U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended April 30, 1997
--------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the transition period from __________ to
Commission File number 0-21019
-------
INNOVATIVE MEDICAL SERVICES
---------------------------
(Name of small business issuer in its charter)
California 33-0530289
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1725 Gillespie Way, El Cajon, California 92020
----------------------------------------------
(Address of principal executive offices)
619 596 8600
------------
Issuer's telephone number
Check whether the issuer (1) filed all reports to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
------ -----
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date: 3,520,851 as of June
13, 1997.
<PAGE>
INNOVATIVE MEDICAL SERVICES
FORM 10-QSB
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of July 30, 1996 and April 30, 1997
Statements of Operations for the nine months ended April 30, 1995
and 1996
Statements of Cash Flows for the nine months ended April 30, 1995
and 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities: None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Innovative Medical Services
Balance Sheets
(Unaudited)
April 30, 1997 July 31, 1996
-------------- --------------
ASSETS
Current Assets
Cash and cash equivalents $2,652,560 $ 21,706
Accounts receivable, net of
allowance for doubtful
accounts of $9,000 212,976 81,963
Notes receivable 24,968 24,986
Due from employees 2,420 1,390
Due from shareholders and officers 145,820 76,887
Inventories 21,185 55,660
Prepaid expenses 283,209 7,868
---------- ----------
Total current assets 3,343,138 270,460
---------- ----------
Property, Plant and Equipment
Property, plant and equipment,
net 581,861 163,406
---------- ----------
Total property, plant
and equipment 581,861 163,406
---------- ----------
Noncurrent Assets
Deposits 30,760 5,649
Patent costs 10,000 -
Organizational costs, net 258 1,032
Acquisition costs 2,794 -
Deferred public offering costs - 376,695
---------- ----------
Total noncurrent assets 43,812 383,376
---------- ----------
Total assets $3,968,811 $ 817,242
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 196,457 $ 233,111
Accrued liabilities 206,199 307,092
Notes payable 2,771 402,154
---------- ----------
Total current liabilities 405,427 942,357
---------- ----------
Long-Term Debt - 2,978
---------- ----------
Stockholders' Equity
Class A common stock, no par value;
authorized 20,000,000 shares,
issued and outstanding
3,520,851 at April 30, 1997
and 1,833,851 shares at
July 31, 1996 5,264,374 663,181
Accumulated deficit (1,700,990) (791,274)
---------- ----------
Total stockholders' equity 3,563,384 (128,093)
---------- ----------
Total liabilities and stockholders'
equity $3,968,811 $ 817,242
========== ==========
<PAGE>
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
April 30 April 30
----------------------------------------------------
1997 1996 1997 1996
----------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $273,904 $88,431 $708,046 $701,088
Cost of sales 172,092 65,266 479,079 508,489
---------- ---------- ---------- ----------
Gross profit 101,812 23,165 228,967 192,599
---------- ---------- ---------- ----------
Selling expenses 233,267 18,040 422,045 65,199
General and administrative
expenses 354,122 61,859 842,495 202,972
---------- ---------- ---------- ----------
Total operating costs 587,389 79,899 1,264,540 268,171
---------- ---------- ---------- ----------
Operating income (loss) (485,577) (56,734) (1,035,573) (75,572)
---------- ---------- ---------- ----------
Other income and (expense):
Interest income 35,703 - 126,657 -
Miscellaneous income
and (expense) - 181 - 180
---------- ---------- ---------- ----------
Total other income
and (expense) 35,703 181 126,657 180
---------- ---------- ---------- ----------
Income (loss) before
income taxes (449,874) (56,553) (908,916) (75,392)
Federal and state income taxes - 800 800 800
---------- ---------- ---------- ----------
Net income (loss) $ (449,874) $ (57,353) $ (909,716) $ (76,192)
========== ========== ========== ==========
Net (loss) per common share $ (0.08) $ (0.02) $ (0.16) $ (0.02)
========== ========== ========== ==========
</TABLE>
<PAGE>
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF ACCUMULATED DEFICIT
(Unaudited)
Nine Months
Ended Year Ended
April 30, 1997 July 31, 1996
--------------------------------
Balance, beginning of year $ (791,274) $ (361,226)
Net income (loss) (909,716) (430,048)
---------- ----------
Balance, end of period $(1,700,990) $ (791,274)
========== ==========
<PAGE>
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
April 30
----------------------------
1997 1996
----------------------------
Cash flows from operating activities
Net income (loss) $ (909,716) $ (76,192)
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 51,149 20,029
Amortization 774 774
Officer wages contributed - 44,000
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable (131,013) 129,547
(Increase) decrease in due from
officers and shareholders (68,933) 19,790
(Increase) in due from employees (1,030) 2,395
(Increase) in prepaid expense (275,341) (6,604)
(Increase) decrease in inventory 34,475 (9,863)
(Increase) in notes receivable - (48,325)
(Increase) in deposits (25,111) -
(Increase) in patent costs (10,000) -
(Increase) in acquisition costs (2,794) -
(Increase) in deferred public
offering costs - (58,735)
(Decrease) in accounts payable (36,654) (68,846)
(Decrease) increase in accrued
liabilities (100,893) 9,636
---------- ----------
Net cash (used) by
operating activities (1,475,087) (42,394)
---------- ----------
Cash flows from investing activities
Purchase of property, plant
and equipment (469,586) (30,838)
---------- ----------
Net cash (used) in
investing activities (469,586) (30,838)
---------- ----------
Cash flows from financing activities
Proceeds from debt - 25,000
Payments on debt (402,361) -
Proceeds from sale of common stock 4,977,888 22,220
---------- ----------
Net cash provided by
financing activities 4,575,527 47,220
---------- ----------
Net increase (decrease) in cash 2,630,854 (26,012)
Cash and cash equivalents,
at beginning of period 21,706 47,180
---------- ----------
Cash and cash equivalents,
at end of period $2,652,560 $ 21,168
========== ==========
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the audited and unaudited financial statements of the Company.
OVERVIEW
Innovative Medical Services manufactures and markets reverse osmosis water
filtration systems and related technologies to national health care and
consumer markets. The Company's two principal products are the
Fillmaster(R): a water purification, measuring and dispensing apparatus
used in pharmacies to reconstitute oral antibiotic suspensions; and the
Nutri-Pure(TM) consumer water filtration system. The Company also markets
proprietary filters for both products that require changing at intervals of
nine to twelve months or whenever indicated by the AquaScan 2000 purity
testing module. The filter replacements represent a significant continuing
source of future sales and cash flow to the Company.
Early in the second quarter of fiscal year 1996/97, Innovative Medical
Services began designing a new, electronically automated version of the
Fillmaster(R). The new product provides easier and more precise
measurement than the original Fillmaster(R) and features bar code
technology to ensure even greater time savings in the dispensing of oral
solution prescriptions. In February, the Company announced that it filed
a patent application for the new product. Beta testing of the dispenser is
underway, and the Company expects to launch the new Fillmaster in August
1997.
In addition, the Company has developed a line of reverse osmosis
residential water filtration systems and has established marketing
strategies and distribution channels for the first of the systems, the
Nutri-Pure(TM) home water filtration system. Based on the technology used
in the Fillmaster(R) Water Purification System, the residential product
filters and dispenses water for home use. This June the Company began
promotion of the product through a targeted direct mail program which
offered the NutriPure system to existing Fillmaster users. Following the
direct mailing, the Company will establish lines of distribution for
NutriPure through independent pharmacies.
Innovative Medical Services continues to increase sales of the
Fillmaster(R) to national and regional chain pharmacies. The Company
continues its campaign to gain recognition and increase Fillmaster(R) sales
to the independent pharmacy market through trade show representation, trade
publication advertising, targeted mailings and telemarketing.
The Company continues to actively investigate possible mergers and
acquisitions and has hired an investment banking firm to assist with
identification, evaluation and due diligence matters with regard to mergers
and acquisitions.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED APRIL 30, 1997 VERSUS QUARTER
ENDED APRIL 30, 1996
Revenues of $273,900 in the quarter ended April 30, 1997 were 210% greater
than the $88,400 in revenues reported for the quarter ended April 30, 1996.
This revenue increase was attributable to increased sales of Fillmaster(R)
Purification Systems and the growth of replacement filters. Fillmaster
Purification System sales in the quarter ended April 30, 1997 were $215,700
and replacement filter sales were $58,100. In the third quarter of 1996,
Fillmaster(R) Purification System sales were $76,200 and replacement filter
sales were $12,200. Sales of filters rose as expected during the quarter
due to the continually increasing number of Fillmaster(R) Purification
Systems in use.
Gross profits for the quarter ended April 30, 1997 were $101,800 versus
$23,200 in 1996. Gross profit percentages in 1997 (37%) were higher versus
1996 (26%). The gross profit increase reflects increased filter sales in
the recent quarter.
Net loss for the quarter ended April 30, 1997 was $449,900 versus a net
loss of $57,400 for the same period in 1996. This decrease in net profits
was due to increased Selling Expenses and General and Administrative
Expenses. These expenses increased approximately $507,500 from 1996 to
1997.
<PAGE>
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 1997 VERSUS NINE
MONTHS ENDED APRIL 30, 1996
During the first nine months of fiscal year 1996/97, Innovative Medical
Services focused on positioning for growth. The Company expanded its
production capacity and its sales force in preparation for: 1) aggressive
market penetration of chain pharmacies, 2) increased marketing efforts
aimed toward independent pharmacies, and 3) entry into the residential
water filtration market. In October, the Company moved from a 2,000 square
foot production and administration facility to a technologically-advanced
10,000 square foot facility. Following the move to the new facility, the
Company increased its sales force by 500% by hiring a Vice President of
Sales and Marketing, adding a marketing manager, hiring telemarketing
personnel and expanding its customer service department to ensure continued
support and service to its customers. The Company has also hired a
director of finance and a market research specialist.
Revenues of $708,000 in the nine months ended April 30, 1997 were slightly
higher than the $701,000 in revenues reported for the nine months ended
April 30, 1996. Fillmaster(R) Purification System sales in the nine months
ended April 30, 1997 were $589,900 and replacement filter sales were
$118,100. In the prior period, Fillmaster(R) Purification System sales
were $649,000 and replacement filter sales were $52,000. Sales of filters
rose in fiscal 1996/97 as expected due to the continually increasing number
of Fillmaster(R) Purification Systems in use. Although the nine month
period ended April 30, 1996 contained an atypically large order from a
major chain, the 210% sales increase during the third quarter 1997 enabled
the Company to exceed revenues from the prior period.
Gross profits for the first nine months ended April 30, 1997 were $229,000
versus $192,600 in 1995/96. Gross profit percentages in 1996/97 (32%) were
higher versus 1995/96 (27%), in spite of the fact that the Company offered
more penetration (lower) pricing of the product for the initial
installations of the systems in the nine months 1996/97. The gross profit
increase reflects increased filter sales in the recent nine month period.
As the number of Fillmaster(R) system installations increases, so will the
volume of replacement filter sales. The Company anticipates a strong
influx of filter orders in the coming months resulting from sales of
systems during the nine months of fiscal 1995/96.
Net loss for first nine months ended April 30, 1997 was $909,700 versus a
net loss of $76,200 for the same period in 1995/96. The net profit
decrease was due to increased costs associated with the Company's recent
expansion. Selling Expenses and General and Administrative Expenses
increased approximately $960,000 from 1995/96 to 1996/97 due to continued
product development costs, expenses for additional management and sales
personnel, and costs associated with the development of new markets.
The Company has established the necessary infrastructure to accommodate the
increasing Fillmaster sales and the anticipated NutriPure sales. As
recognition of the Company and its products continues to grow, the Company
expects sales to follow accordingly. The residential water filtration
market represents an expansive market into which the Company has introduced
a superior product at a moderate price.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended April 1997, the Company's current assets to
liabilities ratio rose from .29 to 8.25. Current assets grew by $3,072,700
which was mainly due to the increase in cash and cash equivalents resulting
from the proceeds of the Company's initial public offering in August of
1996. Current liabilities decreased by $536,900 because a portion of the
offering proceeds were used to pay down accounts payable and to retire
substantially all of the Company's short term debt including the IPO bridge
financing of $375,000. Historically, the Company has operated without
incurring significant long-term debt. Management expects to continue this
policy into the foreseeable future.
Cash flows used from operations were $1,475,087 in the first nine months of
fiscal year 1996/97 and $17,000 in 1995/96. For those periods, cash flows
used in investing activities were, respectively, $418,500 and $29,000 for
the purchase of machinery and equipment and for leasehold improvements.
The Company generated $4,489,000 from the public offering during the period
resulting in a net increase in cash equivalents of $3,100,000.
<PAGE>
The Company believes that the expenditures necessary to achieve the sales
capacity required to implement the sales plan have been completed, and
Innovative Medical Services is now successfully positioned to dramatically
increase revenues through existing and new markets.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed, the Company is a defendant in a lawsuit filed by
Durland and Company of West Palm Beach, Florida in the Circuit Court of
Palm Beach County, Florida. The action claims approximately $25,000 of
fees owed for accounting services allegedly performed between February 1994
and June 1995. The Company moved to quash service of the summons on
jurisdictional grounds. In May 1997, the Court held a hearing on the
jurisdictional issue and found that there were insufficient contacts with
the State of Florida to maintain the action. As a result, Mr. Durland's
action was dismissed.
In November 1996, the Company filed an action in Superior Court of the
State of California in and for the County of San Diego against David Reitz,
Zedburn Corporation, Capital Development Group and Does 1 through 100,
seeking damages and cancellation of 140,000 shares of common stock. Mr.
Reitz moved to quash service of process, and on January 27, 1997, the Court
ruled that Florida would be the proper forum for the action based upon a
forum selection provision in the contract between the Company and Zedburn
Management. As a result, the California case has been dismissed.
The Company filed a new action in Federal District Court in Tampa, Florida
against David Reitz, Zedburn Corporation, Capital Development Group and
Does 1 through 100, seeking the same relief as requested in California
State Court. Prior to being served with the Company's Federal Court
action, Mr. Reitz filed an action in Circuit Court of Pinellas County,
Florida seeking unspecified damages from the Company for breach of
contract. The State Court action of Mr. Reitz has been stayed and all
issues will be litigated in Federal Court.
The Company has amended its complaint to include Mr. Durland as an
individual defendant. It is the Company's position that Mr. Durland is
owed nothing and that the Company was fraudulently induced to engage Mr.
Durland as auditor. It is the Company's position that Mr. Durland was in
fact a partner or employee of David Reitz d.b.a. Zedburn Corporation.
Zedburn Corporation is a Florida corporation believed to be the alter ego
of Mr. Reitz. It is the Company's position that in February 1994, Mr.
Reitz perpetrated a scheme to defraud the Company of cash fees and
securities in connection with his purported services of arranging a public
offering of the Company's common stock. The Company terminated its
relationship with Mr. Durland in June 1995 and that of Mr. Reitz in August
1995. In April of 1996, the Company's Board of Directors voted to cancel
the 140,000 shares of common stock which Mr. Reitz obtained through fraud.
The Company has not accrued a liability in its financial statements
regarding this litigation nor disclosed the matter in the footnotes
thereof. The Company has not done so because it does not believe there is
any merit to Mr. Durland's or Mr. Reitz's claims and that the likelihood
that the Company will realize a loss from these matters is believed remote.
In addition, the Company believes that in the unlikely event that the
Company settles, the amount of any such settlement would not be material to
the Company's financial statements.
<PAGE>
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) EXHIBITS
EXHIBITS DESCRIPTION
11 Statement re: computation of per share earnings
27 Financial data schedule
(B) REPORTS ON FORM 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirement 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.
INNOVATIVE MEDICAL SERVICES
(Registrant)
By: /s/ MICHAEL L. KRALL
-----------------------------------
Michael L. Krall, President/CEO
By: /s/ GARY BROWNELL
-----------------------------------
Gary Brownell, Chief Financial
Officer
EXHIBIT 11
INNOVATIVE MEDICAL SERVICES
COMPUTATION OF EARNINGS PER COMMON SHARE
FOR THE NINE MONTHS ENDED
APRIL 30, 1996 AND 1997
For the Nine Months Ended
April 30
----------------------------
1997 1996
----------------------------
Shares outstanding 3,520,851 1,833,851
========== ==========
Weighted average shares outstanding 3,231,111 1,817,368
Stock options 576,250 31,250
Warrants 1,765,417 1,187,500
---------- ----------
Total weighted average
shares outstanding 5,572,778 3,036,118
========== ==========
Net Income (Loss) $ (909,716) $ (76,192)
========== ==========
Net Earnings (Loss) per share $ (0.16) $ (0.02)
========== ==========
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUL-31-1997 JUL-31-1997
<PERIOD-START> FEB-01-1997 AUG-01-1996
<PERIOD-END> APR-30-1997 APR-30-1997
<CASH> 2,652,560 2,652,560
<SECURITIES> 0 0
<RECEIVABLES> 221,976 221,976
<ALLOWANCES> 9,000 9,000
<INVENTORY> 21,185 21,185
<CURRENT-ASSETS> 3,343,138 3,343,138
<PP&E> 716,115 716,115
<DEPRECIATION> 108,089 108,089
<TOTAL-ASSETS> 3,968,811 3,968,811
<CURRENT-LIABILITIES> 405,427 405,427
<BONDS> 0 0
0 0
0 0
<COMMON> 5,264,374 5,264,374
<OTHER-SE> (1,700,990) (1,700,990)
<TOTAL-LIABILITY-AND-EQUITY> 3,968,811 3,968,811
<SALES> 273,904 708,046
<TOTAL-REVENUES> 273,904 708,046
<CGS> 172,092 479,079
<TOTAL-COSTS> 587,389 1,264,540
<OTHER-EXPENSES> 155,481 422,045
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (485,577) (1,035,573)
<INCOME-TAX> 0 800
<INCOME-CONTINUING> (485,577) (1,036,373)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (449,874) (909,716)
<EPS-PRIMARY> (0.08) (0.16)
<EPS-DILUTED> 0 0
</TABLE>
