SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended: March 31, 1999
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _____to______
Commission file number: 0-26028
IMAGING DIAGNOSTIC SYSTEMS, INC.
----------------------------------------------
(Name of small business issuer in its charter)
Florida 22-2671269
- ------------------------ -------------------------
(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 March 31, 1999: 43,908,209 shares of Common Stock, no par value; and, 390
shares of Series B, 38 shares of Series G, 103 shares of Series H Preferred
Convertible Stock, no par value and 138 shares of Series I Preferred Convertible
Stock, no par value.
================================================================================
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Developmental Stage Company)
<TABLE>
<CAPTION>
Part I - Financial Information Page
- ------------------------------ ----
Condensed Balance Sheet -
<S> <C>
March 31, 1999 and June 30, 1998....................................... 3
Condensed Statement of Operations - Three months and nine months ended
March 31, 1999 and 1998, and December 10,
1993 (date of inception) to March 31, 1999.............................. 4
Condensed Statement of Cash Flows - Nine months ended March 31, 1999 and
1998, and December 10, 1993 (date of inception) to March 31,
1999................................................................... 5
Statement of Stockholders' Equity
Nine months ended March 31, 1999....................................... 6
Notes to Condensed Financial Statements...................................... 7
Financial Condition and Results.............................................. 8
Part II - Other Information
Item 1. Legal Proceedings................................................. 12
Item 2. Changes in Securities............................................. 12
Item 3. Defaults Upon Senior Securities................................... 13
Item 4. Submission of Matters to a Vote of
Security Holders ............................................ 13
Item 5. Other Information................................................. 14
Item 6. Exhibits and Reports on Form 8-K.................................. 27
Signature ................................................................... 28
</TABLE>
<PAGE>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
Condensed Balance Sheet
Assets
<TABLE>
<CAPTION>
March 31, 1999 June 30, 1998
-------------- -------------
(Unaudited) *Audited
<S> <C> <C>
Current Assets
Cash $ 127,555 $ 310,116
Inventory 3,685,939 3,214,045
Prepaid expenses 23,724 33,539
Other current assets 19,000 -
------------ ------------
Total Current Assets 3,856,218 3,557,700
------------ ------------
Property and Equipment, net 2,863,791 2,920,980
Other Assets 587,080 688,463
------------ ------------
Total Assets $ 7,307,089 $ 7,167,143
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable
and Accrued Expenses $ 1,444,259 $ 880,478
Accrued Dividends Payable 540,241 483,288
Shareholder Loans 2,112,103 285,407
Current maturity of capital
lease obligation 10,351 9,715
Other Current Liabilities 1,900,233 2,155,978
------------ ------------
Total Current Liabilities 6,007,187 3,814,866
------------ ------------
Long-term capital lease obligation 18,289 26,134
------------ ------------
Redeemable Convertible Preferred Stock
(Series G) 477,117 -
Stockholders' Equity
Convertible Preferred
(Series B) 7% cum. Div. 4,500,000 4,500,000
Convertible Preferred (Series D) - 290,000
Convertible Preferred (Series E) - 240,000
Convertible Preferred (Series H) 1,030,000 1,080,000
Common Stock 25,756,842 23,983,073
Additional Paid-In-Capital 1,932,968 1,884,846
Deficit Accumulated during
development stage (32,023,396) (27,336,655)
------------ ------------
1,196,414 4,641,264
Less subscription receivable (14,309) (14,309)
Less deferred compensation (377,609) (1,300,812)
------------ ------------
Total Stockholders' Equity 804,496 3,326,143
------------ ------------
Total Liabilities and
Stockholders' Equity $ 7,307,089 $ 7,167,143
============ ============
</TABLE>
3
<PAGE>
* Condensed from audited financial statements
The accompanying notes are an integral part
of these condensed financial statements
4
<PAGE>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
(Unaudited)
Condensed Statement of Operations
<TABLE>
<CAPTION>
9 Months Ended 3 Months Ended Since Inception
March 31, March 31, (12/10/93) to
1999 1998 1999 1998 March 31, 1999
----------------------- -------------------- --------------
(Restated) (Restated)
Compensation and related benefits:
<S> <C> <C> <C> <C> <C>
Administrative/Engineering $1,005,848 $1,220,987 $363,426 $410,792 $7,481,086
Research and development 643,085 288,177 232,355 124,822 2,388,174
Research/Development expenses 76,779 367,581 2,808 57,181 2,995,673
Advertising/Promotion 33,761 319,280 2,183 24,811 907,602
Selling/General/Administrative 501,338 653,109 150,476 159,413 1,803,476
Clinical expenses 14,901 7,096 1,108 2,444 375,576
Consulting expenses 79,687 808,091 4,000 323,294 3,016,271
Insurance costs 121,376 129,790 38,588 37,678 450,167
Professional fees 245,635 423,499 (60,563) 83,524 1,597,469
Stockholder expenses 7,889 74,348 7,889 861 104,399
Trade show expenses 100,208 134,802 17,358 35,799 605,666
Travel and subsistence costs 74,059 74,146 12,869 18,740 531,218
Rent expense 27,066 16,320 7,058 (5,303) 273,783
Interest expense 268,555 2,126 121,533 2,126 351,896
Depreciation and amortization 170,619 208,120 56,873 69,373 846,481
Amortization of
deferred compensation 1,132,829 1,093,734 377,610 364,578 3,686,641
Interest Income (964) (19,245) (268) (5,494) (198,381)
----------- ----------- ----------- ----------- -------------
4,502,671 5,801,961 1,335,303 1,704,639 27,217,197
----------- ----------- ----------- ----------- -------------
Net Loss ($4,502,671) ($5,801,961) ($1,335,303) ($1,704,639) ($27,217,197)
Dividends on cumulative Pfd. Stock:
From discount at issuance (127,117) (1,389,387) (127,117) (501,216) (4,201,726)
Earned (56,953) (236,433) - (77,639) (604,473)
----------- ----------- ----------- ----------- -------------
Net loss applicable to common
shareholders ($4,686,741) ($7,427,781) ($1,462,420) ($2,283,494) ($32,023,396)
=========== =========== =========== =========== ============
Net loss per common share:
Basic:
Net loss per common share ($.13) ($.28) ($.04) ($.08) ($1.33)
===== ===== ===== ===== ======
Weighted avg. no. of common shares 38,604,361 26,447,340 39,595,946 28,764,621 24,168,028
=========== =========== =========== =========== ============
Diluted:
Net loss per common share ($.13) ($.28) ($.04) ($.08) ($1.33)
====== ====== ====== ====== =======
Weighted avg. no. of common shares 38,604,361 26,447,340 39,595,946 28,764,621 24,168,028
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements
5
<PAGE>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
Condensed Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Since inception
Ended March 31, (12/10/93) to
1999 1998 March 31, 1999
------------------------- --------------
(Restated)
<S> <C> <C> <C>
Cash provided by (used for)
Operations:
Net loss $(4,502,671) $(5,801,961) $(27,217,197)
Changes in assets and liabilities 2,172,729 2,792,652 13,640,223
----------- ----------- ------------
Net cash provided by operations (2,329,942) (3,009,309) (13,576,974)
----------- ----------- ------------
Investments
Capital expenditures (113,430) (1,278,388) (6,573,455)
----------- ----------- ------------
Cash used for investments (113,430) (1,278,388) (6,573,455)
----------- ----------- ------------
Cash flows from financing activities:
Repayment of capital lease obligation (7,209) (6,625) (21,649)
Other financing activities 1,840,056 360,407 2,125,463
Proceeds from issuance of preferred stock 345,000 3,850,000 13,004,500
Net proceeds from issuance of common stock 82,964 127,582 5,169,670
----------- ----------- ------------
Net cash provided by financing activities 2,260,811 4,331,364 20,277,984
----------- ----------- ------------
Net increase in cash (182,561) 43,667 127,555
Cash, beginning of period 310,116 383,223 -
----------- ----------- ------------
Cash, end of period $127,555 $426,890 $127,555
----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements
6
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockholders' Equity
Nine Months Ended March 31, 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------------- ------------------------ Additional
Number of Number of Paid-In
Shares Amount Shares Amount Capital
---------- ---------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1998 611 $ 6,110,000 36,493,544 $ 23,983,073 $ 1,884,846
------ ----------- ---------- ------------ -----------
Conversion of preferred stock to common stock (58) (580,000) 1,267,245 741,503 (161,503)
Common stock sold 200,000 60,000
Common stock issued in exchange for services 671,300 334,280
Common stock issued for compensation 130,200 79,422
Common stock issued with exercise of stock options 65,612 124,464
Stock issued as payment on accrued liquidated damages 424,242 140,000
Stock issued in satisfaction of debt 286,000 65,000
Stock issued in connection with loans to company 490,000 229,100
Issuance of Series G Redeemable Preferred Stock
Dividends accrued on preferred stock not yet converted
Stock options granted 209,625
Amortization of deferred compensation
Net loss
------ ----------- ---------- ------------ -----------
Balance at March 31, 1999 553 $ 5,530,000 40,028,143 $ 25,756,842 $ 1,932,968
====== =========== ========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
----------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Balance at July 1, 1998 $ (27,336,655) $ (14,309) $ (1,300,812) $ 3,326,143
------------- --------- ------------ -----------
Conversion of preferred stock to common stock
Common stock sold 60,000
Common stock issued in exchange for services 334,280
Common stock issued for compensation 79,422
Common stock issued with exercise of stock options 124,464
Stock issued as payment on accrued liquidated damages 140,000
Stock issued in satisfaction of debt 65,000
Stock issued in connection with loans to company 229,100
Issuance of Series G Redeemable Preferred Stock (127,117) (127,117)
Dividends accrued on preferred stock not yet converted (56,953) (56,953)
Stock options granted (209,625) -
Amortization of deferred compensation 1,132,828 1,132,828
Net loss (4,502,671) (4,502,671)
------------- --------- ------------ -----------
Balance at March 31, 1999 $ (32,023,396) $ (14,309) $ (377,609) $ 804,496
============= ========= ============ ===========
</TABLE>
7
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The financial information included herein has been condensed from financial
statements prepared March 31, 1999. The results of operations for the nine-month
period ended March 31, 1999 is not necessarily indicative of the results to be
expected for the full year.
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 and/or equity financing. The Company
has yet to generate an internal cash flow, and until the sales of its product
begin, the Company is totally dependent upon debt and equity funding. See Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
In the event that the Company is unable to obtain debt or equity financing or is
unable to obtain such financing on terms and conditions acceptable to the
Company, the Company may have to cease or severely curtail its operations. This
would materially impact 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 if and when Federal 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.
8
<PAGE>
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS AND EVENTS COULD
DIFFER MATERIALLY FROM THOSE PROJECTED AS A RESULT OF THE RISKS AND
UNCERTAINTIES SET FORTH UNDER THE CAPTION "CAUTIONARY STATEMENTS REGARDING
FORWARD-LOOKING STATEMENTS", IN THE COMPANY'S FORM 10-KSB, AS AMENDED, FOR THE
YEAR ENDED JUNE 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 applicable to common shareholders since
inception through March 31, 1999 of approximately $32,023,396 after discounts
and dividends on preferred stock. The Company anticipates that losses 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 CTLM(TM), the costs associated with the clinical trials
and other research and development activities. There can be no assurances that
the CTLM(TM) will achieve market acceptance or that sufficient revenues will be
generated from sales of the CTLM(TM) to allow the Company to operate profitably.
RESULTS OF OPERATIONS
General and administrative expenses during the three months and nine months
ended March 31, 1999, were $150,476 and $501,338, respectively, representing a
decrease of $8,937 and $151,771 for the corresponding periods for 1998. The
decreases during the respective periods ending March 31, 1999 were primarily due
to a decrease in administrative costs associated with the development of the
CTLM(TM) breast-imaging device.
Compensation and related benefits during the three months and nine months ended
March 31, 1999, were $595,781 and $1,648,933 respectively, representing an
increase of $60,167 and $139,769 for the corresponding periods for 1998. These
increases were primarily due to the recording of one-time expenses in March 1997
for compensation related to deferred Stock Appreciation Rights (SAR's) for stock
options and the recording of the one-time expenses related to the issuance of
bonus stock to the officers.
Research and development expenses during the three months and nine months ended
March 31, 1999, were $2,808 and $76,779, respectively, representing a decrease
of $54,373 and $290,802 for the corresponding periods for 1998. These decreases
are due primarily to finalizing certain components of the CTLM(TM) device.
Advertising and promotion expenses during the three months and nine months ended
March 31, 1999, were $2,183 and $33,761 representing a decrease of $22,628 and
$285,519 for the corresponding periods for 1998. The decreases are due primarily
to the reduction of advertising in domestic and foreign medical imaging and
medical device publications, and the elimination of public relations and
investor public relations expenses.
Consulting expenses during the three months and nine months ended March 31,
1999, were $4,000 and $79,687 representing a decrease of $319,294 and $728,404
for the corresponding periods for 1998. The decrease is due primarily to the
reduced use of outside consultants needed for special non-recurring projects
required prior to placing CTLM(TM) units into clinical trials.
9
<PAGE>
Clinical expenses during the three months and nine months ended March 31, 1999,
were $1,108 and $14,901 representing a decrease of $1,336 and $7,805 for the
corresponding periods for 1998. The decreases are due primarily to no clinical
trials were conducted in the third quarter. The 20 patient study was completed
in the second quarter.
Insurance costs during the three months and nine months ended March 31, 1999,
were $38,588 and $121,376 representing an increase of $910 and a decrease of
$8,414 for the corresponding periods for 1998. The increase is due primarily to
additional premiums for Workers' Comp., Health Insurance, and Property and
Casualty Insurance.
Professional expenses during the three months and nine months ended March 31,
1999, were $(60,563) and $234,697 representing a decrease of $155,025 and
$188,802 for the corresponding periods for 1998. The decrease in professional
fees is a result of the reversing of the accrued expenses related to the
potential legal fees associated with the litigation that was settled effective
April 6, 1999. These amounts had been originally accrued pursuant to FASB
Statement 5. See Item 1. Legal Proceedings.
Stockholder expenses during the three months and nine months ended March 31,
1999, were $7,889 and $7,889 representing an increase of $7,028 and a decrease
of $66,459 for the corresponding periods for 1998. The increase for the three
months ended March 31, 1999 is due to the cost of printing and mailing an
Information Statement to shareholders. The decrease for the nine months ended
March 31, 1999 is due to the postponement of preparing, printing and mailing the
Company's 1998 Annual Report and Proxy Statement.
Tradeshow expenses during the three months and nine months ended March 31, 1999
were $17,358 and $100,208 representing a decrease of $18,441 and a decrease of
$34,594 for the corresponding periods for 1998. The nine-month decrease is due
to no changes or modifications were required to the Company's exhibit for the
1997 Radiological Society of North America's Scientific Assembly and Annual
Meeting in Chicago, IL.
Travel and subsistence costs during the three months and nine months ended March
31, 1999 were $12,869 and $74,059 representing a decrease of $5,871 and $87 for
the corresponding periods for 1998. The decrease was primarily due to reduced
travel and housing expenses for consultants.
Rent expense during the three months and nine months ended March 31, 1999, were
$7,058 and $27,066 representing an increase of $12,361 and $10,746 for the
corresponding periods for 1998. This increase was primarily due to the cost of
renting a high-speed oscilloscope.
Interest expense during the three months and nine months ended March 31, 1999
was $121,533 and $268,555 representing an increase of $119,407 and $266,429 for
the corresponding periods for 1998. The increase is due primarily to recording
the loans that the company has entered into since July 1, 1998. The Company had
an increase of $39,095 during the nine months ended March 31, 1999 compared to
the nine months ended March 31, 1998 in the amortization of deferred
compensation. The increase was a result of the issuance of stock options to the
officers of the Company during July 1998. The $18,281 decrease in interest
income during the same comparative periods was a result of the overall decrease
in cash that was invested by the company on a daily basis.
Dividends on cumulative preferred stock from discount at issuance decreased
$1,262,270 during the nine months ended March 31, 1999, as compared to the nine
months ended March 31, 1998. The decrease was a result of the Company completing
only one preferred stock issuance during this nine-month period, compared with
four issuances during the prior nine-month period. The dividends earned on the
cumulative preferred stock for the nine months ended March 31, 1999 decreases
$179,480 when compared with the nine months ended March 31, 1998, as the Company
discontinued accruing the dividends to the Series B Holders when they received
the notice of conversion from the Series B Holders. The net loss per common
share allocated to the dividends during the three months and nine months ended
March 31, 1999 was $.003 and $.005 respectively. The Company has the option to
pay the dividends in common stock.
10
<PAGE>
BALANCE SHEET DATA
The Company's combined cash and cash equivalents totaled $127,555 as of March
31, 1999. This is a decrease of $182,561 from $310,116 for the year ended June
30, 1998. On March 17, 1999 Imaging Diagnostic Systems, Inc. finalized a private
placement transaction resulting in $350,000 in equity financing respectively. On
March 10, and 31, 1999 the Company received an advance, in the aggregate, of
$195,000 from the Convertible Debenture, which was finalized on April 6, 1999.
See Item 5, Other Information, Private Placements, and Convertible Debenture.
The Company does not expect to generate a positive internal cash flow for at
least the next twelve (12) months due to the expected increase in spending for
research and development, the costs associated with the clinical trials and the
expected costs of commercializing its initial product, the CTLM(TM) device.
Property and Equipment was valued at $2,863,791 as of March 31, 1998. The
overall gross decrease of $57,189 is due primarily to depreciation recorded for
the third quarter.
LIQUIDITY AND CAPITAL RESOURCES
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 and/or equity financing. The Company
has yet to generate an internal cash flow, and until the sale of its product
begins, the Company is totally dependent upon debt and equity funding. In the
event that the Company is unable to obtain debt or equity financing or is unable
to obtain such financing on terms and conditions acceptable to the Company, the
Company may have to cease or severely curtail its operations. This would
materially impact the Company's ability to continue as a going concern.
The Company has financed its operating and research and development activities
through several Regulation S and Regulation D private placement transactions.
Net cash used for operating and research and development expenses during the
third quarter ending March 31, 1999 was $943,361 primarily due to the Company's
continued research and development of the CTLM(TM) device and preparations for
FDA Clinical Trials including the manufacture of five (5) CTLM(TM) Breast
Imaging Systems, compared to net cash used by operating activities of research
and development of the CTLM(TM) device and related software development of
$736,395 in the same quarter ending March 31, 1998. At March 31, 1999, the
Company had a working capital of ($2,151,208) compared to a working capital of
$(1,223,761) at March 31, 1998.
On May 28, 1998, the Company announced that it had entered into an irrevocable
agreement with a consortium of prominent banking institutions, which will invest
up to $15 million in the Company over the next three years. The Company
estimates that $2.3 million will be required to complete FDA clinical trials
through PMA submission and to ramp-up for the manufacture of the CTLM(TM)
device. Statements made in the May 28th announcement are no longer accurate
because the Company was unable to draw on the equity credit line. Due to the
unavailability of the principals of the investors, the workload of the
investors' attorney and the time and effort spent by the Company in filing the
Information Statement and Registration Statement, the formal Equity Line of
Credit Agreement was delayed. During this time the price of the Company's stock
declined from $.54 on May 27, 1998 to $.26 on August 27, 1998. As a result of
the stock price decline, the Company could not utilize the Equity Line because
the stock price was below the minimum price at which the banking institutions
are required to purchase the Company's equity securities. Moreover, due to the
stock price decline, the Company had to increase its number of authorized shares
in order to have shares available for the conversion of the Series B and other
preferred shares. The increase in shares required an information statement
filing with the Securities and Exchange Commission. Since the Company already
had a commitment for the equity line of credit and could not utilize the equity
line due to the stock price decline and the need for additional shares, the
Company centered its time, efforts and resources on the Information Statement
and Registration Statement and the Equity Agreement was not finalized until
November 20, 1998. Although the equity line of credit is in place, the Company
is unable to utilize it at the present time due to; (i) the price of the
Company's Common Stock is now trading below the $.50 required closing price;
(ii) the Company and the investors will have to amend the agreement to provide
for a draw down and issuance of the Common Stock pursuant to Regulation D and
then registration of the shares; or (iii) the Company will have to file a shelf
registration, if the such registration is available to the Company at the time
it intends to use the equity line of credit.
11
<PAGE>
During the third quarter ending March 31, 1999, the Company was able to raise a
total of $350,000 less expenses through Regulation D private placements. On
April 6, 1999, the Company finalized a Convertible Debenture in the amount of
$1,100,000. See Section 5, Private Placements, Convertible Debentures. The
Company may continue to receive working capital from the exercise of stock
options, private placements and long-term debt and operations. If the Company's
working capital were insufficient to fund its operations, it would have to
explore additional sources of financing. No assurances can be given that future
financing would be available or if available, that it could be obtained at terms
satisfactory to the Company. The Company has already granted a mortgage on its
corporate property as security for the convertible debenture and therefore, in
all likelihood, would be unable to use such property to collateralize any
additional financing. The Company's ability to effectuate its plan of and
continue operations is dependent on its ability to raise capital, structure a
profitable business, and generate revenues.
Capital expenditures for the third quarter ending March 31, 1999 were
approximately $53,682 as compared to approximately $690,677 for the third
quarter ending March 31, 1998. These expenditures were a direct result of
purchases of computer and other equipment, office, warehouse and manufacturing
fixtures, tradeshow equipment, computer software, laboratory equipment, and
other fixed assets. The Company anticipates that the balance of its capital
needs for the fiscal year ending June 30, 1999 will be approximately $60,000.
In October 1998, the Company sold one unit, consisting of a $100,000 promissory
note and 80,000 shares of common stock, to Avalon Capital, Inc., an unaffiliated
third party, pursuant to Regulation D for an aggregate purchase price of
$100,000. The Note bears interest at the rate of 12% per annum. The note, which
was originally due November 2, 1998, was extended twice, became due on January
15, 1999, and remains unpaid to date. The Company has not received a notice of
default in connection with the Note. The Note is personally guaranteed by Linda
B. Grable, the Company's President. Pursuant to the terms of the Note the
principal and interest is payable in cash, however the Company may try to
negotiate repayment in common stock. The Company intends to repay the note
either from the Debenture or other equity and/or debt financing or by the
issuance of additional securities.
In September 1998, the Company sold one unit, consisting of a $250,000
promissory note and 200,000 shares of common stock, to Settondown Capital
International, Ltd., an unaffiliated third party, pursuant to Regulation D, for
an aggregate purchase price of $250,000. The Note bears interest at the rate of
12% per annum. The Note is personally guaranteed by Linda B. Grable, the
Company's President. The repayment of the Note, which was originally due on
October 2, 1998 was extended twice, became due on January 15, 1999, and remains
unpaid to date. The Company has not received a notice of default in connection
with this Note. Pursuant to the terms of the Note the principal and interest is
payable in cash, however the Company may try to negotiate repayment in common
stock. The Company intends to repay the note either from the Debenture or other
equity and/or debt financing or by the issuance of additional securities.
During the nine months ending March 31, 1999 there were no changes in the
Company's existing debt agreements and the Company had no outstanding bank loans
as of March 31, 1998. 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
12
<PAGE>
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 draw upon the second and third tranche of the
Convertible Debenture and, if necessary, to secure additional funding through
the private placement sale of debt or equity securities.
The Company entered into an agreement with The Hawke Group to provide financial
public relations from October 15, 1997 to April 15, 1998. As part of their
financial public relations engagement, The Hawke Group requested pro-forma
projections for their Stock Highlights page. The Company furnished estimated
revenues and pre-tax income in October 1997. The projections were based on
statistics published in Diagnostic Imaging, an imaging trade journal, and the
Company's estimate of the number of CTLM(TM) Systems that could be sold. In
October 1997, the Company believed it could capture 30 units representing $7.5
million of the worldwide mammography market of $400 million in the first year.
The domestic market represented a mammography market of $150 million. In the
second and third year, the Company estimated that it could sell 75 and 186
foreign units and 135 and 300 domestic units, respectively. The Company believed
it could achieve these projections because of the delivery of the laser
components from Spectra-Physics in October 1997, which would enable it to resume
clinical investigational trials and build a clinical atlas of case studies. The
Company's Pacific Rim distributor representing thirteen Asian countries had
stated that they were willing to purchase ten CTLM(TM) Systems immediately once
the Company could provide a CD-ROM of clinical cases. The Company also had
specific indications of interest for an additional twenty CTLM(TM) Systems which
were to be sold in the Pacific Rim once the initial atlas was updated to include
clinical data collected from the first ten Pacific Rim CTLM(TM) Systems. The
purchase of the ten CTLM(TM) Systems and the indications of interest for the
addition twenty CTLM(TM) Systems has been recently reconfirmed by the Pacific
Rim distributor. Although FDA export approval is required for any exportation of
the CTLM(TM), FDA marketing clearance is not required for sales outside the
United States. The Company has not yet applied for FDA export approval for any
country. Concurrent with the foreign sales, the Company believed it would have
at least three clinical investigational sites in the United States providing the
data required for Pre-Market Approval (PMA) from the FDA. Over the next few
years, industry predictions are that mammography sales will increase due to
replacement of older systems. The third year after the introduction of a new
medical imaging device usually creates a demand as imaging centers and hospitals
feel that they will lose market share if they cannot provide the new technology
to their patients. New technology generates new business as experienced with
MRI. A forward-looking disclaimer was included directly below the projections.
In February 1999, the Company, in an interview with the Miami Herald affirmed
the basic projections qualifying them by stating that the results were
anticipated for the fiscal year ending June 30, 2000. On the following pages is
a comparison of the Hawke Projections and the February 1999 Projections.
13
<PAGE>
<TABLE>
<S> <C>
Hawke Projections February 1999 Projections
- ----------------- -------------------------
Fiscal Year 6-30-98 Fiscal Year 6-30-00
30 foreign units at approximately $250,000 30 foreign units at approximately $250,000
per unit per unit
no domestic no domestic
estimated revenue $7.5mm estimated revenue $7.5mm
pre-tax income ($4mm) pre-tax income ($4mm)
Fiscal Year 6-30-99 Fiscal Year 6-30-01
- ------------------- -------------------
75 foreign units at approximately $250,000 75 foreign units at approximately $250,000
per unit per unit
135 domestic units at approximately $350,000 35 domestic units at approximately
per unit $350,000 per unit
estimated revenue $65.9mm estimated revenue $65.9mm
pre-tax income $32mm pre-tax income $32mm
Fiscal Year 6-30-00 Fiscal Year 6-30-02
- ------------------- -------------------
186 foreign units at approximately $250,000 186 foreign units at approximately $250,000
per unit $350,000 per unit
300 domestic units at approximately $350,000 300 domestic units at approximately
per unit $350,000 per unit
estimated revenue $151.5mm estimated revenue $151.5mm
pre-tax income $85.9mm pre-tax income $85.9mm.
</TABLE>
Due to the delay in the commencement of the Nassau County clinical
investigational trials, the Company is unable to determine when it anticipates
FDA marketing approval clearance or will be able to begin foreign distribution,
since the Company has deferred foreign distribution of the CTLM(TM) until such
time as it has collected enough clinical data to compile an atlas of CTLM(TM)
images. The delay in the commencement of the Nassau County investigational
trials has made the February 1999 revenue projections unattainable and the
Company is presently unable to determine when it will begin to generate revenue.
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 1,806,500 shares of common stock pursuant to Registration
Statements on Form S-8. The aggregate fair market value of the shares was
$2,327,151. 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.
The Company is currently seeking additional capital to fund its future
operations through private debt or equity financing, 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.
14
<PAGE>
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. The Company believes that Dr. Kamalov appropriated propriety
information of the Company and used Company time and resources to develop
technology, which he removed from the Company for his own personal use after
terminating his employment. In order to obtain and keep in place a temporary
injunction that prohibited from using the technology and the propriety
information, the Company had to post two bonds for an aggregate of $100,000. The
technical aspects of the case were very complicated and the Court lifted the
restraining order. The Company appealed and lost. Dr. Kamalov threatened to file
a counterclaim. Due to the substantial legal expenses incurred and to be
incurred by the Company in proceeding with the litigation, the possible addition
of a counterclaim and the complicated technical aspects of the case, the
Company's litigation counsel recommended that the Company settle the matter. The
Company entered into a settlement in December 1998. Pursuant to the settlement,
the Defendants retained $90,000 of the $100,000 bond and the remainder was
returned to the Company.
On October 7, 1998 a lawsuit was filed against the Company in the United States
District Court, Southern District of New York, by the Series B Holders (Case No.
98 Civ. 086). The Company was served on October 19, 1998. The lawsuit alleges
that the Company breached its contract of sale to the Series B Holders by, among
other this failing to convert the Series B Preferred Stock and failure to
register the common stock underlying the Preferred. In April 1999, the Series B
Preferred Stock was purchased from the Series B Holders by an unaffiliated third
party, Charlton Avenue LLC ("Charlton"). On April 6, 1999, the Company entered
into a Subscription Agreement with Charlton whereby the Company agreed to issue
to Charlton 138 shares of its Series I, 7% Convertible Preferred Stock. The
Company's Board of Directors established the value of the Series I Preferred at
$10,000 per share. Consideration for the subscription was paid as follows:
(1) Forgiveness of all of the interest due and payable in
connection with the Series B convertible preferred stock
(approximately $725,795).
(2) Settlement and dismissal, with prejudice, of all litigation
concerning the Series B convertible preferred stock.
(3) Cancellation of 112,500 Warrants that were issued with the
Series B Convertible Preferred Stock; and
(4) The amendment of the Series B Preferred designation to impose
a limitation on the owner(s) of the Series B Convertible
Preferred Stock to ownership of not more than 4.99% of the
Company's outstanding common stock at any one time.
The Company is not aware of any other material legal proceedings, pending or
contemplated, to which the Company is, or would be, a party or of which any of
its property is, or would be, the subject.
ITEM 2. CHANGES IN SECURITIES.
In March 1999, the Board of Directors amended the Articles of Incorporation of
the Company in order to designate a class of shares as Series G Convertible
Preferred. The Series C 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. See Item 5 "Other Information -
Private Placements".
15
<PAGE>
In April 1999, the Board of Directors amended the Articles of Incorporation of
the Company in order to designate a class of shares as Series I Convertible
Preferred. The Series I 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. See Item 5 "Other Information -
Private Placements".
In April 1999, the Board of Directors and the Series B Preferred Shareholders
amended the Certificate of Designation of the Series B Preferred to provide for
a conversion limitation of 4.99% or less. See Item 5 "Other Information -
Private Placements".
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
The Company has not submitted any matters to a vote of Security Holders. As of
the 3rd day of December 1998, Austost Anstalt Schaan, Avalon Capital Ltd.,
Balmore Funds S.A., Steven Cohen, Canadian Capital Fund Ltd., Dominion Capital
Funds, Ltd. Linda B. Grable, Richard J. Grable, Deborah O'Brien, The Malcolm
Kanan Empire Trust and Allan L. Schwartz, (collectively "the Majority Common
Shareholders"), and Goodland International Investment Ltd., Weyburn Overseas
Limited, Austost Anstalt Schaan and Balmore Funds S.A (collectively "the
Majority Preferred Shareholders authorized by written action, the Company's
adoption of an amendment, in the form of Exhibit A hereto (the "Amendment"), to
the Company's Certificate of Incorporation, as amended, to increase the
authorized common stock, no par value per share ("Common Stock"), of the Company
from 48,000,000 shares to 100,000,000 shares (the "Written Action"). Taking into
account such provisions, the Majority Common Shareholders and the Majority
Preferred Shareholders (collectively, "the Majority Shareholders") were entitled
to and voted the number of shares set forth opposite their names:
<TABLE>
<CAPTION>
% OF COMMON % OF SHARES
# OF COMMON SHARES # OF PREFERRED PREFERRED
NAME SHARES OUTSTANDING (1) SHARES OUTSTANDING (2)
- ---- ------ --------------- ------ ---------------
<S> <C> <C> <C> <C>
Austost Anstalt Schaan (4) 342,533 .9% 50 8.96%
Avalon Capital Ltd. 673,401 1.7%
Balmore Funds S.A. (5) 342,533 .9% 50 8.96%
Steve Cohen 396,700 1.0%
Canadian Capital Fund Ltd. 636,379 1.65%
Dominion Capital Funds Ltd. 1,334,996 3.5%
Goodland International
Investment Ltd. (3) 315 56.45%
Linda B. Grable 3,497,800 9.1%
Richard J. Grable 7,995,040 20.8%
Deborah O'Brien 287,000 .75%
Allan L. Schwartz 3,579,980 9.3%
The Malcolm Kanan Empire Trust 1,200,000 3.1%
Weyburn Overseas Limited (2) 135 24.19%
TOTAL 20,328,462 52.8% 550 98.56%
</TABLE>
- ----------
1. This column sets forth the percentage of the total number of common shares
outstanding as of December 3, 1998 (38,510,399 shares), the date the final
written action was executed and presented to the Company's Board of
Directors. As of May 14, 1999, there are 41,736,766 shares of common stock
outstanding.
2. This column set forth the percentage of the total number of Preferred
Shares outstanding as of December 3, 1998 (558 Shares)
3. Everest Capital Limited, is the investment manager for Weyburn Overseas
Limited and Goodland International Investments, Ltd. Mr. John Malloy is the
Managing Director of Everest Capital Limited, a British Virgin Island
corporation.
16
<PAGE>
4. Thomas Hackl and Peter Nakowitz are the Directors of and have voting
control over Austost Anstalt Schaan, a British Virgin Island corporation.
5. Francois Morax and Matityahu Kaniel are the Directors of and have voting
control over Balmore Funds S.A., a Liechtenstein corporation.
Pursuant to Section 607.0704 Florida Statutes, any action to be taken at an
annual or special meeting of shareholders may be taken without a meeting,
without prior notice and without a vote if the action is taken by a majority of
the holders of outstanding stock of each voting group entitled to vote. In
addition the voting rights provided to the common stock holders, the
Certificates of Designation of the Series B, D, E, and H Preferred Stock (the
"Certificates"), provide that, in the event there are insufficient shares to
effect a conversion, the Company is required to increase the number of
authorized shares to effect such conversion. Preferred Holders, pursuant to the
Certificates, are granted voting right, and voted solely for the purpose of
increasing the number of authorized shares to accommodate the conversion of
their preferred shares into common shares. Due to the decrease in the Company's
stock price, the Company did not have an adequate number of common shares
authorized to meet its contractual obligations with regard to the conversion of
the Preferred Stock. In addition, the Amendment will insure that there are a
sufficient number of shares of Common Stock available for issuance upon exercise
of outstanding stock options and warrants and enhance the ability of the Company
to attract and retain qualified employees, consultants, officers and directors
by enabling the Company to create stock option, incentives and rewards for their
contributions to the success of the Company. Moreover, until such time as the
Company is able to generate revenues, it is dependent on equity or other
financing to continue operations. 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 issuance of large amounts of common stock upon conversion of the preferred
and the subsequent sale of such shares may further 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. As of May 17, 1999, there are
43,908,209 shares outstanding. Based on the closing price of the Company's
common stock as of as of May 14, 1999 ($0.53) 8,973,769 shares would be required
to convert the Series B shares, 955,975 shares would be required to convert the
Series G shares, 2,591,195 shares would be required to convert the Series H
shares, 3,471,698 would be required to convert the Series I shares, 2,767,296
shares would be required to convert the Debenture and, although the Company is
contractually prohibited from doing so 35,377,358 shares would be required to
draw down the entire Equity Line of Credit. See ", "Sale of Unregistered
Securities-Private Placement of Preferred Stock", and "Sale of Unregistered
Securities-Debentures". In addition, 4,570,871 shares would be required for the
exercise of options and warrants, and 3,500,000 shares are required to be issued
to Mr. Grable in July 1999 pursuant to the Patent Licensing Agreement. Based
upon the foregoing, as of May 14, 1999, the Company would need in excess of 105
million authorized shares to effectuate all conversion, utilize the total Equity
Line of Credit and fulfill its remaining stock related obligations.
On January 28, 1999, the Company filed a Definitive Information Statement with
the Securities and Exchange Commission (the "Commission") with regard to the
Written Action. The Written Action became effective on February 18, 1999.
ITEM 5. OTHER INFORMATION
BACKGROUND
During the first year of operations, the Company researched the interaction
between high speed, rapid pulsed (Ti-Sapphire) laser technology and various
detection technologies associated with standard computed tomographic ("CT")
schemes. This research was based upon a prototype that was developed by Richard
Grable, the Company's Chief Executive Officer, prior to his association with the
Company. During June of 1995, Mr. Grable filed a patent for his prototype, which
was able to create images of a breast. The Company refined various software and
hardware configurations and components of the device based on these first
images, and filed a total of twelve ancillary United States patents from 1996.
The Company intends to file an additional patent application within the next six
17
<PAGE>
months. During this period of time, there were further advances in laser
technology effecting the size and stability of the laser component. The Company
incorporated these changes by purchasing a laser package manufactured by
Spectra-Physics, Inc.
In November 1995, the Company began discussions with Strax Breast Diagnostic
Institute ("Strax") to conduct clinical trials at their facility. The original
CTLM(TM) prototype used an Argon pump laser, which required a 6-ton water
chiller. The landlord of the Strax office building was unwilling to allow the
Company to install this chiller on the roof because of its weight and its
potential to leak water. In December 1995, the Company learned of a new type of
pump laser using diodes being developed by Spectra Physics Lasers. This new
laser was powered by a standard 110-volt outlet and only required a small
portable chiller to cool the crystal. Rather than continuing to develop the
CTLM(TM) with a laser that required massive cooling, the Company decided to wait
for delivery of the first Solid State Diode Pump laser package from
Spectra-Physics. The lasers were delivered on January 24, 1996. Because it was
the first of its kind, many modifications had to be made by Spectra-Physics
field engineers to the lasers before it would operate to specification. The
Company immediately began re-engineering the CTLM(TM) to integrate this new
laser into its system.
After extensive testing of the laser system, the Company proceeded to design and
build two pre-production CTLM(TM) scanners, one of which would be installed at
Strax. In addition to the change in lasers, modifications were made in both the
detection scheme and software.
On December 12, 1995, the Company had a preliminary meeting with the Food and
Drug Administration to discuss generally the approach the Company would take to
obtain marketing clearance for its CTLMTM device. The Company was advised that
it would need to submit and have approved a pre-market approval application
("PMA") in order to obtain marketing clearance for the device. Further, the
Company was advised that it would also need to submit an investigational device
exemption ("IDE") application to the FDA in order to commence human clinical
trials of the device.
The Company submitted its IDE application on January 8, 1996, and it was
approved February 9, 1996. During calendar year 1996, among other matters, the
Company further refined the detection scheme and laser power configuration in
order to obtain substantially better image quality. In order to incorporate the
changes, the Company was required to submit to the FDA an amendment to its IDE
application. During the month of November 1996, the Company installed its device
at the Strax Breast Diagnostic Center. Pursuant to the IDE, as amended, the
Company was authorized to scan 50 patients at the Strax Breast Diagnostic Center
in Lauderhill, Florida, and 20 additional patients at its in-house facility. The
CTLM(TM) device was installed at Strax and 3 patients were scanned. After
scanning the three patients at Strax, the Company learned of a different type of
laser, which could be used in conjunction with the new Solid State Diode Pump
laser package from Spectra-Physics. The Company believed that this additional
laser component would greatly increase the performance and image quality of the
CTLM(TM) device. The Company halted the clinical investigational trials at Strax
in December 1996 and planned to resume the study after the second system
modification. Strax, a not-for-profit corporation, requested a donation of
$5,000, to be used to purchase needed medical equipment for the institute, which
the Company paid on December 31, 1996. Because of the extensive re-engineering
and design, and the delay in receiving the new laser components to be integrated
into the system, the Company was unable to complete and test the new system in a
timely manner. In fact, the first of these new components were not received
until October 1997. Strax was unwilling to wait until the modifications were
completed unless it received compensation for the CTLM(TM) remaining on its
premises. In November 1997, Strax requested that the CTLM(TM) be removed from
its premises. The CTLM(TM) was removed from Strax in November 1997. On May 20,
1998, the Company's termination of the IDE protocol and its final report was
accepted by the FDA.
In February 1996, the Company entered into a letter of intent with an
independent distributor to place a CTLM(TM) device at the Moscow Research
Institute for Diagnostics. The letter of intent is still in place however, due
to the further advances in laser technology the purchase of the new laser
system, the modification and redesign of the CTLM(TM) hardware and software the
actual placement has been delayed.
18
<PAGE>
In February 1997, the Company announced today that the Institutional Review
Board of Columbia JFK Medical Center located in Atlantis, Florida, approved its
request to participate in the first phase of the clinical trials, The Company's
liaison person and proposed principal investigator was Dr. Donna M. Gallagher.
After Dr. Gallagher relocated, the Company did not pursue further involvement at
the hospital.
The Company was granted, in June 1998, its second investigational device
exemption ("IDE") to conduct clinical trials. An IDE allows a company to conduct
human clinical trials without filing an application for marketing clearance. The
Company was authorized to scan 20 patients at the Company's in-house facilities
in Plantation, Florida and upon FDA approval, at three additional clinical
sites. On September 1 and September 10, 1998, the Company formally submitted the
first and second series of the 20 patient in-vivo (human) images and
corresponding interpretation data to the FDA.
The FDA responded to the submission on October 1998 asking that the Company
limit future submissions to significant findings, milestones, annual reports, or
changes that may effect the safety of the CTLM(TM). In all the Company scanned
20 women at its in-house facility. These scans produced no significant findings,
milestones or changes that would effect the safety of the CTLM(TM) so there were
no additional submissions except for the request to expand the study to the
Nassau County Medical Center.
The Company requested that it be permitted to expand the scope of the study to
include a medical facility where access to women with breast cancer is more
practical. Nassau County Medical Center was chosen because of the unusually high
incidence of breast cancer in the population they serve. It is reported that 1
woman in 7 will experience breast cancer if they live in this geographic area.
The significant number of breast surgeries performed each week at Nassau County
was expected to provide a relatively constant supply of histologically confirmed
cases.
The FDA approved expanding the IDE clinical testing to Nassau County. Because of
the limited experience acquired from the 20-patient in-house study, the Company
elected to establish the Nassau County clinical site and begin testing before
expanding the next series of clinical tests to additional locations.
On January 14, 1999, the Company received notice that the IDE application to
extend the in-vivo study to Nassau County Medical Center was conditionally
approved. The Company immediately supplied the additional documentation required
by the FDA and the conditions were complied with. This IDE application is
limited to one institution (Nassau County Medical Center) and 275 subjects. The
Company had originally intended to have the CTLM(TM) positioned at Nassau County
Medical Center not later than mid February 1999, however due to renovations at
Nassau County Medical Center, the delivery of the CTLM(TM) was postponed until
the renovations were complete. On March 3, 1999, the CTLM(TM) System was shipped
to Nassau County Medical Center. Due to unforeseen problems at the Nassau County
Facility, which are discussed in detail in "Nassau County Investigational
Clinical Trials", no patients have been scanned to date.
The testing is designed to develop diagnostic criteria for CTLM(TM) images. The
Company has entered into discussions with 4 hospitals, which are located in
Chicago, Boston, and New York for potential clinical test sites. Although no
firm commitments have been obtained from these hospitals, the Company believes
that it will be able to expand the clinical testing to these areas. In order to
expand its clinical trials to other sites, the expanded IDE application, which
includes Nassau County, would have to be amended by supplying the required
documentation i.e. the protocol, signed investigator agreement, IRB approvals,
and the informed consent form.
On June 12, 1997, the Company was advised by patent counsel that Mr. Grable's
patent, filed June 5, 1995, "Diagnostic Tomographic Laser Imaging Apparatus" was
granted with 4 independent and 24 subordinate claims. The independent claims
serve to provide an overall outline of the disclosure of the invention. The
subordinate claims provide additional information to identify pertinent details
of the invention as they relate to the respective specific independent claim.
19
<PAGE>
In May 1998, the Company, realizing that it had no formal written agreement in
place with Mr. Grable, immediately began negotiating with Mr. Grable for the
exclusive use of the patent. In June 1998, a written agreement was entered into.
Due to the delays in obtaining the new laser system, the delays in the
modification and redesign of the CTLM(TM) and the delay in the commencement of
the Nassau County clinical investigation trials, the Company is unable to
determine when it anticipates FDA marketing clearance. Moreover, due to these
delays, the Company is unable to determine when it will begin to generate
revenue. See "Management Discussion and Analysis of Financial Condition and
Results of Operations".
NASSAU COUNTY INVESTIGATIONAL CLINICAL TRIALS
The Company had originally intended to have the CTLM(TM) positioned at Nassau
County Medical Center not later than mid February, however due to renovations at
Nassau County Medical Center, the CTLM(TM) was shipped on March 3, 1999 and was
installed, calibrated, and ready to scan on April 19, 1999. The installation at
Nassau County Medical Center has taken considerably longer, but has been
hampered by several administrative problems within the hospital caused by
outside interference. Unknown to the Company, a prisoner at the Nassau County
jail was beaten and died on January 13, 1999. One of the Nassau County
physicians, who is one of the principal investigators chosen by Nassau County
for the CTLM(TM) clinical trials, was the surgeon in charge and, along with two
residents, subpoenaed to testify before a federal grand jury looking into the
death of Nassau jail inmate that was ruled a homicide by the Nassau County
Medical Examiner.
The investigation into the inmate's death was ongoing when another unforeseen
event occurred, a demeaning Miami Herald newspaper article appeared on February
22, 1999. The Company has outside counsel reviewing the article with respect to
the intention of the authors, the accuracy of the information, defamation, and
libel. Nassau County administrators received a copy of the article through an
unknown source within days of when the article appeared. Nassau County then
began to receive harassing and defamatory phone calls with regard to the Company
and the clinical trials. The tone of the article coupled with phone calls caused
a serious concern among the Board of Managers (the "Board") of Nassau County.
With one scandal already unfolding, the Board wanted to be sure that there would
be no problems with the CTLM(TM) clinical trials.
On March 3, 1999, Nassau County halted the installation of the CTLM(TM) until
the hospital could decide whether or not it wanted to proceed with the clinical
trials. After a meeting with the Chief Executive Officer, Medical Director and
several of the Board members of Nassau County on March 22, 1999 to discuss the
issues, on March 26, 1999, Nassau County provided the Company with the following
conditions under which the installation could continue:
1. NCMC would have a laser expert review the use of the laser for breast
imaging,
2. The Company would reimburse Nassau County for costs associated with
the project,
3. The Head of Radiology would receive print-outs of the results
immediately after each CTLM(TM) scan, and
4. No publicity.
On March 29, 1999, a letter was sent to Nassau County requesting confirmation of
the four conditions. A written reply has not been received. On March 30, 1999, a
letter was written by the Nassau County Medical Director granting IDSI access to
the examination room to complete the installation and commence the study. On
March 30, 1999, IDSI personnel arrived to continue the installation. During the
installation, it was learned that the heat load produced by the CTLM(TM) device
had not been considered by the Nassau County facilities personnel. The room
temperature rose above an acceptable operating temperature for the lasers.
Calibration of the CTLM(TM) could not be performed until the temperature problem
was resolved. On April 14, 1999, Nassau County provided a portable air
conditioning unit for the room. On April 15, 1999, IDSI personnel completed the
calibration of the CTLM.
20
<PAGE>
On April 19, 1999, the Company's applications specialist arrived to work out the
day-to-day working relationships between her and the Nassau County staff. During
these discussions it was learned that Nassau County was trying to change the
protocol of the IDE even though it had already been reviewed and approved by
both the Nassau County IRB and the FDA. The Board of Nassau County had
arbitrarily decided not to allow Company personnel access to the mammography
films and, where available, the ultrasound and/or magnetic resonance imaging
(MRI) images until after all 275 patient scans were completed.
On April 19 and 20, 1999, a letter was written to the Medical Director of Nassau
County and the two principal investigators, respectively, to discuss the new
requirements. Nassau County did not respond to either letter.
On May 5, 1999, Nassau County orally provided the Company with the following
conditions in order to begin the clinical studies:
1. No patient information, i.e., mammography, ultrasound, and/or
ultrasound films or reports would be released to the Company until all
275 patients have been scanned,
2. NCMC medical staff would select, without the Company's involvement and
knowledge of the patient's condition, all patients that are examined,
and
3. IDSI was asked to pay 6-months of testing expenses in advance.
The conditions imposed by Nassau County essentially: (i) prevented the Company
from performing any comparisons until all 275 volunteers have been scanned with
the CTLM(TM); (ii) posed a risk that the patients selected by Nassau County may
not be appropriate due to Nassau County's limited knowledge of the CTLM(TM), and
(iii) require payment in advance for 6 months of testing expenses for a three
month study. Conditions (i) and (ii) were in direct contradiction to the
previously accepted IDE protocol and oral agreements with Nassau County, and
were caused, the Company believes, as a direct result of the Miami Herald
article and tortuous acts by certain individuals.
The Company has no objection to paying reasonable and customary testing expenses
actually incurred by Nassau County, however, the Company believed that the
"blind study" proposed by Nassau County would defeat the purpose of the clinical
investigational trials since the IDE clinical trials were designed to be a
learning process, i.e. a series of studies, one building on the other. Each
study builds the knowledge base on which to better interpret the next study. A
"blind study" is used to determine the effectiveness of a device after the
interpretation criteria has been established. A "blind study" without
established interpretative criteria serves no clinical purpose. In addition, the
Company believes that the review of all 275 cases at once time instead of on a
daily or weekly basis would (i) multiply the complexity of the task; (ii) add at
least 90 days to the IDE before the Company could develop interpretive criteria;
and (iii) prevent the Company from making adjustments to the software or
hardware of the CTLM(TM) that would improve the quality of the study.
Nassau County was asked for a written confirmation of its position and an
estimate of the expenses that the Company would be required to pay at the start
of the clinical testing. As of May 20, 1999, Nassau County has not replied. To
date, over $26,000 has been spent on the Nassau County installation and the
study has been delayed by at least 90 days through no fault of the Company.
Because of the delay and the uncertainty of the Nassau County clinical
investigational trials, the Company is unable to project when the PMA will be
ready for submission. Due to these atypical delays, no patients have been
scanned to date.
The Company is presently examining the options available to it, which are:
1. Move the CTLM(TM) system to another hospital with a more friendly
environment,
2. Accept Nassau County's terms and conditions, as they are described
above, or
3. Refuse to provide CTLM(TM) images to NCMC until they provide
mammography, ultrasound, and/or ultrasound films or reports.
There could be no way that IDSI could have foreseen these delays that are
atypical for CTLM(TM) installation. Because of the circumstances surrounding
this installation, no volunteers have been scanned as of May 10, 1999.
21
<PAGE>
At present, the Company believes that the issues with Nassau County can be
resolved, however it has already entered into preliminary discussions with
several other medical facilities in the event that it has to terminate the
Nassau County site. In addition, the Company has entered into discussions with
four hospitals, which are located in Chicago, Boston, and New York for potential
clinical test sites. Although no firm commitments have been obtained from these
hospitals, the Company believes that it will be able to expand the clinical
testing to these areas. In order to move its Nassau County IDE to another site
or to expand its clinical trials to other sites, the IDE application for Nassau
County would have to be amended by supplying the required documentation i.e. the
protocol, signed investigator agreement, IRB approvals and the informed consent
form. See "Risk Factors-Government Regulation". See "Business-Regulatory and
Clinical Status-United States/FDA" and Business Government Regulations"
The Company intends to perform studies at four hospitals each of, which will
follow the IDE protocol for 275 volunteers to acquire effectiveness data on
1,100 women. Of these, 400 will be selected for actual submission. The reason
for the plan to scan 1,100 women instead of only 400 is that volunteers in these
kinds of programs for various reasons may withdraw from the study, not have a
histological confirmation of their respective condition, for example a woman
dies before her surgery, or other reason. Additionally, the Company plans to
develop an Atlas of Clinical Examples on CD-ROM for teaching purposes. With a
large number of examples of each breast condition typically encountered, the
Atlas is expected to be of greater value.
The IRB for the Nassau County Study is comprised of twenty-three members. The
IRB was already formed and was not impaneled specifically for the CTLM(TM)
investigational clinical trials. None of the members of the Nassau County IRB
are affiliated with the Company or affiliated with any officer director or
employee of the Company. The professional specialties and other information
which regard to the IRB members of the Nassau County Study is set forth in the
table below.
<TABLE>
<S> <C> <C>
------------------------------------------------------------------------------------
Professional Specialty
Highest Degree Earned General - Specific Affiliation With NCMC
------------------------------------------------------------------------------------
M.D. Neurology Yes
------------------------------------------------------------------------------------
M.D. Surgery Yes
------------------------------------------------------------------------------------
M.D. Pediatrics Yes
------------------------------------------------------------------------------------
Reverend Other Fields, Religion Yes
------------------------------------------------------------------------------------
M.D. Obstetrics & Gynecology Yes
------------------------------------------------------------------------------------
Ph.D Psychiatry; Behavioral Yes
Scientist
------------------------------------------------------------------------------------
M.D. Pathology Yes
------------------------------------------------------------------------------------
M.D., Medicine- Yes
Ph.D. Allergy/Immunology
------------------------------------------------------------------------------------
M.B. Administrator No
------------------------------------------------------------------------------------
J.D. Other Fields, Law No
------------------------------------------------------------------------------------
M.D. Psychiatry Yes
------------------------------------------------------------------------------------
M.D. Pediatrics Yes
------------------------------------------------------------------------------------
Ph.D. Obstetrics & Gynecology Yes
------------------------------------------------------------------------------------
M.D. Psychiatry Yes
------------------------------------------------------------------------------------
Ph.D. Biostatistician Yes
------------------------------------------------------------------------------------
Ph.D. Anesthesiology Yes
------------------------------------------------------------------------------------
B.S., R.Ph. Pharmacy Yes
------------------------------------------------------------------------------------
Ph.D. Medicine-Biochemistry Yes
------------------------------------------------------------------------------------
Ph.D. Pediatrics-Microbiology Yes
------------------------------------------------------------------------------------
Ph.D. Administrative Yes
------------------------------------------------------------------------------------
M.D. Director for Academic Yes
Affairs
------------------------------------------------------------------------------------
Ph.D. Pathology Yes
------------------------------------------------------------------------------------
M.D. Academic Affairs Yes
------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
PRIVATE PLACEMENTS
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. In order to obtain
working capital the Company will continue to seek capital through debt or equity
financing which may include the issuance of Convertible Preferred Stock whose
rights and preferences are superior to those of the common stock holders. The
Company will endeavor to negotiate the best transaction possible taking into
account the impact on its shareholders, dilution, loss of voting power and the
possibility of a change of control. However, in order to satisfy its working
capital needs, the Company may be forced to issue convertible securities with no
limitations on conversio. In addition, the dividends on the preferred stock
affect the net losses applicable to shareholders. There are also adjustments as
a result of the calculation of the deemed preferred stock dividends applicable
because the Company has entered into contracts providing for discounts on the
preferred stock when it is converted. As a result of the dividends on cumulative
preferred stock, the net loss per common shareholder has increased from $.05 per
share for fiscal year ending June 30, 1997 to $.07 per share for fiscal year
ending June 30, 1998. The cumulative total is $.19 per share.
Series B Preferred Stock
In December 1996, the Company sold an aggregate of 450 shares of its Series B
Convertible Preferred Stock, for an aggregate of $4,500,000, to Weyburn Overseas
Limited ("Weyburn") and Goodland International Investment Ltd. ("Goodland")
pursuant to Regulation D. At the time the placement was concluded, the average
bid and ask price of the Company's common stock was approximately $4.70 per
share. Net proceeds to the Company of $4,500.000 were used for working capital
and the continuous research, development and testing of the Company's CTLM(TM)
device. No fees were paid in connection with this offering.
The Company filed a Registration Statement of Form S-1 registering the shares
underlying the Series B Preferred. The shares were never converted and the
registration statement is no longer current. On September 4, 1998, the Company
received a notice of conversion from Weyburn and Goodland requesting the
issuance of 4,559,846 and 10,639,642 shares of common stock, respectively. The
conversion rate was 82% of the average market price over a five-day period prior
to conversion or approximately $.35014 per share. At the time the B Preferred
Shares were issued, the conversion rate would have been $3.85 per share and the
Preferred shares would have been convertible into 1,168,831 shares. The increase
in the number of shares to be issued upon conversion was due to the decline in
the market price of the Company's Common Stock. The Company has the option to
pay the accrued dividends in common stock.
On October 7, 1998 a lawsuit was filed against the Company in the United States
District Court, Southern District of New York, by the Series B Holders (Case No.
98 Civ. 086). See "Business-Legal Proceedings". On April 6, 1999, the Series B
Preferred Stock was sold by the Series B Holders to Charlton Avenue, LLC
(Charlton), an unaffiliated third party with no prior relationship to the
Company or the Series B Holders. On April 6, 1999, the Company also entered into
a Subscription Agreement with Charlton whereby the Company agreed to issue to
Charlton 138 shares of its Series I, 7% Convertible Preferred Stock. The
Company's Board of Directors established the value of the Series I Preferred at
$10,000 per share. Consideration for the subscription was paid as follows:
(1) Forgiveness of approximately of all of the accrued interest due
and payable (approximately $725,795) in connection with the
Series B convertible preferred stock.
(2) Settlement and dismissal, with prejudice, of all litigation
concerning the Series B convertible preferred stock and the
exchange of mutual releases.
(3) Cancellation of 112,500 Warrants that were issued with the Series
B Convertible Preferred Stock; and
(4) The amendment of the Series B Preferred designation to impose a
limitation on the owner(s) of the Series B Convertible Preferred
Stock to ownership of not more than 4.99% of the Company's
outstanding common stock at any one time.
23
<PAGE>
The Series B Preferred is convertible at 82% of the average bid price for the
five trading days immediately preceding conversion and pays a premium of 7% per
annum. As of the date of this Report, 60 shares of Series B Preferred Stock have
been converted into 1,931,123 shares of common stock at a conversion price of
$.379 per share. The converted shares and the shares underlying the Preferred
are being registered by the Company for resale by the Series B Holders.
Series G Preferred Stock
On March 17, 1999, the Company finalized a private placement to Amro
International, S.A., Nesher Inc., Hewlett Fund, and Guaranty & Finance Ltd. of
35 shares of its Series G Convertible Preferred Stock (the "Preferred Shares")
at a purchase price of $10,000 per share and two year Warrants to purchase
65,625 shares of the Company's Common Stock at an exercise price of $.50 per
share. The offering was conducted pursuant to Regulation D as promulgated under
the Securities Act of 1933, as amended (the "Regulation D Sale"). At the time
the placement was concluded, the average bid and ask price of the Company's
common stock was approximately $.34 per share. In connection with the Regulation
D Sale, the Company paid Settondown Capital International, Ltd., and Libra
Finance S.A., unaffiliated Investment Bankers an aggregate of 3 shares of the
Series G Preferred Stock for placement and legal fees. Net proceeds to the
Company of $350,000 will be used for working capital and the continuous
research, development and testing of the Company's Computed Tomography Laser
Mammography (CTLM(TM)) device.
The Series G Preferred has no dividend provisions. 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 (ii) the
Conversion Price (determined as hereinafter provided) in effect at the time of
conversion. The "Conversion Price" is equal to lesser of (i) seventy-five
percent (75%) discount to the two lowest bids in a ten day period immediately
preceding the conversion date; or (ii) $.54. There is no floor on the conversion
price and no time limits on conversion. The shares can be converted at any time
without additional consideration. Pursuant to the Subscription Agreement, and
Series G Designation, the Series G 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. Due to this ownership limitation, the Series G Preferred
Shares can only be converted in increments that, together with all shares of the
Company's common stock held by the Holder, would not exceed 4.99%. Pursuant to
the terms of the Registration Rights Agreement between the Company and the
Series G Holders, the Company is required to register 100% of the number of
shares that would be required to be issued if the Preferred Stock were converted
on the day before the filing of the Registration Statement. In the event that
the Registration Statement is not filed with 14 days from the closing or that it
is not declared effective with in 60 days, the Company will be required to pay
the Series G Holders, as liquidated damages for failure to have the Registration
Statement declared effective, and not as a penalty three (3%) percent of the
principal amount of the Securities for each thirty (30) day period thereafter
until the Company procures registration of the Securities. In the event that the
Registration Statement is not declared effective within 120 days, the Series G
Holders have the right to force the Company to redeem the Series G Preferred at
a redemption price of 120 % of the face value of the Preferred. Pursuant to the
Registration Rights Agreement, 100% of that number of shares that would be
required to be issued if the G Preferred Stock were converted on the day before
the filing of the Registration Statement are being registered on behalf of the
Holders.
Since the conversion price of the Series G 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 G Holders
upon conversion will increase accordingly. The lower the Average Price, the
greater the number of shares to be issued to the Holders 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.
24
<PAGE>
In the event of a voluntarily or involuntarily liquidation of the Company while
the Series G Preferred is outstanding the holders are entitled to a preference
in distribution of the Company's property available for distribution equal to
$10,000 per share.
Series I Preferred
On April 6, 1999, the Company also entered into a Subscription Agreement with
Charlton whereby the Company agreed to issue to Charlton 138 shares of its
Series I, 7% Convertible Preferred Stock. The Company's Board of Directors
established the value of the Series I Preferred at $10,000 per share.
Consideration for the subscription was paid as follows:
(1) Forgiveness of approximately $725,795 in interest due and payable
in connection with the Series B convertible preferred stock.
(2) Settlement and dismissal, with prejudice, of all litigation
concerning the Series B convertible preferred stock and the
exchange of mutual releases.
(3) Cancellation of 112,500 Warrants that were issued with the Series
B Convertible Preferred Stock; and
(4) The amendment of the Series B Preferred designation to impose a
limitation on the owner(s) of the Series B Convertible Preferred
Stock to ownership of not more than 4.99% of the Company's
outstanding common stock at any one time.
The Series I Preferred pay a 7% premium, to be paid in cash or freely trading
Common Stock in the Company's sole discretion, at the time of each conversion.
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 (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 Company's Common Stock for the five-day trading period ending on the day
prior to the date of the conversion. The shares can be converted at any time
without additional consideration. Pursuant to the Series I Designation and the
Subscription Agreement, the Series I Holder, or any subsequent holder of the
Preferred Shares, is prohibited from converting any portion of the Preferred
Stock which would result in the Holder being deemed the beneficial owner, 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. Due to this contractual ownership limitation, the Series I
Preferred Shares can only be converted in increments that, together with all
shares of the Company's common stock held by the Holder, would not exceed 4.99%.
Pursuant to the Registration Rights Agreement, 100% of that number of shares
that would be required to be issued if the I Preferred Stock were converted on
the day before the filing of the Registration Statement are being registered on
behalf of the Holders.
Since the conversion price of the Series I 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 I Holders
upon conversion will increase accordingly. The lower the Average Price, the
greater the number of shares to be issued to the Holders 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.
In the event of a voluntarily or involuntarily liquidation of the Company while
the Series I Preferred is outstanding the holders are entitled to a preference
in distribution of the Company's property available for distribution equal to
$10,000 per share.
25
<PAGE>
The offering was conducted pursuant to Regulation D as promulgated under the
Securities Act of 1933, as amended (the "Regulation D Sale"). At the time the
placement was concluded, the average bid and ask price of the Company's common
stock was approximately $.39 per share.
Convertible Debenture
The Company also entered into a Subscription Agreement with Charlton, pursuant
to which Charlton purchased a Convertible Debenture for $1,100,000. In addition,
the Company may draw down a second tranche in the amount of $825,000 anytime
thirty (30) days after the effective date of the Registration Statement as long
as the Company maintains an average closing bid price of $.45 for the ten (10)
trading days immediately prior to the date the Company requests the second
funding tranche. The Company may draw down a third tranche in the amount of
$825,000 anytime sixty (60) days after the effective date of the Registration
Statement as long as the Company maintains an average closing bid price of $.45
for the ten (10) trading days immediately prior to the date the Company requests
the third funding tranche. When concluded, assuming all the conditions set forth
above are met, the proceeds from the Debenture offering will be $2,750,000.
The Debentures pay a 7% premium, to be paid in cash or freely trading Common
Stock in the Company's sole discretion, at the time of each conversion and is
secured by mortgage on the Company's corporate office building. The Debentures
are subject to automatic conversion at the end of two years from the date of
issuance. The Mortgage will be released after the Registration Statement
covering the Common Stock underlying the Debentures has been declared effective
and upon the earlier of (a) the day the Company qualifies for listing on AMEX or
NASDAQ, as long as said listing requirements are not being met through a reverse
split of the Company's Common Stock or (b) 180 days from the date the Company
receives the third tranche, as described above.
Pursuant to the Registration Rights Agreement, 100% of that number of shares
that would be required to be issued if the Debenture were converted on the day
before the filing of the Registration Statement are being registered on behalf
of the Holders.
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 (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 Company's Common Stock for the five-day trading period ending on the day
prior to the date of the conversion. The Debenture can be converted at any time
without additional consideration. Pursuant to the Subscription Agreement, the
Debenture Holder, or any subsequent holder of the Debenture, is prohibited from
converting any portion of the Debenture 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. Due to this contractual
ownership limitation, the Debentures can only be converted in increments that,
together with all shares of the Company's common stock held by the Holder, would
not exceed 4.99%. Since the conversion price of the Series I 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
Debenture Holders upon conversion will increase accordingly. The lower the
Average Price, the greater the number of shares to be issued to the Holders 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.
In the event of a voluntarily or involuntarily liquidation of the Company while
the Debenture is outstanding the holders are entitled to a preference in
distribution of the Company's property available for distribution equal to the
Debentures then outstanding principal and interest and will be able to foreclose
against the Mortgage.
The offering was conducted pursuant to Regulation D as promulgated under the
Securities Act of 1933, as amended (the "Regulation D Sale"). At the time the
placement was concluded, the average bid and ask price of the Company's common
stock was approximately $.39 per share.
26
<PAGE>
The proceeds from the sale of the Debenture ($1,100,000) will be used for
clinical investigational trial expenses and working capital.
Certain Transactions
Richard J. Grable and. Linda B. Grable are husband and wife. Further, Richard J.
Grable and Linda B. Grable are each "Control Persons" as a result of their
control of a majority voting power of the Company's outstanding stock. Both
parties disclaim, however, any beneficial interest or ownership in the shares
owned by the other party.
In September and October 1998 Linda Grable, the Company's President, personally
guaranteed three promissory notes issued by the Company to third parties. Ms.
Grable received no compensation for these guarantees. As of the date of this
Report, one of the three Notes has been repaid.
In June 1998, the Company finalized an exclusive Patent License Agreement with
Richard Grable, the Company's Chief Executive Officer. Mr. Grable is the owner
of the Patent, which encompasses the technology for the CTLM(TM) device. The
Company and Mr. Grable has previously entered into an oral agreement for the
exclusive license for the patent that was never memorialized in written form.
The term of the license is for the life of the Patent (17 years) and any
renewals, subject to termination, under certain conditions. As consideration for
the License, the Company issued to Mr. Grable 3,500,000 shares of common stock
and is required to issue and additional 3,500,000 shares in June 1999. In
addition, the Company has agreed to pay to Mr. Grable a royalty based upon the
net selling price (the dollar amount earned from the sale by the Company, both
international and domestic, before taxes minus the cost of the goods sold and
commissions or discounts paid) of all products and goods in which the Patent is
used, before taxes and after deducting the direct cost of the product and
commissions or discounts paid. During the second year of the Agreement there is
a minimum cash royalty provision of $250,000 payable at the end of the second
year. See "Risk Factors-Possible Conflict of Interest" and "Description of
Business-Patent Licensing Agreement".
Since October 1998, the Company's has accrued $109,243 in salaries payable to
its executive officers and directors, Richard J. Grable, Allan Schwartz and.
Linda B. Grable, due to the Company's lack of working capital. These salaries
remain unpaid to date and will be paid as soon as the Company determines that
the funds are available.
In January 1999 and February 1999, Richard Grable, the Company's Chief Executive
Officer, director and founder sold an aggregate of 831,743 shares of the
Company's common stock owned by him in excess of four years, pursuant to Rule
144 and lent the aggregate proceeds of approximately $347,775 directly to the
Company.
In January 1999, February 1999 and March 1999, Linda Grable, the Company's
President, director and founder sold an aggregate of 520,000 shares of the
Company's common stock owned by her in excess of four years, pursuant to Rule
144 and lent the aggregate proceeds of approximately $166,618 directly to the
Company.
In December 1998, January 1999 and February 1999, Allan Schwartz, the Company's
Executive Vice President, director and founder sold an aggregate of 820,000
shares owned by him in excess of four years, pursuant to Rule 144 and lent the
aggregate proceeds of approximately $359,707 directly to the Company.
The loans to the Company by Messers. Grable, Schwartz, and Ms. Grable were
interest free and were evidenced by promissory notes. The December, January,
February and March promissory notes were due on January 30, 1999, February
28,1999, March 31, 1999 and April 30, 1999, respectively. The net proceeds were
recorded as a loan payable to each respective founder.
In February 1999, when the December loans were past due and the January loans
were due, the Company's Board of Director voted repay the December and January
loans by the issuance of shares and to compensate Messrs. Grable, Schwartz, and
Ms. Grable (the "Founders") for possible income tax liability and tax benefits.
27
<PAGE>
In April 1999, the repayment of the December, January loans and the repayment of
the February and March loans were revised and structured, respectively, to
provide for a share for share replacement of the shares sold, options for shares
equal to 18% of the money provided to the Company based on the 5-day average
closing price of the stock preceding the date the funds were transferred to the
Company to recover any tax ramifications, option for shares equal to 10% of the
money provided to the Company based on the 5-day average closing price of the
stock preceding the date the funds were transferred to the Company to cover the
difference in tax bracket (28% - 18%) that will occur through sale of shares not
held for 2 years, and options for shares equal to 10% of the money provided to
the Company based on the 5-day average closing price of the stock proceeding the
date the funds were transferred to the Company to as an incentive to sell the
free-trading shares.
A meeting of the Board of Directors was held on May 12, 1999 to review and act
upon the previously adopted schedule of repayment of the loans, interest, and
potential tax liability. Based on an opinion of the Founders personal outside
counsel and upon advice of a tax advisor, the Board voted to rescind the
previously adopted resolution authorized the repayment of the December, January,
February, and March promissory notes in full by the issuance of shares equal to
the number of shares sold. The restricted shares issued as repayment for the
loan bear registration rights. Since the loans are being repaid on a share for
share basis with no other consideration, the Founders have been advised that
there is no capital gain and therefore no tax liability.
In May 1999, Messrs. Grable, Schwartz, and Ms. Grable received 831,743, 820,000,
and 520,000 shares of the Company restricted common stock, respectively as
payment in full for these loans.
YEAR 2000
The Company is reviewing its existing computer systems and its CTLM(TM) software
and hardware products to ensure these systems and products are adequately able
to address the issues expected to arise in the year 2000 and thereafter. In that
regard, the Company's Board of Directors has appointed a committee to draft and
implement a Year 2000 Compliance Plan. The Company has invested, and will
continue to invest, in improving its information technology infrastructure to
ensure that such infrastructure is Year 2000 compliant. The Company's
information technology system employs Microsoft Windows NT 4.0 Network on three
file servers and fifty workstations. The Company's product (the CTLM (TM)) and
its proprietary software comprise its non-information technology that is not
date dependent.
The Company expects to implement successfully the systems and programming
changes necessary to address Year 2000 issues and has spent approximately $2,500
for third party software upgrades and Microsoft Developers Network software
(MSDN). The MSDN software allows the Company's computer programmers to update
its software to Y2K compliance by recompiling the source code. The Company
renews its subscription to MSDN annually. The Company expects such modifications
to its CTLM(TM) products and internal computer systems will be made on a timely
basis; however there can be no assurance there will not be a delay in, or
increased costs associated with, the implementation of such changes, and the
Company's inability to implement such changes could have an adverse effect on
future results of operations. The Company's Year 2000 Compliance Committee
estimates that an additional $35,000 will be spent to complete the Year 2000
Compliance Plan. The Company does not track the internal costs of its Year 2000
Compliance Plan. These costs are principally related payroll costs for its
computer-engineering group.
The Company has received the latest MSDN update from Microsoft and its software
engineers have recompiled all of the proprietary software used in the CTLM(TM).
The Company's proprietary software is now Y2K compliant. The Company is
dependent on the following software programs to conduct its business operations:
Accounting: Peachtree Complete, release 6.0
Manufacturing: Alliance Manufacturing Software, ver. 2.4a
Operating Systems: Windows NT 4.0 and Windows 95
Word Processor: Microsoft Office Professional 97
Database: Oracle7
28
<PAGE>
The Peachtree Complete, Alliance Mfg., and the Oracle7 are Year 2000 compliant.
The Microsoft Windows NT 4.0 and Windows 95 are compliant with minor issues.
Office Professional 97 is compliant. The Company believes that these software
programs are Y2K compliant however there is a risk that some or all of these
programs will have minor Y2K issues. The Company has in place a disaster
recovery plan to deal with any software or hardware failure.
The Company has begun testing its servers and workstations for Y2K compliance.
All of its computers have Intel Pentium processors. During stand-alone tests,
the computers with Intel Pentium processors were Y2K compliant. Software has
been purchased to test and repair non-compliant systems. The testing and
re-mediation by the Company's Computer System Support Engineer is expected to be
completed on or before June 30, 1999.
The Company has not fully determined the extent to which the Company's systems
may be impacted by third parties' systems, which may not be Year 2000 compliant.
While the Company has begun efforts to seek reassurance from its suppliers,
there can be no assurance that the systems of other companies, which the Company
deals with, will be Year 2000 compliant. Third parties' non-compliance could
have an adverse effect on the Company. At this time, the Company is unable to
estimate the cost of its Year 2000 compliance, if any. Failure of third party
vendors to deliver parts and components timely could materially affect the
Company's ability to manufacture and deliver CTLM(TM) Systems. Because of this
potential risk, the Company has expanded its vendor and sub-contractor base to
safeguard itself against this uncertainty. A checklist of Y2K compliant vendors
and sub-contractors will be compiled with a projected completion date of June
30, 1999.
The Company's Year 2000 Compliance Committee has prepared a worst case Y2K
scenario. It estimates that Internet access will be severely impaired including
the ability to send and receive e-mail, possible difficulty in connecting the
Company's computer to remote clinical sites, and delays in shipment and delivery
of parts, components and finished goods. Overall fear and confusion of the Y2K
problem may temporarily impair many companies, even those who are Y2K compliant.
The Company can fully function without the use of the Internet and e-mail.
Clinical data will be sent via overnight delivery from the clinical sites to the
Company. Fear and confusion will diminish in a few weeks as companies and
individuals learn that most companies are compliant and operating without any
major problems. Delays in shipping will be a minor inconvenience, as the Company
will have stockpiled critical parts and components in anticipation of Y2K. The
Company has a Disaster Recovery Plan in place to deal with software and hardware
failures. This plan provides that all computer workstations are backed up on
tape every night and a spare server is ready to be installed upon failure of any
server in service.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibits Description
- -------- -----------
(a)
3.13 Amended Certificate of Amendment-Series G Designation.*
3.14 Certificate of Amendment-Series I Designation*
3.15 Amended Certificate of Amendment-Series B Designation*
4.7 Instruments Defining the Rights of Security Holders - Amended
Designation of Series G Convertible Preferred Shares. (See Exhibit 3.13,
above).*
4.8 Instruments Defining the Rights of Security Holders - Designation of
Series I Convertible Preferred Shares. (See Exhibit 3.14, above).*
4.9 Instruments Defining the Rights of Security Holders - Amended
Designation of Series B Convertible Preferred Shares. (See Exhibit 3.15,
above).*
4.10 Convertible Debenture*
10.16 Form of Series I Preferred Stock Subscription Documents.*
10.17 Form of Debenture Subscription Documents.*
10.18 Form of Mortgage.*
10.19 Form of Series G Subscription Documents.*
* Incorporated by reference to the Company's Amendment number 2 to
Registration on Form S-2, File Number 333-60405.
(b) Reports on Form 8-K
NONE
30
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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: July 22, 1999 Imaging Diagnostic Systems, Inc.
By: /s/Allan L. Schwartz
--------------------
Allan L. Schwartz,
Executive Vice-President
Chief Financial Officer
31
