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: September 30, 1998
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _____to______
Commission file number: 0-26028
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IMAGING DIAGNOSTIC SYSTEMS, INC.
(Name of small business issuer in its charter)
Florida 22-2671269
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(State of incorporation) (IRS employer Ident. No.)
6531 N.W. 18th Court, Plantation, FL 33313
------------------------------------ -----
(address of principal office) (Zip Code)
Registrant's telephone number: (954) 581-9800
Indicate by check mark whether the Registrant:(1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes _X__ No_____
The number of shares outstanding of each of the issuer's classes of equity
as of November 9, 1998: 38,209,399 shares of Common Stock, no par value; and,
450 shares of Series B and 108 shares of Series H Preferred Convertible Stock,
no par value.
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Developmental Stage Company)
<TABLE>
<CAPTION>
Part I - Financial Information Page
- ------------------------------ ----
<S> <C>
Condensed Balance Sheet -
September 30, 1998 and June 30, 1998..........................................3
Condensed Statement of Operations Three months ended September 30, 1998 and
1997, and December 10,
1993(date of inception) to September 30, 1998...............................4
Condensed Statement of Cash Flows Three months ended September 30, 1998 and
1997, and December 10, 1993(date of inception) to September 30,
1998..........................................................................5
Notes to Condensed Financial Statements ............................................6
Management's Discussion and Analysis of
Financial Condition and Results.....................................................7
Part II - Other Information
Item 1, Legal Proceedings........................................................18
Item 2, Changes in Securities....................................................19
Item 3, Defaults Upon Senior Securities..........................................19
Item 4, Submission of Matters To a Vote of
Security Holders ...................................................20
Item 5, Other Information........................................................20
Item 6, Exhibits and Reports on Form 8-K.........................................22
Signature ..........................................................................23
</TABLE>
2
<PAGE>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
Condensed Balance Sheet
Assets
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
------------------ -------------
(Unaudited) Restated * Restated
<S> <C> <C>
Current Assets
Cash $ 99,249 $ 310,116
Inventory 3,549,357 3,214,045
Prepaid expenses 33,539 33,539
------------ ------------
Total Current Assets 3,682,145 3,557,700
------------ ------------
Property and Equipment, net 2,885,390 2,920,980
Other Assets 687,080 688,463
------------ ------------
Total Assets $ 7,254,615 $ 7,167,143
------------ ------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable
and Accrued Expenses $ 1,445,398 $ 880,478
Accrued Dividends Payable 540,241 483,288
Loans Payable 870,407 285,407
Current maturity of capital
lease obligation 9,923 9,715
Other current liabilities 1,900,233 2,155,978
------------ ------------
Total Current Liabilities 4,766,202 3,814,866
------------ ------------
Long-Term capital lease
obligation 22,644 26,134
------------ ------------
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) 1,080,000 1,080,000
Common Stock 24,741,260 23,986,073
Additional paid-in-capital 1,949,248 1,884,846
Deficit accumulated during
development stage (28,657,602) (27,336,655)
------------ ------------
3,612,906 4,641,264
Less: subscription receivable (14,309) (14,309)
deferred compensation (1,132,828) (1,300,812)
------------ ------------
Total Stockholders' Equity 2,465,769 3,326,143
------------ ------------
Total Liabilities and
Stockholders' Equity $ 7,254,615 $ 7,167,143
------------ ------------
</TABLE>
* Condensed from audited financial statements
The accompanying notes are an integral part
of these condensed financial statements
3
<PAGE>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
(Unaudited)
Condensed Statement of Operations
<TABLE>
<CAPTION>
Three Months Ended Since Inception
September 30, (12/10/93) to
1998 1997 September 30,1998
---- ---- -----------------
Restated Restated
<S> <C> <C> <C>
Operating Expenses:
Compensation and related
benefits:
Administrative/Engineering $ 292,064 408,422 $ 6,767,302
Research and development 186,730 94,037 1,931,819
Research/Development expenses 46,775 155,837 2,965,669
Advertising/Promotion 6,749 25,083 880,590
Selling/General/Administrative 95,456 329,403 1,397,593
Clinical expenses 3,876 627 364,551
Consulting expenses 29,996 5,146 2,966,580
Insurance costs 45,015 48,117 373,806
Professional fees 40,030 116,990 1,391,865
Stockholder expenses -- 52,833 96,510
Trade show expenses 41,643 39,730 547,101
Travel and subsistence costs 32,332 16,758 489,491
Rent expense 8,777 -- 256,238
Interest expense 743 -- 83,339
Depreciation and amortization 56,873 69,373 732,735
Amortization of
deferred compensation 377,609 364,578 2,931,422
Interest Income (674) (928) (198,091)
------------ ------------ ------------
1,263,994 1,726,006 23,978,520
------------ ------------ ------------
Net Loss ($ 1,263,994) ($ 1,726,006) ($23,978,520)
Dividends on cumulative Pfd. Stock:
From discount at issuance -- (705,738) (4,074,609)
Earned (56,953) (79,397) (604,473)
------------ ------------ ------------
Net loss applicable to common
shareholders ($ 1,320,947) ($ 2,511,141) ($28,657,602)
============ ============ ============
Net loss per common share:
Basic:
Net loss per common share ($ .04) ($ .10) ($ 1.27)
============ ============ ============
Weighted average no. of shares 37,459,191 25,198,562 22,602,960
============ ============ ============
Diluted:
Net loss per common share ($ .04) ($ .10) ($ 1.27)
============ ============ ============
Weighted average no. of shares 37,459,191 25,198,562 22,602,960
============ ============ ============
</TABLE>
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 Cash Flows
<TABLE>
<CAPTION>
Three Months Since inception
Ended September 30, (12/10/93) to
1998 1997 September 30, 1998
------------------------- ------------------
Restated Restated
<S> <C> <C> <C>
Cash provided by (used for) Operations:
Net loss $ (1,263,994) $ (1,726,006) $(23,978,520)
Changes in assets and liabilities 409,728 667,016 11,877,222
------------ ------------ ------------
Net cash used by operations (854,266) (1,058,990) (12,101,298)
------------ ------------ ------------
Investments
Capital expenditures (21,283) (65,512) (6,481,308)
------------ ------------ ------------
Cash used for investments (21,283) (65,512) (6,481,308)
------------ ------------ ------------
Cash flows from financing activities:
Repayment of capital lease obligation (3,282) (2,188) (17,722)
Other financing activities 585,000 520,407 870,407
Proceeds from issuance of preferred stock -- 2,100,000 12,659,500
Net proceeds from issuance of common stock 82,964 33,947 5,169,670
Net cash provided by financing activities 664,682 2,652,166 18,681,855
------------ ------------ ------------
Net increase(decrease) in cash (210,867) 1,527,664 99,249
Cash, beginning of period 310,116 383,223 --
------------ ------------ ------------
Cash, end of period $ 99,249 $ 1,910,887 $ 99,249
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements
5
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The financial information included herein has been condensed from financial
statements prepared September 30, 1998. The results of operations for the
three-month period ended September 30, 1998 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 financing and/or equity capital. The
Company has yet to generate an internal cash flow, and until the sales of its
product begins, the Company is totally dependent upon debt and equity funding.
As a result of these factors, there exists substantial doubt about the Company's
ability to continue as a going concern. However, management of the Company is
continually negotiating with various outside entities for additional funding
necessary to complete the clinical testing phase of development, required before
they can receive FDA marketing clearance. Management has been able to raise the
capital necessary to reach this stage of product development and has been able
to obtain funding for capital requirements to date. There is no assurance that
once development of the CTLM(TM) prototype is completed and Drug Administration
marketing clearance is obtained, that the CTLM(TM) will achieve market
acceptance or that the Company will achieve a profitable level of operations.
Note 3 - FINANCING ACTIVITIES
The Company has secured financing through private placement of shares and units
consisting of shares and debt instruments and short-term loans as follows:
In October 1998, the Company sold one unit, consisting of a $250,000 promissory
note and 210,000 shares of common stock, to an unaffiliated third party,
pursuant to Regulation D for an aggregate purchase price of $210,000 At the time
the placement was concluded, the average bid and ask price of the Company's
common stock was approximately $.43 per share. The Note bears interest at the
rate of 12% per and is due and payable on November 19, 1998. The Note is
personally guaranteed by Linda B. Grable, the Company's President. In connection
with the sale, the Company paid the sum of $22,500 to LKB Financial LLC as a
placement fee.
In November the Company issued 286,000 shares of common stock as partial
consideration for a $115,000 loan to the Company by an employee. The Company is
also obligated to repay the lender the sum of $50,000.00. There is no note
evidencing this debt. See " Selling Security Holders". At the time the shares
were issued the average bid and ask price of the Company's common stock was
approximately $.775 per share.
6
<PAGE>
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934. ACTUAL RESULTS AND EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
AS A RESULT OF THE "KNOWN UNCERTAINTIES" AS SET FORTH IN THE COMPANY'S FORM
10-KSB FOR FISCAL YEAR ENDED 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 since inception through September 30, 1998
of approximately $28,657,602. The Company anticipates that loss from operations
will continue for at least the next year, primarily due to an anticipated
increase in marketing and manufacturing expenses associated with the
commercialization of the CTLM(TM) 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 ended September 30,
1998, were $95,456, representing a decrease of $233,947 for the corresponding
period for 1997. The decrease during the three-month period ending September 30,
1998 was primarily due to certain reductions in General and administrative costs
associated with Advertising & Promotion expense, Public Relations expense, and
Printing expense. Also contributing to the decrease were the elimination of
Placement Fees and Annual Report expense for the current three-month period.
Compensation and related benefits during the three months ended September 30,
1998 were $478,794, representing a decrease of $23,665 for the corresponding
period for 1997. This decrease was primarily due to adjustments in the software
engineering department.
Research and development expenses during the three months ended September 30,
1998, were $46,775, representing a decrease of $109,062 for the corresponding
period for 1997. This decrease is due primarily to finalizing certain components
of the CTLM(TM) device.
Advertising and promotion expenses during the three months ended September 30,
1998, were $6,749 representing a decrease of $18,334 from $25,083 for the
corresponding period for 1997. The decrease is due primarily to the reduction of
advertising in domestic and foreign medical imaging and medical device
publications.
Consulting expenses during the three months ended September 30, 1998, were
$29,996 representing an increase of $24,850 from $5,146 for the corresponding
period for 1997. The increase is due primarily to the hiring of outside
consultants needed for special non-recurring projects required prior to placing
CTLM(TM) units into clinical trials. These special projects included an
operator's manual, service and parts manual, and risk factors assessment written
by technical writers. A laser physicist was hired to review and prepare a
special report on laser safety that was submitted to the FDA.
7
<PAGE>
Insurance costs during the three months ended September 30, 1998, were $45,015
representing a decrease of $3,102 for the corresponding period for 1997. The
decrease is due primarily to a reduction in premium for the Company's Directors
and Officers Liability Insurance.
Professional expenses during the three months ended September 30, 1998, were
$40,030 representing a decrease of $76,960 from $116,990 for the corresponding
period for 1997. The decrease is due primarily to a reduction in legal fees on
matters handled in previous accounting periods.
There were no Stockholder expenses during the three months ended September 30,
1998, representing a decrease of $52,833 from $52,833 for the corresponding
period for 1997. The decrease is due to the fact that the Company did not do any
stockholder mailings during this quarter. However, the costs associated with
preparing and mailing the Company's annual report and Proxy Statement will be
recorded as a stockholder expense in a subsequent quarter.
Tradeshow expenses during the three months ended September 30, 1998, were
$41,643 representing an increase of $1,913 from $39,730 for the corresponding
period for 1997. The increase is due to an increase in fees for exhibiting at
the 1998 Radiological Society of North America's 84th Scientific Assembly and
Annual Meeting in Chicago, IL.
Travel and subsistence costs during the three months ended September 30, 1998,
were $32,332 representing an increase of $15,574 from $16,758 for the
corresponding period for 1997. This increase was primarily due to additional
travel and housing expenses for consultants and travel expenses for engineers
attending seminars on 1. Risk Assessment and Hazard Analysis, 2. Design Control,
the FDA & ISO, 3. Validation Strategies, 4. Software, the FDA & ISO, and 5. The
CE Mark: Technical Requirements for Medical Devices.
Rent expense during the three months ended September 30, 1998, was $8,777
representing an increase of $8,777 from $-0- for the corresponding period for
1997. This increase was primarily due to the rental of a high-speed
oscilloscope.
Interest expense during the three months ended September 30, 1998, were $743
representing an increase of $743 from $-0- for the corresponding period for
1997. The increase is due to the allocation of the interest paid on the
telephone system lease.
Dividend expense on cumulative preferred stock, from discount at issuance and
earned during the three months ended September 30, 1998 was $56,953 representing
a decrease of $728,182 for the corresponding period for 1997. This decrease was
due to the elimination of dividends from discount at issuance from the
three-month period ending September 30, 1998. The net loss per common share
allocated to the dividends during the three months ended September 30, 1998 was
$.0016. The Company has the option to pay the dividends in common stock.
BALANCE SHEET DATA
The Company's combined cash and cash equivalents totaled $99,249 as of September
30, 1998. This is a decrease of $210,867 from $310,116 for the year ended June
30, 1997. On August 3, 1998, Imaging Diagnostic Systems, Inc. finalized a
private placement transaction resulting in $60,000 in equity financing. See Item
5, Other Information. During the quarter ended September 30, 1998 the Company
obtained a total of $585,000 in short-term debt financing.
8
<PAGE>
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
operation of its clinical site at Nassau County Medical Center and two
additional clinical sites to be announced, the continued research and
development and the expected costs of commercializing its initial product, the
CTLM(TM) device.
Property and Equipment was valued at $2,885,390 as of September 30, 1998. The
overall gross increase of $335,312 is due primarily to the purchase of
additional laboratory equipment.
Inventory was valued as of September 30, 1998, at $3,549,357. This represents an
increase of $335,312 from $3,214,045 for the year ended June 30, 1998. This
increase is due primarily to an increase in developmental and manufacturing
activities leading to the commercialization of the CTLM(TM) device.
LIQUIDITY AND CAPITAL RESOURCES
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
first quarter ending September 30, 1998 was $854,266 primarily due to the
Company's continued research and development of the CTLM(TM) device and
preparations for FDA Clinical Investigational Trials including the manufacture
of five (5) CTLM(TM) Breast Imaging Systems, compared to net cash used by
operating activities and research and development of the CTLM(TM) device and
related software development of $1,058,990 in the same quarter of 1997. At
September 30, 1998, the Company had a working capital of $(1,084,057) compared
to a working capital of $310,310 at September 30, 1997.
During the third quarter of 1998, the Company was able to raise a total of
$664,682 less expenses and repayment of capital lease obligation through
Regulation D transactions. The Company may continue to receive working capital
from the exercise of stock options, private placements and long term debt and
operations. The Company's working capital is insufficient to fund its operations
and therefore must continue to explore additional sources of financing. No
assurances, however, 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'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 quarter ending September 30, 1998 were
approximately $21,283 as compared to approximately $65,512 for the same period
in 1997. 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 fiscal 1999 will
be approximately $100,000.
During the three months ending September 30, 1998 there were no changes in the
Company's existing debt agreements, and the Company had no outstanding bank
loans as of September 30, 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 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
9
<PAGE>
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, 1999 requiring it to secure additional funding through the private placement
sale of debt or equity securities.
ISSUANCE OF STOCK FOR SERVICES/DILUTIVE IMPACT TO SHAREHOLDERS
The Company has and may continue to issue stock for services performed and to be
performed by consultants. Since the Company has generated no revenues to date,
its ability to obtain and retain consultants may be dependant on it ability to
issue stock for services. Since July 1, 1996, the Company has issued an
aggregate of 1,190,200 shares of common stock pursuant to Registration
Statements on Form S-8. The aggregate fair market value of the shares was
$2,069,259. The issuance of large amounts of common stock for services rendered
or to be rendered and the subsequent sale of such shares may depress the price
of the common stock. In addition, since each new issuance of common stock
dilutes existing shareholders, the issuance of substantial additional shares may
effectuate a change of control of the Company. See `Issuance of Stock for
Services" and "Note 16 to Financial Statements".
The Company is currently seeking additional capital to fund its future
operations through private debt or equity financings, or collaborative licensing
or other arrangements with strategic partners. There can be no assurance that
such financing can be obtained or, if it is obtained, that the terms thereof
will be acceptable. The Company plans to continue its policy of investing excess
funds, if any, in a daily cash management account at First Union National Bank.
See "Cautionary Statements Regarding Forward-Looking Statements Uncertainties as
to Future Profitability."
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-QSB under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as in the Company's press releases or oral statements that
may be made by the Company or by officers, directors or employees of the Company
acting on the Company's behalf, that are not historical fact constitute
"forward-looking statements". Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that could cause the actual
results of the Company to be materially different from the historical results or
from any results expressed or implied by such forward-looking statements.
Factors that might cause such a difference include, without limitation, the
information set forth below. In addition to statements which explicitly describe
such risks and uncertainties, statements labeled with the terms "believes",
"belief', "expects", "plans" or "anticipates" should be considered uncertain and
forward-looking. All cautionary statements made in this Report should be read as
being applicable to all related forward-looking statements wherever they appear.
Uncertain Ability to Meet Capital Needs. The Company will require substantial
additional funds for clinical testing of the CTLM(TM) Device, research and
development programs, pre-clinical and clinical testing of other proposed
products, regulatory processes, manufacturing and marketing programs and
operating expenses (including general and administrative expenses). The
Company's future capital requirements will depend on many factors, including the
following: the progress of its research and development projects; the progress
of pre-clinical and clinical testing; the time and cost involved in obtaining
regulatory approvals; the cost of filing, prosecuting, defending and enforcing
any patent claims and other intellectual property rights; competing
technological and market developments; changes and developments in the Company's
existing collaborative, licensing and other relationships and the terms of any
new collaborative, licensing and other arrangements that the Company may
establish; and the development of commercialization activities and arrangements.
Moreover, the Company's fixed commitments, including salaries and fees for
current employees and consultants, equipment rent, payments under license
agreements and other contractual commitments, are substantial and would increase
if additional agreements are entered into and additional personnel are retained.
The Company does not expect to generate a positive internal cash flow for at
least several years due to expected increases in capital expenditures, working
capital needs and ongoing losses, including the expected cost of commercializing
the CTLM(TM) Device. However, the Company's cash requirements may vary
materially from those now planned due to the progress of research and
development programs, results of clinical testing, relationships with strategic
partners, if any, changes in the focus and direction
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of the Company's research and development programs, competitive and
technological advances, the FDA and foreign regulatory processes and other
factors.
The Company needs additional capital to fund its operations, and is seeking to
obtain additional capital through debt or equity financings, or collaborative
licensing or other arrangements with strategic partners. If additional funds are
raised by issuing equity securities, further dilution to existing stockholders
will result and future investors may be granted rights superior to those of
existing stockholders. There can be no assurance, however, that additional
financing will be available when needed, or if available, will be available on
acceptable terms. Insufficient funds may prevent the Company from implementing
its business strategy and will require the Company to further delay, scale back
or eliminate certain of its research, product development-and marketing programs
and may require the Company to license to third parties rights to commercialize
products or technologies that the Company would otherwise seek to develop
itself, or to scale back or eliminate its other operations.
Uncertainty of FDA Marketing Clearance for the CTLM(TM) Device. In November
1997, the Company's clinical site at Strax Breast Diagnostic Institute in
Lauderhill, Florida was closed. In December 1997, the FDA granted approval to
include specific studies on augmented breasts as part of the Company's extensive
in-house study of the CTLM(TM). The 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 is 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.
On January 14, 1999, the Company received notice that the IDE application to
extend the in-vivo investigational device study to Nassau County Medical Center
was conditionally approved. 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, however due to renovations at Nassau County Medical
Center, the delivery of the CTLM(TM) was postponed until such time as the
renovations were complete. On March 3, 1999 the CTLM(TM) System was shipped to
Nassau County Medical Center and is currently being installed. The testing is
designed to develop diagnostic criteria for CTLM(TM) images. In order to acquire
data that will be part of the final pre-market application (PMA), the Company
intends to expand the clinical trials to hospitals in Miami, Chicago, Los
Angeles, Boston and New York.
At the conclusion of the clinical trials the Company will submit the PMA, if and
when accepted for filing by the FDA, it will be designated for review under the
FDA's Expedited Review policy. There can be no assurance, however, that such
Expedited Review status will be maintained or result in a more expeditious
approval, or approval at all. See "Government Regulation; No Assurance of
Regulatory Approval."
Conducting clinical trials will require the expenditure of substantial
additional funds, which the Company does not currently have available.
Furthermore, there can be no assurance (i) that results obtained in any
additional trials will be consistent with the results obtained in trials
conducted by the Company to date, (ii) that results obtained in any clinical
trial or series of clinical trials will be consistent among all study sites,
(iii) that results obtained in clinical trials conducted with U.S. study
populations will be consistent with results obtained in studies conducted in
Europe or other locations outside of the U.S., or (iv) that any such results, or
the filing of the PMA will be accepted by the FDA. There can be no assurance
that the FDA or other regulatory approvals for the CTLM(TM) Device will be
granted on a timely basis, or at all. Failure to obtain FDA clearance to market
the CTLM(TM) Device would have a material adverse effect on the Company's
business, financial condition, cash flows and results of operations.
Limited Operating History; Continuing Operating Losses. The Company has a
limited history of operations. Since its inception in December 1993, the Company
has engaged principally in the development of the CTLM(TM) Device, which has not
been approved for sale in the United States. Consequently, the Company has
little experience in manufacturing, marketing and selling its products. The
Company currently has no source of operating revenue and has incurred net
operating losses since its inception. At September 30, 1998, the Company had an
accumulated deficit of approximately $23,978,520 before discounts and dividends
on convertible preferred stock issuances since
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inception. Such losses have resulted principally from costs incurred in research
and development and clinical trials and from general and administrative costs
associated with the Company's operations. The Company expects operating losses
to increase for at least the next several years due principally to the
anticipated expenses associated with the pre-market approval process for the
CTLM(TM) Device, the proposed commercialization of the CTLM(TM) Device,
development of, and clinical trials for, other medical imaging devices and other
research and development activities.
Uncertainties as to Future Profitability. The Company's ability to achieve
profitability will depend in part on its ability to obtain regulatory approvals
for the CTLM(TM) Device and any other proposed products, and to develop the
capacity to manufacture and market any products either by itself or in
collaboration with others. There can be no assurance if or when the Company will
receive required regulatory approvals for the development and commercial
manufacturing and marketing of the CTLM(TM) Device or any other proposed
products, or achieve profitability. Accordingly, the extent of future losses and
the time required to achieve profitability are highly uncertain.
Early Stage of Product Development. The Company's proposed products, other than
the CTLM(TM) Device, are at an early stage of development and the CTLM(TM)
Device must receive marketing clearance from the FDA before it can be
commercially marketed in the United States. There can be no assurance that any
of the Company's proposed products will be found to be safe and effective, meet
applicable regulatory standards or receive necessary regulatory clearance, or if
safe and effective, can be developed into commercial products, manufactured on a
large scale or be economical to market. Nor can there be any assurance that the
Company's proposed products will achieve or sustain market acceptance. In the
event necessary regulatory approvals are obtained for the CTLM(TM) Device, there
can be no assurance that the Company will be successful in establishing
commercial operations, including gaining market acceptance of the CTLM(TM)
Device and implementing commercial-scale manufacturing and sales and marketing
programs. There is, therefore, substantial risk that the Company's product
development and commercialization efforts will not prove to be successful.
Dependence on a Single Product. Although the Company is in the process of
developing additional products based on its core technology, including an
enhancement of the CTLM(TM) Device for use with fluorescence and PhotoDynamic
Therapy (PDT), none of such applications is expected to result in a commercial
product for at least several years, if at all. Consequently, pending its
approval for commercial distribution in the United States, the CTLM(TM) Device
would account for substantially all of the Company's revenues for the
foreseeable future. Failure to gain regulatory approvals or market acceptance
for the CTLM(TM) Device would have a material adverse effect on the Company's
business, financial condition, cash flows and results of operations.
Dependence on Market Acceptance. There can be no assurance that physicians or
the medical community in general will accept and utilize the CTLM(TM) Device or
any other products developed by the Company. The extent that, and the rate at
which, the CTLM(TM) Device achieves market acceptance and penetration will
depend on many variables including, but not limited to, the establishment and
demonstration in the medical community of the clinical safety, efficacy and
cost-effectiveness of the CTLM(TM) Device, the advantages of the CTLM(TM) Device
over existing technology and cancer detection methods (including x-ray
mammography, ultrasound or high frequency ultrasound, MRI, thermography,
diaphonography, electrical impedance and transillumination devices), third-party
reimbursement practices and the Company's manufacturing, quality control,
marketing and sales efforts. There can be no assurance that the medical
community and third-party payers will accept the Company's unique technology.
Similar risks will confront any other products developed by the Company in the
future. Failure of the Company's products to gain market acceptance would have a
material adverse effect on the Company's business, financial condition, cash
flows and results of operations.
Limited Marketing and Sales Experience. The Company has limited internal
marketing and sales resources and personnel. In order to market the CTLM(TM)
Device or any other products it may develop, the Company will have to develop a
marketing and sales force with technical expertise and distribution
capabilities. There can be no assurance that the Company will be able to
establish sales and distribution capabilities or that the Company will be
successful in gaining market acceptance for any products it may develop. There
can be no assurance that the Company will be
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able to recruit and retain skilled sales, marketing, service or support
personnel, that agreements with distributors will be available on terms
commercially reasonable to the Company, or at all, or that the Company's
marketing and sales efforts will be successful. Failure to successfully
establish a marketing and sales organization, whether directly or through third
parties, would have a material adverse effect on the Company's business,
financial condition, cash flows and results of operations. The Company intends
to pursue distribution arrangements in Europe and Asia with strategic marketing
partners who have established marketing and service capabilities. There can be
no assurance that the Company, either on its own or through arrangements with
others, will be able to enter into such arrangements on acceptable terms, if at
all. To the extent that the Company arranges with third parties to market its
products, the success of such products may depend on the efforts of such third
parties. There can be no assurance that any of the Company's proposed marketing
schedules or plans can or will be met.
Limited Manufacturing History. The Company will have to ramp up its CTLM(TM)
manufacturing and assembly capabilities and contract for the manufacture of the
CTLM(TM) components in the volumes that will be necessary for the Company to
achieve significant commercial sales in the event it begins foreign sales and/or
obtains regulatory approval to market its products in the United States. The
Company has limited experience in the manufacture of medical products for
clinical trials or commercial purposes. Should the Company manufacture its
products, the Company's manufacturing facilities would be subject to the full
range of the current Quality System Regulation ("QSR") (formerly the Good
Manufacturing Practices (GMP) regulation) and similar risks of delay or
difficulty in manufacturing, and the Company would require substantial
additional capital to establish such manufacturing facilities. In addition,
there can be no assurance that the Company would be able to manufacture any such
products successfully or cost-effectively.
Dependence on Third Parties. The Company has used certain third parties to
manufacture and deliver the components of the CTLM(TM) Device and intends to
continue to use third parties to manufacture and deliver such components and any
other products, which the Company may seek to develop. Such third parties must
adhere to the QSR enforced by the FDA through its facilities inspection program
and such third-parties' facilities must pass a plant inspection before the FDA
will grant pre-market approval of the Company's products. There can be no
assurance that the third-party manufacturers on which the Company depends for
the manufacture of CTLM(TM) components will be in compliance with the QSR at the
time of the pre-approval inspection or will maintain such compliance. Such
failure could significantly delay FDA approval of the PMA application for the
CTLM(TM) Device, and such delay would have a material adverse effect on the
Company's business, financial condition, cash flows and results of operations.
The qualification of additional or replacement suppliers for certain components
of the CTLM(TM) Device or services is a lengthy process. For certain services
and components the Company currently relies on single suppliers. If the Company
encounters delays or difficulties with its third-party suppliers in producing,
packaging or distributing components of the CTLM(TM) Device, market introduction
and subsequent sales would be adversely affected. The Company also may have to
rely on alternative sources of supply. In such case, there can be no assurance
that the Company will be able to enter into alternative supply arrangements at
commercially acceptable rates, if at all. If the Company is unable to obtain or
retain qualified third-party manufacturers on commercially acceptable terms, it
may not be able to commercialize its products as planned. The Company's
dependence upon third parties for the manufacture of its products may adversely
affect the Company's profit margins and its ability to develop and deliver its
products on a timely and competitive basis.
Competition. The medical device industry generally, and the cancer diagnostic
imaging segments in particular, are characterized by rapidly evolving
technology-and intense competition. Other companies in the medical device
industry may be developing, or could in the future attempt to develop,
additional products that are competitive with the CTLM(TM) Device. Many of the
Company's potential competitors have substantially greater capital resources and
name recognition than the Company. Many of these companies also have
substantially greater expertise than the Company in research and development,
manufacturing and marketing and obtaining regulatory approvals. There can be no
assurance that the Company's competitors will not succeed in developing or
marketing technologies and products that are more effective than those developed
or marketed by the Company or that would render the
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Company's technology and products obsolete or noncompetitive. Additionally,
there can be no assurance that the Company will be able to compete against such
competitors and potential competitors in terms of manufacturing, marketing and
sales. Although the Company believes that its products may offer certain
technological advantages over its competitors' currently-marketed products,
earlier entrants in the market for a diagnostic application often obtain and
maintain significant market share relative to later entrants. Physicians using
imaging equipment such as x-ray mammography equipment, ultrasound or high
frequency ultrasound systems, MRI systems, thermography, diaphonography,
electrical impedance and transillumination devices may not use the CTLM(TM)
Device or any other products that the Company may develop. Currently,
mammography is employed widely and the Company's ability to sell the CTLM(TM)
Device to medical facilities will, in part, be dependent on the Company's
ability to demonstrate the clinical utility of the CTLM(TM) Device as a
diagnostic adjunct to mammography or physical examination and its advantages
over other available diagnostic tests.
Risk of Technological Obsolescence. Methods for the detection of cancer are
subject to rapid technological innovation and there can be no assurance that
technological changes will not render the Company's proposed products obsolete.
There can be no assurance that the development of new types of diagnostic
medical equipment or technology will not have a material adverse effect on the
marketability of the CTLM(TM) Device or any other products developed by the
Company. Commercial availability of such products could render the Company's
products obsolete, which would have a material adverse effect on the Company's
business, financial condition, cash flows and results of operations.
Potential Reliance on International Sales. The Company intends to commence
commercial sales of the CTLM(TM) Device in Europe and Asia, where permitted,
prior to commencing commercial sales in the United States, where sales cannot
occur unless and until the Company receives pre-market approval from the FDA.
Thus, until the Company receives marketing clearance from the FDA for the
CTLM(TM) Device, as to which there can be no assurance, the Company's revenues,
if any, will be derived from international sales. A significant portion of the
Company's revenues, therefore, may be subject to the risks associated with
international sales, including economic or political instability, shipping
delays, fluctuations in foreign currency exchange rates, foreign regulatory
requirements and various trade restrictions, all of which could have a
significant impact on the Company's ability to deliver products on a competitive
and timely basis. Future imposition of, or significant increases in the level
of, customs duties, export quotas or other trade restrictions could have a
material adverse effect on the Company's business, financial condition, cash
flows and results of operations. The regulation of medical devices, particularly
in Europe, continues to develop and there can be no assurance that new laws or
regulations will not have an adverse effect on the Company.
Government Regulation; No Assurance of Regulatory Approvals. The manufacture and
sale of medical devices, including the CTLM(TM) Device, and any other products
that may be developed by the Company are subject to extensive regulation by
numerous governmental authorities in the United States, principally the FDA and
corresponding state agencies, and in other countries. In the United States, the
Company's products are regulated as medical devices and are subject to the FDA's
pre-market clearance or approval requirements. Securing FDA clearances and
approvals may require the submission of extensive clinical data and supporting
information to the FDA. To obtain FDA approval of an application for pre-market
approval, the pre-market approval application must demonstrate that the subject
device has clinical utility, meaning that the device has a beneficial
therapeutic effect, or that as a diagnostic tool, it provides information that
measurably contributes to a diagnosis of a disease or condition.
The process of obtaining FDA and other required regulatory approvals may be
lengthy, expensive and uncertain and frequently requires from six months to
several years from the date of the FDA submission, if pre-market approval is
obtained at all. Following the filing of a submission of the PMA for the
CTLM(TM) Device, the FDA may require more information or clarification of
information already provided as part of the PMA. During the review period, an
advisory panel will likely be convened by the FDA to review and evaluate the PMA
and provide recommendations to the FDA as to whether the PMA should be approved.
Although the FDA may grant Expedited Review status to the CTLM(TM) Device, there
can be no assurance that such status will be maintained or result in timely
approval of the CTLM(TM) Device, if approval is obtained at all. Failure to
obtain FDA marketing clearance of the CTLM(TM)
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Device would have a material adverse effect on the Company's business, financial
condition, cash flows and results of operations. See "Uncertainty of FDA
Approval for the CTLM(TM) Device."
Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country. The
time required to obtain approval for sale internationally may be longer or
shorter than that required for FDA approval and the requirements may differ. In
addition, in order to sell its products within the European Economic Area,
companies are required to achieve compliance with the requirements of the
Medical Devices Directive and affix a "CE" marking on their products to attest
such compliance. The Company will be required to obtain CE Mark Certification
for the CTLM(TM) Device.
In addition, unapproved products subject to the PMA requirements must receive
prior FDA export approval in order to be marketed outside of the United States
unless they are approved for use by any member country of the European Union or
certain other countries, including Australia, Canada, Israel, Japan, New
Zealand, Switzerland and South Africa, in which case they can be exported to any
country provided that certain limited notification requirements are met. There
can be no assurance that the Company will meet the FDA's export requirements or
receive FDA export approval when such approval is necessary, or that countries
to which the devices are to be exported will approve the devices for import.
Failure of the Company to meet the FDA's export requirements or obtain FDA
export approval when required to do so, or to obtain approval for import, could
have a material adverse effect on the Company's business, financial condition,
cash flows and results of operations.
Regulatory approvals, if granted, may include significant limitations on the
indicated uses for which the product may be marketed. In addition, to obtain
such approvals, the FDA and certain foreign regulatory authorities may impose
numerous other requirements with which medical device manufacturers must comply.
FDA enforcement policy strictly prohibits the marketing of approved medical
devices for unapproved uses. Product approvals could be withdrawn for failure to
comply with regulatory standards or the occurrence of unforeseen problems
following initial marketing. The third-party manufacturers upon which the
Company depends to manufacture its products are required to adhere to applicable
FDA regulations regarding the QSR and similar regulations in other countries,
which include testing, control and documentation requirements. Ongoing
compliance with the QSR and other applicable regulatory requirements will be
monitored by periodic inspection by the FDA and by comparable agencies in other
countries. Failure to comply with applicable regulatory requirements, including
marketing or promoting products for unapproved use, could result in, among other
things, warning letters, fines, injunctions, civil penalties, recall or seizure
of products, total or partial suspension of production, refusal of the
government to grant pre-market clearance or approval for devices, withdrawal of
approvals and criminal prosecution. Changes in existing regulations or adoption
of new governmental regulations or policies could prevent or delay regulatory
approval of the Company's products. Certain material changes to medical devices
also are subject to FDA review and clearance or approval.
There can be no assurance that the Company will be able to obtain, on a timely
basis, or at all, FDA approval of the PMA for the CTLM(TM) Device, foreign
marketing clearances for the CTLM(TM) Device or regulatory approvals or
clearances for other products that the Company may develop, and delays in
receipt of or failure to obtain such approvals or clearances, the loss of
previously obtained approvals, or failure to comply with existing or future
regulatory requirements would have a material adverse effect on the Company's
business, financial condition, cash flows and results of operations.
Limitations on Third-Party Reimbursement. In the United States, suppliers of
health care products and services are greatly affected by Medicare, Medicaid and
other government insurance programs, as well as by private insurance
reimbursement programs. Third-party payers (Medicare, Medicaid, private health
insurance companies and other organizations) may affect the pricing or relative
attractiveness of the Company's products by regulating the level of
reimbursement provided by such payers to the physicians, hospitals, clinics and
imaging centers utilizing the CTLM(TM) Device or any other products that the
Company may develop or by refusing reimbursement. If examinations utilizing the
Company's products are not reimbursed under these programs, the Company's
ability to sell its products may be materially adversely affected.
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There can be no assurance that third-party payers will provide reimbursement for
use of the CTLM(TM) Device or any other products that the Company may develop.
Moreover, the level of reimbursement, if any, may impact the market acceptance
and pricing of the Company's products, including the CTLM(TM) Device. Failure to
obtain favorable rates of third party reimbursement could have a material
adverse effect on the Company's business, financial condition, cash flows and
results of operations.
In international markets, reimbursement by third-party medical insurance
providers, including governmental insurers and independent providers, varies
from country to country. In addition, such third-party medical insurance
providers may require additional information or clinical data prior to providing
reimbursement for a product. In certain countries, the Company's ability to
achieve significant market penetration may depend upon the availability of
third-party and governmental reimbursement. Revenues and profitability of
medical device companies may be affected by the continuing efforts of
governmental and third-party payors to contain or reduce the costs of health
care through various means.
Uncertainties Regarding Health Care Reform. Several states and the U.S.
government are investigating a variety of alternatives to reform the health care
delivery system and further reduce and control health care spending. These
reform efforts include proposals to limit spending on health care items and
services, limit coverage for new technology and limit or control the prices
health care providers and drug and device manufacturers may charge for their
services and products, respectively. If adopted and implemented, such reforms
could have material adverse effect on the Company's business, financial,
condition, cash flows and results of operations.
Uncertain Ability to Protect Patents and Proprietary Technology and Information.
The Company's ability to compete effectively in the medical products industry
will depend on its success in protecting its proprietary technology, both in the
United States and abroad. The patent positions of medical products companies
generally involve complex legal and factual questions. The Company's proprietary
products and technology are the subject of one U.S. patent licensed to the
Company, and eleven additional applications owned by the Company pending with
the United States Patent and Trademark Office ("PTO") and certain foreign
patents. The Company has filed, and intends to continue to file, patent
applications in certain foreign jurisdictions covering the patent claims that
are the subject of U.S. patents and patent applications. There can be no
assurance that the PTO or foreign jurisdictions will grant the Company's pending
patent applications or that the Company will obtain any additional patents or
other protection for which it has applied. There can be no assurance that
patents issued to or licensed by or to the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
any competitive advantage. The Company could incur substantial costs in
defending any patent infringement suits or in asserting any patent rights,
including those granted by third parties.
Although the Company has entered into confidentiality and invention agreements
with its employees and consultants, there can be no assurance that such
agreements will be honored or that the Company will be able to protect its
rights to its non patented trade secrets and know-how effectively. Moreover,
there can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets and know-how. In addition, the
Company may be required to obtain licenses to patents or other proprietary
rights from third parties. There can be no assurance that any licenses required
under any patents or proprietary rights would be made available on acceptable
terms, if at all. If the Company does not obtain required licenses, it could
encounter delays in product development or find that the development,
manufacture or sale of products requiring such licenses could be foreclosed.
Additionally, the Company may, from time to time, support and collaborate in
research conducted by universities and governmental research organizations.
There can be no assurance that the Company will have or be able to acquire
exclusive rights to the inventions or technical information derived from such
collaborations or that disputes will not arise with respect to rights in
derivative or related research programs conducted by the Company or such
collaborators.
Dependence on Qualified Personnel. Due to the specialized scientific nature of
the Company's business, the Company is highly dependent upon its ability to
attract and retain qualified scientific, technical and managerial
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personnel. The loss of the services of existing personnel as well as the failure
to recruit key scientific, technical and managerial personnel in a timely manner
would be detrimental to the Company's research and development programs and to
its business. The Company's anticipated growth and expansion into areas and
activities requiring additional expertise, such as engineering, manufacturing
and marketing, will require the addition of new personnel. Competition for
qualified personnel is intense and there can be no assurance that the Company
will be able to continue to attract and retain qualified personnel necessary for
the development of its business.
Potential Product Liability. The Company's business exposes it to potential
product liability risks, which are inherent in the testing, manufacturing and
marketing of cancer detection products. Significant litigation, not involving
the Company, has occurred in the past based on allegations of false negative
diagnoses of cancer. While the CTLM(TM) Device does not purport to diagnose any
patient, there can be no assurance that the Company will not be subjected to
future claims and potential liability. While the Company plans to maintain
insurance against product and professional liability and defense costs, there
can be no assurance that claims against the Company arising with respect to its
products will be successfully defended or that the insurance to be carried by
the Company will be sufficient to cover liabilities arising from such claims. A
successful claim against the Company in excess of the Company's insurance
coverage could have a material adverse effect on the Company. Furthermore, there
can be no assurance that the Company will be able to continue to obtain or
maintain product liability insurance on acceptable terms.
Potential for Environmental Liability. Although the Company's manufacturing
processes do not currently involve the use of potentially hazardous materials,
it may use such materials in the future. The Company may, in the future, become
subject to stringent federal, state and local laws, rules, regulations and
policies governing the use, generation, manufacture, storage, air emission,
effluent discharge, handling and disposal of such materials. There can be no
assurance that the Company will not incur significant future costs to comply
with environmental laws, rules, regulations and policies, or that the business,
financial position, cash flows or results of operations of the Company will not
be materially and adversely affected by current or future environmental laws,
rules, regulations and policies or by any releases or discharges of hazardous
materials.
Authorization and Discretionary Issuance of Preferred Stock/Barriers to
Takeover. The Company's Articles of Incorporation authorize the issuance of up
to 2,000,000 shares of "blank check" preferred stock with such designations,
rights, and preferences as may be determined from time to time by the board of
directors. Accordingly, the board of directors is empowered, without stockholder
approval, to designate and issue additional series of preferred stock with
dividend, liquidation, conversion, voting or other rights, including the right
to issue convertible securities with no limitations on conversion, which could
adversely affect the voting power or other rights of the holders of the
Company's Common Stock, substantially dilute the common shareholder's interest
and depress the price of the Company's common stock. In addition, the event of
issuance, the preferred stock could be utilized, under certain circumstances, as
a method of discouraging, delaying or preventing a change in control of the
Company. The Company has, in the past, issued Convertible Preferred Stock
without a limit on the number of shares that can be issued upon conversion and
may continue to do so in the future. See "Sale of Unregistered Securities" and
"Description of Securities"
The Series H Preferred Shares are the Company's only Series of Preferred Stock
that has not been converted or noticed for conversion. Since the conversion
price of the Series H Preferred is based on 75% of the Average Price, without a
limit on the number of shares that can be issued upon conversion, in the event
that the price of the Company's common stock decreases, the percentage of shares
outstanding that will be held by the Series H Holders upon conversion will
increase accordingly. See "Sale of Unregistered Securities-Series H Preferred"
and "Sale of Unregistered Securities-Equity Line of Credit".
Due to the fact that, when converting Convertible securities issued without
limitations on conversion, including the Series H Preferred Shares, the lower
the market price the greater the number of shares to be issued to the holders,
holders of such preferred upon conversion, thus increasing the potential profits
to the Holder when the price per share increases and the Holder sells the Common
Shares. The preferred stocks potential for increased share
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issuance and profit in addition to a stock overhang of an undeterminable amount
may depress the price of the Company's common stock. See "Sale of Unregistered
Securities-Series H Preferred" and "Sale of Unregistered Securities-Equity Line
of Credit".
No Dividends. The Company has never declared or paid any cash dividends on its
capital stock and does not intend to pay any cash dividends in the foreseeable
future. The Company currently anticipates that it will retain all its earnings
for use in the operation and expansion of its business and, therefore, does not
anticipate that it will pay any cash dividends in the foreseeable future
Possible Volatility of Stock Price. The price of the Company's Common Stock has
fluctuated substantially since it began trading on the OTC Bulletin Board in
September 1994. The market price of the shares of the Common Stock, like that of
the common stock of many other medical device companies, is likely to continue
to be highly volatile. Factors such as the timing and results of clinical trials
by the Company or its competitors, governmental regulation, healthcare
legislation, equity or debt fundings, developments in patent or other
proprietary rights of the Company or its competitors, including litigation,
fluctuations in the Company's operating results, and market conditions for
medical device company stocks and life science stocks in general, could have a
significant impact on the future price of the Common Stock. The Company's stock
is currently traded on the OTC Bulletin Board. The Company is seeking to be in
compliance with NASDAQ SmallCap Market Listing Requirements. The trading of the
Company's Common Stock on the NASDAQ SmallCap Market is conditioned upon the
Company's meeting certain quantitative criteria related to the market price of
the Company's Common Stock, net tangible assets, market capitalization and
certain other quantitative and non-quantitative requirements established by such
stock market. To maintain eligibility for trading on the NASDAQ Small-Cap
Market, among other requirements, the Company is required to have net tangible
assets in excess of $4,000,000 and have a minimum bid price of $3 per share for
initial inclusion and then maintain a bid price of $ 1 per share. The Company's
failure to meet such requirements could result in the delisting of the Common
Stock from trading on the NASDAQ SmallCap Market. If, however, the Company did
not meet the requirements of the NASDAQ SmallCap Market, trading of the Common
Stock would be conducted on an electronic bulletin board (OTC BB) established
for securities that do not meet the NASDAQ listing requirements or in what is
commonly referred to as the "pink sheets." Delisting may restrict investors'
interest in the Common Stock and materially adversely affect the trading market
and prices for the Common Stock and the Company's ability to issue additional
securities or to secure additional financing.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On July 10, 1997, the Company filed an action in the Circuit Court of the 17th
Judicial Circuit in and for Broward County, case no. 97-10533, against Dr. Valey
Kamalov ("Kamalov") and Irina Struganova. The complaint alleges that Kamalov, an
ex-employee of the Company, violated his employment agreement with the Company
while employed and after terminating his employment with the Company by
violating non-compete, confidentiality, and invention covenants of the
agreement. Due to the substantial legal expenses incurred and to be incurred by
the Company in proceeding with the litigation, the Company entered into a
settlement in December 1998. Pursuant to the settlement the Company was required
to and paid the sum of $90,000 to the Defendants.
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. The Series
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B Holders have demanded damages in excess of $75,000, to be determined at trial,
together with interest costs and legal fees. The Company intends to defend this
suit and has obtained litigation counsel, who is in the processes of reviewing
the case and filing an answer. If the lawsuit is tried and a judgment is entered
against the Company, the Company estimates that the damages could be in excess
of $4.5 million, which is the minimum amount invested by the Series B Holders.
In the event that the lawsuit can not be settled and the Company is adjudged
libel, the Company does not have the funds available to redeem any or all of the
Series B preferred shares. Any judgment to this effect would force the Company
to cease operations.
In April 1999, the Series B Preferred Stock was purchased from the Series 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 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.
(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 in technical default of the Registration Rights Agreement for the
Series H Preferred Shares, which required the Registration Statement to be
declared effective by October 2, 1998. No legal proceeding has been initiated or
threatened as of the date of this Report.
Pursuant to the Registration Right Agreement for the Series H Preferred Shares,
the Company is required to pay the Series H Holders, as liquidated damages for
failure to have the Registration Statement declared effective, and not as a
penalty, two (2%) percent of the principal amount of the Securities for the
first thirty (30) days, and 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 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. .
Pursuant to the Registration Rights Agreement, liquidated damages of $169,000
have accrued as of March 31, 1999. The Company is presently unable to comply
with the liquidated damage provision payment and no assurances can be given that
it will be able to do so in the future. On March 25, 1999 the Company issued
424,242 shares of restricted common stock with registration rights to the Series
H shareholders in lieu of cash for liquidated damages through March 2, 1999. The
value of these shares was $140,000. leaving a balance of $29,000 due for
liquidated damages through March 31, 1999. The Company has the option of paying
the accrued dividends and liquidated damages in common stock.
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.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
19
<PAGE>
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
July 10, 1998, Austost Anstalt Schaan, Balmore Funds S.A., Dominion Capital
Funds, Ltd., Canadian Capital Fund Ltd., Avalon Capital Ltd., Richard J. Grable,
Weyburn Overseas Limited, Linda B. Grable, Goodland International Investment
Ltd. and Allan L. Schwartz, (collectively "the Majority Shareholders"),
authorized, by written action, the Company's adoption of an Amendment to the
Company's Articles of Incorporation increasing the Company's authorized shares
from 48,000,000 shares to 100,000,000 shares.
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. 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. Due to the decrease in the
Company's stock price, the Company no longer has an adequate number of common
shares authorized to meet its contractual obligations with regard to the
conversion of the Preferred Stock. The Certificates also provide that the
holders of the Preferred Shares shall be entitled to vote with the holders of
the Common Stock, as a single class, where each share of Preferred Stock shall
be entitled to that number of votes to which it would be entitled had all of its
shares of Preferred Stock been converted into shares of Common Stock were notice
of conversion given on the date of such vote.
On August 5, 1998, the Company filed an Information Statement with the
Securities and Exchange Commission (the "Commission") with regard to the Written
Action. On September 4, 1998, the Company received a comment letter from the
Commission and on October 29, 1998 filed a revised Information Statement
addressing the Commission's comments. The Majority Shareholders consent with
respect to the Amendment will take effect 20 days from the date it is first
mailed to shareholders.
ITEM 5. OTHER INFORMATION.
Clinical Site
The Company has selected Nassau County Medical Center (NCMC) of East Meadow,
Long Island, New York, to be its first independent clinical site. The Company
had submitted the IDE protocol to the hospital's Institutional Review Board
(IRB) and on November 11, 1998 received approval of the IDE protocol from NCMC's
IRB.. NCMC's IRB must review and approved the IDE Protocol. The documents will
be sent to the FDA for their approval. Once approved by the FDA, the Company is
granted permission, assuming the 20 patient in-vivo studies have been completed,
to proceed with the clinical trials described in the IDE protocol.
On January 14, 1999, the Company received notice that the IDE application to
extend the in-vivo investigational device study to Nassau County Medical Center
was conditionally approved. 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, however due to renovations at Nassau County Medical
Center, the delivery of the CTLM(TM) was postponed until such time as the
renovations were complete. On March 3, 1999 the CTLM(TM) System was shipped to
Nassau County Medical Center and is currently being installed. The testing is
designed to develop diagnostic criteria for CTLM(TM) images. In order to acquire
data that will be part of the final pre-market application (PMA), the Company
intends to expand the clinical investigational trials to hospitals in Miami,
Chicago, Los Angeles, Boston and New York.
20
<PAGE>
PRIVATE PLACEMENT OF COMMON STOCK
In October 1998, the Company sold one unit, consisting of a $250,000 promissory
note and 210,000 shares of common stock, to GCA Strategic Investment Fund Ltd.,
an unaffiliated third party, pursuant to Regulation D for an aggregate purchase
price of $210,000 At the time the placement was concluded, the average bid and
ask price of the Company's common stock was approximately $.43 per share. The
Note bears interest at the rate of 12% per and is due and payable on November
19, 1998. The Note is personally guaranteed by Linda B. Grable, the Company's
President. In connection with the sale, the Company paid the sum of $22,500 to
LKB Financial LLC, an unaffiliated third party, as a placement fee. Net proceeds
of $227,000 were used as follows: (i) salaries ($21,849-executive officers and
$62,447-employees) (ii) machinery and equipment $5,959; (iii) operating expenses
($55,240-inventory parts and sub-assemblies, employee health insurance, workers
comp. and property insurance) and (iv) working capital ($82,000). These Shares
are being registered pursuant to a Form S-2 Registration Statement.
In November the Company issued 286,000 shares of common stock as partial
consideration for a $115,000 aggregate loan to the Company by by Deborah
O'Brien,an employee. At the time the loan was concluded, the average bid and ask
price of the Company's common stock was approximately $.625 per share. The
Company is also obligated to repay the lender the sum of $50,000.00. There is no
note evidencing this debt. See " Selling Security Holders". At the time the
shares were issued the average bid and ask price of the Company's common stock
was approximately $.775 per share. Net proceeds of $115,000 were used as
follows: (i) salaries ($21,849-executive officers and $62,447-employees) (ii)
operating expenses ($16,345-inventory parts and assemblies, employee health
insurance, workers comp. and property insurance) and (iv) working capital
($14,359). These Shares are being registered pursuant to a Form S-2 Registration
Statement.
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
21
<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
remediation 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.
(a) Exhibits
Exhibits Description
- -------- -----------
(a)
None
(b) Reports on Form 8-K
None
22
<PAGE>
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: April 21, 1999 IMAGING DIAGNOSTIC SYSTEMS, INC.
By: /s/Allan L. Schwartz
-------------------------------------------
Allan L. Schwartz, Executive Vice-President
Chief Financial Officer
23
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