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, 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: 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 12, 1998, THERE WERE OUTSTANDING 11,583,333 SHARES OF COMMON
STOCK, PAR VALUE $.01, OF THE REGISTRANT.
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INTELLIGENT MEDICAL IMAGING, INC.
QUARTER ENDED SEPTEMBER 30, 1998
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
CONDENSED BALANCE SHEETS AS OF
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 3
CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 4
CONDENSED STATEMENTS OF CASH FLOWS FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 5
NOTES TO CONDENSED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 9
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
INTELLIGENT MEDICAL IMAGING, INC.
CONDENSED BALANCE SHEETS
September 30, December 31,
1998 1997
----------------- -----------------
(Unaudited)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $437,726 $853,164
Investments available for sale 0 6,230,009
Accounts receivable, net 209,207 671,905
Notes receivable related party 223,232 0
Accrued interest receivable 0 13,151
Inventory 5,092,010 5,933,815
Prepaid expenses 113,033 61,799
Current portion of investment in sales-type leases 113,808 222,213
----------------- -----------------
Total current assets 6,189,016 13,986,056
Revenue equipment, net 306,096 263,632
Property and equipment, net 2,865,559 2,789,693
Long-term portion of investment in sales-type leases 435,326 240,145
Deferred financing costs 106,700 0
Other assets 178,033 126,883
----------------- -----------------
$10,080,730 $17,406,409
================= =================
Liabilities and stockholders' equity Current liabilities:
Accounts payable $1,230,904 $1,298,811
Accrued salaries and benefits 313,635 394,190
Other accrued liabilities 217,600 101,816
Current portion of deferred revenue 105,210 74,673
----------------- -----------------
Total current liabilities 1,867,349 1,869,490
Deferred revenue 434,542 219,574
Convertible debentures, net of unamoritized discount of $662,036 2,337,964 0
Stockholders' equity
Preferred stock, $.01 par value-authorized 2,000,000 shares;
no shares issued or outstanding 0 0
Common stock, $.01 par value-authorized 30,000,000 shares;
issued and outstanding, 11,583,333 shares at September 30, 1998
and 11,023,938 shares at December 31, 1997 115,834 110,239
Additional paid-in capital 43,671,440 42,537,633
Deferred compensation (158,313) (228,252)
Accumulated deficit (38,188,086) (27,102,275)
----------------- -----------------
Total stockholders' equity 5,440,875 15,317,345
----------------- -----------------
$10,080,730 $17,406,409
================= =================
See accompanying notes
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INTELLIGENT MEDICAL IMAGING, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $633,808 $431,516 $2,113,403 $2,843,559
Cost of sales 661,331 352,578 1,765,563 1,647,799
------------------------------------------------------------------------------
(27,523) 78,938 347,840 1,195,760
Operating expenses:
Selling, general and administrative 2,058,338 2,469,323 7,009,123 6,042,244
Research and development 1,275,259 931,423 4,047,256 2,733,469
------------------------------------------------------------------------------
Total operating expenses 3,333,597 3,400,746 11,056,379 8,775,713
------------------------------------------------------------------------------
Loss from operations (3,361,120) (3,321,808) (10,708,539) (7,579,953)
Other (expense) income:
Investment and interest income 37,480 207,240 132,047 872,202
Interest expense (478,314) 0 (478,314) 0
------------------------------------------------------------------------------
Other (expense) income (440,834) 207,240 (346,267) 872,202
------------------------------------------------------------------------------
Net loss $(3,801,954) $(3,114,568) $(11,054,806) $(6,707,751)
==============================================================================
Loss per common share-basic and diluted $(0.33) $(0.28) $(0.97) $(0.61)
==============================================================================
Weighted average common
shares outstanding 11,583,334 10,975,109 11,359,499 10,930,096
==============================================================================
See accompanying notes
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INTELLIGENT MEDICAL IMAGING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months Nine months
ended ended
September 30, September 30,
1998 1997
Operating activities
<S> <C> <C>
Net loss $(11,054,806) $(6,707,752)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation 970,134 509,531
Recognition of deferred revenue (78,041) 0
Amortization of discount on convertible
debentures and deferred financing costs 478,314 0
Services exchanged for common stock 69,939 69,939
Changes in operating assets and liabilities
Accounts receivable 462,698 (1,251,420)
Inventory 288,930 (3,432,376)
Prepaid expenses and accrued interest
receivable (38,083) (35,100)
Investment in sales-type leases (86,776) 0
Other assets (51,150) (99,312)
Revenue equipment (42,464) 0
Accounts payable (67,907) (7,449)
Accrued salaries and benefits (80,555) 183,207
Accrued interest payable 0 (421,132)
Other accrued liabilities 115,784 58,156
Deferred revenue 323,546 0
Contingent settlement liability 0 (1,210,891)
------------------ ------------------
Net cash used in operating activities (8,790,437) (12,344,599)
Investing activities
Purchases of property and equipment (493,125) (1,184,454)
Sales of investments available for sale 6,199,004 13,295,326
Advances to related parties (622,267) 0
Repayments on advances to related parties 399,035 0
------------------ ------------------
Net cash provided by investing activities 5,482,647 12,110,872
Financing activities
Proceeds from issuance of common stock 92,352 110,544
Proceeds from issuance of convertible debentures, net
of financing costs 2,800,000 0
------------------ ------------------
Net cash provided by financing activities 2,892,352 110,544
Net decrease in cash and cash equivalents (415,438) (123,183)
Cash and cash equivalents at beginning of period 853,164 288,001
------------------ ------------------
Cash and cash equivalents at end of period $437,726 $164,818
================== ==================
Supplemental information
Stock purchase warrants issued for financing costs $116,400 $0
================== ==================
Inventory transferred to property and equipment $552,875 $974,715
================== ==================
See accompanying notes
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INTELLIGENT MEDICAL IMAGING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed 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 included
in Intelligent Medical Imaging, Inc.'s ("IMI" or "the Company") annual report on
Form 10-K for the year ended December 31, 1997. Operating results for the three-
and nine-month periods ended September 30, 1998 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1998.
2. REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition" which
the Company has adopted for transactions entered into during the year beginning
January 1, 1998. SOP 97-2 provides guidance for recognizing revenue on software
transactions and supersedes SOP 91-1, "Software Revenue Recognition". In March
1998, the AICPA issued SOP 98-4, "Deferral of the Effective Date of a Provision
of SOP 97-2, Software Revenue Recognition". SOP 98-4 defers, for one year, the
application of certain passages in SOP 97-2 which limit what is considered
vendor-specific objective evidence necessary to recognize revenue for software
licenses in multiple-element arrangements when undelivered elements exist.
Additional guidance is expected to be provided prior to adoption of the deferred
provision of SOP 97-2. The Company will determine the impact, if any, the
additional guidance will have on the current revenue recognition practices when
issued. Adoption of the remaining provisions of SOP 97-2 did not have a material
impact on revenue recognition during 1998.
3. INVESTMENTS AVAILABLE-FOR-SALE
At September 30, 1998 all investments held for sale had been sold and realized
gains and losses of the investments are included in the statements of operation.
Investments available-for-sale at December 31, 1997 consisted 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
re-evaluates such designations as of each balance sheet date. At December 31,
1997, 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 December 31, 1997, are summarized as
follows:
Unrealized Market
Cost Gains Value
--------------------------------------
Cash and cash equivalents $164,708 $- $164,708
U.S. Government agency bonds
and mortgages $3,677,946 $5,466 $3,683,412
U.S. Corporate bonds and
asset backed securities $2,356,350 $25,539 $2,381,889
======================================
Total investments available-for-sale $6,199,004 $31,005 $6,230,009
======================================
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
September 30, December 31,
1998 1997
---------------- ----------------
Furniture, fixtures and office
equipment $2,564,179 $1,403,234
Computer and development
equipment 2,847,205 2,962,150
---------------- ----------------
5,411,384 4,365,384
Accumulated depreciation (2,545,825) (1,575,691)
---------------- ----------------
$2,865,559 $2,789,693
================ ================
5. NOTE RECEIVABLE RELATED PARTIES
In January 1998, $196,000 was advanced to the Company's President and $424,000
was advanced to an individual who was at that time a member of the Board of
Directors. The advance of $196,000 to the Company's President, plus all accrued
interest thereon, was repaid in full on August 14, 1998. The original due date
for the advance in the amount of $424,000, which is secured by shares of the
Company's common stock and bears interest at the rate of prime plus 1% per
annum, was April 8, 1998. During the quarter ended September 30, 1998 and
through November 13, 1998 payments in the amount of $250,000, including accrued
interest, plus a $75,000 credit offset in consulting fees due the former member
of the Board of Directors have been made leaving a balance of $125,053. The
balance of $125,053 has been extended to January 28, 1999.
6. CONVERTIBLE DEBENTURES
On June 30, 1998 ("Original Issue Date") the Company issued, in a private
placement transaction, $3,000,000 of 6% convertible debentures, due June 30,
2001 (the "Debentures"). Subject to adjustment in certain events, twenty-five
percent (25%) of the aggregate principal amount of the Debentures is convertible
into the common stock of the Company beginning on September 28, 1998 ("Initial
Conversion Date") and on the first, second and third month anniversaries of the
Initial Conversion Date up to 50%, 75% and 100%, respectively, of the aggregate
principal amount of the Debentures originally issued on the Original Issue Date
is convertible. The Debentures are convertible at a conversion price
("Conversion Price") equal to the lesser of (a) 120% of the average of the
closing bid price for the common stock of the Company for the five (5) trading
days immediately preceding the Original Issue Date or (b) 86% multiplied by the
average of the five (5) lowest closing bid prices of the common stock of the
Company during the twenty-five (25) trading days immediately preceding the date
of the applicable conversion notice. The Company recorded a debt discount of
$906,250 representing the intrinsic value of the beneficial conversion feature
of the Debentures. Interest is payable quarterly and may, at the Company's
option and subject to certain restrictions, be paid in shares of the Company's
common stock based on the Conversion Price. Subject to certain notification
requirements and the payment of a prepayment premium which is tied to the
applicable Conversion Price and the closing bid price of the common stock on the
date of prepayment, the Company has the right to prepay all or any portion of
the outstanding principal amount of the Debentures which has not previously been
repaid or converted. The principal amount of the Debentures for which conversion
notices have not previously been received or for which prepayment has not been
made will be automatically converted on June 30, 2001 at the Conversion Price on
such date. The Debentures may be converted in whole or in part at the option of
the holder if the average of the closing sales prices of the common stock for
any twenty (20) consecutive trading days is equal to or greater than 175% of the
average of the per share market values for the five (5) trading days immediately
preceding the original issue date. The principal amount of Debentures for which
conversion notices have not previously been received or for which prepayment has
not been made or required shall be automatically converted on the third
anniversary of the Original Issue Date at the Conversion Price on such date.
This automatic conversion shall not occur if (a) (1) an Underlying Securities
Registration Statement is not then effective that names the holder as a selling
stockholder thereunder or (2) the holder is not permitted to resell underlying
shares pursuant to Rule 144(k) promulgated under the Securities Act of 1993,
without volume restrictions; (b) there are not sufficient shares of common stock
authorized and reserved for issuance upon such conversion; and (c) the Company
shall not have defaulted on its covenants and obligations hereunder or under the
Purchase Agreement or Registration Rights Agreement. The Company incurred
financing costs of $200,000 in connection with the issuance of the Debentures,
which will be amortized over the life of the Debentures. On July 30, 1998, the
Company filed a registration statement on Form S-3 with the Securities and
Exchange Commission ("SEC") to register the common stock underlying the
convertible debentures issued in connection with the transaction. This
registration statement was declared effective by the SEC on October 20, 1998.
Additional capital commitments of up to $7,000,000 are available to IMI subject
to the parties mutually agreeing on the terms.
In connection with the issuance of the Debentures, the Company issued warrants
to the holders of the Debentures to purchase 120,000 shares of the Company's
common stock at $3.93 per share. The warrants are exerciseable immediately
through June 30, 2003. The fair value of the warrants based on the Black-Scholes
valuation method is $1.87. The Company recorded a debt discount of $224,400
representing the fair value of the warrants.
In addition, the Company issued a warrant to a financial consultant to purchase
60,000 shares of the Company's common stock at $3.63 per share. The warrant is
exercisable immediately through June 30, 2003. The Company recorded deferred
financing costs of $116,400 in connection with the issuance of the warrant. Such
costs will be amortized over the term of the Debentures. The assumptions used to
compute the value of the warrants were as follows:
Risk-free interest rate 5.48%
Volatility factors of the
expected market price of the
Company's common stock .598
Expected life 5 Years
Dividend yield 0%
7. COMMITMENTS AND CONTINGENCIES
In November 1996, IMI and DiaSys Corporation ("DiaSys") (Nasdaq, DIYS) entered
into a Product Integration Agreement (the "DiaSys Agreement"). DiaSys designs,
develops, manufactures and distributes workstation products which prepare fluid
samples. Under the DiaSys Agreement, IMI was granted a nonexclusive,
nontransferable license to integrate the patented DiaSys wet-preparation
specimen handling system together with the MICRO21 in order to produce
integrated systems for resale to MICRO21 end users. The DiaSys Agreement was
terminated in July 1997, when IMI rejected products delivered by DiaSys and
returned them. The DiaSys Agreement provides for mandatory and binding
arbitration of disputes between the parties. On January 12, 1998, DiaSys filed a
demand for arbitration of the dispute. In its demand for arbitration, DiaSys
seeks damages in excess of $1,000,000 for IMI's alleged breach of the DiaSys
Agreement and IMI's alleged defamation of DiaSys and its products. IMI filed its
response on February 9, 1998. In its response, IMI denies that it breached the
DiaSys Agreement or defamed DiaSys, and states that it properly rejected
products supplied by DiaSys due to non-conformance. IMI also seeks damages for
libelous statements made by DiaSys in a July 2, 1997 press release issued by
DiaSys, and for delays in IMI's product development efforts caused by DiaSys's
breach of the DiaSys Agreement. On October 7, 1998 the arbitration hearings were
completed and on November 6, 1998 written arguments were presented to the
arbitration panel. Management is unable to make a meaningful estimate of the
likelihood or amount or range of loss that could result from an unfavorable
outcome of the pending arbitration. As of September 30, 1998, the Company has
not accrued any loss contingencies or related expenses in connection with this
arbitration. The Company believes that DiaSys's claims are without merit, and
that the Company will prevail in the arbitration. However, there can be no
assurance that the Company will prevail in the arbitration or in its
counterclaim asserted against DiaSys, or that any resolution of the dispute,
which is expected to occur within one year, will not have a material adverse
effect on the Company's liquidity, financial condition and results of
operations.
On March 7, 1997, the Company entered into a settlement agreement with
International Remote Imaging Systems, Inc. ("IRIS") effective March 1, 1997.
Under the settlement agreement, IRIS granted the Company a fully-paid,
royalty-free license for worldwide direct sales of the MICRO21 system by the
Company. The Company agreed to pay a 4 percent royalty on future sales of the
MICRO21 system through third-party distributors in the United States. The
Company does not believe the 4 percent royalty on U.S. sales through
distributors will significantly adversely impact the Company's results of
operations during the term of the license. This license and royalty obligation
expire in September 2000, when the IRIS patents that are the subject of the
license expire. The Company has the right, but not the obligation, to request a
license from IRIS for sales through third-party distributors outside of the
United States; however, the Company does not believe that the MICRO21 system
infringes any foreign patents held by IRIS and the Company has no current plans
to request such a license.
8. MANAGEMENT'S PLANS
The Company reported a net loss of approximately $10,899,000 for the nine-months
ended September 30, 1998, incurred cumulative losses from inception to September
30, 1998, aggregating approximately $38,032,000, and reported negative cash
flows from operations for the nine-months ended September 30, 1998, of
approximately $8,790,000. At September 30, 1998, the Company had working capital
of approximately $4,272,000 and shareholders' equity of approximately
$5,597,000. Costs and delays associated with the Company's efforts to build its
internal sales and service force in the wake of the termination of its exclusive
distribution and marketing agreement with Coulter Corporation Agreement
adversely affected the Company's business, results of operations and financial
condition in 1997 and 1998. The Company's 1998 and 1999 operating plans
contemplate focusing activities on expanding sales revenue through the efforts
of its internal sales, marketing and service force. In addition, during the
fourth quarter of 1997 the Company began to offer a short-term rental program
which it believes will augment its sales and long-term lease programs by giving
potential customers the ability to fund a MICRO21 with operating funds, thereby
overcoming potential cost barriers associated with limited or non-existent
capital expenditure funds. Expansion of this program may require that the
Company secure additional financing. During 1998, the Company has introduced two
new products, a Hematology Slide Maker and Urine Slide Maker, and two additional
procedures which management believes will offer significant opportunities for
expanding the Company's potential customer base. In addition, the Company is
currently negotiating with a company for distribution and licensing agreements
associated with sales of the Company's products. The Company's plans also
contemplate cost control measures implemented in 1998 and cost and personnel
reductions which reduce monthly expenditures from approximately $1.1 million to
$850,000; the cost reductions also include closing the Company's office in
Europe in July, 1998. The Company's plans also contemplate seeking alternative
sources of financing and exploring strategic alternatives.
In June 1998, the Company issued $3 million of convertible debentures. An
additional $7 million of financing is available to the Company, but the
availability of such financing is at the discretion of the lender after
consideration of the trading characteristics of the common stock, the lender's
exposure to the Company at that time, the absence of any material adverse change
in the Company's financial condition or operations and the Company's continued
compliance with the terms of the financing. The debentures include a requirement
that the Company's common stock be listed for trading by Nasdaq. The closing
price of the Company's common stock has closed below the Nasdaq National Market
minimum requirement on a consistent basis, resulting in the potential for the
stock to be delisted from Nasdaq which would constitute an event of default
under the convertible debenture agreement, in which event the full principal
amount of the debentures, together with all accrued interest thereon, would
become immediately due and payable in cash and the availability of the remaining
borrowing capacity under the convertible debenture agreement could be further
limited. The Company is considering a reverse stock split to rectify this
situation, however, there can be no assurance that such action will achieve the
intended result or that it will satisfy the event of default under the
convertible debenture agreement.
The Company continues to explore a variety of alternatives for increasing its
sales and distribution capacity and raising sufficient capital to fund its
operations. Implementation of the Company's business strategy requires
significant expenditures of capital. The Company is currently seeking additional
funds through debt or equity. There can be no assurance that such funds can be
obtained on favorable terms, if at all.
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.
On April 20, 1998, the Company signed a customer financing agreement with Prime
Capital Corp ("Prime") to provide up to $36 million of financing for customers
acquiring the MICRO21 System Workstation. Under the terms of the agreement, the
Company and Prime will establish a wholesale customer finance relationship under
which Prime will provide a "Private Label Fee Per Slide" financing facility to
customers of the Company for an ongoing vendor leasing program. Prime will
provide up to $12 million of customer financing per year over 3 years. This
agreement should help IMI to continue to meet its near-term cash flow needs and
provides a financing alternative for IMI's customers.
On June 30, 1998 the Company completed the sale of $3,000,000 of 6% convertible
debentures, due June 30, 2001. See Footnote 6 of Notes to Condensed Financial
Statements in Part I, Item 1 of this Form 10-Q. The sale of the convertible
debentures will help IMI to continue to meet its near-term cash flow needs.
On August 14, 1998 the Company received full repayment of all amounts due with
respect to an advance which the Company made to the Company's President in
January 1998 in the amount of $196,000. With respect to repayment of the
Company's advance to a former director, R. Wayne Fritzsche, as of November 13,
1998 payments in the amount of $250,000, plus a $75,000 credit offset for
consulting fees past due or payable to Mr. Fritzsche by the Company, have been
applied against the amount due, leaving a balance due of $125,053. The Company
and Mr. Fritzsche have agreed that the balance of $125,053 will be paid by Mr.
Fritzsche in installments with full payment due on January 28, 1999.
On October 30, 1998 Nasdaq notified the Company of its concern regarding the
continued listing of the Company's shares of common stock for trading on the
Nasdaq National Market as a result of the failure of the Company's common stock
to maintain a closing bid price of greater than or equal to $1.00 for thirty
(30) consecutive trade dates. Pursuant to Nasdaq rules, the Company has ninety
(90) calendar days in which to regain compliance with Nasdaq continued listing
requirements. If within this 90-day period the common stock complies with the
minimum closing bid price requirement of $1.00 for a minimum of ten (10)
consecutive days, and is in compliance with all other listing requirements,
continued listing will occur. However, if the Company is unable to demonstrate
compliance with the $1.00 minimum bid price requirement on or before January 28,
1999, the Company's securities will be delisted at the opening of business on
February 1, 1999. Such delisting would constitute an event of default under the
Debentures, in which event the full principal amount of the Debentures, together
with all accrued interest thereon, would become immediately due and payable in
cash and the availability of the remaining borrowing capacity under the related
convertible debenture agreement could be further limited.
On November 16, 1998 the Company entered into three related agreements with
Bayer Corporation ("Bayer") involving the Company's blood slide maker, the
Hematology Slide Master(TM) (HSM(TM)). The three agreements, a Licensing
Agreement, Instrument Supply Agreement and an After Market Supply Agreement,
provide Bayer with certain non-exclusive rights to manufacture and sell products
based on the HSM. Pursuant to the Licensing Agreement, Bayer will pay to IMI a
one-time licensing fee of $1,100,000 in installments with the last payment of
$500,000 subject to Bayer's acceptance of the Company's first commercially
manufactured HSM, as well as a royalty payment of $2,000 on each of the first
400 HSM-based units it manufactures and sells in exchange for the non-exclusive
right to manufacture and sell HMS-based products and the right to negotiate for
the manufacture and distribution of the Company's MICRO21 System, Urine Slide
Maker ("USM") and any other new Company products. The Instrument Supply
Agreement provides that Bayer will manufacture the HSM for the Company for at
least two years in the event the Company chooses not to manufacture the HSM or
chooses to have Bayer manufacture the HSM to supplement the Company's
manufacture of this product. Finally, pursuant to the After Market Supply
Agreement, with limited exceptions Bayer is required to recommend the Company as
a sole source of consumables used on all HSM-based products manufactured and
sold by Bayer until the earlier to occur of (a) three years following Bayer's
sale of 200 HSM's or (b) five years after Bayer's initial sale of an HSM.
The Company is implementing strategic steps so as to allow IMI to remain viable
until sufficient market penetration for the Company's products is achieved. This
plan, which includes personnel reductions, reduces monthly expenditures from
approximately $1,100,000 to $850,000 with the reduction in extraordinary
development expenditures coinciding with the completion of the HSM and USM
instruments and across the board reductions in IMI's operating costs. In
connection with these cost reductions, the Company decided to discontinue its
operations in Europe and, instead, rely on qualified distributors. The IMI
Europe office was officially closed on July 31, 1998.
The Company is moving forward to identify and implement reductions in sales
expenditures, while emphasizing a sales process that better targets prospective
customers who are closest to making a purchase decision. The reduction of sales
expenditures is in furtherance of the strategy of focusing on specific customer
groups and markets and the de-emphasis on providing total market coverage to all
types of prospects. The Company is implementing a plan that will segment the
market according to product fit and geographic location.
During the fourth quarter of 1997, the Company began to offer a short-term
rental program which provides for monthly or annual rentals of the MICRO21
system. The Company believes that this program will augment its sales and
long-term lease programs by giving potential customers the ability to fund a
MICRO21 with operating funds, thereby overcoming potential cost barriers
associated with limited or non-existent capital expenditure funds. Expansion of
the short-term rental program may require that the Company secure additional
financing.
The Company continues to explore a variety of alternatives for increasing its
sales and distribution capacity and raising sufficient capital to fund its
operations. Implementation of the Company's business strategy requires
significant expenditures of capital. The Company is currently seeking additional
funds through debt or equity. There can be no assurance that such funds can be
obtained on favorable terms, if at all.
RESULTS OF OPERATIONS
Product sales were $633,808 for the third quarter of 1998 compared with $431,516
for the third quarter of 1997 an increase of $202,292. The increase in sales for
the quarter was primarily due to an increase in the number of closings of
MICRO21s. Product sales were $2,113,403 for the nine months ended September 30,
1998 compared with $2,843,599 for the nine months ended September 30, 1997, a
decrease of $730,156. The overall decease in sales for the nine months ended
September 30, 1998 compared to September 30, 1997 was primarily due to a
decrease in closings of MICRO21s in the international market.
Cost of sales was $661,331 for the third quarter of 1998 compared with $352,578
for the third quarter of 1997, an increase of $308,753. Cost of sales was
$1,765,563 for the nine months ended September 30, 1998 compared with $1,647,799
for the nine months ended September 30, 1997, an increase of $117,764. The
increase in cost of sales for the quarter was primarily due to depreciation
recorded on the revenue equipment, the write down of obsolete inventory, and
costs associated with idle capacity.
Gross margin was negative for the third quarter of 1998 at ($27,523) or (4%)
compared with $78,938 or 18% for the third quarter of 1997 and $347,840 or 16%
for the nine months ended September 30, 1998 compared with $1,195,760 or 42% for
the nine months ended September 30, 1997. This decline is primarily the result
of sales not meeting the Company's expectations and, therefore, the Company has
incurred manufacturing inefficiencies and idle plant costs. As a result of the
lower than expected sales, the Company continues to examine the adequacy of its
obsolescence reserves, particularly for materials associated with the Micro21
and through September 30, 1998 has recorded additional reserves or inventory
writedowns. In addition, during the fourth quarter of 1997 the company began
offering the Micro21 on operating lease arrangements which result in lower
margins than those achieved on sales or sales-type lease transactions.
Selling, general and administrative expenses were $2,058,338 for the third
quarter of 1998 compared with $2,469,323 for the third quarter of 1997, a
decrease of $410,985. Selling, general and administrative expenses decreased
because of the staff and expense reductions implemented early in the third
quarter. Selling, general and administrative expenses were $7,009,123 for the
nine months ended September 30, 1998 compared with $6,042,245 for the nine
months ended September 30, 1997, an increase of $966,878. The overall increase
in selling, general and administrative expenses was primarily due to increases
in staffing during the second half of 1997, expenses associated therewith were
incurred throughout most of 1998. In addition, the Company incurred business
development expenses during 1998 and increases in legal and accounting fees.
Research and development expenses were $1,275,259 for the third quarter of 1998
compared with $931,423 for the third quarter of 1997, an increase of $343,836.
Research and development expenses were $4,047,256 for the nine months ended
September 30, 1998 compared with $2,733,469 for the nine months ended September
30, 1997, an increase of $1,313,787. Research and development expenses have
increased due to resources being utilized in the development of new procedures,
technologies and products. The majority of the expenses are related to the
designing, manufacturing and testing of the HSM system, which was completed in
October, 1998. In October 1998, the Company began manufacturing the HSM system.
Interest income was $37,480 for the third quarter of 1998 compared with $207,240
for the third quarter of 1997, a decrease of $169,760. Interest income was
$132,047 for the nine months ended September 30, 1998 compared with $872,202 for
the nine months ended September 30, 1997, a decrease of $740,155. The decrease
was primarily due to the sale of investment securities to fund operations.
Interest expense was $478,314 for the third quarter of 1998 compared with $0 for
the third quarter of 1997. Interest expense was $478,314 for the nine months
ended September 30, 1998 compared with $0 for the nine months ended September
30, 1997. Interest expense represents the amortization of the discounts and
deferred financing costs related to the issuance of the convertible debentures
that were issued on June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1998, net cash used in operating
activities of $8,790,437 was primarily due to the Company's operating loss.
For the nine months ended September 30, 1998, net cash provided by investing
activities of $5,482,647 was primarily the result of sales of investments
available-for-sale, partially offset by purchases of computer equipment to be
used in research and development and advances made to a former member of the
Board of Directors.
For the nine months ended September 30, 1998, net cash provided by financing
activities of $2,892,352 was the result of the cash received from the issuance
of the convertible debentures offset by the financing costs.
During 1998 the Company has experienced a reduction in revenue and
increased costs that have adversely affected the Company's current results of
operations and its liquidity. The Company's 1998 and 1999 operating plans
contemplate focusing activities on expanding sales revenue through the efforts
of its internal sales, marketing and service force. In addition, during the
fourth quarter of 1997 the Company began to offer a short-term rental program
which it believes will augment its sales and long-term lease programs by giving
potential customers the ability to fund a MICRO21 with operating funds, thereby
overcoming potential cost barriers associated with limited or non-existent
capital expenditure funds. Expansion of this program may require that the
Company secure additional financing. The Company's plans also contemplate
continuing the cost control measures implemented in 1998 and cost and personnel
reductions, which reduce monthly expenditures from approximately $1,100,000 to
$850,000; the cost reductions also include closing the Company's office in
Europe in July 1998. The Company's plans also contemplate seeking alternative
sources of financing and exploring strategic alternatives. During 1998, the
Company has introduced two new products, a Hematology Slide Maker and Urine
Slide Maker, and two additional procedures which management believes will offer
significant opportunities for expanding the Company's potential customer base.
In addition, the Company is currently negotiating with a company for
distribution and licensing agreements associated with sales of the Company's
products. Also, during the third quarter of 1998, the Company implemented cost
controls and personnel reductions. In June 1998, the Company issued $3 million
of convertible debentures; an additional $7,000,000 million of financing may be
available to the Company subject to the mutual agreement of the parties. At
September 30, 1998 the Company's remaining cash balance totalled $437,726.
Although management believes that its plan will be successful, there can be no
assurance that the Company will be successful in its attempt to expand revenue,
secure additional financing or consummate the distribution and licensing
agreements.
As described above, in June 1998, the Company issued $3 million of convertible
debentures. An additional $7,000,000 million of financing may be available to
the Company, but the availability of such financing is at the discretion of the
lender after consideration of the trading characteristics of the common stock,
the lender's exposure to the Company at that time, the absence of any material
adverse change in the Company's financial condition or operations and the
Company's continued compliance with the terms of the financing. The debentures
include a requirement that the Company's common stock be listed for trading by
Nasdaq. On October 30, 1998 Nasdaq notified the Company that it's common stock
has failed to maintain a closing bid price of greater than or equal to $1.00 for
thirty consecutive dates. The Company has 90 calendar days to regain compliance
with Nasdaq rules. If the Company is unable to comply with the minimum bid price
requirement on or before January 28, 1999, the Company's common stock will be
delisted at the opening of business on February 1, 1999. Such delisting which
would constitute an event of default under the convertible debenture agreement,
in which event the full principal amount of the debentures, together with all
accrued interest thereon, would become immediately due and payable in cash and
the availability of the remaining borrowing capacity under the convertible
debenture agreement could be further limited. The Company is considering a
reverse stock split to rectify this situation, however, there can be no
assurance that such action will achieve the intended result or that it will
satisfy the event of default under the convertible debenture agreement.
Implementation of the Company's business strategy requires significant
expenditures of capital. The Company is currently seeking additional funds
through equity or debt. There can be no assurance that such funds can be
obtained on favorable terms, if at all.
YEAR 2000 ISSUE
The Company has implemented a process for identifying, prioritizing and
modifying or replacing certain computer and other systems and programs that may
be affected by the Year 2000 issue. The Company is also monitoring the adequacy
of the manner in which certain third parties and third party vendors of systems
are attempting to address the Year 2000 issue. The Company has substantially
completed an assessment of its computer and embedded systems and determined that
it needed to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. While the Company believes its process is designed to be successful,
because of the complexity of the Year 2000 issue, and the interdependence of
organizations using computer systems, it is possible that the Company's efforts,
or those of third parties with whom the Company interacts, will not be
successful or satisfactorily completed in a timely fashion.
The Company estimates that the total cost that it will incur in connection with
attempting to address the Year 2000 issue, including assessment development of a
modification or replacement plan, purchase of new hardware and software and
implementation of the modification or replacement plan or software, will be
approximately $50,000. To date, the Company has incurred approximately $35,000
(of which $-0- has been capitalized and $35,000 expensed). The Company funded
the costs incurred to date through cash flow from operations and expects to fund
future costs through cash flow from operations.
The project is estimated to be completed by September 1999, which is prior to
any anticipated impact on the Company's operating systems. The Company believes
that with modifications to existing software, conversions to new software and
replacement or modification of certain embedded systems, the Year 2000 issue
will not pose significant operational problems. However, if such modifications
and conversions are not made, or are not completed on a timely basis, the Year
2000 issue would have a material adverse impact on the Company's business,
financial condition and results of operations.
The estimated costs of the project and the date on which the Company believes
necessary modifications and replacements to address the Year 2000 issue will be
completed are based on management's estimates, which were derived utilizing
numerous assumptions of future events, including the continued availability of
certain resources and other factors. As the Company progresses in addressing the
Year 2000 issue, estimates of costs could change, and there can be no assurance
that the Company will not experience cost overruns or delays in connection with
its plan for modifying or replacing systems and programs. In addition, it may
not be possible to adequately assess the impact of the failure of third parties
to adequately address the Year 2000 issue. As a result, actual operating results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained to address the Year 2000 issue, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
Due to the fact that the Company believes it has secured sufficient resources to
address the Year 2000 issue as it relates to its computer systems, the
assessment of embedded systems is complete and the Company does not believe that
contingency planning is warranted at this time. The assessment of third parties
external to the Company is underway, and the results of this assessment, when
completed, may reveal the need for contingency planning at a later date. The
Company will regularly evaluate the need for contingency planning based on the
progress and findings of the Year 2000 project.
FORWARD LOOKING STATEMENTS
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
1998 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 need for the Company to raise additional capital to
finance operations in the immediate near-term, through debt or equity, and the
inability to provide assurances that such capital will be available or available
on terms favorable to the Company; the delays and impediments to customer
acceptance associated with industry and market perception of the historical
dispute between the Company and Coulter Corporation; the uncertainty of
availability of debt or equity capital for future long-term capital needs,
especially in the event of further delays in anticipated widespread market
acceptance and market penetration of MICRO21 systems; the uncertainty of the
commercial viability and potential market acceptance of other IMI products such
as the newly developed HSM and USM, which have not yet been manufactured or sold
in commercial volumes; uncertainty as to the ability of the Company to achieve
sales and marketing goals following implementation of the Company's cost
reduction program, including reduction in sales and marketing personnel, due to
the decrease in personnel and the possible adverse impact on potential customer
perception of the Company; the risk that expansion of sales in foreign markets
may be possible only through distributors, such as Beckman Coulter, at transfer
prices too low for favorable profitability; the inability of the Company to
enter into an alternative exclusive distribution arrangement due to certain
rights granted to Coulter Corporation under the Coulter Settlement Agreement;
uncertainty as to whether the Company and Beckman Coulter will enter into a
definitive agreement based on the signed nonbinding letter of intent relating to
the HSM; the potential for an adverse judgment against the Company in connection
with the ongoing arbitration of the dispute between the Company and DiaSys
Corporation; the potential termination of listing of the Company's common stock
on Nasdaq; potential delays and technical problems in the development and
commercial release of new products and procedures such as the proposed MICRO21
Microscopic Workstation System, the HSM and the USM; the expense, delays and
potential setbacks in development of competent and capable sales and marketing
teams and service teams for penetration and support of the market for the
MICRO21 system, including but not limited to the pharmaceutical and veterinary
lab market; delays in closing sales of systems placed for evaluation due to
length of the closing cycle, uncertainty due to industry consolidation and
customer budget processes and restrictions; the expense of product development
and the related delay and uncertainty as to receipt of any requisite FDA
clearance or other governmental clearance or approval for new products and new
procedures for use on the MICRO21 system; the uncertainty of profitability and
sustainability of revenues and profitability; the possibility that agreements
with a potential strategic partner candidate will not be consummated or will not
result in significant improvements in results; the Company's limited
manufacturing experience; fluctuations in operating results; the Company's
ability to its protect trade secrets and proprietary technology; competition and
technological 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.
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
LIST OF EXHIBITS DESCRIPTION
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
<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 16, 1998 By: /S/ TYCE M. FITZMORRIS
------------------------------
Tyce M. Fitzmorris,
President and Chief
Executive Officer
Date: November 16, 1998 By: /S/ GENE M. COCHRAN
------------------------------
Gene M. Cochran,
Chief Financial Officer
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