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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 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.
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(Exact name of registrant as specified in its charter)
NEVADA 87-0458721
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two Centerpointe Drive, Suite 450,
Lake Oswego, OR 97035
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (503) 594-1210
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates of
the registrant at September 4, 2002 was approximately $61,000,000. Shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded from this computation in
that such persons may be deemed to be affiliates.
As of September 4, 2002, there were 83,203,352 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is omitted from this Annual Report
in that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K, and certain
information included therein is incorporated into Part III of the Annual Report
by reference.
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COMPUTERIZED THERMAL IMAGING, INC.
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1. Business............................................................................................4
ITEM 2. Properties.........................................................................................17
ITEM 3. Legal Proceedings..................................................................................18
ITEM 4. Submission of Matters to a Vote of Security Holders................................................19
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters..........................19
ITEM 6. Selected Financial Data............................................................................20
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............20
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.........................................30
ITEM 8. Financial Statements and Supplementary Data.......................................................F-1
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............31
PART III
ITEM 10. Directors and Executive Officers of the Registrant.................................................31
ITEM 11. Executive Compensation.............................................................................31
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.....................................32
ITEM 13. Certain Relationships and Related Transactions.....................................................32
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................32
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PART I
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THIS DOCUMENT, AND THE DOCUMENTS INCORPORATED BY REFERENCE, INCLUDING,
BUT NOT LIMITED TO, CERTAIN STATEMENTS CONTAINED IN ITEM 1, "BUSINESS" AND ITEM
7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," 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, EXCEPT AS OTHERWISE REQUIRED UNDER
APPLICABLE LAWS AND REGULATIONS.
THIS DOCUMENT SHOULD BE READ IN CONJUNCTION WITH OUR AUDITED FINANCIAL
STATEMENTS INCLUDED IN PART II AND "RISK FACTORS" NOTED BELOW.
ITEM 1. BUSINESS
INTRODUCTION
Computerized Thermal Imaging, Inc. ("we", "us", "our", "CTI", "the
Company") designs, manufactures and markets thermal imaging and infrared devices
and services used for clinical diagnosis, pain management and non-destructive
testing of industrial products and materials. We market our products with an
internal sales force and independent distributors.
Our research emphasizes applications for thermal imaging technology and
the development of equipment and methods for producing, interpreting, and
cataloging thermal images. We believe our products provide our customers with
valuable and unique data for the detection of abnormalities. Our medical
products are used in the diagnosis and treatment of certain diseases and
disorders. Our industrial products are used for testing product quality and
enabling more efficient designs.
We have applied for a pre-market approval ("PMA") from the U.S. Food
and Drug Administration (the "FDA") for our Breast Imaging System: The BCS
2100(TM) ("BCS 2100") , a painless and non-invasive technique for acquiring
physiological information from women recommended for breast biopsy. To receive
PMA approval, we must establish the BCS 2100's ability to consistently
distinguish between malignant and benign tissue and thereby reduce the number of
benign breast biopsies performed.
The FDA has accepted four of five modules of our PMA application, and
based on their review of the fifth module, have invited us to present before its
Radiological Devices Advisory Panel (the "Panel") on October 16, 2002. The Panel
is an independent review board comprised of experienced radiologists,
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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
granting final approval, 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 BCS 2100.
In addition to our BCS 2100, we have developed products for pain
management . We designed, manufacture and sell our Thermal Image Processor
("TIP") as a device to assist in the diagnosis of pain syndromes and soft tissue
injuries and our Photonic Stimulator as a device to treat pain.
We also have developed a product that uses our technology in an
industrial setting. Our Turbine Blade Inspection System is a quality assurance
tool and, using techniques similar to our BCS 2100, meets industrial
requirements for non-destructive testing and examination of turbine blades and
other industrial components, composite materials and metals.
We are publicly traded on the American Stock Exchange under the symbol
"CIO." As of September 4, 2002, we had approximately 83 million shares of common
stock outstanding; held by approximately 29,000 shareholders. In addition to
common stock, there are outstanding warrants and options to acquire
approximately 15 million shares at exercise prices ranging from $.60 to $9.0625.
Of the approximately 98 million fully-diluted common shares outstanding, 26.5%
are beneficially owned by insiders and affiliates. Other than our wholly-owned
subsidiary, Bales Scientific, Inc., we have no interest in any other entity.
We use our capital to pay general corporate expenses, including
salaries, manufacturing costs, professional fees, clinical study and technical
support costs, and general and administrative expenses. To date, we have funded
our business activities with funds raised through the private placement of
common stock, debt and warrants, and the exercise of warrants and options.
INDUSTRY OVERVIEW & TRENDS
The American Cancer Society estimates that 203,500 new cases of
invasive breast cancer will be diagnosed among women and approximately 40,000
women in the United States will die from the disease during 2002(1). Breast
cancer is the most commonly diagnosed cancer among women, accounting for nearly
one of every three new cancers diagnosed, and is the second leading cause of
cancer death (after lung cancer)(2). In order to accurately identify the 203,500
new cases of breast cancer expected during 2002, physicians will perform
approximately 1.3 million biopsies. More than 80 percent of these breast
biopsies performed during 2002 are expected to yield benign results.
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(1) American Cancer Society website - Key Statistics for Breast Cancer
(2) Although more women are diagnosed with breast cancer, more women will die
from lung cancer according to the latest statistics report from the American
Cancer Society - 2001 Cancer Facts & Figures.
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Each year, more than 20 million women in the U.S. have a mammogram to
screen for breast cancer. Ten percent of those mammograms require additional
follow-up due to a suspicious finding, and approximately 1.3 million abnormal
mammograms require a breast biopsy to characterize the suspicious tissue as
benign or malignant. The American Cancer Society estimates that in 2002 only
203,500 of those suspicious lesions will turn out to actually be cancerous.
Of the 1.3 million breast biopsies performed in the U.S. each year,
approximately 800,000 are open surgical procedures where the patient is
anesthetized or heavily sedated and a surgeon extracts the mass through an
incision. The remaining approximately 500,000 biopsies are less invasive "core"
biopsies where a needle is guided to the region of interest and a sample is
obtained without having to perform open surgery. The trend is toward less
invasive biopsy methods to reduce scaring, cost and emotional trauma. The number
of biopsies performed has doubled in the last 10 years, and the trend toward
less invasive biopsy techniques has accelerated.
If we receive FDA approval for our breast imaging system, under
prescribed circumstances radiologists and surgeons will be able to use the
physiological profile of the suspicious tissue produced by our BCS 2100 to
determine whether masses are benign, without performing a biopsy.
OUR PRODUCTS AND SERVICES
Our imaging systems integrate third-party hardware, our proprietary
software and heat-sensing camera to produce, interpret, and catalogue thermal
images. These systems provide medical professionals with physiological
information to assist in the evaluation of breast abnormalities and the
management of chronic pain. These systems also have industrial applications in
non-destructive testing and inspection of complex industrial products; e.g.,
turbine blades.
The Company has developed six significant proprietary technologies: (1)
a climate-controlled examination unit to provide patient comfort and facilitate
reproducible tests; (2) an imaging protocol that produces consistent results;
(3) a statistical model that detects physiological irregularities; (4) infrared
imaging and analysis hardware, including our proprietary heat-sensing camera
(collectively, we refer to items 2-4 as the "Thermal Imaging Process"); (5) a
system to treat pain and other symptoms of diseases that restrict blood flow
(the "Photonic Stimulator"); and (6) a system for non-destructive testing and
examination of turbine blades and other industrial components (the "Turbine
Blade Inspection System").
Our BCS 2100 provides a non-invasive, painless way to collect
information that supplements the information provided by mammograms for the
evaluation of suspicious breast lesions. The BCS 2100 captures 103 dynamic
images of each breast and analyzes over 8.3 million temperature values per
breast, to measure minute changes in physiological and metabolic activity. This
data, when combined with diagnostic information from mammograms, provides
radiologists additional information that can be useful in determining more
precisely when a surgical biopsy is needed.
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Mammography and related imaging methods capture a snapshot of structure
at a moment in time, but do not provide information about the behavior of the
structures exposed. While mammography may detect the presence of an abnormality
in the breast, a biopsy is required to determine whether the abnormality is
benign or malignant. We believe our technology produces images that expose the
physiology and function of structures and provides health professionals with a
tool for more accurately discriminating between those cases that require
invasive biopsy and those that do not. We believe our BCS 2100 provides
physiological data that can lead to fewer biopsies, 80 percent of which have
benign findings.
Medical professionals use the Thermal Imaging Processor to compare
actual, relative and absolute temperature differences, to locate soft tissue
injuries or potential sources of pain and to verify the effect of treatment. The
Photonic Stimulator is an infrared light therapy device used to treat the
symptoms of soft tissue injuries and pain syndromes.
The Turbine Blade Inspection System provides customers an effective,
cost-efficient quality assurance tool. Using techniques similar to our BCS 2100,
our automated infrared inspection system creates thermal stress by rapidly
heating or cooling the component, collects a series of images as the component
returns to ambient temperature, and then analyzes these images to determine the
presence or absence of characteristics determined to correlate with certain
manufacturing and usage-induced defects. The analysis identifies defects,
abnormalities and flaws in the test material. This system can identify blockages
in cooling holes as small as the diameter of a human hair.
The Company performs services for customers in connection with
developing additional hardware, software to expand the type and number of
components a customer can test, repairing previously installed equipment, and
helping customers solve quality assurance or product design problems.
PATENTS
As of June 30, 2002, we have the following patents or patent
applications pending before the United States Patent and Trademark Office:
o Patent No. 5,999,842, dated December 7, 1999, acquired by
assignment from TRW on a Functional Thermal Imaging Apparatus
(our BCS 2100 Patient Positioning Table).
o Patent No. 6,157,854, dated December 5, 2000, covering
techniques designed to reduce or eliminate pain by the
application of infrared therapy while monitoring the process
as it is being conducted. The techniques involve the use of
our Photonic Stimulator to apply infrared energy to a patient
while using the Thermal Imaging Processor to monitor the
patient's response to the therapy.
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o Patent No. 6,366,802, dated April 2, 2002, covering techniques
designed to reduce or eliminate pain by the application of
infrared therapy while monitoring the process as it is being
conducted. The techniques involve the use of our Photonic
Stimulator to apply infrared energy to a patient while using
the Thermal Image Processor to monitor the patient's response
to the therapy.
o Patent application (Serial No. 09/425,042, dated October 19,
1999) for an algorithm used to analyze imaging data collected
through our BCS 2100.
o Patent application (Serial No. 10/062,638, dated January 31,
2002) for a turbine component inspection system, emphasizing
the system's integration and ability to deliver precise
thermal stimuli independent of the overall inspection cycle.
o Patent application (Serial No. 10/062,862, dated January 31,
2002) for a heat exchanger for turbine component inspection
system covering an improved convective heat exchanger design
for use in the turbine component inspection system.
o Patent application (Serial No. 10/062,631, dated January 31,
2002) for an infrared imaging arrangement for the turbine
component inspection system covering the overall fixture and
infrared imager arrangement.
o Patent application (Serial No. 10/006,441, dated November 21,
2001) for software providing operator assistance during the
use of an automated infrared inspection system of turbine
components.
o Patent application (Serial No. 10/006,436, dated November 21,
2001) for software performing automated analysis of the
thermal response of a turbine component to application of
thermal stimuli by an infrared inspection system.
o Patent application (Serial No. 60/378,764, dated May 7, 2002)
for the cold stimulus turbine component inspection system.
We expect to apply for additional patents in the future to cover other
technologies or components of our products.
BUSINESS STRATEGY AND MARKETS
We believe our products and technologies provide a unique collection of
new and cost effective diagnostic, pain management and product testing solutions
for medical and industrial customers. Our target customers are hospital
radiology departments, cancer research facilities and imaging centers,
chiropractors and physical therapists, and manufacturers of products with
complex cast components or processes.
To exploit the BCS 2100 and expand the market for our pain management
products, the Company is pursuing FDA approvals and clearances. Our BCS 2100
qualifies as a medical device under federal law, because of its intended use in
the diagnosis of disease. We are pursuing FDA approval for our BCS 2100, and we
believe that this approval will enhance our ability to market our products by:
1) allowing us to reference medical efficacy claims in connection with marketing
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our BCS 2100; 2) improving physician acceptance of our systems; and 3)
facilitating the designation of insurance payment codes. We are conducting
clinical studies to expand the approved labeling and indications for use for our
pain management products. We believe that expanding indications for use will
improve physician acceptance of our products and increase pain management
product revenues.
Our marketing efforts rely upon building relationships with
manufacturers, medical equipment dealers, physicians and clinical investigators.
We attend trade shows and conferences and make direct sales calls on industrial
customers and sponsor clinics, where we introduce and demonstrate our breast
imaging, pain management and non-destructive testing products. We believe
marketing our medical products directly and through a dealer channel, augmented
with trade shows, conference presentations, direct mail and inside sales,
provides a cost-effective approach to diagnostic imaging and pain management
practitioners. We plan to continue investing resources in these programs.
As with all medical devices, it is important that our BCS 2100
customers receive adequate reimbursements from third party-payers: insurance
companies, Medicare and Medicaid reimbursement agencies. We have applied for an
Emerging Technology Code from the American Medical Association for our BCS 2100,
which is the first step in obtaining reimbursement codes. We plan to present our
technology and information regarding the medical efficacy and cost effectiveness
of our BCS 2100 to insurance carriers and other payers. Our pain management
products qualify for insurance reimbursement in most states, at rates that vary
on a state-by-state basis.
We plan to continue organizing clinical studies with institutions and
practitioners to obtain user feedback and to secure technical, peer reviewed
papers for training and educational marketing purposes. For example, during 2002
we entered into a research relationship with McKay-Dee Hospital and
Massachusetts General Hospital, Harvard Medical School's largest teaching
hospital.
Although our primary focus is now product manufacturing and marketing,
we continue 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.
OUR COMPETITION
MEDICAL IMAGING. The principal methods used to visualize internal human
anatomy are: X-ray, computed tomography, ultrasound and magnetic resonance
imaging. Physicians view these technologies as elements of a toolkit, each
uniquely suited to the diagnosis of a specific problem or problems.
Our BCS 2100 provides physiological information that supplements the
anatomical information obtained from mammography and does not compete directly
with X-ray, computed tomography, ultrasound or magnetic resonance imaging. Our
system is painless, requires no radioactive materials, and involves no invasive
technology.
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Our pain management products compete with ultra-sound, electrical
stimulation, newly approved laser light therapy devices; and infrared cameras,
typically purchased from aftermarket sources.
Our industrial applications compete with industrial x-ray, and high
pressure water and air techniques; which require skilled labor, are time
consuming and may utilize dangerous radiation that requires special facilities.
Our system provides additional defect analysis more quickly, using less skilled
labor and no special environment; and may replace high pressure water and air or
x-ray for certain applications.
The companies that supply diagnostic and industrial imaging equipment
range from large manufacturers to smaller specialized companies. Large
diversified manufacturers, for which imaging systems define only a portion of
their total business, include General Electric, Siemens, Toshiba, Hitachi and
Philips.
NEW TECHNOLOGIES.
Digital X-ray captures images electronically and may provide several
important benefits relative to existing technologies: 1) reduced radiation
dosage, 2) faster access to images, which is critical for emergency room use, 3)
digital technology, which can be distributed and accessed through a computer,
enables remote consultation, and 4) reductions in labor and radiographic film
costs. Our BCS 2100 does not compete with digital X-ray equipment. In fact, as
mammography technology improves more women are referred for biopsies. This will
create a greater demand for technologies, like our BCS 2100 that may be able to
determine whether a patient's mass is benign without the use of an invasive
surgical procedure.
Positron Emission Tomography ("PET"), an invasive, nuclear
medicine-based diagnostic imaging technique for measuring the metabolic activity
of human cells, may benefit patients suffering from certain types of cancer or
certain conditions affecting the brain and heart. Many insurance carriers
approve PET, but the technology is expensive and difficult to administer.
Optical imaging of the breast based on laser transillumination is a
technology under investigation as a possible approach for medical imaging, and
at least one potential competitor is attempting to secure FDA approval for their
version of this technology. Laser transillumination has been investigated for
over 20 years and recent implementations of this technology use computed
tomography to improve the results. We believe our BCS 2100 competes favorably
with this technology.
OUR SALES AND MARKETING STRATEGY
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OVERVIEW. We plan to market our products with a multi-channel strategy
incorporating independent distributors, direct marketing, telemarketing, the
internet and corporate marketing. We plan to address the industrial market with
a direct sales force augmented by distributors as appropriate.
DISTRIBUTORS. The Company has retained and will continue to seek the
services of distributors. Our distributors usually focus their efforts on a
specific channel in a specific region; e.g., chiropractors and physical
therapists in Northern California. We believe that distributors provide intimate
local market knowledge and contacts critical to accessing hospital imaging
facilities, radiologists and local service capability.
TELEMARKETING / TELESALES. We believe telemarketing/telesales provides
important direct marketing, lead follow-up and customer service capability,
particularly in the pain management segment. Telemarketing creates revenue
through direct sales and generates leads for distributors.
INTERNET. We use the internet to provide information to current and
potential customers.
USER GROUPS AND SEMINARS. We believe meeting with our customers and
potential customers at informal user conferences and training sessions provides
valuable market intelligence, product use information, and assists us in selling
our products. We conduct user group meetings at various sites across the United
States and by conference call.
TRADE SHOWS AND ASSOCIATIONS. We attend medical and industrial trade
shows and present papers at professional conferences. We believe attendance at
trade shows and conferences allows us to build product awareness, demonstrate
our products, educate customers and generate leads for future sales.
CLINICAL STUDIES. We plan to conduct clinical studies utilizing our BCS
2100, Thermal Imaging Processor technology and Photonic Stimulator at hospitals
and clinics in the United States. These studies provide us with an opportunity
to: 1) evaluate product enhancements; 2) research expanded indications for use,
which we may use to obtain expanded FDA clearances; and 3) collect data for
technical manuscripts, which are submitted to professional journals to consider
for publication, used for presentations to professional organizations and as
sales literature.
CORPORATE MARKETING. We intend to develop product and company
collateral materials, advertise in select trade journals, demonstrate our
products and present papers, and research results at conferences and trade
shows. We believe that this activity will build corporate and product awareness
and support our sales efforts in selected vertical markets.
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INDUSTRIAL PRODUCTS. The Company has a small internal team pursuing
industrial opportunities. This team manages relationships with existing and
potential customers in the turbine power market and is exploring potential
relationships with industrial customers requiring non-destructive testing
capabilities.
SERVICE PROVIDERS AND CONTRACTOR RELATIONSHIPS
OVERVIEW. As a development company, our business model relies upon
contractors and suppliers to reduce our development risk and to provide
necessary clinical resources. We continue to utilize some of these contractors
to support our PMA application and clinical studies.
BATTELLE MEMORIAL INSTITUTE assists us in the preparation of regulatory
submissions and provides technical consulting services in connection with 1)
algorithm development and 2) statistical consultation for interaction with the
FDA.
QUINTILES, INC. is an independent consulting firm, authorized by the
FDA to verify clinical examination results, provide clinical trial monitoring
and FDA preparation support. Quintiles provides the Company services on a time
and materials basis. Quintiles continues to provide consulting support in
connection with securing FDA approval.
CLINICAL TRIALS. We contracted with six hospitals to conduct the
clinical trials necessary for FDA approval of the BCS 2100. The Company
continues to maintain relationships with these institutions in connection with
completion of the PMA:
- USC/Norris Comprehensive Cancer Center, Los Angeles;
- Los Angeles County Hospital, Los Angeles;
- Mt. Sinai Hospital, Miami;
- St. Agnes Hospital, Baltimore;
- Lahey Clinic, Boston; and
- Providence Hospital, Washington, D.C.
GOVERNMENT REGULATION
OVERVIEW. Our BCS 2100 and pain management devices qualify as medical
devices under federal law because they are intended for use in the diagnosis,
cure, mitigation, treatment or prevention of disease but do not interact
chemically with the body. Typically, low risk devices that are substantially
similar to approved products already on the market obtain FDA clearance by the
agency's pre-market notification known as a 510(k) filing. Each year more than
4,000 new devices are cleared using this approach. Sophisticated instruments
that entail significant risk, or utilize unique or new technology require
manufacturers to submit a PMA to the FDA. More complex and time-consuming to
prepare than a 510(k) filing, a PMA typically contains significant clinical
testing, manufacturing and other data, all of which are scrutinized by the FDA
to demonstrate the product's safety, reliability and effectiveness. Typically,
less then 40 devices a year are granted PMA approval.
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We are pursuing PMA approval for our BCS 2100, and we believe an
approved PMA provides valuable benefits that enhance our ability to market the
product, including: 1) an ability to reference medical efficacy claims in our
marketing, 2) improved physician acceptance of our system, and 3) assistance in
obtaining insurance reimbursement codes, which we believe will enhance the
successful marketing of the BCS 2100.
We submitted our PMA in five modules. Module 1 provided:
o an introduction of the use of infrared imaging, its safety and
effectiveness;
o summary of indications for use of infrared imaging;
o summary of incidence, diagnosis and prognosis of breast
cancer;
o description of current modalities for detecting breast cancer;
o description of our BCS 2100, including major components and
the population for which our device has clinical utility;
o description of our clinical study and the population of the
study; and
o statement of marketing of our device for its intended use.
Module 2 provided:
o a detailed description of our BCS 2100 and its component
parts;
o detailed discussion of the clinical evaluation system required
to analyze and interpret the clinical data obtained through
the clinical study; and
o documentation of all software used in our BCS 2100, including
software used in the development of our system and the
acquisition of data in our clinical study.
Module 3 provided:
o manufacturing information concerning our BCS 2100, including a
detailed discussion of the facilities, personnel, equipment
and controls used to manufacture our system;
o information concerning the distribution and installation of
our system; and
o a description of the procedures and record keeping associated
with the manufacture, testing and installation of our device.
Module 4 reiterated certain information and provided additional information
regarding:
o the safety of our system, including all non-clinical testing
of the structural and functional components of our device; and
o the safety of materials used in manufacturing the device.
Finally, Module 5 was an evaluation of our clinical studies, including the
accumulation and analysis of all the clinical study and efficacy data.
The FDA has accepted four of the five modules of our PMA application.
On October 16, 2002, the Panel will meet to discuss, make recommendations and
vote on our PMA. The Panel's recommendation could be conditioned upon, among
other things, modifications to labeling requirements, additional clinical
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validation or further data analysis. The FDA is not obligated to follow the
Panel's findings, but we believe the FDA is often strongly influenced by the
Panel's findings and recommendations in making the final decision to grant
approval, provide conditional approval or deny product approval. Before granting
final approval, the FDA will conduct an audit to ensure our manufacturing
practices comply with FDA regulations and will conclude an audit of our clinical
trial study controls; and may request from us further information, analysis or
clinical data. We cannot determine when or whether the FDA will approve our BCS
2100.
CURRENT EMPLOYEES
As of June 30, 2002, we had 75 full and part time employees: 14 general
and administrative, 15 sales and marketing, 18 research, software and
engineering, and 28 manufacturing and service. None of our employees are
represented by a union, and we consider our employee relations to be good.
RISK FACTORS
INVESTMENT IN SHARES OF OUR COMMON STOCK IS SUBJECT TO A NUMBER OF RISK FACTORS
THAT, IF REALIZED OR COME TO FRUITION, MAY ADVERSELY AFFECT THE COMPANY'S
PROFITABILITY AND THE VALUE OF THESE SHARES WHILE HELD BY OUR SHAREHOLDERS.
THE FAILURE TO OBTAIN FDA APPROVAL OF OUR BCS 2100 WOULD HAVE A MATERIAL ADVERSE
IMPACT ON THE COMPANY.
Our BCS 2100 is presently under review with the FDA. There is no
assurance that we will receive FDA approval. Failure to secure FDA approval
would materially reduce or eliminate the market for our BCS 2100 and would have
a material adverse effect on the business.
WE ARE INVOLVED IN SUBSTANTIAL SHAREHOLDER LITIGATION, WHICH MAY HAVE AN ADVERSE
IMPACT ON US AND OUR SHAREHOLDERS.
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 plaintiffs believe caused significant
damage to the shareholders holding shares of our common stock at the time of
these alleged misrepresentations and omissions. We believe the allegations are
without merit and intend to defend them vigorously. Defending these lawsuits,
which we believe will be 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.
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 insurance counsel to advise us in
this matter, which is in its early stages.
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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.
All of these financial impacts may have an adverse impact on the value
of our common stock.
WE HAVE LIMITED REVENUES FROM OPERATIONS AND MAY NEVER HAVE SUBSTANTIAL REVENUE
FROM OPERATIONS.
With limited exceptions, our products have not been used in commercial
applications and there is no assurance that the market will accept our products
in sufficient volume to assure profitability.
WE MUST OBTAIN INSURANCE CODES FOR OUR BCS 2100 THAT PROVIDE ADEQUATE
REIMBURSEMENT FOR OUR CUSTOMERS.
We have applied to the American Medical Association for an Emerging
Technology Code, which is the first step in obtaining Medicare, Medicaid and
private insurance reimbursement for procedures performed using our BCS 2100.
There can be no assurance that we will receive these codes, that Medicare,
Medicaid or private insurers will provide reimbursement under these codes, or
that our customers will find the reimbursements sufficient to warrant the use of
our BCS 2100. If our customers cannot obtain adequate insurance reimbursement
for their services, the market for our BCS 2100 would be reduced, and this would
have a material adverse effect on us and our shareholders.
WE EXPECT TO CONTINUE TO INCUR LOSSES, DEFICITS, AND DEFICIENCIES IN LIQUIDITY
THAT COULD IMPAIR OUR ABILITY TO GROW.
We must develop clinical applications, obtain regulatory approvals and
market our products in order to become profitable. There is no assurance that we
will be able to accomplish these objectives. We have incurred substantial losses
in the past and expect to continue to incur losses, deficits and deficiencies in
liquidity due to the significant costs associated with the continuing
development and commercialization of our products. Such losses and deficiencies
could have a material adverse impact on us and our shareholders.
WE WILL HAVE TO RAISE ADDITIONAL CAPITAL IN ORDER TO FUND OPERATIONS.
Until our operating results improve, we will have to rely on outside
financing or the sale of assets to fund our business. We expect that we will use
a combination of equity and debt securities and instruments in order to secure
additional funding. The sale of equity securities could dilute our existing
shareholders, and borrowings from third parties could result in assets being
15
pledged as collateral and loan terms that could restrict our operations. There
is no assurance that capital will be available from any source or, if available,
upon acceptable terms and conditions. If our losses continue and we are unable
to obtain additional third party financing or proceeds from the sale of certain
of our assets, we will have to materially reduce our operations, which could
adversely affect us and our shareholders.
WE ARE DEPENDENT ON OUR EMPLOYEES.
Our success is dependent upon the time, talent, experience and
technical knowledge of our employees. In order for us to obtain regulatory
approvals; develop, enhance and market our products, and secure additional
financing, we must attract, motivate, retain and manage qualified employees.
Demand for qualified technology personnel is intense. There is no assurance that
we will be able to attract and retain the people we need.
THE RECENT VOLATILITY IN THE MARKET PRICE OF OUR SHARES COULD CONTINUE AND
ADVERSELY AFFECT SHAREHOLDER VALUE.
The market price of our stock may continue to experience wide
fluctuations, as it has in the recent past, which could be unrelated to our
financial and operating results. Such volatility could result in a material loss
in the value of your investment in our shares.
WE COULD ISSUE PREFERRED STOCK AND THIS COULD HARM YOUR INTERESTS.
We have authorized 3 million shares of preferred stock, par value $5.00
per share, none of which are outstanding. The preferred stock, if issued, could
have preferential voting, dividend and liquidation rights which adversely affect
the rights of our common shareholders. Our authority to issue preferred stock
without shareholder approval could discourage potential takeover attempts and
could delay or prevent a change in control through merger, tender offer, proxy
contest or otherwise by making such attempts more difficult and costly. The
inability for a third party to enter into such a transaction may reduce the
value of our shares.
WE RELY ON THIRD PARTIES IN THE DEVELOPMENT AND MANUFACTURE OF KEY COMPONENTS
FOR OUR PRODUCTS. IF THEY FAIL TO PERFORM, FDA APPROVALS, PRODUCT DEVELOPMENT,
AND/OR PRODUCTION COULD BE SUBSTANTIALLY DELAYED.
We depend upon third parties to assist us with clinical studies,
product development and to supply product components. Our products are highly
specialized and have component parts developed and manufactured according to
unique specifications. Although there may be more than one developer or
manufacturer for these components, failure to develop or manufacture in a timely
manner could result in a loss of business and further result in substantial
delays in FDA approvals and/or commercialization of our products. Such delays
could adversely affect our operations and shareholder value.
IF WE ARE UNSUCCESSFUL IN PREVENTING OTHERS FROM USING OUR INTELLECTUAL
PROPERTY, WE COULD LOSE A COMPETITIVE ADVANTAGE.
16
Our success will depend, in part, on our ability to use and prevent
others from using our trademarks and other intellectual property. We currently
hold three patents and have submitted seven patent applications. There can be no
assurance that the steps we have taken to protect our property will protect our
rights. Defense of our intellectual property could be expensive and time
consuming, and parties that misappropriate our intellectual property could have
significantly more financial resources than the Company, making it financially
impossible to protect our rights.
WE DO NOT HAVE PRODUCT LIABILITY INSURANCE.
The manufacture and sale of medical imaging systems may entail
significant risk of product liability claims. There can be no assurance that we
can obtain insurance coverage with limits adequate to protect us from any
liability that might arise in connection with the sale of our products. Without
such insurance, we may have to pay claims with Company funds, thereby making it
impossible to maintain operations.
ITEM 2. PROPERTIES
We lease facilities under various operating leases requiring fixed
monthly payments, adjusted periodically over their term as follows:
LAKE OSWEGO, OREGON LEASE AGREEMENT. We lease approximately 7,388
square feet of executive office space through July 31, 2005, with respect to
2,088 square feet and July 1, 2006, with respect to the remaining 5,300 square
feet. Pursuant to the agreement, monthly lease payments are $15,700. This space
is used as our headquarters and houses our administrative, financial, executive,
and marketing employees.
LAYTON, UTAH LEASE AGREEMENT. We currently lease approximately 8,507
square feet of office space in Layton, Utah which formerly housed our corporate
offices and clinical research operations, which have been moved to the Ogden,
Utah and Lake Oswego, Oregon facilities. The Layton Lease Agreements specifies
rent of $14,579 per month, expires by its terms November 2002, and will not be
renewed.
WALNUT CREEK, CALIFORNIA LEASE AGREEMENT. In connection with the
acquisition of Bales Scientific, Inc., we entered into a three-year lease ending
on April 19, 2003. The monthly lease payment of $8,131 covers approximately
5,500 square feet of office space. The lease rate increases on April 20 of each
year by an amount computed using the Consumer Price Index. The facility houses
our industrial products and product research and development operations.
OGDEN, UTAH LEASE AGREEMENT. We lease approximately 7,660 square feet
of manufacturing space in Ogden, Utah through June 30, 2003. Monthly payments
under the lease are $5,783. Our manufacturing, regulatory, quality assurance and
clinical development departments use this space.
17
We believe that our offices are adequate for our present needs and that
suitable space will be available for our future needs.
ITEM 3. LEGAL PROCEEDINGS
SHAREHOLDER SECURITIES LITIGATION
See the description above in "Risk Factors."
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.
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.
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.
DAVID PACKER VS. COMPUTERIZED THERMAL IMAGING, INC.
In June of 2001, the Company terminated the employment of Mr. Packer,
the Company's former president. Shortly thereafter, Mr. Packer filed suit
against the Company to recover benefits, compensation, and 1,000,000 stock
options granted pursuant to certain employment and separation agreements the
Company had previously entered into with Mr. Packer. The Company filed a
counterclaim and answered with affirmative defenses against Mr. Packer. The
Company later dismissed its counterclaim and the trial court subsequently
18
granted summary judgment in favor of Mr. Packer against the Company's
affirmative defenses. As a result, the extent of Mr. Packer's damages remained
the only outstanding issue. On August 31, 2002, the Company and Mr. Packer
reached a settlement in this case that settled Mr. Packer's and the Company's
claims and allows the Company to avoid further defense costs and litigation
risk.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
fiscal year ended June 30, 2002.
PART II
- -------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock trades on the American Stock Exchange under the symbol
"CIO."
PRICE RANGE OF OUR COMMON STOCK
The following table summarizes the quarterly low and high bid prices
per share for our common stock. The bid prices reflect inter-dealer prices,
without retail markup, markdown, or commission and may not represent actual
transactions.
Fiscal year ended June 30, 2001 Low Bid High Bid
------------------------------- ------- --------
First Quarter $4.81 $4.97
Second Quarter $1.44 $1.63
Third Quarter $2.28 $2.47
Fourth Quarter $2.77 $4.95
Fiscal year ended June 30, 2002
First Quarter $1.85 $4.05
Second Quarter $1.28 $2.40
Third Quarter $0.82 $1.62
Fourth Quarter $0.56 $1.10
On September 4, 2002, the closing price of our common stock as reported
on the American Stock Exchange was $.70 per share. On September 4, 2002, we had
approximately 29,000 beneficial stockholders of our common stock and
approximately 83 million shares of our common stock outstanding.
19
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below are for each
fiscal year in the five-year period ended June 30, 2002. This data is derived
from, and qualified by reference to, CTI's audited consolidated financial
statements and notes thereto. We are considered a development stage enterprise
as described in Note 1 to consolidated financial statements.
DESCRIPTION 2002 2001 2000 1999 1998
- ----------- ------------- ------------- ------------- ------------- -------------
Revenues $ 877,929 $ 673,782 $ 329,283 $ -- $ --
Cost of goods sold (609,159) (419,157) (176,936) -- --
------------- ------------- ------------- ------------- -------------
Gross margin 268,770 254,625 152,347 -- --
Operating expenses
Operating, general &
administrative 1,356,017 11,345,164 2,861,414 2,576,169 3,167,690
Litigation Settlement 1,600,000 -- 583,054 -- --
Research & development 6,141,190 8,702,618 5,114,518 1,837,182 2,430,038
Marketing 2,992,654 3,101,095 674,514 -- --
Depreciation & amortization 1,600,015 2,258,445 616,205 50,393 --
Impairment loss 8,717,149 2,893,849 -- -- --
------------- ------------- ------------- ------------- -------------
Total operating expenses 22,407,025 28,301,171 9,849,705 4,463,744 5,597,728
------------- ------------- ------------- ------------- -------------
Operating income (loss) (22,138,255) (28,046,546) (9,697,358) (4,463,744) (5,597,728)
------------- ------------- ------------- ------------- -------------
Other income, net 434,924 1,933,962 804,203 (562,097) (411,794)
Extinguishment of Debt 65,637
Net Loss $(21,703,331) $(26,112,584) $ (8,893,155) $ (5,025,841) $ (5,943,885)
------------- ------------- ------------- ------------- -------------
Basic loss per Share $ (0.26) $ (0.32) $ (0.13) $ (0.09) $ (0.14)
============= ============= ============= ============= =============
Cash, cash equivalents, and
marketable securities $ 8,939,765 $ 18,880,350 $ 35,032,166 $ 137,162 $ 230,064
Total Assets 12,541,124 31,843,009 51,462,670 375,805 381,525
Accumulated deficit (82,695,560) (60,913,229) (34,601,965) (25,708,810) (20,682,969)
Total Equity $ 6,046,064 $ 29,184,680 $ 48,284,845 $ (159,709) $ (2,787,343)
============= ============= ============= ============= =============
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
FORWARD-LOOKING STATEMENTS CONCERNING OUR BUSINESS
The following discussion should be read in conjunction with the
Consolidated Financial Statements, the Notes thereto and the other information
included in this Report. Certain statements in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" are forward-looking
statements. When used in this document, the words "expects," "anticipates,"
"intends," "plans," "may," "believes," "seeks," "estimates," and similar
expressions generally identify forward-looking statements. The forward-looking
statements contained herein are based on current expectations and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in such forward-looking statements. For a more detailed
discussion of these and other business risks, see "Risk Factors."
20
OVERVIEW
Our mission is to improve the quality of life by continuously raising
the performance standards of infrared thermal imaging technology for both the
medical device and industrial markets. We design, manufacture and market thermal
imaging devices and services used for clinical diagnosis, pain management and
industrial non-destructive testing. We provide inspection services and design
and build non-destructive test systems for industrial customers.
Our current products are the Breast Cancer System (currently undergoing
FDA review), Photonic Stimulator, Thermal Imaging Processor, and our Turbine
Blade Inspection System. We market our products with an internal sales force and
through independent distributors.
To date, revenues have been generated from the sale of our Photonic
Stimulator, Thermal Imaging Processor and services provided in connection with
our Turbine Blade Inspection System. The Company has delivered a Turbine Blade
Inspection System to Alstom Power UK Limited ("Alstom"), but has deferred that
revenue in accordance with Generally Accepted Accounting Principles ("GAAP").
GAAP will allow us to recognize this revenue upon expiration of an extended
warranty and software upgrade period, which we believe will occur during the
third quarter of fiscal 2003.
RESULTS OF OPERATION
FISCAL YEARS ENDED JUNE 30, 2002 AND 2001
REVENUE
Total revenue for the fiscal year ended June 30, 2002, totaled $878,000
compared to $674,000 for the prior year, an increase of $204,000 or 30%.
Revenues do not include $420,000 in deferred revenues for products shipped
during the twelve months ended June 30, 2001, which will be recognized as
revenues in future periods in accordance with, and to the extent permitted by,
GAAP.
Our medical segment revenue was $750,000 and $566,000 for the fiscal
years ended June 30, 2002, and 2001, respectively. The $184,000 or 33%
improvement results from increased shipments of Thermal Imaging Processors and
Photonic Stimulators.
Industrial segment revenue, primarily from the sale of test services
and product analysis, was $128,000 and $108,000 for the fiscal years ended June
30, 2002 and 2001, respectively. The $20,000 or 19% increase is from increased
sales of turbine blade test services to Alstom, which ended when the Company
shipped a Turbine Blade Inspection System ("TBIS") to Alstom during the second
fiscal quarter. Industrial revenues do not include deferred revenue from the
shipment of a TBIS to Alstom during the second quarter, which will be recognized
in accordance with GAAP. On June 30, 2002, we had a backlog of industrial orders
for our TBIS and industrial products of approximately $425,000 that we expect to
21
complete in the next fiscal year. We have no backlog for Pain Management
products, which are shipped immediately upon receipt of an order. Reported
backlog represents the actual value of purchase orders issued to the Company for
delivery of goods in the future.
EXPENSES
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
fiscal year ended June 30, 2002 were $1,356,000 compared to $11,345,000 for the
same period last year. Excluding a non-cash compensation benefit resulting from
variable accounting for certain employee stock options of $2,914,000 during the
fiscal year ended June 30, 2002, and non-cash compensation expense of $5,140,000
for the fiscal year ended June 30, 2001, general and administrative expenses
decreased by $1,935,000, or 31%. This decrease is primarily a result of: 1) a
$258,000 decrease in wages and related expenses; 2) $877,000 decrease in legal
services expense, offset by a $250,000 provision for legal fees relating to the
shareholder litigation; 3) $64,000 decrease in professional services expense; 4)
$401,000 decrease in stockholder service expense; and 5) $191,000 decrease in
overhead expenses, primarily insurance and rent.
During the year, we accrued $250,000 in legal fees. This accrual
represents our insurance deductible and expected obligations related to the
shareholder securities litigation described above. Our current policy covers up
to $10 million in potential claims. As of September 5, 2002, our insurance
carrier has denied coverage. If our insurance carrier continues to take the
position that the claims are not covered by insurance and does not pay the
claims associated with this lawsuit, we will incur significant legal fees and,
if we are unable to defend the lawsuit successfully, significant damages.
LITIGATION SETTLEMENT. During the 12 months ended June 30, 2002, we
expensed $1,600,000 and assumed liabilities to concluded lawsuits.
SALES AND MARKETING. Sales and marketing expenses for the fiscal year
ended June 30, 2002, were $2,993,000 compared to $3,101,000 for the same period
last year. Excluding a non-cash compensation benefit resulting from variable
accounting for certain employee stock options of $378,000 during the fiscal year
ended June 30, 2002, and non-cash compensation expense of $577,000 for the
fiscal year ended June 30, 2001, sales and marketing expenses increased by
$847,000 or 34%. This increase was primarily a result of: 1) $408,000 increase
in wages and related expenses from an increase in the number of sales and
marketing employees; 2) $74,000 increase in marketing and tradeshows to develop
a market for our products; 3) $83,000 increase in overhead
expenses--principally, utilities, supplies, postage and miscellaneous expenses;
and 4) $43,000 increase in employee benefits.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
fiscal year ended June 30, 2002, were $6,141,000 compared to $8,703,000 for the
same period last year. Excluding a non-cash compensation benefit resulting from
variable accounting for certain employee stock options of $209,000 during the
fiscal year ended June 30, 2002, and non-cash compensation expense of $216,000
for the fiscal year ended June 30, 2001, research and development expenses
decreased by $2,137,000 or 25%. This decrease was primarily a result of: 1)
$2,867,000 decrease in consulting services associated with the development of
our BCS 2100 and FDA PMA application; 2) $310,000 decrease in software license
22
fees; and 3) $707,000 decrease in clinical trial expense. This reduction in
expense was partially offset by: 4) $796,000 increase in salaries and related
expenses as a result of an increase in the number of engineering, regulatory,
and manufacturing support employees; 5) $299,000 increase in administrative
costs; 6) $121,000 increase in patent related expenditures; and 7) $206,000
increase in temporary labor services.
For the fiscal year ended June 30, 2002, and all prior periods, we
expensed all costs associated with process and systems development, including
software code development, computer hardware and software purchases, and
expenses related to the development of our examination table.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the fiscal year ended June 30, 2002, were $1,600,000 compared to $2,258,000
for the same period last year. The $658,000, or 29% decrease was primarily
related to fixed asset impairments recorded in the fiscal year ended June 30,
2001.
NON-RECURRING EXPENSES. During the 12 months ended June 30, 2002, we
evaluated the carrying value of our long-lived assets pursuant to the methods
described in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," and we recorded a reduction of
$8,717,000 in goodwill and other intangible assets in fiscal 2002.
NET INTEREST INCOME/EXPENSE
Interest income for the fiscal year ended June 30, 2002, was $654,000
compared to $1,921,000 for the same period last year. The $1,267,000 or 66%
decrease was primarily a result of lower interest rates and decreased cash
balances available for investment.
Interest expense for the fiscal year ended June 30, 2002, was $219,000.
This amount includes interest on $2,500,000 of long-term debentures and the
amortization of deferred finance costs totaling $367,000 and other financing
cost of $243,000 related to the debenture.
NET LOSS
As a result of the foregoing, we incurred a loss of $21,703,331, or
$(.26) per share, for the fiscal year ended June 30, 2002, compared to a loss of
$26,113,000, or $(0.32) per share, for the fiscal year ended June 30, 2001.
FISCAL YEARS ENDED JUNE 30, 2001 AND 2000
REVENUE
Revenue for the fiscal year ended June 30, 2001, totaled $674,000
compared to $329,000 for the prior year, an increase of $345,000 or 105%.
23
The Company's medical segment revenue was $566,000 and $318,000 for the
fiscal years ended June 30, 2001, and 2000, respectively. The $248,000 or 78%
increase was primarily related to the sales of Thermal Imaging Processors and
Photonic Stimulators.
The Company's industrial segment revenue was $108,000 and $11,000 for
the fiscal years ended June 30, 2001, and 2002, respectively. The $97,000 or
882% increase was primarily related to turbine blade testing for Alstom.
EXPENSES
GENERAL AND ADMINISTRATIVE. During the fiscal year ended June 30, 2001,
general and administrative expenses increased $8,484,000 and were $11,345,000
compared to $2,861,000 for the prior comparable period. Excluding a non-cash
compensation expense of $5,140,000 in fiscal year 2001, general and
administrative expenses increased by $3,344,000 or 117%. This increase is
primarily a result of: 1) additional compensation and related expenses of
$1,039,000 resulting from an increase in the number of employees; 2) additional
legal expenses of $1,339,000 incurred in connection with regulatory filings,
ongoing litigation, and other legal matters; 3) an increase in travel costs of
$345,000; 4) an increase in professional related services of $225,000 incurred
in connection with regulatory and business consultation; and 5) a $164,000
increase in insurance expenses. These expenses were partially offset by a
decrease $280,000 in stockholder services related to public relations,
shareholder meetings, and SEC filing requirements.
MARKETING. During the fiscal year ended June 30, 2001, marketing
expenses increased $2,426,000 to $3,101,000. Excluding a non-cash compensation
expense of $577,000, sales and marketing expenses increased $1,849,000 or 274%
from $675,000 to $2,524,000. The increase, excluding non-cash compensation, is
primary a result of: 1) an increase in salary and wage related expenses of
$631,000 attributable to an increase in the number of marketing employees; 2)
increased marketing and public relations expenses of $755,000; and 3) an
increase of $132,000 in travel expenses.
RESEARCH AND DEVELOPMENT. During the fiscal year ended June 30, 2001,
research and development expenses increased $3,588,000 to $8,703,000 compared to
$5,115,000 for the prior comparable period. Excluding a non-cash compensation
expense of $216,000, research and development expenses increased $3,372,000 or
66% to $8,487,000 compared to $5,115,000 for the prior comparable period. The
increase, excluding non-cash compensation, results primarily from 1) a
$1,460,000 increase in salary and wage related expenses attributable to an
increase in the number of research and engineering employees; 2) a $544,000
increase in research and development costs related the development of our
medical and industrial applications; 3) a $253,000 increase in employee
benefits; and 4) a $194,000 increase in clinical trial expenses.
For the 12 months ended June 30, 2001, and all prior periods, we
expensed all costs associated with process and systems development, including
software code development, computer hardware and software purchases, and
expenses related to the development of our examination table.
24
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the 12
months ended June 30, 2001, increased $1,642,000 or 267% to $2,258,000 compared
to $616,000 for the prior comparable period. This increase is expense resulting
from amortization of goodwill associated with our acquisition of Bales
Scientific in April 2000 and amortization of our software licenses.
NONRECURRING EXPENSES. During the 12 months ended June 30, 2001, we
abandoned our database management project. In connection therewith, we reduced
the capitalized value of the software to zero, incurring a one-time charge of
approximately $2,740,000. We also wrote off other tangible and intangible
assets, with a net book value of $154,000 in connection with relocating our Utah
operations to our Ogden, Utah, manufacturing facility.
NET INTEREST INCOME (EXPENSE)
Interest income for the 12 months ended June 30, 2001, increased
$1,083,000 or 129% to $1,921,000 compared to $838,000 for the prior comparable
period. This increase resulted from investing proceeds from the April 2000
private placement of our common stock.
NET LOSS
As a result of the foregoing, we incurred a loss of $26,113,000, or
$(0.32) per share, for the 12 months ended June 30, 2001, compared to a loss of
$8,893,000, or $(0.13) per share, for the 12 months ended June 30, 2000.
UNAUDITED QUARTERLY RESULTS OF OPERATIONS
- -----------------------------------------
The following table summarizes our results of operations for each of
the four quarters ended June 30, 2000, through June 30, 2002. This information
was derived from unaudited interim consolidated financial statements that, in
the opinion of management, have been prepared on a basis consistent with the
audited consolidated financial statements contained elsewhere in this report and
includes all adjustments necessary for fair statement of such information when
read in conjunction with the audited consolidated financial statements and notes
thereto.
Period-to-period comparisons of our historical operating results are
not necessarily indicative of future performance.
25
Quarter ended (unaudited)
(in thousands)
6/30/02 3/31/02 12/31/01 9/30/01 6/30/01 3/31/01 12/31/00 9/30/00
Revenues $ 121 $ 314 $ 236 $ 207 $ 371 $ 107 $ 116 $ 80
Cost of goods
sold (124) (219) (155) (111) (285) (42) (49) (43)
--------- -------- -------- -------- --------- -------- -------- --------
Gross margin (3) 95 81 96 86 65 67 37
General &
administrative 1,110 1,091 1,182 (2,027) 4,786 1,761 3,342 1,456
Litigation
settlements 1,600 -- -- -- -- -- -- --
Research &
development 1,760 1,511 1,581 1,289 2,127 2,492 2,294 1,790
Marketing 956 751 1,056 230 1,623 512 634 332
Depreciation &
amortization 434 391 388 387 567 544 709 438
Impairment Loss 8,717 -- -- -- 2,894 -- -- --
--------- -------- -------- -------- --------- -------- -------- --------
Total costs and
expenses 14,577 3,744 4,207 (121) 11,997 5,309 6,979 4,016
Interest income/
(expense) (52) (8) 230 265 367 425 512 617
Misc. Income -- -- -- -- 6 4 -- 2
--------- -------- -------- -------- --------- -------- -------- --------
Total other
income (52) (8) 230 265 373 429 512 619
========= ======== ======== ======== ========= ======== ======== ========
Net loss $(14,632) $(3,657) $(3,896) $ 482 $(11,538) $(4,815) $(6,400) $(3,360)
========= ======== ======== ======== ========= ======== ======== ========
For the quarter ended December 31, 2001, our net loss is adjusted by
$9,000 to $3,896,000 to reflect an increase to general and administrative
expense; and for the quarter ended March 31, 2002, the net loss is adjusted
$11,000 to $3,657,000 to reflect a $5,000 increase in general and administrative
expense and a $6,000 increase in interest expense. These non-cash expenses
increased from an adjustment to the volatility computations applied in the Black
Scholes equation we used to calculate the fair value of options and warrants
issued to consultants and Beach Boulevard, LLC.
The Company's financial results for the fourth quarter of fiscal year
2002 were affected by an approximate $8.7 million asset impairment loss related
to the writeoff of goodwill.
SOURCES OF LIQUIDITY
Since inception, we have generated losses from operations. As of June
30, 2002, these losses equal $82,418,000 in the aggregate.
Our cash requirements include general corporate expenses including
salaries and benefits, lease payments for office space, technology acquisition,
software license and maintenance contract payments, legal and accounting fees,
clinical trial and technical support, FDA consulting, marketing, and expenses
associated with the private placement of our equity securities. Capital
resources needed to meet our past and planned expenditures have been financed
and are likely to continue to be primarily from the sale of equity securities.
The following table summarizes the Company's contractual obligations
and commitments to make future payments:
Payments due by period
Less than After
Contractual Obligations Total 1 year 1-2 years 3 years
Operating Leases $ 964,426 $ 429,267 $ 203,170 $ 331,989
Debenture 2,500,000 2,500,000
Penalty 287,165 287,165
Interest on Debenture 175,000 175,000 -- --
----------- ----------- ----------- -----------
Total Commercial Commitments $3,926,591 $3,391,432 $ 203,170 $ 331,989
=========== =========== =========== ===========
26
AGREEMENT WITH BEACH BOULEVARD, LLC.
On December 31, 2001, we reached a financing agreement (the
"Agreement") with Beach Boulevard, LLC (the "Investor"), pursuant to which the
we issued a 7 percent convertible debenture in the amount of $2.5 million (the
"Debenture Offering") and secured an equity line of credit (the "Equity Line")
for $20 million that allows the us to sell up to $20 million in common stock to
the Investor at 94 percent of the market price, as defined by the Agreement. The
Convertible Debenture is due on December 31, 2004. The terms of the Agreement
permit the Investor to convert the Convertible Debenture into common stock at a
conversion price of $1.44 per share at any time during the term of the
Agreement.
In connection with the agreement, we entered into a registration rights
agreement and subsequently filed an effective registration statement with the
SEC. The Investor may require us to redeem all or a portion of the Convertible
Debenture if the average closing bid price of the our 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
interest (the "Redeemable Balance"). If a Trigger Event occurs, the Investor is
required to provide notice to us 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 we do not pay the Redeemable Balance in full by the Redemption
Due Date, we are required to issue registered unrestricted shares of common
stock pursuant to a series of 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 us that a Trigger Event had
occurred. On the date of the Trigger Event, the Redeemable Balance was
approximately $2.9 million, which includes principal of $2.5 million, $111,000
of accrued interest and $287,000 of penalty. We elected to satisfy the
Redeemable Balance through a series of 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 equal to the lesser of $500,000 or 125 percent of
the weighted average volume for the 20 days immediately preceding the date of
the put notice. Based on the terms of the Equity Line and the weighted average
volume for the 20 days preceding the first put on August 1, 2002, we estimate we
will be able to pay approximately $696,000 of the Redeemable Balance before the
end of the six-month period. The remaining unpaid balance will then be due in
cash.
The Equity Line allows for the sale of up to $20 million of common
stock subject to certain conditions during a 24-month period, at 94 percent of
the then current market price. We believe our availability under the Equity Line
will be significantly less than $20 million because availability is contingent
upon a) our common stock price and b) our daily trading volume both of which
have declined since we entered into the financing arrangement, and because we
are using the Equity Line to redeem the debenture as described above.
27
In connection with the Agreement, we 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. We also issued separate warrants to an
investment bank for the purchase of 100,000 shares of common stock at $1.87 per
share. The fair market value of these warrants and other related financing costs
have been recorded as deferred financing costs and are being amortized over the
three-year term of the Agreement.
CAPITAL REQUIREMENTS/PLAN OF OPERATION
Our capital requirements may vary from our estimates and depend upon
numerous factors including 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.
We estimate that we will require approximately $16.0 million in net
cash to meet our operating and financing goals for the fiscal year ending June
30, 2003. If we are able to satisfy our operating and financing needs through
increased revenue and securing additional equity or debt financing, 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) $3.8 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; and f) $2.0 million for legal, accounting and
litigation settlement expenses.
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 we believe will be 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.
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.
28
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 if there is no coverage under
our insurance policies 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.
RECENT ACCOUNTING PRONOUNCEMENTS
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 methods of accounting
be used and establishes new standards and the recognition of certain
identifiable intangible assets separate from goodwill for all business
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. Management does not expect
these statements to 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. Management does not expect these statements to 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 in May 2002, except for the rescission of SFAS No. 4,
which is effective in January 2003. Management has not determined the impact, if
any, this statement will have 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 plans to adopt SFAS
No. 146 in July 2002. Management has not determined the impact, if any, this
statement will have on the Company's consolidated financial statements.
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a development stage enterprise. We currently believe we are not
subject to market risks beyond ordinary economic risks, such as interest rate
fluctuation and inflation. As we begin to market our products, we 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 obsolescence.
At June 30, 2002, we had invested approximately $8.0 million in
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.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COMPUTERIZED THERMAL IMAGING, INC.
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS
- ----------------------------------------------------------------------------------------
PAGE
Independent Auditors' Report--Deloitte & Touche LLP F-2
Independent Auditors' Report--HJ & Associates, LLC F-3
Consolidated Balance Sheets as of June 30, 2002 and 2001 F-4
Consolidated Statements of Operations for the years ended June 30, 2002, 2001,
and 2000, and for the period June 10, 1987 (inception) through June 30, 2002 F-5
Consolidated Statements of Stockholders' Equity for the years ended June 30,
2002, 2001, and 2000, and for the period June 10, 1987 (inception) through
June 30, 2002 F-6
Consolidated Statements of Cash Flows for the years ended June 30, 2002, 2001,
and 2000, and for the period June 10, 1987 (inception) through June 30, 2002 F-13
Notes to Consolidated Financial Statements F-14
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Computerized Thermal Imaging, Inc. and Subsidiaries
(A Development Stage Company)
Lake Oswego, Oregon
We have audited the accompanying consolidated balance sheets of Computerized
Thermal Imaging, Inc. and subsidiaries (the "Company") (a development stage
company) as of June 30, 2002 and 2001, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the years then ended and
for the period June 10, 1987 (date of inception) to June 30, 2002. Our audits
also include the information for the years ended June 30, 2002 and 2001 in the
financial statement schedule listed in the Index at Item 14. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits. The
Company's consolidated financial statements for the year ended June 30, 2000,
and for the period June 10, 1987 (date of inception) through June 30, 2000 were
audited by other auditors whose report dated September 1, 2000, expressed an
unqualified opinion on those statements. The consolidated financial statements
for the period June 10, 1987 (date of inception) through June 30, 2000 reflect
total revenues and net loss of $329,283 and $34,601,965, respectively, of the
related totals. The other auditors' report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for such prior period, is
based solely on the report of such other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors for the
cumulative information for the period from June 10, 1987 (date of inception) to
June 30, 2000, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at June 30, 2002 and
2001, and the results of its operations and its cash flows for the years then
ended, and for the period June 10, 1987 (date of inception) to June 30, 2002, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule for the years
ended June 30, 2002 and 2001, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, The Company is in the development stage and
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. Management's plans concerning these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
September 25, 2002
F-2
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of
Computerized Thermal Imaging, Inc.
(A Development Stage Company)
Layton, Utah
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Computerized Thermal Imaging, Inc. (a
development stage company) for the year ended June 30, 2000, and from inception
on June 10, 1987 through June 30, 2000. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Computerized Thermal Imaging, Inc. (a development stage company)
for the year ended June 30, 2000, and from inception on June 10, 1987 through
June 30, 2000 in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
HJ & Associates, LLC
Salt Lake City, Utah
September 1, 2000
F-3
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND 2001
- ----------------------------------------------------------------------------------------------------
ASSETS 2002 2001
CURRENT ASSETS:
Cash and cash equivalents $ 936,796 $ 7,810,285
Investments available for sale 8,002,969 11,070,065
Accounts receivable - trade (less allowance for doubtful
accounts of $96,115 and $23,963 for 2002 and 2001, respectively) 47,145 383,331
Accounts receivable - other 116,617 559,080
Inventories 1,078,437 643,098
Prepaid expenses 514,444 269,708
Deferred finance costs 366,837 --
------------- -------------
Total current assets 11,063,245 20,735,567
------------- -------------
PROPERTY AND EQUIPMENT, Net 1,438,873 1,228,609
------------- -------------
INTANGIBLE ASSETS:
Goodwill (less accumulated amortization of $1,348,184) -- 9,834,830
Intellectual property rights (less accumulated amortization:
2002 - $10,994; 2001 - $5,993) 39,006 44,003
------------- -------------
TOTAL ASSETS $ 12,541,124 $ 31,843,009
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 992,006 $ 1,802,866
Accrued liabilities 1,426,072 844,203
Accrued litigation settlement 1,400,000 --
Convertible debenture 2,257,076 --
Deferred revenues 419,906 11,260
------------- -------------
Total current liabilities 6,495,060 2,658,329
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 9, and 13)
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $5.00 par value, 3,000,000
shares authorized -- --
Common stock, $.001 par value, 200,000,000 shares authorized,
83,004,313 and 81,076,546 issued and outstanding on June 30,
2002 and 2001, respectively 83,004 81,077
Additional paid-in capital 88,644,442 89,910,457
Accumulated other comprehensive income 14,178 106,375
Deficit accumulated during the development stage (82,695,560) (60,913,229)
------------- -------------
Total stockholders' equity 6,046,064 29,184,680
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,541,124 $ 31,843,009
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
F-4
COMPUTERIZED THERMAL IMAGING, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2002, 2001, AND 2000
AND FOR THE PERIOD JUNE 10, 1987 (INCEPTION) THROUGH JUNE 30, 2002
- --------------------------------------------------------------------------------------------------------------------------
FROM
JUNE 10, 1987
(INCEPTION)
YEARS ENDED JUNE 30, THROUGH
--------------------------------------------- JUNE 30,
2002 2001 2000 2002
INCOME:
Revenues $ 877,929 $ 673,782 $ 329,283 $ 1,880,994
Cost of goods sold (609,159) (419,157) (176,936) (1,205,252)
------------- ------------- ------------- -------------
GROSS MARGIN 268,770 254,625 152,347 675,742
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Operating, general and administrative 1,356,017 11,345,164 2,861,414 31,567,865
Litigation settlements 1,600,000 -- 583,054 2,697,434
Research and development 6,141,190 8,702,618 5,114,518 26,990,572
Marketing 2,992,654 3,101,095 674,514 6,916,333
Depreciation and amortization 1,600,015 2,258,445 616,205 4,615,635
Impairment loss 8,717,149 2,893,849 -- 11,610,998
------------- ------------- ------------- -------------
Total operating expenses 22,407,025 28,301,171 9,849,705 84,398,837
------------- ------------- ------------- -------------
OPERATING LOSS (22,138,255) (28,046,546) (9,697,358) (83,723,095)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 653,618 1,921,066 837,682 3,438,373
Interest expense (218,694) -- (33,479) (2,392,506)
Other -- 12,896 -- 193,711
------------- ------------- ------------- -------------
Total other income 434,924 1,933,962 804,203 1,239,578
------------- ------------- ------------- -------------
LOSS BEFORE EXTRAORDINARY ITEM (21,703,331) (26,112,584) (8,893,155) (82,483,517)
EXTRAORDINARY GAIN ON
EXTINGUISHMENT OF DEBT -- -- -- 65,637
------------- ------------- ------------- -------------
NET LOSS (21,703,331) (26,112,584) (8,893,155) (82,417,880)
OTHER COMPREHENSIVE INCOME (LOSS) -
Unrealized gain (loss) on investments available for sale (92,197) 73,883 32,492 14,178
------------- ------------- ------------- -------------
TOTAL COMPREHENSIVE LOSS $(21,795,528) $(26,038,701) $ (8,860,663) $(82,403,702)
============= ============= ============= =============
WEIGHTED AVERAGE SHARES
OUTSTANDING 82,525,878 80,463,731 68,452,635 --
============= ============= ============= =============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.26) $ (0.32) $ (0.13) --
============= ============= ============= =============
The accompanying notes are an integral part of these consolidated statements.
F-5
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2002, 2001, AND 2000
AND FOR THE PERIOD JUNE 10, 1987 (INCEPTION) THROUGH JUNE 30, 2002
- -------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED LOSSES
OTHER ACCUMULATED
COMMON STOCK ADDITIONAL COMPRE- DURING THE
------------------------ PAID-IN SUBSCRIPTION HENSIVE DEVELOPMENT
SHARES AMOUNT CAPITAL RECEIVABLE INCOME STAGE TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at inception, June 10, 1987 -- -- -- -- -- -- --
Stock issued for cash to founders
in 1987 at $0.001 per share 5,000,000 $ 5,000 -- -- -- -- $ 5,000
Stock issued for cash in
connection with public offering
in 1988 at $0.004 per share 5,000,000 5,000 $ 14,562 -- -- -- 19,562
Stock issued for cash in
connection with a Regulation D
offering in 1989 at $3.13
per share 80,000 80 249,930 -- -- -- 250,010
Stock issued for services in
1990 at $0.51 per share 500,000 500 254,500 -- -- -- 255,000
Stock issued for cash in
connection with a Regulation D
offering in 1991 at $0.50 per
share 180,000 180 89,820 -- -- -- 90,000
Stock issued for services in
1991 at $0.50 per share 3,240,000 3,240 1,616,760 -- -- -- 1,620,000
Stock issued for services in
1992 at $0.12 per share 4,860,000 4,860 578,340 -- -- -- 583,200
Stock issued for services in
1993 at $0.06 per share 1,134,500 1,134 82,726 -- -- -- 83,860
Stock issued for extension of
debt agreement in 1993 at
$0.08 per share 9,000 9 691 -- -- -- 700
Stock issued in connection
with claims of certain stock-
holders in 1993 at $0.06 per
share 1,000 1 59 -- -- -- 60
Stock issued for cash in 1994
at $0.07 per share 387,000 387 25,613 -- -- -- 26,000
Stock issued for services in
1994 at $0.10 per share 1,485,660 1,486 149,148 -- -- -- 150,634
Stock issued for extension of
debt agreement in 1994 at
$0.07 per share 9,000 9 591 -- -- -- 600
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance Forward 21,886,160 21,886 3,062,740 -- -- -- 3,084,626
----------- ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements.
F-6
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2002, 2001, AND 2000
AND FOR THE PERIOD JUNE 10, 1987 (INCEPTION) THROUGH JUNE 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED LOSSES
OTHER ACCUMULATED
COMMON STOCK ADDITIONAL COMPRE- DURING THE
--------------------------- PAID-IN SUBSCRIPTION HENSIVE DEVELOPMENT
SHARES AMOUNT CAPITAL RECEIVABLE INCOME STAGE TOTAL
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance Forward 21,886,160 $ 21,886 $ 3,062,740 -- -- -- $ 3,084,626
Stock issued in connection with
claims by certain stockholders
at $0.12 per share 51,000 51 5,989 -- -- -- 6,040
Stock issued for cash in 1995
at $0.60 per share 679,202 680 407,995 -- -- -- 408,675
Stock issued for services in
1995 at $0.87 per share 3,506,461 3,506 3,049,200 -- -- -- 3,052,706
Stock issued to convert notes
payable in 1996 at $0.17 per
share 702,400 702 117,941 -- -- -- 118,643
Common stock issued upon
conversion of preferred shares
in 1995 at $1.69 per share 124,600 125 209,875 -- -- -- 210,000
Stock issued for cash in
connection with a Regulation D
offering in 1996 at $1.00 per
share 1,462,600 1,463 1,461,137 -- -- -- 1,462,600
Stock issued for note receivable
in connection with a Regulation
D offering in 1996 at $1.00 per
share 525,000 525 524,475 (525,000) -- -- --
Stock issued in satisfaction of
offering costs in connection
with a Regulation D offering
in 1996 at $0.00 per share 53,650 53 (53) -- -- -- --
Stock issued in connection with
the settlement of a note payable
to an individual in 1996 at
$0.98 per share 734,942 735 721,345 -- -- -- 722,080
Stock issued in connection with
the settlement of claims by
certain stockholders in 1996
at $0.88 per share 578,000 578 507,702 -- -- -- 508,280
Common stock issued upon
conversion of preferred shares
in 1996 at $1.70 per share 14,700 14 24,986 -- -- -- 25,000
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance Forward 30,318,715 30,318 10,093,332 (525,000) -- -- 9,598,650
------------- ------------- ------------- ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements.
F-7
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2002, 2001, AND 2000
AND FOR THE PERIOD JUNE 10, 1987 (INCEPTION) THROUGH JUNE 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED LOSSES
OTHER ACCUMULATED
COMMON STOCK ADDITIONAL COMPRE- DURING THE
--------------------------- PAID-IN SUBSCRIPTION HENSIVE DEVELOPMENT
SHARES AMOUNT CAPITAL RECEIVABLE INCOME STAGE TOTAL
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance Forward 30,318,715 $ 30,318 $ 10,093,332 $ (525,000) -- -- $ 9,598,650
Stock issued in repayment of
notes payable/interest expense
in 1996 at $1.05 per share 146,590 147 153,060 -- -- -- 153,207
Stock issued for cash in 1996
at $0.68 per share 1,163,625 1,164 795,306 -- -- -- 796,470
Stock issued for services in
1996 at $1.05 per share 1,277,633 1,278 891,874 -- -- -- 893,152
Stock issued as a bonus to
investors in connection with
the Company's 1996
Regulation D offering at $0.00
per share 211,900 212 (212) -- -- -- --
Conversion of debentures to
common stock at $0.65 per
share 98,768 99 64,026 -- -- -- 64,125
Stock issued for cash at
$0.55 per share 1,833,152 1,833 1,008,376 -- -- -- 1,010,209
Stock issued for services at
$0.59 per share 687,266 687 404,811 -- -- -- 405,498
Losses accumulated during
the period from inception,
June 10, 1987 to June 30, 1997 -- -- -- -- -- $(14,739,084) (14,739,084)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance, June 30, 1997 35,737,649 35,738 13,410,573 (525,000) -- (14,739,084) (1,817,773)
Conversion of debentures to
common stock at $0.41 per
share 2,403,838 2,404 977,951 -- -- -- 980,355
Stock issued to convertible
debenture holders for failure
to complete registration of
the underlying common stock
in a timely manner at $0.42
per share 197,574 198 82,018 -- -- -- 82,216
Stock issued for cash at $0.31
per share 9,476,418 9,476 2,896,760 -- -- -- 2,906,236
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance Forward 47,815,479 47,816 17,367,302 (525,000) -- (14,739,084) 2,151,034
------------- ------------- ------------- ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements.
F-8
COMPUTERIZED THERMAL IMAGING, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2002, 2001, AND 2000
AND FOR THE PERIOD JUNE 10, 1987 (INCEPTION) THROUGH JUNE 30, 2002
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