Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[Mark One]
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: June 30, 2010
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to_____________
Commission file number: 0-26028
IMAGING DIAGNOSTIC SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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Florida
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22-2671269
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(State of incorporation)
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(IRS employer Ident. No.)
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5307 NW 35th Court, Fort Lauderdale, FL.
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33309
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(address of principal office)
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(Zip Code)
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Registrant's telephone number, including area code: (954) 581-9800
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of class)
Indicate by check mark whether the registrant:(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non- accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
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¨ Large accelerated filer
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¨ Accelerated filer
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x Non Accelerated filer
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Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the act). Yes o No x
Based on the average closing bid and asked prices of the common stock on the latest practicable date, October 12, 2010, the aggregate market value of the voting stock held by non-affiliates of the registrant was $12,577,939.
The number of shares outstanding of each of the issuer’s classes of common stock, as of October 12, 2010 was 884,278,434. As of October 12, 2010, the issuer had 35 shares of preferred stock outstanding.
Documents Incorporated By Reference
[None]
IMAGING DIAGNOSTIC SYSTEMS, INC.
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
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PART I
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Page No
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ITEM 1.
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3
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ITEM 1A
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17
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ITEM 1B
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31
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ITEM 2.
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31
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ITEM 3.
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31
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ITEM 4.
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32
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PART II
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ITEM 5.
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33
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ITEM 6.
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42
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ITEM 7.
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43 | |
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ITEM 7A.
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53
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ITEM 8.
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54
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ITEM 9.
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120 | |
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ITEM 9A
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120
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ITEM 9B
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121
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PART III
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ITEM 10.
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122
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ITEM 11.
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126
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ITEM 12.
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135
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ITEM 13.
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136
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ITEM 14.
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136
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PART IV
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ITEM 15.
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137
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140
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THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. ACTUAL RESULTS AND EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED AS A RESULT OF THE “KNOWN UNCERTAINTIES” AS SET FORTH IN ITEM 7 “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CAUTIONARY STATEMENTS.”
PART I
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®"). We are currently in the process of commercializing the CTLM® in certain international markets where approvals to market have been secured although CTLM® is not yet approved for sale in the U.S. We initially filed a Pre-Market Approval (“PMA”) application for the CTLM® with the Food and Drug Administration (“FDA”) in 2003. Because the CTLM® was determined to be new medical technology for which there was no predicate device, it was automatically designated a Class III medical device, which requires PMA approval.
In August 2003, we received a letter from the FDA citing some deficiencies in our PMA application. Initially we planned on submitting an amendment to make the PMA approvable and received an extension of time in March 2004 to respond with the amendment. In October 2004, we made a decision to voluntarily withdraw our current PMA application and resubmit the entire package in a simpler and more clinically and technically robust filing. In November 2004, we received a letter from the FDA stating that the CTLM® study has been declared a Non-Significant Risk (NSR) study when used for our intended use. We have completed a draft of our application to obtain FDA marketing clearance and have engaged counsel to assist us in the preparation and review of our application. We believe that this application will be filed with the FDA by the end of December 2010.
The CTLM® system is a CT-like scanner, but its energy source is a laser beam and not ionizing x-radiation such as is used in conventional x-ray mammography or CT scanners. The advantages of imaging without ionizing radiation may be significant in our markets. CTLM® is an emerging new imaging modality offering the potential of functional molecular imaging, which can visualize the process of angiogenesis which may be used to distinguish between benign and malignant tissue. X-ray mammography is a well-established method of imaging the breast but has limitations especially in dense breast cases. Ultrasound is often used as an adjunct to mammography to help differentiate tumors from cysts or to localize a biopsy site. The CTLM® is being marketed as an adjunct to mammography not a replacement for it, to provide the radiologist with additional information to manage the clinical case. We believe that the adjunctive use of CT Laser Mammography may help diagnose breast cancer earlier, reduce diagnostic uncertainty especially in mammographically dense breast cases, and may help decrease the number of biopsies performed on benign lesions. The CTLM® technology is unique and patented. We intend to develop our technology into a family of related products. We believe these technologies and clinical benefits constitute substantial markets for our products well into the future.
As of the date of this report, we have had no substantial revenues from our operations and have incurred net losses applicable to common shareholders since inception through June 30, 2010 of $111,880,882 after discounts and dividends on preferred stock. We anticipate that losses from operations will continue for at least the next 12 months, primarily due to an anticipated increase in marketing and manufacturing expenses associated with the international commercialization of the CTLM®, expenses associated with our FDA approval process, and the costs associated with advanced product development activities. We had originally planned on submitting our application to the FDA in December 2008; however, due to delays caused by our lack of financing as well as technical and operational issues, we anticipate that the remaining process consisting of the preparation, documentation and review of the application by outside counsel will be completed and filed by the end of December 2010. Nonetheless, this timetable cannot be met unless we obtain sufficient financing through the sale of equity or debt securities. There can be no assurance that we will obtain this financing. Further, since we rely on outside experts in data management, monitoring, biostatistics and FDA matters, there can be no assurance that we will be able to timely submit the application even if we obtain the necessary financing. Finally, there can be no assurance that we will obtain FDA approval; that the CTLM® will achieve market acceptance or that sufficient revenues will be generated from sales of the CTLM® to allow us to operate profitably.
Breast Cancer
The National Cancer Institute (NCI) estimated that approximately 207,090 new cases of invasive breast cancer and 54,010 cases of carcinoma in situ (CIS) non-invasive (localized) breast cancer will be diagnosed in the United States during 2010. Breast cancer ranks as the second leading cause of cancer-related death among women and will cause an estimated 39,840 deaths in women in the U.S. in 2010. Based on rates from 2005-2009, 1 in 8 women will be diagnosed with breast cancer during their lifetime.
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 relative survival rate of women who have cancer confined to the primary site is 98%. It decreases from 98% to 84% after the cancer has spread to the lymph nodes, and to 23% 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 10%-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). Besides skin cancer, breast cancer is the most commonly diagnosed cancer among U.S. women. 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 clinical breast exam (CBE) every three years for women in their 20s and 30s; (iii) a baseline mammogram for women by the age of 40; and (iv) an annual mammogram for women age 40 or older.
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 may 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 a diagnostic mammogram seeks to characterize suspicious lesions.
In the U.S., a certified technologist performs the x-ray procedure under the Congressional Mammography Quality Standards Act (MQSA). MQSA was enacted to improve x-ray breast cancer detection studies by 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. X-ray mammography is documented to be less effective for women with dense breasts. X-ray mammography machines use mechanical means to squeeze or compress the breast and flatten the volume so that
x-rays may penetrate more uniform tissue. These techniques are technically necessary but are often painful and uncomfortable to patients. Most mammography exams include 2 views of each breast which equates to 4 compressions per session.
The Medicare billing of a diagnostic mammogram is approximately $120 to $160 per procedure 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 $300,000 to $430,000 and Medicare billing for the procedures ranges from $170 to $200.
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. 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 not only visualizes fine-details in breast tissue but also detects 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. Dedicated breast MRI systems sell for approximately $1,200,000 and Medicare billing is approximately $1,500.
Ultrasound
Ultrasound imaging is routinely used in breast imaging practices. 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 over the area of interest. In some countries physicians perform the study and interpret the results. Ultrasound images are localized to areas of suspicion usually detected by a previous mammogram. If mammographic results suggest the presence of a lesion, ultrasound may help differentiate a solid from a cystic mass and locate a biopsy site. The Medicare billing rate is approximately $240 per procedure and requires the use of capital equipment ranging in cost from approximately $60,000 to $200,000.
CTLM®
The CTLM® laser breast imaging system is being marketed as an adjunct to mammography and will not compete directly with X-ray mammography. CTLM® is, however, an emerging new modality offering the potential of functional molecular imaging, which can visualize the process of angiogenesis which may be used to distinguish between benign and malignant tissue. While x-ray mammography and ultrasound produce two dimensional images (2D) of the breast which is three dimensional (3D), the CTLM® produces 3D images.
We believe that the adjunctive use of CT laser breast imaging will improve early diagnosis, reduce diagnostic uncertainty, decrease the number of biopsies performed on benign lesions, and improve breast cancer case management, especially in dense breasts. Because breast cancers nearly always develop in the dense tissue of the breast (not in the fatty tissue), older women who have mostly dense tissue on a mammogram are at an increased risk of breast cancer. Abnormalities in dense breasts can be more difficult to detect on a mammogram.
A CTLM® breast exam is non-invasive and can be performed by a medical technician. A patient lies face down on a scanning table with one breast suspended naturally into a specially designed scanning chamber. The scanner images the breast in contiguous slices from chest wall to nipple in minutes. One breast is scanned at a time. The CTLM® 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. At least one company to our knowledge is developing a fluorescent compound for possible use in breast cancer detection.
The CTLM® system laser diodes can stimulate fluorescent light emissions when used in conjunction with such 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, may retain a higher concentration of the fluorescent compound. As the CTLM® scanner illuminates these areas; fluorescent light is emitted and detected. Reconstructed CTLM® images then locate and quantify the fluorescent area within the area of interest.
Several CTLM®’s were retrofitted with laser diodes tuned to specific wavelengths of light which matched the compounds. Optical filters limited the spectral responses to selected wavelengths. Experiments were conducted by placing fluorescent compounds inside a breast equivalent phantom and scanning it with CTLM®. To our knowledge we were the first with the ability to excite a fluorescent compound, detect its location within the simulated breast, and create an image. 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.
In March 2002, we signed an agreement with Schering AG to evaluate the advantages of new fluorescence compounds for the potential use of detecting breast cancer. We installed three CTLM® systems for Schering AG’s clinical trials: one at Charité’s Robert-Rössle Clinic in Berlin, one at the University of Muenster, and the third at Charité Hospital in Berlin, Germany as part of their Phase 1 clinical studies of fluorescent imaging compounds. In November 2005, we announced that Schering AG had completed the evaluation of fluorescent imaging compound SF64 with three modified CT Laser Mammography systems. The loaned systems, which had been modified to Schering AG's specifications were subsequently returned to IDSI and have been re-manufactured.
In July 2009, we announced the commencement of a breast cancer imaging study at the Charité, Medical University in Berlin, Germany. The study will examine the potential role of the CTLM® as an enhanced breast cancer screening tool when used in combination with the fluorescent dye, Indocyanine Green (ICG). The study will be conducted at the Campus Virchow-Klinikum and the principal investigator is radiologist Dr. Alexander Poellinger. IDSI is continuing to research and develop fluorescence imaging techniques.
Laser Imager for Lab Animals
Our Laser Imager for Lab Animals “LILA™” program is an optical helical micro-CT scanner in a third-generation configuration. The system was designed to image numerous compounds, especially green fluorescent protein, derived from the DNA of jellyfish. The LILA scanner is targeted at pharmaceutical developers and researchers who monitor cancer growth and who use multimodality small animal imaging in their clinical research.
IDSI’s strategic thrust for the LILA project changed, as we decided to focus on women’s health business markets with a family of CTLM® systems and related devices and services. The animal imager did not fit our business model although the fundamental technology is related to the human breast imager. Consequently, we sought to align the project with a company already in the animal imaging market that might complete the LILA and commercialize it.
On August 30, 2006 we announced an exclusive license agreement under which Bioscan, Inc. would integrate LILA technology into their animal imaging portfolio. Under the agreement we would transfer technology to Bioscan by December 2006 upon receipt of the technology transfer fee. We have received full payment of $250,000 for the technology transfer fee and $69,000 for the parts associated with the agreement. The agreement also provides for royalties on future sales. Bioscan has commenced its work on the LILA project and placed one of their engineers at our facility so that he can confer with our engineers if necessary. Bioscan pays us for use of the space and consulting fees if they require our engineering assistance. There can be no assurance that it will be successful or that we will receive any royalties from Bioscan.
Government Regulation
United States Regulation
The CTLM® is a medical device and it is subject to the relevant provisions of the United States 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® in the United States. The 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, 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. The CTLM is a Class III device. 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. 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 statistical analyses.
Once a PMA application has been filed, the FDA has up to 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. 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 lengthy and expensive and there can be no assurance that a PMA application will be approved within 180 days.
In August 2003, we received a letter from the FDA citing some deficiencies in our PMA application. Initially we planned on submitting an amendment to make the PMA approvable and received an extension of time in March 2004 to respond with the amendment. In October 2004, we made a decision to voluntarily withdraw our current PMA application and resubmit the entire package in a simpler and more clinically and technically robust filing. In November 2004, we received a letter from the FDA stating that the CTLM® study had been declared a Non-Significant Risk (NSR) study when used for our intended use. We have completed a draft of our application to obtain FDA marketing clearance and have engaged counsel to assist us in the preparation and review of our application. We believe that this application will be filed with the FDA by the end of December 2010.
We have engaged the services of U.S. regulatory consultants who specialize in FDA matters to assist us in the final preparation and submission of our FDA application. 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®. See “Regulatory and Clinical Status”.
Any products manufactured or distributed by us pursuant to FDA marketing clearance will be subject to pervasive and continuing regulation by the FDA. Labeling, advertising and promotional activities are subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. In addition, the marketing and use of our products may be regulated by various state agencies. The export of medical devices is also subject to regulation in certain instances. 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 CTLM® systems 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 have permitted us to begin marketing the CTLM® 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”), we were required to achieve compliance with requirements of the Medical Devices Directive (“MDD”) and affix a “CE” marking on our 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 obtaining these certifications, we utilized the services of a notified body (“NB”). A NB is a private sector regulatory body responsible for the review and approval of the documentation submitted by us to gain CE approval. 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® system. CE marking provides us the opportunity to market the CTLM® within the European Union, one of the largest markets in the world and permits medical device product sales in many other markets worldwide.
In October 2000, we contracted Underwriters Laboratories Inc. (“UL”) to perform safety testing and assist us in achieving the regulatory certifications necessary to begin selling the CTLM® system outside the United States. We also chose our Notified Body to certify our compliance with EN29000/46001/ISO9000 quality assurance standards. In January 2001 we received notice from UL of completion for worldwide safety classification of our CTLM® system. We replaced our European authorized representative with Emergo Europe effective August 1, 2005 in the normal course of business.
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® system by conforming to an effective quality management system recognized around the world.
On September 25, 2001, we received a Certificate of Exportability from the FDA for the CTLM®. The FDA requires unapproved Class III products that are subject to PMA requirements to have FDA Certificate of Exportability in order to be exported outside of the United States. We received a renewal of our Certificate of Exportability dated June 22, 2009, which is 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, 13485:2003, 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. We have been re-inspected by UL and our EC Certificate of Approval and our ISO 13485:2003 have been renewed through May 29, 2012.
CTLM® Development History, Regulatory and Clinical Status
Since inception, the entire mission of IDSI was to further develop and refine the CT Laser Mammography system which was invented in 1989 by our late co-founder, Richard J. Grable. The 1994 prototype was built on a platform using then state-of-the-art computer processors which were slow and lasers which were very sensitive to temperature changes and required frequent calibration and servicing.
In order to market and sell the CTLM® in the United States, we must obtain marketing clearance from the Food and Drug Administration. A Pre-Market Approval (PMA) application must be supported by extensive data, including pre-clinical and clinical trial data, as well as evidence to prove the safety and effectiveness of the device. Under the Food, Drug, and Cosmetic Act, the FDA has up to 180 days to review a submitted PMA application, although in certain cases the FDA may increase that time period through requests for additional information or clarification of existing information.
We received FDA approval to begin our non-pivotal clinical study in February 1999. The first CTLM® was installed at Nassau County (NY) Medical Center in July 1999 and a second CTLM® was installed at the University of Virginia Health System. We submitted the non-pivotal clinical data to the FDA in May 2001. In spite of our efforts to control operating temperatures with thermal cooling cabinets for the lasers and voltage stabilizers to control power, our engineering team led by Mr. Grable decided that they would re-design the CTLM®
system into a compact, robust system using surface-mount technology for the electronics and a solid state diode laser that did not require a separate chiller to control its operating temperature. It was a case where technology had to catch up with the invention. Unfortunately, Mr. Grable passed away unexpectedly in 2001. It took several years to re-design and test but our efforts were successful and we began to collect the clinical data necessary to file the PMA application. The application was filed in April 2003.
In August 2003, we received a letter from the FDA citing some deficiencies in the PMA application. Initially we planned on submitting an amendment to make the PMA approvable and received an extension of time in March 2004 to respond with the amendment. In October 2004, we made a decision to withdraw our current PMA application and resubmit the entire package in a simpler and more clinically and technically robust filing. The new PMA application would contain a rephrased intended use statement better supported by our data, the inclusion of new clinical cases to improve the biometrics, and with a new clinical protocol to fully support the adjunctive use of CTLM® in clinical mammography settings.
In November 2004, we received a letter from the FDA stating that it had determined that the CTLM® proposed clinical investigation was a non-significant risk (NSR) device study. We believed this new classification would be helpful in securing new research and development collaborative agreements.
In January 2005 we determined that the clinical study we intended to submit to the FDA did not, in our opinion, adequately reflect the capabilities of CTLM® as an adjunctive mammography tool. The clinical cases were collected on CTLM® systems dating back to 2001. Since that time we had developed significant improvements in the scanning subsystems, image reconstruction and image display software. We had also improved quality assurance routines to ensure better operator and physician training, and improved image quality control. We therefore announced our intention to collect data using our latest systems because we believed the results would yield a stronger study to support our PMA application. Consequently, we decided to install updated CTLM® systems in the U.S. which extended the time to actual PMA submission from what we were earlier anticipating, but we believed this approach would better support the application.
We reported in our Prospectus dated December 27, 2005 that we experienced further delays because of difficulties in designing a revised clinical protocol and in enlisting hospitals and imaging centers to participate in acquiring new clinical cases. In spite of the delays we experienced in obtaining the necessary approvals from the hospitals and their respective Institutional Review Boards (“IRB”), we made good progress in advancing PMA activities. We further reported on March 23, 2006 that changes would be incorporated to bring the CTLM® system to its most current design level. Those changes were made and do, we believe, improve the device’s image quality and reliability. Upgraded CTLM® systems were installed at our U.S. clinical sites and data collection proceeded in accordance with our clinical protocol. We are continuing to research and develop CTLM® technologies to advance the state-of-art of this new imaging modality.
We announced in March 2009 that our research and development team achieved a technical breakthrough with a new reconstruction algorithm that improves visualization of angiogenesis (cancer) in the CTLM® images. The improved algorithm enhances the images by reducing the number of artifacts occasionally produced during an examination, thereby making diagnosis easier. We also incorporated streamlined numerical methods into the software so that the new algorithm does not require additional computing resources, allowing us to provide the improved functionality to existing customers as a software upgrade.
As of May 2009, 10 clinical sites have participated in the clinical trials and we believe we have sufficient clinical data to support our FDA application. As of the date of this report, we have completed a draft of our application to obtain FDA marketing clearance and have engaged counsel to assist us in the preparation and review of our application. We believe that this application will be filed with the FDA by the end of December 2010.
The development chronology stated above details how complicated the process is to develop a brand new medical imaging technology. We believe that we have a strong patent portfolio and are the world leader in optical tomography. We have received marketing approval in China and Canada; the CE Mark for the European Union; ISO 13485:2003 registration; UL Electrical Test Certificate; and Product registrations in Brazil and Argentina. The registrations for Brazil and Argentina were not renewed in 2009 because of the costs associated with new testing requirements by UL. We have now completed the Electromagnetic Compatibility (“EMC”) testing required by UL and plan to submit our renewal
application for these product registrations in 2011. Worldwide, our end users have completed more than 15,000 patient scans, and we have sold 15 CTLM® systems as of the date of this report. Our decision to fund the Company primarily through the sale of equity has enabled us to reach this important milestone. In fiscal 2010 we used the proceeds from short-term loans and proceeds from our Southridge Private Equity Credit Agreement for working capital. Going forward we intend to use the proceeds of draws from our Southridge Private Equity Credit Agreement and any successor private equity agreements with Southridge and/or alternative financing facilities, which may include issuance of convertible preferred stock, as our sources of working capital. Substantial additional financing will be required before and after the filing of the FDA application. See Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters – “Financing/Equity Line of Credit.”
Clinical Collaboration Sites Update
CTLM® Systems have been installed and patients are being scanned under clinical collaboration agreements as follows:
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1)
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Humboldt University of Berlin, Charité Hospital, Berlin, Germany
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2)
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The Comprehensive Cancer Centre, Gliwice, Poland (Two Systems)
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3)
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Catholic University Hospital, Rome, Italy
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4)
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MeDoc HealthCare Center, Budapest, Hungary
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5)
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Tianjin Medical University’s Cancer Institute and Hospital, Tianjin, China
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We are in discussions with other hospitals and clinics wishing to participate in our clinical collaboration program. We have been commercializing the CTLM® in many global markets and we previously announced our plans to set up this network to foster research and to promote the technology in local markets. We will continue to support similar programs outside of the United States. These investments may accelerate CTLM® market acceptance while providing valuable clinical experiences.
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Domestic Sales and Marketing
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The CTLM will be positioned as an adjunct to x-ray mammography and may be especially useful in studies of dense breasts. Consequently, CTLM will be marketed to centers performing x-ray mammography. There are approximately 8,700 Mammography Quality Standards Act (MQSA) centers certified in the United States. Sales in the U.S. cannot occur unless and until we receive pre-market approval from the FDA. IDSI will begin marketing to the centers following FDA approval.
Since CT laser breast imaging is a new imaging modality the rate at which the CTLM® 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®, and the advantage of the CTLM® when used as an adjunct to existing technology and cancer detection methods. We believe that the clinical data being collected and assessed under our FDA clinical trial and at research sites will have a significant impact on the ultimate market size for our device. 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®.
In order to effectively market any products we may develop, we will have to develop a marketing and distribution channel 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.
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International Sales
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We are pursuing international sales in those countries where regulations permit us to begin marketing the CTLM® subject to certain homologations. Some countries, including Japan, require FDA approval before the CTLM® can be marketed. As part of our global commercialization program for the CTLM®, we have installed systems at a number of international locations as clinical partner reference sites. See “Clinical Collaboration Sites Update”.
Until we receive pre-market approval from the FDA to market the CTLM® in the United States, a significant portion of our revenues 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.
International Distributors - Global Commercialization
In March 2009, we announced that we had redefined our marketing strategy and launched a new campaign focusing on the international market. Because of our disappointment with the performance of many of our previous distributors, we have terminated their distribution agreements for non-performance or allowed their agreements to expire. In April 2009, we were pleased to announce that we renewed our distribution agreement with EDO MED Sp. Z.o.o. as our exclusive distributor in Poland. EDO MED will continue to market and provide technical service support for the CTLM® throughout Poland, as well as to assist with and promote the ongoing research efforts utilizing CTLM® technology at the Comprehensive Cancer Centre in Gliwice, Poland and other institutes and research centers. Currently, the CTLM® system is in use at the Comprehensive Cancer Centre, Maria Sklodowska-Curie Memorial Institute, and the Military Institute of Health Services in Gliwice and Warsaw.
In the Asia-Pacific Region, we previously announced that we contracted with BAC, Inc. to manage our representative office in Beijing, existing distributors and develop new areas. As part of our continuing cost cutting initiatives, we closed our representative office in January 2009, and in December 2008, we terminated our contract with BAC, Inc. for non-performance. In March 2009, we announced the appointment of Jainsons Pty Ltd Company as our new distributor for Australia and New Zealand. In July 2010, we announced that we installed a CTLM® system at Tata Memorial Hospital, the national cancer comprehensive cancer center in Mumbai, India. The system was placed by Anto Puthiry, Managing Director of High-Tech Healthcare Equipments Pvt. Ltd. We continue to seek qualified distribution channels in China but as of the date of this report we have not secured such channels.
In September 2007, we announced the installation of a CTLM® system at the Tianjin Medical University’s Cancer Institute and Hospital (“Tianjin”), the largest breast disease center in China. The hospital evaluated the CTLM® under three research protocols designed to improve current methods of addressing breast cancer imaging and treatment follow-up. We previously announced that we installed a CTLM® system at Beijing’s Friendship Hospital, which enabled CTLM® clinical procedures to become listed on the Regional and subsequently the National Schedule for patient payments.
In December 2008, we announced that a recent study of the CTLM® was one of the featured scientific abstracts at the Radiological Society of North America (“RSNA”) from November 30th to December 5th. Dr. Jin Qi, a radiologist at the Tianjin Medical University Cancer Institute and Hospital, Tianjin, China was selected for her clinical paper, “CTLM as an Adjunct to Mammography in the Diagnosis of Patients with Dense Breasts.” Dr. Qi attended RSNA with IDSI and was present at our exhibit. Dr. Qi’s clinical paper was accepted as one of the European Congress of Radiology’s conference presentations in March 2009. The study demonstrated that: “when the CTLM® system was used as an adjunct to mammography in heterogeneously and extremely dense breasts, the sensitivity (detecting cancer) increased significantly.”
We previously signed an exclusive distributor in Malaysia, where interest in breast cancer detection and treatment was surging due to publicity surrounding their former First Lady, who succumbed to the disease. In September 2007, we announced the installation of a CTLM® system at the Univeriti Putra Malaysia (“UPM”) in Kuala Lumpur, Malaysia. The CTLM® was installed at UPM’s academic facility within the jurisdiction of the Ministry of Education and was evaluated by specialists from UPM in conjunction with specialists from Serdang Hospital in Kuala Lumpur. Following the evaluation at UPM, we appointed a new distributor, Daichi Holding Berhad (“Daichi”) of Penasng, Malaysia. The CTLM® was removed from UPM academic facility at the conclusion of the evaluation period. Daichi issued a purchase order for this system and it was initially installed in August 2009 at Catherine Women’s Medical Center in Petaling Jaya, Malaysia. On September 22, 2009, we announced that Daichi completed the purchase of the system with full payment. In June 2010, Daichi notified us that they were relocating the system and is now installed at the Breast Wellness (M) SDN. BHD (a public limited liability company) in Petaling Jaya, Malaysia.
Activities in Europe and the Middle East are top marketing priorities for IDSI. As a result of our participation as an exhibitor at the Arab Health Medical Conference in January 2009 in Dubai, UAE, and at the European Congress of Radiology (“ECR”) in March 2009 in Vienna, Austria, we were able to meet with qualified distributors to discuss
their interest in representing us in their respective territories. While attending Arab Health, we hired a Managing Director to market the CTLM® in the UAE and parts of the Middle East.
In March 2009, we announced the appointment of Shihab Muscat United LLC (“SMU”) as our exclusive distributor for the country of Oman. Additionally, we are negotiating with distributors in Egypt, Jordan, Saudi Arabia, India, Yemen, Belgrade and Syria. In April 2009, we signed a non-exclusive agreement with Neomedica d.o.o. Beograd to market the CTLM® system to the private and public sectors of Slovenia, Croatia, Serbia, Montenegro, and Macedonia. In October 2008, we announced that our distributor, Laszlo Meszaros of Kardia Hungary Kft. purchased the first CTLM® system for Budapest, Hungary. The CTLM® system has been installed at the new MeDoc HealthCare Center (“MDHC”) located in Budapest, in collaboration with Dr. Maria Gergely, Chief Radiologist of Uzsoki Hospital. Also in April 2009 we announced that Socrate Medical SRL located in Milan, Italy, has been selected as a distributor for the CTLM® system in Northern and Central Italy.
We previously announced in October 2008 that our distributor, The Oyamo Group (“Oyamo”) placed an order for the first CTLM® system for Jerusalem, Israel. Oyamo obtained the import license from The Israeli Ministry of Health for the CTLM® system and has recently advised us that they now plan to install the system at Sheba Medical Center at Tel Hashomer, which is outside of Tel Aviv, by the end of November 2010.
In December 2008, we announced that a new study evaluating the CTLM system as an adjunct to mammography was featured in the December 2008 issue of Academic Radiology. Alexander Poellinger, M.D., a radiologist at Charite Hospital in Berlin. Germany, authored “Near-infrared Laser Computed Tomography of the Breast: A Clinical Experience” along with colleagues at Charite and IDSI’s Director of Advanced Development as co-author. Their work demonstrated an increase in accuracy of diagnosing malignant and benign breast lesions in patients who were examined with mammography and CTLM adjunctively compared to mammography alone. Dr. Poellinger’s clinical paper was distributed to doctors and distributors visiting our booth at the European Congress of Radiology in March 2009.
In January 2010, we exhibited the CTLM® at the Arab Health 2010 medical conference held from January 26 – 29 at the Dubai International Convention and Exhibition Centre in Dubai, United Arab Emirates (UAE). We demonstrated the CTLM system, identified potential distributors for the Middle East region and obtained prospective sales leads. The Arab Health Exhibition and Congress is one of the largest and most prestigious healthcare events in the Middle East, with over 2,300 exhibitors from over 65 countries and more than 60,000 medical professionals.
In March 2010, we exhibited our CTLM® system and clinical results at the annual European Congress of Radiology (ECR 2010) held from March 4 -8, in Vienna, Austria. ECR 2010 attracted approximately 19,000 participants worldwide. ECR is one of the largest medical meetings in Europe and the second largest radiology meeting in the world and currently has 45,000 members.
Among our global users, we have three systems in Poland, two in Italy, two in the Czech Republic, two systems in the United Arab Emirates, and two systems in China as well as one system each in Germany, Hungary, Malaysia and India. As of the date of this report IDSI’s users have performed over 15,000 CT Laser Mammography (CTLM®) patient scans worldwide.
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® or by refusing reimbursement. 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.
The U.S. President and Congress have enacted a comprehensive reform of the U.S. healthcare system through the passage of the Health Care Reform Act of 2010 (the “Act”). The ultimate effect of this new Act to reform health care is uncertain, and there can be no assurance that the changes made to the U.S. healthcare system will not materially adversely affect us. Some of the provisions in the Act may limit and further reduce and control spending on healthcare products 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. These reforms could cause U.S. healthcare providers to limit use of or not use the CTLM® systems, in which case we would be materially adversely affected.
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® 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. We previously carried $3,000,000 in product liability insurance to cover both clinical sites and sales. As part of our cost savings initiatives, we cancelled the policy as we have not had any adverse experiences after conducting more then 15,000 patient scans worldwide.
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® 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® is being marketed as an adjunct to mammography and will not compete directly with X-ray mammography. CTLM® 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® 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.
To our knowledge, several companies are targeting the breast optical imaging market. 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 to be scanned. ART may have distribution agreements with GE Medical should a product become available. ART has not received a PMA.
In December 2005, Philips Medical Systems announced their intent to develop optical imaging equipment with an intention to “be on the market early after 2010.” IDSI also believes that Siemens Medical Systems may be developing optical imaging equipment.
CTLM® Laser Mammography Systems are installed in the following countries: Italy, Germany, Poland, the Czech Republic, the Peoples Republic of China, Malaysia and the United Arab Emirates. Over 15,000 breast exams have been completed on CTLM® systems.
Patents
The rapid technological advancements that characterize the medical device industry have led us to rely on a combination of patents, trade secrets, copyrights, trademarks, and confidentiality procedures and processes to protect our CTLM® and other technologies that we have developed.
The original patent for the CTLM® was granted in December 1997 under U.S. 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® 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 20 patents and have 3 additional United States patents pending with regard to optical
tomography, many of which are based on the original CTLM® technology. We also have 17 International patents and have two International patents pending.
In September 1999, we were granted a patent for “A Laser Imaging Apparatus Using Biomedical Markers That Bind To Cancer Cells”. This patent was issued under U.S. Patent No. 5,952,664. 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® system. The CTLM® 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 November 1999, we were granted an Australian patent for “Diagnostic Tomographic Laser Apparatus” as Australian patent number 712849. This patent, the Australian counterpart of U.S. Patent No. 5,692,511, was issued in the name of Richard J. Grable and is exclusively licensed to Imaging Diagnostic Systems, Inc. See “Patent Licensing Agreement”.
In February 2000, we were granted 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 U.S. Patent No. 6,029,077. 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 granted a patent for: “Apparatus And Method for Determining the Perimeter of the Surface of an Object Being Scanned”. The patent was issued under U.S. Patent No. 6,044,288. This patent covers an optical technique to determine the perimeter of a scanned breast. The U.S. Patent No. 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 granted a patent for: “Detector Array for Use in a Laser Imaging Apparatus”. The patent was issued under U.S. Patent No. 6,100,520. 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® to scan the breast without the use of breast compression.
In October 2000, we were granted a patent for: “Method of Reconstructing an Image Being Scanned”. The patent was issued under U.S. Patent No. 6,130,958. This patent describes the algorithms used to reconstruct images from data acquired from CTLM® scans.
In December 2000, we were granted a patent for: “Detector Array With Variable Gain Amplifiers For Use In A Laser Imaging Apparatus”. The patent was issued under U.S. Patent No. 6,150,649. This patent describes the proprietary electronics used in the CTLM® detector array.
In February 2001, Mr. Richard Grable was granted a patent for “Diagnostic Tomographic Laser Imaging Apparatus”. This patent was issued for his proprietary scanning bed, a unique feature of the CTLM®, and was issued as U.S. Patent No. 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. See “Patent Licensing Agreement”.
In April 2001, we were granted a patent for: “Detector Array for Use in a Laser Imaging Apparatus”. The patent was issued under Patent No. 6,211,512. 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® to scan the breast without the use of breast compression.
In January 2002, we were granted 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 granted 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 October 2003, we were granted a Canadian patent for “Diagnostic Tomographic Laser Imaging Apparatus” as Canadian patent number 2223606. This patent, the Canadian counterpart of U.S. Patent No. 5,692,511, was issued in the name of Richard J. Grable and is exclusively licensed to Imaging Diagnostic Systems, Inc. See “Patent Licensing Agreement”.
In December 2003, we were granted a European patent for “Diagnostic Tomographic Laser Imaging Apparatus” as European patent number 0837649. This patent, the European counterpart of U.S. Patent No. 5,692,511, was issued in the name of Richard J. Grable and is exclusively licensed to Imaging Diagnostic Systems, Inc. See “Patent Licensing Agreement”.
In January 2004, we were granted 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 were granted 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 were granted 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 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 were granted a patent for “Medical Optical Imaging Scanner Using Multiple Wavelength Simultaneous Data Acquisitions For Breast Imaging” as U.S. 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 were granted a Chinese Patent for “Diagnostic Tomographic Laser Imaging Apparatus” as Chinese Patent No. ZL95197940X. The patent, the Chinese counterpart of U.S. Patent 5,692,511, 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 July 2004, we were granted a European patent for “Method For Reconstructing The Image Of An Object Scanned With A Laser Imaging Apparatus” as European patent number 1005286. This patent is the European counterpart of U.S. Patent No. 6,130,958 and protects the algorithms used to reconstruct CTLM images.
In July 2004, we were granted an Australian patent for “Laser Imaging Apparatus Using Biomedical Markers That Bind To Cancer Cells” as Australian patent number 775069. This patent is the Australian counterpart of U.S. Patent No. 5,952,664 and protects the fluorescent imaging application of the CTLM.
In August 2004, 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.
In December 2004, we were granted a Hong Kong patent for “Apparatus For Determining The Perimeter Of The Surface Of An Object Being Scanned” as Hong Kong patent number HK1029506. This patent is the Hong Kong counterpart 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.
In December 2004, we were granted a Hong Kong patent for “Method For Reconstructing The Image Of An Object Scanned With A Laser Imaging Apparatus” as Hong Kong patent number HK1029508. This patent is the Hong Kong counterpart of U.S. Patent No. 6,130,958 and protects the algorithms used to reconstruct CTLM images.
In June 2005, we were granted a European patent for “Laser Imaging Apparatus Using Biomedical Markers That Bind To Cancer Cells” as European patent number 1181511. This patent is the European counterpart of U.S. Patent No. 5,952,664 and protects the fluorescent imaging application of the CTLM.
In January 2007, we were granted U.S. Patent 7,155,274, entitled “Optical Computed Tomography Scanner for Small Laboratory Animals,” the first patent application of the LILA technology.
In May 2007, a new patent for our optical CT scanner for small laboratory animals was issued as U.S. Patent 7,212,848. This second patent adds the concept of a second laser which will provide a geographic reference for the fluorescence image. Our first patent covered the basic CT fluorescent imaging of small laboratory animals.
In November 2007, we announced the issuance of Chinese patent ZL 99 8 16608.1, issued July 11, 2007, entitled “Laser Imaging Apparatus using Biochemical Markers that Bind to Cancer Cells.” The patent is granted for a period 20 years from date of filing, until April 1, 2019. This patent, equivalent to U.S. patent 5,952,664, protects the concept of imaging and activating a photodynamic therapy agent in an optical CT scanner.
In November 2008, we were granted U.S. Patent 7,446,875, entitled “Apparatus and Method for Acquiring Time Resolved Measurements Utilizing Direct Digitization of the Temporal Point Spread Function of the Detected Light”. This invention developed by our engineers covers a key technology for time-resolved optical imaging which improves the quality of the imaging data and decreases the time required to acquire the image data.
We intend to file for patents on products, including the CTLM®, 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, we could be materially adversely affected.
Patent Licensing Agreement
IDSI was formed in December 1993 for the sole purpose of developing and commercializing Mr. Richard Grable's invention, a CT laser breast-imaging device (the “Mammoscan™”).
In June 1998, IDSI signed an exclusive patent license agreement with Mr. Grable, which covers some of the technology for the CTLM®. 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, Mr. Grable received 7,000,000 shares of common stock and a royalty based upon a percentage, ranging from 6% to 10%, of the dollar amount earned from each sale before taxes minus the cost of the goods sold and commissions or discounts paid. The royalty provisions do not apply to sales made prior to receipt of FDA approval for the CTLM®. In addition, following FDA approval, Mr. Grable would be eligible for minimum royalties of $250,000 per year based on the sales of the products and goods in which the CTLM® patent is used. Mr. Grable’s interests in the patent license agreement passed to his estate in August 2001. Mrs. Richard Grable, our Chairman and CEO, is the principal beneficiary of Mr. Grable’s estate.
The following table sets forth the Patent licensing royalty structure:
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ANNUAL ADJUSTED SALES
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PERCENTAGE
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$0 to $1,999,999
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10%
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$2,000,000 to $3,999,999
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9%
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$4,000,000 to $6,999,999
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8%
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$7,000,000 to $9,999,99
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7%
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Greater than $10,000,000
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6%
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Employees
As of October 2010, we have 19 full-time employees, including our three executive officers. Seven of our employees (36%), are employed in the areas of scientific, clinical and product research and development. In September 2009, we had 14 full-time employees, of which eight (57%) were employed in the areas of scientific, clinical and product research and development. The increase is due to staffing requirements to complete our FDA application. Our ability to develop our products and 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 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.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-K and certain information incorporated by reference contains “forward-looking statements” within the meaning of the federal securities laws and use terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “projects”, “potential,” or “continue,” or the negative or other comparable terminology regarding beliefs, plans, expectations, or intentions regarding the future. These forward-looking statements involve substantial risks and uncertainties, and actual results could differ materially from those discussed and anticipated in such statements. 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®. This strategy assumes that the CTLM® will provide benefits, from both a medical and an economic perspective, to alternative techniques for diagnosing and managing breast cancer. Factors that could cause actual results to materially differ include, without limitation, the timely and successful completion of our U.S. Food and Drug Administration (“FDA”) clinical trials; the timely and successful submission of our FDA application for marketing clearance of the CTLM®; manufacturing risks relating to the CTLM®, including our reliance on a single or limited source or sources of supply for some key components of our products as well as the need to comply with especially high standards for those components and in the manufacture of optical imaging products in general; uncertainties inherent in the development of new products and the enhancement of our existing CTLM® product, including technical and regulatory risks, cost overruns and delays; our ability to accurately predict the demand for our CTLM® product as well as future products and to develop strategies to address our markets successfully; the early stage of market development for medical optical imaging products and our ability to gain market acceptance of our CTLM® product by the medical community; our ability to expand our international distributor network for both the near and longer-term to effectively implement our globalization strategy; our dependence on senior management and key personnel and our ability to attract and retain additional qualified personnel; risks relating to financing utilizing our Private Equity Credit Agreement or other working capital financing arrangements; technical innovations that could render the CTLM® or other products marketed or under development by us obsolete; competition; risks and uncertainties relating to intellectual property, including claims of infringement and patent litigation; risks relating to future acquisitions and strategic investments and alliances; and reimbursement policies for the use of our CTLM® product and any products we may introduce in the future. There are also 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 that 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. These risks and uncertainties include, but are not limited to, those described above or elsewhere in this annual report. All forward-looking statements and risk factors included in this document are made as of the date of this report based on
information available to us as of the date of this report, and we assume no obligation to update any forward-looking statements or risk factors. You are cautioned not to place undue reliance on these forward-looking statements.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Risks associated with our financial results
We have incurred and are incurring significant losses and we may not be able to continue our business in the future.
At June 30, 2010, we had an accumulated deficit of $111,880,882 after discounts and dividends on preferred stock. These losses have resulted principally from costs associated with research and development, clinical trials and from general and administrative costs associated with our operations. We expect operating losses will continue for at least the next 12 months due primarily to the anticipated expenses associated with:
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demonstrator sites
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clinical collaboration sites
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pre-market approval process,
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anticipated commercialization of the CTLM®, and
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other research and development programs
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We have a limited history of operations. Since our inception in December 1993, we have been engaged principally in the development of the CTLM®, which has not been approved for sale in the United States. While we have received FDA export approval for foreign sales, we have made only 15 foreign sales. Consequently, we have limited experience in manufacturing, marketing and selling our products. We currently have no source of material operating revenues and have incurred substantial net operating losses since inception.
Our auditors have raised substantial doubts as to our ability to continue as a going concern as we have not been and may not be able to be profitable.
We have received an opinion from our auditors stating that the fact that we have suffered substantial losses and have yet to generate an internal cash flow raises substantial doubt about our ability to continue as a going concern. Our ability to achieve profitability will depend on our ability to obtain regulatory approvals for the CTLM®, develop the capacity to manufacture and market the CTLM® and achieve market acceptance of the CTLM®. There can be no assurance we will achieve profitability if and when we receive regulatory approvals for the development, commercial manufacturing and marketing of the CTLM®.
Risks associated with our lack of capital
We require additional capital which we may be unable to raise which may cause us to stop or cut back our operations.
Through June 30, 2010 we have spent approximately $77 million. Our currently estimated annual expenses are approximately $2.6 million. In the year following receipt of marketing clearance for our CTLM® from the FDA, we anticipate that we will need approximately $5 million to complete all necessary stages in order to manufacture and market the CTLM® in the United States and foreign countries. We plan on using the net proceeds raised from the sale of common stock through our Private Equity Credit Agreement with Southridge Partners II, LP and additional financings to develop and market this product family, including funds for:
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research, engineering and development programs,
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pre-clinical and clinical testing of the family of products,
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regulatory processes,
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inventory,
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marketing programs, and
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operating expenses (including general and administrative expenses).
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Our future capital requirements depend on many factors, including the following:
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the progress of our research and development projects,
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the progress of pre-clinical and clinical testing on other proposed products,
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the time and cost involved in obtaining regulatory approvals,
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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
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the development of commercialization activities and arrangements.
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In addition, our fixed commitments are substantial and would increase if additional agreements were entered into and additional personnel were retained. We do not expect to generate a positive internal cash flow for at least 12 months due to an anticipated increase in marketing and manufacturing expenses associated with the international commercialization of the CTLM®, expenses associated with our FDA process, and the costs associated with advanced product development activities.
Although we have from time to time reviewed opportunities provided to us by investment bankers or potential investors in regard to additional equity financings, there can be no assurance that additional financing will be available when needed, or if available, will be available on acceptable terms. Insufficient funds may prevent us from implementing our business strategy and will require us to further delay, scale back or eliminate our research, product development and marketing programs; and may require us to license to third parties rights to commercialize products or technologies that we would otherwise seek to develop ourselves, or to scale back or eliminate our other operations. See “Financing/Equity Line of Credit.”
We have had and may have to issue securities, sometimes at prices substantially below market price, for services which may further depress our stock price and dilute the holdings of our shareholders.
Since we have generated no material 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 covered by registration statements on Form S-8. The aggregate fair market value of those 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. On July 15, 2008, we entered into a Financial Services Consulting Agreement (the “Agreement”) with R.H. Barsom Company, Inc. of New York, NY, an unaffiliated third-party, to provide us with investor relations services and guidance and assistance in available alternatives to maximize shareholder value. The aggregate fair market value of the 5,000,000 restricted shares when issued was $55,000. In April 2010, we issued 250,000 restricted shares to Frederick P. Lutz to satisfy the balance of $2,250 previously owed to him for investor relation services and for providing additional investor relation services. The aggregate fair market value of the 250,000 restricted shares when issued was $13,500. (See Item 5 Market for Registrant's Common Equity and Related Stockholder Matters - Private Placement of Common Stock - Issuance of Stock for Services)
We have in the past and may have to in the future sell additional unregistered convertible securities, possibly without limitations on the number of common shares the securities are convertible into, which could dilute the value of the holdings of current shareholders.
We have relied on the private placement of convertible preferred stock and convertible debentures to obtain working capital and may continue to do so in the future. As of the date of this report, we have issued 206,827,591 shares of common stock which were converted from privately placed preferred stock and debentures. This number of shares of common stock represents approximately 23% of the currently outstanding number of shares of common stock.
In deciding to issue preferred stock and debentures through private placements, we took into account:
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the number of common shares authorized and outstanding,
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the market price of the common stock at the time of each preferred stock or debenture sale, and
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number of common shares the preferred stock or debentures would have been convertible into at the time of the sale
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At the time of each private placement there were enough shares, based on the price of our common stock at the time of the sale of the preferred stock or debentures, to satisfy the conversion requirements. Although our board of directors attempted to negotiate a floor on the conversion price of each series of preferred stock and debentures prior to their sale, it was unable to do so.
In order to obtain working capital we will continue to:
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draw on our Southridge Private Equity Agreement pursuant to a prior registration statement which has been declared effective
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seek capital through debt or equity financing which may include the issuance of convertible debentures or convertible preferred stock whose rights and preferences are superior to those of the common stockholders, and
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attempt to negotiate the best transactions possible taking into account the impact on our shareholders, dilution, loss of voting power and the possibility of a change-in-control.
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Nonetheless, in order to satisfy our working capital needs, it may become necessary to issue convertible securities without a floor on the conversion price.
In the event that we issue convertible preferred stock or convertible debentures without a limit on the number of shares that can be issued upon conversion and if the price of our common stock decreases:
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the percentage of shares outstanding that will be held by these holders upon conversion will increase accordingly,
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the lower the market price the greater the number of shares to be issued to these holders upon conversion, thus increasing the potential profits to the holder when the price per share later increases and the holder sells the common shares,
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the preferred stockholders' and debenture holders’ potential for increased share issuance and profit, including profits derived from short sales of our common stock, in addition to a stock overhang of an indeterminable amount, may depress the price of our common stock,
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the sale of a substantial amount of preferred stock or debentures to relatively few holders could effectuate a possible change-in-control, and
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in the event of our voluntary or involuntary liquidation while the preferred stock or debentures are outstanding, the holders of those securities will be entitled to a preference in distribution of our property.
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We may need to record a derivative liability.
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We may draw on our equity credit line which may cause the value of our common stock to decline and dilute the holdings of our shareholders.
Since January 2001 we have raised $42,714,650 and issued 425,676,012 common shares through a series of six Private Equity Credit Agreements with Charlton Avenue LLC (“Charlton”).
On November 23, 2009 we executed a new Private Equity Credit Agreement with Southridge, which was amended on January 7, 2010. Pursuant to our Southridge Private Equity Credit Agreement, when we deem it necessary, we may raise capital through the private sale of our common stock to Southridge at a price equal to 93% of the market price, based on the formula set forth in our agreement with Southridge. We may need capital in excess of the amounts available under the Southridge Private Equity Credit Agreement, and we may seek additional funding through public or private financing or collaborative, licensing and other arrangements with corporate partners. As we utilize the Southridge Private Equity Credit Agreement, or additional funds are raised by issuing equity securities, especially convertible preferred stock, dilution to existing shareholders will result and future investors
may be granted rights superior to those of existing shareholders. Since January 2010 we have raised $2,000,000 and issued 71,244,381 common shares through the Southridge Private Equity Credit Agreement. See “Financing/Equity Line of Credit/Debentures.”
We have increased and will need to increase our authorized shares of common stock to have sufficient shares available to raise capital for continuing operations and strategic initiatives which may cause the value of our common stock to decline and dilute the holdings of our shareholders.
We now have issued and outstanding 884,278,434 shares of common stock out of 950,000,000 authorized shares. In addition, we have reserved 16,587,690 shares to cover the conversion of the 35 shares of Series L Convertible Preferred Stock outstanding and 45,523,120 shares to cover outstanding options. As of the date of this report, we would have 3,610,756 shares available to be sold to Southridge pursuant to our effective Registration Statement. In order to increase the availability of additional shares for use with our Southridge Equity Credit Line, our three executive officers’ have agreed that they will not exercise any of their respective options to purchase 31,377,000 shares of the Company’s common stock until all shares covered by the Registration Statement are sold, and then only if and to the extent that the Company has authorized but unissued shares of common stock available for issuance in connection with such exercise, or until the Registration Statement is withdrawn. As a result of the waivers, we now have 34,987,756 shares available to be issued pursuant to our Registration Statement. Given our ongoing need to issue substantial amounts of new shares to raise capital to continue operations under our Southridge Private Equity Credit Agreement with Southridge and to have the ability to engage in strategic initiatives, such issuances may cause the value of our common stock to decline and dilute the holdings of our shareholders.
Our currently authorized common stock may not be sufficient to satisfy our financing needs.
In December 2008, our shareholders approved an increase of our authorized common stock to 950,000,000 shares. With this increase we believed that we would have sufficient shares available to raise the funds needed to complete the FDA approval process and reach a point where we could generate internal revenues from operations. Due to delays in the completion of our clinical trials and preparation of our FDA application (due in large part to our lack of financing) as well as the depressed level of our stock price, we may not have authorized shares sufficient to satisfy our near-term financing needs. We now have 884,278,434 shares outstanding, and after reservation of 16,587,690 shares to cover the conversion of the 35 shares of Series L Convertible Preferred Stock and 45,523,120 shares to cover outstanding options. As of the date of this report, we would have 3,610,756 shares available to be sold to Southridge pursuant to our effective Registration Statement. In order to increase the availability of additional shares for use with our Southridge Equity Credit Line, our three executive officers’ agreed that they will not exercise any of their respective options to purchase 31,377,000 shares of the Company’s common stock until all shares covered by the Registration Statement are sold, and then only if and to the extent that the Company has authorized but unissued shares of common stock available for issuance in connection with such exercise, or until the Registration Statement is withdrawn. As a result of the waivers, we now have 34,987,756 shares available to be issued pursuant to our Registration Statement. Given our substantial financing needs, low stock price and the likelihood that any new debt financing or the private placement sale of convertible preferred shares would involve convertibility into common stock, we plan to seek shareholder approval to amend our Articles of Incorporation to increase our authorized common stock at our Annual Meeting tentatively planned for December 2010. Such an increase would cause substantial additional dilution to our shareholders, and further downward pressure on our stock price, and there can be no assurance that our shareholders would approve any such increase if it were proposed.
The Southridge Private Equity Credit Line may not be available when we need it, thus limiting our ability to bring our CTLM® to market.
The Southridge Private Equity Credit Line contains various conditions to our being able to use it, including effectiveness of the required registration statement and the absence of any material adverse change in our business or financial condition. Further, Southridge is a limited partnership registered in the state of Delaware and if it were unable or unwilling to fulfill its obligations, our legal remedies would be limited. Thus, we may be unable to draw down on the Southridge Private Equity Credit Line when we need the funds, and that could severely harm our business and financial condition and our ability to bring the CTLM® to market. Prior to the effective date of the Southridge Private Equity Credit Line, we were almost exclusively dependent on Charlton for working capital for nine years. Since April 1999, we have issued to Charlton a total of 469,676,012 shares of common stock
through conversion of $13,410,000 face amount of our preferred stock and debentures purchased by Charlton and through $44,714,650 in purchases under all of our private equity lines. Since January 2010 we have raised $2,000,000 and issued 71,244,381 common shares through the Southridge Private Equity Credit Agreement. See “Financing/Equity Line of Credit/Debentures.”
We have had and may have to issue securities, sometimes at substantially below market price, in order to pay off our debts which may further depress our stock price and dilute the holdings of our shareholders.
Since we have generated no material revenues to date, we have had difficulty in paying off some of our debts which have become due. In order to pay these debts, we have issued shares and/or warrants to purchase shares of common stock. We have also entered into agreements whereby the lender, sometimes at its option, may be issued other equity securities, such as warrants, to pay off debt. On some occasions, we have converted debt into equity at prices that were well below the market price. In addition, as we have no material revenues, we may have to issue more shares of common stock or other equity securities, sometimes at prices well below market price, in order to pay off current or future debts that become due. These types of issuances of common stock and other equity securities to pay off debt may further depress the price of our common stock and would dilute the holdings of our shareholders, and if substantial dilution does occur, could also cause a change-in-control.
Conversions of our convertible preferred stock and exercise of our convertible debentures and warrants may cause a change of control and other detrimental effects to the value of our shareholders’ holdings.
If we issue substantial amounts of convertible securities and the market price of our common stock declines significantly, we could be required to issue a number of shares of common stock sufficient to result in our current stockholders not having an effective vote in the election of directors and other corporate matters. In the event of a change-in-control, it is possible that the new majority stockholders may take actions that may not be consistent with the objectives or desires of our current stockholders.
We would most likely be required to convert any convertible preferred stock and convertible debentures which we choose to issue based on a formula that varies with the market price of our common stock. As a result, if the market price of our common stock increases after the issuance of our convertible preferred stock and convertible debentures, it is possible that, upon conversion of the convertible preferred stock and convertible debentures, we will issue shares of common stock at a price that is far less than the then-current market price of the common stock.
If the market price of our common stock decreases after we issue the convertible preferred stock or convertible debentures, upon conversion, we will have to issue an increased number of shares to the preferred stock and convertible debenture holders. The sale of convertible preferred stock and debentures may result in a very large conversion at one time. As of the date of this Report, we have no Debentures outstanding and 35 shares of Series L convertible preferred stock outstanding. In the event that we issue additional convertible preferred stock or convertible debentures and we do not have sufficient authorized shares to cover conversion of these securities would have to seek shareholder approval increase the number of authorized shares.
In addition, if we issue warrants they will likely be exercisable at a fixed price based on the then-existing market price of our common stock. If the market price of our common stock thereafter exceeds the warrant exercise price, exercise of the warrants may pose a risk to shareholders because these exercises may drive down the market price of our common stock.
Risks associated with our industry
We depend on market acceptance to sell our products, which have not been proven, and a lack of acceptance would depress our sales.
There can be no assurance that physicians or the medical community in general will accept and utilize the CTLM® or any other products that we develop. The extent and rate the CTLM® 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® and the advantages of the CTLM® 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.
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® 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®. Failure to obtain favorable rates of third-party reimbursement could discourage the purchase and use of the CTLM® 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 the effect of the recently-passed Health Care Reform Act of 2010 and other possible legislation, whereby our potential customers may not receive adequate reimbursement for the use of our product on their patients, which may cause our potential customers to use other services and products.
The U.S. President and Congress have enacted a comprehensive reform of the U.S. healthcare system through the passage of the Health Care Reform Act of 2010 (the “Act”). The ultimate effect of this new Act to reform health care is uncertain, and there can be no assurance that the changes made to the U.S. healthcare system will not materially adversely affect us. Some of the provisions in the Act may limit and further reduce and control spending on healthcare products 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. These reforms could cause U.S. healthcare providers to limit use of or not use the CTLM® systems, in which case we would be materially adversely affected.
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.
Risks associated with our securities
Our common stock is considered "a penny stock" and may be difficult to sell.
The SEC adopted regulations which generally define "penny stock" to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. Presently, the market price of our common stock is substantially less than $5.00 per share and therefore may be designated as a "penny stock" according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement
from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of investors to sell their shares. In addition, since our common stock is traded on the NASDAQ OTC Bulletin Board, investors may find it difficult to obtain accurate quotations of our common stock.
The volatility of our stock price could adversely affect your investment in our common stock.
The price of our common stock has fluctuated substantially since it began trading on the OTC Bulletin Board in September 1994. For example, in the current fiscal year which began July 1, 2010, the bid price ranged from a low of $0.014 in the second quarter to a high of $0.034 in the first quarter, and in our last fiscal year which ended June 30, 2010, the bid price ranged from a low of $0.004 in the first quarter to a high of $0.068 in the third quarter. The market price of our shares, like that of the common stock of many other medical device companies, is likely to continue to be highly volatile. Factors that may have an impact on the price of our common stock include:
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the timing and results of our clinical trials or those of our competitors,
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governmental regulation,
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healthcare legislation,
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geopolitical events,
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equity or debt financing, and
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developments in patent or other proprietary rights pertaining to our competitors or us, including litigation, fluctuations in our operating results, and market conditions for medical device company stocks and life science stocks in general.
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We may issue preferred stock at any time to prevent a takeover or acquisition, any of which issuance could dilute the price of our common stock.
Our articles of incorporation authorize the issuance of preferred stock with designations, rights, and preferences that may be determined from time to time by the board of directors. Our board of directors is empowered, without stockholder approval, to designate and issue additional series of preferred stock with dividend, liquidation, conversion, voting and other rights, including the right to issue convertible securities with no limitations on conversion, which could adversely affect the voting power or other rights of the holders of our common stock. This could substantially dilute the common shareholders’ interest and depress the price of our common stock. In addition, the preferred stock could be utilized as a method of discouraging, delaying or preventing a change-in-control. The substantial number of issued and outstanding convertible preferred stock and the convertible debentures, and their terms of conversion may discourage or prevent an acquisition of our company.
Our dependence on our Equity Credit Line for financing our operations could dilute the price of our common stock.
Until the time when we are able to generate material revenues, we are dependent on equity or other financing to continue operations. We will require substantial additional funds for our operations and the costs associated with the submission of our FDA application. In the event that we are unable to utilize our Equity Credit Line, our common shares may be used for the conversion of new preferred stock or debentures or to accommodate other future issuances of equity securities.
Based on the closing bid price of our common stock on October 12, 2010 of $0.0146 per share, hypothetically 955,882,353 shares would be required to be issued to draw the entire $13 million balance available under the Southridge Private Equity Credit Agreement; however, our ability to use the equity credit line at any particular time will be limited by the number of shares currently authorized and based on our stock price at the time, unless our shareholders approve an increase in our authorized shares.
As of October 12, 2010, we would be required to issue hypothetically 1.01 billion authorized shares apportioned as follows:
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955,882,353 shares for complete utilization of the Southridge Private Equity Credit Agreement
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45,523,120 shares required for the exercise of all outstanding options
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16,587,690 shares required for the conversion of the 35 shares of Series L Convertible Preferred Stock
We now have issued and outstanding 884,278,434 shares of common stock out of 950,000,000 authorized shares. After reservation of 16,587,690 shares to cover the conversion of the 35 shares of Series L Convertible Preferred Stock and 45,523,120 shares to cover outstanding options, as of the date of this report, we would have 3,610,756 shares available to be sold to Southridge pursuant to our effective Registration Statement. In order to increase the availability of additional shares for use with our Southridge Equity Credit Line, our three executive officers’ agreed that they will not exercise any of their respective options to purchase 31,377,000 shares of the Company’s common stock until all shares covered by the Registration Statement are sold, and then only if and to the extent that the Company has authorized but unissued shares of common stock available for issuance in connection with such exercise, or until the Registration Statement is withdrawn. As a result of the waivers, we now have 34,987,756 shares available to be issued pursuant to our Registration Statement.
There is potential exposure to us in that certain shares of common stock have been issued by us pursuant to conversion of our convertible debentures and exercise of related warrants, which were resold by the debenture holders relying on the effectiveness of the relevant registration statement.
From November 12, 2008 through December 5, 2008, the Debenture holders Whalehaven Capital Fund Ltd. (“Whalehaven”) and Alpha Capital Anstalt (“Alpha”) converted $175,000 principal amount of the first $400,000 debenture, sold on August 1, 2008, for which the relevant registration statement became effective on November 12, 2008. On November 20, 2008, in connection with the sale of the second $400,000 debenture, the text of the first debenture was amended to add conforming language implementing the $.013 floor price for conversion of the debentures as agreed to by the parties on October 23, 2008. On December 10, 2008, we entered into an Amendment Agreement with Whalehaven and Alpha (the “Purchasers”) specifically relating to the warrants which accompanied the initial debenture (the “Warrants”). Under this Amendment Agreement, we agreed to reduce the exercise price of the Warrants to $.015 per share in exchange for the Purchasers' agreement to immediately exercise the Warrants as to 7,000,000 shares (5,000,000 covered by the Whalehaven Warrant and 2,000,000 covered by the Alpha Warrant). On December 12, 2008, we filed a prospectus supplement reflecting this re-pricing of the warrants.
As of December 31, 2008, we entered into a second Amendment Agreement with Whalehaven and Alpha specifically relating to the Warrants. On January 5, 2009, we filed a prospectus supplement. Under the second Amendment Agreement, we agreed to reduce the exercise price of the Warrants to $.005 per share in exchange for the Purchasers' agreement to immediately exercise the Warrants as to 14,755,555 shares (11,200,000 by Whalehaven and 3,555,555 by Alpha). We further agreed to issue new Warrants to purchase at $.005 per share up to a number of shares of Common Stock equal to the number of shares underlying the existing Warrants being exercised by Whalehaven and Alpha under the second amendment agreement. On January 7, 2009, we filed a prospectus supplement reflecting this re-pricing of the Warrants.
The re-pricing of the Warrants and amendment of the initial debentures after the effectiveness of the subject registration statement, together with the sale of shares underlying the debentures and warrants after the effectiveness, may have resulted in the unlawful sale of unregistered securities, based on the SEC’s interpretive guidance which permits the registration for resale of securities issued pursuant to a private placement provided that the terms of the private placement are not changed following effectiveness of the registration statement. The re-pricing of the Warrants may have been inconsistent with this guidance. Consequently, third parties who purchased the subject shares after November 12, 2008 could sue us and/or Whalehaven or Alpha for rescission. The measure of damages would be the purchase price paid plus interest. We are unable to assess the amount of damages in the event that there is any liability. As of the date of this Report, neither we nor Whalehaven nor Alpha has been contacted by any third parties seeking rescission. See Sale of Unregistered Securities -"Debenture Private Placement".
We currently are controlled by our executive officers and directors; however, a change-in-control may occur.
Our management beneficially owns 45,152,794 shares of our common stock or 6.12% (assuming exercise of their currently exercisable options) of our common stock. Although management owns a minority of the outstanding common stock, since we do not have cumulative voting, and since, in all likelihood the officers and directors will be voting as a block and will be able to obtain proxies of other shareholders, management may remain in a position to elect all of our directors and control our policies and issue up to 955,882,353 shares to
draw the balance of $13 million available under the Southridge Private Equity Credit Agreement. The amounts of shares issuable under the Southridge Private Equity Credit Agreement or any subsequent Private Equity Credit Agreement could increase substantially if our common stock price declines. Dilution to management's ownership percentage as a result of share issuances under the Southridge Private Equity Credit Agreement and subsequent financings could cause a change in control.
We have not paid and do not currently intend to pay dividends, which may limit the current return you may receive on your investment in our common stock.
Since inception, we have not paid a dividend on our common stock and do not intend to pay dividends on our common stock in the foreseeable future.
Risks associated with our technology
We depend on third-party licensing agreements for patents and software without which our operations may be curtailed.
We hold the rights, through an exclusive patent licensing agreement, for the use of the patent for the CTLM® technology. In addition, we own 20 patents and have 4 additional United States patents pending with regard to optical tomography. We also have patent rights through a non-exclusive licensing agreement from a third-party as well as three non-exclusive licensing agreements for software from third-parties. If any of these agreements were terminated, our operations may be curtailed until alternative solutions were found.
Our business would lose its primary competitive advantage if we are unable to protect our proprietary technology, or if substantially the same technology is developed by others.
We rely primarily on a combination of trade secrets, patents, copyright and trademark laws, and confidentiality procedures to protect our technology. Our ability to compete effectively in the medical imaging products industry will depend on our success in protecting our proprietary technology, both in the United States and abroad. There can be no assurances that any patent that we apply for will be issued, or that any patents issued will not be challenged, invalidated, or circumvented, that we will have the financial resources to enforce them, or that the rights granted will provide any competitive advantage. We hold 16 foreign patents; however, we have applied for 6 patents in various foreign countries. We could incur substantial costs in defending any patent infringement suits or in asserting any patent rights, including those granted by third parties, the expenditure of which we might not be able to afford. Although we have entered into confidentiality and invention agreements with our employees and consultants, there can be no assurance that these agreements will be honored or that we will be able to protect our rights to our non-patented trade secrets and know-how effectively. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how. In addition, we may be required to obtain licenses to patents or other proprietary rights from third parties. If we do not obtain required licenses, we could encounter delays in product development or find that the development, manufacture, or sale of products requiring these licenses could be foreclosed. Additionally, we may, from time to time, support and collaborate in research conducted by universities and governmental research organizations. There can be no assurance that we will have or be able to acquire exclusive rights to the inventions or technical information derived from such collaborations or that disputes will not arise with respect to rights in derivative or related research programs that we conducted in conjunction with these organizations.
It may be necessary to enter into unfavorable agreements or defend lawsuits which would be costly if we infringe upon the intellectual property rights of others.
There has been substantial litigation regarding patent and other intellectual property rights in the medical device and related industries. We have been, and may be in the future, notified that we may be infringing on intellectual property rights possessed by other third parties. If any claims are asserted against our intellectual property rights, we may seek to enter into royalty or licensing arrangements. There is a risk in situations that no license will be available or that a license will not be available on reasonable terms. Alternatively, we may decide to litigate these claims or design around the patented technology. These actions could be costly and would divert the efforts and attention of our management and
technical personnel. Consequently, any infringement claims by third parties or other claims for indemnification by customers resulting from infringement claims, whether or not proven to be true, may be costly to defend and may further limit the use of our technology.
We may not be able to keep up with the rapid technological change in the medical imaging industry which could make the CTLM® obsolete.
Methods for the detection of cancer are subject to rapid technological innovation and there can be no assurance that technical changes will not render our proposed products obsolete. Although we believe that the CTLM® can be upgraded to maintain its state-of-the-art character, the development of new technologies or refinements of existing ones might make our existing system technologically or economically obsolete, or cause a reduction in the value of, or reduce the need for, our CTLM®. There can be no assurance that the development and commercial availability 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. Although we are aware of no substantial technological changes pending, should a change occur, there can be no assurance that we will be able to acquire the new or improved technology which may be required to update the CTLM®.
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.
A 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® system in the U.S. and other countries.
In the United States, the CTLM® 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 marketing clearance of a diagnostic device such as the CTLM®, the FDA 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 or management of a disease or condition. We rely on outside FDA consultants to assist us in reviewing and finalizing our FDA application for marketing clearance of the CTLM®.
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.
Regulatory approvals, if granted, may include significant limitations on the indicated uses for which the CTLM® 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. 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:
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FDA marketing clearance for the CTLM®,
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foreign marketing clearances for the CTLM® or regulatory approvals or clearances for other products that we may develop, on a timely basis, or at all,
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timely receipt of approvals or clearances,
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continued approval or clearance of previously obtained approvals and clearances, and
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compliance with existing or future regulatory requirements.
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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, products other than the CTLM® device are at early stages of development. There can be no assurance that any of our proposed products, including the CTLM®, will:
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be found to be safe and effective,
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meet applicable regulatory standards or receive necessary regulatory clearance,
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be safe and effective, developed into commercial products, manufactured on a large scale or be economical to market, or
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achieve or sustain market acceptance.
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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® 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® or any other products that we develop. The extent and rate the CTLM® 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® and the advantages of the CTLM® 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®; 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® 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 our three 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® manufacturing and assembly capabilities and contract for the manufacture of the CTLM® 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®.
We have used and do use third parties to manufacture and deliver the components of the CTLM® 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® 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 marketing clearance approval for the CTLM® 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® in Europe, Asia, South America and the Middle East. Until we receive marketing clearance from the FDA to market the CTLM® 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:
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economical and political instability,
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shipping delays,
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fluctuation of foreign currency exchange rates,
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foreign regulatory requirements, and
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various trade restrictions, all of which could have a significant impact on our ability to deliver products on a timely basis.
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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. While we attempt to minimize the risk of doing business with distributors in countries which are having difficult financial times by requesting payment via an irrevocable letter of credit (“L/C”) drawn on a United States bank prior to shipment of the CTLM®, it is not always possible to obtain an L/C from our distributor. In these cases we must seek alternative
payment arrangements which include third-party financing, leasing or extending payment terms to our distributors.
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 previously carried $3,000,000 in product liability insurance to cover both clinical sites and sales. As part of our cost savings initiatives, we cancelled the policy as we have not had any adverse experiences after conducting more then 15,000 patient scans worldwide. We have assumed the risk of product liability. A successful product liability claim against us could have a material adverse effect on the Company. Furthermore, there can be no assurance that, in the future, we will be able to obtain adequate or maintain product liability insurance on acceptable terms.
Item 1B. Unresolved Staff Comments
None
Item 2. Description of Our Property
On June 2, 2008, we executed a Business Lease Agreement with Ft. Lauderdale Business Plaza Associates, an unaffiliated third-party, for 9,870 square feet of commercial office and manufacturing space at 5307 NW 35th Terrace, Ft. Lauderdale, Florida. The term of the lease is five years and one month with the first monthly rent payment due September 1, 2008 with an option to renew for one additional period of three years. The monthly base rent for the initial year is $6,580.00 plus applicable sales tax. During the term and any renewal term of the lease, the base annual rent shall be increased each year. Commencing with the first day of August 2009 and each year thereafter, the base annual rent shall be cumulatively increased by 3.5% each lease year plus applicable sales tax. IDSI will also be obligated to pay as additional rent its pro-rata share of all common area maintenance expenses which is estimated to be $3,084.37 per month for the first 12 months of the lease. The total monthly rent including Florida sales tax for the first 12 months is $10,244.23. Upon the execution of the lease, we paid the first month’s rent of $10,244.23 and a security deposit of $13,160.00. In August 2008, we moved into our new headquarters facility. We believe that our new facility is adequate for our current and reasonably foreseeable future needs and provides us with a monthly cost savings of $23,196 per month. We intend to assemble the CTLM® at our facility from hardware components that will be made by vendors to our specifications.
On September 13, 2007, we entered into an agreement with an unaffiliated third-party for the sale and lease-back of our prior facility at 6531 N.W. 18th Court, Plantation, Florida. On March 31, 2008, pursuant to the sale/lease-back transaction, we closed the sale of our commercial building for $4.4 million to Bright Investments LLC (“Bright”), an unaffiliated third-party and a sister company to Superfun B.V. On April 29, 2008, we gave six months prior written notice of termination of our lease of the Plantation facility as part of our cost cutting initiatives.
In April 2008, we were served with a lawsuit filed against us in Venice, Italy, by Gio Marco S.p.A. and Gio IDH S.p.A., related Italian companies which, between them, had purchased three CTLM® systems in 2005. One system was purchased directly from us, and the other two were purchased from our former Italian distributor and an affiliate of the distributor.
The plaintiffs alleged that they purchased the CTLM® systems for experimental purposes based on alleged oral assurances by our sales representative to the effect that we would promptly receive FDA approval for the CTLM® and that we would give them exclusive distribution rights in Italy. The plaintiffs are seeking to recover a total of €628,595, representing the aggregate purchase price of the systems plus related expenses.
Based on our preliminary investigation of this matter, we believe that this claim is without merit, and we intend to vigorously defend the case. Our Italian counsel responded to the lawsuit in November 2008 and requested and was granted an extension to May 2009 to respond. Our counsel filed our defenses in the Court of Venice at a hearing held in June 2009. The judge set the next hearing for March 3, 2010 in order to allow the parties to clarify their claims and defenses. At the hearing, the plaintiffs did not prove all of the facts underlying their claims. The Judge set a hearing for November 10, 2010 for the “clarification of conclusions”. At that time, our counsel will present our demand for damages from “vexatious litigation” by the plaintiffs.
In December 2008, we were served with a lawsuit against us in Cuyahoga County, Ohio, by Plexar Associates, Inc. (“Plexar”), a company that provides software and algorithm development for medical imaging companies. On January 23, 2008, we engaged the services of Plexar to provide work over a three-month period relating to artifact reduction. The initial purchase order was limited to an amount not to exceed $48,700. A second purchase order for a three-month period was signed on July 8, 2008 with a limit not to exceed $61,000. Thus, the total commitment was $109,700. As of June 30, 2009, we have paid Plexar the sum of $93,910.66 and have not received any useful work product that would help us reduce artifacts in our images. In their complaint, Plexar is seeking the sum of $65,076.25. We filed a counter-claim for non-performance and answered the complaint on February 6, 2009. Prior to mediation, we reached an agreement with Plexar on August 6, 2009 to settle this case and agreed to allow Plexar’s counsel to prepare a Settlement Agreement and Mutual Release in this matter, which was signed on August
24, 2009. We believe it was in our best interest to settle this case to avoid incurring substantial litigation costs and the risks of a trial that would have been held in Cleveland, Ohio. We also would have incurred significant travel and lodging expenses for our employees and expert witnesses.
The Settlement Agreement and Mutual Release stipulated that we would pay Plexar $52,000 with payments as follows: $5,000 no later than August 25, 2009, which was paid; $15,000 no later than October 15, 2009; eight additional payments of $4,000, with the first of these monthly payments due on November 15, 2009 and continuing on the 15th day of each successive month through June 15, 2010. If any of the above payments remained unpaid for more than five calendar days after each is due, then an additional payment of $9,000 would be due. The October 15th payment and subsequent payments were not made timely, and we were in default of the Settlement Agreement. On November 2, 2009, Plexar obtained a final judgment against us for $56,053.69 in the Ohio court. Plexar stated its intention to seek to domesticate the judgment in Florida. On December 21, 2009, we paid the sum of $32,036 to Plexar of which $30,000 was applied to the Judgment and $2,036 was applied to attorney’s fees pursuant to an agreement for settlement of the same date. On January 20, 2010, we paid the sum of $27,919.12 to Plexar as a final payment pursuant to the agreement for settlement which includes accrued interest, filing fees and attorney’s fees for the month of December 2009. Plexar has filed a notice of discharge in both the Ohio Court and the Broward County, Florida Court. This case is now closed.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
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.
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QUARTER ENDING
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High Bid
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Low Bid
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FISCAL YEAR 2008
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First Quarter
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$0.088
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$0.035
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Second Quarter
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$0.074
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$0.045
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Third Quarter
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$0.055
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$0.046
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Fourth Quarter
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$0.049
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$0.02
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FISCAL YEAR 2009
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First Quarter
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$0.055
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$0.012
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Second Quarter
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$0.048
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$0.02
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Third Quarter
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$0.023
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$0.007
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Fourth Quarter
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$0.009
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$0.005
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FISCAL YEAR 2010
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First Quarter
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$0.011
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$0.004
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Second Quarter
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$0.029
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$0.007
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Third Quarter
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$0.068
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$0.018
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Fourth Quarter
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$0.063
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$0.02
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FISCAL YEAR 2011
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First Quarter
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$0.034
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$0.02
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Second Quarter (until October 12, 2010)
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$0.021
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$0.014
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On October 12, 2010, the closing trade price of the common stock as reported on the OTC Bulletin Board was $0.0146. As of such date, there were approximately 2,804 registered holders of record of our common stock.
Sale of Unregistered Securities
Debenture Private Placement
On August 1, 2008, we entered into a Securities Purchase Agreement (the “Initial Purchase Agreement”) with an unaffiliated third party, Whalehaven Capital Fund Limited (“Whalehaven”), relating to a private placement (the “Initial Private Placement”) of a total of up to $800,000 in principal amount of one-year 8% Senior Secured Convertible Debentures (the “Initial Debentures”). We were required to file within 30 days an S-1 Registration Statement (the “Registration Statement”) covering the shares of common stock underlying the Initial Debentures and related Warrants pursuant to the terms of a Registration Rights Agreement dated August 1, 2008, between IDSI and Whalehaven; however, with Whalehaven’s consent, we were permitted to file the Registration Statement promptly after the filing of our Annual Report on Form 10-K.
The Initial Purchase Agreement provided for the sale of the Initial Debentures in two closings. The first closing, which occurred on August 4, 2008, was for a principal amount of $400,000. The second closing would be for up to $400,000 and would occur within the earlier of five business days following the effective date of the Registration Statement and December 1, 2008, provided that the closing conditions in the Initial Purchase Agreement were met. We retained the option to use our existing equity credit line until the Registration Statement was declared effective. Sales under the Initial Purchase Agreement were subject to an 8% placement agent fee. Thus, the first closing generated proceeds to IDSI of $368,000, before normal transaction costs.
Prior to maturity, the Initial Debentures would bear interest at the rate of 8% per annum, payable quarterly in cash or, at our option, in shares of common stock based on the then-existing market price provided that we were in compliance with the Initial Purchase Agreement.
The Initial Debentures could be converted in whole or in part at the option of the holder any time after the closing date into our Common Stock at the lesser of (i) a set price, initially $.019 per share, which was the closing price of our shares on the closing date (“fixed conversion price”) or (ii) 80% of the 3 lowest bid prices during the 10 consecutive trading days immediately preceding a conversion date; however, the terms of each Initial Debenture prevent the holder from converting the Debenture to the extent that the conversion would result in the holder and its affiliates beneficially owning more than 4.99% of the outstanding shares of our common stock; however, the limit could be increased to 9.99% on 61 days prior written notice from the holder.
At any time after closing, we could redeem for cash, upon written notice, any and all of the outstanding Initial Debentures at a 25% premium of the principal amount plus accrued and unpaid interest on the Initial Debentures to be redeemed.
The Initial Debentures were secured by a pledge of substantially all of our assets pursuant to a Security Agreement dated August 1, 2008, between IDSI and Whalehaven.
Pursuant to the first closing of the Initial Private Placement, we issued to Whalehaven five-year Warrants to purchase 22,222,222 shares of our common stock. The exercise price of these Warrants was $0.0228, i.e., 120% of the market price on the closing date. The Warrants were subject to cashless exercise at Whalehaven’s option.
The placement agent was entitled to receive a Warrant to purchase common stock equal to 12% of Whalehaven’s Warrants with an exercise price equal to Whalehaven’s exercise price. Consequently, a Warrant to purchase 2,666,666 shares was issued to the placement agent based on the first closing.
On October 23, 2008, we entered into an Amendment Agreement (the “Amendment”) with Whalehaven relating to the Initial Purchase Agreement, and the Initial Debenture due August 1, 2009, in the principal amount of $400,000 issued by us to Whalehaven pursuant to the Initial Purchase Agreement. The Amendment provided that the minimum conversion price would be $.013 per share and that the contemplated second closing for another $400,000 debenture would be abandoned. Consequently, no debenture or warrants were issued beyond the securities issued in connection with the first closing, as the total facility amount was limited to $400,000.
On November 12, 2008, our Registration Statement relating to the Initial Debenture was declared effective. On November 20, 2008, we entered into a Securities Purchase Agreement with two unaffiliated third parties, Whalehaven and Alpha Capital Anstalt (“Alpha”), relating to a private placement (the “New Private Placement”) of $400,000 in principal amount of one-year 8% Senior Secured Convertible Debentures (the “New Debentures”). We were required to file a Registration Statement covering the shares of common stock underlying the New Debentures, including any shares payable as interest, pursuant to the terms of a Registration Rights Agreement dated November 20, 2008, between IDSI and Whalehaven and Alpha promptly following our annual meeting of shareholders, which was held on December 29, 2008. At the meeting the shareholders voted to approve an amendment to our articles of incorporation to increase the authorized shares from 450,000,000 to 950,000,000 (the “Share Amendment”). We were required to use commercially reasonable efforts to cause a Registration Statement to be declared effective as promptly as practicable and no later than 75 days after filing. In the case of a review by the Securities and Exchange Commission the effectiveness date deadline extended to 120 days. In the absence of timely filing or effectiveness, we would be subject to customary liquidated damages.
The New Private Placement generated gross proceeds of $368,000 after payment of an 8% placement agent fee but before other expenses associated with the transaction.
Prior to maturity, the New Debentures provided interest at the rate of 8% per annum, payable quarterly in cash or, at the Company’s option, in shares of common stock based on the then-existing market price.
The New Debentures could be converted in whole or in part at the option of the holder any time after the shareholders have voted to approve the Share Amendment at the lesser of (i) a set price, initially $.033 (the closing price of the shares on the closing date) or (ii) 80% of the 3 lowest bid prices during the 10 consecutive trading days immediately preceding a conversion date; provided, however, that the Conversion Price is subject to a floor price, initially $0.013, and provided further however, that the terms of each Initial Debenture prevent
the holder from converting the Debenture to the extent that the conversion would result in the holder and its affiliates beneficially owning more than 4.99% of the outstanding shares of our common stock; however, the limit could be increased to 9.99% on 61 days prior written notice from the holder.
After the effectiveness of the Registration Statement, we could redeem for cash, upon written notice, any and all of the outstanding Debentures at a 25% premium of the principal amount plus accrued and unpaid interest on the Debentures to be redeemed.
The New Debentures were secured by a pledge of substantially all of our assets pursuant to a Security Agreement dated November 20, 2008 between IDSI and Whalehaven and Alpha. This security interest was pari passu with the security interest granted to Whalehaven on August 1, 2008, in connection with the Company’s sale of the $400,000 Initial Debenture to Whalehaven..
In November 2008, Whalehaven converted $160,000 principal amount of the Initial Debenture and received 9,206,065 shares of our common stock as a result. On November 26, 2008, Whalehaven sold to Alpha $50,000 principal amount of the Initial Debenture and the right to purchase 5,555,555 shares underlying the Warrant. As a result of this transaction, the Warrant for 22,222,222 shares were replaced by a warrant held by Whalehaven covering 16,666,667 shares (the "Whalehaven Warrant") and a warrant held by Alpha covering 5,555,555 shares (the "Alpha Warrant") (collectively, the "Warrants").
On December 10, 2008, we entered into an Amendment Agreement with Whalehaven and Alpha relating to the Warrants. Under this Amendment Agreement, we agreed to reduce the exercise price of the Warrants to $.015 per share in exchange for the Purchasers' agreement to immediately exercise the Warrants as to 7,000,000 shares (5,000,000 covered by the Whalehaven Warrant and 2,000,000 covered by the Alpha Warrant). We used the $105,000 proceeds from the warrant exercise for working capital.
On December 15, 2008, Alpha converted $15,000 principal amount of its Initial Debenture and received 1,052,628 shares of our common stock as a result.
We entered into a second Amendment Agreement dated as of December 31, 2008, with Whalehaven and Alpha relating to the Warrants. Under this Amendment Agreement, we agreed to reduce the exercise price of the Warrants to $.005 per share in exchange for the Purchasers' agreement to immediately exercise the Warrants as to 14,755,555 shares (11,200,000 by Whalehaven and 3,555,555 by Alpha). We further agreed to issue new Warrants to purchase at $.005 per share up to a number of shares of Common Stock equal to the number of shares underlying the existing Warrants being exercised by Whalehaven and Alpha under the second Amendment Agreement.
In December 2008 we received $56,000, and in January 2009 we received $17,778 in proceeds from these Warrant exercises, we used the proceeds for working capital.
After the issuance of shares pursuant to Whalehaven’s Notice of Exercise of its Warrant and subsequent issuance of new Warrants, they had a balance of 11,666,667 shares available for exercise. After the issuance of shares pursuant to Alpha’s Notice of Exercise of its Warrant and subsequent issuance of new Warrants, they had a balance of 3,555,555 shares available for exercise.
We entered into a third Amendment Agreement dated as of March 20, 2009, with Whalehaven and Alpha. This Amendment Agreement pertained to a request by the Company to the Holders that they agree to a suspension of the Company’s obligations under the Registration Rights Agreements for both the Initial and New Debentures. In consideration for such suspensions, the Company agreed to an adjustment in the conversion price for both debentures whereby the floor price was reduced from $0.013 to $0.005 and the set price was reduced from $0.019 to $0.01. The new formula for determining the conversion price on any Conversion Date would be equal to the lesser of (a) $0.01, subject to certain standard adjustments (the “Set Price”) and (b) 80% of the average of the 3 lowest Closing Prices during the 10 Trading Days immediately prior to the applicable Conversion Date (subject to adjustments) (the “Conversion Price”); provided, however, that the Conversion Price shall in no event be less than $0.005 (subject to certain standard adjustments).
As of June 30, 2010, Whalehaven had sold to Alpha a total of $100,000 principal amount of the August Debenture and received from Alpha a total of $50,000 principal amount of the November Debenture, which it had acquired from Alpha on March 17, 2009 in connection with the sale of $50,000 of the August Debenture to Alpha.
As of June 30, 2010, Whalehaven had converted the $300,000 of the August Debenture which it did not sell to Alpha and has received 36,841,918 shares as a result. Whalehaven has
converted $250,000 of the November Debenture and has received 51,600,363 shares as a result. Thus, Whalehaven has converted all of its August and November Debentures into 88,442,281 shares of common stock.
In October 2009, Whalehaven exercised Warrants to purchase 6,000,000 shares and received 4,648,649 shares of common stock using the cashless conversion feature with a Volume Weighted Average Price (“VWAP”) conversion price of $0.022. The shares were issued pursuant to Rule 144. Whalehaven held Warrants to purchase 5,666,667 shares of common stock at an exercise price of $0.005.
As of June 30, 2010, Alpha had converted $100,000 of the August Debenture and received 17,313,265 shares as a result. Alpha has converted $150,000 of the November Debenture and has received 28,429,066 shares as a result. Thus, Alpha has converted all of its August and November Debentures into 45,742,331 shares of common stock which does not include interest. In October 2009, we issued Alpha 2,166,263 shares as a result of the 8% interest on their portion of the debentures.
In October 2009, Alpha exercised its remaining Warrants to purchase 3,555,555 shares and received 2,942,528 shares of common stock using the cashless conversion feature with a VWAP exercise price of $0.029. The shares were issued pursuant to Rule 144.
In October 2009, the Placement Agents exercised their Warrants to purchase 2,666,666 shares and received 1,989,845 shares of common stock using the cashless conversion feature with a VWAP exercise price of $0.0197. The shares were issued pursuant to Rule 144.
In December 2009, Whalehaven exercised its remaining Warrants to purchase 5,666,667 shares and received 4,542,328 shares of common stock using the cashless conversion feature with a VWAP exercise price of $0.0252. The shares were issued pursuant to Rule 144.
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 specified preference in distribution of our property available for distribution. As of the date of this report there are 35 shares of Series L Convertible Preferred Stock. (See “Issuance of Stock in Connection with Short-Term Loans”)
Series K Preferred
See “Financing/Equity Line of Credit”.
Private Placement of Common Stock
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 registered on Form S-8 when issued was $2,437,151. On July 15, 2008, we entered into a Financial Services Consulting Agreement (the “Agreement”) with R.H. Barsom Company, Inc. of New York, NY, an unaffiliated third-party, to provide us with investor relations services and guidance and assistance in available alternatives to maximize shareholder value. The term of the Agreement is six months, with payment for services being made with shares of IDSI’s common stock with a restricted legend to Richard E. Barsom. The total payment will be 5,000,000 restricted shares, with the first payment of 2,500,000 restricted shares paid on July 16, 2008, and the second payment of 2,500,000 restricted shares due three months after July 15, 2008. The aggregate fair market value of the 5,000,000 restricted shares when issued was $55,000. The Company agreed to register as soon as practicable the aggregate of 5,000,000 shares in an S-1 Registration Statement. In April 2010, we issued 250,000 restricted shares to Frederick P. Lutz to satisfy the balance of $2,250 previously owed to him for investor relation services and for additional investor relation services. The aggregate fair market value of the 250,000 restricted shares when issued was $13,500.
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.
Issuance of Stock for Settlements In Lieu of Cash
On March 28, 2002, we issued 350,000 restricted shares of common stock to Anthony Giambrone in settlement of a lawsuit for alleged breach of a consulting agreement. 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.
On or about September 18, 2003, we entered into a settlement agreement to settle a lawsuit filed by Ladenburg Thalmann & Co. Inc. for alleged breach of an investment-banking contract. 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 would be issued within the meaning of Section 3(a)(10) and the case was closed. The shares were issued on November 12, 2003.
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.
From July 2000 until August 2007, when we entered into an agreement for the sale/lease-back of our headquarters facility, Charlton Avenue LLC (“Charlton”) provided all of our necessary funding through the private placement sale of convertible preferred stock with a 9% dividend and common stock through various private equity credit agreements. See “Item 2, Results of Operations, Liquidity and Capital Resources, Sale/Lease-Back” We initially sold Charlton 400 shares of our Series K convertible preferred stock for $4 million and subsequently issued an additional 95 Series K shares to Charlton for $950,000 on November 7, 2000. We paid Spinneret Financial Systems Ltd. (“Spinneret”), an independent financial consulting firm unaffiliated with the Company 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. The total of $4,950,000 was designed to serve as bridge financing pending draws on the Charlton private equity line provided through the various private equity credit agreements described in the following paragraphs.
From November 2000 to April 2001, Charlton converted 445 shares of Series K convertible preferred stock into 5,600,071 common shares and we redeemed 50 Series K shares for $550,000 using proceeds from the Charlton private equity line. Spinneret converted 5 Series K shares for $63,996. All Series K convertible preferred stock has been converted or redeemed and there are no convertible preferred shares outstanding.
Prior Equity Agreements
From August 2000 to February 2004, we obtained funding through three Private Equity Agreements with Charlton. Each equity agreement provided that the timing and amounts of the purchase by the investor were at our sole discretion. The purchase price of the shares of common stock was set at 91% of the market price. The market price, as defined in each 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. 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 fees in advance. We reached an agreement to pay Spinneret in advance as requested and paid them $250,000 out of proceeds from a put.
From the date of our first put notice, January 25, 2001 to our last put notice, February 11, 2004, under our Third Private Equity Credit Agreement, we drew a total of $20,506,000 and issued 49,311,898 shares to Charlton. As each of the obligations under these prior agreements was satisfied, the agreements were terminated. The Third Private
Equity Agreement was terminated on March 4, 2004 upon the effectiveness of our first Registration Statement for the Fourth Private Equity Credit Agreement.
On January 9, 2004, we and Charlton entered into a new “Fourth Private Equity Credit Agreement” which replaced our prior private equity agreements. The terms of the Fourth Private Equity Credit Agreement were more favorable to us than the terms of the prior Third Private Equity Credit Agreement. The new, more favorable terms were: (i) The put option price was 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 was 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 was $15,000,000, (iv) the minimum amount we were required to draw through the end of the commitment period was $1,000,000, while the prior Third Private Equity Credit Agreement minimum amount was $2,500,000, (v) the minimum stock price requirement was controlled by us as we had 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 were no fees associated with the Fourth Private Equity Credit Agreement; the prior private equity agreements required the payment of a 5% consulting fee to Spinneret, 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 requirement in the Third Private Equity Credit Agreement was $20,000.
We made sales under the Fourth Private Equity Credit Agreement from time to time in order to raise working capital on an “as needed” basis. Under the Fourth Private Equity Credit Agreement we drew down $14,198,541 and issued 66,658,342 shares of common stock. We terminated use of the Fourth Private Equity Credit Agreement and instead began to rely on the Fifth Private Equity Credit Agreement (described below) upon the April 26, 2006, effectiveness of our S-1 Registration Statement filed March 23, 2006.
On March 21, 2006, we and Charlton entered into a new “Fifth Private Equity Credit Agreement” which has replaced our prior Fourth Private Equity Credit Agreement. The terms of the Fifth Private Equity Credit Agreement were similar to the terms of the prior Fourth Private Equity Credit Agreement. The new credit line’s terms were (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 (the “Valuation Period”), (ii) the commitment period was two years from the effective date of a registration statement covering the Fifth Private Equity Credit Agreement shares, (iii) the maximum commitment was $15,000,000, (iv) the minimum amount we were required to draw through the end of the commitment period was $1,000,000, (v) the minimum stock price, also known as the floor price was computed as follows: In the event that, during a Valuation Period, the Bid Price on any Trading Day fell more than 18% below the closing trade price on the trading day immediately prior to the date of the Company’s Put Notice (a “Low Bid Price”), for each such Trading Day the parties had no right and were under no obligation to purchase and sell one tenth of the Investment Amount specified in the Put Notice, and the
Investment Amount accordingly would be deemed reduced by such amount. In the event that during a Valuation Period there existed a Low Bid Price for any three Trading Days—not necessarily consecutive—then the balance of each party’s right and obligation to purchase and sell the Investment Amount under such Put Notice would terminate on such third Trading Day (“Termination Day”), and the Investment Amount would be adjusted to include only one-tenth of the initial Investment Amount for each Trading Day during the Valuation Period prior to the Termination Day that the Bid Price equaled or exceeded the Low Bid Price and (vi) there were no fees associated with the Fifth Private Equity Credit Agreement.
We made sales under the Fifth Private Equity Credit Agreement from time to time in order to raise working capital on an “as needed” basis. Prior to the expiration of the Fifth Private Equity Credit Agreement on March 21, 2008, we drew down $5,967,717 and issued 82,705,772 shares of common stock.
The Sixth Private Equity Credit Agreement
On April 21, 2008, we and Charlton entered into a new “Sixth Private Equity Credit Agreement” which has replaced our prior Fifth Private Equity Credit Agreement. The terms of the Sixth Private Equity Credit Agreement are similar to the terms of the prior Fifth Private Equity Credit Agreement. This new credit line’s 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 (the “Valuation Period”), (ii) the commitment period is three years from the effective date of a registration statement covering the Sixth Private Equity Credit Agreement shares, (iii) the maximum commitment is $15,000,000, (iv) There is no minimum commitment amount, (v) the minimum stock price, also known as the floor price is computed as follows: In the event that, during a Valuation Period, the Bid Price on any Trading Day falls more than 20% below the closing trade price on the trading day immediately prior to the date of the Company’s Put Notice (a “Low Bid Price”), for each such Trading Day the parties shall have no right and shall be under no obligation to purchase and sell one tenth of the Investment Amount specified in the Put Notice, and the Investment Amount shall accordingly be deemed reduced by such amount. In the event that during a Valuation Period there exists a Low Bid Price for any three Trading Days—not necessarily consecutive—then the balance of each party’s right and obligation to purchase and sell the Investment Amount under such Put Notice shall terminate on such third Trading Day (“Termination Day”), and the Investment Amount shall be adjusted to include only one-tenth of the initial Investment Amount for each Trading Day during the Valuation Period prior to the Termination Day that the Bid Price equals or exceeds the Low Bid Price and (vi) there are no fees associated with the Sixth Private Equity Credit Agreement. The conditions to our ability to draw under this private equity line, as described above, may materially limit the draws available to us.
We have made sales under the Sixth Private Equity Credit Agreement from time to time in order to raise working capital on an “as needed” basis. As of the date of this report, we have drawn down $2,042,392 and issued 227,000,000 shares of common stock pursuant to this Agreement.
As of the date of this report, since January 2001, we have drawn an aggregate of $42,714,650 in gross proceeds from our equity credit lines with Charlton and have issued 425,676,012 shares as a result of those draws.
The Southridge Private Equity Credit Agreement
On November 23, 2009, we and Southridge entered into a new “Southridge Private Equity Credit Agreement” which has replaced our prior Sixth Private Equity Credit Agreement with Charlton. On January 7, 2010, we and Southridge amended the terms of the “Southridge Private Equity Credit Agreement” and revised the language to clarify that Southridge is irrevocably bound to accept our put notices subject to compliance with the explicit conditions of the Agreement.
The terms of the Southridge Private Equity Credit Agreement are similar to the terms of the prior Sixth Private Equity Credit Agreement with Charlton. This new credit line’s 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 (the “Valuation Period”), (ii) the commitment period is three years from the effective date of a registration statement covering the Southridge Private Equity Credit Agreement shares, (iii) the maximum commitment is $15,000,000, (iv) There is no minimum commitment amount, and (v) there are no fees associated with the Southridge Private Equity Credit Agreement. The conditions to our ability to draw under this private equity line, as described above, may materially limit the draws available to us.
We are obligated to prepare promptly, and file with the SEC within sixty (60) days of the execution of the Southridge Private Equity Credit Agreement, a Registration Statement with respect to not less than 100,000,000 of Registrable Securities, and, thereafter, use all diligent efforts to cause the Registration Statement relating to the Registrable Securities to become effective the earlier of (a) five (5) business days after notice from the Securities and Exchange Commission that the Registration Statement may be declared effective, or (b) one hundred eighty (180) days after the Subscription Date, and keep the Registration Statement effective at all times until the earliest of (i) the date that is one year after the completion of the last Closing Date under the Purchase Agreement, (ii) the date when the Investor may sell all Registrable Securities under Rule 144 without volume limitations, or (iii) the date the Investor no longer owns any of the Registrable Securities (collectively, the "Registration Period"), which Registration Statement (including any amendments or supplements, thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.
We are further obligated to prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to keep the Registration Statement effective at all times during the Registration Period, and, during the Registration Period, and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement until the expiration of the Registration Period.
On January 12, 2010, we filed a Registration Statement for 120,000,000 shares pursuant to the requirements of the Southridge Private Equity Credit Agreement. This Registration Statement was declared effective on February 25, 2010. On May 24, 2010 we filed a Post-Effective Amendment No. 1 to our Registration Statement to update our financial statements and related notes to the financial statements and business information for the quarter ending March 31, 2010. We reduced the amount of shares registered to 85,744,007 shares. This amended Registration Statement was declared effective on May 27, 2010.
As of the date of this report, we have drawn down $2,000,000 and issued 71,244,381 shares of common stock under the Private Equity Credit Agreement with Southridge.
As of the date of this report, since January 2001, we have drawn an aggregate of $44,714,650 in gross proceeds from our equity credit lines with Charlton and Southridge and have issued 496,920,393 shares as a result of those draws.
In March 2008, we completed the sale of our Plantation, Florida building for $4.4 million, which was paid for in the following installments:
|
First Installment
|
8/02/2007
|
$1,100,000.00
|
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Second Installment
|
9/21/2007
|
$1,100,000.00
|
|
Third Installment
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12/14/2007
|
$550,000.00
|
|
Fourth Installment
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1/04/2008
|
$550,000.00
|
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Fifth Installment
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1/18/2008
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$1,056,000.00
|
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Final Payment
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3/26/2008
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$44,027.00
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These funds were used to finance our operations on terms more favorable than those which were available under the Fifth Private Equity Credit Agreement.
The following selected financial data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements"
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Year Ended
|
Year Ended
|
Year Ended
|
Year Ended
|
Year Ended
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||||||||||||||||
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June 30, 2010
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June 30, 2009
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June 30, 2008
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June 30, 2007
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June 30, 2006
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||||||||||||||||
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Sales
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$ | 181,172 | $ | 70,617 | $ | 39,647 | $ | 65,136 | $ | 675,844 | ||||||||||
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Gain (Loss) on sale of fixed assets
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- | 1,181,894 | 1,609,525 | - | (2,439 | ) | ||||||||||||||
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Cost of Sales
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22,512 | 20,546 | 20,944 | 17,870 | 316,189 | |||||||||||||||
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Gross Profit
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158,660 | 1,231,965 | 1,628,228 | 47,266 | 357,216 | |||||||||||||||
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Operating Expenses
|
4,872,107 | 4,505,908 | 6,232,663 | 7,123,347 | 6,984,057 | |||||||||||||||
|
Operating Loss
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(4,713,447 | ) | (3,273,943 | ) | (4,604,435 | ) | (7,076,081 | ) | (6,626,841 | ) | ||||||||||
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Interest income
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995 | 636 | 13,377 | 11,455 | 8,416 | |||||||||||||||
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Other income
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118,796 | 5,909 | 7,827 | 250,001 | 21,500 | |||||||||||||||
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Derivative expense
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(64,524 | ) | - | - | - | - | ||||||||||||||
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Loss on derivative expense
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(137,631 | ) | - | - | - | - | ||||||||||||||
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Interest expense
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(175,904 | ) | (677,031 | ) | (40,447 | ) | (387,697 | ) | (565,797 | ) | ||||||||||
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Net Loss
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(4,971,715 | ) | (3,944,429 | ) | (4,623,678 | ) | (7,202,322 | ) | (7,162,722 | ) | ||||||||||
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Dividends on cumulative Pfd. stock:
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||||||||||||||||||||
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From discount at issuance
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- | - | - | - | - | |||||||||||||||
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Earned
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- | - | - | - | - | |||||||||||||||
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Net loss applicable to
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||||||||||||||||||||
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common shareholders
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$ | (4,971,715 | ) | $ | (3,944,429 | ) | $ | (4,623,678 | ) | $ | (7,202,322 | ) | $ | (7,162,722 | ) | |||||
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Net Loss per common share
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$ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.03 | ) | |||||
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Weighted avg. no. of common shares,
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||||||||||||||||||||
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Basic & Diluted
|
758,622,934 | 424,330,162 | 318,673,749 | 271,667,256 | 218,846,738 | |||||||||||||||
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Cash and Cash Equivalents
|
$ | 73,844 | $ | 12,535 | $ | 49,433 | $ | 477,812 | $ | 1,467,687 | ||||||||||
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Total Assets
|
980,360 | 1,134,580 | 1,583,356 | 4,365,427 | 6,250,909 | |||||||||||||||
|
Deficit accumulated during
|
||||||||||||||||||||
|
the development stage
|
(111,880,882 | ) | (106,909,167 | ) | (102,964,738 | ) | (98,341,059 | ) | (91,138,737 | ) | ||||||||||
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Stockholders' Equity
|
(2,715,156 | ) | (1,129,222 | ) | (468,761 | ) | 3,441,322 | 5,651,916 | ||||||||||||
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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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The following discussion and analysis should be read in conjunction with the “Selected Financial Data” and the Condensed Financial Statements included elsewhere in this report and the information described under the caption “Risk Factors” below.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to inventories, and intangible assets. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Inventory
Our inventories consist of raw materials, work-in-process and finished goods, and are stated at the lower of cost (first-in, first-out) or market. As a designer and manufacturer of high technology medical imaging equipment, we may be exposed to a number of economic and industry factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage. These factors include, but are not limited to, technological changes in our markets, our ability to meet changing customer requirements, competitive pressures in products and prices and reliability, replacement and availability of key components from our suppliers. We evaluate on a quarterly basis, using the guidance provided in ASC 330 (“Inventory”), our ability to realize the value of our inventory based on a combination of factors including the following: how long a system has been used for demonstration or clinical collaboration purpose; the utility of the goods as compared to their cost; physical obsolescence; historical usage rates; forecasted sales or usage; product end of life dates; estimated current and future market values; and new product introductions. Assumptions used in determining our estimates of future product demand may prove to be incorrect, in which case excess and obsolete inventory would have to be adjusted in the future. If we determined that inventory was overvalued, we would be required to make an inventory valuation adjustment at the time of such determination. Although every effort is made to ensure the accuracy of our forecasts of future product demand, significant unanticipated changes in demand could have a significant negative impact on the value of our inventory and our reported operating results. Additionally, purchasing requirements and alternative usage avenues are explored within these processes to mitigate inventory exposure.
Stock-Based Compensation
The computation of the expense associated with stock-based compensation requires the use of a valuation model. ASC-718, (“Compensation-Stock Compensation”) is a very complex accounting standard, the application of which requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility, expected option lives, and expected option forfeiture rates, to value equity-based compensation. The Company currently uses a Black-Scholes option pricing model to calculate the fair value of its stock options. The Company primarily uses historical data to determine the assumptions to be used in the Black-Scholes model and has no reason to believe that future data is likely to differ materially from historical data. However, changes in the assumptions to reflect future stock price volatility and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards. ASC-718 requires the recognition of the fair value of stock compensation in net income. Although every effort is made to ensure the accuracy of our estimates and assumptions, significant unanticipated changes in those estimates, interpretations and assumptions may result in recording stock option expense that may materially impact our financial statements for each respective reporting period.
Impact of Derivative Accounting
As a result of recent financing transactions we have entered into, our financial statements for the year ended June 30, 2010 and future periods have and will be impacted by the accounting effect of the application of derivative accounting. The application of EITF 07-05 “Determining Whether an Instrument (or Embedded Feature) is Indexed to a Company's Own Stock,” which was effective on January 1, 2009 will significantly affect the application of ASC Topic 815 and ASC Topic 815-40 for both freestanding and embedded derivative financial instruments in our financial statements. Generally, warrants, conversion features in debt, and similar terms that include “full-ratchet” or reset provisions, which mean that the exercise or conversion price adjusts to pricing in subsequent sales or issuances, no longer meet the definition of indexed to a company's own stock and are not exemption for equity classification provided in ASC Topic 815-15. This means that instruments that were previously classified in equity are reclassified to liabilities and ongoing measurement under ASC Topic 815. The amount of quarterly non-cash gains or losses we will record in future periods will be based upon the fair market value of our common stock on the measurement date.
Results of Operations
In the continuing process of commercializing our operations and as part of our transition plan to exit from reporting as a development stage enterprise, we continue to use the format established for the fiscal year ending June 30, 2005 of our management discussion and analysis of financial condition and results of operations (MD&A) to better disclose and discuss the three most significant categories of expenses, i.e., general and administrative, research and development, and sales and marketing.
Beginning with the fiscal year ending June 30, 2005 we also expanded our discussion of health insurance and worker’s compensation insurance so that they fell into compensation and related benefits for one of the three expense categories, where previously they were included under insurance costs. For the fiscal year ending June 30, 2006, we expanded our compensation and related benefits disclosure to include the non-cash compensation related to the expensing of stock options in the three expense categories.
Twelve Months Ended June 30, 2010 and June 30, 2009
SALES AND COST OF SALES
Revenues during the year ended June 30, 2010, were $181,172 representing an increase of $110,555 or 157% from $70,617 during the year ended June 30, 2009. The increase in revenues is a result of a sale of a CTLM® system to our distributor in Malaysia.
The Cost of Sales during the year ended June 30, 2010, was $22,512 representing an increase of $1,966 or 10% from $20,546 during the year ended June 30, 2009. The increase in Cost of Sales is a result of a sale of a CTLM® system to our distributor in Malaysia.
GENERAL AND ADMINISTRATIVE
Our general and administrative expenses include compensation and related benefits for employees in administration, finance, human resources and information technology. Also included are travel/subsistence related to general and administrative activities; property and casualty insurance; directors’ and officers’ liability insurance; professional fees associated with our corporate and securities attorneys and independent auditors; patent maintenance; corporate governance expenses; stockholder expenses; consulting; utilities; maintenance; telephones; office supplies and sales and property taxes.
General and administrative expenses during the year ended June 30, 2010, were $3,584,608 representing an increase of $1,205,496 or 51% from $2,379,112 during the year ended June 30, 2009. Of the $3,584,608 and $2,379,112, compensation and related benefits comprised $1,768,030 (49%) and $1,465,548 (63%), respectively, representing an increase of $302,482 or 21%. Of the $1,768,030 and $1,465,548 compensation and related benefits, $578,961 (33%) and $116,319 (9%), respectively, were due to non-cash compensation associated with expensing stock options.
The general and administrative increase of $1,205,496 is due primarily to increases of $302,482 in compensation and related benefits as a result of non-cash compensation associated with expensing stock options; $465,500 in loan costs expense associated with the issuance of additional consideration for short-term loans; $357,000 in loan costs expense to record one month of amortization of the debt discount; $438,144 in premium expenses associated with the short-term loans; $37,500 for a call option fee associated with obtaining a medium term bank bond to be used as collateral for a bank loan.
The total increase is partially offset by decreases of $81,103 in rent expense as a result of recording the rent holiday associated with the lease on our former Plantation facility in the prior fiscal year; $64,000 in placement fees and $7,467 in liquidated damage expense associated with the sale of Convertible Debentures in August and November 2008; $69,429 in proxy service expenses as no Annual Meeting was held in fiscal year 2010; $66,797 in legal expenses involving corporate and securities matters; $32,975 as a result of reducing or canceling several of our insurance policies; $24,819 in real estate taxes, $22,901 in maintenance and repairs, $14,101 in utilities as a result of our move to a smaller facility in August 2008 that we rent rather than own; and $17,640 in freight expenses.
We do not expect a material increase in our general and administrative expenses until we realize a significant increase in revenue from the sale of our product.
RESEARCH AND DEVELOPMENT
We incur research and development expenses to develop significant enhancements to our sole product, the CTLM®. These expenses consist primarily of compensation and related benefits; clinical, legal and consulting fees associated with our FDA application; costs of materials and components we use to make product enhancements; new product research; professional fees associated with the research and applications for new patents; and the costs associated with the travel/subsistence, shipping, training, installing and servicing clinical collaboration sites.
Research and development expenses during the year ended June 30, 2010, were $734,943 representing a decrease of $491,775 or 40% from $1,226,718 during the year ended June 30, 2009. Of the $734,943 and $1,226,718, compensation and related benefits comprised $643,315 (88%) and $755,348 (62%), respectively, representing a decrease of $112,033 or 15%. Of the $643,315 and $755,348 compensation and related benefits, $9,552 (1%) and $12,939 (2%), respectively, were due to non-cash compensation associated with expensing stock options.
The research and development decrease of $491,775 is due primarily to a decrease of $112,033 in compensation and related benefits as a result of a reduction in staff; $174,432 in consulting expenses due to our decreased use of consultants in the field of scientific and clinical disciplines, in consulting expenses primarily associated with the monitoring and data management of our FDA process and various consultants involved with design engineering, software engineering and research by our consulting radiologist; $136,058 in clinical expenses; $45,848 in freight expenses; $2,941 in legal patent expenses associated with patent applications; and $17,715 in travel related expenses due to reduced travel to our U.S. clinical sites and to our International clinical collaboration sites.
Clinical expenses during the year ended June 30, 2010, were $5,655 representing a decrease of $136,058 or 96% from $141,713 as a result of concluding costs associated with our FDA clinical trials.
We expect a significant increase in our research and development expenses during the fiscal year ending June 30, 2011 due to increased costs associated with preparing our FDA application and submitting it to the FDA. We also expect our consulting expenses and professional fees to increase due to the costs associated with our FDA application. See Item 1. Our Business - “Clinical Collaboration Sites Update”.
SALES AND MARKETING
Our sales and marketing expenses consist primarily of compensation and related benefits for employees in the areas of sales, marketing, sales support and sales administration. Also included are the expenses associated with advertising and promotion; representative office expense; trade shows; conferences; promotional and training costs related to marketing the CTLM®; commissions; travel/subsistence; consulting; certification expenses; and product liability insurance.
Sales and marketing expenses during the year ended June 30, 2010, were $340,433 representing a decrease of $275,015 or 45% from $615,448 during the year ended June 30, 2009. Of the $340,433 and $615,448, compensation and related benefits comprised $762 (0%) and $111,743 (18%), respectively, representing a decrease of $110,982 or 99%. Of the $762 and $111,743 compensation and related benefits, $0 (0%) and $2,069 (2%), respectively, were due to non-cash compensation associated with expensing stock options.
The sales and marketing decrease of $275,015 was due primarily to a decrease in compensation and related benefits of $110,982 as a result of the reduction in staff; $116,053 in representative office expense as a result of closing our representative office in Beijing, China in the prior fiscal year as part of our cost savings initiative; $18,640 in regulatory expenses, $11,250 in public relations expense as a result of a reduction in the issuances of press releases during the year; $9,871 in advertising and promotion; and $5,416 in freight expenses.
After we file our FDA application, we expect commissions, trade show expenses, advertising and promotion and travel and subsistence costs to increase as we continue to implement our global commercialization program.
AGGREGATED OPERATING EXPENSES
Total operating expenses (general and administrative, research and development, sales and marketing, inventory valuation adjustments and depreciation and amortization) during the year ended June 30, 2010, were $4,872,107 representing an increase of $366,199 or 8% from $4,505,908 when compared to the operating expenses during the year ended June 30, 2009. The overall increase in expenses was a result of the costs associated with short-term loans.
Compensation and related benefits during the year ended June 30, 2010, were $2,412,107 representing an increase of $79,468 or 3% from $2,332,639 during the year ended June 30, 2009 due to an increase in stock option expense partially offset by a reduction in staff. Of the $2,412,107 and $2,332,639 compensation and related benefits, $588,483 (24%) and $131,327 (6%), respectively, were due to non-cash compensation associated with expensing stock options. The net increase of $79,468 was due to a $457,156 increase in the recording of non-cash compensation related to the expensing of stock options which was partially offset by a decrease of cash compensation of $377,688.
Inventory valuation adjustments during the year ended June 30, 2010, were $67,678 representing a decrease of $14,609 or 18% from $82,286 during the year ended June 30, 2009. The decrease is due to previous reductions in the write-down of systems that have lost value due to usage as demonstrators on consignment. See “Critical Accounting Policy – Inventory”.
Depreciation and amortization during the year ended June 30, 2010, were $144,445 representing a decrease of $57,889 or 29% from $202,344 during the year ended June 30, 2009.
Interest expense during the fiscal year ended June 30, 2010, was $175,904 representing a decrease of $501,127 or 74% from $677,031 during the year ended June 30, 2009. The decrease is due to the recording of the amortization of the debt discount on our convertible debentures and the imputed interest in the prior fiscal year. Of the $175,904, $24,792 is imputed interest associated with our old equity credit line with Charlton Avenue, LLC (“Charlton”) and $102,754 is imputed interest associated with our new equity credit line with Southridge Partners II, LLP (“Southridge”) as per the terms and conditions of our private equity credit agreement(s); and $35,532 is the amortization of the debt discount on our convertible debentures Our utilization of the equity credit line decreased during fiscal 2010 compared to the prior period. See Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters – “Financing/Equity Line of Credit”
Other income during the year ended June 30, 2010, was $118,796 representing an increase of $112,821 or 1,888% from $5,975 during the year ended June 30, 2009. Of the $118,796 other income, $98,829 represented the extinguishment of debt.
We previously presented the gain on the sale of our Plantation property as a non-operating expense item. We have reviewed the guidance provided by ASC and have determined that the gain should be presented in the income section of our Statement of Operations.
Twelve Months Ended June 30, 2009 and June 30, 2008
SALES AND COST OF SALES
Revenues during the year ended June 30, 2009, were $70,617 representing an increase of $30,970 or 78% from $39,647 during the year ended June 30, 2008. The increase in revenues is a result of recording revenue from payment plans at the time when the customers paid. We also recognized certain non-refundable customer deposits as revenue when one of our customers failed to make payments according to the sales agreements.
The Cost of Sales during the year ended June 30, 2009, was $20,546 representing a decrease of $398 or 2% from $20,944 during the year ended June 30, 2008. The decrease in Cost of Sales is a result of inventory write-downs from prior periods and has been adjusted accordingly to what the customer paid compared to the year ended June 30, 2008.
GENERAL AND ADMINISTRATIVE
Our general and administrative expenses include compensation and related benefits for employees in administration, finance, human resources and information technology. Also included are travel/subsistence related to general and administrative activities; property and casualty insurance; directors’ and officers’ liability insurance; professional
fees associated with our corporate and securities attorneys and independent auditors; patent maintenance; corporate governance expenses; stockholder expenses; consulting; utilities; maintenance; telephones; office supplies and sales and property taxes.
General and administrative expenses during the year ended June 30, 2009, were $2,379,113 representing a decrease of $265,443 or 10% from $2,644,556 during the year ended June 30, 2008. Of the $2,379,113 and $2,644,556, compensation and related benefits comprised $1,465,548 (63%) and $1,661,477 (63%), respectively, representing a decrease of $195,929 or 12%. Of the $1,465,548 and $1,661,477 compensation and related benefits, $116,319 (9%) and $155,133 (9%), respectively, were due to non-cash compensation associated with expensing stock options.
The general and administrative decrease of $265,443 is due primarily to decreases of $195,929 in compensation and related benefits as a result of a reduction in staff; $114,867 in Board Meeting expense as a result of not having any outside independent directors; and $133,966 as a result of reducing or canceling several of our insurance policies; $52,974 in real estate taxes, $38,122 in maintenance and repairs and $4,228 in utilities as a result of moving into a smaller facility in August 2008 that we rent rather than own; $9,637 in office supplies and $21,160 in telephone and cell phone expenses as a result of a reduction in staff; and $28,500 in investor relations expenses as a result of canceling our agreement in March 2008 with LC Group, an investor relations consulting firm. These reductions were a result of our cost saving initiatives.
The total decrease is partially offset by increases of $122,187 in office rent expense; $80,788 in legal expenses associated with general corporate and securities matters; $69,428 in proxy service expenses due to having our annual meeting during the fiscal year and not having an annual meeting in fiscal year 2008; and $64,000 in placement fees in connection with the convertible debenture financing of $800,000.
We do not expect a material increase in our general and administrative expenses until we realize a significant increase in revenue from the sale of our product.
RESEARCH AND DEVELOPMENT
We incur research and development expenses to develop significant enhancements to our sole product, the CTLM®. These expenses consist primarily of compensation and related benefits; clinical, legal and consulting fees associated with our FDA application; costs of materials and components we use to make product enhancements; new product research; professional fees associated with the research and applications for new patents; and the costs associated with the travel/subsistence, shipping, training, installing and servicing clinical collaboration sites.
Research and development expenses during the year ended June 30, 2009, were $1,226,718 representing a decrease of $853,547 or 41% from $2,080,265 during the year ended June 30, 2008. Of the $1,226,718 and $2,080,265, compensation and related benefits comprised $755,348 (62%) and $1,024,852 (49%), respectively, representing a decrease of $269,504 or 26%. Of the $755,348 and $1,024,852 compensation and related benefits, $12,939 (2%) and $13,067 (1%), respectively, were due to non-cash compensation associated with expensing stock options.
The research and development decrease of $853,547 is due primarily to a decrease of $269,504 in compensation and related benefits as a result of a reduction in staff; $218,068 in consulting expenses due to our decreased use of consultants in the field of scientific and clinical disciplines, in consulting expenses primarily associated with the monitoring and data management of our FDA approval process and various consultants involved with design engineering, software engineering and research by our consulting radiologist; $138,594 in research and development projects; $112,940 in clinical expenses; $71,071 in travel related expenses due to decreased travel to our U.S. clinical sites and to our International clinical collaboration sites; and $56,318 in FDA legal expenses.
Clinical expenses during the year ended June 30, 2009, were $141,713 representing a decrease of $112,940 or 44% from $254,653 as a result of the variable costs associated with our FDA clinical trials.
We expect a significant increase in our research and development expenses during the fiscal year ending June 30, 2010 due to increased costs associated with preparing our FDA application and submitting it to the FDA. We also expect our consulting expenses and professional fees to increase due to the costs associated with our FDA application. See Item 1. Our Business - “Clinical Collaboration Sites Update”.
SALES AND MARKETING
Our sales and marketing expenses consist primarily of compensation and related benefits for employees in the areas of sales, marketing, sales support and sales administration. Also included are the expenses associated with advertising and promotion; representative office expense; trade shows; conferences; promotional and training costs related to marketing the CTLM®; commissions; travel/subsistence; consulting; certification expenses; and product liability insurance.
Sales and marketing expenses during the year ended June 30, 2009, were $615,448 representing a decrease of $452,207 or 42% from $1,067,655 during the year ended June 30, 2008. Of the $615,448 and $1,067,655, compensation and related benefits comprised $111,743 (18%) and $176,005 (16%), respectively, representing a decrease of $64,262 or 37%. Of the $111,743 and $176,005 compensation and related benefits, $2,069 (2%) and $1,919 (1%), respectively, were due to non-cash compensation associated with expensing stock options.
The sales and marketing decrease of $452,207 was due primarily to a decrease in compensation and related benefits of $64,262 as a result of the reduction in staff; $90,479 in freight charges as a result of transportation charges, customs fees, duties and taxes associated with CTLM® systems we shipped internationally in fiscal year 2008; $67,174 in representative office expense as a result of our new strategic marketing plan to appoint a distributor and dealers and closed our representative office in Beijing, China as part of our cost savings initiative; $203,405 in travel expenses associated with sales and marketing related activities; $33,210 in advertising and promotion; and $49,800 in marketing related consulting expenses.
The total decrease is partially offset by increases of $30,742 in regulatory expenses and $14,048 in trade show expenses.
After we file our FDA application, we expect commissions, trade show expenses, advertising and promotion and travel and subsistence costs to increase as we continue to implement our global commercialization program.
AGGREGATED OPERATING EXPENSES
Total operating expenses (general and administrative, research and development, sales and marketing, inventory valuation adjustments and depreciation and amortization) during the year ended June 30, 2009, were $4,505,908 representing a decrease of $1,726,755 or 28% from $6,232,663 when compared to the operating expenses during the year ended June 30, 2008. The overall reduction in expenses was a result of the implementation of cost saving initiatives.
Compensation and related benefits during the year ended June 30, 2009, were $2,332,639 representing a decrease of $529,695 or 19% from $2,862,334 during the year ended June 30, 2008 due to a reduction in staff. Of the $2,332,639 and $2,862,334 compensation and related benefits, $131,327 (6%) and $170,119 (6%), respectively, were due to non-cash compensation associated with expensing stock options. The net decrease of $529,695 was due to a decrease of cash compensation of $490,904 combined with a $38,792 decrease in the recording of non-cash compensation related to the expensing of stock options.
Inventory valuation adjustments during the year ended June 30, 2009, were $82,286 representing a decrease of $176,089 or 68% from $258,375 during the year ended June 30, 2008. The decrease is due to a reduction in the write-down of systems that have lost value due to usage as demonstrators on consignment. See “Critical Accounting Policy – Inventory”.
Depreciation and amortization during the year ended June 30, 2009, were $202,344 representing an increase of $20,532 or 11% from $181,812 during the year ended June 30, 2008.
Interest expense during the fiscal year ended June 30, 2009, was $677,031 representing an increase of $636,584 or 1,574% from $40,447 during the year ended June 30, 2008. The interest expense is primarily comprised of the amortization of the debt discount on our convertible debentures and the imputed interest associated with our equity credit line with Charlton Avenue, LLC (“Charlton”) as per the terms and conditions of our private equity credit agreement. Our utilization of the equity credit line increased significantly during fiscal 2009 as we previously used in fiscal 2008 the proceeds from the sale/lease-back of our building for current operations. This resulted in the substantial year-over-year increase in interest expense. See Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters – “Financing/Equity Line of Credit”
Other income during the year ended June 30, 2009, was $5,909 representing a decrease of $1,918 or 25% from $7,827 during the year ended June 30, 2008. The $5,909 represents the sale of the LILA Inventory, use of our facilities and consulting with our engineers pursuant to the Bioscan Agreement. (See Item 1 Our Business -“Laser Imager for Lab Animals”).
Balance Sheet Data
We have financed our operations since inception by the issuance of equity securities with aggregate net proceeds of approximately $68,886,284 and through loan transactions in the aggregate net amount of $3,846,823. Furthermore, we issued equity securities for the conversion of all outstanding convertible debentures in the aggregate net amount of $4,040,000.
Our combined cash and cash equivalents totaled $73,844 at June 30, 2010. We do not expect to generate a positive internal cash flow for at least the next 12 months due to our efforts to obtain FDA approval, the expected costs of commercializing our initial product, the CTLM®, and the time required for homologations from certain countries.
Our inventory, which consists of raw materials, work in process (including completed units under testing), finished goods less Inventory Reserve, totaled $436,110 at June 30, 2010 and $527,467 at June 30, 2009. Raw materials used for research and development or other purposes are expensed and not included in inventory. This decrease is primarily due to inventory valuation adjustments of $67,678 and $22,512 to Cost of Goods Sold. We expect to recover our investment because the CTLM® represents a new technology for imaging the breast using a laser beam instead of ionizing x-ray to produce three dimensional images. During fiscal year 2010, we continued to receive encouraging results and scientific clinical papers from our various clinical collaboration sites worldwide. We continue to believe that over time the CTLM® will gain worldwide acceptance in the medical community because computed tomography has a strong basis in science. See Note 6 “Inventories”.
Our property and equipment, net, totaled $221,763 at June 30, 2010 and $332,031 at June 30, 2009. The overall decrease of $110,268 is due primarily to depreciation during fiscal year 2010 (See Note 8 – Sale/Lease-Back of Building).
Our Intangible assets (formerly “Other assets”) totaled $170,882 at June 30, 2010 compared to $205,059 at June 30, 2009. This decrease is due to the amortization of a patent licensing agreement.
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 private placement transactions. Net cash used for operating and product development expenses, which include our purchase of additional materials to continue the manufacture of CTLM® Systems in anticipation of receiving orders from our distributors in certain countries where permitted by law was $2,927,704 during fiscal 2010, compared to net cash used by operating activities and product development of the CTLM® and related software development of $2,635,609 during fiscal 2009. At June 30, 2010, we had working capital of ($2,555,647) compared to working capital of ($1,666,312) at June 30, 2009.
If and when we receive approval 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® in the United States and foreign countries. The $5 million will be used to purchase inventory, sub-contracted components, tooling and manufacturing templates and pay 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. We expect to use our Amended Private Equity Agreement with Southridge and/or alternative financing facilities to raise the additional funds required to continue operations. In the event that we are unable or elect not to utilize the Amended Private Equity Agreement with Southridge or any successor agreement(s) on comparable terms, 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, whether to Southridge or other investors, dilution to existing stockholders will result, and future investors may be granted rights superior to those of existing stockholders. See “Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters/Financing/Equity Line of Credit”.
During fiscal 2010, we raised a total of $1,397,219 less expenses through private placement transactions pursuant to our Sixth Private Equity Credit Agreement with Charlton and Amended Private Equity Credit Agreement with Southridge dated January 7, 2010. Of the $1,397,219, $297,219 was raised through our Sixth Private Equity Credit Agreement with Charlton and $1,100,000 was raised through our Amended Private Equity Credit Agreement with Southridge. We do not expect to generate a positive internal cash flow for at least the next 12 months due to limited expected sales and the expected costs of commercializing our initial product, the CTLM®, in the international market and the expense of continuing our ongoing product development program. We will require additional funds for operating expenses, FDA regulatory processes, manufacturing and marketing programs and to continue our product development program. We expect to use our Amended Private Equity Agreement with Southridge and/or alternative financing facilities to raise the additional funds required to continue operations. In the event that we are unable or elect not to utilize the Amended Private Equity Agreement with Southridge or any successor agreement(s) on comparable terms, 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, whether to Southridge or other investors, dilution to existing stockholders will result, and future investors may be granted rights superior to those of existing stockholders. In the event we are unable to draw from this new private equity line, alternative financing will be required to continue operations, and there is no assurance that we will be able to obtain alternative financing on commercially reasonable terms. There is no assurance that, if and when Food and Drug Administration (“FDA”) marketing clearance is obtained, the CTLM® will achieve market acceptance or that we will achieve a profitable level of operations.
As of the date of this report, since January 2001, we have drawn an aggregate of $44,714,650 in gross proceeds from our equity credit lines with Charlton and Southridge and have issued 496,920,393 shares as a result of those draws.
As of the date of this report, we have issued and outstanding 884,278,434 shares of common stock out of 950,000,000 authorized shares. In addition, we have reserved approximately 45,523,120 shares to cover outstanding options. We had anticipated that revenues would have been a significant source of cash by the date of this report, but commercialization has been slower than expected largely due to the delay in obtaining FDA approval, which we believe has depressed our stock price. We previously used the proceeds of the sale of our building and the proceeds of the sale of convertible debentures for working capital. In May 2008, we returned to equity funding through our Private Equity Credit Agreement(s). From November 2009 through February 2010 we relied on short-term loans from private investors for working capital (“See Issuance of Stock in Connection with Short-Term Loans”).
Issuance of Stock in Connection with Short-Term Loans
In November 2009, we borrowed a total of $237,500 from four private investors pursuant to short-term promissory notes. These notes were due and payable in the amount of principal plus 20% premium, so that the total amount due was $285,000. The original due date of December 21, 2009, was first extended to February 28, 2010, with a second extension to June 15, 2010, a third extension to September 30, 2010 and a fourth extension to October 31, 2010. In connection with these four extensions a total of $13,600 of additional premium was accrued. As of the date of this report, we have repaid an aggregate principal and premium in the amount of $147,500 on these short term notes. In addition, we issued to the investors 70 shares of restricted common stock for each $1 lent so that a total of 16,625,000 shares of stock were issued to the investors. The aggregate fair market value of the 16,625,000 shares of stock when issued was $465,500.
In December 2009, we borrowed a total of $400,000 from a private investor pursuant to three short-term promissory notes. These notes were payable from March 10 through March 15, 2010 in the amount of principal plus 15% premium, so that the total amount due was $460,000. In addition, we issued to the investor 24,000,000 shares of restricted common stock as collateral. These shares are to be returned and cancelled upon payment of the notes. The original due date of March 15, 2010 was first extended to June 15, 2010, with a second extension to September 30, 2010 and a third extension to October 31, 2010. In connection with these three extensions a total of $97,400 of additional premium was accrued. As of the date of this report, we have not repaid any of the aggregate principal and premium on these short term notes.
On January 8, 2010, we borrowed $600,000 from a private investor pursuant to a short-term promissory note. This note was payable April 6, 2010 in the amount of principal plus 15% premium, so that the total amount due was $690,000. In addition, we issued to the investor 31,363,637 shares of restricted common stock as collateral. These shares are to be returned and cancelled upon payment of the notes. The original due date of April 6, 2010 was first extended to June 15, 2010, with a second extension to September 30, 2010 and a third extension to October 31, 2010. In connection with these three extensions a total of $141,000 of additional premium was accrued. As of the date of this report, we have not repaid any of the aggregate principal and premium on these short term notes.
On February 25, 2010, we borrowed $350,000 from a private investor pursuant to a short-term promissory note. We issued to the investor 35 shares of Series L Convertible Preferred Stock as collateral. This note had a maturity date of April 30, 2010; however, the investor gave us notice of conversion to the collateral shares on March 31, 2010. The Note was cancelled upon this conversion. The 35 shares of Series L Convertible Preferred Stock accrue dividends at an annual rate of 9% and are convertible into an aggregate of 16,587,690 shares of common stock (473,934 shares of common stock for each share of preferred stock).
As of the date of this report, we owe a total of $1,539,500 in short-term debt. Of the $1,539,500 we owe a total of $1,089,356 in principal and $450,144 in premium. We have received loan extensions on all of our short-term notes to October 31, 2010. We have repaid aggregate principal and premium in the amount of $147,500 on all of our short-term notes.
There can be no assurances that we will be able to pay these notes when due. If we default on all of the notes due to the lack of new funding, the holders could sell 55,363,907 of the collateral shares, which could materially adversely affect our Company.
Capital expenditures for fiscal 2010 were $0 as compared to $7,360 for the prior year. During fiscal 2009, we reclassified the net realizable value of $8,591 of CTLM® systems in Inventory to Clinical equipment. We anticipate that our capital expenditures for fiscal 2011 will be approximately $25,000.
During the year ending June 30, 2010, there were no changes in our existing debt agreements other than extensions and we had no outstanding bank loans as of June 30, 2010. Our annual fixed commitments, including salaries and fees for current employees and consultants, rent, payments under license agreements and other contractual commitments are approximately $4.8 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 $400,000 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 international commercialization of the CTLM®, activities related to our FDA regulatory process, and advanced product development activities. We expect to use our Amended Private Equity Agreement with Southridge and/or alternative financing facilities to raise the additional funds required to continue operations. In the event that we are unable or elect not to utilize the Amended Private Equity Agreement with Southridge or any successor agreement(s) on comparable terms, 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, whether to Southridge or other investors, dilution to existing stockholders will result, and future investors may be granted rights superior to those of existing stockholders. There is no assurance that, if and when Food and Drug Administration (“FDA”) marketing clearance is obtained, the CTLM® will achieve market acceptance or that we will achieve a profitable level of operations. No assurances, however, can be given that this financing or any 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. In the absence of adequate funding, we will have to cease operations.
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. Financial Statements
|
Index to Financial Statements
|
||
|
Page
|
||
|
55
|
||
|
Financial Statements
|
||
|
56
|
||
|
57
|
||
|
58
|
||
|
70
|
||
|
72
|
||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Imaging Diagnostic Systems, Inc.
We have audited the accompanying balance sheets of Imaging Diagnostic Systems, Inc. (A Development Stage Enterprise) as of June 30, 2010 and 2009, and the related statements of operations, stockholders’ equity (deficit), and cash flows for each of the years ended June 30, 2010 and 2009 and for the period December 10, 1993 (date of inception) to June 30, 2010. We did not audit the financial statements for the period December 10, 1993 (date of inception) to June 30, 2005. 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 audit.
We conducted our audit 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 of 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 principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2010 and 2009, and the results of its operations and cash flows for each of the years then ended June 30, 2010 and 2009 and for the period December 10, 1993 (date of inception) to June 30, 2010 in conformity with generally accepted accounting principles in the United States of America.
The accompanying financial statements have been prepared assuming that Imaging Diagnostic Systems, Inc. will continue as a going concern. As more fully described in Note 5, the Company has incurred recurring operating losses and will have to obtain additional capital to sustain operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 5. The accompanying financial statements do not include any adjustments to reflect the possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
/s/ SHERB & CO, LLP
Certified Public Accountants
Boca Raton, Florida
October 13, 2010
|
IMAGING DIAGNOSTIC SYSTEMS, INC.
|
|||||||||
|
(A Development Stage Company)
|
|||||||||
|
Balance Sheets
|
|||||||||
|
Assets
|
|||||||||
|
June 30, 2010
|
June 30, 2009
|
||||||||
|
Current assets:
|
|||||||||
|
Cash
|
$ | 73,844 | $ | 12,535 | |||||
|
Accounts receivable, net of allowances for doubtful accounts
|
|||||||||
|
of $57,982 and $57,982, respectively
|
12,850 | 21,514 | |||||||
|
Loans receivable, net of reserve of $57,000
|
|||||||||
|
and $57,000, respectively
|
3,796 | 357 | |||||||
|
Inventories, net of reserve of $399,000 and $408,000, respectively
|
436,110 | 527,467 | |||||||
|
Prepaid expenses
|
61,115 | 35,617 | |||||||
|
Total current assets
|
587,715 | 597,490 | |||||||
|
Property and equipment, net
|
221,763 | 332,031 | |||||||
|
Intangible assets, net
|
170,882 | 205,059 | |||||||
|
Total assets
|
$ | 980,360 | $ | 1,134,580 | |||||
|
Liabilities and Stockholders' Equity (Deficit)
|
|||||||||
|
Current liabilities:
|
|||||||||
|
Accounts payable and accrued expenses
|
$ | 1,538,748 | $ | 1,994,220 | |||||
|
Customer deposits
|
98,114 | 96,114 | |||||||
|
Short term debt
|
1,506,500 | - | |||||||
|
Convertible debenture, net of debt discount of $0
|
|||||||||
|
and $35,532, respectively
|
- | 173,468 | |||||||
|
Total current liabilities
|
3,143,362 | 2,263,802 | |||||||
|
Convertible preferred stock (Series L), 9% cumulative annual dividend,
|
|||||||||
|
no par value, 35 and 0 shares issued, respectively
|
350,000 | - | |||||||
|
Derivative Liability
|
202,155 | - | |||||||
|
Stockholders equity (Deficit):
|
|||||||||
|
Common stock, no par value; authorized 950,000,000 shares,
|
|||||||||
|
issued 837,087,622 and 611,378,787 shares, respectively
|
105,927,719 | 102,280,228 | |||||||
|
Common stock - Debt Collateral
|
(1,150,000 | ) | - | ||||||
|
Additional paid-in capital
|
4,388,006 | 3,499,717 | |||||||
|
Deficit accumulated during development stage
|
(111,880,882 | ) | (106,909,167 | ) | |||||
|
Total stockholders' equity (Deficit)
|
(2,715,157 | ) | (1,129,222 | ) | |||||
|
Total liabilities and stockholders' equity (Deficit)
|
$ | 980,360 | $ | 1,134,580 | |||||
|
See accompanying notes to the financial statements.
|
|||||||||
|
IMAGING DIAGNOSTIC SYSTEMS, INC.
|
||||||||||||
|
(a Development Stage Company)
|
||||||||||||
|
Statements of Operations
|
||||||||||||
|
From Inception
|
||||||||||||
|
(December 10,
|
||||||||||||
|
Year Ended
|
Year Ended
|
1993) to
|
||||||||||
|
June 30, 2010
|
June 30, 2009
|
June 30, 2010
|
||||||||||
| * | ||||||||||||
|
Net Sales
|
$ | 181,172 | $ | 70,617 | $ | 2,324,664 | ||||||
|
Gain on sale of fixed assets
|
- | 1,181,894 | 2,794,565 | |||||||||
|
Cost of Sales
|
22,512 | 20,546 | 928,617 | |||||||||
|
Gross Profit
|
158,660 | 1,231,965 | 4,190,612 | |||||||||
|
Operating Expenses:
|
||||||||||||
|
General and administrative
|
3,584,608 | 2,379,112 | 58,574,022 | |||||||||
|
Research and development
|
734,943 | 1,226,718 | 22,428,958 | |||||||||
|
Sales and marketing
|
340,433 | 615,448 | 9,113,254 | |||||||||
|
Inventory valuation adjustments
|
67,678 | 82,286 | 4,820,349 | |||||||||
|
Depreciation and amortization
|
144,445 | 202,344 | 3,301,674 | |||||||||
|
Amortization of deferred compensation
|
- | - | 4,064,250 | |||||||||
|
Total Operating Expenses
|
4,872,107 | 4,505,908 | 102,302,507 | |||||||||
|
Operating Loss
|
(4,713,447 | ) | (3,273,943 | ) | (98,111,895 | ) | ||||||
|
Interest income
|
995 | 636 | 309,396 | |||||||||
|
Other income
|
118,796 | 5,975 | 883,188 | |||||||||
|
Other income - LILA Inventory
|
- | (66 | ) | (69,193 | ) | |||||||
|
Derivative expense
|
(64,524 | ) | (64,524 | ) | ||||||||
|
Loss on derivative liability
|
(137,631 | ) | (137,631 | ) | ||||||||
|
Interest expense
|
(175,904 | ) | (677,031 | ) | (7,842,463 | ) | ||||||
|
Net Loss
|
(4,971,715 | ) | (3,944,429 | ) | (105,033,122 | ) | ||||||
|
Dividends on cumulative preferred stock:
|
||||||||||||
|
From discount at issuance
|
- | - | (5,402,713 | ) | ||||||||
|
Earned
|
- | - | (1,445,047 | ) | ||||||||
|
Net loss applicable to
|
||||||||||||
|
common shareholders
|
$ | (4,971,715 | ) | $ | (3,944,429 | ) | $ | (111,880,882 | ) | |||
|
Net Loss per common share:
|
||||||||||||
|
Basic and diluted
|
$ | (0.01 | ) | $ | (0.01 | ) | $ | (0.63 | ) | |||
|
Weighted average number of
|
||||||||||||
|
common shares outstanding:
|
||||||||||||
|
Basic and diluted
|
758,622,934 | 424,330,162 | 177,889,047 | |||||||||
|
* The numbers presented from inception December 10, 1993 to June 30, 2005 are unaudited by our current auditor.
|
||||||||||||
|
See accompanying notes to the financial statements.
|
||||||||||||
|
IMAGING DIAGNOSTIC SYSTEMS, INC.
|
||||||||||||||||||||||||||||
|
(a Development Stage Company)
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Statements of Stockholders' Equity (Deficit)
|
||||||||||||||||||||||||||||
|
From December 10, 1993 (date of inception) to June 30, 2010*
|
||||||||||||||||||||||||||||
|
Deficit
|
||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||
|
Preferred Stock (**)
|
Common Stock
|
Additional
|
During the
|
|||||||||||||||||||||||||
|
Number of
|
Number of
|
Paid-in
|
Development
|
Subscriptions
|
Deferred
|
|||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Stage
|
Receivable
|
Compensation
|
Total
|
||||||||||||||||||||
|
Balance at December 10, 1993 (date of inception)
|
-
|
$
|
-
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||||
|
Issuance of common stock, restated for reverse
|
||||||||||||||||||||||||||||
|
stock split
|
-
|
-
|
510,000
|
50,000
|
-
|
-
|
-
|
-
|
50,000
|
|||||||||||||||||||
|
Acquisition of public shell
|
-
|
-
|
178,752
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||
|
Net issuance of additional shares of stock
|
-
|
-
|
15,342,520
|
16,451
|
-
|
-
|
-
|
16,451
|
||||||||||||||||||||
|
Common stock sold
|
-
|
-
|
36,500
|
36,500
|
-
|
-
|
-
|
36,500
|
||||||||||||||||||||
|
Net loss
|
-
|
-
|
-
|
-
|
(66,951
|
)
|
-
|
(66,951
|
)
|
|||||||||||||||||||
|
Balance at June 30, 1994
|
-
|
-
|
16,067,772
|
102,951
|
-
|
(66,951
|
)
|
-
|
-
|
36,000
|
||||||||||||||||||
|
Common stock sold
|
-
|
-
|
1,980,791
|
1,566,595
|
-
|
-
|
(523,118
|
)
|
-
|
1,043,477
|
||||||||||||||||||
|
Common stock issued in exchange for services
|
-
|
-
|
115,650
|
102,942
|
-
|
-
|
-
|
-
|
102,942
|
|||||||||||||||||||
|
Common stock issued with employment agreements
|
-
|
-
|
75,000
|
78,750
|
-
|
-
|
-
|
-
|
78,750
|
|||||||||||||||||||
|
Common stock issued for compensation
|
-
|
-
|
377,500
|
151,000
|
-
|
-
|
-
|
-
|
151,000
|
|||||||||||||||||||
|
Stock options granted
|
-
|
-
|
-
|
-
|
622,500
|
-
|
-
|
(622,500
|
)
|
-
|
||||||||||||||||||
|
Amortization of deferred compentsation
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
114,375
|
114,375
|
|||||||||||||||||||
|
Forgiveness of officers' compensation
|
-
|
-
|
-
|
-
|
50,333
|
-
|
-
|
-
|
50,333
|
|||||||||||||||||||
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
(1,086,436
|
)
|
-
|
-
|
(1,086,436
|
)
|
|||||||||||||||||
|
Balance at June 30, 1995
|
-
|
-
|
18,616,713
|
2,002,238
|
672,833
|
(1,153,387
|
)
|
(523,118
|
)
|
(508,125
|
)
|
490,441
|
||||||||||||||||
| *The numbers presented from inception December 10, 1993 to June 30, 2005 are unaudited by our current auditor. | ||||||||||||||||||||||||||||
| **See note 17 for a detailed breakdown by Series. | ||||||||||||||||||||||||||||
| See accompanying notes to the financial statements. | ||||||||||||||||||||||||||||
|
IMAGING DIAGNOSTIC SYSTEMS, INC.
|
||||||||||||||||||||||||||||
|
(a Development Stage Company)
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Statements of Stockholders' Equity (Deficit) (Continued)
|
||||||||||||||||||||||||||||
|
From December 10, 1993 (date of inception) to June 30, 2010*
|
||||||||||||||||||||||||||||
|
Deficit
|
||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||
|
Preferred Stock (**)
|
Common Stock
|
Additional
|
During the
|
|||||||||||||||||||||||||
|
Number of
|
Number of
|
Paid-in
|
Development
|
Subscriptions
|
Deferred
|
|||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Stage
|
Receivable
|
Compensation
|
Total
|
||||||||||||||||||||
|
Balance at June 30, 1995
|
-
|
-
|
18,616,713
|
2,002,238
|
672,833
|
(1,153,387
|
)
|
|||||||||||||||||||||