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 quarterly period ended September 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ___________ to __________
Commission file number 0-12627
MEDICAL DISCOVERIES, INC.
-------------------------
(Exact name of Small Business Issuer as specified in its charter)
Utah 87-0407858
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
738 Aspenwood Lane, Twin Falls, Idaho 83301
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(Address of principal executive offices)
(208) 736-1799
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(Issuer's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 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 issuer's classes
of common equity, as of the latest practicable date: As of November 01, 2001,
there were 33,946,917 shares of the issuer's Common Stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following financial statements are filed with this report:
Condensed Consolidated Balance Sheet as of September 30, 2001,
(unaudited) and December 31, 2000
Condensed Consolidated Statements of Operations for the three-month and
nine-month periods ended September 30, 2001 (unaudited) and September
30, 2000 (unaudited) and cumulative amounts since inception through
September 30, 2001 (unaudited)
Condensed Consolidated Statements of Cash Flows for the three-month and
nine-month periods ended September 30, 2001 (unaudited) and September
30, 2000 (unaudited) and cumulative amounts since inception through
September 30, 2001 (unaudited)
Notes to Unaudited Financial Statements
2
MEDICAL DISCOVERIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
As of September 30, 2001
(Unaudited) and December 31, 2000
September 30, 2001 December 31, 2000
------------------ -----------------
Current assets
Cash $ 6,139 $ 19,781
Current portion of deferred charges 40,968 --
------------ ------------
Total current assets 47,107 19,781
Equipment, at cost, net of accumulated depreciation 1,307 4,614
Deferred charges less current portion 61,465 --
------------ ------------
Total assets $ 109,879 $ 24,395
============ ============
Current liabilities
Accounts payable $ 1,541,477 $ 1,509,679
Accrued interest 281,720 192,716
Current portion of notes payable 551,717 520,807
Convertible notes payable 693,200 193,200
------------ ------------
Total current liabilities 3,068,114 2,416,402
Stockholders' deficit
Escrow receivable (252,300) (384,600)
Common stock, no par value, authorized
100,000,000 shares; 33,946,917 and 32,075,421
shares issued and outstanding at September 30, 2001
and December 31, 2000, respectively 10,756,526 10,413,837
Accumulated deficit (13,462,461) (12,421,244)
------------ ------------
Total stockholders' deficit (2,958,235) (2,392,007)
------------ ------------
$ 109,879 $ 24,395
============ ============
* See notes to consolidated financial statements
3
MEDICAL DISCOVERIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
As of September 30, 2001 (Unaudited) and September 30, 2000 (Unaudited),
and Cumulative Amounts
(Unaudited)
For the Three Months For the Nine Months Since
Ended September 30, Ended September 30, November 20,
---------------------------- ---------------------------- 1991 (Date of
2001 2000 2001 2000 Inception)
------------ ------------ ------------ ------------ ------------
Revenues $ -- $ -- $ -- $ 7,620 $ 134,104
Cost of goods sold -- -- -- 2,511 10,526
------------ ------------ ------------ ------------ ------------
Gross profit -- -- -- 5,109 123,578
Research and development expenses -- -- 132,300 244 2,521,741
Inventory writedown -- 96,859 -- 96,859 96,859
Impairment loss -- 9,709 -- 9,709 9,709
License -- -- -- -- 1,001,500
General and administrative expenses 115,826 27,188 758,354 119,635 8,873,707
------------ ------------ ------------ ------------ ------------
Operating loss (115,826) (133,756) (890,654) (221,338) (12,379,938)
Other income (expense)
Interest income -- -- -- -- 23,406
Other income -- -- -- -- 268,926
Interest expense (60,639) (25,987) (150,563) (55,884) (422,318)
------------ ------------ ------------ ------------ ------------
(60,639) (25,987) (150,563) (55,884) (129,986)
Loss before income taxes and
extraordinary item (176,465) (159,743) (1,041,217) (277,222) (12,509,924)
Income taxes -- -- -- -- --
Forgiveness of debt net of $0 income taxes -- -- -- -- 1,235,536
------------ ------------ ------------ ------------ ------------
Net loss available to shareholders $ (176,465) $ (159,743) $ (1,041,217) $ (277,222) $(11,274,388)
============ ============ ============ ============ ============
Net loss per share
Continuing operations $ (0.01) $ (0.01) $ (0.03) $ (0.01) $ (0.59)
Extraordinary item -- -- -- -- 0.06
------------ ------------ ------------ ------------ ------------
Net loss per share $ (0.01) $ (0.01) $ (0.03) $ (0.01) $ (0.53)
============ ============ ============ ============ ============
Weighted average shares outstanding 33,616,830 26,656,959 32,587,327 26,656,959 21,240,626
* See notes to consolidated financial statements
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MEDICAL DISCOVERIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
As of September 30, 2001 (Unaudited) and September 30, 2000
(Unaudited), and Cumulative Amounts (Unaudited)
Cumulative
Amounts
For the Nine Months Since
Ended September 30, November 20,
----------------------------------- 1991 (Date of
2001 2000 Inception)
------------ ------------ -------------
Cash flows from operating activities
Net loss $ (1,041,217) $ (277,222) $(12,062,884)
Adjustments to reconcile net loss to net
cash used by operating activities
Common stock issued for research costs -- -- 115,400
Common stock options issued for services -- -- 2,556,890
Common stock issued for services, expenses,
and litigation 323,599 -- 3,883,585
Reduction of escrow receivable from
research and development 132,300 -- 132,300
Reduction of legal costs -- -- (130,000)
Notes payable issued for litigation 385,000 -- 385,000
Depreciation 3,307 13,541 98,964
Write-off of subscription receivables -- -- 112,500
Impairment loss on assets -- 9,709 9,709
Loss on disposal of equipment -- -- 30,364
Gain on debt restructuring -- -- (1,235,536)
Write-off of receivables -- -- 193,965
Changes in assets and liabilities
Prepaid expenses (102,433) -- (102,433)
Accounts receivable -- -- (7,529)
Prepaid expenses -- -- --
Other assets -- 900 --
Accounts payable 31,798 6,873 1,385,568
Accrued expenses 89,004 55,884 303,201
------------ ------------ ------------
Net cash used by operating activities (178,642) (90,945) (4,330,936)
Cash flows from investing activities
Purchase of equipment -- -- (132,184)
------------ ------------ ------------
Payments received on note receivable -- -- 130,000
Net cash used by investing activities -- -- (2,184)
Cash flows from financing activities
Contributed equity -- -- 131,374
Issuance of common stock -- -- 3,255,359
Payments on notes payable (85,000) -- (182,287)
Proceeds from notes payable 250,000 83,000 916,613
Payments on convertible notes payable -- -- (98,500)
Proceeds from convertible notes payable -- -- 316,700
------------ ------------ ------------
Net cash provided by financing activities 165,000 83,000 4,339,259
------------ ------------ ------------
Net increase (decrease) in cash (13,642) (7,945) 6,139
Cash, beginning of period 19,781 10,152 --
------------ ------------ ------------
Cash, end of period 6,139 2,207 6,139
============ ============ ============
Supplemental disclosures of cash flow information
Noncash investing and financing activities
Conversion of notes payable to common stock 19,090
* See notes to consolidated financial statements
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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
NOTE 1. UNAUDITED INTERIM FINANCIAL STATEMENTS.
The accompanying unaudited financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, all adjustments and disclosures
necessary to a fair presentation of these financial statements have been
included. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's 2000 Annual
Report on Form 10-KSB for the year ended December 31, 2000, as filed with the
Securities and Exchange Commission. Certain reclassifications and other
corrections for rounding have been made in prior period financial statements to
conform to the current period presentation. The consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All significant inter-company transactions and balances have been
eliminated in consolidation.
NOTE 2. GOING CONCERN CONSIDERATIONS.
The Company's recurring losses from the Company's development-stage activities
in current and prior years raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments to reflect the possible effects on the recoverability and
classification of assets or amounts and classifications of liabilities that may
result from the possible inability of the Company to continue as a going
concern. The Company is attempting to raise additional capital to sustain
operations. However, there can be no assurance that these plans will be
successful.
NOTE 3. COMMITMENT REGARDING PEREGRINE STOCK.
Peregrine Properties, LLC, a Utah limited liability company ("Peregrine"), has
entered into an agreement to provide $500,000 to the Company to fund testing and
research steps necessary to continue development of MDI-P. The studies will be
funded through an escrow agent. As of September 30, 2001, the Company has
deposited in escrow a single certificate for 5.5 million shares of common stock
for these purposes. As of September 30, 2001, Peregrine had funded $250,800 to
the escrow, of which $247,700 had been disbursed and recorded as research and
development expense on the financial statements of the Company. Of this amount,
$132,300 has been disbursed and recorded as research and development expense in
the nine months ended September 30, 2001. The remaining $252,300 to be expended
under the agreement has been recorded on the balance sheet in equity under the
caption "escrow receivable." As expenditures are made from the escrow for
research and development, the expenses will be recorded on the books of the
Company with a corresponding reduction in the escrow receivable. Upon completion
of the studies, the escrow agent will disburse the 5.5 million shares to
Peregrine and will disburse the research results to the Company.
NOTE 4. CONTINGENCIES REGARDING HARVEST JV AGREEMENT.
As of June 28, 2000, the Company, an outside investment group (Harvest Group,
L.L.C. ("Harvest")), and Hydromedics, Inc. ("Hydromedics"), a corporation
formed by Harvest and two other investors, entered into a so-called JV
Agreement (the "JV Agreement"). The JV Agreement contemplated that the Company
would (1) assign to Hydromedics its rights to certain skin care products, (2)
issue 13,000,000 shares to Harvest, and (3) seek to appoint two Harvest
representatives to the Company's Board of directors. In return, Hydromedics
would (1) issue 2,000,000 of its shares to the Company, (2) assume certain
obligations of the Company associated with the skin care products to be
transferred, and (3) market the skin care products. As for Harvest's
obligations, the JV Agreement contemplated that Harvest would (1) assign to the
Company 20,000,000 of its previously-owned Hydromedics shares and (2) make
available to the Company a $150,000 line of credit. Finally, the JV Agreement
contemplated certain post-closing obligations including (1) Harvest making an
additional investment in Hydromedics in exchange for 30,000,000 shares of
Hydromedics stock, (2) Harvest assigning 20,000,000 of such shares to the
Company, and (3) the Company issuing an additional 12,000,000 shares of its
stock to Harvest. In total, the transactions contemplated by the JV Agreement
would result in the Company owning approximately 40% of Hydromedics and Harvest
owning 25,000,000 new shares of the Company's stock (which, if issued, would
equal approximately 44% of the Company's total outstanding stock).
The JV Agreement provided that the transactions contemplated above were to have
closed on June 28, 2000. However, no closing occurred on June 28, 2000 or since
and the Company has taken the position that the transactions contemplated by
the JV Agreement have not been consummated. Months later, Harvest and
Hydromedics attempted to tender partial performance under the JV Agreement. The
Company rejected that tender and has taken the position that the JV Agreement
is no longer enforceable by any of the parties because no party timely or
completely tendered performance.
On December 26, 2000, Harvest demanded arbitration of the dispute pursuant to
terms of the JV Agreement. In its arbitration demand, Harvest sought specific
performance of the JV Agreement or damages in excess of $1 million.
On August 10, 2001, the Company and Harvest reached a tentative, mediated
settlement. The tentative settlement, which has not yet been documented,
provides, among other terms, for the Company to deliver to Harvest a
non-interest bearing, convertible promissory note in the principal sum of
$500,000 due in approximately nine months. Under the tentative agreement, the
note and other terms will be in full satisfaction of all current amounts owing
on loans from Harvest and all of Harvest's other claims against the Company.
The parties are continuing to negotiate a definitive agreement. Once a
definitive agreement has been reached, more specific details will be disclosed.
In the meantime, the Company has accrued the $500,000 as a payable as of
September 30, 2001 in lieu of the $115,000 in notes payable that would
otherwise have been accrued.
If for whatever reason the tentative settlement falls through and a court or
arbitrator were to force the Company and the other parties to specifically
perform the transactions contemplated by the JV Agreement, the Company's
shareholders could suffer significant dilution because the value of the
consideration the Company will receive under the JV Agreement could be
substantially less than the current market value of the stock to be issued to
Harvest. In addition, specific performance could result in significant changes
to the Company's financial statements, especially if the JV Agreement were
deemed to have been consummated during a period already reported. The financial
statements do not include any adjustments or reserves to reflect the possible
effects of such a result.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The purpose of this section is to discuss and analyze the Company's consolidated
financial condition, liquidity and capital resources, and results of operations.
This analysis should be read in conjunction with the financial statements and
notes thereto at pages 2 through 7 and Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2000 (the "2000 10-KSB").
This section contains certain forward-looking statements that involve risks and
uncertainties, including statements regarding the Company's plans, objectives,
goals, strategies and financial performance. The Company's actual
6
results could differ materially from the results anticipated in these
forward-looking statements as a result of factors set forth under "Cautionary
Statement for Forward-Looking Information" below and elsewhere in this report.
OVERVIEW
Medical Discoveries, Inc. (the "Company" or "MDI") has developed a product
(hereafter "MDI-P") that appears to have the ability to destroy certain viruses,
bacteria and fungi, including the HIV virus. 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 is 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 a variety of applications.
MDI is a development stage company. To date, the Company has not generated
significant revenues from operations or realized a profit. The Company is
presently investing all of its resources in the testing, development and
commercialization of MDI-P and its other technologies. The Company is attempting
to raise additional funding to continue development of its technologies and to
submit its technologies to appropriate regulatory agencies to secure approvals
when required for the marketing and use of its products.
RECENT EVENTS
HARVEST DISPUTE. On August 10, 2001, the Company and Harvest Group, L.L.C.
("Harvest") reached a tentative, mediated settlement in the case initiated by
Harvest last December concerning the parties' failed joint venture. The
tentative settlement, which has not yet been documented, provides, among other
terms, for the Company to deliver to Harvest a non-interest bearing, convertible
promissory note in the principal sum of $500,000 due in approximately nine
months. Under the tentative agreement, the note and other terms will be in full
satisfaction of all current amounts owing on loans from Harvest and all of
Harvest's other claims against the Company. The parties are continuing to
negotiate a definitive agreement. Once a definitive agreement has been reached,
more specific details will be disclosed. In the meantime, the Company has
accrued the $500,000 as a payable as of September 30, 2001 in lieu of the
$115,000 in notes payable that would otherwise have been accrued.
7
RESULTS OF OPERATIONS
REVENUES AND GROSS PROFIT. The Company booked no revenue for the quarter ended
September 30, 2001, nor was any revenue booked for the quarter ended September
30, 2000. The Company does not anticipate booking significant revenues in the
near future as it continues to focus on getting products to market.
OPERATING EXPENSES AND OPERATING LOSS. The Company did not spend any funds on
research and development for the quarter ended September 30, 2001, nor were any
such funds expended during the same quarter of 2000. The Company's general and
administrative expenses were $115,826 during the third quarter of 2001, as
compared to $27,188 during the quarter ended September 30, 2000. This increase
was due primarily to higher travel, salary, accounting and legal expenses as the
Company strengthens its management infrastructure and progresses toward
commercialization of key products. As a result of the foregoing, the Company
sustained an operating loss of $115,826 for the quarter ended September 30,
2001, as compared with an operating loss of $133,756 for the same period of
2000.
OTHER INCOME/EXPENSE AND NET LOSS. The Company incurred interest expenses of
$60,639 for the quarter ended September 30, 2001, as compared with $25,987 in
such expenses for the same period of 2000. The increase in interest expense
reflects the Company's need to operate on short-term, high-interest borrowings
while it continues to seek significant equity investment. In sum, the Company's
net loss for the third quarter of 2001 was $176,465 or a loss of less than $0.01
per fully diluted share. For the quarter ended September 30, 2000, the Company
sustained a net loss of $159,743, also a loss of less than $0.01 per fully
diluted share.
FUTURE EXPECTATIONS. Management expects the Company will operate at a loss for
several more years while it continues to study, gain regulatory approval of and
commercialize its technologies. If the Company is successful in raising
additional capital, the Company will likely spend more during the remainder of
2001 in research and development and general and administrative expenses, and
thereby sustain greater resulting losses, than it has in recent years.
LIQUIDITY AND CAPITAL RESOURCES
The Company will require significant additional funding to continue to develop,
research and seek regulatory approval of its technologies. In addition, the
Company cannot survive, even in the near term, without immediate additional
funding for operations. The Company does not currently generate any cash from
operations and has no credit facilities in place or available. Currently, the
Company is funding operations through short-term loans from shareholders and
others.
Management is seeking to raise substantial additional funds in private stock
offerings in order to meet its near-term and long-term funding requirements.
While management is optimistic that it can raise such funds, the Company has not
always been successful in doing so in recent years. Given that the Company is
still in an early development stage and does not have revenues from operations,
raising equity financing is difficult. In addition, any additional equity
financing will have a substantial dilutive effect to the Company's current
shareholders.
CAUTIONARY STATEMENT FOR FORWARD LOOKING INFORMATION
Certain information set forth in this report contains "forward-looking
statements" within the meaning of federal securities laws. Forward looking
statements include statements concerning plans, objectives, goals, strategies,
future events, future revenues or performance, capital expenditures, and
financing needs of the Company and other information that is not historical
information. When used in this report, the words "estimates," "expects,"
"anticipates," "forecasts," "plans," "intends," "believes" and variations of
such words or similar expressions are intended to identify forward-looking
statements. Additional forward-looking statements may be made by the Company
from time to time. All such subsequent forward-looking statements, whether
written or oral and whether made by or on behalf of the Company, are also
expressly qualified by these cautionary statements.
The Company's forward-looking statements are based upon the Company's current
expectations and various assumptions. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis, including without limitation, management's examination of
historical operating trends, data contained in the Company's records and other
data available from third parties, but there
8
can be no assurance that management's expectations, beliefs and projections will
result or be achieved or accomplished. The Company's forward-looking statements
apply only as of the date made. The Company undertakes no obligation to publicly
update or revise forward-looking statements which may be made to reflect events
or circumstances after the date made or to reflect the occurrence of
unanticipated events.
There are a number of risks and uncertainties that could cause actual results to
differ materially from those set forth in, contemplated by or underlying the
forward-looking statements contained in this report. Those risks and
uncertainties include, but are not limited to, our lack of significant operating
revenue to date, our need for substantial and immediate additional capital, the
fact that we may dilute existing shareholders through additional stock
issuances, the extensive governmental regulation to which we are subject, the
fact that our technologies remain unproven, the intense competition we face from
other companies and other products, and our reliance upon potentially inadequate
intellectual property. Those risks and certain other uncertainties are discussed
in more detail in the 2000 10-KSB. There may also be other factors, including
those discussed elsewhere in this report, that may cause the Company's actual
results to differ from the forward-looking statements. Any forward-looking
statements made by or on behalf of the Company should be considered in light of
these factors.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to ongoing litigation with Harvest Group, L.L.C.
concerning a so-called "JV Agreement" dated as of June 28, 2000. As disclosed
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Recent Events" above, the parties reached a tentative
settlement of this matter on August 10, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report:
None.
(b) Reports on 8-K.
None.
9
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.
MEDICAL DISCOVERIES, INC.
/S/ JUDY M. ROBINETT
---------------------------------------
Judy M. Robinett
Chief Executive Officer
Date: November 14, 2001
10