U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(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, 1996
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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 .
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Commission file number 0-12627
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Medical Discoveries, 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.)
2040 East Murray-Holladay Road, Suite 116, Salt Lake City, UT 84117
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (801) 273-7388
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Securities Registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
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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.
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The Company had no revenues from operations during the fiscal year ended
December 31, 1996.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant (21,658,423 shares) is approximately $8,663,369. The aggregate
market value has been computed by reference to the average bid and asked
prices of such stock ($0.40 per share) as of March 31, 1997 (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 March 31,
1997 was 21,658,423.
PART I
ITEM 1. BUSINESS OVERVIEW
THE COMPANY
Medical Discoveries, Inc. ("MDI" or the "Company")has developed a product
(hereafter "MDI-P") that appears to have the ability to destroy certain
viruses and bacteria. MDI-P may also have the ability to kill other
infectious agents, possibly including pathogenic fungi and parasites. MDI-P
may possibly be used as a sterilizing agent for medical and dental
instruments. MDI-P may also potentially be used to remove or inactivate
infectious agents in human and animal blood-derived products, such as plasma
and gamma globulin.
MDI is a development stage company. The Company needs to raise additional
funding to continue development of its technology and to submit its technology
to the Food and Drug Administration(the "FDA") for approval. FDA approval is
required for commercialization of the Company's products.
THE PRODUCT
The Company's product is referred to as MDI-P. MDI-P stands for "Medical
Discoveries, Inc.-Pharmaceutical." MDI-P is a saline solution that is
chemically changed by electrolysis to form the MDI-P solution, which is then
injected into the body intravenously or is applied to the surface of a
surgical instrument, for example. 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 hypochlorous
acid. 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.
<PAGE>
IN VITRO applications, such as the sterilization of surgical instruments,
involve the washing and/or submersion of the instrument or material in the
MDI-P solution. In the Company's currently proposed protocol for treating
human diseases, this electrolyzed solution would be administered intravenously
to a patient in a series of injections over a two-week period. MDI-P could
also conceivably be administered orally, nasally, or topically.
PATENTS AND PATENT APPLICATIONS
MDI has been issued the following three patents:
"Electrically Hydrolyzed Salines as in vivo Microbicides for Treatment of
Cardiomyopathy and Multiple Sclerosis", issued August 2, 1994, patent
5,334,383. This is the original patent filed by MDI.
"Apparatus for Electrolyzing Fluids", issued April 16, 1996, patent 5,507,932.
This allows for patent protection for the device which manufactures MDI-P.
Divisional Application for "Apparatus for Electrolyzing Fluids", issued
October 1, 1996, patent 5,560,816. This covers the methods for using the
device to generate MDI-P.
MDI has been issued the following two Notice of Allowances ("NOA"; an NOA is
the step which precedes the actual issuance of a patent):
"Electrically hydrolyzed salines as microbicides for in vitro treatment of
contaminated fluids containing blood", NOA issued August 27, 1996. This
covers the use of MDI-P for blood and blood products sterilization.
"Electrically hydrolyzed saline solution comprising reactive species of ozone
and chlorine", NOA issued March 28, 1997. This is a patent on the product
MDI-P produced by the Company's technology.
MDI has two other patents pending which, if allowed, will provide protection
for in vivo treatment of microbial infections and the methods used to prepare
MDI-P.
In addition, the Company has made use of the Patent Treaty Cooperative to
extend its patent protection to countries in the European Union, Canada,
Mexico, and Japan.
RESEARCH AND DEVELOPMENT
MDI is a start-up company with limited resources. During the two fiscal years
ended December 31, 1995 and 1996, the Company spent $140,481 and $ 286,858
respectively on research and development of MDI-P. The Company intends
actively to pursue and expand its research efforts as funds will allow. The
focus of the initial research will be on the use of MDI-P as a sterilizing
agent for dental and medical instruments. In the future as funds allow, the
Company will also focus its research on the use of MDI-P as a broad spectrum
bactericide, anti-fungal agent, human anti-viral agent, and a potential
sterilizing agent for blood products.
<PAGE>
1996 RESEARCH ACTIVITIES
MDI contracted with the Baylor College of Dentistry to perform preliminary
studies on the use of MDI-P as a sterilizing agent for dental instruments.
The preliminary studies demonstrated the feasibility of using MDI-P as a
sterilizing agent by showing that MDI-P can kill Bacillus subtilis spores on
autoclave quality control spore strips and demonstrating that contaminated
handpieces have shown no growth after six minutes exposure to MDI-P.
MDI contracted with UCLA to perform preliminary studies on the use of MDI-P as
an anti-bacterial agent. Several pathogenic strains of bacteria when tested
in-vitro against MDI-P showed no growth after less than a one-minute exposure
to MDI-P. Some of the strains include methicillin-resistant Staphylococcus
aureus (MRSA) and vancomycin-resistant Enterococcus faecalis.
MDI contracted with the Albany Medical College to perform preliminary studies
on the use of MDI-P as an anti-fungal agent. Preliminary in-vitro studies have
shown that MDI-P has killed up to 99.6% of the 109 CFU/ml of Candida albicans
in less that one minute.
ALL 1996 STUDIES ARE PRELIMINARY IN NATURE AND ADDITIONAL CLINICAL AND
LABORATORY TESTS ARE REQUIRED. THE COMPANY HAS NOT YET DEMONSTRATED THE
EFFICACY OF MDI-P IN ANY OF ITS USES IN COMPREHENSIVE LABORATORY TESTING OR
IN WIDE SPREAD CLINICAL TRIALS.
SCIENTIFIC ADVISORY BOARD
Scientific Advisory Board. In 1996, MDI added two members to its Scientific
Advisory Board. The Board is charged with the responsibility of providing
expert advice and guidance with respect to the Company's research, FDA
submissions, and the commercialization of MDI-P. The members of this
Scientific Advisory Board are as follows:
William D. Welch, Ph.D., the Company's Vice President of Research &
Development, is the Chairman of the Scientific Advisory Board.
Bruce J. Dezube, M.D., who is an Assistant Professor of Medicine at the
Harvard Medical School, Director of AIDS Oncology at Beth Israel Hospital in
Boston, and a member of the AIDS Clinical Trial Group.
William J. Novick, Ph.D., who held various senior positions at Smith Kline &
French, Rorer and Hoechst-Roussel, where he was Senior Director for
International Drug Development for ten years.
Thomas M. Asher Ph.D., who is currently the President of the Southern
California Biomedical Council, an organization representing over 70 biotech
companies. Dr. Asher has been President and CEO of Hemacare, Inc., a company
that provides specialized blood components and therapeutic services to
hospitals.
Ned Weinshaker, Ph.D., who is currently President and CEO of IOMED, Inc. a
leader in the field of active transport of drugs into and across the skin
(iontophresis).
THE FUTURE
In regard to applications of MDI-P other than the direct treatment of human
diseases, MDI intends to actively pursue the potential application of MDI-P as
<PAGE>
a sterilizing agent for medical and dental instruments in the U.S. and
overseas. MDI intends, as soon as the necessary studies are completed, to
file a 510(k) pre-market notification in this regard with the FDA. In regard
to use of MDI-P for human diseases, MDI intends to file appropriate
"investigational new drug" applications ("IND Application") with the FDA for
use of MDI-P. The Company has filed a pre-IND submission for the possible use
of MDI-P as an anti-HIV agent. The Company will also seek funding to commence
appropriate clinical trials on such patients upon approval of the IND
Application. Additionally, the Company intends to further investigate the
ability of MDI-P to kill certain highly resistant and pathogenic bacteria.
Also, MDI intends to continue possible cooperative research efforts with the
two major pharmaceutical/biotechnology companies mentioned above with respect
to blood-derived products and veterinary diseases. The results of the current
preliminary research in these areas will determine the course of future
research efforts.
MORROW LICENSE AGREEMENT
MDI previously was obligated to pay a royalty on all revenues from sales of
MDI-P. This royalty agreement was terminated and all other outstanding items
with the holder of the royalty agreement were resolved by a mutual general
agreement on March 26, 1996 in exchange for 150,000 shares of MDI stock and
cash of $1,500. MDI has no future obligations with regard to royalty
payments.
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
MDI, 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
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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, that these agreements will provide
meaningful protection for the Company's trade secrets in the event of
unauthorized use or disclosure of such information.
COMPETITION
COMPETITION WITH RESPECT TO STERILIZATION TECHNIQUES. The most commonly used
technique for sterilizing medical and dental instruments is the autoclave
apparatus. An autoclave is a chamber in which the instruments or materials to
be sterilized are placed. This chamber is then heated to 121 C. and
pressurized to 15 psi for 15 to 20 minutes. Autoclaves are manufactured and
distributed by a variety of companies, notably Barnstead and Amsco Scientific.
Another sterilization technique is the use of ethylene oxide gas, a toxic gas,
that requires 18 hours to complete. This technique has primarily been used in
the past by large hospitals or clinics, however, its use is currently
declining in the United States due to strict controls that have been placed on
its use in the United States by the Environmental Protection Agency ("EPA").
In addition to the autoclaving and ethylene oxide techniques, there are
several other sterilization processes, which are used on a limited basis.
Sterris Corporation manufactures and distributes its "Sterris System I," a
chemical sterilant process for immersible medical and surgical instruments.
This process requires approximately 30 minutes. Another sterilization
technique is the "Sterrad Sterilization System" which is manufactured and
distributed by a division of Johnson & Johnson. This technique uses hydrogen
peroxide and requires over one hour to complete. Another sterilization
technique is the "Plazlyte Sterilization System," which is manufactured and
distributed by AbTox, Inc. This process also uses chemical sterilants and
requires approximately six hours to complete.
MDI's preliminary tests of MDI-P as a sterilizing agent have shown that
sterilization of "contaminated" dental handpieces can be accomplished in six
minutes or less. Moreover, MDI-P is a non-toxic sterilizing agent, in
contrast to some of the techniques currently in the marketplace that use toxic
chemicals or toxic gas. Based on these preliminary tests, MDI's management
believes that MDI-P has the potential to be competitive in the sterilization
marketplace. Nevertheless, future sterilization techniques may be developed
that could compete directly with MDI-P.
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
<PAGE>
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 MDI 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 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 REGULATIONS
REGULATIONS GENERALLY. The Company's use of the MDI-P solution in the
treatment of HIV and for other human or IN VITRO uses is subject to extensive
regulation by United States and foreign governmental authorities. These
regulations apply not only to the use of MDI-P itself, but also to the
manufacture of the electrolyzer used to create MDI-P. 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, on going compliance
with these requirements can require the expenditure of substantial resources.
Difficulties or unanticipated costs may been countered 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.
GOVERNMENT APPROVALS NEEDED FOR COMMERCIALIZATION. For in vivo uses, MDI must
conduct preclinical studies to prepare its IND application. If the FDA
accepts the IND application, the Company would be allowed to commence a series
of clinical trials. Each clinical study must be evaluated by an independent
institutional review board ("IRB"). Data from preclinical testing and
clinical trials of MDI-P against HIV or as an anti-bacterial agent may
eventually be submitted to the FDA in a "New Drug Application" ("NDA") for
marketing approval. After the FDA grants approval for the NDA, initial
marketing efforts may begin. Each step of the approval process can involve
considerable time, money, and effort. At any point, approvals may be
withdrawn if compliance with regulatory standards are not maintained. For in
vitro uses, the FDA process is significantly less complicated and time
consuming. Because the use of MDI-P as a sterilizing agent does not require
the injection of this "new drug" in a human patient, MDI is required by the
FDA regulations only to demonstrate in laboratory tests that MDI-P is an
effective sterilizing agent. This data is required to be filed with the FDA
by MDI in the form of a "510(k) Application." This 510(k) Application is
subject to FDA approval, but the time required for such approval is
<PAGE>
considerably less than the time required for the approval of a "new drug"
because extensive clinical data is not required. Given appropriate funding,
MDI's management believes that MDI will be able to obtain approval from the
FDA for the use of MDI-P as a sterilizing agent possibly before June, 1998,
although there is no guarantee that such approval can be obtained within that
time. Again, the FDA's approval may be withdrawn if any regulatory standards
are not maintained.
OTHER GOVERNMENTAL REGULATIONS. In addition to regulations enforced by the
FDA, the Company is also subject in the United States to 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 these environmental laws.
CONTINUING RESEARCH
MDI has not yet commenced any operations other than research and development
with respect to MDI-P. Initially, the Company intends to focus its continuing
research on commercializing the use of MDI-P as a sterilizing agent for
medical and dental instruments.
LICENSING, DISTRIBUTION, AND MANUFACTURING
Given the preliminary nature of the Company's research, and given the
uncertainty of regulatory approvals and market viability, management of the
Company has not yet determined the best course for commercialization of MDI-P
in its various potential applications. MDI may seek to commercialize the
potential applications of MDI-P either directly or indirectly in contracts
with third parties, including larger, established pharmaceutical companies.
EMPLOYEES AND OFFICERS
MDI is currently a development stage company that conducts research primarily
through third parties. It currently has one full-time, paid employee who is
not an officer. The officers of the Company are Mr. Alvin Zidell, Interim
President, Dr. William Welch, Vice President of Research and Development, and
Mr. Marlin Toombs, Vice President of Corporate Affairs and Secretary. Dr.
Welch and Mr. Toombs each devote their full time to MDI's affairs. Mr. Zidell
currently works on a parttime basis. Generally, the officers of the Company
have not drawn any regular salaries or bonuses, although the Company
occasionally has authorized compensation to certain officers for services
rendered and expenses personally incurred on the Company's behalf. This
compensation has generally taken the form of a waiver of the cash exercise
price for outstanding stock options to these individuals (see "Executive
Compensation" below). It is anticipated that in 1998, given an appropriate
level of funding, the Company will begin to pay appropriate salaries to its
officers. The Company has terminated its formal relationship with Gerald T.
Simmons who has served as Advisor to the Board since April 8, 1996. Mr.
Simmons remains available to advise the Company as needed.
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ITEM 2. PROPERTIES
The Company's principal place of business is located in a small commercial
office space at 2040 East Murray-Holladay Road, Suite 116, Salt Lake City,
Utah 84117. The lease on the Company's offices expires on July 31, 1998, with
a remaining lease obligation of approximately $18,500. This space is
currently used primarily by Marlin Toombs and the Company's one staff
employee. This space is currently adequate for the Company's needs, but the
Company will likely need to acquire additional space in the near future.
ITEM 3. LEGAL PROCEEDINGS
NO LEGAL PROCEEDINGS. The Company is not currently involved in any legal
proceedings.
SETTLEMENT OF ANTI-VIRAL LAWSUIT. In January 1996, the Company entered into a
Settlement Agreement with Anti-Viral of America, Inc., the Company with which
MDI had previously signed a Letter of Intent for the use of MDI-P in Mexico.
In connection with the Settlement Agreement, a permanent injunction was
entered against Anti-Viral of America, Inc., its principals, and others
permanently enjoining them from using the MDI-P treatment or the technology
concerning the MDI-P treatment in any manner, from disclosing the technology
or any other trade secrets of the Company, from providing the MDI-P treatment
to patients or others, and from having possession or control, directly or
indirectly, of any machines which produce the treatment. The claims against
the Company were also dismissed with prejudice.
POTENTIAL DISPUTE. A former advisor to the Company, Spira & Associates, has
indicated dissatisfaction with the terms of its separation from MDI and cited
various disagreements with management. There has been no communications from
Spira & Associates since the second quarter of 1996. An associate of Spira &
Associates, Mr. John Carella, who served for a time as the Company's Chief
Financial Officer, has also cited various disagreements with management. In
subsequent discussions with management, Mr. Carella was offered and he agreed
to become a director of the Company. The agreement was not consummated.
MDI raised $332,000 through the MDI Investors Trust ("Trust") in the third
quarter of 1995 to be used for research. To date, the Trust has disbursed
$281,000 to MDI and has paid commissions of $33,200 on behalf of MDI. The
trustee of the Trust has alleged that some of the Trust funds have not been
spent in accordance with the Trust's budget. The Board of Directors of MDI
commissioned an independent review of the Company's expenditures which were
approved by Mr. Carella. The Board of Directors believes the results of this
review showed that the funds were expended in accordance with the budget, and
the Company has provided the results of its review to the Trustee. The Trustee
has noted his disagreement with the review.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
<PAGE>
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the over-the-counter("OTC") system
under the symbol "MLSC". The following table sets forth, for the periods
indicated, the closing high and low bid prices for the Common Stock. The
prices represent inter-dealer prices, without adjustment for retail markups,
markdowns, or commissions and may not represent actual transactions. The
information has been provided by the National Quotation Bureau, Inc.
BID PRICE
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HIGH LOW
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Fiscal Year Ended December 31, 1996
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First quarter 1 1/8 1/2
Second quarter 1 3/4 5/8
Third quarter 7/8 7/16
Fourth quarter 5/8 1/4
Fiscal Year Ended December 31, 1995
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First quarter 1 3/4 1/4
Second quarter 1 3/4 1/8
Third quarter 2 --- 1/8
Fourth quarter 1 11/16 1/8
On March 31, 1996, there were approximately 1,003 record owners of the
Company's Common Stock. The Company estimates that the number of beneficial
holders is in excess of 2,000.
The Company has never paid a cash dividend and does not anticipate the payment
of cash dividends in the foreseeable future. Earnings are expected to be
retained to finance the Company's growth. Declaration of dividends in the
future will remain within the discretion of the Company's Board of Directors,
which will review its dividend policy from time to time.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
RESULTS OF OPERATIONS: FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995. The
Company had no revenue in 1996 compared to $38,200 of revenue in 1995. In
1995, the Company initiated limited testing in a foreign country which
resulted in revenues of $38,200. Testing was abandoned due to regulatory
issues. The Company has interest revenue of $11,974 in 1996 compared to
$3,088 in 1995 due to capital raised by the Company during the year. Funds
raised in equity offerings were placed in low-risk interest-bearing accounts
until needed by the Company and resulted in higher interest income in 1996.
The Company spent $286,858 on R&D in 1996 compared to $140,481 in 1995, an
increase of 104%. The additional funds supported thrid-party research at
UCLA, Baylor College of Dentistry, and the Albany Research Institute for anti-
microbial, anti-fungal, and dental sterilization studies. G&A Costs were
$807,002 in 1996 compared to $1,463,282 in 1995. G&A costs in 1995 included
the value of stock paid to investment advisors of approximately $700,000. The
Company made interest payments of $46,566 in 1996 compared to $7,097 in 1995.
The increase in interest payments is due primarily to interest costs of
approximately $38,000 due to the MDI Investors Trust (the "Trust") in 1996.
The Company began borrowing money from the Trust in October of 1995 and
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currently owes the Trust $316,700. During the year, the Company was late in
making interest payments to the Trust. At of the date of filing this report,
the Company was not in default under the terms of the notes to the Trust.
LIQUIDITY. The Company's net working capital position (current assets less
current liabilities) improved to negative $616,129 in 1996 from negative
$1,095,144 in 1995, due primarily to debt forgiveness of $673,486 in 1996. Of
the Company's $699,000 in current liabilities, approximately $200,000 results
from to legal services, approximately $264,000 results from dated payables
from a predecessor company, and approximately $181,000 results from accrued
liabilities to officers and employees. None of these three groups has made or
is expected to make a demand for cash payments until the Company's cash
positon improves.
CONTINUING RESEARCH. The Company is continuing its research and development
of MDI-P. The Company's focus in the next twelve months will be to seek
commercialization of MDI-P as a sterilizing agent. Beyond that, the Company
will continue its research into the use of MDI-P as an anti-bacterial agent.
At the same time, the Company will continue its joint research into removing
or inactivating infectious agents in blood-derived products and in treating
livestock diseases. Each of these objectives is discussed separately below.
MDI-P AS A STERILIZING AGENT. Management of the Company intends to seek
commercialization of MDI-P as a sterilizing agent. The reason forthis
priority, as discussed above under "BUSINESS--GOVERNMENTAL REGULATIONS," is
that such use can be approved by the FDA relatively quickly. The Company will
likely seek an alliance with a large pharmaceutical company in this regard to
assist MDI in the manufacturing and marketing of these sterilizers.
Steril*Med, an affiliate of Cooley& Cooley and the Company who originally
financed the initial research into the use of MDI-P as a sterilizing agent,
has a first right of negotiation in this regard. How these sterilizers will
be marketed is still undecided, but will be determined once a marketing
partner is identified. Management believes that this use can be
commercialized in the near future, but given that the FDA must approve the
application, there is no guarantee that such approval will be obtained soon,
if at all.
MDI-P AS AN ANTI-BACTERIAL AGENT. The Company has conducted preliminary tests
on the use of MDI as a potential broad spectrum anti bacterial agent. The
Company's management will likely seek an alliance with a major pharmaceutical
company to market and distribute MDI-P. That partner would also assist the
Company in obtaining FDA approval for such use. The Company expects that an
NDA to the FDA will be approved, if at all, in a number of years.
OTHER RESEARCH EFFORTS. The Company intends to pursue its cooperative
research efforts with two major United Stated based
pharmaceutical/biotechnology companies to evaluate the use of MDI-P in
removing or inactivating infectious agents in blood-derived products. While
preliminary research has been sufficiently positive to encourage continued
joint research efforts in this area, the Company does not know whether such
research will lead to commercialization of such uses. If the joint research
efforts are ultimately successful in establishing that such use of MDI-P is
commercially viable, MDI intends to fully cooperate with the pharmaceutical
companies' efforts at commercialization and derive revenues from the sale of
MDI-P to these companies. Beside the objectives described above, the Company
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intends to conduct further research and to seek regulatory approval in the
United States and abroad for the testing and commercial use of MDI-P on other
human diseases and ailments.
PATENT APPLICATIONS. During the next twelve months, the Company will continue
to seek expanded patent protection for the use of MDI-P on a variety of
diseases and ailments. The Company intends to seek patent protection both in
the United States and abroad.
PRIVATE PLACEMENTS CLOSED. The Company closed the follwing private placemtns
during 1996:
During the first quarter of 1996, the Company sold 676,923 shares of stock to
sophistcated investors for $440,000 at $0.65 per share. Each investor in this
offering also received a warrant to acquire three shares in the future of
every one share acquired currently. Accordingly, the Company issued warrants
to these investors allowing them to acquire an aggregate of 2,030,769 shares
at $3.00 per share over the next three years.
During the second quarter of 1996, the Company sold 80,000 shares of stock to
sophistcated investors for $50,000 at $0.625 per share. Each investor in this
offering also received a warrant to acquire two shares in the future of every
one share acquired currently. Accordingly, the Company issued warrants to
these investors allowing them to acquire an aggregate of 160,000 shares at
$3.00 per share over the next three years.
During the third quarter of 1996, the Company sold 25,000 shares of stock to
sophistcated investors for $25,000 at $1.00 per share. Also during the thrid
quarter, an investor exersized an option to putchase 25,000 shares of stock at
$1.00 per share for $25,000. No warrants were associated with either sale of
stock.
During the fourth quarter of 1996, the Company sold 63,637 shares of stock to
sophistcated investors for $35,000 at $0.55 per share. Each investor in this
offering also received a warrant to acquire three shares in the future of
every one share acquired currently. Accordingly, the Company issued warrants
to these investors allowing them to acquire an aggregate of 190,911 shares at
$3.00 per share over the next three years.
ADDITIONAL FUNDING IS REQUIRED. The Company's planned research and testing
will require substantial additional funds. At this time, the Company does not
have sufficient cash to support all the required testing for the projects
described above. Management intends to raise substantial additional funds in
both private and possibly public stock offerings in the future in order to
meet its future funding requirements. Additionally, MDI will seek licensing
and research funds from the companies with whom MDI may establish a
relationship. As additional funds are raised or revenues received, the
Company intends to commence paying salaries to its officers and to lease
appropriate office space. The Company also intends at that time to hire
additional technical and administrative personnel. The bulk of any additional
funding will likely be spent on continued research, testing, and patent
protection with respect to MDI-P.
ITEM 7. FINANCIAL STATEMENTS
The financial statements are filed at the end of this report and are
incorporated herein by reference.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table identifies the name, ages, and positions of all directors,
officers, and persons nominated by management to become a director.
NAME AGE POSITION
- ------------------------ --- --------------------------------------
Alvin Zidell 67 Director and Interim President
William D. Welch 45 Director and Vice President of
Research and Development
Marlin N. Toombs 65 Director, Vice President of
Corporate Affairs, and Secretary
David Walker 52 Director
All current directors are serving one-year terms and are subject to re-election
at the annual meeting of shareholders. Officers are elected to serve, subject
to the discretion of the Board, until their successors are appointed.
Alvin Zidell has been a Director of the Company since December 1, 1993. Since
February 1, 1996, Mr. Zidell has served as Interim President of the Company.
Since April 1, 1989, Mr. Zidell has acted as President of AZ Healthcare Group,
a company which develops and sells laser machines. Since April 1, 1992, Mr.
Zidell has also acted as a vice president of Dal-Tex Recycling, a paper
recycling company which employs approximately 48 people.
William Welch has been a Director and the Vice President of Research for the
Company since December 2, 1993. He was appointed as Interim President on
March 7, 1995, but relinquished this position on February 1, 1996 so that he
could focus on his duties as Vice President of Research and Development.
Since 1987, Dr. Welch has been the sole owner and President of WMCL, Inc., a
California corporation that provides biotechnology consulting services. Dr.
Welch has also served as a consultant for Kaiser Permanente Regional
Laboratory in Southern California from 1990 to April 1996. From 1987 to 1990,
Dr. Welch served as the Chief of Microbiology of the Kaiser Laboratory. Dr.
Welch earned his Bachelor of Science degree in biology in 1973 and his Masters
of Arts degree in Immunology in 1974, both from California State University,
Fullerton. Dr. Welch earned his Ph.D in Microbiology and Immunology in 1978
from the University of California, Los Angeles.
Marlin Toombs has been a Director and the Secretary for the Company since
August 6, 1992. He has served as Vice President for Corporate Affairs since
February 21, 1994. Mr. Toombs has also served as marketing director for
<PAGE>
International Marketing, Inc. from 1985 to 1989. He managed personal real
estate from 1990 until 1992.
David Walker was appointed to the board of directors on May 2, 1996. He
represents a group of investors who recently invested in the Company in a
private stock offering. He has been general manager of Sunheaven Farms in
Prosser, Washington (a twelve thousand acre agricultural operation) for twenty
years. Mr. Walker has a degree in economics from Brigham Young University.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who beneficially own
more than ten percent of the Company's stock, to file initial reports of
ownership and reports of changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than ten-percent owners are
required by applicable regulations to furnish the Company with copies of all
Section 16(a) forms that they file.
Based solely on a review of the copies of such forms furnished to the Company
or written representations from certain persons, the Company believes that
during the 1996 fiscal year all filing requirements applicable to its current
officers and directors were complied with.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth the annual compensation for services rendered
by certain officers for the fiscal years indicated.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Other
Annual
Name and Position Year Salary Bonus Comp
- ---------------------- --------- -------- -------- -------------
William D. Welch (1) Fiscal 96 -0- -0- -0-
Interim President and Fiscal 95 -0- -0- -0-
Vice President of R&D Fiscal 94 -0- -0- $75,000 (2)
Marlin Toombs Fiscal 96 -0- -0- $60,000 (3)
Vice President of Fiscal 95 -0- -0- $60,000 (4)
Corporate Affairs Fiscal 94 -0- -0- $135,000 (5)
and Secretary
John J. Carella (7) Fiscal 96 N/A N/A N/A
CFO (resigned) Fiscal 95 -0- -0- $4,687 (6)
Fiscal 94 N/A N/A N/A
Ken Brennen (8) Fiscal 96 N/A N/A N/A
Vice President of Fiscal 95 -0- -0- -0-
Financial Affairs Fiscal 94 N/A N/A N/A
(resigned)
(1) Interim President from March 7, 1995 to February 1, 1996.
<PAGE>
(2) On February 17, 1995, Dr. Welch was allowed to exercise a stock
option for 75,000 shares at $1.00 per share, without the payment of the
$75,000 exercise price. This compensation was for services rendered in 1994.
(3) During 1996, Mr. Toombs was given the right to exercise stock options
for 60,000 shares (accruing at 5,000 shares per month) at $1.00 per share,
without the payment of the $60,000 exercise price. He has not exercised
options for any shares from the 1996 grant.
(4) During 1995, Mr. Toombs was given the right to exercise stock options
for 60,000 shares (accruing at 5,000 shares per month) at $1.00 per share,
without the payment of the $60,000 exercise price. To date, Mr. Toombs has
only exercised stock options for 30,000 shares, although he has the right to
acquire an additional 30,000 shares.
(5) On February 17, 1995, Mr. Toombs was allowed to exercise a stock
option for 75,000 shares at $1.00 per share, without the payment of the
$75,000 exercise price. During 1994, Mr. Toombs was given the right to
exercise stock options for 60,000 shares (accruing at 5,000 shares per month)
at $1.00 per share, without the payment of the $60,000 exercise price.
(6) During 1995, Mr. Carella earned 1,500 shares per month for five
months ended December 31, 1995 for an aggregate of 7,500 shares. Assuming
that these shares are issued as of December 31, 1995 at an the fair market
value at that date of $0.625 per share, Mr. Carella's total compensation is
$4,687.
(7) CFO from June 1995 to March 9, 1996.
(8) V.P. of Financial Affairs from June 1995 to March 20, 1996.
The following table sets forth all long-term compensation and all other
compensation for the above-named executive officers for the fiscal years
indicated.
<PAGE>
SUMMARY COMPENSATION TABLE CONTINUED
LONG-TERM (OPTIONS/SARS) AND ALL OTHER COMPENSATION
All Other
Name and Position Year Options/SARS Compensation
- --------------------- --------- --------------- -------------
William Welch (1) Fiscal 96 150,000 (2) None
Vice President of R&D 275,000 (3)
Fiscal 95 None None
Fiscal 94 None None
Marlin Toombs Fiscal 96 200,000 (2) None
Vice President of 335,000 (3)
Corporate Affairs Fiscal 95 None None
Fiscal 94 None None
Alvin Zidell Fiscal 96 200,000 (2) None
173,000 (3)
Fiscal 95 None None
Fiscal 94 None None
John J. Carella (4) Fiscal 96 None None
CFO (resigned) Fiscal 95 None None
Fiscal 94 N/A N/A
Ken Brennen (5) Fiscal 96 None None
Vice President of Fiscal 95 None None
Financial Affairs Fiscal 94 N/A N/A
(resigned)
(1) Interim President from March 7, 1995 to February 1, 1996.
(2) Options granted at $0.25 per share to expire on December 31, 2001
(3) Options previously granted at $1.00 per share which expired on
December 31, 1996. The expiration date is extended to December 31, 1999.
(4) CFO from June 1995 to March 9, 1996.
(5) V.P. of Financial Affairs from June 1995 to March 20, 1996.
No officers or directors of the Company exercised any options or SARS in
fiscal 1996.
<PAGE>
COMPENSATION OF DIRECTORS
The Company has no standard arrangements to compensate directors of the
Company.
The compensation previously described for William Welch and Marlin Toombs in
the section captioned "Executive Compensation" includes compensation for their
services as directors of the Company.
As previously described above, in footnote 2 to the Summary Compensation Table
in the section "Executive Compensation," the Company has granted to Mr. Toombs
the right to exercise Company stock options that were previously granted to
him at the rate of 5,000 shares per month without the payment of the $1.00
exercise price in consideration for services rendered and expenses he
personally incurred as an officer on behalf of the Company. Pursuant to this
arrangement, Mr. Toombs acquired 30,000 shares in 1995 and no shares in 1996.
Mr. Toombs has the right to acquire an additional 60,000 shares for 1996.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table sets forth the holdings of Common Stock (the Company's
sole class of stock) as of March 31, 1997 by (i) each person who held of
record, or was known by the Company to own beneficially, more than five
percent of the outstanding Common Stock of the Company, (ii) each director,
(iii) each director nominee, and (iv) all directors and officers as a group.
Unless otherwise indicated, all shares are owned directly. Common Stock that
is "beneficially owned" includes all the Common Stock that the person has the
right to acquire within 60 days of March 31, 1997, and stock for which the
person has voting rights alone. The percentage ownership for any person
assumes that all the stock that could be acquired by that person, by option
exercise or otherwise, is in fact outstanding and that no other stockholder
has exercised a similar right to acquire additional shares. The number of
shares of stock in this table is 22,804,786 which includes 21,417,786 shares
outstanding on March 31, 1997 plus all shares represented by options currently
held by the directors listed in the table.
BENEFICIAL OWNERS OF COMMON STOCK
Names and Addresses Amount of Percentage
of Certain Beneficial Owners Beneficial Ownership of Class
- ----------------------------- -------------------- ----------
Marlin Toombs
Director/Vice President
c/o Medical Discoveries, Inc. 1,679,600 (1) (2) 7.37%
Dr. William Welch
Director/Vice President
c/o Medical Discoveries, Inc. 1,058,500 (1) (3) 4.64%
Alvin Zidell
Director
c/o Medical Discoveries, Inc. 1,098,000 (1) (4) 4.81%
David Walker
Director
c/o Medical Discoveries, Inc. 91,538 0.40%
Directors and Executive Officers
as a Group (4 persons) 3,927,638 17.22%
(1) Includes shares to which the shareholder has voting rights under a
Stock Purchase Agreement ("SPA") with a former director of the Company. The
SPA is for 2,800,000 shares purchased in 40 quarterly installments by buyers
(including a fourth individual not on table). Each buyer receives 1/4 of
shares. Shares are held by an escrow agent. Shares are released in groups of
70,000 on payment of each installment. Voting proxy for balance of shares
held by escrow agent has been granted to the buyers. If buyers default any
shares with the escrow agent revert to the seller and proxy for those shares
is canceled.
(2) Includes 290,180 shares owned directly; 381,920 shares owned in a
family partnership in which Mr. Toombs is a general partner; 472,500 shares
for which Mr. Toombs has voting rights under the SPA referred to in footnote
<PAGE>
(1) above; and options to purchase 535,000 shares that are currently
exercisable. Excludes: all shares owned by Mr. Toombs' children (other than
through the family partnership noted above), for which Mr. Toombs disclaims
beneficial ownership.
(3) Includes: 161,000 shares owned directly; 472,500 shares for which
Mr. Welch has voting rights under the SPA referred to in footnote (1) above;
and options to purchase 425,000 shares that are currently exercisable.
(4) Includes: 252,500 shares owned directly; 472,500 shares for which
Mr. Zidell has voting rights under the SPA referred to in footnote (1) above;
and options to purchase 373,000 shares that are currently exercisable.
Excludes: all shares held by children and other relatives of Mr. Zidell, for
which Mr. Zidell disclaims beneficial ownership.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. William Welch, who is a director and Vice President of Research and
Development of the Company, is the sole owner and the President of WMCL, Inc.,
a business that performs consulting and supervisory services for the Company.
The Company incurred cash expenses of $91,816 for such services in 1996 and
$79,877 for such services in 1995 to WMCL, Inc.
Mr. David Walker, a director of the Company received 61,538 shares of the
Company's stock in April 1996, valued in the aggregate at $40,000 or $0.65 per
share. These shares were paid to Mr. Walker as compensation for his services
in assisting the Company in raising money in connection with a recent private
stock offering.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Required by Item 601 of Regulation S-B.
The following are exhibits to this Form 10-KSB:
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------
3.1 Articles of Incorporation, as amended June 14, 1994. (1)
3.2 Bylaws, as amended June 14, 1994. (1)
10.1 1993 Incentive Plan, effective April 1, 1993. (1) (2)
10.2 Form of Stock Option Grant under 1993 Incentive Plan. (1) (2)
10.3 Settlement Agreement, dated October 12, 1995, between Dr.
Robert E. Morrow and the Company re settlement of lawsuit. (3)
10.4 Agreement, dated March 26, 1996, between Dr. Robert E. Morrow
and the Company re termination of royalties. (4)
10.5 Engagement Agreement, dated June 15, 1995, between Robert A.
Spira and the Company re financial advisory services. (4)
27 Financial Data Schedule
<PAGE>
(1) These exhibits are incorporated by reference to the Company's
Form 10-KSB for the fiscal year ended December 31, 1994, to which these
exhibits were filed as exhibits with the same exhibit numbers as shown above.
(2) These exhibits are management or compensatory plans, contracts
or arrangements required to be filed as exhibits.
(3) This exhibit is incorporated by reference to the Company's Form8-K,
dated October 12, 1995, to which it was originally filed as "Exhibit 10.1."
(4) These exhibits are incorporated by reference to the Compnay's
original filing of Form 10-KSB for the Fiscal Year ended December 31, 1995, to
which these exhibits were filed as exhibits with the same exhibit numbers as
shown above.
The Company has filed no 8-k reports during the since the previous
10KSB/a filing.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To 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, 1996, and the related statements of operations,
stockholders' deficit and cash flows for the two years ended
December 31, 1996 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, 1996, 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.
TANNER+CO.
Salt Lake City, Utah
February 18, 1997
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Balance Sheet
December 31,
1996 1995
Assets --------------------------
Current assets:
Cash $ 25,307 $ 37,833
Current portion of note receivable - related 46,785 20,796
Prepaid expenses 10,780 65,860
-------------------------
Total current assets 82,871 124,489
-------------------------
Note receivable - related party 30,586 99,166
Furniture and equipment 74,231 52,471
Less accumulated depreciation (16,181) (3,233)
-------------------------
Net furniture and equipment 58,050 49,238
Other assets 1,170 1,170
-------------------------
Total assets $ 172,677 $ 274,063
=========================
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 670,166 $ 536,494
Accrued interest 26,039 30,583
Current maturities of notes payable 2,795 652,556
-------------------------
Total current liabilities 699,000 1,219,633
-------------------------
Notes payable 2,008 4,803
Convertible notes payable 316,700 301,700
Commitments and contingencies - -
Stockholders' deficit:
Common stock - no par value, authorized
100,000,000 shares, 21,658,423 shares and
21,699,558 shares issued and outstanding
in 1996 and 1995, respectively 6,121,733 5,670,585
Accumulated deficit (6,794,264) (6,337,798)
Subscription receivables (172,500) (584,860)
-------------------------
Total stockholders' deficit (845,031) (1,252,073)
-------------------------
$ 172,677 $ 274,063
=========================
See accompanying notes to financial statements. F-2
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Statement of Operations
Cumulative
Amounts
Since
November 20,
Year Ended December 31, 1991 (Date of
1996 1995 Inception)
-----------------------------------------
Revenues
Medical care and fees $ - $ 38,200 $ 108,200
Interest 11,974 3,088 15,062
-----------------------------------------
Total revenue 11,974 41,288 123,262
-----------------------------------------
Expenses
License 1,500 - 1,001,500
Research and development 286,858 140,481 1,707,056
General and administrative 807,002 1,463,282 3,969,786
Interest 46,566 7,097 75,143
-----------------------------------------
Total expenses 1,141,926 1,610,860 6,753,485
-----------------------------------------
Loss before income taxes and
extraordinary item (1,129,952) (1,569,572) (6,630,223)
Income taxes - - -
Forgiveness of debt net of $-0-
income taxes 673,486 562,050 1,235,536
-----------------------------------------
Net loss $(456,466) $(1,007,522) $(5,394,687)
=========================================
Gain loss per share
Continuing operations $ (.05) $ (.08) $ (.39)
Extraordinary item .03 .03 .07
-----------------------------------------
Net loss per share $ (.02) $ (.05) $ (.32)
=========================================
Weighed average number of shares 22,549,000 19,064,000 16,862,000
=========================================
See accompanying notes to financial statements. F-3
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Statement of Stockholders Deficit
<TABLE>
<S> <C> <C> <C> <C> <C>
Accumu- Sub-
Common Stock lated scription
Shares Amount Deficit Receivables 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)
------------------------------------------------------------
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)
Common stock issued for
license 2,000,000 1,000,000 - - 1,000,000
Common stock issued for cash 542,917 528,500 - - 528,500
</TABLE>
See accompanying notes to financial statements. F-4
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Statement of Stockholders Deficit
Continued
<TABLE>
<S> <C> <C> <C> <C> <C>
Accumu- Sub-
Common Stock lated scription
Shares Amount Deficit Receivables Total
------------------------------------------------------------
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 - - (2,271,999) - (2,271,999)
------------------------------------------------------------
Balance, December 31, 1993 16,084,367 2,601,400 (4,107,114) - (1,505,714)
Common stock issued for cash 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 - - (1,223,162) - (1,223,162)
------------------------------------------------------------
Balance, December 31, 1994 16,941,279 3,683,539 (5,330,276) - (1,646,737)
Common stock issued for cash 424,732 283,200 - - 283,200
Common stock issued for
services 4,333,547 1,683,846 - (584,860) 1,098,986
Common stock option issued
to satisfy debt restructuring - 20,000 - - 20,000
Net loss - - (1,007,522) - (1,007,522)
------------------------------------------------------------
Balance, December 31, 1995 21,699,558 5,670,585 (6,337,798) (584,860) (1,252,073)
Common stock issued for cash 962,868 635,000 - (60,000) 575,000
</TABLE>
See accompanying notes to financial statements. F-5
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Statement of Stockholders Deficit
Continued
<TABLE>
<S> <C> <C> <C> <C> <C>
Accumu- Sub-
Common Stock lated scription
Shares Amount Deficit Receivables Total
------------------------------------------------------------
Common stock issued for
services 156,539 101,550 - - 101,550
Common stock canceled (1,400,000) (472,360) - 472,360 -
Common stock issued in
settlement of obligations 239,458 186,958 - - 186,958
Net loss - - (456,466) - (456,466)
------------------------------------------------------------
Balance, December 31, 1996 21,658,423 $6,121,733 $(6,794,264) $(172,500) $ (845,031)
============================================================
</TABLE>
See accompanying notes to financial statements. F-6
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Statement of Cash Flows
Cumulative
Amounts
Since
November 20,
Year Ended December 31,1991 (Date of
1996 1995 Inception)
------------------------------------
Cash flows from operating activities:
Net loss $(456,466) $(1,007,522) $(5,394,687)
Adjustments to reconcile net loss to
net cash used in operating activities:
Common stock issued for services,
license, and litigation 199,050 1,098,986 3,215,611
Reduction of legal costs - (130,000) (130,000)
Depreciation 12,948 3,233 17,641
Loss on disposal of property and
equipment - - 6,330
Gain on debt restructuring (673,486) (562,050) (1,235,536)
Write-off of receivables - - 193,965
Increase in receivables - - (7,529)
Decrease (increase) in prepaid
expenses 55,080 (65,860) (10,780)
Increase in other assets - (1,170) (1,170)
Increase (decrease) in:
Advance to shareholders' - (2,660) -
Accounts payable 223,130 131,913 514,257
Accrued expenses 18,943 7,097 47,520
------------------------------------
Net cash used in
operating activities (620,801) (528,033) (2,784,378)
------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (21,760) (44,310) (73,860)
Payments received on note receivable 42,591 10,038 52,629
------------------------------------
Net cash provided by (used in)
investing activities 20,831 (34,272) (21,231)
------------------------------------
Cash flows from financing activities:
Payment of notes payable (2,556) (802) (3,358)
Increase in convertible note payable 15,000 301,700 316,700
Contributed equity - - 131,374
Common stock issued for cash 575,000 283,200 2,386,200
------------------------------------
Net cash provided by
financing activities 587,444 584,098 2,830,916
------------------------------------
See accompanying notes to financial statements F-7
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Statement of Cash Flows
Continued
Cumulative
Amounts
Since
November 20,
Year Ended December 31,1991 (Date of
1996 1995 Inception)
-------------------------------------
Net (decrease) increase in cash (12,526) 21,793 25,307
Cash, beginning of period 37,833 16,040 -
-------------------------------------
Cash, end of period $ 25,307 $ 37,833 $ 25,307
=====================================
Supplemental disclosure of non-cash investing and financing activities
In 1996, the Company issued common stock for settlement of accounts
payable totaling $89,458.
In 1995, the Company acquired furniture and equipment with a cost of
$8,161 for notes payable.
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)
------------
Stockholders' Deficit $(1,292,987)
============
See accompanying notes to financial statements F-8
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Statement of Cash Flows
Continued
Actual amounts paid for interest and income taxes are as follows:
Cumulative
Amounts
Since
November 20,
Year Ended December 31, 1991 (Date of
1996 1995 Inception)
-------------------------------------
Interest $ - $ 236 $ 236
=====================================
Income taxes $ - $ - $ -
=====================================
See accompanying notes to financial statement F-9
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1995
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 are 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 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.
Furniture and Equipment
Furniture and equipment are carried at cost. Depreciation is computed
using the straight-line method over 3 to 7 years. When assets are
retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or
loss is recognized in income for the period. The cost of maintenance
and repairs is charged to income as incurred; significant renewals and
betterments are capitalized. Deduction is made for retirements
resulting from renewals or betterments.
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.
F-10
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1995
1. Summary of Significant Accounting Policies- Continued
Business and Concentration of Credit
The primary purpose of the business is the research and development of
the sterilization of medical equipment and an anti-viral treatment for
infectious diseases. The Company has no significant revenues and,
therefore, no trade receivables or extensions of credit.
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, 1996.
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.
Reclassifications
Certain amounts in the 1995 financial statements have been reclassified
in order to conform to the 1996 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
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.
F-11
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1995
3. Note Receivable Related Party
In 1995, the Company entered into an agreement to recover costs which
had been expended in a dispute with a former officer. The Company
received a 0% interest rate note in the amount of $150,000. The note
was discounted to $130,000 to realize a 9.5% return for financial
statements. The note requires quarterly payments of $13,125.
The balance of the note receivable at December 31, 1996 and 1995 are as
follows:
1996 1995
-----------------------
Current $ 46,785 $ 20,796
Noncurrent 30,586 99,166
-----------------------
Total $ 77,371 $ 119,962
=======================
4. 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 called 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 was 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. In 1996, the Company paid cash of
$1,500 for the termination of the licensing agreement.
5. Advances Payable to Shareholders
The Company had advances payable to two shareholders totaling $286,890
at December 31, 1994. The advances were 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 (see
note 11).
F-12
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1995
6. Notes Payable
The Company has the following notes payable at December 31, 1995:
1996 1995
-----------------------
Note payable to a company
requiring monthly payments
of $260 including interest
at an implied rate of 9%
secured by equipment $ 4,803 $ 7,359
Note payable to a financial
institution which is in
default and currently due.
At the time of the merger
with WPI, the Company was
unaware of the debt. In
1996, the Company resolved
litigation relating to the
note payable where in the
Company was forgiven of the
note payable and related
accrued interest. - 650,000
-----------------------
4,803 657,359
-----------------------
Less current maturity 2,795 652,556
-----------------------
Total long-term $ 2,008 $ 4,803
=======================
Current maturities are as follows:
Year Amount
---- ----------
1997 $ 2,795
1998 2,008
----------
$ 4,803
==========
7. Convertible Notes Payable
The Company has $316,700 at December 31, 1996 and $301,700 at December
31, 1995 of notes payable to a trust. The notes have an interest rate
of 12%, have a term of three years and are due in 1998. Each $1,000
note is convertible into 667 shares of the Company's common stock.
F-13
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1995
8. Related Party Transactions
During 1995, the Company settled litigation relating to a former officer
of the Company where in the officer forgave the Company of advances
payable of $284,230 and assumed the liability for notes payable of
$250,000 plus related accrued interest in exchange for an option to
purchase 100,000 shares of the Company's common stock for $.25 per
share. The Company recognized a $20,000 expense from the option as it
was issued for less than the market value of the stock. The expense was
offset against the gain on the forgiveness of debt.
The Company has at December 31, 1995 made a prepaid advance of $65,860
to an officer shareholder and his entity relating to development of the
technology and at December 31, 1996, has an accounts payable to the
officer shareholder and his entity of $58,500 and another officer of
$102,000. During 1996 and 1995, the Company incurred costs relating
primarily to the development of the technology of $91,816 and $79,877,
respectively, from the officer shareholder and his related entity.
The Company has agreed to make the payments on a vehicle lease for an
officer of the Company. The annual payments totaled $2,680 and $4,320
during 1996 and 1995, respectively.
F-14
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1995
9. Income Taxes
The provision for income taxes for the years ended December 31, 1996 and
1995, 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:
Cumulative
Amounts
Since
November 20,
Year Ended December 31, 1991 (Date of
1996 1995 Inception)
--------------------------------------
Federal income tax
benefit (provision)
at statutory rate $ 155,000 $ 342,000 $ 1,800,000
Change in valuation
allowance (155,000) (342,000) (1,800,000)
--------------------------------------
$ - $ - $ -
======================================
The net timing differences for deferred income tax assets are as
follows:
Net operating loss carryforward $ 1,800,000
Valuation allowance (1,800,000)
------------
Net deferred tax asset $ -
============
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
$5,394,000 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 2011. Should
the Company experience a change of ownership the utilization of net
operating losses could be reduced.
F-15
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1995
10. Gain on Debt Forgiveness
At December 31, 1994, the Company was involved in litigation regarding
notes payable of $900,000 and corresponding related accrued interest.
In 1995, the litigation was partially resolved and the Company was
relieved of $250,000 principal 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 and
related accrued interest. To resolve the litigation including repayment
of the advances payable of $284,230, 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
1995 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. The
gain on the debt forgiveness in 1995 was $562,050 and $673,486 in 1996.
11. Stock Options
The Company has an incentive stock option plan wherein 4,000,000 shares
of the Company's 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 common stock. In addition, the Company
granted 2,658,604 warrants to individuals who had purchased shares of
the Company's common stock. The warrants have a purchase price of $3.00
per share. A schedule of the options at December 31, 1996 is as
follows:
Number of Option Price
Options Per Share
-----------------------------
Outstanding at December 31, 1995 1,454,000 $ .25 TO 1.00
Granted 3,602,604 .25 to 3.00
Exercised (25,000) 1.00
Expired (425,000) 1.00
-----------------------------
Outstanding at December 31, 1996 4,606,604 $ .25 TO 3.00
=============================
F-16
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1995
11. Stock Options - Continued
Options exercisable and shares available for future grant are as
follows:
December 31,
1996 1995
--------- ---------
Options exercisable 4,596,604 1,484,000
Shares available for grant 2,052,000 2,546,000
In October 1995, the Financial Accounting Standards Board issued
Statement of financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123) which established financial
accounting and reporting standards for stock-based compensation. The
new standard defines a fair value method of accounting for an employee
stock option or similar equity instrument. This statement gives
entities the choice between adopting the fair value method or continuing
to use the intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25 with footnote disclosures of the pro forma effects
if the fair value method had been adopted. The Corporation has opted
for the latter approach. Had compensation expense for the Corporation's
stock option plan been determined based on the fair value at the grant
date for awards in 1996 and 1995 consistent with the provisions of FAS
No. 123, the Corporation's results of operations would have been reduced
to the pro forma amounts indicated below:
December 31,
1996 1995
----------------------------
Net loss - as reported $ (456,466) $ (1,007,522)
Net loss - pro forma $ (1,622,499) $ (1,021,255)
Loss per share - as reported $ (.02) $ (.05)
Loss per share - pro forma $ (.07) $ (.05)
F-17
<PAGE>
MEDICAL DISCOVERIES, INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1995
11. Stock Options - Continued
The fair value of each option grant is estimated at the date of grant
using the Black-Scholes option pricing model with the following
assumptions:
December 31,
1996 1995
--------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 97.5% 97.5%
Risk-free interest rate 5.5% 5.5%
Expected life of options 1-5 years 2-3 years
===========================
The weighted average fair value of options granted during 1996 and 1995
are $.32 and $.83, respectively.
The following table summarized information about fixed stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
---------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise at Life Exercise at Exercise
Prices 12/31/96 (Years) Price 12/31/96 Price
-----------------------------------------------------------------------
$ .25 to .65 1,034,000 3.30 $ 0.39 1,024,000 $ 0.39
1.00 914,000 3.00 1.00 914,000 1.00
3.00 2,658,604 2.30 3.00 2,658,604 3.00
-----------------------------------------------------------------------
$ .25 to 3.00 4,606,604 2.70 $ 2.02 4,596,604 $ 2.02
=======================================================================
12. 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
------ ----------
1997 $ 11,600
1998 6,900
----------
$ 18,500
==========
Annual rent expense totaled approximately $10,000 for the years ended
December 31, 1996 and 1995.
F-18
<PAGE>
13. Contingency
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 has
canceled 1,400,000 shares of the common stock issued as a fee for to
raise the capital. The corresponding subscription receivable was also
canceled. 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.
F-19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MEDICAL
DISCOVERIES, INC. DECEMBER 31, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 25,307
<SECURITIES> 0
<RECEIVABLES> 77,371
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 82,871
<PP&E> 74,231
<DEPRECIATION> 16,181
<TOTAL-ASSETS> 172,677
<CURRENT-LIABILITIES> 699,000
<BONDS> 0
0
0
<COMMON> 6,121,733
<OTHER-SE> (6,966,764)
<TOTAL-LIABILITY-AND-EQUITY> 172,677
<SALES> 0
<TOTAL-REVENUES> 11,974
<CGS> 0
<TOTAL-COSTS> 1,095,360
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,566
<INCOME-PRETAX> (1,129,952)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,129,952)
<DISCONTINUED> 0
<EXTRAORDINARY> 673,486
<CHANGES> 0
<NET-INCOME> (456,466)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
