SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[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, 2000
[ ] 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 September 30, 2000: 105,535,903 shares of common stock, no par value; and
400 shares of Series K preferred convertible stock, no par value.
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Developmental Stage Company)
Part I - Financial Information
Item 1. Financial Statements
Page
Condensed Balance Sheet -
September 30, 2000 and June 30, 2000............................ 3
Condensed Statement of Operations -
Three months ended
September 30, 2000 and 1999, and December 10,
1993(date of inception) to September 30, 2000................... 4
Condensed Statement of Cash Flows -
Three months ended September 30, 2000 and 1999,
and December 10, 1993(date of inception)
to September 30, 2000........................................... 5
Notes to Condensed Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition and Results....................................... 7
Part II - Other Information
Item 1. Legal Proceedings.......................................... 11
Item 2. Changes in Securities...................................... 11
Item 3. Defaults Upon Senior Securities............................ 11
Item 4. Submission of Matters to a Vote of
Security Holders........................................... 11
Item 5. Other Information.......................................... 12
Item 6. Exhibits and Reports on Form 8-K........................... 15
Signature............................................................. 16
2
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Developmental Stage Company)
Condensed Balance Sheet
Assets
<TABLE>
<CAPTION>
Sept. 30, 2000 Jun. 30, 2000
(Unaudited) *
<S> <C> <C>
Current Assets
Cash $ 1,069,585 $ 159,126
Inventory 2,746,580 2,595,878
Prepaid expenses 63,379 37,339
Other current assets 14,727 3,000
------ -----
Total Current Assets 3,894,271 2,795,343
--------- ---------
Property and Equipment, net 2,473,348 2,525,287
Other Assets 590,570 593,800
------- -------
$ 6,958,189 $ 5,914,430
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable $ 276,584 $ 561,947
Accrued Expenses and
Accrued Dividends Payable 512,548 $ 434,007
Loans Payable 395,444 1,755,716
Current maturity of capital
lease obligation 12,176 11,505
Other current liabilities 2,021,147 2,021,147
------------ ------------
Total Current Liabilities 3,217,899 4,784,322
--------- ---------
Long-Term capital lease obligation -- 4,057
--------- ---------
Total Liabilities 3,217,899 4,788,379
--------- ---------
Stockholders Equity:
Convertible Preferred
(Series K) 9% cum. Div 4,000,000 --
Common Stock 42,893,207 42,818,057
Additional paid-in capital 2,163,437 1,597,780
Deficit accumulated during
development stage (45,302,045) (43,261,878)
----------- -----------
3,754,599 1,153,959
Less: subscriptions receivable (14,309) (27,908)
------- -------
Total stockholders' equity 3,740,290 1,126,051
--------- ---------
$ 6,958,189 $ 5,914,430
============ ============
</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
Condensed Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
3 Months Ended Since Inception
September 30, (12/10/93) to
2000 1999 Sept. 30, 2000
---------- ---------- ----------------
<S> <C> <C> <C>
Compensation and related benefits:
Administrative and engineering $ 440,626 $ 314,888 $ 11,376,126
Research and development 281,712 201,322 3,824,002
Research and development expenses (1,656) 1,093 2,991,271
Advertising and promotion expenses 3,071 5,329 936,117
Selling, general and administrative 87,225 82,039 2,163,975
Clinical expenses 16,254 21,918 461,891
Consulting expenses 44,813 5,236 3,220,006
Insurance costs 42,689 48,701 718,702
Inventory valuation adjustments 1,400 -- 777,557
Inventory restocking costs -- -- 377,006
Professional fees 99,851 24,054 1,971,859
Stockholder expenses -- -- 224,181
Trade show expenses 992 3,152 813,389
Travel and subsistence costs 93,356 38,694 917,180
Rent expense 2,974 3,682 294,782
Interest expense 36,832 341,278 1,775,724
Loan placement expenses and fees 200,000 81,500 606,494
Depreciation and amortization 76,146 77,896 1,369,546
Amortization of deferred compensation -- -- 4,064,250
Liquidated damages costs -- 31,000 291,000
Interest income (25,775) (58) (229,899)
------------- ------------- -------------
1,400,510 1,281,724 38,945,159
--------- --------- ----------
Net Loss (1,400,510) (1,281,724) (38,945,159)
Dividends on cumulative Pfd. stock:
From discount at issuance (565,657) -- (5,260,240)
Earned (74,000) (76,453) (1,096,646)
------- ------- ----------
Net loss applicable to
common shareholders $ (2,040,167) $ (1,358,177) $ (45,302,045)
============= ============= =============
Net Loss per common share:
Basic:
Net loss per common share $ (0.02) $ (0.03) $ (1.26)
=========== =========== ===========
Weighted avg. no. of common shares 105,526,662 51,064,251 35,835,846
=========== ========== ==========
Diluted:
Net loss per common share $ (0.02) $ (0.03) $ (1.26)
=========== =========== ===========
Weighted avg. no. of common shares 105,526,662 51,064,251 35,835,846
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Developmental Stage Company)
Condensed Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Since Inception
Ended September 30, (12/10/93) to
2000 1999 Sept. 30, 2000
------------ -------------- ---------------
<S> <C> <C> <C>
Cash provided by (used for)
Operations:
Net loss $ (1,400,510) $ (1,281,724) $(38,945,159)
Changes in assets and liabilities (373,818) 662,966 18,198,706
-------- ------- ----------
Net cash used by operations (1,774,328) (618,758) (20,746,453)
---------- -------- -----------
Investments
Capital expenditures (14,978) (40,607) (6,624,382)
------- ------- ----------
Cash used for investments (14,978) (40,607) (6,624,382)
------- ------- ----------
Cash flows from financing activities:
Repayment of capital lease obligation (3,386) (2,560) (38,113)
Other financing activities - net (1,372,000) 662,305 5,418,339
Proceeds from issuance of preferred stock 4,000,000 -- 17,039,500
Net proceeds from issuance of common stock 75,151 -- 6,020,694
------ ---------
Net cash provided by financing activities 2,699,765 659,745 28,440,420
--------- ------- ----------
Net increase (decrease) in cash 910,459 380 1,069,585
Cash, beginning of period 159,126 70,037 --
------- ------
Cash, end of period $ 1,069,585 $ 70,417 $ 1,069,585
============ ============ ============
</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 has been condensed from financial statements
prepared September 30, 2000. The results of operations for the three-month
period ended September 30, 2000, are not necessarily indicative of the results
to be expected for the full year.
NOTE 2 - GOING CONCERN
Imaging Diagnostic Systems, Inc. (IDSI) is currently a development stage company
and our continued existence is dependent upon our ability to resolve our
liquidity problems, principally by obtaining additional debt and/or equity
financing. IDSI has yet to generate an internal cash flow, and until the sales
of our product begin, we are 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 we are unable to obtain debt or equity financing or we are
unable to obtain such financing on terms and conditions acceptable to us, we may
have to cease or severely curtail our operations. This would materially impact
our ability to continue as a going concern. However, our management is
continually negotiating with various outside entities for additional funding
necessary to complete the clinical testing phase of development, required before
we 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(R) prototype is completed and if and when FDA
marketing clearance is obtained, that the CTLM(R) will achieve market acceptance
or that we will achieve a profitable level of operations.
6
<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 OUR FORM 10-KSB FOR THE FISCAL YEAR ENDED JUNE
30, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Imaging Diagnostic Systems, Inc. is a developmental stage company, which, since
inception, has been engaged in research and development of its Computed
Tomography Laser Mammography device (CTLM(R)). The CTLM(R) is a breast-imaging
device for the detection of cancer which utilizes laser technology and
proprietary computer algorithms to produce three dimensional cross section slice
images of the breast. Due to the fact that IDSI is in the last stages of the
development of its cancer detection technology and its CTLM(R), it has not yet
engaged in any marketing or distribution of it products and therefore has had no
revenue from its operations.
We have incurred net losses applicable to common shareholders since inception
through September 30, 2000, of approximately $45,302,045 after discounts and
dividends on preferred stock. We anticipate 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(R), the costs associated with the clinical trials and other research
and development activities. There can be no assurances that the CTLM(R) will
achieve market acceptance or that sufficient revenues will be generated from
sales of the CTLM(R) to allow us to operate profitably.
RESULTS OF OPERATIONS
General and administrative expenses in the aggregate during the three months
ended September 30, 2000 were $629,457 representing a decrease of $57,126 or
8.3% from $686,583 when compared to the corresponding period in 1999. General
and administrative expenses in the aggregate are derived from deducting
compensation and related benefits, research and development expenses,
depreciation and amortization and adding interest income to the net loss as
presented on the Statement of Operations.
Compensation and related benefits during the three months ended September 30,
2000, were $722,338 representing an increase of $206,128 or 40% from $516,210
for the corresponding period for 1999. The increase was primarily due to the
hiring of additional employees to administer our clinical sites and prepare for
the submission of our modular FDA pre-market approval application and other
regulatory issues including but not limited to Underwriters Laboratories
certification, CE marking and ISO 9002 certification.
Advertising and promotion expenses during the three months ended September 30,
2000, were $3,071 representing a decrease of $2,258 or 42% from $5,329 for the
corresponding period for 1999. The decrease is due primarily to the reduction of
advertising in domestic and foreign medical imaging and medical device
publications.
Selling, general and administrative expenses during the three months ended
September 30, 2000, were $87,225 representing an increase of $5,186 or 6% from
$82,039 for the corresponding period for 1999.
Clinical expenses during the three months ended September 30, 2000, were $16,254
representing a decrease of $5,664 or 26% from $21,918 for the corresponding
period for 1999. The decrease is due primarily to the reduction of one-time
charges to our Nassau County Medical Center and University of Virginia Health
Systems clinical sites.
Consulting expenses during the three months ended September 30, 2000, were
$44,813 representing an increase of $39,577 or 755% from $5,236 for the
corresponding period for 1999. The increase is due primarily to the use of
outside consultants needed for FDA Pre-Market approval and CE mark of the
CTLM(R) system.
7
<PAGE>
Insurance costs during the three months ended September 30, 2000, were $42,689
representing a decrease of $6,012 or 12% from $48,701 for the corresponding
period for 1999. The decrease is due primarily to payments for premiums for
Workers' Comp., Professional and Product Liability and Property and Casualty
Insurance being paid in prior accounting periods.
Professional expenses during the three months ended September 30, 2000, were
$99,851 representing an increase of $75,797 or 315% from $24,054 for the
corresponding period for 1999. The increase in professional fees is a result of
the increased use of outside counsel for various legal matters.
Travel and subsistence costs during the three months ended September 30, 2000,
were $93,356 representing an increase of $54,662 or 141% from $38,694 for the
corresponding period for 1999. The increase is primarily due to travel and
housing expenses for our clinical application specialists at Nassau County
Medical Center and University of Virginia Health Systems clinical sites.
Interest expense during the three months ended September 30, 2000, was $36,832
representing a decrease of $304,446 or 89% from $341,278 for the corresponding
period for 1999. The decrease is due primarily to a substantial reduction in
outstanding loans.
Loan placement expenses and fees during the three months ended September 30,
2000, were $200,000 representing an increase of $118,500 or 145% from $81,500
for the corresponding period for 1999. The increase is due to the placement fee
on the Series K preferred stock.
Liquidated damage costs during the three months ended September 30, 2000, were
$0 representing a decrease of $31,000 or 100% from $31,000 for the corresponding
period in 1999. The decrease was a result of not having to pay any liquidated
damages during the three months ended September 30, 2000.
Interest income during the three months ended September 30, 2000, was $25,775
representing an increase of $25,717 from $58 for the corresponding period for
1999. The increase was a result of the overall increase in cash that we invested
on a daily basis.
BALANCE SHEET DATA
Our combined cash and cash equivalents totaled $1,069,585 as of September 30,
2000. This is an increase of $910,459 from $159,126 for the year ended June 30,
2000. During the quarter ending September 30, 2000, we received $4,000,000 from
the private placement sale of our Series K convertible preferred stock. In
connection with the sale of the Series K convertible preferred stock we paid a
$200,000 placement fee.
We do not expect to generate a positive internal cash flow for at least the next
12 months due to the expected increase in spending for research and development,
the costs associated with the clinical trials and regulatory submissions and the
expected costs of commercializing our initial product, the CTLM(R) device.
Property and Equipment was valued at $2,473,348 net as of September 30, 2000.
The overall decrease of $51,939 from June 30, 2000 is due primarily to
depreciation recorded for the first quarter.
LIQUIDITY AND CAPITAL RESOURCES
We are currently a development stage company and our continued existence is
dependent upon our ability to resolve our liquidity problems, principally by
obtaining additional debt and/or equity financing. We have yet to generate an
internal cash flow, and until the sale of our product begins, we are totally
dependent upon debt and equity funding. In the event that we are unable to
obtain debt or equity financing or we are unable to obtain such financing on
terms and conditions acceptable to us, we may have to cease or severely curtail
8
<PAGE>
our operations. This would materially impact our ability to continue as a going
concern.
We have financed our operating and research and development activities through
several Regulation S and Regulation D private placement transactions. Net cash
used for operating and research and development expenses during the first
quarter ending September 30, 2000, was $1,774,328 primarily due to our purchase
of additional materials to continue to manufacture CTLM(R) systems in
anticipation of receiving orders from our distributors in certain countries
where permitted by law and the hiring of 3 additional employees, compared to net
cash used by operating activities and research and development of the CTLM(R)
device and related software development of $618,758 in the same quarter ending
September 30, 1999. At September 30, 2000, we had working capital of $676,372
compared to working capital of $609,034 at September 30, 1999, and ($1,988,979)
at June 30, 2000.
We have also financed our operations with loans from unaffiliated third parties.
On January 27, 2000, we executed a promissory note with Cycle of Life
Technologies, Inc. The note was for a principal sum of $500,000, together with
interest of 12% per annum on the unpaid balance. The maturity date was July 26,
2000. The note provided that, on its maturity, Cycle of Life had the option of
being repaid the principal and accrued interest either in cash or by issuance of
a two-year warrant to purchase 1,500,000 shares of common stock at an exercise
price of $.35 per share. On the date of the note's issuance, January 27, 2000,
the bid-ask range of our common stock was $1.91-$1.97. Prior to the note's
maturity, we elected to prepay the note consistent with its terms and applicable
law. On July 18, 2000, we sent Cycle of Life the sum of $530,000 representing
payment in full of the principal and interest due. Cycle of Life, after
receiving the payment, responded by rejecting the payment and subsequently
requested issuance of the warrants in lieu of the payment. We have placed the
funds in escrow with our counsel. As of the date of this report there has been
no legal action filed.
On March 31, 2000, we received a loan from Charlton Avenue LLC in the amount of
$500,000, which was repaid in full on July 18, 2000. The accrued interest (12%
per year) was waived by the holder. On June 8, 2000, we received a loan from
Aspen International Ltd. in the amount of $110,000 evidenced by a promissory
note bearing interest of 10% per annum. If certain terms and conditions of the
promissory note were not met, we were required to issue a two-year warrant to
purchase 50,000 shares of our common stock at $1.452 per share in addition to
the principal and interest. Those terms were not met, and on August 23, 2000, we
paid the sum of $112,291.03 in principal and interest and issued the warrant as
required.
In May 1998, we entered into an irrevocable commitment with a consortium of
prominent banking institutions to invest up to $15 million in IDSI over the next
three years. A formal Equity Line of Credit Agreement was to be drafted,
reviewed, and executed at a later date. The Equity Agreement was not finalized
until November 20, 1998. Although this equity line of credit is in place, we
have chosen not to utilize this equity line as it has been replaced with the new
$25 million Private Equity Credit Agreement with Charlton dated August 17, 2000.
This new equity credit agreement contains terms that are more favorable for us.
In September 2000, we filed a registration statement on Form S-2 to register the
common shares required to utilize the new equity credit line. The registration
statement is not yet effective.
During the first quarter ending September 30, 2000, we were able to raise a
total of $4,000,000 less expenses through a Regulation D private placement of
Series K convertible preferred stock. We do not expect to generate a positive
internal cash flow for at least the next 12 months due to the expected costs of
commercializing our initial product, the CTLM(R) and for the expense of
continuing our research and development program. We will require additional
funds for operating expenses, clinical testing, FDA regulatory processes,
manufacturing and marketing programs and to continue our research and
development program. Accordingly, we plan to utilize the Charlton Private Equity
Agreement to raise the funds required prior to the end of fiscal year 2001 in
order to continue operations. In the event that we are unable to utilize the
Private Equity Agreement, we would have to raise the additional funds required
by either equity or debt financing, including entering into a transaction(s) to
privately place equity, either common or preferred stock, or debt securities, or
combinations of both; or by placing equity into the public market through an
underwritten secondary offering or by obtaining mortgage financing on our real
property and improvements, which we believe has a fair market value of at least
$2.7 million. If additional funds are raised by issuing equity securities,
9
<PAGE>
dilution to existing stockholders will result, and future investors may be
granted rights superior to those of existing stockholders.
Capital expenditures for the first quarter ending September 30, 2000, were
approximately $14,978 as compared to approximately $40,607 for the first quarter
ending September 30, 1999. These expenditures were a direct result of purchases
of computer and other equipment, office, warehouse and manufacturing fixtures,
computer software, laboratory equipment, and other fixed assets. We anticipate
that the balance of our capital needs for the fiscal year ending June 30, 2001,
will be approximately $85,000.
There were no other changes in our existing debt agreements other than
extensions and we had no outstanding bank loans as of September 30, 2000. Our
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. We will need substantial
additional funds for our research and development programs, pre-clinical and
clinical testing, operating expenses, regulatory processes, and manufacturing
and marketing programs. Our future capital requirements will depend on many
factors, including the following:
1) The progress of our research and development projects;
2) The progress of pre-clinical and clinical testing;
3) The time and cost involved in obtaining regulatory approvals;
4) The cost of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights;
5) Competing technological and market developments;
6) Changes and developments in our existing collaborative, licensing and
other relationships and the terms of any new collaborative, licensing
and other arrangements that we may establish; and
7) The development of commercialization activities and arrangements.
We do not expect to generate a positive internal cash flow for at least the next
12 months due to expected increases in capital expenditures, working capital and
ongoing losses, including the expected cost of commercializing the CTLM(R)
device. We do not have sufficient cash to fund our operations until the end of
the fiscal year ending June 30, 2001, requiring us to secure additional funding
through the private placement sale of Convertible Preferred Stock or upon the
effectiveness of our registration statement on Form S-2, the sale of common
stock through our Private Equity Agreement, or from other outside sources.
ISSUANCE OF STOCK FOR SERVICES/DILUTIVE IMPACT TO SHAREHOLDERS
We have and may continue to issue stock for services performed and to be
performed by consultants. Since we have generated no revenues to date, our
ability to obtain and retain consultants may be dependent on our ability to
issue stock for services. From July 1, 1996, to the filing date of this report,
we have issued an aggregate of 1,806,500 shares of common stock according 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 in our control.
We are currently seeking additional capital to fund our future operations
through private debt or equity financing, or collaborative licensing or other
arrangements with strategic partners. There can be no assurance that this
financing can be obtained or, if it is obtained, that the terms will be
acceptable. We plan to continue our policy of investing excess funds, if any, in
a daily cash management account at First Union National Bank.
10
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On May 1, 2000, we filed a civil lawsuit against DOE 1 a/k/a DEIGHTON and DOE 2
a/k/a docpatel in the Circuit Court of the 17th Judicial Circuit in and for
Broward County, Florida, Case No. CACE 00-006881 (04) for defamation and
tortious interference with the Company's contracts and business relationships. A
Final Judgment of Permanent Injunction against defendant Steven Cortopassi a/k/a
"docpatel" was ordered by the Court on July 12, 2000. This injunction
permanently enjoins and restrains Mr. Cortopassi from posting any messages
whatsoever concerning the Company, Richard Grable and Linda Grable on The Raging
Bull or any other Internet bulletin/message board and permanently enjoins and
restrains Mr. Cortopassi from publishing any false or defamatory statements
concerning the Company, and its officers, directors and employees. Mr.
Cortopassi is also permanently enjoined and restrained from interfering with any
contractual/business relationship by and between the Company, Richard Grable,
Linda Grable and/or its employees, customers, etc.
The civil lawsuit filed against Doe 1 a/k/a DEIGHTON is still pending and seeks
permanent relief which would restrain Doe 1 and their agents, etc. from making
any statement or engaging in any conduct to intentionally interfere with any
contractual/business relationship by and between the Company, Richard Grable and
Linda Grable and our customers, shareholders and/or investors, and for damages,
attorney fees, costs and interest in excess of $15,000.00. A Summons and
Verified Complaint was served on Doe 1 and a response was filed by Diane M.
Strait, a former employee of the Company. The defendant, Ms. Strait, has
admitted to being the author, with another person, of over 1,000 postings on the
Raging Bull message boards regarding the Company. Testimony on the motion for a
temporary injunction commenced on May 18, 2000. Although our motion for a
temporary injunction has been denied, we are currently conducting discovery in
conjunction with this case and are going to continue to seek a permanent
injunction. We intend to vigorously prosecute this action and prevent the
further publication and dissemination of false information.
On June 16, 2000 we filed a motion for the issuance of an Interlocutory and
Permanent Injunction against David J. Hall, Ph.D. (a former employee) and ART
Advanced Research Technologies Inc. (his current employer) in the Superior Court
of the Province of Quebec, District of Montreal, Case No. 500-05-058294-008
seeking to enjoin Dr. Hall from using, divulging or disclosing trade secrets or
other confidential information to ART and to enjoin Dr. Hall from breaching his
fiduciary duty of loyalty and contractual obligation of confidentiality and
non-competition. We have conducted "Examinations on Affidavits" of all parties
and legal arguments have been scheduled for November 2000.
We are not aware of any other material legal proceedings, pending or
contemplated, to which we are, or would be a party to or of which any of our
property is, or would be, the subject.
ITEM 2. CHANGES IN SECURITIES.
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.
None.
11
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ITEM 5. OTHER INFORMATION
Recent Developments
In August 2000 Richard Grable, CEO, presented a peer reviewed paper at the
International Optoelectronics Symposium in Taiwan. In August 2000, we were
issued a patent for: "Detector Array for Use in a Laser Imaging Apparatus". This
patent describes the several different variations that can be used while
scanning the breast without any contact between the breast and the optical
components. Unlike the conventional method, this unique feature allows the
CTLM(TM) to scan the breast without the use of breast compression. In October
2000, our patent, "Method for Reconstructing the Image of an Object Being
Scanned" for the reconstruction algorithm, was issued.
In September 2000, we started the application process for Pre-Market Approval
("PMA") of our CTLM(R) system by submitting our first module to the U.S. Food
and Drug Administration (the "FDA"). Under the modular approach, we will
periodically submit a portion of the data needed for FDA review as the required
documentation is completed.
In October 2000, we contracted Underwriters Laboratories ("UL") to perform
safety testing and assist us in achieving regulatory certifications necessary to
begin selling the CTLM(R) system outside the United States. We are working with
UL to achieve the ISO 9000 Certification and CE marking that we need to begin
selling the CTLM(R) in Europe and certain other countries. We also chose UL as
our Notified Body to certify our compliance with EN2900/4600/ISO9000 quality
assurance standards. The certifications and CE marking, if obtained, will
signify that the product and its design, manufacturing and quality systems
comply with international standards. The UL safety testing is also necessary in
order for the CTLM(R) system to be sold in the United States once we receive FDA
approval.
Clinical Update
We are continuing to scan patients fitting the criteria of our IDE at Nassau
County Medical Center, East Meadow, New York and University of Virginia Health
System, Charlottesville, Virginia.
PRIVATE PLACEMENTS
On August 17, 2000, we entered into a $25 million Private Equity Credit
Agreement (the "Private Equity Agreement") with Charlton Avenue LLC, which
followed our July 17, 2000, private placement to Charlton of 400 shares of our
Series K convertible preferred stock for $4 million, which was designed to serve
as bridge financing pending draws on the private equity line established in the
Private Equity Agreement. We are obligated to pay a 9% dividend on the
convertible preferred in cash or common stock at our option semi-annually on
June 30 and December 31 of each calendar year or upon the conversion date. We
have the option of redeeming the convertible preferred solely through the use of
the private equity line by paying cash with the following redemption premiums.
Days from closing 0-120 121-180 180
Redemption price
As a % of Principal 105% 107.5% 110%
In the event that, for whatever reason, we are unable to redeem the convertible
preferred according to the above schedule, the holder has the right to convert
the convertible preferred into common stock at a price equal to 87.5% of the
average of the three lowest closing bid prices (which need not be consecutive)
of the 20 consecutive trading days prior to the conversion date. The agreement
further provides that we must register the common shares underlying the Series K
Convertible Preferred stock in a registration statement as soon as possible
after the closing date. We must use our best efforts to file timely within 45
days (which has now been extended to 70 days by the holder) after closing and
cause the registration statement to become effective within 120 days (which has
been extended to 145 days by the holder) from the closing date. In the event
that the registration statement does not become effective, we will be liable for
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liquidated damages in the amount of 2% of the purchase price of the unredeemed
convertible preferred stock for the first 30 days and 2% for every 30 day period
thereafter until the registration statement has been filed and/or declared
effective. The liquidated damages will be payable upon demand in cash or stock
at our option. Charlton has agreed to extend the deadline for filing the
Registration Statement to September 25, 2000, and the deadline for effectiveness
to December 9, 2000. The registration statement was filed on September 25, 2000.
It is not yet effective.
The Private Equity Agreement commits Charlton to purchase up to $25 million of
common stock subject to certain conditions pursuant to Regulation D over the
course of 12 months after an effective registration of the Private Equity
Agreement common shares. The timing and amounts of the purchase by the investor
are at our sole discretion. We do, however, have to draw down a minimum of $10
million from the credit line over the 12-month period. The purchase price of the
shares of common stock is set at 91% of the market price. The market price, as
defined in the agreement, is the average of the three lowest closing bid prices
of the common stock over the ten day trading period beginning on the put date
and ending on the trading day prior to the relevant closing date of the
particular tranche. We expect to redeem the bridge financing of $4 million in
Series K convertible preferred stock with the proceeds of the sale of common
stock under the equity credit line. In order to use the equity credit line we
must use our best efforts to file and cause our registration statement to become
effective as soon as possible. If, subsequent to effectiveness, the registration
statement is suspended at any time, we are obligated to pay liquidated damages
of 1.5% of the cost of all common stock then held by the investor for each
fifteen-day period or portion thereof, beginning on the date of the suspension.
If such suspension is cured within the first fifteen days, the damages shall not
apply. This financing agreement has no warrants attached to either the bridge
financing or the private equity line. The only fees associated with this
financing were a 5% consulting fee payable to Spinneret Financial Ltd.
The principal conditions to our ability to draw under the private equity line
are that (i) during the 15 trading days immediately preceding each of the put
notice date and the corresponding closing date (11 trading days after the put
notice date) the average bid price of our common stock must be at least $.75 and
the average daily trading volume must be at least $150,000, (ii) no more than
19,455,000 shares of common stock (19.9% of our outstanding common stock on the
date of the Private Equity Agreement) may be issued under the agreement without
shareholder approval, (iii) Charlton will not be obligated to purchase shares to
the extent the purchase would cause it to beneficially own more than 9.9% of our
outstanding common stock (it beneficially owns an approximate 2% interest in the
common stock as of the date of this prospectus based on its ownership of the
Series K Preferred Stock), and (iv) there be no material adverse change in our
business or financial condition since our most recent filing with the SEC. These
conditions may materially limit our ability to make draws under the Private
Equity Agreement.
After the effectiveness of the S-2 registration statement, which can not be
assured, we intend to sell shares of common stock under the Private Equity
Agreement in an amount sufficient to raise net proceeds of $4,200,000, the
amount needed to redeem the Series K Preferred Stock. We intend to make
additional sales under the Agreement from time to time in order to raise working
capital on an "as needed" basis. Based on our current assessment of our
financing needs, we intend to draw only the $10,000,000 minimum under the
Private Equity Agreement; however, if those needs change we may draw up to the
$25,000,000 maximum.
The Series K Preferred Stock was issued in order to obtain $4,000,000 in bridge
financing pending finalization and implementation of the Private Equity
Agreement. We intend to use draws under the Private Equity Agreement to redeem
the Series K Preferred Stock because we believe that the overall cost of the
$4,000,000 in financing will be lower under the Private Equity Agreement. By
exercising our right of redemption utilizing funds available under the Private
Equity Agreement, we will be able to raise $4,000,000 based on 91% of the common
stock market price in order to redeem stock convertible at 87.5% of the market
price. That 3.5% spread is worth approximately $140,000 given the $4,000,000
stated value of the Series K Preferred Stock. If we redeem on or before December
9, 2000, we will have to pay a $200,000 (5%) redemption premium, and that
premium increases to $300,000 (7.5%) and $400,000 (10%) on December 10, 2000,
and February 7, 2001; however, by redeeming the preferred stock with common
stock we will save $360,000 annually by eliminating the 9% dividend. Further, by
utilizing the equity line to redeem the preferred stock, we can take advantage
of a relatively high stock price and issue a relatively small amount of common
stock to obtain the redemption funds. On the other hand, if the preferred stock
is not redeemed, we face the risk that the preferred stock will be converted by
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the holder when the price of common stock is depressed, requiring the issuance
of a relatively large amount of common stock as well as payments of dividends
until conversion. On November 7, 2000 we entered into a Securities Purchase
Agreement with Charlton Avenue LLC and sold them an additional $950,000 worth of
Series K convertible preferred stock, bringing their total holdings to
$4,950,000. A consulting fee of 5 Series K convertible preferred shares was paid
to Spinneret Financial Ltd.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibits Description
-------- -----------
(a)
3.16 Certificate of Amendment-Series K Designation Incorporated by reference
to our Form 10-KSB for the fiscal year ending June 30, 2000 filed on
September 14, 2000.
10.26 Promissory Note by and between IDSI and Cycle of Life Technologies,
Inc, dated February 1, 2000. Incorporated by reference to our
Post-Effective Amendment No. 4 to Registration on Form S-2, File Number
333-60405.
10.31 Securities Purchase Agreement for Series K between IDSI and Charlton
Avenue LLC. Incorporated by reference to our Form 10-KSB for the fiscal
year ending June 30, 2000 filed on September 14, 2000.
10.32 Registration Rights Agreement for Series K between IDSI and Charlton
Avenue LLC. Incorporated by reference to our Form 10-KSB for the fiscal
year ending June 30, 2000 filed on September 14, 2000.
10.33 Private Equity Credit Agreement between IDSI and Charlton Avenue LLC.
Incorporated by reference to our Form 10-KSB for the fiscal year ending
June 30, 2000 filed on September 14, 2000.
10.34 Registration Rights Agreement for Private Equity Agreement for $25
Million between IDSI and Charlton Avenue LLC. Incorporated by reference
to our Form 10-KSB for the fiscal year ending June 30, 2000 filed on
September 14, 2000.
10.35 Convertible Promissory Note between IDSI and Aspen International Ltd.
Incorporated by reference to our Form 10-KSB for the fiscal year ending
June 30, 2000 filed on September 14, 2000.
10.36 Promissory Note from IDSI to Charlton Avenue LLC. Incorporated by
reference to our Form 10-KSB for the fiscal year ending June 30, 2000
filed on September 14, 2000.
10.38 Securities Purchase Agreement between IDSI and Charlton Avenue LLC.
(b) Reports on Form 8-K
NONE
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, who is duly
authorized to sign as an officer and as the principal financial officer of the
registrant.
Dated: November 13, 2000 Imaging Diagnostic Systems, Inc.
By: /s/Allan L. Schwartz
--------------------
Allan L. Schwartz,
Executive Vice-President
Chief Financial Officer
(PRINCIPAL ACCOUNTING OFFICER)
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