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 31,1997
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.)
425 Metro Place North, Suite 140, 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: 10,947,114 common shares,
without par value, on March 31, 1997.
FORM 10-Q
NETMED, INC.
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Balance Sheets December 31, 1996 1
and March 31, 1997
Statements of Operations For the Three Months Ended
March 31, 1997 and 1996 2
Statements of Cash Flows For the Three Months Ended
March 31, 1997 and 1996 3
Notes to Financial Statements -
March 31, 1997 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. 11
Signatures 12
PART I. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
NETMED, Inc.
Balance Sheets
March 31, December 31,
1997 1996
---------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 135,575 $ 142,074
Accounts receivable 247,370 175,512
Prepaid assets 29,400 28,394
---------------------------
Total current assets 412,345 345,980
Notes receivable - NSI 21,443 21,443
Investment in NSI--available for sale 6,522,453 9,238,503
Furniture and equipment (net of
accumulated depreciation) 27,565 28,034
Deferred taxes 829,162 744,162
Deposits and other assets 1,468 1,468
---------------------------
Total assets $ 7,814,436 $ 10,379,590
---------------------------
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 168,177 $ 97,625
Accrued expenses 229,563 223,536
Loan payable 149,815 96,909
Other liabilities 30,000 29,844
----------------------------
Total current liabilities 577,555 447,914
Deferred taxes 1,846,189 2,896,609
Stockholders' equity:
Common stock 3,959,097 3,881,605
Unrealized gains on available-for-sale
securities net of deferred taxes 2,379,134 3,954,764
Retained deficit (947,539) (801,302)
----------------------------
Total stockholders' equity 5,390,692 7,035,067
----------------------------
Total liabilities and stockholders' equity $ 7,814,436 $ 10,379,590
---------------------------
---------------------------
See accompanying notes.
1
NETMED, INC.
Statements of Operations
(Unaudited)
Three Months Ended
March 31,
-----------------------------
1997 1996
-----------------------------
Royalty revenue $ 125,353 $ 13,553
Operating expenses:
Salaries and benefits 334,080 70,070
Sales and marketing 152,175 17,184
General and administrative 134,501 25,859
Business development 43,661 0
Merger (Note 8) 0 36,613
-----------------------------
Total operating expense 664,417 149,726
-----------------------------
Operating loss (539,064) (136,173)
Other income (expense):
Interest income 38 6,010
Interest expense (4,260) --
Gain on available-for-sale securities 312,049 --
Equity loss in partnerships -- (1,275)
-----------------------------
Total other income 307,827 4,735
-----------------------------
Loss before income taxes (231,237) (131,438)
Income tax benefit (85,000) (52,575)
-----------------------------
Net loss $ (146,237) $ (78,863)
-----------------------------
-----------------------------
Net loss per share ($0.01) ($0.01)
-----------------------------
-----------------------------
Shares used in computation 10,945,508 6,072,936
----------------------------
----------------------------
See accompanying notes.
2
NETMED, INC.
Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1996
---------------------
OPERATING ACTIVITIES
Net loss ($146,237) ($78,863)
Adjustments to reconcile net loss to net
cash provided by (used for) operating activities:
Depreciation and amortization 3,600 1,500
Recognition of deferred tax assets (85,000) (52,575)
Gain on available-for-sale securities (312,049) --
Deferred compensation 77,488 --
Equity loss in partnership -- 1,275
Changes in operating assets and liabilities:
Accounts receivable (71,858) (53,544)
Prepaid assets (1,006) --
Accounts payable 70,552 59,034
Accrued expenses and other liabilities 6,027 (46,662)
Other liabilities 156 (41,974)
---------------------
Net cash used in operating activities (458,327) (211,809)
---------------------
INVESTING ACTIVITIES
Sale of NSI stock 402,049 --
Purchase of furniture and equipment (3,127) --
---------------------
Net cash provided by investing activities 398,922 --
---------------------
FINANCING ACTIVITIES
Proceeds from margin account 52,906 --
---------------------
Net cash provided by financing activities 52,906 --
---------------------
Net decrease in cash (6,499) (211,809)
Cash and cash equivalents at beginning of period 142,074 811,359
---------------------
Cash and cash equivalents at end of period $ 135,575 $ 599,550
---------------------
---------------------
See accompanying notes.
3
NetMed, Inc.
Notes to Financial Statements
(Unaudited)
March 31, 1997
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, 1997 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1997. For
further information, refer to the financial statements and footnotes thereto
included in the NetMed, Inc. Form 10-K/A No. 1 for the year ended December 31,
1996 as filed with the Securities and Exchange Commission.
NOTE B - MERGER
On December 5, 1996, the Company shareholders approved an Agreement and Plan of
Merger with Cytology Indiana, Inc., Indiana Cytology Review Company, ER Group,
Inc., CCWP Partners, Inc., and Carolina Cytology, Inc. On December 16, 1996 the
merger was declared effective and the Company changed its name to NetMed, Inc.
NetMed, Inc. has the rights to market the PAPNET(R) System and PAPNET(R) Service
in Ohio, Kentucky, Missouri, Georgia, North Carolina and the Consolidated
Statistical Area of Chicago. Unaudited pro forma results of operations for the
quarter ended March 31, 1996, assuming the merger had occurred as of January 1,
1996, are presented below. The pro forma amounts include adjustments that the
Company believes are reasonable.
1996
---------
Royalty revenue $ 24,069
Operating loss (255,503)
Net loss (172,093)
Net loss per share (.02)
4
NOTE C - NET LOSS PER SHARE
The net loss per share has been calculated based on the weighted
average number of common shares outstanding. In February 1997, the Financial
Accounting Standards Board issued Statement No. 128, "Earnings Per Share"
(SFAS 128). SFAS 128 requires adoption for periods ending after December 15,
1997. Until that time, the Company is required to continue calculating
earnings per share (EPS) in accordance with Accounting Principles Board
Opinion No. 15. The Company has calculated "Basic EPS" and "Diluted EPS" for
the three-month period ended March 31, 1997 in accordance with SFAS 128 and
the amounts would not differ from that disclosed in the accompanying
statement of operations for net loss per share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NETMED, INC.
OVERVIEW
NetMed, Inc., (the "Company"), is an Ohio corporation engaged in the business
of acquiring, developing and marketing medical and health-related
technologies. The Company's revenues are currently derived principally from
the marketing of the PAPNET-Registered Trademark-Testing System and Service,
which are proprietary products of Neuromedical Systems, Inc., ("NSI"). The
Company is also currently engaged in the development of an oxygen
concentration device which it plans to manufacture and sell in the home
healthcare market.
The PAPNET-Registered Trademark-Testing System is a semi-automated cancer
detection system for the review of cell, tissue or body fluid specimens,
including but not limited to, cervical cytology specimens. The
PAPNET-Registered Trademark-Service permits laboratories to submit slides
containing such specimens to one of NSI's central facilities for image
processing employing NSI's patented neural network technology. NSI returns
the slides and digital tape containing processed images for evaluation by
NSI-trained cytotechnologists.
On December 5, 1996, the Company's shareholders approved an Agreement and Plan
of Merger (the "Merger Agreement") whereby Cytology Indiana, Inc., Indiana
Cytology Review Company, ER Group, Inc., CCWP Partners, Inc., and Carolina
Cytology, Inc. (the "Predecessor Companies") were merged with and into the
Company (the "Merger"). The Merger was effective on December 16, 1996 and the
Company issued, in the aggregate, 4,849,988 shares of its common stock,
without par value, in exchange for the issued and outstanding shares of the
Predecessor Companies. Under terms of the Merger Agreement, Papnet of Ohio,
Inc. changed its name to NetMed, Inc. NetMed common stock began trading on the
American Stock Exchange on December 18, 1996 under the symbol
5
NMD.
As a result of the Merger, NetMed has the marketing rights to the
PAPNET-Registered Trademark- Testing System and Service in Ohio, Kentucky,
Missouri, Georgia, North Carolina and the Consolidated Statistical Area of
Chicago. The Company's marketing rights are exclusive within these
territories, subject to the right of NSI to conduct marketing and sales
activities therein. However, because the royalties paid to the Company by NSI
are based on revenues recognized by NSI from activities (including any sales
by NSI) in the licensed territories, NSI's sales activities therein benefit
the Company.
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 Form 10-KA/No. 1 as filed with the United States Securities
and Exchange Commission, File No. 1-12529, in the section titled "Business
Risks".
For accounting purposes, the historical financial statements of the Company are
those of Papnet of Ohio, Inc. The results of operations for the merged entities
are reported on a prospective basis commencing December 16, 1996. The following
discussion therefore includes the operations of Papnet of Ohio, Inc. from
January 1, 1996 through March 31, 1996, and the consolidated operations of all
entities from January 1, 1997 through March 31, 1997.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
The PAPNET-Registered Trademark-Testing System was approved by the FDA
for commercial use in the United States on November 8, 1995. Prior to that
time, it was permitted to be utilized in the United States on an
investigational basis only, and NSI was permitted to derive revenue with
respect thereto only to recover certain of its costs. Beginning January 1,
1996, the Company and NSI began the task of building a sales force and
familiarizing doctors and laboratories with the benefits of the PAPNET(R)
Testing System and Service. Beginning in September of 1996, the commercial
launch of the product was initiated with a national advertising campaign.
In February 1997, the Company entered into an agreement with Blue Cross
Blue Shield Mutual of Ohio now known as Medical Mutual of Ohio (MMO) whereby
MMO agreed to cover the cost of the PAPNET-Registered Trademark-test for all
of its members. In addition, MMO has agreed to strongly recommend to its
clinicians and laboratories that all negative Pap smears covered by its
benefit plans are to be examined using PAPNET-Registered Trademark-testing.
MMO is one of the largest healthcare finance and delivery systems in the
6
State of Ohio with approximately 1.5 million covered members. While
management believes that this agreement will increase the number of Pap
smears processed using the PAPNET-Registered Trademark-Testing System (the
"Slides") during 1997, there can be no guarantee as to the increased quantity
or timing of any increase.
As a result of the FDA approval mentioned above, the commercial launch
of the product in September 1996 and an increase in the number of sales
representatives, the number of Slides processed in the Company's territories
increased to 15,202 Slides for the three months ended March 31, 1997, from
6,853 Slides for the quarter ended December 31, 1996 and from 1,590 Slides for
the three months ended March 31, 1996. On a proforma basis, 14,157 and 2,029
Slides were processed, for NetMed and the Predecessor Companies, for the
quarters ended December 31, 1996 and March 31, 1996, respectively. Royalty
revenue was $125,353 for the three months ended March 31, 1997, an increase
from $13,553 for the three months ended March 31, 1996.
The total number of employees of the Company increased to 15 during the
three months ended March 31, 1997, an increase of 10 employees from the same
period the previous year. The increase consisted of an additional six sales
representatives and four administrative employees. As a result of granting
options to certain employees and directors during the three months ended March
31, 1997, the Company incurred compensation expense of $77,488. This amount
has been included in salaries and benefits. As a result of the increased
number of employees, the expense for the grant of options, salary and benefits
increased to $334,080 for the three months ended March 31, 1997 from $70,070
for the three months ended March 31, 1996.
Sales and marketing expense other than salaries and benefits increased
to $152,175 for the three months ended March 31, 1997 from $17,184 for the
three months ended March 31, 1996. In addition to the direct expenses of the
sales representatives in developing their respective sales territories, the
Company incurred expenses for advertising, promotional materials and sales
literature. The Company incurred a total of $47,500 for professional services
in its efforts to expand the reimbursement of the cost of the
PAPNET-Registered Trademark-test by healthcare providers and for employment
agency fees for the additional sales representatives hired during the three
months ended March 31, 1997.
General and administrative expenses increased to $134,501 for the three
months ended March 31, 1997 compared to $25,859 for the three months ended
March 31, 1996. The increase in general and administrative expense is
primarily due to an increase in accounting, legal and stock exchange costs as
well as the increase in headcount from two to six employees.
While the Company's primary focus has been, and will continue to be,
exploiting its rights under the NSI license, the Company will also consider
the acquisition of compatible healthcare related technologies
7
in the future. Consistent with that plan, the Company incurred costs of $43,661
for the three months ended March 31, 1997 in the negotiation and evaluation of
additional opportunities in medical technology. On March 3, 1997, the Company
announced that it had entered an agreement with CeramPhysics, Inc. of
Westerville, Ohio ("Ceram"), pursuant to which the Company has the right to
acquire control of a newly-organized corporation holding a world-wide license to
Ceram's patented oxygen generation technology, which is exclusive as to all
applications except oxygen sensors and fuel cells. The Company in late 1996
entered into a non-binding preliminary letter of intent for an investment of
approximately $4,000,000 in common stock of HUBLink, Inc., a healthcare software
development and marketing company. While the Company has not concluded this
transaction, it continues to negotiate with HUBLink.
During 1995, the Company began discussions with the Predecessor Companies that
resulted in the Merger that was effective December 16, 1996. For the three
months ended March 31, 1996, the Company incurred one time merger expenses of
$36,613. No additional merger expenses are anticipated for 1997 related to this
transaction.
The Company recognized a gain on available-for-sale securities of $312,049 for
the three months ended March 31, 1997. There were no sales of securities during
the three months ended March 31, 1996. The increase is due to the gain on the
sale of 45,000 shares of NSI stock held by the Company at net prices ranging
from $8.50 to $9.88 per share.
Interest income for the three months ended March 31, 1997 was $38 compared to
$6,010 for the same period the prior year. The decrease was a result of lower
available cash balances to invest, as cash balances have been utilized to fund
the negative cash flow from operations
The Company has incurred loans payable of $149,815 as of March 31, 1997. The
loans are the result of opening margin accounts utilizing the NSI stock for
collateral. Interest expense as a result of these loans was $4,260 for the three
months ended March 31, 1997.
The equity in income or loss in partnerships is the Company's percentage of
income or loss in Carolina Cytology Licensing Company and Carolina Cytology
Warrant Partnership. Both entities were Predecessor Companies and were merged
into the Company on the effective date of the Merger.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily by the sale of NSI common
stock owned by the Company. The Company's combined cash and cash equivalents
totaled $135,575 at March 31, 1997,
8
a decrease of $6,499 from December 31, 1996. The Company owns 652,245
unrestricted shares of NSI common stock which can be liquidated in an orderly
fashion to fund future operations. NSI common stock closed trading at $10.00 per
share on March 31, 1997 and at $8.125 on May 9, 1997.
While the Company anticipates that its cash requirements will be
substantial for the foreseeable future, it believes its existing investments
will be adequate to meet those requirements. The cash requirements relate
specifically to the accounts and loan payable and accrued expenses at March
31, 1997 of approximately $575,000, the continuing negative cash flow
generated from operations on a monthly basis and the costs associated with
the sales and marketing efforts to healthcare providers, doctors,
laboratories and direct to the consumer during 1997 and potentially 1998. The
sales and marketing expenses include, but are not limited to, the cost of
expanding the sales force, direct advertising to consumers, advertising and
promotion expense associated with the implementation of the MMO contract and
professional fees associated with marketing to insurance and managed care
companies. The professional fees associated with marketing to insurance and
managed care companies are necessary as the current sales force is responsible
for marketing primarily to doctors and laboratories. While management
believes that the above strategies will increase Slide volume, there can be
no guarantee as to the timing and the amount of increase, if any.
In addition to exploiting its rights under the license agreement with
NSI, the corporate mission of the Company 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 the initial investment, the PAPNET-Registered Trademark-technology, in
pursuing other opportunities in healthcare technology. Specifically, making
early investments and applying the management and marketing resources of the
Company to develop and implement strategies which will substantially increase
the value of the investment over a period of two to four years. As
opportunities become available, the Company will require substantial funds in
making the initial investment and/or commercializing the healthcare product.
The Company has currently committed to the following in conjunction with the
recent agreement with CeramPhysics. Pursuant to the agreement, the Company
will work with and loan up to $200,000 to Ceram to complete the fabrication
and testing of a ceramic element incorporating the licensed technology, which
will be capable of generating oxygen of a purity and in quantities suitable
for medical use. It is the Company's intention to incorporate the element
into an oxygen generation device which the Company will manufacture and
market for the home health care market. If the device is acceptable to the
Company, it has the right to acquire 95% of the capital stock of the licensee
for an additional $200,000 investment, with the remaining 5% to be held by
Ceram. In addition, substantial funds would be necessary to commercialize the
oxygen device beginning in late 1997 and during 1998.
9
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters discussed in
this Form 10-Q include forward-looking statements that involve risks and
uncertainties, including, but not limited to, the Company's 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 operating cash flow, limited marketing and sales
history, the impact of third-party reimbursement decisions, and other risks
detailed in the Company's most recent Annual Report on Form 10-K/A No. 1 and
other Securities and Exchange Commission filings.
10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit Exhibit Description
- ------- -------------------
10(a) Investment Agreement among the Registrant,
CeramPhysics, Inc. and Ceram Oxygen
Technologies, Inc., dated February 28, 1997.
(Previously filed as Exhibit 10(j) to the
Registrant's Form 10K/A No.1 for the year ended
December 31, 1996 and incorporated herein by
reference.)
10(b) Revolving Loan-Grid Note, between the
Registrant as lender and Ceram Oxygen
Technologies, Inc., as maker, dated February
28, 1997. (Previously filed as Exhibit 10(k) to
the Registrant's Form 10K/A No.1 for the year ended
December 31, 1996 and incorporated herein by
reference.)
10(c) Marketing Support Agreement, among
Neuromedical Systems, Inc., the
Registrant, and Blue Cross and Blue Shield
Mutual of Ohio, dated January 30, 1997.
(Previously filed as Exhibit 10(l) to the
Registrant's Form 10K/A No.1 for the year ended
December 31, 1996 and incorporated herein by
reference.)**
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.
PART II. OTHER INFORMATION
SIGNATURE
11
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, 1997 to be signed on its behalf by the undersigned,
thereto duly authorized.
NETMED, INC.
By: /s/ David J. Richards
-----------------------------------------------
David J. Richards, President and Secretary*
By: /s/ Kenneth B. Leachman
-----------------------------------------------
Kenneth B. Leachman, Vice President of Finance*
Dated: May 14, 1997
* 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 of Finance, Mr. Leachman is the Registrant's
principal financial officer.
12
EXHIBIT INDEX
EXHIBIT EXHIBIT EXHIBIT INDEX
NUMBER DESCRIPTION PAGE NUMBER
------ ----------- -----------
10(a) Investment Agreement among the Registrant,
CeramPhysics, Inc. and Ceram Oxygen
Technologies, Inc., dated February 28, 1997.
(Previously filed as Exhibit 10(j) to the
Registrant's Form 10K/A No.1 for the year
ended December 31, 1996 and incorporated
herein by reference.)
10(b) Revolving Loan-Grid Note, between the
Registrant as lender and Ceram Oxygen
Technologies, Inc., as maker, dated February
28, 1997. (Previously filed as Exhibit 10(k)
to the Registrant's Form 10K/A No.1 for the
year ended December 31, 1996 and incorporated
herein by reference.)
10(c) Marketing Support Agreement, among
Neuromedical Systems, Inc., the
Registrant, and Blue Cross and Blue Shield
Mutual of Ohio, dated January 30, 1997.
(Previously filed as Exhibit 10(l) to the
Registrant's Form 10K/A No.1 for the year ended
December 31, 1996 and incorporated herein by
reference.)**
27 Financial Data Schedule.
** Registrant has requested that portions of this Exhibit be given confidential
treatment.