NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -
BASIS OF PRESENTATION AND CONSOLIDATION:
The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X for smaller reporting companies and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated financial statements include the accounts of Magna-Lab Inc. and its wholly owned subsidiary, Cardiac MRI, Inc. (collectively, the “Company”) and all significant intercompany transactions and balances have been eliminated in consolidation. All adjustments which are of a normal recurring nature and, in the opinion of management, necessary for a fair presentation have been included. These condensed consolidated financial statements should be read in conjunction with the more complete information and the Company’s audited consolidated financial statements and related notes thereto included in the Company's annual report on Form 10-K for the year ended February 29, 2016. The operating results for the three months ended May 31, 2016 are not necessarily indicative of the results that may be expected for the year ending February 28, 2017.
NOTE 2
- DISCUSSION OF THE COMPANY'S ACTIVITIES AND GOING CONCERN CONSIDERATION:
Company Activities -
The Company is focused on engaging in a “reverse merger” transaction with an unrelated business that would benefit from the Company’s public reporting status. Additional activities have included preserving cash, making settlements with creditors, attempting to raise capital and continuing the Company’s public reporting.
The Company was previously engaged in research, development and commercialization activities until it ceased such activities during the period September 2002 through March 2003. The Company’s efforts to raise additional capital or enter into a strategic arrangement in order to complete commercialization of its cardiac diagnostic Illuminator products and development of its Artery View product or to seek other means to realize value through sale, license or otherwise have been unsuccessful.
Going Concern Consideration
- As indicated in the accompanying condensed consolidated financial statements, at May 31, 2016, the Company had approximately $3,000 of cash and approximately $1,292,000 in negative working capital and stockholders’ deficit and negative cash flows from operations. For the three months ended May 31, 2016, the Company had a net loss of approximately $34,000 and utilized approximately $8,000 of cash in operating activities. Further, losses are continuing subsequent to May 31, 2016. These factors, among others, indicate that the Company is in need of additional financing or a strategic arrangement in order to continue its planned activities for the fiscal year that began on March 1, 2016. The Company’s plans to deal with this uncertainty are described above in “Company Activities.” Management’s plans to raise capital, enter into a strategic arrangement or sell or merge with an unrelated business have not been successful to date and there can be no assurance that management’s plans can be realized at all. While a shareholder provided the Company with an additional loan subsequent to May 31, 2016 (Note 4), such amounts are not sufficient to continue operations for the coming twelve months and the Company has no commitment for further financing. These factors, among others, raise substantial doubt about the Company’s ability to continue operations as a going concern. No adjustments have been made in the accompanying condensed consolidated financial statements to the amounts and classification of assets and liabilities which could result should the Company be unable to continue as a going concern.
NOTE 3 –
NET LOSS PER COMMON SHARE:
The Company complies with the accounting and reporting requirements of U.S. GAAP with respect to computing its net loss per common share. Net loss per common share is computed based on the weighted average number of Class A Common and Class B Common shares outstanding.
Basic loss per share excludes dilution and is computed by dividing loss available to common stockholders by the weighted average common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Since there are no options, warrants or derivative securities outstanding, basic and diluted loss per share were the same for the three month periods ended May 31, 2016 and 2015.
NOTE 4 –
NOTES PAYABLE – RELATED PARTY:
Notes payable include 12% unsecured notes payable to the Company’s principal stockholder, Magna Acquisition LLC (“MALLC”) in the aggregate principal amount of $479,000, plus approximately $355,000 of interest accrued. Such notes become due 120 days after issuance and, as such, approximately $479,000 principal amount of such notes are overdue at May 31, 2016. The notes that are overdue bear interest at 15% per year subsequent to their maturity date.
On June 7, 2016, MALLC loaned an additional $25,000 to the Company on the same terms as above.
The Company intends to make a proposal to this principal stockholder to convert all amounts outstanding to them (including overdue amounts) into common stock of the Company.
NOTE 5 –
ACCOUNTS PAYABLE AND ACCRUALS:
Approximately $106,000 of accounts payable relates to intellectual property counsel fees and costs including approximately $68,000 of which that has been paid by and is therefore due to the Company’s Chairman and President for payments he has made on the Company’s behalf to preserve certain intellectual property rights. This officer ceased making such payments several years ago and, as such, the underlying intellectual property became compromised.
Accrued expenses and other current liabilities includes approximately $18,000 payable to a third party, guaranteed by our principal stockholder, for amounts paid to an account payable in October 2007 on our behalf. This amount is repayable if the proposed merger transaction with this party was not completed. This party subsequently merged with a third party and abandoned its possible transaction with the Company, however there has not been a demand for repayment of this amount. The Company believes it would be entitled to an offset for recovery of certain costs from this third party associated with that proposed transaction pursuant to understandings between the parties.
Some of the amounts recorded as accounts payable may have passed the statute of limitations for purposes of the vendor seeking recovery of such monies. The Company has not undertaken a formal study to evaluate recorded payables past the statute of limitations for purposes of possible write-off of such payables. See also Notes 3 and 8 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended February 29, 2016 for other information on outstanding liabilities and related matters.
There was no activity in the restructuring accrual for the pre-1997 activities during the three months ended May 31, 2016 or 2015. The Company periodically adjusts the remaining accrual based on the status of the matters and activity given the passage of time.
NOTE 6 –
STOCK-BASED COMPENSATION:
In accordance with GAAP, the Company recognizes the cost of employee services received in exchange for awards of equity instruments in the financial statements based on the grant date fair value of those awards. Stock awards to consultants and other non-employees are accounted for based on an estimate of their fair value at the time of grant. The fair value of each option or warrant grant under GAAP is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions: risk free interest rate of 5%; no dividend yield; expected option lives of five to nine years and expected volatility in excess of 200%.
In April 2004, the Board of Directors agreed to reserve 90,000 shares of class A common stock for issuance to directors and management in the event that their efforts result in Board approval of a merger or financing transaction. The criteria for recognition of this share compensation was met on July 24, 2008 and the Company recorded stock-based compensation expense of approximately $10,000 reflecting the fair value of the 90,000 shares at the date of entry into the agreement at the closing bid price of the Company’s stock. Because of cash constraints, the Company has not been able to issue such shares. However, for accounting purposes, the Company has accounted for such shares as though they have been issued.
NOTE 7 –
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS:
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern(“ASU 2014-15”). ASU 2014-15 provides guidance on management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company's ability to continue as a going concern within one year form the date the financial statements are issued. The amendments in ASU 2014-15 are effective for annual reporting periods ending after December 15, 2016 and for annual and interim periods thereafter. Early adoption is permitted. The Company has adopted the methodologies prescribed by ASU 2014-15, and does not anticipate that the adoption of ASU 2014-15 will have a material effect on its financial position or results of operations.
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying condensed consolidated financial statements.