UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE
EXCHANGE ACT OF 1934
From the transition period from __________ to ___________
Commission file number 000-30074
APO HEALTH, INC.
(Exact name of registrant as specified in its charter)
Nevada 86-0871787
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3590 Oceanside Road, Oceanside, New York 11575
(Address of principal executive offices)
(800) 365-2839
(Issuer's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period of time 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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer, or
an accelerated filer. See definition of "accelerated filer and large accelerated
filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [
] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of May 10, 2006, 56,575,212
shares of Common Stock of the issuer were issued and outstanding.
APO HEALTH, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2006
TABLE OF CONTENTS
Page
PART I - Financial Information
Item 1 Financial Statements.
Consolidated Balance Sheets as of
March 31, 2006 and September 30, 2005. 2
Consolidated Statements of Operations for the three and six
months ended March 31, 2006 and 2005. 3
Consolidated Statements of Cash Flows for the
six months ended March 31, 2006 and 2005. 4
Notes to Consolidated Financial Statements. 5 - 11
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations. 11 - 12
Item 3 Quantitative and Qualitative Disclosures About
Market Risk. 12
Item 4 Controls and Procedures. 12
PART II - Other Information
Item 1 Legal Proceedings. 12 - 13
Item 1A Risk Factors. 13 - 16
Item 2 Unregistered Sales of Equity
Securities and Use of Proceeds. 16
Item 3 Defaults upon Senior Securities. 16
Item 4 Submission of Matters to a Vote of Security Holders. 16
Item 5 Other Information. 16
Item 6 Exhibits. 16
Signatures 17
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
APO HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
March 31, September 30,
2006 2005
----------- -----------
(Unaudited)
ASSETS
------
Current Assets:
Cash $ 255,776 $ 634,161
Accounts Receivable, net of allowance for
doubtful accounts of $400,000 and $405,397 331,834 452,878
Inventory 473,964 228,008
Other Current Assets 26,596 36,082
----------- -----------
Total Current Assets 1,088,170 1,351,129
----------- -----------
Property and Equipment, net of accumulated
Depreciation of $90,541 and $89,639 1,088 1,991
Deposits 7,500 7,500
----------- -----------
Total Assets $ 1,096,758 $ 1,360,620
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current Liabilities:
Bank Notes Payable $ 112,915 $ 457,369
Accounts Payable 946,447 783,069
Accrued Compensation 104,473 42,473
Customer Deposits 238,213 214,280
----------- -----------
Total Current Liabilities 1,407,048 1,497,191
----------- -----------
Stockholders' Equity (Deficit):
Common stock, $.0002 par value,
125,000,000 shares authorized, 43,587,712
and 42,387,712 shares issued and outstanding 8,718 8,478
Paid-in Capital 2,283,605 2,271,845
Retained Earnings (Deficit) (2,597,613) (2,416,894)
----------- -----------
Total Stockholders' Equity (Deficit) (305,290) (136,571)
----------- -----------
Total Liabilities and Stockholders' Equity (Deficit) $ 1,096,758 $ 1,360,620
=========== ===========
2
APO HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED
MARCH 31, 2006 AND 2005 (UNAUDITED)
Three Months Six Months
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Revenue $ 1,891,053 $ 3,893,623 $ 3,994,968 $ 8,606,580
Cost of Revenue 1,526,333 3,443,829 3,348,637 7,769,390
------------ ------------ ------------ ------------
Gross Margin 364,720 449,794 646,331 837,190
------------ ------------ ------------ ------------
Operating Expenses
Selling Expense 51,171 89,718 117,188 212,929
General and Administrative Expenses 302,575 419,443 692,348 796,400
------------ ------------ ------------ ------------
353,746 509,161 809,536 1,009,329
------------ ------------ ------------ ------------
Income (Loss) from Operations 10,974 (59,637) (163,205) (172,139)
Interest Expense (8,469) (13,648) (17,514) (27,554)
------------ ------------ ------------ ------------
Net Income (Loss) $ 2,505 $ (73,015) $ (180,719) $ (199,693)
============ ============ ============ ============
Basic and Diluted Earnings
Per Common Share: $ .00 $ (.00) $ (.00) $ (.00)
============ ============ ============ ============
Weighted Average Common Shares
Outstanding 43,587,712 36,090,822 43,187,692 35,931,055
============ ============ ============ ============
3
APO HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
March 31, 2006 AND 2005 (UNAUDITED)
2006 2005
--------- ---------
Cash Flow from Operating Activities:
Net (Loss) $(180,719) $(199,693)
Adjustments to Reconcile Net Income to
Net Cash Flows from Operating Activities:
Depreciation and Amortization 903 3,068
Stock Issued for Services 12,000 40,000
Allowance for Doubtful Accounts (5,397) (20,000)
Changes In:
Accounts Receivable 126,441 367,341
Inventory (245,956) (69,532)
Other Current Assets 9,486 87,948
Accounts Payable 163,378 (241,101)
Accrued compensation 62,000 11,594
Customer Deposits Payable 23,933 28,954
--------- ---------
Cash Flows from Operating Activities (33,931) 8,279
--------- ---------
Cash Flows from Financing Activities:
Proceeds (Payment) on Bank Notes Payable, Net (344,454) (311,531)
--------- ---------
Cash Flows from Financing Activities (344,454) (311,531)
--------- ---------
Net (Decrease) in Cash (378,385) (303,252)
Cash Balances:
Beginning of Period 634,161 574,732
--------- ---------
End of Period $ 255,776 $ 271,480
========= =========
4
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial information is submitted in response to the requirements
of Form 10-Q and does not purport to be financial statements prepared in
accordance with generally accepted accounting principles. Further, in the
opinion of management, the interim financial statements reflect fairly the
financial position and results of operations for the periods indicated.
It is suggested that these interim consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in APO
Health, Inc.'s Form 10K containing the audited financial statements as of and
for the year ended September 30, 2005, filed with the Securities and Exchange
Commission.
The results of operations for the six months ended March 31, 2006 are not
necessarily indicative of results to be expected for the entire fiscal year
ending September 30, 2006.
Note 1 - SUMMARY OF ACCOUNTING POLICIES
Nature of business and basis of consolidation- APO Health, Inc., a New York
corporation, ("APO") was incorporated under the laws of the state of New York in
August 1978. APO and its wholly-owned subsidiary, Universal Medical
Distributors, Inc. ("Universal") distribute disposable medical products
principally to dental and medical professionals and wholesalers in the United
States, principally on the East Coast. Effective June 13, 2001,
InternetFinancialCorp.com, Inc., ("IFAN"), a Nevada corporation, which is an
inactive public company, acquired APO (collectively, the "Company") pursuant to
a tax-free reorganization agreement. The acquisition was accounted for by the
purchase method under business combinations in a reverse acquisition
transaction. Concurrently, IFAN changed its name to APO Health, Inc., a Nevada
corporation ("APO Nevada").
All significant intercompany balances and transactions have been eliminated in
consolidation.
Operating deficit and economic conditions
Adverse economic conditions have limited the ability of the Company to market
its products at amounts sufficient to recover its operating and administrative
costs. As a result, the Company incurred losses of $663,837, $1,048,828, and
$517,526 for the three years ended September 30, 2005, and an operating loss of
$180,719 for the six months ended March 31, 2006. APO is in violation of the
working capital and tangible net worth covenants of its lending agreement (see
note 4). As more fully described in note 8, APO is a defendant in two lawsuits
with Proctor & Gamble and Alcoa, involved in the sale of products of those two
companies, by APO, which Proctor and Gamble and Alcoa claim to have been
counterfeit products. It is not possible to predict at this time the ultimate
outcome of the litigation or the extent, if any, of the effect on APO. In
addition, the trustee in bankruptcy of a former customer, is seeking return of a
payment which it deems to be a preferential distribution. The above factors
cause substantial doubt of the Company's and APO's ability to continue as a
going concern.
In view of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon the Company's ability to meet its
financing requirements, and the success of its operations. Management believes
that actions presently being taken to revise the Company's operating and
financial requirements may not provide the opportunity for the Company to
continue as a going concern. The financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as
a going concern.
Cash and cash equivalents - For purposes of the statements of cash flows, cash
equivalents include all highly liquid investments purchased with original
maturities of three month or less.
Revenue recognition - Revenue recognition occurs when products are shipped.
Advertising - Advertising is expensed as incurred. Advertising expense for the
six months ended March 31, 2006, and 2005 was $1,125 and $9,227, respectively.
Merchandise inventory - Merchandise inventory is stated at the lower of cost or
market. Cost is determined using the first-in, first-out method.
Property and equipment - Property and equipment is stated at cost. Depreciation
is provided for on the straight-line method over the useful estimated life. The
cost of maintenance and repairs is expensed as incurred.
5
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - SUMMARY OF ACCOUNTING POLICIES (continued)
Long-lived Assets - The Company follows Statement of Financial Accounting
Standards No. 144, Impairment of Long-lived Assets, by reviewing such assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable.
Shipping and handling - Shipping and handling costs are expensed as incurred.
Shipping and handling expense included in selling expense was $59,824 and
$113,794 for the six months ended March 31, 2006 and 2005 respectively.
Income taxes - Income taxes are computed using the tax liability method of
accounting, whereby deferred income taxes are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates that will be in effect when the differences
reverse.
Earnings Per Share - Basic net income per share has been calculated based on the
weighted average number of shares of common stock outstanding during the period.
Diluted net income per share is computed by dividing the net income by the
weighted average number of common shares outstanding plus potential dilutive
securities.
Fair value financial instruments - The Company's carrying amount of financial
instruments which include cash, accounts receivable, bank notes payable, and
accounts payable approximate fair value.
Estimates and assumptions - Preparing financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses at the balance sheet date and for the period then ended. Actual
results could differ from these estimates.
Note 2 - SUPPLEMENTAL CASH FLOW STATEMENT DISCLOSURES
2006 2005
---- ----
Cash paid during the period for interest $17,514 $27,554
Non cash transactions:
Stock issued for services $12,000 $40,000
Note 3- OTHER CURRENT ASSETS
Other current assets consist of the following:
2006 2005
---- ----
Prepaid Expenses $26,596 $36,082
Note 4 - BANK NOTES PAYABLE
On October 29, 2002, APO entered into a financing agreement with Rosenthal &
Rosenthal, Inc. The financing agreement provides APO with a maximum credit
facility not to exceed $3,000,000. On September 1, 2004 the credit facility was
amended by mutual consent and reduced the maximum amount of credit under the
facility to $1,000,000. On March 2, 2005 the financing agreement was amended
reducing the maximum credit facility to $500,000. On February 1, 2006, Rosenthal
& Rosenthal further reduced the credit limit to a maximum of $300,000. The
credit facility is collateralized by substantially all of APO's assets and is
personally guaranteed by Dr. Jan Stahl, Chairman and CEO of the Company.
Interest is payable monthly on the average daily loan balance at the announced
prime rate of JP Morgan Chase bank plus 2.5% (9.25% as of September 30, 2005).
Under terms of the agreement, the lender may call the loan if APO is in
violation of any restrictive covenant. At March 31, 2006, APO is in violation of
its net worth and working capital covenants. Rosenthal & Rosenthal has not
waived the violations, and accordingly, the entire amount of the obligation is
callable. The credit facility matured on October 31, 2005 and has been extended
through May 31, 2006 under substantially the same terms as the original
agreement APO and the lender have agreed to continue the credit facility on a
month to month basis.
6
APO HEALTH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - INCOME TAXES
Income taxes (benefit) consist of the following:
2006 2005
------------ -------------
Current $ -- $ --
Deferred -- --
------------ -------------
Total $ -- $ --
------------ -------------
A reconciliation of income tax at the federal statutory income tax rate to total
income taxes is as follows:
2006 2005
------------- -------------
Computed at the federal statutory
Rate of 34% $ -- $ --
State income tax (benefit) -- --
Valuation allowance adjustment -- --
Other adjustments -- --
------------- -------------
Total $ -- $ --
============= =============
The components of deferred taxes are as follows:
2006 2005
------------ -------------
Deferred tax assets
Allowance for doubtful accounts $ 160,000 $ 156,000
Depreciation 18,000 19,200
Deferred compensation 41,800 40,000
Net operating loss carryover 696,000 534,000
Valuation allowance (915,800) (749,200)
------------ ------------
Total deferred tax assets $ -- $ --
------------ ------------
The Company has a net operating loss carryover of approximately $1,740,000 to
offset future taxable income. The carryover loss expires through 2025. The
Company has offset the deferred tax asset by a valuation of $915,800, since it
cannot be determined more likely than not whether the Company will be able to
utilize such net operating loss carryover. During the period ended March 31,
2006, the valuation allowance increased by $91,500.
7
APO HEALTH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - COMMON STOCK ISSUANCES
In December 2005, the Company issued a total of 1,200,000 shares of common stock
for professional services valued at $12,000.
During the fiscal year ended September 30, 2005, the Company issued a total of
2,548,000 shares of common stock for consulting and professional services valued
at $64,880.
On April 1, 2005, the Company issued 4,166,667 shares of restricted common stock
to Dr. Jan Stahl, chief executive officer of the Company on the conversion of
$50,000 of deferred compensation.
Stock Option Plan
On July 22, 2002, the Company adopted a Bonus Compensation Warrant Agreement,
whereby, the Company would issue Bonus Compensation Warrants equivalent to 10%
of the price of any merger or acquisition brought to the Company. All of the
warrants being exercisable into shares of common stock at 80% of the 20 day
average bid and ask price of the Company's common stock. The Company authorized
up to a maximum aggregate of 3,000,000 shares of common stock available for any
Bonus Compensation Warrants. To date none of these shares have been exercised.
On July 22, 2002, the Company issued a common stock purchase warrant for 260,000
shares of common stock exercisable at $.10 per share and on September 27, 2002,
a common stock purchase warrant for 1,875,000 shares exercisable at $.04 per
share, both expiring on August 31, 2007. To date none of these warrants have
been exercised.
Note 7 - LEASES
The Company's offices are located at 3590 Oceanside Road, Oceanside, New York.
The premises contain approximately 9,800 square feet under a five-year lease
(the "Lease") which expired on November 30, 2004 (the "Lease Term"). The Lease
Term has been extended for an additional five years through November 30, 2009.
These premises are occupied under a Lease between the landlord, who is an
unaffiliated third party, and an affiliated company PJS Trading, Corp., a New
York corporation ("PJS") owned by Dr. Stahl formed for the express purpose of
entering into the Lease. The Company occupies these premises under an oral
agreement with PJS and Dr. Stahl whereby the Company has agreed to discharge all
of the Lease obligations with the landlord. The annual lease payment under the
new lease starts at approximately $77,300 per year and increases to $80,000 in
the fifth year with additional increases for real estate taxes over the Lease
Term. Neither PJS nor Dr. Stahl derives any profit from the Lease nor will they
during the balance of the Lease Term. Management of the Company believes the
current facility is adequate for its current operations. Effective December 1,
2005, the Company has subleased for a one year period approximately 2,000 square
feet of the warehouse space at approximately $30,000 per year. Rental expense
net of subleases was $17,027 and $22,290 for the six months ended March 31, 2006
and 2005..
Future minimum lease payments are as follows:
For the years ended September 30,
2006 $ 35,285
2007 71,225
2008 75,825
2009 79,405
2010 13,337
8
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - COMMITMENTS AND CONTINGENCIES
Employment Agreement
Effective October 1, 2001, the Company has entered into a three-year employment
agreement with its chief executive officer that provides for a minimum annual
salary of $250,000 with incentives based on the Company's attainment of
specified levels of sales and earnings as defined in the agreement. The
employment agreement expired September 30, 2004 and shall be automatically
renewed for successive periods of one year unless either party gives written
notice to terminate the agreement.
Legal Proceedings
On or about July 7, 2004, APO was served with process in a suit commenced by The
Proctor & Gamble Company ("P&G") in the US District Court for the Eastern
District of New York, against it and a number of other parties. P&G claimed that
the Company, as well as others were involved in the sale of Pantene and Head and
Shoulders products which were not manufactured by P&G. APO purchased several
shipments of these products abroad and unbeknownst to the APO some non P&G
products may have been included in these shipments. APO has cooperated with P&G
as well as the Federal regulatory agencies and has supplied P&G with all of its
documentation in order to assist P&G in its efforts. The lawsuit is seeking,
among other relief, a request for a temporary and permanent injunction from
selling such products. Recently, the complaint was amended to include a number
of additional parties, including Dr. Jan Stahl, chief executive officer of the
Company. The co-defendants in the suit have asserted cross-complaints against
APO for an unspecified amount to be determined at trial based upon their receipt
and subsequent resale of these products.
On or about December 3, 2004, APO and Dr. Jan Stahl were served with process in
a suit commenced by Alcoa, Inc. (Alcoa) in the US District Court for the Eastern
District of New York, against it and a number of other parties. Alcoa claimed
that APO as well as others were involved in the sale of products which were not
manufactured by Alcoa. APO purchased several shipments of these products abroad
and unbeknownst to APO, Alcoa claims that counterfeit products were included in
these shipments. The lawsuit is seeking, among other relief, a request for a
temporary and permanent injunction from selling such products. Recently, the
complaint was amended to include a number of additional parties. The
co-defendants in the suit have asserted cross-complaints against APO for an
unspecified amount to be determined at trial based upon their receipt and
subsequent resale of these products.
In both the P&G and Alcoa law suits, the plaintiff's have sought compensatory
damages in an amount to be proven at the time of trial. Each plaintiff has also
requested an award of punitive damages in the sum of $10,000,000. At this time
outside counsel believes that the plaintiffs at trial will be unable to render
their punitive damages. Outside counsel indicates that the litigation is in the
early stages of discovery and is unable to render their expert opinion. The
Company believes it has meritorious defenses and is vigorously defending its
position.
One of APO's former customers, Allou Distributors Inc. has recently filed for
bankruptcy protection. The bankruptcy trustee is seeking the return of $70,000
which he deems is a preferential distribution for payment of merchandise sold to
Allou Distributors Inc. APO believes the claim is without merit and will
vigorously defend its position.
Product Liability
Certain of the Company's products and proposed products will be utilized in
medical procedures where the Company could be subject to claims from injuries
resulting from use of the Company's products. Recent developments in the
insurance industry have reduced the availability and increased the cost of
liability insurance coverage. At present, the Company is not insured for product
liability claims.
9
APO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at various financial institutions. At times
such balances exceed the insured limits of the financial institution. The
Company has not experienced any losses in such accounts and does not believe it
is exposed to any significant credit risk on cash balances. As of March 31,
2006, the Company had approximately $190,555 on deposit, in excess of the
$100,000 in each bank, which is insured under federal law.
The concentration of credit risk due to receivables is minimal due to the
Company's diverse customer base throughout the United States. For the period
ending March 31, 2006, the following customers had in excess of 10% of the total
sales:
2006
Customer A 12%
Customer B 11%
No single vendor accounts for more than 10% of purchases.
Foreign manufacturing is subject to a number of risks, including transportation
delays and interruptions, political and economic disruptions, the imposition of
tariffs and similar import/export controls and changes in government policies.
Although, to this date, the Company has not experienced any material adverse
effects due to such risks, there can be no assurance that such events will not
occur in the future with result of possible increases in product costs and /or
delays in product delivery which would, in all likelihood, result in the loss of
revenues and goodwill by the Company.
Note 10- SUBSEQUENT EVENTS
On April 7, 2006, upon unanimous consent of the Board of Directors of the
Company and approval by holders of a majority of shares in the Company approved
that the articles of incorporation be amended to increase the number of
authorized shares in the Company from 125,000,000 to 25,000,000,000 and to
authorize 15,000,000 preferred shares.
On April 7, 2006 the Company issued a debt conversion agreement with six
individuals who converted the aggregate accrued outstanding fees for consulting
services totaling $51,950 into 13,000,000 shares of common stock at $.004 per
share.
On April 21, 2006, APO entered into a definitive Agreement and Plan of Merger
(the "Merger Agreement") with APO Health Acquisition Corp, Inc., a Nevada
corporation and wholly-owned subsidiary of APO Nevada and Jupiter Global
Holdings, Corp., a Nevada corporation ("Jupiter"). The Merger Agreement provides
that upon the terms and subject to the conditions set forth in the Merger
Agreement, APO Acquisition will merge with and into Jupiter, with Jupiter being
the surviving corporation (the "Surviving Corporation") and a wholly-owned
subsidiary of APO Nevada.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements. All
statements other than statements of historical fact made in this annual report
are forward looking. In particular, the statements herein regarding industry
prospects and future results of operations or financial position are
forward-looking statements. Forward-looking statements reflect management's
current expectations and are inherently uncertain. The Company 's actual results
may differ significantly from management's expectations.
RESULTS OF OPERATIONS
Revenue for the six months ended March 31, 2006 was $3,994,968, a decrease of
$4,611,612, or 53.6%, from $8,606,580 for the six months ended March 31, 2005.
The decrease in revenue has been categorized into two areas. First, sales in
2005 to customers that were either no longer in business in 2006 or who were no
longer buying from the Company and are using alternative sources decreased by
approximately $1,500,000. The Company purchased many different products which
were imported from both Canada and Europe. In fiscal 2006, the Company reduced
the amount of imports from those areas as the United States dollar decreased in
value against the Canadian dollar, British pound and the Euro, and also the loss
of major suppliers resulted in a reduction of sales of approximatley $3,000,000.
Cost of revenue for the six months ended March 31, 2006 was $3,348,637, a
decrease of $4,420,753, or 56.9%, from $7,769,390 for the six months ended March
31, 2005. The decrease in cost of sales is approximately the same as the
percentage in revenue. The gross profit percentage for the six months ended
March 31, 2006 was 16.2% compared to 9.7% for the six months ended March 31,
2005. Wholesale revenue accounted for approximately 75% of total revenue for the
six months ended March 31, 2005 and had a gross profit of approximately 6%.
Retail sales during the same period accounted for 25% of the total revenue and
had a gross profit of approximately 20-20%.For the six months ended March 31,
2006 wholesale revenue accounted for approximately 60% of total revenue with a
gross profit of approximately 7.5% and retail sales accounted for 40% of the
total revenue with a gross profit of approximately 25-30%. These factors
accounted for the overall increase in gross profit percentage.
Selling expenses for the six months ended March 31, 2006 were $117,188, a
decrease of $95,741 from the six months ended March 31, 2005. Shipping costs
decreased by $53,970 and commissions decreased by $28,036 for the quarter ended
March 31, 2006 due to the decrease in revenue to wholesale customers.
Advertising and related costs declined by approximately $8,000 as the Company
reduced its mailing of advertising materials. There were minor increases and
decreases in other selling expenses with an overall decrease which was directly
related to the decrease in revenue.
General and administrative expenses for the six months ended March 31, 2006 were
$692,348, a decrease of $104,052 from $796,400 for the six months ended March
31, 2005. Total compensation, including payroll taxes and employee benefits
increased by $6,843. The increase in compensation reflects an accrual of
salaries that had been reduced during the period to preserve cash flow.
Consulting fees decreased by $35,000 to $5,000 in the period ended March 31,
2006. For the period ended March 31, 2005 consulting expense represented the
balance of a one year contract that expired in January 2005. The Company reduced
its allowance for bad debts by $20,000 in the period ended March 31, 2005 after
writing off $151,214 of uncollectible receivables. There was no comparable cost
in 2005. Professional fees for the six months ended March 31, 2006 were
$181,173, an increase of $83,134 over the six months ended March 31, 2005. The
entire amount of the increase is attributed to legal fees incurred in the
lawsuits with Proctor & Gamble and Alcoa.
Interest expense for the six months ended March 31, 2006 was $17,514, a decrease
of $10,040 from the six month period ended March 31, 2005. The decrease in
interest expense is due to a reduction of the credit facility with Rosenthal &
Rosenthal, Inc which reduced the monthly minimum interest expense.
LIQUIDITY AND FINANCIAL CONDITION
As of March 31, 2006, the Company had a working capital deficit of $318,878, a
decrease of $172,816 from the working capital at September 30, 2005. The Company
's losses from continuing operations of $180,719 for the six months ended March
31, 2006 was funded by the decrease in working capital and increase in accounts
payable and accrued expenses of $225,378. At March 31, 2006 the APO had
available a $300,000 credit facility with Rosenthal & Rosenthal, Inc., of which
$112,915 was outstanding at March 31, 2006 (see Note 4 to the accompanying
financial statements). The credit facility is collateralized by all of APO's
assets and is personally guaranteed by Dr. Jan Stahl, Chief Executive Officer of
the Company. Under terms of the credit facility, the lender may call the loan if
APO is in violation of certain restrictive covenants. At March 31, 2006, APO is
in violation of its net worth and working capital covenants. Rosenthal &
Rosenthal has not waived the violations, and accordingly, the entire amount of
the obligation is callable. The credit facility matured on October 31, 2005 and
was extended through December 31, 2005 under substantially the same terms as the
original agreement. APO and the lender have agreed to continue the credit
facility on a month to month basis through May 31, 2006.
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OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements that are likely to
have a current or future effect on the Company's financial condition, revenues
or expenses, results of operations or capital resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Exchange Rate Risk.-The products distributed by the Company are, for the most
part, manufactured by third parties in the United States, the Far East, Mexico
and Canada. As a result, our financial results could be affected by factors such
as changes in foreign currency exchange rates or weak economic conditions in
foreign markets.
Credit Risk.-The Company maintains cash balances at various financial
institutions. At times, such balances exceed the insured limits of the financial
institution. To date, the Company has not experienced any losses in such
accounts. As of March 31, 2006, the Company had $190,555 on deposit, in excess
of the $100,000 in each bank, which is insured under federal law.
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report the Company conducted an
evaluation, under the supervision and with the participation of its principal
executive officer and principal financial officer, of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the
Exchange Act). Based upon this evaluation, the Company's principal executive
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act is: (1) accumulated and communicated to the Company's management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure; and (2)
recorded, processed, summarized and reported, within the time periods specified
in the Commission's rules and forms. There was no change in the Company's
internal controls or in other factors that could affect these controls during
the Company's last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company's s internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On or about July 7, 2004, APO was served with process in a suit commenced by The
Proctor & Gamble Company ("P&G") in the US District Court for the Eastern
District of New York, against it and a number of other parties. P&G claimed that
APO, as well as others were involved in the sale of Pantene and Head and
Shoulders products which were not manufactured by P&G. APO purchased several
shipments of these products abroad and unbeknownst to APO some non P&G products
are alleged to be included in these shipments. APO cooperated with P&G as well
as the federal regulatory agencies and has supplied P&G with all of its
documentation in order to assist P&G in its efforts to remove these products
from the marketplace and to allow it to trace back the source of these improper
products. The lawsuit is seeking, among other relief, a request for a temporary
and permanent injunction from selling such products. Recently, the complaint was
amended to include a number of additional parties, including Dr. Jan Stahl,
chief executive officer of the Company. The co-defendants in the suit have
asserted cross-complaints against APO for an unspecified amount to be determined
at trial based upon their receipt and subsequent resale of these products.
On or about December 3, 2004, APO was served with process in a suit commenced by
Alcoa, Inc. ("Alcoa") in the US District Court for the Eastern District of New
York, against it and a number of other parties. Alcoa claimed that the Company
New York, as well as others were involved in the sale of products which were not
manufactured by Alcoa. APO purchased several shipments of these products abroad
and unbeknownst to APO, Alcoa claims that counterfeit products were included in
these shipments APO is cooperating with Alcoa as well as the federal regulatory
agencies and is supplying Alcoa with all of its documentation in order to assist
Alcoa in its efforts to remove these products from the marketplace and to allow
it to trace back the source of these improper products. Recently, the complaint
was amended to include a number of additional parties, including Dr. Jan Stahl,
chief executive officer of the Company. The co-defendants in the suit have
asserted cross-complaints against APO for an unspecified amount to be determined
at trial based upon their receipt and subsequent resale of these products.
In both the P&G and Alcoa lawsuits, the plaintiffs have sought compensatory
damages in an amount to be proven at the time of trial. Each plaintiff has also
requested an award of punitive damages in the sum of $10,000,000.
One of APO's former customers, Allou Distributors Inc. has recently filed for
bankruptcy protection. The bankruptcy trustee is seeking the return of $70,000
which he deems is a preferential distribution for payment of merchandise sold to
Allou Distributors Inc. APO believes the claim is without merit and will
vigorously defend its position.
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ITEM 1A. RISK FACTORS.
The Company's business involves a high degree of risk. Before deciding whether
to invest in the Company's securities potential investors should carefully
consider the risks and uncertainties described below and the other information
in this report and in the Company's annual report on Form 10-K for the fiscal
year ended September 30, 2005 which was filed with the Securities and Exchange
Commission on January 13, 2006. Each of the following risks could materially and
adversely affect the Company's business, financial condition, and results of
operations. This could cause the trading price of the Company's common stock to
decline, with the loss of part or all of your investment.
APO'S FINANCIAL STATUS CREATES SUBSTANTIAL DOUBT WHETHER THE COMPANY WILL
CONTINUE AS A GOING CONCERN FOR MORE THAN 12 MONTHS FROM THE DATE OF THIS
REPORT. IF APO DOES NOT CONTINUE AS A GOING CONCERN, INVESTORS MAY LOSE THEIR
ENTIRE INVESTMENT.
The Company reported a net loss totaling $180,719 for the six months ended March
31, 2006 and net losses totaling $663,837, $1,048,828 and $517,526 for the
fiscal years ended September 30, 2005, 2004 and 2003, respectively. As of March
31, 2006 the Company had a stockholders deficit of $305,290 and a working
capital deficit of $318,878. Adverse economic conditions have limited the
ability of the Company to market its products at amounts sufficient to recover
its operating and administrative costs. APO is in violation of the tangible net
worth covenant of its credit facility with Rosenthal & Rosenthal, Inc. (See Note
4 to the accompanying financial statements). As further described under Part II,
Item 1 of this report, the Company's wholly owned subsidiary the APO is a
defendant in two lawsuits commenced by The Proctor & Gamble Company and Alcoa,
Inc., based on the sale of products of those two companies, which unbeknownst to
APO were counterfeit products. In view of these matters, realization of a major
portion of the assets in the accompanying balance sheet is dependent upon APO's
ability to meet its financing requirements, and the success of its operations.
Management believes that actions presently being taken to revise APO's operating
and financial requirements provide the opportunity for APO to continue as a
going concern. The accompanying financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as
a going concern. While APO believes it has sufficient capital resources to fund
operations for the next 12 months, APO may require additional capital to
continue operations beyond such period. The Company may raise additional working
capital either through private placements, public offerings and/or bank
financing. There are no assurances that APO will be able to achieve a level of
revenues adequate to generate sufficient cash flow from operations or obtain
additional financing through private placements, public offerings and/or bank
financing necessary to support its working capital requirements. To the extent
that funds generated from any private placements, public offerings and/or bank
financing are insufficient, the Company will have to raise additional working
capital. No assurance can be given that additional financing will be available,
or if available, will be on acceptable terms. If adequate working capital is not
available APO will be forced to discontinue operations, which may cause
investors to lose the entire amount of their investment. In the event APO is
forced to discontinue operations, the Company may divest itself of its
subsidiaries, APO and Universal and attempt to locate and negotiate with another
company for the purpose of a business combination of the two companies in order
to obtain another business opportunity for the Company's shareholders.
THE COMPANYS WHOLLY OWNED OPERATING SUBSIDIARY APO NEW YORK IS A DEFENDANT IN
TWO LITIGATION PROCEEDINGS, WHICH HAS CAUSED APO TO LOSE CUSTOMERS RESULTING IN
A SIGNIFICANT LOSS OF REVENUE. THESE PROCEEDINGS MAY CAUSE APO NEW YORK TO LOSE
OTHER CUSTOMERS WHICH WOULD FURTHER WORSEN APO'S FINANCIAL CONDITION AND COULD
FORCE APO NEW YORK TO DISCONTINUE OPERATIONS.
As further described under Part II, Item 1 of this report, the Company's wholly
owned subsidiary, APO, is a defendant in two lawsuits commenced by The Proctor &
Gamble Company ("P&G") and Alcoa, Inc. ("Alcoa"), based on the sale of products
of those two companies, which unbeknownst to APO, were counterfeit products. APO
purchased several shipments of products abroad and unbeknownst to APO, some
non-P&G and non-Alcoa products were included in these shipments. APO is
cooperating with P&G and Alcoa as well as the federal regulatory agencies and is
supplying P&G and Alcoa with all of its documentation in order to assist P&G and
Alcoa in their efforts to remove these products from the marketplace and to
allow them to trace back the source of these improper products.
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APO MAY INCUR MATERIAL PRODUCT LIABILITY COSTS.
Providers of medical products to hospitals and other health care institutions
may encounter liability for damages to patients in the event that their products
prove to be defective. Certain of APO's products and proposed products will be
utilized in medical procedures where APO could be subject to claims for such
injuries resulting from the use of its products. All of the products APO sells
are produced by third-party manufacturers. As a distributor of products
manufactured by third parties, APO may be liable for various product liability
claims for products APO does not manufacture even though the APO has no control
over the manufacturing procedures used in connection with the production of
these third-party products. At present APO has no product liability insurance.
COMPLIANCE WITH GOVERNMENTAL REGULATIONS MAY IMPOSE ADDITIONAL COSTS, WHICH MAY
ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Some of APO's products may be regulated as medical devices by the U.S. Food and
Drug Administration (the "FDA") pursuant to the federal Food and Drug Cosmetic
Act and are, or may be, subject to regulation by other federal and state
governmental agencies. The FDA has comprehensive authority to regulate the
development, production, distribution and promotion of medical devices.
Furthermore, certain states impose additional requirements on the distribution
of medical devices. The FDA may require pre-market approval of some of APO's
proposed products, requiring extensive testing and a lengthy review process. The
cost of complying with present and future regulations may be significant.
Furthermore, the regulatory approval process and attendant costs may delay or
prevent the marketing of products developed by APO in the future. The Mandatory
Device Reporting regulation obligates manufactures including, in some cases,
distributors such as APO to provide information to the FDA on injuries alleged
to have been associated with the use of a product or certain products failures
which could cause injury. The FDA is empowered to take action against
manufacturers of regulated products including both civil and criminal remedies,
and may also prohibit or suspend the marketing of products if circumstances so
warrant. Any such action by the FDA could result in a disruption of APO's
operations for an undetermined time. Compliance with any of these laws and
regulations may impose additional costs on APO which may negatively affect APO's
financial condition.
THE DENTAL, MEDICAL AND VETERINARY PRODUCTS SUPPLY BUSINESSES ARE INTENSELY
COMPETITIVE. APO HAS MANY WELL-ESTABLISHED COMPETITORS WITH SUBSTANTIALLY
GREATER FINANCIAL AND OTHER RESOURCES THAN THE COMPANY. THESE FACTORS MAKE IT
DIFFICULT FOR APO TO COMPETE IN ITS INDUSTRY AND MAY ADVERSELY AFFECT APO'S
RESULTS OF OPERATIONS.
The medical, dental and veterinary products supply business is intensely
competitive. At present, APO estimates that there are over 40 companies whose
products compete with many of APO's present and proposed products. These
companies range from major multinational companies to enterprises that are
smaller in size and financial ability than APO APO's present and prospective
competitors also include the numerous manufacturers and suppliers of reusable
medical products and manufacturers of raw materials used by APO. Many of APO's
competitors have far greater financial resources, larger staffs, and more
established market recognition in both the domestic and international markets
than APO. These factors make it difficult for APO to compete in its industry and
may adversely affect APO's results of operations.
IF APO'S SUPPLIERS ARE UNABLE TO DELIVER PRODUCT, THE COMPANY'S REVENUES AND
ULTIMATELY PROFITS WILL BE REDUCED.
APO is highly dependent on third party vendors to manufacture and distribute its
products. APO does not directly manufacture any of the products it presently
sells. The products distributed by APO are, for the most part, manufactured by
third parties in the United States, the Far East, Mexico and Canada. In general,
APO does not have long-term contracts with its manufacturers. Although APO
believes alternative sources for virtually all of its products are readily
available, there can be no assurance that the available supply from such
alternative sources would be adequate to meet the increased demand for
production that would most likely result from any significant disruption in
APO's traditional manufacturers and suppliers. If APO's suppliers are unable to
deliver product, APO's revenues and ultimately profits will be reduced.
APOIS SUBJECT TO RISKS SPECIFIC TO FOREIGN MANUFACTURING WHICH COULD CAUSE
INCREASES IN PRODUCT COSTS AND DELAYS IN PRODUCT DELIVERY WHICH WOULD RESULT IN
LOSS OF REVENUES AND GOODWILL.
Foreign manufacturing is subject to a number of risks, including transportation
delays and interruptions, political and economic disruptions, the imposition of
tariffs and similar import/export controls and changes in governmental policies.
Although, to date, APO has not experienced any material adverse effects due to
such risks, there can be no assurance that such events will not occur in the
future with the result of possible increases in product costs and/or delays in
product delivery which would, in all likelihood, result in the loss of revenues
and goodwill by APO.
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THE LOSS OF THE SERVICES OF THE COMPANY'S CHIEF EXECUTIVE OFFICER, DR. JAN
STAHL, COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS.
The Company's success depends to a large degree on the skills of Dr. Jan Stahl,
who is presently one of two executive officers. The other executive officer is
Kenneth Levanthal who serves as the Company's Corporate Secretary. The loss of
Dr. Stahl's services could have a materially adverse effect upon the Company's
ability to successfully carry on its business. Furthermore, the Company's
operations require the services of additional skilled personnel. There can be no
assurance that the Company will be able to attract persons with the requisite
skills and training to meet the Company's needs or, even if suitable persons are
found that they will be available on terms acceptable to the Company.
THE COMPANY'S HISTORIC STOCK PRICE HAS BEEN VOLATILE AND THE FUTURE MARKET PRICE
FOR THE COMPANY'S COMMON STOCK IS LIKELY TO CONTINUE TO BE VOLATILE. FURTHER,
THE LIMITED MARKET FOR THE COMPANY'S COMMON STOCK MAKES THE STOCK PRICE MORE
VOLATILE. THIS MAY MAKE IT DIFFICULT FOR YOU TO SELL THE COMPANY'S COMMON STOCK
FOR A POSITIVE RETURN ON YOUR INVESTMENT.
The public market for the Company's common stock has historically been very
volatile. During the past two fiscal years ended September 30, 2005 and the six
months ended March 31, 2006, the market price for the Company's common stock has
ranged from $0.01 to $0.18. Any future market price for the Company's common
stock is likely to continue to be very volatile. This price volatility may make
it more difficult for you to sell shares when you want at prices you find
attractive. The Company's litigation proceedings with The Proctor & Gamble
Company and Alcoa, Inc. may have contributed to the volatility in the Company's
stock price. In addition, the stock market in general has experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of companies. Broad market factors and the
investing public's negative perception of the Company's business may reduce the
Company's stock price, regardless of the Company's operating performance.
Further, the market for the Company's common stock is limited and the Company
cannot assure you that a larger market will ever be developed or maintained. As
of February 15, 2006, the average daily trading volume of the Company's common
stock over the past three months was approximately 46,620 shares. The last
reported sales price for the Company's common stock as of February 15, 2006, was
$0.0071 per share. Market fluctuations and volatility, as well as general
economic, market and political conditions, could reduce the market price of the
Company's common stock. As a result, this may make it difficult or impossible
for you to sell the Company's common stock for a positive return on your
investment.
THE COMPANY'S COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC,
WHICH MAKES TRANSACTIONS IN THE COMPANY'S COMMON STOCK CUMBERSOME AND MAY REDUCE
THE VALUE OF AN INVESTMENT IN THE COMPANY.
The Securities and Exchange Commission has adopted Rule 3a51-1 which establishes
the definition of a "penny stock," for the purposes relevant to the Company, as
any equity security that has a market price of less than $5.00 per share or with
an exercise price of less than $5.00 per share, subject to certain exceptions.
For any transaction involving a penny stock, unless exempt, Rule 15g-9 requires:
That a broker or dealer approve a person's account for transactions in penny
stocks; and
The broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to be
purchased in order to approve a person's account for transactions in penny
stocks,
The broker or dealer must: obtain financial information and investment
experience objectives of the person; and make a reasonable determination that
the transactions in penny stocks are suitable for that person and the person has
sufficient knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the SEC relating to the penny stock
market, which, in highlight form: sets forth the basis on which the broker or
dealer made the suitability determination; and
That the broker or dealer received a signed, written agreement from the investor
prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of the Company's common stock and cause a decline in the
market value of the stock.
15
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During December 2005, the Company issued a total of 1,200,000 shares of common
stock as consideration for professional services valued at $12,000.00. This
transaction was exempt from registration requirements pursuant to Section 4(2)
of the Securities Act of 1933, as amended.
On April 7, 2006 the Company issued a debt conversion agreement with six
individuals who converted the aggregate accrued outstanding fees for consulting
services totaling $56,450, into 14,112,500 shares of common stock at $.004 per
share. In this transaction 6,250,000 shares are exempt from registration
requirements pursuant to Section 4(2) of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
At March 31, 2006 APO had available a $300,000 credit facility with Rosenthal &
Rosenthal, Inc., of which $112,915 was outstanding (see Note 4 to the
accompanying financial statements). The credit facility is collateralized by all
of the APO's assets and is personally guaranteed by Dr. Jan Stahl, Chief
Executive Officer of the Company. Under terms of the credit facility, the lender
may call the loan if APO is in violation of certain restrictive covenants. At
March 31, 2006 APO is in violation of its net worth and working capital
covenants. Rosenthal & Rosenthal has not waived the violations, and accordingly,
the entire amount of the obligation is callable. The credit facility matured on
October 31, 2005 and was extended through December 31, 2005 under substantially
the same terms as the original agreement. APO and the lender have agreed to
continue the credit facility on a month to month basis. APO had requested an
extension of the credit facility through March 31, 2006.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
31.1 Certification by Dr. Jan Stahl, Chief Executive Officer and Principal
Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification by Dr. Jan Stahl, Chief Executive Officer and Principal
Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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SIGNATURES
Pursuant to the requirements 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.
APO HEALTH, INC.
Date: May 10, 2006 By: /s/ Jan Stahl
---------------------------------
Dr. Jan Stahl, Chief Executive
Officer, Acting Principal
Accounting Officer
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