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: August 31, 2000 - 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
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock on October 5,
2000: 12,846,631.
<PAGE>
<TABLE>
<CAPTION>
Q-MED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
August 31, 2000 November 30, 1999
(Unaudited)
--------------- ---------------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,135,950 $ 794,430
Investments 1,496,043 --
Accounts receivable, net of
allowance of approximately
$42,000 and $116,000 respectively 90,155 170,657
Inventories 266,171 372,742
Prepaid expenses and other current assets 157,744 34,656
--------------- ---------------
3,146,063 1,372,485
Investment in joint venture -0- --
Property and equipment, net 435,373 440,555
Product software development costs, net 118,660 8,714
Other assets 130,229 144,296
--------------- ---------------
$ 3,830,325 $ 1,966,050
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 531,193 $ 680,817
--------------- ---------------
531,193 680,817
Convertible long-term debt -- 50,000
Leases payable - long term 71,956 68,902
Deferred warranty revenue 15,732 24,542
--------------- ---------------
618,881 824,261
Stockholders' equity Common stock $.001
par value; 20,000,000 shares authorized;
12,844,961 and 12,258,781 shares issued
and 12,822,961 and 12,236,781
shares outstanding 12,844 12,259
Paid-in capital 26,440,921 23,098,930
Accumulated deficit 23,165,196 (21,893,775)
Accumulated other comprehensive income
Unrealized holding losses on
available for sale securities (1,500) --
--------------- ---------------
3,287,069 1,217,414
Less: treasury stock at cost, 22,000 common shares (75,625) (75,625)
--------------- ---------------
Total stockholders' equity 3,211,444 1,141,789
--------------- ---------------
$ 3,830,325 $ 1,966,050
=============== ===============
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
and Accountant's Review Report
2
<PAGE>
<TABLE>
<CAPTION>
Q-MED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
For the Nine For the Nine For the Three For the Three
Months Ended Months Ended Months Ended Months Ended
August 31, 2000 August 31, 1999 August 31, 2000 August 31, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 1,908,696 $ 1,552,366 $ 835,745 $ 540,513
Cost of revenue 983,953 814,639 368,276 300,510
------------- ------------- ------------- -------------
Gross profit 924,743 737,727 467,469 240,003
Selling, general and
administrative expenses 2,144,572 1,628,949 824,722 593,030
Research and development
expenses 357,826 429,877 103,009 150,298
Debt conversion expense -- 737,135 -- 737,135
------------- ------------- ------------- -------------
Income (loss) from operations (1,577,655) (2,058,234) (460,262) (1,240,460)
Interest income 106,527 58,660 41,624 5,237
Interest expense (27,497) (112,563) (4,883) (26,515)
Other income - sale of tax benefits 309,256 -- -- --
Net loss in joint venture (82,052) -- (82,052) --
------------- ------------- ------------- -------------
Net (loss) $ (1,271,421) $ (2,112,137) $ (505,573) $ (1,261,738)
Other comprehensive income (loss)
Unrealized gains on securities
Unrealized holding gains (losses)
arising during period (1,500) (13,068) $ 21,202 $ (1,505)
------------- ------------- ------------- -------------
Comprehensive (loss) $ (1,272,921) $ (2,125,205) $ (484,371) $ (1,263,243)
============= ============= ============= =============
(Loss) per common
share $ (.10) $ (.18) $ (.04) $ (.11)
------------- ------------- ------------- -------------
Weighted average number of
shares of common stock
outstanding 12,586,235 11,605,548 12,844,743 11,636,988
============= ============= ============= =============
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
and Accountant's Review Report
3
<PAGE>
<TABLE>
<CAPTION>
Q-MED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY For the Nine Months Ended August 31, 2000
(Unaudited)
Accumulated Common Stock
Common Paid-in Accumulated Other Held in Treasury
Stock Capital Deficit Comprehensive (Loss) Shares Amount Total
------- ----------- ------- -------------------- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--November 30, 1999 $12,259 $23,098,930 $(21,893,775) 22,000 $(75,625) $1,141,789
Exercise of stock options and
warrants for cash 71 165,244 165,315
Sale of stock to Quest
Diagnostics for cash 286 1,984,714* 1,985,000
Sale of stock to private
investor for cash 163 1,000,049 1,000,212
Issuance of shares for debt
conversion 65 184,517 184,582
Amortization of non-employee
stock options 7,467 7,467
Net loss for the nine months
ended August 31, 2000 (1,271,421) (1,271,421)
Unrealized holding losses on
available for sale securities (1,500) (1,500)
------- ----------- ------------ ------- ------ -------- ----------
Balance--August 31, 2000 $12,844 $26,440,921 $(23,165,196) $(1,500) 22,000 $(75,625) $3,211,444
======= =========== ============ ======= ====== ======== ==========
</TABLE>
* Net of legal fees
See Accompanying Notes to Condensed Consolidated Financial Statements
and Accountant's Review Report
4
<PAGE>
<TABLE>
<CAPTION>
Q-MED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
August 31, 2000 August 31, 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Comprehensive (loss) $ (1,272,921) $ (2,125,205)
------------- --------------
Adjustments to reconcile net income
to cash (used in) operating activities:
Depreciation and amortization 183,742 194,453
Debt conversion expense -- 737,135
Amortization on non-employee
stock options 7,467 --
Changes in assets and liabilities:
Decrease in accounts receivable 80,502 85,658
Decrease in inventories 106,571 56,569
Increase (decrease) in accounts payable
and accrued liabilities (15,042) 145,819
(Increase) in prepaid expenses and
other assets (123,088) (107,285)
Other, net (11,548) (32,747)
------------- --------------
Total adjustments 228,604 1,079,602
------------- --------------
Net cash (used in) operating activities (1,044,317) (1,045,603)
============= ==============
Cash flows from investing activities:
Purchase of securities (1,496,043) (539,120)
Capital expenditures, net (268,647) (46,354)
------------- --------------
Net cash provided by investing activities (1,764,690) (585,474)
============= ==============
Cash flows from financing activities:
Net proceeds from issuance of common
stock 3,150,527 261,446
------------- --------------
Net cash provided by financing activities 3,150,527 261,446
============= ==============
Net (decrease) increase in cash and cash equivalents 341,520 (1,369,631)
Cash and cash equivalents at beginning of period 794,430 2,075,179
------------- --------------
Cash and cash equivalents at end of period $ 1,135,950 $ 705,548
============= ==============
Supplemental disclosure of cash flow information:
Cash paid during the periodfor:
Interest $ 10,426 $ 13,955
Non-cash investing and financing activities:
In April 2000, the holders of $50,000 principal amount of the company's
16% Convertible Notes converted the entire $50,000 principal plus accrued
interest of $134,582 principal into 64,315 shares of common stock.
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
and Accountant's Review Report
5
<PAGE>
Q-MED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited condensed consolidated 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 nine month period ended August 31, 2000 are
not necessarily indicative of the results that may be expected for the year
ending November 30, 2000. These condensed consolidated 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, 1999.
Note 1 - Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
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 2 - Investments
<TABLE>
<CAPTION>
Amortized Gross Gross Fair Carrying
Cost Unrealized Unrealized Value Amount
Gains Losses
<S> <C> <C> <C> <C> <C>
Available for Sale Securities
Corporate Debt Securities $1,000,043 $ -- $ (1,500) $ 998,543 $ 998,543
Government Bonds 497,500 -- -- 497,500 497,500
$1,497,543 $ -- $ (1,500) $1,496,043 $1,496,043
</TABLE>
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:
<TABLE>
<CAPTION>
August 31, November 30,
2000 1999
(Unaudited)
------------- -------------
<S> <C> <C>
Raw materials (component parts) $ 144,485 $ 167,902
Finished units 121,686 204,840
------------- -------------
$ 266,171 $ 372,742
============= =============
</TABLE>
6
<PAGE>
Note 4 - Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include the following:
<TABLE>
<CAPTION>
August 31, November 30,
2000 1999
(Unaudited)
------------- -------------
<S> <C> <C>
Accounts payable trade $ 139,714 $ 325,477
Deferred warranty revenue 131,005 135,109
Accrued payroll and commissions 92,717 96,626
Other accrued expenses 167,757 123,605
------------- -------------
$ 531,193 $ 680,817
============= =============
</TABLE>
Note 5 - Investment in Joint Venture
The Company has a 50% interest in HeartMasters, L.L.C. ("HM"). The management
agreement provides for profits and losses to be allocated based on the Company's
percentage of revenue. As of August 31, 2000 the Company contributed
approximately $82,000 to HM, however losses for the period exceeded this amount
bringing the investment in joint venture to zero.
7
<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 Period Percentage Changes
For the Nine Months For the Three Months For the Nine Months For the Three Months
Ended August 31, Ended August 31, Ended August 31, Ended August 31,
2000 1999 2000 1999 2000 Vs. 1999 2000 Vs. 1999
---- ---- ---- ---- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0% 23.0 54.6
Cost of revenue 51.6 52.5 44.1 55.6 20.8 22.6
----- ------ ----- ------
Gross profit 48.4 47.5 55.9 44.4 25.4 94.8
Selling, general and administrative 112.4 104.9 98.7 109.7 31.7 39.1
Research and development 18.7 27.7 12.3 27.8 (16.8) (31.5)
Debt conversion expense -- 47.5 -- 136.4 * *
----- ------ ----- ------
(Loss) from continuing operations (82.7) (132.6) (55.1) (229.5) (23.3) (62.9)
Interest Income 5.6 3.8 7.5 1.0 79.0 1583.4
Interest expense (1.5) (7.3) (.6) (5.0) (75.6) (81.6)
Other Income - sale of tax benefits 16.2 -- -- -- * --
Net loss in joint venture (4.3) -- (9.8) -- * *
----- ------ ----- ------
Net (loss) (66.7) (136.1) (58.0) (233.5) (40.1) (61.7)
===== ====== ===== ======
</TABLE>
* Not meaningful
NINE AND THREE MONTHS ENDED AUGUST 31, 2000 COMPARED WITH THE NINE AND THREE
MONTHS ENDED AUGUST 31, 1999
Net sales for the nine months ended August 31, 2000 increased by 23% or
approximately $356,000 when compared to the nine months ended August 31,1999.
This increase is due to a 117% or $679,000 increase in revenue related to
ohms|cad(R). Revenue related to the capital equipment segment decreased
approximately 50% or $323,000 for the same nine month period. Net sales for the
three months ended August 31, 2000 increased by 54.6% or approximately $295,000
when compared to the three months ended August 31,1999. Revenue related to
ohms|cad increased by 141% or $370,000 for the three month period ended August
31, 2000 when compared to the prior year, while revenue related to the capital
equipment segment decreased by 27.1% or $75,000 for the same period. The
substantial increase in ohms|cad revenue during this period is due to the July
2000 implementation of the newest contract for the Company with Regence
BlueCross BlueShield of Oregon. The Company expects ohms|cad revenues to
continue to increase substantially as the implementation of additional contracts
(executed earlier this year) begin with Dakotacare, Regence Washington and
additional lives from Regence Oregon.
Revenues received through IHMC are structured on a contractual basis whereby the
Company receives a payment from health management organizations calculated as a
percentage of the reduction of the organization's costs of providing care for
CAD patients or other method of assigning a PMPM calculation for fee revenues.
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 according to the contract.
From inception of the contract, the Company receives a monthly pre-payment of a
portion of the estimated savings or fixed PMPM fees. Such pre-payments are
recorded as revenue. Once the actual results are calculated, any increases or
reductions in revenue would be recorded at that time. In certain cases, the
Company has insured itself from any material reductions.
8
<PAGE>
The Company's gross profit margin increased to 48.4% from 47.5% and to 55.9%
from 44.4%, respectively for the nine and three month period ended August 31,
2000 compared to the nine and three months ended August 31, 1999. The increase
was primarily due to the increase in revenue related to the Company's disease
management segment.
Selling, general and administrative expenses for the nine months ended August
31, 2000 increased by approximately 32% or $516,000 compared to the nine months
ended August 31, 1999. Selling, general and administrative expenses for the
three months ended August 31, 2000 increased by approximately 39% or $232,000
compared to the three months ended August 31, 1999. This increase is associated
with initial implementation of contracts which includes additional personnel,
travel and commission expenses. Management expects selling, general and
administrative expenses to increase as new clients are added to the ohms|cad
program.
Research and development expenses for the nine months ended August 31, 2000
decreased by approximately 16.8% or $72,000 when compared to the corresponding
nine months ended August 31, 1999. Research and development expenses for the
three months ended August 31, 2000 decreased by approximately 31.5% or $47,000
when compared to the corresponding three months ended August 31, 1999. During
the past year the Company has focused its R&D efforts primarily on the
development of new, advanced disease management software programs. Approximately
$120,000 of these related costs incurred during the past six months has been
capitalized as product software development costs. These programs incorporate
state of the art digital communications, data management, security and
information technology. The Company intends to continue to improve and expand
the capabilities of the ohms|cad system.
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 $26,000,000 less applicable expenses.
During the period from March 17, 2000 to April 28, 2000, the Company
substantially improved its capital through the private placement of
approximately $3,000,000 of common stock and the conversion of approximately
$183,000 of outstanding principal and interest on 16% Convertible Debentures due
December 18, 2007.
The Company had working capital of $2,614,870 at August 31, 2000 compared to
$691,668 at November 30, 1999 and ratios of current assets to current
liabilities of 5.9:1 as of August 31, 2000 and 2.1:1 as of November 30, 1999.
The working capital increase of approximately $1,900,000 was primarily due to
the sale of shares of the Company's common stock to private investors.
The Company anticipates 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 balance over 90 days past due was 16.8%
of the receivables balance at August 31, 2000 and November 30, 1999. 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 additional arrangements entered into during fiscal 2000.
The Company believes that there has not been a significant impact from inflation
on the Company's operations during the past three fiscal years.
9
<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 August 31, 2000, the Company had approximately
$2,600,000 of cash and short term investments. The Company has experienced
negative cash flows since fiscal 1995 and recently experienced a reduction in
negative cash flow. The Company expects the monthly negative cash flow to
continue to 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. It remains the Company's policy to seek the minimum
amount of capital required to finance existing contracts based on market
conditions. 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.
10
<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
None.
(b) Reports of Form 8-K
None.
11
<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: October 5, 2000
12
<PAGE>
Independent Accountants' Review Report
We have reviewed the accompanying condensed balance sheets of Q-Med, Inc. and
Subsidiaries as of August 31, 2000, and the related condensed consolidated
statements of operations for the nine and three months then ended and condensed
consolidated statements of cash flows for the nine months then ended. These
financial statements are the responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet as of November 30, 1999, and the related statements
of operations, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 23, 2000, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of November 30, 1999, is fairly stated, in all material respects, in relation
to the balance sheet from which it has been derived.
October 4, 2000
Edison, New Jersey
13
