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: JUNE 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 AUGUST 12, 1999, THERE WERE OUTSTANDING 13,996,021 SHARES OF COMMON STOCK,
PAR VALUE $.01, OF THE REGISTRANT.
================================================================================
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
QUARTER ENDED JUNE 30, 1999
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
BALANCE SHEETS AS OF
JUNE 30, 1999 AND DECEMBER 31, 1998 3
STATEMENTS OF OPERATIONS FOR THE SIX
MONTHS ENDED JUNE 30, 1999 AND 1998 4
STATEMENTS OF CASH FLOWS FOR
THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 5
NOTES TO FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
PART II - OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 18
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTELLIGENT MEDICAL IMAGING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1999 1998
(unaudited)
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 113,053 $ 31,923
Accounts receivable, net of allowance for uncollectable
accounts of $40,000 232,772 1,002,781
Notes receivable -- 86,684
Inventory 1,971,423 3,157,537
Prepaid expenses 48,175 67,408
Current portion of investment in sales-type leases 497,000 497,000
------------ ------------
Total current assets 2,862,423 4,843,333
Long-term portion of investment in sales-type leases 451,808 451,808
Revenue equipment, net 415,093 544,215
Property and equipment, net 1,161,478 2,556,347
Other assets 41,779 52,650
Deferred financing costs, net 277,603 297,000
------------ ------------
$ 5,210,184 $ 8,745,353
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,530,181 $ 1,159,737
Accrued salaries and benefits 831,851 372,149
Notes payable 890,942 335,493
Other accrued liabilities 992,107 258,671
Due to factor -- 320,000
Current portion of amount due to financing companies 497,000 497,000
Current portion of capital lease obligation 14,371 30,562
Current portion of deferred revenue 106,907 318,381
------------ ------------
Total current liabilities 4,863,359 3,291,993
Deferred revenue 521,957 412,423
Amount due to financing companies 451,808 451,808
Capital lease obligation 45,711 54,719
Convertible debentures, net of unamortized discount 2,505,397 2,788,000
------------ ------------
Total long-term liabilities 3,524,873 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 June 30, 1999
and 11,631,486 shares at December 31, 1998 126,569 116,315
Additional paid-in capital 47,683,518 44,416,708
Deferred compensation (1,728,524) (486,000)
Accumulated deficit (49,259,611) (42,300,613)
------------ ------------
Total stockholders' equity (3,178,048) 1,746,410
------------ ------------
Total liabilities and stockholders' equity $ 5,210,184 $ 8,745,353
============ ============
</TABLE>
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales:
Product sales $ 464,429 $ 437,297 $ 1,063,789 $ 1,479,595
Licensing fees -- -- 500,000 --
------------ ------------- ------------- -------------
Total Sales 464,429 437,297 1,563,789 1,479,595
Cost of sales 546,446 342,940 1,147,713 1,104,232
Inventory provisions 1,000,000 -- 1,000,000 --
------------ ------------- ------------- -------------
Gross profit (loss) (1,082,017) 94,357 (583,924) 375,363
------------ ------------- ------------- -------------
Operating expenses:
Selling, general and administrative 2,260,170 2,601,060 3,669,295 4,950,785
Research and development 581,741 1,354,972 1,463,126 2,771,997
Restructuring charges 913,982 -- 913,982 --
------------ ------------- ------------- -------------
Total operating expenses 3,755,893 3,956,032 6,046,403 7,722,782
------------ ------------- ------------- -------------
Loss from operations (4,837,910) (3,861,675) (6,630,327) (7,347,419)
------------ ------------- ------------- -------------
Other income (expense):
Investment and interest income 308 26,409 3,322 94,567
Interest expense (243,356) -- (275,197) --
Discount on debenture (28,398) -- (56,796) --
------------ ------------- ------------- -------------
Other income (expense) (271,446) 26,409 (328,671) 94,567
------------ ------------- ------------- -------------
Net loss $ (5,109,356) $ (3,835,266) $ (6,958,998) $ (7,252,852)
============ ============ ============= =============
Loss per common share
--basic and diluted: (0.41) (0.33) (0.58) (0.64)
============ ============ ============= =============
Weighted average common
shares outstanding 12,382,034 11,463,386 12,048,097 11,245,726
============ ============ ============= =============
</TABLE>
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(6,958,998) $(7,252,852)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,533,266 593,270
Amortization on deferred compensation 114,118 --
Inventory provisions 1,000,000 --
Services received in exchange for common stock
and stock options 1,637,819 46,626
Changes in operating assets and liabilities:
Accounts receivable 450,009 443,891
Inventory 186,114 132,251
Prepaid expenses 19,233 (66,217)
Investment in sales-type leases -- 234,359
Other assets 10,871 (32,326)
Revenue equipment 10,122 (134,746)
Accounts payable 370,444 (13,905)
Accrued salaries and benefits 459,702 28,558
Other accrued liabilities 733,436 (22,251)
Deferred revenue (101,940) 146,519
------------- -------------
Net cash used in operating activities (535,804) (5,896,823)
------------- -------------
INVESTING ACTIVITIES
Purchases of property and equipment -- (326,322)
Sale of investments held for sale -- 6,167,342
Advances to related parties 86,684 (622,267)
------------- -------------
Net cash provided by investing activities 86,684 5,218,753
------------- -------------
FINANCING ACTIVITIES
Proceeds from sale of common stock -- 92,352
Proceeds from issuance of notes payable 555,449 --
Repayment capital leases (25,199) --
Convertible debentures --
2,800,000
------------- -------------
Net cash provided by financing activities 530,250 2,892,352
------------- -------------
Net (decrease) increase in cash 81,130 2,214,282
Cash at beginning of period 31,923 853,164
------------- -------------
Cash at end of period $ 113,053 $ 3,067,446
============= =============
Supplemental Information
Stock purchase warrants issued for financing costs $ -- $ 116,400
============= =============
Conversion of convertible debentures to common stock $ 282,603 $ --
============= =============
Inventory transferred to property and equipment $ -- $ 612,262
============= =============
</TABLE>
<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,
<PAGE>
1998. Operating results for the six month period ended June 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 six
months ended June 30, 1999. The Company has taken and continues to take
significant steps to reduce spending and capital expenditures. The Company is
currently working to raise capital to assist in funding the Company's currently
proposed operating activities for the next twelve months. However, a significant
shortfall from the Company's current operating plan, or the inability to raise
additional capital would unfavorably impact the Company's cash flow. There can
be no assurances that the Company could obtain the necessary financing.
The Company initiated actions to restructure its operations and recorded
restructuring and other charges totaling $1,913,982 during the six months ended
June 30, 1999. This charge included $1,000,000 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 $2,713,284 of which $1,356,642
is included in operating expenses for the six month period ending June 30, 1999.
The Company has implemented strategic steps in an effort to remain viable until
sufficient market penetration for the Company's products is achieved. This plan,
which includes personnel reductions, has reduced monthly expenditures from
approximately $1,100,000 in July 1998 to approximately $280,000 as of July 15,
1999, with the reduction in extraordinary development expenditures coinciding
with the completion of the HSM instrument and across the board reductions in the
Company's operating costs.
The Company has also reduced 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.
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 June 30, 1999 the Company is delinquent in its payroll obligations
(including wages, severance pay and accrued vacation pay) in the amount of
approximately $642,000. The Company is also currently delinquent in the payment
of its accounts payable. The Company's failure to pay its employees will
adversely affect the Company's efforts to maintain a competent and capable sales
and marketing staff. The Company will continue to lose employees unless it can
raise capital promptly. In addition, the Company's inability to timely pay its
accounts payable has had an adverse effect on the Company's
<PAGE>
relationship with its vendors, resulting in some vendors refusing to ship
products or to provide services to the Company. 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.
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
<PAGE>
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 June 30, 1999
interest payable relating to the Debentures of $169,650 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
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 June 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:
<PAGE>
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 June 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. 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, 1999, the Company has accrued
$170,000 of potential loss contingencies or related expenses in connection with
this Arbitration. The Company believes that it will prevail in the arbitration.
However, there can be no assurance that the Company will prevail in the
arbitration or in its counterclaim asserted against DiaSys, or that any
resolution of the dispute, which is expected to occur within one year, will not
have a material adverse effect on the Company's liquidity, financial condition
and results of operations.
On March 7, 1997, the Company entered into a settlement agreement with
International Remote Imaging Systems, Inc. ("IRIS") effective March 1, 1997.
Under the settlement agreement, IRIS granted the Company a fully paid,
royalty-free license for worldwide direct sales of the MICRO21 system by the
Company. The Company agreed to pay a 4 percent royalty on future sales of the
MICRO21 system through third-party distributors in the United States. The
Company does not believe the 4 percent royalty on U.S. sales through
distributors will significantly adversely impact the Company's results of
operations during the term of the license. This license and royalty obligation
expire in September 2000, when the IRIS patents that are the subject of the
license expire. The Company has the right, but not the obligation, to request a
license from IRIS for sales through third-party distributors outside of the
United States; however, the Company does not believe that the MICRO21 system
infringes any foreign patents held by IRIS and the Company has no current plans
to request such a license.
<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.
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 April 9, 1999, Beck an-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.
<PAGE>
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 5 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. 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.
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.
<PAGE>
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 June 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.
In the second quarter of 1999, Mr. Fitzmorris, loaned the Company an aggregate
of $175,000 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.
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 connection
with such loans, the Company issued an aggregate of 310,000 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
<PAGE>
efforts to cause to become effective, a registration statement under the
Securities Act of 1933, as amended, for the resale of the Shares.
The Company is implementing strategic steps so as to allow IMI to remain viable
until sufficient market penetration for the Company's products is achieved. This
plan, which includes personnel reductions, reduces monthly expenditures from
approximately $1,100,000 to $280,000 with the reduction in extraordinary
development expenditures coinciding with the completion of the HSM and USM
instruments and across the board reductions in IMI's operating costs. In
connection with these cost reductions, the Company decided to discontinue its
operations in Europe and, instead, rely on qualified distributors. The IMI
Europe office was officially closed on July 31, 1998.
The Company is moving forward to identify and implement reductions in sales
expenditures, while emphasizing a sales process that better targets prospective
customers who are closest to making a purchase decision. The reduction of sales
expenditures is in furtherance of the strategy of focusing on specific customer
groups and markets and the de-emphasis on providing total market coverage to all
types of prospects. The Company is implementing a plan that will segment the
market according to product fit and geographic location.
During the fourth quarter of 1997, the Company began to offer a short-term
rental program which provides for monthly or annual rentals of the MICRO21
system. The Company believes that this program will augment its sales and
long-term lease programs by giving potential customers the ability to fund a
MICRO21 with operating funds, thereby overcoming potential cost barriers
associated with limited or non-existent capital expenditure funds. Expansion of
the short-term rental program may require that the Company secure additional
financing.
The Company continues to explore a variety of alternatives for increasing and
improving its sales and distribution capacity (including actively seeking
alliances with well-established manufacturers and distributors) and raising
sufficient capital to fund its operations. Implementation of the Company's
business strategy requires significant expenditures of capital. The Company is
currently seeking additional funds through debt or equity. There can be no
assurance that such funds can be obtained on favorable terms, if at all.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999
COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Product sales were $464,429 for the three months ended June 30, 1999 compared
with $437,297 for the three months ended June 30, 1998, a slight increase of
$27,132. The increase resulted from a minimal amount of additional sales for the
quarter.
Cost of sales were $546,446 for the three months ended June 30, 1999 compared
with $342,940 for the three months ended June 30, 1998, an increase of $203,506.
The primary reason for the increase is a result of accelerated depreciation on
revenue equipment and certain one-time charges.
During the three month period ended June 30, 1999 the Company recorded a
$1,000,000 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 $2,260,170 for the second
quarter of 1999 compared with $2,601,060 for the second quarter of 1998, a
decrease of $340,890. Selling, general and
<PAGE>
administrative expenses decreased because of the staff and expense reductions
implemented early in the third quarter of 1998 and have continued into 1999.
Research and development expenses were $581,741 for the three months ended June
30, 1999 compared with $1,354,972 for the three months ended June 30, 1998, a
decrease of $773,231. 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 $308 for the three months ended June 30, 1999 compared with
$26,409 for the six months ended June 30, 1998, a decrease of $26,101. The
decrease was primarily due to the sale of investment securities to fund
operations. Interest expense was $243,356 for the three months ended June 30,
1999, compared with $0 for the three months ended June 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 June 30, 1998.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Product sales were $1,063,789 for the six months ended June 30, 1999 compared
with $1,479,595 for the six months ended June 30, 1998, a decrease of $415,806.
The decrease in sales for the six months ended June 30, 1999 was primarily due
to decreased demand for the Company's products and the $500,000 of licensing
fees related to the Licensing Agreement with Bayer Corporation.
Cost of sales was $1,147,713 for the six months ended June 30, 1999 compared
with $1,104,232 for the six months ended June 30, 1998, a slight increase of
$43,481. The primary reason for the increase is a result of accelerated
depreciation on revenue equipment and certain one-time charges.
Selling, general and administrative expenses were $3,669,295 for the six months
ended June 30, 1999 compared with $4,950,785 for the comparable six month
period, a decrease of $1,281,490. Selling, general and administrative expenses
decreased because of the staff and expense reductions implemented early in the
third quarter of 1998 and have continued into 1999.
Research and development expenses were $1,463,126 for the six months ended June
30, 1999 compared with $2,771,997 for the six months ended June 30, 1998, a
decrease of $1,308,871. 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 six months ended June 30, 1999 compared with
$94,567 for the six months ended June 30, 1998, a decrease of $91,245. The
decrease was primarily due to the sale of investment securities to fund
operations. Interest expense was $275,197 for the six months ended June 30,
1999, compared with $0 for the six months ended June 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 June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1999, net cash used in operating activities of
$535,804 was primarily due to the Company's operating loss, net of increases in
assets and liabilities.
<PAGE>
For the six months ended June 30, 1999, net cash provided by investing
activities of $86,684 was primarily the result of advances by related parties.
For the six months ended June 30, 1999, net cash provided by financing
activities of $530,250 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. The Company's plans also contemplate continuing the cost control
measures implemented in 1998 and cost and personnel reductions, which have
reduced monthly expenditures from approximately $1,100,000 to $280,000. The
Company's plans also contemplate seeking alternative sources of financing and
exploring strategic alternatives. During 1998, the Company has introduced two
new products, a Hematology Slide Maker and Urine Slide Maker, and two additional
procedures which management believes will offer significant opportunities for
expanding the Company's potential customer base. In addition, the Company is
currently negotiating with a company for distribution and licensing agreements
associated with sales of the Company's products. At June 30, 1999, the Company's
remaining cash balance totaled $113,053. Although management believes that its
plan will be successful, there can be no assurance that the Company will be
successful in its attempt to expand revenue, secure additional financing or
consummate the distribution and licensing agreements.
As described above, in June 1998, the Company issued $3 million of convertible
debentures. An additional $7,000,000 million of financing may be available to
the Company, but the availability of such financing is at the discretion of the
lender after consideration of the trading characteristics of the common stock,
the lender's exposure to the Company at that time, the absence of any material
adverse change in the Company's financial condition or operations and the
Company's continued compliance with the terms of the financing. The debentures
include a requirement that the Company's common stock be listed for trading by
Nasdaq. 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.
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 June 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.
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
<PAGE>
systems are attempting to address the Year 2000 issue. The Company has
substantially completed an assessment of its computer and embedded systems and
determined that it needed to modify or replace portions of its software so that
its computer systems will function properly with respect to dates in the year
2000 and thereafter. While the Company believes its process is designed to be
successful, because of the complexity of the Year 2000 issue, and the
interdependence of organizations using computer systems, it is possible that the
Company's efforts, or those of third parties with whom the Company interacts,
will not be successful or satisfactorily completed in a timely fashion.
The Company estimates that the total cost that it will incur in connection with
attempting to address the Year 2000 issue, including assessment development of a
modification or replacement plan, purchase of new hardware and software and
implementation of the modification or replacement plan or software, will be
approximately $50,000. To date, the Company has incurred approximately $35,000
(of which $-0- has been capitalized and $35,000 expensed). The Company funded
the costs incurred to date through cash flow from operations and expects to fund
future costs through cash flow from operations.
The project is estimated to be completed by September 1999, which is prior to
any anticipated impact on the Company's operating systems. The Company believes
that with modifications to existing software, conversions to new software and
replacement or modification of certain embedded systems, the Year 2000 issue
will not pose significant operational problems. However, if such modifications
and conversions are not made, or are not completed on a timely basis, the Year
2000 issue would have a material adverse impact on the Company's business,
financial condition and results of operations. The estimated costs of the
project and the date on which the Company believes necessary modifications and
replacements to address the Year 2000 issue will be completed are based on
management's estimates, which were derived utilizing numerous assumptions of
future events, including the continued availability of certain resources and
other factors. As the Company progresses in addressing the Year 2000 issue,
estimates of costs could change, and there can be no assurance that the Company
will not experience cost overruns or delays in connection with its plan for
modifying or replacing systems and programs. In addition, it may not be possible
to adequately assess the impact of the failure of third parties to adequately
address the Year 2000 issue. As a result, actual operating results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained to address the Year 2000 issue, the ability to locate and
correct all relevant computer codes and similar uncertainties.
Due to the fact that the Company believes it has secured sufficient resources to
address the Year 2000 issue as it relates to its computer systems, the
assessment of embedded systems is complete and the Company does not believe that
contingency planning is warranted at this time. The assessment of third parties
external to the Company is underway, and the results of this assessment, when
completed, may reveal the need for contingency planning at a later date. The
Company will regularly evaluate the need for contingency planning based on the
progress and findings of the Year 2000 project.
FORWARD LOOKING STATEMENTS
Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements that are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The Company cautions
that a number of important factors could cause the Company's actual results for
1999 and beyond to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company.
<PAGE>
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 pursuant to a pending decision on damages by an
arbitration panel; 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.
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) No Reports on Form 8-K were filed during this period
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: August 15, 1999
----------------------------------------
Tyce M. Fitzmorris
President and Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements of the Comapany for the fiscal year ended
December 31, 1998, and for the three and six months ended June 30, 1998 and
1999, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000930090
<NAME> Intelligent Medical Imaging, Inc.
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<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 DEC-31-1999
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