<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-10285
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4-D NEUROIMAGING
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(Exact name of registrant as specified in its charter)
California 95-2647755
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9727 Pacific Heights Boulevard, San Diego, California 92121-3719
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(Address of principal executive offices) (zip code)
(858) 453-6300
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Registrant's telephone number, including area code)
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(Former name, former address and formal fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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.
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of August 10, 2000 Registrant had only one class of common stock of which
there were 84,898,754 shares outstanding.
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
4-D NEUROIMAGING (FORMERLY BIOMAGNETIC TECHNOLOGIES, INC.)
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,500 $ 441
Short-term investments 48 2,695
Restricted cash 375 54
Accounts receivable, less allowance for
doubtful accounts of $220 and $410 1,175 365
Inventories 6,763 3,983
Prepaid expenses and other current assets 810 141
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Total current assets 10,671 7,679
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Net property and equipment 981 870
Goodwill 10,535 -
Restricted cash 350 165
Deferred income taxes 545 -
Other assets 550 156
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TOTAL ASSETS $ 23,632 $ 8,870
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 2,393 $ 1,314
Accrued liabilities 1,681 470
Accrued salaries and employee benefits 452 429
Customer deposits 4,217 1,714
Deferred revenues 363 318
Current portion of royalty obligation 312 -
Current portion of capital lease obligations 12 23
Investment in Magnesensors 195 137
Interest payable 33 -
Notes payable 12,313 -
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Total current liabilities 21,971 4,405
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Royalty obligation, net of current portion 2,188 -
Capital lease obligations, net of current portion 36 51
Deferred revenues 137 308
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Total liabilities 24,332 4,764
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock -- no par value, 200,000,000 shares
authorized; 84,898,754 and 83,367,112 shares issued
and outstanding 100,079 99,392
Additional paid-in capital 3,000 3,000
Accumulated deficit (103,779) (98,286)
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Total shareholders' equity (deficit) (700) 4,106
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 23,632 $ 8,870
============= =============
</TABLE>
See notes to consolidated condensed financial statements.
2
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4-D NEUROIMAGING (FORMERLY BIOMAGNETIC TECHNOLOGIES, INC.)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Products $ 5,073 $ 104 $ 5,426 $ 2,665
Product services 171 103 427 294
Contract research and other - 26 - 41
-------------- -------------- -------------- --------------
5,244 233 5,853 3,000
-------------- -------------- -------------- --------------
COST OF REVENUES
Products 2,850 444 3,903 1,930
Product services 63 51 365 118
Contract research and other - 23 - 37
-------------- -------------- -------------- --------------
2,913 518 4,268 2,085
-------------- -------------- -------------- --------------
GROSS MARGIN 2,331 (285) 1,585 915
OPERATING EXPENSES
Research and development 653 981 2,183 2,826
Marketing, general and administrative 1,577 1,055 4,181 3,277
-------------- -------------- -------------- --------------
2,230 2,036 6,364 6,103
-------------- -------------- -------------- --------------
OPERATING INCOME (LOSS) 101 (2,321) (4,779) (5,188)
Interest income (expense), net (258) 43 (529) 285
Loss from investment in
Magnesensors (21) - (58) -
Other expense, net (4) - (86) -
-------------- -------------- -------------- --------------
LOSS BEFORE INCOME TAX PROVISION $ (182) $ (2,278) $ (5,452) $ (4,903)
Income tax provision - - 41 -
NET LOSS $ (182) $ (2,278) $ (5,493) $ (4,903)
============== ============== ============== ==============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.00) $ (0.03) $ (0.06) $ $(0.06)
============== ============== ============== ==============
Weighted average number of shares outstanding 84,851 83,367 84,033 83,367
============== ============== ============== ==============
</TABLE>
See notes to consolidated condensed financial statements.
3
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4-D NEUROIMAGING (FORMERLY BIOMAGNETIC TECHNOLOGIES, INC.)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
2000 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (5,493) $ (4,903)
Adjustments to reconcile net loss to net
cash used in operating activities, net of impact from
acquisition of Neuromag:
Depreciation 285 109
Amortization of goodwill 702 -
Changes in operating assets and liabilities:
Restricted cash (506) 81
Accounts receivable (51) 302
Inventories (829) (283)
Prepaid expenses and other (338) (64)
Other assets (292) 35
Accounts payable (241) 60
Accrued liabilities 421 46
Accrued salaries and employee benefits 23 -
Customer deposits 1,970 (1,195)
Deferred revenue (126) (315)
Interest payable 33 -
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Net cash used in operating activities (4,442) (6,127)
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INVESTING ACTIVITIES
Net change in short-term investments 2,698 6,168
Interest receivable - (47)
Purchases of property and equipment (216) (708)
Loss from investment in Magnesensors 58 -
Acquisition of Neuromag, net of cash acquired (9,507) -
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Net cash (used in) provided by investing activities (6,967) 5,413
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FINANCING ACTIVITIES
Proceeds from notes payable 11,828 -
Payments on notes payable (21) -
Payments on capital lease obligations (26) -
Proceeds from stock options exercised 687 -
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Net cash provided by financing activities 12,468 -
------------- -------------
-
Net Increase (Decrease) in Cash and Cash Equivalents 1,059 (714)
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Cash and Cash Equivalents at Beginning of Period 441 2,282
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Cash and Cash Equivalents at End of Period $ 1,500 $ 1,568
============= =============
</TABLE>
See notes to consolidated condensed financial statements.
4
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4-D NEUROIMAGING (FORMERLY BIOMAGNETIC TECHNOLOGIES, INC.)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
2000 1999
------------- ------------
<S> <C> <C>
Royalty obligation incurred in acquisition of Neuromag $ 2,500 $ -
Property and equipment acquired under capital lease obligation $ - $ 58
</TABLE>
See notes to consolidated condensed financial statements.
5
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4-D NEUROIMAGING (FORMERLY BIOMAGNETIC TECHNOLOGIES, INC.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited consolidated condensed financial statements of 4-D Neuroimaging
and its subsidiaries, Neuromag Oy, a wholly owned Finnish entity, and
Biomagnetic Technologies, GmbH, an inactive wholly owned German entity,
(together, the "Company", "we", "our", or "4-D") have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The Company suggests that these financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's annual report on Form 10-K for the fiscal year ended September 30,
1999. The reader should also make reference to the Company's filings on Form 8-K
on January 6, 2000 and the Company's filing on Form 8-K/A on March 6, 2000.
In the opinion of the Company, the accompanying unaudited consolidated condensed
financial statements contain all adjustments, consisting only of normal
recurring entries, necessary to present fairly its financial position at June
30, 2000 and the results of its operations and its cash flows for the periods
presented.
The preparation of financial statements, in conformity with generally accepted
accounting principles, 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 date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
On December 22, 1999, 4-D Neuroimaging acquired all of the issued and
outstanding capital stock ("Shares") of Neuromag Oy pursuant to the terms of a
Share Purchase Agreement, by and between Marconi Medical Systems, Inc.
("Marconi") and 4-D (the "Share Purchase Agreement"). This transaction was
accounted for under the purchase method. Under the terms of the Share Purchase
Agreement, 4-D paid a total of $10 million in cash to Marconi for the purchase
of the Shares and agreed to pay between a minimum of $2.5 million and a maximum
of $5 million in royalties to Marconi under an ancillary royalty agreement over
8 years, and additional consideration of up to approximately $1.8 million
dependent upon the occurrence of certain future events.
The accompanying statements of operations include the results of operations of
Neuromag Oy for the three and six months ended June 30, 2000 as results of
operations between December 22, 1999 and December 31, 1999 were not material to
the consolidated condensed statements of operations.
Certain prior period balances have been reclassified to conform to the current
period presentation.
2. CAPITAL NEEDS FOR FUNDING DEBT OBLIGATIONS AND CONTINUING OPERATIONS
The Company has notes payable of $11.4 million due on December 29, 2000 and
notes payable of $835,000 due on September 30, 2000. Based on its current cash
position and expected cash flows from operations, the Company does not
anticipate being able to satisfy its debt obligations at maturity or being able
to fund continuing operations after December 2000. The Company's expectation of
funding operations through December 2000 does not take into account cash
required for maturities of its notes payable, and
6
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the Company must raise additional capital to continue operating and to meet debt
servicing requirements. There can be no assurance that the Company will be able
to raise such capital or restructure the payment terms and maturity of its loans
on terms acceptable to the Company, if at all.
To acquire the shares of Neuromag Oy, the Company obtained a loan from AIG
Private Bank Ltd. totaling $11 million that is secured by the entire share
capital of Neuromag Oy and is guaranteed by an entity unaffiliated with the
Company. Martin Egli, a Board member of 4-D, also serves on the Board of
Directors of AIG Private Bank Ltd. ("AIG Bank" or "AIG"). The $11 million loan
was restructured in July 2000 which extended the maturity date from June 30,
2000 to December 29, 2000. Additionally, AIG Bank increased the loan principal
by $400,000 to $11.4 million, and the additional $400,000 has been used to fund
operations. In June 2000, Brain Diagnostic Network ("BDN"), a related party
controlled by Board members, loaned the Company $835,000 which is due on
September 30, 2000. Loan proceeds from BDN were used to satisfy $485,000 of
interest due on the AIG loan at June 30, 2000 and $350,000 was used to meet
working capital requirements. If the Company is not able to repay the AIG loan
principal and related interest at maturity on December 29, 2000, the bank could
exercise its rights in its security interests and take ownership of Neuromag Oy.
Based on the Company's current expectation of anticipated cash receipts related
to firm orders received and anticipated bookings of up to two additional MSI
systems, the Company expects to have sufficient cash to continue operations
through December 2000 without taking into account cash requirements for
maturities of its notes payable. Historically, the Company has raised additional
capital through its majority shareholders and related parties to fund continuing
operations. The Company is working with these shareholders and related parties
to provide additional funding to reduce or repay existing debt and continue to
fund operations. There can be no assurance that these sources of capital will
continue to remain available, or that the existing debt can be extended.
3. BUSINESS RISKS AND UNCERTAINTIES
4-D Neuroimaging, founded in 1970 as Biomagnetic Technologies, Inc. as a
California corporation, is engaged primarily in the business of developing,
manufacturing and selling innovative functional imaging systems to medical
institutions located in the United States, Europe and the Far East. The magnetic
source imaging ("MSI") systems developed by the Company measure magnetic fields
created by the human body for the noninvasive diagnosis of a broad range of
disorders.
To date, the Company has been engaged principally in research and development
activities, and has made only low volume sales to a variety of medical
research institutions and hospitals. The Company is currently dependent on
its Magnes-Registered Trademark-2500 WH and Vectorview systems for clinical
market sales, for which there are currently limited clinical applications.
Additional clinical applications development and testing needs to be
conducted with MSI systems at major clinical research centers before a
substantial commercial clinical market may emerge. The Company is currently
finalizing development of its Magnes 3600 WH system, which is targeted
primarily to research markets. The Company must continue to depend upon sales
to the research marketplace to meet its revenue goals for the near-term.
There can be no assurance that a substantial commercial market will develop
for diagnostic or monitoring uses of the Company's MSI systems or for the MSI
industry to become viable and profitable. A continued lack of clinical
applications and commercial market for the Company's MSI systems will have a
material adverse impact on the Company's financial position, results of
operations and cash flows.
The Company's commercial success is also highly dependent on the availability of
reimbursement for procedures using MSI systems. To date, reimbursements from
third party payors have been on a case-by-case basis. As of June 30, 2000, there
have been limited reimbursements from third party payors in the United States.
Although the number of third party payors making reimbursements has increased to
over 200 in the U.S., there is no assurance that third party reimbursements will
become widely available.
7
<PAGE>
Reimbursements are not currently provided for MSI procedures by the U.S.
government, nor is there any assurance that the U.S. government will authorize
or budget for such procedures in the future. If widespread availability of
reimbursement from government and private insurers were not achieved, the
Company's financial position, results of operations and cash flows would be
materially adversely affected. The Company also cannot predict what legislation
relating to its business or the health care industry may be enacted in the
future, including legislation relating to third party reimbursement, or what
effect such legislation may have on its financial position, results of
operations and cash flows.
The industry in which the Company operates is characterized by rapid
technological change. New products using other technologies or improvements to
existing products and technologies may reduce the size of the potential markets
for the Company's products, and may render them obsolete or non-competitive.
Competitors may develop new or different products using technology or imaging
modalities that may provide or be perceived as providing greater value than the
Company's products. Any such developments could have a material adverse effect
on the Company's financial position, results of operations and cash flows.
Additionally, there has been recently, and continues to be, ongoing significant
price competition from the Company's competitors for the currently limited
number of whole head systems being purchased worldwide. This aggressive
competition may affect future profitability of the Company.
For the nine months ended June 30, 2000, the Company incurred a net loss of
$5,493,000 and had negative cash flows from operations of $4,442,000. At June
30, 2000, the Company had an accumulated deficit of $103,779,000 and a working
capital deficit of $11,300,000. The Company anticipates that during the
remainder of calendar year 2000, operating and working capital and debt maturity
requirements will substantially exceed cash projected to be generated by product
sales.
Based on its current operating plans, revenue expectations, expected capital
expenditures, expected working capital requirements and existing capital
resources, the Company will require additional funds on an ongoing basis.
Realization of the Company's operating plans is dependent upon its ability to
successfully close a number of MSI system sales in the current highly
competitive market for the limited number of systems being purchased worldwide.
There can be no assurance that sufficient sales of the Company's Magnes and
Vectorview systems will be achieved in order to realize the current operating
plans. Even if the Company meets its operating plans, the Company must continue
to fund its operating needs and service its debt, and is currently considering a
number of financing alternatives, such as the sale of equity or debt securities.
Historically, the Company's sources of capital to fund operations and service
debt has been to raise equity or borrow funds from its majority shareholders and
related parties. There can be no assurances that such financing will be
available on terms acceptable to the Company, if at all.
The Company's expectation of funding operations through December 2000 does not
take into account cash required for maturity of its $11,400,000 AIG loan from
the acquisition of Neuromag and maturity of its $835,000 BDN notes payable that
was used to service interest on the AIG loan and to fund operations. Without
raising additional capital or restructuring the payment terms and maturity of
the loans, the Company will not be able to meet its payment obligations at
maturity. The AIG loan is collateralized by the entire share capital of Neuromag
and upon default on the loan, the bank could exercise its rights in its security
interests and take ownership of Neuromag Oy.
Additional risks and uncertainties include, but are not limited to, satisfying
customer performance and service requirements for our systems, identification of
additional clinical applications for MSI, unreliable diagnostic information,
increased government regulations and requirements, foreign exchange risks and a
highly volatile stock price. The reader is encouraged to refer to the MD&A of
this 10-Q and the Company's other Securities and Exchange Commission filings,
including its most recent Form 10-K as of September 30, 1999, to ascertain the
extent and magnitude of these and other risks and uncertainties the Company may
encounter.
8
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4. ACQUISITION OF NEUROMAG OY AND PRO FORMA DATA
The accompanying unaudited consolidated condensed balance sheets at June 30,
2000 contain an allocation of the purchase price of Neuromag Oy, based on
estimates of the fair value of assets and liabilities acquired. The fair value
of such assets and liabilities acquired may be adjusted in the near term as more
information becomes available. This could affect the value of goodwill reflected
in these financial statements. Goodwill is being amortized over a period of
eight years.
Unaudited condensed pro forma net sales and net loss for the nine months ended
June 30, 2000 and June 30, 1999, assuming the acquisition of Neuromag Oy
occurred on September 30, 1999 and September 30, 1998, respectively, are as
follows (in thousands):
<TABLE>
<CAPTION>
Nine months ended
(unaudited)
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Net revenues $ 7,175 $ 6,967
Net loss $ (6,732) $ (6,782)
</TABLE>
5. BASIC AND DILUTED NET LOSS PER SHARE
Shares used in computing basic and diluted net loss per share include the
weighted average number of common shares outstanding. Common stock equivalents
are antidilutive and are excluded from the computation of basic and diluted net
loss per share.
6. INVENTORIES
The composition of inventories is as follows:
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
---------- ------------
<S> <C> <C>
Raw materials $ 359 $ 170
Work-in process 4,986 3,562
Finished goods 1,418 251
---------- ----------
$ 6,763 $ 3,983
========== ==========
</TABLE>
The Company regularly evaluates the composition of its inventories and has
established reserves for estimated obsolete and excess inventories. The values
presented are net of these reserve estimates.
7. CUSTOMER BACKLOG AND DELIVERY RISK
As of June 30, 2000, the aggregate amount of revenue backlog from firm orders
for the Company's Magnes and Vectorview products and services was approximately
$13,314,000 which the Company does not expect to recognize before September 30,
2000. The revenue backlog includes orders for two Magnes 3600 WH systems, four
Vectorview systems and deferred service revenues. Future cash proceeds related
to such backlog totals approximately $9,788,000, subject to currency
fluctuations. As sales of the Company's systems typically involve transactions
of $1 million or more, revenues and backlog are expected to fluctuate
significantly from period to period depending upon timing of orders received,
installations completed and customer acceptances received during the reporting
period.
9
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8. SEGMENT INFORMATION
The Company operates in one segment that includes developing, manufacturing and
selling magnetic source imaging products. The overall market for the Company's
operations can be further divided into three overlapping sub-segments: the basic
research market, the applications research market, and the commercial clinical
market. To date, substantially all of the Company's revenues have been derived
from, and substantially all of the Company's assets have been devoted to, the
basic research market. The Company also assesses its operations for 4-D and
Neuromag on a stand-alone basis. Summary data related to 4-D and Neuromag is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, 2000 June 30, 2000
4-D Neuromag 4-D Neuromag
--- -------- --- --------
<S> <C> <C> <C> <C>
Revenues $ 2,099,000 $ 3,145,000 $ 2,571,000 $ 3,282,000
Gross margin 559,000 1,772,000 1,000 1,584,000
Operating loss/income (1,163,000) 1,264,000 (5,688,000) 909,000
Net loss /income $(3,093,000) $ 2,911,000 $ (6,358,000) $ 865,000
</TABLE>
As of June 30, 2000, total assets for 4-D and Neuromag totaled $18,524,000 and
$5,108,000, respectively.
9. RESTRICTED CASH
Restricted cash primarily consists of cash balances required to be held under a
guaranteed letter of credit for Magnesensors for $100,000 and a portion of the
Company's royalty obligation totaling approximately $625,000.
10. COMPREHENSIVE INCOME
The functional currency of Neuromag Oy is the Finnish Markka. As such,
translation adjustments related to the financial statements of Neuromag Oy are
accounted for as a component of comprehensive income. For the three and nine
months ended June 30, 2000, such translation adjustments were immaterial.
11. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). The
effective date of SAB 101 was amended by SAB 101B in June 2000. SAB 101 draws on
existing accounting rules and provides specific guidance on how those accounting
rules should be applied to revenue recognition. The Company is required to adopt
the provisions of SAB 101 in the fourth fiscal quarter of the first fiscal year
beginning after December 15, 1999, and believes that its accounting policies
conform to the current provisions of SAB 101.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following information should be read in conjunction with the condensed
consolidated financial statements and the accompanying notes included in Item 1
of this quarterly report, and the audited financial statements, accompanying
notes and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in our annual report on Form 10-K for the fiscal
year ended September 30, 1999. The reader should also refer to the Company's
filing on Form 8-K on January
10
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6, 2000 and Form 8-K/A on March 6, 2000. See "Risks and Uncertainties" for a
discussion of some of the factors known to us that could cause reported
financial information not to be necessarily indicative of future results. We are
not obligated to publicly release the results of any revisions to
forward-looking statements to reflect events and circumstances arising after the
date this report is filed.
OVERVIEW
Since 1984, the primary business of the Company has been the development of MSI
systems that measure magnetic fields generated by the human body and assist in
the noninvasive diagnosis of a potentially broad range of medical disorders. The
measurement of the body's magnetic fields by MSI provides information about the
normal and abnormal functioning of the brain, heart and other organs. The
Company is focusing on the use of its technology for potential commercial market
applications such as the diagnosis and planning for surgical treatment of
epilepsy, and the functional mapping of areas of the brain at risk during
surgery for tumors and other lesions. The Company is continuing to investigate
the potential applications of its technology for problems of the heart, spine,
and gastrointestinal system, as well as for disorders of the brain such as
closed-head trauma, schizophrenia and other neuro-psychiatric disorders. To
date, the Company, its competitors and independent researchers have identified
only a limited number of MSI diagnostic applications.
As of June 30, 2000, over forty Magnes and Vectorview systems have been
installed in medical and research institutions worldwide, and more than 5,000
MSI examinations have been performed on patients and control subjects at the
Company's application development sites. Related findings by 4-D and its
collaborators have been published in more than 200 scientific and medical
papers. Since the first reimbursement for MSI procedures was received in
September 1993, more than 200 insurance companies have approved reimbursement on
a case-by-case basis for certain MSI procedures performed with the Company's
Magnes and Vectorview MSI systems.
In fiscal 1995, 4-D announced development of the Magnes 2500 WH, an expansion of
the existing Magnes I and Magnes II systems product line. The Magnes 2500 WH
allows for examination of the entire brain at once and is designed for
evaluating ambulatory or critically ill patients in seated or fully reclined
positions. As of June 30, 2000, the Company had shipped twelve Magnes 2500 WH
systems and received eleven final acceptances from customers. In fiscal 1997 4-D
commenced the development of the Magnes 3600 WH, initially for a Japanese
customer. Final development is expected to be complete in fiscal 2000. In fiscal
1998, the Company's Neuromag subsidiary shipped the first Vectorview to the
University of Utah; it has since installed six more in Japan, three of which
were accepted during the third quarter of fiscal year 2000.
The current price of 4-D's MSI systems ranges from approximately $1.0 to $2.5
million, depending upon system configuration. A major portion of the Company's
sales have been, and are expected to be, in foreign markets. Although the
distributor agreements that the Company has entered into in the Far East have
required sales to be priced in U.S. dollars, the Company has previously priced
certain of its European sales in the currency of the country in which the
product was sold and the prices of such products in U.S. dollars varied as the
value of the U.S. dollar fluctuated against the quoted foreign currency price.
Additionally, substantially all of the receivables and payables of the Company's
foreign subsidiaries are denominated in currencies other than U.S. dollars.
Consequently, the Company's reported results are subject to various risks,
including without limitation, foreign currency risks. Although at June 30, 2000
the Company did not have any open forward exchange contracts, the Company may in
the future enter into forward exchange contracts to partially hedge, or protect
against, such foreign currency exposure, if appropriate. As part of a
comprehensive approach to risk management, the Company is presently evaluating
alternatives to address this risk. See our discussion under "Risks and
Uncertainties - If foreign currency rates fluctuate our return on sales in U.S.
dollars may suffer" for a more detailed discussion of the quantitative and
qualitative disclosures about market risk.
11
<PAGE>
The Company believes that the relatively small number of proven medical
applications for the Magnes and Vectorview systems, the lack of routine
reimbursement for MSI procedures, and the uncertainty of product acceptance in
the U.S. market have limited system sales. Additionally, it is not possible to
reliably predict the timing and extent of future product sales due to the
uncertainties of the acceptance of medical applications, reimbursement and
product acceptance. The Company does not anticipate multiple sales to the same
end-user at current sales volumes, and the sale of one Magnes or Vectorview
system may have a significant impact on the Company's financial position and
results of operations during any reporting period. As a result, quarterly and
annual operating performance will continue to fluctuate significantly.
RESULTS OF OPERATIONS
The Company's results of operations for the quarter ended June 30, 2000 report
increased margins, operating profit, and a substantial reduction in net loss as
compared to the quarter ended June 30, 1999. These improved results are
primarily due to the favorable timing of multiple product acceptances, revenue
recognition and a change in product mix from the acquisition of Neuromag Oy. The
results of operations for the three months ended June 30, 2000 are not
necessarily indicative of the results to be expected for the Company's fiscal
year ending September 30, 2000 or for future quarters.
Total revenues for the third quarter of fiscal 2000 were $5,244,000, including
$171,000 of service revenues, compared to $233,000 of total revenues, including
$103,000 of service revenues, for the third quarter of fiscal 1999. This
increase in total revenues was due to the recognition of revenue for a 2500 WH
system, a 1300 C cardiac system and three Vectorview systems in the third
quarter of fiscal 2000. Total revenues for the first nine months of fiscal 2000
were $5,853,000, including service revenues of $427,000, as compared to
$3,000,000 of total revenues, including $294,000 of service revenues for the
first nine months of fiscal 1999.
Cost of revenues for the third quarter of fiscal 2000 were $2,913,000, compared
of $518,000 for the same period of fiscal 1999. Cost of revenues for the first
nine months of fiscal 2000 were $4,268,000 as compared to $2,085,000 for the
first nine months of fiscal 1999. The increase in cost of revenues was related
to the recognition of five system sales in the third quarter of fiscal 2000.
Research and development expenses amounted to $653,000 and $2,183,000 for the
three and nine month periods ended June 30, 2000. These amounts represent a
decrease of 33% for the quarter and 23% for the nine month period ended June 30,
2000, compared to research and development expenses of $981,000 and $2,826,000
for the same periods in fiscal 1999. These decreases can be attributed to a
reduction in the amount of expenses incurred to build product engineering
testing equipment and development of the Magnes 3600 WH system as compared to
fiscal 1999.
Marketing, general and administrative expenses increased by $522,000 to
$1,577,000 for the third quarter of fiscal 2000, a 50% increase versus the
comparable period in fiscal 1999. For the first nine months of fiscal 2000, such
expenses increased by $904,000 to $4,181,000, a 28% increase as compared to the
same period last fiscal year. The increases are primarily due to the costs
associated with the acquisition of Neuromag Oy, including goodwill amortization
of $702,000 for the first nine months of fiscal 2000, and additional marketing,
general and administrative costs associated with the operation of that
subsidiary.
Interest income (expense), net, totaled ($258,000) for the three months and
($529,000) during the nine months ended June 30, 2000, as compared to $43,000
and $285,000 during the comparable periods in fiscal 1999. The increased net
expense in fiscal 2000 was the result of borrowing to acquire Neuromag Oy and
a reduction of invested cash.
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Net loss for the third quarter of fiscal 2000 amounted to $182,000 compared
to a net loss of $2,278,000 for the comparable period in the prior fiscal
year. The reduction in net loss was due to the recognition of five system
sales during the quarter. Net loss for the nine months ended June 30, 2000
was $5,493,000 as compared to $4,903,000 for the comparable period last
fiscal year. The increased net loss for the nine month period was primarily
due to the increase in marketing and general and administrative costs from
the acquisition of Neuromag Oy.
LIQUIDITY AND CAPITAL RESOURCES
The Company has notes payable of $11.4 million due on December 29, 2000 and
notes payable of $835,000 due on September 30, 2000. Based on its current cash
position and expected cash flows from operations, the Company does not
anticipate being able to satisfy its debt obligations at maturity or being able
to fund continuing operations after December 2000. The Company's expectation of
funding operations through December 2000 does not take into account cash
required for maturities of its notes payable, and the Company must raise
additional capital to continue operating and to meet debt servicing
requirements. There can be no assurance that the Company will be able to raise
such capital or restructure the payment terms and maturity of its loans on terms
acceptable to the Company, if at all.
On December 22, 1999, 4-D, acquired all of the issued and outstanding capital
stock of Neuromag Oy pursuant to the terms of a Share Purchase Agreement, by and
between Marconi Medical Systems, Inc. and 4-D. Under the terms of the Share
Purchase Agreement, 4-D paid a total of $10 million in cash to Marconi for the
purchase of the shares and agreed to pay between a minimum of $2.5 million and a
maximum of $5 million in royalties to Marconi under a royalty agreement over
eight years, and additional consideration of up to approximately $1.8 million
dependent upon the occurrence of certain future events.
To acquire the shares of Neuromag Oy, the Company obtained a loan from AIG
Private Bank Ltd. totaling $11 million that is secured by the entire share
capital of Neuromag Oy and is guaranteed by an entity unaffiliated with the
Company. Martin Egli, a Board member of 4-D, also serves on the Board of
Directors of AIG Private Bank Ltd. The $11 million loan was restructured in July
2000 which extended the maturity date from June 30, 2000 to December 29, 2000.
Additionally, AIG Bank increased the loan principal by $400,000 to $11.4
million, and the additional $400,000 has been used to fund operations. In June
2000, Brain Diagnostic Network ("BDN"), a related party controlled by Board
members, loaned the Company $835,000 which is due on September 30, 2000. Loan
proceeds from BDN were used to satisfy $485,000 of interest due on the AIG loan
at June 30, 2000 and $350,000 was used to meet working capital requirements. If
the Company is not able to repay the AIG loan principal and related interest at
maturity on December 29, 2000, the bank could exercise its rights in its
security interests and take ownership of Neuromag Oy.
At June 30, 2000, the Company had a net working capital deficit of $11,300,000.
At September 30, 1999, the Company's working capital was $3,274,000. The net
decrease in working capital at June 30, 2000 was due to the short-term nature of
the notes payable totaling $12,313,000 and to the funding of current operations
with existing cash and short-term investments.
As of June 30, 2000, the aggregate amount of revenue backlog from firm orders
for the Company's products and services was approximately $13,314,000 of which
the Company does not expect to fill any before September 30, 2000. The revenue
backlog is composed of orders for two Magnes 3600 WH systems, four Vectorview
systems and deferred service revenues. Future cash proceeds related to such
backlog total approximately $9,788,000.
Capital equipment expenditures totaling $169,000 for the nine months of fiscal
2000 was a decrease from the $708,000 for the same period in fiscal 1999. The
decrease in capital expenditures is attributable to the Company's liquidity
concerns.
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The Company anticipates that in fiscal 2000 operating and working capital
requirements will substantially exceed cash projected to be generated by
product sales. Historically, the Company has raised capital resources from
private placements of its common stock and debt offerings to continue to fund
operations. Based on its current operating plans, revenue expectations,
capital expenditures, expected working capital requirements and existing
capital resources, the Company will require additional funds on an ongoing
basis. Based on the Company's current expectation of anticipated cash
receipts related to firm orders received and anticipated bookings of up to
two additional MSI systems, the Company expects to have sufficient cash to
continue operations through December 2000 without taking into account cash
required for the maturities of its notes payable. The realization of the
Company's operating plans is dependent upon its ability to successfully close
a number of Magnes and Vectorview system sales in the current highly
competitive market for the limited number of systems being purchased
worldwide. Even if the Company meets its operating plan, the Company must
continue to fund its operating needs, and is currently considering a number
of financing alternatives, such as corporate partnerships and the sale of
equity or debt securities. There can be no assurance that such financing will
be available on terms acceptable to the Company, if at all.
The Company's expectation of funding operations does not take into account funds
required for maturity of the $11,400,000 AIG loan facility due on December 29,
2000 or maturity of the $835,000 BDN notes payable due September 30, 2000.
Without raising additional capital or restructuring the payment terms and
maturity of the Company's debt obligations, the Company will not be able to meet
its payment obligations at maturity in September and December 2000. The AIG loan
is collateralized by the entire share capital of Neuromag. There can be no
assurance that the Company will be able to raise additional capital or
restructure the terms of the loans on terms acceptable to the Company, if at
all. If the Company is unable to repay the AIG loan principal and related
interest at maturity on December 29, 2000, the bank could exercise its rights in
its security interests and take ownership of Neuromag Oy.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report on Form 10-Q may contain forward-looking statements that
involve risks and uncertainties. Such statements include, but are not limited
to, statements containing the words "believes", "anticipates", "expects",
"estimates", and words of similar import. The Company's results could differ
materially from any forward-looking statements, which reflect management's
opinions only as of the date hereof, as a result of factors, such as those more
fully described under "Risks and Uncertainties". The Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements. Readers should carefully review the risk factors set
forth below as well as other factors addressed in this report, its Annual Report
on Form 10-K and in other documents the Company files from time to time with the
Securities and Exchange Commission.
RISKS AND UNCERTAINTIES
WE ARE UNCERTAIN WITH RESPECT TO ADDITIONAL FUNDING AND MAY NOT BE ABLE TO MEET
FUTURE CAPITAL NEEDS. AS A RESULT, THERE IS SUBSTANTIAL DOUBT ABOUT THE
COMPANY'S ABILITY TO OPERATE AS A GOING CONCERN.
We require additional capital to fund the Company's losses and working capital
requirements on an ongoing basis. We will need to restructure the $835,000 BDN
notes payable or obtain additional financing in September 2000 to fund
operations and repay the notes and related interest in September, 2000. We also
need to obtain financing before December 29, 2000 to repay the $11.4 million AIG
loan facility. We may not be able to arrange such financing or restructure the
notes on terms acceptable to us, if at all. If the Company is unable to repay
the AIG loan principal and related interest at December 29, 2000, the AIG bank
could exercise its rights in its security interests and take ownership of
Neuromag Oy.
IF WE CONTINUE TO INCUR OPERATING LOSSES, WE MAY BE UNABLE TO CONTINUE OUR
OPERATIONS.
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Our financial position reflects that we have been principally focused on
research and development with only low volume sales to medical research
institutions. For example, our net losses in the last three years have been as
follows:
- $7,464,000 of losses in fiscal 1999,
- $4,968,000 of losses in fiscal 1998, and
- $5,242,000 of losses in fiscal 1997.
In the last three years, our negative cash flows from operations have been as
follows:
- $8,602,000 in fiscal 1999,
- $5,520,000 in fiscal 1998, and
- $2,032,000 in fiscal 1997.
Our cash projections from operations will not be sufficient to meet our
operating and working capital requirements and debt maturity requirements in
fiscal 2000.
IF ADDITIONAL CLINICAL APPLICATIONS FOR MSI SYSTEMS ARE NOT IDENTIFIED BY
OTHERS, OR US, OUR PRODUCTS MAY NOT BE VIABLE.
Currently, there are only a few established diagnostic uses for MSI systems that
the medical industry is aware of. Although we have started our own clinical
research and testing to identify new, large application areas, we cannot assure
you that a commercial market will develop for multiple uses of our products.
To date, we have been engaged principally in research and development
activities, and have made only low volume sales to medical research
institutions. We are currently dependent on our Magnes 2500 WH and Vectorview
systems for clinical market sales, for which there are currently limited
clinical applications. Additional clinical applications testing needs to be
conducted with the MSI system at major clinical research centers before a
substantial commercial clinical market emerges. We must continue to depend upon
sales to the basic research markets to meet our revenue goals for the near-term.
We cannot assure you that a substantial commercial market will develop for
diagnostic or monitoring uses of our MSI systems or for the MSI industry to
become viable and profitable. A continued lack of clinical applications and
commercial market for our MSI systems will have a material adverse impact on our
financial position, results of operations and cash flows.
IF WE FAIL TO OBTAIN AN ADEQUATE LEVEL OF REIMBURSEMENT FOR MSI PROCEDURES BY
THIRD PARTY PAYORS, SALES WILL SUFFER.
Our commercial success is also highly dependent on reimbursement for procedures
using the MSI system. Currently, Medicare, insurance companies and other
healthcare providers approve payment for MSI procedures on a case-by-case basis.
As of June 30, 2000, these third party payors have only approved limited
reimbursements in the United States. Although third party payors have
increasingly approved reimbursements, we cannot assure you that third party
reimbursements will become widely available. The United States government does
not currently reimburse for MSI procedures. If reimbursement does not become
more widely available, our financial position and results of operations will be
materially adversely affected. Further, if the Federal government or any state
legislature enacts legislation relating to our business or the health care
industry, including legislation relating to third party reimbursement, our
financial position and results of operations could be negatively affected. In
addition, there is currently no reimbursement for MSI procedures outside of the
United States.
IF OUR PRODUCTS PRODUCE UNRELIABLE DIAGNOSTIC INFORMATION, IT MAY RESULT IN A
LIABILITY, WHICH WOULD ADVERSELY IMPACT OUR FINANCIAL CONDITION.
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Although our products are noninvasive and diagnostic in nature, treatment
courses based on the information generated by our instruments may be unreliable
or result in adverse effects. This possibility exposes us to the risk of product
liability claims. While we carry product liability insurance, there is no
assurance that such insurance will be adequate, will be available in the future
at a level and cost that is appropriate, or available at all, or that a product
liability claim would not adversely affect our business, prospects, financial
condition or results of operation.
IF DISCOVERIES OR DEVELOPMENTS OF NEW TECHNOLOGIES OCCUR, OUR PRODUCTS AND
TECHNOLOGY MAY BECOME OBSOLETE.
Our industry is characterized by rapid technological change, which may also
impact our commercial success. Competitors may develop products using other
technologies or may improve existing products. This competition may reduce the
size of the potential market for our products or make them obsolete or
non-competitive. Competitors may also develop new or different products using
technology or imaging modalities that provide, or are perceived as providing,
greater value than the Company's products. Our financial position and results of
operations will be materially adversely affected if such competitive
developments occur.
IF WE FAIL TO COMPETE SUCCESSFULLY, OUR REVENUES AND OPERATING RESULTS WILL BE
ADVERSELY AFFECTED.
Our industry is also characterized by ongoing significant price competition. Our
competitors compete with us aggressively for the currently limited number of
whole head systems being purchased worldwide. The future profitability of our
systems may be negatively impacted by this aggressive competition.
IF WE ARE UNABLE TO SATISFY CUSTOMER PERFORMANCE AND SERVICE REQUIREMENTS, WE
MAY BE UNABLE TO COMPETE EFFECTIVELY.
Our success may be limited by our ability to satisfy customer performance
requirements for our systems; as well as by our ability to complete, in a timely
fashion, product developments and enhancements to satisfy customer requirements.
In addition, if our distributors or we are not able to respond in a timely
manner to service requirements, our competitiveness may be adversely impacted.
IF NEW GOVERNMENT LEGISLATION IS ENACTED OR UNFAVORABLE MEDICAL INDUSTRY TRENDS
ARISE, WE MAY BE UNABLE TO SELL OUR PRODUCTS AND OUR REVENUES WILL SUFFER.
We cannot predict what adverse effect, if any, future legislation or FDA
regulations may have on the MSI market and our financial results. Medical
industry cost containment trends may impose restrictions on sizeable third-party
reimbursements for diagnostic procedures, limiting the market opportunity.
Further, if Federal government agencies or any state legislature enacts
legislation or guidelines relating to our business or the health care industry
that create additional business hurdles, including legislation relating to third
party reimbursement, our financial position and results of operations could be
negatively affected.
IF FOREIGN CURRENCY EXCHANGE RATES FLUCTUATE, OUR RETURN ON SALES IN U.S.
DOLLARS MAY SUFFER.
A significant portion of our sales, receivables and payables are denominated in
Finnish Markka, Deutsche Mark, and French Franc. Fluctuations in the value of
these foreign currencies relative to the U.S. dollar have caused and will
continue to cause currency transaction gains and losses. We cannot predict the
effect of exchange rate fluctuations upon future operating results. As a result
of exchange rate fluctuations, we recognized a foreign currency translation loss
of approximately $192,000 during the nine months ended June 30, 2000. In the
normal course of business, we may use forward exchange contracts to hedge
against such foreign currency risks. At June 30, 2000, we did not have any open
forward currency exchange
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contracts. Our hedging activities, if used, may not adequately protect us
against the risks associated with foreign currency fluctuations. We may
experience currency losses in the future.
INTEGRATING 4-D NEUROIMAGING AND NEUROMAG OY WILL BE DIFFICULT AND MAY POSSIBLY
FAIL, ADVERSELY AFFECTING OUR BUSINESS.
Our acquisition of Neuromag on December 22, 1999 brought together two previous
international competitors. Risks common to such mergers include:
- Difficulties in attempting to integrate the technologies or operations.
- Difficulties in achieving the possible financial and strategic
advantages such a merger may provide or imply.
- New competitors enter the market.
- Product brand recognition and customer awareness or satisfaction
deteriorates.
- Management is unable to make the changes necessary without their
attention being diverted from normal business operations.
- Employee relationships suffer, and we risk the potential loss of key
employees of the acquired company.
- Geographic separation, language barriers and cultural differences
inhibit effective communication and management effectiveness.
- Increased currency risk exposure.
Also, it is possible that despite a successful integration, future results of
operations of the merged Company do not meet expectations, due to other risks
discussed in this 10-Q or other documents filed with the SEC, and other factors.
THE COMPANY'S SUCCESS IS DEPENDENT UPON ITS ABILITY TO ATTRACT AND RETAIN
QUALIFIED SCIENTIFIC AND MANAGEMENT PERSONNEL.
The loss of services of any one of our executive management or key scientific
personnel would delay our ability to execute our business plans and reduce our
ability to successfully develop and commercialize products, maintain good
customer relationships and compete in the marketplace. We also face increasing
difficulties in recruiting qualified personnel in the software and hardware
design areas because of intense competition for such personnel in today's job
market. There can be no assurance that the Company will be able to hire, train
or retain such qualified personnel.
In addition, the loss of the services of the Chief Executive Officer, D. Scott
Buchanan and Antti Ahonen, Managing Director of Neuromag Oy, would have a
materially adverse effect on our prospects. Currently none of the executive
officers of the Company have an employment agreement or contract with the
Company; all are "at-will" and under no specified term arrangements.
OUR STOCK PRICE IS HIGHLY VOLATILE AND SUBJECT TO SWINGS BASED ON SALES AND
OTHER MARKET CONDITIONS.
The market prices for securities of companies with newly emerging markets have
historically been highly volatile, and their stock price from time to time has
experienced significant price and volume fluctuations that are unrelated to the
operating performance of such companies. Moreover, 4-D's relatively low trading
volume increases the likelihood and severity of volume fluctuations, which
likely will result in a corresponding increase in the volatility of 4-D's Common
Stock price. Factors such as announcements of complex technological innovations
or new sales, governmental regulations, developments in patent or other
proprietary rights, adverse changes in the Company's relationships with its
lenders, general market conditions and the timing of decisions by existing 4-D
shareholders to buy or sell large positions of our Common Stock may have a
significant effect on the market price of the Company's Common Stock.
Fluctuations in financial performance from period to period also may have a
significant impact on the market price of the Common Stock.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under "Item 2 - Management's
Discussion and Analysis of Financial Conditions and Results of Operations" under
the caption "Risks and Uncertainties - If foreign currency rates fluctuate our
return on sales in U.S. dollars may suffer."
PART II. OTHER INFORMATION
(SEE ATTACHED)
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K.
a) EXHIBIT NO. DESCRIPTION
3.1(1) Fifth Amended and Restated Articles
of Incorporation
3.2(2) Related By-Laws
10.1 Loan Agreement between 4-D
Neuroimaging and BDN, a company
based in Spain, dated June 28,
2000, in the amount of $350,000.
10.2 Loan Agreement between 4-D
Neuroimaging and BDN, a company
based in Spain, dated June 28,
2000, in the amount of $484,595.
27 Financial Data Schedule.
(1) This exhibit was previously filed as a part of, and is hereby
incoroporated by reference to, the same numbered exhibit in
the Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2000 filed with the Securities and Exchange
Commission on May 15, 2000.
(2) This exhibit was previously filed as a part of, and is hereby
incorporated by reference to, the same numbered exhibit in the
Registration Statement filed pursuant to the Securities Act of
19933 on Form S-1 Registration Statement No. 33-29095, filed
June 7, 1989, as amended by Amendment No. 1, filed June 13,
1989, Amendment No. 2, filed July 21, 1989 and Amendment No.
3, filed July 28, 1989.
b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
4-D NEUROIMAGING
August 11, 2000 /s/ D. Scott Buchanan
-------------------- --------------------------------------------------
Date D. Scott Buchanan
President and Chief Executive Officer
August 11, 2000 /s/ Aron P. Stern
-------------------- --------------------------------------------------
Date Aron P. Stern
Vice President of Finance, Chief Financial Officer
Corporate Secretary, Principal Financial
and Accounting Officer
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