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 12/31/98
Commission file number 333-47237
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
12months (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 [ ] No [ x ]
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 December 31, 1998, the issuer had outstanding 50,086,998 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 December 31, 1998, 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)
DECEMBER 31, JUNE 30,
1998 1998
------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 257,704 $ 230,064
Deposits 2,204 2,204
------------- ----------------
Total current assets 259,908 232,268
Property and equipment, net 127,669 149,257
------------- ----------------
Total assets $ 387,577 $ 381,525
============= ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable (Note 2) $ 1,282,343 $ 655,390
Accounts payable 819,865 511,920
Accrued liabilities 143,255 278,111
Advances from stockholder 2,048,407 1,416,574
------------- ----------------
Total current liabilities 4,293,870 2,861,995
------------- ----------------
Commitments and contingencies
Common stock subject to rescission offer - 306,873
(Note 5) ------------- ----------------
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; 50,086,998 issued &
outstanding as of December 31, 1998 50,087 47,566
Additional paid-in capital 19,597,412 18,373,060
Subscription receivable (525,000) (525,000)
Losses accumulated during the development
stage (23,028,792) (20,682,969)
-------------- ----------------
Total stockholders' deficit (3,906,293) (2,787,343)
-------------- ----------------
Total liabilities and stockholders'
deficit $ 387,577 $ 381,525
============== ================
The accompanying selected notes are an integral
part of these interim financial statements.
2
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997,
THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997,
AND INCEPTION ON JUNE 10, 1987 THOUGH DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED INCEPTION TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997 1998
------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Interest income $ 934 $ 913 $ 1,667 $ 1,247 $ 21,550
Income from sale of prototype - - - - 180,815
------------- ------------- ------------- ------------ -------------
Total income 934 913 1,667 1,247 202,365
------------- ------------- ------------- ------------ -------------
Operating, general and admin-
istrative expenses 334,614 1,679,941 805,848 2,030,345 14,391,675
Research and development costs 593,411 652,349 1,148,164 909,651 6,343,228
Interest expense 202,783 5,960 371,272 173,978 1,943,384
Depreciation expense 10,686 59,423 22,206 12,348 104,127
Litigation settlement - - - - 514,380
------------- ------------- ------------- ------------ -------------
Total expenses 1,141,494 2,937,673 2,347,490 3,126,322 23,296,794
------------- ------------- ------------- ------------ -------------
Net loss before extraordinary (1,140,560) (2,396,760) (2,345,823) (3,125,075) (23,094,429)
item
Extraordinary gain on extin-
guishment of debt - - - - 65,637
------------- ------------- ------------- ------------- -------------
Net loss $ (1,140,560) $ (2,396,760) $(2,345,823) $(3,125,075) $(23,028,792)
============= ============= ============= ============= =============
Weighted average shares
outstanding 48,931,925 40,030,358 48,248,841 38,769,017
============= ============= ============= ============
Loss per common share $ (0.023) $ (0.060) $ (0.049) $ (0.081)
============= ============= ============= ============
</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 SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997, AND THE
PERIOD FROM INCEPTION, JUNE 10, 1987, THROUGH DECEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED INCEPTION TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998
------------- ------------ -------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (2,345,823) $(3,125,075) $(23,028,792)
Adjustments to reconcile net loss
to net cash used in operating activities:
Extraordinary gain on debt extin-
guishment - - (65,637)
Depreciation expense 22,206 12,348 104,127
Amortization of debt issuance costs
and discounts 329,833 134,727 670,302
Common stock issued as compensation
for services - 1,198,334 8,355,910
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 173,089 (60,904) 963,120
------------- ------------- -------------
Net cash used in operating activities (1,820,695) (1,840,570) (11,982,982)
------------- ------------- -------------
Cash Flows Used in Investing Activities:
Fixed asset capital expenditures (618) (19,211) (231,796)
------------- ------------- -------------
Cash used in investing activities (618) (19,211) (231,796)
Cash Flows from Financing Activities:
Common stock issued for cash 920,000 - 7,894,762
Stock offering costs - (54,287) (125,000)
Advances from stockholders 631,833 1,680,610 2,048,407
Proceeds from notes payable and accrued
interest 377,218 - 3,235,832
Legal fees and interest added to note 219,902 296,525 519,902
Payment of debt issuance costs - - (133,600)
Payment of notes and convertible debentures (300,000) - (967,821)
------------- ------------- -------------
Cash provided in financing activities 1,848,953 1,922,848 12,472,482
Net (decrease) increase in cash 27,640 63,067 257,704
Cash beginning of period 230,064 193,852 -
------------- ------------- -------------
Cash, end of period $ 257,704 $ 256,919 $ 257,704
============= ============= =============
Supplemental Schedule of Non-Cash Financing
and Investing Activities:
Common Stock (4,727,177 shares) issued for
advances from shareholders $ - $ 1,608,260
Common stock (801,439 shares) issued for
convertible subordinated debentures - 355,500
Common Stock (711,200 shares) returned to
equity, rescission offer declined 306,873 -
------------- -------------
Total Supplemental Non-Cash Activities $ 306,873 $ 1,963,760
============= ============= =============
Cash paid for interest (no income tax paid) $ 0 $ 0 $ 8,770
============= ============= =============
</TABLE>
The accompanying selected notes are an integral
part of these interim financial statements.
4
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
(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 100,467
shares issued for a
placement fee to a
third party 1,465,041 1,465 718,535 - - 720,000
Net loss for six months
ended December 31, 1998 - - - - (2,345,823) (2,345,823)
---------- -------- ------------ ------------- -------------- ------------
Balance, December 31, 1998 50,086,998 $ 50,087 $ 19,597,412 $ (525,000) $ (23,028,792) $(3,906,293)
========== ======== ============ ============= ============== ============
The accompanying notes are an integral part of these financial statements
5
</TABLE>
<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 six months and three
months ended December 31, 1998, 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 six month periods December, 1998 and 1997 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 second quarter ended December 31, 1998, 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, were
assigned to Thermal Imaging, Inc. ("TII") and totaled $1,061,218 at December
31, 1998, which represents the original note balances of $597,750, accrued
amortization discount of $434,000 and accrued interest of $29,468.
3. INCOME TAXES:
The Company has incurred losses since its inception and has a net operating
loss carry-forward of approximately $15,000,000 dat December 31, 1998.
4. COMPREHENSIVE INCOME:
Effective July 1, 1998 the Company adopted Statement of Financial Accounting
standards ("SFAS") No. 130, Reporting Comprehensive Income, which requires a
company to display an amount representing comprehensive income as part of the
Company's basic financial statements. The Company's financial statements
include none of the additional elements that affect comprehensive income,
therefore comprehensive income and net income are identical.
6
<PAGE>
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. COMMON STOCK SUBJECT TO RESCISSION OFFERS:
During 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
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"). Thermal Medical
Imaging, Inc. ("TMI") 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 "TMI System"). TRW, Inc. ("TRW") is
the Company's primary systems development vendor.
SECOND QUARTER ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997. The
Company incurred a loss of $1,140,560 for the quarter ended December 31, 1998,
as compared to a loss of $2,396,760 for the three months ending December 31,
1997. The Company had no revenues in either period. The decrease in losses
was attributable to a significant decrease in general and administrative
expenses.
General and administrative expenses decreased from $1,679,941 during
the second quarter of 1997 to $334,614 during the same period in 1998. The
1997 period includes a charge of $850,167 for options issued to a consultant
with no comparable expense in 1998. This decrease was also due to decreased
legal and accounting fees for 1998 over 1997 and decreases in consulting fees
between the two periods. The Company's general and administrative activities
focused on fund raising and support of research activities which included
primarily, clinical testing in 1998 and development expenses with TRW in 1997.
7
<PAGE>
During the second quarter of 1998, the Company spent $593,411 on
research an development expenses compared with $652,349 during the same period
in 1997. Clinical testing costs during the second quarter of 1998 rose to
$148,092 from $65,212 in the prior year's quarter. The Company's expenses
incurred in connection with the TRW contracts decreased to $317,641 in the
second quarter of 1998 as compared to $493,374 in 1997. The costs incurred for
research equipment during the second quarter of 1998 were $37,285 and FDA
consulting costs were $38,099 with no comparable expense in 1997 for equipment
and $20,672 for FDA ting/consulting costs. Interest expense increased to
$202,783 from $59,423 during the second quarter of 1998 versus 1997 due to the
realization of a $329,833 discount on two notes payable to MFG during this
period. This discount is attributable to the fact that the notes are
convertible into common stock at a rate of fifty percent (50%) of the market
price of the Company's common stock at maturity. Depreciation expense
increased in the second quarter of 1998 to $10,686 from $5,960 in 1997.
SIX MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997. The Company
incurred a loss of $2,345,823 for the six months ended December 31, 1998 as
compared to a loss of $3,125,075 for that same six month period in 1997. 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 $805,848 for the six months ended
December 31, 1998 from $2,030,345 during that same period in 1997. The
decrease was largely due to a decrease in consulting fee expenses from
$1,374,591 for the six months ended December 1997, to $231,301 for the first
half of the next fiscal year. The decrease was due to the lack of stock
transactions to fund general and administrative expenses in 1998. The Company
funded $1,198,334 in general and administrative expenses through the issuance
of stock in 1997. The Company also experienced a decrease in legal and
accounting of approximately $36,000 when comparing the 1998 and 1997 periods.
During the six months ended December 31, 1998, the Company spent
$57,238 on FDA testing and consulting compared with $25,379 in that same
period in 1997. TRW contracts and patent work cost the Company $552,679 in
the first half of the fiscal year 1998, a decrease from the $709,961 spent in
the first half of the fiscal year 1997. Equipment for research was $123,055
for the six months ended December 31, 1998 with no such expenditures in that
same time period for the prior year. Clinical trial expenses significantly
increased for the six months ended December 31, 1998 when compared to December
31, 1997, and were $304,521 and $65,802, respectively. Depreciation expenses
at first half of the year ended December 31, 1998 increased to $22,206 over
$12,348 in 1997. Interest in the two comparable six month periods, was
$371,272 as of December 31, 1998, a substantial increase over that same period
in 1997, when interest cost the Company $173,978.
The Company funded its losses during the six months ended December
31, 1998 and 1997, 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 $631,833 in non-interest bearing advances in
the period ending December 31, 1998, and $1,680,610 in non-interest bearing
advances in the that same period of 1997. The Company received loans from MFG
in the amount of $347,750 during the September and October of 1998 and no
notes were entered into in the comparative period of 1997. The Company also
8
<PAGE>
received $219,902 in legal services during the six months ended December 31,
1998 which were incorporated into the Company's revolving note agreement with
the Company's law firm. The Company also made payments of $300,000 to its law
firm, $150,000 in each of the first two quarters of 1998. During the first six
months of 1997 fiscal period, the Company satisfied a large part of its cash
flow requirement through issuance of shares. Shares were issued to affiliates
to satisfy advances consisting of 4,727,177 common shares in repayment of
advances totaling $1,608,260. Common shares aggregating 871,333 were also
issued as compensation and for services valued at $348,167. In addition, the
Company paid off $355,500 in debentures and accrued interest through the
issuance of 801,439 common shares. During the comparable six month period of
1998, the Company issued 1,750,041 common shares for cash contributions of
$862,400.
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, TMI's operational budget requirements, including TRW's technical
support of TMI and the Company, and the costs of maintaining TMI's clinical
trials. Available funds have been insufficient to pay Company and TMI
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 introduced to the Company, 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. Since the effective date of the Prospectus, and subsequent to the end
of the Company's second fiscal quarter, the Company has received capital
contributions as a result of the exercise of warrants from only one party
totaling $188,200. Although the Company hopes that other warrant holders may
elect to convert warrants into common shares resulting in additional capital
contributions to the Company, 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.
THE MANHATTAN FINANCIAL GROUP INVESTMENT AGREEMENT. Subsequent to
the Company's second fiscal period, 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 and will give the Company some
short term liquidity. MFG is one of the parties which has consistently
provided funding to the Company.
<PAGE> 9
CAPITAL REQUIREMENTS OVER THE NEXT YEAR The Company will require an
estimated $5,000,000 of which $400,000 is owed to TRW and $221,125 is owed its
former attorneys (less $50,000 paid to the former attorneys after the fiscal
period end, in January of 1999). 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 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, 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 MFG with
respect to any future capital contributions to the Company, and there is no
way to predict when and if any such additional contributions may be made.
Consequently, the bulk of the needed capital over the next 12 months must come
from one or more substantial new investors. Although the Company hopes to
complete a securities purchase agreement with a substantial new investor, as
of this date, it has no firm commitment from such investor, or any other
substantial new investors. Until such time as it can locate a source of
material funding, the Company expects 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.
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 TMI 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 TMI ON THE COMPANY. TMI, 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 "TMI System"), has no source
of revenue, other than contributions to its capital made by the Company. It
is not expected that TMI's dependence on the Company will change until the
clinical trials are successfully concluded and TMI or the Company then is able
to market for sale or use the TMI System. TMI 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 TMI develops its business and
then is capable of financing its operations. TMI has developed the TMI System
exclusively using contributions of capital from the Company. The efficacy of
the TMI System is currently subject to confirmation in FDA clinical trials as
a tool complementary to mammography. The FDA clinical trials requirement for
<PAGE> 10
TMI to receive its PMA approval requires four separate medical facilities to
conduct examinations and conduct and produce clinical statistical data from
use of the TMI System. Those clinical trials are currently being conducted at
Providence Hospital in Washinton DC, at two Los Angeles hospitals managed by
the University of Southern California Medical School, and at Mt. Sinai
Hospital in Miami, Florida. The rate of conducting examinations determines the
monthly cash flow requirements and the time for qualifying for PMA. TMI 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 TMI approximately 5.5
Million through December 31, 1998. The estimated requirements to fund TMI's
research and clinical testing are approximately $500,000 per quarter.
If the Company is incapable of raising sufficient funds to finance TMI's
clinical trials, as well as funds sufficient to conduct its own business, TMI
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 TMI for the completion of the
ongoing FDA Clinical Trials. Although the Company is prioritizing its funding
of TMI, 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 TMI
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 TMI 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 TMI 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.
<PAGE> 11
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 TMI to market the TMI 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 approval for the CTI System. However,
TMI is actively pursuing FDA approval (the "PMA") for the TMI 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 TMI, secured by the sales or
Use Agreements and the inventory produced. Assuming the PMA is granted after
the TMI clinical trials are completed, TMI anticipates funding to be available
from capital and debt financing to commence production and sales of the TMI
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 September 30,
1998 (contained in the Company's registration statement on Form SB-2) which
have not been registered under the Securities Act of 1933.
1. Subsequent to the Company's second quarter ended, 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
<PAGE> 12
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 as "an isolated 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.
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. $772,000 was paid
as of the quarter ended December 31, 1998, and the balance 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 of 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.
3. In October of the 1998, the Company issued 285,000 shares of its
unregistered common stock to an officer and director and to one shareholder
for a cash payment of $200,000. The Company relied on the exemption from
registration provided for under Section 4(2) as a "transaction not involving a
public offering".
4. Subsequent to the Company's first quarter, an aggregate of 771,200
of the Company's common shares were reclassified as outstanding. The subject
shares were part of a total of 8,876,418 shares of common stock issued in 1998
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
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 became the subject of a recission 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.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE> 13
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The following exhibits are filed herewith:
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
- ----------- --------------------------
10(ddd) Stock Purchase Agreement with Manhattan Financial Group, dated
February 8, 1999
27 Financial Data Schedule.
(b} Reports on Form 8-K -- None
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: March 1,1999 By: /s/ David Johnston
------------------------
David B. Johnston
Chairman of the
Board of Directors and
Chief Executive Officer
Exhibit 10(ddd)
Manhattan Financial Group
1147 Manhattan Avenue, #134
Manhattan Beach, CA 90266
To: David B. Johnston
From: Daron C. Dillia
Dated: February 8, 1999
RE: 144 Investment
Manhattan Financial Group (MFG) agrees on or before March 15, 1999 to provide
Computerized Thermal Imaging, Inc. (CTI) with a minimum investment of $250,000
and a maximum investment of $1,250,000 for the purchase of CTI common stock
subject to rule #144 of the SEC act of 1933. As consideration for such
investment CTI will allow MFG to purchase the common stock at 50% of the low
bid price during the time period (2/8/99 to 3/15/99). The stock purchased
will be br granted piggy back registration rights.
/s/ Daron C. Dillia
- ---------------------------------------------
Daron C. Dillia dba Manhattan Financial Group
Agreed:
/s/ David B. Johnston
- --------------------------------------------
David B. Johnston - CEO
Computerized Thermal Imaging
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's unaudited financial statements for the six months ended December 31,
1998, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 257,704
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 259,908
<PP&E> 231,798
<DEPRECIATION> (104,129)
<TOTAL-ASSETS> 387,577
<CURRENT-LIABILITIES> 4,293,870
<BONDS> 0
0
0
<COMMON> 50,087
<OTHER-SE> (3,956,380)
<TOTAL-LIABILITY-AND-EQUITY> 387,577
<SALES> 0
<TOTAL-REVENUES> 1,667
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,976,218
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 371,272
<INCOME-PRETAX> (2,345,823)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,345,823)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,345,823)
<EPS-PRIMARY> (.049)
<EPS-DILUTED> (.049)
</TABLE>
