1
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 September 30, 1996
------------------
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 0-20532
-------
LIFEQUEST MEDICAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2559866
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9601 McAllister Freeway, Suite 1120
San Antonio, Texas 78216
(Address of principal executive offices)
(Zip Code)
(210) 366-2100
(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 reports), and (2) has been subject to such
filing requirements 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.
On November 5, 1996, there were outstanding 3,793,205 shares of Common Stock,
$.001 par value, of the registrant.
Page 1 of 13
2
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements
Consolidated Balance Sheets - December 31, 1995, and September 30, 1996 3
Consolidated Statements of Operations - For the Three Months and Nine Months
Ended September 30, 1995 and 1996 5
Consolidated Statements of Cash Flows - For the Nine Months Ended
September 30, 1995 and 1996 6
Notes to Consolidated Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Items 1-6: Other Information 12
SIGNATURES 13
- 2 -
3
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
ASSETS 1995 1996
----------- -----------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 317,915 $ 199,221
Short-term investments 4,817,221 3,406,733
Accounts receivable 100,395 125,318
Interest receivable 95,655 93,800
Inventories 23,643 156,889
Prepaid and other assets 98,968 19,660
----------- -----------
Total current assets 5,453,797 4,001,621
----------- -----------
Property and Equipment:
Capital leased equipment 521,867 --
Leasehold improvements 65,229 71,252
Machinery and equipment -- 627,972
Furniture and fixtures 206,124 271,993
Less-Accumulated depreciation (565,906) (644,834)
227,314 326,383
----------- -----------
Intangible Assets:
Licensed technology rights 427,273 427,273
----------- -----------
Total assets $ 6,108,384 $ 4,755,277
=========== ===========
- 3 -
4
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (continued)
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1996
--------------- ---------------
Current Liabilities:
Current portion of:
Long-term debt $ 59,189 $ 707,894
Capital lease obligations 108,364 --
Accounts payable 432,510 36,469
Accrued expenses 32,730 17,296
Due to stockholders 27,599 15,952
--------------- ---------------
Total current liabilities 660,392 777,611
Long-term Debt, Less Current Portion 5,509 --
Capital Lease Obligations, Less Current Portion 222,942 --
--------------- ---------------
Total liabilities 888,843 777,611
--------------- ---------------
Minority Interest 141,364 125,447
--------------- ---------------
Commitments
Stockholder's Equity:
Common Stock, $.001 par value; 10,000,000 shares authorized;
shares issued and outstanding: 3,754,835 (1995)
and 3,793,205 (1996) 3,754 3,793
Additional paid-in capital 17,640,456 17,671,359
Accumulated deficit (12,566,033) (13,822,933)
--------------- ---------------
Total stockholders' equity 5,078,177 3,852,219
--------------- ---------------
Total liabilities and stockholders' equity $ 6,108,384 $ 4,755,277
=============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
- 4 -
5
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended September 30 Ended September 30
-------------------------- -------------------------
1995 1996 1995 1996
----------- ----------- ----------- -----------
Revenues:
Net sales $ 228,760 $ 193,079 $ 657,697 $ 662,193
----------- ----------- ----------- -----------
Cost And Expenses:
Cost of sales 233,899 113,838 590,107 393,355
Research and development 105,317 100,820 590,297 278,752
Selling, general and administrative 387,689 324,717 1,550,229 1,197,543
Interest 17,329 11,984 47,578 40,863
Depreciation and amortization 36,973 29,197 105,834 78,929
----------- ----------- ----------- -----------
781,207 580,556 2,884,045 1,989,442
----------- ----------- ----------- -----------
Loss from operations (552,447) (387,477) (2,226,348) (1,327,249)
----------- ----------- ----------- -----------
Other income(expense):
Investment income 86,589 48,904 270,879 169,808
Merger and acquisition costs -- (6,238) -- (115,375)
----------- ----------- ----------- -----------
Net Loss Before Minority Interest
and Extraordinary Item (465,858) (344,811) (1,955,469) (1,272,816)
Minority interest in net loss of
consolidated subsidiary 31,994 630 92,126 15,916
----------- ----------- ----------- -----------
Net Loss Before Extraordinary Item (433,864) (344,181) (1,863,343) (1,256,900)
Extraordinary Item:
Gain on extinguishment of debt -- -- 24,686 --
----------- ----------- ----------- -----------
Net Loss $ (433,864) $ (344,181) $(1,838,657) $(1,256,900)
=========== =========== =========== ===========
Net Loss Per Share of Common Stock $ (.12) $ (.09) $ (.49) $ (.33)
=========== =========== =========== ===========
Weighted Average Shares Used In
Computing Net Loss Per Share
of Common Stock 3,754,835 3,793,205 3,754,835 3,786,140
=========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
- 5 -
6
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30
--------------------------
1995 1996
----------- -----------
Cash Flow From Operating Activities:
Net Loss $(1,838,657) $(1,256,900)
Adjustments to reconcile net loss to net cash
used in operating activities -
Depreciation and amortization 105,834 78,929
Issuance of stock options in connection with First-Med acquisition 20,849 --
Marketing agreement expense -- 17,500
Gain on extinguishment of debt (24,686) --
Minority interest in net loss of consolidated subsidiary (92,126) (15,916)
Changes in operating assets and liabilities-
(Increase) decrease in accounts receivable 183,685 (24,923)
(Increase) decrease in interest receivable (148,171) 1,855
(Increase) decrease in inventories 208,308 (133,246)
Decrease in prepaid and other assets 126,816 79,308
(Increase) in accounts receivable from related party (39,696) --
(Decrease) increase in accounts payable 16,671 (396,041)
(Decrease) increase in accrued expenses 21,509 (15,434)
----------- -----------
Net cash used in operating activities (1,459,664) (1,664,868)
----------- -----------
Cash Flows From Investing Activities:
Additions to property and equipment (25,526) (177,997)
Sale of investments 1,303,531 1,410,488
----------- -----------
Net cash provided by investing activities 1,278,005 1,232,491
----------- -----------
Cash Flows From Financing Activities:
Additional capital contributed by minority interest 27,695 --
Funds advanced by stockholder 14,815 --
Proceeds from issuance of notes payable 33,161 750,000
Proceeds from exercise of stock options -- 13,440
Payment on due to stockholder -- (11,647)
Payments on notes payable (100,577) (438,110)
----------- -----------
Net cash provided (used) by financing activities (24,906) 313,683
----------- -----------
Net Increase (Decrease) In Cash And Cash Equivalents (206,565) (118,694)
Cash And Cash Equivalents, beginning of period 698,931 317,915
----------- -----------
Cash And Cash Equivalents, end of period $ 492,366 $ 199,221
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
- 6 -
7
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Nine Months
Ended September 30,
-------------------------
1995 1996
-------- ---------
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the period for -
Interest $47,578 $40,863
Income taxes - -
Noncash Investing And Financing Activities:
The Company issued 350,000 shares of common stock in connection with the
merger discussed in Note 3.
A stockholder gave a marketing consultant 16,854 equivalent shares of
the Company's stock in exchange for the consultant's services in connection with
the merger discussed in Note 3. The stock had an estimated fair market value of
approximately $18,000.
The accompanying notes are an integral part of these
consolidated financial statements
- 7 -
8
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of LifeQuest
Medical, Inc. (the "Company"), LifeQuest Endoscopic Technologies, Inc.
("LQET"), a wholly owned subsidiary of the Company (Note 3), and the Company's
82% ownership interest in ValQuest Medical, Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation. The
consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. However, all adjustments have been made which are, in
the opinion of the Company, necessary for a fair presentation of the results of
operations for the periods covered. In addition, all such adjustments are of a
normal recurring nature. Certain information and footnote disclosures normally
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 believes that the disclosures are adequate to
make the information presented not misleading. It is recommended that these
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto for the fiscal year ended December 31, 1995,
included in the Company's Form 10-K.
From inception through December 31, 1995, the Company was a development stage
enterprise whose efforts and resources were devoted primarily to research and
development activities related to its initial products.
NOTE 2 - NET LOSS PER SHARE
Net loss per share is computed by dividing net loss by the weighted average
number of shares of Common Stock outstanding during the period. Common stock
equivalents are not considered in the computation as their effect is
antidilutive.
NOTE 3 - MERGER OF GM ENGINEERING, INC.
On February 13, 1996, but effective January 1, 1996, the Company completed the
merger of GM Engineering, Inc., a California corporation ("GME") with and into
LifeQuest Endoscopic Technologies, Inc., a Nevada corporation and newly formed
wholly owned subsidiary of the Company. GME was acquired through the issuance
of 350,000 shares of LifeQuest common stock. The transaction was recorded
using the pooling of interests method of accounting, therefore the assets,
liabilities, and operations of GME are included in the consolidated financial
statements for all periods reported.
- 8 -
9
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Certain statements contained in "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations," including
statements regarding the anticipated development and expansion of the Company's
business, expenditures, the intent, belief or current expectations of the
Company, its directors or its officers, primarily with respect to the future
operating performance of the Company and other statements contained herein
regarding matters that are not historical facts, are "forward-looking"
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995). Because such statements include risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially from those expressed or implied by such forward-looking statements
include, but are not limited to, those discussed in other filings made by the
Company with the Securities and Exchange Commission.
OVERVIEW
From inception through December 31, 1995, the Company was a development
stage enterprise whose efforts and resources were devoted primarily to research
and development activities related to its initial products. During this
development stage, the Company received minimal operating revenues and, thus,
was unprofitable. As of September 30, 1996, the Company had an accumulated
deficit of approximately $13,823,000. There can be no assurance that the
Company will be able to achieve or sustain profitability.
The Company's future operating results will depend on many factors,
including the Company's ability to manufacture and market its products on a
cost-effective basis, demand for the Company's products and the level of
competition in the market place.
In February 1996, the Company completed the merger of GM Engineering, Inc.,
a California corporation ("GM Engineering") with and into LifeQuest Endoscopic
Technologies, Inc., a Nevada corporation ("LQET") and newly formed wholly owned
subsidiary of the Company. GM Engineering was acquired through the issuance of
350,000 shares of LifeQuest common stock. The transaction was recorded using
the pooling of interests method of accounting, therefore the assets,
liabilities and operations of GM Engineering are included in the consolidated
financial statements for all periods reported. LQET develops, manufactures,
and markets surgical and related instruments used in minimally invasive surgery
and, as GM Engineering, recorded sales of approximately $1 million in fiscal
1995.
In May 1994, the Company and Valdor Fiber Optics ("Valdor") of San Jose,
California, formed a corporate joint venture called ValQuest Medical, Inc.
("ValQuest"). In accordance with the terms of the joint venture agreement,
Valdor transferred to ValQuest the exclusive worldwide rights to develop,
manufacture, and market all present and future medical applications of Valdor's
patented fiber optic connector technology. The Company paid $100,000 to Valdor
in consideration for the transfer of these rights to ValQuest. Valdor
contributed such rights, which had an initial value of $327,273 in the
consolidated financial statements, to ValQuest in exchange for a 45% interest
in ValQuest. The Company contributed $400,000 to be used as working capital in
exchange for a 55% interest in ValQuest. Currently, subsequent purchases of
additional stock have increased the Company's ownership interest in ValQuest to
82%.
The Company submitted its PMA application to the Food and Drug
Administration (FDA) for the Osteoport(R) device on July 19, 1993. On May 9,
1995, the FDA informed the Company that additional information will be required
to enable completion of the Osteoport(R) PMA application review. Required
information may include clarifications and further analysis of existing data
and/or additional patient studies. However, the Company does not plan to
initiate any further work on the Osteoport(R) device unless an appropriate
corporate partner can be identified. This decision stems from management's
current concern about the likelihood of incurring prohibitively high costs in
clarifying and addressing FDA's requests for additional information since the
July 1993 PMA submission.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had cash, cash equivalents and
investments of approximately $3,606,000 and working capital of $3,224,000. The
Company believes these funds will be sufficient to complete the development
and, subject to obtaining required regulatory approvals, commercialization of
its current products. However, there can be no assurance that the available
cash will prove to be sufficient to complete any of these activities.
- 9 -
10
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
Net loss for the three months ended September 30, 1996 was $344,000, a
decrease of 21 percent from the $434,000 net loss for the comparable period of
1995. The decline was primarily due to a reduction in expenses as detailed
hereinafter.
Sales for the three months ended September 30, 1996 and 1995 were $193,000
and $229,000 respectively. The Company believes this decline was a temporary
aberration caused by a sales disruption due to changes within the member group
of the national distributor network.
Research and development expenses were relatively flat from quarter to
quarter. The costs in 1995 were primarily due to expenses incurred in
conjunction with development of the First-Med system. The Company anticipates
the research and development focus for 1996 will continue to be enhancement of
LQET's current products and development of future products. Therefore,
research and development costs should increase slightly during the fourth
quarter of 1996.
Selling, general and administrative expenses, which consist primarily of
salaries and other costs necessary to support the Company's infrastructure,
decreased 16 percent to $325,000 in 1996 from $388,000 in 1995. This
comparative decline is a result of management's continuing efforts to reduce
expenses.
The minority interest in net loss of consolidated subsidiary of $630
reflects the minority ownership share of the ValQuest net loss for the three
months ended September 30, 1996.
Investment income represents interest earned on proceeds from private and
public sales of the Company's equity securities and gains on sales of
marketable securities.
Merger and acquisition costs include legal, accounting and testing expenses
incurred during the acquisition of GM Engineering.
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. Management does not believe, based
on current circumstances, Statement 121 will have a material effect on the
carrying amount of the Company's long-lived assets.
As of September 30, 1996, the Company had net operating loss carryforwards
of approximately $11,888,000 for federal income tax purposes which are
available to reduce future taxable income and will expire in 2006 through 2011
if not utilized and $13,175,000 for financial reporting purposes. For federal
income tax purposes the Company deferred for future amortization certain
acquisition and research and development costs in the amount of $2,453,000.
Such costs, which have been expensed for financial reporting purposes, will be
amortized for tax purposes over future years when commercial operations
commence. The Company received IRS approval of its request for a change of tax
accounting method to expense research and development costs for expenditures
incurred in 1992 and future years.
The Company's ability to use its NOL carryforwards to offset future taxable
income is subject to restrictions enacted in the United States Internal Revenue
Code of 1986 as amended (the "Code"). These restrictions provide for
limitations on the Company's utilization of its NOL carryforwards following
certain ownership changes described in the Code. As a result of ownership
changes in 1996, the Company's existing NOL carryforwards are subject to the
limitation. The amount subject to limitation at September 30, 1996, is
approximately $486,000.
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
Trends that were evident in the quarter ended September 30, 1996, were also
generally evident in the nine months ended September 30, 1996.
Net loss for the nine months ended September 30, 1996, was $1,257,000, a
decrease of 32 percent from the $1,839,000 net loss for the comparable period
of 1995.
However, despite a decline for the quarter, sales for the nine months
ended September 30, 1996 increased to $662,000 as compared to $658,000 for the
same period of 1995.
- 10 -
11
Research and development expenses decreased 53 percent to $279,000 for the
nine months ended September 30, 1996, from $590,000 in the comparable period of
1995. Likewise, general and administrative expenses declined 23 percent to
$1,198,000 from $1,550,000 for the comparable periods.
- 11 -
12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - Not applicable
Item 2. Changes in Securities - Not applicable
Item 3. Defaults Upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not applicable
Item 5. Other Information - Not applicable
Item 6. Exhibits and Reports on Form 8-K
27.3 Financial Data Schedule
- 12 -
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIFEQUEST MEDICAL, INC.
-----------------------
(Registrant)
Dated: November 5, 1996 By HERBERT H. SPOON
---------------------------------
Herbert H. Spoon
President and Chief Executive
Officer
(Principal Executive Officer)
Dated: November 5, 1996 By RANDALL K. BOATRIGHT
---------------------------------
Randall K. Boatright
Vice President and Chief
Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
- 13 -
14
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 - Financial Data Schedule