Epstein Becker & Green, P.C.
ATTORNEYS AT LAW
150 NORTH MICHIGAN AVENUE, SUITE 420
CHICAGO, ILLINOIS 60601-7630
312.499.1400
FAX: 312.845.1998
EBGLAW.COM
STEPHEN R. DRAKE
TEL: 312.499.1423
FAX: 312.845.1998
SDRAKE@EBGLAW.COM
January 25, 2006
VIA EDGAR
James Rosenberg
Keira Ino
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0306
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|
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Re:
|
|
Medical Discoveries, Inc.
Amendment No. 3 to Form SB-2 Registration Statement
File No. 333-121635 |
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|
Dear Mr. Rosenberg and Ms. Ino:
We are writing on behalf of our client, Medical Discoveries, Inc. (the Company), in response
to the letter of comments from Jeffrey P. Riedler of the United States Securities and Exchange
Commission to the Company, dated November 23, 2005, with respect to the Companys Amendment No. 3
to Form SB-2, File No. 333-121635 (the Registration Statement). Prior to the Company filing
another amendment to the Registration Statement addressing all of the staffs comments, we are
proposing responses to you to paragraphs 14 and 15 of the letter of comments. This letter contains
an update to our December 21, 2005 letter for the same purpose. The numbered paragraphs below
restate the numbered paragraphs in the staffs letter of comments to the Company, and the
discussion set out below each such paragraph is the Companys proposed response to the staffs
comment.
Financial Statements December 31, 2004
Notes to Financial Statements, page F-10
Note F Stockholders Equity, page F-14
14. |
|
As it appears that your warrants and preferred stocks require a settlement in the registered
shares, these warrants and the conversion feature of the preferred stocks should be classified
as a liability and marked to market, until such registration right
|
James Rosenberg
Keiro Ino
January 25, 2006
Page 2
lapses.
Refer to EITF 00-19. Accordingly, please reclassify these warrants and the
conversion feature of the preferred stocks outstanding as of December 31, 2004
to liability. The change in the fair value of the instruments from the date of the
issuance to the period presented should be reflected in your statements of operations.
The Company does not believe that EITF 00-19 applies
to the warrants or the conversion feature of the preferred stock issued in October 2004 and reflected on
the December 31, 2004 balance sheet. All such warrants and preferred stock instruments
require physical settlement or net-share settlement. Neither the warrants nor the preferred stock
instruments give the Company a choice of net-cash settlement, give the investor a choice of
net-cash settlement, or require net-cash settlement. Accordingly, the warrants and conversion
features are correctly classified as equity. (EITF 00-19, ¶8)
Furthermore,
the Companys classification of these instruments is consistent with the
Accounting Staffs December 1, 2005 guidance document, Current
Accounting and Disclosure Issues in the Division of Corporation Finance
(the Guidance). According to the Guidance, warrants should be accounted for
as liabilities if (1) the warrants could be required to be settled in cash upon
delisting, failure to register underlying shares, or other reasons, or (2) the
warrants contain registration rights with significant liquidated damages. In the case of
the Companys warrants, there is no provision whatsoever for settlement in cash for any
reason. Furthermore, the applicable registration rights agreement requires the Company to
use best efforts to obtain effectiveness of the registration statement as
soon as possible after it is filed and if the registration statement is not declared
effective within the specified period, there are no liquidated damages assessed to
the Company. Therefore, the issues raised in the Guidance do not apply to the Companys warrants.
Also according to the Guidance, a preferred stock conversion
feature should be accounted for as a liability if (1) the number of shares issuable upon conversion of the convertible
instrument is variable, and there is no cap on the number of shares which could be issued, or
(2) the stock includes registration rights with significant liquidated damages. In the case of
the Companys convertible preferred stock issued in October 2004, there is a cap on the
number of shares which could be issued upon conversion and there are no liquidated damages provisions.
Therefore, the issues raised in the Guidance do not apply to the Companys preferred stock issued in October 2004.
For the foregoing reasons, the Company does not
believe that the warrants or preferred stock conversion features outstanding as of December 31, 2004 should be
reclassified as liabilities or that any subsequent income statement adjustments are appropriate. However, the Company
will, on a going forward basis (including in its amended 2005 10-QSBs
discussed under comment 15 below) update
its disclosure concerning the registration rights agreement.
James Rosenberg
Keiro Ino
January 25, 2006
Page 3
Notes to the Unaudited Condensed Consolidated Financial Statements, page F-23
Note 3 Issuance of Common Stock. Preferred Stock, and Warrants, page F-24
Preferred Stock and Warrants, page F-24
15. |
|
Since the preferred stocks issued on March 14, 2005 has no minimum conversion price, the
conversion feature and warrants related to this instrument as well as all other instruments
such as the one in the preceding comment above and other warrants
listed in the table on page F-17 with features that are exercisable or convertible into common stocks should be classified
as a liability and marked to market until there no longer is a conversion feature with an
unlimited ratio (thorough exercise, amendment or retirement). Refer
to EITF 00-19.
Accordingly, please reclassify warrants and the embedded conversion features of the securities
outstanding as of June 30, 2005. The change in the fair value of the instruments from the date
of the issuance to the period presented should be reflected in your statements of operations. |
Because the 30,000
shares of Series A Convertible Preferred Stock issued March 14, 2005 contain a variable
conversion price without a floor, the Company will reclassify the conversion feature of such
shares as a liability pursuant to EITF 00-19 and will mark such conversion feature to market. The
Company will restate its Quarterly Reports filed in 2005 to reflect this reclassification. However,
because all of the other instruments (including warrants) to which this comment relates have a
stated conversion price or contain a floor on a variable conversion
price, neither EITF 00-19
nor the Guidance requires their reclassification. (See response to
Comment 14 above for a further explanation.)
Accordingly, the Company intends to continue to classify the warrants as equity. The Companys
proposed amended Quarterly Reports for the quarters ended March 31, June 30 and
September 30, 2005 are annexed here to as Annexes A, B and C, respectively.
Please let me know whether you find these proposed responses satisfactory. Thank you very
much.
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Very truly yours,
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/s/ Stephen R. Drake
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Stephen R. Drake |
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ANNEX A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB/A
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2005
|
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o |
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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)
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Utah
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87-0407858 |
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(State or other jurisdiction of
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|
(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
1388 S. Foothill Drive, #266, Salt Lake City, Utah 84108
(Address of principal executive offices)
(801) 582-9583
(Issuers telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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 þ No o
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: As of May 12, 2005, there were 107,101,947 shares of the issuers Common
Stock and 42,000 shares of the issuers Series A Preferred Stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes o No þ
Explanatory
Note
The purpose of this
amendment on Form 10-QSB/A to the Quarterly Report on Form 10-QSB of
Medical Discoveries, Inc, for the three months ended March 31, 2005 is to
restate our interim consolidated financial statements for the period
ended March 31, 2005 and related disclosures as of and for the
period ended March 31, 2005. Generally, no attempt has been made in
this Form 10-QSB/A to modify or update other disclosures
presented in the original report on Form 10-QSB except as
required to reflect the effects of the restatements. The Form 10-QSB/A
generally does not reflect events occurring after the filing of the
events. Information not affected by the restatements is unchanged and
reflects the disclosures made at the time of the original filing of
the Form 10-QSB on May 16, 2005. Accordingly, this Form 10-QSB/A
should be read in conjunction with our filings made with the
Securities and Exchange Commission subsequent to the filing of the
original Form 10-QSB, including any amendments to those filings. The
following items have been amended as a result of the restatement.
Part I
Item 1. Financial Statements
Part I
Item 2. Managements Discussion and Analysis of Financial
Condition and Result of Operations
Part II
Item 6. Exhibits
The
Purpose of the restatement is to give effect to EITF 00-19,
Accounting for Derivative Financial Investments Indexed to and
potentially settled in a Companys Own Stock, Pursuant to
which we have reclassified as liabilities the conversion features of
our Series A Convertible Preferred Stock and the warrants issued in
connection therewith.
For
convenience and ease of reference, we are filing our quarterly report
in its entirely with the applicable change.
TABLE OF CONTENTS
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|
PART I |
|
|
|
|
FINANCIAL INFORMATION |
|
|
|
|
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS |
|
|
2 |
|
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
|
|
11 |
|
ITEM 3. CONTROLS AND PROCEDURES |
|
|
14 |
|
PART II |
|
|
|
|
OTHER INFORMATION |
|
|
|
|
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS |
|
|
14 |
|
ITEM 6. EXHIBITS |
|
|
15 |
|
SIGNATURES |
|
|
15 |
|
INDEX TO EXHIBITS |
|
|
15 |
|
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following financial statements are filed with this report:
Condensed Consolidated Balance Sheets as of March 31, 2005, (unaudited) and December 31, 2004
(audited)
Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 2005
(unaudited), March 31, 2004 (unaudited) and from inception of the development stage on November 20,
1991 through March 31, 2005 (unaudited)
Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2005
(unaudited), March 31, 2004 (unaudited), and from inception of the development stage on November
20, 1991 through March 31, 2005 (unaudited)
Notes to Unaudited Consolidated Financial Statements
2
MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Balance Sheets
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Restated) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
3,158,525 |
|
|
$ |
1,455,397 |
|
Deposits |
|
|
51,100 |
|
|
|
51,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
3,209,625 |
|
|
|
1,506,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
3,209,625 |
|
|
$ |
1,506,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
2,363,550 |
|
|
$ |
2,448,454 |
|
Accrued interest payable |
|
|
431,160 |
|
|
|
415,262 |
|
Notes payable |
|
|
336,717 |
|
|
|
336,717 |
|
Convertible notes payable |
|
|
193,200 |
|
|
|
193,200 |
|
Research and development obligation |
|
|
645,800 |
|
|
|
|
|
Financial instrument |
|
|
8,390,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
12,360,431 |
|
|
|
3,393,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
|
12,360,431 |
|
|
|
3,393,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, Series A, convertible; no par value; 50,000 shares
authorized; 42,000 and 12,000 shares issued and outstanding, respectively;
(aggregate liquidation preference of $4,200,000 and $1,200,000, respectively) |
|
|
|
|
|
|
523,334 |
|
Common stock, no par value; 250,000 shares authorized; 107,101,947
and 105,653,335 shares issued and outstanding, respectively |
|
|
15,179,407 |
|
|
|
14,918,657 |
|
Additional paid-in capital |
|
|
1,811,477 |
|
|
|
3,424,383 |
|
Deficit accumulated prior to the development stage |
|
|
(1,399,577 |
) |
|
|
(1,399,577 |
) |
Deficit accumulated during the development stage |
|
|
(24,742,113 |
) |
|
|
(19,353,933 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Deficit |
|
|
(9,150,806 |
) |
|
|
(1,887,136 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT |
|
$ |
3,209,625 |
|
|
$ |
1,506,497 |
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
3
MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception |
|
|
|
|
|
|
|
|
|
|
|
of the |
|
|
|
|
|
|
|
|
|
|
|
Development Stage |
|
|
|
For the Three |
|
|
on November 20, 1991 |
|
|
|
Months Ended |
|
|
Through |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
|
(Restated) |
|
|
|
|
|
|
(Restated) |
|
REVENUES |
|
$ |
|
|
|
$ |
|
|
|
$ |
157,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD |
|
|
|
|
|
|
|
|
|
|
14,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
|
|
|
|
|
|
|
|
|
142,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
251,996 |
|
|
|
2,047,693 |
|
|
|
15,428,966 |
|
Research and development |
|
|
1,551,986 |
|
|
|
38,643 |
|
|
|
5,100,724 |
|
Inventory write-down |
|
|
|
|
|
|
|
|
|
|
96,859 |
|
Impairment loss |
|
|
|
|
|
|
|
|
|
|
9,709 |
|
License fees |
|
|
|
|
|
|
|
|
|
|
1,001,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses |
|
|
1,803,982 |
|
|
|
2,086,336 |
|
|
|
21,637,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS |
|
|
(1,803,982 |
) |
|
|
(2,086,336 |
) |
|
|
(21,495,278 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on financial instrument |
|
|
(3,593,764 |
) |
|
|
|
|
|
|
(3,593,764 |
) |
Interest income |
|
|
5,564 |
|
|
|
1,700 |
|
|
|
35,135 |
|
Interest expense |
|
|
(15,898 |
) |
|
|
(53,676 |
) |
|
|
(1,133,335 |
) |
Foreign currency transaction gain |
|
|
19,900 |
|
|
|
|
|
|
|
19,900 |
|
Gain on forgiveness of debt |
|
|
|
|
|
|
|
|
|
|
1,235,536 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
881,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Expenses |
|
|
(3,584,198 |
) |
|
|
(51,976 |
) |
|
|
(2,554,636 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS |
|
|
(5,388,180 |
) |
|
|
(2,138,312 |
) |
|
|
(24,049,914 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend from beneficial
conversion feature |
|
|
|
|
|
|
|
|
|
|
(692,199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS |
|
$ |
(5,388,180 |
) |
|
$ |
(2,138,312 |
) |
|
$ |
(24,742,113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED LOSS PER
COMMON SHARE |
|
$ |
(0.05 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING |
|
|
106,506,793 |
|
|
|
84,830,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
4
MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception |
|
|
|
|
|
|
|
|
|
|
|
of the |
|
|
|
For the Three |
|
|
Development Stage |
|
|
|
Months Ended |
|
|
on November 20, 1991 |
|
|
|
March 31, |
|
|
Through March 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
|
(Restated) |
|
|
|
|
|
|
(Restated) |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,388,180 |
) |
|
$ |
(2,138,312 |
) |
|
$ |
(24,049,914 |
) |
Adjustments to reconcile net loss to
net cash used by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency transaction gain |
|
|
(19,900 |
) |
|
|
|
|
|
|
(19,900 |
) |
Common stock issued for services, expenses,
and litigation |
|
|
18,750 |
|
|
|
1,727,466 |
|
|
|
4,286,467 |
|
Acquired research and development costs |
|
|
665,700 |
|
|
|
|
|
|
|
665,700 |
|
Unrealized loss on financial instrument |
|
|
3,593,764 |
|
|
|
|
|
|
|
3,593,764 |
|
Depreciation |
|
|
|
|
|
|
|
|
|
|
100,271 |
|
Reduction of
escrow receivable from research and development |
|
|
|
|
|
|
|
|
|
|
272,700 |
|
Stock options and warrants granted
for services |
|
|
|
|
|
|
|
|
|
|
4,811,253 |
|
Reduction of legal costs |
|
|
|
|
|
|
|
|
|
|
(130,000 |
) |
Write-off of subscriptions receivable |
|
|
|
|
|
|
|
|
|
|
112,500 |
|
Impairment loss on assets |
|
|
|
|
|
|
|
|
|
|
9,709 |
|
Loss on disposal of equipment |
|
|
|
|
|
|
|
|
|
|
30,364 |
|
Gain on debt restructuring |
|
|
|
|
|
|
|
|
|
|
(1,235,536 |
) |
Write-off of accounts receivable |
|
|
|
|
|
|
|
|
|
|
193,965 |
|
Note payable issued for litigation |
|
|
|
|
|
|
|
|
|
|
385,000 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase in accounts receivable |
|
|
|
|
|
|
|
|
|
|
(7,529 |
) |
Decrease in prepaid expenses |
|
|
|
|
|
|
11,331 |
|
|
|
|
|
Decrease in deferred charges |
|
|
|
|
|
|
12,077 |
|
|
|
|
|
Increase (decrease) in accounts payable |
|
|
(84,904 |
) |
|
|
133,292 |
|
|
|
2,207,641 |
|
Increase (decrease) in accrued expenses |
|
|
15,898 |
|
|
|
(3,264 |
) |
|
|
615,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used by Operating Activities |
|
|
(1,198,872 |
) |
|
|
(257,410 |
) |
|
|
(8,157,938 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in deposits |
|
|
|
|
|
|
|
|
|
|
(51,100 |
) |
Purchase of equipment |
|
|
|
|
|
|
|
|
|
|
(132,184 |
) |
Payments received on note receivable |
|
|
|
|
|
|
|
|
|
|
130,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used by Investing Activities |
|
|
|
|
|
|
|
|
|
|
(53,284 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, preferred
stock and warrants for cash |
|
|
2,902,000 |
|
|
|
441,504 |
|
|
|
9,929,845 |
|
Contributed equity |
|
|
|
|
|
|
|
|
|
|
131,374 |
|
Proceeds from notes payable |
|
|
|
|
|
|
|
|
|
|
1,336,613 |
|
Payments on notes payable |
|
|
|
|
|
|
|
|
|
|
(501,287 |
) |
Proceeds from convertible notes payable |
|
|
|
|
|
|
|
|
|
|
571,702 |
|
Payments on convertible notes payable |
|
|
|
|
|
|
|
|
|
|
(98,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities |
|
|
2,902,000 |
|
|
|
441,504 |
|
|
|
11,369,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH |
|
|
1,703,128 |
|
|
|
184,094 |
|
|
|
3,158,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AT BEGINNING OF PERIOD |
|
|
1,455,397 |
|
|
|
424,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD |
|
$ |
3,158,525 |
|
|
$ |
608,310 |
|
|
$ |
3,158,525 |
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
5
MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
|
Months Ended |
|
|
|
March 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Restated) |
|
|
|
|
|
SUPPLIMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Initial valuation of financial instrument |
|
$ |
10,624,050 |
|
|
$ |
|
|
Retirement of notes payable with common stock |
|
$ |
|
|
|
$ |
175,000 |
|
See notes to condensed consolidated financial statements.
6
MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Unaudited Condensed Consolidated Financial Statements
Note 1 Basis of Presentation
Unaudited Interim Consolidated Financial Statements
The accompanying unaudited consolidated 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
Companys 2004 Annual Report on Form 10-KSB for the year ended December 31, 2004, 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.
Loss Per Common Share
Loss per share is computed by dividing net loss applicable to common shareholders by the
weighted-average number of shares outstanding. Potential common shares from convertible notes
payable, warrants and stock options have not been included as they are anti-dilutive.
Stock Based Compensation
The Company accounts for its
stock options under Accounting Principles Board (APB) Option No. 25
using the intrinsic value method. The Company has elected not to
adopt the provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation (FAS 123). In
accordance with Financial Accounting Standards (SFAS) No. 148,
Accounting for Stock-Based Compensation Transition and
Disclosure, pro-forma net income, stock-based compensation expense,
and earnings per share using the fair value method are stated as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three
months Ended March 31, |
|
|
2005 |
|
2004 |
Net loss
applicable to common stockholders, as reported |
|
$ |
(5,388,180 |
) |
|
$ |
(2,138,812 |
) |
Add:
stock-based employee compensation expense included in reported net loss |
|
|
|
|
|
|
1,577,000 |
|
Deduct:
Total stock based employee compensation expense determined under
fair value based method for all awards |
|
|
|
|
|
|
(1,916,768 |
) |
|
|
|
|
|
|
|
Pro forma net
loss applicable to common shareholders |
|
$ |
(5,388,180 |
) |
|
$ |
(2,478,080 |
) |
|
Basic and
diluted loss per share, as reported |
|
$ |
(0.05 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
Basic and
diluted loss per share, pro forma |
|
$ |
(0.05 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
Assumptions used to calculate
the income statement impact of stock options granted as it the
Company had adopted FAS 123 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
Expected
dividend yield |
|
n/a |
|
|
|
|
Risk free interest rate |
|
n/a |
|
|
3.8 |
% |
Expected
volatility |
|
n/a |
|
|
220 |
% |
Expected Life |
|
n/a |
|
|
7 years |
|
Weighted
average fair value per share |
|
n/a |
|
$ |
0.10 |
|
Note 2 Restatement of
Financial Statements
The Companys previously issued condensed consolidated
financial statements as of and for the three months ended March 31, 2005 have been restated to record
the accounting of the warrants and embedded conversion option of the Series A Convertible Preferred Stock, entered into in October 2004 and March 2005, as liabilities, resulting in
an increase to current liabilities, rather than as being recorded as equity. As a result of this restatement,
the Company recorded $8,390,004 of additional current liability related to the fair value of the warrants and
conversion feature of the preferred stock, with a reduction of $4,796,240 in equity along with an additional
expense of $3,593,764 recorded as unrealized loss on financial
instrument as of and for the three months ended March 31,
2005.
The
following table summarizes the effect of the restatement and
reclassification adjustments on the financial statements as of and for
the three months ended March 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception of the |
|
|
|
|
|
|
|
|
|
|
|
Development Stage on |
|
|
|
For the Three Months |
|
|
November 20, 1991 Through |
|
|
|
Ended March 31, |
|
|
March 31, 2005 |
|
|
|
|
|
|
|
(Previously |
|
|
|
|
|
|
(Previously |
|
|
|
(Restated) |
|
|
reported) |
|
|
(Restated) |
|
|
Reported) |
|
Revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
157,044 |
|
|
$ |
157,044 |
|
Cost of Goods Sold |
|
|
|
|
|
|
|
|
|
|
14,564 |
|
|
|
14,564 |
|
Operating Expenses |
|
|
1,803,982 |
|
|
|
1,803,982 |
|
|
|
21,637,758 |
|
|
|
21,637,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations |
|
|
(1,803,982 |
) |
|
|
(1,803,982 |
) |
|
|
(21,495,278 |
) |
|
|
(21,495,278 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on financial instrument |
|
|
(3,593,764 |
) |
|
|
|
|
|
|
(3,593,764 |
) |
|
|
|
|
Interest income |
|
|
5,564 |
|
|
|
5,564 |
|
|
|
35,135 |
|
|
|
35,135 |
|
Interest expense |
|
|
(15,898 |
) |
|
|
(15,898 |
) |
|
|
(1,133,335 |
) |
|
|
(1,133,335 |
) |
Foreign currency transaction gain |
|
|
19,900 |
|
|
|
19,900 |
|
|
|
19,900 |
|
|
|
19,900 |
|
Gain on forgiveness of debt |
|
|
|
|
|
|
|
|
|
|
1,235,536 |
|
|
|
1,235,536 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
881,892 |
|
|
|
881,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expenses) |
|
|
(3,584,198 |
) |
|
|
9,566 |
|
|
|
(2,554,636 |
) |
|
|
1,039,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
(5,388,180 |
) |
|
|
(1,794,416 |
) |
|
|
(24,049,914 |
) |
|
|
(20,456,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend from beneficial
conversion feature |
|
|
|
|
|
|
(1,264,409 |
) |
|
|
(692,199 |
) |
|
|
(1,956,608 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Applicable to Common
Shareholders |
|
$ |
(5,388,180 |
) |
|
$ |
(3,058,825 |
) |
|
$ |
(24,742,113 |
) |
|
$ |
(22,412,758 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2005 |
|
|
|
|
|
|
(Previously |
|
|
(Restated) |
|
reported) |
Total current liabilities |
|
|
12,360,431 |
|
|
|
3,970,427 |
|
Total liabilities |
|
|
12,360,431 |
|
|
|
3,970,427 |
|
Preferred stock |
|
|
|
|
|
|
1,570,109 |
|
Additional paid-in capital |
|
|
1,811,477 |
|
|
|
6,302,017 |
|
Deficit accumulated during the development stage |
|
|
(24,742,113 |
) |
|
|
(22,412,758 |
) |
Total stockholders deficit |
|
|
(9,150,806 |
) |
|
|
(760,802 |
) |
Note 3 Going Concern Considerations
The Companys recurring losses from development-stage activities in current and prior years raise
substantial doubt about the Companys 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 fund research and development costs until it is able to consistently
generate revenues and sustain profitable operations. However, there can be no assurance that these
plans will be successful.
Note 4 Issuance of Common Stock, Preferred Stock, and Warrants
Common Stock
During the three months ended March 31, 2005, the Company issued 1,448,612 shares of restricted
common stock, 104,167 of which were issued for services valued at $18,750 and 1,344,445 of which
were issued for cash totaling $242,000. In connection with the sales for cash, the Company also
issued warrants to purchase 1,344,445 shares of restricted common stock at $0.18 per share,
expiring 3 years from the date of issuance.
7
Preferred Stock, Warrants
and Financial Instrument
During the three months ended March 31, 2005, the Company
issued 30,000 shares of Series A Convertible Preferred Stock and warrants to purchase 22,877,478 shares
of common stock for a total offering price of $3.0 million. The Company incurred $340,000 of offering costs
and issued to the placement agent warrants to purchase 1,220,132 shares of common stock exercisable at $0.1967
per share which are exercisable for a period of three years. The Company valued these warrants at $194,612 ($0.16
per share) using the Black-Scholes option pricing model with the following assumptions: risk free rate of 3.9%, volatility
of 170% and an expected life of three years.
Each share of Preferred Stock entitles the holder to convert the
share of Preferred Stock into the number of shares of common stock resulting from multiplying $100 by the
conversion price. The conversion price is 75% of the average of the three lowest intra-day trading prices for
the Companys common stock during the 10 trading days immediately preceding the conversion date. The conversion
price may not exceed $0.1967. The warrants are subject to equitable adjustment in connection with a stock split,
stock dividend or similar transaction. The warrants entitle the holder to purchase up to 22,877,478 shares of common
stock of the Company at $0.1967 per share. The warrants expire three years after the date of issuance.
The Series A Convertible Preferred Stock has no voting rights.
In the event of liquidation, the holders are entitled to a liquidating distribution of $100 per share. The
Company also entered into a Registration Rights Agreement with the investors requiring the Company to file a
registration statement with the Securities and Exchange Commission concerning
the shares of common stock issuable upon conversion of the Preferred
Stock and exercise of the warrants and use its best efforts to obtain effectiveness of the registration statement as soon as possible after it is filed.
There
are no liquidation damages and no significant penalties in
the event the Companys registration statement is not declared effective within the required period.
The conversion terms of the Series A Convertible Preferred Stock
doesnt contain a conversion floor; therefore the Company is unable to determine the number of common shares
the preferred stock can be converted into. Accordingly, under the
guidance of EITF 00-19 Accounting for Derivative
Financial Instruments Indexed to and Potentially Settled in a
Companys Own Stock, the conversion feature and the
warrants associated with the preferred stock are considered a financial instrument which is recorded at its full fair
value and classified as a liability on the accompanying financial statements. The fair value of the conversion feature
and the warrants on the date of issuance was $8,293,198 computed using the Black Scholes model with the following assumptions:
volatility of 170%, risk-free interest rate of 3.9% and an expected life of three years. The fair value of the financial instrument
exceeded the proceeds by $5,827,810 which was recorded as an expense on the statement of operations. Due to the fair value of the conversion
feature and warrants being greater than the net proceeds received from the preferred stock offering, none of the net proceeds have been assigned
to the preferred stock.
As noted above, the Company cannot determine the number of shares issuable for the Conversion of the
Series A Convertible Preferred Stock to common stock, therefore, the Company is unsure whether it has sufficient shares to satisfy the 12,000 share
Series A Convertible Preferred Stock and 4,575,495 warrants issued in October 2004. In accordance with EITF 00-19 the fair value of the conversion
feature and warrants has been reclassified as a liability. The fair value of the conversion feature and the warrants on the date of reclassification
was $2,330,852 computed using the Black Scholes model with the following assumptions: volatility of 170%, risk-free interest rate of 3.9% and an expected
life of three years. The difference between the fair value of the financial instrument and the proceeds previously recorded as equity ($1,423,598) was recorded
against additional paid-in capital. Due to the fair value of the conversion feature and the warrants being greater than the previous equity amount and the preferred
stock having no par value, no amounts have been assigned to the preferred stock.
The Company is also required to value the fair market price of the financial instrument as of March 31, 2005. The fair value
of the financial instrument was $8,390,004. The Company used the Black-Scholes model in calculating fair value with the following assumptions: volatility of 166%, risk
free interest rate of 4.0% and an expected life of three years. The
changes in fair market value have been recorded as adjustments in the
line Unrealized loss on financial
instrument in the statement of operations for all periods presented.
8
Note 5 Other Significant Events
SaveCream Asset Purchase
On March 16, 2005, the Company completed the purchase of the intellectual property assets (the
Assets) of Savetherapeutics AG, a German corporation in liquidation in Hamburg, Germany
(SaveT). The Assets consist primarily of patents, patent applications, pre-clinical study data
and clinical trial data concerning SaveCream, SaveTs developmental-stage topical aromatase
inhibitor treatment for breast cancer. SaveCream never generated revenues for SaveT. The
Companys analysis as to whether the intellectual property purchased constituted a business
resulted in the conclusion that no such business had been acquired.
The purchase price of the Assets was negotiated to be 2,350,000 (approximately $3.1 million under
current exchange rates), payable as follows: 500,000 at closing, 500,000 (approximately $645,800
using the March 31, 2005 exchange rates) upon conclusion of certain pending transfers of patent and
patent application rights from SaveTs inventors to the Company, and the remaining 1,350,000
(approximately $1.74 million at current exchange rates) upon successful commercialization of the
Assets. The Companys source of funds for the acquisition was a $3 million investment in the
Companys Series A Preferred Stock by an unrelated third party, as described in Note 3.
SaveT inventors have yet to assign the patent and application rights to the Company, management has
deemed the assignment of the rights to be reasonably likely because the inventors are contractually
bound to execute and deliver the assignments; therefore, the Company has recorded the second
500,000 payment as a current liability in these financial statements. At present it is
undeterminable whether the intellectual property will ever be
commercialized; therefore, the final
1,350,000 under this acquisition has
9
not been accrued as a liability as of March 31, 2005. The Company determined the intellectual
property purchased should be expensed as research and development costs
Formation of MDI Oncology, Inc.
On March 22, 2005, the Company formed MDI Oncology, Inc., a Delaware Corporation, as a wholly-owned
subsidiary for the purpose of acquiring and operating the assets and associated business ventures
associated with the SaveCream purchase.
Note 6 Subsequent Event
In April, 2005, the Company
negotiated a settlement regarding notes payable totaling $336,717 and
accrued interest of $269,364, by payment of $300,000 in
cash. The Company will recognize a gain on
settlement of debt totaling $306,081.
10
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The purpose of this section is to discuss and analyze our consolidated financial condition,
liquidity and capital resources, and results of operations. This analysis should be read in
conjunction with the consolidated financial statements and notes
thereto at pages 2 through 8 and
Managements Discussion and Analysis of Financial Condition and Results of
Operations contained in
our Annual Report on Form 10-KSB for the year ended December 31, 2004 (the 2004 10-KSB).
This section contains certain forward-looking statements that involve risks and uncertainties,
including statements regarding our plans, objectives, goals, strategies and financial performance.
Our actual 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 and Factors Affecting Future Results below and elsewhere in this report.
Overview
We are a developmental-stage bio-pharmaceutical company engaged in the research, validation,
development and ultimate commercialization of two drugs: MDI-P and SaveCream. MDI-P is an
anti-infective drug that we believe will be a safe and effective treatment for bacterial
infections, viral infections and fungal infections. SaveCream is a breast cancer medication that is
applied topically to reduce breast cancer tumors. Both of these drugs are still in development and
have not been approved by the U.S. Food and Drug Administration (FDA).
Our initial target indications for MDI-P are Cystic Fibrosis and HIV. We have filed an
Investigatory New Drug application (IND) with the FDA seeking
permission to begin Phase I human
clinical trials of MDI-P as a treatment for Cystic Fibrosis. The FDA has responded to our IND and
we are hopeful that we can satisfactorily answer the FDAs questions and satisfy the FDAs
follow-up requests for further animal testing, resulting in the FDA approving the application. If
the FDA approves that IND, we will begin human trials at St. Lukes Regional Medical Center in
Boise, Idaho using a protocol designed by Dr. Henry Thompson. If
our Phase I IND for Cystic
Fibrosis is successful, we intend to file an IND for Phase I testing of MDI-P as a treatment for
HIV at Harvard School of Medicine using a protocol designed by Dr. Bruce Dezube. We also expect to
add additional indications for the use of MDI-P in the future as we further our pre-clinical
development.
We recently purchased the intellectual property for SaveCream from the liquidation estate of a
defunct German biotechnology company. In a European Union study of
SaveCream used by over 100 women
diagnosed with breast cancer, a significant number of those women experienced a significant tumor
reduction. This study, while preliminary, indicates that SaveCream may be substantially more
effective and faster acting than similar drugs already on the market. We are in the process of
developing a global commercialization strategy for SaveCream.
Recent Events
SaveCream Asset Purchase. On March 16, 2005 we announced the purchase of intellectual property
assets from the liquidation estate of Savetherapeutics AG, a defunct German biotechnology company
headquartered in Hamburg. The purchase price was 2,350,000 (approximately $3.035 million, using
the March 31, 2005 exchange rate). Before it ceased business in 2004, Savetherapeutics (SaveT) had
been developing SaveCream, a topical steroidal form of aromatase inhibitor (AI) for breast cancer
that never generated revenues for SaveT.
11
This promising cancer therapeutic product has been tested in the European Union under a unique
German regulatory scheme that allows patients with limited treatment options to receive novel
treatments. In the study, over 100 women diagnosed with breast cancer received special permission
to be treated with SaveCream. A significant number of those women experienced significant tumor
reduction. This study indicates substantially improved efficacy in reduction of breast tumors, in
shorter time frames than the three approved AIs currently on the market. We are in the process of
developing a global commercialization strategy for SaveCream.
M.A.G. Capital, LLC (formerly Mercator Advisory Group, LLC), through its designated funds, Mercator
Momentum Fund, L.P., and Mercator Momentum Fund III, L.P., provided us with $3 million for the
purchase.
We expect to perform additional CMC (chemistry manufacturing and control) work and expand the
clinical trials over 2005, and believe this will open the door to commercialization opportunities
for SaveCream by late 2006, which may be quicker than we can commercialize MDI-P. This purchase
also allows us to diversify our product base.
We analyzed whether the intellectual property purchased was a business within the contemplation of
Regulation S-X, and concluded that no such business had been acquired.
Cystic Fibrosis IND. We are continuing to prosecute our IND for Cystic Fibrosis with the FDA. We
have agreed with the FDA on a large animal model protocol to establish pharmacological safety with
relation to cardio and central nervous system toxicity for this IND. We expect to begin that phase
of testing in the very near future and to start Phase I clinical trials on Cystic Fibrosis in Q4 of
2005.
Results of Operations
Revenues and Gross Profit We did not book any revenue for the three-month periods ended March 31,
2005 or March 31, 2004. As we continue to pursue pre-clinical and clinical testing of our
pharmaceuticals, we do not anticipate booking significant revenues in the near future.
Operating Expenses and Operating Loss We incurred $1,551,986 in research and development expenses
for the quarter ended March 31, 2005, $1,345,000 of which related to our acquiring the patents and
patent rights relating to SaveCream. We incurred $38,643 in research and development expenses for
the same period of 2004. Our general and administrative expenses were $251,996 during the first
quarter of 2005, as compared to $2,047,693 during the quarter ended March 31, 2004. As a result of
the foregoing, we sustained an operating loss of $1,803,982 for the quarter ended March 31, 2005,
as compared with an operating loss of $2,086,336 for the same period of 2004.
Other Income/Expense and Net Loss - We booked $5,564 in interest income and incurred interest
expenses of $15,898 for the quarter ended March 31, 2005, as compared with interest income of
$1,700 and $53,676 in interest expenses for the same period of 2004. The decrease in interest
expense is a result of our successful efforts to convert high-interest debt to equity. In
addition, we realized a gain of $19,900 on the foreign currency adjustment relating to our
obligations in the SaveCream asset purchase.
We also recognized an unrealized loss on financial instrument of
$3,593,764 during the quarter as a result of the
change in fair value associated with these instruments. There was no such
loss recognized during the first quarter of 2004. In sum, our net
loss applicable to common
shareholders for the first quarter of 2005 was $5,388,180 or a loss
of $0.05 per fully diluted
share. For the quarter ended March 31, 2004 we incurred a net loss applicable to common
shareholders of $2,138,312, making a loss of $0.03 per fully diluted share.
Future Expectations - We expect to operate at a loss for several more years while we continue to
research, gain regulatory approval of, and commercialize our technologies. We will spend more in
the remainder of the 2005 fiscal year in research and development expenses than we did over the
prior year as we continue
12
to implement our commercialization strategy. Similarly, we expect our general and administrative
expenses to continue to increase for the remainder of 2005 as we continue to expand the scope of
our operations. As a result, we expect to sustain a greater net loss in 2005 than we have in recent
years.
Liquidity and Capital Resources
As of March 31, 2005, we
had $3,158,525 in cash and had a working capital deficit of $9,150,806.
Since our inception, we have financed our operations primarily through private sales of equity and
the issuance of convertible and non-convertible notes. We continue to require significant
supplementary funding to continue to develop, research, and seek regulatory approval of our
technologies. We do not currently generate any cash from operations and have no credit facilities
in place or available. Currently, we are funding operations through private issuances of equity.
During the three months ended March 31, 2005, we issued 30,000 shares of our Series A Preferred
Stock to an unrelated third-party in exchange for $3 million in cash, less offering costs of
$340,000. We intend to use this cash for additional research and development, including making the
second installment on our purchase of the SaveCream assets.
We are seeking to raise substantial additional funds in private stock offerings in order to meet
our near-term and mid-term funding requirements. While we are optimistic that we can raise such
funds, we cannot provide positive assurances that we will be successful in our efforts. Given that
we are still in an early development stage and do not have revenues from operations, raising equity
financing can, at times, be difficult. In addition, any additional equity financing will have a
substantial dilutive effect to our current shareholders.
We believe we have sufficient capital on hand to complete Phase I clinical trials for Cystic
Fibrosis once the FDA approves our IND. We also believe we have sufficient capital to file our IND
for HIV.
Once an IND application for HIV is submitted, and assuming it is approved, we will need additional
capital to initiate Phase I clinical trials. We estimate the cost to complete Phase I and Phase II
clinical trials to be several million dollars per indication and the cost to complete Phase III
testing and obtain approval of an NDA to be in the tens of millions of dollars per indication.
While our ability to obtain financing may improve in the event our IND application is approved, we
cannot give assurances that we will have access to the significant capital required to take a drug
through regulatory approvals and to market. We may seek a partner in the global pharmaceutical
industry to help us co-develop, license, or even purchase some or all of our technologies.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined in Item 303(c) of Regulation S-B.
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 our
plans, objectives, goals, strategies, future events, future revenues or performance, capital
expenditures, and financing needs 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 us from time to
time. All such subsequent forward-looking statements, whether written or oral and whether made by
us or on our behalf, are also expressly qualified by these cautionary statements.
Our forward-looking statements are based upon our current expectations and various assumptions. Our
expectations, beliefs and projections are expressed in good faith and are believed by us to have a
reasonable
13
basis, including without limitation, our examination of historical operating trends, data contained
in our records and other data available from third parties, but there can be no assurance that our
expectations, beliefs and projections will result or be achieved or accomplished. Our
forward-looking statements apply only as of the date made. We undertake 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 revenues and lack of profit 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 2004 10-KSB. There may also be other factors, including those
discussed elsewhere in this report, that may cause our actual results to differ from the
forward-looking statements. Any forward-looking statements made by us or on our behalf should be
considered in light of these factors.
ITEM 3. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange Act), as of March 31, 2005. Based on
this evaluation, our principal executive officer and principal financial officer concluded that our
disclosure controls and procedures were effective as of March 31, 2005.
(b) There have been no significant changes (including corrective actions with regard to significant
deficiencies or material weaknesses) in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of the evaluation referenced in
paragraph (a) above.
PART II
OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2005, we issued 1,344,445 restricted shares of common stock
to unrelated private investors for a cash inflow of $242,000, in accordance with Rule 144 of the
Securities Exchange Act of 1934. In addition, we issued 30,000 shares of our Series A Preferred
Stock in March 2005, in exchange for $3,000,000 in cash. Neither of these issuances involved an
underwriter. We believe these issuances were exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933 because the sales did not involve a public offering. The investment
proceeds were utilized toward the purchase of the SaveCream assets, and will help complete our
Phase I clinical trials in Cystic Fibrosis which we plan to commence in the first quarter of 2005
once our IND is accepted with the FDA. In addition, we intend to utilize a significant portion of
these proceeds in further research, development, and commercialization of the patents and patent
rights acquired in the SaveCream purchase.
14
ITEM 6. EXHIBITS
The following documents are
furnished as exhibits to this Form 10-QSB/A. Exhibits marked with an
asterisk are filed herewith. The remainder of the exhibits previously have been filed with the
Commission and are incorporated herein by reference.
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Number |
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Exhibit |
2 .1
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Sale and Purchase Agreement between Attorney
Hinnerk-Joachim Müller as liquidator of
Savetherapeutics AG i.L. and Medical
Discoveries, Inc. regarding the purchase of the
essential assets of Savetherapeutics AG i.L.
(filed as Exhibit 2.1 to the Companys Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 2004, and incorporated herein by
reference). |
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|
|
3 .1
|
|
Amended and Restated Articles of Incorporation
of the Company (filed as Exhibit 3.1 to the
Companys Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994, and
incorporated herein by reference). |
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|
|
3 .2
|
|
Amended Bylaws of the Company (filed as Exhibit
3.2 to the Companys Annual Report on Form
10-KSB for the fiscal year ended December 31,
1994, and incorporated herein by reference). |
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4 .1
|
|
Registration Rights Agreement dated October 18,
2004 among Monarch Pointe Fund, Ltd., Mercator
Advisory Group, LLC and Medical Discoveries,
Inc. (filed as Exhibit 4.1 to the Companys
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2004, and incorporated herein
by reference). |
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|
|
4 .2
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|
Registration Rights Agreement dated December 3,
2004 among Mercator Momentum Fund, LP, Mercator
Momentum Fund III, LP, Mercator Advisory Group,
LLC and Medical Discoveries, Inc. (filed as
Exhibit 4.2 to the Companys Annual Report on
Form 10-KSB for the fiscal year ended December
31, 2004, and incorporated herein by reference). |
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10 .1
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2002 Stock Incentive Plan adopted by the Board
of Directors as of July 11, 2002 (filed as
Exhibit 10.5 to the Companys Quarterly Report
on Form 10-QSB for the quarter ended June 30,
2002, and incorporated herein by reference). |
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21
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Subsidiaries. |
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31.1
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Rule 13a-14(a) Certification, as adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.* |
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31.2
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Rule 13a-14(a) Certification, as adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.* |
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32.1
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|
Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.* |
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32.2
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|
Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.* |
* |
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Filed herewith. |
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|
Previously filed. |
SIGNATURES
In accordance with the
requirements of the Exchange Act, the registrant caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
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MEDICAL DISCOVERIES, INC. |
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Judy M. Robinett |
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President and Chief Executive Officer |
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Date:
January ___, 2006 |
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15
INDEX TO EXHIBITS
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|
Number |
|
Exhibit |
2.1
|
|
Sale and Purchase Agreement between Attorney
Hinnerk-Joachim Müller as liquidator of
Savetherapeutics AG i.L. and Medical
Discoveries, Inc. regarding the purchase of the
essential assets of Savetherapeutics AG i.L.
(filed as Exhibit 2.1 to the Companys Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 2004, and incorporated herein by
reference). |
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|
|
3.1
|
|
Amended and Restated Articles of Incorporation
of the Company (filed as Exhibit 3.1 to the
Companys Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994, and
incorporated herein by reference). |
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|
|
3.2
|
|
Amended Bylaws of the Company (filed as Exhibit
3.2 to the Companys Annual Report on Form
10-KSB for the fiscal year ended December 31,
1994, and incorporated herein by reference). |
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|
|
4.1
|
|
Registration Rights Agreement dated October 18,
2004 among Monarch Pointe Fund, Ltd., Mercator
Advisory Group, LLC and Medical Discoveries,
Inc. (filed as Exhibit 4.1 to the Companys
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2004, and incorporated herein
by reference). |
|
|
|
4.2
|
|
Registration Rights Agreement dated December 3,
2004 among Mercator Momentum Fund, LP, Mercator
Momentum Fund III, LP, Mercator Advisory Group,
LLC and Medical Discoveries, Inc. (filed as
Exhibit 4.2 to the Companys Annual Report on
Form 10-KSB for the fiscal year ended December
31, 2004, and incorporated herein by reference). |
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10.1
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|
2002 Stock Incentive Plan adopted by the Board
of Directors as of July 11, 2002 (filed as
Exhibit 10.5 to the Companys Quarterly Report
on Form 10-QSB for the quarter ended June 30,
2002, and incorporated herein by reference). |
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21
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Subsidiaries. |
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|
31.1
|
|
Rule 13a-14(a) Certification, as adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.* |
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|
|
31.2
|
|
Rule 13a-14(a) Certification, as adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.* |
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32.1
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Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.* |
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32.2
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Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.* |
* |
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Filed herewith. |
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Previously filed. |
16
Exhibit 31.1
RULE 13a-14(a) CERTIFICATION
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Judy M. Robinett, certify that:
1. I have
reviewed this quarterly report on Form 10-QSB/A of Medical Discoveries, Inc., a Utah corporation (the registrant);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other information
included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d -15(e) for the
registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to me by others
within those entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this quarterly report based on such evaluation; and
c) Disclosed in this report any change in the small business issuers
internal control over financial reporting that occurred during the small
business issuers most recent fiscal quarter (the small business issuers fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business issuers internal
control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control
over financial reporting, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent
function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrants ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls over
financial reporting.
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Dated: January __, 2006 |
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Judy M. Robinett |
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President and Chief Executive Officer |
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Exhibit 31.2
RULE 13a-14(a) CERTIFICATION
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Dierdra J. Burgess, certify that:
1. I have reviewed this quarterly report on Form 10-QSB/A of Medical Discoveries, Inc., a Utah corporation (the registrant);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other information
included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d -15(e)) for the
registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to me by others
within those entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this quarterly report based on such evaluation; and
c) Disclosed in this report any change in the small business issuers
internal control over financial reporting that occurred during the small
business issuers most recent fiscal quarter (the small business issuers fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business issuers internal
control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over
financial reporting, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrants ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls over
financial reporting.
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Dated: January __, 2006 |
|
|
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Dierdra J. Burgess |
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Controller |
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Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the amended Quarterly Report of Medical Discoveries, Inc.
(the Company) on Form 10-QSB/A for the quarter ended March 31, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the Report),
I, Judy M. Robinett, President and Chief Executive Officer, certify pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge and belief:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the Company.
|
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Dated: January __, 2006 |
|
|
|
Judy M. Robinett |
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|
President and Chief Executive Officer |
|
|
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff
upon request. The foregoing certifications are accompanying the Companys Form
10-QSB/A solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of Section 1350, chapter 63 of title 18, United States
Code) and is not being filed as part of the Form 10-QSB/A or as a separate
disclosure document.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the amended Quarterly Report of Medical Discoveries, Inc.
(the Company) on Form 10-QSB/A for the quarter ended September 30, 2005 as
filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Dierdra J. Burgess, Controller, certify pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to the best of my knowledge and belief:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the Company.
|
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Dated: January __, 2006 |
|
|
|
Dierdra J. Burgess |
|
|
Controller |
|
|
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff
upon request. The foregoing certifications are accompanying the Companys Form
10-QSB/A solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of Section 1350, chapter 63 of title 18, United States
Code) and is not being filed as part of the Form 10-QSB/A or as a separate
disclosure document.
ANNEX B
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB/A
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2005
|
|
|
o |
|
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
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.) |
1388 S. Foothill Drive, #266, Salt Lake City, Utah 84108
(Address of principal executive offices)
(Issuers telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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 þ No o
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: As of August 10, 2005, there were 107,829,724 shares of the issuers
Common Stock and 42,000 shares of the issuers Series A Preferred Stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes o No þ
Explanatory
Note
The purpose of this amendment on Form 10-QSB/A to the Quarterly Report on Form 10-QSB
of Medical Discoveries, Inc. for the three and six months ended June 30, 2005 is to restate our interim
consolidated financial statements for the period ended June 30, 2005 and related disclosures
as of and for the period ended June 30, 2005. Generally, no attempt has been made in this
Form 10-QSB/A to modify or update other disclosures presented in the original report on
Form 10-QSB except as required to reflect the effects of the restatement. The
Form 10-QSB/A generally does not reflect events occurring after the filing of the
Form 10-QSB or modify or update those disclosures, including the exhibits to the
Form 10-QSB, affected by subsequent events. Information not affected by the restatement
is unchanged and reflects the disclosures made at the time of the original filing of the
Form 10-QSB on August 12, 2005. Accordingly, this Form 10-QSB/A should be read in conjunction
with our filings made with the Securities and Exchange Commission subsequent to the filing
of the original Form 10-QSB, including any amendments to those filings. The following items
have been amended as a result of the restatement:
Part
I - Item 1. Financial Statements
Part
I - Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Part
II - Item 6. Exhibits
The purpose of
the restatement is to give effect to EITF 00-19,
Accounting for Derivative Financial Instruments
Indexed to and Potentially Settled in a Companys Own Stock, pursuant to which we have
reclassified as liabilities the conversion features of our Series A Convertible Preferred
Stock and the warrants issued in connection therewith.
For convenience and ease of reference, we are filing our quarterly
report in its entirely with the applicable changes.
TABLE OF CONTENTS
|
|
|
|
|
PART I |
|
|
|
|
FINANCIAL INFORMATION |
|
|
|
|
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS |
|
|
3 |
|
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|
|
11 |
|
ITEM 3. CONTROLS AND PROCEDURES |
|
|
14 |
|
PART II |
|
|
|
|
OTHER INFORMATION |
|
|
|
|
ITEM 6. EXHIBITS |
|
|
15 |
|
SIGNATURES |
|
|
16 |
|
INDEX TO EXHIBITS |
|
|
17 |
|
- 2 -
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following financial statements are filed with this report:
Condensed Consolidated Balance Sheets as of June 30, 2005, (unaudited) and December 31, 2004
(audited)
Condensed Consolidated Statements of Operations for the six-month periods ended June 30, 2005
(unaudited), June 30, 2004 (unaudited), three-month periods ended June 30, 2005 (unaudited), June
30, 2004 (unaudited) and from inception of the development stage on November 20, 1991 through June
30, 2005 (unaudited)
Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2005
(unaudited), June 30, 2004 (unaudited), and from inception of the development stage on November 20,
1991 through June 30, 2005 (unaudited)
Notes to Unaudited Condensed Consolidated Financial Statements
- 3 -
MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Balance Sheets
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Restated) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
2,424,197 |
|
|
$ |
1,455,397 |
|
Deposits |
|
|
51,100 |
|
|
|
51,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
2,475,297 |
|
|
|
1,506,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net |
|
|
67,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
2,542,918 |
|
|
$ |
1,506,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
2,611,343 |
|
|
$ |
2,448,454 |
|
Accrued interest payable |
|
|
222,760 |
|
|
|
415,262 |
|
Notes payable |
|
|
56,000 |
|
|
|
336,717 |
|
Convertible notes payable |
|
|
193,200 |
|
|
|
193,200 |
|
Research and development obligation |
|
|
604,900 |
|
|
|
|
|
Financial instrument |
|
|
7,646,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
11,334,753 |
|
|
|
3,393,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
|
11,334,753 |
|
|
|
3,393,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, Series A, convertible; no par value; 50,000 shares
authorized; 42,000 and 12,000 shares issued and outstanding, respectively;
(aggregate liquidation preference of $4,200,000 and $1,200,000, respectively) |
|
|
|
|
|
|
523,334 |
|
Common stock, no par value; 250,000 shares authorized; 107,829,724 and 105,653,335 shares issued and outstanding, respectively |
|
|
15,310,407 |
|
|
|
14,918,657 |
|
Additional paid-in capital |
|
|
1,811,504 |
|
|
|
3,424,383 |
|
Deficit accumulated prior to the development stage |
|
|
(1,399,577 |
) |
|
|
(1,399,577 |
) |
Deficit accumulated during the development stage |
|
|
(24,514,169 |
) |
|
|
(19,353,933 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Deficit |
|
|
(8,791,835 |
) |
|
|
(1,887,136 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT |
|
$ |
2,542,918 |
|
|
$ |
1,506,497 |
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
- 4 -
MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of the |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development Stage |
|
|
|
For the Three |
|
|
For the Six |
|
|
on November 20, 1991 |
|
|
|
Months Ended |
|
|
Months Ended |
|
|
Through |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
|
(Restated) |
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
(Restated) |
|
REVENUES |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
157,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
636,325 |
|
|
|
369,270 |
|
|
|
888,321 |
|
|
|
2,416,963 |
|
|
|
16,065,291 |
|
Research and development |
|
|
118,520 |
|
|
|
132,335 |
|
|
|
1,670,506 |
|
|
|
170,978 |
|
|
|
5,219,244 |
|
Inventory write-down |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,859 |
|
Impairment loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,709 |
|
License fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,001,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses |
|
|
754,845 |
|
|
|
501,605 |
|
|
|
2,558,827 |
|
|
|
2,587,941 |
|
|
|
22,392,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS |
|
|
(754,845 |
) |
|
|
(501,605 |
) |
|
|
(2,558,827 |
) |
|
|
(2,587,941 |
) |
|
|
(22,250,123 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on financial instrument |
|
|
743,427 |
|
|
|
|
|
|
|
(2,850,337 |
) |
|
|
|
|
|
|
(2,850,337 |
) |
Interest income |
|
|
9,346 |
|
|
|
1,426 |
|
|
|
14,910 |
|
|
|
3,126 |
|
|
|
44,481 |
|
Interest expense |
|
|
(7,237 |
) |
|
|
(33,048 |
) |
|
|
(23,135 |
) |
|
|
(86,724 |
) |
|
|
(1,140,572 |
) |
Foreign currency transaction gain |
|
|
40,900 |
|
|
|
|
|
|
|
60,800 |
|
|
|
|
|
|
|
60,800 |
|
Gain on forgiveness of debt |
|
|
196,353 |
|
|
|
|
|
|
|
196,353 |
|
|
|
|
|
|
|
1,431,889 |
|
Other income |
|
|
|
|
|
|
720 |
|
|
|
|
|
|
|
720 |
|
|
|
881,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expenses) |
|
|
982,789 |
|
|
|
(30,902 |
) |
|
|
(2,601,409 |
) |
|
|
(82,878 |
) |
|
|
(1,571,847 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS) |
|
|
227,944 |
|
|
|
(532,507 |
) |
|
|
(5,160,236 |
) |
|
|
(2,670,819 |
) |
|
|
(23,821,970 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend from beneficial
conversion feature |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(692,199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS |
|
$ |
227,944 |
|
|
$ |
(532,507 |
) |
|
$ |
(5,160,236 |
) |
|
$ |
(2,670,819 |
) |
|
$ |
(24,514,169 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS/(LOSS) PER SHARE |
|
$ |
0.00 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS/(LOSS) PER SHARE |
|
$ |
0.00 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
- 5 -
MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception |
|
|
|
|
|
|
|
|
|
|
|
of the |
|
|
|
For the Six |
|
|
Development Stage |
|
|
|
Months Ended |
|
|
on November 20, 1991 |
|
|
|
June 30, |
|
|
Through June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
|
(Restated) |
|
|
|
|
|
|
(Restated) |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,160,236 |
) |
|
$ |
(2,670,819 |
) |
|
$ |
(23,821,970 |
) |
Adjustments to reconcile net loss to
net cash used by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on financial instrument |
|
|
2,850,337 |
|
|
|
|
|
|
|
2,850,337 |
|
Foreign currency transaction gain |
|
|
(60,800 |
) |
|
|
|
|
|
|
(60,800 |
) |
Gain on debt restructuring |
|
|
(196,353 |
) |
|
|
|
|
|
|
(1,431,889 |
) |
Common stock issued for services, expenses,
and litigation |
|
|
18,750 |
|
|
|
1,750,954 |
|
|
|
4,286,467 |
|
Acquired research and development costs |
|
|
665,700 |
|
|
|
|
|
|
|
665,700 |
|
Depreciation |
|
|
870 |
|
|
|
|
|
|
|
101,141 |
|
Reduction of
escrow receivable from research and development |
|
|
|
|
|
|
|
|
|
|
272,700 |
|
Stock options and warrants granted
for services |
|
|
|
|
|
|
|
|
|
|
4,811,253 |
|
Reduction of legal costs |
|
|
|
|
|
|
|
|
|
|
(130,000 |
) |
Write-off of subscriptions receivable |
|
|
|
|
|
|
|
|
|
|
112,500 |
|
Impairment loss on assets |
|
|
|
|
|
|
|
|
|
|
9,709 |
|
Loss on disposal of equipment |
|
|
|
|
|
|
|
|
|
|
30,364 |
|
Write-off of accounts receivable |
|
|
|
|
|
|
|
|
|
|
193,965 |
|
Note payable issued for litigation |
|
|
|
|
|
|
|
|
|
|
385,000 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase in accounts receivable |
|
|
|
|
|
|
|
|
|
|
(7,529 |
) |
Decrease in prepaid expenses |
|
|
|
|
|
|
11,331 |
|
|
|
|
|
Decrease in deferred charges |
|
|
|
|
|
|
12,077 |
|
|
|
|
|
Increase (decrease) in accounts payable |
|
|
162,889 |
|
|
|
293,150 |
|
|
|
2,455,434 |
|
Increase (decrease) in accrued expenses |
|
|
23,134 |
|
|
|
2,516 |
|
|
|
622,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used by Operating Activities |
|
|
(1,695,709 |
) |
|
|
(600,791 |
) |
|
|
(8,654,775 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in deposits |
|
|
|
|
|
|
|
|
|
|
(51,100 |
) |
Purchase of equipment |
|
|
(68,491 |
) |
|
|
|
|
|
|
(200,675 |
) |
Payments received on note receivable |
|
|
|
|
|
|
|
|
|
|
130,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used by Investing Activities |
|
|
(68,491 |
) |
|
|
|
|
|
|
(121,775 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS
FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, preferred
stock and warrants for cash |
|
|
3,033,000 |
|
|
|
718,504 |
|
|
|
10,060,845 |
|
Contributed equity |
|
|
|
|
|
|
|
|
|
|
131,374 |
|
Proceeds from notes payable |
|
|
|
|
|
|
|
|
|
|
1,336,613 |
|
Payments on notes payable |
|
|
(300,000 |
) |
|
|
(195,000 |
) |
|
|
(801,287 |
) |
Proceeds from convertible notes payable |
|
|
|
|
|
|
|
|
|
|
571,702 |
|
Payments on convertible notes payable |
|
|
|
|
|
|
|
|
|
|
(98,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities |
|
|
2,733,000 |
|
|
|
523,504 |
|
|
|
11,200,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH |
|
|
968,800 |
|
|
|
(77,287 |
) |
|
|
2,424,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AT BEGINNING OF PERIOD |
|
|
1,455,397 |
|
|
|
424,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD |
|
$ |
2,424,197 |
|
|
$ |
346,929 |
|
|
$ |
2,424,197 |
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
- 6 -
MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Six |
|
|
|
Months Ended |
|
|
|
June 30, |
|
|
|
2005 |
|
|
2004 |
|
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Initial valuation of financial instrument |
|
$ |
10,624,050 |
|
|
$ |
|
|
Retirement of notes payable with common stock |
|
$ |
|
|
|
$ |
175,000 |
|
See notes to condensed consolidated financial statements.
- 7 -
MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Unaudited Condensed Consolidated Financial Statements
Note 1 Basis of Presentation
Unaudited Interim Consolidated Financial Statements
The accompanying unaudited consolidated 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
for 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 Companys 2004 Annual Report on Form 10-KSB for the year ended December 31, 2004, 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.
Stock Based Compensation
The Company accounts for its stock options under Accounting Principles Board (APB) Opinion No. 25
using the intrinsic value method. The Company has elected not to adopt the provisions of Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (FAS 123). In
accordance with Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, pro-forma net income, stock-based compensation expense,
and earnings per share using the fair value method are stated as follows:
- 8 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net
income (loss) applicable to
common shareholders, as
reported |
|
$ |
227,944 |
|
|
$ |
(532,507 |
) |
|
$ |
(5,160,236 |
) |
|
$ |
(2,670,819 |
) |
Add: Stock-based employee
compensation expense
included in reported net
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,577,000 |
|
Deduct: Total stock based
employee compensation
expense determined under
fair value based method for
all awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,916,768 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
net income (loss) applicable
to common shareholders |
|
$ |
227,944 |
|
|
$ |
(532,507 |
) |
|
$ |
(5,160,236 |
) |
|
$ |
(3,010,587 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per
share, as reported |
|
$ |
0.00 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share, as reported |
|
$ |
0.00 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per
share, pro forma |
|
$ |
0.00 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share, pro forma |
|
$ |
0.00 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions used to calculate the income statement impact of stock options granted as if the
Company had adopted FAS 123 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
Expected dividend yield |
|
|
N/A |
|
|
|
|
|
Risk free interest rate |
|
|
N/A |
|
|
|
3.8 |
% |
Expected volatility |
|
|
N/A |
|
|
|
220 |
% |
Expected life |
|
|
N/A |
|
|
7 years |
Weighted
average fair value per share |
|
|
N/A |
|
|
$ |
0.10 |
|
Earnings (Loss) Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
For the Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Net income (loss) |
|
$ |
227,944 |
|
|
$ |
(532,507 |
) |
|
$ |
(5,160,236 |
) |
|
$ |
(2,670,819 |
) |
|
Basic Weighted-Average Common Shares Outstanding |
|
|
107,580,033 |
|
|
|
92,393,559 |
|
|
|
107,043,413 |
|
|
|
88,478,847 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes |
|
|
128,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock |
|
|
57,776,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
767,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
|
16,289,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Weighted-Average Common Shares
Outstanding |
|
|
182,543,456 |
|
|
|
92,393,559 |
|
|
|
107,043,413 |
|
|
|
88,478,847 |
|
|
Basic Net Income Per Common Share |
|
$ |
0.00 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.03 |
) |
Diluted Net Income Per Common Share |
|
$ |
0.00 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.03 |
) |
|
Potential common shares from convertible notes payable, convertible preferred stock,
warrants and stock options for the three months ended June 30, 2004 and the six months ended June
30, 2005 and 2004 have not been included as their effects are anti dilutive.
Note 2 Restatement of Financial Statements
The Companys previously issued condensed consolidated financial statements as of June 30,
2005 and for the three and six months ended June 30, 2005 have been restated to record the
accounting of the warrants and embedded conversion option of the Series A Convertible Preferred
Stock, entered into in October 2004 and March 2005, as liabilities, resulting in an increase to
current liabilities, rather than as being recorded as equity. As a result of this restatement, the
Company recorded $7,646,550 of additional current liability related to the fair value of the
warrants and conversion feature of the preferred stock, with a reduction of $4,796,213 in equity
along with an additional expense of $2,850,337 recorded as a unrealized loss on financial
instrument as of and for the six months ended June 30, 2005.
The following table summarizes the effect of the restatement and reclassification
adjustments on the financial statements as of June 30, 2005 and for the three and six months
ended June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception of the |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development Stage on |
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
November 20, 1991 Through |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
June 30, 2005 |
|
|
|
|
|
|
|
(Previously |
|
|
|
|
|
|
(Previously |
|
|
|
|
|
|
(Previously |
|
|
|
(Restated) |
|
|
reported) |
|
|
(Restated) |
|
|
reported) |
|
|
(Restated) |
|
|
Reported) |
|
Revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
157,044 |
|
|
$ |
157,044 |
|
Cost of Goods Sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,564 |
|
|
|
14,564 |
|
Operating Expenses |
|
|
754,845 |
|
|
|
754,845 |
|
|
|
2,558,827 |
|
|
|
2,558,827 |
|
|
|
22,392,603 |
|
|
|
22,392,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations |
|
|
(754,845 |
) |
|
|
(754,845 |
) |
|
|
(2,558,827 |
) |
|
|
(2,558,827 |
) |
|
|
(22,250,123 |
) |
|
|
(22,250,123 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on financial instrument |
|
|
743,427 |
|
|
|
|
|
|
|
(2,850,337 |
) |
|
|
|
|
|
|
(2,850,337 |
) |
|
|
|
|
Interest income |
|
|
9,346 |
|
|
|
9,346 |
|
|
|
14,910 |
|
|
|
14,910 |
|
|
|
44,481 |
|
|
|
44,481 |
|
Interest expense |
|
|
(7,237 |
) |
|
|
(7,237 |
) |
|
|
(23,135 |
) |
|
|
(23,135 |
) |
|
|
(1,140,572 |
) |
|
|
(1,140,572 |
) |
Foreign currency transaction gain |
|
|
40,900 |
|
|
|
40,900 |
|
|
|
60,800 |
|
|
|
60,800 |
|
|
|
60,800 |
|
|
|
60,800 |
|
Gain on forgiveness of debt |
|
|
196,353 |
|
|
|
196,353 |
|
|
|
196,353 |
|
|
|
196,353 |
|
|
|
1,431,889 |
|
|
|
1,431,889 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
881,892 |
|
|
|
881,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expenses) |
|
|
982,789 |
|
|
|
239,362 |
|
|
|
(2,601,409 |
) |
|
|
248,928 |
|
|
|
(1,571,847 |
) |
|
|
1,278,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
|
227,944 |
|
|
|
(515,483 |
) |
|
|
(5,160,236 |
) |
|
|
(2,309,899 |
) |
|
|
(23,821,970 |
) |
|
|
(20,971,633 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend from beneficial
conversion feature |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,264,409 |
) |
|
|
(692,199 |
) |
|
|
(1,956,608 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Applicable to Common
Shareholders |
|
$ |
227,944 |
|
|
$ |
(515,483 |
) |
|
$ |
(5,160,236 |
) |
|
$ |
(3,574,308 |
) |
|
$ |
(24,514,169 |
) |
|
$ |
(22,928,241 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 |
|
|
|
|
|
|
(Previously |
|
|
(Restated) |
|
reported) |
Total current liabilities |
|
|
11,334,753 |
|
|
|
3,688,203 |
|
Total liabilities |
|
|
11,334,753 |
|
|
|
3,688,203 |
|
Preferred stock |
|
|
|
|
|
|
1,570,109 |
|
Additional paid-in capital |
|
|
1,811,504 |
|
|
|
6,302,017 |
|
Deficit accumulated during the development stage |
|
|
(24,514,169 |
) |
|
|
(22,928,241 |
) |
Total stockholders equity (deficit) |
|
|
(8,791,835 |
) |
|
|
(1,145,285 |
) |
Note 3 Going Concern Considerations
The Companys recurring losses from development-stage activities in current and prior years raise
substantial doubt about the Companys 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 fund research and development costs until it is able to consistently
- 9 -
generate revenues and sustain profitable operations. However, there can be no assurance that these
plans will be successful.
Note 4 Issuance of Common Stock, Preferred Stock, and Warrants
Common Stock
During the six months ended June 30, 2005, the Company issued 2,176,389 shares of restricted common
stock, 104,167 of which were issued for services valued at $18,750 and 2,072,222 of which were
issued for cash totaling $373,000. In connection with the sales for cash, the Company also issued
warrants to purchase 2,072,222 shares of restricted common stock at $0.18 per share, expiring 3
years from the date of issuance.
Preferred Stock, Warrants and Financial Instrument
During the three months ended March 31, 2005, the Company issued 30,000 shares of Series A
Convertible Preferred Stock and warrants to purchase 22,877,478 shares of common stock for a
total offering price of $3.0 million. The Company incurred $340,000 of offering costs and
issued to the placement agent warrants to purchase 1,220,132 shares of common stock
exercisable at $0.1967 per share which are exercisable for a period of three years. The
Company valued these warrants at $194,612 ($0.16 per share) using the Black Scholes option
pricing model with the following assumptions: risk free rate of 3.9%, volatility of 170%
and an expected life of three years.
Each share of Preferred Stock entitles the holder to convert the share of Preferred Stock into the
number of shares of common stock resulting from multiplying $100 by the conversion price. The
conversion price is 75% of the average of the three lowest intra-day trading prices for the
Companys common stock during the 10 trading days immediately preceding the conversion date.
The conversion price may not exceed $0.1967. The warrants are subject to equitable adjustment
in connection with a stock split, stock dividend or similar transaction. The warrants entitle
the holder to purchase up to 22,877,478 shares of common stock of the Company at $0.1967 per
share. The warrants expire three years after the date of issuance.
The Series A Convertible Preferred Stock has no voting rights. In the event of liquidation, the
holders are entitled to a liquidating distribution of $100 per share. The Company also entered
into a Registration Rights Agreement with the investors requiring the
Company to file a registration statement with the Securities
and Exchange Commission concerning the shares of common stock issuable upon conversion of the Preferred
Stock and exercise of the warrants and to use its best efforts to obtain effectiveness of the
registration statement as soon as possible after it is filed. There are no liquidation damages and no significant penalties
in the event the Companys registration statement is not declared effective within the required period.
The conversion terms of the Series A Convertible Preferred Stock
doesnt
contain a conversion floor; therefore the Company is unable to determine the number of common
shares the preferred stock can be converted into. Accordingly, under the guidance of EITF
00-19 Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in a Companys
Own Stock,
the conversion feature and the warrants associated with the preferred stock are considered a
financial instrument which is recorded at its full fair value and classified as a liability on
the accompanying financial statements. The fair value of the conversion feature and the warrants
on the date of issuance was $8,293,198 computed using the Black Scholes model with the following
assumptions: volatility of 170%, risk-free interest rate of 3.9% and an expected life of three
years. The fair value of the financial instrument exceeded the proceeds by $5,827,810 which was
recorded as an expense on the statement of operations. Due to the fair value of the conversion
feature and warrants being greater than the net proceeds received from the preferred stock
offering, none of the net proceeds have been assigned to the preferred stock.
As noted
above, the Company cannot determine the number of shares issuable for the Conversion of the Series
A Convertible Preferred Stock to common stock, therefore, the Company is unsure whether it has
sufficient shares to satisfy the 12,000 share Series A Convertible Preferred Stock and
4,575,495 warrants issued in October 2004. In accordance with EITF 00-19 the fair value of
the conversion feature and warrants has been reclassified as a liability. The fair value
of the conversion feature and the warrants on the date of reclassification was
$2,330,852 computed using the Black Scholes model with the following assumptions:
volatility of 170%, risk-free interest rate of 3.9% and an expected life of three
years. The difference between the fair value of the financial instrument and the
proceeds previously recorded as equity ($1,423,598) was recorded against additional
paid-in capital. Due to the fair value of the conversion feature and the warrants
being greater than the previous equity amount and the preferred stock having no par value,
no amounts have been assigned to the preferred stock.
The Company
is also required to value the fair market price of the financial instrument as
of June 30, 2005. The fair value of the financial instrument was $7,646,550 on
June 30, 2005. The Company used the Black-Scholes model in calculating fair value with the
following assumptions: volatility of 152%, risk free interest rate of 3.7% and
an expected life of three years. The changes in fair market value have been recorded as
adjustments in the line Unrealized loss on financial
instrument in the statement of operations for all periods presented.
Note 5
Other Significant Events
SaveCream Asset Purchase
On March 16, 2005, the Company completed the purchase of the intellectual property assets (the
Assets) of Savetherapeutics AG, a German corporation in liquidation in Hamburg, Germany
(SaveT). The Assets consist primarily of patents, patent applications, pre-clinical study data
and clinical trial data concerning SaveCream,
- 10 -
SaveTs developmental-stage topical aromatase inhibitor treatment for breast cancer. SaveCream
never generated revenues for SaveT. The Companys analysis as to whether the intellectual property
purchased constituted a business resulted in the conclusion that no such business had been
acquired.
The purchase price of the Assets was negotiated to be 2,350,000 (approximately $2.8 million under
current exchange rates), payable as follows: 500,000 at closing, 500,000 (approximately $665,700
on the date of transaction, $604,900 using the June 30, 2005 exchange rates) upon conclusion of
certain pending transfers of patent and patent application rights from SaveTs inventors to the
Company, and the remaining 1,350,000 (approximately $1.74 million at current exchange rates) upon
successful commercialization of the Assets. The Companys source of funds for the acquisition was a
$3 million investment in the Companys Series A Preferred Stock by an unrelated third party, as
described in Note 3.
SaveT inventors have yet to assign the patent and application rights to the Company, management has
deemed the assignment of the rights to be reasonably likely because the inventors are contractually
bound to execute and deliver the assignments; therefore, the Company has recorded the second
500,000 payment as a current liability in these financial statements. At present it is
undeterminable whether the intellectual property will ever be commercialized; therefore, the final
1,350,000 under this acquisition has not been accrued as a liability as of June 30, 2005. The
Company determined the intellectual property purchased should be expensed as research and
development costs
Formation of MDI Oncology, Inc.
On March 22, 2005, the Company formed MDI Oncology, Inc., a Delaware Corporation, as a wholly-owned
subsidiary for the purpose of acquiring and operating the assets and associated business ventures
associated with the SaveCream purchase.
Settlement of Debt
On April 1, 2005, the Company negotiated a settlement regarding notes payable totaling $280,717 and
accrued interest of $215,636, by payment of $300,000 in cash. The Company recognized a gain on
settlement of debt totaling $196,353.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The purpose of this section is to discuss and analyze our consolidated financial condition,
liquidity and capital resources, and results of operations. This analysis should be read in
conjunction with the consolidated financial statements and notes thereto at pages 3 through 11 and
Managements Discussion and Analysis of Financial Condition and Results of Operations contained in
our Annual Report on Form 10-KSB for the year ended December 31, 2004 (the 2004 10-KSB).
This section contains certain forward-looking statements that involve risks and uncertainties,
including statements regarding our plans, objectives, goals, strategies and financial performance.
Our actual 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 and Factors Affecting Future Results below and elsewhere in this report.
Overview
We are a developmental-stage bio-pharmaceutical company engaged in the research, validation,
development and ultimate commercialization of two drugs: MDI-P and SaveCream. MDI-P is an
anti-infective drug that we believe will be a safe and effective treatment for bacterial
infections, viral infections and fungal infections. SaveCream is a
- 11 -
breast cancer medication that is applied topically to reduce breast cancer tumors. Both of these
drugs are still in development and have not been approved by the U.S. Food and Drug Administration
(FDA).
Our initial target indications for MDI-P are Cystic Fibrosis and HIV. We have filed an
Investigatory New Drug application (IND) with the FDA seeking permission to begin Phase I human
clinical trials of MDI-P as a treatment for Cystic Fibrosis. The FDA has responded to our IND and
we are hopeful that we can satisfactorily answer the FDAs questions and satisfy the FDAs
follow-up requests for further animal testing, resulting in the FDA approving the application. If
the FDA approves that IND, we will begin human trials at St. Lukes Regional Medical Center in
Boise, Idaho using a protocol designed by Dr. Henry Thompson. If our Phase I IND for Cystic
Fibrosis is successful, we intend to file an IND for Phase I testing of MDI-P as a treatment for
HIV at Harvard School of Medicine using a protocol designed by Dr. Bruce Dezube. We also expect to
add additional indications for the use of MDI-P in the future as we further our pre-clinical
development.
We recently purchased the intellectual property for SaveCream from the liquidation estate of a
defunct German biotechnology company. In a European Union study of SaveCream used by over 100 women
diagnosed with breast cancer, a significant number of those women experienced a significant tumor
reduction. This study, while preliminary, indicates that SaveCream may be substantially more
effective and faster acting than similar drugs already on the market. We are in the process of
developing a global commercialization strategy for SaveCream.
Recent Events
SaveCream Asset Purchase. We are in the process of developing a commercialization plan for
SaveCream and of integrating the SaveCream assets into MDI. Specifically, we are working to
complete the transfer of patents and patent applications to MDIs subsidiary designated for
developing SaveCream. As we previously reported, at the time we purchased SaveCream and the other
intellectual property assets from Savetherapeutics A.G. (SaveT), SaveT had not yet obtained and
filed with the appropriate patent offices assignments of the various inventors rights to the
underlying inventions. Each of those inventors has agreed and is contractually bound to assign such
rights. We are currently in the process of securing the applicable assignments. However, we may
need to initiate litigation against the inventors to secure such assignments.
Cystic Fibrosis IND. We are continuing to prosecute our IND for cystic fibrosis with the FDA. We
have agreed with the FDA on a large animal model protocol to establish pharmacological safety with
relation to cardio and central nervous system toxicity as well as genotoxicity for this IND. We
expect to begin that phase of testing in Q3 of this year and to start Phase I clinical trials on
cystic fibrosis in Q1 of 2006, subject to FDA approval.
Results of Operations
Revenues and Gross Profit We did not book any revenue for the three or six-month periods ended
June 30, 2005 or June 30, 2004. As we continue to pursue pre-clinical and clinical testing of our
pharmaceuticals, we may not book significant revenues in the near future.
Operating
Expenses and Operating Loss We incurred $118,520 in research and development expenses
for the quarter ended June 30, 2005. We incurred $132,335 in research and development expenses for
the same period of 2004. Our general and administrative expenses were $636,325 during the quarter
ended June 30, 2005, as compared to $369,270 during the quarter ended June 30, 2004. As a result of
the foregoing, we sustained an operating loss of $754,845 for the quarter ended June 30, 2005, as
compared with an operating loss of $501,605 for the same period of 2004.
For the six months ended June 30, 2005 we incurred $1,670,506 in research and development expenses,
$1,345,000 of which related to our acquiring the patents and patent rights relating to SaveCream.
We incurred $170,978 in research and development expenses for the same period of 2004. Our general
and administrative expenses were
- 12 -
$888,321 during the first six months of 2005, as compared to $2,416,963 during the six-month period
ended June 30, 2004, resulting in operating losses of $2,558,827 through June 30, 2005 and
$2,587,941 for the same period of 2004.
Other
Income/Expense and Net Income/Loss We booked $9,346 in interest income and incurred interest
expenses of $7,237 for the quarter ended June 30, 2005, as compared with interest income of $1,426
and $33,048 in interest expenses for the same period of 2004. The decrease in interest expense is a
result of our successful efforts to convert high-interest debt to equity. We also recorded
$196,353 as Gain on Forgiveness of Debt during the quarter ended June 30, 2005, which resulted from
a negotiated settlement of certain notes payable. In addition, we
recognized an unrealized gain on financial instrument of $743,427
during the quarter. In sum, we incurred net income applicable to common
shareholders for the second quarter of 2005 of $227,944 or income of less than $0.01 per fully
diluted share. For the quarter ended June 30, 2004 we incurred a net loss applicable to common
shareholders of $532,507, making a loss of $0.01 per fully diluted share.
For the six months ended June 30, 2005, we booked $14,910 in interest income and incurred interest
expense of $23,135, as compared with $3,126 of interest income and $86,724 of interest expense for
the comparable period of 2004. In addition, we recognized an
unrealized loss on financial instrument of $2,850,337
during the first six months as a result of the change in fair value associated with these instruments. There was no such loss recognized during the first half of
2004. Our net loss applicable to common shareholders for the first
half of 2005 was $5,160,236 or
$0.05 per fully diluted share. Our net loss for the first half of 2004 was $2,670,819 or $0.03 per
fully diluted share.
Future
Expectations We may operate at a loss for several more years while we continue to
research, gain regulatory approval of, and commercialize our technologies. We will spend more in
the remainder of the 2005 fiscal year in research and development expenses than we did over the
prior year as we continue to implement our commercialization strategy. Similarly, we expect our
general and administrative expenses to continue to increase for the remainder of 2005 as we
continue to expand the scope of our operations. As a result, we expect to sustain a greater net
loss in 2005 than we have in recent years.
Liquidity and Capital Resources
As
of June 30, 2005, we had $2,424,197 in cash and had a working
capital deficit of $8,859,456.
Since our inception, we have financed our operations primarily through private sales of equity and
the issuance of convertible and non-convertible notes. We continue to require significant
supplementary funding to continue to develop, research, and seek regulatory approval of our
technologies. We do not currently generate any cash from operations and have no credit facilities
in place or available. Currently, we are funding operations through private issuances of equity.
During the six months ended June 30, 2005, we issued 30,000 shares of our Series A Preferred Stock
to an unrelated third-party in exchange for $3 million in cash,
less offering costs of $340,000.
We intend to use this cash for additional research and development, including making the second
installment on our purchase of the SaveCream assets.
We believe we have sufficient capital on hand to complete Phase I clinical trials for Cystic
Fibrosis once the FDA approves our IND. We also believe we have sufficient capital to file our IND
for HIV.
Once an IND application for HIV is submitted, and assuming it is approved, we will need additional
capital to initiate Phase I clinical trials. We estimate the cost to complete Phase I and Phase II
clinical trials to be several million dollars per indication and the cost to complete Phase III
testing and obtain approval of an NDA to be in the tens of millions of dollars per indication.
While our ability to obtain financing may improve in the event our IND application is approved, we
cannot give assurances that we will have access to the significant capital required to take a drug
through regulatory approvals and to market. We may seek a partner in the global pharmaceutical
industry to help us co-develop, license, or even purchase some or all of our technologies.
- 13 -
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined in Item 303(c) of Regulation S-B.
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 our
plans, objectives, goals, strategies, future events, future revenues or performance, capital
expenditures, and financing needs 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 us from time to
time. All such subsequent forward-looking statements, whether written or oral and whether made by
us or on our behalf, are also expressly qualified by these cautionary statements.
Our forward-looking statements are based upon our current expectations and various assumptions. Our
expectations, beliefs and projections are expressed in good faith and are believed by us to have a
reasonable basis, including without limitation, our examination of historical operating trends,
data contained in our records and other data available from third parties, but there can be no
assurance that our expectations, beliefs and projections will result or be achieved or
accomplished. Our forward-looking statements apply only as of the date made. We undertake 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 revenues and lack of profit 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 2004 10-KSB. There may also be other factors, including those
discussed elsewhere in this report, that may cause our actual results to differ from the
forward-looking statements. Any forward-looking statements made by us or on our behalf should be
considered in light of these factors.
ITEM 3. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange Act), as of June 30, 2005. Based on
this evaluation, our principal executive officer and principal financial officer concluded that our
disclosure controls and procedures were effective as of June 30, 2005.
(b) There have been no significant changes (including corrective actions with regard to significant
deficiencies or material weaknesses) in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of the evaluation referenced in
paragraph (a) above.
- 14 -
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS
The
following documents are furnished as exhibits to this Form 10-QSB/A. Exhibits marked with an
asterisk are filed herewith. The remainder of the exhibits previously have been filed with the
Commission and are incorporated herein by reference.
|
|
|
Number |
|
Exhibit |
2.1
|
|
Sale and Purchase Agreement between Attorney
Hinnerk-Joachim Müller as liquidator of
Savetherapeutics AG i.L. and Medical
Discoveries, Inc. regarding the purchase of the
essential assets of Savetherapeutics AG i.L.
(Exhibits referenced therein will be provided
upon request.) |
|
|
|
3.1
|
|
Amended and Restated Articles of Incorporation
of the Company (filed as Exhibit 3.1 to the
Companys Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994, and
incorporated herein by reference). |
|
|
|
3.2
|
|
Amended Bylaws of the Company (filed as Exhibit
3.2 to the Companys Annual Report on Form
10-KSB for the fiscal year ended December 31,
1994, and incorporated herein by reference). |
|
|
|
4.1
|
|
Registration Rights Agreement dated October 18,
2004 among Monarch Pointe Fund, Ltd., Mercator
Advisory Group, LLC and Medical Discoveries,
Inc. (filed as Exhibit 4.1 to the Companys Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2004,
and incorporated herein by reference). |
|
|
|
4.2
|
|
Registration Rights Agreement dated December 3,
2004 among Mercator Momentum Fund, LP, Mercator
Momentum Fund III, LP, Mercator Advisory Group,
LLC and Medical Discoveries, Inc. (filed as Exhibit 4.2 to the
Companys Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2004, and incorporated herein by reference). |
|
|
|
10.1
|
|
2002 Stock Incentive Plan adopted by the Board
of Directors as of July 11, 2002 (filed as
Exhibit 10.5 to the Companys Quarterly Report
on Form 10-QSB for the quarter ended June 30,
2002, and incorporated herein by reference). |
|
|
|
21
|
|
Subsidiaries. |
|
|
|
31.1
|
|
Rule 13a-14(a) Certification, as adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.* |
|
|
|
31.2
|
|
Rule 13a-14(a) Certification, as adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.* |
|
|
|
32.1
|
|
Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.* |
|
32.2
|
|
Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.* |
|
|
|
* |
|
Filed herewith. |
|
|
|
Previously filed. |
- 15 -
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant
caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
MEDICAL DISCOVERIES, INC. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Judy M. Robinett |
|
|
|
|
President and Chief Executive Officer |
|
|
Date:
January __, 2006
- 16 -
INDEX TO EXHIBITS
|
|
|
Number |
|
Exhibit |
2.1
|
|
Sale and Purchase Agreement between Attorney
Hinnerk-Joachim Müller as liquidator of
Savetherapeutics AG i.L. and Medical
Discoveries, Inc. regarding the purchase of the
essential assets of Savetherapeutics AG i.L.
(Exhibits referenced therein will be provided
upon request.) |
|
|
|
3.1
|
|
Amended and Restated Articles of Incorporation
of the Company (filed as Exhibit 3.1 to the
Companys Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994, and
incorporated herein by reference). |
|
|
|
3.2
|
|
Amended Bylaws of the Company (filed as Exhibit
3.2 to the Companys Annual Report on Form
10-KSB for the fiscal year ended December 31,
1994, and incorporated herein by reference). |
|
|
|
4.1
|
|
Registration Rights Agreement dated October 18,
2004 among Monarch Pointe Fund, Ltd., Mercator
Advisory Group, LLC and Medical Discoveries,
Inc. (filed as Exhibit 4.1 to the Companys Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2004,
and incorporated herein by reference). |
|
|
|
4.2
|
|
Registration Rights Agreement dated December 3,
2004 among Mercator Momentum Fund, LP, Mercator
Momentum Fund III, LP, Mercator Advisory Group,
LLC and Medical Discoveries, Inc. (filed as Exhibit 4.2 to the
Companys Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2004, and incorporated herein by reference). |
|
|
|
10.1
|
|
2002 Stock Incentive Plan adopted by the Board
of Directors as of July 11, 2002 (filed as
Exhibit 10.5 to the Companys Quarterly Report
on Form 10-QSB for the quarter ended June 30,
2002, and incorporated herein by reference). |
|
|
|
21
|
|
Subsidiaries. |
|
|
|
31.1
|
|
Rule 13a-14(a) Certification, as adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.* |
|
|
|
31.2
|
|
Rule 13a-14(a) Certification, as adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.* |
|
|
|
32.1
|
|
Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.* |
|
|
|
32.2
|
|
Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.* |
|
|
|
* |
|
Filed herewith. |
|
|
|
Previously filed. |
- 17 -
Exhibit 31.1
RULE 13a-14(a) CERTIFICATION
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Judy M. Robinett, certify that:
1. I have reviewed this quarterly report on Form 10-QSB/A of Medical
Discoveries, Inc., a Utah corporation (the registrant);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other information
included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d -15(e) for the
registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to me by others
within those entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this quarterly report based on such evaluation; and
c) Disclosed in this report any change in the small business issuers
internal control over financial reporting that occurred during the small
business issuers most recent fiscal quarter (the small business issuers fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business issuers internal
control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over
financial reporting, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrants ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls over
financial reporting.
|
|
|
|
|
Dated: January ___, 2006 |
|
|
|
Judy M. Robinett |
|
|
President and Chief Executive Officer
|
|
|
|
|
|
Exhibit 31.2
RULE 13a-14(a) CERTIFICATION
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Dierdra J. Burgess, certify that:
1. I have reviewed this quarterly report on Form 10-QSB/A of Medical
Discoveries, Inc., a Utah corporation (the registrant);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other information
included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d -15(e)) for the
registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to me by others
within those entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this quarterly report based on such evaluation; and
c) Disclosed in this report any change in the small business issuers
internal control over financial reporting that occurred during the small
business issuers most recent fiscal quarter (the small business issuers fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business issuers internal
control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over
financial reporting, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrants ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls over
financial reporting.
|
|
|
|
|
Dated: January ___, 2006 |
|
|
|
Dierdra J. Burgess |
|
|
Controller
|
|
|
|
|
|
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the amended Quarterly Report of Medical Discoveries, Inc.
(the Company) on Form 10-QSB/A for the quarter ended June 30, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the Report),
I, Judy M. Robinett, President and Chief Executive Officer, certify pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge and belief:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
|
|
|
|
|
|
|
|
Dated: January __, 2006 |
|
|
|
Judy M. Robinett |
|
|
President and Chief Executive Officer |
|
|
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff
upon request. The foregoing certifications are accompanying the Companys Form
10-QSB/A solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of Section 1350, chapter 63 of title 18, United States
Code) and is not being filed as part of the Form 10-QSB/A or as a separate
disclosure document.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the amended Quarterly Report of Medical Discoveries, Inc.
(the Company) on Form 10-QSB/A for the quarter ended September 30, 2005 as
filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Dierdra J. Burgess, Controller, certify pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to the best of my knowledge and belief:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
|
|
|
|
|
|
|
|
Dated: January __, 2006 |
|
|
|
Dierdra J. Burgess |
|
|
Controller |
|
|
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff
upon request. The foregoing certifications are accompanying the Companys Form
10-QSB/A solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of Section 1350, chapter 63 of title 18, United States
Code) and is not being filed as part of the Form 10-QSB/A or as a separate
disclosure document.
ANNEX C
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB/A
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005
|
|
|
o |
|
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
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.) |
1388 S. Foothill Drive, #266, Salt Lake City, Utah 84108
(Address of principal executive offices)
(801) 582-9583
(Issuers telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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 þ No o
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No þ
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: As of November 10, 2005, there were 107,679,724 shares of the issuers
Common Stock and 42,000 shares of the issuers Series A Preferred Stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes o No þ
Explanatory Note
The purpose of this amendment on Form 10-QSB/A to the Quarterly Report on Form 10-QSB of
Medical Discoveries, Inc. for the three and nine months ended
September 30, 2005 is to restate our interim
consolidated financial statements for the period ended
September 30, 2005 and related
disclosures as of and for the period ended September 30, 2005. Generally, no attempt has been
made in this Form 10-QSB/A to modify or
update other disclosures presented in the original report on Form 10-QSB except as required
to reflect the effects of the restatement. The Form 10-QSB/A generally does not reflect events
occurring after the filing of the Form 10-QSB or modify or update those disclosures, including
the exhibits to the Form 10-QSB, affected by subsequent events. Information not affected by the
restatement is unchanged and reflects the disclosures made at the time of the original filing of
the form 10-QSB on November 14, 2005. Accordingly, this Form 10-QSB/A should be read in
conjunction with our filings made with the Securities and Exchange Commission subsequent to the
filing of the original Form 10-QSB, including any amendment to those filings. The following items
have been amended as a result of the restatement:
Part I Item 1. Financial Statements
Part I
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Part II
Item 6. Exhibits
The purpose of the restatement is to
give effect to EITF 00-19, Accounting for Derivative Financial Instruments Indexed to and
Potentially Settled in a Companys Own Stock, pursuant to which we have reclassified as
liabilities the conversion features of our Series A Convertible
Preferred Stock and the warrants issued in Connection therewith.
For
convenience and ease of reference, we are filing our quarterly report
in its entirely with the applicable changes.
TABLE OF CONTENTS
|
|
|
|
|
PART I |
|
|
|
|
FINANCIAL INFORMATION |
|
|
|
|
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS |
|
|
3 |
|
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|
|
11 |
|
ITEM 3. CONTROLS AND PROCEDURES |
|
|
14 |
|
PART II |
|
|
|
|
OTHER INFORMATION |
|
|
|
|
ITEM 6. EXHIBITS |
|
|
15 |
|
SIGNATURES |
|
|
17 |
|
INDEX TO EXHIBITS |
|
|
18 |
|
|
|
|
|
|
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following financial statements are filed with this report:
Condensed Consolidated Balance Sheets as of September 30, 2005, (unaudited) and December 31, 2004
(audited)
Condensed Consolidated Statements of Operations for the nine-month periods ended September 30, 2005
(unaudited), September 30, 2004 (unaudited), three-month periods ended September 30, 2005
(unaudited), September 30, 2004 (unaudited) and from inception of the development stage on November
20, 1991 through September 30, 2005 (unaudited)
Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2005
(unaudited), September 30, 2004 (unaudited), and from inception of the development stage on
November 20, 1991 through September 30, 2005 (unaudited)
Notes to Unaudited Condensed Consolidated Financial Statements
3
MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Balance Sheets
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Restated) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
1,256,939 |
|
|
$ |
1,455,397 |
|
Deposits |
|
|
|
|
|
|
51,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
1,256,939 |
|
|
|
1,506,497 |
|
|
|
|
|
|
|
|
|
Note receivable |
|
|
301,450 |
|
|
|
|
|
Property and Equipment, Net |
|
|
73,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
1,631,821 |
|
|
$ |
1,506,497 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
2,658,393 |
|
|
$ |
2,448,454 |
|
Accrued interest payable |
|
|
230,298 |
|
|
|
415,262 |
|
Notes payable |
|
|
56,000 |
|
|
|
336,717 |
|
Convertible notes payable |
|
|
193,200 |
|
|
|
193,200 |
|
Research and development obligation |
|
|
602,900 |
|
|
|
|
|
Financial instrument |
|
|
7,073,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
10,814,726 |
|
|
|
3,393,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
|
10,814,726 |
|
|
|
3,393,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, Series A, convertible; no par value; 50,000 shares
authorized; 42,000 and 12,000 shares issued and outstanding, respectively;
(aggregate liquidation preference of $4,200,000 and $1,200,000, respectively) |
|
|
|
|
|
|
523,334 |
|
Common stock, no par value; 250,000 shares authorized; 107,629,724 and 105,653,335 shares issued and outstanding, respectively |
|
|
15,283,407 |
|
|
|
14,918,657 |
|
Additional paid-in capital |
|
|
1,811,504 |
|
|
|
3,424,383 |
|
Deficit accumulated prior to the development stage |
|
|
(1,399,577 |
) |
|
|
(1,399,577 |
) |
Deficit accumulated during the development stage |
|
|
(24,878,239 |
) |
|
|
(19,353,933 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Deficit |
|
|
(9,182,905 |
) |
|
|
(1,887,136 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT |
|
$ |
1,631,821 |
|
|
$ |
1,506,497 |
|
|
|
|
|
|
|
|
4
MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of the |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development Stage |
|
|
|
For the Three |
|
|
For the Nine |
|
|
on November 20, 1991 |
|
|
|
Months Ended |
|
|
Months Ended |
|
|
Through |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
|
(Restated) |
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
|
(Restated) |
|
REVENUES |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
157,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
557,713 |
|
|
|
250,819 |
|
|
|
1,446,034 |
|
|
|
2,667,782 |
|
|
|
16,623,004 |
|
Research and development |
|
|
364,335 |
|
|
|
191,506 |
|
|
|
2,034,841 |
|
|
|
362,484 |
|
|
|
5,583,579 |
|
Inventory write-down |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,859 |
|
Impairment loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,709 |
|
License fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,001,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses |
|
|
922,048 |
|
|
|
442,325 |
|
|
|
3,480,875 |
|
|
|
3,030,266 |
|
|
|
23,314,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS |
|
|
(922,048 |
) |
|
|
(442,325 |
) |
|
|
(3,480,875 |
) |
|
|
(3,030,266 |
) |
|
|
(23,172,171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain(loss) on financial instrument |
|
|
572,615 |
|
|
|
|
|
|
|
(2,277,722 |
) |
|
|
|
|
|
|
(2,277,722 |
) |
Interest income |
|
|
2,674 |
|
|
|
854 |
|
|
|
17,584 |
|
|
|
3,980 |
|
|
|
47,155 |
|
Interest expense |
|
|
(7,591 |
) |
|
|
(27,497 |
) |
|
|
(30,726 |
) |
|
|
(114,221 |
) |
|
|
(1,148,163 |
) |
Foreign currency transaction gain (loss) |
|
|
(9,720 |
) |
|
|
|
|
|
|
51,080 |
|
|
|
|
|
|
|
51,080 |
|
Gain on forgiveness of debt |
|
|
|
|
|
|
|
|
|
|
196,353 |
|
|
|
|
|
|
|
1,431,889 |
|
Other income |
|
|
|
|
|
|
39 |
|
|
|
|
|
|
|
759 |
|
|
|
881,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expenses) |
|
|
557,978 |
|
|
|
(26,604 |
) |
|
|
(2,043,431 |
) |
|
|
(109,482 |
) |
|
|
(1,013,869 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS |
|
|
(364,070 |
) |
|
|
(468,929 |
) |
|
|
(5,524,306 |
) |
|
|
(3,139,748 |
) |
|
|
(24,186,040 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend from beneficial
conversion feature |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(692,199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS |
|
$ |
(364,070 |
) |
|
$ |
(468,929 |
) |
|
$ |
(5,524,306 |
) |
|
$ |
(3,139,748 |
) |
|
$ |
(24,878,239 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED LOSS PER
COMMON SHARE |
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING |
|
|
107,760,835 |
|
|
|
96,482,603 |
|
|
|
107,282,554 |
|
|
|
89,667,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Inception |
|
|
|
|
|
|
|
|
|
|
|
of the |
|
|
|
For the Nine |
|
|
Development Stage |
|
|
|
Months Ended |
|
|
on November 20, 1991 |
|
|
|
September 30, |
|
|
Through September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
|
(Restated) |
|
|
|
|
|
|
(Restated) |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,524,306 |
) |
|
$ |
(3,139,748 |
) |
|
$ |
(24,186,040 |
) |
Adjustments to reconcile net loss to
net cash used by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on financial instrument |
|
|
2,277,722 |
|
|
|
|
|
|
|
2,277,722 |
|
Foreign currency transaction gain |
|
|
(51,080 |
) |
|
|
|
|
|
|
(51,080 |
) |
Gain on debt restructuring |
|
|
(196,353 |
) |
|
|
|
|
|
|
(1,431,889 |
) |
Common stock issued for services, expenses,
and litigation |
|
|
18,750 |
|
|
|
66,500 |
|
|
|
4,286,467 |
|
Acquired research and development costs |
|
|
665,700 |
|
|
|
|
|
|
|
665,700 |
|
Depreciation |
|
|
4,613 |
|
|
|
|
|
|
|
104,884 |
|
Reduction of escrow receivable from
research and development |
|
|
|
|
|
|
|
|
|
|
272,700 |
|
Stock options and warrants granted
for services |
|
|
|
|
|
|
1,675,000 |
|
|
|
4,811,253 |
|
Reduction of legal costs |
|
|
|
|
|
|
|
|
|
|
(130,000 |
) |
Write-off of subscriptions receivable |
|
|
|
|
|
|
|
|
|
|
112,500 |
|
Impairment loss on assets |
|
|
|
|
|
|
|
|
|
|
9,709 |
|
Loss on disposal of equipment |
|
|
|
|
|
|
|
|
|
|
30,364 |
|
Write-off of accounts receivable |
|
|
51,100 |
|
|
|
|
|
|
|
245,065 |
|
Note payable issued for litigation |
|
|
|
|
|
|
|
|
|
|
385,000 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase in accounts receivable |
|
|
|
|
|
|
|
|
|
|
(7,529 |
) |
Decrease in prepaid expenses |
|
|
|
|
|
|
11,331 |
|
|
|
|
|
Decrease in deferred charges |
|
|
|
|
|
|
12,077 |
|
|
|
|
|
Increase (decrease) in accounts payable |
|
|
209,939 |
|
|
|
264,288 |
|
|
|
2,502,484 |
|
Increase (decrease) in accrued expenses |
|
|
30,672 |
|
|
|
37,905 |
|
|
|
630,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used by Operating Activities |
|
|
(2,513,243 |
) |
|
|
(1,072,647 |
) |
|
|
(9,472,309 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in deposits |
|
|
|
|
|
|
|
|
|
|
(51,100 |
) |
Purchase of equipment |
|
|
(78,045 |
) |
|
|
|
|
|
|
(210,229 |
) |
Issuance of note receivable |
|
|
(313,170 |
) |
|
|
|
|
|
|
(313,170 |
) |
Payments received on note receivable |
|
|
|
|
|
|
|
|
|
|
130,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used by Investing Activities |
|
|
(391,215 |
) |
|
|
|
|
|
|
(444,499 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, preferred
stock and warrants for cash |
|
|
3,006,000 |
|
|
|
1,352,886 |
|
|
|
10,033,845 |
|
Contributed equity |
|
|
|
|
|
|
|
|
|
|
131,374 |
|
Proceeds from notes payable |
|
|
|
|
|
|
|
|
|
|
1,336,613 |
|
Payments on notes payable |
|
|
(300,000 |
) |
|
|
(270,000 |
) |
|
|
(801,287 |
) |
Proceeds from convertible notes payable |
|
|
|
|
|
|
|
|
|
|
571,702 |
|
Payments on convertible notes payable |
|
|
|
|
|
|
|
|
|
|
(98,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities |
|
|
2,706,000 |
|
|
|
1,082,886 |
|
|
|
11,173,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH |
|
|
(198,458 |
) |
|
|
10,239 |
|
|
|
1,256,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AT BEGINNING OF PERIOD |
|
|
1,455,397 |
|
|
|
424,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD |
|
$ |
1,256,939 |
|
|
$ |
434,455 |
|
|
$ |
1,256,939 |
|
|
|
|
|
|
|
|
|
|
|
6
MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine |
|
|
|
Months Ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
SUPPLIMENTAL DISCLOSURES OF
CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Initial valuation of financial instrument |
|
$ |
10,624,054 |
|
|
$ |
|
|
Retirement of notes payable with common stock |
|
$ |
|
|
|
$ |
175,000 |
|
See
notes to condensed consolidated financial statements.
7
MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Unaudited Condensed Consolidated Financial Statements
Note 1 Basis of Presentation
Unaudited
Interim Condensed Consolidated Financial Statements
The
accompanying unaudited condensed consolidated 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
for 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 Companys 2004 Annual Report on Form 10-KSB for the year ended December 31, 2004, as filed
with the Securities and Exchange Commission. 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.
Stock Based Compensation
The Company accounts for its stock options under Accounting Principles Board (APB) Opinion No. 25
using the intrinsic value method. The Company has elected not to adopt the provisions of Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (FAS 123). In
accordance with Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, pro-forma net income, stock-based compensation expense,
and earnings per share using the fair value method are stated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Sep. 30, |
|
|
Nine Months Ended Sep. 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net loss applicable to
common shareholders, as
reported |
|
$ |
(364,070 |
) |
|
$ |
(468,929 |
) |
|
$ |
(5,524,306 |
) |
|
$ |
(3,139,748 |
) |
Add: Stock-based employee
compensation expense
included in reported net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,577,000 |
|
Deduct: Total stock based
employee compensation
expense determined under
fair value based method for
all awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,916,768 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss applicable
to common shareholders |
|
$ |
(364,070 |
) |
|
$ |
(468,929 |
) |
|
$ |
(5,524,306 |
) |
|
$ |
(3,479,516 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per
share, as reported |
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per
share, pro forma |
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Assumptions used to calculate the fair value of stock options granted as if the Company had adopted
FAS 123 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
Expected dividend yield |
|
|
N/A |
|
|
|
|
|
Risk free interest rate |
|
|
N/A |
|
|
|
3.8 |
% |
Expected volatility |
|
|
N/A |
|
|
|
220 |
% |
Expected life |
|
|
N/A |
|
|
7 |
years |
Weighted average fair value per share |
|
|
N/A |
|
|
$ |
0.10 |
|
Loss Per Common Share
Loss per share is computed by dividing net loss applicable to common shareholders by the
weighted-average number of shares outstanding. Potential common shares from convertible notes
payable, convertible preferred stock, warrants and stock options have not been included as they are anti-dilutive.
Note 2 Restatement of Financial Statements
The
Companys previously issued
condensed consolidated financial statements as of September 30, 2005 and for the three and nine
months ended September 30, 2005 have been restated to record the accounting of the warrants and
embedded conversion option of the Series A Convertible Preferred Stock, entered into in October
2004 and March 2005, as liabilities, resulting in an increase to current liabilities, rather than
as being recorded as equity. As a result of this restatement, the Company recorded $7,073,935 of
additional current liability related to the fair value of the warrants and conversion feature of
the preferred stock, with a reduction of $4,796,213 in equity along with an additional expense
of $2,277,722 recorded as a unrealized loss on financial instrument as of and for the nine months
ended September 30, 2005.
The following table summarizes the
effect of the restatement and reclassification adjustments on the financial statements as of
September 30, 2005 and for the three and nine months ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
November 20, 1991 Through |
|
|
|
Ended September 30, 2005 |
|
|
Ended September 30, 2005 |
|
|
September 30, 2005 |
|
|
|
|
|
|
|
(Previously |
|
|
|
|
|
|
(Previously |
|
|
|
|
|
|
(Previously |
|
|
|
(Restated) |
|
|
reported) |
|
|
(Restated) |
|
|
reported) |
|
|
(Restated) |
|
|
Reported) |
|
Revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
157,044 |
|
|
$ |
157,044 |
|
Cost of Goods Sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,564 |
|
|
|
14,564 |
|
Operating Expenses |
|
|
922,048 |
|
|
|
922,048 |
|
|
|
3,480,875 |
|
|
|
3,480,875 |
|
|
|
23,314,651 |
|
|
|
23,314,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations |
|
|
(922,048 |
) |
|
|
(922,048 |
) |
|
|
(3,480,875 |
) |
|
|
(3,480,875 |
) |
|
|
(23,172,171 |
) |
|
|
(23,172,171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on financial instrument |
|
|
572,615 |
|
|
|
|
|
|
|
(2,277,722 |
) |
|
|
|
|
|
|
(2,277,722 |
) |
|
|
|
|
Interest income |
|
|
2,674 |
|
|
|
2,674 |
|
|
|
17,584 |
|
|
|
17,584 |
|
|
|
47,155 |
|
|
|
47,155 |
|
Interest expense |
|
|
(7,591 |
) |
|
|
(7,591 |
) |
|
|
(30,726 |
) |
|
|
(30,726 |
) |
|
|
(1,148,163 |
) |
|
|
(1,148,163 |
) |
Foreign currency transaction gain |
|
|
(9,720 |
) |
|
|
(9,720 |
) |
|
|
51,080 |
|
|
|
51,080 |
|
|
|
51,080 |
|
|
|
51,080 |
|
Gain on forgiveness of debt |
|
|
|
|
|
|
|
|
|
|
196,353 |
|
|
|
196,353 |
|
|
|
1,431,889 |
|
|
|
1,431,889 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
881,892 |
|
|
|
881,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expenses) |
|
|
557,978 |
|
|
|
(14,637 |
) |
|
|
(2,043,431 |
) |
|
|
234,291 |
|
|
|
(1,013,869 |
) |
|
|
1,263,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
(364,070 |
) |
|
|
(936,685 |
) |
|
|
(5,524,306 |
) |
|
|
(3,246,584 |
) |
|
|
(24,186,040 |
) |
|
|
(21,908,318 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend from beneficial
conversion feature |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,264,409 |
) |
|
|
(692,199 |
) |
|
|
(1,956,608 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Applicable to Common
Shareholders |
|
$ |
(364,070 |
) |
|
$ |
(936,685 |
) |
|
$ |
(5,524,306 |
) |
|
$ |
(4,510,993 |
) |
|
$ |
(24,878,239 |
) |
|
$ |
(23,864,926 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
|
|
|
|
|
(Previously |
|
|
|
(Restated) |
|
|
reported) |
|
Total current liabilities |
|
|
10,814,726 |
|
|
|
3,740,791 |
|
Total liabilities |
|
|
10,814,726 |
|
|
|
3,740,791 |
|
Preferred stock |
|
|
|
|
|
|
1,570,109 |
|
Additional paid-in capital |
|
|
1,811,504 |
|
|
|
6,302,017 |
|
Deficit accumulated during the development stage |
|
|
(24,878,239 |
) |
|
|
(23,864,926 |
) |
Total stockholders deficit |
|
|
(9,182,905 |
) |
|
|
(2,108,970 |
) |
Note 3 Going Concern Considerations
The Companys recurring losses from development-stage activities in current and prior years raise
substantial doubt about the Companys 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 fund research and development costs until it is able to consistently
generate revenues and sustain profitable operations. However, there can be no assurance that these
plans will be successful.
Note 4 Issuance of Common Stock, Preferred Stock, and Warrants
Common Stock
During the nine months ended September 30, 2005, the Company issued 2,026,389 shares of restricted
common stock, 104,167 of which were issued for services valued at $18,750 and 192,222 of which were
issued for cash totaling $346,000. In connection with the sales for cash, the Company also issued
warrants to purchase 192,222 shares of restricted common stock at $0.18 per share, expiring 3 years
from the date of issuance.
Preferred Stock, Warrants and Financial Instrument
During the three months ended
March 31, 2005, the Company issued 30,000 shares of Series A Convertible Preferred Stock and
warrants to purchase 22,877,478 shares of common stock for a total offering price of $3.0 million.
The Company incurred $340,000 of offering costs and issued to the placement agent warrants to
purchase 1,220,132 shares of
common stock exercisable at $0.1967 per share which are exercisable for a period of three years.
The Company valued these warrants at $194,612 ($0.16 per share) using the Black Scholes option
pricing model with the following assumptions: risk free rate of 3.9%, volatility of 170% and an
expected life of three years.
Each share of Preferred Stock
entitles the holder to convert the share of Preferred Stock into the number of shares of
common stock resulting from multiplying $100 by the conversion price. The conversion price
is 75% of the average of the three lowest intra-day trading prices
for the Companys common
stock during the 10 trading days immediately
preceding the conversion date. The conversion price may not exceed $0.1967. The warrants
are subject to equitable adjustment in connection with a stock split, stock dividend or
similar transaction. The warrants entitle the holder to purchase up to 22,877,478 shares of
common stock of the Company at $0.1967 per share. The warrants expire three years after the
date of issuance.
The Series A Convertible Preferred
Stock has no voting rights. In the event of liquidation, the holders are entitled to a
liquidating distribution of $100 per share. The Company also entered into a Registration Rights
Agreement with the investors requiring the Company to file a
registration statement with the
Securities and Exchange Commission concerning the shares of common stock issuable upon
conversion of the Preferred Stock and exercise of the warrants and to use its best efforts to obtain
effectiveness of the registration statement as soon as possible after it is filed. There are no liquidation
damages and no significant penalties in the event the Companys registration statement is not declared effective within the required period.
The
conversion terms of the Series A Convertible Preferred Stock
doesnt contain a conversion floor; therefore the Company is
unable to determine the number of common shares the preferred stock
can be converted into. Accordingly, under the guidance of EITF 00-19
Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a
Companys Own Stock, the conversion feature and the warrants associated with the
preferred stock
are considered a financial instrument which is recorded at its full fair value and classified as
a liability on the accompanying financial statements. The fair value of the conversion feature
and the warrants on the date of issuance was $8,293,198 computed using the Black Scholes model
with the following assumptions: volatility of 170%, risk-free interest rate of 3.9% and an
expected life of three years. The fair value of the financial instrument exceeded the proceeds
by $5,827,810 which was recorded as an expense on the statement of operations. Due to the fair
value of the conversion feature and warrants being greater than the net proceeds received from
the preferred stock offering, none of the net proceeds have been assigned to the preferred stock.
As noted above, the Company cannot
determine the number of shares issuable for the Conversion of the Series A Convertible Preferred
Stock to common stock, therefore, the Company is unsure whether it has sufficient shares to
satisfy the 12,000 share Series A Convertible Preferred Stock and 4,575,495 warrants issued in
October 2004. In accordance
with EITF 00-19 the fair value of the conversion feature and warrants has been reclassified as a
liability. The fair value of the conversion feature and the warrants on the date of
reclassification was $2,330,852 computed using the Black Scholes model with the following
assumptions: volatility of 170%, risk-free interest rate of 3.9% and an expected life of three
years. The difference between the fair value of the financial instrument and the proceeds
previously recorded as equity ($1,423,598) was recorded against additional paid-in capital.
Due to the fair value of the conversion feature and the warrants being greater than the previous
equity amount and the preferred stock having no par value, no amounts have been assigned to the
preferred stock.
The Company is also required to value
the fair market price of the financial instrument as of September 30, 2005. The fair value of the
financial instrument was $7,073,935 on September 30, 2005. The Company used the Black-Scholes
model in calculating fair value with the following assumptions: volatility of 153%, risk free
interest rate of 4.2% and
an expected life of three years. The changes in fair market value have been recorded as
adjustments in the line Unrealized loss on financial
instrument in the statement of operations
for all periods presented.
9
Note 5 Other Significant Events
SaveCream Asset Purchase
On March 16, 2005, the Company completed the purchase of the intellectual property assets (the
Assets) of Savetherapeutics AG, a German corporation in liquidation in Hamburg, Germany
(SaveT). The Assets consist primarily of patents, patent applications, pre-clinical study data
and clinical trial data concerning SaveCream, SaveTs developmental-stage topical aromatase
inhibitor treatment for breast cancer. SaveCream never generated revenues for SaveT. The Companys
analysis as to whether the intellectual property purchased constituted a business resulted in the
conclusion that no such business had been acquired.
The purchase price of the Assets was negotiated to be 2,350,000 (approximately $2.8 million
under current exchange rates), payable as follows: 500,000 at closing, 500,000
(approximately $665,700 on the date of transaction, $602,900 using the September 30, 2005 exchange
rates) upon conclusion of certain pending transfers of patent and patent application rights from
SaveTs inventors to the Company, and the remaining 1,350,000 (approximately $1.62 million at
current exchange rates) upon successful commercialization of the Assets. The Companys source of
funds for the acquisition was a $3 million investment in the Companys Series A Preferred Stock by
an unrelated third party, as described in Note 3.
SaveT inventors have yet to assign the patent and application rights to the Company, management has
deemed the assignment of the rights to be reasonably likely because the inventors are contractually
bound to execute and deliver the assignments; therefore, the Company has recorded the second
500,000 payment as a current liability in these financial statements. At present it is
undeterminable whether the intellectual property will ever be commercialized; therefore, the final
1,350,000 under this acquisition has not been accrued as a liability as of September 30, 2005.
The Company determined the intellectual property purchased should be expensed as research and
development costs
Formation of MDI Oncology, Inc.
On March 22, 2005, the Company formed MDI Oncology, Inc., a Delaware Corporation, as a wholly-owned
subsidiary for the purpose of acquiring and operating the assets and associated business ventures
associated with the SaveCream purchase.
Settlement of Debt
On April 1, 2005, the Company negotiated a settlement regarding notes payable totaling $280,717 and
accrued interest of $215,636, by payment of $300,000 in cash. The Company recognized a gain on
settlement of debt totaling $196,353.
10
Transactions with Shareholder
On July 15, 2005, the Company entered into an agreement to grant a shareholder a non-interest
bearing loan in the amount of 500,000 (approximately $603,000 under current exchange rates) in
exchange for the transfer of certain patents in relation to Savetherapeutics AG, and the
performance of certain research activities. The loan is payable as follows, 100,000 upon
closing, 150,000 after signature of consent to the transfer of patents, and 250,000 after
performance and acceptance of certain research activities. As of September 30, 2005, the amount of
the loan was 250,000 (approximately $301,000 under current exchange rates). Settlement of the
loan shall take place by offsetting against profit claims, which accrue to the shareholder from his
stake in the Company.
Subsequent to the transfer of the industrial property rights and applications, the Company shall
grant to the aforementioned shareholder a 6% stake in MDI Oncology, Inc and to assign to him 6% of
the shares. The Company deemed these shares to have no value because it is a start-up company, and
its success is contingent on several different factors. The Company also entered into an
employment contract with the shareholder for a period of 24 months. The shareholder will receive a
fee of 120,000 per annum (approximately $145,000 using current exchange rates.)
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The
purpose of this section is to discuss and analyze our condensed consolidated financial condition,
liquidity and capital resources, and results of operations. This analysis should be read in
conjunction with the condensed consolidated financial statements and notes thereto at pages 3 through 11 and
Managements Discussion and Analysis of Financial Condition and Results of Operations contained in
our Annual Report on Form 10-KSB for the year ended December 31, 2004 (the 2004 10-KSB).
This section contains certain forward-looking statements that involve risks and uncertainties,
including statements regarding our plans, objectives, goals, strategies and financial performance.
Our actual 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 and Factors Affecting Future Results below and elsewhere in this report.
Overview
We are a developmental-stage bio-pharmaceutical company engaged in the research, validation,
development and ultimate commercialization of two drugs: MDI-P and SaveCream. MDI-P is an
anti-infective drug that we believe will be a safe and effective treatment for bacterial
infections, viral infections and fungal infections. We further believe that MDI-P will be a safe
and effective treatment for cystic fibrosis. SaveCream is a breast cancer medication that is
applied topically to reduce breast cancer tumors. Both of these drugs are still in development and
have not been approved by the U. S. Food and Drug Administration (FDA).
Our initial target indications for MDI-P are cystic fibrosis and HIV. We have filed an
Investigational New Drug application (IND) with the FDA seeking permission to begin Phase I human
clinical trials of MDI-P as a treatment for cystic fibrosis. The FDA has responded to our IND and
we are hopeful that we can satisfactorily answer the FDAs questions and satisfy the FDAs
follow-up requests for further animal testing, resulting in the FDA approving the application. If
the FDA approves that IND, we will begin human trials at St. Lukes Regional Medical Center in
Boise, Idaho using a protocol designed by Dr. Henry Thompson. If our Phase I IND for cystic
fibrosis is successful, we intend to file an IND for Phase I testing of MDI-P as a treatment for
HIV at Harvard School of Medicine using a protocol designed by Dr. Bruce Dezube. We also expect to
add additional indications for the use of MDI-P in the future as we further our preclinical
development.
We recently purchased SaveCream from a German biotechnology company. In a European Union study of
SaveCream used by over 100 women diagnosed with Stage 4 breast cancer, a significant number of
those women experienced a significant tumor reduction. This preliminary study showed an average
reduction in tumor size of fifty percent in two weeks. If these preliminary results are realized in
further clinical testing, this compound may be a useful neoadjuvant therapy for reducing tumor
size, increasing the potential for breast-saving surgery in place of mastectomy. We are in the
process of developing a global commercialization strategy for SaveCream.
11
Recent Events
SaveCream Asset Transfer. We are in the process of developing a commercialization plan for
SaveCream and of integrating the SaveCream assets into MDI. Specifically, we are working to
complete the transfer of patents and patent applications to MDIs subsidiary designated for
developing SaveCream. As we previously reported, at the time we purchased SaveCream and the other
intellectual property assets from Savetherapeutics A.G. (SaveT), SaveT had not yet obtained and
filed with the appropriate patent offices assignments from SaveCreams two inventors of the rights
to the underlying inventions. Each of those inventors has at least twice agreed with SaveT to
assign such rights and is contractually bound to do so. The fact that SaveT never followed through
and filed the assignment appears to be a mere oversight. One of the inventors, Alfred Schmidt, has
refused to cooperate to correct that oversight. We may need to initiate litigation against Mr.
Schmidt to extinguish his rights as a co-inventor. We have entered into an agreement with the
other inventor, Heinrich Wieland, pursuant to which he has provided us with the applicable
assignments, which we are in the process of filing with the appropriate patent offices. Should we
be unsuccessful in terminating Mr. Schmidts rights, he will remain a co-owner with us of the
patent rights. As a co-owner we would have the right to commercialize the inventions, but that
right would not be exclusive. Without exclusive rights to the inventions underlying SaveCream,
their value to us is much lower than it otherwise would be.
Cystic Fibrosis IND. We are continuing to prosecute our IND for cystic fibrosis with the FDA. At
the FDAs request, we have conducted a large animal model study intended to establish
pharmacological safety with relation to cardio and central nervous system toxicity as well as
genotoxicity for this IND. Should the FDA find the results of that study sufficient, we could start
Phase I clinical trials on cystic fibrosis in Q1 of 2006, subject to FDA approval.
Results of Operations
Revenues and Gross Profit We did not book any revenue for the three or nine-month periods ended
September 30, 2005. As we continue to pursue preclinical and clinical testing of our
pharmaceuticals, we may not book significant revenues in the near future.
Operating Expenses and Operating Loss We incurred $364,335 in research and development expenses
for the quarter ended September 30, 2005. We incurred $191,506 in research and development expenses
for the same period of 2004. Our general and administrative expenses
were $557,713 during the
quarter ended September 30, 2005, as compared to $250,819 during the quarter ended September 30,
2004. As a result of the foregoing, we sustained an operating loss of
$922,048 for the quarter
ended September 30, 2005, as compared with an operating loss of
$442,325 for the same period of
2004.
For the nine months ended September 30, 2005 we incurred $2,034,841 in research and development
expenses, $1,345,000 of which related to our acquiring the patents and patent rights relating to
SaveCream. We incurred $362,484 in research and development expenses for the same period of 2004.
Our general and administrative expenses were $1,446,034 during the first nine months of 2005, as
compared to $2,667,782 during the nine-month period ended September 30, 2004, resulting in
operating losses of $3,480,875 through September 30, 2005 and
$3,030,266 for the same period of
2004.
Other Income/Expense and Net Loss We booked $2,674 in interest income and incurred interest
expenses of $7,591 for the quarter ended September 30, 2005, as compared with interest income of
$854 and $27,497 in interest expenses for the same period of 2004.
During the quarter ended September 30, 2005, we also booked a foreign
currency loss of $9,720. We had no foreign currency risk in 2004. In
addition, we recognized an unrealized gain on financial instrument
of $572,615 during the quarter.
In sum, our net loss applicable
to common shareholders for the third quarter
of 2005 was $364,070 or a loss of less than $0.01 per fully diluted share. For the quarter ended
September 30, 2004 we incurred a net loss applicable to common shareholders of $468,929, making a
loss of less than $0.01 per fully diluted share.
For the nine months ended September 30, 2005, we booked $17,584 in interest income and incurred
interest expense of $30,726, as compared with $3,980 of interest income and $114,221 of interest
expense for the comparable period of 2004. In addition, we recognized
an unrealized loss on financial instrument of $2,277,722 during the nine months as a result of
the change in fair value associated with these instruments. There was no such dividend recognized during the first
nine months of 2004. During the nine months ended September 30,
2005, we also booked a foreign currency gain of $51, 080. We had no
foreign currency risk in 2004. Our net loss applicable to common shareholders for the first nine months of
2005 was $5,524,306 or $0.05 per fully diluted share. Our net loss
for the first nine months of 2004 was
$3,139,748 or $0.03 per fully diluted share.
12
Future Expectations We may operate at a loss for several more years while we continue to
research, gain regulatory approval of, and commercialize our technologies. We will spend more in
the remainder of the 2005 fiscal year in research and development expenses than we did over the
prior year as we continue to implement our commercialization strategy. Similarly, we expect our
general and administrative expenses to continue to increase for the remainder of 2005 as we
continue to expand the scope of our operations. As a result, we expect to sustain a greater net
loss in 2005 than we have in recent years.
Liquidity
and Capital Resources
As of September 30, 2005, we had $1,256,939 in cash and had a working capital deficit of
$9,557,787. Since our inception, we have financed our operations primarily through private sales of
equity and the issuance of convertible and non-convertible notes. We continue to require
significant supplementary funding to continue to develop, research, and seek regulatory approval of
our technologies. We do not currently generate any cash from operations and have no credit
facilities in place or available. Currently, we are funding operations through private issuances of
equity.
We have entered into fixed price contracts for all of the research services we expect will be
required in connection with our cystic fibrosis IND to meet the FDAs request for additional
preclinical information and for Phase I testing. We have budgeted for these costs and believe we
have sufficient funds to initiate this testing, however we may need to raise additional capital to
complete all of the necessary testing. Much of the preclinical testing requested by the FDA has
been completed with positive results. Our contracts for the additional outstanding testing require
completion of this work by December 31, 2005. In the interim, we are preparing a submission of the
existing data to the FDA in hopes of being permitted to proceed with Phase I testing pending the
outcome of the remaining preclinical work. We anticipate that we may be able to start Phase I
clinical trials on cystic fibrosis as early as Q1 of 2006.
If our Phase I IND for cystic fibrosis is successful, we intend to file an IND for Phase I testing
of MDI-P as a treatment for HIV at Harvard School of Medicine using a protocol designed by Dr.
Bruce Dezube. We believe we have insufficient capital to file our IND for HIV. In addition, once
an IND application for HIV is submitted, and assuming it is approved, we will need additional
capital to initiate Phase I clinical trials.
While our ability to obtain financing may improve in the event an IND application is approved and
we enter the clinic, we cannot give assurances that we will have access to the significant capital
required to take a drug through regulatory approvals and to market. We may seek a partner in the
global pharmaceutical industry to help us co-develop, license, or even purchase some or all of our
technologies.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined in Item 303(c) of Regulation S-B.
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 our
plans, objectives, goals, strategies, future events, future revenues or performance, capital
expenditures, and financing needs 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 us from time to
time. All such subsequent forward-looking statements, whether written or oral and whether made by
us or on our behalf, are also expressly qualified by these cautionary statements.
Our forward-looking statements are based upon our current expectations and various assumptions. Our
expectations, beliefs and projections are expressed in good faith and are believed by us to have a
reasonable basis, including without limitation, our examination of historical operating trends,
data contained in our records and other data available from third parties, but there can be no
assurance that our expectations, beliefs and projections will result or
13
be achieved or accomplished. Our forward-looking statements apply only as of the date made. We undertake 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 revenues and lack of profit 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 2004 10-KSB. There may also be other factors, including those
discussed elsewhere in this report, that may cause our actual results to differ from the
forward-looking statements. Any forward-looking statements made by us or on our behalf should be
considered in light of these factors.
ITEM 3. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange Act), as of September 30, 2005. Based
on this evaluation, our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures were effective as of September 30, 2005.
(b) There have been no significant changes (including corrective actions with regard to significant
deficiencies or material weaknesses) in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of the evaluation referenced in
paragraph (a) above.
14
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS
The
following documents are furnished as exhibits to this Form 10-QSB/A. Exhibits marked with an
asterisk are filed herewith. The remainder of the exhibits previously have been filed with the
Commission and are incorporated herein by reference.
|
|
|
Number |
|
Exhibit |
2.1
|
|
Sale and Purchase Agreement between Attorney
Hinnerk-Joachim Müller as liquidator of
Savetherapeutics AG i.L. and Medical
Discoveries, Inc. regarding the purchase of the
essential assets of Savetherapeutics AG i.L.
(filed as Exhibit 2.1 to the Companys Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 2004, and incorporated herein by
reference). |
|
|
|
3.1
|
|
Amended and Restated Articles of Incorporation
of the Company (filed as Exhibit 3.1 to the
Companys Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994, and
incorporated herein by reference). |
|
|
|
3.2
|
|
Amended Bylaws of the Company (filed as Exhibit
3.2 to the Companys Annual Report on Form
10-KSB for the fiscal year ended December 31,
1994, and incorporated herein by reference). |
|
|
|
4.1
|
|
Registration Rights Agreement dated October 18,
2004 among Monarch Pointe Fund, Ltd., Mercator
Advisory Group, LLC and Medical Discoveries,
Inc. (filed as Exhibit 4.1 to the
Companys Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2004, and
incorporated herein by reference). |
|
|
|
4.2
|
|
Registration Rights Agreement dated December 3,
2004 among Mercator Momentum Fund, LP, Mercator
Momentum Fund III, LP, Mercator Advisory Group,
LLC and Medical Discoveries, Inc.
(filed as Exhibit 4.2 to the Companys
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2004, and incorporated herein
by reference). |
|
|
|
4.3
|
|
Certificate of Designations of Preferences and
Rights of Series A Convertible Preferred Stock
of Medical Discoveries, Inc. (filed as Exhibit
4.1 to Registration Statement No. 333-121635
filed on Form SB-2 on December 23, 2004, and
incorporated herein by reference). |
|
|
|
4.4
|
|
Amendment to Certificate of Designations of
Preferences and Rights of Series A Convertible
Preferred Stock of Medical Discoveries, Inc.
(filed as Exhibit 4.2 to Registration Statement
No. 333-121635 filed on Form SB-2 on December
23, 2004, and incorporated herein by reference). |
|
|
|
10.1
|
|
2002 Stock Incentive Plan adopted by the Board
of Directors as of July 11, 2002 (filed as
Exhibit 10.5 to the Companys Quarterly Report
on Form 10-QSB for the quarter ended June 30,
2002, and incorporated herein by reference). |
|
|
|
10.2
|
|
Subscription Agreement dated October 18, 2004
among Monarch Pointe Fund, Ltd., Mercator
Advisory Group, LLC, and Medical Discoveries,
Inc. (filed as Exhibit 10.2 to Amendment No. 2
to Registration Statement No. 333-121635 filed
on form SB-2 on June 2, 2005, and incorporated
herein by reference). |
|
|
|
10.3
|
|
Subscription Agreement dated December 3, 2004
among Mercator Momentum Fund, LP, Mercator
Momentum Fund III, LP, Mercator Advisory Group,
LLC, and Medical Discoveries, Inc. (filed as
Exhibit 10.3 to Amendment No. 2 to Registration
Statement No. |
15
|
|
|
Number |
|
Exhibit |
|
|
333-121635 filed on form SB-2 on
June 2, 2005, and incorporated herein by
reference).
|
|
|
|
10.4
|
|
Employment Agreement dated March 1, 2005 between
Medical Discoveries, Inc. and Judy M. Robinett.
(filed as Exhibit 10.4 to Amendment No. 3 to
Registration Statement No. 333-121635 filed on
Form SB-2 on October 13, 2005, and incorporated
herein by reference). |
|
|
|
21
|
|
Subsidiaries. |
|
|
|
31.1
|
|
Rule 13a-14(a) Certification, as adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.* |
|
|
|
31.2
|
|
Rule 13a-14(a) Certification, as adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.* |
|
|
|
32.1
|
|
Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.* |
|
|
|
32.2
|
|
Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.* |
|
|
|
* |
|
Filed herewith. |
|
|
|
Previously filed. |
16
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Judy M. Robinett |
|
|
|
|
President and Chief Executive Officer |
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Date:
January __, 2006 |
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17
INDEX TO EXHIBITS
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Number |
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Exhibit |
2.1
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Sale and Purchase Agreement between Attorney
Hinnerk-Joachim Müller as liquidator of
Savetherapeutics AG i.L. and Medical
Discoveries, Inc. regarding the purchase of the
essential assets of Savetherapeutics AG i.L.
(filed as Exhibit 2.1 to the Companys Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 2004, and incorporated herein by
reference). |
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3.1
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Amended and Restated Articles of Incorporation
of the Company (filed as Exhibit 3.1 to the
Companys Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994, and
incorporated herein by reference). |
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3.2
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Amended Bylaws of the Company (filed as Exhibit
3.2 to the Companys Annual Report on Form
10-KSB for the fiscal year ended December 31,
1994, and incorporated herein by reference). |
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4.1
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Registration Rights Agreement dated October 18,
2004 among Monarch Pointe Fund, Ltd., Mercator
Advisory Group, LLC and Medical Discoveries,
Inc. (filed as Exhibit 4.1 to the
Companys Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2004, and
incorporated herein by reference). |
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4.2
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Registration Rights Agreement dated December 3,
2004 among Mercator Momentum Fund, LP, Mercator
Momentum Fund III, LP, Mercator Advisory Group,
LLC and Medical Discoveries, Inc.
(filed as Exhibit 4.2 to the Companys
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2004, and incorporated herein
by reference). |
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4.3
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Certificate of Designations of Preferences and
Rights of Series A Convertible Preferred Stock
of Medical Discoveries, Inc. (filed as Exhibit
4.1 to Registration Statement No. 333-121635
filed on Form SB-2 on December 23, 2004, and
incorporated herein by reference). |
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4.4
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Amendment to Certificate of Designations of
Preferences and Rights of Series A Convertible
Preferred Stock of Medical Discoveries, Inc.
(filed as Exhibit 4.2 to Registration Statement
No. 333-121635 filed on Form SB-2 on December
23, 2004, and incorporated herein by reference). |
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10.1
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2002 Stock Incentive Plan adopted by the Board
of Directors as of July 11, 2002 (filed as
Exhibit 10.5 to the Companys Quarterly Report
on Form 10-QSB for the quarter ended June 30,
2002, and incorporated herein by reference). |
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10.2
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Subscription Agreement dated October 18, 2004
among Monarch Pointe Fund, Ltd., Mercator
Advisory Group, LLC, and Medical Discoveries,
Inc. (filed as Exhibit 10.2 to Amendment No. 2
to Registration Statement No. 333-121635 filed
on form SB-2 on June 2, 2005, and incorporated
herein by reference). |
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10.3
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Subscription Agreement dated December 3, 2004
among Mercator Momentum Fund, LP, Mercator
Momentum Fund III, LP, Mercator Advisory Group,
LLC, and Medical Discoveries, Inc. (filed as
Exhibit 10.3 to Amendment No. 2 to Registration
Statement No. 333-121635 filed on form SB-2 on
June 2, 2005, and incorporated herein by
reference). |
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10.4
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Employment Agreement dated March 1, 2005 between
Medical Discoveries, Inc. and Judy M. Robinett.
(filed as Exhibit 10.4 to Amendment No. 3 to
Registration Statement No. 333-121635 filed on
Form SB-2 on October 13, 2005, and incorporated
herein by reference). |
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21
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Subsidiaries. |
18
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Number |
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Exhibit |
31.1
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Rule 13a-14(a) Certification, as adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.* |
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31.2
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Rule 13a-14(a) Certification, as adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.* |
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32.1
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Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.* |
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32.2
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Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.* |
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* |
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Filed herewith. |
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Previously filed. |
19
Exhibit 31.1
RULE 13a-14(a) CERTIFICATION
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Judy M. Robinett, certify that:
1. I have reviewed this quarterly report on Form 10-QSB/A of Medical
Discoveries, Inc., a Utah corporation (the registrant);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other information
included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d -15(e)) for the
registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to me by others
within those entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this quarterly report based on such evaluation; and
c) Disclosed in this report any change in the small business issuers
internal control over financial reporting that occurred during the small
business issuers most recent fiscal quarter (the small business issuers fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business issuers internal
control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over
financial reporting, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrants ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls over
financial reporting.
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Dated: January __, 2006 |
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Judy M. Robinett |
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President and Chief Executive Officer |
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Exhibit 31.2
RULE 13a-14(a) CERTIFICATION
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Dierdra J. Burgess, certify that:
1. I have reviewed this quarterly report on Form 10-QSB/A of Medical
Discoveries, Inc., a Utah corporation (the registrant);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other information
included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d -15(e)) for the
registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to me by others
within those entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this quarterly report based on such evaluation; and
c) Disclosed in this report any change in the small business issuers
internal control over financial reporting that occurred during the small
business issuers most recent fiscal quarter (the small business issuers fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business issuers internal
control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over
financial reporting, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrants ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls over
financial reporting.
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Dated: January __, 2006 |
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Dierdra J. Burgess |
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Controller |
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Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the amended Quarterly Report of Medical Discoveries, Inc.
(the Company) on Form 10-QSB/A for the quarter ended September 30, 2005 as
filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Judy M. Robinett, President and Chief Executive Officer, certify
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
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Dated: January __, 2006 |
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Judy M. Robinett |
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President and Chief Executive Officer |
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A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff
upon request. The foregoing certifications are accompanying the Companys Form
10-QSB/A solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of Section 1350, chapter 63 of title 18, United States
Code) and is not being filed as part of the Form 10-QSB/A or as a separate
disclosure document.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the amended Quarterly Report of Medical Discoveries, Inc.
(the Company) on Form 10-QSB/A for the quarter ended September 30, 2005 as
filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Dierdra J. Burgess, Controller, certify pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to the best of my knowledge and belief:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
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Dated: January __, 2006 |
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Dierdra J. Burgess |
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Controller |
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A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff
upon request. The foregoing certifications are accompanying the Companys Form
10-QSB/A solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of Section 1350, chapter 63 of title 18, United States
Code) and is not being filed as part of the Form 10-QSB/A or as a separate
disclosure document.