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 QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO ____________
Commission File Number 0-23153
VOLU-SOL, INC.
(Exact name of small business issuer as specified in its charter)
Utah 87-0543981
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5095 West 2100 South
Salt Lake City, Utah 84120
(Address of principal executive offices) (Zip Code)
(801) 974-9474
(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
As of May 10, 2001, the issuer had issued and outstanding 3,570,421 shares of
common stock, par value $.0001.
Transitional Small Business Disclosure Format (Check One): Yes __ No X
---
1
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
No.
1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet as of March 31, 2001...3
Unaudited Condensed Consolidated Statements of Operations for
the Three and Six Months Ended March 31, 2001 and 2000................4
Unaudited Condensed Consolidated Statements of Cash Flows for
the Three and Six Months ended March 31, 2001 and 2000................5
Notes to Unaudited Condensed Consolidated Financial Statements........6
2. Management's Discussion and Analysis or Plan of Operation.............8
PART II. OTHER INFORMATION....................................................11
5. Other Information....................................................11
2
PART I
Item 1 - Financial Statements
VOLU-SOL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31,
2001
------------
ASSETS
Current assets:
Cash and cash equivalents $ 188,894
Accounts receivable, less allowance for doubtful accounts of $21,188 78,066
Inventories 52,671
------------
Total current assets 319,631
Property and equipment, net 45,685
Note receivable 150,710
Other assets - deposits 3,624
------------
Total assets $ 519,650
============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 141,601
Accrued liabilities 86,550
Preferred stock dividends payable 152,920
------------
Total current liabilities 381,071
Long-Term Liabilities:
Debentures 500,000
------------
Total Liabilities 881,070
------------
Stockholders' equity:
Preferred stock, $.0001 par value; 30,000 shares authorized 22,228
shares outstanding (aggregate liquidation preference $59,286) 7,963,895
Common Stock, par value $.0001; 50,000,000 shares authorized,
3,570,421 shares issued and outstanding 357
Additional paid-in capital 2,050,506
Preferred stock subscriptions receivable (338,300)
Accumulated deficit (10,037,879)
------------
Total stockholders' equity (361,421)
------------
Total liabilities and stockholders' deficit $ 519,650
============
The accompanying notes are an integral part of these unaudited
condensed consolidated balance sheets.
3
VOLU-SOL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2001 2000 2001 2000
---- ---- ---- ----
Sales $ 141,560 $ 141,384 $ 255,765 $ 256,734
Cost of goods sold 87,725 92,093 158,575 165,144
----------- ----------- ----------- -----------
Gross Margin 53,835 49,291 97,190 91,596
----------- ---------- ----------- -----------
Selling, general and administrative expenses 1,521,925 1,068,682 2,176,629 1,249,301
----------- ----------- ----------- -----------
Loss from operations (1,468,090) (1,019,391) (2,079,439) (1,157,711)
Other income (expense):
Interest income 1,661 1,961 3,905 1,961
Interest expense 13,050 - (13,050) -
Net loss before provision for income taxes (1,479,479) (1,017,430) (2,088,584) (1,155,750)
Provision for income taxes - - - -
Net loss (1,479,479) (1,017,430) (2,088,584) (1,155,750)
Dividends on Series A preferred stock (80,690) (76,987) (152,920) (117,087)
Preferred stock accretion (2,885,823) (42,936) (2,904,783) (85,873)
Net loss applicable to common stock $(4,445,992) (1,137,353) (5,146,287) (1,358,710)
----------- ----------- ----------- -----------
Net loss per common share - basic and diluted $ (1.40) $ (0.96) $ (1.68) $ (1.58)
----------- ----------- ----------- -----------
Weighted average common shares outstanding 3,183,591 1,177,545 3,066,420 859,454
----------- ----------- ----------- -----------
The accompanying notes are an integral part of these unaudited
condensed consolidated statements.
4
VOLU-SOL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months
Ended March 31,
2001 2000
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,088,584) $(1,272,837)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 13,730 38,895
Stock issued for services 400,000 220,000
Options issued for services 12,799 -
Preferred stock issued for services 695,000 220,00
Increase (decrease) in:
Accounts receivable 39 (9,047)
Inventories (1,781) 6,774
Other assets (352) 100
Increase (decrease) in:
Accounts payable (49,029) (20,650)
Accrued liabilities 47,461 (2,157)
------------ ------------
Net cash used in operating activities: (970,717) (1,038,922)
------------ ------------
Cash flows from investing activities:
Equipment purchases (3,100) -
Note receivable (150,710) -
----------- ------------
Net cash used in investing activities (153,810) -
------------ ------------
Cash flows from investing activities:
Proceeds from notes payable 535,000 -
Proceeds from debentures 500,000 -
Proceeds from sale of preferred stock - 236,000
Proceeds from sale of common stock - 1,700,000
------------ ------------
Net cash provided by financing activities 1,035,000 1,936,000
------------ ------------
Net increase (decrease) in cash (89,527) 1,079,723
Cash, beginning of period 278,421 44,123
------------ ------------
Cash, end of period $ 188,894 $ 1,123,846
============ ============
The accompanying notes are an integral part of these unaudited
condensed consolidated statements.
5
VOLU-SOL, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Organization and Business Activity
The unaudited condensed consolidated financial statements consist of Volu-Sol,
Inc., which is incorporated in the state of Utah, and its wholly owned
subsidiary, Volu-Sol Reagents Corporation, which was incorporated on March 5,
1998 in the state of Utah (collectively, the "Company").
The Company engages in the manufacturing, marketing and distribution of medical
diagnostic stains.
(1) PRESENTATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying interim condensed consolidated financial statements of the
Company have been prepared consistent with generally accepted accounting
principles for interim financial information in accordance with the instructions
to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, such unaudited
financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
position, results of operations and cash flows of the Company for the interim
periods presented, have been included. Operating results for the three and six
months ended March 31, 2001 are not necessarily indicative of the results that
may be expected for the year ending September 30, 2001. The Company suggests
that these condensed consolidated financial statements be read in conjunction
with the financial statements and notes thereto included in the Company's Form
10-KSB for the year ended September 30, 2000.
(2) RELATED-PARTY TRANSACTIONS
During the six months ended March 31, 2001, the Company borrowed $535,000 from
an entity controlled by a major shareholder. The Company exchanged 2,675 Series
A Preferred Stock for extinguishment of this debt. The Company may borrow up to
$2,000,000 against the note. The note bears interest at 12%, matures September
2001, and is secured by the right of the note holder to convert the debt to
Series A Convertible Preferred Stock of the Borrower at $3.00 per share.
(3) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market value. Inventories consist of the following as of March 31, 2001:
Raw materials, packaging and supplies $30,990
Instruments, biological stains and reagents 21,681
--------
$52,671
(4) CONVERTIBLE DEBENTURES
The Company issued 15% Convertible Debentures, due on or before August 1, 2001.
The Debentures are convertible into common stock at an initial conversion rate
of $3.00 per share. Total debentures outstanding at March 31, 2001 were
$500,000.
(5) SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the six months ended March 31, 2001, the Company:
o Accrued preferred stock dividends payable of $152,920.
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o Increased preferred stock and decreased additional paid-in-capital for
$2,904,806 due to accretion.
o The Company issued 2,675 shares of Series A Preferred Stock in exchange for
$535,000 of debt to an entity controlled by a major shareholder.
During the six months ended March 31, 2000, the Company:
o Accrued preferred stock dividends payable of $102,645.
o Increased preferred stock and decreased additional paid-in-capital for
$85,873 due to accretion.
Actual amounts paid for interest and income taxes are as follows:
Six Months Ended
March 31,
2001 2000
--------------------------
Interest $ - $ -
==========================
Income taxes $ - $ -
==========================
(6) SERIES A PREFERRED STOCK
On September 8, 1997, the Company amended its Articles of Incorporation to
create a series of preferred stock. The Series A 10% Convertible Non-Voting
Preferred Stock, consists of 30,000 shares with $.0001 par value. This series is
part of the Company's 10,000,000 authorized shares of non-voting preferred
stock. The holders of the shares are entitled to dividends at the rate of ten
percent (10%) per annum on the stated value of the Series A Preferred Stock (or
$200 per share), payable in cash or in additional shares of Series A Preferred
Stock at the discretion of the Board of Directors. Dividends are fully
cumulative and accrue from the date of original issuance.
(7) NET LOSS PER COMMON SHARE
Basic net loss per common share ("Basic EPS") excludes dilution and is computed
by dividing net loss by the weighted average number of common shares outstanding
during the period. Diluted net loss per common share ("Diluted EPS") reflects
the potential dilution that could occur if stock options or other contracts to
issue common stock including convertible preferred stock were exercised or
converted into common stock. The computation of Diluted EPS does not assume
exercise or conversion of securities that would have an anti-dilutive effect on
net loss per common share. Because the Company has incurred a loss for the
periods presented, no exercises or conversions have been considered, as they
would be anti-dilutive, thereby decreasing the net loss applicable to common
shares.
During the six months ended March 31, 2001 the Company issued 183,924 shares of
common stock as part of the original divestiture of the Company from Biomune
Systems, Inc. in the nature of a dividend.
At March 31, 2001, there were outstanding options to purchase 2,600,500 shares
of common stock and there were 16,138 shares of Series A Preferred Stock
outstanding, convertible into a minimum of 5,971,060 shares of common stock.
Approximately 500,500 options relate to options to purchase Biomune common stock
outstanding at the time of the Company's divestiture from Biomune Systems, Inc.
The holders of such Biomune options were also granted options to purchase
Volu-Sol common stock.
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Item 2 - Management's Discussion and Analysis or Plan of Operation
Introduction
The Company was incorporated in Utah on July 27, 1995, as a wholly
owned subsidiary of Biomune Systems, Inc., a Nevada corporation ("Biomune").
Volu-Sol was organized to engage in the business of manufacturing and marketing
medical diagnostic stains and solutions and related equipment, which business
operations were conducted before that time as an unincorporated division of
Biomune called the Volu-Sol Medical Division. Biomune purchased the assets
comprising the Volu-Sol Medical Division in December 1991 from Logos
Scientific, Inc. Biomune transferred all of the net assets of the Volu-Sol
Medical Division to the Company. Through the fiscal year ended September 30,
1995, Volu-Sol operated out of leased facilities in Henderson, Nevada. In
October 1995, the Company relocated to West Valley City, Utah, where its
manufacturing facility and corporate offices are presently located.
A total of 422,244 shares of the Company's common stock were
distributed pro rata as a stock dividend to the holders of the common stock of
Biomune in 1997 (the "Distribution"). As a consequence of the Distribution,
Volu-Sol ceased to be a subsidiary of Biomune and commenced operations as a
separate, independent company. Volu-Sol continues to conduct the operations it
conducted as a subsidiary of Biomune. The Company's management has recently
developed a new business plan to broaden the business emphasis of the Company
to include remote medical diagnostics and medical alert technologies and
services.
Special Note Regarding Forward-looking Information
Certain statements in this Item 2 - "Management's Discussion and
Analysis or Plan of Operation" are "forward-looking statements" within the
meaning of the Exchange Act. For this purpose, any statements contained or
incorporated in this report that are not statements of historical fact may be
deemed to be forward-looking statements. The words "believes," "plans,"
"anticipates," "expects" and similar expressions are intended to identify
forward-looking statements. A number of important factors could cause the
actual results of the Company to differ materially from those anticipated by
forward-looking statements. These factors include those set forth under the
caption "Risk Factors" in Item 6 - "Management's Discussion and Analysis or
Plan of Operation" in the Company's annual report on Form 10-KSB for the year
ended September 30, 2000.
Business Strategy
Until recently, Volu-Sol's primary business strategy has been to
capitalize on the global medical diagnostic industry by providing "building
block" stains and reagents and to grow through the selective acquisition of
complimentary businesses, devices and product lines. Management recently
determined to pursue a more expanded role in the medical diagnostic industry.
The new business strategy of the Company is outlined in greater detail below.
New Business Direction
Volu-Sol's management has determined to expand the scope of its
operations to develop products that provide a powerful way to manage patient
medical information and to link patients, physicians and payors. The Company
will continue to conduct its medical stains and solutions business under the
Volu-Sol(TM) name and will operate its remote health monitoring and diagnostic
business under the name RemoteMDx(TM).
The Company believes that its management team has a breadth of
experience and knowledge in the medical diagnostic arena needed to pursue
development of new technologies in the medical device and electronics fields.
Under the RemoteMDx brand the Company will introduce the "ROSE System(TM)"-- a
family of healthcare monitoring and remote diagnostic products and services,
which will position the Company in a market with high growth and profitability
potential. The Company is developing the ROSE System to compete in the home
healthcare and telemedicine markets. The Company estimates this market to be
approximately $100 billion annually, based on industry publications. The ROSE
System combines innovative hardware and software technologies with a powerful
medical data capture and communication network.
8
The new business model is based on providing solutions to some of the
most substantial problems in healthcare today. This new product is intended to
provide the patient power to decide when and where they have their "examination"
while providing the physician with increased flexibility and efficiency in
diagnosis.
The healthcare market provides a significant opportunity for the
Company to create new products and services that improve the quality and cost of
care given. According to industry reports, total healthcare expenditures in the
United States for 1998 were in excess of $1 trillion (14% of the gross domestic
product). Expenditures are projected to grow to $2 trillion by 2007 (17% of the
gross domestic product).
The Company has formed a strategic alliance with Battelle Memorial
Institute ("Battelle"), a not-for-profit research organization to collaborate
with the Company to develop the ROSE System. The Company anticipates that it
will continue to use Battelle to collaborate on development and design for the
foreseeable future. The Company anticipates that after its products have been
introduced it will continue to refine and develop enhancements to the products,
as well as look for opportunities for future product offerings.
Battelle has completed a demonstration unit with core components of the
ROSE Acute Diagnostic system. The Company will continue to revise the
demonstration model as product development continues.
Collaborative Relationships
In addition to its relationship with Battelle, the Company intends to
continue to form strategic alliances with industry leaders to achieve and
fulfill its business plan. The Company has two additional areas in which the
Company believes strategic alliances will better serve its needs. These areas
include product marketing, distribution and access to patient markets and data
transfer and processing.
In order to enhance its marketing strength and augment its distribution
channels, the Company is in the process of developing marketing and distribution
alliance partners for its products and services. The Company is currently in
contact with Veterans Affairs and regional HMO/PPO organizations with
significant networks of physicians and patients. The Company is exploring an
alliance with HMO/PPO organizations and other organizations for testing and
receiving input on final technology design of its products. Volu-Sol is also in
the process of evaluating acquisitions that would be good strategic fits with
the product development and distribution plans of the Company.
The Company anticipates that these additional strategic alliance
partners would provide the following:
o A consortium of providers, specific to chronically ill care,
to act as a focus group on product definition matched to
specific care areas.
o The opportunity to conduct prototype review and gain
decision-making input into final technology design for test
markets.
o Sites to conduct trials, to establish protocols, to track
outcomes and to act as early-adopter organizations for
acquiring the technology.
o Access to significant channels of distribution.
Results of Operations
Comparison of the Three Months Ended March 31, 2001 to the Three Months Ended
March 31, 2000.
During the three months ended March 31, 2001, the Company's revenues
totalled $141,560 compared to $141,384 for the three months ended March 31,
2000. Revenues have remained constant due to maintaining a customer base similar
to that in the prior year period. The Company is not aggressively marketing
sales for the reagent product line, which accounts for substantially all
revenues, due to its new business direction.
9
Cost of revenues for the three months ended March 31, 2001 totalled
$87,725 compared to $92,093 for the three months ended March 31, 2000. The
overall gross margin for the quarter ended March 31, 2001 was approximately 38%
of revenues compared to 35% of revenues for the comparable quarter in 2000. The
increase in the gross margin on sales is primarily the result of improved
inventory management and a continued effort to create a leaner production team
and better inventory management, as well as the implementation of a price
increase.
Selling, general and administrative expenses totalled $1,521,925 for
the three months ended March 31, 2001, compared to $1,068,682 for the three
months ended March 31, 2000, an overall increase of $453,243. The increase is
due to costs associated with new product development.
The Company incurred a net loss applicable to common shares of
$4,445,992 for the three months ended March 31, 2001 compared to a net loss
applicable to common shares of $1,137,353 for the three months ended March 31,
2000. This increase in net loss is attributable to the expenses incurred in
connection with issuance of Common and Preferred Stock for services in the
quarter ended March 31, 2001.
Comparison of the Six Months Ended March 31, 2001 to the Six Months Ended March
31, 2000.
During the six months ended March 31, 2001, the Company's revenues
totalled $255,765 compared to $256,734 for the six months ended March 31, 2000.
Revenues have remained constant due to maintaining a customer base similar to
that in the prior year period. The Company is not aggressively marketing sales
for the reagent product line, which accounts for substantially all revenues, due
to its new business direction.
Cost of revenues for the six months ended March 31, 2001 totalled
$158,575 compared to $165,144 for the six months ended March 31, 2000. The
overall gross margin for the six months ended March 31, 2001 was approximately
38% of revenues compared to 36% of revenues for the comparable period in fiscal
year 2000. The increase in the gross margin on sales is primarily the result of
improved inventory management and a continued effort to create a leaner
production team, as well as the implementation of a price increase.
Selling, general and administrative expenses totalled $2,176,629 for
the six months ended March 31, 2001, compared to $1,249,301 for the six months
ended March 31, 2000, an overall increase of $927,328. The increase is due to
costs associated with new product development.
The Company incurred a net loss applicable to common shares of
$5,146,287 ($1.68 per share) for the six months ended March 31, 2001 compared to
a net loss applicable to common shares of $1,358,710 ($0.57 per share) for the
six months ended March 31, 2000.
Liquidity and Capital Resources
The Company currently is unable to finance its operations solely from
its cash flows from operating activities. From October 1, 1993 through March 31,
1999, Biomune financed the Company's operations through a series of loans and
other capital contributions totalling approximately $2,900,000. The Company also
sold shares of Series A Preferred Stock to provide additional working capital.
The Company believes that cash generated by operations, together with
the proceeds from additional sales of its securities will be sufficient to meet
its capital requirements for a minimum of twelve months. However funds from
equity sales may not be available.
As of March 31, 2001, the Company had cash of $188,894 and working
capital deficit $61,440 compared to cash of $278,421 and working capital deficit
of $177,697 as of September 30, 2000.
During the six months ended March 31, 2001, the Company's operating
activities used cash of ($970,717), much of which was funded by the issuance of
convertible debentures and a related party note payable. During the six months
ended March 31, 2000, the Company's operating activities used cash in the amount
of $1,038,922, which was funded by the sale of Series A Preferred Stock.
10
The Company has no credit facility with any commercial lending
institution. In the past, the Company borrowed and received capital from time to
time from Biomune, but the Company has no formal financing arrangement,
agreement or understanding for debt financing with Biomune in the future. During
the six months ended March 31, 2001, the Company entered into an agreement with
ADP Management, an entity controlled by a major shareholder, in which the
Company may borrow up to $2,000,000. The Note bears interest at 12%, matures
September, 2001, and is secured by the right of the note holder to covert the
debt to Series A Convertible Preferred Stock of the borrower at $200 per share,
or to Common Stock at $3 per share.
The unaudited condensed consolidated financial statements of the
Company have been prepared on the assumption that the Company will continue as a
going concern. The Company's product line is limited and the Company has relied
upon borrowings and financing from the sale of its equity securities to sustain
operations. Additional financing will be required if the Company is to continue
as a going concern. If such additional funding cannot be obtained, the Company
may be required to scale back or discontinue its operations. Even if such
additional financing is available to the Company, there can be no assurance that
it will be on terms favorable to the Company. In any event, such financing will
result in immediate and possible substantial dilution to existing shareholders.
PART II - OTHER INFORMATION
Item 5. Other Information
During the quarter ended March 31, 2001, the Company's Board of
Directors was reorganized. Ken Westover and Barry Edwards resigned to pursue
other interests. The Board nominated and approved David G. Derrick and James
Dalton as their successors. The Board now comprises David G. Derrick, Chairman
and CEO, James Dalton, Co-Chairman, and Wilford W. Kirton, III.
The Board also approved the creation of three operating divisions and
appointed management to be responsible for those divisions and operations as
follows:
o Technology - David G. Derrick has primary responsibility for this
division.
o P.A.L. - James Dalton is President of this Division.
o Diagnostics - Wilford W. Kirton heads this division, in addition to his
responsibilities for operations generally.
James Dalton, 56, from 1987 to present, Mr. Dalton has been the owner
and President of Dalton Development, a real estate development company, and in
that capacity has developed and managed several real estate projects. Mr. Dalton
was as a director of Biomune from February 1996 until 1998. He also served as a
director of Optim from 1996 until 1998. He was our General Manager until January
1996.
David G. Derrick, 48, has agreed to serve as Chairman of the Board of
Directors after the closing of this Offering. Mr. Derrick served as the Chief
Executive Officer and as Chairman of the Board of Directors of Biomune and its
subsidiary Optim, Inc. between 1989 and 1998. From 1996 to 1999 Mr. Derrick
served as Chairman of the Board of Directors of The Purizer Company (formerly
Bioxide Corporation). From September 1979 to June 1983, Mr. Derrick was a
faculty member at the University of Utah College of Business, Department of
Finance. Mr. Derrick graduated from the University of Utah College of Business
with a Bachelor of Science degree in Economics in 1975 and with a Masters in
Business Administration degree with an emphasis in Finance in 1976. Mr. Derrick
is the brother-in-law of Bill Kirton, our President. Mr. Derrick is also one of
our significant shareholders.
Also during the quarter ended March 31, 2001, the Company entered into
a loan agreement with ADP Management, a company owned by Mr. Derrick. ADP also
agreed to loan up to an aggregate of $2,000,000 in principal. Amounts loaned
under the agreement are repayable at the option of ADP in cash or in shares of
Series A Preferred Stock or a series with terms and preferences substantially
the same as the Series A. The Board approved a new series of preferred as
required to accommodate eventual conversion of the Loans made under the
agreement.
11
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VOLU-SOL, INC.
Date: May 18, 2001 By: /s/ David G. Derrick
------------------------------
David G. Derrick, Chief Executive Officer
Date: May 18, 2001 By: /s/ Michael G. Acton
---------------------------------------
Michael G. Acton, Chief Financial Officer
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