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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 September 30,1997
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.)
6189 MEMORIAL DRIVE, 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 September 30, 1997.
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TABLE OF CONTENTS
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PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at September 30, 1997 1
and December 31, 1996
Statements of Operations For the Three Months Ended and
the Nine Months Ended September 30, 1997 and 1996 2
Statements of Cash Flows For the Nine Months Ended
September 30, 1997 and 1996 3
Notes to Financial Statements -
September 30, 1997 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
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 12
Signatures 12
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETMED, INC.
Balance Sheets
September 30, December 31,
1997 1996
(Unaudited)
----------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,184,458 $ 142,074
Accounts receivable 540,585 175,512
Investment in NSI--available for sale 2,932,807 9,238,503
Prepaid assets 9,523 28,394
----------------------------
Total current assets 5,667,373 9,584,483
Notes receivable - NSI 21,443 21,443
Furniture and equipment (net of
accumulated depreciation) 30,887 28,034
Deferred taxes 535,771 744,162
Deposits and other assets 4,443 1,468
----------------------------
Total assets $ 6,259,917 $ 10,379,590
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 199,044 $ 97,625
Accrued expenses 324,635 223,536
Loan payable -- 96,909
Other liabilities 13,633 29,844
----------------------------
Total current liabilities 537,312 447,914
Deferred taxes 535,771 2,896,609
Debentures payable 3,000,000 --
Stockholders' equity:
Common stock 4,940,767 3,881,605
Unrealized gains on available-for-sale
securities net of deferred taxes 413,506 3,954,764
Retained deficit (3,167,439) (801,302)
----------------------------
Total stockholders' equity 2,186,834 7,035,067
----------------------------
Total liabilities and stockholders' equity $ 6,259,917 $ 10,379,590
============================
See accompanying notes.
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NETMED, INC.
Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---------------------------- ----------------------------
Royalty revenue $ 279,000 $ 16,618 $ 618,608 $ 43,717
Operating expenses:
Salaries and benefits 461,031 94,148 1,223,588 240,881
Sales and marketing 157,583 51,001 534,240 103,534
General and administrative 109,684 24,523 460,779 82,264
Business development 116,378 -- 175,723 --
Merger (Note 8) -- 101,534 -- 235,984
------------------------------------------------------------
Total operating expense 844,676 271,206 2,394,330 662,663
------------------------------------------------------------
Operating loss (565,676) (254,588) (1,775,722) (618,946)
Other income (expense):
Interest income 13,196 903 15,295 11,774
Interest expense (29,076) -- (33,960) --
Gain on available-for-sale securities -- 125,812 745,056 125,812
Financing costs (1,106,452) -- (1,106,452) --
Equity loss in partnerships -- (4,263) -- (8,354)
------------------------------------------------------------
Total other income (expense) (1,122,332) 122,452 (380,061) 129,232
------------------------------------------------------------
Loss before income taxes (1,688,008) (132,136) (2,155,783) (489,714)
Income tax expense (benefit) 92,932 (47,000) 210,351 (169,001)
------------------------------------------------------------
Net loss $ (1,780,940) $ (85,136) $ (2,366,134) $ (320,713)
============================================================
Net loss per share ($ 0.16) ($ 0.01) ($ 0.22) ($ 0.05)
============================================================
Shares used in computation 10,947,114 6,426,861 10,946,585 6,438,418
============================================================
See accompanying notes.
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NETMED, INC.
Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
--------------------------
1997 1996
--------------------------
OPERATING ACTIVITIES
Net loss $(2,366,134) $ (320,712)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 10,800 4,500
Change in deferred tax assets 208,391 (169,001)
Gain on available-for-sale securities (745,056) (125,812)
Deferred compensation 209,062 --
Equity (income) loss in partnership -- 8,354
Financing costs 850,096 --
Changes in operating assets and liabilities:
Accounts receivable (365,073) (97,128)
Prepaid assets 18,871 --
Deposits and other assets (2,975) (934)
Accounts payable 101,419 127,537
Accrued expenses and other liabilities 101,099 (63,719)
Due from related entities -- (335,785)
Other liabilities (16,211) --
--------------------------
Net cash used in operating activities (1,995,711) (972,700)
--------------------------
INVESTING ACTIVITIES
Sale of NSI stock 1,148,656 141,812
Notes receivable-NSI -- 29,637
Purchase of furniture and equipment (13,652) (11,470)
--------------------------
Net cash provided by investing activities 1,135,004 159,979
--------------------------
FINANCING ACTIVITIES
Issuance of common stock on
options exercised -- 3,600
Issuance of convertible debentures 3,000,000 --
Borrowings (repayments) from
margin account (96,909) 85,000
--------------------------
Net cash provided by financing activities 2,903,091 88,600
--------------------------
Net increase (decrease) in cash 2,042,384 (724,121)
Cash and cash equivalents at beginning of period 142,074 811,359
--------------------------
Cash and cash equivalents at end of period $ 2,184,458 $ 87,238
==========================
See accompanying notes.
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NETMED, INC.
Notes to Financial Statements
(Unaudited)
September 30, 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 nine month period ended September 30,
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 for the
year ended December 31, 1996 as filed with the Securities and Exchange
Commission ("SEC"), and in the Registration Statement on Form S-1, as amended,
Registration No. 333-35663, filed with the SEC on October 1, 1997.
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
nine months ended September 30, 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 $ 106,027
Net loss (635,751)
Net loss per share (.06)
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 and nine month
period ended September 30, 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.
NOTE D-CONVERTIBLE DEBT ISSUANCE
On August 13, 1997, the Company issued $3,000,000 in principal amount of 6%
Secured Convertible Subordinated Debentures (the "Debentures") to certain
investors in a private placement. The Debentures are due August 13, 2000, bear
interest at a rate of 6% per annum, and are redeemable by the Company. The
Debentures and any interest accrued thereon may be converted into common stock
of the Company at any time. However, no sales of conversion shares may be made
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prior to November 11, 1997, and during the period from November 11, 1997 through
May 10, 1998 the maximum aggregate number of conversion shares which can be sold
is 500,000. After May 10, 1998, 100% of the conversion shares may be sold. The
Company can prohibit sales during the period from December 14, 1997 to February
1, 1998 (the "Blackout Period"). The Debentures are convertible into shares of
the Company's common stock based on the "Conversion Price" at the time of
conversion, which varies based on the date when the Debentures are converted.
For the period through March 31, 1998, the Conversion Price is an amount equal
to 80% of the average closing bid price of the common stock on the American
Stock Exchange for the previous three business days ending on the day before the
conversion date. For the period beginning April 1, 1998, the Conversion Price is
an amount equal to 75% of the average closing bid price of the common stock on
the American Stock Exchange for the previous three business days ending on the
day before the conversion date.
The Debentures are secured by 475,000 shares of common stock of Neuromedical
Systems, Inc. owned by the Company (the "NSI Shares"). If at any time prior to
March 31, 1998, the conversion price is $3.00 or less, the holders of the
Debentures may elect to exercise their conversion rights for NSI Shares, rather
than common stock of the Company, at a 20% discount from the market price at the
time of conversion. If the Company prohibits sales during the Blackout Period,
and the trading volume in the common stock prior to December 15, 1997 does not
meet defined minimums, the holders may convert into the NSI Shares at a discount
from the market price which would produce a 25% return on an annualized basis.
The NSI Shares may be released from the pledge ratably as the outstanding
principal amount of Debentures is reduced.
In connection with this financing, the Company issued warrants to the investors
and to investment bankers. The warrants are exercisable at any time prior to
August 13, 2000 at exercise prices of $7.79 per share (for up to 150,000 Shares)
and $9.35 per share (for up to 65,000 shares).
The Company incurred a one time expense related to the issuance of the
Debentures of $1,106,452 in the quarter ended September 30, 1997.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
NetMed, Inc., formerly known as Papnet of Ohio, 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(R) 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(R) 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(R) Service permits
laboratories to submit slides containing such specimens ("Slides") to one of
NSI's central facilities for image processing employing NSI's patented neural
network technology. NSI returns the Slides and digital tape or CD-ROM containing
processed images to the laboratory for evaluation by NSI-trained
cytotechnologists.
The PAPNET(R) 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.
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
Papnet of Ohio, Inc. (the "Merger"). The Merger was effective on December 16,
1996, and the Company issued 4,849,988 common shares, without par value, in
exchange for the issued and outstanding shares of the Predecessor Companies.
Pursuant to the Merger Agreement, the Company changed its name to NetMed, Inc.,
and its common shares began trading on the American Stock Exchange on December
18, 1996 under the symbol NMD.
As a result of the Merger, the Company has the marketing rights to the
PAPNET(R) 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.
While the Company's primary focus has been, and will continue to be,
exploiting its rights under the NSI license, the Company also intends to pursue
the acquisition of other promising healthcare-related technologies. In February
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.
For accounting purposes, the financial statements of the Company for
1996 and prior years 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 September 30, 1996, and the
consolidated operations of all entities from January 1, 1997 through September
30, 1997.
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 differences include, but are not limited to, those discussed in the section
entitled "Business Risks" of the Company's Form
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10-K for the year ended December 31, 1996 (SEC File No. 1-12529) and in the
section entitled "Risk Factors" of the Company's Registration Statement on Form
S-1 filed October 1, 1997 (Registration 333-35663).
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
As a result of the FDA approval mentioned above, the commercial launch
of the PAPNET(R) 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 33,886 Slides for the three months ended September 30,
1997, from 26,100 Slides for the quarter ended June 30, 1997 and from 2,580
Slides for the three months ended September 30, 1996. On a proforma basis, 7,904
Slides were processed for NetMed and the Predecessor Companies for the quarter
ended September 30, 1996. Royalty revenue was $279,000 for the three months
ended September 30, 1997, an increase from $16,618 for the three months ended
September 30, 1996.
The number of employees of the Company increased to 16 during the three
months ended September 30, 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, the Company recognized compensation
expense of $77,787 for the three months ended September 30, 1997. This amount
has been included in salaries and benefits. As a result of the headcount
increases mentioned above and the expense for the grant of options, salary and
benefit expense increased to $461,031 for the three months ended September 30,
1997 from $94,148 for the three months ended September 30, 1996.
Sales and marketing expense other than salaries and benefits increased
to $157,583 for the three months ended September 30, 1997 from $51,001 for the
three months ended September 30, 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 of $76,958 for the quarter ended September 30, 1997.
General and administrative expenses increased to $109,684 for the three
months ended September 30, 1997 compared to $24,523 for the three months ended
September 30, 1996. The increase in general and administrative expense is
primarily due to an increase in professional fees as well as the increase in
headcount from two to six administrative employees.
Business development expenses of $116,378 were incurred during the
three months ended September 30, 1997 as the Company continued its development
of an oxygen device, that if successfully completed, will be sold in the home
healthcare market.
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 September 30, 1996, the Company incurred one time merger
expenses of $101,534. No such expenses were incurred in the three months ended
September 30, 1997, and no further expenses are anticipated for the remainder of
1997 related to this transaction.
The Company recognized a gain on available-for-sale securities of
$125,812 for the three months ended September 30, 1996, resulting from the sale
of 8,000 shares of NSI common stock held by the Company at net prices ranging
from $15.72 to 19.27 per share. There were no sales of securities during the
three months ended September 30, 1997.
The Company issued $3,000,000 in principal amount of 6% Secured
Convertible Subordinated Debentures ("Debentures") during the quarter ended
September 30, 1997, and recorded associated one time expenses of $1,106,452. The
expenses included $750,000 in discount calculated as of the closing date,
$100,000 for the cost of warrants issued to the placement agents and the
purchasers of the Debentures, $170,000 in placement fees and $87,000 in
professional, stock exchange and registration fees associated with the
debentures and subsequent registration statement.
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Interest income for the three months ended September 30, 1997 was
$13,196 compared to $903 for the same period the prior year. The increase is the
result of higher cash balances to invest from the proceeds of the issuance of
the Debentures.
Interest expense for the three months ended September 30, 1997 was
$29,076. This was the result of the issuance of the Debentures during the
quarter.
The Company recognized income tax expense of $92,932 for the three
months ended September 30, 1997, compared to an income tax benefit of $47,000
for the three months ended September 30, 1996. The expense for the third quarter
of 1997 is the result of recording a valuation allowance against the deferred
tax asset. The deferred tax liability was reduced during the quarter as a result
of the decline in market value of the NSI common stock. Since the deferred tax
liability is subject to the fluctuations in market price of the NSI common
stock, the Company may recognize additional expense or benefit in future
periods.
The equity in income or loss in partnerships reported for the second
quarter of 1996 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, and consequently no similar item is reported for
the same period in 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
As a result of the FDA approval mentioned above, the commercial launch
of the PAPNET(R) 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 75,188 Slides for the nine months ended September 30,
1997 from 6,796 Slides for the nine months ended September 30, 1996. On a
proforma basis, 12,120 Slides were processed for NetMed and the Predecessor
Companies for the nine months ended September 30, 1996. Royalty revenue was
$618,608 for the nine months ended September 30, 1997, an increase from $43,717
for the nine months ended September 30, 1996.
In February 1997, the Company entered into an agreement with Medical
Mutual of Ohio ("MMO"), whereby MMO agreed to cover the cost of the PAPNET(R)
test for all members. In addition, MMO has agreed to strongly recommend to its
clinicians and laboratories that all negative Pap smears covered by its benefit
plans be examined using PAPNET(R) testing. MMO is one of the largest third party
payers for health care in the State of Ohio, with approximately 1.5 million
covered members.
The number of employees of the Company increased to 16 during the nine
months ended September 30, 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 nine months ended
September 30, 1997, the Company incurred compensation expense of $209,062. This
amount has been included in salaries and benefits. As a result of the headcount
increases mentioned above and the expense for the grant of options, salary and
benefit expense increased to $1,223,588 for the nine months ended September 30,
1997 from $240,881 for the nine months ended September 30, 1996.
Sales and marketing expense other than salaries and benefits increased
to $534,240 for the nine months ended September 30, 1997 from $103,534 for the
nine months ended September 30, 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 of $260,140. The Company incurred a total of $58,500 for professional
services in its efforts to expand the reimbursement of the cost of the PAPNET(R)
test by healthcare providers and for employment agency fees for the additional
sales representatives hired during the nine months ended September 30, 1997.
General and administrative expenses increased to $460,779 for the nine
months ended September 30, 1997 compared to $82,264 for the nine months ended
September 30, 1996. The increase in general and administrative expense
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is primarily due to an increase in accounting, legal and stock exchange costs as
well as the increase in headcount from two to six administrative employees.
Consistent with the Company's plan to acquire additional healthcare
technologies, the Company incurred costs of $175,723 for the nine months ended
September 30, 1997 in the negotiation and evaluation of additional opportunities
in medical technology, including the Ceram transaction described above.
During 1995, the Company began discussions with the Predecessor
Companies that resulted in the Merger that was effective December 16, 1996. For
the nine months ended September 30, 1996, the Company incurred one time merger
expenses of $235,984. No expenses related to this transaction were incurred in
the nine months ended September 30, 1997.
The Company recognized a gain on available-for-sale securities of
$745,056 for the nine months ended September 30, 1997 compared to $125,812 for
the nine months ended September 30, 1996. The increase is due to the gain on the
sale of 125,000 shares of NSI common stock held by the Company at net prices
ranging from $5.07 to $10.13 per share.
The Company issued the Debentures during the nine months ended
September 30, 1997 and recorded associated one time expenses of $1,106,452. The
expenses included $750,000 in discount calculated as of the closing date,
$100,000 for the cost of warrants issued to the placement agents and the
purchasers of the Debentures, $170,000 in placement fees and $87,000 in
professional, stock exchange and registration fees associated with the
Debentures and subsequent registration statement.
Interest income for the nine months ended September 30, 1997 was
$15,295 compared to $11,774 for the same period the prior year. The increase is
the result of higher cash balances to invest from the issuance of the Debentures
described above.
Interest expense was $33,960 for the nine months ended September 30,
1997 as a result of the issuance of the Debentures and as a result of borrowings
under margin accounts throughout the period.
The Company recognized income tax expense of $210,351 for the nine
months ended September 30, 1997, compared to an income tax benefit of $169,001
for the nine months ended September 30, 1996. The expense for 1997 is the result
of recording a valuation allowance against the deferred tax asset. The deferred
tax liability was reduced during the period as a result of the decline in market
value of the NSI common stock. Since the deferred tax liability is subject to
the fluctuations in market price of the NSI common stock, the Company may
recognize additional expense or benefit in future periods.
The equity in income or loss in partnerships reported for the nine
months ended September 30, 1996 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, and consequently no similar item is reported for
the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's combined cash and cash equivalents totaled $2,184,458 at
September 30, 1997, an increase of $2,042,384 from December 31, 1996. The
increase is due to the issuance of the Debentures, less costs of the financing
of $195,000, and less the funding of the negative cash flow from operations. As
of September 30, 1997, the Company owned 572,246 shares of NSI common stock, of
which 475,000 shares are pledged to the holders of the Debentures. The balance
of the shares are unrestricted and can be liquidated to fund future operations.
NSI common stock closed trading at $5.13 per share on September 30, 1997.
The Debentures issued on August 13, 1997 are due August 13, 2000, bear
interest at a rate of 6% per annum, and are redeemable by the Company. The
Debentures and any interest accrued thereon may be converted into common stock
of the Company at any time. However, no sales of conversion shares may be made
prior to November 11, 1997, and during
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the period from November 11, 1997 through May 10, 1998 the maximum aggregate
number of conversion shares which can be sold is 500,000. After May 10, 1998,
100% of the conversion shares may be sold. The Company can prohibit sales during
the period from December 14, 1997 to February 1, 1998 (the "Blackout Period").
The Debentures are convertible into shares of the Company's common stock based
on the "Conversion Price" at the time of conversion, which varies based on the
date when the Debentures are converted. For the period through March 31, 1998,
the Conversion Price is an amount equal to 80% of the average closing bid price
of the Common Stock on the American Stock Exchange for the previous three
business days ending on the day before the conversion date. For the period
beginning April 1, 1998, the Conversion Price is an amount equal to 75% of the
average closing bid price of the common stock on the American Stock Exchange for
the previous three business days ending on the day before the conversion date.
The Debentures are secured by 475,000 shares of NSI common stock owned
by the Company (the "NSI Shares"). If at any time prior to March 31, 1998, the
conversion price is $3.00 or less, the holders of the Debentures may elect to
exercise their conversion rights for NSI Shares, rather than common stock of the
Company, at a 20% discount from the market price at the time of conversion. If
the Company prohibits sales during the Blackout Period, and the trading volume
in the Company's common stock prior to December 15, 1997 does not meet defined
minimums, the holders may convert into the NSI Shares at a discount from the
market price which would produce a 25% return on an annualized basis. The NSI
Shares may be released from the pledge ratably as the outstanding principal
amount of Debentures is reduced.
While the Company anticipates that its cash requirements will be
substantial for the immediate future, it believes its existing cash and
investments will be adequate to meet those requirements. The cash requirements
relate specifically to the accounts payable and accrued expenses at September
30, 1997 of approximately $525,000, the continuing negative cash flow generated
from operations on a monthly basis, costs of sales and marketing efforts, and
the development of the oxygen generation technology licensed from Ceram.
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(R) technology, in pursuing other opportunities in
healthcare technology. Specifically, the Company intends to make 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 new healthcare products.
In pursuit of that strategy, the Company has recently embarked upon the
development of an oxygen generation/concentration device for use in home
healthcare, based upon technology acquired from Ceram. Pursuant to the
agreement, through September 30, 1997, the Company has advanced $206,000 to
Ceram to complete the fabrication and testing of a prototype 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 prototype into an oxygen concentrator
which the Company will manufacture and market for the home health care market.
If the prototype is accepted by 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.
Assuming acceptance of the prototype, the Company intends to complete
the development of a commercial version of the device, proceed with obtaining
appropriate regulatory approvals, and commence manufacturing, marketing and
distribution of the product. Such activities are likely to require substantial
expenditures in late 1997 and during 1998, and depending upon the ultimate
methods of manufacture, marketing and distribution chosen by the Company, may
require it to seek additional capital.
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,
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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 in other Securities and Exchange
Commission filings.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit Exhibit Description
------- -------------------
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.
SIGNATURE
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 September 30, 1997 to be signed on its behalf by the undersigned,
thereto duly authorized.
NETMED, INC.
By: /s/David J. Richards
------------------------------------------------
David J. Richards, President*
By: /s/Kenneth B. Leachman
------------------------------------------------
Kenneth B. Leachman, Vice President of Finance*
Dated: November 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.
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EXHIBIT INDEX
EXHIBIT EXHIBIT EXHIBIT INDEX
NUMBER DESCRIPTION PAGE NUMBER
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27 Financial Data Schedule.
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