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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NUMBER: 000-27690
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 SEPTEMBER 30, 1999, THERE WERE OUTSTANDING 13,996,021 SHARES OF COMMON
STOCK, PAR VALUE $.01, OF THE REGISTRANT.
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<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
BALANCE SHEETS AS OF
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 2
STATEMENTS OF OPERATIONS FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 3
STATEMENTS OF CASH FLOWS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 4
NOTES TO FINANCIAL STATEMENTS 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
i
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTELLIGENT MEDICAL IMAGING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 125,403 $ 31,923
Accounts receivable, net 145,705 1,002,781
Notes receivable related parties -- 86,684
Inventory 906,173 3,157,537
Prepaid expenses and other
current assets -- 67,408
Current portion of investment
in sales-type leases 497,000 497,000
------------ ------------
Total current assets 1,674,281 4,843,333
Long-term portion of
investment in sales-type leases 451,808 451,808
Revenue equipment, net 296,092 544,215
Property and equipment, net 805,050 2,556,347
Other assets 18,821 52,650
Deferred financing costs, net 267,904 297,000
------------ ------------
$ 3,513,956 $ 8,745,353
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,249,224 $ 335,493
Accounts payable 1,551,957 1,159,737
Accrued salaries and benefits 937,353 372,149
Other accrued liabilities 694,994 258,671
Accrued settlement costs 325,000 --
Advances from factor -- 320,000
Current portion of amount
due to financing companies 497,000 497,000
Current portion of capital lease obligation -- 30,562
Current portion of deferred revenue 160,008 318,381
------------ ------------
Total current liabilities 5,415,536 3,291,993
------------ ------------
Long-term liabilities:
Deferred revenue 428,853 412,423
Long term portion of amounts
due to financing companies 451,808 451,808
Long term portion of
capital lease obligation -- 54,719
Convertible debentures, net
of unamortized discount 2,524,096 2,788,000
------------ ------------
Total long-term liabilities 3,404,757 3,706,950
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par
value-authorized 2,000,000
shares; no shares issues or
outstanding -- --
Common Stock, $.01 par
value-authorized 30,000,000
shares; issued and outstanding,
12,656,871 shares at September
30, 1999 and 11,631,486 shares
at December 31, 1998 126,569 116,315
Additional paid-in capital 48,360,048 44,416,708
Deferred compensation (708,761) (486,000)
Accumulated deficit (53,084,193) (42,300,613)
------------ ------------
Total stockholders' equity (5,306,337) 1,746,410
------------ ------------
Total liabilities and stockholders' equity $ 3,513,956 $ 8,745,353
============ ============
</TABLE>
See accompanying notes
2
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPT. 30, 1999 SEPT. 30, 1998 SEPT. 30, 1999 SEPT. 30, 1998
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Sales:
Product sales $ 466,229 $ 633,808 $ 1,530,018 $ 2,113,403
Licensing fees - - 500,000 -
------------ ------------- ------------ -------------
Total Sales 466,229 633,808 2,030,018 2,113,403
Cost of sales 361,782 661,331 1,509,495 1,765,563
Inventory provisions 900,000 - 1,900,000 -
------------ ------------- ------------ -------------
Gross profit (loss) (795,553) 27,523 (1,379,477) 347,840
------------ ------------- ------------ -------------
Operating expenses:
Selling, general and administrative 2,565,382 2,058,338 6,234,677 7,009,123
Research and development 371,617 1,275,259 1,834,743 4,047,256
Restructuring charges - - 913,982 -
------------ ------------- ------------ -------------
Total operating expenses 2,936,999 3,333,597 8,983,402 11,056,379
------------ ------------- ------------ -------------
Loss from operations (3,732,552) (3,361,120) (10,362,879) (10,708,539)
------------ ------------- ------------ -------------
Other income (expense):
Investment and interest income - 37,480 3,322 132,047
Interest expense (63,632) (478,314) (338,829) (478,314)
Discount on debenture (28,398) - (85,194) -
------------ ------------- ------------ -------------
Other income (expense) (92,030) (440,834) (420,701) (346,267)
------------ ------------- ------------ -------------
Net loss $ (3,824,582) $ (3,801,954) $ (10,783,580) $ (11,054,806)
============= ============= ============ =============
Loss per common share
--basic and diluted: $ (0.30) $ (0.33) $ (0.86) $ (0.97)
============= ============= ============ =============
Weighted average common
shares outstanding basic and diluted 12,656,871 11,583,334 12,562,190 11,359,499
============= ============= ============ =============
</TABLE>
See accompanying notes
3
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(10,783,580) $(11,054,806)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization 2,074,489 1,448,448
Amortization on deferred
compensation 114,118 --
Inventory provisions 1,900,000 --
Services received in exchange
for common stock and stock
options 3,296,715 69,939
Changes in operating assets
and liabilities:
Accounts receivable 537,076 462,698
Inventory 351,364 288,930
Prepaid expenses 67,408 (38,083)
Investment in sales-type
leases -- (86,776)
Other assets 33,829 (51,150)
Revenue equipment 10,123 (42,464)
Accounts payable 392,220 (67,907)
Accrued salaries and
benefits 565,204 (80,555)
Other accrued liabilities 436,323 115,784
Deferred revenue (141,943) 245,505
Accrued settlement costs 325,000 --
------------ ------------
Net cash used in operating activities (821,654) (8,790,437)
------------ ------------
INVESTING ACTIVITIES
Purchases of property and equipment -- (493,125)
Sale of investments held for
sale -- 6,199,004
Advances to related parties 86,684 (223,232)
------------ ------------
Net cash provided by investing activities 86,684 5,482,647
------------ ------------
FINANCING ACTIVITIES
Proceeds from sale of common stock -- 92,352
Proceeds from issuance of
notes payable 913,731 --
Repayment capital leases (85,281) --
Convertible debentures -- 2,800,000
------------ ------------
Net cash provided by
financing activities 828,450 2,892,352
------------ ------------
Net (decrease) increase in
Cash and cash equivalents 93,480 (415,438)
Cash and cash equivalents
at beginning of period 31,923 853,164
------------ ------------
Cash and cash equivalents
at end of period $ 125,403 $ 437,726
============ ============
Supplemental Information
Stock purchase warrants
issued for financing costs $ -- $ 116,400
============ ============
Conversion of convertible
debentures to common stock $ 345,000 $ --
============ ============
Inventory transferred to
property and equipment $ -- $ 552,875
============ ============
</TABLE>
See accompanying notes
4
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. These
financial statements, footnotes and discussions should be read in conjunction
with audited financial statements and related footnotes included in Intelligent
Medical Imaging, Inc.'s ("IMI" or "the Company") annual report on Form 10-K for
the year ended December 31, 1998. Operating results for the nine month period
ended September 30, 1999 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1999.
The Company incurred a significant loss during fiscal 1998 and for the nine
months ended September 30, 1999. Due to these significant losses and the
Company's inability to raise additional capital on a timely basis, the Company
intends on filing for immediate protection under the federal bankruptcy laws.
The Company intends on implementing strategic steps to allow IMI to remain
viable until sufficient market penetration for the Company's products is
achieved. This plan includes: (i) personnel reductions, which reduces monthly
expenditures from approximately $1,100,000 to $60,000; and (ii) arranging for
post-petition financing to cover day-to-day operating expenses. There can be no
assurance though that such funds can be obtained on favorable terms, if at all.
The Company initiated actions to restructure its operations and recorded
restructuring and other charges totaling $2,813,982 during the nine months ended
September 30, 1999. This charge included $1,900,000 for excess inventory and
$913,982 for restructuring charges including $151,082 of severance and $762,900
related to the impairment of fixed assets. Cash expenditures associated with the
restructuring and one-time charges, are payable over the next six months and are
estimated to be $151,082. In addition, the Company issued stock options to
employees at below market prices in an effort to retain employees. Compensation
expense related to stock options issued totaled $3,296,715 of which $3,029,619
is included in operating expenses for the nine month period ending September 30,
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 had ninety
(90) calendar days in which to regain compliance with Nasdaq continued listing
requirements. If within this 90-day period the common stock complied with the
minimum closing bid price requirement of $1.00 for a minimum of ten (10)
consecutive days, and was in compliance with all other listing requirements,
continued listing would have occurred. However, due to the Company's inability
to demonstrate compliance with the $1.00 minimum bid price requirement on or
before January 28, 1999, the Company's securities were delisted on May 18, 1999.
Since May 18, 1999, the Company's securities have been traded on the OTC
Bulletin Board under the symbol "IMII." Such delisting constituted an event of
default under the Debentures, which was waived by the holder.
As of September 30, 1999 the Company is delinquent in its payroll obligations
(including wages, severance pay and accrued vacation pay) in the amount of
approximately $865,000. The Company is also currently delinquent in the payment
of its accounts payable.
On April 27, 1999, James Davis, William Whittaker, George Masters and Gene
Cochran resigned their positions with the Board of Directors. Gene Cochran also
resigned his position as Chief Financial Officer effective April 30, 1999. The
Company is seeking to hire a new Chief Financial Officer and 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. If the Company's efforts to raise capital are unsuccessful, the Company
will have to cease operations.
5
<PAGE>
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. NOTE RECEIVABLE RELATED PARTIES
In January 1998, $196,000 was advanced to the Company's President and Chief
Executive Officer 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
year the advance of $424,000, plus all accrued interest thereon, was repaid in
full by payments in the amount of $290,000, plus a $163,563 credit offset in
consulting fees due the former member of the Board of Directors.
4. 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. At September 30, 1999, interest
payable relating to the Debentures of approximately $209,000 is included in
accrued expenses. 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
6
<PAGE>
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. As of September 30, 1999 the
holder of the Debentures had converted $345,000 of the original $3,000,000
principal amount of the Debentures into shares of the Company's common stock.
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 exercisable 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%
As of September 30, 1999 the Company was in default of certain covenants
relating to the Debentures, which subsequently were waived by the holder.
5. 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. In September 1999 the Company settled its dispute with
DiaSys. In November 1999, the Company defaulted under the terms of the
settlement agreement. As of September 30, 1999, the Company has accrued $325,000
of potential loss contingencies or related expenses in connection with the
default of the settlement agreement.
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.
7
<PAGE>
On November 16, 1998 the Company entered into three related agreements with
Bayer Corporation ("Bayer") involving the Company's blood slide maker, the HSM.
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 paid the Company a one-time licensing fee of $1,100,000. The
Licensing Agreement further provides for Bayer to pay the Company 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 HSM-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 HSMs or (b) five years after Bayer's initial
sale of an HSM. Bayer has yet to begin distributing the Company's product.
On November 23, 1998, the Company entered into an Invoice Purchase and Sale
Agreement with Finova Capital Corporation ("Finova") pursuant to which Finova
purchased certain invoices from the Company at an invoice purchase price of 95%
of the net amount of the invoice. Eighty percent (80%) of the purchase price is
payable to the Company at the time of the acceptance of the invoice by Finova
and the remainder of the purchase price is due to the Company upon payment of
the invoice by the account debtor. As of April 9, 1999, the Company had sold
invoices with an aggregate net amount of $1,057,000 to Finova.
On December 17, 1998, the Company entered into a distribution agreement with
Beckman-Coulter involving the Company's blood slide maker, the HSM. The
non-exclusive distribution agreement has a term of ten years and allows
Beckman-Coulter to obtain the HSM on a volume discount basis for re-sale to its
customers. Domestically IMI will have prime responsibility for customer support,
with Beckman-Coulter field support personnel providing installation and field
maintenance services on a fixed fee basis. In foreign markets, Beckman-Coulter
will have total responsibility for customer support. Beckman-Coulter will
recommend IMI as the sole source for consumables on all HSMs it sells,
domestically and overseas. As of September 30, 1999, Beckman-Coulter had
purchased two HSMs under the distribution agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed
financial statements and notes thereto appearing elsewhere in this report.
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 June 30, 1998 the Company completed the sale of $3,000,000 of 6% convertible
debentures, due June 30, 2001. See Footnote 5 of Notes to Condensed Financial
Statements in Part I, Item 1 of this Form 10-Q.
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. As of June 30, 1999, the Company also
received full repayment of all amounts due with respect to an advance which the
Company made to a former director, R. Wayne Fritzsche, by virtue of payments in
the amount of $290,000, plus a $163,563 credit offset in consulting fees due to
Mr. Fritzsche.
8
<PAGE>
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 had ninety
(90) calendar days in which to regain compliance with Nasdaq continued listing
requirements. If within this 90-day period the common stock complied with the
minimum closing bid price requirement of $1.00 for a minimum of ten (10)
consecutive days, and was in compliance with all other listing requirements,
continued listing would have occurred. However, due to the Company's inability
to demonstrate compliance with the $1.00 minimum bid price requirement on or
before January 28, 1999, the Company's securities were delisted on May 18, 1999.
Since May 18, 1999, the Company's securities have been traded on the OTC
Bulletin Board under the symbol "IMII." Such delisting constituted an event of
default under the Debentures, which was waived by the holder.
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 HSM-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. Bayer
has yet to begin distributing the Company's product.
In December 1998 the Company's new blood slide maker, HSM, was commercially
released. The HSM fully automates the process of blood slide making/staining.
The HSM was designed so that results from the hematology analyzers manufactured
by Bayer and Beckman-Coulter can trigger the automatic preparation of a slide,
providing the lab significant labor savings and improved operational efficiency.
Once prepared, the slides can be automatically reviewed by the MICRO21,
providing even greater labor savings and improved operational efficiency.
During April 1999, all of the Company's directors other than Mr. Fitzmorris
resigned from the Board of Directors primarily due to concerns regarding the
Company's financial condition and personal liability issues.
In April 1999, the Board of Directors of the Company implemented a plan of
salary deferrals pursuant to which all employees were offered the option of
deferring a percentage of their salary in exchange for options to purchase three
shares of the Company's common stock at $0.01 per share for each dollar of
salary deferred. Pursuant to such salary deferral plan, Messrs. Tyce M.
Fitzmorris, Jaime Pereira, and Ronald Hagner, the Company's executive officers,
elected to defer 60%, 100% and 40%, respectively, of their salary payments, and,
for the deferral of salary in April, May and June 1999, were issued options to
purchase approximately 662,000, 296,000 and 296,000 restricted shares of the
Company's common stock, respectively.
On April 21, 1999, the Company entered into a Loan and Security Agreement
("Agreement") with Advisco Capital Corp. ("Advisco") pursuant to which Advisco
agreed to lend to the Company from time to time, subject to certain conditions,
up to $2,000,000. All amounts, if any, advanced under the Agreement would be
secured by a lien on all of the Company's assets and property, including,
without limitation, all equipment, receivables, inventory and general
intangibles. As of September 30, 1999, no amounts were advanced under the
Agreement. In the second quarter of 1999, due to the failure of Advisco to make
any advances under the Agreement, the Company failed to make certain required
minimum monthly payments which constitutes an event of default under the
Agreement.
9
<PAGE>
In the second quarter of 1999, Mr. Fitzmorris, loaned the Company an aggregate
of $154,000 for working capital purposes. Such loans bear interest at a rate per
annum equal to the prime rate. In connection with such loans, Mr. Fitzmorris was
granted options for the purchase of 175,000 restricted shares of the Company's
common stock for nominal consideration.
On April 26, 1999, the Company borrowed $200,000 for working capital purposes.
Such loan was evidenced by a promissory note that matured on June 25, 1999, with
interest at 12% per annum, and was secured by certain receivables, inventory and
equipment. In connection with such loan, the Company issued to the lender
213,350 restricted shares of the Company's common stock for nominal
consideration. This loan was paid in full on June 25, 1999.
On June 15, 1999, the Company engaged Geneva Capital Corp. to render certain
financial advisory services to the Company. In consideration of such services,
the Company has agreed to pay Geneva a combination of cash and stock upon the
occurrence of certain events.
On June 25, 1999, the Company borrowed an aggregate of $310,000 to repay certain
maturing indebtedness and to pay certain outstanding lease and payroll expenses.
Subsequently, the Company borrowed an additional $200,000 for working capital
needs. Such loans are evidenced by promissory notes that mature on the earlier
to occur of certain events, and bear interest at the rate of 12% per annum. In
September 1999 the Company defaulted under the terms of the promissory notes.
The holders of the promissory notes filed legal action seeking to foreclose on
their respective security interests. In connection with such loans, the Company
issued an aggregate of 710,000 restricted shares of the Company's common stock
for nominal consideration (the "Shares"). The Company has agreed to file with
the Securities and Exchange Commission not later than November 15, 1999, and to
use its best efforts to cause to become effective, a registration statement
under the Securities Act of 1933, as amended, for the resale of the Shares. As
of November 15, 1999, the Company failed to file a registration statement.
In July 1999 the Company elected Patricia Meding, Stephen Blinn, and Bruce
Garcia as directors. There is a dispute between the Chairman of the Board and
the other Board members as to whether at this meeting an employment agreement
for the Chairman of the Board in his capacity as President and CEO and an
employment agreement for Ron Hagner as Vice President of Sales was also
ratified.
In August 1999 the Company elected William Carraway as a director; however,
there exists a dispute between the Chairman of the Board and the other Board
members as to whether Mr. Carraway was properly elected and whether Mr. Blinn
and Mr. Garcia resigned as directors in September 1999.
In August 1999 the Company offered for sale 80 units at $50,000 per Unit. Each
Unit consisted of 100,000 shares of Common Stock and Warrants to purchase 33,000
shares of Common Stock. The Offering commenced on August 1, 1999 and terminated
on September 30, 1999, due to the failure to sell the minimum amount.
In September 1999, the Company's bank account was garnished by a judgment
creditor. All monies in the account are being held by the bank pending receipt
of an order from the State Court in Florida.
In the third quarter several of the Company's trade vendors, certain employees,
and the Florida tax commissioner initiated legal actions against the Company.
Several other trade vendors have threatened legal action.
In November 1999, Ernst and Young LLP, the Company's auditors, terminated their
relationship with the Company.
The Company intends on filing for immediate protection under the federal
bankruptcy laws. The Company intends on implementing strategic steps to allow
IMI to remain viable until sufficient market penetration for the Company's
products is achieved. This plan includes: (i) personnel reductions, which
reduces monthly expenditures from approximately $1,100,000 to $60,000; and (ii)
arranging for post-petition financing to cover day-to-day operating expenses.
There can be no assurance though that such funds can be obtained on favorable
terms, if at all.
10
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998
Product sales were $466,229 for the three months ended September 30, 1999
compared with $633,808 for the three months ended September 30, 1998, a decrease
of $167,579. The decrease resulted from a reduction in sales for the quarter.
Cost of sales were $361,782 for the three months ended September 30, 1999
compared with $661,331 for the three months ended September 30, 1998, a decrease
of $299,549. The decrease corresponds with the decrease in sales volume.
During the three month period ended September 30, 1999 the Company recorded a
$900,000 provision for obsolete and excess inventory as a result of sales being
well below the Company's 1999 initial operations plan.
Selling, general and administrative expenses were $2,565,382 for the third
quarter of 1999 compared with $2,058,338 for the third quarter of 1998, an
increase of $507,044. The increase is the result of compensation expense of
$1,672,977 incurred for the three months ended September 30, 1999 for the
issuance of stock options below fair market value netted against cost savings
from operations.
Research and development expenses were $371,617 for the three months ended
September 30, 1999 compared with $1,275,259 for the three months ended September
30, 1998, a decrease of $903,642. Research and development expenses have
decreased due to resources being cut and development of new procedures,
technologies and products being put on hold.
Interest income was $0 for the three months ended September 30, 1999 compared
with $37,480 for the three months ended September 30, 1998, a decrease of
$37,480. The decrease was primarily due to the sale of investment securities to
fund operations. Interest expense was $63,602 for the three months ended
September 30, 1999, compared with $478,314 for the three months ended September
30, 1998. Interest expense represents interest on notes payable and the
Debentures and the amortization of the discounts and deferred financing costs
related to the issuance of the convertible debentures that were issued on
September 30, 1998.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998
Product sales were $1,530,018 for the nine months ended September 30, 1999
compared with $2,113,403 for the nine months ended September 30, 1998, a
decrease of $583,385. The decrease in sales for the nine months ended September
30, 1999 was primarily due to decreased demand for the Company's products offset
by $500,000 of licensing fees related to the Licensing Agreement with Bayer
Corporation.
Cost of sales was $1,509,495 for the nine months ended September 30, 1999
compared with $1,765,563 for the nine months ended September 30, 1998, a
decrease of $256,068. The decrease corresponds to the decreased sales volume.
Selling, general and administrative expenses were $6,234,677 for the nine months
ended September 30, 1999 compared with $7,009,123 for the comparable nine month
period, a decrease of $774,446. Selling, general and administrative expenses
decreased because of the staff and expense reductions implemented during the
past year, offset by an increase in compensation expense resulting from stock
options being granted at below fair market value.
Research and development expenses were $1,834,743 for the nine months ended
September 30, 1999 compared with $4,047,256 for the nine months ended September
30, 1998, a decrease of $2,212,513. Research and development expenses have
decreased due to resources being cut and development of new procedures,
technologies and products put on hold.
Interest income was $3,322 for the nine months ended September 30, 1999 compared
with $132,047 for the nine months ended September 30, 1998, a decrease of
$128,725. The decrease was primarily due to the sale of investment securities to
fund operations. Interest expense was $338,829 for the nine months ended
September 30, 1999, compared with $478,314 for the nine months ended September
30, 1998. Interest expense represents interest on notes payable and the
Debentures and the amortization of the discounts and deferred financing costs
related to the issuance of the convertible debentures that were issued on
September 30, 1998.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1999, net cash used in operating
activities of $821,654 was primarily due to the Company's operating loss, net of
non cash activities and increases in assets and liabilities.
For the nine months ended September 30, 1999, net cash provided by investing
activities of $86,684 was primarily the result of advances by related parties.
For the nine months ended September 30, 1999, net cash provided by financing
activities of $828,450 was the result of proceeds from the issuance of notes
payable.
During 1998 the Company experienced a reduction in revenue and increased costs
that continue to 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. These revenues have not yet been
realized. Accordingly the Company intends on filing for immediate protection
under the federal bankruptcy laws. The Company intends on implementing strategic
steps to allow IMI to remain viable until sufficient market penetration for the
Company's products is achieved. This plan includes: (i) personnel reductions,
which reduces monthly expenditures from approximately $1,100,000 to $60,000; and
(ii) arranging for post-petition financing to cover day-to-day operating
expenses. There can be no assurance though that such funds can be obtained on
favorable terms, if at all.
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. However, due to the Company's inability to demonstrate compliance with
the $1.00 minimum bid price requirement on or before January 28, 1999, the
Company's securities were delisted on May 18, 1999. Such delisting constituted
an event of default under the Debentures, which was waived by the holder. The
Company believes it is highly unlikely that the lender will loan the Company
additional monies.
As described above, in the second quarter of 1999, the Company borrowed an
aggregate of $675,000 to repay certain maturing indebtedness and for working
capital purposes.
As described above, on April 21, 1999, the Company entered into a Loan and
Security Agreement with Advisco pursuant to which Advisco agreed to lend to the
Company from time to time, subject to certain conditions, up to $2,000,000. As
of September 30, 1999, Advisco has not funded any loans under the Advisco Loan
Agreement on the basis that certain conditions precedent to such funding have
not been satisfied. In October 1999, the Company terminated the Loan and
Security Agreement.
Implementation of the Company's business strategy requires significant
additional 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.
12
<PAGE>
The project was completed in September 1999. 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
1999 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 immediate need for the Company to raise significant
additional capital to satisfy delinquent payroll, accounts payable and notes
payable obligations and to finance operations in the near-term, and the
inability to provide assurances that such capital will be available on terms
favorable to the Company, if at all; the delay in the Company's achievement of
substantial market penetration and widespread acceptance of the MICRO21 system;
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; the potential failure of the
Company's sales team, Bayer Corporation and Beckman-Coulter or other
distributors to sell HSMs in amounts sufficient to generate a meaningful
recurring revenue base associated with HSM consumables and to sell MICRO21
systems in amounts sufficient to help the Company achieve its sales goals;
uncertainty as to whether strategic partners will become involved in MICRO21
sales; uncertainty as to the ability of the Company to achieve sales and
marketing goals following implementation of the Company's revised sales
approach, including increased reliance on strategic partners for worldwide
sales/service and reductions in the Company's sales and marketing personnel, due
to the decrease in personnel, and the possible adverse impact on potential
customer perception of the Company; uncertainty due to industry consolidation
and customer budget processes and restrictions; the possibility that agreements
with strategic partners will not result in significant improvements in results;
the uncertainty as to the actual amount of damages which the Company will be
obligated to pay DiaSys due to its default of the Diasys settlement agreement;
the risk that expansion of sales in foreign markets may be possible only through
distributors, such as Coulter, at transfer prices too low for favorable
profitability; the expense of product development and the related delay and
uncertainty as to receipt of any requisite FDA clearance or other government
clearance or approval for new products and new procedures for use on the MICRO21
system; and the uncertainty of profitability and sustainability of revenues and
profitability.
13
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) No exhibits are filed as of part of this report.
(b) The Company filed a Form 8-K on November 17, 1999, which disclosed a
change in certifying accountant.
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTELLIGENT MEDICAL IMAGING, INC.
By: /s/ TYCE M. FITZMORRIS Date: November 22, 1999
---------------------------
Tyce M. Fitzmorris
President and Chief Executive Officer
15
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