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, 1999
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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.)
1800 South West Temple, Suite 304, Salt Lake City, Utah 84115
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (801) 463-9311
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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 revenues totaling $ 19,830 from operations during the fiscal
year ended December 31, 1999.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant (24,807,921 shares) is approximately $3,100,990. The aggregate market
value has been computed by reference to the average bid and asked prices of such
stock ($0.125 per share) as of April 28, 2000 (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 April 28,
2000 was 26,656,959.
PART I
ITEM 1. BUSINESS OVERVIEW
This annual report contains a number of forward-looking statements, including,
without limitation, statements referring to: future research efforts,
competition, government regulation, and funding efforts. Any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects," "intends" and similar expressions
are intended to identify forward-looking statements, although not all
forward-looking statements contain these words.
There are a number of important factors that could cause actual events or the
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, those set
forth in this report. The Company does not assume any obligation to update any
forward-looking statements made herein.
The Company has made every effort to address Y2K issues in its internal systems
and with its suppliers. The Company has completed the transition into the year
2000 without any noticeable events related to Y2K compliance or system problems.
As of March 30, 2000, the Company had not identified, nor was aware of, any
material Year 2000 issues.
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. The Company
has extended its core technology to preliminary investigations of a wide variety
of "functional waters" 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 1999 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 therapy of scars.
The Company remains committed to its pursuit of establishing MDI-P as an
effective anti-bacterial, anti-viral and anti-fungal pharmaceutical for in-vitro
and in-vivo applications and to developing MDI-P as an effective liquid chemical
sterilant for the sterilization of surgical instruments and as its base
business.
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.
RECENT DEVELOPMENTS
In October 1999, the Company signed a letter of intent with an outside
investment group. The letter provides for a due diligence investigation. As part
of the due diligence efforts discussed below, the Company borrowed $76,000 to
maintain operations. If these funds are exhausted before due diligence
investigations are completed, the Company will seek additional debt from the
funding group. If MDI completes due diligence investigations successfully, MDI
and the investment group will form a joint venture to sell MDI-HCS products. The
Company plans for the joint venture to generate cash for further development of
MDI-P. MDI has also initiated discussions with the investment group for a direct
investment in MDI. Under the terms of the joint venture, the investment group
will provide funds of $750,000 to the joint venture and will extend a $150,000
line of credit to MDI (of which the Company has previously drawn $76,000). MDI
will assign all rights it owns in HCS products to the joint venture. MDI will
own 42 percent of the joint venture. The investment group will receive
25,000,000 shares of MDI stock.
THE PRODUCT
The Company's product is referred to as MDI-P. MDI-P stands for "Medical
Discoveries, Inc.-Pharmaceutical." In the 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 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.
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.
Function water 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 seven 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.
"Method 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, 1998. 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, 1998. This is a patent on the product MDI-P
produced by the Company's technology.
"Electrically Hydrolyzed Salines As Microbicides", issued March 24, 1998
"System and Method for Electrolyzing Fluids for use as Antimicorbial Agents",
issued December 28, 1999
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, 1998 and 1999 the Company spent $ 415,415 and $ 376,481
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 is 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. In the future, as funds allow, the Company will also focus its
research on the use of MDI-P as a sterilizing agent for dental and medical
instruments.
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 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 considerably less than the time required for the approval of a
"new drug" because extensive clinical data is not required.
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.
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. Lee Kulas, who has served as a director and as the Company's interim
president and CEO since May 1997, resigned as president and CEO to pursue other
interests. Me. Kulas subsequently resigned as a director on December 31, 1999.
His position as director has not been filled on the board. The Company is
currently conducting a search for president and CEO. In April 2000, the board
appointed Mr. Scott Wood, currently serving as CFO, to the position of interim
president until a search was completed for a permanent president. The officers
of the Company are William J. Novick, Ph.D., Vice President and Chief Technical
Officer, and Mr. Scott Wood, interim President and Chief Financial Officer.
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
2000, given an appropriate level of funding, the Company will begin to pay
appropriate current and accrued salaries to its officers.
ITEM 2. PROPERTIES
The Company's principal place of business is located in a small commercial
office space at 1800 South West Temple, Suite 304, Salt Lake City, Utah 84116.
The Company is currently sub-leasing space. The lease is currently on a
month-to-month basis. This space is currently used as corporate headquarters.
ITEM 3. LEGAL PROCEEDINGS
NO LEGAL PROCEEDINGS. The Company is not currently involved in any legal
proceedings.
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, 1999
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First quarter 0.62 0.30
Second quarter 0.35 0.18
Third quarter 0.21 0.05
Fourth quarter 0.17 0.05
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
On December 31, 1999, 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 1999 COMPARED TO FISCAL YEAR 1998.
The Company had revenue of $19,832 as the result of initial commercialization of
selected products from its newly formed, wholly owned, consumer products
subsidiary MDI HealthCare Systems, Inc in 1999 compared to $18,409 revenue from
products in 1998. The Company had interest revenue of $-0- in 1999 compared to
$2,515 in 1998 due to capital raised by the Company. Funds raised in equity
offerings were placed in low-risk interest-bearing accounts until needed by the
Company. The Company spent $376,481 on R&D in 1999 compared to $415,415 in 1998.
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 (IND). G&A costs were $575,834 in 1999 compared to
$3,028,063 in 1998. The decrease in G&A costs resulted from expenses in 1998
relating to services received where common stock was issued. The Company had
interest expense of $51,585 in 1998 compared to $95,041 in 1999.
LIQUIDITY. The Company's net working capital position (current assets less
current liabilities) increased to negative $2,356,233 in 1999 from negative
$1,629,047, due primarily to increased short-term borrowings and accrued
expenses. Of the Company's $2,465,755 in current liabilities, approximately
$250,000 results from legal services, approximately $264,000 results from dated
payables from a predecessor company, $356,000 results from short-term borrowings
from shareholders, and approximately $820,000 results from payables to officers
and employees. None of these four groups 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 1999:
In July 1999, the Company issued 13,334 shares of common stock in exchange for
$2,000, with shares priced at $0.15 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 1999 and an additional $50,000 in the first quarter of
2000 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, 1999, accrued interest is estimated at approximately $59,000.
TECHNOLOGY UPDATE
Pharmaceutical Drug Discovery and Development Activities
Due to the Company's cash situation, it has currently suspended testing efforts.
As soon as funds become available, the Company will reinstate its testing
program.
Over-the-counter, Cosmeceuticals Product Development Activities
In 1999 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 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, an innovative topical silicone gel, and Aqua-Cleanse, 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 Face Mask, enables the Company to enter the
anti-aging, facial beautification market.
The Company
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 which MDI seeks to establish cooperative
alliances.
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
Dr. William J. Novick, Jr. 66 Director, Vice President, Chief
Technical Officer
Alvin Zidell 68 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, 1998. He represents a group of
investors who recently 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.
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 that 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., joined as a Director in January of 1999. Dr. Desai is a
Diplomat of the American Board of Internal Medicine, and is currently in private
practice in Burbank, California. Dr. Desai is the owner of Victory Olive Medical
Group and has been practicing Internal Medicine in Burbank, California since
1980. He has extensive experience in Internal Medicine and enjoys an excellent
reputation in the community for his professional experience and his experience
in business and financial dealings. Dr. Desai is one of the founding members and
a shareholder of Lakeside IPA, one of the largest IPAs in southern California.
He has served as Chairman on numerous boards within the TMMC physician
partnership including the Finance Committee and Business Development Committee.
Dr. Desai is also active in community charity events and is a member of the BCH
Foundation. In addition, Dr. Desai is the founder and president of a successful
investment club with 34 members, which has accumulated over $2.5 million in
assets with nearly a 40%, annualized return.
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 1999 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 99 -0- -0- $50,000 (1)
President and Chief Fiscal 98 -0- -0- $120,000 (1)
Executive Officer Fiscal 97 -0- -0- $90,000 (1)
William Novick Fiscal 98 -0- -0- $40,000 (2)
Chief Technical Fiscal 97 -0- -0- $60,000 (2)
Officer Fiscal 96 -0- -0- $40,000 (2)
(1) All compensation payable to Mr. Kulas has been accrued and has not been paid
by the Company. Mr. Kulas separated from the Company in October 1999 and
resigned as a director on December 31, 1999.
(2) All compensation payable to Dr. Novick has been accrued and has not been
paid by the Company.
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 99 0 None (1)
President and Chief Fiscal 98 0 None (1)
Executive Officer Fiscal 97 0 None
William Novick Fiscal 99 None
Chief Technical Fiscal 98 200,000 None
Officer Fiscal 97 150,000 None
(1) Previously, 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
expense 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, 1999, 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 27,803,959 which includes 26,373,625 shares outstanding on March
31, 1999 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. 191,538 0.70%
Alvin Zidell
Director
c/o Medical Discoveries, Inc. 967,000 (1) (2) 3.56%
William Novick, Jr.
Director/Vice President
c/o Medical Discoveries, Inc. 350,000 1.29%
Neal Desai, M.D.
Director
c/o Medical Discoveries, Inc. 266,666 0.98%
Scott Wood
Officer
c/o Medical Discoveries, Inc. 324,500 1.19%
Directors and Executive Officers
as a Group (6 persons) 2,099,704 7.72%
(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; 297,500 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 during the since the
previous 10KSB/a filing.
<PAGE>
MEDICAL DISCOVERIES, INC.
Consolidated Financial Statements
December 31, 1999 and 1998
<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, 1999 and 1998, and the related statements of operations, stockholders'
deficit and cash flows for the two years ended December 31, 1999 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, 1999 and
1998, 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, a deficit of working capital, 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.
Salt Lake City, Utah
March 20, 2000
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheet
December 31,
- ----------------------------------------------------------------------------------------------------------
1999 1998
----------------------------------
Assets
Current assets:
<S> <C> <C>
Cash $ 10,152 $ 84,847
Accounts receivable - 2,716
Inventory 99,370 158,225
Prepaid expenses - 10,973
----------------------------------
Total current assets 109,522 256,761
----------------------------------
Furniture and equipment 108,521 108,521
Less accumulated depreciation (79,328) (39,610)
----------------------------------
Net furniture and equipment 29,193 68,911
----------------------------------
Other assets 900 1,409
----------------------------------
Total assets $ 139,615 $ 327,081
----------------------------------
- ----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 1,780,811 $ 1,368,392
Accrued expenses 108,154 75,154
Current maturities of notes payable 375,807 191,717
Convertible notes payable 200,983 250,983
----------------------------------
Total current liabilities 2,465,755 1,886,246
----------------------------------
Notes payable 12,000 -
----------------------------------
Commitments and contingencies - -
Stockholders' deficit:
Common stock - no par value, authorized 100,000,000
shares, 26,656,959 shares and 26,373,625 shares
issued and outstanding in 1999 and 1998, respectively 9,913,837 9,661,250
Accumulated deficit (12,139,477) (11,107,915)
Subscription receivables (112,500) (112,500)
----------------------------------
Total stockholders' deficit (2,338,140) (1,559,165)
----------------------------------
Total liabilities and stockholders' deficit $ 139,615 $ 327,081
----------------------------------
- ----------------------------------------------------------------------------------------------------------
accompanying notes to consolidated financial statements. 1
</TABLE>
<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
-----------------------------------
1999 1998 Inception)
-----------------------------------------------------
Revenues
<S> <C> <C> <C>
Product revenue and fees $ 19,832 $ 18,409 $ 126,609
Interest - 2,515 23,406
-----------------------------------------------------
Total revenue 19,832 20,924 150,015
-----------------------------------------------------
Expenses
Cost of sales 4,038 7,750 7,750
Research and development 376,481 415,415 2,272,291
General and administrative 575,834 3,028,063 7,860,586
License - - 1,001,500
Interest 95,041 51,585 194,828
-----------------------------------------------------
Total expenses 1,051,394 3,502,813 11,336,955
-----------------------------------------------------
Loss before income taxes and
extraordinary item (1,031,562) (3,481,889) (11,186,940)
Income taxes - - -
Forgiveness of debt net of $-0-,
income taxes - - 1,235,536
-----------------------------------------------------
Net loss $ (1,031,562) $ (3,481,889) $ (9,951,404)
-----------------------------------------------------
Loss per share basic and diluted:
Continuing operations $ (.04) $ (.14) $ (.57)
Extraordinary item - - .06
-----------------------------------------------------
Net loss per share $ (.04) $ (.14) $ (.51)
-----------------------------------------------------
Weighted average common shares -
basic and diluted 26,515,000 24,283,000 19,672,000
-----------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Consolidated Statement 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 11,750,000 135,000 (1,399,577) - (1,264,577)
(Date of Inception)
Common stock issued for 200,000 100,000 - - 100,000
cash
Common stock issued for
services 500,000 250,000 - - 250,000
Common stock issued for 40,000 60,000 - - 60,000
cash
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 542,917 528,500 - - 528,500
cash
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Consolidated Statement 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 617,237 739,500 - - 739,500
cash
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 424,732 283,200 - - 283,200
cash
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 962,868 635,000 - (60,000) 575,000
cash
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Consolidated Statement 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 311,538 135,000 - 60,000 195,000
cash
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 2,236,928 650,000 - - 650,000
cash
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 Statement 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
for services - 2,336,303 - - 2,336,303
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)
Common stock issued for:
Interest 100,000 30,000 - - 30,000
Cash 13,334 2,000 - - 2,000
Options exercised and
waived option price 170,000 24,000 - - 24,000
Options issued for services - 196,587 - - 196,587
Net loss - - (1,031,562) - (1,031,562)
--------------------------------------------------------------------------
Balance, December 31, 1999 26,656,959 $ 9,913,837 $ (12,139,477) $ (112,500) $ (2,338,140)
--------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
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
-----------------------------------
1999 1998 Inception)
-----------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (1,031,562) $ (3,481,889) $ (10,739,900)
Adjustments to reconcile net loss to
net cash used in operating activities:
Common stock options issued for
services 220,587 2,336,303 2,556,890
Common stock issued for services,
expenses, and litigation 30,000 110,750 3,559,986
Reduction of legal costs - - (130,000)
Depreciation 39,718 16,103 80,787
Loss on disposal of property and
equipment - - 30,364
Gain on debt restructuring - - (1,235,536)
Write-off of receivables - (2,716) 193,965
(Increase) decrease in receivables 2,716 (104) (7,529)
(Increase) decrease in inventory 58,855 (158,225) (99,370)
Decrease in prepaid expenses 10,973 - -
(Increase) decrease in other assets 509 1,751 (900)
Increase (decrease) in:
Accounts payable 412,419 451,658 1,624,902
Accrued expenses 33,000 60,794 129,635
-----------------------------------------------------
Net cash used in
operating activities (222,785) (665,575) (4,036,706)
-----------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment - (36,217) (132,184)
Payments received on note receivable - 30,586 130,000
-----------------------------------------------------
Net cash used in
investing activities - (5,631) (2,184)
-----------------------------------------------------
Cash flows from financing activities:
Payments of convertible notes payable (50,000) (40,717) (90,717)
Increase in notes payable 286,807 145,806 533,613
Payments of notes payable (90,717) - (97,287)
Increase in convertible note payable - - 316,700
Contributed equity - - 131,374
Common stock issued for cash 2,000 650,200 3,255,359
-----------------------------------------------------
Net cash provided by
financing activities 148,090 755,289 4,049,042
-----------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Cash Flows
Continued
- ----------------------------------------------------------------------------------------------------------
Cumulative
Amounts
Since
November 20,
Years Ended December 31, 1991 (Date of
-----------------------------------
1999 1998 Inception)
-----------------------------------------------------
<S> <C> <C> <C>
Net (decrease) increase in cash (74,695) 84,083 10,152
Cash, beginning of period 84,847 764 -
-----------------------------------------------------
Cash, end of period $ 10,152 $ 84,847 $ 10,152
-----------------------------------------------------
</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.
Actual amounts paid for interest and income taxes are as follows:
Cumulative
Amounts
Since
November 20,
1991 (Date of
1999 1998 Inception)
-----------------------------------------------------
Interest $ 30,000 $ 21,816 $ 88,852
-----------------------------------------------------
Income taxes $ - $ - $ -
-----------------------------------------------------
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
8
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
1. Summary of Organization and Presentation
Significant Medical Discoveries, Inc. (the Company) was organized under
Accounting the laws of the state of Utah on November 20, 1991, date of
Policies 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.
- --------------------------------------------------------------------------------
9
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Summary of Furniture and Equipment
Significant Furniture and equipment are carried at cost. Depreciation is
Accounting computed using the straight-line method over 3 to 7 years.
Policies When assets are retired or otherwise disposed of, the cost
Continued 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.
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, 1999.
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.
- --------------------------------------------------------------------------------
9
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Summary of Reclassifications
Significant Certain amounts in the 1998 financial statements have been
Accounting reclassified in order to conform to the 1999 presentation.
Policies
Continued
2. Going The accompanying financial statements have been prepared
Concern 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, 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.
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.
- --------------------------------------------------------------------------------
9
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
3. Notes The Company has the following notes payable at December 31,:
Payable
1999 1998
---------------------
Notes payable to shareholders
which are currently due and in
default. Interest is at 12%. The
notes are unsecured $ 355,807 $ 101,000
Note payable to a company
requiring monthly payments of
$2,174 including interest at an
implied rate of 12%, unsecured 32,000 --
Notes payable to officer of the
Company which are due on
demand. Interest is at 12%. The
notes are unsecured -- 90,717
---------------------
$ 387,807 $ 191,717
---------------------
Current maturities of notes payable are as follows:
Year Amount
-----------------
2000 $ 375,807
2001 12,000
-----------------
$ 387,807
-----------------
4. Convertible The Company has convertible notes payable to a trust. The
Notes notes have an interest rate of 12%, have a term of three
Payable years and were due in 1998. Each $1,000 note is convertible
into 667 shares of the Company's common stock.
- --------------------------------------------------------------------------------
9
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
4. Convertible During 1999 and 1998, the Company made payments directly to
Notes certain beneficiaries of the Trust. Those payments aggregate
Payable $50,000 and $40,717 during 1999 and 1998, respectively, and
Continued have been presented in the consolidated financial statements
as a reduction of the convertible notes payable.
5. Related At December 31, 1999 and 1998, the Company had accounts
Party payable to current and former officers and directors
Transactions totaling $1,152,450 and $766,750, respectively, for services
performed and costs incurred in behalf of the Company. The
Company has notes payable to stockholders of the Company
aggregating $355,807 and $101,000 at December 31, 1999 and
1998, respectively. Interest expense recorded on these notes
was approximately $49,000 and $12,000 for 1998 and 1998,
respectively.
6. Income The provision for income taxes for the years ended December
Taxes 31, 1999 and 1998, 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:
<TABLE>
<CAPTION>
Cumulative
Amounts
Since
November
20, 1991
Years Ended December 31, (Date of
---------------------------------
1999 1998 Inception)
--------------------------------------------------
<S> <C> <C> <C>
Federal income tax
benefit at statutory
rate $ 350,000 $ 1,184,000 $ 3,508,000
Change in valuation
allowance (350,000) (1,184,000) (3,508,000)
--------------------------------------------------
$ - $ - $ -
--------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
9
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Income The net timing differences for deferred income tax assets
Taxes are as follows:
Continued
<TABLE>
1999 1998
-----------------------------------
<S> <C> <C>
Net operating loss carryforward $ 2,466,000 $ 2,205,000
Stock options 823,000 794,000
Accrued compensation 321,000 261,000
Valuation allowance (3,610,000) 3,260,000
-----------------------------------
Net deferred tax asset $ - $ -
-----------------------------------
</TABLE>
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 $7,260,000 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 2014. Should the Company experience a change of
ownership the utilization of net operating losses could be
reduced.
- --------------------------------------------------------------------------------
9
s
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Stock The Company has an incentive stock option plan wherein
Options 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:
<TABLE>
<CAPTION>
Number of Warrant and
Warrants and Option Price
Options Per Share
----------------------------------
<S> <C> <C>
Outstanding at January 1, 1998 9,780,218 $ .25 to 3.00
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
Granted 1,880,900 .15 to .25
Exercised (170,000) .15 to .20
Expired (2,996,118) .15 to 3.00
Forfeited (2,508,000) .25 to 1.00
----------------------------------
Outstanding at December 31, 1999 5,644,341 $ .25 to .25
----------------------------------
</TABLE>
- --------------------------------------------------------------------------------
9
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Stock In October 1995, the Financial Accounting Standards Board
Options issued Statement of financial Accounting Standards No. 123,
Continued "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:
<TABLE>
December 31,
-----------------------------------
1999 1998
-----------------------------------
<S> <C> <C>
Net loss - as reported $ (1,031,562) $ (3,481,889)
Net loss - pro forma $ (1,111,682) $ (4,236,225)
Loss per share - as reported $ (.04) $ (.14)
Loss per share - pro forma $ (.04) $ (.17)
</TABLE>
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:
<TABLE>
December 31,
-----------------------------------
1999 1998
-----------------------------------
<S> <C> <C>
Expected dividend yield $ - $ -
Expected stock price volatility 121% 142.2%
Risk-free interest rate 5% 5.0%
Expected life of options 1 to 3 years 10 years
-----------------------------------
</TABLE>
The weighted average fair value of options granted during
1999 and 1998 are $.08 and $.52, respectively.
- --------------------------------------------------------------------------------
9
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Stock The following table summarized information about fixed stock
Options options outstanding at December 31, 1999:
Continued
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .25 2,656,000 2.4 $ .25 2,656,000 $ .25
.50 to 1.00 2,828,341 1.0 .76 2,828,341 .76
3.00 160,000 0.3 3.00 160,000 3.00
--------------------------------------------------------------------------------
$.15 to 3.00 5,644,341 1.70 $ .58 5,644,341 $ .58
--------------------------------------------------------------------------------
</TABLE>
8. 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
-----------------
2000 $ 3,600
-----------------
Annual rent expense totaled approximately $10,000 for the
years ended December 31, 1999 and 1998.
- --------------------------------------------------------------------------------
9
<PAGE>
MEDICAL DISCOVERIES, INC. and SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9 . Recently In June 1998, the FASB issued SFAS No. 133, "Accounting for
Issued Derivative Instruments and Hedging Activities." This
Accounting statement establishes accounting and reporting standards for
Statements 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.
- --------------------------------------------------------------------------------
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 10,152
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 99,370
<CURRENT-ASSETS> 109,522
<PP&E> 108,521
<DEPRECIATION> 79,328
<TOTAL-ASSETS> 139,615
<CURRENT-LIABILITIES> 2,465,755
<BONDS> 12,000
0
0
<COMMON> 9,913,837
<OTHER-SE> (12,251,977)
<TOTAL-LIABILITY-AND-EQUITY> 139,615
<SALES> 19,832
<TOTAL-REVENUES> 19,832
<CGS> 4,038
<TOTAL-COSTS> 956,353
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95,041
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,031,562)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,031,562)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
