March 1, 1999 (COII) Quarterly Report (SEC form 10QSB)
Management's Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
The Company is a development stage company that is a medical imaging systems integrator producing a computerized clinical thermal imaging diagnostic and patient management system (the "CTI System"). Thermal Medical Imaging, Inc. ("TMI") is an 80 percent owned subsidiary of the Company that utilizes the CTI System specially configured as a breast cancer system which is a non-invasive, non-contact procedure that does not involve breast compression or exposure to radiation (the "TMI System"). TRW, Inc. ("TRW") is the Company's primary systems development vendor.
SECOND QUARTER ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997. The Company incurred a loss of $1,140,560 for the quarter ended December 31, 1998, as compared to a loss of $2,396,760 for the three months ending December 31, 1997. The Company had no revenues in either period. The decrease in losses was attributable to a significant decrease in general and administrative expenses.
General and administrative expenses decreased from $1,679,941 during the second quarter of 1997 to $334,614 during the same period in 1998. The 1997 period includes a charge of $850,167 for options issued to a consultant with no comparable expense in 1998. This decrease was also due to decreased legal and accounting fees for 1998 over 1997 and decreases in consulting fees between the two periods. The Company's general and administrative activities focused on fund raising and support of research activities which included primarily, clinical testing in 1998 and development expenses with TRW in 1997.
During the second quarter of 1998, the Company spent $593,411 on research an development expenses compared with $652,349 during the same period in 1997. Clinical testing costs during the second quarter of 1998 rose to $148,092 from $65,212 in the prior year's quarter. The Company's expenses incurred in connection with the TRW contracts decreased to $317,641 in the second quarter of 1998 as compared to $493,374 in 1997. The costs incurred for research equipment during the second quarter of 1998 were $37,285 and FDA consulting costs were $38,099 with no comparable expense in 1997 for equipment and $20,672 for FDA ting/consulting costs. Interest expense increased to $202,783 from $59,423 during the second quarter of 1998 versus 1997 due to the realization of a $329,833 discount on two notes payable to MFG during this period. This discount is attributable to the fact that the notes are convertible into common stock at a rate of fifty percent (50%) of the market price of the Company's common stock at maturity. Depreciation expense increased in the second quarter of 1998 to $10,686 from $5,960 in 1997.
SIX MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997. The Company incurred a loss of $2,345,823 for the six months ended December 31, 1998 as compared to a loss of $3,125,075 for that same six month period in 1997. The Company had no revenues in either period. The decrease was due to a substantial decrease in general and administrative expenses. General and administrative expenses decreased to $805,848 for the six months ended December 31, 1998 from $2,030,345 during that same period in 1997. The decrease was largely due to a decrease in consulting fee expenses from $1,374,591 for the six months ended December 1997, to $231,301 for the first half of the next fiscal year. The decrease was due to the lack of stock transactions to fund general and administrative expenses in 1998. The Company funded $1,198,334 in general and administrative expenses through the issuance of stock in 1997. The Company also experienced a decrease in legal and accounting of approximately $36,000 when comparing the 1998 and 1997 periods.
During the six months ended December 31, 1998, the Company spent $57,238 on FDA testing and consulting compared with $25,379 in that same period in 1997. TRW contracts and patent work cost the Company $552,679 in the first half of the fiscal year 1998, a decrease from the $709,961 spent in the first half of the fiscal year 1997. Equipment for research was $123,055 for the six months ended December 31, 1998 with no such expenditures in that same time period for the prior year. Clinical trial expenses significantly increased for the six months ended December 31, 1998 when compared to December 31, 1997, and were $304,521 and $65,802, respectively. Depreciation expenses at first half of the year ended December 31, 1998 increased to $22,206 over $12,348 in 1997. Interest in the two comparable six month periods, was $371,272 as of December 31, 1998, a substantial increase over that same period in 1997, when interest cost the Company $173,978.
The Company funded its losses during the six months ended December 31, 1998 and 1997, through issuances of common stock in exchange for cash contributions, notes, and through advances from one or more of the parties which have consistently provided funding to the Company: Thermal Imaging, Inc. ("TII"), an affiliate of Mr. Johnston, Doug Holt doing business as PDH, Ltd.("PDH"), an independent contractor which provides various services to the Company and Daron Dilia doing business as Manhattan Financial Group ("MFG"). The Company received funding of $631,833 in non-interest bearing advances in the period ending December 31, 1998, and $1,680,610 in non-interest bearing advances in the that same period of 1997. The Company received loans from MFG in the amount of $347,750 during the September and October of 1998 and no notes were entered into in the comparative period of 1997. The Company also
received $219,902 in legal services during the six months ended December 31, 1998 which were incorporated into the Company's revolving note agreement with the Company's law firm. The Company also made payments of $300,000 to its law firm, $150,000 in each of the first two quarters of 1998. During the first six months of 1997 fiscal period, the Company satisfied a large part of its cash flow requirement through issuance of shares. Shares were issued to affiliates to satisfy advances consisting of 4,727,177 common shares in repayment of advances totaling $1,608,260. Common shares aggregating 871,333 were also issued as compensation and for services valued at $348,167. In addition, the Company paid off $355,500 in debentures and accrued interest through the issuance of 801,439 common shares. During the comparable six month period of 1998, the Company issued 1,750,041 common shares for cash contributions of $862,400.
LIQUIDITY AND CAPITAL RESOURCES
NO REVENUES FROM OPERATIONS -The Company has had no significant revenues from operations from inception. The Company's cash requirements consist of its salaries, office expenditures, legal and accounting fees to comply with securities registration and reporting requirements, legal fees for contracting, TMI's operational budget requirements, including TRW's technical support of TMI and the Company, and the costs of maintaining TMI's clinical trials. Available funds have been insufficient to pay Company and TMI operating costs, incurred TRW development costs and incurred legal fees. The Company intends to raise additional equity funds from the sale of the common stock through private offerings, either pursuant to an investment agreement or from new investors introduced to the Company, to meet its cash requirements through 1999.
PROSPECTUS DECLARED EFFECTIVE - On January 8, 1999, a Prospectus filed as part of a Form SB2 Registration Statement with the Securities and Exchange Commission was declared effective for the registration of certain shares of common stock on behalf of selling shareholders as well as common stock underlying certain warrants (the "Prospectus"). Although the Company hopes that certain of the warrants with underlying shares registered in the Prospectus are exercised, there can be no assurance that the same will take place. Since the effective date of the Prospectus, and subsequent to the end of the Company's second fiscal quarter, the Company has received capital contributions as a result of the exercise of warrants from only one party totaling $188,200. Although the Company hopes that other warrant holders may elect to convert warrants into common shares resulting in additional capital contributions to the Company, the majority of the warrants outstanding as of the date hereof are unlikely to be exercised because the exercise price is considerably higher than the price per share of the Company's common stock in the over-the-counter market.
THE MANHATTAN FINANCIAL GROUP INVESTMENT AGREEMENT. Subsequent to the Company's second fiscal period, on February 8, 1999, Daron Dilia, doing business as Manhattan Financial Group, agreed to purchase a minimum of $250,000 of the Company's common stock and a maximum of $1,250,000 of the Company's common stock on or before March 15, 1999. As consideration therefor, the Company would allow MFG to purchase the common shares at 50% of the low bid price during that time period (February 8 through March 15, 1999). The Company also granted piggy back registration rights to MFG. The shares issued in the transaction will be restricted and will give the Company some short term liquidity. MFG is one of the parties which has consistently provided funding to the Company.
CAPITAL REQUIREMENTS OVER THE NEXT YEAR The Company will require an estimated $5,000,000 of which $400,000 is owed to TRW and $221,125 is owed its former attorneys (less $50,000 paid to the former attorneys after the fiscal period end, in January of 1999). Such cash requirements for the next 12 months will be needed for its research and development programs, preclinical and clinical testing, development of its sales and distribution efforts, operating expenses, and regulatory processes. The Company's capital requirements will depend on numerous factors, including the progress of its research and development programs; results of preclinical and clinical testing; the time and cost involved in obtaining regulatory approvals; the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; the economic impact of competing technological and market developments; developments and changes in the Company's existing research, licensing and other relationships; and the terms of any new collaborative, licensing and other arrangements that the Company may establish. During the three years prior to the date of its Prospectus, David B. Johnston, the Chairman of the Board and the Chief Executive Officer of the Company, and certain affiliates of Mr. Johnston and the Company have contributed approximately $4,175,000 to the capital of the Company in exchange for shares of the Common Stock. The Company believes that its current assets and potential additional contributions from affiliates of the Company and certain accredited investors, as needed, will be sufficient to meet the Company's short-term operating expenses and capital expenditures. At the present time, however, there is no commitment from anyone other than MFG with respect to any future capital contributions to the Company, and there is no way to predict when and if any such additional contributions may be made. Consequently, the bulk of the needed capital over the next 12 months must come from one or more substantial new investors. Although the Company hopes to complete a securities purchase agreement with a substantial new investor, as of this date, it has no firm commitment from such investor, or any other substantial new investors. Until such time as it can locate a source of material funding, the Company expects affiliate stockholders to continue to support the Company either through loans or contributions to capital in exchange for the restricted common stock of the Company.
If the Company does not commence generating adequate revenues, or if it does not attract new capital sufficient to meet its operating needs, the Company will not be able maintain the existing clinical trials to obtain FDA approval for the TMI System or to obtain insurance payment codes for the CTI System. In such event, the Company would have difficulty selling its products in the United States. The Company would then be forced to focus on sales to foreign markets that do not require FDA approval.
DEPENDENCE OF TMI ON THE COMPANY. TMI, an 80% subsidiary of the Company which utilizes the CTI System especially configured as a breast cancer system which is a non-invasive, non-contact procedure that does not involve breast compression or exposure to radiation (the "TMI System"), has no source of revenue, other than contributions to its capital made by the Company. It is not expected that TMI's dependence on the Company will change until the clinical trials are successfully concluded and TMI or the Company then is able to market for sale or use the TMI System. TMI has no assurance that it can finance its development, marketing, or production costs. The Company must fund or finance the balance of the clinical trials and any subsequent development, operating, marketing and production costs until TMI develops its business and then is capable of financing its operations. TMI has developed the TMI System exclusively using contributions of capital from the Company. The efficacy of the TMI System is currently subject to confirmation in FDA clinical trials as a tool complementary to mammography. The FDA clinical trials requirement for
TMI to receive its PMA approval requires four separate medical facilities to conduct examinations and conduct and produce clinical statistical data from use of the TMI System. Those clinical trials are currently being conducted at Providence Hospital in Washinton DC, at two Los Angeles hospitals managed by the University of Southern California Medical School, and at Mt. Sinai Hospital in Miami, Florida. The rate of conducting examinations determines the monthly cash flow requirements and the time for qualifying for PMA. TMI also incurs costs for FDA legal counsel and for consulting services from a firm recognized by the FDA for overseeing clinical trial data collection and adherence to FDA requirements. The Company has advanced TMI approximately 5.5 Million through December 31, 1998. The estimated requirements to fund TMI's research and clinical testing are approximately $500,000 per quarter.
If the Company is incapable of raising sufficient funds to finance TMI's clinical trials, as well as funds sufficient to conduct its own business, TMI may be forced to abandon its FDA plans.
CTI SYSTEM DEVELOPMENT. The Company has committed to devote a major portion of its resources and subsequent capital financing, in excess of its fixed operating costs, to the operations of TMI for the completion of the ongoing FDA Clinical Trials. Although the Company is prioritizing its funding of TMI, it also plans to conduct multiple clinical trials involving the CTI System in the identification of soft tissue maladies. Although such clinical trials may not be necessary for physicians to use the CTI System, the benefit of specific purpose clinical trials will be to enable the Company to reference medical efficacy claims in connection with marketing efforts, to enhance physician confidence in the CTI System, and to obtain the designation of insurance payment codes for particular CTI System procedures. Management believes that the market in the United States alone for the CTI System would be dramatically enhanced if clinical trials were to substantiate the Company's assertion that the CTI System can distinguish and verify fraudulent (versus real muscular) lower back pains.
MARKETING. The Company cannot assure investors that expenditures for clinical trials will result in confirming results or an FDA approval, nor can the Company be sure that any FDA approval or successful clinical trial will result in a profitable business activity. In order to be successful, the TMI System and the CTI System must be accepted both by physicians and the public. The primary method for creating physician acceptance of the Systems will be through the publication and presentation of technical research papers to medical professional groups. Management has already collaborated with physicians working on the TMI System clinical trial program to submit an abstract report to the Radiological Society of North America for presentation at their December 1998 conference in Chicago. If the abstract is selected by the society, a detailed research paper will be presented as part of the conference and published in the proceedings. As more research data becomes available, the Company hopes to team with research physicians on similar projects in the future.
A marketing campaign must also be undertaken to educate the general public regarding the advantages associated with the use of the Systems. Management understands that this marketing effort will require substantial funds which are not presently available. While most of the funds needed to engage in a large scale marketing effort would be necessary if the PMA were approved and would likely have to come from equity financing, Management believes that usage charges from the TMI System will provide sufficient funds to initiate the campaign. Based upon the current pace of clinical trials, the 600 qualified patient examinations required by the FDA should be completed by the end of 1999 for consideration for the FDA to grant the PMA.
EQUIPMENT FINANCING. The Company expects to commence production and sales for the CTI System when capital or debt financing is available and Use Agreements are in place. Equipment financing will be necessary for the Company or TMI to market the TMI and/or CTI Systems to enable manufacturing, production, and extensive marketing. Foreign sales of the CTI System may be likely with adequate marketing expenditures, but substantial U.S. sales are only likely to follow an FDA program for approval. A the present time, management doe not expect to seek FDA approval for the CTI System. However, TMI is actively pursuing FDA approval (the "PMA") for the TMI System. The Company contemplates revenues from the CTI System in the U.S. to be generated pursuant to Use Agreements, placing the CTI System in a hospital or medical care facility under an agreement requiring the user to compensate the Company based upon the time used. The Company contemplates systems integration and sales agreements for overseas production and sales. The Company expects to obtain equipment financing for the Company and TMI, secured by the sales or Use Agreements and the inventory produced. Assuming the PMA is granted after the TMI clinical trials are completed, TMI anticipates funding to be available from capital and debt financing to commence production and sales of the TMI System. The Company has entered into discussions with equipment financing companies that have indicated that the Systems can be financed in this manner.
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