ITEM 1. BUSINESS
La Jolla Diagnostics, Inc. (the "Company"), a California corporation (OTC Bulletin Board, Symbol LAJD) is a healthcare, nutraceutical and diagnostic products company. The Company has two divisions, a Healthcare Products Division, using proprietary technology, and a Diagnostic Division, primarily concerned with the development and marketing of clinical diagnostic products using immunological and molecular biological technologies.
On September 16, 1998, the Company, through a newly formed subsidiary, DiagnosTech, Inc. (DTI), purchased the assets and technologies of AmTech Scientific, Inc. (ATS), a privately held diagnostic company. These assets include a proprietary, patent pending diagnostic test for active tuberculosis. The accuracy and efficacy of the TB test has been confirmed in three separate clinical trials, and is currently approved for sale and distribution in several countries with approvals pending in others. Additionally, a Japanese pharmaceutical company, having completed internal testing, is in the process of registering the product with the Japanese Ministry of Health.
Other assets to be acquired by La Jolla Diagnostics, Inc. include a rapid diagnostic test for HIV I and II, H. Pilori, and Hepatitis B.
In addition, DiagnosTech acquired the management team of ATS, Stephen C. Roberts, M.D., and G. Bruce Whitfield, J.D.
Prior to April 17, 1995, the Company had not engaged in significant business activities since December 31, 1991. As of April 17, 1995, the Company acquired Unified Technologies, Inc. ("Unified"). The Company is now utilizing the business, scientific and technical expertise of the founders of Unified to develop its ongoing business operations. The Company was incorporated April 26, 1983 under the name Women's Health Centers of America, Inc. On February 8, 1990, the Company completed the acquisition of Chemical Dependency Healthcare, Inc. On April 17, 1995, following the acquisition of Unified, the Company changed its name to La Jolla Diagnostics, Inc. The Company currently has four subsidiaries, Unified Technologies, Inc., Antisera Associates, Ltd., Nasal Mist, Inc. (formed August 6, 1997) and Chemical Dependency Healthcare of California, Inc. The discussion of the Company herein refers to the Company and its subsidiaries on a consolidated basis.
The Company's corporate headquarters is located at 7777 Fay Avenue, Suite 160, La Jolla, California 92037.
The Company's management and scientists have extensive expertise in a wide variety of healthcare areas, including basic science, clinical investigation, product development and dealing with the Food & Drug Administration (FDA), and other regulatory agencies.
LA JOLLA DIAGNOSTICS, INC.
HEALTHCARE PRODUCTS DIAGNOSTIC PRODUCTS
Living Water Eye Lotion(TM) * Antisera Reagents*
Feverfew Nasal Mist(TM) * Heart Attack Predictor
OptoPet Eye Wash(TM) * DiagnosTech Rapid Diagnostic Tests (see full disclosure)
MigraSpray(TM) *
Prescription Eye Drops
Allergy Products
Drug Delivery Systems
* Now being marketed.
HEALTHCARE & NUTRACEUTICAL PRODUCTS
OPHTHALMIC & NASAL SOLUTIONS
One of the Company's founders, Don Brucker, was a pioneer in the development of soft contact lenses and other ophthalmic products. By using his know-how and reputation, the Company has negotiated for exclusive access to a proprietary technology for the special preparation of healthcare and nutraceutical solutions. These solutions are prepared with a patented (U.S. Patent Number 5711950) clustered water technology which the Company feels gives them significant advantages over competitive products. The Company has a license for the exclusive worldwide use of this technology for all eye and nasal solutions, plus other rights.
This clustered water remains chemically identical with unprocessed water, however, when exposed to active biological molecules, the clusters form polywater complexes which take on the structural and electronic "signature" of biomolecules, a process which may enhance the biological effectiveness of the solution. These solutions include:
FEVERFEW NASAL MIST(TM) (currently being marketed)
Feverfew Nasal MistTM, a patent-pending moisturizing nasal spray containing the herb feverfew. The Company is investigating the possibility of adding further indications for its use beyond that as a moisturizer, including its use for symptomatic relief of migraine, menstrual and hangover headaches. The product has been shown at several professional conventions and has been favorably commented on by many health care practitioners. It is now marketed by a large distributor under private label. Several other companies, both foreign and domestic, are in negotiation to market the products.
The suggested domestic retail price of the Feverfew Nasal MistTM is currently $29.95 per spray bottle. The length of time a bottle will last will depend upon its frequency of use and will vary from approximately one month (for those who may choose to use the product prophylactically on a frequent basis) to several months for those who use it as needed. The product will also be marketed under the name, Hi-Altitude Nasal Spray(TM), which will be sold at sporting goods stores, ski resorts, airports, and other locations that cater to people who are exposed to the rigors of high altitude, which includes altitude sickness.
MIGRASPRAY(TM) (currently being marketed along with Feverfew)
MigraSpray(TM), a sublingual oral spray, very similar to Feverfew Nasal Mist, which can be promoted for the treatment of migraine headaches because it is classified as a nutraceutical.
LIVING WATER EYE LOTION(TM) (currently being marketed)
Living Water Eye LotionTM is an eye wash or irrigating solution, used in cleansing the eye to help relieve irritation, burning, stinging, and itching due to loose foreign material, air pollutants (smog or pollen), or chlorinated water.
The solution is a clustered water borate buffered, sterile isotonic aqueous solution containing sodium chloride. It is preserved with a mild preservative, 0.1% sorbic acid and disodium EDTA (ingredients commonly used in solutions for sensitive eyes). In contrast with:
"Eye lubricants," "Artificial Tears," and "Lens Lubricants," which contain ingredients which increase fluid viscosity in an attempt to relieve eye dryness or re-wet contact lenses.
"Eye redness relievers," which contain vasoconstrictors which can cause eye problems when used too frequently.
Eye drops, which contain antihistamines to treat allergy symptoms.
Living Water Eye LotionTM is specially formulated to enhance eye comfort by irrigating, flushing and cleansing without interfering with natural functions.
The product has generally exceeded the expectations of those who have tried it.
OPTOPET EYE WASH(TM) (currently being marketed)
OptoPet Eye Wash(TM) is for cleansing the eyes of dogs and cats and removing mucous which causes fur stains beneath the eyes (a major problem in certain breeds).
PILOCARPINE LW(TM) (future marketing effort and product)
Pilocarpine LW(TM) is a prescription drug used in the treatment of glaucoma, a condition of the eye in which there is usually an elevation of the intraocular pressure which may lead to deterioration of the visual fields and ultimately to blindness. The condition, more prevalent after the age of forty, is frequently symptomless in its early stages unless it is diagnosed during an eye examination.
The active ingredient in the product, pilocarpine (one of the oldest methods of glaucoma treatment), is in a solution similar to the Company's Living Water Eye LotionTM. The properties of Living Water Eye LotionTM make it an exceptional vehicle for the introduction of the pilocarpine to the eye. Presently, the use of pilocarpine (a miotic, i.e., makes the pupil smaller) is limited, because it is uncomfortable to use and is frequently only partially effective. Its use in a Living Water Eye LotionTM type of solution may allow the use of a smaller concentration of pilocarpine, and diminish side effects.
HYPERTONIC LW(TM) (future marketing effort and product)
Hypertonic LW(TM) is a hypertonic saline (2%) agent (eye drop) which may be used to reduce corneal edema (swelling) of various etiologies, including the overwearing of contact lenses, and healing after photorefractive keratectomy (PRK) surgery.
A hypertonic solution exerts an osmotic gradient greater than that present in body tissues and fluids, so that water is drawn from the body tissue across semi-permeable membranes. Applied topically to the eye, it draws fluid out of the cornea.
Most hypertonic saline agents may cause temporary burning and irritation on instillation. The Hypertonic LW(TM) formulation is similar to that of Living Water Eye LotionTM, and is designed to enhance eye comfort.
ALLERGY PRODUCTS
The Company is developing proprietary products which will use the clustered water technology.
OTHER OPHTHALMIC SOLUTIONS
Several compounds, such as steroids, antibiotics and antioxidants using Living Water Eye LotionTM type of solution as a vehicle are being studied by the Company. As with Pilocarpine LWTM, the use of a clustered water type solution may offer certain advantages to the user.
OTHER HEALTHCARE AND NUTRACEUTICALS
The company is developing and intends to market other nasal sprays, sublingual sprays and other nutraceuticals.
DRUG DELIVERY LICENSING
The Company is in contact with major pharmaceutical companies in regards to the licensing of the clustered water process as a more efficient, drug delivery system for ophthalmic, nasal, injectables, parenterals, and oral medications.
DIAGNOSTIC PRODUCTS
The Diagnostic Division, through its subsidiary, DiagnosTech is developing and marketing clinical diagnostic products using immunologic and molecular biologic technologies. The product line now consists of nine self-contained, rapid, point-of-care diagnostics:
A rapid test for active M. tuberculosis (TB) disease. A rapid serum/plasma test for HIV I and II (AIDS) infection. A rapid whole blood test for HIV I and II (AIDS) infection. A rapid saliva test for HIV I and II (AIDS) infection. A rapid test for H. pylori infection (the causative agent in over 90% of ulcers). A rapid test for hepatitis B (hepatitis B surface antigen: HBsAg). A rapid pregnancy test. A rapid test for Trypanasoa cruzi infection (Chagas disease: a common and often fatal parasitic infection endemic to many parts of South and Central America). A rapid test for Toxoplasma gondii infection (Toxoplasmosis: a common opportunistic infection among AIDS patients).
The Company believes each of these diagnostic products to be uniquely advantageous secondary to certain proprietary technology, know-how, and formulations employed by the Company, and that the TB test in particular has no equivalent in the marketplace. Each test requires only a very small sample of patient blood, serum, urine, or saliva, as the case may be. Each test gives an accurate result in 1 to 5 minutes. These tests can easily be performed by any healthcare worker, semi-skilled technician, or by the patients themselves. They are extremely rugged, require no refrigeration, and have a shelf life of 12 to 18 months. No special equipment is required to perform any test. Each test addresses a large and growing market both domestically and internationally.
Each of the diagnostic tests manufactured and marketed represent state-of-the-art technology in that they are rapid, accurate, easy-to-use, and inexpensive. These characteristics make the products ideal for both the U.S. and overseas markets. Changes in the economics of medicine increasingly favor products that can be employed economically and effectively at the point-of-care. Outside of the industrialized world, citizens of emerging economies seek access to healthcare as a high priority. Tests that address significant medical needs, are available at a modest price, and require no special instrumentation, are in high demand.
ANTISERA
The Company has transferred its antisera inventory to DiagnosTech. It consists of high quality, highly purified antibodies which are needed for basic research and clinical immunological assays. The primary users of these antisera products include universities and other research facilities, clinical diagnostic laboratories, hospitals and clinics, where certain antibody reagents are used in large volumes. DiagnosTech is in a position to market it aggressively.
MYOCARDIAL INFARCTION PREDICTOR
The Company has filed for patent application on a novel method of identifying risk factors for myocardial infarction among a certain subset of mature people. The company intends to market an inexpensive test which would be used for screening purposes. Those with this risk factor are several times more likely to experience morbidity or mortality from a condition which may be ameliorated by changes in living conditions and life style. The technology was turned over to DiagnosTech for development of the final diagnostic kit for marketing.
THE MARKET FOR HEALTHCARE AND NUTRACEUTICALS
FEVERFEW NASAL MIST TM
The Company feels that the market for moisturizing nasal sprays, which do not contain vasoconstriction (decongestant) agents and/or antihistamines with their attendant side effects, is growing and will continue to grow along with an overall national trend toward natural and alternative medicine.
Besides its use as a moisturizing nasal spray, the Company intends to pursue the possibility of adding an indication for the use of Feverfew Nasal Mist(TM) for aiding in the alleviation of the symptoms of migraine headaches, menstrual headaches and hangover headaches, all which are thought to be caused by the dilation of cerebral blood vessels. Many people suffering from migraines, and most health care practitioners who treat migraine headaches are familiar with the herb feverfew. In addition, the symptoms of some menstrual headaches have a similar etiology as migraine headaches, which greatly enlarges the potential market.
The product has been endorsed and mentioned in print by leading alternative healthcare practitioners.
At the present time, all the products which are indicated to have some efficacy in the treatment of migraine headache symptoms are sold with a prescription; however, the FDA recently allowed the indication for migraine of the OTC product, Excedrin. If the FDA follows the suggestion of its advisory panel, which it usually does, it might set a precedent in regards to Feverfew Nasal Mist(TM) .
Feverfew (Tanacetum parthenium), an herb which has been used for centuries as a folk remedy, is commonly recommended as an aid in relieving the symptoms of migraine headaches without side effects. Recent international clinical studies continue to give promising results. Traditionally, feverfew is taken orally, either in capsule or liquid solution form.
Migraine headaches are believed to be caused by dilation of the blood vessels of the skull and the scalp. Feverfew is said to be an anti-inflammatory and reduces blood vessel spasms.
More than 20 million people in the United States suffer from migraines, according to the National Headache Foundation, most often striking those between the ages of 25 and 45. Three out of four diagnosed cases are women. The frequency and severity of migraines varies greatly among individuals. The worldwide market for migraine remedies is estimated to be in the neighborhood of $4 billion per year.
Twenty percent of migraine patients experience a pre-headache visual aura which may include sparkling lights, blind spots and vibrating patterns called scintillating scotoma.
Eighty-seven percent of migraine patients sometimes suffer from nausea and fifty-six percent vomit on occasion. Other symptoms include blurred vision, diarrhea, and increased sensitivity to light, sound and smell.
Patients search for the perfect medicine and are frequently shocked to find there isn't one. What may work for one person may be useless or actually make the symptoms worse for another. Most medicines have side effects. Migraine sufferers are forced to settle for what works best, while trying to avoid things which may trigger an attack. "Triggers" vary from individual to individual, and range from chocolate chip cookies to changes in atmospheric pressure to stressful situations.
Menstrual headaches are common, and usually are treated by OTC headache products, such as aspirin or Tylenol, or specialized menstrual products, such as Midol. Feverfew Nasal Mist(TM) could be an effective and economical treatment.
MIGRASPRAY
MigraSpray is a sublingual version of Feverfew Nasal Mist. Because it is classified as a nutraceutical, the fact that Feverfew is used as a treatment for migraine headaches may be promoted. A book on natural treatments for the symptoms of migraine headaches by Douglas Hunt, M.D., entitled Migraine Killers, has recently been published. The primary product featured in Dr. Hunt's book (who has authored several books on alternative medicine) is MigraSpray.
LIVING WATER EYE LOTION(TM)
Living Water Eye Lotion(TM) falls under the category of an OTC eye wash or irrigating solution. It can be used by anyone who wishes to cleanse the eye to relieve irritation, burning, stinging or itching. However, because of its superior qualities it is frequently being used in place several different types of OTC eye solutions including vasoconstrictors such as Visine, astringents such as Murine, and lubricating agents or artificial tears. The total OTC ophthalmic solution market in the Untied States is in the hundreds of millions of dollars.
Major ophthalmic solution suppliers include Allergan, Alcon Laboratories (a subsidiary of Nestle), Bausch and Lomb, Ciba Vision Corp., IOLab (a subsidiary of Johnson & Johnson), Merck, and Pharmacia Ophthalmic.
Therefore, though Living Water Eye Lotion(TM) compares favorably with other OTC eye solutions, the Company does not intend to compete with the brand leaders. In addition to traditional sales and marketing efforts, it intends to use existing specialized distributors and marketing channels which it has identified, and who have specialized capabilities and/or interests. The product is now being carried in two of the leading alternative health medicine catalogs.
OPTOPET EYE WASH(TM)
The domestic market for veterinary ophthalmic solutions is a highly fragmented market estimated at $10.8 million in annual revenues. The Company believes its eye drop, which is especially effective in cleansing the eyes of dogs and cats (a major problem in certain breeds), will capture a significant portion of the market. The product is being introduced to pet owners, pet stores and veterinarians through a public relations campaign in pet magazines and the general press. In addition, the Company is negotiating with a major veterinary products company to private label the product and distribute.
PILOCARPINE LW(TM)
It is estimated that over 2 million people suffer from glaucoma in the United States, with almost 80,000 Americans blind from the condition, making it the nation's leading cause of preventable blindness.
There are many glaucoma medications on the market. Existing products have unpleasant side effects, such as, blurred vision, burning eyes, conjunctivitis, headaches and heart palpitations. The leading glaucoma product is Timoptic by Merck with sales estimated of $175 million in the United States, and $395 million worldwide.
Because Pilocarpine LW contains a low concentration of this active ingredient in a solution similar to the Company's Living Water Eye Lotion(TM), it should be well accepted by both patients and ophthalmologists who will prescribe it.
HYPERTONIC LW(TM)
In addition to being used as a "first aid" treatment in cases of corneal edema caused by the overwearing of contact lenses, Hypertonic LWTM is suitable for use on a standard prophylactic basis for a period of weeks or months on a post-PRK patient.
OTHER OPHTHALMIC SOLUTIONS
The properties of Living Water Eye LotionTM would benefit many other types of ophthalmic solutions, and while the volume of use of many of these solutions is not great because they are usually not used chronically, they may make profitable niche markets of several million dollars each.
THE MARKET FOR DIAGNOSTIC PRODUCTS
THE MARKET FOR DIAGNOSTECH'S PRODUCTS
The following table sets forth the Company's abbreviated assessment of the indications and total potential market size for several of its products.
The Company believes each of these diagnostic products to be uniquely advantageous secondary to certain proprietary technology, know-how, and formulations employed by the Company, and that the TB test in particular has no equivalent in the marketplace. Each test requires only a very small sample of patient blood, serum, urine, or saliva, as the case may be. Each test gives an accurate result in 1 to 5 minutes. These tests can easily be performed by any healthcare worker, semi-skilled technician, or by the patients themselves. They are extremely rugged, require no refrigeration, and have a shelf life of 12 to 18 months. No special equipment is required to perform any test. Each test addresses a large and growing market both domestically and internationally.
Each of the diagnostic tests manufactured and marketed by DiagnosTech represent state-of-the-art technology in that they are rapid, accurate, easy-to-use, and inexpensive. These characteristics make the products ideal for both the U.S. and overseas markets. Changes in the economics of medicine increasingly favor products that can be employed economically and effectively at the point-of-care. Outside of the industrialized world, citizens of emerging economies seek access to healthcare as a high priority. Tests that address significant medical needs, are available at a modest price, and require no special instrumentation, are in high demand.
ANTISERA PRODUCTS
The primary users of antisera products include universities and other research facilities, clinical diagnostic laboratories, hospitals and clinics, where anti-IgG, anti-IgM and anti-IgA antibody reagents are used in large volume. Smaller volumes of the anti-IgD and anti-IgE are in demand because the IgD and IgE antigens are rarer.
Although there are many immunological reagent suppliers, there is an apparent inadequate number of primary manufacturing suppliers of certain types of top-quality highly purified antibodies which are needed for basic research and clinical immunological assays. The Company has the capacity to further purify antigens as needed, should the demand justify it.
MYOCARDIAL INFARCTION PREDICTOR
The Company's myocardial infarction risk factor predictor for mature people has the potential for broad use, especially in a managed care environment where the cost saving advantages of disease prevention are stressed.
REGULATORY AFFAIRS
As a manufacturer, importer and distributor of medical products, the Company is subject to various regulations of the FDA, and various state and foreign health regulatory agencies. The FDA has promulgated regulations to which the Company must adhere relating to the effectiveness and safety of the Company's products. These regulations include, but are not limited to, premarket approval regulations, manufacturing and quality assurance procedures, and conditions and procedures under which investigation of new products or new uses may be conducted. The Company's antisera products do not require FDA approval for its use as research reagents. The Company's diagnostic tests may require submission to the FDA as a premarketing application (PMA) for a new type of diagnostic product or a premarket notification under Section 510(k) for any diagnostic product which is substantially similar to an existing product with FDA approval. Some of the Company's diagnostic tests now in the planning stage are unique, and therefore, will require clinical trials to prove its efficacy before a PMA can be submitted to the FDA.
Many product solutions do not require FDA pre-clearance if they fall into certain OTC or nutraceutical categories. Other types do require pre-clearance. The Company's products will fall into both categories. The Company may search for a pharmaceutical company to enter into a joint venture for the development of products requiring full FDA pre-clearance.
The Company believes its long-term success will be partially dependent on its ability to efficiently gain approval on the products which will require FDA pre-clearance. The Company's Chief Executive Officer has had substantial experience in dealing with FDA registration and regulation requirements.
PATENTS, TRADE SECRETS AND LICENSES
Proprietary protection for the Company's products, processes and know-how is important to the Company's business. Thus, the Company plans to aggressively prosecute and defend its proprietary technology. The Company intends to file patent applications, where appropriate, to protect technology, inventions and improvements that are considered important to the development of its business. The Company also relies upon trade secrets, know-how, continuing technological innovation and licensing opportunities to develop and maintain its competitive position.
The Company currently holds no patents, but has filed two patent applications one on its Myocardial Infarction Predictor and one on its Feverfew Nasal MistTM. In addition, an application has been filed on DiagnosTech's rapid test for TB.
The Company has an exclusive license agreement to market eye and nasal products plus other rights from the developer and founder of a patented clustered water process (U.S. Patent Number 5711950).
The patent positions of medical product firms, including the Company's, are generally uncertain and involve complex legal and factual questions. Consequently, even though the Company may prosecute its patent applications with the United States and foreign patent offices, the Company does not know whether any applications will result in the issuance of patents or whether any issued patents will provide significant proprietary protection or will be circumvented or invalidated. Since patent applications in the United States are maintained in secrecy until patents are issued, and publication of discoveries in the scientific or patent literature tend to lag behind actual discoveries, the Company cannot be certain that it was the original creator of inventions which may be covered by patent applications or that it was the first to file patent applications for such inventions.
There can be no assurance that patents, if issued, would be held valid by a court of competent jurisdiction. Moreover, to determine priority of invention, the Company may have to participate in interference proceedings declared by the United States Patent and Trademark Office or opposition proceedings before an equivalent foreign agency, which could result in substantial cost to the Company.
There can be no assurance that the patent applications, if any, will result in patents being issued or that if issued, the patents will afford protection against competitors with similar technology; nor can there be any assurance that others will not obtain patents that the Company would need to license or circumvent.
The Company will also rely upon unpatented trade secrets, and there can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology, or that the Company can meaningfully protect its right to unpatented trade secrets.
HUMAN RESOURCES
As of June 30, 1998, the Company had three employees and utilized the services of five part-time personnel or independent contractors, engaged in research, development and manufacturing, customer service and general administration. The Company's research and development staff is made up of professionals working as independent contractors, who perform their services in exchange for Common Stock and Warrants. See "Management, Consultants and Advisors." None of the Company's employees are covered by a collective bargaining agreement, and the Company has experienced no work stoppages. The Company believes that it maintains positive relations with its personnel.
In addition, on September 16, 1998, the top management of DiagnosTech, Stephen Roberts, M.D. and Bruce Whitfield, joined the Company.
The success of the Company in its research and development of medical products is dependent upon the experience and know-how of its key scientific and technical personnel.
ITEM 2.
ITEM 2. PROPERTY
The corporate headquarters of the Company are located at 7777 Fay Avenue, Suite 160, La Jolla, California 92037. The facilities are approximately 1,400 square feet and are leased at approximately $2,500 per month. The Company has a month-to-month lease and is currently looking at larger quarters.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS The Company is not involved in any litigation.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At October 9, 1998, there were over 500 holders of record of the Common Stock. The Company has not paid cash dividends on its capital stock since inception nor does it intend to for the future. The Company currently intends to retain earnings, if any, for use in its business.
ITEM 6.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The Company has not had significant revenues from operations in each of its last three fiscal years and is believed to still be in its development stage. The Company's business is divided into two separate, distinct operations: the Ophthalmic Division and the Diagnostic Division.
PLAN OF OPERATIONS
FINANCIAL RESOURCES
At June 30, 1998 and 1997, the Company had current assets of $48,835 and $79,011 including cash of $1,307 and $13,275, respectfully. Total assets were $3,042,597 and $3,133,677 including inventory valued at $2,481,641 and $2,483,890, respectively.
Total sales for the years ended June 30, 1998 and 1997 were $73,800 and $173,624, respectively, for each period.
Costs and expenses for the twelve months ended June 30, 1998 and 1997 were $785,732 and $906,719 resulting in a loss from operations for the period of $711,932 and $733,095,respectively. Costs and expenses included consulting services of $191,338 and $266,112, and research and development expense of $54,525 and $80,938, substantially all of which was for services performed by the directors, officers and advisors identified in the section "Management", who accepted as compensation for such services common stock and warrants to acquire common stock of the Company. See "Executive Compensation - Stock Awards and Performance Warrants."
The increase in selling and administrative expenses for the years ended June 30, 1998 and 1997 are due to the Company's increase in sales and financial and reporting responsibilities. Selling and administrative expenses included; $127,745 and $110,265 salaries, $40,287 and $49,611 rent, $41,469 and $54,612 legal and accounting fees, $15,102 and $6,511 advertising, and $256,772 and $193,434 in miscellaneous other expenses.
VALUATION OF ANTISERA INVENTORY
The Company has made the decision to sell its inventory of antisera products via a close-out sale because it has been determined that the marketing of antisera products no longer fits into the Company's long-range plans. The Company intends to concentrate on proprietary diagnostic products and consumer healthcare products.
In the past, the Company marketed its inventory of antisera on a limited basis by placing ads in journals stressing the high quality of the products, along with discount prices. The initial response to the ads, that is people and institutions requesting catalogs, was commensurate with the marketing effort, but follow-ups with actual orders was not.
After investigation, the Company has come to the conclusion that the discount offered of 10 to 20 percent below standard market prices was not sufficient to entice users of antisera away from their customary suppliers, so marketing was suspended.
Now that the Company has made the decision to close out its antisera inventory, it feels confident that a more vigorous discounting of antisera prices, along with aggressive advertising in leading journals, stressing that the demand for a product determines the price, will result in a sale of a significant portion of the inventory in a relatively short period of time.
The proposed 40 percent discount off the Company's present catalog discount prices will result in an average discount of 50 percent or more off the industry standard.
During the prior year the Company booked a reserve for inventory of approximately 40 percent to reflect estimates of the close-out sale. Additionally, the associated Note Receivable was written down by $406,900 and the associated Interest Receivable of $100,648 was written down.
The Company believes an active market exists for its antisera inventory. The level of sales of the antisera inventory is directly dependent on marketing efforts. An aggressive marketing campaign could result in a rapid turnover of the inventory at favorable prices.
MATERIAL UNCERTAINTIES AFFECTING LIQUIDITY AND VALUE OF ANTISERA INVENTORY
In addition to the factors which might affect the value of the antisera inventory discussed in "Risk Factors," above, there are other factors which might affect the value of the antisera inventory.
The Company's ability to increase sales of antisera depends heavily on the success of its marketing strategy, which includes, among other things, advertising in research journals and directly mailing brochures listing the Company's inventory and sale prices to research facilities. There can be no assurance that potential consumers of antisera will commit to purchase the Company's inventory at the Company's close-out prices.
ANTISERA ASSOCIATES
The Company has a 75 percent interest in Antisera Associates, Ltd., which was formed on December 21, 1994. Antisera Associates, Ltd. was formed to market, sell and distribute the antisera inventory.
The partnership was formed when the Company sold $1,000,000 of antisera inventory to Sogery Trust, an unrelated entity, for $100,000 in cash and a note for $900,000. Following the sale, the Company contributed its remaining $3,142,784 of antisera inventory for its 75 percent interest, and Sogery Trust contributed its $1,000,000 of inventory for a 25 percent interest in the partnership.
The minority interest has been accounted for under the "parent company theory" in the consolidated balance sheet. Under this approach, the minority interest is not considered part of stockholders' equity, and is disclosed in the consolidated balance sheet between the liability section and the stockholders' equity section..
EXPECTED PURCHASES OR SALES OF PLANT AND SIGNIFICANT EQUIPMENT
The Company does not expect to purchase and/or sell any significant equipment during the next twelve months.
EXPECTED CHANGES IN NUMBER OF EMPLOYEES
The Company plans to add additional employees over the next twelve months as its research and development effort increases, and its sales of solutions, diagnostic kits and miscellaneous products expand. Several people are expected to be added in sales, marketing, administrative and to handle regulatory matters, as well as in the laboratory for both research and development projects and the processing of antisera. In addition, consultants and part-time or temporary employees may be used on specific projects.
RESULTS OF OPERATIONS
As discussed above, the Company did not engage in significant business prior to April 17, 1995. On that day, the Company acquired Unified, a small development stage business. Since that time, the Company has been developing products and expects its first significant sales in the coming fiscal year.
FISCAL YEARS ENDED JUNE 30, 1998 AND 1997
On a consolidated basis, the Company had sales totaling $73,800 for the year ended June 30, 1998, compared with $173,624 in sales for the Company for the same period ending June 30, 1997. The decrease in sales resulted from decreased sales of contact lenses.
The Company experienced a net loss of $695,787 for the twelve-month period ended June 30, 1998, compared with a net loss of $2,516,095 for the same period ended June 30, 1997. The decrease in losses is partially attributable to the previously discussed antisera inventory write down, a write down of the note receivable on antisera inventory and interest on the note receivable. See "Plan of Operation -- Financial Resources."
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through private placements of common stock, issuing warrants to acquire stock in exchange for services rendered for the benefit of the Company, and to a lesser degree, sales. The Company anticipates that the proceeds from private placements of stock and exercise of warrants, together with existing capital and revenues from product sales will be sufficient to finance its operations and working capital requirements for at least twelve months. See "Plan of Operation -- Financial Resources."
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
PAGE
REPORT OF INDEPENDENT ACCOUNTANTS 18
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of June 30, 1998 and 1997 19-20
Consolidated Statements of Operations for the years ended June 30, 1998 and 1997, and cumulative totals for development stage operations from December 3, 1993 (date of recommencement) through June 30, 1998 21
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended June 30, 1998, 1997, 1996, and 1995 for the period December 3, 1993 (date of recommencement) through June 30, 1994, and for the period July 1, 1993 through December 2, 1993 22-23
Consolidated Statements of Cash Flows for the years ended June 30, 1998 and 1997, and cumulative totals for development stage operations from December 3, 1993 (date of recommencement) through June 30, 1998 24-25
Notes to Consolidated Financial Statements 26-35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of La Jolla Diagnostics, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of La Jolla Diagnostics, Inc. (a California corporation) and its subsidiaries as of June 30, 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of La Jolla Diagnostics, Inc. as of June 30 1997, were audited by other auditors whose report dated October 9, 1997 included an explanatory paragraph describing conditions that raised substantial doubt about the Company's ability to continue as a going concern.
Except as discussed in the following paragraph, we conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
We were unable to confirm or observe antisera inventory which was held by a third party and valued at $292,784 at June 30, 1998. We were also unable to satisfy ourselves about the existence of the inventory through alternative procedures. (Note E)
In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to confirm the inventory referred to in the preceding paragraph, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of La Jolla Diagnostics, Inc. and its subsidiaries as of June 30, 1998, and the results of its operations and cash flows for the year then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note M to the financial statements, the Company has suffered recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note M. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Logan Throop & Co., LLP San Diego, California October 7, 1998
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1998 AND 1997
ASSETS 1998 1997
CURRENT ASSETS: Cash $ 1,307 $ 13,275 Accounts receivable 3,735 9,953 Advances to officer 6,626 8,487 Inventory: Healthcare Products 14,730 26,979 Prepaid expenses 22,437 20,317 --------- --------- TOTAL CURRENT ASSETS 48,835 79,011 INVENTORY (Note E) 2,466,911 2,456,911 PROPERTY & EQUIPMENT, net 30,970 45,820 NOTE RECEIVABLE (Note D) 493,100 493,100 OTHER ASSETS 2,781 58,835 --------- --------- $3,042,590 $3,133,677 ========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES: Accounts payable $ 335,959 $ 282,226 Accrued expenses 24,658 34,490 Customer deposits 663 40,418 Lease obligations, current portion (Note H) 1,119 2,408 Loans payable (Note G) 114,591 293,216 ---------- --------- TOTAL CURRENT LIABILITIES 476,990 652,758 LEASE OBLIGATION, non-current portion (Note H) 2,042 5,240 MINORITY INTEREST 555,069 358,650
See accountants' report and notes to consolidated financial statements.
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED BALANCE SHEETS (con't) AS OF JUNE 30, 1998 AND 1997
STOCKHOLDERS' EQUITY: 1998 1997 Common stock, no par value (50,000,000 shares authorized, 12,068,986 and 9,137,534 shares issued & outstanding, respectively) 12,403,499 11,816,245 Additional paid-in capital 831,247 831,247 Preferred stock, no par value (5,000,000 shares authorized, no shares issued) -- -- Retained deficit ($4,815,731 and $4,119,944 deficit accumulated during development stage begun December 3, 1993, respectively)(Note B) (11,226,250) (10,530,463) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 2,008,496 2,117,029 ---------- ---------- $3,042,597 $3,133,677 ========= =========
See accountants' report and notes to consolidated financial statements.
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1998 AND 1997, AND CUMULATIVE TOTALS FOR DEVELOPMENT STAGE OPERATIONS FROM DECEMBER 3, 1993 (DATE OF RECOMMENCEMENT) THROUGH JUNE 30, 1998
Development Stage Ended June 30, June 30, June 30, 1998 1997 1998 (Note B)
NET SALES (Note K) $ 73,800 $ 173,624 $ 528,823
COSTS AND EXPENSES: Cost of products sold 45,255 131,952 372,894 Selling and administrative expenses 481,375 414,433 1,445,774 Research and development 54,525 80,938 661,431 Consulting services 191,338 266,112 1,323,791 Depreciation and amortization 13,239 13,284 36,002 --------- --------- --------- TOTAL COSTS & EXPENSES 785,732 906,719 3,839,892 --------- --------- --------- LOSS FROM OPERATIONS (711,932) (733,095) (3,311,069)
OTHER INCOME (EXPENSES) Interest income -- 579 101,227 Interest expense (28,049) (23,305) (66,458) Minority interest 48,194 433,342 664,585 Write-down of Inventory -- (1,683,668) (1,683,668) Write-down of Notes/ Interest Receivable -- (507,548) (507,548) --------- --------- --------- TOTAL OTHER INCOME (EXPENSE) 20,145 (1,780,600) (1,491,862) --------- --------- --------- LOSS BEFORE INCOME TAXES (691,787) (2,513,695) (4,802,931) PROVISION FOR INCOME TAXES (Note I) 4,000 2,400 12,800 --------- --------- --------- NET LOSS (Note B) $ (695,787) $(2,516,095) $(4,815,731) ======= ========== =========
PRIMARY AND FULLY DILUTED LOSS PER SHARE (Note F) $(0.07) $(0.33) $(0.82) --------- --------- --------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 10,685,391 7,720,196 5,852,580 ========== ========== ==========
See accountants' report and notes to consolidated financial statements.
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED JUNE 30, 1998, 1997, 1996 AND 1995, FOR THE PERIOD DECEMBER 3, 1993 (DATE OF RECOMMENCEMENT) THROUGH JUNE 30, 1994, AND FOR THE PERIOD JULY 1, 1993 THROUGH DECEMBER 2, 1993
See accountants' report and notes to consolidated financial statements.
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1998 AND 1997, AND CUMULATIVE TOTALS FOR DEVELOPMENT STAGE OPERATIONS FROM DECEMBER 3, 1993 (DATE OF RECOMMENCEMENT) THROUGH JUNE 30, 1998
See accountants' report and notes to consolidated financial statements.
LA JOLLA DIAGNOSTICS, INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies:
ORGANIZATION AND BASIS OF CONSOLIDATION:
La Jolla Diagnostics, Inc., a California corporation ("LAJD" or the "Company") was incorporated on April 26, 1983 as Women's Health Centers of America, Inc. On February 8, 1990, the Company acquired Chemical Dependency Healthcare of California, Inc. and changed its name to Chemical Dependency Healthcare, Inc. On April 17, 1995, the Company acquired Unified Technologies, Inc. and changed its name to La Jolla Diagnostics, Inc. The Company has two wholly-owned subsidiaries, Unified Technologies, Inc. (UTI) and Chemical Dependency Healthcare of California, Inc. (CDHC) and a 75 percent ownership interest in Antisera Associates, Ltd. (AAL), a California limited partnership as well as a 52 percent ownership interest in Nasal Mist, Inc. (NMI), a California corporation. The Company is still considered a development stage enterprise (see Note B).
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of La Jolla Diagnostics, Inc. and its subsidiaries. Minority interest represents the minority partner's share of the equity in AAL and minority shareholder's interest in NMI. All significant intercompany transactions and balances have been eliminated in consolidation.
BASIS OF ACCOUNTING:
The Company's policy is to use the accrual method of accounting and to prepare and present financial statements which conform to generally accepted accounting principles.
INVENTORY:
Inventory consists of medical and healthcare products, and the antisera products. The inventory is valued at the lower of cost or market. Cost is determined under the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT:
Property and equipment is recorded at cost. Maintenance, repairs and minor renewals are expensed as incurred. When property and equipment are retired or otherwise disposed, the related cost and accumulated depreciation are eliminated and any gain or loss on disposition is reflected in income or expense. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets of five years. Property and equipment is shown net of accumulated depreciation of $30,584 and $19,634 for the years ended June 30, 1998 and 1997, respectively.
INCOME TAXES:
Income taxes are provided for the tax effects of transactions reported in the financial statements and consists of taxes currently due plus deferred taxes related primarily to differences between the basis of various assets for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for net operating losses that are available to offset future taxable income and tax credits that are available to offset future federal income taxes.
USE OF ESTIMATES:
The preparation of the Company's financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the financial statement date and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
B. Development Stage Business:
The Company is a development stage business engaged in the development and sale of medical products. The Company researches, develops, manufactures and markets various healthcare products and provides certain laboratory services. The consolidated financial statements reflect activity primarily related to identifying suitable products for sale and efforts devoted to financing and carrying on administrative functions. The Company has recommenced its operations, however, revenues generated to date have been primarily related to the sale of ancillary products.
Development stage operations for the Company began upon the incorporation of UTI on December 3, 1993. Prior to this date, the Company was inactive and had no material operations. The following information details the deficit accumulated during the development stage and the related losses prior to the development stage:
Retained deficit as of June 30, 1998 and 1997 consists of the following:
1998 1997
Deficit accumulated during the development stage $(4,815,731) $(4,119,944) Deficit accumulated prior to the development stage (6,410,519) (6,410,519) --------- --------- $(11,226,250) $(10,530,463) ========== ==========
C. Acquisitions:
On April 17, 1995, the Company acquired 100 percent of the outstanding stock of UTI by issuing 4,938,750 shares of its no par value common stock in exchange for 9,877,500 shares of UTI common stock. This stock exchange resulted in UTI shareholders receiving one share of CDHC common stock for every two shares of UTI common stock held. The business combination has been accounted for under the pooling of interests method. Effective April 17, 1995, the Company changed its name to La Jolla Diagnostics, Inc. (Note A).
Under the pooling of interests method, UTI's results of operations have been included in the consolidated results of operations since the date of its inception, December 3, 1993, and the assets and liabilities of the separate companies have been combined and are recorded at their historical cost based amounts. Since CDHC was inactive and had no assets or operations for any reported periods prior to the merger, the consolidated results of operations consist solely of UTI's operations prior to the date of combination and the basis of accounting used by UTI has continued and accordingly, no adjustments were necessary to change to different accounting methods. The operations subsequent to the merger relate to the continuing development stage activities, which relate primarily to the development and sale of medical healthcare products (Note B).
In July 1994, UTI merged with Pathfinder Holding Corporation (Pathfinder), a Nevada publicly-held shell corporation, in which Pathfinder was to be the surviving entity. However, after the merger was completed, certain unintentional misrepresentations concerning the SEC registration status of Pathfinder's stock were discovered, resulting in an agreement among the parties to rescind the merger. Accordingly, on February 10, 1995, the merger was rescinded and all the assets and liabilities of the Company existing prior to the merger, as well as all assets acquired and obligations created after the merger were transferred to UTI. In exchange for the recision and the rights to the name Pathfinder Holding Corporation, the Company issued warrants to purchase an aggregate of 678,300 shares of the Company's common stock at an exercise price of the greater of $1.00 or 50 percent of the average trading price for the five days prior to exercise.
D. Formation of Subsidiaries
ANTISERA ASSOCIATE, LTD.
On December 21, 1994, the Company sold $1,000,000 of antisera inventory to Sogery Trust, an unrelated entity, for $100,000 in cash and a note receivable of $900,000 secured by the inventory. Following the sale, the Company and Sogery Trust formed Antisera Associates, Ltd., whereby the Company contributed $3,142,784 of antisera inventory for a 75 percent interest and Sogery Trust contributed its $1,000,000 of inventory for a 25 percent interest in the partnership.
The original note receivable from Sogery Trust bears interest at 7 percent annual rate and calls for principal payments due in fiscal years 1996, 1997, 1998 and 1999. However, by mutual agreement no payments have been made to date. Per the partnership agreement, if the Company is unable to sell the inventory due to lack of marketability or reduction in value, then the outstanding balance on the promissory note will be reduced as appropriate to reflect any corresponding reduction in value. (See Note E.) The partnership is scheduled to terminate in December of 1998.
NASAL MIST, INC.
During August 1997, the Company formed Nasal Mist, Inc. (NMI), a subsidiary organized for the production and marketing of herbal nasal sprays. NMI raised approximately $269,000 for a 48 percent equity interest. The proceeds are to be used to fund NMI's internal operation costs and to apply to the development of markets for the product. In exchange for that funding, LAJD has granted NMI a license and the right to receive from LAJD and its successors-in-interest, an amount equal to 10% of the net sales, less commissions and discounts of nasal sprays sold by LAJD and its successors-in-interest.
E. Inventory
The antisera inventory was purchased by UTI on June 8, 1994 from a private family trust in bulk form for total consideration valued at $4,142,784. Payment was in the form of 532,970 shares of the Company's common stock (with an effective share price of $7.77 per share), along with warrants to purchase an additional 60,000 shares at $0.20 per share (after giving effect for the 1 for 2 shares of UTI stock exchanged in the UTI merger). The transaction was valued based upon independent appraisals of the antisera inventory, as that value was deemed to be more readily determinable than the stock and warrants issued. Subsequent to the exchange common stock sold through a private placement issue averaged approximately $0.40 per share.
As described in Note D, $1,000,000 of the inventory was sold at cost and recontributed in exchange for a 25 percent interest in Antisera Associates, Ltd.
During the year ended June 30, 1997, the Company wrote down the inventory by approximately 40% ($1,683,668) and began preparing for the implementation of a close-out sale marketing campaign. In addition, the related note due from the Sogery Trust was also reduced to $493,100 by a $406,900 valuation reserve and interest receivable of $100,648 was written off. Management has estimated that the antisera inventory can be sold for at least its recorded net value and it is reasonably possible that those values could change in the near future.
Inventory as of June 30, 1998 and 1997 is comprised of the following:
1998 1997
Antisera at original value $4,150,579 $4,140,579
Less reserve (1,683,668) (1,683,668) --------- --------- Antisera products, net of reserve 2,466,911 2,456,911
Healthcare products 14,730 26,979 --------- --------- $2,481,641 $2,483,890 ========= =========
At June 30, 1998 antisera inventory valued at $292,784 was stored by a principal stockholder and former employee. Management is confident that the inventory is safe and hopes to establish contact with the former employee in the near future.
F. Net Loss Per Common Share:
Net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. For the years ended June 30, 1998 and 1997, the Company's common stock equivalents were antidilutive, and therefore, were not included in the computation of net loss per common share. The per share computations reflect the effect of a 10 for 1 reverse stock split that occurred on April 14, 1995 and a 2 for 1 stock exchange between the Company and UTI on April 17, 1995.
The Company has restated common stock to reflect the reverse stock split as a result of the merger. For the years ended June 30, 1994 through 1998, changes in stockholders' equity (deficit) reflect activity incurred during the development stage period.
G. Loans Payable:
Loans Payable as of June 30, 1998 and 1997 consist of the following:
1998 1997
Loans payable to unrelated parties, unsecured, with annual interest of 10 percent, due on demand. $ 7,341 $ 7,341
Loan payable to a group of foreign investors, unsecured, with annual interest of 8 percent, due on demand. 31,000 32,125
Loans payable to unrelated parties, unsecured, with annual interest of 10 percent, due August 1997, note holders have option to convert at $1.00/share into shares of common stock of Nasal Mist, Inc. -- 26,700
Loans payable to unrelated parties, unsecured, with annual interest of 12 percent, due at various dates through January 1998, note holders have the option to convert at $.20/share into shares of common stock of the Company. 30,000 227,050
Loan payable to a director, unsecured, with annual interest rate of 10 percent, due June 30, 1999, note holder has warrants attached with an exercise price of $0.20 per common share. 7,250 --
Loan payable to unrelated party, secured by inventory with prepaid interest of $2,000 and interest payments of $2,750 due and payable July 27, 1998. 19,000 --
Loan payable to unrelated party, unsecured, with annual interest of 7%, due December 1998. 20,000 -- ------- ------- $114,591 $293,216 ======= =======
H. Capital Lease Obligation:
The Company leases equipment under a capital lease. The Company is financing the acquisition over a sixty month period. The capital lease is reflected in the Company's assets & liabilities. The following is an analysis of the book value of the leased asset included in property and equipment:
Cost $ 5,350
Accumulated Depreciation (2,675) ------- $ 2,675 =======
The following is a schedule by year of the future minimum lease payments under the above capital lease, together with the present value of the net minimum lease payments:
Year ending June 30
1999 1,534 2000 1,534 2001 767 ----- 3,835 Amount representing interest (674) ----- Present value of net minimum lease payment 3,161 Less current portion (1,119) ----- $2,042 =====
I. Income Taxes:
The provision for income taxes for the years ended June 30, 1998 and 1997 consists solely of the $800 minimum California franchise taxes for the Company and its wholly-owned subsidiaries.
Provision for income taxes is summarized as follows:
June 30, 1998 June 30, 1997
Current income taxes $4,000 $2,400 Deferred income taxes -- -- ----- ----- Provision for income taxes $4,000 $2,400 ===== =====
The Company's total deferred tax asset as of June 30, 1998 is as follows:
Net operating loss carryforwards $381,000 Valuation allowance (381,000) ------- Net deferred tax asset $ -- =======
As of June 30, 1998, the Company had net operating loss carryforwards totaling approximately $10,000,000 for federal and $1,892,000, before any limitations, which expire through 2013 for federal and 2003 for state.
However, the realization of any future income tax benefits from the utilization of net operating losses is limited. Federal and state tax laws provide that when more than 50 percent ownership changes within a three-year period, the net operating loss that can be used each year is limited. Therefore, the net operating loss carryforwards available have been limited to approximately $15,000 per year until they expire. Losses totaling $3,602,000 federal and $1,801,000 state generated after the merger will not be limited by any change that resulted from the previous merger.
J. Warrants and Options:
Warrants and options outstanding as of June 30, 1998 and 1997 consists of 3,277,350 and 2,991,350, nonredeemable warrants and options to purchase shares of common stock of the Company, which are exercisable into 1 share of common stock each at various prices ranging from $0.20 to $1.00 per share. The warrants were issued in connection with certain transactions and performance of services and expire five years after the date of issuance. The options were issued for certain transactions and performance of services and expire at various times from three to eight years. Warrants in the amount of $10,000 and $141,818 have been exercised during the years ended June 30, 1998 and June 30, 1997, respectively.
K. Export Sales:
The Company's operations consist of sales of products to domestic and foreign markets. As of June 30, 1998 the Company had unshipped orders for products totaling $663. There were $40,418 in unshipped orders as of June 30, 1997. Although the Company is a development stage enterprise and product sales have commenced, the breakdown of sales between foreign and domestic markets is as follows for the years ended June 30, 1998 and 1997:
1998 1997
Domestic market $52,154 $ 24,209
Foreign market (Russia) 21,646 149,415 ------ ------- $73,800 $173,624 ====== =======
L. Related Party Transactions:
For the years ended June 30, 1998 and June 30, 1997 various shareholders and directors provided consulting and research and development activities and were compensated with S-8 Common Stock issuances and S-8 stock options. This compensation amounted to $17,750 and $5,000 for the years ending June 30, 1998 and 1997, respectively.
M. Going Concern:
As shown in the accompanying Financial Statements, the Company has incurred recurring losses from operations. As of June 30, 1998, current liabilities exceed current assets by approximately ($428,000) The Company has also been unsuccessful in marketing or selling significant amounts of the antisera inventory. In addition, the Company had negative cash flows from operations of $419,500 for the year ended June 30, 1998. These factors, as well as the uncertainty regarding the Company's ability to continue to raise capital through the sale of equity securities, create an uncertainty as to the Company's ability to continue as a going concern.
Management feels confident that the above problems are being solved. The Company is currently negotiating a merger (Note N) and plans to establish a new subsidiary designed to market and process the sale of its antisera inventory. It intends to close-out its inventory of antisera (various reagents which contain antibodies against immunoglobulins) by reducing its current sale prices in order to concentrate on the development of its proprietary diagnostic products, and the marketing and development of its ophthalmic solutions, and nasal sprays. The Company expects the continued close-out sale of antisera will create significant revenues and provide cash for working capital over the next three to five years.
M. Going Concern (continued):
The Company has numerous products that are in various stages of development and a few products are being actively marketed with limited revenues.
The Company is also trying to raise capital through the exercise of outstanding options and warrants through a private placement to provide capital for the introduction of Feverfew Nasal Mist and other nasal sprays the Company intends to develop.
The ability of the Company to continue as a going concern is dependent upon their success in the above endeavors to obtain additional sources of capital, and attain sufficient growth in their user base to enable them to achieve future profitability. The accompanying financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
N. Subsequent Event:
In September 1998, the Company entered into negotiations to acquire AmTech Scientific, Inc. (ATS), a diagnostic company. The Company will establish a subsidiary and capitalize it with 6,000,000 of the Company's shares and the antisera inventory. The subsidiary will then acquire the stock of ATS in exchange for the 6,000,000 shares and a certain number of the subsidiaries shares. The assets and liabilities of ATS will then be merged into the new subsidiary. The acquisition is expected to be accounted for as a pooling-of-interests.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Registrant dismissed the accounting firm of Harlan & Boettger, LLP, CPA on August 11, 1998. There were no disagreements with Harlan & Boettger, LLP, CPA on any matter of accounting principles or practice, financial statement disclosure or auditing scope or procedure from April 17, 1995 (date of first engagement) and through the period from the date of the last audited financial statements to September 25, 1998.
The registrant has engaged the accounting firm of Logan, Throop & Co., LLP, CPA on August 25, 1998 as the principal accountant to audit the Registrants' most recent fiscal years and any subsequent interim period.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The name, age and current position(s) of each director and executive officer of the Company are as set forth below:
Name Age Position
Donald Brucker 64 President, Chief Executive Officer, Chief Financial Officer and Director
Robert N. Hamburger, M.D. 74 Director
Greg S. Campbell 50 Director and Consultant
Robert A. Rist 51 Director
Thomas V. Cajka 45 Director
DONALD BRUCKER
Donald Brucker serves as a director and as the Company's Chief Executive Officer and Chief Financial Officer. He is responsible for business development, marketing and FDA regulatory affairs. The Company will be recruiting a Chief Financial Officer, but until an appropriate person can be hired, Mr. Brucker's responsibilities will also include financial and accounting matters. Mr. Brucker has been in the medical products business for over 30 years. He was a founder and the Chief Executive Officer of Continuous Curve Contact Lenses, Inc., at one time, the second largest manufacturer of contact lens products. Continuous Curve was recognized as an innovator in introducing new series of FDA-approved contact lenses. As Chief Executive Officer of Continuous Curve, Mr. Brucker administered their public offering in 1977 and its sale to Revlon in 1981 for a value in excess of $100,000,000. Following the acquisition, Mr. Brucker became President of Revlon Vision Care. From 1981 to 1982, Mr. Brucker served as Chief Executive Officer of Immunetech Pharmaceuticals (now known as Dura Pharmaceuticals).
From 1982 to 1989, Mr. Brucker served as a consultant for several healthcare and medical device companies. From 1989 to 1993, Mr. Brucker was Chief Executive Officer of Ariel Life Systems, the former maker of a computerized exercise system. On June 24, 1994, Ariel filed a bankruptcy petition. As a result of losses suffered by Mr. Brucker in connection with his investment in Ariel, on February 3, 1994 Mr. Brucker personally filed a bankruptcy petition.
ROBERT N. HAMBURGER, M.D.
Dr. Hamburger serves as a director and as the Company's medical laboratory director with responsibility for all clinical assays which are reported. Dr. Hamburger reviews the quality and accuracy of all clinical diagnostic laboratory results before they are reported to clinicians. Since July 1, 1990, Dr. Hamburger has been a Professor Emeritus at USCD School of Medicine, where from 1970 to 1990 he was Chairman of the Pediatric Allergy and Immunology Division. Dr. Hamburger has published over 200 articles, is the holder of three patents, and has achieved national and international recognition for his research in immunology.
GREGORY S. CAMPBELL
Mr. Campbell (Board Member), who most recently served as executive vice president of Coldwell Banker Corporation, Mission Viejo, where he directed operations for Coldwell Banker Residential Affiliates, Coldwell Banker Residential Brokerage, Guardian Title & Escrow, Corporate Marketing, Education and Real Estate and The Home Mortgage Network Joint Venture. Coldwell Banker is a national residential real estate company with more than 2,500 offices and 56,000 sales associates.
Prior to joining Coldwell Banker, Mr. Campbell served as senior vice president of asset management for Homart Development, Co., a Sears-owned national regional shopping center and office building developer. He also held senior positions at a number of leading nationwide real estate consulting, management and brokerage firms. Mr. Campbell is a Wheaton College graduate with a degree in business and economics.
ROBERT A. RIST
Mr. Rist began his career in marketing and management, including responsibility for the entire marketing effort for menswear for Sears Roebuck (a $1.5 billion annual revenue business), where he subsequently became a corporate officer and General Manager of its subsidiary, Sears Roebuck de Mexico.
Later Mr. Rist joined Coldwell Banker Corporation to help organize their overall marketing effort. He ended his career at Coldwell Banker as President and CEO, Coldwell Banker Residential Affiliates in 1996, when he and his partners sold the company.
Mr. Rist has served on the Board of Directors of the National Association of Realtors, The International Franchise Association, and also as Chairman of the Real Estate National Networks.
For the past five years, Mr. Rist has been a Trustee for the Burnham Institute (formerly the La Jolla Cancer Research Institute), which is one of the ten Basic Science Cancer Centers in the nation, as designated by the National Cancer Institute.
THOMAS V. CAJKA
Thomas V. Cajka graduated from San Diego State University in 1978 with a B.A. in Business Administration/Accounting and became a Certified Public Accountant. He began his career in the entertainment industry at the well-known firms of Gelfand, Rennert & Feldman, and later with Breslauer, Jacobson & Rutman working in business management where he advised top-rated entertainers in their financial and business affairs.
In 1986, Mr. Cajka joint The Michael Mann Company that brought such award-winning television shows as Miami Vice, Crime Story and Drug Wars to worldwide viewers and the feature films entitled The Keep and Manhunter. As producer and executive in charge of production, Mr. Cajka coordinated all activities of the film and television projects from budget preparation to negotiation of contracts, to the hiring of both above- and below-the-line personnel. He also organized post-production activities and supervised the business affairs of the company.
Since 1990, Mr. Cajka has consulted and worked with independent production companies and producers in both the areas of domestic and international film and distribution. Some of his other accomplishments include the supervision of production, accounting and finance on Robert Redford's Oscar-nominated A River Runs Through It and Dark Wind. Mr. Cajka provided production and corporate accounting for High Five Entertainment's productions of the nationally syndicated television shows The Road, The Root's of Country and At the Ryman for TNN.
All members of the Board of Directors are elected to serve until their respective successors have been elected and qualified or until their earlier death, resignation or removal in the manner specified in the Company's by-laws.
The Board of Directors has a Compensation Committee, currently comprised of Messrs. Hamburger and Brucker, and an Audit Committee, currently comprised of Messrs. Hamburger, Cajka and Brucker. The Compensation Committee makes recommendations concerning salaries and bonuses for executive officers of the Company. The Audit Committee reviews the results and scope of the audits and other services provided by the Company's independent auditors.
The Directors of the Company intend to use reasonable efforts to expand the Board to seven directors and appoint to the Company's Board of Directors one more outside director before the end of fiscal year 1999.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE CASH COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows, for the most recent four fiscal years, the cash compensation paid by the Company, as well as all other compensation paid or accrued for those years to the Chief Executive Officer and the Company's other executive officers as of June 30, 1998.
SUMMARY COMPENSATION TABLE
Name and Annual Compensation Long-term Compensation Principal Position Fiscal Year Salary Bonus Other Stock Awards Warrants
Donald Brucker, 1998 $96,000 $0 $0 0 0 President, CEO, 1997 $96,000 $0 $0 0 0 CFO 1996 $96,000 $0 $0 0 0 1995 $49,604 $0 $0 1,361,972 190,000
STOCK AWARDS AND PERFORMANCE WARRANTS
As of the date of the Unified acquisition (April 17, 1995), each of the following executive officers, directors, consultants, advisers, promoters and founders was issued Common Stock and granted a Common Stock performance warrant (collectively, the "Performance Warrants") by the Company to purchase the number of shares of Common Stock at any time prior to April 17, 2000 at the prices as set forth in the table below. The Common Stock and Performance Warrants were earned when issued and granted. The Company has entered into Stock Restriction Agreements with certain of the persons listed below. Pursuant to the Stock Restriction Agreement, the Common Stock may not be transferred without the consent of the Company for a period of two years, and thereafter shall be subject to the resale restrictions as set forth in Paragraph (e)(1) of Rule 144 of the Rules and Regulations of the Securities and Exchange Commission. Further, pursuant to the Stock Restriction Agreement, such Common Stock is subject to forfeiture in the event the Shareholder is no longer affiliated with the Company as an officer, director, consultant or adviser upon payment by the Company to such Shareholder of the sum of $0.01 per share. The Performance Warrants are nontransferable and under the terms of certain Stock Restriction Agreements expire unless exercised by the warrant holder within 30 days after such holder is no longer affiliated with the Company as an officer, director, consultant or adviser.
COMPENSATION OF DIRECTORS
No director of the Company receives any cash compensation for his service as a director. Common Stock and Performance Warrants granted to directors are listed above. All directors are entitled to be reimbursed for travel and other expenses incurred while attending meetings of the Board of Directors.
EMPLOYMENT CONTRACTS
The Company has no employment contracts.
ITEM 11.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial ownership of Common Stock as of September 30, 1998 (assuming the exercise of options and warrants exercisable within 60 days of the date hereof) by: (i) each person known to the Company to beneficially own more than 5 percent of the outstanding shares of Common Stock, (ii) each of the Company's directors, (iii) each of the Company's executive officers named in the Summary Compensation Table above, and (iv) all directors and officers of the Company as a group. Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole investment power with respect to all the shares beneficially owned, subject to community property laws, where applicable. Percentage ownership assumes all warrants and options of listed person exercised and all other warrants and options unexercised.
Name and Address Amount Percent
Greg Campbell (1) 24591 Del Prado, Suite 201 Dana Point, CA 92629-3802 1,540,082 12
Donald Brucker (2) 2838 Caminito Turnberry La Jolla, CA 92037 1,453,832 12
Kenneth Brucker, as Trustee (3) of the A.K. Trust 1782 D St.,Apt. 63 Hayward, CA 94541 1,263,832 10
Robert Buchner (4) 713 N. Daisy Street Escondido, CA 92027 897,295 7
Robert Hamburger, M.D. (5) 9485 La Jolla Shores La Jolla, CA 92037-1149 785,100 6
Andrei Vorobiev (6 921 Coast Blvd., South #1 La Jolla, CA 92037 740,010 6
Richard O'Connor (7) Sharp Rees-Stealy 2001 4th Avenue San Diego, CA 92101 739,610 6
Robert A. Rist (8) 322 Boca Del Canon San Clemente, CA 92672 200,000 2
Tom V. Cajka 3330 Second Avenue San Diego, CA 92103 100,000 1
All directors and executive officers as a group (five individuals) 4,079,014 32
NOTES: 1. Includes 402,500 shares subject to Performance Warrants. 2. Includes 1,263,832 shares owned of record by the A.K. Trust of which Mr. Brucker is a beneficiary and 190,000 shares subject to a Performance Warrant. 3. Held as Trustee only, Kenneth Brucker disclaims any beneficial ownership. 4. Includes 150,000 shares subject to Performance Warrants. 5. Includes 105,000 shares subject to Performance Warrants. 6. Includes 100,000 shares subject to Performance Warrants. 7. Includes 100,000 shares subject to Performance Warrants. 8. Includes 200,000 shares subject to Performance Warrants.
ITEM 12.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None.
ITEM 13(a). EXHIBITS None.
ITEM 13(b). REPORTS ON FORM 8-K Form 8-K filed September 29, 1998 is incorporated by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: October 9, 1998 LA JOLLA DIAGNOSTICS, INC.
By: /S/ DON BRUCKER Don Brucker Chief Executive Officer
In accordance with the Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Title Date
/S/ DON BRUCKER Director, Chief Executive October 9, 1998 Don Brucker Officer and Chief Financial Officer (Principal Executive Officer, Principal Financial Officer and Controller)
/S/ ROBERT N. HAMBURGER Robert Hamburger, M.D. Director October 9, 1998
/S/ GREGORY S. CAMPBELL Gregory S. Campbell Director October 9, 1998
/S/ ROBERT A. RIST Robert A. Rist Director October 9, 1998
/S/ THOMAS V. CAJKA Thomas V. Cajka Director October 9, 1998