<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[xx] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ ---------------------------
Commission File Number: 33-2205-D
--------------------------------------------------------
NeuroCorp., Ltd.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 87-0446395
- ----------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 White Plains Road, Tarrytown, New York 10591
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(914) 631-3315
- --------------------------------------------------------------------------------
(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) has 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 [xx] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: 11,213,806 shares as of June 30, 1998
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PART 1 - FINANCIAL INFORMATION:
ITEM I - FINANCIAL STATEMENTS Page
number
------
Consolidated balance sheets at June 30, 1998 (unaudited)
and December 31, 1997 1
Consolidated statements of operations (unaudited)
for the three months ended June 30, 1998 and 1997 2
Consolidated statements of operations (unaudited)
for the six months ended June 30, 1998 and 1997 3
Consolidated statement of stockholders' equity (unaudited)
for the six months ended June 30, 1998 4
Consolidated statements of cash flows (unaudited)
for the six months ended June 30, 1998 and 1997 5
Notes to consolidated financial statements 6 - 13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14 - 22
PART II - OTHER INFORMATION 23
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Current assets:
Cash $ 368,596 $ 1,597,825
Accounts receivable, net of allowance for doubtful accounts of
$5,547 at June 30, 1998 and $40,777 at December 31, 1997 697,409 650,505
Inventory 134,241 132,727
Prepaid expenses and taxes 100,362 152,979
Other current assets 77,781 61,629
----------- -----------
Total current assets 1,378,389 2,595,665
----------- -----------
Equipment and fixtures, net 566,777 236,002
----------- -----------
Other assets:
Database development costs, net 1,173,099 1,228,189
Computer system product development costs, net 309,555 371,888
Other 150,805 178,266
----------- -----------
Total other assets 1,633,459 1,778,343
----------- -----------
Total assets $ 3,578,625 $ 4,610,010
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 585,273 $ 271,129
Accrued expenses 116,004 215,252
Stockholder notes and loans payable 385,985 386,332
----------- -----------
Total current liabilities 1,087,262 872,713
----------- -----------
Long-term liabilities:
Deferred income taxes 240,000 240,000
----------- -----------
Commitments and contingencies (Note 4) -
Stockholders' equity:
Preferred stock, authorized 5,000,000 shares, issued as follows:
Cumulative Preferred stock, class B, series 1, no par value, issued and
outstanding 150,000 shares, full liquidation value $150,000 150,000 150,000
Common stock, $.001 par value, 100,000,000 shares authorized,
11,213,806 & 10,813,806 issued and outstanding 21,914 21,514
Additional paid-in capital 7,151,497 6,751,897
Accumulated deficit (5,072,048) (3,426,114)
----------- -----------
Total stockholders' equity 2,251,363 3,497,297
----------- -----------
Total liabilities and stockholders' equity $ 3,578,625 $ 4,610,010
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
1
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Net sales $ 43,914 $ 311,513
Cost of sales, including amortization expense
of $66,847 and $67,207, respectively 92,479 123,220
----------- ----------
Gross (loss) profit (48,565) 188,293
----------- ----------
Expenses:
General and administrative expenses 805,041 524,718
Research and development - 34,653
----------- ----------
Total expenses 805,041 559,371
----------- ----------
Loss from operations before other income (expense)
and income tax expense (853,606) (371,078)
----------- ----------
Other income (expense):
Interest income 1,221 10,292
Interest expense (9,826) (30,659)
----------- ----------
Total other income (expense) (8,605) (20,367)
----------- ----------
Loss before income tax expense (862,211) (391,445)
Income tax expense (benefit) 1,625 (1,300)
----------- ----------
Net loss $ (863,836) $ (390,145)
=========== ==========
Net loss applicable to common shares $ (867,586) $ (393,895)
=========== ==========
Loss per common equivalent share:
Basic:
Net loss $ (.08) $ (.05)
=========== ==========
Net loss applicable to common shares $ (.08) $ (.05)
=========== ==========
Weighted average number of shares outstanding 10,880,473 8,015,486
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
2
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Net sales $ 209,328 $ 587,000
Cost of sales, including amortization expense
of $134,220 and $135,802, respectively 217,818 293,063
----------- ----------
Gross (loss) profit (8,490) 293,937
----------- ----------
Expenses:
General and administrative expenses 1,614,993 844,765
Research and development - 52,128
----------- ----------
Total expenses 1,614,993 896,893
----------- ----------
Loss from operations before other income (expense)
and income tax expense (1,623,483) (602,956)
----------- ----------
Other income (expense):
Interest income 7,201 21,708
Interest expense (20,527) (77,975)
----------- ----------
Total other income (expense) (13,326) (56,267)
----------- ----------
Loss before income tax expense (1,636,809) (659,223)
Provision for income tax 1,625 -
----------- ----------
Net (loss) $(1,638,434) $ (659,223)
=========== ==========
Net loss applicable to common shares $(1,645,934) $ (666,723)
=========== ==========
Loss per share:
Basic:
Net loss $ (.15) $ (.08)
=========== ==========
Net loss applicable to common shares $ (.15) $ (.08)
=========== ==========
Weighted average number of shares outstanding 10,847,139 8,015,486
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
3
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Additional Total
Class B, Series 1 Common Stock Paid-in (Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit) Equity
------- -------- ---------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997 150,000 $150,000 10,813,806 $21,514 $6,751,897 $(3,426,114) $ 3,497,297
Exercise of 400,000 warrants - - 400,000 400 399,600 - 400,000
Preferred stock dividend - - - - - (7,500) (7,500)
Net loss for the six months
ended June 30, 1998 - - - - - (1,638,434) (1,638,434)
------- -------- ---------- ------- ---------- ----------- -----------
Balances at June 30, 1998 150,000 $150,000 11,213,806 $21,914 $7,151,497 $(5,072,048) $ 2,251,363
======= ======== ========== ======= ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
4
<PAGE>
NEUROCORP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Cash flows for operating activities:
Net loss from operations $(1,638,434) $ (659,223)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 183,879 169,225
Amortization of deferred financing costs 26,188 53,516
Bad debt recovery (35,230) -
Decrease (increase) in:
Accounts receivable (11,674) 30,170
Due from affiliates (14,584) -
Inventory (1,514) 6,762
Prepaid expenses and taxes 52,617 (50,233)
Other current assets - (47,816)
Increase (decrease) in:
Accounts payable 312,519 (94,177)
Accrued expenses (99,248) (1,988)
Income taxes payable 1,625 (4,384)
Billings in excess of costs and estimated earnings on uncompleted contracts - (191,972)
----------- ----------
Net cash flows used for operating activities (1,223,856) (790,120)
----------- ----------
Cash flows for investing activities:
Purchase of equipment and fixtures (381,605) (65,975)
Database development costs capitalized (14,353) (75,359)
Other assets - (101,027)
Proceeds from sale of automobile - 1,660
----------- ----------
Net cash flows used for investing activities (395,958) (240,701)
----------- ----------
Cash flows from financing activities:
Repayment of stockholder loans (22,434) (102,007)
Principal payments on long-term debt - (54,217)
Registration costs incurred - (114,035)
Proceeds from exercise of warrants and sale of common stock 400,000 600,000
Proceeds from stockholder loan 13,019 -
----------- ----------
Net cash flows provided by financing activities 390,585 329,741
----------- ----------
Net (decrease) increase in cash (1,229,229) (701,080)
Cash at beginning of period 1,597,825 1,851,114
----------- ----------
Cash at end of period $ 368,596 $1,150,034
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 7,201 $ 3,770
=========== ==========
Income taxes $ 1,625 $ -
=========== ==========
Schedule of non-cash investing and financing activities:
Accrued dividends on Series 1 preferred stock $ 7,500 $ 7,500
=========== ==========
Bank note liquidated in exchange for automobile $ - $ 22,703
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
5
<PAGE>
NEUROCORP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
NOTE 1 - GENERAL
NeuroCorp, Ltd. (the "Company") was incorporated in the State of
Nevada on March 18, 1987. On November 23, 1994 the Company
entered into an agreement and a plan of reorganization with HZI
Research Center, Inc. ("HZI").
The Company is primarily involved in two business. Through its
wholly-owned subsidiary, HZI, the Company sub-contracts clinical
research and performs data analysis for health agencies, research
organizations and pharmaceutical companies. In addition, as an
outgrowth of its research activities, the Company also designs
diagnostic testing software and equipment for neuropsychiatric
applications and performs neurological testing services for
hospital and physicians. Through its wholly-owned subsidiary
Memory Centers of America, Inc. ("MCAI") a Delaware corporation,
the Company provides non-medical management of facilities as well
as education and consultation services to individuals who suffer
from memory complaints. Revenues from this wholly-owned
subsidiary were immaterial for the three and six months ended
June 30, 1998 and 1997.
HZI assigns certain clinical research contracts to the New York
Institute for Medical Research, Inc. ("NYI"), a not-for-profit
private foundation that is controlled by board members that also
control the Company. TeleMap, Inc., is a wholly-owned subsidiary
of HZI and has no material business operations.
The Company conducts its operations in Tarrytown, New York. The
Company's revenues consist of a concentration of significant
long-term contracts, thus leading to a limited number of
customers comprising a significant percentage of revenues.
The unaudited interim financial statements for the three and six
months ended June 30, 1998 and 1997 included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission and, in the
opinion of the Company, reflect all adjustments (consisting only
of normal recurring adjustments) and disclosures which are
necessary for a fair presentation. The results of operations for
the three months ended are not necessarily indicative of the
results for the full year. For further information, refer to the
Company's audited financial statements and footnotes thereto at
December 31, 1997, included in Form 10-KSB filed with the
Securities and Exchange Commission.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. For the years ended December 31, 1997 and 1996, the
Company incurred losses of $2,423,602 and $1,634,675.
Additionally, the Company generated negative cash flows from
operations of $2,568,380 and $897,382 for the years ended
December 1997 and 1996, respectively. The Company's ability to
continue as a going concern is currently dependent on its ability
to successfully attain profitability and positive cash flows from
operations as well as obtain capital or other financing to fund
future losses and intended expansion. These factors raise
substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include
adjustments relating to the recoverability and realization of
assets and classification of liabilities that might be necessary
should the Company be unable to continue in operation.
6
<PAGE>
NEUROCORP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
NOTE 2 - GOING CONCERN (Cont'd)
Managements plans to mitigate the Company's financial problems
are outlined below.
On April 7, 1998, the Company signed a Letter of Intent with
Pioneer Ventures Associates Limited Partnership ("Pioneer")
whereby the Company would receive a minimum of $2,000,000 to a
maximum of $4,500,000 in exchange for issuing cumulative
preferred stock convertible into common stock at $3 per share
with an 8% dividend. Prior to the Company receiving the full
amount of any funds, Pioneer is performing a due diligence which,
if completed to its satisfaction, will result in the Company
receiving an initial $2,000,000. Pioneer has imposed certain
other conditions which has resulted in the Company bringing in a
new chief executive officer and the election of two (2) Pioneer
representatives to the Board of Directors.
The Company received an initial investment of $1,000,000 from
Pioneer on July 31, 1998 for which it issued 333,333 shares of a
new class of Series C Senior Convertible Preferred Stock. During
the due diligence process, Pioneer is evaluating the capital
requirements of MCAI and HZI's contract research division and
will invest up to a total of $4,500,000 based on terms and
conditions to be agreed upon. The Company is also exploring
additional options to obtain capital or financing.
Regarding current operations, in order to maintain its liquidity
and economic viability in the interim, the Company is continuing
its ongoing marketing efforts to obtain contracts for its
contract research division and has implemented several measures
including payroll and expense reductions and aggressive
collection efforts on its receivables.
NOTE 3 - STOCKHOLDERS' EQUITY
a) ISSUANCE OF WARRANTS
Pursuant to the plan of reorganization on November 23, 1994 with
HZI, the Board of Directors of the Company authorized the
issuance of Class B and Class C Warrants to all stockholders of
the Company of record as of November 1, 1994. The Warrants were
distributed on a 1 Warrant for 1 share of common stock basis and
comprised in the aggregate 800,000 Class B and 800,000 Class C
Warrants, each of which was exercisable into one share of Common
Stock of the Company. The Class B Warrants were exercisable at
$2.25 per share and the Class C Warrants are exercisable at $2.75
per share, and were to expire September 30, 1996. The shares of
Common Stock underlying the Warrants must be registered with the
Securities and Exchange Commission ("SEC") prior to the Warrants
becoming exercisable. The exercise price of the Warrants, may be
adjusted downward or upward at any time by the Company's Board of
Directors. Further, the Warrants are redeemable by the Company
at any time upon thirty days written notice, at a price of $.001
per Warrant.
During January 1996, the Company's Board of Directors reduced the
exercise price of the Class B and Class C warrants from $2.25 to
$1.00 per share and from $2.75 to $2.00 per share, respectively
and during the last quarter of 1997, the expiration dates were
extended to March 31, 1998. Lastly, on March 31, 1998, an
additional extension to September 30, 1998 for the exercise of
such warrants was approved by the Board of Directors.
7
<PAGE>
NEUROCORP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
NOTE 3 - STOCKHOLDERS' EQUITY (Cont'd)
a) ISSUANCE OF WARRANTS (Cont'd)
On March 12, 1997, two (2) shareholders exercised in the
aggregate 200,000 Class B Warrants and 200,000 Class C Warrants,
which resulted in the Company receiving proceeds of $600,000 and
issuing 400,000 shares of common stock.
b) SENIOR MANAGEMENT INCENTIVE PLAN
On November 23, 1994, the Company adopted an incentive stock
option plan that provides for the granting of options to purchase
up to 1,500,000 shares of the Company's common stock that are
intended to qualify either as statutory stock options or
non-statutory stock options. Options to purchase shares may be
granted under the incentive stock option plan to persons who are
employees or officers of the Company.
On September 19, 1995, December 15, 1995 and December 18, 1996,
the Company granted 250,000, 50,000 and 500,000 options
respectively to purchase shares of common stock pursuant to the
Company's Incentive Plan. 250,000 options were granted to the
former President of the Company, 50,000 to a consultant, and
500,000 options were granted to the former President of MCAI.
The exercise price of the options was fixed at $.10, $.01 and the
lower of $7.00 or fair market value per share respectively. Such
options expire between September 2002 and January 2007.
c) ISSUANCE OF COMMON STOCK AS CONSIDERATION FOR LOANS
On May 24, 1996, the Company entered into an agreement with a
shareholder to borrow $200,000. The loan is non-interest bearing
and is payable within one (1) year or is payable out of the first
proceeds resulting from any exercise of outstanding Class B and
Class C warrants, whichever comes first. As additional
consideration the Company issued 66,665 shares of restrictive
common stock. The Company has valued the common stock at
$133,333 or fifty percent (50%) of the fair market value on May
24, 1996, the date of the transaction. The Company recorded
deferred financing cost and increased stockholders' equity by
$133,333, respectively for this transaction. The deferred
financing cost were amortized over one year, which is the maximum
term of the loan. During June 1997 the original maturity date of
May 24, 1997 was extended to December 15, 1998. Accordingly, as
of June 30, 1998, and December 31, 1997 such loans have been
classified as short term.
d) PREFERRED STOCK
During December 1994, the Company issued two classes of preferred
stock for total consideration of $400,000. The first class of
150,000 shares of cumulative non-convertible preferred stock
class B, series 1, no par value has a liquidation preference of
$1 per share. Dividends accrue on such stock commencing January
1, 1996 at a rate of 10% of the liquidation value and are payable
semi-annually in cash or stock. At June 30, 1998 and December
31, 1997, the Company had accrued dividends of $8,750 and $1,250,
respectively, related to this preferred stock after a payment of
$28,750 in the form of common stock during December 1997.
8
<PAGE>
NEUROCORP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
NOTE 3 - STOCKHOLDERS' EQUITY (Cont'd)
d) PREFERRED STOCK (Cont'd)
The second class of 250,000 shares of convertible, no par value,
preferred stock, Class B, Series 2, were converted into common
stock during November 1997.
e) REGISTRATION OF COMMON STOCK
During February, 1996, the Company commenced registering common
shares and warrants pursuant to certain registration rights, and
other contractual obligations incurred by the Company in
connection with the issuance of such common shares and warrants
pursuant to the HZI acquisition agreement signed in November 1994
and the sale of common shares in December 1995. The Company will
not receive any of the proceeds from the sale of the common
shares or warrants since all respective shares are being offered
by the selling stockholders. The Company has also agreed to pay
for such costs related to the registration.
f) EXERCISE OF WARRANTS
On December 31, 1997, the Company issued 1,100,000 shares of
common stock for $1,100,000 in connection with the exercise of
1,100,000 warrants. Simultaneously with such exercise, the
Company also sold to the same investor for $400,000, 400,000
units comprising of 400,000 shares of common stock and 400,000
warrants to purchase one share of common stock at $5 per share
which expire on December 31, 1998. The exercise price of the
warrants was subsequently reduced by the Board of Directors to $1
per share and such warrants were exercised June 30, 1998
resulting in the issuance of 400,000 shares of common stock for
$400,000.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
a) OPERATING LEASES
The Company and its subsidiaries have entered into lease
agreements for administrative offices and certain equipment under
noncancellable operating leases expiring in various dates through
December 2002. The administrative office leases contain a
provision for additional rent which is equal to the Company's pro
rated share of future real estate taxes.
A schedule of future minimum rental payments at June 30, 1998 is
as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
<S> <C>
1998 $ 85,758
1999 122,002
2000 115,572
2001 115,000
2002 115,000
--------
$553,332
========
</TABLE>
Rent expense under all operating leases for the six months ended
June 30, 1998 and 1997 was $76,403 and $56,657, respectively.
9
<PAGE>
NEUROCORP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Cont'd)
b) CONCENTRATION OF CREDIT RISK
For the six months ended June 30, 1998 and 1997, approximately 69% and
80%, respectively, of net sales were derived from three and two
unrelated customers, respectively who are in the pharmaceutical and
psychiatric industries. As of June 30, 1998 and December 31, 1997,
approximately 64% and 90% respectively, of accounts receivable are due
from four unrelated customers.
c) EMPLOYMENT AGREEMENTS
i) On September 20, 1995, the Company's Chairman of the Board
entered into an employment agreement providing for a base
salary of $250,000 per year. The agreement is for an
initial term of 10 years and is renewable on a month to
month basis thereafter. Further, the agreement provides for
a term life insurance policy amounting to $1,000,000 payable
to the Chairman's designated beneficiary and also provides
for transportation arrangements funded by the Company.
Through December 31, 1996, the Company's Chairman waived his
right to receive the term life insurance as
provided for in the
employment
agreement. For the
six months ended
June 30, 1998 and
1997 premiums paid
on such policy
amounted to $13,754
and $9,506,
respectively.
On May 7, 1998, pursuant to a board meeting, the Chairman of
the Board resigned as President and CEO effective May 15,
1998. Accordingly, a director of the Company was elected as
the interim Chief Executive Officer and President.
ii) On December 7, 1994, the Company entered into an employment
agreement with an Executive Vice President providing for a
base salary of $100,000 per year. The agreement expires on
January 1, 2000 and is renewable on a year to year basis
thereafter. The agreement provides that on January 1 of
each year the Executive Vice President shall be entitled to
a 10% salary increase and an annual bonus equal to at least
fifty percent (50%) of his base salary subject to the Board
of Directors approval. During the three months ended June
30, 1998, a bonus of $60,500 was paid. Such amount had not
been accrued at December 31, 1997 as the Board of Directors
had not approved the bonus until May 1998. If the employee
is terminated within the contract period due to a change in
control of the Company as defined in the Securities Exchange
Act of 1934, under Sections 13(d) and 14(d), said Executive
Vice President shall be entitled to a lump sum payment equal
to five (5) times his gross annual compensation, in effect
at date of termination. Additionally, for the three year
period after the date of termination, the Company is
obligated to provide the employee with life and health
insurance benefits substantially similar to those which the
Executive Vice President was receiving prior to the date of
termination.
iii) On December 31, 1996, the Company entered into an employment
agreement with its then Chief Financial Officer ("CFO")
providing for a base salary of $85,000 per year. The
agreement expires on January 1, 2000 and is renewable on a
year to year basis thereafter. This agreement was later
amended to document that her official title and duties were
changed from CFO to Vice President, Administration, and
Special Assistant to the Chairman.
10
<PAGE>
NEUROCORP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Cont'd)
c) EMPLOYMENT AGREEMENTS (Cont'd)
iv) On December 18, 1996, the Company and MCAI entered into an
employment agreement with the CEO and President of MCAI who
was also an Executive Vice President of the Company
providing for a base salary of $150,000 in year one,
$225,000 in year two and increasing by the Consumer Price
Index ("CPI") change each year thereafter. The agreement
expires on January 1, 2000 and is renewable on a year to
year basis thereafter. The agreement provides for 500,000
qualified stock options for purchase of common stock
exercisable at the lower of $7.00 per share or fair market
value. The options are exercisable upon vesting and expire
January 6, 2007. On January 6, 1997, 200,000 of such
options vested and 150,000 options each vest on January 6,
1998 and 1999. During March 1998, such individual resigned
from the Company and accordingly, lost the right to the
options which would have vested January 6, 1999.
v) On July 1, 1997, the Company entered into an employment
agreement with the Vice President of Technical Operations,
providing for a base salary of $80,000 per year with annual
increases. This agreement expires on July 1, 2000 and is
renewable for successive one-year terms thereafter.
vi) On July 1, 1997 MCAI and the Company entered into an
employment agreement with the Managing Director of MCAI.
This agreement provides for a base salary of $75,000 per
year with annual increases, expiring on July 1, 1999 and is
renewable on a year to year basis thereafter.
d) CONSULTING AGREEMENT
On July 1, 1995, the Company entered into a five (5) year
consulting agreement with an entity controlled by the Company's
former President and Vice Chairman. Said agreement provided for
a fee of $75,000 per annum. The agreement was amended on July
12, 1996 to provide for a reduced fee of $30,000 per annum.
During March 1998, such individual became the acting Chief
Executive Officer of MCAI and his compensation was increased to
$10,000 per month pursuant to a verbal agreement with the
Company.
e) LETTER OF INTENT
On April 7, 1998, the Company signed a Letter of Intent with
Pioneer Ventures Associates Limited Partnership ("Pioneer")
whereby the Company would receive a minimum of $2,000,000 to a
maximum of $4,500,000 in exchange for issuing cumulative
preferred stock convertible into common stock at $3 per share
with an 8% dividend. Prior to the Company receiving the full
amount of any funds, Pioneer is performing a due diligence which,
if completed to its satisfaction, will result in the Company
receiving an initial $2,000,000. Pioneer has imposed certain
other conditions which has resulted in the Company bringing in a
new chief executive officer and the election of two (2) Pioneer
representatives to the Board of Directors.
The Company received an initial investment of $1,000,000 from
Pioneer on July 31, 1998 for which it issued 333,333 shares of a
new class of Series C Senior Convertible Preferred Stock. During
the due diligence process, Pioneer is evaluating the capital
requirements of MCAI and HZI's contract research division and
will invest up to a total of $4,500,000 based on terms and
conditions to be agreed upon.
11
<PAGE>
NEUROCORP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
NOTE 5 - RELATED PARTY TRANSACTIONS
a) REVENUES FROM AFFILIATES
Manhattan Westchester Medical Services, P.C. ("Manhattan
Westchester") reimburses the Company for the use of certain
employees as well as office and laboratory space (administration
services) of the Company. The Company and Manhattan Westchester
also operate under an oral agreement whereby the Company is paid
$1,000 per month for each of the Memory Centers operated by
Manhattan Westchester. Manhattan Westchester is 100% owned by
the Company's Chairman. Net revenues from Manhattan Westchester
for the six months ended June 30, 1998 and 1997 approximated
$15,675 and $23,708, respectively. Effective March 1, 1998, such
oral agreement was terminated with Manhattan Westchester. The
Company is undergoing negotiations with an unrelated physician to
provide medical services relating to the Memory Centers.
b) STOCKHOLDER NOTES AND LOANS PAYABLE
Stockholder notes and loans payable consisted of the following at:
<TABLE>
<CAPTION>
June
30, 1998 December
(Unaudited) 31, 1997
--------------------------------------------------------------------
<S> <C> <C>
Non-interest bearing loans and payables,
(See (i) below) $ 85,985 $ 86,332
Notes payable bearing an interest of
5% to 9% (See below) 300,000 300,000
-------- --------
$385,985 $386,332
======== ========
</TABLE>
i) Stockholder loans payable relates to advances made to HZI
and NYI by its former Chairman of the Board which are due on
demand.
ii) On May 24, 1996, the Company entered into an agreement with
a shareholder to borrow $200,000. The note is non-interest
bearing and was payable within one (1) year or is payable
out of the first proceeds resulting from any exercise of
outstanding Class B and Class C warrants, whichever comes
first. As consideration for such loan, the Company issued
66,666 shares of restricted common stock. During June 1997,
the original maturity date of May 24, 1997 was extended to
December 15, 1998. Lastly, the Company agreed to include
said shares in its pending Registration Statement.
iii) On July 16, 1996, the Company entered into two loan
agreements amounting to $200,000 with two unrelated
shareholders. Each note was for $100,000, bears interest at
9% per annum and was due at the earlier of one (1) year or
payable from any of the proceeds of a sale of the Company's
securities including the exercise of Class B and C Warrants.
On April 30, 1997, the Company liquidated one note amounting
to $100,000 and extended the second note's maturity date to
December 15, 1998.
At June 30, 1998 and December 31, 1997, accrued interest related
to such notes and loans amounted to $21,809 and $17,309,
respectively, and is included in accrued expenses.
12
<PAGE>
NEUROCORP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
NOTE 5 - RELATED PARTY TRANSACTIONS (Cont'd)
c) CONSULTING AGREEMENT
On July 1, 1995, the Company entered into a five (5) year
consulting agreement with an entity controlled by the Company's
former President and Vice Chairman. Said agreement provided for
a fee of $75,000 per annum. The agreement was amended on July
12, 1996 to provide for a reduced fee of $30,000 per annum.
During March 1998, such individual became the acting Chief
Executive Officer of MCAI and his compensation was increased to
$10,000 per month pursuant to a verbal agreement with the
Company.
d) DUE FROM AFFILIATES
Manhattan Westchester reimburses the Company for the use of
certain employees as well as office and laboratory space of the
Company. The Company and Manhattan Westchester also operate
under an oral agreement whereby the Company is paid $1,000 per
month for each of the Memory Centers controlled Manhattan
Westchester. Manhattan Westchester is 100% owned by the
Company's Chairman. At June 30, 1998 and December 31, 1997, any
estimated amounts due from Manhattan Westchester, principally for
management and administrative services have been included in
other current assets. Effective March 1, 1998, such oral
agreement was terminated with Manhattan Westchester. The Company
is undergoing negotiations with an unrelated physician to provide
medical services relating to the Memory Centers.
13
<PAGE>
NEUROCORP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company was incorporated in the State of Nevada on March 18,
1987 with the name Tamarac Ventures, Ltd. On November 23, 1994,
in connection with the reverse acquisition of HZI Research
Center, Inc. ("HZI"), the Company amended its Certificate of
Incorporation to change its name to NeuroCorp, Ltd. and to reduce
its authorized common stock from 200,000,000 shares to
100,000,000 shares and to authorize 5,000,000 shares of preferred
stock.
The Company is primarily involved in two businesses: (i) it
sub-contracts clinical research and performs data analysis for
health agencies, research organizations and pharmaceutical
companies, and (ii) it manages a group of facilities that
diagnose and treat memory disorders. In addition, as an
outgrowth of its research activities, the Company also designs
diagnostic testing software and equipment for neuropsychiatric
applications and the Company performs neurological testing
services for hospitals and physicians. The Company conducts
these activities through two wholly owned subsidiaries, HZI and
Memory Centers-TM- of America, Inc. ("MCAI"), a Delaware
Corporation. In November 1994, the Company acquired all of the
issued and outstanding shares of HZI. HZI conducts contract
research, designs diagnostic software and equipment and performs
neurological testing services. In March 1996, the Company
established MCAI to provide non-medical management, educational,
consultation and marketing services to licensed physicians and
entities controlled by them. These physicians offer professional
diagnostic, preventive and treatment services, through pilot
facilities, Memory Centers-TM-, to persons who suffer from memory
complaints. MCAI, through affiliated corporations, also supplies
the medical equipment used in Memory Centers-TM-. There are
currently three Memory Centers-TM-, one located in New York City
(Manhattan) one in Tarrytown, New York, and one in Bakersfield,
California. These Memory Centers-TM- are operated under
management agreements with physicians. During January 1998, the
Company commenced the construction of a signature Memory Center
in Manhattan, New York. The Company expects such Memory Center
to be completed by the late summer. Under the terms of these
management agreements, MCAI supplies equipment, management,
marketing, data handling and personnel services for physicians,
and the physicians provide all medical services and employ all
clinical staff. MCAI is compensated through fixed management
fees for its managerial services, and it is compensated for its
billing services and variable expenses, such as supplies, as they
occur. These agreements are for a fixed period of time,
generally not less than one year. MCAI began full operation of
the pilot program at the end of the second quarter of 1996. Each
facility is estimated to cost between $70,000 to $250,000 for
equipment, leasehold improvements and working capital which
includes administration costs. Revenues from this wholly-owned
subsidiary were $25,070 and $16,000 for the six months ended June
30, 1998 and 1997, respectively.
During the second quarter of 1997, the Company created a new
division within NeuroCorp Ltd., called Tel-Neuro Psychiatry
("TNP"). The TNP division is responsible for marketing
Tele-Neuro Psychiatric systems which are based on the Company's
proprietary software and hardware equipment. The TNP system
provides data communication with off-site experts. Furthermore,
the Company believes the new TNP system is useful for enhancing
quality controls in research programs. The Company is currently
utilizing TNP systems in the four (4) MCAI centers. In September
1997, Drs. Itil and Le Bars and Mr. Eralp received a patent for
certain data collection, analysis and transmission procedures
that the TNP system relies upon. This patent has been assigned
to the Company.
14
<PAGE>
NEUROCORP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
The Company recognizes revenue and costs from its contracts under
the percentage of completion method. Cost of revenues include
all direct material and labor costs and those indirect costs
related to contract performance. General and administrative
expenses are accounted for as period costs and are, therefore,
not included in the calculation of the estimates to complete
contracts in progress. Changes in each contracts's performance,
conditions and estimated profitability including those arising
from contract penalty provisions, and final contract settlements
may result in revisions to costs and income and are recognized in
the period in which the revisions are determined. In addition,
losses are recognized in full when determinable.
Revenue from computer system sales, which include BFM Systems,
are recognized upon the shipment of the turnkey systems. Service
revenues are recognized as they are rendered on the accrual basis
of accounting.
THREE MONTHS ENDED JUNE 30, 1998 AS COMPARED TO THE THREE MONTHS
ENDED JUNE 30, 1997
The Company reported a net loss of $863,836 for the three months
ended June 30, 1998 as compared to a net loss of $390,145 for the
three months ended June 30, 1997.
Revenues for the three months ended June 30, 1998 and 1997
amounted to $43,914 and $311,513, respectively. Revenues
decreased by $267,599 or 86% for the three months ended June 30,
1998 as compared to the three months ended June 30, 1997. Gross
(loss) profit for the three months ended June 30, 1998 and 1997
amounted to $(48,565) and $188,293, respectively or a net
decrease of $236,858. Gross (loss) profit percentages for the
three months ended June 30, 1998 and 1997, were (111%) and 60%,
respectively, or a net decrease of 171%. The Company includes in
the cost of sales amortization of its database and computer
system product development costs. Commencing, January 1, 1996
the Company revised its estimate of the useful life of the
software development cost from 17 years to 7 years. This change
was made to better reflect the estimated period during which the
assets will remain in service. For the three months ended June
30, 1998 and 1997 amortization charges amounted to $66,847 and
$68,604, respectively. The decrease in gross profit is a result
of no sales of BFM equipment during the three months ended June
30, 1998 while amortization charges related to BFM continue to be
made.
Furthermore, the decrease in sales and gross profit during the
three months ended June 30, 1998 as compared to the three months
ended June 30, 1997 is attributable to the following:
1. The Company has not entered into any major multi-million dollar
new long-term contracts since December 31, 1993 and major
contracts recorded prior to this period were substantially
completed during the December 31, 1995 and 1994 year end. For
the years ended December 31, 1997 and 1996, the Company received
$405,700 and $759,000, respectively, of new contracts. Revenues
from contracts for the three months ended June 30, 1998 as
compared to the three months ended June 30, 1997 amounted to
$24,193 and $311,513, respectively, or a net decrease of
$287,320. The contract division's low revenues for the June 30,
1998 and 1997 quarters is attributable to the Company's lack of
major new contracts. Management believes that the drug research
industry has been temporarily negatively impacted due to
consolidation in the pharmaceutical industry, which has resulted
in the reduction of the available pool to new research contracts.
The Company believes that demand for more effective central
nervous system drugs with fewer negative side effects will
continue to stimulate the demand for contract research on central
nervous system drugs.
15
<PAGE>
NEUROCORP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
THREE MONTHS ENDED JUNE 30, 1998 AS COMPARED TO THE THREE MONTHS
ENDED JUNE 30, 1997 (Cont'd)
The gross (loss) profit percentage from contracts for the three
months ended June 30, 1998 is (139)% as compared to the June 30,
1997 which was 60%. The decrease in gross profit for the three
months ended June 30, 1998, as compared to the three months ended
June 30, 1997, is primarily a result of amortization charges
related to contract research and the reduced revenues of the
contract research division.
2. Net sales of BFM Systems-Registered Trademark- for the three
months ended June 30, 1998 and 1997 amounted to $0 and $28,884,
respectively. Gross (loss) profit amounts for the three months
ended June 30, 1998 amounted to $(26,196) whereas for the three
months ended June 30, 1997, the gross (loss) profit amounted to
$(3,686) or a net decrease of $22,510. Amortization expense
related to BFM Systems for three months ended June 30, 1998 and
1997 amounted to $26,196 and $25,043, respectively. The Company
management is revising its marketing strategy and believes the
lack of sales is temporary.
3. Revenues of the TeleMap-Registered Trademark- division for the
three months ended June 30, 1998 and 1997 amounted to $10,651 and
$25,928, respectively. Gross profit percentage for the three
months ended June 30, 1998 and 1997 amounted to 34% and 45%,
respectively due to a decrease in labor costs.
4. Memory Center-TM- management fees for the three months ended June
30, 1998 and 1997 amounted to $9,070 and $6,000, respectively. $0
and $6,000 of this revenue for the three months ended June 30,
1998 and June 30, 1997 was derived from Manhattan Westchester
Medical Services, P.C. ("Manhattan Westchester") through a
program conducted under the management of MCAI and $8,000 of the
revenue for the three months ended June 30, 1998 was from the
Bakersfield Memory Center. Manhattan Westchester is a medical
practice that is controlled by the Company Chairman. While MCAI
does not receive any direct insurance reimbursements, it does
receive a management fee from Manhattan Westchester. Insurance
reimbursements are received by the medical practice conducting
the program based on rates established by third party payors
which are in turn based on the number of visits and type of
service performed. Effective March 1, 1998, Manhattan
Westchester will not be providing such medical services to MCAI.
The Company is undergoing negotiations with unrelated physicians
to provide medical services to MCAI.
General and administration expenses include overhead,
administration salaries, selling and consulting costs. Further,
the Company classifies the costs of planning, designing and
establishing the technological feasibility of its computer system
products as research and development costs and charges those
costs to expense when incurred. After technological feasibility
has been established, costs of producing a marketable product and
its prototype are capitalized. Capitalized database and computer
system development costs are composed mainly of payroll and other
direct employee costs. Costs associated with the above, which
are not capitalized during the period, are charged to either
general and administrative or research and development expense.
General and administrative expenses for the three months ended
June 30, 1998 were $805,041 as compared to the three months ended
June 30, 1997 of $524,718 or an increase of $280,323 or 53%. The
increase in general and administrative expenses for the three
months ended June 30, 1998 is primarily due to the Company
increasing its development costs for its subsidiary, MCAI.
16
<PAGE>
NEUROCORP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
THREE MONTHS ENDED JUNE 30, 1998 AS COMPARED TO THE THREE MONTHS
ENDED JUNE 30, 1997 (Cont'd)
Research and development costs ("R&D") for the three months ended
June 30, 1998 were $0 as compared to the three months ended June
30, 1997 of $34,653 or a decrease of $34,653. The decrease in
R&D costs is principally due to a concentration by the Company on
its contract research and the development of Memory Centers.
During November and December 1997, the Company liquidated several
loans which were convertible into common stock. As a result of
these conversions, interest expense for the three months ended
June 30, 1998 as compared to the three months ended June 30, 1997
decreased by $20,833.
SIX MONTHS ENDED JUNE 30, 1998 AS COMPARED TO THE SIX MONTHS
ENDED JUNE 30, 1997
Revenues for the six months ended June 30, 1998 and 1997 amounted
to $209,328 and $587,000, respectively. Revenues decreased by
$377,672 or 64% for the six months ended June 30, 1998 as
compared to the six months ended June 30, 1997. Gross (loss)
profit for the six months ended June 30, 1998 and 1997 amounted
to $(8,490) and $293,947, respectively or a net decrease of
$302,437. Gross (loss) profit percentages for the six months
ended June 30, 1998 and 1997, were (4)% and 50%, respectively, or
a net decrease of 54%. The Company includes in the cost of sales
amortization of its database and computer system product
development costs. Commencing, January 1, 1996 the Company
revised its estimate of the useful life of the software
development cost from 17 years to 7 years. This change was made
to better reflect the estimated period during which the assets
will remain in service. For the six months ended June 30, 1998
and 1997 amortization charges amounted to $134,220 and $135,805,
respectively. The decrease in gross profit is a result of an
overall decrease in revenues during the six months ended June 30,
1998 while amortization charges continue to be made.
Furthermore, the decrease in sales and gross profit during the
six months ended June 30, 1998 as compared to the six months
ended June 30, 1997 is attributable to the following:
1. The Company has not entered into any major multi-million dollar
new long-term contracts since December 31, 1993 and major
contracts recorded prior to this period were substantially
completed during the December 31, 1995 and 1994 year end. For
the years ended December 31, 1997 and 1996, the Company received
$405,700 and $759,000, respectively, of new contracts. Revenues
from contracts for the six months ended June 30, 1998 as compared
to the six months ended June 30, 1997 amounted to $155,408 and
$393,100, respectively, or a net decrease of $237,692. The
contract division's low revenues for the June 30, 1998 and 1997
quarters is attributable to the Company's lack of major new
contracts. Management believes that the drug research industry
has been temporarily negatively impacted due to consolidation in
the pharmaceutical industry, which has resulted in the reduction
of the available pool to new research contracts. The Company
believes that demand for more effective central nervous system
drugs with fewer negative side effects will continue to stimulate
the demand for contract research on central nervous system drugs.
17
<PAGE>
NEUROCORP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
SIX MONTHS ENDED JUNE 30, 1998 AS COMPARED TO THE SIX MONTHS
ENDED JUNE 30, 1997 (Cont'd)
The gross profit percentage from contracts for the six months
ended June 30, 1998 is 2% as compared to the June 30, 1997 which
was 50%. The decrease in gross profit for the six months ended
June 30, 1998, as compared to the six months ended June 30, 1997,
is primarily a result of amortization charges related to
contract research and the reduced revenues of the contract
research division.
As of June 30, 1998, the Company's contract research division had
a backlog of approximately $0 from uncompleted contracts.
The contract research division during 1997 and 1996 performed
significant work for a major foreign customer, resulting in a
large increase in their accounts receivable. As of June 30, 1998
the receivable amount from this foreign customer amounted to
approximately $80,515, all of which is expected to be collected
during 1998.
2. Net sales of BFM Systems-Registered Trademark- for the six months
ended June 30, 1998 and 1997 amounted to $0 and $53,278,
respectively. Gross (loss) profit amounts for the six months
ended June 30, 1998 amounted to $(51,273) whereas for the six
months ended June 30, 1997 the gross profit amounted to $(50,194)
or a net decrease of $1,079. Amortization expense related to BFM
Systems for six months ended June 30, 1998 and 1997 amounted to
$53,146 and $70,617, respectively. The Company management is
revising its marketing strategy and believes the lack of sales is
temporary.
3. Revenues of the TeleMap-Registered Trademark- division for the
six months ended June 30, 1998 and 1997 amounted to $28,850 and
$50,520, respectively. Gross profit percentage for the six
months ended June 30, 1998 and 1997 amounted to 74% and 48%,
respectively due to a decrease in labor costs.
4. Memory Center-TM- management fees for the six months ended June
30, 1998 and 1997 amounted to $25,070 and $20,629, respectively.
$6,000 and $16,000 of this revenue for the six months ended June
30, 1998 and 1997 was derived from Manhattan Westchester through
a pilot program conducted under the management of MCAI and
$18,000 of the revenue for the six months ended June 30, 1998 was
from the Bakersfield Memory Center.
General and administrative expenses for the six months ended June
30, 1998 were $1,614,993 as compared to the six months ended June
30, 1997 of $844,765 or an increase of $770,228 or 91%. The
increase in general and administrative expenses for the six
months ended June 30, 1998 is primarily due to the Company
increasing its development costs for its subsidiary, MCAI, by
$485,316 as compared to the six months ended June 30, 1997.
Research and development costs ("R&D") for the six months ended
June 30, 1998 were $0 as compared to the six months ended June
30, 1997 of $52,128 or an decrease of $52,128. The decrease in
R&D costs is principally due to a concentration by the Company on
its contract research and the development of Memory Centers.
During November and December 1997, the Company liquidated several
loans which were convertible into common stock. As a result of
these conversions, interest expense for the six months ended June
30, 1998 as compared to the six months ended June 30, 1997
decreased by $20,527.
18
<PAGE>
NEUROCORP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998 and December 31, 1997, the Company had working
capital of $291,127 and $1,464,877, respectively. The Company's
cash balance at June 30, 1998 amounting to approximately $368,596
is primarily made up of an influx of $400,000 of capital on June
30, 1998. The Company's net accounts receivable amounted to
$697,409 at June 30, 1998. As of June 30, 1998, of the Company
current liabilities amounting to $1,087,262, $300,000 represents
stockholder loans which are not due until December 31, 1998. The
Company expects to repay the remaining debt from internally
generated funds or additional public or private sales of its
securities.
For the six months ended June 30, 1998 and 1997, the Company used
cash for operations of $1,223,856 and $790,120, respectively,
resulting in increased use of cash for operations by $433,736.
The net increase for the six months ended June 30, 1998 is the
result of loss from operations amounting to $1,638,434 compared
to the loss from operations for the six months ended June 30,
1997 of $659,223.
For the six months ended June 30, 1998 and 1997 cash used by
investing activities amounted to $395,958 and $240,701,
respectively, or a net decrease in use of cash of $155,257. The
increase use in cash for investing activities for the six months
ended June 30, 1998 as compared to the six months ended June 30,
1997 was attributable to the following: (i) purchase of equipment
and fixtures amounting to $381,605 and $52,517 for the six months
ended June 30, 1998 and 1997 (ii) capitalized database
development costs of $14,353 and $75,359 for the six months ended
June 30, 1998 and 1997 (iii) decrease in purchases of other
assets to $0 for June 30, 1998 from $101,027 for the six months
ended June 30, 1997. The decrease in the database development
costs was the result of a large amount of EEG studies inputted
into the database. The Company during the six months ended June
30, 1998 purchased equipment amounting to approximately $190,000,
principally for its subsidiary MCAI.
For the six months ended June 30, 1998 and 1997 cash provided by
financing activities amounted to $390,585 and $329,741,
respectively. For the six months ended June 30, 1998, 400,000
shares were issued in connection with exercise of 400,000
warrants. For the six months ended June 30, 1997, the Company
received $600,000 in connection with the exercise of 200,000
Class B and 200,000 Class C warrants, which resulted in the
Company issuing 400,000 shares of common stock. The Company
incurred registration costs for the six months ended June 30,
1998 and 1997 amounting to $0 and $114,035, respectively, in
connection with registering shares of common stock and warrants
pursuant to contractual obligations with certain stockholders.
At June 30, 1998 and 1997, the Company accrued $7,500 and $7,500
of dividends for Series 1 preferred stock as required under the
terms of the preferred stock.
19
<PAGE>
NEUROCORP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
MANAGEMENTS'S PLAN
The intended development of Memory Centers-TM- requires
substantial amounts of capital without any assurance that they
will be successful. Depending on size and location, the Company
estimates that each facility would require between $70,000 and
$250,000 for equipment, leasehold improvements, and working
capital, including corporate overhead
attributable to operating the Memory Centers-TM-. Therefore, the
Company estimated that its short term capital requirements for 30
fully functioning Memory Centers-TM- will be in the range of
$4,000,000 to $5,000,000.
The Company intends to set up 240 centers within the next 4 years
if additional capital can be raised. Long term capital
requirements for these centers based on the same assumptions as
set forth above, could range from $15,000,000 to $20,000,000.
The Company intends to raise such capital through public and
private sale of its securities as well as by debt financing.
Additionally the Company is exploring joint ventures and
strategic alliances with other companies. No assurance can be
given that such capital will be raised or that strategic
alliances or joint ventures will be formed.
As a result of a successful research project, the Company's
largest customer has made new commitments to the Company. In
this connection the Company received from this customer, as of
December 31, 1996, $100,000 to support the efforts of an Advisory
Committee of a prominent international health organization to
develop an Alzheimer's Study protocol, as well as commitments for
$285,000 to continue its work on the plant extract product. The
Company, during the fourth quarter of 1996, also obtained a new
contract ($140,000) from a U.S. pharmaceutical company to
conduct a QPEEG-Registered Trademark- study. In September 1997,
the Company obtained another contract in the amount of $230,708
pursuant to which a U.S. pharmaceutical company will use
QPEEG-Registered Trademark- in their multi-center drug trial.
QPEEG-Registered Trademark- is a proprietary method developed by
HZI that evaluates a drug's effect on the central nervous system
using computer analyzed EEG, ("CEEG-Registered Trademark-"). HZI
statistically analyzes the before and after effects of a drug and
correlates the changes with information in HZI's psychotropic
drug data base to determine the optimal time or dosage window to
yield particular central nervous system effects.
In January, 1995, the Company entered into a joint venture
arrangement with Tena, Ltd. in Istanbul, Turkey, for the purpose
of further research and development of the Company's products and
the marketing and sales of its products in the Mid-East, former
U.S.S.R. countries and in other geographical area in which the
Company has no distribution. Each project assigned to the joint
venture requires a statement of work to be completed, and a
budget with funding responsibility to be decided by the
respective parties. The Company entered into this joint venture
anticipating that certain of its products could be developed by
the joint venture at a cost below that attainable in the United
States. While no development work has been assigned to Tena to
date, Tena is involved in marketing the Company's products.
Accordingly, there are at present no capital or other funding
requirements anticipated with respect to this venture. However,
during the second quarter of 1997, Tena ordered a TNP system,
including a full BFM system, in order to set up a Memory Center
in Istanbul, Turkey. A letter of intent in connection with this
joint venture was signed in September 1997 by Tena for two
systems. However, this has subsequently been reduced to one
system.
20
<PAGE>
NEUROCORP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
MANAGEMENTS'S PLAN (Cont'd)
On September 4, 1997, the Company signed an agreement with the
CoreCare Corporation, a regional provider of mental health care
services, to form a joint venture. The joint venture, which, if
consummated, will be 50% owned by the Company, will be located at
Kirkbride Center, a large medical complex being developed in
Philadelphia. Within the Kirkbride Hospital complex, the
agreement contemplates that the joint venture will establish a
Memory Center-TM- and Tele-Neuro psychiatric diagnostic
laboratory. In September 1997, CoreCare ordered two TNP
systems in order to set up a Memory Center (each at $95,800), and
a TNP diagnostic laboratory. The various aspects of the joint
venture will require additional development and capital.
Accordingly, there can be no assurance that any aspect of the
joint venture can be developed within a reasonable amount of time
or that any of these will be successful, or that capital will be
found to develop any of these ventures.
The Company successfully obtained 510K approval for its EEG/EP
amplifier and is currently preparing its 510K application to the
FDA with respect to its HZI Electrode Headset and Digital EEG
System Software. Two of the products require improved prototypes
and the software product is in the final testing stage. The
aggregate cost for finishing the products and completing the 510K
applications is estimated at $90,000, which funds will be derived
from currently available working capital. A patent for a
proprietary telephonic Test Dose-Registered Trademark- system is
being prepared and then a pre-marketing approval will be sought.
The Company does not presently have any long term capital
commitments for its HZI and general corporate operations and does
not expect to have major capital expenditures for these
activities.
The Company's financial statements have been prepared assuming
that the Company will continue as a going concern. At December
31, 1997, the Company has an accumulated deficit of $3,426,114.
For the years ended December 31, 1997 and 1996, the Company
reported net losses of $2,423,602 and $1,634,675, respectively.
Additionally, the Company generated negative cash flows from
operations of $2,568,380 and $897,382 for the years ended
December 31, 1997 and 1996, respectively. Lastly, for the six
months ended June 30, 1998, the Company generated a net loss of
$1,638,434 and negative cash flows from operations amounting to
$1,223,856.
The Company's ability to continue as a going concern is currently
dependent on its ability to obtain an immediate influx of cash.
The company is currently negotiating with Pioneer Ventures
Associates Limited Partnership ("Pioneer") for Pioneer to invest
up to $4,500,000 pursuant to a letter of intent dated April 7,
1998 as discussed below.
21
<PAGE>
NEUROCORP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
MANAGEMENTS'S PLAN (Cont'd)
On April 7, 1998, the Company entered into a letter of intent
"(LOI") with Pioneer Ventures Associates Limited Partnership
("Pioneer"), whereby Pioneer would invest up to $4,500,000 in the
Company in return for cumulative convertible preferred stock, 8%
dividend, convertible at $3.00 per share into common stock. Upon
execution of the final contract, Pioneer invested $1,000,000.
The remaining $3,500,000 investment is subject to the
satisfactory completion by the Company of certain conditions as
well as agreed to milestones to be achieved. In connection with
the transaction, a new Chief Executive Officer has been named
and, in addition, a marketing and financial team will be
assembled for the Company, and two seats on the Board of
Directors are held by Pioneer representatives. The Company
incurred costs of approximately $120,000 to complete this
transaction. The Company completed the first phase of this
transaction on July 31, 1998. In consideration for the initial
investment of $1,000,000, the Company issued 333,333 shares of a
new class of Series C Senior Convertible Preferred Stock.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking information made on behalf of the
Company. All statements, other than statements of historical
facts, which address the Company's expectations of sources of
capital or which express the Company's expectation for the future
with respect to financial performance or operating strategies can
be identified as forward-looking statements. Forward-looking
Statements made by the Company are based on knowledge of the
environmental in which it operates, but because of the factors
previously listed, as well as the factors beyond the control of
the Company, actual results may differ materially from the
expectations expressed in the forward-looking statements.
22
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings:
None
ITEM 2 - Changes in Securities:
None
ITEM 3 - Defaults Upon Senior Securities:
None
ITEM 4 - Submission of Matters to a Vote of Security Holders:
None
ITEM 5 - Other Information:
Effective July 16, 1998, Vernon Wells was appointed as Acting Chief
Executive Officer of the Company.
ITEM 6 - Exhibits and Reports on Form 8-K:
a) Exhibits
None
b) Reports on Form 8-K
None
23
<PAGE>
SIGNATURE
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.
NeuroCorp., Ltd.
Date: August 19, 1998 By: /s/ Kurt Z. Itil
----------------------------- -------------------------------
Kurt Z. Itil
Executive Vice President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Balance
Sheet, Statement of operations, Statement of Cash Flows and Notes thereto
incorporated in Part I, Item 1 of this Form 10-QSB and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 368,596
<SECURITIES> 0
<RECEIVABLES> 702,956
<ALLOWANCES> (5,547)
<INVENTORY> 134,241
<CURRENT-ASSETS> 1,378,389
<PP&E> 1,212,180
<DEPRECIATION> (645,403)
<TOTAL-ASSETS> 3,578,625
<CURRENT-LIABILITIES> 1,087,262
<BONDS> 0
21,914
0
<COMMON> 150,000
<OTHER-SE> 2,079,449
<TOTAL-LIABILITY-AND-EQUITY> 3,578,625
<SALES> 209,328
<TOTAL-REVENUES> 209,328
<CGS> 217,818
<TOTAL-COSTS> 217,818
<OTHER-EXPENSES> 1,614,993
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,527
<INCOME-PRETAX> (1,636,809)
<INCOME-TAX> 1,625
<INCOME-CONTINUING> (1,638,434)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,638,434)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
