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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, 2005
[ ] 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)
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 12, 2005, 65,604,405 shares of the issuer's Common Stock were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes ____ No X.
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DOBI Medical International, Inc.
June 30, 2005 Form 10-QSB Quarterly Report
Table of Contents
Part I Financial Information
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheet at June 30, 2005 3
Condensed Consolidated Statements of Operations for the
Three and Six Month Periods ended June 30, 2005
and 2004 and for the Period from September 7, 1999
(Inception) to June 30, 2005 4
Condensed Consolidated Statements of Cash Flows for the
Six Month Periods Ended June 30, 2005 and 2004
and for the Period from September 7, 1999
(Inception) to June 30, 2005 5-6
Notes to Condensed Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis or Plan of Operation 11-16
Item 3. Controls and Procedures 18
Part II Other Information
Item 1. Legal Proceedings 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
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, 2005
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 7,678,296
Accounts receivable 51,000
Prepaid expenses and other current assets 176,871
Inventory 616,065
------------
Total current assets 8,522,232
Property and equipment, net 619,651
Intangible assets, net 8,474
Other assets 45,529
------------
Total assets $ 9,195,886
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 236,923
Accrued expenses 619,027
Deferred revenue 125,095
------------
Total current liabilities 981,045
Stockholders' Equity
Preferred stock, $.0001 par value, 10,000,000 shares
authorized, 186 issued and outstanding --
Common stock, $.0001 par value, 140,000,000 shares
authorized, 65,397,564 issued and outstanding 6,540
Additional paid-in capital 36,066,627
Deficit accumulated during development stage (27,858,326)
------------
Total stockholders' equity 8,214,841
------------
Total liabilities and stockholders' equity $ 9,195,886
============
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,
1999
(inception)
Three months ended Six months ended to
June 30, June 30, June 30,
2005 2004 2005 2004 2005
----------------------------------------------------------------------------
Revenue
Product $ 92,300 $ -- $ 137,314 $ -- $ 453,630
Service 18,450 -- 35,850 -- 40,800
----------------------------------------------------------------------------
110,750 -- 173,164 -- 494,430
----------------------------------------------------------------------------
Cost of sales
Product 101,635 -- 284,248 -- 647,562
Service 67,949 -- 130,837 -- 151,355
----------------------------------------------------------------------------
169,584 -- 415,085 -- 798,917
----------------------------------------------------------------------------
Gross loss (58,834) -- (241,921) -- (304,487)
----------------------------------------------------------------------------
Research and development expenses 469,818 466,342 917,908 969,981 9,777,418
General and administrative expenses 695,829 515,804 1,491,309 992,791 8,005,763
Clinical program expenses 639,978 147,760 1,025,820 276,753 3,670,402
Sales and marketing expenses 224,303 506,911 483,868 712,430 4,173,235
----------------------------------------------------------------------------
Total operating expenses 2,029,928 1,636,817 3,918,905 2,951,955 25,626,818
----------------------------------------------------------------------------
Operating loss (2,088,762) (1,636,817) (4,160,826) (2,951,955) (25,931,305)
Other income (expense)
Interest expense (2,802) (2,020) (5,061) (4,140) (2,178,212)
Interest income 54,182 565 58,523 4,490 251,191
----------------------------------------------------------------------------
Net loss (2,037,382) (1,638,272) (4,107,364) (2,951,605) (27,858,326)
Deemed dividend on preferred stock (35,604) -- (72,481) -- (877,874)
Preferred stock dividends (93,228) -- (186,455) -- (392,909)
----------------------------------------------------------------------------
Net loss applicable to common stock $ (2,166,214) $ (1,638,272) $ (4,366,300) $ (2,951,605) $(29,129,109)
============================================================================
Basic and diluted loss per common share $ (0.03) $ (0.04) $ (0.08) $ (0.08)
============================================================================
Weighted average common shares, basic and diluted 65,374,169 37,693,974 54,841,197 37,616,669
============================================================================
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)
Period from
September 7,1999
Six months ended (inception)
June 30, to
2005 2004 June 30, 2005
------------------------------------------------
Operating activities
Net loss $ (4,107,364) $ (2,951,605) $(27,858,326)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 114,710 26,107 435,057
Amortization of financing costs -- -- 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 1,135 22,370 446,873
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 accounts receivable (51,000) -- (51,000)
(Increase) in inventory (236,653) -- (616,065)
(Increase) decrease in prepaid expenses and other current assets (38,810) 346,167 (176,649)
(Increase) decrease in other assets -- (169,411) 42,996
Increase (decrease) in accounts payable (33,672) 370,699 502,398
Increase in accrued expenses 2,794 188,619 174,194
Increase (decrease) in deferred revenue (11,400) 43,645 125,095
------------------------------------------------
Net cash used in operating activities (4,360,260) (2,123,409) (23,901,477)
Investing activities
Purchase of business, net of cash received -- -- (500,000)
Purchase of property and equipment (81,052) (237,698) (916,634)
Patent costs -- -- (43,022)
Proceeds from sale of equipment -- -- 250
------------------------------------------------
Net cash used in investing activities (81,052) (237,698) (1,459,406)
Financing activities
Proceeds from founding members -- -- 525,000
Cash paid for transaction costs associated with equity transactions (835,000) -- (2,843,107)
Cash paid for transaction costs associated with debt transactions -- -- (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) from Series 1 and 2 Convertible Notes, net -- (170,000) 4,386,000
Proceeds from notes payable, net -- -- 3,113,799
Proceeds from sale of common stock 10,500,000 -- 23,626,149
Net proceeds from sale of preferred stock -- -- 4,208,167
Repayment of notes payable -- -- (229,300)
------------------------------------------------
Net cash provided by financing activities 9,665,000 (170,000) 33,039,179
Increase in cash and cash equivalents 5,223,688 (2,531,107) 7,678,296
Cash and cash equivalents at beginning of year/period 2,454,608 2,627,887 --
------------------------------------------------
Cash and cash equivalents at end of year/period $ 7,678,296 $ 96,780 $ 7,678,296
================================================
See notes to condensed consolidated financial statements
5
DOBI Medical International, Inc. and Subsidiary
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows (continued)
(unaudited)
Period from
September 7,
1999
Six months ended (inception)
June 30, to
2005 2004 June 30, 2005
----------------------------------------------
Supplemental disclosures of cash flow information
Cash paid during the period for interest $ 5,061 $ 4,138 $ 103,166
=============================================
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 preferred shares to common stock $ 206,454 $ -- $ 1,514,300
=============================================
Preferred stock dividends paid with common stock $ 186,454 $ -- $ 392,908
=============================================
Deemed dividends to preferred stock shareholders $ 72,481 $ -- $ 877,874
=============================================
Share subscription note $ -- $ -- $ 239,625
=============================================
Issuance of common warrants for consulting $ -- $ -- $ 326,348
=============================================
Accretion of Class A redeemable convertible preferred shares $ -- $ -- $ 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, 2005 are not necessarily
indicative of the operating results that may be expected for the year ending
December 31, 2005.
These consolidated financial statements should be read in conjunction
with the consolidated financial statements and related notes included in the
Company's 2004 Annual Report on Form 10-KSB (as amended) filed 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 an adjunct to mammography. The accompanying financial
statements have been prepared in accordance with Statement of Financial
Accounting Standards No. 7, Development Stage Enterprises, since limited,
principal operations only began in the fourth quarter of 2004.
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 unless or 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. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management has so far 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, but there can be no
assurance that the Company will be able to continue to do so. 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
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, 2005, the Board of Directors granted
stock options to purchase 2,316,500 shares of the Company's stock. These options
have various exercise prices from $.46 to $.93 per share. They expire between 5
and 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 weighted average fair market value per
share of these options was estimated to be $.33 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 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:
2005 2004
--------------------------------
Net loss applicable to common stock, as reported $ (4,366,300) $ (2,951,605)
Add total stock-based compensation, as reported 1,135 22,368
Deduct total stock-based compensation determined
under fair value based method for all awards (428,968) (146,935)
---------------------------------
Pro forma net loss applicable to common stock $ (4,794,133) $ (3,076,172)
=================================
Basic and diluted loss per common share - as reported $ ( 0.08) $ (0.08)
=================================
Pro forma loss per share basic and diluted $ ( 0.09) $ (0.08)
=================================
8
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, warrants and convertible
preferred shares 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, warrants and convertible
preferred shares outstanding as of June 30, 2005 was 6,730,500, 34,031,719 and
3,558,276, respectively.
Recently Issued Accounting Standards
In December 2004, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 123R, "Share Based Payment." This statement is a revision
of SFAS Statement No. 123, "Accounting for Stock-Based Compensation," and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
its related implementation guidance. SFAS 123R addresses all forms of share
based payment ("SBP") awards including shares issued under employee stock
purchase plans, stock options, restricted stock and stock appreciation rights.
Under SFAS 123R, SBP awards result in a cost that will be measured at fair value
on the awards grant date, based on the estimated number of awards that are
expected to vest. This statement is effective for public entities that file as
small business issuers as of the beginning of the first fiscal year that begins
after December 15, 2005. The Company is currently in the process of evaluating
the effect that the adoption of this pronouncement may have on its financial
statements.
In May 2005, the FASB issued FASB 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements. This statement
changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This statement is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005.
4. Common Stock
On March 30, 2005, the Company completed a private placement for
21,000,000 shares of its common stock at a purchase price of $.50 per share, for
gross proceeds of $10,500,000 and net proceeds of approximately $9,665,000 (net
of transaction costs totaling $835,000). The investors also received 5,250,000
five-year warrants to purchase shares of common stock at an exercise price of
$.75 per share and 5,250,000 five-year warrants to purchase shares of common
stock at an exercise price of $1.25. In addition, the placement agent received
840,000 four-year warrants to purchase shares of common stock at an exercise
price of $.88 per share.
On January 31, 2005 and April 15, 2005, the Company issued 227,641 and
140,409 shares of common stock in payment of accrued preferred stock dividends
totaling $206,454 and $93,227, respectively.
On February 1, 2005, the Company issued 281,220 shares of common stock
to a Series A preferred stockholder converting 20 shares of outstanding Series A
preferred shares into shares of common stock.
5. Series A Preferred Convertible Shares
On July 30, 2004, the Company completed a private placement
financing in which it sold 206.45 Series A preferred shares, which are
convertible into 2,580,667 shares of common stock, for $25,000 per share.
9
Proceeds from the transaction were $4,208,167 net of fees. The Company also
issued 2,580,667 four-year investor warrants to purchase common stock at an
exercise price of $3.00 per share. Deemed dividends of $72,481 for the six
months ended June 30, 2005 consisted of imputed dividends resulting from
increasing rate preferred stock in accordance with Emerging Issue Task Force
("EITF") 98-5 and Staff Accounting Bulletin ("SAB") Topic 5.Q, "Increasing Rate
Preferred Stock." In connection with the December 17, 2004 sale of 6,000,000
shares of common stock and the March 30, 2005 sale of 21,000,000 million shares
of common stock, we reduced the conversion price of series A preferred stock
from $2.00 per share to $1.31 per share, increasing the number of common shares
into which the series A preferred stock is convertible to 3,839,496 shares.
6. Legal Proceedings
In the ordinary course of business, the Company may become a party to
legal or regulatory proceedings resulting from litigation, claims, or other
disputes. There can be no assurance that one or more future actions, if they
occur, would not have a material adverse effect on the Company's business. As of
the filing of this report, except as follows, there is no material litigation,
threatened or pending, involving the Company.
On April 15, 2005, the Company filed suit in the Supreme Court of the
State of New York, County of New York, Index No. 601348/05, against Brian
Vodicka, a former member of the Company's Board of Directors, alleging breach of
contract and breach of fiduciary duty and seeking specific performance and
injunctive relief preventing the disclosure and requiring the return of certain
confidential and proprietary documents. On July 11, 2005, the New York Supreme
Court issued an order preliminarily enjoining Mr. Vodicka from using documents
or information provided to Mr. Vodicka by the Company wrongfully and in
violation of the confidentiality agreement between Mr. Vodicka and the Company.
On April 25, 2005, the Company received a copy of a Verified Petition
to Take Depositions before Suit from a Robin Chiswell allegedly filed in the
Harris County, TX District Court, apprising the Company that the petitioner
wished to take deposition of a custodian of the Company's records to investigate
whether there have been possible violations of the Texas Securities Act. No
action has been initiated by petitioner in this proceeding. The Company believes
that this proceeding is related to the one described below. The Company will
aggressively defend any proceedings and suits brought against it.
On July 15, 2005, the Company was served with a complaint that has been
filed in the United States District Court for the Western District of Texas by a
group of shareholders, some of whom are associated with Mr. Vodicka, alleging,
among other things, that the Company and certain of its officers and directors,
as well as two of its previous advisors, violated federal and state securities
laws and seeking damages, interest, and attorneys' fees and costs. The Company
expects a related lawsuit to be served shortly by Mr. Vodicka containing similar
allegations and claims. The plaintiffs claim that the Company made material
omissions and/or misrepresentations and that this caused plaintiffs to privately
purchase shares of the Company's stock at allegedly artificially inflated
prices. The Company believes that the allegations are without merit and stem
from plaintiffs' dissatisfaction with the current market price of the Company's
stock. The Company intends to vigorously defend against plaintiffs' claims. As
of June 30, 2005, no amounts have been provided for in the financial statements.
10
Item 2. Management's Discussion and Analysis or Plan of Operation
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, Inc. 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 from Lions Gate Investment Limited to
DOBI Medical International, Inc. and changed our state of incorporation from
Nevada to Delaware pursuant to an Agreement and Plan of Merger dated as of
January 29, 2004, between Lions Gate and DOBI Medical International. DOBI
Medical Systems currently remains a wholly-owned subsidiary of DOBI Medical
International.
DOBI Medical Systems, LLC was formed as a Delaware limited liability
company in October 1999. In December 1999, DOBI Medical Systems, LLC 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.
On January 1, 2003, DOBI Medical was incorporated in Delaware and
became DOBI Medical Systems, Inc. Since the reverse merger transaction on
December 9, 2003, DOBI Medical Systems, Inc. has been a wholly-owned subsidiary
of DOBI Medical International, Inc.
Since our future business will be that of DOBI Medical only, the
information in this 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 the audited consolidated financial statements presented in Item
1 of this report include those of DOBI Medical Systems prior to the reverse
merger, as these provide the most relevant information for us on a continuing
basis.
For accounting purposes, DOBI Medical Systems was the acquirer in the
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, DOBI Medical
International.
OVERVIEW
We are a developmental stage company with no significant revenues. Our
goal is to establish the ComfortScan(TM) system as the new standard of breast
imaging diagnostic care in the United States and international medical
community. The first steps in attaining this goal are to receive U.S. Federal
Food and Drug Administration (`"FDA") approval for our ComfortScan(TM) system as
an adjunct to mammography and establish our ComfortScan system as a recognized
and widely utilized technology to aid physicians in the effective diagnosis of
breast cancer.
During 2004, we released version 1.0 of our ComfortScan system, renewed
our CE Mark, implemented FDA and quality systems standards, invested in
production-level tooling, established a manufacturing facility compliant with
good manufacturing practices, received our FDA Export Certificate, finalized
agreements with several international distributors in select countries in Latin
America, Europe and the Asia-Pacific regions, verified and validated our first
release of the ComfortScan system, and sold and shipped 12 revenue-producing and
production level ComfortScan investigative units to international markets for
the purpose of conducting local clinical regulatory and marketing studies. In
addition, our PMA clinical trial protocol was accepted by the FDA, we delivered
and installed our ComfortScan system in our first three PMA sites, and we
trained and commenced the collection of patient scan data pursuant to our PMA
clinical trial protocol.
During 2005, we have concluded agreements with an additional five
international distributors, and delivered three ComfortScan systems to
distributors in order to commence clinical studies. To date, we have commenced
six clinical studies in international locations and continue to expand the
number of clinical studies conducted for the purpose of generating publishable
clinical data concerning the efficacy of the ComfortScan system, obtain patient
data for the continued development of the ComfortScan system, and obtain local
ministry of health approval. In the United States, we have expanded the number
of PMA sites to 17, and continue to increase
11
the number of sites participating in our PMA.
We continue to work towards our goal of submission of Module Five to
the FDA by the end of the year; however, due to slower than anticipated PMA
clinical site recruitment and fewer qualified patient enrollments due to the
restrictions imposed by our FDA PMA protocol, we are seeking to expand the
number of clinical sites being recruited in order to increase the number of
patients for inclusion in our study as we move out of the slower summer
recruitment months and into the fall. We continue to diligently work towards
completion of our PMA clinical trial activities and plan to submit Module Five,
the final Module of the submission package, to the FDA when finalized.
In November 2004, after successful completion of verification and
validation testing in accordance with current quality systems regulations, and
with outside, independent physicians as readers, we released our first
production level version 1.0 ComfortScan system as an investigational device. In
late 2004, we sold and shipped 12 revenue-producing, production level
ComfortScan investigational systems to international distributors for conducting
local clinical studies. Subsequently, in January 2005, in connection with the
development of version 2.0 of our ComfortScan system, internal testing by
non-physician employees raised concerns about scan acceptance rates,
repeatability performance, and the overall diagnostic accuracy. With the
assistance of leading academic and clinical experts, we believe we have made
significant progress towards successfully resolving these concerns. We have
released our ComfortScan 2.0 acquisition software to our PMA sites, and we have
installed our beta ComfortView 2.0 reading software and continue testing and
reviewing results from a number of international clinical sites. We have
substantially resolved the acceptance rate issue and have made substantial
progress towards resolving the repeatability issue. Work continues to reduce
image artifact and to improve our image reconstruction algorithms. We believe
that the emergence and resolution of concerns such as these arise within the
ordinary course of medical device product development efforts and result in the
continued improvement of the medical device and its underlying technology. We do
not currently believe that the improvements we have made to our software and
hardware in connection with the development of ComfortScan system 2.0 will
require reinitiating our PMA clinical trial. If we had to restart our PMA, our
best estimate is that our PMA submission to the FDA may be delayed by up to
twelve months and possibly longer.
During the second half of 2005, we plan to commercially sell
investigative ComfortScan systems through our international distributors in
order to generate clinical results supporting the use of our ComfortScan system
as an adjunct to mammography. We plan to continue to seek distribution alliances
in international markets in order to obtain local regulatory approval and to
acquire patient scans for use in our research and development efforts. We intend
to place added emphasis internationally in developing clinical research sites,
and publish peer-reviewed clinical papers to gain physician awareness and
adoption if and when the ComfortScan system obtains local regulatory approval.
We have generated insignificant ComfortScan system revenues to date,
and therefore can draw no conclusions regarding the seasonality of our business.
The accompanying financial statements in Item 1 of this report have
been prepared assuming that we will continue as a going concern. We are
currently a development stage enterprise and, as such, our continued existence
is dependent upon our ability to resolve our liquidity problems, principally by
obtaining additional debt or equity financing. We have 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 we are unable to obtain debt or equity financing or
we are unable to obtain financing on terms and conditions that are acceptable to
us, we may have to cease or severely curtail our operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern. So
far, 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, but there can be no assurance that we will be able to continue to
do so. Moreover, there is no assurance that, if and when FDA premarket approval
is obtained, our ComfortScan system will achieve market acceptance or that we
will achieve a profitable level of operations. The accompanying financial
statements in Item 1 of this report do not include any adjustments that might be
necessary should we be unable to continue as a going concern.
12
APPLICATION OF CRITICAL ACCOUNTING POLICIES
We generally recognize revenue upon the shipment of our product to our
customers except for the initial maintenance component. That component is
deferred and is recognized on a straight-line basis over the initial maintenance
term.
We account for stock-based compensation in accordance with the fair
value recognition provisions of SFAS 123, Accounting for Stock-Based
Compensation. Under the fair value recognition provisions of SFAS 123,
stock-based compensation cost is measured at the grant date based on the value
of the award and is recognized as expense over the vesting period. Determining
the fair value of stock-based awards at the grant date requires judgment,
including estimating the expected term of stock options, the expected volatility
of our stock and expected dividends. In addition, judgment is also required in
estimating the amount of stock-based awards that are expected to be forfeited.
If actual results differ significantly from these estimates, stock-based
compensation expense and our results of operations could be materially impacted.
In order to achieve our goals, we incur research and development
expenses, general and administrative expenses, clinical expenses and sales and
marketing expenses.
Research and development expenses consist primarily of compensation,
benefits and related expenses for personnel engaged in research and development
activities, outside contract and consulting expenses, material and supplies, and
personnel costs to produce prototype units and develop manufacturing processes,
methods and templates.
General and administrative expenses consist of compensation, benefits
and related expenses for personnel engaged in general management, finance and
administrative positions. They also include expenses for financial advisory,
legal and accounting fees, medical and scientific advisory board expenses,
insurance and other expenses.
Clinical program expenses consist of compensation, benefits and related
expenses for personnel engaged in clinical-related activities. These expenses
also include costs of developmental studies, consultants, and that portion of
travel and general corporate expenses allocated to that department.
Sales and marketing expenses consist of compensation, benefits and
related expenses for personnel engaged in sales, marketing, and related business
development activities. These expenses also include consultants, printing of
promotional materials, trade shows and that portion of travel and general
corporate expenses allocated to that department.
We account for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). SFAS No. 109
requires the recognition of deferred tax assets and liabilities for both the
expected impact of differences between the financial statements and tax basis of
assets and liabilities, and for the expected future tax benefit to be derived
primarily from tax loss carry forwards. The Company has established a valuation
allowance related to the benefits of net operating losses for which utilization
in future periods is uncertain. We believe it is more likely than not that we
will not realize the benefits of these deductible differences in the near future
and therefore a full valuation allowance of approximately $6,500,000 is
provided.
As of June 30, 2005, we had approximately $16,270,000 of federal net
operating losses available to offset future taxable income, which if not
utilized will expire in 2024. No provision for income taxes has been recorded in
the financial statements as a result of continued losses. Any benefit for income
taxes as a result of utilization of net operating losses may be limited as a
result of change in control.
The preparation of financial statements are in conformity with
accounting principles generally accepted in the United States and requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates. As a development stage enterprise, we have not had to make
material estimates which have an effect on financial presentation.
13
OFF-BALANCE SHEET ARRANGEMENTS
Our office facilities are subject to a five-year operating lease
requiring monthly lease payments of approximately $20,000 per month. We have no
other material off-balance sheet arrangements or liabilities.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2005 AND 2004
Revenues for the quarter ended June 30, 2005 were approximately
$111,000. Limited sales began in the quarter ended December 31, 2004 and,
therefore, there were no sales to compare with for the prior year.
Cost of sales was approximately $170,000 for the three months ended
June 30, 2005 creating a gross loss of approximately $59,000 due to the limited
sales for the period. We maintain a manufacturing facility with a breakeven
point of approximately 15 devices per quarter. Production volumes of less than
15 units per quarter will continue to negatively affect gross profit margins. In
2005, we plan to produce approximately 40 devices in order to meet our PMA
clinical site and international sales requirements.
Research and development expenses increased approximately $3,000, or
1%, from $467,000 to approximately $470,000 for the three months ended June 30,
2005 compared to the prior year. Approximately $86,000 in production and
production facility costs were included in research and development in the 2004
period. We expended approximately $98,000 more for the three months ended June
30, 2005 compared to the prior year for additional personnel and consulting
services in connection with the continued development of the ComfortScan system.
In addition, we expended an additional $32,000 over the prior year's
corresponding period to obtain clinical scans solely for research and
development purposes, offset by a reduction in prototype development.
General and administrative expenses increased approximately $180,000,
or 35%, from $516,000 to approximately $696,000 for the three months ended June
30, 2005 compared to the prior year. This increase was primarily due to higher
payroll costs of approximately $107,000 primarily related to the increase
staffing and approximately $80,000 in additional legal costs compared to the
prior year.
Clinical program expenses increased approximately $492,000, to $640,000
for the three months ended June 30, 2005 compared to the prior year due to the
commencement of the PMA clinical trials. These additional costs included device
costs, site costs, personnel and consulting costs, and travel expenses.
Sales and marketing expenses of approximately $224,000 for the three
months ended June 30, 2005 reflect a decrease of approximately $283,000 compared
to the three months ended June 30, 2004. This was primarily due to the decreased
costs of approximately $293,000 in investor relations programs.
Interest expense for the three months ended June 30, 2005 and 2004 was
insignificant.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2005 AND 2004
Revenues for the six months ended June 30, 2005 were approximately
$173,000. Limited sales began in the quarter ended December 31, 2004 and,
therefore, there were no sales to compare with for the prior year.
Cost of sales was approximately $415,000 for the six months ended June
30, 2005, creating a gross loss of approximately $242,000 due to the limited
sales for the period. We maintain a manufacturing facility with a breakeven
point of approximately 15 devices per quarter. Production volumes of less than
15 units per quarter will continue to negatively affect gross profit margins. In
2005, we plan to produce approximately 40 devices in order to meet our PMA
clinical site and international sales requirements.
Research and development expenses decreased approximately $52,000, or
5%, from $970,000 to approximately $918,000 for the six months ended June 30,
2005 compared to the prior year. The following areas
14
created the primary variances during these comparative periods. Approximately
$168,000 in production and production facility costs that were within the
research and development group in the 2004 have been reassigned to
manufacturing. We expended approximately $118,000 more during six months ended
June 30, 2005 compared to the prior year for continued development of the
ComfortScan system. In addition, we expended an additional $109,000 over the
prior year's corresponding period to obtain clinical scans solely for research
and development purposes and reduced prototype development expenditures by
$146,000.
General and administrative expenses increased approximately $498,000,
or 50%, from $993,000 to approximately $1,491,000 for the six months ended June
30, 2005 compared to same period in the prior year. This increase was primarily
due to higher payroll costs, including performance bonuses to the Chief
Executive Officer and Chief Financial Officer, of approximately $173,000 and
other payroll costs of approximately $172,000 related to the increase in
staffing. In addition, the Company's legal costs increased approximately $88,000
over the same period last year.
Clinical program expenses increased approximately $749,000, to
$1,026,000 for the six months ended June 30, 2005 compared to the prior year due
to the commencement of the PMA clinical trials. These additional costs included
device costs, site costs, personnel and consulting costs, and travel expenses.
Sales and marketing expenses decreased approximately $229,000 for the
six months ended June 30, 2005 compared to the six months ended June 30, 2004.
This was primarily due to the decreased costs of approximately $386,000 in
investor relations programs and increases in personnel costs and marketing
programs of approximately $94,000.
Interest expense for the six months ended June 30, 2005 and 2004 was
insignificant.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception through private
issuances of equity and debt securities, generating approximately $38,500,000 in
gross proceeds to date, described chronologically below.
Prior to its merger into a publicly-traded company in December 2003,
DOBI Medical raised approximately $14.58 million in gross proceeds through the
sale of common stock, preferred stock and convertible debt, which were converted
into shares of the publicly-traded company DOBI Medical International, Inc. in
December 2003.
In December 2003, DOBI Medical Systems merged into a publicly-traded
company, Lions Gate Investment Limited, which became the surviving entity (in
January, 2004, Lions Gate changed its corporate name to DOBI Medical
International, Inc.), 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 three-year warrants to purchase
2,750,000 shares of common stock at an exercise price of $1.54 per share,
generating gross proceeds of $5,500,000.
In July 2004, we completed the private placement of approximately
$5.16 million in shares of our Series A preferred convertible stock and
associated warrants. The shares of Series A preferred stock sold in the private
placement carry a dividend of 8% per year and were initially convertible into
2,580,667 shares of common stock. We also issued four-year investor warrants to
purchase 2,580,667 shares of common stock at an exercise price of $3.00 per
share. In connection with the closing of the second tranche of the December 2003
private placement and the March 2005 private placement, the number of common
shares into which the Series A preferred stock is convertible was increased to
approximately 3,839,496 shares, reflecting anti-dilution adjustments.
At the closing of the performance milestone-based second tranche in
December 2004, we issued 6,000,002 shares of common stock at a price of $.50 per
share, generating gross proceeds of approximately $3,000,000. In that
connection, we issued three-year warrants to purchase 3,000,000 shares of common
stock at an exercise price of $1.54 per share.
15
On March 30, 2005, we completed a private placement of 21,000,000
shares of our common stock at a price of $.50 per share, and warrants to
purchase 10,500,000 shares of our common stock at an exercise price of $.75 for
the first 5,250,000 warrant shares and $1.25 for the next 5,250,000 warrant
shares, resulting in aggregate gross cash proceeds of $10,500,000 and
approximate net cash proceeds of $9,665,000. We believe that with these proceeds
we will meet our funding needs into 2006.
As of June 30, 2005, we had cash and cash equivalents of
approximately $7,678,000. Net cash used in operating activities during the six
months ended June 30, 2005 totaled approximately $4,360,000, and capital
expenditures totaled approximately $81,000. For the balance of 2005, we have no
significant capital expenditure commitments. We expect net cash used in
operating activities in the 2005 second half to be approximately $6,500,000,
which includes approximately $2,300,000 in PMA clinical trial project costs and
approximately $800,000 in costs associated with the continued development of a
full field version of our ComfortScan breast imaging system.
We are a development stage enterprise and, as such, our continued
existence is dependent upon our ability to resolve our liquidity problems,
principally by obtaining additional debt or equity financing. We have 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 we are unable to obtain debt or equity financing
or we are unable to obtain financing on terms and conditions that are acceptable
to us, we may have to cease or severely curtail our operations. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. So far, 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, but there can be no assurance that we will be able to continue to
do so.
16
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
Statements in this report contain information that includes or is based
upon certain "forward-looking statements" relating to our business. These
forward-looking statements represent management's current judgments and
assumptions as of the date of this report. Forward-looking statements can be
identified by the fact that they do not relate strictly to historical or current
facts, and are frequently accompanied by the use of such words as "may," "will,"
"anticipates," "plans," "believes," "expects," "projects," "intends," "seeks,"
and similar expressions. Such forward-looking statements involve known and
unknown risks, uncertainties, and other factors, including without limitation,
successful verification and validation for release of our ComfortScan 2.0
system; those relating to our ability to timely and successfully complete our
patient clinical trials; our ability to timely and successfully complete and
submit our premarket approval application to the FDA; the timely and final
approval by the FDA of our ComfortScan system as a adjunct to mammography, which
approval in the U.S. cannot be assured; the submission and final approval of our
ComfortScan system in various international markets, which approval cannot be
assured; the success and continued improvements in our product development and
research efforts; our ability to timely meet U.S. and foreign government laws
and industry standards; our ability to meet U.S. and foreign medical device
quality regulation standards required to maintain our CE Mark, and to maintain
our ISO, UL and FDA Export certifications; our ability to timely and
successfully ship and deliver our products into international markets; the
acceptance and use of our ComfortScan system by physicians, hospitals, imaging
clinics, and patients; and our ability to obtain adequate third party coverage,
coding and reimbursement from U.S. and foreign government and private payers.
We caution readers not to place undue reliance on forward-looking
statements, which speak only as of the date of this report. Any one of these or
other risks, uncertainties, other factors or any inaccurate judgments and
assumptions could cause actual results to be materially different from those
described herein or elsewhere by us. Certain of these risks, uncertainties, and
other factors are 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 the "Investment Considerations" and the "Cautionary
Factors That May Affect Future Results" as set forth in our 2004 Annual Report
on Form 10-KSB, as amended, and the "Risk Factors" in our Registration Statement
on Form SB-2 declared effective on May 11, 2005, all of 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 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.
17
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.
The 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 are reasonably likely to
materially affect the Company's internal controls over financial reporting
during the period covered by this Quarterly Report.
18
Part II Other Information
Item 1. Legal Proceedings
In the ordinary course of business, we may become a party to legal or
regulatory proceedings resulting from litigation, claims, or other disputes.
There can be no assurance that one or more future actions, if they occur, would
not have a material adverse effect on our business. As of the filing of this
report, except as follows, there is no material litigation, threatened or
pending, involving us.
On April 15, 2005, we filed suit in the Supreme Court of the State of
New York, County of New York, Index No. 601348/05, against Brian Vodicka, a
former member of our board of directors, alleging breach of contract and breach
of fiduciary duty and seeking specific performance and injunctive relief
preventing the disclosure and requiring the return of certain confidential and
proprietary documents. On July 11, 2005, the New York Supreme Court issued an
order preliminarily enjoining Brian Vodicka, a former director of DOBI Medical
International, Inc. (the "Company"), from using documents or information
provided to Mr. Vodicka by the Company wrongfully and in violation of the
confidentiality agreement between Mr. Vodicka and the Company.
On April 25, 2005, we received a copy of a Verified Petition to Take
Depositions before Suit from a Robin Chiswell allegedly filed in the Harris
County, TX District Court, apprising us that the petitioner wished to take
deposition of a custodian of our records to investigate whether there have been
possible violations of the Texas Securities Act. No action has been initiated by
petitioner in this proceeding. We believe that this proceeding is related to the
action described below. We will aggressively defend any proceedings and suits
brought against us.
On July 15, 2005, the Company was served with a complaint that has been
filed in the United States District Court for the Western District of Texas by a
group of shareholders, some of whom are associated with Mr. Vodicka, alleging,
among other things, that the Company and certain of its officers and directors,
as well as two of its previous advisors, violated federal and state securities
laws and seeking damages, interest, and attorneys' fees and costs. The Company
expects a related lawsuit to be served shortly by Mr. Vodicka containing similar
allegations and claims. The plaintiffs claim that the Company made material
omissions and/or misrepresentations and that this caused plaintiffs to privately
purchase shares of the Company's stock at allegedly artificially inflated
prices. The Company believes that the allegations are without merit and stem
from plaintiffs' dissatisfaction with the current market price of the Company's
stock. We intend to vigorously defend against plaintiffs' claims.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On June 30, 2005, the Company held its Annual Meeting of Shareholders.
The votes for the two proposals coming before the meeting were as follows:
1. Election of Directors: For Withheld
----------- --------
Brad Baker 34,052,951 20,450
19
Steve M. Barnett 34,052,051 21,350
David H. Clarke 34,053,051 20,350
William Li, MD 34,058,201 15,200
Robert B. Machinist 34,058,201 15,200
Phillip C. Thomas 34,060,201 13,200
Webb W. Turner 34,054,951 18,450
2. Ratify Appointment of Marcum & Kliegman, LLP as the Company's independent
auditors
For 33,983,064
Against 88,437
Abstain 1,900
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 Current Report on Form 8-K on May 3, 2005 regarding the
appointment of Steven Barnett to our Board of Directors and director
compensation.
2. We filed a Current Report on Form 8-K on June 15, 2005 regarding the
delay in releasing version 2.0 of our ComfortScan system.
3. We filed a Current Report on Form 8-K on July 15, 2005 regarding the
order of the New York Supreme Court preliminarily enjoining Brian Vodicka, a
former director of the Company, from using document or information provided to
Mr. Vodicka by the Company wrongfully and in violation of the confidentiality
agreement between Mr. Vodicka and the Company, and regarding a complaint filed
in the United States District Court for the Western District of Texas by a group
of shareholders, some of whom are associated with Mr. Vodicka, against the
Company and certain of its officers and directors and financial advisors
alleging among other things, violation of federal and certain state securities
laws.
20
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 12, 2005 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