1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 1997
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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)
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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
--- ---
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Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date.
On May 6, 1997, there were outstanding 5,789,021 shares of Common
Stock, $.001 par value, of the registrant.
Page 1 of 12
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LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
FORM 10-QSB
INDEX
Page
PART I. FINANCIAL INFORMATION ----
Item 1: Consolidated Financial Statements
Consolidated Balance Sheets - December 31, 1996, and March 31, 1997 3
Consolidated Statements of Operations - For the Three Months Ended
March 31, 1996 and 1997 4
Consolidated Statements of Cash Flows - For the Three Months Ended
March 31, 1996 and 1997 5
Notes to Consolidated Financial Statements 7
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
ASSETS 1996 1997
----------------- ----------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 292,539 $ 965,999
Short-term investments 2,464,743 1,997,078
Accounts receivable (net of allowance for doubtful accounts of
$231,891 in 1996 and 1997) 749,744 843,320
Accounts receivable from related party 11,845 11,399
Interest receivable 60,381 32,112
Inventories 1,517,959 1,374,550
Prepaid and other assets 92,315 60,950
----------------- ----------------
Total current assets 5,189,526 5,285,408
----------------- ----------------
Property, Plant and Equipment 1,141,629 1,176,402
Less-Accumulated depreciation (736,910) (769,645)
----------------- ----------------
404,719 406,757
----------------- ----------------
Intangible Assets:
Licensed technology rights 427,273 427,273
Goodwill, net 2,677,337 2,610,404
----------------- ----------------
Total assets $ 8,698,855 $ 8,729,842
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,248,698 $ 1,399,323
Accrued expenses 994,930 835,983
Current portion of long-term debt and
capital lease obligations 11,577 689,702
----------------- ---------------
Total current liabilities 2,255,205 2,925,008
Long-term debt and capital lease obligations 694,379 10,618
----------------- ---------------
Total liabilities 2,949,584 2,935,626
----------------- ---------------
Minority Interest 120,380 121,777
----------------- ---------------
Commitments and contingencies
Stockholder's Equity:
Common Stock, $.001 par value; 10,000,000 shares authorized;
shares issued and outstanding: 5,667,455 (1996)
and 5,737,641 (1997) 5,667 5,737
Additional paid-in capital 19,963,735 20,077,108
Accumulated deficit (14,340,511) (14,410,406)
------------------ -----------------
Total stockholders' equity 5,628,891 5,672,439
----------------- ----------------
Total liabilities and stockholders' equity $ 8,698,855 $ 8,729,842
================= ================
The accompanying notes are an integral part of these
consolidated financial statements.
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LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months
Ended March 31,
----------------------------
1996 1997
----------- -----------
Revenues:
Net sales $ 895,634 $ 2,749,324
----------- -----------
Cost And Expenses:
Cost of sales 599,177 1,745,116
Research and development 92,701 24,609
Selling, general and administrative 612,432 967,437
Depreciation and amortization 26,768 99,668
----------- -----------
1,331,078 2,836,830
----------- -----------
Loss from operations (435,444) (87,506)
----------- -----------
Other income(expense):
Investment income 63,824 30,357
Interest expense (15,748) (10,948)
Merger and acquisition costs (91,637) (500)
Other 2,307 99
----------- -----------
Net Loss Before Minority Interest (476,698) (68,498)
Minority interest in net loss (income) of
consolidated subsidiary 11,185 (1,397)
----------- -----------
Net Loss $ (465,513) $ (69,895)
=========== ===========
Net Loss Per Share of Common Stock $ (.11) $ (.01)
=========== ===========
Weighted Average Shares Used In
Computing Net Loss Per Share of Common Stock 4,391,269 5,687,462
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
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LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
--------------------------
1996 1997
--------- -----------
Cash Flow From Operating Activities:
Net Loss $(465,513) $ (69,895)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities -
Depreciation and amortization 26,768 99,668
Issuance of stock, marketing agreement expense 17,500 --
Minority interest in net (loss) income of consolidated subsidiary (11,185) 1,397
Changes in operating assets and liabilities-
Increase in accounts receivable, net (77,337) (93,576)
(Increase) decrease in interest receivable (1,187) 28,269
Decrease in inventories 93,989 143,409
Decrease in prepaid and other assets 57,100 31,365
Decrease in accounts receivable from related party (945) 446
(Decrease) increase in accounts payable (318,524) 150,625
Decrease in accrued expenses (35,696) (158,947)
--------- -----------
Net cash (used in) provided by operating activities (715,030) 132,761
--------- -----------
Cash Flows From Investing Activities:
Additions to property and equipment (60,873) (34,773)
Purchases of investments (475,759) (878,860)
Investment maturities 939,482 1,346,525
--------- -----------
Net cash provided by investing activities 402,850 432,892
--------- -----------
Cash Flows From Financing Activities:
Proceeds from issuance of notes payable 780,090 --
Proceeds from exercise of stock options 11,630 113,443
Payment on due to stockholder (127) --
Payments on long-term debt and capital lease obligations (396,170) (5,636)
--------- -----------
Net cash provided by financing activities 395,423 107,807
--------- -----------
Net increase in cash and cash equivalents 83,243 673,460
Cash and cash equivalents, beginning of period 326,065 292,539
--------- -----------
Cash and cash equivalents, end of period $ 409,308 $ 965,999
========= ===========
The accompanying notes are an integral part of these
consolidated financial statements
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LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Three Months
Ended March 31,
--------------------
1996 1997
-------- -------
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the period for -
Interest $ 15,748 $10,948
Income taxes -- --
Noncash Investing And Financing Activities:
The Company issued 950,000 shares of common stock in connection with the
mergers of G. M. Engineering, Inc. and Klein Medical, Inc. For a discussion of
these mergers, see the Company's annual report on Form 10-KSB.
The accompanying notes are an integral part of these
consolidated financial statements
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LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of LifeQuest
Medical, Inc. (the "Company"), LifeQuest Endoscopic Technologies, Inc.
("LQET"), Klein Medical, Inc. ("KMI"), Val-U-Med, Inc. ("VMI"), wholly owned
subsidiaries of the Company, 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, 1996, included in the Company's
Form 10-KSB. Certain reclassifications have been made in the prior period
financial statements to conform with the current period presentation.
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 - INVENTORIES
Inventories are summarized as follows:
December 31, March 31,
1996 1997
---------- ----------
Raw materials $ 66,979 $ 47,977
Work-in-process 128,774 116,276
Finished Goods 1,322,206 1,210,297
---------- ----------
$1,517,959 $1,374,550
========== ==========
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Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Certain statements contained in this 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 the Company's Registration
Statement on Form S-3 filed on February 7, 1997, and the Company's annual and
quarterly reports filed 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 March 31, 1997, the Company had an accumulated
deficit of approximately $14,410,000. 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 December, 1996, Val-U-Med, Inc., a Georgia corporation
("Val-U-Med") was acquired by the Company and merged into Val-U-Med Acquisition
Co., a Nevada corporation ("VMI") and newly-formed, wholly-owned subsidiary of
the Company. Val-U-Med was purchased for an aggregate of 1,200,000 shares of
Common Stock and an aggregate of $400,000. The transaction was accounted for
using the purchase method of accounting. VMI is involved in the distribution
and marketing of minimally invasive surgical products.
In November, 1996, Klein Medical, Inc., a Texas corporation ("Klein")
was acquired by the Company and merged into Klein Medical Acquisition Co., a
Nevada corporation ("KMI") and newly-formed, wholly-owned subsidiary of the
Company. Klein was purchased for an aggregate of 600,000 shares of Common
Stock. The transaction was accounted for using the pooling-of-interests
accounting method, therefore, the assets, liabilities, and operations of KMI
are included in the consolidated financial statements for all periods reported
herein. KMI is involved in the distribution and marketing of minimally invasive
surgical products.
In February, 1996, the Company completed the merger of GM Engineering,
Inc., a California corporation, ("GME"), with and into LifeQuest Endoscopic
Technologies, Inc., ("LQET") a Nevada corporation and newly formed wholly-owned
subsidiary of the Company. GME was purchased for 350,000 shares of 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
herein. LQET develops, manufactures, and markets surgical and related
instruments used in minimally invasive surgery.
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 percent
interest in ValQuest. The Company contributed $400,000 to be used as working
capital in exchange for a 55 percent interest in ValQuest. Currently,
subsequent purchases of stock have increased the Company's ownership interest
in ValQuest to 82 percent.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had current assets of $5,285,000 and
current liabilities of $2,925,000 resulting in working capital of $2,360,000.
This compares to a working capital position of $2,935,000 at December 31, 1996.
The decline in working capital is primarily due to costs related to the larger
infrastructure necessary to support the geographical expansion of the Company's
sales force.
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Capital expenditures were $35,000 during the first three months of
1997. The Company anticipates further capital expenditures as the Company's
geographical expansion continues and the Company moves into new San Antonio
facilities as discussed below.
On February 26, 1996, the Company borrowed $750,000 from a commercial
bank pledging a like amount of short-term investments as collateral. The loan
proceeds were used to replace more expensive debt, mainly capital equipment
leases, acquired with the acquisition of GME. The balance of this loan at March
31, 1997 is $683,000.
Based upon the current level of operations, the Company believes that
cash flow from operations plus the Company's cash from the realization of its
current assets will be adequate to meet its anticipated requirements for
working capital and capital expenditures. However, there can be no assurance
that the available cash will prove to be sufficient to satisfy these demands.
RESULTS OF OPERATIONS
Net loss for the three months ended March 31, 1997, was $70,000, a
decrease of 85 percent from the $466,000 net loss for the three months ended
March 31, 1996. The decline was primarily due to an increase in net sales and
an increase in gross profit margins as detailed hereinafter.
Net sales increased 207% for the first three months of 1997 as
compared with the same period in 1996: $2,749,000 and $896,000 respectively.
This increase was due to sales growth throughout the Company and the
acquisition of VMI.
Gross profit from sales was $1,004,000 in 1997 versus $296,000 in
1996. The corresponding gross profit margins were 37 percent in 1997 and 33
percent in 1996. This increase is due to the inclusion of VMI. In the interest
of improving efficiencies and to properly plan for sales growth, the Company is
combining it corporate offices, San Antonio warehouse and distribution center,
repair and service center, and manufacturing facility in one new San Antonio
location. The existing LQET facilities in Los Angeles County and the existing
KMI facilities in San Antonio will be closed and all business activities
contained therein moved to the new San Antonio location. It is contemplated the
move will be completed by June 30, 1997, and the estimated relocation costs of
$75,000 were recorded in 1996.
In connection with planning for sales growth and improving
efficiencies, VMI and the Atlanta distribution center moved to a new larger
facility in February 1997.
Research and development expenses decreased 73 percent from $93,000 on
1996 to $25,000 in 1997. This decline is due to the Company's decision to
severely curtail research activity and to concentrate its resources on sales
growth through geographical and product line expansion. Therefore, these
expenses should continue to decline in 1997.
Selling, general and administrative expenses, which consist primarily
of sales commission, salaries and other costs necessary to support the
Company's infrastructure, increased 58 percent to $967,000 in 1997 from
$612,000 in 1996. These costs reflect higher sales commissions due to the
Companywide sales growth and overall increased activity due to the inclusion of
VMI. However, as a percentage of sales, these costs decreased from 68% to 35%.
The minority interest in net income of consolidated subsidiary of $1,400
in 1997 reflects the minority ownership share of the ValQuest net income.
Investment income represents interest earned on the Company's short
term investments. Investment income declined from $64,000 in 1996 to $30,000 in
1997 as the level of short term investments declined from year to year.
Merger and acquisition costs of $92,000 in 1996 include legal, accounting
and testing expenses incurred during the acquisition of GME.
As of March 31, 1997, the Company had net operating loss carryforwards
of approximately $13,077,000 for federal income tax purposes which are
available to reduce future taxable income and will expire in 2006 through 2011
if not utilized. 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 also has Research and development credit carryforwards available to
offset future income taxes and expire in 2005 through 2010.
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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, the Company's existing NOL carryforwards are subject to the
limitation. Of the $13,077,000 of NOL carryforwards, $543,000 is subject to
limitation. Approximately $40,000 of the $543,000 can be utilized annually.
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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
(a) Exhibit:
Exhibit Number 27: Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K: Not applicable
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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: May 13, 1997 By HERBERT H. SPOON
-------------------------------------
Herbert H. Spoon
President and Chief Executive Officer
(Principal Executive Officer)
Dated: May 13, 1997 By RANDALL K. BOATRIGHT
-------------------------------------
Randall K. Boatright
Vice President and Chief Financial
Officer
(Principal Financial Officer and
Principal Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule (filed herewith)