<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
or
[_] TRANSITION REPORT UNDER SECTION 13
OR 15 (d) OF THE EXCHANGE ACT
For the transition period from ______ to ______
Commission File Number 1-15445
DRUGMAX.COM, INC.,
(Exact Name of Small Business Issuer as Specified in Its Charter)
STATE OF NEVADA 34-1755390
--------------- ----------
(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
12505 Starkey Road, Suite A, Largo, Florida 33773
-------------------------------------------------
(Address of Principal Executive Offices)
(727) 533-0431
-------------
(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. [X] Yes [_] No
As of September 30, 2000, there were 6,417,754 outstanding shares of the
Issuer's common stock, par value $.001 per share.
Transitional Small Business Disclosure Formats (check one):
Yes [_] No [X]
<PAGE>
DRUGMAX.COM, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 2000 March 31, 2000
---------------------- ----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,475,136 $ 6,020,129
Accounts receivable, net of allowance for doubtful accounts
of $472,870 and $113,282 10,399,412 4,106,105
Inventory 9,262,283 1,416,241
Due from affiliates 50,349 13,564
Prepaid expenses and other current assets 409,377 126,542
---------------------- ----------------------
Total current assets 25,596,557 11,682,581
Property and equipment, net 719,422 693,340
Intangible assets (primarily goodwill), net 28,432,960 26,090,635
Stockholder notes receivable 100,000 -
Notes receivable - 37,614
Deposits 8,242 9,742
---------------------- ----------------------
Total assets $ 54,857,181 $ 38,513,912
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,326,942 $ 3,170,890
Accrued expenses 496,688 442,598
Credit lines payable 7,828,668 2,391,095
Notes payable - current portion 236,147 4,872
Due to affiliates 529,370 511,717
---------------------- ----------------------
Total current liabilities 21,417,815 6,521,172
Notes payable - long term 1,394,358 -
---------------------- ----------------------
Total liabilities 22,812,173 6,521,172
---------------------- ----------------------
Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares authorized;
no preferred shares issued or outstanding - -
Common stock, $.001 par value; 24,000,000 shares authorized;
6,417,754 and 6,200,499 shares issued and outstanding 6,419 6,202
Additional paid-in capital 36,279,447 34,079,957
Accumulated deficit (4,240,858) (2,093,419)
---------------------- ----------------------
Total stockholders' equity 32,045,008 31,992,740
---------------------- ----------------------
Total liabilities and stockholders' equity $ 54,857,181 $ 38,513,912
====================== ======================
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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<PAGE>
DRUGMAX.COM, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months Ended For the Three Months Ended For the Six Months Ended For the Six Months Ended
September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999
---------------------------------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C>
Net revenues $ 38,827,714 $ 16,799 $ 67,862,991 $ 50,697
Cost of goods sold 37,463,122 11,804 65,495,437 26,590
------------------ ------------------ ------------------ ------------------
Gross profit 1,364,592 4,995 2,367,554 24,107
Selling, general and
administrative
expenses 1,819,256 168,810 4,182,445 270,117
------------------ ------------------ ------------------ ------------------
Operating loss (454,664) (163,815) (1,814,891) (246,010)
------------------ ------------------ ------------------ ------------------
Other income (expense):
Interest income 74,689 224 139,043 559
Other Income 20 360 20 360
Interest expense (247,655) (3,827) (471,611) (4,417)
------------------ ------------------ ------------------ ------------------
Total other expense (172,946) (3,243) (332,548) (3,498)
------------------ ------------------ ------------------ ------------------
Net loss $ (627,610) $ (167,058) $ (2,147,439) $ (249,508)
================== ================== ================== ==================
Basic and diluted loss
per share $ (0.10) $ (0.06) (0.34) (0.09)
================== ================== ================== ==================
Basic and diluted
weighted average
number of common
shares outstanding 6,417,754 2,687,794 6,396,385 2,681,496
================== ================== ================== ==================
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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<PAGE>
DRUGMAX.COM, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months For the Six Months
Ended Ended
September 30, 2000 September 30, 1999
----------------------- -----------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,147,439) $ (249,508)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 1,433,279 6,648
Changes in operating assets and liabilities net of effects from purchase of
Valley Drug Company:
Accounts receivable, net (2,814,670) (1,572)
Inventory (1,155,406) (6,989)
Due from affiliates (36,785) -
Prepaid expenses and other current assets (249,917) (197,927)
Shareholder notes receivable 70,000 -
Notes receivable 37,615 -
Deposits 1,500 180
Accounts payable 5,195,498 62,719
Accrued expenses (126,802) 112,770
----------------------- -----------------------
Net cash provided by (used in) operating activities 206,873 (273,679)
Cash flows from investing activities:
Purchases of property and equipment (63,895) -
Increase in intangible assets (50,163) -
Cash paid for acquisitions, net (1,757,481) -
----------------------- -----------------------
Net cash used in investing activities (1,871,539) -
Cash flows from financing activities:
Net change under revolving line of credit agreements 1,223,573 -
Payments of long-term obligations (121,553) -
Repayment of principal on note payable - (2,277)
Proceeds from related party obligation - 200,000
Proceeds from issuance of note payable - 23,603
Proceeds from affiliates 17,653 -
----------------------- -----------------------
Net cash provided by financing activities 1,119,673 221,326
----------------------- -----------------------
Net decrease in cash and cash equivalents (544,993) (52,353)
Cash and cash equivalents at beginning of period 6,020,129 56,986
----------------------- -----------------------
Cash and cash equivalents at end of period $ 5,475,136 $ 4,633
======================= =======================
Supplemental disclosures of cash flow information:
Cash paid during period for interest $ 482,119 $ 189
======================= =======================
Cash paid for income taxes $ - $ -
======================= =======================
Supplemental schedule of non-cash investing and financing activities:
DrugMax.com, Inc. purchased all of the capital stock of Valley Drug
Company for $1,757,481 in cash plus 217,255 shares of its common stock.
In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $ 14,059,822
Cash and stock issued for Valley capital stock 3,957,188
----------------------
Liabilities Assumed $ 10,102,634
======================
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
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<PAGE>
DrugMax.com, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
For the Three-and Six-Month Periods Ended September 30, 2000 and 1999.
NOTE A-BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of DrugMax.com, Inc. and its wholly-owned subsidiaries: Discount Rx,
Inc., Valley Drug Company, Desktop Corporation and its subsidiary Desktop
Ventures, Inc, and Desktop Media Group, Inc.; and its 70% owned subsidiary
VetMall, Inc. (collectively referred to as the "Company"). All intercompany
balances and transactions have been eliminated.
In March 2000, Becan Distributors, Inc., the Company's wholly owned
subsidiary, was merged into the Company. All Becan financial activity has been
included as a division of the Company.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring items) considered necessary for a fair presentation have
been included. Interim results are not necessarily indicative of the results
that may be expected for a full year. These statements should be read in
conjunction with the consolidated financial statements and footnotes included in
the Company's Form 10-KSB/A as of and for the year ended March 31, 2000, and as
of and for the period September 8, 1998 through March 31, 1999.
NOTE B - RECENTLY ISSUED AUTHORITATIVE GUIDANCE
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101, as amended, provides guidance related to revenue
recognition issues based on interpretations and practices followed by the SEC.
Management has determined that the adoption of SAB 101 did not have a material
impact on its September 30, 2000, condensed consolidated financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued,
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities.", which
will be effective for the Company on April 1, 2001. SFAS 133 establishes
accounting and reporting standards for derivative instruments embedded in other
contracts, and for hedging activities. SFAS 133 as amended by SFAS 137 and 138,
requires, among other things, that all derivatives be recognized in the
consolidated balance sheets as either assets or liabilities and measured at fair
value. The corresponding derivative gains and losses should be reported based
upon the hedge relationship, if such a relationship exists. Changes in the fair
value of derivatives that are not designated as hedges or that do not meet the
hedge accounting criteria in SFAS 133, are required to be reported in income.
The Company is in the process of quantifying the impact of SFAS 133 on its
consolidated financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation". FIN 44
clarifies the application of APB Opinion No. 25 regarding (a) the definition of
employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a stock option plan qualifies as a noncompensatory plan, (c)
the accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions cover specific events that occur after either December
15, 1998, or January 12, 2000. Management believes that the adoption of FIN 44
will not have a material effect on the financial position or results of
operations of the Company.
NOTE C - ACQUISITIONS
In November 1999, the Company acquired all of the outstanding shares of
common stock of Becan Distributors, Inc. ("Becan"), a wholesale distributor
primarily of pharmaceutical products and, to a lesser extent, over-the-counter
drugs and health and beauty care products. Becan had net revenues of
approximately $31.1 million and $26.5 million for its fiscal year ended March
31, 1999, and for its six months ended September 30, 1999,
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<PAGE>
respectively. Results of operations for the fiscal year ended March 31, 2000,
include the results of operations of Becan from November 26, 1999, through March
31, 2000.
In March 2000, the Company acquired Desktop Corporation ("Desktop") and a
70% interest in VetMall, Inc. ("VetMall"). Desktop is an Internet e-commerce
solutions provider specializing in the design, development and delivery of
technology solutions by providing custom programming services and web hosting
services. VetMall is an e-commerce pet care product sales distributor. Desktop
had revenues and a net loss for the year ended March 31, 2000, of $2.4 million
and ($1.9) million, respectively. Results of operations for the fiscal year
ended March 31, 2000, include the results of operations of Desktop and VetMall
from March 20, 2000 through March 31, 2000.
On April 19, 2000, DrugMax Acquisition Corporation ("Buyer"), a wholly
owned subsidiary of the Company, Valley Drug Company ("Valley"), Ronald J.
Patrick ("Patrick") and Ralph A. Blundo ("Blundo" and together with Patrick, the
"Sellers") signed a Merger Purchase Agreement (the "Agreement"). In connection
with the merger, the Sellers received an aggregate of 226,666 shares of the
Company's common stock and cash in the amount of $1.7 million. The Sellers were
granted the right to include their shares in any registration filed by the
Company until such time as their shares of the Company may be sold pursuant to
Rule 144 of the General Rules and Regulations promulgated under the Securities
Act of 1933, as amended. In addition, the Sellers deposited 22,666 shares of the
Company's common stock with an escrow agent (the "Holdback Shares"). Based on
audited financial statements of Valley as of April 19, 2000, the stockholders'
equity amounted to $400,667 which was $141,160 less than the threshold amount of
$541,827. Therefore, 9,411 of the Holdback Shares will be returned to the
Company. After consideration of the return of the Holdback Shares, a total of
217,255 shares at $10.125 per share were issued for the acquisition. The
acquisition was accounted for using the purchase method of accounting and
accordingly $3.6 million of goodwill was recorded. The goodwill will be
amortized over fifteen (15) years.
The results of operations of Valley are included in the condensed
consolidated financial statements from the purchase date. The Company acquired
the following assets and liabilities (net of cash received of $502) in the above
business combination:
Accounts receivable $ 3,478,637
Inventory 6,690,636
Property and equipment 67,146
Other assets 266,380
Goodwill 3,557,023
Assumption of liabilities (10,102,634)
--------------
Net value of purchased assets 3,957,188
Fair value of common stock issued 2,199,707
--------------
Cash paid for acquisitions $ 1,757,481
==============
The unaudited pro forma effects of the acquisitions of Becan, Valley,
Desktop and VetMall on the Company's revenues, net (loss) income and net (loss)
income per share, had the acquisitions occurred on April 1, 1999 are as follows:
<TABLE>
<CAPTION>
For the Six For the Six
Months Ended Months Ended
September 30, September 30,
2000 1999
----------------- ----------------
<S> <C> <C>
Revenues $ 70,679,990 $ 52,039,842
Net (loss) income (2,285,667) 294,455
Basic and diluted net (loss) income per share ($.36) $.06
</TABLE>
NOTE D - IMPAIRMENT OF LONG-LIVED ASSETS
As events and circumstances change, the Company evaluates the
recoverability of the net carrying value of its property and equipment and its
intangible assets by comparing the carrying values to the estimated future
undiscounted cash flows. A deficiency in these cash flows relative to the
carrying amounts is an indication of the
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<PAGE>
need for a write-down due to impairment. The impairment write-down would be the
difference between the carrying amounts and the fair value of these assets. A
loss on impairment would be recognized by a charge to earnings.
NOTE E - INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No. 109
("SFAS 109"), Accounting for Income Taxes. Under SFAS 109, the Company uses the
asset and liability method which recognizes the amount of current and deferred
taxes payable or refundable at the date of the financial statements as a result
of all events that have been recognized in the consolidated financial statements
and as measured by the provisions of enacted tax laws.
The Company has a gross deferred tax asset as of September 30, 2000, which
represents the potential future tax benefit associated with its operating losses
to date. Management has evaluated the available evidence regarding the Company's
future taxable income and other possible sources of realization of deferred tax
assets. As a result of the evaluation, a 100 percent valuation allowance has
been established by management against the gross deferred tax asset, as it is
more likely than not that the deferred tax asset will not be realized. The
Company continually reviews the adequacy of the valuation allowance and will
recognize deferred tax asset benefits only when a reassessment indicates that it
is more likely than not that the benefits will be realized.
NOTE F - COMMITMENTS AND CONTINGENCIES
On February 15, 2000, the Company entered into an Agreement with
Purchasepro.com, Inc. ("PPRO") wherein PPRO will design and develop a "sell-
side" private e-marketplace labeled to include the marks and logos of the
Company and powered by PPRO. The custom e-marketplace will be utilized within
the Company's web site. PPRO's development and unlimited buyer license fee for
private e-marketplace will be issued in the form of 200,000 of the Company's
warrants and revenue sharing will take place on transactions and subscriptions
resulting from the Company's marketplace. The warrants shall be exercisable, in
whole or in part, during the term commencing on the date of project completion
(the "Initial Exercise Date"), and ending at 5:00 p.m., Pacific Standard Time,
six months after the date of completion (the "Exercise Period"), and shall be
void thereafter. In consideration for the hosting, archiving, maintenance and
recurring customization of the private e-marketplace, the Company will guarantee
PPRO at least $80,000 in annual transaction revenue. The Company plans to use
the sell-side e-marketplace to primarily sell pharmaceuticals and health
supplements as well as the value added services from PPRO's preferred providers.
On April 19, 2000, in conjunction with the Valley acquisition, the Company
agreed to become an additional guarantor of the outstanding bank indebtedness of
Valley. As of September 30, 2000, Valley maintains a revolving line of credit
and a term loan with National City Bank with a combined outstanding balance of
approximately $5,682,500. The revolving line of credit and term loan are also
personally guaranteed by the former owners of Valley. In October 2000, the line
of credit and term loan with National City Bank were paid in full with the
proceeds from the Mellon Bank, N.A. refinancing (See Subsequent Events
Footnote).
On July 7, 2000, the Company entered into a consulting agreement with Marc
Mazur Consulting, Inc. ("Mazur"). Upon satisfaction by Mazur of its obligations
under the agreement, the Company will grant to Mazur warrants to purchase
200,000 shares of the Company's common stock with an exercise price of $10.00
per share. Upon issuance, these warrants will be immediately exercisable.
On August 10, 2000, the Company entered into a Consulting Agreement with
Stephen M. Watters ("Watters") for an annual fee of $100,000, payable monthly,
for a term of thirty-six months, terminating August 10, 2003. The Consulting
Agreement terminates the Employment Agreement by and between the Company and
Watters dated April 15, 1999.
On September 13, 2000, the Company entered into a letter of intent to
purchase substantially all of the assets of Penner & Welsch, Inc. ("P&W"), a
wholesale distributor of pharmaceuticals, over-the-counter products and health
and beauty care products, headquartered near New Orleans, Louisiana. Also on
that date, P&W filed a voluntary petition for Chapter 11 relief under the United
States Bankruptcy Code. The case is pending in the United States Bankruptcy
Court for the Eastern District of Louisiana. Pursuant to the letter of intent,
the Company will work with P&W, on an exclusive basis, to formulate a bankruptcy
reorganization plan, pursuant to which the Company
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<PAGE>
offered to purchase, for $750,000 worth of restricted DrugMax common stock, all
of P&W's assets and/or equity, without its liabilities, while keeping P&W's
customers in continuous service. While the Company expects that any plan of
reorganization filed by P&W will conform with the terms of the Company's letter
of intent, it can not guarantee that when filed, such plan of reorganization
will in fact conform to the terms of the Company's letter of intent, nor can the
Company guarantee that the Bankruptcy Court will confirm a bankruptcy
reorganization plan that is acceptable to the Company or that the Bankruptcy
Court will approve the transactions contemplated by the letter of intent. In
addition, even if the contemplated transactions are completed, the Company can
not guarantee that it will successfully assimilate the additional personnel,
operations, acquired technology and products of P&W into the Company's business,
or retain key personnel and customers.
In addition, on September 13, 2000, the Company entered into a management
agreement with P&W, pursuant to which it will manage the day-to-day operations
of P&W, in exchange for a management fee equal to a percentage of the gross
revenues of P&W each month. Also on September 13, 2000, the Company entered into
a financing and security agreement with P&W, pursuant to which the Company
agreed to provide P&W with a secured revolving line of credit for the sole
purpose of purchasing inventory from the Company, up to an aggregate amount of
$2.5 million as may be requested by P&W and as may be allowed by the Company in
its sole discretion. The line of credit is secured by a second lien on
substantially all of the assets of P&W, second only to P&W's primary banking
facility, as well as real estate owned by an affiliate of P&W. On October 31,
2000, the Bankruptcy Court entered a final order approving the management
agreement and financing and security agreement.
NOTE G - SEGMENT INFORMATION
The Company is organized into two strategic business units which have
separate management teams and infrastructures that offer different products and
services. Each segment requires different employee skills, technology, and
marketing strategies. The wholesale distribution segment includes traditional
wholesale, as well as internet-based distribution operations. The computer
software development segment includes the design, development and delivery of
technology solutions through custom programming services and web hosting
services. The Company evaluates the performance of each segment based upon
profit or loss from operations before income taxes and non-recurring gains or
losses.
There has been no change in the basis of segmentation or in the measurement
of segment losses since the Company's last annual report on Form 10-KSB/A.
Summarized financial information by business segment is as follows:
<TABLE>
<CAPTION>
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues from external customers
Distribution $ 38,701,038 $ 16,799 $ 67,638,518 $ 50,697
Software Development 126,676 -- 224,473 --
-------------- -------------- -------------- --------------
Total $ 38,827,714 $ 16,799 $ 67,862,991 $ 50,697
============== ============== ============== ==============
Segment loss from operations
Distribution $ (448,745) $ (163,815) $ (1,290,001) $ (246,010)
Software Development (5,919) -- (524,890) --
-------------- -------------- -------------- --------------
Total $ (454,664) $ (163,815) $ (1,814,891) $ (246,010)
============== ============== ============== ==============
September 30, 2000 March 31, 2000
------------------ --------------
Assets
Distribution $ 54,687,538 $ 38,408,017
Software Development 169,643 105,895
-------------- --------------
Total $ 54,857,181 $ 38,513,912
============== ===============
</TABLE>
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<PAGE>
There were no inter-segment sales or transfers during either the three-or
six-month periods ended September 30, 2000 or 1999. Operating loss by business
segment excludes interest income, interest expense, and other income and
expenses.
NOTE H - SIGNIFICANT EVENTS
In August 2000, the Company established its online trade exchange,
DrugMaxTrading.com, which offers one of the first business-to-business online
trade exchanges for pharmaceuticals, over-the-counter products, health and
beauty care products, and nutritional supplements dedicated exclusively to
manufacturers, distributors, wholesalers and retailers in the pharmaceutical and
over-the-counter product markets. DrugMaxTrading.com allows the Company's trade
exchange members to lower their overall costs of doing business while providing
them with wider market access and competitively priced products. Capitalizing on
the efficiencies of the Internet and its strategic alliances, DrugMaxTrading.com
aggregates a variety of product and market participant information, and, in
doing so, facilitates the execution of mutually beneficial online transactions
among trade exchange members in an open-market format. The DrugMaxTrading.com
web site, though complete, was not yet processing business as of September 30,
2000.
On or about September 19, 2000, the Company informed the selling
shareholders of Desktop that 20,000 shares held under escrow, pursuant to the
acquisition agreement, would not be released as contemplated in the initial
purchase price. Upon final receipt of these shares from the escrow agent,
management anticipates reducing the purchased goodwill by approximately
$329,000.
NOTE I - SUBSEQUENT EVENTS
In October 2000, the Company obtained from Mellon Bank, N.A. ("Mellon") a
line of credit and a $2 million term loan to refinance its prior bank
indebtedness and to provide additional working capital and for other general
corporate purposes. The new line of credit enables the Company to borrow a
maximum of $15 million, with borrowings limited to 85% of eligible accounts
receivable and 65% of eligible inventory. The term loan is payable in monthly
principal installments of $55,556 commencing on December 1, 2000, and in one
final payment of the remaining principal balance plus all accrued and unpaid
interest thereon on October 24, 2003. The term loan bears interest, payable
monthly, at 0.75% per annum over the base rate, which is the higher of Mellon's
prime rate or the effective federal funds rate plus 0.50% per annum. The
revolving credit facility will bear interest at the floating rate of 0.25% per
annum above the base rate. After the Company delivers its audited financial
statements for the fiscal year ending March 31, 2001 to Mellon, the applicable
margin over the base rate may change on an annual basis depending on the ratio
of funded debt to EBITDA. At the Company's option, it may instead pay interest
at a LIBOR rate plus an applicable margin, which also varies on the ratio of
funded debt to EBITDA. On October 27, 2000, proceeds were used to repay the
Merrill Lynch Financial and National City Bank credit facilities, aggregating
approximately $8.9 million, and approximately $5.5 million was available for
borrowing.
On November 1, 2000, the Company filed a registration statement with the
Securities and Exchange Commission for a proposed secondary offering of
2,000,000 shares of the Company's common stock. Of the 2,000,000 offered shares,
the Company will offer 1,600,000 shares and certain selling stockholders will
offer 400,000 shares. The Company will not receive any proceeds from the sale of
shares by the selling stockholders. Utendahl Capital Partners, L.P. is the lead
managing underwriter of the proposed offering. The Company expects to use the
net proceeds of this offering primarily for working capital, as well as future
strategic acquisitions, business expansion and marketing efforts. There can be
no assurance as to the completion of the secondary offering.
On November 6, 2000, the Company extended the $1,000,000 line of credit
agreement with First Community Bank of America for an additional period of six
months with a due date of April 1, 2001. Terms and conditions of the agreement
provide for interest to be charged at 1% over the rate of interest (6.3% as of
September 30, 2000) paid on the Company's $1,000,000 certificate of deposit used
to collateralize the loan facility, in accordance with the Security Agreement
dated March 17, 2000. The certificate of deposit matures on March 15, 2001. The
total balance outstanding on this line of credit was approximately $996,000 as
of September 30, 2000.
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NOTE J - LOSS PER SHARE
Basic net loss per common share is computed by dividing loss available to
common stockholders by the weighted-average number of common shares outstanding
during the period. Diluted net loss per common share is calculated by dividing
loss available to common stockholders by the weighted average number of shares
of common stock outstanding during the period, adjusted for the dilutive effect
of common stock equivalents, using the treasury stock method. The Company does
not have any dilutive shares outstanding as of September 30, 2000 and 1999,
respectively.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
The following management discussion and analysis should be read in
conjunction with the Condensed Consolidated Financial Statements and Notes
presented elsewhere in this Form 10-QSB.
Certain oral statements made by management from time to time and certain
statements contained herein that are not historical facts are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Because such statements involve risks and uncertainties, actual results
may differ materially from those expressed or implied by such forward-looking
statements. Forward-looking statements, including those in Management's
Discussion and Analysis of Financial Condition and Results of Operations, are
statements regarding the intent, belief or current expectations, estimates or
projections of the Company, its Directors or its Officers about the Company and
the industry in which it operates, and assumptions made by management, and
include among other items, (a) the Company's strategies regarding growth and
business expansion, including future acquisitions; (b) the Company's financing
plans; (c) trends affecting the Company's financial condition or results of
operations; (d) the Company's ability to continue to control costs and to meet
its liquidity and other financing needs; (e) the declaration and payment of
dividends; (f) the Company's use of proceeds from the currently contemplated
equity offering, and (g) the Company's ability to respond to changes in customer
demand and regulations. Although the Company believes that its expectations are
based on reasonable assumptions, it can give no assurance that the anticipated
results will occur. When used in this report, the words "expects,"
"anticipates," intends," "plans," "believes," "seeks," "estimates," and similar
expressions are generally intended to identify forward-looking statements.
Important factors that could cause the actual results to differ materially
from those in the forward-looking statements include, among other items, (i)
changes in the regulatory and general economic environment related to the health
care industry; (ii) conditions in the capital markets, including the interest
rate environment and the availability of capital; (iii) changes in the
competitive marketplace that could affect the Company's revenue and/or cost
bases, such as increased competition, lack of qualified marketing, management or
other personnel, and increased labor and raw materials costs; (iv) changes in
technology or customer requirements, which could render the Company's
technologies noncompetitive or obsolete; (v) new product introductions, product
sales mix and the geographic mix of sales and (vi) our customers' willingness to
accept our Internet platform. Further information relating to factors that could
cause actual results to differ from those anticipated is included but not
limited to information under the headings "Business" and "Risk Factors" in the
Company's Form 10-KSB/A for the year ended March 31, 2000, and the Company's
Registration Statement on Form SB-2, as well as information contained in this
Form 10-QSB. The Company disclaims any intention or obligation to update or
revise forward-looking statements, whether as a result of new information,
future events or otherwise.
Overview
DrugMax.com, Inc. is primarily an e-commerce business providing: (1) the
wholesale distribution of pharmaceuticals, over-the-counter products, health and
beauty care products, veterinary products, and nutritional supplements and (2)
one of the first business-to-business online trade exchanges for the same
products, dedicated exclusively to manufacturers, distributors, wholesalers and
retailers in the pharmaceuticals and over-the-counter product markets. The
Company will continue to derive a significant portion of revenue from its
traditional "brick and mortar" full-line wholesale distribution business. The
Company utilizes its competitive advantage of being one of the early entrants
into the Internet business-to-business pharmaceutical market, leveraging its
existing infrastructure, technology, relationships, marketing and management
resources. The Company believes that the combination of its traditional
wholesale distribution business with both its online wholesale distribution
business and its e-commerce trade
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exchange provides the "click and mortar" combination that will allow it to
aggressively market and distribute its products and services.
In general, the Company distributes its products primarily to independent
pharmacies in the continental United States, and secondarily to small and
medium-sized pharmacy chains, alternate care facilities and other wholesalers
and retailers. Since the early December 1999 launch of its website,
www.drugmax.com, over 9,000 independent pharmacies, small regional pharmacy
chains, wholesalers and distributors have registered to purchase products
through the Company's web site. The Company believes it has been successful in
attracting potential customers to its web site because it has designed its web
site as an online source for a select group of products, typically higher cost
and margin products, which make up a large percentage of the Company's targeted
customers sales. In addition, the Company maintains an inventory of over 20,000
stock keeping units, and continues to serve its customers as a primary, full-
line wholesale distributor through a combination of its e-commerce venues and
traditional distribution methods.
The Company's online trade exchange, DrugMaxTrading.com, established in
August 2000, offers one of the first business-to-business online trade exchanges
for pharmaceuticals, over-the-counter products, health and beauty care products,
and nutritional supplements dedicated exclusively to manufacturers,
distributors, wholesalers and retailers in the pharmaceutical and over-the-
counter product markets. DrugMaxTrading.com allows the Company's trade exchange
members to lower their overall costs of doing business while providing them with
wider market access and competively priced products. The DrugMaxTrading.com
concept capitalizes on the efficiencies of the Internet and its strategic
alliances, offering a variety of product and market participant information,
and, in doing so, facilitates the execution of mutually beneficial online
transactions among trade exchange members in an open-market format.
Results of Operations
Three- and Six-Month Periods Ended September 30, 2000 and 1999.
Revenues. The Company generated revenues of $38.8 million and $67.9
million, respectively, for the three- and six-month periods ended September 30,
2000, compared to $16,799 and $50,697, respectively, for the three- and
six-month periods ended September 30, 1999. The increase in primarily is
attributable to the acquisitions of Becan in November 1999, Desktop and VetMall
in March 2000, and Valley in April 2000, as well as additional organic growth
within each respective acquired operation.
Gross Profit. The Company secured gross profits of $1.4 million and $2.4
million, respectively, for the three- and six-month periods ended September 30,
2000, compared to $4,995 and $24,107, respectively, for the three- and six-month
periods ended September 30, 1999. Gross margins for both the three- and six-
month periods ended September 30, 2000 was 3.5%, compared to 29.7% and 47.6% for
the three- and six-month periods ended September 30, 1999, respectively. The
increase in gross profit is attributable to the acquisitions of Becan in
November 1999, Desktop and VetMall in March 2000, and Valley in April 2000. The
quarter-to-quarter growth of gross profits generated by the acquired companies
has been enhanced through the implementation of the Company's e-commerce
strategy and the operating synergies recognized post acquisition.
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The decline in the gross margin percentages is attributable to the variety of
product offerings of acquired companies which contribute varying degrees of
profit margins from sales generated.
Selling, general and administrative expenses. The Company incurred selling,
general and administrative expenses of $1.8 million and $4.2 million for the
three- and six-month periods ended September 30, 2000, respectively, compared to
$168,810 and $270,117 for the three- and six-month periods ended September 30,
1999, respectively. These costs typically include various administrative,
sales, marketing and other indirect operating costs. The increase between
periods was primarily due to additional advertising and promotional expenses,
increased payroll, and amortization of goodwill associated with the acquisitions
of Becan, Desktop, VetMall and Valley.
Interest expense. Interest expense was $247,655 and $471,611, respectively,
for the three- and six-month periods ended September 30, 2000, compared to
$3,827 and $4,417, respectively, for the three- and six-month periods ended
September 30, 1999. The increase between periods was a result of borrowings
under the Company's credit facilities for the financing of additional working
capital needs associated with the various acquisitions made by the Company, and
to a greater extent, the outstanding debt assumed with the Valley acquisition.
Net loss per share. The net loss per share for the quarter ended September
30, 2000, amounted to $(.10) per share compared to $(.24) per share for the
quarter ended June 30, 2000, an improvement of $.14 per share.
Income Tax. The Company has no income tax provision for the periods
presented due to its recurring net operating losses. These net operating losses
may be carried forward for up to 15 years to offset future taxable income.
Inflation; Seasonality. Management believes that there was no material
effect on operations or the financial condition of the Company as a result of
inflation for the three or six months ended September 30, 2000. Management also
believes that its business is not seasonal; however, significant promotional
activities can have a direct impact on sales volume in any given quarter.
Financial Condition, Liquidity and Capital Resources
The Company's operations produced positive cash flow for the quarter ended
September 30, 2000. The significant improvement from prior periods was
attributable to growth of the Company's core business, control over corporate
expenditures and management's ability to maintain acceptable gross margins. The
Company had previously financed its operations primarily through proceeds
received from a public offering in November 1999. Net proceeds from that
offering were approximately $11.9 million. The Company has working capital, and
cash and cash equivalents, of $4.2 million and $5.5 million at September 30,
2000, respectively.
Cash provided from operating activities was $206,873 for the six months
ended September 30, 2000. The favorable increase in cash provided from
operations is principally attributable to the Company's net loss for such period
offset by depreciation and amortization, as well as an increase in accounts
receivable and inventory resulting from increased sales associated with the
Becan and Valley acquisitions, an increase in prepaid expenses and other current
assets, and a decrease in accrued expenses, offset by an increase in accounts
payable and decreases in notes receivable.
Net cash used in investing activities of $1,871,539 primarily represents
the cash paid for the acquisition of Valley.
Net cash provided by financing activities was $1,119,673 for the six months
ended September 30, 2000, representing the net change in revolving line of
credit agreements and proceeds from affiliates, which was offset by repayments
of long-term obligations.
On March 17, 2000, the Company signed a $1,000,000 line of credit agreement
with First Community Bank of America. The total balance outstanding on this line
of credit was approximately $996,000 as of September 30, 2000. Terms of the
agreement provide for interest to be charged at 1% over the rate of interest
(6.3% as of September 30, 2000) paid on the Company's $1,000,000 certificate of
deposit held by First Community Bank of America and used to collateralize the
credit facility. The balance on the line of credit became due on October 1,
2000. On November 6, 2000, documents were executed to extend the line of credit
agreement for an additional six-month period with a due date of April 1, 2001.
Additionally, in March 2000, the Company entered into a line of credit with
Merrill Lynch. The line of credit enables the Company to borrow a maximum of
$5,000,000 with borrowings limited to 80% of eligible accounts receivable and
50% of inventory (capped at $1,000,000). As of September 30, 2000 the
outstanding principal on the note was approximately $2,780,500 and approximately
$774,500 available for borrowing. Terms of the
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agreement provide for interest to be charged at the rate of 30-day commercial
paper, plus 2.5% (9.06% as of September 30, 2000.) The Merrill Lynch line of
credit was paid in full in October 2000, through the Mellon Bank, N.A.
refinancing.
As part of the acquisition of Valley, the Company agreed to become an
additional guarantor of the outstanding bank indebtedness of Valley. As of
September 30, 2000, Valley maintained a revolving line of credit and a term loan
with National City Bank with a combined outstanding balance of approximately
$5,682,500. In October 2000, the National City Bank line of credit was paid in
full through the Mellon Bank N.A. refinancing.
In October 2000, the Company obtained from Mellon Bank, N.A. ("Mellon") a
line of credit and a $2.0 million term loan to refinance its prior bank
indebtedness and to provide additional working capital and for other general
corporate purposes. The new line of credit enables the Company to borrow a
maximum of $15 million, with borrowings limited to 85% of eligible accounts
receivable and 65% of eligible inventory. The term loan is payable over a 36-
month period with interest at 0.75% per annum over the base rate, which is the
higher of Mellon's prime rate or the effective federal funds rate plus 0.50% per
annum. The revolving credit facility will bear interest at the floating rate of
0.25% per annum above the base rate. After the Company delivers its audited
financial statements for the fiscal year ending March 31, 2001, to Mellon, the
applicable margin over the base rate may change on an annual basis depending on
the ratio of funded debt to EBITDA. At the Company's option, it may instead pay
interest at a LIBOR rate plus an applicable margin, which also varies on the
ratio of funded debt to EBITDA. The Company used the proceeds from this credit
facility to repay its prior credit facilities.
On November 1, 2000, the Company filed a registration statement with the
Securities and Exchange Commission for a proposed secondary offering of
2,000,000 shares of the Company's common stock. Of the 2,000,000 offered shares,
the Company will offer 1,600,000 shares and certain selling stockholders will
offer 400,000 shares. The Company will not receive any proceeds from the sale of
shares by the selling stockholders. Utendahl Capital Partners, L.P. is the lead
managing underwriter of the proposed offering. There can be no assurance as to
the completion of the secondary offering.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
From time to time, the Company may become involved in litigation arising in
the ordinary course of its business. The Company is not presently subject to any
material legal proceedings.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the past three years, the Company has issued unregistered securities
to a limited number of persons as described below. The following information
regarding the Company's shares of common stock has been adjusted to give effect
to (i) the one-for-fifty reverse split of the Company's common stock effected in
March 1999, (ii) the two-for-one stock split in the form of a stock dividend
effected in April 1999, and (iii) a one-for-one reverse stock split in October
1999.
(1) On March 18, 1999, the Company issued an aggregate of 2,400,000 shares
of common stock to 14 investors in connection with the merger of
Nutricueticals.com Corporation, a Florida corporation, with and into
the Company.
(2) On March 31, 1999, the Company issued an aggregate of 100,000 shares
of common stock, to one investor in connection with the acquisition of
Healthseek.com Corporation, a Massachusetts corporation.
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(3) On August 16, 1999, the Company issued an aggregate of 20,000 shares
of common stock to Lyntren Communications, Inc. in connection with the
acquisition of the Nutriceuticals.com domain name.
(4) On November 26, 1999, the Company issued an aggregate of 2,000,000
shares of common stock to Dynamic Health Products, a Florida
corporation, in connection with the acquisition of Becan Distributors,
Inc.
(5) On March 20, 2000, the Company issued an aggregate of 50,000 shares of
common stock in connection with the acquisition of Desktop
Corporation.
(6) On March 20, 2000, the Company issued an aggregate of 49,985 shares of
common stock to retire debt associated with the acquisition of Desktop
Corporation.
(7) On March 20, 2000, the Company issued 25,000 shares of common stock in
connection with the acquisition of VetMall.
(8) On April 19, 2000, the Company issued 217,225 shares of common stock
in connection with the acquisition of Valley Drug Company.
None of the foregoing transactions involved any underwriter, underwriting
discounts or commissions or any public offering, and the Company believes that
each transaction was exempt from the registration requirements of the Securities
Act by virtue of Section 4(2) thereof. The recipients in such transactions
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates and instruments
issued in such transactions. All recipients had adequate access to information
about the Company.
Item 3. - DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of the Stockholders of the Company was held on August
10, 2000. At the meeting, the following actions were taken by the shareholders:
William L. LaGamba, Stephen M. Watters, Ronald J. Patrick, Howard L.
Howell, DDS, Jeffery K Peterson, Jugal K. Taneja and Joseph Zappala were elected
as Directors to the serve until the next annual meeting and until their
respective successors are elected and qualified or until their earlier
resignation, removal from office or death. The votes cast for and against each
were as follows:
For Against Abstain
--- ------- -------
William L. LaGamba 4,112,983 0 0
Stephen M. Watters 4,112,983 0 0
Ronald J. Patrick 4,112,983 0 0
Howard L. Howell, DDS 4,112,983 0 0
Jeffery K Peterson 4,112,983 0 0
Jugal K. Taneja 4,112,983 0 0
Joseph Zappala 4,112,983 0 0
The Company's 1999 Incentive and Non-Statutory Stock Option Plan was
approved and the issuance of 400,000 shares of Common Stock covered by the plan
was authorized. The voting on the proposal was as follows:
For Against Abstain
-- ------- -------
4,112,983 0 0
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Item 5. OTHER INFORMATION.
In August 2000, the Company relocated the business offices of Desktop
Corporation and VetMall, Inc. from Dallas, Texas, to the Florida location at
12505 Starkey Road, Suite A, Largo, Florida 33773. The move was made in order to
consolidate the Company's operations and to reduce overhead.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibits are filed with this report:
2.1 Agreement and Plan of Merger by and between NuMed Surgical, Inc. and
Nutriceuticals.com Corporation, dated as of January 15, 1999. (1)
2.2 Agreement and Plan of Reorganization between the Registrant and Eric Egnet
dated March 31, 1999. (1)
2.3 Agreement and Plan of Reorganization dated September 8, 1999 by and
between Nutriceuticals.com Corporation and Dynamic Health Products, Inc.
(2)
2.4 Agreement and Plan of Reorganization between DrugMax.com, Inc., Jimmy L.
Fagala, K. Sterling Miller, and HCT Capital Corp. dated as of March 20,
2000. (3)
2.5 Stock Purchase Agreement between DrugMax.com, Inc. and W.A. Butler Company
dated as of March 20, 2000. (3)
2.6 Merger Purchase Agreement between DrugMax.com, Inc., DrugMax Acquisition
Corporation, and Valley Drug Company, Ronald J. Patrick and Ralph A.
Blundo dated as of April 19, 2000. (4)
2.7 Letter of Intent to acquire Penner & Welsch, Inc. by Discount RX, Inc., a
wholly-owned subsidiary of DrugMax.com, Inc., dated September 13, 2000.*
3.1 Articles of Incorporation of NuMed Surgical, Inc., filed October 18, 1993.
(1)
3.2 Articles of Amendment to the Articles of Incorporation of NuMed Surgical,
Inc., filed March 18, 1999. (1)
3.3 Articles of Merger of NuMed Surgical, Inc. and Nutriceuticals.com
Corporation, filed March 18, 1999. (1)
3.4 Certificate of Decrease in Number of Authorized Shares of Common Stock of
Nutriceuticals.com Corporation, filed October 29, 1999. (5)
3.5 Articles of Amendment to Articles of Incorporation of Nutriceuticals.com
Corporation, filed January 11, 2000. (8)
3.6 Articles and Plan of Merger of Becan Distributors, Inc. and DrugMax.com,
Inc., filed March 29, 2000. (8)
3.7 Amended and Restated Bylaws, dated November 11, 1999. (5)
4.2 Specimen of Stock Certificate. (8)
10.1 Employment Agreement by and between Nutriceuticals.com Corporation and
William L. LaGamba dated January 1, 2000. (7)
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10.3 Employment Agreement by and between Valley Drug Company and Ronald J.
Patrick dated April 19, 2000. (8)
10.4 Employment Agreement by and between Valley Drug Company and Ralph A.
Blundo dated April 19, 2000. (8)
10.5 Consulting Agreement by and between Nutriceuticals.com Corporation and
Jugal K. Taneja, dated as of April 1, 1999. (1)
10.6 Loan and Security Agreement in favor of Merrill Lynch Business Financial
Services, Inc. from the Company dated February 15, 2000. (8)
10.7 Security Agreement in favor of First Community Bank of America from the
Company dated March 17, 2000. (8)
10.8 Consulting Agreement by and between DrugMax.com, Inc. and Stephen M.
Watters dated August 10, 2000.(9)
10.9 Loan and Security Agreement among DrugMax.com, Inc. and Valley Drug
Company and Mellon Bank, N.A., dated October 24, 2000. (9)
10.10 Note in favor of First Community Bank of America from the Company dated
November 6, 2000.*
10.11 Management Agreement between Discount RX and Penner & Welsch, Inc. dated
September 13, 2000.*
21.0 Subsidiaries of DrugMax.com, Inc. (9)
27.1 Financial Data Schedule (for SEC use only). *
99.1 DrugMax.com, Inc.1999 Incentive and Non-Statutory Stock Option Plan. (8)
___________________________
* Filed herewith.
(1) Incorporated by reference to the Company's Registration Statement on
Form SB-2, filed June 29, 1999, File Number 0-24362, as amended.
(2) Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form SB-2, filed on September 13, 1999, File
No. 0-24362.
(3) Incorporated by reference to the Company's Report on Form 8-K, filed
April 6, 2000, File Number 0-24362.
(4) Incorporated by reference to the Company's Report on Form 8-K, filed May
3, 2000, File Number 0-24362.
(5) Incorporated by reference to Amendment No. 2 to the Company's
Registration Statement on Form SB-2, filed on November 12, 1999, File
No. 0-24362.
(6) Incorporated by reference to the Company's Report on Form 8-K, filed
February 8, 2000, File No. 0-24362.
(7) Incorporated by reference to the Company's Form 10-KSB, filed June 29,
2000, File No. 0-24362.
(8) Incorporated by reference to the Company's Form 10-KSB/A, filed July 14,
2000, File No. 0-24362.
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(9) Incorporated by reference to the Company's Registration Statement on
Form SB-2, filed on November 1, 2000.
(b) Reports on Form 8-K.
------------------------
During the three months ended September 30, 2000, the Company filed the
following one (1) report on Form 8-K:
Form 8-K dated September 14, 2000, pursuant to which the Company
reported that it had entered into a Letter of Intent and Management
Agreement with Penner & Welsch, Inc.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DrugMax.com, Inc.
Date: November 13, 2000 By: /s/ Jugal K. Taneja
--------------------- ------------------------------------
Jugal K. Taneja
Chief Executive Officer
Date: November 13, 2000 By: /s/ Ronald J. Patrick
--------------------- ------------------------------------
Ronald J. Patrick
Chief Financial Officer, Vice
President of Finance,
Secretary and Treasurer
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Index to Exhibits
Exhibit
No. Description
--- -----------
2.7 Letter of Intent to acquire Penner & Welsch, Inc. by Discount RX, Inc.,
a wholly-owned subsidiary of DrugMax.com, Inc., dated September 13,
2000.
10.10 Note in favor of First Community Bank of America from the Company dated
November 6, 2000.
10.11 Management Agreement between Discount RX and Penner & Welsch, Inc.
dated September 13, 2000.
27.1 Financial Data Schedule (for SEC use only).
