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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 JUNE 30, 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.
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(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 August 4, 2004, 37,694,322 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
June 30, 2004
(unaudited)
Index
Part I - Financial Information
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheet at June 30, 2004 3
Condensed Consolidated Statements of Operations for the Three and Six Month
Periods ended June 30, 2004 and 2003 and for the Period from
September 7, 1999 (Inception) to June 30, 2004 4
Condensed Consolidated Statements of Cash Flows for the Six Month
Periods Ended June 30, 2004 and 2003 and for the Period from
September 7, 1999 (Inception) to June 30, 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
June 30, 2004
(Unaudited)
ASSETS
Current assets:
Cash $ 96,780
Prepaid expenses and other current assets 347,810
Inventory 130,876
------------
Total current assets 575,466
Property and equipment, net 247,071
Intangible assets, net 22,850
Other assets 175,688
------------
Total assets $ 1,021,075
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 634,761
Accrued expenses 741,044
Deferred revenue 87,290
------------
Total current liabilities 1,463,095
Stockholders' deficiency
Preferred stock, $.0001 par value, 10,000,000 shares
authorized, none issued and outstanding -
Common stock, $.0001 par value, 140,000,000 shares
authorized, 37,694,322 issued and outstanding 3,769
Additional paid-in capital 19,246,340
Deficit accumulated during development stage (19,692,129)
------------
Total stockholders' deficiency (442,020)
------------
Total liabilities and stockholders' deficiency $ 1,021,075
============
See notes to condensed consolidated financial statements
3
DOBI Medical International, Inc. and Subsidiary
(A Development Stage Company)
Condensed Consolidated Statements of Operations
(Unaudited)
Period from
September 7,
Three months ended Six months ended 1999
June 30, June 30, (inception) to
----------------------------- ----------------------------- June 30,
2004 2003 2004 2003 2004
------------- -------------- -------------- -------------- ---------------
Research and development expenses $ 466,342 $ 273,001 $ 969,981 $ 601,054 $ 7,872,235
General and administrative expenses 515,804 285,419 992,791 575,911 5,360,017
Clinical program expenses 147,760 92,240 276,753 138,148 1,992,823
Sales and marketing expenses 506,911 119,086 712,430 233,781 2,482,973
Interest expense 2,020 359,078 4,140 707,400 2,169,796
Interest income (565) (36) (4,490) (280) (185,715)
------------- -------------- -------------- -------------- ---------------
Net loss $ (1,638,272) $ (1,128,788) $ (2,951,605) $ (2,256,014) $ (19,692,129)
============= ============== ============== ============== ==============
Basic and diluted loss per common share $ (0.04) $ (0.06) $ (0.08) $ (0.12)
============= ============== ============== ==============
Weighted average common shares,
basic and diluted 37,693,974 18,802,410 37,616,669 18,800,327
============= ============== ============== ==============
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)
Six months ended Period from
June 30, September 7, 1999
----------------------------- (inception) to
2004 2003 June 30, 2004
-------------- -------------- -----------------
Operating activities
Net loss $ (2,951,605) $ (2,256,013) $ (19,692,129)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 26,107 24,820 230,427
Amortization of financing costs - 576,791 854,343
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 22,370 29,636 401,217
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) in other current assets 346,167 (34,268) (467,768)
(Increase) Decrease in other assets (169,411) (51,125) (97,859)
Increase (decrease) in accounts payable 370,699 43,471 900,236
Increase (decrease) in accrued expenses 188,619 155,575 389,439
Increase in deferred revenue 43,645 43,645 87,290
-------------- -------------- -----------------
Net cash used in operating activities (2,123,409) (1,467,468) (15,175,197)
Investing activities
Purchase of business, net of cash received - - (500,000)
Purchase of property and equipment (237,698) (8,864) (353,802)
Patent costs - - (43,022)
Proceeds from sale of equipment - - 250
-------------- -------------- -----------------
Net cash used in investing activities (237,698) (8,864) (896,574)
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 - (44,229) (132,689)
Proceeds from share subscription note - related party - - 239,625
Proceeds (payments) Series 1 and Series 2 Convertible Notes - net (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 provided by financing activities (170,000) 895,821 16,168,551
Increase (decrease) in cash (2,531,107) (580,511) 96,780
Cash at beginning of period 2,627,887 628,407 -
-------------- -------------- ---------------
Cash at end of period $ 96,780 $ 47,896 $ 96,780
============== ============== ===============
See note to condensed financial statements
5
DOBI Medical International, Inc. and Subsidiary
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows (continued)
(Unaudited)
Six months ended Period from
June 30, September 7, 1999
----------------------------- (inception) to
2004 2003 June 30, 2004
-------------- -------------- -----------------
Supplemental disclosures of cash flow information
Cash paid during the period for interest $ 4,138 $ 675 $ 94,748
============== ============== =================
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 - - 242,407
============== ============== =================
Accretion of Class A redeemable convertible preferred shares - $ 99,473 $ 364,334
============== ============== =================
See notes to condensed 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 and six month periods ended June 30, 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 its 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
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 six months ended June 30, 2004, the Board of Directors granted employees
and directors 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 per share of these options was estimated to be $1.48 to $1.95 per
share 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 expense recorded for the three and
six months ended June 30, 2004 and 2003 were $22,368 and $17,138, 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 six months ended June 30:
2004 2003
--------------- ---------------
Net loss, as reported $ (2,951,605) $ (2,256,014)
Add total stock-based compensation, as reported 22,368 17,138
Deduct total stock-based compensation determined
under fair value based method for all awards (146,935) (50,072)
--------------- ---------------
Pro forma net loss $ (3,076,172) $ (2,291,948)
=============== ===============
Basic and diluted loss per common share - as reported $ (0.08) $ (0.12)
=============== ===============
Pro forma loss per share basic and diluted $ (0.08) $ (0.12)
=============== ===============
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
since their inclusion would be antidilutive. The total number of stock options
and warrants outstanding as of June 30, 2004 was 3,577,250 and 15,943,102
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. The adoption of this pronouncement did not have a material effect on the
Company's financial statements.
4. Subsequent Event
On July 30, 2004, the Company closed on a private placement financing in which
it sold 206.45 Series A Preferred shares for $25,000 per share, which are
convertible into 2,580,667 shares of common stock. Gross proceeds of the
transaction were $5,161,333. The Company also issued 2,580,667 4-year investor
warrants to purchase common stock at a price of $3.00 per share.
9
DOBI Medical International, Inc. and Subsidiary
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company incurred cash transaction costs totaling approximately $828,000,
which included placement agent commissions and non-accountable expenses totaling
approximately $664,000. In addition, the Company issued 770,450 4-year placement
agent warrants to purchase common stock at a price of $2.00 per share.
The holders of Series A Preferred Stock shall be entitled to receive a quarterly
cumulative dividend at the end of each calendar quarter (the "Dividend")
calculated at a rate of 8% per annum of the issue price of any outstanding share
of Series A Preferred Stock for the first three years after the closing of this
Offering, 10% per annum for the following two years, and 12% per annum for any
additional year in which any share of Series A Preferred Stock remains
outstanding. At the option of the Company, the Dividend may be paid in either
cash or registered shares of Common Stock. In the case of payment in stock, this
stock will be valued at 95% of the average of the closing trading price of the
Common Stock for the 20 trading days ending on the day prior to the day on which
such payment is due.
10
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 For
Forward Looking Statements", as well as those discussed in this report and
elsewhere, and in our 2003 Annual Report on Form 10-KSB/A filed on May 17, 2004
and our First Quarter Report on Form 10-QSB filed with the Securities and
Exchange Commission on May 17, 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 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 International
only, and the former DOBI Medical Systems stockholders control the merged
companies, the information in this Annual Report is that of DOBI Medical
International 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 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 Systems' 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 system as a 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 Federal Food and Drug Administration
("FDA") approval for the ComfortScan system as an adjunct to screening
mammography and establish the ComfortScan system outside the United States 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 the
11
Certificate of Exportability (Section 802 of the FDA Act) which was granted in
July, 2004 and under our CE Marking where FDA or similar governmental approval
is not required.
We have successfully completed four of the five required steps in the FDA pre
market approval ("PMA") process. In June, 2004 the FDA had indicated to us that
we had come to agreement with it concerning our PMA protocol which is necessary
in order to commence our PMA clinical trials. Subsequently, the FDA raised
additional matters which we believe we have addressed in our revised protocol
that we submitted to it. We have been awaiting the FDA's response to our revised
protocol and expect to finalize our PMA protocol with the FDA in the near future
so that we can commence our clinical trials as planned. However, based on recent
experience in this regard, there is no assurance that the protocol will be
finalized soon. We are actively recruiting PMA clinical sites and expect that a
clinical test of approximately 600 patients will be the final step to complete
the fifth module of our PMA, however, it is still possible that the FDA may
require more than a 600-patient study. We expect the clinical study to take
approximately six to nine months to complete. We plan to submit Module 5 to the
FDA by Q3 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 or shortly thereafter in Q1 of 2006.
The development requirements for the first commercial version of our
ComfortScan system are largely complete. We are in the process of completing the
verification and validation of our ComfortScan system, including hardware
components and our software, which includes acquisition, processing, display,
and reader interpretation components. In order to achieve the above-mentioned
goals, it will be necessary to complete our product development and research,
including the verification and validation of our software, maintain our CE Mark
and ISO certifications, and obtain an FDA export license, which may require
passing a comprehensive inspection of our facility. We continue to work on
establishing a manufacturing facility compliant with good manufacturing
practices, identifying and finalizing agreements with additional distributors,
recruiting and training additional PMA clinical test sites, and developing and
updating training programs for physicians, technicians and other end users. We
expect to hire an adequate number of employees by year end 2004 to expand our
efforts in these areas, and our expenses are expected to increase accordingly.
We also 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.
During the second quarter, we signed distributorship agreements to
serve markets in India, Panama, Costa Rica, Colombia and Nicaragua. To date, we
have shipped pre-production devices to locations in Europe, South America, and
India to commence local clinical trials and aid in obtaining local regulatory
approvals to sell the ComfortScan system commercially. Production tooling has
been completed in preparation for pilot production in August and production in
September. We are in the process of finalizing the PMA protocol with the FDA,
and are recruiting sites to participate in the PMA clinical trial, scheduled to
commence in September 2004. We recently presented information regarding the
ComfortScan system at conferences including the SMI Angiogenesis Conference in
London, the MilanoTech Technology Conference in Milan, and the 23rd
International Congress of Radiology in Montreal, Quebec.
We continue to recruit distributors in countries that do not require
FDA approval in order to market the ComfortScan 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.
The accompanying financial statements in Item 1 of this filing have
been prepared assuming that the Company will continue as a going concern. The
Company is currently a development stage enterprise and, as such, 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 July 2004, we completed the private placement of approximately $5.16
million in shares of our Series A Preferred stock and associated warrants. We
believe that the amounts available to Company pursuant to the July 2004 private
placement, plus the $3 million tranche 2 of the private placement closed in
December 2003, are sufficient to fund our operations through the end of 2004 and
beyond. While we believe that we will achieve the
12
milestones required by tranche 2 of the December 2003 private placement during
2004, we cannot be certain that we will do so. These matters are more fully
discussed in "Liquidity and Capital Resources" below.
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. We have been able to raise the capital necessary to reach this
stage of product development and have 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 in Item 1 of this filing do not include any adjustments
that might be necessary should the Company be unable to continue as a going
concern.
RESULTS OF OPERATIONS
COMPARISON OF 3 MONTHS ENDED JUNE 30, 2004 AND JUNE 30, 2003
Research and development expenses increased approximately $193,000, or
71%, from $273,000 to approximately $466,000 for the three months ended June 30,
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 $230,000,
or 81%, from $285,000 to approximately $515,000 for the three months ended June
30, 2004 compared to the prior year. This increase was mainly due to the
additional cost associated with the addition of administrative personnel of
approximately $19,000, higher insurance costs of approximately $56,000,
consulting costs of approximately $73,000 and investor relation costs of
approximately $37,000. Many of these additional costs relate to the company
having additional requirements as a public entity.
Clinical program expenses increased approximately $56,000, to $148,000
for the three months ended June 30, 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 $507,000 for the three
months ended June 30, 2004 reflect an increase of approximately $388,000,
primarily in consulting costs to initiate a capital markets program for the
purpose of creating an awareness of the Company and its products, of
approximately $306,000 and additional personnel costs of approximately $87,000,
compared to the prior year.
Interest expense for the three months ended June 30, 2004 consisted of minor
financing of operational costs. For the three months ended June 30, 2003,
interest expense of $359,000 was primarily for Series 1 Convertible Promissory
Notes, most of which were converted into common stock in December 2003.
COMPARISON OF 6 MONTHS ENDED JUNE 30, 2004 AND JUNE 30, 2003
Research and development expenses increased approximately $369,000, or
61%, from $601,000 to approximately $970,000 for the six months ended June 30,
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 $416,000,
or 72%, from $576,000 to approximately $993,000 for the six months ended June
30, 2004 compared to the prior year. This increase was mainly due to the
additional cost associated with the addition of administrative personnel of
approximately $93,000, higher insurance costs of approximately $111,000,
consulting costs of approximately $114,000 and investor relation costs of
approximately $38,000. Many of these additional costs relate to the company
having additional requirements as a public entity.
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Clinical program expenses increased approximately $139,000, to
$277,000, or 100%, for the six months ended June 30, 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 $712,000 for the six
months ended June 30, 2004 reflect an increase of approximately $479,000,
primarily in consulting costs to initiate a capital markets program for the
purpose of creating an awareness of the Company and its products, totaling
approximately $397,000 and additional personnel costs of approximately $140,000,
compared to the prior year.
Interest expense for the six months ended June 30, 2004 consisted of
minor financing of operational costs. For the six months ended June 30, 2003,
interest expense of $707,000 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 $25,000,000 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. Class A convertible shares and series 1 and series 2 notes
were exchanged for DOBI Medical shares in connection with the December 2003
transaction described below.
In December, 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 achievement of the following milestones by not later than 18 months after
the closing of the private placement:
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. This milestone was achieved on June 30,
2004.
In July 2004, we completed the private placement of approximately $5.16
million in shares of our Series A Preferred stock and associated warrants. The
shares of Series A Preferred stock sold in the private placement carry a
dividend of 8% per year and are convertible into 2,580,667 shares of common
stock.. We also issued 2,580,667 four-year investor warrants to purchase shares
of common stock at a price of $3.00 per share.
As of June 30, 2004, we had a working capital deficit of approximately
$888,000. Net cash used in operating activities during the six months ended June
30, 2004 totaled approximately $2,123,000, and capital expenditures totaled
approximately $267,000. We have no significant capital commitments. Our planned
capital expenditures for the remainder of 2004 are approximately $200,000.
We believe that the year 2004 will mark DOBI Medical's transformation
from a development stage
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company into a commercial enterprise. We expect to begin to ship the first
commercial version of the ComfortScan system to select international markets in
2004 and commence the final FDA clinical trial in 2004. While we believe that we
will achieve the two remaining milestones required to close the $3 million
second tranche of the private placement by the end of 2004, we cannot be certain
that we will do so.
On the basis of the foregoing, and subject to the risk factors more fully
discussed below, we believe that cash on hand and resources available will be
sufficient fund our working capital requirements through 2004 and beyond.
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
Statements contained in this "Management's Discussion and Analysis or Plan of
Operation" may contain information that includes or is based upon certain
"forward-looking statements" relating to our business. 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 "anticipates," "plans," "believes," "expects," "projects," "intends,"
and 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 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 the timely and final approval by the FDA of our ComfortScan system
as a adjunct to mammography, which approval and commercial
availability in the U.S. cannot be assured (note: other medical
device imaging companies have recently experienced delays in seeking
FDA final approval);
o our ability to secure the additional financing adequate to execute
our business plan;
o the success of product development and research efforts, including,
but not limited to, successful verification and validation testing
of the ComfortScan system, including hardware and its various
software components;
o our ability to timely meet United States and foreign government
regulations, and related industry regulations and standards;
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 assurance standards and requirement
to maintain our CE Mark and ISO certifications, and successfully
pass periodic FDA inspections of our facilities and the ComfortScan
system, including the establishment of good manufacturing practices,
documentation and auditing controls, and training materials;
o our ability to timely ship and export our products to certain
international markets;
o the acceptance and use of our ComfortScan system by physicians,
imaging clinics, and patients both in international and domestic
markets;
o existing 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 which may be accessed from our
website at www.dobimedical.com. Subsequent written and oral forward-looking
statements attributable to us or to persons acting on our behalf are
15
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.
16
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 has been no change in the Company's internal controls over
financial reporting that has 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.
17
Part II - Other Information
Item 1. Legal Proceedings.
We are not a party to any material litigation or threatened
litigation.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
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 May 18, 2004 giving notice of a change
to our certifying accountant, effective prior to our reverse merger into a
publicly held company in December, 2003.
2. We filed a Form 8-K on April 29, 2004 extending the date by
which to file its "resale" registration statement to or around June 30, 2004.
3. We filed a Form 8-K on July 29, 2004 extending the date by
which to file its "resale" registration statement to or around September 30,
2004, and providing guidance for fiscal years 2004 and 2005.
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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: August 16, 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
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