SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934, for the fiscal year ended December 31, 1999
Commission File No. _____
ELAST TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
NEVADA 88-0380544
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2505 Rancho Bel Air, Las Vegas, Nevada 89107
(Address of registrant's principal executive offices) (Zip Code)
702.878.8310
(Registrant's Telephone Number, Including Area Code)
Check whether the registrant (1) has filed all reports required by Section 13 or
15(d) of the Securities Act of 1934 during the preceding 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 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]
State issuer's revenues for its most recent fiscal year: $0.00
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act). As of February 29, 2000, approximately
$8,000,000.00.
The number of shares outstanding of the issuer's only class of Common Stock,
$.001 par value, was 7,961,481 on December 31, 1999.
Documents incorporated by reference. There are no annual reports to security
holders, proxy information statements, or any prospectus filed pursuant to Rule
424 of the Securities Act of 1933 incorporated herein by reference.
Transitional Small Business Disclosure format (check one):
Yes [_] No [X]
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PART I.
Item 1. Description of Business.
Development of the Company. Med Mark, Inc., a Nevada corporation ("Company"),
was incorporated in the State of Nevada on November 5, 1996. On or about June
29, 1998, the Company filed a Certificate of Amendment to its Articles of
Incorporation changing the name of the Company to Elast Technologies, Inc. The
executive offices of the Company are located at 2505 Rancho Bel Air, Las Vegas,
Nevada 89107. On February 1, 2000, we relocated our research and development
facilities to San Diego's Center for Applied Competitive Technologies. The
Company's telephone number in Las Vegas is 702.878.8310.
Business of the Company. The Company was organized to engage in the business of
manufacturing and marketing medical equipment and supplies, as well as health
related products, including vitamins and nutritional supplements. The Company
plans to develop its own products and may also obtain marketing and distribution
rights to existing products or products currently in development by others. The
Company currently spends a significant portion of its time and funds in research
and development activities, and has done so for the last two fiscal years, as
specified below
On or about June 30, 1998, the Company acquired all of the issued and
outstanding capital stock of Elast Technologies Corporation, a Delaware
corporation ("Elast Delaware"), and, as specified above, changed the Company's
name from Med Mark, Inc. to Elast Technologies, Inc. The Company entered into a
licensing agreement with Dr. Robert D. Milne and acquired the rights to develop,
test, manufacture, and market Dr. Milne's patented allergy-testing device
("ELAST Device", U.S. Patent No. 5413113, issued on or about May 9, 1995). Dr.
Milne is a board-certified family practice physician with extensive experience
in allergy testing and preventative medicine. The Company has spent significant
amounts of time during its last two fiscal years on research and development
activities relating to the ELAST Device.
The licensing agreements relating to the ELAST Device are specified more
completely herein under the subsection entitled Licensing Agreements Were Not
the Result of Arms-Length Negotiations,
The ELAST Device is based on the clinical observation that the human body loses
energy (that is, the body's normal electrical flow is interrupted) when exposed
to a substance to which that body is sensitive or allergic. The energy loss is
rapid and is measured in micro-voltage. The ELAST Device measures the body's
energy loss and documents it graphically, providing the treating physician with
an accurate assessment of a patient's sensitivity. The Company intends to
clinically test the device under the direction of Dr. Milne. After clinical
testing, the ELAST Device will be submitted to the United States Food and Drug
Administration ("FDA") for approval.
Human therapeutic products are subject to rigorous pre-clinical and clinical
testing and other approval procedures. The FDA and comparable foreign government
regulatory agencies require laboratory and clinical testing and other costly and
time-consuming procedures before medical products such as the ELAST Device can
be marketed. Various federal, state and foreign statutes also govern or affect
the manufacturing, safety, labeling, storage, and marketing of such products, as
well as record-keeping incidental to such marketing. Obtaining such approvals,
and maintaining ongoing compliance with these requirements can require the
expenditure of significant resources. To date, the Company has not determined
what procedures, if any, will be required in this regard and has not begun any
of these procedures. The Company is currently investigating the possibility that
the ELAST Device falls under a category for which FDA approval has already been
given. The Company
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anticipates that the ELAST Device may be included in such a category, but
research is currently being done by the Company to determine regulatory
requirements. In addition, regulatory testing and approval would require
significant funding and, in the event that such funding exceeded the present
financial resources of the Company, the Company would have to raise additional
capital to market the ELAST Device.
In the event the FDA or other domestic or foreign regulatory agency requires
approval and testing of the ELAST Device, prior to its commercial exploitation,
the Company cannot provide any assurances that testing procedures will be
successfully completed, or if completed, demonstrate that the ELAST Device is
safe and efficacious. Further, there can be no assurances that any required
government approvals will be obtained. Accordingly, there can be no assurance
that the Company will be able to market the ELAST Device in the United States or
any foreign country. Any failure by the Company, its subsidiary, collaborators
or licensees to obtain any required regulatory approvals or licenses would
adversely affect the ability of the Company to market its products and would
have a significant adverse affect on the Company's revenues.
Employees. The Company currently has 3 employees. Management of the Company
anticipates using consultants for business, accounting, engineering, and legal
services on an as-needed basis. Because the Company anticipates entering into
licensing and manufacturing agreements with third parties, the Company
anticipates that it will require few additional employees during the next fiscal
year.
Competition. Because the ELAST Device is based on a new concept in diagnostics
and is patented, there are currently no direct competitors with a similar
product in the marketplace. Once the ELAST Device gains product acceptance in
the medical community, the Company anticipates physicians could prescribe
home-testing.
However, competition in the medical products industry, generally, is intense.
The Company and its subsidiary compete directly with other companies and
businesses that have developed and are in the process of developing technologies
and products which will be competitive with the products developed and offered
by the Company and its subsidiary. There can be no assurance that other
technologies or products which are functionally equivalent or similar to the
technologies and products of the Company and its subsidiary have not been
developed or are not in development. The Company expects that companies or
businesses which may have developed or are developing such technologies and
products as well as other companies and businesses which have the expertise
which would encourage them to develop and market products directly competitive
with those developed and marketed by the Company. Many of these competitors have
greater financial and other resources, and more experience in research and
development, than the Company.
For example, according to its 1994 Annual Report, Bayer Corporation (formerly
Miles, Inc.) holds over 50% of the worldwide allergy testing market, exclusive
of in vitro testing. In 1994, Pharmacia (now Pharmacia & Upjohn, Inc.) held
approximately 73% of the worldwide market share for in vitro allergy tests. The
Company's additional competitors in this area include Sanofi, Ciba Corning and
Diagnostic Products Corporation.
There can be no assurance that competitors have not or will not succeed in
developing technologies and products that are more effective than any which have
been or are being developed by the Company or which would render the products of
the Company obsolete and noncompetitive. Many of the competitors of the Company
have substantially greater experience, financial and technical resources and
production, marketing and development capabilities than the Company. If the
Company commences commercial sales of its products, it will also be competing
with respect to manufacturing efficiency and sales and marketing capabilities.
Compliance with Environmental Laws. The Company's management believes that no
toxic or hazardous materials will be byproducts of the manufacturing processes
of the ELAST Device; accordingly, management
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of the Company believes that the Company will not incur unforeseen material
expenditures related to the cost of compliance with applicable environmental
laws, rules or regulations. The Company believes that it is presently in
compliance with all applicable federal, state, and local environmental laws,
rules and regulations. Furthermore, in the event the Company licenses the
manufacturing rights, of the ELAST Device, to third parties, the Company will
not become subject to any such restrictions. However, at some time in the
future, the research, development, manufacturing and production processes of the
Company may involve the controlled use of hazardous materials. The Company may
be subject to various laws and regulations governing the use, manufacture,
storage, handling, and disposal of such materials and certain waste products.
The risk of accidental contamination or injury from hazardous materials cannot
be completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and any such liability could exceed the
financial resources of the Company. In addition, there can be no assurance that
in the future the Company will not be required to incur significant costs to
comply with environmental laws and regulations relating to hazardous materials.
The Company cannot estimate the potential costs of complying with local, state,
and federal environmental laws.
Comparison of Results of Operations at December 31, 1999 and December 1, 1998.
The Company's available cash and equivalents decreased from $226,818 at December
31, 1998 to $205,715 at December 31, 1999. The Company's accounts payable
increased from $8,617 to $14,613 and accrued payroll and payroll taxes increased
from $4,375 to $38,898 because of an increase in executive compensation due to
the addition of one executive and increased research and development activities.
The Company's net property and equipment increased from $3,434 to $10,672 due
primarily to the purchase of additional computer equipment. The Company's
property and equipment consists of computers with an expected useful life of 5
years. Depreciation expense for the years ended December 31, 1999 and 1998 were
$2,546 and $370, respectively.
Officers' compensation increased from $203,682 for the year ended December 31,
1998 to $344,737 for the year ended December 31, 1999 due primarily to the
addition of one corporate executive. Research and development expenses increased
from $108,161 to $329,684, due to increased research and development activities
and the hiring of two outside consultants. For the year ended December 31, 1999,
the Company expended $60,000 on consulting fees in an attempt to obtain
institutional financing. The Company did not secure the financing and the
consulting fee was expensed. Legal and professional costs decreased from
$502,231 to $111,812 during the same periods. The Company's cash flows used in
operating activities were $305,374 for the year ended December 31, 1998 and
$816,942 for the year ended December 31, 1999. The increase in funds expended
was primarily the result of ongoing research and development necessary to
effectuate the Company's business plan. Cash provided by financing activities
increased from $427,716 for the year ended December 31, 1998 to $808,232 for the
year ended December 31, 1999 due to an influx of $380,516 resulting from a
private placement of the Company's common stock.
Item 2. Description of Property.
Property held by the Company. The consolidated financial statements filed as
exhibits to this Registration Statement include the accounts of the Company and
its wholly-owned subsidiary, Elast Technologies Corporation, a Delaware
corporation (previously defined in this Registration Statement as "Elast
Delaware"). All significant intercompany transactions have been eliminated. As
of the dates specified in the following table, the Company held the following
property:
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Property Dec. 31, 1999 Dec. 31, 1998
-------- ------------- -------------
Cash and equivalents $205,715.00 $226,818.00
License to use Patent No. 5413113 $240.00 $400.00
Property and Equipment $10,672.00 $3,434.00
The Company defines cash equivalents as all highly liquid investments with a
maturity of 3 months or less when purchased. The Company's property and
equipment consists of computers with an expected useful life of 5 years.
Item 3. Legal Proceedings
There are no legal actions pending against the Company nor are any such legal
actions contemplated, except as specified below:
There is presently a dispute regarding the validity of certain stock options
relating to the purchase of certain shares of common stock of Elast Technologies
Corporation, a Delaware corporation ("Elast Delaware"), a subsidiary of the
Company. On or about May 14, 1999, Dr. Gary Marrone, the former Secretary of
Elast Delaware and a former Director of Elast Delaware, notified the Company
that he believed that the 100,000 unexpired Elast Delaware stock options held by
each Director of Elast Delaware had been converted into options to purchase as
many as 400,000 shares of the Company's common stock at a significantly reduced
price as a result of the Plan of Merger. The Company believes that Dr. Marrone's
claim is without merit. The Company further believes that Dr. Marrone may take
legal action with regard to this matter. The Company intends to vigorously
oppose any such action.
Certain disputes have arisen between and among the present management of the
Company, on the one hand, and Edward L. Hamilton, a former officer and director
of the Company, on the other hand. Specifically, on or about December 30, 1999,
the holders of at least two-thirds (2/3) of the Company's issued and outstanding
shares of $.001 par value common stock provided the Company's Secretary with
written consents approving the removal of Edward L. Hamilton as a member of the
Company's Board of Directors. The Company's Board of Directors also terminated
Mr. Hamilton's employment as an officer of the Company on or about the same
date.
The Company anticipates that Mr. Hamilton may take legal action with regard to
this matter. The Company is currently engaging in settlement discussions with
Mr. Hamilton. The Company intends to oppose vigorously any action by Mr.
Hamilton in regard to this matter, but will also consider a reasonable
settlement if the Company's Board of Directors determines that the terms and
conditions of such a settlement are in the best interests of the Company.
Certain disputes have developed between David Phillips, a former consultant to
the Company, on the one hand, and the Company, on the other hand, regarding the
Company's research and development activities. Specifically, Mr. Phillips'
consulting services initially focused on the measurement of electrical
resistance by the ELAST Device (U.S. Patent No. 5413113, issued on or about May
9, 1995) which the Company owns the rights to develop, test, manufacture and
market. Before providing the Company with consulting services, Mr. Phillips had
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developed a means to measure electrical potential, as opposed to electrical
resistance. In or about April, 1999, Mr. Phillips' consulting services to the
Company were terminated. By that time, however, he had, while working as a
consultant to the Company, developed a prototype diagnostic machine which
incorporated technology to detect variances in electrical potential. The Company
anticipates seeking further patent protection for a diagnostic machine which,
among other things, detects variances in electrical potential; however, the
Company is continuing to develop its own technology and processes and has
already replaced the analog system favored by Mr. Phillips with a digital
system. The Company is informed and, therefore, believes that Mr. Phillips may
claim that the Company's patent application infringes on existing patents or, in
the alternative, may claim to have certain rights to the use or ownership of the
technology on which the Company's patent application is based.
Patent infringement occurs when a person or business "makes, uses, or sells" a
patented invention. The language specifying particular patent rights, typically
referred to as the "patent claims", allows a patent owner to prohibit any
unauthorized manufacture, use or sale of products which utilize the patent
owner's patented technology.
When two or more persons work together to make an invention, they are joint
inventors and a patent will be issued to them jointly on the basis of a proper
patent application. If, on the other hand, one of these persons has provided all
of the ideas of the invention, and the other person has only followed
instructions in making that invention, the person who contributed the ideas is
the sole inventor and the patent application and patent shall be in his or her
name alone. Moreover, if one person furnishes all of the ideas to make an
invention and another person employs him or her or furnishes the money for
building and testing the invention, the patent application must be signed by the
true inventor, and filed in the Patent and Trademark Office, in the inventor's
name. This is the person who furnishes the ideas, not the employer or the person
who furnishes the money.
At this time, Mr. Phillips' potential claim against the Company is that he is a
joint inventor (or even the "true" or sole inventor) of the Elast Device, as
presently constructed. Mr. Phillips has indicated that he would contest any
patent applications, by the Company, relating to diagnostic machines based on
technology which detects variances in electrical potential. If Mr. Phillips
claims that the Company's patent application infringed on any patent or
technology in which he had an ownership interest, he could sue for relief in the
appropriate federal court. He could ask the court for an injunction to prevent
the continuation of that infringement and could also ask the court for an award
of damages because of that infringement. In the event he prevailed, Mr. Phillips
could force the Company to pay him a royalty for making, using or selling the
Elast Device, or could prevent the Company from making, using or selling the
Elast Device.
Because the right conveyed by a patent is the right to prohibit a certain action
related to the patented invention, most patent infringement claims must be
settled by filing a suit against the party who is violating a patent holder's
rights. Mr. Phillips' potential claim is not a claim that the Company is
infringing on a patent which he holds; rather, as specified above, he has
indicated that he would challenge the Company's patent application itself and
seek to prevent the issuance of a patent to the Company because he is a
co-inventor (or sole inventor) of the Elast Device. The Company believes that
Mr. Phillips' potential claim is without merit because (i) the Elast Device was
patented long before Mr. Phillips became a consultant to the Company, (ii) the
Company's research and development activities have resulted in the development
of new technology significantly different from the technology claimed by Mr.
Phillips; and (iii) the general concept of measuring electrical potential is
not, in and of itself, patentable. Challenges to patent applications occur
frequently as part of the patent application process and, as the Company is
continuing to refine its technology, it is too early to determine the validity
of any such potential challenge. The Company intends to pursue patent protection
for its technology vigorously and will respond in an appropriate manner to any
challenges by any party, including, but not limited to, Mr. Phillips, to any
patent applications filed by the Company relating to the Elast Device or its
derivatives.
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Subsequent to year end, the Company initiated an offering of 1,000,000 shares of
its $.001 par value common stock on a best efforts basis pursuant to a
Registration Statement on Form SB-2 filed with the Securities and Exchange
Commission. On or about February 23, 2000, the Company was informed by the
Securities and Exchange Commission that its Registration Statement on Form SB-2
was effective and placed 800,000 of those shares in CEDE & Company through DTC,
one of the world's largest securities depository and a national clearinghouse
for the settlement of trades in corporate and municipal securities. DTC is a
limited purpose trust company under New York Banking Law, a member of the
Federal Reserve System, and a registered clearing agency with the Securities and
Exchange Commission. Those shares were to be for the account of Crescent Fund
Partners LP. Additionally, the Company placed (i) 50,000 of those shares with
Xcell Associates, a market maker; (ii) 50,000 of those shares with NC Capital, a
market maker; and (iii) 33,334 of those shares with ARDT, an investment banker.
On or about March 7, 2000, the Company was informed by the Securities and
Exchange Commission that the financial statements filed with the Company's
Registration Statement on Form SB-2 were not current, and that the Company must
file a Post-Effective Amendment containing more recent financial statements and
a Consent of Auditors to use those more recent financial statements. The Company
directed that the 800,000 shares in DTC be returned to certificate form and none
of those shares were delivered to any prospective purchaser. As of March 13,
2000, the shares placed with Xcell Associates, NC Capital and ARDT had not been
sold or distributed to any person. On March 14, 2000, the Company filed
Post-Effective Amendment No. 1 to the Registration Statement on Form SB-2 with
current financial statements. The Company has demanded that Crescent Fund
Partners LP return the 800,000 shares placed through the DTC, but Crescent Fund
Partners LP has only returned approximately 520,000 of those shares to date. The
Company believes Crescent Fund Partners LP may be selling or otherwise disposing
of those shares without the permission of the Company and may seek court
intervention if this matter cannot be resolved.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable
PART II.
Item 5. Market for Common Equity and Related Stockholder Matters
Reports to Security Holders. The Company is a reporting company with the
Securities and Exchange Commission ("SEC"). The public may read and copy any
materials filed with the SEC at the SEC's Public Reference Room at 450 Fifth
Street N.W., Washington, D.C. 20549. The public may also obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC. The address of that site is http://www.sec.gov. The Company
currently maintains its own Internet address at www.elast.com.
The Company participates in the OTC Bulletin Board, an electronic quotation
medium for securities traded outside the Nasdaq Stock Market. The Company's
common stock trades on the OTC Bulletin Board under the trading symbol "ESTG".
This market is extremely limited and the prices for the Company's common stock
quoted by brokers is not necessarily a reliable indication of the value of the
Company's common stock. The Company was listed with Standard & Poor's
Corporation Records by publication on or about December 3, 1998.
The Company is authorized to issue 25,000,000 shares of common stock, $.001 par
value, each share of common stock having equal rights and preferences, including
voting privileges. The shares of $.001 par value common stock of the Company
constitute equity interests in the Company entitling each shareholder to a pro
rata share
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of cash distributions made to shareholders, including dividend payments. The
Bylaws of the Company specify how the cash available for distribution, whether
occurring from operations or sales or refinancing, is to be shared among the
shareholders. The holders of the Company's common stock are entitled to one vote
for each share of record on all matters to be voted on by shareholders. There is
no cumulative voting with respect to the election of directors of the Company or
any other matter, with the result that the holders of more than 50% of the
shares voted for the election of those directors can elect all of the Directors.
The holders of the Company's common stock are entitled to receive dividends
when, as and if declared by the Company's Board of Directors from funds legally
available therefor; provided, however, that cash dividends are at the sole
discretion of the Company's Board of Directors. In the event of liquidation,
dissolution or winding up of the Company, the holders of common stock are
entitled to share ratably in all assets remaining available for distribution to
them after payment of liabilities of the Company and after provision has been
made for each class of stock, if any, having preference in relation to the
Company's common stock. Holders of the shares of Company's common stock have no
conversion, preemptive or other subscription rights, and there are no redemption
provisions applicable to the Company's common stock. All of the outstanding
shares of Company's common stock are duly authorized, validly issued, fully paid
and non-assessable.
Dividend Policy. The Company has never declared or paid a cash dividend on its
capital stock and does not expect to pay cash dividends on its Common Stock in
the foreseeable future. The Company currently intends to retain its earnings, if
any, for use in its business. Any dividends declared in the future will be at
the discretion of the Board of Directors and subject to any restrictions that
may be imposed by the Company's lenders.
Stock Option Plan. The Company's Board of Directors has approved and adopted a
stock option plan ("Stock Option Plan"), pursuant to which 5,000,000 shares of
the Company's $.001 par value common stock will be reserved for issuance to
satisfy the exercise of options. The Stock Option Plan will be designed to
retain qualified and competent officers, employees, and directors of the
Company. The Company's Board of Directors, or a committee thereof, shall
administer the Stock Option Plan and will be authorized, in its sole and
absolute discretion, to grant options thereunder to all eligible employees of
the Company, including officers, and to the Company's directors, whether or not
those directors are also employees of the Company. Options will be granted
pursuant to the provisions of the Stock Option Plan on such terms, subject to
such conditions and at such exercise prices as shall be determined by the
Company's Board of Directors. Options granted pursuant to the Stock Option Plan
shall not be exercisable after the expiration of ten years from the date of
grant.
Warrants. At December 31, 1999, the Company had outstanding warrants to purchase
500,000 shares of the Company's common stock at a price of $2.40 per share, all
of which expire by their own terms in July, 2004.
The high and low bid information for the Company's common stock that follows was
obtained from Yahoo!Finance. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions. There is no information available prior to October, 1999.
Date Open High Low Close
- ---- ---- ---- --- -----
October 1999 $2.125 $2.125 $1.875 $1.875
December 1999 $1.6875 $1.875 $0.9375 $0.9375
February 2000 $2.25 $2.25 $1.9375 $2.0312
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Item 6. Plan of Operation
THIS PROSPECTUS SPECIFIES FORWARD-LOOKING STATEMENTS OF MANAGEMENT OF THE
COMPANY ("FORWARD-LOOKING STATEMENTS") INCLUDING, WITHOUT LIMITATION,
FORWARD-LOOKING STATEMENTS REGARDING OUR EXPECTATIONS, BELIEFS, INTENTIONS AND
FUTURE STRATEGIES. FORWARD-LOOKING STATEMENTS ARE STATEMENTS THAT ESTIMATE THE
HAPPENING OF FUTURE EVENTS AND ARE NOT BASED ON HISTORICAL FACTS.
FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY, SUCH AS "COULD", "MAY", "WILL", "EXPECT", "SHALL", "ESTIMATE",
"ANTICIPATE", "PROBABLE", "POSSIBLE", "SHOULD", "CONTINUE", "INTEND" OR SIMILAR
TERMS, VARIATIONS OF THOSE TERMS OR THE NEGATIVE OF THOSE TERMS. THE
FORWARD-LOOKING STATEMENTS SPECIFIED IN THIS PROSPECTUS HAVE BEEN COMPILED BY
MANAGEMENT OF THE COMPANY ON THE BASIS OF ASSUMPTIONS MADE BY MANAGEMENT AND
CONSIDERED BY MANAGEMENT TO BE REASONABLE. FUTURE OPERATING RESULTS OF THE
COMPANY, HOWEVER, ARE IMPOSSIBLE TO PREDICT AND NO REPRESENTATION, GUARANTY, OR
WARRANTY IS TO BE INFERRED FROM THOSE FORWARD-LOOKING STATEMENTS.
THE ASSUMPTIONS USED FOR PURPOSES OF THE FORWARD-LOOKING STATEMENTS REPRESENT
ESTIMATES OF FUTURE EVENTS AND ARE SUBJECT TO UNCERTAINTY AS TO POSSIBLE CHANGES
IN ECONOMIC, LEGISLATIVE, INDUSTRY, AND OTHER CIRCUMSTANCES. AS A RESULT, THE
IDENTIFICATION AND INTERPRETATION OF DATA AND OTHER INFORMATION AND THEIR USE IN
DEVELOPING AND SELECTING ASSUMPTIONS FROM AND AMONG REASONABLE ALTERNATIVES
REQUIRE THE EXERCISE OF JUDGMENT. TO THE EXTENT THAT THE ASSUMED EVENTS DO NOT
OCCUR, THE OUTCOME MAY VARY SUBSTANTIALLY FROM ANTICIPATED OR PROJECTED RESULTS,
AND, ACCORDINGLY, NO OPINION IS EXPRESSED ON THE ACHIEVABILITY OF THOSE
FORWARD-LOOKING STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF THE
ASSUMPTIONS RELATING TO THE FORWARD-LOOKING STATEMENTS SPECIFIED IN THIS REPORT
ARE ACCURATE, AND WE ASSUME NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING
STATEMENTS.
General. We intend to manufacture and market medical devices. We are currently
negotiating proposed marketing agreements and plans to negotiate and enter into
marketing agreements with appropriate distributors and marketing agents. Other
than the ELAST Device, we do not currently have any plans to develop other
products. We may, however, acquire the right to sell or distribute existing
products, or obtain licensing, marketing, distribution or other rights to
compatible products. Therefore, other than costs related to the continued
development of the ELAST Device, we do not anticipate significant expenditures
on acquisition or development of other products during the current fiscal year.
On February 1, 2000, we relocated our research and development facilities to San
Diego's Center for Applied Competitive Technologies ("CACT"). Established in
1990, CACT is one of twelve advanced technology centers designated by the State
of California to serve firms in the manufacture of biomedical and bio-technical
products and to assist such companies in transition from research and
development activities to manufacturing their products. CACT is a member of the
National Coalition of Advanced Technology Centers and has served since 1992 as a
regional affiliate of the National Institute for Standards and Technology's
Manufacturing Extension Centers. Since 1997, CACT has been a Regional Affiliate
of the National Aeronautics and Space Administration's Far West Regional
Technology Transfer Center.
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We will focus our initial marketing and distribution efforts on development and
commercial exploitation of the ELAST Device. Our present plan is to lease or
license the ELAST Device. We believe that such a plan minimizes variable costs
and creates an informed and updated client base.
Our business will expose us to potential product liability risks that are
inherent in the testing, manufacturing and marketing of medical products. We do
not have product liability insurance, and there can be no assurance that we will
be able to obtain or maintain such insurance on acceptable terms or, if
obtained, that such insurance will provide adequate coverage against potential
liabilities. We face an inherent business risk of exposure to product liability
and other claims in the event that the development or use of our technology or
products is alleged to have resulted in adverse effects. Such risk exists even
with respect to those products that are manufactured in licensed and regulated
facilities or that otherwise possess regulatory approval for commercial sale.
There can be no assurance that we will avoid significant product liability
exposure. There can be no assurance that insurance coverage will be available in
the future, on commercially reasonable terms; or that such insurance will be
adequate to cover potential product liability claims; or that a loss of
insurance coverage would not materially adversely affect our business, financial
condition and results of operations. While we have taken, and will continue to
take, what we believe are appropriate precautions, there can be no assurance
that we will avoid significant liability exposure. An inability to obtain
product liability insurance at acceptable cost or to otherwise protect against
potential product liability claims could prevent or inhibit the
commercialization of products developed by the Company. A product liability
claim could have a material adverse effect on our business, financial condition
and results of operations.
Our strategy for growth is substantially dependent upon our ability to market
and distribute products successfully. Other companies, including those with
substantially greater financial, marketing and sales resources, compete with the
Company, and have the advantage of marketing existing products with existing
production and distribution facilities. There can be no assurance that we will
be able to market and distribute products on acceptable terms, or at all. Our
failure to market our products successfully could have a material adverse effect
on our business, financial condition or results of operations.
The medical products industry has been under increasing scrutiny by various
state and federal regulatory agencies. While we do not presently require any
government approval to create, develop or manufacture the ELAST Device, we may
be subject to various forms of government regulations, including consumer safety
laws and environmental safety laws. Any future violation of, or the cost of
compliance with, these laws and regulations could have a material adverse effect
on our business, financial condition and results of operations.
The medical products industry is rapidly changing through the continuous
development and introduction of new products. Our strategy for growth is
substantially dependent upon our ability to successfully introduce the ELAST
Device. Accordingly, our ability to compete may be dependent upon our ability to
enhance and improve our products continually. There can be no assurance that
competitors will not develop technologies or products that render our products
obsolete or less marketable. We may be required to adapt to technological
changes in the industry and develop products to satisfy evolving industry or
customer requirements, any of which could require the expenditure of significant
funds. At this time, we do not have a source of commitment for such funds.
Continued refinement and improvement costs are risks inherent in new product
development, including unanticipated technical or other problems which could
result in material delays in product commercialization.
Liquidity and Capital Resources. During the year ended December 31, 1999, the
Company received approximately $808,250 from the sale of common stock. At
December 31, 1999, the Company had cash resources of $205,715. The cash and
equivalents constitute our present internal sources of liquidity. Because we are
not generating any revenues from the sale or licensing of our products, our only
external source of liquidity is the sale
10
<PAGE>
of our capital stock. The Company registered 1,000,000 shares of its common
stock for sale on a "best efforts" basis and believes it will sell some or all
of this stock during the next 12 months.
The Company believes its current cash resources coupled with those funds the
Company expects to raise pursuant to the sale of the 1,000,000 shares of its
common stock that the Company recently registered, are sufficient to complete
prototype development and limited clinical trials of the ELAST Device. If the
ELAST Device performs as anticipated, the Company believes that it will be able
to raise the funds necessary to begin production of the ELAST Devices - for the
North American and international clinical trials and the FDA approval process -
through the sale of equity, debt, or licensing. Should the development of the
prototype or clinical testing of the prototype take more time than anticipated,
or if the results of testing require significant modifications to the ELAST
Device, sufficient funds may not be available to enable the ELAST Device to be
completed and brought to market during the time period currently anticipated by
the Company.
Manufacturing and Marketing the Company's Products. The Company does not
anticipate any supply problems. As this time, the Company does not require
manufacturing facilities. As the principal components of the ELAST Device
consist of electronic parts that are readily available, the Company does not
anticipate that its manufacturer will have any supply problems. The Company's
operations are not effected by any seasonal factors.
Company's Plan of Operation For Next 12 Months. Once the initial testing of the
ELAST Device is completed, the Company will manufacture, or cause to be
manufactured, about 10 units of the ELAST Device, which will be provided to a
selected group of physicians, including eye, ear, nose and throat specialists,
chemical ecologists, and allergy specialist doctors, naturopaths, and
chiropractors. Thereafter, the ELAST Device will be marketed to physicians and
hospitals to test patients for prescription drug compatibility, to avoid
drug-related illnesses. The Company's operating plan is to market the ELAST
Device as a stand-alone device that can be attached to "medical environment"
computers. Once the ELAST Device gains acceptance in the medical community, the
Company anticipates that a patient home-testing unit may be developed.
Impact of the Year 2000. The Year 2000 (commonly referred to as "Y2K") issue
resulted from the fact that many computer programs were written using two,
rather than four, digits to identify the applicable year. As a result, computer
programs with time-sensitive software might recognize a two digit code for any
year in the 21st century as related to the 20th century. For example, "00",
entered in a date-field for the year 2000, may be interpreted as the year 1900,
resulting in system failures or miscalculations and disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in other normal business activities. While companies and governments in
the United States spent an estimated $150 billion to $225 billion repairing the
problem, countries like Russia and China, which spent relatively minor amounts,
seemed to clear the New Year's Day hurdle with equal success. Major news media
in the United States are reporting that, after years of work and billions of
dollars spent repairing the Year 2000 computer glitch, the technological
tranquility of New Year's Day has raised a new concern that the United States
overreacted to this problem. While it is still too soon to state positively that
the Y2K transition has passed without mishap, we believe that Y2K issues will
not have a material adverse affect on our business.
Changes in Number of Employees. During the next 12 months, depending on the
success of the Company's market expansion plan, the Company may be required to
hire additional employees; however, the Company is not able to provide a
reasonable estimate of the number of such additional employees which may be
required at this time.
11
<PAGE>
Item 7. Financial Statements
Copies of the financial statements specified in Regulation 228.310 (Item 310)
are filed with this Annual Report on Form 10-KSB.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with the Company's accountants
since the formation of the Company required to be disclosed pursuant to Item 304
of Regulation S-B.
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
The directors and principal executive officers of the Company are as specified
on the following table:
Name Age Position
---- --- --------
Thomas Krucker 60 President and Director
Robert D. Milne, M.D. 53 Chairman of the Board of Directors
Nicholas Spencer 38 Director
Dr. Eduardo Daniel 58 Director
Jimenez Gonzalez
Thomas Krucker is the President, Chief Executive Officer, and a director of the
Company. Mr. Krucker graduated from the University of Arizona in 1962 and
received a Juris Doctorate degree from Pepperdine University in 1969. Mr.
Krucker served with Toyota USA for approximately 20 years. Mr. Krucker was
formerly the chief operating officer of Fun City Popcorn, Inc., a Nevada
corporation which in 1997 was acquired by Tone Products and now operates as a
wholly-owned subsidiary of Tone Products. Mr. Krucker left Tone Products to
accept the office of President of the Company.
Robert D. Milne, M.D. is the Chairman of the Board of Directors of the Company.
Dr. Milne is a board- certified family practice physician with extensive
experience in allergy testing and preventative medicine. He is also the inventor
of the ELAST Device. Before starting his own practice at the Milne Medical
Center in Las Vegas, Nevada, Dr. Milne was Medical Director at the Omni Medical
Center and also practiced medicine at the Nevada Clinic after previous
assignments in emergency medicine and a family practice. Dr. Milne is the author
of numerous papers in the medical field and has authored several books,
including The Definitive Guide to Headaches and The Photon Connection - Energy
for the New Millennium.
Nicholas Spencer is a director of the Company. Mr. Spencer has more than 15
years experience in starting, managing, and improving business performance and
now specializes in business planning and start-up companies with a special
emphasis on marketing and development. Mr. Spencer currently serves on the Board
of Directors
12
<PAGE>
of Medsearch Pty. Limited, Sydney, New South Wales, and also serves as Chairman
of the Board for that company.
Dr. Eduardo Daniel Jimenez Gonzalez is an international banker and Mexican
attorney who specializes in immigration, civil, and criminal matters in the
Republic of Mexico and who provides international consulting services regarding
finance, credit, commerce, industrial and tourist development, import and export
matters, and administrative management. Dr. Gonzalez is a Fullbright Scholar who
received a Master of Arts Degree from John Hopkins University, School of
Advanced International Studies, in Washington, D.C. and who has studied
International Economics at Harvard University and American Civilization at
Georgetown University. Dr. Gonzalez has served as a counselor at the Mexican
Embassy in Washington, D.C., as a Mexican Minister in Bonn, as Ambassador at
Large for Mexico in Oslo, Norway and Islandia, and as private secretary for a
former President of Mexico. He has served as Managing Director for Latin
American Investment Banking for First Chicago Bank in Panama, Colombia,
Venezuela, Ecuador and Peru, as as First Chicago Bank's Vice-President for the
Western Hemisphere. He is an international lecturer on economic development and
an International Law Professor at the University of Mexico.
There is no family relationship between any of the officers or directors of the
Company. There are no orders, judgments, or decrees of any governmental agency
or administrator, or of any court of competent jurisdiction, revoking or
suspending for cause any license, permit or other authority to engage in the
securities business or in the sale of a particular security or temporarily or
permanently restraining any officer or director of the Company from engaging in
or continuing any conduct, practice or employment in connection with the
purchase or sale of securities, or convicting such person of any felony or
misdemeanor involving a security, or any aspect of the securities business or of
theft or of any felony, nor are any of the officers or directors of any
corporation or entity affiliated with the Company so enjoined.
Section 16(a) Beneficial Ownership Reporting Compliance. The Company does not
presently have knowledge as to whether all of its officers, directors, and
principal shareholders have filed all reports required to be filed by those
persons on, respectively, Form 3 ( Initial Statement of Beneficial Ownership of
Securities), a Form 4 (Statement of Changes of Beneficial Ownership of
Securities), or a Form 5 (Annual Statement of Beneficial Ownership of
Securities).
Item 10. Executive Compensation.
Any compensation received by officers, directors, and management personnel of
the Company will be determined from time to time by the Board of Directors of
the Company. Officers, directors, and management personnel of the Company will
be reimbursed for any out-of-pocket expenses incurred on behalf of the Company.
Officers' compensation, in the aggregate, increased from $203,682 during the
year ended 1998 to $344,737 during the year ended 1999. Compensation to the
Company's officers is specified on the following chart:
<TABLE>
<CAPTION>
Cash Auto Meals & Total
Compensation Expense Insurance Entertainment Travel Housing Compensation
------------ ------- --------- ------------- ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
T. Krucker $ 66,040 $ 16,269 $ 8,397 $ 69,004 $ 20,184 $ -- $179,894
T. Hamilton 110,894 8,470 1,701 -- -- 15,000 136,065
Dr. Milne 28,778 -- -- -- -- -- 28,778
Totals $205,712 $ 24,739 $ 10,098 $ 69,004 $ 69,004 15,000 $344,737
</TABLE>
13
<PAGE>
During 1999, the Company also granted options to purchase up to 150,000 shares
of the Company's common stock to two members of the Board of Directors; however,
because the exercise price of the options equaled or exceeded the fair value of
the Company's common stock at the date of grant, no compensation expense was
recognized in connection with the issuance of these options. In 1999 the Company
paid $11,000 to an officer and major shareholder for rental and purchase of a
vehicle. Of the amount paid, $2,700 represented automobile rental and $8,300
represented the purchase price. The automobile was used for business purposes
and subsequently sold to an independent party for $5,000. The Company recognized
a $2,608 loss from the sale of the asset. Other expenditures for travel,
entertainment, insurance, car leases, and miscellaneous expenses were also
categorized as compensation to officers during fiscal 1999.
Shares Issued as Compensation for Services. In 1998, the Company issued 270,000
shares of its $.001 par value common stock as compensation for consulting and
engineering services, and employee compensation, as follows:
(i) Consultants were issued 115,000 shares of the Company's $.001 par value
common stock as additional compensation for their services to the Company. Those
shares were valued at what the Company believes was the fair market value at the
time of issuance, which was $1.50 per share.
(ii) Third party engineers were issued 55,000 shares of the Company's $.001
par value common stock as additional compensation for their services to the
Company. Those shares were valued at what the Company believes was the fair
market value at the time of issuance, which was $1.54 per share.
(iii) Dr. Milne, an officer, director and major shareholder of the Company,
was issued 100,000 shares of the Company's $.001 par value common stock as
additional compensation for his services to the Company; specifically, his
continuing efforts related to the development of certain technology which will
be utilized by the Company in its business operations. Those shares were valued
at what the Company believes was the fair market value at the time of issuance,
which was $1.50 per share.
In 1999, the Company issued shares of its $.001 par value common stock as
compensation for services provided to the Company, and employee compensation, as
follows: 13,400 shares to Gerald Klein; 4,700 shares to Ron Almadova; 4,700
shares to William Milne; 3,333 shares to Hope Lane; 25,000 shares to Jim
Woodens; and 25,000 shares to John Martinez.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock as of December 31, 1999, by (i) each
person or entity known by the Company to be the beneficial owner of more than 5%
of the outstanding shares of common stock, (ii) each of the Company's directors
and named executive officers, and (iii) all directors and executive officers of
the Company as a group. The number of shares outstanding of the issuer's only
class of Common Stock, $.001 par value, was 7,961,481 on December 31, 1999.
(a) Security Ownership of Certain Beneficial Owners. Other than officers and
directors, no persons are beneficial owners of 5% or more of the Company's
issued and outstanding common stock.
(b) Security Ownership of Management. The directors and principal executive
officers of the Company directly or beneficially own, in the aggregate,
4,445,308 shares of the Company's common stock, or approximately 55.8 % of the
issued and outstanding common shares, as set forth on the following table
(percentages are rounded off to the nearest one-tenth of one percent).
Associates and family members residing
14
<PAGE>
with directors and principal executive officers also own shares of the Company's
common stock, as specified under the heading entitled Beneficial Ownership
immediately below the table.
<TABLE>
<CAPTION>
Amount and
Name and Address Nature of Percent of
Title of Class of Owner Owner Class (approx.)
- -------------- ---------------- ---------- ---------------
<S> <C> <C> <C>
$.001 par value Dr. Robert Milne(1) 4,029,976 50.6%
Common Stock 2432 Greens Ave. Secretary and Director
Henderson, NV 89014
$.001 par value Thomas Krucker(2) 390,332 4.9%
Common Stock 2505 Rancho Bel Air President and Director
Las Vegas, NV 89107
$.001 par value Nicholas Spencer 25,000 0.3%
Common Stock 13 Edinburgh Road Director
N.S.W., Australia
Total shares beneficially
owned by all officers and directors
as a group 4,445,308 55.8%
</TABLE>
Beneficial Ownership. Beneficial ownership is determined in accordance with the
rules of the Commission and generally includes voting or investment power with
respect to securities. In accordance with Commission rules, shares of the
Company's common stock which may be acquired upon exercise of stock options or
warrants which are currently exercisable or which become exercisable within 60
days of the date of the table are deemed beneficially owned by the optionees.
Subject to community property laws, where applicable, the persons or entities
named in the table above have sole voting and investment power with respect to
all shares of the Company's common stock indicated as beneficially owned by
them.
(1) Shares of the Company's common stock are held by (i) Dr. Milne; (ii) Dr.
Milne's spouse, Julie Milne; (iii) immediate family members Drew Milne, Meredith
Milne and Brook Milne, who reside with Dr. Milne; (iv) a Milne family trust; and
(v) the Milne Medical Center, an affiliate of Dr. Milne.
(2) Shares of the Company's common stock are held by (i) Mr. Krucker; (ii) a
trust in the name of Mr. Krucker's spouse, Katherine; and (iii) Katherine
Krucker as custodian for his daughter, Kimberly, who resides with him.
On or about October 18, 1999, the Company issued a press release which specified
that Dr. Milne had agreed to retire 1.5 million shares of the Company's common
stock held in his name in exchange for stock options to purchase up to 1.5
million shares of the Company's common stock at $1.68 per share. Subsequent to
that press release, the Company's Board of Directors determined that Dr. Milne
had not received consideration for the retirement of those shares; therefore,
those shares were not retired, and the stock options were never issued.
Changes in Control. Management of the Company is not aware of any arrangements
which may result in "changes in control" as that term is defined by the
provisions of Item 403(c) of Regulation S-B. Pursuant to a Plan of Merger filed
with the Delaware Secretary of State, in June, 1998, Elast Technologies
Corporation, a Delaware corporation (previously defined in this Registration
Statement as "Elast Delaware"), merged with and
15
<PAGE>
into Elast Merger, Inc., a Nevada corporation, which was a wholly-owned
subsidiary of the Company. Shareholders who formerly held stock in Elast
Delaware received 4 shares of the Company's common stock for each share of their
Elast Delaware stock on or about June 30, 1998, with the result that the former
shareholders of Elast Delaware now hold a controlling interest in the Company,
and Elast Delaware is now a wholly-owed subsidiary of the Company. The Company
changed its name from Med Mark, Inc. to Elast Technologies, Inc. on or about
October 27, 1998.
Item 12. Certain Relationships and Related Transactions.
Related Party Transactions. Dr. Milne, the Chairman of the Board of the Company,
provides office space and services to the Company, at no cost to the Company. At
such time as the Company begins receiving revenue from operations, management of
the Company anticipates that the Company will begin paying rent for 800 square
feet of this office space, at a rate of $1,200 per month.
Also in 1999, Edward L. Hamilton, who was, at the time, an officer and director
of the Company, was provided housing in a residence owned by Thomas Krucker. The
Company paid Mr. Krucker $15,000 for the housing and that cost was included in
Mr. Hamilton's compensation for 1999.
In 1999, the Company paid to Thomas Krucker, an officer and major shareholder of
the Company, $11,000 for the rental and purchase of an automobile. Of the amount
paid, $2,700 represented automobile rental and $8,300 represented the purchase
price. The automobile was used for business purposes and who subsequently sold
to an independent party for $5,000. The Company recognized $2,608 loss from the
sale of the asset.
Licensing Agreement Was Not the Result of Arms-Length Negotiations. As set forth
above, on or about June 12, 1996, Elast Delaware acquired a license from Robert
D. Milne, M.D., who was, at that time, Chairman of the Board of Directors and a
major shareholder of Elast Delaware, whereby Elast Delaware acquired the
exclusive right to develop, manufacture and market the ELAST Device. Elast
Delaware issued to Dr. Milne 3,200,000 shares of its common stock to acquire the
licensing rights. The Company believes that the fair market value of 3,200,000
shares of Elast Delaware's common stock at the time of the transaction was
$800.00, and, therefore, the Company determined that 3,200,000 shares of Elast
Delaware's common stock was fair consideration for the license agreement with
Dr. Milne. Because modifications may be made during the development and testing
of the ELAST Device, it is not certain that the final technology developed by
Elast Delaware will be protected by the original patent.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No.
3.1 Certificate of Incorporation
(Charter Document)*
3.2 Amendment to Certificate of Incorporation
(Charter Document)*
3.3 Bylaws*
16
<PAGE>
4. Instruments Defining the Rights of Holders (not applicable)
9. Voting Trust Agreement - Not Applicable
10.1 Financing Agreement
(material contract)**
10.2 Frontier GlobalCenter, Inc. Agreement
(material contract)*
11. Statement Re: Computation of Per Share Earnings(Loss)**
16. Letter on change in certifying accountant (Not applicable)
18. Letter on Change in Accounting Principles (Not applicable)
21. Subsidiaries of the Registrant**
22. Published Report Regarding Matters Submitted to Vote
(not applicable)
23.1 Consent of Auditors
23.2 Consent of Counsel*
24. Power of Attorney (Not applicable)
27. Financial Data Schedule
99. Additional Exhibits (not applicable)
*Previously filed as Exhibits to Registration Statement on Form SB-2 filed with
the Commission on December 7, 1999.
**Included in consolidated financial statements filed herewith.
(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K with the Commission.
17
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned in the City of
Newport Beach, California, on March 29, 2000.
Elast Technologies, Inc.,
a Nevada corporation
By: /s/
---------------------------
Thomas Krucker
Its: President and Secretary
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.
ELAST TECHNOLOGIES, INC.
/s/
- --------------------------- March 29, 2000
Director
/s/
- --------------------------- March 29, 2000
Director
/s/
- --------------------------- March 29, 2000
Director
18
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage )
Consolidated Financial Statements
As of December 31, 1999 and 1998 and
For Each of the Two Years in the Period Ended December 31, 1999 and
For the Period from June 12, 1996 (Inception) to December 31, 1999
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Index to the Consolidated Financial Statements
As of December 31, 1999 and 1998 and
For Each of the Two Years in the Period Ended December 31, 1999 and
For the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
Report of Independent Auditors 1
Consolidated Financial Statements of Elast Technologies, Inc.:
Consolidated Balance Sheets, December 31, 1999 and 1998 2
Consolidated Statements of Operations for Each of the Two Years in
the Period ended December 31, 1999 and for the Period from
June 12, 1996 (Inception) to December 31, 1999 3
Consolidated Statements of Shareholders' Equity for Each of the Two
Years in the Period ended December 31, 1999 and for the
Period from June 12, 1996 (Inception) to December 31, 1999 4
Consolidated Statements of Cash Flows for Each of the Two Years in
the Period ended December 31, 1999 and for the Period from
June 12, 1996 Inception) to December 31, 1999 7
Notes to the Consolidated Financial Statements 10
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Elast Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Elast
Technologies, Inc. (a company in the development stage) as of December 31, 1999
and 1998, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the two years in the period ended December
31, 1999 and for the period from June 12, 1996 (inception) to December 31, 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Elast
Technologies, Inc. (a development stage company) as of December 31, 1999 and
1998, and the consolidated results of operations and cash flows for the years
ended December 31, 1999 and 1998 and for the period from June 12, 1996
(inception) to December 31, 1999, in conformity with generally accepted
accounting principles. Kelly & Company
/s/ Kelly & Company
Kelly & Company
Newport Beach, California
March 1, 2000
1
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Consolidated Balance Sheets
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
ASSETS
1999 1998
----------- -----------
Current assets:
Cash and equivalents $ 205,715 $ 226,818
----------- -----------
Total current assets 205,715 226,818
Property and equipment, net 10,672 3,434
License, net 240 400
----------- -----------
Total assets $ 216,627 $ 230,652
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 14,613 $ 8,617
Accrued payroll and payroll taxes 38,898 4,375
----------- -----------
Total liabilities 53,511 12,992
----------- -----------
Shareholders' equity:
Common stock, $.001 par value;
25,000,000 shares authorized;
7,961,481 and 7,179,448 shares
issued and outstanding at December
31, 1999 and 1998, respectively 7,961 7,179
Additional paid-in capital 2,130,488 1,413,886
Additional paid-in capital for warrants 205,000 --
Deficit accumulated during the
development stage (2,180,333) (1,203,405)
----------- -----------
Total shareholders' equity 163,116 217,660
----------- -----------
Total liabilities and shareholders' equity $ 216,627 $ 230,652
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
2
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Consolidated Statements of Operations
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
For the For the June 12, 1996
Year Ended Year Ended (Inception) to
December 31, 1999 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Operating costs:
Officers compensation $ 344,737 $ 203,682 $ 548,419
Research and development 329,684 108,161 506,065
Legal and professional 111,812 502,231 638,377
Investor relations 86,082 238,759 324,841
Financing consulting fee 60,000 -- 60,000
Other operating costs and expenses 54,842 63,107 133,913
----------- ----------- -----------
Total operating costs (987,157) (1,115,940) (2,211,615)
----------- ----------- -----------
Interest income 10,229 13,566 31,282
----------- ----------- -----------
Net loss $ (976,928) $(1,102,374) $(2,185,333)
=========== =========== ===========
Loss per common share - basic and diluted $ (0.13) $ (0.19) $ (0.40)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Consolidated Statements of Shareholders' Equity
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Elast
Technologies, Inc.
Elast Technologies (Formerly
Corporation Med Mark, Inc.)
(A Delaware (A Nevada Deficit
Corporation) Corporation) Detachable Accumulated
-------------------- ---------------- Price Additional Stock During the
Common Common Common Common Per Paid-in Purchase Development
Shares Stock Shares Stock Share Capital Warrants Stage
------ ----- ------ ----- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 12, 1996
(inception) -- -- -- -- -- -- -- --
Shares issued for the
medical device license 3,200,000 $3,200 -- -- -- $ (2,400) -- --
Shares issued for legal
services 21,332 21 -- -- $0.31 6,698 -- --
Contribution of funds
expended by the major
shareholder on the
Company's behalf -- -- -- -- -- 4,167 -- --
Shares issued in private
placement 546,672 547 -- -- 0.38 204,453 -- --
Net loss from inception to
December 31, 1996 -- -- -- -- -- -- -- --
--------- ------ ---- ---- ----- -------- ---- --------
Balance, December 31, 1996 3,768,004 3,768 -- -- -- 212,918 -- (38,309)
Contribution of funds
expended by the major
shareholder on the
Company's behalf -- -- -- -- -- 1,500 -- --
Net loss for the year ended
December 31, 1997 -- -- -- -- -- -- -- --
(62,722)
--------- ------ ---- ---- ----- -------- ---- --------
Balance, December 31, 1997 3,768,004 3,768 -- -- -- 214,418 -- (101,031)
--------- ------ ---- ---- ----- -------- ---- --------
<CAPTION>
Less:
Common
Stock
Subscription
Subtotal Receivable Total
-------- ---------- -----
<S> <C> <C> <C>
Balance, June 12, 1996
(inception) -- -- --
Shares issued for the
medical device license $ 800 -- $ 800
Shares issued for legal
services 6,719 -- 6,719
Contribution of funds
expended by the major
shareholder on the
Company's behalf 4,167 -- 4,167
Shares issued in private
placement 205,000 $(10,000) 195,000
Net loss from inception to
December 31, 1996 (38,309) (38,309) --
--------- -------- --------
Balance, December 31, 1996 178,377 (10,000) 168,377
Contribution of funds
expended by the major
shareholder on the
Company's behalf 1,500 -- 1,500
Net loss for the year ended
December 31, 1997 (62,722) (62,722) --
(62,722)
--------- -------- --------
Balance, December 31, 1997 117,155 (10,000) 107,155
--------- -------- --------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Consolidated Statements of Shareholders' Equity
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Elast
Technologies, Inc.
Elast Technologies (Formerly
Corporation Med Mark, Inc.)
(A Delaware (A Nevada Deficit
Corporation) Corporation) Detachable Accumulated
-------------------- ---------------- Price Additional Stock During the
Common Common Common Common Per Paid-in Purchase Development
Shares Stock Shares Stock Share Capital Warrants Stage
------ ----- ------ ----- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 3,768,004 $3,768 -- -- -- $ 214,418 -- $(101,031)
Shares outstanding prior
to the reorganization -- -- 1,220,000 $1,220 -- 29,506 -- --
Shares issued in private
placement 394,000 394 -- -- $0.50 196,606 -- --
Payment of receivable arising
from issuance of common stock -- -- -- -- -- -- -- --
Shares issued on the exercise
of warrants 506,640 507 -- -- 0.38 189,483 -- --
Shares issued to consultant
in connection with the
reorganization 1,007,472 1,007 -- -- 0.38 376,791 -- --
Shares issued and surrendered
in the acquisition of Elast
Technologies, Inc. (a Nevada
Corporation) (reverse merger) (5,676,116) (5,676) 5,676,116 5,676 -- -- -- --
Shares issued for consulting
services, engineering services,
and employee compensation -- -- 270,000 270 1.51 407,095 -- --
Shares issued to an existing
shareholder to correct a
stock issuance error -- -- 13,332 13 (13) -- -- --
Net loss for the year ended
December 31, 1998 -- -- -- -- -- -- -- (1,102,374)
--------- ------ --------- ---- ----- ---------- ---- -----------
Balance, December 31, 1998 -- -- 7,179,448 $7,179 -- $1,413,886 -- $(1,203,405)
--------- ------ --------- ---- ----- ---------- ---- -----------
<CAPTION>
Less:
Common
Stock
Subscription
Subtotal Receivable Total
-------- ---------- -----
<S> <C> <C> <C>
Balance, December 31, 1997 $ 117,155 $(10,000) $ 107,155
Shares outstanding prior
to the reorganization 30,726 -- 30,726
Shares issued in private
placement 197,000 -- 197,000
Payment of receivable arising
from issuance of common stock -- 10,000 10,000
Shares issued on the exercise
of warrants 189,990 -- 189,990
Shares issued to consultant
in connection with the
reorganization 377,798 -- 377,798
Shares issued and surrendered
in the acquisition of Elast
Technologies, Inc. (a Nevada
Corporation) (reverse merger) -- -- --
Shares issued for consulting
services, engineering services,
and employee compensation 407,365 -- 407,365
Shares issued to an existing
shareholder to correct a
stock issuance error -- -- --
Net loss for the year ended
December 31, 1998 (1,102,374) -- (1,102,374)
---------- -------- ----------
Balance, December 31, 1998 $ 217,660 -- $ 217,660
---------- -------- ----------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Consolidated Statements of Shareholders' Equity
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Elast
Technologies, Inc.
Elast Technologies (Formerly
Corporation Med Mark, Inc.)
(A Delaware (A Nevada Deficit
Corporation) Corporation) Detachable Accumulated
-------------------- ---------------- Price Additional Stock During the
Common Common Common Common Per Paid-in Purchase Development
Shares Stock Shares Stock Share Capital Warrants Stage
------ ----- ------ ----- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 -- -- 7,179,448 $7,179 -- $1,413,886 -- $(1,203,405)
Shares issued in private placement -- -- 205,900 $ 206 $1.50 308,044 -- --
Shares issued in private placement -- -- 500,000 500 0.59 294,482 $205,000 --
Shares issued for consulting services -- -- 26,133 26 1.54 40,126 -- --
Shares issued for research and
development services -- -- 50,000 50 1.48 73,950 -- --
Net loss for the year ended
December 31, 1999 -- -- -- -- -- -- (976,928) --
----- ----- --------- ------ ----- ---------- -------- -----------
Balance, December 31, 1999 -- -- 7,961,481 $7,961 -- $2,130,488 $205,000 $(2,180,333)
===== ===== ========= ====== ===== ========== ======== ===========
<CAPTION>
Less:
Common
Stock
Subscription
Subtotal Receivable Total
-------- ---------- -----
<S> <C> <C> <C>
Balance, December 31, 1998 $ 217,660 -- $ 217,660
Shares issued in private placement 308,250 -- 308,250
Shares issued in private placement 499,982 -- 499,982
Shares issued for consulting services 40,152 -- 40,152
Shares issued for research and
development services 74,000 -- 74,000
Net loss for the year ended
December 31, 1999 (976,928) (976,928) --
---------- -------- ----------
Balance, December 31, 1999 $ 163,116 -- $ 163,116
========== ======== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
6
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Consolidated Statements of Cash Flows
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
For the For the June 12, 1996
Year Ended Year Ended (Inception) to
December 31, 1999 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(976,928) $(1,102,374) $(2,180,333)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 2,706 770 3,476
Issuance of stock for services 114,152 785,163 906,034
Loss on sale of asset 2,608 -- 2,608
Increase (decrease) in liabilities:
Accounts payable, trade 5,997 8,617 14,614
Accounts payable, officer -- (1,925) --
Accrued payroll taxes 34,523 4,375 38,898
--------- ----------- -----------
Cash used in operating activities (816,942) (305,374) (1,214,703)
--------- ----------- -----------
Cash flows used in investing activities:
Purchase of equipment (17,393) (3,804) (21,197)
Sale of equipment 5,000 -- 5,000
--------- ----------- -----------
Cash used in investing activities (12,393) (3,804) (16,197)
--------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
7
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Consolidated Statements of Cash Flows
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
For the For the June 12, 1996
Year Ended Year Ended (Inception) to
December 31, 1999 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows provided by financing activities:
Acquisition of MedMark, Inc. -- $ 30,726 $ 30,726
Proceeds from the exercise of warrants -- 189,990 189,990
Payment of common stock subscription receivable -- 10,000 10,000
Proceeds from the issuance of common stock $808,232 197,000 1,200,232
Contribution to additional paid-in capital -- -- 5,667
Cash provided by financing activities 808,232 427,716 1,436,615
-------- -------- ----------
Net increase (decrease) in cash (21,103) 118,538 205,715
Cash at beginning of period 226,818 108,280 --
-------- -------- ----------
Cash at end of period $205,715 $226,818 $205,715
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
8
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Consolidated Statements of Cash Flows
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Supplemental Disclosure of Cash Flow Information
Period from
For the For the June 12, 1996
Year Ended Year Ended (Inception) to
December 31, 1999 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Interest paid -- -- $ 1,375
Income taxes paid $170 $1,403 $ 1,973
Supplemental Schedule of Non-Cash Investing and Financing Activities
Assets acquired in non-cash transactions:
Acquisition of medical device license -- -- $ 800
Increase in common stock subscription receivable -- -- $ 10,000
Issuance of common stock -- -- $(10,800)
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
9
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
1. Development Stage Operations
Elast Technologies, Inc. (a company in the development stage) has a limited
operating history with no revenues and no products or operable technology
ready for the market. The Company is engaged in the ongoing development of
its first product, a non-invasive medical device to test for allergies with
real time, quantifiable, visually displayed results. Management's efforts
to date have focused primarily on the development of the medical device and
the raising of equity capital. As such, the Company is subject to the risks
and uncertainties associated with a new business. The success of the
Company's future operations is dependent, in part, upon the Company's
ability to successfully market its yet to be developed products and obtain
additional capital. Management's plans are discussed further in Note 11.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Elast Technologies, Inc. (a Nevada corporation) (the "Company") and its
subsidiary, Elast Technologies Corporation (a Delaware corporation) ("Elast
Delaware"). All significant intercompany transactions have been eliminated.
Prior to June 10, 1998, the Company was named Med Mark, Inc. ("Med Mark").
The name change was in conjunction with the reverse merger acquisition
(Note 10).
Revenue Recognition
Revenue will be recognized when the Company's goods are shipped.
Cash and Equivalents
The Company invests portions of its excess cash in highly liquid
investments. Cash and equivalents include time deposits and commercial
paper with original maturities of three months or less. In addition, the
Company has no compensating balance requirements. The Company maintains its
cash in bank accounts, which exceeded federally insured limits by $104,334
and $131,886 at December 31, 1999 and 1998, respectively. The Company has
not experienced any losses in such accounts. The Company believes it is not
exposed to any significant credit risk on cash.
10
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, Continued
Property and Equipment
The Company records property and equipment at cost. Significant
improvements, which extend the life of the underlying asset, are
capitalized, and expenditures for normal maintenance and repairs are
charged to operations. Depreciation is provided for property and equipment
using the straight-line method over the expected useful lives. The
Company's property and equipment consists of computers with an expected
useful life of 5 years.
Intangible Asset
The Company recorded its intangible asset at cost. The intangible asset is
amortized on a straight-line method over the shorter of its estimated
useful live or its contractual term, whichever is shorter.
Research and Development Costs
Research and development expenditures are charged to operations as they are
incurred.
Impairment of Long-Lived Assets
The Company annually evaluates its long-lived assets, including its
intangible asset, described as a license to patented technology, for
potential impairment. When circumstances indicate that the carrying amount
of the asset is not recoverable, as demonstrated by the projected
undiscounted cash flows, an impairment loss will be recognized. The
Company's management has determined that there was no such impairment
present at December 31, 1999 and 1998.
Income Taxes
The Company accounts for income taxes using the liability method. Under the
liability method, deferred income taxes are determined based on differences
between the financial reporting and tax bases of assets and liabilities.
They are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. The Company is
required to adjust its deferred tax liabilities in the period when tax
rates or the provisions of the income tax laws change. Valuation allowances
are established to reduce deferred tax assets to the amounts expected to be
realized.
11
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, Continued
Disclosures about Fair Value of Financial Instruments
The Company accounts for the value of financial instruments using the fair
value method.
Stock Based Compensation
Statement of Financial Account Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123"), established accounting and
disclosure requirements using a fair value based method of accounting for
stock-based employee compensation plans. As permitted by SFAS No. 123, the
Company will continue to account for stock-based compensation using the
intrinsic value method as prescribed in Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees ("APB No. 25").
Compensation cost from stock options, if any, is measured as the excess of
the quoted market price of the Company's stock at the date of grant over
the amount an employee must pay to acquire the stock. Compensation cost is
amortized over the requisite vesting periods.
Common Shares and Per Share Amounts
All common shares and per share amounts have been adjusted to give
retroactive effect, where applicable to the one for four reverse stock
split.
Earnings per Common Share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share. This pronouncement replaced the previously reported
primary and fully diluted earnings per share with basic and diluted
earnings per share ("EPS"), respectively. Loss per share for the years
ended December 31, 1999 and 1998, and for the period from June 12, 1996
(Inception) to December 31, 1999 have been calculated in accordance with
this pronouncement.
Basic EPS is computed by dividing income or loss available to common
shareholders by the weighted average number of common shares outstanding
for the year. Diluted EPS is similar to basic EPS except that the weighted
average of common shares outstanding is increased to include the number of
additional common shares that would have been outstanding if potentially
dilutive common shares had been issued.
12
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, Continued
Management Estimates
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.
Reclassification
Certain reclassifications have been made to the 1998 financial statements
in order to conform to the 1999 financial statement presentation.
3. Property and Equipment
Property and equipment at December 31, 1999 and 1998 consist of the
following:
1999 1998
-------- --------
Computers $ 12,896 $ 3,804
Less: accumulated depreciation (2,224) (370)
-------- --------
Total property and equipment, net $ 10,672 $ 3,434
======== ========
Depreciation expense for the years ended December 31, 1999 and 1998 were
$2,546 and $370, respectively.
13
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
4. Income Taxes
At December 31, 1999 and 1998, the components of the provision for income
taxes are as follows:
1999 1998
-------- --------
Current tax expense:
Federal -- --
State -- --
-------- --------
-- --
-------- --------
Deferred tax expense:
Federal -- --
State -- --
-------- --------
-- --
-------- --------
Total provision -- --
======== ========
Significant components of the Company's deferred income tax assets and
liabilities at December 31, 1999 and 1998 are as follows:
1999 1998
--------- ---------
Deferred income tax asset:
Capitalized expenses $ 719,707 $ 399,012
Tax credits 48,684 15,716
--------- ---------
Total deferred income tax asset 768,391 414,728
Valuation allowance (768,391) (414,728)
--------- ---------
Net deferred income tax liability -- --
========= =========
The Company, based upon its history of losses during its development stage
and management's assessment of when operations are anticipated to generate
taxable income, has concluded that it is more likely than not that none of
the net deferred income tax assets will be realized through future taxable
earnings and has established a valuation allowance for them.
14
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
4. Income Taxes, Continued
Reconciliation of the effective income tax rate to the U.S. statutory rate
is as follows:
1999 1998
------ ------
Tax expense at the U.S. statutory income tax rate 34.0% 34.0%
Increase in the valuation allowance (36.2) (34.2)
Other 2.2 (0.2)
------ ------
Effective income tax rate -- (0.4)%
====== ======
As of December 31, 1999, the Company has a federal research and
experimentation credit carryover of $48,684. The credits will begin to
expire in 2011.
5. Related Party Transactions
Licensing Agreement
In 1996 the Company entered into a licensing agreement with an individual
who is an officer and major shareholder whereby the Company received the
exclusive right to develop, manufacture, and market an allergy detection,
non-invasive, medical device (Electronic Allergo-Sensitivity Test Device,
U.S. Patent No. 5413113). The Company issued 3,200,000 shares of Company
common stock with a value of $800. The licensing agreement does not require
any royalty payments. The licensing agreement is for a term of five years,
with the Company holding options to extend the agreement for two additional
five-year terms at no additional cost.
Vehicle Acquisition
In 1999 the Company paid $11,000 to an officer and major shareholder for
rental and purchase of a vehicle. Of the amount paid, $2,700 represented
automobile rental and $8,300 represented the purchase price. The automobile
was used for business purposes and subsequently sold to an independent
party for $5,000. The Company recognized a $2,608 loss from the sale of the
asset.
15
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
5. Related Party Transactions, Continued
Housing Expenses
In 1999, an officer was provided housing in a residence owned by a
different officer who is a major shareholder. The Company paid $15,000 for
the housing and the cost was included in lessee officer's compensation.
6. Commitments and Contingencies
Patent Technology
In 1996, the Company entered into a technology licensing agreement that
provided for its use of certain intellectual property described by a United
States patent. Since obtaining the license rights, the Company has expended
significant research and development efforts in conjunction with the
intellectual property that has resulted in significant modifications and
enhancements. The Company's efforts to date, plus its anticipated efforts
in the future, raise doubt that the final technology involved in the
medical device will be protected by the original patent.
Stock Options Dispute
A dispute between the Company and a former director exists relating to
options to purchase common stock granted by Elast Delaware, prior to its
merger with the Company. The former director claims the 100,000 options
granted to him by Elast Delaware are options to purchase shares of the
Company. The Company has reviewed this matter and the relevant
documentation and believes the former director's claim is without merit,
and plans to vigorously defend itself in the event legal action is
commenced.
Employment Taxes
The Company, in its fiduciary capacity as an employer, has the primary
responsibility for deducting and remitting both the employer and employee
portions of payroll related taxes to the appropriate governmental agencies.
Since inception, the Company paid $548,419 in compensation to three of its
officers upon which taxes were not withheld from these employees nor
remitted to the appropriate governmental authorities. If, as a result of
not withholding employment taxes, the employees incur an income tax
liability that ultimately
16
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
6. Commitments and Contingencies, Continued
Employment Taxes, Continued
results in a deficiency, the Company becomes contingently responsible, if
the employees cannot or do not satisfy that liability. Since inception, the
Company is contingently liable for these taxes, penalties, and interest,
which approximate $207,000. The employer portion of the payroll related
taxes has been recorded as a liability by the Company.
Termination Dispute
A dispute exists between the Company and another former officer and
director of the Company. In December 1999, this former officer and director
was removed from the Board of Directors and terminated as an officer. The
Company anticipates legal action may result from this matter. The Company
intends to vigorously oppose any such action. The Company is engaged in
discussions with this individual and may consider settlement of this matter
provided the terms of such settlement are reasonable and in the best
interests of the Company. However, an estimate of any settlement or amount
of loss, if any, from an unfavorable outcome from litigation cannot be made
at this time.
Operating Leases
The Company leases an automobile under an operating lease with a fixed term
through June 2002. Future minimum lease payments at December 31, 1999 are
as follows:
2000 $ 8,396
2001 8,396
2002 4,198
-------
Total minimum lease payments $20,990
=======
7. Stock Based Compensation
During 1999, the Company's Board of Directors granted options to purchase
150,000 shares of the Company's common stock to two members of the Board of
Directors. The options
17
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
7. Stock Based Compensation, Continued
were issued with an exercise price of $1.50 with 100,000 expiring in March
2003 and 50,000 expiring in July 2002. As the directors are employees of
the Company, the options were accounted for under APB No. 25. The exercise
price of the options equaled or exceeded the fair value of the Company's
common stock at the date of grant. Consequently, no compensation expense
was recognized in connection with the issuance of these options.
On February 13, 1998, the Board of Directors of Elast Delaware granted
100,000 options to purchase common stock to each of the three members of
the Board of Directors of Elast Delaware in recognition of their service to
it. The 300,000 options have a three year term are exercisable at $2.00 per
share. Two of the Directors were employees of Elast Delaware, and their
options were accounted for under APB No. 25. The options were granted at
prices which equaled or exceeded the fair value of Elast Delaware's common
stock at the date of grant. Consequently, no compensation expense was
recognized in connection with the issuance of these 200,000 options. The
100,000 options issued to the nonemployee director were valued in
accordance with the provision of SFAS No. 123 and determined to have no
value, therefore no compensation expense was recognized.
The following summarizes information about stock options of the Company
granted and outstanding at December 31, 1999 and 1998, and changes during
the years then ended:
<TABLE>
<CAPTION>
1999 1998
---------------------- ---------------------
Exercise Exercise
Options Price Options Price
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year -- -- -- --
Granted 150,000 $1.50 -- --
Exercised -- -- -- --
Forfeited -- -- -- --
------- ----- ----- -----
Outstanding at end of year 150,000 $1.50 -- --
======= ===== ===== =====
</TABLE>
18
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
7. Stock Based Compensation, Continued
The following summarizes information about the stock options of Elast
Delaware granted and outstanding at December 31, 1999 and 1998, and changes
during the years then ended:
<TABLE>
<CAPTION>
1999 1998
------------------------ ------------------------
Exercise Exercise
Options Price Options Price
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year 300,000 $ 2.00 -- --
Granted -- -- 300,000 $ 2.00
Exercised -- -- -- --
Forfeited -- -- -- --
------- ------- ------- -------
Outstanding at end of year 300,000 $ 2.00 300,000 $ 2.00
======= ======= ======= =======
</TABLE>
The Company continues to account for stock-based compensation to employees
using the intrinsic value method as prescribed in APB No. 25 under which no
compensation cost for options is recognized for options granted at or above
fair market value of the Company's common stock at the date of grant. Had
the compensation expense for options awards been determined based upon fair
values at the grant dates in accordance with SFAS No. 123, the Company's
pro forma net loss and net loss per share for the year ended December 31,
1999 would have been the amount indicated in the following schedule. There
was no effect on the Company's pro forma net loss and net loss per share
for the year ended December 31, 1998.
The Black-Scholes Option Pricing Model was developed for use in estimating
the fair value of traded options. The Company's employee stock options have
characteristics significantly different from those of traded options, such
as vesting restriction and extremely limited transferability. In addition,
the assumptions used in option valuation models are highly subjective,
particularly the expected stock price volatility of the underlying stock.
Because changes in these subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not provide a reliable single measure of the fair value of its employee
stock options.
19
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
7. Stock Based Compensation, Continued
The pro forma effect on net loss for the year ended December 31, 1999 may
not be representative of the actual results had the Company accounted for
the stock options using the fair value method.
Net loss, as reported $ (976,928)
Pro forma net loss $ (1,134,928)
Basic loss per share $ (0.13)
Pro forma net loss per share $ (0.15)
For purposes of the above pro forma calculation, the fair value of options
granted in 1999 and 1998 is estimated using the BSOPM with the weighted
average assumptions listed below.
1999 1998
-------- --------
Risk-free interest rate 4.850% 5.000%
Expected stock dividend yield -- --
Expected stock price volatility 0.834 0.834 --
Expected life in years 1.000 3.000
Summary information about the Company's options outstanding at October 31,
1999:
<TABLE>
<CAPTION>
The Subsidiary
Company (Elast Delaware)
------- ----------------
<S> <C> <C>
Exercise price $ 1.50 $ 2.00
Options outstanding, December 31, 1999 150,000 300,000
Weighted average remaining contractual life 1.1 years 1.1 years
Weighted average exercise price $ 1.50 $ 2.00
Options exercisable, December 31, 1999 150,000 300,000
Weighted average exercise price $ 1.50 $ 2.00
</TABLE>
20
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
8. Stock Purchase Warrants
The Company's private placement offering of stock in 1999 was accomplished
with the sale of 500,000 units comprised of one share of common stock and
one stock purchase warrants The stock purchase warrants were immediately
exercisable upon issuance. The stock purchase warrants provide for an
exercise price of $2.40 and expire in July 2004. To date, none of the stock
purchase warrants have been exercised.
At December 31, 1999 and 1998, the Company had outstanding warrants to
purchase 500,000 and 40,032 shares of the Company's common stock, at prices
of $2.40 and $.38 per share, respectively. Warrants to purchase 40,032
shares expired on September 30, 1999. At December 31, 1999 and 1998,
500,000 and 40,032 shares of common stock, respectively, were reserved for
this purpose.
9. Loss Per Common Share
In the year ended December 31, 1997, the Company adopted SFAS No. 128,
Earnings per Share. Loss per common share has been calculated in accordance
with this statement.
Basic and diluted loss per common share have been computed by dividing the
loss available to common shareholders by the weighted-average number of
common shares for the period.
The computations of basic and diluted loss per common share for the years
ended December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Period from
For the For the June 12, 1996
Year Ended Year Ended (Inception) to
December 31, 1999 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net loss available to common stockholders $ (976,928) $ (1,102,374) $ (2,185,333)
Weighted-average shares, basic and diluted 7,711,880 5,798,194 5,446,490
--------------- --------------- ---------------
Loss per common share, basic and diluted $ (0.13) $ (0.19) $ (0.40)
=============== =============== ===============
</TABLE>
21
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
9. Loss Per Common Share, Continued
The effect of the potentially dilutive securities listed below was not
included in the computation of diluted loss per share because to do so
would have been antidilutive for the periods presented.
<TABLE>
<CAPTION>
Period from
For the For the June 12, 1996
Year Ended Year Ended (Inception) to
December 31, 1999 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Shares of common stock issuable under:
Stock options of the Company 150,000 -- 150,000
Stock options of consolidated subsidiary 300,000 300,000 300,000
Stock purchase warrants of the Company 500,000 40,032 500,000
------- ------- -------
950,000 340,032 950,000
======= ======= =======
</TABLE>
10. Stock Transactions
Shares Issued to Acquire a License Agreement
In 1996, the Company issued 3,200,000 shares of its stock for $800 to
obtain a licensing agreement from an individual, who is an officer of the
Company (Note 5).
Shares Issued for Services
In 1996, the Company issued 21,332 shares for legal services related to
corporate formation and preparation of the Company's private placement
memorandum. The shares of Company stock were issued for legal services
valued at $6,719. In 1998 the Company issued 270,000 shares for consulting
and engineering services and employee compensation as follows:
Consultants were issued 115,000 shares as additional recognition of
their services to the Company. The shares were valued at their fair
value at the time of issuance, $1.50 per share.
22
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
10. Stock Transactions, Continued
Shares Issued for Services, Continued
An outside engineer was issued 55,000 shares as additional recognition
of his services to the Company. The shares were valued at fair value
at the date of their issuance, $1.54 per share.
An officer and major shareholder was issued 100,000 shares as
additional recognition of his continuing efforts related to the
development of the technology. The shares were valued at their fair
value at the date of issuance, $1.50 per share.
In 1999 the Company issued 76,133 shares for consulting and research and
development services as follows:
Consultants were issued 26,133 shares as additional recognition of
their services to the Company. The shares were valued at their fair
value at the time of issuance, $1.54 per share.
Research and development engineers were issued 50,000 shares as
additional recognition of their services to the Company. The shares
were valued at fair value at the time of issuance, $1.48 per share.
Private Placement Offerings
In 1996, the Company, in a private placement offering, sold 546,672 units
consisting of one share of common stock and one stock purchase warrant (the
"warrants") at an exercise price of $0.38 per share. The warrants were
redeemable at $0.38 per warrant immediately upon issuance, and expired on
September 30, 1999.
In 1998, the Company, in a private placement offering, sold 394,000 shares
of common stock at $0.50 per share.
23
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
10. Stock Transactions, Continued
Private Placement Offerings, Continued
In 1999, the Company, in a private placement offering, sold 500,000 units
at $1.00 per unit consisting of one share of common stock and one stock
purchase warrant ("warrants") at an exercise price of $2.40 per share. The
warrants are exercisable immediately and they will expire in July 2004. The
proceeds of from the sale of the units were allocated between the common
stock and warrants based on their relative market values.
In 1999, the Company, in a private placement offering, sold 205,900 shares
of common stock at $1.50 per share.
Common Shares Issued for Warrants Exercised
During 1997, 506,640 warrants were exercised resulting in the issuance of
506,640 shares of common stock.
Shares Issued for Raising Capital
In 1998, the Company issued 1,007,472 shares of stock for consulting
services related to the acquisition of Med Mark, Inc. (a reverse merger).
One of the individuals who received 200,000 shares for the
acquisition-related consulting services is an officer of the Company. The
shares were valued at $0.38 per share.
Acquisition of Med Mark, Inc. (Reverse Merger)
On June 10, 1998, the Company acquired all of the outstanding common stock
of Elast Delaware in a business combination accounted for as a purchase.
For accounting purposes, the acquisition has been treated as the
acquisition of the Company by Elast Delaware with Elast Delaware as the
acquiror (reverse acquisition). The effective purchase price was 1,220,000
shares of the Company's common stock. The Company, formerly known as Med
Mark, had no operations as of the acquisition date. No goodwill has been
recorded as a result of this transaction. As this transaction is treated as
a reverse merger acquisition, the historical financial statements prior to
June 10, 1998 are those of Elast Delaware.
24
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
10. Stock Transactions, Continued
Stock Issued to Correct a Stock Issuance Error
In 1998, the Company issued 13,332 shares to correct an error on a previous
stock issuance.
11. Management's Plan, (Unaudited)
The Company is presently continuing research and development activities
relating to a non-invasive, patented allergy-testing device (the "device"),
which the Company owns the rights to develop, test, manufacture and market.
To further advance the research and development of the device, and to
validate the scientific principle of bio-voltage measurement, an extensive
period of testing will commence in conjunction with the University of
California at San Diego.
Once the initial testing of the device is completed, the Company intends to
have approximately 10 units of the device manufactured, which will be
provided to a selected group of physicians and scientists. The operating
plan is to develop the device on a stand-alone basis, which is
user-friendly and fully self-contained. Once the device gains acceptance in
the medical community, the Company anticipates that a patient home-testing
unit may be developed.
The Company plans to negotiate and enter into marketing agreements with
appropriate distributors and marketing agents. In addition, it may acquire
the right to sell or distribute existing products, or obtain licensing,
marketing, distribution or other rights to compatible products. However,
other than costs related to the continued development of the device, the
Company does no anticipate significant expenditures on acquisition or
development of other products during the next year. The Company will focus
its initial marketing and distribution efforts on development and
commercial exploitation of the device. The present plan is to lease or
license the device to minimize costs and create an informed and updated
client base.
It may be necessary to raise additional funds to complete prototype
development and limited clinical trials of the device. However, if the
device performs as anticipated, the Company's management believes that they
will be able to raise the funds necessary to begin production of the
devices for clinical trials and the Food and Drug Administration approval
process by the sale of the Company's capital stock, debt, and/or licensing
certain proprietary rights.
25
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- --------------------------------------------------------------------------------
11. Management's Plan, (Unaudited), Continued
Should the development of the prototype or clinical testing of the
prototype take more time than anticipated, or if the results of testing
require significant modifications to the device, sufficient funds may not
be available to enable the device to be completed and brought to market.
12. Subsequent Events (Unaudited)
Subsequent to year end, the Company initiated a public offering of
1,000,000 shares of its common stock on a best efforts basis. As of
February 25, 2000, the Company believes that approximately 575,000 shares
had been sold and that approximately $850,000 had been raised from this
offering.
26
23.1 CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Annual Report of Form 10-KSB of our report
dated March 1, 2000, on our audits of the financial statements and financial
statements schedules of Elast Technologies, Inc.
/s/
- ------------------------------
Kelly & Company
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-1-1999 JAN-1-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 205,715 226,818
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 205,715 226,818
<PP&E> 12,896 3,804
<DEPRECIATION> (2,224) (370)
<TOTAL-ASSETS> 216,627 230,652
<CURRENT-LIABILITIES> 53,511 12,992
<BONDS> 0 0
0 0
0 0
<COMMON> 7,961 7,179
<OTHER-SE> 155,155 210,481
<TOTAL-LIABILITY-AND-EQUITY> 216,627 230,652
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 987,157 1,115,940
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 10,229 (13,566)
<INCOME-PRETAX> (976,928) (1,102,374)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (976,928) (1,102,374)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (976,928) (1,102,374)
<EPS-BASIC> (.13) (.19)
<EPS-DILUTED> (.13) (.19)
</TABLE>
