U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(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, 2004
[ ] 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: 001-16253
COMPUTERIZED THERMAL IMAGING, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
NEVADA 87-0458721
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1719 West 2800 South
Ogden, Utah 84401
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(801) 776-4700
--------------
(Registrant'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 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 [ ]
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 114,561,698 shares were issued and outstanding as of January
31, 2005.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
COMPUTERIZED THERMAL IMAGING, INC.
FORM 10-QSB
QUARTERLY REPORT
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements................................................3
Condensed Consolidated Balance Sheets as of December 31, 2004
and June 30, 2004 ................................................3
Condensed Consolidated Statements of Operations and Other
Comprehensive Income (Loss) for the three months ended
December 31, 2004 and 2003 .......................................4
Condensed Consolidated Statements of Cash Flows for the
three months ended December 31, 2004 and 2003.....................5
Notes to Condensed Consolidated Financial Statements..............6
Item 2. Management's Discussion and Analysis or Plan of Operation..........11
Item 3. Controls and Procedures............................................22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................22
Item 6. Exhibits ..........................................................23
SIGNATURES....................................................................24
2
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
COMPUTERIZED THERMAL IMAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
2004 2004
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,176 $ 168,955
Accounts receivable-trade, net (less allowance for doubtful accounts of $0 at
December 31, 2004 and $3,199 at June 30, 2004) -- 53,328
Accounts receivable-other, net -- 1,391
Inventories 242,307 260,331
Prepaid expenses 45,053 91,474
------------- -------------
Total current assets 289,536 575,479
------------- -------------
PROPERTY AND EQUIPMENT, Net 154,261 169,358
------------- -------------
INTANGIBLE ASSETS:
Intellectual property rights, net (less accumulated amortization of accounts
of $19,440 and $17,437 for December 31, 2004 and June 30, 2004, respectively) 13,407 15,410
------------- -------------
TOTAL ASSETS $ 457,204 $ 760,247
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 529,090 $ 512,542
Accrued liabilities 155,516 172,036
Short-term Note Payable 227,345 220,690
Deferred revenues 1,057,548 1,083,100
------------- -------------
Total current liabilities 1,969,499 1,988,368
------------- -------------
LONG-TERM NOTE PAYABLE 111,700 109,178
------------- -------------
TOTAL LIABILITIES 2,081,199 2,097,546
------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock, no par value, 3,000,000 shares authorized; issued-none
Common stock, $.001 par value, 200,000,000 shares authorized, 114,561,698 issued
and outstanding on December 31, 2004 and June 30, 20004 114,562 114,562
Additional paid-in capital 95,454,274 95,454,274
Deficit accumulated (97,192,831) (96,906,135)
------------- -------------
Total stockholders' equity (deficit) (1,623,995) (1,337,299)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 457,204 $ 760,247
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
3
COMPUTERIZED THERMAL IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSEIVE INCOME (LOSS)
(Unaudited)
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------- ---------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
INCOME:
Product revenues $ 54,480 $ 69,656 $ 121,088 $ 122,002
Service revenues 1,690 23,989 11,477 34,340
-------------- -------------- -------------- --------------
Total Revenues 56,170 93,645 132,565 156,342
-------------- -------------- -------------- --------------
Cost of product revenues (9,106) (20,530) (22,523) (62,932)
Cost of service revenues -- -- -- --
-------------- -------------- -------------- --------------
Total cost of revenues (9,106) (20,530) (22,523) (62,932)
-------------- -------------- -------------- --------------
GROSS MARGIN 47,064 73,115 110,042 93,410
-------------- -------------- -------------- --------------
OPERATING EXPENSES:
Operating, general and administrative 138,135 379,839 254,176 924,816
Litigation settlements -- 100,000 -- 100,000
Research and development 34,104 296,794 90,906 663,700
Marketing 7,875 97,073 25,441 251,128
Depreciation and amortization 11,919 40,903 17,099 95,700
-------------- -------------- -------------- --------------
Total operating expenses 192,033 914,609 387,622 2,035,344
-------------- -------------- -------------- --------------
OPERATING LOSS (144,969) (841,494) (277,580) (1,941,934)
-------------- -------------- -------------- --------------
OTHER INCOME (EXPENSE):
Interest income 57 2,257 61 4,185
Interest expense (4,598) -- (9,221) (5,425)
Other 24 -- 44 --
-------------- -------------- -------------- --------------
Total other income (expense) (4,517) 2,257 (9,116) (1,240)
-------------- -------------- -------------- --------------
NET LOSS $ (149,486) $ (839,237) $ (286,696) $ (1,943,174)
-------------- -------------- -------------- --------------
WEIGHTED AVERAGE SHARES
OUTSTANDING 114,561,698 112,706,442 114,561,698 112,706,442
============== ============== ============== ==============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.00) $ (0.01) $ (0.00) $ (0.02)
============== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
4
COMPUTERIZED THERMAL IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE
SIX MONTHS ENDED
DECEMBER 31,
-----------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (286,696) $(1,943,174)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 17,100 54,797
Amortization of bond premium (discount) -- (15,192)
Bad debt expense -- 63,032
Accounts receivable - trade 53,328 328,352
Accounts receivable - other 1,391 --
Inventories 18,024 (27,846)
Prepaid expenses 46,421 118,268
Accounts payable 16,548 (26,985)
Accrued liabilities (7,343) (28,279)
Deferred revenues (25,552) 371,871
------------ ------------
Net cash used in operating activities (166,779) (1,105,156)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceed from sale of assets -- 22,177
============ ============
Net cash provided by (used in) investing activities -- 22,177
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and warrants,
net of offering costs $ -- $ 1,000,000
============ ============
Net cash provided by financing activities -- 1,000,000
------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (166,779) (82,979)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 168,955 454,387
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,176 $ 371,408
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Interest expense $ -- $ --
Income taxes -- --
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING AND INVESTING ACTIVITIES
Common stock issued to reduce debenture, interest and
penalty $ -- $ 157,277
The accompanying notes are an integral part of these consolidated financial statements.
5
COMPUTERIZED THERMAL IMAGING, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2004
(UNAUDITED)
NOTE A. UNAUDITED FINANCIAL STATEMENTS AND BASIS OF PRESENTATION
The condensed consolidated financial statements of Computerized Thermal
Imaging (the "Company") for the three-month and six-month periods ended December
31, 2004 and 2003 are unaudited. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the Company's results of operation for the periods presented
have been included. These interim statements should be read in conjunction with
the audited consolidated financial statements and footnotes thereto contained in
the Company's most recent Annual Report on Form 10-KSB for the Year Ended June
30, 2004. The consolidated results of operations for the three-month and
six-month periods ended December 31, 2004 are not necessarily indicative of the
results to be expected for the full year.
Certain amounts from the prior period financial statements have been
reclassified to conform to current period presentation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions, including for example, accounts receivable
allowances, inventory obsolescence reserves, deferred tax valuation allowances,
and reserves for pending or threatened litigation. These assumptions affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from these estimates.
The accompanying condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern. In its Annual
Report on Form 10-KSB for the Year Ended June 30, 2004, the Company reported
that its recurring losses from operations, negative cash flows from operations,
the Company's need for additional working capital, and the Company's continuing
struggle to obtain FDA approval for its primary product raised substantial doubt
about the Company's ability to continue as a going concern. The Company's
independent auditors have also expressed their doubts about the Company's
ability to continue as a going concern.
In order to pursue its existing plan of operations, the Company will
have to secure additional financing through the sale of equity, the incurrence
of debt or the sale of assets, including the Company's intellectual property.
There can be no assurance that capital will be available from any source or, if
available, that the terms and conditions associated with such capital will be
acceptable to the Company. If the Company raises equity or debt capital, the
sale of these securities could dilute existing shareholders, and borrowings from
third parties could result in assets being pledged as collateral and could
provide loan terms that could adversely affect the Company's operations and the
price of its common stock.
On January 11, 2005 Computerized Thermal Imaging, Inc. entered into the
attached "PREFERRED STOCK ISSUANCE AGREEMENT" with Strategica Management, LLC.
6
Strategica Management, LLC is a Merchant banking and Financial services
company that provides advisory and financial services to its client business.
Strategica provides or arranges debt and/ or equity capital and value, and
venture partners for clients and provides financial and business advisory
services utilizing its relationships and financial expertise for emerging
companies. Through their combined experience, Strategica executives have been
involved with a variety of debt, equity, mergers, acquisitions and financings in
multi-millions of dollars. Strategica is diversified as to industry and
geography and is proficient in providing management support, creative financial
strategies and sophisticated debt restructurings. (www.strategica.net) We
believe that Strategica will be able to lead us to the funding necessary to
sustain the company while helping us to pursue the customer contracts necessary
to become profitable.
The accompanying condensed consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary if the Company is unable to continue as a going concern.
NOTE B. REVENUE RECOGNITION
The Company generates revenues from sales of its products and from
services provided to its customers. The Company sells its products to
independent distributors and end customers. With the exception of sales
transactions in which a customer may return a defective product, the Company
does not provide its customers with other rights to return products.
The Company recognizes revenue from its product sales to end customers
upon shipment of products when persuasive evidence of an agreement exists,
delivery of the product has occurred, no significant Company obligations remain,
the fee is fixed or determinable, and collectibility is probable. If these
conditions are not met, revenue is deferred until such obligations and
conditions are fulfilled. If the Company retains an ongoing obligation under a
sales arrangement, revenue is deferred until all of the Company's obligations
are fulfilled.
The Company has adopted the practice of deferring revenue on shipments
to distributors until cash payment from the distributor is received by the
Company, which is generally when the product is sold by the distributor to the
end customer.
Certain of the Company's products contain software that is not
considered incidental to the product. Sales of those products are subject to the
provisions of AICPA Statement of Position No. 97-2, SOFTWARE REVENUE
RECOGNITION, as amended, which requires the deferral of revenue from certain
multiple-element arrangements. The Company defers revenue from multiple-element
arrangements until all elements have been delivered.
Service revenue is derived from non-destructive testing of turbine
blades and other items as well as service of medical equipment previously sold
but not covered by warranty. Service revenue is recognized upon the completion
of the services provided. The Company offers extended warranties on certain of
its products. Warranty revenue is recognized ratably over the period of the
agreement as services are provided.
7
NOTE C. DEFERRED REVENUE
Deferred revenues at December 31, 2004 was approximately $1,057,548,
and consisted of $660,000 of deferred revenues associated with a
manufacturing/licensing agreement (the "NanDa Agreement") between the Company
and NanDa Thermal Medical Technology, Inc. ("NanDa"), $7,608 of deferred
warranty revenues and $389,940 of deferred industrial revenues and deposits
relating a Turbine Blade Inspection System ("TBIS") the Company shipped to Pratt
& Whitney. Deferred revenues at June 30, 2004 was approximately $1,083,100, and
consisted of $660,000 of deferred revenues associated with the NanDa Agreement,
$7,705 of deferred warranty revenues and $415,395 of deferred industrial
revenues and deposits relating primarily to the TBIS the Company shipped to
Pratt & Whitney.
DEFERRED REVENUES DECEMBER 31, JUNE 30,
2004 2004
------------ ------------
Nanda Licensing 660,000 660,000
Industrial Products 389,940 415,395
Warranty Revenue 7,608 7,705
------------ ------------
Total Deferred Revenue $ 1,057,548 $ 1,083,100
============ ============
Industrial products deferred revenue consists of non-destructive
testing devices shipped to Pratt & Whitney. The Company anticipates that it will
recognize these sales when it has completed its obligations under the purchase
agreements with Pratt & Whitney. Although the equipment has been shipped,
installed and is in use, the customer is awaiting a final calibration and test
to be performed on-site by the Company. The $389,940 has been paid by Pratt &
Whitney. The Company has deferred the full amount of the contract until the
final calibration and testing can be performed on-site. We await the
specifications necessary to conduct the final calibration and have been working
with the customer to establish their unique specifications. This is in
accordance with the Company's revenue recognition policy.
The Company's Manufacturing License Agreement with NanDa (the "NanDa
Agreement") is billed in stages. The Company has billed NanDa $660,000 to date
and received payment for $660,000. The NanDa Agreement obligates the Company to
provide training services for NanDa employees in the United States and in China.
The Company has provided the training services for NanDa employees in the United
States, but, has yet to train in China. Therefore, according to the Company's
revenue recognition policy, the Company will not recognize any revenue from the
NanDa Agreement until all its obligations are performed or the NanDa Agreement
is deemed to be complete.
NOTE D. INVENTORIES
Inventories are stated at the lower-of-cost or market with cost
determined using the first-in first-out method of accounting. As of the dates
set forth below, the Company's inventories consisted of the following:
8
DECEMBER 31, JUNE 30,
2004 2004
-------------- --------------
Raw materials $ 602,263 $ 616,508
Inventory reserve (629,967) (629,967)
Work-in process 24,378 18,629
Finished goods 245,633 255,161
-------------- --------------
Total $ 242,307 $ 260,331
============== ==============
Finished goods inventory at December 31, 2004 consisted of
approximately $245,307 of finished goods ready for sale, $24,378 in the
manufacturing process and $602,263 of raw materials. In their report on the
Company's condensed consolidated financial statements for the year ended June
30, 2004, the Company's independent auditors expressed concern regarding the
Company's ability to continue its operations as a going concern. As a result of
that concern, coupled with the decision of the U.S. Food and Drug Administration
(the "FDA") to deny pre-market approval of the Company's breast imaging system,
(the "BCS 2100"), the Company has treated its inventories as impaired assets on
its condensed consolidated financial statements for the quarter ended December
31, 2004. The impairment is held in a reserve account and represents
approximately 71% of all inventories.
The Company has in the past reserved for excess and obsolete inventory
by comparing inventory on hand to estimated consumption during the next twelve
months. Consumption is estimated by annualizing trailing three or six -month
sales volumes, adjusting those volumes for known activities and trends, then
comparing forecast consumption to quantity on hand. However, the Company
evaluates all inventories to determine if the total impaired book value could be
recovered if liquidation becomes necessary. The Company felt no need to impair
additional inventory in the quarter ended December 31, 2004.
NOTE E. INCOME TAXES
The Company accounts for income taxes using the liability method. Under
this method, the Company records deferred income taxes to reflect future year
tax consequences of temporary differences between the tax basis of assets and
liabilities and their financial statement amounts. The Company has reviewed its
net deferred tax assets, together with net operating loss carry-forwards, and
has provided a valuation allowance to reduce its net deferred tax assets to
their net realizable value. Due to the uncertainty regarding the going concern
status of the Company, the Company has not recorded any deferred tax assets.
NOTE F. CONTINGENCIES
SEC INVESTIGATION
In December 2002, the Company was requested to provide certain
documents to the Securities and Exchange Commission and the U.S. Department of
Justice in connection with an investigation regarding possible violations of the
insider trading prohibitions found in the federal securities laws. The Company
has responded to the Commission's requests for copies of documentation, and
members of the Company's management have provided testimony to the Commission.
9
Through February 1, 2005, the Company had incurred approximately $650,000 in
legal costs in complying with these requests. The Company also may be required
to indemnify its officers and directors in connection with fees incurred in
connection with these investigations. The Company's efforts to respond to the
Commission's requests have required, and in the future may require, significant
additional legal expenses, may make fund raising more difficult if not
impossible, and will distract the Company's management from day-to-day
operations.
INDEMNIFICATION
Under the Company's bylaws and contractual agreements, the Company may
be required to indemnify its current and former officers and directors who are
parties to litigation or other proceedings by providing legal defense or
reimbursing the parties for their own attorneys' fees and expenses and covering
damages the parties may suffer if the plaintiffs are successful.
OTHER LEGAL PROCEEDINGS
From time to time, the Company is involved in certain other litigation
matters in the normal course of business which management currently believes are
not likely to result in any material adverse effects on the Company's financial
position, results of operations, or net cash flows.
NOTE G. RECENT DEVELOPMENTS
FDA CITIZEN PETITION
On June 30, 2004 the Company filed a "Citizen Petition" with the FDA
contending that consideration of the Company's application for pre-market
approval was severely and improperly prejudiced because of pervasive bias
against the Company by the FDA staff reviewers who improperly undermined the
review of the Company's application and ultimately caused the FDA to reject that
application. The Company is seeking internal documents within the FDA to
determine the basis for the FDA staff's behavior. The full text of the full
Citizen Petition and 23 exhibits thereto are available at
http://www.fda.gov/ohrms/dockets/dailys/04/july04/070104/04p-0276-cp00001-
toc.htm.
STRATEGICA PREFERRED STOCK ISSUANCE AGREEMENT
On January 11, 2005 the Company entered into a Preferred Stock Issuance
Agreement (the "Stratgica Agreement") with Strategica Management, LLC
("Strategica"). Strategica is a merchant banking and financial services company
that provides advisory and financial services to its client businesses.
Strategica provides or arranges debt and/ or equity capital and value, and
venture partners for clients and provides financial and business advisory
services utilizing its relationships and financial expertise for emerging
companies. The Strategica Agreement provides for the designation and issuance of
up to 3,000,000 shares of the Company's Series A Convertible Preferred Stock
(the "Series A Preferred") on the terms and subject to the conditions set forth
in the Agreement, as well as a Certificate of Designation (the "Certificate"), a
form of which is attached as an exhibit to the Agreement. The Series A Preferred
carries special voting and conversion rights based upon formulas as set forth in
the Certificate. The consideration to be received by the Company consists of the
performance by Strategica of the terms and conditions of a Financial Advisory
Agreement to be executed by the Company and Strategica (the "Financial Advisory
10
Agreement"). As set forth in the Certificate, the number of shares of Series A
Preferred, with special voting and conversion rights, to be issued by the
Company to Strategica will be based upon the amount of capital, if any, raised
by the Company from Strategica and/or its affiliates or from prospective
investors introduced to the Company by Strategica pursuant to the terms of the
Financial Advisory Agreement.
NOTE H - OTHER REGULATORY MATTERS
The Company has received a Medical Device License from Health Canada to
market its BCS 2100 in Canada. In late August 2004, the Company shipped the
first BCS 2100 to Ville Marie in Montreal, Canada for a one-to-three month
evaluation that may result in a lease of the device at the end of evaluation.
NOTE I - STOCK WARRANTS AND OPTIONS
WARRANTS--There were no warrants granted nor were warrants that expired for the
three and six month periods ended December 31, 2004.
OPTIONS--Periodically, the Company has issued incentive stock options to
employees and officers and non-qualified options to directors and outside
consultants to promote the success of the Company and enhance its ability to
attract and retain the services of qualified persons.
The Company has 3,689,423 options outstanding and issued under the 1997 Stock
Option and Restricted Stock Plans (the "Plan") since its adoption, and could
issue an additional aggregate of 6,310,577 options and shares. The Plan permits
restricted stock grants to employees, officers, directors and consultants at
prices that may be less than 100% of the fair market value of the Company's
common stock on the date of issuance. The Company also has outstanding 75,000
non-statutory stock options issued outside the Plan. Options issued under the
Plan will have variable terms based on the services provided and will generally
vest on the date of grant.
EMPLOYEE STOCK OPTIONS--The Company has granted the following fixed price stock
options during the period July 1, 2004, through December 31, 2004:
Six Months Ending December 31, 2004
Average
Number of Options Price
Outstanding at June 30, 2004 3,592,023 1.27
-----------------------------------
Issued December 31, 2004 175,000 0.10
Forfeited (77,780) 1.01
-----------------------------------
Outstanding at December 31, 2004 3,689,243 1.37
Options exercisable at December 31, 2004 3,689,243 1.37
Modifications to the terms of previously fixed stock options or awards granted
to employees are accounted for in accordance with APB Opinion No. 25 and
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION--AN INTERPRETATION OF ACCOUNTING PRINCIPLES BOARD (APB) OPINION NO.
25 ("FIN 44"). During the year ended June 30, 2004 the Company did not re-price
any options. As a result of the Company's significant reduction in personnel
during the six month period ended December 31, 2004., nearly all those employees
holding options that had been re-priced in prior years are no longer employed by
the Company and their rights to exercise their options have lapsed.
If compensation cost for options or awards granted to employees had been
determined based on SFAS No. 123, the Company's net loss and basic and diluted
loss per common share would have not changed.
There were 175,000 options granted on December 31, 2004 to the then current four
employees and three members of the board of directors for 25,000 each at a
strike price of $0.10 per share. According to the 1997 stock option plan
terminated employees have 90 days to exercise any exercisable options. 77,780
options expired during the six month period ended December 31, 2004 due to the
termination of employees.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS CONCERNING OUR BUSINESS
The following discussion should be read in conjunction with the
Condensed Consolidated Financial Statements, the notes thereto and the other
information included in this Report. Certain statements in this "Management's
Discussion and Analysis or Plan of Operation" are forward-looking statements.
When used in this document, the words "expects," "anticipates," "intends,"
"plans," "may," "believes," "seeks," "estimates," and similar expressions
generally identify forward-looking statements. The forward-looking statements
contained herein are based on current expectations and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward-looking statements. For a more detailed discussion of
these and other business risks, see "Factors that May Affect Future Results."
OVERVIEW
Our mission is to improve the quality of life by raising the
performance standards of infrared thermal imaging technology for both the
medical device and industrial markets. We design, manufacture and market thermal
imaging devices and services used for clinical diagnosis, pain management and
industrial non-destructive testing. We provide inspection services and design
and build non-destructive test systems for industrial customers.
Our current products are the BCS 2100, Photonic Stimulator, Thermal
Image Processor ("TIP") and our TBIS. We have historically marketed our products
with an internal sales force and through independent distributors. At present,
however, due to our troubled financial condition, we are not actively marketing
our products. To date, our revenues have been generated principally from the
sale of our Photonic Stimulator, TIP, TBIS and services provided in connection
with our TBIS.
Given our inability to market our principal product unless we secure
FDA pre-market approval, our need to raise capital to fund our operations, our
history of losses ($97 million since inception), and the risk of pending or
future litigation, our independent auditor's opinion dated September 24, 2004
contains a "going concern qualification," meaning that our independent auditors
have indicated that there is substantial doubt as to our ability to continue as
11
a going concern. Our efforts to raise additional funds to date have been only
marginally successful. Since the FDA's rejection of our application for
pre-market approval of the BCS 2100 in December 2002, we have raised $500
thousand in advances under an equity line of credit with Beach Boulevard, $1.32
million through a private issuance of restricted stock, $660 thousand from the
NanDa Agreement and $220 thousand from short-term notes. We have pursued
additional financing transactions, but, as of the date of this Report, we have
been unsuccessful in our efforts to raise additional capital.
On January 11, 2005, we entered into a Preferred Stock Issuance
Agreement (the "Stratgica Agreement") with Strategica Management, LLC
("Strategica"). Strategica is a merchant banking and financial services company
that provides advisory and financial services to its client businesses.
Strategica provides or arranges debt and/ or equity capital, and venture
partners for clients and provides financial and business advisory services
utilizing its relationships and financial expertise for emerging companies. The
Strategica Agreement provides for the designation and issuance of up to
3,000,000 shares of our Series A Convertible Preferred Stock (the "Series A
Preferred") on the terms and subject to the conditions set forth in the
Agreement, as well as a Certificate of Designation (the "Certificate"), a form
of which is attached as an exhibit to the Agreement. The Series A Preferred
carries special voting and conversion rights based upon formulas as set forth in
the Certificate. The consideration we anticipate receiving under the Strategica
Agreement consists of the performance by Strategica of the terms and conditions
of a Financial Advisory Agreement we intend to execute with Strategica (the
"Financial Advisory Agreement"). As set forth in the Certificate, the number of
shares of Series A Preferred, with special voting and conversion rights, to be
issued to Strategica will be based upon the amount of capital, if any, we raise
from Strategica and/or its affiliates or from prospective investors introduced
to us by Strategica pursuant to the terms of the Financial Advisory Agreement.
We believe Strategica's performance of the Strategica Agreement will
assist us in our efforts to raise funds through equity, debt and revenue
producing contracts. Strategica has indicated that it intends to focus its
efforts on our existing FDA approved products, the TIP and Photonic Stimulator,
by funding sales and marketing activities that lead to revenue producing
contracts. Regardless of the FDA's ultimate decision regarding our application
for pre-market approval of the BCS2100, we will require additional capital to
execute our operating plan, which may include more clinical trials, research and
development, marketing into Canada and marketing and manufacturing expenses.
The following discussion and analysis of our condensed consolidated
financial condition and results of operations should be read in conjunction with
our audited condensed consolidated financial statements and notes thereto
contained in our Annual Report on Form 10-KSB for the fiscal year ended June 30,
2004.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires us to estimate the
effect of various matters that are inherently uncertain as of the date of the
financial statements. Each of these required estimates varies in regard to the
level of judgment involved and its potential impact on our reported financial
results. Estimates are deemed critical when a different estimate could have
reasonably been used or where changes in the estimate are reasonably likely to
occur from period to period, and would materially impact our financial condition
12
or results of operations. Our significant accounting policies are discussed in
Note 1 of the notes to our condensed consolidated financial statements. Critical
estimates inherent in these accounting policies are discussed in the following
paragraphs. Our management has discussed the development and selection of these
critical accounting policies with the Audit Committee of our Board of Directors.
CASH AND CASH EQUIVALENTS -- Cash and cash equivalents include cash in
checking accounts and short-term highly liquid investments with an original
maturity of one year or less.
REVENUE RECOGNITION -- Revenue recognition is a significant business
process that requires management to make estimates and assumptions. We recognize
revenue from product sales after shipment when persuasive evidence of an
agreement exists, delivery of the product has occurred, no significant
obligations remain, the price or fee is fixed or determinable, and collection is
probable. If these conditions are not met, revenue is deferred until such
obligations and conditions are fulfilled.
Our standard domestic terms for our medical products to end-user
customers are "net 30 days," and our standard international terms for our
medical products require payment in cash or placement of a letter of credit
before shipment. On occasion, we offer extended payment terms beyond our normal
business practices, usually in connection with providing an initial order of
demonstration equipment to a new domestic distributor. We consider fees on these
extended terms agreements not fixed and collectibility less than probable and
defer the revenue until receipt of payment. Our sales prices have declined over
time and we credit price decreases to any balance due from a distributor. We
sell separate extended warranty contracts for our TIP and Photonic Stimulator
and recognize revenue from those arrangements ratably over the contract life. We
do not offer rights or return privileges in sales agreements.
Industrial sales are made pursuant to individually negotiated
commercial contracts which specify payment terms that have ranged from 60 to 90
days from shipment or service completion. With industrial products, even if
delivery and payment have occurred, we may retain a significant ongoing
obligation under a sales arrangement for the delivery of components or
customized software and customer testing, and we defer recognizing revenue until
all the multiple elements of the sale are completed
RESEARCH AND DEVELOPMENT EXPENSES -- We expense as incurred the direct,
indirect and purchased research and development costs associated with our
products. We believe this method is conservative given the product and market
acceptance risk inherent to our products and reduces administrative burden and
cost.
IMPAIRMENT OF LONG-LIVED ASSETS -- We follow the provisions of
Financial Accounting Standards Board ("FASB") SFAS No. 141, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
which requires that if the sum of the future cash flows expected to result from
the assets, undiscounted and without interest charges, is less than a company's
reported value of the assets, the asset is not recoverable and the company must
recognize an impairment. The amount of impairment to be recognized is the excess
of the reported value of the assets over the fair value of those assets and is
recorded as impairment expense on our statements of operations. In estimating
13
impairments, our management makes assumptions about future cash flows and fair
value that are inherently uncertain, can significantly affect the results and
may differ from actual future results.
INVENTORY RESERVES -- We have in the past reserved for excess and
obsolete inventory by comparing inventory on hand to estimated consumption
during the next twelve months. Consumption is estimated by annualizing trailing
three or six-month sales volumes, adjusting those volumes for known activities
and trends, then comparing forecast consumption to quantity on hand. However, we
evaluate all inventories to determine if the total impaired book value could be
recovered if liquidation is necessary. We felt no need to impair additional
inventory during the quarter ended December 31, 2004.
TRENDS/UNCERTAINTIES AFFECTING CONTINUING OPERATIONS
We are exposed to the opportunities and risks usually associated with
marketing and manufacturing novel products, including staff retention and
recruiting, market acceptance of our products, product warranty, bad debts and
inventory obsolescence. Due to the financial position and going concern of the
company coupled with lack of FDA approval of our latest product we are subject
to skepticism in the financial markets limiting our ability to attract the
appropriate financial support. We expect to generate revenues from the sale of
our products, but there is no guarantee that these revenues will recover all the
costs of marketing, selling and manufacturing our products.
We have only internet marketing efforts at present due to our current
lack of resources. If we are able to acquire additional capital, of which there
can be no assurance, we hope to be able to resume marketing efforts by building
relationships with manufacturers, medical equipment dealers, physicians and
clinical investigators; communicating with our target markets by attending trade
shows and conferences, making direct sales calls, and sponsoring clinics in
which we could introduce and demonstrate our products. We believe marketing
medical products through trade shows, conference presentations, direct mail and
inside sales, augmented with dealers, provides a low-cost, high-leverage
approach to diagnostic imaging and pain management practitioners.
If resources permit, we hope to be able to organize clinical studies
with institutions and practitioners to obtain user feedback and to secure
technical papers for training and marketing purposes. These strategies represent
a significant investment of time and resources and in the past have provided
useful information; however, there can be no guarantee that these strategies
will lead to market acceptance of our products.
To date, we have had limited operating revenues from the sale of our
products and services ($3.9 million in total revenues since inception). We
cannot provide any assurance that we will achieve profitability in the future.
Our immediate priority is to produce revenue by utilizing existing TIP and
Photonic Stimulator inventory, then, to expand our market in Canada where we
have obtained the necessary licenses for our current product offerings to pursue
the U.S. market for our TIP and Photonic Stimulator; and to reconcile issues
presented to the FDA in our Citizens Petition. At this time, we are unsure how
much time and additional financing we will require to resolve issues with the
FDA, and there can be no assurance that we will succeed in those efforts. We are
also unsure about our ability to raise additional financing that will be
required to continue our business operations. These uncertainties, among others,
raise doubts about our ability to continue as a going concern.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
Our operating results and financial condition are subject to
substantial risks and uncertainties. These risks and uncertainties include, but
are not limited to, the following:
o We could issue preferred stock or sell other securities or
other financing instruments, including shares of Series A
Preferred issuable under the Strategica Agreement or
convertible debt, which could result in significant dilution
to existing shareholders.
o Our failure to secure customer contracts for multiple TIP and
Photonic Stimulator installations could jeopardize our receipt
of any benefits under the Strategica Agreement, which would
limit our ability to fund our continuing operations and sales
efforts.
o Our failure to raise additional capital could cause us to
severely curtail operations, which would likely result in
immediate and substantial dilution to our shareholders, or
cease operations entirely, which would likely eliminate any
value in our common stock.
o Our failure to obtain FDA approval of our BCS 2100 would
continue to have a material adverse impact on our results of
operation and financial condition, and would likely result in
cessation of our operations entirely.
o We have limited revenues from operations and may never have
substantial revenue from operations.
o Failure to obtain insurance reimbursement codes for our BCS
2100 may make the BCS 2100 unmarketable, thereby threatening
the continued operation of our company and adversely affecting
shareholder value.
o We expect to continue to incur losses, deficits, and
deficiencies in liquidity for the foreseeable future. Unless
we are able to reverse those trends, we will likely be unable
to continue our operations.
o We may sell assets or reduce activities to fund operations,
which could adversely affect shareholder value.
o The recent volatility in the market price of our common stock
could continue and adversely affect shareholder value.
o We rely on third parties in the development and manufacture of
key components for our products. If they fail to perform,
product development and/or production could be substantially
delayed.
15
o If we are unsuccessful in preventing others from using our
intellectual property, we could lose a competitive advantage.
If our intellectual property infringes the rights of other
parties, we could incur damages or be forced to cease using
marketing or selling those products.
o We do not have product liability insurance; if we are made
subject to a products liability claim, whether or not the
claim is meritorious, our results of operation and financial
condition may be adversely affected.
OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS.
The foregoing factors should be read in conjunction with our audited
condensed consolidated financial statements, notes thereto and risk factors set
forth in our Annual Report on Form 10-KSB for the fiscal year ended June 30,
2004 (the "Form 10-KSB"). Many of the risks identified above are discussed in
greater detail in the Form 10-KSB.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2004, COMPARED TO QUARTER ENDED DECEMBER
31, 2003.
REVENUES
Revenues for the three and six months ended December 31, 2004 decreased
$38 and $23 thousand, or 40% and 15%, respectively, from the same period last
year, from $94 thousand and $156 thousand to $56 and $133 thousand respectively.
Of these amounts, $50 thousand (three months) and $113 thousand (six months) of
our revenues resulted from product sales and rental revenue; $2 thousand (three
months) and $11 thousand (six months) resulted from services and repairs of
equipment previously sold not under warranty; $4 thousand (three months) and $8
thousand (six months) was recognition of warranty revenue. The decrease in
revenue was primarily attributed to the reduction in sales force.
There were no unfilled orders as of December 31, 2004, as compared to
one unfulfilled order for a TIP camera for $47 thousand as of December 31, 2003.
We recognized $19 thousand (three months) and $35 thousand (six
months), or 35% (three months) and 29% (six months) of total revenue,
respectively, in foreign sales, consisting primarily of fees generated from the
rental of a TIP camera to a Canadian customer in 2004. Comparatively, in 2003 we
recognized $19 thousand (three months) and $35 thousand (six months), or 20%
(three months) and 22% (six months) of total revenue, from foreign sales,
consisting primarily of fees generated from the Canadian rental contract
described above.
COSTS AND EXPENSES
Gross margins for the three and six months ended December 31, 2004 were
$47 thousand (three months) and $110 thousand (six months), compared to gross
margins of $73 thousand (three months) and $93 thousand (six months) for the
same periods of the prior year or a 36% decrease (three months) and a 18%
increase (six months). Total cost of goods sold for the three and six months
16
ended December 31, 2004 was $9 thousand (three months) and $23 thousand (six
months), compared to $21 thousand (three months) and $63 thousand (six months)
for the same periods last year. Gross margin as a percentage of revenue
increased from 78% to 84% (three months) and 60% to 83% (six months),
respectively.
The increase in gross margins for the three and six-month periods
ending December 31, 2004, resulted primarily from the significant reduction in
our cost of goods sold. Our cost of goods declined for several principal
reasons. First, we have dramatically reduced our operations, which has resulted
in significantly lower revenues, but has also reduced our cost of goods. Second,
in part as a result of our reduced level of operations, we have experienced
lower costs of servicing equipment. Third, due to a slight over-accrual of
warranty costs during prior periods, we did not incur warranty costs for the
three and six-month periods ended December 31, 2004.
We are currently in the process of developing a revised business
structure that we believe will enhance revenue through leasing our products and
providing services to our customers rather than direct sales.
General and administrative expenses for the three and six months ended
December 31, 2004 were $138 thousand (three months) and $254 thousand (six
months), compared to $380 thousand (three months) and $925 thousand (six months)
for the same period last year, a decrease of $242 thousand (three months) and
$671 thousand (six months), or 64% (three months) and 73% (six months). The
decrease reflects the necessity to reduce costs to preserve cash. The decrease
consisted of declines in salary expense ($71 thousand decrease for three months;
$159 thousand decrease for six months), office expense ($24 thousand decrease
for three months; $32 thousand decrease for six months), and professional
services and legal expense ($111 thousand decrease for three months; $376
thousand decrease for six months), insurance expense ($17 thousand decrease for
three months; $53 thousand decrease for six months), travel expenses ($17
thousand decrease for three months; $41 thousand decrease for six months) and
other expenses ($1 thousand decrease for three months; $11 thousand increase for
six months).
Research and development expenses for the three and six months ended
December 31, 2004 were $34 thousand (three months) and $91 thousand (six
months), compared to $297 thousand (three months) and $664 thousand (six months)
for the same periods last year, a decrease of $263 thousand (three months) and
$573 thousand (six months), or 89% (three months) and 86% (six months). The
reduction in research and development expense reflects the necessity to preserve
cash. Reductions in salary expense accounted for $207 thousand (three months)
and $379 thousand (six months) of the decrease and reductions insurance
resulting in decreases of $36 thousand (three months) and $85 thousand (six
months). In addition, reductions in office expenses ($23 thousand three months;
$41 six months thousand), legal expenses ($23 thousand three month and $70
thousand six month) and remainder of expenses actually increasing primarily due
to a credit issued in 2003 for clinical trails ($25 thousand three month and $2
thousand six month).
Marketing expenses for the three and six-month periods ended December
31, 2004 were $8 thousand (three months) and $25 thousand (six months), compared
to $97 thousand (three months) and $251 thousand (six months) for the same
periods last year, a decrease of $89 thousand (three months) and $226 thousand
(six months), or 92% (three months) and 90% (six months), from the same periods
last year. Reduction in salaries accounted for $55 thousand (three months) and
17
$113 thousand (six months) of the decrease. The decrease also reflected
decreased insurance expenses ($7 thousand for three months; $21 thousand for six
months), reduced outside consultant's expense ($10 thousand for three and $9 six
months), and reduced other expenses ($17 thousand for three months; $83 thousand
for six months). The decrease reflected management's efforts to preserve our
cash position.
We continue to seek cash to fund efforts to pursue FDA pre-marketing
approval of our BCS 2100. However, our efforts in the near future will
concentrate on leasing and service contracts with strategic customers, which, we
believe, may eventually provide us with the cash needed to continue product
development and FDA approval. Securing a favorable recommendation from the FDA
is critical to obtaining additional capital funding. Due, however, to the delay
in FDA response, we have been forced to conserve cash by reducing expenses
throughout our operations. We feel it is not wise to continue development of a
product that has not yet been approved by the FDA.
Depreciation and amortization expense for the three and six-month
periods ended December 31, 2004 decreased $29 thousand (three months) and $79
thousand (six months) from $41 thousand (three months) and $96 thousand (six
months) to $12 thousand (three months) and $17 thousand (six months), or 71%
(three months) and 82% (six months) decrease, compared to the same periods of
the prior year. During fiscal 2003, we impaired all assets to reflect possible
recovery values due to the concern expressed by our auditors that we may not be
able to continue as a going concern. There was no additional impairment in the
three and six-month periods ended December 31, 2004.
We plan to continue conducting clinical studies at a much reduced
level, utilizing the BCS 2100, primarily in Canada, to obtain user feedback,
test product enhancements as they become available, to secure technical papers
and for training and educational marketing purposes. Clinical studies are not
the same as clinical trials, which we conducted in connection with our
application to the FDA for pre-market approval purposes.
OPERATING INCOME / LOSS
We recorded an operating loss of $145 thousand (three months) and $278
thousand (six months) for the periods ended December 31, 2004, compared to an
operating loss of $841 (three months) and $1.9 million (six months) for the
periods ended December 31, 2003. The operating loss improvement of approximately
$696 thousand (three months) and $1.66 million (six months) was due principally
to our receipt of revenues resulting from an existing customer's need for
repairs and service on previously purchased products, contrasted with the
necessity of reducing costs due to our current lack of cash.
OTHER INCOME
Net interest and other expense for the three and six-month periods
ended December 31, 2004 decreased $7 thousand (three months) and $8 thousand
(six months) from the same periods of 2003, from $2 thousand income (three
months) and $1 thousand expense (six months) to a net expense of $5 thousand
(three months) and $9 thousand expense (six months). Interest expense is
primarily an accrual of imputed interest on three loans of $100 thousand, $200
thousand and $20 thousand, all to related parties. There was virtually no
interest income due to the lack of cash.
18
NET INCOME/(LOSS)
We recognized no extraordinary gains or losses during the three and
six-month periods ended December 31, 2004, therefore, net income and operating
income were identical. We also recorded no income taxes or income tax benefit
due to the going concern opinion issued by our auditors. Because our future as a
going concern is in question, our ability to take advantage of a booked tax
benefit is also in question. Therefore, no benefit has been recognized. However,
we do hope to be able to, in the future, obtain a profitable operational status
at which time we could then take advantage of a net operating loss carry-forward
for tax purposes.
The net loss for the three and six-month periods ended December 31,
2004 resulted in a per share loss of $0.001 (three months) and $0.002 (six
months), compared to a per share loss of $0.007 (three months) and $0.017 (six
months) ended December 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF LIQUIDITY
Our sources of funds used for operations have historically come from
selling common stock, as well as the issuance and exercise of options and
warrants, revenues generated from operations, sales of marketable securities,
interest earned from marketable securities available for sale and debt
assumption.
For the three and six month periods ended December 31, 2004 our sole
source of cash was from sales and collection of prior sales. We did not generate
cash from the sale of equity or issuance of debt during the period. Comparably,
during the same periods ended December 31, 2003 we generated $0 (three months)
and $1 million (six months) in cash from the sale of equity (a July 2003 private
placement).
Our cash requirements include, but are not limited to, general
corporate expenses including employee salaries and benefits, lease payments on
office space, legal and accounting fees for litigation and public company
reporting requirements, costs of clinical trials and studies and technical
support, FDA consulting expenses, procurement of inventory and supply expenses
associated with our efforts to develop, manufacture and market our medical and
industrial applications. We have reduced many of these costs in an effort to
preserve cash; however, most of these costs are attributable to activities that
are necessary to continue our operations.
Net cash used in operating activities for the six months ended December
31, 2004 was $146 thousand, compared to $1.1 million for the six months ended
December 31, 2003. The decrease in cash used in operating activities was
primarily a result of our efforts to decrease our expenses and cash outlays and
is affected by fluctuations in accounts receivable, accounts payable and accrued
expense balances.
Accounts receivable decreased approximately $53 thousand from $53
thousand to $0 for the six month period ended December 31, 2004, compared a
decrease of $328 thousand for the same six month period ended December 31, 2003.
Due to our lack of cash, most of our customers have been willing to either
prepay or pay within a very short time period.
19
Inventory has not been replaced as sales have occurred, resulting in
positive cash flow of $18 thousand for the six-month period ended December 31,
2004, compared to a increase in inventory for the same six-month period ended
December 31, 2003.
We have in the past carried several prepaid expenses including
insurance. All insurance policies have been canceled and as of December 31, 2004
we had no prepaid insurance. We have received refunds of two legal retainers
held for prior employee indemnification creating a positive cash flow of
approximately $28 thousand. As of December 31, 2004 we had approximately $40
thousand in legal retainers for both employee indemnification and FDA matters.
The total cash made available due to the elimination of insurance and reduction
in legal retainers was $46 thousand for the six month-period ended December 31,
2004 as compared to $118 thousand for the six-month period ended December 31,
2003.
Accounts payables increased by $16 thousand for the six months ended
December 31, 2004, compared to a decrease in accounts payable for the six-month
period ended December 31, 2003. We have been able to work with certain vendors
to extend terms allowing us to preserve cash for the most necessary outlays.
Net cash provided by investing activities for the six months ended
December 31, 2004 was $0, compared to net cash used in investing activities of
$22 thousand in the six months ended December 31, 2003. The cash used during the
six months ended December 31, 2003 was attributable primarily to the sale of
assets.
Net cash provided by financing activities was $0 for the three months
ended December 31, 2004, compared to $1 million during the three months ended
December 31, 2003. On July 9, 2003 we closed a private placement of 3,344,482
shares of our common stock to Therfield Holdings LTD., a limited liability
company formed under the laws of the British Virgin Islands, for $1 million.
As a result of the foregoing, our net cash outflow was $147 thousand
during the six months ended December 31, 2004, compared to a $83 thousand
outflow in the six months ended December 31, 2003.
Cash and cash equivalents at December 31, 2004 were $22 thousand,
compared to $374 thousand at December 31, 2003.
As of February 1, 2005, our current monthly expense rate is under $50
thousand; our monthly expense rate at our former full operational level was
approximately $1.1 million. As of February 1, 2005, we had cash, accounts
receivable and pre-paid expenses of approximately $47 thousand and current
liabilities of approximately $952 thousand. These current liabilities consisted
of approximately $529 thousand of accounts payable, $196 thousand of accrued
liabilities, and $227 thousand of short-term notes payable. Accordingly, unless
we are able to secure additional funding from a third party, we do not currently
have sufficient working capital to sustain our operations, which are already
substantially reduced, beyond February 2005. Our failure to secure additional
funding may result in discontinuance of our operations. We may also seek, or
become involuntarily subject to, protection under applicable bankruptcy laws,
and regulations.
20
We had no contractual obligations or commitments as of December 31,
2004. All rentals and leases are on a month-to-month basis.
CAPITAL REQUIREMENTS/PLAN OF OPERATION
Our capital requirements have varied significantly from our estimates
and will likely continue to vary from those estimates. Our capital requirements
depend upon numerous factors including, but not limited to: a) FDA approval
process; b) results of pre-clinical and clinical testing; c) costs of
technology; d) time and costs involved in obtaining other regulatory approvals;
e) costs of filing, defending and enforcing any patent claims and other
intellectual property rights; f) the economic impact of developments in
competing technology and our markets; g) competing technological and market
developments; h) the terms of any new collaborative, licensing and other
arrangements that we may establish; i) litigation costs; and j) costs we incur
in responding to inquiries and investigations conducted by the SEC and other
governmental entities.
Since inception, we have generated significant losses from operations
($97 million) and, although we have generated some revenues ($3.9 million), we
are still a development stage enterprise. We have taken actions to reduce our
expenses and cash consumption; however, we expect to incur additional operating
losses for the indefinite future. Our working capital requirements in the
foreseeable future will depend on a variety of factors and assumptions. In
particular, we will need to obtain additional financing through additional
equity and/or debt financings or through the sale of assets (including our
intellectual property) during fiscal year 2005. If we raise additional funds
through the issuance of equity securities or other financing instruments which
are convertible for equity securities, our shareholders may experience
significant dilution that would aversely affect the price of our common stock.
Furthermore, there can be no assurance that additional financing will be
available when needed or at all, or that if available, such financing will be on
terms favorable to us or our shareholders. If financing is not available when
required or is not available on acceptable terms, we may be required to curtail
our operating plan and will likely not be able to continue operations as a going
concern.
We do not have sufficient capital to cover: 1) the expected costs of
additional clinical studies currently required by the FDA; or 2) the anticipated
expense of funding our business plan over the next year. We will not be able to
continue our business operations unless we obtain additional capital
immediately. This capital, if obtained, could be generated through issuance of
securities, assumption of loans, sale of assets (including our intellectual
property); however, we have only limited commitments for any capital infusion,
and can give no assurance that we will be able to raise any such capital.
Furthermore, our troubled financial condition, as well as the lack of FDA
pre-market approval of the BCS2100, have made it difficult if not impossible to
raise capital needed to continue our operations. If we are not successful in
quickly raising additional capital, we will have to scale back our business plan
or discontinue operations.
As of December 31, 2004, we believed that we had sufficient liquidity
to sustain current operations for the next two months. Our monthly expense rate
at that time averaged $57 thousand, we had cash, marketable securities, accounts
receivable and pre-paid expenses of approximately $2 thousand and current
liabilities (excluding a debenture and deferred revenue) of approximately $912
thousand. On a short-term basis, we believed we would be able to fund our
21
operations with cash on hand and the proceeds of our receivables and current
sales activities; however, to fund our operations over the long term (more than
2 months) we believed we would need to raise additional capital or curtail our
operation.
As of February 1, 2004, we have reduced operating expenses and
curtailed operating activities. Overall, we have reduced our monthly cash
consumption to under $50 thousand, which we currently believe will be adequate
to sustain our curtailed operations only through February 2005. We have
systematically reduced expenses by eliminating all expenditures except for the
those necessary to fill orders, file regulatory reports, and seek funding. If we
are unable to secure additional capital, we will likely be forced to discontinue
operations entirely.
ITEM 3. CONTROLS AND PROCEDURES
Based on the evaluation of our "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e))
required by paragraph (b) of Rules 13a-15 or 15d-15, our president and our chief
financial officer have concluded that, as of June 30, 2004, our disclosure
controls and procedures were effective.
We are not presently required to conduct quarterly evaluations of our
internal control over financial reporting pursuant to paragraph (d) of Rules
13a-15 or 15d-15 promulgated under the Exchange Act. We are, however, in the
process of designing, evaluating and implementing internal controls in
anticipation of the date when we will become subject to such evaluation
requirements.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SEC INVESTIGATION
In December 2002, we were requested to provide certain documents to the
SEC and the U.S. Department of Justice in connection with an investigation
regarding possible violations of the insider trading prohibitions found in the
federal securities laws. We have responded to the SEC's requests for copies of
documentation, and members of our management have provided testimony to the SEC.
To date, we have incurred approximately $650,000 in legal costs in complying
with these requests. We may also be required to indemnify our officers and
directors in connection with fees incurred in connection with these
investigations. Our efforts to respond to the SEC's requests have required, and
in the future may require, significant additional legal expenses, may make fund
raising more difficult if not impossible, and will distract our management from
our day-to-day operations.
ST. PAUL PROPERTIES
On April 11, 2003, St. Paul Properties, Inc. (the "Landlord") filed
suit against us in the Circuit Court for Clackamas County. The Landlord alleged
that we breached our prior corporate office lease by failing to pay the rent
specified under the lease. The Landlord sought damages of approximately
$667,000, plus interest and attorneys and other fees. We filed an answer and
affirmative defenses alleging that St. Paul Properties failed to use reasonable
efforts to mitigate its damages. In April of 2004, we settled with St. Paul for
the sum of $110,000 and which included a $50,000 payment with 5 monthly payments
of $12,000. The final payment of $12,000 was paid on August 15, 2004.
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INDEMNIFICATION
Under our bylaws and contractual agreements, we may be required to
indemnify our current and former officers and directors who are parties to
litigation or other proceedings by providing legal defense or reimbursing the
parties for their own attorneys' fees and expenses and covering all damages the
parties may suffer if the plaintiffs are successful.
OTHER LEGAL PROCEEDINGS
We are involved in certain other litigation matters in the normal
course of business which management currently believes are not likely to result
in any material adverse effects on our financial position, results of
operations, or net cash flows.
ITEM 6. EXHIBITS
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer
32.2 Certification of Chief Financial Officer
[BJ: ANY OTHER EXHIBITS?]
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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 11, 2005
Richard V. Secord
Chairman & Chief Executive Officer
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