UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of The
Securities Exchange Act of 1934
For the Quarter Ended March 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission File Number 0-21441
MEDISYS TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Utah 72-1216734
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
144 Napoleon Street, Baton Rouge, Louisiana, 70802
(address of principal executive officers)
Issuer's telephone number: (225) 343-8024
9624 Brookline Avenue, Baton Rouge, Louisiana, 70809
(former address of principal executive officers)
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the
issuers classes of common equity, as of the latest practicable
date:
Class Outstanding as of March 31, 1999
Common Stock, 34,995,711
Par Value $0.0005 per value
Transitional Small Business Disclosure Format (check one):
Yes [ ]; No [ X ]
MEDISYS TECHNOLOGIES, INC.
TABLE OF CONTENTS
Page
PART I
Item 1. Financial Statements . . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis or Plan
of Operation . . . . . . . . . . . . . . . . . . . . 21
PART II
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . 24
Item 2. Changes in Securities and Use of Proceeds. . . . . . 24
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . 25
Item 4. Submissions of Matters to a Vote of Security
Holders. . . . . . . . . . . . . . . . . . . . . . . 25
Item 5. Other Information. . . . . . . . . . . . . . . . . . 25
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 25
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 26
PART I
Item 1. Financial Statements
The following unaudited Financial Statements for the period
ended March 31, 1999, have been prepared by the Company.
Medisys Technologies, Inc.
(a Development Stage Company)
Consolidated Financial Statements
March 31, 1999 and December 31, 1998
MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
March 31, December 31,
1999 1998
CURRENT ASSETS (Unaudited)
Cash $ 94,657 $ 75,483
Accounts receivable, net (Note 1) 352,226 294,949
Due from related party - 18,546
Inventory (Note 1) 453,362 432,706
Prepaid expenses 23,289 25,658
Total Current Assets 923,534 847,342
FIXED ASSETS
Computers and equipment 73,129 72,061
Machinery and equipment 293,850 293,850
Leasehold improvements 65,445 65,445
Furniture and equipment 49,249 49,249
Vehicles 19,915 19,915
Accumulated depreciation (248,081) (226,970)
Total Fixed Assets 253,507 273,550
OTHER ASSETS
Security deposits 45,765 41,765
Patent and trademark costs, net (Note 1) 471,763 462,069
Total Other Assets 517,528 503,834
TOTAL ASSETS $ 1,694,569 $ 1,624,726
MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
March 31, December 31,
1999 1998
(Unaudited)
CURRENT LIABILITIES
Accounts payable $ 775,788 $ 591,688
Accrued expenses 131,659 95,819
Due to related party 14,432 -
Customer deposits - 116,200
Payable - shareholders (Note 2) 114,062 111,817
Notes payable, current portion (Note 8) 46,618 46,622
Line of credit (Note 4) 250,000 250,000
Notes payable - shareholders (Note 6) 30,222 30,222
Debentures payable - related parties (Note 3) 280,000 395,000
Total Current Liabilities 1,642,781 1,637,368
LONG-TERM DEBT
Notes payable (Note 8) 58,978 70,750
Total Long-Term Debt 58,978 70,750
TOTAL LIABILITIES 1,701,759 1,708,118
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock: 100,000,000 shares authorized
of $0.0005 par value, 34,995,711 and 34,009,757
shares issued and outstanding, respectively 17,498 17,004
Additional paid-in capital 8,404,105 8,122,813
Stock subscriptions receivable (Note 5) (175,000) (175,000)
Accumulated deficit (8,253,793) (8,048,209)
Total Stockholders' Equity (Deficit) (7,190) (83,392)
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 1,694,569 $ 1,624,726
MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended
March 31,
1999 1998
REVENUES $ 718,885 $ 19,993
COST OF GOODS SOLD 503,224 4,561
GROSS MARGIN 215,661 15,432
OPERATING EXPENSES
Product research and development 42,651 75,625
Depreciation and amortization 21,433 3,957
General and administrative 320,204 139,811
Total Operating Expenses 384,288 219,393
OPERATING LOSS (168,627) (203,961)
OTHER INCOME (EXPENSES)
Interest income 252 -
Interest expense (37,209) (1,128)
Total Other Income (Expenses) (36,957) (1,128)
LOSS BEFORE INCOME TAXES (205,584) (205,089)
INCOME TAXES - -
NET LOSS $ (205,584) $ (205,089)
BASIC LOSS PER SHARE OF COMMON STOCK (Note 1) $ (0.01) $ (0.02)
FULLY DILUTED LOSS PER SHARE (Note 1) $ (0.01) $ (0.01)
MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Additional Stock
Common Stock Paid-In Subscription Accumulated
Shares Amount Capital Receivable Deficit
Balance, December 31,
1997 13,120,810 $ 6,560 $6,373,102 $(175,000) $(6,795,708)
Common stock issued to
acquire Phillips Pharmatech
Labs, Inc. (Note 1) 15,602,147 7,801 25,687 - -
Common stock issued in
satisfaction of accrued
wages and accounts
payables 2,448,767 1,224 978,284 - -
Common stock issued for
services rendered 881,255 441 307,843 - -
Common stock issued for
cash at $0.25 per share 546,666 273 169,727 - -
Common stock issued for
interest expense 760,112 380 268,495 - -
Additional common stock
issued for cash received
in prior year 650,000 325 (325) - -
Net loss for the year ended
December 31, 1998 - - - - (1,252,501)
Balance, December 31,
1998 34,009,757 17,004 8,122,813 (175,000) (8,048,209)
Common stock issued
for services rendered
(unaudited) 144,712 73 48,713 - -
Common stock issued for
accrued wages (unaudited) 168,235 84 59,916 - -
Common stock issued
for interest expense
(unaudited) 84,118 42 29,958 - -
Issuance of common stock from
exercise of common stock
warrants at $1.125 per share
(unaudited) 8,889 5 9,995 - -
Common stock issued for cash at
$0.15 per share (unaudited) 120,000 60 17,940 - -
Common stock issued to convert
debentures at $0.25 per share
(unaudited) 460,000 230 114,770 - -
Net loss for the three months
ended March 31,1999
(unaudited) - - - - (205,584)
Balance, March 31, 1999
(unaudited) 34,995,711 $17,498 $8,404,105 $(175,000) $(8,253,793)
MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended
March 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (205,584) $ (205,089)
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Common stock issued for services and interest 78,786 -
Depreciation and amortization 21,433 3,957
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (57,277) 3,563
(Increase) decrease in due from related party 18,546 (2,500)
(Increase) decrease in inventory (20,656) 14,511
(Increase) decrease in prepaid expenses 2,369 -
(Increase) decrease in deposits (4,000) -
Increase (decrease) in accounts payable 184,100 (21,406)
Increase (decrease) in accrued expenses 95,840 121,262
Increase (decrease) in due to related party 14,432 -
Increase (decrease) in customer deposits (116,200) -
Net Cash Provided (Used) by Operating Activities 11,789 (85,702)
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in patent costs (10,016) (462)
Purchase of fixed assets (1,068) -
Net Cash (Used) by Investing Activities (11,084) (462)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from stockholders 2,245 97,000
Payment on notes payable (11,776) (1,278)
Issuance of common stock 28,000 -
Net Cash Provided by Financing Activities $ 18,469 $ 95,722
MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
For the Three Months Ended
March 31,
1999 1998
NET INCREASE (DECREASE) CASH AND
CASH EQUIVALENTS $ 19,174 $ 9,558
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 75,483 2,178
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 94,657 $ 11,736
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
CASH PAID FOR
Income taxes $ - $ -
Interest $ 7,157 $ -
NON-CASH FINANCING ACTIVITIES
Stock issued for services and interest expense $ 138,786 $ -
Stock issued for accrued wages $ 60,000 $ -
MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999 and December 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
a. Business Organization
The Company was incorporated on March 17, 1983 under the
laws of the State of Utah. The Company subsequently ceased
its original business activity in 1985 and thereafter
primarily investigated and sought new business
opportunities and was reclassified as a development stage
company until December of 1998 when it acquired Phillips
Pharmatech Labs, Inc.
The Company has a wholly-owned subsidiary Medisys
Technologies, Inc. (Medisys) which was incorporated in the
State of Louisiana, on January 21, 1991, for the purpose
of developing a device for the assistance of childbirth
under a patent which was applied for in May 1990 and
granted on June 15, 1992.
Medisys has been classified as a development stage company
since all activities to date have been related to the
development of a childbirth assistance device as well as
other medical devices.
On August 6, 1992 the Company acquired all of the
outstanding common stock of Medisys. For accounting
purposes the acquisition has been treated as a
recapitalization of Medisys with Medisys as the acquirer.
Phillips Pharmatech Labs, Inc. (Phillips) was organized
under the laws of the State of Florida on December 13,
1994. It was incorporated for the purpose of engaging in
the manufacturing and bottling of health supplements and
other health related and natural products.
On December 22, 1998, the Company completed an acquisition
and share exchange agreement whereby Medisys issued
15,602,147 shares of its common stock in exchange for all
of the outstanding common stock of Phillips. The shares
issued by Medisys represented 50% of the total shares of
the Company's common stock issued and outstanding
immediately following the acquisition. The acquisition is
accounted for as a purchase of Phillips.
b. Fixed Assets
Fixed assets are stated at cost less accumulated
depreciation. Expenditures for small tools, ordinary
maintenance and repairs are charged to operations as
incurred. Major additions and improvements are
capitalized. Depreciation is computed using the straight-
line method over estimated useful lives as follows:
Leasehold improvements 39 years
Furniture and fixtures 5 years
Computers and equipment 5 years
Machinery and equipment 5 to 7 years
Vehicles 5 years
Depreciation expense for the three months ended March 31, 1999 was $21,111.
MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999 and December 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
c. Patent and Trademark Costs
The capitalized costs of obtaining patents consists of
legal fees and associated filing costs. These patent costs
will be amortized over the shorter of their legal or useful
lives. The Company has numerous patents in various stages
of development and the application process. Several
patents have been granted but are being developed further
in a continuation-in-part (CIP) status until the
development of a commercial product is complete, the
related product has received FDA (Food and Drug
Administration) approval and is in a marketable condition
ready for sale. Once patents have been granted, FDA
approval obtained, and sales commenced, no further costs
associated with the patent are capitalized. As of December
31, 1998, the Company did have one patented product for
which sales have commenced with the related costs being
amortized over the estimated useful life (17 years) of the
patent. Management has determined that estimated future
cash flows from this product will be sufficient to recover
the capitalized basis of the costs associated with that
patent. The other patents for which costs have been
capitalized are considered to have continued viability
according to management of the Company with no significant
events occurring which would impair the value of the
capitalized costs associated with the individual patents.
The Company has also incurred costs associated with
obtaining trademarks related to the Company's existing and
future products. Those costs have been capitalized and
will be amortized over the estimated useful life of the
trademarks once approval has been received and usage
begins. These trademarks are considered to have continued
viability according to management with no significant
events occurring which would impair the value of the
capitalized costs associated with the trademarks.
Patent and trademark costs incurred are as follows:
March 31, December 31,
1999 1998
(Unaudited)
Patents $ 464,095 $ 454,079
Trademarks 11,961 11,961
Subtotal 476,056 466,040
Less accumulated amortization (4,293) (3,971)
Totals $ 471,763 $ 462,069
Amortization expense for the three months ended March 31,
1999 was $322.
d. Accounting Method
The Company's financial statements are prepared using the
accrual method of accounting. The Company has elected a
December 31 year end.
MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999 and December 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
e. Cash and Cash Equivalents
For purposes of financial statement presentation, the
Company considers all highly liquid investments with a
maturity of three months or less, from the date of
purchase, to be cash equivalents.
f. Income Taxes
No provision for federal income taxes has been made at
December 31, 1998 due to accumulated operating losses. The
Company has accumulated approximately $8,048,209 of net
operating losses as of December 31, 1998, which may be used
to reduce taxable income and income taxes in future years.
The use of these losses to reduce future income taxes will
depend on the generation of sufficient taxable income prior
to the expiration of the net operating loss carryforwards.
The carryforwards expire as follows:
Year of Net Operating
Expiration Loss
2006 $ 8,667
2007 269,551
2008 802,338
2009 960,966
2010 1,162,772
2011 1,498,725
2012 2,092,689
2013 1,252,501
$ 8,048,209
In the event of certain changes in control of the Company,
there will be an annual limitation on the amount of net
operating loss carryforwards which can be used. The
potential tax benefits of the net operating loss
carryforwards have been offset by a valuation allowance of
the same amount.
g. Principles of Consolidation
The consolidated financial statements include the accounts
of Medisys Technologies, Inc. (parent), Medisys
Technologies, Inc. (Medisys) a wholly owned subsidiary and
Phillips Pharmatech, Inc. (Phillips) a wholly-owned
subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
h. Revenue Recognition
Revenue is recognized upon shipment of goods to the
customer.
MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
March 31, 1999 and December 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
i. Inventory
Inventory is carried at the lower of cost or market value
using the first-in, first-out method. Inventory consisted
of the following:
March 31, December 31,
1999 1998
(Unaudited)
Raw materials $ 425,694 $ 400,185
Work-in-process 15,362 27,236
Finished goods 12,306 5,285
Totals $ 453,362 $ 432,706
j. Basic and Fully Diluted Loss Per Share
The basic loss per share of common stock is based on the
weighted average number of shares issued and outstanding
during the period of the consolidated financial statements.
Shares to be issued from warrants and options and the
conversion of debentures have been included in the
computation of the fully diluted loss per share.
k. Advertising
The Company follows the policy of charging the costs of
advertising to expense as incurred.
l. Credit Risks
The Company maintains its cash accounts primarily in two
banks in Louisiana and Florida. The Federal Deposit
Insurance Corporation insures accounts to $100,000. The
Company's accounts occasionally exceed the insured amount.
m. 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.
n. Accounts Receivable
Accounts receivable are shown net of the allowance for
doubtful accounts of $153,199 at March 31, 1999 and
December 31, 1998.
MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999 and December 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
o. Change in Accounting Principle
The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share" during the
year ended December 31, 1998. In accordance with SFAS No.
128, diluted earnings per share must be calculated when an
entity has convertible securities, warrants, options, and
other securities that represent potential common shares.
The purpose of calculating diluted earnings (loss) per
share is to show (on a pro forma basis) per share earnings
or losses assuming the exercise or conversion of all
securities that are exercisable or convertible into common
stock and that would either dilute or not affect basic EPS.
As permitted by SFAS No. 128, the Company has retroactively
applied the provisions of this new standard by showing the
fully diluted loss per common share for all years
presented.
p. Unaudited Consolidated Financial Statements
The accompanying unaudited consolidated financial
statements include all of the adjustment which, in the
opinion of management, are necessary for a fair
presentation. Such adjustments are of a normal, recurring
nature.
NOTE 2 - PAYABLE - SHAREHOLDERS
From time to time the Company receives advances from
certain shareholders for the purpose of providing funds for
the Company's operating expenditures. The Company has also
advanced funds to shareholders. The outstanding balances
of these advances fluctuates during the year and do not
have specific repayment terms although the advances are
generally considered to be due or payable on demand.
Accordingly, the related receivable or payable has been
reflected as current in the accompanying consolidated
financial statements. At March 31, 1999 and December 31,
1998, the balance payable to shareholders totaled $114,062
and $111,817, respectively.
NOTE 3 - DEBENTURES PAYABLE - RELATED PARTIES
The Company also has notes payable (debentures) to various
shareholders in the aggregate of $280,000 and $395,000 at
March 31, 1999 and December 31, 1998, respectively. The
notes bear interest at 10% per annum, are unsecured and are
due in 1999. In February 1999, the Company issued 460,000
shares of its common stock in payment of $115,000 of
debentures payable. The shares were issued on the basis of
four shares for each dollar of debt.
MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999 and December 31, 1998
NOTE 4 - LINE OF CREDIT
An analysis of the line of credit with Nations Bank as of
March 31, 1999 and December 31, 1998 is shown below:
Available
Line of Debt
Credit Outstanding
$ 250,000 $ 250,000
Borrowings under the line of credit are guaranteed by the
Company's inventory and accounts receivable. Interest
accrues at the bank's prime rate plus 2.75% (9.50% at
December 31, 1998).
NOTE 5 - STOCK SUBSCRIPTION RECEIVABLE
During 1996, the Company issued 100,000 shares of
restricted common stock upon the exercise of common stock
warrants representing the same number of shares, having an
exercise price of $1.75 per share. Payment for the common
stock was made with a non-interest bearing four year
promissory note. The related shares are being held by the
Company as collateral for the promissory note. The shares
have been reflected as issued and outstanding with a
corresponding $175,000 stock subscription receivable
reflected as a reduction of stockholders' equity.
NOTE 6 - NOTES PAYABLE - SHAREHOLDERS
Notes payable - shareholders consisted of the following:
March 31, Decmber 31,
1999 1998
(Unaudited)
Note payable to Richard L. Apel, unsecured,
dated November 2, 1993 at 8%; principal and
interest delinquent since August 18, 1994. $ 12,500 $ 12,500
Note payable to Cynthia F. Vatz, unsecured,
dated October 19, 1993 at 8%; principal and
interest delinquent since August 18, 1994. 12,500 12,500
Note payable to Abraham B. and Edele Eckstein,
unsecured, dated March 1, 1995 which replaces
an October 6, 1993 note at 8%; monthly payments
of $500 commencing March 1, 1995 with a single
balloon payment for the remaining balance plus
interest delinquent since March 1, 1996. 5,222 5,222
Totals 30,222 30,222
Less current portion (30,222) (30,222)
Total long-term portion $ - $ -
MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999 and December 31, 1998
NOTE 6 - NOTES PAYABLE - SHAREHOLDERS (Continued)
These notes payable are technically in default. None of
the related note holders have demanded repayment and the
Company is in the process of negotiating repayment terms.
The Company continues to pay the $500 monthly installments
on the note payable to Mr. and Mrs. Eckstein and continues
to accrue interest on these and all outstanding notes
payable. 8,572 shares of common stock were issued in
partial payment of the Eckstein note in 1997.
NOTE 7 - COMMON STOCK
During 1998, the Company issued 2,448,767 shares of its
common stock in satisfaction for accrued wages and accounts
payable of $979,508. The Company issued 457,056 shares of
its common stock for services. The services were valued at
the trading price of the common stock on the date the
shares were issued. The Company issued 100,000 shares of
its common stock for cash at $0.25 per share. The Company
issued an additional 650,000 shares of its common stock to
a shareholder to prevent dilution of the shares previously
issued to the shareholder.
During 1999, the Company issued 144,712 shares of its
common stock for services. The services were valued at the
trading price of the common stock on the date the shares
were issued. The Company issued 8,889 shares of its common
stock from the exercise of common stock warrants at $1.125
per share. The Company issued 120,000 shares of its common
stock for cash at $0.15 per share. The Company issued
168,235 shares of its common stock in payment of accrued
wages at approximately $0.35 per share or $60,000.
NOTE 8 - NOTES PAYABLE
Notes payable consisted of the following: March 31, December 31,
1999 1998
(Unaudited)
Note payable to Nations Bank, collateralized by a
vehicle of the Company, interest at 8.99%, principal
and interest payments of $303 are due monthly,
matures on September 11, 2000. $ 4,911 $ 5,865
Note payable to Nations Bank, collateralized by
equipment of the Company, interest at 12.5%,
principal and interest payments of $450 are due
monthly, matures on November 4, 2002. 15,695 16,518
Note payable to Nations Bank, collateralized by
certain assets of the Company, interest at the
bank's prime rate plus 2.25%, interest payments
due monthly along with principal payments of
$3,333, matures on June 12, 2001. 84,990 94,989
Total notes payable 105,596 117,372
Less: current portion (46,618) (46,622)
Long-term notes payable $ 58,978 $ 70,750
MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999 and December 31, 1998
NOTE 8 - NOTES PAYABLE (Continued)
Maturities of notes payable are as follows:
Year Ending
December 31, Amount
1999 $ 46,622
2000 46,608
2001 19,490
2002 4,652
2003 -
2004 and thereafter -
Total $ 117,372
NOTE 9 - COMMITMENTS AND CONTINGENCIES
During 1996, the Company adopted a Simplified Employee
Pension (SEP) Plan. The Plan enables the Company to make
an annual discretionary contribution to be allocated to
employees on a prorata basis according to their
compensation for the year. In addition, employees have the
option to make voluntary Retirement Savings Contributions
in amounts not to exceed 15% of their annual compensation.
The Company elected to not make a contribution for the year
ended December 31, 1998. The Company has no other bonus,
profit sharing or deferred compensation plans for the
benefit of its employees, officers or directors except if
discussed elsewhere.
The Company currently has employment contracts with Edward
P. Sutherland and Kerry Frey whereby they each will receive
salaries of $12,500 per month. The Company also entered
into an independent consulting contract with Gary Alexander
pursuant to which he will receive $5,000 per month.
Any additional compensation to these employees is to be in
the form of an annual cash bonus or the granting of stock
and/or stock options at the discretion of the Board of
Directors not to exceed 50% of their annual compensation.
On March 29, 1995 the Company entered into a contract with
a medical institution to perform a clinical study of the
Company's SofCepts product. The contract required that
payments totaling $247,262 be made by the Company to the
medical institution for testing services. During 1995, the
contract was amended with additional payments to be made
based on services to be performed. The contract was later
terminated before its completion. The Company had made
payments of $265,465 for services performed pursuant to the
contract. The medical institution has claimed an unpaid
balance of $133,326 which the Company disputes. The
Company contends that the services stipulated by the terms
of the contract were not performed by the medical
institution and that no additional amounts are due and
payable related to this contract. No amount has been
accrued in the accompanying consolidated financial
statements related to this transaction. The Company intends
to vigorously contest any further claims with respect to
this contract and believes that the probability that the
Company will be required to make additional payments is
remote.
MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999 and December 31, 1998
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
Phillips currently leases its office on a month-to-month
basis at $3,784 per month. Subsequent to year end,
Phillips purchased the office building and as a result, the
lease was terminated (see Note 13). Phillips also leases
warehouse space at a rate of $3,766 per month though
January 2000.
Medisys entered into a lease agreement with a related party
for its office space located in Louisiana. The lease is
for a period of one year at a rate of $835 per month,
expiring in September 1999.
NOTE 10 - COMMON STOCK WARRANTS
As of December 31, 1998, the Company had outstanding
warrants for the issuance of common stock as follows:
Number of Date Expiration Exercise Estimated
Shares Issued Date Price Proceeds
516,000 1995 1999-2005 $ 1.1250 - $2.6250 $ 1,030,500
2,718,368 1996 1999-2001 $ 1.0000 - $4.2500 6,552,489
977,737 1997 2000-2002 $ 0.6875 - $1.8750 1,188,211
5,582,867 1998 1999-2005 $ 0.2500 - $4.2500 10,273,860
9,794,972 $ 19,045,060
762,000 common stock warrants were issued to current and
former officers, directors and affiliates of the Company
for incurring personal liability for the Company's
indebtedness. The exercise price of these warrants was
equal to the fair market value of the underlying common
stock.
Of the outstanding common stock warrants, 212,500 were
issued to holders of the Company's notes payable as
collateral and also in return for the extension of
repayment terms. In November 1995, 300,000 common stock
warrants were issued to the Company's patent attorney for
deferring payment of legal fees. The exercise price of all
of these warrants was equal to the fair market value of the
underlying common stock on the date the common stock
warrants were granted.
261,000 common stock warrants have been issued in return
for directors of the Company forfeiting their claim to
director fees from prior periods. In addition, officers,
directors and affiliates have been issued a total of
1,172,597 common stock warrants in exchange for common
stock which they surrendered and were issued to an
unrelated entity for their assistance in raising equity
capital for the Company. In both cases, the exercise price
of the warrants was equal to the fair market value of the
related common stock on the date the common stock warrants
were granted.
MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999 and December 31, 1998
NOTE 10 - COMMON STOCK WARRANTS (Continued)
During the period August through December 1997, the Company
issued a total of 23,102 common stock warrants having
exercise prices between $1.00 and $3.50 per share at a time
when the fair market price of the underlying common stock
was $2.75 to $3.50 per share. The aggregate difference
between the exercise price and fair market value of the
common stock totaling $33,454 has been reflected as
professional services with a corresponding charge to
additional paid-in-capital.
All common stock warrants issued in 1998 and 1997 had
exercise prices at or above the trading price of the
shares.
During 1998, the Company conducted a private placement of
its common stock, wherein the purchaser of one share of the
Company's common stock also received a warrant to purchase
one additional share of common stock at $1.25 per share.
The Company issued 912,333 common stock warrants pursuant
to this private placement. The Company also issued
4,670,534 common stock warrants to the stockholders of
Philips pursuant to the acquisition agreement redeemable at
various prices depending on the expiration dates of the
warrants.
NOTE 11 - GOING CONCERN
The Company's consolidated financial statements have been
prepared using generally accepted accounting principles
applicable to a going concern which contemplates the
realization of assets and liquidation of liabilities in the
normal course of business. The Company has incurred
significant losses since inception, relating to its
research and development efforts and has had no significant
operating revenues until the acquisition of Phillips in
December 1998. In prior periods, the Company has had
substantial working capital and stockholders' equity
deficits. In 1998, the Company was able to raise working
capital through the private placement of its common stock.
However, cash flow projections show that the Company's
reserves are not adequate to cover its needs for the
expansion of its research and development projects in 1999.
It is unlikely that the Company can complete these research
and development projects without additional funds. In the
past, the Company has been able to generate sufficient
capital to cover its operating needs and plans to raise
additional capital through a private placement or a public
offering of its common stock or through additional mergers
and acquisitions. The Company also expects to generate
additional revenue from increased product sales including
the products of Phillips.
NOTE 12 - RELATED PARTY TRANSACTIONS
The Company has incurred $30,000 of interest expense to
shareholders during the three months ended March 31, 1999.
This balance is comprised of the issuance of 84,118 shares
of common stock valued at $30,000 for taking stock instead
of cash for payment of their compensation. (See also Notes
2, 3 and 7)
MEDISYS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 1999 and December 31, 1998
NOTE 13 - CONSOLIDATED PROFORMA STATEMENTS OF OPERATIONS
The historical information contained herein has been
consolidated on a proforma basis. The purchase of Phillips
on December 22, 1998 is described in Note 1. The purchase
has been presented as though it were effective January 1,
1998 and 1997. All significant accounting policies for
Phillips are the same as the Company's as defined in
Note 1.
For the Year Ended
December 31, 1998
Proforma Proforma
Medisys Phillips Adjustments Combined
Revenues $ 26,846 $ 2,777,766 $ - $ 2,804,612
Cost of products sold 5,396 1,949,919 - 1,955,315
Gross Margin 21,450 827,847 - 849,297
Product research and development 382,318 - - 382,318
Depreciation and amortization 14,322 66,224 - 80,546
General and administrative 564,543 725,845 - 1,290,388
Total Operating Expenses 961,183 792,069 - 1,753,252
Operating Loss (939,733) 35,778 - (903,955)
Gain on sale of asset 1,475 - - 1,475
Interest expense (312,213) (44,251) - (356,464)
Bad debt expense (2,030) (4,936) - (6,966)
Total Other Income (Expense) (312,768) (49,187) - (361,955)
Net Loss $(1,252,501) $ (13,409) $ - $(1,265,910)
NOTE 14 - SUBSEQUENT EVENT
On March 25, 1999, the Company entered into a formal Letter of
Intent with the shareholders of Health Care Direct Services,
Inc., Direct Distribution U.S.A., Inc. and Gulf Coast Media
Group, Inc. whereby the Company would acquire 100% of the
issued and outstanding stock of these three companies in
exchange for shares of preferred convertible stock of Medisys.
The primary purpose of these three companies are the marketing
of complimentary healthcare products to independent and chain
pharmacies and nutritional supplement stores.
Item 2. Management's Discussion and Analysis or Plan of Operation
Results of Operations
The net loss for the three month period ended March 31, 1999
("first quarter of 1999") increased slightly to $205,584 when
compared to the $205,089 loss for the corresponding 1998 period.
These results reflect the first full fiscal quarter of operations
following the Company's acquisition of Phillips Pharmatec Labs,
Inc. ("Phillips"). The Company's revenues for the first quarter of
1999 increased to $718,885 compared to $19,993 for the
corresponding 1998 period, primarily due to revenues generated by
Phillips. Cost of goods sold rose to $503,224 for the first
quarter of 1999 compared to $4,561 for the first quarter of 1998,
also due to the acquisition of Phillips.
Product research and development costs for the first quarter
of 1999 decreased 44% to $42,651 compared to $75,625 for the
comparable 1998 period, due to a reduction of operating capital and
the corresponding reduction of all expenditures. General and
administrative costs for the first quarter of 1999 were $320,204
compared to $139,811 for the comparable 1998 period, a 129%
increase due to the acquisition of Phillips.
Liquidity and Capital Resources
Historically, the Company's working capital needs have been
satisfied primarily through its financing activities including
private loans and raising capital through the sale of securities.
Working capital as of March 31, 1999 was a negative $719,247
compared to a negative $790,026 at December 31, 1998. This 9%
increase in working capital is attributable to the 25% increase in
cash from $75,483 to $94,657, the 19% increase in accounts
receivable and the 29% decrease in debentures payable related to
the conversion of $115,000 of debt into 460,000 shares of the
Company's common stock during the first quarter of fiscal 1999.
Partially offsetting the increase in working capital was the 37%
increase in accrued expenses primarily representing
deferred salaries.
Net cash provided by operating activities for the first
quarter of 1999 was $11,789 compared to net cash used of $85,702
for the comparable 1998 period. This change is primarily
attributable to the $184,100 increase in accounts payable during
the first quarter of 1999 compared to a $21,406 decrease in the
1998 period, and the issuance of common stock for services valued
at $78,786. The results were partially offset by the $57,277
decrease in accounts receivable for the first quarter of 1999
compared to a $3,563 increase in the 1998 period, and the $116,200
decrease in customer deposits in the 1999 period, related to
deposits required from Phillips customers which were prepaid and
subsequently applied to the invoice.
Net cash used by investing activities was $11,084 for the
first quarter of 1999 compared to $462 for the first quarter of
1998, due primarily to the $11,016 increases in patent costs. Net
cash provided by financing activities during the first quarter of
1999 was $18,469 compared to $95,722 for the comparable 1998
period, primarily due to $97,000 in borrowings from stockholders
during the 1998 period.
The Company is currently technically in default on three notes
payable to various individuals totaling $30,222. One of the three
notes calls for monthly payments of $500 which the Company
continues to pay. Neither of the other two note holders have
demanded repayment and the Company continues to accrue interest on
all outstanding notes payable.
As of March 31, 1999 the Company had total assets of
$1,694,569 and stockholders' deficit of $7,190. In comparison, as
of December 31, 1998 the Company had total assets of $1,624,726 and
total stockholders' deficit of $83,392.
Management believes that the Company has sufficient capital
resources and commitments to fund anticipated operations in 1999.
The acquisition of Phillips Pharmatec has improved the Company's
financial status. Phillips basically funds itself through
operations and management estimates that its current level of
operations require approximately $50,000 in additional operating
capital per month in cash based upon average monthly cash flows
during the fourth quarter of 1998. Unless the Company is able to
substantially increase current sales of its products during early
1999, or is able to raise funds from the sale of corporate debt or
equity securities, or complete its intended mergers or
acquisitions, the Company may encounter a cash flow shortage during
the second quarter of 1999. The Company intends to seek additional
equity or debt capital through private sources and/or a public
offering, although there can be no assurance that the Company could
successfully complete any such offering. As of the date hereof,
the Company has not entered into any firm agreements or
understandings for the raising of capital from public or private
sources. The Company has signed a letter of intent to acquire a
marketing company which has substantial positive cash flow. If
sales revenue from the Company's products under development are not
adequate to fund the Company's future operations and it is unable
to secure financing from the sales of its securities or from
private lenders, the Company could experience additional losses
which could curtail the Company's operations or postpone product
development and expansion plans. The continuation as a going
concern is directly dependent upon the success of its future
operations and ability to obtain additional financing.
Net Operating Loss
The Company has accumulated approximately $8,048,209 of net
operating loss carryforwards as of December 31, 1999, which may be
offset against taxable income and income taxes in future years.
The use of these losses to reduce future income taxes will depend
on the generation of sufficient taxable income prior to the
expiration of the net operating loss carryforwards. The
carry-forwards expire in the year 2013. In the event of certain
changes in control of the Company, there will be an annual
limitation on the amount of net operating loss carryforwards which
can be used. No tax benefit has been reported in the financial
statements for the year ended December 31, 1998 or three month
period ended March 31, 1999 because there is a 50% or greater
chance that the carryforward will not be used. Accordingly, the
potential tax benefit of the loss carryforward is offset by a
valuation allowance of the same amount.
Inflation
In the opinion of management, inflation has not had a material
effect on the operations of the Company.
Recent Developments
In December of 1998, Medisys acquired Phillips Pharmatec Labs,
Inc. ("Phillips") which added revenue and manufacturing capability
to Medisys for some of its patented products and the complimentary
healthcare product lines of Phillips and its customers along with
significant key personnel.
In March of 1999, Medisys signed a letter of intent to acquire
Health Care Direct Services, Inc. and affiliates. Management
believes that this acquisition will add revenue to the Company and
give Medisys the marketing capability necessary to begin
commercialization of many of its proprietary devices and
complimentary health care products of Phillips and its customers.
As of the date hereof, negotiations are still progressing although
no definitive agreement has been entered.
Year 2000
Year 2000 issues may arise if computer programs have been
written using two digits (rather than four) to define the
applicable year. In such case, programs that have time-sensitive
logic may recognize a date using "00" as the year 1900 rather than
the year 2000, which could result in miscalculations or system
failures.
The Company has completed its assessment of the Year 2000
issue and believes that any costs of addressing the issue will not
have a material adverse impact on the Company's financial position.
The Company believes that its existing accounting computer systems
and software will not need to be upgraded to mitigate the Year 2000
issues. The Company has not incurred any costs associated with its
assessment of the Year 2000 problem. In the event that Year 2000
issues impact the Company's accounting operations and other
operations aided by its computer system, the Company believes, as
part of a contingency plan, that it has adequate personnel to
perform those functions manually until such time that any Year 2000
issues are resolved.
The Company believes that third parties with whom it has
material relationships will not materially be affected by the Year
2000 issues as those third parties are relatively small entities
which do not rely heavily on information technology ("IT") systems
and non-IT systems for their operations. However, if the Company
and third parties upon which it relies are unable to address any
Year 2000 issues in a timely manner, it could result in a material
financial risk to the Company, including loss of revenue and
substantial unanticipated costs. Accordingly, the Company plans to
devote all resources required to resolve any significant Year 2000
issues in a timely manner.
Risk Factors and Cautionary Statements
Forward-looking statements in this report are made pursuant to
the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. The Company wishes to advise readers that
actual results may differ substantially from such forward-looking
statements. Forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially
from those expressed in or implied by the statements, including,
but not limited to, the following: the ability of the Company to
secure additional financing, the development of the Company's
existing and new products, the potential market for the Company's
products, competitive factors, and other risks detailed in the
Company's periodic report filings with the Securities and Exchange
Commission.
PART II
Item 1. Legal Proceedings
The Company is not a party to any material pending legal
proceedings and no such action by, or to the best of its knowledge,
against the Company has been threatened.
Item 2. Changes in Securities and Use of Proceeds
During the three month period ended March 31, 1999, the
Company issued an aggregate of 985,954 shares of authorized, but
previously unissued common stock. Of this amount, the Company
issued 144,712 shares to 16 persons in exchange for services
rendered to the Company, 168,235 shares in payment of accrued wages
valued at $60,000, and 84,118 shares in lieu of interest on debt
valued $30,000. Additionally, the Company issued 8,889 shares to
two persons upon the exercise of common stock warrants at $1.125
per share, and 120,000 shares to two persons for cash at $.15 per
share. Also, twelve debenture holders converted their debentures
with a face value of $115,000 into 460,000 shares at $.25 per
share. The Company realized $28,000 in gross proceeds from the
sale of shares for cash and upon the exercise of warrants. These
funds were used for general operating expenses.
With the exception of the conversion of debentures, the
Company relied upon the exemption from registration under the
Securities Act of 1933, as amended (the "Act"), provided by
Section 4(2) of the Act. Shares issued upon conversion of
debentures were issued in reliance upon the exemption provided by
Section 4(9) of the Act.
Item 3. Defaults Upon Senior Securities
This Item is not applicable to the Company.
Item 4. Submissions of Matters to a Vote of Security Holders
This Item is not applicable to the Company.
Item 5. Other Information
This Item is not applicable to the Company.
Item 6. Exhibits and Reports on Form 8-K
On March 26, 1999, the Company filed a report on Form 8-K
reporting under Item 2 the entering into of the Letter of Intent to
acquire Health Care Direct Services, Inc. and affiliates, related
to the acquisition by the Company of Phillips Pharmatec Labs, Inc.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDISYS TECHNOLOGIES, INC.
BY: /S/ Edward P. Sutherland
EDWARD P. SUTHERLAND
Chairman, Chief Executive
Officer, Treasurer and
Director
DATE: May 24, 1999
BY: /S/ Kerry M. Frey
KERRY M. FREY
President, Chief
Operating and
Director
DATE: May 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE MEDISYS
TECHNOLOGIES, INC. FINANCIAL STATEMENTS FOR THE
PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 94,657
<SECURITIES> 0
<RECEIVABLES> 505,425
<ALLOWANCES> 153,199
<INVENTORY> 453,362
<CURRENT-ASSETS> 923,534
<PP&E> 501,588
<DEPRECIATION> 248,081
<TOTAL-ASSETS> 1,694,569
<CURRENT-LIABILITIES> 1,642,781
<BONDS> 58,978
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0
<COMMON> 17,498
<OTHER-SE> 8,404,105
<TOTAL-LIABILITY-AND-EQUITY> 1,694,569
<SALES> 718,885
<TOTAL-REVENUES> 718,885
<CGS> 503,224
<TOTAL-COSTS> 384,288
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,209
<INCOME-PRETAX> (205,584)
<INCOME-TAX> 0
<INCOME-CONTINUING> (205,584)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (205,584)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
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