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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended: May 31, 1998
Commission file number: 0-11411
Q-MED, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-2468665
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 METRO PARK SOUTH, LAURENCE HARBOR, NEW JERSEY 08878
- ------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number, including area code) (732) 566-2666
Indicate by check mark whether the registrant (1) has filed all reports required
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 number of shares outstanding of the registrant's common stock
on July 9, 1998: 9,659,519
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<PAGE>
Q-MED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 31, 1998 November 30,
(Unaudited) 1997
------------ ------------
ASSETS
Current assets
Cash and cash equivalents ....................... $ 1,193,923 $ 640,266
Accounts receivable, net of
allowances of approximately
$337,800 and $250,000 respectively ............ 181,037 197,901
Inventories ..................................... 561,834 667,255
Prepaid expenses and other current assets ....... 136,130 68,439
------------ ------------
2,072,924 1,573,861
Debt issue costs ................................ 39,687 --
Product software development costs .............. 47,927 60,998
Property and equipment, net ..................... 682,400 624,761
Other assets .................................... 179,800 190,913
------------ ------------
$ 3,022,738 $ 2,450,533
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses ........... $ 782,283 $ 770,446
------------ ------------
782,283 770,446
8% Convertible notes ............................ 2,000,000 --
Leases payable - long term ...................... 131,642 77,522
Deferred warranty revenue ....................... 30,519 40,047
------------ ------------
2,944,444 888,015
Stockholders' equity
Common stock $.001 par value;
20,000,000 shares authorized;
9,659,519 and 9,648,519 shares
issued and 9,637,519 and 9,626,519
outstanding ................................... 9,660 9,649
Paid-in capital ................................. 18,057,155 18,041,941
Accumulated deficit ............................. (17,912,896) (16,413,447)
------------ ------------
153,919 1,638,143
Less: treasury stock at cost, 22,000
common shares.................................. (75,625) (75,625)
------------ ------------
Total stockholders' equity ...................... 78,294 1,562,518
------------ ------------
$ 3,022,738 $ 2,450,533
============ ============
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
Q-MED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Six For the Three For the Six For the Three
Months Ended Months Ended Months Ended Months Ended
May 31, 1998 May 31, 1998 May 31, 1997 May 31, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales .............................. $ 974,538 $ 519,422 $ 1,188,883 $ 628,883
Less sales returns and
allowances ....................... 5,530 5,530 22,553 20,318
----------- ---------- ----------- ----------
Net sales ...................... 969,008 513,892 1,166,330 608,565
Cost of sales ...................... 337,720 188,980 452,079 220,842
----------- ---------- ----------- ----------
Gross profit ................... 631,288 324,912 714,251 387,723
Selling, general and
administrative expenses .......... 1,788,147 855,931 2,043,895 1,048,319
Provision for uncollectible
accounts ......................... 119,200 57,542 27,049 27,049
Research and development
expenses ......................... 168,483 121,438 83,142 47,403
----------- ---------- ----------- ----------
Income (loss) from operations ...... (1,444,542) (709,999) (1,439,835) (735,048)
Interest expense ................... (95,199) (45,664) (14,232) (7,339)
Other income ....................... 40,292 17,429 63,912 28,547
----------- ---------- ----------- ----------
Net (loss) ......................... $(1,499,449) $ (738,234) $(1,390,155) $ (713,840)
=========== ========== =========== ==========
(Loss) per common share ............ $ (.15) $ (.07) $ (.15) $ (.07)
----------- ---------- ----------- ----------
Weighted average number of
shares of common stock
outstanding ...................... 9,653,459 9,658,291 9,518,636 9,541,464
=========== ========== =========== ==========
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
Q-MED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended May 31, 1998
(Unaudited)
<CAPTION>
Common Stock
Held in Treasury
Common Paid-in Accumulated --------------------
Stock Capital Deficit Shares Amount Total
------ ----------- ------------- ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance--November 30, 1997 ..... $9,649 $18,041,941 $(16,413,447) 22,000 $(75,625) $1,562,518
Exercise of stock options
and warrants ................. 11 15,214 15,225
Net loss for the six months
ended May 31, 1998 ........... (1,499,449) (1,499,449)
------ ----------- ------------ ------ -------- ----------
Balance--May 31, 1998 .......... $9,660 $18,057,155 $(17,912,896) 22,000 $(75,625) $ 78,294
====== =========== ============ ====== ======== ==========
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
Q-MED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Six For the Six
Months Ended Months Ended
May 31, May 31,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) ........................................... $(1,499,449) $(1,390,155)
Adjustments to reconcile net income to cash (used in)
provided by operating activities:
Depreciation and amortization ........................ 136,728 135,247
Changes in assets and liabilities:
Decrease in accounts receivable ...................... 16,864 42,910
Decrease in inventories .............................. 105,421 303,463
Increase (decrease) in accounts payable and
accrued liabilities ................................ 11,837 179,031
(Increase) in prepaid expenses and other assets ...... (67,691) (25,195)
Other, net ........................................... 41,921 (23,116)
----------- -----------
Total adjustments .................................... 245,080 612,340
----------- -----------
Net cash (used in) operating activities .............. $(1,254,369) $ (777,815)
=========== ===========
Cash flows from investing activities:
Proceeds from sale of investments .................... -- 1,055,639
Capital expenditures, net ............................ (163,004) (315,909)
----------- -----------
Net cash provided by (used in) investing activities .. $ (163,004) $ 739,730
=========== ===========
Cash flows from financing activities:
Net proceeds from issuance of 8% Convertible Notes ... 1,955,805 --
Principal (payment) on note payable to bank .......... -- (100,000)
Proceeds from issuance of common stock ............... 15,225 110,899
----------- -----------
Net cash provided by financing activities ............ $ 1,971,030 $ 10,899
=========== ===========
Net (decrease) increase in cash and cash equivalents ...... 553,657 (27,186)
Cash and cash equivalents at beginning of period .......... 640,266 680,686
----------- -----------
Cash and cash equivalents at end of period ................ $ 1,193,923 $ 653,500
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ............................................. $ 15,201 $ 14,232
=========== ===========
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
Q-MED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, these financial statements do not include
all of the information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six month period ended May 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
November 30, 1998. These consolidated condensed financial statements should be
read in conjunction with the financial statements and footnotes thereto included
in the Company's annual report on Form 10-K for the year ended November 30,
1997.
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
EARNINGS PER SHARE
Effective for the Company's financial statements for the year ended November 30,
1998, the Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share", (SFAS 128). SFAS 128 replaces the presentation of primary
earnings per share ("EPS") and fully diluted EPS with a presentation of basic
EPS and diluted EPS, respectively. Basic EPS excludes dilution and is computed
by dividing earnings available to common stockholders by the weighted-average
number of common shares outstanding during the period. Diluted EPS assumes
conversion of dilutive options and warrants, and the issuance of common stock
for all other potentially dilutive equivalent shares outstanding. All
potentially dilutive equivalent shares outstanding are antidilutive for all
periods. The adoption of SFAS 128 did not have a material effect on the
Company's reported EPS amounts.
NOTE 2 -- RESULTS OF OPERATIONS
In the opinion of management, the financial statements for the six months ended
May 31, 1998 and May 31, 1997 include all adjustments and accruals necessary for
a fair presentation. All such adjustments are of a normal recurring nature. The
results of operations for the six months ended May 31, 1998 are not necessarily
indicative of the results which may be expected for the full year ended November
30, 1998.
NOTE 3 -- INVENTORIES
Inventories, consisting of finished units and raw materials, are stated at the
lower of cost (determined on a moving weighted average method) or market.
Inventories consist of the following:
May 31, November 30,
1998 1997
(Unaudited)
----------- ------------
Raw materials (component parts) ........... $200,054 $209,580
Finished units ............................ 361,780 457,675
-------- --------
$561,834 $667,255
======== ========
During the second quarter ending May 31, 1998 approximately $43,000 was written
off as obsolete inventory and approximately $40,000 was capitalized as fixed
assets with an estimated useful life of 5 years.
<PAGE>
NOTE 4 -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following:
May 31, November 30,
1998 1997
(Unaudited)
----------- ------------
Accounts payable trade .................... $336,006 $394,264
Deferred warranty revenue ................. 183,811 204,260
Accrued payroll and commissions ........... 85,127 76,997
Other accrued expenses .................... 97,339 94,925
Interest Payable .......................... 80,000 --
-------- --------
$782,283 $770,446
======== ========
NOTE 5 -- PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of qmed, Inc., its
83% owned subsidiary, Heart Map, Inc., and its 100% owned subsidiary,
Interactive Heart Management Corp., which was formed in March, 1995. Interactive
Heart Management Corp. provides coronary artery disease management services to
health care providers throughout the United States. All inter-company accounts
and transactions have been eliminated.
<PAGE>
PART I -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents the percentage of total revenues for the periods
indicated and changes from period to period of certain items included in the
Company's Statements of Operations.
<TABLE>
<CAPTION>
Period to Percentage
Period Changes
For the Six Months For the Three Months For the For the
Ended May 31, Ended May 31, Six Months Three Months
------------------ ------------------ Ended May 31, Ended May 31,
1998 1997 1998 1997 1998 Vs. 1997 1998 Vs. 1997
------ ------ ------ ------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sales (net) .................................... 100.0% 100.0% 100.0% 100.0% (17.0) (15.6)
Cost of Sales .................................. 34.8 38.8 36.7 36.3 (25.3) (14.5)
------ ------ ------ ------
Gross Profit ................................... 65.2 61.2 63.3 63.7 (11.7) (16.2)
Selling, general and administrative ............ 184.6 175.3 166.6 172.2 (12.6) (18.4)
Provision for uncollectible accounts ........... 12.3 2.3 11.2 4.5 340.7 112.8
Research and development ....................... 17.4 7.1 23.7 7.8 102.7 156.2
------ ------ ------ ------
(Loss) from continuing operations .............. (149.1) (123.5) (138.2) (120.8) .4 (3.4)
Interest expense ............................... (9.9) (1.2) (8.9) (1.2) 568.9 522.3
Other Income ................................... 4.2 5.5 3.4 4.7 (37.0) (39.0)
------ ------ ------ ------
Net (loss) ..................................... (154.8) (119.2) (143.7) (117.3) 7.9 3.5
====== ====== ====== ======
</TABLE>
SIX AND THREE MONTHS ENDED MAY 31, 1998 COMPARED
WITH THE SIX AND THREE MONTHS ENDED MAY 31, 1997
Net sales for the six months ended May 31, 1998 decreased by 17% or
approximately $197,000 when compared to the six months ended May 31, 1997. Net
sales for the three months ended May 31, 1998 decreased by 15.6% or
approximately $95,000 when compared to the three months ended May 31, 1997. This
decrease is primarily due to the continued reduction in the Company's capital
equipment sales to the primary care marketplace. The Company's management has
focused primarily on the marketing of the ohms|cad system to managed care
organizations through its wholly owned subsidiary, Interactive Heart Management
Corp. ("IHMC"). The Company expects an increase in revenue during the third
quarter of 1998 from the implementation of the ohms|cad system under the
Company's agreement with CIGNA Healthcare of Ohio.
The Company has continued to aggressively market ohms|cad to leading health care
providers throughout the United States. The Company has had discussions with
large providers to use its ohms|cad system on a national scale within their
organizations to effectively manage coronary artery disease. Included in the net
loss of ($1,499,449) for the six months ended May 31, 1998 was approximately
($1,204,000) from IHMC.
The Company's gross profit margin increased to 65.2% during the six months ended
May 31, 1998 when compared to 61.2% for the six months ended May 31, 1997. The
Company's gross profit margin decreased slightly to 63.3% during the three
months ended May 31,1998 from 63.7% for the three months ended May 31, 1997. The
overall increase was primarily due to the consolidation of the production and
customer support operations related to the Company's capital equipment segment.
Selling, general and administrative expenses decreased by 12.6% or approximately
$256,000 for the six months ended May 31, 1998 when compared to the six months
ended May 31, 1997. Selling, general and administrative expenses for the three
months ended May 31, 1998 decreased by 18.4% or approximately $192,000 when
compared to the corresponding quarter of 1997. This decrease was primarily due
to a decrease in capital equipment sales-related expenses.
Research and development expenses for the six and three months ended May 31,
1998 increased by approximately $85,000 and $74,000, respectively, when compared
to the corresponding periods of the prior year. This increase is primarily due
to the development of ohms II which will enhance the capabilities of the present
ohms|cad system dramatically. This new system should be completed during the
third quarter.
<PAGE>
The provision for doubtful accounts increased by approximately $92,000 and
$30,000 respectively for the six and three months ended May 31, 1998 when
compared to the corresponding periods of the prior year. This increase is
primarily due to the reservation of certain accounts receivable of IHMC. While
the Company has reviewed interim data and believes these amounts are due, a
reserve has been set aside until the final accounting has been reconciled.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company's principle sources of working capital have been provided
by proceeds from public and private placements of securities, operations and the
sale of certain assets. Since the Company's inception, sales of securities and
assets have generated approximately $18,000,000 less applicable expenses.
On December 18, 1997, the Company sold an aggregate $2,000,000 8% Convertible
Subordinated Notes due December 18, 2002 (the "Notes"), without discount or
premium, in a private placement to three investors led by Galen Partners III,
L.P. Interest on the Notes is accrued monthly, compounded annually, and will be
due at maturity. The Notes are convertible into shares of the Company's common
stock at the rate of $5.60 per share. The Company may redeem the Notes in the
event the average closing price of shares of the Company's common stock equals
or exceeds $12.00 for a period of 90 days at the following times with the
following premiums and may elect to pay the redemption price in shares of common
stock:
Year Redemption Price
---- ----------------
1998 .............................. 105%
1999 .............................. 104%
2000 .............................. 103%
2001 .............................. 102%
2002 .............................. 100%
The Company is required to redeem the Notes at higher premiums in the event of a
change of control. In connection with the sale of the Notes, the Company granted
certain rights to the purchasers, including registration rights and the right to
appoint a member of the Company's board of directors. The Note Purchase
Agreement prohibits the Company from paying dividends until the Notes are paid.
The Company had working capital of $1,290,641 at May 31, 1998 compared to
$803,415 at November 30, 1997 and ratios of current assets to current
liabilities of 2.7:1 and 2.0:1 as of May 31, 1998 and November 30, 1997. The
working capital increase of approximately $487,000 was primarily due to the sale
of the Notes described above during December 1997.
The Company has anticipated that funds generated from operations, together with
cash and investments, may not be sufficient to meet its working capital
requirements for the current year. The Company is currently seeking additional
financing to support IHMC's sales efforts. See "Need for Additional Capital".
The Company maintains a general policy of net 30-day payment terms on equipment
sales to distributors, cash or third-party leasing arrangements with direct
sales to physicians and letters of credit for international sales. In some
instances, the Company has extended payment terms beyond net 30 to selected
distributors. The Company's receivables balances over 90 days past due was 5.9%
of the receivables balance at May 31, 1998 compared to 12.8% at November 30,
1997. The Company is aggressively seeking payment arrangements on these overdue
amounts.
The Company, with its IHMC subsidiary, enters into contract arrangements with
physician groups and managed care organizations where either a prepayment toward
a cost savings is made per month or billing is done on a per test basis. During
December 1997, the Company had entered into an agreement with CIGNA Healthcare
of Ohio, which has become operational July 1998. The Company expects revenue to
increase as it recognizes cost savings from additional arrangements during
fiscal 1998.
The Company believes that there has not been a significant impact from inflation
on the Company's operations during the past three fiscal years.
<PAGE>
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
FUTURE OPERATING RESULTS. Future operating results may be impacted by a number
of factors that could cause actual results to differ materially from those
stated herein, which reflect management's current expectations. These factors
include worldwide economic and political conditions, industry specific factors,
the Company's ability to maintain access to external financing sources and its
financial liquidity, the acceptance of the ohms|cad system by managed care
organizations, and the Company's ability to manage expense levels.
NEED FOR ADDITIONAL CAPITAL. As of May 31, 1998, the Company had approximately
$1,200,000 of cash and short term investments. The Company has experienced
negative cash flows since fiscal 1995 and expects the negative cash flow to
continue until significant service revenue is generated under agreements to
provide ohms|cad services. The Company expects that the monthly negative cash
flow will decrease as a result of increased activities related to ohms|cad. The
Company's future success is highly dependent upon its continued access to
sources of financing which it believes are necessary for the continued support
of IHMC's sales effort. In the event the Company is unable to maintain access to
its existing financing sources, or obtain other sources of financing, there
would be a material adverse effect on the Company's business, financial position
and results of operations.
REGULATION. The Company's products are subject to extensive government
regulation in the United States by federal, state and local agencies including
the Food and Drug Administration. The process of obtaining and maintaining FDA
and other required regulatory approvals for the Company's products is lengthy,
expensive and uncertain. There can be no assurance that changes in existing
regulations or the adoption of new regulations will not occur which will
adversely affect the Company.
STOCK PRICE FLUCTUATIONS. The Company's participation in a highly competitive
industry often results in significant volatility in the Company's common stock
price. This volatility in the stock price is significant risk investors should
consider.
FORWARD-LOOKING STATEMENTS. This report contains certain forward-looking
statements that are based on current expectations. In light of the important
factors that can materially affect results, including those set forth above and
elsewhere in this report, the inclusion of forward-looking information herein
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved. The Company may
encounter competitive, technological, financial and business challenges making
it more difficult than expected to continue to market its products and services;
competitive conditions within the industry may change adversely; the Company may
be unable to retain existing key management personnel; the Company's forecasts
may not accurately anticipate market demand; and there may be other material
adverse changes in the Company's operations or business. Certain important
factors affecting the forward-looking statements made herein include, but are
not limited to (i) accurately forecasting capital expenditures and (ii)
obtaining new sources of external financing. Assumptions relating to budgeting,
marketing, product development and other management decisions are subjective in
many respects and thus susceptible to interpretations and periodic revisions
based on actual experience and business developments, the impact of which may
cause the Company to alter its capital expenditure or other budgets, which may
in turn affect the Company's financial position and results of operations.
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No change from previous filing.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on June 2, 1998,
pursuant to written notice and the Company's bylaws. The total number of
the Company's shares outstanding on April 29, 1998, the record date of the
meeting, was 9,659,519 of which 8,925,837 were present, in person or by
proxy. The following persons were nominated by management and each was
elected to serve as director until the next annual meeting of stockholders:
No. of Votes
------------
Michael W. Cox .......................... 8,861,062
Howard L. Waltman ....................... 8,864,662
Richard I. Levin ........................ 8,864,662
Robert A. Burns ......................... 8,864,662
Herbert H. Sommer ....................... 8,864,662
The following matters were submitted to stockholders and adopted by the
requisite vote of a majority of the shares present and voting on the
matter:
For Against Abstain
--------- ------- -------
To ratify the selection of Auditors... 8,862,696 27,928 35,213
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Q-MED, INC.
By: /s/ MICHAEL W. COX
----------------------------------
Michael W. Cox
President
Principal Executive and
Financial Officer
Dated: July 10, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> MAY-31-1998
<CASH> 1,193,923
<SECURITIES> 0
<RECEIVABLES> 518,837
<ALLOWANCES> 337,800
<INVENTORY> 561,834
<CURRENT-ASSETS> 2,072,924
<PP&E> 2,793,498
<DEPRECIATION> 2,111,098
<TOTAL-ASSETS> 3,022,738
<CURRENT-LIABILITIES> 782,283
<BONDS> 0
0
0
<COMMON> 9,660
<OTHER-SE> 78,294
<TOTAL-LIABILITY-AND-EQUITY> 3,022,738
<SALES> 969,008
<TOTAL-REVENUES> 1,009,300
<CGS> 337,720
<TOTAL-COSTS> 1,956,630
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 119,200
<INTEREST-EXPENSE> 95,199
<INCOME-PRETAX> (1,499,449)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,499,449)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,499,449)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
