UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2002 Commission File Number 0-109659
CITA BIOMEDICAL, INC.
(Exact name of registrant as specified in its charter)
COLORADO 93-0962072
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9025 Wilshire Boulevard Suite 301 Beverly Hills, CA 95030
--------------------------------------------------- -----
(Address of administrative offices) (Zip code)
(310) 550-4971
(Registrant's telephone number, including area code)
-------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes ____X_____ No _________
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Common Stock, $.01 par value 55,377,273
---------------------------- ----------
Class Number of shares outstanding at Sep. 30, 2002
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page 3
Condensed consolidated balance sheet, September 30, 2002
(unaudited). Page 3
Condensed consolidated statements of operations, three and
nine months ended September 30, 2002 (unaudited) and three
and nine months ended September 30, 2001 (unaudited) Page 4
Condensed consolidated statements of cash flows, nine
months ended September 30, 2002 (unaudited) and nine
months ended
September 30, 2001 (unaudited) Page 5
Notes to condensed consolidated financial statements Page 5
Item 2. Management's Discussion and Analysis Page 7
PART II OTHER FINANCIAL INFORMATION
Item 1. Legal Proceedings Page 10
Item 2. Changes in Securities Page 10
Item 3. Defaults Upon Senior Securities Page 10
Item 4. Submission of Matters to a Vote of Security Holders Page 10
Item 5. Other Information Page 10
Item 6. Exhibits and Reports on Form 8-K Page 11
PART III CERTIFICATION Page 12
FORM 10-QSB
3RD QUARTER
PART I. Item 1. FINANCIAL INFORMATION
CITA BIOMEDICAL, INC.
Condensed Consolidated Balance sheet
(Unaudited)
September 30, 2002
Assets
Current assets:
Cash $ 34,005
---------------------
Total current assets 34,005
Property and equipment, net 10,276
Intangible assets, net 50,405
---------------------
$ 94,686
=====================
Liabilities and Shareholder's Deficit (Note D)
Current liabilities:
Accounts payable and accrued liabilities $ 2,465,363
Short-term loans 422,915
Advances payable to officer (Note B) 154,176
---------------------
Total current liabilities 3,042,454
---------------------
Shareholder's deficit (Note E)
Common stock 553,773
Additional paid-in capital 8,610,101
Stock options 183,770
Deferred compensation (103,324)
Accumulated deficit (12,192,088)
---------------------
Total shareholder's deficit (2,947,768)
---------------------
$ 94,686
=====================
See accompanying notes to unaudited condensed consolidated financial
statements.
CITA BIOMEDICAL, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------------------------------
2002 2001 2002 2001
---------------------------------------------------------------------------------
Sales and revenues, net $ 83,000 $ 96,000 $ 248,209 $ 295,483
Cost of sales and revenues 39,744 58,560 128,505 185,245
---------------------------------------------------------------------------------
Gross profit 43,256 37,440 119,704 110,238
Operating expenses:
General and administrative 736,980 507,588 2,019,063 1,806,170
Depreciation 5,948 107,852 15,492 327,508
---------------------------------------------------------------------------------
Total operating expenses 742,928 615,440 2,034,555 2,133,678
---------------------------------------------------------------------------------
Loss from operations (699,672) (578,000) (1,914,851) (2,023,440)
---------------------------------------------------------------------------------
Interest expense - (1,745) - (5,075)
Gain on accounts payable write off - - - 32,233
Interest income (958) 1,571 1,224 14,384
---------------------------------------------------------------------------------
Loss before income taxes (700,630) (578,174) (1,913,627) (1,981,898)
Provision for income taxes - - - -
---------------------------------------------------------------------------------
Net loss $ (700,630) (578,174) $(1,913,627) (1,981,898)
=================================================================================
Basic and diluted loss per common share $ (0.01) $ (0.02) $ (0.04) $ (0.06)
=================================================================================
Basic and diluted weighted average 52,464,783 35,808,200 48,103,558 32,400,702
common shares outstanding
=================================================================================
See accompanying notes to unaudited condensed consolidated financial statements.
CITA BIOMEDICAL, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
------------------------------------------------------
2002 2001
------------------------------------------------------
Net cash used in operating activities $ (724,745 ) $ (1,110,522)
------------------------------------------------------
Cash flows from investing activities: - -
Equipment purchases - (4,219)
------------------------------------------------------
Net cash used in investing activities - (4,219)
------------------------------------------------------
Cash flows from financing activities:
Proceeds from line of credit - 95,009
Proceeds from sale of common stock 498,001 1,102,735
Repayment of officer's advances (Note
B) (47,000) (75,647)
Proceeds from working capital
advances - -
------------------------------------------------------
Net cash provided by financing activities 545,001 1,122,097
------------------------------------------------------
Net change in cash (179,744) 7,356
Cash, beginning of period 213,749 287,614
------------------------------------------------------
Cash, end of period $ 34,005 $ 294,970
======================================================
See accompanying notes to unaudited condensed consolidated financial statements
CITA BIOMEDICAL, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note A: Basis of presentation
The condensed consolidated financial statements presented herein have
been prepared by the Company in accordance with the accounting policies
in its annual 10-KSB report dated December 31, 2001 and should be read
in conjunction with the notes thereto.
In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) which are necessary to provide a fair
presentation of operating results for the interim periods presented
have been made. The results of operations for the periods presented are
not necessarily indicative of the results to be expected for the year.
Interim financial data presented herein are unaudited.
Note B: Related party transactions
During the nine months ended September 30, 2002, the Company repaid an
officer, Joseph Dunn, $47,000 related to working capital previously
advanced to the Company. As of September 30, 2002, the remaining
balance owed to the officer totaled $154,176, which is included in the
accompanying condensed consolidated balance sheet as advances payable
to officer. The amount advanced to the Company by the officer bears no
interest rate, is due on demand, and matures on September 30, 2003.
Note C: Income taxes
The Company records its income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". The Company incurred net operating
losses during the nine months ended September 30, 2002 resulting in a
deferred tax asset, which was fully allowed for by a valuation
allowance; therefore, the net benefit and expense resulted in no income
tax liability.
Note D: License Agreement Included in Accrued Liabilities
The Company entered into a licensing agreement with CITA, S.L., a
Spanish corporation ("CITA SL") for the Detoxification and
NeuronAdaptation ("DNA") for addictions Intellectual Property in
November 2001. The DNA license agreement requires the Company to make
royalty payments of $1,000 for each patient treated up to 5,000
patient's treatments. After 5,000 patient treatments the royalty
payment is reduced to $500.00 per patient treatment (less than 50
patients treated thus far under this agreement). There was a minimum
royalty payment in the first year of $1,000,000 that the Company has
renegotiated to a value of $500,000 in cash and stock in the following
manner:
Cash payments of: $50,000 in Quarter 2, 2002; $50,000 in Quarter 4,
2002; $100,000 in Quarter 1, 2003. Issue shares of Restricted Common
Stock at market value in lieu of cash payments for the value of:
8,000,000 shares to be issued for a cash value of $200,000 in Quarter
4, 2002; Between 2,500,000 and 5,000,000 shares to be issued for a cash
value of $100,000 in Quarter 1, 2003.
In the second year the agreement requires the Company to make a minimum
royalty payment of $2,000,000. The Company also has an option to
acquire the DNA Intellectual Property, within two years of the closing
date of the agreement, for a purchase price of $5,000,000 plus the
payment of continuing royalties of $500 per patient treatment in
perpetuity. However, the Company is in the process of renegotiating
this second year payment and the acquisition of the DNA Intellectual
Property with CITA, S.L.
Note E: Stockholders' Deficit
Following is the statement of changes in shareholders' deficit for the
nine months ended September 30, 2002:
Preferred Stock Common Stock
--------------- ------------ Paid-in Stock Deferred Accumulated
Shares Amount Shares Par Value Capital Options Compensation Deficit Total
------ ------ ------ --------- ------- ------- ------------ ------- -----
Balance, January
1, 2002 - - 40,218,270 $402,183 $7,955,513 $183,770 $(103,324) $(10,278,460) $(1,840,318)
Sale of common
stock ($.039 per
share) - - 10,117,859 101,179 296,822 - - - 398,001
Common Stock sold 2,000,000 20,000 80,000 - - - 100,000
For reduction in
Debt
Common Stock issued 3,041,144 30,411 277,766 - - - 308,177
In exchange for
Services ($.10) share
Net loss for
the nine
months ended
Sept. 30,
2002 - - - - - - - (1,913,627) (1,913,627)
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30,
2002 - - 55,377,273 $553,773 $8,610,101 $183,770 $(103,324) $(12,192,088) $(2,947,768)
------------------------------------------------------------------------------------------------------------------------------------
PART I. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
Cash
At September 30, 2002 the Company's cash ending balance was $34,005 as
compared to $294,970 at September 30, 2001. The decrease of $260,965
was primarily due to the Company having lower cash from operations due
to lower revenue and lower new capital invested in the Company, which
amounted to $156,965, for the nine months ended September 30, 2002 as
compared to the same period ended September 30, 2001. In addition, the
Company was required by IBM Credit Corporation ("IBM") to pay off a
credit lease line for computer hardware and software that was secured
by an irrevocable letter of credit in the amount of $184,978. The pay
off required by IBM was the result of the Company being unable to make
its monthly payments due to insufficient working capital. The actual
impact on cash was $104,000 with the remaining $80,978 being borrowed
from Bank of America. (refer to LIABILITIES, Short-term loans)
Property and equipment (net of depreciation)
At September 30, 2002 the Company had Property and equipment, net of
depreciation of $10,276 as compared to $630,809 at September 30, 2001.
This decrease is primarily due to the Company writing-off the value of
their web site software and software development costs in the fourth
quarter of 2001.
Intangible assets (net of amortization)
At September 30, 2002 the Company had Intangible assets, net of
amortization of $50,405 as compared to $723,213 at September 30, 2001.
This decrease is primarily due to the Company writing-off a significant
portion of the UROD(R) method, trade name, and patent costs in the
fourth quarter of 2001.
LIABILITIES
Accounts payable and accrued liabilities
At September 30, 2002 the Company had Accounts payable and accrued
liabilities of $2,465,363 as compared to $1,743,154 at September 30,
2001. This increase is due primarily to the obligations under the
licensing agreement for minimum royalty payments or $550,000 of the
total $722,209 increase.
The accounts payable is primarily comprised of legal fees and costs
supporting the web site development incurred in years 2001 and 2000.
The accrued liabilities are primarily comprised of payments due to the
Company's three employees for salaries, CITA.S.L. for royalties, (refer
to Item 5 Other Information, License Agreement) and consultant's fees,
accrued but not paid, that the Company has engaged for various
administrative, marketing, operational, and sales activities. The
Company has been unable to pay a significant portion of these expenses
due to inadequate working capital from ongoing operations and
investment activities.
Short-term loans
At September 30, 2002 the Company had Short-term loans of $422,915 as
compared to $350,804 at September 30, 2001. The increase of $72,111 is
listed in the table below.
The Company has short-term loans with the following corporations and
individuals with the terms as follows:
September 30, 2002 September 30, 2001 Difference
------------------ ------------------ ----------
Isaka Investments/Others $ 271,000 $ 350,804 $ (79,804)
Bank of America 80,978 - 80,978
Private individual (A) 41,437 - 41,437
Private individual (B) 17,500 - 17,500
Private individual (C) 12,000 - 12,000
------------------------------------------------------------------------------------------------
Total Short-term loans $ 422,915 $ 350,804 $ 72,111
The loan with Isaka Investments bears no interest rate and is due on
demand and matures on September 30, 2003.
The loan with Bank of America bears no interest rate and is due on
demand and matures on December 31, 2002.
The loan from private individual (A) bears a nominal interest rate and
is due on demand and matures on December 31, 2004.
The loan from private individual (B) bears a nominal interest rate and
is due on demand and matures on December 31, 2004.
The loan from private individual (C) bears a nominal interest rate and
is due on demand and matures on December 31, 2003.
RESULTS OF OPERATIONS
Revenue
The Company recognizes revenue at the time the patient is treated in
the full amount of the treatment (specific performance method). The
Company, in most cases receives payment from the patient prior to the
treatment being performed.
The Company's net revenues for the nine months ended September 30, 2002
were $248,209 compared to $295,483 for the nine months ended September
30, 2001. For the nine months ended September 30, 2002, $219,432 or 88%
of the revenue was derived from treatments administered by physicians
licensed to perform the Company's patented UROD(R) process. New
treatments using the DNA process for alcohol and cocaine were
introduced during the third quarter of 2002 accounted for the remainder
of revenue. However, the lower revenue for the period ended September
30, 2002 as compared to September 30, 2001 was primarily due to a lower
number of patients utilizing the Company's UROD(R) treatment process.
The Company's net revenues for the three months ended September 30,
2002 were $83,000 compared to $96,000 for the three months ended
September 30, 2001. This decrease was primarily due to the Company
discontinuing its treatment operations in Chicago, Illinois.
Cost of Revenue
The Company recognizes cost of revenue at the time the patient is
treated. Cost of revenue is comprised of fees paid to the
administrating physician and/or nurse; treatments center charges and
medications used in treatments.
The Company's cost of revenue for the nine months ended September 30,
2002 were $128,505 compared to $185,245 for the nine months ended
September 30, 2001. $123,005 or 95 percent of this cost of revenue was
derived from treatment procedures performed by physicians licensed to
perform the Company's patented UROD(R) process.
The Company's cost of revenue for the three months ended September 30,
2002 were $39,744 compared to $58,560 for the three months ended
September 30, 2001. This reduction is primarily due to reduced spending
to support multiple centers.
The Company has been unable to pay portions of these cost of revenue
expenses, in a timely manner, due to inadequate working capital from
ongoing operations and investment activities, therefore these expenses
are reflected in the Company's accounts payable on the Balance Sheet.
Other Operating Expenses
General and Administrative Expenses
The Company's general and administrative expenses for the nine months
ended September 30, 2002 were $2,019,063 compared to $1,806,170 for the
nine months ended September 30, 2001. All of this increase is
attributable to the costs for the licensing agreement of $600,000.
The Company's general and administrative expenses for the three months
ended September 30, 2002 were $736,980 compared to $507,588 for the
three months ended September 30, 2001. Similarly, this increase is
attributable to the costs recorded in the quarter for the minimum
licensing royalty payment of $300,000.
Depreciation
The Company's depreciation expense for the nine months ended September
30, 2002 were $15,492 compared to $327,508 for the nine months ended
September 30, 2001.
The Company's depreciation expense for the three months ended September
30, 2002 were $5,948 compared to $107,852 for the three months ended
September 30, 2001.
Depreciation expense is lower for the nine and three months ended
September 30, 2002 as compared to the same period for 2001 due to the
Company writing-off the value of their web site software costs in the
fourth quarter of 2001.
FINANCIAL CONDITION
The Company has experienced losses since 1994, and expenses continue to
exceed revenues. Despite additional capital raised through the sale of
shares of the Company's Common Stock, the Company's financial
statements show a negative net worth for the period ended September 30,
2002. Although the Company has agreed in principle to the terms of an
agreement to purchase technology which will permit the Company to enter
new markets, in the aggregate, these financial indicators raise
substantial doubt about the Company's ability to continue as a going
concern.
The Company is actively pursuing new operating centers and alliances
with other organizations in the addiction treatment field, which
management believes will provide positive working capital. The Company
believes that these factors will make the Company more attractive to
prospective investors and business partners. However, there is no
assurance that outside parties will share this view, or that the
Company will be successful in raising sufficient additional capital to
capitalize on these opportunities.
The Company faces substantial risk if the Company is unsuccessful in
raising additional capital and may not be able to make payments for
services rendered under accounts payable, accrued liabilities, and
short-term loans (refer to the Balance Sheet: Liabilities) made in the
past. Therefore, the Company may have to file for Chapter 11 bankruptcy
protection in the very near future.
PART II - OTHER INFORMATION
This report contains certain forward-looking statements (as such term
is defined in Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934) with respect to future events,
the outcome of which is subject to certain risks.
Item 1. LEGAL PROCEEDINGS
The Company is involved in various claims and lawsuits arising from its
inability to pay for contracts entered into and/or services rendered.
Management believes that any financial responsibility that could be
incurred in the settlement of such claims and lawsuits would be more
adverse to the Company's current financial position. (Refer to
Financial Condition above)
Item 2. SALES OF SECURITIES
During the nine months ended September 30, 2002, the Company issued
15,159,003 shares of its Common Stock for an aggregate price of
$806,178. However, after broker commissions and other costs associated
with the sale of the Company's Common Stock the net proceeds to the
Company were $498,001.
The stock sales were conducted in reliance on the exemption from
federal securities registration requirements provided by Regulation S
under Securities Exchange Act of 1934.
Item 3. DEFAULTS UPON SENIOR SECURITIES
The Company has no defaults upon senior securities.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company has no security holders, therefore no submission of matters
were required to a vote.
Item 5. OTHER INFORMATION
Acquisition of Alternative Tobacco Products, Inc.
In November 2001 the Company entered into a Stock Purchase Agreement,
to acquire Alternative Tobacco Products, Inc. ("AltTPro"), a developer
of products to assist individuals addicted to nicotine from cigarettes
and other tobacco-related products. The Company also entered into an
Employment Agreement (refer to Employment Agreement for VP of R&D in
Employment Agreements section below) and Confidentiality Agreement with
the Chief Executive Officer, John Bancroft of AltTPro.
In February 2002 AltTPro terminated the Stock Purchase Agreement with
the Company due to the two companies being unable to agree upon the
actual value of AltTPro. However, the Company continues to actively
negotiate with AltTPro to enter into a new Stock Purchase Agreement and
is confident an agreement will be made in the very near future.
The Employment and Confidentiality Agreements between the Company and
AltTPro remains intact.
Item 5. OTHER INFORMATION (continued)
License Agreement
The Company entered into a licensing agreement with from CITA, S.L., a
Spanish corporation ("CITA SL") for the Detoxification and
NeuronAdaptation ("DNA") for addictions Intellectual Property in
November 2001. The DNA license agreement requires the Company to make
royalty payments of $1,000 for each patient treated up to 5,000
patient's treatments. After 5,000 patient treatments the royalty
payment is reduced to $500.00 per patient treatment (less than 50
patients treated thus far under this agreement). There was a minimum
royalty payment in the first year of $1,000,000 that the Company has
renegotiated to a value of $500,000 in cash and stock in the following
manner:
Cash payments of:
$50,000 in Quarter 2, 2002;
Approximately $50,000 is planned to be made in
Quarter 4, 2002; Approximately $100,000 is planned to
be made in Quarter 1, 2003.
Issue shares of Restricted Common Stock at market
value in lieu of cash payments for the value of:
8,000,000 shares are planned to be issued for a cash
value of $200,000 in Quarter 4, 2002; Between
2,500,000 and 5,000,000 shares are planned to be
issued for a cash value of $100,000 in Quarter 1,
2003.
In the second year the agreement requires the Company to make a minimum
royalty payment of $2,000,000. The Company also has an option to
acquire the DNA Intellectual Property, within two years of the closing
date of the agreement, for a purchase price of $5,000,000 plus the
payment of continuing royalties of $500 per patient treatment in
perpetuity. However, the Company is in the process of renegotiating
this second year payment and the acquisition of the DNA Intellectual
Property with CITA, S.L.
Employment Agreements
The Company entered into an employment agreement with its Vice
President of Research and Development, John Bancroft, ("VP of R&D") in
December 2001. The agreement requires the Company to pay the VP of R&D
a minimum annual base salary of $150,000, bonuses aggregating up to two
times the base salary, (at the discretion of the board of directors),
health, dental and life insurance through November 2006. Under the
terms of this employment agreement the Company retains the right to
terminate the agreement at any time but, must first determine cause.
The Company entered into an employment agreement with its Vice
President of Marketing, Paula Pineda, ("VP of MKT") in September 2000.
The agreement requires the Company to pay the VP of MKT.a minimum
annual base salary of $120,000, bonuses aggregating at least $20,000
annually (additional bonuses are determined at the Company's
discretion), health, dental and life insurance through August 2004. The
agreement also requires the Company to issue 200,000 incentive stock
options at a price determined by the Company's board of directors to
vest over a 48 month period beginning in September 2000. Under the
terms of this employment agreement the Company retains the right to
terminate the agreement at any time with or without cause. However, if
the Company terminates the agreement without cause the VP of MKT shall
be paid a severance amount equal to 6 month's salary.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
No exhibits provided by the Company.
The Company filed no reports on Form 8-K during the nine months ended
September 30, 2002.
PART III CERTIFICATION
I, Joseph Dunn, certify that:
I have reviewed this quarterly report on Form 10-Q of CITA Biomedical,
Inc.:
This quarterly report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this quarterly report.
The financial statements, and other financial information included in
this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly
report.
I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and I have:
a)designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to me and by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
c)presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
I have disclosed, based on our most recent evaluation, to the
registrant's auditors and to the board of directors (or persons
performing the equivalent function):
a)all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls;
b)any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls.
I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
The financial information furnished herein has not been audited by an
independent accountant; however, in the opinion of management, all
adjustments (only consisting of normal recurring accruals) necessary
for a fair presentation of the results of operations for the three and
nine months ended September 30, 2002 and September 30, 2001 have been
included.
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Joseph Dunn
---------------------
Name: Joseph Dunn
Title: Chairman of the Board, Chief Executive Officer and Chief
Financial Officer
Date: December 13, 2002
END OF FILING