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: JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NUMBER: 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 AUGUST 11, 1998, THERE WERE OUTSTANDING 11,583,333 SHARES OF COMMON STOCK,
PAR VALUE $.01, OF THE REGISTRANT.
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
QUARTER ENDED JUNE 30, 1998
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) 3
CONDENSED BALANCE SHEETS AS OF
JUNE 30, 1998 AND DECEMBER 31, 1997 3
CONDENSED STATEMENTS OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997 4
CONDENSED STATEMENTS OF CASH FLOWS FOR
THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 5
NOTES TO CONDENSED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 8
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION 12
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS 12
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
INTELLIGENT MEDICAL IMAGING, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------------- -------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $3,067,446 $853,164
Investments available for sale 31,662 6,230,009
Accounts receivable, net 228,014 671,905
Notes receivable related parties 622,267
Inventory 5,189,302 5,933,815
Prepaid expenses and other current assets 141,167 61,799
Current portion of investment in sales-type leases 47,704 222,213
Accrued interest receivable 13,151
Total current assets 9,327,562 13,986,056
Revenue equipment, net 398,378 263,632
Property and equipment, net 3,135,007 2,789,693
Investment in sales-type leases, net 180,295 240,145
Other assets 159,209 126,883
Deferred financing costs 316,400
---------------
$13,516,851 $17,406,409
================= ===============
Liabilities and stockholders' equity Current liabilities:
Accounts payable $1,284,906 $1,298,811
Accrued salaries and benefits 422,748 394,190
Other accrued liabilities 79,565 101,816
Current portion of deferred revenue 111,111 74,673
Total current liabilities 1,898,330 1,869,490
Deferred revenue 329,655 219,574
Convertible debentures, net of unamortized discount of 1,130,650 1,869,350 ---
Stockholders' equity
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, shares at 11,583,333 June 30, 1998
and 11,023,938 at December 31, 1997 115,834 110,239
Additional paid-in capital 43,871,440 42,537,633
Deferred compensation (181,626) (228,252)
Accumulated deficit (34,386,132) (27,102,275)
Total stockholders' equity 9,419,516 15,317,345
------------------ -------------------
$13,516,851 $17,406,409
================== ===================
</TABLE>
See accompanying notes
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales $437,297 $1,570,338 $1,479,595 $2,412,043
Cost of sales 342,940 888,978 1,104,232 1,295,221
---------------------------------------------------------------------
94,357 681,360 375,363 1,116,822
Operating expenses:
Selling, general and administrative 2,601,060 2,077,318 4,950,785 3,571,957
Research and development 1,354,972 1,086,827 2,771,997 1,803,011
---------------------------------------------------------------------
Total operating expenses 3,956,032 3,164,145 7,772,782 5,374,968
---------------------------------------------------------------------
Loss from operations (3,861,675) (2,482,785) (7,347,419) (4,258,146)
Other income:
Investment and interest income 26,409 358,104 94,567 664,961
---------------------------------------------------------------------
Net loss ($3,835,266) ($2,124,681) ($7,252,852) ($3,593,185)
=====================================================================
Loss per common share-basic and diluted ($0.33) ($0.19) ($0.64) ($0.33)
=====================================================================
Weighted average common
shares outstanding 11,463,386 10,911,612 11,245,726 10,907,213
=====================================================================
</TABLE>
See accompanying notes
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months Six months
ended ended
June 30, 1998 June 30, 1997
Operating activities
<S> <C> <C>
Net loss $(7,252,852) ($3,593,185)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation 593,270 301,988
Amortization of deferred revenue (52,730) --
Services exchanged for common stock 46,626 46,626
Changes in operating assets and liabilities
Accounts receivable 132,251 (1,427,903)
Inventory 443,891 (2,458,360)
Prepaid expenses and accrued interest
receivable (66,217) (316,343)
Investment in sales-type leases 234,359 --
Other assets (32,326) (228,583)
Revenue equipment (134,746) --
Accounts payable (13,905) (20,645)
Accrued salaries and benefits 28,558 254,396
Other accrued liabilities (22,251) (376,786)
Deferred revenue 199,249 --
Convertible debentures -- --
Coulter settlement liability 0 (1,048,929)
----------- -----------
Net cash used in operating activities (5,896,823) (8,867,724)
Investing activities
Purchases of property and equipment (326,322) (726,615)
Sales of investments available for sale 6,167,342 9,552,407
Advances to related parties (622,267) --
----------- -----------
Net cash provided by investing activities 5,218,753 8,825,792
Financing activities
Proceeds from issuance of common stock 92,352 32,400
Proceeds from issuance of debentures, net of financing 2,800,000
costs
Net cash provided by financing activities 2,892,352 32,400
Net increase (decrease) in cash and cash equivalents 2,214,282 (9,532)
Cash and cash equivalents at beginning of period 853,164 288,001
----------- -----------
Cash and cash equivalents at end of period $ 3,067,446 $ 278,469
=========== ===========
Supplemental information
Stock purchase warrants issued as
deferred financing costs $ 116,400 --
=========== ===========
Inventory transferred to property and equipment $ 612,262 $ 842,858
=========== ===========
See accompanying notes
</TABLE>
<PAGE>
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 six-month periods ended June 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 the second quarter of 1998.
3. INVESTMENTS AVAILABLE-FOR-SALE
Investments available-for-sale at December 31, 1997 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
re-evaluates such designations as of each balance sheet date. At June 30, 1998
and 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 June 30, 1998 and December 31, 1997,
are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
Unrealized Market Unrealized Market
Cost Gains Value Cost Gains (Losses) Value
(Losses)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $31,662 --- $31,662 $164,708 $ 0 $164,708
U.S. Government agency bonds and --- --- --- 3,677,946 5,466 3,683,412
mortgages
U.S. Corporate bonds and asset backed --- --- --- 2,356,350 25,539 2,381,889
securities
========================================================================================
Total investments available-for-sale $31,662 --- $31,662 $6,199,004 $31,005 $6,230,009
========================================================================================
</TABLE>
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
Furniture, fixtures and office
<S> <C> <C>
equipment $2,500,311 $1,403,234
Computer and development
equipment 2,803,657 2,962,150
----------- -----------
5,303,968 4,365,384
Accumulated depreciation (2,168,961) (1,575,691)
----------- -----------
$3,135,007 $2,789,693
=========== ==========
</TABLE>
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 but has been extended to August 28, 1998.
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 has not been declared effective by the SEC. 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 a warrant
to the holder of the Debentures to purchase 120,000 shares of the Company's
common stock at $3.93 per share. The warrant is exercisable immediately through
June 30, 2003. The fair value of the warrant 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 warrant.
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(1) .598
Expected life 5 Years
Dividend yield 0%
(1) Price of the Company's Stock
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. 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 June 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. The Company and DiaSys have selected the panel of arbitrators and
the arbitration hearing date of October 5, 1998 has been scheduled.
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. Since the
Company's current business plan is to sell its products primarily on a direct
basis, without reliance on third-party distributors, 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 $7,253,000 for the six-months
ended June 30, 1998 incurred cumulative losses from inception to June 30, 1998,
aggregating approximately $34,386,000, and reported negative cash flows from
operations for the six-months ended June 30, 1998, of approximately $5,897,000.
At June 30, 1998, the company had working capital of approximately $11,526,000
and shareholders' equity of approximately $9,327,000. Costs and delays
associated with he 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 the limited or non-existent capital expenditure funds. Expansion
of this program may require that the Company secure additional financing,
however. 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. The Company's plans also contemplate cost
control measures implemented in 1998 and cost and personnel reductions, 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 subject to the mutual agreement
of the parties. Although management believes that its plan will be successful,
there can be no assurance that the Company will e successful in its attempt to
expand revenue, secure additional financing or consummate a strategic
alternative.
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.
The Company is currently in formal discussions with Bayer Corporation regarding
a possible non-exclusive manufacturing and distribution agreement for IMI's
hematology slidemaker/stainer technology. The Company has also signed a letter
of intent with Beckman Coulter, Inc. ("Beckman Coulter"), relating to a
potential non-exclusive distribution agreement for IMI's newly developed (not
yet sold commercially) hematology slide maker ("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 $1.1 million to $850,000 with the reduction in extraordinary
development expenditures coinciding with the competition of the HSM and Urine
Slide Maker ("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.
RESULTS OF OPERATIONS
Product sales were $437,297 for the second quarter of 1998 compared with
$1,570,338 for the second quarter of 1997 a decrease of $1,133,041. Product
sales were $1,479,595 for the six months ended June 30, 1998 compared with
$2,412,043 for the six months ended June 30, 1997, a decrease of $932,448. The
decease in sales for the six months ended June 30, 1998 compared to June 30,
1997 was primarily due to fewer than expected closings on systems.
Cost of sales was $342,940 for the second quarter of 1998 compared with $888,978
for the second quarter of 1997, a decrease of $546,038. Cost of sales was
$1,104,232 for the six months ended June 30, 1998 compared with $1,295,221 for
the six months ended June 30, 1997, a decrease of $190,989. The decrease in cost
of sales for the quarter was consistent with the sales for the period.
Selling, general and administrative expenses were $2,601,060 for the second
quarter of 1998 compared with $2,077,318 for the second quarter of 1997, an
increase of $523,742. Selling, general and administrative expenses increased
because of the continued growth of the Company and the need for additional
personnel through December 1997. Selling, general and administrative expenses
were $4,950,785 for the six months ended June 30, 1998 compared with $3,571,957
for the six months ended June 30, 1997, an increase of $1,378,828. The increase
was primarily due to increases in staffing during the second half of 1997 and
business development expenses and higher than expected legal and accounting
fees.
Research and development expenses were $1,354,972 for the second quarter of 1998
compared with $1,086,827 for the second quarter of 1997, an increase of
$268,145. Research and development expenses increased due to resources being
utilized in the development of new procedures, technologies and products.
Research and development expenses were $2,771,997 for the six months ended June
30, 1998 compared with $1,803,011 for the six months ended June 30, 1997, an
increase of $968,986. The increase was primarily due to the Company's
development of new procedures and new products for the Micro21 System.
Interest income was $26,409 for the second quarter of 1998 compared with
$358,104 for the second quarter of 1997, a decrease of $331,695. Interest income
was $94,567 for the six months ended June 30, 1998 compared with $664,961 for
the six months ended June 30, 1997, a decrease of $570,394. The decrease was
primarily due to the sale of investment securities to fund operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents consist of cash and liquid investments with a maturity
of 90 days or less. Investments available-for-sale at June 30, 1998 consist of
cash and cash equivalents.
For the six months ended June 30, 1998, net cash used in operating activities of
$5,896,823 was primarily due to the Company's operating loss.
For the six months ended June 30, 1998, net cash provided by investing
activities of $5,218,753 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 to the Company's Chief Executive
Officer and a then member of the Board of Directors.
For the six months ended June 30, 1998, net cash provided by financing
activities of $2,892,352 was the result of the cash received from issuance of
the convertible debentures offset by the financing costs.
At June 30, 1998, the Company had a net operating loss ("NOL") carryforward of
approximately $29,000,000 available for income tax purposes through the year
2012. Section 382 of the Internal Revenue Code, as amended, 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 NOL carryforward is currently subject to these
limitations because the Company experienced an Ownership Change on June 30,
1995, due to the issuance of common stock.
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 the limited or non-existent capital expenditure funds. Expansion
of this program may require that the Company secure additional financing,
however. The Company's plans also contemplate continuing the cost control
measures implemented in 1998 and cost and personnel reductions, 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 June 1998, the Company issued $3 million of convertible debentures; an
additional $7 million of financing is available to the Company subject to the
mutual agreement of the parties. 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 a
strategic alternative.
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 projected annual
expenditures through 1999. Implementation of the Company's business strategy
will require significant expenditures of capital, and the Company will require
additional financing in the future. Such additional funds may be sought through
equity or debt financings. There can be no assurance that commitment for such
financings 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
the 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 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 MCIRO21 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 failure of the Company to negotiate mutually acceptable terms for a
definitive Licensing Agreement with Bayer Corporation; the potential for an
adverse judgment against the Company in connection with the ongoing arbitration
of the dispute between the Company and DiaSys Corporation; 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 potential strategic partner candidates 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(C) Sales of Unregistered Securities
In connection with a private placement consummated on June 30, 1998
(the "Private Placement"), the Company issued convertible debentures in an
aggregate principal amount of $3,000,000 (the "Debentures') to JNC Opportunity
Fund, Ltd. ("JNC"). In connection with this transaction, the Company also issued
warrants to purchase the Company's Common Stock (the "Warrants") to JNC (120,000
shares), the financial consultant, Wharton Capital Partners, Ltd. ("Wharton")
(42,000 shares) and Elizabeth D'Angelis (18,000 shares). 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 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 Warrants are exercisable between June
30, 1998 and June 30, 2003 at an exercise price equal to $3.923 per share
(120,000 shares) or $3.63 per share (60,000 shares), as the case may be, subject
to adjustment in certain events. The above referenced Debentures and Warrants
issued by the Company during the three months ending June 30, 1998 were not
registered under the Securities Act of 1933 in reliance upon the registration
exemption set forth in Regulation D under the Securities Act of 1933, which
exemption was made available to the Company due to the nature and number of
investors involved in the Private Placement and the Company's compliance with
all other requirements of such exemption. The Company has filed a registration
statement on Form S-3 to register for resale by the holders the shares of Common
Stock underlying the Debentures and the Warrants, and certain other shares of
Common Stock held by other stockholders of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders was held on May 21, 1998.
(b) Each of the persons named in the Proxy Statement as a nominee for
Director was elected.
(c) The following are the voting results on each of the matters which
were submitted to the stockholders:
Withheld or Broker
Election of Directors: For Against Abstain Non-Votes
Tyce M. Fitzmorris 6,017,837 23,131
Gene M. Cochran 6,017,837 23,131
James E. Davis 6,017,837 23,131
George Masters 6,017,837 23,131
William Whittaker 6,017,837 23.131
Resolutions:
To ratify the 6,027,168 9,100 4,700
appointment of Ernst &
Young LLP as
independent auditors
for 1998
Additional information regarding the matters referred to under this
Item 4 is set forth in the Proxy Statement dated April 30, 1998 previously filed
with the Commission and incorporated herein by reference.
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: August 14, 1998 By: /S/ TYCE M. FITZMORRIS
--------------- -------------------------
Tyce M. Fitzmorris, President and Chief
Executive Officer
Date: August 14, 1998 By: /S/ GENE M. COCHRAN
--------------- ----------------------
Gene M. Cochran, Chief Financial Officer
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