UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1996
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: 1-14190
INTELLIGENT MEDICAL IMAGING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-0136178
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
4360 NORTHLAKE BOULEVARD, SUITE 214, PALM BEACH GARDENS, FLORIDA 33410
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (561) 627-0344
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 [ ]
AS OF NOVEMBER 8, 1996, THERE WERE OUTSTANDING 10,895,054 SHARES OF COMMON
STOCK, PAR VALUE $.01, OF THE REGISTRANT.
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
QUARTER ENDED SEPTEMBER 30, 1996
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS 3
BALANCE SHEETS AS OF SEPTEMBER 30, 1996 AND 3
DECEMBER 31, 1995
STATEMENTS OF OPERATIONS FOR THE THREE AND NINE 4
MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS 5
ENDED SEPTEMBER 30, 1996 AND 1995
NOTES TO FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 8
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION 13
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTELLIGENT MEDICAL IMAGING, INC.
BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $1,770,291 $75,821
Investments available for sale 25,903,475 -
Accounts receivable 593,391 182,000
Accrued interest receivable 246,389 -
Inventory 3,060,936 1,655,181
Prepaid expenses 91,475 3,606
------------ ------------
Total current assets 31,665,957 1,916,608
Property and equipment, net 1,348,045 686,266
Other assets 47,242 102,456
------------ ------------
$33,061,244 $2,705,330
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
Current liabilities:
Note payable in default $- $500,000
Accounts payable 650,581 1,034,467
Accrued salaries and benefits 326,417 204,238
Accrued interest payable - 139,478
Other accrued liabilities 56,482 105,000
Due to officers and related party - 105,000
Customer advance - 150,000
Current portion of capitalized lease
obligation 36,200 36,200
Current portion of long-term notes
payable - 4,000
Current portion of long-term notes
payable to related parties - 507,926
------------ ------------
Total current liabilities 1,069,680 2,786,309
Capitalized lease obligation 66,917 94,114
Long-term notes payable - 156,000
Long-term notes payable to related parties - 131,032
Due to officers and related party - 762,897
Commitments and contingencies
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Preferred stock, $.01 par value-authorized
2,000,000 shares; no shares issued
or outstanding - -
Common stock, $.01 par value-authorized
30,000,000 shares; issued and
outstanding, 10,871,355 shares at
September 30, 1996, and 6,843,246
at December 31, 1995 108,714 68,432
Additional paid-in capital 42,382,412 7,656,290
Deferred compensation (344,817) (401,357)
Net unrealized investment gains and (losses) 22,258 -
Accumulated deficit (10,243,919) (8,548,387)
------------ ------------
Total stockholders' equity (capital
deficiency) 31,924,648 (1,225,022)
------------ ------------
$33,061,244 $2,705,330
============ ============
See accompanying notes
3
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT MEDICAL IMAGING, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Sales $ 258,702 $ 160,883 $ 3,324,785 $ 160,883
Cost of sales 78,988 220,012 1,788,399 220,012
----------- ----------- ----------- -----------
179,714 (59,129) 1,536,386 (59,129)
Operating expenses:
Selling, general and
administrative 1,004,391 738,331 2,260,848 1,719,005
Research and
development 815,020 349,707 1,712,709 1,059,851
----------- ----------- ----------- -----------
Total operating expenses 1,819,411 1,088,038 3,973,557 2,778,856
----------- ----------- ----------- -----------
Loss from operations (1,639,696) (1,147,167) (2,437,171) (2,837,985)
Other income (expense):
Other -- -- 76,475 --
Investment and
interest income 395,631 8,731 806,312 10,896
Interest expense (11,179) (36,574) (141,149) (110,809)
----------- ----------- ----------- -----------
Other income (expense) 384,452 (27,842) 741,639 (99,913)
----------- ----------- ----------- -----------
Loss before extraordinary item (1,255,244) (1,175,009) (1,695,532) (2,937,898)
Extraordinary item-gain on
early extinguishment of debt -- 157,494 -- 157,494
----------- ----------- ----------- -----------
Net loss $(1,255,244) $(1,017,515) $(1,695,532) $(2,780,404)
=========== =========== =========== ===========
Loss per common share:
Before extraordinary item (0.12) (.17) (0.18) (0.43)
Extraordinary item-gain
on early extinguishment
of debt -- 0.02 -- 0.02
----------- ----------- ----------- -----------
Net loss per common share $ (0.12) $ (0.15) $ (0.18) $ (0.41)
=========== =========== =========== ===========
Weighted average common
shares outstanding 10,836,254 6,858,266 9,616,735 6,853,761
=========== =========== =========== ===========
</TABLE>
See accompanying notes
4
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
OPERATING ACTIVITIES
Net loss $ (1,695,532) $(2,780,404)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation 206,768 127,264
Services exchanged for common 56,540 95,499
stock
Changes in operating assets
and liabilities
Accounts receivable (411,391) (161,325)
Inventory (1,799,108) (1,116,073)
Prepaid expenses and accrued
interest receivable (334,258) (18,254)
Other assets 55,214 (17,667)
Accounts payable (383,886) (82,198)
Accrued salaries and
benefits 122,179 (75,659)
Accrued interest payable (139,478) (61,941)
Other accrued liabilities (48,518) 30,680
Due to related party (105,000) --
Customer advance (150,000) --
------------ -----------
Net cash used in operating activities (4,626,470) (4,060,078)
INVESTING ACTIVITIES
Purchases of property and equipment (475,194) (131,871)
Purchase of investments available
for sale (25,881,217) --
------------ -----------
Net cash used in investing activities (26,356,411) (131,871)
FINANCING ACTIVITIES
Proceeds from long-term notes payable 60,000 --
Repayment of long-term notes payable
and capitalized lease obligations (747,197) (774,910)
Repayments of notes payable to related
parties (338,958) (186,643)
Advance from factor 2,216,614 --
Repayments to factor (2,216,614) --
Due to related party (762,897) --
Proceeds from sale of common stock 34,466,404 4,017,628
------------ -----------
Net cash provided by financing activities 32,677,352 3,056,075
Net increase (decrease) in cash and cash
equivalents 1,694,470 (1,135,874)
Cash and cash equivalents at beginning
of period 75,821 1,494,482
------------ -----------
Cash and cash equivalents at end of
period $ 1,770,291 $ 358,608
============ ===========
SUPPLEMENTAL INFORMATION
Interest paid $ 141,149 $ 37,702
============ ===========
Notes payable and notes payable to
related parties converted to
common stock $ 300,000 $ 930,000
============ ===========
Inventory transferred to property and
equipment $ 393,353 $ --
============ ===========
See accompanying notes
5
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. These
financial statements, footnotes and discussions should be read in conjunction
with audited financial statements and related footnotes in the registration
statement on Form S-1 filed by Intelligent Medical Imaging, Inc. (the "Company")
with the Securities and Exchange Commission. Operating results for the three-
and nine-month periods ended September 30, 1996 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1996.
2. INVESTMENTS AVAILABLE FOR SALE
Investments available for sale consist of asset backed securities, corporate
bonds and U.S. Government agency bonds. Management determines the proper
classifications of investments in obligations with fixed maturities and
marketable equity securities at the time of purchase and reevaluates such
designations as of each balance sheet date. At September 30, 1996, all
securities were designated as available for sale. Accordingly, these securities
are stated at fair market value, with unrealized gains and losses reported as a
separate component of stockholders' equity. Realized gains and losses on sales
of investments, as determined on a specific identification basis, are included
in the statements of operations.
Investment securities available for sale at September 30, 1996, are summarized
as follows:
UNREALIZED MARKET
COST GAINS VALUE
(LOSSES)
---------------------------------------
U.S. Government Securities $ 6,666,518 $(10,752) $ 6,655,766
Corporate bonds $13,639,198 $ 22,304 $13,661,502
Asset backed securities $ 5,575,502 $ 10,705 $ 5,586,207
----------------------------------------
Total investments available for $25,881,218 $ 22,257 $25,903,475
sale
=======================================
3. INVENTORY
The components of inventory consist of the following:
SEPTEMBER 30 DECEMBER 31,
1996 1995
------------ ------------
Raw materials $ 1,192,359 $ 817,064
Work in process 207,334 838,117
Finished goods
1,660,943 -
------------ ------------
$ 3,060,636 $ 1,655,181
============ ============
6
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4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
Furniture, fixtures and
office equipment $ 737,752 $ 157,617
Computer and development
equipment 1,147,995 859,583
------------- ------------
1,885,747 1,017,200
Accumulated depreciation (537,702) (330,934)
------------- ------------
$ 1,348,045 $ 686,266
============= ============
5. INITIAL PUBLIC OFFERING
On March 27, 1996 the Company completed an initial public offering of 3,450,000
shares of common stock at a price of $11.00 per share. The net proceeds to the
Company from the sale of such common stock were approximately $34,000,000 after
deducting underwriting commissions of approximately $2,700,000 and offering
expenses of approximately $900,000, and are to be used primarily for research
and development of Micro21 System enhancements and additional procedures,
repayment of accrued liabilities and existing and anticipated indebtedness and
working capital and general corporate purposes. Prior to June 30, 1996, the
Company repaid $2,216,614 advanced under the Company's factoring arrangement,
paid $450,000 of accrued bonuses to Messrs. Tyce Fitzmorris, President, CEO and
Chairman of the Company, Eric Espenhahn, Vice President - Product Development
and Jaime Pereira, Vice President - Engineering; $868,711 of notes payable to
related parties and accrued interest, and $650,621 of notes payable and accrued
interest.
On January 16, 1996, Intelligent Medical Imaging, Inc. ("IMI Delaware") was
formed for the purpose of changing the Company's state of incorporation from
Florida to Delaware. Also on January 16, 1996, the Board of Directors declared a
three-for-one stock split, effective upon the merger described below, on IMI
Delaware's common stock in the form of a 200 percent stock dividend, payable
January 18, 1996, to shareholders of record on January 18, 1996. Effective
January 17, 1996, IMI Florida was merged into IMI Delaware. IMI Delaware has
30,000,000 shares of $.01 par value common stock and 2,000,000 shares of $.01
par value preferred stock authorized for issuance. IMI Delaware and its
predecessor IMI Florida are referred to herein as the "Company."
The financial statements have been restated to reflect the newly authorized
shares and to give retroactive recognition to the stock split in prior periods
by reclassifying from additional paid-in capital to common stock, the par value
of the additional shares arising from the split.
6. NOTES PAYABLE
On April 1, 1996, $348,525 was paid to XL Vision in settlement of the full
amount outstanding on the note payable in default at December 31, 1995.
7. COMMITMENTS AND CONTINGENCIES
In August 1995, the Company entered into an exclusive sales and distribution
agreement with Coulter (the "Coulter Agreement") which was amended in January
1996. Through March 31, 1996, Coulter was committed to purchase a certain
minimum number of Micro21 Systems for approximately $4,000,000 of which
$1,400,000 was earned by the Company in 1995 and the balance was earned during
1996. Subsequent to March 31, 1996, under the Coulter Agreement the Company was
committed to deliver a certain minimum number of systems at a specified sales
price through August 31, 2000, provided
7
<PAGE>
that the Micro21 System meets "market requirements," as to the first contract
year ending August 31, 1996 and subject to modification by mutual agreement due
to market conditions for subsequent periods through August 31, 2000.
The Coulter Agreement specifies that Coulter will place these systems with end
users and the Company and Coulter will share revenue earned from end users after
Coulter receives certain minimum payments. To date, 24 Micro21 Systems have been
installed with end users (19 in the United States) of which four have been
purchased or leased from Coulter by U.S. hospitals for use in their clinical
laboratories. In addition, the Company has placed six Micro21 Systems from its
inventory with end users pursuant to evaluation orders obtained by Coulter.
Under the terms of the Coulter Agreement, the Company has agreed to license its
proprietary software and technology to Coulter. Coulter also has rights to
negotiate distribution rights for any new in vitro diagnostic products the
Company develops including any new applications for the Micro21 System.
Under the Coulter Agreement, Coulter has a right of first offer in the event
that the Company intends to engage in a sale of the Company or certain other
specified transactions involving a change in control of the Company. Coulter
also has the right to match any unsolicited offer by a third party to purchase
the Company or engage in certain other transactions involving a change in
control of the Company. The Coulter Agreement further provides that the Company
is required to indemnify Coulter for any injury to person or property resulting
from the design or manufacture of the Micro21 System. The Company is required to
maintain product liability insurance with a minimum coverage of $5 million with
respect to any such injury.
The Company can terminate the Coulter Agreement in the event that Coulter fails
to make the minimum required purchases, and Coulter can terminate the Agreement
if the Micro21 System fails to meet "market requirements." The parties can each
terminate the Coulter Agreement under certain other circumstances, including the
breach by the other party of the Coulter Agreement.
On September 30, 1996 Coulter unilaterally revoked its previous commitment to
purchase $5,500,000 of Micro21 Systems during the third and fourth quarters of
1996. In response, the Company gave Coulter written notice of termination of the
Coulter Agreement and submitted this dispute to arbitration in accordance with
the terms of the Coulter Agreement. As a result of Coulter's revocation of its
commitment to purchase any Micro21 Systems during the third and fourth quarters
of 1996, the Company did not realize any product sales for the third quarter
ended September 30, 1996, and the Company may not realize any product sales for
the fourth quarter ended December 31, 1996.
On December 28, 1995, the Company entered into a factoring agreement with a
commercial factoring company (the "Factor") in which the Factor agreed to
purchase a minimum of $3,000,000 of the Company's Coulter receivables, with
recourse, over the six-month term of the agreement for 80% of the net amount of
the Coulter receivables. The processing fee charged by the Factor was 1.15% of
the face amount of each invoice for each 15-day period that the invoice remained
unpaid. The factoring agreement was terminated July 6, 1996. During 1996, the
Company received advances of approximately $2,216,000 on approximately
$2,775,000 of Coulter accounts receivable all of which were paid during 1996. At
December 31, 1995, no receivables were purchased by the Factor under this
Agreement
The Company has been notified that its product may infringe patents issued to
two other parties. No infringement claim has been asserted against the Company
in one of these matters; however, the Company is a party to legal proceedings
regarding the other matter. In management's opinion, based upon knowledge of
facts and the advice of patent counsel, the ultimate resolution of the
infringement claims described above are not expected to have a material adverse
effect on the Company's financial condition or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company has developed and is marketing the Micro21(TM) System, an
intelligent, automated microscope system, for diagnostic use in hospital,
commercial reference and physician group laboratories. The Micro21 System is
designed to automate a broad range of manual microscopic procedures, potentially
enabling the clinical laboratory to reduce costs and exposure to liabilities,
enhance analytical accuracy and consistency, increase the productivity of
medical technologists and improve patient care.
8
<PAGE>
In August 1995, the Company entered into an exclusive worldwide distribution
agreement (the "Coulter Agreement") with Coulter Corporation ("Coulter") for
sales, marketing and service of the Micro21 System. Coulter is a leading
producer of automated laboratory equipment and the world's largest provider of
cellular analysis systems.
To date, 24 Micro21 Systems have been placed with 24 hospital laboratories (19
in the U.S.) (none for longer than one year) in connection with the testing of
the Micro21 System for evaluation pursuant to issued evaluation orders. To date,
four of these systems have been purchased or leased by end user U.S. hospitals
for use in their clinical laboratories. In addition, the Company has placed six
Micro21 Systems from its inventory with end users pursuant to evaluation orders
obtained by Coulter.
On September 30, 1996 Coulter unilaterally revoked its previous commitment to
purchase $5,500,000.00 of Micro21 Systems during the third and fourth quarters
of 1996. In response, the Company gave Coulter written notice of termination of
the Coulter Agreement and submitted this dispute to arbitration in accordance
with the terms of the Coulter Agreement. As a result of Coulter's revocation of
its commitment to purchase any Micro21 Systems during the third and fourth
quarters of 1996, the Company did not realize any product sales for the third
quarter ended September 30, 1996, and the Company may not realize any product
sales for the fourth quarter ended December 31, 1996. See "Item 1. Legal
Proceedings."
The Company has concentrated its efforts primarily on the development of the
Micro21 System and is dependent on the successful commercialization of this
product to generate revenue. The success of the Micro21 System is dependent upon
many variables, including its acceptance as a reliable, accurate and
cost-effective tool for microscopic analysis as well as on the Company's
manufacturing capacity. The Company has been dependent on its relationship with
Coulter for sales, marketing and service. Coulter's revocation of its previous
commitment to purchase Micro21 Systems during the third and fourth quarters of
1996 has had a material adverse effect on the Company's results of operations
for the third quarter of 1996 and is expected to have a material adverse effect
on the Company's results of operations for the fourth quarter and for the fiscal
year ending December 31, 1996.
The Company has given Coulter written notice of termination of the Coulter
Agreement and, following the expiration of a thirty day cure period, written
notice that the Company has deemed the Coulter Agreement to be terminated.
Coulter has stated that it has not breached the Coulter Agreement and that the
Coulter Agreement remains in effect. The dispute has been submitted to
arbitration. Under the Coulter Agreement, Coulter had primary responsibility for
sales, marketing and service relating to the Micro21 System. Termination of the
Coulter Agreement requires the Company to build an internal sales and marketing
organization to enable the Company to implement its plans for operating without
Coulter. The Company anticipates it will continue to sell the Micro21 System to
Coulter but it will not do so pursuant to the exclusive distribution arrangement
set forth in the Coulter Agreement. Any delay and expense associated with
building the Company's sales and marketing organization following termination of
the Coulter Agreement could have a material adverse effect on the Company's
results of operations during the fourth quarter of 1996 and for the fiscal year
ending December 31, 1996.
In addition, the Company cannot predict with certainty the results of the
pending arbitration process. While the Company believes it has a legal right to
terminate the Coulter Agreement and the related distribution relationship with
Coulter, an arbitration panel may disagree and the Company could be required to
pay damages to Coulter for wrongful termination, which could have a material
adverse effect on the Company's financial condition and its results of
operations.
RESULTS OF OPERATIONS
Product sales were $258,702 for the third quarter of 1996 compared with $160,883
for the third quarter of 1995, an increase of $97,819. Product sales were
$3,324,785 for the nine months ended September 30, 1996 compared to $160,883 for
the nine months ended September 30, 1995, an increase of $3,163,902. The
increase in product sales for the quarter was primarily due to sales of
peripheral equipment and service billings. There were no sales of Micro 21
Systems to Coulter in the third quarter of 1996.
Cost of sales was $78,988 for the third quarter of 1996 compared with $220,012
for the third quarter of 1995, a decrease of $141,024. Cost of sales was
$1,788,399 for the nine months ended September 30, 1996 compared to $220,012 for
the nine months ended September 30, 1995, an increase of $1,568,387. The
decrease in cost of sales for the quarter was primarily due to Coulter's failure
to purchase Micro21 Systems in the third quarter.
Selling, general and administrative expenses were $1,004,391 for the third
quarter of 1996 compared with $738,331 for the third quarter of 1995, an
increase of $266,060 or 36%. Selling, general and administrative expenses have
continued to increase because of the continued growth of the Company and the
need for additional personnel. Selling, general and administrative expenses were
$2,260,848 for the nine months ended September 30, 1996 compared to $1,719,005
for the
9
<PAGE>
nine months ended September 30, 1995, an increase of $541,843 or 31%. The
increase was primarily due to increases in staffing and business development
expenses.
Research and development expenses were $815,020 for the third quarter of 1996
compared with $349,707 for the third quarter of 1995, an increase of $465,313 or
133%. Research and development expenses have increased due to resources being
utilized in the development of new procedures, technologies and products.
Research and development expenses were $1,712,709 for the nine months ended
September 30, 1996 compared to $1,059,851 for the nine months ended September
30, 1995, an increase of $652,858 or 62%. The increase was primarily due to the
Company's development of new procedures, upgrades and new products for the
Micro21 System. Research and development expenses are expected to increase as
new procedures, technologies and products are developed.
Other income and extraordinary income was $0 for the third quarter of 1996
compared with $157,494 for the third quarter of 1995 due to an extraordinary
gain in 1995 resulting from the Company's settlement of a note payable. Other
income and extraordinary income was $76,475 for the nine months ended September
30, 1996 compared with $157,494 for the nine months ended September 30, 1995, a
decrease of $81,019.
Interest income was $395,631 for the third quarter of 1996 compared with $8,731
for the third quarter of 1995, an increase of $386,900. Interest income was
$806,312 for the nine months ended September 30, 1996 compared to $10,896 for
the nine months ended September 30, 1995, an increase of $795,416. The increase
was primarily due to interest income earned on the proceeds from the Company's
initial public offering which closed on March 27, 1996.
Interest expense was $11,179 for the third quarter of 1996 compared with $36,574
for the third quarter of 1995, a decrease of $25,395. Interest expense was
$141,149 for the nine months ended September 30, 1996 compared to $110,809 for
the nine months ended September 30, 1995, an increase of $30,340. The increase
was primarily due to interest incurred on advances received from a factor prior
to completion of the initial public offering, and to satisfy the terms and
conditions as specified in the factoring agreement. The factoring agreement was
terminated on July 6, 1996.
LIQUIDITY AND CAPITAL RESOURCES
On March 27, 1996, the Company completed an initial public offering, selling
3,450,000 shares of common stock at $11.00 per share, resulting in approximately
$34,000,000 in net proceeds to the Company. In the nine months ended September
30, 1996, cash, cash equivalents and investments increased $27,844,344,
primarily due to net cash provided by proceeds from the initial public offering.
At June 30, 1996 the Company had paid all long term notes payable and all notes
payable to related parties.
In May 1996 the Company employed investment advisors to manage the cash assets
of the Company subject to specific restrictions and limitations. The advisors
are allowed to buy, sell, exchange and otherwise trade in any stocks, bonds and
other securities consistent with the Company's objectives. The specific
restrictions and limitations limit the advisors to investments characterized as
investment grade only and of maturities no longer than two years. These
investments are classified as available for sale.
Cash and cash equivalents consist of cash and liquid investments with a maturity
of 90 days or less. Investments available for sale consist of asset backed
securities, corporate bonds and U.S. Government agency bonds. Management
determines the appropriate classification of debt securities at the time of
purchase and re-evaluates such designation as of each balance sheet date.
Unrealized holding gains and losses on securities classified as available for
sale are reported as a separate component of shareholders' equity.
For the nine months ended September 30, 1996 net cash used in operating
activities of $4,626,470 was primarily due to increasing inventories, reduction
of accounts payable, and payments of amounts due related parties.
For the nine months ended September 30, 1996 net cash used in investing
activities of $26,356,411 was primarily the result of purchases of investments
available for sale and purchases of development equipment and leasehold
improvements to the corporate offices.
For the nine months ended September 30, 1996 net cash provided by financing
activities of $32,677,352 was primarily the result of proceeds from the sale of
common stock in the initial public offering.
10
<PAGE>
At September 30, 1996 the Company had a net operating loss carryforward ("NOL")
of approximately $6,800,000 available for income tax purposes that expire
through the year 2010. Section 382 of the Internal Revenue Code, as amended
("Section 382"), limits the amount of federal taxable income that may be offset
by pre-existing NOLs of a corporation following a change in ownership
("Ownership Change") of the corporation. A portion of the Company's NOLs
(approximately $2,500,000) are currently subject to these limitations because
the Company experienced an Ownership Change on June 30, 1995 due to the issuance
of common stock. Of the Company's limited NOLs, no more than $500,000 per year
may be utilized through 1999. Subsequent to 1999, such amounts will no longer be
limited by Section 382.
The Company believes that cash, cash equivalents, and investments held for sale,
together with projected cash flow from operations, will be sufficient to meet
the Company's liquidity and capital requirements for at least two years,
although no assurance exists that the Company will not require additional
capital prior to the end of such period.
11
<PAGE>
Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements that are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The Company cautions
that a number of important factors could cause the Company's actual results for
1996 and beyond to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company.
Forward-looking statements involve a number of risks and uncertainties
including, but not limited to, the Company's history of operating losses;
uncertainty of profitability and uncertainty of widespread market acceptance for
the Micro21 System; the Company's dependency on Coulter for sales, marketing and
service of its products in the event the Coulter Agreement is not terminated;
uncertainty of the Company's realization of its remedies against Coulter,
including termination of the Coulter Agreement or restructuring of the
relationship between the Company and Coulter by mutual agreement or through
arbitration in accordance with the terms of the Coulter Agreement; uncertainty,
risks and costs associated with the Company's need to expand and enhance its own
sales and marketing organization to replace Coulter; the anticipated loss of
revenue and earnings during the period of potential transition of sales,
marketing and service responsibilities from Coulter to the Company; the
Company's limited manufacturing experience; fluctuations in operating results;
the Company's ability to its protect trade secrets and proprietary technology
(including the outcome of the Company's litigation with International Remote
Imaging Systems, Inc.); competition and technical change in the industry in
which the Company is engaged; product liability and the ability of the Company
to obtain adequate insurance for product liability; uncertainty of third party
reimbursement and health care reform policies; and government regulation. The
Company cannot assure that it will be able to anticipate or respond timely to
any of the factors, or changes in any of the factors, listed above, which could
adversely affect the operating results in one or more fiscal quarters. Results
of operations in any past period should not be considered indicative of the
results to be expected for future periods. Fluctuations in operating results may
also result in fluctuations in the price of the Company's common stock.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 16, 1996, the Company initiated proceedings for resolution of
disputes between the Company and Coulter arising under the Coulter Agreement
before a panel of three arbitrators proceeding under the rules of the American
Arbitration Association. The Coulter Agreement includes minimum purchase
requirements. On September 30, 1996, Coulter revoked its previous commitment to
purchase $5,500,000 of Micro21 Systems during the third and fourth quarter of
1996. The Company then sent written notice of termination of the Coulter
Agreement with an opportunity for Coulter to cure identified material breaches
of the Coulter Agreement and submission of the dispute to arbitration. On
November 4, 1996, the Company notified Coulter that the 30 day cure period
expired and the Coulter Agreement was accordingly terminated. Coulter has stated
that it is not in breach of the Coulter Agreement and is cooperating with the
submission of the dispute to arbitration. The Company is seeking confirmation of
its right to terminate the Coulter Agreement and damages relating to breaches by
Coulter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
LIST OF EXHIBITS DESCRIPTION
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
13
<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.
INTELLIGENT MEDICAL IMAGING, INC.
Date: NOVEMBER 13, 1996 BY: /s/ TYCE M. FITZMORRIS
----------------- ----------------------
Tyce M. Fitzmorris, President and Chief
Executive Officer
Date: NOVEMBER 13, 1996 BY: /s/ GENE M. COCHRAN
----------------- ----------------------
Gene M. Cochran, Chief Financial Officer
14
<TABLE>
<CAPTION>
EXHIBIT 11
INTELLIGENT MEDICAL IMAGING, INC.
COMPUTATION OF NET LOSS PER SHARE
THREE MONTHS THREE MONTHS NINE MONTH NINE MONTHS
ENDED ENDED ENDED ENDED
SEPT. 30, 1996 SEPT. 30, 1995 SEPT. 30, 1996 SEPT. 30, 1995
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss before extraordinary item $(1,255,244) $(1,175,009) $(1,695,532) $(2,937,898)
Extraordinary gain on
extinguishment of debt - 157,494 - 157,494
---------------------------------------------------------------
Net loss $(1,255,244) $(1,017,515) $(1,695,532) $(2,780,404)
==============================================================
Weighted average common shares
outstanding 10,836,254 4,349,958 9,616,735 4,345,453
Shares related to Staff
Accounting Bulletin 83:
Stock options and warrants granted - 468,345 - 468,345
Issuance of common stock - 2,039,963 - 2,039,963
--------------------------------------------------------------
Weighted average common shares
outstanding 10,836,254 6,858,266 9,616,735 6,853,761
==============================================================
Net loss per common share:
Before extraordinary item $ (0.12) $ (0.17) $ (0.18) $ (0.43)
Extraordinary gain on early
extinguishment of debt - 0.02 - 0.02
--------------------------------------------------------------
Net loss per common share $ (0.12) $ (0.15) $ (0.18) $ (0.41)
==============================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,770,291
<SECURITIES> 25,903,475
<RECEIVABLES> 593,391
<ALLOWANCES> 0
<INVENTORY> 3,060,936
<CURRENT-ASSETS> 31,665,957
<PP&E> 1,885,747
<DEPRECIATION> 537,702
<TOTAL-ASSETS> 33,061,244
<CURRENT-LIABILITIES> 1,069,680
<BONDS> 66,917
0
0
<COMMON> 108,714
<OTHER-SE> 31,815,934
<TOTAL-LIABILITY-AND-EQUITY> 33,061,244
<SALES> 3,324,785
<TOTAL-REVENUES> 3,324,785
<CGS> 1,788,399
<TOTAL-COSTS> 1,788,399
<OTHER-EXPENSES> (741,639)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 141,149
<INCOME-PRETAX> (1,695,532)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,695,532)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,695,532)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> 0
</TABLE>
