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, 2001
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[ ] 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
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INNOVATIVE MEDICAL SERVICES
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(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
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(Address of principal executive offices)
619 596 8600
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Issuer's telephone number
Check whether the issuer (1) filed all reports to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date: 6,625,752 as of March 16,
2001.
EXPLANATORY NOTE ON AMENDMENT
The Registrant has filed this Amendment in response to comments received from
the staff of the U.S. Securities and Exchange Commission. The Amendment has
revised the following sections:
Financial Statements
Notes to Financial Statements
Management's Discussion and Analysis of Financial Condition and Results
of Operations
Exhibits
Signatures
INNOVATIVE MEDICAL SERVICES
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of July 31, 2000 and January 31, 2001
Statements of Operations for the three months ended
January 31, 2000 and 2001
Statements of Cash Flows for the three months ended
January 31, 2000 and 2001
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K
Signatures
The interim financial statements include all adjustments which in the opinion of
management are necessary in order to make the financial statements not
misleading.
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
(Unaudited)
January 31 July 31
2001 2000
Restated Restated
ASSETS (Note 6) (Note 6)
------------- -------------
Current Assets
Cash and cash equivalents $ 348,578 $ 1,121,316
Restricted cash 211,004 204,887
Accounts receivable, net of allowance for doubtful
accounts of $ 225,000 at January 2001
and $225,000 at July 31, 2000 285,574 411,322
Due from officers and employees 335,624 226,729
Inventories 892,937 796,136
Prepaid expenses 63,842 33,975
------------ ------------
Total current assets 2,137,559 2,794,365
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Property, Plant and Equipment
Property, plant and equipment 966,892 1,056,252
------------ ------------
Total property, plant and equipment 966,892 1,056,252
------------ ------------
Noncurrent Assets
Deposits 8,127 14,083
Patents and license 803,009 300,910
Deferred acquisition costs -- 202,542
------------ ------------
Total noncurrent assets 811,137 517,535
------------ ------------
Total assets $ 3,915,587 $ 4,368,152
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable $ 319,321 $ 308,812
Accrued liabilities 46,867 36,880
Notes payable 196,009 210,592
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Total current liabilities 562,196 556,284
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Minority interest payable -- 61,697
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Stockholders' Equity
Class A common stock, no par value: authorized
20,000,000 shares, issued and outstanding
6,504,351 at January 31, 2001 and
5,942,903 at July 31, 2000 10,556,543 10,018,873
Class A warrants: issued and outstanding 3,686,000
warrants 108,750 108,750
Accumulated deficit (7,311,901) (6,377,452)
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Total stockholders' equity 3,353,391 3,750,171
------------ ------------
Total liabilities and stockholders' equity $ 3,915,587 $ 4,368,152
============ ============
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
-------------------------------------------------------------------------------------------------------
For the Six Months Ended For the Three Months Ended
January 31 January 31
---------- ----------
2001 2000 2001 2000
------------- -------------- -------------- --------------
Net sales $ 761,441 $ 1,216,995 $ 395,315 $ 312,107
Cost of sales 424,517 575,053 260,440 164,840
-------- -------- -------- -------
Gross profit 336,924 641,942 134,874 147,267
-------- -------- -------- -------
Selling expenses 277,166 258,430 102,647 145,726
General and administrative expenses 939,493 571,262 492,565 322,081
Research and development 82,803 44,116 31,818 5,513
------- ------- ------- -----
-
Total operating costs 1,299,461 909,323 628,485 492,536
---------- -------- -------- -------
Operating income (loss) (962,537) (267,380) (493,611) (345,268)
--------- --------- --------- ---------
Other income and (expense):
Interest income 23,161 2,504 8,562 1,426
Interest Expense (9,645) (35,514) (1,455) (19,215)
------- -------- ------- --------
-
Total other income (expense) 13,516 (33,010) 7,107 (17,789)
------- -------- ------ --------
Income (loss) before income taxes, minority
Interest in subsidiary operations and
change in accounting principle (949,021) (264,876) (494,693) (343,842)
Federal and state income taxes 400 400 200 200
-------- -------- -------- --------
Income (loss) before minority interest in
subsidiary operations and change in
accounting principl (949,421) (265,276) (494,893) (344,042)
Minority interest in subsidiary operations 14,972 310 0 310
------- ---- -- ---
Net income (loss) before cumulative
change in accounting principle (934,449) (264,966) (494,893) (343,732)
Cumulative effect of change
in accounting principle - 79,896 - 79,896
------- ------- ------- ------
Net income (loss) $ (934,449) $ (185,070) $ (494,893) $ (263,836)
=========== =========== =========== ===========
Net income (loss) per common share before change
in accounting principle (basic) $ (0.15) $ (0.06) $ (0.08) $ (0.07)
Cumulative effect of change
in accounting principle - 0.02 - 0.02
------- ------ ------- -----
Net income (loss) per common share (basic) $ (0.15) $ (0.04) $ (0.08) $ (0.06)
======== ======== ======== ========
Net income (loss) per common share before change
in accounting principal (diluted) $ (0.15) $ (0.03) $ (0.08) $ (0.04)
Cumulative effect of change
in accounting principle - 0.01 - 0.01
------- ------- ------- -------
Net income (loss) per common share (diluted) $ (0.15) $ (0.02) $ (0.08) $ (0.03)
======== ======== ======== ========
Six Months
Ended Year Ended
January 31 July 31
CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS 2001 2000
--------------------------------------------------------------------------------
Balance, beginning of period $ (6,377,452) $ (3,840,610)
Net income (loss) (934,449) (2,536,842)
--------- -----------
Balance, end of period $ (7,311,901) $ (6,377,452)
============= =============
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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For the Six Months Ended
January 31
2001 2000
------------ ----------
Cash flows from operating activities
Net income (loss) $ (934,449) $(185,070)
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization 43,099 --
Depreciation 95,370 72,324
Minority interest in subsidiary operations (61,697) 101,490
Changes in assets and liabilities:
(Increase) decrease in restricted cash (6,117) 1,963
(Increase) decrease in accounts receivable 125,748 (95,242)
(Increase) decrease in due from officers and employees (108,895) (97,153)
(Increase) decrease in prepaid expense (29,867) (13,245)
(Increase) decrease in inventory (96,801) 3,172
(Increase) decrease in deposits 5,956 (6,508)
(Increase) decrease in goodwill -- 3,267
(Increase) decrease in intangible assets -- 4,500
Increase (decrease) in accounts payable 10,509 (89,127)
Increase (decrease) in accrued liabilities 9,987 (33,467)
----------- ---------
Net cash provided (used) by operating
activities (947,157) (333,096)
----------- ---------
Cash flows from investing activities
Purchase of patents and licenses (299,558) (68,400)
Purchase of property, plant and equipment (49,109) (292,236)
----------- ---------
Net cash (used) in investing activities (348,667) (360,636)
----------- ---------
Cash flows from financing activities
Proceeds from debt obligations -- 121,300
Payments on debt obligations (14,583) (141,829)
Proceeds from sale of common stock 537,669 771,775
----------- ---------
---------
Net cash provided by financing activities 523,086 751,246
----------- ---------
Net increase (decrease) in cash and cash
equivalents (772,738) 57,514
Cash at beginning of period 1,121,316 22,056
----------- ---------
Cash at end of period $ 348,578 $ 79,570
=========== =========
Supplemental disclosures of cash flow information
Cash paid for interest paid $ 9,645 $ 35,514
Cash paid for taxes paid $ 800 $ 800
Noncash investing and financing activities:
Value of shares issued in exchange for
Nutripure.com minority interest $ 550,011 $ --
Value of shares issued in exchange for ETI H2O $ 140,953
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, 2000 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.
Note 2. Stock Dividend
On October 26, 2000 Innovative Medical Services announced that the
Board of Directors voted to declare a dividend in kind of Innovative
Medical Services' common stock. This common stock dividend was
declared and distributed in lieu of the previously announced dividend
of Nutripure.com shares. The Company distributed one share of
Innovative Medical Services' common stock for every fifty shares held
of record on November 6, 2000, with fractional shares rounded up to
the nearest whole share, for a total of 121,961 shares.
In December 1999, Innovative Medical Services formed a wholly owned
subsidiary, Nutripure.com, to capitalize on internet commerce
opportunities focusing on health and wellness. In January 2000,
Innovative Medical Services declared a dividend in kind of
Nutripure.com common stock as the Company began the process to spin
off Nutripure.com as a separate public company. The record date and
distribution date were to be set following completion of the
registration of Nutripure.com as a reporting issuer with the
Securities and Exchange Commission. During the last several months,
however, adverse market conditions for solely internet-based ventures
have eroded Management's confidence in the viability of a public
market for Nutripure.com common stock. Therefore, the Board has
amended its declaration of a Nutripure.com dividend to a dividend of
Innovative Medical Services' common stock. The Company will retain
Nutripure.com as an operating division of Innovative Medical Services
in order to minimize the substantial administrative expense associated
with launching and operating a public company.
Note 3. Acquisitions
In November 2000, Innovative Medical Services acquired 100% of the
stock of ETIH2O, Inc., a Florida corporation, for 56,381 shares of IMS
stock valued at $140,953 ($2.50 per share). The transaction was
recorded using the purchase method of accounting. The assets acquired
and liabilities assumed are as follows:
Assets:
Notes Receivable $ 33,655
Inventories 32,077
Equipment 16,932
Licensing & Distribution Rights 118,324
-------
Total Assets 200,988
Liabilities:
Notes Payable - IMS 60,035
------
Equity $ 140,953
=========
Assets and liabilities were valued at historical cost and no goodwill
was recorded in the transaction. Results of operations of ETIH2O Inc.
are included in the current quarter. The acquired entity was a startup
company, if results of operations were included in prior periods and
shown as though the companies had been combined at the beginning of
the period, it would not have a material affect on the consolidated
financial statements of Innovative Medical Services.
The Company merged ETIH2O with a newly formed Nevada corporation of
similar name and dissolved the Florida corporation. ETI-H2O, a
privately held technology corporation, developed Axenohl and focuses
on research and development of varied water treatment applications,
including electronic RF scale control, copper/silver ionization and
filtration technologies.
Note 4. Common Stock
In addition to the common stock issued, described in Notes 2 and 3,
the Company completed a $250,000 private placement in January 2001 in
which the Company issued 83,334 shares of common stock to six
investors at $3.00 per Unit. Each Unit contained one share of common
stock and a warrant to acquire an additional share of common stock for
$4.00 per share up to January 28, 2003.
Note 5. Business Segment and Sales Concentrations
The Company operates in a single operating segment and is engaged in
the development, manufacturing and marketing of water purification and
dispensing equipment and related filter sales to independent
pharmacies and large chain drug stores. Although the Company has
expanded from its niche pharmacy market into other, broader markets
with new products, including residential and commercial water
filtration systems, health and wellness-related retail merchandise,
e-commerce products, and silver ion bioscience technologies, at the
January 31, 2001 revenues from these future segments were not material
to the consolidated financial statements and no disaggregated
information was reviewed.
Significant customers consisted primarily of domestic retail chain
pharmacies. Sales concentrations to major chain stores were
approximately $175,900 and $448,200, respectively, for the three
months and the six months ended January 31, 2001. No customer
accounted for more than 10% of consolidated sales in 2000 or 2001.
Export sales were $26,200 for the quarter and $41,300 for the six
months ended January 31, 2001.
Note 6. Prior Period Adjustment - Write Down of Impaired Assets
The balance sheets have been adjusted to reflect the write-down of
impaired assets in the fourth quarter of 2000. Ampromed was purchased
in October of 1998 to enable the Company to take advantage of the
lucrative markets for medical and dental supplies in Brazil and other
South American countries and to later introduce and distribute its
water purification products to these markets. Since the acquisition
the economic conditions in the region have declined and implementation
of the project has been delayed. The Company made its last sale in the
region in October of 1999 and in May of 2000 terminated its lease in
Rio de Janeiro and did not replenish the Ampromed inventory. The
Company no longer has immediate plans to import medical and dental
supplies into Brazil but believes, however, that Ampromed is a vital
part of its plan to market and sell "Axenohl", RoachX and the
Nutripure line of water treatment products. The Company believes there
is considerable value in owning a Brazilian Limitada but has
reassessed the value of the goodwill the customer list it purchased.
Statement of Financial Accounting Standards No. 121 (Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of) requires an entity to review long-lived assets and
identifiable intangible assets when, among other factors, there is a
change in the extent or manner in which an asset is to be used or when
there is a significant change in the business climate that could
affect the value of an asset. The statement requires an entity
estimate the future cash flows expected to result from the use of the
asset and to recognize an impairment loss when the sum of the future
cash flows is less than the carrying amount of the asset. Because of
the unique nature of the products to be introduced, the Company does
not believe it has enough quantifiable historical information to
reliably predict future cash flows from this operation. For this
reason the Company believes the Goodwill and Customer List should be
written off, and the value of the Limitada license to do business in
Brazil should be written down to what it would cost to acquire in
today's market. This is estimated to be approximately $150,000 which
will be amortized over its expected useful life of 15 years. The total
reduction of assets from this restatement was $791,411. Because the
effect of the write-down on the statements of operations presented was
only a $1,400 they have not been restated. Instead the adjustment will
be made in the fourth quarter of 2001.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the
audited and unaudited financial statements of the Company.
OVERVIEW
Innovative Medical Services (the Company) began as a provider of pharmaceutical
water purification products. The Company has expanded from its niche pharmacy
market into other, broader markets with new products, including residential and
commercial water filtration systems, health and wellness-related retail
merchandise, e-commerce products, and silver ion bioscience technologies.
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. The Company also markets proprietary NSF
certified replacement filters for the Fillmaster Systems.
The Company's Nutripure(R) line of water treatment and filtration systems
includes the Nutripure 3000S-Series whole-house water softening systems, the
Nutripure Elite reverse osmosis point-of-use systems, the Nutripure 2000
countertop water filtration system and the Nutripure Sport filtered sport
bottle. The Company distributes its various Nutripure products in several ways,
including retail sales, catalogue placement, business-to-business sales,
internet promotion and in-home sales presentations.
During the first half of fiscal 2001, Innovative Medical Services created the
Nutripue dealer program, a comprehensive sales and marketing program for the
water treatment industry. The program offers existing independent water
treatment dealers a line of residential water softening and other point-of-use
water treatment equipment for sale to the public under IMS' Nutripure brand. In
addition, the program provides complementary, industry-unique financing that
extends credit to consumers for the purchase of water treatment equipment.
During the second quarter, the Company partnered with Automated Payment Services
("APS"), and MBNA to strengthen and streamline the financing program and
administration of the Nutripure dealer program. Under the unique Nutripure
program, independent water treatment dealers may now offer credit to all
prospective customers because the Nutripure programs offers competitive,
risk-based interest rates. In addition, through APS, dealers can obtain
real-time processing and approval information online for their customers. The
dealer base for the program grows steadily, and the Company expects revenues
from the Nutripure dealer program to accelerate in the second half of the year.
The Company, through its subsidiary Nutripure.com(R), operates an e-commerce
health website, Nutripure.com, as a distributor of Bergen Brunswig products,
which provides consumers a wide variety of vitamins, minerals, nutritional
supplements, homeopathic remedies and natural products. In addition to
merchandise, the website offers comprehensive health and wellness information in
an easy-to-access, intuitive reference format.
Innovative Medical Services has obtained worldwide manufacturing and marketing
rights for advanced silver ion technologies. Axenohl(TM) is an antimicrobial
technology that uses the biocidal properties of ionic silver to kill bacteria
viruses and fungi. Axenohl's broad effectiveness works to prevent and treat
infection, and, unlike traditional disinfectants, Axenohl is non-toxic and
environmentally friendly. Potential applications for products containing Axenohl
include municipal and point-of-use/point-of-entry water treatment, food
processing, personal disinfecting retail products, and commercial and retail
hard surface disinfecting products. In addition, this technology may provide
applications in the healthcare market for treatment of disease, including human
and animal infections and wounds, and for disinfecting applications in
hospitals, clinics, surgical centers, dental offices and other medical and
health related facilities.
The disinfection efficacy of Axenohl has been well documented by independent
testing laboratories. Axenohl eliminates the following test organism strains all
within one minute and with 99.9999% efficacy (complete kill): Pseudomonas
aeruginosa ATCC 15422, Staphylococcus aureus ATCC 6538, Salmonella cholerasuis
ATCC 10708, E. Coli ATCC 0157:H7, Listeria monocytogenes ATCC 11543, Entrococcus
facium ATCC 11543, Rhino virus (common colds), and Rotavirus (infectious
diarrhea).
In March 2001, the US Patent and Trademark Office issued US Patent Number
6,197,814 for Axenohl. Patent applications have been filed in more than 50
countries and regions, and the World Intellectual Property Organization
published the Axenohl International Patent Application on April 22, 1999 under
publication number WO 99/18790.
Regulatory approval is a threshold event for the Company's commercial launch of
Axenohl and related products in the United States. EPA approval of Axenohl for
use as a hard surface disinfectant is believed imminent. Meanwhile, the Company
has applied for approvals in several other countries. Axenohl is approved in
Costa Rica for use as a water treatment chemical, hard surface disinfectant, and
industrial disinfectant for direct food contact. Approval in Costa Rica for
human and veterinary topical use is expected this quarter.
In March 2001, the Company signed its first significant contract for Axenohl
with a Korean cosmetics company. Dodo & Company is launching a revolutionary
line of acne-fighting cosmetics containing Axen as its active ingredient.
(Axen(TM) is the trade name for the use dilution Axenohl solution.) Under the
terms of the contract, Dodo & Company will purchase approximately $1.2 million
dollars of product from Innovative Medical Services over five years. In addition
to the purchase price, Innovative Medical Services will receive a royalty on
sales of the Axen-containing products. The Company anticipates that total
revenues from the contract should exceed $5 Million over five years. Dodo &
Company plans to begin purchasing product in May 2001 in preparation for the
September launch of its new product line. The company expects to begin realizing
revenues from sales of Axenohl to additional international customers in the
third fiscal quarter of 2001.
In January 2001, the Company acquired a new, pesticide technology. The
EPA-approved RoachX(R) will be the first product to launch from the line. 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. The patent-pending time-released formulation protects the
boric acid from dissolving in water and maintains the integrity of the pesticide
to obtain maximum killing effect. The product line, containing particular
formulas for specific pests, provides excellent results against cockroaches,
ants, palmetto bugs, silverfish, waterbugs, ticks, fleas, lice and garden pests.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2001 VERSUS THREE
MONTHS ENDED JANUARY 31, 2000 Total revenues of $395,300 in the first quarter
ended January 31, 2001 were 27% higher than the $312,100 in revenues reported
for the same quarter ended January 31, 2000. Fillmaster Purification System
sales in the 2001 quarter were $298,900 and replacement filter sales were
$77,800. In the 2000 quarter, Fillmaster Purification System sales were $234,600
and replacement filter sales were $74,000.
Gross profit in the most recent quarter was $134,900 versus $147,300 in the
year-earlier quarter. The gross profit of 34% in 2001 was lower versus the 47%
gross profit in 2000.
Net loss for the quarter ended January 31, 2001 was $494,900 versus a loss of
$263,800 for the same quarter in 2000.
In November 2000, Innovative Medical Services acquired 100% of the stock of
ETIH2O, Inc., a Florida corporation, for approximately 56,400 shares of IMS
stock valued at approximately $141,000. The transaction was recorded using the
purchase method of accounting. The Company merged ETIH2O with a newly formed
Nevada corporation of similar name and dissolved the Florida corporation.
ETI-H2O, a privately held technology corporation, developed Axenohl and
previously manufactured the product in cooperation with NVID. ETI-H2O
specializes in research and development of varied water treatment applications,
including electronic RF scale control, copper/silver ionization and filtration
technologies.
During the second quarter, the Company partnered with Automated Payment Services
("APS"), and MBNA to strengthen and streamline the financing program and
administration of the Nutripure dealer program. Under the unique Nutripure
program, independent water treatment dealers may now offer credit to all
prospective customers because the Nutripure programs offers competitive,
risk-based interest rates. In addition, through APS, dealers can obtain
real-time processing and approval information online for their customers.
Revenues from the Nutripure water treatment dealer program continue to ramp up.
The dealer base grows steadily, and Management believes that the program will
accelerate through the second half of the year.
In addition to the ongoing expansion of the water dealer program, distribution
of the Company's other products in the Water Treatment Division continued to
grow in the second quarter. The Nutripure Sport Bottle was shipped to 900 GNC
stores. Shaws Supermarkets has stocked the Nutripure Sport Bottle and the
Nutripure 2000 and also will be installing Fillmaster Systems in the coming
quarter. In March, Kaiser Permanente began purchasing Fillmaster pharmaceutical
water filtration systems for all California pharmacies. Wal-Mart has placed
Nutripure 2000 countertop water filtration systems in over 350 of its highest
volume stores. CVS currently purchases Fillmaster systems for its new and
remodeled stores at a rate of at least 50 units per month and plans to continue
the roll out through the end of the calendar year. Nutripure Sport Bottle,
Nutripure 2000 and Fillmaster are also being tested in Canada, with initial
placement in some Pharma Plus and Wal-Mart Canada Stores. The Company expects
retail product distribution to continue to increase in the second half of the
fiscal year.
As mentioned in the Company Overview, regulatory approval is a threshold event
for the Company's commercial launch of Axenohl and related products in the
United States. EPA approval of Axenohl for use as a hard surface disinfectant is
believed imminent, and if approvals are received, Management expects revenues
from Axenohl to rapidly and substantially develop. Meanwhile, the Company has
applied for international approvals in several countries. Axenohl is approved in
Costa Rica for use as a water treatment chemical, hard surface disinfectant, and
industrial disinfectant for direct food contact. Approval in Costa Rica for
human and veterinary topical use is expected this quarter.
In March 2001, Innovative Medical Services signed a five-year contract with Dodo
& Company, a leading Korean cosmetics manufacturer and marketer to provide
Axenohl. Dodo & Company is launching a revolutionary line of acne-fighting
cosmetics containing Axen as its active ingredient. (Axen is the trade name for
the use-dilution Axenohl solution.) Under the terms of the contract, Dodo &
Company will purchase approximately $1.2 million dollars of product from
Innovative Medical Services over five years. In addition to the purchase price,
Innovative Medical Services will receive a royalty on sales of the
Axen-containing products. The Company anticipates that, over the five years, the
revenues from the cosmetics royalties will exceed the revenues from sales of
Axen.
In January 2001, the Company announced its acquisition of a new, non-toxic
pesticide technology. RoachX is the first product to launch, and since January,
the Company has been working to increase distribution to commercial applicators
and retailers. Major distribution projects are underway in the United States,
Canada, Mexico, Germany, the United Kingdom, Korea, China and South Africa. The
Company expects revenues from sales of RoachX to accelerate in the coming
quarter and have a very significant short and long-term impact on revenues and
earnings.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JANUARY 31, 2001 VERSUS SIX
MONTHS ENDED JANUARY 31, 2000
Revenues of $761,400 in the six months ended January 31, 2001 were 37% lower
than the $1,217,000 in revenues reported for the six months ended January 31,
2000. Fillmaster Purification System sales in the six months ended January 31,
2001 were $483,100 and replacement filter sales were $199,600. In the prior
period, Fillmaster Purification System sales were $843,000and replacement filter
sales were $266,000. Sales of Fillmaster Purification System decreased 23% and
sales of filter replacements decreased 36% during the fiscal quarter 2000/2001.
Management believes the decline in Fillmaster revenues is due to multiple
factors, including the fact that the market for pharmacy products is maturing in
that there is a decreasing number of pharmacy chains that do not have water
filtration products, and that the Company has sold systems to most major chains.
The focus for further Fillmaster sales will be on incremental and upgrade sales
to individual pharmacies within current chain accounts, although the Company is
still actively pursuing Fillmaster sales to remaining chains. Management expects
to close such volume sales to new chains in the coming year, and, as in prior
years, those sales will result in spikes in Fillmaster revenues. The Company
works to retain customers with its Customer Service Plan 2000, a multi-year
service and warranty contract.
Gross profits for the six months ended January 31, 2001 were $336,900 versus
$641,900 in 2000. The gross profit of 44% in 2001 was lower versus the 53% gross
profit in 2000. The decrease in gross profit percentage was largely due to fixed
production and labor costs being applied to the unexpected lower sales volume
for the year.
Net loss for first six months ended January 31, 2001 was $934,400 versus
$185,100 for the same period last year. The decreased income was due to
decreased sales and to an increase in General and Administrative expenses as the
Company positions for anticipated rapid growth activity related to new ventures,
including expanded retail distribution of the Nutripure 2000 home water system,
Nutripure.com. and the new silver ion technologies. General and Administrative
expenses increased $368,200 from $571,300 in fiscal 2000 to $939,500 in fiscal
2001, $137,600 of these expenses were related to Nutripure.com, a wholly owned
subsidiary incorporated in the state of Nevada in December 1999. Nutripure.com
is an e-commerce web supersite providing consumers a wide variety of vitamins,
minerals, nutritional supplements, homeopathic remedies and natural products. In
addition to products, the website offers comprehensive health and wellness
information in an easy-to-access, intuitive reference format. The website also
presents the Nutripure line of water filtration systems.
Throughout the six-month period, Innovative Medical Services focused its
resources on expanding the current and future scope of business and related
growth potential. The Company's increased selling expenses and general and
administrative expenses reflect the Company's transition from a niche market
company that provides water purification equipment to pharmacies to an
international company containing several divisions to manage new products and
programs in consumer and commercial water treatment, direct-to-consumer
e-commerce and retail distribution of multiple product lines.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended January 31, 2000, the Company's current assets to
liabilities ratio decreased from 5.02 to 3.80. Current assets decreased $658,700
from $2,794,400 to $2,135,700. The change in current assets during the six
months ended January 31, 2001 include an decrease of $772,700 in cash on hand,
an increase in inventories of $94,900, while total receivables remained constant
during the period. Current liabilities also remained virtually constant during
the six months ended January 31, 2001.
Cash flows used from operations were $947,200in the first six months of fiscal
year 2001. Cash flows used from operations were $333,100 for the same period in
2000. For those periods, cash flows used in investing activities included,
respectively, $49,100 and $292,200 for the purchase of fixed assets and
$299,600and $68,400 for the purchase of patents and licenses. Cash flows from
financing activities were decreased by payments on debt obligation of $14,600
and increased by $537,100 from the sale of common stock, which included a
$250,000 private placement in January 2001 in which the Company issued 83,334
shares of common stock to six investors at $3.00 per Unit. Each Unit contained
one share of common stock and a warrant to acquire an additional share of common
stock for $4.00 per share up to 5:00 p.m. Pacific time, January 28, 2003. Also,
In November 2000, Innovative Medical Services acquired 100% of the stock of
ETIH2O, Inc., a Florida corporation, for approximately 56,400 shares of IMS
stock valued at approximately $141,000. The transaction was recorded using the
purchase method of accounting. In addition, approximately $132,700 was received
from exercise of outstanding stock options.
The total decrease in cash and cash equivalents for the 2001 six-month period
was $772,700 as compared to increase of $57,500 during the same period in 2000.
PART 2 OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
The following is an update of developments in the previously disclosed
litigation involving the Company filed in the Circuit Court of Pinellas County,
Florida by Zedburn Corporation, against the Company for breach of contract in
October 1997. The Company has filed counterclaims based upon the Racketeer
Influenced and Corrupt Organization (RICO) Act against Mr. David Reitz, Zedburn
Corporation, Capital Development Group, Steven Durland and other defendants. It
is the Company's position that Mr. Reitz and others perpetrated a scheme to
defraud the Company of cash fees and securities in connection with purported
services of arranging a public offering of the Company's common stock. In
October 1997, Mr. Reitz and Zedburn filed for protection under the Federal
bankruptcy laws. In August 1998, Mr. Reitz voluntarily dismissed his bankruptcy
and as a result thereof the Company has named Mr. Reitz as a defendant to its
counterclaims.
The Company believes that the defendants had perpetrated similar schemes against
other parties. The Company also believes it has substantially completed
discovery and compiled compelling evidence to prove its claims.
Several of the Defendants filed Motions to Dismiss the Company's counterclaims.
A hearing on the Motions was held on October 1, 1998. Certain of the Motions
were granted pending the Company's amendment of its Counterclaim. The Company
amended its Counterclaims in accordance with the judge's rulings. Certain
Defendants filed second Motions to Dismiss the amended Counterclaims. A hearing
on these latest motions was held in March 1999, before a different judge than
the judge who ruled on the first motions. On April 20,1999, Orders were entered
granting the Defendants' Motions to Dismiss. However these Orders did not state
the basis for the Orders, nor was the Company's legal counsel provided notice of
the Orders or a copy of the new judge's correspondence offering a "formal
ruling" upon request. In May 1999 the Company filed an Appeal of the Orders and
Motions for Reconsideration based upon inconsistency of the Orders with the
previous judge's rulings and the lack of notice to the Company. The Company
believes that its Appeal and Motions have merit and will be granted. In any
event the Company intends to pursue a trial as soon as possible. As of March 16,
2001, no ruling has been received on the Company's Appeal.
The Company has neither accrued a liability in its financial statements
regarding this litigation nor disclosed the matter in the footnotes thereof. The
Company has not done so because it does not believe there is any merit to Mr.
Reitz's claims and that the likelihood that the Company will realize a loss from
these matters is believed remote. In addition, the Company believes that in the
unlikely event that the Company settles, the amount of any such settlement would
not be material to the Company's financial statements.
The Company has filed an action against John Woodard, former Vice President of
Sales, in Superior Court in the State of California in April 2000. The Company
has alleged Mr. Woodard violated his non-competition/non-disclosure agreement
and provided proprietary information, including information regarding the
Company's Fillmaster line of products and Fillmaster customer base, to Fresh
Water Systems, Inc. The Company ha alleged the misappropriation of customer
lists, equipment service and maintenance schedules, equipment data, business
plans and research and development secrets. The Company is seeking monetary
damages and injunctive relief. On November 20, 2000 an "Amendment to Complaint"
was filed adding Lisa Still as a new Defendant. The Company alleges the same
causes of actions to Lisa Still as previously alleged against Mr. Woodard.
The Company has also filed an action against Fresh Water Systems, Inc., Steven
Norvell, Brian Folk and Eric Norvell in Superior Court in the State of
California. The action was filed in August 2000 and amended in October 2000. The
Company alleges Fresh Water Systems and it's officers and directors
misappropriated trade secrets of the Company obtained from former employees of
the Company, engaged in unfair competition in violation of the California Unfair
Practices Act, tortious interference with contractual relations, tortious
interference with prospective business advantage, fraud, trade libel and
conspiracy with regard to the Fillmaster line of products and Fillmaster
customer base. The Company is seeking monetary damages and injunctive relief. On
or about October 20, 2000 a motion for Consolidation was granted by the Superior
Court, thereby merging the Fresh Water Systems lawsuit into the Woodard lawsuit.
A jury trial date was set in the above matters for January 2002. Numerous
discovery issues propounded to defendants are still awaiting responses.
The Company filed an action against Eckerd Corporation in Superior Court in the
State of California in August 2000. The Company alleges Eckerd Corporation has
not paid for Fillmaster products ordered by and shipped to Eckerd pharmacies.
The Company seeks monetary damages not less than $170,000 plus interest and
attorney's fees. In September 2000, Defendant filed a "Notice of Removal" moving
said case from California Superior Court to the Federal Court for the Southern
District of California. Minimal discovery commenced regarding Eckerd's contacts
with California. Defendants then filed a motion to "Dismiss for Lack of Personal
Jurisdiction." On March 5, 2001 this motion was granted dismissing said action.
The Company plans to appeal this motion and/or file this action in the state of
Florida.
ITEM 2.
CHANGES IN SECURITIES
In January 2001, the Company issued 83,334 shares of common stock to six
investors in a private placement at $3.00 per Unit. Each unit contained one
share of common stock and a warrant to acquire an additional share of common
stock for $4.00 per share up to 5:00 p.m. Pacific time, January 28, 2003.
With respect to the sales made, the Company relied on Section 4(2) of the
Securities Act of 1933, as amended. No advertising or general solicitation was
employed in offering the securities. The securities were offered solely to
accredited or sophisticated investors who were provided all of the current
public information available on the Company.
Also in February 2001, the Company issued 20,000 shares of common stock to a
single investor in settlement of a debt of ETI H2O, Inc.
With respect to these shares, the Company relied on Section 3(a)(10) of the
Securities Act of 1933, as amended as the shares were a security issued in
exchange for a bona fide outstanding claim where the terms and conditions of
such issuance and exchange have been approved, after a hearing by a court of the
United States.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 8, 2001 the Registrant held its annual meeting of shareholders in San
Diego, California. The following Directors of the Registrant were reelected to
the Board of Directors by the votes as follows:
Nominee Votes For Votes Withheld Abstentions/Broker Non-Votes
Dennis Brovarone 5,093,587 13,832 0
Gary Brownell 5,093,587 13,832 0
Patrick Galuska 5,093,629 13,790 0
Michael L. Krall 5,093,587 13,832 0
Eugene Peiser 5,093,629 13,790 0
Donna Singer 5,093,629 13,790 0
The only other item of business at the meeting was approval of the Innovative
Medical Services 2001 Officers Directors Stock Option Plan. The plan was
approved by the following vote:
Votes For Votes Against Abstentions Broker Non-Votes
922,944 93,831 14,300 4,076,344
ITEM 5.
OTHER INFORMATION
Not applicable.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10.4 -- Weaver - Roach X Assignment dated January 4, 2001
EXHIBITS DESCRIPTION
11 Statement re: computation of per share earnings
(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
August 13, 2001
By: /s/ Gary Brownell
--------------------------------------
Gary Brownell, Chief Financial Officer
August 13, 2001