SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 1996
[ ] 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 333-10323
OCUREST LABORATORIES, INC.
--------------------------
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0259441
- ------------------------------- ------------------------------------
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization
4400 PGA BOULEVARD, SUITE 300, PALM BEACH GARDENS, FL 33410
-----------------------------------------------------------
(Address of principal executive offices) (zip code)
(561) 627-8121
--------------
Registrant's telephone number, including area code
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the issuer (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 [ ] NO [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of December 26, 1996 the registrant had 3,122,674 shares of common stock
issued and outstanding.
Transitional Small Business Disclosure Format: YES [ ] NO [X]
<PAGE>
OCUREST LABORATORIES, INC.
INDEX TO FORM 10-QSB
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1995 and September 30, 1996
(unaudited)
Statements of Operations for the nine month and three month
periods ended September 30, 1995 and 1996 (unaudited)
Statement of Stockholders' Equity for the nine month period
ended September 30, 1996 (unaudited)
Statements of Cash Flows for the nine month periods ended
September 30, 1995 and 1996 (unaudited)
Notes to Financial Statements (unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
<PAGE>
OCUREST LABORATORIES, INC.
BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
ASSETS
Current Assets
Cash $1,607 $405,880
Accounts receivable-customers 65,140 132,467
Inventories 542,071 698,925
Prepaid expenses 64,412 84,000
---------- ----------
Total current assets 673,230 1,321,272
Property and Equipment, at cost, net 543,301 942,631
Other Assets
Patent and trademark licensing rights, net 141,600 120,775
Deposits 198,340 12,000
Deferred offering costs 5,000 190,512
Organizational costs, net 800 4,000
---------- ----------
Total other assets 345,740 327,287
---------- ----------
Total assets $1,562,271 $2,591,190
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable $1,889,113 $1,637,335
Accrued advertising 155,276
Accrued salaries and taxes 47,362 98,508
Accrued expenses 144,620 241,634
Accrued interest 16,770 142,791
Notes payable-stockholders 238,774 1,715,130
Advances payable-factor 127,139 260,000
Patent & trademark licensing rights payable 30,000 0
---------- ----------
Total Current Liabilities 2,649,054 4,095,398
Notes payable-stockholders 657,257
Commitments
Stockholders' Equity (Deficit)
Preferred stock - $.01 par value, 5,000,000
shares authorized - none issued
Common stock, $.008 par value, 25,000,000
shares authorized 1,123,341 and 1,922,674
shares issued and outstanding December 31,
1995 and September 30, 1996, respectively 8,989 15,322
Paid-in capital 3,245,462 5,065,152
Retained earnings (deficit) (4,998,491) (6,584,682)
---------- ----------
Total stockholders' equity (deficit) (1,744,040) (1,504,208)
---------- ----------
Total liabilities and stockholders' equity
(deficit) $1,562,271 $2,591,190
========== ==========
The accompanying notes are an integral part of this statement.
<PAGE>
<TABLE>
<CAPTION>
OCUREST LABORATORIES, INC.
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1995 1996 1995 1996
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales $564,548 $1,023,465 $364,164 $289,174
Cost of goods sold 396,096 638,586 235,890 195,007
----------- ----------- --------- ---------
168,452 384,879 128,274 94,167
Selling and marketing expenses 1,143,464 863,384 680,629 224,332
General and administrative expenses 679,743 797,253 213,195 312,605
Royalty expense 22,592 40,936 14,577 11,556
----------- ----------- --------- ---------
(1,677,347) (1,316,694) (780,127) (454,326)
Interest Expense (67,888) (269,497) (35,330) (121,415)
Interest Income 14 0 14 0
----------- ----------- --------- ---------
(1,745,221) (1,586,191) (815,443) (575,741)
Provision for taxes -- -- -- --
----------- ----------- --------- ---------
($1,745,221) ($1,586,191) ($815,443) ($575,741)
=========== =========== ========= =========
Net loss per share ($1.01) ($0.63) ($0.47) ($0.23)
=========== =========== ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OCUREST LABORATORIES, INC
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 1,123,341 $8,989 $3,245,462 ($4,998,491) ($1,744,040)
Issuance of stock, net 400,000 3,200 931,800 935,000
Issuance of stock upon conversion of
notes and accrued interest 300,327 2,402 693,081 695,483
Issuance of stock for cash upon
exercise of warrants 88,250 705 171,695 172,400
Issuance of stock in lieu of cash to
stockholders who provide
professional services 7,500 60 18,690 18,750
Issuance of stock in lieu of cash to
employees for accrued salaries 3,256 25 8,115 8,140
Adjustment to previously issued stock for
professional services (3,750) (3,750)
Net loss for the nine months ended
September 30, 1996 (1,586,191) (1,586,191)
--------- ------- ---------- ------------ ------------
Balance at September 30, 1996 (Unaudited) 1,922,674 $15,381 $5,065,093 ($6,584,682) ($1,504,208)
========= ======= ========== ============ ============
</TABLE>
<PAGE>
OCUREST LABORATORIES, INC.
STATEMENTS OF CASH FLOW
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1995 1996
------------ -----------
Cash flows (used in) from operating activities
Net loss ($1,745,221) (1,586,191)
Adjustments to reconcile net loss to net cash
used in operating activities
Professional services paid with
stock 27,000 18,750
Accrued salaries paid with stock 118,848 8,140
Interest Expense paid with stock 7,394 53,425
Depreciation & Amortization 76,899 99,030
Changes in assets and liabilities
Increase in accounts receivable (51,811) (67,327)
Increase in inventories (21,232) (162,115)
Increase in prepaid expenses (20,819) (14,327)
Increase (decrease) in accounts
payable (120,293) (251,778)
Increase in accrued expenses 526,983 118,905
------------ -----------
Net cash used in operating
activities (1,202,252) (1,783,488)
Cash flows from investing activities
Purchase of property and equipment (47,746) (294,395)
Deposits on fixed assets (5,000) (185,513)
------------ -----------
Net cash used in investing
activities (52,746) (479,908)
Cash flows from financing activities
Proceeds from issuance of common
stock 486,820 1,745,708
Proceeds from new borrowings 705,898 921,960
Principal repayments on indebtedness
Increase (decrease) in deferred
offering costs (16,500)
------------ -----------
Net cash from financing
activities 1,176,218 2,667,668
------------ -----------
Net increase (decrease) in cash (78,780) 404,272
Cash at beginning of period 84,836 1,607
------------ -----------
Cash at end of period $6,056 $405,879
============ ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $42,201 $108,807
============ ===========
Noncash transactions:
Conversion of notes payable to
common stock $100,000 $642,058
============ ===========
The accompanying notes are an integral part of these statements.
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Unless otherwise indicated, all dollar amounts included in this section
have been rounded to the nearest thousand dollars and the related dollar and
percentage fluctuations are calculated based on such rounding.
OVERVIEW
Ocurest was organized in 1991 to commercialize new consumer products in
the health and personal care industry. For the period from inception though
December 31,1993, the Company was in a development stage and accumulated a
deficit of $572,379 attributed to developing manufacturing and marketing plans
and paying the cost of professional services. The Company sells ophthalmic drug
solutions in an ophthalmic delivery system in the non-prescription eye drop
market. The Company believes that a similar delivery system has not been and is
not now being marketed by any other entity. The delivery system is protected by
United States patent and trademarks. The products sold with the delivery system
are Ocurest Sterile Eye Drops in a line of two over-the-counter formulations.
In late 1994, the Company began limited marketing of two OTC eyedrop
products in the Ocurest dispenser. In late 1995 the Company expanded its
marketing efforts to ten southern states. In early 1996, the Company began the
process of expanding the Ocurest brand nationally. For the nine months ended
September 30 1995 and 1996 the Company had net losses of ($1,745,000) and
($1,586,000) on net sales of $565,000 in 1995 and $1,023,000 in 1996. Net sales
for the three months ended September 30, 1995 were $364,000 compared with
$289,000 for the three months ended September 30, 1996 and the net loss in 1995
was ($815,000) as compared with ($575,000) in 1996. Sales for the two nine month
periods reflect the expansion in 1996 to national distribution and shipments
only to the eleven southeast and southwest states in 1995. The decrease in sales
for the three month period ended 1996 versus 1995 reflects the fact that most
initial shipments to fill retail shelves nationally were made in the first six
months of 1996 rather that the third quarter of 1996. In addition, the sales
decrease reflects the fact that during the third quarter of 1995 the Company
engaged in television advertising in eleven southern states. The Company did not
engage in any television advertising during the third quarter of 1996. Primarily
because the of the quarter-to-quarter reduction in advertising expenditures, the
Company's net loss declined 29% from approximately ($815,000) in 1995 to
($576,000) in 1996 despite the reduction in sales. The Company's net loss
declined 9% from approximately ($1,745,000) to ($1,586,000) for the nine month
periods 1995 and 1996, respectively. This reflects the heavy initial marketing
costs in 1995 in the eleven southern states that gradually diminished in late
1995 and early 1996. The Company did not commence advertising at the national
level until the fourth quarter of 1996 accounting for the overall reduction in
marketing costs. Prospects for the remainder of the year and 1997 are for
marketing costs to increase significantly.
COST OF GOODS SOLD
Cost of goods sold was 70% of net sales for the nine month period of
1995 and 62% for the same period of 1996. For the three months ended September
30, 1995, cost of goods sold was 65% of net sales as compared with 67% of net
sales for the three months ended
<PAGE>
September 30, 1996. The decrease between the nine month periods was primarily
attributable to lower per unit production costs. The Company anticipates that
product costs and expenses will continue to decline as a percentage of net sales
as the Company gains wider national distribution. The percentage increase
between the three month period is not significant.
SELLING AND MARKETING EXPENSES
The Company believes that consumer demand for its products can be
generated through advertising and sales promotion. As a result, the Company
intends to expend substantial amounts of funds in advertising and sales
promotion in future years. Selling and marketing expenses in 1995 and early 1996
reflect costs associated with the regional then national roll-out of the
Company's products from the state of Florida, the Company's lead market, to ten
more southern states and then nationally. Spot TV and magazine advertising are
primarily attributable for the marketing costs. Distribution costs increased in
1995 as sales expanded from Florida. For the nine months ended September 30,
1995 selling and marketing expenses of $1,144,000 were reduced to $863,000 as
$547,000 less advertising was offset with $222,000 higher promotional costs. The
period-to-period reduction in advertising expenditure per sales dollar was due
to unavailability of funds.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include professional services and
administrative expenses for the nine months ended September, 1995 of $680,000 as
compared to $797,000 for the same period in 1996. The increase of $117,000 is
for administrative and outside services costs to support the Company's November,
1996 public stock offering. The Company believes general and administrative
expenses will be substantially higher for the balance of 1996 and all of 1997 as
the Company hires additional personnel necessary to provide the infrastructure
to support the Company's planned continued national distribution of the
Company's product line.
INTEREST EXPENSE
Interest expense was nominal initially as the company relied heavily on
equity investments to fund operations. Interest expense increased in 1995 and a
gain in 1996 as the Company increased its indebtedness as discussed below under
"Liquidity and Capital Resources." Interest expense for the nine months ended
September, 1996 was $269,000. Management estimates the interest expense for 1996
will be higher due to increased indebtedness and higher rates of interest.
The Company obtained various loans in 1995 and 1996 and in August 1995
the Company entered into a factoring and financing agreement to sell its
accounts receivable and its finished goods inventory. The factor has agreed not
to terminate its present arrangements with the company prior to December 1997.
The Company is renegotiating the terms of the factoring arrangements. In the
event that the Company is not able to negotiate more favorable terms, the
company will seek to obtain financing from other sources, including other
factors.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital and capital requirements will depend on
numerous factors, including growth of the Company's sales. The Company currently
has a factoring and financing agreement pursuant to which the Company sells its
accounts receivable and finished goods inventory, subject to the right of the
company to repurchase such accounts receivable and inventory, and pledges its
machinery and equipment to secure a loan. In addition to interest and fees, the
financing agreement requires the company to pay the factor a management fee of
$5,000 per month. Such agreement may be terminated by the Company at any time or
by the factor commencing in December 1997. In the event that the Company is not
able to negotiate more favorable terms, the company will seek to obtain
financing from other sources, including other factors.
The Company believes that the level of financial resources available to
it is an important factor in its ability to achieve the marketing and
distribution objectives for its products as well as in its ability to compete
effectively. Consequently, the company may seek to raise additional capital
through public or private equity or debt financing in the future.
The Company's net operating losses for income tax purposes are subject
to certain restrictions on their utilization. The Company has experienced in
1995, and will experience in 1996, changes in ownership under Internal Revenue
Service regulations that will limit the amount of net operating losses that can
be utilized in any given year. If the Company's future pre-tax profits in any
given year exceed such limitation, cash payments for such income tax liabilities
will have to be made.
FORWARD-LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis of Financial
Condition and Results of Operations contains various "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which represent the Company's expectations or beliefs concerning future events,
including without limitation the following: the expected growth of the Company's
sales to a level to enable the Company to achieve profitability by the last
quarter of 1997; the Company's ability to secure additional credit facilities in
the U.S. , if necessary for the Company to do so; and the sufficiency of the
Company's cash provided by operating, investing and financing activities for the
Company's future liquidity and capital resource needs.
The Company cautions that these statements are further qualified by
important factors that could cause actual results to differ materially from
those in the forward-looking statements, including without limitation the
following: general economic conditions; the demand for the Company's products;
the size and timing of future orders; management decisions to commence or
discontinue product lines; the Company's ability to introduce new products on a
cost-effective and timely basis; the maintenance of present and the availability
of future strategic alliances the introduction of new products and product
enhancements by the Company or its competitors; changes in the level of
operating expenses; and the present and future
<PAGE>
level of competition in the industry. Results actually achieved thus may differ
materially from expected results included in these statements.
<PAGE>
OCUREST LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The quarterly consolidated financial statements herein have been
prepared by Ocurest Laboratories, Inc., a Florida corporation (the "Company"),
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission and in accordance with the requirements of Regulation S-B.
Certain information and footnote disclosures which would be included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Although the Company's management believes the disclosures are
adequate to make the information not misleading, it is suggested that these
quarterly financial statements be read in conjunction with the Company's audited
annual consolidated financial statements and footnotes thereto contained in its
definitive prospectus dated November 12. 1996 (Commission File No. 333-10323),
with respect to its initial public offering of securities (the "IPO").
The accompanying unaudited interim consolidated financial statements
include all adjustments (consisting only of those of a normal recurring nature)
necessary for a fair presentation of the results of the interim period.
2. INITIAL PUBLIC OFFERING
On November 12, 1996 the Company completed its initial public offering
of 1,200,000 units consisting of one share of common stock and one warrant. Each
warrant entitled the holder to purchase, at any time commencing on the date the
warrants are separately tradeable and transferable and until November 12, 1999,
one share of common stock at a price of $4.80 per share, subject to adjustments
in certain events. The right to exercise the warrants will terminate at the
close of business on November 12,1999. Commencing on the date the warrants are
separately tradeable and transferable, the warrants may be redeemed by the
Company at a price of $.55 per warrant until November 12, 1998 and at $.75 per
warrant until November 12, 1999, on 30 days' prior written notice given at any
time that the common stock has traded above $6.72 ( or 140% of the then exercise
price of the warrants if the exercise price is adjusted) per share for a least
20 consecutive trading days ending within 10 days prior to the date of the
notice of redemption,.
The net proceeds received by the Company from the IPO were $3,876,000,
inclusive of $924,000 of offering costs (including commissions and discounts) as
of November 12, 1996.
<PAGE>
OCUREST LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
3. FORWARD-LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis of Financial
Condition and Results of Operations contains various "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which represent the Company's expectations or beliefs concerning future events,
including without limitation the following: the continued growth of the
Company's sales; the ability to maintain or surpass past or current levels of
profitability; the Company's ability to secure additional credit facilities in
the U.S. , if necessary for the Company to do so; and the sufficiency of the
Company's cash provided by operating, investing and financing activities for the
Company's future liquidity and capital resource needs.
The Company cautions that these statements are further qualified by
important factors that could cause actual results to differ materially from
those in the forward-looking statements, including without limitation the
following: general economic conditions; the demand for the Company's products;
the size and timing of future orders; management decisions to commence or
discontinue product lines; the Company's ability to introduce new products on a
cost-effective and timely basis; the maintenance of present and the availability
of future strategic alliances the introduction of new products and product
enhancements by the Company or its competitors; changes in the level of
operating expenses; and the present and future level of competition in the
industry. Results actually achieved thus may differ materially from expected
results included in these statements.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant hereby certifies that it has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized in Palm Beach Gardens in
the State of Florida on December 27, 1996.
OCUREST LABORATORIES, INC.
--------------------------
(Registrant)
Date: December 27, 1996 By: /s/ EDMUND G. VIMOND, JR.
-------------------------
Edmund G. Vimond, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date: December 27, 1996 By: /s/ JOHN F. CARLSON
-------------------------
John F. Carlson
Vice President, Chief Financial Officer
and Treasurer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 406
<SECURITIES> 0
<RECEIVABLES> 132
<ALLOWANCES> 0
<INVENTORY> 699
<CURRENT-ASSETS> 1,321
<PP&E> 1,423
<DEPRECIATION> 200
<TOTAL-ASSETS> 2,591
<CURRENT-LIABILITIES> 4,095
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> (1,519)
<TOTAL-LIABILITY-AND-EQUITY> 2,591
<SALES> 1,023
<TOTAL-REVENUES> 1,023
<CGS> 638
<TOTAL-COSTS> 1,701
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 269
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,316)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,316)
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0.63
</TABLE>
