U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the quarterly period ended August 31, 2001.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-12561
MEDITECH PHARMACEUTICALS, INC.
------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 95-3819300
------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
PMB 382, 10105 E. Via Linda, #103, Scottsdale, AZ 85258
------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (480) 614-2874
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes x No
--- ---
On October 8, 2001, there were 149,975,487 shares of the issuer's Common
Stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes No x
--- ---
MEDITECH PHARMACEUTICALS, INC., AND SUBSIDIARY
(Development Stage Companies)
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
August 31, 2001 and May 31, 2001 F-1
Condensed Consolidated Statements of
Operations for the three months ended
August 31, 2001 and 2000 F-2
Condensed Consolidated Statements of Cash Flows
for the three months ended August 31, 2001 and 2000 F-3
Notes to Condensed Consolidated Financial Statements F-4 - F-12
Item 2. Management's Discussion and Analysis or Plan of Operation 3 - 6
Part II. Other Information 7
PART I - FINANCIAL INFORMATION
Item 1. Financial Information
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONDENSED CONSOLIDATED BALANCE SHEETS
August 31, 2001 May 31, 2001
--------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash $ 132,300 $ 161,600
------------ ------------
Total current assets 132,300 161,600
------------ ------------
Property and equipment, net 1,900 2,100
Other assets 46,300 7,843
------------ ------------
$ 180,500 $ 171,543
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 291,070 $ 264,321
Accrued compensation 2,896,100 2,814,350
Advances from affiliates 4,031,200 3,941,900
------------ ------------
Total current liabilities 7,218,370 7,020,571
------------ ------------
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; no shares issued and outstanding -- --
Common stock, $0.001 par value; 400,000,000
shares authorized; 149,975,487 and 148,818,487
shares issued and outstanding at August 31, 2001
and May 31, 2001, respectively 149,975 148,805
Subscriptions receivable (235,540) (213,404)
Additional paid-in capital 8,597,200 8,513,176
Deficit accumulated during development stage (15,740,805) (15,488,905)
------------ ------------
Total stockholders' deficit (7,229,170) (7,040,328)
------------ ------------
$ 180,500 $ 171,543
============ ============
The accompanying notes are an integral part
of these financial statements
F-1
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Period
For The For The Quarter May 4, 1982 (Date
Quarter Ended Ended of Inception) to
August 31, August 31, August 31,
2001 2000 2001
------------- ------------- -------------
Revenue $ -- $ -- $ 125,000
------------- ------------- -------------
Operating expenses:
Research and development 1,800 4,800 1,846,600
General and administrative 162,300 107,450 12,847,237
Aborted stock offering costs -- -- 325,400
------------- ------------- -------------
Total operating expenses 164,100 112,250 15,019,237
------------- ------------- -------------
Loss before other income (expense) (164,100) (112,250) (14,894,237)
------------- ------------- -------------
Other income (expense):
Interest expense (89,400) (81,700) (2,961,300)
Interest income 1,600 -- 304,100
Other income, net -- -- 75,600
------------- ------------- -------------
Total other income (expense) (87,800) (81,700) (2,581,600)
------------- ------------- -------------
Loss before minority interest in losses of
subsidiary and extraordinary item (251,900) (193,950) (17,475,837)
Minority interest in losses of subsidiary 329,800
------------- ------------- -------------
Loss before extraordinary item (251,900) (193,950) (17,146,037)
Extraordinary item - Gain on forgiveness
of debt, net of income taxes of $0 -- -- 1,405,232
------------- ------------- -------------
Net income (loss) $ (251,900) $ (193,950) $ (15,740,805)
============= ============= =============
Net loss available to common shareholders
per common share:
Loss before extraordinary item $ (0.00) $ (0.00)
Extraordinary item - gain on forgiveness
of debt -- --
------------- -------------
Income (loss) per common share $ (0.00) $ (0.00)
============= =============
Weighted average shares outstanding 149,657,630 136,713,432
============= =============
The accompanying notes are an integral part
of these financial statements
F-2
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Period
For The For The May 4, 1982 (Date
Quarter Ended Quarter Ended of Inception) to
August 31, August 31, August 31,
2001 2000 2001
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (251,900) $ (193,950) $(15,740,805)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 200 -- 137,500
Warrants and options issued to employees
and vendors -- -- 794,600
Minority interest in losses of subsidiary -- -- (329,800)
Stock issued to employees and vendors -- -- 1,667,300
Contributed services -- 91,350 463,050
Accrued interest on advances from affiliates 89,300 81,700 2,961,200
Gain on forgiveness of debt -- -- (1,405,232)
Changes in operating assets and liabilities:
Other assets (38,500) (10,000) (46,943)
Accounts payable and accrued expenses 26,700 1,100 1,625,253
Accrued compensation 81,800 -- 2,896,150
------------ ------------ ------------
Net cash used in operating activities (92,400) (29,800) (6,977,727)
------------ ------------ ------------
Cash flows used in investing activities:
Purchases of furniture and equipment -- (3,400) (138,800)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from advances from affiliates, net -- (1,000) 2,250,800
Proceeds from loan payable -- -- 71,000
Proceeds from sale of stock, net 48,400 -- 4,732,800
Proceeds from exercise of options -- -- 300,000
Costs incurred to register securities 14,700 -- (62,273)
Principal payments on advances from stockholder -- -- (43,500)
------------ ------------ ------------
Net cash provided by (used in) financing activities 63,100 (1,000) 7,248,827
------------ ------------ ------------
Net decrease in cash (29,300) (34,200) --
Cash, beginning of period 161,600 114,800 --
------------ ------------ ------------
Cash, end of period $ 132,300 $ 80,600 $ 132,300
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ $ $
============ ============ ============
Income taxes $ $ $
============ ============ ============
The accompanying notes are an integral part
of these financial statements
F-3
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001 and August 31, 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. 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
---------------------------------------------------
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 the annual consolidated financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted pursuant to such rules and regulations. The results of the
three months ended August 31, 2001 are not necessarily indicative of the results
to be expected for the full year ending May 31, 2002.
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.
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.
F-4
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001 and August 31, 2001 (Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
The Company has not generated significant revenues from operations and has no
assurance of any future revenues. All losses accumulated since inception have
been considered as part of the Company's development stage activities. The
Company will require substantial additional funding for continuing research and
development, obtaining regulatory approval and for the commercialization of its
products. There is no assurance that the Company will be able to obtain
sufficient additional funds when needed, or that such funds, will be obtainable
on terms satisfactory to the Company. The Company's products, to the extent they
may be deemed medical devices or biologics, are governed by the Federal Food,
Drug and Cosmetics Act and by the regulations of state agencies and various
foreign government agencies. There can be no assurance that the Company will
maintain or obtain the regulatory approvals required to market its products.
Going Concern
-------------
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
Company incurred a net loss of $251,900 during the quarter ended August 31, 2001
and $842,537 (before extraordinary items) during the year ended May 31, 2001. In
addition, at August 31, 2001, the Company had an accumulated deficit of
$15,740,805, and had negative working capital of $7,086,070. Management
recognizes that the Company must generate additional resources and the eventual
achievement of sustained profitable operations. Management's plans include
obtaining additional capital through equity financing and the extension of
existing debt. However, no assurance can be given that additional capital, if
needed, will be available when required or upon terms acceptable to the Company
or that the Company will be successful in its efforts to negotiate the extension
of its existing debt. The accompanying consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts (including the realizability of long-lived assets under
SFAS 121) or the amount and classification of liabilities that might result from
the outcome of this uncertainty that might be necessary if the Company is unable
to continue as a going concern.
F-5
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001 and August 31, 2001 (Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
--------------------------------------------------------------
Estimates
---------
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, requires management to make
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. In December 1999, the Securities and
Exchange Commission staff released Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition," to provide guidance on the recognition, presentation, and
disclosure of revenue in Financial statements. Changes in accounting to apply
the guidance in SAB No. 101 may be accounted for as a change in accounting
principle effective January 1, 2000. The adoption of SAB 101 did not have a
material impact on the Company's financial position and results of operations.
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. Based on its analysis, the
Company believes that no impairment of the carrying value on its long-lived
assets exists at August 31, 2001. There can be no assurance, however, that
market conditions will not change or demands for the Company's products will
continue which could result in impairment on long-lived assets in the future.
F-6
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001 and August 31, 2001 (Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
--------------------------------------------------------------
Stock-Based Compensation
------------------------
The Company accounts for non-employee stock-based compensation under Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock
Based Compensation." SFAS 123 defines a fair value based method of accounting
for stock-based compensation. However, SFAS 123 allows an entity to continue to
measure compensation cost related to stock and stock options issued to employees
using the intrinsic method accounting prescribed by Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." Under APB
25, compensation cost, if any, is recognized over the respective vesting period
based on the difference, on the date of grant, between the fair value of the
Company's common stock and the grant price. Entities electing to remain with the
accounting method of APB 25 must make pro forma disclosures of net income and
earnings per share, as if the fair value method of accounting defined in SFAS
123 had been applied. The Company has elected to account for its stock-based
compensation to employees under APB 25.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions Involving Stock Compensation," an interpretation of APB 25.
FIN 44 clarifies the application of APB 25 for (a) the definition of employee
for purposes of applying APB 25 (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequence for various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain provisions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The adoption of FIN 44 did not have a material effect on the financial
statements.
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. A valuation allowance is
provided for significant deferred tax assets when it is more likely than not
that such assets will not be recovered.
F-7
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001 and August 31, 2001 (Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
--------------------------------------------------------------
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 quarter ended August 31, 2001 and the year
ended May 31, 2001, the Company incurred net losses (before extraordinary
items); therefore, basic and diluted loss per share are the same.
Reclassifications
-----------------
Certain reclassifications have been made to the May 31, 2001 financial
statements to conform with the August 31, 2001 presentation.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
--------------------------------------
Leases
------
Currently, the Company uses its operating facilities, which are provided by its
Chief Executive Officer, without a lease. During the quarter ended August 31,
2001 and the year ended May 31, 2001, the Company incurred approximately $3,000
and $15,000 of rent expense related to this lease. There is no guarantee the
officer will be willing to provide these facilities in the future.
Employment Agreements
---------------------
The Company entered into an employment agreement dated February 3, 2000 (amended
on May 3, 2001) with its Chief Executive Officer. The agreement is for a
three-year term beginning on March 15, 2000 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
F-8
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001 and August 31, 2001 (Unaudited)
NOTE 3 - COMMITMENTS AND CONTINGENCIES, continued
-------------------------------------------------
contract plus any prorated earned bonuses in the event of termination without
cause or upon change of control. Additionally, on August 9, 2001 the Company
granted options to purchase 23,450,000 shares of common stock exercisable at
$0.056 per share and vesting immediately on the date of grant. No compensation
expense is to be recognized for the granting of these options as the exercise
price was equal to the market price on the date of grant.
The Company entered into an employment agreement dated February 3, 2000 (amended
May 3, 2001) with its Chief Financial Officer. The agreement is for a three-year
term beginning on March 15, 2000 and provides for a base salary of $120,000 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 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. Additionally, on August 9, 2001
the Company granted options to purchase 21,450,000 shares of common stock
exercisable at $0.056 per share and vesting immediately on the date of grant. No
compensation expense is to be recognized for the granting of these options as
the exercise price was equal to the market price on the date of grant.
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. Under the terms of
the letter, if an agreement is reached, the Company will issue an option to INR
F-9
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001 and August 31, 2001 (Unaudited)
NOTE 3 - COMMITMENTS AND CONTINGENCIES, continued
-------------------------------------------------
for up to 10,000,000 shares of common stock, 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. 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.
On May 25, 2001 the Company and INR entered into a definitive licensing
agreement, which terminated the letter of intent. Under this licensing agreement
the Company assigned its rights and interests in two applications of its
proprietary products. In consideration for the assignment INL agreed to pay a
royalty equal to 2% of the gross worldwide sales of each of the products. The
term of the royalty is the longer of 10 years or the life of any patent based on
the products. The Company has not yet recognized any licensing revenue related
to this agreement.
NOTE 4 - STOCKHOLDERS' DEFICIT
------------------------------
During the quarter ended August 31, 2001, the Company received approximately
$14,700 for reimbursed fees from INR associated with the filing of the
registration statement in fiscal year 2001. This amount has been shown as an
increase into additional paid-in capital, as the original amounts paid were
previously recorded as decreases to paid-in capital.
During the quarter ended August 31, 2001, the Company received cash of $48,400
for payment of subscriptions receivable (see Note 5).
NOTE 5 - 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 which was May 3, 2001.
F-10
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001 and August 31, 2001 (Unaudited)
NOTE 5 - INVESTMENT AGREEMENT, continued
----------------------------------------
Under the agreement, in order to invoke a put right, the Company must 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.
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.
During the year ended May 31, 2001, the Company exercised a put option pursuant
to an investment agreement. Pursuant to the terms of the agreement the Company
put 605,055 shares of its common stock to the investor for total proceeds of
$48,404, which was not received as of May 31, 2001 and was therefore recorded as
a subscription receivable. These funds were received during the quarter ended
August 31, 2001. The Company had originally put (and transferred) 1,500,000
shares of its common stock to the investor, but due to certain volume
restrictions the investor was obligated to purchase only 605,055 shares. The
Company is to receive back 894,945 shares which have not been sold, and has
presented these shares as treasury shares with no cost.
F-11
MEDITECH PHARMACEUTICALS, INC. AND SUBSIDIARY
(Development Stage Companies)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001 and August 31, 2001 (Unaudited)
NOTE 5 - INVESTMENT AGREEMENT, continued
----------------------------------------
During the quarter ended August 31, 2001, the Company exercised a put option
pursuant to an investment agreement. Pursuant to the terms of the agreement the
Company put 1,157,000 shares of its common stock to the investor for total
proceeds of $70,542, which was not received as of August 31, 2001 and has
therefore been recorded as a subscription receivable. The Company had originally
put (and transferred) 5,000,000 shares of its common stock to the investor, but
due to certain volume restrictions the investor was obligated to purchase only
1,157,000 shares. The Company is to receive back 3,843,000 shares which have not
been sold, and has presented these shares as treasury shares with no cost.
NOTE 6 - RELATED PARTY TRANSACTIONS
-----------------------------------
During the quarter ended August 31, 2001, the Company advanced $25,000 to an
officer of the Company. The advance is unsecured, no stated interest rate and
due on demand. The advance is included in other assets in the accompanying
consolidated balance sheet at August 31, 2001.
During the quarter ended August 31, 2001, the Company prepaid $9,000 of rent to
the Chief Executive Officer.
NOTE 7 - EXTRAORDINARY ITEM
---------------------------
During fiscal year 2001, the Company recognized extraordinary gain on
retirements of debt, accounts payable and accrued interest in the amount of
$1,405,232. The relief of debt was due to the fact that the liabilities are no
longer enforceable against the Company.
F-12
Item 2. 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 restated
research and development efforts and minimal testing of our products. Through
August 31, 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, 2001
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
$251,900 during the three months ended August 31, 2001, and had a cash balance
of approximately $132,300, and an accumulated deficit of approximately
$15,740,805 at August 31, 2001. These factors, among others, raise substantial
doubt about our ability to continue as a going concern.
3
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 met our obligations
on a timely basis, and to continue and complete our research and development and
testing efforts.
RESULTS OF OPERATIONS
Sources of Revenues and Revenue Recognition
-------------------------------------------
Revenues earned from inception consist entirely of $125,000 in fees 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).
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED AUGUST 31, 2001 AND 2000
Revenues
--------
There were no revenues for the three months ended August 31, 2001 nor were there
any for the three months ended August 31, 2000.
Our expenses included research and development and general and administrative.
Research and development consists of laboratory expenses, consulting expenses,
tests 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 higher percentage of our operating expenses and are relatively fixed
in advance of each quarter.
Research and Development Costs
------------------------------
We incurred research and development costs of $1,800 for the three months ended
August 31, 2001 as compared with $4,800 for the three months ended August 31,
2000.
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General and Administrative Expenses
-----------------------------------
Direct costs were $162,300 for the three months ended August 31, 2001, as
compared with $107,450 for the three months ended August 31, 2000. the increase
was primarily due to additional professional fees recognized during the three
months ended August 2001.
Interest Expense
----------------
Interest expense was $89,400 for the three months ended August 31, 2001 as
compared to $81,700 for the three months ended August 31, 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 $251,900 for the three months ended August 31, 2001 as compared to
$193,950 for the three months ended August 31, 2000. The increase in net loss
was due to the increase in professional fees incurred during August 31, 2001.
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 activities
in fiscal year 2001.
The cash and cash equivalents were $132,300 at August 31, 2001 (down from
$161,600 at August 31, 2000). Cash decreased at August 31, 2001 due primarily to
a $25,000 advance to an officer of the Company.
Net cash used in operations in the 2001 period was $92,400 compared to $29,800
in the 2000 period.
Net cash used in investing activities in the 2001 period was $0 compared to
$3,400 in the 2000 period.
Net cash provided by financing activities in the 2001 period was $63,100
compared to $1,000 used in the 2000 period. The increase was due to cash
received on collection of subscriptions receivable (sale of common stock)
$48,400 and $14,600 of reimbursed securities registration fees.
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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 shares to Swartz for up to an
aggregate of $30 million form 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.
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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Change in Securities
During the quarter ended August 31, 2001, we exercised a put option
pursuant to which we put 1,157,000 shares of common stock to Swartz for an
aggregate purchase price of $470,542.
No underwriter was involved in the above issuance of securities. The above
securities were issued in reliance upon the exemptions set forth in Section
4(2) of the Securities Act of 1933 on the basis that they were issued
under circumstances not involving a public offering.
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.
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Signature(s)
Pursuant to the requirements of the Securities and 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 Kern Dated October 15, 2001
------------------- ----------------------
Steven Kern, Chief Financial Officer
8