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US Securities and Exchange Commission
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the quarterly period ended June 30, 1998.
[ ] 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
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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.)
9191 Towne Centre Drive, Suite 420, San Diego, California 92122
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(Address of principal executive offices)
Issuer's telephone number: (619) 455-7127
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Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports); and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
State issuer's revenues for its most recent fiscal year $62,750.
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 July 31, 1998, was $4,038,845
As of July 31, 1998, Registrant had outstanding 4,250,482 shares of common stock
and 56,386 redeemable common stock purchase warrants.
Transitional Small Business Disclosure Format (check one): Yes ___ No. X
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997..............................................F-1
Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 1998 and June 30, 1997...........F-3
Consolidated Statements of Stockholders' Equity for the
Six Months Ended June 30, 1998 ................................F-4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and June 30, 1997..........................F-5
Notes to Consolidated Financial Statements.....................F-8
Item 2. Management's Discussion And Analysis And Plan Of Operation ......3
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................13
Item 2. Changes in Securities............................................13
Item 3. Defaults Upon Senior Securities..................................13
Item 4. Submission of Matters to a Vote of Security Holders..............13
Item 5. Other Information................................................13
Item 6. Exhibits and Reports on Form 8-K.................................13
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
See attached consolidated financial statements and notes thereto for the period
ended June 30, 1998.
ITEM 2. 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 Part I, Item 1 in this Form
10-QSB.
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.
Description of Business
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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". In
January 1994, the Company effected a one (1) for six (6) reverse split of its
Common Stock. In April 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. On March 6, 1998, the Company effected a one (1) for thirty-five
(35) 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 of Common
Stock (100,000,000) remained unchanged.
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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. As of March
31, 1998, the Company's Common Stock, par value $.15 per share (the "Common
Stock") is traded over-the-counter under the symbol "MEDD". The Company's
Redeemable Common Stock Purchase Warrants (the "Redeemable Warrants") and Common
Stock, which previously traded on the National Association of Securities Dealers
Automated Quotation (NASDAQ) SmallCap Market under the symbols MEDDW and MEDD
were delisted by NASDAQ on September 30, 1997 and March 26, 1998, respectively.
The Company's 6% Cumulative Convertible Series A Preferred Stock, par value $.01
per share (the "Preferred Stock"), which previously traded on the NASDAQ
SmallCap Market under the symbol "MEDDP", converted to Common Stock at a ratio
of 4 (four) shares of Common Stock to 1 (one) share of Preferred Stock on July
24, 1997. There were no shares of Preferred Stock outstanding at June 30, 1998.
Effective as of January 1, 1994, the Company, (A Development Stage 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 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). The Company believes the FAS and CRS have potential
commercial viability. The FAS is a device which monitors the integrity of
infection control barriers, such as surgical gloves and gowns worn during
medical procedures. The 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 Company's license
for the ICP was revoked by the licensor in January 1998 after the Company failed
to cure a default in the license agreement with the licensor for non-payment of
royalties. As a result, the Company recorded an impairment loss on the ICP
license in the amount of $487,784 in 1997. The Company deemed the ICP license to
have no future value.
In the immediate future, the primary focus of the Company's activities will be
to complete a corporate acquisition of or merger with another entity with
greater financial resources for the purpose of providing additional resources to
fund on-going business activities and provide access to new products and
markets, as well as funding its current negative working capital position.
In the longer term the Company needs to obtain additional financing for its
working capital requirements associated with the costs of development, marketing
and sales of its medical devices. The Company currently intends to continue
marketing the FAS, and completing the regulatory and development process
relative to the CRS so that the Company can also bring this product to market.
On an ongoing basis, 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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On June 23, 1997 the Company announced that it had contracted to purchase
certain products and distribution rights from Boehringer Mannheim, Inc.
("Boehringer") for $1.35 million. On November 14, 1997, the Company announced
that it had canceled the contract with Boehringer.
On March 11, 1998, the Company announced it had entered into a letter of intent
to acquire Vision Diagnostics, Inc. for undisclosed consideration. Vision
Diagnostics, Inc. owns medical diagnostic imaging centers that provide
diagnostic imaging technology to the US medical marketplace.
Acquisitions
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The Company also plans to seek, investigate and, if such investigation warrants,
to acquire controlling interest in business opportunities presented to it by
persons or firms who or which desire to seek the perceived advantages of an
Exchange Act registered corporation. The Company will not restrict its search to
any specific business, industry, or geographical location, although does plan to
concentrate its search in the medical business in general. However, the Company
may participate in a business venture of virtually any kind or nature.
The Company may seek a business opportunity in the form of firms which have
recently commenced operations, are developing companies in need of expansion
into new products or markets, are seeking to develop a new product or service or
established mature businesses.
In seeking business opportunities, the management decision of the Company will
be based upon the objectives of seeking long-term appreciation in the value of
the Company. Current income will only be a minor factor in such decisions.
Although it is unlikely that the Company will be able to participate in more
than one business opportunity concurrently, management may, in its sole
discretion, elect to enter into more than one acquisition if it believes these
transactions can be effected on terms favorable to the Company. This potential
lack of diversification may not permit the Company to offset potential losses
from one business opportunity against profits from another and should be
considered a substantial risk to shareholders of the Company.
The analysis of new business opportunities will be pursued under guidelines and
objectives established by the Company's officers and directors. The Company will
have unrestricted flexibility in seeking, analyzing and participating in
business opportunities. In these efforts, the Company will consider the
following, among other, factors:
(a) potential for growth in revenues and profits, as indicated by new
technology, anticipated market expansion or new products;
(b) competitive position compared to other firms of similar size and
experience within the industry segment, as well as within the
industry as a whole;
(c) strength and diversity of management, either in place or
scheduled for recruitment;
(d) capital requirements and anticipated availability of required
funds to be provided by the target company for operations,
through the sale of additional securities, the formation of joint
ventures or similar arrangements, or from other sources;
(e) the cost of participation by the Company as compared to the
perceived tangible and intangible values and potential;
(f) the value of existing and accessibility of required resources
other than capital including management expertise, personnel, raw
materials, services, professional assistance and other required
items; and
(g) such other relevant factors as may arise from time to time,
including investor and market makers, if any, interest.
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In applying the foregoing criteria, no one of which is now known to be
controlling, management will attempt to analyze all relevant factors and make a
determination based upon reasonable investigative measures and available data.
Potentially available business opportunities may occur in many different
industries and at various stages of development, all of which will make the task
of comparative investigation and analysis of such business opportunities
extremely difficult and complex. Because of the Company's lack of capital, the
Company may not discover or adequately evaluate adverse facts about an
opportunity to be acquired.
The Company is unable to predict when it may participate in a business
opportunity. It expects, however, that the analysis of specific proposals and
the selection of a business opportunity may take a substantial amount of time
during the coming fiscal year.
Prior to making a decision to participate in a business opportunity, the Company
will generally request that it be provided with written materials regarding the
business opportunity and containing such items as: (I) a description of product,
service and company history; (ii) management resumes; (iii) financial
information (including projections and audited financial statements, if
available); (iv) evidence of existing patents, trademarks or service marks or
rights thereto; (v) an explanation of proprietary products and services; vi)
present and proposed forms of compensation to management; (vii) a description of
transactions between the target and its affiliates during relevant periods;
(viii) a description of present and required facilities; (ix) an analysis of
risks and competitive conditions; (x) a financial plan of operation and
estimated capital requirements; and (xi) other information deemed relevant under
the circumstances, including investor and market makers, but only after the
release of public information on the target.
As part of the Company's investigation, officers and directors will meet
personally with management and key personnel, visit and inspect material
facilities, obtain independent analysis or verification of certain information
provided, check references of management and key personnel and take other
reasonable investigative measures to the extent reasonably allowed by the
Company's limited financial resources. Management of the Company will utilize
the services of its present attorney and accountants in the investigation of
prospective acquisitions. The Company may also utilize the services of hired
consultants.
The Company anticipates that the selection of a business opportunity in which to
participate will be complex and extremely risky. Because of general economic
conditions, rapid technological advances being made in some industries and
shortages of available capital, management believes that there are numerous
firms seeking the perceived benefits of a publicly registered corporation. Such
perceived benefits may include facilitating or improving the terms on which
additional equity financing may be sought, providing liquidity for incentive
stock options or similar benefits to key employees, providing liquidity (subject
to restrictions of applicable statutes), for all shareholders and other factors.
Potentially available business opportunities may occur in many different
industries and at various stages of development, all of which will make the task
of comparative investigation and analysis of such business opportunities
extremely difficult and complex.
Risks
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As development of each 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 operations should be read in
conjunction with the consolidated financial statements and notes thereto
appearing in Part 1, Item 1 in this Form 10-QSB.
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In the immediate future, in order to fund its current negative working capital
position and to continue to operate, the Company currently intends to seek a
corporate acquisition of or merger with another entity with greater financial
resources and to seek to complete additional private placements of debt and/or
equity. The Company's ability to complete an acquisition or merger or to obtain
additional sources of financing cannot be assured. The Company also seeks to
achieve certain minimum sales of the FAS device during the next twelve months,
but these would require the Company obtaining sufficient working capital to
support marketing operations and this cannot be assured. The long-term viability
of the Company is dependent on its ability to obtain additional funding to
profitably develop and market its current products and to obtain the financing
necessary to fund its operations.
Subsequent Events
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On July 14, 1998, the Registrant acquired certain defined magnetic resonant
image technology properties and Vision Diagnostics, Inc. for a total of
approximately 3.0 Million shares of the Registrant and the assumption of
approximately $700,000 in liabilities. As a result of the acquisitions, the
Registrant has acquired ownership interests in four locations: Orlando, Florida;
Jacksonville, Florida; Oak Brook, Illinois; and Toledo, Ohio. As a part of the
acquisition of these properties, Dr. Larry Lammers, the principal owner of the
properties, has been indemnified against certain liabilities and received a
two-year consulting agreement with the Registrant, which includes a 5% finder's
fee on all new properties acquired by the Registrant through Dr. Lammers'
efforts. Dr. Lammers has become a member of the Registrant's Board of Directors.
Dr. Lammers has become the major shareholder of the Registrant, subject to a
Voting Trust Agreement which permits the current Board of Directors of the
Registrant to vote his shares for a period of three years from the date of
closing.
General
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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 1.
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Results of Operations for the Three Months Ended June 30, 1998
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Revenues
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Operating revenues for the three months ended June 30, 1998 were $0 compared to
$13,200 for the same period in 1997. The decrease of 100% is a result of, among
other factors, a substantial decrease in promotional resources and distributor
recruiting activities compared to that in the same period in 1997, when the FAS
launch and public relations campaign was initiated. The Company is continuing,
although with greatly reduced capital resources and personnel, to recruit
distributors for the FAS worldwide. The FAS accounted for all sales revenue in
1998 and 1997.
Gross Profit
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Gross profit for the three month period ended June 30, 1998 was $0 as compared
to negative $16,181 for the same three month period in 1997, resulting from
greatly reduced sales and production activities in 1998 compared to significant
manufacturing start-up and overhead costs in 1997.
Operating Expenses
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Research and Development
Research and development costs in the second quarter of 1998 were $38,982, as
compared to $176,021 in the second quarter of 1997, representing a decrease of
77.9%. This decrease was due to the postponement of research and development
expenditures on all products in 1998 as compared to 1997.
Sales, General and Administrative
Sales, general and administrative costs were $454,234 in the three month period
ended June 30, 1998 as compared to $879,132 in 1997, representing a decrease of
48.3%. This decrease was primarily the result of reduced FAS promotion and
distributor recruiting efforts and corporate downsizing of the sales, marketing,
general and administrative staff and management as compared to 1997.
Losses
The Company's net loss for the second quarter of 1998 was $513,781 as compared
to $1,029,918 in the second quarter of 1997, representing a 50.1% decline in the
net loss. This reduced loss was primarily attributable to the postponement of
research and development expenditures, the reduction of FAS promotion and the
sales, marketing, general and administrative personnel downsizing in 1998 as
compared to 1997. Loss per common share for the second quarter of 1998 was $0.82
as compared to $5.26 representing a reduction in loss per share of 84.4%. This
reduction in loss per common share was primarily attributable to the reduced net
loss in the second quarter of 1998 compared to 1997 and secondarily attributable
to the increase in the weighted average number of common shares outstanding in
1998 as compared to 1997.
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Results of Operations for the Six Months Ended June 30, 1998
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Revenues
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Operating revenues for the first six months of 1998 were $1,900 compared to
$58,700 for the same period in 1997. The decrease of 96.8% is a result of, among
other factors, a substantial decrease in promotional resources and distributor
recruiting activities compared to that in the same period of 1997 when the FAS
launch and public relations campaign was initiated. The FAS accounted for all
sales revenue in 1998 and 1997.
Gross Profit
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Gross profit for the six months ended June 30, 1998 was $1,281 as compared to
negative $9,901 for the same six month period in 1997, resulting from greatly
reduced sales and production activities in 1998 as compared to extraordinary
manufacturing overhead and manufacturing start-up allocation costs in 1997.
Operating Expenses
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Research and Development
Research and development costs in the six month period ended June 30, 1998 were
$35,589, as compared to $495,712 in 1997, representing a decrease of 92.8%. This
decrease was due to the postponement of research and development expenditures on
all products in 1998 as compared to 1997.
Sales, General and Administrative
Sales, general and administrative costs were $745,922 in the first six months of
1998 as compared to $1,714,293 in 1997, representing a decrease of 56.5%. This
decrease was primarily the result of reduced FAS promotion and distributor
recruiting efforts and corporate downsizing of the sales, marketing, general and
administrative staff and management as compared to the same six month period in
1997.
Losses
The Company's net loss for the first six months of 1998 was $810,391 as compared
to $2,149,362 in 1997, representing a 62.3% decline in the net loss. This
reduced loss was primarily attributable to the postponement of research and
development expenditures, the reduction of FAS promotion and the sales,
marketing, general and administrative personnel downsizing in 1998 as compared
to 1997. Loss per common share for the first six months of 1998 was $1.49 as
compared to $10.43 representing a reduction in loss per share of 85.7%. This
reduction in loss per common share was primarily attributable to the reduced net
loss in the first six months of 1998 compared to 1997 and secondarily
attributable to the increase in the weighted average number of common shares
outstanding in 1998 as compared to 1997.
Liquidity and Capital Resources
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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 June 30, 1998 was $108,452 as compared to $45,505 at December
31, 1997, representing a 138.3% increase. In the first six months of 1998,
$217,073 of net cash was used for operating activities and $0 was invested in
property and equipment. The Company received $225,020 from the proceeds of
private placement convertible notes and $55,000 from the proceeds of Restricted
Rule 144 Common Stock to be issued during the first six months of 1998. Net cash
used in operating activities in 1998 consisted principally of a net loss of
$810,391. This net loss was partially offset by a decrease in other net assets
(excluding cash) of $172,633, $287,626 in common stock paid for services and
interest in lieu of cash, plus depreciation and accrued compensation expense of
$133,059. Changes in current assets and current liabilities resulted in a
deficit in the Company's working capital position of $547,386 at June 30, 1998
as compared to a negative working capital of $475,196 at December 31, 1997. The
Company's current deficit in working capital requires the Company to obtain
funds in the short-term to be able to continue in business, and in the longer
term to continue to market its products and to fund research and development on
products not yet ready for market. The Company is seeking to fund these and
other operating needs in the next 12 months from funds to be obtained through a
corporate acquisition of or merger with another entity with greater financial
resources, or from the proceeds of additional private placements or public
offerings of debt or equity securities, or both.
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In the immediate future, in order to fund its current negative working capital
position and to continue to operate, the Company intends to seek a corporate
acquisition of or merger with another entity with greater financial resources
and to complete additional private placements of debt and/or equity. The
Company's ability to complete an acquisition or merger or to obtain additional
sources of financing cannot be assured. The Company also seeks to achieve
certain minimum sales of the FAS device during the next twelve months, but these
would require the Company obtaining sufficient working capital to support
marketing operations and this cannot be assured. The long-term viability of the
Company is dependent on its ability to obtain additional funding to profitably
develop and market its current products and to obtain the financing necessary to
fund its operations.
During the fourth quarter of 1997, the Company issued $100,000 ($50,000 to three
of the Company's directors) in principal amount of 36% short-term convertible
notes payable, due May 18, 1998, to five individuals to finance operations until
a corporate acquisition could be completed. Until payment in full, the unpaid
principal amount of these notes, or any portion may, at the election of
the noteholder at any time, be converted at the conversion price per share of
fifty (50%) percent of the previous thirty day average trading bid price as of
the date of conversion (as amended). As additional consideration for these
loans, the individual lenders, including the directors, were awarded an
aggregate of warrants to purchase 1,429 shares of Common Stock for every $12,500
loaned to the Company at an exercise price of $4.20 per share (see Note 4). In
connection with the issuance of the warrants to the individuals, the Company did
not recognize additional interest expense, as the value of the warrants was
deemed to be immaterial. The interest rate and terms of these notes were made at
arms length.
On June 19, 1998, 164,096 shares of Restricted Rule 144 Common Stock were issued
in order to convert all of these 1997 notes including principal and accrued
interest payable. Cash paid to these individuals and to the directors for
interest was $0 at December 31, 1997 and June 30, 1998. Restricted Rule 144
Common Stock paid to these individuals and to the directors for interest was $0
at December 31, 1997 and $21,300 at June 30, 1998. Accrued interest amounted to
$4,400 for the year ended December 31, 1997 to $0 as of June 30, 1998. All of
the noteholders did not elect to exercise the related warrants, thus, all such
warrants expired on May 18, 1998.
During the first six months of 1998, the Company issued $225,020 in principal
amount of short-term convertible notes payable, due one year from the date of
the related note or the date the Company receives funding from any offering or
merger with another corporation, to four individual to finance operations until
a corporate acquisition could be completed. Until payment in full, the unpaid
principal and accrued interest amounts of these notes, may be converted, at the
option of the noteholder, into common shares of the Company at any time prior to
repayment thereof at a conversion price per share of fifty (50%) percent of the
previous thirty day average trading bid price as of the date of conversion.
These notes accrues interest at a rate per annum equal to one (1%) percent over
the referenced prime lending rate announced from time to time by Bank of America
in San Francisco, California. As additional consideration for these loans, the
individual lenders were awarded 6,250 Restricted Rule 144 Common Stock for every
$12,500 loaned to the Company (see Note 4).
On June 19, 1998, 309,373 shares (including the additional consideration shares)
of Restricted Rule 144 Common Stock were issued in order to convert certain 1998
short-term convertible notes, including principal and accrued interest payable
(see Notes 4 and 5). Cash paid to these individuals for interest was $0 at June
30, 1998. Restricted Rule 144 Common Stock paid to these individuals for
interest was $13,044 at June 30, 1998. Accrued interest amounted to $280 as of
June 30, 1998.
Pursuant to an investment letter dated June 26, 1998 with an individual, the
Company received $55,000 for the purchase of 55,000 shares of Restricted Rule
144 Common Stock at a purchase price of $1.00 per share. At June 30, 1998, such
shares had not been issued (see Note 5).
The Company is seeking to fund its immediate and longer-term working capital
needs from funds to be obtained through a corporate acquisition or merger with
another entity with greater financial resources or from the proceeds of
additional private placements or public offerings of debt or equity securities.
These funds could be partially supplemented by certain minimum anticipated sales
of the FAS in 1998.
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During the next twelve months, the Company will be required to seek additional
sources of financing through private placement of debt and/or equity securities,
which cannot be assured. In the event the Company cannot complete a corporate
acquisition or merger with another entity with greater financial resources or
obtain additional financing, the Company would have to further curtail its
operations due to lack of funds. The long-term viability of the Company is
dependent upon obtaining the financing necessary to fund its current working
capital deficit, funding the operating requirements associated with marketing
and developing its current products and to profitably develop and market new
products.
Net Operating Loss Carryforward
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At June 30, 1998, the Company had approximately $21,471,000 in net operating
loss carryovers to offset future taxable income. These carryovers will expire in
various years through 2012. 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, for
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 deferred tax assets when it is more likely than not, based on
available evidence, that some portion or all of the deferred tax assets 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
2012, the year after which all current available net operating loss
carryforwards expire, to utilize all of the Company's deferred assets. A
valuation allowance has been recognized for the full amount of the deferred tax
assets of $7,810,298.
New Accounting Pronouncements
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Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") issued by the FASB is effective for financial
statements with fiscal years beginning after December 15, 1997. Earlier
application is permitted. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The Company adopted SFAS No. 130 on January 1,
1998 and it had no effect on its financial position or results of operations.
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information" ("SFAS No. 131") issued by the FASB is
effective for financial statements with fiscal years beginning after December
15, 1997. The new standard requires that public business enterprises report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of interim
periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate and their major customers. The Company
adopted SFAS No. 131 on January 1, 1998 and it had no effect on its financial
position or results of operations.
11
<PAGE>
PLAN OF OPERATION
Emergence from a Development Stage Company
- ------------------------------------------
The Company is seeking to emerge in 1998 from a development stage to an
operating company through a corporate acquisition or merger with another
operating entity with greater financial resources or from the proceeds of
additional private placements or public offerings of debt or equity securities.
Such proceeds would be used to fund marketing for the FAS and additional
clinical testing, continued development, FDA filing, and marketing of the CRS.
The Company's Capital Requirements
- ----------------------------------
The Company's greatest cash requirements during 1998 will be for funding, in the
immediate future, its deficit in working capital, and in the longer term,
obtaining the working capital necessary for marketing the FAS, and additional
clinical testing, continued development, FDA filings of the CRS, and selling,
general and administrative expenses. The funding for costs and build-up of
working capital necessary for the marketing of the FAS could be partially
supplemented by certain minimum anticipated sales of the FAS in 1998.
The Company is seeking to fund these and other operating needs in the next 12
months from funds to be obtained through a corporate acquisition or merger with
another entity with greater financial resources or from the proceeds of
additional private placements or public offerings of debt or equity securities.
If a corporate acquisition or merger with another entity or private placement is
not completed, the Company will be required to further reduce costs and seek
alternative financing sources which cannot be assured. Consequently, the
Company's operating outlook is not assured.
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.
Year 2000
- ---------
The Company's management has been assured by its current accounting software
manufacturer and independent consultants that all necessary modifications for
the year 2000 have been or will be made and tested on a timely basis. The
Company may choose to acquire different accounting software prior to the year
2000 and base its decision on the ability to provide uninterrupted performance
in and beyond the year 2000.
Should the Company undertake any product enhancement or new product development
projects which require either internal or external use of a yearly calendar, its
product development documentation will explicitly address accommodation of the
year 2000.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Refer to the Company's Form 10-KSB for the year ended December 31, 1997.
In January 1998, the Company was sued for payment of work allegedly performed
for the Company by a third party in the amount of approximately $93,000. The
Company is currently negotiating with the third party, but it is uncertain
whether a mutually agreeable settlement can be reached and litigation avoided.
The Company has accrued the $93,000 in accounts payable as of June 30, 1998. If
the Company can not reach such a settlement with the third party, accelerated
payments of amounts due, if any, and/or litigation expense could have a material
adverse effect on the Company if it is not able to raise additional capital
through an acquisition or merger, or through the placement of debt or equity
securities, or both.
There are no other legal proceedings to which the Company is a party which could
have a material adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES
Effective March 6, 1998, the directors of the Company approved a one (1) for
thirty-five (35) reverse split of the common stock in order to meet NASDAQ
listing requirements. There were no changes in the common stock voting rights,
par value or authorized shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 Financial Data Schedule.
The Company filed a Current Report on Form 8-K which was issued July 15, 1998.
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ M. Lee Hulsebus Chief Executive Officer, President, August 14, 1998
- ------------------------ and Chief Financial Officer
M. Lee Hulsebus, Chairman
13
<PAGE>
<TABLE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
(unaudited)
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 108,452 $ 45,505
Accounts receivable (net of allowance of $46,473 and $46,473) 15,162 15,162
Inventory (net of reserve of $6,275 and $5,711) 189,074 189,638
Prepaid expenses and other assets 63,938 44,391
- ---------------------------------------------------------------------------------------------------------
Total current assets 376,626 294,696
- ---------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 105,188 105,188
Machinery and equipment 199,373 199,373
Equipment under capital lease 5,349 5,349
- ---------------------------------------------------------------------------------------------------------
309,910 309,910
Less accumulated depreciation (165,938) (136,979)
- ---------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 143,972 172,931
- ---------------------------------------------------------------------------------------------------------
LICENSE AGREEMENTS
(net of accumulated amortization of $847,015 and $745,570) 977,796 1,079,242
OTHER ASSETS 16,834 16,834
- ---------------------------------------------------------------------------------------------------------
$ 1,515,228 $ 1,563,703
=========================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-1
<PAGE>
<TABLE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
(unaudited)
------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 606,450 $ 454,977
Accrued expenses 140,479 100,332
Current obligation under termination agreement 114,583 114,583
Current convertible notes payable (Note 4) 62,500 100,000
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 924,012 769,892
Commitments and Contingencies
STOCKHOLDERS' EQUITY (NOTE 5)
Series I convertible preferred stock (247,500 shares
authorized; 0 issued and outstanding) 0 0
6% cumulative convertible Series A preferred stock,
$.01 par value (1,972,500 shares authorized; 0
and 0 shares issued and outstanding) 0 0
Preferred stock, $.01 par value (10,000,000 shares authorized;
0 shares issued and outstanding) 0 0
Common stock, $.15 par value (100,000,000 shares
authorized; 1,093,781 and 436,262 outstanding) 164,067 65,439
Common stock to be issued (55,715 shares and 715 shares) 78,440 23,440
Additional paid-in capital 23,054,696 22,603,053
Deferred stock compensation 25,443 22,792
Accumulated deficit ($18,583,548 and $17,773,157 accumulated
losses during the development stage through June 30, 1998
and December 31, 1997 (22,731,430) (21,920,913)
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 591,216 793,811
- ---------------------------------------------------------------------------------------------------------
$ 1,515,228 $ 1,563,703
==========================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<PAGE>
<TABLE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<CAPTION>
June 1, 1992 to
Three Months Ended June 30, Six Months Ended June 30, June 30, 1998
--------------------------- ------------------------- ---------------
1998 1997 1998 1997 (Cumulative)
===============================================================================================================
<S> <C> <C> <C> <C> <C>
NET SALES $ 0 $ 13,200 $ 1,900 $ 58,700 $ 90,843
COST OF SALES 0 29,381 619 68,601 191,102
- ---------------------------------------------------------------------------------------------------------------
GROSS PROFIT (LOSS) 0 (16,181) 1,281 (9,901) (100,259)
OPERATING EXPENSES:
Research and development 38,982 176,021 35,589 495,712 3,693,915
Sales, general and administrative 454,234 879,132 745,922 1,714,293 12,432,670
Loss on impairment of license agreement 487,784
- ---------------------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (493,216) (1,071,334) (780,230) (2,219,906) (16,714,628)
OTHER INCOME (EXPENSE):
Other income 25,000 25,000
25,000
Interest income 16,416 45,544 150,127
Interest expense (20,565) (30,161) (1,066,987)
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 (513,781) (1,029,918) (810,391) (2,149,362) (17,691,778)
DISCONTINUED OPERATIONS (520,396)
LOSS FROM DISPOSAL OF OIL AND GAS OPERATIONS (371,374)
- ---------------------------------------------------------------------------------------------------------------
NET LOSS $ (513,781) $(1,029,918) $ (810,391) $(2,149,362) $ (18,583,548)
===============================================================================================================
LOSS PER SHARE:
LESS: CUMULATIVE PREFERRED STOCK DIVIDENDS 182,506 182,506
==============================================================================================
NET LOSS ATTRIBUTABLE TO COMMON STOCK $ (513,781) $ 1,212,424) $ (810,391) (2,331,868)
==============================================================================================
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.82) $ (5.26) $ (1.49)$ (10.43)
==============================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 628,253 230,511 543,677 223,519
==============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
<TABLE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(Unaudited)
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- ------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
(Note 5) ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998 0 0 436,262 $65,439 $22,603,053
Common stock issued for research and development,
compensation and services - - 80,381 12,057 75,858
Accrued stock issuance - - - - -
Net loss for three months ended March 31, 1998 - - - - -
-------------------------------------------------------
BALANCE, MARCH 31, 1998 0 0 516,643 $77,496 $22,678,911
==================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
COMMON DEFERRED
STOCK COMPEN- ACCUMULATED
TO BE ISSUED SATION DEFICIT TOTAL
------------ ------ ------- -----
(Note 5)
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998 $23,440 $22,792 ($21,920,913) 793,811
Common stock issued for research and development,
compensation and services - - - 87,915
Accrued stock issuance - 2,651 - 2,651
Net loss for three months ended March 31, 1998 - - (296,610 (296,610)
------------------------------------------------------
BALANCE, MARCH 31, 1998 $23,440 $25,443 ($22,217,523 $587,767
==================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- ------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
(Note 5)
Common stock issued for research and development,
compensation and services - - 102,830 15,425 149,942
Common stock issued as a result of the rounding
of shares for the thirty-five to one reverse split - - 839 126 -
Restricted Rule 144 Common Stock issued for the conversion of
principal and accrued interest on convertible notes payable - - 473,469 71,020 225,843
Restricted Rule 144 Common Stock to be issued - - - - -
Net loss for three months ended June 30, 1998 - - - - -
------------------------------------------------------
BALANCE, JUNE 30, 1998 0 0 1,093,781 164,067 23,054,696
==================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
COMMON DEFERRED
STOCK COMPEN- ACCUMULATED
TO BE ISSUED SATION DEFICIT TOTAL
------------ ------ ------- -----
<S> <C> <C> <C> <C>
(Note 5)
Common stock issued for research and development,
compensation and services - - - 165,367
Common stock issued as a result of the rounding
of shares for the thirty-five to one reverse split - - (126) 0
Restricted Rule 144 Common Stock issued for the conversion of
principal and accrued interest on convertible notes payable - - - 296,863
Restricted Rule 144 Common Stock to be issued 55,000 - - 55,000
Net loss for three months ended June 30, 1998 - - (513,781) (513,781)
------------------------------------------------------
BALANCE, JUNE 30, 1998 $78,440 $25,443 ($22,731,430) $591,216
==================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
<TABLE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
JUNE 1, 1992 TO
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS SIX MONTHS ENDED JUNE 30, JUNE 30, 1998
1998 1997 (CUMULATIVE)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($810,391) ($2,149,362) ($18,583,548)
Adjustments to reconcile net loss
to net cash used in operating activities:
Loss from discontinued operations from
January 1 through May 31,1992 (100,599)
Stock paid for services 253,282 223,439 4,854,275
Stock paid for interest on convertible notes payable 34,344 34,344
Compensation recognized relating to
accrued employee stock grants and warrants 2,651 41,876 451,387
Bad debt expense 441,193
Depreciation and amortization 130,408 178,419 2,092,072
Amortization of loan origination fees and
original issue discount 942,620
Loss (gain) on disposal of fixed assets 222 107,290
Loss on Impairment of license agreement 487,784
Reversal of litigation outstanding at end of prior year (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 (55,175) (59,120)
Interest receivable 8,053
Amounts due from related party 1,682
Inventory 564 (152,976) (189,074)
Prepaid royalties (50,000) (50,000) (210,000)
Prepaid expenses and other assets 30,453 (56,969) (190,280)
Other assets (52,834)
Accounts payable 151,473 (7,458) 519,368
Termination obligation (74,000) 114,583
Accrued expenses and taxes 40,143 (8,406) 143,375
- -------------------------------------------------------------------------------------------------------------
Net cash used in operating activities ($217,073) ($2,110,390) ($9,020,242)
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Patent and marketing licensing costs (906,298)
Purchase of property and equipment (79,224) (368,788)
Proceeds from sale of property and equipment 77,226
Other (proceeds from sale of marketable
securities and loan repayments) 175,188
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities 0 ($79,224) ($1,022,672)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
<TABLE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
JUNE 1, 1992 TO
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS SIX MONTHS ENDED JUNE 30, JUNE 30, 1998
1998 1997 CUMULATIVE)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings from related party $22,608
Proceeds from preferred stock and warrant
issuance (net of offering costs) 6,431,079
Proceeds from notes payable 225,020 2,520,020
Principal payments on notes payable (2,050,000)
Proceeds from common stock to be issued 55,000 1,292,167
Proceeds from issuing common stock 1,364,052
Proceeds from warrant exercise 275,000
Capital lease financing (1,103) 0
Advances on private common stock placement 296,440
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities $280,020 ($1,103) 10,151,366
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 62,947 (2,190,717) 108,452
Cash and cash equivalents, beginning of period 45,505 2,889,233 0
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $108,452 $ 698,516 $108,452
- -----------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
<TABLE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES:
PAYMENTS FOR:
Interest $ - $
- -
Income taxes $ 800 $ 800
STOCK ISSUED FOR:
Research and development $2,597 $100,074
Public relations and marketing services - 22,651
Legal, professional and employee services 227,341 76,568
Directors' fees 21,469 24,146
Termination agreement 1,875 -
Interest expense on convertible notes payable 34,344 -
--------------------------------
$287,626 $223,439
--------------------------------
Common stock dividends distributable to 6% cumulative
convertible Series A preferred stockholders $ - $182,506
</TABLE>
NON-CASH FINANCING ACTIVITY:
During the second quarter of 1998, short-term convertible notes payable in the
amount of $262,520 were converted along with accrued interest payable of $34,344
into 473,469 shares of Restricted Rule 144 Common Stock (see Note 4).
During the first six months of 1998 and 1997, deferred compensation expense of
$2,651 and $41,876 were recorded relating to accrued employee stock grants in
order to value such shares at the estimated fair market value at the date of
grant.
Pursuant to certain employee agreements in the first quarter of 1997, 7,857
shares of accrued employee common stock grants were issued. Accordingly,
deferred stock compensation of $247,500 was reclassified to common stock and
additional paid-in capital.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Statement of Information Furnished
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal and recurring
accruals) necessary to present fairly the Company's financial position for the
interim reporting period as of June 30, 1998, and the results of
operations for the three month and six month periods ended June 30, 1998 and
1997 and cash flows for the six month periods June 30, 1998 and 1997. These
results have been determined on the basis of generally accepted accounting
principles and practices applied consistently with those used in the preparation
of the Company's 1997 Annual Report on Form 10-KSB.
The results of operations for the three month and six month period ended June
30, 1998 are not necessarily indicative of the results to be expected for any
other period or for the full year.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. The accompanying consolidated financial
statements should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1997.
2. Inventory
The inventory balance shown at June 30, 1998 consisted of $109,262 of finished
goods, net of reserve of $6,275, $0 of work in process and $79,812 of parts and
materials. The inventory balance shown at December 31, 1997 consisted of
$109,826 of finished goods, net of reserve of $5,711, $0 of work in process and
$79,812 of parts and materials. Inventory is valued at the lower of cost or
market, on a first-in, first-out basis.
3. Loss Per Common Share
Loss per share is based on the weighted average number of common shares
outstanding during each period presented. For the three months and six months
ended June 30, 1998 and 1997, outstanding stock options and warrants of 87,847
and 89,421, respectively, are not included in the diluted earnings per share
calculation since their effect would be anti-dilutive. Weighted average number
of common shares outstanding during the three months and six months ended June
30, 1998 and 1997 includes stock to be issued; however, convertible notes
payable were not included as common stock equivalents as the effect would be
anti-dilutive.
F-8
<PAGE>
4. Short-term Notes Payable
During the fourth quarter of 1997, the Company issued $100,000 ($50,000 to three
of the Company's directors) in principal amount of 36% short-term convertible
notes payable, due May 18, 1998, to five individuals to finance operations until
a corporate acquisition could be completed. Until payment in full, the unpaid
principal amount of these notes, or any portion may, at the election of
the noteholder at any time, be converted at the conversion price per share of
fifty (50%) percent of the previous thirty day average trading bid price as of
the date of conversion (as amended). As additional consideration for these
loans, the individual lenders, including the directors, were awarded an
aggregate of warrants to purchase 1,429 shares of Common Stock for every $12,500
loaned to the Company at an exercise price of $4.20 per share (see Note 4). In
connection with the issuance of the warrants to the individuals, the Company did
not recognize additional interest expense, as the value of the warrants was
deemed to be immaterial. The interest rate and terms of these notes were made at
arms length.
On June 19, 1998, 164,096 shares of Restricted Rule 144 Common Stock were issued
in order to convert all of these 1997 notes including principal and accrued
interest payable. Cash paid to these individuals and to the directors for
interest was $0 at December 31, 1997 and June 30, 1998. Restricted Rule 144
Common Stock paid to these individuals and to the directors for interest was $0
at December 31, 1997 and $21,300 at June 30, 1998. Accrued interest amounted to
$4,400 for the year ended December 31, 1997 to $0 as of June 30, 1998. All of
the noteholders did not elect to exercise the related warrants, thus, all such
warrants expired on May 18, 1998.
During the first six months of 1998, the Company issued $225,020 in principal
amount of short-term convertible notes payable, due one year from the date of
the related note or the date the Company receives funding from any offering or
merger with another corporation, to four individual to finance operations until
a corporate acquisition could be completed. Until payment in full, the unpaid
principal and accrued interest amounts of these notes, may be converted, at the
option of the noteholder, into common shares of the Company at any time prior to
repayment thereof at a conversion price per share of fifty (50%) percent of the
previous thirty day average trading bid price as of the date of conversion.
These notes accrues interest at a rate per annum equal to one (1%) percent over
the referenced prime lending rate announced from time to time by Bank of America
in San Francisco, California. As additional consideration for these loans, the
individual lenders were awarded 6,250 Restricted Rule 144 Common Stock for every
$12,500 loaned to the Company.
On June 19, 1998, 309,373 shares (including the additional consideration shares)
of Restricted Rule 144 Common Stock were issued in order to convert certain 1998
short-term convertible notes, including principal and accrued interest payable
(see Notes 4 and 5). Cash paid to these individuals and to the for interest was
$0 at June 30, 1998. Restricted Rule 144 Common Stock paid to these individuals
for interest was $13,044 at June 30, 1998. Accrued interest amounted to $280 as
of June 30, 1998.
In each case, the shares of Restricted Rule 144 Common Stock have not been
registered under the Securities Act of 1933 (the "Act") and are "restricted
securities" as that term is defined in Rule 144 under the Act. These shares may
not be offered for sale, sold or otherwise transferred for one year and one day
from the date of issue.
F-9
<PAGE>
5. Stockholders' Equity
Common Stock
Pursuant to certain employment agreements in the first three months of 1997,
7,856 shares of accrued employee common stock grants were issued. Accordingly,
deferred stock compensation of $247,500 was reclassified to common stock and
additional paid-in capital in the first quarter of 1997.
Effective March 6, 1998, the Director's of the Company approved a one (1) for
thirty-five (35) reverse split of the common stock in order to meet NASDAQ
listing requirements. There was no change in the common stock voting rights, par
value or authorized shares. All share balances have been retroactively adjusted
to reflect the reverse stock split.
On June 19, 1998, 473,469 shares of Restricted Rule 144 Common Stock were issued
in order to convert certain 1997 and 1998 convertible notes payable and the
related accrued interest(see Notes 4). Cash paid to these individuals for
interest was $0 at June 30, 1998 and December 31, 1997. In each case, the shares
of Restricted Rule 144 Common Stock have not been registered under the
Securities Act of 1933 (the "Act") and are "restricted securities" as that term
is defined in Rule 144 under the Act. These shares may not be offered for sale,
sold or otherwise transferred for one year and one day from the date of issue.
Pursuant to an investment letter dated June 26, 1998 with an individual, the
Company received $55,000 for the purchase of 55,000 shares of Restricted Rule
144 Common Stock at a purchase price of $1.00 per share. At June 30, 1998, such
shares had not been issued. When issued, the shares of Restricted Rule 144
Common Stock will not be registered under the Act and are "restricted
securities" as that term is defined in Rule 144 under the Act. These shares may
not be offered for sale, sold or otherwise transferred for one year and one day
from the date of issue.
In each of the five most current years, the Company's board of directors have
annually approved a stock compensation plan, the most recent which registered
100,000 shares of common stock under Form S-8 on May 13, 1998, whereby services
are obtained in exchange for issuance of free trading stock of the Company.
Shares may be awarded under this plan until April 1, 2003. During the six months
ended June 30, 1998 and 1997, 183,210 and 10,259 shares, respectively, of common
stock under Form S-8 registrations were issued for directors fees, research and
development, advertising and public relations, compensation and legal and
professional services provided to the Company.
6. New Accounting Pronouncements
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") issued by the FASB is effective for financial
statements with fiscal years beginning after December 15, 1997. Earlier
application is permitted. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The Company adopted SFAS No. 130 on January 1,
1998 and it had no effect on its financial position or results of operations.
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information" ("SFAS No. 131") issued by the FASB is
effective for financial statements with fiscal years beginning after December
15, 1997. The new standard requires that public business enterprises report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of interim
periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate and their major customers. The Company
adopted SFAS No. 131 on January 1, 1998 and it had no effect on its financial
position or results of operations.
7. Subsequent Event
On July 14, 1998, the Registrant acquired certain defined magnetic resonant
image technology properties and Vision Diagnostics, Inc. for a total of
approximately 3.0 Million shares of the Registrant and the assumption of
approximately $700,000 in liabilities. As a result of the acquisitions, the
Registrant has acquired ownership interests in four locations: Orlando, Florida;
Jacksonville, Florida; Oak Brook, Illinois; and Toledo, Ohio. As a part of the
acquisition of these properties, Dr. Larry Lammers, the principal owner of the
properties, has been indemnified against certain liabilities and received a
two-year consulting agreement with the Registrant, which includes a 5% finder's
fee on all new properties acquired by the Registrant through Dr. Lammers'
efforts. Dr. Lammers has become a member of the Registrant's Board of Directors.
Dr. Lammers has become the major shareholder of the Registrant, subject to a
Voting Trust Agreement which permits the current Board of Directors of the
Registrant to vote his shares for a period of three years from the date of
closing.
F-10
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10QSB
06/30/98 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 APR-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 108452 108452
<SECURITIES> 0 0
<RECEIVABLES> 61635 61635
<ALLOWANCES> 46473 46473
<INVENTORY> 189074 189074
<CURRENT-ASSETS> 376626 376626
<PP&E> 309910 309910
<DEPRECIATION> 165938 165938
<TOTAL-ASSETS> 1515228 1515228
<CURRENT-LIABILITIES> 924012 924012
<BONDS> 0 0
0 0
0 0
<COMMON> 164067 164067
<OTHER-SE> 427149 427149
<TOTAL-LIABILITY-AND-EQUITY> 591216 591216
<SALES> 1900 0
<TOTAL-REVENUES> 1900 0
<CGS> 619 0
<TOTAL-COSTS> 619 0
<OTHER-EXPENSES> 781511 493216
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (30161) (20565)
<INCOME-PRETAX> (810391) (513781)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (810391) (513781)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (810391) (513781)
<EPS-PRIMARY> (1.49) (.82)
<EPS-DILUTED> (1.49) (.82)
</TABLE>
