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, 2000
--------------
[ ] 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
INNOVATIVE MEDICAL SERVICES
---------------------------
(Name of small business issuer in its charter)
California 33-0530289
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(State or other jurisdiction
of incorporation or organization) (IRS Employer Identification No.)
1725 Gillespie Way, El Cajon, California 92020
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(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: 6,443,814 as of June 8,
2000.
<PAGE>
INNOVATIVE MEDICAL SERVICES
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements Balance Sheets as of July 31, 1999 and April
30, 2000 Statements of Operations for the three months ended April 30,
1999 and 2000 Statements of Cash Flows for the three months ended
April 30, 1999 and 2000
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
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
The interim financial statements include all adjustments which in the opinion of
management are necessary in order to make the financial statements not
misleading.
<PAGE>
ITEM 1
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------------------------
(Unaudited)
April 30 July 31
ASSETS 2000 1999
--------------- ----------------
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 1,413,219 $ 22,056
Restricted cash 200,962 205,574
Accounts receivable, net of allowance for doubtful
accounts of $ 50,000 1,144,105 790,166
Notes receivable 216,647 339,524
Inventories 712,214 719,972
Prepaid expenses 59,153 37,078
------- ------
Total current assets 3,746,299 2,114,370
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Property, Plant and Equipment
Property, plant and equipment 1,237,287 805,523
---------- -------
Total property, plant and equipment 1,237,287 805,523
---------- -------
Noncurrent Assets
Deposits 13,083 6,575
Patents and license 576,016 425,550
Goodwill 252,522 256,422
Other intangible assets 346,500 353,250
Deferred acquisition costs 103,376 53,851
-------- ------
Total noncurrent assets 1,291,498 1,095,648
---------- ---------
Total assets $ 6,275,083 $ 4,015,541
============ ===========
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable $ 321,962 $ 594,948
Accrued liabilities 55,709 43,068
Notes payable 260,411 446,067
-------- -------
Total current liabilities 638,082 1,084,083
-------- ---------
Minority interest payable 71,877 -
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Stockholders' Equity
Class A common stock, no par value: authorized
20,000,000 shares, issued and outstanding
6,416,939 at April 30, 2000 and
4,392,242 at July 31, 1999 9,771,973 6,663,318
Class A warrants: issued and outstanding 3,687,500
warrants 108,750 108,750
Accumulated deficit (4,315,598) (3,840,610)
----------- -----------
Total stockholders' equity 5,565,125 2,931,458
---------- ---------
Total liabilities and stockholders' equity $ 6,275,083 $ 4,015,541
============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF INCOME (Unaudited)
----------------------------------------------------------------------------------------------------------------------------
For the Nine Months Ended For the Three Months Ended
April 30 April 30
2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 1,909,590 2,733,401 357,845 1,169,903
Cost of sales 809,301 1,050,880 234,249 496,960
-------- ---------- -------- -------
Gross profit 1,100,288 1,682,521 123,596 672,943
---------- ---------- -------- -------
Selling expenses 406,378 289,028 147,947 101,256
General and administrative expenses 1,117,945 790,669 629,036 342,964
Research and development 84,496 119,862 40,380 34,923
------- -------- ------- ------
-
Total operating costs 1,608,818 1,199,559 817,363 479,143
---------- ---------- -------- -------
Operating income (loss) (508,530) 482,962 (693,767) 193,800
--------- -------- --------- -------
Other income and (expense):
Interest income 4,218 8,097 1,714 2,716
------ ------ ------ -----
Total other income (expense) 4,218 8,097 1,714 2,716
------ ------ ------ -----
Income (loss) before income taxes and
Minority interest in subsidiary operations (504,312) 491,059 (692,053) 196,516
Federal and state income taxes 600 600 200 200
---- ---- ---- ---
Income (loss) before minority interest in
Subsidiary operations (504,912) 490,459 (692,253) 196,316
Minority interest in subsidiary operations 29,923 - 29,923 -
------- ------- ------- -------
Net income (loss) $ (474,989) $ 490,459 $ (662,331) $ 196,316
=========== ========== =========== =========
Net income (loss) per common share (basic) $ (0.10) $ 0.12 $ (0.12) $ 0.05
======== ======= ======== ======
Net income (loss) per common share (diluted) $ (0.06) $ 0.07 $ (0.08) $ 0.03
======== ======= ======== ======
</TABLE>
<TABLE>
<CAPTION>
April 30 Ended July 31
CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS 2000 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of period $ (3,840,610) $ (4,101,330)
Net income (loss) (474,989) 260,720
--------- -------
Balance, end of period $ (4,315,599) $ (3,840,610)
============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
------------------------------------------------------------------------------------------------
For the Nine Months Ended
April 30
2000 1999
---- ----
Cash flows from operating activities
<S> <C> <C>
Net income (loss) $ (474,989) $ 490,459
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 115,324 116,189
Minority interest in subsidiary operations 71,877 -
Changes in assets and liabilities:
(Increase) decrease in restricted cash 4,613 101,425
(Increase) decrease in accounts receivable (353,939) (1,021,065)
(Increase) decrease in notes receivable 122,877 (83,399)
(Increase) decrease in prepaid expense (22,075) (1,080)
(Increase) decrease in inventory 7,758 (62,095)
(Increase) decrease in deposits (6,508) (4,450)
(Increase) decrease in patent and licenses (150,465) (367,140)
(Increase) decrease in deferred acquisition costs (49,525) 1,051,422
(Increase) decrease in goodwill 3,900 (258,055)
(Increase) decrease in intangible assets 6,750 (355,500)
Increase (decrease) in accounts payable (272,987) (71,054)
Increase (decrease) in accrued liabilities 12,641 (43,928)
---------------------------------------
Net cash provided (used) by operating
activities (984,749) (508,272)
---------------- -------------------
Cash flows from investing activities
Purchase of property, plant and equipment (547,088) (120,817)
---------------- -------------------
Net cash (used) in investing activities (547,088) (120,817)
---------------- ---------
Cash flows from financing activities
Increase (decrease) in notes payable (185,656) 361,172
Proceeds from sale of common stock 3,108,655 375,238
--------------- -------------------
- -
Net cash provided by financing activities 2,923,000 736,410
--------------- -------------------
Net increase (decrease) in cash and cash
equivalents 1,391,163 107,320
Cash at beginning of period 22,056 48,250
---------------------------------------
Cash at end of period $ 1,413,219 $ 155,570
============ =========
Interest paid $ 65,286 $ 39,622
Taxes paid $ 600 $ 600
</TABLE>
<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 (the Company), based in El Cajon, California,
markets unique water treatment and disinfecting solutions to a broad range of
customers, including pharmaceutical, healthcare and consumer markets.
The Company is the nation's leader in pharmaceutical water purification. The
Company's cornerstone products have been the Fillmaster(R), Fillmaster
1000e(R)and Scanmaster(TM)water purification, measuring and dispensing
technologies used in pharmacies to reconstitute oral antibiotic prescriptions.
The Company markets proprietary filters for the aforementioned products, thereby
gaining another significant source of revenues and cash flow.
Innovative Medical Services has also entered the consumer market with its
Nutripure(R) line of residential drinking water systems, including the Nutripure
Elite reverse osmosis water system available as either a convenient, compact
unit easily installed beneath the sink, or as an attractive countertop appliance
requiring no installation. Brand recognition for the Nutripure products is
driven by the Nutripure 2000 countertop water filtration system. Nutripure 2000
competes with PUR(R), Brita(R) and Culligan(R) products, delivering superior
product quality and capacity to consumers.
The Company has licensed silver ion water treatment and disinfecting
technologies for the healthcare market, including hospitals, clinics, surgical
centers, dentists' and doctors' offices and other medical and health related
facilities. Innovative Medical Services has also secured rights to market the
Axenohl(TM)disinfectant technology to the healthcare, food processing, dental,
point-of-use and point-of-entry drinking water markets.
During the third quarter, the Company launched Nutripure.com, an e-commerce
supersite providing consumers a wide variety of vitamins, minerals, nutritional
supplements, homeopathic remedies and natural products. In addition to products,
the website offers comprehensive health and wellness information in an
easy-to-access, intuitive reference format. The website also presents the
Nutripure line of water filtration systems.
Nutripure.com has formed a strategic alliance with Bergen Brunswig Corporation
to provide a seamless online interface for efficient, direct-to-consumer
distribution of products through Bergen Brunswig's strategically located
state-of-the-art distribution facility in Louisville, Kentucky. The alliance
combines the strengths of Nutirpure.com's aggressive sales, marketing and
customer support programs with Bergen Brunswig's leadership, buying power and
order fulfillment and delivery system.
Also during the quarter, the Company filed a registration statement for
Nutripure.com to register the stock under the Securities and Exchange Act of
1934. After the Company receives notice of the effectiveness of the registration
statement, the Company will set a record date and distribution date for the
Nutripure.com dividend to shareholders of Innovative Medical Services. Holders
of Innovative Medical Services Common Stock will receive one share of
Nutripure.com Common Stock for each ten shares of Innovative Medical Services
Common Stock held as of a record date to be specified. The Company expects SEC
clearance and to set the record date in June 2000.
In March 2000, the Company announced that it began shipping its Nutripure(R)2000
countertop water system and replacement filters to Wal-Mart Stores and Super
Centers. The regional rollout included four states, and the Company has received
several reorders from Wal-Mart to restock stores in that region. IMS expects to
expand distribution of the Nutripure 2000 system not only to additional Wal-Mart
regions, but also to additional national retailers in the coming months.
<PAGE>
The Nutripure 2000 professional, one-micron, carbon microfilter is trusted to
reduce dirt, chorine, lead and filterable cysts, including cryptosporidium and
giardia, to improve the taste, quality and safety of drinking water. In this era
of water awareness, consumers are turning away from tap water to cleaner, safer
sources of water. The "pharmacist recommended" Nutripure(R)2000 countertop
carbon filtration system leads its category with a 2,000 gallon-capacity filter
and a unique electronic monitor to remind users when to change the filter.
The Company continued to broaden its reach in the disinfecting technologies
market by launching the Reservoir Metering System (RMS) in March 2000. The new
product was unveiled at the 4th Decennial Conference on Nosocomial and
Healthcare-Associated Infections held in Atlanta. Recent outbreaks of
Legionnaires' disease and national media attention regarding the transmission of
Legionella have created a heightened awareness about the role that contaminated
water systems play in nosocomial infections.
The Reservoir Metering System is a non-halogen disinfection system that
effectively treats large volumes of water with ionic silver compounds. Designed
to be a cost effective alternative to the use of halogens (chlorine) for water
disinfection in either single pass or re-circulating systems, RMS technology
delivers ionic silver using proprietary assayed electrodes. The ions are metered
into the process water by dosing pumps based upon flow rates to ensure precise
dosage of ions. Generation of the ion concentrate is produced off-line by the
RMS without utilizing the process water, enabling the equipment to produce ions
more effectively and efficiently than conventional ionization systems.
In addition to the RMS silver ion product, the Company moved forward with its
antimicrobial product line featuring Axenohl(TM) (Axen(TM)). The Company has
developed equipment to dispense Axen in measured doses to municipal, commercial
and point-of-use water supplies to kill bacteria, viruses and fungi originating
from the water source or the delivery infrastructure. Axen may be used to
replace, or drastically reduce, halogens (e.g. chlorine) as the primary method
of disinfection. International trials of the system are progressing well, and
the Company expects to begin marketing the Axen product for water treatment
later in the year.
The Company has also established a veterinary line of products featuring Axen
including antimicrobial shampoo, hoof spray, wound salve and stall and kennel
spray. These products will be launched in June 2000.
The Company plans to launch a consumer line of products featuring Axen in the
coming quarter. The first products to launch will be antimicrobial soap and hand
lotion.
Axenohl(TM)(Axen(TM)) is a patent-pending, non-toxic aqueous disinfectant. Based
upon proprietary ionization stabilization technology, Axenohl does not include
the use of traditional disinfectants such as quaternary ammonium salts, phenols,
glutaraldehyde, chlorine or bromine compounds. Axenohl enhances the disinfection
properties of halogens (chlorine) at reduced levels and is a cost effective,
stand alone alternative to halogens in many markets where conventional
disinfection methodologies are employed. Innovative Medical Services will market
Axenohl to the medical, dental and food processing markets in addition to the
commercial and consumer drinking water markets in conjunction with IMS'
Nutripure line of water treatment systems.
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2000 VERSUS THREE
MONTHS ENDED APRIL 30, 1999
Revenues of $357,800 in the third quarter ended April 30, 2000 were 69% lower
than the $1,169,900 in revenues reported for the same quarter ended April 30,
1999. Fillmaster Purification System sales in the 2000 quarter were $206,600 and
replacement filter sales were $123,000. In the 1999 quarter, Fillmaster
Purification System sales were $922,100 and replacement filter sales were
$247,800. As anticipated, filter sales are recovering from the second quarter of
the fiscal year. Net loss for the quarter ended April 30, 2000 was $662,300
versus net income of $196,300 for the same quarter in 1999. The decreased income
was due to decreased sales and an increase in General and Administrative
expenses as the Company positions for anticipated rapid growth activity related
to new ventures, including expanded retail distribution of the Nutripure 2000
home water system, Nutripure.com and the new silver ion technologies.
During the third quarter, management worked to strengthen the Company by adding
key personnel in the areas of sales, marketing, infectious diseases management
and web design. The Company continues its marketing campaigns to expand into new
markets while pursuing development of future products.
Gross profit in the most recent quarter was $123,600 versus $672,900 in the
year-earlier quarter. Gross profit percentage of 35% in the 2000 quarter was
lower versus the 58% gross profit percentage in the 1999 quarter. The decrease
in gross profit percentage was largely due to applying fixed production labor
costs to the unexpected lower sales volume for the quarter.
The Company is transitioning from a niche market company that provides pharmacy
water purification to an international company containing several divisions to
manage new products and programs in consumer and commercial water treatment,
direct-to-consumer e-commerce and retail distribution of multiple product lines.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 2000 VERSUS NINE
MONTHS ENDED APRIL 30, 1999
Revenues of $1,909,600 in the nine months ended April 30, 2000 were 30% lower
than the $2,733,400 in revenues reported for the nine months ended April 30,
1999. Fillmaster Purification System sales in the nine months ended April 30,
2000 were $1,042,900 and replacement filter sales were $377,500. In the prior
period, Fillmaster Purification System sales were $2,035,500 and replacement
filter sales were $665,400. Sales of Fillmaster Purification System decreased
49% and sales of filter replacements decreased 43% during the recent fiscal
period.
The decrease in Fillmaster Purification System and replacement filter sales was
partially offset by the sale of an internally developed e-commerce supersite.
During the period the Company sold the website to its new subsidiary,
Nutripure.com, for an initial purchase price of $1,000,000. Of this amount,
$665,200 was eliminated from sales in inter-company consolidation adjustments.
The remaining $334,800 represents the cost of the website development not
capitalized in previous quarters. During the period Nutripure.com paid the
Company $492,000 of the purchase price for the website. The sale of the website
during the period increased total sales 18%.
Gross profits for the nine months ended April 30, 2000 were $1,100,300 versus
$1,682,500 in 1999. The gross profit of 58% in 2000 was lower versus the 62%
gross profit in 2000. The gross profit decrease resulting from decreased
Fillmaster and replacement filter sales was largely offset by the website sale
described above.
Net loss for first nine months ended April 30, 2000 was $475,000 versus a net
income of $490,500 for the same period last year.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended April 30, 2000, the Company's current assets to
liabilities ratio rose from 1.95 to 5.87. Current assets increased $1,631,900
from $2,114,400 to $3,746,300. Current assets at April 30, 2000 include an
increase of $1,391,200 in cash on hand and an increase of $353,900 in accounts
receivable. Notes receivable decreased $122,900 while inventories remained
constant during the period. Current liabilities decreased $446,000 from
$1,084,100 to $638,100. The decrease in current liabilities was the result of
the Company's ability to pay down accounts payable by $273,000 and notes payable
by $185,700 during the recent period. The company has no long-term debt.
Cash flows used from operations were $475,000 in the first nine months of fiscal
year 2000. Cash flows from operations were $490,500 for the same period in 1999.
For those periods, cash flows used in investing activities included,
respectively, $547,100 and $120,800 for the purchase of fixed assets. Cash flows
used in investing activities for the recent period included $334,800 capitalized
website cost by Nutripure.com. Cash flows from financing activities in the
current period were $3,108,700 from the sale of common stock including
$2,596,500 from proceeds received through private placements of IMS and
Nutripure.com. Of the $2,596,500, $200,000 was received through a private
placement of 160,000 common shares of Innovative Medical Services at $1.25 per
share in October 1999; $500,000 received from the private sale of 1,000,000
shares of Nutripure.com common stock in Dec-Feb 2000; and $1,896,500 received
through a private placement of 607,411 units sold at $3.375 per unit in March
2000. Each unit contained one share of Innovative Medical Services common stock
and one warrant exercisable at $5.25 expiring March 2001. In addition,
approximately $500,000 was received from exercise of outstanding stock options
which management believes were largely exercised in anticipation of the
Nutripure.com stock dividend. The total increase in cash and cash equivalents
for the 2000 nine-month period was $1,413,200 as compared to an increase of
$155,600 during the same period in 1999.
<PAGE>
PART 2 OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
The following is an update of developments in the previously disclosed
litigation involving the Company filed in the Circuit Court of Pinellas County,
Florida by Zedburn Corporation, against the Company for breach of contract in
October 1997. The Company has filed counterclaims based upon the Racketeer
Influenced and Corrupt Organization (RICO) Act against Mr. Reitz, Zedburn
Corporation, Capital Development Group, Steven Durland and other defendants. 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. In
October 1997, Mr. Reitz and Zedburn filed for protection under the Federal
bankruptcy laws. In August 1998, Mr. Reitz voluntarily dismissed his bankruptcy
and as a result thereof the Company has named Mr. Reitz as a defendant to its
counterclaims.
The Company believes that the defendants had perpetrated similar schemes against
other parties. The Company also believes it has substantially completed
discovery and compiled compelling evidence to prove its claims.
Several of the Defendants filed Motions to Dismiss the Company's counterclaims.
A hearing on the Motions was held on October 1, 1998. Certain of the Motions
were granted pending the Company's amendment of its Counterclaim. The Company
amended its Counterclaims in accordance with the judge's rulings. Certain
Defendants filed second Motions to Dismiss the amended Counterclaims. A hearing
on these latest motions was held in March 1999, before a different judge than
the judge who ruled on the first motions. On April 20,1999, Orders were entered
granting the Defendants' Motions to Dismiss. However these Orders did not state
the basis for the Orders, nor was the Company's legal counsel provided notice of
the Orders or a copy of the new judge's correspondence offering a "formal
ruling" upon request. In May 1999 the Company filed an Appeal of the Orders and
Motions for Reconsideration based upon inconsistency of the Orders with the
previous judge's rulings and the lack of notice to the Company. The Company
believes that its Appeal and Motions have merit and will be granted. In any
event the Company intends to pursue a trial as soon as possible. As of June 8,
2000, no ruling has been received on the Company's Appeal.
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 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.
ITEM 2. CHANGES IN SECURITIES
In March 2000, the Company issued 607,411 units, consisting of one share of
common stock and one warrant to purchase an additional share of common stock @
$5.25 per share on or before March 31, 2001 for $1,896,500 ($3.375 per unit) in
a private placement of the units to 15 accredited investors.
With respect to the sales made, the Company relied on Section 4(2) of the
Securities Act of 1933, as amended. No advertising or general solicitation was
employed in offering the securities. The securities were offered to accredited
investors who were provided all of the current public information available on
the Company.
<PAGE>
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
Change in Auditor filed June 12, 2000
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
<PAGE>
