UNITED STATES 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, 2003
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: 0-21371
APPLIED IMAGING CORP.
(Exact name of registrant as specified in its charter)
Delaware 77-0120490
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2380 Walsh Avenue, Building B,
Santa Clara, California 95051
(Address of principal executive offices including zip code)
(408) 562-0250
(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 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [x]
As of October 27, 2003 there were 15,960,839 shares of the Registrant's Common
Stock outstanding.
APPLIED IMAGING CORP.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
September 30, 2003 and December 31,2002 3
Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss) for the three and nine months ended September 30, 2003
and 2002 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2003 and 2002. 5
Notes to Condensed Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Derivatives and Financial Instruments 16
Item 4. Disclosure Controls and Procedures 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
APPLIED IMAGING CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
September 30, December 31,
2003 2002
-------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,117 $ 2,897
Restricted cash 167 156
Trade accounts receivable, net 4,746 7,155
Inventories 1,479 1,759
Prepaid expenses and other current assets 583 289
-------------- --------------
Total current assets 9,092 12,256
Property and equipment, net 806 1,014
Goodwill 2,364 2,364
Other assets 61 62
-------------- --------------
Total assets $ 12,323 $ 15,696
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,872 $ 2,372
Accrued expenses 1,628 1,562
Bank debt 994 2,175
Deferred revenue, current 2,494 2,880
-------------- --------------
Total current liabilities 6,988 8,989
Deferred revenue, non-current 301 333
-------------- --------------
Total liabilities 7,289 9,322
-------------- --------------
Stockholders' equity:
Common stock 16 16
Additional paid-in capital 49,207 49,151
Accumulated other comprehensive loss (367) (367)
Accumulated deficit (43,822) (42,426)
-------------- --------------
Total stockholders' equity 5,034 6,374
-------------- --------------
Total liabilities and stockholders' equity $ 12,323 $ 15,696
============== ==============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
APPLIED IMAGING CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
and Comprehensive Income (Loss)
(in thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
--------------------------- ----------------------------
2003 2002 2003 2002
----------- ------------ ------------ ------------
Revenues $ 4,833 $ 5,541 $ 15,063 $ 15,733
Cost of revenues 2,147 2,111 6,312 5,947
----------- ------------ ------------ ------------
Gross profit 2,686 3,430 8,751 9,786
----------- ------------ ------------ ------------
Operating expenses:
Research and development 980 832 2,761 2,510
Sales and marketing 1,793 1,848 5,438 5,284
General and administrative 709 584 1,978 1,915
Restructuring - (2) - 220
----------- ------------ ------------ ------------
Total operating expenses 3,482 3,262 10,177 9,929
----------- ------------ ------------ ------------
Operating income (loss) (796) 168 (1,426) (143)
Other income (expense), net (1) (37) 30 (68)
----------- ------------ ------------ ------------
Net income (loss) (797) 131 (1,396) (211)
Other comprehensive loss
Change in unrealized loss on
short-term investments - - - (2)
----------- ------------ ------------ ------------
Comprehensive income (loss) $ (797) $ 131 $ (1,396) $ (213)
=========== ============ ============ ============
Net income (loss) per share
- basic $ (0.05) $ 0.01 $ (0.09) $ (0.01)
=========== ============ ============ ============
- diluted $ (0.05) $ 0.01 $ (0.09) $ (0.01)
=========== ============ ============ ============
Weighted average shares outstanding
- basic 15,961 15,885 15,938 15,788
=========== ============ ============ ============
- diluted 15,961 16,140 15,938 15,788
=========== ============ ============ ============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
APPLIED IMAGING CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine months ended September 30,
--------------------------------------
2003 2002
----------------- ----------------
Cash flows from operating activities:
Net loss $ (1,396) $ (211)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 465 466
Provision for doubtful accounts (100) (24)
Loss on sale of fixed assets 2 77
Changes in operating assets and liabilities:
Trade accounts receivable 2,509 (1,252)
Inventories 280 (402)
Prepaid expenses and other current assets (294) 195
Accounts payable (500) 287
Accrued expenses 66 268
Deferred revenue (418) (333)
----------------- ----------------
Net cash provided by (used in) operating activities: 614 (929)
----------------- ----------------
Cash flows from investing activities:
Proceeds from sale and maturities of investments - 650
Goodwill - (20)
Purchases of property and equipment (259) (540)
Other assets 1 -
----------------- ----------------
Net cash provided by (used in) investing activities: (258) 90
----------------- ----------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 56 1,034
Restricted cash (11) 89
Bank and other loan proceeds 9,009 9,950
Bank and other loan payments (10,190) (9,768)
Capital lease payments, principal portion - (14)
----------------- ----------------
Net cash provided by (used in) financing activities: (1,136) 1,291
----------------- ----------------
Net increase in cash and cash equivalents (780) 452
Cash and cash equivalents at beginning of period 2,897 2,538
----------------- ----------------
Cash and cash equivalents at end of period $ 2,117 $ 2,990
================= ================
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
APPLIED IMAGING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of Applied Imaging Corp. and subsidiaries (the "Company", "we", "us",
"our") for the three and nine months ended September 30, 2003 and 2002. These
financial statements are unaudited and reflect all adjustments, consisting only
of normal recurring adjustments, which are, in the opinion of management,
necessary for a fair presentation of our financial position, operating results
and cash flows for those interim periods presented. The results of operations
for the three and nine months ended September 30, 2003 are not necessarily
indicative of results to be expected for the fiscal year ending December 31,
2003. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto, for
the year ended December 31, 2002, contained in our 2002 annual report on Form
10-K.
Liquidity: We expect negative cash flow from operations to continue through at
least the first quarter of 2004, as we continue research and development of new
applications for our SPOT(TM) and Ariol(TM) systems, conduct clinical trials
required for the U.S. Food and Drug Administration ("FDA") clearance of new
products, expand our marketing, sales and customer support capabilities, and add
additional infrastructure. We currently estimate that our capital resources will
enable us to meet our capital needs for at least the next twelve months.
However, expenditures required to achieve growth and profitability in the
long term may be greater than projected or the cash flow generated from
operations may be less than projected. As a result, our long-term capital needs
may require us to try to obtain additional funds through equity or debt
financing, collaborative or other arrangements with other companies, bank
financing and other sources. We have expended and will continue to expend
substantial amounts of money for research and development, preclinical testing,
conducting clinical trials for FDA clearance of new products, capital
expenditures, working capital needs and manufacturing and marketing of our
products. Our future research and development efforts, in particular, are
expected to include development of additional applications of our current
cytogenetic products and additional applications for the SPOT(TM) and Ariol(TM)
systems, which may require additional funds.
There can be no assurance that we will be able to obtain additional debt or
equity financing if needed and on terms acceptable to us. If adequate and
acceptable funding is not available, we could be required to delay development
or commercialization of certain products, to license to third parties the rights
to commercialize certain products or technologies that we would otherwise seek
to commercialize internally, or to reduce the marketing, customer support, or
other resources devoted to product development. Accordingly, our failure to
obtain sufficient funds on acceptable terms when needed could have a material
adverse effect on our ability to achieve our long-term business objectives.
We had a one-year loan agreement with Silicon Valley Bank ("SVB") that was
effective through September 27, 2003 with borrowing capability of up to $3.5
million depending on the level of certain of our North American accounts
receivable. The loan agreement included the requirement for us to maintain a
minimum level of tangible net worth. The loan agreement was amended on January
31, 2003 and on July 30, 2003 to reduce the minimum level of tangible net worth
6
that we had to maintain through the end of the loan agreement. The amendments
also provided us with a waiver of our non-compliance with the requirement to
maintain a minimum level of tangible net worth as at December 31, 2002 and June
30, 2003, respectively.
The loan agreement was further amended on September 3, 2003 to extend the
term of the agreement for an additional year through September 26, 2004. At
September 30, 2003 we had used $994,000 of the SVB facility with $688,000
available but not used. The interest rate on the facility was 6.0% at September
30, 2003, computed as the SVB prime rate plus 2 percent. The loan is
collateralized by substantially all of the assets of the U.S. corporation and
requires us to maintain a minimum level of tangible net worth amounting to $2.6
million at September 30, 2003. Other loan covenants include the need to maintain
insurance on our property, monthly reporting to SVB, the need to obtain SVB
approval for any extraordinary action and a limitation on the U.S. corporation's
ability to transfer more than $600,000 to a subsidiary. We were in compliance
with the SVB loan covenants as of September 30, 2003.
We collateralize various credit card and bank guarantees (used for customs
clearance purposes) with cash deposits at an international bank in the United
Kingdom. This amounted to (pounds)100,000 ($167,000) at September 30, 2003.
Note 2 - Inventories (in thousands)
Balance as of September 30, 2003 December 31, 2002
------------------- -------------------
Raw materials $ 1,205 $ 1,210
Work in process 86 306
Finished goods 188 243
------------------- -------------------
Total $ 1,479 $ 1,759
=================== ===================
Note 3 - Net Income (loss) per share
The computation of basic and diluted net income (loss) per share ("EPS")
for the three and nine months ended September 30, 2003 and September 30, 2002 is
determined by dividing net income (loss) as reported as the numerator by the
number of shares included in the denominator as shown in the following table (in
thousands):
Three months ended September 30, Nine months ended September 30,
-----------------------------------------------------------------------
2003 2002 2003 2002
-------------- ---------------- -------------- --------------
Weighted average shares outstanding - basic 15,961 15,885 15,938 15,788
Dilutive shares - stock options - 245 - -
Dilutive shares - warrants - 10 - -
-------------- ---------------- -------------- --------------
Weighted average shares outstanding - diluted 15,961 16,140 15,938 15,788
============== ================ ============== ==============
Securities excluded from the computation of EPS because their effect on EPS
was antidilutive, but could dilute basic EPS in future periods are as follows
(in thousands):
Three months ended September 30, Nine months ended September 30,
-----------------------------------------------------------------
2003 2002 2003 2002
------------ ------------ ------------- -------------
Options 3,139 2,143 3,139 2,982
Warrants 1,222 651 1,222 651
------------ ------------ ------------- -------------
Total 4,361 2,794 4,361 3,633
============ ============ ============= +============
7
Note 4 - Stock Based Compensation
We account for stock-based employee compensation arrangements in accordance
with the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." Under APB No. 25, compensation
expense is based on the difference, if any, between the fair value of our stock
and the exercise price on the date of the grant.
We account for equity instruments issued to non-employees in accordance
with the provisions of Statement of Financial Accounting Standards ("SFAS") No.
123 "Accounting for Stock-based Compensation" and Emerging Issues Task Force
("EITF") Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring or in Conjunction With Selling Goods and
Services."
We have adopted the pro forma disclosure provisions of SFAS No. 148
"Accounting for Stock-Based Compensation Transition and Disclosure" for the 1998
Stock Plan and Employee Stock Purchase Plan. The fair value of the stock options
granted to employees is calculated using the Black-Scholes option pricing model
as of the date of grant. Had compensation cost for our stock-based compensation
plans been determined in a manner consistent with the fair value approach
described in SFAS No. 123, our net income (loss) and net income (loss) per share
as reported would have been changed to the pro forma amounts indicated below (in
thousands, except per share data):
Three months ended Nine months ended
September 30, September 30,
-------------------------------- ----------------------------
2003 2002 2003 2002
--------------- --------------- ------------ ------------
Net income (loss):
As reported $ (797) $ 131 $ (1,396) $ (211)
Stock-based employee compensation expense
determined under fair-value method (177) (195) (513) (539)
--------------- --------------- ------------ ------------
Pro forma $ (974) $ (64) $ (1,909) $ (750)
=============== =============== ============ ============
Net income (loss) per share:
As reported - basic: $ (0.05) $ 0.01 $ (0.09) $ (0.01)
=============== =============== ============ ============
As reported - diluted: $ (0.05) $ 0.01 $ (0.09) $ (0.01)
=============== =============== ============ ============
Pro forma - basic: $ (0.06) $ (0.00) $ (0.12) $ (0.05)
=============== =============== ============ ============
Pro forma - diluted: $ (0.06) $ (0.00) $ (0.12) $ (0.05)
=============== =============== ============ ============
The fair value of each option is estimated on the date of grant using the
fair value method with the following weighted-average assumptions:
Three months ended Nine months ended
September 30, September 30,
-------------------- -----------------------
2003 2002 2003 2002
--------- --------- ---------- ----------
Risk-free interest rate 2.19% 2.64% 2.03% 3.73%
Expected life (in years) 3 3 3 3
Dividend Yield -% -% -% -%
Expected volatility 75% 111% 84% 129%
All of the above assumptions were used for the Employee Stock Purchase Plan
except that the expected life is six months.
8
Note 5 - Product Warranty
We generally warrant our products against defects for a period of one year
and record a liability for such product warranty obligations at the time of sale
based upon historical experience. We do not provide separately priced extended
warranty coverage. However, we sell separately priced service contracts to
provide additional service coverage on our systems when the warranty period
expires. The related revenue on the service contracts is recognized on a
straight-line basis over the life of the service contract, which is generally
one year. Costs associated with services performed under the service contract
obligation are expensed as incurred.
Changes in product warranty obligations for the nine months ended September
30, 2003 are as follows (in thousands):
Balance as of December 31, 2002 $127
Add accruals for warranties issued 15
Less costs incurred under warranties issued (49)
-----------
Balance as of September 30, 2003 $93
===========
Note 6 - Restructuring
In January 2002, we instituted a series of actions to reduce our operating
costs. We consolidated our manufacturing and engineering facilities and are
closing our League City, Texas office. We recorded a restructuring charge of
$222,000 in the first quarter of 2002 that was reflected in the Condensed
Consolidated Statement of Operations and Comprehensive Loss as a separate line
item under operating expenses. This charge is related to the costs of
terminating 12 employees ($132,000) and closing the League City, Texas office
($90,000). The employee separation costs were all cash and the League City
office costs were made up of $40,000 in cash charges and $50,000 in non-cash
charges. All payments were made in 2002, and the reserve balance was zero at
September 30, 2003 and December 31, 2002.
Note 7 Recent Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after December 15, 2003. We do not have any
ownership in any variable interest entities as of September 30, 2003. We will
apply the consolidation requirement of FIN 46 in future periods if we should own
any interest in any variable interest entity.
9
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables."
EITF Issue No. 00-21 provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products, services and/or rights
to use assets. The provisions of EITF Issue No. 00-21 apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
adoption of this standard had no material impact on our financial statements.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes, and with our audited
financial statements and notes for the fiscal year ended December 31, 2002.
This quarterly report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include statements relating to operating performance,
the adequacy of our current capital resources and the timing of future capital
requirements. Our actual results could differ materially from those predicted in
the forward-looking statements as a result of risks and uncertainties including,
but not limited to, those discussed in this quarterly report and those discussed
under "Item 1 - Business, Additional Factors That Might Affect Future Results,"
and under "Item 7 - Management's Discussion And Analysis Of Financial Condition
And Results Of Operations; Factors that May Affect Future Results," commencing
on pages 11 and 23, respectively, in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2002. These risks and uncertainties include, but
are not limited to, competition, medical device regulation, general economic
conditions in the United States and internationally, adverse changes in the
specific markets for our products or reimbursement levels to our clinical
customers, adverse changes in customer order patterns, the effectiveness of our
sales force, pricing pressures, risks associated with foreign operations, delay
or failure to launch new products, failure to reduce costs or improve operating
efficiencies, the availability of debt or equity financing when needed, and the
sufficiency of our capital resources to meet our capital needs. You should not
rely on these forward-looking statements, which reflect our position as of the
date of this report. We are under no obligation to revise or update any
forward-looking statements.
Results of Operations
Revenues. Our revenues are derived primarily from the sale of products,
service contracts, software maintenance and grant revenues. Revenues for the
three and nine months ended September 30, 2003 were $4.8 million and $15.1
million, respectively, compared to $5.5 million and $15.7 million for the
corresponding periods in 2002. The decrease in revenues in the third quarter and
nine months was due primarily to lower sales in the U.S. caused by slower than
projected conversion of customers using older generation systems to our newest
CytoVision(R)systems.
Sales of systems were $3.5 million and $11.2 million in the three and nine
months ended September 30, 2003, respectively, compared to $4.3 million and
$12.2 million for the corresponding periods in 2002. The decrease in systems
sales was due primarily to the impact in the U.S. of slower conversion to our
newest CytoVision systems.
Service contract, software maintenance and grant revenues were $1.3 million
and $3.9 million in the three and nine months ended September 30, 2003,
respectively, compared to $1.2 million and $3.5 million for the corresponding
periods in 2002. The increase in the first nine months was due primarily to
collaboration revenues received in the first and third quarters from the
agreement with the Sanger Institute in the U.K. There were no collaboration or
grant revenues in the first nine months of 2002.
Cost of revenues. Cost of revenues includes direct material and labor
costs, manufacturing overhead, installation costs, warranty-related expenses and
post-warranty service and application support expenses. Costs of revenues for
the three and nine months ended September 30, 2003 were $2.1 million and $6.3
11
million, respectively, compared to $2.1 million and $5.9 million for the
corresponding periods in 2002. Cost of revenues, as a percentage of total
revenues, for the three and nine months ended September 30, 2003 were 44% and
42%, respectively, compared to 38% for the corresponding prior year periods. The
increase is primarily due to the sale of a number of our Ariol(TM)systems during
2003 at a lower gross margin percent for market development purposes.
Research and development expenses. Research and development expenses for
the three and nine months ended September 30, 2003 were $980,000 and $2.8
million, respectively, compared to $832,000 and $2.5 million in the comparative
prior year periods. This increase in the third quarter is due primarily to
$70,000 in costs associated with additional research staff in the U.S. and the
payment of a $55,000 license fee. The increase in the first nine months is due
primarily to the unfavorable impact ($100,000) of the weakening of the U.S.
dollar on our U.K.-based R&D expense and $60,000 in costs associated with hiring
additional research staff.
Sales and marketing expenses. Sales and marketing expenses for the three
and nine months ended September 30, 2003 were $1.8 million and $5.4 million,
respectively, compared to $1.8 million and $5.3 million for the comparative
prior year periods. The slight increase in sales and marketing expenses in the
first nine months is due primarily to the unfavorable impact ($200,000) of the
weakening of the U.S. dollar on our U.K.-based sales and marketing expenses.
General and administrative expenses. General and administrative expenses
for the third quarter and first nine months of 2003 were $709,000 and $2.0
million, respectively, compared to $584,000 and $1.9 million in the comparative
prior year periods. The increase in general and administrative expenses in the
third quarter was primarily attributable to the reversal of a reserve for bad
debts in 2002 in the amount of $120,000 that was no longer deemed necessary. In
the first nine months of the year, the increase in general and administrative
costs in the third quarter was offset by decreased costs in the second quarter
associated with the receipt of a grant from our landlord (net effect of
$170,000) in the U.K. that was treated as an offset to rent expense in the
second quarter.
Restructuring. There were no restructuring costs in the first nine months
of 2003. The restructuring costs in 2002 were due to a series of actions taken
to rationalize our operations to provide a lower operating cost while increasing
efficiencies. We are closing our League City, Texas office and have consolidated
our manufacturing and engineering facilities. We recorded a restructuring charge
of $222,000 in the first quarter of 2002 that was due to the costs of
terminating 12 employees ($132,000) and closing the League City, Texas office
($90,000.)
Other income (expense), net. The other expense of $37,000 in the third
quarter of 2002 was due primarily to net interest expense. Other income of
$30,000 in the first nine months of 2003 was primarily comprised of $101,000 of
foreign currency gains incurred in the translation of various balance sheet
items from foreign currencies into the U.S. dollar and $57,000 in net interest
expense payable on our bank borrowings. There was $68,000 of other expense in
the first nine months of 2002 primarily comprised of $64,000 of net interest
expense, $28,000 of income tax expense and $18,000 of foreign currency gains
incurred in the translation of various balance sheet items from foreign
currencies into the U.S. dollar.
12
Liquidity and Capital Resources
At September 30, 2003, we had cash, restricted cash and cash equivalents of
$2.3 million and working capital of $2.1 million compared to $3.1 million and
$3.3 million respectively at December 31, 2002. Restricted cash, which
collateralizes various credit card and bank guarantees in the United Kingdom,
amounted to $167,000 at September 30, 2003 and $156,000 at December 31, 2002.
Cash provided by operations for the nine months ended September 30, 2003
was $614,000 compared to cash used in operations of $929,000 for the first nine
months of 2002. Changes in the components of cash used in operations included:
an increase in net loss amounting to $1.2 million (a net loss of $1.4 million in
the first nine months of 2003 versus a net loss of $211,000 in the first nine
months of 2002), and decreased requirements for trade accounts receivables of
$3.8 million (a decrease of $2.5 million in 2003 reflecting improved collections
versus an increase of $1.3 million in 2002) and for inventories of $682,000 (a
decrease of $280,000 in 2003 reflecting a reduction in the components that had
been built up for new products, versus an increase of $402,000 in 2002 due to a
build-up in components for new products). These decreases were partially offset
by increases in the need for funds for accounts payable and accrued expenses of
$787,000 and $202,000, respectively. Accounts payable decreased by $500,000 in
the first nine months of 2003 compared to an increase of $287,000 in the first
nine months of 2002. The decrease in the first nine months of 2003 was due
primarily to a reduction in accounts payable to vendors supplying system
components, reflecting lower inventory at the end of the September 2003.
Trade accounts receivable as a percent of third quarter revenues were 98%
at September 30, 2003 compared to 121% at September 30, 2002 and 130% at
December 31, 2002 reflecting improved collections in the quarter. This strong
relationship between quarter-end receivables and that quarter's sales is
primarily due to the fact that most of our sales occur late in the quarter as is
typical of a capital equipment business. Although our payment terms are net 30
days, certain customers, specifically government, university, Asian and European
customers, tend to take longer to pay their receivable balances.
Cash used in investing activities was $258,000 in the first nine months of
2003 compared to cash provided by investing activities of $90,000 in the first
nine months of 2002. This change was primarily due to a decrease in our
short-term investments of $650,000 in 2002 versus no change in 2003 since we no
longer have any short-term investments. We invested $259,000 for purchases of
capital equipment in the first nine months of 2003 compared to $540,000 in the
first nine months of 2002.
Cash used in financing activities was $1.1 million in the first nine months
of 2003, primarily due to repayments on our bank line with SVB, compared to cash
provided by financing activities of $1.3 million in the first nine months of
2002. We received $1.0 million from the issuance of common stock in a private
placement in the first nine months of 2002 and $182,000 from an increase in bank
loans.
On January 31, 2002, we completed a private placement of 571,500 shares of
our common stock to an institutional investor (purchasing for three separate
funds) at a purchase price of $1.75 per share. On July 29, 2002, each investor
received a warrant exercisable for the number of shares of our common stock
equal to the number of shares of common stock purchased by that investor in the
January 31, 2002 financing. The warrants are exercisable for four years from
July 29, 2002 at a price of $2.25 per share. All warrants remain outstanding as
of September 30, 2003.
13
We had a one-year loan agreement with Silicon Valley Bank ("SVB") that was
effective through September 27, 2003 with borrowing capability of up to $3.5
million depending on the level of certain of our North American accounts
receivable. The loan agreement included the requirement for us to maintain a
minimum level of tangible net worth. The loan agreement was amended on January
31, 2003 and on July 30, 2003 to reduce the minimum level of tangible net worth
that we had to maintain through the end of the loan agreement. The amendments
also provided us with a waiver of our non-compliance with the requirement to
maintain a minimum level of tangible net worth as at December 31, 2002 and June
30, 2003, respectively.
The loan agreement was further amended on September 3, 2003 to extend the
term of the agreement for an additional year through September 26, 2004. At
September 30, 2003 we had used $994,000 of the SVB facility with $688,000
available but not used. The interest rate on the facility was 6.0% at September
30, 2003, computed as the SVB prime rate plus 2 percent. The loan is
collateralized by substantially all of the assets of the U.S. corporation and
requires us to maintain a minimum level of tangible net worth amounting to $2.6
million at September 30, 2003. Other loan covenants include the need to maintain
insurance on our property, monthly reporting to SVB, the need to obtain SVB
approval for any extraordinary action and a limitation on the U.S. corporation's
ability to transfer more than $600,000 to a subsidiary. We were in compliance
with the SVB loan covenants as of September 30, 2003.
We collateralize various credit card and bank guarantees (used for customs
clearance purposes) with cash deposits at an international bank in the United
Kingdom. This amounted to (pounds)100,000 ($167,000) at September 30, 2003.
We expect negative cash flow from operations to continue through at least
the first quarter of 2004, as we continue the research and development of new
applications for our SPOT(TM) and Ariol(TM) systems, conduct clinical trials
required for FDA clearance of new products, expand our marketing, sales and
customer support capabilities, and add additional infrastructure. We currently
estimate that our capital resources will enable us to meet our capital needs for
at least the next twelve months.
However, expenditures required to achieve growth and profitability in the
long term may be greater than projected or the cash flow generated from
operations may be less than projected. As a result, our long-term capital needs
may require us to try to obtain additional funds through equity or debt
financing, collaborative or other arrangements with other companies, bank
financing and other sources. We have expended and will continue to expend
substantial amounts of money for research and development, preclinical testing,
conducting clinical trials for FDA clearance of new products, capital
expenditures, working capital needs and manufacturing and marketing of our
products. Our future research and development efforts, in particular, are
expected to include development of additional applications of our current
cytogenetic products and additional applications for the SPOT(TM) and
Ariol(TM)systems, which may require additional funds.
There can be no assurance that we will be able to obtain additional debt or
equity financing if needed and on terms acceptable to us. If adequate and
acceptable funding is not available, we could be required to delay development
or commercialization of certain products, to license to third parties the rights
to commercialize certain products or technologies that we would otherwise seek
to commercialize internally, or to reduce the marketing, customer support, or
other resources devoted to product development. Accordingly, our failure to
obtain sufficient funds on acceptable terms when needed could have a material
adverse effect on our ability to achieve our long-term business objectives.
14
We have received from SVB various waivers of our non-compliance with the
loan covenant requiring us to maintain a minimum level of tangible net worth.
There is no assurance that SVB will continue to provide such waivers in the
future. In the event that we are unable to remain in compliance with this
covenant, we would have to repay any outstanding balance on the SVB loan, which
could limit our ability to fund our working capital and growth objectives.
We transferred our listing from the Nasdaq National Market to the Nasdaq
SmallCap Market, which has less stringent listing requirements, as of February
4, 2003. As a result, we may find it more difficult to raise additional capital
should the need arise in the future.
In July 2003, we learned of a change in U.S. Medicare reimbursement for the
imaging component of certain pathology tests. This change reduced, through the
end of 2003, the payments (or reimbursements) that clinical laboratory customers
receive from Medicare for certain pathology tests performed using automated
imaging systems. The Centers for Medicare & Medicaid Services ("CMS") notified
laboratories that they had made an NCCI edit for a specific image analysis
procedural code retroactive to April 1 this year. CMS has also indicated that
they would implement a new reimbursement ("CPT") code with a specific image
analysis component beginning January 1, 2004 at a yet-to-be-announced
reimbursement level. Although we are not yet able to quantify the impact of
these changes on our clinical laboratory customers in the U.S., we believe that
some clinical laboratory customers have deferred, and may continue to defer,
decisions to purchase our Ariol(TM) systems until the new reimbursement level is
determined.
Recent Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after December 15, 2003. We do not have any
ownership in any variable interest entities as of September 30, 2003. We will
apply the consolidation requirement of FIN 46 in future periods if we should own
any interest in any variable interest entity.
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables."
EITF Issue No. 00-21 provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products, services and/or rights
to use assets. The provisions of EITF Issue No. 00-21 apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
adoption of this standard had no material impact on our financial statements.
15
Item 3. Quantitative and Qualitative Disclosures about Market Risk Derivatives
and Financial Instruments.
For the nine months ended September 30, 2003, there were no material
changes from the disclosures made in our Form 10-K for the year ended December
31, 2002. We maintain our funds as cash or cash equivalents, primarily in money
market investments with a maturity of less than 90 days. We invested these funds
at an average interest rate of 0.90% during the third quarter of 2003. These
investments are not subject to interest rate risk.
Item 4. Disclosure Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation as of the end of the period covered by this Quarterly Report on Form
10-Q, our chief executive officer and chief financial officer have concluded
that our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act") are
effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms.
(b) Changes in internal control over financial reporting. There were no
significant changes in our internal control over financial reporting or in other
factors during our last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Description
10.47 Amendment to Loan Documents dated September 3, 2003 between Registrant and
Silicon Valley Bank
31-1 Chief Executive Officer's Certification Pursuant to 15 U.S.C. Section 7241
31-2 Chief Financial Officer's Certification Pursuant to 15 U.S.C. Section 7241
32-1 Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32-2 Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On July 31, 2003, we filed a Current Report on Form 8-K which
contained as an exhibit a copy of our press release announcing earnings for the
second quarter of fiscal 2003.
17
APPLIED IMAGING CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on our behalf by the
undersigned thereunto duly authorized.
APPLIED IMAGING CORP.
(Registrant)
Date: October 31, 2003 By: /S/ CARL HULL
--------------------------
Carl Hull
President and
Chief Executive Officer
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Date: October 31, 2003 By: /S/ BARRY HOTCHKIES
-------------------------
Barry Hotchkies
Executive Vice President, Chief Financial Officer