ITEM 1. OUR BUSINESS
OVERVIEW Imaging Diagnostic Systems, Inc. ("IDSI") is a development stage medical technology company. Since its inception in December 1993, we have been engaged in the development and testing of a Computed Tomography Laser Breast Imaging System for detecting breast cancer (CT Laser Mammography or, "CTLM(R)"). We are currently in the process of commercializing the CTLM(R) in certain international markets.
Although the CTLM(R) system is a CT-like scanner, its energy source for imaging is a laser beam and not ionizing radiation such as is found in conventional x-ray mammography or CT scanners. The advantage of imaging without ionizing radiation may be significant in our markets. X-ray mammography is a well-established method of imaging the structures within the breast. Ultrasound is often used as an adjunct to mammography to help differentiate tumors and cysts. The CTLM(R) is being marketed as an adjunct to mammography and will not compete directly with X-ray mammography. CTLM(R) is, however, an emerging new modality offering the potential of molecular functional imaging, which can visualize the process of angiogenesis which may be used to distinguish between benign and malignant tissue.
We believe that the adjunctive use of CT laser breast imaging will improve early diagnosis, reduce diagnostic uncertainty, and decrease the number of biopsies performed on benign lesions. The CTLM technology is unique and patented. IDSI intends to develop their technologies into a family of related products. We believe these technologies and clinical benefits constitute substantial markets for our products well into the future.
We have a limited history of operations. Since our inception in December 1993, we have been engaged principally in the development of the CTLM(R). We currently have a limited source of operating revenue and have incurred substantial net operating losses since our inception. On June 30, 2004, we had an accumulated deficit of $77,247,281 after discounts and dividends on Preferred Stock. Such losses have resulted principally from costs associated with our operations. We expect operating losses will continue for at least the next 12 months as substantial costs and expenses continue due principally to the commercialization of the CTLM(R), sales and marketing in the international market, activities related to our regulatory processes, and advanced product development activities. Our ability to achieve profitability will depend in large part on obtaining regulatory approvals for our proposed products and to develop the capacity to manufacture and market our approved products either by ourselves or in collaboration with others. There can be no assurance as to if or when we will ever receive US regulatory approvals for the commercialization of the CTLM(R), or achieve profitability. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations".
BREAST CANCER According to the American Cancer Society ("ACS"), approximately one in eight women in the United States will develop breast cancer during her lifetime. Nationwide, it was estimated that in 2003 211,300 new cases of invasive breast cancer would occur among women in the United States, and approximately 40,200 women would die from this disease. Excluding skin cancers, the breast is the most frequent site of cancer among American women, accounting for 32% of incident cancers and 17% of cancer deaths. It is the second leading cause of cancer death for American women following lung cancer, which is the leading cause of cancer death among women. The annual cost of breast cancer
management in the United States alone is approximately $25 billion.
There is widespread agreement that screening for breast cancer, when combined with appropriate follow-up, will reduce mortality from the disease. According to the National Cancer Institute (NCI), the five-year survival rate decreases from 96% to 78% after the cancer has spread to the lymph nodes, and to 18% after it has spread to other organs such as the lung, liver or brain. A major problem with current detection methods is that studies have shown that mammography does not detect, 15%-20% of breast cancers detected by physical exam alone.
Breast cancer screening is generally recommended as a routine part of preventive healthcare for women over the age of 20 (approximately 90 million in the United States). For these women, the American Cancer Society (ACS) has published guidelines for breast cancer screening including: (i) monthly breast self-examinations for all women over the age of 20; (ii) a baseline mammogram for women by the age of 40; (iii) a mammogram every one to two years for women between the ages of 40 and 49; and (iv) an annual mammogram for women age 50 or older. As a result of family medical histories and other factors, certain women are at "high risk" of developing breast cancer during their lifetimes. For these women, physicians often recommend close monitoring, particularly if an abnormality posing increased risk factors has been detected.
Each year, approximately eight million women in the United States require diagnostic testing for breast cancer due to a physical symptom, such as a palpable lesion, pain or nipple discharge, discovered through self or physical examination (approximately seven million) or a non-palpable lesion detected by screening x-ray mammography (approximately one million). Once a physician has identified a suspicious lesion in a woman's breast, the physician may recommend further diagnostic procedures, including a diagnostic x-ray mammography, an ultrasound study, a magnetic resonance imaging procedure, or a minimally invasive procedure such as fine needle aspiration or large core needle biopsy. In each case, the potential benefits of additional diagnostic testing must be balanced against the costs, risks and discomfort to the patient associated with undergoing the additional procedures
Due in part to the limitations in the ability of the currently available modalities to identify malignant lesions, a large number of patients with suspicious lesions proceed to surgical biopsy, an invasive and expensive procedure. Approximately 1.3 million surgical biopsies are performed each year in the United States, of which approximately 80% result in the surgical removal of benign breast tissue. The average cost of a surgical biopsy ranges from approximately $1,000 to $5,000 per procedure. Thus, biopsies of benign breast tissue cost the U.S. health care system approximately $2.45 billion annually. In addition, biopsies result in pain, scarring, and anxiety to patients. Patients who are referred to biopsy usually are required to schedule the procedure in advance and generally must wait up to 48 hours for their biopsy results.
SCREENING AND DIAGNOSTIC MODALITIES
Mammography - -----------
Mammography is an x-ray imaging modality commonly used for both routine breast cancer screening and as a diagnostic tool. A mammogram produces either films or electronic images of the internal structure of the breast and surrounding tissues. In a screening mammogram, radiologists seek to detect suspicious lesions, while in a diagnostic mammogram radiologist seek to characterize suspicious lesions. Mammograms require subjective interpretation by a trained radiologist.
A certified technologist performs the x-ray procedure under strict guidance from the Congressional Mammography Quality Standards Act (MQSA). MQSA was enacted to improve x-ray breast cancer detection studies by tightly regulating machine specifications, quality control procedures, technologist training and certification, and other variables. Still, mammography is viewed as an `imperfect' breast cancer detection tool and is often supplemented with follow-up studies including more x-rays at later dates, closer physical examination of the patient, adjunctive ultrasound exams, and, when available, breast MRI or Scintimammography, and biopsy.
Because x-ray mammography exposes the patient to radiation, the American Cancer Society recommends that mammograms be limited to once per year. In addition,
x-ray mammography is considered to be less effective for women under the age of 50 who have dense breast tissue which may compromise the breast x-ray study. Various mechanical means have been implemented to squeeze or compress the breast to pull tissue away from the chest wall and flatten the tissue so that x-rays may penetrate the tissue more uniformly. These techniques introduce pain and discomfort to many mammogram patients. Most mammography exams include 2 views of each breast which equates to 4 compressions per patient.
The cost of a diagnostic mammogram is approximately $55 to $200 per procedure (an average of $113) and requires the use of x-ray equipment ranging in cost from $75,000 to $225,000 and perhaps ultrasound equipment ranging from $60,000 to $200,000.
Digital Mammography - -------------------
Digital mammography, also referred to as "full-field digital" mammography, is the latest form of breast x-ray examination. These systems eliminate the use of x-ray film and record images directly on electronic panels. The digital images can then be manipulated and examined on an electronic viewing station. However, the limitations of conventional mammography still exist in digital mammography. Digital mammography units sell for an average price of $430,000 and procedures range from $250 to $500.
Magnetic Resonance Imaging - --------------------------
Magnetic resonance imaging ("MRI") produces images using a magnetic field and radiofrequency (RF) gradients under computer control to produce proton density images. When applied to breast exams, MRI produces images with 10 to 100 times more contrast resolution than an x-ray. MRI has proven effective in imaging breasts with prosthetic implants, detecting recurrent cancer, evaluating the response to chemotherapy and serving as an additional imaging option when mammography or ultrasound fails to provide sufficient imaging information.
MRI offers the advantage over x-ray that it can visualize fine-details in breast tissue but also detect blood flow and angiogenesis associated with malignancies. The disadvantages are that MRI systems are not widely available in the global market and the costs of using conventional MRI scanners for breast exams are sometimes prohibitive. MRI systems sell for approximately $1,200,000 and procedures range from $1,000 to $2,000.
Ultrasound - ----------
Ultrasound systems can image breast tissue by `sonar' techniques. Sound transducers are placed directly on breast tissue coupled with an acoustic gel substance. Trained sonographers locate suspicious areas by moving the transducer and observing the sonar image on an electronic viewing station. In some countries physicians perform the study.
Ultrasound images are localized to specific areas of suspicion usually detected by a previous mammogram. If mammographic results suggest a lesion, ultrasound may differentiate a solid from a cystic mass. The cost for a breast ultrasound is approximately $125 to $500 per procedure (an average of $235) and requires the use of capital equipment ranging in cost from approximately $60,000 to $200,000.
CTLM(R) - -------
Although the CTLM(R) system is a CT-like scanner, its energy source for imaging is a laser diode beam and not ionizing radiation such as is found in conventional x-ray mammography or CT scanners. The advantage of imaging without ionizing radiation may be significant in our markets. X-ray mammography is a well-established method of imaging the structures within the breast. Ultrasound is often used as an adjunct to help differentiate tumors and cysts. The CTLM(R) is being marketed as an adjunct to mammography and will not compete directly with X-ray mammography. CTLM(R) is, however, an emerging new modality offering the potential of molecular functional imaging, which can visualize the process
of angiogenesis which may be used to distinguish between benign and malignant tissue.
We believe that the adjunctive use of CT laser breast imaging will improve early diagnosis, reduce diagnostic uncertainty, and decrease the number of biopsies performed on benign lesions.
A breast exam utilizing the CTLM(R) is non-invasive and can be performed by a medical technician. A patient lies face down on the scanning table with one breast hanging into a specially designed scanning chamber. Once the entire breast is scanned the other breast may be positioned in the chamber for scanning. Both breasts can be scanned in approximately 24 minutes. The CTLM(R) is a sophisticated electro-mechanical scanner under microprocessor and computer control. Results are available immediately in digital format for comparison to mammography results, consultation, transmission to multi-modality reading stations, or archiving.
Images and study results present as multiple-slice data sets which can be viewed slice-by-slice or as a 3D volume with image manipulation tools. Images are usually viewed in gray and green color shades, since color displays are common with other molecular imaging modalities such as nuclear medicine, PET, fMRI, and in radiation therapy imaging.
FLUORESCENCE IMAGING - --------------------
Fluorescence and molecular imaging techniques are of growing importance to the drug development industry and for disease detection. Certain molecules exhibit the phenomenon of emitting light after being illuminated by light of an appropriate wavelength, e.g., from a laser. The light that is emitted is referred to as "fluorescent" light. The compounds that produce fluorescence are commonly referred to as fluorescent dyes. A number of pharmaceutical companies are developing fluorescent compounds for possible use in breast cancer detection.
The CTLM(R) system laser diodes stimulate fluorescent light emissions when used in conjunction with these compounds. When an appropriate fluorescent compound has been introduced into the blood, areas with an abundance of blood vessels, i.e., the angiogenesis associated with a tumor, will retain a higher concentration of the fluorescent compound. As the CTLM(R) scanner illuminates these areas, fluorescent radiation is emitted and detected by the system's detectors. Reconstructed CTLM(R) images then locate and quantify the fluorescent area within the perimeter of the scanned breast.
Several CTLM(R)'s were retrofitted with laser diodes tuned to specific wavelengths of light which matched the compounds. Optical filters were added to limit the spectral response to required wavelengths. Experiments were conducted by placing fluorescent dyes inside a breast equivalent phantom and scanning it with CTLM(R). The ability to excite the dye, detect the location of the fluorescence within the simulated breast, and create an image has not, to our knowledge, been accomplished before. On September 14, 1999, a patent was issued to IDSI titled "Laser Imaging Apparatus Using Biomedical Markers that Bind to Cancer Cells" as Patent No 5,952,664.
The FDA has approved the use of radioactive compounds to identify breast cancer locations. The use of non-radioactive fluorescent dyes for breast imaging, we believe, has the potential to play a significant role in breast cancer detection. We intend to work with contrast agent manufacturers to explore and develop this emerging technique. The FDA must first approve the use of non-radioactive florescent dyes before they can be used commercially in the United States. Any such approval could take several years.
In March 2002, we signed an agreement with Schering AG to evaluate the advantages of new fluorescence dyes for the potential use of detecting breast cancer. Our CTLM(R) systems are being used in conjunction with Schering AG's dyes during their clinical trials. The collaboration is assisting in determining the potential benefits of using both technologies adjunctively to enhance capabilities to detect breast cancer. We have installed two CTLM(R) systems in Germany for Schering AG's clinical trials: one at Charite's Robert-Rossle Clinic in Berlin and the other at the University of Muenster. In August 2003, Schering AG announced that their innovative method for breast cancer detection showed positive results in a clinical Phase 1 study. In September 2004, we installed a
third CTLM(R) system for Schering AG in Charite Hospital in Berlin, Germany as part of their Phase 1 clinical studies of fluorescent imaging compounds.
LASER IMAGER FOR LAB ANIMALS - ----------------------------
In November 2003, we announced the signing of a collaborative agreement with the Rumbaugh-Goodwin Institute for Cancer Research, Inc. for the development of optical imaging products for the laboratory market. With this agreement, IDSI plans to address a new market, targeting pharmaceutical developers and researchers who monitor cancer growth and who use optical imaging in their clinical research. The first model of the Laser Imager for Lab Animals "LILA(TM)" product line is a miniature optical helical CT scanner in a third-generation configuration for imaging green fluorescent protein, derived from the DNA of jellyfish. The scanner is a work-in-progress and we expect to have a working prototype in the first half of 2005. It is believed the LILA(TM) will provide a useful tool for scientists to monitor cancer growth, metastasis and the effect of new therapies in the treatment of cancer.
GOVERNMENT REGULATION
United States Regulation - ------------------------ The United States Food and Drug Administration (the "FDA") has regulatory authority over the testing, manufacturing, and sale of the CTLM(R) in the United States. Because the CTLM(R) is a medical device, it is subject to the relevant provisions of the Federal Food, Drug and Cosmetic Act (FD&C Act") and its implementing regulations. Pursuant to the FD&C Act, the FDA regulates, among other things, the manufacturing, labeling, distribution, and promotion of the CTLM(R) in the United States. The FD&C Act requires that a medical device must (unless exempted by regulation) be cleared or approved by the FDA before being commercially distributed in the United States. The FD&C Act also requires that manufacturers of medical devices, among other things, comply with specific labeling requirements and manufacture devices in accordance with Current Good Manufacturing Practices ("CGMPs"), which require that companies manufacture their products and maintain related documentation in a conformed manner with respect to manufacturing, testing, and quality control activities. The FDA inspects medical device manufacturers and distributors, and has broad authority to order recalls of medical devices, to seize non-complying medical devices, to enjoin and/or impose civil penalties, and to criminally prosecute violators.
The FDA classifies medical devices intended for human use into three classes: Class I; Class II; and Class III. In general, Class I devices are products for which the FDA can determine that their safety and effectiveness can be reasonably assured by general controls under the FD&C Act relating to such matters as adulteration, misbranding, registration, notification, records and reports, and QSRs. Class II devices are products for which the FDA determines that these general controls are insufficient to provide reasonable assurance of safety and effectiveness, and that require special controls such as the promulgation of performance standards, post-market surveillance, patient registries, or such other actions as the FDA deems necessary. Class III devices are devices for which the FDA has insufficient information to conclude that either general controls or special controls would be sufficient to assure safety and effectiveness, and which are life-supporting, life-sustaining, of substantial importance in preventing impairment of human health (e.g., a diagnostic device to detect a life-threatening illness), or present a potentially unreasonable risk of illness or injury.
The FD&C Act further provides that, unless exempted by regulation, medical devices may not be commercially distributed in the United States unless they have been approved or cleared by the FDA. Manufacturers of Class III devices must apply to the FDA for pre-marketing approval ("PMA") before marketing can begin. PMA applications must demonstrate, among other matters, that the medical device is safe and effective. A PMA application is typically a complex submission, usually including the results of clinical studies, and preparing an application is a detailed and time-consuming process.
Once a PMA application has been filed, the FDA has by regulation 180 days to review it; however, the review time may be extended by the FDA asking for additional information or clarification of information already provided in the submission. In addition, the FDA will inspect the manufacturing facility to ensure compliance with the FDA's quality system regulations commonly referred to as QSRs prior to approval of a PMA. The PMA process is a lengthy and expensive
one, and there can be no assurance that a PMA application will be approved within 180 days.
We have engaged the services of U.S. regulatory consultants who specialize in FDA matters and to assist us in the final preparation and submission of our PMA application. We filed our PMA application on April 29, 2003 and requested expedited review. We are in the process of amending our PMA application to address deficiencies outlined in a letter from the FDA in August 2003. See Item 1. "Business-Regulatory and Clinical Status, United States/FDA". If we are unable to obtain prompt FDA approval, it will have a material adverse effect on our business and financial condition and would result in postponement of the commercialization of the CTLM(R). See "Regulatory and Clinical Status".
Any products manufactured or distributed by us pursuant to a PMA are or will be subject to pervasive and continuing regulation by the FDA. The FDA Act also requires that our products be manufactured in registered establishments and in accordance with QSR regulations. Labeling, advertising and promotional activities are subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. The export of medical devices is also subject to regulation in certain instances. In addition, the marketing and use of our products may be regulated by various state agencies.
All lasers manufactured for us are subject to the Radiation Control for Health and Safety Act administered by the Center for Devices and Radiological Health of the FDA. The law requires laser manufacturers to file new product and annual reports and to maintain quality control, product testing, and sales records, and to comply with labeling and certification requirements. Various warning labels must be affixed to the laser, depending on the class for the product under the performance standard.
Both the FDA and the individual states may inspect the manufacturers of our products on a routine basis for compliance with current QSR regulations and other requirements.
In addition to the foregoing, we are subject to numerous federal, state, and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, and fire hazard control. There can be no assurance that we will not be required to incur significant costs to comply with such laws and regulations and that such compliance will not have a material adverse effect upon our ability to conduct business. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations-Cautionary Statements - Extensive Government Regulation, No Assurance of Regulatory Approvals".
Foreign Regulation - ------------------ Sales of medical devices outside of the United States are subject to foreign regulatory requirements that vary widely from country to country. The time required to obtain approval for sale in foreign countries may be longer or shorter than that required for FDA clearance or approval, and the requirements may differ. The laws of certain European and Asian countries may permit us to begin marketing the CTLM(R) in Europe and Asia before marketing would be permitted in the United States. In order to sell our products within the European Economic Area ("EEA"), companies are required to achieve compliance with requirements of the Medical Devices Directive ("MDD") and affix a "CE" marking on their products to attest such compliance. In Europe, we have obtained the certifications necessary to enable the CE mark to be affixed to our products in order to conduct sales in member countries of the EEA, subject to compliance with additional regulations imposed by individual countries. In obtaining these certifications, we utilized the services of UL International (UK). Ltd. as our notified body ("NB"). An NB is a regulatory body from the private sector that is responsible for the review and approval of the documentation submitted by us in order to enable the CE mark to be affixed to products. Certain standards and steps were complied with in order to obtain the CE mark in order to distribute the CTLM(R) in the EEA. These standards include risk assessment, quality assurance and labeling. The listed standards are for the EEA market only and additional document requirements and standards exist for other markets.
In October 2000, we contracted Underwriters Laboratories Inc. ("UL") to perform safety testing and assist us in achieving regulatory certifications necessary to begin selling the CTLM(R) system outside the United States. We also chose UL as our Notified Body to certify our compliance with EN2900/4600/ISO9000 quality assurance standards. The certifications and CE marking signify that the product
and its design, manufacturing and quality systems comply with international standards. The UL safety testing is also necessary in order for the CTLM(R) system to be sold in the United States once we receive FDA approval. In January 2001 we received notice from UL of completion for worldwide safety classification of our CTLM(R) system.
In November 2000, we were recommended for CE marking, subject to review by UL's Notified Body. In January 2001, we received regulatory approval from UL to apply the CE marking to our CTLM(R) system. CE marking provides us the opportunity to market the CTLM(R) within the European Union, one of the largest markets in the world. In addition, CE marking permits medical device product sales in many other markets worldwide.
In May 2001, we received ISO 9002 certification demonstrating our commitment for quality and our ability to provide consistency, reliability, value and exceptional customer service. ISO 9002 certification is significant in facilitating the global marketing of our CTLM(R) system by conforming to an effective quality management system recognized as the gold standard around the world.
On September 25, 2001, we received a Certificate of Exportability from the FDA for the CTLM(R). The FDA requires unapproved products that are subject to PMA requirements to have prior FDA Certificate of Exportability in order to be exported outside of the United States. On September 17, 2003, we received a renewal of our Certificate of Exportability, which will be valid for two years.
In October 2003 we announced that we received a Certificate of Approval that our Quality Management System has been inspected and upgraded to the following quality assurance standards: ISO 9001:2000, ISO, 3485:2003, EN 46001:1996 and Annex II have been granted. As of the date of this report, almost 100 countries, including the United States, the United Kingdom, Germany, Australia, Canada, Japan and France have adopted ISO Standards as the primary means for evaluating the quality of manufacturing products.
Regulatory and Clinical Status - ------------------------------
In order to sell the CTLM(R) commercially in the United States, we must obtain marketing clearance from the Food and Drug Administration. A PreMarket Approval application must be supported by extensive data, including pre-clinical and clinical trial data, as well as extensive literature to prove the safety and effectiveness of the device. Under the Food, Drug, and Cosmetic Act, the FDA has 180 days to review a PMA application, although in certain cases the FDA may increase that time period through requests for additional information or clarification of existing information.
We followed the guidelines of the "Standardized Shell for Modular Submission" for the FDA approval process. The FDA assigned a Modular Shell Control Number and a general description of items required for the submission. Below is a table indicating the status of our FDA Modular Submission:
Module # Description of Module Submission Date Filed Date Accepted - -------- --------------------------------- ---------- -------------- Module 1 General Information & Safety 9/27/2000 1/7/2002 Module 2 Software 4/17/2001 6/12/2001 Module 3 Non-Pivotal Clinical 5/1/2001 8/13/2001 Module 4 Manufacturing & Quality Systems 1/2/2001 9/25/2001 PMA PMA Submission 4/29/2003 Pending
On April 29, 2003, we announced that we submitted our PMA with the U.S. Food and Drug Administration (FDA) seeking marketing approval for our Computed Tomography Laser Mammography System, the CTLM(R).
On June 18, 2003, we announced that we received notification from the Food and Drug Administration that an initial review of our PMA had been conducted and was found to be sufficiently complete to permit a substantive review and, therefore,
suitable for filing. An in-depth evaluation of the safety and effectiveness of the device will be conducted to determine the final approval of the PMA application.
On August 27, 2003, we announced in an 8-K filing that we received a letter from the FDA dated August 22, 2003. The FDA letter outlined the deficiencies in our PMA application, which must be resolved before the FDA's review could be completed. The FDA stated that until these deficiencies are resolved, the PMA application is not approvable in its current form. We are continuing to work closely with the FDA and our new regulatory consultants to address the deficiencies and to submit an amendment to our PMA application.
On February 2, 2004, we announced in an 8-K filing that we received a warning letter from the FDA specifically regarding the bio-monitoring section of an inspection conducted August 13th through August 18th, 2003 at our facility. We submitted our response to this letter to the FDA on February 9, 2004.
On February 10, 2004, we announced in an 8-K filing that we had submitted our response to the warning letter and on March 29, 2004, we announced in an 8-K filing that our responses to the FDA's warning letter regarding the bio-monitoring inspection addressed each of the issues and no further response to the FDA is required at this time.
On March 25, 2004, we announced in an 8-K filing that the FDA agreed with our request for an extension of time to respond to the FDA's August 22, 2003 letter regarding our pre-market approval application. We are seeking PreMarket approval from the FDA for this intended use: "The Imaging Diagnostics Computed Tomography Laser Mammography (CTLM(R)) scanner is intended for use as an adjunct to mammography in patients who have equivocal mammographic findings within ACR BI-RADS categories 3 or 4. In particular, it is not intended for use in cases with clear mammographic or non-mammographic indications for biopsy. This device provides the radiologist with additional information to guide a biopsy recommendation". We are continuing to work closely with the FDA and our new regulatory consultants to address the deficiencies and to submit an amendment to our PMA application.
Patients are continuing to be scanned at our various collaboration sites, including the University of Vienna, Allgemeines Hospital, the Humboldt University of Berlin, Charite Hospital and at Policlinico Paolo Giancone Hospital in Palermo, Italy. IDSI expects to remain involved in the PMA supplement process if we receive approval as the CTLM(R) technology platform will evolve to expand the range of clinical utility. The Company intends to pursue a rigorous clinical program to discover and commercialize the envisioned applications.
Product Quality and Safety
Product Safety Evaluation -We believe that one of the most important aspects of product safety is the design of the product. If safety standards are not considered through the design of the product, the product safety evaluation may require that the mechanical and electrical parts of the product be re-designed. Throughout the CTLM(R) design process, we have made every effort to confirm that it complies with all domestic and international safety standards. New requirements, or new interpretations of existing requirements, may affect the CTLM(R). In January 2001 we received notice of completion for worldwide safety classification of our CTLM(R) system from Underwriters Laboratories Inc. (UL).
Quality Assurance -We have implemented and intend to maintain a full quality system at our corporate offices. Our Quality Assurance Manager ("QAM") has completed the process of implementation in accordance with the required standards. After implementation of the quality system, auditors from Underwriters Laboratories completed an assessment of our quality systems. UL found us in compliance with ISO 9002 and in May 2001 issued a certificate signifying such compliance for the manufacture and servicing of laser-based diagnostic mammography imaging systems.
DOMESTIC SALES AND MARKETING
There are approximately 9,600 Mammography Quality Standards Act (MQSA) centers certified in the U.S. IDSI will begin marketing the CTLM(R) to the centers following FDA approval. There are 600 MQSA centers located in 49 of the larger cities in the U.S., which are believed to have patient volume in excess of 40 patients per day. These centers will be IDSI's initial marketing targets.
Since the field of Molecular Optical Imaging is relatively new to most radiologists and mammographers, the extent that, and rate at which, the CTLM(R) achieves market acceptance and penetration will depend on many variables. These include, but are not limited to, the establishment and demonstration in the medical community of the clinical safety, efficacy, and cost-effectiveness of the CTLM(R), and the advantage of the CTLM(R) over existing technology and cancer detection methods. We believe that the clinical data being collected and assessed under our PMA process will have a significant impact on the ultimate market size for our device. We have focused our efforts on establishing a presence at major Breast Imaging Conferences that are held each year. Failure of our products to gain market acceptance would have a material adverse effect on our business, financial condition, and results of operations. There can be no assurance that physicians or the medical community in general will accept and/or utilize the CTLM(R).
In order to market any products we may develop, we will have to develop a marketing and sales force with technical expertise and distribution capability. There can be no assurance that we will be able to establish sales and distribution capabilities or that we will be successful in gaining market acceptance for any products we may develop.
International Sales - -------------------
We appointed a new Vice President, International Sales, in September 2004 and we intend to pursue international sales in those countries where permitted prior to commencing commercial sales in the United States. Sales in the United States cannot occur unless and until we receive pre-market approval from the FDA. The laws of certain countries permit us to begin marketing the CTLM(R) subject to certain homologations before marketing would be permitted in the United States. See "Government Regulation". In preparation for launching international sales of the CTLM(R) we have installed systems at University of Vienna, Allgemeines Hospital and at Charite Hospital, Humboldt-University Berlin as demonstrators. We have arranged special terms on a CTLM(R) System to our distributor, Biomedical International S.n.c. of Rome, Italy, which was installed in June 2004 at Policlinico Paolo Giancone Hospital in Palermo, Sicily.
Until we receive pre-market approval from the FDA to market the CTLM(R) in the United States, as to which there can be no assurance, our revenues, if any, will be derived from sales to international distributors. A significant portion of our revenues, therefore, may be subject to the risks associated with international sales, including economical and political instability, shipping delays, fluctuation of foreign currency exchange rates, foreign regulatory requirements and various trade restrictions, all of which could have a significant impact on our ability to deliver products on a timely basis. Future imposition of, or significant increases in the level of customs, duties, export quotas or other trade restrictions could have a material adverse effect on our business, financial condition and results of operations. The regulation of medical devices continues to develop and there can be no assurance that new laws or regulations will not have an adverse effect on us.
We filed our application with Health Canada for a new medical device license to sell the CTLM(R) in Canada, in July 2001 shortly after our May 2001 filing of the last module as part of our PMA modular submission process. Since July 2001, we have supplemented our Canadian application from time to time with the information requested by Health Canada. We filed a new application with Health Canada in June 2003. On June 18, 2003 we received notification from the Medical Device Bureau of Health Canada that our application had been accepted for review. On November 14, 2003 we announced that we received notification from the Medical Device Bureau of Health Canada that our application for a "New Medical Device" license was approved. The license was issued in accordance with the Medical Device Regulations, Section 36. Furthermore, we possess the CMD/CSA ISO
13485-1998 certification, which is an additional regulatory requirement that is evidence of compliance to the quality system of the medical device.
In November 2003, we announced that we received a deposit for the purchase of a CTLM(R) System through our distributor, Veccsa S.A., who intended to sell it to The Institutos Medicos de Alta Tecnologia, a comprehensive diagnostic imaging center in Buenos Aires, Argentina pending product registration from the Ministry of Health of Argentina. We received product registration in June 2004 but due to the delay in receiving the registration, the customer requested a re-negotiation of the terms of the sale with the distributor. We and Veccsa S.A are in the process of negotiating new terms and conditions for the sale, which may or may not be acceptable to the distributor's customer.
In November 2003, we announced receipt of a purchase order with a guaranteed letter of credit for three CTLM(R) Systems from our Chinese distributor, China Far East International Trading Corp (CFETC). Headquartered in Beijing, CFETC was established in 1985 and has 23 satellite offices located throughout China as well as four international branches located in the United States, Belgium, Southeast Asia and Hong Kong. CFETC works in conjunction with the Chinese Government's Ministry of Foreign Trade and Economic Co-Operation. In February 2004, we shipped four CTLM(R) Systems to China in accordance with an irrevocable confirmed letter of credit. The fourth system will be used for The State Food and Drug Administration (SFDA) testing and subsequent training and clinical research in a hospital.
On May 4, 2004, we announced shipment of a CTLM(R) System to Dubai as a result of a purchase order from Axis Medical LLC from February 2004. Full payment was received and the revenue from the sale was recorded in the fourth quarter.
INTERNATIONAL DISTRIBUTORS
In May 2003, based on our commitment to develop international sales, we engaged the services of an international sales and marketing consultant. The consultant had experience in the international marketing of medical imaging devices, establishing worldwide distribution networks, launching new products and creating training and development programs. In March 2004, we terminated our agreement with the consultant. In order to achieve our international marketing goals, management decided to seek a full-time international sales Vice President who joined IDSI in September 2004.
We intend to add new distributors to cover international regions. Where performance fails to meet agreed upon targets, distributors may be terminated. We expect such changes to occur in the normal course of introducing a new product to global markets.
THIRD-PARTY REIMBURSEMENT; HEALTH CARE REFORM
In the United States, suppliers of health care products and services are greatly affected by Medicare, Medicaid, and other government insurance programs, as well as by private insurance reimbursement programs. Third-party payers (Medicare, Medicaid, private health insurance companies and other organizations) may affect the pricing or relative attractiveness of our products by regulating the level of reimbursement provided by such payers to the physicians and clinics utilizing the CTLM(R) or by refusing reimbursement. If examinations utilizing our products were not reimbursed under these programs, our ability to sell our products may be materially and/or adversely affected. There can be no assurance that third-party payers will provide reimbursement for use of our products. In international markets, reimbursement by private third-party medical insurance providers, including governmental insurers and independent providers, varies from country to country. In certain countries, our ability to achieve significant market penetration may depend upon the availability of third-party governmental reimbursement. Revenues and profitability of medical device companies may be affected by the continuing efforts of governmental and third party payers to contain or reduce the cost of health care through various means.
PRODUCT LIABILITY Our business exposes us to potential product liability risks, which are inherent in the testing, manufacturing and marketing of cancer detection products. While the CTLM(R) is being developed as an adjunct to other diagnostic techniques, there can be no assurance that we will not be subjected to future claims and potential liability. At present we carry $3,000,000 in product liability insurance to cover both clinical sites and sales.
COMPETITION
The medical device industry generally, and the diagnostic imaging segments in particular, are characterized by rapidly evolving technology and intense competition. The IDSI approach of employing continuous wave laser optical technology in a CT-like device to produce 3D images is unique and patented, and the concept of imaging angiogenesis in the breast to differentiate between benign and malignant tissue is well accepted.
Although the CTLM(R) system is a CT-like scanner, its energy source for imaging is a laser beam and not ionizing radiation such as is found in conventional x-ray mammography or CT scanners. The advantage of imaging without ionizing radiation may be significant in our markets. X-ray mammography is a well-established method of imaging the structures within the breast. Ultrasound is often used as an adjunct to help differentiate tumors and cysts. The CTLM(R) is being marketed as an adjunct to mammography and will not compete directly with X-ray mammography. CTLM(R) is, however, a method of molecular functional imaging, which can visualize the process of angiogenesis which may be used to distinguish between benign and malignant tissue. Unlike X-ray or ultrasound, optical molecular imaging is a revolutionary functional imaging modality. In this respect, CTLM(R) may compete with magnetic resonance imaging (MRI) in breast imaging because both CTLM and MRI have the capacity to visualize function at the molecular level.
The CTLM(R) Laser Breast System differs from any other optical imaging device in several ways:
1. CTLM(R) employs advanced continuous wave laser signals versus transillumination or time domain approaches which we tested earlier and subsequently abandoned.
2. CTLM(R) does not compress or even touch the breast--it is painless.
3. CTLM(R) is truly 3D and presents the breast study as a volume on a viewing workstation vs. planar or 2D approaches that superimpose many layers of information upon themselves. CT and MRI are examples of 3D imagers like CTLM(R).
Two companies, to our knowledge, are targeting the breast optical imaging markets. Advanced Research Technologies, Inc. (ART) (TSX:ARA) is developing a non-3D imager which does not utilize our patented continuous wave technology and in which the breast must be immersed in a gel. ART has signed distribution agreements with GE Medical should a product become available.
DOBI Medical International, Inc. (DBMI:OB) is developing an optical imager based upon compression and transillumination of the breast, which produces a 2D `map' of relative oxygenation. IDSI views this adaptation of older technology as unlikely to become a threat to our CT laser 3D approach.
Neither ART nor DOBI have FDA approval. To IDSI's knowledge, no other company has a functioning optical imaging device designed for use as an adjunct to mammography. CTLM(R) Breast Imaging Systems are in clinical settings in Italy, Germany, Austria, Peoples Republic of China, and the United Arab Emirates. In vivo human studies of fluorescent compounds are also underway at three Schering AG locations.
Methods for the detection of cancer are subject to rapid technological innovation and there can be no assurance that future technical changes will not render our CTLM(R) obsolete. There can be no assurance that the development of new types of diagnostic medical equipment or technology will not have a material adverse effect on our business, financial condition, and results of operations.
PATENTS
The patent for the CTLM(R) was issued in December 1997 under Patent Number 5,692,511 (the "Patent"). The Patent has a total of 4 independent claims and 24 subordinate claims. The independent claims serve to provide an overall outline of the disclosure of the invention. The subordinate claims provide additional information to identify pertinent details of the invention as they relate to the respective specific independent claim. We own the rights to the Patent for its 17-year life pursuant to an exclusive patent licensing agreement with the late Richard Grable, who invented the CTLM(R) and served as our Chief Executive Officer and whose estate has owned the Patent since his death in August 2001. See "Patent Licensing Agreement" and "Certain Transactions." As of the date of this report, we own 17 patents and have nine additional United States patents pending with regard to optical tomography, many of which are based on the original CTLM(R) technology. We also have eight International patents and have 28 International patents pending.
In September 1999, we were issued a patent for a laser imaging apparatus using biomedical markers that bind to cancer cells. This patent was issued under Patent Number 5,952,664 and is owned by the Company. The biomedical marker we are currently testing is a fluorescent marker. We plan to continue studying other biomedical markers in conjunction with major pharmaceutical companies as a potential advanced diagnostic feature to be used with our CTLM(R) system. The CTLM(R) in combination with the fluorescent feature has the potential to be used with photodynamic therapy (PDT) to aid in the treatment of breast cancer.
In February 2000, we were issued a patent for: "Device for Determining the Perimeter of the Surface of an Object Being Scanned and for Limiting Reflection from the Object Surface". The patent was issued under Patent Number 6,029,077 and is owned by the Company. This particular patent covers the technique for determining the perimeter of the breast, which simplifies the algorithms necessary to produce the image.
In March 2000, we were issued a patent for: "Apparatus and Method for Determining the Perimeter of the Surface of an Object Being Scanned". The patent was issued under Patent Number 6,044,288, and is owned by the Company. This additional patent covers an optical technique to determine the perimeter of a scanned breast. The Company's patent 6,029,077 described in the previous paragraph covers a different technique to perform the same measurement. Together, these two patents protect the practical techniques that can be used to acquire this information.
In August 2000, we were issued a patent for: "Detector Array for Use in a Laser Imaging Apparatus". The patent was issued under Patent Number 6,100,520 and is owned by the Company. This patent describes the several different variations that can be used while scanning the breast without any contact between the breast and the optical components. Unlike the conventional method, this unique feature allows the CTLM(R) to scan the breast without the use of breast compression.
In October 2000, we were issued a patent for: "Method of Reconstructing an Image Being Scanned". The patent was issued under Patent Number 6,130,958 and is owned by the Company. This patent describes the algorithms used to reconstruct images from data acquired from CTLM(R) scans.
In December 2000, we were issued a patent for: "Detector Array With Variable Gain Amplifiers For Use In A Laser Imaging Apparatus". The patent was issued under Patent Number 6,150,649 and is owned by the Company. This patent describes the proprietary electronics used in the CTLM(R) detector array.
In February 2001, Mr. Grable was issued a patent for "Diagnostic Tomographic Laser Imaging Apparatus". This patent was issued for his proprietary scanning bed, a unique feature of the CTLM(R), and was issued as U.S. Patent Number 6,195,580. The patent allows for a fixed horizontal platform including a top surface with an opening through which the female breast is vertically pendent using a laser beam for the detection of breast abnormalities. The patent should prevent others in the industry from utilizing a scanning bed with a laser breast imaging system that requires the patient to lie in the prone position. See "Patent Licensing Agreement".
In April 2001, we were issued a patent for: "Detector Array for Use in a Laser Imaging Apparatus". The patent was issued under Patent No. 6,211,512 and is
owned by the Company. The patent allows for several different optics variations while scanning the breast without contact between the breast and the optical components. This feature allows the CTLM(R) to scan the breast without the use of breast compression.
In January 2002, we announced that we were issued a patent for "Detector Array With Variable Gain Amplifiers for Use in a Laser Imaging Apparatus," as U.S. Patent No. 6,331,700. This patent protects some of the non-obvious, but essential, design aspects of an optical CT scanner. This patent addresses the solution to the problem of accommodating a huge dynamic range of light intensities emitted from the breast.
In February 2002, we were issued a patent for "Time-Resolved Breast Imaging Device," as U.S. Patent No. 6,339,216. This patent protects the key electronics of a time-resolved optical CT scanner. It addresses the solution to the problem of simultaneously accommodating a large dynamic range of light intensities emitted from the breast while achieving the necessary temporal resolution.
In May 2003, we were issued a patent for "Medical Optical Imaging Scanner Using Multiple Wavelength Simultaneous Data Acquisition for Breast Imaging," as U.S. Patent No. 6,571,116.
In January 2004, we announced that we were issued a patent for "PHANTOM FOR OPTICAL AND MAGNETIC RESONANCE IMAGING QUALITY CONTROL," as U.S. Patent No. 6,675,035. This invention relates to phantoms for use in optical and magnetic resonance imaging that emulates the optical characteristics of breast tissue, that resembles the breast in shape and size, as an integral component of a quality assurance protocol to verify the performance of the medical imaging apparatus being evaluated.
In January 2004, we announced that we were issued a patent for "METHOD FOR IMPROVING THE ACCURACY OF DATA OBTAINED IN A LASER IMAGING APPARATUS," as U.S. Patent No. 6,681,130. This method improves the accuracy of data obtained using a diagnostic medical imaging apparatus that employs a near-infrared laser and array of detectors with variable gain amplifiers that can accommodate the wide dynamic range of signals available from the detectors.
In February 2004, we announced that we were issued a patent for "LASER IMAGING APPARATUS USING BIOMEDICAL MARKERS THAT BIND TO CANCER CELLS" as U.S. Patent No. 6,693,287. This patent protects the proprietary method of collecting data while using "biomedical" markers that bind to cancer cells during a CT laser scan to provide a positive identification of the cancer area, to selectively activate the Photo Dynamic Therapy (PDT) drug to destroy the cancer.
In April 2004, we announced that we were granted a Canadian Patent for "LASER IMAGING APPARATUS USING BIOMEDICAL MARKERS THAT BIND TO CANCER CELLS" as Canadian Patent No. 2,373,299. This patent broadly covers the optical imaging of fluorescent compounds.
In May 2004, we announced that we were issued a patent for "MEDICAL OPTICAL IMAGING SCANNER USING MULTIPLE WAVELENGTH SIMULTANEOUS DATA ACQUISITIONS FOR BREAST IMAGING" as Patent No. 6,738,658. This patent protects the concept of differential reconstruction: reconstructing the difference in data before and after an injection of a contrast agent, such as a fluorescent compound.
In June 2004, we announced that we were granted a Chinese Patent for "DIAGNOSTIC TOMOGRAPHIC LASER IMAGING APPARATUS" as Chinese Patent No. ZL95197940X. The patent was issued in the name of Richard J. Grable for a period of 20 years from the date of filing until July 10, 2015 and is exclusively licensed to Imaging Diagnostic Systems, Inc. See "Patent Licensing Agreement".
In August 2004, we announced that we were granted a European Patent for "APPARATUS FOR DETERMINING THE PERIMETER OF THE SURFACE OF AN OBJECT BEING SCANNED" as European Patent No. 1003419. This is the European equivalent of U.S. Patent No. 6,044,288, which protects a key element in the optical technique used to determine the perimeter of an object being scanned.
We intend to file for patents on products, including the CTLM(R), for which we believe the cost of obtaining a patent is economically reasonable in relation to the expected protection obtained. There can be no assurances that any patent that we apply for will be issued, or that any patents issued will protect our technology. If the patents we license or obtain are infringed upon, or if we are required to defend any patent infringement cases brought against us, that will require substantial capital, the expenditure of which we might not be able to afford.
PATENT LICENSING AGREEMENT IDSI was formed in December 1993 for the sole purpose of developing and commercializing Richard Grable's invention, a CT laser breast-imaging device (the "Mammoscan(TM)"). The Mammoscan(TM) had already been exhibited at the Radiology Society of North America ("RSNA") 1989 session and held the promise of a new, emerging technology for the detection of breast abnormalities without compression or ionizing X-rays. This device used a laser diode for its energy source and a 386 processor that was extremely slow. Once the technology became available to speed up the processing, IDSI's founders (Richard Grable, Linda Grable and Allan Schwartz) believed that this device would be a major breakthrough in the early detection of breast cancer.
Mr. Grable invented the CTLM(R) by making major improvements in the Mammoscan(TM) technology. In June 1998, we finalized an exclusive patent license agreement with Mr. Grable, which encompasses the technology for the CTLM(R). The term of the license is for the life of the Patent (17 years) and any renewals, subject to termination, under specific conditions. As consideration for this license, we issued to Mr. Grable 7,000,000 shares of common stock. In addition, we agreed to pay Mr. Grable a royalty based upon a percentage, ranging from 6% to 10%, of the net selling price (the dollar amount earned from our sale, both international and domestic, before taxes minus the cost of the goods sold and commissions or discounts paid) of all the products and goods in which the patent is used. Mr. Grable agreed that these royalty provisions will not apply to any sales and deliveries of CTLM(R) systems made by IDSI prior to receipt of the PMA for the CTLM(R). In addition, following issuance of the PMA, IDSI and Mr. Grable agreed that Mr. Grable would be paid guaranteed minimum royalties of at least $250,000 per year based on the sales of the products and goods in which the CTLM(R) patent is used. Due to Mr. Grable's death in August 2001, his interest in the patent license agreement passed to his estate. Mr. Grable's widow, Linda Grable, is the principal beneficiary of Mr. Grable's estate.
The following table sets forth the Patent licensing royalty structure:
ANNUAL GROSS SALES PERCENTAGE OF NET SELLING PRICE ----------------- ------------------------------- $0 to $1,999,999 10%
$2,000,000 to $3,999,999 9%
$4,000,000 to $6,999,999 8%
$7,000,000 to $9,999,99 7%
Greater than $10,000,000 6%
EMPLOYEES As of the date of this Report, we have 45 full-time employees, including our four executive officers. Thirty-eight percent of our employees (17) are employed in the areas of scientific, clinical and product research and development. As of September 2003, we had 43 full-time employees, of whom 32 were employed in the areas of scientific, clinical, and product research and development. The increase and reallocation of human resources is due to our focus on commercializing the CTLM(R). Our ability to provide our services is dependent upon our recruiting, hiring and retaining qualified technical personnel. To date, we have been able to recruit and retain sufficient qualified personnel. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good.
Due to the specialized scientific nature of our business, we are highly dependent upon our ability to attract and retain qualified scientific, technical and managerial personnel. Therefore, we have entered into employment agreements with certain of our executive officers and key employees. The loss of the services of existing personnel as well as the failure to recruit key scientific, technical and managerial personnel in a timely manner would be detrimental to our research and development programs and to our business. Our anticipated growth and expansion into areas and activities requiring additional expertise, such as marketing, will require the addition of new management personnel. Competition for qualified personnel is intense and there can be no assurance that we will be able to continue to attract and retain qualified personnel necessary for the development of our business.
ITEM 2.
ITEM 2. DESCRIPTION OF OUR PROPERTY
Our headquarters facility is located at 6531 N.W. 18th Court, Plantation, Florida. The facilities are owned by us and comprise a 24,000-sq. ft. building with ample space to expand, located on a 5-acre landscaped tract. We believe that our facility is adequate for our current and reasonably foreseeable future needs. We intend to assemble the CTLM(R) at our facility from hardware components that will be made by vendors to our specifications.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On May 1, 2000, we filed a civil lawsuit against DOE 1 a/k/a DEIGHTON in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida, Case No. CACE 00-006881 (04) for defamation and tortious interference with our contracts and business relationships.
The civil lawsuit filed against Doe 1 a/k/a DEIGHTON sought permanent relief which would restrain Doe 1 and his/her agents, etc. from making any statement or engaging in any conduct to intentionally interfere with any contractual/business relationship by and between IDSI, Richard Grable and Linda Grable and our customers, shareholders and/or investors, and for damages, attorney fees, costs and interest in excess of $15,000. A Summons and Verified Complaint was served on the Doe 1 and a Response was filed by Diane M. Strait, a former employee of the company. The defendant, Ms. Strait admitted to being the author, with her husband, Robert Leonard of over 1,000 postings on the Raging Bull message boards regarding us. Our motion for a temporary injunction was denied on November 3, 2000. On December 18, 2000, we served an amended complaint, which added Mr. Leonard as a defendant in the lawsuit. Diane Strait filed a counterclaim for defamation against us. We filed a motion to dismiss this counterclaim for failure to state cause of action. Our motion to dismiss was granted and the defendants were given leave to amend their counterclaim. Defendant, Diane Strait, filed a second amended counterclaim in January 2002. We filed a motion to dismiss Ms. Strait's second amended counterclaim, which was granted on April 2, 2002, with leave to file a third amended counterclaim within 30 days. Ms. Strait filed a third amended counterclaim on May 1, 2002, for defamation, abuse of privilege, negligence, negligent supervision and negligent retention. We filed an answer to the counterclaim.
The Judge issued an Order referring the case with regard to us, to Non-Binding Arbitration, pursuant to Florida Statutes Section 44.103. The parties appeared before an Arbitrator on August 13, August 29, and September 8, 2003, and in a decision dated September 29, 2003, the Arbitrator found on all counts set forth in Plaintiffs' First Amended Complaint for Injunctive Relief and Damages, on the evidence presented, Imaging Diagnostic Systems, Inc., Richard Grable and Linda
Grable's request for injunctive relief was denied and held that Defendants Diane Strait and Robert Leonard shall have and recover costs from the plaintiffs that may properly be taxed as determined by the Court. On all counts set forth in Defendant/Counterplaintiff Diane Strait's Third Amended Counterclaim, the Arbitrator found that Defendant/Counterplaintiff Diane Strait's request for damages be denied. It was also ordered that we shall have and recover costs from the Plaintiff that may properly be taxed as determined by the court.
On October 15, 2003 the parties including Linda Grable individually and on behalf of the Estate of Richard Grable filed with the Court an Agreement and Release dated September 30, 2003, which states that all parties are in agreement to dismissing the case brought by us against Diane Strait and Robert Leonard and the case brought by Diane Strait against us. Both parties agreed to waive costs, and general releases were exchanged. Both cases are now closed.
We were served with a lawsuit filed in the United States District Court, Eastern District of New York on February 16, 2001 by Anthony Giambrone for alleged breach of a consulting agreement. Mr. Giambrone sent notice of exercise of all of his warrants to purchase 500,000 shares of our common stock at a price of $.93 per share on February 10, 2000, as provided in the consulting agreement. On March 17, 2000, he tendered only $100,000, representing partial payment for the warrants and received the 107,527 shares corresponding to the payment. No further payments were made and the warrants expired on July 26, 2000. Mr. Giambrone was seeking 392,473 unrestricted shares of common stock or alternatively, damages of at least $430,645. A Settlement Agreement dated as of
March 22, 2002, was entered into between Mr. Giambrone and us. On March 28, 2002, we issued 350,000 restricted shares of common stock to Mr. Giambrone in settlement of the lawsuit. The shares were issued in an exempt transaction pursuant to section 4(2) of the Securities Act of 1933, as amended. The suit was dismissed by stipulation on April 23, 2002. In addition we agreed that, if the market price of our common stock on March 28, 2003, was less than $.75 per share, then we would issue to him additional shares of common stock equal to the quotient of (a) 262,500 minus the product of (i) 350,000 and (ii) the market price, divided by (b) the market price. On March 28, 2003, the market price of our stock was $.17, so we issued to him 1,194,118 additional shares bearing a restricted legend. Under the settlement agreement, we were obligated to register the shares issued to Mr. Giambrone, subject to certain conditions. The shares were subsequently registered on July 23, 2003.
We were served with a lawsuit filed in the United States District Court, Southern District of New York on March 14, 2001 by Ladenburg Thalmann & Co. Inc. for alleged breach of an investment-banking contract. We believed that the complaint was without merit as Ladenburg Thalmann & Co. terminated the contract and we believed that we complied with all of our obligations under the contract. We filed a motion to dismiss on May 25, 2001, which was granted in part and denied in part on December 10, 2001. We filed an answer to the Plaintiff's complaint on April 16, 2002, denying the material allegations of the complaint.
On or about September 18, 2003, we entered into a settlement agreement to settle this action. Under this settlement we agreed to issue 401,785 shares of our common stock to Ladenburg in exchange for Ladenburg's dismissal with prejudice of its claims against us. As of the date of the Settlement Agreement the value of the stock was approximately $450,000. We and Ladenburg jointly moved for Court approval of the settlement as fair to Ladenburg so that the delivery of the shares to and the resale of the shares in the United States by Ladenburg may be exempt from registration under Section 3(a)(10) of the Securities Act of 1933. In an order dated October 24, 2003, the Judge ordered and adjudged that the settlement was approved as fair to the party to whom the shares will be issued within the meaning of Section 3(a)(10) and the case was closed. The shares were issued on November 12, 2003.
We are not aware of any other material legal proceedings, pending or contemplated, to which we are, or would be a party to, or of which any of our property is, or would be, the subject.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 24, 2004 we held an annual meeting of stockholders at our corporate offices at 6531 NW 18th Court, Plantation, Florida for the following purposes:
1. To elect six directors to serve a one-year term expiring at the Fiscal Year 2005 Annual Meeting of Stockholders or until his/her successor is duly elected and qualified;
2. To consider and act upon a proposal to adopt the Company's 2004 Non-Statutory Stock Option Plan;
3. To ratify the Company's Board of Directors' appointment of Margolies, Fink and Wichrowski, CPA's as independent auditors for the Company for the fiscal year ending June 30, 2004.
For proposal no. 1, the stockholders elected six incumbent directors with the voting as follows:
Linda B. Grable FOR 161,458,971 AGAINST 356,033 ABSTAIN 1,896,586 Allan L. Schwartz FOR 161,777,341 AGAINST 37,663 ABSTAIN 1,896,586 Sherman Lazrus FOR 161,468,461 AGAINST 346,543 ABSTAIN 1,896,586 Patrick J. Gorman FOR 161,146,798 AGAINST 668,206 ABSTAIN 1,896,586 Edward Rolquin FOR 161,364,561 AGAINST 450,443 ABSTAIN 1,896,586 Jay S. Bendis FOR 161,493,998 AGAINST 321,006 ABSTAIN 1,896,586
For proposal no. 2, the stockholders voted to adopt the Company's 2004 Non-Statutory Stock Option Plan: The affirmative vote of a majority of the outstanding shares of the Common Stock present in persons or represented by Proxy at the Annual Meeting and entitled to vote were required to approve the adoption of the Stock Option Plan.
FOR 35,168,753 AGAINST 6,580,936 ABSTAIN 820,887
For proposal no. 3, the stockholders voted to ratify the Board of Directors' action of its appointment of Margolies, Fink and Wichrowski, CPA's as independent auditors for the Company for the fiscal year ending June 30, 2004 with the following votes:
FOR 162,287,050 AGAINST 757,047 ABSTAIN 667,493
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the NASDAQ's OTC Bulletin Board market under the symbol IMDS. There has been trading in our common stock since September 20, 1994. The following table sets forth, for each of the fiscal periods indicated, the high and low bid prices for the common stock, as reported on the OTC Bulletin Board. These per share quotations reflect inter-dealer prices in the over-the-counter market without real mark-up, markdown, or commissions and may not necessarily represent actual transactions.
QUARTER ENDING HIGH BID LOW BID
FISCAL YEAR 2003 First Quarter $0.43 $0.20 Second Quarter $0.27 $0.19 Third Quarter $0.33 $0.17 Fourth Quarter $0.85 $0.17
FISCAL YEAR 2004 First Quarter $1.80 $0.81 Second Quarter $1.25 $0.84 Third Quarter $1.15 $0.57 Fourth Quarter $0.79 $0.39
FISCAL YEAR 2005 First Quarter (through September 16, 2004) $0.41 $0.27
On September 16, 2004, the closing trade price of the common stock as reported on the OTC Bulletin Board was $.37. As of such date, there were approximately 2,481 registered holders of record of our common stock.
SALE OF UNREGISTERED SECURITIES
Private Placement of Preferred Stock
We have had to rely on the private placement of preferred and common stock to obtain working capital. In deciding to issue preferred stock pursuant to the private placements, we took into account the number of common shares authorized and outstanding, the market price of the common stock at the time of each preferred sale and the number of common shares the preferred stock would have been convertible into at the time of the sale. At the time of each private placement of preferred stock there were enough shares, based on the price of our common stock at the time of the sale of the preferred to satisfy the preferred conversion requirements. Although our board of directors tried to negotiate a floor on the conversion price of each series of preferred stock prior to sale, it was unable to do so. In order to obtain working capital we will continue to seek capital through debt or equity financing which may include the issuance of convertible preferred stock whose rights and preferences are superior to those of the common stock holders. We have endeavored to negotiate the best transaction possible taking into account the impact on our shareholders, dilution, loss of voting power and the possibility of a change-in-control; however, in order to satisfy our working capital needs, we have been and may continue to be forced to issue convertible securities and debentures with no limitations on conversion. In addition, the dividends on the preferred stock affect the net losses applicable to shareholders. There are also applicable adjustments as a result of the calculation of the deemed preferred stock dividends because we have entered into contracts providing for discounts on the preferred stock when it is converted.
In the event that we issue preferred stock without a limit on the number of shares that can be issued upon conversion and the price of our common stock decreases, the percentage of shares outstanding that will be held by preferred holders upon conversion will increase accordingly. The lower the market price the greater the number of shares to be issued to the preferred holders, upon conversion, thus increasing the potential profits to the holders when the price per share increases and the holders sell the common shares. In addition, the sale of a substantial amount of preferred stock to relatively few holders could cause a possible change-in-control. In the event of a voluntary or involuntary liquidation while the preferred stock is outstanding, the holders will be entitled to a preference in distribution of our property available for distribution equal to $10,000 per share. As of the date of this report there are no outstanding shares of preferred stock.
Series K Preferred
See "Financing/Equity Line of Credit".
Private Placement of Common Stock
On January 26, 2000, we entered into a consulting agreement with Anthony Giambrone, an unaffiliated third party, which provided payment for services rendered to us over a six-month period with warrants exercisable into 500,000 shares of common stock at a price of $0.93 per share. The term of the warrants ran concurrent with the term of the consulting agreement. On the date of the execution of the agreement, the bid-ask range of our common stock was $1.81 - $2.00. The agreement provided that Mr. Giambrone, an investment banker with 30 years of experience in the financial sector, including fund management and public relations, would assist us in implementing our short and long range business plans, including implementing a marketing program, monitoring our hired advertising and public relations firms, advising us on our stockholders relations program and raising the awareness of institutional investors regarding our products and company. Mr. Giambrone sent notice of exercise for all of his warrants on February 10, 2000 as provided in the consulting agreement. On March 17, 2000 he only tendered partial payment of $100,000 and received 107,527 common shares of stock applicable to such payment. No further payments were made. The shares paid for were promptly issued and registered. The consulting agreement and the unpaid warrants expired on July 26, 2000; however, Mr. Giambrone has sued us for the issuance of 392,473 unrestricted shares of common stock or alternatively, for the alleged $430,645 value of the expired warrants. The suit was settled. See "Legal Proceedings".
ISSUANCE OF STOCK FOR SERVICES
We, from time to time, have issued and may continue to issue stock for services rendered by consultants, all of whom have been unaffiliated.
Since we have generated no significant revenues to date, our ability to obtain and retain consultants may be dependent on our ability to issue stock for services. Since July 1, 1996, we have issued an aggregate of 2,306,500 shares of common stock according to registration statements on Form S-8. The aggregate fair market value of the shares when issued was $2,437,151. The issuance of large amounts of our common stock, sometimes at prices well below market price, for services rendered or to be rendered and the subsequent sale of these shares may further depress the price of our common stock and dilute the holdings of our shareholders. In addition, because of the possible dilution to existing shareholders, the issuance of substantial additional shares may cause a change-in-control.
FINANCING/EQUITY LINE OF CREDIT
We will require substantial additional funds for working capital, including operating expenses, clinical testing, regulatory processes and manufacturing and marketing programs and our continuing product development programs. Our capital requirements will depend on numerous factors, including the progress of our product development programs, results of pre-clinical and clinical testing, the time and cost involved in obtaining regulatory approvals, the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments and changes in our existing research, licensing and other relationships and the terms of any new collaborative, licensing and other arrangements that we may establish. Moreover, our fixed commitments, including salaries and fees for current employees and consultants, and other contractual agreements are likely to increase as additional agreements are entered into and additional personnel are retained.
On July 17, 2000 we sold to Charlton in a private placement 400 shares of our Series K convertible preferred stock for $4 million. We issued an additional 95 Series K shares to Charlton for $950,000 on November 7, 2000. The total of $4,950,000 was designed to serve as bridge financing pending draws on the Charlton private equity line (described below). We paid Spinneret Financial Systems Ltd. ("Spinneret"), an independent financial consulting firm unaffiliated with us and, according to Spinneret and Charlton, unaffiliated with Charlton, $200,000 as a consulting fee for the first tranche of Series K shares and five Series K shares as a consulting fee for the second tranche. We were
obligated to pay a 9% dividend on the Series K convertible preferred in cash or common stock at our option semi-annually on June 30 and December 31 of each calendar year or upon the conversion date. Under the Series K Certificate of Designations, we had the option of redeeming the remaining convertible preferred (except for the Spinneret shares) solely through the use of the private equity line by paying cash with the following redemption premiums.
Days from closing 0-120 121-180 180
Redemption price As a % of Principal 105% 107.5% 110%
In the event that, for whatever reason, we did not redeem the convertible preferred according to the above schedule, the holder had the right to convert the convertible preferred into common stock at a per share price equal to the lower of $1.29 (115% of the closing bid price on the day prior to the initial issuance) or 87.5% of the average of the three lowest closing bid prices (which need not be consecutive) of the 20 consecutive trading days prior to the conversion date. In November 2000, Charlton converted 25 Series K shares plus accrued dividends into 197,349 restricted shares of common stock. In January 2001, Charlton converted $3,950,000 (395 shares) of Series K convertible preferred stock into an aggregate of 4,935,412 common shares and Spinneret converted $50,000 (5 shares) of Series K convertible preferred stock into an aggregate of 63,996 common shares. On December 12, 2000, we registered 5,720,605 common shares underlying the 500 shares of Series K convertible preferred stock. The shares registered included only 58,140 shares underlying the Spinneret Series K preferred so we had to issue 5,856 common shares with a restrictive legend. Those shares were registered in February 2001. Of the remaining 100 shares of Series K preferred stock, 50 shares were converted into 664,659 shares of common stock in April 2001 and 50 shares were redeemed for $550,000 using proceeds from the Charlton private equity line in April 2001.
On August 17, 2000, we entered into a $25 million private equity credit agreement with Charlton. On November 29, 2000, prior to any draws under the initial private equity agreement, we terminated that agreement and the initial agreement was replaced by an Amended Private Equity Credit Agreement dated November 30, 2000 (the "Private Equity Agreement"). The Private Equity Agreement committed Charlton to purchase up to $25 million of common stock subject to certain conditions pursuant to Regulation D over the course of a commitment period extending 12 months after the effective date of a registration statement covering the Private Equity Agreement common shares. The timing and amounts of the purchase by the investor were at our sole discretion. We were required to draw down a minimum of $10 million from the credit line over the initial 12-month period. If the minimum amount was not sold, Charlton was entitled to receive a payment equal to 9% of the difference between the $10,000,000 and the amount drawn by us (the "Shortfall Payment"). The purchase price of the shares of common stock was set at 91% of the market price. The market price, as defined in the agreement, was the average of the three lowest closing bid prices of the common stock over the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche. If, subsequent to effectiveness, the registration statement was suspended at any time, we would be obligated to pay liquidated damages of 1.5% of the cost of all common stock then held by the investor for each 15-day period or portion thereof, beginning on the date of the suspension. If such suspension was cured within the first 15 days, the damages would not apply. The only fee associated with the private equity financing was a 5% consulting fee payable to Spinneret. In September 2001 Spinneret proposed to lower the consulting fee to 4% provided that we pay their consulting fee in advance. We reached an agreement and paid them $250,000 out of proceeds from a put. On December 13, 2000 we registered 7,089,685 shares of common stock underlying $10 million out of the $25 million available in the Private Equity Agreement. Because of the decline in our stock price, we did not have sufficient common shares registered to fulfill our obligation under the Private Equity Agreement. To satisfy our obligation to provide registered common shares to cover the $10 million minimum, we registered 9,875,000 additional shares on October 23, 2001. We paid Spinneret an additional $186,235 in consulting fees relating to the Private Equity Agreement from January to September 2001.
The New Private Equity Agreement - --------------------------------
Because the average bid price of our common stock fell below the contractually required $.50 during the 15-day period prior to puts and/or put closings from
time to time in the period beginning November 15, 2001, Charlton orally agreed to waive the minimum price requirement. Further, because we drew only $5,825,000 of the $10,000,000 minimum by December 13, 2001, Charlton orally agreed to extend the commitment period and thereby waived its right to receive a Shortfall Payment based on our failure to timely draw the $10,000,000 minimum. On May 7, 2002, we and Charlton entered into a written amendment to the Private Equity Agreement as of November 15, 2001, which (i) reduced the minimum stock price requirement from $.50 to $.25, (ii) reduced the minimum average daily trading volume to $50,000, and (iii) extended the commitment period to December 13, 2003. Between November 15, 2001, and April 24, 2002, Charlton accepted two puts totaling $625,000 and 1,410,240 shares despite the relevant average bid price having fallen below $.50. From December 14, 2001, to April 24, 2002, Charlton accepted eight puts totaling $2,600,000 and 5,897,827 shares. Charlton has not accepted any puts under the prior Private Equity Agreement since April 24, 2002.
Charlton agreed to the waivers sought by us in connection with the prior Private Equity Agreement because of our good working relationship and the mutually beneficial nature of the relationship. During the initial one-year commitment period, we drew only $5,825,000 of the $10,000,000 minimum because we did not require all of the funds and wanted to avoid unnecessary dilution of our shareholders and unnecessary sales of our stock, which could have depressed its market price. Charlton has never rejected any of our puts. From January 25, 2001 to April 9, 2002 we drew $8,425,000 and issued 15,015,479 shares to Charlton under the prior Private Equity Agreement.
On May 15, 2002, we and Charlton entered into a new private equity agreement, which replaced the prior Private Equity Agreement (the "New Private Equity Agreement"). The terms of the New Private Equity Agreement are substantially equivalent to the terms of the prior agreement, except that (i) the commitment period is three years from the effective date of a registration statement covering the New Private Equity Agreement shares, (ii) the minimum amount we must draw through the end of the commitment period is $2,500,000, (iii) the minimum stock price requirement has been reduced to $.20, and (iv) the minimum average trading volume has been reduced to $40,000. The conditions to our ability to draw under the Charlton private equity line, as described above, may materially limit the draws available to us.
Since we did not yet have an effective registration statement covering shares to be sold pursuant to the New Private Equity Agreement, in May 2002, Charlton loaned us $350,000 in order to partially cover our short-term working capital needs. This loan was evidenced by a promissory note dated May 29, 2002, due August 1, 2002, and bearing interest at a rate of 2% per month. The loan was secured by a pledge of 1,000,000 shares of our common stock, 500,000 each by our Chief Executive Officer, Linda Grable, and by our Executive Vice President and Chief Financial Officer, Allan Schwartz, and was personally guaranteed by Ms. Grable and Mr. Schwartz. Charlton orally agreed to extend the due date of the note, and we have paid it back in full with proceeds of puts under the New Private Equity Agreement between July and December 2002.
On May 17, 2002 we filed a registration statement on Form S-2 to register 10,000,000 shares underlying the New Private Equity Agreement, which was declared effective by the SEC on July 24, 2002. We intend to make sales under the New Private Equity Agreement from time to time in order to raise working capital on an "as needed" basis. We may sell additional shares pursuant to the New Private Equity Agreement through subsequent registration statement(s), provided that our stock price remains above that agreement's minimum. As of the date of this report under the New Private Equity Agreement we have drawn down $2,076,000 and issued 9,989,319 shares of common stock.
The Third Private Equity Credit Agreement - -----------------------------------------
On October 29, 2002, we and Charlton entered into a new "Third Private Equity Credit Agreement" with which we intend to supplement the prior New Private Equity Agreement. The terms of the Third Private Equity Credit Agreement are substantially equivalent to the terms of the prior agreement, except that (i) the commitment period is three years from the effective date of a registration statement covering the Third Private Equity Credit Agreement shares, (ii) the maximum commitment is $15,000,000, (iii) the minimum amount we must draw through the end of the commitment period is $2,500,000, (iv) the minimum stock price requirement has been reduced to $.10, and (v) the minimum average trading volume
in dollars has been reduced to $20,000. The conditions to our ability to draw under this private equity line, as described above, may materially limit the draws available to us.
We intend to make sales under the new Third Private Equity Credit Agreement from time to time in order to raise working capital on an "as needed" basis. Based on our current assessment of our financing needs, we intend to draw in excess of the $2,500,000 minimum but substantially less than the $15,000,000 maximum under the new Third Private Equity Credit Agreement; however, if those needs change we may draw up to the $15,000,000 maximum. As of the date of this report under the Third Private Equity Credit Agreement we have drawn down $7,805,000 and issued 21,756,177 shares of common stock.
The Fourth Private Equity Credit Agreement - ------------------------------------------
On January 9, 2004, we and Charlton entered into a new "Fourth Private Equity Credit Agreement" which replaces our prior private equity agreements. The terms of the Fourth Private Equity Credit Agreement are more favorable to us than the terms of the prior Third Private Equity Credit Agreement. The new, more favorable terms are: (i) the put option price is 93% of the three lowest closing bid prices in the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche, while the prior Third Private Equity Credit Agreement provided for 91%, ii) the commitment period is two years from the effective date of a registration statement covering the Fourth Private Equity Credit Agreement shares, while the prior Third Private Equity Credit Agreement was for three years, (iii) the maximum commitment is $15,000,000, (iv) the minimum amount we must draw through the end of the commitment period is $1,000,000, while the prior Third Private Equity Credit Agreement minimum amount was $2,500,000, (v) the minimum stock price requirement is now controlled by us as we have the option of setting a floor price for each put transaction (the previous minimum stock price in the Third Private Equity Credit Agreement was fixed at $.10), (vi) there are no fees associated with the Fourth Private Equity Credit Agreement; the prior private equity agreements required the payment of a 5% consulting fee, which was subsequently lowered to 4% by mutual agreement in September 2001, and (vii) the elimination of the requirement of a minimum average daily trading volume in dollars. The previous trading volume requirement in the Third Private Equity Credit Agreement was $20,000. The conditions to our ability to draw under this private equity line, as described above, may materially limit the draws available to us.
On January 30, 2004, we filed a registration statement with respect to 5,000,000 shares of our common stock to be issued pursuant to the Fourth Private Equity Credit Agreement. This registration statement became effective March 4, 2004, at which time the Third Private Equity Credit Agreement was terminated and we began drawing under the Fourth Private Equity Credit Agreement. On June 21, 2004 we filed a registration statement with respect to 9,800,000 shares of our common stock to be issued pursuant to the Fourth Private Equity Credit Agreement. This registration statement became effective June 29, 2004. We intend to make sales under the new Fourth Private Equity Credit Agreement from time to time in order to raise working capital on an "as needed" basis. Based on our current assessment of our financing needs, we intend to draw in excess of the $1,000,000 minimum but substantially less than the $15,000,000 maximum under the new Fourth Private Equity Credit Agreement; however, if those needs change we may draw up to the $15,000,000 maximum. As of the date of this report, under the Fourth Private Equity Credit Agreement we have drawn down $3,100,000 and issued 8,732,735 shares of common stock.
As of the date of this report, since January 2001, we have drawn an aggregate of $23,606,000 in gross proceeds from our equity credit lines with Charlton and have issued 58,044,633 shares as a result of those draws.
There can be no assurance that adequate financing will be available when needed, or if available, will be available on acceptable terms. Insufficient funds may prevent us from implementing our business plan or may require us to delay, scale back, or eliminate certain of our research and product development programs or to license to third parties rights to commercialize products or technologies that we would otherwise seek to develop ourselves. If we utilize the new Fourth Private Equity Credit Agreement or additional funds are raised by issuing equity securities, especially convertible preferred stock and convertible debentures, dilution to existing shareholders will result and future investors may be granted rights superior to those of existing shareholders. Moreover, substantial dilution may result in a change in our control.
Item 6.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with "Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information set forth below should be read in conjunction with our Financial Statements and the Notes included elsewhere in this Report.
RESULTS OF OPERATIONS
Twelve Months Ended June 30, 2004 and June 30, 2003 - --------------------------------------------------- Revenues during the year ended June 30, 2004, were $733,211 representing an increase of $549,126 or 298% from $184,085 during the year ended June 30, 2003. The Cost of Sales during the year ended June 30, 2004, was $284,682 representing an increase of $205,493 or 259% from $79,189 during the year ended June 30, 2003. The increase is a result of selling four CTLM(R) Systems compared to one CTLM(R) System during the year ended June 30, 2003.
General and administrative expenses in the aggregate during the 12 months ended June 30, 2004 were $4,288,625 representing a decrease of $760,205 or 15% from $5,048,830 during the 12 months ended June 30, 2003. General and administrative expenses in the aggregate are derived from deducting compensation and related benefits, research and development expenses, depreciation and amortization and adding interest income to the net loss as presented on the Statement of Operations. The decrease in general and administrative expenses was due primarily to a reduction in inventory write-downs and the cost associated with a one-time settlement. Selling, general and administrative expenses ("SG&A") in the aggregate during the year ended June 30, 2004, were $643,892 representing an increase of $218,136 or 51% from $425,756 during the year ended June 30, 2003. The increase in SG&A was primarily due to costs associated with commercializing the CTLM(R) in the international market.
Compensation and related benefits during the year ended June 30, 2004, were $3,836,289 representing an increase of $944,986 or 33% from $2,891,303 during the year ended June 30, 2003. The increase in compensation is primarily due to the recording of a stock bonus given to the employees during the third quarter and the accrual of the payment obligation to Linda Grable pursuant to her retirement agreement. See Item 10. "Executive Compensation".
Consulting expenses during the year ended June 30, 2004, were $402,156 representing an increase of $24,884 or 7% from $377,272 during the year ended June 30, 2003. The increase was due primarily to increased use of consultants during the year ended June 30, 2004.
Inventory Valuation Adjustments during the year ended June 30, 2004, were $586,510 representing a decrease of $323,934 or 36% from $910,444 during the year ended June 30, 2003. The decrease is due to a reduction in write-downs of obsolete lasers and other components that are no longer used in the manufacturing of the CTLM(R).
Professional expenses during the year ended June 30, 2004, were $430,813 representing a decrease of $81,966, or 16% from $512,779 during the year ended June 30, 2003. The decrease was due primarily to reduced litigation expenses as a result of the settlement of lawsuits during the year ended June 30, 2004. See Item 3. "Legal Proceedings".
Travel and subsistence costs during the year ended June 30, 2004, were $324,239 representing an increase of $85,917 or 36% from $238,322 during the year ended June 30, 2003. This increase was primarily due to additional international travel costs associated with trade shows and developing our distributor network.
Interest expense during the year ended June 30, 2004, was $694,142 representing a decrease of $293,775, or 30% from $987,917 during the year ended June 30, 2003. The decrease was primarily due to a reduction in the use of our Private Equity Credit lines resulting in a decrease in recording of the 9% discount on the Third Private Equity Credit Agreement and the 7% discount on the Fourth Private Equity Credit Agreement.
Twelve Months Ended June 30, 2003 and June 30, 2002 - --------------------------------------------------- Revenues during the year ended June 30, 2003, were $184,085 as a result of our first sale of a CTLM(R) System. There were no revenues in the year ended June 30, 2002.
General and administrative expenses in the aggregate during the 12 months ended June 30, 2003 were $5,048,830 representing an increase of $507,246 or 11% from $4,541,584 during the 12 months ended June 30, 2002. General and administrative expenses in the aggregate are derived from deducting compensation and related benefits, research and development expenses, depreciation and amortization and adding interest income to the net loss as presented on the Statement of Operations. Selling, general and administrative expenses ("SG&A") in the aggregate during the year ended June 30, 2003, were $425,756 representing an increase of $2,658 or 1% from $423,098 during the year ended June 30, 2002.
Compensation and related benefits during the year ended June 30, 2003, were $2,891,303 representing an increase of $3,296 or .01% from $2,888,007 during the year ended June 30, 2002. The increase in compensation is due to normal fluctuations in the course of business.
Consulting expenses during the year ended June 30, 2003, were $377,272 representing a decrease of $2,777 or 1% from $380,049 during the year ended June 30, 2002. The decrease was due primarily to reduced use of consultants during the year ended June 30, 2003.
Inventory Valuation Adjustments during the year ended June 30, 2003, were $910,444 representing an increase of $363,502 or 66% from $547,942 during the year ended June 30, 2002. The increase is due to the write-down of obsolete lasers and other components that are no longer used in the manufacturing of the CTLM(R).
Professional expenses during the year ended June 30, 2003, were $512,779 representing an increase of $107,543, or 27% from $405,236 during the year ended June 30, 2002. The increase was due primarily to additional litigation expenses. See Item 3. "Legal Proceedings".
Travel and subsistence costs during the year ended June 30, 2003, were $238,322 representing a decrease of $314,553 or 57% from $552,875 during the year ended June 30, 2002. This decrease was primarily due to less travel and housing expenses for our clinical application specialists at our various clinical sites in the United States and Mexico since the clinical studies were completed.
Interest expense during the year ended June 30, 2003, was $987,917 representing a increase of $276,582, or 39% from $711,335 during the year ended June 30, 2002. The increase was primarily due to the recording of the 9% discount on our equity credit line as interest and interest associated with our mortgage.
BALANCE SHEET DATA We have financed our operations since inception by the issuance of equity securities with aggregate net proceeds of approximately $46,665,705 and through loan transactions in the aggregate net amount of $2,595,029. Furthermore, we issued equity securities for the conversion of all outstanding convertible debentures in the aggregate net amount of $3,240,000.
Our combined cash and cash equivalents totaled $554,354 at June 30, 2004. We do not expect to generate a positive internal cash flow for at least the next 12 months due to the expected costs of commercializing our initial product, the CTLM(R) and the time required for homologations from certain countries.
Our inventory totaled $2,357,864 at June 30, 2004 and $2,012,275 at June 30, 2003. This increase is primarily due to the purchase of components for the manufacture of CTLM(R) Systems after giving affect to the valuation adjustment of $586,510 recorded during the year. Our property and equipment, net, totaled $2,301,095 at June 30, 2004 and $2,129,338 at June 30, 2003. This increase is due to the purchase of a new trade show booth for the Radiological Society of North America's ("RSNA") annual conference during the year ended June 30, 2004. The trade-show booth will be maintained in storage by our exhibit company and
will be used annually at future RSNA conferences.
LIQUIDITY AND CAPITAL RESOURCES We are currently a development stage company and our continued existence is dependent upon our ability to resolve our liquidity problems, principally by obtaining additional debt and/or equity financing. We have yet to generate a positive internal cash flow, and until significant sales of our product occur, we are mostly dependent upon debt and equity funding from outside investors. In the event that we are unable to obtain debt or equity financing or are unable to obtain such financing on terms and conditions acceptable to us, we may have to cease or severely curtail our operations. This would materially impact our ability to continue as a going concern.
We have financed our operating and research and development activities through several Regulation S and Regulation D private placement transactions. Net cash used for operating and product development expenses during fiscal 2004 was $6,834,193 primarily due to our purchase of additional materials to continue the manufacture of CTLM(R) Systems in anticipation of receiving orders from our distributors in certain countries where permitted by law compared to net cash used by operating activities and product development of the CTLM(R) and related software development of $5,529,017 in fiscal 2003. At June 30, 2004, we had working capital of $478,872 compared to working capital of $1,152,061 at June 30, 2003.
If and when we receive a PMA from the FDA, which cannot be assured, we believe that, based on our current business plan approximately $5 million will be required above and beyond normal operating expenses over the next year to complete all necessary stages in order for us to market the CTLM(R) in the United States and foreign countries. The $5 million will be used to purchase inventory, sub-contracted components, tooling, manufacturing templates and non-recurring engineering costs associated with preparation for full capacity manufacturing and assembly and marketing, advertising and promotion, training, ongoing regulatory expenses, and other costs associated with product launch. If the need should arise for capital in excess of the Fourth Private Equity Credit Agreement or if the Fourth Private Equity Credit Agreement is unavailable due to the price of our common stock, our inability to comply with the registration provision, Charlton's breach of its agreement, or any other reason, we may be forced to seek additional funding through public or private financing, collaboration, licensing and other arrangements with corporate partners. See "Sale of Unregistered Securities-Financing/Equity Line of Credit."
During fiscal 2004, we were able to raise a total of $5,850,000 less expenses through Regulation D transactions. We do not expect to generate a positive internal cash flow for at least the next 12 months due to the expected costs of commercializing our initial product, the CTLM(R) and the expense of our continuing product development program. We will require additional funds for operating expenses, developing our CD-ROM clinical atlas, FDA regulatory processes, manufacturing and marketing programs and to continue our product development program. Accordingly, we plan to utilize the Fourth Private Equity Credit Agreement to raise the funds required prior to the end of fiscal year 2005 in order to continue operations. In the event that we are unable to utilize the Fourth Private Equity Credit Agreement, we would have to raise the additional funds required by either equity or debt financing, including entering into a transaction(s) to privately place equity, either common or preferred stock, or debt securities, or combinations of both; or by placing equity into the public market through an underwritten secondary offering. If additional funds are raised by issuing equity securities, dilution to existing stockholders will result, and future investors may be granted rights superior to those of existing stockholders.
No assurances, however, can be given that the necessary future financing will be available or, if available, that it will be obtained on terms satisfactory to us. Our ability to effectuate our business plan and continue operations is dependent on our ability to raise capital, structure a profitable business, and generate revenues. If our working capital were insufficient to fund our operations, we would have to explore additional sources of financing.
Capital expenditures for the fiscal 2004 were $334,264 as compared to $43,314 for fiscal 2003. These expenditures were a direct result of purchases of computer and other equipment, office, warehouse and manufacturing fixtures, trade show equipment, computer software, laboratory equipment, and other fixed assets. We anticipate that our capital expenditures for fiscal 2005 will be approximately $75,000.
During the year ending June 30, 2004, there were no changes in our existing debt agreements and we had no outstanding bank loans as of June 30, 2004. Our annual fixed commitments, including salaries and fees for current employees and consultants, rent, payments under license agreements and other contractual commitments are approximately $7.4 million, as of the date of this report and are likely to increase as additional agreements are entered into and additional personnel are retained. We will require substantial additional funds for our product development programs, operating expenses, regulatory processes, and manufacturing and marketing programs, which are presently estimated at an aggregate of approximately $620,000 per month. The foregoing projections are subject to many conditions most of which are beyond our control. Our future capital requirements will depend on many factors, including the following: the progress of our product development projects, the time and cost involved in obtaining regulatory approvals; the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; competing technological and market developments; changes and developments in our existing collaborative, licensing and other relationships and the terms of any new collaborative, licensing and other arrangements that we may establish; and the development of commercialization activities and arrangements. We do not expect to generate a positive internal cash flow for at least 12 months as substantial costs and expenses continue due principally to the commercialization of the CTLM(R), activities related to our FDA PMA process, and advanced product development activities. We intend to use the Fourth Private Equity Credit Agreement as our principal source of additional capital. We plan to continue our policy of investing excess funds, if any, in a High Performance Money Market account at Wachovia Bank N.A.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of the federal securities laws. These forward-looking statements include, among others, statements relating to our business strategy, which is based upon our interpretation and analysis of trends in the healthcare treatment industry, especially those related to the diagnosis and treatment of breast cancer, and upon management's ability to successfully develop and commercialize its principal product, the CTLM(R). This strategy assumes that the CTLM(R) will prove superior, from both a medical and an economic perspective, to alternative techniques for diagnosing breast cancer. This strategy also assumes that we will be able to promptly obtain from the FDA and the relevant foreign governmental agencies the approvals which are needed to market the CTLM(R) in the United States and key foreign markets and that we will be able to raise the capital necessary to finance the completion of the development and commercialization of the CTLM(R). Many known and unknown risks, uncertainties and other factors, including, but not limited to, technological changes and competition from new diagnostic equipment and techniques, changes in general economic conditions, healthcare reform initiatives, legal claims, regulatory changes and risk factors detailed from time to time in our Securities and Exchange Commission filings may cause these assumptions to prove incorrect and may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Risks associated with our business
We must comply with extensive government regulation and have no assurance of regulatory approvals or clearances, which could cause us to cut back or cease operations.
Our delay or inability to obtain any necessary United States, state or foreign regulatory clearances or approvals for our products would prevent us from selling the CTLM(R) system in the U.S. and other countries.
In the United States, the CTLM(R) is regulated as a medical device and is subject to the FDA's pre-market clearance or approval requirements. To obtain FDA approval of an application for pre-market approval of a diagnostic tool such as the CTLM(R), the pre-market approval application must demonstrate based on statistically significant results from extensive clinical studies, that the subject device is safe and has clinical utility, meaning that as a diagnostic tool it provides information that measurably contributes to a diagnosis of a
disease or condition. We are now relying on outside FDA consultants to assist us in obtaining the PMA from the FDA.
In addition, sales of medical devices outside the United States may be subject to international regulatory requirements that vary from country to country. The time required to gain approval for international sales may be longer or shorter than required for FDA approval and the requirements may differ. For example, in order to sell our products within the European Economic Area ("EEA"), companies are required to achieve compliance with the requirements of the medical devices directive and affix a "CE" marking on their products to attest compliance. In Europe, we have obtained the certifications in January 2001 necessary to enable the CE mark to be affixed to our products in order to conduct sales in member countries of the EEA, subject to compliance with additional regulations imposed by individual countries.
Regulatory approvals, if granted, may include significant limitations on the indicated uses for which the CTLM(R) may be marketed. In addition, to obtain these approvals, the FDA and certain foreign regulatory authorities may impose numerous other requirements which medical device manufacturers must comply with. FDA enforcement policy strictly prohibits the marketing of approved medical devices for unapproved uses. Product approvals could be withdrawn for failure to comply with regulatory standards or the occurrence of unforeseen problems following initial marketing.
The third-party manufacturers upon which we will depend to manufacture our products are required to adhere to applicable FDA regulations regarding quality systems regulations commonly referred to as QSRs, which include testing, control and documentation requirements. Failure to comply with applicable regulatory requirements, including marketing and promoting products for unapproved use, could result in warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to grant pre-market clearance or approval for devices, withdrawal of approvals and criminal prosecution. Changes in existing regulations or adoption of new government regulations or polices could prevent or delay regulatory approval of our products. Material changes to medical devices also are subject to FDA review and clearance or approval.
There can be no assurance that we will be able to obtain or maintain the following:
o FDA approval of a pre-market approval application for the CTLM(R), o foreign marketing clearances for the CTLM(R) or regulatory approvals or clearances for other products that we may develop, on a timely basis, or at all, o timely receipt of approvals or clearances, o continued approval or clearance of previously obtained approvals and clearances, and o compliance with existing or future regulatory requirements.
If we do not obtain or maintain any of the above-mentioned standards, there may be material adverse effects on our business, financial condition and results of operations.
We may not be able to develop other products that are currently in the early stages of development due to our need for additional capital.
Due to our need for additional capital, our proposed products other than the CTLM(R) device are at early stages of development. There can be no assurance that any of our proposed products, including the CTLM(R), will:
o be found to be safe and effective, o meet applicable regulatory standards or receive necessary regulatory clearance, o be safe and effective, developed into commercial products, manufactured on a large scale or be economical to market, or o achieve or sustain market acceptance.
Therefore, there is substantial risk that our product development and commercialization efforts will prove to be unsuccessful.
We depend on market acceptance to sell our products, which have not been proven, and a lack of acceptance of the CTLM(R) could cause our business to fail.
There can be no assurance that physicians or the medical community in general will accept and utilize the CTLM(R) or any other products that we develop. The extent and rate the CTLM(R) achieves market acceptance and penetration will depend on many variables, including, but not limited to the establishment and demonstration in the medical community of the clinical safety, efficacy and cost-effectiveness of the CTLM(R) and the advantages of the CTLM(R) over existing technology and cancer detection methods.
There can be no assurance that the medical community and third-party payers will accept our unique technology. Similar risks will confront any other products we develop in the future. Failure of our products to gain market acceptance would hinder our sales efforts resulting in a loss of revenues and potential profit and, ultimately, could cause our business to fail. It would further prevent us from developing new products.
We depend upon suppliers with whom we have no contracts, which suppliers could cause production disruption if they terminated or changed their relationships with us.
We believe that there are a number of suppliers for most of the components and subassemblies required for the CTLM(R); however, components for our laser system are provided by one supplier. Although these components are provided by a limited number of other suppliers, we believe our laser supplier and their products are the most reliable. We have no agreement with our laser supplier and purchase the laser components on an as-needed basis. For certain services and components, we currently rely on single suppliers. If we encounter delays or difficulties with our third-party suppliers in producing, packaging, or distributing components of the CTLM(R) device, market introduction and subsequent sales would be adversely affected.
We have limited experience in sales, marketing and distribution, which could negatively impact our ability to enter into collaborative arrangements or other third party relationships which are important to the successful development and commercialization of our products and potential profitability.
We have limited internal marketing and sales resources and personnel. There can be no assurance that we will be able to establish sales and distribution capabilities or that we will be successful in gaining market acceptance for any products we may develop. There can be no assurance that we will be able to recruit and retain skilled sales, marketing, service or support personnel, that agreements with distributors will be available on terms commercially reasonable to us, or at all, or that our marketing and sales efforts will be successful.
There can be no assurance that we will be able to further develop our distribution network on acceptable terms, if at all, or that any of our proposed marketing schedules or plans can or will be met.
We depend on qualified personnel to run and develop our specialized business who we may be unable to retain or hire.
Due to the specialized scientific nature of our business, we are highly dependent upon our ability to attract and retain qualified scientific, technical and managerial personnel. We have entered into employment agreements with some of our executive officers. The loss of the services of existing personnel, as well as the failure to recruit key scientific, technical and managerial personnel in a timely manner would be detrimental to our research and development programs and could have an adverse impact upon our business affairs and finances. Our anticipated growth and expansion into areas and activities requiring additional expertise, such as marketing, will require the addition of new management personnel. Competition for qualified personnel is intense and there can be no assurance that we will be able to continue to attract and retain qualified personnel necessary for the development of our business.
We have a limited manufacturing history that could cause delays in the production and shipment of our product.
We will have to expand our CTLM(R) manufacturing and assembly capabilities and contract for the manufacture of the CTLM(R) components in volumes that will be necessary for us to achieve significant commercial sales in the event we begin substantial foreign sales and/or obtain regulatory approval to market our products in the United States. We have limited experience in the manufacture of medical products for clinical trials or commercial purposes. Should we continue to manufacture our products at our facility, our manufacturing facilities would continue to be subject to the full range of the FDA's current quality system regulations. In addition, there can be no assurance that our manufacturing efforts will be successful or cost-effective.
We depend on third parties who may not be in compliance with the FDA's quality system regulations which may delay the approval or decrease the sales of the CTLM(R).
We have used and do use third parties to manufacture and deliver the components of the CTLM(R) and intend to continue to use third parties to manufacture and deliver these components and other products we may develop. There can be no assurance that the third-party manufacturers we depend on for the manufacturing of CTLM(R) components will be in compliance with the quality system regulations (QSR) at the time of the pre-approval inspection or will maintain compliance afterwards. This failure could significantly delay FDA approval of the pre-market approval application for the CTLM(R) device.
We will rely on international sales and may be subject to risks associated with international commerce.
We have commenced international sales efforts for the CTLM(R) in Europe, Asia and the Middle East. Until we receive pre-market approval from the FDA to market the CTLM(R) in the United States, our revenues, if any, will be derived from sales to international distributors. A significant portion of our revenues may be subject to the risks associated with international sales, including:
o economical and political instability, o shipping delays, o fluctuation of foreign currency exchange rates, o foreign regulatory requirements, and o various trade restrictions, all of which could have a significant impact on our ability to deliver products on a timely basis.
Significant increases in the level of customs duties, export quotas or other trade restrictions could have a material adverse effect on our business, financial condition and results of operations. The regulation of medical devices in foreign countries continues to develop, and there can be no assurance that new laws or regulations will not have an adverse effect on us. In order to minimize the risk of doing business with distributors in countries which are having difficult financial times, our international distribution agreements all require payment via an irrevocable letter of credit drawn on a United States bank prior to shipment of the CTLM(R).
Our business has the risk of product liability claims and preferred insurance coverage may be expensive or unavailable which may expose us to material liabilities.
Our business exposes us to potential product liability risks, which are inherent in the testing, manufacturing, and marketing of cancer detection products. Significant litigation, not involving us, has occurred in the past based on the allegations of false negative diagnoses of cancer. There can be no assurance that we will not be subjected to claims and potential liability. Although the FDA does not require product liability insurance with regard to clinical investigations, we obtained and presently carry product liability insurance in the amount of $3,000,000. While we plan to maintain insurance against product liability and defense costs, there can be no assurance that claims against us arising with respect to our products will be successfully defended or that the insurance to be carried by us will be sufficient to cover liabilities arising
from any claims. A successful claim against us in excess of our insurance coverage could have a material adverse effect on us. Furthermore, there can be no assurance that we will be able to continue to obtain or maintain product liability insurance on acceptable terms.
Risks associated with our industry
Lack of third-party reimbursement may have a negative impact on the sales of our products, which would negatively impact our revenues.
In the United States, suppliers of health care products and services are greatly affected by Medicare, Medicaid and other government insurance programs, as well as by private insurance reimbursement programs. Third-party payers (Medicare, Medicaid, private health insurance companies, and other organizations) may affect the pricing or relative attractiveness of our products by regulating the level of reimbursement provided by these payers to the physicians, clinics and imaging centers utilizing the CTLM(R) or any other products that we may develop, by refusing reimbursement. The level of reimbursement, if any, may impact the market acceptance and pricing of our products, including the CTLM(R). Failure to obtain favorable rates of third-party reimbursement could discourage the purchase and use of the CTLM(R) as a diagnostic device.
In international markets, reimbursement by private third-party medical insurance providers, including governmental insurers and independent providers varies from country to country. In addition, such third-party medical insurance providers may require additional information or clinical data prior to providing reimbursement for a product. In some countries, our ability to achieve significant market penetration may depend upon the availability of third-party governmental reimbursement. Revenues and profitability of medical device companies may be affected by the continuing efforts of governmental and third party payers to contain or reduce the cost of health care through various means.
There are uncertainties regarding healthcare reform including possible legislation, whereby our customers may not receive medical reimbursement for the use of our product on their patients, which may cause our customers to use other services and products.
Several states and the United States government are investigating a variety of alternatives to reform the health care delivery system. These reform efforts include proposals to limit and further reduce and control health care spending on health care items and services, limit coverage for new technology and limit or control the price health care providers and drug and device manufacturers may charge for their services and products, respectively. If adopted and implemented, these reforms could cause our healthcare providers to limit or not use the CTLM(R) systems.
Competition in the medical imaging industry may result in competing products, superior marketing and lower revenues and profits for us.
The market in which we intend to participate is highly competitive. Many of the companies in the cancer diagnostic and screening markets have substantially greater technological, financial, research and development, manufacturing, human and marketing resources and experience than we do. These companies may succeed in developing, manufacturing and marketing products that are more effective or less costly than our products. The competition for developing a commercial device utilizing computed tomography techniques and laser technology is difficult to ascertain given the proprietary nature of the technology.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of the date of this report, we believe that we do not have any material quantitative and qualitative market risks.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
Page ---- Report of Independent Certified Public Accountants
Financial Statements
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity -12
Statements of Cash Flows -15
Notes to Financial Statements -62
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders Imaging Diagnostic Systems, Inc.
We have audited the accompanying balance sheets of Imaging Diagnostic Systems, Inc. (a Development Stage Company) as of June 30, 2004 and 2003, and the related statements of operations, stockholders' equity and cash flows for the years ended June 30, 2004, 2003 and 2002 and for the period December 10, 1993 (date of inception) to June 30, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Imaging Diagnostic Systems, Inc. (a Development Stage Company), as of June 30, 2004 and 2003 and the results of its operations and its cash flows for the years ended June 30, 2004, 2003 and 2002 and for the period December 10, 1993 (date of inception) to June 30, 2004 in conformity with United States generally accepted accounting principles.
The Company is in the development stage as of June 30, 2004 and to date has had no significant operations. Recovery of the Company's assets is dependent on future events, the outcome of which is indeterminable. In addition, successful completion of the Company's development program and its transition, ultimately, to attaining profitable operations is dependent upon obtaining adequate financing to fulfill its development activities and achieving a level of sales adequate to support the Company's cost structure.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has suffered recurring losses and has yet to generate an internal cash flow that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 4. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Margolies, Fink and Wichrowski
Certified Public Accountants Pompano Beach, Florida August 23, 2004
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Balance Sheets
June 30, 2004 and 2003
The accompanying notes are an integral part of these condensed financial statements.
IMAGING DIAGNOSTIC SYSTEMS, INC. A Developmental Stage Company
Statement of Operations
See accompanying notes to the financial statements.
See accompanying notes to the financial statements.
See accompanying notes to the financial statements.
See accompanying notes to the financial statements.
See accompanying notes to the financial statements.
See accompanying notes to the financial statements.
** See Note 15 for a detailed breakdown by Series.
See accompanying notes to the financial statements.
** See Note 15 for a detailed breakdown by Series.
See accompanying notes to the financial statements.
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Statement of Stockhoders' Equity (Continued)
From December 10, 1993 (date of inception) to June 30, 2004
** See Note 15 for a detailed breakdown by Series.
See accompanying notes to the financial statements.
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Statement of Stockhoders' Equity (Continued)
From December 10, 1993 (date of inception) to June 30, 2004
** See Note 15 for a detailed breakdown by Series.
See accompanying notes to the financial statements.
INSERT STATEMENT OF CASH FLOWS PAGE
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Statement of Cash Flows
See accompanying notes to the financial statements.
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Statement of Cash Flows (Continued)
See accompanying notes to the financial statements.
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements
(1) BACKGROUND
The Company, ("Imaging Diagnostic Systems, Inc.") was organized in the state of New Jersey on November 8, 1985, under its original name of Alkan Corp. On April 14, 1994, a reverse merger was effected between Alkan Corp. and the Florida corporation of Imaging Diagnostic Systems, Inc. ("IDSI-Fl."). IDSI-Fl. was formed on December 10, 1993. (See Note 3) Effective July 1, 1995 the Company changed its corporate status to a Florida corporation.
The Company is in the business of developing medical imaging devices based upon the combination of the advances made in medical optical technology and the unique knowledge of medical imaging devices held by the founders of the Company. Previously, the technology for these imaging devices had not been available. The initial Computed Tomography Laser Mammography ("CTLM(R)") prototype had been developed with the use of "Ultrafast Laser Imaging TechnologyTM", and this technology was first introduced at the "RSNA" scientific assembly and conference during late November 1994. The completed CTLM(R) device was exhibited at the "RSNA" conference November 1995. The Company has continued to develop its CTLM(R) technology and to exhibit its latest clinical images produced by the newest generation of the CTLM(R) at the "RSNA" conferences held annually, in Chicago, commencing on the Sunday following Thanksgiving and running for five days.
The initial CTLM(R) prototype produced live images of an augmented breast on February 23, 1995. From the experience gained with this initial prototype, the Company continued its research and development resulting in new hardware and software enhancements.
The Company is currently in a development stage and is in the process of raising additional capital through the use of its Fourth Private Equity Credit Agreement. There is no assurance that once the development of the CTLM(R) device is completed and finally receives Federal Drug Administration marketing clearance, that the Company will achieve a profitable level of operations.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(b) Revenue Recognition
Revenue from sales of medical imaging products is recorded for international sales upon the passing of title and risks of ownership, which occurs upon the shipment of goods. In the U.S. market, when PMA approval is received, revenue will be recorded upon installation of the CTLM(R) System and acceptance by the customer.
(c) Cash and cash equivalents
Holdings of highly liquid investments with original maturities of three months or less and investment in money market funds are considered to be cash equivalents by the Company.
(d) Inventory
Inventories, consisting principally of raw materials, work-in-process and completed units under testing, are carried at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.
Due to recent technological advances resulting in overall lower costs for certain inventory components, the Company has reduced these components of its inventory to their net realizable value. The inventory valuation adjustments are reflected in the statement of operations and amounted to $586,510, $910,444, $547,942, and $3,235,001, for the years ended June 30, 2004, 2003 and 2002, and for the period December 10, 1993 (date of inception) to June 30, 2004, respectively.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e) Prototype equipment
The direct costs associated with the final CTLM(R) prototypes have been capitalized. On June 17, 1996 the Company's Director of Research and Development and the Director of Engineering decided to discontinue with the development of the then current generation proprietary scanner and data collection system (components of the prototype CTLM(R) device) and to begin development of a third generation scanner and data collection system. As a result, certain items amounting to $677,395 were reclassified as follows: $512,453 as research and development expense and $164,942 as computer and lab equipment. The original amortization period of two years was increased to five years to provide for the estimated period of time the clinical equipment would be in service to gain FDA approval.
During the fiscal year ended June 30, 1998, the costs associated with the various pre-production units available for sale have been reclassified as inventory and the remaining costs which will no longer benefit future periods were expensed to research and development costs.
(f) Property, equipment and software development costs
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using straight-line methods over the estimated useful lives of the related assets.
Under the criteria set forth in Statement of Financial Accounting Standards No. 86, capitalization of software development costs begins upon the establishment of technological feasibility for the product. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future gross product revenues, estimated economic life and changes in software and hardware technology. After considering the above factors, the Company has determined that software development costs, incurred subsequent to the initial acquisition of the basic software technology, should be properly expensed. Such costs are included in research and development expense in the accompanying statements of operations.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(g) Research and development
Research and development expenses consist principally of expenditures for equipment and outside third-party consultants, which are used in testing and the development of the Company's CTLM(R) device, product software and compensation to specific company personnel. The non-payroll related expenses include testing at outside laboratories, parts associated with the design of initial components and tooling costs, and other costs which do not remain with the developed CTLM(R) device. The software development costs are with outside third-party consultants involved with the implementation of final changes to the developed software. All research and development costs are expensed as incurred.
(h) Net loss per share
In 1998, the Company adopted SFAS No. 128, ("Earnings Per Share"), which requires the reporting of both basic and diluted earnings per share. Basic net loss per share is determined by dividing loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock, as long as the effect of their inclusion is not anti-dilutive.
(i) Patent license agreement
The patent license agreement will be amortized over the seventeen-year life of the patent, the term of the agreement.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(j) Stock-based compensation
The Company adopted Statement of Financial Accounting Standards No. 123. "Accounting for Stock-Based Compensation" ("SFAS 123"), in fiscal 1997. As permitted by SFAS 123, the Company continues to measure compensation costs in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", but provides pro forma disclosures of net loss and loss per share as if the fair value method (as defined in SFAS 123) had been applied beginning in fiscal 1997.
(k) Long-lived assets
Effective July 1, 1996, the Company adopted the provisions of Statement of Financial Accounting Standards No. 121. "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). This statement requires companies to write down to estimated fair value long-lived assets that are impaired. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In performing the review of recoverability the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the assets, an impairment loss is recognized. The Company has determined that no impairment losses need to be recognized through the fiscal year ended June 30, 2004.
In August of 2001, the Company adopted the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), which addresses accounting and financial reporting for the impairment and disposal of long-lived assets. This statement is effective for the Company beginning July 1, 2002. The Company does not believe that the adoption of SFAS 144 will have a significant impact on its financial position and results of operations.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(l) Income taxes
Effective December 10, 1993, the Company adopted the method of accounting for income taxes pursuant to the Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires an asset and liability approach for financial accounting and reporting for income taxes. Under SFAS 109, the effect on deferred taxes of a change in tax rates is recognized in income in the year that includes the enactment date.
(m) Intangible assets
Intangible assets, consisting of the patent license agreement and UL and CE approvals are reflected in "Other Assets" on the balance sheet, net of accumulated amortization (Note 7). The patent license agreement has a fixed life of seventeen years and will continue to be amortized over its remaining useful life. The UL and CE approvals are subject to amortization and will be reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable, in accordance with Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). The Company has adopted SFAS 142 for its fiscal year beginning July 2001. As of June 30, 2004, the Company has determined that there is no impairment loss that needs to be recognized at this time with respect to the UL and CE approvals.
(n) Deemed preferred stock dividend
The accretion resulting from the incremental yield embedded in the conversion terms of the convertible preferred stock is computed based upon the discount from market of the common stock at the date the preferred stock was issued. The resulting deemed preferred stock dividend subsequently increases the value of the common shares upon conversion.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(o) Discount on convertible debt
The discount which arises as a result of the allocation of proceeds to the beneficial conversion feature upon the issuance of the convertible debt increases the effective interest rate of the convertible debt and will be reflected as a charge to interest expense. The amortization period will be from the date of the convertible debt to the date the debt first becomes convertible.
(p) Comprehensive income
SFAS 130, "Reporting Comprehensive Income", requires a full set of general purpose financial statements to be expanded to include the reporting of "comprehensive income". Comprehensive income is comprised of two components, net income and other comprehensive income. For the period from December 10, 1993 (date of inception) to June 30, 2004, the Company had no items qualifying as other comprehensive income.
(q) Impact of recently issued accounting standards
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure" ("SFAS 148"), amends SFAS 123, "Accounting for Stock-Based Compensation." In response to a growing number of companies announcing plans to record expenses for the fair value of stock options, SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The Statement also improves the timeliness of those disclosures by requiring that this information be included in interim as well as annual financial statements.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In the past, companies were required to make pro forma disclosures only in annual financial statements. The transition guidance and annual disclosure provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002.
(r) Reclassifications
Certain amounts in the prior period financial statements have been reclassified to conform with the current period presentation.
(3) MERGER
On April 14, 1994, IDSI-Fl. acquired substantially all of the issued and outstanding shares of Alkan Corp. The transaction was accounted for as a reverse merger in accordance with Accounting Principles Board Opinion #16, wherein the shareholders of IDSI-Fl. retained the majority of the outstanding stock of Alkan Corp. after the merger. (see Note 17)
As reflected in the Statement of Stockholders' Equity, the Company recorded the merger with the public shell at its cost, which was zero, since at that time the public shell did not have any assets or equity. There was no basis adjustment necessary for any portion of the merger transaction as the assets of IDSI-Fl. were recorded at their net book value at the date of merger. The 178,752 shares represent the exchange of shares between the companies at the time of merger.
As part of the transaction, the certificate of incorporation of Alkan was amended to change its name to Imaging Diagnostic Systems, Inc.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(4) GOING CONCERN
The Company is currently a development stage company and its continued existence is dependent upon the Company's ability to resolve its liquidity problems, principally by obtaining working capital through its Fourth Private Equity Credit Agreement and if not available, then through debt financing and/or other equity capital. The Company has yet to generate a positive internal cash flow, and until significant sales of its product begins, the Company is totally dependent upon equity and debt funding.
As a result of these factors, there exists substantial doubt about the Company's ability to continue as a going concern. However, management of the Company believes that its Fourth Private Equity Credit Agreement should provide the funding necessary to complete the FDA and other regulatory processes necessary to receive FDA marketing clearance and to commercialize the CTLM(R) both in the International and Domestic markets. In the event that we are unable to utilize the Fourth Private Equity Credit Agreement we would seek and negotiate with outside entities for the funding necessary to achieve FDA marketing clearance and commercialization of the CTLM(R) product. To date, management has been able to raise the necessary capital to reach this stage of product development and has been able to fund any capital requirements. However, there is no assurance that once the development of the CTLM(R) device is completed and finally receives FDA marketing clearance, that the Company will achieve a profitable level of operations.
(5) INVENTORIES
Inventories consisted of the following: June 30, -------------------------------- 2004 2003 -------------- --------------
Raw materials $ 1,100,112 $ 1,307,052 Work-in process 93,869 49,784 Completed units under testing 1,163,883 655,439 ------------- -------------
$ 2,357,864 $ 2,012,275 ============ ============
The raw materials inventory is reflected net of inventory valuation adjustments to the net realizable value for certain components. The valuation adjustments are reflected in the statement of operations and amounted to $586,410, $910,444, $547,942, and $3,235,001, for the years ended June 30, 2004, 2003 and 2002, and for the period December 10, 1993 (date of inception) to June 30, 2004, respectively.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(6) PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, less accumulated depreciation:
June 30, --------------------------------- 2004 2003 --------------- ---------------
Furniture and fixtures $ 262,264 $ 260,880 Building and land 2,086,330 2,086,330 Clinical equipment 30,714 30,714 Computers, equipment and software 333,535 349,268 CTLM(R) software costs 352,932 352,932 Trade show equipment 298,400 - Laboratory equipment 212,560 222,560 ----------- ------------
3,576,735 3,302,684 Less: accumulated depreciation (1,275,640) (1,173,346) ------------- -------------
Totals $ 2,301,095 $ 2,129,338 ============= ============
The estimated useful lives of property and equipment for purposes of computing depreciation and amortization are:
Furniture, fixtures, clinical, computers, laboratory equipment and trade show equipment 5-7 years Building 40 years CTLM(R) software costs 5 years
Telephone equipment, acquired under a long-term capital lease at a cost of $50,289, is included in furniture and fixtures. The net unamortized cost of the CTLM(R) software at June 30, 2004 and 2003 are $0 and $0, respectively, which represents the net realizable value of the CTLM(R) software at the end of each period presented.
Amortization expense related to the CTLM(R) software for each period presented in the statement of operations is as follows:
Period ended Amount ------------ --------- 6/30/01 $ 16,241 6/30/00 51,425 6/30/99 70,514 6/30/98 70,587 Prior 144,165 ----------
Total $ 352,932 =========
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(7) OTHER ASSETS
Other assets consist of the following: June 30, ------------------------- 2004 2003 ----------- ----------- Patent license agreement, net of accumulated amortization of $205,059 and $170,882 respectively $ 375,942 $ 410,118 UL and CE approvals, net of accumulated amortization of $8,225 and $8,225, respectively 430,302 430,302 ---------- ----------
Totals $ 806,244 $ 840,420 ========== ==========
During June 1998, the Company finalized an exclusive Patent License Agreement with its former chief executive officer. (See Note 21) The officer was the owner of patents issued on December 2, 1997 which encompassed the technology of the CTLM(R). Pursuant to the terms of the agreement, the Company was granted the exclusive right to modify, customize, maintain, incorporate, manufacture, sell, and otherwise utilize and practice the Patent, all improvements thereto and all technology related to the process, throughout the world. The license shall apply to any extension or re-issue of the Patent. The term of license is for the life of the Patent and any renewal thereof, subject to termination, under certain conditions. As consideration for the License, the Company issued to the officer 7,000,000 shares of common stock (See Note 17). The License agreement has been recorded at the historical cost basis of the chief executive officer, who owned the patent.
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30, ------------------------------ 2004 2003 ------------------------------
Accounts payable - trade $ 486,225 $ 447,511 Accrued property taxes payable 14,085 14,085 Accrued compensated absences 122,084 126,721 Accrued interest payable 126,548 130,024 Accrued wages payable 420,000 218,664 Other accrued expenses 3,585 - ------------- ------------
Totals $ 1,172,527 $ 937,005 ============ ===========
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(9) OTHER CURRENT LIABILITIES
Other current liabilities consist of the following: June 30, ------------------------------ 2004 2003 ------------ ----------------
Accrued compensation-stock options $ 1,014,486 $ 1,014,486 ----------- ------------
$ 1,014,486 $ 1,014,486 =========== ============
(10) SHORT-TERM DEBT
Short-term debt consisted of the following: June 30, ------------------------------- 2004 2003 -------------- -------------
Loan payable $ 300,407 $ 300,407 ------------ ------------
$ 300,407 $ 300,407 ============ ============
The Company has borrowed a total of $475,407, from an unrelated third-party on an unsecured basis. The loan accrues interest at a rate of 6% per annum and is payable on demand. The Company has repaid $175,000 as of June 30, 2004. Accrued interest of $126,549 is reflected in accrued expenses on the balance sheet. Based on its review of this transaction, Company management has disputed the validity of the debt.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(11) OTHER OPERATING EXPENSES
Other operating expenses as follows:
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(12) EQUITY LINE OF CREDIT
On August 17, 2000 the Company finalized a financing agreement with a private institutional equity investor, which contains two component parts, a $25 million Private Equity Agreement and a private placement of 500 shares of Series K convertible preferred stock as bridge financing in the amount of $5,000,000 (See Note 16). On May 15, 2002, the Company entered into a second private equity agreement, which replaced the original Private Equity Agreement. The terms of the second Private Equity Agreement were substantially equivalent to the terms of the original agreement, except that (i) the commitment period is three years from the effective date of a registration statement covering the second Private Equity Agreement shares, (ii) the minimum amount we must draw through the end of the commitment period is $2,500,000, (iii) the minimum stock price requirement has been reduced to $.20, and (iv) the minimum average trading volume has been reduced to $40,000.
On October 29, 2002, the Company entered into a new "Third Private Equity Credit Agreement" which the Company intends to supplement the second Private Equity Agreement. The terms of the Third Private Equity Credit Agreement are substantially equivalent to the terms of the prior agreement, in that (i) the commitment period is three years from the effective date of a registration statement covering the Third Private Equity Credit Agreement shares, (ii) the maximum commitment is $15,000,000, (iii) the minimum amount we must draw through the end of the commitment period is $2,500,000, (iv) the minimum stock price requirement has been reduced to $.10, and (v) the minimum average trading volume in dollars has been reduced to $20,000. The conditions to draw under this private equity line, as described above, may materially limit the draws available to the Company. On November 7, 2002 the Company filed a registration statement on Form S-2 to register 5,500,000 shares underlying the Third Private Equity Credit Agreement, which was declared effective by the SEC on November 21, 2002. On December 30, 2002 the Company filed a registration statement on Form S-2 to register an additional 9,750,000 shares underlying the Third Private Equity Credit Agreement, which was declared effective by the SEC on January 16, 2003. On April 11, 2003 the Company filed a registration statement on Form S-2 to register an additional 9,800,000 shares underlying the Third Private Equity Credit Agreement, which was declared effective by the SEC on May 13, 2003.
The Private Equity Agreement commits the investor to purchase up to $25 million of common stock subject to certain conditions pursuant to Regulation D over the course of 12 months after an effective registration of the shares. The timing and amounts of the purchase by the investor are at the sole discretion of the Company. However, they do have to draw down a minimum of $10 million from the credit line over the twelve-month period. The purchase price of the shares of common stock are set at 91% of the market price. The market price, as defined in the agreement, is the average of the three lowest closing bid prices of the common stock over the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche.
On January 9, 2004, the Company entered into a new "Fourth Private Equity Credit Agreement" which replaces the prior private equity agreements. The terms of the Fourth Private Equity Credit Agreement are more favorable to the Company than the terms of the prior Third Private Equity Credit
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(12) EQUITY LINE OF CREDIT (Continued)
Agreement. The new, more favorable terms are: (i) The put option price is 93% of the three lowest closing bid prices in the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche, while the prior Third Private Equity Credit Agreement provided for 91%, ii) the commitment period is two years from the effective date of a registration statement covering the Fourth Private Equity Credit Agreement shares, while the prior Third Private Equity Credit Agreement was for three years, (iii) the maximum commitment is $15,000,000, (iv) the minimum amount the Company must draw through the end of the commitment period is $1,000,000, while the prior Third Private Equity Credit Agreement minimum amount was $2,500,000, (v) the minimum stock price requirement is now controlled by the Company as it has the option of setting a floor price for each put transaction (the previous minimum stock price in the Third Private Equity Credit Agreement was fixed at $.10), (vi) there are no fees associated with the Fourth Private Equity Credit Agreement; the prior private equity agreements required the payment of a 5% consulting fee, which was subsequently lowered to 4% by mutual agreement in September 2001, and (vii) the elimination of the requirement of a minimum average daily trading volume in dollars. The previous trading volume requirement in the Third Private Equity Credit Agreement was $20,000.
On January 30, 2004, the Company filed a registration statement with respect to 5,000,000 shares of its common stock to be issued pursuant to the Fourth Private Equity Credit Agreement. This registration statement became effective March 4, 2004, at which time the Third Private Equity Credit Agreement was terminated, and the Company began drawing under the Fourth Private Equity Credit Agreement. On June 21, 2004 the Company filed a registration statement on Form S-2 to register an additional 9,000,000 shares underlying the Fourth Private Equity Credit Agreement, which was declared effective by the SEC on June 29, 2004.
These financing agreements have no warrants attached to either the bridge financing or the private equity line. Furthermore, the Company was not required to pay the investor's legal fees, but the Company previously paid a 5% consulting fee for the money funded in all prior transactions up until the approval of the Fourth Private Equity Credit Agreement. The Company sold $2,840,000 of common stock under the terms of the agreement during the year ended June 30, 2001. The total shares issued by the Company amounted to 3,407,613. The Company incurred $139,985 of consulting fees and recorded $303,666 of deemed interest expense as a result of the 9% discount off of the market price. During the year ended June 30, 2002, an additional $5,585,000 of common stock was sold under the terms of the equity credit line agreement, and the Company issued a total of 11,607,866 shares of common stock. The Company incurred $296,250 of consulting fees and recorded $628,805 of deemed interest expense as a result of the 9% discount off of the market price. During the year ended June 30, 2003, an additional $7,881,000 of common stock was sold under the terms of the equity credit line agreement, and the Company issued a total of 29,390,708 shares of common stock. The Company incurred $211,800 of consulting fees and recorded $856,772 of deemed interest expense as a result of the 9% discount off of the market price. During the year ended June 30, 2004, an additional $5,850,000 of common stock was sold under the terms of the equity
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(12) EQUITY LINE OF CREDIT (Continued)
credit line agreement, and the Company issued a total of 8,630,819 shares of common stock. The Company incurred $188,000 of consulting fees which was solely from the Third Private Equity Credit Agreement and recorded a total of $691,701 of deemed interest expense of which $555,897 is a result of the 9% discount off the market price under the Third Private Equity Credit Agreement and $135,804 is a result of the 7% discount off the market price under the Fourth Private Equity Credit Agreement.
(13) LEASES
The Company leases certain office equipment under operating leases expiring in future years. Minimum future lease payments under the non-cancelable operating lease having a remaining term in excess of one year as of June 30, 2004 are as follows:
Year ending June 30, Amount
2005 $ 5,604 2006 4,159 Thereafter 2,492 ---------
Total minimum future lease payments $ 12,255 =========
(14) INCOME TAXES
No provision for income taxes has been recorded in the accompanying financial statements as a result of the Company's net operating losses. The Company has unused tax loss carryforwards of approximately $57,159,000 to offset future taxable income. Such carryforwards expire in years beginning 2014. The deferred tax asset recorded by the Company as a result of these tax loss carryforwards is approximately $22,580,000 and $19,950,000 at June 30, 2004 and 2003, respectively. The Company has reduced the deferred tax asset resulting from its tax loss carryforwards by a valuation allowance of an equal amount as the realization of the deferred tax asset is uncertain. The net change in the deferred tax asset and valuation allowance from July 1, 2003 to June 30, 2004 was an increase of approximately $2,630,000.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(15) REDEEMABLE CONVERTIBLE PREFERRED STOCK
On March 17, 1999, the Company finalized the private placement to foreign investors of 35 shares of its Series G Redeemable Convertible Preferred Stock at a purchase price of $10,000 per share and two year warrants to purchase 65,625 shares of the Company's common stock at an exercise price of $.50 per share. The agreement was executed pursuant to Regulation D as promulgated by the Securities Act of 1933, as amended. A total of 43,125 warrants were exercised during the year ended June 30, 2000, and an additional 9,375 warrants were exercised during the year ended June 30, 2001.
The Series G Preferred Stock had no dividend provisions. The preferred stock was convertible, at any time, for a period of two years thereafter, in whole or in part, without the payment of any additional consideration, into fully paid and nonassessable shares of the Company's no par value common stock based upon the "conversion formula". The conversion formula stated that the holder of the Series G Preferred Stock would receive shares determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price" in effect at the time of conversion. The "Conversion Price" shall be equal to the lesser of $.54 or seventy-five percent (75%) of the Average Closing Price of the Company's common stock for the ten-day trading period ending on the day prior to the date of conversion.
In connection with the sale, the Company issued three preferred shares to an unaffiliated investment banker for placement and legal fees, providing net proceeds to the Company of $350,000. The shares underlying the preferred shares and warrant are entitled to demand registration rights under certain conditions.
Pursuant to the Registration Rights Agreement ("RRA") the Company was required to register 100% of the number of shares that would be required to be issued if the Preferred Stock were converted on the day before the filing of the S-2 Registration Statement. In the event the Registration Statement was not declared effective within 120 days, the Series G Holders had the right to force the Company to redeem the Series G Preferred Stock at a redemption price of 120% of the face value of the preferred stock. The Registration Statement was declared effective on July 29, 2000. During the year ended June 30, 2000, the Series G Preferred Stock was converted into 3,834,492 shares of the Company's common stock.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(16) CONVERTIBLE PREFERRED STOCK
On April 27, 1995, the Company amended the Articles of Incorporation to provide for the authorization of 2,000,000 shares of no par value preferred stock. The shares were divided out of the original 50,000,000 shares of no par value common stock. All Series of the convertible preferred stock are not redeemable and automatically convert into shares of common stock at the conversion rates three years after issuance.
The Company issued 4,000 shares of "Series A Convertible Preferred Stock" ("Series A Preferred Stock") on March 21, 1996 under a Regulation S Securities Subscription Agreement. The agreement called for a purchase price of $1,000 per share, with net proceeds to the Company, after commissions and issuance costs, amounting to $3,600,000.
The holders of the Series A Preferred Stock could have converted up to 50% prior to May 28, 1996, and may convert their remaining shares subsequent to May 28, 1996 without the payment of any additional consideration, into fully paid and nonassessable shares of the Company's no par value common stock based upon the "conversion formula". The conversion formula states that the holder of the Preferred Stock will receive shares determined by dividing (i) the sum of $1,000 plus the amount of all accrued but unpaid dividends on the shares of Convertible Preferred Stock being so converted by the (ii) "Conversion Price". The "Conversion Price" shall be equal to seventy-five percent (75%) of the Market Price of the Company's common stock; provided, however, that in no event will the "Conversion Price" be greater than the closing bid price per share of common stock on the date of conversion.
The agreement provides that no fractional shares shall be issued. In addition, provisions are made for any stock dividends or stock splits that the Company may issue with respect to their no par value common stock. The Company is also required to reserve and keep available out of its authorized but unissued common stock such number of shares of common stock as shall be available to effect the conversion of all of the outstanding shares of Series A Convertible Preferred Stock. The holders of the Series A Preferred Stock are also entitled to receive a five percent (5%) per share, per annum dividend out of legally available funds and to the extent permitted by law. These dividends are payable quarterly on the last business day of each quarter commencing with the calendar quarter next succeeding the date of issuance of the Series A Preferred Stock. Such dividends shall be fully cumulative and shall accrue, whether or not declared by the Board of Directors of the Company, and may be payable in cash or in freely tradeable shares of common stock.
The Series A Preferred Stockholders shall have voting rights similar to those of the regular common stockholders, with the number of votes equal to the number of shares of common stock that would be issued upon conversion thereof. The Series A Preferred Stock shall rank senior to any other class of capital stock of the Company now or hereafter issued as to the payment of dividends and the distribution of assets on redemption, liquidation, dissolution or winding up of the Company.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(16) CONVERTIBLE PREFERRED STOCK (Continued)
As of June 30, 1996, 1,600 shares of the Series A Preferred Stock had been converted into a total 425,416 shares (including accumulated dividends) of the Company's common stock. The remaining 2,400 shares of Series A Preferred Stock were converted into 1,061,202 shares (including accumulated dividends) of the Company's common stock during the fiscal year ended June 30, 1997.
The Company issued 450 shares of "Series B Convertible Preferred Stock" ("Series B Preferred Stock") and warrants to purchase up to an additional 112,500 shares of common stock on December 17, 1996 pursuant to Regulation D and Section 4(2) of the Securities Act of 1933. The agreement called for a purchase price of $10,000 per share, with proceeds to the Company amounting to $4,500,000.
The holders of the Series B Preferred Stock could have converted up to 34% of the Series B Preferred Stock 80 days from issuance (March 7, 1997), up to 67% of the Series B Preferred Stock 100 days from issuance (March 27, 1997), and may convert their remaining shares 120 days from issuance (April 19, 1997) without the payment of any additional consideration, into fully paid and nonassessable shares of the Company's no par value common stock based upon the "conversion formula". The conversion formula states that the holder of the Series B Preferred Stock will receive shares determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price" in effect at the time of conversion. The "Conversion Price" shall be equal to eighty-two percent (82%) of the Market Price of the Company's common stock; provided, however, that in no event will the "Conversion Price" be greater than $3.85. The warrants are exercisable at any time for an exercise price of $5.00 and will expire five years from the date of issue.
The agreement provides that no fractional shares shall be issued. In addition, provisions are made for any stock dividends or stock splits that the Company may issue with respect to their no par value common stock. The Company is also required to reserve and keep available out of its authorized but unissued common stock such number of shares of common stock as shall be available to effect the conversion of all of the outstanding shares of Convertible Preferred Stock. The holders of the Series B Preferred Stock are also entitled to receive a seven percent (7%) per share, per annum dividend out of legally available funds and to the extent permitted by law. These dividends are payable quarterly on the last business day of each quarter commencing with the calendar quarter next succeeding the date of issuance of the Series B Preferred Stock. Such dividends shall be fully cumulative and shall accrue, whether or not declared by the Board of Directors of the Company, and may be payable in cash or in freely tradeable shares of common stock.
The Series B Preferred Stockholders shall have voting rights similar to those of the regular common stockholders, with the number of votes equal to the number of shares of common stock that would be issued upon conversion thereof. The Series B Preferred Stock shall rank senior to any other class of capital stock of the Company now or hereafter issued as to the payment of dividends and the distribution of assets on redemption, liquidation, dissolution or winding up of the Company.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(16) CONVERTIBLE PREFERRED STOCK (Continued)
On September 4, 1998, the Company received a notice of conversion from the Series B Holders. The Series B Holders filed a lawsuit against the Company on October 7, 1998. The Company was served on October 19, 1998. The lawsuit alleged that the Company has breached its contract of sale to the Series B Holders by failing to convert the Series B Holders and failure to register the common stock underlying the Preferred Stock. The Series B Holders demanded damages in excess of $75,000, to be determined at trial, together with interest costs and legal fees. On April 6, 1999, the Series B Holders sold their preferred stock to an unaffiliated third party ("the Purchaser") with no prior relationship to the Company, or the Series B Holders. As part of the purchase agreement, the Series B Holders were required to dismiss the lawsuit with prejudice and the Company and the Series B Holders exchanged mutual general releases (see Series I).
As of June 30, 2000, the Series B Preferred Stock has been converted into 30,463,164 shares of the Company's common stock, and 60 shares were canceled at the request of the holder.
During the years ended June 30, 1999 and 1998 the Company issued a total of six Private Placements of convertible preferred stock (see schedule incorporated into Note 15). The Private Placements are summarized as follows:
Series C Preferred Stock On October 6, 1997, the Company finalized the private placement to foreign investors of 210 shares of its Series C Convertible Preferred Stock at a purchase price of $10,000 per share and warrants to purchase up to 160,000 shares of the Company's common stock at an exercise price of $1.63 per share, and warrants to purchase up to 50,000 shares of the Company's common stock at an exercise price of $1.562 per share. The agreement was executed pursuant to Regulation S as promulgated by the Securities Act of 1933, as amended. As of June 30, 2001, 40,000 warrants at the $1.63 exercise price were exercised, and the remaining 140,000 warrants had expired. The remaining 50,000 warrants ($1.562 exercise price) are outstanding as of June 30, 2001.
The Series C Preferred Stock is convertible, at any time, commencing 45 days from the date of issuance and for a period of three years thereafter, in whole or in part, without the payment of any additional consideration, into fully paid and nonassessable shares of the Company's no par value common stock based upon the "conversion formula". The conversion formula states that the holder of the Series C Preferred Stock will receive shares determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price" in effect at the time of conversion.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(16) CONVERTIBLE PREFERRED STOCK (Continued)
The "Conversion Price" shall be equal to seventy-five percent (75%) of the Average Closing Price of the Company's common stock; however, in no event will the "Conversion Price" be greater than $1.222. Pursuant to the Regulation S documents, the Company was also required to escrow an aggregate of 3,435,583 shares of its common stock (200% of the number of shares the investor would have received had the shares been converted on the closing date of the Regulation S sale).
In connection with the sale, the Company paid an unaffiliated investment banker $220,500 for placement and legal fees, providing net proceeds to the Company of $1,879,500.
Series D Preferred Stock On January 9, 1998, the Company finalized the private placement to foreign investors of 50 shares of its Series D Convertible Preferred Stock at a purchase price of $10,000 per share and warrants to purchase up to 25,000 shares of the Company's common stock at an exercise price of $1.22 per share. The agreement was executed pursuant to Regulation S as promulgated by the Securities Act of 1933, as amended. As of June 30, 2001 the warrants had expired.
The Series D Preferred Stock is convertible, at any time, commencing 45 days from the date of issuance and for a period of three years thereafter, in whole or in part, without the payment of any additional consideration, into fully paid and nonassessable shares of the Company's no par value common stock based upon the "conversion formula". The conversion formula states that the holder of the Series D Preferred Stock will receive shares determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price" in effect at the time of conversion. The "Conversion Price" shall be equal to seventy-five percent (75%) of the Average Closing Price of the Company's common stock.
In connection with the sale, the Company issued four preferred shares to an unaffiliated investment banker for placement fees and paid legal fees of $5,000, providing net proceeds to the Company of $495,000. The shares underlying the preferred shares and warrant are entitled to demand registration rights under certain conditions.
Series E Preferred Stock On February 5, 1998, the Company finalized the private placement to foreign investors of 50 shares of its Series E Convertible Preferred Stock at a purchase price of $10,000 per share and warrants to purchase up to 25,000 shares of the Company's common stock at an exercise price of $1.093 per share. The agreement was executed pursuant to Regulation S as promulgated by the Securities Act of 1933, as amended. As of June 30, 2001 the warrants had expired.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(16) CONVERTIBLE PREFERRED STOCK (Continued)
The Series E Preferred Stock is convertible, at any time, commencing 45 days from the date of issuance and for a period of three years thereafter, in whole or in part, without the payment of any additional consideration, into fully paid and nonassessable shares of the Company's no par value common stock based upon the "conversion formula".
The conversion formula states that the holder of the Series E Preferred Stock will receive shares determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price" in effect at the time of conversion. The "Conversion Price" shall be equal to seventy-five percent (75%) of the Average Closing Price of the Company's common stock.
In connection with the sale, the Company issued four preferred shares to an unaffiliated investment banker for placement fees and paid legal fees of $5,000, providing net proceeds to the Company of $495,000. The shares underlying the preferred shares and warrant are entitled to demand registration rights under certain conditions.
Series F Preferred Stock On February 20, 1998, the Company finalized the private placement to foreign investors of 75 shares of its Series F Convertible Preferred Stock at a purchase price of $10,000 per share. The agreement was executed pursuant to Regulation S as promulgated by the Securities Act of 1933, as amended.
The Series F Preferred Shares pay a dividend of 6% per annum, payable in Common Stock at the time of each conversion and are convertible, at any time, commencing May 15, 1999 and for a period of two years thereafter, in whole or in part, without the payment of any additional consideration, into fully paid and nonassessable shares of the Company's no par value common stock based upon the "conversion formula". The conversion formula states that the holder of the Series F Preferred Stock will receive shares determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price" in effect at the time of conversion. The "Conversion Price" shall be equal to seventy percent (70%) of the Average Closing Price of the Company's common stock.
In connection with the sale, the Company paid an unaffiliated investment banker $50,000 for placement and legal fees, providing net proceeds to the Company of $700,000. The shares underlying the preferred shares and warrant are entitled to demand registration rights under certain conditions.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(16) CONVERTIBLE PREFERRED STOCK (Continued)
Series H Preferred Stock On June 2, 1998, the Company finalized the private placement to foreign investors of 100 shares of its Series H Convertible Preferred Stock at a purchase price of $10,000 per share and Series H-"A" warrants to purchase up to 75,000 shares of the Company's common stock at an exercise price of $1.00 per share, and Series H-"B" warrants to purchase up to 50,000 shares of the Company's common stock at an exercise price of $1.50 per share. The agreement was executed pursuant to Regulation D as promulgated by the Securities Act of 1933, as amended. As of June 30, 2001 none of the warrants had been exercised.
The Series H Preferred Stock is convertible, at any time, for a period of two years thereafter, in whole or in part, without the payment of any additional consideration, into fully paid and nonassessable shares of the Company's no par value common stock based upon the "conversion formula". The conversion formula states that the holder of the Series H Preferred Stock will receive shares determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price" in effect at the time of conversion. The "Conversion Price" shall be equal to the lesser of $.53 or seventy-five percent (75%) of the Average Closing Price of the Company's common stock for the ten-day trading period ending on the day prior to the date of conversion.
In connection with the sale, the Company issued eight preferred shares and paid $10,000 to an unaffiliated investment banker for placement and legal fees, providing net proceeds to the Company of $990,000. The shares underlying the preferred shares and warrant are entitled to demand registration rights under certain conditions.
The Company was in technical default of the Registration Rights Agreement ("RRA"), which required the S-2 Registration Statement to be declared effective by October 2, 1998. Pursuant to the RRA, the Company was required to pay the Series H holders, as liquidated damages for failure to have the Registration Statement declared effective, and not as a penalty, 2% of the principal amount of the Securities for the first thirty days, and 3% of the principal amount of the Securities for each thirty day period thereafter until the Company procures registration of the Securities. On March 25, 1999, the Company issued 424,242 shares of common stock as partial payment of the liquidated damages. The cumulative liquidated damages expense for the years ended June 30, 2001 amounted to $140,000.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(16) CONVERTIBLE PREFERRED STOCK (Continued)
Series I Preferred Stock On April 6, 1999, the Company entered into a Subscription Agreement with the Purchaser of the Series B Preferred Stock whereby the Company agreed to issue 138 shares of its Series I, 7% Convertible Preferred Stock ($1,380,000). The consideration for the subscription agreement was paid as follows:
1. Forgiveness of approximately $725,795 of accrued interest (dividends) in connection with the Series B Convertible Preferred stock. The Company recorded the forgiveness of the accrued interest (dividends) by reducing the accrual along with a reduction in the accumulated deficit. 2. Settlement of all litigation concerning the Series B Convertible Preferred stock. 3. Cancellation of 112,500 warrants that were issued with the Series B Convertible Preferred stock. 4. A limitation on the owner(s) of the Series B Convertible Preferred stock to ownership of not more than 4.99% of the Company's outstanding common stock at any one time.
The Series I Preferred stock pays a 7% premium, to be paid in cash or freely trading common stock at the Company's sole discretion, upon conversion.
The Series I Preferred Stock is convertible, at any time, in whole or in part, without the payment of any additional consideration, into fully paid and nonassessable shares of the Company's no par value common stock based upon the "conversion formula". The conversion formula states that the holder of the Series I Preferred Stock will receive shares determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price" in effect at the time of conversion. The "Conversion Price" shall be equal to seventy-five percent (75%) of the Average Closing Price of the Company's common stock.
Pursuant to the Series I designation and the Subscription Agreement, the Series I Holder, or any subsequent holder of the Preferred Shares, is prohibited from converting any portion of the Preferred Stock which would result in the Holder being deemed the beneficial owner of 4.99% or more of the then issued and outstanding common stock of the Company.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(16) CONVERTIBLE PREFERRED STOCK (Continued)
Series K Preferred Stock On July 17, 2000, the Company finalized the private placement to foreign investors of 500 shares of its Series K Convertible Preferred Stock at a purchase price of $10,000 per share. The agreement was executed in accordance with and in reliance upon the exemption from securities registration by Rule 506 under Regulation D as promulgated by the Securities Act of 1933, as amended.
The Company was obligated to pay a 9% dividend on the convertible preferred in cash or common stock at its option semi-annually, on June 30, and December 31, of each calendar year or upon conversion date. The Company also had the option of redeeming the convertible preferred solely through the use of the private equity line by paying cash with the following redemption premiums:
Days from closing 0-120 121-180 180 Redemption price as a % of Principal 105% 107.5% 110%
If the Company, for whatever reason, was unable to redeem the convertible preferred according to the above schedule, the holder has the right to convert the convertible preferred into common stock at a price equal to 87.5% of the average of the three lowest closing bid prices (which need not be consecutive) of the twenty consecutive trading days prior to the conversion date. The agreement further provides that the Company register the underlying common shares in a registration statement as soon as possible after the closing date, and must use their best efforts to file timely and cause the registration statement to become effective within 120 days from the closing date. The registration statement was effective on December 13, 2000.
The entire amount of the Series K Convertible Preferred Stock was converted or redeemed by the Company during the year ended June 30, 2001 into 5,664,067 shares of common stock, including 219,225 shares as payment of the 9% accrued dividend.
The agreements provided that no fractional shares shall be issued. In addition, provisions were made for any stock dividends or stock splits that the Company may issue with respect to their no par value common stock. The Company was also required to reserve and keep available out of its authorized but unissued common stock such number of shares of common stock as shall be available to effect the conversion of all of the outstanding shares of Convertible Preferred Stock. The preferred stockholders shall not be entitled to vote on any matters submitted to the stockholders of the Company, except as to the necessity to vote for the authorization of additional shares to effect the conversion of the preferred stock. The holders of any outstanding shares of preferred stock shall have a preference in distribution of the Company's property available for distribution to the holders of any other class of capital stock, including but not limited to, the common stock, equal to $10,000 consideration per share.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(16) CONVERTIBLE PREFERRED STOCK (Continued)
The following schedule reflects the number of shares of preferred stock that have been issued, converted and are outstanding as of June 30, 2003, including certain additional information with respect to the deemed preferred stock dividends that were calculated as a result of the discount from market for the conversion price per share:
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(16) Convertible Preferred Stock (Continued)
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(17) COMMON STOCK
On June 8, 1994, at a special meeting of shareholders of the Company, a one for one hundred reverse stock split was approved reducing the number of issued and outstanding shares of common stock from 68,875,200 shares to 688,752 shares (510,000 shares of original stock, for $50,000, and the 178,752 shares acquired in the merger). In addition, the board of directors approved the issuance of an additional 27,490,000 shares of common stock that had been provided for in the original merger documents. However, during April, 1995 the four major shareholders agreed to permanently return 12,147,480 of these additional shares. Therefore, the net additional shares of common stock issued amounts to 15,342,520 shares, and the net additional shares issued as a result of this transaction have been reflected in the financial statements of the Company (See Statement of Stockholders' Equity).
The Company has sold 1,290,069 shares of its common stock through Private Placement Memorandums dated April 20, 1994 and December 7, 1994, as subsequently amended. The net proceeds to the Company under these Private Placement Memorandums were approximately $1,000,000. In addition, the Company has sold 690,722 shares of "restricted common stock" during the year ended June 30, 1995. These shares are restricted in terms of a required holding period before they become eligible for free trading status. As of June 30, 1995, receivables from the sale of common stock during the year amounted to $523,118. During the year ended June 30, 1996, 410,500 shares of the common stock related to these receivables were canceled and $103,679 was collected on the receivable. The unpaid balance on these original sales and other subsequent sales of common stock, in the amount of $35,559, as of June 30, 1997, is reflected as a reduction to stockholder's equity on the Company's balance sheet.
During the year ended June 30, 1995, 115,650 shares of common stock were issued to satisfy obligations of the Company amounting to $102,942, approximately $.89 per share. The stock was recorded at the fair market value at the date of issuance.
In addition, during the year ended June 30, 1995, wages accrued to the officers of the Company in the amount of $151,000, were satisfied with the issuance of 377,500 shares of restricted common stock. Compensation expense has been recorded during the fiscal year pursuant to the employment agreements with the officers. In addition, during the year ended June 30, 1995, 75,000 shares of restricted common stock were issued to a company executive pursuant to an employment agreement. Compensation expense of $78,750 was recorded in conjunction with this transaction.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(17) COMMON STOCK (Continued)
During the year ended June 30, 1996, the Company sold, under the provisions of Regulation S, a total of 700,471 shares of common stock. The proceeds from the sale of these shares of common stock amounted to $1,561,110. The Company issued an additional 2,503,789 shares ($4,257,320) of its common stock as a result of the exercise of stock options issued in exchange for services rendered during the year. Cash proceeds associated with the exercise of these options and the issuance of these shares amounted to $1,860,062, with the remaining $2,397,258 reflected as noncash compensation. These 2,503,789 shares were issued at various times throughout the fiscal year. The stock has been recorded at the fair market value at the various grant dates for the transactions. Compensation, aggregating $2,298,907, has been recorded at the excess of the fair market value of the transaction over the exercise price for each of the transactions.
As of June 30, 1996, there were a total of 425,416 shares of common stock issued as a result of the conversion of the Series A Convertible Preferred Stock and the related accumulated dividends (See Note 16).
Common stock issued to employees as a result of the exercise of their incentive stock options and their non-qualified stock options during the fiscal year ended June 30, 1996 amounted to 1,187,900, of which 996,400 shares were issued pursuant to the provisions of the non-qualified stock option plan and were exercised in a "cash-less" transaction, resulting in compensation to the officers of $567,164. Compensation cost was measured as the excess of fair market value of the shares received over the value of the stock options tendered in the transaction. The excess of fair market value at July 15, 1995 approximated $.57 per share on the 996,400 shares issued.
During the year ended June 30, 1997, the Company issued a total of 1,881,295 shares ($5,461,589) of its common stock. The conversion of Series A Convertible Preferred Stock, including accrued dividends (See Note 16), accounted for the issuance of 1,081,962 shares ($2,808,643). The remaining 799,333 shares were issued as follows:
1. Services rendered by independent consultants in exchange for 31,200 shares. Research and development expenses of $90,480 were charged as the fair market value at November 20, 1996 was $2.90 per share.
2. On December 20, 1996, bonus stock was issued to Company employees, 3,200 shares. Compensation expense of $10,463 was charged as the fair market value at that date was $3.27 per share.
3. On January 3, 1997 bonus stock was issued to the officers of the Company, 350,000 shares. Compensation expense of $907,900 was charged, as the fair market value at that date was $2.59 per share.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(17) COMMON STOCK (Continued)
4. On February 13, 1997, 4,000 shares were issued to an outside consultant in exchange for services performed. Consulting services of $11,500 were recorded, representing the fair market value ($2.88 per share) on that date.
5. Services rendered by an independent consultant during June 1997 in exchange for 199,000 shares. Consulting expenses of $548,149 were charged, as the fair market value on the date of the transaction was approximately $2.75 per share.
6. Exercise of incentive stock options comprised of 27,000 shares ($33,750) exercised and paid for at $1.25 per share, and 334,933 shares ($1,103,203) acquired in the exchange for options tendered in a cash-less transaction.
7. The Company repurchased 150,000 shares ($52,500), which had been previously acquired by one of its employees.
During the year ended June 30, 1998, the Company issued a total of 11,588,460 shares ($8,583,721) of its common stock. The conversion of Convertible Preferred Stock (see Note 16) accounted for the issuance of 6,502,448 shares ($4,984,684). The remaining 5,056,012 shares were issued as follows:
1. Services rendered by independent consultants in exchange for 100,000 shares. Consulting expenses of $221,900 were charged as the fair market value at July 10, 1997 was $2.22 per share.
2. Services rendered by an independent consultant in exchange for 200,000 shares. Consulting expenses of $400,000 were charged as the fair market value at August 20, 1997 was $2.00 per share.
3. Services rendered by an independent consultant in exchange for 40,000 shares. Consulting expenses of $67,480 were charged as the fair market value at September 4, 1997 was $1.69 per share.
4. Services rendered by a public relations company in exchange for 166,000 shares. Public relations expenses of $269,750 were charged as the fair market value at October 24, 1997 was $1.63 per share.
5. On December 15, 1997, bonus stock was issued to Company employees, for 39,300 shares. Compensation expense of $41,658 was charged as the fair market value at that date was $1.06 per share.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(17) COMMON STOCK (Continued)
6. Services rendered by an independent consultant in exchange for 250,000 shares. Consulting expenses of $320,000 were charged as the fair market value at January 7, 1998 was $1.28 per share.
7. Services rendered by an independent consultant during May 1998 in exchange for 200,000 shares. Consulting expenses of $140,000 were charged, as the fair market value on that date was $.70 per share.
8. The Company sold 500,000 shares on May 15, 1998 in a Regulation D offering at $.40 per share, and received cash proceeds of $200,000.
9. On June 5, 1998, the Company issued to its chief executive officer 3,500,000 shares ($1,890,000) as consideration for an exclusive Patent License Agreement (see Note 7). The market value of the stock on this date was $.54 per share. The excess of the fair market value of the common stock over the historical cost basis of the patent license was recorded as a distribution to the shareholder; recorded as a reduction to additional paid-in capital of $3,199,000.
10. On June 11, 1998, the Company issued 25,000 shares to its corporate counsel as additional bonus compensation. Legal expenses of $12,750 were recorded as the market value of the stock on that date was $.51 per share.
11. A total of 65,712 non-qualified stock options were exercised and proceeds of $22,999 ($.35 per share) was received by the Company.
On July 10, 1998, the majority shareholders of the Company authorized, by written action, the Company's adoption of an Amendment to the Company's Articles of Incorporation increasing the Company's authorized shares of common stock from 48,000,000 shares to 100,000,000 shares. The Florida Statutes provide that any action to be taken at an annual or special meeting of shareholders may be taken without a meeting, without prior notice and without a vote, if the action is taken by a majority of outstanding stockholders of each voting group entitled to vote. On August 5, 1998, the Company filed an Information Statement with the Securities and Exchange Commission with regard to the Written Action. The Majority Shareholders consent with respect to the Amendment was effective on February 18, 1999. The number of authorized shares was further increased to 150,000,000 shares during the shareholders annual meeting held on May 10, 2000, and increased again during the 2002 annual meeting to 200,000,000 shares, effective January 3, 2003.
During the year ended June 30, 1999, the Company issued a total of 12,804,131 shares ($5,837,656) of its common stock. The conversion of Convertible Preferred Stock (see Note 16) accounted for the issuance of 4,865,034 shares ($1,972,296). The remaining 7,939,097 shares were issued as follows:
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(17) COMMON STOCK (Continued)
1. The Company sold 200,000 shares on August 5, 1998 in a Regulation D offering at $.30 per share, and received cash proceeds of $60,000.
2. In June 1999, the Company issued to its chief executive officer 3,500,000 shares ($1,890,000), representing the balance of shares to be issued as consideration for the exclusive Patent License Agreement (see Note 7).
3. On November 9, 1998, the Company issued 15,000 shares to its corporate counsel as additional bonus compensation. Legal expenses of $10,800 were recorded as the market value of the stock on that date was $.72 per share.
4. A total of 65,612 non-qualified stock options were exercised and proceeds of $22,964 ($.35 per share) was received by the Company. An additional $101,500 was received this year for stock sold in the prior year.
5. A total of 480,000 shares were issued in connection with loans that were received by the Company. The total loan fee expenses (based on the market value of the stock at the date of issuance) charged to the statement of operations for the year was $292,694, or an average of $.61 per share.
6. A total of 2,974,043 shares were issued as repayment of various accounts payable and loans payable during the year. A total of $1,196,992 (average of $.40 per share) of debts were satisfied through the issuance of the stock.
7. On December 11, 1998, bonus stock was issued to Company employees, for 130,200 shares. Compensation expense of $79,422 was charged as the fair market value at that date was $.61 per share.
8. On March 26, 1999, the Company issued 424,242 shares of stock as partial-payment ($140,000) on the liquidated damages in connection with Series H Preferred Stock. The fair market value at that date was $.33 per share.
9. During the year a total of 150,000 shares were issued for to various independent parties for services rendered to the Company. Expenses of $81,788 were charged, or an average price of $.50 per share.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(17) COMMON STOCK (Continued)
During the year ended June 30, 2000, the Company issued a total of 56,214,003 shares ($12,997,328) of its common stock. The conversion of Convertible Debentures accounted for the issuance of 4,060,398 shares ($3,958,223), the conversion of Redeemable Convertible Preferred Stock (see Note 15) accounted for the issuance of 3,834,492 shares ($507,115), and the conversion of Convertible Preferred Stock (see Note 16) accounted for the issuance of 41,581,242 shares ($6,806,219). The remaining 6,737,871 shares were issued as follows:
1. The Company sold 100,000 shares on April 27, 2000 in a Regulation D offering at $1.57 per share, and received cash proceeds of $157,000.
2. A total of 5,061,294 shares were issued as repayment of various loans payable during the year. A total of $1,067,665 (average of $.21 per share) of debts were satisfied through the issuance of the stock.
3. On November 12, 1999, bonus stock was issued to Company employees, for 145,000 shares. Compensation expense of $12,325 was charged as the fair market value at that date was $.09 per share. The company also canceled 8,000 shares, which had been previously issued to an independent contractor for consulting services. A reduction of $31,000 was recorded to consulting expenses for the year.
4. A total of 7,297 shares were issued in connection with a loan that was received by the Company. The total loan fee expense and interest charged to income amounted to $2,408 during the year.
5. During the year at total of 150,652 shares were issued for the exercise of warrants. On March 21, 2000, the Company received $100,000 for the exercise of 107,527 warrants at an exercise price of $.93 per share. The Company recorded a charge to consulting expense, as the fair market value at the date the warrants were issued was $1.84. The Company also received $21,563 from the exercise of 43,125 of Series G Preferred Stock warrants during the last quarter of the fiscal year.
6. Exercise of 1,281,628 incentive stock options, ($395,810) exercised and paid for at prices ranging from $.13 per share to $1.13 per share.
During the year ended June 30, 2001, the Company issued a total of 13,916,169 shares ($12,333,724) of its common stock. The conversion of Convertible Preferred Stock (see Note 16) accounted for the issuance of 5,664,067 shares ($5,580,531), and the common stock issued through the equity line of credit (See Note 12) accounted for the issuance of 3,407,613 shares ($3,143,666). The remaining 4,844,489 shares were issued as follows:
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(17) COMMON STOCK (Continued)
1. A total of 810,000 shares were issued as repayment of a loan payable during the year. (See Note 10) A total of $530,000 of debt was satisfied through the issuance of the stock, and an additional $863,200 was charged as interest expense as the fair market value of the stock at the date of issuance was $1.72 per share.
2. On December 7, 2000, 143,500 shares of bonus stock were issued to Company employees. Compensation expense of $219,555 was charged as, the fair market value of the common stock at that date was $1.53 per share. The Company also issued 10,000 shares on May 17, 2001. Consulting services of $8,300 was charged, as the fair market value of the stock was $.83 per share.
3. During the year a total of 99,375 shares of common stock were issued for the exercise of warrants. The Company received $4,687 from the exercise of 99,375 Series G Preferred Stock warrants. On August 10, 2000, the Company received $65,200 for the exercise of 40,000 Series C Preferred Stock warrants at an exercise price of $1.63 per share.
4. Common stock issued to officers as a result of the exercise of their incentive stock options and their non-qualified stock options amounted to 3,755,414 shares. The options were exercised in a "cash-less" transaction, resulting in compensation to the officers of $1,848,566. An additional 26,200 shares were issued to employees upon the exercise of their incentive stock options during the year, at exercise prices ranging from $.35 per share to $.60 per share.
During the year ended June 30, 2002, the Company issued a total of 12,167,866 shares ($6,508,155) of its common stock. The common stock issued through the equity line of credit (See Note 12) accounted for the issuance of 11,607,866 shares ($6,213,805). The remaining 560,000 shares were issued as follows:
1. On November 21, 2001, 210,000 shares of bonus stock were issued to Company employees. Deferred compensation of $117,600 was charged as, the fair market value of the common stock at that date was $.56 per share, and the stock will not be physically delivered to the employees until January 2003.
2. A total of 350,000 shares were issued in conjunction with the settlement on March 22, 2002 of a lawsuit. Settlement expense of $176,750 has been charged on the statement of operations, as the fair market value of the stock at the date of issuance was $.51 per share. (Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(17) COMMON STOCK (Continued)
During the year ended June 30, 2003, the Company issued a total of 31,398,326 shares ($9,708,425) of its common stock. The common stock issued through the equity line of credit (See Note 12) accounted for the issuance of 29,390,708 shares ($8,737,772). The remaining 2,007,618 shares were issued as follows:
1. During December 2002, 258,500 shares of bonus stock were issued to Company employees. Compensation of $62,425 was charged as, the fair market value of the common stock on the dates of issuance averaged $.24 per share. In addition, the Company recorded an adjustment for deferred compensation, which resulted in a reduction to common stock for $73,500.
2. A total of 1,194,118 shares were issued in conjunction with the settlement on June 5, 2003 of a lawsuit. Settlement expense of $841,853 has been charged on the statement of operations, as the fair market value of the stock at the date of issuance was $.70 per share.
3. During the year a total of 555,000 shares were issued to various parties for services rendered to the Company. Expenses of $139,875 were charged, or an average price of $.25 per share.
During the year ended June 30, 2004, the Company issued a total of 10,333,373 shares ($7,867,351) of its common stock. The common stock issued through the equity line of credit (See Note 12) accounted for the issuance of 8,630,819 shares ($5,850,000). The remaining 1,702,554 shares were issued as follows:
1. During November 2003, 401,785 shares were issued in conjunction with the settlement on September 18, 2003 of a lawsuit. Settlement expense of $450,000 has been charged on the statement of operations as the fair market value of the stock at the date of the settlement agreement was $1.12 per share.
2. During January 2004, 333,000 shares of bonus stock were issued to Company employees. Compensation of $382,950 was charged as the fair market value of the common stock on the date of issuance was $1.15 per share.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(17) COMMON STOCK (Continued)
3. Common stock issued to directors as a result of the exercise of their incentive stock options amounted to 450,000 shares during the year. The Company received $262,500 from the exercise of 450,000 option shares. The exercise prices ranging from $.55 per share to $.65 per share.
4. Common stock issued to employees as a result of the exercise of their incentive stock options amounted to 517,769 shares during the year. The Company received $230,201 from the exercise of 517,769 option shares. The exercise prices ranging from $.19 per share to $.65 per share.
(18) STOCK OPTIONS
During July 1994, the Company adopted a non-qualified Stock Option Plan (the "Plan"), whereby officers and employees of the Company may be granted options to purchase shares of the Company's common stock. Under the plan and pursuant to their employment contracts, an officer may be granted non-qualified options to purchase shares of common stock over the next five calendar years, at a minimum of 250,000 shares per calendar year. The exercise price shall be thirty-five percent of the fair market value at the date of grant. On July 5, 1995 the Board of Directors authorized an amendment to the Plan to provide that upon exercise of the option, the payment for the shares exercised under the option may be made in whole or in part with shares of the same class of stock. The shares to be delivered for payment would be valued at the fair market value of the stock on the day preceding the date of exercise. The plan was terminated effective July 1, 1996, however the officers will be issued the options originally provided under the terms of their employment contracts.
On March 29, 1995, the incentive stock option plan was approved by the Board of Directors and adopted by the shareholders at the annual meeting. This original plan was revised and on January 3, 2000 the Board of Directors adopted the Company's "2000 Non-Statutory Plan", and the plan was subsequently approved by the shareholders on May 10, 2000 at the annual meeting. This plan provides for the granting, exercising and issuing of incentive stock options pursuant to Internal Revenue Code Section 422. The Company may grant incentive stock options to purchase up to 4,850,000 shares of common stock of the Company. This Plan also allows the Company to provide long-term incentives in the form of stock options to the Company's non-employee directors, consultants and advisors, who are not eligible to receive incentive stock options. In January 2002, our Board replaced the 1995 Plan and 2000 Plan with a new combined stock option plan, the 2002 Incentive and Non-Statutory Stock Option Plan (the "2002 Plan"), which provides for the grant of incentive and non-statutory options to purchase an aggregate of 6,340,123 shares of Common Stock. Upon approval of the 2002 Plan at the next shareholders' meeting, all options outstanding under the 1995 and 2000 Plans will remain outstanding; however, no new options will be granted under those plans. The Board of Directors or a company established compensation committee has direct responsibility for the administration of these plans.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(18) STOCK OPTIONS (Continued)
The exercise price of the non-statutory stock options shall be equal to no less than 50% of the fair market value of the common stock on the date such option is granted.
On February 4, 2004, the Board of Directors adopted the Company's 2004 Non-Statutory Stock Option Plan (the "2004 Plan"), which was adopted by the shareholders on March 24, 2004 at the annual meeting, to provide a long-term incentive for employees, non-employee directors, consultants, attorneys and advisors of the Company. The maximum number of options that may be granted under the 2004 Plan shall be options to purchase 8,432,392 shares of Common Stock (5% of our issued and outstanding common stock as of February 4, 2004). Options may be granted under the 2004 Plan for up to 10 years after the date of the 2004 Plan. The 2004 Non-Statutory Stock Plan replaced the 2002 Incentive and Non-Statutory Stock Option Plan.
In accordance with the provisions of APB No. 25, the Company records the discount from fair market value on the non-qualified stock options as a charge to deferred compensation at the date of grant and credits additional paid-in capital. The compensation is amortized to income over the vesting period of the options. In addition, the Company is periodically accruing compensation on the officers' incentive stock options in accordance with the provisions of FASB Interpretation No. 28 ("Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans").
Transactions and other information relating to the plans are summarized as follows:
** On June 25, 1999, the exercise price of 502,225 outstanding incentive stock options was restated to $.60 per share. The Company has recorded compensation of $330,569 during the fiscal year ended June 30, 1999 as a result of this repricing, in accordance with the guidelines discussed in the proposed FASB interpretation of APB Opinion No. 25.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(18) STOCK OPTIONS (Continued)
At June 30, 2004, 2003 and 2002, 7,053,586, 4,941,985 and 2,244,045 respectively, of the employee incentive stock options were vested and exercisable. The employee stock options vest at various rates over periods up to ten years. At June 30, 2004, 2003 and 2002, 650,000, 575,000 and 300,000, respectively, of the director stock options were vested and exercisable. Shares of authorized common stock have been reserved for the exercise of all options outstanding. The following summarizes the option transactions that have occurred:
On July 5, 1994 the Company issued non-qualified options to its officers and directors to purchase an aggregate of 750,000 shares of common stock at 35% of the fair market value at the date of grant. Compensation expense of $567,164 was recorded during the year ended June 30, 1996 as a result of the discount from the market value.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(18) STOCK OPTIONS (Continued)
On November 7, 1994, the Company granted 300,000 non-qualified options to its general counsel, currently a vice-president of the Company, at an exercise price of $0.50 per share. Deferred compensation of $150,000 was recorded on the transaction and is being amortized over the vesting period. The options were all exercised as of June 30, 1997.
On March 30, 1995, the Company granted to the director of engineering, a non-qualified option to purchase up to 150,000 shares of common stock per year, or a total of 450,000 shares, during the period March 30, 1995 and ending March 31, 1999. The exercise price shall be $0.35 per share. The options do not "vest" until one year from the anniversary date. Deferred compensation of $472,500 was recorded on the transaction and is being amortized over the vesting period. The Company also granted the individual, incentive options to purchase 75,000 shares of common stock at an exercise price of $1.40 per share. The options originally expired on March 30, 1998, but were reissued on March 30, 1998 for two years.
On July 5, 1995 the Company issued non-qualified options to its officers and directors to purchase an aggregate of 750,000 shares of common stock at 35% of the fair market value at the date of grant. Compensation expense was recorded during the year ended June 30, 1996 as a result of the discount from the market value.
On September 1, 1995, the Company issued to its three officers and directors incentive options to purchase 107,527 shares, individually, at an exercise price of $0.93 per share (110% of the fair market value). The options expire on September 1, 1999.
On September 1, 1995, the Company issued to an employee incentive options to purchase 119,047 shares of common stock at an exercise price of $0.84 per share. The options expire on September 1, 1999
At various dates during the fiscal year ended June 30, 1996, the Company issued to various employees incentive options to purchase 328,681 shares of common stock at prices ranging from $0.81 to $8.18. In all instances, the exercise price was established as the fair market value of the common stock at the date of grant, therefore no compensation was recorded on the issuance of the options. In most cases, one-third of the options vest one year from the grant date, with one-third vesting each of the next two years. The options expire in ten years from the grant date.
On July 4, 1996, the Company issued to its three officers and directors incentive options to purchase 22,883 shares, individually, at an exercise price of $4.37 per share (110% of the fair market value). The options expire on July 4, 2001.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(18) STOCK OPTIONS (Continued)
On July 5, 1996 the Company issued non-qualified options to its officers and directors to purchase an aggregate of 750,000 shares of common stock at 35% of the fair market value at the date of grant. Deferred compensation of $1,891,500 was recorded on the transaction and is being amortized over the remaining term of the employment contracts (three years).
At various dates during the year ended June 30, 1997, the Company issued to various employees incentive options to purchase 264,778 shares of common stock at prices ranging from $2.56 to $3.81. In all instances, the exercise price was established as the fair market value of the common stock at the date of grant, therefore no compensation was recorded on the issuance of the options. In most cases, one-third of the options vest one year from the grant date, with one-third vesting each of the next two years. The options expire in ten years from the grant date.
On July 4, 1997, the Company granted to its three officers and directors incentive options to purchase 34,000 shares, individually, at an exercise price of $2.94 per share (110% of the fair market value). The options expire on July 4, 2002.
On July 5, 1997, the Company issued non-qualified options to its officers and directors to purchase 750,000 shares of common stock at 35% of the fair market value at the date of grant. Deferred compensation of $1,340,625 was recorded on the transaction and is being amortized over the remaining term of the employment contract (two years).
At various dates during the year ended June 30, 1998, the Company issued to various employees incentive options to purchase 204,905 shares of common stock at prices ranging from $.55 to $2.60. In all instances, the exercise price was established as the fair market value of the common stock at the date of grant, therefore no compensation was recorded on the issuance of the options. In most cases, one-third of the options vest one year from the grant date, with one-third vesting each of the next two years. The options expire in ten years from the grant date.
On July 5, 1998, the Company issued non-qualified options to its officers and directors to purchase 750,000 shares of common stock at 35% of the fair market value at the date of grant. Deferred compensation of $622,500 was recorded on the transaction and is being amortized over the remaining term of the employment contract (one year).
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(18) STOCK OPTIONS (Continued)
At various dates during the year ended June 30, 1999, the Company issued to various employees incentive options to purchase 786,635 shares of common stock at prices ranging from $.46 to $.60. In all instances, the exercise price was established as the fair market value of the common stock at the date of grant, therefore no compensation was recorded on the issuance of the options. In most cases, one-third of the options vest one year from the grant date, with one-third vesting each of the next two years. The options expire in ten years from the grant date.
At various dates during the year ended June 30, 2000, the Company issued to its officers and various employees incentive options to purchase 3,139,459 shares of common stock at prices ranging from $.23 to $4.38. The exercise price was established as the fair market value of the common stock at the date of grant for employees, and 110% of the fair market value at the date of grant for officers, therefore no compensation was recorded on the issuance of the options. The officers' options vested immediately, while the employees' options vest one-third from the grant date, with one-third vesting each of the next two years. The options expire in five years from the grant date.
At various dates during the year ended June 30, 2001, the Company issued to its officers and various employees incentive options to purchase 1,915,700 shares of common stock at prices ranging from $.65 to $2.85. The exercise price was established as the fair market value of the common stock at the date of grant for employees, and 110% of the fair market value at the date of grant for officers, therefore no compensation was recorded on the issuance of the options. The officers' options vested immediately, while the employees' options vest one-third from the grant date, with one-third vesting each of the next two years. The options expire in five years from the grant date.
In addition, on November 20, 2000 the Company granted to each director a stock option to purchase 50,000 shares (an aggregate of 150,000 shares) of the Company's common stock at an exercise price of $.65 per share. The option expires in ten years and shall become exercisable on a quarterly pro-rata basis (12,500 shares) from the date of grant. The option is not intended to be an incentive stock option pursuant to Section 422 of the Internal Revenue Code.
At various dates during the year ended June 30, 2002, the Company issued to its officers and various employees incentive options to purchase 6,839,864 shares of common stock at prices ranging from $.50 to $.93. The exercise price was established as the fair market value of the common stock at the date of grant for employees, and 110% of the fair market value at the date of grant for officers, therefore no compensation was recorded on the issuance of the options.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(18) STOCK OPTIONS (Continued)
Vesting for certain of the officers' options is immediately, while the other officers' options and the employees' options vest over varying periods up to three years from the date of grant. The options expire from four to ten years from the grant date.
In addition, on November 20, 2001 the Company granted to each director a stock option to purchase 100,000 shares (an aggregate of 300,000 shares) of the Company's common stock at an exercise price of $.55 per share. The option expires in ten years and shall become exercisable on a quarterly pro-rata basis (25,000 shares) from the date of grant. The option is not intended to be an incentive stock option pursuant to Section 422 of the Internal Revenue Code.
At various dates during the year ended June 30, 2003, the Company issued to its officers and various employees incentive options to purchase 1,459,705 shares of common stock at prices ranging from $.19 to $.79. The exercise price was established as the fair market value of the common stock at the date of grant for employees, and 110% of the fair market value at the date of grant for officers, therefore no compensation was recorded on the issuance of the options. Vesting for certain of the officers' options is immediately, while the other officers' options and the employees' options vest over varying periods up to three years from the date of grant. The options expire from four to ten years from the grant date.
In addition, at various dates during the year ended June 30, 2003 the Company granted to each new director a stock option to purchase 100,000 shares (an aggregate of 400,000 shares) of the Company's common stock at exercise price ranging from $.20 to $.25 per share. The option expires in ten years and shall become exercisable on a quarterly pro-rata basis (25,000 shares) from the date of grant. The option is not intended to be an incentive stock option pursuant to Section 422 of the Internal Revenue Code.
At various dates during the year ended June 30, 2004, the Company issued to its officers and various employees incentive options to purchase 1,576,620 shares of common stock at prices ranging from $.81 to $1.25. At various dates during the year ended June 30, 2004, the Company issued to various employees Non-Statutory options to purchase 31,748 shares of common stock at prices ranging from $.39 to $.78. The exercise price was established as the fair market value of the common stock at the date of grant for employees, and 110% of the fair market value at the date of grant for an officer, therefore no compensation was recorded on the issuance of the options. Vesting for certain of the officers' options is immediate, while the other officers' options and the employees' options vest over varying periods up to five years from the date of grant. The options expire from four to ten years from the grant date.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(18) STOCK OPTIONS (Continued)
In addition, at various dates during the year ended June 30, 2004, the Company issued to its Directors stock options to purchase 100,000 shares of the Company's common stock at prices ranging from $1.03 to $1.11. At various dates during the year ended June 30, 2004, the Company issued to its Directors Non-Statutory options to purchase 700,000 shares of common stock at prices ranging from $.69 to $.88. The options expire in ten years and shall become exercisable on a quarterly pro-rata basis (50,000 shares) from the date of grant. Options issued to the Directors are not intended to be incentive stock options pursuant to Section 422 of the Internal Revenue Code.
The following table summarizes information about all of the stock options outstanding at June 30, 2004:
At June 30, 2004, the Company has issued options pursuant to four different stock option plans, which have been previously described. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans with respect to its employees, however compensation has been recorded with respect to its officers due to their provisions of utilizing "additional incentive stock options" to exercise their incentive stock options, and acquire shares of common stock. The compensation cost that has been charged against income for the officers was $(178,250) and $(262,200) for 2003 and 2002, respectively.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(18) STOCK OPTIONS (Continued)
The weighted average Black-Scholes value of options granted during 2004, 2003 and 2002 was $.49, $.19 and $.36 per option, respectively. Had compensation cost for the Company's fixed stock-based compensation plan been determined based on the fair value at the grant dates for awards under this plan consistent with the method of SFAS 123, the Company's pro forma net loss and pro forma net loss per share would have been as indicated below:
For purposes of the preceding proforma disclosures, the weighted average fair value of each option has been estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in 2004, 2003 and 2002, respectively: no dividend yield; volatility of 75.65%, 107.8% and 79.2%; risk-free interest rate of 4%, 4% and 5%; and an expected term of five years.
(19) CONCENTRATION OF CREDIT RISK
During the year, the Company has maintained cash balances in excess of the Federally insured limits. The funds are with a major money center bank. Consequently, the Company does not believe that there is a significant risk in having these balances in one financial institution. The cash balance with the bank at June 30, 2004 was $578,880.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(20) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximated their fair values due to the short maturity of these instruments. The fair value of the Company's debt obligations is estimated based on the quoted market prices for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. At June 30, 2004 and 2003, the aggregate fair value of the Company's debt obligations approximated its carrying value.
(21) COMMITMENTS AND CONTINGENCIES
On August 29, 1999, the Company entered into five-year employment agreements with Richard Grable (CEO), Allan Schwartz (Executive Vice President) and Linda Grable (President). Under these agreements, base annual salaries were as follows: Richard Grable, $286,225; Linda Grable, $119,070; and Allan Schwartz, $119,070. In addition, each person received a car allowance of $500 per month. Each employment agreement provided for performance bonuses, health insurance, car allowances, and other customary benefits, and a cost of living adjustment of 7% per annum. No bonuses were paid to date to the three executives during the five-year terms of their respective employment agreements. Upon the expiration of Mr. Schwartz's employment agreement on August 29, 2004, he entered into a one-year Employment Extension Agreement on August 30, 2004 which provides for an annual salary of $185,000 and options to purchase up to an aggregate of 500,000 shares of the Company's common stock at an exercise price of $.30 per share, in accordance with the Company's 2004 Non-Statutory Stock Option Plan. These options shall vest on August 30, 2005.
At a special meeting of the Board of Directors held on August 28, 2001 the Board, with Linda Grable abstaining, voted to grant a death benefit of one year's salary ($286,225) to Richard Grable's beneficiary in recognition of his services as a co-founder, CEO and inventor of the CTLM(R). This benefit was paid to Linda Grable as beneficiary in installments with the final payment made on April 15, 2004.
On August 15, 2001, the Company entered into a three-year employment agreement with Edward Horton, Chief Operating Officer, at an annual salary of $110,000. The COO was also granted 500,000 incentive stock options at an exercise price of $.77 per share, the fair market value at the date of the grant, which vested ratably over the three-year period. Upon the expiration of his employment agreement on August 15, 2004, the Company entered into a one-year employment agreement with Mr. Horton at an annual salary of $125,000. He was also granted 175,000 non-statutory stock options at an exercise price of $.28, the fair market value at the date of the grant, which will vest at the end of the one-year period.
(Continued)
IMAGING DIAGNOSTIC SYSTEMS, INC. (a Development Stage Company)
Notes to Financial Statements (Continued)
(21) COMMITMENTS AND CONTINGENCIES (Continued)
On December 1, 2001, the Company entered into a new three-year employment agreement with Linda Grable (appointed to CEO upon the death of Richard Grable). Under this agreement, Ms. Grable received an annual base salary of $280,000. Ms. Grable received incentive options to purchase up to an aggregate of 2,250,000 shares of the Company's common stock at an exercise price of $.60 per share. The incentive stock options vested at 750,000 shares per year starting December 1, 2002. In addition, she also received a car allowance of $500 per month. On April 15, 2004, Ms. Grable retired as CEO and Chairman of the Board. As part of her Retirement Agreement the Board of Directors agreed to pay out the remainder of her employment agreement and continue coverage of her health insurance through its expiration on December 15, 2005. The total amount due for the un-expired term of her agreement is $466,667 (based on her salary of $280,000 per year). Payments are made on the 15th and 30th of each month. Payments will continue to be made through December 15, 2005.
On September 15, 2003, the Company entered into a three-year employment agreement with Deborah O'Brien, Senior Vice-President, at an annual salary of $95,000. The Senior Vice-President was also granted 302,000 incentive stock options at an exercise price of $1.13 per share, the fair market value at the date of the grant, which will vest ratably over the three-year period.
On July 8, 2004, the Company entered into a three-year employment agreement with Timothy Hansen, its new Chief Executive Officer, commencing on July 26, 2004 at an annual salary of $210,000 and appointed him a Director of the Company. Mr. Hansen was granted 1,500,000 non-statutory stock options at an exercise price of $.38, the fair market value at the date of the grant, which will vest over the three-year period in accordance with the table below:
Date of Vesting No. of Option Shares - --------------- -------------------- July 8, 2005 500,000 January 8, 2006 250,000 July 8, 2006 250,000 January 8, 2007 250,000 July 8, 2007 250,000
Mr. Hansen also received 100,000 restricted shares of our common stock. The executive will receive a $500 car allowance per month along with pre-approved living expenses for a three-month period and moving expenses.
The Company has entered into agreements with various distributors located throughout Europe, Asia and South America to market the CTLM(R) device. The terms of these agreements range from eighteen months to three years. The Company has the right to renew the agreements, with renewal periods ranging from one to five years.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to the filing date of this report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Company's management, including our Chief Executive Officer along with our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer along with our Chief Financial Officer concluded that our disclosure controls and procedures are effective. There have been no significant changes in our internal controls or in other factors, which could significantly affect internal controls subsequent to the date we carried out our evaluation.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning our directors and executive officers:
* Linda B. Grable, our former Chairman and Chief Executive Officer, retired on April 15, 2004
Allan Schwartz and Linda Grable are our founders and as such may be deemed "promoters" and "parents" as defined in the Rules and Regulations promulgated under the Securities Act, as those terms are defined in the rules and regulations promulgated under the Securities Act. Directors serve until the next meeting of shareholders. Officers serve at the pleasure of the Board of Directors.
We have adopted a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act of 2002 that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.
Tim Hansen Tim Hansen was appointed our Chief Executive Officer and a Director of the Company by the Board of Directors in July 2004. Prior to his appointment as CEO and Director of IDSI, Mr. Hansen served as General Manager of Radiation Management Services, a business of Cardinal Health, Inc. (NYSE:CAH) of Dublin, Ohio from January 2002 to July 2004. From August 2001 to January 2002 he served as the President of Syncor Radiation Management in Cleveland, Ohio, a division of Syncor International Corporation (NASDAQ:SCOR) of Woodland Hills, CA. Cardinal Health acquired Syncor in January 2003. From April 2000 to August 2001 Mr. Hansen was a consultant to Inovision, LLC serving as President of Inovision Radiation Measurements in Cleveland, Ohio. He also served as President of Cleaner Foods, Inc. of Cleveland, OH and a Director of Kliniki St. Paul of Warsaw, Poland from March 2000 to August 2001. From 1982 to 2000 Mr. Hansen held several high-level executive positions with Picker International, Inc. of Cleveland, Ohio. From 1999 to 2000 he served as President of Picker Medical Systems, a leading manufacturer of diagnostic imaging systems including CT and MRI scanners, nuclear medicine imagers and X-Ray systems. Picker International was a wholly owned subsidiary of G.E.C. plc/Marconi Medical Systems with $1.6 billion in annual sales. Philips Medical Systems acquired Marconi in October 2001. Prior to Picker, Mr. Hansen was Vice President of Sales, Service and Marketing for Xonics Medical Systems, Inc. of Des Plaines, IL; National Sales Manager, Manager, Business Planning and Marketing Manager, X-Ray and CT for General Electric Medical Systems of Milwaukee, WI; and Regional Sales Manager for Smith Kline Instruments, a subsidiary of Smith Kline and French. Mr. Hansen holds a Bachelor of Science degree in Economics from the University of Wisconsin-Milwaukee.
Allan L. Schwartz Mr. Schwartz is Executive Vice-President and Chief Financial Officer of the Company and is responsible for its financial affairs. He has a wide range of management, marketing, field engineering, construction, and business development experience. Prior to joining the Company as a founder in 1993, he developed the Chronometric Trading System for analyzing stock market trends using neural networks and developed pre-engineered homes for export to Belize, Central America for S.E. Enterprises of Miami, Florida. In 1991 he formed Tron Industries, Inc. for the development of low-voltage neon novelty items and self-contained battery powered portable neon. He is a graduate of C.W. Post College of Long Island University with a B.S. in Business Administration. Previous innovations by Mr. Schwartz before relocating to Florida have included the use of motion detection sensors in commercial burglar alarm systems for Tron-Guard Security Systems. Inc. and the use of water reclamation systems with automatic carwash equipment. Mr. Schwartz has been a Director and Officer of the Company since its inception.
Edward R. Horton Mr. Horton was appointed Chief Operating Officer by the Board of Directors in August 2001 and is responsible for all operational activities including the planning, purchasing, production, quality assurance, engineering and distribution functions. Mr. Horton began his career almost 20 years ago in the medical device industry beginning with Bristol Myers as a manufacturing engineer. He then became the VP of Manufacturing and Operations for Microtek Medical Inc. in 1993. From 1997 to 2001 he was a co-founder and Vice President of Operations for Deka Medical, Inc. bringing the company from a start-up to a revenue producing company with over $23 million in annual sales in just 4 years. Mr. Horton holds a B.S. degree in Industrial Engineering from Bradley University and a M.B.A. from University of North Florida.
Deborah O'Brien Deborah O'Brien was appointed Senior Vice President on September 15, 2003. Ms. O'Brien has been employed at IDSI since 1995. During her tenure, she has held the positions of Director of Investor Relations, Vice President of Corporate Communications and most recently, since September 2001, Vice President of Business Development. Her responsibilities have included developing and executing a strategic corporate communications campaign, managing internal communications, outside public relations, marketing, and clinical applications. In addition, Ms. O'Brien was directly responsible for the development and establishment of consumer and industry awareness of our CTLM(R) System via a media outreach which targeted industry publications, national network television, radio, nationally-circulated publications and high traffic internet sites. As Vice President of Business Development, she was closely involved with various regulatory and marketing projects and played an integral role in the development and preparation of our PMA Application. She also supervised and managed the collection of clinical data for the PMA process. Prior to joining IDSI, she worked for seven years in the financial arena, managing investor accounts, and in the medical device industry, marketing medical equipment. Ms. O'Brien began her career in the mortgage loan industry as an account executive with Citibank.
Sherman Lazrus Mr. Lazrus has been a Director since December 2002 and serves as a member of the Compensation Committee. On April 15, 2004, the Board of Directors appointed him Co-Chairman of the Board. He has enjoyed a distinguished career with nearly 40 years' experience in government and private sector health care and health care finance. He was elected to the Board of Directors of Emergency Filtration Products, Inc., Las Vegas, NV (OTCBB: EMFP) in December 1998, and appointed as Interim Chief Executive Officer in June 2001 and appointed Chairman of the Board of Directors in August 2002. He continues to serve in these positions. Mr. Lazrus presently also serves as President of American Medical Capital, a division of American Medical Enterprises, LLC located in Bethesda, Maryland, a financial services and investment banking company specializing in the healthcare industry, a position he has held since 1991. Mr. Lazrus was initially employed with the Federal Government and while at the Department of Health, Education and Welfare in 1964 he was involved with the development of the Medicare and Medicaid Programs and served as the Director of Policy Coordination for the two programs. Also while employed by the Federal Government, Mr. Lazrus served from 1965 to 1966 in the office of the Director of the National Institute of Health and was involved in planning activities in areas involving biomedical research. He later administered the Social Security Administration's Disability Insurance Research Programs as Director of Program Analysis. Mr. Lazrus's final Federal Government position encompassed the administration of the military health care system serving as the Deputy Assistant Secretary of Defense from 1974 to 1976. In this position he was the Federal Government's senior career health official. Mr. Lazrus also served in the State of Maryland's Governor's office as Director of the Governor's Study Group on Vocational Rehabilitation from 1966 to 1968 and later developed a comprehensive human services delivery system for the City of Washington, D.C. from 1968 to 1972. While in the private sector, Mr. Lazrus from 1976 to 1978 was Vice President of American Medical International Inc., a major NYSE hospital corporation, which owned and operated numerous hospitals around the world. The company is now known as Tenet Healthcare Corporation. As a developer Mr. Lazrus was responsible for the development of various Washington D.C. area office buildings, shopping centers, industrial warehouses and residential communities. Mr. Lazrus attended George Washington University where he received A.A., B.A. and M.B.A. degrees.
Patrick J. Gorman Mr. Gorman, a Certified Public Accountant practicing in West Islip, New York, has been a Director since January 2003 and serves as Chairman of the Audit Committee. He has enjoyed a distinguished 25-year career in both public and private accounting. From 1991 to the present he has worked in private practice, serving both publicly traded and privately held companies, specializing in taxation. Mr. Gorman served as Corporate Tax Manager for Axsys Technologies, Inc. in Deer Park, New York from 1987 to 1990 and Controller/Tax Manager for Computer Associates in Jericho, New York from 1983 to 1986. Prior to joining Computer Associates, he served as Tax Manager with Ernst & Young in Melville, New York and Tax Accountant for Arthur Andersen in New York City. Mr. Gorman holds a MS in taxation from Long Island University and is a member of the NYSSCPA and the AICPA.
Edward Rolquin Mr. Rolquin of Naples, Florida, a consultant and retired corporate executive, has been a Director since February 2003 and serves as a member of the Compensation Committee. He has enjoyed a distinguished 48-year career in management, sales and finance with international experience in the medical industry. From 1989 to 1995, he served as a consultant for the Chinese government on various import, export and technology transfer projects. From 1984 to 1992 Mr. Rolquin was the Founder and President of JR Micrographics in Huntington, NY that specialized in medical records management. He has served in a management and consultant capacity while working with major international companies such as Anaconda Copper Mining Company in Chile and El Salvador from 1952 to 1984, Mobil Oil from 1976 to 1984, Cerro Corp., (an international mining company in Peru) from 1962 to 1978, and Esso (Standard Oil) from 1957 to 1968. Mr. Rolquin was responsible for equipping five hospitals for Anaconda, a 100-bed hospital in Chile for Cerro Corp., a 50-bed dispensary for Mobil Oil, and a hospital for Esso.
Jay S. Bendis Mr. Bendis of Akron, Ohio, has been a Director since February 2003 and serves as a member of the Audit Committee and is Chairman of the Compensation Committee. On April 15, 2004, the Board of Directors appointed him Co-Chairman of the Board. He has over 30 years experience in sales and marketing and is currently
President of Transfer Technology Consultants, Akron, OH, where he specializes in transferring new product concepts through to commercialization working with established and start-up companies in both domestic and international markets. He is also a partner in the Crystal Corridor Group, Hudson, OH, which works with Kent State University's Liquid Crystal Institute in facilitating liquid crystal technology. From 1995 to 2000, Mr. Bendis was Vice President of Sales and Marketing and a Director of American Bio Medica Corp. a public company in Kinderhook, NY, which develops and markets on-site drug abuse diagnostic kits. From 1993 to 1999, he was the President and co-founder of Emerging Technology Systems, Akron, OH, which is a research and development company specializing in developing new concept medical devices. From 1990 to 1992, he was a co-founder and Vice President of Sales and Marketing and a Director for Scientific Imaging Instruments of Trumbull, CT. From 1985 to 1990, he served as National Sales Manager of the XANAR Laser Corp., Colorado Springs, CO, a division of Johnson & Johnson, where he directed its national sales force and developed its marketing strategy for integrating high power lasers into the hospital market. From 1979 to 1984, he was the Sales and Marketing Manager for the IVAC Corp., San Diego, CA, a division of Eli Lilly Corp. and has had sales and management experiences with XEROX and A.M. International. He has also served as a member of the Edison BioTechnology Center Advisory Council for the State of Ohio. Mr. Bendis presently serves on the Boards of several private companies and earned his B.A. in Marketing/Management from Kent State University.
AUDIT COMMITTEE The Board of Directors has elected Patrick J. Gorman as Chairman of the Audit Committee. In addition, the Board has determined that Mr. Gorman is an "audit committee financial expert," as defined under new SEC regulations, who is independent of management of the Company. Jay S. Bendis also serves as a member of the Audit Committee.
COMPENSATION COMMITTEE The Board of Directors has elected Jay S. Bendis as Chairman of the Compensation Committee. Sherman Lazrus and Edward Rolquin also serve as members of the Compensation Committee.
COMPENSATION OF DIRECTORS
Each director who is not an employee of the Company receives a quarterly retainer of $2,000 and $600 per diem fees for days in which a Board meeting is attended or a non-employee board member is otherwise required to visit the Company or spend a significant amount of a day on Company matters. Non-employee directors are also reimbursed for travel expenses. Through December 2003, non-employee directors were eligible to receive options to purchase 100,000 shares per year of our common stock, vesting at 25,000 shares per quarter of service to the Company. Those options were issued pursuant to our 2002 Incentive and Non-Statutory Stock Option Plan. In December 2003, the Board voted to increase the amount of options that non-employee directors are eligible to receive from 100,000 to 200,000 shares per year, vesting at 50,000 shares per quarter of service to the Company. The new option structure will take effect on each non-employee director's respective anniversary date. The option price will be at the Fair Market Value (FMV) on each respective director's anniversary date. All future options will be granted under the 2004 Non-Statutory Stock Option Plan, which was adopted on March 24, 2004 by the stockholders at our annual meeting.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than 10 percent of our common stock, to file with the SEC initial reports of ownership and reports of changes in ownership, furnishing us with copies of all Section 16(a) forms they file. To the best of our knowledge, based solely on review of the copies of such reports furnished to us, all Section 16(a) filing requirements applicable to our officers and directors were complied with during the year ended June 30, 2004.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the compensation awarded to, earned by or paid to our Chief Executive Officer and other executive officers for services rendered to us during fiscal 2004, 2003 and 2002. No other person during these years, who served as one of our executive officers, had a total annual salary and bonus in excess of $100,000. Also, see "Stock Option Plan-Option/SAR Grants in Last Fiscal Year".
(1) Ms. Grable retired on April 15, 2004. Under her retirement agreement Ms. Grable is entitled to receive her $280,000 annual salary through December 2005. Salary recorded for f/y 2004 includes $3,200 of non-cash compensation for Christmas stock bonus, $47,704 in accrued wages payable as of 6/30/02 to Linda B. Grable as heir to the estate of Richard J. Grable and $19,890 in accrued wages payable as of 6/30/02 to Linda B. Grable. (2) Mr. Grable passed away on August 13, 2001. (3) Mr. d'Auguste commenced employment on August 15, 2001 and resigned on March 14, 2002. (4) Salary recorded for f/y 2004 include $3,200 of non-cash compensation for Christmas stock bonus, $19,890 in accrued wages payable as of 6/30/02 to Allan L. Schwartz and $10,000 additional wages while serving as Interim CEO. (5) Mr. Horton commenced employment on August 15, 2001. Wages recorded for f/y 2004 include $1,775 of non-cash compensation for Christmas stock bonus. (6) Ms. O'Brien was appointed Senior Vice President on September 15, 2003. Wages recorded for f/y 2004 include $3,075 of non-cash compensation for Christmas stock bonus.
EMPLOYMENT AGREEMENTS - --------------------- On August 29, 1999, we entered into five-year employment agreements with Richard Grable, Allan Schwartz and Linda Grable. Under these agreements, base annual salaries, are as follows: Richard Grable, $286,225; Linda Grable, $119,070; and Allan Schwartz, $119,070. In addition, each person received a car allowance of $500 per month. Each employment agreement provide for performance bonuses, health insurance, car allowances, and other customary benefits, and a cost of living adjustment of 7% per annum. No bonuses were paid to the three executives during the five-year terms of their respective employment agreements. Upon the expiration of Mr. Schwartz's employment agreement on August 29, 2004, he entered into a one-year Employment Extension Agreement on August 30, 2004 which provides for an annual salary of $185,000 and options to purchase up to an aggregate of 500,000 shares of our common stock at an exercise price of $.30 per share, in accordance with our 2004 Non-Statutory Stock Option Plan. These options shall vest on August 30, 2005.
At a special meeting of the Board of Directors held on August 28, 2001 the Board, with Linda Grable abstaining, voted to grant a death benefit of one year's salary ($286,225) to Richard Grable's beneficiary in recognition of his services as a co-founder, CEO and inventor of the CTLM(R). On April 15, 2004, we paid the balance due of this death benefit to Linda Grable, as beneficiary of Richard Grable.
On August 15, 2001, we entered into a three-year employment agreement with Edward Horton, our Chief Operating Officer at an annual salary of $110,000. The COO was also granted 500,000 incentive stock options at an exercise price of $.77 per share, the fair market value at the date of the grant, which will vest ratably over the three-year period. Upon the expiration of his employment agreement on August 15, 2004, we entered into a one-year employment agreement with Mr. Horton at an annual salary of $125,000. He was also granted 175,000 non-statutory stock options at an exercise price of $.28, the fair market value at the date of the grant, which will vest at the end of the one-year period.
On December 1, 2001, we entered into a new three-year employment agreement with Linda Grable. Under this agreement, Ms. Grable received an annual base salary of $280,000. Ms. Grable received incentive options to purchase up to an aggregate of 2,250,000 shares of our common stock at an exercise price of $.60 per share. The incentive stock options were scheduled to vest at 750,000 shares per year starting December 1, 2002. In addition, she received a car allowance of $500 per month. On April 15, 2004, Ms. Grable retired as CEO and Chairman of the Board. As part of her Retirement Agreement, the Board of Directors agreed to pay out the remainder of her employment agreement and continue coverage of her health insurance through its expiration on December 15, 2005. The total amount due for the unexpired term of her agreement was $466,667 (based on her salary of $280,000 per year). Payments are made on the 15th and 30th of each month which is our normal payroll schedule. The payments will continue through December 15, 2005.
On September 15, 2003, we entered into a three-year employment agreement with Deborah O'Brien, our Senior Vice-President at an annual salary of $ 95,000. The Senior Vice-President was also granted 302,000 incentive stock options at an exercise price of $1.13 per share, the fair market value at the date of the grant, which will vest ratably over the three-year period.
On July 8, 2004, we entered into a three-year employment agreement with Timothy Hansen, our new Chief Executive Officer, commencing on July 26, 2004 at an annual salary of $210,000 and appointed him a Director of the Company. Mr. Hansen was granted 1,500,000 non-statutory stock options at an exercise price of $.38, the fair market value at the date of the grant, which will vest over the three-year period in accordance with the table below:
Date of Vesting No. of Option Shares - --------------- -------------------- July 8, 2005 500,000 January 8, 2006 250,000 July 8, 2006 250,000 January 8, 2007 250,000 July 8, 2007 250,000
Mr. Hansen also received 100,000 restricted shares of our common stock. He will receive a $500 car allowance per month along with pre-approved living expenses for a three-month period and moving expenses.
The following table sets forth certain information with regard to the Options/SAR grants by the Company to management for the fiscal year ended June 30, 2004. Linda B. Grable, Allan L. Schwartz, Edward Horton and Deborah O'Brien did not exercise any options during fiscal 2004.
Stock Option Plans - ------------------ Our 1995 Stock Option Plan was approved by our Board of Directors and adopted by the shareholders at the March 1995 annual meeting. The plan provided for the granting, exercising and issuing of incentive options pursuant to Internal Revenue Code, Section 422.
On August 30, 1999, we established an equity incentive plan. The shareholders had to approve this plan within one year. The maximum number of shares that could be granted under this plan is 15,000,000 shares of common stock and 5,000,000 shares of preferred stock. The series, rights and preferences of the preferred stock were to be determined by our Board of Directors. This plan also included any stock available for future stock rights under our 1995 Stock Option Plan. On January 3, 2000 the Board of Directors decided to replace this equity incentive plan and adopted our 2000 Non-Statutory Stock Option Plan so as to provide a critical long-term incentive for employees, non-employee directors, consultants, attorneys and advisors of the Company. On May 10, 2000 our shareholders approved the 2000 Non-Statutory Stock Option Plan, which was replaced with our 2002 Incentive and Non-Statutory Stock Option Plan approved by our shareholders on March 13, 2002. Our Board of Directors has direct responsibility for the administration of the plan.
On February 4, 2004, the Board of Directors adopted our 2004 Non-Statutory Stock Option Plan (the "2004 Plan"), which was adopted by the shareholders on March 24, 2004 at our annual meeting to provide a long-term incentive for employees, non-employee directors, consultants, attorneys and advisors of the Company and its subsidiaries. The maximum number of options that may be granted under the 2004 Plan shall be options to purchase 8,432,392 shares of Common Stock (5% of our issued and outstanding common stock as of February 4, 2004). Options may be granted under the 2004 Plan for up to 10 years after the date of the 2004 Plan. The 2004 Non-Statutory Stock Plan replaced the 2002 Incentive and Non-Statutory Stock Option Plan.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table shows the beneficial ownership of our common stock as of September 17, 2004 regarding:
o each person that we know of who beneficially owns more than 5% of the outstanding shares of our common stock, o each current director and executive officer, and o all executive officers and directors as a group.
Name and Address Number of Shares Owned % of Outstanding of Beneficial Owner Beneficially (1)(2) Shares of Common Stock - ------------------- ---------------------- ---------------------
Linda B. Grable 19,660,274(3) 11.0%
Timothy B. Hansen 100,000(4) <0.1% 6531 NW 18th Court Plantation, FL 33313
Allan L. Schwartz 6,942,510(5) 3.9% 6531 NW 18th Court Plantation, FL 33313
Edward Horton 512,500(6) 0.3% 6531 NW 18th Court Plantation, FL 33313
Deborah O'Brien 835,000(7) 0.5% 6531 NW 18th Court Plantation, FL 33313
Sherman Lazrus 260,000(8) 0.2%
Patrick J. Gorman 1,016,160(9) 0.6%
Edward Rolquin 210,000(8) 0.1%
Jay S. Bendis 265,000(8) 0.2%
All officers and directors 10,141,170(10) 5.7% as a group (8 persons)
All beneficial owners 29,801,444(11) 16.7% Listed above (9 persons)
(1) Except as indicated in the footnotes to this table, based on information provided by such persons, the persons named in the table above have sole voting power and investment power with respect to all shares of common stock shown beneficially owned by them.
(2) Percentage of ownership is based on 178,435,040 shares of common stock outstanding as of September 10, 2004 plus each person's options that are exercisable within 60 days. Shares of common stock subject to stock options that are exercisable within 60 days as of September 10, 2004 are deemed outstanding for computing the percentage of that person and the group.
(3) Based on the last filing of record includes 3,250,000 shares subject to options and 16,410,274 shares owned by Linda B. Grable.
(4) Mr. Hansen was issued 100,000 restricted shares pursuant to his employment agreement dated July 8, 2004.
(5) Includes 2,500,000 shares subject to options and 9,000 shares owned by the wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims beneficial ownership.
(6) Includes 500,000 shares subject to options.
(7) Includes 325,000 shares subject to options.
(8) Includes 250,000 shares of options owned by Sherman Lazrus, 200,000 shares of options owned by Edward Rolquin and 200,000 shares of options owned by Jay S. Bendis.
(9) Includes 250,000 shares subject to options and 183,356 shares owned by the wife of Patrick J. Gorman, Diana Gorman, of which he disclaims beneficial ownership.
(10) Includes 4,225,000 shares subject to options held by, Allan Schwartz , Edward Horton, Deborah O'Brien, Sherman Lazrus, Patrick J. Gorman, Edward Rolquin and Jay S. Bendis. Also includes 9,000 shares owned by the wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims beneficial ownership and 183,356 shares owned by the wife of Patrick J. Gorman, Diana Gorman, of which he disclaims beneficial ownership.
(11) Includes all of the shares in footnote 10 plus 3,250,000 shares subject to options held by Linda B. Grable.
Dividend Policy To date, we have not declared or paid any dividends with respect to our common stock, and the current policy of the Board of Directors is to retain any earnings to provide for our growth. We do not anticipate paying cash dividends on our common stock in the foreseeable future.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The late Richard Grable and Linda Grable were husband and wife. Linda Grable continues to be a "control person" as a result of her control of a substantial portion of our outstanding stock.
In June 1998, we finalized an exclusive patent license agreement with Richard Grable. Mr. Grable was the owner of the patent which encompasses the technology for the CTLM(R). IDSI and Mr. Grable had previously entered into an oral agreement for the exclusive license for the patent that was never memorialized in written form. The term of the license is for the life of the patent (17 years) and any renewals, subject to termination, under specific conditions. As consideration for this license, we issued to Mr. Grable 7,000,000 shares of common stock. In addition, we agreed to pay Mr. Grable a royalty based upon a percentage, ranging from 6% to 10%, of the net selling price (the dollar amount earned from our sale, both international and domestic, before taxes minus the cost of the goods sold and commissions or discounts paid) of all the products and goods in which the patent is used. Mr. Grable agreed that these royalty provisions will not apply to any sales and deliveries of CTLM(R) systems made by IDSI prior to receipt of the PMA for the CTLM(R). In addition, following issuance of the PMA, IDSI and Mr. Grable agreed that he would be paid guaranteed minimum royalties of at least $250,000 per year based on the sales of the products and goods in which the CTLM(R) patent is used. Upon Mr. Grable's death in August 2001, his interest in the patent license agreement passed to his estate, of which Linda Grable is the principal beneficiary.
In May 2002, Charlton loaned us $350,000 in order to partially cover our short-term working capital needs. This loan is evidenced by a promissory note dated May 29, 2002, due August 1, 2002, and bearing interest at a rate of 2% per month. The loan is secured by a pledge of 1,000,000 shares of our common stock, 500,000 each by our Chief Executive Officer, Linda B. Grable, and by our Executive Vice President and Chief Financial Officer, Allan L. Schwartz, and is personally guaranteed by Ms. Grable and Mr. Schwartz. As of the date of this report we have paid back this note in full.
In May 2002, Linda B. Grable loaned us an aggregate of $10,000. On June 12, 2002, we paid back the loans in full with cash without interest.
In November 2002, Linda B. Grable loaned us $81,000. On May 21, 2003, we paid back the loan in full with cash without interest.
On April 15, 2004, Ms. Grable retired as CEO and Chairman of the Board. As part of her Retirement Agreement, the Board of Directors agreed to pay out the remainder of her employment agreement and continue coverage of her health insurance through its expiration on December 15, 2005. The total amount due for the unexpired term of her agreement was $466,667 (based on her salary of $280,000 per year). Payments are made on the 15th and 30th of each month which is our normal payroll schedule. The payments will continue through December 15, 2005.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
For the Fiscal Years ended June 30, 2004 and 2003, we paid audit fees totaling $24,715 and $22,685, respectively, and paid fees for tax services totaling $2,000 and $2,000 respectively.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT DESCRIPTION
3.1 Articles of Incorporation (Florida)- Incorporated by reference to Exhibit 3(a) of our Form 10-KSB for the fiscal year ending June 30, 1995 3.2 Amendment to Articles of Incorporation (Designation of Series A Convertible Preferred Shares) - Incorporated by reference to Exhibit 3. (i). 6 of our Form 10-KSB for the fiscal year ending June 30, 1996. File number 033-04008. 3.3 Amendment to Articles of Incorporation (Designation of Series B Convertible Preferred Shares). Incorporated by reference to our Registration Statement on Form S-1 dated July 1, 1997. 3.4 Amendment to Articles of Incorporation (Designation of Series C Convertible Preferred Shares). Incorporated by reference to our Form 8-K dated October 15, 1997. 3.5 Amendment to Articles of Incorporation (Designation of Series D Convertible Preferred Shares). Incorporated by reference to our Form 8-K dated January 12, 1998. 3.6 Amendment to Articles of Incorporation (Designation of Series E Convertible Preferred Shares). Incorporated by reference to our Form 8-K dated February 19,1998. 3.7 Amendment to Articles of Incorporation (Designation of Series F Convertible Preferred Shares). Incorporated by reference to our Form 8-K dated March 6, 1998. 3.8 Amendment to Articles of Incorporation (Designation of Series H Convertible Preferred Shares). Incorporated by reference to our Registration Statement on Form S-2 File Number 333-59539. 3.9 Certificate of Dissolution - is incorporated by reference to Exhibit (3)(a) of our Form 10-KSB for the fiscal year ending June 30, 1995. 3.10 Articles of Incorporation and By- Laws (New Jersey) -are incorporated by reference to Exhibit 3 (i) of our Form 10-SB, as amended, file number 0-26028, filed on May 6, 1995 ("Form 10-SB"). 3.11 Certificate and Plan of Merger - is incorporated by reference to Exhibit 3(i) of the Form 10-SB. 3.12 Certificate of Amendment - is incorporated by reference to Exhibit 3(i) of the Form 10-SB. 3.13 Amended Certificate of Amendment-Series G Designation. 3.14 Certificate of Amendment-Series I Designation 3.15 Amended Certificate of Amendment-Series B Designation 3.16 Certificate of Amendment-Series K Designation. Incorporated by reference to our Form 10-KSB for the fiscal year ending June 30, 2000 filed on September 14, 2000. 10.2 Patent Licensing Agreement. Incorporated by reference to our Registration Statement on Form S-2, File Number 333-59539. 10.3 Incentive Stock Option Plan - is incorporated by reference to Exhibit 10(b) of the Form 10-SB. 10.27 Consulting Agreement by and between IDSI and Anthony Giambrone, dated January 26, 2000. Incorporated by reference to our Post-Effective Amendment No. 4 to Registration on Form S-2, File Number 333-60405.
10.28 Employment Agreement(s) for Richard J. Grable, Allan L. Schwartz and Linda B. Grable signed August 30, 1999. Incorporated by reference to our Post-Effective Amendment No. 4 to Registration on Form S-2, File Number 333-60405. 10.29 2000 Non-Statutory Stock Option Plan Incorporated by reference to our Form 10-KSB for the fiscal year ending June 30, 2000 filed on September 14, 2000. 10.40 Distribution Agreement between IDSI and Medical Imaging Systems, Inc. 10.41 Distribution Agreement between IDSI and Medical Imaging Services, Ltd. 10.42 Employment Agreement with John d'Auguste, President. Incorporated by reference to our Form 10-QSB for the quarter ending September 30, 2001, filed on November 13, 2001. 10.43 Employment Agreement with Ed Horton, Chief Operating Officer. Incorporated by reference to our Form 10-QSB for the quarter ending September 30, 2001, filed on November 13, 2001. 10.44 Employment agreement with Linda B. Grable, Chief Executive Officer. Incorporated by reference to our Form 10-QSB for the quarter ending September 30, 2001, filed on November 13, 2001. 10.45 2002 Incentive and Non-Statutory Stock Option Plan. Incorporated by reference to our Schedule 14A proxy statement filed on February 7, 2002. 10.47 Amendment dated as of November 15, 2001, to Amended Private Equity Credit Agreement, dated as of November 30, 2000 between IDSI and Charlton Avenue LLC. The Amended Private Equity Credit Agreement is incorporated by reference to our Amendment No. 2 to registration on Form S-2, File Number 333-46546, and the Amendment to the Amended Private Equity Agreement is incorporated by reference to our Form 10-QSB for the quarter ending March 31, 2002, filed on May 15, 2002. 10.48 Private Equity Agreement between IDSI and Charlton Avenue, LLC dated as of May 15, 2002. Incorporated by reference to our Form 10-QSB for the quarter ending March 31, 2002, filed on May 15, 2002. 10.49 Registration Rights Agreement between IDSI and Charlton Avenue, LLC dated as of May 15, 2002. Incorporated by reference to our Form 10-QSB for the quarter ending March 31, 2002, filed on May 15, 2002. 10.50 $350,000 Promissory Note dated May 21, 2002, from IDSI to Charlton Avenue, LLC. Incorporated by reference to our Amendment No. 1 to our Registration on Form S-2, File Number 333-88604 filed on June 28, 2002.
10.51 $750,000 Balloon Promissory Note and Mortgage from IDSI to Peter Wolofsky, incorporated by reference to our Form 8-K filed on June 25, 2002. 10.52 Private Equity Agreement between IDSI and Charlton Avenue LLC dated as of May 15, 2002, with exhibits. Incorporated by reference to our Amendment No. 1 to our Registration on Form S-2, File Number 333-88604 filed on June 28, 2002. 10.53 Amendment dated as of July 18, 2002, to Private Equity Agreement dated as of May 15, 2002 between IDSI and Charlton Avenue LLC. Incorporated by reference to our Amendment No. 2 to our Registration on Form S-2, File Number 333-88604 filed on July 18, 2002. 10.54 Letter of Intent between IDSI and Sanotech Group Srl. dated January 8, 2002. 10.55 Distributorship Agreement between IDSI and JAMCO Medical Inc. dated March 22, 2002. 10.56 Financial Services Consulting Agreement between Linda B. Grable and iCapital Finance, Inc. dated September 19, 2002. 10.57 Third Private Equity Credit Agreement between IDSI and Charlton Avenue LLC dated as of October 29, 2002, with exhibits. 10.58 Registration Rights Agreement between IDSI and Charlton Avenue LLC dated as of October 29, 2002. Incorporated by reference to our Form S-2, File Number 333-101070 filed on November 7, 2002 10.59 Termination letter of distributorship agreement between IDSI and JAMCO Medical Inc. dated May 28, 2003. 10.60 Employment Agreement with Deborah O'Brien, Senior Vice President dated September 15, 2003. 10.61 Fourth Private Equity Credit Agreement between IDSI and Charlton Avenue LLC, dated as of January 9, 2004, with exhibits. Incorporated by reference to our Form S-2, File Number 333-112377 filed on January 30, 2004. 10.62 Registration Rights Agreement between IDSI and Charlton Avenue, LLC dated as of January 9, 2004. Incorporated by reference to our Form S-2, File Number 333-112377 filed on January 30, 2004.
10.63 Retirement Agreement between IDSI and Linda B. Grable dated April 15, 2004. Incorporated by reference to our Form S-2, File Number 333-116694 filed on June 21, 2004. 10.64 Employment Agreement with Timothy B. Hansen, Chief Executive Officer dated July 8, 2004. 10.65 Employment Agreement with Edward Horton, Chief Operating Officer dated August 15, 2004. 10.66 One-Year Employment Extension Agreement with Allan L. Schwartz, Executive Vice President and Chief Financial Officer dated August 30, 2004. 14.1 Code of Ethics for Senior Financial Officers 31.1 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 32.1 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
(b) Reports on Form 8-k
A Form 8-K was filed on August 27, 2003, stating that we are in receipt of a letter from the FDA stating that it has completed its review of the Company's PreMarket approval application (PMA). The FDA, in its letter, outlined deficiencies in the PMA submission, which must resolved before the FDA's review could be completed. The FDA stated that until these deficiencies are resolved, the PMA application is not approvable in its current form. The FDA identified measures to make the PMA approvable and the Company will amend its PMA application to address the deficiencies in the letter.
A Form 8-K was filed on August 28, 2003, stating that Schering AG of Berlin, Germany announced, through a press release today, that their innovative method for breast cancer detection shows positive results in their clinical phase 1 study. The fluorescent dyes used in the clinical study were used in conjunction with our proprietary Computed Tomography Laser Breast Imaging System (CTLM(R)).
A Form 8-K was filed on November 13, 2003, stating that we received notification from Health Canada Medical Device Bureau that they have issued a Medical Device License for our Computed Tomography Laser Breast Imaging System (CTLM(R)) in accordance with Medical Device Regulation, Section 36.
A Form 8-K was filed on February 2, 2004, stating that we received a warning letter from the FDA specifically regarding the biomonitoring section of an inspection conducted August 13th through August 18th, 2003 at our facility and that we would submit our response to the FDA on or before February 9, 2004, as well as continue to prepare supplementary information to support our PMA application.
A Form 8-K was filed on February 10, 2004, stating that we timely submitted our response to the warning letter from the FDA regarding the biomonitoring inspection.
A Form 8-K was filed on March 25, 2004, stating that at our Fiscal Year 2004 Annual Meeting of Stockholders, Dr. Eric Milne, Chief Radiologist reported that a scientific paper from the University of Vienna, (authors D. Floery, C. Riedl, W. Matzek, S. Jaromi, M.H. Fuchsjaeger and T. Helbich, M.D.), describing the typical vascular appearances of breast cancers imaged by our CTLM(R) Breast Imaging System at the University of Vienna, Allgemeines Hospital was presented at the recent exhibition at the European Congress of Radiology (ECR) held in Vienna. The paper has been nominated for "Best and Original Paper for Breast Imaging" by the ECR. Ms. Deborah O'Brien, Senior Vice-President announced that we would recognize revenues of at least $540,000 for the third quarter ending March 31, 2004. She also informed the shareholders that the FDA agreed with our request to have an extension of time to respond to the FDA's August 22, 2003 letter regarding our pre-market approval application.
A Form 8-K was filed on March 29, 2004, stating that our responses to the FDA's warning letter of the biomonitoring inspection addressed each of the issues and no further response is necessary at this time.
A Form 8-K was filed on April 16, 2004, stating that Linda B. Grable, CEO, Chairman of the Board and co-founder, has retired effective April 15, 2004. The Board of Directors appointed Jay S. Bendis and Sherman Lazrus as Co-Chairmen of the Board and has begun an immediate search for a new CEO. Meanwhile, the Board appointed Allan L. Schwartz, Executive Vice President and Chief Financial Officer, to serve as interim CEO until a new CEO is appointed.
A Form 8-K was filed on July 13, 2004, stating that Tim Hansen was appointed by the Board of Directors to serve as the new Chief Executive Officer and Board member. Mr. Hansen has served in top-level executive positions in the medical imaging industry over a 30-year period and was notably President of Picker Medical Systems, a leading company in the diagnostic imaging market. Most recently, Mr. Hansen was with Cardinal Health, Inc. as the general manager of the Radiation Management Services, a leading provider of medical imaging quality assurance instruments and solutions.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, Imaging Diagnostic Systems, Inc. has duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized,
IMAGING DIAGNOSTIC SYSTEMS, INC.
By: /s/Timothy B. Hansen Timothy B. Hansen, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1933, as amended, this Annual Report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated.