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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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.)
1275 KINNEAR ROAD, COLUMBUS, OHIO 43212
(Address of principal executive offices, including zip code)
(614) 675-3722
(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: 13,713,597 common
shares, without par value, on August 11, 2000.
Transitional Small Business Disclosure Format YES NO X
--- ---
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<TABLE>
TABLE OF CONTENTS
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<CAPTION>
PAGE NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheet June 30, 2000 1
Consolidated Statements of Operations for the Three Months Ended
and the Six Months Ended June 30, 2000 and 1999 2
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 3
Notes to Consolidated Financial Statements -
June 30, 2000 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 7
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. 8
Signatures 8
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
NETMED, INC.
Consolidated Balance Sheet
<CAPTION>
June 30, 2000
(Unaudited)
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<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 622,119
Prepaid assets 15,608
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Total current assets 637,727
Available-for-sale securities 784,922
Furniture and equipment (net of
accumulated depreciation) 22,835
License (net of accumulated
amortization) 267,256
Deposits and other assets 29,411
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Total assets $ 1,742,151
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,695
Accrued expenses 10,779
Other liabilities 186,969
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Total current liabilities 206,443
Preferred stock of subsidiary 441,000
Stockholders' equity:
Common stock 8,069,273
Unrealized gain on available-
for-sale securities 71,719
Retained deficit (7,046,284)
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Total stockholders' equity 1,094,708
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Total liabilities and stockholders' equity $ 1,742,151
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</TABLE>
See accompanying notes.
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<TABLE>
NETMED, INC.
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Royalty revenue $ -- $ -- $ -- $ --
Operating expenses:
Selling, general and administrative 66,076 331,419 245,456 594,098
Business development 25,123 36,938 57,307 100,853
--------------------------------------------------------------
Total operating expense 91,199 368,357 302,763 694,951
--------------------------------------------------------------
Operating loss (91,199) (368,357) (302,763) (694,951)
Other income (expense):
Interest income 7,028 607 11,020 7,549
Interest expense -- -- -- (4,965)
Gain from NSI bankruptcy 1,043,203 -- 1,043,203 --
Gain (loss) on available-for-
sale securities -- (6,151) 67,210 (385,865)
--------------------------------------------------------------
Total other income (expense) 1,050,231 (5,544) 1,121,433 (383,281)
--------------------------------------------------------------
Income (loss) before minority interest 959,032 (373,901) 818,670 (1,078,232)
Minority interest (9,000) (5,290) (18,667) (9,932)
--------------------------------------------------------------
Net income (loss) before taxes 950,032 (379,191) 800,003 (1,088,164)
Income tax expense 16,000 -- 16,000 --
--------------------------------------------------------------
Net income (loss) 934,032 (379,191) 784,003 (1,088,164)
Preferred dividend -- (5,845) -- (509,905)
(Loss) gain on redemption of
preferred stock (100,000) 1,252,142 (100,000) 1,252,142
--------------------------------------------------------------
Net income (loss) applicable to
common stockholders $ 834,032 $ 867,106 $ 684,003 $ (345,927)
==============================================================
Net income (loss) per share-basic and diluted $ 0.06 $ 0.07 $ 0.05 $ (0.03)
==============================================================
Shares used in computation - basic 13,713,597 12,868,951 13,421,220 12,546,519
==============================================================
Shares used in computation - dilutive 13,979,668 12,868,951 13,687,291 12,546,519
==============================================================
</TABLE>
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<TABLE>
NETMED, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
----------------
2000 1999
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<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 784,003 $(1,088,164)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 17,260 26,498
Minority interest 18,667 9,932
(Gain) loss on available-for-sale securities (51,759) 385,865
Deferred compensation 18,807 17,777
(Gain) on stock received from bankruptcy (713,203) --
Write off NSI note receivable -- 6,757
Warrants issued to former officer -- 24,300
Changes in operating assets and liabilities:
Accounts receivable -- 30,000
Prepaid assets 9,600 11,600
Deposits (25,000) --
Accounts payable (39,916) 137,040
Accrued expenses and other liabilities 15,663 (2,765)
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Net cash used in operating activities 34,122 (441,160)
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INVESTING ACTIVITIES
Proceeds from joint development partner -- 250,000
Sale of TriPath Stock 171,759 --
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Net cash provided by investing activities 171,759 250,000
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FINANCING ACTIVITIES
Redemption of preferred stock -- (125,000)
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Net cash used by financing activities -- (125,000)
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Net increase (decrease) in cash 205,881 (316,160)
Cash and cash equivalents at beginning of period 416,238 513,712
---------------------------
Cash and cash equivalents at end of period $ 622,119 $ 197,552
===========================
</TABLE>
See accompanying notes.
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NETMED, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2000
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of NetMed, Inc.
(the "Company" or "NetMed") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-QSB and Item 10(a) of Regulation S-B, and include the
results of operations of OxyNet, Inc. ("OxyNet"), a 89.7% owned subsidiary
beginning April 3, 1998. 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 and six month periods ended June
30, 2000 are not necessarily indicative of the results that may be expected for
the year ended December 31, 2000. For further information, refer to the
financial statements and footnotes thereto included in the NetMed, Inc. Form
10-KSB for the year ended December 31, 1999 as filed with the Securities and
Exchange Commission.
NOTE B - CONVERTIBLE PREFERRED STOCK
On January 22, 1999, pursuant to an exchange agreement between NetMed and the
holders of the Company's outstanding 6% Convertible Debentures ("Debentures"),
97,712 Series A, 6% Convertible Preferred Shares ("Preferred Stock") were issued
in exchange for the outstanding Debentures, which at the time of the exchange
had a principle balance of $1,350,000 and accrued interest of $117,634.
The Preferred Stock was convertible into Common Stock at a conversion price
equal to 75% of the average closing price of the Common Stock for the three
business days immediately preceding the date of conversion. The Preferred Stock
could be redeemed for cash at the Company's option. Dividends were cumulative,
and at the option of the Company could be paid in cash or converted to Common
Stock at the conversion price. The Company recorded a preferred dividend
financing charge to retained earnings in the amount of $489,000 to reflect the
value of the discount as of the closing date.
In May 1999, the Company redeemed the remaining outstanding Preferred Stock
(with an aggregate stated value and accrued dividends of $1,388,521) for an
immediate payment of $125,000 and 400 shares of OxyNet, Inc. common stock owned
by the Company. In addition, the Company agreed to pay as additional
consideration fifty percent (50%) of any net cash proceeds received by the
Company in respect of claims of the Company allowed in the Chapter 11
reorganization proceedings of Neuromedical Systems, Inc., pending in the United
States Bankruptcy Court for the District of Delaware, but with the maximum
amount of such additional consideration payable capped at $100,000.
NOTE C - 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 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. For the
quarter ended June 30, 2000 and 1999, total comprehensive income (loss) amounted
to $1,005,751 and ($104,890), respectively. For the six months ended June 30,
2000 and 1999 total comprehensive income (loss) was $855,762 and ($452,603),
respectively.
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NOTE D - NSI BANKRUPTCY
On March 26, 1999, NSI announced that it had commenced reorganization
proceedings under Chapter 11 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware. On December 5, 1999 the United
States Bankruptcy Court for the District of Delaware approved a settlement
agreement among NetMed, NSI, and the official committee of unsecured creditors
in NSI's pending Chapter 11 bankruptcy reorganization. The settlement agreement
provided for the settlement and release of NetMed's claims in exchange for
175,000 shares of common stock of Tripath Imaging, Inc ("TriPath"), and the
allowance in the bankruptcy proceeding of an unsecured claim by NetMed in the
amount of $1.5 million. The 175,000 TriPath shares were issued to the Company in
late December, 1999.
On April 17, 2000, the United States Bankruptcy Court for the District of
Delaware approved a further distribution with respect to the balance of the
Company's allowed claim, in the amount of $330,000 plus 127,500 shares of common
stock of TriPath. For the quarter ended June 30, 2000, the Company recorded
income of $1,043,203 from the bankruptcy settlement. Although the Company may
receive further distributions in respect of its allowed claim, it is unable to
predict the amount and timing of any additional payments it may ultimately
receive. However, it does not expect that such additional payments will be
substantial. As a result of receiving this settlement, the Company has recorded
$100,000 an as adjustment to the gain on redemption of preferred stock to
reflect the additional liability owed the former convertible preferred
shareholders (see Note B).
NOTE E - LITIGATION
On March 1, 1999, the Company and OxyNet commenced a lawsuit in the Common Pleas
Court of Franklin County, Ohio against Ceram and its principals over Ceram's
purported termination of the license for the ceramic oxygen generation
technology, as well as over other issues, including whether oxygen "scrubbing"
applications are included in the scope of the license and whether minimum
royalties are payable prior to the manufacture or sale of products incorporating
the technology, and asserting claims for damages for fraud and negligent
misrepresentation. On March 3, 1999, the Company and OxyNet obtained a temporary
restraining order prohibiting Ceram from taking any action to terminate the
license or that otherwise is inconsistent with the rights of the Company under
the license. On March 24, 1999, the court issued a decision finding that the
license had not been terminated and granting a preliminary and permanent
injunction against Ceram from taking any action inconsistent with the Company's
rights under the license. On June 22, 2000, the Court granted the Company's
motion for partial summary judgment that no minimum royalties are payable to
Ceram prior to the sale of products incorporating the licensed technology, and
granted Ceram's motion for partial summary judgment that Ceram retained a right
to use the licensed technology for oxygen sensor and fuel cell applications.
While the Company is confident that it will prevail in any appeal from the
Court's decisions concerning license termination and minimum royalty
obligations, and that its remaining claims will be found meritorious, it is
unable to predict the ultimate outcome of the litigation. The Company expects
that the remaining issues in the case will be tried in October, 2000.
NOTE F - PREFERRED STOCK ISSUANCE
In September 1998, OxyNet completed the sale of 500 shares of 8% Cumulative
Convertible Preferred Shares (the "Shares") in a private offering, with net
proceeds to OxyNet of $491,000. The net proceeds of $491,000 has been recorded
as a minority interest in the accompanying financial statements. The Shares are
entitled to cumulative dividends at the rate of 8% per annum payable in
additional shares, and are convertible into common shares of OxyNet, Inc. on a
one share for one share basis (subject to adjustments for dilution in certain
events). The Shares were sold with a one time right to exchange them at their
original stated value, plus accrued dividends, for common shares of NetMed, for
a period of 30 days following a date which is 18 months from the date of
issuance, at the then-prevailing market price of NetMed common shares (not to
exceed $3.00 per share), if there has been no initial public offering for common
shares of OxyNet. The 18 month period expired in March 2000 without a public
offering having occurred, but holders of 350 of the OxyNet shares have agreed to
extend the period for an additional 12 months. A holder of 50 preferred shares
notified the Company of the exercise of the exchange right, which required the
Company to issue the holder 844,646 common shares of NetMed common stock.
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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
sole business activity of the Company, through its majority owned subsidiary
OxyNet, Inc., is the development and commercialization of products incorporating
a new ceramic-based technology for separation of oxygen from ambient air and
other gases. The first such product targeted for commercialization is an oxygen
concentrator for use in the home health industry.
Prior to March 26, 1999, the Company was also in the business of
marketing the PAPNET(R) Testing System, an automated cervical cancer screening
product of Neuromedical Systems, Inc. ("NSI"). The Company marketed the
PAPNET(R) Testing System in a five state area under license from NSI. On March
26, 1999, NSI announced that it had commenced reorganization proceedings under
Chapter 11 of the U.S. Bankruptcy Code. In connection with its Chapter 11
filing, NSI terminated the majority of its U.S. workforce and agreed to sell its
intellectual property and related assets to AutoCyte, Inc. (now TriPath Imaging,
Inc.), for $4,000,000 in cash and 1.4 million shares of AutoCyte common stock.
As of May 6, 1999, NSI, as debtor in possession, rejected the Company's license
and the Bankruptcy Court confirmed the rejection over the Company's objection.
As a result, the Company became an unsecured creditor of NSI with a breach of
contract claim for the termination of the license (see Note D).
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 1999 Form 10-KSB as filed with the United States Securities and
Exchange Commission, File No. 1-12529, in the section titled "Business Risks."
PLAN OF OPERATION
The Company plans to continue the development of an oxygen concentrator
for the home health care market. The Company may also seek a partner or partners
for joint development, manufacturing, distribution, or marketing of the oxygen
concentrator. The Company does not plan to incur more than $400,000 in
development expenses for this product in the next year.
The Company also plans to continue its joint effort with MG Generon,
Inc. to develop a device that will use the Company's oxygen separation
technology to produce highly concentrated nitrogen from gas mixtures through the
removal of oxygen from such mixtures. The terms of the joint development
agreement call for the Company to work as a consultant to MG Generon in this
effort. The Company does not expect to make significant expenditures in the
coming year to support this project.
The Company is also evaluating other technologies to joint venture,
acquire or develop. If the Company decides to pursue any of these technologies,
it may need to raise additional capital to support the development,
manufacturing, distribution, or marketing of these technologies.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily by the sale
of NSI common stock owned by the Company, proceeds from the NSI bankruptcy, the
sale of Common Shares, the sale of the convertible debentures and the joint
development agreement with MG Generon. The Company's combined cash and cash
equivalents totaled $622,000 at June 30, 2000, an increase of $206,000 from
December 31, 1999.
The Company is a development company and 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
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development of the OxyNet device and continue funding the negative cash flow
from 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 resources required and ultimate outcome of the
Company's claims in the NSI bankruptcy hearings and the outcome of the
litigation with Ceram. 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 condition 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 ability to
successfully commercialize any products using the ceramic oxygen technology,
continuing losses from operations and negative cash flow, the challenges of
research and development of new products, and other risks detailed in the
Company's most recent Annual Report on Form 10-KSB 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 1. LEGAL PROCEEDINGS
On March 1, 1999, the Company and OxyNet commenced a lawsuit in the Common Pleas
Court of Franklin County, Ohio against Ceram and its principals over Ceram's
purported termination of the license for the ceramic oxygen generation
technology, as well as over other issues, including whether oxygen "scrubbing"
applications are included in the scope of the license and whether minimum
royalties are payable prior to the manufacture or sale of products incorporating
the technology, and asserting claims for damages for fraud and negligent
misrepresentation. On March 3, 1999, the Company and OxyNet obtained a temporary
restraining order prohibiting Ceram from taking any action to terminate the
license or that otherwise is inconsistent with the rights of the Company under
the license. On March 24, 1999, the court issued a decision finding that the
license had not been terminated and granting a preliminary and permanent
injunction against Ceram from taking any action inconsistent with the Company's
rights under the license. . On June 22, 2000, the Court granted the Company's
motion for partial summary judgment that no minimum royalties are payable to
Ceram prior to the sale of products incorporating the licensed technology, and
granted Ceram's motion for partial summary judgment that Ceram retained a right
to use the licensed technology for oxygen sensor and fuel cell applications.
While the Company is confident that it will prevail in any appeal from the
Court's decisions concerning license termination and minimum royalty
obligations, and that its remaining claims will be found meritorious, it is
unable to predict the ultimate outcome of the litigation. The Company expects
that the remaining issues in the case will be tried in October, 2000.
.
On March 26, 1999, NSI announced that it had commenced reorganization
proceedings under Chapter 11 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware. On December 5, 1999 the United
States Bankruptcy Court for the District of Delaware approved a settlement
agreement among NetMed, NSI, and the official committee of unsecured creditors
in the NSI's pending Chapter 11 bankruptcy reorganization. The settlement
agreement provided for the settlement and release of NetMed's claims in exchange
for 175,000 shares of common stock of TriPath Imaging, Inc. ("TriPath"), and the
allowance in the bankruptcy
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proceeding of an unsecured claim by NetMed in the amount of $1.5 million. The
175,000 TriPath shares were issued to the Company in late December, 1999.
On April 17, 2000, the United States Bankruptcy Court for the District
of Delaware approved a further distribution with respect to the balance of the
Company's allowed claim, in the amount of $330,000 plus 127,500 shares of common
stock of TriPath. Although the Company may receive further distributions in
respect of its allowed claim, it is unable to predict the amount and timing of
any additional payments it may ultimately receive. However, it does not expect
that such additional payments will be substantial. As a result of receiving this
settlement, the company owes the former convertible preferred shareholders
$100,000 (see Notes B and D).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit Exhibit Description
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27 Financial Data Schedule.
(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.
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant has duly caused this Form 10-QSB for the quarterly
period ended June 30, 2000 to be signed on its behalf by the undersigned,
thereto duly authorized.
By:/s/ Kenneth B. Leachman
-------------------------------
Kenneth B. Leachman,
Vice President of Finance*
Dated: August 11, 2000
* In his capacity as Vice President of Finance, Mr. Leachman is the
Registrant's principal financial officer.
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EXHIBIT INDEX
EXHIBIT EXHIBIT EXHIBIT INDEX
NUMBER DESCRIPTION PAGE NUMBER
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27 Financial Data Schedule.
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