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 January 31, 1998
------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
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Commission File number 0-21019
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INNOVATIVE MEDICAL SERVICES
---------------------------
(Name of small business issuer in its charter)
California 33-0530289
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 3,832,851 as of March
16, 1998.
<PAGE>
INNOVATIVE MEDICAL SERVICES
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of July 31, 1997 and January 31, 1998
Statements of Operations for the three months and six
months ended January 31, 1997 and 1998
Statements of Cash Flows for the three months and six
months ended January 31, 1997 and 1998
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>
BALANCE SHEETS
- -----------------------------------------------------------------------------
(unaudited)
January 31, July 31,
1998 1997
Assets ----------- ----------
Current Assets
Cash and cash equivalents $ 685,795 $1,982,660
Accounts receivable, net of
allowance for doubtful
accounts of $17,850 274,698 219,047
Notes receivable 418,059 25,930
Inventories 84,944 23,532
Prepaid expenses 528,637 583,333
---------- ----------
Total current assets 1,992,133 2,834,502
---------- ----------
Property, Plant and Equipment
Property, plant and equipment 793,043 685,187
---------- ----------
Total property, plant and equipment 793,043 685,187
---------- ----------
Noncurrent Assets
Deposits 73,375 25,375
Patents 44,806 44,806
Deferred acquisition costs 478,532 45,431
---------- ----------
Total noncurrent assets 596,713 115,612
---------- ----------
Total assets $3,381,889 $3,635,301
========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Account payable $ 153,635 $ 91,487
Line of credit 94,025 -
Accrued liabilities 1,255 64,550
Notes payable 1,390 2,721
---------- ----------
Total current liabilities 250,305 158,758
---------- ----------
Long-Term Debt - 257
---------- ----------
Stockholders' Equity
Class A common stock, no par value:
authorized 20,000,000 shares,
issued and outstanding 3,832,851 6,016,124 5,566,124
Class A warrants: issued and
outstanding 3,687,500 warrants 108,750 108,750
Accumulated deficit (2,993,290) (2,198,588)
---------- ----------
Total stockholders' equity 3,131,584 3,476,286
---------- ----------
Total liabilities and stockholders' equity $3,381,889 $3,635,301
========== ==========
<PAGE>
STATEMENTS OF INCOME (Unaudited)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
January 31 January 31
------------------------ ------------------------
1998 1997 1998 1997
------------------------ ------------------------
<S> <C> <C> <C> <C>
Net sales $ 423,790 $ 214,474 $ 859,048 $ 434,142
Cost of sales 267,750 146,221 516,167 306,987
---------- ---------- ---------- ----------
Gross profit 156,040 68,253 342,881 127,155
---------- ---------- ---------- ----------
Selling expenses 221,826 155,481 374,289 188,778
General and administrative
expenses 310,711 329,125 699,911 488,373
Research and development 39,321 - 92,586 -
---------- ---------- ---------- ----------
Total operating costs 571,858 484,606 1,166,786 677,151
---------- ---------- ---------- ----------
Operating income (loss) (415,818) (416,353) (823,905) (549,996)
---------- ---------- ---------- ----------
Other income and (expense)
Interest income - 46,185 - 90,954
Dividend income 7,893 - 29,603 -
---------- ---------- ---------- ----------
Total other income (expense) 7,893 46,185 29,603 90,954
---------- ---------- ---------- ----------
Income (loss) before income
taxes (407,925) (370,168) (794,302) (459,042)
Federal and state income
taxes 200 200 400 800
---------- ---------- ---------- ----------
Net income (loss) $ (408,125) $ (370,368) $ (794,702) $ (459,842)
========== ========== ========== ==========
Net (loss) per common share $ (0.07) $ (0.06) $ (0.14) $ (0.09)
========== ========== ========== ==========
</TABLE>
STATEMENTS OF ACCUMULATED DEFICITS
- -----------------------------------------------------------------------------
(Unaudited)
Six Months
Ended Year Ended
January 31 July 31
1998 1997
--------------------------
Balance, beginning of period $(2,198,588) $ (791,274)
Net income (loss) (794,702) (1,407,314)
---------- ----------
Balance, end of period $(2,993,290) $(2,198,588)
========== ==========
<PAGE>
STATEMENTS OF CASH FLOWS (Unaudited)
- -----------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
JANUARY 31
1998 1997
--------------------------
Cash flows from operating activities
Net income (loss) $ (794,702) $ (459,842)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 58,044 24,984
Amortization - 516
Stock issued for services 450,000 -
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable (55,651) (41,998)
(Increase) decrease in due from
officers - (80,027)
(Increase) decrease in due from employees - (2,098)
(Increase) decrease in notes receivable (392,129) -
(Increase) decrease in prepaid expense 54,696 (333,256)
(Increase) decrease in inventory (61,412) 42,859
(Increase) decrease in deposits (48,000) (8,549)
(Increase) decrease in patent costs - (10,000)
(Increase) decrease in deferred
acquisition costs (433,101) -
Increase (decrease) in accounts payable 62,148 (159,904)
Increase (decrease) in line of credit 94,025 -
Increase (decrease) in accrued
liabilities (63,295) (105,105)
---------- ----------
Net cash provided (used) by
operating activities (1,129,377) (1,132,420)
---------- ----------
Cash flows from investing activities
Purchase of property, plant and equipment (165,899) (407,804)
---------- ----------
Net cash (used) in investing
activities (165,899) (407,804)
---------- ----------
Cash flows from financing activities
Increase (decrease) in notes payable (1,589) (401,576)
Proceeds from sale of common stock - 5,077,888
---------- ----------
Net cash provided by financing
activities (1,589) 4,676,312
---------- ----------
Net increase (decrease) in cash
and cash equivalents (1,296,865) 3,136,088
Cash at beginning of period 1,982,660 21,706
---------- ----------
Cash at end of period $ 685,795 $3,157,794
========== ==========
<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 and related
notes included therein.
OVERVIEW
Innovative Medical Services, through an aggressive, growth-oriented
business strategy, has built a strong market presence in the manufacturing
and marketing of water filtration systems and pharmacy efficiency products.
In addition, the Company is moving through acquisitions into the
international distribution of medical, dental and veterinary supplies. The
Company's principal products are the Fillmaster(R) Pharmacy Water
Purification and Dispensing System for reconstituting oral suspension
prescriptions, and the NutriPure(R) Home Drinking Water System. The
Company also markets, for both products, proprietary filters that require
changing at intervals of nine to twelve months or whenever indicated by the
purity testing module. The filter replacements represent a significant
continuing source of revenue to the Company.
During the first half of this fiscal year, Innovative Medical Services
launched two new products: the computerized Fillmaster 1000e Pharmacy
Water Purification and Dispensing System and the NutriPure Home Drinking
Water System. To facilitate successful product launches, the Company
tripled its participation in national and regional industry trade shows,
increased trade publication advertising, initiated several direct marketing
campaigns and continued its aggressive media relations program. The
increased marketing efforts have resulted in substantially elevated
industry awareness of Innovative Medical Services and our products and have
generated significant interest in and excitement over the new products
being released by the Company.
The Company beta tested the Fillmaster 1000e during the second quarter, and
since March 1, 1998 has been accepting advanced orders for the product. A
major advertising campaign begun in December announces the arrival of the
new Fillmaster and will continue through April. The Company expects
Fillmaster 1000e revenues to build not only through new sales to new chain
and independent pharmacies, but also through an upgrade sales program
established for existing Fillmaster customers.
During the second quarter of this fiscal year, the Company test marketed
its NutriPure Home Drinking Water System and received highly favorable
market reaction. In March 1998, after the end of the second quarter,
Innovative Medical Services established 30 independent pharmacy dealers
across the nation who recommend the product to their pharmacy customers.
The Company has already begun to see sales results from the program and
continues its marketing campaign to recruit dealers.
The Medifier, to which Innovative Medical Services has acquired the patent,
manufacturing and marketing rights, is a unique magnifying device for use
with any size prescription bottle label, targeted to the growing elderly
population. The Medifier represents a low-cost entry into the
premium/promotional product market and is being sold though the Company's
current distribution channels as well as through catalogues and independent
dealers. In the second quarter, the Company reported an initial Medifier
sale of $40,000. The Company anticipates similar bulk sales of the
Medifier in the second half of the year.
<PAGE>
During the second quarter, Innovative Medical Services took steps to
acquire the assets of Export Company of America, Inc. (EXCOA), a Fort
Lauderdale, Florida-based distributor of medical, dental and veterinary
supplies. Acquisition of distributors such as EXCOA provides Innovative
Medical Services the means to expand into related markets, to enhance
current product offerings and lines of distribution within the medical
market, and to expand into the global marketplace with current and future
products.
EXCOA's products are distributed to Brazil through Ampromed, a Rio de
Janeiro-based import company which is owned by EXCOA. EXCOA's products are
sold to practitioners, retail outlets and government agencies. The
Brazilian government is actively promoting growth and higher quality health
services by infusing $36 billion over the next five years into a nationwide
healthcare upgrade. This massive public health initiative will increase
demand for a wide range of medical and dental supplies and offers a bright
forecast for EXCOA product sales. The Company also plans to tap Brazil's
agricultural market with specialized veterinary supplies sold by EXCOA.
The Company anticipates that this acquisition will result in an additional
$3 million in revenue in the next 12 months.
Innovative Medical Services continues to pursue additional possible
acquisition opportunities in the wholesale medical distribution industry.
As announced in September, Innovative Medical Services has signed a letter
of intent to purchase the assets of Xetal, Inc. and its wholly owned
subsidiaries, an Oceanside, New York-based wholesale distributor of
medical, dental and veterinary supplies. To date, the Company is in
involved in ongoing negotiations with Xetal and continues its investigation
of other medical supply acquisitions, both domestic and international.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 1998 VERSUS
THREE MONTHS ENDED JANUARY 31, 1997
Revenues of $423,800 in the second quarter ended January 31, 1998 were 98%
greater than the $214,500 in revenues reported for the same quarter ended
January 31, 1997. This revenue increase resulted from increased sales of
Fillmaster Pharmacy Water Purification and Dispensing Systems and from
continued growth of replacement filter sales. Fillmaster Purification
System sales in the 1998 quarter were approximately $289,000 and
replacement filter sales were $94,000. In the 1997 quarter, Fillmaster
Purification System sales were $188,000 and replacement filter sales were
$26,500. The 255% increase in replacement filter sales was expected due to
the continually increasing number of Fillmaster Purification Systems in
use.
While occurring in all markets, more than 75% of the volume increase in
Fillmaster Purification System sales took place in the chain pharmacy
marketplace, bringing the total number of Fillmaster Systems in use to
approximately 8,500. In spite of this substantial market share, about 80%
of America's pharmacies remain as potential customers of the Company.
Gross profits in the most recent quarter were $156,000 versus $68,300 in
the year-earlier second fiscal quarter. Gross profit percentages of 37% in
the 1998 quarter were higher versus the 32% gross profit percentage in the
1997 quarter. The gross profit percentage increase reflects increased
filter sales associated with higher margins during the year.
Net loss for the quarter ended January 31, 1998 was $408,100 versus a net
loss of $370,400 for the same quarter in 1997. The increased loss was due
to increases in Selling Expenses, which includes
<PAGE>
marketing and advertising costs incurred to promote the Company and the
Company's products, and Research and Development costs associated with
production and development of new products.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JANUARY 31, 1998 VERSUS SIX
MONTHS ENDED JANUARY 31, 1997
Revenues of $859,000 in the six months ended January 31, 1998 were 98%
higher than the $434,100 in revenues reported for the six months ended
January 31, 1997. Fillmaster Purification System sales in the six months
ended January 31, 1998 were $579,000 and replacement filter sales were
$219,000. In the prior period, Fillmaster Purification System sales were
$389,100 and replacement filter sales were $45,000. Sales of filters rose
387% in fiscal 1998 as expected due to the continually increasing number of
Fillmaster Purification Systems in use.
Gross profits for the six months ended January 31, 1998 were $342,900
versus $127,100 in the 1997 six month period. Gross profit percentage of
39% in 1998 was higher versus 29% in 1997. The gross profit increase
reflects increased filter sales in the recent six months period. As the
number of Fillmaster 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 second half of fiscal 1997.
Net loss for the first six months ended January 31, 1998 was $794,700
versus a net loss of $460,000 for the same period in 1997. The increased
loss was due in part to the $185,500 (98%) increase in Selling Expenses,
which includes marketing and advertising costs incurred to promote the
Company's products. In addition, General and Administrative Expenses
increased approximately $211,600 (43%) from 1997 to 1998 due to continued
product development costs associated with the development of new markets.
The Company also expensed $92,600 of Research and Development costs
associated with production and development of new products.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended January 31, 1998, the Company's current asset
to liabilities ratio fell from 17.85 to 7.96. Current assets decreased
$842,400 from $2,834,500 to $1,992,100. Current liabilities increased
$91,500 from $158,800 to $250,300. Although the dollar amount of increase
in current liabilities is modest, it represents a substantial percentage
change for the period resulting in the large fluctuation in the Company's
current ratio. The increase in current liabilities was the result of
increased accounts payable associated with a corresponding increase in
accounts receivable. In addition, the Company installed a line of credit,
from which $94,000 has been drawn.
Cash flows used from operations were $1,129,400 in the first half of fiscal
year 1998 and $1,132,400 in 1997. For those periods, cash flows used in
investing activities were, respectively, $165,900 and $407,800 for the
purchase of machinery and equipment and leasehold improvements. The total
decrease in cash and cash equivalents for 1998 six month period was
$1,296,900 which was largely a result of an increase in notes receivable
and an increase in deferred acquisition costs. The Company generated
$5,077,900 from a public offering during the 1996 period resulting in a net
increase in cash equivalents of $3,136,100.
<PAGE>
PART 2 OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
In February 1997, the Company filed an action in Federal District Court in
Tampa, Florida against David Reitz, Zedburn Corporation, Capital
Development Group and Does 1 through 100 seeking damages and cancellation
of 140,000 shares of common stock. Zedburn Corporation is a Florida
corporation believed to be the alter ego of Mr. Reitz. 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 amended its complaint to include Steven Durland as an
individual defendant. Based upon information derived from discovery that
the defendants had perpetrated similar schemes against other parties, the
Company moved the Court for leave to file a second amended complaint in
September 1997 based upon the Racketeer Influenced and Corrupt Organization
(RICO) Act against the existing defendants and additional defendants. In
October 1997, Mr. Reitz and Zedburn filed a counterclaim against the
Company for breach of contract and claim against some of the Company's
directors alleging fraud in the cancellation of the stock certificates
previously issued to Mr. Reitz. The Company has moved to dismiss the fraud
count of the counterclaim for failure to state a claim as well as sanctions
against Mr. Reitz's legal counsel for filing a frivolous counterclaim. In
October 1997, Mr. Reitz and Zedburn filed for protection under the federal
bankruptcy laws. The Company is pursuing discovery in the bankruptcy
proceeding.
It is the Company's position that Mr. Reitz and others perpetrated a scheme
to defraud the Company of cash fees and securities in connection with
purported services of arranging a public offering of the Company's common
stock. It is also the Company's position that it was fraudulently induced
to execute an engagement of Mr. Durland as auditor.
The Company has neither 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. Reitz's counterclaim 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.
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
<PAGE>
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.
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 SIX MONTHS ENDED JANUARY 31, 1997 AND 1998
For the Six Months Ended
January 31,
----------------------------
1998 1997
----------------------------
Shares outstanding 3,832,851 3,370,851
========== ==========
Weighted average shares outstanding 3,655,134 3,202,938
Stock Options 406,250 31,250
Warrants 1,798,125 1,765,417
---------- ----------
Total weighted average
shares outstanding 5,859,509 4,999,605
========== ==========
Net Income (Loss) $ (794,702) $ (459,842)
========== ==========
Net Earnings (Loss) per share $ (0.14) $ (0.09)
========== ==========
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 685,795
<SECURITIES> 0
<RECEIVABLES> 292,548
<ALLOWANCES> (17,850)
<INVENTORY> 84,944
<CURRENT-ASSETS> 1,992,133
<PP&E> 976,840
<DEPRECIATION> 183,797
<TOTAL-ASSETS> 3,381,889
<CURRENT-LIABILITIES> 250,305
<BONDS> 0
0
0
<COMMON> 6,016,124
<OTHER-SE> (2,884,540)
<TOTAL-LIABILITY-AND-EQUITY> 3,381,889
<SALES> 859,048
<TOTAL-REVENUES> 859,048
<CGS> 516,167
<TOTAL-COSTS> 1,166,786
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (823,905)
<INCOME-TAX> 400
<INCOME-CONTINUING> (524,305)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (794,702)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> 0
</TABLE>
