U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission file number: 000-23955
COMPUTERIZED THERMAL IMAGING, INC.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
NEVADA 87-0458721
----------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Two Centerpointe Way, Suite 450 Portland, Oregon 97035
------------------------------------------------ -------
(Address of principal executive offices) (Zip Code)
(801) 776-4700
------------------------
(Registrant's telephone number, including area code)
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: State the number of shares
outstanding of each of the issuer's classes of common equity, as of the latest
practicable date: Common stock, par value $0.001, of which 80,548,763 shares
were issued and outstanding as of May 11, 2001.
1
COMPUTERIZED THERMAL IMAGING, INC.
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements............................................. 3
Condensed Consolidated Balance Sheets as of March
31, 2001 and June 30, 2000....................................... 3
Condensed Consolidated Statements of Operations
for the three and nine months ended March 31, 2001
and 2000 and for the period from inception on June
10, 1987 to March 31, 2001....................................... 4
Condensed Consolidated Statements of Cash Flows
for the three and nine months ended March 31, 2001
and 2000 and for the period from inception on June
10, 1987 to March 31, 2001....................................... 5
Notes to Consolidated Financial Statements....................... 8
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................10
ITEM 3. Quantitative and Qualitative Disclosure of Market Risk...........18
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................19
ITEM 2. Changes in Securities.............................................20
ITEM 3. Defaults upon Senior Securities...................................20
ITEM 4. Submission of Matters to a Vote of Security Holders...............20
ITEM 5. Other Information.................................................20
ITEM 6. Exhibits and Reports on Form 8-K..................................22
SIGNATURES
2
PART I - FINANCIAL INFORMATION
ITEM 1.
The following comprise our condensed (unaudited) consolidated financial
statements for the three and nine-month periods ended March 31, 2001 and 2000.
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Condensed Consolidated Balance Sheets
(UNAUDITED)
ASSETS
------
March 31, June 30,
2001 2000
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 1,105,794 $ 8,997,767
Investment securities available for sale 21,086,859 26,034,399
Accounts receivable, trade net 100,331 177,254
Inventory 717,556 110,206
Interest receivable 343,177 439,273
Prepaid expenses 73,968 204,541
Software maintenance contract - 309,863
------------ ------------
Total Current Assets 23,427,685 36,273,303
PROPERTY AND EQUIPMENT, NET 1,253,203 567,936
SOFTWARE LICENSES, NET 2,871,274 3,447,289
GOODWILL, NET 10,106,959 10,994,561
INTELLECTUAL PROPERTY RIGHTS, NET 45,249 49,334
ADVANCES TO AFFILIATES - 130,247
------------ ------------
TOTAL ASSETS $ 37,704,370 $ 51,462,670
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable trade $ 426,783 $ 688,064
Sales taxes payable 1,733 14,809
Deferred revenues - 1,750,000
Accrued liabilities 777,058 724,952
------------ ------------
Total Current Liabilities 1,205,574 3,177,825
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Convertible preferred stock, $5.00 par value,
3,000,000 shares authorized - -
Common stock, $.001 par value, 200,000,000 shares
authorized, 80,488,138 and 80,149,516 issued and
outstanding on March 31, 2001 and June 30, 2000 80,488 80,150
Additional paid-in-capital 90,425,758 82,774,168
Accumulated other comprehensive income 204,939 32,492
Accumulated deficit ( 54,212,389) ( 34,601,965)
------------ ------------
Total Stockholders' Equity 36,498,796 48,284,845
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,704,370 $ 51,462,670
============ ============
See notes to condensed consolidated financial statements.
3
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Condensed Consolidated Statements of Operations
(UNAUDITED)
From
Inception on
Three months ended Nine months ended June 10, 1987
March 31, March 31, through
-------------------------- -------------------------- March 31,
2001 2000 2001 2000 2001
------------ ------------ ------------ ------------ ------------
INCOME
Sales revenues $ 106,712 $ - $ 302,419 $ - $ 631,702
Cost of goods sold ( 41,759) - ( 133,558) - ( 310,494)
------------ ------------ ------------ ------------ ------------
Gross Margin 64,953 - 168,861 - 321,208
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES
General and administrative
costs 2,775,127 858,840 8,620,138 2,097,676 28,309,406
Research and development
costs 1,989,246 1,190,557 5,991,894 3,196,065 18,138,658
Depreciation and
amortization expense 544,038 212,352 1,691,062 251,407 2,448,237
Litigation and settlement
expenses - 62,500 - 62,500 1,097,434
------------ ------------ ------------ ------------ ------------
Total Costs and
Expenses 5,308,411 2,324,249 16,303,094 5,607,648 49,993,735
------------ ------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ( 5,243,458) ( 2,324,249) (16,134,233) ( 5,607,648) (49,672,527)
OTHER INCOME AND EXPENSES
Interest income 424,720 259,365 1,588,928 268,833 2,452,617
Interest expense - ( 576) ( 35,705) ( 576) ( 2,209,517)
Income from sale of
prototypes - - - - 180,815
Miscellaneous income 4,000 - 6,552 - 6,552
------------ ------------ ------------ ------------ ------------
Total Other Income
and Expenses 428,720 258,789 1,559,775 268,257 430,467
------------ ------------ ------------ ------------ ------------
LOSS BEFORE
EXTRAORDINARY ITEM ( 4,814,738) ( 2,065,460) (14,574,458) ( 5,339,391) (49,242,060)
EXTRAORDINARY GAIN ON
EXTINGUISHMENT OF DEBT - - - - 65,637
------------ ------------ ------------ ------------ ------------
NET LOSS ( 4,814,738) ( 2,065,460) (14,574,458) ( 5,339,391) (49,176,423)
OTHER COMPREHENSIVE
INCOME
Unrealized gain on
available-for-sale
securities 31,108 - 172,447 - 204,939
------------ ------------ ------------ ------------ ------------
TOTAL COMPREHENSIVE LOSS $( 4,783,630) $( 2,065,460) $(14,402,011) $( 5,339,391) $(48,971,484)
============ ============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 80,486,460 67,218,472 80,456,637 65,684,683
============ ============ ============ ============
BASIC AND DILUTED LOSS
PER SHARE $( 0.06) $( 0.03) $( 0.24) $( 0.08)
============ ============ ============ ============
See notes to condensed consolidated financial statements.
4
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(UNAUDITED)
From
Inception on
Three months ended Nine months ended June 10, 1987
March 31, March 31, through
-------------------------- -------------------------- March 31,
2001 2000 2001 2000 2001
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $( 4,814,738) $( 2,065,460) $(14,574,458) $( 5,339,391) $(49,176,423)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization 544,038 212,352 1,691,062 251,407 2,448,237
Amortization of debt
issuance costs and
discounts on notes - - - - 937,969
Amortization of bond
(premium) discount, net 635 - 17,624 - 17,624
Common stock, warrants,
and options issued as
compensation 137,000 58,098 137,000 432,206 10,008,594
Variable options marked to
market as compensation 196,103 - 196,103 - 196,103
Warrants/options extended
beyond expiration as
compensation - - 1,687,250 - 1,687,250
Common stock issued for
interest expense - - - - 423,596
Common stock/warrants issued
to settle litigation - - - - 514,380
Options issued at discount
to market as compensation - - 231,250 - 231,250
Common stock issued for
failure to complete
timely registration - - - - 82,216
Common stock issued to
401(k) plan 52,751 43,226 52,751 43,226 95,977
Extraordinary gain on
extinguishment of debt - - - - ( 65,637)
Write-off of advances
to affiliate - - 130,537 - 130,537
Changes in operating
assets and liabilities
(net of effects of
acquisition):
Accounts receivable
trade ( 4,638) ( 27,182) 76,923 ( 30,782) 21,035
Inventory ( 228,117) - ( 607,350) - ( 540,798)
Interest receivable 53,611 - 96,096 - ( 343,177)
Prepaid expenses 81,453 - 130,573 - ( 73,968)
Miscellaneous
Receivables 44,000 - - - -
Maintenance contract 178,082 309,863 ( 471,918) -
Accounts payable ( 145,337) 1,346,198 ( 261,280) 1,945,335 359,104
Sales taxes payable ( 13,779) - ( 13,077) - 1,733
Deferred revenues - - ( 1,750,000) - -
Accrued liabilities 258,847 - 52,106 - 777,058
------------ ------------ ------------ ------------ ------------
Net Cash Used in Operating
Activities $( 3,838,171) $( 254,686) $(12,397,027) $( 3,169,917) $(32,267,340)
------------ ------------ ------------ ------------ ------------
See notes to condensed consolidated financial statements.
5
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Continued)
(UNAUDITED)
From
Inception on
Three months ended Nine months ended June 10, 1987
March 31, March 31, through
-------------------------- -------------------------- March 31,
2001 2000 2001 2000 2001
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of
assets - - - - 4,790
Purchase of property
and equipment ( 241,017) ( 139,561) ( 985,066) ( 236,768) ( 1,844,272)
Purchase of software
license - ( 2,410) - ( 3,852,410)
Proceeds on sale of
securities available
for sale 2,970,240 - 6,575,872 - 6,575,872
Purchase of securities
available for sale - - ( 1,332,277) - (27,330,366)
Acquisition of Bales
Scientific common
stock - - - ( 5,642,880)
Acquisition of minority
interest in subsidiary - ( 30,000) ( 40,000) ( 60,000) ( 100,000)
------------ ------------ ------------ ------------ ------------
Net Cash (Used in) Provided
by Investing Activities 2,729,223 ( 169,561) 4,216,119 ( 296,768) (32,189,266)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Common stock, warrants
and options issued for
cash 758 49,460,275 311,608 53,505,359 63,868,229
Stock offering costs - ( 2,933,793) - ( 2,933,793) ( 2,933,793)
Cash paid in Bales
acquisition - - - - 38,822
Advances to affiliates - - ( 22,673) - ( 130,537)
Advances (to)/from
stockholders - ( 7,042) - - 2,320,738
Proceeds from borrowings,
net of debt issuance
costs and accrued
interest - 45,793 - 45,793 3,576,131
Retirement of notes and
debentures - - - - ( 1,177,190)
------------ ------------ ------------ ------------ ------------
Net Cash Provided by
Financing Activities 758 46,565,233 288,935 50,617,359 65,562,400
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS ( 1,108,190) 46,140,986 ( 7,891,973) 47,150,674 1,105,794
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 2,213,984 1,146,850 8,997,767 137,162 -
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 1,105,794 $ 47,287,836 $ 1,105,794 $ 47,287,836 $ 1,105,794
============ ============ ============ ============ ============
See notes to condensed consolidated financial statements.
6
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Continued)
(UNAUDITED)
From
Inception on
Three months ended Nine months ended June 10, 1987
March 31, March 31, through
-------------------------- -------------------------- March 31,
2001 2000 2001 2000 2001
------------ ------------ ------------ ------------ ------------
SUPPLEMENTAL CASH FLOW
INFORMATION
Cash paid for:
Interest expense $ - $ - $ 35,705 $ - $ 35,705
Income taxes - - - - -
SUPPLEMENTAL SCHEDULE OF
NON-CASH FINANCING AND
INVESTING ACTIVITIES
Common stock issued to
individuals to acquire
minority interest in
subsidiary $ - $ - $ - $ - $ 165,500
Common stock issued as
consideration for
Bales Scientific, Inc. - - - - 5,500,000
Options issued for
offering costs - - - - 744,282
Common stock issued for
offering costs - 75,000 300,634
Common stock issued for
notes payable, accrued
discount and interest - - - - 2,224,953
Common stock issued for
liabilities - - - - 50,000
Deemed dividend on
extension of warrants - - 5,035,966 - 5,035,966
See notes to condensed consolidated financial statements.
7
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
NOTE A. UNAUDITED FINANCIAL STATEMENTS AND BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been condensed or omitted as permitted by such rules and regulations. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of results of
operations have been included in the financial statements. Results for
interim periods are not necessarily indicative of the results that may be
expected for the full year. These financial statements should be read in
connection with the audited consolidated financial statements and notes
thereto included in the Company's latest annual report on Form 10-KSB.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and related disclosures. Actual
results may differ from these estimates.
NOTE B. NEW ACCOUNTING STANDARD AND GUIDANCE
Accounting for Derivative Instruments and Hedging Activities
------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", subsequently amended by SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities", which establishes accounting and reporting standards for
derivative instruments and hedging activities. SFAS 133 requires an entity to
recognize all derivative instruments as either assets or liabilities in the
statement of financial position and measure those instruments at their fair
value. The Company adopted the statement on July 1, 2000 and has determined
that the adoption of SFAS 133 did not have a material effect on the financial
condition of the Company.
Revenue Recognition
-------------------
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." The SAB summarizes the SEC staff's views on applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company has reviewed its revenue recognition policies and has determined
that they comply with the principles set forth in SAB No. 101. Accordingly,
the issuance of SAB No. 101 did not have any effect on the Company's financial
position or results of operation.
NOTE C. INVENTORIES
8
Inventories are stated at the lower-of-cost or market with cost
determined using first-in first-out. Inventories consist of the following:
March 31, 2001 June 30, 2000
---------- ----------
Raw materials and work-in-process $ 659,033 $ 110,206
Finished goods 33,955 -
Supplies 24,568 -
---------- ----------
$ 717,556 $ 110,206
========== ==========
NOTE D. INCOME TAXES
The Company uses the liability method of accounting for income taxes.
Under this method, deferred income taxes are recorded to reflect the tax
consequences on future years of temporary differences between the tax basis of
assets and liabilities and their financial statement amounts at the end of
each reporting period. The Company has reviewed its net deferred tax assets,
together with net operating loss carryforwards, and has provided a valuation
allowance to reduce its potential deferred tax assets to their net realizable
value. In making this determination, the Company has considered the Company's
history of tax losses incurred since inception and the fact that the Company
is still within the development stage.
NOTE E. STOCK WARRANTS, OPTIONS, AND RESTRICTED STOCK
During the second quarter of fiscal year 2001, employee stock options
covering 500,000 shares of common stock were issued at an 11.38 percent
discount to market and 1,000,000 employee stock options, originally scheduled
to expire on December 20, 2000, were extended to September 18, 2001. As a
result of the issuance and extension of the stock options, the Company
recorded additional compensation expense of $1,918,500 for the nine-month
period ended March 31, 2001. The additional compensation expense has no net
effect to the cash flows or total stockholders' equity of the Company.
During the second quarter of fiscal year 2001, warrants representing 2,086,150
underlying shares of common stock scheduled to expire on December 31, 2000
were extended to August 31, 2001. The expiration date of such warrants was
previously extended from December 31, 1999 to December 31, 2000. The excess of
the fair value of the warrants on the date of extension over the fair value of
such warrants measured at the date of their original issuance, or $5,035,966,
was recorded as a deemed dividend paid to the warrant holders for the
nine-month period ended March 31, 2001. The deemed dividend has no net effect
to the cash flows or total stockholders' equity of the Company.
During the third quarter of fiscal year 2001, stock options covering
1,000,000 shares of common stock previously granted to an employee were
repriced from a $3.63 per share exercise price to a $2.15 per share exercise
price. The vesting of such options were also accelerated such that options,
previously scheduled to vest over a three-year employment period beginning
April 30, 2000, will vest no later than December 31, 2001. Pursuant to
Accounting Principles Board Opinion No. 25 and Financial Accounting Standards
Board Interpretation No. 44, these options are accounted for as variable
options and marked-to-market at the conclusion of each accounting period
following the change in the terms of the options. Since the price of the
Company's stock was equal to or less than the revised exercise price on the
date such options were repriced, no additional compensation expense was
9
recorded as a result of the repricing. However, the Company recorded
additional compensation expense of $290,000 for the three and nine-month
periods ended March 31, 2001 in connection with marking-to-market such options
at the close of the period. The additional compensation expense has no net
effect to the cash flows or total stockholders' equity of the Company.
NOTE F. CONTINGENCIES
At March 31, 2001, the Company was not involved in any pending or
threatened legal disputes that the Company believes would have a material
adverse impact on the Company's financial statements.
NOTE G. RECLASSIFICATIONS
Certain 2000 amounts have been reclassified to conform to the 2001
presentations.
NOTE H. CANCELLATION OF AGREEMENTS WITH CTII
Pursuant to certain agreements entered into in fiscal 2000 to market and
deploy our Breast Cancer System 2100 throughout Central and South America, the
Company accepted a purchase order on June 6, 2000 for the sale of 10 Breast
Cancer Systems for $5 million to Computerized Thermal Imaging International,
Inc. ("CTII"), an entity in which the Company received a 15-percent interest
pursuant to the agreements. The Company received a down payment of $1.75
million (which was recorded as deferred revenue as of June 30, 2000), with the
remaining $3.25 million to be received upon delivery of the systems. The
invoice obligated the Company to deliver the 10 systems to CTII on, or about,
mid-October, 2000. Additionally, the Company expected to issue 500,000
options upon the delivery and placement of such systems into commercial use.
In late September 2000, the Company advised CTII of its desire to
renegotiate the foregoing agreements given the substantial change in market
conditions, the increased value of the Company's common stock and unresolved
issues concerning the deployment of the Company's systems in Mexico. On
October 11, 2000, following attempts to reach more favorable terms, the
Company concluded it was in the best interests of the Company and its
shareholders to mutually terminate the agreements and the purchase order for
the 10 units. Accordingly, the agreements and purchase order were terminated
and the Company refunded the $1.75 million down payment received from CTII on
the initial order of the 10 units. In connection with the termination of the
agreements, the Company's obligation to issue options to CTII was eliminated,
the Company's 15% ownership in CTII reverted back to the remaining principals
of CTII, and each party to the agreements will bear the respective costs of
any performance under the agreements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This document contains forward-looking statements about our business and
future. The United States Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for certain forward-looking statements. Our
forward-looking statements are expressed in good faith and we believe that
there is a reasonable basis for us to make them. However, readers are
cautioned not to place undue reliance on such statements. Forward-looking
statements include, but are not limited to, statements about our: 1) plans; 2)
objectives; 3) goals; 4) strategies; 5) expectations for the future; 6) future
performance and events; 7) underlying assumptions for all of the above; and 8)
other statements that are not statements of historical fact.
We make these forward-looking statements based on our analysis of
internal and external historical trends and future expectations. However, such
statements involve risks and uncertainties that could cause our actual results
to materially differ from our forward-looking statements and there can be no
assurance that we will achieve the results set forth in these forward-looking
statements. In addition to other factors, the following are important factors
that could cause our actual results to materially differ from our
forward-looking statements: 1) the results of our pre-clinical and clinical
testing; 2) the time and costs involved in obtaining regulatory approvals for
our systems and products; 3) our ability to respond to changes in the medical
technology marketplace including our ability to develop or acquire new
technologies; 4) competitive factors; 5) the availability of financing on
terms and conditions acceptable to us; 6) the availability of personnel with
requisite skills; and 7) the terms of any new collaborative, licensing and
other arrangements that we may establish.
We have no obligation, or intent, to update or revise these
forward-looking statements to reflect future events, new information, or
otherwise. The following discussion and analysis of our consolidated financial
condition and results of operations should be read in conjunction with our
Audited Consolidated Financial Statements and Notes thereto contained in our
Form 10-KSB for the fiscal year ended June 30, 2000.
Trends/Uncertainties Affecting Continuing Operations
----------------------------------------------------
10
We are a development stage enterprise and have generated no significant
revenues since inception in 1987. Our ability to achieve profitability will
depend, in large part, on our ability to successfully develop clinical
applications for our products, obtain regulatory approvals, and develop the
capacity to manufacture and extensively market our products.
We are presently making the transition from a research and development
stage company to a commercial operating company. This transition anticipates
final approval of our Breast Cancer System 2100 currently undergoing FDA
evaluation. We can make no assurances that we will ultimately obtain FDA
approval of our Breast Cancer System 2100 or, that if approved, we will be
able to successfully make the transition to a commercial operating company and
sell our products on a broad basis. While attempting to make this transition,
we will be subject to all risks inherent in a growing venture, including, but
not limited to, the need to develop and manufacture reliable and effective
products, develop marketing expertise and expand our sales force. There can
be no assurance that we will achieve profitable operations.
General
-------
Computerized Thermal Imaging, Inc. ("we", "us", "our", and "the Company")
is in business to enhance the quality of human life through cost-effective,
superior diagnostics. Our research indicates that data generated by our
infrared imaging system can help physicians detect many diseases, disorders,
and injuries within the body's physiological, neurological, and vascular
systems that may go undetected using conventional imaging modalities.
Realizing that our non-invasive, painless imaging system can be applied to the
public good, we have placed our primary focus on an area of great need: breast
cancer detection. This decision resulted in the development of our Breast
Cancer System 2100 ("Breast Cancer System"). We are presently seeking FDA
premarket approval ("PMA") of this system as an adjunct to mammography. The
purpose of our PMA Application and clinical trial is to establish the efficacy
of our Breast Cancer System to consistently distinguish between malignant and
benign tissue and, thereby, significantly reduce the number of unnecessary
breast biopsies performed each year. We have submitted, and received
acceptance on, four of the five modules to be submitted to the FDA as part of
our PMA Application. In late 2000, we completed the data collection phase of
our clinical trial and expect to submit the fifth, and final, module following
compilation and analysis of the clinical results prior to June 30, 2001.
In addition to screening for breast cancer, we believe our thermal
imaging technology also shows promise in the treatment of pain, the
identification of musclo-skeletal abnormalities, and the non-destructive
testing of structural components. In connection therewith, we design,
manufacture and sell our Photonic Stimulator designed to improve vascularity
and increase blood flow circulation in the treatment of pain. Specifically,
we have recently initiated practical studies to demonstrate the Photonic
Stimulator's usefulness in the treatment of diabetic neuropathy. We also
develop, manufacture, and sell unique industrial applications of our
technology to address the non-destructive inspection of aging aircraft,
electronics, composites, metals and other advanced materials, as well as
breakthroughs in the inspection of turbine blades of large power-generation
equipment. To date, our line of products consists of our Breast Cancer
11
System (currently undergoing FDA review), our Photonic Stimulator, our Thermal
Image Processor, and our Turbine Blade Inspection System.
We are presently transitioning from development stage to
commercialization. In March 2000, we raised over $44 million to support this
transition and complete our PMA Application. We have had limited revenues
from operations and essentially no sales of any magnitude related to our
Breast Cancer System. To date, revenues have been generated primarily from
sales of our Photonic Stimulator and Thermal Image Processor and services
provided in connection with our Turbine Blade Inspection System. In January
of our fiscal year 2001, we initiated a marketing campaign designed to
establish the distribution channels for our products. In connection
therewith, we recently executed agreements with distribution agents to market
our products. Orders resulting from our marketing campaign exceeded $850,000
during the quarter ended March 31, 2001. These orders will be recognized as
revenues in future periods in accordance with, and to the extent permitted by,
generally accepted accounting principles and regulations promulgated by the
Securities and Exchange Commission.
We are publicly traded on the American Stock Exchange under the "CIO"
ticker symbol. As of May 11, 2001, we have 80,548,763 shares of common stock
outstanding held by approximately 29,000 known shareholders. Known
shareholders are comprised primarily of individual investors. In addition to
the issued and outstanding common stock, we have approximately 18.7 million
shares underlying warrants and options that remain unexercised, including
warrants and options not fully vested as of the date hereof. Accordingly, on
a fully diluted basis, we have approximately 99 million common shares
outstanding, 24.1% of which is beneficially owned by insiders and affiliates.
In addition to the foregoing, we own 98.1 percent of Computerized Thermal
Imaging Company (previously known as Thermal Medical Imaging, Inc.) and 100
percent of Bales Scientific, Inc. We have no other interest in any other
entity.
Capital is required, in part, to satisfy general corporate expenses,
salaries, software license and maintenance contract payments, manufacturing
costs, professional fees to comply with securities reporting requirements,
costs of clinical trials and technical support, FDA consulting expenses,
acquisition of technology, costs of litigation, and expenses associated with
the private placement and registration of our securities. Our capital
resources are principally derived from the sale and private placement of our
common stock and warrants and the exercise of our common stock warrants and
options.
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31,
2000.
-------------------------------------------------------------------------
Revenues
--------
Revenues for the quarter ended March 31, 2001 totaled $106,712. These
revenues resulted entirely from product sales by Bales Scientific, our
subsidiary, which we acquired in April 2000. Accordingly, we had no revenues
for the comparative period ended March 31, 2000. The foregoing revenues do
12
not reflect over $850,000 in orders received during the quarter ended March
31, 2001 which will be recognized as revenues in future periods in accordance
with, and to the extent permitted by, generally accepted accounting principles
and regulations promulgated by the Securities and Exchange Commission.
Interest income in the quarter ended March 31, 2001 increased $165,355
compared with the same quarter of 2000, to $424,720. This increase is
primarily the result of investing the proceeds from the private placement of
our common stock during the quarter ended March 31, 2000.
Costs and Expenses
------------------
General and Administrative Expenses. General and administrative expenses
for the quarter ended March 31, 2001 increased $1,916,287 or 223% over the
same quarter in 2000, to $2,775,127. This increase is primarily a result of
additional compensation expense of $750,931 in the 2001 quarter ($196,103
resulting from the accounting for employee stock options, $417,828 resulting
from a material increase in the number of employees over the prior period, and
$137,000 resulting from granting restricted stock). The increase is further
attributable to 1) additional legal expenses of $326,739 incurred in
connection with regulatory filings, on-going litigation, and other legal
matters; 2) additional retirement plan and employee-related expenses of
$126,581 resulting from the aforementioned increase in the number of
employees; 3) an increase in travel costs of $125,198; 4) an increase in
marketing-related costs of $173,329 incurred as a result of transitioning
efforts towards commercialization of our products; and 5) a $226,086 increase
in miscellaneous and office-related expenses.
Research and Development Expenses. Research and development expenses for
the quarter ended March 31, 2001 increased $798,689, or 67%, over the same
quarter in 2000, to $1,989,246. The increase is primarily a result of 1) a
$69,413 increase in clinical trial expenses; 2) a $512,533 increase in
salaries as a result of a material increase in the number of employees; and 3)
a $194,234 increase in expenses attributable to software and systems
development consultants.
Depreciation and Amortization. Depreciation and amortization expenses
for the quarter ended March 31, 2001 increased $331,686, or 157% over the
results of the same quarter in 2000, to $544,038. The increase in
depreciation and amortization expense primarily resulted from amortization of
goodwill associated with our acquisition of Bales Scientific in April 2000 and
amortization of our software licenses.
During the quarter ended March 31, 2001 and all prior periods, we
expensed all costs associated with processes and systems development,
including software code writings, computer systems hardware and software
purchases, material expenses in the development of our examination table and
all payroll expenses throughout the periods presented.
Net Loss
--------
As a result of the foregoing, we incurred a loss of $4,814,738 for the
quarter ended March 31, 2001 compared to a loss of $2,065,460 for the quarter
ended March 31, 2000.
13
For the quarter ended March 31, 2001, the loss attributable to common
shareholders was $4,814,738, or $(0.06) per share, compared to a loss
attributable to common shareholders of $2,065,460, or $(0.03) per share, for
the quarter ended March 31, 2000.
NINE MONTHS ENDED MARCH 31, 2001 COMPARED TO NINE MONTHS ENDED MARCH 31, 2000.
-----------------------------------------------------------------------------
Revenues
--------
Revenues for the nine months ended March 31, 2001 totaled $302,419. These
revenues resulted entirely from product sales by Bales Scientific, our
subsidiary, which we acquired in April 2000. Accordingly, we had no revenues
for the comparative period ended March 31, 2000.
Interest income in the nine months ended March 31, 2001 increased
$1,320,095 compared with the same period of 2000, to $1,588,928. This
increase is primarily the result of investing the proceeds from the private
placement of our common stock during the quarter ended March 31, 2000.
Costs and Expenses
------------------
General and Administrative Expenses. General and administrative expenses
for the nine months ended March 31, 2001 increased $6,522,462, or 311% over
the same period in 2000 to $8,620,138. This increase is primarily a result of
additional compensation expense of $3,408,065 in the 2001 quarter ($2,114,603
resulting from the accounting for employee stock options, $1,156,462 resulting
from a material increase in the number of employees over the prior period, and
$137,000 resulting from granting restricted stock). The overall increase was
further attributable to 1) additional legal expenses of $1,023,390 in
connection with our Nasdaq/AMEX listing application, regulatory filings,
on-going litigation, and other legal matters; 2) additional retirement plan
and employee-related expenses of $276,499 resulting from the aforementioned
increase in the number of employees; 3) an increase in travel costs of
$345,793; 4) an increase in marketing-related costs of $431,152 as a result of
transitioning efforts towards commercialization of our products; 5) a $235,490
increase in office-related expenses; 6) a $175,203 increase in insurance
expense; and 7) a $249,753 increase in rent expense.
Research and Development Expenses. Research and development expenses for
the nine months ended March 31, 2001 increased $2,795,829, or 87% over the
same period in 2000, to $5,991,894. The increase is primarily a result of 1)
a $146,567 increase in clinical trial expenses; 2) a $1,288,269 increase in
salaries as a result of a material increase in the number of employees; 3) a
$1,194,634 increase in payments to various contractors in connection with our
clinical trials, software development and FDA Pre-Market Approval application;
and 4) a $309,687 increase in software license fees.
Depreciation and Amortization. Depreciation and amortization expenses
for the nine months ended March 31, 2001 increased $1,439,655, or 573% over
the results of the same period in 2000, to $1,691,062. The increase in
depreciation and amortization expense primarily resulted from amortization of
14
goodwill associated with our acquisition of Bales Scientific and amortization
of our software licenses.
During the nine months ended March 31, 2001 and all prior periods, we
expensed all costs associated with processes and systems development,
including software code writings, computer systems hardware and software
purchases, material expenses in the development of our examination table and
all payroll expenses throughout the periods presented.
Net Loss
--------
As a result of the foregoing, we incurred a loss of $14,574,458 for the
nine months ended March 31, 2001 compared to a loss of $5,339,391 for the nine
months ended March 31, 2000. After accounting for dividends deemed paid to
specified warrant holders on the extension of their warrants, we incurred a
loss of $19,610,424 for the period ended March 31, 2001 compared to a loss of
$5,339,391 for the period ended March 31, 2000.
For the nine months ended March 31, 2001, the loss attributable to common
shareholders was $19,610,424, or $(0.24) per share, compared to a loss
attributable to common shareholders of $5,339,391, or $(0.08) per share, for
the nine months ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Sources of Liquidity
--------------------
Our net working capital at March 31, 2001 was $22,222,111 compared to
$41,471,687 at March 31, 2000. The ratio of current assets to current
liabilities was 19.43 to 1.0 at March 31, 2001 compared to 7.56 to 1.0 at
March 31, 2000.
Our cash requirements consist of, but are not limited to, general
corporate expenses including office salaries and expenses, lease payments on
our office space, acquisition of technology, software license and maintenance
contracts payments, legal and accounting fees to comply with securities
registration and reporting requirements, costs of clinical trials and
technical support, and FDA consulting expenses.
Net cash used in operating activities for the nine months ended March 31,
2001 was $12,397,027 compared to $3,169,917 for the nine months ended March
31, 2000. Net cash provided by investing activities in the 2001 period was
$4,216,119 compared to net cash used in investing activities of $296,768 in
the prior year's comparable period. Net cash provided by financing activities
was $288,935 in the nine months ended March 31, 2001 compared to $50,617,359
generated in the prior year's comparable period. As a result of the
foregoing, cash and cash equivalents decreased by $7,891,973 in the nine
months ended March 31, 2001 compared to a $47,150,674 increase in the nine
months ended March 31, 2000.
Capital resources needed to meet our planned expenditures are derived
primarily from equity funding on the private placement of our common stock and
warrants and the exercise of our outstanding warrants and options.
15
Agreement with Beach Boulevard, LLC. On March 4, 1999, we entered into a
Securities Purchase Agreement (as amended in May 1999, the "Investment
Agreement") with Beach Boulevard L.L.C. ("Beach"). Subject to certain
conditions set forth in the Investment Agreement, we have the right to require
Beach to purchase up to $7 million of our common stock in a series of $500,000
tranches. As of the date hereof, we have required Beach to purchase
approximately $3 million of our common stock in a series of six tranches
during our fiscal years ended June 30, 2000 and 1999. Since Beach's
participation in the sixth tranche, we have made no requirements of funding by
Beach, although Beach's obligation to provide funding, subject to the terms
and conditions set forth in the Investment Agreement, continues.
Because Beach is not required to purchase additional shares unless
certain conditions are satisfied as set forth in the Investment Agreement,
there is no assurance that Beach will ultimately provide us with the remaining
$4 million commitment. Furthermore, there is no assurance that we will
require Beach to purchase additional shares even if the conditions set forth
in the Investment Agreement are satisfied.
Sources of Potential Long-term Liquidity. We expect that both use
agreements and equipment financing will be sources of long-term liquidity for
us, although it is premature to anticipate the results of either. Although we
have investigated both options and have entered into preliminary discussions
with equipment financing companies, we are awaiting Pre-Market Approval of our
Breast Cancer System 2100 before entering into any additional planning or
definitive agreements regarding either. Much of what we anticipate as being
sources of long-term liquidity is contingent upon (1) whether or not we
achieve Pre-Market Approval of our Breast Cancer System 2100, (2) the
development and execution of a definitive and successful marketing strategy,
(3) whether we are able to develop our Medical Systems for other applications
in the United States, and (4) the results of our marketing efforts in domestic
and foreign markets.
Capital Requirements/Plan of Operation
--------------------------------------
We are a development stage enterprise and, as such, are largely dependent
on the sale of our common stock and warrants, and the exercise of our warrants
and options, to provide liquidity. Since inception, we have continually
sought funding to meet our day-to-day operations and business plan and have
often sought substantial loans from affiliates and shareholders to meet our
financial obligations. Such loans were often repaid in stock. Although we
believe that we have sufficient resources to meet our current plan of
operations for the next 12 months, it is possible that, due to unforeseen
events, we will have insufficient resources and funding required to execute
our plan of operations. Until such time as we begin generating significant
revenues from operations, which is not likely until and unless Pre-Market
Approval of our Breast Cancer System 2100 is obtained from the FDA and our
products are marketed and sold on a large-scale basis, we will be faced with
the difficulties and expenses associated with our financing needs and
obligations.
Our capital requirements may vary from our estimates and depend on
numerous factors including, but not limited to: 1) progress in our research
and development programs; 2) results of pre-clinical and clinical testing; 3)
costs of technology; 4) time and costs involved in obtaining regulatory
approvals; 5) hiring of additional personnel to carry out our plan of
16
operations; 6) costs of filing, defending and enforcing any patent claims and
other intellectual property rights; 7) economic impact of competing
technological and market developments; 8) the costs of transitioning to a
commercial enterprise; 8) the costs to manufacture our products; and 9) the
terms of any new collaborative, licensing and other arrangements that we may
establish.
We estimate that we will require approximately $17 million in cash to
meet our business plan and obligations for the 12-month period ending March
31, 2002 including approximately $6.8 million in engineering and manufacturing
design costs and research and development to continue and/or initiate clinical
trials, test our systems in connection with industrial and other medical
applications and complete our FDA Pre-Market Approval application with the
FDA, $2.0 million for day-to-day operating expenses including lease payments
on our facilities, $4.6 million to cover salaries, $1.1 million in capital
equipment, $1.8 million for public relations, advertising, and
commercialization of our products, and $.7 million for legal and accounting
for SEC compliance with reporting obligations, on-going litigation, and
general legal representation. As of March 31, 2001, we have 53 employees and
plan to hire additional employees as we move towards completion of the FDA
approval process and develop our marketing and distribution plan.
Certain aspects of our Plan of Operation for the next twelve months
include: 1) completion of FDA Pre-Market Approval application on our Breast
Cancer System 2100; 2) development and initiation of our plan for
commercialization of our products including development of relationships with
distributors; and 3) development and commercialization of our technologies
into industrial application.
We have a financing arrangement (discussed in "Sources of Liquidity"
above) whereby Beach is currently required to provide us with up to $4,000,000
in financing from time to time under certain conditions and then only if we
desire to obtain financing from Beach. This financing arrangement is in the
form of a Securities Purchase Agreement whereby Beach purchases shares of our
common stock at a 15% discount to the market price of our common stock at the
time of the funding. We can provide no assurances that we will require
additional funding under the Securities Purchase Agreement or, if we desire
additional funding, we will meet the terms of the Securities Purchase
Agreement necessary to require additional funding. Furthermore, any issuance
of shares to Beach could have a severe dilutive effect on the existing holders
of our common stock.
There are currently outstanding options and warrants covering
approximately 16.6 million shares that can be exercised or converted with
exercise prices ranging from $.60 to $9.0625 (representing gross proceeds to
us, upon conversion, of approximately $45.8 million). Of the estimated $45.8
million in gross proceeds available to us upon conversion of vested options
and warrants, approximately $6.4 million is attributable to options and
warrants expiring in 2001, approximately $5.3 million is attributable to
options and warrants expiring in 2002, approximately $3.0 million is
attributable to options and warrants expiring in 2003, approximately $30.5
million is attributable to options and warrants expiring in 2005, and
approximately $0.6 million is attributable to warrants and options which
expire after 2005. Additional proceeds of approximately $9 million may become
available to us at a future date upon the vesting and exercise of yet unvested
options. As of March 31, 2001, we had outstanding: a) 7,933,751
17
immediately exercisable options to purchase our common stock at exercise
prices ranging from $.60 to $9.0625 per share; b) 2,074,285 options to
purchase our common stock at exercise prices ranging from $.76 to $7.71875
that vest at future dates pursuant to various agreements; and c) immediately
exercisable warrants to purchase 8,715,431 shares of our common stock at
prices ranging from $.72 to $7.25 per share.
The likelihood of warrants and options being exercised will be high if
our common stock trades at a price above the respective strike prices of these
securities. However, we can provide no assurances that our outstanding
options and warrants will be exercised even if the price of our common stock
trades above the respective strike prices of these securities.
Based on the foregoing, we believe we will have sufficient capital to
fund our business plan over the next year from our existing cash and cash
equivalents and from the proceeds from the redemption of our marketable
securities. If, due to unforeseen events, funding falls short and we need to
obtain additional funds, we would seek them from private investors through
loans or on the sale of our restricted common stock. However, we can provide
no assurances that either of these avenues of financial support would be
available to us or, if available, on terms acceptable to us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a development stage enterprise. We do not believe that we are
currently subject to market risks beyond ordinary economic risks, such as
interest rate fluctuation and inflation, to which most enterprises are
subject.
At March 31, 2001, we had invested approximately $21 million in
available-for-sale marketable securities including investments in United
States government securities and corporate bonds. Although we believe the
issuers of the securities in which we have invested are solvent and are
favorably rated by recognized rating agencies, there is the risk that such
issuers may not have sufficient liquid assets to satisfy their obligations at
the time such obligations become due. If such were to occur, we may not be
able to recover the full amount of our investment.
Each of our marketable securities has a fixed rate of interest.
Accordingly, a change in market interest rates may result in an increase or
decrease in the market value of our marketable securities. If we liquidate
any of our marketable securities prior to the time of their maturity, we could
receive less than the face value of the security.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Bloomberg/Evans Defamation Action
---------------------------------
On August 28, 2000, we filed a complaint for libel in the United States
District Court for the District of Utah, Northern Division, Case No.
1:00CV00098K against Bloomberg, L.P. (the "Defendant"). The lawsuit alleges
that on June 29 and July 18, 2000, Defendant published certain defamatory
articles about the Company that were written by David Evans through its news
service, Bloomberg News. According to the Complaint, the defamatory articles
18
were published over Defendant's Internet web site and elsewhere to millions of
people, and contained certain false, misleading, and defamatory statements
regarding our business and thermal imaging technology. The lawsuit further
alleges that, after publication of the first defamatory article on June 29,
2000, we wrote to Defendant and explained the alleged inaccuracies and
falsehoods contained therein. Although Defendant then published on July 18,
2000 what it labeled as a "correction" to the first story, this second
"defamatory article" still contained defamatory matter calling into doubt
(among other things) our ability to attract capital as well as the efficacy of
our Breast Cancer System 2100. The Complaint alleges damages against Defendant
in excess of One Hundred Million Dollars ($100,000,000). On October 23, 2000,
Defendant filed a motion to dismiss our complaint pursuant to Rule 12(b)(6) of
the Federal Rules of Civil Procedure. On December 11, 2000, we responded to
the Defendant's motion, and on January 3, 2001, the Defendant filed its reply
brief. A hearing was held by the Utah District Court on the Defendant's motion
to dismiss our complaint on February 2, 2001. On March 26, 2001, the Court
dismissed, without prejudice, our complaint against the Defendant. In so
doing, the Court ruled that despite the possibility that a jury could have
found Defendant's statements to be defamatory, damages had not been
sufficiently pleaded. We had alleged that the Defendant statements directly
caused a decline in our stock price and that the price decline did not merely
"coincide" with those statements, as Defendant maintained. The court held
that any decline in our stock value attributable to the Defendant statements
may be damage to our shareholders, but not necessarily to the Company itself,
and that other resulting damages directly relating to the Company were not
specifically delineated in the initial pleadings. On April 13, 2001, we filed
a motion with the District Court to reconsider its decision to dismiss. As of
the date of this filing, the District Court has not ruled on our request to
reconsider and there is insufficient information to make a conclusion as to
the outcome of the case.
Kathleen Sullivan Employment Agreement
--------------------------------------
On June 27, 2000, Kathleen Sullivan ("Plaintiff") filed a complaint in
the Superior Court of California for the County of Los Angeles (Central
District), Case No. BC232482, against us alleging breach of contract.
Thereafter, in March 2001, Plaintiff amended her complaint to include causes
of action for fraud and negligent misrepresentation against us and a former
officer. Plaintiff seeks unspecified damages pursuant to an agreement whereby
she was to undertake particular promotional activities for the benefit of the
Company during 1998. The agreement required us to issue stock and/or warrants
in exchange for Plaintiff's performance. Plaintiff claims that we failed to
duly compensate her for services rendered, whereas, we assert breach and
non-performance as a defense on the basis that Plaintiff failed to fulfill her
contractual obligations.
We believe that Plaintiff's claims are without merit and will defend
ourselves against any and all claims. We are currently engaged in discovery
and trial has been continued to October 15, 2001.
State Securities Matters
------------------------
In a letter dated May 17, 2000, the Utah Division of Securities (the
"Division") proposed terms of an order whereby we would cease and desist from
paying commissions except to broker-dealers and we would pay a $500 fine in
19
connection with our recent private placement. On July 21, 2000, we responded
and requested that it reconsider the proposed terms of its order. On August
17, 2000, we were advised that the Division had considered our letter but was
not predisposed to consider a change to its initial order. On March 5, 2001,
we met with the Division and requested that the Division reconsider the
proposed items of its order. We are awaiting its response.
ITEM 2. CHANGES IN SECURITIES
No instruments defining the rights of the holders of any class of
registered securities have been materially modified, limited or qualified
during the period.
The following securities, which are not registered under the Securities
Act of 1933 (the "Act"), were issued since the Company's last report for the
quarter ended December 31, 2000. The following includes the issuance of
shares upon conversion of warrants and options:
During January, 2001, we issued 11,533 shares of restricted common stock
to the Company's 401K Plan to fund the Company's 2000 contribution to the
Plan. This transaction is exempt from registration pursuant to Section 4(2)
of the Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
FDA Approval Status
-------------------
Our Breast Cancer System 2100 qualifies as a medical device under 21
U.S.C. 321(h) because it is intended for use in the diagnosis, cure,
mitigation, treatment or prevention of disease and does not interact
chemically with the body. Typically, low risk, Class I or Class II devices
that are substantially similar to approved products already on the market can
obtain FDA clearance by the agency's pre-market notification known as a 510(k)
filing. Sophisticated instruments that entail significant risk are generally
classified as Class III devices and require manufacturers to submit a
Pre-Market Application ("PMA") to the FDA. A PMA is much more complex and
time-consuming to prepare than a 510(k) filing. A PMA typically contains a
significant quantity of clinical testing, manufacturing and other data, all of
which are carefully scrutinized by the FDA to demonstrate the product's
safety, reliability and effectiveness.
We do not believe that our Breast Cancer System 2100 requires us to
submit a PMA to the FDA for approval. Notwithstanding, we have chosen to
pursue FDA approval via the PMA process to gain market acceptance of our
system. We believe that FDA approval of our Breast Cancer System 2100 will 1)
enable us to reference medical efficacy claims in connection with the
marketing of our Breast Cancer System 2100, 2) lend credibility to all of our
imaging systems, 3) ease the task of introducing our other products to the
20
market, 4) enhance physician acceptance of our systems, and 5) permit us to
obtain designation of insurance payment codes for particular medical
procedures.
The FDA is permitting us to submit our PMA in five modules, thereby
accelerating the data submittal process. To date, we have submitted four of
the five required modules and have received FDA acceptance on each of the four
modules submitted. We anticipate submitting our final module (Module 5) prior
to June 30, 2001. We cannot determine if, or when, we will ultimately obtain
FDA approval of our Pre-Market Approval application.
David A. Packer Separation Agreement
------------------------------------
On September 29, 2000, David A. Packer, our retiring President and Chief
Operating Officer, signed an employment agreement effective for a term of
three years beginning April 30, 2000. The agreement called for compensation
of $200,000 per year, plus stock options covering 1,000,000 shares of common
stock at an exercise price of $3.625 per share. On March 19, 2001, we entered
into a Separation Agreement with Mr. Packer. Mr. John Brenna, our incoming
President and Chief Operating Officer, will assume the duties and
responsibilities held by Mr. Packer and will focus efforts to transition the
Company from development stage to a commercial enterprise.
In consideration of Mr. Packer's employment agreement and in the
interests of the Company, Mr. Packer will remain employed with us through
December 31, 2001 to assist in the completion of Module 5 and provide other
related services as requested. Further, the stock options covering 1,000,000
shares of common stock noted above were repriced to a $2.15 per share exercise
price. The vesting of such options was also accelerated such that 750,000
options, previously scheduled to vest over a two-year employment period
beginning April 30, 2001, are scheduled to vest no later than December 31,
2001. A copy of Mr. Packer's Separation Agreement is attached hereto as
Exhibit 10.1.
Kevin L. Packard Employment Agreement
-------------------------------------
Earlier this year, we began planning the consolidation of our corporate
headquarters to our offices in Oregon and our manufacturing facilities to our
offices in Utah. This consolidation is expected to occur within this calendar
year and will necessitate the relocation of several key individuals from Utah
to our offices in Oregon. Recently, Mr. Kevin Packard, our Chief Financial
Officer, accepted a position as a professor of accounting at a nearby
university and has advised us that he will not be relocating to Oregon. We
have engaged a placement firm to locate Mr. Packard's successor. Mr. Packard
has agreed to continue as the Company's Chief Financial Officer, Secretary and
Treasurer until August 1, 2001 or until his successor is found to effect a
seamless transition of his responsibilities. In connection therewith, Mr.
Packard signed a six-month employment agreement effective February 1, 2001.
The agreement calls for compensation of $138,000 per year (to be reduced to
$100,000 after his successor is found), plus 50,000 shares of restricted stock
that vests at the conclusion of the six-month agreement. In consideration, Mr.
Packard relinquished all rights that he had in 100,000 stock options granted
to him in May 2000. The restricted stock granted to Mr. Packard is governed
by our 1997 Stock Option and Restricted Stock Plan. If the employment
agreement is terminated for "cause" as defined in the
21
agreement, or Mr. Packard voluntarily terminates the agreement, all of the
restricted stock granted to Mr. Packard thereunder, and which has not vested,
shall be forfeited. The agreement subjects Mr. Packard to a two-year
non-compete restriction, the obligation to give us the right to take advantage
of any business opportunity, and the duty not to reveal any confidential
information about the business of the Company. A copy of Mr. Packard's
Employment Agreement is attached hereto as Exhibit 10.2.
Current Registration Statements
-------------------------------
On October 16, 2000, we filed an amended combined registration statement
on Form S-3, File #333-39654 Amendment No. 1, that included the common stock
transactions covered by two prior registration statements. On October 26,
2000 we filed Amendment No. 2 to such registration statement and, on October
27, 2000, the Securities and Exchange Commission declared the combined
registration statement effective. Accordingly, all common stock underlying
the transactions covered by our Registration Statement #333-39654 can be sold,
traded or otherwise transferred pursuant to the terms of such registration
statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Report on Form 8-K filed April 4, 2001 reporting the dismissal of the
Bloomberg litigation.
Exhibits. The following exhibits are filed herewith:
10.1 Separation and Severance Agreement dated March 19, 2001 between
Computerized Thermal Imaging, Inc. and David A. Packer.
10.2 Employment agreement effective as of February 1, 2001 between
Computerized Thermal Imaging, Inc. and Kevin L. Packard.
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 May 17, 2001 -----------------------------------------
Richard V. Secord
Chairman & Chief Executive Officer
/s/Kevin L. Packard
Dated May 17, 2001 -----------------------------------------
Kevin L. Packard
Chief Financial Officer, Secretary &
Treasurer
22