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 October 31, 2002
-----------------
[ ] 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: 8,780,899 as of December 13,
2002.
INNOVATIVE MEDICAL SERVICES
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of July 31, 2002 and October 31, 2002
Statements of Operations for the three months ended
October 31, 2001 and 2002 Statements of Cash Flows for
the three months ended October 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 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
--------------------------------------------------------------------------------------
(Unaudited)
October 31 July 31
2002 2002
------------- -------------
ASSETS
Current Assets
Cash and cash equivalents $ 121,534 $ 151,257
Accounts receivable, net of allowance for doubtful
accounts of $ 111,000 at October 31, 2002
and $111,000 at July 31, 2002 222,865 166,601
Due from officers and employees 186,457 209,437
Inventories 537,168 595,071
Prepaid expenses 303,295 168,835
----------- -----------
Total current assets 1,371,319 1,291,201
----------- -----------
Property, Plant and Equipment
Property, plant and equipment 574,149 613,909
----------- -----------
Total property, plant and equipment 574,149 613,909
----------- -----------
Noncurrent Assets
Deposits 9,341 8,954
Patents and licenses 2,593,079 2,626,376
----------- -----------
Total noncurrent assets 2,602,420 2,635,330
----------- -----------
Total assets $ 4,547,888 $ 4,540,440
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable $ 693,048 $ 591,031
Accrued liabilities 85,381 77,530
Loans from shareholders -- 500,000
----------- -----------
Total current liabilities 778,429 1,168,561
----------- -----------
Long-term debt
Loans from shareholders 600,000 --
----------- -----------
Stockholders' Equity
Class A common stock, no par value: authorized
50,000,000 shares, issued and outstanding
8,780,899 at October 31, 2002 and
8,400,899 at July 31, 2002 14,252,853 13,976,448
Accumulated deficit (11,083,394) (10,604,569)
----------- -----------
Total stockholders' equity 3,169,459 3,371,879
----------- -----------
Total liabilities and stockholders' equity $ 4,547,888 $ 4,540,440
============ ============
The accompanying notes are an integral part of the financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
-------------------------------------------------------------------------
For the Three Months Ended
October 31
2002 2001
---------------------------
Net revenues $ 727,261 $ 864,028
Cost of sales 424,141 487,864
--------- ---------
Gross profit 303,120 376,164
--------- ---------
Selling expenses 150,200 234,409
General and administrative expenses 442,535 449,925
Research and development 173,068 70,823
--------- ---------
Total operating costs 765,803 755,157
--------- ---------
Loss from operations (462,683) (378,993)
--------- ---------
Other income and (expense):
Interest income 1,328 212
Interest Expense (17,470) (1,690)
Other -- (600)
--------- ---------
Total other income (expense) (16,142) (2,078)
Net loss $(478,825) $(381,071)
========= =========
Net loss per common share, basic and diluted $ (0.05) $ (0.05)
========= =========
For the Years Ended
July 31
CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS (Unaudited) 2002 2001
-------------------------------------------------------------------------------- --------------
Balance, beginning of period $(10,604,569) $(8,159,676)
Net income (loss) (478,825) (2,444,893)
------------- -------------
Balance, end of period $ (11,083,394) $ (10,604,569)
============= =============
The accompanying notes are an integral part of the financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
-----------------------------------------------------------------------------------------------------
For the Three Months Ended
October 31
2002 2001
---------- -----------
Cash flows from operating activities
Net loss $(478,825) $(381,071)
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 38,037 14,165
Depreciation 48,688 67,317
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (56,264) 36,556
(Increase) decrease in due from officers and employees 22,980 (16,935)
(Increase) decrease in prepaid expense 64,996 5,757
(Increase) decrease in inventory 57,903 89,579
(Increase) decrease in deposits (387) --
Increase (decrease) in accounts payable 102,017 (192,949)
Increase (decrease) in accrued liabilities 7,851 (351)
---------- ----------
Net cash provided (used) by operating
activities (193,004) (377,932)
---------- ----------
Cash flows from investing activities
Purchase of patents and licenses (4,741) (71,588)
Purchase of property, plant and equipment (8,928) (6,434)
---------- ----------
Net cash (used) in investing activities (13,669) (78,022)
---------- ----------
Cash flows from financing activities
Proceeds from debt obligations 100,000 300,000
Proceeds from sale of common stock 76,950 50,779
---------- ----------
Net cash provided by financing activities 176,950 350,779
---------- ----------
Net increase (decrease) in cash and cash equivalents (29,723) (105,175)
---------- ----------
Cash and cash equivalents at beginning of period 151,257 207,092
---------- ----------
Cash and cash equivalents at end of period $ 121,534 $ 101,917
========== ==========
Supplemental disclosures of cash flow information
Cash paid for interest paid $ 17,470 $ 1,690
Cash paid for taxes paid $ -- $ 2,400
Noncash investing and financing activities:
Value of shares issued in exchange for services $ 139,650
Value of options issued in exchange for services $ 59,805
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.
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. Assets are not
allocated to segments for internal reporting presentations.
Reconciling amounts consist of unallocated general and administrative
expenses including $86,700 of depreciation and amortization in 2002
and $81,500 of depreciation and amortization in 2001.
-------------------- -------------------- --------------------- ------------------- ---------------
Reconciling
Water Treatment Biosciences Amounts Consolidated
-------------------- -------------------- --------------------- ------------------- ---------------
2001
-------------------- -------------------- --------------------- ------------------- ---------------
Revenues $ 528,300 $ 335,700 $ 0 $864,000
-------------------- -------------------- --------------------- ------------------- ---------------
Operating
Income/(Loss) $ 26,500 $ 15,100 $(422,700) $(381,100)
-------------------- -------------------- --------------------- ------------------- ---------------
-------------------- -------------------- --------------------- ------------------- ---------------
2002
-------------------- -------------------- --------------------- ------------------- ---------------
Revenues $ 693,400 $ 33,900 $ 0 $727,300
-------------------- -------------------- --------------------- ------------------- ---------------
Operating
Income/(Loss) $ 125,600 $ (230,100) $(374,300) $(478,800)
-------------------- -------------------- --------------------- ------------------- ---------------
Significant customers primarily consisted of domestic retail chain
pharmacies. Sales concentrations to major chain stores were
approximately $375,100 and export sales were $2,400 for the quarter
ended October 31, 2002. Sales concentrations to major chain stores
were approximately $171,100 and export sales were $405,500 for the
quarter ended October 31, 2001. No customer accounted for more than
10% of consolidated sales.
Note 3. Common Stock
On August 30, 2002, 60,000 shares of common stock were issued in
exchange for a 1 year agreement for EPA regulatory consulting. On
September 18, 2002, 120,000 shares were issued in exchange for a
1-year consulting agreement to facilitate the identification and
facilitation of sponsored research relationships and outlicensing
opportunities for the Company. On September 18, 2002, 65,000 shares
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.
Note 4. Loans from Shareholders and Stock Options (Related Party Transactions)
The Company renegotiated its line of credit with S.P.S. LLC. and Colt
Communications LLC in September of 2002 and extended the line of
credit 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.
At October 31, 2002 the Company has drawn the maximum $600,000 against
the credit line. Colt Communications LLC is owned by a principal
shareholder of the Company. During the quarter the Company also
entered into a one year marketing and business development consulting
agreement with Colt Communications for 65,000 shares of stock valued
at $0.57 per share plus 135,000 options valued at $0.44 per share
using the Black Scholes Option Pricing Model. The cost of the
consulting agreement is being expensed over the one-year term of the
contract.
Note 5. 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, internet promotion and in-home sales presentations.
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 EPA registration for use of Axenohl and Axen as hard surface disinfectants
has been issued, and we plan to pursue additional EPA and FDA regulatory
approvals for other applications. For example, 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, including 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) 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 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 OCTOBER 31, 2002 VERSUS THREE
MONTHS ENDED OCTOBER 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 segment and our bioscience segment, which includes silver ionization
and pesticide divisions.
Revenues of $727,300 in the quarter ended October 31, 2002 were 16% lower than
the $864,100 in revenues reported for the quarter ended October 31, 2001. The
decrease was due to a decrease in sales in the biosciences division. During the
quarter, water treatment division revenues of $693,400 were 31% higher than the
$528,300 in the prior quarter. Bioscience segment revenues in the current
quarter of $33,900 were 90% lower than the $335,600 in the prior quarter and
reflect a large decrease in both silver ionization and pesticide product sales.
In addition to a slight increase in water treatment sales to pharmacies, the
increase in water treatment division revenues was due primarily to increased
sales of the Nutripure residential water treatment products. 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.
Although we had expected that during the quarter we would see a shift in
revenues toward the bioscience division, sales in that division were down
significantly over the prior quarter. The decrease in pesticide product sales
was due to a change in sales strategy, including a change from salaried sales
employees to commissioned outside sales representatives. During the quarter, we
also began refocusing our market strategy from marketing primarily to the pest
control industry wholesalers to including 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.
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. No Axen was
shipped to Dodo & Company and no Axen revenue was recognized during the quarter
ended October 31, 2002.
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 October 31, 2002 was $303,100 versus $376,200
in 2001. Gross profit percentage of 42% in 2002 remained virtually unchanged
when compared to 44% in 2001.
Loss from operations for the quarter ended October 31, 2002 was $478,800 versus
loss from operations of $381,100 for the same period in 2001. During the
quarter, General and Administrative expenses decreased 2% or $7,400 from
$449,900 in fiscal 2001 to $442,500 in fiscal 2002. Administrative expenses were
lower in spite of an increase in amortization costs associated with purchased
patents and licenses. Selling expense decreased approximately $84,200, or 36%,
from $234,400 in 2001 to $150,200 in 2002 because of a decreased reliance on
salaried sales personnel. Research and Development costs were higher; increasing
$102,200 or 144% from $70,800 in the quarter ended October 31, 2001 to $173,100
in the current quarter. 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.
LIQUIDITY AND CAPITAL RESOURCES
From inception through October 31, 2002, 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.
Because of the extension, the Company has reclassified this debt from short-term
to long-term and will report long-term debt for the first time. 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.
During the fiscal three months ended October 31, 2002, our current assets to
liabilities ratio rose from 1.10 to 1.76. Current assets increased $80,200 from
$1,291,200 at July 31, 2002 to $1,371,400 at October 31, 2002 due mainly to an
increase in accounts receivable and prepaid expenses. Current liabilities
decreased $390,200 from $1,168,600 to $778,400. During the current quarter
accounts payable increased approximately $102,000, but current loans payable
decreased by $500,000 due to the extension of line of credit described above.
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.
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.
Noncurrent assets decreased by $32,900 during the period due to the amortization
of Patents and Licenses. Also, fixed assets decreased approximately 39,800 due
mainly to depreciation of equipment.
Cash flows used from operations were $193,000 in the three months ended October
31, 2002 and $377,900 in 2001. For fiscal 2002, cash flows used in investing
activities included $4,700 for the purchase of machinery and equipment and
$8,900 for the purchase of patents and licenses. In fiscal 2001 cash flows used
in investing activities included $6,400 for the purchase of machinery and
equipment and $71,500 for the purchase of patents and licenses.
Cash flows from financing activities were $176,900 in fiscal 2002 and $350,800
in fiscal 2001. Financing activities for the current period included the
addition of $100,000 in loans payable from a line of credit renegotiated in
September 2002 which was reclassified to long-term debt. Cash flows from
financing activities also included an increase of common stock of $76,950 from
the exercise of stock options. In the prior period, cash flows from financing
activities included an increase notes payable of $300,000 from draws against our
existing credit line. In addition, approximately $50,800 was received from
exercise of outstanding stock options in the prior period. The total decrease in
cash and cash equivalents for 2002 was $29,700 as compared to a decrease of
$105,200 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, 2002 as filed on October 29,
2002.
ITEM 2.
CHANGES IN SECURITIES
On August 30, 2002, 60,000 shares of common stock were issued in exchange for a
1-year agreement for EPA regulatory consulting. On September 18, 2002, 120,000
shares were issued in exchange for a 1-year consulting agreement to facilitate
the identification and facilitation of sponsored research relationships and
outlicensing opportunities for the Company. On September 18, 2002, 65,000 shares
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.
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
11. -- Statement RE: Computation of Per Share Earnings
13 (13) -- Subsidiaries of the Registrant
(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
December 13, 2002
By: /s/ Michael L. Krall
--------------------------------------
Gary Brownell, Chief Financial Officer
December 13, 2002
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
REGARDING FACTS AND CIRCUMSTANCES RELATING TO EXCHANGE ACT FILINGS
I, Michael L. Krall, certify that:
1. I have read this quarterly report on Form 10-QSB of Innovative Medical
Services;
2. To my knowledge, the information in this report is true in all
important respects as of December 13, 2002, and
3. This report contains all information about the company of which I am
aware that I believe is important to a reasonable investor, in light
of the subjects required to be addressed in this report, as of October
31, 2002.
4. I:
(a) am responsible for establishing and maintaining internal
disclosure controls and procedures;
(b) have designed such internal disclosure controls and procedures to
ensure that material information relating to the company is made
known to me by others within the company, particularly during the
period in which the periodic reports are being prepared;
(c) have evaluated the effectiveness of the issuer's internal
disclosure controls and procedures as of a date within 90 days
prior to the report; and
(d) have presented in the report my conclusions about the
effectiveness of their internal disclosure controls and
procedures based on my evaluation as of that date;
5. I have disclosed to the company's auditors and the audit committee of
the board of directors (or persons fulfilling the equivalent
function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the company's
ability to record, process, summarize, and report financial data
and have identified for the company'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 company's
internal controls; and
6. I have indicated in the 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 their
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
7. Based on my knowledge, the report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary in order 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 the report.
8. Based on my knowledge, the financial statements, and other financial
information included in the report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the company as of, and for, the period presented in the report.
For purposes of this certification, information is "important to a reasonable
investor" if:
(a) There is a substantial likelihood that a reasonable investor would
view the information as significantly altering the total mix of
information in the report; and
(b) The report would be misleading to a reasonable investor if the
information is omitted from the report.
BY: /s/ Michael L. Krall Subscribed and sworn to
-------------------- before me this 13th day
Michael L. Krall, President and CEO of December 2002
(Principal Executive Officer)
DATE: December 13, 2002 /s/ Dolana Blount
-----------------
Notary Public
My Commission Expires:
March 17, 2005
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
REGARDING FACTS AND CIRCUMSTANCES RELATING TO EXCHANGE ACT FILINGS
I, Gary Brownell, certify that:
1. I have read this quarterly report on Form 10-QSB of Innovative Medical
Services;
2. To my knowledge, the information in this report is true in all
important respects as of December 13, 2002, and
3. This report contains all information about the company of which I am
aware that I believe is important to a reasonable investor, in light
of the subjects required to be addressed in this report, as of October
31, 2002.
4. I:
(a) am responsible for establishing and maintaining internal
disclosure controls and procedures;
(b) have designed such internal disclosure controls and procedures to
ensure that material information relating to the company is made
known to me by others within the company, particularly during the
period in which the periodic reports are being prepared;
(c) have evaluated the effectiveness of the issuer's internal
disclosure controls and procedures as of a date within 90 days
prior to the report; and
(d) have presented in the report my conclusions about the
effectiveness of their internal disclosure controls and
procedures based on my evaluation as of that date;
5. I have disclosed to the company's auditors and the audit committee of
the board of directors (or persons fulfilling the equivalent
function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the company's
ability to record, process, summarize, and report financial data
and have identified for the company'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 company's
internal controls; and
6. I have indicated in the 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 their
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
7. Based on my knowledge, the report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary in order 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 the report.
8. Based on my knowledge, the financial statements, and other financial
information included in the report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the company as of, and for, the period presented in the report.
For purposes of this certification, information is "important to a reasonable
investor" if:
(a) There is a substantial likelihood that a reasonable investor would
view the information as significantly altering the total mix of
information in the report; and
(b) The report would be misleading to a reasonable investor if the
information is omitted from the report.
BY: /s/ Gary Brownell Subscribed and sworn to
------------------ before me this 13th day of
Gary Brownell, Treasurer and CFO December 2002
(Principal Accounting Officer)
DATE: December 13, 2002 /s/ Dolana Blount
-----------------
Notary Public
My Commission Expires:
March 17, 2005