1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 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:
0-22390
U.S. MEDICAL SYSTEMS, INC.
Delaware 68-0206382
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
7600 Burnet Road, Suite 350, Austin, TX 78757
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code. . . . . . . . (512) 458-3335
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 Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO_____
Number of shares outstanding of the issuer's common stock, as of
December 31, 1997: 2,873,823
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U.S. MEDICAL SYSTEMS, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets - December 31, 1997
and June 30, 1997 3
Unaudited Condensed Consolidated Statements of Operations - For the
three months ended December 31, 1997 and December 31, 1996 4
Unaudited Condensed Consolidated Statement of Operations For the six
months ended December 31, 1997 and December 31, 1996 5
Unaudited Condensed Consolidated Statements of Cash Flows - For the
six months ended December 31, 1997 and December 31, 1996 6
Notes to the Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations 8
PART II. OTHER INFORMATION
Item 1-4 9
Item 5-6 10
Signature 13
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. MEDICAL SYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
December 31 June 30
1997 1997
----------- -----------
ASSETS
Current Assets
Cash and cash equivalents $ 206,000 $ 275,000
Accounts receivable 31,000 16,000
Inventory 22,000 59,000
Prepaid expenses 87,000 5,000
----------- -----------
TOTAL CURRENT ASSETS 346,000 355,000
Other Assets
Property and equipment, net 11,000 16,000
Intangible assets, net -- --
----------- -----------
TOTAL OTHER ASSETS 11,000 16,000
----------- -----------
TOTAL ASSETS $ 357,000 $ 371,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 39,000 $ 31,000
Accrued liabilities 14,000 29,000
Current portion of long-term debt due to stockholders 50,000 50,000
----------- -----------
TOTAL CURRENT LIABILITIES 103,000 110,000
----------- -----------
TOTAL LIABILITIES 102,000 110,000
----------- -----------
Stockholders' Equity
Common stock, 20,000,000 shares authorized, $.01 par
value, 2,873,823 issued
and outstanding December 31, 1997
and 2,332,023 issued and outstanding June 30, 1996 29,000 29,000
Additional paid-in capital 7,039,000 7,039,000
Accumulated deficit (6,813,000) (6,807,000)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 254,000 261,000
TOTAL LIABILITIES AND STOCKHOLDERS' ----------- -----------
EQUITY $ 357,000 $ 371,000
=========== ===========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
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U.S. MEDICAL SYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
For the three months For the three months
ended December 31 ended December 31
1997 1996
------------------ ------------------
$ 48,000 $ 113,000
Net Sales (26,000) (58,000)
Cost of sales ---------- ----------
22,000 55,000
GROSS PROFIT (LOSS)
Costs and expenses 71,000 90,000
General and administrative -- 31,000
Selling and marketing 1,000 1,000
Research and development 2,000 40,000
Depreciation and amortization ---------- ----------
74,000 162,000
TOTAL COST AND EXPENSES
---------- ----------
(52,000) (107,000)
PROFIT (LOSS) FROM OPERATIONS
Other income (expense) 1,000 1,000
Interest income (1,000) (8,000)
Interest expense (3,000) 8,000
Miscellaneous income (expense), net ---------- ----------
(3,000) 1,000
TOTAL OTHER INCOME (EXPENSE)
---------- ==========
NET PROFIT (LOSS) $ (49,000) $ (106,000)
=========== ==========
Net income (loss) per share $ (0.02) $ (0.08)
========== ==========
Weighted average shares outstanding 2,873,823 1,372,578
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
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U.S. MEDICAL SYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
For the six months For the six months
ended December 31 ended December 31
1997 1996
----------------- -----------------
Net Sales $ 261,000 $ 216,000
Cost of sales (109,000) (132,000)
---------- ----------
GROSS PROFIT 152,000 85,000
Costs and expenses
General and administrative 151,000 165,000
Selling and marketing 5,000 39,000
Research and development 2,000 7,000
Depreciation and amortization 5,000 61,000
---------- ----------
TOTAL COSTS AND EXPENSES 163,000 272,000
---------- ----------
LOSS FROM OPERATIONS (11,000) (187,215)
Other income (expense)
Interest income 1,000 1,000
Interest expense (2,000) (28,000)
Miscellaneous income (expense), net 3,000 12,000
---------- ----------
TOTAL OTHER INCOME (EXPENSE) (4,000) (15,000
---------- ----------
NET LOSS $ (7,000) $ (203,000)
========== ==========
Net income (loss) per share $ (0.002) $ (0.15)
Weighted average shares outstanding 2,873,823 1,294,085
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
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U.S. MEDICAL SYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months For the six months
ended December 31 ended December 31
1997 1996
------------------ -------------------
Cash flows from operating activities
Net Income (Loss) $ (7,000) $(203,489)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 5,000 60,976
Write off of excess inventory 21,000 638
Changes in assets and liabilities
Accounts receivable (15,000) 30,338
Inventories 16,000 54,913
Prepaid expenses and other assets (82,000) 137
Accounts payable and accrued liabilities (7,000) 56,940
--------- ---------
Net cash used for operating activities (69,000) 453
--------- ---------
Cash flows from investing activities:
Proceeds from sales of furniture and equipment -- --
Additions to patents -- --
--------- ---------
Net cash provided by (used for) investing activities -- --
--------- ---------
Increase (decrease) in cash (69,000) 213,275
Cash and cash equivalents at beginning of year 275,000 22,014
--------- ---------
Cash and cash equivalents at end of period $ 206,000 $ 235,742
========= =========
Supplemental non-cash financing activities:
The following occurred in December 1996.
1. 3,177,325 shares of common stock held in escrow were canceled.
2. A one-for-seven reverse split of common stock was completed.
3. 1,110,983 shares of common stock were issued in exchange for notes
payable totaling $747,450 and accrued interest totaling $105,889.
The accompanying notes are an integral part of these unaudited consolidated
financial statements
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U.S. MEDICAL SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. ORGANIZATION
U.S. MEDICAL SYSTEMS, INC. (the "Company") (formally Medical Polymers
Technologies, Inc.), through its wholly owned subsidiary U.S. Medical,
Inc., develops, produces and markets products directed at the
over-the-counter consumer market and products related to infection
prevention for the professional dental health care industry.
The Company's current cash resources have not been sufficient to
support the Company's debt interest payments and extensive consumer
promotion of existing products. As such, the Company continues to focus
its strategy on the Miracle Grip(R) and PDS(R) Clean products. Due to
the extensive capital requirements for consumer advertising, the
Company will continue to focus in 1998 on its two revenue producing
products. In December 1996, the Company completed a restructuring and
$853,000 of its long-term debt was converted to equity.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and, accordingly, do not include all
information and footnotes required under generally accepted accounting
principles for complete financial statements. In the opinion of
management, these interim condensed consolidated financial statements
contain all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation of the financial position
of the Company as of December 31, 1997, and the results of the
Company's operations and its cash flows for the six months ended
December 31, 1997 and 1996. These condensed consolidated financial
statements should be read in conjunction with the Company's Annual
Report on Form 10-KSB filed on September 26, 1997 and Form 10-KSB/A1
filed on November 11, 1997.
3. INVENTORIES
At December 31, 1997 and December 31, 1996, inventories consisted
primarily of finished products, work in progress and raw chemicals. The
balance of inventory consisted of packaging materials for Miracle
Grip(R).
4. LONG-TERM DEBT
The Company completed a private placement of 10% subordinated debt with
warrants to existing stockholders on March 1, 1995 for $805,000. This
private placement included one stock purchase warrant exercisable for
approximately 2.9 shares of $.01 par value Common Stock of the Company
for every $1.00 of principal. One cent of each dollar invested was
attributed to the purchase of the warrants and $0.99 was attributed to
the notes. The warrants were exercisable at any time after September 1,
1995 until February 27, 2000 at an exercise price of $0.15 per share of
common stock, subject to adjustment. Terms of debt were 10% interest
only to be paid March 1, 1996; 10% interest and one-half of the
principal to be paid March 1, 1997; and 10% interest
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and the balance of the principal was to be paid March 1, 1998. The
amount of the proceeds attributable to the warrants ($8,050) was
recorded as a discount to debt (to be amortized over the life of the
debt) and an increase to additional paid-in capital. Offering expenses
of $35,000 were incurred and recorded as an intangible asset in the
financial statements. However, the remaining unamortized offering
expense of $21,000 were written off in December 1996, when the debt
was converted to equity. These expenses were being amortized over the
life of the debt. On November 19, 1996, stockholders approved a
reorganization plan which converted $853,000 of the principle and
interest of this debt to equity. On December 17, 1996 1,110,983 shares
of Common Stock were issued to satisfy the above debt. Warrants
related to this private placement were canceled as part of the
reorganization. At December 31, 1997 one debt holder remained
representing $49,500 of principle and approximately $13,250 in
interest. The Company is seeking to settle this debt.
5. REORGANIZATION PLAN
In order to address the Company's financial problem and return the
Company to a stable financial condition, management, with the approval
of the Board of Directors, devised a Reorganization Plan. The
Reorganization Plan called for the cancellation of all the indebtedness
of the Company to its noteholders through an offer to exchange the
outstanding notes for the Company's Common Stock. On June 10, 1996, the
Vancouver Stock Exchange indicated that it had no objection to the
proposed debt settlement with the noteholders. Written approval was
secured by 23 of the noteholders. The stockholders approved the debt
settlement on November 19, 1996. Stockholders also approved, as part of
the reorganization, a consolidation of the Company's shares on a
one-for-seven reverse split and approved a change of the name of the
Company to U. S. Medical Systems, Inc. Other items the Company took
action on as part of the reorganization, which did not require
stockholder approval, were: cancellation of 3,177,325 escrowed shares
and a private placement which raised approximately $270,900. On
December 17, 1996, the Vancouver Stock Exchange approved the
reorganization and the Company began trading as U.S. Medical Systems,
Inc. on the Vancouver Stock Exchange (Symbol: USS) and the NASD
Bulletin Board (Symbol: USME). On January 22, 1997, the Vancouver Stock
Exchange approved the private placement. Since the private placement
was not approved until January 1997, $213,275 received in December 1996
from investors in the private placement was recorded as U.S. Medical
Systems, Inc. liabilities and included in accrued liabilities in the
December 31, 1996 financial statements. An additional $57,625 was
received in January 1997 and 541,800 shares of Common Stock were
issued.
6. NET INCOME (LOSS) PER SHARE
Net (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares and common share equivalents
(if dilutive) during each period. As required by accounting principles
generally accepted in the United States, issued and outstanding shares
of Common Stock which are held in escrow are excluded from the weighted
average number of common and common equivalent shares because the
release of such shares is contingent upon the Company reaching certain
financial goals which have not yet been attained. On December 31, 1997,
the weighted average, excluding escrow shares, was 2,873,823 for the
six-month period.
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ITEM 2.
This quarterly report on Form 10-QSB contains certain forward-looking statements
and information relating to the Company and its subsidiaries that are based on
the beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. When used in this
report, the words "anticipate," "believe," "estimate" and "intend" and words or
phrases of similar import, as they relate to the Company or its subsidiaries or
Company management, are intended to identify forward-looking statements. Such
statements reflect the current risks, uncertainties and assumptions related to
certain factors including, without limitations, competitive factors, general
economic conditions, customer relations, relationships with vendors,
governmental regulation and supervision, seasonality, distribution networks,
product introductions and acceptance, technological change, changes in industry
practices, onetime events and other factors described herein. Based upon
changing conditions, should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended. The Company does not intend to update
these forward-looking statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion below analyzes changes in the consolidated operating results and
financial condition of the Company during its second quarter of fiscal 1998 and
1997.
GENERAL
The Company experienced a decrease in net sales, a loss from operations and a
loss for the fiscal quarter ended December 31, 1997. Net sales decreased 58%
during the second quarter from $113,000 in 1997 to $48,000 in 1998. Operating
losses decreased from $107,000 in the second quarter of fiscal 1997 to a loss of
$52,000 in fiscal 1998 second quarter. Net losses decreased from a loss of
$106,000 in 1997 to a loss of $49,000 for the reporting quarter. The Company's
gross margin decreased to 46% in 1998 from 48.0% in 1997. Losses are anticipated
in 1998 as the Company continues its efforts to obtain increased market
acceptance for its Miracle Grip(R) product line, and expand the PDS(R) line to
other markets.
The decrease in sales for the current period is attributable to the lack of
sales in the PDS(R) line and to slow sales of Miracle Grip(R) leading up to the
holiday season. Likewise, increases in operating losses are related to this
decrease in sales and increase in overall expenses, especially in G&A related to
annual meeting expenses and costs related to merger/acquisition activities. It
is expected that overhead expenses will increase over the next period due to the
expenses related to the Company's annual meeting and payment of costs relating
to merger/acquisition activities.
The Company continues to seek increases in sales of the Miracle Grip(R) product
line through major food and drug chains in the United States. Likewise, the
Company continues a direct mail program in areas of the country where Miracle
Grip(R) is not sold and may continue to pursue sales through that channel as
well as beginning a marketing effort on the Internet at miraclegrip.com. The
Company will require additional capital to manufacture and market existing and
future products developed internally.
In late 1996, the Board of Directors completed a reorganization plan to
restructure the Company and convert debt to equity. There can be no assurance
that the reorganization approved by stockholders in November 1996 and by the
Vancouver Stock Exchange will improve financial performance. Likewise, there can
be no assurance that the Company will be able to sustain operations through
1998, convert its
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remaining raw materials and packaging inventories into salable
products or successfully market its products. The Company has previously
disclosed that it might seek to sell one or all of its existing product lines
and seek to acquire or merge with an existing company. Management continues to
pursue this strategy.
The Company has suffered significant net losses, has a substantial accumulated
deficit and has generated significant negative cash flows from operations.
Marketing expenses and costs to maintain inventory during fiscal 1998 will
require significant cash resources. The Company obtained $270,900 in December
1996 and January 1997 in connection with the private placement of equity and
warrants. However, there can be no assurance that the additional cash resources
will enable the Company to sustain operations in the next fiscal year, convert
its remaining raw materials and packaging inventories into salable products or
successfully market its products. In consideration of this, additional financing
may be required in order to continue to fund operations. See the discussion
under "Liquidity and Capital Resources" below.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from
the Company's Condensed Consolidated Financial Statements of Income, expressed
as a percentage of revenue:
Six Months ended
December 31
1997 1996
--------------------------------------------------------------------------------------
NET SALES 100.0% 100.0%
COSTS AND EXPENSES
Cost of sales (41.8%) (61.1%)
General and administrative (57.8%) (76.4%)
Selling and marketing (1.9%) (18.1%)
Research and development (.8%) (3.2%)
Depreciation and amortization (1.9%) (28.2%)
--------------------- ----------------------
OPERATING EXPENSES (104.2%) (187.0%)
--------------------- ----------------------
INCOME (LOSS) from operations (4.2%) (87.0%)
Total other income (expense): 1.5% (7.0%)
NET INCOME (LOSS) (2.7%) (94.0%)
----------------------------------------- --------------------- ----------------------
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1996
Net sales for the three months ended December 31, 1997, decreased 58.0%, to
$46,000 from $113,000 for the same period last year. Sales in the period were
related to Miracle Grip(R) consumer product for the retail market which has
lower margins, increased cost of goods and higher marketing costs. Sales of the
polymer film product line dropped 41% from last year's period. This was due to
the inability of the Company to aggressively advertise the product.
Cost of goods sold as a percentage of net sales increased to 54.2% from 51.3%
primarily as the result of a shift in mix of sales, with decreased sales in the
PDS(R) technology compared to the film technology
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product and higher gross margins of products sold in the current period. Gross
margins are expected to fluctuate in future quarters depending on whether the
polymer film technology or the PDS(R) line is the more significant contribution
to revenues.
General and administrative expenses decreased by $9,000, or 21.1%, in the first
quarter 1998 period compared to the 1997 period primarily as a result of an
decrease in travel and contract labor. Although management plans to continue
cost cutting efforts in this area, overhead expenses are expected to increase in
the next quarter.
The decrease of $31,000 or 96.0%, in sales and marketing expenses in the second
quarter 1998 period was largely associated with cost containment. Currently six
brokers representing the Company market the Miracle Grip(R) product. Limited
advertising on the Internet began in the quarter.
Research and development expenses decreased to less than $1,000 in the current
period due to discontinuation of testing by NewForm Development Labs.
Interest expense decreased to $1,000 due to the conversion of $853,000 of
principle and interest. Interest income increased in the period to $1,000.
As a result of the above activities, the Company's performance improved from a
loss $106,000 in the fiscal 1997 period, or $(0.08) per share, to a loss of
$49,000, or $(0.02) per share, in fiscal 1998's second quarter. If the Company
is able to effectively implement Internet advertising support for Miracle
Grip(R) in 1998, sales volumes for the Miracle Grip(R) product line may improve.
However, the Company operates in a highly competitive industry with companies
that are better established in the marketplace and have vastly greater resources
than the Company. Therefore, there can be no assurances that demand for the
Company's Miracle Grip(R) product line will grow.
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
Net sales for the six months ended December 31, 1997 increased $45,000, or 21%,
to $261,000 as compared to $216,000 for the same period of the previous year.
The increase in net sales was attributable to increased purchases of the PDS(R)
product line. Sales of Miracle Grip(R) decreased by 26% in the period over the
second quarter of fiscal 1997.
Costs of goods sold as a percentage of net sales declined to 42% from 61% in the
fiscal 1997 period. This improvement resulted from the change of mix of products
being manufactured.
General and administrative expenses decreased by $14,000, or 8%, to $151,000 in
the six-month period. This was due primarily to reduced staff throughout the
period, reduction of unnecessary office and lab space and the elimination of
certain insurance, consulting and advertising services. The Company incurred a
one-time expense of approximately $21,000 for costs associated with inventory
write-off. The Company expects that general and administrative expenses will
stabilize since the Company is currently placing emphasis on cost controls and
limiting non-essential spending whenever feasible.
Sales and marketing expenses also decreased by $34,000, or 87%, from $39,000 in
the six-month period last year. This improvement resulted from the management
decision to eliminate national advertising until distribution expands.
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Research and development expenses decreased 71% to $2,000 in the six-month
period. This resulted from the completion of development on current products
with NewForm Development Labs. The Company expects that research and development
costs will be minimal through the remainder of fiscal year 1998.
Interest expense decreased to $2,000 is attributable to the debt to equity
conversion by stockholders from the debt financing of $805,000 on March 1, 1995.
The increase in interest income of $2,000 from the previous six-month period
last year was a result of more interest bearing investments during the current
period due to the reduction of operational losses of the Company.
Net losses of $7,000 were down $196,000, or 97%, from the corresponding fiscal
1997 six-month period. The continued reduction in losses resulted from a steady
focus of management cost controls, including less expensive manufacturing
processes and completion of major research and development work on the stick
technology.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 1997 was $243,000 compared to $245,000 at June
30, 1997. The current ratio was 3.4% compared to 3.2 at June 30, 1997. The
decrease in working capital is due to costs related to possible
merger/acquisition and annual meeting expenses.
There were no capital expenditures in this period.
At December 31, 1997, total long-term debt outstanding was $50,000. Not
including accrued interest of $13,200. Interest on the debt is being accrued
monthly.
In December 1996, the Company completed a Reorganization Plan which included the
conversion of equity of $853,000 of principle and interest through November 1,
1996. This transaction was approved by 23 of the 24 noteholders representing 94%
of the Company's outstanding debt. The Company is negotiating to settle with the
remaining noteholder.
Management believes the reorganization, including the debt conversion to equity,
together with existing cash resources and net proceeds from sales of its
products and the completed private placement will be satisfactory to fund
operations for the next three to five months. There can be no assurance that the
Company will be able to obtain financing on acceptable terms, if at all, to fund
operations beyond that time frame. Currently, management is continuing to pursue
new sources of revenue by reviewing acquisition or merger opportunities.
PART II - OTHER INFORMATION
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S. MEDICAL SYSTEMS, INC.
THE REGISTRANT
Date: February 10, 1998
/s/ LEE COOKE
-------------------------------
Lee Cooke
Chairman of the Board, President
and Chief Executive Officer
(Principal Financial Officer)
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INDEX TO EXHIBITS
Exhibit Number Description
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27 Financial Data Schedule