U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the period ended January 31, 2002
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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
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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: 7,928,099 as of March 15,
2002.
INNOVATIVE MEDICAL SERVICES
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of July 31, 2001 and January 31, 2002
Statements of Operations for the three months ended
January 31, 2001 and 2002 Statements of Cash Flows for
the three months ended January 31, 2001 and 2002
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.
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------------------
(Unaudited)
January 31 July 31
2002 2001
-------------- ---------------
ASSETS
Current Assets
Cash and cash equivalents $ 330,238 $ 207,092
Accounts receivable, net of allowance for doubtful
accounts of $ 110,000 at January 2002
and $115,000 at July 31, 2001 503,713 570,734
Subscriptions receivable 100,000 --
Due from officers and employees 239,688 240,001
Inventories 653,473 711,018
Prepaid expenses 173,158 182,556
--------- ---------
Total current assets 2,000,270 1,911,400
--------- ---------
Property, Plant and Equipment
Property, plant and equipment 790,210 903,072
--------- ---------
Total property, plant and equipment 790,210 903,072
--------- ---------
Noncurrent Assets
Deposits 8,953 8,127
Patents and license 2,650,645 1,014,282
Deferred acquisition costs 243,000 230,000
--------- ---------
Total noncurrent assets 2,902,598 1,252,409
--------- ---------
Total assets $ 5,693,077 $ 4,066,881
========= =========
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable $ 520,948 $ 543,992
Accrued liabilities 108,300 62,900
Notes payable 400,245 --
--------- ---------
Total current liabilities 1,029,492 606,892
--------- ---------
Stockholders' Equity
Class A common stock, no par value: authorized
20,000,000 shares, issued and outstanding
7,928,099 at January 31, 2002 and
6,954,699 at July 31, 2001 13,620,475 11,619,665
Accumulated deficit (8,956,890) (8,159,676)
--------- ---------
Total stockholders' equity 4,663,585 3,459,989
--------- ---------
Total liabilities and stockholders' equity $ 5,693,077 $ 4,066,881
========= =========
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
------------------------------------------------------------------------------------------------------------
For the Six Months Ended For the Three Months Ended
January 31 January 31
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales $ 1,698,183 $ 761,441 $ 834,155 $ 395,315
Cost of sales 805,819 424,517 317,955 260,440
----------- ----------- --------- ---------
Gross profit 892,364 336,924 516,200 134,875
----------- ----------- --------- ---------
Selling expenses 354,525 277,166 120,116 102,647
General and administrative expenses 1,006,793 939,493 556,868 492,565
Research and development 316,212 82,803 245,389 41,773
----------- ----------- --------- ---------
Total operating costs 1,677,531 1,299,462 922,374 636,985
----------- ----------- --------- ---------
Operating income (loss) (785,167) (962,538) (406,174) (502,110)
----------- ----------- --------- ---------
Other income and (expense):
Interest income 343 23,161 131 8,562
Interest Expense (11,190) (9,645) (9,500) (1,455)
----------- ----------- --------- ---------
Total other income (expense) (10,848) 13,516 (9,370) 7,107
----------- ----------- --------- ---------
Income (loss) before income taxes, minority
Interest in subsidiary operations (796,014) (949,022) (415,543) (495,003)
Federal and state income taxes 1,200 400 600 200
----------- ----------- --------- ---------
Income (loss) before minority interest in subsidiary
operations (797,214) (949,422) (416,143) (495,203)
Minority interest in subsidiary operations -- 14,972 -- 310
----------- ----------- --------- ---------
Net income (loss) before cumulative $ (797,214) $ (934,450) $(416,143) $(494,893)
=========== =========== ========= =========
Net income (loss) per common (basic) $ (0.11) $ (0.15) $ (0.06) $ (0.08)
=========== =========== ========= =========
Net income (loss) per common share (diluted) $ (0.11) $ (0.15) $ (0.06) $ (0.08)
=========== =========== ========= =========
Six Months
Ended Year Ended
January 31 July 31
CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS 2002 2001
--------------------------------------------------------------------------------
Balance, beginning of period $(8,159,676) $(6,377,451)
Net income (loss) (797,214) (1,782,224)
----------- -----------
Balance, end of period $(8,956,890) $(8,159,676)
=========== ===========
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
-------------------------------------------------------------------------------------------------------
For the Six Months Ended
January 31
2002 2001
------------- ---------------
Cash flows from operating activities
Net income (loss) $ (797,214) $ (934,449)
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization 115,483 42,385
Depreciation 128,429 95,370
Minority interest in subsidiary operations -- (61,697)
Changes in assets and liabilities:
(Increase) decrease in restricted cash -- (6,117)
(Increase) decrease in accounts receivable 67,021 125,748
(Increase) decrease in subscriptions receivable (100,000) --
(Increase) decrease in due from officers and employees 313 (108,895)
(Increase) decrease in prepaid expense 9,398 (29,867)
(Increase) decrease in inventory 57,545 (96,801)
(Increase) decrease in deposits (826) 4,956
(Increase) decrease in goodwill -- 4,267
(Increase) decrease in intangible assets -- 4,500
Increase (decrease) in accounts payable (23,044) 10,509
Increase (decrease) in accrued liabilities 45,400 9,987
--------- ---------
Net cash provided (used) by operating
activities (497,496) (940,104)
--------- ---------
Cash flows from investing activities
Purchase of patents and licenses (83,334) (307,325)
Purchase of property, plant and equipment (131,049) (48,395)
Purchase of deferred acqusition costs (13,000) --
--------- ---------
Net cash (used) in investing activities (227,383) (355,720)
--------- ---------
Cash flows from financing activities
Proceeds from debt obligations 400,245 --
Payments on debt obligations -- (14,583)
Proceeds from sale of common stock 447,780 537,669
--------- ---------
Net cash provided by financing activities 848,025 523,086
--------- ---------
Net increase (decrease) in cash and cash
equivalents 123,146 (772,738)
Cash at beginning of period 207,092 1,121,316
--------- ---------
Cash at end of period $ 330,238 $ 348,578
=========== ===========
Supplemental disclosures of cash flow information
Cash paid for interest paid $ 11,190 $ 9,645
Cash paid for taxes paid $ 1,200 $ 400
Noncash investing and financing activities:
Value of shares issued in exchange for Silver Ion Technology patent $ 1,540,600 $ --
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, 2001 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. Segment Information
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 Biosciences 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 treatment,
Residential Retail products and the Nutripure Water Dealer
program. Bioscience includes two new products, Axenohl (Silver Ion
Technology) and RoachX (Pest Management).
The Company plans to utilize multiple forms of analysis and
control to evaluate the performance of the segments and to
evaluate investment decisions. In general, gross margin and
Earnings Before Interest Taxes Depreciation and Amortization
(EBITDA) are deemed to be the most significant measurements of
performance, although collection volumes and certain controllable
costs also provide useful "early warning signs" of future
performance. Because the Company has just recently changed to
multiple segments, current and historical data on gross profit,
income from operations and changes in material assets is not yet
available. However, the following is a summary of segment revenues
at January 31, 2001 and January 31, 2002:
Three months % Three months Ended %
Ended Total January 31, 2002 Total
January 31, 2001 Sales Sales
----------------------- --------- --------------------- --------
Revenues:
Water Treatment $393,700 100% $409,800 49%
Bioscience 0 0% 423,500 51%
-------- ------ ------- ---
Total Revenues $393,700 100% $833,300 100%
======== ====== ======== ====
Six months % Six months %
Ended Total Ended Total
January 31, 2001 Sales January 31, 2002 Sales
----------------------- --------- --------------------- --------
Revenues:
Water Treatment $759,500 100% $959,800 57%
Bioscience 0 0% 736,600 43%
-------- ------ ------- ---
Total Revenues $759,500 100% $1,696,400 100%
======== ==== ========== ====
Note 3. Patent Acquisition
On November 30, 2001, we settled the dispute with NVID. Under the
terms of the agreement, NVID dismissed its case against us and
assigned the Axenohl patent to us. In return, NVID receives
651,000 shares of our common stock and 5% of our gross Axenohl
sales until March 2018, the end of the life of the patent.
Innovative Medical Services issued an additional 49,000 shares to
settle claims on behalf of NVID. There are minimum royalties of
$1,000,000 for the period of November 2001 to July 31, 2004 and
for each fiscal year thereafter. If the minimum royalty for any
period is not met, we have the right, in our sole and absolute
discretion to pay NVID the deficiency in cash, in our common stock
at prevailing market prices or transfer the patent back to NVID
without further royalty obligation. As the sole owner of the
patent, we control the granting of rights to market and distribute
Axenohl and related products. ETI-H2O, our wholly owned
subsidiary, retains sole manufacturing rights. As part of the
settlement agreement, we have entered into non-exclusive marketing
agreements for Axenohl with Watertronics, Ltd., for the United
Kingdom and Aqua Biotech S.A. de C.V. for the Republic of Mexico.
In addition, Innovative Medical Services reaffirmed the exclusive
right of Sistecam, S.A. to manufacture and market Axenohl for sale
in Costa Rica for the duration of the patent.
Note 4. Warrants
On August 8, 2001 the total 3,687,500 Class A warrants and the
total 785,000 Class Z warrants expired without exercise.
Note 5. Line of Credit
During the quarter, the Company obtained line of credit financing
with a private lender. The term of the agreement is one year
beginning September 15, 2001 with an interest rate of 12% per
annum The Company may borrow up to $500,000, which is fully
secured against the Company's accounts receivable. At January 31,
2002, the Company had drawn $400,000 against the line of credit.
Note 6. Common Stock
During the quarter, the Company conducted 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 received $300,000 before the end of the
quarter. The remaining $100,000 was received in February and
recorded as subscriptions receivable at January 31, 2002. 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. The Company also
received approximately $48,000 from the exercise of options.
Note 7. Subsequent Events
On March 11, 2002, the Company's shareholders approved the
Innovative Medical Services 2002 Employee Incentive Stock Option
Plan. The purpose of the Plan is to advance the business and
development of the Company and its shareholders by affording to
the key employees and non-employee directors of the Company the
opportunity to acquire a propriety interest in the Company by the
grant of Options to acquire shares of the Company's common stock.
The Options granted are "Incentive Stock Options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, for certain key employees. The Plan is administered by an
Administrative Committee whom shall serve a one-year term. Subject
to anti-dilution provisions, the Plan may issue Options to acquire
up to 4,000,000 shares to Key Employees. The exercise price for
Options shall be set by the Administrative Committee but shall not
be for less than the fair market value of the shares on the date
the Option is granted. The period in which Options can be
exercised shall be set by the Administrative Committee not to
exceed five years from the date of Grant. The Plan may be
terminated, modified or amended by the Board of directors upon the
recommendation of the Administrative Committee.
On March 11, 2002, the Company's shareholders approved the
Innovative Medical Services 2002- Non-Qualified Stock Option Plan.
The purpose of the Plan is to advance the business and development
of the Company and its shareholders by affording Eligible Plan
Participants the opportunity to acquire a propriety interest in
the Company by the grant of Options to acquire shares of the
Company's common stock. Eligible Plan Participants include the
Directors and Officers of the Company, consultants, advisors and
other individuals deemed by the Compensation Committee to provide
valuable services to the Company but who are not otherwise
eligible to participate in the Employee Incentive Stock Option
Plan.
The Plan is administered by an Administrative Committee whom shall
serve a one-year term. The Administrative Committee is composed of
the Board's Compensation/Administration Committee. Subject to
anti-dilution provisions, the Plan may issue Options to acquire up
to 2,000,000 shares to Eligible Plan Participants. The Company
will not receive any consideration for the grant of options under
the Plan and approximate market value of the shares to be reserved
for the plan is $4,000,000 based upon the average thirty trading
day closing price for the Company's common stock for the period
ending January 31, 2002. The exercise price for Options shall be
set by the Administrative Committee but shall not be for less than
the fair market value of the shares on the date the Option is
granted. Fair market value shall mean the average of the closing
price for ten consecutive trading days at which the Stock is
listed in the Nasdaq quotation system ending on the day prior to
the date an Option is granted. The period in which Options can be
exercised shall be set by the Administrative Committee not to
exceed five years from the date of Grant.
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 the majority of our current revenues are still
from the pharmacy industry, we have expanded from our commercial pharmacy market
into other, broader markets with new products, including residential water
filtration systems and bioscience 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
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
Nutripure whole-house water softening systems, the 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 in-home sales presentations.
E-Commerce
In December 2001, Bergen Brunswig Corporation requested we release it from its
contract to provide the vitamins, minerals, nutritional supplements, homeopathic
remedies and natural products sold on our Nutripure.com website. We agreed, and
therefore, on January 15, 2002, Bergen Brunswig Corporation terminated the
distribution license for these products. As a result, we have closed our
e-commerce division.
Bioscience Division
Our bioscience division includes a silver ion technology called Axenohl(TM).
Axenohl is a patented, aqueous disinfectant. The use dilution formulation of
Axenohl is called Axen(TM). The EPA registration for use of Axenohl and Axen as
hard surface disinfectants has been issued. The first Axen-containing product we
developed was our CleanKill(TM) hard surface disinfectant for sale to the pest
control industry. We intend not only to sell our own Axen-based hard surface
disinfectant products, but also to sell Axen as an additive to other
manufacturer's products.
The current EPA approval of Axen is based on prior testing using 12-part per
million (ppm) strength. In February and March 2002, we announced the results of
a battery of tests using an increased formula strength of 30-ppm to meet
rigorous standards of potential product partners and to achieve the shortest
possible kill times on a greater scope of microbes. The tests were performed by
nationally recognized independent laboratories under AOAC protocol and GLP
regulations in accordance with EPA regulations.
Specific Axen test results include:
- 30-Second Kill Time ---At 30 ppm, Axen demonstrated a 30-second,
99.9999% kill of standard indicator organisms including Staphylococcus
aureus ATCC 6538, Pseudomonas aeruginosa ATCC 15442 and Salmonella
cholerasuis ATCC 10708. Each is regarded as ever present in nearly
every person's life and is also a frequent human pathogen.
- Residual Kill Activity --- The residual activity of Axen was tested at
0, 1, 6, and 24 hours after application to a hard surface against
standard indicator organisms (Staphylococcus aureus ATCC 6538,
Pseudomonas aeruginosa ATCC 15442 and Salmonella cholerasuis ATCC
10708). Quantitative residual results at 24 hours after initial
application show a 99.99% reduction in all three bacteria tested.
- Bacteria---Additional testing of Axen against Methicillin Resistant
Staphylococcus aureus ATCC 700698 (MRSA), Vancomycin Resistant
Enterococcus faecium ATCC 700221 (VRE) and Escherichia coli OH157 ATCC
43888 demonstrated a 99.9999% kill in 2 minutes. These specific
bacteria are especially problematic in hospitals because of their
resistance to antibiotics. Further, Axen showed a 99.9999% kill in 30
seconds against Listeria monocytogenes ATCC 19111. Food processing
operations are challenged to keep this bacterium under control.
- Fungus --- Axen demonstrated a 99.9999% kill in 10 minutes of the
common athlete's foot fungus, Trichophyton mentagrophytes ATCC 9533.
After review and approval by the EPA, this data will allow the Company
to add a fungicidal claim to its hard surface disinfectant label.
- Viruses --- Axen also demonstrated 99.9999% virucidal efficacy against
HIV Type 1 in 30 seconds, Herpes simplex virus type 1 in one minute,
and Influenza A virus ATCC VR-544, Rhinovirus type R 37 ATCC VR-1147,
Strain 151-1 and Poliovirus type 2 ATCC VR-1022, Strain Lansing in 10
minutes. After review and approval by the EPA, this data will allow
the Company to add these virucidal claims to its hard surface
disinfectant label.
We plan to submit this new test data to the EPA as the basis for expanding the
existing Axen efficacy claims as a hard surface disinfectant.
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.
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 and personal disinfecting retail products, 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. The investment necessary to pursue regulatory approval
for Axenohl will be significant, but as additional US and international
approvals for Axenohl uses are received, we expect revenues to develop quickly.
We currently operate under a five-year contract signed in March 2001 to provide
Axenohl to Dodo & Company, a Korean cosmetics manufacturer and marketer. Dodo &
Company has developed an Axen-containing line of skin care products for the
treatment of acne. The product line, called A-Clinic, launched in South Korea in
September 2001. Under the contract, Dodo & Company will purchase approximately
$1.2 million dollars of product from us over five years. In addition to the
purchase price, we receive a royalty on sales of the Axen-containing products.
We anticipate that, over the five years, the revenues from Dodo & Company
cosmetics royalties will exceed $5 Million. Regulatory clearances have not been
issued in South Korea.
Originally, we obtained worldwide manufacturing and marketing rights to
Axen/Axenohl from NVID International, Inc., in a License Agreement dated
November 24, 1999 and a Manufacturing, Licensing and Distribution Agreement
dated March 26, 2000 which supersedes the November 1999 Agreement. The latter
agreement became the subject of litigation that has subsequently settled in
November 2001.
Under the terms of the settlement, we acquired the Axenohl patent from NVID in
exchange for 700,000 shares of our common stock and 5% of our gross Axenohl
sales until March 2018, the end of the life of the patent. There are minimum
royalties of $1,000,000 for the period of November 2001 to July 31, 2004 and for
each fiscal year thereafter. If the minimum royalty for any period is not met,
we have the right, in our sole and absolute discretion to pay NVID the
deficiency in cash, in our common stock at prevailing market prices or transfer
the patent back to NVID without further royalty obligation. As the sole owner of
the patent, we control the granting of rights to market and distribute Axenohl
and related products. ETI-H2O, our wholly owned subsidiary, retains sole
manufacturing rights. As part of the settlement agreement, we have entered into
non-exclusive marketing agreements for Axenohl with Watertronics, Ltd., for the
United Kingdom and Aqua Biotech S.A. de C.V. for the Republic of Mexico. In
addition, Innovative Medical Services reaffirmed the exclusive right of
Sistecam, S.A. to manufacture and market Axenohl for sale in Costa Rica for the
duration of the patent.
The United States patent for Axenohl was issued on March 6, 2001, and a
supplemental patent has been filed to cover the substitution of 14 other organic
acids for citric acid in the formulation.
Our bioscience division also includes a line of pesticide technologies. The
EPA-approved, patent-pending RoachX(TM) was the first product to launch from the
line. The national kickoff took place at the National Pest Management
Association meeting in New Orleans, Louisiana, in October 2001. We are selling
RoachX through Vopak (formerly Van, Waters & Rogers) and members of the Speckoz
group of nine regional independent wholesalers.
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 combination of boric
acid, glycerin and a protein-based attractant in a colloidal suspension to
create three unique results: 1) The formula protects the boric acid from water
and humidity, 2) The cockroaches perceive the formulation as food and will
actually eat the glycerin-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 for specific pests, is
effective against cockroaches, ants, palmetto bugs, silverfish, waterbugs,
ticks, fleas, lice and garden pests.
At the October trade show, we also launched Pro's Choice(TM) caulk for pest
control operators. We repackage an NSF, USDA and FDA approved food-grade
silicone caulk as our Pro's Choice product. Pro's Choice does not contain any
pesticide and is a convenience tool for pest control operators for "exclusion",
or the filling of cracks and crevices to create a physical barrier insects
cannot penetrate.
In January 2002, we formally launched CleanKill(TM), the Axen-based hard surface
disinfectant for the pest control industry. CleanKill is approved by the EPA as
an additional brand name of Axen. We believe adding sales of these products to
the already climbing RoachX revenues will have a very material positive effect
on revenues in the coming fiscal year.
In March 2002, we received EPA approval for our second pesticide product,
AntX(TM). Targeted to pest control professionals, AntX 75 will soon be available
through commercial distributors in the pesticide industry. AntX 75 combines our
patent-pending glycerol boric acid technology with a carbohydrate-based
attractant to create a non-drying, time-released bait. The non-drying formula
allows ants to feed until the bait is gone. The formula also completely masks
the borate in the bait and produces a time-released effect that lengthens the
kill time, giving the ants time to return to their nests before dying.
Although we think that the pesticide technologies will have the most immediate
material impact on revenues in the coming quarters, we believe that the silver
ion technologies will ultimately become the largest revenue generator for
Innovative Medical Services. We intend not only to sell our own Axen-based
products, like CleanKill, but also to sell Axen as an additive to other
manufacturer's products, like Dodo Cosmetics' acne-fighting product line. We
believe that the innumerable applications for a Class IV, tasteless, odorless,
highly effective antimicrobial agent present an outstanding market opportunity
for our Axenohl products.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2002 VERSUS THREE
MONTHS ENDED JANUARY 31, 2001
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 and bioscience divisions.
Revenues of $834,200 in the quarter ended January 31, 2002 were 111% higher than
the $395,300 in revenues reported for the quarter ended January 31, 2001. In the
prior period, revenues were exclusively from sales of commercial and residential
water treatment products. In the current period, revenues were also generated
from our new bioscience division. The increase in revenues was due to both an
increase in revenues in our water treatment division and the addition of
revenues from our bioscience division. During the quarter, water treatment
division revenues of $409,800 were 9% higher than the prior quarter and include
$319,900 in Fillmaster commercial water purification product sales and $89,900
in Nutripure residential water treatment product sales. This compares to
$298,900 in Fillmaster and $77,800 in Nutripure sales in the quarter ended
January 31, 2001. Bioscience division revenues were $423,500 and include silver
ionization product sales of $336,700 and pesticide product sales of $86,800.
Revenues of all products are recognized on shipment where the sale is made
F.O.B. shipping point, including the Nutripure water dealer program sales, which
consist mostly of sales of other manufacturers' products to independent dealers.
Revenue is recognized on sales to dealers as shipped since we currently do not
sell to third party customers of the dealers.
Gross profit for the quarter ended January 31, 2002 was $516,200 versus $134,900
in 2001. Gross profit percentage of 62% in 2002 was higher versus 34% in 2001.
The increase in gross profit percentage was largely due to higher margins
associated with the silver ionization and pesticide products.
Net loss for the quarter ended January 31, 2002 was $416,100 versus net loss of
$495,200 for the same period in 2001. During the quarter, General and
Administrative expenses increased 13% or $64,300 from $492,600 in fiscal 2001 to
$556,900 in fiscal 2002. Selling expense increased approximately $17,500, or
17%, from $102,600 in 2001 to $120,100 in 2002 because of increased costs
associated with development of marketing materials, hiring of additional sales
personnel, trade shows and product launches for the bioscience division.
Research and Development costs were higher; increasing $203,600 or 487% from
$41,800 in the quarter ended January 31, 2001 to $245,400 in the current
quarter. The increase was due mainly to costs associated with development of
bioscience division products, including RoachX, AntX and Clean Kill.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JANUARY 31, 2002 VERSUS SIX
MONTHS ENDED JANUARY 31, 2001
Revenues of $1,698,200 in the six months ended January 31, 2002 were 123% higher
than the $761,400 in revenues reported for the six months ended January 31,
2001. In the prior period, revenues were exclusively from sales of commercial
and residential water treatment products. In the current period, revenues were
also generated from our new bioscience division. The increase in revenues was
due to both an increase in revenues in our water treatment division and the
addition of revenues from our bioscience division. During the current six
months, water treatment division revenues of $959,800 were 26% higher than the
prior six-month period and include $725,900 in Fillmaster commercial water
purification product sales and $223,900 in Nutripure residential water treatment
product sales. Bioscience division revenues were $736,600 and include silver
ionization product sales of $546,700 and pesticide product sales of $189,900.
Gross profit for the six months ended January 31, 2002 was $892,400 versus
$336,900 in 2001. Gross profit percentage of 53% in 2002 was higher versus 44%
in 2001. The increase in gross profit percentage was largely due to higher
margins associated with the silver ionization and pesticide products.
Net loss for the six months ended January 31, 2002 was $797,200 versus net loss
of $934,500 for the same period in 2001. Selling expense increased approximately
$77,300, or 28%, from $277,200 in 2001 to $354,500 in 2002 because of increased
costs associated with development of marketing materials, hiring of additional
sales personnel, trade shows and product launches for the bioscience division.
Research and Development costs were higher; increasing $233,400 or 282% from
$82,800 in the six months ended January 31, 2001 to $245,400 in the current
period. The increase was due mainly to costs associated with development of
bioscience division products, including RoachX, AntX and Clean Kill.
During the current six months, General and Administrative expenses increased 7%
or $67,300 from $939,500 in fiscal 2001 to $1,006,800 in fiscal 2002. Included
in General and Administrative expenses during the current six month period is
$115,700 of expenses related to Nutripure.com, a wholly owned subsidiary
incorporated in the state of Nevada in December 1999. Nutripure.com was an
e-commerce website that provided consumers a wide variety of vitamins, minerals,
nutritional supplements, homeopathic remedies and natural products. In December
2001, Bergen Brunswig Corporation requested we release it from its contract to
provide the vitamins, minerals, nutritional supplements, homeopathic remedies
and natural products sold on our Nutripure.com website. We agreed, and
therefore, on January 15, 2002, Bergen Brunswig Corporation terminated the
distribution license for these products. As a result, we have closed our
e-commerce division. Sales to date from the e-commerce division have not been
material and closing the e-commerce division will result in cost savings of
approximately $35,000 per quarter in maintenance and service fees, amortization
and labor costs. The General and Administrative expenses of Nutripure.com in the
six months ended January 31, 2002 included writing off approximately $70,000 of
the value attributed to the Bergen Brunswig Corporation license. The website
software with a value of approximately $75,000 will be held as an asset for
resale.
LIQUIDITY AND CAPITAL RESOURCES
From inception through January 31, 2002, we have financed our operations
primarily through our initial public offering in August of 1996, by a subsequent
private placement in March of 2000, and by other smaller private placement stock
sales. We have operated without long-term debt and have no plans to obtain
long-term financing in the next twelve months. 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 2002. 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.
Our liquidity is unaffected by the financing program offered to participating
dealers in the Nutripure water dealer program. We receive funds from our primary
lender and disperse the funds to the dealer, less a commission charged by us,
upon completion of the contract. The primary 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, 2002, our current assets to
liabilities ratio decreased from 3.15 to 1.94. Current assets remained virtually
unchanged increasing $88,900 from $1,911,400 at July 31, 2001 to $2,000,300 at
January 31, 2002. Current liabilities, however, increased $422,600 from $606,900
to $1,029,500. The increase in current liabilities was mainly the result of an
increase in notes payable of $400,000. The note payable was drawn against a
$500,000 credit line we established during the period, which is secured against
our accounts receivable.
Noncurrent assets increased by $1,650,200 during the period due to the increase
in Patents and Licenses of approximately $1,550,000 mainly from the purchase of
a Silver Ionization technology patent. Of this amount, $83,300 was paid in cash
and $1,636,300 was paid with common stock of the Company.
Cash flows used from operations were $497,500 in the six months ended January
31, 2002 and $940,100 in 2001. For 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. In fiscal 2001 cash flows used
in investing activities included $48,400 for the purchase of machinery and
equipment and $307,300 for the purchase of patents and licenses. We also
incurred $13,000 in deferred acquisition costs during fiscal 2002.
Cash flows from financing activities were $848,000 in fiscal 2002 and $523,100
in fiscal 2001. Financing activities for the current period included the
addition of $400,000 in notes payable from a line of credit established in
September 2001. 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 received $300,000 of the funds before
the end of the quarter. The remaining $100,000 was received in February and was
recorded as subscriptions receivable at January 31, 2002. The Company also
received approximately $48,000 from the exercise of options during the period.
In the prior period, cash flows from financing activities included a pay down of
$14,600 in notes payable and an increase of common stock of $537,700 from the
sale of common stock, which included a $250,000 private placement in January
2001 and the acquisition of 100% of the stock of ETIH2O, Inc., a Florida
corporation, for approximately 56,400 shares of IMS stock valued at
approximately $141,000. In addition, approximately $132,700 was received from
exercise of outstanding stock options in the prior period. The total increase in
cash and cash equivalents for 2002 was $123,100 as compared to a decrease of
$772,700 during the same period in 2001.
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, 2001 as filed on October 29,
2001.
ITEM 2.
CHANGES IN SECURITIES
During the quarter, we conducted a private placement of common stock and as a
result, we issued 250,000 shares of common stock to eleven accredited investors
at a price of $1.60 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
A. Exhibits
11 -- Statement re: computation of per share earnings
B. Reports on Form 8-K:
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
March 15, 2002
By: /s/ Gary Brownell
------------------------------
Gary Brownell, Chief Financial Officer
March 15, 2002