matrix of diagnostic data to the pathologist; and (ii) the
"batch processing" systems (the TechMate 1000 and TechMate 500) which process
high volumes of tests on multiple patient biopsies. Each Ventana proprietary
system placed typically provides a recurring revenue stream as customers consume
reagents and supplies sold by the Company for each test conducted. Reagents
consist of two principal components: a primary antibody and a detection
chemistry. The use of these reagents allows the pathologist to characterize and
identify the type of cancer and to visualize it on a glass slide under a
microscope. Therefore, the principal economic drivers for the Company are the
number, type and method of placement of instruments, and the amount of reagents
and consumables used by the customer. The Company's strategy is to maximize the
number of instruments placed with customers and thereby increase its ongoing,
higher margin reagent revenues. The Company expects that reagents will comprise
a greater proportion of total revenues in the future as its installed base of
instruments increases, as new placements represent a smaller percentage of the
Company's existing installed base of instruments and as reagent program ("RP")
placements increase as a percentage of total instrument placements. There can be
no assurance that the Company's market expansion strategy will produce the level
of revenues and profitability expected or that these revenues and profits will
be sustainable.
During the first quarter of 1996 the Company acquired BioTek Solutions, Inc.
("BioTek"), its principal competitor, for aggregate consideration of $18.8
million, consisting of cash, promissory notes, common stock, and the assumption
of liabilities. The transaction was accounted for as a purchase. The purchase
price was allocated between tangible net assets and intangible assets consisting
of developed technology, customer list, goodwill and in-process research and
development. In accordance with FAS 2, in-process research and development of
$7.9 million was written-off as of the acquisition date.
As a result of the merger, the Company assumed certain contractual obligations
and contingent liabilities including contractual arrangements with DAKO A/S
("DAKO"), Curtin Matheson Scientific, Inc. ("CMS"), Kollsman Manufacturing
Company, Inc. ("Kollsman") and LJL BioSystems, Inc. ("LJL"). Consequently, the
Company is obliged to perform according to the provisions of these contracts as
they relate to the sales, marketing, distribution and manufacturing of many of
the products acquired in the BioTek merger. Although these contracts have been,
or are, in the process of renegotiation, they expose the Company to certain
legal, operating and marketing risks which are neither predictable or
quantifiable. Consequently, these potential risks could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company places instruments through direct sales, including nonrecourse
leases, instrument rentals and the Company's reagent programs ("RPs"). Revenue
on direct sale and nonrecourse leases of instruments is recognized upon shipment
to customers. Rental revenues are recognized
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<PAGE> 10
over their respective contractual lives. Revenue related to reagent and other
consumables is recognized upon shipment to customers. Under an RP, the Company
provides the customer with the use of an instrument without their attendant
capital investment that creates an opportunity for the Company to generate
reagent revenue. The terms and conditions of RP instrument placements can vary
from formal agreements specifying minimum volumes and unit pricing for reagent
purchases to short term, informal arrangements where customers purchase reagents
on a month to month basis. RP placements require the Company to incur the costs
of manufacturing or procuring instruments and recognize revenues only as
customers purchase reagents rather than at the time of instrument placement. The
manufacturing costs of instruments placed through RPs is charged to cost of
goods sold by depreciating the standard cost of the instrument over a three to
four year period. As a result, gross profit for instruments placed through RPs
is recognized over a three to four year period rather than at the time of
placement. Revenues associated with instruments placed through RPs is based on a
volume pricing matrix which is designed to enable the Company to recover the
sales value of the instrument through an increased price on reagents purchased
by the customer. The Company typically recovers the cash cost associated with
the placement of instruments through RPs in less than two years, although the
Company's ability to recover such costs may be affected by the volume and
pricing of reagents purchased by the customers. Due to working capital
requirements associated with RPs, the Company has historically sought to limit
the amount of instruments placed through RPs to approximately 30% of instrument
placements. However, the Company anticipates that the percentage of instruments
placed through RPs, in particular RPs without formal reagent purchase
commitments, will increase with the introduction of new lower cost instruments
during 1997 and as the Company obtains the additional working capital required
to support greater RP placements. In the future, this is likely to result in a
decrease in instrument sales both in absolute dollars and as a percentage of
total revenues. Instruments provided to customers under RPs without formal
reagent purchase commitments are only considered placements if and when certain
reagent purchase criteria are met by the customer. The Company typically only
provides an instrument under an RP, without a formal reagent purchase
commitment, if the Company believes that the customer performs a minimum number
of IHC tests annually.
The Company's future results of operations may fluctuate significantly from
period to period due to a variety of factors. The initial placement of an
instrument is subject to a longer, less consistent sales cycle than the sales of
reagents, which begin typically when the instrument is placed. The Company's
operating results in the near future are likely to fluctuate substantially from
period to period because instrument sales are likely to remain an important part
of revenues. The degree of fluctuation will depend on the timing, level and mix
of instruments placed through direct sales and instruments placed through RPs.
In addition, average daily reagent use by customer may fluctuate from period to
period, which may contribute to future fluctuations in revenues. Sales of
instruments may also fluctuate from period to period because sales to the
Company's international distributors typically provide such distributors with
several months of instrument inventory, which the distributors will subsequently
seek to place with end customers. The Company's instrument installed base
includes instruments shipped to DAKO, the Company's European distributor for
batch processing instruments and related consumables. These shipments to DAKO
are recognized as sales when shipped, and the Company believes that over 85% of
shipments to DAKO have been placed with end customers.
Shipments to CMS, the Company's domestic distributor for batch processing
instruments and reagents, are included in inventory until such instruments and
related reagents and consumables are shipped to end customers. The Company
recognizes revenue and related costs when products
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are shipped by CMS to end users. The agreement provides CMS exclusive
distribution rights within the United States and expires in April 1998. The
Company has had discussions regarding possible modifications to or early
termination of the relationship with CMS. To the extent that CMS does not
adequately promote and market batch processing instruments and reagents or
manage customer relationships or in the event that difficulties arise in the
relationship between the Company and CMS, the Company's sales of batch
processing instruments and reagents in the United States could be adversely
affected and the Company could also experience disruptions in the supply of
batch processing instruments and reagents to customers in the United States.
Results of operations for the remainder of 1996 are also expected to be affected
by costs associated with centralizing reagent manufacturing, expanding reagent
product offerings for batch processing instruments and the elimination of
operational redundancies. Other factors that may result in fluctuations in
operating results include the timing of new product announcements and the
introduction of new products and technologies by the Company and its
competitors, market acceptance of the Company's current or new products,
developments with the respect to regulatory matters, availability and cost of
raw materials purchased from suppliers, competitive pricing pressures, increased
sales and marketing expenses associated with the implementation of the Company's
market expansion strategies for its instruments and reagent products and
increased research and development expenditures.
Future instrument and reagent sales could also be adversely affected by the
configuration of the Company's patient priority instruments, which require the
use of the Company's detection chemistries, particularly if and to the extent
that competitors are successful in developing and introducing new IHC
instruments or if competitors offer reagent supply arrangements having pricing
or other terms more favorable than those offered by the Company. In connection
with future introductions of new products, the Company may be required to incur
charges for inventory obsolescence in connection with unsold inventory of older
generation products. To date, however, the Company has not incurred material
charges or expenses associated with inventory obsolescence in connection with
new product introductions. In addition, a significant portion of the Company's
expense levels is based on its expectation of higher levels of revenues in the
future and is relatively fixed in nature. Therefore, if revenue levels are below
expectations, operating results, in a given period, are likely to be adversely
affected.
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<PAGE> 12
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Ventana acquired BioTek as of February 26, 1996. The acquisition was accounted
for as a purchase. Consequently, operating performance for the combined Company
reflects BioTek's results since the date of acquisition only.
Net Sales
Presented below is a summary of revenue for the three and six months ended June
30, 1996 and 1995:
Revenue Summary
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
--------------------- -----------------------
$ % $ % $ % $ %
----------------------------- -------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Instruments $1,706 31% $1,029 43% $3,299 34% $2,036 44%
Reagents and other 3,835 69% 1,372 57% 6,388 66% 2,567 56%
------ ------ ------ ------
Total revenue $5,541 $2,401 $9,687 $4,603
====== ====== ====== ======
</TABLE>
Net sales for the three and six months ended June 30, 1996 versus the same
periods ending during 1995 increased 131% and 110% to $5.5 million and $9.7
million compared to $2.4 million and $4.6 million respectively. The increase in
net sales was attributable to a 66% increase for the quarter and 62% increase
for the six months in instrument sales and a 180% increase for the quarter and a
149% increase for the six months in reagent sales. Instruments sales increased
due to increased instrument placements, higher selling prices, the introduction
of the gen II ISH patient priority instrument and instrument sales resulting
from the BioTek acquisition of $0.5 and $0.6 million for the quarter and six
months ended June 30, 1996, respectively. Reagent sales increased due to sales
of reagents to new customers, increased sales to existing customers and reagent
sales to customers acquired with the merger with BioTek of $1.4 and $1.9 million
for the quarter and six months ended June 30, 1996, respectively.
Gross Margin
Gross profit for the three and six months ended June 30, 1996 increased to $3.4
million and $6.1 million respectively from $1.4 million and $2.7 million for the
same period in 1995. Gross margin for the three and six months ended June 30,
1996 increased to 62% and 63% versus 58% for both of the periods during 1995.
Overall gross margin increased primarily due to a shift in revenue mix toward
higher margin reagent products. Gross margins on instrument sales increased due
to increased sales of gen II instruments, improvements in manufacturing
efficiencies, increased absorption of manufacturing overhead and the inclusion
of BioTek's instrument sales. Gross margins on reagent sales increased due to
economies of scale associated with increased volumes, improvements in
manufacturing efficiencies and the inclusion of BioTek reagent and consumable
revenues.
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<PAGE> 13
Research and Development
Research and development expenses were approximately $0.8 million and $1.4
million for the three and six months ended June 30, 1996 respectively. This
represents an increase of $0.2 million and $0.3 million compared to the same
periods during 1995. Research and development expenses declined as a percent of
sales to 14% for the three and six months ended June 30, 1996 compared to 23%
and 24% for the same periods during 1995. Research and development expenses for
the three and six months ended June 30, 1996 related primarily to the
development of new reagents and instruments, including the NexES patient
priority instrument and new prognostic markers. Research and development expense
for the three and six months ended June 30, 1995 related primarily to the gen II
patient priority instrument and IHC reagent development.
Selling, General and Administrative ("SG&A")
Presented below is a summary of SG&A expense for the three and six months ended
June 30, 1996 and 1995.
SG&A SUMMARY
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
--------------------- -----------------------
% % % %
$ Sales $ Sales $ Sales $ Sales
------------------------------ --------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
( dollars in thousands)
Sales and marketing $2,410 43% $1,345 56% $4,206 43% $2,557 56%
Administration 584 11% 411 17% 1,161 12% 793 17%
----------- ----------- ----------- -----------
Total SG&A $2,994 54% $1,756 73% $5,367 55% $3,350 73%
=========== =========== =========== ===========
</TABLE>
SG&A expense for the three and six months ended June 30, 1996 increased to $3.0
million and $5.4 million from $1.8 million and $3.4 million for the three and
six months ended June 30, 1995 respectively. SG&A, as a percent of net sales,
declined to 54% and 55% for the three and six months ended June 30, 1996
compared to 73% for both the periods during 1995. The fluctuation in SG&A
expense from period to period reflects the growth of Ventana's sales and
marketing organization to facilitate its market expansion strategy and a
corresponding increase in infrastructure expenses to support a larger business
base. The growth in sales and marketing expense is the result of the Company's
decision to service the market through its own sales and marketing staff,
expenses necessary to support the growth of the Company and expenses associated
with the ongoing support activities resulting from the BioTek acquisition.
Increases in administrative expenses are associated with the Company's
regulatory strategy and costs associated with supporting an expanding business
base.
Amortization of Intangibles
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<PAGE> 14
As a result of the acquisition of BioTek, the Company has recorded certain
intangible assets. These intangible assets include developed technology,
customer base, goodwill and other intangible assets which are amortized to
expense over a period of fifteen to twenty years based upon the Company's
estimate of the economic utility of these assets. As a result, the Company will
charge to expense each quarter approximately $0.1 million for the amortization
of these intangible assets. Additionally, the Company will review the utility of
these assets each quarter to evaluate their continued value. Should the Company
determine that any of these assets are impaired, it expects that it would write
them down to their then estimated fair market value.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in accumulated losses of $33.2 million as of June 30, 1996.
The Company has funded its operations primarily through the private placement of
approximately $31.0 million in equity and debt securities. As of June 30, 1996
the Company's principal source of liquidity consisted of cash and cash
equivalents of $3.2 million and borrowing capacity under its bank term credit
facility and revolving line of credit. The bank term loan was fully utilized
with approximately $2.0 million outstanding as of June 30, 1996. As of June 30,
1996 approximately $0.9 million of the Company's $1.7 million revolving line of
credit had been utilized for letters of credit to facilitate certain contract
manufacturing arrangements for the production of TechMate instruments leaving an
available revolving credit facility of $0.8 million. The net proceeds from the
Company's initial public offering were approximately $16.8 million. The bank
term credit facility was paid off in full from proceeds of the IPO. In addition,
proceeds from the offering may be used to liquidate approximately $14.1 million
acquisition debt which bears interest at 7% per annum. The Company expects to
use approximately $0.5 million of the net proceeds during the next twelve months
for capital expenditures for manufacturing capacity expansion and enhancements
to its business application computer hardware and software resources. The
Company anticipates the remaining net proceeds will be used for working capital
and general corporate purposes. Although the Company may use a portion of the
these proceeds for the acquisition of complementary businesses, products or
technologies, the Company currently has no such agreements or commitments for
such transactions.
During the six months ended June 30, 1996 the Company used for operations and
investing activities approximately $6.4 million in cash versus $2.0 million for
the six months ended June 30, 1995. The increase in cash usage of approximately
$4.4 million during 1996 compared to 1995 is the result of the following
activities:
<TABLE>
<S> <C>
Capital expenditures (including RP's) $ (999)
BioTek acquisition (2,500)
BioTek integration and merger costs (2,294)
Improvement in operating results 1,152
Decrease in working capital utilization 205
-------
Total $(4,436)
=======
</TABLE>
The Company believes that the net proceeds from the offering along with its
existing capital resources and interest earned thereon, will be sufficient to
satisfy its working capital requirements through 1997. The Company's future
capital requirements will depend on many factors, includ-
14
<PAGE> 15
ing the extent to which the Company's products gain market acceptance, the mix
of instruments placed through direct sales or RPs, progress of the Company's
product development programs, competing technological and market developments,
expansion of the Company's sales and marketing activities, the cost of
manufacturing scale up activities, possible acquisitions of complementary
businesses, products or technologies, the extent and duration of operating
losses and the timing of regulatory approvals. The Company may be required to
raise additional capital in the future through the issuance of either debt
instruments or equity securities, or both. There is no assurance that such
capital will be available to the extent required or on terms acceptable to the
Company, or at all.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
The Company does not provide financial performance forecasts. The forward
looking statements in this Form 10-Q are made under the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The Company's operating
results and financial condition have varied in the past and may vary
significantly in the future depending on a number of factors. Except for the
historical information contained herein, the matters contained in this report
include forward looking statements that involve risk and uncertainties. The
following factors, among others, could cause actual results to differ materially
from those contemplated by such forward-looking statements made in this report
and presented elsewhere by management from time to time. Such factors, among
others, may have a material adverse effect on the Company's business, results of
operations and financial condition.
The following discussion of the Company's risk factors should be read in
conjunction with the Company's financial statements and related notes thereto.
Because of these and other factors, past financial performance should not be
considered an indication of future performance.
HISTORY OF LOSSES. The Company has incurred substantial losses since inception.
The Company expects such losses to continue for the foreseeable future due to
its planned product development efforts, expansion of its sales and marketing
activities both domestically and internationally, market acceptance of existing
and future instrument and reagent systems, competitive conditions, FDA
regulations and related product approvals, product development efforts and the
integration of BioTek's operations.
FUTURE FLUCTUATIONS IN OPERATING RESULTS. The Company derives revenues from the
sale of instruments and reagents through its direct sales force and certain
domestic and international distributors. There can be no assurances that these
outside distributors will continue to meet their contractual commitments, or
their historical sales rates or that these distributors contracts will remain in
effect.
The initial placement of an instrument is subject to a longer, less consistent
sales cycle than the sale of reagents, which begin and are typically recurring
once the instrument is placed. Consequently, the Company's future operating
results are likely to fluctuate substantially from period to period because
instrument sales are likely to remain an important part of revenues in the near
future. The degree of fluctuation will depend on the timing, level and mix of
instruments placed through direct sale versus RPs. The Company anticipates that
the percentage of instruments placed through RPs, particularly RPs without
formal reagent agreements, will increase in the
15
<PAGE> 16
future which is likely to result in a decrease in instrument sales. In addition,
average daily reagent use by customers may fluctuate from period to period,
which may contribute to future fluctuations in revenues. In particular,
customers who have received instruments under RP arrangements that do not
provide for specified reagent purchase commitments are not contractually
obligated to purchase reagents from the Company and there can be no assurance
regarding the timing or volume of reagent purchases by such customers.
Furthermore, customers that have entered into contractual RP agreements may also
attempt to cancel all or a portion of their reagent purchase commitments.
Accordingly, there can be no assurance regarding the level of revenues that will
be generated by customers procuring instruments through RP arrangements,
particularly from those customers who obtain instruments without reagent
purchase commitments. In the event that RP customers do not purchase anticipated
quantities of reagents the Company will have incurred substantial costs in
supplying instruments to RP customers without the receipt of an adequate reagent
revenue stream; therefore, the Company's business, financial condition and
results of operations would be materially and adversely affected.
RATE OF MARKET ACCEPTANCE AND TECHNOLOGICAL CHANGE. Use of automated systems to
perform diagnostic tests is relatively new. Historically, the diagnostic tests
performed by the Company's systems have been performed manually by laboratory
personnel. The rate of market acceptance of the Company's products will be
largely dependent on the Company's ability to persuade the medical community of
the benefits of automated diagnostic testing using the Company's products.
Market acceptance and sales of the Company's products may also be affected by
the price and quality of its products. The Company's products could also be
rendered obsolete or noncompetitive by virtue of technological innovations in
the fields of cellular or molecular diagnostics.
RISKS ASSOCIATED WITH DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS. The
Company's future growth and profitability will be dependent, in large part, on
its ability to develop, introduce and market new instruments and reagents used
in diagnosing and selecting treatment for cancer and other disease states. In
particular, the Company must timely and successfully introduce its new smaller
instruments to the market place. These instruments are smaller capacity, lower
priced instruments than the Company's current instruments and are necessary to
expand the market opportunity at smaller hospitals and reference laboratories in
the United States and Europe. The Company depends, in part, on the success of
medical research in developing new antibodies, nucleic acid probes and clinical
diagnostic procedures that can be adapted for use in the Company's systems. In
addition, the Company will need to obtain licenses, on satisfactory terms, for
certain technologies, which cannot be assured. Certain of the Company's products
are currently under development, initial testing or preclinical or clinical
evaluation by the Company. Other products are scheduled for future development.
Products under development or scheduled for future development may prove to be
unreliable from a diagnostic standpoint, may be difficult to manufacture in an
efficient manner, may fail to receive necessary regulatory clearances may not
achieve market acceptance or may encounter other unanticipated difficulties.
COMPETITION. Competition in the diagnostic industry is intense and is expected
to increase. Competition in the diagnostic industry is based on, among other
things, product quality, price and the breadth of a company's product offerings.
The Company's systems compete both with products manufactured by competitors and
with traditional manual diagnostic procedures. The Company's competitors may
succeed in developing products that are more reliable or effectively
16
<PAGE> 17
less costly than those developed by the Company and may be more successful than
the Company in manufacturing and marketing their products.
MANUFACTURING RISKS. The Company has only manufactured patient priority
instruments and reagents for commercial sale since late 1991. Manufacturing of
the Company's batch processing instruments is performed by third parties. As the
Company continues to increase production of such instruments and reagents and
develops and introduces new products, it may, from time to time, experience
difficulties in manufacturing. The Company completed the consolidation of the
former BioTek reagent manufacturing into its Tucson facility during July 1996.
The Company must continue to increase production volumes of instruments and
reagents, in a cost effective manner, in order to be profitable. To increase
production levels, the Company will need to scale-up its manufacturing
facilities, increase its automated manufacturing capabilities and continue to
comply with current good manufacturing procedures ("GMP") regulations prescribed
by the United States Food and Drug Administration ("FDA") and other standards
prescribed by various federal, state and local regulatory agencies in the United
States and other countries, including the International Standards Organization
("ISO") 9000 Series certifications.
DEPENDENCE ON KEY SUPPLIERS. The Company's instruments and reagent products are
formulated from chemicals, biological materials and parts utilizing proprietary
Ventana technology as well as standard processing techniques. Certain
components, raw materials and primary antibodies, used in the manufacturing of
the Company's reagent products, are currently provided by single source vendors.
There can be no assurance that the materials or parts or needed by the Company
will be available in commercial quantities, at acceptable prices, or at all. Any
supply interruption or related yield problems encountered in the use of
materials from these vendors could have a material adverse effect on the
Company's ability to manufacture its products until, or if, a new source of
supply is obtained.
DEPENDENCE UPON THIRD PARTY MANUFACTURERS FOR BATCH PROCESSING INSTRUMENTS. The
Company relies on two outside parties, Kollsman and LJL, to manufacture its
batch processing instruments. There can be no assurance that these manufacturers
will be able to meet the Company's product needs in a satisfactory, cost
effective or timely manner. The Company's reliance on third-party manufacturers
involves a number of risks, including the absence of guaranteed capacity,
reduced control over delivery schedules, quality assurance issues and costs. The
amount and timing of resources to be devoted to these activities by such
manufacturers are not within the control of the Company, and there can be no
assurance that manufacturing problems will not occur in the future.
RISKS ASSOCIATED WITH PAST ACQUISITIONS. In February 1996 the Company acquired
BioTek. Although the Company has no pending agreements or commitments, the
Company may make additional acquisitions of complementary technologies or
products in the future. Acquisitions of companies, divisions of companies, or
products entail risks, including: (i) the potential inability to successfully
integrate acquired operations and products or to realize anticipated synergies,
economies of scale or other value, (ii) diversion of management's attention, and
(iii) loss of key employees of acquired operations. No assurance can be given
that the Company will not incur problems in integrating BioTek's operations or
any future acquisition and there can be no assurance that the acquisition of
BioTek, or any future acquisition, will result in the Company becoming
profitable or, if the Company achieves profitability, that such acquisition will
increase the Company's profitability. Furthermore, there can be no assurance
that the Company will realize value from any such acquisition which equals or
exceeds the consideration paid.
17
<PAGE> 18
RISKS RELATING TO PATENTS AND PROPRIETARY RIGHTS. The Company's success depends,
in part, on its ability to obtain patents, maintain trade secret protection and
operate without infringing on the proprietary rights of others. There can be no
assurance that the Company's patent applications will result in patents being
issued or that any issued patents will provide protection against competitive
technologies or will be held valid if challenged. Others may independently
develop products similar to those of the Company or design around or otherwise
circumvent patents issued to the Company. In the event that any relevant claims
of third-party patents are upheld as valid and enforceable, the Company could be
prevented from practicing the subject matter claimed in such patents, or would
be required to obtain licenses from the patent owners of each of such patents or
to redesign its products or processes to avoid infringement. There can be no
assurance that such licenses would be available or, if available, would be on
terms acceptable to the Company or that the Company would be successful in any
attempt to redesign its products or processes to avoid infringement. If the
Company does not obtain necessary licenses, it could be subject to litigation
and encounter delays in product introductions while it attempts to design around
such patents. Alternatively, the development, manufacture or sale of such
products could be prevented. Litigation which could result would result in
significant cost to the Company as well as diversion of management time.
In March 1995, BioGenex sued BioTek in federal court for infringement of certain
patent rights held by BioGenex relating to an antigen retrieval method used in
IHC tests. BioGenex's claims include claims of both direct, indirect and
contributory infringement. BioTek has denied infringement and has asserted
several defenses, including invalidity of the patent that is the subject of the
litigation. In April 1995, BioTek ceased offering the products that were the
subject of the alleged infringements. BioTek's total sales of these products
during the period were approximately $0.6 million. A trial is currently
scheduled for October 1, 1996. The parties have, from time to time, engaged in
settlement negotiations. There can, however, be no assurance that a pre-trial
settlement will be reached. Although there can be no assurance as to the
ultimate resolution of this matter, based on currently available information,
the Company does not believe that the resolution of this matter will have a
material adverse effect on the Company's business, financial condition or
results of operations.
UNCERTAINTY OF FUTURE FUNDING OF CAPITAL REQUIREMENTS. The Company anticipates
that its existing capital resources, including the net proceeds of this Offering
and interest earned thereon, will be adequate to satisfy its capital
requirements through 1997. The Company's future capital requirements will depend
on many factors, including the extent to which the Company's products gain
market acceptance, the mix of instruments placed through direct sales or through
RP's, progress of the Company's product development programs, competing
technological and market developments, expansion of the Company's sales and
marketing activities, the cost of manufacturing scale up activities, possible
acquisitions of complementary businesses, products or technologies, the extent
and duration of operating losses and timing of regulatory approvals. The Company
may require additional capital resources and there is no assurance such capital
will be available to the extent required, on terms acceptable to the Company, or
at all. Any such future capital requirements could result in the issuance of
equity securities which would be dilutive to existing stockholders.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon the retention of
principal members of its management, scientific, technical, marketing and sales
staff and the recruitment of additional personnel. The Company does not maintain
"key person" life insurance on any of
18
<PAGE> 19
its personnel. The Company competes with other companies, academic institutions,
government entities and other organizations for qualified personnel in the areas
of the Companies activities. The inability to hire or retain qualified personnel
could have material adverse effect on the Company's business, financial
condition and results of operations.
UNCERTAINTY RELATED TO GOVERNMENT FUNDING. A portion of the Company's products
are sold to universities, research laboratories, private foundations and other
institutions where funding is dependent upon grants from government agencies,
such as the National Institutes of Health. However, research funding by the
government may be significantly reduced under several budget proposals being
discussed by the United States Congress, or for other reasons. Any such
reduction may materially affect the ability of the Company's research customers
to purchase the Company's products.
FDA AND OTHER GOVERNMENT REGULATIONS. The manufacturing, marketing and sale of
the Company's products are subject to extensive and rigorous government
regulations in the United States and other countries. In the United States, and
certain other countries, the process of obtaining and maintaining required
regulatory approvals is lengthy, expensive and uncertain. In the United States,
the FDA regulates, as medical devices, clinical diagnostic tests and reagents,
as well as instruments used in the diagnosis of adverse conditions. The Federal
Food, Drug and Cosmetic Act governs the design, testing, manufacture, safety,
efficacy, labeling, storage, record keeping, approval, advertising and promotion
of the Company's products. There are two principal FDA regulatory review paths
for medical devices: pre-market notification ("510(k)") process and the
pre-market approval ("PMA") process. The PMA process typically requires the
submission of more extensive clinical data and is costlier and more
time-consuming to complete than the 510(k) process. Regulator's of medical
devices in foreign countries where the Company operates have regulations similar
to the United States in most cases. Additionally, the Company is required to
comply with the FDA's GMP regulations. These regulations mandate certain
operating, control and documentation procedures when manufacturing medical
products, instruments and devices.
The Company is also required to comply with the FDA's Clinical Laboratory CLIA
regulations. These rules restrict the sale of reagents to clinical laboratories
certified under CLIA. The full implementation of CLIA rules could limit the
clinical customers to which the Company could sell reagents in the future.
In addition to these regulations, the Company is subject to numerous federal,
state and local laws and regulations relating to such matters as safe working
conditions and environmental matters. There can be no assurance that such laws
and regulations will not in the future have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS RELATING TO AVAILABILITY OF THIRD-PARTY REIMBURSEMENT AND POTENTIAL
ADVERSE EFFECTS OF HEALTH CARE Reform. The Company's ability to achieve revenue
growth and profitability may depend on the ability of the Company's customers to
obtain adequate levels of third-party reimbursement for the use of certain
diagnostic tests in the United States, Europe and other countries. Currently,
availability of third-party reimbursement is limited and uncertain for some IHC
tests.
PRODUCT LIABILITY AND RECALL; PRODUCT LIABILITY INSURANCE. The marketing and
sales of the Company's diagnostic instruments and reagents entails risk of
product liability claims. The
19
<PAGE> 20
Company has product liability insurance coverage with a per occurrence maximum
of $2.0 million and an aggregate annual maximum of $5.0 million. There can be no
assurance that this level of insurance coverage will be adequate or that
insurance coverage will continue to be available on acceptable terms, or at all.
A product liability claim or recall could have a material adverse effect on the
Company's business, reputation, financial condition and results of operations.
ENVIRONMENTAL MATTERS. Certain of the Company's manufacturing processes,
primarily processes involved in manufacturing certain of the Company's reagent
products, require the use of potentially hazardous and carcinogenic chemicals.
The Company is required to comply with applicable federal, state and local laws
regarding the use, storage and disposal of such materials. The Company currently
uses third-party disposal services to remove and dispose of the hazardous
materials used in the processes. The Company could, in the future, encounter
claims from individuals, governmental authorities or other persons or entities
in connection with exposure to, disposal or handling of such hazardous materials
or violations of environmental laws by the Company or its contractors and could
also be required to incur additional expenditures for hazardous materials
management or environmental compliance. Costs associated with environmental
claims, violations of environmental laws or regulations, hazardous materials
management and compliance with environmental laws could have a material adverse
effect on the business, financial condition and results of operations of the
Company.
BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS. The Company may
use up to $16.1 million of the net proceeds from the Offering to repay certain
indebtedness. The Company anticipates that the remaining estimated net proceeds
of this Offering will be used for capital expenditures, working capital and
general corporate purposes. The amounts identified for such uses are estimated
and the amounts actually expended for each such purpose and the timing of such
expenditure may vary depending upon numerous factors. The Company's management
will have broad discretion in determining the amount and timing of expenditures.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's Common
Stock, similar to the securities of other medical device and life sciences
companies, is likely to be highly volatile. Factors such as fluctuations in the
Company's operating results, announcements of technological innovations or new
products by the Company or its competitors, FDA and other governmental
regulations, developments with respect to patents or proprietary rights, public
concern as to the safety of products developed by the Company or others, changes
in financial analysts' estimated earnings or recommendations regarding the
Company and general market conditions may have a material adverse effect on the
market price of the Company's Common Stock. The Company's results of operations
may, in future periods, fall below the expectations of public market analysts
and investors and, in such event, the market price of the Company's Common Stock
could be materially and adversely affected.
ABSENCE OF DIVIDENDS. The Company has not declared or paid any dividends since
its inception and does not intend to pay any dividends in the foreseeable
future. In addition, the Company's bank credit agreement currently prohibits the
Company from paying cash dividends.
20
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
In July 1996, a majority of the then outstanding shares of Common Stock and
Preferred Stock of the Company approved by written consent, in lieu of a meeting
of stockholders, the following: (i) the approval of the amendment and
restatement of the Company's Certificate of Incorporation to effect a reverse
stock split, authorize a class of undesignated preferred stock, change certain
rights and preferences of the Company's Series A, C & D Preferred Stock and
eliminate the right of stockholders to act by written consent following an
initial public offering, (ii) the approval of a further restatement of the
Company's Certificate of Incorporation to eliminate references to the Company's
Series A, C and D Preferred Stock following completion of an initial public
offering, (iii) the approval to restate the Company's Bylaws to change the
persons authorized to call special meetings of stockholders, eliminate the right
of stockholders to act by written consent following completion of an initial
public offering, establish an advance notice requirement for business to be
conducted at meetings of shareholders, establish a classified board of directors
effective upon completion of an initial public offering and make certain other
changes; (iv) the approval, effective upon the completion of an initial public
offering, dividing the directors into three classes: Class I consisting of
directors C. Anthony Stellar, James M. Strickland and James R. Weersing, Class
II consisting of directors Rex J. Bates, Michael R. Danzi and Edward M. Giles
and Class III consisting of directors Jack W. Schuler, R. James Danehy, Thomas
M. Grogan and John Patience, with terms of office of Class I, II and III
directors to expire upon the Company's 1997, 1998 and 1999 annual meetings of
stockholders, respectively; (v) the approval to adopt the 1996 Stock Option Plan
and reservation of 1,000,000 post split shares of Common Stock of the Company
for issuance under the Plan; (vi) the approval to adopt the 1996 Employee Stock
Purchase Plan and reservation of 200,000 post split shares of the Company's
Common Stock for issuance under such Plan; (vii) the approval to adopt the 1996
Director Stock Option Plan and reservation of 250,000 post split shares of the
Company's Common Stock for issuance under the Plan; and (viii) the approval to
reserve an additional 34,167 shares of pre-split Series D Preferred Stock for
issuance to the Company's 1991 Employee Stock Purchase Plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
11.1 Statement of Computation of Weighted Average Shares
Outstanding.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed by the Company for the
quarter ended June 30, 1996.
21
<PAGE> 22
SIGNATURE
Pursuant to the requirements of the securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ventana Medical Systems, Inc.
Date: August 15, 1996.
By: /s/ R. Michael Rodgers
------------------------------------
R. Michael Rodgers
Vice President, Chief Financial Officer,
Treasurer and Secretary.
(Principal Financial and Accounting
Officer)
22
<PAGE> 23
Exhibit Index
11.1 Statement of Computation of Weighted Average Shares
Outstanding.
27.1 Financial Data Schedule
<PAGE> 1
Exhibit 11.1
VENTANA MEDICAL SYSTEMS, INC.
NET LOSS PER COMMON SHARE
HISTORICAL
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
1995 1996 1995 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net loss $ (869,000) $ (743,000) $(1,704,000) $(11,049,000)
Less accretion of preferred stock redemption (579,000) (604,000) (1,183,000) (1,219,000)
requirement ----------- ----------- ----------- ------------
Net loss $(1,448,000) $(1,347,000) $(2,887,000) $(12,268,000)
=========== =========== =========== ============
Weighted average common shares
outstanding 929,468 1,383,286 915,812 1,250,047
Common stock equivalents pursuant to
SAB No. 83:
Stock, options and warrants issued
within one year of initial filing
(May 24, 1996) 1,092,779 1,092,779 1,092,779 1,092,779
----------- ----------- ----------- ------------
Weighted average common shares and
common share equivalents outstanding
during the period 2,022,247 2,476,065 2,008,591 2,342,826
=========== =========== =========== ============
Net loss per share $ (0.72) $ (0.54) $ (1.44) $ (5.24)
=========== =========== =========== ============
</TABLE>
<PAGE> 2
Exhibit 11.1
VENTANA MEDICAL SYSTEMS, INC.
NET LOSS PER COMMON SHARE
PRO FORMA
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
1995 1996 1995 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net loss $ (869,000) $ (743,000) $(1,704,000) $(11,049,000)
Less accretion of preferred stock redemption
requirement -- -- -- --
----------- ----------- ----------- ------------
Net loss $ (869,000) $ (743,000) $(1,704,000) $(11,049,000)
=========== =========== =========== ============
Weighted average common shares
outstanding 929,468 1,383,826 915,812 1,250,047
Assumed conversion of Class A, C, and D
preferred shares 6,594,236 6,626,679 6,546,990 6,619,152
Assumed exercise of warrants to purchase
Class D preferred stock 34,085 34,085 34,085 34,085
Common stock equivalents pursuant to
SAB No. 83:
Stock, options and warrants issued
within one year of initial filing
(May 24, 1996) 1,092,779 1,092,779 1,092,779 1,092,779
----------- ----------- ----------- ------------
Weighted average common shares and
common share equivalents outstanding
during the period 8,650,568 9,137,369 8,589,666 8,996,063
=========== =========== =========== ============
Net loss per share $ (0.10) $ (0.08) $ (0.20) $ (1.23)
=========== =========== =========== ============
</TABLE>
<PAGE> 3
Exhibit 11.1
VENTANA MEDICAL SYSTEMS, INC.
NET LOSS PER COMMON SHARE
CONDENSED CONSOLIDATED PRO FORMA STATEMENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
---------------------
1995 1996
---- ----
(Unaudited)
<S> <C> <C>
Net loss $(13,527,000) $ (1,153,000)
============ ============
Weighted average common shares
outstanding 915,812 1,250,047
Assumed conversion of Class A, C, and D
preferred shares 6,546,990 6,619,152
Assumed exercise of warrants to purchase
Class D preferred stock 34,085 34,085
Common stock equivalents pursuant to
SAB No. 83:
Stock, options and warrants issued
within one year of initial filing
(May 24, 1996) 1,092,779 1,092,779
Shares of common stock issued in connection
with the initial public offering to be used
to retire acquisition debt 1,890,907 1,890,907
------------ ------------
Weighted average common shares and
common share equivalents outstanding
during the period 10,480,573 10,886,970
============ ============
Net loss per share $ (1.29) $ (0.11)
============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,197
<SECURITIES> 0
<RECEIVABLES> 3,347
<ALLOWANCES> 0
<INVENTORY> 2,787
<CURRENT-ASSETS> 10,270
<PP&E> 3,009
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,696
<CURRENT-LIABILITIES> 8,669
<BONDS> 16,064
36,941
0
<COMMON> 4,395
<OTHER-SE> (42,373)
<TOTAL-LIABILITY-AND-EQUITY> 23,696
<SALES> 9,687
<TOTAL-REVENUES> 9,687
<CGS> 3,561
<TOTAL-COSTS> 3,561
<OTHER-EXPENSES> 17,109
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66
<INCOME-PRETAX> (11,049)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,049)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,049)
<EPS-PRIMARY> (1.23)
<EPS-DILUTED> 0
</TABLE>
