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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________.
Commission file number: 1-12529
NETMED, INC.
(Exact name of Registrant as specified in its charter)
OHIO 31-1282391
(State of incorporation (I.R.S. Employer
or organization) Identification No.)
6189 MEMORIAL DRIVE, DUBLIN, OHIO 43017
(Address of principal executive offices, including zip code)
(614) 793-9356
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirement for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date 11,465,381 common
shares, without par value, on May 1, 1998.
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TABLE OF CONTENTS
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PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Balance Sheets December 31, 1997 1
and March 31, 1998
Statements of Operations For the Three Months
Ended March 31, 1998 and 1997 2
Statements of Cash Flows For the Three Months Ended
March 31, 1998 and 1997 3
Notes to Financial Statements -
March 31, 1998 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 5
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. N/A
Item 2. Changes in Securities. N/A
Item 3. Defaults Upon Senior Securities. N/A
Item 4. Submission of Matters to a Vote of Security Holders. N/A
Item 5. Other Information. N/A
Item 6. Exhibits and Reports on Form 8-K. 7
Signatures 8
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
NETMED, INC.
Balance Sheets
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited)
--------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,139,520 $ 1,656,370
Accounts receivable 123,521 216,356
Prepaid assets 16,808 25,208
-------------------------------
Total current assets 1,279,849 1,897,934
Investment in NSI-available for sale 853,100 1,267,343
Notes receivable-NSI 21,443 21,443
Notes receivable-COTI 363,470 278,499
Furniture and equipment (net of
accumulated depreciation) 42,859 42,263
Deferred taxes 260,100 260,100
Deposits and other assets 1,467 1,467
-------------------------------
Total assets $ 2,822,288 $ 3,769,049
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 105,010 $ 113,176
Accrued expenses 288,080 304,576
Other liabilities 77,432 69,102
-------------------------------
Total current liabilities 470,522 486,854
Deferred taxes 260,100 260,100
Convertible debentures 1,697,000 2,190,000
Stockholders' equity:
Common stock 5,791,042 5,417,151
Unrealized loss on available-for-sale
securities (452,249) (499,478)
Retained deficit (4,944,127) (4,085,578)
-------------------------------
Total stockholders' equity 394,666 832,095
-------------------------------
Total liabilities and stockholders' equity $ 2,822,288 $ 3,769,049
===============================
</TABLE>
See accompanying notes.
1
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NETMED, INC.
Statements of Operations
(Unaudited)
Three Months Ended
March 31,
1998 1997
-------------------------------
Royalty revenue $ 151,255 $ 125,353
Operating expenses:
Selling, general and administrative 593,167 620,756
Business development 144,538 43,661
-------------------------------
Total operating expense 737,705 664,417
-------------------------------
Operating loss (586,450) (539,064)
Other income (expense):
Interest income 17,239 38
Interest expense (30,949) (4,260)
(Loss) gain on available-for-
sale securities (258,385) 312,049
-------------------------------
Total other (expense) income (272,095) 307,827
-------------------------------
Loss before income taxes (858,545) (231,237)
Income tax expense (benefit) -- (85,000)
-------------------------------
Net loss $ (858,545) $ (146,237)
===============================
Weighted average shares
outstanding 11,152,927 10,945,508
===============================
Net loss per share-basic $ (0.08) $ (0.01)
===============================
Net loss per share-diluted $ (0.08) $ (0.01)
===============================
See accompanying notes.
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<TABLE>
NETMED, INC.
Statements of Cash Flows
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (858,545) $(146,237)
Adjustments to reconcile net loss to net
cash provided by (used for) operating activities:
Depreciation and amortization 5,700 3,600
Change in deferred tax assets -- (85,000)
Loss (gain) on available-for-sale securities 258,385 (312,049)
Deferred compensation 54,203 77,488
Changes in operating assets and liabilities:
Accounts receivable 92,835 (71,858)
Prepaid assets 8,400 (1,006)
Accounts payable (8,166) 70,552
Accrued expenses and other liabilities 21,605 6,183
----------------------------
Net cash used in operating activities (425,583) (458,327)
----------------------------
INVESTING ACTIVITIES
Sale of NSI stock -- 402,049
Notes receivable-COTI (84,971) --
Purchase of furniture and equipment (6,296) (3,127)
----------------------------
Net cash (used) provided by investing activities (91,267) 398,922
----------------------------
FINANCING ACTIVITIES
Proceeds from margin account -- 52,906
----------------------------
Net cash provided by financing activities -- 52,906
----------------------------
Net decrease in cash (516,850) (6,499)
Cash and cash equivalents at beginning of period 1,656,370 142,074
----------------------------
Cash and cash equivalents at end of period $1,139,520 $ 135,575
============================
</TABLE>
See accompanying notes.
3
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NETMED, INC.
Notes to Financial Statements
(Unaudited)
March 31, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. 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 March 31, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the financial
statements and footnotes thereto included in the NetMed, Inc. Form 10-K for the
year ended December 31, 1997 as filed with the Securities and Exchange
Commission.
NOTE B - ACQUISITION OF CERAM OXYGEN TECHNOLOGIES, INC.
On April 3, 1998, the Company acquired from Ceram Oxygen Technologies, Inc.
("COTI") 95 common shares, representing 95 percent of COTI's outstanding common
shares immediately following the closing, in exchange for a cash payment of
$50,000 and delivery of a note in the principal amount of $150,000 (the "Note").
The Note provides for three equal principal payments of $50,000 on each of June
1, July 1, and August 1, 1998, together with interest at the rate of 8.5 percent
per annum. The remaining 5 percent of COTI's outstanding common equity is owned
by CeramPhysics, Inc. ("Ceram") of Westerville, Ohio. COTI holds an exclusive
worldwide license to Ceram's patented oxygen generation technology for all
applications of the technology except oxygen sensors and fuel cells. The
consideration was applied by COTI to payment of a $200,000 license fee owed to
Ceram, with $50,000 being paid in cash, and the balance by assignment of the
Note.
The acquisition was made pursuant to a February, 1997 agreement among the
Company, COTI and Ceram, whereby the Company agreed to make advances to COTI to
complete the fabrication and testing of a ceramic element incorporating the
licensed technology. Pursuant to the agreement, through April 3, 1998, the
Company had advanced $363,470 to COTI for this purpose. The agreement also
provided that upon completion of an acceptance test of the ceramic element
satisfactory to the Company, the Company had the right to acquire 95% of the
equity of COTI for $200,000.
NOTE C - CONVERTIBLE DEBENTURES
Pursuant to the convertible debenture purchase agreement dated August 1997, the
purchasers of the debentures under certain conditions may elect to exercise
their conversion rights for Neuromedical Systems, Inc. (NSI) common shares
pledged as collateral. For the three months ended March 31, 1998, the purchasers
converted $203,000 of principal plus accrued interest into a total of 117,694
shares of NSI. This resulted in a loss on available for sale securities of
$258,000 for the three months ended March 31, 1998. Subsequent to March 31,
1998, the purchasers of the debentures converted an additional $197,000 of
principal plus accrued interest into a total of 106,484 shares of NSI resulting
in a loss on available for sale securities of $212,683 which will be recorded in
the quarter ending June 30, 1998.
NOTE D - COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement No. 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires
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unrealized gains or losses on the Company's available-for-sale securities, which
prior to adoption were reported separately in shareholders' equity to be
included in other comprehensive income. During the first quarter of 1998 and
1997, total comprehensive income amounted to ($811,320) and ($1,721,865).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is an Ohio corporation engaged in the business of
acquiring, developing and marketing medical and health-related technologies. The
principal business activity of the Company is the marketing of the PAPNET(R)
Testing System, which is a proprietary product of Neuromedical Systems, Inc.
("NSI"). The PAPNET Testing System is a sophisticated interactive computer
assisted system that assists the laboratory professional in the detection of
abnormal cells on cervical cytology specimens (also known as Pap smears). Slides
containing cytology specimens are processed using the PAPNET Testing System
(either by the laboratory at its own facilities or at one of NSI's central
facilities) which produces processed images for evaluation by the laboratory's
NSI-trained cytotechnologists.
In the United States, the PAPNET Testing System is promoted to assist
the cytology professional in the examination of conventionally prepared smears
that have first been assessed by standard manual microscopic review to be
"negative", "within normal limits", or evidencing "benign cellular changes".
Outside of the U.S,. some of NSI's laboratory customers use the PAPNET Testing
System in a variety of modes, including to assist in the interpretation of
liquid-based Pap specimens, and Pap smears that have not first been assessed by
manual microscopic review. NSI has stated its intention to pursue FDA approval
of the PAPNET Testing System for primary screening of both conventional and
liquid-based pap smears, with clinical trials to be completed in the fourth
quarter of 1998 and FDA approval in 1999. As a consequence, NSI has reduced the
resources and effort devoted to marketing the PAPNET Testing System as an
adjunct or supplemental test. The promotion of the PAPNET Testing System
primarily to laboratories was a shift in marketing focus which NSI initiated
early in 1998. As a result, there have been steep reductions in pricing for
laboratories that commit to use the PAPNET system to rescreen 100% of their
negative smears, or a large specified proportion of their negative smears. The
Company currently has two laboratories that have committed to 100% rescreening
and one additional laboratory committing to a large portion of their negative
smears. The new pricing structure has reduced the effective yield per slide for
the Company by approximately 20 percent.
Total revenue increased approximately 21 percent for the quarter ended
March 31, 1998 compared to the same quarter last year. This rate of increase is
significantly less than the rate of increase experienced by the Company in the
previous four quarters. The decline in the rate of increase is due to a number
of factors including a reduction in marketing effort and expense by NSI,
continued lack of widespread insurance reimbursement, increased competition from
liquid-based preparations, negative publicity regarding the cost effectiveness
of the PAPNET test and a shift in market focus away from the clinician to the
laboratory. Not all publicity concerning cost-effectiveness was negative
however. There have been extensive peer-reviewed published studies demonstrating
the cost-effectiveness of PAPNET rescreening (as compared to other commonly
reimbursed tests, such as mammography screening for breast cancer and PSA
testing for prostate cancer), including a retrospective study of over 200,000
Pap smears reported in a recent issue of the international pathology journal
Acta Cytologica. While the Company and/or NSI have plans to address each of
these situations, there can be no guarantee that the Company or NSI will be
successful in implementing those plans during 1998 or future years. Further,
given NSI's change in focus, increases in revenue as compared to prior year
quarters may be difficult to maintain throughout the remainder of 1998.
In addition to exploiting its rights under the license agreements with
NSI, the corporate mission of NetMed is to become a well diversified health care
technology company founded upon proprietary products that offer a distinct
market advantage. The Company's intention is to follow the example of its
initial investment, the PAPNET technology, in pursuing other opportunities in
healthcare technology. Specifically, it intends to make early investments in
selected healthcare technologies and apply the management and marketing
resources of the Company to develop and implement strategies designed to
significantly increase the value of the investment over a period of two to four
years.
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This report contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in Item I of
the Company's 1997 Annual Report on Form 10-K as filed with the United States
Securities and Exchange Commission, File No. 1-12529, in the section titled
"Business Risks."
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Royalty revenue increased by 21% from $125,000 for the three months
ended March 31, 1997 to $151,000 for the three months ended March 31, 1998.
Total volume increased 52% but was offset by a lower average price due to the
special pricing offered to laboratories for 100% rescreening.
Total operating expenses increased by 11% from $664,000 for the three
months ended March 31, 1997 to $738,000 for the same period in 1998. Business
development expenses increased $101,000 as the Company continued the evaluation
and testing of the OxyNet(R) ceramic oxygen generator. Selling, general and
administrative expense decreased from $621,000 to $593,000 primarily due to a
decrease in sales and marketing expenses of $75,000 caused by elimination of
recruiting fees and lower supplies cost as the Company transitioned its
marketing focus to the laboratory from the clinician office. The reduction in
sales and marketing expense was partially offset by an increase in total
employee cost of $30,000 in the general and administrative expense.
In August 1997, the Company completed a $3,000,000 convertible
debenture financing. The Company, as a condition to the financing, has pledged
shares of common stock of NSI that under certain conditions may be used by the
purchasers to convert outstanding debentures as well as accrued interest. For
the three months ended March 31, 1998, the purchasers converted $203,000 of
principal plus accrued interest into a total of 117,694 shares of NSI. This
resulted in a loss on available for sale securities of $258,000 for the three
months ended March 31, 1998. For the three months ended March 31, 1997 the
Company sold 45,000 shares of available for sale securities in order to fund
operations and recognized a gain of $312,000.
Interest income increased from $0 for the three months ended March 31,
1997 to $17,000 for the three months ended March 31, 1998. The increase is due
to higher cash balances to invest as a result of a convertible debenture
financing completed in August of 1997.
Interest expense increased from $4,000 for the three months ended March
31, 1997 to $31,000 for the same period in 1998. The increase in interest
expense is the result of the convertible debenture financing mentioned above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily by the sale
of NSI common stock owned by the Company, the sale of common shares, and the
sale of the convertible debentures. The Company's combined cash and cash
equivalents totaled $1,140,000 at March 31, 1998, a decrease of $517,000 from
December 31, 1997. As of March 31, 1998, the Company owned 332,917 shares of NSI
common stock, of which 82,246 shares were unrestricted and can be liquidated in
an orderly fashion to fund future operations. The remaining 250,671 are pledged
as additional security for the convertible debentures. NSI common stock closed
trading at $2.56 per share on March 31, 1998, and at $2.00 per share on May 12,
1998.
Cash used in the Company's operations was $426,000 for the three months
ended March 31, 1998 versus $458,000 used in the same period of 1997. The
Company anticipates that its cash requirements will be substantial for the
immediate future and believes that it will be necessary to raise additional
capital in order to complete the development of the OxyNet device and continue
funding the negative cash flow from operations. In April 1998, the
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Company completed the previously announced transaction with CeramPhysics
("Ceram") to acquire 95% ownership of a Ceram subsidiary that holds an exclusive
world-wide license to Ceram's patented oxygen generation technology for all
applications except oxygen sensors and fuel cells. The purchase price for the
stock was $200,000 with $50,000 paid at closing and the balance payable in three
equal payments of $50,000 in June, July and August of 1998. The Company
anticipates incurring significant expenses to complete the development of an
oxygen device to be marketed to the home healthcare market during the second
quarter of 1999. In addition to funding the development of the oxygen device,
the Company must continue funding the negative cash flow from the remaining
operations. The Company has reduced expenses as a result of focusing the sales
and marketing efforts of the PAPNET test towards the laboratory and away form
the clinician but will continue to require additional cash to fund operations.
The Company's future liquidity and capital requirements will depend
upon numerous factors, including the resources required to further develop the
OxyNet oxygen device, the success of laboratory marketing plans and the
Company's ability to increase the sales of the PAPNET Testing System, the timing
of NSI's receipt of FDA approval for the PAPNET Testing System as a primary
screener of all cytological specimens and the resources required to manufacture
and market the OxyNet device. Additional funding may not be available when
needed or on terms acceptable to the Company, which would have a material
adverse effect on the Company's business financial conditional and results of
operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements in this release which relate to other than strictly
historical facts, including statements about the Company's plans and strategies,
as well as management's expectations about new and existing products,
technologies and opportunities, market growth, demand for and acceptance of new
and existing products (including the PAPNET Testing System and the OxyNet oxygen
concentration device), are forward looking statements. The words "believe,"
"expect," "anticipate," "estimate," "project," and similar expressions identify
forward-looking statements that speak only as of the date hereof. Investors are
cautioned that such statements involve risks and uncertainties that could cause
actual results to differ materially from historical or anticipated results due
to many factors including, but are not limited to, the Company's current
reliance on a single product marketed under license from NSI, the corresponding
dependence on NSI's patents and proprietary technology, government regulation,
continuing losses from operations and negative cash flow, limited marketing and
sales history, the impact of third party reimbursement decisions, the challenges
of research and development of new products, and other risks detailed in the
Company's most recent Annual Report on Form 10-K and other Securities and
Exchange Commission filings. The Company undertakes no obligation to publicly
update or revise any forward-looking statements.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit Exhibit Description
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27 Financial Data Schedule.
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(b) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the period for
which this report is filed.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant has duly caused this Form 10-Q for the quarterly
period ended March 31, 1998 to be signed on its behalf by the undersigned,
thereto duly authorized.
By: /s/ David J. Richards
----------------------------------------------
David J. Richards, President*
By: /s/ Kenneth B. Leachman
----------------------------------------------
Kenneth B. Leachman, Vice President-Finance*
Dated: May 15, 1998
* In his capacity as President of the Registrant, Mr. Richards is duly
authorized to sign this Report on behalf of the Registrant. In his
capacity as Vice President-Finance, Mr. Leachman is the Registrant's
principal financial officer.
8
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EXHIBIT INDEX
EXHIBIT EXHIBIT EXHIBIT INDEX
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -------------
27 Financial Data Schedule.
9
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,139,520
<SECURITIES> 0
<RECEIVABLES> 123,521
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,279,849
<PP&E> 94,654
<DEPRECIATION> 51,795
<TOTAL-ASSETS> 2,822,288
<CURRENT-LIABILITIES> 470,522
<BONDS> 1,697,000
0
0
<COMMON> 5,791,042
<OTHER-SE> (5,396,376)
<TOTAL-LIABILITY-AND-EQUITY> 2,822,288
<SALES> 151,255
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 737,705
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,949
<INCOME-PRETAX> (858,545)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (858,545)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
