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, 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
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 11,
2000: 12,844,961
<PAGE>
<TABLE>
<CAPTION>
Q-MED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
May 31, 2000 November 30,
(Unaudited) 1999
--------------- ---------------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,128,359 $ 794,430
Investments 2,069,054 --
Investment in HeartMasters, LLC 5,100 --
Accounts receivable, net of
allowances of approximately
$41,000 and $116,000 respectively 75,841 170,657
Inventory 292,087 372,742
Prepaid expenses and other current assets 83,184 34,656
--------------- ---------------
3,653,625 1,372,485
Product software development costs 67,998 8,714
Property and equipment, net 423,436 440,555
Other assets 134,131 144,296
--------------- ---------------
$ 4,279,190 $ 1,966,050
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 504,289 $ 680,817
Convertible long-term debt -- 50,000
Leases payable - long term 70,748 68,902
Deferred revenue 20,542 24,542
--------------- ---------------
595,579 824,261
Stockholders' equity Common stock $.001
par value; 20,000,000 shares authorized;
12,843,293 and 12,258,781 shares issued
and 12,821,293 and 12,236,781 outstanding 12,843 12,259
Paid-in capital 26,428,718 23,098,930
Accumulated deficit (22,659,623) (21,893,775)
Accumulated other comprehensive income
Unrealized holding losses on
available for sale securities (22,702) --
--------------- ---------------
3,759,236 1,217,414
Less: treasury stock at cost, 22,000
common shares (75,625) (75,625)
--------------- ---------------
Total stockholders' equity 3,683,611 1,141,789
--------------- ---------------
$ 4,279,190 $ 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 Six For the Three For the Six For the Three
Months Ended Months Ended Months Ended Months Ended
May 31, 2000 May 31, 2000 May 31, 1999 May 31, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales $ 1,072,951 $ 542,562 $ 1,011,853 $ 619,635
Cost of sales 615,677 318,690 514,129 284,983
------------- ------------- ------------- -------------
Gross profit 457,274 223,872 497,724 334,652
Selling, general and
administrative expenses 1,319,850 691,032 1,035,919 523,793
Provision for uncollectible
accounts -- -- -- --
Research and development
expenses 254,817 121,260 279,579 139,934
------------- ------------- ------------- -------------
Income (loss) from operations (1,117,393) (588,420) (817,774) (329,075)
Interest expense (22,614) (12,783) (86,048) (42,910)
Interest income 64,903 68,514 53,423 41,359
Other income - sale of
tax benefits 309,256 -- -- --
------------- ------------- ------------- -------------
Net (loss) (765,848) (532,689) (850,399) (330,626)
Other comprehensive income (loss)
Unrealized holding (losses)
on available for sale securities (22,702) (22,702) (11,563) (6,560)
------------- ------------- ------------- -------------
Comprehensive (loss) $ (788,550) $ (555,391) $ (861,962) $ (337,186)
============= ============= ============= =============
(Loss) per common
share $ (.06) $ (.04) $ (.07) $ (.03)
------------- ------------- ------------- -------------
Weighted average number of
shares of common stock
outstanding 12,456,981 12,641,966 11,589,655 11,590,989
============= ============= ============= =============
</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 Six Months Ended May 31, 2000
(Unaudited)
Accumulated
other Common Stock
Common Paid-in Accumulated Comprehensive Held in Treasury
Stock Capital Deficit (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 70 160,508 160,578
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
Net loss for the six months
ended May 31, 2000 (765,848) (765,848)
Unrealized holding losses on
available for sale securities (22,702) (22,702)
------- ----------- ------------ -------- ------ -------- ----------
Balance--May 31, 2000 $12,843 $26,428,718 $(22,659,623) ($22,702) 22,000 $(75,625) $3,683,611
======= =========== ============ ======== ====== ======== ==========
</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 Six For the Six
Months Ended Months Ended
May 31, May 31,
2000 1999
------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net (loss) $ (788,550) $ (861,962)
============= =============
Adjustments to reconcile net income to cash
and cash equivalents (used in)
provided by operating activities:
Depreciation and amortization 105,968 128,112
(Increase) decrease in
Accounts receivable 94,816 122,450
Inventory 80,655 38,115
Prepaid expenses and other current assets (48,528) 14,274
Increase (decrease) in
Accounts payable and accrued liabilities (41,946) (90,353)
Other, net (10,176) (33,040)
------------- -------------
Total adjustments 180,789 179,558
------------- -------------
$ (607,761) $ (682,404)
============= =============
Cash flows from investing activities:
Purchase of securities available for sale (2,069,054) (1,000,000)
Capital expenditures, net (135,046) (31,575)
------------- -------------
$ (2,204,100) $ (1,031,575)
============= =============
Cash flows from financing activities:
Proceeds from issuance of common stock $ 3,145,790 $ 11,293
============= =============
Net (decrease) increase in cash and cash equivalents 333,929 (1,702,686)
Cash and cash equivalents at beginning of period 794,430 2,075,179
------------- -------------
Cash and cash equivalents at end of period $ 1,128,359 $ 372,493
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 9,065 $ 10,048
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 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 six month period ended May 31, 2000 are not
necessarily indicative of the results that may be expected for the year ending
November 30, 2000. 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,
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 condensed consolidated financial statements include the accounts of Q-Med,
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
Available for Sale Securities
<S> <C> <C> <C> <C> <C>
Corporate Debt Securities $1,000,134 $ -- $ (5,604) $ 994,530 $994,530
Government Bonds 589,434 -- -- 589,434 589,434
Government Asset Backed
Securities 502,188 -- (17,098) 485,090 485,090
---------- --------- ------------ ---------- ----------
$2,091,756 $ -- $ (22,702) $2,069,054 $2,069,054
========== ========= ============ ========== ==========
</TABLE>
6
<PAGE>
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,
2000 1999
(Unaudited)
------------- -------------
Raw materials (component parts) $ 151,535 $ 167,902
Finished units 140,552 204,840
------------- -------------
$ 292,087 $ 372,742
============= =============
Note 4 - Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include the following:
May 31, November 30,
2000 1999
(Unaudited)
------------- -------------
Accounts payable trade $ 97,362 $ 325,477
Deferred revenue 133,630 135,109
Accrued payroll and commissions 111,729 96,626
Other accrued expenses 161,568 123,605
------------- -------------
$ 504,289 $ 680,817
============= =============
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 Six Months For the Three Months For the Six Months For the Three Months
Ended May 31, Ended May 31, Ended May 31, Ended May 31,
2000 1999 2000 1999 2000 Vs. 1999 2000 Vs. 1999
<S> <C> <C> <C> <C> <C> <C>
Sales (net) 100.0% 100.0% 100.0% 100.0% 6.0 (12.4)
Cost of sales 57.4 50.8 58.7 46.0 19.8 11.8
Gross profit 42.6 49.2 41.3 54.0 (8.1) (33.1)
Selling, general and administrative 123.0 102.4 127.4 84.5 27.4 31.9
Provision for uncollectible accounts - - - - - -
Research and development 23.7 27.6 22.4 22.6 (8.9) (13.3)
---- ---- ---- ----
(Loss) from continuing operations (104.1) (80.8) (108.5) (53.1) 36.6 78.8
Interest expense (2.1) (8.5) (2.3) (7.0) (73.7) (70.2)
Interest income 3.9 5.3 8.4 6.7 21.5 65.7
Other income 28.8 - - - * -
---- ---- ---- ----
Net (loss) (73.5) (84.0) (102.4) (53.4) (9.9) 61.1
===== ===== ====== =====
</TABLE>
SIX AND THREE MONTHS ENDED MAY 31, 2000 COMPARED WITH THE SIX AND THREE MONTHS
ENDED MAY 31, 1999
Net sales for the six months ended May 31, 2000 increased by 6% or approximately
$61,000 when compared to the six months ended May 31,1999. This overall increase
is primarily due to a 97.1% or $309,000 increase in revenue related to
ohms|cad(R). Revenue related to the capital equipment segment decreased
approximately 36% or $247,000 for the same six month period. The Company's focus
has been primarily on the marketing of the ohms|cad system to managed care
organizations through its wholly owned subsidiary, Interactive Heart Management
Corp. ("IHMC(R)"). Net sales for the three months ended May 31, 2000 decreased
by 12.4% or approximately $77,000 when compared to the three months ended May
31,1999. Although revenue related to ohms|cad increased by 96.5% or $181,000 for
the three month period ended May 31, 2000 when compared to the prior year,
revenue related to the capital equipment segment decreased by 59.6% or $258,000
for the same period. The Company anticipates a substantial increase in revenue
during the subsequent quarters as the implementation of the newest contract for
ohms|cad with Regence BlueCross BlueShield of Oregon begins during July 2000.
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's gross profit margin for the six months ended May 31, 2000
decreased to 42.6% from 49.2% for the six months ended May 31, 1999. The
Company's gross profit margin for the three months ended May 31, 2000 decreased
to 41.3% from 54% for the three months ended May 31, 1999. The
8
<PAGE>
decrease was primarily due to the decrease in sales related to the Company's
capital equipment segment.
Selling, general and administrative expenses for the six months ended May 31,
2000 increased by approximately 27% or $284,000 compared to the six months ended
May 31, 1999. Selling, general and administrative expenses for the three months
ended May 31, 2000 increased by approximately 32% or $167,000 compared to the
three months ended May 31, 1999. This increase was primarily due to the increase
in the level of selling costs related to the Company's disease management
segment. 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 six months ended May 31, 2000
decreased by approximately 8.9% or $25,000 when compared to the corresponding
six months ended May 31, 1999. Research and development expenses for the three
months ended May 31, 2000 decreased by approximately 13.3% or $19,000 when
compared to the corresponding three months ended May 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. 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 $3,149,336 at May 31, 2000 compared to
$691,668 at November 30, 1999 and ratios of current assets to current
liabilities of 7.2:1 as of May 31, 2000 and 2.1:1 as of November 30, 1999. The
working capital increase of approximately $2,400,000 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 14.7%
of the receivables balance at May 31, 2000 compared to 16.8% at 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 May 31, 2000, the Company had approximately
$3,200,000 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 and Use of Proceeds
On March 17, 2000, the Company sold 285,714 shares of its
common stock to Quest Diagnostics Ventures, LLC, the venture
capital affiliate of Quest Diagnostics Inc. for $2,000,000. On
April 28, 2000, the Company completed the sale of 163,330
shares of its common stock to an individual accredited
investor for approximately $1,000,000. Both transactions are
claimed to be exempt from registration pursuant to Rule 506 of
Section 4(2) of the Securities Act of 1933 and were sold
without the payment of any fees to any broker or finder.
On April 12, 2000, the Company issued 64,315 shares to the
holders of 16% Convertible Notes due December 18, 2007. The
issuance of these shares is exempt from registration pursuant
to Section 3(a)(9) of the Securities Act of 1933.
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
10.1 Employment Agreement dated May 12, 2000 between Gary
A. Levin, M.D. and Interactive Heart Management Corp.
27.1 Financial Data Schedule
99.1 Limited Liability Agreement of HeartMasters, LLC
dated April 14, 2000.
99.2 Trademark and Data License and Services Agreement
between Interactive Heart Management Corp., and
HeartMasters, LLC dated April 14, 2000.
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: July 14, 2000
12
<PAGE>
Independent Accountants' Review Report
We have reviewed the accompanying condensed consolidated balance sheets of
Q-Med, Inc. and Subsidiaries as of May 31, 2000, and the related condensed
statements of operations and condensed consolidated statements of cash flows for
the six 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.
/s/ AMPER, POLITZINER & MATTIA P.A.
July 11, 2000
Edison, New Jersey
13
