Back to GetFilings.com
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 September 30, 2002
[ ] 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 incorporation (IRS Employer
or organization) Identification No.)
Two Centerpointe Drive, Suite 450 Lake Oswego, Oregon 97035
----------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
(503) 594-1210
------------------------
(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 83,948,878 shares
were issued and outstanding as of October 30, 2002.
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 September 30, 2002
and June 30, 2002 ....................................................3
Condensed Consolidated Statements of Operations for the three
months ended September 30, 2002 and 2001 and for the period from
inception on June 10, 1987 to September 30, 2002 .....................4
Condensed Consolidated Statements of Cash Flows for the three
months ended September 30, 2002 and 2001 and for the period from
inception on June 10, 1987 to September 30, 2002 .....................5
Notes to Condensed Consolidated Financial Statements..................7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................14
ITEM 3. Quantitative and Qualitative Disclosure of Market Risk...............23
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings....................................................23
ITEM 2. Changes in Securities................................................25
ITEM 3. Defaults upon Senior Securities......................................25
ITEM 4. Submission of Matters to a Vote of Security Holders..................25
ITEM 5. Other Information....................................................25
ITEM 6. Exhibits and Reports on Form 8-K.....................................25
SIGNATURES ...................................................................26
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, June 30,
ASSETS 2002 2002
CURRENT ASSETS:
Cash and cash equivalents $ 669,249 $ 936,796
Investments available for sale 4,478,097 8,002,969
Accounts receivable-trade, net 327,835 47,145
Accounts receivable-other, net 59,466 116,617
Inventories 1,172,928 1,078,437
Prepaid expenses 341,376 514,444
Deferred finance costs 132,359 366,837
------------- -------------
Total current assets 7,181,310 11,063,245
------------- -------------
PROPERTY AND EQUIPMENT, Net 1,326,936 1,438,873
------------- -------------
INTANGIBLE ASSETS:
Intellectual property rights, net 37,746 39,006
------------- -------------
TOTAL ASSETS $ 8,545,992 $ 12,541,124
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 712,919 $ 992,006
Accrued liabilities 1,445,046 1,426,072
Accrued settlement reserve 100,000 1,400,000
Convertible debenture 2,549,215 2,257,076
Deferred revenues and deposits 807,853 419,906
------------- -------------
Total current liabilities 5,615,033 6,495,060
------------- -------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $5.00 par value, 3,000,000
shares authorized; issued-none -- --
Common stock, $.001 par value, 200,000,000 shares authorized,
83,489,455 and 83,004,313 issued and outstanding on
September 30, 2002 and June 30, 2002, respectively 83,489 83,004
Additional paid-in capital 88,936,369 88,644,442
Accumulated other comprehensive income 28,611 14,178
Deficit accumulated during the development stage (86,117,510) (82,695,560)
------------- -------------
Total stockholders' equity 2,930,959 6,046,064
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,545,992 $ 12,541,124
============= =============
The accompanying condensed notes are an integral part of
these consolidated financial statements.
3
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FROM
THREE MONTH PERIOD ENDED JUNE 10, 1987
SEPTEMBER 30, (INCEPTION)
------------------------------------- THROUGH
2002 2001 SEPTEMBER 30, 2002
INCOME:
Revenues $ 263,930 $ 207,253 $ 2,144,924
Cost of goods sold (204,377) (111,433) (1,409,629)
------------- ------------- -------------
GROSS MARGIN 59,553 95,820 735,295
------------- ------------- -------------
OPERATING EXPENSES:
General and administrative 832,791 (2,027,427) 32,400,656
Litigation Settlements -- -- 2,697,434
Research and development 1,248,312 1,289,413 28,238,884
Marketing 608,515 230,237 7,524,848
Depreciation and amortization 163,584 386,567 4,779,219
Impairment loss -- -- 11,610,998
------------- ------------- -------------
Total operating expenses 2,853,202 (121,210) 87,252,039
------------- ------------- -------------
OPERATING INCOME (LOSS) (2,793,649) 217,030 (86,516,744)
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 89,349 264,724 3,527,722
Interest expense (717,650) -- (3,110,156)
Other -- -- 193,711
------------- ------------- -------------
Total other income (expense) (628,301) 264,724 611,277
------------- ------------- -------------
LOSS BEFORE EXTRAORDINARY ITEM (3,421,950) 481,754 (85,905,467)
EXTRAORDINARY GAIN ON
EXTINGUISHMENT OF DEBT -- -- 65,637
------------- ------------- -------------
NET INCOME (LOSS) (3,421,950) 481,754 (85,839,830)
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on investments available for sale 14,433 (20,268) 28,611
------------- ------------- -------------
TOTAL COMPREHENSIVE INCOME (LOSS) $ (3,407,517) $ 461,486 $(85,811,219)
============= ============= =============
WEIGHTED AVERAGE SHARES
OUTSTANDING 83,135,384 81,529,282 --
============= ============= =============
BASIC (LOSS)EARNINGS PER COMMON SHARE $ (0.04) $ 0.01 --
============= ============= =============
FULLY DILUTED SHARES OUTSTANDING 83,135,384 86,569,553
============= =============
FULLY DILUTED (LOSS) EARNINGS PER SHARE $ (0.04) $ 0.01 --
============= ============= =============
The accompanying condensed notes are an integral part of these
consolidated financial statements.
4
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FROM
THREE MONTHS ENDED INCEPTION
SEPTEMBER 30, THROUGH
------------------------------- SEPTEMBER 30,
2002 2001 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,421,950) $ 481,754 $(85,839,830)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 163,584 386,567 4,779,219
Impairment loss -- -- 11,610,998
Bond amortization 24,316 48,035 6,656
Amortization of bonds and deferred finance costs and
discounts on convertible debenture 388,904 -- 1,427,738
Common stock, warrants, and options issued
as compensation for services -- -- 9,639,920
Options extended beyond their expiration date -- -- 1,687,250
Common stock issued for interest expense -- -- 423,595
Stock-based compensation on options marked to market 7,280 (3,348,669) 347,075
Common stock issued to settle litigation -- -- 514,380
Options issued at discount to market to settle litigation -- -- 475,000
Options issued at discount to market as
compensation expense -- -- 226,586
Penalty on convertible debenture 287,164 287,164
Common stock issued for failure to complete
timely registration -- -- 82,216
Common stock issued to 401(k) plan -- -- 95,977
Extraordinary gain on extinguishment of debt -- -- (65,637)
Bad debt expense (30,713) 51,925 507,512
Changes in operating assets and liabilities:
Accounts receivable - trade (249,977) (230,865) (395,181)
Accounts receivable - other 57,151 384,703 206,446
Inventories (94,491) (303,237) (996,170)
Prepaid expenses 173,068 (11,895) (99,602)
Accounts payable (279,087) (574,910) 560,029
Accrued liabilities 72,586 (42,066) 1,384,159
Accrued litigation settlement (1,300,000) 100,000
Deferred revenues and deposits 387,947 354,200 807,853
------------- ------------- -------------
Net cash used in operating activities (3,814,218) (2,804,458) (52,226,647)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets -- -- 4,790
Capital expenditures (50,387) (100,600) (2,757,805)
Acquisition of Thermal Imaging, Inc. common stock -- -- (100,000)
Purchase of software license -- -- (3,850,000)
Purchase of investments available for sale -- (8,160,431) (43,851,010)
Proceeds from redemption of investments available for sale 3,514,989 8,010,000 39,064,162
Acquisition of Bales Scientific common stock, --
net of cash acquired -- -- (5,604,058)
------------- ------------- -------------
Net cash provided by (used in) investing activities 3,464,602 (251,031) (17,093,921)
------------- ------------- -------------
The accompanying condensed notes are an integral part of these
consolidated financial statements.
(Continued)
5
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(UNAUDITED)
FROM
THREE MONTHS ENDED INCEPTION
SEPTEMBER 30, THROUGH
------------------------------- SEPTEMBER 30,
2002 2001 2002
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and warrants,
net of offering costs $ 82,069 $ 1,627,741 $ 63,276,794
Advances to affiliate -- -- (107,864)
Advances from stockholders -- -- 2,320,738
Preferential dividend to a shareholder -- (79,000)
Proceeds from borrowing-net of finance
costs and penalties -- -- 5,756,339
Payments on debt -- -- (1,177,190)
------------- ------------- -------------
Net cash provided by financing activities 82,069 1,627,741 69,989,817
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (267,547) (1,427,748) 669,249
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 936,796 7,810,285 --
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 669,249 $ 6,382,537 $ 669,249
============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest expense $ -- $ -- $ 8,770
Income taxes -- -- --
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING AND INVESTING ACTIVITIES
Common stock issued to redeem a portion of the
converible debenture and pay interest and penalty $ 203,064 $ -- $ 203,064
Common stock issued to individuals to acquire
minority interest of subsidiary -- -- 165,500.00
Common stock issued in consideration of Bales Scientific -- -- 5,500,000
Options issued at discount to market in connection
with offering -- -- 744,282
Stock offering costs capitalized -- -- (744,282)
Common stock issued for advances from shareholders -- -- 2,320,738
Common stock issued for notes payable, accrued
discount and interest -- -- 2,224,953
Common stock issued for convertible subordinated
debentures -- -- 640,660
Common stock issued for liabilities -- -- 50,000
The accompanying condensed notes are an integral part of
these consolidated financial statements.
6
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
(UNAUDITED)
NOTE A. UNAUDITED FINANCIAL STATEMENTS AND BASIS OF PRESENTATION
The condensed consolidated financial statements for the three-month
periods ended September 30, 2002 and 2001 are unaudited. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation 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 Form 10-K. The consolidated results of operations for the
three-month periods ended September 30, 2002 and 2001 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 with current period presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions, including for example, accounts receivable allowances, inventory
obsolescence reserves, deferred tax valuation allowances, and reserve for
pending or threatening 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-K for the year ended June 30, 2002, the Company reported that
the Company's recurring losses from operations, negative cash flows from
operations, pending shareholder class-action lawsuits and denial of coverage for
any resulting claims by the Company's provider of directors and officers
insurance, forced redemption of the convertible debentures, the need for
additional working capital, and the possibility that the Company may not receive
FDA approval for its primary product raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying 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. RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. SFAS No. 141 requires that the purchase method of accounting
be used and establishes new standards and the recognition of certain
identifiable intangible assets separate from goodwill for all business
7
combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized but
instead tested for impairment at least annually. The Company adopted this
statement on July 1, 2002, and the adoption did not have a material
impact on the Company's consolidated financial statements.
The FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS, effective June 1, 2002, that addresses obligations associated with
the retirement of tangible long-lived assets and associated retirement costs.
The FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS, effective for fiscal years beginning after December 15, 2001,
that addresses financial accounting and reporting for the impairment or disposal
of long-lived assets. The Company adopted SFAS No. 143 and 144 on July 1, 2002,
and the adoption did not have a material impact on the Company's consolidated
financial statements.
In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB
STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTIONS. SFAS No. 145 rescinds several statements, including SFAS No. 4,
REPORTING GAINS AND LOSSES FROM EXTINGUISHMENT OF DEBT. The statement also makes
several technical corrections to other existing authoritative pronouncements.
SFAS No. 145 is effective for the Company July 1, 2002, except for the
rescission of SFAS No. 4, which is effective in January 2003. Management does
not expect this statement to have a material impact on the Company's
consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES, which requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred and nullifies EITF 94-3. The Company adopted SFAS No. 146
effective for the Company July 1, 2002, and the adoption did not have a material
impact on the Company's consolidated financial statements.
NOTE C. CONVERTIBLE DEBENTURE
On December 31, 2001, the Company entered into a financing agreement
(the "Agreement") with Beach Boulevard, LLC (the "Investor"), pursuant to which
the Company issued a 7 percent convertible debenture in the amount of $2.5
million (the "Convertible Debenture") and secured an equity line of credit (the
"Equity Line") that allows the Company to sell up to $20 million in common stock
to the Investor at 94 percent of the market price, as defined by the Agreement.
Based on its original terms, the Convertible Debenture is due on December 31,
2004. The terms of the Agreement permit the Investor to convert the Convertible
Debenture into 2,100,694 shares of common stock at a conversion price of $1.44
per share at any time during the term of the Agreement. Interest on the
Convertible Debenture is due on the conversion date and is payable, at the
option of the Company, in cash or common stock.
In connection with the agreement, the Company entered into a
registration rights agreement and subsequently filed a registration statement
with the SEC, which was declared effective on March 18, 2002. The Investor may
require the Company to redeem all or a portion of the Convertible Debenture if
the average closing bid price of the Company's common stock for the 90
consecutive trading days after the effective date of the registration statement
is less than $1.44 (a "Trigger Event"). The amount redeemable is equal to 111
percent of the principal balance of the Convertible Debenture and accrued
8
interest (the "Redeemable Balance"). If a Trigger Event occurs, the Investor is
required to provide notice to the Company of its election to force redemption
and to specify the date (the "Redemption Due Date") on which the Redeemable
Balance is to be paid. If the Company does not pay the Redeemable Balance in
full by the Redemption Due Date, the Company is required to issue registered
unrestricted shares of common stock pursuant to a series of mandatory put
notices consistent with the terms of the Equity Line. If the Redeemable Balance
is not satisfied through the mandatory puts within six months of the Investor's
notice to force redemption, the unpaid portion of the Redeemable Balance is
required to be paid immediately.
On July 25, 2002, the Investor notified the Company that a Trigger
Event had occurred and the Redeemable Balance of the Convertible Debenture
became due. On the date of the Trigger Event, the Redeemable Balance was
approximately $2,898,000, which included principal of approximately $2,500,000,
$111,000 of accrued interest and $287,000 of penalty. The Company elected to
satisfy the Redeemable Balance through a series of mandatory put notices based
on the terms of the Equity Line. The terms of the Equity Line provide for one
mandatory put per month and a maximum put amount per put equal to the lesser of
$500,000 or 125 percent of the weighted average trading volume of the Company's
common stock for the 20 days immediately preceding the date of the mandatory put
notice.
In connection with the Agreement, the Company issued the Investor
warrants for the purchase of 260,417 shares of common stock at $2.03 a share and
641,026 shares of common stock at $1.95 a share, which expire December 31, 2004
and December 31, 2007, respectively. The proceeds from the Debenture Offering
were allocated between the Convertible Debenture, the beneficial conversion
feature, and the warrants issued to the Investor. The Company also issued
separate warrants to an investment bank for the purchase of 100,000 shares of
common stock at $1.87 per share in connection with the Debenture Offering. The
fair market value of these warrants and other related financing costs have been
recorded as deferred financing costs. Because of the Trigger Event discussed in
the preceding paragraph, the deferred financing costs and discount on the
convertible debenture are being amortized over the six-month period ending
January 25, 2003.
During the three months ended September 30, 2002, the Company issued
341,533 common shares through mandatory put notices and applied the proceeds to
redeem $128,000 of principal, $49,000 of accrued interest, and $19,000 of
penalty pursuant to requirements of the Equity Line. The Company also issued
143,609 shares of common stock for $82,000 pursuant to the Equity Line and used
the proceeds for general corporate purposes.
The redeemable balance on September 30, 2002, was approximately
$2,625,000. Based on the terms of the Equity Line and the weighted average
trading volume for the 20 days preceding the first mandatory put on August 1,
2002, the Company estimates it will be able to pay approximately $600,000 of the
Redeemable Balance before the end of the six-month period. The remaining unpaid
balance will then be payable in cash.
9
NOTE D. REVENUE RECOGNITION
The Company recognizes revenue from product sales when it has a firm
fixed price substantiated by a signed purchase order, the products have been
shipped, the Company has fulfilled all obligations contingent to the sale, and
collectibility is probable. If these conditions are not met, revenue is deferred
until all obligations and conditions are fulfilled. For example, if the Company
retains an obligation to install or provide software upgrades; revenue is
deferred until the product is installed or the software or the upgrade is
provided. The Company occasionally sells extended warranties, and revenue
related to these transactions is recognized ratably over the period of the
agreement as services are provided.
NOTE E. INVENTORIES
Inventories are stated at the lower-of-cost or market with cost
determined using first-in first-out. Inventories consist of the following:
SEPTEMBER 30, JUNE 30,
2002 2002
Raw Materials $ 532,913 $ 490,464
Work-in process 104,913 102,178
Finished goods 535,101 485,795
----------- -----------
Total $1,172,928 $1,078,437
=========== ===========
Finished goods inventory at September 30, 2002, consists of $276,101 of finished
goods ready for sale, and $259,000 of deferred costs relating to deferred
revenue and deposits of $808,000.
NOTE F. 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.
NOTE G. STOCK WARRANTS, OPTIONS, AND RESTRICTED STOCK
In accordance with Accounting Principles Board Opinion (APB) No. 25
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES FOR STOCK-BASED COMPENSATION, and
Financial Accounting Standards Board Interpretation No. 44, ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION (AN INTERPRETATION OF APB 25),
10
during the quarter ended September 30, 2001, the Company recorded a decrease to
operating expenses of approximately $3,349,000 related to stock-based
compensation for variable stock options. This non-cash adjustment represents
changes in the difference between the exercise price of certain stock options
and the fair market value of the underlying security (the Company's common
stock). Because the value of a share of the Company's stock at September 30,
2001 was less than the value of a share at June 30, 2001, the Company recorded a
decrease in previously recognized expense.
NOTE H. CONTINGENCIES
Except as disclosed in our Form 10-K and in Part II, Item 1 of this
report, the Company is unaware of any material contingencies.
11
NOTE I. EARNINGS PER SHARE
Basic and fully diluted earnings per share are based on the net income
(loss) for the period and the weighted average number of common shares
outstanding during each period. For the quarter ended September 30, 2002, common
equivalent shares from common stock options and warrants are excluded from the
computation of diluted earnings per share, as their effect would be
antidilutive. Options to purchase approximately 916,000 shares of common stock
at prices ranging from $2.95 to $9.06 per share and warrants to purchase
approximately 5,847,000 shares of common stock at prices ranging from $5.00 to
$7.25 were outstanding during the quarter ended September 30, 2001, but were not
included in the computation of diluted earnings per share because the exercise
prices were greater than the average market price of the common shares. Basic
and diluted earnings per share are as follows:
For the Three Month Period Ended September 30, 2002
---------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Loss before extraordinary item
and accounting change......................... $(3,421,950)
------------
Basic Loss per share............................ $(3,421,950) 83,135,384 $ (0.04)
========
Effect of dilutive securities
Options....................................... -
Warrants...................................... -
----------
Diluted loss per share.......................... $(3,421,950) 83,135,384 $ (0.04)
============ ========== ========
For the Three Month Period Ended September 30, 2001
---------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Income before extraordinary item
and accounting change......................... $481,754
--------
Basic earnings per share........................ $481,754 81,529,282 $ 0.01
======
Effect of dilutive securities
Options....................................... 4,411,806
Warrants...................................... 628,465
----------
Diluted earnings per share...................... $481,754 86,569,553 $ 0.01
======== ========== ======
12
NOTE J. SEGMENTS
Management evaluates the Company as two distinct lines of business:
medical and industrial products and services. The following table describes
operations for each product segment for the three-month periods September 30,
2002 and 2001.
Segment results for the three month period ended September 30, 2002
Medical Industrial Total
------- ---------- -----
Revenues $ 250,930 $ 13,000 $ 263,930
Cost of goods sold (200,477) (3,900) (204,377)
------------ ------------ ------------
Gross margin 50,453 9,100 59,553
Operation, general and administrative 674,561 158,230 832,791
Research and development 1,022,475 225,837 1,248,312
Marketing 492,897 115,618 608,515
Depreciation and amortization 146,889 16,695 163,584
------------ ------------ ------------
Total operating expense 2,336,822 516,380 2,853,202
------------ ------------ ------------
Operating loss $(2,286,369) $ (507,280) $(2,793,649)
============ ============ ============
Segment results for the three month period ended September 30, 2001
Medical Industrial Total
------- ---------- -----
Revenues $ 136,680 $ 70,573 $ 207,253
Cost of goods sold (97,850) (13,583) (111,433)
------------ ------------ ------------
Gross margin 38,830 56,990 95,820
Operation, general and administrative (1,642,216) (385,211) (2,027,427)
Research and development 970,066 319,347 1,289,413
Marketing 186,492 43,745 230,237
Depreciation and amortization 100,529 286,038 386,567
------------ ------------ ------------
Total operating expense (385,129) 263,919 (121,210)
------------ ------------ ------------
Operating income (loss) $ 423,959 $ (206,929) $ 217,030
============ ============ ============
NOTE K. FDA DEVELOPMENTS
The Company's medical imaging and treatment products are subject to
regulation by the US Food and Drug Administration ("FDA"). The Company is
seeking approval for its Breast Cancer System through the FDA's Pre-Market
Approval process ("PMA"), which requires rigorous clinical efficacy testing,
manufacturing and other data. The Company utilized the FDA's modular submission
method and has submitted all five modules of the PMA to the FDA for review.
13
On July 25, 2002, the FDA announced that the Company's breast cancer
system would be discussed at an FDA Panel Review Meeting scheduled for October
16, 2002. On October 15, 2002, the Company agreed to change the Panel date to
December 10, 2002 at the request of the FDA staff, who requested additional time
to resolve an administrative breakdown and logistical issues. The FDA has
represented to the Company that the FDA does not expect the Panel date to be
further postponed.
The Company was asked to provide additional information to assist the
FDA staff in preparation for Panel Review. O November 8, 2002, CTI provided a
formal response to questions posed by the FDA on October 18 and 31, 2002. The
Company believes it has furnished the FDA staff with the answers necessary for
their Panel preparation and presentation. The Company believes it can provide
any other information required to satisfy the FDA with existing clinical data
and cases.
The Panel is an independent review board comprised of experienced
radiologists, scientists, statisticians, an industry representative and a
consumer representative. The Panel will review our clinical data and make
recommendations to the FDA regarding our PMA application. The FDA is not
obligated to follow the Panel's findings or recommendations, but we believe the
FDA often relies upon and follows the Panel's findings and recommendations in
making the final decision to approve, approve with condition or deny product
approval. Before completing the approval process, the FDA will audit our
manufacturing processes, conclude its audit of our clinical trials and may
request from us further information, analysis or clinical trial data, which
could delay the approval process. We cannot guarantee when or whether the FDA
will approve our Breast Imaging System.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document, and the documents incorporated by reference, contain
forward-looking statements within the meaning of the Securities Act of 1933 and
Securities Exchange Act of 1934. Forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied. When
used in this document the words "expects", "anticipates," "intends," "plans,"
"may," "believes," "seeks," "estimates," and similar expressions generally
identify forward-looking statements. All forward-looking statements included in
this document are based on information available to the Company on the date
hereof, and we assume no obligation to update any forward-looking statements.
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-K for the fiscal year ended June 30, 2002.
14
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosure in
conformity with accounting principles generally accepted in the United States of
America and our discussion and analysis of our financial condition and results
of operation requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the 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 those estimates.
We believe the following to be critical accounting policies. That is,
they are both important to the portrayal of our financial condition and results,
and they require management to make judgments and estimates about matters that
are inherently uncertain.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash in
checking accounts and short-term highly liquid investments with an original
maturity of three months or less.
REVENUE RECOGNITION--The Company recognizes revenue from its product
sales 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 the Company's obligations are
fulfilled. Warranty revenue is recognized ratably over the period of the
agreement as services are provided.
RESEARCH AND DEVELOPMENT EXPENSES--The Company expenses as incurred the
direct, indirect, and purchased research and development costs associated with
its products.
IMPAIRMENT OF LONG-LIVED ASSETS--The Company evaluates its long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
TRENDS/UNCERTAINTIES AFFECTING CONTINUING OPERATIONS
In connection with actively marketing and selling our pain management
and industrial products, we have become exposed to the opportunities and risks
usually associated with marketing and manufacturing novel products, including
staff recruiting and retention, market acceptance, product warranty, bad debts,
and inventory obsolesce. We expect to earn 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.
Our marketing efforts rely upon building relationships with
manufacturers, medical equipment dealers, physicians and clinical investigators.
We reach our target markets by attending trade shows and conferences, making
direct sales calls on industrial customers, and by sponsoring clinics, where we
introduce and demonstrate our breast imaging, pain management and
non-destructive testing products. We believe marketing our medical products
15
through the dealer channel, augmented with trade shows, conference
presentations, direct mail and inside sales, provides a low cost, high leverage
approach to diagnostic imaging and pain management practitioners and that the
dealer's knowledge of local market conditions will facilitate rapid expansion of
our revenues. We plan to continue investing resources in these programs,
although there can be no assurance they will lead to market acceptance of our
products.
We 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 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. We cannot assure you that we will achieve profitability
in the future. Our immediate priority is preparation for a presentation to the
FDA's Radiological Devices Panel on December 10, 2002. However, we will continue
marketing and selling our pain management and industrial products and plan to
expend significant financial and technical resources improving and developing
new applications for our products. While we cannot assure the success of any new
product or regulatory approval of any proposed indication for use, we believe
that improving product features and functions will expand the market for our
products and increase revenues.
GENERAL
Computerized Thermal Imaging, Inc. ("we", "us", "our", "CTI", "the
Company") designs, manufactures and markets thermal imaging devices and services
used for clinical diagnosis, pain management and industrial non-destructive
testing. The Company markets its products worldwide through an internal sales
force and a network of independent distributors.
The Company has focused its research activities on the application of
thermal imaging technology and the development of equipment and methods
utilizing those applications. We have developed non-invasive and non-destructive
infrared imaging systems for healthcare and industrial markets. We believe our
thermal imaging systems generate data, difficult to obtain or not available
using other imaging methods, that are useful to health care providers in the
detection of certain diseases and disorders and useful to the industry for
product quality testing.
Our research indicates that our equipment and technology is useful in
studying and diagnosing breast cancer, which is the most common cancer in women
after skin cancers. Our research and development efforts have led to the
creation of our Breast Cancer System 2100(TM) ("Breast Imaging System"). We are
seeking FDA pre-market approval ("PMA") for this system, as an adjunct to
mammography and clinical examinations, for use as a painless and non-invasive
technique for acquiring clinical information. To receive PMA approval, we must
establish the Breast Imaging System's ability to consistently distinguish
between malignant and benign tissue and thereby reduce the number of unnecessary
breast biopsies performed. We have received acceptance on four of five modules
required for PMA approval. We submitted the fifth module, which includes
clinical trial results and efficacy claims, during June 2001. We are responding
to FDA inquiries and comments and the FDA has assured us that its Radiological
Advisory Panel (the "Panel") will meet December 10, 2002, to review, discuss and
make recommendations to the FDA regarding our Breast Imaging System.
16
The Panel is an independent review board comprised of experienced
radiologists, scientists, statisticians, an industry representative and a
consumer representative. The Panel will review our clinical data and make
recommendations to the FDA regarding our PMA application. The FDA is not
obligated to follow the Panel's findings or recommendations, but we believe the
FDA often relies upon and follows the Panel's findings and recommendations in
making the final decision to approve, approve with condition or deny product
approval. Before completing the approval process, the FDA will audit our
manufacturing processes, conclude its audit of our clinical trials and may
request from us further information, analysis or clinical data. We cannot
determine when or whether the FDA will approve our Breast Imaging System.
In addition to breast cancer screening, we believe our technologies
have applications in pain treatment and non-destructive testing of industrial
and structural components. We design, manufacture and sell our Thermal Image
Processor as a device to assist in the diagnosis of pain, and Photonic
Stimulator for the treatment of pain. We have developed industrial applications
for our technology that provide non-destructive testing and inspection of
turbine blades, aging aircraft, electronics, composites, metals and other
advanced materials.
We are publicly traded on the American Stock Exchange under the symbol
"CIO". On October 30, 2002, we had approximately 83.9 million shares of common
stock outstanding held by approximately 29,000 shareholders, primarily
individuals. In addition to common stock outstanding, we have approximately 15
million shares of common stock underlying warrants and options that remain
unexercised. On a fully diluted basis, we have approximately 98.9 million common
shares outstanding, 23.9% of which are beneficially owned by insiders and
affiliates. Other than our wholly-owned subsidiary, Bales Scientific, Inc., we
have no other interest in any other entity.
The Company uses capital to pay general corporate expenses, including
salaries, manufacturing costs, professional fees, clinical trials and technical
support costs, and general and administrative expenses. To date, the Company has
funded its business activities with funds raised through the private placement
of common stock, debt and warrants and the exercise of warrants and options.
RESULTS OF OPERATIONS
Quarter Ended September 30, 2002, Compared to Quarter Ended September 30, 2001,
(rounded in thousands).
REVENUES
Revenues for the quarter ended September 30, 2002, increased $57,000
(net) from the same period last year to $264,000, of which $251,000 resulted
from the sale of pain management products and the $13,000 from the sale of
industrial products and services.
17
During the quarter ended September 30, 2002, medical segment revenues
increased $114,000, or 83%, from the same period last year to $251,000. During
the quarter ended September 30, 2001, medical segment revenues were $137,000.
During the quarter ended September 30, 2002, industrial segment
revenues decreased $57,000, or 81%, from the same period last year to $13,000.
During the quarter ended September 30, 2001, medical segment revenues were
$70,000. This decrease is related to inspection services we provided Alstom
Power UK Ltd., which ended with the shipment of a Turbine Blade Inspection
System during November 2001.
COSTS AND EXPENSES
General and administrative expenses for the quarter ended September 30,
2002, were $833,000 compared to ($2,027,000) for the same period last year.
Excluding a non-cash compensation expense of $7,000 for the three months ended
September 30, 2002, and a benefit of $2,789,000 for the three months ended
September 30, 2001, general and administrative expenses for the quarter
increased $64,000, or 8%, from the same quarter in 2001 to $826,000. This
increase is primarily a result of a $238,000 increase in professional services,
legal expenses and the conclusion of litigation expenses. This increase in
professional and legal services was partially offset by a $64,000 decrease in
travel and business expenses and a $59,000 decrease in administrative overhead
and office expenses.
Research and development expenses for the quarter ended September 30,
2002, were $1,248,000 compared to $1,289,000 for the same period last year.
Excluding a non-cash compensation benefit of $202,000 for the three months ended
September 30, 2001, research and development expenses for the quarter ended
September 30, 2002, decreased $243,000, or 16%, from the same three-month period
in 2001. The decrease is primarily a result of: 1) a $153,000 decrease in
research and development related to the development of our Breast Imaging
System, and other medical devices; 2) a $50,000 decrease in clinical trial
expenses for our Breast Imaging System and Pain Management Products; and 3) a
$81,000 decrease in research and development related to the development of our
industrial applications. This reduction in expenses was partially offset by a
$53,000 increase in administrative overhead and office expenses.
Marketing expenses for the quarter ended September 30, 2002, were
$609,000 compared to $230,000 for the same period last year. Excluding a
non-cash compensation benefit of $359,000, for the quarter ended September 30,
2001, marketing expenses increased $20,000 or 3% from the same three-month
period in 2001. Even though total expenses remained substantially flat, wages,
benefits, and related employee expenses increased $84,000 from an increase in
marketing personnel. Administrative overhead and office expenses also increased
$40,000. This increase in expenses was offset by a $107,000 decrease in
marketing and advertising services.
Depreciation and amortization expense for the quarter ended September
30, 2002, decreased $223,000, or 58% from the same quarter in 2001 to $164,000.
During Fiscal 20002, we amortized our goodwill ratably over 10 years, however,
we wrote off essentially all of our intangible assets during the fourth quarter
of our 2002 fiscal year and no longer have to record goodwill amortization
expense.
18
OTHER INCOME
Net interest income for the quarter ended September 30, 2002, decreased
$893,000 from the same quarter of 2001 to ($628,000). This decrease resulted
from: 1) a $287,000 charge to interest expense recorded to increase the
redeemable balance of the debenture by 11% pursuant to provisions of the
convertible debenture (see Agreement with Beach Boulevard LLC, below); 2) a
$329,000 of charge to accelerate amortization of deferred finance cost and
beneficial conversion feature discount on the debenture over the life of the
mandatory put period; and 3) lower yields and decreased balances in marketable
securities available for sale.
NET INCOME/(LOSS)
As a result of the foregoing, we recorded a net loss of ($3,422,000)
for the quarter ended September 30, 2002, compared to net income of $482,000 for
the quarter ended September 30, 2001.
For the quarter ended September 30, 2002, the loss attributable to
common shareholders was ($3,422,000), or ($0.04) per share, compared to a profit
attributable to common shareholders of $482,000 or $0.01 per share, for the
quarter ended September 30, 2001. Excluding a non-cash compensation benefit of
$3,349,000, for the quarter ended September 30, 2001, the loss attributable to
common shareholders was ($0.03) per share.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF LIQUIDITY
Our cash requirements includes, but are not limited to, general
corporate expenses including office salaries and expenses, lease payments on our
office space, legal and accounting fees for litigation and to comply with
securities registration and reporting requirements, costs of clinical trials and
technical support, FDA consulting expenses, procurement of inventory and
technical support, FDA consulting expenses, procurement of inventory and
manufacturing expenses, and research and development of our medical and
industrial applications.
Net cash used in operating activities for the quarter ended September
30, 2002, was $3,814,000 compared to $2,804,000 for the quarter ended September
30, 2001. The increase in cash used in operating activity was primarily a result
of incurring litigation charges in the fourth quarter of the fiscal year 2002
and paying those charges in first quarter of fiscal year 2003.
Net cash provided by investing activities for the quarter ended
September 30, 2002, was $3,465,000 compared to net cash used in investing
activities of $251,000 in the quarter ended September 30, 2001. Net cash
provided by and used in investing activities primarily relates to selling
securities to fund operations or using cash to purchase securities
available-for-sale.
19
Net cash provided by financing activities was $82,000 in the quarter
ended September 30, 2002, compared to $1,628,000 during the quarter ended
September 30, 2001. Net cash provided by financing activities for the quarter
ended September 30, 2002, was from selling stock to Beach Boulevard, LLC
pursuant to the equity line. Net cash provided from financing actives for the
quarter ended September 30, 2001, was primarily from the exercise of employee
options and investor warrants.
As a result of the foregoing, the net cash outflow decreased by
$268,000 in the quarter ended September 30, 2002, compared to a $1,428,000
decrease in the quarter ended September 30, 2001.
Cash and cash equivalents at the end of the quarter ended September 30,
2002 were $669,000 compared to $6,383,000 for the quarter ended September 30,
2001. The large cash balance at September 30, 2001 primarily reflects cash from
then recently maturing marketable securities not yet reinvested.
The following table summarizes the Company's contractual obligations
and commitments to make future payments:
Payments due by period
----------------------
Total Less than 1 year 1-2 years After 3 years
----- ---------------- --------- -------------
Operating Leases $ 821,395 $ 337,028 $ 203,170 $ 281,197
Convertible debenture
net of conversion privilege 2,549,215 2,549,215 -- --
Interest on Debenture 178,445 178,445 -- --
----------- ----------- ----------- -----------
Total $3,549,055 $3,064,688 $ 203,170 $ 281,197
=========== =========== =========== ===========
Agreement with Beach Boulevard, LLC
-----------------------------------
On December 31, 2001, the Company entered into a financing agreement
(the "Agreement") with Beach Boulevard, LLC (the "Investor"), pursuant to which
the Company issued a 7 percent convertible debenture in the amount of $2.5
million (the "Convertible Debenture") and secured an equity line of credit (the
"Equity Line") that allows the Company to sell up to $20 million in common stock
to the Investor at 94 percent of the market price, as defined by the Agreement.
Based on its original terms, the Convertible Debenture is due on December 31,
2004. The terms of the Agreement permit the Investor to convert the Convertible
Debenture into 2,100,694 shares of common stock at a conversion price of $1.44
per share at any time during the term of the Agreement. Interest on the
Convertible Debenture is due on the conversion date and is payable, at the
option of the Company, in cash or common stock.
In connection with the agreement, the Company entered into a
registration rights agreement and subsequently filed a registration statement
with the SEC, which was declared effective on March 18, 2002. The Investor may
require the Company to redeem all or a portion of the Convertible Debenture if
the average closing bid price of the Company's common stock for the 90
20
consecutive trading days after the effective date of the registration statement
is less than $1.44 (a "Trigger Event"). The amount redeemable is equal to 111
percent of the principal balance of the Convertible Debenture and accrued
interest (the "Redeemable Balance"). If a Trigger Event occurs, the Investor is
required to provide notice to the Company of its election to force redemption
and to specify the date (the "Redemption Due Date") on which the Redeemable
Balance is to be paid. If the Company does not pay the Redeemable Balance in
full by the Redemption Due Date, the Company is required to issue registered
unrestricted shares of common stock pursuant to a series of mandatory put
notices consistent with the terms of the Equity Line. If the Redeemable Balance
is not satisfied through the mandatory puts within six months of the Investor's
notice to force redemption, the unpaid portion of the Redeemable Balance is
required to be paid immediately.
On July 25, 2002, the Investor notified the Company that a Trigger
Event had occurred and the Redeemable Balance of the Convertible Debenture
became due. On the date of the Trigger Event, the Redeemable Balance was
approximately $2,898,000, which included principal of approximately $2,500,000,
$111,000 of accrued interest and $287,000 of penalty. The Company elected to
satisfy the Redeemable Balance through a series of mandatory put notices based
on the terms of the Equity Line. The terms of the Equity Line provide for one
mandatory put per month and a maximum put amount per put equal to the lesser of
$500,000 or 125 percent of the weighted average trading volume of the Company's
common stock for the 20 days immediately preceding the date of the mandatory put
notice.
In connection with the Agreement, the Company issued the Investor
warrants for the purchase of 260,417 shares of common stock at $2.03 a share and
641,026 shares of common stock at $1.95 a share, which expire December 31, 2004
and December 31, 2007, respectively. The proceeds from the Debenture Offering
were allocated between the Convertible Debenture, the beneficial conversion
feature, and the warrants issued to the Investor. The Company also issued
separate warrants to an investment bank for the purchase of 100,000 shares of
common stock at $1.87 per share in connection with the Debenture Offering. The
fair market value of these warrants and other related financing costs have been
recorded as deferred financing costs. Because of the Trigger Event discussed in
the preceding paragraph, the deferred financing costs and discount on the
convertible debenture are being amortized over the six-month period ending
January 25, 2003.
During the three months ended September 30, 2002, the Company issued
341,533 common shares through mandatory put notices and applied the proceeds to
redeem $128,000 of principal, $49,000 of accrued interest, and $19,000 of
penalty pursuant to requirements of the Equity Line. The Company also issued
143,609 shares of common stock for $82,000 pursuant to the Equity Line and used
the proceeds for general corporate purposes.
The redeemable balance on September 30, 2002, was approximately
$2,625,000. Based on the terms of the Equity Line and the weighted average
trading volume for the 20 days preceding the first mandatory put on August 1,
2002, the Company estimates it will be able to pay approximately $600,000 of the
Redeemable Balance before the end of the six-month period. The remaining unpaid
balance will then be payable in cash.
21
CAPITAL REQUIREMENTS/PLAN OF OPERATION
Our capital requirements may vary from our estimates and depend upon
numerous factors including, but not limited to: a) progress in our research and
development programs; b) results of pre-clinical and clinical testing; c) costs
of technology; d) time and costs involved in obtaining 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; and i) litigation costs.
Since inception, we have generated significant losses from operations,
and, although we have generated some revenues, we are still a development stage
enterprise. If we can secure financing to complete our objectives, we estimate
that we will require approximately $14.7 million in net cash to meet our
operating and financing goals for the twelve-month period ending September 30,
2003. We expect to use approximately: a) $4.2 million to fund research and
development to continue our clinical studies, test our medical systems in
connection with other clinical applications, and expand our industrial
applications; b) $4.5 million for day-to-day operating expenses including lease
payments on our facilities; c) $3.4 million to cover salaries not including R&D
salaries; d) $2.1 million for public relations, advertising, and
commercialization of our products; e) $0.5 million for capital expenditures.
This estimate is contingent upon additional financing and does not include any
damages we may have to pay as a result of the securities litigation discussed
below.
While we have taken actions to reduce our expenses and cash
consumption, we expect to incur additional operating losses. Our working capital
requirements in the foreseeable future will depend on a variety of factors and
assumptions, in particular that we can generate revenue growth from customer
sales, and that we acquire additional financing through additional equity and/or
debt financings or through the sale of assets during fiscal year 2003. If
additional funds are raised through the issuance of equity securities, our
stockholders may experience significant dilution. 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
stockholders. If financing is not available when required or is not available on
acceptable terms, we may be required to curtail our operating plan and may be
unable to meet operating obligations.
In 2002, five different lawsuits were filed against us in the United
States District Court in Oregon. Each suit makes substantially the same
allegations: the Company misled shareholders regarding such things as FDA
approval and other matters, which the plaintiff's believe caused significant
damage to the shareholders holding shares of our common stock at the time of
these alleged misrepresentations and omissions. The Company believes the
allegations are without merit and intends to defend them vigorously. However,
defending these lawsuits, which have been consolidated into a single lawsuit,
will require additional legal expenses to defend, may make fund raising more
difficult if not impossible and will distract certain members of management from
day-to-day operations.
22
Moreover, our insurance carrier has denied there is insurance coverage
for the plaintiff's claims and, accordingly, has indicated it will not cover the
costs of defending the claims and will not pay any resulting damages we may
suffer if the plaintiff's are successful. We have retained insurance counsel who
is in the process of evaluating the amended consolidated complaint.
Finally, under our bylaws and contractual agreements we are required to
indemnify our current and former officers and directors who are a party to the
litigation by providing legal defense through our attorneys (or reimbursing them
for their own attorneys) and covering all damages they may suffer if the
plaintiffs are successful.
We do not have sufficient capital to cover the expected costs or
potential damages of the shareholder litigation without insurance coverage or to
fund our business plans over the next year. We will have to obtain additional
capital through loans, the sale of assets or capital contributions from private
investors. We are working with an investment banking firm and, we believe that
we will be able to acquire the capital needed to carry out our business plans;
however, if we are not successful, we will have to scale back our business
plans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a development stage enterprise. We believe we are not subject to
market risks beyond ordinary economic risks, such as interest rate fluctuation
and inflation.
At September 30, 2002, we had invested approximately $5.15 million in
cash and available-for-sale marketable securities including investments in
United States government securities and corporate bonds. Although we believe the
issuers of these marketable securities 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 DEFAMATION ACTION
- ---------------------------
On August 28, 2000, we filed a complaint for libel in the United States
District Court for the District of Utah against Bloomberg, L.P. ("Bloomberg").
The lawsuit alleges that on June 29 and July 18, 2000, Bloomberg published
certain defamatory articles about the Company through its news service. On March
26, 2001, the Court dismissed our complaint against Bloomberg, with prejudice.
23
We have appealed the District Judge's decision to the United States 10th Circuit
Court of Appeals in Denver, Colorado, and oral arguments were heard on September
24, 2002, and the Court has not yet issued a decision.
SALAH AL-HASAWI ADVISORY SERVICES CLAIM
- ---------------------------------------
On March 29, 2000, Salah Al-Hasawi ("Plaintiff"), a citizen and
resident of Kuwait, filed an action in the United States District Court for the
Southern District of New York, against us and our former Chief Executive
Officer, alleging violations under Section 10(b) of the Securities Exchange Act
of 1934 and Rule 10b-5 promulgated thereunder, for commissions allegedly due to
Plaintiff in connection with the private placement of our securities. Shortly
thereafter, the Plaintiffs lawsuit was dismissed without prejudice and on April
12, 2000, the Plaintiff filed a similar complaint in the United States District
Court for the District of Utah. Plaintiff seeks specified damages of $15.5
million, attorney fees and unspecified damages pursuant to five separate causes
of action including breach of contract, fraud and unjust enrichment.
We have denied all of Plaintiffs claims and have affirmatively alleged
that all amounts due have been paid in full. We are currently engaged in
discovery and no trial date has yet been set.
SHAREHOLDER SECURITIES LITIGATION
- ---------------------------------
During May 2002, five different lawsuits were filed against us in the
United States District Court in Oregon. Each suit makes substantially the same
allegations: the Company misled shareholders regarding such things as FDA
approval and other matters, which the plaintiffs believe caused significant
damage to the shareholders holding shares of our common stock at the time of
these alleged misrepresentations and omissions. On September 24, 2002, the Court
appointed a lead plaintiff and consolidated these lawsuits into a single action;
and on November 5, 2002, the plaintiffs filed an amended consolidated complaint
against the Company and certain current and former officers. The Company's
response, which may be extended, is due December 20, 2002. We believe the
allegations are without merit and intend to defend them vigorously.
Moreover, our insurance carrier has denied coverage for the plaintiffs'
claims and, accordingly, has indicated it will not cover the costs of defending
the claims and will not pay any resulting damages we may suffer if the
plaintiffs are successful. We have retained counsel to evaluate the question of
insurance coverage regarding the plaintiffs claims set out in their amended
consolidated complaint. There can be no assurance the Company will be successful
in obtaining Director & Officer's coverage for this litigation.
Finally, under our bylaws and contractual agreements we are required to
indemnify our current and former officers and directors who are parties to the
litigation by providing legal defense through our attorneys (or reimbursing them
for their own attorneys) and covering all damages they may suffer if the
plaintiffs are successful.
24
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
(1) These exhibits are filed as part of this Form 10-Q.
Exhibit No. Identification of Exhibit
- ----------- -------------------------
99.1 Certification of Computerized Thermal Imaging, Inc. Chief
Executive and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification of Computerized Thermal Imaging, Inc. Chief
Executive and Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
None
25
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 November 14, 2002 ---------------------------------
Richard V. Secord
Chairman & Chief Executive Officer
/s/Bernard J. Brady
Dated November 14, 2002 ---------------------------------
Bernard J. Brady
Chief Financial Officer, Secretary & Treasurer
26