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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from ________ to ___________
Commission File No.: 0-32523
DOBI MEDICAL INTERNATIONAL, INC.
----------------------------------------------
(Name of small business issuer in its charter)
DELAWARE 98-0222710
----------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1200 MACARTHUR BLVD.
MAHWAH, NJ 07430
-------------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
(201) 760-6464
---------------------------------
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par
value $.0001 per share
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No
As of May 3, 2004, 37,687,995 shares of the issuer's Common Stock were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes[ ] No [X].
DOCUMENTS INCORPORATED BY REFERENCE: None.
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DOBI Medical International, Inc. and Subsidiary
(A Development Stage Company)
Condensed Consolidated Financial Statements
March 31, 2004
(unaudited)
Index
Part I - Financial Information
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheet at March 31, 2004 3
CondensedConsolidated Statements of Operations for the Three Month
Periods ended March 31, 2004 and 2003 and for the Period from
September 7, 1999 (Inception) to March 31, 2004 4
CondensedConsolidated Statements of Cash Flows for the Three Month
Periods Ended March 31, 2004 and 2003 and for the Period from
September 7, 1999 (Inception) to March 31, 2004 5-6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-13
Item 3. Controls and Procedures 14
Part II - Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15-16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
Part I - Financial Information
Item 1. Financial Statements
DOBI Medical International, Inc. and Subsidiary
(A Development Stage Company)
Condensed Consolidated Balance Sheet
March 31, 2004
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 871,722
Prepaid expenses and other current assets 881,565
Inventory 59,703
----------------
Total current assets 1,812,990
Property and equipment, net 79,578
Intangible assets, net 28,336
Other assets 80,004
----------------
Total assets $ 2,000,908
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 247,738
Accrued expenses 532,406
Deferred revenue 43,645
----------------
Total current liabilities 823,789
Stockholders' Equity
Preferred stock, $.0001 par value, 10,000,000 shares
authorized, none issued and outstanding -
Common stock, $.0001 par value, 140,000,000 shares
authorized, 37,687,995 issued and outstanding 3,769
Additional paid-in capital 19,227,206
Deficit accumulated during development stage (18,053,856)
----------------
Total stockholders' equity 1,177,119
----------------
Total liabilities and stockholders' equity $ 2,000,908
===============
See notes to condensed consolidated financial statements
3
DOBI Medical International, Inc. and Subsidiary
(A Development Stage Company)
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended Period from
March 31, September 7, 1999
-------------------------------------- (inception) to
2004 2003 March 31, 2004
------------------ ------------------- ---------------------
Research and development expenses $ 503,639 $ 328,053 $ 7,405,893
General and administrative expenses 476,987 290,492 4,844,213
Clinical program expenses 128,993 45,908 1,845,063
Sales and marketing expenses 205,519 114,695 1,976,062
Interest expense 2,120 348,195 2,167,776
Interest income (3,925) (117) (185,150)
------------------ ------------------- ---------------------
Net loss $ (1,313,333) $ (1,127,226) $ (18,053,857)
================== =================== =====================
Basic and diluted loss per common share $ ( 0.03) $ (0.06)
================== ===================
Weighted average common shares, basic and diluted 37,539,363 18,798,243
================== ===================
See notes to condensed consolidated financial statements
4
DOBI Medical International, Inc. and Subsidiary
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three months ended Period from
March 31, September 7, 1999
-------------------------------------- (inception) to
2004 2003 March 31, 2004
------------------ ------------------- --------------------
OPERATING ACTIVITIES
Net loss $ (1,313,333) $(1,127,226) $(18,053,856)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 11,954 12,413 216,274
Amortization of financing costs - 284,224 854,343
Loss on sale of equipment - - 334
Write-off of purchased in-process research and development costs - - 1,023,525
Interest receivable in connection with share subscription
notes charged to equity - - (14,625)
Stock based compensation 3,234 21,069 382,081
Accrued interest converted to equity - - 340,454
Accretion of discount on Series 1and 2 Convertible Notes - - 808,113
Common stock warrants in connection with
the conversion of notes payable - - 61,806
Changes in assets and liabilities:
(Increase) decrease in other current assets (66,118) 3,397 (880,053)
(Increase) in inventory (59,703) (59,703)
(Increase) decrease in other assets (64,321) (45,808) 7,231
Increase (decrease) in accounts payable (16,322) (50,243) 513,214
Increase (decrease) in accrued expenses (20,018) (63,092) 180,802
Increase in deferred revenue 43,645
--------------- ---------------- -------------------
Net cash used in operating activities (1,524,627) (965,266) (14,576,415)
INVESTING ACTIVITIES
Purchase of business, net of cash received - - (500,000)
Purchase of property and equipment (61,538) (4,340) (177,642)
Patent costs - - (43,022)
Proceeds from sale of equipment - - 250
--------------- ---------------- -------------------
Net cash used in investing activities (61,538) (4,340) (720,414)
FINANCING ACTIVITIES
Proceeds from founding members - - 525,000
Cash paid for transaction costs associated with equity transactions - - (2,008,107)
Cash paid for transaction costs associated with debt transactions - (142,950) (719,485)
Deferred offering costs - - (75,000)
Proceeds from subscriptions receivable - Class A preferred shares - - 940,020
Dividends - Class A redeemable convertible preferred units - - (132,689)
Proceeds from share subscription note - related party - - 239,625
Proceeds (payments) - Series 1 and Series 2 Convertible Notes (170,000) 1,083,000 4,386,000
Proceeds from notes payable, net - 3,113,799
Proceeds from sale of common stock - 10,128,688
Repayment of notes payable - - (229,300)
--------------- ---------------- -------------------
Net cash (used in) provided by financing activities (170,000) 940,050 16,168,551
Increase in cash and cash equivalents (1,756,165) (29,556) 871,722
Cash and cash equivalents at beginning of year/period 2,627,887 628,407 -
--------------- ---------------- -------------------
Cash and cash equivalents at end of year/period $ 871,722 $ 598,851 $ 871,722
=============== ================ ===================
See accompanying notes to condensed consolidated financial statements
5
DOBI Medical International, Inc. and Subsidiary
(A Development Stage Company)
Consolidated Statements of Cash Flows (continued)
(unaudited)
Three months ended Period from
March 31, September 7, 1999
----------------------------------- (inception) to
2004 2003 March 31, 2004
------------------ ---------------- --------------------
Supplemental disclosures of cash flow information
Cash paid during the period for interest $ 2,120 $ - $ 92,730
================= ================ ====================
Income taxes paid - - $ -
================= ================ ====================
Purchase of business, net of cash received:
Fair value of assets purchased - - $ (109,693)
Acquisition of in-process research and development costs - - 1,023,525)
Assumption of promissory notes - - 417,877
Transaction costs - - 56,250
Issuance of shares - - 159,091
----------------- ---------------- --------------------
Net cash used to acquire business - - $ (500,000)
================= ================ ====================
Non-cash investing and financing activities:
Conversion of notes payable and accrued interest to common stock - - $ 8,026,451
================= ================ ====================
Conversion of Class A preferred shares to common stock - - 1,307,846
================= ================ ===========--=======
Share subscription note - - 239,625
================= ================ ====================
Transaction costs in accrued expenses in connection with
sale of common stock - - $ 27,500
================= ================ ====================
Issuance of common warrants for consulting - - $ 326,348
================= ================ ====================
Accretion of Class A redeemable convertible preferred shares - $ 48,678 $ 364,334
================= ================ ====================
See notes to consolidated financial statements
6
DOBI Medical International, Inc. and Subsidiary
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Organization of Business
The consolidated financial statements include the accounts of DOBI Medical
International, Inc. and its wholly-owned subsidiary, DOBI Medical Systems, Inc.
All significant inter-company balances and transactions have been eliminated.
The Company was formed to acquire and further develop a new technology for
imaging of the human body, referred to as Dynamic Optical Breast Imaging,
("DOBI" (R)).
2. Basis of Presentation
The accompanying interim unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-QSB. Accordingly, they do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows for all periods presented have been made. The results of operations
for the three month period ended March 31, 2004 are not necessarily indicative
of the operating results that may be expected for the year ending December 31,
2004.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-KSB filed on February 18, 2004 with the Securities and
Exchange Commission.
The Company's principal activities to date have been in the research and
development of a medical diagnostic system known as the ComfortScan (TM) system,
which is an optically-based medical device for improved diagnosis of breast
cancer as a complement to mammography. The accompanying financial statements
have been prepared in accordance with Statement of Financial Accounting
Standards No. 7, Development Stage Enterprises, since planned principal
operations have not yet commenced.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is currently a development
stage enterprise and its continued existence is dependent upon its ability to
resolve our liquidity problems, principally by obtaining additional debt and/or
equity financing. The Company has yet to generate a positive internal cash flow,
and until meaningful sales of our product begin, we are totally dependent upon
debt and equity funding.
In the event that the Company is unable to obtain debt or equity financing or we
are unable to obtain such financing on terms and conditions that are acceptable
to the Company, we may have to cease or severely curtail our operations. This
would materially impact the Company's ability to continue as a going concern.
Management has been able to raise the capital necessary to reach this stage of
product development and has been able to obtain funding for operating
requirements to date. There is no assurance that, if and when FDA premarket
approval is obtained, the ComfortScan system will achieve market acceptance or
that the Company will achieve a profitable level of operations. The accompanying
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern.
3. Summary of Significant Accounting Policies
Equity-Based Compensation
As permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation
("FAS 123"), which establishes a fair value based method of accounting for
equity-based compensation plans, the Company has
7
DOBI Medical International, Inc. and Subsidiary
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
(unaudited)
elected to follow Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25") for recognizing equity-based compensation
expense for financial statement purposes. Under APB 25, no compensation expense
is recognized at the time of option grant if the exercise price of the employee
stock option is fixed and equals or exceeds the fair market value of the
underlying common stock on the date of grant and the number of shares to be
issued pursuant to the exercise of such options are known and fixed at the grant
date.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of FAS 123 and the Emerging Issues Task Force in
Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or In Conjunction with Selling, Goods or Services which
require that such equity instruments are recorded at their fair value on the
measurement date, which is typically the date the services are performed.
In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure ("FAS 148"). This standard amends the
disclosure requirements of FAS 123 for fiscal years ending after December 15,
2002 to require prominent disclosure in both annual and interim financial
statements about the method used and the impact on reported results. The Company
follows the disclosure-only provisions of FAS 123 which require disclosure of
the pro forma effects on net income (loss) as if the fair value method of
accounting prescribed by FAS 123 had been adopted, as well as certain other
information.
Option valuation models require the input of highly subjective assumptions
including the expected life of the option. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
During three months ended March 31, 2004, the Board of Directors granted 715,000
options. These options have various exercise prices from $2.50 to $3.30 per
share. They expire 10 years from the date of grant. Options granted to
non-employees are accounted for under SFAS No. 123, whereby compensation
measurement of equity awards is based on their fair value. The fair market value
of these options was estimated at the date of grant using the Black-Scholes
option pricing model. Compensation expense generally must be recorded based on
the fair value of the stock options over the vesting period. The expenses
recorded for the three months ended March 31, 2004 and 2003 were $3,234 and
$8,569 respectively.
8
DOBI Medical International, Inc. and Subsidiary
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table summarizes relevant information as to reported results under
the Company's intrinsic value method of accounting for stock awards, with
supplemental information as if the fair value recognition provisions of FAS 123
had been applied for the following three months ended March 31:
2004 2003
------------------- --------------------
Net loss, as reported $ (1,313,333) $ (1,127,226)
Add total stock-based compensation, as reported 3,234 8,569
Deduct total stock-based compensation determined
under fair value based method for all awards (25,036)
(73,467)
------------------- --------------------
Pro forma net loss $ (1,383,566) $ (1,143,693)
=================== ====================
Basic and diluted loss per common share - as reported $ ( 0.03) $ (0.06)
=================== ====================
Pro forma loss per share basic and diluted $ ( 0.04) $ (0.06)
=================== ====================
Net Loss Per Common share
Basic net loss per common share is computed using the weighted average number of
common shares outstanding during the periods presented. There were no common
stock equivalents consisting of options and warrants which were required to be
included in the calculation of diluted loss per share for the periods presented.
The total number of stock options and warrants outstanding as of March 31, 2004
was 3,577,250 and 16,056,102 respectively.
Recently issued Accounting Standards
In January 2003, the FASB issued Interpretation No. 46 (FIN 46"), "Consolidation
of Variable Interest Entities, and Interpretation of ARB No. 51." FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
financial support from other parties. FIN 46 is effective for all new variable
interest entities created or acquired after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or interim period
beginning after June 15, 2003. However, in December 2003, FASB deferred the
latest date by which all public entities, which meet the definition of small
business issuer under SEC Regulation S-B ("Public SBs"), must apply FIN 46 to
the first interim or annual reporting period ended after December 15, 2004.
Management does not believe that the adoption of this pronouncement will have a
material effect on the Company's financial statements.
9
Item 2. Management's Discussion and Analysis or Plan of Operation
Please read the following discussion together with the consolidated
financial statements and related notes appearing elsewhere in this report. This
Item 2 contains forward-looking statements that involve risks and uncertainties.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report. Actual results may
differ materially from those included in such forward-looking statements.
Factors which could cause actual results to differ materially include those set
forth at the end of this Item 2 under the heading "Cautionary Statement Pursuant
to Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1935", as well as those discussed in this report and elsewhere, and in our 2003
Annual Report on Form 10-KSB filed on February 18, 2004. Unless otherwise
specified or the context requires otherwise, the terms "we", "us", "our" and the
"Company" refer to DOBI Medical International, Inc. and its subsidiary, DOBI
Medical Systems, Inc.
OVERVIEW
We recently completed a reverse merger transaction on December 9, 2003
with Lions Gate Investment Limited, a Nevada corporation formed on October 29,
1999. Until the merger, Lions Gate engaged in oil and gas exploration
activities, which Lions Gate discontinued following the merger and succeeded to
the business of DOBI Medical Systems. The directors and management of DOBI
Medical Systems thereupon became the directors and management of Lions Gate.
On January 30, 2004, we changed our corporate name to DOBI Medical
International, Inc. and our state of incorporation to Delaware pursuant to an
Agreement and Plan of Merger, dated as of January 29, 2004, between Lions Gate
and DOBI Medical International. This transaction was approved by the holders of
a majority of the outstanding common stock of Lions Gate by written consent in
lieu of a special meeting of the shareholders of Lions Gate, all as more fully
described in Lions Gate's Definitive Information Statement on Schedule 14C,
which was filed with the SEC on January 9, 2004. DOBI Medical Systems continues
as a wholly-owned, operating subsidiary of DOBI Medical International, Inc.
DOBI Medical Systems was formed initially as a limited liability
company in Delaware on October 26, 1999. In December 1999, DOBI Medical Systems
acquired substantially all the assets of Dynamics Imaging, Inc., including a
number of patents and trade secrets that form the basis for its current
proprietary technology position.
Since our future business will be that of DOBI Medical only, and the
former DOBI Medical Systems stockholders control the merged companies, the
information in this Annual Report is that of DOBI Medical as if DOBI Medical
Systems had been the registrant for all the periods presented in this Report.
Management's Discussion and Analysis or Plan of Operation presented in this Item
2. and audited consolidated financial statements presented in Item 1 of this
Report are also those of DOBI Medical Systems, as these provide the most
relevant information about us on a continuing basis.
For accounting purposes, DOBI Medical Systems was the acquirer in the
December 2003 reverse merger transaction, and consequently the transaction is
treated as a recapitalization of the company. DOBI Medical's financial
statements are the historical financial statements of the post-merger entity.
We are a development-stage company with no revenue. Our goal is to
establish the ComfortScan(TM) system as the new standard of imaging-based
diagnostic care in the United States and international medical community. The
first steps in attaining this goal are to receive FDA approval for the
ComfortScan system as a complement to mammography and establish the ComfortScan
system as a recognized and widely utilized technology to aid physicians in the
effective diagnosis of breast cancer.
We will continue to aggressively seek distribution alliances in
international markets. We have entered into distribution agreements in select
countries in Latin America, Europe and the Asia-Pacific regions. We expect to
begin shipping commercial versions of our ComfortScan system to these
international markets pursuant to FDA export regulations in the third quarter of
2004 under our CE Marking where FDA or similar governmental approval is not
required.
10
We have successfully completed four of the five required steps in the
premarket approval ("PMA") process. A clinical test of approximately 1,200
patients involving 180 malignancies is the final step to complete the fifth
module of our PMA and is expected to take approximately six to nine months to
complete after it begins. Module 5 is expected to be submitted to the FDA by
mid-2005 with FDA review expected to take approximately six months. If the FDA
determines within this anticipated time period that the submission meets the
regulatory and statutory requirements, FDA approval to market the device as an
adjunct to mammography in the United States could issue in the fourth quarter of
2005.
The development requirements for the first commercial version of our
ComfortScan system are largely complete. In order to achieve the above-mentioned
goals, it will be necessary to complete the product roll-out process, maintain
our CE Mark and ISO certifications, and obtain a FDA export license, which may
require passing a comprehensive inspection of our facility, invest in
production-level tooling, establish a manufacturing facility compliant with good
manufacturing practices, identify and finalize agreements with additional
distributors, finalize the PMA protocol with the FDA, recruit and train
additional PMA clinical test sites, and update training programs for technicians
and users. We expect to hire an adequate number of employees by mid-year 2004 in
order to expand our efforts in these areas, and our expenses are expected to
increase to approximately $1,400,000 per quarter. In addition, we expect to make
investments in property and equipment of approximately $400,000. While we
believe that we will meet our goals as specified above, we cannot be certain
that we will do so
To date, we have updated our production processes for the first
commercial version of the ComfortScan system, renewed our CE Mark, and have
invested in production-level tooling in order to commence production of the
ComfortScan system in the third quarter of 2004. We are in the process of
finalizing the PMA protocol with the FDA, and are on plan to commence the final
PMA clinical trial by September 2004. We have upgraded several investigative
devices to the current version of the ComfortScan system, and have shipped two
investigational ComfortScan system devices to locations in Europe in order to
commence local clinical trials and obtain local regulatory approves to sell the
ComfortScan system commercially. We continue to recruit distributors in
countries that do not require FDA approval in order to market the Comfort scan
system. We believe that we are currently meeting our business plan goals to
execute the commercialization of the ComfortScan system. While we believe that
we will continue to meet our business plan goals in the future, we cannot be
certain that we will do so.
RESULTS OF OPERATIONS
COMPARISON OF 3 MONTHS ENDED MARCH 31, 2004 AND MARCH 31, 2003
Research and development expenses increased approximately $175,000, or
54%, from $328,000 to approximately $504,000 for the three months ended March
31, 2004 compared to the prior year. Substantially all of this increase was
attributed to the increased number of personnel recruited to finalize the
upgrading, and documentation of our investigational prototypes of the
ComfortScan system for developmental testing and for refining the engineering of
the hardware and software.
General and administrative expenses increased approximately $186,000,
or 64%, from $290,000 to approximately $477,000 for the three months ended March
31, 2004 compared to the prior year. This increase was mainly due to the
additional cost associated with the addition of financial and legal personnel of
approximately $74,000, higher insurance costs of approximately $55,000 and
consulting costs of approximately $41,000. Many of these additional costs relate
to the reverse merger in December 2003 and ongoing costs related to the company
having additional requirements as a public entity.
Clinical program expenses increased approximately $83,000, to $129,000
for the three months ended March 31, 2004 compared to the prior year due to the
increased number of personnel recruited to manage clinical programs in the US
and abroad. These additional costs included site costs, personnel costs, and
travel expenses.
Sales and marketing expenses of approximately $206,000 for the three
months ended March 31, 2004 reflect an increase of approximately $91,000,
primarily in consulting costs, compared to the prior year.
11
Interest expense for the three months ended March 31, 2003 consisted of
minor financing of operational costs. For the three months ended March 31, 2003,
interest expense of $348,000 was primarily for Series 1 Convertible Promissory
Notes, most of which were converted into common stock in December 2003.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception through the issuance of
equity and debt securities, generating approximately $20,000,000 in gross
proceeds to date, described chronologically as follows.
During the year 2000, DOBI Medical completed its first private
placement of shares, issuing 3,170,069 common shares at an issuance price of
$2.31 per share, generating gross proceeds of approximately $7,316,000. In 2001,
DOBI Medical Systems completed a private placement of 2,211,491 units of its
class A convertible preferred shares at an issue price of $1.00 per lot (each
lot consisting of one unit of class A convertible preferred shares and one
warrant to purchase common shares), generating gross proceeds of approximately
$2,211,000. In 2003, DOBI Medical completed the sale of its series 1 convertible
8% notes and warrants in the amount of $3,373,000. Later in 2003, the Company
completed the sale of its series 2 convertible 12% notes and warrants in the
amount of $1,680,000.
Also in 2003, DOBI Medical merged into a publicly listed company in
which it was the surviving entity and simultaneously completed the first tranche
of a two tranche private placement in which we issued 5,500,000 shares of common
stock at a price of $1.00 per share and 2,750,000 three-year warrants to
purchase common stock at an exercise price of $1.54 per share, generating gross
proceeds of $5,500,000. Gross proceeds from the second tranche are expected to
be $3,000,000. The closing of the second tranche is conditioned on the
following:
o completion of at least 20 patient clinical test scans after the
commencement of FDA Module 5;
o shipment of at least 10 revenue-producing and production level
ComfortScan systems; and
o our loss from operations for the two complete fiscal quarters ending
immediately following the closing of the merger, not exceeding
approximately $3,400,000.
As of March 31, 2004, we had working capital of approximately
$1,177,000. Net cash used in operating activities during the three months ended
March 31, 2004 totaled approximately $1,525,000, and capital expenditures
totaled approximately $62,000.
In order to achieve the above-mentioned milestones, it will be
necessary to complete the product roll-out process, maintain our CE Mark and ISO
certifications, update our previously accepted FDA regulatory modules 1 - 4,
invest in production-level tooling, establish a manufacturing facility compliant
with good manufacturing practices, identify and finalize agreements with
additional distributors, finalize the PMA protocol with the FDA, recruit and
train additional PMA sites, and develop updated training programs for
technicians and users. We will hire an adequate number of personnel to expand
our efforts in these areas, and our expenses will increase to approximately
$1,400,000 per quarter. In addition, we will make investments in property and
equipment of approximately $400,000.
While we believe that we will achieve the milestones required by
tranche 2 of the private placement during 2004, there can be no assurance that
we will do so.
We continue to explore various options to raise enough funds to
complete the formal clinical testing related to the PMA, and to continue product
enhancement, the establishment of international and domestic distribution
networks as well as the necessary support structure to meet customer
requirements. The Company has yet to generate cash flow from operations, and
until the sales of our product begin, we are totally dependent upon debt and
equity funding from outside investors.
In that connection, a placement agent has undertaken to use its best
efforts to privately place an additional $5.0 million to $10.0 million in our
securities in a PIPE (private-investment, public-equity) transaction
12
by May 31, 2004, and we have granted this placement agent the exclusive right to
do so for seven months after the closing of the reverse merger. The placement
agent's undertaking to manage the transaction and act as lead placement agent is
subject to several factors, including market conditions and no adverse change in
our business and prospects. In the event that we are unable to obtain equity or
debt financing or are unable to obtain such financing on terms and conditions
acceptable to us, we may have to cease or severely curtail our operations.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Statements contained in this "Management's Discussion and Analysis or
Plan of Operation" and elsewhere in this report may contain information that
includes or is based upon certain "forward-looking statements" within the
meaning of the Securities Litigation Reform Act 1995 relating to the business of
DOBI Medical. These forward-looking statements represent management's current
judgment and assumptions, and can be identified by the fact that they do not
relate strictly to historical or current facts. Forward-looking statements are
frequently accompanied by the use of such words as "anticipate", "plans",
"believes", "expects", "project", "intends", or similar expressions. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors, including, while it is not possible to predict or identify all
such risks, uncertainties, and other factors, those relating to:
o our ability to secure the additional financing adequate to execute
our business plan;
o the success of product development and research efforts;
o our ability to timely meet United States and foreign government
regulations, and related industry regulations and standards;
o our ability to timely and successfully complete our patient clinical
trials;
o our ability to timely and successfully complete and submit our
premarket approval application to the FDA;
o timely and final approval by the FDA of our ComfortScan system as a
complement to mammography, which approval and commercial
availability in the US cannot be assured;
o delays in the manufacturing process caused by our inabilities or the
inabilities of our subcontractors to timely meet our specifications;
o our ability to establish and maintain international and domestic
distribution networks,
o our ability to meet the quality standards and requirement to
maintain our CE Mark and ISO certifications, and successfully pass
FDA inspections;
o our ability to timely export our products to international markets;
o the acceptance and use of our ComfortScan system by physicians,
imaging clinics, and patients both in international and domestic
markets;
o exiting or new competitors developing superior diagnostic imaging
technologies;
o our ability to meet the performance milestones and obtain the
funding to close on the second tranche of the private placement we
completed in December, 2003;
o the success of our investor relations program to create and sustain
interest and liquidity in our stock, which is thinly traded over the
counter;
o our ability to obtain third party reimbursement from government and
private payers; and
o our ability to compete on price and quality.
Any one of these or other risks, uncertainties, other factors, or any
inaccurate assumptions may cause actual results to be materially different from
those described herein or elsewhere by us. We caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date
they were made. Certain of these risks, uncertainties, and other factors may be
described in greater detail in our filings from time to time with the Securities
and Exchange Commission, which we strongly urge you to read and consider,
including our 2003 Annual Report on Form 10-KSB filed on February 18, 2004.
Subsequent written and oral forward-looking statements attributable to us or to
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements set forth above and elsewhere in our reports filed with
the Securities and Exchange Commission. We expressly disclaim any intent or
obligation to update any forward-looking statements.
13
Item 3. Controls and Procedures
Evaluation of disclosure, controls and procedures. At the period end of
this Quarterly Report on Form 10-QSB, the Company's management, including the
Company's Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's Chief Executive Officer
and Chief Financial Officer have concluded, as of the end of the quarter covered
by this report, that:
The Company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in the reports it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified.
That Company's disclosure controls and procedures are effective to
ensure that such information is accumulated and communicated to the Company's
management, and made known to the Company's Chief Executive Officer and Chief
Financial Officer, to allow timely decision regarding the required disclosure.
There have been no changes in the Company's internal controls over
financial reporting that have materially affected, or is reasonably likely to
materially affect the Company's internal controls over financial reporting
during the period covered by this Quarterly Report.
14
Part II - Other Information
Item 1. Legal Proceedings.
We are not a party to any pending or threatened legal proceedings.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
As reported in our 2003 Annual Report on Form 10-KSB filed with the SEC
on February 18, 2004, the holders of a majority of our outstanding common stock
executed a written consent dated December 10, 2003 in favor of the actions
described below and that are described in greater detail in the definitive
Information Statement on Schedule 14C filed with the SEC on January 9, 2004. A
copy of that Information Statement was mailed to all shareholders of record
commencing on January 9, 2004. This consent satisfied the stockholder approval
requirement for the proposed actions and allowed us to take the following
actions effective on January 30, 2004:
1. We changed our corporate name from Lions Gate Investment Limited to
DOBI Medical International, Inc.
2. We reincorporated Lions Gate Investment Limited in Delaware by a merger
of Lions Gate with and into a newly-formed Delaware subsidiary, known as "DOBI
Medical International, Inc.," which resulted in:
o a change of domicile of Lions Gate from the state of Nevada to the
state of Delaware, which means that the surviving corporation is now
governed by the state of Delaware;
o the change of our corporate name from Lions Gate Investment Limited
to DOBI Medical International, Inc.;
o the right of our shareholders to receive one share of common stock
of DOBI Medical International for each share of common stock of
Lions Gate owned by the shareholder as of the record date of the
reincorporation;
o the persons serving presently as executive officers and directors of
Lions Gate to serve in their same respective positions in DOBI
Medical International after the reincorporation;
o the number of shares of common stock being increased from the
100,000,000 shares of common stock, par value $.0001 per share,
authorized under Lions Gate's articles of incorporation, to
150,000,000 shares of capital stock, divided into 140,000,000 shares
of common stock, par value $.0001 per share, and 10,000,000 shares
of preferred stock, par value $.0001 per share, authorized under our
new certificate of incorporation;
o Lions Gate's By-laws becoming the By-laws of the DOBI Medical
International; and
o our fiscal year end being changed from July 31 to December 31 of
each year.
3. We amended our By-laws to increase the maximum size of our board of
directors to nine from five, and to fix the current number of directors at six;
4. We ratified the adoption of the 2000 Stock Incentive Plan of DOBI
Medical Systems, which we assumed in connection with the reverse merger
transaction completed on December 9, 2003, as well as an amendment to that plan
increasing the number of shares of common stock available for issuance under the
plan to 5,630,000 shares; and
5. We ratified the appointment of Marcum & Kliegman LLP, New York, New
York as our new certifying public accountants for the fiscal year ended December
31, 2003.
For a more complete summary of our reincorporation and corporate name
change, see our Current Report on Form 8-K dated January 30, 2004 and filed with
the SEC on February 2, 2004.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
31.1 Certification of C.E.O. Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of C.F.O. Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certificate Pursuant To 10 U.S.C. Section 1350, Section 906 of
the Sarbanes-Oxley Act of 2002
b) Reports on Form 8-K
1. We filed a Form 8-K on February 2, 2004 regarding our reincorporation
from Nevada to Delaware on January 30, 2004 pursuant to an Agreement and Plan of
Merger dated January 29, 2004.
16
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 14, 2004 DOBI MEDICAL INTERNATIONAL, INC.
By:/s/ Phillip C. Thomas
--------------------------------------
Phillip C. Thomas
Chief Executive Officer
By:/s/ Michael R. Jorgensen
--------------------------------------
Michael R. Jorgensen
EVP, Chief Financial Officer
17