United States
Securities and Exchange Commission
Washington, DC 20549
Form 10-QSB
(Mark One)
(X) Quarterly Report Under Section 13 or 15(d)
of the Securities and Exchange Act of 1934
For Quarter Ended February 28, 2001
or
( ) Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition
period from ______ to _______
Commission File No. 0-12561
Meditech Pharmaceuticals, Inc.
(Exact name of Registrant as specified in its charter)
Nevada 95-819300
---------------- ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
PMB 382, 10105 E. Via Linda, #103, Scottsdale, AZ 85258
-------------------------------------------------------
(Address of principal executive offices and zip code)
(480) 614-2874
-------------------
(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (D) of the Securities Exchange Act of 1934
during the preceding 12 months (and for such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the last practicable date.
146,703,432 shares of $.001 par value common stock, as of February 28, 2001
Transactional small business disclosure format (check one): Yes No X
----- -----
This quarterly report on Form 10-QSB (The "Report") may be deemed to contain
forward-looking statements within the meaning of the Private Securities
Litigation Act of 1995 ("The Reform Act".) Forward-looking statements in this
report or hereafter included in other publicly available documents filed with
the Securities and Exchange Commission (The "Commission"), reports to the
Company's stockholders and other publicly available statements issued or
released by the Company involve known and unknown risks, uncertainties and other
factors which could cause the Company's actual results, performance (financial
or operating) or achievements to differ from the future results, performance
(financial or operating) or achievements expressed or implied by such
forward-looking statements. Such future results are based upon management's best
estimates based upon current conditions and the most recent results of
operations. These risks include, but are not limited to, the risks set forth
herein, each of which could adversely affect the Company's business and the
accuracy of the forward-looking statements contained herein.
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONTENTS
FEBRUARY 28, 2001 (UNAUDITED)
================================================================================
Page
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets 1 - 2
Condensed Consolidated Statements of Operations 3 - 4
Condensed Consolidated Statements of Cash Flows 5 - 6
Notes to Condensed Consolidated Financial Statements 7 - 13
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONDENSED CONSOLIDATED BALANCE SHEETS
MAY 31, 2000 AND FEBRUARY 28, 2001 (UNAUDITED)
================================================================================
ASSETS
FEBRUARY 28, May 31,
2001 2000
------------ ------------
(unaudited)
CURRENT ASSETS
Cash $ 265,000 $ 114,800
Prepaid expenses 600 600
------------ ------------
Total current assets 265,600 115,400
OTHER ASSETS 40,700 2,100
------------ ------------
TOTAL ASSETS $ 306,300 $ 117,500
============ ============
The accompanying notes are an integral part of these financial statements.
1
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONDENSED CONSOLIDATED BALANCE SHEETS
MAY 31, 2000 AND FEBRUARY 28, 2001 (UNAUDITED)
===================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
FEBRUARY 28, May 31,
2001 2000
------------- -------------
(unaudited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,498,600 $ 1,502,500
Accrued compensation 2,787,100 2,787,100
Advances from affiliates 3,854,500 3,603,800
Advances from stockholders 42,500 43,500
Loan payable 71,000 71,000
Deferred revenue 100,000 100,000
------------- -------------
Total current liabilities 8,353,700 8,107,900
------------- -------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 191,300 191,300
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock, $0.001 par value
25,000,000 shares authorized
0 (unaudited) and 0 issued and outstanding - -
Common stock, $0.001 par value
400,000,000 shares authorized
146,703,432 (unaudited) and 136,713,432 shares
issued and outstanding 146,700 136,700
Subscriptions receivable (10,000) (10,000)
Additional paid-in capital 8,307,200 7,743,200
Accumulated deficit (16,682,600) (16,051,600)
------------- -------------
Total stockholders' deficit (8,238,700) (8,181,700)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 306,300 $ 117,500
============= =============
The accompanying notes are an integral part of these financial statements.
2
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 2001 AND 2000 (UNAUDITED) AND
FOR THE PERIOD FROM MAY 4, 1982 (INCEPTION) TO FEBRUARY 28, 2001 (UNAUDITED)
===========================================================================================================
For the
Period from
May 4,
For the Three Months Ended For the Nine Months Ended 1982
February February (Inception) to
------------------------------ ------------------------------ February 28,
2001 2000 2001 2000 2001
------------- ------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
REVENUE $ - $ - $ - $ - $ 25,000
------------- ------------- ------------- ------------- -------------
OPERATING EXPENSES
Research and
development - - 6,500 - 1,844,800
General and
administrative 125,000 506,600 375,300 751,300 12,458,300
Aborted stock
offering costs - - - - 325,400
------------- ------------- ------------- ------------- -------------
Total operating
expenses 125,000 506,600 381,800 751,300 14,628,500
------------- ------------- ------------- ------------- -------------
LOSS BEFORE OTHER
INCOME (EXPENSE) (125,000) (506,600) (381,800) (751,300) (14,603,500)
------------- ------------- ------------- ------------- -------------
OTHER INCOME
(EXPENSE)
Interest expense (85,400) (78,100) (250,700) (229,100) (2,784,500)
Interest income 1,500 - 1,500 - 300,000
Other income, net - - - - 75,600
------------- ------------- ------------- ------------- -------------
Total other income
(expense) (83,900) (78,100) (249,200) (229,100) (2,408,900)
------------- ------------- ------------- ------------- -------------
LOSS BEFORE MINORITY
INTEREST IN LOSSES
OF SUBSIDIARY (208,900) (584,700) (631,000) (980,400) (17,012,400)
MINORITY INTEREST IN
LOSSES OF
SUBSIDIARY - - - - 329,800
------------- ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements.
3
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 2001 AND 2000 (UNAUDITED) AND
FOR THE PERIOD FROM MAY 4, 1982 (INCEPTION) TO FEBRUARY 28, 2001 (UNAUDITED)
===========================================================================================================
For the
Period from
May 4,
For the Three Months Ended For the Nine Months Ended 1982
February February (Inception) to
------------------------------ ------------------------------ February 28,
2001 2000 2001 2000 2001
------------- ------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
NET LOSS $ (208,900) $ (584,700) $ (631,000) $ (980,400) $(16,682,600)
============= ============= ============= ============= =============
BASIC AND DILUTED LOSS
PER SHARE $ (0.01) $ (0.01) $ (0.01) $ (0.01) $ (0.17)
============= ============= ============= ============= =============
WEIGHTED-AVERAGE
SHARES
OUTSTANDING 142,036,765 131,001,894 138,937,864 129,907,593 100,597,241
============= ============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
4
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED FEBRUARY 28, 2001 AND 2000 (UNAUDITED) AND
FOR THE PERIOD FROM MAY 4, 1982 (INCEPTION) TO FEBRUARY 28, 2001 (UNAUDITED)
======================================================================================================
For the
Period from
May 4,
For the Nine Months Ended 1982
February (Inception) to
------------------------------ February 28,
2001 2000 2001
------------- ------------- -------------
(unaudited) (unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (631,000) $ (980,400) $(16,682,600)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization - - 135,600
Warrants and options issued to employees and
vendors - - 775,100
Minority interest in losses of subsidiary - - (329,800)
Stock issued to employees and vendors - 600,700 1,667,300
Contributed services 274,000 63,500 400,900
Accrued interest on advances from affiliates 250,700 229,100 2,784,500
Increase in
Prepaid expenses - - (600)
Other assets (35,200) - (37,300)
Increase (decrease) in
Accounts payable and accrued expenses (3,900) (6,400) 1,498,600
Accrued compensation - 52,700 2,787,100
Deferred revenue - - 100,000
------------- ------------- -------------
Net cash used in operating activities (145,400) (40,800) (6,901,200)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (3,400) - (139,000)
------------- ------------- -------------
Net cash used in investing activities (3,400) - (139,000)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from advances from stockholders (1,000) - 42,500
Proceeds from advances from affiliates, net - 40,800 2,207,300
Proceeds from loan payable - - 71,000
Proceeds from sale of stock, net 300,000 - 4,984,400
------------- ------------- -------------
Net cash provided by financing activities 299,000 40,800 7,305,200
------------- ------------- -------------
The accompanying notes are an integral part of these financial statements.
5
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED FEBRUARY 28, 2001 AND 2000 (UNAUDITED) AND
FOR THE PERIOD FROM MAY 4, 1982 (INCEPTION) TO FEBRUARY 28, 2001 (UNAUDITED)
======================================================================================================
For the
Period from
May 4,
For the Nine Months Ended 1982
February 28, (Inception) to
------------------------------ February 28,
2001 2000 2001
------------- ------------- -------------
(unaudited) (unaudited) (unaudited)
Net decrease in cash $ 150,200 $ - $ 265,000
CASH, BEGINNING OF PERIOD 114,800 - -
------------- ------------- -------------
CASH, END OF PERIOD $ 265,000 $ - $ 265,000
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
INTEREST PAID $ - $ - $ -
============= ============= =============
INCOME TAXES PAID $ - $ - $ -
============= ============= =============
The accompanying notes are an integral part of these financial statements.
6
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000 AND FEBRUARY 28, 2001 (UNAUDITED)
================================================================================
NOTE 1 - DESCRIPTION OF BUSINESS
Meditech Pharmaceuticals, Inc. ("Meditech") is a drug development
company, which is focused in the areas of research, development, and
marketing in the biomedical industry, with an emphasis on
anti-infective drugs. Meditech was incorporated in Nevada on March 21,
1983 and completed its initial public offering in August 1983. Since
then, it has been engaged in research and development activities
associated with bringing its products to market.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Meditech
and its 37% owned and controlled subsidiary Viral Research
Technologies, Inc. ("Viral") (collectively, the "Company"). All
significant intercompany transactions and balances have been eliminated
in consolidation.
Going Concern Issues
--------------------
The Company has received a report from its independent auditors that
includes an explanatory paragraph describing the Company's uncertainty
to continue as a going concern. These consolidated financial statements
contemplate the ability to continue as such and do not include any
adjustments that might result from this uncertainty.
Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements have been
prepared by Meditech pursuant to the rules and regulations of the
Securities and Exchange Commission. The information furnished herein
reflects all adjustments (consisting of normal recurring accruals and
adjustments) which are, in the opinion of management, necessary to
fairly represent the operating results for the respective periods.
Certain information and footnote disclosures normally present in annual
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such rules
and regulations. The results of the nine months ended February 28, 2001
are not necessarily indicative of the results to be expected for the
full year ending May 31, 2001.
7
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000 AND FEBRUARY 28, 2001 (UNAUDITED)
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Development Stage Enterprise
----------------------------
The Company is a development stage company as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and
Reporting by Development Stage Enterprises." The Company is devoting
substantially all of its present efforts to establish a new business,
and its planned principal operations have not yet commenced. All losses
accumulated since inception have been considered as part of the
Company's development stage activities.
Estimates
---------
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue
-------
Revenue represents license fees that are recognized when earned over
the period of the applicable license agreement.
Impairment of Long-Lived Assets
-------------------------------
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of the
assets to future net cash flows expected to be generated by the assets.
If the assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
exceeds the fair value of the assets. To date, no impairment has
occurred.
8
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000 AND FEBRUARY 28, 2001 (UNAUDITED)
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
------------
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.
Loss per Share
--------------
The Company utilizes SFAS No. 128, "Earnings per Share." Basic loss per
share is computed by dividing loss available to common stockholders by
the weighted-average number of common shares outstanding. Diluted loss
per share is computed similar to basic loss per share except that the
denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive. For
the nine months ended February 28, 2001 and 2000, the Company incurred
net losses; therefore, basic and diluted loss per share are the same.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
Leases
------
Currently, the Company uses its operating facilities, which are
provided by its Chief Executive Officer, without a lease. There is no
guarantee the officer will be willing to provide these facilities in
the future (see Note 7).
Employment Agreements
---------------------
The Company entered into an employment agreement dated as of February
3, 2000 with its Chief Executive Officer, contingent upon completion of
the offering discussed in Note 7. The agreement is for a three-year
term and provides for a base salary of $150,000 per annum for the first
year with an increase at least equal to the consumer price index over
each succeeding year. The agreement provides for a severance payment
including the unearned salary for the remainder of the contract plus
any prorated earned bonuses in the event of termination without cause
or upon change of control. Additionally, the agreement grants options
to purchase 15,950,000 shares of common stock exercisable at various
prices and vesting over the course of his employment agreement.
9
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000 AND FEBRUARY 28, 2001 (UNAUDITED)
================================================================================
NOTE 3 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employment Agreements (Continued)
---------------------
The Company entered into an employment agreement dated as of February
3, 2000 with its Chief Financial Officer, contingent upon completion of
the offering discussed in Note 5. The agreement is for a three-year
term providing for a base salary of $120,000 per annum for the first
year and not less than $120,000 per annum during the second and third
years of the agreement. In addition, the officer will be granted a
total of 13,950,000 warrants exercisable at various prices and vesting
over the course of the agreement. The agreement provides for a
severance payment including the remainder of the base salary due under
the agreement if the officer is discharged without cause or if the
officer is terminated within 12 months of a change of control of the
Company. The severance payment will be equal to 12 months of the
current salary.
Litigation
----------
The Company may become involved in various legal proceedings and claims
which arise in the ordinary course of its business. Management does not
believe that these matters will have a material adverse effect on the
Company's consolidated position or results of operations.
License Agreement
-----------------
On February 3, 2000, the Company received $25,000 from Immune Network
Research, Ltd. ("INR"), a Canadian pharmaceutical development company,
under a letter of intent. The payment was made for a one-year
irrevocable option granting the right to negotiate for an exclusive
license for pharmaceutical applications worldwide outside of the United
States. The Company then received an additional $100,000 from INR in
anticipation of a definitive agreement. This amount has been recorded
as deferred revenue until such a time as the agreement is executed.
Under the terms of the letter, the Company issued a one-year option to
INR for 10,000,000 shares of common stock, immediately exercisable at
$0.03 per share. In return, the Company will receive royalties equal to
7% of net sales for all MTCH-24(TM) products sold and 4% of net sales
for all Viraplex(R) products sold by INR. During the second quarter of
2000, the agreement was executed. The option was valued at $400,000,
using the Black-Scholes option-pricing model, which has been recorded
as an operating expense on the date granted.
During the nine months ended February 28, 2001, INR exercised options
to purchase 10,000,000 shares of common stock and paid $300,000 to the
Company.
10
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000 AND FEBRUARY 28, 2001 (UNAUDITED)
================================================================================
NOTE 4 - INVESTMENT AGREEMENT
On June 30, 2000 and subsequently amended on February 15, 2001, the Company
entered into an investment agreement with Swartz Private Equity, LLC ("Swartz").
The investment agreement entitles the Company to issue and sell common stock to
Swartz in the form of put rights for up to an aggregate of $30,000,000 from time
to time during a three-year period beginning on the date of an effective
registration statement.
Under the agreement, in order to invoke a put right, the Company must have an
effective registration statement on file with the Securities and Exchange
Commission and provide Swartz with at least 10 but not more than 20 business
days advance notice of the date on which the Company intends to exercise a put
right and must indicate the number of shares of common stock the Company intends
to sell to Swartz. The Company may also designate a maximum dollar amount of
common stock (not to exceed $2,000,000), which the Company will sell to Swartz
during the put and/or a minimum purchase price per common share at which Swartz
may purchase shares during the put. The number of shares of common stock sold to
Swartz in a put may not exceed the lesser of (i) 1,500,000 shares; (ii) 15% of
the aggregate daily reported trading volume of the Company's common shares,
excluding certain block trades, during the 20 business days after the date of a
put notice, with certain restrictions; (iii) 15% of the aggregate daily reported
trading volume of common shares during the 20 business days before the put date,
excluding certain block trades; or (iv) a number of shares that, when added to
the number of shares acquired by Swartz under the investment agreement during
the 31 days preceding the put date, would exceed 9.99% of the total number of
shares of common stock outstanding. For each common share, Swartz will pay the
Company the lesser of (i) the market price for such put, minus $0.075 or (ii)
91% of the market price for the put. This may be construed as a below-market
issuance of securities and could result in significant charges to the Company's
earnings.
Further, under the provisions of the agreement, during the term of the
investment agreement and for a period of one year thereafter, the Company is
prohibited from engaging in certain financing transactions involving the
Company's equity securities
11
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000 AND FEBRUARY 28, 2001 (UNAUDITED)
================================================================================
NOTE 5 - INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities for income taxes consisted of the following:
February 28, May 31,
2001 2000
--------------- ---------------
(unaudited)
Deferred tax assets
Reserve for finance charges $ 400,000 $ 400,000
Accrued compensation 1,100,000 1,100,000
Interest on related party advances 1,110,000 1,010,000
Operating losses 2,150,000 1,629,000
Valuation allowance (4,760,000) (4,139,000)
--------------- ---------------
NET DEFERRED TAX ASSET $ - $ -
--============= ===============
The federal operating loss carryforwards at February 28, 2001 were
approximately $5,832,600 (unaudited).
NOTE 6 - RELATED PARTY TRANSACTIONS
Since inception, the Company has received advances from Petro-Med, Inc,
an affiliate, to fund its working capital requirements. At May 31, 2000
and 1999 and February 28, 2001, the Company maintained short-term
advances from affiliates of $3,603,800, $3,294,700, and $3,769,100
(unaudited), respectively. Accrued interest is attributed to the
outstanding balance as incurred. The advances bear interest at 9% per
annum on any outstanding balance. Interest expense on the advances was
$309,000 and $283,000 for the years ended May 31, 2000 and 1999,
respectively.
At May 31, 2000 and February 28, 2001, the Company maintained unsecured
advances from stockholders in the amount of $43,500 and $42,500
(unaudited). The advances are unsecured, non-interest-bearing, and are
payable on demand.
Due to cash shortages, the Company has accrued deferred salaries and
related taxes payable to certain officers who are stockholders and
directors of the Company. At May 31, 2000, the aggregate amount of
accrued compensation was $2,787,100.
The Company has entered into certain employment agreements with its
officers and stockholders (see Note 5).
12
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000 AND FEBRUARY 28, 2001 (UNAUDITED)
================================================================================
NOTE 6 - RELATED PARTY TRANSACTIONS (CONTINUED)
The Company maintains its primary place of business in facilities owned
by the Chief Executive Officer. In addition, the Company has not paid
or accrued compensation to certain of its officers for the nine months
ended February 28, 2001. Related to these services, the Company has
recorded expenses in the amount of $182,700 (unaudited) for the nine
months ended February 28, 2001, which have been reflected as an
increase in additional paid-in capital.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and
operations in conjunction with the condensed consolidated financial statements
and the related notes included elsewhere in this filing. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in these
forward-looking statements as a result of many factors.
OVERVIEW
We are a drug development company, founded in 1982, focused in the
areas of research, development, and marketing in the biomedical industry, with
an emphasis on anti-infective drugs. The Company has completed various stages of
planning and developing products containing its proprietary drugs Viraplex (R)
and MTCH-24(TM).
Our development activities since inception (May 4, 1982) have included
efforts to secure financing, create a management and business structure, and
develop and test Viraplex (R) and MTCH-24(TM) for release as both OTC and
ethical products. These activities have produced very little in operating
revenues.
From the time we became a public company in 1983 to 1987, our
operations related primarily to research and development, securing our patents,
initiating and continuing clinical tests, recruiting personnel and raising
capital. In 1987 we halted testing of our products and significantly reduced our
research and development efforts due to a lack of funding. From 1987 through
late-1999, we had very limited operations, and conducted minimal research and
development in order to keep our existing projects active. During our period of
inactivity, most of the costs incurred by the Company related to general
administrative expenses, primarily executive compensation which was accrued but
not paid and stock based compensation, and other minimal operating costs to keep
the Company and its products afloat pending a financing. In late-1999, in
anticipation of our financing arrangement with Swartz Private Equity, LLC, we
gradually restarted research and development efforts and minimal testing of our
products. Through February 28, 2001, we have derived our revenues from the sale
of a license option to Immune Network Research, Inc. to develop and market our
patented products.
GOING CONCERN
Our consolidated financial statements for the fiscal year ended May 31,
2000 were prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
As shown in our consolidated financial statements, we experienced a loss of
approximately $631,000 during the nine months ended February 28, 2001, and had a
cash balance of approximately $265,000, and an accumulated deficit of
approximately $16,682,600 at February 28, 2001. These factors, among others,
raise substantial doubt about our ability to continue as a going concern.
We must raise additional funds in order to actively reinstate our
research and development efforts, to complete existing product testing which was
suspended in 1987, or commence new testing on such product, and to conduct
additional testing on our products. We intend to obtain the necessary financing
through our Investment Agreement with Swartz Private Equity, LLC. There can be
no assurance that we will be successful in raising from Swartz sufficient
additional capital in order to continue and complete our research and
development and testing. Our future success is dependent upon raising additional
money to provide for the necessary operations of the Company. If we are unable
to obtain such additional financing, there would be a material adverse effect on
our business, financial position, and results of operations. Our continuation as
a going concern is dependent on our ability to generate sufficient capital to
meet our obligations on a timely basis, and to continue and complete our
research and development and testing efforts.
14
RESULTS OF OPERATIONS
SOURCES OF REVENUES AND REVENUE RECOGNITION
Revenues earned from inception consist entirely of a $25,000 fee paid
to us by Immune Network, Limited ("INL") in connection with the execution of our
letter agreement dated February 3, 2000. Pursuant to the letter agreement, we
granted INL an irrevocable option to license, develop and market several
applications of MTCH-24(TM) and Viraplex (R). In addition, pursuant to the
letter agreement, INL is obligated to pay to us the sum of $100,000 upon
execution of a definitive license agreement. Although we have not completed
negotiations of the license, INL has paid the $100,000, which has been recorded
as deferred revenue as of February 28, 2001.
We will recognize revenues from licenses over the period of the
applicable license.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 28, 2001 AND FEBRUARY
29, 2000.
REVENUES. There were no revenues for the three months ended February 28, 2001
nor were there any revenues for the three months ended February 29, 2000.
Our expenses include research and development and general and administrative.
Research and development consists of laboratory expenses, consulting expenses,
test expenses, clinical and research salaries, and other costs associated with
the development of products not yet being marketed. General and administrative
expenses include the salaries and benefits costs of management and other
non-manufacturing employees, sales and marketing expenses, rent, accounting,
legal and operational costs. Personnel compensation and facilities costs
represent a high percentage of our operating expenses and are relatively fixed
in advance of each quarter.
RESEARCH AND DEVELOPMENT COSTS. There were no research and development costs for
the three months ended February 28, 2001 or for the three months ended February
29, 2000.
GENERAL AND ADMINISTRATIVE EXPENSES. Direct costs were $125,000 for the three
months ended February 28, 2001, as compared with $506,600 for the three months
ended February 29, 2000. The decrease was primarily due to stock based
compensation expenses recognized during the three months ended February 29,
2000.
INTEREST EXPENSE. Interest expense was $85,400 for the three months ended
February 28, 2001 as compared to $78,100 for the three months ended February 29,
2000. This increase was due to the additional debt incurred in 2001. This
interest is accrued at a rate of 9% simple interest per annum on funds advanced
to the company by Petro-Med Inc. Meditech's Chief Executive Officer, Gerald N.
Kern, also serves as Chairman of Petro-Med Inc.
NET LOSS. Net loss was $208,900 for the three months ended February 28, 2001 as
compared to $584,700 for the three months ended February 28, 2000. The decrease
in net loss was due to the decrease in stock based compensation expense for the
three months ended February 28, 2001.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED FEBRUARY 28, 2001 AND FEBRUARY
29, 2000.
REVENUES. There were no revenues during the six months ended February 28, 2001
(the "2001 Period") nor were there any revenues for the six months ended
February 29, 2000 (the "2000 Period").
RESEARCH AND DEVELOPMENT COSTS. Direct research and development cost for the
2001 period were $6,500, consisting of the costs of additional clinical trials
on the products. There were no research and development costs for the 2000
period.
15
GENERAL AND ADMINISTRATIVE EXPENSES. Direct costs were $375,300 for the 2001
Period, as compared with $751,300 for the 2000 Period. The decrease was
primarily due to a decrease in stock-based compensation expense in the 2001
Period as compared to the 2000 Period. In the future, we expect direct costs to
increase in absolute dollar terms but to decrease as a percentage of revenues
due to OTC products reaching the market and the sale of additional product
licenses. In the future, we expect selling, general and administrative expenses
to increase in absolute dollars but to decrease as a percentage of revenues due
to improved economies of scale and higher overall revenues.
INTEREST EXPENSE. Interest expense was $250,700 for the 2001 Period as compared
to $229,100 for the 2000 Period. This increase was due to the additional debt
incurred in the 2001 Period. This interest is accrued at a rate of 9% simple
interest per annum on funds advanced to the company by Petro-Med Inc. Meditech's
Chief Executive Officer, Gerald N. Kern, also serves as Chairman of Petro-Med
Inc.
NET LOSS. Net loss was $631,000 in the 2001 Period compared to $980,400 in the
2000 Period. The decrease was primarily due to a decrease in stock-based
compensation expense in the 2001 Period as compared to the 2000 Period.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations and investments in
property and equipment through cash from equity financings and cash from
licensing fees.
Our cash and cash equivalents were $265,000 at February 28, 2001 (up
from $0 at February 28, 2000). Cash was augmented at February 28, 2001 by net
proceeds from financing activities in fiscal year 2001.
Net cash used in operations in the 2001 Period was $145,400 compared to
$40,800 in the 2000 Period.
Net cash used in investing activities in the 2001 Period was $3,400
compared to $0 in the 2000 Period.
Net cash provided from financing activities in the 2001 Period was
$299,000 compared to $40,800 in the 2000 Period. The increase in cash was due to
the exercise by INR of options to purchase 10,000,000 shares of common stock of
the Company for which the Company received $300,000.
16
On June 30, 2000, we entered into an investment agreement with Swartz
Private Equity, LLC, which was amended and restated on February 15, 2001. The
investment agreement entitles us to issue and sell our common stock to Swartz
for up to an aggregate of $30 million from time to time during a three-year
period beginning on the date that this registration statement is declared
effective. This is also referred to as a put right. The trading volume limits
the dollar amount of each sale and a minimum period of time must occur between
sales. In order to sell shares to Swartz, there must be an effective
registration statement on file with the SEC covering the resale of the shares by
Swartz and we must meet certain other conditions. The agreement is for a
three-year period ending June 30, 2003. Any time that the shares are putted, the
discount between the put price to Swartz and the trading price will result in a
selling discount for the Swartz shares which will be part of our operating
expenses in the income statement.
We have incurred recurring operating losses and negative cash flows
from operating activities and have negative working capital. We believe that our
available equity financing arrangement with Swartz will be sufficient to meet
our working capital and capital expenditure requirements for at least the next
two years. However, there can be no assurance that we will receive financing
from Swartz, that we will not require additional financing within this time
frame or that such additional financing, if needed, will be available on terms
acceptable to us, if at all.
Should the Swartz financing fail to close, we will lack the capital
necessary to meet operational requirements and achieve our business plan. In
addition, the shareholders will suffer dilution from the 7 million warrants
which have been granted to Swartz prior to the proposed offering. The warrants
are valued at $2,380,000 and represent offering costs. If the transaction is
aborted, these costs will be charged to operations.
17
Part II - Other information
Item 1 - Legal proceedings
Not applicable
Item 2 - Change in securities
During the three months ended February 28, 2001, INR exercised options to
purchase 6,666,667 shares of common stock and paid $200,000 to the Company.
Item 3 - Defaults upon senior securities
Not applicable
Item 4 - Submission of matters to a vote of security holders
Not applicable
Item 5 - Other information
Not applicable
Item 6 - Exhibits and reports on Form 8-K
Not applicable
18
Signature(s)
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Meditech Pharmaceuticals, Inc.
(Registrant)
By: /s/ Steven I. Kern Dated April 13, 2001
- ----------------------------------
Steven I. Kern
Chief Financial Officer