U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(AMENDMENT NO. 1)
(Mark One)
X Annual Report Under Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
(Fee Required)
For the fiscal year ended December 31, 1994
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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 0-12627
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Medical Discoveries, Inc. (dba Viral Control, Inc.)
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(Name of Small Business Issuer in Its Charter)
Utah 87-0407858
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(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
P. O. Box 4029, Logan, Utah 84323-4029
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(Address of Principal Executive (Zip Code)
Offices)
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(801) 755-7686
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Issuer's Telephone Number, Including Area Code
Securities Registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
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(Title of Class)
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
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B 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. --------
The Company had $70,000 in revenues during the recent fiscal year
ended December 31, 1994.
The aggregate market value of the voting stock held by non
affiliates of the registrant (16,676,925 shares) is approximately
$14,675,694. The aggregate market value has been computed by reference
to the average bid and asked prices of such stock ($0.88 per share) as
of May 31, 1996 (WHICH DATE IS WITHIN 60 DAYS OF THE FILING OF THIS
FORM 10-KSB/A).
The number of shares outstanding of the issuer's Common Stock as of
May 31, 1996 was 20,887,555.
Transitional Small Business Disclosure Format (check one):
Yes No X
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PART I
ITEM 1. BUSINESS
EXPLANATORY NOTE: PURSUANT TO SECURITIES AND EXCHANGE COMMISSION RULES,
THE COMPANY IS RESTATING THIS ITEM 1 IN ITS ENTIRETY ALTHOUGH THE ONLY
CHANGES MADE TO ITEM 1 ARE REGARDING RESEARCH AND DEVELOPMENT
EXPENDITURES AS AMENDED BY THE 1994 FINANCIAL STATEMENTS ATTACHED HERETO.
OVERVIEW
THE COMPANY. Medical Discoveries, Inc. (dba "Viral Control") has
developed a treatment that appears to have the ability to destroy
certain human viruses. Medical Discoveries, Inc. is hereafter referred
to as "Viral Control" or the "Company". The Company intends to change
its corporate name to "Viral Control, Inc." at its next annual meeting
of shareholders. The Company's antiviral treatment also has the
potential to be able to kill certain bacteria and fungi. Further, the
solution used in the treatment may be to be able to remove or inactivate
infectious agents in human and animal blood-derived products such as
plasma and gamma globulin. The Company's treatment using the
electrolyzed solution and the related processes and technology is
hereafter referred to as "MDI-P".
THE MDI-P TREATMENT. The treatment developed by the Company uses a
saline solution that is electrolyzed to render it a highly effective
microbicide. In the Company's current protocol for treating human
diseases, the electrolyzed solution is administered intravenously to a
patient in a series of injections over several weeks.
JOINT RESEARCH EFFORTS. During the last half of 1994 and early
1995, Viral Control commenced two separate joint research efforts with
two large, United States-based pharmaceutical/biotechnology companies.
The primary focus of these preliminary research efforts is the use of
MDI-P to remove or inactivate infectious agents in blood-derived
products. One company is focusing on product applications for humans
while the other company is focusing on the veterinary market. Studies
underway have demonstrated killing of the bovine diarrhea virus, a
significant viral pathogen in cattle which is also used as a laboratory
model for the hepatitis virus.
THE PATENT AND PATENT APPLICATIONS. Viral Control has filed a
patent application with the U.S. Patent and Trademark Office ("U.S.
PTO"), covering the application of MDI-P to a variety of human diseases
and ailments, including "acquired immune deficiency syndrome ("AIDS").
The U.S. PTO has granted the Company a patent with respect to the
application of MDI-P to multiple sclerosis and cardiomyopathy. (Patent
No. 5,334,383 for "Electrically Hydrolyzed Salines as In Vivo
Microbicides or Treatment of Cardiomyopathy and Multiple Sclerosis").
The Company intends to pursue its current application to expand the
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scope of its patent protection to include other diseases and ailments,
particularly the human immunodeficiency virus ("HIV") that causes AIDS.
The Company is also pursuing other United States and foreign
applications to provide patent protection for other uses of MDI-P.
THE DISCOVERY. MDI-P was discovered by Dr. Robert E. Morrow, an
experienced orthopedic surgeon and the founder of the Company. Dr.
Morrow was concerned about the AIDS epidemic. He investigated methods
to sterilize surgical instruments without the intense heat and pressure
of customary sterilization techniques. After learning of the
microbicidal effect of electrolyzed saline solutions on surgical
instruments, he thought to apply this technology within the human body.
APPLICATION OF MDI-P TO THE HIV VIRUS. Viral Control has now
conducted limited tests using MDI-P in the treatment of HIV. HIV is the
precursor to AIDS. In preliminary laboratory tests, the MDI-P has been
shown to destroy HIV. In preliminary tests on AIDS patients, conducted
outside of the United States, MDI-P appears to be effective in reducing
or eliminating HIV in the patient's body, without significant adverse
side effects. These tests are only preliminary. The Company has not
yet conducted any widespread clinical trials. Although these
preliminary results are encouraging, MDI-P has not yet been demonstrated
to be effective or safe in widespread studies. The results of these
preliminary tests have encouraged the Company to conduct further tests.
These further tests will include tests within the United States, after
appropriate application is made to the U.S. Food and Drug Administration
("FDA").
THE FUTURE. In regard to use of MDI-P for human diseases, Viral
Control intends soon to file an "investigational new drug" application
("IND Application") with the FDA for use of MDI-P on patients in the
United States who are HIV positive or who have AIDS. The Company has
filed a pre-IND submission in this regard. The Company will also seek
funding to continue clinical trials on such patients pursuant to
approval of the IND Application. If MDI-P proves to be safe and
effective, Viral Control will seek to use MDI-P through Company-owned
clinics or will seek to distribute MDI-P solution directly to medical
practitioners. Beyond the initial focus on HIV, and as funds will
allow, the Company intends to conduct research into the use of MDI-P
with respect to multiple sclerosis and cardiomyopathy and with respect
to other human diseases and ailments. In regard to applications of
MDI-P other than direct treatment of human diseases, Viral Control
intends to continue cooperative research efforts with the two major
pharmaceutical/biotechnology companies mentioned above. The results of
the current preliminary joint research will determine the course of
future research efforts.
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THE TREATMENT AND MDI-P
DESCRIPTION. The treatment process developed by Viral Control does
use a "drug" in the common sense of the word, but is rather a treatment
process using sterile saline solution. This solution is chemically
changed by electrolysis to form the MDI-P solution, which is then
injected into the body intravenously. The solution injected into
patients is regulated as a drug by the FDA. Electrolysis is the method
whereby a certain type of electric current is passed through a chemical
solution. The electrical current causes the chemicals in the saline
solution to alter, producing a variety of chemical compounds, such as
ozone and hydrochlorous. Different electrical currents produce
different concentrations of these and related products. In previously
published scientific literature, electrolyzed saline solutions have been
shown to have an intense microbicidal effect. Dr. Robert E. Morrow of
Viral Control appears to be the first to attempt to apply this
technology within the human body. In the Company's current protocol, a
patient will receive a series of weekly injections of the MDI-P solution
over the course of 30 days. In preliminary tests, MDI-P appears to be
able to destroy certain viruses (and notably, HIV), without significant
adverse side effects to the patient. Further tests, however, must be
done to demonstrate the efficacy and safety of MDI-P in further
laboratory testing and in widespread clinical trials. Significantly,
MDI-P appears to have an effect on a variety of viruses and, indeed, on
certain bacteria and fungi as well. Preliminary research in cooperation
with a major veterinary/pharmaceutical company also indicates that MDI-P
may be useful in treating viruses in livestock. Additionally,
preliminary testing indicates that MDI-P might be used to reduce,
remove, or inactivate infectious agents in blood-derived products for
humans and animals.
RESEARCH AND DEVELOPMENT. Viral Control is a start-up company with
limited resources. (AMENDED IN ACCORDANCE WITH THE EXPLANATORY NOTE AT THE
OUTSET OF THIS ITEM.) During the two fiscal years ended December
31, 1993 and 1994, the Company spent $429,374 and $850,343 respectively
on research and development of MDI-P. The Company intends to actively
pursue and expand its research efforts as funds will allow. The focus
of the initial research will be on the use of MDI-P with respect to HIV.
As funds will allow, the Company will also focus its research on
multiple sclerosis and cardiomyopathy, the two diseases for which a U.S.
patent has been issued. Also, as funds will allow, the Company will
expand its research efforts to encompass the use of MDI-P on other
diseases and ailments and other applications as a commercial
microbicide.
THE DISCOVERY
MDI-P was developed by Dr. Robert E. Morrow, an orthopedic surgeon
and the founder of the Company. Dr. Morrow was previously a full time
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and thereafter a part time faculty instructor in the Department of
Surgery, University of Utah Medical Center, Department of Orthopedic
Surgery. From 1961 to the present, Dr. Morrow has been engaged in the
private practice of orthopedic surgery in Salt Lake City, Utah. He is
now 65 years old. In the 1980's, Dr. Morrow became concerned about the
growing epidemic of AIDS. He feared that HIV might be transmitted from
one patient to the next through contaminated surgical instruments. He
saw the need to sterilize delicate optical instruments used in
orthoscopic surgery. The difficulty was that these instruments were
unable to withstand the intense heat and pressure of the traditional
autoclave sterilization technique because they contained sensitive
electrical components. Beginning in about 1986, Dr. Morrow began to
investigate alternative sterilization techniques. Dr. Morrow noted that
electrolyzed saline solution had been shown to be an effective
microbicide. He began to experiment in the use of electrolyzed saline
solutions to sterilize his surgical instruments. From this
investigation, Dr. Morrow thought to apply the same technology within
the human body.
PATENTS, TRADE SECRETS, AND LICENSES
MORROW LICENSE AGREEMENT. MDI-P was initially developed by Dr.
Robert E. Morrow, the founder of the Company. Dr. Morrow filed a patent
application for the use of MDI-P in the human body for a variety of
diseases and ailments, including AIDS. Initially, Dr. Morrow filed this
patent application in his own name. Subsequently, Dr. Morrow licensed
MDI-P to Viral Control in exchange for royalties (the "Morrow License
Agreement"). The Morrow License Agreement was subsequently amended to
assign all right, title, and interest in MDI-P and to Viral Control in
exchange for continuing royalties. In connection with the amendment and
wholesale assignment of MDI-P to the Company, Dr. Morrow has also
assigned all existing patents and patent applications to the Company.
Pursuant to the Morrow License Agreement, Dr. Morrow is owed a three
percent royalty on net proceeds from the use of MDI-P or the sale of
related products (so-called "earned royalties"). A ten percent royalty
applies to any license fees or minimum royalties that are not otherwise
offset by earned royalties. The Company's obligation to pay royalties
to Dr. Morrow continues until the last to expire of any patent issued
anywhere in the world. If no patent is obtained, the Company's
obligation to pay royalties expires on the abandonment of all patent
applications or on July 31, 2002, whichever occurs later.
THE PATENT AND PATENT APPLICATIONS. The original patent
application for MDI-P, as now owned by Viral Control, covers in vivo and
in vitro use of MDI-P on a variety of diseases and ailments. The U.S.
PTO has granted a patent to the Company for the in vivo use of
electrically hydrolyzed salines as microbicides and the treatment of
multiple sclerosis and cardiomyopathy. (Patent No. 5,334,383 for
"Electrically Hydrolyzed Salines as In Vivo Microbicides or Treatment of
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Cardiomyopathy and Multiple Sclerosis.") Multiple sclerosis is a
serious nervous system disorder. Cardiomyopathy is a typically chronic
disorder, sometimes of viral origin, of the heart muscle that may
involve enlargement and obstructive damage to the heart. Viral Control
will continue to seek patent protection for the other inventions pending
in its current application to the U.S. PTO. The Company also has
patents pending with the U.S. PTO on the apparatus for electrolyzing
fluids and electrically hydrolyzed salines as microbicides (covering in
vivo and in vitro uses of MDI-P). The Company plans to file other
applications to expand the scope of its patent protection where
possible, including other types of microbicide applications.
Additionally, Viral Control has filed foreign patent applications
corresponding to the above defined United States applications.
TECHNOLOGY PROTECTION POLICY AND DISCLAIMERS. It is the Company's
policy to protect its technology by, among other means, filing patent
applications to protect technology which it considers important to the
development of its business. The Company will also rely upon trade
secrets and improvements, unpatented know-how, and continuing
technological innovation to develop and maintain its competitive
position. Despite the Company's policy to seek patent protection
wherever appropriate, there can be no assurance that the Company's
patent applications will result in further patents being issued or that,
if issued, the patents will afford protection against competitors with
similar technology. There can also be no assurance that any patent
issued to the Company will not be infringed or circumvented by others or
that others will not obtain patents that the Company would need to
license or circumvent. There can be no assurance that licenses, which
might be required for the Company's processes or products, would be
available on reasonable terms or that patents issued to others would not
prevent the Company from developing and marketing its products. In
addition, there can be no assurance that the patents, if issued, would
be held valid by a court of competent jurisdiction. To the extent the
Company also relies upon unpatented trade secrets, there can be no
assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain
access to the Company's trade secrets or disclose such technology.
CONFIDENTIALITY POLICY AND DISCLAIMERS. Viral Control, as a matter
of policy, requires its employees, consultants, and advisors to execute
a confidentiality agreement upon the commencement of an employment or
consulting relationship with the Company. The Company also, as a matter
of policy, obtains such confidentiality agreements from appropriate
independent parties. The agreements provide that all confidential
information developed or made known to the individual during the course
of the relationship shall be kept confidential and not be disclosed to
others except in specified circumstances. In the case of employees and
certain consultants, the agreements contain non-competition clauses and
provide that all inventions conceived by the individual shall be the
exclusive property of the Company. There can be no assurance, however,
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that these agreements will provide meaningful protection for the
Company's trade secrets in the event of unauthorized use or disclosure
of such information.
APPLICATION OF MDI-P TO THE HIV VIRUS
THE AIDS PANDEMIC. The first officially recognized cases of AIDS
were reported in 1981. During 1983 and 1984, various clinical
investigators identified HIV as the cause of AIDS. The number of HIV
infected individuals is currently estimated at one to two million in the
United States, with a worldwide incidence of more than 20 million.
Since HIV-infected individuals ultimately develop AIDS, with a mortality
rate believed to be effectively 100 percent, AIDS presents a significant
societal threat. There were 401,749 individuals reported with AIDS in
the United States through June 1994, of which 243,423 have died. The
Center for Disease Control projects that the total number of AIDS cases
could reach 500,000 by the end of 1995 in the United States. Certain
sources estimate the number of AIDS cases worldwide to reach 12-15
million by the end of 1995. Projections of the number of AIDS cases are
based on currently available information and may not reflect the actual
number of future cases.
THE HIV VIRUS AND AIDS. Shortly after an individual is infected
with HIV, the virus multiplies rapidly and can be detected in the blood.
The immune system responds by producing antibodies. While this response
is usually sufficient to temporarily arrest the progress of the
infection and reduce levels of virus in the blood, the virus remains
sequestered within certain cells. This latent phase may last from a
period of months to several years or longer. During this time, levels
of antibodies to HIV remain high. Other indicators of immune status,
however, progressively decline, including cell-mediated immune response
(as measured by skin testing) and the number of the certain white blood
cells, known as T4 cells, which are needed to maintain the immune
system. The development of certain early clinical symptoms of AIDS is
referred to as AIDS-related complex ("ARC") and may occur during the
later portion of this latent phase. The latent phase eventually ends,
at which time the level of antibodies declines and the concentration of
HIV in the blood increases. Thereafter, the disease progresses with the
collapse of the immune system, leaving the body susceptible to fatal
infections and cancers. AIDS represents the end stage of the infection
by HIV and is characterized by dementia, pneumonia, and other infectious
diseases of the pulmonary system, central nervous system,
gastrointestinal tract and skin, as well as cancers.
RESULTS OF TESTS ON AIDS PATIENTS. Viral Control has conducted
preliminary tests of MDI-P on AIDS patients outside the United States.
Initially, five patients have received MDI-P. Each of these five
terminal AIDS patients underwent treatment. Blood specimens were drawn
from these five patients prior to the first treatment and at regular
intervals during and after these treatments. These blood specimens were
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sent to independent laboratories for testing. Approximately five months
following completion of the second treatment, blood specimens from four
of the five patients were tested by an independent laboratory for the
presence of HIV. It should be noted that the fifth patient declined to
participate in the later blood test. He, like to other four AIDS
patients, was a volunteer, and could not be compelled to be tested. The
further tests on the four patients were performed using a standard HIV
culture method performed by the Nichols Institute. The result of this
independent test was: "No virus isolated." Additionally, there was a
dramatic rise in absolute T4 cell count (43%) occurring after two months
of treatment cycles. This T4 cell count increase is highly significant
in bolstering the patients' immune response. It is also important to
note that a lack of toxicity of MDI-P was observed in the five patients
by their normal tests of liver function throughout their treatment. All
of the above patients verbally reported that they felt improved, less
fatigued, and less depressed through the course of therapy. There were
no serious complications during these preliminary treatments. The minor
complications were occasional sore arms from the intravenous needles,
as well as intestinal cramps and diarrhea. The patient who was not
followed by later tests reported verbally that he was feeling better and
was working at his occupation. Subsequently, three additional AIDS
patients were treated outside the United States in 1994. The tests of
these three patients have again shown these patients to be HIV negative
following treatment, meaning that no virus has been detected from their
blood. THE COMPANY HAS CONDUCTED ONLY PRELIMINARY TESTS ON A FEW
PATIENTS. THE COMPANY HAS NOT YET DEMONSTRATED THE LONG-TERM EFFICACY
OR SAFETY OF MDI-P IN COMPREHENSIVE LABORATORY TESTING OR IN WIDESPREAD
CLINICAL TRIALS.
LABORATORY TESTS ON HIV. MDI-P has been tested by classical
laboratory methods to assess its anti-HIV activity and toxicity toward
human lymphocytes. These laboratory experiments were performed by a
reputable, independent testing laboratory. Exposure of human
lymphocytes infected with HIV (HB-2 cells) to MDI-P results in a five
log reduction in HIV after one minute of exposure without significant
toxicity to the lymphocytes. Extension of the incubation period to 10
minutes demonstrated similar trends in HIV killing (measured by the
ELISA HIV p24 antigen assay) and minimal toxicity. Clinical isolates of
HIV (HIV isolated from patients with HIV, in contrast to laboratory
isolates such as HB-2 cells) that were subjected to MDI-P, were also
killed in identical time frames, indicating a lack of resistance to
MDI-P from such "field" isolates. THE COMPANY HAS ONLY CONDUCTED
PRELIMINARY LABORATORY TESTS. THE COMPANY HAS NOT YET DEMONSTRATED THE
LONG-TERM EFFICACY OR SAFETY OF MDI-P IN COMPREHENSIVE LABORATORY
TESTING OR WIDESPREAD CLINICAL TRIALS.
ONGOING TESTS. Animal toxicity testing in two canine populations
has demonstrated that up to 40 times the recommended dose for human
subjects was tolerated without any evidence of toxicity. Additional
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animal studies provided data sufficient to meet the United States
Pharmacopeia requirements for transport of the MDI-P solution in
appropriate containers. During 1994, The Company submitted a pre-IND
application to the FDA which included the results of initial animal
toxicity studies. The FDA responded to the Company's pre-IND submission
by letter, dated August 30, 1994, indicating that certain additional
information and testing data should be included in the IND Application.
The letter also suggested items to assist the Company in designing the
proposed initial clinical development plan for a Phase I trial of MDI-P.
As funding becomes available, the Company intends to pursue the
recommendations of the FDA in conducting further testing and compiling
additional information necessary to make its IND Application complete.
The Company is currently attempting to raise additional funds for this
purpose. THE COMPANY HAS ONLY CONDUCTED PRELIMINARY LABORATORY TESTS.
THE COMPANY HAS NOT YET DEMONSTRATED THE LONG-TERM EFFICACY OR SAFETY OF
MDI-P IN COMPREHENSIVE LABORATORY TESTING OR WIDESPREAD CLINICAL TRIALS.
OTHER APPLICATIONS OF MDI-P
As funds become available, Viral Control intends to conduct tests
in the application of MDI-P to other viruses, bacteria, and fungi. The
Company also intends in time to pursue research in the application of
MDI-P to other microbicide applications. In this regard, the Company
has entered into cooperative research efforts with two other companies
to determine the usefulness of MDI-P for applications other than direct
treatment of diseases in humans. In one instance, Viral Control has
entered into a confidential joint research effort with a major United
States pharmaceutical company to conduct preliminary research into the
effectiveness of using MDI-P in removing or inactivating infection
agents in blood-derived products such as gamma globulin. In the other
instance, Viral Control has entered into a confidential joint research
effort with a major United States veterinary/pharmaceutical company to
conduct preliminary research into the effectiveness of using MDI-P in
removing or inactivating infection agents in animal blood products such
as horse and bovine gamma globulin or plasma, as well as the use of
MDI-P in the treatment of important horse and bovine viral diseases. In
both instances, the research will be funded completely by the other
company involved. The results of the preliminary research will
determine whether the joint research efforts will be continued.
COMPETITION
COMPETITION WITH RESPECT TO HIV. Competition among companies
addressing the treatment and prevention of AIDS and infection by the HIV
virus is intense. In general, this competition falls into four
categories: drugs designed to chemically inhibit the replication of
HIV, non-specific immune system stimulants, receptor proteins (such as
T4) that inhibit viral binding, and therapeutic and preventive vaccines.
The first category includes AZT, which is manufactured by Burroughs
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Wellcome Co., the United States subsidiary of Wellcome PLC,
dideoxyinosine ("ddI"), which is manufactured by Bristol-Myers Squibb
Company, and dideoxycytidine ("ddC") which is under development by
Hoffman LaRoche, Inc. AZT, ddC in combination with AZT, and ddI have
been approved by the FDA for use in certain HIV infected individuals.
Although AZT, ddC in combination with AZT, and ddI have been found to be
effective, over time patients appear to resume the decline in immune
function associated with HIV infection. In addition, AZT, ddC in
combination with AZT, and ddI have been associated with significant
toxicity in some treated subjects. Although the receptor protein and
non-specific immune system stimulant approaches have been shown to be
non-toxic in humans, their effectiveness has not been established. As
for the fourth approach, a variety of vaccines are under development by
pharmaceutical companies and public and private research institutions.
It is possible that one or more of these existing anti-HIV agents may be
used effectively with MDI-P. Substantial government funding has been
made available to promote AIDS-related research at certain public and
private institutions. This research could lead to the development of
products that would compete directly with MDI-P, and the level of
funding made available to promote such research could be significantly
increased in the future.
COMPETITION GENERALLY. The biotechnology and pharmaceutical
industries are characterized by rapidly evolving technology and intense
competition. The Company's competitors include major pharmaceutical,
chemical, and specialized biotechnology companies, many of which have
financial, technical, and marketing resources significantly greater than
those of the Company. Fully integrated pharmaceutical companies, due to
their expertise in research and development, manufacturing, testing,
obtaining regulatory approvals, and marketing, as well as their
substantially greater financial and other resources, may be the
Company's most formidable competitors. In addition, acquisitions by
such pharmaceutical companies could enhance the financial and marketing
resources of smaller competitors. Furthermore, colleges, universities,
governmental agencies, and other public and private research
organizations will continue to conduct research and possibly market
competitive commercial products on their own or through joint ventures.
These institutions are becoming more active in seeking patent protection
and licensing arrangements to collect royalties for use of technology
that they have developed. These institutions also will compete with the
Company in recruiting and retaining highly qualified scientific
personnel. If and when Viral Control obtains regulatory approval for
any of the uses of MDI-P, it must then compete for acceptance in the
marketplace. Given that such regulatory approval, especially in the
United States, may take a number of years, the timing of the
introduction of MDI-P and other products to the market is critical.
Other safe and effective drugs and treatments may be introduced into the
market prior to the time that the Company is able to obtain approval for
the commercialization of MDI-P. In addition, even after such regulatory
approval is obtained, competition among products approved for sale may
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be affected by, among other things, product efficacy, safety,
reliability, availability, price, and patent position. There can be no
assurance that MDI-P will be competitive if and when introduced into the
marketplace for any of its possible uses.
GOVERNMENT REGULATION
REGULATION GENERALLY. The Company's use of the MDI-P solution in
the treatment of HIV and for other human uses is subject to extensive
regulation by United States and foreign governmental authorities. These
regulations apply not only to the use of the MDI-P solution itself, but
also to the manufacture of the electrolyzer used to create the MDI-P
solutions, and related items. In particular, pharmaceutical treatments
are subject to rigorous preclinical and clinical testing and other
approval requirements by the FDA in the United States under the federal
Food, Drug and Cosmetic Act and by comparable agencies in most foreign
countries. Various federal, state and foreign statutes also govern or
influence the manufacture, labeling, storage, record keeping, and
marketing of such products. Pharmaceutical manufacturing facilities are
also regulated by state, local, and other authorities. Obtaining
approval from the FDA and other regulatory authorities for a new drug or
treatment may take several years and involve substantial expenditures.
Moreover, ongoing compliance with these requirements can require the
expenditure of substantial resources. Difficulties or unanticipated
costs may be encountered by the Company or marketing partners in their
respective efforts to secure necessary governmental approvals, which
could delay or preclude the Company or its marketing partners from
marketing MDI-P.
IND APPLICATION TO FDA FOR THE USE OF MDI-P FOR HIV. As an initial
step in the FDA regulatory approval process for MDI-P, preclinical
studies are typically conducted in animals to identify potential safety
problems. For certain diseases, animal models exist which are believed
to be predictive of human efficacy. For such diseases, a drug candidate
is tested in such an animal model. The results of the studies are
submitted to the FDA as part of an "investigational new drug"
application ("IND") which is filed to comply with FDA regulations prior
to beginning human clinical testing. As funding is available, the
Company will continue the animal studies and other tests required to
file the IND Application with the FDA. The Company initially intends to
complete and file an IND Application for the use of MDI-P with respect
to HIV. If the FDA accepts the IND application, the Company would be
allowed to commence clinical trials. There is no assurance that the FDA
will approve the Company's IND Application for the use of MDI-P with
respect to HIV.
FDA CLINICAL TRIALS. Once FDA approval has been received for the
Company's IND Application, human clinical trials may be commenced.
Clinical trials are typically conducted in three sequential phases,
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although the phases may overlap. In Phase I, which frequently begins
with the initial introduction of the drug into healthy human subjects
prior to introduction into patients, MDI-P will be tested for safety and
dosage tolerance. Phase II typically involves studies in a somewhat
larger patient population to identify possible adverse side effects and
safety risks, to begin gathering preliminary efficacy data, and to
investigate potential dose sizes and schedules. Phase III trials are
undertaken to further evaluate clinical efficacy and to further test for
safety within an expanded patient population. Each trial is conducted
in accordance with certain standards under protocols that detail the
objectives of the study, the parameters to be used to monitor safety,
and the efficacy criteria to be evaluated. Each clinical study must be
evaluated by an independent institutional review board ("IRB") at the
institution at which the study will be conducted. The IRB will
consider, among other things, ethical factors, the safety of human
subjects, and the possible liability of the institution. The FDA has
recently published guidelines regarding the accelerated approval of
drugs and treatments for life threatening diseases. Given that MDI-P
may be applied to HIV, the Company will seek accelerated handling of the
FDA review process. There can be no assurance that the FDA will handle
its review on an expedited basis.
NEW DRUG APPLICATION TO FDA. Data from preclinical testing and
clinical trials of MDI-P for HIV will eventually be submitted to the FDA
in a "New Drug Application" ("NDA") for marketing approval. Preparing
an NDA involves considerable data collection, verification, analysis,
and expense, and there can be no assurance that any approval will be
granted on a timely basis, if at all. The approval process is affected
by a number of factors, including the severity of the disease, the
ability of alternative treatments, and the risks and benefits
demonstrated in clinical trials. The FDA may deny an NDA if applicable
regulatory criteria are not satisfied, require additional testing or
information, or require post-marketing testing and surveillance to
monitor the safety of MDI-P. Quality control and manufacturing
procedures conforming to the FDA's "Good Manufacturing Practices"
("GMP") are conditions for clinical studies and NDA approval. In
complying with standards set forth in these regulations, manufacturers
must continue to expend time, money and effort in the area of production
and quality control to insure full technical compliance. After FDA
approval of use of MDI-P with respect to HIV, further clinical trials
would be necessary to gain approval for the use of MDI-P for any
additional diseases. Approvals may be withdrawn if compliance with
labeling and GNP regulatory standards are not maintained or if
unexpected safety problems occur following initial marketing.
OTHER GOVERNMENTAL REGULATIONS. In addition to regulations
enforced by the FDA, the Company is also subject in the United States to
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<PAGE>
regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the
Resource Conservation and Recovery Act, and other present and potential
federal, state and local regulations. Because the Company does not
currently produce, use, or otherwise handle hazardous chemicals or
produce pollutants in regulated amounts, it is not subject to
significant costs of compliance with environmental laws (federal, state,
or local).
OPERATIONS, LICENSING AND MANUFACTURING
OPERATIONS. Viral Control has not yet commenced any operations
other than research and development with respect to MDI-P. In time, and
as funds will allow, the Company may establish Company-owned clinics,
especially in the United States, and/or distribute the MDI-P solution to
health care providers, who will in turn administer it to their patients.
Initially, if MDI-P is shown to be safe and effective, the Company
intends to focus on the treatment of patients with HIV or with AIDS. In
time, as proper regulatory approvals are obtained, and if MDI-P is shown
to be safe and effective, the Company intends to market MDI-P with
respect to other diseases and ailments as well, particularly those
covered by the Company's patent.
DISTRIBUTION. Previously, Viral Control had considered licensing
third parties to use MDI-P, subject to the payment of royalties to the
Company. In this regard, the Company had executed a preliminary
agreement with a proposed licensee for Mexico, but this agreement has
been terminated due to the proposed licensee's failure to comply with
its terms. The Company had also entered into a preliminary agreement
with a proposed licensee for the Caribbean, but this agreement has also
been terminated due to the licensee's failure to comply with its terms.
The Company is still considering using Company-owned clinics to provide
treatment using MDI-P. As an alternative to licensing, however,
management is developing plans for the direct distribution of the MDI-P
solution to health care providers.
MANUFACTURING. If and when the Company obtains regulatory approval
for the commercial use of MDI-P, the Company will establish
manufacturing facilities for the MDI-P solution. To the extent that
MDI-P is manufactured and/or sold in the United States, these facilities
will be subject to the FDA's "Good Manufacturing Practices" ("GMP") and
other state and local regulations.
CORPORATE HISTORY
Viral Control was incorporated as "Medical Discoveries, Inc." in
the State of Utah on November 20, 1991 by Dr. Robert E. Morrow, the
inventor of MDI-P. The Company was organized for the purpose of
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<PAGE>
developing MDI-P. Dr. Morrow thereafter licensed the exclusive use of
MDI-P to the Company in exchange for royalties. On August 6, 1992, the
Company merged with and into WPI Pharmaceutical, Inc., a Utah
corporation that had no significant business operations. Upon the
merger, WPI Pharmaceutical, Inc. changed its name to "Medical
Discoveries, Inc." WPI Pharmaceutical, Inc. had once conducted an
active business of supplying pre-packaged prescriptions drugs and other
clinical products directly to medical and dental practitioners. In
1987, a bill prohibiting doctors from dispensing prescription medication
was submitted to the United States Congress. Although the bill was
never sent to the full floor of the House and Senate for a vote, the
adverse publicity surrounding the bill made it impossible for WPI
Pharmaceutical, Inc. to successfully conduct its business. WPI
Pharmaceutical, Inc. eventually ceased operations altogether. At the
time it ceased operations, WPI Pharmaceutical, Inc. did have a number of
shareholders and was a reporting company with the U.S. Securities and
Exchange Commission ("SEC"). It was for the purpose of obtaining these
shareholders and the visibility of an SEC reporting company that the
merger between Medical Discoveries, Inc. and WPI Pharmaceutical, Inc.
was consummated.
ITEM 2. PROPERTIES
EXPLANATORY NOTE: PURSUANT TO SECURITIES AND EXCHANGE COMMISSION RULES,
THE COMPANY IS RESTATING THIS ITEM 2 IN ITS ENTIRETY ALTHOUGH THE
ONLY CHANGES MADE TO ITEM 2 ARE REGARDING RENT EXPENSE AS AMENDED BY THE
1994 FINANCIAL STATEMENTS ATTACHED HERETO.
The Company's principal place of business is located in commercial
office space at 55 North Main Street in Logan, Utah 84321, the same
location as the offices of Richard W. Waters & Associates, the
accounting firm owned and operated by Richard W. Waters, the Company's
Chief Financial Officer. The Company's rent expense totaled
approximately $10,000 for the year ended December 31, 1994. The Company
intends to lease appropriate office space for the Company's management
personnel when funds become available, likely in Salt Lake City, Utah.
PART II
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company required by this item are
filed as an attachment at the end of this Form 10-KSB/A and are
incorporated herein by reference.
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<PAGE>
PART III
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
EXPLANATORY NOTE: PURSUANT TO SECURITIES AND EXCHANGE COMMISSION RULES
THE COMPANY IS AMENDING AND RESTATING THIS ITEM 12 IN ITS ENTIRETY.
Dr. William Welch, who is a director, vice president, and President
pro temp of the Company, is the sole owner and the President of WMCL,
Inc., a business that performs certain in vitro and in vivo testing
services for the Company. The Company paid to WMCL, Inc. $612,075 for
such services in 1994 and $368,500 for such services in 1993. The
Company is currently indebted to WMCL, Inc. for an additional $230,400.
The Company intends to continue to have WMCL, Inc. perform future animal
toxicity laboratory testing for the Company, but no specific contracts
have been proposed or entered into at this time.
On July 31, 1993, Dr. Robert Morrow, who was a director and officer
of the Company until March 31, 1994, licensed to the Company the
technology for the treatment of a variety of human diseases (the
"Treatment") and for which he had filed in his own name a patent
application for the use of the Treatment in the human body. Dr. Morrow
had initially developed the Treatment. He licensed the Treatment to the
Company in exchange for royalties (the "Morrow License Agreement").
Pursuant to the Morrow License Agreement, Dr. Morrow is owed a three
percent royalty on net proceeds from the use of the Treatment or the
sale of related products (so-called "earned royalties"). A ten percent
royalty applies to any license fees or minimum royalties that are not
otherwise offset by earned royalties. The Company's obligation to pay
royalties to Dr. Morrow continues until the last to expire of any patent
issued anywhere in the world. If no patent is obtained, the Company's
obligation to pay royalties expires 10 years from the date of the
Agreement or on July 31, 2002. The Morrow License Agreement was
subsequently amended on January 1, 1993, to assign all right, title, and
interest in the Treatment to the Company in exchange for 2,000,000
shares in the Company. The Company has a continuing obligation to pay
royalties to Dr. Morrow as described above. In connection with the
amendment and wholesale assignment of the Treatment to the Company, Dr.
Morrow has also assigned all existing patents and patent applications to
the Company. Pursuant to the terms of the Morrow License Agreement, the
Company paid Dr. Morrow $2,100 in royalties during 1993 and no royalties
during 1994.
Page 16
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<PAGE>
MEDICAL DISCOVERIES, INC.
DECEMBER 31, 1994 AND 1993
FINANCIAL STATEMENTS
Page 17
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<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
THE BOARD OF DIRECTORS AND
STOCKHOLDERS OF MEDICAL DISCOVERIES, INC.
We have audited the accompanying balance sheet of Medical
Discoveries, Inc., (a development stage company) as of December 31, 1994
and 1993, and the related statements of operations, stockholders'
(deficit) and cash flows for the two years ended December 31, 1994 and
cumulative amounts since inception. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Medical
Discoveries, Inc., (a development stage company) as of December 31, 1994
and 1993, and the results of its operations and its cash flows for the
two years then ended and cumulative amounts since inception 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
2, the Company's significant losses, lack of significant revenue and a
stockholders' deficit raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these
matters are also described in note 2. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Salt Lake City, Utah
April 26, 1996
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<PAGE>
MEDICAL DISCOVERIES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1994 AND 1993
1994 1993
---- ----
ASSETS
- ------
Current assets - cash $ 16,040 33,203
=========== ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
- ---------------------------------------
Current liabilities
Accounts payable $ 404,581 280,721
Accrued interest 71,306 71,306
Notes payable 900,000 900,000
Advances to shareholders 286,890 286,890
----------- ----------
Total current liabilities 1,662,777 1,538,917
----------- ----------
Commitments and contingencies - -
Stockholders' (deficit)
Common stock - no par value,
authorized 100,000,000 shares,
16,941,279 shares and 16,084,367 shares
issued and outstanding at 1994 and
1993, respectively 3,683,539 2,601,400
Accumulated (deficit) (5,330,276) (4,107,114)
----------- -----------
Total stockholders' (deficit) (1,646,737) (1,505,714)
----------- -----------
$ 16,040 33,203
=========== ===========
See accompanying notes to financial statements.
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<PAGE>
MEDICAL DISCOVERIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
CUMULATIVE
YEAR ENDED AMOUNTS SINCE
DECEMBER 31, NOVEMBER 20,
------------------- 1991 (DATE
1994 1993 OF INCEPTION)
-------- -------- ---------------
Revenues: $ 70,000 - 70,000
------------ ----------- -----------
Expenses
License - 1,000,000 1,000,000
Research and development 850,343 429,374 1,279,717
General and administrative 442,819 842,625 1,699,502
Interest - - 21,480
------------ ----------- -----------
Total expenses 1,293,162 2,271,999 4,000,699
------------ ----------- -----------
Loss before income taxes (1,223,162) (2,271,999) (3,930,699)
Income taxes - - -
------------ ----------- -----------
Net loss $(1,223,162) (2,271,999) (3,930,699)
Loss per share $(.07) $(.15) $(.27)
============ =========== ===========
Weighted average number
of shares 16,578,000 15,063,000 14,379,000
============ =========== ===========
See accompanying notes to financial statements.
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<PAGE>
MEDICAL DISCOVERIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' (DEFICIT)
COMMON STOCK
------------------- ACCUMULATED
SHARES AMOUNT (DEFICIT) TOTAL
------ ------ ----------- ------
Balance,
October 31, 1991 3,500,000 $252,997 (1,482,514) (1,229,517)
Reverse stock
split (1 for 2) (1,750,000) - - -
Restatement for
reverse
acquisition of
WPI Pharmaceutical,
Inc. by Medical
Discoveries, Inc. - (252,997) 252,997 -
Shares issued in
merger of WPI
Pharmaceutical
and Medical
Discoveries Inc. 10,000,000 135,000 (170,060) (35,060)
----------- --------- --------- -----------
Balance at
November 20,
1991 (Date of
Inception) 11,750,000 135,000 (1,399,577) (1,264,577)
Common stock
issued for cash 200,000 100,000 - 100,000
Common stock
issued for
services 500,000 250,000 - 250,000
Common stock
issued for cash 40,000 60,000 - 60,000
Net loss October 31,
1992 - - (370,398) (370,398)
---------- -------- ----------- -----------
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<PAGE>
Balance,
October 31, 1992 12,490,000 545,000 (1,769,975) (1,224,975)
Net loss two
months ended
December 31, 1992 - - (65,140) (65,140)
Balance,
December 31, 1992 12,490,000 545,000 (1,835,115) $(1,290,115)
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<PAGE>
MEDICAL DISCOVERIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS (DEFICIT) - CONTINUED
COMMON STOCK
------------------- ACCUMULATED
SHARES AMOUNT (DEFICIT) TOTAL
------ ------ ----------- ------
Common stock issued
for license 2,000,000 1,000,000 - 1,000,000
Common stock issued
for cash at
prices of $.50
to $2.00 per share 542,917 528,500 - 528,500
Common stock issued
for services 251,450 127,900 - 127,900
Common stock issued
for $100,000
cash plus services 800,000 400,000 - 400,000
Net loss year ended
December 31, 1993 - - (2,271,999) (2,271,999)
--------- --------- ----------- -----------
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<PAGE>
Balance,
December 31,
1993 16,084,367 2,601,400 (4,107,114) (1,505,714)
Common stock
issued for cash
at prices of
$.75 to $2.00
per share 617,237 739,500 - 739,500
Common stock
issued for
services 239,675 239,675 - 239,675
Cash contributed - 102,964 - 102,964
Net loss year ended
December 31, 1994 - - (1,223,162) (1,223,162)
----------- ---------- ----------- -----------
Balance,
December 31, 1994 16,941,279 $3,683,539 (5,330,276) (1,646,737)
=========== ========== =========== ===========
See accompanying notes to financial statements.
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<PAGE>
MEDICAL DISCOVERIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
CUMULATIVE
YEAR ENDED AMOUNTS SINCE
DECEMBER 31, NOVEMBER 20,
------------------- 1991 (DATE
1994 1993 OF INCEPTION)
-------- -------- ---------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(1,223,162) (2,271,999) (3,930,699)
Adjustments to reconcile
net loss to net cash
used in operating activities:
Stock issued for services
and license 239,675 1,427,900 1,917,575
Depreciation - - 1,460
Loss on disposal of
property and equipment - 6,330 6,330
Write off of receivables - 193,965 193,965
(Increase) in receivables - - (7,529)
Increase (decrease) in:
Advance to shareholders - - 2,660
Accounts payable 123,860 16,306 159,214
Accrued expense - - 21,480
------------ ----------- -----------
Net cash used in
operating activities (859,627) (627,498) (1,635,544)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment - - (7,790)
------------ ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Equity contributed 102,964 - 131,374
Common stock issued
for cash 739,500 628,500 1,528,000
------------ ----------- -----------
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<PAGE>
Net cash provided by
financing activities 842,464 628,500 1,659,374
------------ ----------- -----------
Net (decrease) increase
in cash (17,163) 1,002 16,040
Cash, beginning of period 33,203 32,201 -
------------ ----------- ------------
Cash, end of period $ 16,040 33,203 16,040
============ =========== ============
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<PAGE>
MEDICAL DISCOVERIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS - CONTINUED
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
On August 6, 1992 the Company and WPI Pharmaceutical, Inc. (WPI)
entered into an agreement which has been accounted for as if the
Company acquired WPI. At the time of the acquisition WPI had the
following balance sheet:
Receivables $ 186,436
Accounts payable (245,367)
Accrued interest (49,826)
Advances shareholders (284,230)
Notes Payable (900,000)
------------
Stockholder's (Deficit) $(1,292,987)
============
CUMULATIVE
YEAR ENDED AMOUNTS SINCE
DECEMBER 31, NOVEMBER 20,
------------------- 1991 (DATE
1994 1993 OF INCEPTION)
-------- -------- ---------------
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION
Interest $ - - -
========== ========== =============
Income taxes $ - - -
========== ========== =============
See accompanying notes to financial statements.
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<PAGE>
<PAGE>
MEDICAL DISCOVERIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------------------
ORGANIZATION
Medical Discoveries, Inc. (the Company) was organized under the laws of
the state of Utah on November 20, 1991, date of inception. On August 6,
1992, the Company entered into an agreement whereby the shareholders of
the Company exchanged 100 percent of their common stock for 10,000,000
shares of common stock of WPI Pharmaceutical, Inc. (WPI). The WPI
shareholders had 1,750,000 shares following a reverse stock split of one
share for two shares. At the time of the transaction the name of WPI
was changed to Medical Discoveries, Inc. (MDI). Inasmuch as the
10,000,000 shares of common stock is in excess of 80 percent of the
total outstanding common stock of WPI, the transaction is accounted for
as a reverse acquisition. The Company is, therefore, deemed to have
acquired WPI. At the time of the merger the entity previously known as
Medical Discoveries, Inc., ceased. The financial statements are those
of MDI for the periods ending December 31, 1993 and cumulative amounts
since inception. The operations for WPI are included in the period from
August 6, 1992 (date of the transaction) through December 31, 1994. The
development stage commenced on November 20, 1991 which is the date of
the inception of MDI.
The Company has not generated any significant revenue and is, therefore,
considered a development stage company as defined in SFAS No. 7. The
Company has, at the present time, not paid any dividends and any
dividends that may be paid in the future will depend upon the financial
requirements of the Company and other relevant factors.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with a maturity of three months or less
to be cash equivalents.
INCOME (LOSS) PER COMMON SHARE
Income (loss) per share of common stock is calculated based on the
weighted average number of shares outstanding during the periods.
Common stock equivalents and stock options have not been included as
they are antidilutive.
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<PAGE>
CONCENTRATION OF CREDIT
The primary purpose of the business is the research and development of
an anti-viral treatment for infectious diseases and the sterilization of
medical equipment. The Company has no significant revenues and,
therefore, no receivables or extensions of credit.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
- -----------------------------------------------------------
USE OF 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate.
Financial instruments subject to possible material market variations
from the recorded book value are notes payable to related parties and
advances from related parties. There are no material differences in
these financial instruments from the recorded book value as of December
31, 1994 and 1993.
RECLASSIFICATIONS
Certain amounts in the prior period financial statements have been
reclassified in order to conform to the 1994 presentation.
(2) GOING CONCERN
- ------------------
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has not had
significant revenues and is still in the process of developing anti
viral treatments for infectious diseases and the sterilization of
medical equipment. The Company is hopeful but there is no assurance
that the current product development and research will be economically
viable. The Company has incurred substantial operating losses in the
development of the product.
The Company is dependent upon the sale of its common stock to satisfy
its current cash operating needs. The Company is also looking into the
possibility of licensing its technology to an outside unrelated party.
Although, management has been successful thus far in raising the needed
capital there can be no assurance that the Company and its management
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<PAGE>
will be able to continue to sell sufficient amounts of common stock or
enter into license agreements to bring the current product development
to a point where it is economically viable. Management intends to meet
its cash needs through the issuance of additional shares of common stock
and licensing its technology.
(3) LICENSE AGREEMENT
- ----------------------
In July 1992, the Company entered into an agreement to acquire the
license for the exclusive rights to certain technology and patents. The
agreement was amended in January 1993 and October 1995. The amended
agreement calls for the Company to make royalty payments of 1% for all
sales made by the Company using the technology, and should the Company
sublicense the technology the Company will make royalty payments of 3%
for all sublicense sales. The term of the licensing agreement is ten
years. The Company issued 2,000,000 shares of its restricted common
stock as consideration for the exclusive world wide licensing agreement.
The Company has not had any revenues which are applicable to the license
agreement. In March 1996, the Company entered into an agreement which
terminated the licensing agreement. The Company is to pay cash of
$1,500 and issue 150,000 shares of free trading stock for the
termination of the licensing agreement and for a history of the
technology.
(4) NOTES PAYABLE
- ------------------
The Company has notes payable to two financial institutions totaling
$900,000. The notes are in default and currently due. The notes are
guaranteed by the same shareholder that $284,230 of advances payable are
due too. At the time of the merger with WPI the Company was not aware
of WPI's liability of the notes payable and the related interest. The
Company is involved in litigation regarding the notes payable of
$900,000 and the corresponding related accrued interest. In 1995, the
litigation was partially resolved and the Company was relieved of a
portion of its obligation on the notes payable and accrued interest. In
March, 1996, the Company was notified that it had been released from all
obligations relating to the debt. To resolve the litigation the Company
agreed to issue options to a former officer to purchase 100,000 shares
of company stock at $.25 per share. The Company did not accrue interest
for the notes payable in 1994 and 1993 as its contention that it was not
liable was up held and the $900,000 of notes payable and accrued
interest of $71,306 were written off as an extraordinary gain on debt
forgiveness in 1995 and 1996.
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<PAGE>
(5) ADVANCES TO SHAREHOLDERS
- -----------------------------
The Company has advances payable to two shareholders totaling $286,890
at December 31, 1994 and 1993. The advances are non interest bearing.
Effective December 31, 1995, the Company entered into an agreement which
resolved litigation relating to the advances and other matters. As part
of the settlement agreement the shareholder forgave $284,230 of the
advances payable from the Company and received an option to purchase
100,000 shares of the Company's common stock for $.25 per share.
(6) RELATED PARTY TRANSACTIONS
- -------------------------------
The Company has advances payable to two shareholders in the amount of
$612,075. The Company paid $612,075 and $368,500 in 1994 and 1993,
respectively, to a shareholder and entities affiliated with a
shareholder of the Company for services related to the research and
development of the technology.
The Company has agreed to make the payments on a vehicle lease for an
officer of the Company. The payments total $4,320 during 1994, and
future payments total $7,800.
(7) INCOME TAXES
- -----------------
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes." The statement requires the use of the asset and
liability approach for financial accounting and reporting for income
taxes. Financial statements for prior years have not been restated and
the cumulative effect of the accounting change was not material.
The provision for income taxes for the year ended December 31, 1994 and
1993, is different than amounts which would be provided by applying the
statutory federal income tax rate to income before provision for income
taxes for the following reasons:
YEAR ENDED
DECEMBER 31,
-----------------
1994 1993
------ ------
Federal income tax
benefit (provision) at
statutory rate $ 416,000 772,000
Change in valuation allowance (416,000) (772,000)
---------- ---------
$ - -
========== =========
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<PAGE>
The net timing differences for deferred income tax assets are as
follows:
Net operating loss carry forward $1,235,000
Valuation allowance (1,235,000)
-----------
Net deferred tax asset $ -
===========
(7) INCOME TAXES - CONTINUED
- -----------------------------
Inasmuch as it is not possible to determine when or if the net operating
losses will be utilized, a valuation allowance has been established to
offset the benefit of the utilization of the net operating losses.
The Company has available net operating losses of approximately
$3,600,000 which can be utilized to offset future earnings of the
Company. The Company also has available approximately $43,000 in
research and development credits which expire in 2008. The utilization
of the net operating losses and research and development credits are
dependent upon the tax laws in effect at the time such losses can be
utilized. The losses expire between the years 2007 and 2009.
(8) STOCK OPTIONS
- ------------------
The Company has an incentive stock option plan wherein 4,000,000 shares
of the Company common stock can be issued. The Company has granted
stock options to certain officers and shareholders of the Company to
purchase shares of the Company's restricted common stock. A schedule of
the options at December 31, 1994 is as follows:
NUMBER OF OPTION YEARS NUMBER OF NUMBER OF
DATE OPTIONS OPTION EXPIRATION OPTION OPTIONS OPTIONS
GRANTED GRANTED PRICE DATE EXERCISED EXERCISED AVAILABLE
- ------- --------- ------ ---------- --------- --------- ---------
1-1-93 2,301,000 $1.00 12-31-96 1994 657,000
1995 655,000 989,000
9-1-94 100,000 1.00 12-31-96 1995 25,000 75,000
--------- --------- ---------
2,401,000 1,337,000 1,064,000
========= ========= =========
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<PAGE>
(9) COMMITMENTS
- ----------------
The Company leases its office facility under an operating lease. The
lease requires monthly payments of $895 through the year 1998.
Approximate future commitments under this lease are as follows:
YEAR AMOUNT
---- ------
1995 $10,800
1996 11,000
1997 11,600
1998 6,900
-------
$40,300
=======
Rent expense totaled approximately $10,000 and $8,000 for the years
ended December 31, 1994 and 1993, respectively.
(10) LITIGATION
- ----------------
The Company is involved in several pieces of litigation relating to the
recorded notes payable, accrued interest and advances payable.
Effective December 1995 and March 1996, the Company reduced the
litigation surrounding the Company's obligation on the notes payable,
related accrued interest, and the advances payable. To resolve the
matter the Company agreed to issue options to purchase 100,000 shares of
its common stock for all liabilities relating to the notes payable,
accrued interest and advances payable being forgiven.
(11) RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------------
The Financial Accounting Standards Board has issued Statements of
Financial Accounting Standard Statement No. 121, "Accounting for Long
Lived Assets" and No. 123 "Accounting and Disclosure of Stock-Based
Compensation." Statement No. 121 is effective for years beginning after
December 15, 1995. The effect of adoption of Statement No. 121 will not
have a material effect on the Company's financial statements. Statement
No. 123 is effective for awards granted after December 31, 1994, and has
required financial presentation for years beginning after December 15,
1995. The effect of adoption of Statement 123 is not expected to have a
material effect on the Company's financial statements.
Page 33
<PAGE>
<PAGE>
MEDICAL DISCOVERIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(12) SUBSEQUENT EVENTS
- -----------------------
* Litigation
The Company resolved its litigation relating to the
liabilities of its note payable, accrued interest, and
advances payable. The Company in 1995 and 1996, realized an
aggregate extraordinary gain of approximately $1,200,000.
* Potential Dispute
The Company in 1995, engaged an entity to raise capital. As
part of the agreement the Company issued shares of its stock
to the entity, placed an officer of the other entity on the
Company's Board of Directors and appointed another individual
related to the entity to be the Company's Chief Financial
Officer. In 1996, both individuals resigned from their
positions with the Company and have made numerous allegations.
The Company is in discussion with the entity and these
individuals to determine the extent and validity of these
allegations. The Company is unable at this time to determine
the validity, extent or financial importance these items may
or will have on the financial condition of the Company. No
adjustment has been made in these financial statements for
this item.
* Issuance of Stock
The Company has continued to issue its restricted common stock
to generate working capital. Subsequent to December 31, 1994,
the Company has issued 5,589,049 shares of its restricted
common stock for cash and services.
Page 34
<PAGE>
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Company caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDICAL DISCOVERIES, INC.
June 14, 1996 By:/s/ Alvin Zidell
--------------------------------------
Alvin Zidell
Interim President (principal executive
and financial officer)
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
POWER OF ATTORNEY
-----------------
Know all men by these presents, that each person whose
signature appears below constitutes and appoints Alvin Zidell and Marlin
Toombs, jointly and severally, his true and lawful attorney in fact and
agent, with full power of substitution for him and in his name, place
and stead, in any and all capacities, to sign any or all amendments to
this report on Form 10-KSB and to file the same, with all exhibits
thereto and other documents in connection therewith with the Securities
and Exchange Commission, hereby ratifying and confirming all that each
said attorney in fact or his substitute or substitutes may do or cause
to be done by virtue hereof.
Page 35
<PAGE>
<PAGE>
Signature Title Date
--------- ----- ----
/s/ Alvin Zidell
- ------------------------------- Director and Interim June 14, 1996
Alvin Zidell President
/s/ Marlin Toombs
- ------------------------------- Director, Vice June 14, 1996
Marlin Toombs President, Corporate
Affairs, and Secretary
/s/ David Walker
- ------------------------------- Director June 14, 1996
David Walker
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> $16,040
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> $16,040
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> $16,040
<CURRENT-LIABILITIES> $1,662,777
<BONDS> 0
0
0
<COMMON> 3,683,539
<OTHER-SE> $(5,330,276)
<TOTAL-LIABILITY-AND-EQUITY> $16,040
<SALES> $70,000
<TOTAL-REVENUES> $70,000
<CGS> 0
<TOTAL-COSTS> $1,293,162
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> $(1,223,162)
<INCOME-TAX> $(1,223,162)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $(1,223,162)
<EPS-PRIMARY> $(.07)
<EPS-DILUTED> $(.07)
</TABLE>
