U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 33-33662
Molecular Diagnostics & Therapeutics, Inc.
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(Name of small business issuer in its charter)
Colorado 84-1191749
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1880 Industrial Circle, Suite B-3, Longmont, CO 80501
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (303) 485-8500
Securities registration under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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None N/A
Securities registered under Section 12(g) of the Exchange Act:
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(Title of class)
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(Title of class)
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes No x
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not 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-
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. N/A
Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 9,068,123
Transitional Small Business Disclosure Format (check one):
Yes No x
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PART I
Item 1. Description of Business.
General
Over the past three years our efforts have been focused upon
organizational activities, development of a business plan, development of plans
for our permanent facility and final development of plans for our cyclotron and
its components that will provide a higher beam current and multiple beam lines.
We have entered into a contract to purchase land for our permanent facility,
developed a web-site, obtained funding from successful offerings A through I
shares of preferred stock (all of which shares have been converted to common
stock) and are preparing the radioactive materials and establishment license
applications and Investigational New Drug/New Drug Applications for certain
proposed radiopharmaceutical products, for filing with the Colorado Department
of Public Health and Environment--State Laboratory and Radiation Services
Division and the Food And Drug Administration. In addition to preparing these
applications, Mr. Malcolm H. Benedict, our CEO, has developed a technetium-99m
generator system, which he believes to be technologically feasible and
patentable, for the purpose of automating the radiochemical and
radiopharmaceutical manufacturing process using robotics technology.
We plan to manufacture, market and distribute a range of
radiopharmaceuticals and radiochemicals to the nuclear medicine industry, an
endeavor that represents the merger of medicine and biology. We will employ new
machines and techniques in a proprietary approach that gives superior quality
products while sharply lowering costs. Radiopharmaceuticals and radiochemicals
are used to identify and label radioactive elements in medical diagnostics,
biological research and commercial applications. According to the Institute of
Medicine, while the production methods of radiopharmaceuticals are antiquated,
the nuclear medicine industry is growing substantially with an estimated $7 to
$10 billion dollars spent annually in the United States alone, thirteen percent
(13%) of which represents radiopharmaceuticals (Isotopes for Medicine and Life
Sciences, National Academy Press: 1995). We will employ an Internet site for our
marketing applications and to serve as one of the portals for all levels of
users.
Our Approach
Nuclear medicine is the field that administers radioactive drugs to
patients for the diagnosis of diseases such as heart disease and cancer. When
these radiopharmaceuticals are given to a patient, they are taken up within the
body according to their physical and chemical properties. These individual
radiopharmaceuticals are chosen based on their attraction for particular body
organs or other sites of clinical concern. Radiopharmaceuticals are different
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from standard pharmaceuticals since they are not intended to change the body's
normal biological functions. Radioactive elements behave chemically and
pharmacologically in a manner similar to their non-radioactive counterparts. We
intend to acquire several unique and powerful new cyclotrons that will provide
us with the capability to make less expensive and purer radioactive elements
than the competition. We will combine our manufacturing approach with a
computerized robotic system that:
o Reduces manufacturing labor costs;
o Enables a 24-hour production and quality control cycle;
o Reduces staff exposure to radiation;
o Eliminates expensive, repetitive errors;
o Guarantees consistent quality with every batch of
radiochemicals and radiopharmaceuticals; and;
o Permits local delivery with lower inventory and wastage.
Our system will replace older lower amperage, single beam instruments
using manual procedures that have produced poorer quality and higher costs than
our proposed system. We believe that:
o Our technology and process will change the production methods
for radiopharmaceuticals;
o We have sharply superior technology compared to existing
manufacturers;
o We can manufacture with high gross margins;
o Our products will improve the quality of healthcare.
We are prepared to file the necessary applications required for
licensing and/or regulatory approval, upon opening our temporary facility, with
the Colorado Department of Public Health and Environment--State Laboratory and
Radiation Services Division, for the handling of radioactive materials and, upon
opening our permanent facility, with the Food and Drug Administration for the
operation of a nuclear medicine laboratory and for the production of iodine
radiopharmaceutical products. Under an agreement between the State of Colorado
and the Nuclear Regulatory Commission, approval of our application by the State
will provide us with all necessary approval by the Nuclear Regulatory
Commission.
Business Strategy
The acquisition of our powerful cyclotron, designed by our CEO and
manufactured by EBCO Technologies, Inc., will provide us with the most powerful
radioactive element production cyclotron of its kind. This instrument is capable
of providing higher beam current and multiple (5) beam lines. Increasing the
beam current focuses higher energy that then produces higher purity radioactive
elements with greater commercial yields. Multiple beam lines increase the number
of radioactive elements produced at a given time.
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Construction and licensing of our facility and installation of our
first cyclotron will enable us to begin producing, subject to regulatory
approval, our first two radiochemical and radiopharmaceutical products, sodium
iodide 123 solutions and capsules and fluorine 18 FDG. At the same time we will
acquire and install a PET camera and establish our diagnostic imaging center to
serve the Rocky Mountain region. We will also produce technetium-99m generators.
Technetium-99m is used in certain diagnostic procedures such as brain liver,
lung or kidney scans.
The radioactive drug producing equipment, coupled with computerized
robotics, provide a fully automated and integrated system for the manufacture of
radioactive drugs. Computerized robotic manufacturing provides numerous
advantages to the system for the production by generating higher purity, higher
yield, and cost-effective radioactive drugs. Our system replaces instruments
using manual procedures for the production of radiopharmaceuticals. These
antiquated instruments, coupled with outdated procedures, produce poor and
inconsistent quality, low yield, and higher cost radiopharmaceuticals.
We will manufacture eight of the 34 radiochemicals and
radiopharmaceuticals (listed below) in our Nuclear Regulatory Commission
application. New drugs in research pipelines promise to accelerate applications
even more, and we expect to be in a significant position to supply increased
demand.
o Sodium Iodide-123 solution for thyroid studies
o Fluorine-18 FDG (Fluor-Deoxy-Glucose) used to test metabolic
function for PET (Positron Emission Tomography)
o Carbon-11 used to detect brain tumors
o Nitrogen-13 used for cardiac blood flow studies
o Oxygen-15 used in studying blood flow
o Palladium-103 primarily used as a therapeutic for treating
prostate cancer
o Gallium-67 used as therapeutic for skin cancer
o Technetium-99m (Sodium Pertechnetate) solution for diagnostic
procedures
We will employ an in-house direct mail and telephone strategy. We will
market and drop-ship directly to diagnostic centers and university hospitals. We
also have incorporated an aggressive approach to use of the internet in concert
with traditional forms of communication in our industry.
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Market Analysis
Overview
While radioactive elements are essential in medicine, these elements
also find wide parallel uses in research in chemistry, physics and geosciences
with additional needs existing in the commercial sector. The U.S. Department of
Energy (DOE) and its predecessors, the Atomic Energy Commission and the Energy
Research and Development Agency, have supported the development and application
of these elements in a technology transfer. One of every three hospitalized
patients in the United States undergoes a nuclear medicine procedure. More than
36,000 diagnostic medical procedures that employ radioactive elements are
performed daily in the United States and close to 100 million laboratory tests
that use radioactive materials are performed each year. Radiopharmaceuticals are
also used to deliver radiation therapy to a growing number of patients each year
(approximately 180,000 in 1998). (Source: National Academy Press, Division of
Health Sciences Policy).
Current Nuclear Medicine Industry Status
The nuclear medicine industry is governed by dated New Drug
Applications and Drug Master Files which, in order to change, would require the
following:
*Designing new technologies for manufacturing;
*Developing new chemistries within some of these drugs;
*Developing new processing and operational procedures.
*Developing prototypes for each area;
*Streamlining distribution centers (nuclear pharmacies); and
*Revising Drug Master Files to reflect all new technologies and
operational procedures.
In order for the nuclear medicine industry to make the above changes,
they must continue to operate their old manufacturing facility according to
their existing New Drug Applications until a supplemental application for each
new drug product is submitted and approved. This could significantly increase
the products' cost since the estimated cost for a New Drug Application
(Supplemental Application) may exceed $1 million per drug application. The
effect of these changes are delays in availability for 9 months for minor
changes and 4 years for major changes, provided a completely new New Drug
Application is not demanded by the Food and Drug Administration. For these
reasons, not many companies would attempt a supplemental application. A change
in the Current Good Manufacturing Practices (cGMP's) requires intensive
capitalization to deliver quality diagnostic medicine.
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The Nuclear Medicine Market
Nuclear medicine today in the United States is a multi-billion dollar
industry. One of every three hospitalized patients in the United States
undergoes a nuclear medicine procedure. Since 1994, the nuclear medicine
industry exceeded the growth rates of the general medical community. The market
has been estimated to have grown to $7 to $10 billion (Isotopes for Medicine and
the Life Sciences, National Academy Press; 1995). There are in excess of
110,000,000 target organ procedures that will be performed annually using
nuclear medicine throughout the United States (Isotopes for Medicine and the
Life Sciences). The growth of nuclear medicine is due to new methods of
diagnostic procedures. The increase in the average age of the general population
ensures that nuclear medicine will continue to play an expanded role in medical
diagnosis.
The radiopharmaceuticals of tomorrow depend on the investigation of
radioactive drugs and therapeutic drugs of today. The vast potential of
molecular nuclear medicine may not be realized with current limitations in the
supply of research radioactive elements. We believe with lower cost, higher
quality and effective distribution, the potential market is much greater than
presently exists.
Within the industry, three major markets co-exist: the commercial
market, the medical market and the research market. Our product lines will cross
over into each of these special markets. The demand for different product lines,
however, will vary in each market. The commercial market consists of those
companies producing sealed sources or who produce commercial technetium-99m
generators distributed directly or indirectly to the medical market. The
research market is widespread and diverse throughout the United States. It
includes universities as well as private research facilities. The government
research activities are also included in this segment.
The medical market is the largest of these broad segments. It includes
all the nuclear medicine facilities in hospitals and clinics throughout the
country. These facilities provide both diagnostic and treatment programs. Over
8,000 physicians practice nuclear medicine in the U.S. The radiopharmaceutical
wholesale market accelerated rapidly due to the introduction of Thallium-201 and
the general growth of nuclear procedures. Thallium-201 sales increased because
of increased utilization of examinations of the heart by means of nuclear
medicine. Iodine-123 sales also increased dramatically to $14.7 million due to
the increase in the renal studies being done and sales of other products, such
as, indium oxide for blood cell labeling (according to the Society of Nuclear
Medicine).
As we try to estimate the future, it appears that most of the increase
in dollar volume will be in new product areas. The largest potential will be
derived from the introduction of our new, improved technetium-99m generators.
Thus, coupled with increased use of PET scans (diagnostic images) using
Fluorine-18 FDG in new product applications, this additional dollar volume
should result in an increased market for radiopharmaceuticals. Within each
market segment, the customer base is varied. Physicians and hospitals comprise
the principal customer base in the medical division. Universities, research
scientists and government facilities constitute the base in the research
division, with commercial manufacturers and distributors in the commercial
division. In each section the customer base and the direct purchasers of our
products have been identified. Specific marketing and sales programs have been
developed to serve every customer base within each section.
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We estimate the current market of products and categories as follows:
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Wholesale market (radiochemicals) $ 950,400,000
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Research market $1,607,555,000
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Retail market $8,553,600,000
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Therapy $ 110,000,000
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Sales and Distribution
We will capitalize on the expertise of Malcolm Benedict and Donald
Ludwig Ph.D., for the distribution of our products. Mr. Benedict and Dr. Ludwig
have many contacts throughout the nuclear medicine community. We expect to use
an established distribution program, plus an in-house direct mail and telephone
campaign. We will market and drop-ship directly to physicians, universities,
diagnostic centers, nuclear pharmacies and hospitals. Mr. Benedict has also
taken the required steps to ship product. Our shipping requirements will be in
compliance with all the regulatory agencies.
Technology, Production and Products
Overview
Developments in therapeutic and diagnostic drugs have historically come
from the need to improve treatment regimens and provide more accurate diagnoses.
Specifically, improvements in radiopharmaceutical diagnostic drugs are required
to provide a clearer picture of the affected organ system to prevent
misdiagnosis. Diagnostic procedures that can provide more accurate diagnoses,
significantly reduce costs to the entire health care system: the patient, the
hospital, third party payors and the employer.
Technology
Our technology focuses on an integrated system that can produce high
quality, cost effective radiopharmaceuticals. Our technology includes
instruments for the production of radio chemicals with computerized robotics for
the manufacture of these radiochemicals.
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Cyclotron. A cyclotron is an instrument used by physicists to
accelerate elementary particles to energies effective in causing chemical,
atomic, sub-atomic and nuclear reactions to occur. Historically, the cyclotron
was a large, heavy and expensive piece of equipment. Newer systems are medium
weight, efficient, automated and cost effective. Cyclotrons accelerate charged
particles in a circular pathway through accelerating gaps. The internal parts of
the cyclotron that accomplish this process are in the shape of the letter "D"
and are referred to as Dees. A charged particle, such as the proton, is
accelerated from one dee to the next dee by the means of a voltage increase
across the face of the dees. As the proton passes from one dee to the next dee,
its velocity or momentum increases. At a certain specific energy the protons,
which form the beam, are directed from the cyclotron to the target producing
radioactive products of interest. All radiopharmaceutical substances produced by
these methods are produced at specified energy levels in order to maximize
production and minimize impurities that reduce the product's safety and
efficacy. The cyclotron accomplishes the same function by directing the particle
beam through a series of accelerating nodes that are arranged in a spiral.
The production process for cyclotron produced radioactive elements is
similar to that associated with certain aspects of nuclear reactors in that
special stable material targets have to be prepared. Targets are bombarded by
the cyclotron using charged particles, which are appropriate for the particular
nuclear reaction. This is followed by a chemical separation process to prepare
the desired form of the radiochemical. However, there is a tremendous shortage
of cyclotron produced radiochemicals for domestic use. The Journal of Nuclear
Medicine, Vol. 34, Number 6, June 1993 stated, "that the Department of Energy
(DOE) indicates that the department recognizes that this is a very serious issue
and the department is making every effort that it can".
We believe that the cyclotron will be the primary production unit for
the next 10 to 25 years. Linear accelerators are machines for the future as
nuclear medicine expands. We believe the cyclotron, however, will not outgrow
its usefulness for producing radioactive elements at a low cost. Linear
accelerators are in the experimental state and have not been proven for
commercial production. The linear accelerator and cyclotron are both based on
the technology of accelerating charged particles to very high velocities, and
therefore high energies. The particle beam is then directed into "targets"
consisting of stable atoms. The high energies of the particles cause the
non-radioactive target material to become radioactive through nuclear changes.
Cyclotrons have the advantage of smaller size and may operate in a much smaller
space, thus being more advantageous to nuclear medicine industry applications.
We believe that cyclotrons also are less expensive to operate than linear
accelerators and therefore are more ideal for small to large volume operations.
Cyclotrons are being used in industrial applications as well as other various
uses such as cancer therapy, explosive and incendiary detection, nondestructive
materials testing and mineral content determination and analysis. These areas
are also very profitable and are continuing to expand.
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The acquisition of several powerful cyclotrons from EBCO Technologies,
Inc. will provide us with the most powerful radioactive element production
cyclotron of its kind. This instrument is capable of providing higher beam
current and multiple (5) beam lines. Increasing the beam current produces higher
energy targets that generate higher purity radio active atoms with greater
production yields. Multiple beam lines increase the number of radioactive atoms
produced at a given time. We believe that no other company has this technology
available to them at this time.
Technetium-99m Generator. The use of radiopharmaceutical products
called technetium-99m generators is advantageous because these products show the
function of major body organs. Technetium-99m is used because it provides good
resolution and efficiency with the nuclear medicine camera. The producers of
these generators replace the customer's product on a weekly and bi-weekly basis.
The capacity of the generator is selected so that it provides sufficient output
for one to two weeks. The larger users, such as the nuclear pharmacies, may
order one or more generators per week. E.I. du Pont deNemours and Company,
Amersham Pharmacia Biotech Ltd. and Mallinckrodt Inc. now produce generators for
the United States market. These companies produce generators in the 1 to 15
Curie range. Our generators will be in the 100 to 1,600 Curie range. We believe
that this is substantially higher in quality and quantity than anything
available in the market.
Our strategy will be to challenge this market by introducing a
permanent, proprietary rechargeable generator invented by our founder, Malcolm
H. Benedict. We believe such a generator will offer a purer and more
cost-effective product. These generators will also provide handling advantages
(such as reducing radiation exposure) over the industry's existing disposable
units. The new technetium-99m generators will be placed in nuclear pharmacies or
clinics in major metropolitan areas throughout the country. The role of these
entities will be to supply the product to hospitals and clinics, thus
eliminating the need for such facilities to own and operate their own
generators. We believe the instant availability of massive quantities of a purer
technetium-99m, through a local distribution network will offer an advantage to
the physicians and this will also represent a substantial cost savings to the
hospital and the patient. We believe that the greater availability of the drug
can also be expected to increase the use of radiopharmaceuticals, which will
increase our market share and sales volume.
Development and Manufacturing of Radioactive Elements
Radioactive elements are produced either in a nuclear reactor or
particle accelerator (one of two kinds of cyclotron). After target elements are
bombarded by a particle beam from a cyclotron or linear accelerator, the
resultant radioactive elements are processed into radiochemicals in specially
designed facilities. These radiochemicals are then processed into
radiopharmaceuticals for distribution and use in nuclear medicine laboratories
and clinics.
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Radiopharmaceuticals are used in extremely small quantities to make the
drugs safe and effective for human use. The radiopharmaceuticals on the market
today are safe in that they reduce radiation exposure to the patient; however,
we believe that they could be greatly improved. Radiopharmaceuticals are
prepared in various forms, such as capsule, sterile solutions and single or
multiple dose vials for injection into the body. Most of the available
radiopharmaceuticals are used in the form provided by the manufacturer.
Technetium-99m can be utilized in combination with various other compounds or it
can be used in its more basic form, as technetium-99m, for brain and thyroid
scanning.
In order to develop radiopharmaceuticals, it is necessary:
* to establish a chemical similar to a body substance, which can be
represented by a specific radiopharmaceutical, that will demonstrate
dynamic function of an organ or gland.
* to determine the amount of time it takes to reach the organ or target
of interest in the body and to determine the effect on surrounding body
regions which might blur and confuse the evidence of the diagnosis. The
objective is to maximize the scan and make sure it does not compromise
the other qualities sought.
* for the radioactive material to have the minimum or lowest possible
physical useful life consistent with the practicality of the time
required for shipment. Generally, the shorter the useful life of the
radiopharmaceutical, the safer the drug is to administer to the
patient. Therefore, more diagnostic information can be recorded from
the patient in a shorter time period. The shorter useful life of the
radiopharmaceutical diminishes radiation exposure to the patient by
reducing the time that the body is exposed to the radioactive form of
the material. The object is to minimize the radiation dose to the
patient while getting a moving picture of the organ of interest.
In addition, radiopharmaceuticals used in conjunction with
complementary procedures can assist in the diagnosis and tracking of a disease.
For example, the combination of two radiopharmaceuticals, "technetium-99m" and
"xenon 133" can be used to study lung perfusion. Lung perfusion demonstrates the
flow of blood through the lungs whereby the xenon 133 gas inhalation
demonstrates the viability of the air passages in the lung. This provides a very
accurate assessment of the function of the patient's lungs.
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We plan to manufacture the following radiochemical and
radiopharmaceutical products in the first year following the opening of our
permanent facility:
Sodium Iodine-123. Iodine is an essential element in the normal diet
and is extracted by the thyroid gland and converted into thyroxin and other
thyroid hormones. Sodium Iodine-123 has been used by physicians in order to
discriminate between the many types of thyroid dysfunction and disease. Sodium
Iodine-123 radiopharmaceutical has ideal chemical properties for studies of the
thyroid. Furthermore, many drugs and metabolically active compounds can be
labeled by the inclusion of sodium iodine-123 without loss of biochemical
activity. For example, sodium iodine-123 labeled amphetamines are used to
determine the regional cerebral blood flow in patients who have suffered, for
example, a stroke. The New York State research foundation was responsible for
the research and origin of Sodium Iodine-123 HIPDM. Our founder, Malcolm
Benedict, was responsible for the development and commercialization of Sodium
Iodine-123 HIPDM into a finished radiopharmaceutical. This product is also used
for strokes, Alzheimer's disease, epilepsy and brain imaging. Due to its low
toxicity, it is equally well tolerated by adults and children.
PET Products. These products, which are listed below, are produced
entirely by cyclotrons and must be processed as radiochemicals, formulated into
radiopharmaceuticals and administered to patients within a very short time.
These products have been generally produced in a research hospital environment
and are now used on site on a commercial basis.
o Fluorine-18 (FDG) has a useful life of 110 minutes and is a
radiochemical that can be incorporated into organic chemicals
and used as a radiopharmaceutical. It is also used to produce
other products for specific purposes that can be used for
examination of many different organs.
o Carbon-11 has a 20-minute useful life and can be incorporated
in many organic compounds to replace non-radioactive
Carbon-12. Sometimes, physicians prefer to use Carbon-11
Methionine in the detection of disease with brain tumors that
cannot be detected with Fluorine-18 (FDG).
o Nitrogen-13 has a 10-minute useful life and can be
incorporated into numerous organic compounds. An application
of this type of study is to attach a radiopharmaceutical and
physical process continuously going on, in living organisms
and cells. Nitrogen-13 is often used for cardiac blood flow
studies.
o Oxygen-15 has a 2-minute useful life and is used in studying
blood flow of the brain and the heart by labeling ordinary
water.
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The PET camera produces images from the emitting of the
radiopharmaceutical administered to the patient. PET is the most accurate test
to reveal coronary artery disease or rule out its presence. The PET images can
show inadequate blood flow to the heart during stress, which goes undetected by
other non-invasive cardiac tests. We believe that at this time PET is considered
to be one of the best diagnostic methods to determine the viability of heart
tissue for blood flow studies. PET imaging can be used on the following cancers:
lung, colorectal, breast, adrenal and brain. PET can be used to determine the
location of tumor cells. Because tumor cells are more metabolically active than
normal cells, a PET scan easily detects them. PET scans can also determine
whether a tumor is benign or malignant, whether cancer treatment, such as
chemotherapy, has been effective. Clinical indications for imaging in neurology
include the evaluation of primary central nervous system tumors, epilepsy and
dementia.
We plan to manufacture the following radiopharmaceutical products in
the second year following the opening of our permanent facility:
Gallium-67. This product tends to concentrate in tumors and abscesses.
The primary use of this radiopharmaceutical is the detection of cancer. It has
application in many specific tumors (lymphoma, melanoma, carcinoma, lung, and
hematoma) and a wide variety of tumors common in pediatric patients. Gallium-67
also is known to concentrate in sites of local or systemic inflammation and is
therefore valuable as a screening tool for infections of non-specific origin,
for which there are no other diagnostic or localizing techniques.
Technetium-99m. Technetium-99m is a common radiopharmaceutical used for
showing the function of major body organs and other tissues (brain, lung, legs,
bone, liver, and kidney). Technetium-99m, alone, or combined with other agents,
is used to determine brain blood flow (brain scan image), lung scans before and
after surgery, thrombosis in the peripheral vascular system, bone diseases and
tumors in various organs. Technetium-99m is delivered in bulk and requires a
specialist in nuclear medicine to be on duty in each of the medical facilities
or nuclear pharmacies.
Palladium-103. Palladium-103 is a form of small radioactive pellets
which are implanted in a patient's prostate under ultrasound guidance to destroy
a tumor. These small radioactive sources ("commonly called "seeds") are
permanently implanted, via needles, into the prostate gland, and are clinically
excellent therapy for the treatment of early-stage prostate cancer.
Intellectual Property
We do not have any issued patents or patents pending. We anticipate
filing patents for many of our robotic manufacturing procedures, radiochemical
targets and technetium-99m generator.
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History
We are dependent upon the extensive expertise of Malcolm H. Benedict,
our founder, Chairman, President and Chief Executive Officer. In 1972, Mr.
Benedict founded Benedict Nuclear Pharmaceuticals, Inc., ("BNPI"). BNPI began
producing radiopharmaceuticals under the control of the Nuclear Regulatory
Commission and the State of Colorado Health Department, acting in place of the
Federal Food and Drug Administration, and later consented to make filings under
Food and Drug Administration procedures. Mr. Benedict has devoted his principal
efforts and resources to meeting the regulatory requirements necessary to
manufacture radioactive drugs. In August 1981, the Food and Drug Administration
granted BNPI an Investigational New Drug permit to manufacture and conduct
clinical trials on Iodine-123 capsules (Iodine-123). After reporting the
findings on the safety and effectiveness of these drugs, BNPI submitted a New
Drug Application for Iodine-123 capsules (Iodine-123). BNPI's New Drug
Application was awarded in May 1982. The application was completed in nine
months from the initial acceptance until final approval. Canada's Radiation
Safety Bureau issued BNPI a New Drug Application for its Iodine-123 capsules
within three months of filing the necessary documentation. Similarly, an
Investigational New Drug/New Drug Application was filed for Thallium-201. Mr.
Benedict left BNPI in 1991, and subsequently that firm was merged with several
other companies prior to its acquisition by Syncor, Inc.
Competition
We believe that six major corporations currently dominate the
radiochemical and radiopharmaceutical industry; however, brand name competition
is not a significant factor in marketing diagnostic drug products; the
improvement of the quality and purity of diagnostic drug products will be a more
significant factor. The six major manufacturers that we have identified are E.I.
du Pont deNemours and Company, Mallinckrodt Chemical Corporation,
Nycomed-Amersham International, MDS-Nordion, International Isotopes and
Theragenics. Our cyclotrons, which we expect to be manufactured by EBCO
Technologies, Inc., will run at an energy level, which we believe far exceeds
the cyclotron capacity of our competitors.
Fundamental Weaknesses of the Industry.
There are inherent weaknesses within this industry. The companies
referred to in the preceding paragraph began manufacturing radiopharmaceuticals
from the products developed for university-generated research. As a result, they
were not committed to the development of quality products at a low cost. Their
entire business was based on their ability to obtain Food and Drug
Administration approvals on these drug products as they were developed. For the
most part, they operate today from the New Drug Applications and Drug Master
Files that were developed 15-20 years ago.
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We believe our technological innovations and production techniques will
allow us to produce and market existing radiopharmaceuticals and radiochemicals
at a lower cost and to develop new radiochemical and radiopharmaceutical
products. These innovations we believe will provide impetus that will change the
nuclear pharmaceutical market and allow us to improve the industry through
quality, cost and distribution upgrades.
Currently, radioactive elements produced by a cyclotron accelerator are
manufactured in the United States by companies, primarily, we believe, for their
own radiopharmaceutical products. We believe that hospitals, medical
institutions and universities also produce certain short-lived radioactive
elements utilizing small cyclotron accelerators, principally for their own
radiopharmaceutical needs. These producing companies have substantially greater
capital and other resources than we do, and there can be no assurance that they
may not elect to produce radioactive elements for commercial sale. The U.S.
government also produces radioactive elements, primarily for research purposes,
in three national laboratories, Brookhaven National Laboratory, Los Alamos
National Laboratory and the Oak Ridge, Tennessee National Laboratory, and has
announced that it plans to modify the nuclear reactor at Sandia National
Laboratory in Albuquerque, New Mexico to produce certain radioactive elements.
In addition, there can be no assurance that a third party will not contract with
the U.S. government to acquire radioactive elements for commercial sale. Outside
the United States, MDS Nordion, Inc., a Canadian firm, and Mallinckrodt, N.V. at
Petten, a Netherlands firm, both of which have substantially greater capital and
other resources than we do, are major producers of cyclotron-produced and
accelerator-produced radioactive elements. MDS Nordion, Inc. currently supplies
a significant portion of the radioactive materials used in the diagnostic
nuclear medicine industry in the United States, and there can be no assurance
that we will be able to compete successfully with this firm.
Government Regulation
Regulation of Production and Radioactive Waste. The manufacture of
radiochemicals and radiopharmaceuticals is subject to extensive federal and
state regulation. Prior to commencing operations, we must obtain approval of our
facility from the various agencies which administer these regulations, and prior
to transporting medical use radiochemicals and radiopharmaceuticals across state
lines, we must obtain approval from the Food and Drug Administration. In
addition, the Department of Transportation regulates the quantity and method of
shipment of radioactive materials, and sets specifications with respect to the
class of shipping containers used. Our facilities will be subject to continual
inspection for compliance with state and federal regulations, which require that
we manufacture radiochemicals and maintain manufacturing, testing and quality
control records in a prescribed manner. See "Risk Factors--Government
Regulation." Since our facility will have to be approved by the State of
Colorado Department of Public Health - State Laboratory and Radiation Services
Division, which approves facilities under agreement with the Nuclear Regulatory
Commission, we believe it will not be subject to regulation by the Nuclear
Regulatory Commission or the Department of Energy. Food and Drug Administration
regulations provide that a radiopharmaceutical production facility may not be
used for any purpose other than the production of radiochemicals and
radiopharmaceuticals.
13
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We will be required to file a Drug Master File with the Food and Drug
Administration for each radiopharmaceutical which we propose to produce. These
radiochemicals and/or radiopharmaceuticals can then be used by other
radiopharmaceutical companies for manufacturing their own proprietary
radiopharmaceuticals. These products will be covered by New Drug Applications
filed by the respective radiopharmaceutical companies, which companies will make
reference to our applicable Drug Master File.
The production and processing of radioactive materials generate a
certain amount of low-level, solid radioactive waste. Pursuant to the Low Level
Radioactive Waste Policy Act of 1980, states are required to assure the safe
disposal of mildly radioactive materials. The handling, retention and disposal
of radioactive waste is regulated by various other agencies, which enforce
federal regulations promulgated by the Environmental Protection Agency and their
own regulations. We believe that radioactive waste that we produce will fall
into the category of low-level radioactive waste. Most of this waste will be in
the form of used laboratory expendables, such as latex gloves and absorbent
paper used to protect laboratory counter tops from direct exposure to spilled
materials, which waste will be compacted and disposed of through the usual
commercial channels used by universities, medical institutions and industrial
users of radioactive materials. Between scheduled waste pick-ups, compacted
materials containing longer-lived radioactive materials temporarily will be
retained on-site in a specially designed, low-level waste reduction facility,
which facility will reduce the amount of radioactive waste that must be removed
to a permanent radioactive waste disposal facility. The production of
radioactive elements at our facility will include the chemical separation of
radioactive materials. This may lead to the production of some mixed hazardous
waste, consisting of a mixture of low-level radioactive materials, water,
organic solvents and inorganic salts. We will hold such materials on-site for a
period of time until the radioactive materials decay to stable materials, at
which time the materials can be moved off-site for disposal by commercial waste
handlers. Liquid waste resulting from the processing of accelerator-produced
controlled products or from the washing down of hot cells or other
decontamination procedures will be contained in storage tanks at our facility.
It is anticipated that the capacity of the storage tanks will be sufficient to
permit the holding of radioactive wastes until decay to negligible levels has
taken place. In compliance with applicable state laws, we will maintain a
radiation safety committee, comprised of Malcolm Benedict and Dr. Donald A.
Ludwig. Our radiation safety officer will be appointed to oversee our radiation
safety procedures. The radiation protection officer will control and monitor our
compliance with state and federal regulations, and will conduct radiation audits
to comply with applicable regulatory requirements.
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Although we intend to comply with all applicable regulations regarding
the manufacture and sale of radiochemicals and radiopharmaceuticals, such
regulations are subject to change and depend on administrative interpretations.
We cannot assure that future changes in regulations or interpretations made by
the Food and Drug Administration or other regulatory bodies, with possible
retroactive effect, will not have a material adverse effect on us. We also will
be subject to numerous federal, state and local laws relating to such matters as
safe working conditions, manufacturing practices, fire hazard control and
disposal of hazardous or potentially hazardous substances. We cannot assure that
we will not incur significant costs in complying with such laws and regulations
or that such laws or regulations will not have a material adverse effect upon
us.
Medical imaging centers must comply with regulations, promulgated in
most states by an agency of the state government under authority delegated by
the Nuclear Regulatory Commission, governing the possession and use of
radiopharmaceuticals for diagnostic medical procedures. In order to secure
approval, a medical imaging center must submit an acceptable site plan for its
camera, employ adequate radiation safety and quality procedures, and provide a
nuclear medicine physician or other qualified physician who meets certain
training and experience standards. Many states have "certificate of need"
regulations that require a hospital purchaser or user of expensive diagnostic
equipment, such as medical imaging cameras, to obtain regulatory approval prior
to purchasing the equipment. A primary purpose of those regulations is to
contain health care costs by restricting the number of similar units in a
particular locality. We cannot assure that such requirements or the delays that
may be occasioned thereby will not limit our ability to market and sell our
products.
Other Regulations. If we enter into agreements with suppliers to
acquire various controlled-items, neutron-produced research and therapeutic
radiochemicals or accelerator-produced radiochemicals for our distribution, we
will be subject to various regulations regarding the handling of radioactive
materials. Compliance with such regulations will be the responsibility of the
contracting supplier. Any radiopharmaceuticals developed under arrangements
between us and medical institutions and universities, including preclinical
animal studies, the filing of an Investigational New Drug application, human
clinical trials and the approval of a New Drug Application, will require prior
approval of the Food and Drug Administration, which has established mandatory
procedures and standards for the clinical testing, manufacture and marketing of
therapeutic and diagnostic products. Obtaining approval from the Food and Drug
Administration could be a time consuming and costly process.
15
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We also will be subject to regulation by the Environmental Protection
Agency, Occupational Safety and Health Administration and other agencies with
respect to the radioactive content of water and air discharges and the handling
and disposal of radioactive waste. We intend to comply with all such laws and
regulations and believe our facilities and operations will not create any
hazards to nearby residents, employees or visitors. See "Risk
Factors--Government Regulation".
Regulatory Approvals. We are prepared to file the necessary
applications required for licensing and/or regulatory approval from the Colorado
Department of Public Health and Environment - (State Laboratory and Radiation
Services Division) for the handling of radioactive materials and the Food and
Drug Administration for the operation of a nuclear medicine laboratory and for
the production of iodine radiochemical products. We believe these licenses will
be granted when the building and equipment are completed in our temporary and
permanent facilities and final inspection has taken place. We do not anticipate
any obstacles in our ability to obtain the required licenses.
Product Liability and Insurance.
The use of our radioactive elements in radiopharmaceuticals and in
clinical trials may expose us to potential product liability, which is inherent
in the testing, manufacture, marketing and sale of human diagnostic and
therapeutic products. In addition, the failure to effect timely delivery of
radioactive elements may cause a delay in a scheduled test or procedure or
result in the functional loss of radioactivity of the radioactive elements,
thereby exposing us to potential liability. We currently have no product
liability insurance. We intend to obtain product liability insurance prior to
commencing production of any radioactive elements and prior to the manufacture
and sale of any products, but there can be no assurance we will be able to
obtain or maintain such insurance on acceptable terms or that any insurance
obtained will provide adequate coverage. Claims or losses in excess of any
liability insurance coverage ultimately obtained by us could have a material
adverse effect on us.
Item 2. Description of Property.
We currently lease office space at 1880 Industrial Circles, Suite B-3
in Longmont, Colorado and additional space in Boulder, Colorado. The office
space in Boulder, Colorado is subleased to an unrelated entity. Upon completion
of our public offering, we anticipate temporarily leasing additional space in
Longmont to begin production and sale of sodium iodide-123. We will also
purchase land for and begin construction of our permanent facility. We have
entered in to a contract to purchase approximately 5.5 acres of land (with an
option to purchase an additional 5 acres) in Weld County, Colorado,
approximately 6.7 miles east of Longmont, Colorado and approximately 2.3 miles
west of Interstate 25, Colorado's major north-south throughway. We have
deposited 102,000 shares of common stock in an escrow account for that purchase
and we anticipate, pending the fulfillment of all conditions to the purchase,
closing on the purchase in July, 2000; however, we cannot assure that we will be
able to close on the purchase.
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We will obtain insurance on our facilities for fire, theft and general
liability coverage during the period of any occupied or leased facility. The
dollar value of the property coverage shall not be less than eighty (80%) of the
replacement cost of the facility and equipment, unless otherwise covered in an
equal amount.
Item 3. Legal Proceedings.
There are no legal proceedings to which we are a party.
Item 4. Submission of Matters to a Vote of Security Holders.
There was no matter submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
There is no public market upon which our stock is traded. We have
applied to have our stock traded on the National Association of Securities
Dealers Automated Quotation (Small CapSM) system ("NASDAQ"). We have been
advised by NASDAQ that the staff is unable to move forward with the listing
process until our public offering closes and we can demonstrate compliance, on a
post-offering basis, with the NASDAQ (Small CapSM) market listing requirements.
Upon completion of our public offering we expect to comply with NASDAQ's listing
requirements. We do not have any outstanding options or warrants to purchase, or
securities convertible into, our common stock.
We have an effective registration statement on Form SB-2 on file with
the Securities and Exchange Commission to publicly offer a minimum of 200,000
shares and a maximum of 1,000,000 shares of our common stock; this registration
statement was declared effective on May 15, 2000. The minimum number of shares
must be sold by November 15, 2000 (which date may be extended at our option by
180 days) or the offering will close and all subscriptions received will be
returned. The offering is being conducted by Three Arrows Capital Corporation
and Travis Morgan Securities, Inc. on a best efforts basis. As of this time, we
have not reached the minimum necessary to close on the offer.
17
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There are currently approximately 337 holders of our common stock. All
of our 9,068,123 shares of common stock currently outstanding are "restricted
securities" or owned by "affiliates", as those terms are defined in Rule 144,
and may not be sold publicly unless they are registered under the Securities Act
or are sold pursuant to Rule 144 or another exemption from registration. The
9,068,123 restricted shares will be eligible for sale without registration under
Rule 144, 365 days following the completion date of our public offering.
In the period covered by this report, we have sold the following
securities:
In April, 1999 we issued an aggregate of 35,000 shares of our common
stock to seven individuals (5,000 shares each) for their agreement to serve on
our Scientific Advisory Board. The shares were valued at the time of issuance at
$.75 per share. Each of the individuals was provided with access to all material
information regarding an investment in the company and was given the opportunity
to ask questions of and receive answers from our executive officers.
Accordingly, these issuances were exempt from registration under the Securities
Act pursuant to Section 4(2) thereunder.1
In May, 1999 we issued 6,667 shares of our common stock to an
individual for services provided to us. The shares were valued at the time of
issuance at $.75 per share. Such individual was provided with access to all
material information regarding an investment in the company and was given the
opportunity to ask questions of and receive answers from our executive officers.
Accordingly, this issuance was exempt from registration under the Securities Act
pursuant to Section 4(2) thereunder.1
In July, 1999 we issued 800 shares of our common stock to an individual
as a consulting fee for reviewing documents in connection with our Series H
preferred offering. The shares were valued at the time of issuance at $.75 per
share. Such individual was provided with access to all material information
regarding an investment in the company and was given the opportunity to ask
questions of and receive answers from our executive officers. Accordingly, this
issuance was exempt from registration under the Securities Act pursuant to
Section 4(2) thereunder.1
------------------------------
1 The sales and issuances of securities in these transactions were deemed by us
to be exempt from registration under the Act by virtue of section 4(2) thereof
as transactions not involving any public offering. The recipients represented
their intention to acquire the securities for investment only and not with a
view to the distribution thereof. All shares issued to these persons contained
legends restricting transfer of the shares without compliance with applicable
securities laws. All recipients either received adequate information regarding
the Company or had access through employment or other relationships to such
information.
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In July, 1999 the Registrant issued 10,000 shares of its common stock
to the Registrant's corporate secretary for her services as secretary. The
shares were valued at the time of issuance at $.75 per share. She had access to
all material information regarding an investment in the Registrant. Accordingly,
this issuance was exempt from registration under the Securities Act pursuant to
Section 4(2) thereunder.1
In July, 1999 the Registrant issued 33,933 shares of its common stock
to an officer of the Registrant as employment compensation. The shares were
valued at the time of issuance at $.75 per share. The individual had access to
all material information regarding an investment in the Registrant. Accordingly,
the issuance was exempt from registration under the Securities Act pursuant to
Section 4(2) thereunder.1
In July, 1999 the Registrant issued 5,000 shares of its common stock to
an individual as a consulting fee for investor relations services. The shares
were valued at the time of issuance at $.75 per share. The individual was
provided with access to all material information regarding an investment in the
Registrant and was given the opportunity to ask questions of and receive answers
from the executive officers of the Registrant. Accordingly, the issuance was
exempt from registration under the Securities Act pursuant to Section 4(2)
thereunder.1
In August, 1999 the Registrant sold an aggregate of 379,100 shares of
its common stock in a private placement to 14 investors for an aggregate
consideration of $284,325 ($.75 per share). Each of the purchasers was an
existing shareholder of the Registrant and an accredited investor, as defined in
Regulation D ("Regulation D") promulgated under the Securities Act of 1933, as
amended (the "Securities Act"), who was provided with access to all material
information regarding an investment in the Registrant and who was given the
opportunity to ask questions of and receive answers from the executive officers
of the Registrant. Accordingly, these issuances were exempt from registration
under the Securities Act pursuant to Section 4(2) thereunder.1
In September, 1999 the Registrant issued 20,000 shares of its common
stock to an officer of the Registrant as employment compensation. The shares
were valued at the time of issuance at $.75 per share. Such officer had access
to all material information regarding an investment in the Registrant.
Accordingly, this issuance was exempt from registration under the Securities Act
pursuant to Section 4(2) thereunder.1
On November 1, 1999 the Registrant's shareholders approved a three for
two reverse stock split. Prior to the split, the Registrant had 12,989,962
common shares outstanding and, following the split, there were 8,659,975 common
shares outstanding.
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During January and February, 2000 the Registrant sold an aggregate of
172,796 shares of its common stock in a private placement to seven investors for
an aggregate consideration of $194,399 ($1.125 per share). Each of the
purchasers was an existing shareholder of the Registrant and an accredited
investor, as defined in Regulation D ("Regulation D") promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), who was provided with
access to all material information regarding an investment in the Registrant and
who was given the opportunity to ask questions of and receive answers from the
executive officers of the Registrant. Accordingly, these issuances were exempt
from registration under the Securities Act pursuant to Section 4(2) thereunder.1
On March 8, 2000, the Registrant entered into a contract to purchase
land and, as part thereof, agreed to issue 102,000 shares of its common stock as
earnest money towards the total purchase price of $1,198,730 (unaudited). The
stock is being held by the seller's real estate agent pending the closing of the
sale. The purchaser is an accredited investor, as defined in Regulation D
promulgated under the Securities Act and was provided with access to all
material information regarding an investment in the Registrant and was given the
opportunity to ask questions of and receive answers from the executive officers
of the Registrant. Accordingly, these issuances were exempt from registration
under the Securities Act pursuant to Section 4(2) thereunder.1
During March, 2000 the Registrant sold an aggregate of 76,330 shares of
its common stock in a private placement to nine investors for an aggregate
consideration of $85,874 ($1.125 per share). Each of the purchasers was an
existing shareholder of the Registrant and an accredited investor, as defined in
Regulation D promulgated under the Securities Act, who was provided with access
to all material information regarding an investment in the Registrant and who
was given the opportunity to ask questions of and receive answers from the
executive officers of the Registrant. Accordingly, these issuances were exempt
from registration under the Securities Act pursuant to Section 4(2) thereunder.1
Item 6. Management's Discussion and Analysis or Plan of Operation.
We are a development stage company and have not had any revenues from
operations; however, we believe our technological and production techniques will
allow us to become a significant domestic producer of radiochemicals and
radiopharmaceuticals for retail and commercial sale to the nuclear medicine
industry. Since our inception, our operations have been limited to developing
the concept for our cyclotron and related automatic robotic system, designing
facilities for its operations, identifying land, preparing license applications
and raising capital.
As was discussed in the Use of Proceeds section, if we sell only the
minimum number of shares offered, the net proceeds will enable us to open our
temporary facility and to begin manufacturing and marketing Iodine 123. If we
are unable to sell the minimum number of shares being offered, we will continue
to seek debt or equity financing through private sources in an amount sufficient
to open our temporary facility and then attempt to fulfill our business plan
from anticipated earnings.
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We intend to finance the acquisition of the cyclotron, the production
facility and the majority of the robotic and manufacturing equipment. We expect
to pay interest on the construction loans and advances to the cyclotron
manufacturer during the course of construction. The following plan of operation
is based upon our selling the maximum number of shares being offered. If we sell
less than the maximum, we will determine the proper allocation of the proceeds
received in excess of the minimum net proceeds.
During the first quarter following funding, we will hire five
additional people, including a radio-chemist, a controller (CPA) and three
clerical people. We will begin filing the applications for the various licenses
that will be required. We will complete the acquisition of the land for the
permanent facility, including our manufacturing facility, corporate offices and
PET diagnostic imaging center. We will also lease a temporary facility and begin
constructing the robotic processes that will be employed with the cyclotron
production processes. EBCO Technologies, Inc. will begin constructing the
cyclotron and orders for related equipment will be placed. Construction will
commence upon the permit approval process acceptance. Cash expended will be as
follows:
General and administrative expenses $ 405,000
Acquisition of property and equipment $ 1,246,000
------------
First quarter expenditures $ 1,651,000
============
During the second quarter following funding, construction will proceed
on the permanent facility. The manufacture of the cyclotron will also proceed.
Work on various applications will still be in process. Our computer system,
phone system and laboratory equipment will be ordered. Additional robotic
equipment will be purchased. We will begin the implementation of our marketing
department, including the hire of two additional personnel. Cash expended during
this quarter will be as follows:
General and administrative expenses $ 433,000
Acquisition of property and equipment $ 620,000
-----------
Second quarter expenditures $ 1,053,000
===========
During the third quarter following funding, we will hire four new
personnel to be used in human resources, accounting and clerical positions.
Construction of the permanent facility and the cyclotron will continue. We also
anticipate that our temporary facility will be licensed and will commence
operations. Work will also progress on the various applications. Final payments
will be made on the phone system, and computer system. Furniture and fixtures
for the permanent facility will be ordered. We will begin the development of
21
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other production systems for additional products and begin the coordination of
the radiation monitoring system and its installation. Cash will be expended
during this quarter as follows:
General and administrative expenses $ 500,000
Acquisition of property and equipment $ 1,350,000
------------
Third quarter expenditures $ 1,850,000
============
In the fourth quarter following funding, the permanent facility will be
completed. The cyclotron and related production equipment will be installed. The
permanent facility will be occupied. The full level of general and
administration expenses of $323,000 per month will be reached in the twelfth
month. Ten technical personnel, including the cyclotron crew, will be hired.
Additional production equipment will be purchased. Cash outlays during this
quarter will be as follows:
General and administrative expenses $ 860,000
Acquisition of property and equipment $ 900,000
Financing and lease payments $ 815,000
-----------
Fourth quarter expenditures $ 2,575,000
===========
Production and sales are expected to begin during the thirteenth month
from our permanent facility; we anticipate sales of sodium iodide-123 from our
temporary facility beginning in the third quarter following funding; however, we
have not estimated a sales figure for these purposes. Throughout the
twelve-month period, excess funds will be invested in money market instruments.
Estimated interest income of $320,000 is expected.
Proceeds of offering $ 9,200,000
Interest income $ 320,000
------------
Funds available $ 9,520,000
Cash expended during first twelve months $ 7,129,000
------------
Balance available for further working capital $ 2,391,000
============
We anticipate that the balance available for further working capital,
together with revenues from sales of Iodide-123 from our temporary facility
beginning in the third quarter following funding, and revenues from sales of
Iodide-123 and other products from our permanent facility commencing in the
thirteenth month following funding, will sustain us until we become profitable;
however, if we have not become profitable by the time these funds have been
expended, we may have to seek capital from other sources, including debt and/or
equity financing to continue operations.
22
<PAGE>
Our program for the balance of 2000 and the first half of 2001 is to
complete construction of its manufacturing facility. We will begin development
of our sodium iodine-123 radiochemical manufacturing and distribution program.
We will also pursue formal relationships with various distributors, universities
and medical institutions. Our PET diagnostic imaging center, which consists of
our second product, fluorine-18 FDG, a radiopharmaceutical, will be a service to
the medical community of the local and surrounding regions. This will be
accomplished by offering the local medical communities with the access to the
latest PET diagnostic imaging procedures, without the high costs associated with
the development with a PET diagnostic center. Following the completion of
construction, we intend to move our principal executive offices to our permanent
facility and to use that facility to assemble proprietary equipment and finalize
the installation and testing of the cyclotron components (targets).
We have allocated a portion of the net proceeds from this offering for
the development of proprietary equipment and also the purchase of wholesale
quantities of radiochemicals. We also intend, prior to completion of the
manufacturing facility, to enter into preliminary contracts with distributors,
universities and medical institutions throughout the United States, and to
pursue formal commitments with foreign sources, such as sources in Europe,
Russia and Israel, for the acquisition of enriched stable materials necessary
for the production of radiochemicals and radiopharmaceuticals; however, there
can be no assurance of obtaining these radioactive elements.
We have recently commenced a $25.0 million capital expansion
undertaking that includes $10.0 million in equity offered hereby, $10.0 million
in debt for the purchase of our first cyclotron and $5.0 million for the
construction of new production and administrative facilities. Although no
assurances can be given, we expect that the new cyclotron and facilities will
become operational between the middle and the end of 2001. We intend to apply a
portion of the net proceeds of this offering toward the purchase of equipment to
be installed in calendar year 2000 and use the remainder for working capital and
other corporate purposes as appropriate.
During the course of our development activities from February 2, 1992
through March 31, 2000, we have sustained operating losses, and have an
inadequate cash supply. From February 19, 1992 (inception) through March 31,
2000, we raised working capital through offerings of our no par value preferred
stock, which was expected to permit us to continue operations.
We intend to file a patent application with the U.S. Patent and
Trademark Office pertaining to the unique automation features of this process;
however, we cannot assure that such proposed patent application will be
successfully filed or approved, or result in the issuance of letters patent to
us.
23
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Despite the above-described activities and our having raised gross
proceeds totaling $3,154,597 from a series of stock offerings, we are not yet in
a position to commence our proposed business activities in the manufacture,
marketing and distribution of radiochemical and radiopharmaceutical products.
Since inception, we have received no revenue from operations and, for the period
from inception through March 31, 2000, we realized an accumulated net loss from
operations aggregating $2,664,571. As of March 31, 2000, our assets totaled
$294,876; our liabilities are $109,577; and our total stockholders' equity was
$185,299. Of our total expenses of $2,664,808 as of March 31, 2000, $639,173
thereof consisted of the rights to certain applications (including the
radioactive materials license and establishment license applications and
Investigational New Drug/New Drug Applications for sodium iodide I-123 capsules,
and fluorine-18 FDG), designs, processes, procedures, technology and
specifications (including the technology and specifications for the
technetium-99m generator system designed by Mr. Benedict), which are intangible
assets, accounted for in accordance with SFAS No. 2. SFAS No. 2 requires that
all research and development costs, except those done for others under contract
or certain government-related entities, are charged to expense.
We had working capital in the amount of $47,597 as of March 31, 2000.
Our working capital is presently minimal or negative, and there can be no
assurance that our financial condition will improve. After this offering which,
if completed, will yield net proceeds of a maximum of approximately $9,200,000,
we nevertheless expect to continue to have minimal working capital or a working
capital deficit as a result of the continuing net loss anticipated from
operations until such time, if ever, as we are successful in obtaining the
requisite licensing and regulatory approvals and sufficient additional capital
to obtain the facilities, inventory and equipment and employ the requisite
personnel required in order to commence operations. To fully implement our
current business plan, we need to obtain additional debt capital to acquire the
facilities and the cyclotron. We expect to continue in operation, without an
infusion of capital, after the expiration of twelve months from the closing of
this offering. In order to obtain additional equity financing, management may be
required to dilute the interest of existing shareholders or forego a substantial
interest in its revenues, if any. We cannot assure that any such operating
capital required by us in order to fully implement our business plan will be
available to us in the foreseeable future, if ever.
Subsequent Events
On June 28, 2000 we received a commitment for bridge financing from
Oxford International, Inc. ("Oxford"). Pursuant to the terms of the commitment,
Oxford has agreed to loan us $500,000 for a term of 24 months in exchange for a
3% fee. The loan is to be secured by a first lien on all of our assets and our
right to acquire the land for our permanent facility. We anticipate using the
proceeds from this financing to open our temporary facility and for working
capital. We will notify the Securities and Exchange Commission upon the closing
of the bridge financing.
Item 7. Financial Statements.
24
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INDEX TO FINANCIAL STATEMENTS
Page
Independent auditors' report...............................................F-2
Balance sheet, March 31, 2000..............................................F-3
Statements of operations, for the years ended March 31, 2000 and 1999,
and from February 19, 1992 (inception) through March 31, 2000.........F-4
Statement of shareholders' equity, from February 19, 1992 (inception)
through March 31, 2000................................................F-5
Statements of cash flows, for the years ended March 31, 2000 and 1999,
and from February 19, 1992 (inception) through March 31, 2000.........F-9
Summary of significant accounting policies................................F-11
Notes to financial statements.............................................F-15
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Molecular Diagnostics and Therapeutics, Inc.
(Formerly Nu-Tec., L.T.D.)
We have audited the accompanying balance sheet of Molecular Diagnostics and
Therapeutics, Inc. (formerly Nu-Tec., L.T.D.) (a development stage company) as
of March 31, 2000 and the related statements of operations, shareholders'
equity, and cash flows for the years ended March 31, 2000 and 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Molecular Diagnostics and
Therapeutics, Inc. as of March 31, 2000, and the results of its operations and
its cash flows for the years ended March 31, 2000 and 1999 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in the Summary of Significant
Accounting Policies, the Company has no revenues and has experienced significant
operating losses during the periods from February 19, 1992 (inception) through
March 31, 2000, which raises a substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
described in the Summary of Significant Accounting Policies. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Cordovano and Harvey, P.C.
April 26, 2000
F-2
<PAGE>
MOLECULAR DIAGNOSTICS AND THERAPEUTICS, INC.
(Formerly Nu-Tec., L.T.D.)
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
March 31, 2000
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash......................................................................... $ 155,117
Prepaid expenses............................................................. 2,057
----------
TOTAL CURRENT ASSETS 157,174
FURNITURE AND EQUIPMENT, less accumulated depreciation
totaling $81,081 (Note C).................................................... 19,971
OTHER ASSETS:
Deposit (Note G)............................................................. 114,750
Other........................................................................ 2,981
----------
$ 294,876
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities..................................... $ 109,577
----------
TOTAL CURRENT LIABILITIES 109,577
----------
COMMITMENTS AND CONTINGENCIES (Note G)............................................ -
SHAREHOLDERS' EQUITY (Note E):
Preferred stock, no par value, 5,000,000 shares authorized;
-0- shares issued and outstanding......................................... -
Common stock, no par value, 45,000,000 shares authorized;
9,068,123 (post-split) shares issued and outstanding...................... 3,142,446
Deferred offering costs...................................................... (292,339)
Deficit accumulated during the development stage............................ (2,664,808)
----------
TOTAL SHAREHOLDERS' EQUITY 185,299
----------
$ 294,876
==========
</TABLE>
See accompanying summary of significant accounting policies and
notes to financial statements.
F-3
<PAGE>
MOLECULAR DIAGNOSTICS AND THERAPEUTICS, INC.
(Formerly Nu-Tec., L.T.D.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
February 19,
1992
Years Ended (Inception)
March 31, Through
---------------------------- March 31,
2000 1999 2000
--------- ---------- -------------
(Unaudited)
<S> <C> <C> <C>
COSTS AND EXPENSES:
Salaries and payroll taxes.................................................$ 266,523 $ 174,915 $ 698,905
Stock-based compensation (Notes B&E):
Employee compensation................................................... 124,825 77,625 202,450
Professional fees....................................................... 16,850 143,700 213,821
Directors' fees......................................................... 26,250 - 26,250
Prizes.................................................................. - 750 4,707
Research and development costs (Note B).................................... 79,640 157,157 639,173
Web site, graphics and computer services.................................. 28,012 43,425 71,437
Rent....................................................................... 41,019 37,413 173,359
Professional fees.......................................................... 13,262 44,796 94,470
Office..................................................................... 11,192 12,600 53,665
Postage.................................................................... 6,009 5,402 25,486
Telephone.................................................................. 17,800 7,832 57,802
Contract labor............................................................. 14,938 12,213 248,650
Repairs and maintenance.................................................... 1,697 340 10,881
Depreciation............................................................... 17,015 17,857 80,988
Other...................................................................... 23,241 15,792 62,527
--------- --------- -----------
OPERATING LOSS (688,273) (751,817) (2,664,571)
INTEREST EXPENSE................................................................ - - (237)
--------- --------- -----------
LOSS BEFORE INCOME TAXES (688,273) (751,817) (2,664,808)
INCOME TAX BENEFIT (EXPENSE) (Note D):
Current.................................................................... 332,064 324,429 1,109,333
Deferred................................................................... (332,064) (324,429) (1,109,333)
--------- --------- -----------
NET LOSS $(688,273) $(751,817) $(2,664,808)
========= ========= ===========
Basic loss per common share.....................................................$ (0.08) $ (0.10)
========= =========
Basic weighted average common shares
outstanding................................................................8,463,012 7,608,692
========= =========
Diluted loss per common share...................................................$ (0.08) $ (0.10)
========= =========
Diluted weighted average common shares
outstanding................................................................8,463,012 7,608,692
========= =========
</TABLE>
See accompanying summary of significant accounting policies and
notes to financial statements.
F-4
<PAGE>
MOLECULAR DIAGNOSTICS AND THERAPEUTICS, INC.
(Formerly Nu-Tec., L.T.D.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
February 19, 1992 (inception) through March 31, 2000
<TABLE>
<CAPTION>
Deficit
Accumulated
Preferred Stock Common Stock Deferred During the Total
------------------- ------------------- Offering Development Shareholders'
Shares Amount Shares Amount Costs Stage Equity
-------- ------- --------- ------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, February 19, 1992 (inception) - $ - - $ - $ - $ - $ -
Sale of common stock, $0.0001 per share (Note B) - - 5,250,000 578 - - 578
Issuance of convertible preferred shares in
exchange for intellectual property rights at
$0.0001 per share 100,000 10 - - - - 10
Sale of common stock, $0.015 per share (Note E) - .- 400,000 6,000 - - 6,000
Shares issued for stock-based compensation, valued
at cost, $0.015 per share (Note E) - .- 120,000 1,800 - - 1,800
Conversion of convertible preferred stock to
common stock at a rate of 1 to 4 (100,000) (10) 400,000 10 - - -
---------- --------- --------- -------- ------ --------- ---------
BALANCE, MARCH 31, 1992 (unaudited) - - 6,170,000 8,388 - - 8,388
---------- --------- --------- -------- ------ --------- ---------
Sale of Class B convertible preferred shares,
pursuant to a private placement memorandum,
net of offering costs totaling $50,289,
$5.00 per share 29,000 94,711 - - - - 94,711
Net loss for the year ended
March 31, 1993 - - - - (95,678) (95,678)
---------- --------- --------- -------- ------ --------- ---------
BALANCE, MARCH 31, 1993 (unaudited) 29,000 94,711 6,170,000 8,388 - (95,678) 7,421
---------- --------- --------- -------- ------ --------- ---------
Shares issued for stock-based compensation, valued
at cost, $0.001 per share (Note B) - - 905,000 905 - - 905
Sale of Class B convertible preferred shares,
pursuant to a private placement memorandum,
net of offering costs totaling $4,195,
$5.00 per share 2,700 9,305 - - - - 9,305
Conversion of Class B convertible preferred stock to
common stock at a rate of 1 to 12, respectively (31,700) (104,016) 380,400 104,016 - - -
Shares issued for stock-based compensation, valued
at cost, $0.4166 per share - - 8,500 3,540 - - 3,540
Sale of common stock, $0.22 per share - - 50,000 11,000 - - 11,000
Shares issued for stock-based compensation, valued
at cost, $0.22 per share (Note E) - - 200,000 44,000 - - 44,000
Net loss for the year ended
March 31, 1994 - - - - - (90,504) (90,504)
---------- --------- --------- -------- ------ --------- ---------
BALANCE, MARCH 31, 1994 (unaudited) - - 7,713,900 171,849 - (186,182) (14,333)
---------- --------- --------- -------- ------ --------- ---------
Sale of common stock, $0.625 per share - - 2,500 1,565 - - 1,565
Shares issued for stock-based compensation, valued
at cost, $0.4166 per share - - 1,000 417 - - 417
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-5
<PAGE>
MOLECULAR DIAGNOSTICS AND THERAPEUTICS, INC.
(Formerly Nu-Tec., L.T.D.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
February 19, 1992 (inception) through March 31, 2000
<TABLE>
<CAPTION>
Deficit
Accumulated
Preferred Stock Common Stock Deferred During the Total
------------------- ------------------- Offering Development Shareholders'
Shares Amount Shares Amount Costs Stage Equity
-------- ------- --------- ------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sale of Class A convertible preferred shares,
pursuant to a private placement memorandum,
net of offering costs totaling $28,990,
$5.00 per share 25,000 96,010 - - - - 96,010
Conversion of Class A convertible preferred stock to
common stock at a rate of 1 to 8, respectively (25,000) (96,010). 200,000 96,010 - - -
Sale of Class C convertible preferred shares,
pursuant to a private placement memorandum,
$5.00 per share 6,000 30,000 - - - - 30,000
Net loss for the year ended
March 31, 1995 - - - - - (119,509) (119,509)
---------- --------- --------- -------- ------ --------- ---------
BALANCE, MARCH 31, 1995 (unaudited) 6,000 30,000 7,917,400 269,841 - (305,691) (5,850)
---------- --------- --------- -------- ------ --------- ---------
Sale of common stock, $0.625 per share - - 5,000 3,132 - - 3,132
Sale of Class C convertible preferred shares,
pursuant to a private placement memorandum,
net of offering costs totaling $69,810,
$5.00 per share 93,570 339,774 - - - - 339,774
Conversion of Class C convertible preferred stock to
common stock at a rate of 1 to 16, respectively (99,570) (369,774) 1,593,120 369,774 - - -
Sale of Class D convertible preferred shares,
pursuant to a private placement memorandum,
$5.00 per share 18,100 108,600 - - - - 108,600
Conversion of Class D convertible preferred stock to
common stock at a rate of 1 to 12, respectively (11,600) (69,600) 139,200 69,600 - - -
Net loss for the year ended
March 31, 1996 - . - - - - (430,541) (430,541)
---------- --------- --------- -------- ------ --------- ---------
BALANCE, MARCH 31, 1996 (unaudited) 6,500 39,000 9,654,720 712,347 - (736,232) 15,115
---------- --------- --------- -------- ------ --------- ---------
Sale of Class D convertible preferred shares,
pursuant to a private placement memorandum,
net of offering costs totaling $100,571,
$5.00 per share 22,400 90,841 - - - - 90,841
Conversion of Class D convertible preferred stock to
common stock at a rate of 1 to 12, respectively (28,900) (129,841) 346,800 129,841 - - -
Sale of Class E convertible preferred shares,
pursuant to a private placement memorandum,
$6.00 per share 12,835 77,010 - - - - 77,010
Conversion of Class E convertible preferred stock to
common stock at a rate of 1 to 12, respectively (12,835) (77,010) 154,020 77,010 - - -
Shares issued for stock-based compensation, valued
at cost of offering, $0.50 per share (Note E) - - 13,133 6,566 - - 6,566
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-6
<PAGE>
MOLECULAR DIAGNOSTICS AND THERAPEUTICS, INC.
(Formerly Nu-Tec., L.T.D.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
February 19, 1992 (inception) through March 31, 2000
<TABLE>
<CAPTION>
Deficit
Accumulated
Preferred Stock Common Stock Deferred During the Total
------------------- ------------------- Offering Development Shareholders'
Shares Amount Shares Amount Costs Stage Equity
-------- ------- --------- ------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sale of common stock, $0.50 per share - - 4,832 2,416 - - 2,416
Net loss for the year ended
March 31, 1997 - - - - - (211,401) (211,401)
---------- --------- ---------- -------- ------ ---------- ---------
BALANCE, MARCH 31, 1997 - - 10,173,505 928,180 - (947,633) (19,453)
---------- --------- ---------- -------- ------ ---------- ---------
Sale of Class F convertible preferred shares,
pursuant to a private placement memorandum,
$6.00 per share 20,500 123,000 - - - - 123,000
Conversion of Class F convertible preferred stock to
common stock at a rate of 1 to 12, respectively (10,500) (63,000) 126,000 63,000 - - -
Sale of common stock, $0.50 per share - - 500 250 - - 250
Repurchase of common stock, subsequently cancelled - - (8,000) (5,873) - - (5,873)
Sale of Class G convertible preferred shares,
pursuant to a private placement memorandum,
net of offering costs totaling $49,125,
$6.00 per share 67,351 354,981 - - - - 354,981
Net loss for the year ended
March 31, 1998 - - - - - (277,085) (277,085)
---------- --------- ---------- -------- ------ ---------- ---------
BALANCE, MARCH 31, 1998 77,351 414,981 10,292,005 985,557 - (1,224,718) 175,820
---------- --------- ---------- -------- ------ ---------- ---------
Sale of Class G convertible preferred shares,
pursuant to a private placement memorandum,
$6.00 per share 1,000 6,000 - - - - 6,000
Conversion of Class F convertible preferred stock to
common stock at a rate of 1 to 12, respectively (10,000) (60,000) 120,000 60,000 - - -
Conversion of Class G convertible preferred stock to
common stock at a rate of 1 to 12, respectively (68,351) (360,981) 820,212 360,981 - - -
Sale of Class H convertible preferred shares,
pursuant to a private placement memorandum,
net of offering costs totaling $26,215,
$6.00 per share 60,499 336,779 - - - - 336,779
Shares issued for stock-based compensation,
valued at cost of stock offering , $.75 per
share (Note E) - - 296,100 222,075 - - 222,075
Conversion of Class H convertible preferred stock to
common stock at a rate of 1 to 8, respectively (60,499) (336,779) 483,992 336,779 - - -
Sale of Class I convertible preferred shares,
pursuant to a private placement memorandum,
net of offering costs totaling $9,211,
$6.00 per share 22,875 128,039 - - - - 128,039
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-7
<PAGE>
MOLECULAR DIAGNOSTICS AND THERAPEUTICS, INC.
(Formerly Nu-Tec., L.T.D.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
February 19, 1992 (inception) through March 31, 2000
<TABLE>
<CAPTION>
Deficit
Accumulated
Preferred Stock Common Stock Deferred During the Total
------------------- ------------------- Offering Development Shareholders'
Shares Amount Shares Amount Costs Stage Equity
-------- ------- --------- ------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Offering costs related to proposed initial
public offering (Note E) - - - - (86,405) - (86,405)
Net loss for the year ended
March 31, 1999 - - - - - (751,817) (751,817)
---------- --------- ---------- --------- ------- ---------- ----------
BALANCE, MARCH 31, 1999 22,875 128,039 12,012,309 1,965,392 (86,405) (1,976,535) 30,491
---------- --------- ---------- --------- ------- ---------- ----------
Shares issued for stock-based compensation,
valued at cost of stock offering , $.75 per
share (Note E) - - 111,400 83,550 - - 83,550
Sale of Class I convertible preferred shares,
pursuant to a private placement memorandum,
$6.00 per share 34,458 206,748 - - - - 206,748
Conversion of Class I convertible preferred stock to
common stock at a rate of 1 to 8, respectively (57,333) (334,787) 458,664 334,787 - - -
Sale of common shares to existing shareholders,
$.75 per share - - 399,400 299,550 - - 299,550
Three for 2 reverse split of common stock (Note E) - - (4,321,798) - - - -
Sale of common shares to existing shareholders,
$1.125 per share - - 231,148 260,042 - - 260,042
Shares issued for stock-based compensation,
valued at cost of stock offering , $1.125 per
share (Note E) - - 75,000 84,375 - - 84,375
Shares issued for earnest money deposit as part of
a contract to purchase land (Note G) - - 102,000 114,750 - - 114,750
Offering costs related to proposed initial
public offering (Note E) - - - - (205,934) - (205,934)
Net loss for the year ended March 31, 2000 - - - - - (688,273) (688,273)
---------- -------- ---------- --------- -------- ---------- ----------
BALANCE, MARCH 31, 2000 - $ - 9,068,123 $3,142,446 $(292,339) $(2,664,808) $ 185,299
========== ======== ========== ========= ======== ========== ==========
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
F-8
<PAGE>
MOLECULAR DIAGNOSTICS AND THERAPEUTICS, INC.
(Formerly Nu-Tec., L.T.D.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
February 19,
1992
Years Ended (Inception)
March 31, Through
---------------------------- March 31,
2000 1999 2000
--------- ---------- -------------
(Unaudited)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss...................................................................$(688,273) $(751,817) $(2,664,808)
Transactions not requiring cash:
Depreciation............................................................ 17,015 17,857 80,988
Stock-based compensation (Note E)....................................... 167,925 222,075 447,228
Changes in current assets and current liabilities:
Receivables and other current assets.................................... 1,324 (3,805) (5,038)
Accounts payable and accrued expenses (net of
$108,649 accrued for offering costs)................................. (9,012) (15,597) 928
--------- --------- -----------
NET CASH (USED IN)
OPERATING ACTIVITIES (511,021) (531,287) (2,140,702)
--------- --------- -----------
INVESTING ACTIVITIES
Payments for furniture and equipment....................................... (7,800) (13,978) (101,052)
--------- --------- -----------
NET CASH (USED IN)
INVESTING ACTIVITIES (7,800) (13,978) (101,052)
--------- --------- -----------
FINANCING ACTIVITIES
Proceeds from the issuance of preferred and
common stock............................................................ 766,340 506,244 2,924,840
Payments for the repurchase of common stock................................ - - (5,873)
Payments for offering costs................................................ (97,285) (121,831) (522,096)
--------- --------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 669,055 384,413 2,396,871
--------- --------- -----------
NET CHANGE IN CASH.............................................................. 150,234 (160,852) 155,117
Cash at beginning of year.................................................. 4,883 165,735 -
--------- --------- -----------
CASH AT END OF YEAR.............................................................$ 155,117 $ 4,883 $ 155,117
========= ========= ===========
</TABLE>
See accompanying summary of significant accounting policies and
notes to financial statements.
F-9
<PAGE>
MOLECULAR DIAGNOSTICS AND THERAPEUTICS, INC.
(Formerly Nu-Tec., L.T.D.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
February 19,
1992
Years Ended (Inception)
March 31, Through
---------------------------- March 31,
2000 1999 2000
--------- ---------- -------------
(Unaudited)
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest.....................................................$ - $ - $ 237
========= ========= ===========
Cash paid for income taxes.................................................$ - $ - $ -
========= ========= ===========
NON-CASH INVESTING TRANSACTION:
Common stock issued as earnest money as part of a
land purchase agreement (Note G)........................................$ 114,750 $ - $ 114,750
========= ========= ===========
Accrued offering costs.....................................................$ 108,649 $ - $ 108,649
========= ========= ===========
</TABLE>
See accompanying summary of significant accounting policies and
notes to financial statements.
F-10
<PAGE>
MOLECULAR DIAGNOSTICS AND THERAPEUTICS, INC.
(Formerly Nu-Tec., L.T.D.)
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Development stage company
Molecular Diagnostics and Therapeutics, Inc. (the "Company") is in the
development stage in accordance with Statement of Financial Accounting Standard
(SFAS) No. 7.
Use of estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, and
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.
Cash equivalents
For the purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Furniture, equipment and depreciation
Furniture and equipment are recorded at cost. When capital assets are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts and the net difference, less any amount realized,
is reflected in the statement of operations.
Depreciation is calculated on the straight-line method over the useful lives of
the related assets.
Earnest money deposit
The Company made an earnest money deposit under the terms of a land purchase
agreement. The deposit will be forfeited if the Company defaults on the contract
but applied to the purchase price if the sale is closed.
Research and development costs
Costs to obtain certain intangible assets are accounted for in accordance with
SFAS No. 2, "Accounting for Research and Development Costs". Research and
development costs consist of the direct labor and expenses incurred in preparing
new drug applications and applying for Cyclotron and Radioactive Materials
Licenses. SFAS No. 2 requires that all research and development costs, except
those done for others under contract or certain government-related entities, be
charged to expense.
Web-site development costs
Web-site development costs are expensed when incurred.
F-11
<PAGE>
MOLECULAR DIAGNOSTICS AND THERAPEUTICS, INC.
(Formerly Nu-Tec., L.T.D.)
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Income taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the recorded book basis and the tax
basis of assets and liabilities for financial and income tax reporting. The
deferred tax assets and liabilities represent the future tax return consequences
of those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. Deferred taxes are also recognized for
operating losses that are available to offset future taxable income and tax
credits that are available to offset future federal income taxes.
Deferred offering costs
The Company incurred costs related to the offerings of its preferred stock and
common stock during the periods presented. All costs associated with the
Company's private stock offerings were deducted from proceeds received from
those offerings. Costs associated with the Company's planned initial public
stock offering will also be deducted from the gross proceeds at its conclusion.
However, should the offering not be successful, the deferred costs associated
with the public offering will be expensed at that time.
Earnings/(loss) per share
Effective December 31, 1997, Statement of Financial Accounting Standards No. 128
"Earnings Per Share" requires a dual presentation of earnings per share - basic
and diluted. Basic earnings per share has been computed on the weighted average
of common shares outstanding. Diluted earnings per share reflects the increase
in weighted average common shares outstanding that would result from the assumed
exercise of outstanding stock options and conversion of outstanding preferred
shares. For the years ended March 31, 1999 and 1998, 1,547,797 and 1,354,696
shares, respectively, were excluded from the diluted earnings per share
calculation, as these shares were anti-dilutive. Had these shares been included
in the calculation, diluted weighted average shares outstanding would have
increased to 12,960,835 and 11,500,611 for the years ended March 31, 1999 and
1998, respectively.
Fair value of financial instruments
The Company has determined, based on available market information and
appropriate valuation methodologies, that the fair value of its financial
instruments approximates carrying value. The carrying amounts of cash,
receivables, payables and other current liabilities approximate fair value due
to the short-term maturity of the instruments.
F-12
<PAGE>
MOLECULAR DIAGNOSTICS AND THERAPEUTICS, INC.
(Formerly Nu-Tec., L.T.D.)
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Stock-based compensation
During the period from February 19, 1992 (inception) through March 31, 2000, the
Company used shares of its no par value common stock to pay for various services
and for use as prizes. The Company also used shares of common stock to
compensate certain employees. During the same period, the Company granted stock
options to members of management. The Company accounted for these stock-based
compensation arrangements in a consistent manner, for all periods presented. For
shares of common stock issued to employees, consultants, and for prizes, the
Company valued the transaction at the historical fair value of the common stock
issued. The fair value of the common stock was adjusted to the most recent
historical price at which the Company offered its common stock for sale to
unrelated third party investors.
The Company applied the "intrinsic value method" as prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" in
determining compensation expense when accounting for stock option awards. The
intrinsic value method computes stock option expense at the excess of the strike
price of the option over the market price of the underlying share of common
stock, on the grant date.
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued in October
1995 and was effective for fiscal years beginning after December 15, 1995. This
accounting standard encourages the use of the "fair value based method" in
accounting for compensation expense associated with stock option awards and
similar plans but permitted the continued use of the intrinsic value method. The
Company adopted SFAS No. 123 effective April 1, 1996; however, the Company has
elected to continue to determine the value of stock-based compensation
arrangements under the provisions of APB 25. No pro forma disclosures have been
included in the accompanying notes to the financial statements as there was no
pro forma effect to the Company's operations or earnings per share.
Recently issued accounting pronouncements
The Company has adopted the following new accounting pronouncements for the year
ended March 31, 1999. There was no effect on the financial statements presented
from the adoption of the new standards. SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," requires an entity to recognize all
derivatives on a balance sheet, measured at fair value. Statement of Position
("SOP") 98-1, "Accounting for Costs of Computer Software Developed for Internal
Use," requires that entities capitalize certain internal-use software costs once
certain criteria are met. SOP 98-5, "Reporting on the Costs of Start-Up
Activities," provides among other things, guidance on the reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. There was no effect on the
financial statements presented from the adoption of the new pronouncements. In
June 1999, the FASB issued SFAS 137, which amended the implementation date for
SFAS 133 to be effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. The Company will continue to review new accounting
pronouncements over time to determine if any additional disclosures are
necessary based on evolving circumstances.
F-13
<PAGE>
MOLECULAR DIAGNOSTICS AND THERAPEUTICS, INC.
(Formerly Nu-Tec., L.T.D.)
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain reclassifications have been made to the presentation of the prior years'
financial statements to correspond to the current year. Total equity and net
loss are unchanged due to these reclassifications.
Basis of presentation
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
financial statements, the Company is a development stage company with no revenue
as of March 31, 2000 and has incurred a loss of 2,664,808 for the period from
February 19, 1992 (inception) through March 31, 2000. These factors, among
others, may indicate that the Company will be unable to continue as a going
concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company's continuation
as a going concern is dependent upon its ability to generate sufficient cash
flow to meet its obligations on a timely basis and ultimately to attain
profitability. The Company plans on raising $10 million through an initial
public offering that will be registered with the Securities and Exchange
Commission on Form SB-2 to fund a building, cyclotron and its proposed
operations. The costs of implementing the business plan in excess of the initial
public offering proceeds are expected to be financed with debt. The Company is
largely dependent upon the proceeds anticipated to be received from the proposed
initial public offering and debt financings to carry out its proposed
operations. The Company's ability to continue as a going concern is dependent
upon successful completion of the offering and financings and ultimately, upon
obtaining government approval for its licenses and achieving profitable
operations. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Name change
On November 9, 1999, the Company changed its name from Nu-Tec., L.T.D. to
Molecular Diagnostics and Therapeutics, Inc.
F-14
<PAGE>
MOLECULAR DIAGNOSTICS AND THERAPEUTICS, INC.
(Formerly Nu-Tec., L.T.D.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE A: BACKGROUND
The Company was incorporated under the laws of Colorado on February 19, 1992.
The principal activities since inception have included efforts towards the
preparation of four new drug applications, a radioactive materials license, a
cyclotron license, and the sale and issuance of shares of its preferred and
common stocks. Upon receipt of regulatory approval, the Company intends to
develop, manufacture and distribute radiochemical and radiopharmaceutical drug
products. Due to the nature of the products and the presence of radioactive
substances, the Company will be subject to regulation by a number of federal and
state agencies, including the Food and Drug Administration. Following is a
summary of the Company's new drug applications and licenses as well as its
current status:
Description Status
----------- ------
New Drug Applications:
----------------------
Iodine-123...........................Application preparation in progress
Technetium-99m.......................Application preparation in progress
Flourine-18 (FDG)....................Application preparation in progress
Palladium-103........................Initial stage of application preparation
in progress
Licenses:
---------
Radioactive Materials License........Application preparation in progress
Cyclotron Operating License..........Application preparation in progress
NOTE B: RELATED PARTY TRANSACTIONS
During the years ended March 31, 2000 and 1999, and for the period from February
19, 1992 (inception) through March 31, 2000, the Company paid officers $23,500,
$157,157, and $583,033 (unaudited), respectively, for compensation that is
included in the accompanying financial statements as research and development
costs.
During the year ended March 31, 2000, the Company issued 53,933 shares of no par
value common stock to employees for compensation valued by the Board of
Directors at the fair value of the common stock, or $.75 per share (see Note E).
The Board of Directors considered contemporaneous equity transactions and other
analysis to determine the fair value of the common stock. These shares are
"restricted securities" and may be sold only in compliance with Rule 144 of the
Securities Act of 1933, as amended (the "Act").
During the year ended March 31, 2000, the Company issued 75,000 shares
(post-split) of no par value common stock to employees for compensation valued
by the Board of Directors at the fair value of the common stock, or $1.125 per
share (post-split) (see Note E). The Board of Directors considered
contemporaneous equity transactions and other analysis to determine the fair
value of the common stock. These shares are "restricted securities" and may be
sold only in compliance with Rule 144 of the Securities Act of 1933, as amended
(the "Act").
F-15
<PAGE>
MOLECULAR DIAGNOSTICS AND THERAPEUTICS, INC.
(Formerly Nu-Tec., L.T.D.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE B: RELATED PARTY TRANSACTIONS, CONTINUED
During the year ended March 31, 1999, the Company issued 103,500 shares of no
par value common stock to employees for compensation valued by the Board of
Directors at the fair value of the common stock, or $.75 per share (see Note E).
The Board of Directors considered contemporaneous equity transactions and other
analysis to determine the fair value of the common stock. These shares are
"restricted securities" and may be sold only in compliance with Rule 144 of the
Securities Act of 1933, as amended (the "Act").
During the year ended March 31, 1994, the Company issued 905,000 (unaudited)
shares of its no par value common stock to an officer valued by the Board of
Directors at the fair value of the common stock, or $.001 per share. The Board
of Directors considered contemporaneous equity transactions and other analysis
to determine the fair value of the common stock. Stock-based compensation
expense of $905 was recognized in the accompanying financial statements for the
year ended March 31, 1994. These shares are "restricted securities" and may be
sold only in compliance with Rule 144 of the Act.
During the period ended March 31, 1992, the Company issued 5,250,000 (unaudited)
shares of no par value common stock to an officer valued by the Board of
Directors at the fair value of the common stock, or $.0001 per share. The Board
of Directors considered contemporaneous equity transactions and other analysis
to determine the fair value of the common stock. These shares are "restricted
securities" and may be sold only in compliance with Rule 144 of the Act.
NOTE C: FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following at March 31, 2000:
Furniture...........................................$.19,444
Office and computer equipment.........................70,288
Computer software.....................................11,320
---------
101,052
Less: accumulated depreciation...................... (81,081)
---------
$ 19,971
=========
F-16
<PAGE>
MOLECULAR DIAGNOSTICS AND THERAPEUTICS, INC.
(Formerly Nu-Tec., L.T.D.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE D: INCOME TAXES
A reconciliation of the U.S. statutory federal income tax rate to the effective
rate is as follows:
March 31,
--------------------------
2000 1999
------- -------
U.S. federal statutory graduated rate............... 34.00% 34.00%
State income tax rate,
net of federal benefit........................... 3.14% 3.14%
Offering costs...................................... 11.11% 6.01%
Net operating loss for which no tax
benefit is currently available...................-48.25% -43.15%
------ ------
0.00% 0.00%
====== ======
At March 31, 2000, deferred taxes consisted of a net tax asset of $1,109,333 due
to operating loss carryforwards of $2,664,808, which was fully allowed for in
the valuation allowance of $1,109,333. The valuation allowance offsets the net
deferred tax asset for which there is no assurance of recovery. The change in
the valuation allowance for the years ended March 31, 2000 and 1999 was $332,064
and $324,429, respectively. Net operating loss carryforwards will expire through
2019.
The valuation allowance will be evaluated at the end of each year, considering
positive and negative evidence about whether the asset will be realized. At that
time, the allowance will either be increased or reduced; reduction could result
in the complete elimination of the allowance if positive evidence indicates that
the value of the deferred tax asset is no longer impaired and the allowance is
no longer required.
NOTE E: SHAREHOLDERS' EQUITY AND STOCK-BASED COMPENSATION
The Company has established one class of common stock and has authorized
preferred shares to be designated by class as determined by the Board of
Directors.
The common shares each have voting rights, with no par value or preference
rights. The preferred shares have voting rights equal to the number of shares of
converted common stock and no par value.
During the year ended March 31, 2000, the Company sold 399,400 shares of its no
par value common stock to certain shareholders of record for proceeds of
$299,550 ($.75 per share). The Company incurred no offering costs related to the
sale.
During the year ended March 31, 2000, the Company sold 231,148 shares of its no
par value common stock to certain shareholders of record for proceeds of
$260,042 (post-split) ($1.125 per share). The Company incurred no offering costs
related to the sale.
F-17
<PAGE>
MOLECULAR DIAGNOSTICS AND THERAPEUTICS, INC.
(Formerly Nu-Tec., L.T.D.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE E: SHAREHOLDERS' EQUITY AND STOCK-BASED COMPENSATION, CONTINUED
During the year ended March 31, 2000, the Company issued 57,467 shares of common
stock for services rendered. 35,000 of the shares were issued to directors in
lieu of fees and the remaining 22,467 shares were issued to consultants for
other professional services. These shares were valued by the Board of Directors
at the price of the shares of common stock sold in a stock offering ongoing at
the time of issuance, or $.75 per share. As a result, stock-based compensation
expense of $43,100 was recognized in the accompanying financial statements for
the year ended March 31, 2000.
During the year ended March 31, 2000, the Company issued 53,933 shares of its no
par value common stock as compensation. These shares were valued by the Board of
Directors at the fair value of common stock, or $.75 per share. As a result,
stock-based compensation expense of $40,450 was recognized in the accompanying
financial statements for the year ended March 31, 2000.
During the year ended March 31, 2000, the Company issued 75,000 shares
(post-split) of its no par value common stock as compensation. The Board of
Directors valued these shares at the fair value of common stock, or $1.125 per
share (post-split). As a result, stock-based compensation expense of $40,450 was
recognized in the accompanying financial statements for the year ended March 31,
2000.
On September 30, 1999, the Board of Directors approved a 3 for 2 reverse split
of the Company's no par value common stock. The shareholders ratified the
reverse stock split on November 1, 1999.
On February 1, 1999, the Company commenced a private offering of 58,333 shares
of its Class I Convertible Preferred Stock at $6.00 per share pursuant to an
exemption under Rule 504 of Regulation D under the Securities Act of 1933, as
amended. Each preferred share is convertible by the Company on or before July
28, 1999, into eight common shares for no additional consideration and is
entitled to a preference of $6.00 per share upon liquidation of the Company.
Each issued and outstanding preferred share is entitled to eight votes based
upon the conversion ratio of eight common shares issuable upon the conversion of
each preferred share. As of March 31, 1999, there were 22,875 shares of
Convertible Preferred Stock outstanding that were convertible to 183,000 shares
of common stock. During the year ended March 31, 2000, the Company sold 34,458
shares of convertible preferred stock in connection with its Class "I" offering.
The 34,458 shares were in addition to the 22,875 shares sold prior to March 31,
1999. On July 27, 1999, all 57,333 preferred shares were converted to 458,664
shares of common stock.
During the year ended March 31, 2000, the Company incurred $205,934 in legal,
accounting, printing and investor consulting costs related to its proposed
initial public offering.
The Company filed a registration statement on Form SB-2 with the Securities and
Exchange Commission on March 30, 1999. Following approval of the registration
statement, the Company plans to conduct an initial public offering and offer for
sale 1,000,000 shares of its no par value common stock at $10.00 per share. The
Company plans to commence the offering during 2000.
F-18
<PAGE>
MOLECULAR DIAGNOSTICS AND THERAPEUTICS, INC.
(Formerly Nu-Tec., L.T.D.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE E: SHAREHOLDERS' EQUITY AND STOCK-BASED COMPENSATION, CONTINUED
During the year ended March 31, 1999, the Company issued 41,600 shares for
services rendered. 27,900 shares were issued for professional fees related to
the preparation of Company's business plan; 10,000 shares were issued for legal
fees in connection with the Company's offering; and 3,700 shares were issued to
consultants for other professional services. These shares were valued by the
Board of Directors at the fair value of common stock, or $.75 per share. The
Board of Directors considered contemporaneous equity transactions and other
analysis to determine the fair value of the common stock. Stock-based
compensation expense of $31,200 was recognized in the accompanying financial
statements for the year ended March 31, 1999.
During the year ended March 31, 1999, the Company issued 253,500 shares of its
no par value common stock as compensation to officers, employees and
consultants. These shares were valued by the Board of Directors at the fair
value of common stock, or $.75 per share. Stock-based compensation expense of
$190,125 was recognized in the accompanying financial statements for the year
ended March 31, 1999.
During the year ended March 31, 1999, the Company issued 1,000 shares as prizes
at trade shows. These shares were valued by the Board of Directors at the fair
value of common stock, or $.75 per share. Stock-based compensation expense of
$750 was recognized in the accompanying financial statements for the year ended
March 31, 1999.
During the year ended March 31, 1997, the Company issued 13,133 shares to a
consultant for services rendered. These shares were valued by the Board of
Directors at the fair value of common stock, or $.50 per share. Stock-based
compensation expense of $6,566 was recognized in the accompanying financial
statements for the year ended March 31, 1999.
During the year ended March 31, 1995, the Company issued 1,000 shares as prizes
at trade shows. These shares were valued by the Board of Directors at the fair
value of common stock, or $.4166 per share. Stock-based compensation expense of
$417 was recognized in the accompanying financial statements for the year ended
March 31, 1995.
During the year ended March 31, 1994, the Company issued 200,000 (unaudited)
shares to a consultant for services rendered. These shares were valued by the
Board of Directors at the fair value of common stock, or $.22 per share.
Stock-based compensation expense of $44,000 was recognized in the accompanying
financial statements for the year ended March 31, 1994.
During the year ended March 31, 1994, the Company issued 8,500 shares as prizes
at trade shows. These shares were valued by the Board of Directors at the fair
value of common stock, or $.4166 per share. Stock-based compensation expense of
$3,540 was recognized in the accompanying financial statements for the year
ended March 31, 1994.
F-19
<PAGE>
MOLECULAR DIAGNOSTICS AND THERAPEUTICS, INC.
(Formerly Nu-Tec., L.T.D.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE E: SHAREHOLDERS' EQUITY AND STOCK-BASED COMPENSATION, CONTINUED
During the year ended March 31, 1992, the Company issued 120,000 (unaudited)
shares of no par value common stock to consultants for services rendered. These
shares were valued by the Board of Directors at the fair value of common stock,
or $.015 per share. Stock-based compensation expense of $1,800 was recognized in
the accompanying financial statements for the year ended March 31, 1992. These
shares are "restricted securities" and may be sold only in compliance with Rule
144 of the Act.
During the period ended March 31, 1992, the Company issued 400,000 (unaudited)
shares of its common stock to an investor for $6,000 (unaudited), or $.015 per
share. These shares are "restricted securities" and may be sold only in
compliance with Rule 144 of the Act.
NOTE F: STOCK OPTION AGREEMENTS
On December 29, 1995, the Board of Directors adopted a Stock Option Plan, which
reserved 5,000,000 shares of the Company's common stock. On January 23, 1996,
the Company granted non-compensatory stock options for 1,122,183 shares of its
common stock to its president and other individuals. The options, which are
vested and exercisable as of the grant date, allow the optionees to purchase
475,000; 275,000; 172,183; 100,000; and 100,000 shares of common stock at $.35
per share. The Company's common stock is not traded in the public market and the
exercise price of $.35 per share on the grant date approximated management's
estimate of the fair value of the Company's common stock. The options expire on
January 23, 2001.
On September 30, 1999, the Board of Directors approved the termination of all
outstanding stock options.
NOTE G: COMMITMENTS AND CONTINGENCIES
Land purchase contract
On March 8, 2000, the Company entered into a contract to purchase land for
$1,198,730. The Company plans to purchase the land in order to construct a
manufacturing facility for its proposed operations. The Company issued 102,000
shares of its restricted common stock as an earnest money deposit under the
terms of the contract. The shares were valued in the contract at the fair value
of common stock, or $1.125 per share (post-split) based on contemporaneous
equity transactions and other analysis. The earnest money deposit, valued at
$114,750, will be forfeited if the Company defaults but applied to the purchase
price if the sale is closed. The closing date for the sale is July 17, 2000
unless both parties agree to an extension. It is anticipated that the remainder
of the purchase price, or $1,083,980, will be paid out of the net proceeds of
the common stock offering described in Note E. The Company's ability to recover
the cost of its deposit of $114,750 and to pay the remainder of the purchase
price of $1,083,980 is dependent on the timing and success of the proposed stock
offering.
F-20
<PAGE>
MOLECULAR DIAGNOSTICS AND THERAPEUTICS, INC.
(Formerly Nu-Tec., L.T.D.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE G: COMMITMENTS AND CONTINGENCIES, CONTINUED
Office leases
The Company entered into an operating lease for office space located in Boulder,
Colorado on January 27, 1997. The Boulder lease commenced February 1, 1997 and
expires January 31, 2002. On October 22, 1998, the Company entered into a second
operating lease for office space located in Longmont, Colorado. The Longmont
lease commenced November 1, 1998 and expires October 31, 2001.
On October 14, 1999, the Company signed a tenant to a sublease agreement for the
office space located in Boulder, Colorado. The sublease commences on November 1,
1999 and ends on January 31, 2002.
Future minimum lease payments under both office leases and receipts under the
sublease agreement for the years ended March 31 are as follows:
Minimum Sublease Net
Rental Rental Rental
Payments Income Payments
--------- -------- ----------
March 31,
2001........................ 44,021 18,797 25,224
2002........................ 32,802 16,253 16,549
-------- -------- --------
$ 76,823 $ 35,050 $ 41,773
======== ======== =========
F-21
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
During our two most recent fiscal years and since the end of our most
recent fiscal year our principal independent accountant has not resigned and has
not been dismissed and we have had no disagreements on any matter of accounting
principles or practices, financial statement disclosure or auditing scope and
procedure.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
Board of Directors and Executive Officers
The following are our directors and executive officers:
Name Age Position
---- --- --------
Malcolm H. Benedict 62 President, CEO and Chairman of the Board
Donald A. Ludwig, Ph.D. 52 Director and Executive Vice President
Janet L. Davis 44 Director and Secretary
Vernon L. Morris, CPA 55 Chief Financial Officer
Malcolm H. Benedict has served as the President, Chief Executive
Officer and Chairman of the Board of Directors since the inception of Molecular
Diagnostics and Therapeutics, Inc., (formally Nu-Tec., L.T.D.), on February 19,
1992. From 1979 to 1991, Mr. Benedict served as the President, Chief Executive
Officer and Chairman of the Board of Directors of Golden Pharmaceuticals, Inc.,
Golden, Colorado ("Golden Pharmaceuticals", formerly known as "North American
Chemical Corporation," and "Benedict Nuclear Pharmaceuticals, Inc."), a publicly
held corporation that was engaged in the manufacturing and distribution of
radiopharmaceuticals, subsequently selling its product line to Syncor
Pharmaceuticals, Inc. During the approximate 19 years since Mr. Benedict's
founding of Golden Pharmaceuticals in 1972, Golden Pharmaceuticals developed
into a national drug company and received Food and Drug Administration approval
for the commercialization of two radiopharmaceutical products. Mr. Benedict has
extensive experience in nuclear medicine during the past 35 years. Mr. Benedict
is an active member of five well-known professional organizations, as well as
the Society of Nuclear Medicine.
25
<PAGE>
Donald A. Ludwig is Executive Vice President and a Director. He has
held these positions for the past two years. Prior to assuming these duties, he
was the founder and Director of Physics for Medicine, a medical consulting
company from 1988 through 1998. His firm has been hired by hospitals,
institutions and corporations in medical physics, manufacturing, marketing and
distribution. A range of consumers have drawn on his business and medical
background and extensive experience of more than 25 years. Clients have ranged
from national to international organizations including International Isotopes,
Inc., MDS Nordion, E.I. du Pont deNemours and Company, The Malaysian Institute
for Nuclear Technology, National Laboratory of Germany and numerous
manufacturers of medical and radiation therapy devices. Among other tasks, he
was the Director of International Sales and Marketing for Positron Corporation,
a manufacturer of scanners for positron emission tomography. He holds advanced
degrees both in marketing and medical physics.
Janet L. Davis has served as the Secretary since 1996 and has served as
an interim director since December 1999. She was appointed to serve as an
interim director upon the resignation of J.D. Kish. From 1994 through 1997 she
was employed as the general manager of Chance Northern, LLC. In 1998 Ms. Davis
was employed by Cudd & Associates as a paralegal. Since the beginning of 1999,
Ms. Davis has been employed by Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, P.C., most currently in the position of Paralegal in the Tax, Trusts
& Estates Department. Ms. Davis successfully completed an American Bar
Association-approved program in paralegal studies and has a Bachelor of Science
degree from Louisiana State University.
Vernon L. Morris. Mr. Morris was appointed as our Chief Financial
Officer in January 2000. He is a Certified Public Accountant and has had his own
accounting practice in Boulder, Colorado for the past twelve years. Mr. Morris
received his degree in Physics from Colorado State University and his CPA
certificate in Colorado in 1972. Mr. Morris was employed with Brock Cordle and
Associates as chief audit partner and securities audit partner. Mr. Morris will
be responsible for all financial operations and controls, including budgeting,
financing, financial reports and taxes. Mr. Morris is a member of the American
Institute of Certified Public Accountants.
Effective August 1, 2000, we anticipate appointing the following two
individuals to our Board of Directors:
Gregory C. Dutcher has been employed, since 1994, as president of the
Oxford International Institute, a company dealing in institutional investing and
commercial lending. Mr. Dutcher specializes in corporate finance for small and
mid-sized public and private companies. Customers include consumer finance
firms, high technology development companies and many others. He has served in
various capacities of these firms, regarding financial decision-making and
financial advisor in capital management and financial statements. For over 15
years, he has also been responsible for structuring and originating commercial
mortgages, venture capital and debt instruments for such companies as Citibank,
American Home Funding and National First Mortgage Corporation, to name a few.
26
<PAGE>
Paul B. Knight has been affiliated with several investment banking
firms, including services as specialty underwriter for a member of the New York
Stock Exchange. As President of Transwestern Financial Advisors, he assists in
structuring and originating commercial mortgages, venture capital, creation of
debt instruments, financial management, investment advisement, bond financing
and securitizations, and acts as financial advisor to a number of commercial
clients. He also has experience in capital management, financial forecasting,
preparation of financial statements and overseeing SEC filings and requirements.
All directors currently hold office until the next annual meeting of
shareholders and until their successors are duly elected and qualified. Our
executive officers serve at the discretion of the Board of Directors and until
their successors are duly elected and qualified.
Medical and Scientific Advisory Board
Michael J. Lawson, M.D. (Board Certified Nuclear Medicine & Internal
Medicine) is the Director of the Good Samaritan PET Center, Phoenix, Arizona.
Dr. Lawson has an extensive background in the field of nuclear medicine over the
past thirty years. He is a founding Member of the American Society of Nuclear
Cardiology. Dr. Lawson is an active member of more than six medical
organizations as well as having extensive publications. He is a graduate of the
University of Utah School of Medicine. Dr. Lawson has joined us as the Advisor
and Director of the PET Center.
Steven M. Larson, M.D. (Board Certified Nuclear Medicine & Internal
Medicine) is the Chief of Nuclear Medicine at Memorial Sloan Kettering Cancer
Institute, New York, New York. Dr. Larson, a graduate of the Washington School
of Medicine, has had an extensive background in the field of nuclear medicine
and internal medicine over the past thirty years. Dr. Larson is an active member
of several medical organizations as well as having extensive publications. Dr.
Larson has joined us as a medical advisor in diagnostic and therapeutic
medicine.
Karl Erdman, Ph.D. has worked as Chief Scientist on PET Medical
Cyclotron, Research Cyclotron, and Commercial Radioisotope Cyclotron Projects at
EBCO Technologies, Inc. since 1987. Dr. Erdman received his Ph.D. in Physics
from the University of British Columbia. Prior to joining Ebco, he worked as
Associate Director of TRIUMF, Canada's National Meson Facility located in
Vancouver, BC, and was involved as part of the team who built TRIUMF in 1972. He
is an internationally recognized expert in negative ion cyclotrons,
radio-frequency systems in Cyclotron Accelerators, charged particle beam line
design and operation, and cyclotron applications. Dr Erdman taught at the
Physics Department at the University of British Columbia. He has had many
accepted international articles published on physics. He has joined us as a
scientific advisor in cyclotron operations and controls.
27
<PAGE>
Richard R. Johnson, Ph.D. has worked as Program Manager on PET Medical
Cyclotron, Research Cyclotron, and Commercial Radioisotope Cyclotron Projects at
EBCO Technologies since 1996. Dr. Johnson received his Ph.D. in Physics from the
University of British Columbia. Prior to joining Ebco, he worked as Division
Head of TRIUMF, Canada's National Meson Facility located in Vancouver, BC, and
was involved as part of Administration, Technical and Applied Programs
responsible for medical applications. He has joined us as a scientific advisor
in cyclotron operations and manufacturing procedures.
Hermann Schweickert, Ph.D. is the head of the Cyclotron Laboratory at
the National Laboratory of Germany. Dr. Schweickert received his Ph.D. in
Physics from University of Heidelberg, Germany. He was responsible for the
design, construction and operation of two accelerators at the laboratory. He is
the head of the accelerator development group. He is a member the Institute of
Nuclear Physics and The Institute of Neutron Physics and Reactor Technology. Dr.
Schweickert is an expert for the International Atomic Energy Agency throughout
the world in the field of radioisotope production for medical applications. He
has published extensively in international physics journals. He has joined us as
a scientific advisor in cyclotron operations and targets.
Volker Bechtold, Ph.D. is the Deputy Director of the Cyclotron
Laboratory at the National Laboratory of Germany. Dr. Bechtold received his
Ph.D. in Physics of the University of Karlsrule, Germany. Previously, he was the
scientist responsible for the design, construction and operation of the 42 MeV
Cyclotron. He has worked as Director of Isotope Production and in the research
center of the National Laboratory developing many of the radiopharmaceuticals
for medical applications in Europe. Dr. Bechtold is an expert for the
International Atomic Agency (IAEA) throughout the world in the field of
radioisotope production for medical applications. He has published extensively
in international physics journals. He has joined us as a scientific advisor in
cyclotron operations, targets, (gas and solid), manufacturing and production of
radiochemicals and radiopharmaceuticals.
Robert L. Mundis, Certified Health Physicist is our radiation
protection officer. His responsibilities will include, but not be limited to,
the following: enforce compliance with all safety rules as contained in
radioactive materials license and as promulgated by the federal, state and local
governments; to inspect our facilities and records according to the provisions
of the radioactive license on a quarterly basis and issue reports. He has worked
as a Certified Health Physicist at the Los Alamos National Laboratory since
1991. Mr. Mundis received his BA in Mathematics from the University of Niagara.
He is a Technical Staff Member in the TA-53 Accelerator Health Physics Section
of the HS-1 Health Physics Operations Group at the Laboratory.
28
<PAGE>
Ronald J. Callahan Ph.D. is the Nuclear Pharmacist at the Division of
Nuclear Medicine, Massachusetts General Hospital (Harvard Medical School). He
received his Ph.D. at the Massachusetts College of Pharmacy. He is an expert in
the field of pharmaceuticals and radiopharmaceuticals and on the Advisory Panel
of the United States Pharmacopeia & National Formulary. He has served on the
Board of Trustees of the Society of Nuclear Medicine. Dr. Callahan is a member
of numerous societies, of which one is the Radiopharmaceutical Science Council
of the Society of Nuclear Medicine.
The members of the Medical and Scientific Advisory Board are expected
to advise us on technical and scientific issues. We anticipate that the board of
advisors will review the technical progress of our products, engineering and
research and development, and will be compensated at a rate per meeting to be
determined by our Board of Directors, plus reasonable travel expenses in
connection with such meetings. The advisors will make recommendations to us
regarding product capability and specifications, engineering designs and
research and development objectives, and our future technical development. We do
not intend to retain individuals to serve as advisors whose primary employers,
or other third parties with whom such individuals have consulting arrangements,
are in competition with us. Advisors may be retained individually by us on a
consulting basis to perform work specifically for and at our direction. The
members of the Medical and Scientific Advisory Board have each received 5,000
shares of common stock for their participation on this board.
Item 10. Executive Compensation.
The following table sets forth the compensation paid or accrued, for
the fiscal years ended March 31, 2000, 1999 and 1998 for our President and
Executive Vice President. Other than our President and Executive Vice President,
we have no officer whose salary and bonus were in excess of $100,000. There is
no executive officer, other than those listed on the following table, who was
awarded, earned or paid more than $100,000 for the fiscal year ended March 31,
2000, 1999 and 1998. We do not have any option or other grants outstanding.
<TABLE>
<CAPTION>
------------------------------------ ---------------- --------------- ------------------ -------------------- ------------
Bonus
Fiscal Year Salary Research and Cyclotron License Stock Bonus
Name and Principal Position Ended Development and Design
------------------------------------ ---------------- --------------- ------------------ -------------------- ------------
<S> <C> <C> <C> <C> <C>
Malcolm H. Benedict, President 2000 $125,000 $ 23,500 -0- -0-
1999 $125,000 $ 100,428 $37,157 -0-
1998 $ 86,667 $ 67,600 -0- -0-
------------------------------------ ---------------- --------------- ------------------ -------------------- ------------
Donald A. Ludwig, Ph.D., Executive 2000 $ 52,084 -0- -0- $75,000
Vice President 1999 $ 2,083 $ 19,572 -0- -0-
1998 -0- -0- -0- -0-
------------------------------------ ---------------- --------------- ------------------ -------------------- ------------
</TABLE>
29
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information with respect to the
beneficial ownership of shares of common stock held by:
o each person or entity who is known by us to beneficially own five percent or
more of the common stock; o each of our directors and executive officers; and o
all of our directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned (3)
Name of Beneficial Owner (1) Number of Shares(2) Before Offering After Offering
---------------------------- ------------------- --------------- --------------
<S> <C> <C> <C>
Malcolm H. Benedict 3,119,000 34.39% 30.98%
Donald A. Ludwig 66,667 0.73% 0.66%
Janet L. Davis 6,667 0.07% 0.07%
Vernon L. Morris 75,000 0.83% 0.74%
All Directors and Executive
Officers as a group (four) persons
3,267,334 36.03% 32.45%
Jacqueline Rae Quinn (4) 821,333 9.06% 8.16%
First Trust Corporation (5) 513,333 5.66% 5.10%
Total of all Principal Shareholders
4,602,000 50.75% 45.71%
</TABLE>
(1) Unless otherwise indicated, the address for each named individual or
group is in care of Molecular Diagnostics and Therapeutics, Inc. at
1880 Industrial Circle, Suite B-3, Longmont, CO 80501.
(2) Reflects 3 for 2 reverse stock split.
(3) Unless otherwise indicated, we believe that all persons named in the
table have sole voting and investment power with respect to all shares
of common stock beneficially owned by them. None of the persons listed
owns any options or other rights to acquire additional shares of our
common stock.
(4) Jacqueline Rae Quinn is the beneficial owner of these shares, which
were acquired by James C. Quinn while he served as a director of
Molecular Diagnostics and Therapeutics, Inc. Mr. Quinn resigned as a
director of Molecular Diagnostics and Therapeutics, Inc., effective
July 7, 1999.
(5) These shares beneficially owned by Arthur W. Young, a former director.
30
<PAGE>
Item 12. Certain Relationships and Related Transactions.
During the years ended March 31, 2000 and 1999, and for the period from
February 19, 1992 (inception) through March 31, 2000, we paid officers $23,500,
$157,157 and $583,033 (unaudited) respectively, for compensation that is
included in the accompanying financial statements as research and development
costs.
During the year ended March 31, 2000, we paid officers $23,500 for
compensation that was charged to research and development costs. Additional
expenses of $56,140 resulted in research and development costs totaling $79,640
for the year ended March 31, 2000.
During the year ended March 31, 2000 we issued 53,933 shares of no par
value common stock to employees for compensation valued by management at the
fair value of the common stock or $.75 per share. These shares are "restricted
securities" and may be sold only in compliance with Rule 144 of the Securities
Act.
During the year ended March 31, 2000 we issued 75,000 shares (post
split) of no par value common stock to employees for compensation valued by
management at the fair value of the common stock or $1.25 per share (post
split). These shares are "restricted securities" and may be sold only in
compliance with Rule 144 of the Securities Act.
During the year ended March 31, 1999, we issued 103,500 shares of no
par value common stock to employees for compensation valued by management at the
fair value of the common stock, or $.75 per share. These shares are "restricted
securities" and may be sold only in compliance with Rule 144 of the Securities
Act.
We believe that these transactions were fair and reasonable to us and
were on terms no less favorable than could have been obtained from unaffiliated
third parties. Any such future transactions will be on terms no less favorable
to us than could be obtained from unaffiliated parties.
31
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits:
1. Underwriting and Selling Agreement, dated August 4, 1999
between the Registrant and Three Arrows Capital Corp.,
including Letter Agreement, dated August 3, 1999, between the
Registrant and Three Arrows Capital Corp.*
1.1 Escrow Agreement, dated May 15, 2000, by and among the
Registrant, the Underwriter, Norwest Bank Colorado, N.A. **
3.1 Copy of Registrant's Amended and Restated Articles of
Incorporation.*
3.1.1 Copy of Registrant's Articles of Amendment to the Articles of
Incorporation, as filed with the Colorado Secretary of
State on October 30, 1992.*
3.1.2 Copy of Registrant's Articles of Amendment to the Articles of
Incorporation, as filed with the Colorado Secretary of
State on November 9, 1999.*
3.2 Copy of Registrant's Bylaws.*
4.1 Specimen Common Stock Certificate.*
4.2 Form of Subscription Agreement**
5.1 Opinion by Reinhart, Boerner, Van Deuren, Norris & Rieselbach,
P.C., as to legality of the shares of Common Stock
offered by the Company.**
10.1 Copy of Second Amendment to Employment Agreement, effective
as of January 1, 1999 between Registrant and Malcolm H.
Benedict.*
10.2 Copy of Employment Agreement, effective as of April 1, 1998
between Registrant and Donald A. Ludwig, Ph.D.*
10.3 Letter of Proposal, dated September 30, 1999, from DVI
Financial Services, Inc. to the Registrant.*
10.4 Pre-Contract Agreement, dated March 11, 1998 between the
Registrant and Ebco Technologies.*
10.5 Contract to Buy and Sell Real Estate, dated March 8, 2000,
between the Registrant and Horizon Investments, LLC.*
10.6 Agreement to Amend/Extend Contract, dated March 15,2000,
between the Registrant and Horizon Investments, LLC.*
10.7 Loan Commitment dated June 28, 2000 to the Registrant from
Oxford International, Inc.
23.1 Consent of Cordovano and Harvey, P.C.
23.2 Consent of Reinhart, Boerner, Van Deuren, Norris & Rieselbach,
P.C., (included in Exhibit 5.1).**
27.1 Financial Data Schedule as of March 31, 2000.*
* Filed with the Commission on March 31, 2000 as part of Registrant's
Registration Statement on Form SB-2
** Filed with the Commission on May 9, 2000 as part of Registrant's Amendment
No. 1 to Registration Statement on Form SB-2
(b) The Registrant has not filed any report on Form 8-K during
the last quarter
32
<PAGE>
SIGNATURES
In accordance with Section 15(d) of the Exchange Act of 1933, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MOLECULAR DIAGNOSTICS & THERAPEUTICS, INC.
Date: July 14, 2000
By: /s/ Malcolm H. Benedict
-------------------------------------------
Malcolm H. Benedict,
Chairman of the Board, Chief Executive
Officer, President and Treasurer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/Malcolm H. Benedict Chairman of the Board, Chief Executive July 14, 2000
----------------------- Officer, President & Treasurer
Malcolm H. Benedict
Executive Vice President and Director
--------------------
Donald A. Ludwig
/s/Janet L. Davis Secretary and Director July 14, 2000
------------------
Janet L. Davis
33
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE EXCHANGE ACTBY NON-REPORTING ISSUERS
As of the date of filing of this report on Form 10-KSB, no annual
report or proxy material has been sent to security holders. At such time as the
Registrant furnishes such an annual report or proxy materials to security
holders, the Registrant shall furnish copies of such material to the Commission.
34
