NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
- BUSINESS DESCRIPTION
AND GOING CONCERN:
Company Activities -
Magna-Lab Inc. and Subsidiary (collectively, the “Company”) is focused on engaging in a “reverse merger”
transaction with an unrelated business that could benefit from the Company’s public reporting status. Additional activities
have included preserving cash, attempting to raise capital to support its activities and continuing its 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 since the Company was unable to secure financing to support its planned activities. The Company’s efforts
to enter into a strategic arrangement or to seek other means to realize value for its cardiac diagnostic technologies through sale,
license or otherwise have been unsuccessful and therefore, in January 2017, the Company sold such technology to its President and
CEO in exchange for relief from certain liabilities.
Going Concern Consideration
- As indicated in the accompanying
consolidated financial statements, at February 28, 2019, the Company had approximately $4,000 in cash and approximately $1,664,000
in negative working capital and stockholders’ deficit. For the year ended February 28, 2019, the Company had a net loss of
approximately $148,000 and utilized approximately $32,000 in cash for operations. Further, losses are continuing subsequent to
February 28, 2019. These factors, among others, indicate that the Company is in need of additional financing in order to continue
its planned activities for the fiscal year that began on March 1, 2019. The Company’s plans to deal with this uncertainty
are described above in “Company Activities.” Management’s plans to raise capital 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. These factors,
among others, indicate that the Company may be unable to continue operations as a going concern. No adjustment has been made in
the accompanying 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 2
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation –
The consolidated financial
statements present the financial position, results of operations and cash flows of the Company in accordance with accounting principles
generally accepted in the United States of America (“US GAAP”). All dollar amounts are rounded to the nearest thousand
dollars.
Principles of Consolidation –
The consolidated
financial statements include the accounts of Magna-Lab Inc. and its wholly-owned subsidiary, Cardiac MRI, Inc. All significant
intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents -
The
Company considers all highly liquid instruments with original maturities of three months or less when acquired, to be cash equivalents. The
Company had no cash equivalents at February 28, 2019 and 2018.
Income Taxes
– The Company complies with the accounting
and reporting requirements of US GAAP in accounting for income taxes. The Company uses the asset and liability approach to financial
reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement
and tax basis of assets and liabilities that will result in future taxable or deductible amounts and are based on enacted tax laws
and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred income tax assets to the amount expected to be realized.
The Company also complies with US GAAP
in accounting for uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is “more
likely than not” that the position is sustainable based on its technical merits. Based on its analysis, the Company has determined
that it has not incurred any liability for unrecognized tax benefits as of February 28, 2019 and 2018. However, the Company's
conclusions may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses
of and changes to tax laws, regulations and interpretations thereof. The Company recognizes interest and penalties related
to unrecognized tax benefits in interest expense and other expenses, respectively. No interest expense or penalties have
been recognized as of and for the years ended February 28, 2019 and 2018. Generally, the Company is no longer subject to
income tax examinations by major taxing authorities for years before 2015.
Net Loss Per Share
– The Company complies with
the accounting and reporting requirements of US GAAP in reporting its earnings per share. Net loss per 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 year. 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. In the
fiscal years ended February 28, 2019 and 2018, there were no options, warrants or derivative securities outstanding. Therefore,
basic and diluted loss per share were the same for the fiscal years ended February 28, 2019 and 2018.
Fair Value of Financial Instruments -
The
fair value of the Company's assets and liabilities, which qualify as financial instruments under US GAAP, approximate the carrying
amounts presented in the consolidated balance sheets.
Use of Estimates and Assumptions
- The preparation of
consolidated financial statements in accordance with US GAAP requires the Company’s management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
can, and in many cases will, differ from those estimates.
Stock-Based Compensation –
The Company complies
with the US GAAP accounting and reporting requirements for its Share-Based Payments. US GAAP requires companies to recognize the
cost of employee services received in exchange for awards of equity instruments in the consolidated 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 and, in the instance of options and warrants, are based upon
a Black-Scholes option valuation model.
The fair value of each option grant is estimated on the date
of the grant using the Black-Scholes option pricing model with generally the following weighted-average assumptions: risk free
rate of 5%; no dividend yield; option lives of five to nine years and expected volatility in excess of 200%.
Effect of Recent Accounting Pronouncements -
The Company
has evaluated recent accounting pronouncements and believes that none of them will have a material effect on the Company’s
consolidated financial statements.
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 consolidated
financial statements.
Subsequent Events –
Management has evaluated subsequent
events to determine if events or transactions occurring through the date the consolidated financial statements were available to
be issued, require potential adjustment to or disclosure in the consolidated financial statements and has concluded that all such
events that would require recognition or disclosure have been recognized or disclosed.
NOTE 3 –
ACCOUNTS PAYABLE AND ACCRUALS:
During the year ended Fevruary 28, 2018, accrued liabilities
and accounts payable to various parties totaling approximately $74,000 were settled by our principal stockholder or its affiliates
and such amounts are now payable to that principal stockholder (MALLC, see Note 4).
The Company intends to make a proposal to various of its significant
outstanding creditors to convert all amounts outstanding to them into common stock of the Company.
At February 28, 2019 and 2018, accrued expenses includes approximately
$18,000 payable to a third party, guaranteed by our principal shareholder, for amounts paid to an account payable in October 2007
on our behalf. This amount was repayable if the proposed merger transaction with this party was not completed. This party subsequently
merged with another entity and abandoned its possible transaction with the Company, however there has not been a demand for repayment
of this amount.
At February 28, 2019 and 2018, accounts payable also includes
approximately $14,000 related to certain pre-1997 accounts payable (Note 8).
Some of the amounts recorded as accounts payable or accrued
liabilities may have passed the statute of limitations for purposes of the counterparty 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.
NOTE 4 –
NOTES PAYABLE – RELATED PARTY:
During the two years ended February 28, 2019, the Company has
received an aggregate of approximately $89,000 of proceeds under notes payable to its majority shareholder, Magna Acquisition LLC
(“MALLC”) and MALLC has paid approximately $74,000 of liabilities of the Company on our behalf, raising the principal
amount outstanding under such notes to an aggregate of $687,250 and $653,750, respectively, (plus accrued interest of approximately
$598,000 and $497,000, respectively) at February 28, 2019 and 2018. Such notes are unsecured and mature, by their terms, 120 days
from issuance. At February 28, 2019 and 2018, approximately $679,650 and $566,000, respectively, face amount of such notes were
beyond their maturity date and therefore due on demand. Such notes bear interest at 12% per year and such interest increases to
15% per year once the note is past its due date. Interest expense on such notes aggregated approximately $101,000 and $86,000 in
the years ended February 28, 2019 and 2018, respectively.
Subsequent to February 28, 2019 on May
20, 2019 a director of the Company who is also the managing member of MALLC loaned an additional approximately $10,000 to the Company
on the same terms as above except that the interest rate is 10% initially and increases to 12% upon default.
The Company intends to make a proposal to MALLC and to the director
who loaned money to the Company in May 2019 to convert all amounts outstanding to them (including overdue amounts) into common
stock of the Company.
NOTE 5
- STOCKHOLDERS' DEFICIT:
Description of Class A and Class B Common Stock
- The
Class A and Class B common stock are identical in most respects except that: (i) the Class B common stock has five votes per share
and the Class A common stock has one vote per share and, (ii) each share of Class B common stock is convertible into one share
of Class A common stock and requires conversion to Class A for sale or transfer to a non-Class B stockholder and (iii) by understanding
with an underwriter, no more Class B common stock can be issued. Holders of Class A and Class B common stock have equal ratable
rights to dividends and, upon liquidation, are entitled to share ratably, as a single class, in the net assets available for distribution.
Shares of Class A and Class B common stock are not redeemable, have no preemptive rights or cumulative voting power, and vote as
one class, except in certain circumstances, in matters before the shareholders. At February 28, 2019 and 2018, 8,183 class B shares
have been converted to Class A shares.
Under an agreement with an underwriter, 10,000 shares of Class
B common stock were forfeited by the holders based on performance measures that were not met. During the fiscal year ended February
28, 2001, 2,698 of such forfeited shares were inadvertently released by the Company’s transfer agent; 1,376 of which have
been returned. The Company has not been successful in recovering the remaining 1,322 shares.
Principal Shareholder and Related Party Relationship -
In a series of transactions consummated on October 31, 2005, MALLC acquired an aggregate of 607,727 shares of Class A Common Stock,
representing approximately 56% of the Company’s issued and outstanding shares of Class A Common Stock at that time, and approximately
55% of the voting power represented by the Company’s issued and outstanding Common Stock at that time. Two directors of the
Company and the Company’s Chief Financial Officer serve as sole managers of MALLC, with the ability to vote and dispose of
such shares owned by MALLC by majority vote. See also Note 4.
Stock Grant -
In July 2008 the Company recorded stock-based
compensation expense of approximately $10,000 reflecting the fair value of 90,000 Class A common shares that were issuable to management
at that time 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.
Stock Options and Warrants
– There were no stock
options or warrants issued or outstanding during the fiscal years ended February 28, 2019 and 2018. The Company’s Stock Option
Plan has expired.
NOTE 6
- INCOME TAXES:
On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”),
which significantly modified U.S. corporate income tax law, was signed into law. The TCJA contains significant changes to corporate
income taxation, including but not limited to the reduction of the corporate income tax rate from a top marginal rate of 35% to
a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of earnings (except for certain small businesses),
limitation of the deduction for net operating losses to 80% of current year taxable income and generally eliminating net operating
loss carrybacks, allowing net operating losses to carryforward without expiration, one-time taxation of offshore earnings at reduced
rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions),
immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing
many business deductions and credits (including changes to the orphan drug tax credit and changes to the deductibility of research
and experimental expenditures that will be effective in the future).
The Company has not recorded any provisional adjustments in
the financial statements in accordance with its current understanding of the TCJA and guidance currently available as of this filing.
At February 28,
2019 and February 29, 2018, the Company had net operating loss carryforwards of approximately $14.0 million and $13.9 million,
respectively, to offset future income subject to tax. These resulted in an estimated $3.0 million and $2.9 million, respectively,
of federal and $0.5 million and $0.5 million, respectively, of state deferred tax assets at February 28, 2019 and February 29,
2018. A full valuation allowance has been established for these deferred tax assets since their realization is considered unlikely.
The difference between the tax provision at the federal corporation tax statuary rate and the rate (zero) included in the Company’s
consolidated financial statements occurs because the Company has never had any taxable income nor the ability to utilize loss carryforwards.
Changes
in the ownership of a majority of the fair market value of the Company's common stock would likely limit or eliminate the utilization
of existing net operating loss carryforwards and credits. Although a formal Section 382 study to determine whether a change in
control has occurred has not been completed, the Company believes, based upon limited analysis, that such changes may have occurred
in 1997, 2000 and 2005. Such carryforwards and credits expire between 2019 and 2035. It is likely that any “reverse merger”
or settlement of existing liabilities with equity or other strategic transaction is likely to result in a change in control under
Section 382.
NOTE 7
- OTHER MATTERS:
Rent expense -
Rent expense for each of the fiscal years
ended February 28, 2019 and 2018 was approximately $5,000 and $12,000 under a lease which expired in July 2019.
NOTE 8
- COMMITMENTS AND CONTINGENCIES:
Litigation –
The Company knows of no pending litigation
against it.
Discontinued MAGNA-SL Business and Related 1997 Restructuring;
Legacy payables –
Commencing in February 1997, the Company executed a plan of restructuring to reposition itself out
of its prior activity and into the cardiac activities conducted until 2003. Beginning in October 1997, reorganization counsel offered
the Company’s creditors the opportunity to settle liabilities due them at substantially reduced amounts. Most of the Company’s
liabilities from that time were settled in this manner as described more fully in the Company’s Form’s 10-KSB for prior
years’. Through the passage of time, few of the remaining balances have been settled and others have been written-off. Residual
amounts at February 28, 2019, are discussed in Note 3. The Company was also exposed to potential litigation from agreements entered
into in connection with such pre-1997 business activities. However, the Company believes that the passage of time and statutes
of limitation have mitigated such exposures and as such the Company has not recorded liabilities for such contingencies. Further,
as mentioned in Note 1, in January 2018, the Company entered into a Purchase Agreement with its CEO in which the CEO purchased
the residual technology and other assets and assumed all liabilities associated with that business.