SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999
Commission file number 000-23955
Computerized Thermal Imaging, Inc.
________________________________________________________________
(Exact name of small business issuer as specified in its charter)
Nevada 87-0458721
____________________________ ________________________________
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
476 HERITAGE PARK BOULEVARD, SUITE 210
LAYTON, UTAH 84041
______________________________________
(Address of principal executive offices)
(801) 776-4700
________________________________________________
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports) Yes [ X ] No [ ], 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:
As of March 31, 1999, the issuer had outstanding 57,366,800 shares of its
Common Stock, $0.001 par value.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The unaudited financial statements of Computerized Thermal Imaging, Inc.,
a Nevada corporation (the "Company"), as of March 31, 1999, were prepared by
Management and commence on the following page. In the opinion of Management
the financial statements fairly present the financial condition of the
Company.
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31, JUNE 30,
1999 1998
------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 472,273 $ 230,064
Deposits 2,204 2,204
------------- ----------------
Total current assets 474,477 232,268
Property and equipment, net 126,870 149,257
------------- ----------------
Total assets $ 601,347 $ 381,525
============= ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable (Note 2) $ 1,332,804 $ 655,390
Accounts payable 659,908 511,920
Accrued liabilities 192,396 278,111
Advances from stockholder 108,175 1,416,574
------------- ----------------
Total current liabilities 2,293,283 2,861,995
Commitments and contingencies - -
Common stock subject to rescission offer - 306,873
(Note 4)
Stockholders' deficit:
Convertible preferred stock, $5.00 par
value, 100,000 shares authorized - -
Common stock, $.001 par value; 100,000,000
shares authorized, 47,565,757 shares
issued and outstanding on June 30,
1998, excluding 771,200 shares subject
to rescission offer; 57,366,800 issued &
outstanding as of March 31, 1999 57,367 47,566
Additional paid-in capital 22,932,103 18,373,060
Subscription receivable (525,000) (525,000)
Losses accumulated during the development
stage (24,156,406) (20,682,969)
-------------- ----------------
Total stockholders' deficit (1,691,936) (2,787,343)
-------------- ----------------
Total liabilities and stockholders'
deficit $ 601,347 $ 381,525
============== ================
The accompanying selected notes are an integral part
of these interim financial statements.
2
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COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998,
THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998,
AND INCEPTION ON JUNE 10, 1987 THOUGH MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED INCEPTION TO
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1999 1998 1999
------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Interest income $ 3,186 $ 1,441 $ 4,853 $ 2,688 $ 24,736
Income from sale of prototype 180,815
------------- ------------- ------------- ------------ -------------
Total income 3,186 1,441 4,853 2,688 205,551
------------- ------------- ------------- ------------ -------------
Operating, general and admin-
istrative expenses 667,880 590,864 1,451,594 2,599,507 15,059,555
Research and development costs 282,183 515,007 1,452,481 1,446,359 6,625,411
Interest expense 169,805 65,299 541,077 239,277 2,113,189
Depreciation expense 10,932 11,218 33,138 23,566 115,059
Litigation settlement - - - - 514,380
------------- ------------- ------------- ------------ -------------
Total expenses 1,130,800 1,182,388 3,478,290 4,308,709 24,427,594
------------- ------------- ------------- ------------ -------------
Net loss before extraordinary (1,127,614) (1,180,946) (3,473,437) (4,306,021) (24,222,043)
item
Extraordinary gain on extin-
guishment of debt - - - - 65,637
------------- ------------- ------------- ------------- -------------
Net loss $ (1,127,614) $ (1,180,946) $ (3,473,437) $ (4,306,021) $(24,156,406)
============= ============= ============= ============= =============
Weighted average shares
outstanding 54,827,433 42,151,613 50,441,705 39,896,549
============= ============= ============= =============
Loss per common share $ (0.02) $ (0.03) $ (0.07) $ (0.11)
============= ============= ============= =============
</TABLE>
The accompanying selected notes are an integral
part of these interim financial statements
3
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998, AND THE
PERIOD FROM INCEPTION, JUNE 10, 1987, THROUGH MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED INCEPTION TO
MARCH 31, MARCH 31, MARCH 31,
1999 1998 1999
------------- ------------ -------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (3,473,437) $(4,306,021) $(24,156,406)
Adjustments to reconcile net loss
to net cash used in operating activities:
Extraordinary gain on debt extin-
guishment - - (65,637)
Depreciation expense 46,880 23,568 128,802
Amortization of debt issuance costs
and discounts 475,368 134,727 815,837
Common stock issued as compensation
for services 30,686 1,262,553 8,386,596
Common stock issued for interest expense - - 423,596
Common stock issued in settlement of
litigation - - 514,380
Common stock issued for failure to
complete timely registration - - 82,216
Changes in operating assets and liabilities:
Increase in deposits - - (2,204)
Increase (decrease) in accounts payable
and accrued liabilities 62,273 (60,904) 852,304
------------- ------------ -------------
Net cash used in operating activities (2,858,230) (2,946,077) (13,020,516)
------------- ------------ -------------
Cash Flows Used in Investing Activities:
Fixed asset capital expenditures (24,493) (72,489) (255,672)
------------- ------------ -------------
Cash used in investing activities (24,493) (72,489) (255,672)
Cash Flows from Financing Activities:
Common stock issued for cash 2,263,200 557,637 9,237,962
Stock offering costs - (90,788) (125,000)
Advances from stockholders 659,686 2,640,822 2,076,260
Proceeds from notes payable and accrued
interest 462,525 3,278 3,321,139
Legal fees and interest added to note 189,521 238,453 489,521
Payment of debt issuance costs - - (133,600)
Payment of notes and convertible debentures (450,000) - (1,117,821)
------------- ------------ -------------
Cash provided in financing activities 3,124,932 3,349,402 13,748,461
Net (decrease) increase in cash 242,209 330,836 472,273
Cash beginning of period 230,064 193,852 -
------------- ------------ -------------
Cash, end of period $ 472,273 $ 524,688 $ 472,273
============= ============= =============
Supplemental Schedule of Non-Cash Financing
and Investing Activities:
Common Stock (8,662,527 shares) issued for
advances from shareholders $ 1,968,085 $ 2,197,500
Common stock (801,439 shares) issued for
convertible subordinated debentures 640,660
Common Stock (711,200 shares) returned to
equity, rescission offer declined 306,873
------------- ------------
Total Supplemental Non-Cash Activities $ 2,274,958 $ 2,838,160
============= ============= =============
Cash paid for interest (no income tax paid) $ 0 $ 0 $ 8,770
============= ============= =============
The accompanying selected notes are an integral part of these interim financial statements.
</TABLE>
4
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Total
Common Common Accumu- Stock-
Stock Stock Paid-in Subscription lated Holders'
Shares Amount Capital Receivable Deficit Deficit
---------- --------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30,1998 47,565,757 $ 47,566 $ 18,373,060 $ (525,000) $(20,682,969) $(2,787,343)
Reclassification of stock
no longer subject to
recission offer 771,200 771 306,102 - - 306,873
Shares issued in a private
placement to a director &
a stockholder for cash 285,000 285 199,715 - - 200,000
Shares issued to a
corporation for a cash in
Regulation D, 504 offering
prior to effective date of
Prospectus with 169,837
shares issued for a
placement fee to a
third party 2,133,862 2,134 997,866 - - 1,000,000
Issuance of common stock to
affiliate to satisfy cash
advances- 3,580,800 3,581 1,786,821 - - 1,790,402
Issuance of common stock to
Pdh,Ltd. for cash advances 355,350 355 177,328 - - 177,683
Issuance of common stock
upon conversion of warrants
at $.72 per share net of
placement fee of $2000 264,166 264 187,936 - - 188,200
Shares issued for services
@ $.67 per share rendered
during third quarter 45,800 46 30,640 - - 30,686
Shares issued in a private
placement - 2,364,865 2,365 872,635 875,000
Net loss for nine months
Ended March 31, 1999 - - - - (3,473,437) (3,473,437)
---------- --------- ------------- ------------ ------------- ------------
Balance at March 31, 1999 57,366,800 $ 57,367 $22,932,103 $ (525,000) $(24,156,406) $(1,691,936)
========== ========= ============= ============ ============= ============
The accompanying selected notes are an integral part of these interim financial statements.
</TABLE>
5
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. UNAUDITED FINANCIAL STATEMENTS:
The unaudited consolidated financial statements for the nine months and three
months ended March 31, 1999, have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. In the opinion of management, all
adjustments necessary for a fair presentation of results of operations have
been made to the interim financial statements. Results of operations for the
three-month and nine-month periods March 31, 1999 and 1998 are not necessarily
indicative of results of operations for the respective full years.
A summary of the Company's significant accounting policies and other
information necessary to understand these consolidated financial statements
for its third quarter ended March 31, 1999, is presented in the Company's
audited financial statements for the years ended June 30, 1998 and 1997.
Accordingly, the Company's audited financial statements, as contained in the
Company's Prospectus, declared effective on January 8, 1999 should be read in
connection with these financial statements.
2. NOTES PAYABLE AND CONVERTIBLE DEBT:
On September 11, 1998, the Company entered into a $347,750 note payable to a
stockholder/affiliate bearing interest at a stated rate of 10% per year and
due April 11, 1999. This note is uncollateralized and may be converted to
common stock of the Company at any time subsequent to its maturity based upon
the lesser of 50% of the closing price of the Company's common stock at the
date of the note or 50% of the price of the Company's common stock at the date
the lender notifies the Company of his intent to convert. The resulting
discount from the fair value of the Company's common stock is being amortized
to expense over the seven-month term of the note and, accordingly, the note
bears an effective interest rate of approximately 131% per year. This note and
a related note in the amount of $250,000 issued on April 15, 1998 with similar
terms, were assigned to Thermal Imaging, Inc. ("TII") and totaled $1,247,126
on April 15, 1999 which represents the original note balances of $597,500,
accrued amortization discount of $597,500 and accrued interest of $52,126. On
April 15, 1999 the Company issued an aggregate of 2,140,164 shares of its
common stock to TII to satisfy the notes.
3. INCOME TAXES:
The Company has incurred losses since its inception and has a net operating
loss carry-forward of approximately $15,000,000 at March 31, 1999.
4. COMMON STOCK SUBJECT TO RESCISSION OFFERS:
Prior to September of 1998, the Company issued a total of 8,876,418 shares of
common stock to affiliates of the Company for cash or other consideration and
such common shares are considered to be "restricted" securities with limited
transferability under state and federal securities laws. These affiliates, in
secondary transactions, subsequently sold or otherwise transferred certain of
the foregoing shares to fourteen non-affiliates. Because of the limited number
of parties involved, Management of the Company does not believe the transfers
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<PAGE>
constituted a "public offering" of the shares; however, in order to limit
certain potential liabilities which could arise from such transfers which
could be deemed in violation of various securities laws, of the shares
transferred to non-affiliates, 771,200 shares became the subject of a
rescission offer made by the affiliates to the non-affiliate transferees.
Such recission offer was made in compliance with certain available exemptions
under the applicable states' securities laws where the transfers took place.
Subsequent to September 30, 1998, all of the stockholders in question elected
to reject the rescission offers and the balance of common stock subject to
rescission orders was reclassified and included in stockholders' equity at
December 31, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
The Company is a development stage company that is a medical imaging
systems integrator producing a computerized clinical thermal imaging
diagnostic and patient management system (the "CTI System"). Computerized
Thermal Medical Imaging, Inc. ("CTMI")(formerly known as Thermal Medical
Imaging, Inc.) is an 80 percent owned subsidiary of the Company that utilizes
the CTI System specially configured as a breast cancer system which is a
non-invasive, non-contact procedure that does not involve breast compression
or exposure to radiation (the "CTMI System"). TRW, Inc. ("TRW") is the
Company's primary systems development vendor.
THIRD QUARTER ENDED MARCH 31, 1999 AND MARCH 31, 1998. The Company
incurred a loss of $1,127,614 for the quarter ended March 31, 1999, as
compared to a loss of $1,180,946 for the third quarter ended March 31, 1998.
The Company had no revenues in either period. General and administrative
expenses increased slightly from $590,864 during the third quarter of the
Company's last fiscal year to $667,880 during the third quarter of this fiscal
year. Payroll, salary, consulting and special/stockholder service fees were up
during this year's third fiscal quarter over the third quarter of last year by
over $173,000. This increase is attributable to expenses related to financial
consulting and capital fund raising services. Legal fees however, between the
two comparable third quarters, reduced this year by $34,000, and accounting
fees reduced by $85,372. The reduction in legal and accounting fees was mainly
due to the completion of legal and accounting expenses related to the filing
of the Company's Form SB-2 Registration Statement and the related Prospectus
declared effective on January 8, 1999. The Company's general and
administrative activities focused on fund raising and support of research
activities which included primarily, clinical testing in 1998-99 and
development expenses with TRW in 1997-98.
During its third quarter of this year, the Company spent $282,183
research and development expenses compared with $515,007 during the same
period in 1998, a $233,000 decrease. The reduction was mostly due to a
significant decrease in estimated TRW contract payables of approximately a
quarter of a million dollars between the comparable quarters. The Company had
no significant expenditures on research equipment during the three months
ended March 31, 1999 as opposed to equipment costs of $67,000 for the three
months ended March 31, 1998. Clinical testing costs rose during the third
quarter of the Company's current fiscal year to $225,848 from $154,930 in the
prior year's third quarter. FDA consulting costs were $51,684 during the third
quarter of 1999 compared to $6,362 in that same period of 1998, a direct
result of the increase in clinical testing expenses.
Interest expenses increased to $169,805 from $65,299 during this year's
third quarter due to the realization of a $110,400 discount on two notes
payable to MFG during this period. This discount is attributable to the fact
that the notes are
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convertible into common stock at a rate of fifty percent (50%) of the market
price of the Company's common stock at maturity. Depreciation expenses during
the two comparable periods were nearly the same.
NINE MONTHS ENDED MARCH 31 1999 AND MARCH 31, 1998. The Company
incurred a loss of $3,473,437 for the nine months ended March 31, 1999 as
compared to a loss of $4,306,021 for that same nine month period in 1998. The
Company had no revenues in either period. The decrease was due to a
substantial decrease in general and administrative expenses. General and
administrative expenses decreased to $1,451,594 for the nine months ended
March 31, 1999 from $2,599,507 during that same nine month period in 1998.
The Company incurred an administrative charge of $850,167 for incentive stock
options issued to non-employees in 1998 with no comparable expense in 1999.
The Company also experienced a decrease in legal and accounting expenses of
approximately $159,000 when comparing the same nine month period last year.
During the nine months ended March 31, 1999, the Company spent
$108,922 on FDA testing and consulting compared with $31,740 in that same
period in 1998. TRW contracts and patent work cost the Company $485,273 in
the first nine months of this fiscal year, a decrease from the $697,469 spent
during that same nine months in the last fiscal year. Equipment for research
was $119,507 for the nine months ended March 31, 1999 with expenditures in
that same time period for the prior year of only $67,313. Clinical trial
expenses significantly increased for the nine months ended March 31, 1999 when
compared to March 31, 1998, and were $531,668 and $220,732, respectively. This
is mostly due to the Company's shift from research and development to clinical
trial testing during this nine month fiscal period.
Depreciation expenses during the first three quarters of the year ended
March 31, 1999 increased to $33,138 over $23,566 in that same nine month
period ended March 31, 1998. Interest in the two comparable nine month
periods, was $541,077 during the nine months ended March 31, 1999, a
substantial increase over that same period in 1998, when interest cost the
Company $239,277. The increase was a result of discounts on notes payable as
discussed above under the comparison of the three month periods.
The Company funded its losses during the nine months ended March 31,
1999 and 1998, through issuances of common stock in exchange for cash
contributions, notes, and through advances from one or more of the parties
which have consistently provided funding to the Company: Thermal Imaging, Inc.
("TII"), an affiliate of Mr. Johnston, Doug Holt doing business as PDH,
Ltd.("PDH"), an independent contractor which provides various services to the
Company, and Daron Dilia doing business as Manhattan Financial Group ("MFG").
The Company received funding of $2,263,200 from sales of stock for cash during
the nine month period ended March 31, 1999, which included a private placement
of stock with an officer/director for a $200,000 cash contribution, the
exercise of certain warrants for proceeds of $188,200, the completion of a
private placement with gross proceeds of $1,000,000, and $875,000 in cash
contributions from MFG pursuant to a stock purchase agreement exercised in
February/March of 1999. The Company also funded operations with stock for
services and non-interest bearing advances from affiliates of the Company.
These transactions included the issuance of 3,936,150 shares to certain
affiliates of the Company as repayment of advances made from July 31, 1997
through December 31, 1998, aggregating $1,968,085. The Company continued to
received funding from affiliates in 1999 in the amount of $659,686. The
Company currently has a balance of $59,000 due on a revolving note with its
former legal counsel; the Company made payments of $450,000 to such law firm
during the first three quarters of this fiscal year, with an additional
$50,000 payment made subsequent to the quarter end.
During the first nine months of last years fiscal year, the Company
satisfied a
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large part of its cash flow requirement through issuance of shares. Shares
were issued to affiliates to satisfy advances consisting of 6,382,713 common
shares in repayment of advances totaling $2,197,500. Common shares
aggregating 890,752 were also issued as compensation and for services valued
at $383,220. In addition, the Company paid off $640,660 in debentures and
accrued interest through the issuance of 1,621,526 common shares. The Company
also issued 2,914,875 shares for cash proceeds of $557,637.
LIQUIDITY AND CAPITAL RESOURCES
NO REVENUES FROM OPERATIONS -The Company has had no significant
revenues from operations from inception. The Company's cash requirements
consist of its salaries, office expenditures, legal and accounting fees to
comply with securities registration and reporting requirements, legal fees for
contracting, CTMI's operational budget requirements, including TRW's technical
support of CTMI and the Company, and the costs of maintaining CTMI's clinical
trials. Available funds have been insufficient to pay Company and CTMI
operating costs, incurred TRW development costs and incurred legal fees. The
Company intends to raise additional equity funds from the sale of the common
stock through private offerings, either pursuant to an investment agreement or
from new investors, including Beach Boulevard LLC, as discussed below, to meet
its cash requirements through 1999.
PROSPECTUS DECLARED EFFECTIVE - On January 8, 1999, a Prospectus filed
as part of a Form SB2 Registration Statement with the Securities and Exchange
Commission was declared effective for the registration of certain shares of
common stock on behalf of selling shareholders as well as common stock
underlying certain warrants (the "Prospectus"). Although the Company hopes
that certain of the warrants with underlying shares registered in the
Prospectus are exercised, there can be no assurance that the same will take
place, the majority of the warrants outstanding as of the date hereof are
unlikely to be exercised because the exercise price is considerably higher
than the price per share of the Company's common stock in the over-the-counter
market.
PROSPECTUS AMENDED -POST EFFECTIVE AMENDMENT FILED - on April 1, 1999,
the Company filed a Post Effective Amendment to its Registration Statement on
Form SB-2 with a request for effectiveness of April 23, 1999. The purpose of
the amendment was to amend the Company's Prospectus regarding Bristol Asset
Management LLC, a party to a material investment agreement disclosed in the
Company's Prospectus. Subsequent to the effective date of the Prospectus,
January 8, 1999, Bristol declined to participate in such investment agreement.
The Company executed a new investment agreement on March 4, 1999 with Beach
Boulevard LLC to meet its expected capital needs. (The Beach Boulevard
Security Purchase Agreement was filed as Exhibit 10eee of the Post-Effective
Amendment to its Registration Statement on Form SB-2, filed on April 1, 1999,
with the Securities and Exchange Commission, and incorporated herein by
reference.)
BEACH BOULEVARD SECURITY PURCHASE AGREEMENT. On March 4, 1999, the
Company entered into an agreement with Beach Boulevard LLC ("Beach"). Subject
to certain conditions, the Company may require Beach to purchase up to
$7,000,000 of its common stock in tranches. Such conditions include that the
Current Price of the Company's common stock (the lowest sale price of the
Common Stock as reported by Bloomberg, or if not so reported, as reported by
the over-the-counter market during the ten trading days prior to the agreed
upon tranche date) after the Initial Closing Date, be seventy-five cents
($.75) or more; and the average daily trading volume for the twenty
consecutive trading days ending the day before any subsequent closing date, be
200,000 or more shares. In addition, the Company's filed and effective
Registration Statement shall continue to remain effective for all subsequent
tranches. The Company must also warrant the unrestrained trading of its
Common
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Stock on he OTC Bulletin Board, the registration for resale of the newly
issued shares under the Securities Act of 1933, and maintain its status under
the Exchange Act.
The first tranche (the "Initial Tranche")shall aggregate $1,500,000.
Subject to certain limitations and conditions precedent, the Company may
require Beach to purchase additional shares at $500,000 per month commencing
two months after the closing date (the date of the closing of the purchase and
sale of the Initial Tranche) at any time, but not more than once in any
calendar month and not prior to 5 business days after the immediately
preceding closing date with total purchases not to exceed $7,000,000. Such
shares purchased in each subsequent tranche shall equal the price of the
tranche, divided by the Current Price, multiplied by the applicable
percentage. (The applicable percentage is 82.5% for the Initial Closing Date
and 85% for each additional closing date.
If the market price of the Company's common shares is less than the Base
Price (95% of the Current Price applicable to that closing date) at any
trading day during the period (the "Effective Period") beginning on the first
trading day of the relevant Closing Date, and continuing through the 20th
trading day after such closing date, the Company will be obligated to issue
Beach Supplemental Shares. These Supplemental Shares shall be issued no later
than the 30th trading day after each Closing Date. The number of Supplemental
Shares shall be equal in number to the product of the purchased shares of that
relevant Closing Date multiplied by the excess of 95% of the Current Price of
the Common Stock applicable to the Closing Date over the Market Price of the
Common Stock, divided by the Market Price of the Common Stock. For the
purposes of this calculation, Market Price shall mean the average of the
lowest price of a share of Common Stock, as reported by Bloomberg, LP for any
5 trading days during the Effective Period as such dates are selected by the
Purchaser.
As of the date of this Report, Beach has not purchased any shares of the
Company's Common Stock. (See Item 6, Exhibits).
THE MANHATTAN FINANCIAL GROUP INVESTMENT AGREEMENT. On February 8,
1999, Daron Dilia, doing business as Manhattan Financial Group, agreed to
purchase a minimum of $250,000 of the Company's common stock and a maximum of
$1,250,000 of the Company's common stock on or before March 15, 1999. As
consideration therefor, the Company would allow MFG to purchase the common
shares at 50% of the low bid price during that time period (February 8 through
March 15, 1999). The Company also granted piggy back registration rights to
MFG. The shares issued in the transaction will be restricted. During February
and March, 1999, MFG purchased shares of the Company's common stock under the
agreement, and paid a purchase price of $ 875,000 for 2,364,865 shares of
common stock.
CAPITAL REQUIREMENTS OVER THE NEXT YEAR The Company will require an
estimated $5,000,000 of which $380,000 is owed to TRW and $59,000 is owed its
former attorneys. Such cash requirements for the next 12 months will be needed
for its research and development programs, preclinical and clinical testing,
development of its sales and distribution efforts, operating expenses, and
regulatory processes. The Company's capital requirements will depend on
numerous factors, including the progress of its research and development
programs; results of preclinical and clinical testing; the time and cost
involved in obtaining regulatory approvals; the cost of filing, prosecuting,
defending and enforcing any patent claims and other intellectual property
rights; the economic impact of competing technological and market
developments; developments and changes in the Company's existing research,
licensing and other relationships; and the terms of any new collaborative,
licensing and other arrangements that the Company may establish. During the
three years prior to the date of its Prospectus, David B. Johnston, the
Chairman of the Board and the
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Chief Executive Officer of the Company, and certain affiliates of Mr. Johnston
and the Company have contributed approximately $4,175,000 to the capital of
the Company in exchange for shares of the Common Stock. The Company believes
that its current assets and potential additional contributions from affiliates
of the Company and certain accredited investors, as needed, as well as funds
received from Beach pursuant to the investment agreement, will be sufficient
to meet the Company's short-term operating expenses and capital expenditures.
At the present time, however, there is no commitment from anyone other than
Beach with respect to any future capital contributions to the Company, and
Beach's contributions are predicated upon certain factors. Although, the
Company believes the first contribution will be made by Beach during the
Company's fourth quarter, there is no way to predict whether or not the
Company will meet the condition's precedent to Beach's requirement to purchase
shares including the requirement that the Company's stock be worth a certain
amount in the market place. (For a description of the agreement with Beach,
see the section entitled "BEACH BOULEVARD SECURITY PURCHASE AGREEMENT.") As of
this date, the Company believes the bulk of the needed capital over the next
12 months will come from Beach. If such funding source fails or the Company
fails to meet its requirements under the Security Purchase Agreement with
Beach, the Company will need to locate additional sources of material funding,
and will, as in the past, rely upon affiliate stockholders to continue to
support the Company either through loans or contributions to capital in
exchange for the restricted common stock of the Company.
The Company is nearing completion of its initial contract with TRW for the
soft ware writing, documentation and implementation assistance. The Company
anticipates entering into a new contract with TRW for further development work
in the early part of the next fiscal year.
If the Company does not commence generating adequate revenues, or if
it does not attract new capital sufficient to meet its operating needs, the
Company will not be able maintain the existing clinical trials to obtain FDA
approval for the CTMI System or to obtain insurance payment codes for the CTI
System. In such event, the Company would have difficulty selling its products
in the United States. The Company would then be forced to focus on sales to
foreign markets that do not require FDA approval.
DEPENDENCE OF CTMI ON THE COMPANY. CTMI, an 80% subsidiary of the
Company which utilizes the CTI System especially configured as a breast cancer
system which is a non-invasive, non-contact procedure that does not involve
breast compression or exposure to radiation (the "CTMI System"), has no source
of revenue, other than contributions to its capital made by the Company. It
is not expected that CTMI's dependence on the Company will change until the
clinical trials are successfully concluded and CTMI or the Company then is
able to market for sale or use the CTMI System. CTMI has no assurance that it
can finance its development, marketing, or production costs. The Company must
fund or finance the balance of the clinical trials and any subsequent
development, operating, marketing and production costs until CTMI develops its
business and then is capable of financing its operations. CTMI has developed
the CTMI System exclusively using contributions of capital from the Company.
The efficacy of the CTMI System is currently subject to confirmation in FDA
clinical trials as a tool complementary to mammography. The FDA clinical
trials requirement for CTMI to receive its PMA approval requires four separate
medical facilities to conduct examinations and conduct and produce clinical
statistical data from use of the CTMI System. Those clinical trials are
currently being conducted at: Providence Hospital in Washington DC, at s Los
Angeles hospital managed by the University of Southern California Medical
School, at Mt. Sinai Hospital in Miami, Florida, and at a new site, St. Agnes
in Baltimore, Maryland. In June a testing site will be opened at Lahee Clinic
in Boston, Massachusetts. The rate of conducting examinations determines the
monthly cash flow requirements and the time
11
<PAGE>
for qualifying for PMA. CTMI also incurs costs for FDA legal counsel and for
consulting services from a firm recognized by the FDA for overseeing clinical
trial data collection and adherence to FDA requirements. The Company has
advanced CTMI approximately 5.8 Million through March 31, 1999. The estimated
requirements to fund CTMI's research and clinical testing are approximately
$500,000 per quarter.
If the Company is incapable of raising sufficient funds to finance CTMI's
clinical trials, as well as funds sufficient to conduct its own business, CTMI
may be forced to abandon its FDA plans.
CTI SYSTEM DEVELOPMENT. The Company has committed to devote a major
portion of its resources and subsequent capital financing, in excess of its
fixed operating costs, to the operations of CTMI for the completion of the
ongoing FDA Clinical Trials. Although the Company is prioritizing its funding
of CTMI, it also plans to conduct multiple clinical trials involving the CTI
System in the identification of soft tissue maladies. Although such clinical
trials may not be necessary for physicians to use the CTI System, the benefit
of specific purpose clinical trials will be to enable the Company to reference
medical efficacy claims in connection with marketing efforts, to enhance
physician confidence in the CTI System, and to obtain the designation of
insurance payment codes for particular CTI System procedures. Management
believes that the market in the United States alone for the CTI System would
be dramatically enhanced if clinical trials were to substantiate the Company's
assertion that the CTI System can distinguish and verify fraudulent (versus
real muscular) lower back pains.
MARKETING. The Company cannot assure investors that expenditures for
clinical trials will result in confirming results or an FDA approval, nor can
the Company be sure that any FDA approval or successful clinical trial will
result in a profitable business activity. In order to be successful, the CTMI
System and the CTI System must be accepted both by physicians and the public.
The primary method for creating physician acceptance of the Systems will be
through the publication and presentation of technical research papers to
medical professional groups. Management has already collaborated with
physicians working on the CTMI System clinical trial program to submit an
abstract report to the Radiological Society of North America for presentation
at their December 1998 conference in Chicago. If the abstract is selected by
the society, a detailed research paper will be presented as part of the
conference and published in the proceedings. As more research data becomes
available, the Company hopes to team with research physicians on similar
projects in the future.
A marketing campaign must also be undertaken to educate the general
public regarding the advantages associated with the use of the Systems.
Management understands that this marketing effort will require substantial
funds which are not presently available. While most of the funds needed to
engage in a large scale marketing effort would be necessary if the PMA were
approved and would likely have to come from equity financing, Management
believes that usage charges from the CTMI System will provide sufficient funds
to initiate the campaign. Based upon the current pace of clinical trials, the
600 qualified patient examinations required by the FDA should be completed by
the end of 1999 for consideration for the FDA to grant the PMA.
EQUIPMENT FINANCING. The Company expects to commence production and
sales for the CTI System when capital or debt financing is available and Use
Agreements are in place. Equipment financing will be necessary for the Company
or CTMI to market the CTMI and/or CTI Systems to enable manufacturing,
production, and extensive marketing. Foreign sales of the CTI System may be
likely with adequate marketing expenditures, but substantial U.S. sales are
only likely to follow an FDA program for approval. A the present time,
management doe not expect to seek FDA
12
<PAGE>
approval for the CTI System. However, CTMI is actively pursuing FDA approval
(the "PMA") for the CTMI System. The Company contemplates revenues from the
CTI System in the U.S. to be generated pursuant to Use Agreements, placing the
CTI System in a hospital or medical care facility under an agreement requiring
the user to compensate the Company based upon the time used. The Company
contemplates systems integration and sales agreements for overseas production
and sales. The Company expects to obtain equipment financing for the Company
and CTMI, secured by the sales or Use Agreements and the inventory produced.
Assuming the PMA is granted after the CTMI clinical trials are completed, CTMI
anticipates funding to be available from capital and debt financing to
commence production and sales of the CTMI System. The Company has entered into
discussions with equipment financing companies that have indicated that the
Systems can be financed in this manner.
YEAR 2000 COMPLIANCE. The Year 2000 issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. The Company believes that its
internal systems are Year 2000 compliant or will be upgraded or replaced in
connection with previously planned changes to information systems prior to the
need to comply with Year 2000 requirements. However, the Company is uncertain
as to the extent its customers and vendors may be affected by Year 2000 issues
that require commitment of significant resources and may cause disruptions in
the customers' and vendors' businesses.
ANY FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-QSB REFLECT
MANAGEMENT'S BEST JUDGMENT BASED ON FACTORS CURRENTLY KNOWN AND INVOLVE RISKS
AND UNCERTAINTIES. ACTUAL RESULTS MAY VARY MATERIALLY.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
No instruments defining the rights of securities holders have been
materially modified, limited or qualified. The following securities were
issued since the Company's last report for the quarter ended December 31, 1999
(contained in the Company's registration statement on Form SB-2) which have
not been registered under the Securities Act of 1933. The following
transactions took place during the Company's third quarter, two of which were
reported in the Company's Quarterly Report on Form 10QSB for the period ended
December 31, 1999, and filed with the Securities and Exchange Commission on
March 1, 1999.
1. On January 29, 1999, as an inducement to exercise certain warrants
(the underlying common shares of such warrants were registered as part of the
Company's Prospectus, declared effective on January 8, 1999), the Company
issued an aggregate of 264,166 warrants (the "New Warrants")to three parties.
The parties were beneficial owners of certain of those warrants discussed in
the Prospectus and in the record name of Ambient Capital, the Company's
financial advisor. The Company received $188,200, net of a $2,000 fee, from
the exercise of the warrants and issued 264,166 common shares (registered in
the Prospectus) in connection therewith. The same number of New Warrants were
also issued in reliance upon the exemption provided for under Section 4(2) of
the Securities Act of 1933 (the "Act") as "an isolated
13
<PAGE>
transaction not involving a public offering." The New Warrants were issued to
the following parties: Bristol Asset LLC was issued 104,066 Warrants, Gary
Post was issued 150,000 Warrants, and Pak Choi was issued 10,000 Warrants.
Each Warrant is convertible into one common share of Company's stock at an
exercise price of $1.19 per share and must be exercised on or before February
1, 2002. (Reported on the Company's Quarterly Report on Form 10QSB for
December 31,1998, filed with the Securities and Exchange Commission on March
1, 1999.)
2. 2,133,862 unregistered common shares were issued for a total of
$1,000,000 in connection with an offering made in reliance upon the exemption
provided for in Section 3(b) under Regulation D, Rule 504. $720,000 was paid
as of the quarter ended December 31, 1998, and the balance of $280,000 was
received in January of 1999. Of the 2,133,862 shares issued in the
transaction, 169,837 shares were issued to a third party as a placement fee.
Because the Company was not yet a "reporting company" under Section 13 or
15(d) of the Securities and Exchange Act of 1934 at the time of the offering,
the Company believes that the exemption was available to it. It also believes
that it complied with the applicable terms and conditions of Rule 504.
(Reported on the Company's Quarterly Report on Form 10QSB for December
31,1998, filed with the Securities and Exchange Commission on March 1, 1999.)
3. 3,580,800 shares were issued in January, 1999, to Thermal Imaging,
Inc., an affiliate of the Company, to satisfy $1,790,701 in cash advances
made by TII to the Company from July 1, 1997 through December 31, 1998. An
additional 355,350 shares were issued to PDH Ltd. to satisfy $177,683,39 in
cash advances made by PDH Ltd. to the Company from July 1, 1997 through
December 31, 1998. The foregoing shares were issued pursuant to the exemption
from the registration requirements of the Act provided for under Section 4(2)
as a "transaction not involving a public offering."
4. The Company issued an aggregate of 2,364,865 shares of its common
stock to Manhattan Financial Group ("MFG") pursuant to an agreement as between
the Company and MFG dated March 29, 1999. (The agreement was filed as Exhibit
10, to the Company's Quarterly Report on Form 10QSB for December 31,1998,
filed with the Securities and Exchange Commission on March 1, 1999, and
incorporated herein by reference.) Under the agreement MFG was entitled to
purchase between $250,000 to $1,250,000 of the Company's common shares at a
purchase price equal to 50% of the low bid price during the time period from
February 8, 1999 through March 15, 1999. The low bid price during those dates
was $0.74 per share in the over the counter market. MFG paid $875,000 for the
shares in the transaction. The foregoing shares were issued pursuant to the
exemption from the registration requirements of the Act provided for under
Section 4(2) as a "transaction not involving a public offering."
5. The Company issued 45,800 shares for services: 9,000 shares to
Jeffrey and Margo Wilson (4,500 shares each), and 36,800 to James O'Brien,
Optimum Source International. Such shares were issued at $.67 per share and
were issued pursuant to Section 4(2) of the Act as a "transaction not
involving a public offering."
The following transaction took place subsequent to the Company's third quarter
ended:
6. In early May of 1999, the Company issued a total of 2,140,164 of its
unregistered common shares to satisfy a total of $1,247,126 in notes payable
to MFG. The amount due was comprised of the remaining principal due on the
notes in the amount of $597,500, accrued amortization discount of $597,500 and
accrued interest of $52,126. The shares were issued pursuant to Section 4(2)
of the Act.
14
<PAGE>
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The following exhibits are filed as part of this Form 10-QSB for the Company's
quarter ended March 31, 1999:
(i)
EXHIBIT NO. EXHIBIT DESCRIPTION(1) WHERE INCORPORATED IN THIS REPORT
- ---------- ------------------- -------------------------------
Post Effective Amendment to Part I
Registration Statement on
Form SB-2, filed April 1,
1999(2)
Quarterly Report on Form 10QSB Part II
10QSB for the quarter ended
December 31, 1999,
filed on March 1, 1999(2)
(ii)
EXHIBIT
NO. IDENTIFICATION OF EXHIBIT
- ----------- --------------------------
10ddd Manhattan Financial Agreement(3)
10eee Beach Boulevard LLC Security Agreement(4)
27 Financial Data Schedule.
(b} Reports on Form 8-K -- None
(1) Summaries of all Exhibits contained within this Report are modified in
their entirety by reference to these exhibits
(2) These documents and related exhibits have been previously filed with the
Securities and Exchange Commission.
(3) Previously filed as an Exhibit to the Company's Quarterly Report on Form
10-QSB for December 31, 1998, filed on March 1, 1999.
(4) Previously filed as part of the Company's Post-Effective Amendment to its
Registration Statement on Form SB-2, filed on April 1, 1999.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMPUTERIZED THERMAL IMAGING, INC.
(Registrant)
Date: May 17,1999 By: /s/ David A. Packer
------------------------
David A. Packer
President/Treasurer
Chief Financial Officer
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