U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
[ ] 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: 000-23955
COMPUTERIZED THERMAL IMAGING, INC.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
NEVADA 87-0458721
--------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
476 Heritage Park Blvd., Layton, UT 84041
--------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
(801) 776-4700
------------------------
(Registrant's telephone number, including area code)
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: State the number of shares
outstanding of each of the issuer's classes of common equity, as of the latest
practicable date: Common stock, par value $0.001, of which 80,476,100 shares
were issued and outstanding as of February 7, 2001.
1
COMPUTERIZED THERMAL IMAGING, INC.
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements................................................3
Consolidated Balance Sheets as of December 31, 2000
and June 30, 2000...................................................3
Consolidated Statements of Operations for the three
and six months ended December 31, 2000 and 1999 and
for the period from inception on June 10, 1987 to
December 31, 2000...................................................4
Consolidated Statements of Cash Flows for the three
and six months ended December 31, 2000 and 1999 and
for the period from inception on June 10, 1987 to
December 31, 2000...................................................5
Consolidated Statements of Stockholders' Equity
(Deficit) for the six months ended December 31, 2000
and for the period from inception on June 10, 1987
to December 31, 2000................................................8
Notes to Consolidated Financial Statements..........................9
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................11
ITEM 3. Quantitative and Qualitative Disclosure of Market Risk.............19
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings..................................................19
ITEM 2. Changes in Securities..............................................21
ITEM 3. Defaults upon Senior Securities....................................21
ITEM 4. Submission of Matters to a Vote of Security Holders................22
ITEM 5. Other Information..................................................22
ITEM 6. Exhibits and Reports on Form 8-K...................................23
SIGNATURES
2
PART I - FINANCIAL INFORMATION
ITEM 1.
The following comprise our condensed (unaudited) consolidated financial
statements for the three and six-month periods ended December 31, 2000 and
1999.
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Balance Sheets
(UNAUDITED)
ASSETS
------
December 31, June 30,
2000 2000
(Restated)
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 2,213,984 $ 8,997,767
Investment securities - available for sale 24,026,629 26,034,399
Accounts receivable, trade -net 95,693 177,254
Inventory 489,439 110,206
Interest receivable 396,788 439,273
Prepaid expenses 155,421 204,541
Miscellaneous receivables 44,000 -
Software maintenance contract - 309,863
------------- -------------
Total Current Assets $ 27,421,954 $ 36,273,303
PROPERTY AND EQUIPMENT, NET 1,086,216 567,936
SOFTWARE LICENSES, NET 3,061,604 3,447,289
GOODWILL, NET 10,385,402 10,994,561
INTELLECTUAL PROPERTY RIGHTS, NET 46,481 49,334
ADVANCES TO AFFILIATES - 130,247
------------- -------------
TOTAL ASSETS $ 42,001,657 $ 51,462,670
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES
Accounts payable - trade $ 572,121 $ 688,064
Sales taxes payable 15,511 14,809
Deferred revenues - 1,750,000
Accrued liabilities 518,210 724,952
------------- -------------
Total Current Liabilities $ 1,105,842 $ 3,177,825
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY (DEFICIT)
Convertible preferred stock, $5.00 par value,
3,000,000 shares authorized - -
Common stock, $.001 par value, 200,000,000 shares
authorized, 80,476,100 and 80,149,516 issued and
outstanding on December 31, 2000 and June 30, 2000 80,476 80,172
Additional paid-in-capital 93,684,786 86,247,518
Accumulated other comprehensive income 173,831 32,492
Retained deficit ( 53,043,278) ( 38,075,337)
------------- -------------
Total Stockholders' Equity 40,895,815 48,284,845
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 42,001,657 $ 51,462,670
============= =============
See notes to condensed consolidated financial statements.
3
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statements of Operations
(UNAUDITED)
From
Inception
Three months ended Six months ended through
December 31, December 31, December 31,
-------------------------- -------------------------- ------------
2000 1999 2000 1999 2000
(Restated) (Restated) (Restated)
------------ ------------ ------------ ------------ ------------
INCOME
Sales revenues $ 116,042 $ - $ 195,707 $ - $ 524,990
Cost of goods sold ( 48,780) - ( 91,799) - ( 268,735)
------------ ------------ ------------ ------------ ------------
Gross Margin 67,262 - 103,908 - 256,255
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES
General and administrative
costs 3,890,724 1,823,483 5,814,949 2,163,640 26,375,100
Research and development
costs 2,378,855 1,251,617 4,002,648 2,005,508 16,149,412
Depreciation and
amortization expense 709,237 22,750 1,147,024 39,055 1,904,199
Litigation settlement - - - - 1,244,434
------------ ------------ ------------ ------------ ------------
Total Costs and
Expenses 6,978,816 3,097,850 10,964,621 4,208,203 45,673,145
------------ ------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ( 6,911,554) ( 3,097,850) (10,860,713) ( 4,208,203) (45,416,890)
OTHER INCOME AND EXPENSES
Interest income 546,046 7,975 1,162,888 9,468 2,026,577
Interest expense ( 35,705) - ( 35,705) - ( 2,209,517)
Income from sale of
prototypes - - - - 180,815
Miscellaneous income 1,320 - 3,872 - 3,872
------------ ------------ ------------ ------------ ------------
Total Other Income
and Expenses 511,661 7,975 1,131,055 9,468 1,747
------------ ------------ ------------ ------------ ------------
NET LOSS BEFORE
EXTRAORDINARY ITEM $( 6,399,893) $( 3,089,875) $( 9,729,658) $( 4,198,735) $(45,415,143)
EXTRAORDINARY GAIN ON
EXTIGUISHMENT OF DEBT - - - - 65,637
------------ ------------ ------------ ------------ ------------
NET LOSS $( 6,399,893) $( 3,089,875) $( 9,729,658) $( 4,198,735) $(45,349,506)
OTHER COMPREHENSIVE
INCOME
Unrealized gain on
available-for-sale
securities 81,338 - 141,339 - 173,831
------------ ------------ ------------ ------------ ------------
TOTAL COMPREHENSIVE LOSS $( 6,318,555) $( 3,089,875) $( 9,588,319) $( 4,198,735) $(45,175,675)
============ ============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 80,475,868 66,795,058 80,438,548 65,634,370
============ ============ ============ ============
BASIC AND DILUTED LOSS
PER SHARE $( 0.14) $( 0.08) $( 0.19) $( 0.10)
============ ============ ============ ============
See notes to condensed consolidated financial statements.
4
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows
(UNAUDITED)
From
Inception
Three months ended Six months ended through
December 31, December 31, December 31,
-------------------------- -------------------------- ------------
2000 1999 2000 1999 2000
(Restated) (Restated) (Restated)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $( 6,399,893) $( 3,089,875) $( 9,729,658) $( 4,198,735) $(45,349,506)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization 709,237 22,750 1,147,024 39,055 1,904,199
Loss (gain) on
disposition of assets 24,589 - 77,532 - 1,006,845
Amortization of bond
(premium) discount, net ( 37,207) - ( 60,543) - ( 60,543)
Common stock, warrants,
and options issued as
compensation for
services - 291,902 - 327,872 9,213,342
Warrants/options extended
beyond expiration as
compensation 1,687,500 971,040 1,687,500 971,040 2,658,540
Common stock issued for
interest expense - - - - 423,596
Common stock/warrants issued
to settle litigation - - - - 1,136,380
Options issued at
discount to market as
compensation expense 231,250 - 231,250 - 323,000
Common stock issued for
failure to complete
timely registration - - - - 82,216
Common stock issued to
401(k) plan - - - - 43,226
Extraordinary gain on
extinguishment of
debt - - - - ( 65,637)
Write-off of advances
to affiliate - - 130,537 - 130,537
Changes in operating
assets and
liabilities (net of
effects of acquisition):
Accounts receivable -
trade ( 41,072) ( 3,600) 81,561 ( 3,600) 25,673
Inventory ( 129,132) - ( 379,233) - ( 312,681)
Interest receivable 41,855 - 42,485 - ( 396,788)
Prepaids 56,468 - 49,120 - ( 155,421)
Miscellaneous
Receivables ( 21,617) - ( 44,000) - ( 44,000)
Maintenance contract 146,027 ( 650,000) 309,863 ( 650,000) -
Accounts payable 260,492 829,374 ( 115,943) 587,137 504,442
Sales taxes payable 2,624 - 702 - 15,511
Deferred revenues ( 1,750,000) - ( 1,750,000) - -
Accrued liabilities ( 237,461) - ( 206,742) - 518,210
------------ ------------ ------------ ------------ ------------
Net Cash Used in Operating
Activities $( 5,456,340) $( 1,628,409) $( 8,558,857) $( 2,927,231) $(28,398,859)
------------ ------------ ------------ ------------ ------------
See notes to condensed consolidated financial statements.
5
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows (Continued)
(UNAUDITED)
From
Inception
Three months ended Six months ended through
December 31, December 31, December 31,
-------------------------- -------------------------- ------------
2000 1999 2000 1999 2000
(Restated) (Restated) (Restated)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of
assets - - - - 4,790
Purchase of property
and equipment ( 219,109) ( 13,706) ( 744,049) ( 85,207) ( 1,603,255)
Purchase of software
license ( 775) - ( 2,410) - ( 3,852,410)
Proceeds on sale of
securities available
for sale 3,512,940 - 3,575,322 - 3,575,322
Purchase of securities
available for sale ( 299,876) - ( 1,301,966) - (27,330,366)
Acquisition of Bales
Scientific common
stock - - - ( 5,642,880)
Acquisition of minority
interest of subsidiary - ( 30,000) ( 40,000) ( 30,000) ( 100,000)
------------ ------------ ------------ ------------ ------------
Net Cash (Used in)/Provided
by Investing Activities 2,993,180 ( 43,706) 1,486,897 ( 115,207) (34,948,799)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Common stock, warrants
and options issued for
cash - 2,566,626 310,850 4,045,084 63,941,002
Stock offering costs - - - - ( 3,007,324)
Cash purchased in Bales
acquisition - - - - 38,822
Advances to affiliates - - ( 22,673) - ( 130,537)
Advances (to)/from
stockholders - ( 18,599) - 7,042 2,320,738
Proceeds from borrowings,
net of debt issuance
costs
and accrued interest - - - - 3,576,131
Retirement of notes and
debentures - - - - ( 1,177,190)
------------ ------------ ------------ ------------ ------------
Net Cash Provided by
Financing Activities 0 2,548,027 288,177 4,052,126 65,561,642
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS ( 2,463,160) 875,912 ( 6,783,783) 1,009,688 2,213,984
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 4,677,144 270,938 8,997,767 137,162 -
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 2,213,984 $ 1,146,850 $ 2,213,984 $ 1,146,850 $ 2,213,984
============ ============ ============ ============ ============
See notes to condensed consolidated financial statements.
6
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows (Continued)
(UNAUDITED)
From
Inception
Three months ended Six months ended through
December 31, December 31, December 31,
-------------------------- -------------------------- ------------
2000 1999 2000 1999 2000
(Restated) (Restated) (Restated)
------------ ------------ ------------ ------------ ------------
SUPPLEMENTAL CASH FLOW
INFORMATION
Cash paid for:
Interest expense $ 35,705 $ - $ 35,705 $ - $ 35,705
Income taxes - - - - -
SUPPLEMENTAL SCHEDULE OF
NON-CASH FINANCING AND
INVESTING ACTIVITIES
Common stock issued to
individuals to acquire
minority interest of
subsidiary $ - $ - $ - $ 165,000 $ 165,500
Common stock issued as
consideration for
Bales Scientific, Inc. - - - - 5,500,000
Options issued for
offering costs - - - - 744,282
Common stock issued for
advances from
shareholders - - - - 2,320,738
Common stock issued for
notes payable, accrued
discount and interest - - - - 2,224,953
Common stock issued for
liabilities - - - - 50,000
Deemed dividend on
extension of warrants 5,238,283 2,455,489 5,238,283 2,455,489 7,693,772
See notes to condensed consolidated financial statements.
7
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit)
(UNAUDITED)
Additional Accumulated
Common Stock Paid-in Other Retained
-------------------------- Capital Comprehensive Deficit
Shares Amount (Restated) Income (Restated) Total
------------ ------------ ------------ -------------- ------------ ------------
Balance at June 30, 2000,
As originally reported 80,149,516 $ 80,150 $ 82,774,168 $ 32,492 $(34,601,965) $ 48,284,845
Deemed dividend on extension
of warrants - - 2,455,489 - ( 2,455,489) -
Compensation expense on
extension of warrants - - 971,040 - ( 971,040) -
Restatement of warrants
issued at a discount
for services - 22 ( 100,179) - 100,157 -
Warrants issued at a
discount in satisfaction
of litigation settlement - - 147,000 - ( 147,000) -
------------ ------------ ------------ -------------- ------------ ------------
Balance at June 30, 2000,
As restated 80,149,516 $ 80,172 $ 86,247,518 $ 32,492 $(38,075,337) $ 48,284,845
Warrants exercised at
$1.70 per share on
cashless basis 162,430 162 ( 162) - - -
Warrants exercised at $5.00
per share for cash 26,246 26 131,204 - - 131,230
Options exercised at $1.70
per share for cash 93,559 94 158,957 - - 159,051
Warrants exercised at
$0.9375 per share on
cashless basis 32,249 10 ( 30,322) - - ( 30,312)
Options exercised at $1.70
per share for cash 12,100 12 20,558 - - 20,570
Options extended beyond
expiration date - - 1,687,500 - - 1,687,500
Options issued at discount
to market - - 231,250 - - 231,250
Other Comprehensive Income - - - 141,339 - 141,339
Deemed dividend on extension
of warrants - - 5,238,283 - ( 5,238,283) -
Net loss for six months
ended December 31, 2000 - - - - ( 9,729,658) ( 9,729,658)
------------ ------------ ------------ -------------- ------------ ------------
Balance at
December 31, 2000 80,476,100 $ 80,476 $ 93,684,786 $ 173,831 $(53,043,278) $ 40,895,815
============ ============ ============ ============== ============ ============
See notes to condensed consolidated financial statements.
8
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
NOTE A. UNAUDITED FINANCIAL STATEMENTS AND BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted as
permitted by such rules and regulations. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation of results of operations have been included in the
financial statements. Results for interim periods are not necessarily
indicative of the results that may be expected for the full year. These
financial statements should be read in connection with the audited condensed
consolidated financial statements and notes thereto included in the Company's
latest annual report on Form 10-KSB.
The accompanying unaudited condensed financial statements for the three
and six month periods ended December 31, 1999 and for the period from
inception on June 10, 1987 through December 31, 2000 have been restated to
account for $971,040 of additional consulting expense and $2,455,489 of deemed
dividends paid resulting from the extension of warrants representing 2,964,125
underlying common shares originally scheduled to expire on December 31, 1999.
During the quarter ended December 31, 1999, the Company extended the
expiration date of such warrants to December 31, 2000. On the date of
extension, 840,000 shares underlying such warrants were held by consultants to
the Company and the remaining 2,124,125 shares underling the warrants were
held by unrelated warrant holders. The fair value of the warrants on the date
of extension in excess of the fair value of such warrants measured at the
original date of their issuance was recorded partially as consulting expense
and partially as a deemed dividend paid to the warrant holders as noted above.
The Company also reduced consulting expense $100,157 for the periods noted
above in connection with warrants issued for advertising expenses and
increased litigation settlement expenses $147,000 in connection with warrants
issued to settle prior litigation. The prior period adjustments have no net
effect to the cash flows or total stockholders' equity of the Company.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and related disclosures. Actual
results may differ from these estimates.
NOTE B. NEW ACCOUNTING STANDARD AND GUIDANCE
Accounting for Derivative Instruments and Hedging Activities
------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), subsequently amended by SFAS
138 "Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS 133 requires an entity to recognize all derivative
9
instruments as either assets or liabilities in the statement of financial
position and measure those instruments at their fair value. The Company
adopted the statement on July 1, 2000 and has determined that the adoption of
SFAS 133 has no material effect on the financial condition of the Company.
Revenue Recognition
-------------------
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." The SAB summarizes the SEC staff's views on applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company has reviewed its revenue recognition policies and has determined
that they comply with the principles as set forth in SAB No. 101.
Accordingly, the issuance of SAB No. 101 will have no effects on the Company's
financial position or results of operation.
NOTE C. INVENTORIES
Inventories are stated at the lower-of-cost or market with cost
determined using first-in first-out. Inventories consist of the following:
December 31, 2000 June 30, 2000
---------- ----------
Raw materials and work-in-process $ 447,798 $ 110,206
Finished goods 23,269 -
Supplies 18,372 -
---------- ----------
$ 489,439 $ -
========== ==========
NOTE D. INCOME TAXES
The Company uses the liability method of accounting for income taxes.
Under this method, deferred income taxes are recorded to reflect the tax
consequences on future years of temporary differences between the tax basis of
assets and liabilities and their financial amounts at year-end. The Company
has reviewed its net deferred tax assets, together with net operating loss
carryforwards, and has decided to forego recognition of potential tax benefits
arising therefrom. In making this determination, the Company has considered
the Company's history of tax losses incurred since inception and the fact that
the Company is still within the development stage. The Company has provided a
valuation allowance to reduce its potential deferred tax assets to their net
realizable value.
NOTE E. GOODWILL
Costs in excess of the fair value of identifiable net assets of
acquired entities are being amortized over their useful life. During the
second quarter of fiscal year 2001, the Company reduced the amortization
period of goodwill from 15 years to 10 years resulting in $262,000 of
additional amortization expense recorded in the current quarter.
NOTE F. STOCK WARRANTS AND OPTIONS
10
During the second quarter of fiscal year 2001, 500,000 stock options
were issued at an 11.38 percent discount to market to an employee of the
Company and 1,000,000 employee stock options, originally scheduled to expire
on December 20, 2000, were extended to September 18, 2001. As a result of the
issuance and extension of the stock options, the Company recorded additional
compensation expense of $1,918,750. The additional expense has no net effect
to the cash flows or total stockholders' equity of the Company.
During the second quarter of fiscal year 2001, warrants representing
2,191,750 underlying shares scheduled to expire on December 31, 2000 were
extended to August 31, 2001. The expiration date of such warrants was
previously extended from December 31, 1999 to December 31, 2000. The fair
value of the warrants on the date of extension in excess of the fair value of
such warrants measured at the date of their original issuance, or $5,238,283,
was recorded as a deemed dividend paid to the warrant holders. The deemed
dividend has no net effect to the cash flows or total stockholders' equity of
the Company.
NOTE G. RECLASSIFICATIONS
Certain 1999 amounts have been reclassified to conform to the 2000
presentations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This document contains numerous forward-looking statements about our
business and future. The United States Private Securities Litigation Reform
Act of 1995 provides a "safe harbor" for certain forward-looking statements.
Our forward-looking statements are expressed in good faith and we believe that
there is a reasonable basis for us to make them. However, readers are
cautioned not to place undue reliance on such statements. Forward-looking
statements include, but are not limited to, statements about our: 1) plans; 2)
objectives; 3) goals; 4) strategies; 5) expectations for the future; 6) future
performance and events; 7) underlying assumptions for all of the above; and 8)
other statements that are not statements of historical fact.
We make these forward-looking statements based on our analysis of
internal and external historical trends and future expectations. However, such
statements involve risks and uncertainties that could cause our actual results
to materially differ from our forward-looking statements and there can be no
assurance that we will achieve the results set forth in these forward-looking
statements. In addition to other factors, the following are important factors
that could cause our actual results to materially differ from our
forward-looking statements: 1) the results of our pre-clinical and clinical
testing; 2) the time and costs involved in obtaining regulatory approvals for
our systems and products; 3) our ability to respond to changes in the medical
technology marketplace including our ability to develop or acquire new
technologies; 4) competitive factors; 5) the availability of financing on
terms and conditions acceptable to us; 6) the availability of personnel with
requisite skills; and 7) the terms of any new collaborative, licensing and
other arrangements that we may establish.
We have no obligation, or intent, to update or revise these forward-
looking statements to reflect future events, new information, or otherwise.
11
The following discussion and analysis of our combined financial condition
and results of operations should be read in conjunction with our Audited
Consolidated Financial Statements and Notes thereto contained in our Form
10-KSB for the fiscal year ended June 30, 2000.
Trends/Uncertainties Affecting Continuing Operations
----------------------------------------------------
We are a development stage enterprise and have generated no significant
revenues since inception in 1987. Although our recently acquired subsidiary,
Bales Scientific, has generated limited revenues during the past several
years, Bales has also primarily been engaged in research and development
activities since its inception. Accordingly, our ability to achieve
profitability will depend, in large part, on our ability to successfully
develop clinical applications for our products, obtain regulatory approvals,
and develop the capacity to manufacture and extensively market our products.
We are presently making the transition from a research and development
company to a commercial operating company. This transition anticipates final
approval of our Breast Cancer System 2100 currently undergoing FDA evaluation.
We can make no assurances that we will ultimately obtain FDA approval of our
Breast Cancer System 2100 or, that if approved, we will be able to
successfully make the transition to a commercial operating company and sell
our products on a broad basis. While attempting to make this transition, we
will be subject to all risks inherent in a growing venture, including, but not
limited to, the need to develop and manufacture reliable and effective
products, develop marketing expertise and expand our sales force. There can
be no assurance that we will achieve profitable operations.
General
-------
We are a medical imaging systems integrator producing thermal imaging
diagnostic and patient management systems configured to produce, interpret,
and catalogue computerized thermal images for medical applications. Through
our subsidiary, Bales Scientific, we design, manufacture and sell high
resolution, dynamic, digital infrared imaging workstations and related
products for both medical and industrial application. Specialized cameras
developed as part of these workstations are integral components of our Breast
Cancer System 2100 and General Use System.
Our Breast Cancer System 2100 is designed to serve as a non-invasive,
painless adjunct to mammography, whereas, our General Use System is designed
to function as a diagnostic tool to help healthcare payers identify and reduce
fraudulent workers' compensation claims and to aid in the identification of
musclo-skeletal abnormalities. Our recently introduced Photonic Stimulators
are used to improve vascularity and increase blood flow circulation in the
treatment of pain. Industrial application of our imaging systems includes
non-destructive inspection of aging aircraft, electronics, composites, metals
and other advanced materials, as well as breakthroughs in the inspection of
turbine blades of large power-generation equipment. TRW is our primary
systems development vendor, BATTELLE is our principal systems engineer and
INFORMIX is our primary software database provider.
Capital is required, in part, to satisfy general corporate expenses,
salaries, software license and maintenance contract payments, professional
fees to comply with securities reporting requirements, costs of clinical
trials and technical support, FDA consulting expenses, acquisition of
technology, costs of
12
litigation, and expenses associated with the private placement and
registration of our securities. Our capital resources are principally derived
from the sale and private placement of our common stock and warrants and the
exercise of our common stock warrants and options.
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1999.
-----------------------------------------------------------------------------
Revenues
--------
Revenues for the quarter ended December 31, 2000 totaled $116,042. These
revenues resulted entirely from product sales by Bales Scientific, our
subsidiary, which we acquired in April 2000. Accordingly, we had no revenues
for the comparative period ended December 31, 1999.
Interest income in the quarter ended December 31, 2000 increased
$538,071 compared with the same quarter of 1999, to $546,046. This increase
is primarily the result of investing the proceeds from the private placement
of our common stock during the quarter ended March 31, 2000.
Costs and Expenses
------------------
General and Administrative Expenses. General and administrative
expenses for the quarter ended December 31, 2000 increased $2,067,241 or 113%
over the same quarter in 1999, to $3,890,724. This increase is primarily a
result of 1) additional compensation expense of $2,340,172 ($1,687,500
resulting from the extension of stock options beyond their scheduled date of
expiration, $231,250 arising from the issuance of employee stock options at a
discount to market, and $421,422 resulting from a material increase in the
number of employees); 2) additional legal expenses of $236,526 incurred in
connection with our Nasdaq listing application, regulatory filings, and
various legal matters; and 3) an $141,350 increase in travel costs, offset by
a $971,040 consulting expense incurred in the prior comparable period as a
result of the extension of the expiration date of warrants.
Research and Development Expenses. Research and development expenses
for the quarter ended December 31, 2000 increased $1,127,238, or 90%, over the
same quarter in 1999, to $2,378,855. The increase is primarily a result of 1)
an $166,255 increase in clinic trial expenses; 2) a $515,072 increase in
salaries as a result of a material increase in the number of employees; 3) an
$149,477 increase in software license fees, and 4) an $183,398 increase in
equipment and supplies.
Depreciation and Amortization. Depreciation and amortization expenses
for the quarter ended December 31, 2000 increased $686,487, or 3,018% over the
results of the same quarter in 1999, to $709,237. The increase in
depreciation and amortization expense primarily resulted from amortization of
goodwill associated with our acquisition of Bales Scientific and amortization
of our software licenses.
During the quarter ended December 31, 2000 and all prior periods, we
expensed all costs associated with processes and systems development,
13
including software code writings, computer systems hardware and software
purchases, material expenses in the development of our examination table and
all payroll expenses throughout the periods presented.
Net Loss
--------
As a result of the foregoing, we incurred a loss of $6,399,893 for the
quarter ended December 31, 2000 compared to a loss of $3,089,875 for the
quarter ended December 31, 1999. After accounting for dividends deemed paid
to specified warrant holders on the extension of their warrants, we incurred a
loss of $11,638,176 for the quarter ended December 31, 2000 compared to a loss
of $5,545,364 for the quarter ended December 31, 1999.
For the quarter ended December 31, 2000, the loss attributable to common
shareholders was $11,638,176, or $(0.14) per share, compared to a loss
attributable to common shareholders of $5,545,364 or $(0.08) per share, for
the quarter ended December 31, 1999.
SIX MONTHS ENDED DECEMBER 31, 2000 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1999.
-----------------------------------------------------------------------------
Revenues
-------
Revenues for the six months ended December 31, 2000 totaled $195,707.
These revenues resulted entirely from product sales by Bales Scientific, our
subsidiary, which we acquired in April 2000. Accordingly, we had no revenues
for the comparative period ended December 31, 1999.
Interest income in the six months ended December 31, 2000 increased
$1,153,420 compared with the same period of 1999, to $1,162,888. This
increase is primarily the result of investing the proceeds from the private
placement of our common stock during the quarter ended March 31, 2000.
Costs and Expenses
------------------
General and Administrative Expenses. General and administrative
expenses for the six months ended December 31, 2000 increased $3,651,309, or
169% over the same period in 1999 to $5,814,949. This increase is primarily a
result of 1) additional compensation expense of $2,563,439 ($1,687,500
resulting from the extension of stock options beyond their scheduled date of
expiration, $231,250 arising from the issuance of employee stock options at a
discount to market, and $644,689 resulting from a material increase in the
number of employees); 2) additional legal expenses of $670,208 incurred in
connection with our Nasdaq listing application, regulatory filings, and
various legal matters; 3) an $176,231 increase in professional services; 4) a
$512,239 increase in stockholder service/public relations costs as a result of
our involvement with the RSNA Conference in Chicago and USA Track & Field Team
during the Sydney 2000 Olympics; and 5) a $222,783 increase in travel costs,
offset by a $971,040 consulting expense incurred in the prior comparable
period as a result of the extension of the expiration date of warrants.
Research and Development Expenses. Research and development expenses for
the six months ended December 31, 2000 increased $1,997,140, or 100% over
14
the same period in 1999, to $4,002,648. The increase is primarily a result of
1) a $53,058 increase in clinic trial expenses; 2) a $787,954 increase in
salaries as a result of a material increase in the number of employees; 3) a
$133,923 increase in payments to Battelle, TRW and Therma Corp in connection
with our clinical trials, software development and FDA Pre-Market Approval
application; 4) a $313,313 increase in software license fees, and 5) a
$253,576 increase in equipment and supplies.
Depreciation and Amortization. Depreciation and amortization expenses
for the six months ended December 31, 2000 increased $1,107,969, or 2,837%
over the results of the same period in 1999, to $1,147,024. The increase in
depreciation and amortization expense primarily resulted from amortization of
goodwill associated with our acquisition of Bales Scientific and amortization
of our software licenses.
During the six months ended December 31, 2000 and all prior periods, we
expensed all costs associated with processes and systems development,
including software code writings, computer systems hardware and software
purchases, material expenses in the development of our examination table and
all payroll expenses throughout the periods presented.
Net Loss
--------
As a result of the foregoing, we incurred a loss of $9,729,658 for the
six months ended December 31, 2000 compared to a loss of $4,198,735 for the
six months ended December 31, 1999. After accounting for dividends deemed
paid to specified warrant holders on the extension of their warrants, we
incurred a loss of $14,967,941 for the quarter ended December 31, 2000
compared to a loss of $6,654,224 for the quarter ended December 31, 1999.
For the six months ended December 31, 2000, the loss attributable to
common shareholders was $14,967,941 or $(0.19) per share, compared to a loss
attributable to common shareholders of $6,654,224 or $(.10) per share, for the
six months ended December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Sources of Liquidity
--------------------
Our net working capital at December 31, 2000 was approximately
$26,316,112 compared to $670,757 at December 31, 1999. The ratio of current
assets to current liabilities was 24.8 to 1.0 at December 31, 2000 compared to
2.4 to 1.0 at December 31, 1999.
Our cash requirements consist of, but are not limited to, general
corporate expenses including office salaries and expenses, lease payments on
our office space, acquisition of technology, software license and maintenance
contracts payments, legal and accounting fees to comply with securities
registration and reporting requirements, costs of clinical trials and
technical support, FDA consulting expenses, and expenses associated with the
private placement of our equity securities.
Net cash used in operating activities in the six months ended December
31, 2000 was $8,558,857 compared to $2,927,231 in the six months ended
December 31, 1999. Net cash provided by investing activities in the 2000
period was
15
$1,486,897 compared to net cash used in investing activities of $115,207 in
the prior year's comparable period. Net cash provided by financing activities
was $288,177 in the six months ended December 31, 2000 compared to $4,052,126
generated in the prior year's comparable period. As a result of the
foregoing, cash and cash equivalents decreased by $6,783,783 in the six months
ended December 31, 2000 compared to a $1,009,688 increase in the six months
ended December 31, 1999.
Capital resources needed to meet our planned expenditures are derived
primarily from equity funding on the private placement of our common stock and
warrants and the exercise of our outstanding warrants and options.
Agreement with Beach Boulevard, LLC. On March 4, 1999, we entered into
a Securities Purchase Agreement (as amended in May 1999, the "Investment
Agreement") with Beach Boulevard L.L.C. ("Beach"). Subject to certain
conditions set forth in the Investment Agreement, we have the right to require
Beach to purchase up to $7 million of our common stock in a series of $500,000
tranches. As of the date hereof, we have required Beach to purchase
approximately $3 million of our common stock in a series of six tranches
during our fiscal years ended June 30, 2000 and 1999. Since Beach's
participation in the sixth tranche, we have made no requirements of funding by
Beach, although Beach's obligation to provide funding, subject to the terms
and conditions set forth in the Investment Agreement, continues.
Because Beach is not required to purchase additional shares unless
certain conditions are satisfied as set forth in the Investment Agreement,
there is no assurance that Beach will ultimately provide us with the remaining
$4 million commitment. Furthermore, there is no assurance that we will
require Beach to purchase additional shares even if the conditions set forth
in the Investment Agreement are satisfied.
Sources of Potential Long-term Liquidity. We expect that both use
agreements and equipment financing will be sources of long-term liquidity for
us, although it is premature to anticipate the results of either. Although we
have investigated both options and have entered into preliminary discussions
with equipment financing companies, we are awaiting Pre-Market Approval of our
Breast Cancer System 2100 before entering into any additional planning or
definitive agreements regarding either. Much of what we anticipate as being
sources of long-term liquidity is contingent upon (1) whether or not we
achieve Pre-Market Approval of our Breast Cancer System 2100, (2) the
development and execution of a definitive and successful marketing strategy,
(3) whether we are able to develop our Medical Systems for other applications
in the United States, and (4) the results of our marketing efforts in domestic
and foreign markets.
Capital Requirements/Plan of Operation
--------------------------------------
We are a development stage enterprise and, as such, are largely
dependent on the sale of our common stock and warrants, and the exercise of
our warrants and options, to provide liquidity. Since inception, we have
continually sought funding to meet our day-to-day operations and business plan
and have often sought substantial loans from affiliates and shareholders to
meet our financial obligations. Such loans were often repaid in stock.
Although we believe that we have sufficient resources to meet our current plan
of operations for the next 12 months, it is possible that, due to unforeseen
events, we will have insufficient resources and funding required to execute
our plan of operations. Until such time as we begin generating
16
significant revenues from operations, which is not likely until and unless
Pre-Market Approval of our Breast Cancer System 2100 is obtained from the FDA
and our products are marketed and sold on a large-scale basis, we will be
faced with the difficulties and expenses associated with our financing needs
and obligations.
Our capital requirements may vary from our estimates and depend on
numerous factors including, but not limited to: 1) progress in our research
and development programs; 2) results of pre-clinical and clinical testing; 3)
costs of technology; 4) time and costs involved in obtaining regulatory
approvals; 5) hiring of additional personnel to carry out our plan of
operations; 6) costs of filing, defending and enforcing any patent claims and
other intellectual property rights; 7) economic impact of competing
technological and market developments; 8) the costs of transitioning to a
commercial enterprise; and 8) the terms of any new collaborative, licensing
and other arrangements that we may establish.
We estimate that we will require approximately $15 million in cash to
meet our business plan and obligations for the 12-month period ending December
31, 2001 including approximately $5.5 million in research and development to
continue and/or initiate clinical trials, test our systems in connection with
other applications and complete our FDA Pre-Market Approval application, $3.5
million for day-to-day operating expenses including lease payments on our
facilities, $3.5 million to cover salaries, $0.5 million in capital equipment,
$1.3 million for public relations, advertising, and commercialization of
products, and $0.7 million for legal and accounting for SEC compliance with
reporting obligations and general legal representation. We currently have 42
employees and plan to hire additional employees as we move towards completion
of the FDA approval process and develop our marketing and distribution plan.
Certain aspects of our Plan of Operation for the next twelve months
include: 1) completion of FDA Pre-Market Approval application on our Breast
Cancer System 2100; 2) development and initiation of our plan for
commercialization of our products including development of relationships with
distributors, 3) additional development of our General Use System
applications; and 4) development and commercialization of our technologies
into industrial application.
There are currently outstanding options and warrants for approximately
15.9 million shares that can be exercised or converted with exercise prices
ranging from $.60 to $9.0625 (representing gross proceeds to us, upon
conversion, of approximately $45.4 million). Additional proceeds of
approximately $12.8 million may be available to us at a future date upon the
vesting and exercise of yet unvested options. As of December 31, 2000, we had
outstanding a total of 7,619,505 immediately exercisable options to purchase
our common stock at exercise prices ranging from $.60 to $9.0625 per share.
As of December 31, 2000, we also had outstanding 2,505,046 options to purchase
our common stock at exercise prices ranging from $.76 to $9.0625 that vest or
may be granted at future dates pursuant to various agreements. As of December
31, 2000, we had outstanding immediately exercisable warrants to purchase
8,329,153 shares of our common stock at prices ranging from $.72 to $7.25 per
share. Of the immediately exercisable options and warrants noted above,
2,211,083 expire at various times through the year 2001, 3,115,000 expire at
various times through the year 2002, 10,129,037 expire at various times
through the year 2005 and 493,538 expire after 2005.
17
The likelihood of warrants and options being exercised will be high if
our common stock trades at a price above the respective strike prices of these
securities. However, we can provide no assurances that our outstanding
options and warrants will be exercised even if the price of our common stock
trades above the respective strike prices of these securities. Furthermore,
if the exercises of any of these warrants or options occur at below market
prices, there will be an immediate dilution in our per-share net tangible book
value.
We also have a financing arrangement (discussed in "Sources of
Liquidity" above) whereby Beach is currently required to provide us with up to
$4,000,000 in financing from time to time under certain conditions and then
only if we desire to obtain financing from Beach. This financing arrangement
is in the form of a Securities Purchase Agreement whereby Beach purchases
shares of our common stock at a 15% discount to the market price of our common
stock at the time of the funding. We can provide no assurances that we will
require additional funding under the Securities Purchase Agreement or, if we
desire additional funding, we will meet the terms of the Securities Purchase
Agreement necessary to require additional funding. Furthermore, any issuance
of shares to Beach could have a severe dilutive effect on the existing holders
of our common stock.
Based on the foregoing, we believe we will have sufficient capital to
fund our business plan over the next year from our existing cash and cash
equivalents and from the proceeds from the redemption of our marketable
securities. If, due to unforeseen events, funding falls short and we need to
obtain additional funds, we would seek them from private investors through
loans or on the sale of our restricted common stock. However, we can provide
no assurances that either of these avenues of financial support would be
available to us or, if available, on terms acceptable to us.
Cancellation of Agreements with CTII.
-------------------------------------
In connection with Latin America markets, in September 1999, we engaged
William L. Mazilly and Amirali A. Rajwany, independent consultants, to
establish a consortium in Latin America to market and deploy our Breast Cancer
System 2100 throughout Central and South America. For services rendered in
connection therewith, each was paid 100,000 shares of our restricted common
stock valued at $1.20 per share. As a result of their efforts, we entered
into two Letter Agreements (collectively, the "Agreements") on October 28,
1999 with Computerized Thermal Imaging International, Inc. ("CTII"), an entity
in which we received a 15-percent interest, whereby CTII received, among other
things, 1) the exclusive right to represent the expansion of our business into
Central and South America, 2) the obligation to prepare and implement a
marketing strategy for deployment of our Breast Cancer System 2100 in those
areas of the world, 3) the right of first refusal on our Health Card
manufacturing worldwide, and 4) the obligation to sell a minimum of 100 of our
Breast Cancer System over a two-year period in the target territories. The
Agreements further provided that we would grant to CTII, as compensation,
options to purchase up to 5 million shares of our common stock in 50,000 share
increments contingent on their placement of each Breast Cancer System 2100
into commercial use in the specified territories. Each 50,000 block of
options granted the holder thereof the right to purchase, for a period of two
years, 50,000 shares of our common stock at a strike price equal to $1.6745; a
15 percent discount to the bid price of our common stock on October 28,1999.
18
Pursuant to the Agreements, on June 6, 2000, we accepted a purchase
order for the sale of 10 Breast Cancer Systems to CTII for $5 million. In
connection therewith, we received a down payment of $1.75 million with the
remaining $3.25 million to be received upon delivery of the systems. The
invoice obligated us to deliver the 10 systems to CTII on, or about,
mid-October, 2000. In connection therewith, we expected to issue 500,000
options upon the delivery and placement of such systems into commercial use.
In late September 2000, we advised CTII of our desire to renegotiate the
foregoing Agreements given the substantial change in market conditions, the
increased value of our common stock and unresolved issues concerning their
deployment of our systems in Mexico. On October 11, 2000, following attempts
to reach more favorable terms, we concluded it was in the best interests of
the Company and our shareholders to mutually terminate the Agreements and the
purchase order for the 10 units. We accordingly did so and have refunded the
$1.75 million down payment received from CTII on the initial order of the 10
units. In connection with the termination of the Agreements, our obligation
to issue options to CTII was eliminated, our 15% ownership in CTII reverted
back to the remaining principals of CTII and each party to the Agreements will
bear the respective costs of any performance under the Agreements. In
consideration of their efforts to expand our business into Latin America, Mr.
Mazilly and Mr. Rajwany will retain the common stock previously granted to
them.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a development stage enterprise. We do not believe that we are
currently subject to market risks beyond ordinary economic risks, such as
interest rate fluctuation and inflation, to which most enterprises are
subject.
At December 31, 2000, we had invested approximately $24 million in
available-for-sale marketable securities including investments in United
States government securities and corporate bonds. Although we believe the
issuers of the securities in which we have invested are solvent and are
favorably rated by recognized rating agencies, there is the risk that such
issuers may not have sufficient liquid assets to satisfy their obligations at
the time such obligations become due. If such were to occur, we may not be
able to recover the full amount of our investment.
Each of our marketable securities has a fixed rate of interest.
Accordingly, a change in market interest rates may result in an increase or
decrease in the market value of our marketable securities. If we liquidate
any of our marketable securities prior to the time of their maturity, we could
receive less than the face value of the security.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Kathleen Sullivan Employment Agreement
--------------------------------------
On June 27, 2000, Kathleen Sullivan ("Plaintiff") filed a complaint in
the Superior Court of California for the County of Los Angeles (Central
District), Case No. BC232482, against us alleging breach of contract.
Plaintiff seeks unspecified damages pursuant to an agreement whereby she was
to undertake particular promotional activities for the benefit of the Company
19
during 1998. The agreement required us to issue stock and/or warrants in
exchange for Plaintiff's performance. Plaintiff claims that we failed to duly
compensate her for services rendered, whereas, we assert breach and
non-performance as a defense on the basis that Plaintiff failed to fulfill her
contractual obligations.
We believe that Plaintiff's claims are without merit and will vigorously
defend ourselves against any and all claims. We are currently engaged in
discovery and trial has been set to commence on June 11, 2001.
Salah Al-Hasawi Advisory Services Claim
---------------------------------------
On March 29, 2000, Salah Al-Hasawi ("Plaintiff"), a citizen and resident
of Kuwait, filed an action in the United States District Court for the
Southern District of New York, Docket No. 00CIV.2390, against us and Mr. David
Johnston, our former Chairman and Chief Executive Officer, alleging violations
under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of
the Code of Federal Regulations for commissions allegedly due to Plaintiff in
connection with the private placement of our securities. Shortly thereafter,
the Plaintiff's lawsuit was dismissed without prejudice and on April 12, 2000,
the Plaintiff filed a similar complaint in the United States District Court
for the District of Utah under Case No. 2:00CV-0317K. The Plaintiff is
seeking specified damages, attorney fees and unspecified damages pursuant to
five separate causes of action including breach of contract, fraud and unjust
enrichment.
In connection with our private placement, Plaintiff claims that he
personally placed and sold approximately $10.7 million of our securities on
contract and that we failed to pay him commissions of $516,000 plus stock
options to purchase 1,070,000 shares of our common stock valued at $15
million. Plaintiff alternatively alleges that he had a revised contract with
us whereby he was to receive one-third of the foregoing commissions and stock
options.
We have categorically denied all of Plaintiff's claims and have
affirmatively alleged that, at all times, Plaintiff acted as an agent of
Financial Services Group. We are currently engaged in discovery and the trial
has been set to commence on July 30, 2001.
Bloomberg/Evans Defamation Action
---------------------------------
On August 28, 2000, we filed a complaint for libel in the United States
District Court for the District of Utah, Northern Division, Case No.
1:00CV00098K against Bloomberg, L.P. (the "Defendant"). The lawsuit alleges
that on June 29 and July 18, 2000, Defendant published certain defamatory
articles about the Company that were written by David Evans through its news
service, Bloomberg News. According to the Complaint, the defamatory articles
were published over Defendant's Internet web site and elsewhere to millions of
people, and contained certain false, misleading, and defamatory statements
regarding our business and thermal imaging technology, which we are focusing
on developing as an adjunct imaging tool to mammography in the detection of
breast cancer. The lawsuit alleges that, after publication of the first
defamatory article on June 29, 2000, we wrote to Defendant and explained the
numerous inaccuracies and falsehoods contained therein. Although Defendant
then published on July 18, 2000 what it labeled as a "correction" to the first
story, this second defamatory article" still contained defamatory
20
matter calling into doubt (among other things) our ability to attract capital
as well as the efficacy of our Breast Cancer System 2100, which is currently
undergoing clinical testing by physicians at five independent hospital sites
in accordance with a protocol used in connection with our application for
Pre-Market Approval from the Food and Drug Administration. The Complaint
alleges damages against Defendant in excess of One Hundred Million Dollars
($100,000,000). On October 23, 2000, Defendant filed a motion to dismiss
pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. On
December 11, 2000, we responded to the Defendant's motion, and on January 3,
2001, Bloomberg filed its reply brief. A hearing was held by the Utah District
Court on Bloomberg's motion to dismiss our complaint on February 2, 2001. The
District Court has not issued its opinion regarding the motion to dismiss.
ITEM 2. CHANGES IN SECURITIES
No instruments defining the rights of the holders of any class of
registered securities have been materially modified, limited or qualified
except as noted below:
David B. Johnston and Daron Dillia (d/b/a Manhattan Financial Group),
who combined hold approximately 24.5 percent of the beneficial ownership of
the Company's outstanding common stock, have entered into voting agreements
with respect to their respective shares of common stock of the Company. The
term of the agreements is three years beginning October 19, 2000. The voting
agreements provide that, during the term of the agreements, common shares
owned by either David B. Johnston (directly or indirectly) or Daron Dillia
(and any affiliated transferees) shall be voted in proportion to the votes of
common stock held by all other shareholders. The voting restrictions
terminate if the shares are transferred to persons who are not affiliates of
David Johnston or Daron Dillia. On December 15, 2000, the October 19, 2000
agreements were amended and restated. The amended voting agreements for David
B. Johnston and Daron Dillia are attached hereto as Exhibits 9.1 and 9.2,
respectively.
On October 5, 2000, our Board of Directors extended the exercise date
for warrants representing 2,191,750 underlying common shares previously
granted in connection with our 1996 Private Placement of securities. The
common stock warrants have a strike price of $2.50 per share and were
scheduled to expire on December 31, 2000. The exercise date of the warrants
has been extended to August 31, 2000.
The following securities, which are not registered under the Securities
Act of 1933 (the "Act"), were issued since the Company's last report for the
quarter ended September 30, 2000. The following includes the issuance of
shares upon conversion of warrants and options:
In October 2000, we issued 500,000 common stock options to John M.
Brenna, our Executive Vice President in connection with his employment
agreement. Such options were granted pursuant to our 1997 Stock Option and
Restricted Stock Plan and vest over a period of 3 years. Each option entitles
the holder thereof, upon exercise, to one share of common stock at an exercise
price of $3.60 per share. This transaction was a private placement made in
reliance on Section 4(2) of the Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
American Stock Exchange Listing
-------------------------------
On March 30, 2000, we applied to have our common stock listed on the
Nasdaq National Market. On June 26, 2000, Nasdaq approved the listing of our
common stock to be effective June 29, 2000. On June 28, 2000, Nasdaq informed
us that our listing was "on hold" and requested additional information from
us. In November 2000, the Nasdaq notified us that we satisfied all
qualifications, except the minimum bid price, for our common stock to be
listed on the Nasdaq National Market. Following a period of observing the
daily minimum bid-price of our common stock, we applied to have our common
stock listed on the American Stock Exchange ("AMEX"). Shortly thereafter, we
were approved for AMEX listing and, on December 6, 2000, our common stock
began trading on the AMEX.
FDA Approval Status
-------------------
Our Breast Cancer System 2100 qualifies as a medical device under 21
U.S.C. 321(h) because it is intended for use in the diagnosis, cure,
mitigation, treatment or prevention of disease and does not interact
chemically with the body. Typically, low risk, Class I or Class II devices
that are substantially similar to approved products already on the market can
obtain FDA clearance by the agency's pre-market notification known as a 510(k)
filing. Sophisticated instruments that entail significant risk are generally
classified as Class III devices and require manufacturers to submit a
Pre-Market Application ("PMA") to the FDA. A PMA is much more complex and
time-consuming to prepare than a 510(k) filing. A PMA typically contains a
significant quantity of clinical testing, manufacturing and other data, all of
which are carefully scrutinized by the FDA to demonstrate the product's
safety, reliability and effectiveness.
We do not believe that our Breast Cancer System 2100 requires us to
submit a PMA to the FDA for approval. Notwithstanding, we have chosen to
pursue FDA approval via the PMA process to gain market acceptance of our
system. We believe that FDA approval of our Breast Cancer System 2100 will 1)
enable us to reference medical efficacy claims in connection with the
marketing of our Breast Cancer System 2100, 2) lend credibility to all of our
imaging systems, 3) ease the task of introducing our other products to the
market, 4) enhance physician acceptance of our systems, and 5) permit us to
obtain designation of insurance payment codes for particular medical
procedures.
The FDA is permitting us to submit our PMA in five modules, thereby
accelerating the data submittal process. To date, we have submitted four of
the five required modules and have received FDA acceptance on each of the four
modules submitted. We anticipate submitting our final module (Module 5) in
early 2001. Although we anticipate that we will be able to obtain and
assemble the data necessary to submit Module 5 as planned, any delay or
difficulties experienced in the assembly and verification of patient data
22
could delay our submission of Module 5. We cannot determine if, or when, we
will ultimately obtain FDA approval of our Pre-Market Approval application.
John M. Brenna Employment Agreement
-----------------------------------
On October 12, 2000, Mr. John M. Brenna signed a three-year employment
agreement to serve as Executive Vice President. In connection therewith,
500,000 common stock options were granted as described in ITEM 2, Changes in
Securities, above. Mr. Brenna's responsibilities include the strategic and
global commercialization of our thermal imaging products, including the Breast
Cancer System 2100 currently undergoing the Food and Drug Administration's
regulatory approval process. During 1996-1999, Mr. Brenna was Executive Vice
President of Marketing of Trex Medical, a Thermo-Electron company. He was
also President and Chief Operating Officer of the LORAD division of Trex
Medical, which specializes in advanced Breast Imaging and Stereotactic Biopsy
systems. A copy of Mr. Brenna's employment agreement is attached hereto as
Exhibit 10.1.
Current Registration Statements
-------------------------------
On October 16, 2000, we filed an amended combined registration statement
on Form S-3, File #333-39654 Amendment No. 1, that included the common stock
transactions covered by two prior registration statements. On October 26,
2000 we filed Amendment No. 2 to such registration statement and, on October
27, 2000, the Securities and Exchange Commission declared the combined
registration statement effective. Accordingly, all common stock underlying
the transactions covered by our Registration Statement #333-39654 can be sold,
traded or otherwise transferred pursuant to the terms of such registration
statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Report on Form 8-K filed October 13, 2000 reporting the termination
of Agreements with CTII dated October 28, 1999 and Purchase Order
dated June 5, 2000.
Report on Form 8-K filed November 3, 2000 reporting a change in
accountants from H.J. & Associates to Deloitte and Touche, LLP.
Exhibits. The following exhibits are filed hereto:
9.1 Amended and Restated Voting Agreement dated December 15,
2000 between David B. Johnston and Computerized Thermal
Imaging, Inc.
9.2 Amended and Restated Voting Agreement dated December 15,
2000 between Daron C. Dillia dba Manhattan Financial Group
and Computerized Thermal Imaging, Inc.
10.1 Employment Agreement dated October 12, 2000 between
Computerized Thermal Imaging, Inc. and John M. Brenna.
10.2 Letter of Agreement Terminating Agreements with CTII dated
October 28, 1999 and Purchase Order dated June 5, 2000
incorporated by reference to Form 8-K filed October 13,
2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPUTERIZED THERMAL IMAGING, INC.
(Registrant)
/s/Richard V. Secord
Dated February 7, 2000 -----------------------------------------
Richard V. Secord
Chairman & Chief Executive Officer
/s/Kevin L. Packard
Dated February 7, 2000 -----------------------------------------
Kevin L. Packard
Chief Financial Officer, Secretary &
Treasurer
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