U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: August 31, 1998
---------------
( ) 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 0-21320
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MAGNA-LAB INC.
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(Exact name of small business issuer as specified in its charter)
New York 11-3074326
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
P.O. 780, Syosset, NY 11791
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(Address of principal executive offices)
(516) 595-2111
---------------------------
(Issuer's telephone number)
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(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes ( ) No (X)
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 - October 9, 1998
Class A Common Stock, $.001 Par Value 19,422,142
----------------------------------------------------- ---------------
Class B Common Stock, $.001 Par Value 764,858
----------------------------------------------------- ---------------
Class Shares
Transitional Small Business Disclosure Format (check one) Yes ( ) No (X)
<PAGE>
MAGNA-LAB INC. AND SUBSIDIARY
CONTENTS
PART 1 - FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS 1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 3
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5 - 9
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION 9 - 11
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 11
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 11
All items which are not applicable or to which the answer is negative have been
omitted from this report.
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MAGNA-LAB INC. and Subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETS
August 31, 1998 (unaudited) and February 28, 1998
August 31, February 28,
1998 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 109,000 $ 599,000
Accounts receivable, net of allowance for doubtful accounts of $356,000 - -
Inventory, net of allowance for estimated
non-realizable value of approximately $532,000 - -
Deposits and other, net of amounts written off - -
-------------- --------------
Total current assets 109,000 599,000
-------------- --------------
PROPERTY AND EQUIPMENT, less accumulated depreciation and amortization
and write-offs of approximately $793,000 and $791,000, respectively 16,000 17,000
-------------- --------------
OTHER ASSETS - -
-------------- --------------
$ 125,000 $ 616,000
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 261,000 $ 254,000
Accrued and other current liabilities 569,000 511,000
-------------- ---------------
Total current liabilities 830,000 765,000
-------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share, 5,000,000
shares authorized, no shares issued - -
Common stock, Class A, par value $.001 per share,
40,000,000 shares authorized, 19,422,142 and
19,322,142 shares issued and outstanding, respectively. 19,000 19,000
Common stock, Class B, par value $.001 per share,
3,750,000 shares authorized, 1,875,000 shares issued,
764,858 and 764,858 shares outstanding, respectively. 1,000 1,000
Capital in excess of par value 15,354,000 15,334,000
Accumulated deficit (16,079,000) (15,503,000)
-------------- ---------------
Total stockholders' equity (705,000) (149,000)
-------------- ---------------
$ 125,000 $ 616,000
============== ===============
See accompanying notes to financial statements
</TABLE>
1
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<TABLE>
<CAPTION>
MAGNA-LAB INC. and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended Six months ended
August 31, August 31,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
REVENUES
COSTS AND EXPENSES:
General and administrative $ 72,000 $ 104,000 $ 158,000 $ 302,000
Selling and marketing - - - 39,000
Research and development 207,000 - 422,000 42,000
----------- ----------- ----------- -----------
279,000 104,000 580,000 383,000
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Other income - - - -
Interest and financing expense - (2,000) - (5,000)
Interest income 1,000 - 4,000 -
----------- ----------- ----------- -----------
NET LOSS $ (278,000) $ (106,000) $ (576,000) $ (388,000)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 20,187,000 4,890,000 20,187,000 4,890,000
=========== =========== =========== ===========
NET LOSS PER SHARE $ (0.01) $ (0.02) $ (0.03) $ (0.08)
=========== =========== =========== ===========
See accompanying notes to financial statements
</TABLE>
2
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<TABLE>
<CAPTION>
MAGNA-LAB INC. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(unaudited)
Six Months ended August 31,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (576,000) $ (388,000)
--------------- ---------------
Adjustments:
Depreciation and amortization - 1,000
Effect on cash of changes in operating assets and liabilities:
Accounts receivable - 64,000
Accounts payable and accrued liabilities 86,000 377,000
--------------- ---------------
Total adjustments 86,000 442,000
--------------- ---------------
NET CASH USED IN OPERATING ACTIVITIES (490,000) 54,000
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
None - -
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES - -
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repay note to related party - (64,000)
--------------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES - (64,000)
--------------- ---------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (490,000) (10,000)
CASH AND CASH EQUIVALENTS:
Beginning of period 599,000 10,000
--------------- ---------------
End of period $ 109,000 $ -
=============== ===============
SUPPLEMENTAL INFORMATION ON NON-CASH TRANSACTIONS
Common stock issued to settle account payable $ 20,000 $ -
=============== ===============
See accompanying notes to financial statements
</TABLE>
3
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<TABLE>
<CAPTION>
MAGNA-LAB INC. and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the six months ended August 31, 1998 (unaudited)
Common Stock
------------------------------------------------- Capital in
Class A Class B Excess
---------------------- ------------------- Of Par Accumulated
Shares Amount Shares Amount Value (a) Deficit
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<S> <C> <C> <C> <C> <C> <C>
BALANCES, February 28, 1998 19,322,142 $ 19,000 764,858 $ 1,000 $15,334,000 (15,503,000)
CONVERT B SHARES TO A - - - - - -
SHARES ISSUED TO SETTLE LIABILITY 100,000 - - - 20,000 -
NET LOSS - - - - - (576,000)
------------------------------------------------------------------------------------
BALANCES, August 31, 1998 (unaudited) 19,422,142 $ 19,000 764,858 $ 1,000 $15,354,000 (16,079,000)
=========== ========== ======== ========== ============ ============
See accompanying notes to financial statements
</TABLE>
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MAGNA-LAB INC. and Subsidiary
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The accompanying financial statements have been prepared in accordance with the
instructions to Form 10-QSB and do not include all of the information and
disclosures required by generally accepted accounting principles. All
adjustments which are of a normal recurring nature and, in the opinion of
management, necessary for a fair presentation have been included. These
statements should be read in conjunction with the more complete information and
financial statements and notes thereto included in the Company's annual report
on Form 10-KSB for the year ended February 28, 1998.
NOTE 2 - DISCUSSION OF THE COMPANY'S ACTIVITIES/PRODUCTS AND CASH REQUIREMENTS;
GOING CONCERN CONSIDERATION:
BACKGROUND/HISTORY - Since commencement of operations on February 10, 1992,
Magna-Lab Inc. and Subsidiary (the "Company") has developed and intended to
manufacture and market the MAGNA-SL, the first of a planned series of anatomy
specific MRI (Magnetic Resonance Imaging) products which are smaller and cost
less to own, install and operate than present "whole body" MRI systems. The
Company's efforts to market and sell the MAGNA-SL did not generate sufficient
revenues to sustain the Company's planned operations.
Since receiving US marketing clearance for the MAGNA-SL in September 1994 from
the Food and Drug Administration, the Company sold and delivered four MAGNA-SL
scanners. Three such sales were made to a related party with which the Company
had entered into a sales, marketing and distribution agreement. The third
scanner delivered to this related party has not been paid for by such related
party and the Company has recorded a 100% valuation allowance for this
receivable. The Company is presently unable to support this product and the
passage of time may make it impossible to realize any value from this product.
CURRENT ACTIVITIES - In February 1997, the Company commenced a plan of
restructuring of the Company's operations (the "Plan") to reposition itself into
a development and, hopefully under a then existing or other agreement, royalty
company in the near-term. The Company's activities under the Plan in the fiscal
year ended February 28, 1998 included elimination of Company-directed
production, marketing, administration and systems engineering and development
related to the MAGNA-SL and attempting to strengthen the relationship with
Elscint Cryomagnetics, Ltd. ("Elscint" - See Note 5) which was begun in June
1996. A critical component of the repositioning involves a new development
initiative in Cardiac MRI (the "Cardiac MRI Initiative") through a joint
collaboration with the Cardiac Institute of the Mount Sinai School of Medicine
(New York City) ("MSSM"), as well as raising sufficient financing to pursue the
Cardiac MRI Initiative. The Company received a proposal from Elscint (the
"Elscint Proposal") to support the license/royalty element of the Plan and has
continued to have discussions with Elscint regarding certain work that is
integral to the Plan. The Company has, however, been unable to finalize the
Elscint Proposal because of various difficulties in its negotiations with
Elscint, including a lack of adequate funds and the Company's belief that plans
submitted by Elscint did not represent an adequate opportunity for the Company's
shareholders.
In accordance with the Plan, in March 1997, the majority of the Company's
workforce including the entire sales and marketing staff, the production and
engineering and administrative staff were terminated. Further, the Company,
shortly thereafter, vacated its production, development and executive facility
and ceased the need for other assets including leased assets with remaining
non-cancelable terms, and took other measures. The Company recorded a
restructuring charge of approximately $1.5 million in the fourth quarter ended
February 28, 1997 for write downs of fixed assets, inventories and deposits made
with strategic vendors which are non-refundable, as well as accruals for lease
termination and other costs. While the ultimate amount may differ from this
estimate, the Company presently believes that such restructuring charge is
adequate. At August 31, 1998, only the Company's President and Chief Scientific
Officer is in the full time employ of the Company.
When the Company vacated its principal production, development and executive
facility, it placed certain inventory and
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equipment in storage and several key individuals continued the search for new
capital and the advancement of the development collaboration with the MSSM. The
Company's operations were, therefore, severely curtailed at that time.
In December 1997, the Company's efforts to raise additional financing to
initiate the Cardiac MRI Initiative were successful in raising $1.884 million in
a private placement of 15,072,000 shares of common stock (the "December 1997
Financing"). Such financing was conditioned on the Company initiating a program
to pay its existing liabilities on a reduced basis (the "Debt Reduction Program"
- - See Note 9). Since December 1997, the Company has: (1) initiated and advanced
the Cardiac MRI Initiative, (2) continued the Debt Reduction Program and (3)
continued to have discussions with Elscint with the objective of advancing the
Elscint Proposal (such discussions have not resulted in concluding the Elscint
Proposal). The December 1997 Financing was believed to be sufficient to fund the
Company's operations until approximately July 1998, assuming success in its Debt
Reduction Program and discussions with Elscint. The Company has deferred certain
payments due to MSSM and others in order to maintain its resources beyond July
1998. The Company now requires significant additional financing in order to
support the Plan. It is expected that the Company's ability to obtain such
additional financing will be dependent upon the success of the Debt Reduction
Program, the success of development activities with MSSM and, to a lesser
extent, negotiations regarding the Elscint Proposal.
Activities during the six months ended August 31, 1998 included advancement of
the Cardiac Initiative through collaborative research with MSSM, discussion with
Elscint, business planning and capital raising activities.
The Company is continuing its efforts to: (1) raise additional capital, (2) move
forward with the Cardiac MRI Initiative, (3) complete the Debt Reduction Program
and (4) either complete the Elscint Proposal, if possible on acceptable terms,
or enter into a strategic arrangement with others, if possible. There is no
assurance that any of these efforts will be successful or that the Company will
be able to continue even its significantly reduced operations, for which the
Company presently requires additional capital.
GOING CONCERN CONSIDERATION AND RISK FACTORS - As indicated in the accompanying
unaudited consolidated financial statements, as of August 31, 1998, the Company
had negative working capital, approximately $830,000 of liabilities, negative
net worth of approximately ($705,000) and a development agenda which requires
immediate additional financing in order to continue its efforts. Further, as
indicated in the accompanying unaudited consolidated financial statements, the
Company has incurred a cumulative loss of approximately $16.1 million since
inception and has no present, or projected near-term, revenue. Losses have
continued since August 31, 1998. These factors, among others, indicate that the
Company is in need of immediate significant additional financing and/or a
strategic business arrangement in order to continue the Plan. The Company
believes that its cash resources at August 31, 1998 are not sufficient to fund
its operations in the quarter beginning on September 1, 1998 and that it
presently requires additional capital to continue its planned operations. The
Company has been in contact with various existing and potential investors and
believes, but cannot assure, that it may be successful in raising the additional
capital that it needs to continue the operation of the Plan in the short term.
The current turmoil in the domestic and global financial markets is a
significant "risk factor" in the Company's efforts to attempt to continue its
Plan.
Management's plans discussed in the preceding paragraphs are subject to numerous
"risk factors" including the availability of capital (which is needed
immediately) on acceptable terms and in an uncertain market, the uncertainty of
success of developments under the Cardiac MRI Initiative, the uncertainty of
continued success of the Debt Reduction Program, the risks and uncertainties of
any new technology development program, competitive factors, the limited
availability and difficulty in retention of competent scientific and management
personnel, uncertainties related to existing or new potentially competing
technologies, necessary regulatory approvals for products contemplated by the
Cardiac MRI Initiative, uncertainties of intellectual property protection for
new technology, difficulties in concluding the Elscint Proposal or other
potential license arrangements and other factors associated with the development
and potential growth of a business from a new technology. There can be no
assurances that management's plans described in the preceding paragraphs will be
realized. These factors, among others, indicate that the Company may be unable
to continue operations as a going concern.
NOTE 3 - LOSS PER SHARE OF COMMON STOCK:
Net loss per share is computed based on the weighted average number of Class A
Common and Class B Common shares outstanding after subtracting certain
(1,000,000) Class B shares, which were forfeited at March 31, 1998 because
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<PAGE>
certain performance objectives were not met, from shares outstanding in
computing net loss per share. Dilutive options and warrants outstanding would be
considered in the computation of net income per share under the treasury stock
method when their effect is to reduce reported net income per share.
NOTE 4 - RELATIONSHIP WITH THE CARDIAC INSTITUTE OF THE MOUNT SINAI SCHOOL OF
MEDICINE:
In May 1997, the Company entered into a three-year agreement with the Cardiac
Institute of the Mount Sinai School of Medicine (New York City) and Dr. Valentin
Fuster (as principal investigator) ("MSSM") for a collaborative research
arrangement devoted to utilizing MRI in cardiac arterial imaging (the "Cardiac
MRI Initiative"). Under the agreement, the Company is required to make payments
to MSSM of $600,000 in each of the first and second years and $300,000 in the
third year. The start of the annual periods was delayed and payments of $300,000
were made to MSSM during the fiscal year ended February 28, 1998. The Company
has also agreed to pay royalties, as defined in the agreement, to MSSM for the
sole and exclusive right to use, make, have made, sell and otherwise exploit the
results of the collaboration.
The Company accrues for the cost of the collaboration with MSSM as research and
development expense monthly, subsequent to the delayed start of payments
mentioned above. For the quarter and six months ended August 31, 1998, $150,000
and $300,000, respectively, was charged to research and development expense for
this arrangement.
NOTE 5 - RELATIONSHIP WITH ELSCINT:
In June 1996, the Company and Elscint entered into an agreement covering a
strategic business arrangement in which Elscint would manufacture the MAGNA-SL
for marketing and sale by Elscint in certain non-United States territories,
principally Europe, the Peoples Republic of China, parts of the Middle East and
other territories. The Company would be paid royalties on each system
manufactured and sold by Elscint. To maintain its rights under the agreement,
Elscint was required to sell a minimum number of systems as defined therein, or
to cure, as defined therein, shortfalls. Additionally, Elscint and the Company
agreed to cooperate in various other matters. Importantly, the Company was
required to complete certain development tasks and enhancements, which were not
completed to Elscint's satisfaction as described below. The Company agreed to
provide certain ongoing research and development support which is no longer
practical given the Company's resources. Elscint was granted a right of first
negotiation on certain new products.
The Company was obligated to complete certain development tasks and
enhancements, which, if not completed by November 1996, could result in
termination of the agreement by Elscint. Elscint has informed the Company that
it is not satisfied with the completion of certain of the tasks agreed to by the
parties and has reserved all of its rights including to complete the tasks
itself at the Company's expense or to terminate the agreement and seek damages
from the Company. Elscint has presented to the Company the Elscint Proposal (See
Note 2) to assume the uncompleted tasks and make a major alteration and
improvement of certain systems comprising the MAGNA-SL. The Elscint Proposal
required a development payment of $500,000 plus certain support activities from
the Company. The Company initially agreed to proceed with the Elscint Proposal
but has been unsatisfied with certain aspects of Elscint's expressed plans and
has had difficulties in making the required payments to initiate or complete the
Proposal. The Company has continued to attempt to have discussions with Elscint
regarding the Elscint Proposal but there can be no assurance that this proposal
will go forward (See Note 9). Further, the Company believes that Elscint has
recently divested itself of the business which would have included the MAGNA-SL
and that the Elscint Proposal may no longer be available to the Company.
NOTE 6 - PROPERTY AND EQUIPMENT:
Details of property and equipment at August 31, 1998 are as follows:
Machinery and equipment $760,000
Purchased software 49,000
---------
809,000
Less: accumulated depreciation and amortization 392,000
amounts written off in restructuring charge 400,000
---------
$ 17,000
---------
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NOTE 7 - ACCRUED LIABILITIES:
Included in accrued liabilities at August 31, 1998 are approximately $150,000
for accrued restructuring costs.
NOTE 8 - OTHER
Restructuring charge recouped in May 1997 quarter - During the quarter ended May
31, 1997, inventories which had been written off to restructuring charge at
February 28, 1997 totaling approximately $60,000 were returned to vendors for
credit. This amount has been credited to general and administrative costs during
the quarter ended May 31, 1997.
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
DEBT REDUCTION PROGRAM - By November 30, 1997, the Company had recorded
liabilities of approximately $2,528,000 (unaudited), no cash and no other assets
which were realizable in the near-term. After a period of seeking new investment
into the Company to advance the Plan, new investors were identified. The new
investors indicated their willingness to invest in the Company's Plan if certain
conditions were met including the reduction of recorded liabilities (through
creditor concessions) by a very material amount. In approximately October, 1997,
with the assistance of reorganization counsel retained for this purpose, the
Company commenced the Debt Reduction Program.
Under the Debt Reduction Program, the Company commenced a program of contacting
its creditors, informing them of the Company's dire financial condition,
advising such creditors of the Debt Reduction Program agreed to with the
potential new investors and the Company's willingness to settle liabilities for
a reduced amount. The Company has offered its trade and other creditors the
opportunity to settle the Company's obligations to them for a reduced amount. As
of August 31, 1998, certain vendor claims have been agreed to be settled for
reduced amounts and efforts are still in process to settle remaining amounts in
an orderly manner.
In total, approximately $1,650,000 of liabilities at November 30, 1997 has been
either paid or agreed to be reduced. The difference between recorded payables
and accruals and amounts paid for settlement has been included in other income
in the consolidated financial statements.
The Company has received statements of account from one vendor for amounts
(approximately $132,000 plus claimed interest) materially in excess of amounts
recorded by the Company (approximately $22,000) for amounts alleged to be due
from this vendor. The vendor statements indicate billings of approximately
$83,000 in January 1997 and $16,000 in April 1997 for components fabricated
which were not received by the Company. The Company does not have a record of
being billed for such amounts nor for receipt of such fabricated components.
This matter is being investigated for resolution.
The Company's Debt Reduction Program is ongoing and the Company has been the
subject of several threatened, and certain actual, legal actions for nonpayment
of obligations. While the principal legal actions have been settled, various
other creditors have threatened the Company with litigation to recover amounts
due them. While the Company has had success in reducing its liabilities and
negotiating with its creditors and others in accordance with the Plan and the
Debt Reduction Plan, the ultimate liabilities in these matters are not known and
the vendors (or other parties), in some cases, may seek damages in excess of
amounts recorded in the consolidated financial statements. The Company believes,
but no assurance can be made, that its liability will not exceed amounts
recorded in the consolidated financial statements.
WARRANTY, SERVICE, PRODUCT LIABILITY - The Company has been unable to honor its
obligations for warranty and service for the MAGNA-SL since approximately March
1997. Additionally, product liability claims relating to the MAGNA-SL may be
asserted against the Company. If such claims are asserted against the Company,
there can be no assurance that the Company will have sufficient resources to
defend against any such claim or satisfy any such successful claim. In the event
of an uninsured or inadequately insured product liability claim, the Company's
business and financial condition could further be materially adversely affected.
AGREEMENT WITH ELSCINT - Elscint has informed the Company on several occasions,
including in May 1998, that it believes the Company to be in default of its
obligations under the June 1996 agreement with Elscint described in Note 5.
Elscint may assert damages against the Company. The Company has not recorded any
8
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liability to its consolidated financial statements for this contingency because
it is unable to determine what, if any, liability it could have to Elscint after
any defenses and counterclaims which it may make against Elscint. The Company's
intention is, and it continues to work toward, a negotiated settlement of the
business issues (including the "Elscint Proposal" described in Note 2) with
Elscint. However, during the quarter ended August 31, 1998 discussions with
Elscint have not resulted in a conclusion and the Company believes that Elscint
has recently divested itself of the business which would include the potential
business of the MAGNA-SL. Therefore, the Company is not presently in the
position to conclude that the possibility of any business arrangement being
concluded with Elscint or its potential successors will be possible.
AGREEMENT WITH THIRD PARTY DEVELOPER - In May 1998, the Company entered into an
agreement with a third party developer ("Developer") under which it is
contemplated that Developer will provide the Company with design review,
pre-production prototypes, regulatory compliance services, production prototypes
and ultimately production of the first product under the Cardiac MRI Initiative.
The Company made payments to Developer of approximately $35,000 in the six
months ended August 31, 1998 to initiate the relationship. This relationship
will involve costs of several hundred thousand dollars in the first year and
will be dependent upon the Company's ability to obtain additional capital.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS
OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. ACTUAL RESULTS AND EVENTS
COULD DIFFER MATERIALLY FROM THOSE PROJECTED
(b) Management's Analysis and Discussion or Plan of Operations -
BACKGROUND/HISTORY - Since commencement of operations on February 10, 1992,
Magna-Lab Inc. and Subsidiary (the "Company") has developed and intended to
manufacture and market the MAGNA-SL, the first of a planned series of anatomy
specific MRI (Magnetic Resonance Imaging) products which are smaller and cost
less to own, install and operate than present "whole body" MRI systems. The
Company's efforts to market and sell the MAGNA-SL did not generate sufficient
revenues to sustain the Company's planned operations.
Since receiving US marketing clearance for the MAGNA-SL in September 1994 from
the Food and Drug Administration, the Company sold and delivered four MAGNA-SL
scanners. Three such sales were made to a related party with which the Company
had entered into a sales, marketing and distribution agreement. The third
scanner delivered to this related party has not been paid for by such related
party and the Company has recorded a 100% valuation allowance for this
receivable. The Company is presently unable to support this product and the
passage of time may make it impossible to realize any value from this product.
CURRENT ACTIVITIES - In February 1997, the Company commenced a plan of
restructuring of the Company's operations (the "Plan") to reposition itself into
a development and, hopefully under a then existing or other agreement, royalty
company in the near-term. The Company's activities under the Plan in the fiscal
year ended February 28, 1998 included elimination of Company-directed
production, marketing, administration and systems engineering and development
related to the MAGNA-SL and attempting to strengthen the relationship with
Elscint Cryomagnetics, Ltd. ("Elscint" - See Note 5) which was begun in June
1996. A critical component of the repositioning involves a new development
initiative in Cardiac MRI (the "Cardiac MRI Initiative") through a joint
collaboration with the Cardiac Institute of the Mount Sinai School of Medicine
(New York City) ("MSSM"), as well as raising sufficient financing to pursue the
Cardiac MRI Initiative. The Company received a proposal from Elscint (the
"Elscint Proposal") to support the license/royalty element of the Plan and has
continued to have discussions with Elscint regarding certain work that is
integral to the Plan. The Company has, however, been unable to finalize the
Elscint Proposal because of various difficulties in its negotiations with
Elscint, including a lack of adequate funds and the Company's belief that plans
submitted by Elscint did not represent an adequate opportunity for the Company's
shareholders.
In accordance with the Plan, in March 1997, the majority of the Company's
workforce including the entire sales and marketing staff, the production and
engineering and administrative staff were terminated. Further, the Company,
shortly thereafter, vacated its production, development and executive facility
and ceased the need for other assets including leased assets with remaining
non-cancelable terms, and took other measures. The Company recorded a
9
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restructuring charge of approximately $1.5 million in the fourth quarter ended
February 28, 1997 for write downs of fixed assets, inventories and deposits made
with strategic vendors which are non-refundable, as well as accruals for lease
termination and other costs. While the ultimate amount may differ from this
estimate, the Company presently believes that such restructuring charge is
adequate. At August 31, 1998, only the Company's President and Chief Scientific
Officer is in the full time employ of the Company.
When the Company vacated its principal production, development and executive
facility, it placed certain inventory and equipment in storage and several key
individuals continued the search for new capital and the advancement of the
development collaboration with the MSSM. The Company's operations were,
therefore, severely curtailed at that time.
In December 1997, the Company's efforts to raise additional financing to
initiate the Cardiac MRI Initiative were successful in raising $1.884 million in
a private placement of 15,072,000 shares of common stock (the "December 1997
Financing"). Such financing was conditioned on the Company initiating a program
to pay its existing liabilities on a reduced basis (the "Debt Reduction Program"
- - See Note 9). Since December 1997, the Company has: (1) initiated and advanced
the Cardiac MRI Initiative, (2) continued the Debt Reduction Program and (3)
continued to have discussions with Elscint with the objective of advancing the
Elscint Proposal (such discussions have not resulted in concluding the Elscint
Proposal). The December 1997 Financing was believed to be sufficient to fund the
Company's operations until approximately July 1998, assuming success in its Debt
Reduction Program and discussions with Elscint. The Company has deferred certain
payments due to MSSM and others in order to maintain its resources beyond July
1998. The Company now requires significant additional financing in order to
support the Plan. It is expected that the Company's ability to obtain such
additional financing will be dependent upon the success of the Debt Reduction
Program, the success of development activities with MSSM and, to a lesser
extent, negotiations regarding the Elscint Proposal.
Activities during the six months ended August 31, 1998 included advancement of
the Cardiac Initiative through collaborative research with MSSM, discussion with
Elscint, business planning and capital raising activities.
The Company is continuing its efforts to: (1) raise additional capital, (2) move
forward with the Cardiac MRI Initiative, (3) complete the Debt Reduction Program
and (4) either complete the Elscint Proposal, if possible on acceptable terms,
or enter into a strategic arrangement with others, if possible. There is no
assurance that any of these efforts will be successful or that the Company will
be able to continue even its significantly reduced operations, for which the
Company presently requires additional capital.
GOING CONCERN CONSIDERATION, LIQUIDITY AND RISK FACTORS - As indicated in the
accompanying unaudited consolidated financial statements, as of August 31, 1998,
the Company had negative working capital, approximately $830,000 of liabilities,
negative net worth of approximately ($705,000) and a development agenda which
requires immediate additional financing in order to continue its efforts.
Further, as indicated in the accompanying unaudited consolidated financial
statements, the Company has incurred a cumulative loss of approximately $16.1
million since inception and has no present, or projected near-term, revenue.
Losses have continued since August 31, 1998. These factors, among others,
indicate that the Company is in need of immediate significant additional
financing and/or a strategic business arrangement in order to continue the Plan.
The Company believes that its cash resources at August 31, 1998 are not
sufficient to fund its operations in the quarter beginning on September 1, 1998
and that it presently requires additional capital (virtually immediately) in
order to continue its planned operations. The Company's development plans
involve planned expenditures with MSSM of approximately $600,000 over the coming
twelve months and in excess of $500,000 (potentially very significantly in
excess of $500,000) with the Developer. These costs, in addition to the
Company's operating costs indicate a short term (one year) financing need of
approximately $2.5 million. The Company has been in contact with various
existing and potential investors and believes, but cannot assure, that it may be
successful in raising the additional capital that it needs to continue the
operation of the Plan in the short term. The current turmoil in the domestic and
global financial markets is a significant "risk factor" in the Company's efforts
to attempt to continue its Plan.
Management's plans discussed in the preceding paragraphs are subject to numerous
"risk factors" including the availability of capital (which is needed
immediately) on acceptable terms and in an uncertain market, the uncertainty of
success of developments under the Cardiac MRI Initiative, the uncertainty of
continued success of the Debt Reduction Program, the risks and uncertainties of
any new technology development program, competitive factors, the limited
availability and difficulty in retention of competent scientific and management
personnel, uncertainties related to existing or new potentially competing
technologies, necessary regulatory approvals for products contemplated by the
10
<PAGE>
Cardiac MRI Initiative, uncertainties of intellectual property protection for
new technology, difficulties in concluding the Elscint Proposal or other
potential license arrangements and other factors associated with the development
and potential growth of a business from a new technology. There can be no
assurances that management's plans described in the preceding paragraphs will be
realized. These factors, among others, indicate that the Company may be unable
to continue operations as a going concern.
RESULTS OF OPERATIONS -
Operations in the quarter and six months ended August 31, 1998 resulted in
a net loss of approximately $278,000 and $576,000, respectively. The loss
results principally from the Cardiac MRI Initiative development activities in
collaboration with the Mount Sinai School of Medicine. Cost of the MSSM portion
of the collaboration were approximately $150,000 and $300,000 of the net loss
for the quarter and six months, respectively, ended August 31, 1998. In May
1998, the Company initiated a design review/regulatory/contract manufacturing
relationship with a third party. Expenses with such third party have totaled
approximately $35,000 in the six months ended August 31, 1998. General and
administrative expenses consisted of executive, administrative and business
development consultants as well as certain occupancy, storage and professional
costs.
Operations in the quarter and six months ended August 31, 1997 resulted in
a net loss of approximately $106,000 and $378,000. The majority of the workforce
was terminated between March 5 and March 15, 1997, however, six senior managers
and executives continued to devote their efforts to the Company's Plan of
restructure during a portion of the six months ended August 31, 1998. Their
payroll, which was accrued but not paid during the six months, is the principal
cost in the accompanying Statement of Operations. Net loss also includes the
reversal in the six months ended August 31, 1997 of approximately $60,000 of
restructuring charge as a result of the return for credit of inventory which was
written off to restructuring charge at February 28, 1997.
The Company's belief about its liquidity, financing plans and prospects,
Elscint Proposal and arrangements with Mount Sinai School of Medicine, the
Developer, as well as other information contained in this report (including its
prospects for surviving as a going concern) are based upon present conditions
and anticipated developments. This belief is further based upon estimates and
assumptions including, among other things, completion of additional financing
necessary to fund the planned activities, timely and successful completion of
development milestones, competitive and intellectual property factors,
cooperation of creditors and others with the Debt Reduction Program, and
successful efforts to conclude an arrangement with Elscint or others, among
other matters. In the event that the Company's estimates and assumptions prove
materially incorrect, the Company does not presently have the financial
resources to fund planned operations. The foregoing information constitutes
forward-looking statements within the meaning of Section 21E under the
Securities Exchange Act of 1934, as amended.
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
Reference is made to Part I - Item 3 of Form 10-KSB for the year ended February
28, 1998 for discussion of legal proceedings commenced or threatened against the
Company (including by Devcom, by the Company's former landlord Heartland Rental
Properties Partnership and by Elscint) as well as for discussion of the
settlements of the DevCom and Heartland Rental Properties Partnership legal
proceedings. The Company continues to be subject to judgments for lesser amounts
and other litigation and/or threatened litigation.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No.
-----------
(11) Statement re: computation of loss per share - A
statement regarding the computation of loss per share
is omitted because computation can be clearly
determined from the material contained in this
Quarterly Report
on Form 10-QSB.
(27) Financial Data Schedule
11
<PAGE>
(b) The Company did not file reports on Form 8-K during the quarter
ended August 31, 1998.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MAGNA-LAB INC.
--------------
(Registrant)
Date: October 15, 1998 By: /s/ Daniel M. Mulvena
---- --------------------------------------
Daniel M. Mulvena , Chairman of the
Board of Directors, Chief Executive
Officer (Principal Executive Officer),
Acting Treasurer (Principal Financial
and Accounting Officer)
12
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