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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: February 28, 1999 - 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
April 6, 1999: 11,546,989
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<PAGE>
<TABLE>
Q-MED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
February 28, November 30,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 661,071 $ 2,075,179
Investments 1,006,560 --
Accounts receivable, net of allowances of
approximately $500,000 and $500,000 262,473 304,465
Inventories 484,604 503,994
Prepaid expenses and other current assets 93,848 57,776
----------- -----------
2,508,556 2,941,414
Property and equipment, net 547,352 578,404
Product software development costs 28,320 34,856
Other assets 194,956 202,750
----------- -----------
$ 3,279,184 $ 3,757,424
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 604,140 $ 549,253
----------- -----------
604,140 549,253
Convertible long-term debt 950,000 950,000
Leases payable, long term 96,976 107,724
Deferred warranty revenue 22,552 31,448
----------- -----------
Total liabilities 1,673,668 1,638,425
Temporary equity - put option 4,021,991 4,021,991
Stockholders' equity
Common stock $.001 par value; 20,000,000 shares
authorized; 11,590,989 and 11,586,321 shares issued
and 11,568,989 and 11,564,321 shares outstanding 11,591 11,587
Paid-in capital 17,161,836 17,150,547
Accumulated deficit (19,509,274) (18,989,501)
Accumulated other comprehensive income
Unrealized holding loss/gain on
available-for-sale securities (5,003) --
----------- -----------
(2,340,850) 1,827,367
Less treasury stock at cost, 22,000 common shares (75,625) (75,625)
----------- -----------
Total stockholders' equity (2,416,475) (1,902,992)
----------- -----------
$ 3,279,184 $ 3,757,424
=========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
Q-MED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
For the Three For the Three
Months Ended Months Ended
February 28, February 29,
1999 1998
------------- -------------
Net sales 392,218 455,116
Cost of sales 229,146 317,246
----------- ----------
Gross profit 163,072 137,870
Selling, general and administrative expenses 512,126 640,589
Provision for doubtful accounts -- 61,658
Research and development expenses 139,645 170,166
----------- ----------
(Loss) from operations (488,699) (734,543)
Interest income 12,064 22,863
Interest expense (43,138) (49,535)
----------- ----------
Net (loss) (519,773) (761,215)
Other comprehensive income (loss)
Unrealized gains on securities
Unrealized holding gains (losses)
arising during period (5,003) --
----------- ----------
Comprehensive (loss) $ (524,776) $ (761,215)
=========== ==========
(Loss) per common share $ (.05) $ (.08)
----------- ----------
Weighted average number of shares
of common stock outstanding 11,588,291 9,648,519
=========== ==========
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
Q-MED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months Ended February 28, 1999
(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, 1998 $11,587 $17,150,547 $(18,989,501) 22,000 $(75,625) $(1,902,992)
Exercise of stock options 4 11,289 11,293
Net loss for the three months
ended February 28, 1999 (524,776) (524,776)
------- ----------- ------------ ------ -------- -----------
Balance--February 28, 1999 $11,591 $17,161,836 $(19,514,277) 22,000 $(75,625) $(2,416,475)
======= =========== ============ ====== ======== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
Q-MED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Three For the Three
Months Ended Months Ended
February 28, February 29,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (524,776) $ (761,215)
----------- -----------
Adjustments to reconcile net income to cash (used in)
provided by operating activities:
Depreciation and amortization 69,737 64,996
(Increase) decrease in
Accounts receivable 41,992 (34,439)
Inventory 19,390 9,962
Prepaid expenses and other current assets (36,072) (40,848)
Increase (decrease) in
Accounts payable and accrued liabilities 54,887 65,313
Other, net (25,388) (12,949)
----------- -----------
Total adjustments 124,546 52,035
----------- -----------
$ (400,230) $ (709,180)
=========== ===========
Cash flows from investing activities:
Purchase of investments (1,006,560) (1,695,512)
Capital expenditures, net (18,611) (19,221)
----------- -----------
Net cash (used in) provided by investing activities $(1,025,171) $(1,714,733)
=========== ===========
Cash flows from financing activities:
Proceeds from 8% convertible note, net -- 1,958,059
Proceeds from issuance of common stock 11,293 --
----------- -----------
$ 11,293 $ 1,958,059
=========== ===========
Net (decrease) increase in cash and cash equivalents (1,414,108) (465,854)
Cash and cash equivalents at beginning of period 2,075,179 640,266
----------- -----------
Cash and cash equivalents at end of period $ 661,071 $ 174,412
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 5,138 $ 9,536
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<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 three month period ended February 28, 1999
are not necessarily indicative of the results that may be expected for the year
ending November 30, 1999. 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, 1998.
Note 1 - Summary of Significant Accounting Policies
Reclassifications
Certain reclassifications have been made to the prior years income statements in
order to conform to the current year presentation. $291,000 was reclassed from
selling, general and administrative expenses into cost of goods sold and
research and development expenses.
Comprehensive Income
As of December 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130
establishes standards for the reporting and presentation of comprehensive
income, its components and accumulated balances. Comprehensive income, as
defined, includes all changes to equity except those resulting from investments
by or distributions to owners. Among other disclosures, SFAS 130 requires that
all items that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. Adoption of
this statement had no effect on the Company's financial position or results of
operations.
Note 2 - Results of Operations
In the opinion of management, the financial statements for the three months
ended February 28, 1999 and February 28, 1998 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 three months ended February
28, 1999 are not necessarily indicative of the results which may be expected for
the full year ended November 30, 1999.
Note 3 - Investments
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Amount
---------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Available-for-sale
U.S. Treasury securities $1,011,563 $ -- $(5,003) $1,006,560 $1,006,560
---------- ------- ------- ---------- ----------
$1,011,563 $ -- $(5,003) $1,006,560 $1,006,560
========== ======= ======= ========== ==========
</TABLE>
<PAGE>
Note 4 - 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:
February 28, November 30,
1999 1998
------------ ------------
(Unaudited)
Raw materials (component parts) $214,503 $216,350
Finished units 270,101 287,644
-------- --------
$484,604 $503,994
======== ========
Note 5 - Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include the following:
February 28, November 30,
1999 1998
----------- ------------
(Unaudited)
Accounts payable trade $142,221 $278,224
Deferred warranty revenue 158,423 156,813
Accrued payroll 97,772 78,539
Other accrued expenses 205,724 35,677
-------- --------
$604,140 $549,253
======== ========
Note 6 - 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.
Note 7 - Year 2000
The Company recognizes the need to ensure that its operations will not be
adversely impacted by the Year 2000 software failures. All medical devices sold
by qmed, Inc. are Year 2000 compliant. ohms|cad was designed to be Year 2000
compliant. The Company has notified all of its customers of the need for upgrade
where necessary. All development costs have been expensed as incurred.
All of the Company's internal operating systems are on schedule for compliance
and should be complete by August 1999. The remaining costs to modify the
Company's systems for Year 2000 compliance are expected to be less than $50,000.
<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.
Period to Period
Percentage Changes
For the Three Months For the Three Months Ended
Ended February 28, February 28,
-------------------- ---------------------------
1999 1998 1999 vs. 1998
------ ------ --------------
Sales (net) 100.0% 100.0% (13.8)
Cost of sales 58.4 69.7 (27.8)
----- -----
Gross profit 41.6 30.3 18.3
Selling, general and
administrative 130.6 140.7 (20.1)
Provision for doubtful accounts -- 13.5 *
Research and development 35.6 37.4 (17.9)
----- -----
Loss from continuing
operations (124.6) (161.3) (33.5)
Interest income 1.8 5.0 (69.1)
Interest expense (11.0) (10.9) (12.9)
----- -----
Net loss (133.8) (167.2) (31.1)
===== =====
* Not meaningful
THREE MONTHS ENDED FEBRUARY 28, 1999 COMPARED WITH THE THREE MONTHS ENDED
FEBRUARY 28, 1998
Net sales for the three months ended February 28,1999 decreased by 13.8% or
approximately $63,000 when compared to the three months ended February 28,1998.
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 revenue to increase during
the second quarter as ohms|cad is implemented under two new contracts beginning
in April 1999.
Revenues received through IHMC are structured on a contractual basis whereby the
Company receives a payment from physician groups and health management
organizations calculated as a percentage of the reduction of the organization's
costs of providing care for CAD patients. An initial baseline is selected and
the total CAD costs are computed as baseline costs. The ohms|cad system is then
placed in service and used throughout the contract period to reduce costs and
improve the health status of patients with coronary disease. At the end of each
contract year the total CAD costs are then calculated and compared to the
baseline year costs. The savings derived are distributed to the Company on a
predetermined basis by the contracting organization. From inception of the
contract, the Company receives a monthly pre-payment of a portion of the
estimated savings. Such pre-payments are recorded as revenue. Once the actual
reduction of cost is calculated, the pre-payments are subtracted and any
additional savings distribution owed to the Company is billed and recorded at
that time.
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 $(524,776) for the quarter ending February 28, 1999 was approximately
$(393,772) from IHMC.
<PAGE>
The Company's gross profit margin increased to 41.6% during the three months
ended February 28, 1999 from 30.3% for the three months ended February 28, 1998.
The 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 for the three months ended February
28, 1999 decreased by approximately $128,000 or 20.1% compared to the three
months ended February 28, 1998. This decrease was primarily due to the decrease
in the level of selling costs related to the Company's capital equipment segment
as well as overall cost containment. Management expects selling, general and
administrative expenses to increase as a result of the implementation of the two
new accounts during the second quarter of 1998.
Research and development expenses for the three months ended February 28, 1999
decreased by approximately $31,000 when compared to the corresponding first
quarter of 1998. This decrease is primarily due to the Company's continued cost
reductions.
The Company has conducted a review of its computer systems and products to
identify the systems that could be affected by the "Year 2000" issue and is
implementing its plan to resolve the issue. The Year 2000 problem is the result
of computer programs being written using two digits rather than four to define
the applicable year. Any of the Company's programs that have time sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations. The
Company presently believes, with modifications to existing software and
converting to new software, the Year 2000 problem will not pose significant
operational problems for the Company's computer systems as so modified and
converted. However, if such modifications and conversions are not completed
timely, the Year 2000 problem may have a material impact on the operations of
the Company. Certain of the Company's products will require software upgrade to
deal with the problem as well. The Company has begun to implement a Year 2000
upgrade for each of its products that are the subject of warranties and
estimates that the total expense to be charged, including engineering, testing,
parts and labor will be approximately $180,000, most of which has been expensed
as incurred during fiscal 1998. The Company estimates the cost of upgrading
internal software programs to be about $25,000 which will be incurred during
1999. While the Company's ohms|cad system is fully compliant, the Company relies
on the information technology departments of existing and prospective customers
for data utilized in proposing a contract and in measuring the amount of costs
saved through the implementation of ohms|cad. The Company cannot assess the
effect that Year 2000 programs implemented by these other companies will have.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company's principal sources of working capital have been provided
by proceeds from public and private placements of securities and the sale of
certain assets. Since the Company's inception, sales of securities and assets
have generated approximately $20,000,000 less applicable expenses.
On December 18, 1997, the Company sold 8% Convertible Notes (the "Notes") in the
principal amount of $2,000,000 in a private placement to three investors.
Interest on the Notes accrued monthly and was due on December 18, 2002. On
November 16, 1998, the Company sold an aggregate of 1,926,702 shares of its
common stock for $3,217,626 in a private placement to investors led by the same
three investors that purchased the Notes. The Company received gross cash
proceeds of $2,020,936 from the sale of the shares and the balance was paid by
converting $1,050,000 of $2,000,000 principal amount of the Notes and accrued
interest of $146,663 into shares of common stock. The remaining $950,000
principal amount of the Notes were amended to increase the interest rate to 16%
per annum, and to grant the Noteholders a security interest in substantially all
of the Company's assets. Interest on the Notes is capitalized annually and will
be due at maturity. The Company may redeem the Notes for cash or common stock
for certain premiums and subject to conditions contained in the amended Note
Agreement. The Company is required to redeem the Notes at higher premiums in the
event of a change of control. The Note Agreement prohibits the Company from
paying dividends until the Notes are paid.
<PAGE>
In connection with the sale of the shares, the Company granted certain rights to
the purchasers, including registration rights and the right to cause the Company
to purchase the shares at the following prices in certain events, such as
bankruptcy, a default in payments or if the Company is no longer listed on the
NASDAQ Small Cap Market at the following prices:
Year Redemption Price
---- ----------------
1998 $2.0875
1999 $2.0040
2000 $1.9205
2001 $1.8370
2002 and thereafter $1.6700
In the event the Company is required to redeem the shares for cash, which
management believes is not likely during fiscal 1999, the Company will have to
seek financing or sell assets to pay the redemption price.
The Company had working capital of $1,904,416 at February 28, 1999 compared to
$2,392,161 at November 30, 1998 and ratios of current assets to current
liabilities of 4.2:1 and 5.4:1 as of November 30, 1998. The working capital
decrease of approximately $487,000 was primarily due to the net loss of
approximately $525,000 for the three months ended February 28, 1999.
The Company has anticipated that funds generated from operations, together with
cash and investments, will be sufficient to meet its working capital
requirements for the current year. In the event sales do not meet the Company's
expectations, the Company may be required to seek additional financing to
support IHMC's sales efforts.
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 18.3%
of the receivables balance at February 28, 1999 compared to 11.4% at November
30, 1998. 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 member per month
basis. The Company expects revenue to increase as it begins the utilization of
ohms|cad with CIGNA of Tampa and PacifiCare during the second quarter as well as
additional arrangements entered into during fiscal 1999.
The Company believes that there has not been a significant impact from inflation
on the Company's operations during the past three fiscal years.
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 February 28, 1999, the Company had
approximately $1,668,000 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
<PAGE>
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 a 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
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed with this report
None.
(b) 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: April 19, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-END> FEB-28-1999
<CASH> 661,071
<SECURITIES> 1,006,560
<RECEIVABLES> 762,232
<ALLOWANCES> 499,759
<INVENTORY> 484,604
<CURRENT-ASSETS> 2,508,556
<PP&E> 2,817,804
<DEPRECIATION> 2,270,452
<TOTAL-ASSETS> 3,279,184
<CURRENT-LIABILITIES> 604,140
<BONDS> 0
11,591
0
<COMMON> 0
<OTHER-SE> 1,593,925
<TOTAL-LIABILITY-AND-EQUITY> 3,279,184
<SALES> 392,218
<TOTAL-REVENUES> 404,282
<CGS> 229,146
<TOTAL-COSTS> 651,771
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,138
<INCOME-PRETAX> (524,776)
<INCOME-TAX> 0
<INCOME-CONTINUING> (524,776)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (524,776)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
