UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
SCHEDULE 14A
PROXY
STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Filed
by
the Registrant ý
Filed
by
a Party other than the Registrant ¨
Check
the
appropriate box:
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Preliminary
Proxy Statement
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Confidential,
For Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
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Definitive
Proxy Statement
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Definitive
Additional Materials
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Soliciting
Materials Under
Rule 14a-12
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MEDICAL
DISCOVERIES, INC.
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(Name
of Registrant as Specified in its Charter)
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(Name
of Person(s) Filing Proxy Statement, if other than the
Registrant)
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Payment
of Filing Fee (Check the
appropriate box):
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¨
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No
fee required.
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Fee
computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
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(1)
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Title
of each class of securities to which transaction applies:
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(2)
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Aggregate
number of securities to which transaction applies:
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(3)
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Per
unit price or other underlying value of transaction computed pursuant
to
Exchange Act Rule 0-11 (set forth the amount on
which
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the
filing fee is calculated and state how it was
determined):
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(4)
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Proposed
maximum aggregate value of transaction: $5,906,000
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(5)
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Total
fee paid: $1,182
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Fee
paid previously with preliminary materials.
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¨
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Check
box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its
filing.
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(1) |
Amount
Previously Paid: |
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(2) |
Form,
Schedule or Registration Statement No.:
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(3)
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Filing
Party:
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(4)
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Date
Filed:
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MEDICAL
DISCOVERIES, INC.
6033
W.
Century Blvd, Suite 1090,
Los
Angeles, California 90045
January
7, 2008
Dear
Shareholder:
You
are
cordially invited to attend a special meeting of the shareholders of Medical
Discoveries, Inc. to be held at 10:00 A.M. local time on Tuesday, January 29,
2008, at 6033 W. Century Blvd., Los Angeles, California 90045.
As
more
fully described in the attached notice of special meeting and the accompanying
proxy statement, the matters to be addressed at the special meeting include
your
consideration of the following: (i) a proposal to sell for cash and the
assumption of certain liabilities, all of our rights in “SaveCream”, a
developmental-stage topical aromatase inhibitor cream, to Eucodis
Pharmaceuticals Forschungs und Entwicklungs GmbH, an Austrian company; (ii)
a
proposal to increase our authorized shares of common stock from 250,000,000
shares to 500,000,000 shares; and (iii) a proposal to change the name of our
company to “Global Clean Energy Holdings, Inc.”
Whether
or not you plan to attend the special meeting, please submit your proxy to
ensure your representation.
The
Board
of Directors recommends that you vote “FOR” all of the proposals presented in
this proxy statement. You may attend the special meeting and vote in person
even
if you have submitted your proxy.
Sincerely,
Richard
Palmer
President
and Chief Executive Officer
MEDICAL
DISCOVERIES, INC.
6033
W. Century Blvd, Suite 1090,
Los
Angeles, California 90045
NOTICE
OF SPECIAL MEETING OF SHAREHOLDERS
TO
BE HELD ON JANUARY 29, 2008
Notice
is
hereby given that a special meeting of the shareholders of Medical Discoveries,
Inc. will be held at 10:00 a.m. local time on Tuesday, January 29, 2008 at
6033
W. Century Blvd., Los Angeles, California 90045, for the following
purposes:
1. Approval
of Eucodis Agreement.
To
approve the sale of all of our rights in and to “SaveCream”, a
developmental-stage topical aromatase inhibitor cream, to Eucodis
Pharmaceuticals Forschungs und Entwicklungs GmbH (“Eucodis”), pursuant to the
terms of that certain sale and purchase agreement, dated July 6, 2007, as
amended (“Eucodis Agreement”), by and among Medical Discoveries, Inc., MDI
Oncology, Inc., our wholly-owned subsidiary (“MDI Oncology”), and Eucodis.
2. Approval
of Increase in Authorized Common Stock.
To
approve an amendment of our Amended and Restated Articles of Incorporation
to
increase the authorized number of shares of our common stock from 250,000,000
to
500,000,000 shares.
3. Approval
of Name Change.
To
approve an amendment of our Amended and Restated Articles of Incorporation
to
change our company’s name to “Global Clean Energy Holdings, Inc.”
The
Eucodis Agreement sets forth the terms of the sale to Eucodis and is attached
to
this proxy statement as Appendix
A.
We
have
fixed the close of business on December 28, 2007, as the record date for the
determination of shareholders entitled to notice of and to vote at the special
meeting. Only our shareholders of record at the close of business on that date
will be entitled to notice of and to vote at the special meeting or any
adjournments or postponements thereof. This notice of special meeting and the
accompanying proxy statement and proxy card are being sent to shareholders
on or
about January 7, 2008.
By
Order
of the Board of Directors,
RICHARD
PALMER
President
and Chief Executive Officer
January
7, 2008
YOUR VOTE IS IMPORTANT REGARDLESS
OF
THE NUMBER OF SHARES YOU OWN. IN ORDER TO ENSURE THAT YOUR SHARES ARE
VOTED, PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY
AS
POSSIBLE. IF GIVEN, YOU MAY REVOKE YOUR PROXY BY FOLLOWING THE
INSTRUCTIONS IN THE PROXY
STATEMENT. |
TABLE
OF CONTENTS
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Page
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PROXY
STATEMENT
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2
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PROPOSAL
I - APPROVAL OF THE ASSET SALE TRANSACTION
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8
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Description
Of The Eucodis Agreement And Transaction
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20
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PROPOSAL
II - INCREASE IN AUTHORIZED COMMON STOCK
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27
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PROPOSAL
III - NAME CHANGE
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29
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FINANCIAL
STATEMENTS AND PRO FORMA FINANCIAL INFORMATION
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29
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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72
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS
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75
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OTHER
MATTERS
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76
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WHERE
YOU CAN FIND MORE INFORMATION
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76
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APPENDIX
A
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A-1
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MEDICAL
DISCOVERIES, INC.
6033
W.
Century Blvd, Suite 1090,
Los
Angeles, California 90045
PROXY
STATEMENT
Special
Meeting Of Shareholders To Be Held On January 29, 2008
This
proxy statement is being furnished to the shareholders of Medical Discoveries,
Inc. in connection with the solicitation of proxies by our Board of Directors
for use at the special meeting of the shareholders to be held on Tuesday,
January 29, 2008, and at any adjournments or postponements thereof.
This
Proxy Statement and the accompanying proxy card are first being mailed to our
shareholders on or about January 7, 2008.
The
purpose of the special meeting is to consider and vote upon the following:
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to
approve that certain sale and purchase agreement, as amended, among
Medical Discoveries, Inc., MDI Oncology, Inc. (“MDI Oncology”), our
wholly-owned subsidiary, and Eucodis Pharmaceuticals Forschungs -
und
Entwicklungs GmbH, an Austrian company (“Eucodis”),
pursuant to which we will sell certain of our assets to Eucodis;
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to
approve the amendment to our Articles of Incorporation to increase
the
authorized number of shares of our common stock from 250,000,000
to
500,000,000 shares; and
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to
approve an amendment to our Articles of Incorporation to change our
company’s name to “Global Clean Energy Holdings,
Inc.”
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Record
Date; Shares Entitled To Vote; Vote Required To Approve The
Transaction
The
Board
of Directors has fixed the close of business on December 28, 2007, as the date
for the determination of shareholders entitled to vote at the special meeting.
On the record date, 197,676,560 shares of our common stock were outstanding,
each entitled to one vote per share. In addition, the issued and outstanding
shares of our Series B Convertible Preferred Stock, which are entitled to vote
together with our common stock shares, are convertible into 11,818,181 shares
of
our common stock, as of the record date. Our outstanding shares of Series A
Convertible Preferred Stock are not entitled to vote.
The
presence at the special meeting, in person or by proxy, of the holders of a
majority of the issued and outstanding shares of our common stock (on as-if
converted basis) on the record date is necessary to constitute a quorum for
the
transaction of business at the special meeting. In the absence of a quorum,
the
special meeting may be postponed from time to time until shareholders holding
the requisite number of shares of our common stock (on as-if converted basis)
are represented in person or by proxy. If a quorum is present, then each
proposal will be approved if the votes cast (on as-if converted basis) favoring
the proposal exceed the votes cast opposing the action, whether such votes
are
present in person or represented by proxy at the special meeting. Broker
non-votes and abstentions will be counted towards a quorum at the special
meeting, but will not count as votes for or against the proposals. If you return
the attached proxy card with no voting decision indicated, the proxy will be
voted FOR the approval of all proposals made at the meeting. Each holder of
record of shares of our common stock (on as-if converted basis) is entitled
to
cast, for each share registered in his or her name, one vote on each proposal
as
well as on each other matter presented to a vote of shareholders at the special
meeting.
Solicitation,
Voting and Revocation Of Proxies
This
solicitation of proxies is being made by our Board of Directors, and our company
will pay the entire cost of preparing, assembling, printing, mailing and
distributing these proxy materials. In addition to the mailing of these proxy
materials, the solicitation of proxies or votes may be made in person, by
telephone or by electronic communications by directors, officers and employees
of our company, who will not receive any additional compensation for such
solicitation activities. We also will reimburse brokerage houses and other
custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses
for forwarding proxy and solicitation materials to shareholders.
Shares
of
our common stock represented by a proxy properly signed and received at or
prior
to the special meeting, unless properly revoked, will be voted in accordance
with the instructions on the proxy. If a proxy is signed and returned without
any voting instructions, shares of our common stock represented by the proxy
will be voted “FOR” each proposal and, in accordance with the determination of
the majority of our Board of Directors, as to any other matter which may
properly come before the special meeting, including any adjournment or
postponement thereof. A shareholder may revoke any proxy given pursuant to
this
solicitation by: (i) delivering to our corporate secretary, prior to or at
the
special meeting, a written notice revoking the proxy; (ii) delivering to our
corporate secretary, at or prior to the special meeting, a duly executed proxy
relating to the same shares and bearing a later date; or (iii) voting in person
at the special meeting. Attendance at the special meeting will not, in and
of
itself, constitute a revocation of a proxy. All written notices of revocation
and other communications with respect to the revocation of a proxy should be
addressed to:
Medical
Discoveries, Inc.
6033
W.
Century Blvd, Suite 1090
Los
Angeles, California, 90045
Our
Board
of Directors is not aware of any business to be acted upon at the special
meeting other than consideration of the proposals described herein.
Summary
Term Sheet – Transaction
With
Eucodis-Proposal
I
This
Summary Term Sheet summarizes certain material information regarding the
proposed sale of assets to Eucodis under the Eucodis Agreement. You should
carefully read this entire proxy statement for a more complete understanding
of
the transaction with Eucodis.
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Assets
Sold (page22)
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The
assets being sold to Eucodis include (i) all of our right, title
and
interest in a certain Asset Purchase Agreement between Medical
Discoveries, Inc. and the liquidator of Savetherapeutics AG, a
German
company in liquidation, dated as of March 11, 2005, relating to
certain
rights in “SaveCream”; (ii) all of our right, title and interest in that
certain agreement between MDI Oncology and Eucodis, dated as of
July 29,
2006, in connection with the co-development and licensing of SaveCream;
and (iii) all
of our right, title and interest under certain contracts relating
to
SaveCream.
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Purchase
Price (page 23)
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The
purchase price paid by Eucodis is approximately 4,007,534 euros
or
approximately $5,906,000
based on the currency exchange rate in effect as of November 30,
2007,
comprising a cash payment of approximately $2,267,000, and Eucodis’
assumption of certain of our obligations and liabilities aggregating
approximately $3,639,000. The financial terms of the Eucodis Agreement
are
denominated in euros, and we will be paid in euros. However, for
convenience, the financial terms have been converted throughout
the text
of this proxy statement into U.S. dollars. The currency exchange
rate in
effect as of the closing of the Eucodis transaction or at any future
date
may differ, which may result is us receiving a different amount
of U.S.
dollars for the SaveCream assets.
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Obligations
Assumed and Discharged Indebtedness (page 23)
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Eucodis
has agreed to assume an aggregate of approximately $3,639,000 of
our
current indebtedness that we owe to certain of our creditors. Eucodis
will
also assume all of our financial and other obligations under certain
contracts relating to SaveCream, and certain other costs we have
incurred
since February 28, 2007 in connection with preserving the sold
assets for
the benefit of Eucodis through the closing of the transaction.
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Non-Competition
(page 24)
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We
have agreed to a non-compete provision for the duration of five
years
after the closing of the Eucodis transaction. Specifically, the
non-compete provision restricts us from undertaking research and
development activities with respect to “SaveCream.”
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Representation
and Warranties (page 24)
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The
Eucodis Agreement contains customary representations, warranties
and
covenants, which survive through the closing of the
transaction.
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Closing
Conditions (page 25)
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The
closing of the transaction depends on meeting a number of conditions,
including the following: our delivery to Eucodis of certain documents
necessary to effect the transfer of the assets being sold, and
us
obtaining additional capital or a credit facility in the aggregate
amount
of at least $250,000 (this latter condition has already been met).
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Our
Board’s Recommendation (page 26)
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Our
board of directors has unanimously determined that the transaction
with
Eucodis is advisable, fair to, and in the best interests of our
shareholders.
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QUESTIONS
AND ANSWERS ABOUT THIS PROXY STATEMENT MATERIAL
Q:
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WHAT
IS THIS PROXY STATEMENT AND WHY AM I RECEIVING
IT?
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A:
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You
are receiving this proxy statement in connection with a special meeting
of
shareholders called by our Board of Directors for the purpose of
soliciting shareholder votes for the following: (i) to approve the
sale of
our SaveCream asset to Eucodis; (ii) approve an amendment to the
Articles
of Incorporation of Medical Discoveries, Inc. to increase our authorized
shares of our common stock from 250,000,000 to 500,000,000; and (iii)
approve an amendment to the Articles of Incorporation of Medical
Discoveries, Inc. to effect a name change to “Global Clean Energy
Holdings, Inc.”, each as more fully described in this proxy statement. You
have been sent this proxy statement and the enclosed proxy card because
our Board of Directors is soliciting your proxy to vote at the special
meeting of shareholders called for the purpose of voting on the foregoing
matters.
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The
assets being sold to Eucodis include (i) all of our right, title and interest,
along with all of MDI Oncology’s right, title and interest, in that certain
asset purchase agreement between Medical Discoveries, Inc. and the liquidator
of
Savetherapeutics AG, a German company in liquidation, dated as of March 11,
2005
(the “Savetherapeutics
Contract”),
including, among other things, our rights in and to “SaveCream”, a developmental
topical aromatase inhibitor cream; (ii) all of MDI Oncology’s right, title and
interest in that certain agreement between MDI Oncology and Eucodis, dated
as of
July 29, 2006, in connection with the co-development and licensing of SaveCream
product; and (iii) all
of
our (and MDI Oncology’s) right, title and interest under certain contracts
relating to SaveCream
((i),(ii) and (iii) collectively, the “Purchased Assets”).
This
sale of the SaveCream assets to Eucodis will terminate any further obligation
on
the part of our company or its subsidiary, MDI Oncology, to spend additional
monies to develop SaveCream. The sale may constitute a sale of substantially
all
of our assets for purposes of Utah law, which governs our corporate matters.
Accordingly, the sale is being submitted to our shareholders for approval
pursuant to Section 16-10a-1202 of the Utah Revised Business Corporation
Act.
In
addition, the amendments to our Amended and Restated Articles of Incorporation
to increase our authorized common stock and effect a name change are being
submitted to our shareholders for approval pursuant to Section 16-10a-1003
of
the Utah Revised Business Corporation Act.
Q:
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HOW
MANY VOTES ARE REQUIRED TO APPROVE EACH
PROPOSAL?
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A:
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Each
share of common stock will entitle the holder to cast one vote. Our
outstanding shares of Series A Convertible Preferred Stock are not
entitled to vote. However, our outstanding shares of Series B Convertible
Preferred Stock are entitled to vote, together with the holders of
our
common stock as one class, on all matters presented to the our
shareholders, including the foregoing proposals. Each outstanding
share of
our Series B Convertible Preferred Stock entitles the holder thereof
to
that number of votes equal to the number of shares of our common
stock
into which each such share of Series B Convertible Preferred Stock
would
have been convertible as of December 28, 2007, the record date set
for
determining shareholders entitled to vote at the special meeting.
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Assuming
the presence of a quorum, the affirmative vote of the majority of votes cast
in
person or by proxy on the matter (excluding broker non-votes), with the common
stock and the Series B Convertible Preferred Stock voting together as a single
group, will be required for approval. Abstentions will be considered for
purposes of calculating the vote, but will not be considered to have been voted
in favor of such matter. As of December 28, 2007, the record date, we had
197,676,560 shares of common stock outstanding, and 13,000 shares of Series
B
Convertible Preferred Stock outstanding (which shares of preferred stock have
the right to cast up to 11,818,181 votes).
Q:
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WHAT
WILL HAPPEN IF THE SHAREHOLDERS APPROVE THE
PROPOSALS?
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A:
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If
the shareholders approve the transaction with Eucodis, then shortly
following the special meeting, subject to the satisfaction of certain
conditions set out in the Eucodis Agreement, we (and MDI Oncology)
will
sell to Eucodis the Purchased Assets in exchange for an aggregate
of
€4,007,534
(approximately $5,906,000
based on the currency exchange rate in effect as of November 30,
2007), a
portion of which comprised (a) a cash payment of €1,538,462
(approximately
$2,267,000 based on the currency exchange rate in effect as of November
30, 2007), which is due and payable to us at the closing, less $200,000
already received from Eucodis in March 2007, and (b) Eucodis’ assumption
of an aggregate of €2,469,072
(approximately
$3,639,000 based on the currency conversion rate in effect as of
November
30, 2007), constituting specific indebtedness currently owed to certain
of
our creditors, as more fully discussed under “Proposal I - Terms of Sale
and Purchase Agreement –
Assumption
of Liabilities”.
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The
approximately $2,067,000 in cash proceeds received from the Eucodis sale will
be
used for general business purposes and to repay certain outstanding
indebtedness. We do not anticipate that any distributions will be made to our
shareholders in the near future, if at all.
In
addition, if the shareholders approve the amendments to our Articles of
Incorporation in connection with the proposed increase in authorized common
stock and name change, then subsequent to the special meeting, we will file
the
Articles of Amendment to our Articles of Incorporation with the Office of the
Secretary of State of Utah to increase our authorized number of shares of common
stock, to change our company’s name.
Q:
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WHY
IS THE BOARD OF DIRECTORS PROPOSING THE SALE OF
SAVECREAM?
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A:
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To
date, we have been a developmental-stage bio-pharmaceutical company
engaged in the research, validation, development and ultimate
commercialization of two drug candidates referred to as MDI-P and
SaveCream. Both of these drug candidates are still in development
and
neither has been approved by the U.S. Food and Drug Administration
(the
“FDA”). The total cost to develop these two drugs and to receive the
approval from the FDA would cost many millions of dollars and take
many
more years. Our Board of Directors has determined that we can no
longer
fund the development of the two drug candidates, and cannot obtain
additional funding for these drug candidates. Accordingly, our Board
has
decided to stop our bio-pharmaceutical operations, and to enter the
renewable feedstock-biofuels business. Since we will no longer be
developing our SaveCream assets, we have sought to maximize our return
from these drug assets through their sale at this time, and to use
the
proceeds that we receive from the disposition of these assets to
pay off
all of our creditors and to invest any residual proceeds into our
new
renewable feedstock-biofuels business.
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Q:
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IS
THE BOARD OF DIRECTORS ASKING US TO APPROVE THE NEW BIOFUELS
BUSINESS?
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A:
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No.
The Board of Directors has decided that it is not in the best interests
of
this company, its shareholders, or its creditors to continue to attempt
to
develop and commercialize our bio-pharmaceutical assets and has,
therefore, stopped those operations. The Board has decided to enter
into
the biofuels business, but the Board is not required to obtain shareholder
approval for its activities in this new line of business.
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Q:
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WHY
IS THE BOARD OF DIRECTORS PROPOSING THE INCREASE IN AUTHORIZED COMMON
STOCK?
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A:
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In
addition to ensuring that we have a sufficient number of shares of
common
stock available in connection with the exercise of currently outstanding
options, warrants and other convertible securities, the additional
authorized common stock may be used for future acquisitions and equity
funding.
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Q:
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WHY
IS THE BOARD OF DIRECTORS PROPOSING THE NAME
CHANGE?
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A:
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We
have discontinued our prior operations in the bio-pharmaceutical
industry
and have initiated operations in the biofuels-feedstock market. We
are
proposing a name change to reflect our new business as a biofuels
energy
company.
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Q:
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WILL
WE CONTINUE TO OPERATE AFTER THE EUCODIS TRANSACTION IS
CLOSED?
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A:
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In
connection with the sale to Eucodis, we have agreed that after the
sale
neither we nor MDI Oncology will undertake research and development
activities with respect to SaveCream or any other product which could
be
used in reasonable substitution of SaveCream, or commercialize any
products based on SaveCream, except as may be otherwise expressly
requested by Eucodis. We also intend to dissolve our MDI Oncology
subsidiary after the sale to
Eucodis.
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Since
signing the Eucodis Agreement, we have actively sought to develop a new business
to maximize shareholder value. Our future business plan, and our current
principal business activities, includes the planting, cultivation, harvesting
and processing of inedible feedstock (such as Jatropha
curcas)
to
generate feedstock seed oils and biomass for use in the biofuels industry,
including the production of bio-diesel. See “Business – The Jatropha
Business” for additional details regarding our new feedstock-biofuels
business.
Q:
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HAS
THE COMPANY RECEIVED A VALUATION OR FAIRNESS OPINION WITH RESPECT
TO THE
SALE OF ASSETS?
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A:
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No.
Based on all factors, including the price paid for the SaveCream
assets,
the uncertainty as to title of those assets, and the book value of
those
assets, our Board of Directors determined that the purchase price
being
paid by Eucodis was fair to this
company.
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Q:
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WHAT
HAPPENS IF THE SHAREHOLDERS DO NOT APPROVE THE EUCODIS
TRANSACTION.
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A:
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If
the sale of the SaveCream assets is not approved by the shareholders,
the
sale will be cancelled, and we will continue to own the SaveCream
assets.
However, since our Board has determined that it is not in the best
interests of this company or our shareholders to continue to operate
as a
drug development company, and since we will no longer invest any
funds in
the development of SaveCream, we will not continue our efforts to
develop
that drug candidate. In fact, under the Eucodis Agreement, if the
shareholders do not approve the sale of SaveCream to Eucodis, we
are
obligated to attempt to transfer to Eucodis, by means of a license,
or
otherwise, certain of our rights to
SaveCream.
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Q:
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WHEN
IS THE EUCODIS TRANSACTION EXPECTED TO BE
COMPLETED?
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A:
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The
transaction will close when certain conditions set forth in the sale
and
purchase agreement are satisfied or waived, or at such other time
as is
agreed by the parties. We expect the transaction to close on or about
January 31, 2008.
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Q:
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DOES
OUR BOARD OF DIRECTORS RECOMMEND VOTING FOR THE EUCODIS TRANSACTION
AND
OTHER PROPOSALS?
|
A:
|
Yes.
After careful consideration of our financial position, the value
of the
SaveCream assets, the amount of time and funds needed to further
develop
the SaveCream drug candidate, and other factors, our Board of Directors
has unanimously approved the sale of the SaveCream assets to Eucodis
and
determined that it is in the best interests of us and our shareholders.
Our Board of Directors unanimously recommends that our shareholders
vote
“FOR” approval of the sale.
|
Our
Board
of Directors also recommends that our shareholders vote “FOR” approval of
amendments to our Amended and Restated Articles of Incorporation to increase
our
authorized common stock and to change our corporate name.
A:
|
Send
in your proxy card. After reviewing this document and its appendices,
indicate on your proxy card how you want to vote, and sign, date,
and mail
it in the enclosed envelope as soon as possible to ensure that your
shares
will be represented at the special meeting. If you sign, date, and
send in
your proxy and do not indicate how you want to vote, your proxy will
be
voted in favor of each proposal.
|
Q:
|
IF
MY SHARES ARE HELD IN “STREET NAME” BY MY BROKER, BANK OR OTHER NOMINEE,
WILL IT VOTE MY SHARES FOR ME?
|
A:
|
No,
your broker will not vote your shares if you do not return your proxy
card
or broker voting instructions. Your broker, bank or other nominee
holder
will vote your shares only if you provide it with instructions on
how to
vote. You should instruct your broker, bank or other nominee how
to vote
your shares by following the directions it provides. If you sign
and send
in your proxy card or broker voting instruction card with no further
instructions, your shares will be voted in accordance with the
recommendations of our board of directors (FOR each of the
proposals).
|
Q:
|
CAN
I CHANGE MY MIND AND REVOKE MY
PROXY?
|
A:
|
Yes.
You may revoke your proxy up to the time of the special meeting by
taking
any of the actions explained under “The Special Meeting--Solicitation,
Voting and Revocation of Proxies” on page 3 of this proxy statement,
including by giving a written notice of revocation, by signing and
delivering a new later-dated proxy, or by attending the special meeting
and voting in person.
|
Q:
|
CAN
I VOTE MY SHARES IN PERSON?
|
A:
|
Yes.
Even after you have submitted your proxy, you may change the votes
you
cast or revoke your proxy at any time before the votes are cast at
the
meeting by (1) delivering a written notice of your revocation to
our
corporate secretary at our principal executive office, (2) executing
and
delivering a later dated proxy, or (3) appearing in person at the
meeting,
filing a written notice of revocation with our corporate secretary
and
voting in person the shares to which the proxy
relates.
|
Q:
|
DO
I HAVE DISSENTERS’ RIGHTS IN CONNECTION WITH THE
SALE?
|
A:
|
No.
Under Utah law, “dissenters’ rights” are not available in connection with
the sale of assets by companies that have more than 2,000 shareholders,
or
otherwise in connection with an increase in the authorized number
of
shares, or a change in the name of the company. Based on information
provided to us by our transfer agent, we have approximately 2,950
shareholders.
|
Q.
|
WHO
IS PAYING FOR THIS PROXY
SOLICITATION?
|
A:
|
Our
Board of Directors is making this solicitation, and we will pay the
entire
cost of preparing, assembling, printing, mailing and distributing
these
proxy materials. In addition to the mailing of these proxy materials,
the
solicitation of proxies or votes may be made in person, by telephone
or by
electronic communications by our directors, officers and employees,
who
will not receive any additional compensation for such solicitation
activities. We will also reimburse brokerage houses and other custodians,
nominees and fiduciaries for their reasonable out-of-pocket expenses
for
forwarding proxy and solicitation materials to
shareholders.
|
PROPOSAL
I - APPROVAL OF THE ASSET SALE TRANSACTION
Background
And Reasons For The Transaction
During
the past few years, we have been a developmental-stage bio-pharmaceutical
company engaged in the research, validation, development and ultimate
commercialization of two drug candidates we referred to as “MDI-P” and
“SaveCream.” MDI-P is a drug candidate being developed as an anti-infective
treatment for bacterial infections, viral infections and fungal infections.
SaveCream is a drug candidate being developed to reduce breast cancer tumors.
Both of these drug candidates are still in development and neither has been
approved by the U.S. Food and Drug Administration (the “FDA”). The total cost to
develop these two drugs, and to receive the approval from the FDA, would cost
many millions of dollars and take many more years. To date, we attempted to
fund
our development costs through the sale of our equity securities and debt
instruments, including the sale of our Series A Convertible Preferred
Stock.
At
the
end of 2006, we had virtually no cash, had no source of revenues, had a working
capital deficit of approximately $5,600,000, and had a shareholders deficit
of
approximately $5,500,000. In addition, holders of our Series A Convertible
Preferred Stock informed us that they were no longer willing to fund our then
current operations and biotechnology business strategy. In December 2006, three
of our five directors resigned.
Because
of our lack of capital, we were unable to fund our on-going operations,
including any further drug development activities, and were not able to pay
our
professionals to audit our company’s year-end financial statements and to
prepare the public company period reports we are required to file with the
Securities and Exchange Commission. As a result, we became delinquent in our
Securities and Exchange Commission filings and, in July 2007, or company was
de-listed from the OTC Bulletin Board.
In
February 2007, we engaged a consulting firm to assist it in resolving our
financial issues, to obtain advice regarding any strategic alternatives that
may
be available to us, and to prevent us from losing all of our assets in
bankruptcy. During the past several months, we have explored a number of
transactions that would (i) prevent our shareholders from losing their entire
investment in our company, and (ii) enable our company to repay some of its
currently outstanding debts and liabilities.
Our
Board
of Directors evaluated the value of both of its developmental stage drug
candidates. The commencement of human clinical trials of our MDI-P drug
candidate currently is on Full Clinical Hold by FDA under 21 CRF 312.42(b),
and
may not be initiated until deficiencies in our IND application are resolved
to
the FDA’s satisfaction. The FDA has concluded that our IND application did not
contain sufficient toxicology and genetic toxicology data to support the safety
of the proposed clinical trial. We considered the uncertainty of the efficacy
and safety data of the MDI-P compound, the costs involved in further developing
the compound, and the limited market, and thereafter concluded that we did
not
have the capability or capacity to take the MDI-P compound to commercialization.
Our Board of Directors also evaluated the value of our SaveCream drug candidate
that is currently being co-developed with Eucodis Pharmaceuticals Forschungs
und
Entwicklungs GmbH, an Austrian company (“Eucodis”), and determined that the
highest value for this drug candidate could be realized through a sale of that
drug candidate to Eucodis.
In
reaching this decision, our board considered several factors, including, but
not
limited to, the following:
|
·
|
The
limited capital raising opportunities available to our company, and
the
unlikely possibility that another entity would be interested in funding
the development of our company’s drug
candidates.
|
|
·
|
The
unlikelihood that our company will receive the requisite FDA approvals
for
MDI-P to pursue the development of that drug candidate through to
commercialization.
|
|
·
|
The
costs of further development of the MDI-P and SaveCream drugs weighed
against the limited markets for both
drugs.
|
|
·
|
The
availability of a potential buyer due to Eucodis’ pre-existing interest in
the SaveCream drug (Eucodis currently is our development partner
and holds
rights to SaveCream in certain regions of the
world).
|
The
foregoing discussion of the information and factors considered by our board
is
not intended to be exhaustive, but includes the material factors considered.
In
view of the variety of factors considered in connection with its evaluation
of
the transaction and the offer price, our board did not find it practicable
to,
and did not, quantify or otherwise assign relative weight to the specific
factors considered in reaching its determinations and recommendations, and
individual directors may have given differing weight to different factors.
As
further described below, on July 6, 2007, we entered into an agreement with
Eucodis (the “Eucodis Agreement”) to sell SaveCream for an aggregate of
4,007,534 euros (approximately U.S. $5,906,000 based on the currency exchange
rate in effect as of November 30, 2007), which consideration is payable in
cash
and by the assumption of certain of our outstanding liabilities. We thereafter
also entertained various offers to purchase our rights to the MDI-P compound,
and on August 9, 2007, we sold the MDI-P compound for $310,000 in cash. The
special meeting is being held, in part, to obtain the approval of our
shareholders of the Eucodis Agreement and our plan to sell our SaveCream assets
to Eucodis.
Overview
of Our Bio-Pharmaceutical Business
Prior
to
electing to terminate our biopharmaceutical operations, we were engaged in
the
development of two potential drug candidates that we referred to as “SaveCream”
and “MDI-P.” We had purchased our SaveCream technologies from the liquidator of
Savetherapeutics AG i.L., pursuant to an asset purchase agreement dated March
11, 2005. The SaveCream assets consist primarily of patents, patent
applications, pre-clinical study data and anecdotal clinical trial data
concerning SaveCream. We purchased the SaveCream assets for €2,350,000
payable
as follows: €500,000 at closing, €500,000 upon conclusion of certain
pending transfers of patent and patent application rights to us from SaveCream’s
inventors, and €1,350,000 upon successful commercialization of the
Assets.
In
addition to purchasing the SaveCream asset, we were developing MDI-P as an
anti-infective drug for the treatment of bacterial infections, viral infections
and fungal infections. In addition, we considered that MDI-P could be a useful
therapy for the treatment of cystic fibrosis. However, the commencement of
human
clinical trials of MDI-P was on Full Clinical Hold by the FDA because the FDA
concluded that our IND application did not contain sufficient toxicology and
genetic toxicology data to support the safety of the proposed clinical trial.
Our business strategy was to further develop the SaveCream asset, and to
commence human clinical trials of MDI-P for cystic fibrosis following completion
of the required toxicity and genetic toxicity testing.
We
currently hold eight United States Patents, two Japanese patents and a Mexican
patent covering various applications for MDI-P, the machinery that manufactures
it and the method by which it is manufactured. The U.S. Patents were as follows:
|
·
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Patent
No. 5,334,383: “Electrically Hydrolyzed Salines as In Vivo Microbiocides
for the Treatment of Cardiomyopathy and Multiple Sclerosis”
|
|
·
|
Patent
No. 5,507,932: “Apparatus for Electrolyzing Fluids”
|
|
·
|
Patent
No. 5,560,816: “Method for Electrolyzing Fluids”
|
|
·
|
Patent
No. 5,622,848: “Electrically Hydrolyzed Saline Solution as Microbiocides
for In Vitro Treatment of Contaminated Fluids Containing Blood”
|
|
·
|
Patent
No. 5,674,537: “An Electrolyzed Saline Solution Containing Concentrated
Amount of Ozone and Chlorine Species”
|
|
·
|
Patent
No. 5,731,008: “Electrically Hydrolyzed Salines as Microbiocides”
|
|
·
|
Patent
No. 6,007,686: “System for Electrolyzing Fluids for Use as Antimicrobial
Agents”
|
|
·
|
Patent
No. 6,117,285: “System for Carrying Out Sterilization of Equipment”
|
The
Japanese and Mexican patents provide coverage in those countries for several
of
the U.S. patents. We also hold pending applications with the US Patent and
Trademark Office for patents on MDI-P as a pharmaceutical treatment for cystic
fibrosis, sepsis and asthma, including (i) a patent application for the use
of
MDI-P in the treatment of sepsis, (ii) a provisional patent application for
the
use of MDI-P in the treatment of sepsis, and (iii) a provisional patent
application for the use of MDI-P in the treatment of asthma.
We
also
hold rights to the certain intellectual property assets relating to the
SaveCream drug, including the following four patent families:
|
·
|
“Substances
and Agents for Positively Influencing Collagen.” This included a EU patent
application and a Canadian patent.
|
|
·
|
“Topical
Treatment for Mastalgia.” This included U.S. patent application 10/416,096
filed October 30, 2001, and a European Union patent application.
|
|
·
|
“Medicament
for Preventing and/or Treating a Mammary Carcinoma Containing a Steroidal
Aromatase Inhibitor.” This included a U.S. patent application, No.
09/646,355, filed November 16, 2000 and divisional and continuation
applications based upon the initial application.
|
|
·
|
“Aromatase
Marking.” This included a U.S. Patent application, No. 10/487,953, filed
August 28, 2002, as well as a European Union patent application.
|
We
are
currently a party to a lawsuit that we initiated in the German Federal Court
in
Hamburg, Germany, to confirm all of our rights to the foregoing intellectual
property. If the Eucodis transaction is consummated, Eucodis will take over
that
lawsuit.
Competition
for our bio-pharmaceutical drugs
The
biotechnology and pharmaceutical industries are characterized by rapidly
evolving technologies and intense competition. Our competitors in the
bio-pharmaceutical market included many major pharmaceutical, and specialized
biotechnology companies, most of which have financial, technical, and marketing
resources significantly greater than ours. Fully integrated pharmaceutical
companies, due to their expertise in research and development, manufacturing,
testing, obtaining regulatory approvals, and marketing, as well as their
substantially greater financial and other resources, were our most formidable
competitors. In addition, colleges, universities, governmental agencies, and
other public and private research organizations are becoming more active in
seeking patent protection and licensing arrangements to collect royalties for
use of technology that they have developed. These institutions also competed
with us in recruiting and retaining highly qualified scientific personnel.
In
particular, we faced competition from the manufacturers of products that would
have competed with MDI-P and SaveCream in the event we successfully
commercialized both drugs. The products currently available for the treatment
targeted by SaveCream and MDI-P included drugs produced by Pfizer, Bristol-Myers
Squibb, Boehringer Ingelheim, GlaxoSmithKline, Gilead Sciences, Hoffman-La
Roche, Merck, Abbott Laboratories, Agouron Pharmaceuticals, Abraxis BioScience,
Inc., AstraZeneca and Trimeris. The significant pressure we faced from
competitors with substantially greater financial and other resources contributed
to our decision to exit the biotechnology and pharmaceutical
industries.
Government
Regulations
Our
prior
intention to use MDI-P and SaveCream as pharmaceuticals made us subject to
extensive regulation by United States and foreign governmental authorities.
In
particular, pharmaceutical treatments are subject to rigorous preclinical and
clinical testing, and subject to approval requirements by the FDA in the United
States under the federal Food, Drug and Cosmetic Act and by comparable agencies
in most foreign countries. Various federal, state and foreign statutes also
govern or influence the manufacture, labeling, storage, record keeping, and
marketing of such products. Pharmaceutical manufacturing facilities are also
regulated by state, local, and other authorities. Obtaining approval from the
FDA and other regulatory authorities for a new drug or treatment may take
several years and involve substantial expenditures. Moreover, ongoing compliance
with these requirements can require the expenditure of substantial resources.
The delays and extensive costs associated with our efforts to commercialize
MDI-P and SaveCream contributed to our decision to exit the biotechnology and
pharmaceutical industries.
Recent
Developments
Having
agreed to dispose of our SaveCream assets to Eucodis under the Eucodis
Agreement, we considered entering into a number of other businesses that would
enable us to be able to provide our shareholders with future value. Our Board
has decided to develop a business to produce and sell seed oils, including
seeds
oils harvested from the planting and cultivation of Jatropha
curcas
plant,
for the purpose of providing feedstock oil intended for the generation of methyl
ester, otherwise known as bio-diesel (the “Jatropha Business”). Our Board
concluded that there was a significant opportunity to participate in the rapidly
growing biofuels industry, which previously was mainly driven by high priced,
edible oil-based feedstock. In order to commence our new Jatropha Business,
effective September 7, 2007, we (i) hired Richard Palmer, an energy consultant,
and a member of Global Clean Energy Holdings LLC (“Global”) to act as the our
new President and Chief Operating Officer, (ii) engaged Mobius Risk Group,
LLC,
a Texas company engaged in providing energy risk advisory services, to provide
us with consulting services related to the development of the Jatropha Business,
and (iii) acquired certain trade secrets, know-how, business plans, term sheets,
business relationships, and other information relating to the cultivation and
production of seed oil from the Jatropha plant for the production of bio-diesel
from Global.
Global
Clean Energy Holdings, LLC -- Share Exchange Agreement
In
connection with our efforts to commence the Jatropha Business, on September
7,
2007, we entered into an exchange agreement (the “Global Agreement”) pursuant to
which we acquired all of the outstanding ownership interests in Global Clean
Energy Holdings, LLC, a Delaware limited liability company (“Global”). Global is
a company that owns certain
trade secrets, know-how, business plans, term sheets, business relationships,
and other information relating to the cultivation and production of seed oil
from the seed of the Jatropha plant, for the purpose of providing feedstock
oil
intended for the production of bio-diesel. Richard
Palmer and Mobius Risk Group, LLC, a Texas limited liability company engaged
in
providing energy risk advisory services (“Mobius”), were the sole owners of the
outstanding equity interests of Global. Richard Palmer was also a member of
Global.
In
exchange for all of the outstanding ownership interests in Global, we issued
63,945,257 shares of our common stock to Richard Palmer and Mobius. The shares
issued to Mr. Palmer and Mobius in the acquisition of Global represented 35%
of
our outstanding shares of common stock immediately after the acquisition
(excluding the shares of Series A Convertible Preferred Stock). Of the
63,945,257 shares issued under the Global Agreement, 36,540,146 shares were
issued and delivered to Mr. Palmer (5,220,021 shares) and Mobius (31,320,125
shares) at the closing of the Global Agreement without any restrictions. The
remaining 27,405,111 shares of common stock were, however, issued as restricted
shares, subject to forfeiture in the event that certain specified performance
milestones are not achieved. The restricted shares are being held by us in
escrow until such shares are either released or cancelled. An aggregate of
23,490,095 restricted shares were issued to Mobius, and 3,915,016 restricted
shares were being issued to Palmer. If and when certain specified milestones
are
achieved, the restricted shares will be released and delivered to Mr. Palmer
and
Mobius in accordance with the terms and conditions of the Global Agreement.
During the time that the restricted shares are restricted and subject to
forfeiture, the restricted shares shall be outstanding shares for all purposes
and shall be entitled to vote and receive dividends, if any are declared. As
of
November 30, 2007, a total of 4,567,518 of Mr. Palmer and Mobius’ restricted
shares were released from the restrictions and delivered on a pro rata basis
per
the terms of the Global Agreement to Mr. Palmer and Mobius.
In
order
to obtain the expertise necessary to exploit the assets we acquired under the
Global Agreement, we also entered into an employment agreement with Richard
Palmer, and a consulting agreement with Mobius.
Mobius
Consulting Agreement
Concurrent
with the execution of the Global Agreement, we entered into a consulting
agreement with Mobius pursuant to which Mobius has agreed to provide consulting
services to us in connection with our new Jatropha Business. We engaged Mobius
as consultant to obtain Mobius’ experience and expertise in the
feedstock/bio-diesel market to assist us in developing our new business
operations. Mobius’ compensation for the services provided under the consulting
agreement is a monthly retainer of $45,000; the term of the Mobius consulting
agreement is twelve months, or such shorter period until the scope of work
under
the agreement has been completed.
Employment
Agreement
On
September 7, 2007, we entered into an employment agreement (effective as of
September 1, 2007) with Richard Palmer pursuant to which we hired Mr. Palmer
to
serve as our President and Chief Operating Officer. Mr. Palmer was also
appointed to serve as director on our Board to serve until the next election
of
directors by our shareholders. We hired Mr. Palmer to take advantage of his
experience and expertise in the feedstock/bio-diesel industry, and in
particular, in the Jatropha bio-diesel and feedstock business.
Under
Mr.
Palmer’s employment agreement, we granted Mr. Palmer an incentive option to
purchase up to 12,000,000 shares of our common stock at an exercise price of
$0.03 (the trading price on the date the agreement was signed), subject to
our
achievement of certain market capitalization goals. The option expires after
five years. In addition, Mr. Palmer’s compensation package includes a base
salary of $250,000, and a bonus payment contingent on Mr. Palmer’s satisfaction
of certain performance criteria, which will not exceed 100% of Mr. Palmer’s base
salary. The term of employment commenced September 1, 2007 and ends on September
30, 2010, unless terminated earlier in accordance with the terms of that
agreement.
Appointment
of New Directors
At
a
meeting of our Board held on August 30, 2007, the Board appointed three
individuals to fill three vacancies on the Board. In connection with covenants
we made under the Global Agreement and Mr. Palmer’s employment agreement, the
Board appointed Richard Palmer and Eric J. Melvin to fill two of the vacancies
on the Board. In addition, the Board appointed Martin Schroeder to fill the
final vacancy on the Board. Messrs. Palmer, Melvin and Schroeder will stand
for
re-election at our next annual meeting of shareholders. All of the appointments
were contingent upon, and became effective as of the consummation of the Global
Share Exchange Agreement and the execution of Mr. Palmer’s employment
agreement.
Mr.
Eric
Melvin currently is the Chief Executive Officer of Mobius and a principal owner
of that energy consulting business.
Mr.
Richard Palmer is our newly appointed President, Chief Operating Officer and
Chief Executive Officer. Prior to joining us, Mr. Palmer was a Vice President
of
Mobius, specializing in providing consulting services related to alternative
energy sources, including bio-diesel feedstock production. Mr. Palmer also
owns
a minority equity interest in Mobius.
Mr.
Martin Schroeder currently is the Executive Vice President & Managing
Director of The Emmes Group, Inc., a strategic business development, assessment
and planning organization specializing in the support of firms engaged in the
consumer product, technology, internet, medical diagnostic, biotechnology,
and
pharmaceutical industries. He also is the principal of Emmes Group Consulting,
LLC. Mr. Schroeder has been providing consulting services to us since February
2007.
Lodemo
Services Agreement
On
October 15, 2007, we entered into a Service Agreement (the “Lodemo Agreement”)
with Corporativo LODEMO S.A DE CV, a Mexican corporation (the “Lodemo Group”) in
connection with our new Jatropha Business. We have decided to initiate our
Jatropha Business in Mexico, and have already identified parcels of land in
Mexico to plant and cultivate Jatropha. In order to obtain all of the logistical
and other services needed to operate a large-scale farming and transportation
business in Mexico, we entered into the Lodemo Agreement with the Lodemo Group,
a privately held Mexican company with substantial land holdings, significant
experience in fuel distribution and sales, liquids transportation, logistics,
land development and agriculture.
Under
our
supervision, the Lodemo Group will be responsible for the establishment,
development, and day-to-day operations of our Jatropha Business in Mexico,
including the extraction of the oil from the Jatropha seeds, the delivery of
the
Jatropha oil to buyers, the purchase or lease of land in Mexico, the
establishment and operation of one or more Jatropha nurseries, the clearing,
planting and cultivation of the Jatropha fields, the harvesting of the Jatropha
seeds, the operation of the our oil extraction facilities, and the logistics
associated with the foregoing. Although the Lodemo Group will be responsible
for
identifying and acquiring the farmland, ownership of the farmland or any lease
thereto will be held directly by us. The Lodemo Group will be responsible for
hiring and managing all necessary employees. We will bear all direct and
budgeted costs of the Jatropha Business in Mexico.
The
Lodemo Group will provide the foregoing and other necessary services for a
fee
primarily based on the number of hectares of Jatropha under cultivation. We
have
agreed to pay the Lodemo Group a fixed fee per year of $60 per hectare of land
planted and maintained with minimum payments based on 10,000 hectares of
developed land, to follow a planned planting schedule. The agreement has a
20-year term but we may terminate under certain circumstances. The Lodemo Group
also will potentially receive incentive compensation for controlling costs
below
the annual budget established by the parties, production incentives for increase
yield and a sales commission for biomass sales.
Loan
Agreement
In
order
to fund our operations pending the closing of the SaveCream Asset Sale
Agreement, on September 7, 2007, we entered into a loan and security agreement
(“Loan Agreement”) with Mercator Momentum Fund III, L.P., a California limited
partnership, pursuant to which Mercator Momentum Fund III, L.P. made available
to us a secured term credit facility in the aggregate principal amount of
$1,000,000. We utilized a total of $350,000 under the Loan Agreement, which
amount was evidenced by two secured promissory notes that we issued to Mercator
Momentum Fund III, L.P. in the aggregate principal amount of $350,000 (the
“Notes”). Interest is payable on the Notes at a rate of 12% per annum, payable
monthly. Initially, all advances under the credit facility became due and
payable on December 14, 2007. On December 13, 2007, we repaid $100,000 of the
credit facility advances, and Mercator agreed to extend the maturity date of
the
remaining $250,000 Note to February 21, 2008. The Note is secured by a first
priority lien on all of our assets. Mercator Momentum Fund III, L.P. and its
affiliates currently own all of the issued and outstanding shares of Series
A
Convertible Preferred Stock. We have used the advances under the credit facility
to fund our working capital needs.
Series
B Preferred Stock
In
order
to obtain additional working capital, on November 6, 2007, we entered into
a
Securities Purchase Agreement (the “Securities Purchase Agreement”) with two
accredited investors, pursuant to which we sold a total of 13,000 shares of
our
newly authorized Series B Convertible Preferred Stock (“Series B Shares”) for an
aggregate purchase price of $1,300,000. Each share of the Series B Shares has
a
stated value of $100. The two purchasers of our Series B Shares are parties
who
will be engaged in our Jatropha Business in Mexico.
The
Series B Shares may, at the option of each holder, be converted at any time
or
from time to time into fully paid and non-assessable shares of our common stock
at the conversion price then in effect. The number of shares into which one
Series B Share shall be convertible is determined by dividing $100.00 per share
by the conversion price then in effect. The initial conversion price per share
for the Series B Shares is $0.11, which is subject to appropriate adjustment
for
certain events, including stock splits, stock dividends, combinations,
recapitalizations or other recapitalizations affecting the Series B Shares.
Each
holder of Series B Shares is entitled to the number of votes equal to the number
of shares of our common stock into which the Series B Shares could be converted
on the record date for such vote, and shall have voting rights and powers equal
to the voting rights and powers of the holders of our common stock. In
the
event of our dissolution or winding up, each share of the Series
B
Shares
is entitled to be paid an amount equal to $100 (plus any declared and unpaid
dividends) out of the assets of our company then available for distribution
to
shareholders; subject, however, to the senior rights of the holders of our
Series A Convertible Preferred Stock.
No
dividends are required to be paid to holders of the Series B Shares. However,
we
may not declare, pay or set aside any dividends on shares of any class or series
of our capital stock (other than dividends on shares of our common stock payable
in shares of common stock) unless the holders of the Series B Shares shall
first
receive, or simultaneously receive, an equal dividend on each outstanding share
of Series B Shares.
Employees
As
of
December 31, 2007, we had one employee, our Chief Executive Officer, Richard
Palmer. During the initial development of our Jatropha Business, most of our
Jatropha-related services are being provided to us by the Mobius Risk Group
and
the Lodemo Group. In addition, our accounting and other administrative functions
are also currently being provided to us by consultants. At such time as capital
resources permit, we will hire full-time employees to assume these
positions.
Description
Of Property
Currently,
we operate out of offices located at 6033 W. Century Blvd, Suite 1090, Los
Angeles, California 90045. We recently moved to this location (previously,
our
offices were located in Salt Lake City, Utah) and we have not yet entered into
a
lease for these offices. Accordingly, we currently are not subject to any lease
or rental payments.
Legal
Proceedings
On
August
22, 2006, we initiated legal proceedings in Landgericht Hamburg, a German
Federal Court in Hamburg - Germany, against Dr. Alfred Schmidt to obtain certain
rights concerning “SaveCream”, a developmental topical aromatase inhibitor cream
relevant to our legacy bio-pharmaceutical business. No cross complaints have
been filed against us in this matter. We acquired the “SaveCream” rights and
certain other related intellectual property assets from the liquidator of
Savetherapeutics AG i.L., a German corporation, pursuant to an asset purchase
agreement dated as of March 11, 2005. Pursuant to the Eucodis Agreement, Eucodis
has agreed to assume and become financially responsible for all costs we incur
in connection with the foregoing litigation, subject to the satisfaction of
certain conditions, including that all such
costs are backed up by duly rendered invoices (or receipts).
The
Jatropha Business
Business
Strategy
As
of
September 7, 2007, the day on which we entered into the Global Agreement, we
changed the core business of our company to focus on the cultivation of
non-edible feedstock for certain applications in the biofuels market. In
particular, we anticipate that our core activities in the future will include
the planting, cultivation, harvesting and processing of Jatropha plant feedstock
to generate seed oils and biomass for use in the biofuels industry, including
the production of bio-diesel and certain other biofuels.
Bio-diesel
is a diesel-equivalent, processed fuel derived from biological sources (such
as
plant oils), which can be used in diesel engines and as a replacement for fuel
oil. The term “biofuels” refers to a range of biological based fuels including
biodiesel, synthetic diesel, ethanol and biomass, most of which have
environmental benefits that are the major driving force for their introduction.
Using biofuels instead of fossil fuels reduces net emissions of carbon dioxide
and other green house gases, which are associated with global climate change.
Biofuels further the concept of energy independence and environmental
responsibility, while generating new jobs in new markets. This creates a social,
environmental and economic gain from the production, distribution and end use
of
biofuels. As the world consumes larger volumes of fossil fuels, and further
depletes the supplies of such fossil fuels, alternate sources of energy need
to
be developed to support growing economies.
We
have
identified the Jatropha
curcas
plant
as our primary feedstock for producing bio-diesel and other biofuels. The
Jatropha plant is a perennial plant that produces an inedible fruit with large
seeds containing a high percentage of high quality inedible oil. The entire
fruit, including the seeds, has excellent properties necessary for the
production of biofuels. Our current business plan proposes to utilize the entire
fruit of the Jatropha plant for biofuel production, including the oils produced
from the fruit, as well as the hull, seed cover, seed oil and seed cake.
In
connection with our new feedstock operations, we have identified strategic
locations in North America, the Caribbean, Central America and South America
ideally suited to our proposed planting, cultivation, harvesting and processing
activities, in which we plan to establish cultivation, harvesting and processing
operations. All of the areas identified have been selected for a number of
key
strategic reasons, including proximity to large ports for logistics purposes,
relatively stable democratic governments, favorable trade agreements with the
United States, low-cost land, reasonably priced labor, favorable weather
conditions and acceptable soil conditions.
The
Jatropha plant is indigenous to Mexico, and we have decided to initiate
implementation of our new business plan and related agricultural development
activities in Mexico. Our business plan proposes to establish a nursery in
which
we will initially grow and cultivate Jatropha seedlings prior to transferring
them to the plantation for further growth and cultivation. We are currently
negotiating a lease for approximately 40 hectares of land in the Yucatan
Peninsula, on which we plan to set up our proposed Jatropha nursery. We have
already begun a plant breeding research and development program on this
property.
We
have
identified a wide range of varieties of the Jatropha plant in Mexico, which
we
are currently propagating and studying. Our research and development activities
will focus on plant and soil sciences, plant breeding and other related
activities. We plan to study and identify the proper mix of Jatropha varieties,
as well as optimum growth conditions, in order to maximize our output of the
Jatropha fruit and seed oil. For political as well as legal reasons, we
anticipate organizing a wholly owned Mexican subsidiary for purpose of carrying
out our contemplated activities in Mexico, and plan to locate the corporate
offices of any such Mexican subsidiary on the same property on which our
nursery, plant breeding and research support facilities will be located. We
are
currently in negotiations for the construction of the nursery and research
facilities on an approximately 40-hectare parcel in Mexico.
In
addition, we have identified 2,000 hectares of land in the State of Yucatan
Mexico, which we believe is ideal for establishing and maintaining what we
plan
to be the first of several multi-thousand hectare plantations in which we will
cultivate the Jatropha plant. Our business plan is to acquire the rights to
use
up to 20,000 hectares in Mexico, by the end of our 2008 fiscal year, for
purposes of setting up plantations on which we will cultivate the Jatropha
plant. We anticipate that the 2,000 hectares will yield 1-2 million gallons
of
feedstock oil when fully planted with mature plants.
We
are
also evaluating other locations in the Caribbean, Central America and South
America for purposes of establishing Jatropha plantations, and we plan to have
a
Jatropha plantation and related operations in a location outside of Mexico
by
the end of our 2009 fiscal year.
Our
business plan also proposes the construction of a seed oil extracting facility
in which we would extract the feedstock oil from the Jatropha seed, and collect
the remaining biomass for sale to interested buyers. We have not yet identified
a location for the seed oil extracting facility; however, we plan to locate
the
facility relatively close to the ultimate end user of the biomass in order
to
minimize the costs and logistics of transporting the biomass to prospective
buyers.
We
anticipate that our primary focus will be in the feedstock oil market, and
our
operations will primarily comprise the planting, harvesting and sale of
feedstock oil to end users in the energy industry for production of bio-diesel
and other biofuels. In the short term, while developing Jatropha plantations,
we
expect to generate short-term cash flows through our forward sale contracts
for
feedstock oil and biomass to be produced at our facilities, and the potential
sale of carbon offset credits.
Depending
on future economic, political and other factors, we may in the future expand
our
operations beyond the feedstock oil market. For example, our business plan
contemplates the possibility of entering into a joint venture for the
constructing a bio-diesel refinery in which we would produce bio-diesel using
the feedstock oil that we produce. In any event, we anticipate we will still
remain a feedstock oil company primarily, and that our bio-diesel production,
if
any, would be derived from only a portion of the feedstock oil we produce.
If
economic and other factors at the time encourage us to invest in bio-diesel
production, we anticipate that we may develop or acquire additional refining
capacity in other strategic locations.
Our
employees, advisors and consultants are senior energy professionals with
extensive experience in the energy and biofuels market, the production of
bio-diesel and in the renewable energy sector in general.
We
are
still a development stage company, and we anticipate that we will require
significant time and capital to develop our new operations into a stable and
profitable business.
Principal
Biofuel Products
The
production of biofuels feedstock is primarily a logistical agricultural
operation. It needs to be supported with strong plant and soils sciences to
improve productivity, quality and plant stability. The Jatropha
curcas
plant
will be our primary agricultural focus. The Jatropha plant is a perennial,
inedible plant, and all of its by-products can be used for fuel and biomass
energy production. It is a very efficient plant that produces high quality
seed
oil and high-energy content biomass.
Bio-diesel
Oil Feedstock
The
feedstock oil needed for the production of bio-diesel that is currently
available on the market today is primarily supplied from edible plant seed
oils
including soy, canola (rapeseed) and palm. There are other types of feedstock
utilized including animal fats and recycled cooking grease, but they make up
a
small portion of the market supply. Our primary source of bio-diesel feedstock
will be from the oil produced from the Jatropha plant. One advantage of the
Jatropha plant is that it’s oil and meal is inedible, and the cultivation of the
plant, which will primarily be for use in the biofuels industry, does not
compete for resources with other crops grown primarily for food consumption.
Since the Jatropha plant does not compete with land or other resources used
in
food crop development, it is an additional feedstock supply, growing the base
and the market capacity.
Biomass
Feedstock
The
Jatropha plant produces a fruit (about the size of a golf ball) containing
three
large seeds that contain 32%-38% oil content by weight. The non-oil components
of the fruit, which represents 62-68% of the total fruit, contains high energy
biomass (carbon values) that is an excellent source of feedstock for a number
of
energy producing processes including direct combustion, gasification, power
production, and cellulostic ethanol (alcohol) production.
Carbon
Credits
Biofuels
production and use is a very effective means to reduce both local and global
pollution from emissions that cause climate change. Growing trees and plants
which sequesters carbon from the atmosphere and burning biofuels offsets the
production of greenhouse gasses resulting from the consumption of petroleum
or
other fossil-based fuels. Many biofuels produce less pollution, including CO2,
NOx, SOx and PM10. Through the 1997 Kyoto Protocol to the United Nations
Framework Convention on Climate Change (Kyoto Protocol), signatory countries
are
required to reduce their overall greenhouse gas emissions, or carbon footprint.
As of November 2007, 174 parties are signatories to and have ratified the Kyoto
Protocol. The United States of America is not a signatory to the Kyoto
Protocol.
Signatory countries require local industry and other local energy end-users
to
either reduce their greenhouse gas emissions, or purchase greenhouse gas
emission credits (carbon credits). This requirement has created a worldwide
“Carbon Credit Trading Market” where users sell their excess carbon credits and
buyers purchase the carbon credits they need to meet their greenhouse gas
reduction requirements. The development of agricultural-based energy projects
may produce carbon credits through the sequestration (storing) of carbon by
the
growing of trees and plants, or by the offset of other sequestered carbon.
Selling carbon credits represents potential additional revenue that will help
to
offset capital requirements for our plantation and other development
activities.
In
our
case, Certified Emission Reductions (CERs) may be generated through Clean
Development Mechanism projects in non-Annex 1 nations, which include Mexico,
the
Caribbean, Central and South America. Assuming full capacity at a 20,000-hectare
Jatropha plantation, we estimate that we could generate more than 100,000 metric
tons of sellable carbon credits annually.
Technology
Although
we do not currently possess any patentable technology relating to our operations
in the feedstock and biofuels market, we may develop technology as we design
and
implement our business plan. Any technology we develop will be in three main
categories: (i) plant and science sciences, (ii) agricultural development,
and
(iii) material processing and end use applications. Such technologies developed
are expected to assist in reducing costs, improving efficiency and allowing
us
to move the products higher in value creation. We intend to pursue patentable
technologies, processes and plant varieties.
Market
According
to U.S. Department of Energy estimates, the world demand for crude oil in 2006
was approximately 85 million barrels per day, with approximately 25% of that
demand being diesel and fuel oil (distillate fuel oil). This equates to a global
consumption of distillate fuel oil of approximately 21 million barrels per
day,
or 325 billion gallons per year. At a 5% blend with biodiesel, the world market
for biodiesel exceeds 16 billion gallons per year.
U.S.
distillate fuel oil consumption for 2005 was 4.12 million barrels per
day,
which
equates to over 60 billion gallons of diesel and fuel oil consumed annually.
At
a 5% biodiesel blend, the US biodiesel market is over 3 billion gallons per
year
and growing.
In
2004,
32 U.S. biodiesel refineries produced approximately 30 million gallons of neat
(100%) bio-diesel fuel. In 2005, 50 refineries produced approximately 75 million
gallons and in 2006 approximately 250 million gallons was sold. It is expected
that in 2007 over 300 million gallons of bio-diesel fuel will be produced and
consumed domestically, with an unconfirmed, but announced, biodiesel refinery
construction exceeding a total U.S. Domestic refining capacity of 1 billion
gallons.
Direct
Sales
Based
on
our current business plan, our primary market will be in the direct sale of
Jatropha feedstock oil for bio-diesel production and biomass energy production,
and the sale of carbon credits. Our primary customers will be refiners of
bio-diesel. We estimate that there are approximately 165 bio-diesel plants
in
the United States alone, which can utilize up to 100% of our crude or refined
Jatropha oil.
We
will
generate our highest revenues and greatest margins from customers who have
logistical capacity on a water port accessible from the Gulf of Mexico. This
will reduce redundant transportation costs, and allow us to ship large
quantities economical. These customers have historically paid a higher price
for
feedstock oil, since the majority of feedstock oil supplies has been shipped
from the Midwestern United States. We anticipate that our key customer profile
will include well-financed, low-cost bio-diesel refiners.
Distributor
Sales
As
our
business develops, we expect to utilize some distributors for sale of the
Jatropha feedstock oil and the biomass by-products that we will
produce.
Environmental
Impact
Biofuels,
including bio-diesel, have environmental benefits that are a major driving
force
for their introduction. Using biofuels instead of fossil fuels reduces net
emissions of carbon dioxide and other greenhouse gasses, which are associated
with global climate change. Biofuels are produced from renewable plant resources
that “recycle” the carbon dioxide created when biofuels are consumed. Life-cycle
analyses consistently show that using biofuels produced in modern facilities
results in net reductions of greenhouse gas carbon emissions compared to using
fossil fuel-based petroleum equivalents. These life-cycle analyses include
the
total energy requirements for the farming and production of the biomass
resource, as well as harvesting, conversion and utilization. Biofuels help
nations achieve their goals of reducing carbon emissions. Biofuels burn cleanly
in vehicle engines and reduce emissions of unwanted products, particularly
unburned hydrocarbons and carbon monoxide. These characteristics contribute
to
improvements in local air quality. In a life-cycle study published in October
2002, entitled “A Comprehensive Analysis of Bio-diesel Impacts on Exhaust
Emissions, 2002,” the U.S. Environmental Protection Agency (“EPA”) analyzed
bio-diesel produced from virgin soy oil, rapeseed (canola) and animal fats.
The
study concluded that the emission impact of bio-diesel produced slightly
increased NOx emissions while significantly reducing other major
emissions.
Competition
Although
there are a number of producers of biofuels, few are utilizing non-edible oil
feedstock for the production of bio-diesel. The following table lists the
companies we are aware of that are cultivating Jatropha for the production
of
bio-diesel:
British
Petroleum (UK)
|
Plans
to establish 100,000 hectares of Jatropha plantations in Indonesia
to feed
the 350,000-tonne-per-year biodiesel refinery that it is building
in the
country.
|
Van
Der Horst Corporation (Singapore)
|
Building
a 200,000-tpy biodiesel plant in Juron Island in Singapore that will
eventually be supplied with Jatropha from plantations it operates
in
Cambodia and China, and possible new plantations in India, Laos and
Burma.
|
Mission
Biofuels (Australia)
|
Hired
Agro Diesel of India to manage a 100,000-heactare Jatropha plantation,
and
a contract farming network in India to feed its Malaysian and Chinese
biodiesel refineries. Mission Biofuels has raised in excess of $80
million
to fund its operations.
|
D1
Oils (UK)
|
As
of June 2007, together with its partners, D1 Oils has planted or
obtained
rights to offtake from a total approximately 172,000 hectares of
Jatropha
under cultivation worldwide. D1’s Jatropha plantations are located in
Saudi Arabia, Cambodia, Ghana, Indonesia, the Philippines, China,
India,
Zambia, South Africa and Swaziland. In June 2007, D1 Oils and British
Petroleum entered into a 50:50 joint venture to plant up to an additional
1 million hectares of Jatropha worldwide. British Petroleum funded the
first £31.75 million of the Joint Venture’s working capital requirements
through a purchase of D1 Oils equity, and the total Joint Venture
funding
requirement is anticipated to be £80 million over the next five
years.
|
NRG
Chemical Engineering (UK)
|
Signed
a $1.3 billion deal with state-owned Philippine National Oil Co.
in May
2007. NRG Chemical will own a 70% stake in the joint venture which
will
involve the construction of a biodiesel refinery, two ethanol distilleries
and a $600 million investment in Jatropha plantations that will cover
over
1 million hectares, mainly on the islands of Palawan and
Mindanao.
|
1
hectare
= 2.47 acres
We
believe there is sufficient global demand for alternative non-edible biofuel
feedstock to allow a number of companies to successfully compete worldwide.
In
particular, we note that we are the only US-based producer of non-edible oil
feedstock for the production of bio-diesel which gives us a unique competitive
advantage over many foreign competitors when competing in the USA.
The
price
basis for our non-edible oil and biomass feedstock will be equivalent to other
edible seed oil and biomass feedstock. We have not found any substantial effort
towards the production of any other non-edible oil worldwide that could compete
with Jatropha. With the growing demand for feedstock, and the high price of
oil
and biofuels, we anticipate that we will be able to sell our Jatropha oil and
biomass feedstock profitability.
DESCRIPTION
OF THE EUCODIS TRANSACTION AND AGREEMENT
The
following sets forth a summary of the material provisions of the sale and
purchase agreement between the us and Eucodis (the “Eucodis Agreement”). The
description does not purport to be complete and is qualified in its entirety
by
reference to the sale and purchase agreement, as amended, a copy of which is
attached hereto as Appendix
A.
All
shareholders are urged to read the sale and purchase agreement in its entirety.
Past
Contacts and Negotiations
As
described in this proxy statement, we operated as a development stage
bio-pharmaceutical company engaged in the research and development of two drug
candidates. Both of these drug candidates are still in development and neither
has been approved by the U.S. Food and Drug Administration. The total cost
to
develop these two drugs, and to receive the approval from the FDA, would cost
many millions of dollars and take many more years. As of the end of 2006, we
did
not have the funds to continue our bio-pharmaceutical business, and our
principal financing sources informed us that they were no longer willing to
fund
our operations.
In
order
to assist our management to resolve our financial crisis and to assist in
developing a new business strategy, effective February 1, 2007 we engaged a
consulting firm, the Emmes Group Consulting LLC (“Emmes”) to obtain advice
regarding any strategic alternatives that may be available to us. Emmes is
a
strategy consulting firm that assists pharmaceutical and other
companies.
At
a
Board of Directors meeting held in February 2007, our Board of Directors and
Emmes concluded that it would not be possible to raise additional equity or
debt
financing to fund the continued operation of the bio-pharmaceutical business.
Emmes recommended, and the Board of Directors agreed, to pursue the sale of
its
lead drug candidates in an effort to (i) prevent our shareholders from losing
their entire investment in this company, and (ii) enable us to repay some of
our
currently outstanding debts and liabilities. Emmes further recommended, and
the
Board of Directors agreed, to consider reengineering our business model and
business strategy to one that could attract additional financing.
Our
principal assets (the “Assets”) consisted primarily of patents, patent
applications, pre-clinical study data and clinical trial data concerning
Formestane cream (“SaveCream”), a developmental-stage topical aromatase
inhibitor treatment for breast cancer. Since July 29, 2006, we have been a
party
to a licensing and development agreement with Eucodis Pharmaceuticals Forschungs
und Entwicklungs GmbH, an Austrian company (“Eucodis”), under which agreement we
granted Eucodis a license to the technology to certain territories, and Eucodis
agreed to assist in the further development of the SaveCream Assets. Under
this
license agreement, we granted Eucodis the exclusive right to develop,
manufacture and commercialize SaveCream in the European Union and certain
surrounding countries. Accordingly, Eucodis was familiar with SaveCream and
had
an economic incentive to protect and develop this technology.
In
February 2007, Emmes recommended, and the Board of Directors agreed, that we
approach Eucodis concerning their possible acquisition of our rights in the
Assets for a one-time cash payment plus the assumption of certain our current
debts directly related to the Assets. The Board considered the benefits and
possible draw-backs of selling the Assets to a buyer (Eucodis) that was very
familiar with the Assets. The Board noted that legal title to the Assets was
currently being contested by one of the co-inventors of the SaveCream
technology, and that two lawsuits to resolve ownership dispute over the Assets
were pending in two courts in Germany. The Board noted that these lawsuits
would
likely make it difficult to sell the Assets to a third party who is unfamiliar
with the status of the legal title of the Assets and the status of the lawsuits
in Germany. Eucodis was familiar with the lawsuits and, in fact, was paying
for
all of the legal fees in those lawsuits. The Board also noted, that our
co-development agreement with Eucodis would make it difficult to market the
Assets because a third party purchaser would want to develop the technology
itself. Finally, the Board noted that Eucodis already owned the license to
commercialize the Assets in the European Union and certain other countries,
which would make Eucodis more interested in buying the remaining rights. The
fact that Eucodis has a license to these territories also was believed to
negatively affect any interest a potential third party purchaser may have in
the
Assets. After considering all of these factors, the Board concluded that Eucodis
was the most logical purchaser of the Assets and that Eucodis was most likely
to
offer the highest price for our Assets. Therefore, the Board authorized Emmes
and our management to approach Eucodis regarding the possible purchase of our
rights to the Assets.
In
February 2007, we approached Dr. Wolfgang Schoenfeld, the President and Chief
Executive Officer of Eucodis, to discuss the possible purchase by Eucodis of
the
Assets. Dr. Schoenfeld expressed interest, and Emmes, Mr. Stephen Drake, our
lawyer from Epstein Becker and Green, a Chicago-based law firm, Ms. Valerie
Heusinkveld (another financial consultant we retained for this purpose in
February 2007), and members of our management thereafter proceeded to negotiate
a letter of intent for the purchase of the Assets by Eucodis. Periodically
during the negotiation period, the Board of Directors was updated concerning
the
progress of the negotiations with Eucodis.
On
March
8, 2007, a Board of Directors meeting was held to approve the execution of
a
binding letter of intent (LOI) whereby we agreed to sell the Assets in
consideration for a cash payment and the assumption by Eucodis of certain of
our
current indebtedness directly related to the Assets being purchased by Eucodis.
Upon execution of the LOI by both parties, Eucodis made an upfront payment
of
$200,000 to us.
Following
the signing of the LOI, Emmes and Mr. Drake began to draft the terms of a
definitive purchase agreement for the Assets with Eucodis.
On
April
9, 2007, we delivered a first draft of the definitive purchase agreement to
Dr.
Schoenfeld for his review and comment. Periodically during the negotiation
of
the definitive purchase agreement, the Board of Directors was updated by Emmes
and Mr. Drake regarding the progress of the negotiations with Eucodis and the
terms of the draft asset purchase agreement.
On
April
14, 2007, we discussed with Eucodis their proposed changes to our April
9th
draft
purchase agreement, and prepared a revised draft agreement for Eucodis’ further
review and comment.
On
April
26, 2007, we negotiated a extension of the expiration date of LOI with Eucodis
extending the date by which the parties agree to complete negotiations regarding
the definitive purchase agreement.
On
May
11, 2007, we held a teleconference with Eucodis’ management to discuss the
proposed changes requested by Eucodis.
On
May
15, 2007, a revised draft of the April 9th
draft
purchase agreement was delivered to Dr. Schoenfeld for his review and
comment.
On
May
30, 2007, Emmes, Mr. Drake and management discussed with the Board of Directors
the proposed changes made by Eucodis to the May 15th
draft
agreement. It was the collective opinion of the members of the Board that
Eucodis’ suggested changes were unacceptable, and Emmes was instructed to
proceed with further negotiations with Eucodis in an attempt to resolve the
outstanding issues.
On
June
6, 2007, Emmes made a formal counter proposal to Eucodis concerning the May
15th
draft
agreement received from Eucodis.
On
June
27, 2007, we received from Eucodis comments regarding our June 6th
draft
agreement. Our Board members and management discussed those comments, identified
certain open issues, and instructed Emmes to attempt to resolve the outstanding
issues. On June 27, 2007, Emmes submitted a revised draft agreement to Eucodis
for consideration, which proposal was accepted by Eucodis.
Following
acceptance of the final version of the asset purchase agreement by Eucodis,
that
version of the purchase agreement was submitted to the Board of Directors in
anticipation of a Board meeting to be held to approve the sale.
On
July
6, 2007, our Board of Directors met to consider the terms of the final version
of a sale and purchase agreement to be entered into with Eucodis. The form
and
terms of the Asset Sale Agreement were approved at that meeting. Later that
day,
we entered into that agreement with Eucodis.
Assets
To Be Sold
The
assets being sold to Eucodis include:
|
·
|
all
of our right, title and interest, along with all of MDI Oncology’s right,
title and interest, in that certain asset purchase agreement between
Medical Discoveries, Inc. and the liquidator of Savetherapeutics
AG, a
German company in liquidation, dated as of March 11, 2005 (the
“Savetherapeutics Contract”), including, among other things, our rights in
and to “SaveCream”, a developmental topical aromatase inhibitor
cream;
|
|
·
|
all
of MDI Oncology’s right, title and interest in that certain agreement
between MDI Oncology and Eucodis, dated as of July 29, 2006, in connection
with the co-development and licensing of SaveCream;
|
|
·
|
any
and all of our and MDI Oncology’s rights, title and interests in the
patents and patent applications acquired under the Savetherapeutics
Contract, and any other patent and/or patent application pertaining
to the
SaveCream drug, owned or in our or MDI Oncology’s possession or
control;
|
|
·
|
any
and all United States and foreign regulatory files and data relating
to
the SaveCream drug in our or MDI Oncology’s possession, including
marketing authorization procedures and preclinical and clinical
studies;
|
|
·
|
all
of our right, title and interest in that certain asset purchase agreement
between Medical Discoveries, Inc. and Attorney Hinnerk-Joachim Muller
as
Liquidator of Savetherapeutics AG i.
L.;
|
|
·
|
all
of our right, title and interest in that side letter to the asset
purchase
agreement between Medical Discoveries, Inc. and Attorney Hinnerk-Joachim
Muller as Liquidator of Savetherapeutics AG i.
L.;
|
|
·
|
all
of MDI Oncology’s right, title and interest in that certain Assignment of
Patent, Participation and Research Development Agreement between
MDI
Oncology and Professor Heinrich
Weiland;
|
|
·
|
all
of MDI Oncology’s right, title and interest in that certain Assignment 1
to the Assignment of Patent, Participation and Research Development
Agreement between MDI Oncology and Professor Heinrich Weiland;
and
|
|
·
|
all
of our right, title and interest in that certain consulting agreement
between Medical Discoveries, Inc. and Marc
Kessemeier.
|
The
foregoing are collectively referred to in this proxy statement as the “Purchased
Assets”.
In
the
event the sale to Eucodis is not approved by our shareholders, we are obligated
under the Eucodis Agreement to transfer to Eucodis certain rights to SaveCream,
by means of a license or otherwise, on terms to be determined by the parties.
Accordingly, since we will no longer be developing the SaveCream product even
if
our shareholders do not approve the sale of these assets, we may still enter
into a limited license or other agreement with Eucodis pursuant to which Eucodis
could continue to develop and commercially exploit the SaveCream
products.
Purchase
Price; Obligations To Be Assumed By Eucodis
In
exchange for the Purchased Assets, Eucodis will pay approximately 4,007,534
euros or approximately $5,906,000
based on
the currency exchange rate in effect as of November 30, 2007, comprising a
cash
payment of approximately $2,267,000, and Eucodis’ assumption of certain of our
obligations and liabilities aggregating approximately $3,639,000. Specifically,
at or prior to the closing Eucodis will relieve us (and MDI Oncology, as
applicable) from a total of $3,639,000 of indebtedness and commitments owed
to
Epstein, Becker and Green, LLP; H3 Pharma Consulting Group; Mayer, Brown, Rowe
and Maw, LLP; Professor Heinrich Weiland; the Liquidator of Savetherapeutics
AG
i. L.; Marc Kessemeier; and Millbank Tweed, Hadley & McCloy LLP. The
foregoing obligations to be assumed by Eucodis are collectively referred to
in
this proxy statement as the “Assumed Indebtedness”.
Further,
Eucodis will assume all of our financial and other obligations under certain
contracts relating to SaveCream, which will be assigned to Eucodis when the
transaction closes, and certain other costs we have incurred since February
28,
2007 in connection with preserving the Purchased Assets for the benefit of
Eucodis through the closing of the transaction. Other than the foregoing
obligations, Eucodis will not assume or be liable for any of our obligations
or
liabilities.
Non-Competition
Under
the
Eucodis Agreement, we and MDI Oncology have agreed to a non-compete provision
for the duration of five years after the closing of the Eucodis transaction.
Specifically, the non-compete provision restricts us from undertaking research
and development activities with respect to SaveCream, or any other product
which
could be used in reasonable substitution of SaveCream, or commercializing any
products based on SaveCream, unless expressly authorized by Eucodis.
Representations
And Warranties
The
Eucodis Agreement contains various representations and warranties of Medical
Discoveries and MDI Oncology including among others, representations and
warranties related to:
·
|
due
incorporation
|
·
|
due
authorization,
|
·
|
consents
|
·
|
enforceability
|
·
|
corporate
authority
|
·
|
contracts
|
·
|
no
defaults or violations
|
·
|
litigation
|
·
|
no
liens
|
·
|
no
infringement
|
The
Eucodis agreement contains various representations and warranties of Eucodis
including among others, representations and warranties related to:
·
|
due
incorporation
|
·
|
corporate
authority
|
·
|
enforceability
|
·
|
due
authorization
|
Indemnification
We
and
MDI Oncology have agreed to indemnify Eucodis and its directors, officers,
employees, agents and consultants against, and hold them harmless from, any
and
all losses incurred or suffered by any of them arising out of any of the
following:
|
·
|
any
breach of any representation, warranty, covenant or agreement made
by
either of us or MDI Oncology under the Eucodis Agreement;
and
|
|
·
|
any
act or omission by either of us or MDI Oncology in connection with
the
Purchased Assets to the extent that the cause for such claim was
existing
prior to or on July 6, 2007, or in connection with the transactions
contemplated by the Eucodis
Agreement.
|
Eucodis
has agreed to indemnify us and MDI Oncology and their directors, officers,
employees, agents or consultants against, and hold them harmless from, any
and
all losses incurred or suffered by them arising out of any of the
following:
|
·
|
any
breach of any representation, warranty, covenant or agreement made
by
Eucodis under the Eucodis
Agreement;
|
|
·
|
non
payment by Eucodis of the Assumed Indebtedness;
and
|
|
·
|
any
act or omission by Eucodis in connection with the Purchased Assets
to the
extent that the cause for such claim was created after July 6, 2007,
or in
connection with the transactions contemplated by the Eucodis Agreement.
|
Other
Covenants
Each
of
us, MDI Oncology and Eucodis have agreed:
|
·
|
to
strictly protect and maintain the confidentiality of the confidential
information belonging to the other parties with at least a reasonable
standard of care that is no less than that which it uses to protect
similar confidential information of its own;
|
|
·
|
not
to disclose, nor allow to be disclosed, the confidential information
belonging to the other parties to any person other than to employees,
consultants and counsel, on a need to know basis provided, that such
recipients of the confidential information are bound by obligations
of
confidentiality no less strict than those contained in the Eucodis
Agreement
|
|
·
|
unless
otherwise expressly provided for in the Eucodis Agreement, not use
the
confidential information belonging to the other parties for any purpose
other than in relation to the exercise of its rights and obligations
under
the Eucodis Agreement;
and
|
|
·
|
take
all necessary precautions to restrict access of the confidential
information belonging to the other parties to unauthorized personnel.
|
Conditions
To Closing The Transaction
The
consummation of the transactions contemplated under the Eucodis Agreement is
contingent on approval by our shareholders. In addition, the obligations of
Eucodis, us and MDI Oncology to consummate the transaction at the closing are,
subject to satisfaction of the following conditions precedent on or before
the
closing date:
|
·
|
our
and MDI Oncology’s representations and warranties under the Eucodis
Agreement being true on the closing
date;
|
|
·
|
our
and MDI Oncology’s performance of all covenants and obligations required
under the Eucodis Agreement;
|
|
·
|
our
and MDI Oncology’s delivery to Eucodis of certain documents necessary to
effect the transfer of the Purchased Assets;
and
|
|
·
|
our
obtaining additional capital or a credit facility in the aggregate
amount
of at least $250,000. We have already satisfied this condition.
|
Amendment
Of The Eucodis Agreement
The
Eucodis Agreement may be amended, modified or supplemented but only in writing
signed by all of the parties.
Closing
The
closing of the transaction is to take place on January 31, 2008 following
approval by the shareholders and the satisfaction of all of the closing
conditions set forth in the Eucodis Agreement.
Use
Of Proceeds And Operations After The Transaction
Following
the closing of the Eucodis transaction, neither we nor MDI Oncology will
undertake research and development activities with respect to SaveCream or
any
other product which could be used in reasonable substitution of SaveCream,
or
commercialize any products based on SaveCream except as may be otherwise
expressly requested by Eucodis.
At
the
closing of the Eucodis transaction, in addition to Eucodis’ assumption of
certain indebtedness, as further described in this proxy statement, we will
receive from Eucodis cash proceeds in the aggregate of approximately $2,067,000.
These proceeds will be used to fund our future working capital needs, to repay
certain indebtedness and commitments, and for future operations. At the time
of
the execution of the Eucodis Agreement, we had not yet made any determination
about future business plans once the transaction with Eucodis closed. However,
since signing into the Eucodis Agreement, we decided to engage in a the business
of developing, marketing and selling alternative energy bio-fuels and related
products. The proceeds to be received from Eucodis will, therefore, be used
to
conduct our new alternative biofuels business.
Regulatory
Approvals
There
are
no regulatory approvals required to close the transactions contemplated by
the
Eucodis Agreement.
Certain
Federal Income Tax Consequences
We
expect
that, in our consolidated tax returns, we will recognize taxable gain for U.S.
federal income tax purposes as a result of the sale of the SaveCream assets
to
Eucodis. However, we believe that any taxes payable as a result of this sale
will be offset by our prior operating losses, including those from the fiscal
year ended December 31, 2007.
We
do not
expect that our shareholders will recognize any gain or loss for U.S. federal
income tax purposes as a result of the transaction.
Accounting
Treatment
The
transaction will be accounted for by us and MDI Oncology as a sale of assets.
Recommendation
Of The Board Of Directors
Our
Board
has determined that the approval of the sale and purchase agreement and the
transaction is in the best interest of our shareholders.
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE PROPOSAL TO APPROVE THE EUCODIS
AGREEMENT AND THE ASSET SALE TRANSACTION.
PROPOSAL
II - INCREASE IN AUTHORIZED COMMON STOCK
Overview
Our
Board
of Directors has approved an amendment to our Amended and Restated Articles
of
Incorporation to increase the shares of common stock that are authorized for
issuance from 250,000,000 shares to 500,000,000 shares. The full text of the
amendment to our Amended and Restated Articles of Incorporation increasing
the
authorized number of shares is set forth as follows:
“The
first sentence of Article 3 of the Amended and Restated Articles of
Incorporation of the Corporation is hereby amended to read in its entirety
as
follows:
3. The
aggregate number of shares of stock that the Corporation is authorized to issue
is 550,000,000, consisting of 50,000,000 shares of preferred stock, no par
value
(hereinafter referred to as “Preferred Stock”), and 500,000,000 shares of common
stock, no par value (hereinafter referred to as “Common Stock”).”
Reasons
for the Amendment
Under
our
Amended and Restated Articles of Incorporation as currently in effect, there
are
250,000,000 shares of common stock authorized for issuance. As of the
record date, we have an aggregate of 197,676,560 shares of our common stock
issued and outstanding. An additional 145,719,231 shares of our common stock
are
reserved for issuance upon the exercise of our outstanding warrants and options
or the conversion of our outstanding Series A Convertible Preferred Stock and
our Series B Convertible Preferred Stock. (The holders or the Series A
Convertible Preferred Stock and certain warrants have agreed that they will
not
convert their shares of Series A Convertible Preferred Stock or exercise their
warrants if, by doing so, they would collectively own more than 9.99% of our
outstanding shares. The foregoing assumes that all shares of Series A
Convertible Preferred Stock are converted and all warrants are exercised,
despite this limitation). Based on the number of shares of our common stock
currently issued and outstanding, and on the number of additional shares
issuable in connection with the exercise of outstanding warrants and options
and
the conversion of our convertible Preferred Stock, we have agreed to issue
up to
93,395,791 more shares than our authorized number of shares permits.
Accordingly, unless our Amended and Restated Articles of Incorporation are
amended to increase the number of shares of common stock we are authorized
to
issue, we will not have sufficient authorized shares of common stock available
in connection with exercises of currently outstanding warrants, options and
our
convertible preferred stock.
The
primary purposes of the proposed increase in the number of authorized shares
of
common stock are the following:
1. To
make
additional shares of capital stock available for issuance in connection with
currently outstanding warrants, options and our outstanding Series A Convertible
Preferred Stock and our Series B Convertible Preferred Stock.
2. To
provide our Board of Directors with the flexibility to issue additional
securities as the Board deems appropriate or necessary. In connection with
the
development of our new Jatropha Business, we expect to have to obtain additional
financing in order to fund ongoing operations and to meet our working capital
needs. Unless we increase the number of shares that we are authorized to issue,
we may not be able to raise any additional capital from the issuance of
securities.
3. The
Board
needs to have additional shares available to it for the issuance of options
to
future officers, directors and employees. The Board of Directors believes that
the ability to issue stock options is crucial to the company’s future success.
4. The
company may need additional newly authorized shares in the future in connection
with possible acquisitions of, or business combinations with other companies,
or
in connection with establishing strategic partnerships or other business
relationships, or for other corporate purposes.
Except
pursuant to outstanding options, warrants and other convertible securities,
we
have no present agreement or commitment, however, to issue any additional shares
of common stock.
If
our
shareholders approve the increase in our authorized shares of common stock,
our
Board of Directors does not intend to solicit further shareholder approval
prior
to the issuance of any authorized shares of common stock, except as may be
required by applicable law.
The
increase in the authorized common stock will not have any immediate effect
on
the rights of existing shareholders. To the extent that the additional
authorized shares are issued in the future, they will decrease the existing
shareholders percentage equity ownership and, depending on the price at which
they are issued, could be dilutive to the existing shareholders. Any issuance
of
additional shares of common stock also could have the effect of diluting any
future earnings per share and book value per share of the outstanding shares
of
our common stock, and such additional shares could be used to dilute the stock
ownership or voting rights of a person seeking to obtain control of Medical
Discoveries, Inc. The increase in the authorized number of shares of common
sock
and the subsequent issuance of such shares could have the effect of delaying
or
preventing a change-in-control of this company without further action by the
shareholders.
No
Dissenters Rights
Under
the
laws of Utah, our shareholders are not entitled to dissenters’ rights with
respect to the amendment to increase the number of our authorized capital stock,
and we will not independently provide our shareholders with any such
right.
Federal
Income Tax Consequences
We
believe that the federal income tax consequences of the increase in authorized
capital stock to holders of our common stock will be as follows:
|
·
|
No
gain or loss will be recognized by a shareholder upon the effective
date
of the amendment;
|
|
·
|
The
aggregate tax basis of shares of our common stock will not be affected
by
the amendment; and
|
|
·
|
The
holding period of shares of our common stock after the amendment
will
remain the same as the holding period prior to the
amendment.
|
Our
beliefs regarding the tax consequence of the proposed amendment are not binding
upon the Internal Revenue Service or the courts, and there can be no assurance
that the Internal Revenue Service or the courts will accept the positions
expressed above. This summary does not purport to be complete and does not
address the tax consequences to holders that are subject to special tax rules,
such as banks, insurance companies, regulated investment companies, personal
holding companies, foreign entities, nonresident foreign individuals,
brokers-dealers and tax exempt entities. The state and local tax consequences
of
the amendment may vary significantly as to each shareholder, depending upon
the
state in which he or she resides.
HOLDERS
OF COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR
TAX
CONSEQUENCES TO THEM OF THE INCREASE IN OUR AUTHORIZED COMMON STOCK, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS AND OF
CHANGES IN APPLICABLE TAX LAWS.
OUR
BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE PROPOSAL TO EFFECT AN AMENDMENT
TO OUR AMENDED AND RESTATED ARTICLES OF INCORPORATION TO INCREASE THE NUMBER
OF
AUTHORIZED SHARES OF COMMON STOCK.
PROPOSAL
III –
NAME CHANGE
Overview
Our
Board
of Directors has approved an amendment to our Articles of Incorporation to
effect a name change to “Global Clean Energy Holdings, Inc.” The Article 1 of
the Amended and Restated Articles of Incorporation of the Corporation is hereby
amended to read in its entirety as follows:
“Article
1 of the Amended and Restated Articles of Incorporation is amended to read
in
its entirety as follows:
The
name
of the corporation is “Global Clean Energy Holdings, Inc. (the
“Corporation).”
Reasons
for Amendment
As
stated
elsewhere in this proxy statement, we have discontinued our operations in the
bio-pharmaceutical industry and have commenced our new Jatropha Business. See
“Business – The Jatropha
Business,” above, for additional information about our new business. Since we
are no longer a medical and drug development company, our Board decided to
change the company’s name from “Medical Discoveries, Inc.” to a name that
reflects the new biofuels business we are conducting.
OUR
BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE PROPOSAL TO EFFECT A NAME CHANGE
OF THE COMPANY TO “GLOBAL CLEAN ENERGY HOLDINGS, INC.”
FINANCIAL
STATEMENTS AND PRO FORMA FINANCIAL INFORMATION
Pro
Forma Selected Financial Data
Introduction
to Unaudited Pro Forma Condensed Consolidated Financial
Information
The
following pro forma condensed consolidated financial statements estimate the
pro
forma effect of the Sale and Purchase Agreement by and between Medical
Discoveries, Inc. and Eucodis dated
July 6, 2007, whereby we agreed to sell all of our right, title and interest
in
all patents, patent applications, United
States and foreign regulatory files and data,
pre-clinical study data and anecdotal clinical trial data concerning SaveCream
and to assign to Eucodis all of our right, title and interest in a
co-development agreement with Eucodis, dated as of July 29, 2006, related to
the
co-development and licensing of SaveCream (including the intellectual property
rights acquired in connection with that development).
The
closing of the transaction is subject to the satisfaction of certain closing
conditions pursuant to the terms of the Sale and Purchase Agreement. Pursuant
to
a Settlement and Release Agreement with Ms. Judy Robinett, our former Chief
Executive Officer, we have, among other things, agreed to pay Ms. Robinett
$500,000 upon the closing of the sale of SaveCream to Eucodis.
Therefore, the following pro forma condensed consolidated financial statements
also estimate the pro forma effect of the Settlement
and Release Agreement payment to Ms. Robinett.
The
pro
forma condensed consolidated balance sheet as of September 30, 2007 has been
prepared as if the Sale and Purchase Agreement had been consummated on that
date. The pro forma condensed consolidated statements of operations for the
year
ended December 31, 2006 and for the nine months ended September 30, 2007, are
presented as if the Sale and Purchase Agreement had been consummated at the
beginning of each period.
Pursuant
to the terms of the Sale and Purchase Agreement, the
purchase price to be paid by Eucodis for acquiring these assets will be
€4,007,534 (approximately $5,906,000 under exchange rates in effect as of
November 30, 2007). The purchase price is comprised of (i) a cash payment of
€1,538,462 ($2,267,000 under exchange rates in effect as of November 30, 2007)
less $200,000 we received in March 2007 under the binding letter of intent,
and
(ii) Eucodis’ assumption of an aggregate of €2,469,072 ($3,639,000 under
exchange rates in effect as of November 30, 2007), constituting specific
indebtedness currently owed by us and other commitments to certain of our
creditors. Under
the
terms of the Settlement and Release Agreement, we are obligated to pay Ms.
Robinett $500,000 from the proceeds of the closing of the Sale and Purchase
Agreement in settlement of $895,137 of accrued, but unpaid,
compensation.
The
pro
forma condensed consolidated financial statements are based upon available
information and certain assumptions made by management and believed to be
reasonable in the circumstances. The pro forma condensed consolidated financial
statements may be subject to adjustment based on the actual euro/dollar currency
exchange rate in effect on the date of closing, among other considerations.
The
pro forma information may not be indicative of the results of our operations
and
financial position, as it may be in the future or as it might have been had
the
transactions been consummated on the respective dates assumed. These pro forma
condensed consolidated financial statements is included for comparative purposes
and should be read in conjunction with our historical financial information
in
financial statements included in this proxy statement and in our other reports
and documents filed with the Securities and Exchange Commission.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
PRO
FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER
30, 2007
(Unaudited)
|
|
|
|
Pro
forma
|
|
Pro
forma
|
|
|
|
As
Reported (1)
|
|
Adjustments
|
|
Total
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS |
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
296,121
|
|
$
|
1,987,539
|
|
a |
|
$
|
1,783,660
|
|
|
|
|
|
|
|
(500,000
|
)
|
b |
|
|
|
|
Prepaid
expenses
|
|
|
66,031
|
|
|
|
|
|
|
|
66,031
|
|
Total
Current Assets
|
|
|
362,152
|
|
|
1,487,539
|
|
|
|
|
1,849,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
29,870
|
|
|
|
|
|
|
|
29,870
|
|
Deferred
offering costs
|
|
|
1,530
|
|
|
|
|
|
|
|
1,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
393,552
|
|
$
|
1,487,539
|
|
|
|
$
|
1,881,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,111,501
|
|
$
|
-
|
|
|
|
$
|
1,111,501
|
|
Accrued
payroll and payroll taxes
|
|
|
1,294,584
|
|
|
(895,137
|
)
|
b |
|
|
399,447
|
|
Accrued
interest payable
|
|
|
291,585
|
|
|
|
|
|
|
|
291,585
|
|
Notes
payable to shareholders
|
|
|
56,000
|
|
|
|
|
|
|
|
56,000
|
|
Secured
promissory note, less unamortized discount
|
|
|
58,673
|
|
|
|
|
|
|
|
58,673
|
|
Convertible
notes payable
|
|
|
193,200
|
|
|
|
|
|
|
|
193,200
|
|
Financial
instrument
|
|
|
2,065,470
|
|
|
|
|
|
|
|
2,065,470
|
|
Current
liabilities associated with assets held for sale
|
|
|
3,137,859
|
|
|
(3,137,859
|
)
|
a |
|
|
-
|
|
Total
Current Liabilities
|
|
|
8,208,872
|
|
|
(4,032,996
|
)
|
|
|
|
4,175,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock - undesignated, Series A, convertible; no par value;
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000,000
shares authorized; 28,928 shares issued and outstanding;
|
|
|
|
|
|
|
|
|
|
|
|
|
(aggregate
liquidation preference of $2,892,800); the Company also
|
|
|
|
|
|
|
|
|
|
|
|
|
has
designated Series B with no shares issued or outstanding
|
|
|
514,612
|
|
|
|
|
|
|
|
514,612
|
|
Common
stock, no par value; 250,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
|
|
|
|
170,238,669
shares
issued and outstanding
|
|
|
16,403,248
|
|
|
|
|
|
|
|
16,403,248
|
|
Additional
paid-in capital
|
|
|
1,468,057
|
|
|
|
|
|
|
|
1,468,057
|
|
Deficit
accumulated prior to the development stage
|
|
|
(1,399,577
|
)
|
|
|
|
|
|
|
(1,399,577
|
)
|
Deficit
accumulated during the development stage
|
|
|
(24,801,660
|
)
|
|
5,125,398
|
|
a |
|
|
(19,281,125
|
)
|
|
|
|
|
|
|
395,137
|
|
b |
|
|
|
|
Total
Stockholders' Deficit
|
|
|
(7,815,320
|
)
|
|
5,520,535
|
|
|
|
|
(2,294,785
|
)
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
$
|
393,552
|
|
$
|
1,487,539
|
|
|
|
$
|
1,881,091
|
|
(1)
Based
on the Company's interim financial statements for the nine
months ended September 30, 2007 included in this proxy
statement.
See
accompanying notes to unaudited pro forma condensed consolidated financial
statements
MEDICAL
DISCLOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
PRO
FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2007
(Unaudited)
|
|
|
|
Pro
forma
|
|
Pro
forma
|
|
|
|
As
Reported (1)
|
|
Adjustments
|
|
Total
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
$
|
919,273
|
|
$
|
-
|
|
|
$
|
919,273
|
|
Research
and development
|
|
|
986,584
|
|
|
|
|
|
|
986,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
(1,905,857
|
)
|
|
-
|
|
|
|
(1,905,857
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on financial instrument
|
|
|
(1,520,482
|
)
|
|
|
|
|
|
(1,520,482
|
)
|
Interest
income
|
|
|
394
|
|
|
|
|
|
|
394
|
|
Interest
expense
|
|
|
(27,252
|
)
|
|
|
|
|
|
(27,252
|
)
|
Interest
expense from amortization of discount
|
|
|
|
|
|
|
|
|
|
|
|
on
secured promissory note
|
|
|
(58,673
|
)
|
|
|
|
|
|
(58,673
|
)
|
Gain
on debt restructuring
|
|
|
90,000
|
|
|
|
|
|
|
90,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Other Income (Expenses)
|
|
|
(1,516,013
|
)
|
|
-
|
|
|
|
(1,516,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) from Continuing Operations
|
|
|
(3,421,870
|
)
|
|
-
|
|
|
|
(3,421,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Discontinued Operations (net of
|
|
|
|
|
|
|
|
|
|
|
|
gain
on disposal of MDI-P of $258,809)
|
|
|
(355,305
|
)
|
|
355,305
|
c
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(3,777,175
|
)
|
$
|
355,305
|
|
|
$
|
(3,421,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted Loss per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Continuing Operations
|
|
$
|
(0.028
|
)
|
|
|
|
|
$
|
(0.028
|
)
|
Loss
from Discontinued Operations
|
|
$
|
(0.003
|
)
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(0.031
|
)
|
|
|
|
|
$
|
(0.028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted Weighted-Average Common
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
122,214,575
|
|
|
|
|
|
|
122,214,575
|
|
(1)
Based
on the Company's interim financial statements for the nine
months ended September 30, 2007 included in this proxy
statement..
See
accompanying notes to unaudited pro forma condensed consolidated
financial
statements
MEDICAL
DISCLOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
PRO
FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR
THE YEAR ENDED DECEMBER 31, 2006
(Unaudited)
|
|
|
|
Pro
forma
|
|
|
|
Pro
forma
|
|
|
|
As
Reported (1)
|
|
Adjustments
|
|
|
|
Total
|
|
Revenues
|
|
$
|
800,000
|
|
$
|
(800,000
|
)
|
c |
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
1,986,052
|
|
|
(934,952
|
)
|
c |
|
|
1,051,100
|
|
Research
and development
|
|
|
2,026,907
|
|
|
(2,026,907
|
)
|
c |
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Expenses
|
|
|
(4,012,959
|
)
|
|
2,961,859
|
|
|
|
|
(1,051,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
(3,212,959
|
)
|
|
2,161,859
|
|
|
|
|
(1,051,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on financial instrument
|
|
|
2,564,608
|
|
|
|
|
|
|
|
2,564,608
|
|
Interest
income
|
|
|
2,866
|
|
|
|
|
|
|
|
2,866
|
|
Interest
expense
|
|
|
(29,919
|
)
|
|
|
|
|
|
|
(29,919
|
)
|
Foreign
currency transaction loss
|
|
|
(117,501
|
)
|
|
117,501
|
|
c |
|
|
-
|
|
Gain
on debt restructuring
|
|
|
607,761
|
|
|
|
|
|
|
|
607,761
|
|
Other
income
|
|
|
1,373
|
|
|
|
|
|
|
|
1,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Other Income
|
|
|
3,029,188
|
|
|
117,501
|
|
|
|
|
3,146,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
(183,771
|
)
|
$
|
2,279,360
|
|
|
|
$
|
2,095,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
$
|
0.02
|
|
Diluted
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
113,809,546
|
|
|
|
|
|
|
|
113,809,546
|
|
Diluted
|
|
|
236,518,217
|
|
|
|
|
|
|
|
236,518,217
|
|
(1)
Based
on the Company's annual financial statements for the year ended December
31,
2006 included in this proxy statement..
See
accompanying notes to unaudited pro forma condensed consolidated financial
statements
Notes
to Unaudited Pro Forma Condensed Consolidated Financial
Statements
(a)
The
pro forma condensed
consolidated balance sheet gives the estimated effects of the closing
of the
Sale and Purchase Agreement, including the cash
payment of €1,538,462 ($2,187,539 under exchange rates in effect as of September
30, 2007) less $200,000 received in March 2007 under the binding letter
of
intent, and (ii) Eucodis’ assumption of an aggregate of €2,469,072 ($3,510,773
under exchange rates in effect as of September 30, 2007) of our liabilities,
constituting $3,137,859 of specific indebtedness currently owed and
recorded in
the balance sheet, and $372,914 of other commitments to certain of
our
creditors.
(b)
The
pro
forma condensed
consolidated balance sheet gives the estimated effects of the fulfillment
of the
terms
of
the Settlement and Release Agreement with Judy Robinett, the Company’s former
Chief Executive Officer. Under the Settlement and Release Agreement,
we are
obligated to pay Ms. Robinett $500,000 from the proceeds of the closing
of the
Sale and Purchase Agreement in settlement of $895,137 of accrued, but
unpaid,
compensation.
(c)
The
pro forma condensed consolidated statements of operations for the nine
months
ended September 30, 2007, and for the year ended December 31, 2006,
give effect
of the Sale and Purchase Agreement as though it had been consummated
on January
1, 2007 and January 1, 2006, respectively. This pro forma adjustment
also
includes the effects of eliminating the operating expenses associated
with
MDI-P, a bio-pharmaceutical technology that we sold in August 2007.
It is not
practical to segregate the operating expenses of the MDI-P technology
from the
operating expenses associated with the technology being sold under
the Sale and
Purchase Agreement.
HANSEN,
BARNETT&
MAXWELL,
P.C.
|
|
|
A
Professional Corporation
|
|
Registered
with the Public Company
|
CERTIFIED
PUBLIC ACCOUNTANTS
|
|
Accounting
Oversight Board
|
AND
|
|
|
BUSINESS
CONSULTANTS
|
|
|
5
Triad Center, Suite 750
|
|
|
Salt
Lake City, UT 84180-1128
|
|
|
Phone:
(801) 532-2200
|
|
|
Fax:
(801) 532-7944
|
|
|
www.hbmcpas.com
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders
Medical
Discoveries, Inc.
We
have
audited the accompanying consolidated balance sheets of Medical Discoveries,
Inc. and subsidiaries (a development stage company) as of December
31, 2006 and
2005, and the related consolidated statements of operations, changes
in
stockholders’ deficit, and cash flows for the years then ended, and for the
period from November 20, 1991 (date of inception of the development
stage)
through December 31, 2006. These consolidated financial statements
are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not
audit the
financial statements of the Company from November 20, 1991 through
December 31,
2003, which statements reflect total revenues and deficit accumulated
during the
development stage of $157,044 and $14,930,259, respectively. Those
statements
were audited by other auditors whose reports, dated February 18, 2004
(except
Note K, not included herein, as to which the date is November 15, 2004)
and
March 20, 2000, included
an explanatory paragraph stating there was substantial doubt regarding
the
Company’s ability to continue as a going concern. Our
opinion, insofar as it relates to the consolidated financial statements
for the
period from November 20, 1991 through December 31, 2003, is based solely
on the
report of the other auditors.
We
conducted our audits in accordance with the standards of the Public
Company
Accounting Oversight Board (United States). Those standards require
that we plan
and perform the audits to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as
evaluating the overall financial statement presentation. We believe
that our
audits and the report of the other auditors provide a reasonable basis
for our
opinion.
In
our
opinion, based on our audits and the report of the other auditors,
the
consolidated financial statements referred to above present fairly,
in all
material respects, the financial position of Medical Discoveries, Inc.
and
subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for the years then ended and for the
period from
November 20, 1991 through December 31, 2006, in conformity with U.S.
generally
accepted accounting principles.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. The
Company is a development stage enterprise previously engaged in developing
bio-pharmaceutical research and currently developing bio-diesel fuels.
As
discussed in Note B to the financial statements, the stockholders’ deficit and
the operating losses since inception raise substantial doubt about
the Company’s
ability to continue as a going concern. Management’s plans concerning these
matters are also described in Note B. The financial statements do not
include
any adjustments that might result from the outcome of these
uncertainties.
HANSEN,
BARNETT & MAXWELL, P.C.
Salt
Lake
City, Utah
November
28, 2007
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
Consolidated
Balance Sheets
|
|
December
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
ASSETS
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
47,658
|
|
$
|
654,438
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
47,658
|
|
|
654,438
|
|
|
|
|
|
|
|
|
|
Notes
receivable
|
|
|
-
|
|
|
296,050
|
|
Property
and equipment, net
|
|
|
62,249
|
|
|
80,635
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
109,907
|
|
$
|
1,031,123
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,136,684
|
|
$
|
935,132
|
|
Accrued
payroll and payroll taxes
|
|
|
1,184,264
|
|
|
1,673,651
|
|
Accrued
interest payable
|
|
|
267,739
|
|
|
237,836
|
|
Notes
payable to shareholders
|
|
|
56,000
|
|
|
56,000
|
|
Convertible
notes payable
|
|
|
193,200
|
|
|
193,200
|
|
Research
and development obligation
|
|
|
2,441,445
|
|
|
592,100
|
|
Financial
instrument
|
|
|
294,988
|
|
|
2,859,596
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
5,574,320
|
|
|
6,547,515
|
|
|
|
|
|
|
|
|
|
Long-term
liability
|
|
|
90,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
5,664,320
|
|
|
6,547,515
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock - undesignated, Series A, convertible; no par value;
50,000,000
shares
|
|
|
|
|
|
|
|
authorized;
34,420 and 42,000 shares issued and outstanding, respectively;
(aggregate
|
|
|
|
|
|
|
|
liquidation
preference of $3,442,000 and $4,200,000, respectively); the
Company also
has
|
|
|
|
|
|
|
|
designated
a Series B with no shares issued or outstanding
|
|
|
514,612
|
|
|
523,334
|
|
Common
stock, no par value; 250,000,000 shares authorized; 118,357,704
and
107,679,724
|
|
|
|
|
|
|
|
shares
issued and outstanding, respectively
|
|
|
15,299,017
|
|
|
15,211,895
|
|
Additional
paid-in capital
|
|
|
1,056,020
|
|
|
988,670
|
|
Deficit
accumulated prior to the development stage
|
|
|
(1,399,577
|
)
|
|
(1,399,577
|
)
|
Deficit
accumulated during the development stage
|
|
|
(21,024,485
|
)
|
|
(20,840,714
|
)
|
|
|
|
|
|
|
|
|
Total
Stockholders' Deficit
|
|
|
(5,554,413
|
)
|
|
(5,516,392
|
)
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
$
|
109,907
|
|
$
|
1,031,123
|
|
See
Notes to Consolidated Financial
Statements
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
Consolidated
Statements of Operations
|
|
|
|
|
|
From
Inception of
|
|
|
|
|
|
|
|
the
Development Stage
|
|
|
|
For
the Years Ended
|
|
on
November 20, 1991
|
|
|
|
December
31,
|
|
Through
|
|
|
|
2006
|
|
2005
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
800,000
|
|
$
|
-
|
|
$
|
957,044
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
-
|
|
|
-
|
|
|
14,564
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
800,000
|
|
|
-
|
|
|
942,480
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
1,986,052
|
|
|
1,878,027
|
|
|
19,041,049
|
|
Research
and development
|
|
|
2,026,907
|
|
|
2,172,461
|
|
|
7,748,106
|
|
Inventory
write-down
|
|
|
-
|
|
|
-
|
|
|
96,859
|
|
Impairment
loss
|
|
|
-
|
|
|
-
|
|
|
9,709
|
|
License
fees
|
|
|
-
|
|
|
-
|
|
|
1,001,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Expenses
|
|
|
4,012,959
|
|
|
4,050,488
|
|
|
27,897,223
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(3,212,959
|
)
|
|
(4,050,488
|
)
|
|
(26,954,743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on
|
|
|
|
|
|
|
|
|
|
|
financial
instrument
|
|
|
2,564,608
|
|
|
2,300,191
|
|
|
4,864,799
|
|
Interest
income
|
|
|
2,866
|
|
|
25,727
|
|
|
58,164
|
|
Interest
expense
|
|
|
(29,919
|
)
|
|
(38,264
|
)
|
|
(1,185,620
|
)
|
Foreign
currency transaction gain (loss)
|
|
|
(117,501
|
)
|
|
56,480
|
|
|
(61,021
|
)
|
Gain
on debt restructuring
|
|
|
607,761
|
|
|
196,353
|
|
|
2,039,650
|
|
Other
income
|
|
|
1,373
|
|
|
23,220
|
|
|
906,485
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Other Income (Expenses)
|
|
|
3,029,188
|
|
|
2,563,707
|
|
|
6,622,457
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(183,771
|
)
|
|
(1,486,781
|
)
|
|
(20,332,286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividend from
|
|
|
|
|
|
|
|
|
|
|
beneficial
conversion feature
|
|
|
-
|
|
|
-
|
|
|
(692,199
|
)
|
NET
INCOME (LOSS) APPLICABLE TO
|
|
|
|
|
|
|
|
|
|
|
COMMON
SHAREHOLDERS
|
|
$
|
(183,771
|
)
|
$
|
(1,486,781
|
)
|
$
|
(21,024,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
PER
COMMON SHARE
|
|
$
|
(0.00
|
)
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF
|
|
|
|
|
|
|
|
|
|
|
SHARES
OUTSTANDING
|
|
|
113,809,546
|
|
|
107,398,164
|
|
|
|
|
See
Notes to Consolidated Financial
Statements
MEDICAL
DISCOVERIES INC. AND SUBSIDIARIES
(A
Development Stage Company)
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
Period
From November 20, 1991 (Date of Inception of the Development Stage) through
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Prior
to
|
|
During
the
|
|
Escrow/
|
|
|
|
|
|
Preferred
Stock
|
|
Common
stock
|
|
Paid
in
|
|
Development
|
|
Development
|
|
Subscription
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Stage
|
|
Stage
|
|
Receivables
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at October 31, 1991
|
|
|
|
|
|
|
|
|
1,750,000
|
|
$
|
252,997
|
|
$
|
-
|
|
$
|
(1,482,514
|
)
|
$
|
-
|
|
$
|
-
|
|
$
|
(1,229,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restatement
for reverse acquisition of WPI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmaceutical,
Inc. by Medical Discoveries, Inc.
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(252,997
|
)
|
|
-
|
|
|
252,997
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in merger of WPI Pharmaceutical, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
Discoveries, Inc., $0.01 per share
|
|
|
-
|
|
|
-
|
|
|
10,000,000
|
|
|
135,000
|
|
|
-
|
|
|
(170,060
|
)
|
|
-
|
|
|
-
|
|
|
(35,060
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at November 20, 1991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Date
of Inception of Development Stage)
|
|
|
-
|
|
|
-
|
|
|
11,750,000
|
|
|
135,000
|
|
|
-
|
|
|
(1,399,577
|
)
|
|
-
|
|
|
-
|
|
|
(1,264,577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1992
- $0.50 per share
|
|
|
-
|
|
|
-
|
|
|
200,000
|
|
|
100,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
100,000
|
|
1992
- $1.50 per share
|
|
|
-
|
|
|
-
|
|
|
40,000
|
|
|
60,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
60,000
|
|
1993
- $0.97 per share
|
|
|
-
|
|
|
-
|
|
|
542,917
|
|
|
528,500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
528,500
|
|
1994
- $1.20 per share
|
|
|
-
|
|
|
-
|
|
|
617,237
|
|
|
739,500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
739,500
|
|
1995
- $0.67 per share
|
|
|
-
|
|
|
-
|
|
|
424,732
|
|
|
283,200
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
283,200
|
|
1996
- $0.66 per share
|
|
|
-
|
|
|
-
|
|
|
962,868
|
|
|
635,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(60,000
|
)
|
|
575,000
|
|
1997
- $0.43 per share
|
|
|
-
|
|
|
-
|
|
|
311,538
|
|
|
135,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
60,000
|
|
|
195,000
|
|
1998
- $0.29 per share
|
|
|
-
|
|
|
-
|
|
|
2,236,928
|
|
|
650,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
650,000
|
|
1999
- $0.15 per share
|
|
|
-
|
|
|
-
|
|
|
13,334
|
|
|
2,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,000
|
|
2001
- $0.15 per share
|
|
|
-
|
|
|
-
|
|
|
660,000
|
|
|
99,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
99,000
|
|
2003
- $0.04 per share
|
|
|
-
|
|
|
-
|
|
|
20,162,500
|
|
|
790,300
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
790,300
|
|
2004
- $0.09 per share
|
|
|
-
|
|
|
-
|
|
|
20,138,024
|
|
|
1,813,186
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,813,186
|
|
Services
and Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1992
- $0.50 per share
|
|
|
-
|
|
|
-
|
|
|
500,000
|
|
|
250,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
250,000
|
|
1993
- $0.51 per share
|
|
|
-
|
|
|
-
|
|
|
251,450
|
|
|
127,900
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
127,900
|
|
1993
- $0.50 per share
|
|
|
-
|
|
|
-
|
|
|
800,000
|
|
|
400,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
400,000
|
|
1994
- $1.00 per share
|
|
|
-
|
|
|
-
|
|
|
239,675
|
|
|
239,675
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
239,675
|
|
1995
- $0.39 per share
|
|
|
-
|
|
|
-
|
|
|
4,333,547
|
|
|
1,683,846
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(584,860
|
)
|
|
1,098,986
|
|
1996
- $0.65 per share
|
|
|
-
|
|
|
-
|
|
|
156,539
|
|
|
101,550
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
101,550
|
|
1997
- $0.29 per share
|
|
|
-
|
|
|
-
|
|
|
12,500
|
|
|
3,625
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,625
|
|
1998
- $0.16 per share
|
|
|
-
|
|
|
-
|
|
|
683,000
|
|
|
110,750
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
110,750
|
|
1999
- $0.30 per share
|
|
|
-
|
|
|
-
|
|
|
100,000
|
|
|
30,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
30,000
|
|
2001
- $0.14 per share
|
|
|
-
|
|
|
-
|
|
|
1,971,496
|
|
|
284,689
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
284,689
|
|
2002
- $0.11 per share
|
|
|
-
|
|
|
-
|
|
|
2,956,733
|
|
|
332,236
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
332,236
|
|
2003
- $0.04 per share
|
|
|
-
|
|
|
-
|
|
|
694,739
|
|
|
43,395
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
43,395
|
|
2004
- $0.06 per share
|
|
|
-
|
|
|
-
|
|
|
1,189,465
|
|
|
66,501
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
66,501
|
|
Conversion
of Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1996
- $0.78 per share
|
|
|
|
|
|
|
|
|
239,458
|
|
|
186,958
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
186,958
|
|
1997
- $0.25 per share
|
|
|
-
|
|
|
-
|
|
|
100,000
|
|
|
25,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
25,000
|
|
1998
- $0.20 per share
|
|
|
-
|
|
|
-
|
|
|
283,400
|
|
|
56,680
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
56,680
|
|
2002
- $0.03 per share
|
|
|
-
|
|
|
-
|
|
|
17,935,206
|
|
|
583,500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
583,500
|
|
2004
- $0.07 per share
|
|
|
-
|
|
|
-
|
|
|
9,875,951
|
|
|
650,468
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
650,468
|
|
Other
Issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1993
-License - $0.50 share
|
|
|
-
|
|
|
-
|
|
|
2,000,000
|
|
|
1,000,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,000,000
|
|
1997
- Settlement of contract
|
|
|
-
|
|
|
-
|
|
|
800,000
|
|
|
200,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
200,000
|
|
1998
- Issuance of common stock from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exercise
of warrants, $0.001 per share
|
|
|
-
|
|
|
-
|
|
|
200,000
|
|
|
200
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
200
|
|
2000
- Reversal of shares issued
|
|
|
-
|
|
|
-
|
|
|
(81,538
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
See
Notes to Consolidated Financial
Statements
MEDICAL
DISCOVERIES INC. AND SUBSIDIARIES
(A
Development Stage Company)
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT -
(Continued)
Period
From November 20, 1991 (Date of Inception of the Development Stage) through
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Prior
to
|
|
During
the
|
|
Escrow/
|
|
|
|
|
|
Preferred
Stock
|
|
Common
stock
|
|
Paid
in
|
|
Development
|
|
Development
|
|
Subscription
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Stage
|
|
Stage
|
|
Receivables
|
|
Total
|
|
|
|
|
-
|
|
|
-
|
|
|
103,301,699
|
|
|
12,347,659
|
|
|
-
|
|
|
(1,399,577
|
)
|
|
-
|
|
|
(584,860
|
)
|
|
10,363,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Escrow
and Subscription Receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1996
- Common stock canceled - $.34 per share
|
|
|
-
|
|
|
-
|
|
|
(1,400,000
|
)
|
|
(472,360
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
472,360
|
|
|
-
|
|
2000
- Issuance for escrow receivable $0.09 per share
|
|
|
-
|
|
|
-
|
|
|
5,500,000
|
|
|
500,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(500,000
|
)
|
|
-
|
|
2000
- Write-off of subscription receivable
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
112,500
|
|
|
112,500
|
|
2000
- Research and development costs
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
115,400
|
|
|
115,400
|
|
2001
- Research and development costs
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
132,300
|
|
|
132,300
|
|
2001
- Operating expenses
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
25,000
|
|
|
25,000
|
|
2004
- Termination of escrow agreement
|
|
|
-
|
|
|
-
|
|
|
(2,356,200
|
)
|
|
(227,300
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
227,300
|
|
|
-
|
|
Exercise
of Options and Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1997
- $0.25 per share
|
|
|
-
|
|
|
-
|
|
|
87,836
|
|
|
21,959
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
21,959
|
|
1999
- Waived option price $0.14 per share
|
|
|
-
|
|
|
-
|
|
|
170,000
|
|
|
24,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
24,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
of Options Issued for Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1998
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,336,303
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,336,303
|
|
1999
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
196,587
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
196,587
|
|
2001
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
159,405
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
159,405
|
|
2002
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
124,958
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
124,958
|
|
2003
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
295,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
295,000
|
|
2004
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,675,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,675,000
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1994
- Cash contributed
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
102,964
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
102,964
|
|
1995
- Issuance of common stock option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
satisfy debt restructuring
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
20,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
20,000
|
|
2004
- Issuance of preferred stock and warrants for cash
|
|
|
12,000
|
|
|
523,334
|
|
|
350,000
|
|
|
68,845
|
|
|
477,821
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,070,000
|
|
2004
- Convertible preferred stock beneficial conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
dividend
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
692,199
|
|
|
-
|
|
|
(692,199
|
)
|
|
-
|
|
|
-
|
|
Net
loss from inception through December 31, 2004
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(18,661,734
|
)
|
|
-
|
|
|
(18,661,734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
|
12,000
|
|
|
523,334
|
|
|
105,653,335
|
|
|
14,918,657
|
|
|
3,424,383
|
|
|
(1,399,577
|
)
|
|
(19,353,933
|
)
|
|
-
|
|
|
(1,887,136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for services at $0.18 per share
|
|
|
-
|
|
|
-
|
|
|
104,167
|
|
|
11,312
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
11,312
|
|
Issuance
of common stock for cash at $0.18 per share
|
|
|
-
|
|
|
-
|
|
|
1,922,222
|
|
|
281,926
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
281,926
|
|
Issuance
of preferred stock and warrants
|
|
|
30,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Reclassification
of warrants to a financial instrument
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,435,713
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,435,713
|
)
|
Net
loss for the year ended December 31, 2005
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,486,781
|
)
|
|
-
|
|
|
(1,486,781
|
)
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
42,000
|
|
|
523,334
|
|
|
107,679,724
|
|
|
15,211,895
|
|
|
988,670
|
|
|
(1,399,577
|
)
|
|
(20,840,714
|
)
|
|
-
|
|
|
(5,516,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of preferred stock to common stock
|
|
|
(7,580
|
)
|
|
(8,722
|
)
|
|
10,242,424
|
|
|
8,722
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Issuance
of options for services
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
67,350
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
67,350
|
|
Issuance
of common stock for services at $0.18 per share
|
|
|
-
|
|
|
-
|
|
|
435,556
|
|
|
78,400
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
78,400
|
|
Net
loss for the year ended December 31, 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(183,771
|
)
|
|
-
|
|
|
(183,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
34,420
|
|
$
|
514,612
|
|
|
118,357,704
|
|
$
|
15,299,017
|
|
$
|
1,056,020
|
|
$
|
(1,399,577
|
)
|
$
|
(21,024,485
|
)
|
$
|
-
|
|
$
|
(5,554,413
|
)
|
See
Notes to Consolidated Financial
Statements
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
Consolidated
Statements of Cash Flows
|
|
For
the Year Ended
December
31,
|
|
From
Inception of the
Development
Stage
|
|
|
|
2006
|
|
2005
|
|
on
November 20,
1991
Through
Dec.
31, 2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(183,771
|
)
|
$
|
(1,486,781
|
)
|
$
|
(20,332,286
|
)
|
Adjustments
to reconcile net loss to net cash used by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency transaction (gain) loss
|
|
|
117,501
|
|
|
(56,480
|
)
|
|
61,021
|
|
Gain
on debt restructuring
|
|
|
(607,761
|
)
|
|
(196,353
|
)
|
|
(2,039,650
|
)
|
Common
stock issued for services, expenses, and litigation
|
|
|
78,400
|
|
|
-
|
|
|
4,346,117
|
|
Commitment
for research and development obligation
|
|
|
1,712,745
|
|
|
665,700
|
|
|
2,378,445
|
|
Depreciation
|
|
|
18,386
|
|
|
8,515
|
|
|
127,172
|
|
Reduction
of escrow receivable from research and development
|
|
|
-
|
|
|
-
|
|
|
272,700
|
|
Unrealized
gain on financial instrument
|
|
|
(2,564,608
|
)
|
|
(2,300,191
|
)
|
|
(4,864,799
|
)
|
Stock
options and warrants granted for services
|
|
|
67,350
|
|
|
-
|
|
|
4,878,603
|
|
Reduction
of legal costs
|
|
|
-
|
|
|
-
|
|
|
(130,000
|
)
|
Write-off
of subscriptions receivable
|
|
|
-
|
|
|
-
|
|
|
112,500
|
|
Impairment
of loss on assets
|
|
|
-
|
|
|
-
|
|
|
9,709
|
|
Loss
on disposal of equipment
|
|
|
-
|
|
|
-
|
|
|
30,364
|
|
Write-off
of receivable
|
|
|
317,175
|
|
|
51,100
|
|
|
562,240
|
|
Note
payable issued for litigation
|
|
|
-
|
|
|
-
|
|
|
385,000
|
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
Increase
in accounts receivable
|
|
|
-
|
|
|
-
|
|
|
(7,529
|
)
|
Increase
in accounts payable, accrued payroll and payroll
taxes
|
|
|
407,900
|
|
|
171,641
|
|
|
2,872,086
|
|
Increase
in accrued interest
|
|
|
29,903
|
|
|
38,210
|
|
|
667,822
|
|
Net
Cash Used in Operating Activities
|
|
|
(606,780
|
)
|
|
(3,104,639
|
)
|
|
(10,670,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Increase
in deposits
|
|
|
-
|
|
|
-
|
|
|
(51,100
|
)
|
Purchase
of equipment
|
|
|
-
|
|
|
(89,150
|
)
|
|
(221,334
|
)
|
Issuance
of note receivable
|
|
|
-
|
|
|
(313,170
|
)
|
|
(313,170
|
)
|
Payments
received on note receivable
|
|
|
-
|
|
|
-
|
|
|
130,000
|
|
Net
Cash Used in Investing Activities
|
|
|
-
|
|
|
(402,320
|
)
|
|
(455,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock, preferred stock and warrants for
cash
|
|
|
-
|
|
|
3,006,000
|
|
|
10,033,845
|
|
Contributed
equity
|
|
|
-
|
|
|
-
|
|
|
131,374
|
|
Proceeds
from notes payable
|
|
|
-
|
|
|
-
|
|
|
1,336,613
|
|
Payments
on notes payable
|
|
|
-
|
|
|
(300,000
|
)
|
|
(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
|
|
|
11,173,747
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
(606,780
|
)
|
|
(800,959
|
)
|
|
47,658
|
|
CASH
AT BEGINNING OF PERIOD
|
|
|
654,438
|
|
|
1,455,397
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AT END OF PERIOD
|
|
$
|
47,658
|
|
$
|
654,438
|
|
$
|
47,658
|
|
See
Notes to Consolidated Financial
Statements
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
Consolidated
Statements of Cash Flows (Continued)
|
|
For
the Year Ended
|
|
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
SUPPLEMENTAL
DISCLOSURES OF
|
|
|
|
|
|
CASH
FLOW INFORMATION
|
|
|
|
|
|
Interest
paid
|
|
$
|
46
|
|
$
|
19,283
|
|
|
|
|
|
|
|
|
|
NONCASH
INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Conversion
of preferred stock to common stock
|
|
$
|
8,722
|
|
$
|
-
|
|
Common
stock and warrants issued to placement agent
|
|
$
|
-
|
|
$
|
11,312
|
|
Conversion
of accounts payable to long-term liability
|
|
$
|
90,000
|
|
$
|
-
|
|
See
Notes to Consolidated Financial
Statements
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
A — ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Medical
Discoveries, Inc. (“MDI” or the “Company”) was incorporated under the laws of
the State of Utah on November 20, 1991. Effective as of August 6,
1992, the Company merged with and into WPI Pharmaceutical, Inc., a Utah
corporation (“WPI”), pursuant to which WPI was the surviving corporation.
Pursuant to the MDI-WPI merger, the name of the surviving corporation
was
changed to Medical Discoveries, Inc.
On
July 6, 1998, the Company incorporated a wholly owned subsidiary, Regenere,
Inc., in the State of Nevada. On October 2, 1998, the Company incorporated
another wholly owned subsidiary, MDI Healthcare Systems, Inc., in the
State of
Nevada. As of December 31, 2003, the Company dissolved those subsidiaries.
On
March 22, 2005, the Company formed MDI Oncology, Inc., a Delaware
corporation, as a wholly-owned subsidiary to acquire and operate the
assets and
business associated with the Savetherapeutics transaction, discussed
further in
Note J.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Medical Discoveries,
Inc. and subsidiaries. All significant intercompany transactions have
been
eliminated in consolidation.
Development
Stage Company
The
Company has not yet commenced its planned principal operations and is,
therefore, considered a development stage company as defined in the Financial
Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 7. The Company has, at the present time, not paid any
dividends. Any dividends that may be paid in the future will depend upon
the
financial requirements of the Company. The primary purpose of the business
is
the research and development of pharmaceuticals.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers all highly
liquid
debt instruments maturing in three months or less to be cash equivalents.
From
time to time, the Company has cash deposits in excess of federally insured
limits. The Company did not have any uninsured bank balances at
December 31, 2006.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated lives of the related assets.
Estimated
useful lives are 5 years.
Normal
maintenance and repair items are charged to costs and expensed as incurred.
The
cost and accumulated depreciation of property and equipment sold or otherwise
retired are removed from the accounts and gain or loss on disposition
is
reflected in net income.
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”, the carrying value of intangible assets and other long-lived
assets is reviewed on a regular basis for the existence of facts or
circumstances that may suggest impairment. The Company recognizes impairment
when the sum of the expected undiscounted future cash flows is less than
the
carrying amount of the asset. Impairment losses, if any, are measured
as the
excess of the carrying amount of the asset over its estimated fair
value.
Income
Taxes
The
Company utilizes the liability method of accounting for income taxes.
Under the
liability method, deferred tax assets and liabilities are determined
based on
differences between financial reporting and tax bases of assets and liabilities
and the carryforward of operating losses and tax credits and are measured
using
the enacted tax rates and laws that will be in effect when the differences
are
expected to reverse. An allowance against deferred tax assets is recorded
when
it is more likely than not that such tax benefits will not be realized.
Research
tax credits are recognized as utilized.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue
Recognition
We
recognize revenue in accordance with Securities and Exchange Commission
Staff
Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements”
(“SAB 104”). We recognize revenue when all of the following criteria are met:
persuasive evidence of an arrangement exists; delivery has occurred or
services
have been rendered; the seller’s price to the buyer is fixed or determinable;
collectibility is reasonably assured; and title and the risks and rewards
of
ownership have transferred to the buyer. At the time of the transaction
we also
assess whether or not collection is reasonably assured. If we determine
that
collection of a fee is not reasonably assured, we defer recognition of
the fee
as revenue until the time collection becomes reasonably assured, which
is
generally upon receipt of cash.
Research
and Development
Research
and development has been the principal function of the Company. Expenses
in the
accompanying financial statements include certain costs which are directly
associated with the Company’s research and development of the Company’s
anti-infective pharmaceutical, MDI-P as well as the purchase of the intellectual
property assets of Savetherapeutics AG (See Note J). These costs, which
consist
primarily of pre-clinical testing activities, amounted to $2,026,907
and
$2,172,461 and $7,748,106 for the year ended December 31, 2006 and 2005 and
for the period November 20, 1991 (date of inception of the development
stage) through December 31, 2006, respectively.
Foreign
Currency Translation
The
Company’s functional and reporting currency is the United States dollar.
Monetary assets and liabilities denominated in foreign currencies are
translated
using the exchange rate prevailing at the balance sheet date. Gains and
losses
arising on translation or settlement of foreign currency denominated
transactions or balances are included in the determination of income.
Foreign
currency transactions are primarily undertaken in Euros. The Company
has not
entered into derivative instruments to offset the impact of foreign currency
fluctuations.
Fair
Value of Financial Instruments
The
Company estimates that the fair value of all financial instruments, at
December 31, 2006 do not differ materially from the aggregate carrying
values of its financial instruments recorded in the accompanying balance
sheets.
The estimated fair value amounts have been determined by the Company
using
available market information and appropriate valuation methodologies.
Considerable judgment is required in interpreting market data to develop
the
estimates of fair value, and accordingly, the estimates are not necessarily
indicative of the amounts that the Company could realize in a current
market
exchange.
Estimates
Management
uses estimates and assumptions in preparing financial statements. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and reported revenues
and
expenses. Significant estimates used in preparing these financial statements
include those assumed in determining the valuation of common stock, warrants,
and stock options. It is at least reasonably possible that the significant
estimates used will change within the next year.
Basic
and Diluted Loss per Share
Basic
loss per share is computed on the basis of the weighted-average number
of common
shares outstanding during the year. Diluted loss per share is computed
on the
basis of the weighted-average number of common shares and all dilutive
potentially issuable common shares outstanding during the year. Common
stock
equivalents, stock options and stock warrants have not been included
in the loss
per share for 2006 and 2005 as they are anti-dilutive. The potential
common
shares as of December 31, 2006 and 2005 are detailed below:
|
|
Potential
Common Shares
|
|
|
|
as
of December 31,
|
|
|
|
2006
|
|
2005
|
|
Convertible
notes
|
|
|
128,671
|
|
|
128,671
|
|
Convertible
preferred stock
|
|
|
114,080,000
|
|
|
48,000,000
|
|
Warrants
|
|
|
38,973,861
|
|
|
40,923,861
|
|
Stock
options
|
|
|
19,883,000
|
|
|
19,483,000
|
|
Total
potential common shares
|
|
|
173,065,532
|
|
|
108,535,532
|
|
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Currently,
the Company does not have enough authorized shares to meet the commitments
it
has entered into. Management is aware of the situation and is currently
considering an appropriate course of action.
Stock
Based Compensation
Effective
January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment”
(“SFAS 123(R)”) using the modified prospective application. SFAS 123(R) requires
the recognition of the cost of employee services received in exchange
for an
award of equity instruments in the financial statements and is measured
based on
the grant date fair value of the award. SFAS 123(R) also requires the
stock
option compensation expense to be recognized over the period during which
an
employee is required to provide service in exchange for the award (the vesting
period). Prior to adopting SFAS 123(R), the Company accounted for stock-based
compensation plans under Accounting Principles Board Opinion ("APB")
No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25,
generally
no compensation expense is recorded when the terms of the award are fixed
and
the exercise price of the employee stock option equals or exceeds the
fair value
of the underlying stock on the date of grant. The Company adopted the
disclosure-only provision of SFAS No. 123.
Had
compensation expense for stock option grants been determined based on
the fair
value of the stock options at the grant date, the Company's net loss
and net
loss per share would have been the same for the year ended December 31,
2005.
As
a
result of adopting SFAS 123(R), we recognized compensation expense related
to
options granted during the year ended December 31, 2006 in the amount
of
$67,350, which was the fair value of the options issued during the year
ended
December 31, 2006.
Reclassifications
Certain
2005 balances have been reclassified to conform to the 2006 presentation.
These
reclassifications had no effect on net loss or stockholders’ deficit for the
year ended December 31, 2005.
Recently
Issued Accounting Statements
In
February 2006, the FASB issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments — an amendment of FASB Statements No.
133 and 140
(SFAS
155). SFAS 155 amends SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities and
SFAS
No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
and
related interpretations. SFAS 155 permits fair value remeasurement for
any
hybrid financial instrument that contains an embedded derivative that
otherwise
would require bifurcation and clarifies which interest-only strips and
principal-only strips are not subject to recognition as liabilities.
SFAS 155
eliminates the prohibition on a qualifying special-purpose entity from
holding a
derivative financial instrument that pertains to a beneficial interest
other
than another derivative financial instrument. SFAS 155 is effective for
the
Company for all financial instruments acquired or issued beginning January
1,
2007. The Company is in the process of evaluating the application of
the fair
value option and its effect on its financial position and results of
operations.
In
July
2006, the FASB issued FIN 48, Accounting
for Uncertainty in Income Taxes,
which
attempts to set out a consistent framework for preparers to use to determine
the
appropriate level of valuation allowance tax reserves to maintain for
deferred
tax assets relating to uncertain tax positions. This interpretation for
FASB
Statement No. 109 uses a two-step approach wherein a tax benefit is recognized
if a position is more-than-likely-than-not to be sustained. The amount
of the
benefit is then measured to be the highest tax benefit, which is greater
than
fifty percent likely to be realized. FIN 48 also sets out disclosure
requirements to enhance transparency of an entity’s tax reserves. The Company
will adopt this Interpretation as of January 1, 2007. The Company is
in the
process of evaluating the application of the fair value option and its
effect on
its financial position and results of operations.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (SFAS
157). SFAS 157 defines fair value, establishes a framework for measuring
fair
value in generally accepted accounting principles, and expands disclosures
about
fair value measurements. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007. Accordingly,
the
Company will adopt SFAS 157 in 2008. The Company is currently evaluating
the
impact of SFAS 157 on the financial statements.
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities
-
including an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159
allows
measurement at fair value of eligible financial assets and liabilities
that are
not otherwise measured at fair value. If the fair value option for an
eligible
item is elected, unrealized gains and losses for that item shall be reported
in
current earnings at each subsequent reporting date. SFAS 159 also establishes
presentation and disclosure requirements designed to draw comparison
between the
different measurement attributes the Company elects for similar types
of assets
and liabilities. This statement is effective for fiscal years beginning
after
November 15, 2007. Accordingly, the Company will adopt SFAS 159 in 2008.
The
Company is in the process of evaluating the application of the fair value
option
and its effect on its financial position and results of
operations.
NOTE
B — BASIS OF PRESENTATION AND GOING CONCERN
As
shown
in the accompanying financial statements, the Company incurred a net
loss
applicable to common shareholders of $183,771 during the year ended
December 31, 2006, and has incurred losses applicable to common
shareholders since inception of the development stage of $21,024,485.
The
Company has not had significant revenues and has negative working capital.
The
Company is hopeful, but there is no assurance, that its current business
plan
will be economically viable. Those factors raise substantial doubt about
the
Company’s ability to continue as a going concern.
Management
plans to meet its cash needs through various means including selling
intellectual assets, securing financing, and developing new business
plans. The
Company has entered into an agreement to sell certain intellectual assets
for an
aggregate of €4,007,534
(approximately $5,906,000),
which
consideration is payable in cash and by the assumption of certain of
the
Company’s outstanding liabilities. In order to fund its operations pending the
closing of the asset sale, the Company issued a secured promissory note
for
$1,000,000. The Company will also develop a business to participate in
the
rapidly growing bio-diesel industry. (See Note K for a more detailed
description
of these transactions.)
The
ability of the Company to continue as a going concern is dependent on
that
plan’s success. The financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
NOTE
C - PROPERTY AND EQUIPMENT
Property
and equipment as of December 31, 2006 and 2005 are detailed below:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Research
equipment
|
|
$
|
168,468
|
|
$
|
168,468
|
|
Accumulated
depreciation
|
|
|
(106,219
|
)
|
|
(87,833
|
)
|
|
|
$
|
62,249
|
|
$
|
80,635
|
|
Depreciation
expense was $18,386 and $8,513 for the years ended December 31, 2006
and 2005,
respectively.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
D — INCOME TAXES
Income
taxes are provided for temporary differences between financial and tax
basis
income. The following is a reconciliation of the amount of benefit that
would
result from applying the federal statutory rate to pretax loss with the
benefit
from income taxes for the years ended December 31, 2006 and
2005:
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
Federal
income tax benefit at statutory rate (34%)
|
|
$
|
62,000
|
|
$
|
506,000
|
|
State
income tax, net of federal benefit
|
|
|
11,000
|
|
|
89,000
|
|
Unrealized
gain on financial instrument
|
|
|
1,026,000
|
|
|
920,000
|
|
Change
in valuation allowance
|
|
|
(1,099,000
|
)
|
|
(1,515,000
|
)
|
Provision
for income taxes
|
|
$
|
-
|
|
$
|
-
|
|
The
components of net deferred taxes are as follows at December 31 using
a combined
deferred tax rate of 40%:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Net
operating loss carryforward
|
|
$
|
7,684,000
|
|
$
|
6,663,000
|
|
Research
and development credits
|
|
|
80,000
|
|
|
80,000
|
|
Stock
options
|
|
|
673,000
|
|
|
646,000
|
|
Accrued
compensation
|
|
|
436,000
|
|
|
380,000
|
|
Valuation
allowance
|
|
|
(8,873,000
|
)
|
|
(7,769,000
|
)
|
Net
deferred tax asset
|
|
$
|
-
|
|
$
|
-
|
|
Inasmuch
as it is not possible to determine when or if the net operating losses
will be
utilized, a valuation allowance has been established to offset the benefit
of
the utilization of the net operating losses.
The
Company has available net operating losses of approximately $19,000,000
which
can be utilized to offset future earnings of the Company. The Company
also has
available approximately $80,000 in research and development credits which
expire
in 2008. The utilization of the net operating losses and research and
development credits are dependent upon the tax
laws
in effect at the time such losses can be utilized. The losses begin to
expire
between the years 2007 and 2023. Should the Company experience a significant
change of ownership the utilization of net operating losses could be
reduced.
NOTE
E — NOTES PAYABLE
The
Company has the following notes payable at December 31, 2006 and 2005:
|
|
2006
|
|
2005
|
|
Notes
payable to shareholders, which are currently due
|
|
|
|
|
|
and
in default. Interest is at 12%.
|
|
$
|
56,000
|
|
$
|
56,000
|
|
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.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
F — CONVERTIBLE NOTES PAYABLE
The
Company has the following convertible notes payable at December 31,
2006:
|
|
2006
|
|
2005
|
|
Convertible
notes payable to a trust, which is currently due
|
|
|
|
|
|
|
|
and
in default. Interest is at 12%. Each $1,000 note is convertible
|
|
$
|
193,200
|
|
$
|
193,200
|
|
into
667 shares of Company's common stock.
|
|
|
|
|
|
|
|
NOTE
G — STOCKHOLDERS’ EQUITY
Common
Stock
Preferred
stock converted to common stock - During
2006, the Company converted 200 shares of Series A Preferred Stock into
242,424
shares of common stock. The conversion price was $.0825 per share. The
preferred
stock had an assigned value of $8,722 which was reclassified to common
stock at
the time of conversion. During May 2006, the Company converted 7,380
shares of
Series A Preferred Stock into 10,000,000 shares of common stock. The
conversion
price was $.0738 per share. The preferred stock did not have any assigned
value
due to all the proceeds being assigned to the warrant liability.
Stock
issued for cash - During
the year ended December 31, 2005 the Company issued 1,922,222 shares
of common
stock for cash totaling $281,926 at $0.18 per share. In connection with
the
sales for cash, the Company also issued warrants to purchase 1,922,222
shares of
restricted common stock at $0.18 per share, expiring three years from the
date of issuance.
Stock issued for services - During
the year ended December 31, 2006 the Company issued 435,556 shares of
restricted
common stock for services totaling $78,400 or $0.18 per share, which
was the
fair value of the services rendered. During the year ended December 31,
2005,
the Company issued 104,167 shares for services totaling $11,312 or $0.18
per
share, which was the fair value of the services rendered.
Preferred
Stock, Warrants and Financial Instrument
During
the year ended December 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.
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 Company’s common stock during the 10
trading days immediately preceding the conversion date. The conversion
price may
not exceed $0.1967 and has a conversion price floor of $0.05. 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 use its “best efforts” to timely file a registration statement
with the Securities and Exchange Commission registering the shares of
common
stock issuable upon conversion of the Preferred Stock and exercise of
the
warrants. There are no significant liquidation damages in the event the
Company
is unable to file its registration statement.
The
conversion feature of the Series A Convertible Preferred Stock has
more of the
attributes of an equity instrument than a liability instrument, and
thus not
considered a derivative. However, the Company is unable to guarantee
that there
will be enough shares of stock to settle other “freestanding instruments.”
Accordingly, the warrants attached to the convertible preferred stock
are
measured at their fair value and classified as liability in the financial
statements. The fair value of the warrants was $3,844,116 on the date
of
issuance 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 warrants exceeded the proceeds received
by
$1,184,116, which was recorded as an expense on the statement of
operations.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
As
noted
above, all warrants and options outstanding on March 11, 2005 (with the
exception of stock options issued to employees) were measured at their
fair
value and reclassified as a liability in the financial statements. There
were
16,215,100 warrants issued prior to March 11, 2005 with a fair value
of
$2,435,713. The value of the warrants was 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. As a result of the reclassification,
stockholders’ equity was decreased by the fair value of the
liability.
Subsequent
to March 11, 2005, 611,110 warrants were issued as part of common stock
offerings of 611,110 shares. The warrants have a fair value of $64,074
and are
classified as a liability on the financial statements. The value of the
warrants
was computed using the Black Scholes model with the following assumptions:
volatility of 165%, risk-free interest rate of 3.8%, and an expected
life of
three years. The proceeds received from this issuance exceeded the value
of the
warrants by $45,926, which was attributed to the common stock.
The
Company adjusted to market value the outstanding warrants as of December
31,
2006 and 2005. The fair value of the financial instrument was $294,988
and
$2,859,596, respectively. The Company used the Black-Scholes model in
calculating fair value. At December 31, 2006 the following assumptions
were:
volatility of 138%, risk free interest rate of 5.0% and an expected life
of one
year. At December 31, 2005 the assumptions were: volatility of 152%,
risk free
interest rate of 4.41% and an expected life of two years. The changes
in fair
market value have been recorded as adjustments in the line “Unrealized gain on
financial instrument” in the statement of operations of $2,564,608 and
$2,300,191 for the years ended December 31, 2006 and 2005,
respectively.
NOTE
H - STOCK OPTIONS AND WARRANTS
Stock
Options
The
Company has two incentive stock option plans wherein 24,000,000 shares of
the Company’s common stock are reserved for issuance thereunder. During the year
ended December 31, 2006, the Company granted a stock option to a former
officer
and director. The option is for 500,000 shares exercisable at $0.25 per
share through December 31, 2010. The option was fully vested on January 1,
2006. The Company did not grant any options during 2005. Share-based
compensation recorded during the years ended December 31, 2006 and 2005
was
$67,350 and zero, respectively. No income tax benefit has been recognized
for
share-based compensation arrangements and no compensation cost has been
capitalized in the balance sheet.
A
summary
of the status of the options granted at December 31, 2006 and 2005, and
changes
during the years then ended is presented in the following table:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
Shares
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
Under
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
|
Option
|
|
Price
|
|
Life
|
|
Value
|
|
Outstanding
at January 1, 2005
|
|
|
19,483,000
|
|
$
|
0.04
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
19,483,000
|
|
|
0.04
|
|
|
|
|
|
|
|
Granted
|
|
|
500,000
|
|
|
0.25
|
|
|
|
|
|
|
|
Expired
|
|
|
(100,000
|
)
|
|
0.50
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
19,883,000
|
|
$
|
0.05
|
|
|
6.4
years
|
|
$
|
340,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2006
|
|
|
19,883,000
|
|
$
|
0.05
|
|
|
6.4
years
|
|
$
|
340,000
|
|
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
At
December 31, 2006, 80,000 of the options outstanding have no stated contractual
life. The fair value of each stock option grant is estimated on the date
of
grant using the Black-Scholes option pricing model. The weighted average
fair
value of stock options during the year ended December 31, 2006 was $0.13.
The
weighted-average assumptions used for options granted during the year
ended
December 31, 2006 were risk-free rate of 4.3%, volatility of 152%, expected
life
of five years, and dividend yield of zero. The assumptions employed in
the
Black-Scholes option pricing model include the following. The expected
life of
stock options represents the period of time that the stock options granted
are
expected to be outstanding based on historical exercise trends. The expected
volatility is based on the historical price volatility of the Company’s common
stock. The risk-free interest rate represents the U.S. Treasury constant
maturities rate for the expected life of the related stock options. The
dividend
yield represents our anticipated cash dividend over the expected life
of the
stock options.
As
of
December 31, 2006, there was no unrecognized compensation cost related
to stock
options that will be recognized in the future.
Stock
Warrants
A
summary
of the status of the warrants granted at December 31, 2006 and 2005,
and changes
during the years then ended is presented in the following table:
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
Average
|
|
|
|
Under
|
|
Exercise
|
|
|
|
Warrant
|
|
Price
|
|
Outstanding
at January 1, 2005
|
|
|
14,904,029
|
|
$
|
0.28
|
|
Issued
|
|
|
26,019,832
|
|
|
0.20
|
|
Expired
|
|
|
-
|
|
|
-
|
|
Outstanding
at December 31, 2005
|
|
|
40,923,861
|
|
|
0.23
|
|
Issued
|
|
|
-
|
|
|
-
|
|
Expired
|
|
|
(1,950,000
|
)
|
|
1.00
|
|
Outstanding
at December 31, 2006
|
|
|
38,973,861
|
|
$
|
0.19
|
|
NOTE
I — RELATED PARTY TRANSACTIONS
At
December 31, 2006 and 2005, the Company had accrued payroll and payroll
taxes to
current and former officers, employees, and directors totaling $1,184,264
and
$1,673,651 for services performed and costs incurred in behalf of the
Company,
including $836,804 and $877,636, respectively, to the Company’s President and
CEO, and $75,500 and $73,000, respectively, to the Company’s
controller.
NOTE
J — OTHER SIGNIFICANT TRANSACTIONS
Debt
Restructuring
On
June 10, 2006, the Company entered into an agreement with a former vendor
to forgive certain accrued expenses. The balance owed before the agreement
was
$229,066. Per the agreement, $3,975 was paid on the date of the agreement,
another $3,975 was paid on August 13, 2006, and $131,116 was forgiven.
The
remaining balance of $90,000 will be due and payable immediately upon
MDI’s
receipt of $1 million in cumulative license revenue for MDI’s drug MDI-P in
any human indication and has been recorded as Long-Term Liability in
the
accompanying financial statements. Additionally, the company determined
$476,645
of previously recorded accrued payroll and payroll taxes had passed their
statute of limitations for collection and are included in gain on debt
restructuring in the accompanying financial statements.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Formestane
Cream (formerly 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 formestane cream (formerly called SaveCream), a developmental-stage
topical aromatase inhibitor treatment for breast cancer. Formestane cream
did
not generate revenues for SaveT.
The
purchase price of the Assets was €2,350,000 (approximately $3.1 million
under current exchange rates), payable as follows: €500,000 at closing, €500,000
(approximately $665,700 on the date of transaction, $659,850 using the
December
31, 2006 exchange rates) upon conclusion of certain pending transfers
of patent
and patent application rights from formestane cream’s inventors to the Company,
and the remaining €1,350,000 ($1,781,595 at December 31, 2006) upon
successful commercialization of the Assets.
The
pending transfers of patent and patent application rights have not occurred
as
of December 31, 2006. The Company has deemed the transfers are reasonably
likely
to occur due to existing contractual commitments of the inventors and
the
reasonably likely success of the Company’s action in German court proceeding to
effect these transfers. Accordingly, the Company has recorded the second
€500,000 payment as a research and development obligation in these financial
statements.
In
July
2006 the Company entered into a co-development and license agreement
with
Eucodis Forschungs-und Entwicklungs GmbH (Eucodis), which provides for
up-front
licensing fees and milestone payments in excess of the €1,350,000 threshold for
successful commercialization of the Assets. Accordingly, in the year
ended
December 31, 2006 the Company recorded the final €1,350,000 purchase price
payment as research and development obligation in the accompanying financial
statements. Consistent with the Company’s conclusion that no business had been
acquired in connection with the purchase of the Assets, the charge has
been
reflected as a research and development expense in the accompanying financial
statements. During the year ended December 31, 2006, the Company recognized
revenue of $800,000 from the co-development and license agreement.
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
receivable and R&D agreement
On
July
15, 2005, the Company entered into an Assignment of Patent, Participation
and
Research and Development Agreement (the "Agreement") with the inventor
of the
Company’s SaveCream lead drug candidate. The terms of the
Agreement included the Company granting a €500,000 non-interest bearing loan to
the inventor. The loan was secured by profits expected to be received by
the inventor resulting from the inventor's 6% ownership interest in MDI
Oncology, Inc., a wholly owned subsidiary of the Company. The Agreement
also included a consulting agreement for the inventor to perform research
and
development work. The consulting fee was €10,000 (approximately $13,197
under current exchange rates) per month, under which the Company paid
€60,000
(approximately $79,182 under current exchange rates).
On
October 27, 2006 the Company and the inventor amended the Agreement.
In exchange
for certain intellectual property rights, the amended agreement (i)
terminated the balance of the non-interest bearing loan (€250,000) not
already advanced to the inventor under the terms of the earlier July
15, 2005
agreement, (ii) terminated the consulting agreement requiring the inventor
to
perform certain research and development work and the fee-for-service
payments
anticipated to be made by the Company, and (iii) cancelled the inventor's
6% ownership interest in MDI Oncology, Inc. The amended agreement further
stipulated that the €250,000 already advanced to the inventor in two
installments of €100,000 and €150,000, respectively, as a non-interest
bearing loan under the July 15, 2005 agreement (the "Loan"), would be
secured by
2,301,000 warrants (the "Warrant") for the Company’s common stock issuable to
the inventor upon conclusion of certain pending transfers of patent and
patent
application rights to the Company. The Warrant would have a strike price
of $0.001 per share and a 10 year expiration date. The Warrant would
be issued to the inventor upon transfer of all intellectual property
rights
related to the SaveCream lead drug candidate. As of December 31,
2006, these intellectual property rights were not transferred. At December
31, 2006, the subject patents had yet to be transferred, and the principal
amount of the Loan outstanding was €250,000 (approximately $329,925 under
current exchange rates). During the year ended December 31, 2006, the
Company provided in the accompanying financial statements an allowance
of the
full amount related to collectibility of this note receivable.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
K — SUBSEQUENT EVENTS
Introduction
The
Company has been a development stage bio-pharmaceutical company engaged
in the
research and development of two drug candidates. Both of these drug candidates
are still in development and neither has been approved by the U.S. Food
and Drug
Administration (the FDA). The total cost to develop these two drugs and
to
receive the approval from the FDA would cost many millions of dollars
and take
many more years. The Company attempted to fund its development costs
through the
sale of its equity securities, including the sale of its Series A Convertible
Preferred Stock. At the end of 2006, the Company had virtually no cash,
had no
source of revenues, had a working capital deficit of $5.6 million and
a
stockholders’ deficit of $5.6 million. In addition, the holders of the Series A
Convertible Preferred Stock informed the Company that they were no longer
willing to fund the Company’s then current operations.
The
transactions described in this footnote reflect the Company’s efforts in 2007 to
reorganize its operations and to reposition its business and
operations.
Consulting
Agreement
In
February 2007, the Company engaged a consulting firm to assist it in
resolving
its financial issues, to obtain advice regarding any strategic alternatives
that
may be available to it, and to prevent the Company from losing all of
its assets
in bankruptcy. During the past several months, the Company has explored
a number
of transactions that would (i) prevent the Company’s shareholders from losing
their entire investment in the Company and (ii) enable the Company to
repay some
of its currently outstanding debts and liabilities.
The
consulting agreement has a term of one year. As compensation for its
services,
the consultant is to receive $15,000 per month plus a warrant to purchase
5,000,000 shares of the Company’s common stock. The
warrant has an exercise price of $0.03 per share, contains
a cash-less exercise
provision, and expires ten years from
date
of issue. The Company is currently evaluating the proper accounting
related to the warrant issuance.
Discontinued
Operations
The
Board
of Directors initially determined that it could no longer fund the development
of its two drug candidates and could not obtain additional funding for
these
drug candidates. The Board evaluated the value of both of its developmental
stage drug candidates. In March, 2007, the Board determined that the
best course
of action was to discontinue further development of these two drug candidates
and sell these technologies.
Eucodis
Agreement
On
March
8, 2007, the Company entered into a binding letter of intent with Eucodis
Pharmaceuticals Forschungs - und Entwicklungs GmbH, an Austrian company
(Eucodis),
regarding their intent to proceed with the evaluation, negotiation, and
execution of a sale and purchase agreement related to certain assets
of the
Company. On July 6, 2007, the Company entered into a sale and purchase
agreement
(the Asset Sale Agreement) with Eucodis, pursuant to which Eucodis agreed
to
acquire certain assets of the Company in consideration for a cash payment
and
the assumption by Eucodis of certain indebtedness of the Company. Pursuant
to
the Second Amendment to the Asset Sale Agreement, the sale is scheduled
to be
consummated on or before January 31, 2008 after the shareholders of the
Company
have approved the transaction.
The
assets to be acquired by Eucodis pursuant to the Asset Sale Agreement
include
all of the Company’s right, title and interest in all patents, patent
applications, United
States and foreign regulatory files and data,
pre-clinical study data and anecdotal clinical trial data concerning
SaveCream.
In addition, at the closing of the sale, the Company will also assign
to Eucodis
all of its right, title and interest in a co-development agreement with
Eucodis,
dated as of July 29, 2006, related to the co-development and licensing
of
SaveCream (including the intellectual property rights acquired in connection
with that development) and their rights under certain
other contracts relating to SaveCream.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
purchase price to be paid by Eucodis for acquiring these assets will
be
€4,007,534 (approximately $5,906,000 under exchange rates in effect as
of
November 30, 2007), is comprised of (i) a cash payment of €1,538,462
(approximately $2,267,000 under exchange rates in effect as of November
30,
2007) less $200,000 received in March 2007 under the binding letter of
intent,
and (ii) Eucodis’ assumption of an aggregate of €2,469,072 (approximately
$3,639,000 under exchange rates in effect as of November 30, 2007), constituting
specific indebtedness currently owed and other commitments to certain
creditors
of the Company. In addition, at the closing of the sale, Eucodis will
assume (i)
all financial and other obligations of the Company under certain contracts
to be
assigned to Eucodis, and (ii) certain other costs incurred by the Company
since
February 28, 2007 in connection with preserving the acquired assets for
the
benefit of Eucodis until closing of the sale.
The
Company has agreed to a non-compete provision for the duration of five
years
after the closing of the sale. Specifically, the non-compete provision
will
restrict the Company, or any of its respective affiliates, from undertaking
research and development activities with respect to SaveCream, or any
other
product which could be used in reasonable substitution of that product,
or
commercializing any products based on SaveCream, unless expressly authorized
by
Eucodis.
The
closing of the sale was scheduled to occur on September 30, 2007. However,
Eucodis and the Company have agreed to extend the date of the closing
of the
sale until on or before January 31, 2008 following the date on which
the
shareholders vote to approve the sale. The consummation of the sale is
subject
to certain customary conditions, including (i) the delivery of releases
from
each creditor whose debt is being assumed by Eucodis, releasing the Company
from
any liability concerning such creditor’s indebtedness, and (ii) the Company
obtaining additional capital or a credit facility in the aggregate amount
of at
least $250,000.
MDI-P
Agreement
The
Company also entertained various offers to purchase the Company’s rights to the
assets related to the MDI-P compound. On August 9, 2007, the Company
sold the
MDI-P related assets for $310,000 in cash. The sale included the patents,
name,
and other intellectual property, research results and test data, production
units and equipment, and other assets related to this technology. No
liabilities
were assumed by the purchaser in this transaction. The sale was subject
to
certain customary conditions, representations, and warranties. The Company
is
currently evaluating the accounting treatment as it relates to the sale
of
MDI-P.
Global
Clean Energy Holdings, LLC
Having
agreed to dispose of its assets, the Board of Directors decided to develop
a
business to produce and sell seed oils, including seeds oils harvested
from the
planting and cultivation of the Jatropha
curcas
plant,
for the purpose of providing feedstock oil intended for the generation
of
bio-diesel. In order to commence its new Jatropha based biofuels business,
the
Company (i) hired Richard Palmer, an energy consultant, to act as the
Company’s
new President, Chief Operating Officer and future Chief Executive Officer,
(ii)
engaged Mobius Risk Group, LLC, a Texas company engaged in providing
energy risk
advisory services, to provide the Company with consulting services related
to
the development of the Jatropha bio-diesel business, and (iii) acquired
certain
trade secrets, know-how, business plans, term sheets, business relationships,
and other information relating to the start-up of a business related
to the
cultivation and production of seed oil from the Jatropha plant for the
production of bio-diesel. In order to fund the Company’s operations until cash
is generated from the sale of the Assests to Eucodis and from the new
Jatropha
business, the Company entered into a loan and security agreement pursuant
to
which the Company has borrowed $350,000.
Share
Exchange Agreement
The
Company entered into a share and exchange agreement (the Global Agreement)
pursuant to which the Company acquired all of the outstanding ownership
interests in Global Clean Energy Holdings, LLC, a Delaware limited liability
company (Global) on September 7, 2007 from Mobius Risk Group, LLC (Mobius)
and
from Richard Palmer (Mr. Palmer). Global is an entity that has certain
trade
secrets, know-how, business plans, term sheets, business relationships,
and
other information relating to the start-up of a business related to the
cultivation and production of seed oil from the seed of the Jatropha
plant, for
the purpose of providing feedstock oil intended for the production of
bio-diesel. Under the Global Agreement, the Company issued 63,945,257
shares of
its common stock for all of the issued and outstanding membership interests
of
Global. Of the 63,945,257 shares issued under the Global Agreement, 36,540,146
shares were issued and delivered at the closing of the Global Agreement
without
any restrictions. The remaining 27,405,111 shares of common stock were,
however,
held in escrow by the Company, subject to forfeiture in the event that
certain
specified performance and market-related milestones are not achieved.
Upon the
satisfaction from time to time of the operational and market capitalization
condition milestones, the restricted shares will be released by the Company
from
escrow and delivered to the buyers in accordance with the terms and conditions
of the Global Agreement. In the event that all of the milestone conditions
are
not achieved, the restricted shares that have not been released from
escrow will
be cancelled by the Company and thereafter cease to be outstanding.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Of
the
restricted shares issued under the Global Agreement, 13,702,556 shares
will be
released from escrow if and when certain land lease agreements suitable
for the
planting and cultivation of Jatropha
curcas are
executed; and certain operation management agreements with a third-party
land
and operations management company with respect to the management, planting
and
cultivation of Jatropha
curcas
are
executed. These restricted shares will be held in escrow subject to the
satisfaction of these milestones, at which time such shares will be released
from escrow and delivered to the sellers.
The
remaining 13,702,555 restricted shares issued under the Global Agreement
will be
released from escrow upon satisfaction of certain market capitalization
and
average daily trading volume levels. These restricted shares will be
held in
escrow subject to the satisfaction of these milestones, at which time
such
shares will be released from escrow and delivered to the sellers. As
of November
30, 2007, a total of 4,567,518 shares had been released from escrow and
delivered to the sellers.
The
restricted shares under the Global Agreement are subject to cancellation
and
termination as follows. The restricted shares held in escrow related
to the
operational milestone will be returned to the Company and cancelled if
the
related conditions are not satisfied by the end of the first anniversary
of the
effective date of the Global Agreement. The restricted shares related
to the
market capitalization milestones will be returned to the Company and
cancelled
to the extent that the market-related conditions are not satisfied by
the end of
the second anniversary of the effective date of the Global
Agreement.
As
part
of the Global Agreement, Mobius has agreed to a non-competition agreement
that
prohibits Mobius from engaging or participating in any business that
is in
competition in any manner whatsoever with the Company’s new Jatropha business.
The non-competition prohibition is in effect for a period of five years
following the effective date of the Global Agreement.
The
Company is currently evaluating the accounting effect of the Share Exchange
Agreement.
Mobius
Consulting Agreement
Concurrent
with the execution of the Global Agreement, the Company entered into
a
consulting agreement with Mobius pursuant to which Mobius has agreed
to provide
consulting services to the Company in connection with the Company’s new Jatropha
bio-diesel feedstock business. The Company engaged Mobius as a consultant
to
obtain Mobius’ experience and expertise in the feedstock/bio-diesel market to
assist the Company and Mr. Palmer in developing this new line of operations
for
the Company. Mobius has agreed to provide the following services to the
Company:
(i) manage and supervise a research and development program contracted
by the
Company and conducted by the University of Texas Pan American regarding
the
location, characterization, and optimal economic propagation of the
Jatropha plant;
and (ii) manage and supervise the creation, planning, construction, and
start-up
of plant nurseries and seed production plantations in two geographical
areas
that may include either South Texas, the Yucatan Peninsula of Mexico
(Merida),
the Caribbean or Central America.
The
term
of the agreement is twelve (12) months, or until the scope of work under
the
agreement has been completed. Mobius will supervise the hiring of certain
staff
to serve in management and operations roles of the Company, or hire such
persons
to provide similar services as independent contractors. Mobius’ compensation for
the services provided under the agreement is a monthly retainer of $45,000.
The
Company will also reimburse Mobius for reasonable business expenses incurred
in
connection with the services provided. The agreement contains customary
confidentiality provisions with respect to any confidential information
disclosed to Mobius or which Mobius receives while providing services
under the
agreement.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Palmer
Employment Agreement
Effective
September 1, 2007, the Company entered into an employment agreement with
Richard
Palmer pursuant to which the Company hired Mr. Palmer to serve as its
President
and Chief Operating Officer. Mr. Palmer was also appointed to serve as
director
on the Company’s Board of Directors to serve until the next election of
directors by the Company’s shareholders. Upon the resignation of the current
Chief Executive Officer, Mr. Palmer also will become the Company’s Chief
Executive Officer. The Company hired Mr. Palmer to take advantage of
his
experience and expertise in the feedstock/bio-diesel space, and in particular,
in the Jatropha bio-diesel and feedstock business. The term of employment
commenced September 1, 2007 and ends on September 30, 2010, unless terminated
in
accordance with the provisions of the agreement.
Mr.
Palmer’s compensation package includes a base salary of $250,000, subject to
annual increases based on changes in the Consumer Price Index, and a
bonus
payment based on Mr. Palmer’s satisfaction of certain performance criteria
established by the compensation committee of the Company’s Board of Directors.
The bonus amount in any fiscal year will not exceed 100% of Mr. Palmer’s base
salary. Mr. Palmer is eligible to participate in the Company’s employee stock
option plan and other welfare plans. The Company granted Mr. Palmer an
incentive
option to purchase up to 12,000,000 shares of its common stock at an
exercise
price of $0.03 (the trading price on the date the agreement was signed).
The
options vest upon the Company’s achievement of certain market capitalization
goals. When the Company’s market capitalization reaches $75 million, the
incentive option will vest with respect to 6,000,000 shares. When the
Company’s
market capitalization reaches $120 million, the incentive option will
vest with
respect to the remaining 6,000,000 shares. The option expires five years
after
grant.
If
Mr.
Palmer’s employment is terminated by the Company without “cause” or by Mr.
Palmer for “good reason”, he will be entitled to severance payments including
100% of his then-current annual base salary, plus 50% of the target bonus
for
the fiscal year in which his employment is terminated, and the incentive
option
to purchase 12,000,000 shares of common stock shall vest following termination
of Mr. Palmer’s employment. The Company is currently evaluating the proper
accounting treatment for this employment agreement and option
issuance.
LODEMO
Agreement
On
October 15, 2007, the Company entered into a service agreement with Corporativo
LODEMO S.A DE CV, a Mexican corporation (the LODEMO Group).
The
Company has decided to initiate its Jatropha Business in Mexico, and
has already
identified parcels of land in Mexico to plant and cultivate Jatropha.
In order
to obtain all of the logistical and other services needed to operate
a
large-scale farming and transportation business in Mexico, the Company
entered
into the service agreement with the LODEMO Group, a privately held Mexican
company with substantial land holdings, significant experience in diesel
distribution and sales, liquids transportation, logistics, land development
and
agriculture.
Under
the
supervision of the Company’s management, the LODEMO Group will be responsible
for the establishment, development, and day-to-day operations of the
Jatropha
Business in Mexico, including the extraction of the oil from the Jatropha
seeds,
the delivery of the Jatropha oil to buyers, the purchase or lease of
land in
Mexico, the establishment and operation of one or more Jatropha nurseries,
the
clearing, planting and cultivation of the Jatropha fields, the harvesting
of the
Jatropha seeds, the operation of the Company’s oil extraction facilities, and
the logistics associated with the foregoing. Although the LODEMO Group
will be
responsible for identifying and acquiring the farmland, ownership of
the
farmland or any lease thereto will be held directly by the Company or
by a
Mexican subsidiary of the Company. The LODEMO Group will be responsible
for
hiring and managing all necessary employees. All direct and budgeted
costs of
the Jatropha Business in Mexico will be borne by the Company.
The
LODEMO Group will provide the foregoing and other necessary services
for a fee
primarily based on the number of hectares of Jatropha under cultivation.
The
Company has agreed to pay the LODEMO Group a fixed fee per year of $60
per
hectare of land planted and maintained with minimum payments based on
10,000
hectares of developed land, to follow a planned planting schedule. The
Agreement
has a 20-year term but may be terminated earlier by the Company under
certain
circumstances. The LODEMO Group also will potentially receive incentive
compensation for controlling costs below the annual budget established
by the
parties, production incentives for increase yield and a sales commission
for
biomass sales.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Loan
Agreement
In
order
to fund its operations pending the sale of the Assets to Eucodis, the
Company
entered into a loan and security agreement on September 7, 2007, with
Mercator
Momentum Fund III, L.P., a California limited partnership. Pursuant to
the loan
agreement, the lender made available to the Company a secured term credit
facility in the aggregate principal amount of $1,000,000. In connection
with the
loan agreement, the Company also issued a secured promissory note to
the lender,
which note is secured by a first priority lien on all of the assets of
the
Company. The lender and its affiliates currently own all of the issued
and
outstanding shares of Series A Convertible Preferred Stock of the
Company.
Under
the
loan agreement, interest is payable on the loan at a rate of 12% per
annum,
payable monthly. The loan matures and becomes due and payable on December
14,
2007. In connection with the closing of the loan, the Company agreed
to the
exchange
of the warrants to purchase 27,452,973 shares at a price of $0.1967 per
share
previously issued to the lender and certain of its affiliates to (i)
lower the
exercise price of such warrants to $0.01 per share, (ii) permit the cash-less
exercise of the warrants, and (iii) extend the expiration date thereof
to
September 30, 2013. The Company is currently evaluating the accounting
effect of
the loan agreement and the exchange of warrants.
Consultant
Agreement
On
September 14, 2007, the Company entered into a one-year agreement with
a
consultant for investor relations services. Under the agreement, the
Company
agreed to pay total compensation of $105,000 over the one-year term.
As
additional compensation, the Company issued 4,357,298 shares of restricted
common stock to the consultant and granted piggyback registration rights
for the
stock to be registered in connection with the Company’s next registration of
securities. The Company is currently evaluating the accounting treatment
for
this consulting agreement.
Conversion
of Series A Preferred Stock
On
September 17, 2007, the preferred stockholders gave notice to the Company
and
converted 5,492 shares of Series A Preferred Stock into 10,983,521 shares
of
common stock. The conversion price was $0.05 per share.
Release
and Settlement Agreement
Mercator
Momentum Fund, LP; Monarch Pointe Fund, Ltd.; and Mercator Momentum Fund
III,
LP, each a private investment entity (collectively, the MAG
Funds) purchased shares of the Company’s Series A
Preferred Convertible Stock in 2004 and in 2005. In connection with the
2005
investment, the Company agreed to eliminate the conversion price floor
of the
Series A Stock. The Company failed to file an amendment to the Series
A Stock
Certificate of Designations of Preferences and Rights for the Series
A Stock
that would have eliminated the conversion price floor. Accordingly, in
connection with an intended conversion of some of their Series A Stock
in
September 2007, the MAG Funds were required to convert Series A Stock
at a
conversion price higher than the price that would have applied if the
Amendment
had been filed as agreed.
On
October 22, 2007, the Company executed and entered into a Release and
Settlement
Agreement
(the
Release Agreement), with the MAG Funds
to
settle all losses and damages that MAG may have suffered, and may hereafter
suffer, as result of the Company’s failure to file the amendment to the Series A
Stock Certificate of Designations of Preferences and Rights for the Series
A
Stock.
Pursuant
to the Release Agreement, the Company issued to the MAG Funds a ten-year
warrant
to acquire up to 17,000,000 shares of the Company’s
common stock at
an
exercise price of $0.01 per share expiring October 17, 2017. The
initial warrant
price is subject to adjustments in connection with (i) the Company’s issuance of
dividends in shares of Common Stock, or shares of Common Stock or other
securities convertible into shares of Common Stock without consideration,
(ii)
any cash paid or payable to the holders of Common Stock other than as
a regular
cash dividend, and (ii) future stock splits, reverse stock splits, mergers
or
reorganizations, and similar changes affecting common stockholders.
The
warrant issued to the MAG Funds contain beneficial ownership limitations,
which
preclude the MAG Funds from exercising its warrant if, as a result of
such
conversion or exercise, the MAG Funds would own beneficially more than
9.99% of
the Company’s outstanding common stock then outstanding.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant
to the Release Agreement, the MAG Funds released the Company from any
and all
claims, past, present or future, relating to the losses or the Company’s failure
to file the amendment. In addition, MAG has agreed not to sue the Company
in
connection with the losses or the Company’s failure to file the
Amendment.
The
Company is currently evaluating the accounting significance of this release
and
settlement agreement.
Issuance
of Series B Preferred Stock
In
order
to obtain additional working capital, on November 6, 2007, the Company
entered
into a Securities Purchase Agreement with two accredited investors, pursuant
to
which the Company sold a total of 13,000 shares of our newly authorized
Series B
Convertible Preferred Stock (“Series B Shares”) for an aggregate purchase price
of $1,300,000. Each share of the Series B Shares has a stated value of
$100.
The
Series B Shares may, at the option of each holder, be converted at any
time or
from time to time into shares of our common stock at the conversion price
then
in effect. The number of shares into which one Series B Share shall be
convertible is determined by dividing $100 per share by the conversion
price
then in effect. The
initial conversion price per share for the Series B Shares is $0.11,
which is
subject to appropriate adjustment for certain events, including stock
splits,
stock dividends, combinations, or other recapitalizations affecting the
Series B
Shares.
Each
holder of Series B Shares is entitled to the number of votes equal to
the number
of shares of our common stock into which the Series B Shares could be
converted
on the record date for such vote, and shall have voting rights and powers
equal
to the voting rights and powers of the holders of the Company’s common stock.
In
the
event of our dissolution or winding up, each share of the Series
B
Shares
is entitled to be paid an amount equal to $100 (plus any declared and
unpaid
dividends) out of the assets of the Company then available for distribution
to
shareholders; subject, however, to the senior rights of the holders of
Series A
Convertible Preferred Stock.
No
dividends are required to be paid to holders of the Series B Shares.
However,
the Company may not declare, pay or set aside any dividends on shares
of any
class or series of our capital stock (other than dividends on shares
of our
common stock payable in shares of common stock) unless the holders of
the Series
B Shares shall first receive, or simultaneously receive, an equal dividend
on
each outstanding share of Series B Shares.
Release
and Settlement Agreement with Chief Executive Officer
On
August
31, 2007, the Company entered into a Settlement and Release Agreement
with Judy
Robinett, the Company’s current Chief Executive Officer, pursuant to which Ms.
Robinett agreed to continue to act as the Company’s transitional Chief Executive
Officer. Under the agreement, Ms. Robinett agreed to, among other things,
assist
the Company in the sale of its legacy assets, complete the preparation
and
filing of the delinquent reports to the Securities and Exchange Commission
(the
SEC) that related to the periods prior to the appointment of Mr. Palmer,
and
provide certain shareholder and creditor related services. Upon the completion
of the foregoing matters, in particular the filing of the delinquent
reports to
the SEC, Ms. Robinett will resign, and Mr. Palmer will thereafter assume
the
office of Chief Executive Officer. Under the agreement, Ms. Robinett
agreed to
(i) forgive her potential right to receive $1,851,805 in accrued and
unpaid
compensation, un-accrued and pro-rata bonuses, and severance pay and
(ii) the
cancellation of stock options to purchase 14,000,000 shares of common
stock at
an exercise price of $0.02 per share. In consideration for her services,
the
forgiveness of the foregoing cash payments, the cancellation of the foregoing
stock options, and settlement of other issues, the Company agreed to
(a) pay Ms.
Robinett $500,000 upon the receipt of the Eucodis cash payment under
the
agreement to sell the SaveCream Assets, (b) pay Ms. Robinett a commission
of
fifteen percent of the gross proceeds received by the Company from the
sale of
the MDI-P asset, (c) pay Ms. Robinett $20,833 in monthly salary for serving
as
transitional Chief Executive Officer of the Company during the period
from April
1,
2007 until
the
effective
date of her resignation, and (d) permit
Ms. Robinett to retain some of her previously granted incentive stock
options in
such an amount allowing
her to purchase up to two million shares
of
common stock, which options shall continue to have the same terms and
conditions
as currently in
existence, including an option price of $0.01
per
share and expiration date of December 31, 2112.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Consulting
Agreement
In
February 2007, the Company entered into another consulting agreement
with an
individual to assist it in the preparation of financial statements, reporting
to
the SEC, raising capital, disposing of the existing technologies, and
otherwise
assisting executive management and the Company’s other consulting firm in the
development and execution of the Company’s business plan. The consulting
agreement had a term of one year. As compensation for its services, the
consultant was to receive $10,000 per month plus a warrant to purchase
5,000,000
shares of the Company’s common stock. The warrant has an exercise price of $0.03
per share, contains
a cash-less exercise provision, and
expires ten years from date of issue. Since
the
consulting agreement
was terminated prior to its expiration date, the Company’s obligations under the
consulting agreement, if any, for the period
after the termination
date
are
unclear. No demand for any additional compensation has been made against
the
Company under the consulting agreement.
The
Company is currently evaluating the accounting effect of this consulting
agreement. This
consulting agreement was terminated in May 2007.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
|
(A
Development Stage Company)
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
(Unaudited)
|
|
|
September
30,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
|
|
$
|
296,121
|
|
$
|
47,658
|
|
Prepaid
expenses
|
|
|
66,031
|
|
|
-
|
|
Total
Current Assets
|
|
|
362,152
|
|
|
47,658
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
29,870
|
|
|
789
|
|
Deferred
offering costs
|
|
|
1,530
|
|
|
-
|
|
Assets
held for sale
|
|
|
-
|
|
|
61,460
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
393,552
|
|
$
|
109,907
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,111,501
|
|
$
|
663,691
|
|
Accrued
payroll and payroll taxes
|
|
|
1,294,584
|
|
|
1,184,264
|
|
Accrued
interest payable
|
|
|
291,585
|
|
|
267,739
|
|
Notes
payable to shareholders
|
|
|
56,000
|
|
|
56,000
|
|
Secured
promissory note, less unamortized discount
|
|
|
58,673
|
|
|
-
|
|
Convertible
notes payable
|
|
|
193,200
|
|
|
193,200
|
|
Financial
instrument
|
|
|
2,065,470
|
|
|
294,988
|
|
Current
liabilities associated with assets held for sale
|
|
|
3,137,859
|
|
|
2,914,438
|
|
Total
Current Liabilities
|
|
|
8,208,872
|
|
|
5,574,320
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITY
|
|
|
-
|
|
|
90,000
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
8,208,872
|
|
|
5,664,320
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
Preferred
stock - undesignated, Series A, convertible; no par value;
|
|
|
|
|
|
|
|
50,000,000
shares authorized; 28,928 and 34,420 shares issued and
|
|
|
|
|
|
|
|
outstanding,
respectively; (aggregate liquidation preference of
|
|
|
|
|
|
|
|
$2,892,800
and $3,442,000, respectively); the Company also has
|
|
|
|
|
|
|
|
designated
Series B with no shares issued or outstanding
|
|
|
514,612
|
|
|
514,612
|
|
Common
stock, no par value; 250,000,000 shares authorized;
170,238,669
|
|
|
|
|
|
|
|
and
118,357,704 shares issued and outstanding, respectively
|
|
|
16,403,248
|
|
|
15,299,017
|
|
Additional
paid-in capital
|
|
|
1,468,057
|
|
|
1,056,020
|
|
Deficit
accumulated prior to the development stage
|
|
|
(1,399,577
|
)
|
|
(1,399,577
|
)
|
Deficit
accumulated during the development stage
|
|
|
(24,801,660
|
)
|
|
(21,024,485
|
)
|
Total
Stockholders' Deficit
|
|
|
(7,815,320
|
)
|
|
(5,554,413
|
)
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
$
|
393,552
|
|
$
|
109,907
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements
MEDICAL
DISCLOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
For
the Three Months
|
|
|
For
the Nine Months
|
|
|
From
Inception of the
Development Stage on November
20, 1991
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
through
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
$
|
564,268
|
|
$
|
160,773
|
|
$
|
919,273
|
|
$
|
350,954
|
|
$
|
5,869,946
|
|
Research
and development
|
|
|
986,584
|
|
|
-
|
|
|
986,584
|
|
|
-
|
|
|
986,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
(1,550,852
|
)
|
|
(160,773
|
)
|
|
(1,905,857
|
)
|
|
(350,954
|
)
|
|
(6,856,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on financial instrument
|
|
|
(1,735,102
|
)
|
|
840,271
|
|
|
(1,520,482
|
)
|
|
1,720,351
|
|
|
3,344,317
|
|
Interest
income
|
|
|
124
|
|
|
519
|
|
|
394
|
|
|
2,295
|
|
|
58,558
|
|
Interest
expense
|
|
|
(11,501
|
)
|
|
(7,538
|
)
|
|
(27,252
|
)
|
|
(22,382
|
)
|
|
(1,212,872
|
)
|
Interest
expense from amortization of discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
secured promissory note
|
|
|
(58,673
|
)
|
|
-
|
|
|
(58,673
|
)
|
|
-
|
|
|
(58,673
|
)
|
Gain
on debt restructuring
|
|
|
90,000
|
|
|
2,709
|
|
|
90,000
|
|
|
607,761
|
|
|
2,129,650
|
|
Other
income
|
|
|
-
|
|
|
22
|
|
|
-
|
|
|
805
|
|
|
906,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Other Income (Expenses)
|
|
|
(1,715,152
|
)
|
|
835,983
|
|
|
(1,516,013
|
)
|
|
2,308,830
|
|
|
5,167,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) from Continuing Operations
|
|
|
(3,266,004
|
)
|
|
675,210
|
|
|
(3,421,870
|
)
|
|
1,957,876
|
|
|
(1,689,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Discontinued Operations (net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gain
on disposal of MDI-P of $258,809 in 2007)
|
|
|
(60,501
|
)
|
|
(1,322,366
|
)
|
|
(355,305
|
)
|
|
(2,214,318
|
)
|
|
(22,420,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
(3,326,505
|
)
|
|
(647,156
|
)
|
|
(3,777,175
|
)
|
|
(256,442
|
)
|
|
(24,109,461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividend from beneficial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion
feature
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(692,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Applicable to Common Shareholders
|
|
$
|
(3,326,505
|
)
|
$
|
(647,156
|
)
|
$
|
(3,777,175
|
)
|
$
|
(256,442
|
)
|
$
|
(24,801,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted Income (Loss) per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) from Continuing Operations
|
|
$
|
(0.025
|
)
|
$
|
0.006
|
|
$
|
(0.028
|
)
|
$
|
0.018
|
|
|
|
|
Loss
from Discontinued Operations
|
|
$
|
(0.001
|
)
|
$
|
(0.011
|
)
|
$
|
(0.003
|
)
|
$
|
(0.020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(0.026
|
)
|
$
|
(0.005
|
)
|
$
|
(0.031
|
)
|
$
|
(0.002
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted Weighted-Average Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
129,802,551
|
|
|
117,922,148
|
|
|
122,214,575
|
|
|
112,382,132
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
From
Inception of the
Development Stage
|
|
|
|
For
the Nine Months
|
|
on
November 20, 1991
|
|
|
|
Ended
|
|
through
|
|
|
|
September
30,
|
|
September
|
|
|
|
2007
|
|
2006
|
|
30,
2007
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,777,175
|
)
|
$
|
(256,442
|
)
|
$
|
(24,109,461
|
)
|
Adjustments
to reconcile net loss to net cash used in
|
|
|
|
|
|
|
|
|
|
|
operating
activities
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency transaction loss
|
|
|
199,296
|
|
|
21,125
|
|
|
260,317
|
|
Gain
on debt restructuring
|
|
|
(90,000
|
)
|
|
(607,761
|
)
|
|
(2,129,650
|
)
|
Common
stock issued for services, expenses, litigation, and
|
|
|
|
|
|
|
|
|
|
|
research
and development
|
|
|
986,584
|
|
|
-
|
|
|
5,254,301
|
|
Commitment
for research and development obligation
|
|
|
-
|
|
|
1,712,745
|
|
|
2,378,445
|
|
Depreciation
|
|
|
10,438
|
|
|
13,928
|
|
|
137,610
|
|
Reduction
of escrow receivable from research and development
|
|
|
-
|
|
|
-
|
|
|
272,700
|
|
Unrealized
loss (gain) on financial instrument
|
|
|
1,520,482
|
|
|
(1,720,351
|
)
|
|
(3,344,317
|
)
|
Share-based
compensation for services
|
|
|
529,684
|
|
|
67,350
|
|
|
5,486,687
|
|
Interest
expense from amortization of disocunt on secured
|
|
|
|
|
|
|
|
|
|
|
promissory
note
|
|
|
58,673
|
|
|
-
|
|
|
58,673
|
|
Reduction
of legal costs
|
|
|
-
|
|
|
-
|
|
|
(130,000
|
)
|
Write-off
of subscriptions receivable
|
|
|
-
|
|
|
-
|
|
|
112,500
|
|
Impairment
loss on assets
|
|
|
-
|
|
|
-
|
|
|
9,709
|
|
Gain
on disposal of assets, net of losses
|
|
|
(258,809
|
)
|
|
-
|
|
|
(228,445
|
)
|
Write-off
of receivable
|
|
|
-
|
|
|
167,175
|
|
|
562,240
|
|
Note
payable issued for litigation
|
|
|
-
|
|
|
-
|
|
|
385,000
|
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
-
|
|
|
(225,000
|
)
|
|
(7,529
|
)
|
Prepaid
expenses
|
|
|
(66,031
|
)
|
|
-
|
|
|
(66,031
|
)
|
Accounts
payable
|
|
|
470,405
|
|
|
254,171
|
|
|
3,843,872
|
|
Accrued
expenses
|
|
|
134,166
|
|
|
22,366
|
|
|
300,607
|
|
Net
Cash Used in Operating Activities
|
|
|
(282,287
|
)
|
|
(550,694
|
)
|
|
(10,952,772
|
)
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from disposal of assets
|
|
|
310,000
|
|
|
-
|
|
|
310,000
|
|
Increase
in deposits
|
|
|
-
|
|
|
-
|
|
|
(51,100
|
)
|
Purchase
of property and equipment
|
|
|
(29,250
|
)
|
|
-
|
|
|
(250,584
|
)
|
Issuance
of note receivable
|
|
|
-
|
|
|
-
|
|
|
(313,170
|
)
|
Payments
received on note receivable
|
|
|
-
|
|
|
-
|
|
|
130,000
|
|
Net
Cash Provided by (Used in) Financing Activities
|
|
|
280,750
|
|
|
-
|
|
|
(174,854
|
)
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock, preferred stock, and warrants for cash
|
|
|
-
|
|
|
-
|
|
|
10,033,845
|
|
Contributed
equity
|
|
|
-
|
|
|
-
|
|
|
131,374
|
|
Proceeds
from notes payable and related warrants
|
|
|
250,000
|
|
|
-
|
|
|
1,586,613
|
|
Payments
on notes payable
|
|
|
-
|
|
|
-
|
|
|
(801,287
|
)
|
Proceeds
from convertible notes payable
|
|
|
-
|
|
|
-
|
|
|
571,702
|
|
Payments
on convertible notes payable
|
|
|
-
|
|
|
-
|
|
|
(98,500
|
)
|
Net
Cash Provided by Financing Activities
|
|
|
250,000
|
|
|
-
|
|
|
11,423,747
|
|
Net
Increase (Decrease) in Cash
|
|
|
248,463
|
|
|
(550,694
|
)
|
|
296,121
|
|
Cash
at Beginning of Period
|
|
|
47,658
|
|
|
654,438
|
|
|
-
|
|
Cash
at End of Period
|
|
|
296,121
|
|
|
103,744
|
|
|
296,121
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
Noncash
Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Conversion
of preferred stock to common stock
|
|
$
|
-
|
|
$
|
8,722
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
Notes
to Unaudited Condensed Consolidated Financial Statements
Note
1 -
Basis
of Presentation
Unaudited
Interim 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 accounting
principles generally accepted in the United States of America 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 and are of normal, recurring
nature. These financial statements should be read in conjunction with the
audited financial statements and notes thereto included for the year ended
December 31, 2006 contained in this proxy statement. The results of operations
for the nine months ended September 30, 2007, may not be indicative of the
results that may be expected for the year ending December 31, 2007.
Income
(Loss) per Common Share
Income
(loss) per share amounts are computed by dividing income (loss) applicable
to
common shareholders by the weighted-average number of common shares outstanding
during each period. Diluted income (loss) per share amounts are computed
assuming the issuance of common stock for potentially dilutive common stock
equivalents. All outstanding stock options, warrants, convertible notes,
convertible preferred stock, and common stock held in escrow are currently
antidilutive and have been excluded from the calculations of diluted income
(loss) per share at September 30, 2007 and 2006, as follows:
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
Convertible
notes
|
|
|
128,671
|
|
|
128,671
|
|
Convertible
preferred stock
|
|
|
57,856,000
|
|
|
62,018,018
|
|
Warrants
|
|
|
35,279,494
|
|
|
40,923,861
|
|
Compensation-based
stock options and warrants
|
|
|
41,883,000
|
|
|
19,983,000
|
|
Common
stock held in escrow
|
|
|
27,405,111
|
|
|
-
|
|
|
|
|
162,552,276
|
|
|
123,053,550
|
|
As
of the
date of these financial statements, the Company does not have enough authorized
shares to meet the commitments it has entered into. Management is currently
considering alternative solutions to this situation.
Recently
Issued Accounting Standards
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (SFAS
157). SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures
about
fair value measurements. Certain aspects of this statement are effective for
financial statements issued for fiscal years beginning after November 15, 2007.
Accordingly, the Company will adopt SFAS 157 in 2008 to the extent that it
is
effective. The Company is currently evaluating the impact of SFAS 157 on the
financial statements.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
Notes
to Unaudited Condensed Consolidated Financial
Statements
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities
-
including an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 allows
measurement at fair value of eligible financial assets and liabilities that
are
not otherwise measured at fair value. If the fair value option for an eligible
item is elected, unrealized gains and losses for that item shall be reported
in
current earnings at each subsequent reporting date. SFAS 159 also establishes
presentation and disclosure requirements designed to draw comparison between
the
different measurement attributes the Company elects for similar types of assets
and liabilities. This statement is effective for fiscal years beginning after
November 15, 2007. Accordingly, the Company will adopt SFAS 159 in 2008. The
Company is in the process of evaluating the application of the fair value option
and its effect on its financial position and results of operations.
Note
2 -
Going
Concern Considerations
The
Company’s recurring losses from development-stage activities in the current and
prior years raise substantial doubt about the Company’s ability to continue as a
going concern. As further described in the following footnotes, management
of
the Company is restructuring and reorganizing the Company to reposition the
Company’s future business and related operations. In February 2007, the Company
engaged a consulting firm to assist it in resolving its financial issues, to
obtain advice regarding any strategic alternatives that may be available to
it,
and to prevent the Company from losing all of its assets in bankruptcy. The
Company has discontinued its bio-pharmaceutical operations and has sold certain
assets of this business segment and has an agreement to sell the remainder
of
the assets of this business for cash and assumption of liabilities. The Company
has also obtained a secured term credit facility to provide interim financing
until the sale of assets closes, of which the Company has utilized $350,000.
The
Company has also entered into a share exchange agreement with an entity for
the
purpose of developing a business involving the production of bio-diesel. In
connection with this new business direction, the Company has entered into an
employment agreement for a new Chief Operating Officer, who will also become
the
Chief Executive Officer in the near future and has entered into other consulting
and service agreements in connection with the bio-diesel operation.
The
ability of the Company to continue as a going concern is dependent upon the
success of these new planned operations. 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.
Note
3 - Discontinued Operations
During
the nine months ended September 30, 2007, the Board of Directors determined
that
it could no longer fund the development of its two drug candidates and could
not
obtain additional funding for these drug candidates. The Board evaluated the
value of both of its developmental stage drug candidates. In March, 2007, the
Board determined that the best course of action was to discontinue further
development of these two drug candidates and sell these
technologies.
Eucodis
Agreement
On
March
8, 2007, the Company entered into a binding letter of intent with Eucodis
Pharmaceuticals Forschungs und Entwicklungs GmbH, an Austrian company
(Eucodis),
regarding their intent to proceed with the evaluation, negotiation, and
execution of a sale and purchase agreement related to certain assets of the
Company. On July 6, 2007, the Company entered into a sale and purchase agreement
(the
Asset Sale Agreement)
with
Eucodis, pursuant to which Eucodis agreed to acquire certain assets of the
Company in consideration for a cash payment and the assumption by Eucodis of
certain indebtedness of the Company. Pursuant to the Second Amendment to the
Asset Sale Agreement, the sale is scheduled to be consummated on or before
January 31, 2008 after the shareholders of the Company have approved the
transaction.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
Notes
to Unaudited Condensed Consolidated Financial
Statements
The
assets to be acquired by Eucodis pursuant to the Asset Sale Agreement include
all of the Company’s right, title and interest in all patents, patent
applications, United
States and foreign regulatory files and data,
pre-clinical study data and anecdotal clinical trial data concerning SaveCream.
In addition, at the closing of the sale, the Company will also assign to Eucodis
all of its right, title and interest in a co-development agreement with Eucodis,
dated as of July 29, 2006, related to the co-development and licensing of
SaveCream (including the intellectual property rights acquired in connection
with that development) and their rights under certain
other contracts relating to SaveCream.
The
purchase price to be paid by Eucodis for acquiring these assets will be
€4,007,534 (approximately $5,906,000 under exchange rates in effect as of
November 30, 2007), is comprised of (i) a cash payment of €1,538,462
(approximately $2,267,000 under exchange rates in effect as of November 30,
2007) less $200,000 received in March 2007 under the binding letter of intent,
and (ii) Eucodis’ assumption of an aggregate of €2,469,072 (approximately
$3,639,000 under exchange rates in effect as of November 30, 2007), constituting
specific indebtedness currently owed and other commitments to certain creditors
of the Company. In addition, at the closing of the sale, Eucodis will assume
(i)
all financial and other obligations of the Company under certain contracts
to be
assigned to Eucodis, and (ii) certain other costs incurred by the Company since
February 28, 2007 in connection with preserving the acquired assets for the
benefit of Eucodis until closing of the sale.
MDI-P
Agreement
The
Company also entertained various offers to purchase the Company’s rights to the
assets related to the MDI-P compound. On August 9, 2007, the Company sold the
MDI-P related assets for $310,000 in cash realizing a gain of $258,809. The
sale
included the patents, name, and other intellectual property, research results
and test data, production units and equipment, and other assets related to
this
technology. No liabilities were assumed by the purchaser in this transaction.
A
liability in the amount of $90,000 was extinguished due to the sale. This
liability was only payable when the Company received $1 million in cumulative
license revenue from the MDI-P compound in any human indication. Due to the
sale
of
MDI-P
for
less than $1 million, this liability was no longer owed and was written off.
Accounting
for Discontinued Operations
Pursuant
to accounting rules for discontinued operations, the Company has classified
all
revenue and expense for 2007 and prior periods related to the operations of
its
bio-pharmaceutical business as discontinued operations. For all periods prior
to
March 2007, the Company has reclassified all revenue and operating expenses
to
discontinued operations, except for estimated general corporate overhead,
because all of its operations related to the discontinued technologies. The
assets being sold and the liabilities being assumed in the planned sales have
been segregated in the accompanying balance sheets and are characterized as
Assets Held for Sale and Current Liabilities Associated with Assets Held for
Sale, respectively. Revenues of $200,000 and $800,000 for the nine months ended
September 30, 2007 and 2006, respectively, are included in the loss from
discontinued operations. The Company has recorded a gain from the sale of MDI-P
of $258,809 during the three and nine months ended September 30, 2007, but
has
not recorded any gain or loss at September 30, 2007 associated with the planned
sale of the SaveCream assets. The following table presents the main classes
of
assets and liabilities associated with the discontinued business.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
Notes
to Unaudited Condensed Consolidated Financial Statements
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
Property
and equipment, net of accumulated depreciation
|
|
$
|
-
|
|
$
|
61,460
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
507,344
|
|
$
|
472,993
|
|
Research
and development obligation
|
|
|
2,630,515
|
|
|
2,441,445
|
|
|
|
$
|
3,137,859
|
|
$
|
2,914,438
|
|
Note
4 - Global Clean Energy Holdings, LLC
Having
agreed to discontinue its bio-pharmaceutical operations and dispose of the
related assets, the Company considered entering into a number of other
businesses that would enable it to be able to provide the shareholders with
future value. The Company’s Board of Directors decided to develop a business to
produce and sell seed oils, including seed oils harvested from the planting
and
cultivation of the Jatropha
curcas
plant,
for the purpose of providing feedstock oil intended for the generation of methyl
ester, otherwise known as bio-diesel (the “Jatropha Business”). The Company’s
Board concluded that there was a significant opportunity to participate in
the
rapidly growing biofuels industry, which previously was mainly driven by high
priced, edible oil-based feedstock. In order to commence its new Jatropha
Business, effective September 1, 2007, the Company (i) hired Richard Palmer,
an
energy consultant, and a member of Global Clean Energy Holdings LLC (“Global”)
to act as its new President, Chief Operating Officer and future Chief Executive
Officer, (ii) engaged Mobius Risk Group, LLC, a Texas company engaged in
providing energy risk advisory services, to provide it with consulting services
related to the development of the Jatropha Business, and (iii) acquired certain
trade secrets, know-how, business plans, term sheets, business relationships,
and other information relating to the cultivation and production of seed oil
from the Jatropha plant for the production of bio-diesel from Global.
Share
Exchange Agreement
The
Company entered into a share exchange agreement (the Global Agreement) pursuant
to which the Company acquired all of the outstanding ownership interests in
Global Clean Energy Holdings, LLC, a Delaware limited liability company (Global)
on September 7, 2007 from Mobius Risk Group, LLC (Mobius) and from Richard
Palmer (Mr. Palmer). Global is an entity that has certain trade secrets,
know-how, business plans, term sheets, business relationships, and other
information relating to the start-up of a business related to the cultivation
and production of seed oil from the seed of the Jatropha plant, for the purpose
of providing feedstock oil intended for the production of bio-diesel. Under
the
Global Agreement, the Company issued 63,945,257 shares of its common stock
for
all of the issued and outstanding membership interests of Global. Of the
63,945,257 shares issued under the Global Agreement, 36,540,146 shares were
issued and delivered at the closing of the Global Agreement without any
restrictions. The remaining 27,405,111 shares of common stock were, however,
held in escrow by the Company, subject to forfeiture in the event that certain
specified performance and market-related milestones are not achieved. Upon
the
satisfaction, from time to time, of the operational and market capitalization
condition milestones, the restricted shares will be released by the Company
from
escrow and delivered to the buyers in accordance with the terms and conditions
of the Global Agreement. In the event that all of the milestone conditions
are
not achieved, the restricted shares that have not been released from escrow
will
be cancelled by the Company and thereafter cease to be outstanding.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
Notes
to Unaudited Condensed Consolidated Financial
Statements
Prior
to
the exchange of common stock, Global had no tangible assets or operations,
but
rather had certain trade secrets, know-how, business plans, term sheets,
business relationships, and other information relating to the start-up of a
business related to the cultivation and production of seed oil from the seed
of
the Jatropha plant. Accordingly, Global was not considered a business in
accordance with FASB Emerging Issues Task Force Issue 98-3, Determining
Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or
of a
Business.
With the
exchange of the 36,540,146 shares of common stock, the Company acquired the
trade secrets, know-how, business plans, term sheets, business relationships,
and other information relating to the start-up of this new business.
Accordingly, the Company has recorded research and development expense of
$986,584, or $0.027 per share, for the value of the shares issued. The closing
price of the Company’s common stock on September 7, 2007 was $0.027 per
share.
Of
the
restricted shares issued under the Global Agreement, 13,702,556 shares will
be
released from escrow if and when certain land lease agreements suitable for
the
planting and cultivation of Jatropha
curcas are
executed and certain operation management agreements with a third-party land
and
operations management company with respect to the management, planting and
cultivation of Jatropha
curcas
are
executed. These restricted shares will be held in escrow subject to the
satisfaction of these milestones, at which time such shares will be released
from escrow and delivered to the sellers. The Company has accounted for these
potentially issuable shares as share-based compensation under SFAS No. 123R,
Share-Based
Compensation, for
shares of common stock that contain a performance or service condition. The
Company has determined the value of these shares to be $369,969, or $0.027
per
share, and is amortizing this compensation over four months, the period of
time
in which the satisfaction of the operational milestones is expected to be
fulfilled that will result in the release of the 13,702,556 shares from escrow.
For accounting purposes, shares held in escrow are not considered outstanding,
but are deemed to be potential dilutive shares for loss per share calculations.
During the three and nine months ended September 30, 2007, the Company
recognized $70,911 of share-based compensation related to these
shares.
The
remaining 13,702,555 restricted shares issued under the Global Agreement will
be
released from escrow upon satisfaction of certain market capitalization levels
(based on the number of outstanding shares at the average closing price of
the
previous sixty trading days) and average daily trading volume (for the previous
sixty trading days). These potentially issuable shares will be released as
follows:
a. |
4,567,518
shares will be released upon the achievement of $6 million market
capitalization and 75,000 shares of average daily trading
volume,
|
b. |
4,567,518
shares will be released upon the achievement of $12 million market
capitalization and 100,000 shares of average daily trading volume,
and
|
c. |
4,567,519
shares will be released upon the achievement of $20 million market
capitalization and 125,000 shares of average daily trading
volume.
|
These
restricted shares will be held in escrow subject to the satisfaction of these
milestones, at which time such shares will be released from escrow and delivered
to the sellers. As of November 30, 2007, a total of 4,567,518 shares had been
released from escrow and delivered to the sellers. The Company has accounted
for
these potentially issuable shares as share-based compensation under SFAS No.
123R, for shares of common stock that contain a market condition. The Company
has determined the value of these shares to be $369,969, or $0.027 per share,
and is amortizing this compensation over the periods of time in which the
satisfaction of each of the three market capitalization and trading volume
milestones is expected to be fulfilled that will result in the release of the
13,702,555 shares from escrow. The Company currently estimates these time
periods to be approximately three months for the first tranche of stock and
two
years for the second and third tranches. For accounting purposes, shares held
in
escrow are not considered outstanding, but are deemed to be potential dilutive
shares for loss per share calculations. During the three and nine months ended
September 30, 2007, the Company recognized $41,474 of share-based compensation
related to these shares.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
Notes
to Unaudited Condensed Consolidated Financial Statements
Mobius
Consulting Agreement
Concurrent
with the execution of the Global Agreement, the Company entered into a
consulting agreement with Mobius pursuant to which Mobius has agreed to provide
consulting services to the Company in connection with the Company’s new Jatropha
bio-diesel feedstock business. The Company engaged Mobius as a consultant to
obtain Mobius’ experience and expertise in the feedstock/bio-diesel market to
assist the Company and Mr. Palmer in developing this new line of operations
for
the Company. Mobius has agreed to provide the following services to the Company:
(i) manage and supervise a contemplated research and development program
contracted by the Company and conducted by the University of Texas Pan American
regarding the location, characterization, and optimal economic propagation
of
the Jatropha plant;
and (ii) assist with the management and supervision of the planning,
construction, and start-up of plant nurseries and seed production plantations
in
Mexico, the Caribbean or Central America.
The
term
of the agreement is twelve (12) months, or until the scope of work under the
agreement has been completed. Mobius will supervise the hiring of certain staff
to serve in management and operations roles of the Company, or hire such persons
to provide similar services as independent contractors. Mobius’ compensation for
the services provided under the agreement is a monthly retainer of $45,000.
The
Company will also reimburse Mobius for reasonable business expenses incurred
in
connection with the services provided. The agreement contains customary
confidentiality provisions with respect to any confidential information
disclosed to Mobius or which Mobius receives while providing services under
the
agreement. The Company has paid $45,000 during the three and nine months ended
September 30, 2007, of which $15,750 was expensed as compensation to Mobius
and
$29,250 was capitalized as plantation development costs pursuant to AICPA
Statement of Position 85-3, Accounting
by Agricultural Producers and Agricultural Cooperatives.
Palmer
Employment Agreement
Effective
September 1, 2007, the Company entered into an employment agreement with Richard
Palmer pursuant to which the Company hired Mr. Palmer to serve as its President
and Chief Operating Officer. Mr. Palmer was also appointed to serve as director
on the Company’s Board of Directors to serve until the next election of
directors by the Company’s shareholders. Upon the resignation of the current
Chief Executive Officer, Mr. Palmer also will become the Company’s Chief
Executive Officer. The Company hired Mr. Palmer to take advantage of his
experience and expertise in the feedstock/bio-diesel space, and in particular,
in the Jatropha bio-diesel and feedstock business. The term of employment
commenced September 1, 2007 and ends on September 30, 2010, unless terminated
in
accordance with the provisions of the agreement.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
Notes
to Unaudited Condensed Consolidated Financial
Statements
Mr.
Palmer’s compensation package includes a base salary of $250,000, subject to
annual increases based on changes in the Consumer Price Index, and a bonus
payment based on Mr. Palmer’s satisfaction of certain performance criteria
established by the compensation committee of the Company’s Board of Directors.
The bonus amount in any fiscal year will not exceed 100% of Mr. Palmer’s base
salary. Mr. Palmer is eligible to participate in the Company’s employee stock
option plan and other welfare plans. The Company granted Mr. Palmer an incentive
option to purchase up to 12,000,000 shares of its common stock at an exercise
price of $0.03 (the trading price on the date the agreement was signed). The
options vest upon the Company’s achievement of certain market capitalization
goals. When the Company’s market capitalization reaches $75 million, the
incentive option will vest with respect to 6,000,000 shares. When the Company’s
market capitalization reaches $120 million, the incentive option will vest
with
respect to the remaining 6,000,000 shares. The option expires five years after
grant.
If
Mr.
Palmer’s employment is terminated by the Company without “cause” or by Mr.
Palmer for “good reason”, he will be entitled to severance payments including
100% of his then-current annual base salary, plus 50% of the target bonus for
the fiscal year in which his employment is terminated, and the incentive option
to purchase 12,000,000 shares of common stock shall vest following termination
of Mr. Palmer’s employment.
The
Company has accounted for the options under Mr. Palmer’s employment agreement as
share-based compensation under SFAS No. 123R, for options to purchase common
stock that contain a market condition. The Company valued these options at
$264,000 using the Black-Scholes pricing model. The weighted average fair value
of the stock options was $0.022 per share. The weighted-average assumptions
used
for the calculation of fair value were risk-free rate of 4.21%, volatility
of
116%, expected life of five years, and dividend yield of zero. The Company
is
amortizing this compensation over the period of time in which the satisfaction
of each of the two market capitalization milestones is expected to be fulfilled
that will result in the vesting of these stock options. The Company currently
estimates these time periods to be approximately three years. During the three
and nine months ended September 30, 2007, the Company recognized $7,652 of
share-based compensation related to these options.
Note
5 - Loan Agreement
In
order
to fund ongoing operations pending closing of the sale to Eucodis, the Company
entered into the Loan Agreement with, and issued a promissory note in favor
of,
with Mercator Momentum Fund III, L.P. (Mercator).
Pursuant to the loan agreement, Mercator made available to the Company a secured
term credit facility in principal amount of $1,000,000. The promissory note
initially was due and payable on December 14, 2007. As of December 13, 2007,
the
Company owed Mercator $250,000 under the loan. Mercator has agreed to extend
the
maturity date of the $250,000 to February 21, 2008. The foregoing loan is
secured by a lien on all of our assets. The lender and its affiliates currently
own all of the issued and outstanding shares of Series A Convertible Preferred
Stock of the Company.
Under
the
loan agreement, interest is payable on the loan at a rate of 12% per annum,
payable monthly. In connection with the closing of the loan, the Company agreed
to (i)
the
cancellation
of certain warrants
to purchase 27,452,973 shares of common stock at $0.1967 per share previously
issued to the lender and certain of its affiliates and (ii) the issuance of
new
warrants to purchase 27,452,973 shares of common stock at $0.01 per share.
The
new warrants permit the cash-less exercise of the warrants and expire on
September 30, 2013.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
Notes
to Unaudited Condensed Consolidated Financial
Statements
The
warrants that were cancelled were being accounted for as a liability in the
accompanying financial statements because the Company was unable to guarantee
that there would be enough shares of common stock to settle other “freestanding
instruments.” The carrying value of the liability related to these warrants on
the date of cancellation was $62,205. For the same reasons as described above,
the new warrants that were issued in connection with this loan agreement are
also characterized as a liability in these financial statements. The fair value
of the new warrants was determined to be $691,815, or $0.252 per share, using
the Black-Scholes pricing model. The
weighted-average assumptions used for the calculation of fair value were
risk-free rate of 4.10%, volatility of 123%, expected life of approximately
six
years, and dividend yield of zero. On
the
date of issuance, the fair value of the new warrants has been recorded as (i)
a
discount to the note of $250,000 and (ii) a charge of $441,815 to “unrealized
gain (loss) on financial instrument” in the accompanying Condensed Consolidated
Statement of Operations. As of September 30, 2007, these and certain other
warrants being accounted for as a liability were revalued and are carried at
$2,065,470 in the accompanying balance sheet. The fair value of these warrants
at September 30, 2007 was determined using the Black-Scholes pricing model.
The
weighted-average assumptions used for the calculation of fair value at September
30, 2007 were risk-free rate of 4.18%, volatility of 143%, expected life of
approximately 4.7 years, and dividend yield of zero. For
the
three and nine months ended September 30, 2007, the Company has recorded an
unrealized loss on financial instrument of $1,735,102 and $1,520,482,
respectively. For the comparative three and nine months ended September 30,
2006, the Company recorded an unrealized gain on financial instrument of
$840,271 and $1,720,351, respectively. The discount to the note is being
amortized over the term of the loan agreement from September
7, 2007 to December 14, 2007, and recorded as “interest expense from
amortization of discount on secured promissory note.” For the three and nine
months ended September 30, 2007, the Company amortized $58,673 of the discount.
At
September 30, 2007, this loan is carried in the accompanying balance sheet
as
follows:
Secured
promissory note
|
|
$
|
250,000
|
|
Less
unamortized discount
|
|
|
(191,327
|
)
|
Balance
at September 30, 2007
|
|
$
|
58,673
|
|
Note
6 - Conversion
of Series A Preferred Stock
On
September 17, 2007, the preferred stockholders gave notice to the Company and
converted 5,492 shares of Series A Preferred Stock into 10,983,521 shares of
common stock. For reasons further discussed under the caption “Release and
Settlement Agreement” in Note 10 to the Condensed Consolidated Unaudited
Financial Statements, the conversion price was $0.05 per share.
Note
7 - Consulting Agreements
In
February 2007, the Company engaged the Emmes Group, a consulting firm, to assist
it in resolving its financial issues, to obtain advice regarding any strategic
alternatives that may be available to it, and to prevent the Company from losing
all of its assets in bankruptcy. During the past several months, the Company
has
explored a number of transactions that would (i) prevent the Company’s
shareholders from losing their entire investment in the Company and (ii) enable
the Company to repay some of its currently outstanding debts and liabilities.
The consulting agreement has a term of one year. As compensation for its
services, the consultant is to receive $15,000 per month plus a warrant to
purchase 5,000,000 shares of the Company’s common stock. The warrant has an
exercise price of $0.03 per share, contains a cash-less exercise provision,
and
expires ten years from date of issue. The Company valued this warrant at
$146,000 using the Black-Scholes pricing model. The weighted average fair value
of the stock options was $0.0292 per share. The weighted-average assumptions
used for the calculation of fair value were risk-free rate of 4.84%, volatility
of 134%, expected life of ten years, and dividend yield of zero. The fair value
of the warrant was expensed as share-based compensation on the date of issue.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
Notes
to Unaudited Condensed Consolidated Financial
Statements
In
February 2007, the Company entered into another consulting agreement with an
individual to assist it in the preparation of financial statements and reporting
to the SEC. The consulting agreement had a term of one year. As compensation
for
its services, the consultant was to receive $10,000 per month plus a warrant
to
purchase 5,000,000 shares of the Company’s common stock. The warrant has an
exercise price of $0.03 per share, contains a cash-less exercise provision,
and
expires ten years from date of issue. The
Company valued this warrant at $146,000 using the Black-Scholes pricing model.
The weighted average fair value of the stock options was $0.0292 per share.
The
weighted-average assumptions used for the calculation of fair value were
risk-free rate of 4.84%, volatility of 134%, expected life of ten years, and
dividend yield of zero. The fair value of the warrant was expensed as
share-based compensation on the date of issue. This consulting agreement was
terminated in May 2007. Since the consulting agreement was terminated prior
to
its expiration date, the Company’s obligations under the consulting agreement,
if any, for the period after the termination date are unclear. No demand for
any
additional compensation has been made against the Company under the consulting
agreement.
On
September 14, 2007, the Company entered into a one-year agreement with a
consultant for investor relations services. Under the agreement, the Company
agreed to pay total compensation of $105,000 over the one-year term. As
additional compensation, the Company issued 4,357,298 shares of restricted
common stock to the consultant and granted piggyback registration rights for
the
stock to be registered in connection with the Company’s next registration of
securities. The issuance of the common stock was expensed as share-based
compensation in the amount of $117,647, or $0.027 per share on the date of
the
agreement.
Note
8 - Stock Options and Warrants
Compensation-Based
Stock Warrants and Options
The
Company has two incentive stock option plans wherein 24,000,000 shares of
the Company’s common stock are reserved for issuance thereunder.
As
described in Notes 4 and 7 to the condensed consolidated financial statements,
the Company issued compensation-based warrants to purchase 10,000,000 shares
of
common stock on February 1, 2007 to two consultants and options to purchase
12,000,000 shares of common stock on September 7, 2007 under an employment
agreement. The warrants and option have an exercise price of $0.03 per share,
and expire ten and five years, respectively, from date of issue. During the
nine
months ended September 30, 2006, the Company granted a stock option to a former
officer and director. The option is for 500,000 shares exercisable at $0.25
per share through December 31, 2010. The option was fully vested on January
1, 2006. No income tax benefit has been recognized for share-based compensation
arrangements and no compensation cost has been capitalized in the balance sheet.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
Notes
to Unaudited Condensed Consolidated Financial Statements
A
summary
of the status of the compensation-based warrants and options outstanding
at
September 30, 2007, and changes during the nine months then ended is presented
in the following table:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
Shares
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
Under
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
|
Option
|
|
Price
|
|
Life
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2007
|
|
|
19,883,000
|
|
$
|
0.05
|
|
|
|
|
|
|
|
Granted
|
|
|
22,000,000
|
|
|
0.03
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
41,883,000
|
|
$
|
0.04
|
|
|
6.3
years
|
|
$
|
1,927,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 30, 2007
|
|
|
29,883,000
|
|
$
|
0.04
|
|
|
6.9
years
|
|
$
|
1,387,500
|
|
At
September 30, 2007, 80,000 of the options outstanding have no stated contractual
life. The fair value of each stock option granted or compensation-based warrant
issued to an employee or consultant is estimated on the date of grant or issue
using the Black-Scholes pricing model. The weighted average fair value of
compensation-based stock warrants issued and stock options granted during the
nine months ended September 30, 2007 was $0.0253 per share. The weighted-average
assumptions used for compensation-based warrants issued and stock options
granted during the nine months ended September 30, 2007 were risk-free rate
of
4.50%, volatility of 124%, expected life of 7.3 years, and dividend yield of
zero. The weighted average fair value of stock options granted to the employee
during the nine months ended September 30, 2006 was $0.13 per share. The
weighted-average assumptions used for options granted during the nine months
ended September 30, 2006 were risk-free rate of 4.3%, volatility of 152%,
expected life of five years, and dividend yield of zero.
The
assumptions employed in the Black-Scholes option pricing model include the
following. The expected life of stock options represents the period of time
that
the stock options granted are expected to be outstanding based on historical
exercise trends. The expected volatility is based on the historical price
volatility of our common stock. The risk-free interest rate represents the
U.S.
Treasury constant maturities rate for the expected life of the related stock
warrants. The dividend yield represents our anticipated cash dividend over
the
expected life of the stock warrants.
The
Company recognized $151,473 and $417,152 of share-based compensation for
compensation-based warrants issued, stock options granted, and common stock
held
in escrow during the three and nine months ended September 30, 2007,
respectively. The Company recognized $0 and $67,350 of share-based compensation
for options granted during the three and nine months ended September 30, 2006.
As of September 30, 2007, there was $883,900 of unrecognized compensation cost
related to stock options and common stock held in escrow that will be recognized
over a weighted average period of approximately 0.75 years.
Other
Stock Warrants
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
Notes
to Unaudited Condensed Consolidated Financial Statements
A
summary
of the status of the other warrants outstanding at September 30, 2007,
and
changes during the nine months then ended is presented in the following
table:
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
Average
|
|
|
|
Under
|
|
Exercise
|
|
|
|
Warrant
|
|
Price
|
|
Outstanding
at January 1, 2007
|
|
|
38,973,861
|
|
$
|
0.19
|
|
Issued
|
|
|
27,452,973
|
|
|
0.01
|
|
Cancelled
|
|
|
(27,452,973
|
)
|
|
0.20
|
|
Expired
|
|
|
(3,694,367
|
)
|
|
0.12
|
|
Outstanding
at September 30, 2007
|
|
|
35,279,494
|
|
$
|
0.05
|
|
Note
9 - Release
and Settlement Agreement with Chief Executive Officer
On
August
31, 2007, the Company entered into a Settlement and Release Agreement with
Judy
Robinett, the Company’s current Chief Executive Officer, pursuant to which Ms.
Robinett agreed to continue to act as the Company’s transitional Chief Executive
Officer. Under the agreement, Ms. Robinett agreed to, among other things, assist
the Company in the sale of its legacy assets, complete the preparation and
filing of the delinquent reports to the Securities and Exchange Commission
(the
SEC)
that
related to the periods prior to the appointment of Mr. Palmer, and provide
certain shareholder and creditor related services. Upon the completion of the
foregoing matters, in particular the filing of the delinquent reports to the
SEC, Ms. Robinett will resign, and Mr. Palmer will thereafter assume the office
of Chief Executive Officer. Under the agreement, Ms. Robinett agreed to
(i) forgive her potential right to receive $1,851,805 in accrued and unpaid
compensation, un-accrued and pro-rata bonuses, and severance pay and (ii) the
cancellation of stock options to purchase 14,000,000 shares of common stock
at
an exercise price of $0.02 per share. In consideration for her services, the
forgiveness of the foregoing cash payments, the cancellation of the foregoing
stock options, and settlement of other issues, the Company agreed to (a) pay
Ms.
Robinett $500,000 upon the receipt of the Eucodis cash payment under the
agreement to sell the SaveCream Assets, (b) pay Ms. Robinett a commission of
fifteen percent of the gross proceeds received by the Company from the sale
of
the MDI-P asset, (c) pay Ms. Robinett $20,833 in monthly salary for serving
as
transitional Chief Executive Officer of the Company during the period from
April
1, 2007, until the completion of the transitional period and the issuance of
the
Company’s delinquent SEC reports, and (d) permit Ms. Robinett to retain some of
her previously granted incentive stock options in such an amount allowing her
to
purchase up to two million shares of common stock, which options shall continue
to have the same terms and conditions as currently in existence, including
an
option price of $0.01 per share and expiration date of December 31, 2112. Upon
the fulfillment of all obligations under this agreement, currently anticipated
to occur with the closing of the sale of the SaveCream assets to Eucodis, the
Company will record the settlement of amounts owing to Ms. Robinett and record
a
gain on the settlement in the approximate amount of $400,000. At that date,
the
Company will also record the cancellation of the options currently held by
Ms.
Robinett to purchase 14,000,000 shares of common stock.
Note
10 - Subsequent
Events
LODEMO
Agreement
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
Notes
to Unaudited Condensed Consolidated Financial
Statements
On
October 15, 2007, the Company entered into a service agreement with Corporativo
LODEMO S.A DE CV, a Mexican corporation (the LODEMO Group).
The
Company has decided to initiate its Jatropha Business in Mexico, and has already
identified parcels of land in Mexico to plant and cultivate Jatropha. In order
to obtain all of the logistical and other services needed to operate a
large-scale farming and transportation business in Mexico, the Company entered
into the service agreement with the LODEMO Group, a privately held Mexican
company with substantial land holdings, significant experience in diesel
distribution and sales, liquids transportation, logistics, land development
and
agriculture.
Under
the
supervision of the Company’s management and Mobius, the LODEMO Group will be
responsible for the establishment, development, and day-to-day operations of
the
Jatropha Business in Mexico, including the extraction of the oil from the
Jatropha seeds, the delivery of the Jatropha oil to buyers, the purchase or
lease of land in Mexico, the establishment and operation of one or more Jatropha
nurseries, the clearing, planting and cultivation of the Jatropha fields, the
harvesting of the Jatropha seeds, the operation of the Company’s oil extraction
facilities, and the logistics associated with the foregoing. Although the LODEMO
Group will be responsible for identifying and acquiring the farmland, ownership
of the farmland or any lease thereto will be held directly by the Company or
by
a Mexican subsidiary of the Company. The LODEMO Group will be responsible for
hiring and managing all necessary employees. All direct and budgeted costs
of
the Jatropha Business in Mexico will be borne by the Company.
The
LODEMO Group will provide the foregoing and other necessary services for a
fee
primarily based on the number of hectares of Jatropha under cultivation. The
Company has agreed to pay the LODEMO Group a fixed fee per year of $60 per
hectare of land planted and maintained with minimum payments based on 10,000
hectares of developed land, to follow a planned planting schedule. The Agreement
has a 20-year term but may be terminated earlier by the Company under certain
circumstances. The LODEMO Group also will potentially receive incentive
compensation for controlling costs below the annual budget established by the
parties, production incentives for increase yield and a sales commission for
biomass sales.
Release
and Settlement Agreement
Mercator
Momentum Fund, LP; Monarch Pointe Fund, Ltd.; and Mercator Momentum Fund III,
LP, each a private investment entity (collectively, the MAG Funds) purchased
shares of the Company’s Series A Preferred Convertible Stock in 2004 and in
2005. In connection with the 2005 investment, the Company agreed to eliminate
the conversion price floor of the Series A Stock. The Company failed to file
an
amendment to the Series A Stock Certificate of Designations of Preferences
and
Rights for the Series A Stock that would have eliminated the conversion price
floor. Accordingly, in connection with an intended conversion of some of their
Series A Stock in September 2007, the MAG Funds were required to convert Series
A Stock at a conversion price higher than the price that would have applied
if
the Amendment had been filed as agreed.
On
October 22, 2007, the Company executed and entered into a Release and Settlement
Agreement (the Release
Agreement),
with
the MAG Funds to settle all losses and damages that MAG may have suffered,
and
may hereafter suffer, as result of the Company’s failure to file the amendment
to the Series A Stock Certificate of Designations of Preferences and Rights
for
the Series A Stock. Pursuant to the Release Agreement, the Company issued to
the
MAG Funds a ten-year warrant to acquire up to 17,000,000 shares of the Company’s
common stock at an exercise price of $0.01 per share expiring October 17, 2017.
The warrant contains a cash-less exercise provision, and the initial warrant
price is subject to adjustments in connection with (i) the Company’s issuance of
dividends in shares of Common Stock, or shares of Common Stock or other
securities convertible into shares of Common Stock without consideration, (ii)
any cash paid or payable to the holders of Common Stock other than as a regular
cash dividend, and (ii) future stock splits, reverse stock splits, mergers
or
reorganizations, and similar changes affecting common stockholders.
MEDICAL
DISCOVERIES, INC. AND SUBSIDIARIES
(A
Development Stage Company)
Notes
to Unaudited Condensed Consolidated Financial
Statements
The
warrant issued to the MAG Funds contain beneficial ownership limitations, which
preclude the MAG Funds from exercising its warrant if, as a result of such
conversion or exercise, the MAG Funds would own beneficially more than 9.99%
of
the Company’s outstanding common stock then outstanding.
Pursuant
to the Release Agreement, the MAG Funds released the Company from any and all
claims, past, present or future, relating to the losses or the Company’s failure
to file the amendment. In addition, MAG has agreed not to sue the Company in
connection with the losses or the Company’s failure to file the
Amendment.
The
Company is currently evaluating the accounting significance of this release
and
settlement agreement.
Issuance
of Series B Preferred Stock
In
order
to obtain additional working capital, on November 6, 2007, the Company entered
into a Securities Purchase Agreement with two accredited investors, pursuant
to
which the Company sold a total of 13,000 shares of our newly authorized Series
B
Convertible Preferred Stock (“Series B Shares”) for an aggregate purchase price
of $1,300,000. Each share of the Series B Shares has a stated value of $100.
The
Series B Shares may, at the option of each holder, be converted at any time
or
from time to time into shares of our common stock at the conversion price then
in effect. The number of shares into which one Series B Share shall be
convertible is determined by dividing $100 per share by the conversion price
then in effect. The initial conversion price per share for the Series B Shares
is $0.11, which is subject to appropriate adjustment for certain events,
including stock splits, stock dividends, combinations, or other
recapitalizations affecting the Series B Shares.
Each
holder of Series B Shares is entitled to the number of votes equal to the number
of shares of our common stock into which the Series B Shares could be converted
on the record date for such vote, and shall have voting rights and powers equal
to the voting rights and powers of the holders of the Company’s common stock. In
the event of our dissolution or winding up, each share of the Series B Shares
is
entitled to be paid an amount equal to $100 (plus any declared and unpaid
dividends) out of the assets of the Company then available for distribution
to
shareholders; subject, however, to the senior rights of the holders of Series
A
Stock.
No
dividends are required to be paid to holders of the Series B Shares. However,
the Company may not declare, pay or set aside any dividends on shares of any
class or series of our capital stock (other than dividends on shares of our
common stock payable in shares of common stock) unless the holders of the Series
B Shares shall first receive, or simultaneously receive, an equal dividend.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States require management to make estimates
and
assumptions that affect the reported assets, liabilities, sales and expenses
in
the accompanying financial statements. Critical accounting policies are those
that require the most subjective and complex judgments, often employing the
use
of estimates about the effect of matters that are inherently uncertain. We
are a
development stage company as defined by the Financial Accounting Standards
Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 7,
“Accounting and Reporting by Development Stage Enterprises.” Accordingly, all
losses accumulated since inception have been considered as part of our
development stage activities. Certain other critical accounting policies,
including the assumptions and judgments underlying them, are disclosed in the
Note A to the Consolidated Financial Statements included in this proxy
statement. However, we do not believe that there are any alternative methods
of
accounting for our operations that would have a material affect on our financial
statements.
Results
Of Operations
Twelve
Months Ended December 31, 2006 Compared to Twelve Months Ended December 31,
2005
Revenues
and Gross Profit.
We are
a development stage company that does not sell any products. Accordingly, other
than an $800,000 up-front licensing fee we received during the year ended
December 31, 2006 under our co-licensing and development agreement with Eucodis,
we did not realize any revenues during 2006. We entered into the co-licensing
and development agreement with Eucodis in July 2006. We did not recognize any
revenue for the comparable period in 2005.
Operating
Expenses and Operating Loss.
We
incurred $2,026,907 in research and development expenses for the year ended
December 31, 2006, of which $1,712,745 is related to our acquisition of the
patents and patent rights relating to SaveCream. We incurred $2,172,461 in
research and development expenses for the same period of 2005, of which $665,700
relates to our acquisition of the patents and patent rights relating to
SaveCream. Our general and administrative expenses were $1,986,052 during the
year ended December 31, 2006, as compared to $1,878,027 during the year ended
December 31, 2005. The increase in general and administrative expenses in 2006
was the result of the additional activities related to our SaveCream product
that we acquired during the 2005 fiscal year. While our total expenses for
both
2005 and 2006 were substantially similar, because of the $800,000 licensing
fee
payment we received in 2006, our operating loss decreased to $3,212,959 for
the
year ended December 31, 2006 as compared to the operating loss of $4,050,488
for
the same period of 2005.
Other
Income/ Expense and Net Loss.
We
recorded $2,564,608 as unrealized gain on financial instrument to record the
accounting of warrants resulting from the issuance of the Series A Convertible
Preferred Stock entered into in October 2004 and March 2005, as compared with
an
unrealized gain of $2,300,191 for the comparable period in 2005. This non-cash
income recognition is the result of the periodic revaluation of certain warrants
classified as a liability in the financial statements.
Certain
of our liabilities are denominated in euros. As a result of the decrease in
the
value of the U.S. dollar compared to the euro, during the year ended December
31, 2006 we realized a foreign currency loss of $117,501; in 2005, we realized
a
foreign currency exchange gain of $56,480.
Because
of our limited financial resources and our large unpaid balance of current
liabilities, we periodically have attempted to compromise certain outstanding
liabilities through negotiated settlements with our creditors. In addition,
certain of our liabilities have been extinguished following expiration of the
applicable statute of limitations collection periods. As a result of the
extinguishment of certain of our liabilities at less than the recorded amount
of
those liabilities, as well as our write-off of certain liabilities and
commitments due to expiration of the statute of limitations, we recorded
$607,761 in gain on forgiveness of indebtedness in 2006 and $196,353 of such
gain in 2005.
Despite
our $3,212,959 operating loss, as a result of non-cash income recognized on
the
change in value of financial instruments and the financial statement gain
recognized from the extinguishment of debts, our net loss applicable to common
shareholders for the year ended 2006 was only $183,771 compared to a net loss
applicable to common shareholders of $1,486,781 in fiscal 2005.
Nine
Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
2006
As
discussed previously, during March 2007, the Board of Directors determined
to
discontinue our prior bio-pharmaceutical operations. Pursuant to accounting
rules for discontinued operations, we have classified all revenue and expense
for 2007 and prior periods related to the operations of our bio-pharmaceutical
business as discontinued operations. Since all of our prior operations related
to the bio-pharmaceutical business, all of our revenue and expense, with the
exception of estimated general corporate overhead, has been reclassified into
“Loss from Discontinued Operations” in the accompanying Condensed Consolidated
Statements of Operations for all periods presented.
Revenues
and Gross Profit.
We are
a development stage company and have not had significant revenues from our
operations or reached the level of our planned operations. We have discontinued
our prior bio-pharmaceutical operations during March 2007. In September 2007,
we
commenced operations in our new Jatropha business, but we are still in the
pre-development agricultural stage of our operations and, therefore, do not
anticipate generating significant revenues from the sale of bio-fuel products
until 2009. We are, however, attempting to generate operating cash in 2008
from
the forward sale of carbon credits and possibly from future oil delivery
contracts. During the nine months ended September 31, 2007 and 2006, we
recognized revenue of $200,000 and $800,000, respectively, related to our
discontinued bio-pharmaceutical business, which
revenue has been netted against expenses of discontinued operations and is
included in Loss from Discontinued Operations in the accompanying Condensed
Consolidated Statement of Operations.
Operating
Expenses.
Our
general and administrative expenses related to continuing operations for the
three and nine months ended September 30, 2007 were $564,268 and $919,273
compared to $160,773 and $350,954 for the three and nine months ended September
30, 2006. In 2007, general and administrative expense includes general corporate
overhead of $326,584 and $506,389 for the three and nine months ended September
30, 2007, respectively, and includes share-based compensation of $237,684 and
$412,884 for the three and nine months ended September 30, 2007. In 2006,
general and administrative expense principally consisted of estimated general
corporate overhead. We have included expenses such as director fees, accounting
costs, certain legal costs, certain consulting expenses, and an allocation
of
our employees’ compensation as general corporate overhead. Other general and
administrative expenses more directly related to the operation and disposal
of
our bio-pharmaceutical business have been included in Loss from Discontinued
Operations.
For
the
three and nine months ended September 30, 2007, we have recorded research and
development costs of $986,584 related to the value of common stock issued in
exchange for certain trade secrets, know-how, business plans, term sheets,
business relationships, and other information in connection with the share
exchange with Global Clean Energy Holdings, LLC. Otherwise, we did not incur
any
research and development expenses for the three months and nine months ended
September 30, 2007 due to our Board of Directors’ decision to discontinue
funding development of the SaveCream and MDI-P drug candidate assets. We
incurred $1,667,080 and $1,994,322 of research and development expenses for
the
three and nine month periods ended September 30, 2006, respectively, which
principally related to our acquisition of the patents and patent rights relating
to SaveCream, which are included in Loss from Discontinued
Operations.
Other
Income/ Expense and Net Loss.
Our
interest income decreased to $124 and $394 for the three and nine months ended
September 30, 2007, respectively, from $519 and $2,295 for the corresponding
periods of 2006 because of our decreased cash balances that we maintained in
2007.
During
the three and nine months ended September 30, 2007, we recorded $1,735,102
and
$1,520,482 as unrealized loss on financial instrument to record the accounting
for warrants resulting from the issuance of the Series A Convertible
Preferred Stock entered into in October 2004 and March 2005, and the
cancellation and reissuance in September 2007 of certain related warrants to
purchase 27,452,973 shares of common stock. During the same periods of 2006,
we
recorded unrealized gains as a result of the accounting for these warrants
of
$840,271 and $1,720,351, respectively. This non-cash gain recognition is the
result of the periodic revaluation of certain warrants classified as a liability
in the financial statements.
In
connection with the accounting for the cancellation and reissuance of warrants
mentioned in the previous paragraph, we recorded a discount to the associated
secured promissory note of $250,000. The discount to the note is being amortized
over the term of the loan agreement from September
7, 2007 to December 14, 2007, and being recorded as “interest expense from
amortization of discount on secured promissory note.” For the three and nine
months ended September 30, 2007, the Company amortized $58,673 of the discount.
In
conjunction with our sale of MDI-P, a liability in the amount of $90,000 was
extinguished due to the sale and recorded as “Gain on debt restructuring”. This
liability was only payable if and when we received $1 million in cumulative
license revenue from the MDI-P compound in any human indication. Due to the
sale
of MDI-P for less than $1 million, this liability was no longer owed and was
written off. For the nine months ended September 30, 2006, we recorded “Gain on
debt restructuring” of $607,761 principally related to recognizing certain
previously recorded liabilities as having passed the statute of limitations
for
collection.
Our
Loss
from Discontinued Operations was $60,501 and $355,305 for the three months
and
nine months ended September 30, 2007, respectively, compared to $1,322,366
and
$2,214,318 for the corresponding periods of 2006.
Liquidity
And Capital Resources
As
of
September 30, 2007, we had $296,121 in cash and had a working capital deficit
of
$7,846,720. Since our inception, we have financed our operations primarily
through private sales of equity and debt financing. Accordingly, early in 2007
we re-evaluated our future operations thereafter elected to terminate our
bio-pharmaceutical operations.
In
July
2007, we executed the Asset Sale Agreement with Eucodis pursuant to which we
agreed to sell our SaveCream asset for an aggregate of €4,007,534
(approximately $5,906,000
based on
the currency conversion rate in effect as of November 30, 2007), a portion
of
which comprised (i) a cash payment of €1,538,462
(approximately
$2,267,000 based on the currency conversion rate in effect as of November 30,
2007), which is due and payable to us at the closing, less $200,000 already
received from Eucodis in March 2007 upon the signing of the Letter of Intent,
and (b) Eucodis’ assumption of an aggregate of €2,469,072
(approximately
$3,639,000 based on the currency conversion rate in effect as of November 30,
2007), constituting specific indebtedness currently owed to certain of our
creditors. The sale is scheduled to close on or before January 31, 2008.
In
August
2007, we sold our second drug candidate, the MDI-P compound, for $310,000 in
cash.
In
order
to fund ongoing operations pending closing of the sale to Eucodis, we entered
into the Loan Agreement with, and issued a promissory note in favor of, Mercator
Momentum Fund III, L.P. (“Mercator”). Pursuant to the loan agreement, Mercator
made available to us a secured term credit facility in principal amount of
$1,000,000. Initially, all loans under the credit facility became due and
payable on December 14, 2007. As of December 13, 2007, $250,000 was outstanding
under the credit facility. Mercator has agreed to extend the maturity date
of
this $250,000 loan to February 21, 2008. The foregoing loan is secured by a
lien
on all of our assets.
In
November 2007, we issued 13,000 shares of our newly created Series B Convertible
Preferred Stock to two accredited investors for an aggregate of
$1,300,000.
We
are
currently funding our operations from the Mercator loan and from the proceeds
of
the sale of the Series B Convertible Preferred Stock. Assuming that the sale
of
SaveCream to Eucodis is completed in early 2008, we intend to use the net
proceeds from that sale to fund our operating expenses, and to pay the $500,000
payment due to our former Chief Executive Officer under a certain release and
settlement agreement. However, our business plan calls for significant infusion
of additional capital to establish our Jatropha plantations in Mexico and other
locations. We currently do not have the funds necessary to acquire and cultivate
those plantations, nor will the projected proceeds from the Eucodis sale be
sufficient for those purposes. Accordingly, in addition to the proceeds we
expect to receive upon the sale of SaveCream to Eucodis, we will have to obtain
significant additional capital through the sale of additional equity and/or
debt
securities, the forward sale of Jatropha oil and carbon offset credits, and
from
other financing activities, such as strategic partnerships. While we have
commenced negotiations with third parties to obtain additional funding from
strategic partnerships and for the sale of carbon credits, no assurance can
be
given that we will have sufficient capital available to continue to operate
our
business in 2008 or that we will be able to effect our new business plan in
the
Jatropha Business.
We
have
no off-balance sheet arrangements.
Changes
in and disagreements with accountants on accounting and financial
disclosure.
There
were no changes or disagreements with our accountants on accounting and
financial disclosure for the fiscal year ended December 31, 2006, and the
quarters ended March 31, 2007, June 30, 2007, and September 30, 2007,
respectively.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER
MATTERS.
The
following table sets forth information regarding persons known by us to
beneficially own, as defined by Rule 13d-3 under the Securities Exchange
Act of 1934, more than 5% of Common Stock as of December 30, 2007, based solely
on information regarding such ownership available in filings by such beneficial
owners with the SEC on Schedules 13D and 13G. The following table also sets
forth information regarding beneficial ownership of Common Stock as of December
30, 2007, by our Directors and Judy Robinett, our Chief Executive Officer until
December 26, 2007 (our sole named executive officer), and by the Directors
and
the named executive officer as a group.
Name
and Address of Beneficial Owner (1)
|
|
Shares
Beneficially Owned (2)
|
|
Percent
of
Class
|
Certain
Beneficial Owners:
|
|
|
|
|
|
|
|
|
|
Mercator
Momentum Fund, LP
555
S. Flower St., Suite 4500
Los
Angeles, CA 90071
|
|
47,572,974
(3)(13)
|
|
20.4%
|
Mercator
Momentum Fund III, LP
555
S. Flower St., Suite 4500
Los
Angeles, CA 90071
|
|
39,910,011
(4)(13)
|
|
17.1%
|
Monarch
Pointe Fund, Ltd.
555
S. Flower St., Suite 4500
Los
Angeles, CA 90071
|
|
34,002,509
(5)(13)
|
|
14.9%
|
David
Firestone
555
S. Flower St., Suite 4500
Los
Angeles, CA 90071
|
|
121,485,494
(6)(13)
|
|
40.5%
|
Mobius
Risk Group, LLC
Three
Riverway, Suite 1700
Houston,
Texas 77056
|
|
54,810,220
(7)
|
|
27.7%
|
|
|
|
|
|
Directors/Named
Executive Officers:
|
|
|
|
|
|
|
|
|
|
Judy
M. Robinett
|
|
2,030,000
(8)
|
|
1.0%
|
Richard
Palmer
|
|
9,135,037
(9)
|
|
4.6%
|
David
R. Walker
|
|
1,153,539
(10)
|
|
*
|
Eric
J. Melvin
Three
Riverway, Suite 1700
Houston,
Texas 77056
|
|
54,810,220
(11)
|
|
27.7%
|
Martin
Schroeder
92
Natoma Street, Suite 200
San
Francisco, California 94105
|
|
5,000,000
(12)
|
|
2.5%
|
|
|
|
|
|
All
Named Executive Officers and Directors as a group (5
persons)
|
|
72,128,796
|
|
35.1%
|
*
Less
than 1%
(1)
Unless otherwise indicated, the business address of each person listed is c/o
Medical Discoveries, Inc., 6033 W. Century Blvd, Suite 1090, Los Angeles,
California.
(2)
For
purposes of this table, shares are considered beneficially owned if the person
directly or indirectly has the sole or shared power to vote or direct the voting
of the securities or the sole or shared power to dispose of or direct the
disposition of the securities. Shares are also considered beneficially owned
if
a person has the right to acquire beneficial ownership of the shares within
60
days of September 30, 2007.
(3)
Includes 18,638,877 shares that may be acquired upon the exercise of currently
exercisable warrants, and 17,430,000 shares of common stock issuable upon
conversion of 8,715 shares of Series A convertible preferred stock based on
an
assumed conversion price of $0.05, which is the minimum price at which such
shares of Series A convertible preferred stock can be converted.
(4)
Includes 15,411,001 shares that may be acquired upon the exercise of currently
exercisable warrants, and 20,590,000 shares of common stock issuable upon
conversion of 10,295 shares of Series A convertible preferred stock based on
an
assumed conversion price of $0.05, which is the minimum price at which such
shares of Series A convertible preferred stock can be converted.
(5)
Includes 10,403,095 shares that may be acquired upon the exercise of currently
exercisable warrants, and 19,834,000 shares of common stock issuable upon
conversion of 9,917 shares of Series A convertible preferred stock based on
an
assumed conversion price of $0.05, which is the minimum price at which such
shares of Series A convertible preferred stock can be converted.
(6)
David
Firestone is the managing member of MAG Capital, LLC, a California limited
liability company (“MAG”). Mercator Momentum Fund, LP, and Mercator Momentum
Fund III, LP, are private investment limited partnerships organized under
California law. The general partner of each fund is MAG. Monarch Pointe Fund,
Ltd. is a corporation organized under the laws of the British Virgin Islands.
MAG controls the investment of Monarch Pointe Fund, Ltd.
(7)
Includes 23,490,095 shares subject to forfeiture in the event the company has
not satisfied certain conditions by September 7, 2009.
(8)
Includes 2,000,000 shares that may be acquired upon the exercise of currently
exercisable options.
(9)
Includes 3,262,514 shares subject to forfeiture in the event the company has
not
satisfied certain conditions by September 7, 2009. Mr. Palmer owns 13.33% of
the
outstanding membership interests of Mobius. Mr. Palmer has options to acquire
12,000,000 shares of common stock, which options are not currently exercisable
and will not become exercisable unless certain conditions are met. Neither
the
shares held by Mobius, nor the foregoing options to purchase 12,000,000 shares
have not been included in the table.
(10)
Includes 750,000 shares that may be acquired upon the exercise of currently
exercisable options.
(11)
Includes 54,810,220 shares held in the name of Mobius Risk Group, LLC, a Texas
limited liability company (“Mobius”). Mr. Melvin is the Chief Executive Officer
and a director of Mobius.
(12)
Includes 5,000,000 shares that may be acquired upon the exercise of currently
exercisable warrants held by Emmes Consulting Group, LLC, a California limited
liability company. Mr. Schroeder is the Executive Vice President and Managing
Director of Emmes Consulting Group, LLC.
(13)
Notwithstanding the foregoing percentages, each person identified herein,
individually or in the aggregate is limited by the terms of our Series A
convertible preferred stock and by applicable warrants to owning no more than
9.99% of our outstanding common stock at any given time.
OTHER
MATTERS
Management
does not intend to present any other items of business and knows of no other
matters that will be brought before the special meeting. Whether or not you
plan
to attend the special meeting, please sign and date the enclosed proxy card
and
return it in the enclosed envelope to ensure your representation at the special
meeting.
WHERE
YOU CAN FIND MORE INFORMATION
Medical
Discoveries, Inc. files reports, proxy statements, and other information with
the SEC. You can read and copy these reports, proxy statements, and other
information concerning our company at the SEC’s Public Reference Room at 100 F
Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330
for
further information about the operation of the SEC’s Public Reference Room. The
SEC also maintains an Internet site that contains all reports, proxy statements
and other information that we file electronically with the SEC. The address
of
that website is http://www.sec.gov.
PLEASE
SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT IN THE ACCOMPANYING ENVELOPE
AS PROMPTLY AS POSSIBLE. YOU MAY REVOKE THE PROXY BY GIVING WRITTEN NOTICE
OF
REVOCATION TO THE COMPANY PRIOR TO THE SPECIAL MEETING, BY EXECUTING A LATER
DATED PROXY AND DELIVERING IT TO COMPANY’S CORPORATE SECRETARY PRIOR TO THE
SPECIAL MEETING OR BY ATTENDING THE SPECIAL MEETING AND VOTING IN
PERSON.
|
By
Order of the Board of Directors,
|
|
|
|
Richard
Palmer
|
|
President
and Chief Executive Officer
|
January
7, 2008
|
|
MEDICAL
DISCOVERIES, INC.
6033
W.
Century Blvd, Suite 1090,
Los
Angeles, California 90045
PROXY
FOR
THE SPECIAL MEETING OF SHAREHOLDERS
TO
BE
HELD JANUARY 29, 2008
THIS
PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The
undersigned, having received notice of the Special Meeting of Shareholders
of
Medical Discoveries, Inc. (the “Company”) to be held at 10:00 A.M. local time on
Tuesday, January 29, 2008, hereby designates and appoints Richard Palmer and
Dave Walker, and each of them, as attorney and proxy for the undersigned, with
full power of substitution, to vote all shares of common stock of Medical
Discoveries, Inc. that the undersigned is entitled to vote at such meeting
or at
any adjournment thereof, with all the powers the undersigned would possess
if
personally present, such proxies being directed to vote as specified below
and
in their discretion on any other business that may properly come before the
meeting.
This
proxy when properly executed will be voted in the manner directed herein by
the
undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR
ALL PROPOSALS.
PROPOSAL
I. To approve the sale of our SaveCream assets to Eucodis Pharmaceuticals
Forschungs - und Entwicklungs GmbH.
¨
FOR
|
¨
AGAINST
|
¨
ABSTAIN
|
PROPOSAL
II. To approve an amendment to our Amended and Restated Articles of
Incorporation to increase the authorized number of shares of common stock from
250,000,000 to 500,000,000.
¨
FOR
|
¨
AGAINST
|
¨
ABSTAIN
|
PROPOSAL
III. To approve an amendment to our Amended and Restated Articles of
Incorporation to change our company’s name to “Global Clean Energy Holdings,
Inc.”
¨
FOR
|
¨
AGAINST
|
¨
ABSTAIN
|
In
their
discretion the proxies are authorized to vote upon such other business as may
properly come before the meeting.
The
undersigned reserves the right to revoke this Proxy at any time prior to the
Proxy being voted at the Meeting. The Proxy may be revoked by delivering a
signed revocation to Medical Discoveries, Inc. at any time prior to the Meeting,
by submitting a later-dated Proxy, or by attending the Meeting in person and
casting a ballot. The undersigned hereby revokes any proxy previously given
to
vote such shares at the Meeting.
|
|
Signature
|
|
|
Date:
|
|
|
|
|
|
|
|
Signature
|
|
|
Date:
|
|
|
|
NOTE:
Please sign exactly as name appears hereon. Joint owners should
each sign.
When signing as attorney, executor, administrator, trustee, guardian
or
corporate officer, please give full title as
such.
|
APPENDIX
A
SALE
AND PURCHASE AGREEMENT
SALE
AND PURCHASE AGREEMENT
AMONG
MEDICAL
DISCOVERIES INC.
AND
MDI
ONCOLOGY, INC.
AND
EUCODIS
PHARMACEUTICALS FORSCHUNGS-und ENTWICKLUNGS GmbH
Dated
July
6, 2007
SALE
AND ASSET PURCHASE AGREEMENT
This
Sale
and Asset Purchase Agreement (this “Agreement”,
which
term is intended to include all exhibits, schedules and other documents attached
hereto or referred to herein) is made and entered into on July 6, 2007 (the
“Effective
Date”)
by and
among Medical Discoveries, Inc., a Utah corporation, whose principal place
of
business is 1338 South Foothill Drive, #266, Salt Lake City, Utah 84108
(“MDI”),
MDI
Oncology, Inc., a Delaware corporation and wholly-owned subsidiary of MDI,
whose
principal place of business is 1338 South Foothill Drive, #266, Salt Lake
City,
Utah 84108 (“MDI
Oncology”
and,
together with MDI, the “MDI
Parties”)
and
Eucodis Pharmaceuticals Forschungs - und Entwicklungs GmbH, an Austrian company
whose principal place of business is Brunnerstrasse 59, 1230, Vienna, Austria
(“EUCODIS”;
collectively, the MDI Parties and EUCODIS are referred to as the “Parties”).
RECITALS
MDI
purchased substantially all of the intellectual property assets of
Savetherapeutics AG a German company in liquidation pursuant to an agreement
with its liquidator dated March 11, 2005 (the “Savetherapeutics
Contract”),
as a
result of which the MDI Parties own, among other things, patents, patent
applications, pre-clinical study data and anecdotal clinical trial data
concerning “SaveCream”, a developmental topical aromatase inhibitor cream (the
“Product”).
MDI
Oncology and EUCODIS entered into an agreement for the co-development and
license of the Product as of July 29, 2006 (the “Co-Development
Contract”).
On
March
8, 2007, the Parties entered into a letter of intent for the acquisition
by
EUCODIS of all of the MDI Parties’ rights under the Savetherapeutics Contract,
and all intellectual property and other rights belonging to the MDI Parties,
whether subsequently acquired or developed by or though the efforts of the
MDI
Parties or otherwise which are related to the Product.
NOW,
THEREFORE,
in
consideration of the mutual covenants, agreements, representations and
warranties herein, the Parties agree as follows:
ARTICLE
1
DEFINITIONS
For
purposes of this Agreement, the following definitions shall apply unless
specifically stated otherwise
1.1 “Affiliate”
shall
mean, with respect to any Person, any other Person controlling, controlled
by or
under direct or indirect common control with such Person. A Person shall
be
deemed to control a corporation (or other entity) if such Person possesses,
directly or indirectly, the power to direct or cause the direction of the
management and policies of such corporation (or other entity), whether through
the ownership of voting securities, by contract or otherwise
1.2 “Agreement”
shall
have the meaning set forth in the heading of this document.
1.3 “Assigned
Contracts”
shall
have the meaning set forth in Section 3.2(a) of this Agreement.
1.4 “Closing”
shall
have
the
meaning set forth in Section 4.1(b).
1.5 “Co-Development
Contract”
shall
have the meaning set forth in the Recitals to this Agreement.
1.6 “Commitment”
shall
have the meaning set forth in Section 4.1 of this Agreement.
1.7 “Confidential
Information”
shall
have the meaning set forth in Section 8.1 of this Agreement.
1.8 “Creditor
Indebtedness”
shall
have the meaning set forth in Section 3.1(a) of this Agreement.
1.9 “Effective
Date”
shall
have the meaning set forth in the heading of this Agreement.
1.10
“Encumbrance”
shall
mean any title defect, mortgage, assignment, pledge, hypothecation, security
interest, lien, charge, option, claim of others or encumbrance of any
kind.
1.11
“Escrow
Agent”
shall
mean the New York City law firm of Otterbourg, Steindler, Houston & Rosen,
P.C.
1.12
“EUCODIS”
shall
have the meaning set forth in the heading of this Agreement.
1.13
“Excess
Portion”
shall
have the meaning set forth in Section 3.1(b) of this Agreement.
1.14
“MDI”
shall
have the meaning set forth in the heading of this Agreement.
1.15
“MDI
Creditor”
shall
have the meaning set forth in Section 3.1(a) of this Agreement.
1.16
“MDI
Oncology”
shall
have the meaning set forth in the heading of this Agreement.
1.17
“MDI
Parties”
shall
have the meaning set forth in the heading of this Agreement.
1.18
“MDI
Retained Creditors”
shall
have the meaning set forth in Section 6.1(s) of this Agreement.
1.19
“Parties”
shall
have the meaning set forth in the heading of this Agreement.
1.20
“Patent
Rights”
shall
mean all of the MDI Parties' right, title and interest in the patents and
patent
applications acquired under the Savetherapeutics Contract or in connection
therewith, and any other patent and/or patent application pertaining to the
Product, owned or in possession or control of or under contract for the MDI
Parties, and any division, continuation, continuation-in-part, renewal,
extension, reexamination or reissue of each such patent and any and all
corresponding US and foreign counterpart patent applications or
patents.
1.21
“Product”
shall
have the meaning set forth in the Recitals to this Agreement.
1.22
“Purchased
Assets”
shall
have the meaning set forth in Section 2.1 of this Agreement.
1.23
“Purchase
Price”
shall
have the meaning set forth in Section 3.1 of this Agreement.
1.24
“Person”
shall
mean any individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture or other entity of any
kind.
1.25
“Savetherapeutics
Contract”
shall
have the meaning set forth in the Recitals to this Agreement.
1.26
“Schmidt
Litigation”
shall
have the meaning set forth in Section 3.2(b) of this Agreement.
1.27
“Transfer
Documents”
shall
have the meaning set forth in Section 2.5 of this Agreement.
ARTICLE
2
SALE,
ASSIGNMENT AND TRANSFER OF PURCHASED ASSETS
2.1 Subject
to the terms and conditions set forth in this Agreement and in reliance upon
the
representations and warranties of the Parties herein set forth, promptly
following satisfaction of the conditions to the Closing set forth in Article
4
of this
Agreement, the MDI Parties are
selling, assigning, transferring, conveying and delivering,
as the
case may be, to EUCODIS,
and
EUCODIS shall purchase and, as set forth in Article 3 of this Agreement,
pay
for,
all of
the MDI Parties’ rights, title and interests in and relating to the Product and
the following related assets of the MDI Parties (collectively, the “Purchased
Assets”):
(a) All
of
the intellectual property and all contractual and other rights, if any, acquired
by the MDI Parties pursuant to the Savetherapeutics Contract;
(b) All
of
the rights of the MDI Parties under the Co-Development Contract, including
without limitation the intellectual property and all contractual and other
rights acquired by the MDI Parties pursuant to the Co-Development
Contract;
(c) Any
and
all Patent Rights, inventions, discoveries, rights in confidential data
(including know-how and trade secrets), manufacturing methods and processes,
trademarks, trade names, brand names, logos, trade dress, copyrights and
other
intellectual property and goodwill associated with the Product, owned or
in
possession or control of or under contract to acquire by the MDI Parties,
in
each case whether registered or unregistered, and including without limitation
all applications for and renewals or extensions of such rights, and all similar
or equivalent rights or forms of protection;
(d) Any
and
all United States and foreign regulatory files and data relating to the Product
in the possession or control of the MDI Parties, including without limitation
marketing authorization procedures and preclinical and clinical studies;
and,
(e) All
rights of the MDI Parties under the Assigned Contracts.
2.2 The
Purchased Assets are being sold, assigned, transferred, conveyed and delivered
to EUCODIS free of any and all liabilities, obligations and Encumbrances
except
only for those as may be described in reasonable detail in Exhibit
2.2
(to the
extent that Exhibit 2.2 has been attached to this Agreement prior to the
Effective Date).
2.3 Upon
the
Closing, all of the Purchased Assets and all non-publicly available information
relating thereto shall be considered to be Confidential Information belonging
to
EUCODIS, and the MDI Parties shall no longer have any rights thereto or
therein.
2.4 The
MDI
Parties shall be solely responsible for all sales, use, transfer, value added
and other related taxes, if any, arising out of the sale by MDI Parties of
the
Purchased Assets to EUCODIS pursuant to this Agreement.
2.5 Simultaneously
with the execution and delivery of this Agreement by the Parties, the MDI
Parties shall deliver to the Escrow Agent (in original, fully executed form)
all
assignments, bills of sale and other documents which are necessary, sufficient
or reasonably desirable to effect the transfer of the Purchased Assets to
EUCODIS, along with all other documents referred to in this Agreement as
being
delivered to EUCODIS on or prior to the Closing (collectively, the “Transfer
Documents”). The Transfer Documents shall be held by the Escrow Agent for
delivery as set forth in Article 4 of this Agreement.
ARTICLE
3
PURCHASE
PRICE; TIMING OF PAYMENTS; DISCHARGE OF CERTAIN DEBTS
3.1 The
purchase price for the Purchased Assets (the “Purchase
Price”)
shall
consist of the following:
(a) Relief
of
the MDI Parties from an aggregate of two million four hundred sixty-nine
thousand seventy-two Euros (2,469,072€) of indebtedness, which is comprised of
the following amounts (each a “Creditor
Indebtedness”)
owed
to the following creditors of the MDI Parties (each an “MDI
Creditor”):
(i) 1,850,000
€ owed to the Liquidator of Savetherapeutics AG;
(ii)
205,000
€ owed to Professor Wieland;
(iii)
188,197€
owed to Mayer, Brown, Rowe and Maw, LLP;
(iv)
127,875
€ owed to Epstein, Becker and Green, LLP;
(v)
46,000 €
owed to H3 Pharma;
(vi)
31,000 €
owed to Millbank Tweed (Bob Koch); and
(vii)
21,000 €
owed to Marc
Kessemeier
(b) An
aggregate of one million five hundred thirty-eight thousand four hundred
and
sixty-two Euros (1,538,462€) (herein, the “Excess
Portion”).
(c) On
or
before September 30,
2007,
EUCODIS shall pay
the
Excess Portion to the MDI Parties or to another party as the MDI Parties
may so
direct.
(d) MDI
Parties shall be responsible to cause the transfer of the Purchased Assets
to
EUCODIS by the Closing.
(e)
On
Closing, EUCODIS shall deliver to the MDI Parties, in form and substance
reasonably satisfactory to the MDI Parties, releases from each of the MDI
Creditors forever discharging and releasing the MDI Parties from any liability
for any of their respective Creditor Indebtedness.
3.2 In
addition, on
the
Closing, EUCODIS shall assume and shall be financially responsible
for:
(a) The
financial obligations of the MDI Parties arising under the assigned
contracts described
in reasonable detail in Exhibit
3.2(a)
(to the
extent that Exhibit 3.2(a) has been attached to this Agreement prior to the
Effective Date);
provided,
however,
that
the
benefits of each of such assigned contracts (the “Assigned
Contracts”)
has
been validly assigned to EUCODIS in accordance with the terms
thereof.
(b) All
costs
accruing after February 28, 2007 which were necessarily incurred by or on
behalf
of the MDI Parties to maintain any of the Purchased Assets, including but
not
limited to: (i) the costs to file and maintain, throughout the world, any
of the
Patent Rights, and (ii) the legal fees and related legal costs incurred in
connection with the legal proceedings in Hamburg, Germany to obtain certain
rights belonging to the MDI Parties by co-inventor Dr. Alfred Schmidt (the
“Schmidt
Litigation”);
provided,
however,
that a
reasonably detailed description of such costs are set forth in Exhibit
3.2(b)
(to the
extent that Exhibit 3.2(b) has been attached to this Agreement prior to the
Effective Date)
and
that such costs are backed up by duly rendered invoices (or receipts) and
the
amounts set forth thereon for any costs do no exceed the amounts listed on
Exhibit 3.2(b) by more than ten percent (10%). After the Effective
Date,
the MDI
Parties shall continue to vigorously prosecute the Schmidt action (which
shall be
conducted at the direction, and under the control, of EUCODIS) at the sole
expense of EUCODIS until such time, if any, as EUCODIS can be substituted
for
the MDI Parties in such action. For purposes of clarification, the reasonably
incurred out-of-pocket expenses of the MDI Parties and their representatives
(including legal fees and costs), in furnishing such assistance as may be
reasonably requested by EUCODIS, shall be at the sole expense of EUCODIS.
ARTICLE
4
CONDITIONS
TO THE CLOSING
4.1. The
Closing shall occur if the following conditions are met:
(a) The
MDI
Parties shall have delivered to the Escrow Agent all of the Transfer
Documents,
(b) The
Escrow Agent shall not deliver the Transfer Documents to EUCODIS until such
time
as EUCODIS has delivered to the MDI Parties (i) the Excess Portion of the
Purchase Price without any off set or deduction, and (ii) releases
from each of the MDI Creditors in which such MDI Creditors forever discharges
and releases the MDI Parties from any liability for any of their respective
Creditor Indebtedness, or paid in full the amounts set forth in Section 3.1(a)
to the MDI Parties for the account of such MDI Creditor.
4.2 In
the
event that the Closing does not occur by September 30, 2007, and unless the
parties have otherwise agreed in writing, the Escrow Agent shall deliver
the
Transfer Documents to the MDI Parties or to whomever as the MDI Parties may
so
direct.
4.3 Irrespective
of any provision of this Agreement to the contrary, the obligation of EUCODIS
to
purchase the Purchased Assets is subject to the fulfillment, at or before
the
Closing, of each of the following conditions (all or any of which may be
waived
in whole or in part by EUCODIS in its sole discretion):
(a) Each
of
the representations and warranties made by the MDI Parties in this Agreement
shall be true and correct in all material respects on and as of the Closing
as
though such representation or warranty was made on and as of the
Closing.
(b) The
MDI
Parties shall have performed and complied with, in all material respects,
each
agreement, covenant and obligation required by this Agreement to be so performed
or complied with by the MDI Parties at or before the Closing.
(c) The
MDI
Parties shall have delivered to the Escrow Agent all of the Transfer
Documents.
(d) Since
the
Effective Date, MDI shall have obtained additional capital or a credit facility
aggregating in the amount of at least $250,000.00.
(e) The
MDI
Parties shall have delivered or caused to be delivered to the Escrow Agent
or to
EUCODIS any and all originals and copies of documents pertaining to Purchased
Assets and the Product, which are within the possession or control of the
MDI
Parties, along with any additional documents reasonably requested by
EUCODIS.
4.4 In
the
event that, before the Creditor Indebtedness of any MDI Creditor has been
fully
satisfied, actions are taken pursuant to which either of the MDI Parties
voluntarily declares bankruptcy (however evidenced), or involuntary is caused
to
become bankrupt, then the unpaid amount(s) of any still outstanding Creditor
Indebtedness shall be paid into the court having jurisdiction over the
bankrupt’s estate.
4.5 If
valid
transfer of title to any Purchased Assets or portion thereof is not made
on the
Closing and can not be made by the MDI Parties promptly thereafter, or if
the
circumstances that make such assignment or transfer or any claim to any of
the
Purchased Assets to EUCODIS questionable or impracticable for any reason,
it
shall be the obligation of the MDI Parties to determine another way by which
EUCODIS shall be able to utilize the Purchased Assets with equal or at least
substantially similar economical effect, including (if agreeable to EUCODIS)
under an exclusive, royalty-free, perpetual license with the right to
sublicense.
ARTICLE
5
DELIVERIES
BY THE MDI PARTIES; RESIDUAL RIGHTS
5.1 As
soon
as possible, but no later than within fifteen (15) business days after the
Effective Date, the MDI Parties shall deliver or cause to be delivered to
the
Escrow Agent any
and
all originals and copies of documents pertaining to Purchased Assets and
the
Product, which are within the possession or control of the MDI Parties. All
of
such documents
after
the Closing
are
considered to be Confidential Information of EUCODIS in accordance with Article
8 of this Agreement.
5.2 Promptly
after the Effective Date, the MDI Parties shall deliver to the
Escrow Agent (or if the Closing has occurred, to EUCODIS)
such
additional
assignments and bills of sale transferring title to the Purchased Assets
and the
Product as EUCODIS reasonably shall request, and
promptly
following the Closing
shall
cause the change of title to such assets to be recorded by applicable
patent
offices as appropriate
5.3 The
MDI
Parties shall be entitled to retain one copy of any documents being delivered,
but only in its legal files for evidential purposes in respect of its
confidentiality obligations in relation to this Agreement or other matters
related hereto.
5.4 It
is
expressly understood and agreed that EUCODIS is not the successor to either
of
the MDI Parties in their business affairs, and EUCODIS undertakes no
responsibility, obligation or liability, expressed or implied, under any
contract of the MDI Parties that are not Assigned Contracts, and that such
other
contracts shall remain the sole responsibility of the MDI Parties.
5.5 For
the
period of five (5) years from the Closing,
neither of the MDI Parties, nor any of its or their Affiliates shall be a
party
to, or assist with or undertake, either on its own, with third parties or
on
behalf of third parties, any research and development with respect to the
Product or any product which could be used in reasonable substitution thereof,
nor commercialize any products based on the Product, save as requested by
EUCODIS.
ARTICLE
6
REPRESENTATIONS,
WARRANTIES AND COVENANTS
6.1 The
MDI
Parties represent, warrant and covenant to EUCODIS
as of
the Effective Date and at the Closing as follows:
(a) MDI
is a
corporation duly and validly existing and in good standing under the laws
of the
State of Utah. MDI Oncology is a corporation wholly-owned by MDI which is
duly
and validly existing and in good standing under the laws of the State of
Delaware, and does not conduct business in any other jurisdiction. Each of
the
MDI Parties has all requisite power and authority to own its assets, including
the Purchased Assets, and to carry on its business as presently conducted.
(b) Each
of
the MDI Parties has all requisite power and authority to execute and deliver
and
perform its obligations under this Agreement and to consummate the transactions
contemplated by this Agreement.
(c) All
acts
(corporate or otherwise) required to be taken by or on the part of, and all
approvals required to be obtained by, each of the MDI Parties necessary to
enter
into this Agreement, consummate the transactions contemplated by this Agreement
and perform its obligations under this Agreement have been duly and properly
taken by such MDI Party.
(d) This
Agreement has been duly and validly executed and delivered by the MDI Parties,
and constitutes the legal, valid and binding obligation of the MDI Parties
enforceable against the MDI Parties in accordance with its terms, subject
to
applicable bankruptcy, moratorium, reorganization, insolvency and similar
laws
of general application relating to or affecting the rights and remedies of
creditors generally and to general equitable principles (regardless of whether
a
proceesings is brought in
equity
or at law).
(e) The
Purchased Assets do not constitute all
or
substantially
all of the assets of MDI.
(f) The
execution and delivery of this Agreement by each of the MDI Parties, the
consummation by it of the transactions contemplated by this Agreement, and
the
performance by it of its obligations under this Agreement does not, and will
not
at all relevant times (i) violate or conflict with any provision of
its
respective
Certificate of Incorporation or By-Laws, or (ii) result in a violation by
such
MDI Party of any law to which it or any of its properties or assets are
subject.
(g) The
execution and delivery of this Agreement by each of the MDI Parties, the
consummation by it of the transactions contemplated by this Agreement, and
the
performance by it of its obligations under this Agreement does not, and will
not
at all relevant times violate, or conflict with, or result in a breach of
any
provision of, or constitute a default (or give rise to any right of termination,
cancellation or acceleration) under, any of the terms, conditions or provisions
of any agreement lease, instrument, obligation, understanding or arrangement
to
which such MDI Party is a party or by which any of its properties or assets
is
subject.
(h) Except
as
set forth in Exhibit
6.1(h)
(to the
extent that Exhibit 6.1(h) has been attached to this Agreement prior to
the Effective
Date),
there
is no litigation, proceeding, investigation, arbitration or claim pending,
or,
to the best of the knowledge of the MDI Parties, threatened against the MDI
Parties, and there is, to the best of the MDI Parties’ knowledge, no reasonable
basis for any such action, which affects in whole or in part either MDI Party’s
ability to consummate the transactions contemplated by this Agreement, the
performance of the MDI Parties obligations hereunder or the ability of EUCODIS
to fully enjoy the Purchased Assets.
(i) To
the
best of the MDI Parties’ knowledge,
the use
of the Purchased Assets does not infringe intellectual property rights of
third
parties,
except
to the extent as may have been alleged in the Schmidt Litigation,
(ii) the
Purchased Assets are free from any liens, charges and Encumbrances or other
rights of third parties, (iii) the full enjoyment of the Purchased Assets
are
not dependant on any rights of third parties, (iv) no fraudulent or other
improper document has been filed with any third governmental agency which
may
invalidate any of the rights enjoyed by the Purchased Assets, and (v) the
Purchased Assets are, to the best knowledge of the MDI Parties, valid and
enforceable against third parties, and there are no grounds for revocation,
invalidation or re-examination of any of the Purchased Assets
(j) Except
as
set forth in Exhibit
6.1(j)
(to the
extent that Exhibit 6.1(j) has been attached to this Agreement prior to the
Effective
Date),
no
permit, consent, approval or authorization of, or declaration, filing or
registration with, any governmental authority or other third party is or
will be
necessary to be made or obtained by the MDI Parties in connection with (i)
the
execution and delivery by MDI of this Agreement, (ii) the consummation by
them
of the transactions contemplated under this Agreement, or (iii) the performance
by the MDI Parties of their obligations under this Agreement.
(k) One
or
both of the MDI Parties are a party to each of the Assigned Contracts, all
of
which (i) are in full force and effect, (ii) constitute binding and enforceable
obligations, (iii) subject to the terms and conditions thereof, are assignable
to EUCODIS, and (iv) are being duly assigned to EUCODIS at the
Closing.
(l) Except
as
set forth in Exhibit
6.1(l)
(to the
extent that Exhibit 6.1(l) has been attached to this Agreement prior to
the Effective
Date),
all of
the Purchased Assets are legally, beneficially, and solely owned by the MDI
Parties, and there are no pending or threatened claims or any other undisclosed
liabilities that could impair any right or claim of the MDI Parties is assigning
and transferring that
may
be deemed to be part of, or arise under or are related to,
the
Purchased Assets to EUCODIS under this
Agreement or
that
may
cause
any liability to
be
incurred by
EUCODIS
as the result of its use of the Purchased Assets
after
the Closing.
(m) The
MDI
Parties have not granted any third parties any rights relating to the Product
or
relating in any way to any of the rights obtained pursuant to the
Savetherapeutics Contract.
(n) Schedule
6.1(n)
contains
a complete and correct list of (i) all documents relating to the
Savetherapeutics Contract, including without limitation the Savetherapeutics
Contract, all exhibits and schedules thereto, all amendments thereof and
all
correspondence pertaining thereto with, or on behalf of, the liquidator of
Savetherapeutics AG, dated subsequent to March 11, 2005, (ii) all invoices
and
other debit memoranda from each of the MDI Creditors which support the Creditor
Indebtedness, and (iii) all contracts, findings and correspondence with any
other third parties, including consultants, which relate to the Purchased
Assets
and which were obtained on or after March 11, 2005. Prior to or on the Effective
Date, the MDI Parties have delivered or are delivering to EUCODIS or as it
may
direct a true and complete copy of each item listed on Schedule
6.1(n).
(o) As
specifically set forth in this Agreement, the MDI Parties shall timely fulfill
obligations which relate to or otherwise affect, in any respect, the Purchased
Assets. The
MDI
Parties shall indemnify and reimburse EUCODIS and its officers, directors,
employees, consultants and agents from and against all liabilities, claims,
damages, costs and expenses incurred by
EUCODIS and its officers, directors, employees, consultants and agents arising
from any claims by the contractual parties of the Assigned Contracts in relation
to the non-fulfillment of any obligations of the MDI Parties prior to the
Effective Date.
(p) The
MDI
Parties shall be responsible for obtaining any consents and approvals by
the
contractual parties to the Assigned Contracts necessary to effectuate the
assignment of the Assigned Contracts to EUCODIS, and to obtain the consent
and
approval of the MDI Creditors for the assumption and transfer of their debt
to
EUCODIS; provided,
however,
that
EUCODIS shall render the MDI Parties reasonable help in obtaining such consents
and approvals.
(q) If
valid
transfer of title to any Purchased Assets or portion thereof is not made
on the
Closing and can not be made by the MDI Parties promptly thereafter, or if
the
circumstances that make such assignment or transfer or any claim to any of
the
Purchased Assets to EUCODIS questionable or impracticable for any reason,
it
shall be the obligation of the MDI Parties to determine another way by which
EUCODIS shall be able to utilize the Purchased Assets with equal or at least
substantially similar economical effect, including (if agreeable to EUCODIS)
under an exclusive, royalty-free, perpetual license with the right to
sublicense.
(r) Prior
to
or on the Effective Date, the MDI Parties have delivered or are delivering
to
the
Escrow Agent an
opinion of recognized counsel,
addressed to EUCODIS,
relating
to the representations contained in clauses (a) through (f) above reasonably
satisfactory to counsel for EUCODIS, which may contain such reasonable
qualifications and exceptions as are customary.
(s) Schedule
6.1(s)
contains
a complete and correct list of creditors of the MDI Parties (including the
MDI
Creditors) and the amounts owed by the MDI Parties as of June
30,
2007, except for not more than in aggregate of $5,
000
of
unlisted indebtedness.
After
subtracting from such list any Creditor Indebtedness of a MDI Creditor included
on such list, the remaining balance is less than $1,850,000.
6.2 EUCODIS
represents, warrants and covenants to the MDI Parties as follows:
(a) EUCODIS
is a company duly organized, validly existing and in good standing under
the
laws of Austria and has all requisite power and authority to own its assets
and
to carry on its business as presently conducted.
(b) EUCODIS
has all requisite power and authority to execute and deliver and perform
its
obligations under this Agreement and to consummate the transactions contemplated
hereby.
(c) All
acts
(corporate or otherwise) required to be taken by or on the part of, and all
approvals required to be obtained by, EUCODIS necessary to enter into this
Agreement, consummate the transactions contemplated by this Agreement and
perform its obligations under this Agreement have been duly and properly
taken
by EUCODIS.
(d) This
Agreement has been duly and validly executed and delivered by EUCODIS and
constitutes the legal, valid and binding obligation of EUCODIS enforceable
against EUCODIS in accordance with its terms, subject to applicable bankruptcy,
moratorium, reorganization, insolvency and similar laws of general application
relating to or affecting the rights and remedies of creditors generally and
to
general equitable principles (regardless of whether a proceedings is brought
in
equity or at law).
(e) The
execution and delivery of this Agreement by EUCODIS, the consummation by
it of
the transactions contemplated by this Agreement, and the performance by it
of
its obligations under this Agreement does not, and will not at all relevant
times (i) violate or conflict with any provision of its operative governing
documents, or (ii) result in a violation by EUCODIS of any law to which it
or
any of its properties or assets are subject.
(f) The
execution and delivery of this Agreement by EUCODIS, the consummation by
it of
the transactions contemplated by this Agreement, and the performance by it
of
its obligations under this Agreement does not, and will not at all relevant
times violate, or conflict with, or result in a breach of any provision of,
or
constitute a default (or give rise to any right of termination, cancellation
or
acceleration) under, any of the terms, conditions or provisions of any agreement
lease, instrument, obligation, understanding or arrangement to which EUCODIS
is
a party or by which any of its properties or assets is subject.
(g) EUCODIS
shall timely fulfill after the Closing all
obligations incurred to the MDI Parties under or pursuant to this Agreement.
EUCODIS shall indemnify and reimburse the MDI Parties and their officers,
directors, employees and agents from and against all liabilities, claims,
damages, costs and expenses incurred by
the
MDI Parties and their officers, directors, employees and agents arising from
any
claims by the contractual parties of the Assigned Contracts in relation to
the
non-fulfillment of any obligations of EUCODIS arising on
or
after
the
Closing..
(h) If
any
MDI Creditor does not agree to have its debt obligation assumed by, and
transferred to, EUCODIS, then EUCODIS shall pay the amount set forth in Section
3.1(a) to MDI for the account of such MDI Creditor, and MDI shall immediately
make payment to such MDI Creditor and will be solely responsible for such
payment. MDI shall provide written notification to EUCODIS that said payment
to
such MDI Creditor has been made by MDI.
6.3 In
addition to any obligations of indemnification by the MDI Parties set forth
under this Agreement, the MDI Parties shall indemnify, defend and hold harmless
EUCODIS and its officers, directors, employees, consultants and agents from
and
against all liabilities, claims, damages, costs and expenses (including
reasonable attorney's fees) incurred by EUCODIS and its officers, directors,
employees and agents arising from the breach of any of the representations,
warranties or covenants made by the MDI Parties under this
Agreement.
6.4 In
addition to any obligations of indemnification by EUCODIS set forth under
this
Agreement, EUCODIS shall indemnify, defend and hold harmless the MDI Parties
and
their officers, directors, employees, consultants and agents from and against
all liabilities, claims, damages, costs and expenses (including reasonable
attorney's fees) incurred by the MDI Parties and its officers, directors,
employees and agents arising from the breach of any of the representations,
warranties or covenants made by EUCODIS under this Agreement.
ARTICLE
7
INDEMNIFICATION
7.1 From
and
after the Closing, the MDI Parties shall defend, indemnify and hold harmless
EUCODIS and its officers, directors, employees, consultants and agents from
and
against all liabilities, claims, damages, costs and expenses (including
reasonable attorney's fees) incurred by EUCODIS and its officers, directors,
employees, consultants and agents arising from or out of (a) any breach of
any
representation, warranty, covenant or agreement made by the MDI Parties in
this
Agreement, (b) any act or omission by the MDI Parties (or their agents and
employees) in connection with (i) the Purchased Assets, (ii) the Assigned
Contracts, to the extent that the cause for such claim was existing prior
to or
on the Effective Date, or (iii) the transactions contemplated by this Agreement;
provided,
however,
that
with respect to the Creditor Indebtedness owing to the MDI Creditors, the
MDI
Parties shall have no liability.
7.2 From
and
after the Closing, EUCODIS shall defend, indemnify and hold harmless the
MDI
Parties and their officers, directors, employees, consultants and agents
from
and against all liabilities, claims, damages, costs and expenses (including
reasonable attorney's fees) incurred by the MDI Parties and their officers,
directors, employees, consultants and agents arising from or out of (a) any
breach of any representation, warranty, covenant or agreement made by EUCODIS
in
this Agreement, (b) non-payment of the Creditor Indebtedness to the MDI Parties,
or (c) any act or omission by EUCODIS (or its agents and employees) in
connection with (i) the Purchased Assets, (ii) the Assigned Contracts, to
the
extent that the cause for such claim was created after the Effective Date,
or
(iii) the transactions contemplated by this Agreement.
7.3 No
obligation of indemnification shall arise relating to a third party claim
or
cause of action unless the indemnified Party making such claim shall: (a)
notify
the indemnifying Party of such claim promptly upon becoming aware of the
existence or threatened existence of any such claim giving rise to or that
may
give rise to a claim of indemnification hereunder, and (b) allow the
indemnifying Party full control over the defense of such claim and (c) cooperate
in the defense of such claim at the indemnifying Party’s expense.
Notwithstanding any contrary provision in this Article, the failure to so
notify, provide information and assistance shall not relieve the indemnifying
Party of its obligations to the indemnified Party hereunder if and to the
extent
that the indemnifying Party is materially prejudiced thereby. If the
indemnifying Party does not timely acknowledge its indemnification obligation
hereunder with respect to such claim, or elects not to defend such claim,
the
indemnified Party shall have the right, but not the obligation, to defend
and
settle such claim until such time as the indemnifying Party acknowledges
in
writing its indemnification obligation hereunder with respect to such claim
or
elects in writing to defend and settle such claim in accordance with the
indemnification provisions herein. The indemnified Party shall, at its own
cost,
have the right to participate in any legal proceeding, settlement negotiation
or
other like event, and to contest and defend a claim and to be represented
by
legal counsel of its choosing, but shall have no right to settle a claim
without
the prior written approval of the indemnifying Party.
7.4 Each
Party shall cooperate with and provide to the other all information and
assistance which the latter may reasonably request in connection with any
claim
entitling any party to indemnification hereunder.
7.5 No
party
shall be responsible for or bound by any settlement that imposes any obligation
on it that is made without its prior written consent, which consent shall
not be
unreasonably withheld, conditioned or delayed.
7.6 For
avoidance of any doubt, this Section applies to the situation when (a) both
Parties are named defendants, as well as (b) a Party is named a defendant
and
deems that it may have any right to recourse or indemnification against the
other Party under this Agreement.
ARTICLE
8
CONFIDENTIALITY
8.1 For
purposes of this Agreement, “Confidential
Information”
shall
mean information and data in any medium, including oral, written or electronic,
disclosed in connection with this Agreement, relating to the Purchased Assets
or
the transactions contemplated by this Agreement, along with any trade secrets,
business information, technical information, or marketing information that
the
party disclosing the information deems confidential and has appropriately
marked
as such prior to disclosing such information to the receiving party. The
terms
and conditions of this Agreement (but not its existence) are deemed to be
Confidential Information that shall not be disclosed to third parties without
the written consent of the Parties, with the exception of any regulatory
filings, press releases as set forth in Section 9.11, or disclosures to
investors that a Party may be required to make under either applicable laws
and
regulations. Irrespective of the foregoing, Confidential Information shall
not
include information that (a) was reported as nonconfidential by EUCODIS in
writing prior to disclosure, (b) was lawfully in the public domain prior
to
Closing, or becomes publicly available other than through breach of this
Agreement, (c) is publicly disclosed pursuant to legal, judicial or
administrative proceedings or otherwise required by law (including, without
limitation, regulations promulgated by the U.S. Securities and Exchange
Commission), subject to the MDI Parties giving all reasonable prior notice
and
assistance to EUCODIS to allow it to seek protective or other court orders;
and/or (d) is approved for release in writing by EUCODIS. From and after
the
Closing, all Confidential Information relating to the Purchased Assets shall
be
deemed to be Confidential Information belonging to EUCODIS.
8.2 Each
Party shall:
(a) strictly
protect and maintain the confidentiality of the Confidential Information
belonging to any other Party with at least a reasonable standard of care
that is
no less than that which it uses to protect similar confidential information
of
its own;
(b) not
disclose, nor allow to be disclosed, the Confidential Information belonging
to
any other Party to any person other than to employees, consultants and counsel,
on a need to know basis; provided,
however,
that
such recipients of the Confidential Information are bound by obligations
of
confidentiality no less strict than those contained herein;
(c) unless
otherwise expressly provided for in this Agreement, not use the Confidential
Information belonging to any other Party for any purpose other than in relation
to the exercise of its rights and obligations under this Agreement;
and,
(d) take
all
necessary precautions to restrict access of the Confidential Information
belonging to any other Party to unauthorized personnel; and immediately notify
the Party to which the Confidential Information belongs in the event of any
unauthorized disclosure or loss of such Confidential Information.
8.3 The
MDI
Parties shall not publish or otherwise disclose any Confidential Information
about or in relation to the Purchased Assets generated or known to them before
or after the Effective Date, without the explicit prior written approval
of
EUCODIS.
8.4 No
Party
shall assert that anything disclosed or discussed constitutes a waiver of
attorney-client privilege or attorney work-product.
8.5 The
Parties acknowledge and agree that monetary damages may not be adequate in
the
event of a default under this Article and that the non-defaulting Party shall
be
entitled, without the posting of a bond, to seek injunctive relief by a court
or
other body granting such relief, in which event such relief or receipt of
monetary damages shall not constitute an election of remedies; and the
non-defaulting Party is independently entitled to each and every remedy
available by law for a default under this Article.
8.6 The
provisions of this Article, from and after the Effective Date, shall supersede
and fully replace any confidentiality obligations established between the
Parties in relation to the Purchased Assets prior to the Effective
Date.
ARTICLE
9
MISCELLANEOUS
9.1 Notice.
All
notices, requests, demands or other communications to or upon the respective
Parties hereto shall be deemed to have been given or made the earlier of
(a)
actual receipt or refusal to accept receipt, (b) two (2) business days after
deposit with a recognized overnight courier service, (c) receipt by facsimile
or
electronic means, when such delivery is confirmed by the recipient or his
agent,
or (d) five business days after mailing when deposited in the mails, registered
mail or certified, return receipt requested, postage prepaid, addressed to
the
respective party at the following address (or to such other person or address
as
is specified elsewhere in this Agreement for specific purposes):
|
If to EUCODIS: |
Eucodis Pharmaceuticals Forschungs
- und
Entwicklungs GmbH
Brunnerstrasser
59, 1235
1230,
Vienna, Austria
Attention:
Wolfgang Schoenfeld, M.D.
|
|
|
|
|
If to MDI: |
Medical Discoveries, Inc.
1338
South Foothill Drive # 266
Salt
Lake City, Utah 84108
Attention:
Judy M. Robinett
|
|
|
|
|
If to MDI Oncology: |
MDI Oncology, Inc.
1338
South Foothill Drive # 266
Salt
Lake City, Utah 84108
Attention:
Judy M. Robinett
|
The
above
addresses for receipt of notice may be changed by any Party by notice, given
as
provided herein, which notice shall be effective only upon actual
receipt.
9.2 Entire
Agreement.
This
Agreement contains the entire understanding of the Parties with regard to
the
transactions contemplated by this Agreement, superseding in all respects
any and
all prior oral or written agreements or understandings pertaining to the
subject
matter hereof, other than the Co-Development Contract. This Agreement can
be
amended, modified or supplemented only by an agreement in writing which is
signed by the Parties to be charged.
9.3 Incorporation
of Exhibits and Schedules.
The
Exhibits and Schedules attached to this Agreement are incorporated herein
and
are hereby made a part of this Agreement.
9.4
Severability.
If and
to the extent that any court of competent jurisdiction holds any provision
or
part of this Agreement to be invalid or unenforceable, such holding shall
in no
way affect the validity of the remainder of this Agreement before any other
court or in any other jurisdiction.
9.5 Successors
and Assigns.
This
Agreement shall inure to the benefit of and be binding upon the successors
and
permitted assigns of the Parties.
9.6 Assignment The
benefits of this Agreement (but not the obligations set forth hereunder)
can be
assigned or otherwise transferred in whole or in part by either party without
the transferring party receiving prior written consent of the other party;
provided,
however,
that
the rights of the non-transferring party under this Agreement remain
unaffected.
9.7 Waiver.
A
waiver by any party of any of the terms and conditions of this Agreement
in any
instance shall not be deemed or construed to be a waiver of such term or
condition for the future.
9.8 Headings.
Headings in this Agreement are included for ease of reference only and have
no
legal effect.
9.9 Counterparts.
This
Agreement may be executed in two or more counterparts, each of which shall
be
deemed an original and all of which together shall constitute one and the
same
instrument.
9.10
Applicable
Law.
This
Agreement is governed by and shall be construed in accordance with the laws
of
the State of Delaware, regardless of any conflicts of laws provisions. Any
disputes under this Agreement shall be first submitted to resolution by the
chief executive of the MDI Parties and CEO of EUCODIS, and if
the
said persons (or their nominees) cannot reach agreement on the disputed issue
within a period of thirty (30) days, the Parties shall refer the issue to
arbitration
under
the Rules of Arbitration of the American Arbitration Association, to which
the
Parties hereby consent. The arbitration shall take place in New York City,
New
York with three arbitrators, two of whom shall have significant experience
in
the biotech/pharmaceutical licensing area. The arbitration proceedings shall
be
conducted in the English language. The arbitrators shall apportion the expenses
of the arbitration (including the legal fees and expenses incurred by the
parties) between the parties. Any judgment of the arbitrators shall be
enforceable in any court of competent jurisdiction.
9.11
Further
Assurances.
The
Parties shall provide, grant and/or execute any additional documents or
declarations and shall provide any other assistance that may reasonably be
requested to enable EUCODIS to acquire and manage the Purchased Assets properly
and in full. Except (a) as otherwise provided herein to the contrary, and
(b)
for the costs of recording any assignments to EUCODIS for the Patent Rights
in
patent offices worldwide, which cost shall be at the expense of EUCODIS,
each of
the Parties shall bear its own expenses, including without limitation the
expenses relating to the duplication and delivery of documents and the expenses
relating to the preparation of this Agreement, the documents referred to
herein
and the actions being taken (whether before or after the Effective Date)
to
enable such Party to comply with its representations, warranties, covenants
and
agreements contained herein.
9.12
Press
Release.
The
Parties shall have the right to issue press releases relating to its entry
into
this Agreement; provided,
however,
that
prior to release, the releasing Party provides the other Parties with a draft
of
the press release in sufficient time for the non-releasing Party to comment
on
the release. At
no
time shall any Party issue a release which places the other Parties at risk
with
any governmental authority as such relates to its public company
position.
SIGNATURE
PAGE
In
Witness Whereof,
the
Parties have caused this Agreement to be duly executed in their respective
names
and on their behalf, on the date first above written.
EUCODIS
PHARMACEUTICALS FORSCHUNGS-UND ENTWICKLUNGS GmbH
By:
__________________________
Wolfgang
Schoenfeld, M.D.
Title: Chief
Executive Officer
|
MEDICAL
DISCOVERIES, INC.
By:
___________________________
Judy
Robinett
Title: President
& CEO
|
|
MDI
ONCOLOGY, INC.
By:
___________________________
Judy
Robinett
Title: President
& CEO
|
FIRST
AMENDMENT TO SALE AND ASSET PURCHASE AGREEMENT
This
Amendment (the “Amendment”)
is
made as of this 30th
day of
September 2007 to that that certain Sale and Asset Purchase Agreement, dated
as
of July 6, 2007 (the “Asset
Agreement”),
by
and among Medical Discoveries, Inc., a Utah corporation (“MDI”),
MDI
Oncology, Inc., a Delaware corporation and wholly-owned subsidiary of MDI
(“MDI
Oncology”),
and
Eucodis Pharmaceuticals Forschungs - und Entwicklungs GmbH, an Austrian company
(“Eucodis”).
Capitalized terms used herein but not otherwise defined shall have the meanings
ascribed to them in the Asset Agreement.
WHEREAS,
the Asset Agreement (including, but not limited to, Sections 3.1 and 4.2
thereof) contemplates that that the transactions thereunder (such transactions,
the “Asset
Sale”)
shall
close on or before September 30, 2007; and
WHEREAS,
the Parties remain committed to closing the Asset Sale, however, desire to
extend the period provided for closing the Asset Sale.
NOW,
THEREFORE, in consideration of the mutual promises exchanged herein, the Parties
agree as follows:
1. Amendment
of Asset Agreement.
Section
1.11 of the Asset Agreement is hereby amended as of the Asset Agreement
Effective Date and restated in its entirety to read as follows:
1.11 “Escrow
Agent shall mean Emmes Group Consulting LLC.”
Section
3.1 (c) of the Asset Agreement is hereby amended and restated in its entirety
to
read as follows:
(c)
“On
or
before October
31,
2007,
EUCODIS shall pay
the
Excess Portion to the MDI Parties or to another party as the MDI Parties may
so
direct.”
Section
4.2 of the Asset Agreement is hereby amended and restated in its entirety to
read as follows:
4.2 “In
the
event that the Closing does not occur by October
31, 2007,
and
unless the parties have otherwise agreed in writing, the Escrow Agent shall
deliver the Transfer Documents to the MDI Parties or to whomever as the MDI
Parties may so direct.”
2. No
Further Changes.
All
other provisions of the Asset Agreement shall remain in full force and effect
after the execution of this Amendment.
3. Delaware
Law Governs.
This
Amendment shall be governed by and construed under the internal laws of the
State of Delaware.
IN
WITNESS WHEREOF, the parties have executed this Amendment as of the date first
written above.
EUCODIS
PHARMACEUTICALS FORSCHUNGS-UND ENTWICKLUNGS GmbH
By:/s/
WOLFGANG SCHOENFELD
Wolfgang
Schoenfeld, M.D.
Title: Chief
Executive Officer
|
MEDICAL
DISCOVERIES, INC.
By:/s/
JUDY ROBINETT
Judy
Robinett
Title: Chief
Executive Officer
|
|
MDI
ONCOLOGY, INC.
By:/s/
JUDY ROBINETT
Judy
Robinett
Title: Chief
Executive Officer
|
SECOND
AMENDMENT TO SALE AND ASSET PURCHASE AGREEMENT
This
Amendment (the “Second
Amendment”)
is
made as of this 30th
day of
October 2007 to that that certain Sale and Asset Purchase Agreement, dated
as of
July 6, 2007 (the “Asset
Agreement”,
(as
previously amended by the First Amendment dated September 29, 2007), by and
among Medical Discoveries, Inc., a Utah corporation (“MDI”),
MDI
Oncology, Inc., a Delaware corporation and wholly-owned subsidiary of MDI
(“MDI
Oncology”),
and
Eucodis Pharmaceuticals Forschungs - und Entwicklungs GmbH, an Austrian company
(“Eucodis”).
Capitalized terms used herein but not otherwise defined shall have the meanings
ascribed to them in the Asset Agreement.
WHEREAS,
the Asset Agreement (including, but not limited to, Sections 3.1 and 4.2
thereof), as amended by the First Amendment dated September 29, 2007,
contemplates that that the transactions thereunder (such transactions, the
“Asset
Sale”)
shall
close on or before October 31, 2007; and
WHEREAS,
the Parties remain committed to closing the Asset Sale, however, desire to
extend the period provided for closing the Asset Sale.
NOW,
THEREFORE, in consideration of the mutual promises exchanged herein, the Parties
agree as follows:
1. Second
Amendment of the Asset Agreement.
Section
3.1 (c) of the Asset Agreement is hereby amended and restated in its entirety
to
read as follows:
(c)
“On
or
before January
31,
2008,
EUCODIS shall pay
the
Excess Portion to the MDI Parties or to another party as the MDI Parties may
so
direct.”
Section
4.2 of the Asset Agreement is hereby amended and restated in its entirety to
read as follows
4.2 “In
the
event that the Closing does not occur by January
31, 2008,
and
unless the parties have otherwise agreed in writing, the Escrow Agent shall
deliver the Transfer Documents to the MDI Parties or to whomever as the MDI
Parties may so direct.”
2. No
Further Changes.
All
other provisions of the Asset Agreement shall remain in full force and effect
after the execution of this Second Amendment.
3. Delaware
Law Governs.
This
Second Amendment shall be governed by and construed under the internal laws
of
the State of Delaware.
[signature
page follows]
IN
WITNESS WHEREOF, the parties have executed this Second Amendment as of the
date
first written above.
EUCODIS
PHARMACEUTICALS FORSCHUNGS-UND ENTWICKLUNGS GmbH
By:
__________________________
Wolfgang
Schoenfeld, M.D.
Title: Chief
Executive Officer
|
MEDICAL
DISCOVERIES, INC.
By:
___________________________
Judy
Robinett
Title: Chief
Executive Officer
|
|
MDI
ONCOLOGY, INC.
By:
___________________________
Judy
Robinett
Title: Chief
Executive Officer
|