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 QUARTERLY PERIOD ENDED DECEMBER 31, 1998.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
___________to_____________.
Commission file number: 0-23153
VOLU-SOL, INC.
(Exact name of small business issuer as specified in its charter)
Utah 87-0543981
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5095 West 2100 South
Salt Lake City, Utah 84120
(Address of principal executive offices) (Zip Code)
(801) 974-9474
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required 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 [ ]
As of February 8, 1999, the registrant had issued and outstanding 2,681,169
shares of Common Stock, par value $.0001.
Transitional Small Business Disclosure Format (Check One):
Yes [X] No [ ]
Page 1
<PAGE>
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet as of
December 31, 1998 ....................................................3
Unaudited Condensed Consolidated Statements of Operations
for the Three Months Ended December 31, 1998 and 1997 ...............4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended December 31, 1998 and 1997 ................5
Notes to Unaudited Condensed Consolidated Financial Statements........6
2. Management's Discussion and Analysis or Plan of Operation.............7
PART 2. OTHER INFORMATION................................................... 10
Page 2
<PAGE>
<TABLE>
<CAPTION>
VOLU-SOL, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheet
(UNAUDITED)
December 31, 1998
- --------------------------------------------------------------------------------
Assets
Current Assets:
<S> <C>
Cash $ 9,191
Accounts receivable, less allowance for
doubtful accounts of $3,176 81,950
Inventories 168,870
------------
Total current assets 260,011
Property and equipment, net 165,972
Other assets 24,347
------------
Total assets $ 450,330
============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 19,592
Accrued liabilities 39,933
Preferred stock dividends payable 29,313
Accrued interest payable 19,213
Notes payable 346,149
------------
Total current liabilities 454,200
------------
Commitments and contingencies --
Stockholders' equity:
Preferred Stock, $.0001 par value; 10,000,000
shares authorized:
10,363 shares issued and 5,863 shares
outstanding (aggregate liquidation preference
$ 2,834,277) 2,274,819
Common Stock, par value $.0001; 50,000,000
shares authorized, 2,681,169 shares issued and
outstanding 268
Additional paid-in capital 1,911,541
Preferred stock subscriptions receivable (900,000)
Accumulated deficit (3,290,498)
------------
Total stockholders' equity (3,870)
------------
Total liabilities and stockholders' equity $ 450,330
============
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
</TABLE>
Page 3
<PAGE>
VOLU-SOL, INC. AND SUBSIDIARY
Condensed Consolidated Statement of Operations
(UNAUDITED)
Three Months Ended December 31,
- --------------------------------------------------------------------------------
1998 1997
---------------------------
Sales $ 133,919 $ 121,401
Cost of goods sold 93,101 120,419
---------------------------
Gross Margin 40,818 982
Selling, general and administrative expenses 277,998 171,712
---------------------------
Loss from operations (237,180) (170,730)
Other income (expense):
Interest Income 85 899
Interest Expense (7,708) (9,843)
---------------------------
Net loss before provision for income taxes (244,803) (179,674)
Provision for income taxes -- --
---------------------------
Net loss $ (244,803) $ (179,674)
===========================
Dividends on Series A preferred stock (29,313) (10,082)
===========================
Net loss applicable to common stock $ (274,116) $ (189,756)
===========================
Net loss per common share - basic and diluted (0.11) (0.09)
===========================
Weighted average common shares outstanding 2,446,288 2,111,216
===========================
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
Page 4
<PAGE>
VOLU-SOL, INC. AND SUBSIDIARY
Condensed Consolidated Statement of Cash Flows
(UNAUDITED)
Three Months Ended December 31,
1998 1997
---------------------------
Cash flows from operating activities:
Net loss $(244,803) $(179,674)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 19,975 19,646
Preferred stock issued for services 140,000 --
(Increase) decrease in:
Accounts receivable (19,242) 7,059
Inventories (299) (34,108)
Other assets 12,117 (700)
Decrease in:
Accounts payable (22,942) (8,924)
Accrued liabilities (15,526) (42,180)
---------------------------
Net cash used in
operating activities: (130,720) (238,881)
---------------------------
Cash flows from Investing activities -- --
Cash flows from financing activities:
Proceeds from sale of preferred stock 53,500 50,000
Proceeds from notes payable 70,000 --
Net cash provided by
financing activities 123,500 50,000
---------------------------
Net decrease in cash (7,220) (188,881)
Cash, beginning of period 16,411 337,691
---------------------------
Cash, end of period $ 9,191 $ 148,810
===========================
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
Page 5
<PAGE>
VOLU-SOL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) PRESENTATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of
Volu-Sol, Inc. and Volu-Sol Reagents Corporation, its wholly owned subsidiary
(collectively, the "Company"), have been prepared consistent with generally
accepted accounting principles for interim financial information in accordance
with the instructions to Form 10-QSB and Item 310 of Regulation S-B.
Accordingly, such unaudited financial statements 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 only of normal recurring adjustments, necessary to
present fairly the financial position, results of operations and cash flows of
the Company for the interim periods presented, have been included. Operating
results for the three months ended December 31, 1998 are not necessarily
indicative of the results that may be expected for the year ending September 30,
1999. The Company suggests that these condensed consolidated financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-KSB for the year ended September 30,
1998.
(2) RELATED-PARTY TRANSACTIONS
From March 5, 1997 through December 31, 1998, the Company borrowed money from
Biomune Systems, Inc. ("Biomune,"the Company's former parent) totaling $486,500
(through the date of this report), of which $372,149 remains outstanding as of
the date of this report, and is evidenced by a promissory note. The note bears
interest at an annual rate of ten percent and is due on demand. Accrued but
unpaid interest on the note totaled $19,213 at December 31, 1998 and is included
in "accrued interest payable" in the accompanying condensed consolidated balance
sheet as of December 31, 1998. The Company anticipates repaying this debt from
proceeds raised in a private placement of the Company's Series A Preferred Stock
(see Note 4).
(3) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market value. Inventories consist of the following as of December 31, 1998:
Raw materials, packaging and supplies $ 47,281
Instruments, biological stains and reagents 121,589
----------
$ 168,870
==========
(4) SERIES A PREFERRED STOCK
As of December 31, 1998, the Company has $900,000 of subscriptions receivable
from the sale of 4,500 shares of Series A Preferred Stock. During the three
months ended December 31, 1998, the Company sold 267.50 shares of Series A
Preferred Stock for $53,500 in cash. During the three months ended December 31,
1998, the Company issued a total of 700 shares of the company's Series A
Preferred Stock as commissions for consulting services provided to the company.
The Series A Preferred Stock became convertible into Common Stock beginning
January 1, 1998. The "conversion price," which is the basis for such conversion,
is the lesser of (i) 80
Page 6
<PAGE>
% of the average closing bid price of the Company's Common Stock for the three
trading days immediately preceding the date of conversion or (ii) $1.25 per
share. An investor that subscribed to 6,000 shares of the Company's Series A
Preferred at $200 per share has paid $300,000 of a total $1,200,000
subscription. The investor has notified the Company that it will pay the
$900,000 balance of its subscription at such time as the Company begins trading.
(5) NET LOSS PER COMMON SHARE
Basic net loss per common share ("Basic EPS") excludes dilution and is computed
by dividing net loss by the weighted average number of common shares outstanding
during the period. Diluted net loss per common share ("Diluted EPS") reflects
the potential dilution that could occur if stock options or other contracts to
issue Common Stock including convertible Preferred Stock were exercised or
converted into Common Stock. The computation of Diluted EPS does not assume
exercise or conversion of securities that would have an anti-dilutive effect on
net loss per common share. Because the Company has incurred a loss for the
periods presented, no exercises or conversions have been considered as they
would be anti-dilutive, thereby decreasing the net loss applicable to common
shares.
During the three months ended December 31, 1998 the Company issued 469,762
shares of Common Stock, as part of the original divestiture, in the nature of a
dividend.
At December 31, 1998, there were outstanding options to purchase 527,350 shares
of Common Stock and there were 5,862.65 shares of Series A Preferred Stock
convertible into a minimum of 938,024 shares of Common Stock, neither of which
are included in the computation of Diluted EPS because they would be
anti-dilutive. The options all relate to options to purchase Biomune common
stock outstanding at the time of the divestiture. The holders of such Biomune
options were also granted options to purchase Volu-Sol common stock.
(6) SUBSEQUENT EVENTS
As of February 8, 1999 the Company had borrowed an additional $26,000 from
Biomune, Inc. the Company's former parent.
ITEM 2. Management's Discussion and Analysis or Plan of Operation
Until October 1, 1997, the Company was a division and then a wholly
owned subsidiary of Biomune. Effective October 1, 1997, Biomune divested itself
of the Company by distributing Volu-Sol Common Stock to holders of Biomune
Common Stock as of March 5, 1997. Since October 1, 1997, the Company has
operated as a separate entity. The following discussion and analysis should be
read in conjunction with the Company's unaudited condensed consolidated
financial statements and the notes thereto contained elsewhere in this report.
The discussion of these results should not be construed to imply that any
condition or circumstance discussed herein will necessarily continue in the
future.
When used in this report, the words "believes," "anticipates,"
"expects," and similar expressions are intended to identify forward-looking
statements. The matters modified by such phrases are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date of this report, or to reflect the
Page 7
<PAGE>
occurrence of unanticipated events. A more detailed description of such risks is
contained in the Company's annual report on form 10-KSB for the year.
Results of Operations
Three Months Ended December 31, 1998 Compared to Three Months Ended December 31,
1997
During the three months ended December 31, 1998, the Company's revenues
totaled $133,919 compared to $121,401 for the three months ended December 31,
1997. This increase in revenues resulted primarily from the sales of reagents.
Cost of revenues for the three months ended December 31, 1998 totaled
$93,101 compared to $120,419 for the three months ended December 31, 1997. The
overall gross margin for the three months ended 1998 was 30% of revenues
compared to less than 1% of revenues for the comparable three months ended in
1997. The increase in the gross margin on sales of stains and reagents is
attributable to shipping charges that are now being paid by customers as well as
a price increase that was implemented in March 1998. Also, the increased gross
margin results from a continued effort to create a leaner production team and
better inventory management.
Selling, general and administrative expenses totaled $277,998 for the
three months ended December 31, 1998, compared to $171,712 for the three months
ended December 31, 1997, an overall increase of $106,286. This increase is
primarily attributable to consulting expenses paid through the issuance of the
Company's Series A Preferred Stock, at a value of $140,000.
Interest expense decreased from $9,843 for the three months ended
December 31, 1997 to $7,708 for the three months ended December 31, 1998. The
decrease in interest expense is due to repayment of some of the borrowings from
Biomune, the Company's former parent.
The Company incurred a net loss applicable to common shares of $274,116
for the three months ended December 31, 1998 compared to a net loss applicable
to common shares of $189,756 for the three months ended December 31, 1997. This
increase is due primarily to consulting expenses paid through the issuance of
the Company's Series A Preferred Stock.
It is anticipated that the net losses applicable to common shares will
increase in the future due to dividend requirements associated with the Series A
Preferred Stock. As of December 31, 1998, the Company had remaining
subscriptions receivable totaling $900,000. If only those subscriptions are
collected and no further sales of Series A Preferred Stock are made, the net
loss applicable to common shares would increase by approximately $225,000 for
the one-time charge related to the beneficial conversion feature and by
approximately $90,000 per year for recurring dividends at 10 percent.
Liquidity and Capital Resources
The Company currently is unable to finance its operations solely from
its cash flows from operating activities. From October 1, 1993 through December
31, 1998, Biomune financed the Company's operations through a series of loans
and other capital contributions totaling approximately $2,900,000. Of this
amount, $372,149 represents a note payable to Biomune through the date of this
report which bears interest at the rate of 10% per year and which is payable on
demand. The Company has announced its intentions to sell up to 12,000 shares of
its Series A Preferred Stock for $2,400,000. The Series A Preferred Stock is
convertible into Common Stock of the Company. The "conversion price" which is
the basis for such conversion is the lesser of
Page 8
<PAGE>
(i) 80% of the average closing bid price of the Company's Common Stock for the
three trading days immediately preceding the date of conversion or (ii) $1.25
per share. The Company issued a total of 967.50 shares of Series A Preferred
Stock during the period covered by this report.
The Company intends to use the proceeds from the sale of the Series A
Preferred to repay its indebtedness to Biomune ($372,149 as of the date of this
Report), pay the expenses of the offer and sale of the stock and expenses
incurred in the divestiture of the Company, acquire yet-to-be identified
complimentary businesses or product rights, and supplement working capital. The
Company believes that cash generated by operations, together with the proceeds
from the sale of its securities will be sufficient to meet its capital
requirements for a minimum of twelve months.
As of December 31, 1998, the Company had cash of $9,191 and negative
working capital of $194,189 compared to cash of $16,411 and negative working
capital of $145,665 as of December 31, 1997.
During the three months ended December 31, 1998, the Company's
operating activities used cash of $130,720, much of which was provided by the
sale of Series A Preferred Stock and funds borrowed from Biomune. During the
three months ended December 31, 1997, the Company's operating activities used
cash in the amount of $238,881, which was provided by the sale of Series A
Preferred Stock and funds borrowed from Biomune.
The Company has no credit facility with any commercial lending
institution. In the past, the Company borrowed and received capital from time to
time from Biomune, but the Company has no formal financing arrangement,
agreement or understanding with Biomune or any other party to provide debt
financing in the future.
The unaudited condensed consolidated financial statements of the
Company have been prepared on the assumption that the Company will continue as a
going concern. The Company's product line is limited and the Company has relied
upon borrowings and financing from the sale of its equity securities to sustain
operations. Additional financing will be required if the Company is to continue
as a going concern. If such additional funding cannot be obtained, the Company
may be required to scale back or discontinue its operations. Even if such
additional financing is available to the Company, there can be no assurance that
it will be on terms favorable to the Company. In any event, such financing will
result in immediate and possible substantial dilution to existing shareholders.
Forward-looking Statements and Certain Risk Factors
Statements which are not historical facts contained in this report are
forward-looking statements. Section 27A of the Securities Act of 1933, as
amended, provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, the Company cautions that a variety of
factors could cause the Company's actual results to differ materially from
anticipated results or other expectations expressed in this report. The
forward-looking statements contained in this Management's Discussion and
Analysis or Plan of Operation also contemplate a number of risks and
uncertainties that could cause actual results to differ from projected or
anticipated results. The risk factors discussed in Part I, Item 1 ("Business")
and in the "Management's Discussion and Analysis or Plan of Operation" (Item 6)
of the Company's Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1998 may also affect actual operating results.
PART II - OTHER INFORMATION
Page 9
<PAGE>
ITEM 2. Changes in Securities
Unregistered sales of equity securities during quarter (other than in
reliance on Regulation S).
The following information sets forth certain information for all
securities the Company sold during the quarter ended December 31, 1998, without
registration under the Securities Act of 1933 (the "Securities Act").
During the three months ended December 31, 1998, the Company sold
267.50 shares of Series A Preferred Stock for cash proceeds totaling $53,500.
All sales were so accredited investors (as that term is defined in Rule 501
under Regulation D).
The Series A Preferred is convertible to common stock at the holder's
option into the number of shares of the Company's common stock determined by
dividing $200.00 plus any accrued and unpaid regular or special dividends by an
amount equal to the lesser of (i) the market price of the common stock on the
date of conversion less 20%; or (ii) $1.25. In the event of a merger,
consolidation or sale of all or substantially all of the assets of the Company
or a similar business combination involving the Company, all of the shares of
Series A Preferred, at the option of the holder, may be converted into the
number of shares of common stock into which the shares of Series A Preferred are
convertible at the time of the closing of such transaction. Based on a
conversion factor of $200/$1.25, the number of shares issued during the last two
fiscal years would be convertible into a total of 722,520 shares of common stock
as of the date of this Report.
Notwithstanding the conversion rights of the Series A Preferred, no
single holder (or group of affiliated holders) may convert shares of Series A
Preferred into shares of common stock in an amount that would result in such
holder's aggregate ownership of shares of common stock exceeding 4.9% of the
total number of issued and outstanding shares of common stock.
In making the foregoing offers and sales of restricted and unregistered
securities , the Company relied on the provisions of Sections 3(b) and 4(2) of
the Securities Act and rules and regulations promulgated thereunder, including,
but not limited to Rules 505 and 506 of Regulation D, which exempts transactions
that do not involve any public offering of securities from registration under
the Securities Act. The offer and sale of the securities in each instance was
not made by any means of general solicitation, the securities were acquired by
the investors without a view toward distribution, and all purchasers represented
to the Company that they were sophisticated and experienced in such transactions
and investments and able to bear the economic risk of their investment. A legend
was placed on the certificates and instruments representing these securities
stating that the securities evidenced by such certificates or instruments, as
the case may be, have not been registered under the Securities Act and setting
forth the restrictions on their transfer and sale. Each investor also signed a
written agreement that the securities would be sold only upon registration under
the Securities Act or pursuant to an applicable exemption from such
registration.
ITEM 4. Exhibits and Reports on Form 8-K
(a) Exhibits Required by Item 601 of Regulation S-B
Exhibit No. Description
27 Financial Data Schedule
Page 10
<PAGE>
(b) Reports on Form 8-K
On October 5, 1998, the Company filed a Current Report on Form 8-K to
report its agreement with Nasdaq regarding the issuance of additional shares as
part of the divestiture of the Company from Biomune.
On October 15, 1998, the Company filed a Current Report on Form 8-K to
report the change of its independent public accountants.
Page 11
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VOLU-SOL, INC.
Date: February 5, 1999 By: /s/ W. W. Kirton, III
---------------------------
Wilford W. Kirton, III,
Chief Executive Officer
Date: February 5, 1999 By: /s/ Michael G. Acton
---------------------------
Michael G. Acton,
Acting Principal Accounting
Officer
A:\10QSB.WPD
Page 12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,191
<SECURITIES> 0
<RECEIVABLES> 85,126
<ALLOWANCES> 3,176
<INVENTORY> 168,870
<CURRENT-ASSETS> 260,011
<PP&E> 426,706
<DEPRECIATION> 260,734
<TOTAL-ASSETS> 450,330
<CURRENT-LIABILITIES> 454,200
<BONDS> 0
0
2,274,819
<COMMON> 268
<OTHER-SE> 2,278,957
<TOTAL-LIABILITY-AND-EQUITY> 450,330
<SALES> 133,919
<TOTAL-REVENUES> 134,004
<CGS> 93,101
<TOTAL-COSTS> 371,099
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,708
<INCOME-PRETAX> (244,803)
<INCOME-TAX> 0
<INCOME-CONTINUING> (244,803)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (244,803)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
