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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual report under section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended September
30, 2000
[ ] Transition report under section 13 or 15(d) of the Securities
Exchange Act of 1934 for transition period from to .
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Commission file number 0-23153
VOLU-SOL, INC.
(Name of small business issuer in its charter)
UTAH 87-0543981
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5095 West 2100 South
Salt Lake City, Utah 84120
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (801) 974-9474
Securities registered under Section Name of each exchange on which
12(b) of the Act: registered:
None None
Securities registered under Section 12(g) of the Act: Common Stock, $.0001
par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
Issuer's revenues for the fiscal year ended September 30, 2000 were $496,211.
Registrant's common stock has not traded and there is no market for the
registrant's common stock at this time. On April 28, 2000, the registrant
declared a one-for-five stock split of its common stock that reduced the number
of issued and outstanding shares as of that date. Outstanding common stock data
in this report have been adjusted to reflect the reverse stock split.
There were 3,091,246 shares of common stock of the registrant outstanding as of
December 31, 2000.
Transitional Small Business Disclosure
Format (Check one):
Yes ___ No X
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Part I
Item 1. Business
Introduction
Volu-Sol, Inc. (the "Company" or "Volu-Sol") 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 1 - "Business" and in Item 6 -
"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."
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 the Company's
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
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billion annually, based on industry publications. The ROSE System combines
innovative hardware and software technologies with a powerful medical data
capture and communication network.
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.
The ROSE System
The Company is developing the ROSE System to effectively compete in the
greater than $100 billion home healthcare and telemedicine markets. The ROSE
System combines innovative hardware and software technologies with a powerful
medical data capture and communication network.
The Company currently has under development intellectual property based
hardware and software solutions that enable the remote monitoring and capture of
patient condition data. The Company is simultaneously developing a strategy to
acquire and build a world-class data management network to capture, organize and
distribute this patient information to care providers and other authorized third
parties.
As currently planned, the ROSE System is expected to:
>> Incorporate a Personal Emergency Response System (PERS) product and service.
>> Permit increased independence through a mobile emergency response option.
>> Allow remote monitoring and diagnosis of patient conditions.
>> Increase patient access to healthcare while lowering costs of physician and
patient interaction.
>> Reduce healthcare costs through timely capture of patient condition data
leading to earlier and more cost effective treatments.
>> Improve patient satisfaction and outcomes through more consistent and
convenient access to healthcare.
>> Create a portable and efficient electronic trail to a patient's medical
history.
The Company expects to launch the ROSE System in stages as follows.
Stage 1 - ROSEBUD(TM) (Mobile PERS)
Existing Personal Emergency Response System (PERS) devices provide a range
of use of approximately 150 - 250 feet and are intended for in-home use. ROSEBUD
is a mobile PERS service providing a virtually unlimited range to the user and
expanding the potential market for users from a few million to over 35
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million. ROSEBUD offers greater freedom and mobility to the user who will carry
or wear the small wireless, waterproof pendant, key-chain or watch transmitter.
ROSEBUD will have the ability to be manually activated like traditional PERS
devices. Therefore, at the push of a button from anywhere, at anytime, the user
is in contact with emergency services.
ROSEBUD will be enabled with Global Positioning Satellite (GPS) technology
to allow the user to be located within a matter of meters in the event of an
emergency. In addition, ROSEBUD will have an automated feature such that in the
event of a sudden shock--produced by a fall--a signal will be activated within
the device requiring a response. In the event the response is not received the
predetermined response sequence will be initiated. ROSEBUD will be introduced in
successive generations offering more features and user options such as two-way
voice communication and vital sign monitoring.
The mobility afforded by ROSEBUD will allow users to retain freedom and
carry on with normal daily activities. Users will appreciate their ability to
maintain dignity and a higher quality of life while being monitored and having
access to an emergency response option--thus providing a safety net at all times
for them or their loved ones.
ROSEBUD is easy to use and is designed to signal a friend, relative or
emergency service from anywhere, whenever help is needed. The system operates
using a small wireless, waterproof pendant, key-chain or watch transmitter,
carried or worn by the user. This component links the user to a 24/7 monitoring
center attendant, to neighbors and to loved ones or caregivers.
>> In the event of an emergency, (an intruder, a medical condition, a
fall) at any time, for any purpose, the user presses the activation
button on the console or the wireless pendant. This activates a call
immediately to the Emergency Response Center.
>> Within seconds, a two-way, hands free conversation is established
between the user and the emergency attendant, via a highly sensitive
two-way speakerphone, and the attendant will determine the type of help
needed.
>> The caring attendant will dispatch a neighbor, relative or emergency
service depending on the user's needs.
>> The emergency attendant has the user's pre-programmed information,
including medical history, prescribed medications, user location,
preferred hospital and information on who else should be contacted
(family, neighbors, doctors).
>> If the emergency attendant is unable to make voice contact, the
attendant will contact emergency personnel.
>> The caring attendant will close the loop and call back to the user's home or
stay in voice contact to make sure help has arrived.
>> Caregivers are then contacted to indicate the nature of the incident. The
family is always advised of any incident.
Stage 2 - ROSE Chronic Monitoring(TM)
The ROSE Chronic Monitoring service is designed to be a cost-effective
solution that monitors chronic conditions utilizing home-based and mobile,
monitoring devices. Chronic diseases are those of a longer or permanent
duration. Examples of more prevalent chronic diseases include:
>> Congestive heart failure
>> Coronary heart disease
>> Diabetes
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>> Asthma
>> AIDS/HIV
>> Cancer
The service will be targeted to specific disease monitoring and will obtain
large volumes of extremely precise patient related data which is processed
through the RemoteMDx data management network and then is transmitted in a
real-time fashion to healthcare providers and other authorized third parties.
Initially, the Company will provide patients and healthcare providers with
personalized disease management information and certain diagnostic tests that
allow for home-based monitoring and communication of patient-specific data, such
as blood glucose levels, blood pressure, heart and respiration rates, weight and
other selected criteria. As additional home-based and point-of-care diagnostic
products are approved by the FDA and become more advanced, its RemoteMDx
offerings will expand to allow both the physician and the patient to test for
and to monitor a wider range of chronic conditions through the addition of
modular device connections on the ROSE Chronic Monitoring base unit. The ROSE
Chronic Monitoring service will provide test results and feedback to its
customers and to authorized third parties while storing the information in a
patient medical history database; thereby empowering patients and their
physicians to manage better their health.
Stage 3 - ROSE Acute DiagnosticTM
The ROSE Acute Diagnostic service is designed to simulate a physician
"house call" by allowing the patient to stay at home and have personal vital
signs and diagnostic data acquired, processed through the RemoteMDx data
management network and then sent to a physician. The physician will then make a
diagnosis based on the remotely recorded data, or, if the physician believes
there may be a problem, contact the patient for additional testing in the
physician's office. The end result is intended to be the development of
significantly improved efficiencies for care providers and the convenience of
"24/7" healthcare.
This product is targeted at acute medical events. An acute medical event is
one in which the symptoms or wound come on suddenly and may or may not be life
threatening. Examples of acute medical events include the onset of strep, a
cold, or the flu, receiving a laceration or other wound or displaying specific
conditions such as vomiting, coughing, or a rash.
The ROSE Acute Diagnostic service will accommodate a proactive or on demand
acute medical condition. This service differs from the ROSE Chronic Monitoring
service in that the ROSE Acute service is focused on diagnosing "acute" medical
conditions rather than monitoring chronic, ongoing medical conditions. The ROSE
Acute Diagnostic product will be on a similar platform to that of the ROSE
Chronic Monitoring product with multiple ports for medical diagnostic devices
such as blood pressure cuffs, thermometers, scales and other instruments. This
platform will encompass the ability to perform blood tests, strep tests,
urinalysis, blood pressure checks and other commonly performed procedures at the
physician's office.
ROSE Acute will incorporate state-of-the-art technology to create a user
interface and to transfer data. ROSE Acute will interface with the patient by
asking relevant medical questions based on a medical triage decision tree and
prompts the patient to use appropriate diagnostic medical tools to gather data.
When the appropriate data is gathered, the patient will be prompted to send the
data. The information is processed through and stored in the RemoteMDx data
management network and forwarded to the physician. The physician, when the data
is received, can respond through ROSE Acute's e-mail system or by telephone.
The Company anticipates that as technology progresses, so will ROSE Acute.
Eventually ROSE Acute will have a voice interface and human-like manner.
Additionally, on the physician's side of the ROSE Acute transaction, the data
gathered by ROSE Acute and sent to the physician will integrate with a
comprehensive electronic medical record system, increasing physician
productivity and providing unparalleled access to patient information.
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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.
Product Marketing and Distribution - 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.
The Company anticipates that these additional strategic alliance partners would
provide the following:
>> A consortium of providers, specific to chronically ill care, to act as
a focus group on product definition matched to specific care areas.
>> The opportunity to conduct prototype review and gain decision-making
input into final technology design for test markets.
>> Sites to conduct trials, to establish protocols, to track outcomes and
to act as early-adopter organizations for acquiring the technology.
>> Access to significant channels of distribution.
Data Transfer and Processing. In order to enhance its data transfer and
processing capabilities, the Company intends to forge a strategic alliance with
an industry leader in this arena. The Company is in the process of identifying
potential data transfer and processing alliance partners for its products and
services. The Company believes that the Company may be able to forge an alliance
with a partner that has expertise in both product marketing/distribution and
data transfer and processing.
Product Manufacturing. The Company has no manufacturing facilities for its
new products. As part of the process of identifying and developing these new
products, the Company anticipates that it may be required to manufacture, or
have third parties manufacture, certain products and devices, including
prototypes of the products. To the extent possible, the Company will require any
such manufacturing to be conducted by third parties, including those parties
with which it has collaborative relationships.
Competition
The Company's research has revealed several companies working in the
healthcare arena that have products overlapping different anticipated elements
and aspects of its ROSEBUD product and service. Primary competitors include SOS
Wireless, Magnavox 911 Phone, Digital Angel, Sensatix Smart Shirt, Body Media
and Stay Healthy.com.
The Company has not as yet identified any companies that compete directly
with the planned ROSEBUD mobile PERS service. The companies identified above,
however, have products or services that deliver one or more components of the
ROSEBUD service.
The Company believes that the current competition has targeted chronic
disease monitoring with their products, and has no proprietary position in the
acute diagnostics market. There can be no assurance, however, that they will not
expand their product offerings into those areas that the Company has targeted.
The industry has not embraced the chronic monitoring products of the
Company's current competitors. These current competitors are attempting to sell
hardware units to healthcare providers. The Company's research indicates that
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care providers prefer not to inventory, maintain or carry hardware on their
balance sheets--particularly the majority of home healthcare providers who are
small and who experience cash constraints.
After interviewing several home healthcare agencies and gaining an
understanding of their needs, the Company is approaching the chronic monitoring
market with a direct-to-consumer weekly service fee model. The Company expects
that it will be successful with this strategy due to its combined business model
comprising control over both product hardware and the monitoring service
network.
The Company believes that, because of the nature of the healthcare
industry, competition will likely arise and intensify. The Company also believes
that it will maintain several advantages over its competition, in part because
of its alliance with Battelle and other strategic alliances, as well as because
of its business model combining both technology development and a data
management network. In addition, the Company believes that several components in
the ROSE System will enjoy significant intellectual property protection from
competition. By establishing a basis for real, substantial cost savings and by
providing broad practical solutions to the crisis in healthcare, the Company
believes the ROSE System will flourish in current and future market conditions.
There is no assurance, however, that the Company will be successful in competing
with larger and better-capitalized competitors.
Potential Markets
Market Opportunity--Healthcare Industry Challenges
Pressure from consumers, physicians and insurance groups is mounting on the
healthcare system. This pressure is driving changes in the methods, costs and
availability of healthcare delivery. Healthcare costs in the United States are
spiraling upward and cost containment is a primary issue facing the industry.
Several factors contributing to this situation include, in the Company's
opinion, the following:
>> Errors in transcription of medical data.
>> Lack of patient compliance to prescribed healthcare.
>> Delayed detection and diagnosis of medical needs.
>> Lack of consistent monitoring of "at-risk" patients.
>> Shortage of qualified care providers.
>> Increased prevalence of chronic diseases. (Chronic diseases are those of a
longer or permanent duration.
>> The percentage of the population afflicted with chronic diseases is
substantial.
>> Chronic illnesses account for 60% - 70% ($700 + billion) of total healthcare
costs.
>> Heart disease, cancer and diabetes all account for more than $100 billion in
annual healthcare costs.
The Company believes that routine clinical monitoring of patients with
chronic conditions will prevent a substantial portion of these costs. This
monitoring will lead to earlier intervention, thus often precluding the need for
more expensive in-hospital care.
Factors that evidence the increased economic pressures on the medical
industry, in the Company's view, include the following:
>> Insurance companies are struggling to maintain service levels while
controlling costs.
>> Patient access to timely healthcare is being limited.
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>> Physicians are having their incomes reduced significantly.
>> Federal government is implementing a "Prospective Payment System" which
is a flat fee payment that capitates and limits the costs Medicare and
Medicaid will pay for home healthcare services.
The Company has identified the following industry trends as a direct result
of the factors and effects of rising healthcare costs:
>> Increasing use of home healthcare.
>> Increasing implementation of capitated payment programs. (Capitated
payment programs are flat fee payment programs that limit the amount of
costs that payors will reimburse.)
>> Growing acceptance of new technologies.
In addition to economic pressures there are significant demographic and
life style pressures on the healthcare system. The baby boomers are now aging.
As a population we are living longer and becoming more proactive and informed
with our healthcare issues and choices. Average life expectancy is moving
upward. This coupled with the aging of the baby-boom generation presents an
opportunity for companies providing healthcare to this large population segment.
>> Seventy-five million babies were born in the United States from 1946 to 1964
>> From 1990 to 2020, the elderly population (65+) is projected to
increase to 54 million persons. The growth rate of the elderly will be
more than double that of the total population during this period.
Beginning in 2011, the first members of the baby boom will reach age
65.
>> In 2020, about 1 in 6 Americans will be elderly. By the middle of the
next century, the number of elderly could reach 79 million. In 2050,
the final phase of the gerontological explosion will occur. The elderly
population as a whole will number about 79 million people, more than
double its present size.
A "window of opportunity" now exists for planners, policy makers, and
businesses to prepare for the aging of the baby-boom generation.
Currently 35 million Americans are 65 years of age or older and the size of
the over-85 population is also increasing. These population segments and their
accompanying health status, which clearly declines with increasing age, suggests
that a larger number of individuals will seek long-term care as part of the
continuum from independent living, to assisted living at home, to institutional
care. Additionally, with longer life expectancy and more persons 85 years old
and over, it is likely that more and more people will have surviving older
relatives and be concerned with the daily monitoring of the health status of
these loved ones. In 1959, there were 3 persons 85 years old and over for every
100 persons age 50 to 64. In 2050, there will be 27 persons 85 years old and
over for every 100 persons age 50 to 64.
About half of the over-85 population who live in their homes are frail and
need assistance with everyday activities. Their relatives, in their fifties and
sixties, face the difficulties of providing this care. With an aging population
and the fact that reports indicate that 80% of healthcare costs occur in the
last two years of life, viable cost saving options are needed.
As a person ages, the number of office visits per year to a physician
increases (National Ambulatory 1997 Medical Care Survey). When this trend is
coupled with the fact that the fastest growing segment of the population is
those 65 years of age and older, an explosion of office visits is anticipated.
The Company believes that through its ROSE System family of products and
services, the Company is poised to take advantage of the coming growth in
patients seeking medical office visits or other healthcare services. The
Company's new products offer a solution for dealing with this growth in a
cost-effective manner.
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Proactive Consumerism
As a result of these several factors, many consumers are becoming much more
proactive in their decisions regarding healthcare. They have been somewhat
victimized by the current chaos in the healthcare system and feel the need to
have more control over this most critical area of their lives. The Company
believes that with its new products and services, the Company is positioned to
take advantage of this chaos by providing a single solution that addresses
multiple consumer and industry issues. Among others, the Company believes that
the major issues affecting consumerism in the healthcare industry include the
following:
>> Consumers feel isolated from healthcare and frustrated with paying high
costs for a system that is placing limits and barriers on their ability
to have timely access to their doctor.
>> Consumers are seeking alternatives to traditional healthcare as a means
of taking more control over their health.
>> In the last ten years, complementary and alternative medicine
expenditures have increased dramatically and it has become a $50
billion per year industry.
>> More money is now spent on alternative and complementary medicine than
on primary care services ("Consumerism in Managed Care," MedPro Month,
June-July 2000, Medical Data International).
The healthcare industry is being forced to revolutionize its practices. The
Company believes that its products would position the Company strategically to
ride the wave of this revolution. The Company's RemoteMDx solutions in the ROSE
System of health monitoring, diagnosis, and data management services will have
the following impact on the industry:
>> Improved efficiencies resulting in over $1 billion in cost savings.
>> Improved accuracy, portability and communication of patient data.
>> 50 - 100% improvement in physician office efficiency.
>> Fast, efficient and staged implementation of home healthcare delivery
options.
>> 50% reduction in home healthcare delivery costs.
Market Size
>> National expenditures in the healthcare industry are increasing:
>> Total healthcare industry expenditures are in excess of $1 trillion
>> Home healthcare market is $42 billion (approximately 50% of these costs are
associated with the cost of labor)
>> Telemedicine market is $65 billion
Pressures are mounting on the healthcare industry to gain control over
costs, to meet the demands of a growing patient population and to improve
patient outcomes from the healthcare system. The industry is realizing that the
productivity gains that have occurred via technology in other industries must
also be leveraged to solve some of its own challenges.
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Research and Development
With the change in emphasis to remote medical diagnostics, the Company has
made a significant commitment to research and development. Prior to this change,
Volu-Sol has not invested material amounts in research and development because
of the extent of the product line acquired when Biomune purchased the assets
comprising the Volu-Sol business.
Dependence on Major Customers
During the fiscal years ended September 30, 1999 and 2000, Volu-Sol had
sales to a company that accounted for approximately 19% and 15%, respectively of
the Company's total revenues. Another customer accounted for approximately 11%
of the Company's total revenues during fiscal year 1999.
Employees
At September 30, 2000 Volu-Sol had 4 full time employees and no part-time
employees. Volu-Sol will, as needed, hire additional employees or sub-contract
the balance of its personnel requirements through independent contractors.
Volu-Sol's current manufacturing operations do not require specially skilled
employees and Volu-Sol believes that it will be able to satisfy its labor
requirements for the foreseeable future. The Company's employees are not
represented by a collective bargaining arrangement, and Volu-Sol believes its
relationship with its employees is good. As the Company pursues its new business
plan, it is anticipated that additional employees will be required, particularly
employees with specialized experience in marketing to the medical industry.
Item 2. Properties
Volu-Sol leases approximately 11,500 square feet of laboratory facilities
at 5095 West 2100 South, West Valley City, Utah from a third party. The leased
premises serve as the Company's manufacturing, warehouse and shipping facilities
as well as its corporate headquarters and offices. The lease was extended after
September 30, 2000 through November 2005 with monthly base rent of $5,550,
subject to annual adjustments according to changes in the Consumer Price Index.
Item 3. Legal Proceedings
Volu-Sol is not a party to, and none of its property is subject to, any
pending or threatened legal proceedings which, in the opinion of management, are
likely to have a material adverse impact on the financial condition, results of
operations or cash flows of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of shareholders during the fourth quarter
of fiscal year 2000.
Part II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
Market. Prior to the Distribution, Biomune owned all of the Company's
common stock and consequently there has never been a public trading market for
the Company's securities. Although Volu-Sol anticipates that a public market for
over-the-counter trading of the Company's securities may develop in the future,
there can be no assurance that such a market will ever develop or that it will
be sustained. At such time, if any, as Volu-Sol satisfies applicable entry or
listing criteria, Volu-Sol may seek to include or list its common stock on a
securities market or exchange. Volu-Sol does not meet those listing
qualifications at this time. There is presently no market for the Company's
common stock and there is no assurance that a market will ever develop. There
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can be no assurance that Volu-Sol will ever be able to satisfy such criteria or
that its application for inclusion or listing on the Nasdaq Stock Market or
securities exchange would be accepted.
Holders. As of December 31, 2000, there were approximately 1,300 record
holders of the Company's common stock and approximately 3,091,246 shares issued
and outstanding. The Company had approximately 17,500 outstanding shares of
preferred stock at December 31, 2000, held by 26 record holders and convertible
into a total of 6,500,000 shares of common stock.
Dividends. Since its incorporation, Volu-Sol has not declared any dividend
on its common stock. Volu-Sol does not anticipate declaring a dividend on its
common stock for the foreseeable future. The Series A Preferred Stock accrues
dividends at the rate of 10% annually, which may be paid in cash or additional
shares of preferred stock at the option of the Company. To date all such
dividends have been paid by issuance of preferred stock.
During the fiscal year ended September 30, 2000 the Company declared and
paid a 10% dividend by issuing 1,293 additional shares of Series A Preferred
Stock on the outstanding shares of Series A Preferred Stock.
Dilution. Volu-Sol has a large number of shares of common stock authorized
in comparison to the number of shares issued and outstanding. The Board of
Directors determines when and under what conditions and at what prices to issue
the stock of the Company. In addition, a significant number of shares of common
stock of the Company are reserved for issuance upon exercise of purchase or
conversion rights. Volu-Sol agreed with Nasdaq to issue additional shares of
common stock in connection the distribution. The issuance of any shares, whether
in connection with the Distribution, new equity offerings, acquisitions, or the
exercise of option or conversion rights will result in dilution of the equity
and voting interests of existing shareholders.
Transfer Agent and Registrar. The transfer agent and registrar for the
Company's common stock is American Stock Transfer & Trust Company, 40 Wall
Street, New York City, NY 10005.
Recent Sales of Unregistered Securities
The following information sets forth certain information for all securities
sold by the Company during the past three years without registration under the
Securities Act of 1933 (the "Securities Act").
Fiscal Year 1998
During fiscal year 1998, Volu-Sol sold 1,835 shares of Series A Preferred
to accredited investors for cash of $312,000. Volu-Sol also issued a total of
800 shares of Series A Preferred, valued at $160,000 for services provided to
the Company by employees and consultants, including commissions earned in
connection with the sale of the Series A Preferred to the accredited investors
described above. The Company also issued 15 shares as settlement of a lawsuit.
Fiscal Year 1999
During fiscal year 1999, Volu-Sol sold 797.5 shares of Series A Preferred
Stock for cash proceeds totaling $159,500. All sales were to accredited
investors. In addition, Volu-Sol issued 848 shares of Series A Preferred Stock
as a stock dividend to its Series A holders and 2,460 shares of Series A
Preferred Stock to certain employees, officers, directors, and consultants as
compensation for services rendered to the Company. Volu-Sol also satisfied a
subscription receivable of $402,200 for Series A Preferred Stock with a note
payable to Biomune in the principal amount of $372,411, and accrued interest of
$29,789.
With respect to all of the foregoing offers and sales of restricted and
unregistered securities by the Company, Volu-Sol relied on the provisions of
Sections 3(b) and 4(2) of the Securities Act and rules and regulations
promulgated thereunder, including, but not limited to Rules 505 and 506 of
Regulation D, in that such transactions did not involve any public offering of
securities and were exempt from registration under the Securities Act. The offer
and sale of the securities in each instance was not made by any means of general
solicitation, the securities were acquired by the investors without a view
toward distribution, and all purchasers represented to the Company that they
were sophisticated and experienced in such transactions and investments and able
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to bear the economic risk of their investment. A legend was placed on the
certificates and instruments representing these securities stating that the
securities evidenced by such certificates or instruments, as the case may be,
have not been registered under the Securities Act and setting forth the
restrictions on their transfer and sale. Each investor also signed a written
agreement that the securities would not be sold without registration under the
Securities act or pursuant to an applicable exemption from such registration.
Fiscal Year 2000
During the year ended September 30, 2000, the Company sold 1,900,000 shares
of common stock for $1,500,000. The Company also issued a total of 425,000
shares of common stock for services. The offer and sale of these securities were
exempt from registration under the federal securities and state "blue sky" laws
and regulations pursuant to exemptions promulgated under those laws relating to
offers and sales made to accredited investors. These shares were restricted
shares and their sale or transfer by these investors are subject to restrictions
under applicable federal and state securities laws, including the registration
requirements of those laws. In addition, during the year ended September 30,
2000, the Company issued 72,000 shares of common stock upon conversion of 288
shares of Series A preferred stock.
Item 6. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis should be read in conjunction with
the Company's financial statements and the notes thereto contained elsewhere in
this report. The discussion of these results should not be construed to imply
any conclusion that any condition or circumstance discussed herein will
necessarily continue in the future.
When used in this report, the words "believes," "anticipates," "expects,"
and similar expressions are intended to identify forward-looking statements.
Those statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. Volu-Sol undertakes no obligation to publicly
release the results of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date of this report, or
to reflect the occurrence of unanticipated events.
Results of Operations
Fiscal Year Ended September 30, 2000 Compared to Fiscal Year Ended September 30,
1999
In the fiscal year ended September 30, 2000, Volu-Sol had revenues totaling
$496,211 compared to $528,904 for fiscal year ended September 30, 1999.
Cost of goods sold in the fiscal year ended September 30, 2000 totaled
$291,213 compared to $364,646 for the fiscal year ended September 30, 1999. The
overall gross margin for the fiscal year ended September 30, 2000 was
approximately 41% compared to 31% of revenues in fiscal year 1999.
Selling, general and administrative expenses totaled $1,596,601in fiscal
year 2000, compared to $938,898 in 1999, an overall increase of $657,503.
Volu-Sol incurred a net loss of $3,445,352 in 2000, compared to a net loss
of $906,500 in fiscal year 1999. This net loss is the result of increased
selling, general and administrative and research and development expenses in
2000.
Liquidity and Capital Resources
Volu-Sol currently is unable to finance its operations solely from its cash
flows from operating activities. During the year ended September 30, 2000, the
Volu-Sol financed its operations primarily through the sale of 1,900,000 shares
of common stock for gross proceeds of $1,500,000. These proceeds were used to
supplement cash from operations as working capital.
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As of September 30, 2000, the Company had cash and cash equivalents of
$278,421 and working capital of $177,697, compared to cash of $44,123 and
working capital of $13,340 as of September 30, 1999.
Interest expense decreased from $18,864 in fiscal year 1999 to $0 in the
fiscal year ended September 30, 2000.
During fiscal year 2000, the Company's operating activities used cash of
$1,492,509 compared to $277,449 in 1999. This cash was primarily provided by the
sale of common stock in 2000 and Series A Preferred Stock in 1999.
Volu-Sol presently has no credit facility with any commercial lending
institution. In the past, Volu-Sol borrowed and received capital from time to
time from Biomune, but Volu-Sol has no formal financing arrangement, agreement
or understanding with Biomune or any other party to provide debt financing in
the future. It is anticipated that Volu-Sol will obtain funding through the sale
of its securities to provide cash to meet its operating needs. There can be no
assurance that its efforts to sell its securities will be successful or that
additional financing will not be needed in the future.
Recent Accounting Pronouncements
During January 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-5 "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"). SOP 98-5 became effective for all fiscal years
beginning after December 15, 1998. Volu-Sol adopted SOP 98-5 in the fiscal year
ended September 30, 2000.
In December 1999, The Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 is to be adopted for fiscal years beginning after December
15, 1999, which for the Company would be the fiscal year beginning October 1,
2000. SAB 101 addresses various topics in revenue recognition. The Company is
currently analyzing SAB 101, however based on management's current understanding
and interpretation, SAB 101 is not expected to have a material impact on the
Company's financial statements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), "Accounting for certain Transactions Involving
Stock Compensation - An Interpretative of Accounting Principals Board Opinion
("APB") No. 25". FIN 44 clarifies the application of APB 25 and became effective
July 1, 2000. The Company believes that its current accounting policies are in
conformity with this interpretation, and does not believe that FIN 44 will have
a material effect on the Company's financial statements.
Risk Factors
This Report contains forward-looking statements, which may be affected by
risks and uncertainties including many that are outside the Company's control.
The Company's actual operating results could differ materially as a result of
certain factors, including those set forth below and elsewhere in this Report.
Absence of Profitable Operations. From its inception, Volu-Sol has not
achieved profitable operations and continues to operate at a loss. The present
business strategy is to improve profitability and cash flows by adding to its
existing product line. While management believes the cash generated by
operations together with the proceeds from the sale of Series A Preferred will
satisfy its ordinary cash requirements for at least 12 months, there can be no
assurance that Volu-Sol will ever be able to achieve profitable operations or
that it will not require additional financing to achieve its business plan. See
"Management's Discussion and Analysis or Plan of Operation."
"Going Concern" Issues. The financial statements of the Company have been
prepared on the assumption that it will continue as a going concern. The
Company's product line is limited and it has been necessary to rely upon loans
and capital contributions to sustain operations. Additional financing is
required if the Company is to continue as a going concern. If additional funding
is not obtained, the Company will be required to scale back or discontinue its
operations.
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Uncertainty of Future Financial Results. Profitability depends upon many
factors, including the success of its marketing program, its ability to identify
and obtain the rights to additional products to add to its existing product
line, expansion of its distribution and customer base, maintenance or reduction
of expense levels and the success of the its business activities. Volu-Sol has
an accumulated deficit as of September 30, 2000 of $7,767,375. Volu-Sol
anticipates that it will continue to incur operating losses in the future.
Volu-Sol's ability to achieve profitable operations will also depend on its
ability to develop and maintain an adequate marketing and distribution system.
There can be no assurance that the Company will be able to develop and maintain
adequate marketing and distribution resources. If adequate funds are not
available, Volu-Sol may be required to materially curtail or cease its
operations. See "Management's Discussion and Analysis or Plan of Operation."
Transition to a new business model requires devotion of resources and
energies to a business that is unfamiliar to current management. The Company is
now in the process of transitioning from its laboratory stain and reagent
business to a new business that is focused on providing remote medical
monitoring and diagnostic tools to physicians, consumers and payors. In
transitioning to this new business model, the Company is substantially changing
its business operations, sales and implementation practices, customer service
and support operations and management focus. The Company is facing new risks and
challenges, including a lack of meaningful historical financial data upon which
to plan future budgets, competition from a wider range of sources, the need to
develop strategic relationships and other risks associated with a significant
change of business plans. Failure to successfully address these issues and risks
would materially adversely affect the Company's business, financial condition
and results of operations. In addition, because the Company is moving out of its
current business model, the available historical information relating to its
operations is not indicative of the operating results the Company might expect
under the newly adopted business plan. Consequently, you have very little
historical financial information to assist you in making an investment decision
in connection with this Offering.
Changing the business model and adopting a new business plan means that the
Company may be regarded as a "start-up" venture, subject to the risks and
uncertainties usually associated with startups. You should consider an
investment in the Debentures in light of the risks, uncertainties and
difficulties frequently encountered by companies in their early stages of
development. If the Company is to be successful in this new market, it must
accomplish the following, among other things:
o Develop and introduce functional and attractive product and service
offerings;
o Increase awareness of the Company's brand and develop consumer loyalty;
o Respond to competitive and technological developments;
o Build an operationalstructure to support the Company's business; and
o Attract, retain and motivate qualified personnel.
If the Company fails to achieve these goals, that failure would have a material
adverse effect on the Company's business, prospects, financial condition and
operating results. Because the market for the Company's new product and service
offerings is new and evolving, it is difficult to predict with any certainty the
size of this market and its growth rate, if any. There is no assurance that a
market for these products or services will ever develop or that demand for the
Company's products and services will emerge or be sustainable. If the market
fails to develop, develops more slowly than expected or becomes saturated with
competitors, the Company's business, financial condition and operating results
would be materially adversely affected.
Risks of technological uncertainty. The Company may not realize revenues
from the sale of any of its new products for several years, if at all. Some of
the products the Company is currently evaluating likely will require further
research and development efforts before they can be commercialized. There can be
no assurance that the Company's research and development efforts will be
successful or that the Company will be successful in developing any commercially
successful products. In addition, technology, particularly those that are
integrated or expected to be integrated with the Company's product and service
offerings, is rapidly changing and developing. The Company faces risks
associated with the possible obsolescence of its technology and the risks of
delay in the further development of its own technologies. Other difficulties and
uncertainties normally associated with new industries or the application of new
technologies in new or existing industries also threaten the Company's business,
including the possible lack of consumer acceptance, difficulty in obtaining
financing for untested technologies, increasing competition from larger
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well-funded competitors, advances in competing or other technologies, and
changes in laws and regulations affecting the development, marketing or use of
the Company's new products and related services.
Dependence upon strategic alliances. The Company's strategy for the
identification, development, testing, manufacture, marketing and
commercialization of its products and services includes entering into various
collaborations through corporate alliances. The Company has already entered into
a collaborative relationship with a significant engineering and product
commercialization company and the Company believes that this relationship
provides the Company with a strong strategic alliance for the design and
engineering of its products. The Company's alliance is with a large engineering,
consulting and research and development firm with close connections to the Food
and Drug Administration and other governmental agencies. There can be no
assurance, however, that this relationship will succeed or that the Company will
be able to negotiate strategic alliances with other parties on acceptable terms,
if at all, or that any of these collaborative arrangements will be successful.
To the extent the Company chooses not, or are not able to establish such
arrangements, the Company could experience increased capital requirements as a
result of undertaking such activities at its own risk and expense. In addition,
the Company may encounter significant delays in introducing products currently
under development into the marketplace or find that the development, manufacture
or sale of the Company's proposed products are adversely affected by the absence
of successful collaborative agreements.
Need to attract and retain key personnel. The Company's future success
depends in significant part on the continued service of its senior management
and successfully recruiting additional senior management to oversee the
Company's move into a new business plan. The loss of the services of certain of
the Company's key employees could have a material adverse effect on its
business. The Company does not currently have key man insurance on any of its
employees and the Company does not anticipate obtaining such insurance in the
near future. The Company's future success also depends on its ability to attract
and retain highly qualified design, technical, sales, marketing, customer
service and managerial personnel with experience in its newly targeted markets.
The Company faces competition for qualified individuals from numerous medical
and clinical companies, universities and other research institutions.
Competition for such personnel is intense, and the Company cannot guarantee that
it will be able to attract or retain a sufficient number of highly qualified
employees in the future. Failure to hire and retain personnel in key positions
could materially adversely affect the Company's business, financial condition
and results of operations.
Inability to manage rapid growth. To execute the Company's business plan,
it must grow significantly. This growth will place a significant strain on the
Company's personnel, management systems and resources. The Company expects that
the number of its employees, including management-level employees, will continue
to increase for the foreseeable future and that it may need additional office
space and expanded technology infrastructure. Failure to manage growth
effectively will materially adversely affect the Company's business, results of
operations and financial condition.
Significant future capital needs and no assurance the Company will be
successful in obtaining necessary additional funding. The identification,
development and commercialization of the Company's products will require a
commitment of substantial funds to conduct development activities, to create and
expand distribution and marketing capabilities, and to acquire and expand
manufacturing capacity. Given the development stage of the new business
direction it is uncertain how long these net proceeds will fund the Company's
operations. The Company may be required or elect to raise additional capital
before that time. The Company's actual capital requirements will depend on many
factors, including but not limited to, the costs and timing of its ongoing
development activities, the number and type of clinical or other tests the
Company may be required to conduct in seeking government or agency approval of
these products, the success of its development efforts, the cost and timing of
establishing or expanding its sales, marketing and manufacturing activities, the
extent to which its products gain market acceptance, its ability to establish
and maintain collaborative relationships, competing technological and market
developments, the progress of its commercialization efforts and the
commercialization efforts of its marketing alliances, the costs involved in
preparing, filing, prosecuting, maintaining and enforcing and defending patent
claims and other intellectual property rights, developments related to
regulatory issues, and other factors, including many that are outside its
control.
To satisfy its capital requirements, the Company may seek to raise funds
through public or private financings, collaborative relationships or other
arrangements. Any arrangement that includes the issuance of equity securities or
securities convertible into the Company's equity securities may be dilutive to
shareholders (including the purchasers of the Debentures), and debt financing,
if available, may involve significant restrictive covenants that limit the
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Company's ability to raise capital in other transactions. Collaborative
arrangements, if necessary to raise additional funds, may require that the
Company relinquish or encumber its rights to certain of the Company's
technologies, products or marketing territories. Any inability or failure to
raise capital when needed could also have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that any such financing, if required, will be available on terms
satisfactory to the Company, if at all.
Current and possibly future government regulation. The Company intends to
market medical devices that may be regulated by a number of governmental
agencies, including the United States Food & Drug Administration ("FDA"). The
FDA requires governmental clearance of all medical devices and drugs before they
can be marketed in the United States. Similar approvals are required from other
regulatory bodies in most foreign countries. The regulatory processes
established by these government agencies are lengthy, expensive, and uncertain
and may require extensive and expensive clinical trials. There can be no
assurance that any future products developed by the Company that are subject to
the FDA's authority will prove to be safe and effective and meet all of the
applicable regulatory requirements necessary to be marketed. The results of
testing activities could be susceptible to varied interpretations that could
delay, limit or prevent required regulatory approvals. In addition, the Company
may encounter delays or denials of approval based on a number of factors,
including future legislation, administrative action or changes in FDA policy
made during the period of product development and FDA regulatory review. The
Company may encounter similar delays in foreign countries. Furthermore, approval
may entail ongoing requirements for, among other things, post-marketing studies.
Even if the Company obtains regulatory approval of a marketed product, its
manufacturer and its manufacturing facility are subject to on-going regulation
and inspections. Discovery of previously unknown problems with a product,
manufacturer or facility could result in FDA sanctions, restrictions on a
product or manufacturer, or an order to withdraw and/or recall a specific
product from the market. There can also be no assurance that changes in the
legal or regulatory framework or other subsequent developments will not result
in limitation, suspension or revocation of regulatory approvals granted to the
Company. Any such events, were they to occur, could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company may also be required to comply with FDA regulations for
manufacturing practices, which mandate procedures for extensive control and
documentation of product design, control and validation of the manufacturing
process and overall product quality. Foreign regulatory agencies have similar
manufacturing standards. Any third parties manufacturing the Company's products
or supplying materials or components for such products may also be subject to
these manufacturing practices and mandatory procedures. If the Company, its
management or its third party manufacturers fail to comply with applicable
regulations regarding these manufacturing practices, it could be subject to a
number of sanctions, including fines, injunctions, civil penalties, delays,
suspensions or withdrawals of market approval, seizures or recalls of product,
operating restrictions and, in some cases, criminal prosecutions.
The Company's products and related manufacturing operations may also be
subject to regulation, inspection and licensing by other governmental agencies,
including the Occupational Health and Safety Administration ("OSHA").
Lack of in-house research, development or manufacturing capability. The
Company has no in-house research, development or manufacturing capability or
capacity to produce any products. The Company initially intends to establish
relationships with other companies to provide research, development and
manufacturing services in connection with its components and products. Any delay
in availability of products may result in a delay in the submission of products
for any required regulatory approval or market introduction, subsequent sales of
such products, which could have a material adverse effect on the Company's
business, financial condition and results of operations. These manufacturing
processes may be labor intensive and, if so, significant increases in production
volume would likely require changes in both product and process design in order
to facilitate increased automation of the production processes. There can be no
assurance that any such changes in products or processes or efforts to automate
all or any portion of these manufacturing processes would be successful, or that
manufacturing or quality problems will not arise as the Company initiates
production of any products it might develop.
Lack of experienced sales and marketing capability for the Company's new
product and service lines. The Company currently has no experience in sales,
marketing or distribution in its intended market(s). To market any of its new
products or services directly, the Company would be required to develop a
marketing and sales force with technical expertise and with supporting
distribution capability. Alternatively, the Company may obtain the assistance of
other companies with established distribution and sales forces, in which case
the Company would be required to enter into agreements regarding the use and
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maintenance of these distribution systems and sales forces. There can be no
assurance that the Company will be able to establish in-house sales and
distribution capabilities, or that the Company will be successful in gaining
market acceptance for its products through the use of third parties. There can
be no assurance that the Company will be able to recruit, train and maintain
successfully any such sales and marketing personnel, or that the efforts of such
personnel will be successful.
Risks and uncertainties associated with the protection of intellectual
property and related proprietary rights. The Company believes that its success
will depend, in large part, on the Company's ability to obtain and enforce
patents, maintain trade secrets and operate without infringing on the
proprietary rights of others in the United States and in other countries. The
enforcement of patent rights can be uncertain and involve complex legal and
factual questions. The scope and enforceability of patent claims are not
systematically predictable with absolute accuracy.
The strength of the Company's patent rights depends, in part, upon the
breadth and scope of protection provided by the patent and the validity of its
patents, if any. The Company's inability to obtain or to maintain patents on its
key products could adversely affect its business. The Company intends to file
patent applications in the United States and in key foreign jurisdictions
relating to its technologies, improvements to those technologies and for
specific products the Company may develop. There can be no assurance that
patents will issue on any of these applications or that, if issued, any patents
will not be challenged, invalidated or circumvented. The prosecution of patent
applications and the enforcement of patent rights are expensive and the expense
may adversely affect the Company's profitability and the results of its
operations. In addition, there can be no assurance that the rights afforded by
any patents will guarantee proprietary protection or competitive advantage.
The Company's success will also depend, in part, on its ability to avoid
infringing the patent rights of others. The Company must also avoid any material
breach of technology licenses it may enter into with respect to its new products
and services. Existing patent and license rights may require the Company to
alter the designs of its products or processes, obtain licenses or cease certain
activities. In addition, if patents have been issued to others that contain
competitive or conflicting claims and such claims are ultimately determined to
be valid and superior to the Company's own, it may be required to obtain
licenses to those patents or to develop or obtain alternative technology. If any
licenses are required, there can be no assurance that the Company will be able
to obtain any necessary licenses on commercially favorable terms, if at all. Any
breach of an existing license or failure to obtain a license to any technology
that may be necessary in order to commercialize the Company's products may have
a material adverse impact on its business, results of operations and financial
condition. Litigation that could result in substantial costs may also be
necessary to enforce patents licensed or issued to the Company or to determine
the scope or validity of third party proprietary rights. If the Company's
competitors prepare and file patent applications in the United States that claim
technology also claimed by the Company, it may have to participate in
proceedings declared by the U.S. Patent and Trademark Office to determine
priority of invention, which could result in substantial costs, even if the
Company eventually prevails. An adverse outcome could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from third parties or require that the Company cease using such technology.
The Company relies on trade secrets laws to protect portions of its
technology for which patent protection has not yet been pursued or is not
believed to be appropriate or obtainable. These laws may protect the Company
against the unlawful or unpermitted disclosure of any information of a
confidential and proprietary nature, including but not limited to the Company's
know-how, trade secrets, methods of operation, names and information relating to
vendors or suppliers and customer names and addresses.
The Company intends to protect this unpatentable and unpatented proprietary
technology and processes, in addition to other confidential and proprietary
information in part, by entering into confidentiality agreements with employees,
collaborative partners, consultants and certain contractors. There can be no
assurance that these agreements will not be breached, that the Company will have
adequate remedies for any breach, or that the Company's trade secrets and other
confidential and proprietary information will not otherwise become known or be
independently discovered or reverse-engineered by competitors.
No certainty that the market will accept the Company's products and
services. The Company's targeted markets may never accept its products.
Insurance companies, physicians, nurses, patients and consumers may not use the
Company's products unless they determine, based on experience, clinical data,
advertising or other factors, that those products are a preferable alternative
to currently available methods of diagnosis. In addition, decisions to adopt new
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medical diagnostic devices can be influenced by government administrators,
regulatory factors, and other factors largely outside the Company's control. No
assurance can be given that key decision-makers or third party payors will
accept the Company's new products, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Intense competition. The Company's expected product markets are rapidly
changing. Existing products and emerging products will compete directly with the
products the Company is seeking to develop and market. The Company's technology
will compete directly with other technology, and, although the Company believes
its technology has or will have advantages over these competing systems, there
can be no assurance that the Company's technology will have advantages that are
significant enough to cause users to adopt its use. Competition from such
products is expected to increase.
Many of the companies currently in the remote medical monitoring and
diagnostic market may have significantly greater financial resources and
expertise in research and development, marketing, manufacturing, pre-clinical
and clinical testing, obtaining regulatory approvals and marketing than those
available to the Company. Smaller companies may also prove to be significant
competitors, particularly through collaborative arrangements with large third
parties. Academic institutions, governmental agencies and public and private
research organizations also conduct research, seek patent protection and
establish collaborative arrangements for product and clinical development and
marketing in the medical diagnostic arena. Many of these competitors have
products or techniques approved or in development and operate large, well-funded
research and development programs in the field. Moreover, these companies and
institutions may be in the process of developing technology that could be
developed more quickly or be ultimately more effective than the Company's
planned products.
The Company faces competition based on product efficacy, the timing and
scope of regulatory approvals, availability of supply, marketing and sales
capability, reimbursement coverage, price and patent position. There can be no
assurance that the Company's competitors will not develop more effective or more
affordable products, or achieve earlier patent protection or product
commercialization.
Uncertainties Related to Ability to License Proprietary Technology.
Volu-Sol historically has not been involved in research and development of new
technologies. Consequently, the Company's success in adding to its existing
product line depends on its ability to acquire or otherwise license competitive
technologies and products and to operate without infringing the proprietary
rights of others, both in the United States and internationally. No assurance
can be given that any licenses required from third parties will be made
available on terms acceptable to Volu-Sol, or at all. If Volu-Sol does not
obtain such licenses, it could encounter delays in product introductions while
it attempts to adopt alternate measures, or could find that the manufacture or
sale of products requiring those licenses is not possible. Litigation may be
necessary to defend against claims of infringement, to protect trade secrets or
know-how owned by Volu-Sol, or to determine the scope and validity of the
proprietary rights of others. Litigation could have an adverse and material
impact on the Company and its operations.
Inability to Adequately Protect Proprietary Information. Volu-Sol relies
upon unpatented trade secrets and improvements, unpatented know how and
continuing technological innovation to develop and maintain its competitive
position, which it seeks to protect, in part, by confidentiality agreements with
its employees and consultants. There can be no assurance that these agreements
will not be breached or that they will be enforceable by the Company, or that
the Company's trade secrets and know how will not otherwise be compromised.
Environmental Risks. The chemical manufacturing processes of the Company
involve the controlled use of hazardous materials. Volu-Sol is subject to
federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of such materials and certain waste products.
Although Volu-Sol believes that its activities currently comply with the
standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be eliminated. In the event
of an accident, Volu-Sol could be held liable for any damages that result and
any such liability could exceed the resources of the Company. In addition, there
can be no assurance that Volu-Sol will not be required to incur significant
costs to comply with environmental laws and regulations in the future.
Sufficiency of Marketing and Sales Capabilities. Volu-Sol sells its
products to independent distributors who are free to resell the products. In
order to achieve profitable operations, the Company must maintain its current
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base of distributors and must expand that base in the future. Volu-Sol's sales
staff competes with other companies that currently have experienced and well
funded marketing and sales operations. To the extent that the Company enters
into co-promotion or other marketing and sales arrangements with other
companies, any revenues to be received by the Company will be dependent on the
efforts of others, and there can be no assurance that such efforts will be
successful.
Potential Product Liability Exposure and Limited Insurance Coverage. The
use of any of the Company's existing or potential products in laboratory or
clinical settings may expose the Company to liability claims. These claims could
be made directly by persons who assert that inaccuracies or deficiencies in
their test results were caused by defects in its products. Alternatively,
Volu-Sol could be exposed to liability indirectly by being named as a
third-party defendant in actions brought against companies or persons who have
purchased its products. Volu-Sol has obtained limited product liability
insurance coverage for such events. However, insurance coverage is becoming
increasingly expensive and no assurance can be given that Volu-Sol will be able
to maintain insurance coverage at a reasonable cost or in sufficient amounts to
protect Volu-Sol against losses due to liability. There can also be no assurance
that Volu-Sol will be able to obtain commercially reasonable product liability
insurance for any products added to its product line in the future. A successful
product liability claim or series of claims brought against Volu-Sol could have
a material adverse effect on its business, financial condition and results of
operations.
Dilution. A significant number of shares of Volu-Sol's common stock are
authorized but not issued. In addition, there are a substantial number of shares
of common stock of Volu-Sol reserved for issuance upon the exercise of certain
options, warrants and preferred stock conversion rights. If and to the extent
such options, warrants or rights are exercised, or if the Board of Directors
determines to issue authorized but previously unissued shares of common stock in
connection with acquisitions or other transactions, such issuances could
substantially dilute the voting power of the existing shareholders of Volu-Sol.
Furthermore, the possibility of such issuances may adversely affect the market
for Volu-Sol's common stock, should such a market ever develop.
Item 7. Financial Statements
The Company's audited financial statements and associated notes are
included and set forth on pages F-2 through F-18 of this report.
Part III
Item 9. Directors and Executive Officers of the Registrant
Executive Officers, Key Employees and Directors
The executive officers and directors of Volu-Sol as of December 31, 2000
are as follows:
Name Age Position
Wilford W. Kirton, III 40 Chief Executive Officer and Director
Michael Acton 37 Secretary, Treasurer and Acting Principal
Accounting Officer
Barry Edwards 48 Director
F. Kenneth Westover 73 Director
Wilford W. Kirton, III
Mr. Kirton became a director and the Chief Executive Officer of Volu-Sol in
January 1998. Mr. Kirton holds a bachelor's degree in Political Science from the
University of Utah. Prior to joining Volu-Sol, Mr. Kirton was the proprietor and
President of Travel Systems Network, a travel agency and tour operator from 1987
19
<PAGE>
to February 1994. From February 1994 to June 1996, Mr. Kirton was Vice President
of Old Republic Title, a real estate title company. From July 1996 to March
1997, Mr. Kirton was a sales representative for Schwanns Foods, a food
distributor in Utah. Mr. Kirton was an officer of Optim Nutrition, a subsidiary
of Biomune (former parent of Volu-Sol), from March 1997 until joining Volu-Sol
in January 1998.
Michael G. Acton
Mr. Acton has been Secretary, Treasurer and acting Principal Accounting
Officer since March 3, 1999. Prior to that time, he was the President of
Volu-Sol from March 1996 until March 1997 and Chief Executive Officer and
Chairman of Volu-Sol from March 1997 to January 1998. From June 1998 until
November 2000, Mr. Acton was Chief Executive Officer of Biomune, where he also
served as Chief Financial Officer from July 1997 through November 2000. From
October 1994 to July 1997, he was the Controller of Biomune. From June 1989
through October 1994, Mr. Acton was employed by Arthur Andersen LLP in Salt Lake
City, Utah, where he performed various tax, audit and business advisory
services. Mr. Acton received a Bachelor of Science Degree in Accounting in 1988
and a Masters of Professional Accountancy Degree in 1989, both from the
University of Utah. He is a Certified Public Accountant in the State of Utah.
Barry Edwards
Mr. Edwards became a director of Volu-Sol in December 1998. He is the City
Administrator of Highland, Utah and has been employed as Director of Research
and Development at Kiva, a software company, since February 1998. Prior to
joining Kiva, Mr. Edwards worked as the City Manager of Belmont, California for
three years and was the City Administrator of Ridgecrest, California. He
received a BS in Political Science and a Masters of Public Administration (MPA)
from Brigham Young University.
Ken Westover
Mr. Westover became a director of Volu-Sol in December 1998. He is the
owner of Westover & Associates, a manufacturing representative for floor
coverings, a firm he founded in 1984. Prior to founding his own firm, Mr.
Westover was a factory representative for O'Brien Corporation from 1962 to 1971
and for Hollytex Carpet Mills from 1971 to 1984. He received his undergraduate
degree from LDS Business College in Salt Lake City and also attended the
University of Utah and Brigham Young University.
None of Volu-Sol's executive officers or directors is related to any other
executive officer or director of the Company.
The Board of Directors has not organized any committees to date.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers, directors and persons who beneficially own more than 10% of a
registered class of the Company's equity securities to file reports of ownership
and changes in ownership with the Securities and Exchange Commission. Officers,
directors and greater than 10% shareholders are required by regulation of the
Securities and Exchange Commission to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely upon its review of the copies of such forms furnished to it,
and representations made by certain persons subject to this obligation that such
filings were not required to be made, Volu-Sol believes that all reports
required to be filed by these individuals and persons under Section 16(a) were
filed in a timely manner and Volu-Sol is not aware of any transactions in its
outstanding securities by or on behalf of any director, executive officer or 10%
holder, which would require the filing of any report pursuant to Section 16(a)
during the fiscal year ended September 30, 2000, that was not filed with the
Commission.
20
<PAGE>
Item 10. Executive Compensation
In January 1998 the Company engaged Wilford W. Kirton III as President,
Chief Executive Officer and director. Mr. Kirton has no written agreement with
the Company. He receives an annual salary of $108,000. In addition, in October
2000 Mr. Kirton was granted options to purchase 400,000 shares of common stock
at a price of $1.00 per share. A total of 200,000 shares may be acquired at any
time under these options. The remaining 200,000 shares vest at such time as the
Company enters into a join venture or similar agreement for marketing of the
Company's new products and services.
Since1996 the Company has engaged the services of Michael Acton, who has
served in several executive positions with the Company. Currently Mr. Acton is
the Company's Acting Principal Accounting Officer. There is no written agreement
between Mr. Acton and the Company. In October 2000, the Board granted Mr. Acton
options to purchase 200,000 shares of common stock at an exercise price of $1.00
per share. One-half of these options (100,000 shares) are now exercisable. The
remaining portion vests at such time as the Company enters into a joint venture
or similar agreement for marketing of the Company's new products and services.
The following table sets forth the compensation paid to the Company's chief
executive officer during the past three fiscal years. No other officer was paid
total annual compensation in excess of $100,000 during the three years ended
September 30, 2000.
Summary Compensation Table
Compensation
Name and Principal Position Year Salary ($)
Wilford Kirton III 1998 -
President, Chief Executive Officer and 1999 48,000
Director 2000 89,000
Stock Plans
The 1997 Volu-Sol, Inc. Transition Plan
At the time of the Company's divestiture by Biomune, it adopted the 1997
Volu-Sol, Inc. Transition Plan (the "Transition Plan") to govern the issuance
and exercise of certain options to purchase the Company's common stock. Certain
officers, directors and employees of Biomune had been granted options to
purchase shares of Biomune common stock (the "Biomune Options"). The Biomune
Options were granted pursuant to various Biomune stock plans (the "Biomune
Plans"). The Biomune Plans gave the committee of the Biomune Board that
administers the plans (the "Biomune Plan Committee") the authority to make
equitable adjustments to outstanding Biomune Options in the event of certain
transactions, such as the divestiture of the Company.
At the time of the divestiture, the Biomune Plan Committee and the Biomune
Board determined that, immediately prior to the divestiture, each Biomune Option
would be divided into two separately exercisable options: (i) an option to
purchase the Company's common stock (the "Add-on Volu-Sol Option") in an amount
that would have been issued in the divestiture in respect of the shares of
Biomune common stock subject to the applicable Biomune Option, if such Biomune
Option had been exercised in full immediately prior to the record date of the
divestiture, and containing substantially equivalent terms as the existing
Biomune Option, and (ii) an option to purchase Biomune common stock (an
"Adjusted Biomune Option"), exercisable for the same number of shares of Biomune
common stock as the corresponding Biomune Option had been. The per share
exercise price of the Biomune Option would remain the same in the Adjusted
Biomune Option, and all other terms of such Biomune Option would remain the same
in all material respects. The Add-on Volu-Sol Option carry an option exercise
price per share equal to the price per share of the exercise price under the
Biomune Option.
As a result of the foregoing, certain persons who remained Biomune
employees or non-employee directors of Biomune after the divestiture hold both
Adjusted Biomune Options and separate Add-on Volu-Sol Options. The obligations
21
<PAGE>
with respect to the Adjusted Biomune Options and Add-on Volu-Sol Options held by
Biomune employees and non-employee directors following the distribution are
obligations solely of Biomune. The Company has reserved a total of 732,101
shares of common stock for issuance upon exercise of the Add-on Volu-Sol Options
granted at the time of the divestiture under the Transition Plan.
The Transition Plan is administered by the Board of Directors or a
Committee of the Board of Directors appointed by the Board.
The 1997 Volu-Sol, Inc. Stock Incentive Plan
Immediately prior to the divestiture in August 1997 the Company adopted the
1997 Volu-Sol, Inc. Stock Incentive Plan ("1997 Plan"). The 1997 Plan was
approved by action of Biomune, then the Company's sole shareholder. Under the
1997 Plan, the Company may issue stock options, stock appreciation rights
("SARs"), restricted stock awards, and other incentives to the Company's
employees, officers and directors. The principal features of the 1997 Plan are
summarized below, but the following Summary is qualified in its entirety by the
written plan.
The 1997 Plan provides for the award of incentive stock options to the
Company's key employees and directors and the award of nonqualified stock
options, stock appreciation rights, bonus rights, and other incentive grants to
employees and certain non-employees who have important relationships with the
Company's subsidiaries or the Company. 5,000,000 shares are available for
issuance pursuant to awards granted under the 1997 Plan.
At a regular meeting of the Board in October 2000, the Board granted
options under the plan to certain officers, directors, employees and
consultants. A total of 1,950,000 shares of common stock have been reserved to
be issued upon exercise of those options.
Director Compensation
Directors are paid an annual fee of $7,500 for their service as directors
of the Company. Directors are also reimbursed for expenses they incur in
connection with their attendance at or participation in meetings of the Board of
Directors or shareholders of the Company.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table presents the beneficial ownership of the Company's
common stock as of November 30, 2000 and as adjusted to reflect the sale of the
Debentures (and including the shares of common stock underlying the Debentures)
by (i) each person known by the Company to be the beneficial owner of more than
5% of the outstanding shares of the Company's common stock; (ii) each director;
(iii) each executive officer; and (iv) all directors and executive officers as a
group. Shares of common stock that a person has the right to acquire within 60
days of the date of this Memorandum are considered to be outstanding in
calculating the percentage ownership of that person, but are not considered to
be outstanding for any other purpose. Unless otherwise noted, the address of
each beneficial owner listed below is c/o Volu-Sol, Inc., 5095 West 2100 South,
Salt Lake City, Utah 84120.
<TABLE>
<CAPTION>
Shares of Common Stock Percentage of
Beneficially Owned Class
------------------------ ---------------
5% Stockholders
<S> <C> <C>
ADP Management 1,500,000 50.9%
David G. Derrick (2) 2,500,748 63.4%
James Dalton 400,000 13.6%
Battelle Memorial Institute 400,000 13.6%
Officers & Directors
Wilford Kirton III (3) 200,000 6.4%
Michael Acton (4) 100,000 3.3%
All Officers and Directors as a group (2 300,000 9.7%
persons)
</TABLE>
22
<PAGE>
(1) Assumes a total of 3,091,246 shares issued and outstanding.
(2) Includes 1,500,000 shares owned directly by ADP Management, an entity
owned and controlled by Mr.Derrick, options to purchase 1,000,000
shares of common stock, as well as 748 shares held directly by Mr.
Derrick. Mr. Derrick has been nominated to serve as a director of the
Company upon completion of a private placement of the Company's debt,
expected to be completed in or about April 2001.
(3) Includes options to purchase 200,000 shares of common stock.
(4) Includes options to purchase 100,000 shares of common stock.
Item 12. Certain Relationships and Related Transactions
Volu-Sol has agreed to indemnify each of its directors and officers to the
fullest extent permitted by the Revised Utah Business Corporation Act.
During the year ended September 30, 1999, the Company borrowed $70,000 from
Biomune under a promissory note. On March 31, 1999 Biomune sold the note
relating to this obligation to Bioxide Corporation in exchange for shares of
Bioxide Corporation common stock. Subsequently, Bioxide Corporation assigned the
note to MK Financial, Inc., an entity owned or controlled by David G. Derrick, a
shareholder of the Company, in satisfaction of an obligation owed to MK
Financial, Inc. by Bioxide Corporation. MK Financial accepted the issuance of
approximately 2,011 shares of Series A Preferred Stock from Volu-Sol in full
satisfaction of the note.
On April 17, 2000, the Company entered into a Technical Services Agreement
for research and development with Battelle. This agreement forms the basis of
the Company's mutual cooperation in the further research and development of a
remote access diagnostic system for medical professionals and consumers to
further the Company's new business plan. Under the terms of this agreement, the
Company will compensate Battelle for its services in furthering the research and
development of the project by payment of $800,000 in the form of $400,000 cash
and 400,000 restricted shares of common stock. The Company also granted options
to Battelle to purchase 1,350,000 shares of common stock at prices ranging from
$3.00 to $7.00 per share. The agreement also grants certain anti-dilution rights
to Battelle. Battelle may also appoint a nominee to serve on the Company's Board
of Directors. To date Battelle has not exercised this right.
During March 2000 the Company sold 1,900,000 shares of common stock to ADP
Management (an entity owned by David Derrick, a nominee for director after the
closing of this Offering) and to James Dalton. The Company received cash of
$1,900,000 in these transactions.
The Company has also entered into a consulting agreement with ADP
Management for the one-year period commencing April 1, 2000 through March 31,
2001. Under the terms of this Agreement, ADP Management is paid a consulting fee
of $10,000 per month. The Company has also agreed to reimburse the expenses
incurred by ADP Management in the course of its performance under the consulting
agreement and in connection with its efforts.
Item 13. Exhibits and Reports on Form 8-K
The following exhibits are filed herewith or are incorporated by reference
to exhibits previously filed with the Commission:
23
<PAGE>
(a) Exhibits
Exhibit Number Title of Document
3.01 Articles of Incorporation and Amendments thereto
(incorporated by reference to the Company's
Registration Statement and Amendments thereto on
Form 10-SB, effective December 1, 1997).
3.02 Bylaws (incorporated by reference to the Company's
Registration Statement on Form 10-SB, effective
December 1, 1997).
10.01 Distribution and Separation Agreement (incorporated
by reference to the Company's Registration Statement
and Amendments thereto on Form 10-SB, effective
December 1, 1997).
10.02 1997 Stock Incentive Plan of the Company,
(incorporated by reference to the Company's
Registration Statement and Amendments thereto on
Form 10-SB, effective December 1, 1997).
10.03 1997 Transition Plan (incorporated by reference to
the Company's Registration Statement and Amendments
thereto on Form 10-SB, effective December 1, 1997).
10.04 Securities Purchase Agreement for $1,200,000 of
Series A Preferred Stock (incorporated by reference
to the Company's Registration Statement and
Amendments thereto on Form 10-SB, effective December
1, 1997).
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
24
<PAGE>
SIGNATURES
In accordance with Section 13 and/or 15(d) of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Volu-Sol, Inc.
By: /s/ Wilford W. Kirton, III
-------------------------------------
Wilford W. Kirton, III, Chief
Executive Officer
Dated: January 11, 2000
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/ Wilford W. Kirton, III January 11, 2000
------------------------------- Director, Chairman, and
Wilford W. Kirton, III Chief Executive Officer
------------------------------- Director January __, 2000
Barry Edwards
/s/ Ken Westover
------------------------------- Director January 11, 2000
Ken Westover
/s/ Michael G. Acton
------------------------------- Acting Chief Financial Officer January 11, 2000
Michael G. Acton
25
<PAGE>
VOLU-SOL, INC.
Consolidated Financial Statements
September 30, 2000 and 1999
<PAGE>
VOLU-SOL, INC.
Index to Consolidated Financial Statements
--------------------------------------------------------------------------------
Page
Report of Tanner + Co. F-2
Consolidated balance sheet F-3
Consolidated statement of operations F-4
Consolidated statement of stockholders' equity F-5
Consolidated statement of cash flows F-6
Notes to consolidated financial statements F-7
--------------------------------------------------------------------------------
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders of Volu-Sol, Inc.
We have audited the accompanying consolidated balance sheet of Volu-Sol, Inc.
and subsidiary (the Company), as of September 30, 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended September 30, 2000 and 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Volu-Sol, Inc. and
subsidiary as of September 30, 2000, and the results of their operations and
their cash flows for the years ended September 30, 2000 and 1999 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring operating losses, and
has an accumulated deficit. These conditions raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters also are described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
TANNER + CO.
Salt Lake City, Utah
December 8, 2000
F-2
<PAGE>
VOLU-SOL, INC.
Consolidated Balance Sheet
September 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets
Current Assets:
<S> <C>
Cash $ 278,421
Accounts receivable, less allowance for
doubtful accounts of $21,188 78,105
Inventories 50,890
------------------
Total current assets 407,416
Property and equipment, net 56,315
Other assets 3,272
------------------
Total assets $ 467,003
------------------
--------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 190,630
Accrued liabilities 39,089
------------------
Total current liabilities 229,719
------------------
Commitments and contingencies -
Stockholders' equity:
Preferred stock, $.0001 par value; 10,000,000 shares authorized:
16,138 shares issued and outstanding (aggregate liquidation
preference $43,310) 3,829,112
Common stock, $.0001 par value; 50,000,000 shares authorized,
2,941,246 shares issued and outstanding 294
Additional paid-in capital 4,542,553
Preferred stock subscriptions receivable (338,300)
Accumulated deficit (7,796,375)
------------------
Total stockholders' equity 237,284
------------------
Total liabilities and stockholders' equity $ 467,003
------------------
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-3
<PAGE>
VOLU-SOL, INC.
Consolidated Statement of Operations
Years Ended September 30,
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
-----------------------------------
<S> <C> <C>
Sales $ 496,211 $ 528,904
Cost of goods sold 291,213 364,646
-----------------------------------
Gross margin 204,998 164,258
Research and development - related party 2,069,231 -
Selling, general and administrative expenses 1,596,601 938,898
Impairment loss - 114,620
-----------------------------------
Loss from operations (3,460,834) (889,260)
Other income (expense):
Interest income 15,482 1,624
Interest expense - (18,864)
-----------------------------------
Loss before provision for income taxes (3,445,352) (906,500)
Provision for income taxes - -
-----------------------------------
Net loss $ (3,445,352) $ 906,500)
-----------------------------------
Dividends on Series A preferred stock (258,550) (169,638)
Preferred stock accreation (171,746) (305,750)
Net loss applicable to common stock $ (3,875,648) $ (1,381,888)
-----------------------------------
Net loss per common share - basic and diluted $ (2.85) $ (2.67)
-----------------------------------
Weighted average shares - basic and diluted 1,359,530 517,239
-----------------------------------
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-4
<PAGE>
VOLU-SOL, INC.
Consolidated Statement of Stockholders' Equity
Years Ended September 30, 2000 and 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred
Additional Stock
Preferred Stock Common Stock Paid-In Subscriptions Accumulated
------------------------------------------
Shares Amount Shares Amount Capital Receivable Deficit
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1998 9,395 $ 2,033,028 2,211,407 $ 221 $ 1,959,832 $ (900,000) $ (3,016,335)
Effect of 1 for 5 stock split at
April 15, 2000 - - (1,769,126) (177) 177 - -
Additional shares issued as a
result of the divestiture of the
Company's common stock - - 100,219 10 (10) - -
Issuance of preferred stock for:
Commission 775 155,000 - - - - -
Board of directors
compensation 1,485 297,000 - - - - -
Compensation 200 40,000 - - - - -
Collection of stock
subscription:
Cash - - - - - 159,500 -
Exchange of liabilities - - - - - 402,200 -
Dividends on preferred stock 848 169,638 - - - - (169,638)
Accretion of preferred stock - 305,750 - - (305,750) - -
Net Loss - - - - - - (906,500)
---------------------------------------------------------------------------------
Balance at September 30, 1999 12,703 3,000,416 542,500 54 1,654,249 (338,300) ( 4,092,473)
Additional shares issued as a
result of the divestiture of the
Company's common stock - - 1,746 - - - -
Issuance of common stock for:
Cash (related party) - - 1,900,000 190 1,499,810 - -
Services - - 25,000 3 24,997 - -
Services (related party) - - 400,000 40 399,960 - -
Conversion of preferred (288) (57,600) 72,000 7 57,593 - -
stock
Issuance of preferred stock for:
Cash 1,330 236,000 - - - - -
Cash (related party) 580 116,000 - - - - -
Services 1,100 220,000 - - - - -
Issuance of stock options for
services to related party - - - - 1,077,690 - -
Dividends on preferred stock 1,293 258,550 - - - - (258,550)
Accretion of preferred stock - 171,746 - - (171,746) - -
Net loss - - - - - - (3,445,352)
--------------------------------------------------------------------------------------
Balance at September 30, 2000 16,138 $ 3,829,112 2,941,246 $ 294 $ 4,542,553 $ (338,300) $ (7,796,375)
--------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-5
<PAGE>
VOLU-SOL, INC.
Consolidated Statement of Cash Flows
Years Ended September 30,
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
----------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (3,445,352 $ (906,500)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 59,262 79,902
Provision for losses on accounts receivable 19,000 (987)
Common stock issued for services 425,000 -
Stock options issued for services 1,077,690 -
Preferred stock issued for services 220,000 492,000
Impairment loss - 114,620
(Increase) decrease in:
Accounts receivable (21,408) (12,002)
Inventories 5,330 29,231
Other assets 950 742
Increase (decrease) in:
Accounts payable 156,264 (8,168)
Accrued liabilities 10,755 (16,287)
----------------------------------
Net cash used in
operating activities (1,492,509) (227,449)
----------------------------------
Cash flows from investing activities:
Purchase of property and equipment (9,193) (339)
Proceeds from payment on related party note receivable 200,000 -
Payment for issue of related party note receivable (200,000) -
----------------------------------
Net cash used in
investing activities (9,193) (339)
----------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,500,000 -
Proceeds from notes payable - 96,000
Proceeds from sale of preferred stock 236,000 -
Payment on subscription receivable - 159,500
----------------------------------
Net cash provided by
financing activities 1,736,000 255,500
----------------------------------
Net increase in cash 234,298 27,712
Cash, beginning of year 44,123 16,411
----------------------------------
Cash, end of year $ 278,421 $ 44,123
----------------------------------
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. F-6
<PAGE>
VOLU-SOL, INC.
Notes to Consolidated Financial Statements
September 30, 2000 and 1999
--------------------------------------------------------------------------------
1. Summary of
Significant
Accounting
Policies
Organization and Business Activity
The consolidated financial statements consist of Volu-Sol, Inc. (the Company),
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.
The Company engages in the manufacturing, marketing and distribution of medical
diagnostic stains and the marketing and distribution of the Definitive. The
Definitive is a hematology staining instrument that contains a microchip
(proprietary to a third party) that regulates precise stain amounts.
Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As of September 30, 2000, the Company
had an accumulated deficit of $7,796,375 and has incurred continuous losses from
operations. These conditions raise substantial doubt about the ability of the
Company to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
The Company's ability to continue as a going concern is subject to the
attainment of profitable operations or obtaining necessary funding from outside
sources. Management's plans with respect to this uncertainty include obtaining
debt or equity funding to finance the Company's operations. However, there can
be no assurance they will be successful.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, and
its subsidiary. All significant intercompany balances and transactions have been
eliminated.
Estimates in the Preparation of Financial Statements The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
--------------------------------------------------------------------------------
F-7
<PAGE>
VOLU-SOL, INC.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of
Significant
Accounting
Policies
Continued
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of its customers and maintains
allowances for possible losses which, when realized, have been within the range
of management's expectations.
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments with a maturity of three months or less to be cash
equivalents.
Inventories
Inventories are recorded at the lower of cost or market, cost being determined
on a first-in, first-out (FIFO) method. Substantially, all items included in
inventory are finished goods.
Sales of the Definitive have been lower than expected by the Company, as a
result, the Company has written off the carrying cost of its Definitive
inventory, and recognized an impairment loss in its statement of operations in
1999.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization are determined using the straight-line method over
the estimated useful lives of the assets. Expenditures for maintenance and
repairs are expensed when incurred and betterments are capitalized. Gains and
losses on sale of property and equipment are reflected in operations.
Income Taxes
Deferred income taxes are provided in amounts sufficient to give effect to
temporary differences between financial and tax reporting, principally related
to depreciation.
--------------------------------------------------------------------------------
F-8
<PAGE>
VOLU-SOL, INC.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
1. Summary of
Significant
Accounting
Policies
Continued
Earnings Per Share
Basic and diluted earnings per share are computed in accordance with Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share (EPS).
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted- average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution from securities or
contracts to issue common stock. Common equivalent shares are excluded from the
computation of diluted EPS when their effect is antidilutive.
Advertising
The Company expenses the cost of advertising the first time the advertising
takes place. For the years ended September 30, 2000 and 1999 advertising
expenses totaled approximately $6,000 and $-0-, respectively.
Revenue Recognition
Revenue from the sale of the Company's products, less reserves for returns, is
recognized upon shipment to the customer.
2. Property
and
Equipment
Property and equipment consist of the following:
Leasehold improvements $ 224,045
Furniture and fixtures 170,939
Equipment 41,253
------------------
436,237
Accumulated depreciation (379,922)
------------------
$ 56,315
------------------
3. Related
Party
Transactions
During the year ended September 30, 2000, the Company paid $2,069,231 in stock
and cash to an entity, which holds more than 5% of the issued and outstanding
common shares of the Company, for research and development services. Accounts
payable to this entity were $145,000 at September 30, 2000.
--------------------------------------------------------------------------------
F-9
<PAGE>
VOLU-SOL, INC.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
3. Related
Party
Transactions
Continued
During the year ended September 30, 2000 the Company paid $90,000 in consulting
expenses to an entity controlled by a major shareholder and another major
shareholder. The Company is obligated under an agreement to pay $60,000 in
fiscal year 2001.
During the year ended September 30, 2000 certain shareholders of the Company
purchased 1,900,000 shares of common stock at approximately $.80 per share.
4. Income Tax
The benefit for income taxes is different than amounts which would be provided
by applying the statutory federal income tax rate to loss before provision for
income taxes for the following reasons:
September 30,
-----------------------------------
2000 1999
-----------------------------------
Federal income tax benefit at
statutory rate $ 1,171,000 $ 308,000
Meals and entertainment (2,000) (1,000)
Other (9,000) (5,000)
Change in valuation allowance (1,160,000) $ (302,000)
-----------------------------------
$ - -
-----------------------------------
Deferred tax assets (liabilities) are comprised of the following at September
30, 2000:
Net operating loss carryforward $ 1,348,000
Stock options issued for services 366,000
Depreciation and reserves 66,000
Valuation allowance (1,780,000)
----------------
$ -
----------------
--------------------------------------------------------------------------------
F-10
<PAGE>
VOLU-SOL, INC.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
4. Income Tax
Continued
At September 30, 2000, the Company has net operating loss carryforwards
available to offset future taxable income of approximately $3,966,000 which will
begin to expire in 2018. The utilization of the net operating loss carryforwards
is dependent upon the tax laws in effect at the time the net operating loss
carryforwards can be utilized. The Tax Reform Act of 1986 significantly limits
the annual amount that can be utilized for certain of these carryforwards as a
result of the change in ownership.
5. Lease
Obligations
The Company leases facilities under a noncancellable operating lease that
expires in November 2005. Future minimum rental payments under the
non-cancelable operating lease as of September 30, 2000 are approximately as
follows:
Year Ending September 30: Amount
------------------
2001 $ 60,000
2002 62,000
2003 64,000
2004 66,000
2005 68,000
Thereafter 11,000
------------------
Total future minimum rental payments $ 331,000
------------------
Rent expense related to these non-cancelable operating leases was approximately
$ 57,000 and $60,000 for the years ended September 30, 1999 and 1998,
respectively.
6. Supplemental
Cash Flow
Information
During the year ended September 30, 2000, the Company:
o Issued preferred stock of $258,550 as dividends.
o Increased preferred stock and decreased additional paid-in-capital for
$171,746 due to accretion.
o Increased common stock and additional paid in capital and decreased
preferred stock by $57,600 due to the conversion of 288 shares of preferred
stock to common stock.
--------------------------------------------------------------------------------
F-11
<PAGE>
VOLU-SOL, INC.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
6. Supplemental
Cash Flow
Information
Continued
During the year ended September 30, 1999, the Company:
o Issued preferred stock of $169,638 as dividends.
o Increased preferred stock and decreased additional paid-in-capital for
$305,750 due to accretion.
o Reduced notes payable by $372,149 and the associated accrued interest of
$30,051 in partial satisfaction of subscription receivable.
Actual amounts paid for interest and income taxes are as follows:
Years Ended
September 30,
-----------------------------------
2000 1999
-----------------------------------
Interest $ - $ 318
-----------------------------------
Income taxes $ - $ -
-----------------------------------
7. Reverse
Common
Stock Split
On April 13, 2000, the Company's Board of Directors approved a 1-for-5 reverse
common stock split. All common share amounts, per share information and numbers
of common shares into which preferred stock is convertible , and stock options
have been retroactively adjusted to reflect this reverse common stock split in
the accompanying consolidated financial statements.
8. Capital
Stock
The Company is authorized to issue 50,000,000 shares of common stock, $.0001 par
value per share, and 10,000,000 shares of preferred stock, $.0001 par value per
share. The Company's board of directors has the authority to amend the Company's
Articles of Incorporation, without further stockholder approval, to designate
and determine, in whole or in part, the preferences, limitations and relative
rights of the preferred stock before any issuance of the preferred stock and to
create one or more series of preferred stock.
--------------------------------------------------------------------------------
F-12
<PAGE>
VOLU-SOL, INC.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
9. Preferred
Stock
Series A
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 20,000 shares with $.0001 par value. This series is
part of the Company's 10,000,000 authorized shares of non-voting preferred
stock. The Series A Preferred Stock has the following rights and privileges:
1. 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. At September 30,
2000, all dividends earned have been paid through the
issuance of additional shares of preferred stock.
2. Upon the liquidation of the Company, the holders of
the Series A Preferred Stock are entitled to receive,
prior to any distribution of any assets or surplus
funds to the holders of shares of common stock or any
other stock, an amount equal to $2.00 per share, plus
accrued and unpaid regular or special dividends, if
any, multiplied by 133% .
3. The shares are convertible at the option of the holder at any
time subsequent to January 1, 1998 into common shares,
determined by dividing $200 plus any accrued and unpaid
regular or special dividends by an amount equal to the lesser of
(i) the "Market Price" (defined as the average closing bid price
of the Company's Common Stock for the three trading days
immediately preceding the applicable Conversion Date) less
20%; or (ii) $6.25.
A single holder (or affiliated holders) may not at
any time hold shares of the Company's Common Stock
exceeding 4.9% of the total number of issued and
outstanding shares of Common Stock. Thus, any holder
or group of affiliated holders will only be allowed
to convert shares of Series A Preferred Stock into
shares of Common Stock in an amount such that such
holder's ownership of shares of Common Stock does not
exceed 4.9% of the total number of issued and
outstanding shares of Common Stock.
--------------------------------------------------------------------------------
F-13
<PAGE>
VOLU-SOL, INC.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
9. Preferred
Stock
Continued
4. The holders of the shares have no voting rights.
5. The Company may, at its option, redeem up to 66-2/3% of the
total number of shares of Series A Preferred Stock. The
Company may designate a different and lower conversion price
and the call price for all shares of Series A Preferred Stock
called for redemption by the Company shall be 133% of the
New Conversion Price for all shares of Series A Preferred Stock
called after January 1, 1998.
10. Major
Customers
Sales to major customers which exceeded 10 percent of net sales are as follows:
Years Ended September 30,
-----------------------------------
2000 1999
-----------------------------------
Company A 19.3% 14.6%
Company B - 11.0%
11. Stock Options
and Warrants
Stock Incentive Plan
The Company has adopted the 1997 Volu-Sol, Inc. Stock Incentive Plan (the "1997
Plan"). The 1997 Plan was approved by action of Biomune, the original
stockholder of the Company, in August 1997. Under the 1997 Plan, the Company may
issue stock options, stock appreciation rights, restricted stock awards, and
other incentives to employees, officers and directors of the Company and the
award of nonqualified stock options and other awards to employees and certain
non- employees who have important relationships with the Company. Five million
shares are initially available for grant under the 1997 Plan.
--------------------------------------------------------------------------------
F-14
<PAGE>
VOLU-SOL, INC.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
11. Stock Options
and Warrants
Continued
Add-on Volu-Sol Options
In connection with the Distribution of the Company's common stock, the Board of
Directors of Biomune determined that each Biomune stock option ("Biomune
Option") would be divided into two separately exercisable options: an option to
purchase Biomune common stock and an option to purchase Volu-Sol common stock
(the latter being the "Add-on Volu-Sol Option"). The Add-on Volu-Sol Options
grant the holder the right to purchase the Company's common stock in an amount
that would have been issued in the Distribution in respect of the shares of
Biomune common stock subject to the applicable Biomune Option, if such Biomune
Option had been exercised in full immediately prior to the Distribution, and
containing substantially equivalent terms as the existing Biomune Option. The
Add-on Volu-Sol Options carry an option exercise price per share equal to the
price per share of the exercise price under the Biomune Option.
As a result of the foregoing, certain persons who remain Biomune employees or
non-employee directors after the Distribution and certain persons who were
Biomune employees prior to the Distribution but become Volu-Sol employees after
the Distribution hold both Biomune Options and separate Add-on Volu-Sol Options.
The obligations with respect to the Biomune Options and Add-on Volu-Sol Options
held by Biomune employees and non-employee directors following the Distribution
will be obligations solely of Biomune. Volu-Sol has agreed to sell to Biomune
from time to time shares of Volu-Sol common stock as necessary to satisfy
Biomune's obligations under the Distribution Agreement. The sales price of such
shares of Volu-Sol common stock will be a sum equal to the consideration
received by Biomune in exercise of the related option.
--------------------------------------------------------------------------------
F-15
<PAGE>
VOLU-SOL, INC.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
11. Stock Options
and Warrants
Continued
Volu-Sol Warrants
Biomune has granted rights to purchase Biomune common stock in the form of
warrants (the "Biomune Warrants"). Under the agreements governing the grant and
exercise of the Biomune Warrants, Biomune has agreed to issue to the holders of
such rights, securities otherwise issuable with respect to the Biomune common
shares underlying the Biomune Warrants if and to the extent the Biomune Warrants
are exercised. Consequently, if the holders of the Biomune Warrants exercise
their rights thereunder, Biomune must issue to those holders one share of
Volu-Sol common stock for each share of Biomune common stock issued in
connection with such exercise. Volu-Sol has agreed to sell to Biomune the shares
of Volu-Sol common stock needed to meet this obligation of Biomune. The sales
price of such shares of Volu-Sol common stock will be a sum equal to 10 percent
of the consideration received by Biomune in exercise of the Biomune Warrants.
Number of
Options and Price Per
Warrants Share
---------------------------------
Outstanding at September 30, 1998 2,636,750 $ 5.80 to 20.00
Expired (406,250) 6.25 to 4.00
---------------------------------
Outstanding at September 30, 1999 2,230,500 5.80 to 20.00
Expired (1,420,000) 5.80 to 15.00
Granted 1,350,000 3.00 to 7.00
---------------------------------
Outstanding at September 30, 2000 2,160,500 $ 3.00 to 15.00
---------------------------------
--------------------------------------------------------------------------------
F-16
<PAGE>
VOLU-SOL, INC.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
11. Stock Options
and Warrants
Continued
When accounting for the issuance of stock options and warrants financial
accounting standards allows entities the choice between adopting a fair value
method or an intrinsic value method with footnote disclosures of the pro forma
effects if the fair value method had been adopted. The Company has opted for the
latter approach. During the year ended September 30, 2000, 1,350,000 stock
options were awarded to a related-party entity for research and development
services. The options were valued at a price derived from the Black-Scholes
option pricing model and are recognized as part of the net loss per common share
as reported in the statement of operations. No options were awarded for the year
ended September 30, 1999. Accordingly, the loss applicable to common shares and
loss per common share for pro-forma presentation in accordance with Statement of
Financial Accounting Standards No. 123 does not differ from that of reported
amounts as follows:
Years Ended
September 30,
------------------------------------
2000 1999
------------------------------------
Net loss applicable to common
shares - as reported $ (3,875,648) $ (1,381,888)
Net loss applicable to common
shares - pro forma $ (3,875,648) $ (1,381,888)
Loss per common share - as reported $ (2.8) $ (2.67)
Loss per common share - pro forma $ (2.85) $ (2.67)
------------------------------------
11. Stock Options
and Warrants
Continued
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
September 30,
---------------------------------
2000 1999
---------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility - -
Risk-free interest rate 6% 5.25%
Expected life of options 5 years 5 years
---------------------------------
The weighted average fair value of options granted during the year ended
September 30, 2000 and 1999 are $.80 and $0, respectively.
--------------------------------------------------------------------------------
F-17
<PAGE>
VOLU-SOL, INC.
Notes to Consolidated Financial Statements
Continued
--------------------------------------------------------------------------------
The following table summarizes information about stock options and warrants
outstanding at September 30, 2000:
Outstanding Exercisable
------------------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise at Life Exercise at Exercise
Prices 09/30/00 (Years) Price 09/30/00 Price
--------------------------------------------------------------------------------
$ 3.00 450,000 4.56 $ 3.00 450,000 $ 3.00
5.00 - 7.00 1,520,500 2.92 5.92 1,520,500 5.92
11.70 - 15.00 190,000 0.74 13.92 190,000 3.00
--------------------------------------------------------------------------------
$ 3.00 2,160,500 3.07 $ 6.01 2,160,500 $ 6.01
--------------------------------------------------------------------------------
12. Fair Value of
Financial
Instruments
The Company's financial instruments consist of cash, receivables and payables.
The carrying amount of cash, receivables and payables approximates fair value
because of the short-term nature of these items.
--------------------------------------------------------------------------------
F-18
