SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A2
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended: December 31, 1997
-----------------
[ ] 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
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IMAGING DIAGNOSTIC SYSTEMS, INC.
(Name of small business issuer in its charter)
Florida 22-2671269
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(State of incorporation) (IRS employer Ident. No.)
6531 N.W. 18th Court, Plantation, FL 33313
------------------------------------------
(address of principal office) (Zip Code)
Registrant's telephone number: (954) 581-9800
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes _X_ No_____
The number of shares outstanding of each of the issuer's classes of equity
as of December 31, 1997: 27,826,584 shares of Common Stock, no par value; and,
450 shares of Series B, 10 shares of Series C and 54 shares of Series D
Preferred Convertible Stock, no par value.
1
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<TABLE>
<CAPTION>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Developmental Stage Company)
Part I - Financial Information Page
- ------------------------------ ----
<S> <C>
Condensed Balance Sheet -
December 31, 1997 and June 30, 1997....................................... 3
Condensed Statement of Operations Six months ended December 31, 1997 and
1996,and December 10,
1993(date of inception) to December 31, 1997............................ 4
Condensed Statement of Cash Flows Six months ended December 31, 1997 and 1996,
and December 10, 1993 (date of inception)
to December 31,1997....................................................... 5
Notes to Condensed Financial Statements......................................... 6
Management's Discussion and Analysis of
Financial Condition and Results................................................. 7
Part II - Other Information
Item 1, Legal Proceedings.................................................... 18
Item 2, Changes in Securities................................................ 18
Item 3, Defaults Upon Senior Securities...................................... 18
Item 4, Submission of Matters To a Vote of
Security Holders ............................................... 18
Item 5, Other Information.................................................... 18
Item 6, Exhibits and Reports on Form 8-K..................................... 21
</TABLE>
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Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
<TABLE>
<CAPTION>
Condensed Balance Sheet
Assets
December 31, 1997 June 30, 1997
----------------- -------------
(Unaudited) Restated * Restated
<S> <C> <C>
Current Assets
Cash $ 575,084 $ 383,223
Restricted Certificate of Deposit -- 103,500
Loan receivable-other 4,573 10,073
Prepaid expenses 12,653 56,792
Other current assets 120,441 --
------------ ------------
Total Current Assets 712,751 553,588
------------ ------------
Property and Equipment, net 3,310,630 3,293,297
------------ ------------
Prototype Equipment 1,648,216 1,216,585
Other Assets 9,635 9,635
------------ ------------
Total Assets $ 5,681,232 $ 5,073,105
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable and Accrued Expenses $ 1,206,406 $ 839,093
Current maturity of capital
lease obligation 9,314 8,928
Shareholder Loans 360,407 --
------------ ------------
Total Current Liabilities 1,576,127 848,021
------------ ------------
Long-term capital lease obligation 29,995 35,849
------------ ------------
Stockholders' Equity
Convertible Pfd (Series B) 7% cum. Div 4,500,000 4,500,000
Convertible Preferred (Series C) 100,000 --
Convertible Preferred (Series D) 540,000 --
Common Stock 20,525,320 15,739,729
Additional Paid-In-Capital 3,879,160 3,663,120
Deficit Accumulated during
development stage (23,443,217) (18,298,930)
------------ ------------
6,101,263 5,603,919
Less subscription receivable (35,559) (35,559)
Less deferred compensation (1,990,594) (1,379,125)
------------ ------------
Total Stockholders' Equity 4,075,110 4,189,235
------------ ------------
Total Liabilities and Stockholders' Equity $ 5,681,232 $ 5,073,105
============ ============
</TABLE>
* Condensed from audited financial statements
The accompanying notes are an integral part
of these condensed financial statements END OF
3
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<TABLE>
<CAPTION>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
(Unaudited)
Condensed Statement of Operations
Six Months Ended Three Months Ended Since Inception
December 31, December 31, (12/10/93) to
1997 1996 1997 1996 December 31, 1997
---- ---- ---- ---- -----------------
Restated Restated Restated Restated
<S> <C> <C> <C> <C> <C>
Operating Expenses:
Compensation and related benefits:
Administrative/Engineering $ 810,195 $ 820,216 $ 401,773 $ 494,235 $ 6,074,907
Research and development 163,355 297,780 69,318 191,902 1,131,866
Research/Development expenses 310,400 612,681 154,563 130,011 2,974,572
Advertising/Promotion 294,469 102,229 269,386 74,305 838,864
General/Administrative 493,696 275,472 164,293 207,149
1,399,081
Clinical expenses 4,652 11,852 4,025 10,024
355,468
Consulting expenses 484,797 37,420 479,651 29,120
2,200,705
Insurance costs 92,112 59,144 43,995 43,466 258,354
Professional fees 339,975 65,672 222,985 43,257
1,237,080
Stockholder expenses 73,487 23,373 20,654 23,373 94,389
Trade show expenses 99,003 114,796 59,273 75,587
388,279
Travel and subsistence costs 55,406 86,948 38,648 51,346
401,006
Rent expense 21,623 36,506 21,623 23,008
242,871
Interest expense -- 391 -- 391
27,053
Depreciation and amortization 138,747 126,107 69,374 128,512
530,643
Amortization of
deferred compensation 729,156 394,000 364,578 197,000 1,864,031
Interest Income (13,751) (51,417) (12,823) (14,987) (189,031)
----------- ------------ ------------ ------------ ------------
4,097,322 3,013,170 2,371,316 1,707,699 19,830,138
----------- ------------ ------------ ------------ ------------
Net Loss ($4,097,322) ($3,013,170) $(2,371,316) ($1,707,699) ($19,830,138)
Dividends on cumulative preferred stock:
From discount at issuance (888,171) (998,120) (182,433) (998,120) (3,221,765)
Earned (158,794) (12,082) (79,397) (12,082) (391,314)
Net loss applicable to
common shareholders ($5,144,287) ($4,023,372) ($2,633,146) ($2,717,901) ($23,443,217)
=========== ============ ============ ============ ============
Net loss per common share:
Basic:
Net loss per common share ($.21) ($.17) ($.11) ($.11) ($1.13)
=========== ============ ============ ============ ============
Weighted avg. no. of shares 25,581,160 23,820,035 25,963,757 25,926,254 20,765,310
=========== ============ ============ ============ ============
Diluted:
Net loss per common share ($.21) ($.17) ($.11) ($.11) ($1.13)
=========== ============ ============ ============ ============
Weighted avg. no. of shares 25,581,160 23,820,035 25,963,757 25,926,254 20,765,310
=========== ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements
4
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Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
(Unaudited)
Six Months Since inception
Ended December 31, (12/10/93) to
1997 1996 December 31, 1997
-------------------------- -----------------
Restated Restated
<S> <C> <C> <C>
Cash provided by (used for) Operations:
Net loss ($ 4,097,322) ($ 3,013,170) ($19,830,138)
Changes in assets and liabilities 1,824,408 1,809,634 9,850,193
------------ ------------ ------------
Net cash provided by operations (2,272,914) (1,203,536) (9,979,945)
------------ ------------ ------------
Investments
Capital expenditures (587,711) (3,306,835) (5,349,552)
------------ ------------ ------------
Cash used for investments (587,711) (3,306,835) (5,349,552)
------------ ------------ ------------
Cash flows from financing activities:
Repayment of capital lease obligation (5,468) (641) 10,980)
Other financing activities 360,407 (77,833) 360,407
Proceeds from issuance of preferred stock 2,600,000 4,500,000 10,700,000
Net proceeds from issuance of common stock 97,547 -- 4,855,154
------------ ------------ ------------
Net cash provided by financing activities 3,052,486 4,421,526 15,904,581
------------ ------------ ------------
Net increase(decrease) in cash 191,861 (88,845) 575,084
Cash, beginning of period 383,223 3,975,354 --
------------ ------------ ------------
Cash, end of period $ 575,084 $ 3,886,509 $ 575,084
============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements
5
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NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The financial information included herein has been condensed from financial
statements prepared December 31, 1997. The results of operations for the
six-month period ended December 31, 1997 is not necessarily indicative of the
results to be expected for the full year. Prior 1997 financial statements on a
three-month and six-month basis have been restated to conform with Form 10-KSB
financial statements for fiscal years ending June 30, 1997 and June 30, 1998
which have been restated. END OF REVISION
NOTE 2 - GOING CONCERN
The Company is currently a development stage company and its continued existence
is dependent upon the Company's ability to resolve its liquidity problems,
principally by obtaining additional debt financing and/or equity capital. The
Company has yet to generate an internal cash flow, and until the sales of its
product begins, the Company is totally dependent upon debt and equity funding.
As a result of these factors, there exists substantial doubt about the Company's
ability to continue as a going concern. However, management of the Company is
continually negotiating with various outside entities for additional funding
necessary to complete the clinical testing phase of development, required before
they can receive FDA marketing clearance. Management has been able to raise the
capital necessary to reach this stage of product development and has been able
to obtain funding for capital requirements to date. There is no assurance that
once development of the CTLMTM prototype is completed and Drug Administration
marketing clearance is obtained, that the CTLM(TM) will achieve market
acceptance or that the Company will achieve a profitable level of operations.
NOTE 3 - SERIES D PREFERRED
Effective December 31, 1997, the Board of Directors amended the Articles of
Incorporation of the Company in order to designate a class of shares as Series D
Convertible Preferred. The Series D Preferred is non-voting, can be converted
into common stock of the Company and has rights and preferences that materially
limit or qualify the rights of the holders of registered common stock, including
a liquidation preference of $10,000 per share.
6
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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 THE COMPANY'S FORM 10 -
KSB FOR FISCAL YEAR ENDED 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
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Imaging Diagnostic Systems, Inc. (the "Company") is a developmental stage
company which, since inception, has been engaged in research and development of
its Computed Tomography Laser Mammography ("CTLM(TM)"). The CTLM(TM) is a
breast-imaging device for the detection of cancer, utilizes laser technology and
proprietary computer algorithms to produce three dimensional cross section slice
images of the breast. Due to the fact that the Company is in the last stages of
the development of its cancer detection technology and its CTLM(TM), it has not
yet engaged in any marketing or distribution of it products and therefore has
had no revenue from its operations.
The Company has incurred net losses, before discounts and dividends on
convertible preferred stock issuances, since inception through December 31, 1997
of approximately $19,830,138. The Company anticipates that loss from operations
will continue for at least the next year, primarily due to an anticipated
increase in marketing and manufacturing expenses associated with the
commercialization of the CTLMtm and other research and development activities.
There can be no assurances that the CTLMtm will be approved by the FDA, achieve
market acceptance or that sufficient revenues will be generated from sales of
the CTLMtm to allow the Company to operate profitably.
RESULTS OF OPERATIONS
General and administrative expenses during the three months and six months ended
December 31, 1997, were $164,293 and $493,696, respectively, representing a
decrease of $42,856 and an increase of $218,224 for the corresponding periods
for 1997. The decrease during the three-month period ending December 31, 1997,
was primarily due to certain administrative costs incurred during the
three-month period ending December 31, 1996 associated with the move to our new
building in November of 1996.
Compensation and related benefits during the three months and six months ended
December 31, 1997, were $471,091 and $973,550, respectively, representing an
increase of $215,046 and an increase of $144,446 for the corresponding periods
for 1996. This increase was primarily due to additional compensation expenses as
a result of the hiring of an additional 12 employees during the calendar year
1997.
Research and development expenses during the three months and six months ended
December 31, 1997, were $154,563 and $310,400, respectively, representing an
increase of $24,552 and a decrease of $302,281 for the corresponding periods for
1996. This six-month decrease is due primarily to finalizing certain components
of the CTLM(TM) device.
Advertising and promotion expenses during the three months and six months ended
December 31, 1997, were $269,386 and $294,469 representing an increase of
$195,081 and $192,240 for the corresponding periods for 1996. The increase is
due primarily to the additional costs of advertising in domestic and foreign
medical imaging and medical device publications, and an increase in public
relations and investor public relations expenses.
Consulting expenses during the three months and six months ended December 31,
1997, were $479,651 and $484,797 representing an increase of $450,531 and
$447,377 for the corresponding periods for 1996. The increase is due primarily
to the expanded use of outside consultants needed for special non-recurring
projects required prior to placing CTLM(TM) units into clinical trials.
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Professional expenses during the three months and six months ended December 31,
1997, were $222,985 and $339,975 representing an increase of $179,728 and
$274,303 for the corresponding periods for 1996. The increase is due primarily
to an increase in legal fees on legal matters described in Item 1. Legal
Proceedings.
Stockholder expenses during the three months and six months ended December 31,
1997, were $20,654 and $73,487 representing a decrease of $2,719 and an increase
of $50,114 for the corresponding periods for 1997. The increase for the
six-months ended December 31, 1997 is due to the costs associated with preparing
and mailing the Company's Annual Report and Proxy Statement.
Tradeshow expenses during the three months and six months ended December 31,
1998 were $41,207 and $82,850 representing a decrease of $18,066 and $16,153 for
the corresponding periods for 1997. The decrease is due to no changes or
modifications were required to the Company's exhibit for the 1998 Radiological
Society of North America's 84th Scientific Assembly and Annual Meeting in
Chicago, IL.
Travel and subsistence costs during the three months and six months ended
December 31, 1997 were $38,648 and $55,406 representing a decrease of $12,698
and $31,542 for the corresponding periods for 1996. The decrease was primarily
due to reduced travel and housing expenses for consultants
Rent expense during the three months and six months ended December 31, 1997,
were $21,623 and $21,623 representing a decrease of $1,385 and $14,883 for the
corresponding periods for 1996. This decrease was primarily due to the
expiration of certain rental agreements.
Interest expense during the three months and six months ended December 31, 1997
was $-0- and $-0-representing a decrease of $391 and $391 for the corresponding
periods for 1996. The decrease is due to no interest being paid on loans during
the respective periods.
BALANCE SHEET DATA
The Company's combined cash and cash equivalents totaled $575,084 as of December
31, 1997. This is an increase of $88,361 from $486,723 for the year ended June
30, 1997. On December 31, 1997, Imaging Diagnostic Systems, Inc. finalized a
private placement transaction resulting in $500,000 in equity financing. See
Item 5, Other Information.
The Company does not expect to generate a positive internal cash flow for at
least the next several years due to the expected increase in spending for
research and development and the expected costs of commercializing its initial
product, the CTLM(TM) device.
Property and Equipment was valued at $3,310,630 as of December 31, 1997. The
overall gross increase of $17,333 is due primarily to the purchase of additional
laboratory equipment.
Prototype Equipment was valued as of December 31, 1997, at $1,648,216. This
represents an increase of $431,631 from $1,216,585 for the year ended June 30,
1997. This increase is due primarily to additional development expenses
associated with increasing the sensitivity of the electronics controlling the
detectors, improving the design of the collimators, improving the fiber optics,
improving the design of the scanning bed pad and centering rings, and machined
parts to support these changes leading to the commercialization of the CTLM(TM)
device.
LIQUIDITY AND CAPITAL RESOURCES
Imaging Diagnostic Systems, Inc. has financed its operations and research and
development primarily from the private sale of equity securities consisting of
both convertible preferred and common stock from which it has raised $15,555,154
8
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since inception to December 31, 1997. As a result of the operating losses
incurred by the Company since inception, the accumulated deficit was
approximately $19,830,138 before accrued dividends on cumulative preferred stock
at December 31, 1997.
As of December 31, 1997, the Company had cash and cash equivalents of $575,084
as compared to $486,723 on June 30, 1997. Cash used in the Company's operations
for the six months ended December 31, 1997 increased $88,361 as a result of
funding activities. As of December 31, 1996 the Company had cash and cash
equivalents of $3,886,509 as compared to $575,1084 on December 31, 1997. The
decrease in working capital was the result of approximately $3,311,425 of cash
used primarily to finance the Company's operations and capital requirements
during the twelve months ending December 31, 1997. The Company does not expect
to generate a positive internal cash flow for at least several years due to the
expected increase in spending related to the research and development expenses,
pre-market approval process, and expected costs of commercializing the CTLM(TM)
device.
Capital expenditures during the six months ending December 31, 1997 were
$587,711 as compared to $3,306,835 for the six months ending December 31, 1996.
This decrease of $2,719,124 is a result of the purchase of furniture and
fixtures, manufacturing equipment, computer equipment and the balance of capital
improvements required for the Company's Plantation, Florida facility during the
prior period.
During the six months ending December 31, 1997 there were no changes in the
Company's existing debt agreements, and the Company had no outstanding bank
loans as of December 31, 1997. The Company's fixed commitments, including
salaries and fees for current employees and consultants, rent, payments under
license agreements and other contractual commitments are substantial and are
likely to increase as additional agreements are entered into and additional
personnel are retained. The Company will require substantial additional funds
for its research and development programs, pre-clinical and clinical testing,
operating expenses, regulatory processes, and manufacturing and marketing
programs. The Company's future capital requirements will depend on many factors,
including the following: the progress of its research and development projects;
the progress of pre-clinical and clinical testing; the time and cost involved in
obtaining regulatory approvals; 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 the Company's existing collaborative, licensing and
other relationships and the terms of any new collaborative, licensing and other
arrangements that the Company may establish; and the development of
commercialization activities and arrangements. The Company does not expect to
generate a positive internal cash flow for at least several years due to
expected increases in capital expenditures, working capital and ongoing losses,
including the expected cost of commercializing the CTLM(TM) device. The Company
does not have sufficient cash to fund the Company's operations until the end of
the fiscal year ending June 30, 1998 requiring it to secure additional funding
through the private placement sale of debt or equity securities.
ISSUANCE OF STOCK FOR SERVICES/DILUTIVE IMPACT TO SHAREHOLDERS
The Company has and may continue to issue stock for services performed and to be
performed by consultants. Since the Company has generated no revenues to date,
its ability to obtain and retain consultants may be dependant on it ability to
issue stock for services. Since July 1, 1996, the Company has issued an
aggregate of 740,200 shares of common stock pursuant to Registration Statements
on Form S-8. The aggregate fair market value of the shares was $1,609,259. The
issuance of large amounts of common stock for services rendered or to be
rendered and the subsequent sale of such shares may depress the price of the
common stock. In addition, since each new issuance of common stock dilutes
existing shareholders, the issuance of substantial additional shares may
effectuate a change of control of the Company. See `Issuance of Stock for
Services" and "Note 16 to Financial Statements".
The Company is currently seeking additional capital to fund its future
operations through private debt or equity financings, or collaborative licensing
or other arrangements with strategic partners. There can be no assurance that
such financing can be obtained or, if it is obtained, that the terms thereof
will be acceptable. The Company plans to continue its policy of investing excess
funds, if any, in a daily cash management account at First Union National Bank.
See "Cautionary Statements Regarding Forward-Looking Statements Uncertainties as
to Future Profitability."
9
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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-QSB under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as in the Company's press releases or oral statements that
may be made by the Company or by officers, directors or employees of the Company
acting on the Company's behalf, that are not historical fact constitute
"forward-looking statements". Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that could cause the actual
results of the Company to be materially different from the historical results or
from any results expressed or implied by such forward-looking statements.
Factors that might cause such a difference include, without limitation, the
information set forth below. In addition to statements which explicitly describe
such risks and uncertainties, statements labeled with the terms "believes",
"belief', "expects", "plans" or "anticipates" should be considered uncertain and
forward-looking. All cautionary statements made in this Report should be read as
being applicable to all related forward-looking statements wherever they appear.
Uncertain Ability to Meet Capital Needs. The Company will require substantial
additional funds for clinical testing of the CTLM(TM) Device, research and
development programs, pre-clinical and clinical testing of other proposed
products, regulatory processes, manufacturing and marketing programs and
operating expenses (including general and administrative expenses). The
Company's future capital requirements will depend on many factors, including the
following: the progress of its research and development projects; the progress
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; changes and developments in the Company's
existing collaborative, licensing and other relationships and the terms of any
new collaborative, licensing and other arrangements that the Company may
establish; and the development of commercialization activities and arrangements.
Moreover, the Company's fixed commitments, including salaries and fees for
current employees and consultants, equipment rent, payments under license
agreements and other contractual commitments, are substantial and would increase
if additional agreements are entered into and additional personnel are retained.
The Company does not expect to generate a positive internal cash flow for at
least several years due to expected increases in capital expenditures, working
capital needs and ongoing losses, including the expected cost of commercializing
the CTLM(TM) Device . However, the Company's cash requirements may vary
materially from those now planned due to the progress of research and
development programs, results of clinical testing, relationships with strategic
partners, if any, changes in the focus and direction of the Company's research
and development programs, competitive and technological advances, the FDA and
foreign regulatory processes and other factors.
The Company needs additional capital to fund its operations, and is seeking to
obtain additional capital through debt or equity financings, or collaborative
licensing or other arrangements with strategic partners. If additional funds are
raised by issuing equity securities, further dilution to existing stockholders
will result and future investors may be granted rights superior to those of
existing stockholders. There can be no assurance, however, that additional
financing will be available when needed, or if available, will be available on
acceptable terms. Insufficient funds may prevent the Company from implementing
its business strategy and will require the Company to further delay, scale back
or eliminate certain of its research, product development-and marketing programs
and may require the Company to license to third parties rights to commercialize
products or technologies that the Company would otherwise seek to develop
itself, or to scale back or eliminate its other operations.
Uncertainty of FDA Marketing Clearance for the CTLM(TM) Device. In November
1997, the Company's clinical site at Strax Breast Diagnostic Institute in
Lauderhill, Florida was closed. In December 1997, the FDA granted approval to
include specific studies on augmented breasts as part of the Company's extensive
in-house study of the CTLM(TM). The testing is designed to develop diagnostic
criteria for CTLM(TM) images. In order to acquire data that will be part of the
10
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final pre-market application (PMA), the Company intends to expand the
first-phase clinical trials to hospitals in Miami, Chicago, Los Angeles, Boston
and New York.
At the conclusion of the clinical trials the Company will submit the PMA, if and
when accepted for filing by the FDA, it will be designated for review under the
FDA's Expedited Review policy. There can be no assurance, however, that such
Expedited Review status will be maintained or result in a more expeditious
approval, or approval at all. See "Government Regulation; No Assurance of
Regulatory Approval."
Conducting clinical trials will require the expenditure of substantial
additional funds, which the Company does not currently have available.
Furthermore, there can be no assurance (i) that results obtained in any
additional trials will be consistent with the results obtained in trials
conducted by the Company to date, (ii) that results obtained in any clinical
trial or series of clinical trials will be consistent among all study sites,
(iii) that results obtained in clinical trials conducted with U.S. study
populations will be consistent with results obtained in studies conducted in
Europe or other locations outside of the U.S., or (iv) that any such results, or
the filing of the PMA will be accepted by the FDA. There can be no assurance
that the FDA or other regulatory approvals for the CTLM(TM) Device will be
granted on a timely basis, or at all. Failure to obtain FDA clearance to market
the CTLM(TM) Device would have a material adverse effect on the Company's
business, financial condition, cash flows and results of operations.
Limited Operating History; Continuing Operating Losses. The Company has a
limited history of operations. Since its inception in December 1993, the Company
has engaged principally in the development of the CTLM(TM) Device, which has not
been approved for sale in the United States. Consequently, the Company has
little experience in manufacturing, marketing and selling its products. The
Company currently has no source of operating revenue and has incurred net
operating losses since its inception. At December 31, 1997, the Company had an
accumulated deficit of approximately $19,830,138 before discounts and dividends
on convertible preferred stock issuances since inception. Such losses have
resulted principally from costs incurred in research and development and
clinical trials and from general and administrative costs associated with the
Company's operations. The Company expects operating losses to increase for at
least the next several years due principally to the anticipated expenses
associated with the pre-market approval process for the CTLM(TM) Device, the
proposed commercialization of the CTLM(TM) Device, development of, and clinical
trials for, other medical imaging devices and other research and development
activities.
Uncertainties as to Future Profitability. The Company's ability to achieve
profitability will depend in part on its ability to obtain regulatory approvals
for the CTLM(TM) Device and any other proposed products, and to develop the
capacity to manufacture and market any products either by itself or in
collaboration with others. There can be no assurance if or when the Company will
receive required regulatory approvals for the development and commercial
manufacturing and marketing of the CTLM(TM) Device or any other proposed
products, or achieve profitability. Accordingly, the extent of future losses and
the time required to achieve profitability are highly uncertain.
Early Stage of Product Development. The Company's proposed products, other than
the CTLM(TM) Device, are at an early stage of development and the CTLM(TM)
Device must receive marketing clearance from the FDA before it can be
commercially marketed in the United States. There can be no assurance that any
of the Company's proposed products will be found to be safe and effective, meet
applicable regulatory standards or receive necessary regulatory clearance, or if
safe and effective, can be developed into commercial products, manufactured on a
large scale or be economical to market. Nor can there be any assurance that the
Company's proposed products will achieve or sustain market acceptance. In the
event necessary regulatory approvals are obtained for the CTLM(TM) Device, there
can be no assurance that the Company will be successful in establishing
commercial operations, including gaining market acceptance of the CTLM(TM)
Device and implementing commercial-scale manufacturing and sales and marketing
programs. There is, therefore, substantial risk that the Company's product
development and commercialization efforts will not prove to be successful.
Dependence on a Single Product. Although the Company is in the process of
developing additional products based on its core technology, including an
enhancement of the CTLM(TM) Device for use with fluorescence and PhotoDynamic
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Therapy (PDT), none of such applications is expected to result in a commercial
product for at least several years, if at all. Consequently, pending its
approval for commercial distribution in the United States, the CTLM(TM) Device
would account for substantially all of the Company's revenues for the
foreseeable future. Failure to gain regulatory approvals or market acceptance
for the CTLM(TM) Device would have a material adverse effect on the Company's
business, financial condition, cash flows and results of operations.
Dependence on Market Acceptance. There can be no assurance that physicians or
the medical community in general will accept and utilize the CTLM(TM) Device or
any other products developed by the Company. The extent that, and the rate at
which, the CTLM(TM) Device 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(TM) Device, the advantages of the CTLM(TM) Device
over existing technology and cancer detection methods (including x-ray
mammography, ultrasound or high frequency ultrasound, MRI, thermography,
diaphonography, electrical impedance and transillumination devices), third-party
reimbursement practices and the Company's manufacturing, quality control,
marketing and sales efforts. There can be no assurance that the medical
community and third-party payers will accept the Company's unique technology.
Similar risks will confront any other products developed by the Company in the
future. Failure of the Company's products to gain market acceptance would have a
material adverse effect on the Company's business, financial condition, cash
flows and results of operations.
Limited Marketing and Sales Experience. The Company has limited internal
marketing and sales resources and personnel. In order to market the CTLM(TM)
Device or any other products it may develop, the Company will have to develop a
marketing and sales force with technical expertise and distribution
capabilities. There can be no assurance that the Company will be able to
establish sales and distribution capabilities or that the Company will be
successful in gaining market acceptance for any products it may develop. There
can be no assurance that the Company 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 the Company,
or at all, or that the Company's marketing and sales efforts will be successful.
Failure to successfully establish a marketing and sales organization, whether
directly or through third parties, would have a material adverse effect on the
Company's business, financial condition, cash flows and results of operations.
The Company intends to pursue distribution arrangements in Europe and Asia with
strategic marketing partners who have established marketing and service
capabilities. There can be no assurance that the Company, either on its own or
through arrangements with others, will be able to enter into such arrangements
on acceptable terms, if at all. To the extent that the Company arranges with
third parties to market its products, the success of such products may depend on
the efforts of such third parties. There can be no assurance that any of the
Company's proposed marketing schedules or plans can or will be met.
Limited Manufacturing History. The Company will have to ramp up its CTLM(TM)
manufacturing and assembly capabilities and contract for the manufacture of the
CTLM(TM) components in the volumes that will be necessary for the Company to
achieve significant commercial sales in the event it begins foreign sales and/or
obtains regulatory approval to market its products in the United States. The
Company has limited experience in the manufacture of medical products for
clinical trials or commercial purposes. Should the Company manufacture its
products, the Company's manufacturing facilities would be subject to the full
range of the current Quality System Regulation ("QSR") (formerly the Good
Manufacturing Practices (GMP) regulation) and similar risks of delay or
difficulty in manufacturing, and the Company would require substantial
additional capital to establish such manufacturing facilities. In addition,
there can be no assurance that the Company would be able to manufacture any such
products successfully or cost-effectively.
Dependence on Third Parties. The Company has used certain third parties to
manufacture and deliver the components of the CTLM(TM) Device and intends to
continue to use third parties to manufacture and deliver such components and any
other products, which the Company may seek to develop. Such third parties must
adhere to the QSR enforced by the FDA through its facilities inspection program
and such third-parties' facilities must pass a plant inspection before the FDA
will grant pre-market approval of the Company's products. There can be no
assurance that the third-party manufacturers on which the Company depends for
the manufacture of CTLM(TM) components will be in compliance with the QSR at the
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time of the pre-approval inspection or will maintain such compliance. Such
failure could significantly delay FDA approval of the PMA application for the
CTLM(TM) Device, and such delay would have a material adverse effect on the
Company's business, financial condition, cash flows and results of operations.
The qualification of additional or replacement suppliers for certain components
of the CTLM(TM) Device or services is a lengthy process. For certain services
and components the Company currently relies on single suppliers. If the Company
encounters delays or difficulties with its third-party suppliers in producing,
packaging or distributing components of the CTLM(TM) Device, market introduction
and subsequent sales would be adversely affected. The Company also may have to
rely on alternative sources of supply. In such case, there can be no assurance
that the Company will be able to enter into alternative supply arrangements at
commercially acceptable rates, if at all. If the Company is unable to obtain or
retain qualified third-party manufacturers on commercially acceptable terms, it
may not be able to commercialize its products as planned. The Company's
dependence upon third parties for the manufacture of its products may adversely
affect the Company's profit margins and its ability to develop and deliver its
products on a timely and competitive basis.
Competition. The medical device industry generally, and the cancer diagnostic
imaging segments in particular, are characterized by rapidly evolving
technology-and intense competition. Other companies in the medical device
industry may be developing, or could in the future attempt to develop,
additional products that are competitive with the CTLM(TM) Device. Many of the
Company's potential competitors have substantially greater capital resources and
name recognition than the Company. Many of these companies also have
substantially greater expertise than the Company in research and development,
manufacturing and marketing and obtaining regulatory approvals. There can be no
assurance that the Company's competitors will not succeed in developing or
marketing technologies and products that are more effective than those developed
or marketed by the Company or that would render the Company's technology and
products obsolete or noncompetitive. Additionally, there can be no assurance
that the Company will be able to compete against such competitors and potential
competitors in terms of manufacturing, marketing and sales. Although the Company
believes that its products may offer certain technological advantages over its
competitors' currently-marketed products, earlier entrants in the market for a
diagnostic application often obtain and maintain significant market share
relative to later entrants. Physicians using imaging equipment such as x-ray
mammography equipment, ultrasound or high frequency ultrasound systems, MRI
systems, thermography, diaphonography, electrical impedance and
transillumination devices may not use the CTLM(TM) Device or any other products
that the Company may develop. Currently, mammography is employed widely and the
Company's ability to sell the CTLM(TM) Device to medical facilities will, in
part, be dependent on the Company's ability to demonstrate the clinical utility
of the CTLM(TM) Device as a diagnostic adjunct to mammography or physical
examination and its advantages over other available diagnostic tests.
Risk of Technological Obsolescence. Methods for the detection of cancer are
subject to rapid technological innovation and there can be no assurance that
technological changes will not render the Company's proposed products obsolete.
There can be no assurance that the development of new types of diagnostic
medical equipment or technology will not have a material adverse effect on the
marketability of the CTLM(TM) Device or any other products developed by the
Company. Commercial availability of such products could render the Company's
products obsolete, which would have a material adverse effect on the Company's
business, financial condition, cash flows and results of operations.
Potential Reliance on International Sales. The Company intends to commence
commercial sales of the CTLM(TM) Device in Europe and Asia, where permitted,
prior to commencing commercial sales in the United States, where sales cannot
occur unless and until the Company receives pre-market approval from the FDA.
Thus, until the Company receives marketing clearance from the FDA for the
CTLM(TM) Device, as to which there can be no assurance, the Company's revenues,
if any, will be derived from international sales. A significant portion of the
Company's revenues, therefore, may be subject to the risks associated with
international sales, including economic or political instability, shipping
delays, fluctuations in foreign currency exchange rates, foreign regulatory
requirements and various trade restrictions, all of which could have a
significant impact on the Company's ability to deliver products on a competitive
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and 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 the Company's business, financial condition, cash
flows and results of operations. The regulation of medical devices, particularly
in Europe, continues to develop and there can be no assurance that new laws or
regulations will not have an adverse effect on the Company.
Government Regulation; No Assurance of Regulatory Approvals. The manufacture and
sale of medical devices, including the CTLM(TM) Device, and any other products
that may be developed by the Company are subject to extensive regulation by
numerous governmental authorities in the United States, principally the FDA and
corresponding state agencies, and in other countries. In the United States, the
Company's products are regulated as medical devices and are subject to the FDA's
pre-market clearance or approval requirements. Securing FDA clearances and
approvals may require the submission of extensive clinical data and supporting
information to the FDA. To obtain FDA approval of an application for pre-market
approval, the pre-market approval application must demonstrate that the subject
device has clinical utility, meaning that the device has a beneficial
therapeutic effect, or that as a diagnostic tool, it provides information that
measurably contributes to a diagnosis of a disease or condition.
The process of obtaining FDA and other required regulatory approvals may be
lengthy, expensive and uncertain and frequently requires from six months to
several years from the date of the FDA submission, if pre-market approval is
obtained at all. Following the filing of a submission of the PMA for the
CTLM(TM) Device, the FDA may require more information or clarification of
information already provided as part of the PMA. During the review period, an
advisory panel will likely be convened by the FDA to review and evaluate the PMA
and provide recommendations to the FDA as to whether the PMA should be approved.
Although the FDA may grant Expedited Review status to the CTLM(TM) Device, there
can be no assurance that such status will be maintained or result in timely
approval of the CTLM(TM) Device, if approval is obtained at all. Failure to
obtain FDA marketing clearance of the CTLM(TM) Device would have a material
adverse effect on the Company's business, financial condition, cash flows and
results of operations. See "Uncertainty of FDA Approval for the CTLM(TM)
Device."
Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country. The
time required to obtain approval for sale internationally may be longer or
shorter than that required for FDA approval and the requirements may differ. In
addition, in order to sell its products within the European Economic Area,
companies are required to achieve compliance with the requirements of the
Medical Devices Directive and affix a "CE" marking on their products to attest
such compliance. The Company will be required to obtain CE Mark Certification
for the CTLM(TM) Device.
In addition, unapproved products subject to the PMA requirements must receive
prior FDA export approval in order to be marketed outside of the United States
unless they are approved for use by any member country of the European Union or
certain other countries, including Australia, Canada, Israel, Japan, New
Zealand, Switzerland and South Africa, in which case they can be exported to any
country provided that certain limited notification requirements are met. There
can be no assurance that the Company will meet the FDA's export requirements or
receive FDA export approval when such approval is necessary, or that countries
to which the devices are to be exported will approve the devices for import.
Failure of the Company to meet the FDA's export requirements or obtain FDA
export approval when required to do so, or to obtain approval for import, could
have a material adverse effect on the Company's business, financial condition,
cash flows and results of operations.
Regulatory approvals, if granted, may include significant limitations on the
indicated uses for which the product may be marketed. In addition, to obtain
such approvals, the FDA and certain foreign regulatory authorities may impose
numerous other requirements with which medical device manufacturers must comply.
FDA enforcement policy strictly prohibits the marketing of approved medical
devices for unapproved uses. Product approvals could be withdrawn for failure to
comply with regulatory standards or the occurrence of unforeseen problems
following initial marketing. The third-party manufacturers upon which the
Company depends to manufacture its products are required to adhere to applicable
FDA regulations regarding the QSR and similar regulations in other countries,
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which include testing, control and documentation requirements. Ongoing
compliance with the QSR and other applicable regulatory requirements will be
monitored by periodic inspection by the FDA and by comparable agencies in other
countries. Failure to comply with applicable regulatory requirements, including
marketing or promoting products for unapproved use, could result in, among other
things, 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 governmental regulations or policies could prevent or delay regulatory
approval of the Company's products. Certain material changes to medical devices
also are subject to FDA review and clearance or approval.
There can be no assurance that the Company will be able to obtain, on a timely
basis, or at all, FDA approval of the PMA for the CTLM(TM) Device, foreign
marketing clearances for the CTLM(TM) Device or regulatory approvals or
clearances for other products that the Company may develop, and delays in
receipt of or failure to obtain such approvals or clearances, the loss of
previously obtained approvals, or failure to comply with existing or future
regulatory requirements would have a material adverse effect on the Company's
business, financial condition, cash flows and results of operations.
Limitations on Third-Party Reimbursement. 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 the Company's products by regulating the level of
reimbursement provided by such payers to the physicians, hospitals, clinics and
imaging centers utilizing the CTLM(TM) Device or any other products that the
Company may develop or by refusing reimbursement. If examinations utilizing the
Company's products are not reimbursed under these programs, the Company's
ability to sell its products may be materially adversely affected.
There can be no assurance that third-party payers will provide reimbursement for
use of the CTLM(TM) Device or any other products that the Company may develop.
Moreover, the level of reimbursement, if any, may impact the market acceptance
and pricing of the Company's products, including the CTLM(TM) Device. Failure to
obtain favorable rates of third party reimbursement could have a material
adverse effect on the Company's business, financial condition, cash flows and
results of operations.
In international markets, reimbursement by 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 certain countries, the Company's ability to
achieve significant market penetration may depend upon the availability of
third-party and governmental reimbursement. Revenues and profitability of
medical device companies may be affected by the continuing efforts of
governmental and third-party payors to contain or reduce the costs of health
care through various means.
Uncertainties Regarding Health Care Reform. Several states and the U.S.
government are investigating a variety of alternatives to reform the health care
delivery system and further reduce and control health care spending. These
reform efforts include proposals to limit spending on health care items and
services, limit coverage for new technology and limit or control the prices
health care providers and drug and device manufacturers may charge for their
services and products, respectively. If adopted and implemented, such reforms
could have material adverse effect on the Company's business, financial,
condition, cash flows and results of operations.
Uncertain Ability to Protect Patents and Proprietary Technology and Information.
The Company's ability to compete effectively in the medical products industry
will depend on its success in protecting its proprietary technology, both in the
United States and abroad. The patent positions of medical products companies
generally involve complex legal and factual questions. The Company's proprietary
products and technology are the subject of one U.S. patent licensed to the
Company, and eleven additional applications owned by the Company pending with
the United States Patent and Trademark Office ("PTO") and certain foreign
patents. The Company has filed, and intends to continue to file, patent
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applications in certain foreign jurisdictions covering the patent claims that
are the subject of U.S. patents and patent applications. There can be no
assurance that the PTO or foreign jurisdictions will grant the Company's pending
patent applications or that the Company will obtain any additional patents or
other protection for which it has applied. There can be no assurance that
patents issued to or licensed by or to the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
any competitive advantage. The Company could incur substantial costs in
defending any patent infringement suits or in asserting any patent rights,
including those granted by third parties.
Although the Company has entered into confidentiality and invention agreements
with its employees and consultants, there can be no assurance that such
agreements will be honored or that the Company will be able to protect its
rights to its non patented trade secrets and know-how effectively. Moreover,
there can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets and know-how. In addition, the
Company may be required to obtain licenses to patents or other proprietary
rights from third parties. There can be no assurance that any licenses required
under any patents or proprietary rights would be made available on acceptable
terms, if at all. If the Company does not obtain required licenses, it could
encounter delays in product development or find that the development,
manufacture or sale of products requiring such licenses could be foreclosed.
Additionally, the Company may, from time to time, support and collaborate in
research conducted by universities and governmental research organizations.
There can be no assurance that the Company 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 conducted by the Company or such
collaborators.
Dependence on Qualified Personnel. Due to the specialized scientific nature of
the Company's business, the Company is highly dependent upon its ability to
attract and retain qualified scientific, technical and managerial personnel. 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 the Company's research and development programs and to its
business. The Company's anticipated growth and expansion into areas and
activities requiring additional expertise, such as engineering, manufacturing
and marketing, will require the addition of new personnel. Competition for
qualified personnel is intense and there can be no assurance that the Company
will be able to continue to attract and retain qualified personnel necessary for
the development of its business.
Potential Product Liability. The Company's business exposes it to potential
product liability risks, which are inherent in the testing, manufacturing and
marketing of cancer detection products. Significant litigation, not involving
the Company, has occurred in the past based on allegations of false negative
diagnoses of cancer. While the CTLM(TM) Device does not purport to diagnose any
patient, there can be no assurance that the Company will not be subjected to
future claims and potential liability. While the Company plans to maintain
insurance against product and professional liability and defense costs, there
can be no assurance that claims against the Company arising with respect to its
products will be successfully defended or that the insurance to be carried by
the Company will be sufficient to cover liabilities arising from such claims. A
successful claim against the Company in excess of the Company's insurance
coverage could have a material adverse effect on the Company. Furthermore, there
can be no assurance that the Company will be able to continue to obtain or
maintain product liability insurance on acceptable terms.
Potential for Environmental Liability. Although the Company's manufacturing
processes do not currently involve the use of potentially hazardous materials,
it may use such materials in the future. The Company may, in the future, become
subject to stringent federal, state and local laws, rules, regulations and
policies governing the use, generation, manufacture, storage, air emission,
effluent discharge, handling and disposal of such materials. There can be no
assurance that the Company will not incur significant future costs to comply
with environmental laws, rules, regulations and policies, or that the business,
financial position, cash flows or results of operations of the Company will not
be materially and adversely affected by current or future environmental laws,
rules, regulations and policies or by any releases or discharges of hazardous
materials.
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Authorization and Discretionary Issuance of Preferred Stock/Barriers to
Takeover. The Company's Articles of Incorporation authorize the issuance of up
to 2,000,000 shares of "blank check" preferred stock with such designations,
rights, and preferences as may be determined from time to time by the board of
directors. Accordingly, the board of directors is empowered, without stockholder
approval, to designate and issue additional series of preferred stock with
dividend, liquidation, conversion, voting or 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 the
Company's Common Stock, substantially dilute the common shareholder's interest
and depress the price of the Company's common stock. In addition, the event of
issuance, the preferred stock could be utilized, under certain circumstances, as
a method of discouraging, delaying or preventing a change in control of the
Company. The Company has, in the past, issued Convertible Preferred Stock
without a limit on the number of shares that can be issued upon conversion and
may continue to do so in the future. See "Sale of Unregistered Securities" and
"Description of Securities"
The Series H Preferred Shares are the Company's only Series of Preferred Stock
that has not been converted or noticed for conversion. Since the conversion
price of the Series H Preferred is based on 75% of the Average Price, without a
limit on the number of shares that can be issued upon conversion, in the event
that the price of the Company's common stock decreases, the percentage of shares
outstanding that will be held by the Series H Holders upon conversion will
increase accordingly. See "Sale of Unregistered Securities-Series H Preferred"
and "Sale of Unregistered Securities-Equity Line of Credit".
Due to the fact that, when converting Convertible securities issued without
limitations on conversion, including the Series H Preferred Shares, the lower
the market price the greater the number of shares to be issued to the holders,
holders of such preferred upon conversion, thus increasing the potential profits
to the Holder when the price per share increases and the Holder sells the Common
Shares. The preferred stocks potential for increased share issuance and profit
in addition to a stock overhang of an undeterminable amount may depress the
price of the Company's common stock. See "Sale of Unregistered Securities-Series
H Preferred" and "Sale of Unregistered Securities-Equity Line of Credit".
No Dividends. The Company has never declared or paid any cash dividends on its
capital stock and does not intend to pay any cash dividends in the foreseeable
future. The Company currently anticipates that it will retain all its earnings
for use in the operation and expansion of its business and, therefore, does not
anticipate that it will pay any cash dividends in the foreseeable future
Possible Volatility of Stock Price. The price of the Company's Common Stock has
fluctuated substantially since it began trading on the OTC Bulletin Board in
September 1994. The market price of the shares of the Common Stock, like that of
the common stock of many other medical device companies, is likely to continue
to be highly volatile. Factors such as the timing and results of clinical trials
by the Company or its competitors, governmental regulation, healthcare
legislation, equity or debt fundings, developments in patent or other
proprietary rights of the Company or its competitors, including litigation,
fluctuations in the Company's operating results, and market conditions for
medical device company stocks and life science stocks in general, could have a
significant impact on the future price of the Common Stock. The Company's stock
is currently traded on the OTC Bulletin Board. The Company is seeking to be in
compliance with NASDAQ SmallCap Market Listing Requirements. The trading of the
Company's Common Stock on the NASDAQ SmallCap Market is conditioned upon the
Company's meeting certain quantitative criteria related to the market price of
the Company's Common Stock, net tangible assets, market capitalization and
certain other quantitative and non-quantitative requirements established by such
stock market. To maintain eligibility for trading on the NASDAQ Small-Cap
Market, among other requirements, the Company is required to have net tangible
assets in excess of $4,000,000 and have a minimum bid price of $3 per share for
initial inclusion and then maintain a bid price of $ 1 per share. The Company's
failure to meet such requirements could result in the delisting of the Common
Stock from trading on the NASDAQ SmallCap Market. If, however, the Company did
not meet the requirements of the NASDAQ SmallCap Market, trading of the Common
Stock would be conducted on an electronic bulletin board (OTC BB) established
for securities that do not meet the NASDAQ listing requirements or in what is
commonly referred to as the "pink sheets." Delisting may restrict investors'
interest in the Common Stock and materially adversely affect the trading market
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and prices for the Common Stock and the Company's ability to issue additional
securities or to secure additional financing.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On July 10, 1997, the Company filed an action in the Circuit Court of
the 17th Judicial Circuit in and for Broward County, case no. 97-10533, against
Dr. Valey Kamalov ("Kamalov") and Irina Struganova. The complaint alleges that
Kamalov, an ex-employee of the Company, violated his employment agreement with
the Company while employed and after terminating his employment with the Company
by violating non-compete, confidentiality, and invention covenants of the
agreement.
ITEM 2. CHANGES IN SECURITIES.
Effective December 31, 1997, the Board of Directors amended the
Articles of Incorporation of the Company in order to designate a class of shares
as Series D Convertible Preferred. The Series D Preferred is non-voting, can be
converted into common stock of the Company and has rights and preferences that
materially limit or qualify the rights of the holders of registered common
stock, including a liquidation preference of $10,000 per share
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
NASDAQ LISTING
On March 24, 1996, the Company filed its application with NASDAQ to be listed on
the Small Cap Market. The Company's request for listing was subsequently denied
after a hearing before the Listing Qualifications Panel (the "Panel"). The
denial was based upon the fact that one of the Company's outside shareholders
(the "Shareholder"), who had no influence over the Company, had a questionable
background and owned a 5% interest in the Company.
As a result, the Company appealed the denial decision to the NASDAQ Listing and
Hearing Review Committee (the "Committee") which on February 5, 1997, reversed
the decision of the Panel and stated in part the following:
"Accordingly, we recommend that the Panel's decision denying initial
inclusion be reversed and the case be remanded to the Staff with instructions to
implement the Company's proposal..."
The Company in fact, did implement its proposal and on March 12th, provided
NASDAQ with copies of all things necessary to satisfy any concerns that the
Panel had regarding the Shareholder. On March 31,1997, prior to the time NASDAQ
acted on the proposal, Barrons published an inaccurate article stating that a
NASDAQ spokesman indicated that the listing would be denied. . For the 36
trading day period prior to the date of this article the Company's stock traded
at $3.00 and above. The article had a predictable negative impact on the
Company's stock and the price dropped below $3.00 and did not recover despite a
retraction from Barron's on April 7, 1997. Based -upon this decline the NASDAQ
staff has refused to approve the Company for listing on the NASDAQ Small Cap
Market.
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The following table sets forth, for each of the fiscal periods indicated, the
high and low bid prices for the Common Stock, as reported on the OTC Bulletin
Board. These per share quotations reflect inter-dealer prices in the
over-the-counter market without real mark-up, markdown, or commissions and may
not necessarily represent actual transactions.
QUARTER ENDING HIGH BID LOW BID
FISCAL YEAR 1996
September 1995 $ .78 $ .71
December 1995 $3.15 $ .75
March 1996 $8.25 $8.00
June 1996 $3.90 $3.87
FISCAL YEAR 1997
September 1996 $3.93 $2.25
December 1996 $3.93 $1.43
March 1997 $4.12 $2.43
June 1997 $3.08 $2.62
FISCAL YEAR 1998
September 1997 $2.25 $1.87
December 1997 $1.61 $1.22
March 1998 $1.65 $1.02
June 1998 $0.78 $0.67
FISCAL YEAR 1999
September 1998 $0.58 $0.50
December 1998 $0.62 $0.54
The Company appealed the denial of the listing at an oral hearing before the
Committee in Washington D.C. on January 22, 1998. The Company, as of the date
hereof, has not received a ruling in this matter. If the denial is not
overturned, the Company intends to vigorously pursue this matter by appeal to
the NASDAQ Listing and Hearing Review Committee.
Private Placement of Preferred Stock
The Company has had to rely on the private placement of Preferred and common
stock to obtain working capital. In deciding to issue Preferred Shares pursuant
to the private placements, the Company 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 share
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 the Company's common stock at the time of the sale of the Preferred to
satisfy the Preferred conversion requirements. Although the Company's 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.
On December 31,1997, the Company finalized a $500,000 private placement to
Avalon Capital Ltd. of 50 shares of its Series D Convertible Preferred Stock
("the "Preferred Shares") at a purchase price of $10,000 per share and Warrants
to purchase up to 25,000 shares of the Company's common stock at an exercise
price of $1.22 per share. The offering was conducted pursuant to Regulation S as
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promulgated under the Securities Act of 1933, as amended (the "Regulation S
Sale"). At the time the placement was concluded, the average bid and ask price
of the Company's common stock was approximately $1.22 per share.
Pursuant to the Subscription Agreement, the Series D Holder, or any subsequent
holder of the Preferred Shares, is prohibited from converting any portion of the
Preferred Stock which would result in the Holder being deemed the beneficial
owner, in accordance with the provisions of Rule 13d-3 of the Securities
Exchange Act of 1934, as amended, of 4.99% or more of the then issued and
outstanding Common Stock of the Company.The Preferred Shares are convertible, at
any time, commencing 45 days from the date of issuance and for a period of three
years thereafter, in whole or in part, without the payment of any additional
consideration. The number of fully paid and non-assessable shares of common
stock, no par value, of the Company to be issued upon conversion will be
determined by dividing (i) the sum of $10,000 by (ii) the Conversion Price
(determined as hereinafter provided) in effect at the time of conversion. The
"Conversion Price" is equal to seventy five percent (75%) of the Average Closing
Price of the Corporation's Common Stock for the five-day trading period ending
on the day prior to the date of conversion. The shares underlying the Preferred
Shares and Warrants are entitled to demand registration rights in the event that
Regulation S was amended prior the conversion of the Preferred Stock.
In connection with the Regulation S Sale, the Company issued 4 Preferred Shares
to Settondown Capital International, Ltd., an unaffiliated Investment Banker for
placement fees and paid legal fees of $5,000.
Net proceeds to the Company of $495,000 will be used for working capital and the
continuous research, development and testing of the Company's Computed
Tomography Laser Mammography (CTLM (TM)) device.
INTERNATIONAL DISTRIBUTION
In January 1998, the Company entered into an International Distribution with
Emtron, a leading medical equipment distributor based in the Republic of Turkey.
Emtron currently represents products for companies such as Summit Technology,
Sunrise Technology, Iris Medical Instruments, Telsar, and Medlab, among many
others. Based on due diligence materials received from Emtron, Emtron appears to
have a strong presence in the industry with 30 university hospitals, the Social
Security System (which has over 100 hospitals) and larger private hospitals.
Pursuant to the Agreement, Emtron will have exclusive rights to market the
CTLM(TM) device in the Republic of Turkey for a term of 18 months with an option
to renew for an additional one-year term. The Company believes that this
alliance with Emtron will give the CTLM(TM) a tremendous exposure in the
Republic of Turkey.
The Company has already secured exclusive distributors for the following
territories: Italy, France, South Korea, the Pacific Rim including China,
Switzerland, Moscow, Germany, Austria, and Ecuador.
Based on its present research and development and supplier production schedules,
the Company anticipates that the CTLM(TM) device will be ready for distribution
this Summer. To date, the Company has not marketed, or generated revenues from
the commercialization of the CTLM(TM).
OEM Agreement
In January 1998, the Company entered into an Original Equipment Manufacturer
Agreement (OEM) with Imation Corp.("Imation"), a worldwide leader in the imaging
and information industry. Imation has a marketing presence in more than 60
countries and operates 17 manufacturing, research and distribution facilities.
In December 1998, Imation's medical imaging business in North America, Latin
America, and Asia was purchased by the Eastman Kodak Company. Immediately after
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the purchase by Kodak, the Company received correspondence from Kodak, which
confirmed that the Company's OEM agreement would not be changed by the
acquisition of Imation. At that the time, the company issued a purchasing order
for a new dry View Imager to be
Pursuant to the OEM Agreement, the Company has been granted a limited,
nonexclusive, worldwide, royalty -free license to use Imation's proprietary
information with regard to technical interface, and timing diagrams,
specification, definitions, and drawings defining such technical interface(the
"Dry View Technology"). The OEM Agreement also gives the Company the right to
market the Dry View Technology directly or indirectly through its Distributors.
The DryView(TM) imagesetting film is a hard-dot quality film that requires no
chemical processing, which traditional image processors require. It also
eliminates the need for a dark room. This dry film product was developed by
Imation based on the same technology used to develop Imation's DryView(TM) Laser
Imaging System for the medical imaging market. The dry image setting film is
used in a number of dry film imagesetters developed by systems developers
including Scitex Corporation Ltd., ECRM Incorporated, Ultre Division of
Linotype-Hell Company and Exxtra Corporation. Due to the fact that the
processing procedure for the DryView(TM) does not use chemicals and therefore
eliminates the possibility of environmental contamination, eliminates the need
for a dark room and eliminates the cost of chemical processing, the Company
believes that the Dry View Technology will provide the Company's end users with
the most efficient and economical and ecological product in the medical
industry. In addition, the marketing of the Dry View Technology can provide
immediate revenues to the Company as well as generate additional revenues when
packaged with the CTLM(TM).
CLINICAL SITES
In November 1997, the Company's clinical site at Strax Breast Diagnostic
Institute in Lauderhill, Florida was closed. In December 1997, the FDA granted
approval to include specific studies on augmented breast as part of the
Company's extensive in-house study of the CTLM(TM). The testing is designed to
develop diagnostic criteria for CTLM(TM) images.
In order to acquire data that will be part of the final pre-market application
the Company intends to expand the first-phase clinical trials to hospitals in
Miami, Chicago, Los Angeles, Boston and New York.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibits Description
- -------- -----------
(a)
3. Amendment to Articles of Incorporation(Designation of Series D
Preferred Stock). Contained as an Exhibit to the Form 10-QSB/A.
10.7 Emtron Distribution Agreement
(b) Reports on Form 8-K
None
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned who is duly authorized
to sign as an officer and as the principal financial officer of the registrant.
Dated: March 29, 1999 Imaging Diagnostic Systems, Inc.
By: /s/Allan L. Schwartz
Allan L. Schwartz, Executive Vice-President
Chief Financial Officer
22
IMAGING DIAGNOSTIC SYSTEMS, INC.
DISTRIBUTION AGREEMENT
This Distribution Agreement ("Agreement") is made and entered into as
of January 20th, 1998, by and between EMTRON, a corporation organized and
existing under the laws of Turkey (the "Distributor"), and Imaging Diagnostic
Systems, Inc., a corporation organized and existing under the laws of the State
of Florida ("IDSI").
WITNESSETH:
RECITALS
WHEREAS, IDSI is the owner, and manufacturer of a state of the art
laser imaging system for detection and analysis of masses in the breast, and
ancillary equipment as more fully described on Exhibit A hereto and incorporated
herein (the "Equipment").
WHEREAS, IDSI is the owner of a certain Patent, Patent pending and
Patent applications, trade secrets and other proprietary information in
connection with the Equipment and represents that it has the legal right to
manufacture, sell and distribute the Equipment, either individually or through
others;
WHEREAS, IDSI wishes to grant to Distributor and Distributor wishes to
obtain the exclusive right to be supplied with, sell, distribute and market the
Equipment, individually or through others, in The Republic of Turkey (the
"Territory").
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and for other good and valuable consideration, the parties
hereto agree as follows:
1. DEFINITIONS. For purposes of this Agreement the following terms shall have
the definition set forth below.
(a) Equipment. The term "Equipment" shall mean and include only those
products listed on Exhibit A, as amended from time to time. IDSI may add to,
upgrade or change the Equipment from time to time by providing written notice
not less than thirty (30) days prior to any such change.
(b) Territory. The term "Territory" shall mean the The Republic of
Turkey.
2. TERM. This Agreement shall be for a term of EIGHTEEN (18) months from
the date of its execution by Distributor. This Agreement will automatically
renew for an additional 1 year term provided that Distributor purchases,
sells or markets and IDSI receives and clears proceeds for at least $250,000
of Equipment purchases, exclusive of returns, charge backs, credits and
discounts, for each year of the Term beginning January 20th, 1998 and,
provided that Distributor satisfactorily fulfills all other terms and conditions
of this Agreement.
<PAGE>
3. RIGHT TO SELL, DISTRIBUTE AND MARKET. During the term of this Agreement and
any renewal hereof, IDSI hereby grants to Distributor, as its exclusive agent,
the right to sell, distribute, individually or through outside distributors, and
market the Equipment in the Territory. Distributor shall also have the right to
use the trade names, and trademarks associated with the Equipment in connection
with the promotion, sale, marketing and distribution of the Equipment.
Distributor hereby acknowledges and agrees that all trade names and trademarks
associated with the Equipment are the property of and proprietary to IDSI.
4. DISTRIBUTOR'S DUTIES, REPRESENTATIONS AND WARRANTIES. Distributor agrees to
use its best efforts to sell, market and/or distribute the Equipment in the
Territory. Distributor agrees that it will perform at its expense the following
duties to IDSI's reasonable satisfaction
(a) Promotion and Marketing.
(i) Distributor will maintain a qualified sales and
distribution organization which will provide sales personnel, advertisement,
marketing and distribution support for the solicitation of customers and
potential customers in the Territory for the sale of the Equipment.
(ii) IDSI shall have complete control over the marketing and
sales strategies used to promote and market the Equipment. Any sales promotion,
promotional activities, marketing or advertising strategies, pamphlets,
advertisements, brochures or other promotional materials, other than those
provided by IDSI, must have the prior written approval of IDSI. Five copies of
all Distributor's advertising and sales promotion materials in which the
Equipment of IDSI is mentioned, must be provided for IDSI's review and approval
at least three weeks prior to the time of first use. Distributor shall not use
any such advertising and sales promotion materials or translations of manuals or
other materials until IDSI has approved such use in writing. All advertisements,
pamphlets, brochures or other promotional materials, other than those provided
by IDSI shall be at the sole cost of the Distributor. The Distributor shall have
the continuing right to use any promotional materials produced by IDSI while
this Agreement is in effect.
(iii) Distributor will either (i) purchase and demonstrate or
(ii) sell at its cost to a major medical facility at least one functional set or
unit of each piece of Equipment offered and listed on Exhibit A., as amended
from time to time. The sale to the medical facility shall be approved by IDSI
and conditioned upon and provide Distributor with the unlimited right, subject
to scheduling, to use the Equipment for sale demonstrations. Demonstrations of
the equipment must be complete and must show all features and functions of the
Equipment.
(b) Quarterly Reports. Distributor shall promptly prepare and deliver
to IDSI, within 15 days of the end of each quarter, reports identifying each
purchaser of Equipment by name, address and designation of type of business and
the date of sale, model and serial number for each unit of Equipment sold during
the preceding three months and a forecast of requirements for Equipment for the
following six months, as well as a description of all training, support, and
advertising and sales promotional activities undertaken during such period. In
addition, such Report shall contain a statement of the Distributor' then current
inventory of spare parts and technical literature available for customer
service, maintenance and support of the Equipment. The Report shall be certified
by an officer of the Distributor.
(c) General Conduct. Distributor shall at all times conduct its
business in a manner that reflects favorably on IDSI and its Equipment and will
not engage in any deceptive, misleading, illegal or unethical business
practices.
(d) Service and Support. Distributor's personnel will be required to be
trained at IDSI headquarter facilities in sales and support techniques for all
of the Equipment and services. IDSI will not charge for such training, however
Distributor shall be responsible for all travel, accommodation and other
expenses. Distributor will provide adequate installation, customer service, and
maintenance and support for the Equipment in the Territory. Distributor will
establish and maintain a staff of trained technicians and purchase and maintain
stock of spare parts and technical literature necessary in order to provide
adequate installation, customer service, maintenance and support of the
Equipment in the Territory. Distributor hereby agrees to provide such service
and support in a prompt and workmanlike manner to any user of the Equipment in
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the Territory, whether or not such Equipment was purchased from Distributor,
provided, however, that any such user may be required to pay a reasonable rate
or fee to Distributor for such service and support.
(e) Competitive Products. Distributor will do everything within its
power to feature, promote, and advertise, as part of its merchandising and sales
policy, the Equipment and use its best efforts to stimulate and increase
interest in IDSI's Equipment. IDSI understands that some existing and some new
customers may request competitors' products. Distributor will use its best
efforts to sell, market and distribute the IDSI Equipment to such customers.
Distributor will give IDSI the opportunity to assist with these accounts.
(f) Customer Requirements. With a view to maximizing the potential
market for the Equipment within the Territory, Distributor will report to IDSI
on a quarterly basis, and assist IDSI in the assessment of the needs and
requirements of the potential customer base in the Territory with respect to the
Equipment, including, but not limited to: (i) a rolling twelve-month quantity
forecast, (ii) quality of the Equipment, (iii) design, functional capability and
additional features of the Equipment and related modifications, improvements and
enhancements, and (iv) general market conditions of the Territory.
(g) Co-marketing Protection. Distributor will maintain confidentiality
of IDSI supplied prospective customers and not conduct any direct efforts to
persuade such clients toward competitive equipment or services.
(h) Purchase Orders. Distributor shall forward all orders promptly to
IDSI. The orders shall state clearly the name of the purchaser, the quantity
purchased, and the time and place of delivery.
(i) Delivery. Distributor shall give IDSI at least 180 days prior
written notice before each shipment is required.
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<PAGE>
(j) Expenses and Taxes. Distributor is an independent contractor, and
as such shall pay all expenses, including compensation of salesmen, rentals,
travel, and all taxes, including assessments, which may be made against the
salary or wages of those directly employed by Distributor.
(k) Relationship of Parties. Except as set forth herein, Distributor
shall have no right or authority to create any obligation on the part of IDSI or
bind IDSI to any agreement.
(1) Offices. Distributor shall maintain a suitable office in TO BE
APPROVED BY IDSI with a telephone and facsimile line suitable for use for the
sale of the Equipment. The office shall contain a suitable display area where
the Equipment shall be prominently displayed at all times. This display area or
another area shall be suitable for and used for the demonstration of and
training in the use of, the Equipment. The office shall be staffed from 9:00
a.m. to 5:00 p.m., Monday through Friday, subject to recognized national
holidays.
5. PERFORMANCE STANDARDS. If the following performance standards (the "Minimum
Performance Standards") are not met, IDSI will notify Distributor, in writing,
that it is in default of this Agreement. If Distributor does not cure the
deficiency within 30 days from receipt of the notice, IDSI, at its sole option,
may: (i) continue this Agreement on a nonexclusive basis; (ii) continue this
Agreement on a nonexclusive basis and limit the Territory; or (iii) terminate
this Agreement. Any such action taken by IDSI shall be without prejudice to the
rights of the parties with respect to Equipment already ordered, sold or
delivered:
_______________ Purchase from IDSI of at least $___________ worth of Equipment.
_______________ Purchase from IDSI of at least $___________ worth of Equipment
________________Purchase from IDSI of at least $___________ worth of Equipment
________________Purchase from IDSI of at least $___________ worth of Equipment
________________Purchase from IDSI of at least $___________ worth of Equipment
________________Purchase from IDSI of at least $___________ worth of Equipment
6. PURCHASE OF EQUIPMENT.
(a) Orders. Orders from Distributor for equipment shall be made by
delivery of a purchase order to IDSI. As soon as practicable after receipt of
such purchase order, IDSI will: (i) if such order is accepted, return to
Distributor IDSI's standard form of Sales Acknowledgment (the "Acknowledgment")
setting forth dates on which delivery will be made, or (ii) notify Distributor
in writing that such order is rejected. IDSI will use its best efforts to make
prompt delivery of the Equipment accepted by IDSI on the delivery dates
specified in the Acknowledgment, F.O.B. Fort Lauderdale, at the time and to the
entities and destinations listed in the purchase orders. IDSI shall not be
liable for any failure to deliver, if such failure has been occasioned by fire,
embargo, strike, failure to secure materials from a usual source of supply, or
any circumstance beyond IDSI's control, which shall prevent IDSI from making
deliveries in the normal course of its business. IDSI shall not, however, be
relieved from making delivery when the causes interfering with deliveries shall
have been removed. In particular, the Parties acknowledge that IDSI is reliant
on outside suppliers, which supply the components for its Equipment. Should
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<PAGE>
these suppliers fail to produce the required components in a timely manner, than
IDSI shall be excused from the delivery obligations under this Agreement until
such time as the components can be manufactured, delivered and installed in the
Equipment. In no event shall IDSI be responsible for any loss or liability
suffered by Distributor as a result of delay in delivery of any order.
(b) Cancellation of Orders. Distributor may cancel any order (or any
part thereof) for Equipment by giving IDSI written notice of such cancellation
at least 15 days prior to the shipping date. If Distributor cancels an order for
Equipment (or any part thereof), Distributor will be subject to a charge based
upon the purchase price relating to the Equipment so affected as set forth on
Exhibit B attached hereto. In the event of such cancellation, Distributor will
have no rights in partially completed goods.
(c) Rescheduling Orders. Distributor may at any time, upon not less
than thirty (30) days written notice to IDSI, reschedule and/or postpone the
delivery date relating to an order (or any part thereof) for up to thirty (30)
days. The postponement of delivery to a date more than thirty (30) days from the
delivery date specified in the initial order shall be deemed a cancellation of
such order. DISTRIBUTOR MAY NOT POSTPONE THE DELIVERY DATE MORE THAN ONCE WITH
RESPECT TO ANY ORDER. If Distributor cancels a previously rescheduled delivery
of Equipment, the applicable cancellation charges shall be based on the delivery
date specified in the initial order submitted by Distributor for such delivery.
7. PRICE.
(a) Purchase Price. The purchase price for the Equipment to be sold
hereunder shall initially be as set forth on IDSI's Price List attached hereto
as Exhibit A, which may be discounted based on the cumulative quantities of such
Equipment purchased by Distributor during the term hereof or any Additional
Term. Discounts shall not apply retroactively to prior purchases of Equipment.
IDSI shall have the sole right to set the price and other terms of the sales of
the Equipment. IDSI, at its sole discretion, reserves the right to change
prices, materials used, Equipment line and the components of the Equipment. IDSI
will provide reasonable notice of any price or other changes to Distributor as
to not disrupt the sales and distribution of the Equipment. IDSI reserves the
right to amend Exhibit A with respect to any Additional Term.
(b) Price Changes. IDSI may change the prices to be charged for
Equipment sold hereunder by amending its published Price List and giving
Distributor thirty (30) days prior notice. All orders received and accepted by
IDSI prior to the effective date of the price increase for shipment within
thirty (30) days of such effective date will be billed at the prices in effect
at the time of acceptance of the order; provided, however, that if Distributor
notifies IDSI in writing prior to the effective date of such price increase that
it quoted the original price in an outstanding bid submitted prior to receipt of
IDSI's amended Price Lists, any order relating to such bid accepted by IDSI
prior to the effective date of such price increase for shipment within ninety
(90) days of such effective date will be billed at the prices in effect at the
time of acceptance. All other shipments after thirty (30) days (or ninety days,
if applicable) of such effective date shall be billed at the prices set forth in
the amended Price List.
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<PAGE>
(c) Payment. All payments hereunder shall be in United States dollars
and shall be effected by means of confirmed, irrevocable letters of credit on a
Florida bank established, upon execution of this Agreement, to IDSI's
satisfaction. All exchange, interest, banking, collection and other charges
shall be the sole expense of the Distributor. Distributor shall have the option
to wire transfer funds in advance of shipment to IDSI as follows:
First Union National Bank of Florida, Jacksonville, Florida
Account of Imaging Diagnostic Systems, Inc.
Account Number 2090000
ABA Number 063000021
Shipment will be made upon either receipt of the letter of credit
approved by IDSI or confirmation that a wire transfer has been received.
8. TERMS AND CONDITIONS OF SALE. This Agreement and all sales of Equipment
hereunder by IDSI to Distributor shall be subject to IDSI's standard terms and
conditions of sale as set forth on the applicable Acknowledgment. A copy of
IDSI's current Standard Terms and Conditions of Sale is attached hereto as
Exhibit D and incorporated herein. To the extent that IDSI's standard terms and
conditions are inconsistent with express provisions of this Agreement, the
provisions of this Agreement shall prevail. Distributor agrees that although it
may use its standard forms for others or other notices hereunder, said standard
forms will be governed by the terms and conditions of this Agreement and any
applicable Acknowledgment shall have no force and effect. Distributor agrees to
place the following legend on its standard forms submitted to IDSI hereunder:
"NOTWITHSTANDING ANY OTHER TERMS AND CONDITIONS APPEARING HEREON, THIS PURCHASE
SHALL BE GOVERNED BY THE TERMS AND CONDITIONS OF SALE SET FORTH IN THE IDSI
DISTRIBUTION AGREEMENT."
9. PRODUCT WARRANTY.
(a) Distributor Warranty. The sole warranties provided by IDSI to
Distributor with respect to the Equipment are those contained in IDSI's Standard
Terms and Conditions. Notwithstanding the foregoing, with respect to Equipment
for which IDSI is not the original manufacturer, the sole warranties provided by
IDSI to Distributor shall be equivalent to the sole warranties provided by the
original manufacturer to IDSI (current original manufacturer warranties and the
Equipment to which they pertain are set forth on Exhibit A).
IDSI DISCLAIMS ALL OTHER WARRANTIES, WARRANTS OF TITLE, MERCHANTABILITY, AND
FITNESS FOR A PARTICULAR PURPOSE AND AGAINST INFRINGEMENT UPON THE RIGHTFUL
CLAIM OF ANY THIRD PERSON. IDSI DISCLAIMS LIABILITY FOR ALL CONSEQUENTIAL
DAMAGES IN ANY FORM, EVEN THOUGH IDSI MAY HAVE BEEN ADVISED OR MAY OTHERWISE
KNOW OF THE POSSIBILITY OF SUCH DAMAGES.
6
<PAGE>
Nothing contained in this warranty shall make IDSI liable beyond the express
limitations of this warranty for loss or damage to the business of Distributor,
including any claims as to breach of contract, lost receipts or profits,
business interruptions or other tangible business loss.
(b) End-User Warranty. Distributor is hereby authorized, subject to the
succeeding sentence, to offer the warranties set forth in Section 9(a) to
customers to whom it sells the Equipment, and IDSI agrees to honor such
warranties. Distributor acknowledges and agrees that the warranty period set
forth in the Acknowledgment commences, with respect to both Distributor and its
customers, on the date of delivery to Distributor and not the date of any
subsequent delivery by Distributor to its customers. In no event however shall
the warranty period exceed fifteen thirteen (13) months. In the event that the
Distributor extends or otherwise represents to a customer that the warranties
are more extensive or encompassing than those set forth herein, the Distributor
shall indemnify IDSI for any warranty claims made by a customer based on
Distributor's representations.
10. SUBLICENSES.
(a) Programs Sublicense. Distributor is authorized to grant
restrictive, nonexclusive, nontransferable sublicenses to customers to use the
Programs (as defined in the Acknowledgment) or any portion thereof, provided
that each such Customer (sublicensee) enters into an agreement with Distributor
pursuant to which the sublicensee expressly accepts and agrees to the terms and
conditions of the license set forth in the Acknowledgment. In addition to any
other remedy IDSI may have, IDSI reserves the right to terminate any
sublicensee's sublicense if said sublicensee fails to comply with any term or
condition of any such sublicense. Any sublicense granted by Distributor to a
sublicense hereunder shall also terminate and such sublicense shall cease to use
and return the Programs.
(b) Proprietary Technical Materials Sublicense. Distributor is
authorized to grant restrictive, nonexclusive, nontransferable sublicenses to
customers to use the Proprietary Technical Materials or any portion thereof,
provided that each such customer (sublicensee) enters into an agreement with
Distributor pursuant to which the sublicensee expressly accepts and agrees to
the terms and conditions of the license set forth in the Acknowledgment. In
addition to any other remedy IDSI may have, IDSI reserves the right to terminate
any sublicensee's sublicense if said sublicensee fails to comply with any term
or condition of any such sublicense. Any sublicense granted by Distributor to a
sublicense hereunder shall also terminate and such sublicense shall cease to use
and return the Proprietary Technical Materials.
11. MAINTENANCE.
(a) Distributor's Obligation to Provide Service. Distributor agrees
that IDSI shall have no obligation to maintain the Equipment except for the
warranty obligations specified in Section 9. Distributor acknowledges and agrees
that it will perform, at no expense to IDSI, maintenance and repair of Equipment
sold or leased to the Distributors customers. IDSI will agree to supply Emtron
with all necessary parts for a period of five (5) years after the equipment of
the warranty.
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(b) Consignment of Spares Parts. IDSI may, at its sole discretion,
consign to Distributor, from time to time, as it may deem necessary, spare parts
to support warranty repair service in Distributor's Territory. The title to such
parts shall at all times remain with IDSI and Distributor shall have no right,
title or interest therein until such time as payment is made to IDSI as set
forth below. In the event that such parts used for non-warranty repair service,
Distributor will purchase the part used or to be used for non-warranty repair
services at prices listed in Exhibit A, as may be amended from time to time.
Distributor will provide IDSI with a monthly report, not later than 15 days
after the first day of each month, which will indicate the Customers name,
address and phone number, the work performed, the parts used and whether the
repair was under warranty. The report shall also include a total dollar amount
for parts used for non-warranty repair and be accompanied by a check for full
payment therefor.
12. TERMINATION.
(a) Either party may, by written notice to the other party, terminate
this Agreement upon the occurrence of any one or more of the following events:
(i) Upon the failure of the other party to pay any monies when
due hereunder, if such default continues for five (5) business days or more
after written notice to the defaulting party;
(ii) Upon material failure of a party to observe, keep or
perform any of the covenants, terms or conditions herein, if such default
continues for twenty (20) business days or more after written notice to the
defaulting party;
(iii) In the event: (A) a party makes a general assignment for
the benefit of creditors or transfers all or a substantial portion of its
assets; (B) a receiver is appointed and not discharged within 30 days of
appointment, or (C) the other party has become insolvent.
(b) IDSI may, by written notice to Distributor, terminate this
Agreement upon occurrence of any one more of the following events:
(i) In the event that Distributor solicits orders for
Equipment outside its Territory;
(ii) In the event of any dispute, disagreement or controversy
between or among the owners, partners, managers, officers or stockholders of
Distributor which in the opinion of IDSI adversely affects the ownership,
operation, management, business or interests of Distributor, or in the event of
a change in control or majority ownership of Distributor;
(iii) If Distributor ceases to function as a going concern or
to conduct its operations in the normal course of business, or
(iv) If Distributor fails to meet the Minimum Performance
Standards set forth in Section 5, IDSI shall have the right, upon 30 days
written notice to the Distributor, to terminate this Agreement. Distributor
shall have the right to cure the deficiency within such 30-day period.
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If Distributor does not cure the Deficiency within such 30-day period, IDSI may
terminate this Agreement on the 30th day.
(v) Upon 180 days prior written notice.
(c) Upon termination or expiration of this Agreement, for any reason
Distributor shall discontinue the use of IDSI's name, trademarks, trade names,
labels, copyrights, and other advertising media and shall remove all signs and
displays relating thereto: and will no longer identify itself as a distributor
of IDSI or indicate, in any way, that it is associated with IDSI. Distributor
shall promptly return to IDSI all marketing and selling materials, all manuals,
all technical data, all other documents and copies thereof previously supplied
by IDSI and all spare parts consigned to Distributor by IDSI.
(d) Upon termination or expiration of this Agreement, for any reason,
IDSI shall have the option to repurchase its Equipment and spare parts then in
possession of the Distributor, at prices originally billed to the Distributor if
the Equipment and spare parts are new and at an adjusted price if the Equipment
is used, and with deductions for money due or to become due to IDSI under this
Agreement. As to any of the IDSI's Equipment or spare parts not repurchased by
IDSI, Distributor shall have the right to dispose of them in the regular course
of its business and for this purpose only, the restrictions of preceding sub
paragraph shall be deferred until three months after the termination of this
Agreement.
(e) It is expressly understood and agreed that the rights of
termination as provided in this Agreement are absolute and that both parties
hereto have considered the costs and expenditures associated with the
preparation and performance of this Agreement and the possible losses and
damages which may be incurred by both parties in the event of its termination.
The parties hereto acknowledge and agree, by execution hereof that they have
entered into this Agreement with full knowledge of such possibilities, and
except as provided herein neither party hereto shall be responsible to the other
for compensation, damages, losses, or otherwise, for termination of this
Agreement as set forth above.
13. TRADEMARKS: MARKINGS.
(a) Trademarks and Names. Distributor is hereby granted permission to
use during the term of this Agreement, and any renewal hereof, the trademarks
and trade names used by IDSI in connection with the Equipment. Such permission
is expressly limited to uses by Distributor necessary to performance of
Distributor's obligations under this Agreement, and Distributor hereby admits
and recognizes IDSI's exclusive ownership of such marks and names and the renown
of IDSI's marks and names, both worldwide and specifically in the Territory.
Distributor agrees not to take any action, inconsistent with such ownership and
further agrees to take any action, including without limitation the conduct of
legal proceedings, which IDSI deems necessary to establish and preserve IDSI's
exclusive rights in and to its trademarks and trade names. Reproductions of
IDSI'S trademarks, logos, symbols, etc. shall be true reproductions and shall be
done photographically, in a manner which enhances the reputation and status of
IDSI.
9
<PAGE>
(b) Markings. Distributor will not remove or make or permit any
alterations in any labels or other identifying markings placed by IDSI on any of
the Equipment without written consent by IDSI.
(c) No Additional Rights. No rights to manufacture, alter, or use the
Equipment for purposes other than those contained herein are granted by this
Agreement. Moreover, no licenses are granted or implied by this Agreement under
any patents owned or controlled by IDSI or under which IDSI has a right, except
the right to sell, market and distribute IDSI's Equipment, as contemplated
herein, during the term of this Agreement.
14. INDEMNIFICATION. Distributor shall indemnify and hold harmless IDSI, its
officers, directors, employees, or agents (collectively referred to in this
Section 14 as "IDSI") for damages or expenses resulting from any claim, suit or
proceeding brought against IDSI, with regard to any untrue statement or alleged
untrue statement, misrepresentation or alleged misrepresentations, promise or
agreements made or allegedly made by Distributor or its subdistributors or
arising from the marketing, sale or distribution of the Product by Distributor
or its sub-distributors. This provision shall not apply to Distributor or any
person controlling Distributor in respect of any losses, claims, damages,
liabilities or actions arising out of or based upon any untrue statement or
alleged untrue statement, misrepresentation or alleged misrepresentations,
promise or agreement made or allegedly made by Distributor or arising from the
marketing, sale or distribution of the Product by Distributor, if such untrue
statement or alleged untrue statement, misrepresentation or alleged
misrepresentations, promise or agreement was made in reliance upon information
furnished in writing to Distributor by IDSI specifically for use in connection
with the sale, marketing or distribution of the Equipment. IDSI agrees that
Distributor has the right to defend, or at its option to settle, and Distributor
agrees, at its own expense, to defend or at its option to settle, any claim,
suit or proceeding brought against IDSI. Distributor agrees to pay any costs of
litigation, investigation or defense incurred by IDSI, including reasonable
attorney fees, and final judgement, entered against IDSI on such issue in any
such suit or proceeding. Distributor shall be relieved of the foregoing
obligations unless IDSI notifies Distributor in writing, within fifteen days of
receipt of notification of such suit, claim or proceeding, and gives Distributor
authority to proceed as contemplated herein.
15. RISK OF LOSS. Title to the Equipment shipped shall pass upon shipping,
subject to full payment. Distributor assumes the risk of loss and damage of the
Equipment in transit from IDSI's shipping point to the point of destination.
16. COMPLIANCE WITH LAWS. Distributor shall comply with all material applicable
present and future federal, state, county, local and foreign laws, ordinances
and regulations relating to the importation and sale of the Equipment.
Distributor will take all steps necessary to obtain the proper import licenses,
if applicable and Distributor shall be solely responsible for any excise tax,
duties or other costs for the importation of the Equipment.
17. NON-CIRCUMVENTION AGREEMENT. The respective Parties involved in this
Agreement, agree not to circumvent each other. The Parties agree that they will
not make any contact, directly or indirectly, written, oral, electronic or by
any medium of contact whatsoever, with any Sources without the express written
consent of the other introducing Party. Each of the listed Parties hereto,
10
<PAGE>
accepts and understands that any overt or covert action of circumvention, or
unauthorized disclosure shall constitute a breach of trust and shall be
considered a breach of the terms and conditions of this agreement. Such action
shall be subject to judicial action, and recompense.
If either Party shall bring an action to recover payment or other compensation
pursuant to the terms of this Agreement, the prevailing Party shall be entitled
to reasonable attorney's fees and expenses as may be awarded, including legal
fees and costs, and recovery for liquidated damages and punitive damages as may
be awarded by and through any legal process or jurisdiction.
For the purposes of this Section 17, the term "Party" or "Parties" shall be
considered to include and be binding upon the parties to this Agreement, any
individual, entity or entities, including but not limited to, associates,
partners, assigns, spouses, employees, agents, principals, clients,
corporations, companies, subsidiaries, divisions, affiliated, associations,
collateral providers or the like, which the Parties hereto may now or in the
future be associated with during the term of this Agreement and any renewal
thereof.
For the purposes of this Section 17, the term "Sources" shall be considered to
include any business opportunity, principal, individual, entity or entities,
including but not limited to, customers and distributors, their associates,
partners, assigns, spouses, employees, agents, principals, clients,
corporations, companies, subsidiaries, divisions, affiliated partnerships,
associations or the like, introduced to or brought to the attention of a Party
to the other Party during the term of this Agreement or any renewal thereof.
Distributor acknowledges and agrees that no separate or additional payment will
be required to be made to it in consideration of its undertakings in this
Section 17.
18. NO COPYING. Without the prior written consent of IDSI, Distributor shall
refrain from copying, reverse engineering, disassembling, translating or
modifying the Equipment for its benefit, or granting any other person or entity
the right to do so.
19. NOTICES. Any notice required or permitted by this Agreement shall be in
writing and shall be delivered by U.S. Certified Mail, return receipt requested,
or by special messenger service with receipt (such as Federal Express), by
facsimile delivery or by hand, to the parties at the following addresses or such
substitute person or address of which notice is given in like manner:
Imaging Diagnostics Systems, Inc.
6531 NW 18 Court
Plantation, Florida 33313
Phone 1.954.581.9800
Fax 1.954.581.0555
11
<PAGE>
Distributor
Emtron
Bebek Yolu Sokegi 27/3 Etiler
80630 Istanbul Turkey
Phone: (212) 257 1787
Fax: (212) 257 1787
or to such other address as either of them, by notice to the other may designate
from time to time. The transmission confirmation receipt from the sender's
facsimile machine shall be conclusive evidence of successful facsimile delivery.
Time shall be counted to, or from, as the case may be, the delivery in person or
by mailing.
20. GOVERNING LAW. VENUE AND ARBITRATION. This Agreement shall be deemed to be
executed in the State of Florida and governed by the laws of the State of
Florida. Any controversy or claim arising out of or relating to this Agreement
or to the interpretation, breach or enforcement thereof, except a claim for
injunctive relief, shall be submitted to an arbitrator and settled by
arbitration in Broward County, Florida, in accordance with the rules then
obtaining of the American Arbitration Association. Any award made by the
arbitrator shall be final, binding and conclusive on all parties hereto for all
purposes, and judgement may be entered thereon in any court having jurisdiction
thereof. Nothing contained herein shall serve to prohibit the parties from
seeking injunctive relief in a court of competent jurisdiction.
21. GENERAL.
(a) Independent Contractor. Distributor will act as an independent
contractor under the terms of this Agreement and not an agent or legal
representative of IDSI for any purpose, whatsoever, and, except for the
extension of the warranty set forth in Section 9, Distributor has no right or
authority to assume or create any obligation of any kind, express or implied, on
behalf of IDSI to Distributor's customers or to any other person.
(b) Limitation. Nothing in this Agreement shall be construed to
preclude IDSI from selling or leasing or otherwise marketing any Equipment
directly to any other customer, or through other distribution channels, either
inside or outside the Territory.
(c) Product Changes. IDSI reserves the right to make design and other
modifications in the Equipment at any time but shall not be obligated to
implement such modifications in Equipment that has previously been delivered.
(d) Confidential Information. Distributor agrees not to disclose to any
person outside of its employ, and not to use for any purpose other than to
fulfill its obligations under this Agreement, any information which is disclosed
to Distributor by IDSI and which is not otherwise publicly available.
Distributor agrees to take all preventative measures and precautions to guard
against and prevent any use or disclosure of such confidential information by
its partners, employees, agents, or other persons consistent with the intent of
this paragraph. Distributor further agrees not to disclose to IDSI any
information, which Distributor deems to be confidential, and it is understood
that any information received by IDSI will not be of a confidential nature.
12
<PAGE>
(e) Waiver and Amendment. Any party shall not construe the waiver by
any party to this Agreement of a breach of any provision hereof by any other
party as a waiver of any subsequent breach. The failure by either party at any
time to enforce the provisions of this Agreement, or to exercise any election or
option provided herein, shall in no way be construed as a waiver of such
provisions or options, nor in any way to affect the validity of this Agreement
or any part thereof, or the right of either party thereafter to enforce each and
every such provision. No provision of this Agreement may be terminated, amended,
supplemented, waived or modified other than by an instrument in writing signed
by the party against whom the enforcement of the termination, amendment,
supplement, waiver or modification is sought.
(f) No Other Warranty or Representation. Distributor hereby
acknowledges that it has not entered into this Agreement in reliance upon any
warranty or representation by any person or entity except for the warranties or
representations specifically set forth herein.
(g) Language. This Agreement is in the English language only, which
language shall be controlling in all respects, and all versions hereof in any
other language shall be for accommodation only and shall not be binding upon the
parties hereto. All communications and materials made or given pursuant to this
Agreement, including without limitation any operations and maintenance manuals,
shall be in the English language. IDSI shall have no obligations or liabilities
to Distributor or any other person for loss of profits, loss of use or
incidental, special or consequential damages, even if IDSI has been advised of
the possibility thereof, arising out of or in connection with the translation
from English into any other language of any materials made or given pursuant to
this Agreement, including without limitation any operations and maintenance
manuals.
(h) Licenses and Permits. IDSI will use its best efforts to secure all
export licenses and permits required by the United States government, and
Distributor will secure all import licenses and permits required in connection
with the importation, marketing, sale and distribution of the Equipment. Each
party will furnish any information and assistance reasonably required by the
other party in connection with securing any such licenses and permits.
(i) Import/Export Controls. IDSI's obligations hereunder shall be at
all times subject to the export administration and control laws and regulations
of the United States Government, and any amendments thereof and the import
administration and control laws and regulations of the Territory, and any
amendments thereof. Distributor shall provide IDSI with any written assurances
it may reasonably request with respect to Distributor's compliance with such
laws or regulations. Distributor agrees that, with respect to the import, resale
or any other disposition of Equipment and any printed commercial and technical
data and information supplied by IDSI, Distributor will comply fully with the
import/export administration and control laws and regulations of the United
States of America and the Territory, and any amendments of such laws and
regulations.
(j) Compliance with Laws. IDSI represents that, with respect to the
production of Equipment to be furnished hereunder, IDSI will fully comply with
all applicable laws of the United States and the State of Florida. Distributor
represents that, with respect to the purchase, marketing, sale and distribution
13
<PAGE>
of the Equipment furnished hereunder, Distributor will comply with all
applicable laws of the Territory.
(k) Entire Agreement. This Agreement constitutes the entire agreement
and understanding between the parties concerning the subject matter hereof and
supersedes all prior agreements, negotiations and understandings of the parties
with respect thereto. No representation, promise, modification or amendments
shall be binding upon either party as a warranty or otherwise, unless in writing
and signed on behalf of each party by a duly authorized representative. Although
Distributor may use its standard purchase order form to give any order or other
notice provided for hereunder, said order or notice will be governed by the
terms and conditions of this Agreement any applicable Acknowledgment, and any
term or condition set forth in any such standard form which is inconsistent with
or in addition to the terms and conditions of this Agreement and any applicable
Acknowledgment shall have no force or effort.
(l) Attorney's Fees. In the event any action is commenced with regard
to this Agreement, the prevailing party shall be entitled to reasonable
attorney's fees, costs and expenses.
(m) Severability Clause. In the event any parts of this Agreement are
found to be void, the remaining provisions of this Agreement shall nevertheless
be binding with the same effect as though the void parts were deleted.
(n) Successors. Subject to the provisions of this Agreement, this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns.
(o) Section and Paragraph Headings. The section and paragraph headings
in this Agreement are for reference purposes only and shall not affect the
meaning or interpretation of this Agreement.
(p) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument. The execution of this
Agreement may be by actual or facsimile signature, provided however that
original signatures must be provided within ten days from the date of signing.
(q) Further Assurances. The Parties hereto agree to execute and deliver
from time to time at the other Party's request, without further consideration,
such additional documents and to take such other action necessary to consummate
the transactions contemplated herein.
(r) Assignment. This Agreement may be assigned by IDSI. Distributor
will not be permitted to assign this Agreement.
.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year set forth below.
Dated: January 20th , 1998
14
<PAGE>
In the presence of: Imaging Diagnostic Systems, Inc.
______________________________ BY: _______________________________
Linda Grable, President
Dated: January 21st_, 1998
In the presence of:
______________________________ BY: _______________________________
Dr. Mehmet Melek, President
15
<PAGE>
Exhibit A
Computed Tomography Laser device = $250,000
16
<PAGE>
Exhibit B
Territory The Republic of Turkey
17
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