10-Q 1 dec31200410q.txt 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 December 31, 2004 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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of February 8, 2005, 35,773,045 shares of Common Stock of the issuer were issued and outstanding. APO HEALTH, INC. FORM 10-Q QUARTER ENDED DECEMBER 31, 2004 TABLE OF CONTENTS

1 PART I - FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS.

2 APO HEALTH, INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED December 31, 2004 AND 2003 (UNAUDITED)

3 APO HEALTH, INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED December 31, 2004 AND 2003 (UNAUDITED)

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 the Company's Form 10-K containing the Company's audited financial statements as of and for the year ended September 30, 2004 filed with the Securities and Exchange Commission. The results of operations for the three months ended December 31, 2004 are not necessarily indicative of results to be expected for the entire fiscal year ending September 30, 2005. Note 1 ACCOUNTING POLICIES Nature of business and basis of consolidation. APO Health, Inc. ("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 was 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. Cash and cash equivalents. For purposes of the statements of cash flows, cash equivalents include all highly liquid investments with original maturities of three months or less. Revenue recognition occurs when products are shipped. Merchandise inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out method. 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. 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. 5 APO HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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

Note 3 - BANK NOTES PAYABLE On October 29, 2002, the Company entered into a financing agreement with Rosenthal & Rosenthal, Inc. The financing agreement provides the Company 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. The credit facility is collateralized by substantially all the Company's assets and $500,000 of the facility 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% (7.75% as of December 31, 2004). This agreement is for a period of three years through October 31, 2005 and may be extended on a year to year basis thereafter unless terminated as provided in the agreement. The credit facility provides that the Company maintain certain financial covenants.

6 APO HEALTH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A reconciliation of income taxes at the federal statutory income tax rate to total income taxes is as follows:

The Company has a net operating loss carryover of approximately $1,139,000 to offset future taxable income. The carryover expires at various times through 2024. The Company has offset the deferred tax asset by a valuation allowance of $672,825, since it cannot be determined more likely than not whether the Company will be able to utilize such net operating loss carryover. Note 5 - COMMON STOCK In January of 2004, the Company authorized the creation of 3,500,000 bonus compensation warrants exercisable at $0.025 per share, for an exercise period of three years, to be issued to designated recipients approved by the Board. On January 9, 2004, the Board authorized the issuance of 2,300,000 compensation warrants to various officers and professionals for services rendered. 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 warrants have been issued. 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. 7 APO HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5 - COMMON STOCK (continued) In October, 2004, the Company issued 100,000 shares of common stock to a professional for services valued at $6,000. Note 6 - 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, 2004, 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 $50,261, $59,429 and $73,881 for each of the three years ended September 30, 2004. Future minimum lease payments are as follows: For the years ended September 30, 2005 $ 70,411 2006 70,571 2007 71,225 2008 75,825 2009 79,405 After 2009 13,337 -------- Total $380,774 -------- Note 7 - COMMITMENTS AND CONTINGENCIES Litigation On or about July 7, 2004, APO Health, Inc. 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 8 APO HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7 - COMMITMENTS AND CONTINGENCIES (continued) by P&G. APO purchased several shipments of these products abroad and unbeknownst to APO, some non P&G products were 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 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. The Company continues to cooperate with and assist the Food and Drug Administration ("FDA") in its inquiry and has undertaken a voluntary recall of these products. As a result of APO's continuing cooperation with P&G and the FDA and its lack of knowing culpability, its counsel believes that this proceeding will terminate without any adverse consequence to the Company. On or about December 3, 2004, APO Health, Inc. 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 them 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, some non Alcoa 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. The lawsuit is seeking, among other relief, a request for a temporary and permanent injunction from selling such products. The Company continues to cooperate with and assist the FDA in its inquiry and has undertaken a voluntary recall of these products. As a result of APO's continuing cooperation with Alcoa and the FDA and its lack of knowing culpability, its counsel believes that this proceeding will terminate without any adverse consequence to the Company. 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 on September 30, 2004, and shall be automatically renewed for successive periods of one year unless either party gives written notice to terminate the agreement. Note 8 - 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 December 31, 2004, the Company had $321,805 on deposit, in excess of the $100,000 in each bank, which is insured under federal law. 9 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 within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact made in this 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 three months ended December 31, 2004 was $4,477,957, a decrease of $2,627,030, or 36.2%, from $7,389,987 for the three months ended December 31, 2003. There were several factors which contributed to the decline in revenue. (1) The Company no longer conducted business with several wholesale customers that were sold products that were subsequently determined to be counterfeit. Sales to these customers for the quarter ended December 31, 2003 were in excess of $1,300,000. (2) A second factor which contributed to the reduction in revenue was the cost of products that the Company had previously imported from Canada and Europe increased substantially because of the United States dollars decline against those currencies. The Company was unable to pass along any price increase, and, therefore reduced or eliminated purchases of many imported products The Company is in the process of preparing a new catalogue for medical supplies. The distribution of the catalogue has been delayed into the second or third quarter of fiscal 2005. The Company anticipates that with the distribution of this new catalogue, sales of medical supplies will increase. The gross profits on products included in the catalogue are a minimum of 20% to 25% and any increase in revenue will increase the overall profit margins of the Company. Cost of revenue for the three months ended December 31, 2004 were $4,432,561, a decrease of $2,421,225, or 35.9%, from $6,746,816 for the three months ended December 31, 2003. The decrease in cost of sales is proportionate with the decrease in revenue described above. The gross profit percentage for the three months ended December 31, 2004 was 8.2% compared to 8.6% for the three months ended December 31, 2003. The lower gross profit percentage is a result of increased costs that the Company was unable to pass on to customers. Selling expenses for the three months ended December 31, 2004 were $123,211, a decrease of $40,634 from the three months ended December 31, 2003. Commissions decreased by approximately $17,000 for the quarter ended December 31, 2004 due to the decrease in revenue from wholesale customers. Advertising and related costs declined by approximately $19,000 as the Company reduced its mailing of advertising materials. There were minor increases and decreases in other selling expenses that resulted in an overall decrease which was directly related to the decrease in revenue. 10 General and administrative expenses for the three months ended December 31, 2004 were $376,957, an increase of $40,126 from $336,831 for the three months ended December 31, 2003. Total compensation, including payroll taxes and employee benefits, decreased by $27,100 as the Company reduced salaries for its executive officers and other salaried individuals to reduce costs. Consulting fees, under an agreement entered into in January 2004, were $30,000. There was no comparable cost in 2003. The consulting agreement expired in January 2005. The Company reserved an additional $50,000 to its allowance for bad debts in the quarter ended December 31, 2004. There was no comparable cost in 2003. Banking fees and credit card processing fees decreased in the quarter ended December 31, 2004 by approximately $12,000 as it reduced the available line of credit with its lender. There were minor increases or decreases in all other general and administrative expenses. Interest expense for the three months ended December 31, 2004 was $13,905, a decrease of $8,824 from the three-month period ended December 31, 2003. The decrease in interest expense is due to a reduction of the credit facility with Rosenthal & Rosenthal, Inc. which reduced the Company's monthly minimum interest expense. Liquidity and Capital Resources As of December 31, 2004, the Company had net working capital of $276,618, a decrease of $120,144 from September 30, 2004. The Company has approximately $750,000 of financing available under a $1,000,000 credit facility with Rosenthal & Rosenthal, Inc. to finance additional receivables and inventory. The term of the credit facility expires on October 31, 2005 and may be extended on a year to year basis thereafter unless it is terminated. Based upon the above factors, the Company believes that it has sufficient funds for operations for the next fiscal year. During the past year, because of the decrease in the exchange rate of the U.S. dollar against the Euro and Canadian dollar, the Company has not been able to purchase merchandise at favorable prices from distributors in Europe and Canada. In addition, other product lines are no longer accessible to the Company. Consequently, the Company's sales of products has decreased. 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, the Company's 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 December 31, 2004, the Company had $321,805 on deposit, in excess of the $100,000 in each bank, which is insured under federal law. 11 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 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 internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS. On or about July 7, 2004, APO Health, Inc. 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 were 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 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. The Company continues to cooperate with and assist the Food and Drug Administration ("FDA") in its inquiry and has undertaken a voluntary recall of these products. As a result of APO's continuing cooperation with P&G and the FDA and its lack of knowing culpability, its counsel believes that this proceeding will terminate without any adverse consequence to the Company. On or about December 3, 2004, APO Health, Inc. 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 them 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, some non Alcoa products were included in these shipments. APO is cooperating with Alcoa as well as the federal regulatory agencies and is suppying 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. The lawsuit is seeking, among other relief, a request for a temporary and permanent injunction from selling such products. The Company continues to cooperate with and assist the FDA in its inquiry and has undertaken a voluntary recall of these products. As a result of APO's continuing cooperation with Alcoa and the FDA and its lack of knowing culpability, its counsel believes that this proceeding will terminate without any adverse consequence to the Company. 12 ITEM 2 UNREGISTERED SALES OF EQUITY SECURITES AND USE OF PROCEEDS. In October 2004, the Company issued 100,000 shares of common stock to a professional for services valued at $6,000. ITEM 3 DEFAULTS UPON SENIOR SECURITIES. None. 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 Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification by Dr. Jan Stahl, Chief Executive Officer and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 13 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: February 14, 2005 By: /s/ Dr. Jan Stahl ------------------- Dr. Jan Stahl, Chief Executive Officer, Chief Financial Officer, Secretary and Chairman (Principal Executive Officer and Principal Financial Officer)

APO HEALTH INC /NV/ 10-Q