-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SOVYKX9rkwYALmXtOQh+riJODHDsy0Fivl9WbfMP84AT6C4CqSfuI5e88xNaFGZb KPTDhYFS5hJ/bSbRUwTprQ== 0000950124-98-006787.txt : 19981123 0000950124-98-006787.hdr.sgml : 19981123 ACCESSION NUMBER: 0000950124-98-006787 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACCUMED INTERNATIONAL INC CENTRAL INDEX KEY: 0000888335 STANDARD INDUSTRIAL CLASSIFICATION: 2835 IRS NUMBER: 364054899 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20652 FILM NUMBER: 98752738 BUSINESS ADDRESS: STREET 1: 900 N FRANKLIN ST STREET 2: STE 401 CITY: CHICAGO STATE: IL ZIP: 60610 BUSINESS PHONE: 3126429200 MAIL ADDRESS: STREET 1: 920 N FRANKLIN STREET STREET 2: SUITE 402 CITY: CHICAGO STATE: IL ZIP: 60610 FORMER COMPANY: FORMER CONFORMED NAME: ALAMAR BIOSCIENCES INC DATE OF NAME CHANGE: 19950504 10-Q 1 QUARTERLY REPORT 9-30-98 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X Quarterly report pursuant to Section 13 or 15(d) of the Securities - - --- Exchange Act of 1934 For the quarterly period ended September 30, 1998. 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: 0-20652 ACCUMED INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 36-4054899 -------------------------------- ------------------ (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 900 N. Franklin St., Suite 401, Chicago, IL 60610 (Address of principal executive offices) (312) 642-9200 -------------- (Registrant's telephone number including area code) 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 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 -- -- The registrant had 5,485,453 shares of common stock outstanding as of November 13, 1998. 2 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES INDEX Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets - September 30, 1998 and December 31, 1997 . . . . . . 1 Condensed Consolidated Statements of Operations - Three Months and Nine Months Ended September 30, 1998 and 1997 . . . . . . . . 2 Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1998 and 1997 . . . . 3 Notes to Condensed Consolidated Financial Statements . . . 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . 8 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K . . . . . . . 12 SIGNATURES . . . . . . . . . . . . . . . . . . . . . 13 3 PART I - FINANCIAL INFORMATION ACCUMED INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED AUDITED -------------- ------------- ASSETS SEPT. 30, 1998 DEC. 31, 1997 -------------- ------------- CURRENT ASSETS Cash and cash equivalents $ 114,339 $ 469,639 Accounts receivable, net 4,289,957 4,664,152 Prepaid expenses 319,768 183,817 Production inventory 5,194,688 3,464,190 ------------ ------------ TOTAL CURRENT ASSETS 9,918,752 8,781,798 ------------ ------------ FIXED ASSETS, NET 3,655,305 5,178,528 ------------ ------------ Notes receivable 164,199 164,199 Deferred financing costs 196,824 640,224 Purchased technology 5,244,573 4,950,753 Other assets 812,165 833,215 ------------ ------------ $ 19,991,818 $ 20,548,717 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 2,519,842 $ 3,590,022 Payroll and related accruals 120,000 458,794 Accrued interest 94,865 441,100 Other current liabilities 753,924 660,842 Notes payable 1,636,582 1,888,273 Long term debt, current portion 802,900 700,000 ------------ ------------ TOTAL CURRENT LIABILITIES 5,928,113 7,739,031 ------------ ------------ Warranty reserves, non-current 430,626 467,299 Long term debt 6,289,139 11,454,755 Minority interest -- 154,560 ------------ ------------ 6,719,765 12,076,614 ------------ ------------ STOCKHOLDERS' EQUITY Preferred stock, series A convertible 4,329,466 -- Common stock, $0.01 par value 54,855 227,289 Additional paid-in capital 59,539,595 51,953,823 Other comprehensive income 14,783 22,586 Accumulated deficit (56,378,022) (51,253,889) Treasury stock (216,737) (216,737) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 7,343,940 733,072 ------------ ------------ $ 19,991,818 $ 20,548,717 ============ ============
See accompanying notes to condensed consolidated financial statements. - 1 - 4 ACCUMED INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) ------------------------------------------------------------------------
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30, ------------------------------------ ----------------------------------- 1998 1997 1998 1997 ----------------- ---------------- ------------------ --------------- SALES $ 4,917,491 $ 4,914,004 $ 15,451,174 $ 14,157,306 COST OF SALES (2,784,895) (3,331,740) (8,825,530) (8,905,595) ------------ ------------ ------------ ------------ Gross profit 2,132,596 1,582,264 6,625,644 5,251,711 ------------ ------------ ------------ ------------ OPERATING EXPENSES: General and administrative 1,666,923 1,833,732 4,928,149 6,280,715 Research and development 767,393 1,340,234 2,621,889 3,639,509 Goodwill writeoff -- -- -- 3,582,068 Sales and marketing 872,244 1,125,213 2,560,261 3,215,636 ------------ ------------ ------------ ------------ TOTAL OPERATING EXPENSES 3,306,560 4,299,179 10,110,299 16,717,928 ------------ ------------ ------------ ------------ OPERATING (LOSS) (1,173,964) (2,716,915) (3,484,655) (11,466,217) ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest expense (343,304) (472,851) (1,267,913) (2,960,893) Other income 549,012 102,090 796,515 342,042 ------------ ------------ ------------ ------------ TOTAL OTHER INCOME (EXPENSE) 205,708 (370,761) (471,398) (2,618,851) ------------ ------------ ------------ ------------ LOSS BEFORE INCOME TAXES FROM CONTINUING OPERATIONS (968,256) (3,087,676) (3,956,053) (14,085,068) INCOME TAX EXPENSE -- -- -- -- ------------ ------------ ------------ ------------ LOSS BEFORE EXTRAORDINARY ITEM (968,256) (3,087,676) (3,956,053) (14,085,068) EXTRAORDINARY ITEM - DEBT EXTINGUISHMENT LOSS -- -- (1,168,080) -- ------------ ------------ ------------ ------------ NET LOSS $ (968,256) $ (3,087,676) $ (5,124,133) $(14,085,068) ============ ============ ============ ============ BASIC LOSS PER SHARE BEFORE EXTRAORDINARY ITEM $ (0.18) $ (0.82) $ (0.80) $ (3.92) EXTRAORDINARY LOSS PER SHARE FROM DEBT EXTINGUISHMENT -- -- (0.24) -- ------------ ------------ ------------ ------------ BASIC NET LOSS PER SHARE $ (0.18) $ (0.82) $ (1.04) $ (3.92) ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,485,453 3,747,051 4,950,396 3,595,683 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. - 2 - 5 ACCUMED INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
UNAUDITED --------------------------------------- 1998 1997 ------------------- ------------------ OPERATING ACTIVITIES: Net income (loss) $ (5,124,133) $(14,085,068) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,379,000 2,161,617 Write-off of debt discount -- 1,966,340 Debt extinguishment loss 1,168,080 -- Write-off of impaired goodwill -- 3,582,068 Minority interest (191,560) (303,785) Non-cash gain on settlement -- (22,272) Changes in assets and liabilities: Decrease in restricted cash -- 100,000 Decrease (Increase) in accounts receivable 58,195 (679,152) Decrease (Increase) in prepaid expenses and deposits (135,951) (436,495) Decrease (Increase) in production inventory (1,414,498) (457,178) Decrease (Increase) in other assets (7,770) (571,147) Decrease (Increase) in deferred financing costs (1,100) (821,884) Increase (Decrease) in accounts payable (971,180) 2,387,921 Increase (Decrease) in other current liabilities (411,708) (61,844) Increase (Decrease) in warranty reserves (36,673) (435,908) ------------ ------------ CASH USED IN OPERATING ACTIVITIES (4,689,298) (7,676,787) ------------ ------------ INVESTING ACTIVITIES: Purchase of fixed assets (164,580) (898,372) Purchase of Oncometrics stock (528,000) -- Acquisition of business, net -- (6,000,000) ------------ ------------ CASH USED IN INVESTMENT ACTIVITIES (692,580) (6,898,372) ------------ ------------ FINANCING ACTIVITIES: Proceeds from issuances of common stock, net 4,852,394 556,466 Notes receivable (issued) collected -- (11,427) Payment of capital lease obligation -- (32,870) Proceeds from issuance of notes payable 1,362,550 14,750,000 Proceeds from bridge loan -- 6,000,000 Payment of notes payable and bridge loan (1,188,366) (7,938,455) ------------ ------------ CASH PROVIDED BY FINANCING ACTIVITIES 5,026,578 13,323,714 ------------ ------------ NET (DECREASE) IN CASH AND CASH EQUIVALENTS (355,300) (1,251,445) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 469,639 2,801,359 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 114,339 $ 1,549,914 ============ ============
See accompanying notes to condensed consolidated financial statements. - 3 - 6 ACCUMED INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Preparation of Interim Financial Statements In the opinion of the management of AccuMed International, Inc. and Subsidiaries ("the Company"), the accompanying unaudited condensed consolidated financial statements include all normal adjustments considered necessary to present fairly the financial position as of September 30, 1998, and the results of operations for the three months and nine months ended September 30, 1998 and cash flows for the nine months ended September 30, 1998 and 1997. Interim results are not necessarily indicative of results for a full year. The condensed consolidated financial statements and notes are presented as permitted by Form 10-Q, and do not contain certain information included in the Company's audited consolidated financial statements and notes for the fiscal year ended December 31, 1997. 2. Basis of Presentation The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances, transactions and stockholdings have been eliminated. Since June 1998, the Company has been actively negotiating to sell the Company's microbiology division to a third party. Consummation of such sale is subject to approval by the Board of Directors of terms of a definitive agreement and execution and delivery of such agreement, stockholder approval and certain other approvals and other conditions to closing. The Company will present the operating results of the microbiology division as discontinued operations if the stockholders approve the proposed sale. During the quarter ended March 31, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements, and requires a total for comprehensive income to be provided in condensed financial statements of interim periods. Comprehensive income includes all changes in stockholders' equity during the period except those resulting from investments by owners and distributions to owners. Comprehensive loss consisted of the following:
9 Months Ended Sept. 30, 3 Months ended Sept. 30, ------------------------ ------------------------ 1998 1997 1998 1997 ---- ---- ---- ---- Net loss $ (5,124,133) $ (14,085,068) $ (968,256) $ (3,087,676) Other comprehensive income (loss): Foreign currency translation adjustments (7,803) - (5,991) - -------------- -------------- ------------ ------------- Comprehensive loss $ (5,131,936) $ (14,085,068) $ (974,247) $ (3,087,676) -------------- -------------- ------------ -------------
7 3. Reverse Stock Split On May 19, 1998, the stockholders approved a reverse one-for-six stock split, which was effected by the Board of Directors as of May 21, 1998. The reverse split covered all outstanding common shares and all agreements concerning stock options, warrants, convertible notes and other commitments payable in shares of the Company's common stock. All references to per-share information in the condensed consolidated financial statements have been adjusted to reflect the reverse split on a retroactive basis. 4. Inventories Inventories are summarized as follows:
September 30, December 31, 1998 1997 ---- ---- Raw material and packaging $ 1,694,034 $ 999,561 Finished good and work in process 3,500,654 2,464,629 ----------- ---------- Total inventories $ 5,194,688 $ 3,464,190 ----------- -----------
5. Debt Conversion On February 23, 1998, the Company exchanged $5,275,000 in principal amount of its 12% Convertible Promissory Notes (the "Convertible Notes") plus accrued interest thereon of $329,030 for 1,245,340 shares of Series A Convertible Preferred Stock (the "Preferred Stock") and 5-year warrants to purchase 207,557 shares of Common Stock at an exercise price of $6.75 per share. The Preferred Stock is convertible into 830,227 shares of Common Stock at a conversion price of $6.75 per share. The Company has registered the resale of the shares of Common Stock underlying the Preferred Stock and Warrants with the Securities and Exchange Commission during 1998. Related to the debt conversion, the Company incurred an extraordinary loss of $1,168,080, including stock, warrants and fees paid to the placement agent, warrants issued as an inducement to the converting noteholders, accounting fees, and the write-off of a proportional amount of deferred financing costs associated with the issuance of the Convertible Notes. The placement agent received fees of $175,000, 8,334 shares of Common Stock valued at $40,000, 7-year warrants to purchase 58,334 shares of Common Stock at $6.75 per share valued at $84,000, and repricing of previously issued 4-year warrants to purchase 33,334 shares of Common Stock at an exercise price of $18.75 per share to $6.75 per share, valued at $26,000. The converting noteholders received 5-year warrants to purchase 207,557 shares of Common Stock at an exercise price of $6.75 per share, valued at $37,380. The Company utilized the Black-Scholes pricing model to determine the fair value of warrants issued. The following assumptions were incorporated into the model: risk-free rate - 6%, expected volatility - 20%, and expected dividend - - - zero. The risk-free rate is determined based 8 on the interest rate of U.S. government treasury obligations with a maturity date comparable to the life of the warrant issued. Other assumptions, relating to warrant life, strike price and stock price, are determined at the date the warrant was issued. 6. Private Placement During March 1998, the Company consummated a private placement of 1,447,778 shares of Common Stock and 7-year warrants to purchase an aggregate of 1,447,778 shares of Common Stock at an exercise price of $4.50 per share for gross proceeds of $6,515,000, including $1,000,000 in notes payable converted into Common Stock, and net proceeds of $5,864,000 after payment of fees, commissions and expenses related thereto. Such securities were sold in units (the "Units"), each Unit consisting of 22,223 shares of Common Stock, and seven-year warrants to purchase 22,223 shares of Common Stock at an exercise price of $4.50 per share (the "Unit Warrants"). The Company has registered the resale of the outstanding Common Stock and the Common Stock underlying the Unit Warrants with the Securities and Exchange Commission. If the Common Stock is delisted from The Nasdaq SmallCap Stock Market at any time on or prior to December 31, 1998, original purchasers of the Units will be entitled to receive, at their option, in exchange for the Units, units (the "Alternate Units"), each Alternate Unit consisting of (i) shares of Series B Convertible Preferred Stock, par value $0.01 per share of the Company (the "Series B Preferred"), having an aggregate stated value of $100,000 (the "Series B Stated Value"), convertible into shares of Common Stock at an initial conversion price of $4.50 per share (the "Series B Conversion Price"), and (ii) warrants (the "Alternate Warrants") exercisable to purchase the number of shares of Common Stock issuable upon exercise of the Unit Warrants at the same initial Unit Warrant exercise price. The Series B Preferred, if issued, will be immediately convertible at the option of the holder into shares of Common Stock at the Series B Conversion Price. 7. Acquisition On June 29, 1998, the Company acquired the remaining 33% of the outstanding capital stock of Oncometrics Imaging Corp. ("Oncometrics") it did not already own. The Company paid $342,000 in cash and $342,000 in a convertible 18-month note bearing interest at a rate of 2% over the Canadian prime rate in exchange for the stock and a loan payoff to the seller of $154,000. The note is convertible, in whole or in part, into Common Stock of the Company at a price of $1.79 per share. The acquisition was accounted for using the purchase method of accounting with the purchase price allocated to the net assets acquired based on their estimated fair values at the date of acquisition. The excess purchase price consists of $700,000 of purchased technology recorded on the condensed consolidated balance sheet in the second quarter. The operating results of Oncometrics have been included in the statement of operations from the date of acquisition. 9 Oncometrics was formed in 1995 and is currently developing an automated instrument, using the Company's AcCellTM workstation, designed for use in the detection, diagnosis and prognosis of early-stage cancer by measuring the DNA in cells on microscope slides. Prototypes of the instrument are currently being tested with scientists at cancer research and patient care institutions. 8. Supplemental Disclosures of Cash Flow Information
9 Months ended September 30, ---------------------------- 1998 1997 ---- ---- OPERATING ACTIVITIES Interest paid $ 1,024,918 $ 655,632 NON-CASH INVESTING AND FINANCING ACTIVITIES Deposit reclassified to fixed assets $ 140,000 --
The Company extinguished debt with a carrying value of $4,818,800 through the issuance of preferred stock and warrants with a fair value of $5,986,880 including transaction fees, resulting in an extraordinary loss of $1,168,000. The Company satisfied its obligation under a $1,000,000 note payable through the issuance of 222,223 shares of Common Stock and seven-year warrants to purchase 222,223 shares of Common Stock. 10 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company is engaged in the development and marketing of cost effective screening instruments and systems for clinical diagnostic laboratories, hospitals and others. The Company's operations are in two business segments: 1) Cytopathology - systems made up of instruments and proprietary software that support the review and analysis of Pap smears and DNA for early cancer detection, and 2) Microbiology - proprietary disposable products and automated instruments used to identify infectious organisms and determine susceptibility to antimicrobial agents. OVERVIEW The Company's primary focus is on the development of computer-aided diagnostic imaging systems for the cytopathology laboratory marketplace. The Company's integrated systems use reliable, accurate and innovative products and methods to provide laboratories with comprehensive solutions that improve efficiency and reduce costs while achieving significant improvements in disease detection. On January 20, 1998, the Board voted not to complete the equity carve-out of the research and development portion of its cytopathology business as previously announced. On March 5, 1998, the Company announced that the Board of Directors has authorized management to seek buyers for those aspects of the Company's business that do not contribute to the development and marketing of an integrated product line of imaging-based cytopathology systems and testing procedures. Since June 1998, the Company has been negotiating with a third party to sell the microbiology division under a plan subject to shareholder approval. The Board and management believe that the Company's future depends on the success of the cytopathology product line and directly related technology. The divestiture would allow the Company to commit resources to support and market the cytopathology product line. In October 1998, the Company announced it would focus on documenting quantitatively the benefits of its cytopathology products at three laboratory sites, with each site representing a different segment of the laboratory marketplace. The timeframe required to obtain and publish this data is anticipated to be sometime in 1999. The Company has made reductions in its cytopathology production and marketing workforce in conjunction with this decision. RESULTS OF OPERATIONS Sales revenues for the quarter ended September 30, 1998 of $4,917,000 were flat compared to $4,914,000 for the quarter ended September 30, 1997. This is due to additional sales of microbiology consumables offset by decreases in instrument sales. The cytopathology product line did not have a significant impact in either the 1998 or 1997 quarters. 11 Cost of sales decreased from $3,332,000 in the third quarter of 1997 to $2,785,000 in the third quarter of 1998, reflecting a change in the sales mix to higher margin microbiology consumable products as opposed to instruments. General and administrative expenses decreased 9%, declining from $1,834,000 in the third quarter of 1997 to $1,667,000 in the comparable 1998 quarter. The decrease is due to continued staff reductions and streamlining efforts in the cytopathology division. Research and development expenses decreased 42% from $1,340,000 in the third quarter of 1997 to $767,000 in the third quarter of 1998 due primarily to decreased spending in the microbiology product line. Sales and marketing expenses decreased 22% from $1,125,000 in the third quarter of 1997 to $872,000 in the third quarter of 1998 due to decreased marketing efforts in both the microbiology and cytopathology product lines. Interest expense of $472,000 in the third quarter of 1997 reflected amounts accrued on the $8.5 million Convertible Notes issued in March 1997 to fund the ESP product line acquisition. The interest expense for the third quarter of 1998 of $343,000 reflected interest on the Company's equipment loan, revolving line of credit, and the $3,250,000 in Convertible Notes which were not converted into Series A Preferred Stock in February of 1998. The third quarter of 1998 also reflects $500,000 of other income, representing minimum guaranteed licensing fees for proprietary technology licensed to a third party. The third quarter of 1997 had no comparable transaction. Net loss decreased from $3,088,000 for the third quarter of 1997 to $968,000 for the third quarter of 1998, due to increased gross margins, decreased operating and interest expenses, and other income. Net loss per share for the quarter ended September 30, 1998 was $0.18 compared to a net loss per share of $0.82 for the quarter ending September 30, 1997. The loss per share for the current quarter was about $0.08 per share less due to the increase in the weighted average shares outstanding for 1998. Sales revenues for the nine months ended September 30, 1998 of $15,451,000 were up 9% compared to $14,157,000 for the nine months ended September 30, 1997. This increase reflects a full nine months of sales for the ESP product line, acquired in March 1997, offset by decreases in instrument sales. Cost of sales decreased from $8,906,000 for the nine months ended September 30, 1997 to $8,826,000 for the nine months ended September 30, 1998, reflecting a change in the sales mix to higher margin microbiology consumable products as opposed to instruments. General and administrative expenses decreased 21%, declining from $6,281,000 for the nine months ended September 30, 1997 to $4,928,000 in the comparable 1998 period. The decrease is due to continued staff reductions and streamlining efforts in the cytopathology division. Research and development expenses decreased 18% from $3,640,000 for the nine months ended September 30, 1997 to $2,622,000 for the nine months ended September 30, 1998 due primarily to decreased spending in the microbiology product line. Sales and marketing expenses decreased 20% from $3,216,000 for the nine months ended September 30, 1997 to $2,560,000 for the nine months ended September 30, 1998 due to decreased marketing efforts in both the microbiology and cytopathology products lines. For the nine month period ended September 30, 1998, the Company incurred a $1,168,000 extraordinary loss related to the conversion of par value $5,275,000 of Convertible Notes and $329,030 in accrued interest thereon into 1,245,340 shares of Series A Convertible Preferred Stock. Of the total expense, $193,000 represented cash fees and expenses. The $3,582,000 goodwill write-off in the first nine months of 1997 is due to contingent consideration associated with the AccuMed, Inc. merger into the Company in December 1995 written off as an impaired asset. Net loss decreased from $14,085,000 for the nine month period ended September 30, 1997 to $5,124,000 for the comparable 1998 period. The reduced loss is due primarily to a decrease in 12 operational expenses and interest expense totaling $8,301,000, increased gross margins of $1,374,000, and an extraordinary loss of in 1998 of $1,168,000. The net loss per share for the first nine months of 1998 was $1.04 compared to $3.92 for the 1997 period. The loss per share for the current nine-month period was about $0.38 per share less due to the increase in the weighted average shares outstanding for 1998. LIQUIDITY AND CAPITAL RESOURCES Operating Activities The Company's primary cash requirements are for research and development expenses, including salaries, material and consulting support, to develop new cytopathology products. Throughout the first nine months of 1998, the Company has used operating cash flow from its microbiology product line, together with debt and equity financing, to fund such activities. The Company's cash balance at September 30, 1998 reflects the Company's efforts to minimize interest expense due under its revolving credit line. The Company believes that current cash balances and internally generated funds, including the potential sale of the Company's microbiology product line, will be sufficient to finance the Company's projected operations through at least the next 12 months. The increased inventory levels at September 30, 1998 as compared to December 31, 1997 reflect a build up of cytopathology products to service the Company's "try-buy" program announced in the third quarter. This program allows potential customers to use the Company's cytopathology systems on their premises for up to three months before committing to purchase the systems. Current liabilities are lower at September 30, 1998 as compared to the beginning of the year, mainly due to less vendor financing and less accrued interest due to lower long-term debt levels. Accounts payable was reduced as a result of the private placement of Common Stock in March 1998. Long-term debt was reduced as a result of the debt conversion in February 1998. Investing Activities On June 29, 1998, the Company acquired the remaining one-third of the outstanding stock of Oncometrics Imaging Corp. ("Oncometrics") that it did not already own. The Company paid $342,000 in cash and $342,000 in a convertible 18-month note with a rate of 2% over the Canadian prime rate in exchange for the stock and a loan payoff to the seller of $156,000. Oncometrics is developing a proprietary high-resolution image cytometer that uses the Company's AcCell(TM) workstation, a high-resolution digital camera and proprietary image processing and analysis software to analyze cell images from a microscope slide that has been stained using Oncometrics' proprietary staining method. Prototypes of the Oncometrics instrument have been developed that are capable of detecting and measuring small variations in 13 cell nucleus DNA. The feasibility of the technology as it applies to the detection of early cancer in lung sputum has been demonstrated, which assists the cytotechnologist in detecting lung cancer in an early more curable stage of development. Management believes that the Oncometrics technology may be potentially applied to other types of cancer, such as cervical cancer. The Company has no material commitments for property or equipment investments at this time. Financing Activities In February 1998, the Company exchanged $5,275,000 in principal amount of its Convertible Notes plus accrued interest thereon of $329,000 for 1,245,340 shares of Series A Convertible Preferred Stock (convertible into 830,227 shares of Common Stock at a conversion price of $6.75 per share) and five-year warrants exercisable to purchase 207,557 shares of Common Stock at $6.75 per share. As a result of this exchange, the Company's net tangible assets increased by about $4,700,000 and its interest expense will be reduced by about $1,294,000 through March 2000. The balance of $3,225,000 of the Convertible Notes remains outstanding and unaffected by this exchange. The Company's most recent private placement, closed in March 1998, raised gross cash proceeds of $5,515,000 and net cash proceeds of $4,804,000 after payment of fees and commissions. It resulted from the issuance of 1,447,778 shares of Common Stock and seven-year warrants to purchase 1,447,778 shares of Common Stock at an exercise price of $6.75 per share. During the first nine months of 1998, the Company also received an aggregate of $48,000 upon the exercise of stock options and warrants. At September 30, 1998, the Company's long term debt consists principally of: 1) $3,118,000 of unsecured 12% Convertible Notes, net of a discount of $107,000 due March, 2000, and 2) a $3,456,000 secured note payable, net of a discount of $125,000, payable in 48 equal monthly installments of principal and interest of $113,400 through September 2001, with a balloon payment of $675,000 due October 31, 2001. This loan bears interest at 14.5%. The Company has a one-year revolving credit facility under which it may borrow up to $4,000,000 based on the amount of eligible trade receivables. The credit line under this arrangement was $1,842,000 based on borrowing base calculations at September 30, 1998, of which $304,000 was unused. The interest rate on the credit line is the higher of the highest prime rate plus 2.5% or 9% (11% at September 30, 1998). The Company currently has no commitments with respect to sources of additional financing. The failure of the Company to obtain adequate additional financing may require the Company to delay, curtail or scale back some or all of its research, development, and marketing activities and, potentially, to cease its operations. Any additional equity financing may involve substantial dilution to the Company's then-existing stockholders. 14 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. The following exhibits are filed herewith: 27.1 Financial Data Schedule (b) Reports on Form 8-K. No Current Reports on Form 8-K were filed by the Company with the Securities and Exchange Commission during the quarter ended September 30, 1998. 15 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. ACCUMED INTERNATIONAL, INC. /s/ Leonard R. Prange ----------------------------------- Leonard R. Prange Chief Financial Officer and Chief Operating Officer Date: November 16, 1998 16 Index to Exhibits Exhibit No Description of Exhibit -------------- ---------------------- 27.1 Financial Data Schedule EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 114 0 4,290 0 5,195 9,919 3,655 0 19,992 5,928 6,289 0 4,329 59,594 (56,580) 19,992 15,451 15,451 8,826 8,826 10,110 0 1,268 (3,956) 0 (3,956) 0 (1,168) 0 (5,124) (1.04) (1.04)
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