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US Securities and Exchange Commission
Washington, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1996.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from __________________ to ____________________
Commission File Number 0-12365
MEDICAL DEVICE TECHNOLOGIES, INC.
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(Name of small business issuer in its charter)
Utah 58-1475517
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9171 Towne Centre Drive, Suite 355, San Diego, California 92122
(Address of principal executive offices)
Issuer's telephone number: (619) 455-7127
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12 (g) of the Exchange Act:
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<CAPTION>
Title of each class Name of each exchange on which registered
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Common Stock, $0.15 Par Value The Nasdaq SmallCapSM Market
6% Cumulative Convertible Series A Preferred Stock, $.01 Par Value The Nasdaq SmallCapSM Market
Redeemable Common Stock Purchase Warrants The Nasdaq SmallCapSM Market
</TABLE>
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 X No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B 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 $26,193.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of March 12, 1997, was $3,871,085
As of March 12, 1997, Registrant had outstanding 7,838,632 shares of common
stock, 1,256,080 shares of 6% cumulative convertible Series A preferred stock
and 1,972,000 redeemable common stock purchase warrants.
Transitional Small Business Disclosure Format (check one): Yes No. X
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TABLE OF CONTENTS
PART I
<S> <C> <C>
Item 1. Description of the Business.........................................................2
Item 2. Description of Property............................................................16
Item 3. Legal Proceedings..................................................................16
Item 4. Submission of Matters to a Vote of Security Holders................................17
PART II
Item 5. Market for Common Equity and Related Stockholder Matters ..........................17
Additional Item. Executive Officers and Directors of the Company ...................................18
Item 6. Management's Discussion and Analysis and Plan of Operation.........................21
Item 7. Financial Statements...............................................................27
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure...............................................................28
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act..................................28
Item 10. Executive Compensation.............................................................28
Item 11. Security Ownership of Certain Beneficial Owners and Management.....................28
Item 12. Certain Relationships and Related Transactions.....................................28
PART IV
Item 13. Exhibits and Reports on Form 8-K...................................................28
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF THE BUSINESS
Corporate History
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Medical Device Technologies, Inc. (the "Company") was incorporated on
February 6, 1980, under the laws of the State of Utah, initially under the name
of Gold Probe, Inc. In September 1981, the Company and the Hailey Oil Company,
Inc. a Mississippi corporation, entered into an Agreement and Plan of
Reorganization whereby the Company acquired Hailey Oil Company, Inc. and
exchanged 4,500,000 shares of its Common Stock for all the issued and
outstanding shares of Hailey Oil Company, Inc. Also, pursuant to the
reorganization in January 1982, the Company changed its name to Hailey Energy
Corporation, effected a one (1) for five (5) reverse split of its Common Stock,
and decreased its authorized number of shares to 25,000,000. In October 1986,
the number of authorized shares of the Company was increased to 100,000,000. In
November 1990, the Company effected a one (1) for thirty (30) reverse split of
its Common Stock and increased the par value of its Common Stock to $0.15 per
share. In November 1992, the Company changed its name from "Hailey Energy
Corporation" to "Cytoprobe Corporation." The number of authorized shares of
Common Stock (100,000,000) remained unchanged. In January 1994, the Company
effected a one (1) for six (6) reverse split of its Common Stock. The par value
of the Company's Common Stock remained at $0.15 per share and the number of
authorized shares remained unchanged. In May 1995, the Company changed its name
to Medical Device Technologies, Inc. to reflect the Company's broadening base of
medical products. In June 1996, the Company effected a one (1) for two (2)
reverse split of its Common Stock. The par value of the Company's Common Stock
remained at $0.15 per share and the number of authorized shares remained
unchanged.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and other information filed with the Commission can be inspected and copied at
the public reference facilities of the Commission at 450 Fifth Street NW,
Washington, DC 20549. Such material may also be accessed electronically by means
of the Commission's home page on the Internet at http://www.sec.gov. The
Company's Common Stock, the 6% Cumulative Convertible Series A Preferred Stock ,
par value $.01 per share (the "Preferred Stock") and redeemable common stock
purchase warrants (the "Redeemable Warrants") are traded on the National
Association of Securities Dealers Automated Quotation (Nasdaq) SmallCap Market
under the symbols "MEDD", "MEDDP", and "MEDDW", respectively.
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Forward-Looking Statements
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The following discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be anticipated by such forward-looking
statements. Factors that may affect such forward-looking statements include,
without limitation: the Company's ability to successfully develop new products
for new markets; the impact of competition on the Company's revenues, changes in
law or regulatory requirements that adversely affect or preclude customers from
using the Company's products for certain applications; delays in the Company's
introduction of new products; and failure by the Company to keep pace with
emerging technologies.
When used in this discussion, words such as "believes", "anticipates",
"expects", "intends" and similar expressions are intended to identify
forward-looking statements, but are not the exclusive means of identifying
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
report. The Company undertakes no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may subsequently
arise. Readers are urged to carefully review and consider the various
disclosures made by the Company in this report and other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business.
The Company
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Effective as of January 1, 1994, the Company has been engaged full-time in
identifying, developing and bringing to market medical devices which the Company
believes are innovative, represent improvements over existing products, or are
responsive to a presently unfulfilled need in the marketplace. The Company's
strategy consists of: (i) identifying patented technologies in the medical
device field that it believes have potential commercial viability but still
require refinement and regulatory clearance, (ii) license or acquire the
technologies, (iii) complete product development and obtain the requisite
regulatory clearance of such products, and (iv) attempt to commercialize or
sublicense such technologies by entering into agreements with one or more
entities for clinical development, manufacturing and marketing of such products.
Through this strategy, the Company believes that it can play a role in bridging
the gap between viable patented technologies and their commercialization. The
Company has identified and acquired three licenses to develop the following
products, the Fluid Alarm System (FAS), formerly the Personal Alarm System
(PAS), the Cell Recovery System (CRS) and the Intracranial Pressure Monitoring
System (ICP), all of which the Company believes have commercial viability. The
primary focus of the Company's activities for the foreseeable future will be the
marketing of the FAS and completing the regulatory and development process
relative to the CRS and ICP, so that the Company can also bring these products
to market. Nevertheless, the Company also receives opportunities from time to
time to license other patented technologies in the medical device field.
Depending on the specific device and other circumstances, such as the Company's
then current financial and operating situation, the Company may pro-actively
attempt, on a limited basis, to identify and license additional patented
technologies in the medical device field.
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The Company's Products
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THE FLUID ALARM SYSTEM
The Fluid Alarm System is a device that monitors the integrity of infection
control barriers, such as surgical gloves and gowns worn during medical
procedures. The FAS is designed to provide notification of fluid contact between
the health care professional and patient and thus decrease the probability of
transmission of fluid-borne infectious agents, such as Human Immunodeficiency
Virus ("HIV")[ the virus that causes Acquired Immune Deficiency Syndrome
("AIDS")], Hepatitis B and C viruses, and Staphylococcus ("Staph"). The Company
received the US Food and Drug Administration ("FDA") clearance, after filing a
pre-market notification under Section 510(k) of the Federal Food, Drug and
Cosmetic Act (a "510(k)"), to market its Fluid Alarm System in 1995, and
commenced production and marketing of the product in 1996. The Company has
completed studies that show that fluid contact between health care professionals
and patients occurs not only when barriers such as latex surgical gloves and
gowns are breached by a tear or puncture, but also when such barriers are
fluid-saturated. Further, the Company believes that all latex surgical gloves,
at some point in time during use, become fluid-saturated, potentially permitting
bacteria and viruses contained in bodily fluids to pass between the health care
professionals and the patients.
Hospital and government regulations, as well as good medical practice,
require that defective or compromised barriers be replaced as quickly as
feasible. The immediate awareness of fluid contact between the health care
professional and patient allows action to be taken, in accordance with such
regulations, to decrease the probability of transmission of fluid-borne
infectious agents. Defective or fluid-saturated gloves represent a potential
danger for both the health care professional and the patient. Regulations
promulgated by the US Government's Occupational Safety and Health Administration
("OSHA") require a user of sterile barriers to be aware of the status of his or
her protective barriers at all times during a surgical procedure. The user of
sterile barriers is required by OSHA to change any portion of those barriers
when they have been compromised. The Company believes that the FAS provides
users with a high degree of accuracy and reliability in becoming aware of
compromised infection barriers such as latex surgical gloves.
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Presently, health care professionals rely on visual observations or "feel"
to determine whether the protective barriers have been compromised. While this
approach may be effective, at times, for punctures or tears, it is not reliable
when the integrity of protective barriers are breached due to unnoticed defects
or fluid-saturation. In the case of surgeons' latex gloves, which are frequently
covered with blood and are sweaty inside, visual observation, feel, and
inspection are difficult and unreliable. Thus, the Company believes that its FAS
device will enable health care professionals to immediately recognize with a
high degree of accuracy when a protective barrier has been compromised.
The FAS is designed to be worn similar to a pager, and provides two types
of immediate warnings in order to indicate either fluid-saturation or a small
hole or a tear in a health care worker's glove. The FAS consists of a
battery-powered electronic pager-like device that is simultaneously tethered to
the patient and the health care professional that can sense the flow of
extremely small electrical currents when a fluid contact is made between the
patient and the health care professional. When the FAS senses a current flow
characteristic of a tear, major puncture or fluid saturation, the FAS device
generates a continuous 5-second vibration. Alternatively, when current flow
characteristic of a small puncture or partial fluid saturation is detected, the
FAS device will vibrate in brief intermittent bursts.
The Company presently intends that the FAS will be sold for $500 each to
international distributors, who in turn may resell or lease the FAS device to
end users. In the US, the Company may choose to sell through distributors, or
alternatively, it may market directly to end-users at $750 each.
Potential Market for the FAS Device
The Company believes that the potential market for the FAS includes all
hospitals, physicians' offices, dental offices, emergency rooms, and other
medical facilities. Given the limited resources of the Company, the initial
strategy will be to focus on those markets where the need for the FAS is
greatest. Consequently, the Company will initially market the FAS to hospital
operating rooms and out-patient surgical centers. Further, the Company believes
that it needs to convince the medical community of the unreliability of
infection control barriers such as latex surgical gloves, particularly in the
absence of obvious breaches of the gloves' integrity before it can effect
substantial sales of the FAS device. The Company has conducted extensive studies
with respect to both the fluid-saturation of latex surgical gloves and the
passage time of virus and bacteria through such saturated gloves. In addition,
the Company is also seeking the endorsement of or a mandate from either the
Center for Disease Control in Atlanta, Georgia (the "CDC") or OSHA that a device
like the FAS should be used in connection with all surgical and other medical
procedures where the possibility exists for fluid contact between health care
professionals and patients. There is no assurance that the Company will be able
to convince the medical community of the need for a device like the FAS whether
or not the CDC or OSHA endorses or mandates such a device, of which there can be
no assurance, and thus, there can be no assurance that a market will develop for
the FAS device.
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License Agreement
The Company obtained the rights to the FAS effective June 1, 1994, pursuant
to a license agreement ("PAS License Agreement") with Robert Lee Thompson, d/b/a
Thompson Medical, whereby Mr. Thompson granted to the Company the exclusive
worldwide license to manufacture, use, sell or otherwise dispose of the FAS.
Pursuant to an Addendum to the PAS License Agreement dated September 19, 1996,
the Company made a one time payment to Mr. Thompson of $81,188 as full and
complete settlement of all past and future royalties, and extended the term of
the PAS License Agreement for an additional year so that it now expires June 1,
2005. In May 1995, the Company also entered into an exclusive license agreement
with Dietmar P. Rabussay, Ph.D., a consultant to the Company, for the Signal
Modulation Barrier Monitor (the "SMBM"), which is a component part of the FAS
device. Pursuant to this license agreement the Company is obligated to pay
royalties equal to 1% of the average retail sales price on the net sales of all
FAS devices. The invention disclosure as well as the patent application for the
SMBM have been filed with the Patent and Trademark Office and the Company filed
a patent application for the SMBM during the fourth quarter of 1996.
THE CELL RECOVERY SYSTEM
The Company's Cell Recovery System is a cell "brushing" and retrieval
system which uses an automated brush for the collection of specimen cells from
an organ's internal surface for diagnostic purposes, primarily (but not limited
to) cancer detection. Presently, in order to obtain diagnostically significant
tissue cells from an organ's internal surface an excisional biopsy is necessary,
i.e. the patient must check into a hospital for a $3,000-$5,000 procedure that
requires general anesthesia and the endoscopic surgical removal of tissue from
the patient's internal organ. In contrast, the CRS device is a minimally
invasive procedure that can be performed on an outpatient basis with local
anesthesia.
The first application for the CRS device is in urology for the diagnosis of
cancer. Currently, the preliminary test for bladder cancer is to test a
patient's urine sample, which has a very high incidence of producing "false
negatives." As a consequence, in most instances where there are persistent
symptoms, physicians who receive a negative result from a urine sample when
testing for bladder cancer will then conduct a visual, in-office examination
using a cystoscope, which is a catheter-type instrument. Even if a visual
examination with the cystoscope does not reveal diseased tissue on the bladder
wall, the physician may still complete an excisional biopsy to test if cancer
cells are present in suspect areas. The Company believes that its CRS device
provides a reliable alternative, or complement to, today's standard biopsy
procedure and will be the first automated brush system able to successfully
retrieve cell samples. Although products that utilize a manual, but not
automated, brushing technique for obtaining organ cells are currently available,
the Company believes that there is no automated device that accomplishes the
same tasks the CRS is designed to perform. Manual brushing is awkward and,
unlike the CRS, does not include a system by which the cells that are "brushed"
off the wall of the internal organ are simultaneously and selectively retrieved.
As an alternative to a biopsy, the CRS device, which can be used in an
outpatient (office) setting, is intended to save time, and also give the
physician an option that does not include the increased expense of general
anesthesia and an overnight stay in the hospital, thus representing reduced cost
and risk to the patient. Accordingly, as the CRS automated brushing and
retrieval system is significantly less expensive than excisional biopsy, the
Company also believes that the CRS procedure is reimbursable under medical
insurance, although there can be no such assurances. In addition, the CRS can
also be used for the follow-up care that bladder cancer patients require.
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In March 1996, the Company received marketing clearance from the FDA for
the CRS device for use in the urology market. Prior to the market launch of the
CRS, the Company intends to complete certain clinical trials for a follow-up
510(k) submission to the FDA to establish claims that the device assists with
the detection of certain urological diseases, such as bladder cancer, and at the
same time commence manufacturing for the system's instrumentation and
disposables. The Company intends to launch the CRS in late 1997. There can be no
assurance that the Company will receive 510(k) clearance from the FDA for such
additional claims or that the FDA will not require the Company to submit a
pre-market approval ("PMA") application which is for products that are not
comparable to any other product in the market. A requirement by the FDA to
submit a PMA would substantially delay marketing clearance. There can also be no
assurance that the Company will be successful in establishing volume
manufacturing of the CRS system's instrumentation and disposables.
The Company has not presently determined the price of or manner in which
the CRS device will be marketed and sold.
Potential Market for the CRS Device
The Company believes that in order to successfully market the CRS device,
the Company will have to establish the device's capabilities in assisting with
the detection of certain urological diseases, such as bladder cancer,
particularly in comparison to current cell sampling methods. In order to do so,
the Company has received commitments to begin clinical studies of the CRS from a
leading clinical research organization (CRO) in the urology market. Furthermore,
the Company also presently intends to develop other applications of the
technologies underlying the CRS device. The Company believes that the
technologies underlying the CRS device can readily be applied to, and adapted
for, other diagnostic procedures with relatively minor modifications.
Specifically, the Company believes that the technologies underlying the CRS will
be applicable to a large number of diagnostic procedures amenable to endoscopy,
such as bronchoscopy (lung examination), laparoscopy (abdominal and pelvic organ
examination) and gastro-intestinal endoscopy. No assurance can be given that the
Company will be successful in obtaining FDA clearance or approval for such other
applications.
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License Agreement
In August 1992, the Company entered into an exclusive license agreement, as
amended, (the "CRS License Agreement") with Robert Langdon, Nancy Bush and Max
K. Willscher, MD. for the exclusive worldwide rights to develop, manufacture and
market the CRS and any other device based upon the underlying patent. The CRS
License Agreement is for a term equal to the currently remaining life of the
patent relating to the CRS, which is approximately 13 years.
On August 7, 1996, the Company entered into an Agreement with Robert
Langdon to purchase his entire (50% ownership) interest in the CRS for a payment
of $300,000. Furthermore, the Company is obligated to pay to each of Ms. Bush
and the estate of Dr. Willscher a royalty equal to 5% of the average retail
sales price on all net sales, subject an annual minimum of $100,000 starting in
1996 and ending in 1998. The Company is also required to pay royalties of
$100,000 in 20 equal quarterly installments of $5,000 commencing January 1,
1997, pertaining to calendar years 1994 and 1995. Through December 31, 1996, the
Company has paid $600,000 and issued 227,966 shares of Common Stock pursuant to
the CRS License Agreement. The Company can terminate the CRS License Agreement
with 90 days written notice, at which time all of the Company's patent rights in
the CRS device will cease.
THE INTRACRANIAL PRESSURE MONITORING SYSTEM
The Intracranial Pressure Monitoring System is a device that non-invasively
monitors pressure inside the human skull. Increased intracranial pressure
generally results from either fluid build-up, swelling or abnormal tissue growth
of the brain, thereby cutting off blood flow to the brain, resulting in
increased risk of cell death. This cell death results in brain damage, and in
severe cases, can cause patient death. Presently, intracranial pressure can only
be determined by surgically drilling a hole into or removing a section of the
skull and inserting a catheter pressure transducer to measure the pressure.
Thereafter, if a high level of intracranial pressure is found to be present,
then the same surgical drilling procedure is often used in an attempt to relieve
the pressure. Due to the invasive nature of such a procedure, the current
practice of drilling a hole in or removing a section of the skull is considered
risky and expensive, and cannot be used for routine monitoring and examinations.
The Company believes that the ICP, when developed, can be a valuable diagnostic
tool and will greatly assist health care professionals in assessing when
surgical drilling is necessary to relieve intracranial pressure.
The ICP's non-invasive system utilizes a process of imparting a small known
force on the surface of the skull and sensing the resulting low frequency (0 to
approximately 1000 Hz.) wave signals at different points on the skull surface.
The characteristics of the resulting wave signals are a function of the pressure
within the skull and change when the intracranial pressure increases or
decreases. The Company presently anticipates that it will commercialize two
distinct versions of the ICP device. The first generation ICP device is designed
to measure changes in the direction and rate of change in intracranial pressure.
The second generation ICP device, which will effectively be an upgrade of the
software used in the first generation, is designed to assess ranges of
intracranial pressure levels as well. The Company believes non-overlapping
markets exist for each generation of the device. The ICP system makes use of
proprietary wave form analysis software formerly developed by
Scientific-Atlanta, Inc., and now assigned to Global Associates, Ltd. The
Company originally entered into a teaming agreement with Scientific-Atlanta,
Inc., which was subsequently assigned to Global Associates, Ltd. The teaming
agreement is more fully described below.
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Potential Market for the ICP Device
The Company believes that the potential market for both the first and
second generation ICP device is primarily hospitals that perform intracranial
procedures. Management believes that the initial users of the first generation
ICP will be neurosurgeons in connection with diagnostic procedures. Management
believes that the second generation ICP will be used not only by neurosurgeons
but also by emergency room personnel for patients who have suffered traumas to
the head, as well as by physicians to monitor and record the intracranial
pressure of individuals as a standard diagnostic procedure, similar to measuring
an individual's blood pressure. Clinical testing with respect to the first
generation ICP is estimated to be finished in late 1997. The Company presently
intends to make its first submission to the FDA in late 1997. It has not been
established if the initial submission will take the form of a 510(k) or a PMA.
The Company intends to continue clinical trials as required to gain sufficient
data for the second generation ICP. The Company believes that there is no
product or system presently on the market or under development which has similar
technological advantages as those of the ICP device.
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License Arrangements
The Company has the exclusive right to the ICP. The Company entered into an
agreement in January 1993 with Medys, Inc., a New Hampshire corporation (the
"Medys Agreement"), whereby the Company obtained the right to acquire the
worldwide, exclusive, nontransferable license to develop, manufacture and market
the ICP until the year 2009, which is when the patent relating to the ICP
expires. Under the terms of the agreement, the Company is obligated to pay
Medys, Inc. royalties equal to 10% of the net sales proceeds from the ICP with a
minimum payment of $90,000 for the year ended December 31, 1996, and $200,000
for each of the subsequent years through the life of the patent. With respect to
the royalties due for the year ended December 31, 1996, $15,000 was prepaid on
December 31, 1995. Further, under the Medys Agreement the Company is responsible
for clinical testing of the ICP and obtaining all required FDA and other
required regulatory clearances. The Company can terminate the Medys Agreement
with 90 days written notice at which time all of the Company's patent rights in
the ICP device will cease.
Global Associates, Ltd. Agreement
In February 1993, the Company entered into a teaming agreement (the
"Teaming Agreement") with Scientific-Atlanta, Inc.("S-A") who subsequently
assigned the agreement to Global Associates, Ltd. ("Global") in July 1996, as
the result of the sale of a division by S-A to Global, to provide equipment,
technical expertise and experience directly related to the computer software
which provides the signal/data processing and modal analysis techniques in
developing the ICP. Under the Teaming Agreement, the Company is obligated to use
Global exclusively as its supplier for signal/data processing and modal analysis
techniques, equipment and software for the first twelve (12) months after it
commences sales of the ICP and thereafter only if Global's prices are as low as
those offered by any other third party. The Teaming Agreement is for a term of
the earlier of five years or a date of two years following initial product sale,
unless sooner terminated.
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Manufacturing
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The Company has no manufacturing capabilities and does not intend to
establish any such capabilities in the foreseeable future. The Company intends
to rely on third party original equipment manufacturers ("OEMs") to produce the
Company's medical devices. Any such OEMs will have to comply with FDA and other
regulatory requirements for their facilities, including FDA Current Good
Manufacturing Practice ("CGMP") regulations. The Company entered into a new
agreement with a third party manufacturer effective as of December 15, 1996, for
the manufacture of FAS. The Company believes that this manufacturer satisfies
the FDA's CGMP regulations, however, there can no assurance that the
manufacturer will continue to satisfy such regulations. In the event that the
Company experiences substantial sales of its FAS device, of which there can be
no assurance, the Company may have to identify other third party manufacturers
in connection with additional manufacturing of the FAS. Further, the Company
presently anticipates that it will engage other third party manufacturers in
connection with manufacture of the CRS and ICP devices. There can be no
assurance that such other manufacturers can be identified on commercially
acceptable terms, or at all, or that such other manufacturers, if identified,
will be adequate for the Company's long-term needs, or that they can meet all
relevant regulatory requirements. Moreover, there can be no assurance that the
Company's manufacture of products on a limited-scale basis means that the
Company can effect the successful transition to commercial, large-scale
production.
Sales, Distribution and Marketing Strategy
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The Company is exploring a variety of sales and distribution strategies in
connection with the anticipate commercialization of its medical devices. The
precise strategy that the Company eventually adopts may be a combination of some
or all of these strategies. In addition, the Company may also adopt different
strategies for different products. The two fundamental strategies that currently
are being explored are:
- Forming strategic alliances with corporate partners (such as a latex
glove company) with a strong presence in the market for such a medical device,
for both domestic and international distribution.
- Assembling a network of regional independent distributors who have proven
to be successful in effecting the sale of new medical products in the market for
the particular medical device.
The Company's form of marketing will be influenced by the sales and
distribution strategies it eventually pursues. Nevertheless, the Company
anticipates that for the next 12 months its marketing efforts will, in addition
to arranging strategic alliances, concentrate on making presentations to major
health care users such as large hospitals and hospital chains, attending trade
shows and advertising in trade publications. The Company's marketing strategy
will also include textual and audio video sales literature, general advertising
and publicity and direct mailings.
With respect to the FAS, which the Company began marketing in 1996, the
Company currently intends to sell this product directly to end-users through
trade show appearances and advertisements in trade publications and indirectly
to end-users through independent medical products distributors. The Company is
endeavoring to form a strategic alliance with a corporate partner, who would
most likely be a manufacturer or marketer of latex surgical gloves, although the
Company does not presently have any contracts with respect to the FAS.
Although the Company intends to launch the CRS later in 1997, a specific
market or sales strategy with respect to the CRS device has not yet been decided
on.
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Competition
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The medical device industry is intensely competitive, particularly in terms
of price, quality and marketing. Most of the Company's competitors are better
established and have substantially greater financial, marketing and other
resources than the Company. Further, most of the Company's competitors have been
in existence for a substantially longer period of time and may be better
established in those markets where the Company intends to sell its devices.
Although the Company is not presently aware of any competitor that commercially
manufactures and sells any medical devices similar to those the Company
presently intends to sell, the Company is aware that several technologies
similar to the Fluid Alarm System are being developed and tested by other
companies. Due to the Company's relative lack of experience, financial,
marketing and other resources, even though it has received FDA clearance for the
FAS, there can be no assurance that the Company will be able to market this
device successfully, develop and market any of its other medical devices, or
compete in the medical device industry in general.
Patents and Intellectual Property Rights
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The Company has entered into exclusive license agreements with respect to
each of the patents underlying the Company's first three products: the Fluid
Alarm System; the Cell Recovery System; and the Intracranial Pressure Monitoring
System. There can be no assurance, however, that such patents will provide the
Company with significant protection from competitors. Patent protection relative
to medical devices is generally uncertain, and involves complex legal and
factual questions. To date, there has emerged no consistent policy regarding the
breadth of claims allowed in connection with the patent protection of medical
devices. Furthermore, legislation is being considered which, in the future,
might prevent the patenting or enforcement of a patent covering certain surgical
or medical procedures. Accordingly, there can be no assurance that any patents
licensed by the Company will afford protection against competitors with similar
technologies. Finally, there can be no assurance that the Company will have the
financial resources necessary to enforce its patent rights.
Even though the Company has been licensed under patents, under the terms of
the Company's license agreements, the Company is responsible for defending
against charges of infringement of third party patents by the Company's
products. Challenges may be instituted by third parties as to the validity,
enforceability and infringement of the patents. Further, the cost of the
litigation to defend any challenge to the Company's licensed patents or to
uphold the validity and enforceability and prevent infringement of the Company's
licensed patents could be substantial.
-12-
<PAGE>
The Company may be required to obtain additional licenses from others to
continue to refine, develop, manufacture, and market new products. There can be
no assurance that the Company will be able to obtain any such licenses on
commercially reasonable terms or at all or that the rights granted pursuant to
any licenses will be valid and enforceable.
Notwithstanding the Company's exclusive licenses with respect to the
patents underlying the FAS, CRS and ICP, there can be no assurance that others
will not independently develop similar technologies, or design around the
patents. If others are able to design around the patents, the Company's business
could be materially adversely affected. Further, the Company will have very
limited, if any, protection of its proprietary rights in those jurisdictions
where it has not effected any patent filings or where it fails to obtain patent
protection despite filing therefor.
Even though the patents underlying the Company's three medical devices have
been issued by the United States Patent and Trademark Office, challenges may be
instituted by third parties as to the validity and enforceability of the
patents. The Company is not presently aware of any challenges to the patents.
Similarly, the Company may also have to institute legal actions in order to
protect infringement of the patents by third parties. The Company is not
presently aware of any such infringements. The costs of litigation or settlement
in connection with the defense of any third party challenges relative to the
validity and enforceability of its patents and/or to prevent any infringement of
the patents by third parties, which pursuant to the license agreements with
respect to the patents are the Company's responsibility, could be substantial.
Moreover, in the event that the Company was unsuccessful in any such litigation,
the Company could be materially adversely affected.
In addition to relying on patent protection for its products, of which
there is no assurance, the Company will also attempt to protect its products,
processes and proprietary rights by relying on trade secret laws and
non-disclosure and confidentiality agreements, as well as exclusive licensing
arrangements with persons who has access to its proprietary materials or
processes, or who have licensing or research arrangements exclusive to the
Company. Despite these protections, no assurance can be given that others will
not independently develop obtain access to such materials or processes, or that
the Company's competitive position will not be adversely affected thereby. To
the extent members of the Company's Scientific Advisory Board have consulting
arrangements with, or are employed by, a competitor of the Company, such members
might encounter certain conflicts of interest, and the Company could be
materially adversely affected by the disclosure of the Company's confidential
information by such Scientific Advisors.
-13-
<PAGE>
Government Regulations
- ----------------------
The Company's medical device products are subject to extensive government
regulations in the United States and in other countries. In order to clinically
test, produce, and market its devices, the Company must satisfy numerous
mandatory procedures, regulations, and safety standards established by the FDA,
and comparable state and foreign regulatory agencies. Typically, such standards
require that the products be cleared by the government agency as safe and
effective for their intended use prior to being marketed for human applications.
The clearance process is expensive and time consuming. Other than with respect
to the FAS and the CRS, no assurance can be given that clearances will be
granted for any expanded claims for the CRS or for sale of the ICP or any other
future products, or that the length time for clearance will not be extensive, or
that the cost of attempting to obtain any such clearances will not prohibitive.
The FDA employs a rigorous system of regulations and requirements governing
the clearance processes for medical devices, requiring, among other things, the
presentation of substantial evidence, including clinical studies, establishing
the safety and efficacy of new medical devices. The principal methods by which
FDA clearance is obtained are pre-market approval ("PMA"), which is for products
that are not comparable to any other product in the market, or filing a
pre-market notification under Section 510(k) of the Federal Food, Drug and
Cosmetic Act (a "510(k)") which is for products that are similar to products
that have already received FDA clearance. Although both methods may require
clinical testing of the products in question under approved protocol, because
PMA clearance relates to more unique products, the PMA procedure is more complex
and time consuming. Applicants under the 510(k) procedure must prove that the
products for which clearance is sought are substantially equivalent to products
on the market prior to the Medical Device Amendments of 1976 or products
approved thereafter pursuant to the 510(k). The review period for a 510(k)
application is approximately 150 days from the date of filing the application,
although there can be assurance that the review period will not extend beyond
such a period.
Under the PMA procedure, the applicant is required to conduct substantial
clinical testing to determine safety, efficacy and potential hazards of the
product. The review period under a PMA application is 180 days from the date of
filing, and the application is not automatically deemed cleared if not rejected
during that period. The preparation of a PMA application is significantly more
complex, expensive and time consuming than the 510(k) procedure. Further, the
FDA can request additional information, which can prolong the clearance process.
In order to conduct human clinical studies for any medical procedure
proposed for the Company's products, the Company could also be required to
obtain an Investigational Device Exemption ("IDE") from the FDA, which would
further increase the time before potential FDA clearance. In order to obtain an
IDE, the Company would be required to submit an application to the FDA,
including a complete description of the product, and detailed medical protocols
that would be used to evaluate the product. In the event an application were
found to be in order, an IDE would ordinarily be granted promptly thereafter.
-14-
<PAGE>
The Company may be required to use the PMA process for the Intracranial
Pressure Monitoring System or for expanded claims for the CRS in order to be
granted FDA clearance. The clearance process can take from a minimum of six (6)
months to several or more years, and there can be no assurance that FDA
clearance will be granted for the commercial sale of the Intracranial Pressure
Monitoring System or expanded claims for the CRS device.
The FDA also imposes various requirements on manufacturers and sellers of
medical devices under its jurisdiction, such as labeling, manufacturing
practices, record keeping and reporting requirements. The FDA may also require
post-market testing and surveillance programs to monitor a product's effect.
There can be no assurance that the appropriate clearance from the FDA will be
obtained, that the process to obtain such clearance will not be excessively
expensive or lengthy, or that the Company will have sufficient funds to pursue
such clearances. Moreover, failure to receive requisite clearance for the
Company's products or processes would prevent the Company from commercializing
its products as intended, and would have a materially adverse effect on the
business of the Company.
Even after regulatory clearance is obtained, any such clearance may include
significant limitations on indicated uses. Further, regulatory clearances are
subject to continued review, and later discovery of previously unknown problems
may result in restrictions with respect to a particular product or manufacturer,
including withdrawal of the product from the market, or sanctions or fines being
imposed on the Company.
Distribution of the Company's products in countries other than the United
States may be subject to regulation in those countries. There can be no
assurance that the Company will be able to obtain the approvals necessary to
market its medical devices outside of the United States.
-15-
<PAGE>
Research and Development
- ------------------------
The Company's expenditures for research and development were $893,771 in
1996 and $943,510 in 1995. See "Item 6. Management's Discussion and Analysis and
Plan of Operation."
Number of Employees
- -------------------
As of March 1, 1997, the Company had 10 full-time employees, five of whom
were employed in executive and management capacities, three in sales and
marketing, and two in general and administrative.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its executive offices, which occupy approximately 3,256
square feet, at 9171 Towne Centre Drive, Suite 355, San Diego, CA 92122. The
Company's rent is approximately $5210 per month through April 15, 1998. The
Company is also responsible for its pro-rata share of increased operating
expenses starting in 1997 predicated upon a 1996 base year.
ITEM 3. LEGAL PROCEEDINGS
The Company prevailed in two separate lawsuits in calendar year 1996.
In one case instituted in the Superior Court of the State of California,
County of San Diego, the Company was awarded after trial $1,978,893 in damages
and costs against Chandler Church and Company and affiliated entities based upon
claims sounding in breach of contract and breach of constructive trust.
In a second case commenced in the United States Bankruptcy Court, Southern
District of California, San Diego Division, the Court, in dismissing an
Involuntary Petition filed against the Company, found that the Petition had been
filed in "bad faith" and consequently awarded the Company punitive damages and
attorneys' fees against Chandler Church and Company and affiliated entities,
totaling $761,888. The Company thereafter entered into an out-of-Court
settlement with one of the parties which provides for the payment to the Company
of the stipulated sum of $25,000.
The Company is pursuing collection efforts for the damages, costs and fees
awarded to it in the aforementioned cases, but is uncertain whether it will be
able to recover any or all of the monies awarded to it. Accordingly, the Company
has not recorded a receivable associated with this litigation due to the
uncertainty.
There are no other legal proceedings to which the Company is a party which
could have a material adverse effect on the Company.
-16-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, the Preferred Stock , and the Redeemable
Warrants are traded on the National Association of Securities Dealers Automated
Quotation (Nasdaq) SmallCap Market under the symbols "MEDD", "MEDDP", and
"MEDDW", respectively. The following table sets forth, for the periods
indicated, the high and low bid prices for the Common Stock, as reported by the
Nasdaq SmallCap Market. Common Stock prices have been adjusted to reflect the
one-for-two reverse split in June 1996.
<TABLE>
<CAPTION>
Bid Price
---------
High Low
-----------------------------
1995
<S> <C> <C> <C>
First Quarter $2.00 $1.13
Second Quarter $2.63 $0.75
Third Quarter $3.13 $1.63
Fourth Quarter $2.00 $1.25
1996
First Quarter $1.63 $1.00
Second Quarter $2.25 $1.25
Third Quarter $2.00 $0.88
Fourth Quarter $1.38 $0.38
</TABLE>
On March 12, 1997, the closing price of the Company's Common Stock, as
reported by the Nasdaq Small Cap Market, was $0.53.
On March 12, 1997, there were 1,099 holders of record of Common Stock and
41 holders of record of the Preferred Stock, according to the Company's stock
transfer agent.
The Company has not paid any cash dividends with respect to its Common
Stock, and it is unlikely that Company will pay any dividends on its Common
Stock in the foreseeable future. The Company is required to pay a 6% cumulative,
semi-annual dividend with respect to its Preferred Stock in shares of Common
Stock, and, to date, has made each of such dividend payments. Earnings, if any,
that the Company may realize will be retained in the business for further
development and expansion.
-17-
<PAGE>
ADDITIONAL ITEM. EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The Directors and Executive Officers and their ages, positions held with
the Company, length of time in such positions, and term of office are set forth
below:
<TABLE>
<CAPTION>
Name and Age Current Position Director Since Officer Since
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
M. Lee Hulsebus Chairman of the Board, 11/11/94 8/31/94
Age 58 Chief Executive Officer,
President
Stephen W. Kenney Vice President of Sales 1/23/95
Age 46 and Marketing
Edward C. Hall Chief Financial Officer 3/15/96
Age 56 and Secretary
Richard E. Sloan Vice President of New 3/15/96
Age 47 Business Development
Don L. Arnwine Director 3/6/95
Age 64
Arthur E. Bradley Director 9/26/86
Age 63
William A. Clarke Director 6/27/96
Age 58
Thomas E. Glasgow Director 11/11/94
Age 43
Scott A. Weisman Director 8/1/96
Age 42
</TABLE>
-18-
<PAGE>
The principal occupations and positions for the past several years of each
of the executive officers and directors of the Company are as follows:
M. Lee Hulsebus has been in the health care field for 31 years. From
January 1992 until he joined the Company in August 1994, he was the President
and owner of his own health care consulting firm. From August, 1993 to November,
1993 Mr. Hulsebus also served as Chief Executive Officer of InCoMed Corporation,
then a small California-based medical products company. From 1990 to 1992, Mr.
Hulsebus served as President and Chief Operating Officer of Sports Support,
Inc., a sports medicine company. From 1988 until 1990, he served as Medical
Group President for Teleflex, Inc. For 22 years prior to that, Mr. Hulsebus was
employed by Becton-Dickinson & Co. and C.R. Bard, Inc., both of which are
leading companies in the health care industry. Mr. Hulsebus has served in the
capacity of President/Chief Executive Officer for the past 17 years for various
companies.
Stephen W. Kenney has been Vice President of Sales and Marketing since
January 1995. Prior to joining the Company, Mr. Kenney served as Chief Operating
Officer of Cardio Vista, a medical products company headquartered in Southern
California. Prior to joining Cardio Vista in 1993, he served as Chairman and
Chief Executive Officer of AMBIS, Inc. ,a research instrumentation company based
in San Diego, California, which he originally joined in 1989. From 1987 to 1989,
Mr. Kenney served as Vice President, Sales and Marketing of Digivision, Inc.,
also headquartered in San Diego. Prior to that Mr. Kenney had held various
management positions with IVAC Corporation (San Diego) and American Hospital
Supply.
Edward C. Hall has been the Company's Secretary since April 1996 and its
Chief Financial Officer since March 15, 1996. Mr. Hall has also been a financial
consultant to the Company since March 1995. Since 1994, Mr. Hall has been a
consultant to high technology companies in the San Diego area where he acted as
an interim chief financial officer and has provided financial turnaround
consulting services to a wide variety of high technology and other companies in
California and the Southwest. His experience includes positions and assignments
for medical, pharmaceutical, broadband and wireless communications, specialty
and mail order retailing, and aerospace manufacturing firms.
Richard E. Sloan has been Vice President of New Business Development since
March 1996. Mr. Sloan was also a consultant to the Company from August 1995 to
March 1996. From March 1995 to July 1995, Mr. Sloan served as Chief Financial
Officer of WorldWide Products, Inc., a private Los Angeles based development and
marketing firm that distributes pharmaceutical products to plastic surgeons and
dermatologists. Prior thereto, from March 1992 to March 1995 he served as
corporate marketing director and general manager for Industrial Products of
UniFET Incorporated, a private company based in San Diego, California involved
in the development of sensor-based medical products. From December 1989 through
March 1992, Mr. Sloan managed his own mergers and acquisition business with
First Pacific Group, located in Carlsbad, California, which provided investment
and financial services to privately-held companies in southern California. Prior
to that Mr. Sloan had held various management positions with Baxter and IVAC
Corporation (San Diego).
-19-
<PAGE>
Don L. Arnwine has been President of Arnwine Associates of Irving, Texas, a
company he founded to provide specialized advisory services to the health care
industry, since 1988. The Company intends to launch the CRS in late 1997.
Mr. Arnwine served as Chairman and Chief Executive Officer from 1985 until 1988
of Voluntary Hospitals of America (VHA), a company he joined in 1982. Prior to
joining VHA, Mr. Arnwine served as President and Chief Executive Officer of
Charleston Area Medical Center, a 1000-bed regional facility care center in the
State of West Virginia. Mr. Arnwine holds a BS degree in Business Administration
from Oklahoma Central State University and a Masters degree in Hospital
Management from Northwestern University.
Arthur E. Bradley, DDS has been a practicing dentist since 1961. Dr.
Bradley has been involved for his own account in real estate investments for
twenty years and has been active in oil and gas investments for fifteen years.
Dr. Bradley graduated from the University of Mississippi at Hattiesburg and
obtained his degree in Dentistry from Loyola University Dental School.
William A. Clarke held various positions with Johnson & Johnson, Inc. a
public medical products company since 1967. Most recently, since 1995, Mr.
Clarke has served as a consultant to Johnson & Johnson, Inc. Prior to that time,
from 1986 through 1995, Mr. Clarke was president of Johnson & Johnson Medical,
Inc. a subsidiary of Johnson & Johnson, Inc., with approximately 6,000
employees.
Thomas E. Glasgow has been President and co-owner of Integrated Trade
Systems ("ITS"), a Chicago, Illinois company from April 1992 to the present. Mr.
Glasgow and another individual purchased ITS from its parent company in 1992.
ITS is a logistics management company specializing in the development and
marketing of import and export document generation systems. From 1989 through
1991, Mr. Glasgow was a partner with Wharton Resource Group and a consultant
with ITS. Wharton Resource Group is a strategic management company specializing
in the development of early stage companies. Prior to these activities, he was a
director with Federal Express Corporation for 11 years in various senior
management capacities.
Scott A. Weisman has been Senior Managing Director - Director of Investment
Banking, Josephthal Lyon & Ross Incorporated since 1993. Before joining
Josephthal Lyon & Ross Incorporated, he was a partner at Kelley Drye & Warren
specializing in securities law. He began his career at Parker, Chapin & Flattau
in 1980. Mr. Weisman has a Juris Doctor from Albany Law School and a BA degree
from Syracuse University.
-20-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the consolidated financial
statements and the notes thereto appearing in Item 7 in this Form 10-KSB.
Forward-Looking Statements
- --------------------------
The following discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be anticipated by such forward-looking
statements. Factors that may affect such forward-looking statements include,
without limitation: the Company's ability to successfully develop new products
for new markets; the impact of competition on the Company's revenues, changes in
law or regulatory requirements that adversely affect or preclude customers from
using the Company's products for certain applications; delays in the Company's
introduction of new products; and failure by the Company to keep pace with
emerging technologies.
When used in this discussion, words such as "believes", "anticipates",
"expects", "intends" and similar expressions are intended to identify
forward-looking statements, but are not the exclusive means of identifying
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
report. The Company undertakes no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may subsequently
arise. Readers are urged to carefully review and consider the various
disclosures made by the Company in this report and other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business.
-21-
<PAGE>
General
- -------
From its incorporation in 1980 until June of 1992, the Company was engaged
exclusively in oil and gas activities. In June 1992, the Company commenced
certain initial activities with respect to the medical device business.
Thereafter, the Company continued to increase its activities in the medical
device field while simultaneously decreasing its oil and gas activities.
Effective as of January 1, 1994, the Company having disposed of all its oil and
gas interests and ceased all activities related thereto, commenced on a
full-time basis its current medical device operations. The Company changed its
name in April 1995, from Cytoprobe Corporation, to reflect the change of focus.
On June 1, 1992, the Company was considered, for accounting purposes, to have
re-emerged as a development stage company.
As development of its medical devices concludes, increased marketing and
sales costs will be incurred and the Company's working capital requirements can
be expected to grow accordingly. The Company's sales, general and administrative
costs include costs related to marketing, promotional and sales activities, in
addition to office, administration and overhead expenses.
The Company, which is still in the development stage with respect to its
current medical device operations, has not been profitable for the last 10 years
and expects to incur additional operating losses in the coming year. The
following management discussion and analysis and plan of operation should be
read in conjunction with the consolidated financial statements and notes thereto
referred to in Item 7.
Due to the Company's recurring losses from operations, and continued need
for capital, the Company's independent certified public accountants have
included an explanatory paragraph in their report stating that these factors
raise substantial doubt about the Company's ability to continue as a going
concern.
The Company plans on achieving certain minimum sales of the FAS device
during the next twelve months, but the Company will be required to seek to
obtain additional sources of financing, which cannot be assured. In the event
the Company can not obtain additional financing, the Company would have to
substantially curtail product as well as research and development plans due to
lack of funds. The long-term viability of the Company is dependent on its
ability to profitably develop and market its current products and to obtain the
financing necessary to fund its anticipated growth.
-22-
<PAGE>
Results of Operations
- ---------------------
Year ended December 31, 1996 compared to year ended December 31, 1995.
Revenues
- --------
Operating revenues in 1996 were $26,193, all from sales of the FAS. There
were no revenues in 1995.
Operating Expenses
- ------------------
Research and Development
Research and development costs in 1996 were $893,771, as compared to
$943,510 in 1995, representing a decrease of 5.3%. This decrease was principally
due to a decreased amount of research and development on the FAS in 1996,
whereas a full year of research and development expense was incurred on all
three products in 1995.
Sales, General and Administrative
Sales, general and administrative costs were $2,774,679 in 1996 as compared
to $2,194,393 in 1995, representing an increase of 26.4% This increase was the
result of increased legal, professional and public accounting costs required to
update the Company's accounting systems and procedures, and to complete a bridge
financing and two registration statements prior to the Company's June 1996
public offering, as well as increased sales, marketing and promotional expenses
to introduce the FAS device; and higher general office expenses.
Losses
The Company's net loss for 1996 was $4,589,413 as compared to $3,140,828 in
1995, representing an increased loss of 46.1%. This increased loss was primarily
attributable to an increase in sales, general and administrative costs and to a
$1,021,082 net increase in interest expense associated with the bridge financing
and short-term notes prior to the Company's public offering in June 1996. Loss
per common share was $0.98 in 1996 as compared to $0.94 in 1995, representing an
increased per share loss of 4.3%. This increase was primarily attributable to
the increased losses and preferred dividends in 1996 which more than offset the
reduction in loss per share due to the increase in the average number of shares
outstanding in 1996 as compared to 1995.
-23-
<PAGE>
Liquidity and Capital Resources
- -------------------------------
To date, the Company has funded its capital requirements for its current
medical device operations from the public and private sale of debt and equity
securities and the issuance of common stock in exchange for services. The
Company's cash position at December 31, 1996 was $2,889,233 as compared to
$306,851 at December 31, 1995, representing more than an eight-fold increase. In
1996, $2,512,357 of net cash was used for operating activities plus $521,460 was
invested in patents and property and equipment. The Company received $5,616,199
from net financing activities represented by proceeds from the public offering
in June 1996 of Preferred Stock and Redeemable Warrants, after taking into
effect the repayment of short-term borrowings in the amount of $2,000,000. Net
cash used in operating activities in 1996 consisted principally of a net loss of
$4,589,413, less a decrease in other net assets (excluding cash) of $200,918,
plus $605,295 in Common Stock paid for services in lieu of cash, plus the net of
depreciation, amortization of loan origination fees and original issue discount
and fixed asset writeoff totaling $1,876,138. Changes in current assets and
current liabilities resulted in an increase in the Company's working capital
position to $2,652,599 at December 31, 1996 from a deficit of $417,120 at
December 31, 1995. The Company's working capital requirements will increase as
it brings its products to market and continues to fund research and development
on products not yet ready for market. The Company plans to fund these and other
capital needs in the next 12 months from the proceeds of additional private
placements of debt and/or equity securities it seeks to obtain and certain
minimum sales of the FAS.
In the second quarter of 1995, the Company completed a private placement
(the "1995 Private Placement") of its securities and received net proceeds of
$974,769 in connection with the sale of 20.75 units at a purchase price of
$50,000 per unit. Each unit consisted of 35,715 shares of Common Stock and
12,500 three-year warrants to purchase 12,500 shares of Common Stock. The
warrants are exercisable for $2.00 per share of Common Stock The Company also
issued to the broker-dealer which assisted the Company in effecting the 1995
Private Placement 28,125 two-year warrants to purchase 28,125 shares of Common
Stock at an exercise price of $2.00 per share.
In June and July 1995, the Company issued an aggregate of $275,000 of
short-term convertible debt which, if not converted into Common Stock, was to
mature in six months and bore interest at the rate of 48% per annum (the
"Convertible Debt") payable on maturity. As of December 27, 1995, all of the
Convertible Debt had converted into Common Stock at the rate of 2.5 shares of
Common Stock for each $1.00 of indebtedness, or an aggregate of 687,500 shares
of Common Stock. In connection with the issuance of the Convertible Debt, the
Company also issued an aggregate of 68,750 warrants exercisable for 68,750
shares of Common Stock at $1.20 per share. Prior to the expiration of the
warrants on May 28, 1996, 62,500 warrants were exercised resulting in $75,000
proceeds to the Company. The remaining 6,250 warrants expired unexercised.
Pursuant to a Confidential Private Placement Memorandum dated October 27,
1995, the Company effected between December 14, 1995 and December 27, 1995, a
private placement of short-term notes and 153,750 shares of Series I convertible
preferred stock. Of the $1,025,000 gross proceeds, $384,375 was allocated to the
preferred stock and represented the original issue discount on the notes at
December 31, 1995. The proceeds of the private placement provided working
capital.
-24-
<PAGE>
On January 24, 1996, the Company completed the private placement and issued
additional short-term notes and 93,750 shares of Series I convertible preferred
stock. Of the additional $625,000 gross proceeds, $234,375 was allocated to the
preferred stock and represented additional original issue discount on the notes.
The Company also utilized these proceeds for working capital. Notes sold in the
private placement bore interest at 10% per annum and matured at the earlier of
(i) the expiration of twelve months after their issuance or (ii) receipt by the
Company of at least $3,000,000 in gross proceeds from (a) a public or private
sale of its securities, (b) a joint venture, or (c) a licensing agreement. The
unamortized original issue discount was $0 and $384,375 as of December 31, 1996
and 1995, respectively. Subsequent to the public offering in June 1996, the
Company repaid these private placement notes in full.
During the second quarter of 1996, the Company issued $350,000 in principal
amount of six-month 12% unsecured short-term notes payable to four individuals
and two of the Company's directors to finance its operations until its public
offering could be completed. Subsequent to the public offering in June 1996, the
Company repaid these short-term notes in full (see Note 8 to the consolidated
financial statements). Interest paid related to these notes amounted to $10,500
for the year ended December 31, 1996. In connection with the issuance of
short-term notes, the Company also issued to the six individuals 137,180
warrants to purchase 137,180 shares of Common Stock, at a exercise prices
ranging from $1.26 to $1.38, which vested immediately and expire three years
from issuance. In connection with the issuance of these warrants, the Company
recognized, based on a valuation of these warrants, $143,870 as additional
interest expense during the year ended December 31, 1996.
On June 24, 1996, the Company completed a public offering of 1,500,000
shares of 6% cumulative convertible Series A preferred stock and 1,500,000
redeemable warrants resulting in gross proceeds of $7.65 million. The Company
received approximately $4 million after repayment of short-term debt and costs
associated with the offering. The Preferred Stock is convertible into four (4)
shares of Common Stock at $1.25 per share and each warrant enables the holder to
purchase two shares of Common Stock for a total price of $3.75. As part of the
terms of this offering, the holders of the Series I convertible preferred stock
exchanged their preferred stock for Preferred Stock on a one for one basis at no
cost. Each share of Preferred Stock will by its terms automatically convert into
four (4) shares of Common Stock on July 24, 1997, unless earlier converted by
its holder.
In August 1996, the Company received net proceeds of $459,800 as the result
of the underwriter's exercise of its over-allotment option under the June 24,
1996 public offering to purchase an additional 225,000 Redeemable Warrants and
an additional 100,000 shares of Preferred Stock. These proceeds were offset by
additional offering costs of $93,203 related to the June 1996 public offering
that were recorded during the third quarter.
The Company plans on achieving certain minimum sales of the FAS device
during the next twelve months, but will be required to seek additional sources
of financing through private placements of debt and/or equity securities, which
cannot be assured. In the event the Company cannot obtain additional financing,
the Company would have to curtail product as well as research and development
plans substantially due to lack of funds. The long-term viability of the Company
is dependent on its ability to profitably develop and market its current
products and to obtain the financing necessary to fund its anticipated growth.
-25-
<PAGE>
Net Operating Loss Carryforward
- -------------------------------
At December 31, 1996, the Company had approximately $16,430,000 in
operating loss carryovers to offset future taxable income. These carryovers will
expire in various years through 2011. As a result of a change in ownership,
federal tax rules impose limitations on the use of net operating losses. The
limitations will reduce the amount of these benefits that will be available to
offset future taxable income each year, starting with the year of an ownership
change, which the issuance of the Preferred Stock in the Company's June 1996
public offering was deemed to be. The dollar amount of these limitations is
indeterminable at this time. In addition, the Company provides a valuation
allowance for a deferred tax asset when it is more likely than not, based on
available evidence, that some portion or all of the deferred tax asset will not
be realized. In management's opinion, it cannot determine if it is more likely
than not that the Company will generate sufficient future taxable income before
2011, the year after which all current available net operating loss
carryforwards expire, to utilize all of the Company's deferred asset. A
valuation allowance has been recognized for the full amount of the deferred tax
asset of $6,150,468.
New Accounting Pronouncements
- -----------------------------
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(SFAS No. 121) issued by the Financial Accounting Standards Board (FASB) is
effective for financial statements for fiscal years beginning after December 15,
1995. The new standard establishes new guidelines regarding when impairment
losses on long-lived assets, which include plant and equipment, and certain
identifiable intangible assets, should be recognized and how impairment losses
should be measured. The Company does not expect adoption to have a material
effect on its financial position or results of operations.
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) issued by the Financial Accounting
Standards Board (FASB) establishes a fair value method accounting for
stock-based compensation plans and for transactions in which an entity acquires
goods or services from non-employees in exchange for equity instruments. The
Company adopted this accounting standard on January 1, 1996. SFAS 123 also
encourages, but does not require companies to record compensation cost for
stock-based employee compensation. The Company has chosen to continue to account
for stock-based compensation utilizing the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for stock options and warrants is
measured as the excess, if any, of the fair market price of the Company's stock
at the date of the grant over the amount an employee must pay to acquire the
stock.
Statements of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Exstiguishments of Liabilities"
(SFAS No. 125) is effective for transfers and servicing of financial assets and
extiguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive applications is not permitted. The
new standard provides accounting and reporting standards for transfers and
servicing of financial assets and extiguishment of liabilities. The Company does
not expect adoption to have a material effect on its financial position or
results of operations.
-26-
<PAGE>
PLAN OF OPERATION
Emergence from a Development Stage Company
- ------------------------------------------
The Company anticipates emerging in 1997 from a development stage to an
operating company upon achieving revenues from its first medical device product,
the FAS, which the Company began marketing in 1996.
The Company's Capital Requirements
- ----------------------------------
The Company's greatest cash requirements during 1997 will be for funding
the introduction and working capital associated with the market introduction of
the FAS, and additional clinical testing, continued development, FDA filings of
the CRS and ICP, and selling, general and administrative expenses. The funding
for costs and build-up of working capital associated with the market
introduction of the FAS is expected to be partially supplemented by certain
minimum anticipated sales of the FAS in 1997.
In order to satisfy the Company's capital needs for the next 12 months, the
successful completion in 1997 of additional private placements of debt and/or
equity securities and the Company achieving certain minimum sales of the FAS, is
essential. The private placement is subject to favorable market conditions,
which can not be assured.
If the anticipated private placement is not completed, the Company will be
required to seek alternative financing sources which cannot be assured.
Consequently, the Company might have to substantially curtail product
development and market introduction plans due to lack of funds.
Subsequent to the next 12 months, the Company currently plans to finance
its long-term operations and capital requirements with the profits and funds
generated from the sales of its products as well as through new private
financings and public offerings of debt and equity securities.
ITEM 7. FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Reports of Independent Certified Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the
Years Ended December 31, 1996 and 1995 F-5
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1996 and 1995 F-6
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996 and 1995 F-9
Summary of Accounting Policies F-12
Notes to Consolidated Financial Statements F15 - F25
</TABLE>
-27-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this Item, which will be set forth under the
captions "Proposal No. 1- Election of Directors," "Executive Officers" and
"Compliance with Section 16(a) of the Exchange Act" in the Company's Proxy
Statement for its 1997 Annual Meeting of Shareholders, is incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item, which will be set forth under the
caption "Executive Compensation" in the Company's Proxy Statement for its 1997
Annual Meeting of Shareholders, is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item, which will be set forth under the
caption "Voting Securities and Principal Holders Thereof" in the Company's Proxy
Statement for its 1997 Annual Meeting of Shareholders, is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended December 31, 1996, two directors of the Company
loaned the Company $200,000 and $25,000, respectively, in order to provide
financing to the Company prior to its public offering. The notes were repaid by
the Company in 1996 once the public offering was complete. Interest paid to
these directors amounted to $6,750 for the year ended December 31, 1996. As
additional consideration for these loans, the directors, consistent with terms
to the other four individual lenders, were awarded an aggregate of 89,301 three
year warrants to purchase 89,301 shares of Common Stock at exercise prices from
$1.26 to $1.29 (see Note 3 to the consolidated financial statements). In
connection with the issuance of the warrants to the six individuals, the Company
recognized, based on a valuation of these warrants, $143,870 as additional
interest expense during the year ended December 31, 1996. The interest rate and
terms of these notes were made at arms length. A director also received
compensation of $7,500 for general corporate consulting services. During the
year ended December 31, 1995, a director received compensation of $25,297 for
computer and other general corporate consulting services.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits None
- --------
Reports on Form 8-K See Forms 8-K dated January 15, 1996 and January 31, 1996.
- -------------------
-28-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MEDICAL DEVICE TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ M. Lee Hulsebus Chief Executive Officer, March 31, 1997
- ------------------- President and Chairman
M. Lee Hulsebus
/s/ Edward C. Hall Chief Financial Officer, March 31, 1997
- ------------------- Secretary and Prinicpal
Edward C. Hall Accounting Officer
/s/ Don L. Arnwine Director March 31, 1997
- -------------------
Don L. Arnwine
/s/ Arthur E. Bradley Director March 31, 1997
- -------------------
Arthur E. Bradley
/s/ William A. Clarke Director March 31, 1997
- -------------------
William A. Clarke
/s/ Thomas E. Glasgow Director March 31, 1997
- -------------------
Thomas E. Glasgow
/s/ Scott A. Weisman Director March 31, 1997
- -------------------
Scott A. Weisman
</TABLE>
-29-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Medical Device Technologies, Inc. and subsidiary
San Diego, California
We have audited the accompanying consolidated balance sheet of Medical
Device Technologies, Inc. and subsidiary (a development stage company) (the
"Company") as of December 31, 1996 and 1995 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the two years then ended. We have also audited the statements of
operations and cash flows for the period from June 1, 1992 through December 31,
1996, except that we did not audit these financial statements for the period
from June 1, 1992 to December 31, 1994; those statements were audited by other
auditors whose report dated February 17, 1995 contained an explanatory paragraph
raising substantial doubt as to the Company's ability to continue as a going
concern. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. Our opinion, insofar as
it relates to the amounts for the period from June 1, 1992 to December 31, 1994,
is based solely on the report of other auditors.
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 consolidated 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, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Medical Device Technologies, Inc.
and subsidiary (a development stage company) at December 31, 1996 and 1995 and
the results of their operations and their cash flows for the two years then
ended and the period June 1, 1992 through December 31, 1996 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to this matter are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Los Angeles, California
January 31, 1997
By /s/ BDO SEIDMAN, LLP
- -----------------------
BDO SEIDMAN, LLP
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Medical Device Technologies, Inc. (formerly known as Cytoprobe Corporation)
San Diego, CA
We have audited the accompanying consolidated statement of operations and
cash flows for the period June 1, 1992 through December 31, 1994 of Medical
Device Technologies, Inc. and subsidiary (a development stage company formerly
known as CytoProbe Corporation). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of Medical Device Technologies, Inc. and subsidiary for the
period June 1, 1992 through December 31, 1994, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is in the development stage and has no
operating revenues. This situation raises substantial doubt as to the Company's
ability to continue as a going concern. Management's plans in regard to this
situation are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/Robert Early & Company, P.C.
- -------------------------------
Robert Early & Company, P.C.
Abilene, Texas
February 17, 1995
F-2
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,889,233 $ 306,851
Accounts receivable 8,563 -
Inventory 100,379 147,593
Prepaid royalties (Note 5) - 60,000
Prepaid expenses and other assets 134,309 28,082
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets 3,132,484 542,526
- -----------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 101,854 112,149
Machinery and equipment 190,179 17,136
Equipment under capital lease 5,349 5,349
- -----------------------------------------------------------------------------------------------------------------------------------
297,382 134,634
Less accumulated depreciation (76,046) (37,309)
- -----------------------------------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 221,336 97,325
- -----------------------------------------------------------------------------------------------------------------------------------
LICENSE AGREEMENTS
(net of accumulated amortization of $903,149
and $627,887) (Note 2) 1,864,168 1,598,242
PREPAID ROYALTIES (Note 5) - 115,000
LOAN ORIGINATION FEES (Note 3) - 117,500
OTHER ASSETS 15,003 44,341
- -----------------------------------------------------------------------------------------------------------------------------------
$ 5,332,991 $ 2,514,934
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 185,046 $ 276,366
Accrued expenses and taxes 145,736 40,927
Short-term notes payable, net of unamortized discount of
$384,375 at December 31, 1995 (Note 3) - 640,625
Current obligation under termination agreement (Note 5) 148,000 -
Current obligation under capital lease (Note 4) 1,103 1,728
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 479,885 959,646
OTHER LIABILITIES
Termination agreement obligation (Note 5) 98,667 -
Capital lease obligation (Note 4) - 1,755
- -----------------------------------------------------------------------------------------------------------------------------------
Total other liabilities 98,667 1,755
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY (Note 6)
Series I convertible preferred stock (247,500 shares authorized,
0 and 153,750 issued and outstanding) - 384,375
6% cumulative convertible Series A preferred stock; $.01 par
value(1,343,500 shares authorized, issued and outstanding) 13,435 -
Preferred stock, 10,000,000 shares authorized, $.01 par value,
0 shares issued and outstanding - -
Common stock, $.15 par value (100,000,000 shares authorized,
6,897,963 and 4,196,600 outstanding) 1,034,694 629,490
Stock to be issued (25,000 shares) 16,730 23,440
Additional paid-in capital 20,650,306 12,776,389
Deferred stock compensation 247,500 247,500
Accumulated deficit ($13,390,372 and $8,800,959 accumulated losses
during the development stage through December 31, 1996
and December 31, 1995) (17,331,666) (12,507,661)
- -----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 4,654,439 1,553,533
- -----------------------------------------------------------------------------------------------------------------------------------
$ 5,232,991 $ 2,514,934
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, June 1,1992 to
----------------------- December 31,1996
1996 1995 (cumulative)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES $ 26,193 $ - $ 26,193
Cost of sales 15,493 - 15,493
- -----------------------------------------------------------------------------------------------
Gross profit 10,700 - 10,700
OPERATING EXPENSES:
Research and development 893,771 943,510 2,950,275
Sales, general and administrative 2,774,679 2,194,393 8,541,287
- -----------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (3,657,750) (3,137,903) (11,480,862)
OTHER INCOME (EXPENSE):
Interest income 92,344 - 98,440
Interest expense (1,024,007) (2,925) (1,030,890)
Loss on sale of marketable securities - - (20,790)
Net unrealized loss on marketable securities - - (64,500)
- -----------------------------------------------------------------------------------------------
LOSS BEFORE DISCONTINUED OPERATIONS
AND DISPOSAL OF OIL AND GAS OPERATIONS (4,589,413) (3,140,828) (12,498,602)
DISCONTINUED OPERATIONS - - (520,396)
LOSS FROM DISPOSAL OF OIL AND GAS OPERATIONS - - (371,374)
- -----------------------------------------------------------------------------------------------
NET LOSS $ (4,589,413) $ (3,140,828) $(13,390,372)
- -----------------------------------------------------------------------------------------------
LOSS PER SHARE:
Less: 6% cumulative convertible preferred
series A stock dividends (Note 6) 234,592 -
Loss attributable to common stock $ (4,824,005) $ (3,140,828)
- -----------------------------------------------------------------------------------------------
Net loss per common share (Note 11) $ (0.98) $ (0.94)
- -----------------------------------------------------------------------------------------------
Weighted average of common shares outstanding 4,944,469 3,357,084
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In
--------------- ------------ -------
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
BALANCE, MAY 31, 1992 - $ - 1,429,508 $220,004 $4,472,062
Common stock issued for:
Cash - - 358,834 48,247 510,697
Research and development and services - - 227,966 34,195 393,241
Patent and licensing costs - - 175,000 26,250 105,000
Prepaid market research - - 575,000 86,250 345,000
Common stock to be issued - - - - 163,958
Net loss from June 1 through December 31, 1992 - - - - -
------------------------------------------------------------
BALANCE, DECEMBER 31, 1992 - - 2,766,308 414,946 5,989,958
============================================================
Common stock issued for:
Cash - - 312,750 46,913 284,312
Patent and licensing costs - - 500,000 75,000 714,000
Research and development, compensation
and services - - 362,500 54,375 759,669
Common stock to be issued - - - - -
Net loss for 1993 - - - - -
------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 - $ - 3,941,558 $591,234 $7,747,939
============================================================
</TABLE>
<TABLE>
<CAPTION>
Common Deferred
Stock Compen- Accumulated
To Be Issued sation Deficit Total
------------ ------ ------- -----
<S> <C> <C> <C> <C>
BALANCE, MAY 31, 1992 $ - $ - ($3,706,702) $985,364
Common stock issued for:
Cash - - - 558,944
Research and development and services - - - 427,436
Patent and licensing costs - - - 131,250
Prepaid market research - - - 431,250
Common stock to be issued 37,500 - - 238,958
Net loss from June 1 through December 31, 1992 - - (791,994) (791,994)
------------------------------------------------------------
BALANCE, DECEMBER 31, 1992 37,500 - (4,498,696) 1,981,208
============================================================
Common stock issued for:
Cash (37,500) - - 256,225
Patent and licensing costs - - - 789,000
Research and development, compensation
and services - - - 814,044
Common stock to be issued 21,000 - - 42,000
Net loss for 1993 - - (1,779,841) (1,779,841)
------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 $21,000 $ - ($6,278,537) $2,102,636
============================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------- ------------ Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 - $ - 3,941,558 $591,234 $7,747,939
Reverse stock split - - (3,284,561) (492,684) 492,684
Common stock issued for:
Cash - - 384,820 57,723 426,539
Research and development, compensation
and services - - 605,914 90,887 1,039,961
Patent and licensing costs - - 450,000 67,500 285,833
Conversion of debt - - 47,250 7,087 45,277
Common stock to be issued - - - - -
Accrued stock issuance - - - - -
Net loss for 1994 - - - - -
------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 - - 2,144,981 321,747 10,038,233
============================================================
Common stock to be issued - - - - -
Common stock issued for: (Notes 6 and 7)
Cash - - 43,000 6,450 23,550
Patent and licensing costs - - 20,000 3,000 47,000
Research and development, compensation
and services - - 903,781 135,567 1,427,563
Conversion of debt - - 343,750 51,563 223,437
Private placement - - 741,088 111,163 863,606
Accrued stock issuance (Note 5) - - - - -
Issuance of warrants (Note 6) - - - - 153,000
Issuance of preferred stock (Note 6) 153,750 384,375 - - -
Net loss for 1995 - - - - -
------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 153,750 $384,375 4,196,600 $629,490 $12,776,389
============================================================
</TABLE>
<TABLE>
<CAPTION>
Common Deferred
Stock Compen- Accumulated
To Be Issued sation Deficit Total
------------ ------ ------- -----
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $21,000 $ - ($6,278,537) $2,102,636
Reverse stock split - - - -
Common stock issued for:
Cash (21,000) - - 442,262
Research and development, compensation
and services - - - 1,130,848
Patent and licensing costs - - - 353,333
Conversion of debt - - - 52,364
Common stock to be issued 398,125 - - 796,250
Accrued stock issuance - 66,406 - 66,406
Net loss for 1994 - - (3,088,296) (3,088,296)
------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 398,125 66,406 (9,366,833) 1,855,803
============================================================
Common stock to be issued 100,980 - - 201,959
Common stock issued for: (Notes 6 and 7)
Cash - - - 30,000
Patent and licensing costs - - - 50,000
Research and development, compensation
and services - - - 1,563,130
Conversion of debt - - - 275,000
Private placement (487,385) - - -
Accrued stock issuance (Note 5) - 181,094 - 181,094
Issuance of warrants (Note 6) - - - 153,000
Issuance of preferred stock (Note 6) - - - 384,375
Net loss for 1995 - - - (3,140,828) (3,140,828)
------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 $11,720 $247,500 ($12,507,661) $1,553,533
============================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In
--------------- ------------ -------
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
(Note 6)
BALANCE, JANUARY 1, 1996 153,750 $384,375 4,196,600 $629,490 $12,776,389
Stock issued for: (Note 7)
Research and development, compensation
and services - - 451,205 67,680 537,615
Issuances of convertible preferred stock 93,750 234,375 - - -
Exercise of warrants - - 162,500 24,375 250,625
Series I convertible preferred conversion to 6%
cumulative convertible Series A preferred
stock (247,500) (618,750) - - 618,750
Issuance of 6% cumulative convertible Series A
preferred stock 1,847,500 18,475 - - 6,261,504
Issuance of redeemable warrants - - - - 295,670
Common stock dividend issued to 6% cumulative
convertible Series A preferred stockholders - - 71,658 10,749 90,002
Common stock dividend distributable to 6%
cumulative convertible Series A preferred
stockholders - - - - 117,111
Common stock issued for conversion of 6%
cumulative convertible Series A preferred
stock (504,000) (5,040) 2,016,000 302,400 (297,360)
Accrued stock issuance (Note 5) - - - - -
Net loss for 1996 - - - - -
------------------------------------------------------------
BALANCE DECEMBER 31, 1996 1,343,500 $13,435 6,897,963 $1,034,694 $20,650,306
============================================================
</TABLE>
<TABLE>
<CAPTION>
Common Deferred
Stock Compen- Accumulated
To Be Issued sation Deficit Total
------------ ------ ------- -----
<S> <C> <C> <C> <C>
(Note 6)
BALANCE, JANUARY 1, 1996 $23,440 $247,500 ($12,507,661) $1,553,533
Stock issued for: (Note 7)
Research and development, compensation
and services - - - 605,295
Issuances of convertible preferred stock - - - 234,375
Exercise of warrants - - - 275,000
Series I convertible preferred conversion to 6%
cumulative convertible Series A preferred stock- - - -
Issuance of 6% cumulative convertible Series A
preferred stock - - - 6,279,979
Issuance of redeemable warrants - - - 295,670
Common stock dividend issued to 6% cumulative
convertible Series A preferred stockholders - - (100,751) -
Common stock dividend distributable to 6%
cumulative convertible Series A preferred
stockholders 16,730 - (133,841) -
Common stock issued for conversion of 6%
cumulative convertible Series A preferred
stock - - - -
Accrued stock issuance (Note 5) - - - -
Net loss for 1996 - - (4,589,413) (4,589,413)
------------------------------------------------------------
BALANCE DECEMBER 31, 1996 $40,170 $247,500 ($17,331,666) $4,654,439
============================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
June 1, 1992 to
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Year Ended December 31, December 31, 1996
1996 1995 (Cumulative)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,589,413) $(3,140,828) $(13,390,372)
Adjustments to reconcile net loss
to net cash provided by (used in) operations:
Loss from discontinued operations from
January 1 through May 31,1992 - - (100,599)
Common stock paid for services 605,295 1,563,130 4,128,036
Compensation recognized relating to
accrued employee common stock grants & warrants - 334,094 400,500
Bad debt expense - - 394,720
Depreciation and amortization 320,850 369,139 1,603,558
Amortization of loan origination fees and
original issue discount 942,620 - 942,620
Loss on disposal of fixed assets 7,373 - 109,968
Reversal of litigation outstanding at end of prior year - (286,996) (286,996)
Loss on sale of marketable securities - - 48,290
Net unrealized loss on marketable securities - - 37,000
Loss on disposal of oil and gas operations - - 368,894
Increase (decrease) from changes in:
Accounts receivable (8,563) - (6,048)
Interest receivable - - 8,053
Amounts due from related party - - 1,682
Inventory 47,214 (147,593) (100,379)
Prepaid royalties 15,000 (175,000) (160,000)
Prepaid expenses and other current assets (106,227) (28,082) (310,651)
Other assets (6,662) (36,000) (51,003)
Accounts payable (91,320) 111,408 97,964
Termination agreement liability 246,667 - 246,667
Accrued expenses and taxes 104,809 (1,283) 148,636
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,512,357) (1,435,445) (5,869,460)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Patent and marketing licensing costs (381,188) (50,000) (906,298)
Purchase of property and equipment (140,272) (54,270) (282,646)
Other (proceeds from sale of marketable
securities and loan repayments) - - 175,188
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $(521,460) $(104,270) $(1,013,756)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
F-9
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
June 1, 1992 to
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Year Ended December 31, December 31, 1996
1996 1995 (Cumulative)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings from related party $ - $ - $ 22,608
Proceeds from preferred stock and warrant
issurance (net of offering costs) 6,431,079 - 6,431,079
Proceeds from notes payable 912,500 1,182,500 2,195,000
Principal payments on notes payable (2,000,000) (50,000) (2,050,000)
Proceeds from common stock to be issued - 201,959 1,237,167
Proceeds from issuing common stock - 30,000 1,364,052
Proceeds from warrant exercise 275,000 - 275,000
Capital lease financing (2,380) (1,504) 1,103
Advances on private common stock placement - - 296,440
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 5,616,199 1,362,955 9,772,449
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,582,382 (176,760) 2,889,233
Cash and cash equivalents, beginning of period 306,851 483,611 -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $2,889,233 $306,851 $2,889,233
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES:
PAYMENTS FOR:
Interest $ 81,387 $ 4,281
Income taxes $ 1,600 $ -
STOCK ISSUED FOR:
Research and development $ 323,709 $ 806,587
Public relations and marketing services 97,202 390,806
Legal and professional services 125,320 151,260
Directors' fees 59,064 63,839
Contract payable - 50,000
Note payable - 50,000
Prepaid expenses and inventory - 50,638
------- ---------
$605,295 $1,563,130
------- ---------
Common stock dividends issued and distributable to 6%
cumulative convertible Series A preferred stockholders $234,592 $ -
NON-CASH INVESTING ACTIVITY:
Application of prepaid royalties to the purchase of license agreements: $160,000 $ -
Application of deposit to the purchase of property and equipment: $ 36,000 $ -
</TABLE>
Non-cash financing activity:
During the year ended December 31, 1995, the Company issued Series I
convertible preferred stock valued at $384,375 in conjunction with notes payable
issued in a private placement (Notes 3 and 6). This amount is recorded as an
original issue discount.
Additional short term notes in the amount of $625,000 were added in January
1996 along with preferred stock stated at $234,375 which was added to the 1995
year end original issue discount.
During the second quarter of 1996, additional short-term notes in the
amount of $350,000 were issued along with common stock warrants valued at
$143,870, which was added to the 1995 year end original issue discount for a
total of $762,620.
During the year ended December 31, 1995, $275,000 of debt was converted
into common stock (Note 6).
During the years ended December 31, 1996 and 1995, deferred compensation
expense of $0 and $181,094 was recorded relating to accrued employee common
stock grants in order to value such shares at the fair market value (Notes 5 and
7).
During the years ended December 31, 1996 and 1995, compensation expense of
$0 and $153,000 was recorded relating to the issuance of warrants with an
exercise price below fair market value at the date of issuance (Note 6).
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
Description of Business
Medical Device Technologies, Inc. (the "Company"), is a public company
incorporated in Utah on February 6, 1980 and headquartered in San Diego,
California. The Company's securities currently trade on the Nasdaq SmallCap
Market under the symbols (MEDD, MEDDP and MEDDW). Prior to 1992, the Company's
business was the exploration and production of hydrocarbons. As of June 1, 1992,
the Company re-entered the development stage. Effective January 1, 1994, the
Company completed the divestiture of all oil and gas properties and was no
longer in the hydrocarbon business. Since that time, the Company has been
exclusively a medical device company. The Company changed its name in April
1995, from Cytoprobe Corporation, to reflect the change of focus.
The Company has developed three innovative medical device products. The
first product, the Fluid Alarm System (FAS), formerly called the Personal Alarm
System (PAS), is a device which monitors the integrity of infection control
barriers, such as surgical gloves and gowns worn during medical procedures. The
second product, the Cell Recovery System (CRS), is a cell "brushing" and
retrieval system using an automated biopsy brush for the collection of specimen
cells for diagnostic purposes, primarily (but not limited to) cancer detection.
The third product, the Intracranial Pressure Measuring System (ICP), is a
diagnostic device that measures pressure within the skull non-invasively. The
Company received FDA clearance for the FAS during the year ended December 31,
1995 and received FDA clearance for the CRS in March 1996.
Inventory
The inventory balance shown at December 31, 1996 consisted of $20,685 of
finished goods, net of reserve of $7,900, $20,643 of work in process and $59,051
of parts and materials. The inventory balance at December 31, 1995 consisted of
parts and materials. Inventory is valued at the lower of cost or market, on a
first-in, first-out basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation is being provided
on a straight line basis over the estimated useful lives of the related assets
which range from three to seven years.
F-12
<PAGE>
Loan Origination Fees and Original Issue Discount
In conjunction with the Company's private placements of short-term notes
payable and preferred stock (Note 3), the Company incurred loan origination fees
of $180,000 ($62,500 in 1996 and $117,500 in 1995). Further, the Company
recorded original issue discounts of $378,245 and $384,375 in 1996 and 1995 on
the two sets of notes payable. These amounts were amortized over the expected
term of the notes (approximately five months in 1996). All short-term notes were
repaid with the proceeds of the Company's public offering of 6% cumulative
convertible Series A preferred stock and redeemable warrants, completed in June
1996 (See Notes 3 and 6).
License Agreements
The Company has entered into various license agreements whereby the Company
has acquired the exclusive worldwide rights to develop commercialize,
manufacture, and sell its three products. In addition, the Company paid finder's
fees relating to two of the three products. These costs, along with legal costs
to register the related patents, have been capitalized and are being amortized
over the estimated useful life of the license agreement.
The Company will continue to monitor the markets for its products, the
emergence of competitive products and technologies and associated events, and
will adjust the lives of its patent licenses accordingly.
Income Taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) 109 "Accounting for Income Taxes." The statement
employs an asset and liability approach for financial accounting and reporting
of deferred income taxes. Generally, SFAS 109 allows for recognition of deferred
tax assets in the current period for the future benefit of net operating loss
carryforward and items for which expenses have been recognized for financial
statement purposes but will be deductible in future periods. A valuation
allowance is recognized, if on the weight of available evidence it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.
Cash Flows
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with an original maturity of three months or less
to be cash equivalents.
F-13
<PAGE>
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Loss Per Common Share
Loss per common share data is computed by dividing net loss (less
cumulative preferred stock dividends) by the weighted average number of common
shares outstanding during each period. Warrants outstanding have not been
considered in the average number of common shares since the effect would be
anti-dilutive. Weighted average common shares outstanding at December 31, 1996
and 1995 includes the stock to be issued.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash, accounts
receivable, and accounts payable and accrued expenses approximate fair value
because of their short maturity.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(SFAS No. 121) issued by the Financial Accounting Standards Board (FASB) is
effective for financial statements for fiscal years beginning after December 15,
1995. The new standard establishes new guidelines regarding when impairment
losses on long-lived assets, which include plant and equipment, and certain
identifiable intangible assets, should be recognized and how impairment losses
should be measured. The Company does not expect adoption to have a material
effect on its financial position or results of operations.
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) establishes a fair value method
accounting for stock-based compensation plans and for transactions in which an
entity acquires goods or services from non-employees in exchange for equity
instruments. The Company adopted this accounting standard on January 1, 1996.
SFAS 123 also encourages, but does not require companies to record compensation
cost for stock-based employee compensation. The Company has chosen to continue
to account for stock-based compensation utilizing the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, compensation cost for stock options and
warrants is measured as the excess, if any, of the fair market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock.
Statements of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Exstiguishments of Liabilities'
(SFAS No. 125) is effective for transfers and servicing of financial assets and
extiguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive applications is not permitted. The
new standard provides accounting and reporting standards for transfers and
servicing of financial assets and extiguishments of liabilities. The Company
does not expect adoption to have a material effect on its financial position or
results of operations.
Reclassifications
Certain reclassifications have been made to conform the prior year's
amounts to the current year's presentation.
F-14
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Going Concern
These financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has recurring losses from
operations and is dependent on the success of its three medical devices which
have yet to generate any significant sales. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
The Company plans on achieving certain minimum sales of the FAS device
during the next twelve months, but to meet its capital needs for this period the
Company will be required to obtain , and intends to seek, additional sources of
financing, which cannot be assured. In the event the Company can not obtain
additional financing, the Company would have to substantially curtail product as
well as research and development plans due to lack of funds. The long-term
viability of the Company is dependent on its ability to profitably develop and
market its current products and to obtain the financing necessary to fund its
anticipated growth.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amount of
liabilities that might be necessary should the Company be unable to continue in
existence.
2. License Agreements
License agreements costs are as follows:
<TABLE>
<CAPTION>
December 31,
Useful Life 1996 1995
----------- ---- ----
<S> <C> <C> <C>
CRS 10 Years $1,338,624 $1,038,624
ICP 10 Years 942,505 942,505
FAS 10 Years 486,188 245,000
---------- ----------
$2,767,317 $2,176,129
Less: Accumulated amortization 903,149 627,887
---------- ----------
$1,864,168 $1,598,242
========== ==========
</TABLE>
Amortization expense was $275,262 and $222,612 for the years ended December 31,
1996 and 1995.
F-15
<PAGE>
3. Short-term Notes Payable
Pursuant to a Confidential Private Placement Memorandum dated October 27,
1995, the Company effected between December 14, 1995 and December 27, 1995, a
private placement of short-term notes and 153,750 shares of Series I convertible
preferred stock. Of the $1,025,000 gross proceeds, $384,375 was allocated to the
preferred stock and represented the original issue discount on the notes at
December 31, 1995. The proceeds of the private placement provided working
capital.
On January 24, 1996, the Company completed the private placement and issued
additional short-term notes and 93,750 shares of Series I convertible preferred
stock. Of the additional $625,000 gross proceeds, $234,375 was allocated to the
preferred stock and represented additional original issue discount on the notes.
The Company also utilized these proceeds for working capital.
Notes sold in the private placement bore interest at 10% per annum and
matured at the earlier of (i) the expiration of twelve months after their
issuance, (ii) receipt by the Company of at least $3,000,000 in gross proceeds
from (a) a public or private sale of its securities, (b) a joint venture, or (c)
a licensing agreement. The unamortized original issue discount was $0 and
$384,375 as of December 31, 1996 and 1995, respectively. Subsequent to the
public offering in June 1996, the Company repaid these private placement notes
in full.
During the second quarter of 1996, the Company issued $350,000 in principal
amount of 12% short-term notes payable to four individuals and two of the
Company's directors to finance its operations until its public offering could be
completed. Subsequent to the public offering in June 1996, the Company repaid
these short-term notes in full (see Note 8). Interest paid related to these
notes amounted to $10,500 for the year ended December 31, 1996. In connection
with the issuance of these short-term notes, the Company also issued 137,180
warrants to purchase 137,180 shares of common stock to the six individuals at
exercise prices from $1.26 to $1.38 which vested immediately and expire three
years from issuance. In connection with the issuance of these warrants the
Company recognized, based on a valuation of these warrants, $143,870 as
additional interest expense during the year ended December 31, 1996.
During the year ended December 31, 1995, the Company repaid a note payable
in the principal amount of $50,000 which existed at December 31, 1994.
4. Capital Lease Obligation
Minimum future lease payments under a capital lease for next year and in
aggregate are as follows:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Year-ending December 31, 1997 $1,660
Less: Amount representing interest 557
Present value of minimum lease payments $1,103
</TABLE>
F-16
<PAGE>
5. Commitments
Operating Leases
The Company is currently leasing its offices under a three year operating
lease which ends in April 1998. Future minimum lease payments under this and
other operating leases are as follows:
<TABLE>
<CAPTION>
Year-ending December 31, Amount
- ------------------------ ------
<S> <C>
1997 $69,851
1998 22,961
1999 7,331
2000 7,331
2001 4,576
-------
$112,050
========
</TABLE>
Rent expense, including month to month leases, was $88,157 and $54,642 for
the years ended December 31, 1996 and 1995, respectively.
Royalty Agreements
In June 1994, the Company entered into a royalty agreement when it
purchased the exclusive license and received the technology and developments
relating to the FAS device. In 1996, the agreement was revised wherein the
Company purchased all past and future royalty obligations from the licensor for
an additional $81,188 and was also extended for an additional year so that it
now expires June 1, 2005. Accordingly, previous payments made by the Company of
$160,000 at December 31, 1995 ($60,000 was classified as short-term and $100,000
as long-term) have been reclassified to License Agreements (see Note 2). In
addition, the Company entered into a royalty agreement when it obtained the
exclusive license to the Signal Modulation Barrier Monitor, which is a component
part of the FAS. Pursuant to this license agreement, the Company will pay
royalties of 1% of the average retail sales price on all net sales, through the
life of the future patent, when registered. The Company has obtained FDA
clearance for the FAS and began marketing the device in 1996.
In August 1992, the Company entered into a royalty agreement when it
purchased the exclusive license and technological rights relating to the CRS
device. The Company will pay royalties to a party amounting to 5% of the average
retail sales price on all net sales subject to a minimum of $100,000 per year
starting from 1996 and ending in 1998. The Company is also required to pay
royalties of $100,000 in twenty equal quarterly installments of $5,000 beginning
January 1, 1997, pertaining to calendar years 1994 and 1995. Through December
31, 1996, the company has paid $600,000 and issued 227,966 shares of common
stock pursuant to the original CRS license agreement. The Company can terminate
this agreement with 90 days written notice at which time all patent rights will
cease. In 1996, the Company purchased the future royalty rights from an
individual for $300,000 and have capitalized this amount into License Agreements
(see Note 2). This payment reduced the royalty percentage payable on the CRS by
50% of the original amount.
F-17
<PAGE>
In January 1993, the Company entered into a royalty agreement when it
exercised its option to enter into an exclusive license agreement for the ICP
device. Under the terms of the agreement, the Company will pay royalties equal
to 10% of the net sales proceeds from the ICP. Minimum payments of $75,000 and
$15,000 were made by the Company for the years ended December 31, 1996 and 1995.
The Company is required to pay additional royalties of $200,000 for each of
subsequent years through the life of the patent. The Company can terminate this
agreement with 90 days written notice, at which time all patent rights will
cease.
Further, in accordance with a finder's agreement, the Company is obligated
to pay royalties equal to 8% of the gross sales of the ICP, as well as to issue
an additional 1,000,000 restricted shares of common stock to the finder when
gross sales of the ICP reach $10,000,000. The Company believes, on the advice of
counsel, that it is not obligated to pay the 8% royalty or the 1,000,000 shares
of restricted stock based on a breach of contract by the finder, as the finder
failed to reimburse the Company for consulting fees in accordance with the
agreement.
Medical Advisory Agreements
On January 1, 1997, the Company had agreements with five medical advisors
for a one- to two-year term. The agreements provide for 15,000 shares of common
stock to be issued to each advisor per year, issued semi-annually.
Employment Agreements
In August 1994, the Company entered into an exclusive four-year term
employment with the Chief Executive Officer. The employment agreement provides
for a base salary of $162,000 per year in addition to one hundred twenty-five
thousand (125,000) shares of the common stock at the end of two years of
continuous satisfactory employment by the Company. On August 2, 1996, the Board
of Directors changed the date which the Chief Executive Officer is entitled to
received these shares to January 2, 1997. In addition, the Chief Executive
Officer received 100,000 common stock purchase warrants which are exercisable
over a five (5) year period ending August 31, 1999 at $2.00 per share.
In addition, in 1994, the Company entered into a severance agreement with
the Chief Executive Officer. The severance agreement provides, among other
things, that in the event a change in control of the Company occurs or the Chief
Executive Officer is involuntarily terminated, suffers a disability while
employed by the Company or dies while employed by the Company, then the Chief
Executive Officer is entitled to receive certain benefits from the Company. Such
benefits may include some or all of the following: an amount based on the base
salary as provided for in the employment agreement; an amount based on the bonus
paid or payable to the Chief Executive Officer as provided for in the employment
agreement; the right to receive common stock that shall vest immediately; and
the right to exercise any warrants or stock options held by or granted to the
Chief Executive Officer under the employment agreement or any stock option plan
of the Company or both, health insurance and disability insurance. The Chief
Executive Officer will not receive any benefits upon voluntarily termination of
employment with the Company or if the Company terminates the Chief Executive
Officer "for cause", which is defined as the conviction of the Chief Executive
Officer after appeal of a felony.
F-18
<PAGE>
On August 2, 1996, the Board of Directors extended the Employment and
Severance Agreements with the Chief Executive Officer for an additional one (1)
year period or until August 31, 1999.
In March 1996, the Company terminated the services of a former officer. The
Company entered into a termination agreement with the former officer which
terminated his existing employment and severance agreements, and also provided
for mutual general releases. Under the termination agreement, the former officer
is entitled to receive grants awarded to him under his original employment
agreement of 100,000 shares of the Company's common stock on August 31, 1996 and
75,000 common stock purchase warrants, which expire on August 31, 1999 and are
exercisable at a price of $2.00 per share, after the earlier of August 31, 1996
or the completion of a public offering of the Company's securities. The
termination agreement also provides for the former officer to receive $357,667
over a 29 month period commencing on April 1, 1996 and ending August 31, 1998,
and 37,500 common stock purchase warrants which are exercisable, from August 31,
1998 through August 31, 2001, at a price of $.80 per share. As of December 31,
1996 the obligation is $246,667.
In January 1995, the Company entered into an exclusive employment agreement
with the Vice President of Marketing and Sales for a three-year term providing
for a base salary of $110,000 per annum. This agreement also provides for fifty
thousand (50,000) shares of the Company's common stock to be issued on August
31, 1996. On August 2, 1996, the Board of Directors changed the date which the
Vice President of Marketing and Sales is entitled to receive the shares to
January 2, 1997. The agreement also provides for warrants to purchase
thirty-seven thousand five hundred (37,500) shares of the Company's common stock
at $2.00 per share. One-third of the warrants were issued on January 4, 1996,
and one-third (1/3) of the warrants are to be issued on each of January 4, 1997
and 1998. The warrants are exercisable for a period of five (5) years from the
date of issuance.
In March 1996, the Company entered into an exclusive employment agreement
with the Vice President of New Business Development for a three-year term
providing for a base salary of $108,000 per annum. The agreement also provides
for twenty-five thousand (25,000) shares of the Company's common stock; 12,500
shares of common stock will vest on March 15, 1997 and the remaining 12,500
shares will vest on March 15, 1998. In addition, the agreement provides for
warrants to purchase thirty-seven thousand five hundred (37,500) shares of the
Company's common stock at $.80 per share. One-quarter (1/4) of the warrants are
to be issued on each of March 15, 1997, 1998, 1999 and 2000. The warrants are
exercisable for a period of six (6) years from the date of issuance.
In March 1996, the Company entered into a non-exclusive employment
agreement with the Chief Financial Officer for a three-year term providing for a
base salary of $60,000 per annum based upon a three day work week. In the event
the Chief Financial Officer's services are required by the Company in excess of
three days per week, he is to be compensated at $600 per day. The employment
agreement provides for twelve thousand five hundred (12,500) shares of the
Company's common stock; 6,250 shares of common stock will vest on March 15, 1997
and the remaining 6,250 shares will vest on March 15, 1998. In addition, the
Chief Financial Officer is entitled to receive warrants to purchase twenty-five
thousand (25,000) shares of the Company's common stock at $.80 per share.
One-quarter (1/4) of the warrants are to be issued on each of March 15, 1997,
1998, 1999 and 2000. The warrants are exercisable for a period of six (6) years
from the date of issuance.
F-19
<PAGE>
Litigation
The Company prevailed in two separate lawsuits in calendar year 1996.
In one case instituted in the Superior Court of the State of California,
County of San Diego, the Company was awarded after trial $1,978,893 million in
damages and costs against Chandler Church and Company and affiliated entities
based upon claims sounding in breach of contract and breach of constructive
trust.
In a second case commenced in the United States Bankruptcy Court, Southern
District of California, San Diego Division, the Court, in dismissing an
Involuntary Petition filed against the Company, found that the Petition had been
filed in "bad faith" and consequently awarded the Company punitive damages and
attorneys' fees against Chandler Church and Company and affiliated entities,
totaling $761,888. The Company thereafter entered into an out-of-Court
settlement with one of the parties which provides for the payment to the Company
of the stipulated sum of $25,000.
The Company is pursuing collection efforts for the damages, costs and fees
awarded to it in the aforementioned cases, but is uncertain whether it will be
able to recover any or all of the monies awarded to it. Accordingly, the Company
has not recorded a receivable associated with this litigation due to the
uncertainty.
There are no other legal proceedings to which the Company is a party which
could have a material adverse effect on the Company.
6. Stockholders' Equity
Preferred Stock
In April 1995, the Company amended its Articles of Incorporation to
authorize 10,000,000 shares of $.01 par value preferred stock. In December 1995,
the Company further amended its Articles of Incorporation to authorize 187,500
of Series I convertible preferred stock in conjunction with its private
placement of short-term notes payable (Note 3). As a result of this private
placement offering, the Company issued 153,750 shares of Series I convertible
preferred stock with an assigned value of $384,375 (see Note 3). On January 19,
1996, the Company again amended its Articles of Incorporation to increase the
authorized shares of Series I convertible preferred stock from 187,500 to
247,500. On January 24, 1996, the Company issued an additional 93,750 shares of
Series I convertible preferred stock. These preferred shares were considered an
original issue discount associated with the notes payable and were amortized
over approximately the first five months of 1996 (see Note 3).
On June 24, 1996, the Company completed a public offering of 1,500,000
shares of 6% cumulative convertible Series A preferred stock (the "Preferred
Stock") and 1,500,000 redeemable common stock purchase warrants (the "Redeemable
Warrants") resulting in gross proceeds of $7.65 million. The Company received
approximately $4 million after repayment of short-term debt and costs associated
with the offering. The Preferred Stock is convertible into four (4) shares of
common stock at $1.25 per share and each Redeemable Warrant enables the holder
to purchase two shares for a total of $3.75. As part of the terms of this
offering, the holders of the Series I convertible preferred stock exchanged
their preferred stock for the Preferred Stock on a one for one basis at no cost.
Each share of Preferred Stock will by its terms automatically convert into four
(4) shares of common stock on July 24, 1997, unless earlier converted by its
holder.
In August 1996, the Company received net proceeds of $459,800 as the result
of the underwriter's exercise of its over-allotment option under the June 24,
1996 public offering to purchase an additional 225,000 Redeemable Warrants and
an additional 100,000 shares of Preferred Stock. These proceeds were offset by
additional offering costs of $93,203 related to the June 1996 public offering
that were recorded during the third quarter.
F-20
<PAGE>
Common Stock
On June 20, 1996, the directors of the Company approved a one-for-two
reverse split of the common stock. All share balances have been retroactively
adjusted to reflect the reverse stock split.
During the second quarter of 1995, the Company raised $974,769 for the
issuance of 741,088 shares of common stock.
During June and July 1995, the Company raised $275,000 from the issuance of
convertible debentures. These notes were converted into 687,500 shares of common
stock during December 1995.
During the year ended December 31, 1995, the Company received cash of
$30,000 for the issuance of 43,000 shares of common stock.
During the year ended December 31, 1996, as a result of individuals
exercising 162,500 private warrants, the Company issued 162,500 shares of common
stock for $275,000.
On September 9, 1996, the Company issued 71,658 shares of common stock as a
dividend for the period through August 31, 1996 for the Preferred Stockholders
of record as of August 12, 1996. On November 11, 1996, the Company declared a
second common stock dividend of 111,534 shares for Preferred Stockholders of
record as of December 10, 1996. The shares were issued subsequent to year end
and, accordingly, have been recorded as common stock dividend distributable in
additional paid-in capital at December 31, 1996. The number of shares to be paid
on the Preferred Stock as a dividend is calculated based on the 10 day moving
average price of the common stock during the 30 days prior to the declaration
date, subject to a maximum price of $3.00 and minimum price of $1.20 per share.
Fractional shares are rounded up.
During the fourth quarter of 1996, individuals exercised their rights and
converted 504,000 shares of the Preferred Stock into 2,016,000 shares of common
stock.
F-21
<PAGE>
Warrants
The Company has issued warrants in connection with various private
placements, the secondary public offering in 1996, and certain other agreements
with and compensation to employees and consultants. The Company's private
warrants allow the holder to purchase one share of the Company's common stock at
a specified price and the public warrants each allow the holder to purchase two
shares at $1.875 per share.
Private and public warrants granted and issued by the Company consisted of:
<TABLE>
<CAPTION>
Number of Per share Exercise
warrants Exercise price period
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Outstanding at January 1, 1995 410,000 $2.00 8/31/94-9/23/99
Granted 476,250 $1.85 8/31/94-1/4/01
- -----------------------------------------------------------------------------------------------------
Outstanding at December 31, 1995 886,250 $1.92 8/31/94-1/4/01
Granted 439,680 $1.00 4/22/96-8/1/03
Issued (public-Redeemable Warrants) 1,972,500 $1.88 6/24/96-6/23/99
Exercised (private only) (162,500) $1.69 8/31/94-8/31/97
Expired (private only) (6,250) $1.20 5/28/96
- -----------------------------------------------------------------------------------------------------
Warrants outstanding at December 31, 1996 3,129,680 $2.96 8/31/94-8/1/03
Equivalent common shares 5,102,180 $1.81 8/31/94-8/1/03
- -----------------------------------------------------------------------------------------------------
Warrants exercisable 835,930 $1.86 8/31/94-8/7/01
Equivalent shares resulting 835,930
- -----------------------------------------------------------------------------------------------------
</TABLE>
With regard to the issuance of 150,000 warrants to an officer at $.80 per
warrant during the year ended December 31, 1995, compensation expense of
$153,000 was recorded as the fair market value of the warrants at the
measurement date. Compensation expense was not recorded for any other issuance
of warrants to officers or employees as the fair market value of the warrants
was below the exercise price at December 31, 1996.
F-22
<PAGE>
Information relating to warrants at December 31,1996 summarized by exercise
price is as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------ ----------------------------
Exercise Price Equiv. Weighted Average Equiv. Weighted Average
Per Share Shares Life (Year) Exercise Price Shares Exercise Price
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.80 435,000 6 $0.80 150,000 $0.80
1.26 99,684 3 1.26 99,684 1.26
1.29 19,380 3 1.29 19,380 1.26
1.38 18,116 3 1.38 18,116 1.38
1.88 3,945,000 3 1.88 0 N/A
2.00 460,000 4.6 2.00 437,750 2.00
2.50 25,000 2 2.50 25,000 2.50
3.00 50,000 2 3.00 50,000 3.00
$4.00 50,000 2 $4.00 50,000 $4.00
-------------------------------------------------------------------------------------
5,102,180 3.6 $2.96 835,930 $1.86
</TABLE>
Had compensation cost for stock-based compensation been determined based on
the fair value at the grant dates consistent with the method of SFAS 123, the
Company's net income and earnings per share for the years ended December 31,
1996 and 1995 would have been reduced to the pro forma amounts presented below:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Net loss
As reported $(4,589,413) $(3,140,828)
Pro forma $(4,706,420) $(3,777,091)
Net loss attributable to common stock
As reported $(4,824,005) $(3,140,828)
Pro forma $(4,941,012) $(3,777,091)
Loss per share
As reported $(.98) $(.94)
Pro forma $(1.00) $(1.13)
</TABLE>
The fair value of warrants is estimated on the date of grants utilizing the
Black-Scholes option pricing with the following weighted average assumptions for
years ended December 31, 1996 and 1995: expected life of 5.4 and 3.7 years,
expected volatility of 98% and 114%, risk-free interest rate of 6% and a 0%
dividend yield. The weighted average fair value at the date of grant of the
warrants granted during 1996 and 1995 approximated $1.13 and $1.76 per warrant.
Due to the fact that the Company's warrants vest over several years and
additional awards are made each year, the above proforma numbers are not
indicative of the financial impact had the disclosure provisions of FASB 123
been applicable to all years of previous warrant grants. The above numbers do
not include the effect of warrants granted prior to 1995 that vested in 1995 and
1996.
F-23
<PAGE>
7. Employee Benefit Plans
Compensatory Stock Benefit Plans
In each of the four most current years, the Company's board of directors
have annually approved a stock compensation plan, the most recent which
registered 750,000 shares under Form S-8 on January 10, 1997, whereby services
are obtained in exchange for issuance of free trading stock of the Company.
Shares may be awarded under this plan until January 10, 1999. During the years
ended December 31, 1996 and 1995, 451,205 and 605,914 shares, respectively, of
common stock under Form S-8 registrations were issued for directors fees,
research and development, advertising and public relations, legal, and
professional services provided to the Company.
Beginning in 1997, compensation recognized relating to accrued employee
stock grants and warrants is based on the pro-rata common stock and warrants
earned and the market value of the Company's stock at the time of issuance (fair
value method) and amortized over the applicable period.
Defined Contribution Plan
In August 1996, the Company adopted the Medical Device Technologies, Inc.
Employee Retirement Savings and Profit Sharing Plan (the "Plan"). The Plan is a
defined contribution profit sharing plan which allows the employee to
participate once hired. Total expense for its 10 full time employees amounted to
$1,197 for the year ended December 31, 1996.
8. Related Party Transactions
During the year ended December 31, 1996, two directors of the Company
loaned the Company $200,000 and $25,000, respectively, until the Company could
complete its public offering (see Note 3). The interest rate and terms of these
notes were made at arms length. The notes were repaid by the Company in 1996
once the offering was complete. Interest paid to these individuals amounted to
$6,750 for the year ended December 31, 1996. A director also received
compensation of $7,500 for general corporate consulting services. During the
year ended December 31, 1995, a director received compensation of $25,297 for
computer and other general corporate consulting services.
F-24
<PAGE>
9. Income Taxes
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to the net
deferred tax asset and liability, and their approximate tax effects, are as
follows:
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------ ---- ----
<S> <C> <C>
Inventory reserve $ 3,421 $ -
Accrued vacation 4,385 -
Excess tax depreciation over book - (9,715)
Investment tax credit carryforward - 6,941
Other 975 -
Net operating loss carryforwards 6,141,687 4,640,045
Valuation allowance (6,150,468) (4,637,271)
----------- -----------
TOTAL $ - $ -
=========== ===========
</TABLE>
At December 31, 1996, the Company had approximately $16,430,000 in
operating loss carryovers to offset future taxable income. These carryovers will
expire in various years through 2011. As a result of a change in ownership,
federal tax rules impose limitations on the use of net operating losses. The
limitations will reduce the amount of these benefits that will be available to
offset future taxable income each year, starting with the year of an ownership
change, which the issuance of the preferred stock in the Company's June 1996
public offering was deemed to be. The dollar amount of these limitations is
indeterminable at this time. In addition, the Company provides a valuation
allowance for a deferred tax asset when it is more likely than not, based on
available evidence, that some portion or all of the deferred tax asset will not
be realized. In management's opinion, it cannot determine if it is more likely
than not that the Company will generate sufficient future taxable income before
2011, the year after which all current available net operating loss
carryforwards expire, to utilize all of the Company's deferred asset. A
valuation allowance has been recognized for the full amount of the deferred tax
asset of $6,150,468.
10. Fourth Quarter Adjustments and Transactions
During the fourth quarter of the year ended December 31, 1995, the Company
recorded net adjustments in the amount of $748,577 relating to the reversal of
an estimated loss accrual for litigation of $286,996, an adjustment to deferred
compensation of $118,969, the recording of prepaid royalties of $120,000, and
the recording of amortization expense of $222,612. The adjustments decreased net
loss by $.20 per share for the year ended December 31, 1995.
11. Supplemental Earnings Per Share Data
On December 18, 1995, $275,000 of convertible promissory notes were
converted into common stock. Had this conversion occurred on June 23, 1995, the
date of issuance, the reported net loss per common share for the year ended
December 31, 1995 would have decreased $.04 to ($.90).
F-25
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 12/31/96
10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000723906
<NAME> MEDICAL DEVICE TECHNOLOGIES, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,889,233
<SECURITIES> 0
<RECEIVABLES> 8563
<ALLOWANCES> 0
<INVENTORY> 100,379
<CURRENT-ASSETS> 3,132,484
<PP&E> 297,382
<DEPRECIATION> 76,046
<TOTAL-ASSETS> 5,332,991
<CURRENT-LIABILITIES> 479,885
<BONDS> 98,667
0
13,435
<COMMON> 1,034,694
<OTHER-SE> 3,603,310
<TOTAL-LIABILITY-AND-EQUITY> 5,232,991
<SALES> 26,193
<TOTAL-REVENUES> 26,193
<CGS> 15,493
<TOTAL-COSTS> 15,493
<OTHER-EXPENSES> 3,657,750
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,024,007
<INCOME-PRETAX> (4,589,413)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,589,413)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,589,413)
<EPS-PRIMARY> (0.98)
</TABLE>
