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FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 000-27592
SCANTEK MEDICAL INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-1090126
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
321 PALMER ROAD, DENVILLE, NEW JERSEY 07834
(973) 366-5250
------------------------------------------------------
(Address and telephone number, including area code, of
registrant's principal executive office)
---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
At May 1, 1998, there were 17,220,200 shares of Common Stock, $.001 par
value, outstanding.
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<PAGE>
SCANTEK MEDICAL INC.
INDEX
Page
----
Part I. Financial Information 1
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998
(unaudited) and June 30, 1997 2
Consolidated Statements of Operations for the Nine
Months and Three Months Ended March 31, 1998 and
1997 (unaudited) and for the Period June 10, 1988
(Date of Formation) through March 31, 1998 3
Consolidated Statements of Stockholders' Equity
for the Period June 10, 1988 (Date of Formation)
through March 31, 1998 4 - 7
Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1998 and 1997
(unaudited) and for the Period June 10, 1988
(Date of Formation) through March 31, 1998 8 - 9
Notes to Financial Statements (unaudited) 10 - 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12 - 17
Part II. Other Information
Item 1. Legal Proceedings 18
Item 6. Exhibits and Report on Form 8-K 18
Signatures 19
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Certain information and footnote disclosures required under generally
accepted accounting principles have been condensed or omitted from the following
consolidated financial statements pursuant to the rules and regulations of the
Securities and Exchange Commission. It is suggested that the following financial
statements be read in conjunction with the year-end financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended June 30, 1997.
The results of operations for the nine months ended March 31, 1998, are not
necessarily indicative of the results to be expected for the entire fiscal year
or for any other period.
-1-
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, June 30,
1998 1997
----------- ----------
(Unaudited)
Current Assets:
Cash $ 186,722 $ 918,393
Marketable securities 6,351,421 6,860,371
Due from licensees 875,000 550,000
Prepaid expenses 58,435 70,708
---------- ----------
Total Current Assets 7,471,578 8,399,472
---------- ----------
Equipment - net 783,336 391,452
Other assets - net 795,079 783,768
---------- ----------
TOTAL ASSETS $9,049,993 $9,574,692
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt $1,318,298 $ 966,000
Current portion - long-term debt 888,006 350,000
Current portion - deferred income 752,500 2,129,082
Note payable to officer 304,993 304,993
Accounts payable 196,945 121,901
Accrued interest 85,532 82,289
Accrued salaries 778,119 578,619
Accrued expenses 20,500 40,689
Deferred income taxes 1,315,000 609,000
---------- ----------
Total Current Liabilities 5,659,893 5,182,573
---------- ----------
Long-term debt -- 568,006
---------- ----------
Total Liabilities 5,659,893 5,750,579
---------- ----------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, par value $.001
per share - authorized 5,000,000
shares; none issued -- --
Common stock, par value $.001 per
share - authorized 45,000,000;
outstanding 17,220,200 17,220 17,220
Additional paid-in-capital 2,978,988 2,965,426
Unrealized gain on marketable
securities 4,254,960 5,566,615
Deficit accumulated during
development stage (3,861,068) (4,725,148)
---------- ----------
Total Stockholders' Equity 3,390,100 3,824,113
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $9,049,993 $9,574,692
========== ==========
See notes to consolidated financial statements.
-2-
<PAGE>
<TABLE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
For the Period
June 10, 1988
Nine Months Ended Three Months Ended (Date of
March 31, March 31, Formation)
------------------------------ -------------------------------- through
1998 1997 1998 1997 March 31, 1998
----------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Income:
License fee income $ 1,901,582 $ -- $ 1,901,582 $ -- $ 1,601,582
Interest and dividend
income 18,768 17,571 2,075 6,386 48,480
Consulting -- -- -- -- 15,000
Miscellaneous 3,185 -- (2,604) -- 29,285
----------- ------------ ------------ ------------ -----------
Total Income 1,923,535 17,571 1,901,053 6,386 1,994,347
----------- ------------ ------------ ------------ -----------
Costs and Expenses:
General and
administrative expenses 599,212 323,985 264,484 135,017 3,062,340
Amortization and
depreciation 59,690 74,171 20,613 18,486 681,714
Research and
development 261,587 211,549 112,277 78,797 1,493,330
Interest expense 138,966 78,482 46,897 25,813 618,031
----------- ------------ ------------ ------------ -----------
Total Costs and
Expenses 1,059,455 688,187 444,271 258,113 5,855,415
----------- ------------ ------------ ------------ -----------
Net Earnings (Loss) $ 864,080 $ (670,616) $ 1,456,782 $ (251,727) $(3,861,068)
=========== ============ ============ ============ ===========
Net earnings (loss)
per share - basic $ .05 $ (.04) $ .08 $ (.01) $ --
=========== ============ ============ ============ ===========
Weighted average
number of common
shares and
equivalents
outstanding 17,220,200 16,668,384 17,220,200 17,117,700 --
=========== ============ ============ ============ ===========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
<TABLE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
<CAPTION>
(Deficit)
Unrealized Accumulated
Common Stock Treasury Stock Additional Gain (loss) During the
------------------- ------------------ Paid-In on Marketable Development
Shares Amount Shares Amount Capital Securities Stage Total
--------- -------- ------- -------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Original Capitalization:
Sale of stock ($.023
per share) 2,000,000 $2,000 -- $-- $ 44,094 $ -- $ -- $ 46,094
Issuance of
options for
services rendered (valued
at .10 per share) 5,000 5,000
Net (loss)
June 10, 1988
(Date of Formation) through
June 30, 1991 (18,751) (18,751)
--------- ------ ------- --- -------- ------ --------- ---------
Balance June 30, 1991 2,000,000 2,000 -- -- 49,094 -- (18,751) 32,343
.7 for 1 reverse
stock split (600,000) (600) 600 --
Donated stock to
treasury 500,000 -- --
Issuance of
stock to acquire
subsidiary ($.006
per share) 7,100,000 7,100 -- 92,900 100,000
Sale of treasury
stock ($2.50 per
share) (18,000) 45,000 45,000
Treasury stock exchanged for
services rendered
(valued at $.023
per share) (433,000) 10,000 10,000
Net (loss), June
30, 1992 (485,314) (485,314)
--------- ------ ------- --- -------- ------ --------- ---------
Balance, June 30, 1992 8,500,000 8,500 49,000 -- 197,594 -- (504,065) (297,971)
See notes to consolidated financial statements. (Continued)
</TABLE>
-4-
<PAGE>
<TABLE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (Continued)
(UNAUDITED)
<CAPTION>
(Deficit)
Unrealized Accumulated
Common Stock Treasury Stock Additional Gain (loss) During the
--------------------- ------------------ Paid-In on Marketable Development
Shares Amount Shares Amount Capital Securities Stage Total
---------- -------- ------- -------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Treasury stock
exchanged for
services rendered
(valued at $0.125
per share) (49,000) 6,125 6,125
Issuance of stock
for professional
services rendered
(valued at $.25 to
$.50 per share) 1,450,000 1,450 411,050 412,500
Issuance of stock
for contract
release (valued at
$1.00 per share) 35,000 35 34,965 35,000
Net (loss), June
30, 1993 (924,969) (924,969)
---------- ------ ----- ----- ------- ---- ----------- -----------
Balance, June 30, 1993 9,985,000 9,985 -- -- 649,734 -- (1,429,034) (769,315)
Issuance of callable warrants for
services rendered
(valued at $.125
per share) 15,625 15,625
Issuance of stock
in connection
with bridge loan
financing (issued
at $1.00 per
share) 37,200 37 37,163 37,200
Net (loss), June
30, 1994 (969,408) (969,408)
---------- ------ ----- ----- ------- ---- ----------- -----------
Balance, June 30, 1994 10,022,200 10,022 -- -- 702,522 -- (2,398,442) (1,685,898)
(Continued)
See notes to consolidated financial statements.
</TABLE>
-5-
<PAGE>
<TABLE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (Continued)
(UNAUDITED)
<CAPTION>
(Deficit)
Unrealized Accumulated
Common Stock Treasury Stock Additional Gain (loss) During the
-------------------- -------------- Paid-In on Marketable Development
Shares Amount Shares Amount Capital Securities Stage Total
---------- -------- ------ ------ -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of stock
in connection with
bridge loan financing (issued at
$1.00 per share) 12,000 12 11,988 12,000
Issuance of stock
for services rendered (valued at
$.125 per share) 621,250 621 77,035 77,656
Net (loss), June
30, 1995 (736,267) (736,267)
---------- ------ ---- ---- --------- ------- ---------- -----------
Balance - June 30, 1995 10,655,450 10,655 791,545 -- (3,134,709) (2,332,509)
Issuance of stock
for accrued salaries (valued at
$.10 per share) 4,550,000 4,550 450,450 455,000
Notes payable conversions to
common stock
(at $1.00 per
share) 151,084 151 150,933 151,084
Issuance of stock
for services rendered (at $.60
per share) 433,666 434 273,232 273,666
Issuance of options
for services rendered (at $.30
per share) -- -- 45,000 45,000
Net unrealized gain
on marketable
securities -- -- 364,500 364,500
Net (loss), June
30, 1996 -- -- (816,716) (816,716)
---------- ------ ---- ---- --------- ------- ---------- -----------
Balance - June 30, 1996 15,790,200 15,790 -- -- 1,711,160 364,500 (3,951,425) (1,859,975)
(Continued)
See notes to consolidated financial statements.
</TABLE>
-6-
<PAGE>
<TABLE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (Continued)
(UNAUDITED)
<CAPTION>
(Deficit)
Unrealized Accumulated
Common Stock Treasury Stock Additional Gain (loss) During the
--------------------- --------------- Paid-In on Marketable Development
Shares Amount Shares Amount Capital Securities Stage Total
---------- -------- ------- ------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of stock in
connection with private placement
offering (issued at
$1.00 per share) 1,070,000 1,070 1,068,930 -- -- 1,070,000
Issuance of stock
for professional
services rendered
(at $.167 to $1.00
per share) 72,500 73 22,427 -- -- 22,500
Issuance of stock in
lieu of payment on
equipment (at $1.00
per share) 100,000 100 99,900 -- -- 100,000
Stock options exercised ($.10 to
$.375 per share) 170,000 170 27,830 -- -- 28,000
Issuance of stock
for rent (at $2.01
per share) 17,500 17 35,179 -- -- 35,196
Net unrealized gain
on marketable
securities -- -- -- 5,202,115 -- 5,202,115
Net (loss) - June 30, 1997 -- -- -- -- (773,723) (773,723)
---------- ------- ---- ---- ---------- ----------- ----------- -----------
Balance, June 30, 1997 17,220,200 17,220 -- -- 2,965,426 5,566,615 (4,725,148) 3,824,113
Issuance of warrants
for services rendered
(at $.55 to $1.20 per
share) -- -- 13,562 -- -- 13,562
Net unrealized gain (loss)
on marketable securities -- -- -- (1,311,655) -- (1,311,655)
Net earnings - March 31, 1998 -- -- -- -- 864,080 864,080
---------- ------- ---- ---- ---------- ----------- ----------- -----------
Balance, March 31, 1998 17,220,200 $17,220 -- $ -- $2,978,988 $ 4,254,960 $(3,861,068) $ 3,390,100
========== ======= ==== ==== ========== =========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
-7-
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Period
June 10, 1988
Nine Months (Date of For-
Ended March 31, mation) through
----------------------- March 31,
1998 1997 1998
-------- --------- -------------
Cash flows from operating
activities:
Net earnings (loss) $ 864,080 $ (670,616) $(3,861,068)
Adjustments to reconcile net
earnings (loss) to net cash
used in operating activities:
Depreciation and amortization 59,690 74,171 681,712
Net (gain) on sale of
marketable securities (3,185) -- (4,285)
Non-employee stock based
compensation -- -- 845,574
Non-cash officers compensation -- -- 457,250
Other non-cash items 13,562 12,503 285,542
Changes in operating assets
and liabilities (1,493,728) (144,260) 157,285
----------- ----------- -----------
Net Cash (Used in)
Operating Activities (559,581) (728,202) (1,437,990)
----------- ----------- -----------
Cash flows from investing
activities:
Proceeds from sale of
marketable securities 209,967 -- 232,835
Purchases of patents -- -- (76,069)
Organization costs -- -- (199,672)
Purchase and deposits
of equipment (400,868) (237,647) (803,094)
Purchase of marketable
securities (303,487) -- (735,679)
----------- ----------- -----------
Net Cash (Used in)
Investing Activities (494,388) (237,647) (1,581,679)
----------- ----------- -----------
Cash flows from financing
activities:
Proceeds from borrowings 352,298 -- 1,854,304
Proceeds from officer loans -- -- 306,993
Repayment of officer loans -- -- (2,000)
Repayment of notes (30,000) (37,000) (142,000)
Proceeds from the sale of
options -- 23,000 28,000
Proceeds from sale of common
and treasury stock -- -- 1,161,094
----------- ----------- -----------
Net Cash Provided by
Financing Activities 322,298 1,056,000 3,206,391
----------- ----------- -----------
Net Increase (decrease) in
Cash (731,671) 90,151 186,722
Cash - beginning of period 918,393 247,515 --
----------- ----------- -----------
Cash - end of period $ 186,722 $ 337,666 $ 186,722
=========== =========== ===========
See notes to consolidated financial statements.
-8-
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Period
June 10, 1988
Nine Months (Date of For-
Ended March 31, mation) through
----------------------- March 31,
1998 1997 1998
-------- --------- -------------
Changes in Operating Assets
and Liabilities Consist of:
Decrease (Increase) in due
from licensees $ 75,000 $ (350,000) $ (475,000)
Decrease (increase) in
prepaid expense 12,273 -- (58,435)
(Increase) in other assets (462,017) (715,100) (975,042)
(Decrease) increase in
accounts payable and
accrued expenses 257,598 (131,660) 1,189,943
(Decrease) increase in
deferred income (1,376,582) 1,052,500 475,918
(Decrease) in accrued
franchise tax -- -- (99)
----------- ----------- -----------
$(1,493,728) $ (144,260) $ 157,285
=========== =========== ===========
Supplementary information:
Cash paid during the year for:
Interest $ 135,724 $ 36,370 $ 429,902
=========== =========== ===========
Income taxes $ -- $ -- $ --
=========== =========== ===========
Non-cash investing activities:
Debt incurred for asset transfer
agreement of patents $ $ -- $ 600,000
=========== =========== ===========
Acquisition of subsidiary
for common stock $ $ -- $ 100,000
=========== =========== ===========
Acquisition of marketable
securities in connection
with licensing agreement $ $ -- $ 276,582
=========== =========== ===========
Unrealized (gain) loss on
marketable securities $ 1,311,655 $(6,079,564) $(4,254,960)
=========== =========== ===========
Deposit on equipment for
common stock $ $ 100,000 $ 100,000
=========== =========== ===========
Non-Cash Financing Activities:
Conversion of long-term debt
to common stock $ $ $ 121,000
=========== =========== ===========
Other non-cash activities:
Conversion of accounts
payable and accrued expenses
to common stock $ $ 39,646 $ 900,802
=========== =========== ===========
Conversion of accounts payable
to stock options $ $ $ 50,000
=========== =========== ===========
Conversion of accounts payable
to warrants $ $ $ 15,625
=========== =========== ===========
Conversion of accounts payable
to treasury stock $ $ $ 16,125
=========== =========== ===========
Conversion of accrued officers
salaries to common stock $ $ $ 457,250
=========== =========== ===========
Issuance of warrants for
services rendered $ 13,562 $ 12,503 $ 13,562
=========== =========== ===========
See notes to consolidated financial statements.
-9-
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
At March 31, 1998, planned principal operations of Scantek Medical Inc.
(the "Company" or "Scantek") have not yet commenced and no revenue has been
derived there from; accordingly, the Company is considered a development stage
company. License fee revenues have been realized however, from one of the
licensees since operations of the licensee have commenced during the quarter
ending March 31, 1998.
The consolidated balance sheet as of March 31, 1998, and the consolidated
statements of operations and cash flows for the nine months ended March 31, 1998
and 1997, and for the period June 10, 1988 (Date of Formation) through March 31,
1998 have been prepared by the Company and are unaudited. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows for all periods presented have been made. Certain items in the March
31, 1997 financial statements have been reclassified to conform to March 31,
1998 classifications. The information for June 30, 1997 was derived from audited
financial statements.
Receivable Recognition - Receivables due from licensees are recognized
either upon the acceptance of the equipment by the licensee or upon the signing
of the definitive agreement.
Revenue Recognition - Revenues from license fees are recognized in income
when the licensees commence operations, since substantial performance is
presumed to occur at that point.
2. EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Earnings (loss) per common and common equivalent share for the nine months
ended March 31, 1998 and 1997 was computed using the weighted average number of
common shares outstanding during each period. The dilutive effect of outstanding
options, warrants and common stock equivalents for the nine months ended March
31, 1997 were not considered as their effect was antidilutive.
3. EQUIPMENT
Equipment consists of the following:
March 31, June 30,
1998 1997
-------- --------
Equipment $ 55,230 $ 48,914
Furniture and fixtures 27,489 9,462
Deposit on equipment 710,000 350,000
Leasehold improvements 16,525 --
-------- --------
809,244 408,376
Less accumulated
depreciation 25,908 16,924
-------- --------
Net Equipment $783,336 $391,452
======== ========
-10-
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. OTHER ASSETS
Other assets consist of the following:
March 31, June 30,
1998 1997
---------- ----------
Patent costs $ 676,069 $ 676,069
Marketable securities - long term 400,000 --
Long-term portion of amount
due from licensees 100,000 500,000
Security deposits 13,125 13,125
Other 2,017 --
Deferred charges 60,000 --
---------- ----------
1,251,211 1,189,194
Less accumulated amortization 456,132 405,426
---------- ----------
Other Assets - Net $ 795,079 $ 783,768
========== ==========
Marketable securities consist of 400,000 warrants valued at $400,000
received as part of a settlement agreement with Humascan dated May 15,
1998. The warrants are partial payment of the license agreement and are
exercisable at $4.725 per share and vest on various dates through March
31, 1999 and have a term of five (5) years from date of vesting.
5. INCOME TAXES
Financial Accounting Standards Board Statement No. 109, "Accounting
for Income Taxes" (SFAS 109), provides for the recognition of deferred
assets subject to a valuation allowance. At June 30, 1996, the Company
established a valuation allowance equal to the full amount of the tax
effect of the net operating loss carryforward. At March 31, 1998, the
Company has provided deferred taxes of $1,315,000 on the unrealized gain on
marketable securities after off-setting the net operating loss
carryforward. The deferred taxes are netted against the unrealized gain on
marketable securities.
6. RECENT DEVELOPMENTS
(a) The Company has executed a contract with respect to the acquisition of
a Hungarian based manufacturer of plastic medical packaging products
and the manufacturing facility for an aggregate purchase price of
$1,750,000. The acquisition is subject to the company obtaining
financing for the purchase of the Hungarian manufacturer.
-11-
<PAGE>
SCANTEK MEDICAL INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. RECENT DEVELOPMENTS (CONTINUED)
(b) On May 12, 1998, the Company was required to deposit $200,000 as
additional collateral for the Company's short-term debt. As part of
the agreement with the lender, if the Humascan, Inc. ("Humascan")
stock the Company pledged as collateral falls below $5 per share,
certain call provisions would be initiated. The Company has more than
sufficient capital and marketable securities to extinguish the
short-term debt however; the Company believes the fall in stock price
is a temporary condition and will not be required to sell the Humascan
common stock.
-12-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company is a high-tech development stage company organized to develop,
manufacture, sell and license products and devices to assist in the diagnosis
and early detection of disease. At the present time, the Company is focusing to
manufacture, sell and license the Breast Abnormality Indicator ("Breast Care").
The device has been patented and has Food and Drug Administration ("FDA")
approval for sale. The Breast Care is a screening device which can detect breast
tissue abnormalities, including breast cancer. The Company has entered into
three License Agreements whereby the licensees purchased the right to
manufacture and/or sell the Breast Care in the United States of America, Canada
their territories and possessions, South America and Singapore. During the
quarter ending March 31, 1998, the Company has recognized licensee fee income
from one of the licensees since operations have commenced in those territories.
The following table sets forth for the periods indicated, the percentage
increase or (decrease) of certain items included in the Company's consolidated
statement of operations:
% Increase (Decrease) from Prior Period
---------------------------------------
Nine Months Ended Three Months Ended
March 31, 1998 March 31, 1998
compared with 1997 compared with 1997
------------------ ------------------
General and administrative expense 85.0% 95.9%
Amortization and depreciation (19.5) 11.5
Research and development 23.7 42.5
Interest expense 77.1 81.7
Net earnings 228.8 678.7
NINE MONTHS 1998 VS. NINE MONTHS 1997 AND THREE MONTHS 1998 VS. THREE
MONTHS 1997
General and Administrative Expenses
General and administrative expenses increased 85% to $599,212 during the
nine months ended March 31, 1998 compared to $323,985 during the nine months
ended March 31, 1997. This increase is primarily due to the purchasing of keyman
and directors and officers insurance coupled with increases in rent for the
leasing of office and warehouse space in Denville, NJ, professional fees and
financial services. This was offset in part by decreases in consulting expenses.
General and administrative expense increased 95.9% to $264,484 during the
three months ended March 31, 1998 compared to $135,017 during the three months
ended March 31, 1997 for principally the same reasons set forth in the nine
month analysis.
Amortization and Depreciation Expense
Amortization and depreciation was $59,690 for the nine months ended March
31, 1998 compared to $74,171 for the nine months ended March 31, 1997. The 19.5%
decrease was attributable to organization cost amortization expiring at March
31, 1997. This was offset to a much lesser extent by increases in depreciation
expense.
-13-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Amortization and Depreciation Expense (Continued)
Amortization and depreciation was $20,613 for the three months ended March
31, 1998 compared to $18,486 for the three months ended March 31, 1997. The
11.5% increase was attributable to depreciation expense on an increased amount
of purchased fixed assets.
Research and Development Expenses
Research and development expense increased 23.7% to $261,587 during the
nine months ended March 31, 1998 from $211,549 during the nine months ended
March 31, 1997. The increase is primarily attributable to increased salaries
incurred by the Company in the experimental area of development of its product.
Research and development expense increased 42.5% to $112,277 during the
three months ended March 31, 1998 from $78,797 during the nine months ended
March 31, 1997 for primarily the same reasons set forth in the nine months
analysis and an additional expense of $32,632 for the quarter for samples sent
to South America for research and development.
Interest Expense
Interest expense was $138,966 for the nine months ended March 31, 1998
compared to $78,482 for the nine months ended March 31, 1997. The 77.1% increase
was attributable to interest expense on the short-term debt margin loan.
Interest expense was $46,897 for the three months ended March 31, 1998
compared to $25,813 for the three months ended March 31, 1997. The 81.7%
increase was attributable for the same reasons set forth in the nine months
analysis.
Net Earnings
Net earnings was $864,080 for the nine months ended March 31, 1998 compared
to a net loss of $670,616 for the nine months ended March 31, 1997. The 228.8%
increase was attributable to the recording of Humascan's license fee of
$1,901,582 since the licensee commenced operations during the quarter.
Net earnings was $1,456,782 for the three months ended March 31, 1998
compared to a net loss of $251,727 for the three months ended March 31, 1997.
The 678.7% increase was attributable for the same reasons set forth in the nine
month analysis.
Liquidity and Capital Resources
The Company's need for funds has increased from period to period as it has
incurred expenses for among other things, research and development; applications
for domestic and international patent protection; licensing and pre-marketing
activities; and attempts to raise the necessary capital for initial production.
Since inception, the Company has funded these needs through private placements
of its equity and debt securities and advances from the Company's President,
Chief Executive Officer and major shareholder. In addition, the Company's
auditors' report for the year ended June 30, 1997 dated September 29, 1997,
expressed an opinion as to the Company continuing as a going concern.
-14-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Liquidity and Capital Resources (Continued)
The Company and Humascan have reached a settlement agreement dated May 15,
1998, resolving certain disputes which have arisen under the license agreement.
Among the many issues that were resolved, the following was agreed upon
concerning the licensing fee and royalties:
In consideration for a paid up license and the prior delivery of
technological know-how, consulting services and product development activities,
the licensee agreed to pay the Company $575,000 on various dates through
December 31, 1999 of which $175,000 was received upon signing the agreement and
issue the Company 400,000 warrants exercisable at $4.725 per share vesting on
various dates through March 31, 1999 and have a term of five (5) years from date
of vesting.
In connection with the agreement, commencing with the first day of the
first month in which the Licensed Product is sold and for each year through and
including the termination date October 20, 2012, the Licensee agrees to pay the
Company a royalty based on net sales as follows: three (3%) percent of the first
$2 million of net sales increasing to ten (10%) percent of net sales in excess
of $10 million with a minimum royalty of $400,000 in the third year increasing
to $600,000 in the fifth year and thereafter. The earned royalties payable shall
be reduced by an amount of up to a maximum of $550,000 at the rate of $.50 for
each dollar of earned royalty payable until the amount of $550,000 has been
deducted.
As part of an agreement with the lender on the Company's short-term debt,
the Company deposited $200,000 of additional funds and may be required to sell
the Humascan stock the Company pledged as collateral if the stock price falls
below $3 per share.
On August 15, 1996, the Company entered into a license agreement with
Health Technologies International Inc. ("HTI"), whereby HTI is to assemble
market and sell the Breast Care in Chile and Singapore, and pay the Company a
licensing fee of $250,000, all of which has been received as of June 30, 1997.
Pursuant to the terms of the agreement, HTI agrees to pay the Company minimum
royalties of $100,000 in 1998 with increasing royalties leveling out at a
minimum of $400,000 in the year 2000 and thereafter. Additionally, HTI has
agreed to pay the Company a one-hundred (100%) percent mark-up on product cost
for the Company's services in operating HTI's manufacturing line. As part of the
licensing agreement, the Company received a twenty (20%) percent equity interest
in HTI.
The Company entered into an exclusive license agreement, dated September
22, 1997 with Sandell Corp. S.A. (the "Sandell Agreement"), a Uruguayan
corporation ("Sandell"), pursuant to which the Company granted to Sandell an
exclusive license to market and distribute the product in Brazil, Venezuela,
Columbia, Costa Rica, Ecuador, Nicaragua, Paraguay, Panama, Peru, Bolivia,
Argentina and Uruguay. Sandell is required to maintain operations in Uruguay's
Free Trade Zone. The Sandell Agreement is for a term of fourteen (14) years.
Under the Sandell Agreement, Sandell is to pay the Company a non-refundable
license fee of (i) $500,000 and (ii) thirty-five (35%) percent of the
outstanding shares of Sandell on a fully diluted basis.
-15-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Liquidity and Capital Resources (Continued)
The cash portion of the fee is payable (i) $100,000 upon execution of the
Sandell Agreement, which was paid by Sandell on October 14, 1997, (ii) $200,000
forty-five (45) days after shipment of the first product and (iii) $200,000 on
or before January 30, 1999. Sandell is also required to make minimum purchases
of the Breast Care as follows: (i) 20,000 units per month during calendar 1998,
(ii) 35,000 units per month during 1999, (iii) 65,000 units during 2000 and (iv)
90,000 units per month during 2001 and thereafter during the term of the
license.
The Company's working capital and capital requirements will depend on
numerous factors, including the level of resources that the Company devotes to
the purchase of manufacturing equipment to support start-up production and to
the marketing aspects of its product. The Company intends to construct a
production facility abroad to manufacture, market and sell the Breast Care to
the international market. The Company entered into an agreement with Zigmed Inc.
pursuant to which Zigmed Inc. will manufacture the production equipment needed
for the manufacturing of the BAI for the contract price of $1,850,000. The
Company as of March 31, 1998, has advanced Zigmed Inc. payments of $560,000 to
begin production of the manufacturing equipment and in September 1996 issued
Zigmed Inc. 100,000 shares of the Company's common stock (valued at $1.00 per
share) against the contract price.
The Company has executed a contract with respect to the acquisition of a
Hungarian based manufacturer of plastic medical packaging products and the
manufacturing facility for an aggregate purchase price of $1,750,000. The
acquisition is subject to the Company obtaining financing for the purchase of
the Hungarian manufacturer.
The Company's success is dependent on raising sufficient capital to
establish a production facility and purchase manufacturing equipment to
manufacture the Breast Care for the international market. The Company does not
have all the financing in place at this time, nor may it ever, to meet these
objectives. However, the Company feels payments to be received on the initial
license fees, combined with the capital raised from two private placements and
proceeds from borrowing against the HumaScan common stock, will be more than
sufficient to cover the operations of the Company over the next twelve (12)
months. The Company believes the Breast Care will be commercially accepted
throughout the international market. In addition, the Company's U.S. Licensee
commenced operations in January 1998 and the Company will begin receiving
royalty payments based on its agreement with HumaScan.
As stated previously, the Company has financed its operations through
private placements of its equity and debt securities and advances from the
Company's President.
-16-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Liquidity and Capital Resources (Continued)
In a 1994 private placement, the Company raised $246,000 through unsecured
notes. Each noteholder did receive 2,000 shares of the Company's common stock as
additional consideration for their ten (10%) percent promissory note. The
promissory notes issued in connection with these bridge loans are due in full
upon the completion of a public offering by the Company. In March 1995, the
Company offered to convert the promissory notes into shares of the Company's
common stock at a conversion price of $1.00 per share. $121,000 of the notes
were converted, including accrued interest of $30,084. As of December 31, 1997,
all remaining notes have been paid.
On June 30, 1996, the Company consolidated a $288,006 note, due June 30,
1996 and a $600,000 note, due August 20, 1996 into one note for $888,006 bearing
simple interest at eight (8%) percent per year. The Company has renegotiated the
note with the lenders as of March 31, 1998. The note is due January 31, 1999
with interest payable quarterly.
In July and August 1996, the Company completed two private placements of
the Company's common stock, raising proceeds of $1,070,000.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes forward-looking statements that may or may not
materialize. Additional information on factors that could potentially affect the
Company's financial results may be found in the Company's filings with the
Securities and Exchange Commission.
-17-
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
See Item 3 of the Company's Form 10-KSB for the year ended June
30, 1997.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: Exhibit 27.1 Financial Data Schedule.
(b) There were no Current Reports on Form 8-K filed by the
registrant during the quarter ended March 31, 1998.
-18-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCANTEK MEDICAL INC.
By: /s/ ZSIGMOND SAGI
-------------------------------
Zsigmond Sagi, President and
Chief Financial Officer
Dated: May 20, 1998
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SCANTEK
MEDICAL INC. FINANCIAL STATEMENTS AT MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 186,722
<SECURITIES> 6,351,421
<RECEIVABLES> 875,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,471,578
<PP&E> 809,244
<DEPRECIATION> 25,908
<TOTAL-ASSETS> 9,049,093
<CURRENT-LIABILITIES> 5,659,893
<BONDS> 0
0
0
<COMMON> 17,220
<OTHER-SE> 3,372,880
<TOTAL-LIABILITY-AND-EQUITY> 9,049,993
<SALES> 0
<TOTAL-REVENUES> 1,923,535
<CGS> 0
<TOTAL-COSTS> 1,059,455
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 138,966
<INCOME-PRETAX> 864,080
<INCOME-TAX> 0
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<NET-INCOME> 864,080
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