U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the period ended January 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the transition period from to
-------- ------
Commission File number 0-21019
INNOVATIVE MEDICAL SERVICES
---------------------------
(Name of small business issuer in its charter)
California 33-0530289
------------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1725 Gillespie Way, El Cajon, California 92020
----------------------------------------------
(Address of principal executive offices)
619 596 8600
Issuer's telephone number
Check whether the issuer (1) filed all reports to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No[ ]
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date: 9,826,731 as of March 14,
2003.
INNOVATIVE MEDICAL SERVICES
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of July 31, 2002 and January 31, 2003
Statements of Operations for the three and six months
ended January 31, 2002 and 2003 Statements of Cash Flows
for the six months ended January 31, 2002 and 2003
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Controls and Procedures
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 and Certifications
The interim financial statements include all adjustments, which in the opinion
of management, are necessary in order to make the financial statements not
misleading.
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------------------
July 31
January 31 2002
2003 (Restated)
(Unaudited) (See Note 1)
--------------- ---------------
ASSETS
Current Assets
Cash and cash equivalents $ 90,936 $ 151,257
Accounts receivable, net of allowance for doubtful
accounts of $ 130,000 at January 31, 2003
and $111,000 at July 31, 2002 233,029 166,601
Due from officers and employees 171,130 209,437
Inventories 504,413 595,071
Prepaid expenses 184,956 177,445
--------- ---------
Total current assets 1,184,465 1,299,811
--------- ---------
Property, Plant and Equipment
Property, plant and equipment 525,976 613,909
--------- ---------
Total property, plant and equipment 525,976 613,909
--------- ---------
Noncurrent Assets
Deposits 9,341 8,954
Patents and licenses 2,556,166 2,626,376
--------- ---------
Total noncurrent assets 2,565,507 2,635,330
--------- ---------
Total assets $ 4,275,948 $ 4,549,050
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable $ 798,446 $ 591,031
Accrued liabilities 86,453 118,975
Loans from shareholders 600,000 500,000
--------- ---------
Total current liabilities 1,484,899 1,210,006
--------- ---------
Stockholders' Equity
Class A common stock, no par value: authorized
50,000,000 shares, issued and outstanding
9,961,837 at January 31, 2003 and
8,400,899 at July 31, 2002 14,474,628 13,976,448
Warrants 660,376 8,610
Accumulated deficit (12,343,955) (10,646,014)
----------- -----------
Total stockholders' equity 2,791,048 3,339,044
--------- ---------
Total liabilities and stockholders' equity $ 4,275,948 $4,549,050
============ ==========
The accompanying notes are an integral part of the financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
----------------------------------------------------------------------------------------------------------
For the Six Months Ended For the Three Months Ended
January 31 January 31
2003 2002 2003 2002
---------- ----------- ----------- -----------
Net revenues $ 1,360,803 $ 1,698,183 $ 633,542 $ 834,155
Cost of sales 768,370 805,819 344,229 317,955
----------- ----------- ----------- -----------
Gross profit 592,433 892,364 289,313 516,200
----------- ----------- ----------- -----------
Selling expenses 288,568 354,525 138,368 120,116
General and administrative expenses 940,191 1,006,793 497,656 556,868
Research and development 424,250 316,212 251,182 245,389
Start-up costs 635,376 -- 635,376 --
----------- ----------- ----------- -----------
Total operating costs 2,288,384 1,677,530 1,522,582 922,373
----------- ----------- ----------- -----------
Loss from operations (1,695,952) (785,166) (1,233,269) (406,173)
----------- ----------- ----------- -----------
Other income and (expense):
Interest income 1,331 343 3 131
Interest Expense (44,765) (11,190) (27,295) (9,500)
Other -- (1,200) -- (600)
----------- ----------- ----------- -----------
Total other income (expense) (43,434) (12,047) (27,292) (9,969)
----------- ----------- ----------- -----------
Net loss $(1,739,386) $ (797,213) $(1,260,561) $(416,142)
=========== =========== ============ ===========
Net loss per common share, basic and diluted $ (0.20) $ (0.11) $ (0.14) $ (0.06)
=========== =========== ============ ===========
Six Months Year
Ended Ended
January July 31
CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS 2003 2002
-------------------------------------------------------------------------------- --------------- -----------------
Balance, beginning of period $ (10,604,569) $ (8,423,467)
Net income (loss) (1,739,386) (2,222,547)
----------- -----------
Balance, end of period $ (12,343,955) $ (10,646,014)
============== ==============
The accompanying notes are an integral part of the financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
-----------------------------------------------------------------------------------------------------
For the Six Months Ended
January 31
2003 2002
----------- ----------
Cash flows from operating activities
Net loss $(1,739,386) $(797,213)
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization 77,074 115,483
Depreciation 96,361 128,429
Services paid for with stock and warrants 752,355 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (66,428) 67,021
(Increase) decrease in subscriptions receivable - (100,000)
(Increase) decrease in due from officers and employees 38,307 313
(Increase) decrease in prepaid expense 83,755 9,398
(Increase) decrease in inventory 90,658 57,545
(Increase) decrease in deposits (387) (826)
Increase (decrease) in accounts payable 207,415 (23,044)
Increase (decrease) in accrued liabilities 8,923 45,400
--------- ---------
Net cash provided (used) by operating
activities (451,353) (497,494)
--------- ---------
Cash flows from investing activities
Purchase of patents and licenses (6,865) (83,334)
Purchase of property, plant and equipment (8,428) (131,049)
Deferred acquisition costs -- (13,000)
--------- ---------
Net cash (used) in investing activities (15,293) (227,383)
--------- ---------
Cash flows from financing activities
Proceeds from debt obligations 100,000 400,245
Proceeds from sale of common stock 306,325 447,780
--------- ---------
Net cash provided by financing activities 406,325 848,025
--------- ---------
Net increase (decrease) in cash and cash equivalents (60,321) 123,148
--------- ---------
Cash and cash equivalents at beginning of period 151,257 207,092
--------- ---------
Cash and cash equivalents at end of period $ 90,936 $ 330,240
========= =========
Supplemental disclosures of cash flow information
Cash paid for interest paid $ 44,765 $ 11,190
Cash paid for taxes paid $ -- $ 1,200
Noncash investing and financing activities:
Value of shares issued in exchange for services $ 157,050
Value of options issued in exchange for services $ 59,805
Value of warrants issued in exchange for startup costs $ 635,376
Value of shares issued in exchange for Silver Ion Technology patent $ 1,540,600
The accompanying notes are an integral part of these financial statements
NOTES TO FINANCIAL STATEMENTS
Note 1. Financial Statements
The financial statements included herein have been prepared by
Innovative Medical Services (the Company) without audit, pursuant
to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted as allowed by such rules and regulations, and Innovative
Medical Services believes that the disclosures are adequate to
make the information presented not misleading. It is suggested
that these financial statements be read in conjunction with the
July 31, 2002 audited financial statements and the accompanying
notes thereto. While management believes the procedures followed
in preparing these financial statements are reasonable, the
accuracy of the amounts are in some respects dependent upon the
facts that will exist and procedures that will be accomplished by
Innovative Medical Services later in the year. The results of
operations for the interim periods are not necessarily indicative
of the results of operations for the full year.
The management of the Company believes that the accompanying
audited financial statements contain all adjustments (including
normal recurring adjustments) necessary to present fairly the
operations and cash flows for the periods presented.
Amounts shown for July 31, 2002 are taken from the audited
financial statements of that date as amended.
Note 2. Business Segment and Sales Concentrations
In accordance with the provisions of SFAS No. 131, certain
information is disclosed based on the way management organizes
financial information for making operating decisions and assessing
performance. In determining operating segments, the Company
reviewed the current management structure reporting to the chief
operating decision-maker ('CODM') and analyzed the reporting the
CODM receives to allocate resources and measure performance.
The Company's business activities are divided, managed and
conducted in two basic business segments, the Water Treatment
segment and the Bioscience segment. These two segments were
determined by management based upon the inherent differences in
the end use of the products, the inherent differences in the value
added processes made by the Company, the differences in the
regulatory requirements and the inherent differences in the
strategies required to successfully market finished products. The
Water Treatment segment includes Commercial Water and Residential
Retail products and the Nutripure Water Dealer program. Bioscience
includes Axenohl (Silver Ion Technology) and the Innovex line of
pest control products.
Segment information is presented in accordance with SFAS 131,
Disclosures about Segments of an Enterprise and Related
Information. This standard is based on a management approach,
which requires segmentation based upon the Company's internal
organization and disclosure of revenue and operating income based
upon internal accounting methods. The Company's financial
reporting systems present various data for management to run the
business, including internal profit and loss statements prepared
on a basis not consistent with U.S. generally accepted accounting
principles.
FOR THE THREE MONTHS ENDED Water Reconciling
JANUARY 31, 2002 Treatment Biosciences Amounts Consolidated
-------------------------- ---------- ------------ ------------ -------------
Revenues
Commercial Water Treatment
Fillmaster Products $269,200 $ 269,200
Replacement Filters 108,200 108,200
Residential Water Treatment 21,800 21,800
Water Dealer Program 71,700 71,700
Silver Ionization 0 $ 276,500 276,500
Pesticide 0 86,800 86,800
-------- ----------- --------- ----------
Total Revenues $470,900 $ 363,300 $ 834,200
======== =========== ========= ==========
Operating Income/(Loss) $(208,700) $ (266,900) $(474,300) $(416,100)
======== =========== ========= =========
Segment Assets $802,400 $ 2,676,900
======== ===========
FOR THE THREE MONTHS ENDED
JANUARY 31, 2003
----------------------------
Revenues
Commercial Water Treatment
Fillmaster Products $ 204,000 $ 204,000
Replacement Filters 158,200 158,200
Residential Water Treatment 30,500 30,500
Water Dealer Program 208,900 208,900
Silver Ionization 0 28,100 28,100
Pesticide 0 3,800 3,800
-------- ---------- -------- ---------
Total Revenues $601,600 $31,900 $633,500
======== ========== =========
Operating Income/(Loss) $ 48,800 $( 51,900) $(1,257,500) $(1,260,600)
======== ========== ========== ==========
Segment Assets $770,800 $2,381,900
======== ==========
FOR THE SIX MONTHS ENDED Water Reconciling
JANUARY 31, 2002 Treatment Biosciences Amounts Consolidated
-------------------------- ---------- ------------ ------------ -------------
Revenues
Commercial Water Treatment
Fillmaster Products $ 551,800 $ 551,800
Replacement Filters 231,100 231,100
Residential Water Treatment 57,500 57,500
Water Dealer Program 181,400 181,400
Silver Ionization 0 $486,500 486,500
Pesticide 0 189,900 189,900
---------- -------- -------
Total Revenues $1,021,800 $676,400 $1,698,200
========== ======== ==========
Operating Income/(Loss) $(110,300) $(536,700) $(1,233,600) $(797,200)
======== ========== ========== ==========
Segment Assets $802,400 $2,676,900
======== ==========
FOR THE SIX MONTHS ENDED Water Reconciling
JANUARY 31, 2003 Treatment Biosciences Amounts Consolidated
-------------------------- ---------- ------------ ------------ -------------
Revenues
Commercial Water Treatment
Fillmaster Products $508,500 $ 508,500
Replacement Filters 311,400 311,400
Residential Water Treatment 158,700 158,700
Water Dealer Program 316,400 316,400
Silver Ionization 0 $28,100 28,100
Pesticide 0 37,700 37,700
--------- ---------- ------
Total Revenues $1,295,000 $65,800 $ 1,360,800
========== ============ ===========
Operating Income/(Loss) $ 1,300 $( 67,000) $(1,673,700) $(1,739,400)
========== ============ ============ ===========
Segment Assets $770,800 $2,381,900
========== ============
Significant customers primarily consisted of domestic retail chain
pharmacies. Sales concentrations to major chain stores were approximately
$266,300 and export sales were $29,100 for the quarter ended January 31,
2003. Sales concentrations to major chain stores were approximately
$334,600 and export sales were $41,100 for the six months ended January 31,
2003. No customer accounted for more than 10% of consolidated sales.
Note 3. Common Stock
On August 30, 2002, 60,000 shares of common stock valued at
$34,200 ($0.57 per share) were issued in exchange for a 1-year
agreement for EPA regulatory consulting. On September 18, 2002,
120,000 shares valued at $68,400 ($0.57 per share) were issued in
exchange for a 1-year consulting agreement to facilitate the
identification and facilitation of sponsored research
relationships and out-licensing opportunities for the Company. On
September 18, 2002, 65,000 shares valued at $37,050 ($0.57 per
share) were issued in exchange for a 1-year marketing and business
development consulting agreement. On September 18, 2002, options
on 135,000 shares were exercised.
During the quarter ended January 31, 2003 the Company conducted a
$250,000 private placement in which the Company issued 833,332
shares of common stock to six accredited investors at a price of
$0.30 per share. Fees connected with the offering consisted of
commissions of $25,000 (10%), 135,106 shares of common stock
valued at $58,096 ($0.43 per share), and 71,429 warrants to
purchase common stock at $0.30 per share valued at $25,000 ($0.35
per share based on the Black Scholes Option Pricing Model assuming
no dividend yield, volatility of 101.48% and a risk-free interest
rate of 5.25%). On December 16, 2002, 200,000 shares of common
stock valued at $88,000 ($0.44 per share) were issued for attorney
fees incurred in connection with the acquisition of the Axenohl
patent. Of this amount $70,600 was booked at the date of the
patent acquisition. The Company also received $4,375 from the
exercise of employee options during the quarter.
On November 22, 2002 the board of directors approved the Annual
Grant of Options to Directors from the 2002 Directors and Officers
Stock Option Plan. Officers and directors received a total of
450,000 five-year options with an exercise price of $0.50 per
share. On the date of the grant the common stock of the Company
closed at $0.45 per share.
Note 4. Contracts and Commitments
In January 2003 the Company signed a cross-marketing and licensing
agreement with Nickel Ltd., a manufacturer and distributor of wet
wipes in Europe. Under the terms of the three-part agreement, the
Company is acquiring two "Super Distribution Agreements." The
first Super Distribution agreement grants IMS exclusive rights to
sell Nickel's Clean Plus(R) janitorial/sanitation product line in
the U.S. to suppliers and distributors in the janitorial and
sanitation industries, as well as to mass merchandisers. The
second Super Distribution agreement establishes a 50/50 joint
venture between IMS and Nickel, to be known as CARLINE AMERICA
LTD(TM). This agreement permits the IMS-managed and staffed joint
venture to sell and distribute Nickel's Clean Plus(R) line of
automotive wet wipe products to automotive aftermarket retailers
and mass merchandisers in the United States. CARLINE AMERICA LTD
will become a consolidated subsidiary accounted for on the equity
method.
In the third part of the agreement, Nickel Ltd. agrees to process
all necessary regulatory and other approvals required as a
condition to the commercialization of Axen based products in the
European Union and Innovative Medical Services has granted Nickel
Ltd. a license for industrial-grade silver di-hydrogen citrate
(Axen(TM)) product development in Europe involving hard surface
disinfectant sprays (non-exclusive) and hard surface disinfectant
wet wipes (exclusive) in the hospital, educational/childcare
facilities, hospitality, food processing and military market
segments. In exchange, and as total consideration on the Company's
part, the Company will issue five-year warrants to Nickel Ltd. to
purchase 651,000 shares of common stock for $0.0001 per share
valued at $635,376 ($0.976 per share based on the Black Scholes
Option Pricing Model assuming no dividend yield, volatility of
101.48% and a risk-free interest rate of 5.25%). These costs of
IMS and CARLINE AMERICA LTD have been expensed as start-up costs
in the consolidated financial statements in conformance with SOP
98-5.
In the contract, IMS must purchase a least 1 pallet of each
product from Nickel Ltd. per quarter and must purchase, in the
aggregate, not less than Euro 15,000,000 of product within the
first three years in order to maintain it's exclusivity rights.
The contract also requires the Super Distributor to expend a
minimum of 5% of sales revenues from the products on advertising
and promotion. Once a year the Super Distributor is reimbursed the
lesser of 50% of the amounts paid for advertising and promotion or
2.5% of aggregate purchases of product during the period. The
contract is for three years and renewable each year thereafter if
the minimum requirements are met.
Note 5. Subsequent Events
In February 2003 the Company signed an Investment Banking Advisory
Agreement with SBI Discovery Group, a member of Softbank
Investment Group, to become the Company's non-exclusive financial
advisor in connection with the management of a proposed private
placement of equity securities and/or debt securities on a best
efforts basis. The agreement contemplates that the gross dollar
amount of securities to be offered in the private placement shall
be up to $3,000,000 in equity and $1,000,000 in debt. In the
contract the Company and the investment banker shall enter into a
Managing Dealer Agreement which contains a fee agreement
equivalent to a 10% selling fee, a 3% non-accountable expense
allowance and warrants to purchase 10% of the underlying
securities sold. The Managing Dealer Agreement will also
contemplate the issuance of 2,000,000 warrants at $2.00 for twelve
months effective upon the closing of the contemplated financing.
The agreement provides for an escrow agreement that shall not
allow closing on less than $2,000,000 and a monthly retainer to
the investment banker of $5,000 per month for six months.
Note 6. Recent Accounting Pronouncements
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others". Interpretation 45 is effective for financial statements
of interim or annual periods fiscal years ending after December
15, 2002 and requires the following disclosures of the Company's
product warranties:
The Company provides a standard warranty of two years for
replacement parts on all Fillmaster systems sold. Most of the
Company's chain customers have entered into multi-year contracts
for the Customer Service Plan 2000. The CSP 2000 provides an
extended warranty on all Innovative Medical Services pharmacy
products; significant discounts on maintenance item costs; free
software upgrades for the Fillmaster 1000e and Scanmaster;
automatic replacement filter shipments and simplified, annual
invoicing. When the customer buys a dispenser on the Customer
Service Plan 2000 they agree to pay a fixed annual fee that covers
replacement filters and parts. The Company monitors the costs of
providing replacement parts other than filters. This cost has
remained steady and is computed as a percentage of related
revenues. The following is a summary of changes in the Company's
product warranty liability.
Beginning Ending
Expense Warranty
Liability Incurred Payments Liability
Three months ended $ 42,750 $ 1,789 $ 5,879 $ 38,660
January 31, 2003 ========== ======== ======== =========
Six months ended $ 41,445 $ 9,269 $ 12,054 $ 38,660
January 31, 2003 ========== ======== ======== =========
Note 7. Reclassifications
Certain reclassifications have been made to previously reported
statements to conform to the Company's current financial statement
format.
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 Innovative Medical Services.
OVERVIEW
Innovative Medical Services began as a provider of pharmaceutical water
purification products. Although our current revenues are still primarily from
the pharmacy industry, we have expanded from our niche pharmacy market into
other, broader markets with new products, including residential and commercial
water filtration systems, silver ion bioscience technologies and boric acid
based pesticide technologies.
Water Treatment Division
The Fillmaster(R) pharmaceutical water purification, dispensing and measuring
products include the Pharmapure(R) water purification system, the FMD 550
dispenser, the patented Fillmaster 1000e computerized dispenser and the patented
Scanmaster(TM) bar code reader. We also market proprietary National Sanitation
Foundation certified replacement filters for the Fillmaster Systems.
Our Nutripure(R) line of water treatment and filtration systems includes a line
of Nutripure whole-house water softening systems, a line of Nutripure reverse
osmosis point-of-use systems, the Nutripure 2000 countertop water filtration
system and the Nutripure Sport filtered sport bottle. We distribute our various
Nutripure products in several ways, including retail sales, catalogue placement,
business-to-business sales and internet promotion.
Bioscience Division
Our bioscience division features a patented, aqueous disinfectant called
Axenohl(TM). Based on the EPA toxicity categorization of antimicrobial products
that ranges from Category I (high toxicity) down to Category IV, Axen, with its
combination of the biocidal properties of ionic silver and citric acid, is an
EPA Category IV antimicrobial for which precautionary labeling statements are
normally not required. This compares with Category II warning statements for
most leading brands of antimicrobial products.
The initial EPA registration for use of Axenohl and Axen (12-parts per million
formula) as hard surface disinfectants was issued in 2001. We are currently
awaiting EPA approval on a 30-parts per million formula of Axen. After receiving
EPA approval, we will be able to expand the existing Axen efficacy claims as a
hard surface disinfectant to include a 30 second kill time on standard indicator
bacteria, a 24 hour residual kill on standard indicator bacteria, a 2 minute
kill time on some resistant strains of bacteria, 10 minute kill time on fungi,
30 second kill time on HIV Type I, and 10 minute kill time on other viruses.
We plan to pursue additional EPA and FDA regulatory approvals for other
applications. Additional possible uses for this product include wound care,
topical infection care, personal disinfecting retail products, food processing,
and food safety applications which may require FDA approvals, as well as
municipal water treatment and point-of-use/point-of-entry water treatment
products, which may require additional EPA approvals.
Our bioscience division also includes a line of pesticide technologies. Branded
as Innovex(TM), the product line launched in October 2001 with our EPA-approved,
patent-pending RoachX(TM). Subsequently, we have developed and launched
additional products in the Innovex product line, including and AntX75(TM) baits,
two formulas of EPA-exempt non-toxic TrapX rodent lure, Pro's Choice(TM) caulk
for pest control operators, and EPA approved CleanKill(TM), the Axen-based hard
surface disinfectant for the pest control industry.
United States Department of Agriculture testing confirms that RoachX is over 96%
effective in three to four days with one application for indoor and outdoor
eradication of cockroaches, and can be used near children and food preparation
areas. Boric acid is a well-known and effective deterrent of cockroaches and
will kill them on contact, but cockroaches do not naturally eat the repellent.
Although many pesticide products contain boric acid as the listed active
ingredient, we believe RoachX to be new because of the endothermic reaction
caused by the combination of boric acid and polyglycol that produces three
unique results: 1) The formula protects the boric acid from water and humidity,
2) When combined with an attractant, the cockroaches perceive the formulation as
food and will actually eat the polyglycol-encapsulated boric acid, and 3) The
formula acts as a time-released pesticide, allowing the cockroach to return to
the nest before it dies and then becomes a "bait station" for other roaches in
the colony. We believe the product line, containing particular formulas and
attractants for specific pests, is effective against cockroaches, ants, palmetto
bugs, silverfish, waterbugs, ticks, fleas, lice and garden pests.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2003 VERSUS THREE
MONTHS ENDED JANUARY 31, 2002
During the quarter, we continued to realize revenues from multiple product lines
in our different divisions. In order to be more informative regarding
distribution of revenues, discussion of revenues will be in terms of our water
treatment segment and our bioscience segment, which includes silver ionization
and pesticide divisions.
Revenues of $633,500 in the quarter ended January 31, 2003 were 24% lower than
the $834,200 in revenues reported for the quarter ended January 31, 2002. The
decrease was due to a decrease in sales in the biosciences division. During the
quarter, water treatment division revenues of $601,600 were 28% higher than the
$470,900 in the same quarter of the prior year. Bioscience segment revenues in
the current quarter of $31,900 were 91% lower than the $363,300 in the same
quarter of the prior year and reflect a large decrease in both silver ionization
and pesticide product sales.
The increase in water treatment division revenues was due primarily to increased
sales in the Nutripure dealer program which rose $137,200 from $71,700 in the
quarter ended January 31, 2002 to $208,900 in the recent quarter. We anticipate
that the water treatment division revenues will continue to grow, especially as
the water dealer program continues to expand. The market continues to be very
competitive, and we expect revenues from our other commercial/retail water
treatment products to continue their historic steady growth.
The decrease in pesticide product sales was due to the recent change in sales
strategy, including a change from salaried sales employees to commissioned
outside sales representatives. During the quarter, we continued to refocus our
market strategy from marketing primarily to the pest control industry
wholesalers to include marketing directly to major industry leaders. The change
in sales and marketing strategy resulted in a decrease in sales as we
restructured the pesticide division to more effectively target the professional
pest control industry's need for highly effective but least toxic pest control
products. We believe that our restructuring will result in increased sales, but
we recognize that we face significant competition from larger, better
capitalized companies in this market. We expect to see a shift toward increasing
pest control product sales in the coming quarter.
The decrease in silver ionization sales was due to lack of sales of Axen to Dodo
& Company. In March 2001, we signed a five-year contract to provide Axenohl to
Dodo & Company, a Korean cosmetics manufacturer and marketer. Under the
contract, Dodo & Company would purchase approximately $1.2 million dollars of
product from us over five years. In addition to the purchase price, the contract
calls for us to receive a reimbursement for research and development and a
royalty on sales of the Axen-containing products. The contract requires Dodo &
Company to obtain appropriate regulatory clearances in South Korea, but we have
no documentation to show that this has been completed. We believe that Dodo &
Company has miscalculated the royalties due to us, and we have requested that
Dodo & Company reevaluate their royalty calculations. Dodo & Company has
requested a renegotiation of the contract including the royalty fee calculation.
During last fiscal year, Dodo & Company continued to expand its A-Clinic Club
line to include over 10 different products, all of which contain Axenohl as an
active ingredient. Because of Dodo & Company's significant investment in the
product line, we believed we would be able to renegotiate the contract to the
satisfaction of both parties; however, in early December 2002, we were informed
by the Chairman of Dodo & Company that Dodo & Company has begun a bankruptcy
reorganization process. Until the contract matter is resolved and Dodo & Company
restabilizes, we will not ship additional product to Dodo & Company.
The disinfectant market is highly competitive, and we anticipate that market
acceptance of a brand new technology may be a long term achievement. In addition
to competition challenges, we believe that the investment necessary to pursue
research testing and regulatory approval for Axenohl products will continue to
be significant. As we receive additional regulatory approvals for Axenohl,
however, we expect revenues to develop quickly. For example, we are currently
awaiting EPA approval on the Clean Kill 30-part per million formulation of Axen.
We believe that approval is imminent, and we also believe that upon receipt of
that approval, sales of Clean Kill 30 will have a significant impact on revenues
in the coming quarters.
We continue to believe that pesticide technologies will have a material impact
on revenues in the coming quarters, and we continue to believe that the silver
ion technologies will ultimately become the largest revenue generator for
Innovative Medical Services.
Gross profit for the quarter ended January 31, 2003 was $289,300 versus $516,200
in 2002. Gross profit percentage of 46% in 2003 was lower when compared to 62%
in 2002 because of the decrease in Axenohl sales associated with higher margins
and the increase in Nutripure dealer program revenues which have proportionally
lower margins.
Loss from operations for the quarter ended January 31, 2003 was $1,233,300
versus loss from operations of $406,200 for the same period in 2002. Of the loss
in the current quarter, $635,400 was non-cash start-up costs (651,000 warrants
valued at $0.976 per warrant) used to acquire a three-part cross marketing and
licensing agreement described below in the Liquidity and Capital Recourses
section. During the quarter, General and Administrative expenses decreased 11%
or $59,200 from $556,900 in fiscal 2002 to $497,700 in fiscal 2003.
Administrative expenses were lower in spite of an increase in amortization costs
associated with purchased patents and licenses. Selling expense increased
approximately $18,300, or 15%, from $120,100 in 2002 to $138,400 in 2003 because
of an increase in the use of consultants related to the Axenohl technologies.
Research and Development increased $5,800 over the same period in 2002 from
$245,400 to $251,200. This increase was the result of continued time and
resources devoted to the development and testing of our emerging pesticide and
silver ion technology product lines.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JANUARY 31, 2003 VERSUS SIX
MONTHS ENDED JANUARY 31, 2002 Revenues of $1,360,800 in the six months ended
January 31, 2003 were 20% lower than the $1,698,200 in revenues reported for the
six months ended January 31, 2002. The decrease was due to a decrease in sales
in the biosciences division. During the recent six months, water treatment
division revenues of $1,295,000 were 27% higher than the $1,021,800 in the prior
six-month period. Bioscience segment revenues in the current period of $65,800
were 90% lower than the $676,400 in the prior six-month period and reflect a
large decrease in both silver ionization and pesticide product sales. The
increase in water treatment division revenues was due primarily to increased
sales of the Nutripure dealer program which rose $135,000 from $181,400 in the
six months ended January 31, 2002 to $316,400 in recent period.
Gross profit for the six months ended January 31, 2003 was $592,400 versus
$892,400 in 2002. Gross profit percentage of 44% in 2003 was lower versus 53% in
2002 because of the decrease in Axenohl sales associated with higher margins and
the increase in Nutripure dealer program revenues which have proportionally
lower margins.
Net loss from operations for the six months ended January 31, 2003 was
$1,696,000 versus net loss of $785,200 for the same period in 2002. Of the loss
in the current period, $635,400 was non-cash start-up costs described above.
Selling expense decreased approximately $65,900, or 19%, from $354,500 in 2002
to $288,600 in 2003 because of a decreased reliance on salaried sales personnel.
During the current six months, General and Administrative expenses decreased 7%
or $66,600 from $1,006,800 in fiscal 2002 to $940,200 in fiscal 2003.
Administrative expenses were lower in spite of an increase in amortization costs
associated with purchased patents and licenses. Research and Development costs
were higher; increasing $108,100 or 34% from $316,200 in the six months ended
January 31, 2002 to $424,300 in the current period. The increase was due mainly
to costs associated with development of bioscience division products, including
Axenohl, RoachX, AntX and Clean Kill.
LIQUIDITY AND CAPITAL RESOURCES
From inception through January 31, 2003, we have financed our operations
primarily through our initial public offering in August of 1996 and by
subsequent private placement stock sales. In addition, the Company had obtained
short term financing through a $500,000 line of credit. In September 2002 the
Company renegotiated its line of credit and extended it until November 2003. The
extension includes an increase from $500,000 to $600,000 at an interest rate of
1 1/2 % per month secured against the entire assets of the Company excluding the
Axenohl patent. We believe that sales from our new product lines will not
provide sufficient capital resources to sustain operations and fund product
development through fiscal year 2003. In the short term, we expect to raise
capital through equity sales as necessary to fund future growth until we operate
above the break-even point. We continually evaluate opportunities to sell
additional equity or debt securities, or obtain credit facilities from lenders
to strengthen our financial position. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders.
In January 2003 the Company signed a cross-marketing and licensing agreement
with Nickel Ltd., a manufacturer and distributor of wet wipes in Europe. Under
the terms of the three-part agreement, the Company is acquiring two "Super
Distribution Agreements." The first Super Distribution agreement allows IMS to
sell Nickel's Clean Plus(R) janitorial/sanitation product line in the U.S. to
suppliers and distributors in the janitorial and sanitation industries, as well
as to mass merchandisers. The second Super Distribution agreement establishes a
50/50 joint venture between IMS and Nickel, to be known as CARLINE AMERICA
LTD(TM). This agreement permits the IMS-managed and staffed joint venture to
sell and distribute Nickel's Clean Plus(R) line of automotive wet wipe products
to automotive aftermarket retailers and mass merchandisers in the United States.
In the third part of the agreement Nickel Ltd. agrees to process all necessary
regulatory and other approvals required as a condition to the commercialization
of Axen based products in Europe and Innovative Medical Services has granted
Nickel Ltd. a license for industrial-grade silver di-hydrogen citrate (Axen(TM))
product development in Europe involving hard surface disinfectant sprays
(non-exclusive) and hard surface disinfectant wet wipes (exclusive) in the
hospital, educational/childcare facilities, hospitality, food processing and
military market segments. In exchange, and as total consideration on the
Company's part, the Company will issue warrants to Nickel Ltd. to purchase
651,000 shares of common stock for $0.0001 per share valued at $635,000.
Although no cash was expended to acquire these agreements, it is contemplated
that plans to utilize the contracts will require a significant outlay of capital
over the next twelve months. This situation is aided by a condition of the
contract in which Nickel Ltd. has extended its normal terms of 45 days from
shipment to 30 days beyond the terms IMS extends to the retailer, not to exceed
170 days. The contract also calls for CARLINE AMERICA LTD to obtain accounts
receivable financing.
The Company is currently attempting to strengthen its liquidity position by
working with an investment banker to obtain financing consisting of a
combination of debt and equity instruments. The Company requires an outside
source of capital to fund planned projects relating to new product development
and related product launches, research and development projects, regulatory
approvals and the execution of the two Super Distribution agreements with Nickel
Ltd.. This is because the Company's operations are not expected to generate cash
flows, within the next twelve months, sufficient to fund planned expansion. If
funds are not available, the Company believes that it can maintain viability, if
necessary by scaling back current and planned expansion projects. The Company
has no long-term debt. Upon final approval of the current EPA submission, the
Company intends to file forward-looking financial projections on the Company as
a whole in a Form 8-K.
As a condition of the purchase agreement of the Axenohl patent, the Company
agreed to make certain royalty payments to NVID of 5% of the gross product sales
with a minimum royalty payment total of $1,000,000 for the period from November
15, 2001 to July 31, 2004 and subsequently $1,000,000 per year for the remaining
life of the patent. The contract states that at July 31, 2004 the Company shall
have the right, in its sole and absolute discretion, to do one of the following:
a) pay $1,000,000 in cash or common stock of the Company to NVID, less royalty
amounts already paid, on or before July 31, 2004, b) transfer the patent back to
NVID, at which time the Company would be released of any future minimum payments
and granted a license to manufacture and distribute products covered by the
patent, or c) cancel any royalty obligation under the contract by selling or
assigning its ownership of the patent to a third party and paying NVID a
percentage of the gross proceeds of 10% or 5% depending on how near the date of
the transfer is to July 31, 2004. The Company has not recorded or accrued an
amount for the minimum royalty payments in the financial statements because it
has not determined which of these options it intends to exercise.
Our liquidity is unaffected by the financing program offered to participating
dealers in the Nutripure water dealer program. We receive funds from our lender
and disperse the funds to the dealer, less a commission charged by us, upon
completion of the contract. The lender disperses funds to us. We record a
liability when the funds are received and relief of liability when funds are
dispersed, and we do not retain liability on the credit extended.
During the fiscal six months ended January 31, 2003, our current assets to
liabilities ratio decreased from 1.10 to 0.80. Current assets decreased $106,700
from $1,291,200 at July 31, 2002 to $1,184,500 at January 31, 2003 due mainly to
a decrease in inventories associated with lower sales volume and a decrease in
cash. Current liabilities increased $316,300 from $1,168,600 to $1,484,900. This
increase was due mainly to an increase in loans from shareholders of $100,000
and an increase in accounts payable of approximately $207,400.
Fixed assets decreased approximately $87,900 due mainly to depreciation of
equipment. Noncurrent assets remained unchanged at $2,600,000 consisting almost
entirely of Patents and Licenses.
Cash flows used from operations were $451,400 in the six months January 31, 2003
and $497,500 in 2002. For fiscal 2003, cash flows used in investing activities
included $8,400 for the purchase of machinery and equipment and $6,900 for the
purchase of patents and licenses. In fiscal 2002 cash flows used in investing
activities included $131,000 for the purchase of machinery and equipment and
$83,300 for the purchase of patents and licenses.
Cash flows from financing activities were $406,300 in fiscal 2003 and $848,000
in fiscal 2002. Financing activities for the current period included the
addition of $100,000 in loans payable from a line of credit renegotiated in
September 2002. Cash flows from financing activities also included an increase
of common stock of $306,300. During the current six-month period the Company
conducted a $250,000 private placement in which the Company issued 833,332
shares of common stock to six accredited investors at a price of $0.30 per
share. $225,000 was received before the end of the current period. The Company
also received $81,325 from the exercise of options. In the prior period, cash
flows from financing activities included an increase notes payable of $400,300
from draws against our existing credit line. Cash flows from financing
activities also included an increase of common stock of $391,400 which included
a $400,000 private placement in which the Company issued 250,000 shares of
common stock to eleven accredited investors at a price of $1.60 per share. The
Company also received approximately $48,000 from the exercise of options during
the period. The total decrease in cash and cash equivalents for 2003 was $60,300
as compared to an increase of $123,100 during the same period in 2002.
ITEM 3.
CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure based closely on the definition of "disclosure
controls and procedures" in Rule 13a-14(c). In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation.
PART 2 OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
There have been no developments in the case involving Innovative Medical
Services and Zedburn Corporation et. al. in Circuit Court of Pinellas County,
Florida as previously disclosed and incorporated by reference herein from Annual
Report on Form 10KSB for fiscal year ended July 31, 2002 as filed on October 29,
2002.
On August 12, 2002, Billy Stapleton and Susie Stapleton filed a complaint for
patent infringement in the United States District Court Eastern District of
Tennessee at Knoxville, against Innovative Medical Services with respect to the
RoachX patent. IMS will file answer to the complaint in March 2003. The Company
believes the action is frivolous and without merit.
ITEM 2.
CHANGES IN SECURITIES
On December 16, 2002, 200,000 shares of common stock were issued in exchange for
attorneys fees incurred in connection with the acquisition of the Axenohl
patent. On January 28, 2003, an option on 12,500 shares was exercised. During
the quarter we conducted a private placement of common stock, and as a result,
we issued 833,332 shares of common stock to six accredited investors at a price
of $0.30 per share.
With respect to the sales made, we 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 solely to accredited or
sophisticated investors who were provided all of the current public information
available on Innovative Medical Services.
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
Exhibits
A. The following Exhibits are filed as part of this report pursuant to Item 601
of Regulation S-B:
3.1 (1) -- Articles of Incorporation, Articles of Amendment and Bylaws
3.1.1(13) -- Articles of Amendment dated March 11, 2002
4.1 (1) -- Form of Class A Warrant
4.2 (1) -- Form of Class Z Warrant
4.3 (1) -- Form of Common Stock Certificate
4.4 (1) -- Warrant Agreement
4.5 (2) -- March 2000 Warrant
4.6 (3) -- January 2001 Warrant
4.7 (4) -- Convertible Debenture
4.8 (5) -- Convertible Debenture Purchase Agreement
4.9 (6) -- Convertible Debenture Warrant
10.1 (1) -- Employment Contract/Michael L. Krall
10.2 (7) -- Manufacturing, Licensing and Distribution Agreement dated March 26,
2001
10.3 (8) -- Axenohl License Agreement
10.4 (9) -- Weaver - Roach X Assignment
10.5 (9) -- Dodo Agreement [CONFIDENTIAL TREATMENT REQUESTED FOR CERTAIN OMITTED
INFORMATION FILED SEPARATELY]
10.6 (8) -- Promissory Note of Michael Krall
10.7 (8) -- Promissory Note of Gary Brownell
10.8 (9) -- Nutripure Dealer Agreement
10.9 (9) -- Sales Finance Agreement
10.10 (10) -- ETIH2O, Inc., Acquisition Agreement
10.11 (11) -- NVID Litigation Settlement Agreement
10.12 (12) -- Addendum #1 to NVID Settlement Agreement
(1) Incorporated by reference from Form SB-2 registration statement SEC File #
333-00434 effective August 8, 1996
(2) Incorporated by reference from S-3 registration statement, SEC File
#333-36248 effective on May 17, 2000
(3) Incorporated by reference from S-3 registration statement, SEC File
#333-55758 effective on February 26, 2001
(4) Incorporated by reference from S-3 registration statement, SEC File
#333-61664 filed on May 25, 2001
(5) Incorporated by reference from pre-effective amendment no. 1 to S-3
registration statement, SEC File #333-61664 filed on July 10, 2001
(6) Incorporated by reference from pre-effective amendment no. 2 to S-3
registration statement, SEC File #333-61664 filed on August 13, 2001
(7) Incorporated by reference from Current Report on Form 8-K filed on May 24,
2001 as amended on October 19, 2001
(8) Incorporated by reference from the Amended Annual Report on Form 10KSB for
the fiscal year ended July 31, 2000 filed on October 19, 2001
(9) Incorporated by reference from Amended Form 10QSB for the nine month period
ended April 30, 2001 filed on October 19, 2001
(10) Incorporated by reference from the Amended Annual Report on Form 10KSB for
the fiscal year ended July 31, 2001 filed on November 13, 2001
(11) Incorporated by reference from Current Report on Form 8-K filed on December
6, 2001
(12) Incorporated by reference from Amended Current Report on Form 8-K filed on
December 7, 2001
(13) Incorporated by reference from the Annual Report on Form 10KSB for the
fiscal year ended July 31, 2002 filed on October 29, 2002
B. Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INNOVATIVE MEDICAL SERVICES
(Registrant)
By: /s/ Michael L. Krall
-------------------------------
Michael L. Krall, President/CEO
June 13, 2003
By: /s/ Gary Brownell
--------------------------------------
Gary Brownell, Chief Financial Officer
June 13, 2003
CERTIFICATIONS
I, Michael L. Krall, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Innovative Medical
Services;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed
such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in
which this quarterly report is being prepared; b) evaluated the effectiveness of
the registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and b) any fraud, whether
or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 13, 2003
/s/ Michael L. Krall
---------------------
Michael L. Krall
President/CEO
CERTIFICATIONS
I, Gary Brownell, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Innovative Medical
Services;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed
such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in
which this quarterly report is being prepared; b) evaluated the effectiveness of
the registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and b) any fraud, whether
or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 13, 2003
/s/ Gary Brownell
--------------------------------
Gary Brownell
Chief Financial Officer