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, 1998
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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.)
2985 North 935 East, Suite 9, Layton, UT 84041
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (801) 771-0523
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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. -----
The Company had revenues totaling $18,409 from operations during the fiscal year
ended December 31, 1998.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant (24,807,921 shares) is approximately $8,062,574. The aggregate market
value has been computed by reference to the average bid and asked prices of such
stock ($0.325 per share) as of March 31, 1999 (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,
1999 was 26,473,625.
PART I
ITEM 1. BUSINESS OVERVIEW
THE COMPANY
Medical Discoveries, Inc. ("MDI" or the "Company") has developed a technology
(hereafter "MDI-P") that appears to have the ability to destroy certain viruses
and bacteria. This technology may also have the ability to kill other infectious
agents, possibly including pathogenic fungi and parasites, and may possibly be
used as a sterilizing agent for medical and dental instruments. This technology
may also potentially be used to remove or inactivate infectious agents in human
and animal blood-derived products, such as plasma and gamma globulin. The
Company has extended this core technology to preliminary investigations of a
wide variety of "electrolysis technologies" which may have applications in the
cosmetic, home water purification and skin care markets.
In addition to its base business, the Company expanded into related technologies
in 1998 by forming MDI HealthCare Systems, Inc. ("MDI-HCS"), a wholly-owned
subsidiary. MDI-HCS seeks to take advantage of various products it has developed
in the skin care industry for scar therapy, wound care and skin repair.
The Company remains committed to its pursuit of establishing its electrolysis
technologies and patents as an effective anti-bacterial, anti-viral and
anti-fungal products for in-vitro and in-vivo applications and to developing an
effective liquid chemical sterilant for the sterilization of surgical
instruments.
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 core technology.
THE PRODUCT
The Company's product is referred to as MDI-P. MDI-P stands for "Medical
Discoveries, Inc.-Pharmaceutical." In the potential IN-VIVO applications,
targeted at treating certain human diseases, the MDI-P compound would be
administered either intravenously, orally, nasally or topically as required.
Electrolysis is the method whereby a certain type of electric current is passed
through a saline solution. The electrical current causes the chemicals in the
saline solution to alter, producing a variety of chemical compounds. 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.
In the potential IN-VITRO applications, such as the sterilization of surgical
instruments, will require washing and/or submersion of the surgical instruments
into the electrolysis solution.
Electrolysis technology such as that which has been developed and is in
development by the Company, has received rapid and intense attention in Japan.
In support of this technology, the Japanese government has established a special
organization to study the applications for this technology. The name for this
organization is the Function Water Foundation. Japan currently has as many as 35
separate companies developing products to make the benefits of function water
available for a wide variety of applications. The activity in Japan is an
excellent opportunity to develop key relationships that will enhance the
company's understanding and development of these technologies as MDI prepares to
enter worldwide markets in the future, either separately or in strategic
alliance with several of these companies.
PATENTS AND PATENT APPLICATIONS
MDI has been issued the following six patents:
"Electrically Hydrolyzed Salines as In Vivo Microbicides for Treatment of
Cardiomyopathy and Multiple Sclerosis", issued August 2, 1994. This is the
original patent filed by MDI.
"Apparatus for Electrolyzing Fluids", issued April 16, 1996. This allows for
patent protection for the device which manufactures MDI-P.
"Apparatus for Electrolyzing Fluids", issued October 1, 1996. This covers the
methods for using the device to generate MDI-P.
"Electrically Hydrolyzed Salines as Microbicides for In Vitro Treatment of
Contaminated Fluids Containing Blood", issued April 22, 1997. This covers the
use of MDI-P for blood and blood products sterilization.
"Electrically Hydrolyzed Saline Solution Comprising Reactive Species of Ozone
and Chlorine", issued October 7, 1997. This is a patent on the product MDI-P
produced by the Company's technology.
"Electrically Hydrolyzed Salines as Microbicides", issued March 24, 1998. This
is a patent on the product MDI-P produced by the Company's technology.
MDI has other patent applications pending which, if allowed, will provide
protection for the technologies described in said patents.
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 development stage company with limited resources. During the two fiscal
years ended December 31, 1997 and 1998 the Company spent $ 149,820 and $ 415,415
respectively on research and development. The Company intends actively to pursue
and expand its research efforts as funds will allow. The focus of the initial
research was 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. Current research activities include the discovery and development of
additional market applications based upon a variety of electrolysis based
technologies and in the cosmeceuticals market.
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 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
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 MDI obtains regulatory approval for any of the uses of its
technologies, 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 its products and 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 its products. 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 its
products will be competitive if and when introduced into the marketplace for any
of their possible uses.
GOVERNMENT REGULATIONS
REGULATIONS GENERALLY. The Company's use of the MDI-P solution in the treatment
of HIV, and any other products in discovery and development 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 the
product itself, but also to the manufacture of any device (such as the
electrolyzer) used to create said products. 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 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 the
companies products.
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: However, the granting of approval to initiate human clinical
trials is not presumptive of eventual product approval. Each clinical study must
be evaluated by an independent institutional review board ("IRB"). Data from
preclinical testing and clinical trials may eventually be submitted to the FDA
in a "New Drug Application" ("NDA") for marketing approval: However the
submission of an "NDA" is in no way to be presumptive of eventual 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 less
complicated and time consuming primarily due to the fact that such in vitro use
of the Companies products would not intail the same clinical trial requirements
as are indicated by in vivo use. For IN VITRO applications the Company would be
required to provide evidence of safety and efficacy. This data is required to be
filed with the FDA by 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 considerably less than the time required for the approval of a "new drug"
because extensive clinical data is not required. 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
For its core technologies, MDI has not yet commenced any operations other than
discovery development and testing with respect to MDI-P. Initially, the Company
intends to focus its continuing research in IN VIVO applications targeted
against the HIV virus. The Company is also developing several innovative
applications of its InvisiScar technology.
LICENSING, DISTRIBUTION, AND MANUFACTURING
Given the preliminary nature of the Company's discovery, research and
development of its pharmaceutical technologies, and given the uncertainty of
regulatory approvals and market viability, management of the Company has
determined that the best course for commercialization of these potential
products ant their various potential applications may be through contracts with
third parties including larger, established pharmaceutical companies. However,
for the Companies consumer product technology and resultant products management
has determined that the best course for commercialization is through it's wholly
owned subsidiary MDI HealthCare Systems Inc., either directly or indirectly
through various domestic and international distribution agreements. To this end
the Company will continue its product manufacturing through strategic alliances
with approved contract manufacturing companies.
EMPLOYEES AND OFFICERS
MDI is currently a development stage company that conducts research primarily
through third parties. The officers of the Company are Lee F. Kulas, President
and Chief Executive Officer, William J. Novick, Ph.D., Vice President and Chief
Technical Officer, and Mr. Scott Wood, Chief Financial Officer. Mr. Kulas
devotes his full time to MDI's affairs. Generally, the officers of the Company
have not been paid 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. The Company
accrues amounts due these officers under agreements with the officers. 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 1999, given an appropriate level of funding,
the Company will begin to pay appropriate current and accrued salaries to its
officers.
During the third quarter of 1998, Directors Aaron Etra and Paul Griesgraber,
advised management of their desire to form a non-competitive company focusing on
non-competitive applications for technologies which may be complementary to MDI
and its subsidiary. Mr. Etra and Mr. Griesgraber advised management of their
intention to resign from MDI's Board of Directors and Mr. Griesgraber's
intention to resign from his position as Director of Licensing and Development
to allow them to devote their full attention to their new venture without any
appearance of conflict. The Company and its Board of Directors approved and
agreed with the request and resignations. MDI maintains business relationships
with Mr. Etra and Mr. Griesgraber and is evaluating potential strategic
partnerships.
In December 1998, Mr. Marlin Toombs, a director of the Company since its
inception, advised Management and the Board of his desire to retire from
day-to-day activities as Vice President, Investor Relations and a member of the
Board of Directors to allow him more time for personal interests. The Company
requested and Mr. Toombs agreed to continue to make his services available via a
consultancy agreement.
ITEM 2. PROPERTIES
The Company's principal place of business is located in a small commercial
office space at 2985 North 935 East, Suite 9, Layton, Utah 84041. The lease on
the Company's offices expires on April 30, 2000, with a remaining lease
obligation of approximately $14,400. This space is currently used as corporate
headquarters and since the first quarter of 1998 has served as the company's
base of operations as the company enters consumer markets.
ITEM 3. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS. The Company may, on advice from counsel, become a plaintiff
on a legal action commenced by its wholly owned subsidiary Regenere, Inc., to
enforce its rights under the Joint Venture Agreement with Advanced
BioTechnologies, Inc., to account for proceeds delivered to former officers and
directors and for a declaration from the courts to its rights in the matter.
Management does not believe that the lawsuit will affect the Company's ability
to achieve its Business Plan, and that this lawsuit will not affect the ongoing
activities of Medical Discoveries, Inc.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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 National Quotation
Bureau, Inc has provided the information.
BID PRICE
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HIGH LOW
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Fiscal Year Ended December 31, 1998
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First quarter $ 0.25 $ 0.15
Second quarter 0.94 0.15
Third quarter 1.03 0.41
Fourth quarter 0.68 0.31
Fiscal Year Ended December 31, 1997
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First quarter $ 0.60 $ 0.21
Second quarter 0.47 0.20
Third quarter 0.40 0.18
Fourth quarter 0.33 0.14
On December 31, 1998, there were approximately 1,209 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 1998 COMPARED TO FISCAL YEAR 1997.
The Company had revenue of $18,409, as the result of initial commercialization
of selected products from its newly formed, wholly-owned, consumer products
subsidiary MDI HealthCare Systems, Inc in 1998 compared to no revenue in 1997.
The Company had interest revenue of $2,515 in 1998 compared to $5,829 in 1997
due to capital raised by the Company in 1997. 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 1997. The Company spent $415,415 on
R&D in 1998 compared to $149,820 in 1997. The majority of research funds were
expended in initiating certain US Food and Drug Administration (FDA) required
testing for the filing on an Investigational New Drug Application (IDE). G&A
costs were $3,028,063 in 1998 compared to $619,671 in 1997. Of the $3,028,062 in
G&A costs, $2,341,046 resulted from non-cash expenses attributed to the issuance
of stock options to investors as part of the 1998 private placement issues (see
"Private Placements Closed" below). The balance of the increase in G&A costs
resulted from the initial expense of forming the MDI-HCS subsidiary. The Company
had interest expense of $51,585 compared to $68,100 in 1997.
LIQUIDITY. The Company's net working capital position (current assets less
current liabilities) decreased to negative $1,629,485 in 1998 from negative
$1,283,166, due primarily to increased short-term borrowings and accrued
expenses. Of the Company's $1,886,320 in current liabilities, approximately
$250,000 results from legal services, approximately $264,000 results from dated
payables from a predecessor company, $162,000 results from short-term borrowings
from shareholders, and approximately $820,000 results from accrued liabilities
to officers and employees. None of these four groups (holding a total of
approximately $1,496,000 in current liabilities) has made or is expected to make
a demand for cash payments until the Company's cash position improves.
PRIVATE PLACEMENTS CLOSED. The Company closed the following private placements
during 1998:
During the first quarter of 1998, the Company sold 270,270 shares of stock for $
50,000 at $0.185 per share.
During the second quarter of 1998, the Company sold 50,000 shares of stock for $
25,000 at $0.50 per share.
During the second and third quarters of 1998, the Company sold 1,666,658 shares
of stock for $500,000 at $0.30 per share and certain exclusive limited
distribution rights for the Company's own products as well as products from
MDI-HCS. to an investor group. For every one share acquired, each investor in
this offering received warrants to acquire 0.20 shares at $0.50 per share, 0.40
shares at $0.75 per share, and 0.20 shares at $1.00 per share. Accordingly, the
Company issued warrants to these investors allowing them to acquire an aggregate
of 1,333,326 shares at various prices share over the next three years. This
investment was originally placed at $0.75 per share with warrants issued at to
each investor to acquire 0.50 shares at $0.75 per share, 1.00 share at $1.00 per
share, and 0.50 shares at $1.50 per share. In December 1998, the pricing was
reevaluated to more accurately reflect current valuation and stock pricing in
the public markets. In addition to the investment, the Company awarded warrants
to purchase common stock to a consulting firm who assisted in the placement of
funding as follows: 333,000 warrants at $0.50 per share, 333,000 warrants at
$0.75 per share, and 200,000 warrants at $0.001 per share. The investor group
made an additional investments of $75,000 in December 1998 under the revised
terms of the offering (shares priced at $0.30 and warrants to acquire 0.20
shares at $0.50 per share, 0.40 shares at $0.75 per share, and 0.20 shares at
$1.00 per share).
MDI TRUST FUND NOTES. The company has various notes totaling approximately
$290,000 plus accrued interest due to the MDI Investors Trust, against which, at
the request of certain beneficiaries of the Trust and in exchange for
indemnification by those beneficiaries, MDI has paid approximately $40,000 in
the fourth quarter of 1998 and an additional $50,000 in the first quarter of
1999 directly to the beneficiaries of the Trust. MDI will need to raise an
additional $200,000 to repay the beneficiaries plus in accrued interest. As of
December 31, 1998, accrued interest is estimated at approximately $24,000.
TECHNOLOGY UPDATE
Pharmaceutical Drug Discovery and Development Activities
MDI continues validation testing of its novel drug "MDI-P" targeted at the
HIV/AIDS disease, in preparation of filing an Investigational New Drug
Application (IND) with the US Food and Drug Administration (FDA).
In 1998, MDI initiated a series of validation testing at the Dana-Farber Cancer
Institute, a Harvard Medical School teaching Affiliate and National Institute of
Health (NIH) approved HIV/AIDS Testing Laboratory. These tests confirmed and
extended previous research and testing which demonstrated that MDI-P is shown to
be capable of killing HIV in cell cultures without mortality to the cells.
These encouraging test results led to the initiation of the following strategic
pre-IND activities and resultant expenditures:
1. Signing a six-month Research Grant with the Dana-Farber Cancer Institute
to further extend and confirm the anti-HIV/AIDS activity of MDI-P. ($76,250)
In this Research, MDI-P is being analyzed for effectiveness in killing:
laboratory strains of HIV-1; clinical specimens of HIV; and resistant strains of
HIV-1.
2. Initiation of Toxicology Analysis at Wil Research Laboratories, Ashland,
Ohio. ($225,000)
This work comprises: Acute Toxicity Study of the Oral and Intravenous
administration route in rats; Acute Intravenous toxicity in dogs, including
cardiovascular evaluation; 28-day intravenous toxicity in rats and dogs; and
pathological evaluation.
3. Initiation of Microbiology Evaluation at Clinical Microbiology
Institute, Wilsonville, Oregon. ($56,000)
This study will demonstrate the spectrum of antibacterial and anti-fungal
activity of MDI-P.
4. Initiation of Chemical Characterization study at RICERCA, Inc.,
Wilsonville, Ohio. (Estimated to be $80,000)
This work will provide a comprehensive analysis on the formula of MDI-P.
These studies, required by FDA for IND submission represent a substantial and
ongoing commitment by the Company to progress its novel drug, MDI-P, toward
eventual clinical investigation.
Over-the-counter, Cosmeceuticals Product Development Activities
In 1998 MDI expanded its technology base to position the Company for revenue
producing opportunities in the less regulatory restrictive yet highly profitable
fields of scar treatment, wound care and skin repair. Through technologies
developed both within the Company through its wholly owned subsidiary, MDI
HealthCare Systems, Inc., and outside the Company through a licensing
distribution agreement with Hattori-Seishi, Ltd, Japan, MDI was able to realize
the first commercial products since its inception. These products are
proprietary to the Company, utilize a variety of its core technologies and
position the Company for strong revenue potential in 1999 and the next
millennium.
InvisiScar(TM), an innovative topical silicone gel, and Aqua-Cleanse(TM), an
electrolysis technology based disinfecting cleansing pad, have enabled the
Company to enter the worldwide $3.5 Billion Skin Care market. In addition, a
third product, the Beautification FaceMask(TM), enables the Company to enter the
anti-aging, facial beautification market.
Research and Development Activities, Japan
In addition to its novel drug, MDI-P, and Cosmeceuticals product development and
commercialization accomplishments, the Company continues its discovery and
development activities for electrolysis technologies in its Tokyo, Japan based
Research and Development Group. MDIs Team Japan is to identify additional
applications for the Company's electrolysis based technologies, and develop
appropriate technological innovations for rapid market entry. Currently, the
Company is investigating several resultant product development activities which,
if proven, may lead to additional revenue producing opportunities.
JOINT VENTURE ACTIVITIES
Regenere, Inc.
Regenere, Inc., a subsidiary of Medical Discoveries, Inc. retained Nevada
counsel to enforce its rights under the Joint Venture Agreement with Advanced
BioTechnologies, Inc. to account for proceeds delivered to former officers and
directors and for a declaration from the courts to its rights in the matter. In
March of this year, MDI, acting on advice of counsel elected to become a party
to this suit. Management does not believe that the lawsuit will affect the
Company's ability to achieve its Business Plan, and that this lawsuit will not
affect the ongoing activities of Medical Discoveries, Inc. The Company's
consolidated Balance Sheet does not reflect any assets for this investment.
MDI HealthCare Systems, Inc.
In October of 1998 Medical Discoveries, Inc. formed a wholly owned subsidiary,
MDI HealthCare Systems, Inc. in order to pursue commercialization of certain of
it proprietary product developments in the fields of scar treatment, wound care
and skin repair. The establishment of MDI-HCS as a separate corporation allowed
MDI-HCS to develop a separate corporate identity consistent with the needs of
the Cosmeceuticals health care industry. The Mission Statement for MDI
HealthCare Systems, Inc. is the identification, exploration, validation,
development and commercialization of innovative solutions for scar therapy,
wound healing, and skin care and repair.
This strategy of MDI HealthCare Systems, Inc. demonstrates the Company's program
of utilizing variations its proprietary technologies, intellectual property and
key personnel resources both in the United States, Japan and Canada, to enter
less restrictive consumer markets which offer rapid revenue producing
opportunities.
PATENT ACTIVITY
The Company filed an additional patent with the US Patent and Trademark Office
on newly developed electrolysis technology that has been developed by the
Japan-based research and development team. It is believed that this patent, if
issued, will provide the Company with a wide variety of additional market
applications in the field of sterilization for both the medical products
industry as well as non-medical applications where sterilization is a critical
part of the manufacturing/production process.
ADDITIONAL FUNDING IS REQUIRED. The Company's current FDA required testing in
pursuit of an eventual filing of an IDE will require additional funds estimated
to be in the range of $500,000. In addition, the Company's wholly owned
subsidiary, MDI HealthCare Systems, Inc. is currently offering a Private
Placement in the amount of $2,500,000 to fund the worldwide launching of certain
consumer products targeted at scar therapy, wound care and skin repair.
The funds to be raised will be used in the following areas: 1) submission of an
IND Application with the FDA for its novel Anti-HIV/AIDS drug, 2) the launch of
MDI-HCS, 3) payment of the MDI Trust Fund obligations, 4), the prior debts of
the company, and 5) at such time as funds become available, commencement of
payment of salaries to Company personnel.
At this time, the Company does not have sufficient cash to support all the
required testing for the projects described above. The Company's wholly owned
subsidiary, MDI-HCS, has been established to generate revenue through the sales
of a variety of products targeted at scar therapy, wound care and skin repair.
Management is aggressively pursuing a variety of mechanisms, both private and
possibly public stock offerings in order to meet its funding requirements.
Additionally, MDI is presently seeking licensing and research funds from
companies and private institutions with whom MDI seeks to establish cooperative
alliances.
YEAR 2000 ISSUE. The Company is aware of the issues associated with programming
codes in existing computer systems as the millennium (year 2000) approaches. The
Company has completed the upgrading of its design engineering software and
believes, but can give no assurance, that this software is year 2000 compliant.
However, the accounting and material management system is not compliant. The
Company has conducted preliminary research into replacement accounting and
material management system. The Company plans to acquire and implement a new
system in the third quarter 1999. If the new accounting and material management
system is not implemented as planned, the Company could be adversely affected
beginning in the year 2000 since many computer applications could fail.
FORWARD-LOOKING STATEMENTS. Certain matters discussed in this Annual Report are
"forward-looking statements" intended to qualify for the safe harbors from
liability established by Section 27A of the Securities Act and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These
forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company "believes,"
"anticipates," "expects" or words of similar import. Similarly, statements that
describe the Company's future plans, objectives or goals are also
forward-looking statements. Such statements may address future events and
conditions concerning, among other things, the Company's results of operations
and financial condition; the consummation of acquisition and financing
transactions and the effect thereof on the Company's business; capital
expenditures; litigation; regulatory matters; and the Company's plans and
objectives for future operations and expansion. Any such forward-looking
statements would be subject to the risks and uncertainties that could cause
actual results of operations, financial condition, acquisitions, financing
transactions, operations, expenditures, expansion and other events to differ
materially from those expressed or implied in such forward-looking statements.
Any such forward-looking statements would be subject to a number of assumptions
regarding, among other things, future economic, competitive and market
conditions generally. Such assumptions would be based on facts and conditions as
they exist at the time such statements are made as well as predictions as to
future facts and conditions, the accurate prediction of which may be difficult
and involve the assessment of events beyond the Company's control. Further, the
Company's business is subject to a number of risks that would affect any such
forward-looking statements. These risks and uncertainties include, but are not
limited to, the ability of the Company to commercialize its technology; product
demand and industry pricing; the ability of the Company to obtain patent
protection for its technology; developments in environmental legislation and
regulation; the ability of the company to obtain future financing on favorable
terms; and other circumstances affecting anticipated revenues and costs. These
risks and uncertainties could cause actual results of the Company to differ
materially from those projected or implied by such forward-looking statements.
ITEM 7. FINANCIAL STATEMENTS
The financial statements are filed at the end of this report and are
incorporated herein by reference.
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
- ------------------------ --- --------------------------------------------
David Walker 48 Director, Chairman of the Board
Lee F. Kulas 45 Director, President and Chief
Executive Officer
Dr. William J. Novick, Jr. 66 Director, Vice President, Chief
Technical Officer
Alvin Zidell 70 Director
Neal Desai, M.D. 50 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.
David Walker was appointed to the Board of Directors on May 2, 1996 and was
appointed Chairman of the Board on May 10, 1997. He represents a group of
investors who have invested in the Company in a private stock offering. He has
been general manager of Sunhaven Farms in Prosser, Washington (a twelve
thousand-acre agricultural operation) for twenty years. Mr. Walker has a degree
in economics from Brigham Young University.
Lee F. Kulas has been President, Chief Executive Officer, and a Director since
April 1997. Mr. Kulas was formerly President and CEO of BioWave Research, Inc.,
a development stage biotechnology corporation involved in medical sterilization.
Previously, Mr. Kulas had been President, CEO and Director of ADACHI (USA),
Inc., a USA based trading company engaged in developing distribution
relationships, product development and acquisitions for its Japanese parent
company. Prior to joining ADACHI (USA), Mr. Kulas was the founder, President and
CEO of Arterial Vascular Engineering, (NASDAQ:AVEI), a start-up medical
production venture located in Santa Rosa, California, which was recently
acquired by Medtronic Inc. Mr. Kulas has over twenty years' experience in
management, marketing, sales, business development, and start-up ventures, and
has broad based experience in medical technology and business domestically and
internationally.
Dr. William J. Novick, Jr. has over thirty years' experience in the
pharmaceutical industry. Dr. Novick received his doctoral degree from Duke
University in Physiology-Pharmacology with a minor in Biochemistry. For 23
years, Dr. Novick has held position of increasing responsibility with
Hoechst-Roussel Pharmaceuticals, Inc. Prior to his retirement in 1993, Dr.
Novick was Senior Director, International Products Development for ten years. He
has been cited in 64 publications, where he was named as principal author in 12
of these. Additionally, Dr. Novick is named in 11 patens. Dr. Novick has
lectured in various medical schools throughout the United States and Puerto
Rico, and internationally in the Soviet Union, India, Italy, France, Germany,
and England. Dr. Novick has also consulted on various projects and research for
Johnson & Johnson, Fuji Pharmaceuticals, Forrest Labs, Roussel-UCLAF, Paris,
Park Davis, Apex Pharmaceuticals, and Pfizer. In addition to his duties as the
Company's Chief Technical Officer, Dr. Novick chairs the Medical Scientific
Advisory Board.
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.
Neal Desai, M.D., is an internist in private practice in Burbank, California. Dr
Desai is a diplomat on the American Board of Internal Medicine and is affiliated
with several local hospitals in the Burbank California area. Dr. Desai has
served as a Director on several hospital Boards and review committees during his
medical career of 25 years. Dr. Desai brings to the Board medical expertise as
the Company progresses toward human clinical trials of its technologies and
resultant products.
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 1998 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
- ---------------------- --------- -------- -------- -------------
Lee F. Kulas Fiscal 98 -0- -0- $120,000 (1)
President and Chief Fiscal 97 -0- -0- $90,000 (1)
Executive Officer Fiscal 96 N/A N/A N/A
William Novick Fiscal 98 -0- -0- $60,000 (2)
Chief Technical Fiscal 97 -0- -0- $40,000 (2)
Officer Fiscal 96 N/A N/A N/A
Marlin Toombs Fiscal 98 -0- -0- $60,000 (3)
Vice President of Fiscal 97 -0- -0- $60,000 (3)
Investor Relations Fiscal 96 -0- -0- $60,000 (3)
and Secretary
(resigned)
(1) During 1997 and 1998, Mr. Kulas accrued salary of $90,000 and $120,000
respectively which was not paid by the company.
(2) During 1997 and 1998, Dr. Novick accrued salary of $40,000 and $60,000
respectively which was not paid by the company.
(3) During each of the years of 1996, 1997, and 1998, 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.
The following table sets forth all long-term compensation and all other
compensation for the above-named executive officers for the fiscal years
indicated.
SUMMARY COMPENSATION TABLE CONTINUED
LONG-TERM (OPTIONS/SARS) AND ALL OTHER COMPENSATION
All Other
Name and Position Year Options/SARS Compensation
- --------------------- --------- --------------- ------------------
Lee F. Kulas Fiscal 98 2,000,000 None (1)
President and Chief Fiscal 97 0 None
Executive Officer Fiscal 96 N/A None
William Novick Fiscal 98 200,000 None
Chief Technical Fiscal 97 150,000 None
Officer Fiscal 96 N/A
Marlin Toombs Fiscal 98 0 None
Vice President of Fiscal 97 0 None
Investor Relations Fiscal 96 535,000 None
(resigned)
(1) In addition to the options granted above to Mr. Kulas, the Company has
granted Mr. Kulas an option for 600,000 shares of stock and agreed to waive the
option price to compensate Mr. Kulas for expenses he incurred on behalf of the
Company. Mr. Kulas exercised these options in December 1998.
COMPENSATION OF DIRECTORS
The Company has no standard arrangements to compensate directors of the Company.
The compensation previously described for Marlin Toombs in the section captioned
"Executive Compensation" includes compensation for his services as a director of
the Company.
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, 1999 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, 1998, 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 or warrant 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 29,320,625 which includes 26,373,625 shares outstanding on March
31, 1998 plus all shares represented by options or warrants 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
- ----------------------------- -------------------- ----------
David Walker
Director
c/o Medical Discoveries, Inc. 91,538 0.31%
Lee Kulas
Director/President
c/o Medical Discoveries, Inc. 2,600,000 8.87%
Alvin Zidell
Director
c/o Medical Discoveries, Inc. 1,377,000 (1) (2) 3.54%
William Novick, Jr.
Director/Vice President
c/o Medical Discoveries, Inc. 350,000 1.19%
Neal Desai, M.D.
Director
c/o Medical Discoveries, Inc. 166,666 0.57%
Directors and Executive Officers
as a Group (7 persons) 4,605,704 15.71%
(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
three individuals 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: 296,500 shares owned directly; 437,500 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
Not applicable.
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)
(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 Form 8-K, dated
October 12, 1995, to which it was originally filed as "Exhibit 10.1."
(4) These exhibits are incorporated by reference to the Company'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 since the previous 10KSB/a filing.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Medical Discoveries, Inc.
/s/ Lee Kulas
----------------------
Lee Kulas, President
Date: April 16, 1999
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signatures Capacity in Which Signed Date
- ------------------------- ----------------------------------- ------------------
/s/ Scott Wood Chief Financial Officer April 16, 1999
- ----------------------
Scott Wood
<PAGE>
MEDICAL DISCOVERIES, INC.
Consolidated Financial Statements
December 31, 1998 and 1997
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Medical Discoveries, Inc.
We have audited the accompanying consolidated balance sheet of Medical
Discoveries, Inc. and Subsidiary, (a development stage company) as of December
31, 1998 and 1997, and the related statements of operations, stockholders'
deficit and cash flows for the two years ended December 31, 1998 and cumulative
amounts since inception. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Medical Discoveries,
Inc. and Subsidiary, (a development stage company) as of December 31, 1998 and
1997, and the results of their operations and their cash flows for the two years
then ended and cumulative amounts since inception in conformity with generally
accepted accounting principles.
The accompanying consolidated 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 consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
TANNER + Co.
Salt Lake City, Utah
March 6, 1999
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheet
December 31,
- ----------------------------------------------------------------------------------------------------------
1998 1997
----------------------------------
Assets
<S> <C> <C>
Current assets:
Cash $ 84,847 $ 764
Accounts receivable 2,716 -
Inventory 158,225 -
Current portion of note receivable - related party - 30,586
Prepaid expenses 10,973 10,869
----------------------------------
Total current assets 256,761 42,219
----------------------------------
Furniture and equipment 108,521 72,304
Less accumulated depreciation (39,610) (23,507)
----------------------------------
Net furniture and equipment 68,911 48,797
Other assets 1,409 3,160
----------------------------------
Total assets $ 327,081 $ 94,176
----------------------------------
- ----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 1,368,392 $ 916,734
Accrued expenses 75,154 14,360
Current maturities of notes payable 191,717 102,591
Current maturities of convertible notes payable 250,983 291,700
----------------------------------
Total current liabilities 1,886,246 1,325,385
----------------------------------
Commitments and contingencies - -
Stockholders' deficit:
Common stock - no par value, authorized 100,000,000 shares, 26,373,625
shares and 22,970,297 shares issued
and outstanding in 1998 and 1997, respectively 9,661,250 6,507,317
Accumulated deficit (11,107,915) (7,626,026)
Subscription receivables (112,500) (112,500)
----------------------------------
Total stockholders' deficit (1,559,165) (1,231,209)
----------------------------------
$ 327,081 $ 94,176
----------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Consolidated Statement of Operations
- ----------------------------------------------------------------------------------------------------------
Cumulative
Amounts
Since
November 20,
Years Ended December 31, 1991 (Date of
-----------------------------------
1998 1997 Inception)
-----------------------------------------------------
<S> <C> <C> <C>
Revenues
Product revenue and fees $ 18,409 $ - $ 126,609
Interest 2,515 5,829 23,406
-----------------------------------------------------
Total revenue 20,924 5,829 150,015
-----------------------------------------------------
Expenses
Cost of sales 7,750 - 7,750
License - - 1,001,500
Research and development 415,415 149,820 2,272,291
General and administrative 3,028,063 619,671 7,617,520
Interest 51,585 68,100 194,828
-----------------------------------------------------
Total expenses 3,502,813 837,591 11,093,889
-----------------------------------------------------
Loss before income taxes and
extraordinary item (3,481,889) (831,762) (10,943,874)
Income taxes - - -
Forgiveness of debt net of $-0-,
income taxes - - 1,235,536
-----------------------------------------------------
Net loss $ (3,481,889) $ (831,762) $ (9,708,338)
-----------------------------------------------------
Gain loss per share
Continuing operations $ (.14) $ (.04) $ (.58)
Extraordinary item - .00 .06
-----------------------------------------------------
Net loss per share $ (.14) $ (.04) $ (.52)
-----------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Consolidated Stement of Stockholders Deficit
- --------------------------------------------------------------------------------------------------------------
Accumu- Sub-
Common Stock lated scription
-----------------------------
Shares Amount Deficit Receivables Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Consolidated Stement of Stockholders Deficit
Continued
- --------------------------------------------------------------------------------------------------------------
Accumu- Sub-
Common Stock lated scription
-----------------------------
Shares Amount Deficit Receivables Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Consolidated Stement of Stockholders Deficit
Continued
- --------------------------------------------------------------------------------------------------------------
Accumu- Sub-
Common Stock lated scription
-----------------------------
Shares Amount Deficit Receivables Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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)
Common stock issued for
services and interest 12,500 3,625 - - 3,625
Common stock issued for cash 311,538 135,000 - 60,000 195,000
Common stock issued in
settlement of contract 800,000 200,000 - - 200,000
Common stock issued from
exercise of options 87,836 21,959 - - 21,959
Common stock issued for
conversion of notes payable 100,000 25,000 - - 25,000
Net loss - - (831,762) - (831,762)
--------------------------------------------------------------------------
Balance, December 31, 1997 22,970,297 6,507,317 (7,626,026) (112,500) (1,231,209)
Common stock issued for cash 2,236,928 650,000 - - 650,000
Common stock issued for debt 283,400 56,680 - - 56,680
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Consolidated Stement of Stockholders Deficit
Continued
- --------------------------------------------------------------------------------------------------------------
Accumu- Sub-
Common Stock lated scription
----------------------------
Shares Amount Deficit Receivables Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common stock options issued - 2,336,303 - - 2,336,303
for services
Common stock issued for
services 683,000 110,750 - - 110,750
Common stock issued from
exercise of warrants 200,000 200 - - 200
Net loss - - (3,481,889) - (3,481,889)
--------------------------------------------------------------------------
Balance, December 31, 1998 26,373,625 $ 9,661,250 $ (11,107,915) $ (112,500) $ (1,559,165)
--------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Consolidated Statement of Cash Flows
- ----------------------------------------------------------------------------------------------------------
Cumulative
Amounts
since
November 20,
Years Ended December 31, 1991 (Date of
-----------------------------------
1998 1997 Inception)
-----------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,481,889) $ (831,762) $ (9,708,338)
Adjustments to reconcile net loss to
net cash used in operating activities:
Common stock options issued for
services 2,336,303 - 2,336,303
Common stock issued for services,
license, and litigation 110,750 203,625 3,529,986
Reduction of legal costs - - (130,000)
Depreciation 16,103 7,326 41,069
Loss on disposal of property and
equipment - 24,034 30,364
Gain on debt restructuring - - (1,235,536)
Write-off of receivables (2,716) - 193,965
Increase in receivables (104) - (10,245)
Increase in inventory (158,225) - (158,225)
Increase in prepaid
expenses (90) (10,973)
(Increase) decrease in other assets 1,751 (1,990) (1,409)
Increase (decrease) in:
Accounts payable 451,658 246,568 1,212,483
Accrued expenses 60,794 (11,679) 96,635
-----------------------------------------------------
Net cash used in
operating activities (665,575) (363,968) (3,813,921)
-----------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (36,217) (22,107) (132,184)
Payments received on note receivable 30,586 46,785 130,000
-----------------------------------------------------
Net cash provided by (used in)
investing activities (5,631) 24,678 (2,184)
-----------------------------------------------------
Cash flows from financing activities:
Payments of convertible notes payable (40,717) - (40,717)
Increase in notes payable 145,806 101,000 246,806
Payments of notes payable - (3,212) (6,570)
Increase in convertible note payable - - 316,700
Contributed equity - - 131,374
Common stock issued for cash 650,200 216,959 3,253,359
-----------------------------------------------------
Net cash provided by
financing activities 755,289 314,747 3,900,952
-----------------------------------------------------
7
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Consolidated Statement of Cash Flows
Continued
- ----------------------------------------------------------------------------------------------------------
Cumulative
Amounts
since
November 20,
Years Ended December 31, 1991 (Date of
-----------------------------------
1998 1997 Inception)
-----------------------------------------------------
<S> <C> <C> <C>
Net (decrease) increase in cash 84,083 (24,543) 84,847
Cash, beginning of period 764 25,307 -
-----------------------------------------------------
Cash, end of period $ 84,847 $ 764 $ 84,847
-----------------------------------------------------
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
In 1998, the Company converted $56,680 of obligations into 283,400 shares of
common stock.
In 1997, the Company converted a $25,000 note into 100,000 shares of common
stock.
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.
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
8
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Consolidated Statement of Cash Flows
Continued
- --------------------------------------------------------------------------------
Actual amounts paid for interest and income taxes are as follows:
Cumulative
Amounts
since
November 20,
1991 (Date of
1998 1997 Inception)
-----------------------------------------------------
Interest $ 21,816 $ 36,806 $ 58,858
-----------------------------------------------------
Income taxes $ - $ - $ -
-----------------------------------------------------
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
9
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Organization and Presentation
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.
On October 22, 1998 the Company formed a wholly-owned subsidiary MDI HealthCare
Systems, Inc. (MDIHC). The financial statements reflect MDI for all periods
presented and MDIHC since October 22, 1998. All material intercompany
transactions have been eliminated.
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.
Inventory
Inventory is recorded at cost on the first in first out (FIFO) method.
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.
- --------------------------------------------------------------------------------
10
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Continued
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.
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 significant
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, 1998.
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 1997 financial statements have been reclassified in order
to conform to the 1998 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 antiviral treatments for
infectious diseases, skin cleansing products 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 losses in the development of the product.
- --------------------------------------------------------------------------------
11
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Going Concern
Continued
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, sales of product from its technology and licensing its
technology.
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 note had a balance of $30,586 at December 31, 1997 and
was paid in full during 1998.
- --------------------------------------------------------------------------------
12
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
4. Notes Payable
The Company has the following notes payable at December 31,:
1998 1997
-----------------------------------
Notes payable to shareholders
which are currently due and in
default. Interest is at 12%. The
notes are unsecured $ 101,000$ 101,000
Notes payable to officer of the
Company which are due on
demand. Interest is at 12%. The
notes are unsecured 90,717 -
Note payable to a company requiring
monthly payments of $260 including
interest at an implied rate of
9% secured by equipment - 1,591
-----------------------------------
$ 191,717$ 102,591
-----------------------------------
5. Convertiblec Notes Payable
The Company has $291,700 at December 31, 1998 and 1997 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.
- --------------------------------------------------------------------------------
13
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
5. Convertible Notes Payable
Continued
During 1998, the Company made payments directly to certain beneficiaries of the
Trust. Those payments aggregate $40,717 during 1998 and have been presented in
the consolidated financial statements as a reduction of the convertible notes
payable.
6. Related Party Transactions
During 1997, the Company settled allegations made by a former officer of the
Company where in the Company issued 800,000 shares of the Company's common stock
to settle the allegations. (see Note 12).
At December 31, 1998 and 1997, the Company had accounts payable to officers and
directors totaling $766,750 and $218,500 for services performed and cost
incurred in behalf of the Company, respectively.
7. Income Taxes
The provision for income taxes for the years ended December 31, 1998 and 1997,
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
---------------------------------
1998 1997 Inception)
--------------------------------------------------
Federal income tax
benefit at statutory
rate $ 1,184,000 $ 274,000 $ 3,260,000
Change in valuation
allowance (1,184,000) (274,000) (3,260,000)
--------------------------------------------------
$ - $ - $ -
--------------------------------------------------
- --------------------------------------------------------------------------------
14
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Income Taxes
Continued
The net timing differences for deferred income tax assets are as follows:
1998 1997
-----------------------------------
Net operating loss carryforward $ 2,290,000 $ 2,086,000
Stock options 794,000 -
Accrued compensation 261,000 75,000
Valuation allowance (3,345,000) (2,161,000)
-----------------------------------
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 $6,735,000 which
can be utilized to offset future earnings of the Company. The Company also has
available approximately $80,000 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 2012.
Should the Company experience a change of ownership the utilization of net
operating losses could be reduced.
8. 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 1996 was $673,486 with the aggregate gain totaling
$1,235,536.
- --------------------------------------------------------------------------------
15
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. 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 and
warrants to certain officers and shareholders of the Company to purchase shares
of the Company's common stock. A schedule of the options and warrants is as
follows:
Number of Warrant and
Warrants and Option Price
Options Per Share
-----------------------------------
Outstanding at January 1, 1997 4,362,382 $ .25 to 3.00
Granted 6,075,000 $ .25 to 5.00
Exercised (87,836) $ .25
Expired (569,328) $ .25 to 1.00
-----------------------------------
Outstanding at December 31, 1997 9,780,218
Granted 5,943,741 $ .15 to .75
Exercised (1,166,400 $ .20 to .25
Expired (5,120,000 $ .25 to 5.00
-----------------------------------
Outstanding at December 31, 1998 9,437,559 $ .15 to 3.00
-----------------------------------
- --------------------------------------------------------------------------------
16
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Stock Options
Continued
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 1997 and 1996
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,
-----------------------------------
1998 1997
-----------------------------------
Net loss - as reported $ (3,481,889) $ (831,762)
Net loss - pro forma $ (4,236,225) $ (2,600,339)
Loss per share - as reported $ (.14) $ (.04)
Loss per share - pro forma $ (.17) $ (.12)
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,
-----------------------------------
1998 1997
-----------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 142.2% 142.5%
Risk-free interest rate 5.0% 5.5%
Expected life of options 10 years 3-10 years
-----------------------------------
The weighted average fair value of options granted during 1998 and 1997 are $.52
and $.30, respectively.
- --------------------------------------------------------------------------------
17
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Stock Options
Continued
The following table summarized information about fixed stock options outstanding
at December 31, 1998 :
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 12/31/98 (Years) Price 12/31/98 Price
- --------------------------------------------------------------------------------
$.15 to .25 3,398,000 2.4 $ .26 3,398,000 $ .26
.50 to 1.00 3,446,341 1.0 .79 3,446,341 .79
3.00 2,593,218 0.3 3.00 2,593,218 3.00
- --------------------------------------------------------------------------------
$.15 to 3.00 9,437,559 0.78 $ 1.20 9,437,559 $ 1.20
- --------------------------------------------------------------------------------
10. Loss Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128) "Earnings Per Share," which
requires companies to present basic earnings per share (EPS) and diluted
earnings per share, instead of the primary and fully diluted EPS that was
previously required. The new standard also requires additional informational
disclosures, and makes certain modifications to the previously applicable EPS
calculations defined in Accounting Principles Board No. 15. The new standard is
required to be adopted by all public companies for reporting periods ending
after December 15, 1997, and requires restatement of EPS for all prior periods
reported. During the year ended December 31, 1997, the Company adopted this
standard.
- --------------------------------------------------------------------------------
18
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Loss Per Share
Continued
Loss per share information in accordance with SFAS 128 is as follows:
Year Ended December 31, 1998
-----------------------------------------------
Loss Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------------------
Net loss $ (3,481,889)
Less preferred stock
dividends
----------------
Basic EPS
Loss available to
common stockholders (3,481,889) 24,283,000 $ (.14)
--------------
Effect of Dilutive Securities
Stock options - -
---------------------------------
Diluted EPS
Loss available to common
stockholders plus assumed
conversions $ (3,481,889) 24,283,000 $ (.14)
-----------------------------------------------
Year Ended December 31, 1997
-----------------------------------------------
Loss Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------------------
Net loss $ (831,762)
Less preferred stock
dividends -
----------------
Basic EPS
Loss available to
common stockholders (831,762) 22,206,000 $ (.04)
--------------
Effect of Dilutive Securities
Stock options - -
---------------------------------
Diluted EPS
Loss available to common
stockholders plus assumed
conversions $ (831,762) 22,206,000 $ (.04)
-----------------------------------------------
- --------------------------------------------------------------------------------
19
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Loss Per Share
Continued
Cumulative Amounts Since
November 20, 1991
-----------------------------------------------
Loss Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------------------
Net loss $ (9,708,338)
Less preferred stock
dividends
----------------
Basic EPS
Loss available to
common stockholders (9,708,338) 18,817,000 $ (.52)
--------------
Effect of Dilutive Securities
Stock options - -
---------------------------------
Diluted EPS
Loss available to common
stockholders plus assumed
conversions $ (9,708,338) 18,817,000 $ (.52)
-----------------------------------------------
11. Commitments
The Company leases its office facility and previous office facility under
operating leases The leases require monthly payments of $900 through April 2000.
Approximate future commitments under these leases are as follows:
Year Amount
-----------------
1999 $ 10,800
2000 3,600
-----------------
$ 14,400
-----------------
Annual rent expense totaled approximately $10,000 for the years ended December
31, 1998 and 1997.
- --------------------------------------------------------------------------------
20
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
12. Settlement of Contract
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 to raise capital. The corresponding subscription receivable was
also canceled. The Company, in 1997, resolved the dispute with the former
officer and issued 800,000 shares of the Company's common stock in full
satisfaction.
13. Recently Issued Accounting Statements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. The Company believes that the
adoption of SFAS 133 will not have any material effect on the financial
statements of the Company.
- --------------------------------------------------------------------------------
21
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MEDICAL
DISCOVERIES, INC. FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 84,847
<SECURITIES> 0
<RECEIVABLES> 2,716
<ALLOWANCES> 0
<INVENTORY> 158,225
<CURRENT-ASSETS> 256,761
<PP&E> 108,521
<DEPRECIATION> 39,610
<TOTAL-ASSETS> 327,081
<CURRENT-LIABILITIES> 1,886,246
<BONDS> 0
0
0
<COMMON> 9,661,250
<OTHER-SE> (11,220,415)
<TOTAL-LIABILITY-AND-EQUITY> 327,081
<SALES> 18,409
<TOTAL-REVENUES> 20,924
<CGS> 7,750
<TOTAL-COSTS> 3,520,813
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51,585
<INCOME-PRETAX> (3,481,889)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,481,889)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,481,889)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
