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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 2004
COMMISSION FILE NO.: 333-______
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM S-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------
IMAGING DIAGNOSTIC SYSTEMS, INC.
(Exact Name of Registrant As Specified In Its Charter)
Florida 3845 22-2671269
------- ---- ----------
(State of Incorporation) (Primary Standard Industrial (IRS Employer I.D. Number)
Classification Code Number)
6531 NW 18TH COURT
PLANTATION, FLORIDA 33313
(954) 581-9800
-----------------------------------
(Address, including zip code and telephone number, including
area code of registrant's principal executive offices)
Timothy B. Hansen, CEO
IMAGING DIAGNOSTIC SYSTEMS, INC.
6531 NW 18TH COURT
PLANTATION, FLORIDA 33313
(954) 581-9800
(Name, address and telephone number of Agent for Service)
Copy to:
Robert B. Macaulay, Esquire
ADORNO & YOSS, P.A.
2601 South Bayshore Drive, Suite 1600
Miami, Florida 33133-5412
Tel: (305) 858-5555
Fax: (305) 858-4777
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time, at the discretion of the selling shareholders after the effective date of
this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If the registrant elects to deliver its latest Form 10-K, as amended, to
security holders or a complete and legible facsimile thereof, pursuant to Item
11.(a)(1) of this Form, check the following box. [X]
If the registrant elects to deliver its latest Form 10-Q, as amended, to the
security holder or a complete and legible facsimile thereof, pursuant to Item
11.(a)(2)(ii) of this Form, check the following box. [X]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [_]
Calculation Of Registration Fee
TITLE OF SECURITIES BEING REGISTERED AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
REGISTERED OFFERING PRICE PER AGGREGATE REGISTRATION
SHARE (1) OFFERING PRICE(1) FEE (1)
COMMON STOCK, NO PAR VALUE (2) 7,000,000 $0.40 $2,800,000 $354.76
TOTAL 7,000,000 $0.40 $2,800,000 $354.76
(1) Estimated solely for purposes of calculating the registration fee according
to Rule 457(c) of the Securities Act of 1933, as amended, on the basis of the
average bid and ask price of our common stock on the NASDAQ Electronic Bulletin
Board on November 9, 2004.
(2) In the event that the shares registered in this prospectus are insufficient
to meet the delivery requirement at the actual time of the put date settlement,
we will file a new registration statement to register the additional shares.
(3) All of the shares of common stock registered in this registration statement
will be sold by the selling security holder.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
ii
The information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not seeking an offer to buy these securities in
any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED November___, 2004
PROSPECTUS
IMAGING DIAGNOSTIC SYSTEMS, INC.
7,000,000 shares of common stock
This prospectus is part of the registration statement we filed with the
Securities and Exchange Commission using a "shelf" registration
process. This means:
o We may issue up to 7,000,000 shares of our common stock pursuant
to a new $15 million Fourth Private Equity Credit Agreement dated
January 9, 2004 (the "Fourth Private Equity Credit Agreement")
between us and the selling stockholder, Charlton Avenue LLC
("Charlton"), for which we would receive gross proceeds of
approximately $2.8 million upon the exercise of our put options.
See "Financing/Equity Line of Credit".
o Proceeds from our exercise of the put options would be used for
general corporate purposes. Charlton is an "underwriter" within
the meaning of the Securities Act of 1933 in connection with its
sales of our common stock acquired under the Fourth Private
Equity Credit Agreement.
o Our common stock is traded on the OTC Bulletin Board under the
symbol "IMDS".
o On November 10, 2004, the closing bid price of our common stock
on the OTC Bulletin Board was $0.40
THE SECURITIES OFFERED IN THIS PROSPECTUS INVOLVE A HIGH DEGREE OF
RISK. YOU SHOULD CAREFULLY CONSIDER THE FACTORS DESCRIBED UNDER THE HEADING
"RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
--------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------------------------------------------
The date of this prospectus is November___, 2004
Table Of Contents
Forward-Looking Statements..................................................3
Prospectus Summary..........................................................3
Recent Developments.........................................................5
The Offering................................................................8
Risk Factors................................................................9
Where You Can Find More Information........................................22
Incorporation of Certain Documents by Reference............................22
Information With Respect to the Registrant.................................22
Financing/Equity Line of Credit............................................23
Selling Security Holder....................................................27
Use of Proceeds............................................................28
Plan of Distribution.......................................................28
Description of Securities..................................................29
Disclosure of Commission Position on Indemnification for
Securities and Liabilities.................................................31
Experts ..................................................................31
Legal Matters..............................................................31
Financial Information......................................................32
2
Forward-Looking Statements
This prospectus contains "forward-looking statements" within the meaning of the
federal securities laws. These forward-looking statements include, among others,
statements relating to our business strategy, which is based upon our
interpretation and analysis of trends in the healthcare treatment industry,
especially those related to the diagnosis and treatment of breast cancer, and
upon management's ability to successfully develop and commercialize its
principal product, the CTLM(R). This strategy assumes that the CTLM(R) will
prove superior, from both a medical and an economic perspective, to alternative
techniques for diagnosing breast cancer. This strategy also assumes that we will
be able to promptly obtain from the FDA and the relevant foreign governmental
agencies the approvals which are needed to market the CTLM(R) in the United
States and key foreign markets and that we will be able to raise the capital
necessary to finance the completion of the development and commercialization of
the CTLM(R). Many known and unknown risks, uncertainties and other factors,
including, but not limited to, technological changes and competition from new
diagnostic equipment and techniques, changes in general economic conditions,
healthcare reform initiatives, legal claims, regulatory changes and risk factors
detailed from time to time in our Securities and Exchange Commission filings may
cause these assumptions to prove incorrect and may cause our actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements.
Prospectus Summary
This summary highlights information in this document and the documents
incorporated by reference in this document. You should carefully review the more
detailed information and financial statements included in this document or
incorporated by reference in this document. The summary is not complete and may
not contain all of the information you may need to consider before investing in
our common stock. We urge you to carefully read this document and the documents
incorporated by reference, including the "Risk Factors" and the financial
statements and their accompanying notes.
The Company
We are a medical technology company that has developed a Computed Tomography
Laser Mammography System (CTLM(R)) for detecting breast abnormalities in a
non-invasive procedure. Since our inception in December 1993, we have been
engaged in the development and testing the CTLM(R), which is designed to be used
as an adjunct to x-ray mammography to assist in the detection of breast cancer.
We are currently in the process of commercializing the CTLM(R) in certain
international markets. The CTLM(R) is manufactured and distributed from our
24,000 square foot company-owned facility in Plantation, Florida.
Computed Tomography has had a basis in the science of medical imaging since the
early 1970's. Our former chief executive officer, the late Richard Grable,
invented CT Laser Mammography in 1989 and later founded a predecessor company in
December 1993. The issues of developing a safe and effective laser technology
and software occupied our first several years. Following limited clinical trials
in our facilities and one outside facility, we improved the performance and
stability of the CTLM(R). In July 1999, we began a clinical investigational
trial at Nassau County Medical Center, East Meadow, NY. The clinical trials were
subsequently expanded to University of Virginia Health Systems, Charlottesville,
VA in November 1999. See "Clinical Update" for additional clinical sites.
Although the CTLM(R) system is a CT-like scanner, its energy source for imaging
is a laser beam and not ionizing radiation such as is found in conventional
x-ray mammography or CT scanners. The advantage of imaging without ionizing
radiation may be significant in our markets. X-ray mammography is a
well-established method of imaging the structures within the breast. Ultrasound
is often used as an adjunct to mammography to help differentiate tumors and
cysts. The CTLM(R) is being marketed as an adjunct to mammography and will not
compete directly with X-ray mammography. CTLM(R) is, however, an emerging new
modality offering the potential of molecular functional imaging, which can
visualize the process of angiogenesis which may be used to distinguish between
benign and malignant tissue.
We believe that the adjunctive use of CT laser mammography will improve early
diagnosis, reduce diagnostic uncertainty, and decrease the number of biopsies
performed on benign lesions. The CTLM(R) technology is unique and patented. IDSI
3
intends to develop their technologies into a family of related products. We
believe these technologies and clinical benefits constitute substantial markets
for our products well into the future.
Even though we have completed all of the clinical studies required for our PMA
application, patients are continuing to be scanned at our various collaboration
sites, including the University of Vienna, Allgemeines Hospital, the Humboldt
University of Berlin, Charite Hospital and at Policlinico Paolo Giancone
Hospital in Palermo, Italy. The Company expects to remain involved in the PMA
supplement process even if we receive PMA approval as the CTLM(R) technology
platform evolves to expand the range of clinical utility. The Company intends to
pursue a rigorous clinical program to discover and commercialize the envisioned
applications.
We have experienced many delays that are usual and customary in the development
of medical imaging devices. These delays have included the time required to
obtain a new laser system and to modify and redesign the CTLM(R). Recently, we
have faced delays caused by various factors, including responding to the FDA to
correct deficiencies, withdrawing and resubmitting the PMA, and preparing
clinical cases for resubmission. Due to these delays, we have been unable to
accurately determine when we will receive FDA marketing clearance ("PMA") and
begin to generate material revenues.
Corporate Information
Our executive offices are located at 6531 NW 18th Court, Plantation, Florida
33313, and our telephone number is (954) 581-9800. Our website is located at
www.imds.com. Information on our website is not, and should not be considered,
part of this prospectus. Our SEC filings are available on www.sec.gov.
4
Recent Developments
Regulatory Matters
In order to sell the CTLM(R) commercially in the United States, we must obtain
marketing clearance from the Food and Drug Administration. A PreMarket Approval
application must be supported by extensive data, including pre-clinical and
clinical trial data, as well as extensive literature to prove the safety and
effectiveness of the device. Under the Food, Drug, and Cosmetic Act, the FDA has
180 days to review a PMA application, although in certain cases the FDA may
increase that time period through requests for additional information or
clarification of existing information.
We are following the guidelines of the "Standardized Shell for Modular
Submission" for the FDA approval process. The FDA assigned a Modular Shell
Control Number and a general description of items required for the submission.
Below is a table indicating the status of our FDA Modular Submission:
Module # Description of Module Submission Date Filed Date Accepted
- ------- -------------------------------- ---------- -------------
Module 1 General Information & Safety 9/27/2000 1/7/2002
Module 2 Software 4/17/2001 6/12/2001
Module 3 Non-Pivotal Clinical 5/1/2001 8/13/2001
Module 4 Manufacturing & Quality Systems 1/2/2001 9/25/2001
PMA PMA Submission 4/29/2003 Voluntarily Withdrawn
on 9/24/2004
PMA PMA Re-Submission* Pending
* See "On October 15, 2004,..." below for further information regarding the PMA
Re-Submission.
On April 29, 2003, we announced that we submitted our Premarket Approval
Application (PMA) with the U.S. Food and Drug Administration (FDA) seeking
marketing approval for our Computed Tomography Laser Mammography System, the
CTLM(R).
On June 18, 2003, we announced that we received notification from the Food and
Drug Administration that an initial review of our Premarket Approval Application
(PMA) has been conducted and is sufficiently complete to permit a substantive
review and is, therefore, suitable for filing. An in-depth evaluation of the
safety and effectiveness of the device will be conducted to determine the final
approval of the PMA application.
We filed a new application with Health Canada in June 2003 because of new
clinical data. On June 18, 2003 we received notification from the Medical Device
Bureau of Health Canada that our application had been accepted for review. On
November 14, 2003 we announced that we received notification from the Medical
Device Bureau of Health Canada that our application for a "New Medical Device"
license was approved. The license was issued in accordance with the Medical
Device Regulations, Section 36. Furthermore, we possess the CAN/CSA ISO
13485-1998 certification, which is an additional regulatory requirement that is
evidence of compliance to the quality system of the medical device.
On August 27, 2003, we announced in an 8-K filing that we received a letter from
the FDA stating that it had completed its review of our PMA. The FDA, in its
letter, outlined deficiencies in the PMA submission, which must be resolved
before the FDA's review could be completed. The FDA stated that until these
deficiencies are resolved, the PMA application is not approvable in its current
form. The FDA identified measures to make the PMA approvable and we will amend
our PMA application to address the deficiencies in the letter. We are working
with our FDA counsel and consultants to correct these deficiencies.
On February 2, 2004, we announced in an 8-K filing that we received a warning
letter from the FDA specifically regarding the biomonitoring section of an
inspection conducted August 13th through August 18th, 2003 at our facility. We
submitted our response to this letter to the FDA on February 9, 2004. We are
continuing to prepare supplementary information to support our PMA application.
5
On February 10, 2004, we announced in an 8-K filing that we had submitted our
response to the warning letter and on March 29, 2004, we announced in an 8-K
filing that our responses to the FDA's warning letter regarding the
bio-monitoring inspection addressed each of the issues and no further response
to the FDA is required at this time.
On March 25, 2004, we announced in an 8-K filing that the FDA agreed with our
request for an extension of time to respond to the FDA's August 22, 2003 letter
regarding our pre-market approval application. We are seeking PreMarket approval
from the FDA for this intended use: "The Imaging Diagnostic's Computed
Tomography Laser Mammography (CTLM(R)) scanner is intended for use as an adjunct
to mammography in patients who have equivocal mammographic findings within ACR
BI-RADS categories 3 or 4. In particular, it is not intended for use in cases
with clear mammographic or non-mammographic indications for biopsy. This device
provides the radiologist with additional information to guide a biopsy
recommendation". We are continuing to work closely with the FDA and our new
regulatory consultants to address the deficiencies and to submit an amendment to
our PMA application.
On September 27, 2004, we announced that our CT Laser Mammography System,
CTLM(R), had received Chinese State Food and Drug Administration (SFDA)
marketing approval. The People's Republic of China SFDA issued the registration
"Certificate for Medical Device". The medical device registration number is
20043241646. On September 29, 2004 we filed an 8-K report announcing this press
release and attached it as an exhibit.
On October 15, 2004, we issued a press release of a shareholder letter written
by our new CEO, Tim Hansen, detailing the steps he has taken in FDA and other
corporate development matters during his first three months as CEO of the
Company. In the letter he stated the following: "the PMA involves a process
which has, unfortunately, taken far longer than expected. We have been working
on amending the PMA application at the request of the FDA. Our team recommended
rephrasing the Computed Tomography Laser Mammography System (CTLM(R)) intended
use statement and modifying the patient study protocols. They also recommended
adding more clinical cases. Meanwhile the PMA clock was ticking and these well
advised changes would have taken more time to complete. Also, as we earlier
reported, our PMA amendment and processes were briefly interrupted by a
biomonitoring inspection audit of our clinical trials and subsequent warning
letter and, although that matter was resolved, the sum of these influences
caused serious delays in our filings.
These are complex matters, but after conferring with the FDA and our outside
consultants, I recently made the decision to simply withdraw our current PMA
application and resubmit the entire package in a simpler and more clinically and
technically robust filing. Consequently, IDSI will submit a new PMA application
with a rephrased intended use statement better supported by our data, the
inclusion of new clinical cases to improve the biometrics, and with a new
clinical protocol to fully support the adjunctive use of CTLM(R) in clinical
mammography settings.
The key factor in my decision was the belief that re-filing should not
additionally delay our previous schedule. The schedule should remain unchanged
because the FDA indicated that Modules 1 through 4 would be `grandfathered' so
to speak, and because our clinical case read program will continue in its
current form. We are not starting over in any sense of the word. We will,
however, submit a fresh and concise PMA application without amendments or
extensions. Of course, this approach requires another filing fee but we believe
it yields a higher confidence scenario. So, to be very clear, we will submit a
new PMA application and there should be no additional delays in our overall
schedule. You have all waited patiently for CTLM(R) to become a US market
reality, and I would appreciate your continuing support through this next
important phase. I am very satisfied with this new approach." On October 18,
2004 we filed an 8-K report announcing this press release and attached it as an
exhibit.
Clinical Update
Patients are continuing to be scanned at our various collaboration sites,
including the University of Vienna, Allgemeines Hospital, the Humboldt
University of Berlin, Charite Hospital and at Policlinico Paolo Giancone
Hospital in Palermo, Italy.
We have completed all of the clinical studies required for our PMA application.
In this regard we have removed CTLM(R) Systems used in the studies from the
following locations:
o University of Virginia Health System in Charlottesville, Virginia
6
o The Women's Center for Radiology in Orlando, Florida
o The Don and Sybil Harrington Cancer Center ("Harrington") in Amarillo,
Texas
o The Instituto Nacional de Cancerologia (National Cancer Institute) in
Mexico City, Mexico
o Elizabeth Wende Breast Clinic in Rochester, New York
Other Recent Events
In June 2004, we announced that we were granted a Chinese Patent for "DIAGNOSTIC
TOMOGRAPHIC LASER IMAGING APPARATUS" as Chinese Patent No. ZL95197940X. The
patent was issued in the name of Richard J. Grable for a period of 20 years from
the date of filing until July 10, 2015 and is exclusively licensed to Imaging
Diagnostic Systems, Inc. See "Patent Licensing Agreement".
In July 2004, we announced that Tim Hansen was appointed by the Board of
Directors to serve as the new Chief Executive Officer and Board member. Mr.
Hansen has served in top-level executive positions in the medical imaging
industry over a 30-year period and was notably President of Picker Medical
Systems, a leading company in the diagnostic imaging market. Most recently, Mr.
Hansen was with Cardinal Health, Inc. as the general manager of the Radiation
Management Services, a leading provider of medical imaging quality assurance
instruments and solutions. On July 14, 2004 we filed an 8-K report announcing
this press release and attached it as an exhibit.
In August 2004, we announced that we were granted a European Patent for
"APPARATUS FOR DETERMINING THE PERIMETER OF THE SURFACE OF AN OBJECT BEING
SCANNED" as European Patent No. 1003419. This is the European equivalent of U.S.
Patent No. 6,044,288, which protects a key element in the optical technique used
to determine the perimeter of an object being scanned.
In September 2004, we announced that Janusz Ostrowski has joined IDSI as Vice
President, International Sales. He will be responsible for implementing and
managing the distribution network outside of the U.S. Mr. Ostrowski has over 20
years of experience as an imaging equipment industry executive who has spent his
career introducing new products and services to global markets.
In September 2004, we announced that we have installed a third CT Laser
Mammography System, CTLM(R), as part of Schering AG's Phase 1 clinical study of
the fluorescent imaging compound SF64. The third system was installed in the
prestigious Charite Hospital in Berlin. We had previously announced that CTLM(R)
Systems were installed at the Robert-Rossle Clinic and at the University of
Muenster.
In September 2004, we announced that we signed a multi-year agreement with China
Far East International Trading Corporation (CFETC) for the exclusive sale of our
CTLM(R) System in the People's Republic of China. The new agreement also
includes clinical research and collaboration programs and supersedes our
previous distribution contract with CFETC. On September 29, 2004 we filed an 8-K
report announcing this press release and attached it as an exhibit.
In October 2004, we issued a press release entitled "Shareholder Letter from
Imaging Diagnostic Systems, Inc." written by our new CEO, Tim Hansen. The letter
stated Mr. Hansen's three top priorities: first, get the U.S. FDA Pre Market
Approval (PMA) completed; second, launch a global commercialization program; and
third, lay out a roadmap to enhance the long-term growth of the Company. On
October 18, 2004 we filed an 8-K report announcing this press release and
attached it as an exhibit.
7
The Offering
Securities Offered by Selling Security Holder
Common Stock 7,000,000
Equity Securities Outstanding(1)
Common Stock(1),(2) 183,369,662
Warrants(3) None
Options(3),(4) 12,579,017
(1) The total number of equity shares outstanding as of November 9, 2004. Our
authorized common stock is 200,000,000 shares. See "Risk Factors--Although
we have increased and intend to further increase the number of shares of
our authorized common stock, we still may not have enough authorized common
stock available to utilize our Equity Credit Line."
(2) The total number of shares of common stock does not include (i) shares of
common stock covered by this prospectus and issuable upon the exercise of
our put options from our Fourth Private Equity Credit Agreement for which
we would receive gross proceeds of approximately $2.8 million which, for
the purpose of this prospectus, are estimated to represent 7,000,000 shares
and (ii) 12,579,017 shares of common stock subject to outstanding options.
(3) The options were issued in connection with our stock option plans and/or in
connection with some of our employment agreements. The exercise prices of
the options range from $.11 to $2.77 per share. Any outstanding warrants
that were issued to consultants, finders and private placement investors
expired on November 2, 2003. The exercise prices of the expired warrants
ranged from $1.00 to $1.50.
(4) Some of our executive officers and directors have waived their respective
rights to a reserve of shares for certain options that are unvested,
unexercisable and/or out of the money. Thus, 3,800,000 shares subject to
options are no longer covered by a reserve. This allows sufficient shares
to be available under this prospectus from the authorized shares.
8
Risk Factors
An investment in the common stock offered is highly speculative and
involves a high degree of risk. Accordingly, you should consider all of the risk
factors discussed below, as well as the other information contained in this
document. You should not invest in our common stock unless you can afford to
lose your entire investment and you are not dependent on the funds you are
investing.
Risks associated with our financial results
We have incurred and are incurring significant losses and we may not be able to
continue our business in the future.
At September 30, 2004, we had an accumulated deficit of $79,084,623 after
discounts and dividends on preferred stock. These losses have resulted
principally from costs associated with research and development, clinical trials
and from general and administrative costs associated with our operations. We
expect operating losses will continue for at least the next 12 months due
primarily to the anticipated expenses associated with:
o demonstrator sites
o pre-market approval process,
o anticipated commercialization of the CTLM(R), and
o other research and development activities that may arise.
We have a limited history of operations. Since our inception in December 1993,
we have been engaged principally in the development of the CTLM(R), which has
not been approved for sale in the United States. While we have received FDA
export approval for foreign sales, we have made only five foreign sales.
Consequently, we have little experience in manufacturing, marketing and selling
our products. We currently have no source of material operating revenues and
have incurred substantial net operating losses since inception.
Our auditors have raised substantial doubts as to our ability to continue as a
going concern as we have not been and may not be able to be profitable.
We have received an opinion from our auditors stating that the fact that we have
suffered substantial losses and have yet to generate an internal cash flow
raises substantial doubt about our ability to continue as a going concern. Our
ability to achieve profitability will depend on our ability to obtain regulatory
approvals for the CTLM(R), develop the capacity to manufacture and market the
CTLM(R) and achieve market acceptance of the CTLM(R). There can be no assurance
we will achieve profitability if and when we receive regulatory approvals for
the development, commercial manufacturing and marketing of the CTLM(R).
Risks associated with our lack of capital
We require additional capital which we may be unable to raise which may cause us
to stop or cut back our operations.
Through September 30, 2004 we have spent approximately $67 million. Our
currently estimated annual fixed commitment is approximately $7 million. In the
year following receipt of marketing clearance for our CTLM(R) from the FDA, we
anticipate that we will need approximately $5.0 million to complete all
necessary stages in order to manufacture and market the CTLM(R) in the United
States and foreign countries. We plan on using the net proceeds raised from the
sale of common stock through our Fourth Private Equity Credit Agreement to
develop and market this product, including funds for:
o research, engineering and development programs,
o pre-clinical and clinical testing of other proposed products,
o regulatory processes,
9
o inventory,
o marketing programs, and
o operating expenses (including general and administrative expenses).
Our future capital requirements depend on many factors, including the following:
o the progress of our research and development projects,
o the progress of pre-clinical and clinical testing on other proposed
products,
o the time and cost involved in obtaining regulatory approvals,
o the cost of filing, prosecuting, defending and enforcing any patent claims
and other intellectual property rights; competing technological and market
developments; changes and developments in our existing collaborative,
licensing and other relationships and the terms of any new collaborative,
licensing and other arrangements that we may establish, and
o the development of commercialization activities and arrangements.
In addition, our fixed commitments are substantial and would increase if
additional agreements were entered into and additional personnel were retained.
We do not expect to generate a positive internal cash flow for at least 12
months due to expected increases in capital expenditures, working capital needs,
and ongoing losses.
Although we have from time to time reviewed and may continue to review term
sheets provided to us by investment bankers or potential investors in regard to
additional equity financings, there can be no assurance that additional
financing will be available when needed, or if available, will be available on
acceptable terms. Insufficient funds may prevent us from implementing our
business strategy and will require us to further delay, scale back or eliminate
our research, product development and marketing programs; and may require us to
license to third parties rights to commercialize products or technologies that
we would otherwise seek to develop ourselves, or to scale back or eliminate our
other operations. See "Financing/Equity Line of Credit."
We have had and may have to issue securities, sometimes at prices substantially
below market price, for services which may further depress our stock price and
dilute the holdings of our shareholders.
Since we have generated no material revenues to date, our ability to obtain and
retain consultants may be dependent on our ability to issue stock for services.
Since July 1, 1996, we have issued an aggregate of 2,306,500 shares of common
stock covered by registration statements on Form S-8. The aggregate fair market
value of those shares when issued was $2,437,151. The issuance of large amounts
of our common stock, sometimes at prices well below market price, for services
rendered or to be rendered and the subsequent sale of these shares may further
depress the price of our common stock and dilute the holdings of our
shareholders. In addition, because of the possible dilution to existing
shareholders, the issuance of substantial additional shares may cause a
change-in-control.
We have in the past and may have to in the future sell additional unregistered
convertible securities, possibly without limitations on the number of common
shares the securities are convertible into, which could dilute the value of the
holdings of current shareholders.
We have relied on the private placement of convertible preferred stock and
convertible debentures to obtain working capital and may continue to do so in
the future. As of the date of this registration statement, we have issued
72,642,979 shares of common stock which were converted from preferred stock and
debentures that we privately placed. This number of shares of common stock
represents approximately 40% of the currently outstanding number of shares of
common stock.
10
In deciding to issue preferred stock and debentures through private placements,
we took into account:
o the number of common shares authorized and outstanding,
o the market price of the common stock at the time of each preferred stock or
debenture sale, and
o the number of common shares the preferred stock or debentures would have
been convertible into at the time of the sale.
At the time of each private placement there were enough shares, based on the
price of our common stock at the time of the sale of the preferred stock or
debentures, to satisfy the conversion requirements. Although our board of
directors tried to negotiate a floor on the conversion price of each series of
preferred stock and debentures prior to their sale, it was unable to do so.
In order to obtain working capital we will continue to:
o draw on our Fourth Private Equity Agreement pursuant to a prior
registration statement and this registration statement, once it is declared
effective
o seek capital through debt or equity financing which may include the
issuance of convertible debentures or convertible preferred stock whose
rights and preferences are superior to those of the common stockholders,
and
o try to negotiate the best transaction possible taking into account the
impact on our shareholders, dilution, loss of voting power and the
possibility of a change-in-control.
Nonetheless, in order to satisfy our working capital needs, we may be forced to
issue convertible securities without a floor on the conversion price.
In the event that we issue convertible preferred stock or convertible debentures
without a limit on the number of shares that can be issued upon conversion and
the price of our common stock decreases:
o the percentage of shares outstanding that will be held by these holders
upon conversion will increase accordingly,
o the lower the market price the greater the number of shares to be issued to
these holders upon conversion, thus increasing the potential profits to the
holder when the price per share later increases and the holder sells the
common shares,
o the preferred stockholders' and debenture holders' potential for increased
share issuance and profit, including profits derived from short sales of
our common stock, in addition to a stock overhang of an indeterminable
amount, may depress the price of our common stock,
o the sale of a substantial amount of preferred stock or debentures to
relatively few holders could effectuate a possible change-in-control, and
o in the event of our voluntary or involuntary liquidation while the
preferred stock or debentures are outstanding, the holders of those
securities will be entitled to a preference in distribution of our
property.
We may draw on our equity credit line which may cause the value of our common
stock to decline and dilute the holdings of our shareholders.
We had a $25 million private equity line of credit from Charlton pursuant to our
Amended Private Equity Agreement dated May 15, 2002, and replaced that agreement
with a $15 million Third Private Equity Credit Agreement dated October 29, 2002.
On January 9, 2004, we executed a new Fourth Private Equity Credit Agreement
with Charlton with terms and conditions more favorable for us. Pursuant to our
Fourth Private Equity Credit Agreement, when we feel it necessary, we may raise
capital through the private sale of our common stock to Charlton at a price
equal to 93% of the then market price based on the formula set forth in our
agreement with Charlton. Under the Fourth Private Equity Credit Agreement, we
filed an S-2 registration statement on January 30, 2004 to register 5,000,000
shares for resale by Charlton, which was declared effective on March 4, 2004 and
then on June 21, 2004 we filed an S-2 registration statement to register an
additional 9,000,000 shares for resale by Charlton, which was declared effective
on June 29, 2004. We may need capital in excess of the amounts available under
11
the Fourth Private Equity Credit Agreement or if we decline to use the Fourth
Private Equity Credit Agreement, we may seek additional funding through public
or private financing or collaborative, licensing and other arrangements with
corporate partners. If we utilize the Fourth Private Equity Credit Agreement, or
additional funds are raised by issuing equity securities, especially convertible
preferred stock, dilution to existing shareholders will result and future
investors may be granted rights superior to those of existing shareholders. See
"Financing/Equity Line of Credit."
The Fourth Private Equity Credit Line may not be available when we need it, thus
limiting our ability to bring our CTLM(R) to market.
The Fourth Private Equity Credit Line contains various conditions to our being
able to use it, including effectiveness of the required registration statement,
the absence of any material adverse change in our business or financial
condition, and a floor price, which is set at our option, and if violated during
the valuation period may cause a termination of a particular put transaction
unless waived by us. Further, Charlton is an offshore investment company and if
it were unable or unwilling to fulfill its obligations, our legal remedies would
be limited. Thus, we may be unable to draw down on the Fourth Private Equity
Credit Line when we need the funds, and that could severely harm our business
and financial condition and our ability to bring the CTLM(R) to market. In the
last four years, we have been almost exclusively dependent on Charlton for
working capital. Since April 1999, we have issued to Charlton a total of
106,594,874 shares of common stock through conversion of $13,410,000 face amount
of our preferred stock and debentures purchased by Charlton and through
$25,368,500 in purchases under all of our private equity lines. See "Selling
Security Holder" and "Financing/Equity Line of Credit."
We have had and may have to issue securities, sometimes at substantially below
market price, in order to pay off our debts which may further depress our stock
price and dilute the holdings of our shareholders.
Since we have generated no material revenues to date, we have had difficulty in
paying off some of our debts which have become due. In order to pay these debts,
we have issued shares and/or warrants to purchase shares of common stock. We
have also entered into agreements whereby the lender, sometimes at its option,
may be issued other equity securities, such as warrants, to pay off debt. On
some occasions, we have converted debt into equity at prices that were well
below the market price. In addition, as we have no material revenues, we may
have to issue more shares of common stock or other equity securities, sometimes
at prices well below market price, in order to pay off current or future debts
that become due. These types of issuances of common stock and other equity
securities to pay off debt may further depress the price of our common stock and
would dilute the holdings of our shareholders, and if substantial dilution does
occur, could also cause a change-in-control.
Conversions of our convertible preferred stock and exercise of our convertible
debentures and warrants may cause other detrimental effects to the value of our
shareholders' holdings.
If we issue substantial amounts of convertible securities and the market price
of our common stock declines significantly, we could be required to issue a
number of shares of common stock sufficient to result in our current
stockholders not having an effective vote in the election of directors and other
corporate matters. In the event of a change-in-control, it is possible that the
new majority stockholders may take actions that may not be consistent with the
objectives or desires of our current stockholders.
We would most likely be required to convert any convertible preferred stock and
convertible debentures which we choose to issue based on a formula that varies
with the market price of our common stock. As a result, if the market price of
our common stock increases after the issuance of our convertible preferred stock
and convertible debentures, it is possible that, upon conversion of the
convertible preferred stock and convertible debentures, we will issue shares of
common stock at a price that is far less than the then-current market price of
the common stock.
If the market price of our common stock decreases after we issue the convertible
preferred stock or convertible debentures, upon conversion, we will have to
issue an increased number of shares to the preferred stock and convertible
12
debenture holders. The sale of convertible preferred stock and debentures may
result in a very large conversion at one time. At the present time we have no
convertible preferred stock or convertible debentures outstanding. In the event
that we issue convertible preferred stock or convertible debentures we do not
have sufficient authorized shares to cover any conversion of these issuances and
would have to increase the number of authorized shares.
In addition, the warrants we issue are exercisable at a fixed price. If the
market price of our common stock increases above the warrant exercise price, we
will be required to issue shares of common stock upon exercise of the warrants
at a price that is less than the then-current market price. Issuances at less
than market price pose a risk to investors because these issuances may drive
down the market price of our common stock.
Risks associated with our industry
We depend on market acceptance to sell our products, which have not been proven,
and a lack of acceptance would depress our sales.
There can be no assurance that physicians or the medical community in general
will accept and utilize the CTLM(R) or any other products that we develop. The
extent and rate the CTLM(R) 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(R) and the advantages of the CTLM(R) over
existing technology and cancer detection methods.
There can be no assurance that the medical community and third-party payers will
accept our unique technology. Similar risks will confront any other products we
develop in the future. Failure of our products to gain market acceptance would
hinder our sales efforts resulting in a loss of revenues and potential profit
and, ultimately, could cause our business to fail. It would further prevent us
from developing new products.
Lack of third-party reimbursement may have a negative impact on the sales of our
products, which would negatively impact our revenues.
In the United States, suppliers of health care products and services are greatly
affected by Medicare, Medicaid and other government insurance programs, as well
as by private insurance reimbursement programs. Third-party payers (Medicare,
Medicaid, private health insurance companies, and other organizations) may
affect the pricing or relative attractiveness of our products by regulating the
level of reimbursement provided by these payers to the physicians, clinics and
imaging centers utilizing the CTLM(R) or any other products that we may develop,
by refusing reimbursement. The level of reimbursement, if any, may impact the
market acceptance and pricing of our products, including the CTLM(R). Failure to
obtain favorable rates of third-party reimbursement could discourage the
purchase and use of the CTLM(R) as a diagnostic device.
In international markets, reimbursement by private third-party medical insurance
providers, including governmental insurers and independent providers, varies
from country to country. In addition, such third-party medical insurance
providers may require additional information or clinical data prior to providing
reimbursement for a product. In some countries, our ability to achieve
significant market penetration may depend upon the availability of third-party
governmental reimbursement. Revenues and profitability of medical device
companies may be affected by the continuing efforts of governmental and third
party payers to contain or reduce the cost of health care through various means.
There are uncertainties regarding healthcare reform, including possible
legislation, whereby our customers may not receive medical reimbursement for the
use of our product on their patients, which may cause our customers to use other
services and products.
Several states and the United States government are investigating a variety of
alternatives to reform the health care delivery system. These reform efforts
include proposals to limit and further reduce and control health care spending
on health care items and services, limit coverage for new technology and limit
or control the price health care providers and drug and device manufacturers may
13
charge for their services and products, respectively. If adopted and
implemented, these reforms could cause our healthcare providers to limit or not
use the CTLM(R) systems.
Competition in the medical imaging industry may result in competing products,
superior marketing and lower revenues and profits for us.
The market in which we intend to participate is highly competitive. Many of the
companies in the cancer diagnostic and screening markets have substantially
greater technological, financial, research and development, manufacturing, human
and marketing resources and experience than we do. These companies may succeed
in developing, manufacturing and marketing products that are more effective or
less costly than our products. The competition for developing a commercial
device utilizing computed tomography techniques and laser technology is
difficult to ascertain given the proprietary nature of the technology. To our
knowledge, at least two companies are targeting the breast optical imaging
market. Advanced Research Technologies, Inc. (ART) (TSX:ARA) is developing a
non-3D imager which does not utilize our patented continuous wave technology and
in which the breast must be immersed in a gel. ART has signed distribution
agreements with GE Medical should a product become available. DOBI Medical
International, Inc. (DBMI:OB) is developing an optical imager based upon
compression and transillumination of the breast, which produces a 2D "map" of
relative oxygenation. IDSI views this adaptation of older technology as unlikely
to become a threat to our CT laser 3D approach. Neither ART nor DOBI have FDA
approval. To IDSI's knowledge, no other company has a functioning optical
imaging device designed for use as an adjunct to mammography. CTLM(R) Breast
Imaging Systems are in clinical settings in Italy, Germany, Austria, Peoples
Republic of China, and the United Arab Emirates. In vivo human studies of
fluorescent compounds are also underway at three Schering AG locations. Methods
for the detection of cancer are subject to rapid technological innovation and
there can be no assurance that future technical changes will not render our
CTLM(R) 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 our business, financial condition, and results of operations.
Risks associated with our securities
Our common stock is considered "a penny stock" and may be difficult to sell.
The SEC has adopted regulations which generally define "penny stock" to be an
equity security that has a market price of less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to specific exemptions.
Presently, the market price of our common stock is substantially less than $5.00
per share and therefore may be designated as a "penny stock" according to SEC
rules. This designation requires any broker or dealer selling these securities
to disclose certain information concerning the transaction, obtain a written
agreement from the purchaser and determine that the purchaser is reasonably
suitable to purchase the securities. These rules may restrict the ability of
brokers or dealers to sell our common stock and may affect the ability of
investors to sell their shares. In addition, since our common stock is traded on
the NASDAQ OTC Bulletin Board, investors may find it difficult to obtain
accurate quotations of our common stock.
The volatility of our stock price could adversely affect your investment in our
common stock.
The price of our common stock has fluctuated substantially since it began
trading on the OTC Bulletin Board in September 1994. For example, in the current
fiscal year which began July 1, 2004, the bid price ranged from a low of $.27 in
the first quarter to a high of $.68 in the second quarter, and in our last
fiscal year which ended June 30, 2004, the bid price ranged from a low of $.39
in the fourth quarter to a high of $1.80 in the first quarter. The market price
of our shares, like that of the common stock of many other medical device
companies, is likely to continue to be highly volatile. Factors that may have an
impact on the price of our common stock include:
o the timing and results of our clinical trials or those of our competitors,
o governmental regulation,
o healthcare legislation,
o geopolitical events,
14
o equity or debt financing, and
o developments in patent or other proprietary rights pertaining to our
competitors or us, including litigation, fluctuations in our operating
results, and market conditions for medical device company stocks and life
science stocks in general.
We may issue preferred stock at any time to prevent a takeover or acquisition,
any of which issuance could dilute the price of our common stock.
Our articles of incorporation authorize the issuance of preferred stock with
designations, rights, and preferences that may be determined from time to time
by the board of directors. Our board of directors is empowered, without
stockholder approval, to designate and issue additional series of preferred
stock with dividend, liquidation, conversion, voting and other rights, including
the right to issue convertible securities with no limitations on conversion,
which could adversely affect the voting power or other rights of the holders of
our common stock. This could substantially dilute the common shareholders'
interest and depress the price of our common stock. In addition, the preferred
stock could be utilized as a method of discouraging, delaying or preventing a
change-in-control. The substantial number of issued and outstanding convertible
preferred stock and the convertible debentures, and their terms of conversion
may discourage or prevent an acquisition of our company.
Although we have increased and intend to further increase the number of shares
of our authorized common stock, we still may not have enough authorized common
stock available to utilize our Equity Credit Line.
Pursuant to a vote of a majority of our shareholders in December 2002, we
amended our articles of incorporation to increase our authorized common stock
from 150,000,000 shares to 200,000,000 shares in order to make available the
shares we would need for sale under the Third Private Equity Credit Agreement
and/or other future equity financing arrangements. Soon we will need
substantially more shares for sale under the Fourth Private Equity Credit
Agreement. Therefore, we will again have to increase our authorized common stock
in order to have available sufficient authorized common stock to utilize the
Fourth Private Equity Credit Agreement, which would result in further dilution
to our existing stockholders. In the event that such an amendment were not
approved by our shareholders, we would be materially adversely affected, as our
ability to raise capital would be severely impaired.
In addition, until the time when we are able to generate material revenues, we
are dependent on equity or other financing to continue operations and an
amendment authorizing more common stock would afford us additional shares to
finance our operations through equity financings, which we will continue to do,
as we will require substantial additional funds for our operations. We may again
be obligated to increase our authorized common stock to facilitate the
conversion of new preferred stock or debentures and to utilize our private
equity credit line or to accommodate other future issuances of equity
securities.
Based on the closing bid price of our common stock on November 9, 2004, of $.40
per share approximately 27,251,344 shares would be required to be issued to draw
the balance of the $15 million maximum amount available under the Fourth Private
Equity Credit Agreement, although it is unlikely that we will draw the full
amount available. The amount of shares required would be proportionately less if
we draw less.
In addition, 12,579,017 shares would be required for the exercise of outstanding
options. Based upon this information, as of November 9, 2004, we would need in
excess of approximately 23 million authorized shares for complete utilization of
the Fourth Private Equity Credit Agreement and fulfillment of our existing
stock-related obligations.
We now have issued and outstanding 183,369,662 shares of common stock out of
200,000,000 authorized shares. In addition, we have reserved 8,779,017 shares to
cover outstanding options (after waivers by some of our executive officers and
directors of the reserve requirement for options to purchase 3,800,000 shares
held by them which are unvested, unexercisable and/or out of the money). Given
the balance of 345,907 shares offered pursuant to our current Form S-2
registration statement and prospectus which was declared effective on June 29,
2004, and the 7,000,000 shares covered by this prospectus, we will have less
than less than one million authorized but unissued shares available under our
15
current articles of incorporation. Therefore, given our ongoing need to issue
substantial amounts of new shares to raise capital under our Fourth Private
Equity Credit Agreement with Charlton, we will soon need to obtain shareholder
approval of an amendment to our articles of incorporation approving a
substantial increase in our authorized common stock. There can be no assurance
that our shareholders will approve such an increase. If they do not, then we
will have to seek alternative sources of funding, which may not be available on
commercially reasonable terms. Consequently, a failure to obtain such
shareholder approval could have a material adverse impact on IDSI.
We currently are controlled by our executive officers and directors; however, a
change-in-control may occur.
Our management beneficially owns 10,141,170 shares of our common stock or 5.5%
(assuming exercise of their currently exercisable options) of our common stock.
Separately, Linda Grable, our former Chairman and CEO who retired in April 2004,
beneficially owns 19,660,274 shares of our common stock as of November 9, 2004,
which represents 10.7% of our outstanding common stock (assuming exercise of her
currently exercisable options). Although management owns a minority of the
outstanding common stock, since we do not have cumulative voting, and since, in
all likelihood the officers and directors will be voting as a block and will be
able to obtain proxies of other shareholders, management may, with or without
Ms. Grable's support, remain in a position to elect all of our directors and
control our policies and operations. Based on the current market price of our
common stock, we would have to issue approximately 27,251,344 shares to draw the
balance of the $15 million maximum available under the new Fourth Private Equity
Credit Agreement, and proportionately fewer shares if we draw less funds. The
amounts of shares issuable under the Fourth Private Equity Credit Agreement
could increase substantially if our common stock price declines. Dilution to
management's ownership percentage as a result of share issuances under the
Fourth Private Equity Credit Agreement could cause a change in control. In
addition, Ms. Grable announced in June 2004 that she is "currently evaluating
whether to propose nominees, which may include herself, for election to IDS's
Board of Directors at the next annual meeting of shareholders of IDS or at an
earlier time (and to solicit proxies in connection therewith). No final decision
in this regard has been made." If she proceeds with a proxy contest and
prevails, a change in control would occur. If the proxy contest occurs,
regardless of the outcome, the cost of the contest and resulting distraction to
management and our employees could materially adversely affect our business.
We have not paid and do not currently intend to pay dividends, which may limit
the current return you may receive on your investment in our common stock.
Since inception, we have not paid a dividend on our common stock and do not
intend to pay dividends on our common stock in the foreseeable future.
Risks associated with our technology
We depend on a patent licensed to us by our late founder without which our
operations would cease.
We own the rights, through an exclusive patent licensing agreement, for the use
of the patent for the CTLM(R) technology. The estate of Richard Grable owns the
patent. In addition, we own 17 patents and have 9 additional United States
patents pending with regard to optical tomography, many of which are based on
the original CTLM(R) technology. In the event that we breach the patent
licensing agreement, we could lose the licensing rights to the CTLM(R)
technology. The loss of the patent license would have a material adverse effect
on us and our continued operations.
Our business would lose its primary competitive advantage if we are unable to
protect our proprietary technology, or if substantially the same technology is
developed by others.
We rely primarily on a combination of trade secrets, patents, copyright and
trademark laws, and confidentiality procedures to protect our technology.
16
Our ability to compete effectively in the medical imaging products industry will
depend on our success in protecting our proprietary technology, both in the
United States and abroad. There can be no assurances that any patent that we
apply for will be issued, or that any patents issued will not be challenged,
invalidated, or circumvented, that we will have the financial resources to
enforce them, or that the rights granted will provide any competitive advantage.
We hold eight foreign patents; however, we have applied for 28 patents in
various foreign countries. We could incur substantial costs in defending any
patent infringement suits or in asserting any patent rights, including those
granted by third parties, the expenditure of which we might not be able to
afford.
Although we have entered into confidentiality and invention agreements with our
employees and consultants, there can be no assurance that these agreements will
be honored or that we will be able to protect our rights to our non-patented
trade secrets and know-how effectively. There can be no assurance that others
will not independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to our trade secrets and know-how. In
addition, we may be required to obtain licenses to patents or other proprietary
rights from third parties. If we do not obtain required licenses, we could
encounter delays in product development or find that the development,
manufacture, or sale of products requiring these licenses could be foreclosed.
Additionally, we may, from time to time, support and collaborate in research
conducted by universities and governmental research organizations. There can be
no assurance that we will have or be able to acquire exclusive rights to the
inventions or technical information derived from such collaborations or that
disputes will not arise with respect to rights in derivative or related research
programs that we conducted in conjunction with these organizations.
It may be necessary to enter into unfavorable agreements or defend lawsuits
which would be costly if we infringe upon the intellectual property rights of
others.
There has been substantial litigation regarding patent and other intellectual
property rights in the medical device and related industries. We have been, and
may be in the future, notified that we may be infringing on intellectual
property rights possessed by other third parties. If any claims are asserted
against our intellectual property rights, we may seek to enter into royalty or
licensing arrangements. There is a risk in situations that no license will be
available or that a license will not be available on reasonable terms.
Alternatively, we may decide to litigate these claims or design around the
patented technology. These actions could be costly and would divert the efforts
and attention of our management and technical personnel. Consequently, any
infringement claims by third parties or other claims for indemnification by
customers resulting from infringement claims, whether or not proven to be true,
may be costly to defend and may further limit the use of our technology.
We may not be able to keep up with the rapid technological change in the medical
imaging industry which could make the CTLM(R) obsolete.
Methods for the detection of cancer are subject to rapid technological
innovation and there can be no assurance that technical changes will not render
our proposed products obsolete. Although we believe that the CTLM(R) can be
upgraded to maintain its state-of-the-art character, the development of new
technologies or refinements of existing ones might make our existing system
technologically or economically obsolete, or cause a reduction in the value of,
or reduce the need for, our CTLM(R). There can be no assurance that the
development and commercial availability of new types of diagnostic medical
equipment or technology will not have a material adverse effect on our business,
financial condition, and results of operations. Although we are aware of no
substantial technological changes pending, should a change occur, there can be
no assurance that we will be able to acquire the new or improved systems which
may be required to update the CTLM(R).
17
Risks associated with our business
We must comply with extensive governmental regulations and have no assurance of
regulatory approvals or clearances which could cause us to cut back or cease
operations.
Our delay or inability to obtain any necessary United States, state or foreign
regulatory clearances or approvals for our products would prevent us from
selling the CTLM(R) system in the U.S. and other countries.
In the United States, the CTLM(R) is regulated as a medical device and is
subject to the FDA's pre-market clearance or approval requirements. To obtain
FDA approval of an application for pre-market approval of a diagnostic tool such
as the CTLM(R), the pre-market approval application must demonstrate based on
statistically significant results from extensive clinical studies, that the
subject device is safe and has clinical utility, meaning that as a diagnostic
tool it provides information that measurably contributes to a diagnosis of a
disease or condition. We are now relying on outside FDA consultants to assist us
in obtaining the PMA from the FDA.
In addition, sales of medical devices outside the United States may be subject
to international regulatory requirements that vary from country to country. The
time required to gain approval for international sales may be longer or shorter
than required for FDA approval and the requirements may differ. For example, in
order to sell our products within the European Economic Area ("EEA"), companies
are required to achieve compliance with the requirements of the medical devices
directive and affix a "CE" marking on their products to attest compliance. In
Europe, we have obtained the certifications in January 2001 necessary to enable
the CE mark to be affixed to our products in order to conduct sales in member
countries of the EEA, subject to compliance with additional regulations imposed
by individual countries.
Regulatory approvals, if granted, may include significant limitations on the
indicated uses for which the CTLM(R) may be marketed. In addition, to obtain
these approvals, the FDA and certain foreign regulatory authorities may impose
numerous other requirements which medical device manufacturers must comply with.
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 we will depend to manufacture our
products are required to adhere to applicable FDA regulations regarding quality
systems regulations commonly referred to as QSRs, which include testing, control
and documentation requirements. Failure to comply with applicable regulatory
requirements, including marketing and promoting products for unapproved use,
could result in warning letters, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, refusal of the
government to grant pre-market clearance or approval for devices, withdrawal of
approvals and criminal prosecution. Changes in existing regulations or adoption
of new government regulations or polices could prevent or delay regulatory
approval of our products. Material changes to medical devices also are subject
to FDA review and clearance or approval.
There can be no assurance that we will be able to obtain or maintain the
following:
o FDA approval of a pre-market approval application for the CTLM(R),
o foreign marketing clearances for the CTLM(R) or regulatory approvals or
clearances for other products that we may develop, on a timely basis, or at
all,
o timely receipt of approvals or clearances,
o continued approval or clearance of previously obtained approvals and
clearances, and
o compliance with existing or future regulatory requirements.
If we do not obtain or maintain any of the above-mentioned standards, there may
be material adverse effects on our business, financial condition and results of
operations.
18
We may not be able to develop other products that are currently in the early
stages of development due to our need for additional capital.
Due to our need for additional capital, our proposed products other than the
CTLM(R) device are at early stages of development. There can be no assurance
that any of our proposed products, including the CTLM(R), will:
o be found to be safe and effective,
o meet applicable regulatory standards or receive necessary regulatory
clearance,
o be developed into commercial products, manufactured on a large scale or be
economical to market, or
o achieve or sustain market acceptance.
Therefore, there is substantial risk that our product development and
commercialization efforts will prove to be unsuccessful.
We will depend on a single product, the CTLM(R), for our revenues in the next
few years, any problems with which would cause material adverse effects to our
business.
We are in the process of developing additional products based on our main
technology, including an enhancement of the CTLM(R) device for use with
fluorescence contrast agents. The use of fluorescent contrast agents is not
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(R) device would account for substantially all of our
revenues, if any, for at least the next two years. Failure to gain regulatory
approvals or market acceptance for the CTLM(R) device would prevent the sale of
the CTLM(R) device in the U.S. and other countries adhering to FDA approved
guidelines.
We depend upon suppliers with whom we have no contracts, which suppliers could
cause production disruption if they terminated or changed their relationships
with us.
We believe that there are a number of suppliers for most of the components and
subassemblies required for the CTLM(R); however, components for our laser system
are provided by one supplier. Although these components are provided by a
limited number of other suppliers, we believe our laser supplier and their
products are the most reliable. We have no agreement with our laser supplier and
purchase the laser components on an as-needed basis. For certain services and
components, we currently rely on single suppliers. If we encounter delays or
difficulties with our third-party suppliers in producing, packaging, or
distributing components of the CTLM(R) device, market introduction and
subsequent sales would be adversely affected.
We have limited experience in sales, marketing and distribution, which could
negatively impact our ability to enter into collaborative arrangements or other
third party relationships which are important to the successful development and
commercialization of our products and potential profitability.
We have limited internal marketing and sales resources and personnel. There can
be no assurance that we will be able to establish sales and distribution
capabilities or that we will be successful in gaining market acceptance for any
products we may develop. There can be no assurance that we will be able to
recruit and retain skilled sales, marketing, service or support personnel, that
agreements with distributors will be available on terms commercially reasonable
to us, or at all, or that our marketing and sales efforts will be successful.
There can be no assurance that we will be able to further develop our
distribution network on acceptable terms, if at all, or that any of our proposed
marketing schedules or plans can or will be met.
19
We depend on qualified personnel to run and develop our specialized business who
we may be unable to retain or hire.
Due to the specialized scientific nature of our business, we are highly
dependent upon our ability to attract and retain qualified scientific, technical
and managerial personnel. We have entered into employment agreements with some
of our executive officers. The loss of the services of existing personnel, as
well as the failure to recruit key scientific, technical and managerial
personnel in a timely manner would be detrimental to our research and
development programs and could have an adverse impact upon our business affairs
and finances. Our anticipated growth and expansion into areas and activities
requiring additional expertise, such as marketing, will require the addition of
new management personnel. Competition for qualified personnel is intense and
there can be no assurance that we will be able to continue to attract and retain
qualified personnel necessary for the development of our business.
We have a limited manufacturing history that could cause delays in the
production and shipment of our product.
We will have to expand our CTLM(R) manufacturing and assembly capabilities and
contract for the manufacture of the CTLM(R) components in volumes that will be
necessary for us to achieve significant commercial sales in the event we begin
foreign sales and/or obtain regulatory approval to market our products in the
United States. We have limited experience in the manufacture of medical products
for clinical trials or commercial purposes. Should we continue to manufacture
our products at our facility, our manufacturing facilities would continue to be
subject to the full range of the FDA's current quality system regulations. In
addition, there can be no assurance that our manufacturing efforts will be
successful or cost-effective
We depend on third parties who may not be in compliance with the FDA's quality
system regulations, which may delay the approval or decrease the sales of the
CTLM(R).
We have used and do use third parties to manufacture and deliver the components
of the CTLM(R) and intend to continue to use third parties to manufacture and
deliver these components and other products we may develop. There can be no
assurance that the third-party manufacturers we depend on for the manufacturing
of CTLM(R) components will be in compliance with the quality system regulations
(QSR) at the time of the pre-approval inspection or will maintain compliance
afterwards. This failure could significantly delay FDA approval of the
pre-market approval application for the CTLM(R) device, and a post-approval
failure could materially adversely affect our sales.
We have had and may have delays in getting our products to market both
domestically and internationally, which have hindered and may hinder our sales.
Originally, we anticipated that the CTLM(R) would be ready for distribution in
the summer of 1998; however, during the course of clinical trials, we learned of
problems with particular components of the CTLM(R) that needed to be corrected
before distribution. The solutions to these problems took far longer than
expected. Specifically, the laser components, the electronic technology involved
in image acquisition and the fiber optics had to be modified.
We intend to sell CTLM(R) systems through distributors and dealers in various
countries where sales are permitted. No CTLM(R) systems have been sold pursuant
to an investigational device exemption in the United States market.
We will rely on international sales and may be subject to risks associated with
international commerce.
We have commenced international sales efforts for the CTLM(R) in Europe, China,
and the Middle East. Until we receive pre-market approval from the FDA to market
the CTLM(R) in the United States, our revenues, if any, will be derived from
sales to international distributors. A significant portion of our revenues may
be subject to the risks associated with international sales, including:
o economic and political instability,
20
o shipping delays,
o fluctuation of foreign currency exchange rates,
o foreign regulatory requirements,
o various trade restrictions, all of which could have a significant impact on
our ability to deliver products on a timely basis, and
o inability to collect outstanding receivables to the extent that irrevocable
letters of credit are not used.
Significant increases in the level of customs duties, export quotas or other
trade restrictions could have a material adverse effect on our business,
financial condition and results of operations. The regulation of medical devices
in foreign countries continues to develop, and there can be no assurance that
new laws or regulations will not have an adverse effect on us. In order to
minimize the risk of doing business with distributors in countries which are
having difficult financial times, our international distribution agreements all
require payment via an irrevocable letter of credit drawn on a United States
bank prior to shipment of the CTLM(R).
Our business has the risk of product liability claims, and adequate insurance
coverage may be too expensive or unavailable, which may expose us to material
liabilities.
Our business exposes us to potential product liability risks, which are inherent
in the testing, manufacturing, and marketing of cancer detection products.
Significant litigation, not involving us, has occurred in the past based on the
allegations of false negative diagnoses of cancer. There can be no assurance
that we will not be subjected to claims and potential liability. Although the
FDA does not require product liability insurance with regard to clinical
investigations, we obtained and presently carry product liability insurance in
the amount of $3,000,000. While we plan to maintain insurance against product
liability and defense costs, there can be no assurance that claims against us
arising with respect to our products will be successfully defended or that the
insurance to be carried by us will be sufficient to cover liabilities arising
from any claims. A successful claim against us in excess of our insurance
coverage could have a material adverse effect on us. Furthermore, there can be
no assurance that we will be able to continue to obtain or maintain product
liability insurance on acceptable terms.
21
Where You Can Find More Information
We have filed with the SEC a Registration Statement on Form S-2 with all
amendments and exhibits under the Securities Act of 1933, as amended, concerning
the common stock offered in this prospectus. This prospectus does not contain
all of the information contained in the registration statement. We have omitted
parts of the registration statement in accordance with the rules and regulations
of the SEC. For further information with respect to us and our securities, you
should refer to the registration statement, including its schedules and
exhibits. Statements contained in this prospectus as to the contents of any
contract or other document are not necessarily complete and, in each instance,
you should refer to the copy of the filed contract or document which is
qualified in all respects by such reference. You may obtain copies of the
registration statement from the SEC's principal office in Washington, D.C. upon
payment of the fees prescribed by the SEC, or you may examine the registration
statement without charge at the offices of the SEC described below.
We have filed annual, quarterly and special reports, proxy statements, and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms at 450 Fifth Street, NW, Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further filing information and
locations of public reference rooms. Our SEC filings are also available to the
public on the SEC's website at http://www.sec.gov.
Incorporation Of Certain Documents By Reference
The SEC allows us to "incorporate by reference" the information that we file
with it, meaning we can disclose important information to you by referring you
to those documents already on file with the SEC. The information incorporated by
reference is considered to be part of this prospectus, and information that we
file later with the SEC will automatically update and supersede this
information. We incorporate by reference the following documents:
1. Our annual report on Form 10-K for the year ended June 30, 2004, filed
on September 17, 2004.
2. Our quarterly report on Form 10-Q for the quarter ended September 30,
2004, filed on November 8, 2004.
We also incorporate by reference any future filings made with the SEC under
Sections 13 (a), 13 (c), 14 or 15 (d) of the Securities Act of 1934, as amended,
prior to the termination of the offering to which this prospectus relates.
You may request a copy of any of these filings, at no cost, by writing or
calling us at the following address:
Imaging Diagnostic Systems, Inc.
6531 NW 18th Court
Plantation, Florida 33313
Telephone number (954) 581-9800
Attn: Investor Relations
Information With Respect To The Registrant
The information required to be disclosed in the registration statement
pertaining to this prospectus is incorporated by reference, including, among
other documents, our latest Form 10-K, which is being delivered with this
prospectus. See "Documents Incorporated by Reference", "Prospectus Summary", and
"Risk Factors".
22
Financing/Equity Line of Credit
We will require substantial additional funds for working capital, including
operating expenses, clinical testing, regulatory processes and manufacturing and
marketing programs and our continuing product development programs. Our capital
requirements will depend on numerous factors, including the progress of our
product development programs, results of pre-clinical and clinical testing, the
time and cost involved in obtaining regulatory approvals, the cost of filing,
prosecuting, defending and enforcing any patent claims and other intellectual
property rights, competing technological and market developments and changes in
our existing research, licensing and other relationships and the terms of any
new collaborative, licensing and other arrangements that we may establish.
Moreover, our fixed commitments, including salaries and fees for current
employees and consultants, and other contractual agreements are likely to
increase as additional agreements are entered into and additional personnel are
retained.
On July 17, 2000 we sold to Charlton in a private placement 400 shares of our
Series K convertible preferred stock for $4 million. We issued an additional 95
Series K shares to Charlton for $950,000 on November 7, 2000. The total of
$4,950,000 was designed to serve as bridge financing pending draws on the
Charlton private equity line (described below). We paid Spinneret Financial
Systems Ltd. ("Spinneret"), an independent financial consulting firm
unaffiliated with the Company and, according to Spinneret and Charlton,
unaffiliated with Charlton, $200,000 as a consulting fee for the first tranche
of Series K shares and five Series K shares as a consulting fee for the second
tranche. We were obligated to pay a 9% dividend on the Series K 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. Under the Series
K Certificate of Designations, we had the option of redeeming the remaining
convertible preferred (except for the Spinneret shares) 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 did not redeem the convertible
preferred according to the above schedule, the holder had the right to convert
the convertible preferred into common stock at a per share price equal to the
lower of $1.29 (115% of the closing bid price on the day prior to the initial
issuance) or 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. In November 2000, Charlton converted 25 Series K shares plus
accrued dividends into 197,349 restricted shares of common stock. In January
2001, Charlton converted $3,950,000 (395 shares) of Series K convertible
preferred stock into an aggregate of 4,935,412 common shares and Spinneret
converted $50,000 (5 shares) of Series K convertible preferred stock into an
aggregate of 63,996 common shares. On December 12, 2000, we registered 5,720,605
common shares underlying the 500 shares of Series K convertible preferred stock.
The shares registered included only 58,140 shares underlying the Spinneret
Series K preferred so we had to issue 5,856 common shares with a restrictive
legend. Those shares were registered in February 2001. Of the remaining 100
shares of Series K preferred stock, 50 shares were converted into 664,659 shares
of common stock in April 2001 and 50 shares were redeemed for $550,000 using
proceeds from the Charlton private equity line in April 2001.
On August 17, 2000, we entered into a $25 million private equity credit
agreement with Charlton. On November 29, 2000, prior to any draws under the
initial private equity agreement, we terminated that agreement and the initial
agreement was replaced by an Amended Private Equity Credit Agreement dated
November 30, 2000 (the "Private Equity Agreement"). The Private Equity Agreement
committed Charlton to purchase up to $25 million of common stock subject to
certain conditions pursuant to Regulation D over the course of a commitment
period extending 12 months after the effective date of a registration statement
covering the Private Equity Agreement common shares. The timing and amounts of
the purchase by the investor were at our sole discretion. We were required to
draw down a minimum of $10 million from the credit line over the initial
12-month period. If the minimum amount was not sold, Charlton was entitled to
receive a payment equal to 9% of the difference between the $10,000,000 and the
amount drawn by us (the "Shortfall Payment"). The purchase price of the shares
of common stock was set at 91% of the market price. The market price, as defined
in the agreement, was the average of the three lowest closing bid prices of the
23
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. If, subsequent to effectiveness, the registration statement was
suspended at any time, we would be obligated to pay liquidated damages of 1.5%
of the cost of all common stock then held by the investor for each 15-day period
or portion thereof, beginning on the date of the suspension. If such suspension
was cured within the first 15 days, the damages would not apply. The only fee
associated with the private equity financing was a 5% consulting fee payable to
Spinneret. In September 2001 Spinneret proposed to lower the consulting fee to
4% provided that we pay their consulting fee in advance. We reached an agreement
and paid them $250,000 out of proceeds from a put. On December 13, 2000 we
registered 7,089,685 shares of common stock underlying $10 million out of the
$25 million available in the Private Equity Agreement. Because of the decline in
our stock price, we did not have sufficient common shares registered to fulfill
our obligation under the Private Equity Agreement. To satisfy our obligation to
provide registered common shares to cover the $10 million minimum, we registered
9,875,000 additional shares on October 23, 2001. We paid Spinneret an additional
$186,235 in consulting fees relating to the Private Equity Agreement from
January to September 2001.
The principal conditions to our ability to draw under the private equity line
were 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 $.50 and
the average daily trading volume must be at least $100,000, (ii) no more than
19.9% of our outstanding common stock (34,217,823 shares as of the date of this
report) may be issued under the agreement without shareholder approval if such
approval is required by our principal trading market (it is not required by our
current market, the OTC Bulletin Board), (iii) the purchase cannot cause
Charlton to beneficially own more than 9.9% of our outstanding common stock
(according to the information available to us it beneficially owns less than 5%
of the common stock as of the date of this report), and (iv) there be no
material adverse change in our business or financial condition since our most
recent filing with the SEC.
The New Private Equity Agreement
- --------------------------------
Because the average bid price of our common stock fell below the contractually
required $.50 during the 15-day period prior to puts and/or put closings from
time to time in the period beginning November 15, 2001, Charlton orally agreed
to waive the minimum price requirement. Further, because we drew only $5,825,000
of the $10,000,000 minimum by December 13, 2001, Charlton orally agreed to
extend the commitment period and thereby waived its right to receive a Shortfall
Payment based on our failure to timely draw the $10,000,000 minimum. On May 7,
2002, we and Charlton entered into a written amendment to the Private Equity
Agreement as of November 15, 2001, which (i) reduced the minimum stock price
requirement from $.50 to $.25, (ii) reduced the minimum average daily trading
volume to $50,000, and (iii) extended the commitment period to December 13,
2003. Between November 15, 2001, and April 24, 2002, Charlton accepted two puts
totaling $625,000 and 1,410,240 shares despite the relevant average bid price
having fallen below $.50. From December 14, 2001, to April 24, 2002, Charlton
accepted eight puts totaling $2,600,000 and 5,897,827 shares. Charlton has not
accepted any puts under the prior Private Equity Agreement since April 24, 2002.
Charlton agreed to the waivers sought by us in connection with the prior Private
Equity Agreement because of our good working relationship and the mutually
beneficial nature of the relationship. During the initial one-year commitment
period, we drew only $5,825,000 of the $10,000,000 minimum because we did not
require all of the funds and wanted to avoid unnecessary dilution of our
shareholders and unnecessary sales of our stock, which could have depressed its
market price. Charlton has never rejected any of our puts. From January 25, 2001
to April 9, 2002 we drew $8,425,000 and issued 15,015,479 shares to Charlton
under the prior Private Equity Agreement.
On May 15, 2002, we and Charlton entered into a new private equity agreement
which replaced the prior Private Equity Agreement (the "New Private Equity
Agreement"). The terms of the New Private Equity Agreement are substantially
equivalent to the terms of the prior agreement, except that (i) the commitment
period is three years from the effective date of a registration statement
covering the New Private Equity Agreement shares, (ii) the minimum amount we
must draw through the end of the commitment period is $2,500,000, (iii) the
minimum stock price requirement has been reduced to $.20, and (iv) the minimum
average trading volume has been reduced to $40,000. The conditions to our
ability to draw under this private equity line, as described above, may
materially limit the draws available to us.
24
Since we did not yet have an effective registration statement covering shares to
be sold pursuant to the New Private Equity Agreement, in May 2002, Charlton
loaned us $350,000 in order to partially cover our short-term working capital
needs. This loan was evidenced by a promissory note dated May 29, 2002, due
August 1, 2002, and bearing interest at a rate of 2% per month. The loan was
secured by a pledge of 1,000,000 shares of our common stock, 500,000 each by our
Chief Executive Officer, Linda Grable, and by our Executive Vice President and
Chief Financial Officer, Allan Schwartz, and was personally guaranteed by Ms.
Grable and Mr. Schwartz. Charlton orally agreed to extend the due date of the
note, and we have paid it back in full with proceeds of puts under the New
Private Equity Agreement between July and December 2002.
On May 17, 2002 we filed a registration statement on Form S-2 to register
10,000,000 shares underlying the New Private Equity Agreement, which was
declared effective by the SEC on July 24, 2002. We intend to make sales under
the New Private Equity Agreement from time to time in order to raise working
capital on an "as needed" basis. We may sell additional shares pursuant to the
New Private Equity Agreement through subsequent registration statement(s),
provided that our stock price remains above that agreement's minimum. As of the
date of this prospectus under the New Private Equity Agreement we have drawn
down $2,076,000 and issued 9,989,319 shares of common stock.
The Third Private Equity Credit Agreement
- -----------------------------------------
On October 29, 2002, we and Charlton entered into a new "Third Private Equity
Credit Agreement" with which we intend to supplement the prior New Private
Equity Agreement. The terms of the Third Private Equity Credit Agreement are
substantially equivalent to the terms of the prior agreement, except that (i)
the commitment period is three years from the effective date of a registration
statement covering the Third Private Equity Credit Agreement shares, (ii) the
maximum commitment is $15,000,000, (iii) the minimum amount we must draw through
the end of the commitment period is $2,500,000, (iv) the minimum stock price
requirement has been reduced to $.10, and (v) the minimum average trading volume
in dollars has been reduced to $20,000. The conditions to our ability to draw
under this private equity line, as described above, may materially limit the
draws available to us.
We intend to make sales under the new Third Private Equity Credit 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 in excess of
the $2,500,000 minimum but substantially less than the $15,000,000 maximum under
the new Third Private Equity Credit Agreement; however, if those needs change we
may draw up to the $15,000,000 maximum. As of the date of this prospectus under
the Third Private Equity Credit Agreement we have drawn down $10,005,000 and
issued 24,307,100 shares of common stock.
There can be no assurance that adequate financing will be available when needed,
or if available, will be available on acceptable terms. Insufficient funds may
prevent us from implementing our business plan or may require us to delay, scale
back, or eliminate certain of our research and product development programs or
to license to third parties rights to commercialize products or technologies
that we would otherwise seek to develop ourselves. If we utilize the new Third
Private Equity Credit Agreement or additional funds are raised by issuing equity
securities, especially convertible preferred stock and convertible debentures,
dilution to existing shareholders will result and future investors may be
granted rights superior to those of existing shareholders. Moreover, substantial
dilution may result in a change in our control.
The Fourth Private Equity Credit Agreement
- ------------------------------------------
On January 9, 2004, we and Charlton entered into a new "Fourth Private Equity
Credit Agreement" which replaces our prior private equity agreements. The terms
of the Fourth Private Equity Credit Agreement are more favorable to us than the
terms of the prior Third Private Equity Credit Agreement. The new, more
favorable terms are: (i) The put option price is 93% of the three lowest closing
bid prices in the ten day trading period beginning on the put date and ending on
the trading day prior to the relevant closing date of the particular tranche,
while the prior Third Private Equity Credit Agreement provided for 91%, ii) the
commitment period is two years from the effective date of a registration
statement covering the Fourth Private Equity Credit Agreement shares, while the
prior Third Private Equity Credit Agreement was for three years, (iii) the
maximum commitment is $15,000,000, (iv) the minimum amount we must draw through
the end of the commitment period is $1,000,000, while the prior Third Private
Equity Credit Agreement minimum amount was $2,500,000, (v) the minimum stock
price requirement is now controlled by us as we have the option of setting a
25
floor price for each put transaction (the previous minimum stock price in the
Third Private Equity Credit Agreement was fixed at $.10), (vi) there are no fees
associated with the Fourth Private Equity Credit Agreement; the prior private
equity agreements required the payment of a 5% consulting fee to Spinneret,
which was subsequently lowered to 4% by mutual agreement in September 2001, and
(vii) the elimination of the requirement of a minimum average daily trading
volume in dollars. The previous trading volume requirement in the Third Private
Equity Credit Agreement was $20,000. The conditions to our ability to draw under
this private equity line, as described above, may materially limit the draws
available to us.
On January 30, 2004, we filed a registration statement with respect to 5,000,000
shares of our common stock to be issued pursuant to the Fourth Private Equity
Credit Agreement. This registration statement became effective March 4, 2004, at
which time the Third Private Equity Credit Agreement was terminated, and we
began drawing under the Fourth Private Equity Credit Agreement. On June 21, 2004
we filed to register the offer of an additional 9,000,000 shares for resale by
Charlton, which was declared effective on June 29, 2004. We intend to make sales
under the new Fourth Private Equity Credit 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 in excess of the $1,000,000
minimum but substantially less than the $15,000,000 maximum under the new Fourth
Private Equity Credit Agreement; however, if those needs change we may draw up
to the $15,000,000 maximum. As of the date of this prospectus, under the Fourth
Private Equity Credit Agreement we have drawn down $4,862,500 and issued
13,654,093 shares of common stock.
As of the date of this prospectus, since January 2001, we have drawn an
aggregate of $25,368,500 in gross proceeds from our equity credit lines with
Charlton and have issued 62,965,991 shares as a result of those draws.
Notwithstanding the existence of the Fourth Private Equity Credit Agreement,
there can be no assurance that adequate financing will be available when needed,
or if available, will be available on acceptable terms. Insufficient funds may
prevent us from implementing our business plan or may require us to delay, scale
back, or eliminate certain of our research and product development programs or
to license to third parties rights to commercialize products or technologies
that we would otherwise seek to develop ourselves. If we utilize the new Fourth
Private Equity Credit Agreement; or additional funds are raised by issuing
equity securities, especially convertible preferred stock and convertible
debentures, dilution to existing shareholders will result and future investors
may be granted rights superior to those of existing shareholders. Moreover,
substantial dilution may result in a change in our control.
26
Selling Security Holder
The selling security holder, Charlton Avenue LLC, is the potential purchaser of
stock under the Fourth Private Equity Credit Agreement. The shares offered in
this prospectus are based on the Fourth Private Equity Credit Agreement and the
registration rights agreement between the selling security holder and us. We are
unable to determine the exact number of shares that will actually be sold
according to this prospectus due to:
o the ability of the selling security holder to determine when and whether it
will sell any shares under this prospectus; and
o the uncertainty as to the number of shares of common stock, which will be
issued upon exercise of our put options under the Fourth Private Equity
Credit Agreement.
The put option price is 93% of the three lowest closing bid prices in the ten
day trading period beginning on the put date and ending on the trading day prior
to the relevant closing date of the particular tranche.
Since the purchase price under the Fourth Private Equity Credit Agreement is
based on the market price of our common stock after exercise of our put option,
the number of shares subject to registration rights will increase if the market
price of our common stock decreases, and will decrease if the market price
increases. See "Financing/Equity Line of Credit".
Neither Charlton nor any of its affiliates has held any position, office, or
other material relationship with us in the past five years except that Charlton
has acquired a total of 106,594,874 shares of common stock through conversion of
$13,410,000 of our preferred stock and debentures that it purchased and through
$25,368,500 in purchases under the Private Equity Agreements. See
"Financing/Equity Line of Credit."
The following table identifies the selling security holder based upon
information provided to us by Charlton as of November 9, 2004, with respect to
the shares beneficially held by or acquirable by, the selling security holder,
and the shares of common stock beneficially owned by the selling security holder
which are not covered by this prospectus.
Selling Security Holders' Table
- ------------------------------- ----------------- ------------ ------------- --------------- --------------
Registrant's Common Total Total Percentage
Name and Address Of Relationship Shares Number Of Number Of Owned (if
Security Holder With Selling Owned Shares To Shares Owned more
Security Holder Prior To Be by Security than 1%) by
Within The Past Offering Registered Holder After Security
Three Years Offering Holder After
Offering
- ------------------------------- ----------------- ------------ ------------- --------------- --------------
Charlton Avenue LLC*
c/o Citco Trustees Investor -0- 7,000,000 -0- -0-
(Cayman Limited)
P.O. Box 31106
SMB
Grand Cayman
Cayman Island,
British West Indies
- ------------------------------- ----------------- ------------ ------------- --------------- --------------
* Navigator Management, Ltd. is the director of and has sole voting and
investment control over Charlton Avenue LLC. David Sims is the President and
Director of Navigator and controls Navigator's voting and investment decisions
on behalf of Charlton.
27
Use Of Proceeds
The selling security holder is selling all of the shares covered by this
prospectus for its own account. Accordingly, we will not receive any proceeds
from the resale of the shares. Each time we sell our common stock, we will
provide a prospectus supplement. We will receive proceeds from any sales of
common stock under the Fourth Private Equity Credit Agreement to Charlton. We
intend to use the net proceeds from sales under the Fourth Private Equity Credit
Agreement as working capital to cover our general corporate needs until such
time, if ever, as we are able to generate a positive cash flow from operations.
Based on the $0.40 market price of our common stock on November 9, 2004, we
estimate that we will receive net proceeds of approximately $2.8 million from
sales to Charlton of the shares covered by this prospectus. We expect to use
these net proceeds over the next four months in the following approximate
amounts: $1,150,000 for general and administrative expenses, $920,000 for
research and development expenses, $325,000 for sales and marketing expenses,
and $400,000 for inventory build-up. We will bear all expenses relating to the
registration statement of which this prospectus is a part.
We have used the funds previously raised from Charlton to provide working
capital, primarily for general and administrative, engineering, research and
development, clinical and regulatory expenses. Also, in April 2001, we used
$550,000 raised from Charlton under our Amended Private Equity Agreement to
redeem 50 shares of Series K preferred stock.
Plan Of Distribution
Charlton is offering the shares of common stock purchased by it under the Fourth
Private Equity Credit Agreement for its account as statutory underwriter, and
not for our account. We will not receive any proceeds from the sale of common
stock by Charlton. Charlton has agreed to be named as a statutory underwriter
within the meaning of the Securities Act of 1933 in connection with such sales
of common stock and will be acting as an underwriter in its resales of the
common stock under this prospectus. Charlton has, prior to any sales, agreed not
to effect any offers or sales of the common stock in any manner other than as
specified in the prospectus and not to purchase or induce others to purchase
common stock in violation of any applicable state and federal securities laws,
rules and regulations and the rules and regulations of the principal trading
market of our common stock.
To permit Charlton to resell the shares of common stock issued to it under the
Fourth Private Equity Credit Agreement, we agreed to register those shares and
to maintain that registration. To that end, we agreed with Charlton that we will
prepare and file such amendments and supplements to the registration statement
and the prospectus as may be necessary in accordance with the Securities Act and
the related rules and regulations, in order to keep it effective until the
earliest of any of the following dates:
o The date that is one year after the completion of the last closing
under the Fourth Private Equity Credit Agreement.
o the date after which all of the common stock held by Charlton or its
transferees that are covered by the registration statement have been
transferred to persons who may trade such shares without restriction
under the Securities Act of 1933 or without volume limitations under
SEC rule 144;
o the date after which all of the shares of common stock held by
Charlton or its transferees that are covered by the registration
statement have been sold by Charlton or its transferees pursuant to
the registration statement;
The shares offered by this prospectus may be sold or distributed from time to
time by the selling security holder or by pledgees, donees or transferees of, or
successors in interest to, the selling security holder, directly to one or more
purchasers (including pledgees) or through brokers, dealers or underwriters who
may act solely as agents or may acquire shares as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at negotiated prices or at fixed prices, which may be changed. The
distribution of the shares may be effected in one or more of the following
methods:
28
o ordinary brokers transactions, which may include long or short sales,
o transactions involving cross or block trades or otherwise on the OTC
Bulletin Board,
o purchases by brokers, dealers or underwriters as principal and resale
by such purchasers for their own accounts pursuant to this prospectus,
o "at the market" to or through market makers or into an existing market
for the common stock,
o in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected
through agents,
o through transactions in options, swaps or other derivatives (whether
exchange listed or otherwise), or
o any combination of the foregoing, or by any other legally available
means.
In addition, the selling security holder may enter into hedging transactions
with broker-dealers who may engage in short sales of shares in the course of
hedging the positions they assume with the selling security holder. The selling
security holder may also enter into option or other transactions with
broker-dealers that require the delivery by such broker-dealers of the shares,
which shares may be resold thereafter pursuant to this prospectus.
Brokers, dealers, underwriters or agents participating in the distribution of
the shares may receive compensation in the form of discounts, concessions or
commissions from the selling security holder and/or the purchasers of shares for
whom such broker-dealers may act as agent or to whom they may sell as principal,
or both (which compensation as to a particular broker-dealer may be in excess of
customary commissions). The selling security holder and any broker-dealers
acting in connection with the sale of the shares hereunder may be deemed to be
underwriters within the meaning of Section 2(11) of the Securities Act of 1933,
and any commissions received by them and any profit realized by them on the
resale of shares as principals may be deemed underwriting compensation under the
Securities Act of 1933, as amended. Neither we, nor the selling security holder
can presently estimate the amount of such compensation. We know of no existing
arrangements between the selling security holder and any other security holder,
broker, dealer, underwriter or agent relating to the sale or distribution of the
shares.
We will not receive any proceeds from the sale of the common shares pursuant to
this prospectus. We have agreed to bear the expenses of the registration of the
shares, including legal, accounting and registration fees, and such expenses are
estimated to be $7,500.
We have informed the selling stockholder that certain anti-manipulative rules
contained in Regulation M under the Securities Exchange Act of 1934, as amended,
may apply to their sales in the and have informed them of the need for delivery
of copies of this prospectus.
The selling security holder may also use Rule 144 under the Securities Act, to
sell the shares if they meet the criteria and conform to the requirements of
such rule.
Description Of Securities
Our authorized capital stock consists of 202,000,000 shares of capital stock of
which 200,000,000 shares are common stock, no par value, and 2,000,000 shares
are preferred stock, no par value. As of November 9, 2004, there were issued and
outstanding 183,369,662 shares of common stock, and options to purchase
12,579,017 shares of common stock.
Common Stock
Holders of the common stock are entitled to one vote for each share held in the
election of directors and in all other matters to be voted on by shareholders.
There is no cumulative voting in the election of directors. Holders of common
29
stock are entitled to receive dividends as may be declared from time to time by
our board of directors out of funds legally available. In the event of
liquidation, dissolution or winding up, holders of common stock are to share in
all assets remaining after the payment of liabilities and any preferential
distributions payable to preferred stockholders. The holders of common stock
have no preemptive or conversion rights and are not subject to further calls or
assessments. There are no redemption or sinking fund provisions applicable to
the common stock. The rights of the holders of the common stock are subject to
any rights that may be fixed for holders of preferred stock. All of the
outstanding shares of common stock are fully paid and non-assessable.
Preferred Stock
Our articles of incorporation authorize the issuance of preferred stock with
designations, rights, and preferences as may be determined from time to time by
the board of directors. 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 our common
stock, substantially dilute a common shareholder's interest and depress the
price of our common stock.
30
Disclosure Of Commission Position On Indemnification For
Securities Act Liabilities
Section 607.0850 of the Florida General Corporation Act allows companies to
indemnify their directors, officers and agent against expenses, judgments, fines
and amounts paid in settlement under that conditions and limitations described
in that law.
Article VII of our Articles of Incorporation authorizes us to
indemnify our directors and officers in the following manner:
o To the extent permitted by law, none of our directors or officers will
be personally liable to us or our shareholders for damages for breach
of any duty owed by the directors and officers to us or our
shareholders; provided, that, to the extent required by law, the
directors and officers will not be relieved from liability for any
breach of duty based upon an act or omission (i) in breach of such
person's duty of loyalty to us or our shareholders, (ii) not in good
faith or involving a knowing violation of law or (iii) resulting in
receipt by a director or an officer of an improper personal benefit.
No amendment to or repeal of this Article and no amendment, repeal or
termination of effectiveness of any law authorizing this Article shall
apply to or effect adversely any right or protection of any of our
directors or officers for or with respect to any acts or omissions of
the directors or officers occurring prior to amendment, repeal or
termination of effectiveness.
o To the extent that any of our directors, officers or other corporate
agents have been successful on the merits or otherwise in defense of
any civil or criminal action, suit, or proceeding referred to above,
or in defense of any claim, issue, or matter therein, any director,
officer or corporate agent will be indemnified against any expenses
(including attorneys' fees) actually and reasonably incurred by the
director, officer or corporate agent in connection therewith.
o Expenses incurred by a director, officer, or other corporate agent in
connection with a civil or criminal action, suit, or proceeding may be
paid by the Company in advance of the final disposition of the action
suit, or proceeding as authorized by our board of directors upon
receipt of an undertaking by or on behalf of the corporate agent to
repay the amount if it shall ultimately be determined that the
director, officer or corporate agent is not entitled to be
indemnified. The officers and directors have indemnification
agreements and are covered by Directors and Officers Liability
Insurance in the amount of 1 million dollars.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers and controlling persons
pursuant to these provisions, or otherwise, we have been advised that, in
the opinion of the SEC, this type of indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Experts
Our audited financial statements incorporated by reference have been examined by
Margolies, Fink and Wichrowski, independent certified public accountants, for
the periods and extent in their respective report and are used in reliance upon
their authority as experts in accounting and auditing.
Legal Matters
The validity of the common stock offered in this prospectus will be passed upon
for the Company by Adorno & Yoss, P.A., Miami, Florida.
31
Financial Information
The following financial statements should be read in conjunction with the
financial statement information contained in and incorporated by reference from
our most recent report on Form 10-K, which is being furnished with this
prospectus.
32
ITEM 8. FINANCIAL STATEMENTS
Index to Financial Statements
Page
----
Report of Independent Certified Public Accountants F-1
Financial Statements
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5-12
Statements of Cash Flows F-14-15
Notes to Financial Statements F-16-62
35
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Imaging Diagnostic Systems, Inc.
We have audited the accompanying balance sheets of Imaging Diagnostic Systems,
Inc. (a Development Stage Company) as of June 30, 2004 and 2003, and the related
statements of operations, stockholders' equity and cash flows for the years
ended June 30, 2004, 2003 and 2002 and for the period December 10, 1993 (date of
inception) to June 30, 2004. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free from material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Imaging Diagnostic Systems,
Inc. (a Development Stage Company), as of June 30, 2004 and 2003 and the results
of its operations and its cash flows for the years ended June 30, 2004, 2003 and
2002 and for the period December 10, 1993 (date of inception) to June 30, 2004
in conformity with United States generally accepted accounting principles.
The Company is in the development stage as of June 30, 2004 and to date has had
no significant operations. Recovery of the Company's assets is dependent on
future events, the outcome of which is indeterminable. In addition, successful
completion of the Company's development program and its transition, ultimately,
to attaining profitable operations is dependent upon obtaining adequate
financing to fulfill its development activities and achieving a level of sales
adequate to support the Company's cost structure.
F-1
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has suffered recurring losses and
has yet to generate an internal cash flow that raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are described in Note 4. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/
Margolies, Fink and Wichrowski
Certified Public Accountants
Pompano Beach, Florida
August 23, 2004
F-2
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Balance Sheets
June 30, 2004 and 2003
2004 2003
------------ ------------
Current Assets:
Cash and cash equivalents $ 554,354 $ 1,361,507
Accounts Receivable 28,925 --
Loans receivable - employees 570 1,455
Inventory 2,357,864 2,012,275
Prepaid expenses 64,579 28,722
------------ ------------
Total Current Assets 3,006,292 3,403,959
------------ ------------
Property and Equipment, net 2,301,095 2,129,338
Other Assets 806,244 840,420
------------ ------------
$ 6,113,631 $ 6,373,717
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts Payable and accrued expenses $ 1,172,527 $ 937,005
Customer Deposits 40,000 --
Short term debt 300,407 300,407
Other current liabilities 1,014,486 1,014,486
------------ ------------
Total Current Liabilities 2,527,420 2,251,898
------------ ------------
Stockholders Equity:
Common Stock, no par value; authorized 200,000,000 shares,
issued 173,327,412 and 162,994,039 shares, respectively 79,235,712 71,368,361
Additional paid-in capital 1,597,780 1,597,780
Deficit accumulated during the development stage (77,247,281) (68,844,322)
------------ ------------
Total stockholders' equity 3,586,211 4,121,819
------------ ------------
$ 6,113,631 $ 6,373,717
============ ============
The accompanying notes are an integral part of these condensed financial
statements.
F-3
IMAGING DIAGNOSTIC SYSTEMS, INC.
A Developmental Stage Company
Statement of Operations
From Inception
(December 10,
Year Ended Year Ended Year Ended 1993) to
June 30, 2004 June 30, 2003 June 30, 2002 June 30, 2004
------------- -------------- ------------- ---------------
Sales $ 733,211 $ 184,085 $ -- $ 917,296
Cost of Sales 284,682 79,189 -- 363,871
------------- ------------- ------------- -------------
Gross Profit 448,529 104,896 -- 553,425
------------- ------------- ------------- -------------
Operating Expenses:
Compensation and related benefits:
Administrative and engineering $ 3,461,852 $ 1,782,083 $ 1,761,684 $ 20,592,528
Research and development 374,437 1,109,220 1,126,323 7,847,433
Research and development expenses 111,635 751 2,129 3,107,985
Selling, general and administrative 643,892 425,756 423,098 3,697,145
Inventory valuation adjustments 586,510 910,444 547,942 3,235,001
Depreciation and amortization 175,715 240,329 246,871 2,233,569
Amortization of deferred compensation -- -- -- 4,064,250
Other operating expenses (Note 11) 2,806,941 2,840,863 2,859,209 21,051,891
------------- ------------- ------------- -------------
8,160,982 7,309,446 6,967,256 65,829,802
------------- ------------- ------------- -------------
Operating Loss (7,712,453) (7,204,550) (6,967,256) (65,276,377)
Gain (Loss) on sale of fixed assets (5,669) 11,254 -- 5,585
Interest income 9,305 689 1,031 268,837
Interest expense (694,142) (987,917) (711,335) (5,397,566)
------------- ------------- ------------- -------------
Net Loss (8,402,959) (8,180,524) (7,677,560) (70,399,521)
Dividends on cumulative Pfd. stock:
From discount at issuance -- -- -- (5,402,713)
Earned -- -- -- (1,445,047)
------------- ------------- ------------- -------------
Net loss applicable to
common shareholders $ (8,402,959) $ (8,180,524) $ (7,677,560) $ (77,247,281)
============= ============== ============== =============
Net Loss per common share:
Net loss per common share $ (0.05) $ (0.06) $ (0.06) $ (1.06)
============== ============== ============== ==============
Weighted avg. no. of common shares
Basic & Diluted: 167,982,750 145,150,783 125,746,307 72,732,317
============= ============= ============= =============
See accompanying notes to the financial statements.
F-4
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockhoders' Equity
From December 10, 1993 (date of inception) to June 30, 2004
Preferred Stock (**) Common Stock Additional
Number of Number of Paid-in
Shares Amount Shares Amount Capital
------------- ---------- ------------- ---------- ------------
Balance at December 10, 1993 (date of inception) 0 $- 0 $ -- $ --
Issuance of common stock, restated for reverse
stock split -- -- 510,000 50,000 --
Acquisition of public shell -- -- 178,752 --
Net issuance of additional shares of stock -- -- 15,342,520 16,451
Common stock sold -- -- 36,500 36,500
Net loss -- -- --
----------- --- ----------- ----------- -----------
Balance at June 30, 1994 -- -- 16,067,772 102,951 --
Common stock sold -- -- 1,980,791 1,566,595 --
Common stock issued in exchange for services -- -- 115,650 102,942 --
Common stock issued with employment agreements -- -- 75,000 78,750 --
Common stock issued for compensation -- -- 377,500 151,000 --
Stock options granted -- -- -- -- 622,500
Amortization of deferred compentsation -- -- -- -- --
Forgiveness of officers' compensation -- -- -- -- 50,333
Net loss -- -- -- -- --
----------- --- ----------- ----------- -----------
Balance at June 30, 1995 -- -- 18,616,713 2,002,238 672,833
----------- --- ----------- ----------- -----------
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
------------- ------------ -------------- -------------
Balance at December 10, 1993 (date of inception) $ -- $ -- $ -- $ --
Issuance of common stock, restated for reverse
stock split -- -- -- 50,000
Acquisition of public shell -- -- -- --
Net issuance of additional shares of stock -- -- -- 16,451
Common stock sold -- -- -- 36,500
Net loss -- (66,951) -- (66,951)
----------- ----------- ----------- -----------
Balance at June 30, 1994 (66,951) -- -- 36,000
Common stock sold -- (523,118) -- 1,043,477
Common stock issued in exchange for services -- -- -- 102,942
Common stock issued with employment agreements -- -- -- 78,750
Common stock issued for compensation -- -- -- 151,000
Stock options granted -- -- (622,500) --
Amortization of deferred compentsation -- -- 114,375 114,375
Forgiveness of officers' compensation -- -- -- 50,333
Net loss (1,086,436) -- -- (1,086,436)
----------- ----------- ----------- -----------
Balance at June 30, 1995 (1,153,387) (523,118) (508,125) 490,441
----------- ----------- ----------- -----------
See accompanying notes to the financial statements.
F-5
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockhoders' Equity (Continued)
From December 10, 1993 (date of inception) to June 30, 2004
Preferred Stock (**) Common Stock Additional
-----------------------------------------------------------
Number of Number of Paid-in
Shares Amount Shares Amount Capital
------------- ------------- --------------- --------------- -----------
Balance at June 30, 1995 -- -- 18,616,713 2,002,238 672,833
----------- ----------- ----------- ----------- -----------
Preferred stock sold, including dividends 4,000 3,600,000 -- -- 1,335,474
Common stock sold -- -- 700,471 1,561,110 --
Cancellation of stock subscription -- -- (410,500) (405,130) --
Common stock issued in exchange for services -- -- 2,503,789 4,257,320 --
Common stock issued with exercise of stock options -- -- 191,500 104,375 --
Common stock issued with exercise of options
for compensation -- -- 996,400 567,164 --
Conversion of preferred stock to common stock (1,600) (1,440,000) 420,662 1,974,190 (534,190)
Common stock issued as payment of preferred
stock dividends -- -- 4,754 14,629 --
Dividends accrued on preferred stock not
yet converted -- -- -- -- --
Collection of stock subscriptions -- -- -- -- --
Amortization of deferred compentsation -- -- -- -- --
Forgiveness of officers' compensation -- -- -- -- 100,667
Net loss (restated) -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1996 (restated) 2,400 2,160,000 23,023,789 10,075,896 1,574,784
----------- ----------- ----------- ----------- -----------
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
------------- ------------- -------------- -------------
Balance at June 30, 1995 (1,153,387) (523,118) (508,125) 490,441
----------- ----------- ----------- -----------
Preferred stock sold, including dividends (1,335,474) -- -- 3,600,000
Common stock sold -- -- -- 1,561,110
Cancellation of stock subscription -- 405,130 -- --
Common stock issued in exchange for services -- -- -- 4,257,320
Common stock issued with exercise of stock options -- (4,375) -- 100,000
Common stock issued with exercise of options
for compensation -- -- -- 567,164
Conversion of preferred stock to common stock -- -- -- --
Common stock issued as payment of preferred
stock dividends (14,629) -- -- --
Dividends accrued on preferred stock not
yet converted (33,216) -- -- (33,216)
Collection of stock subscriptions -- 103,679 -- 103,679
Amortization of deferred compentsation -- -- 232,500 232,500
Forgiveness of officers' compensation -- -- -- 100,667
Net loss (restated) (6,933,310) -- -- (6,933,310)
----------- ----------- ----------- -----------
Balance at June 30, 1996 (restated) (9,470,016) (18,684) (275,625) 4,046,355
----------- ----------- ----------- -----------
See accompanying notes to the financial statements.
F-6
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockhoders' Equity (Continued)
From December 10, 1993 (date of inception) to June 30, 2004
Preferred Stock (**) Common Stock Additional
----------------------------------------------------------
Number of Number of Paid-in
Shares Amount Shares Amount Capital
------------- ------------- -------------- --------------- ------------
Balance at June 30, 1996 (restated) 2,400 2,160,000 23,023,789 10,075,896 1,574,784
----------- ----------- ----------- ----------- -----------
Preferred stock sold, including dividends 450 4,500,000 -- -- 998,120
Conversion of preferred stock to common stock (2,400) (2,160,000) 1,061,202 2,961,284 (801,284)
Common stock issued in exchange for services -- -- 234,200 650,129 --
Common stock issued for compensation -- -- 353,200 918,364 --
Common stock issued with exercise of stock options -- -- 361,933 1,136,953 --
Common stock issued to employee -- -- (150,000) (52,500) --
Common stock issued as payment of preferred
stock dividends -- -- 20,760 49,603 --
Dividends accrued on preferred stock not
yet converted -- -- -- -- --
Stock options granted -- -- -- -- 1,891,500
Collection of stock subscriptions -- -- -- -- --
Amortization of deferred compentsation -- -- -- -- --
Net loss (restated) -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1997 (restated) 450 4,500,000 24,905,084 15,739,729 3,663,120
----------- ----------- ----------- ----------- -----------
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
-------------- ------------- --------------- -------------
Balance at June 30, 1996 (restated) (9,470,016) (18,684) (275,625) 4,046,355
----------- ----------- ----------- -----------
Preferred stock sold, including dividends (998,120) -- -- 4,500,000
Conversion of preferred stock to common stock -- -- -- --
Common stock issued in exchange for services -- -- -- 650,129
Common stock issued for compensation -- -- -- 918,364
Common stock issued with exercise of stock options -- (33,750) -- 1,103,203
Common stock issued to employee -- -- -- (52,500)
Common stock issued as payment of preferred
stock dividends (16,387) -- -- 33,216
Dividends accrued on preferred stock not
yet converted (168,288) -- -- (168,288)
Stock options granted -- -- (1,891,500) --
Collection of stock subscriptions -- 16,875 -- 16,875
Amortization of deferred compentsation -- -- 788,000 788,000
Net loss (restated) (7,646,119) -- -- (7,646,119)
----------- ----------- ----------- -----------
Balance at June 30, 1997 (restated) (18,298,930) (35,559) (1,379,125) 4,189,235
----------- ----------- ----------- -----------
See accompanying notes to the financial statements.
F-7
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockhoders' Equity (Continued)
From December 10, 1993 (date of inception) to June 30, 2004
Preferred Stock (**) Common Stock Additional
----------------------------------------------------------
Number of Number of Paid-in
Shares Amount Shares Amount Capital
------------- ------------- -------------- --------------- ------------
Balance at June 30, 1997 (restated) 450 4,500,000 24,905,084 15,739,729 3,663,120
----------- ----------- ----------- ----------- -----------
Preferred stock sold, including dividends
and placement fees 501 5,010,000 -- -- 1,290,515
Conversion of preferred stock to common stock (340) (3,400,000) 6,502,448 4,644,307 (1,210,414)
Common stock sold -- -- 500,000 200,000 --
Common stock issued in exchange for services -- -- 956,000 1,419,130 --
Common stock issued for compensation -- -- 64,300 54,408 --
Common stock issued with exercise of stock options -- -- 65,712 22,999 --
Common stock issued in exchange for
licensing agreement -- -- 3,500,000 1,890,000 (3,199,000)
Dividends accrued on preferred stock not
yet converted -- -- -- -- --
Stock options granted -- -- -- -- 1,340,625
Collection of stock subscriptions -- -- -- 12,500 --
Amortization of deferred compentsation -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1998 611 6,110,000 36,493,544 23,983,073 1,884,846
----------- ----------- ----------- ----------- -----------
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
-------------- ------------- --------------- -------------
Balance at June 30, 1997 (restated) (18,298,930) (35,559) (1,379,125) 4,189,235
----------- ----------- ----------- -----------
Preferred stock sold, including dividends
and placement fees (1,741,015) -- -- 4,559,500
Conversion of preferred stock to common stock -- -- -- 33,893
Common stock sold -- -- -- 200,000
Common stock issued in exchange for services -- -- -- 1,419,130
Common stock issued for compensation -- -- -- 54,408
Common stock issued with exercise of stock options -- -- -- 22,999
Common stock issued in exchange for
licensing agreement -- -- -- (1,309,000)
Dividends accrued on preferred stock not
yet converted (315,000) -- -- (315,000)
Stock options granted -- -- (1,340,625) --
Collection of stock subscriptions -- 21,250 -- 33,750
Amortization of deferred compentsation -- -- 1,418,938 1,418,938
Net loss (6,981,710) -- -- (6,981,710)
----------- ----------- ----------- -----------
Balance at June 30, 1998 (27,336,655) (14,309) (1,300,812) 3,326,143
----------- ----------- ----------- -----------
See accompanying notes to the financial statements.
F-8
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockhoders' Equity (Continued)
From December 10, 1993 (date of inception) to June 30, 2004
Preferred Stock (**) Common Stock Additional
----------------------------------------------------------
Number of Number of Paid-in
Shares Amount Shares Amount Capital
------------- ------------- -------------- --------------- -------------
Balance at June 30, 1998 611 6,110,000 36,493,544 23,983,073 1,884,846
----------- ----------- ----------- ----------- -----------
Preferred stock issued - satisfaction of debt 138 1,380,000 -- -- (161,348)
Conversion of preferred stock to common stock (153) (1,530,000) 4,865,034 1,972,296 (442,296)
Common stock sold -- -- 200,000 60,000 --
Common stock issued - exchange for services
and compensation -- -- 719,442 301,210 --
Common stock issued - repayment of debt -- -- 2,974,043 1,196,992 --
Common stock issued in exchange for loan fees -- -- 480,000 292,694 --
Common stock issued with exercise of stock options -- -- 65,612 124,464 --
Common stock issued in satisfaction of
licensing agreement payable -- -- 3,500,000 1,890,000 --
Redeemable preferred stock sold, deemed dividend -- -- -- -- --
Dividends accrued-preferred stock not yet converted -- -- -- -- --
Stock options granted -- -- -- -- 209,625
Amortization of deferred compentsation -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1999 596 5,960,000 49,297,675 29,820,729 1,490,827
----------- ----------- ----------- ----------- -----------
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
-------------- ------------- --------------- -------------
Balance at June 30, 1998 (27,336,655) (14,309) (1,300,812) 3,326,143
----------- ----------- ----------- -----------
Preferred stock issued - satisfaction of debt (492,857) -- -- 725,795
Conversion of preferred stock to common stock -- -- -- --
Common stock sold -- -- -- 60,000
Common stock issued - exchange for services
and compensation -- -- -- 301,210
Common stock issued - repayment of debt -- -- -- 1,196,992
Common stock issued in exchange for loan fees -- -- -- 292,694
Common stock issued with exercise of stock options -- -- -- 124,464
Common stock issued in satisfaction of
licensing agreement payable -- -- -- 1,890,000
Redeemable preferred stock sold, deemed dividend (127,117) -- -- (127,117)
Dividends accrued-preferred stock not yet converted (329,176) -- -- (329,176)
Stock options granted -- -- (209,625) --
Amortization of deferred compentsation -- -- 1,510,437 1,510,437
Net loss (6,807,194) -- -- (6,807,194)
----------- ----------- ----------- -----------
Balance at June 30, 1999 (35,092,999) (14,309) -- 2,164,248
----------- ----------- ----------- -----------
See accompanying notes to the financial statements.
F-9
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockhoders' Equity (Continued)
From December 10, 1993 (date of inception) to June 30, 2004
Preferred Stock (**) Common Stock Additional
-----------------------------------------------------------
Number of Number of Paid-in
Shares Amount Shares Amount Capital
------------- ------------- --------------- --------------- -------------
Balance at June 30, 1999 596 5,960,000 49,297,675 29,820,729 1,490,827
------------ ------------ ------------ ------------ ------------
Conversion of convertible debentures -- -- 4,060,398 3,958,223 --
Conversion of preferred stock to common, net (596) (5,960,000) 45,415,734 7,313,334 (648,885)
Common stock sold -- -- 100,000 157,000 --
Common stock issued - exchange for services
and compensation, net of cancelled shares -- -- 137,000 (18,675) --
Common stock issued - repayment of debt
and accrued interest -- -- 5,061,294 1,067,665 --
Common stock issued in exchange for
interest and loan fees -- -- 7,297 2,408 --
Common stock issued with exercise of stock options -- -- 1,281,628 395,810 157,988
Common stock issued with exercise of warrants -- -- 150,652 121,563 97,850
Issuance of note payable with warrants at a discount -- -- -- -- 500,000
Dividends accrued-preferred stock not yet converted -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at June 30, 2000 -- -- 105,511,678 42,818,057 1,597,780
------------ ------------ ------------ ------------ ------------
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
---------------- ------------- -------------- -------------
Balance at June 30, 1999 (35,092,999) (14,309) -- 2,164,248
------------ ------------ --- ------------
Conversion of convertible debentures -- -- -- 3,958,223
Conversion of preferred stock to common, net -- -- -- 704,449
Common stock sold -- -- -- 157,000
Common stock issued - exchange for services
and compensation, net of cancelled shares -- -- -- (18,675)
Common stock issued - repayment of debt
and accrued interest -- -- -- 1,067,665
Common stock issued in exchange for
interest and loan fees -- -- -- 2,408
Common stock issued with exercise of stock options -- (13,599) -- 540,199
Common stock issued with exercise of warrants -- -- -- 219,413
Issuance of note payable with warrants at a discount -- -- -- 500,000
Dividends accrued-preferred stock not yet converted (145,950) -- -- (145,950)
Net loss (8,022,929) -- -- (8,022,929)
------------ ------------ --- ------------
Balance at June 30, 2000 (43,261,878) (27,908) -- 1,126,051
------------ ------------ --- ------------
** See Note 15 for a detailed breakdown by Series.
See accompanying notes to the financial statements.
F-10
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockhoders' Equity (Continued)
From December 10, 1993 (date of inception) to June 30, 2004
Preferred Stock (**) Common Stock Additional
-----------------------------------------------------------
Number of Number of Paid-in
Shares Amount Shares Amount Capital
------------- ------------- --------------- --------------- -------------
Balance at June 30, 2000 -- -- 105,511,678 42,818,057 1,597,780
---- ----------- ----------- ----------- -----------
Preferred stock sold, including dividends 500 5,000,000 -- -- 708,130
Conversion of preferred stock to common, net (500) (5,000,000) 5,664,067 5,580,531 (708,130)
Common stock issued - line of equity transactions -- -- 3,407,613 3,143,666 --
Common stock issued - exchange for services
and compensation -- -- 153,500 227,855 --
Common stock issued - repayment of debt
and accrued interest -- -- 810,000 1,393,200 --
Common stock issued with exercise of stock options -- -- 3,781,614 1,868,585 --
Common stock issued with exercise of warrants -- -- 99,375 119,887 --
Dividends accrued-preferred stock -- -- -- -- --
Net loss -- -- -- -- --
---- ----------- ----------- ----------- -----------
Balance at June 30, 2001 -- -- 119,427,847 55,151,781 1,597,780
==== =========== =========== =========== ===========
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
---------------- ------------- -------------- -------------
Balance at June 30, 2000 (43,261,878) (27,908) -- 1,126,051
------------ -------- --- -----------
Preferred stock sold, including dividends (708,130) -- -- 5,000,000
Conversion of preferred stock to common, net -- -- -- (127,599)
Common stock issued - line of equity transactions -- -- -- 3,143,666
Common stock issued - exchange for services
and compensation -- -- -- 227,855
Common stock issued - repayment of debt
and accrued interest -- -- -- 1,393,200
Common stock issued with exercise of stock options -- 13,599 -- 1,882,184
Common stock issued with exercise of warrants -- -- -- 119,887
Dividends accrued-preferred stock (422,401) -- -- (422,401)
Net loss (8,593,829) -- -- (8,593,829)
------------ -------- --- -----------
Balance at June 30, 2001 (52,986,238) (14,309) -- 3,749,014
============ ======== === ===========
** See Note 15 for a detailed breakdown by Series.
See accompanying notes to the financial statements.
F-11
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockhoders' Equity (Continued)
From December 10, 1993 (date of inception) to June 30, 2004
Preferred Stock (**) Common Stock Additional
-----------------------------------------------------------
Number of Number of Paid-in
Shares Amount Shares Amount Capital
------------- ------------- --------------- --------------- -------------
Balance at June 30, 2001 -- -- 119,427,847 55,151,781 1,597,780
---- ----------- ----------- ----------- -----------
Common stock issued - line of equity transactions -- -- 11,607,866 6,213,805 --
Common stock issued - exchange for services
and compensation -- -- 560,000 294,350 --
Net loss -- -- -- -- --
---- ----------- ----------- ----------- -----------
Balance at June 30, 2002 -- $ -- 131,595,713 61,659,936 $ 1,597,780
Common stock issued - line of equity transactions -- -- 29,390,708 8,737,772 --
Common stock issued - exchange for services
and compensation -- -- 2,007,618 970,653 --
Payment of subscriptions receivable -- -- -- -- --
Net loss -- -- -- -- --
---- ----------- ----------- ----------- -----------
Balance at June 30, 2003 -- -- 162,994,039 71,368,361 1,597,780
---- ----------- ----------- ----------- -----------
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
---------------- ------------- -------------- -------------
Balance at June 30, 2001 (52,986,238) (14,309) -- 3,749,014
------------ -------- --- -----------
Common stock issued - line of equity transactions -- -- -- 6,213,805
Common stock issued - exchange for services
and compensation -- -- (117,600) 176,750
Net loss (7,677,560) -- -- (7,677,560)
------------ -------- --- -----------
Balance at June 30, 2002 (60,663,798) (14,309) -- 2,462,009
Common stock issued - line of equity transactions -- -- -- 8,737,772
Common stock issued - exchange for services
and compensation -- -- 117,600 1,088,253
Payment of subscriptions receivable -- 14,309 -- 14,309
Net loss (8,180,524) -- -- (8,180,524)
------------ -------- --- -----------
Balance at June 30, 2003 (68,844,322) -- -- 4,121,819
------------ -------- --- -----------
** See Note 15 for a detailed breakdown by Series.
See accompanying notes to the financial statements.
F-12
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Stockhoders' Equity (Continued)
From December 10, 1993 (date of inception) to June 30, 2004
Preferred Stock (**) Common Stock Additional
-----------------------------------------------------------
Number of Number of Paid-in
Shares Amount Shares Amount Capital
------------- ------------- --------------- --------------- -------------
Balance at June 30, 2003 -- -- 162,994,039 71,368,361 1,597,780
---- ----------- ----------- ----------- -----------
Common stock issued - line of equity transactions -- -- 8,630,819 6,541,700 --
Common stock issued - exchange for services
and compensation -- -- 734,785 832,950 --
Common stock issued - exercise of stock options -- -- 967,769 492,701 --
Net loss -- -- -- -- --
---- ----------- ----------- ----------- -----------
Balance at June 30, 2004 -- $ -- 173,327,412 $ 79,235,712 $ 1,597,780
==== =========== =========== ============ ===========
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
---------------- ------------- -------------- -------------
Balance at June 30, 2003 (68,844,322) -- -- 4,121,819
------------ -------- --- -----------
Common stock issued - line of equity transactions -- -- -- 6,541,700
Common stock issued - exchange for services
and compensation -- -- (117,600) 832,950
Common stock issued - exercise of stock options -- -- -- 492,701
Net loss (8,402,959) -- -- (8,402,959)
------------ -------- --- -----------
Balance at June 30, 2004 $(77,247,281) $ -- $ -- $ 3,586,211
============ ======== === ===========
** See Note 15 for a detailed breakdown by Series.
See accompanying notes to the financial statements.
F-13
INSERT STATEMENT OF CASH FLOWS PAGE F-14
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Cash Flows
From Inception
(December 10,
Year Ended Year Ended Year Ended 1993) to
June 30, 2004 June 30, 2003 June 30, 2002 June 30, 2004
------------- ------------- ------------- -----------------
Net loss $ (8,402,959) $ (8,180,524) $ (7,677,560) $ (70,399,521)
------------- ------------- ------------- --------------
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amoritization 175,715 240,329 246,871 2,233,569
Gain on sale of fixed assets 5,669 (11,254) - (5,585)
Amoritization of deferred compensation - - - 4,064,250
Noncash interest, compensation and consulting service 1,524,650 1,827,425 805,555 16,867,760
(Increase) decrease in loans receivable - employees (28,040) 16 6,929 (68,181)
(Increase) decrease in inventory, net 202,151 913,901 (120,992) 1,248,139
(Increase) decrease in prepaid expenses (35,857) 27,985 (8,095) (64,579)
(Increase) decrease in other assets - 131,909 (52,697) (306,618)
(Increase) decrease in accounts payable and
accrued expenses (235,522) (300,554) 446,928 735,863
(Increase) decrease in other current liabilities (40,000) (178,250) (262,200) 974,486
-------- --------- --------- -------
Total adjustments 1,568,766 2,651,507 1,062,299 25,679,104
---------- ---------- ---------- ----------
Net cash used for operating activities (6,834,193) (5,529,017) (6,615,261) (44,720,417)
----------- ----------- ----------- ------------
Cash flows from investing activities:
Proceeds from sale of property & equipment 18,603 11,254 29,857
Prototype equipment - - - (2,799,031)
Capital expenditures (334,264) (43,314) (78,055) (4,406,500)
--------- -------- -------- -----------
Net cash used for investing activities (315,661) (32,060) (78,055) (7,175,674)
--------- -------- -------- -----------
Cash flows from financing activities:
Repayment of capital lease obligation - - (4,056) (50,289)
Proceeds from convertible debenture - - - 3,240,000
Proceeds from (repayments) loan payable, net - (1,153,310) 1,100,000 2,595,029
Proceeds from issuance of preferred stock - - - 18,039,500
Proceeds from exercise of stock options 492,701 - 492,701
Net proceeds from issuance of common stock 5,850,000 7,881,000 5,585,000 28,133,504
---------- ---------- ---------- ----------
Net cash provided by financing activities 6,342,701 6,727,690 6,680,944 52,450,445
---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (807,153) 1,166,613 (12,372) 554,354
Cash and cash equivalents at beginning of period 1,361,507 194,894 207,266 -
---------- -------- -------- -
Cash and cash equivalents at end of period $ 554,354 $ 1,361,507 $ 194,894 $ 554,354
========== ============ ========== =========
(Continued)
See accompanying notes to the financial statements.
F-14
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statement of Cash Flows (Continued)
From Inception
(December 10,
Year Ended Year Ended Year Ended 1993) to
June 30, 2004 June 30, 2003 June 30, 2002 June 30, 2004
------------- ------------- ------------- -----------------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 5,916 $ 131,145 $ 5,104 $ 215,884
========== ========== ========== ==========
Supplemental disclosures of noncash investing
and financing activities:
Issuance of common stock and options
in exchange for services $ 450,000 $ 841,853 $ 176,750 $6,306,350
========== ========== ========== ==========
Issuance of common stock as loan fees in
connection with loans to the Company $ - $ - $ - $ 293,694
========== ========== ========== ==========
Issuance of common stock as satisfaction of
loans payable and accrued interest $ - $ - $ - $3,398,965
========== ========== ========== ==========
Issuance of common stock as satisfaction of
certain accounts payable $ - $ - $ - $ 257,892
========== ========== ========== ==========
Issuance of common stock in
exchange for property and equipment $ - $ - $ - $ 89,650
========== ========== ========== ==========
Issuance of common stock and other current
liability in exchange for patent
liceensing agreement $ - $ - $ - $ 581,000
========== ========== ========== ==========
Issuance of common stock for
compensation $ 382,950 $ 128,800 $ 117,600 $2,577,938
========== ========== ========== ==========
Issuance of common stock through
exercise of incentive stock options $ 492,701 $ - $ - $3,610,403
========== ========== ========== ==========
Issuance of common stock as
payment for preferred stock dividends $ - $ - $ - $ 507,645
========== ========== ========== ==========
Acquisition of property and equipment
through the issuance of a capital
lease payable $ - $ - $ - $ 50,289
========== ========== ========== ==========
See accompanying notes to the financial statements.
F-15
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements
(1) BACKGROUND
The Company, ("Imaging Diagnostic Systems, Inc.") was organized in the state of
New Jersey on November 8, 1985, under its original name of Alkan Corp. On April
14, 1994, a reverse merger was effected between Alkan Corp. and the Florida
corporation of Imaging Diagnostic Systems, Inc. ("IDSI-Fl."). IDSI-Fl. was
formed on December 10, 1993. (See Note 3) Effective July 1, 1995 the Company
changed its corporate status to a Florida corporation.
The Company is in the business of developing medical imaging devices based upon
the combination of the advances made in medical optical technology and the
unique knowledge of medical imaging devices held by the founders of the Company.
Previously, the technology for these imaging devices had not been available. The
initial Computed Tomography Laser Mammography ("CTLM(R)") prototype had been
developed with the use of "Ultrafast Laser Imaging TechnologyTM", and this
technology was first introduced at the "RSNA" scientific assembly and conference
during late November 1994. The completed CTLM(R) device was exhibited at the
"RSNA" conference November 1995. The Company has continued to develop its
CTLM(R) technology and to exhibit its latest clinical images produced by the
newest generation of the CTLM(R) at the "RSNA" conferences held annually, in
Chicago, commencing on the Sunday following Thanksgiving and running for five
days.
The initial CTLM(R) prototype produced live images of an augmented breast on
February 23, 1995. From the experience gained with this initial prototype, the
Company continued its research and development resulting in new hardware and
software enhancements.
The Company is currently in a development stage and is in the process of raising
additional capital through the use of its Fourth Private Equity Credit
Agreement. There is no assurance that once the development of the CTLM(R) device
is completed and finally receives Federal Drug Administration marketing
clearance, that the Company will achieve a profitable level of operations.
(Continued)
F-16
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(b) Revenue Recognition
Revenue from sales of medical imaging products is recorded for
international sales upon the passing of title and risks of
ownership, which occurs upon the shipment of goods. In the U.S.
market, when PMA approval is received, revenue will be recorded
upon installation of the CTLM(R) System and acceptance by the
customer.
(c) Cash and cash equivalents
Holdings of highly liquid investments with original maturities
of three months or less and investment in money market funds are
considered to be cash equivalents by the Company.
(d) Inventory
Inventories, consisting principally of raw materials,
work-in-process and completed units under testing, are carried
at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method.
Due to recent technological advances resulting in overall lower
costs for certain inventory components, the Company has reduced
these components of its inventory to their net realizable value.
The inventory valuation adjustments are reflected in the
statement of operations and amounted to $586,510, $910,444,
$547,942, and $3,235,001, for the years ended June 30, 2004,
2003 and 2002, and for the period December 10, 1993 (date of
inception) to June 30, 2004, respectively.
(Continued)
F-17
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e) Prototype equipment
The direct costs associated with the final CTLM(R) prototypes
have been capitalized. On June 17, 1996 the Company's Director
of Research and Development and the Director of Engineering
decided to discontinue with the development of the then current
generation proprietary scanner and data collection system
(components of the prototype CTLM(R) device) and to begin
development of a third generation scanner and data collection
system. As a result, certain items amounting to $677,395 were
reclassified as follows: $512,453 as research and development
expense and $164,942 as computer and lab equipment. The original
amortization period of two years was increased to five years to
provide for the estimated period of time the clinical equipment
would be in service to gain FDA approval.
During the fiscal year ended June 30, 1998, the costs associated
with the various pre-production units available for sale have
been reclassified as inventory and the remaining costs which
will no longer benefit future periods were expensed to research
and development costs.
(f) Property, equipment and software development costs
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
computed using straight-line methods over the estimated useful
lives of the related assets.
Under the criteria set forth in Statement of Financial
Accounting Standards No. 86, capitalization of software
development costs begins upon the establishment of technological
feasibility for the product. The establishment of technological
feasibility and the ongoing assessment of the recoverability of
these costs requires considerable judgment by management with
respect to certain external factors, including, but not limited
to, anticipated future gross product revenues, estimated
economic life and changes in software and hardware technology.
After considering the above factors, the Company has determined
that software development costs, incurred subsequent to the
initial acquisition of the basic software technology, should be
properly expensed. Such costs are included in research and
development expense in the accompanying statements of
operations.
(Continued)
F-18
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(g) Research and development
Research and development expenses consist principally of
expenditures for equipment and outside third-party consultants,
which are used in testing and the development of the Company's
CTLM(R) device, product software and compensation to specific
company personnel. The non-payroll related expenses include
testing at outside laboratories, parts associated with the
design of initial components and tooling costs, and other costs
which do not remain with the developed CTLM(R) device. The
software development costs are with outside third-party
consultants involved with the implementation of final changes to
the developed software. All research and development costs are
expensed as incurred.
(h) Net loss per share
In 1998, the Company adopted SFAS No. 128, ("Earnings Per
Share"), which requires the reporting of both basic and diluted
earnings per share. Basic net loss per share is determined by
dividing loss available to common shareholders by the weighted
average number of common shares outstanding for the period.
Diluted loss per share reflects the potential dilution that
could occur if options or other contracts to issue common stock
were exercised or converted into common stock, as long as the
effect of their inclusion is not anti-dilutive.
(i) Patent license agreement
The patent license agreement will be amortized over the
seventeen-year life of the patent, the term of the agreement.
(Continued)
F-19
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(j) Stock-based compensation
The Company adopted Statement of Financial Accounting Standards
No. 123. "Accounting for Stock-Based Compensation" ("SFAS 123"),
in fiscal 1997. As permitted by SFAS 123, the Company continues
to measure compensation costs in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", but provides pro forma disclosures of net loss and
loss per share as if the fair value method (as defined in SFAS
123) had been applied beginning in fiscal 1997.
(k) Long-lived assets
Effective July 1, 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 121. "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"). This statement requires
companies to write down to estimated fair value long-lived
assets that are impaired. The Company reviews its long-lived
assets for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may
not be recoverable. In performing the review of recoverability
the Company estimates the future cash flows expected to result
from the use of the asset and its eventual disposition. If the
sum of the expected future cash flows is less than the carrying
amount of the assets, an impairment loss is recognized. The
Company has determined that no impairment losses need to be
recognized through the fiscal year ended June 30, 2004.
In August of 2001, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets ("SFAS
144"), which addresses accounting and financial reporting for
the impairment and disposal of long-lived assets. This statement
is effective for the Company beginning July 1, 2002. The Company
does not believe that the adoption of SFAS 144 will have a
significant impact on its financial position and results of
operations.
(Continued)
F-20
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(l) Income taxes
Effective December 10, 1993, the Company adopted the method of
accounting for income taxes pursuant to the Statement of
Financial Accounting Standards No. 109 "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires an asset and liability
approach for financial accounting and reporting for income
taxes. Under SFAS 109, the effect on deferred taxes of a change
in tax rates is recognized in income in the year that includes
the enactment date.
(m) Intangible assets
Intangible assets, consisting of the patent license agreement
and UL and CE approvals are reflected in "Other Assets" on the
balance sheet, net of accumulated amortization (Note 7). The
patent license agreement has a fixed life of seventeen years and
will continue to be amortized over its remaining useful life.
The UL and CE approvals are subject to amortization and will be
reviewed for potential impairment whenever events or
circumstances indicate that carrying amounts may not be
recoverable, in accordance with Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible
Assets" ("SFAS 142"). The Company has adopted SFAS 142 for its
fiscal year beginning July 2001. As of June 30, 2004, the
Company has determined that there is no impairment loss that
needs to be recognized at this time with respect to the UL and
CE approvals.
(n) Deemed preferred stock dividend
The accretion resulting from the incremental yield embedded in
the conversion terms of the convertible preferred stock is
computed based upon the discount from market of the common stock
at the date the preferred stock was issued. The resulting deemed
preferred stock dividend subsequently increases the value of the
common shares upon conversion.
(Continued)
F-21
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(o) Discount on convertible debt
The discount which arises as a result of the allocation of
proceeds to the beneficial conversion feature upon the issuance
of the convertible debt increases the effective interest rate of
the convertible debt and will be reflected as a charge to
interest expense. The amortization period will be from the date
of the convertible debt to the date the debt first becomes
convertible.
(p) Comprehensive income
SFAS 130, "Reporting Comprehensive Income", requires a full set
of general purpose financial statements to be expanded to
include the reporting of "comprehensive income". Comprehensive
income is comprised of two components, net income and other
comprehensive income. For the period from December 10, 1993
(date of inception) to June 30, 2004, the Company had no items
qualifying as other comprehensive income.
(q) Impact of recently issued accounting standards
Statement of Financial Accounting Standards No. 148, "Accounting
for Stock-Based Compensation--Transition and Disclosure" ("SFAS
148"), amends SFAS 123, "Accounting for Stock-Based
Compensation." In response to a growing number of companies
announcing plans to record expenses for the fair value of stock
options, SFAS 148 provides alternative methods of transition for
a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148
amends the disclosure requirements of SFAS 123 to require more
prominent and more frequent disclosures in financial statements
about the effects of stock-based compensation. The Statement
also improves the timeliness of those disclosures by requiring
that this information be included in interim as well as annual
financial statements.
(Continued)
F-22
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In the past, companies were required to make pro forma
disclosures only in annual financial statements. The transition
guidance and annual disclosure provisions of SFAS 148 are
effective for fiscal years ending after December 15, 2002, with
earlier application permitted in certain circumstances. The
interim disclosure provisions are effective for financial
reports containing financial statements for interim periods
beginning after December 15, 2002.
(r) Reclassifications
Certain amounts in the prior period financial statements have
been reclassified to conform with the current period
presentation.
(3) MERGER
On April 14, 1994, IDSI-Fl. acquired substantially all of the issued and
outstanding shares of Alkan Corp. The transaction was accounted for as a reverse
merger in accordance with Accounting Principles Board Opinion #16, wherein the
shareholders of IDSI-Fl. retained the majority of the outstanding stock of Alkan
Corp. after the merger. (see Note 17)
As reflected in the Statement of Stockholders' Equity, the Company recorded the
merger with the public shell at its cost, which was zero, since at that time the
public shell did not have any assets or equity. There was no basis adjustment
necessary for any portion of the merger transaction as the assets of IDSI-Fl.
were recorded at their net book value at the date of merger. The 178,752 shares
represent the exchange of shares between the companies at the time of merger.
As part of the transaction, the certificate of incorporation of Alkan was
amended to change its name to Imaging Diagnostic Systems, Inc.
(Continued)
F-23
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(4) 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 working capital through its Fourth Private Equity
Credit Agreement and if not available, then through debt financing and/or other
equity capital. The Company has yet to generate a positive internal cash flow,
and until significant sales of its product begins, the Company is totally
dependent upon equity and debt 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
believes that its Fourth Private Equity Credit Agreement should provide the
funding necessary to complete the FDA and other regulatory processes necessary
to receive FDA marketing clearance and to commercialize the CTLM(R) both in the
International and Domestic markets. In the event that we are unable to utilize
the Fourth Private Equity Credit Agreement we would seek and negotiate with
outside entities for the funding necessary to achieve FDA marketing clearance
and commercialization of the CTLM(R) product. To date, management has been able
to raise the necessary capital to reach this stage of product development and
has been able to fund any capital requirements. However, there is no assurance
that once the development of the CTLM(R) device is completed and finally
receives FDA marketing clearance, that the Company will achieve a profitable
level of operations.
(5) INVENTORIES
Inventories consisted of the following:
June 30,
--------------------------------
2004 2003
-------------- --------------
Raw materials $ 1,100,112 $ 1,307,052
Work-in process 93,869 49,784
Completed units under testing 1,163,883 655,439
------------- -------------
$ 2,357,864 $ 2,012,275
============ ============
The raw materials inventory is reflected net of inventory valuation adjustments
to the net realizable value for certain components. The valuation adjustments
are reflected in the statement of operations and amounted to $586,410, $910,444,
$547,942, and $3,235,001, for the years ended June 30, 2004, 2003 and 2002, and
for the period December 10, 1993 (date of inception) to June 30, 2004,
respectively.
(Continued)
F-24
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(6) PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, less accumulated
depreciation:
June 30,
---------------------------------
2004 2003
--------------- ---------------
Furniture and fixtures $ 262,264 $ 260,880
Building and land 2,086,330 2,086,330
Clinical equipment 30,714 30,714
Computers, equipment and software 333,535 349,268
CTLM(R) software costs 352,932 352,932
Trade show equipment 298,400 -
Laboratory equipment 212,560 222,560
----------- ------------
3,576,735 3,302,684
Less: accumulated depreciation (1,275,640) (1,173,346)
------------- -------------
Totals $ 2,301,095 $ 2,129,338
============= ============
The estimated useful lives of property and equipment for purposes of computing
depreciation and amortization are:
Furniture, fixtures, clinical, computers, laboratory
equipment and trade show equipment 5-7 years
Building 40 years
CTLM(R) software costs 5 years
Telephone equipment, acquired under a long-term capital lease at a cost of
$50,289, is included in furniture and fixtures. The net unamortized cost of the
CTLM(R) software at June 30, 2004 and 2003 are $0 and $0, respectively, which
represents the net realizable value of the CTLM(R) software at the end of each
period presented.
Amortization expense related to the CTLM(R) software for each period presented
in the statement of operations is as follows:
Period ended Amount
------------ ---------
6/30/01 $ 16,241
6/30/00 51,425
6/30/99 70,514
6/30/98 70,587
Prior 144,165
----------
Total $ 352,932
=========
(Continued)
F-25
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(7) OTHER ASSETS
Other assets consist of the following:
June 30,
-------------------------
2004 2003
----------- -----------
Patent license agreement, net of accumulated
amortization of $205,059 and $170,882 respectively $ 375,942 $ 410,118
UL and CE approvals, net of accumulated
amortization of $8,225 and $8,225, respectively 430,302 430,302
---------- ----------
Totals $ 806,244 $ 840,420
========== ==========
During June 1998, the Company finalized an exclusive Patent License Agreement
with its former chief executive officer. (See Note 21) The officer was the owner
of patents issued on December 2, 1997 which encompassed the technology of the
CTLM(R). Pursuant to the terms of the agreement, the Company was granted the
exclusive right to modify, customize, maintain, incorporate, manufacture, sell,
and otherwise utilize and practice the Patent, all improvements thereto and all
technology related to the process, throughout the world. The license shall apply
to any extension or re-issue of the Patent. The term of license is for the life
of the Patent and any renewal thereof, subject to termination, under certain
conditions. As consideration for the License, the Company issued to the officer
7,000,000 shares of common stock (See Note 17). The License agreement has been
recorded at the historical cost basis of the chief executive officer, who owned
the patent.
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30,
------------------------------
2004 2003
------------------------------
Accounts payable - trade $ 486,225 $ 447,511
Accrued property taxes payable 14,085 14,085
Accrued compensated absences 122,084 126,721
Accrued interest payable 126,548 130,024
Accrued wages payable 420,000 218,664
Other accrued expenses 3,585 -
------------- ------------
Totals $ 1,172,527 $ 937,005
============ ===========
(Continued)
F-26
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(9) OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
June 30,
------------------------------
2004 2003
------------ ----------------
Accrued compensation-stock options $ 1,014,486 $ 1,014,486
----------- ------------
$ 1,014,486 $ 1,014,486
=========== ============
(10) SHORT-TERM DEBT
Short-term debt consisted of the following:
June 30,
-------------------------------
2004 2003
-------------- -------------
Loan payable $ 300,407 $ 300,407
------------ ------------
$ 300,407 $ 300,407
============ ============
The Company has borrowed a total of $475,407, from an unrelated third-party on
an unsecured basis. The loan accrues interest at a rate of 6% per annum and is
payable on demand. The Company has repaid $175,000 as of June 30, 2004. Accrued
interest of $126,549 is reflected in accrued expenses on the balance sheet.
Based on its review of this transaction, Company management has disputed the
validity of the debt.
(Continued)
F-27
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(11) OTHER OPERATING EXPENSES
Other operating expenses as follows:
From Inception
(December 10,
Year Ended Year Ended Year Ended 1993) to
June 30, 2004 June 30, 2003 June 30, 2002 June 30, 2004
------------- -------------- ------------- ---------------
Certification expenses $ 51,359 $ 38,814 $ 45,735 $ 135,908
Advertising and promotion expenses 137,274 62,325 173,956 1,369,519
Clinical expenses 51,647 56,024 102,178 741,862
Consulting expenses 402,156 377,272 380,049 4,659,521
Insurance expenses 448,909 382,932 316,256 2,036,325
Inventory restocking costs - - - 377,006
Professional fees 430,813 512,779 405,236 3,554,638
Sales and property taxes 61,252 49,632 54,405 565,337
Stockholder expenses 214,197 128,391 178,303 860,841
Trade show expenses 222,646 143,889 160,806 1,507,845
Travel and subsistence costs 324,239 238,322 552,875 2,339,348
Rent expense 12,449 8,630 11,435 337,419
Loan placement expenses and fees - - 15,000 671,494
Liquidated damages (income) costs - - - 140,000
Settlement expenses 450,000 841,853 176,750 1,468,603
Death benefit expenses - - 286,225 286,225
------- --------- ---------- ---------
Total other operating expenses 2,806,941 2,840,863 2,859,209 21,051,891
========= ========= ========== ==========
F-28
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(12) EQUITY LINE OF CREDIT
On August 17, 2000 the Company finalized a financing agreement with a private
institutional equity investor, which contains two component parts, a $25 million
Private Equity Agreement and a private placement of 500 shares of Series K
convertible preferred stock as bridge financing in the amount of $5,000,000 (See
Note 16). On May 15, 2002, the Company entered into a second private equity
agreement, which replaced the original Private Equity Agreement. The terms of
the second Private Equity Agreement were substantially equivalent to the terms
of the original agreement, except that (i) the commitment period is three years
from the effective date of a registration statement covering the second Private
Equity Agreement shares, (ii) the minimum amount we must draw through the end of
the commitment period is $2,500,000, (iii) the minimum stock price requirement
has been reduced to $.20, and (iv) the minimum average trading volume has been
reduced to $40,000.
On October 29, 2002, the Company entered into a new "Third Private Equity Credit
Agreement" which the Company intends to supplement the second Private Equity
Agreement. The terms of the Third Private Equity Credit Agreement are
substantially equivalent to the terms of the prior agreement, in that (i) the
commitment period is three years from the effective date of a registration
statement covering the Third Private Equity Credit Agreement shares, (ii) the
maximum commitment is $15,000,000, (iii) the minimum amount we must draw through
the end of the commitment period is $2,500,000, (iv) the minimum stock price
requirement has been reduced to $.10, and (v) the minimum average trading volume
in dollars has been reduced to $20,000. The conditions to draw under this
private equity line, as described above, may materially limit the draws
available to the Company. On November 7, 2002 the Company filed a registration
statement on Form S-2 to register 5,500,000 shares underlying the Third Private
Equity Credit Agreement, which was declared effective by the SEC on November 21,
2002. On December 30, 2002 the Company filed a registration statement on Form
S-2 to register an additional 9,750,000 shares underlying the Third Private
Equity Credit Agreement, which was declared effective by the SEC on January 16,
2003. On April 11, 2003 the Company filed a registration statement on Form S-2
to register an additional 9,800,000 shares underlying the Third Private Equity
Credit Agreement, which was declared effective by the SEC on May 13, 2003.
The Private Equity Agreement commits the investor 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 shares. The timing
and amounts of the purchase by the investor are at the sole discretion of the
Company. However, they do have to draw down a minimum of $10 million from the
credit line over the twelve-month period. The purchase price of the shares of
common stock are 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.
On January 9, 2004, the Company entered into a new "Fourth Private Equity Credit
Agreement" which replaces the prior private equity agreements. The terms of the
Fourth Private Equity Credit Agreement are more favorable to the Company than
the terms of the prior Third Private Equity Credit
(Continued)
F-29
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(12) EQUITY LINE OF CREDIT (Continued)
Agreement. The new, more favorable terms are: (i) The put option price is 93% of
the three lowest closing bid prices in the ten day trading period beginning on
the put date and ending on the trading day prior to the relevant closing date of
the particular tranche, while the prior Third Private Equity Credit Agreement
provided for 91%, ii) the commitment period is two years from the effective date
of a registration statement covering the Fourth Private Equity Credit Agreement
shares, while the prior Third Private Equity Credit Agreement was for three
years, (iii) the maximum commitment is $15,000,000, (iv) the minimum amount the
Company must draw through the end of the commitment period is $1,000,000, while
the prior Third Private Equity Credit Agreement minimum amount was $2,500,000,
(v) the minimum stock price requirement is now controlled by the Company as it
has the option of setting a floor price for each put transaction (the previous
minimum stock price in the Third Private Equity Credit Agreement was fixed at
$.10), (vi) there are no fees associated with the Fourth Private Equity Credit
Agreement; the prior private equity agreements required the payment of a 5%
consulting fee, which was subsequently lowered to 4% by mutual agreement in
September 2001, and (vii) the elimination of the requirement of a minimum
average daily trading volume in dollars. The previous trading volume requirement
in the Third Private Equity Credit Agreement was $20,000.
On January 30, 2004, the Company filed a registration statement with respect to
5,000,000 shares of its common stock to be issued pursuant to the Fourth Private
Equity Credit Agreement. This registration statement became effective March 4,
2004, at which time the Third Private Equity Credit Agreement was terminated,
and the Company began drawing under the Fourth Private Equity Credit Agreement.
On June 21, 2004 the Company filed a registration statement on Form S-2 to
register an additional 9,000,000 shares underlying the Fourth Private Equity
Credit Agreement, which was declared effective by the SEC on June 29, 2004.
These financing agreements have no warrants attached to either the bridge
financing or the private equity line. Furthermore, the Company was not required
to pay the investor's legal fees, but the Company previously paid a 5%
consulting fee for the money funded in all prior transactions up until the
approval of the Fourth Private Equity Credit Agreement. The Company sold
$2,840,000 of common stock under the terms of the agreement during the year
ended June 30, 2001. The total shares issued by the Company amounted to
3,407,613. The Company incurred $139,985 of consulting fees and recorded
$303,666 of deemed interest expense as a result of the 9% discount off of the
market price. During the year ended June 30, 2002, an additional $5,585,000 of
common stock was sold under the terms of the equity credit line agreement, and
the Company issued a total of 11,607,866 shares of common stock. The Company
incurred $296,250 of consulting fees and recorded $628,805 of deemed interest
expense as a result of the 9% discount off of the market price. During the year
ended June 30, 2003, an additional $7,881,000 of common stock was sold under the
terms of the equity credit line agreement, and the Company issued a total of
29,390,708 shares of common stock. The Company incurred $211,800 of consulting
fees and recorded $856,772 of deemed interest expense as a result of the 9%
discount off of the market price. During the year ended June 30, 2004, an
additional $5,850,000 of common stock was sold under the terms of the equity
(Continued)
F-30
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(12) EQUITY LINE OF CREDIT (Continued)
credit line agreement, and the Company issued a total of 8,630,819 shares of
common stock. The Company incurred $188,000 of consulting fees which was solely
from the Third Private Equity Credit Agreement and recorded a total of $691,701
of deemed interest expense of which $555,897 is a result of the 9% discount off
the market price under the Third Private Equity Credit Agreement and $135,804 is
a result of the 7% discount off the market price under the Fourth Private Equity
Credit Agreement.
(13) LEASES
The Company leases certain office equipment under operating leases expiring in
future years. Minimum future lease payments under the non-cancelable operating
lease having a remaining term in excess of one year as of June 30, 2004 are as
follows:
Year ending June 30, Amount
2005 $ 5,604
2006 4,159
Thereafter 2,492
---------
Total minimum future lease payments $ 12,255
=========
(14) INCOME TAXES
No provision for income taxes has been recorded in the accompanying financial
statements as a result of the Company's net operating losses. The Company has
unused tax loss carryforwards of approximately $57,159,000 to offset future
taxable income. Such carryforwards expire in years beginning 2014. The deferred
tax asset recorded by the Company as a result of these tax loss carryforwards is
approximately $22,580,000 and $19,950,000 at June 30, 2004 and 2003,
respectively. The Company has reduced the deferred tax asset resulting from its
tax loss carryforwards by a valuation allowance of an equal amount as the
realization of the deferred tax asset is uncertain. The net change in the
deferred tax asset and valuation allowance from July 1, 2003 to June 30, 2004
was an increase of approximately $2,630,000.
(Continued)
F-31
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) REDEEMABLE CONVERTIBLE PREFERRED STOCK
On March 17, 1999, the Company finalized the private placement to foreign
investors of 35 shares of its Series G Redeemable Convertible Preferred Stock at
a purchase price of $10,000 per share and two year warrants to purchase 65,625
shares of the Company's common stock at an exercise price of $.50 per share. The
agreement was executed pursuant to Regulation D as promulgated by the Securities
Act of 1933, as amended. A total of 43,125 warrants were exercised during the
year ended June 30, 2000, and an additional 9,375 warrants were exercised during
the year ended June 30, 2001.
The Series G Preferred Stock had no dividend provisions. The preferred stock was
convertible, at any time, for a period of two years thereafter, in whole or in
part, without the payment of any additional consideration, into fully paid and
nonassessable shares of the Company's no par value common stock based upon the
"conversion formula". The conversion formula stated that the holder of the
Series G Preferred Stock would receive shares determined by dividing (i) the sum
of $10,000 by the (ii) "Conversion Price" in effect at the time of conversion.
The "Conversion Price" shall be equal to the lesser of $.54 or seventy-five
percent (75%) of the Average Closing Price of the Company's common stock for the
ten-day trading period ending on the day prior to the date of conversion.
In connection with the sale, the Company issued three preferred shares to an
unaffiliated investment banker for placement and legal fees, providing net
proceeds to the Company of $350,000. The shares underlying the preferred shares
and warrant are entitled to demand registration rights under certain conditions.
Pursuant to the Registration Rights Agreement ("RRA") the Company was required
to register 100% of the number of shares that would be required to be issued if
the Preferred Stock were converted on the day before the filing of the S-2
Registration Statement. In the event the Registration Statement was not declared
effective within 120 days, the Series G Holders had the right to force the
Company to redeem the Series G Preferred Stock at a redemption price of 120% of
the face value of the preferred stock. The Registration Statement was declared
effective on July 29, 2000. During the year ended June 30, 2000, the Series G
Preferred Stock was converted into 3,834,492 shares of the Company's common
stock.
(Continued)
F-32
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) CONVERTIBLE PREFERRED STOCK
On April 27, 1995, the Company amended the Articles of Incorporation to provide
for the authorization of 2,000,000 shares of no par value preferred stock. The
shares were divided out of the original 50,000,000 shares of no par value common
stock. All Series of the convertible preferred stock are not redeemable and
automatically convert into shares of common stock at the conversion rates three
years after issuance.
The Company issued 4,000 shares of "Series A Convertible Preferred Stock"
("Series A Preferred Stock") on March 21, 1996 under a Regulation S Securities
Subscription Agreement. The agreement called for a purchase price of $1,000 per
share, with net proceeds to the Company, after commissions and issuance costs,
amounting to $3,600,000.
The holders of the Series A Preferred Stock could have converted up to 50% prior
to May 28, 1996, and may convert their remaining shares subsequent to May 28,
1996 without the payment of any additional consideration, into fully paid and
nonassessable shares of the Company's no par value common stock based upon the
"conversion formula". The conversion formula states that the holder of the
Preferred Stock will receive shares determined by dividing (i) the sum of $1,000
plus the amount of all accrued but unpaid dividends on the shares of Convertible
Preferred Stock being so converted by the (ii) "Conversion Price". The
"Conversion Price" shall be equal to seventy-five percent (75%) of the Market
Price of the Company's common stock; provided, however, that in no event will
the "Conversion Price" be greater than the closing bid price per share of common
stock on the date of conversion.
The agreement provides that no fractional shares shall be issued. In addition,
provisions are made for any stock dividends or stock splits that the Company may
issue with respect to their no par value common stock. The Company is also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Series A Convertible Preferred
Stock. The holders of the Series A Preferred Stock are also entitled to receive
a five percent (5%) per share, per annum dividend out of legally available funds
and to the extent permitted by law. These dividends are payable quarterly on the
last business day of each quarter commencing with the calendar quarter next
succeeding the date of issuance of the Series A Preferred Stock. Such dividends
shall be fully cumulative and shall accrue, whether or not declared by the Board
of Directors of the Company, and may be payable in cash or in freely tradeable
shares of common stock.
The Series A Preferred Stockholders shall have voting rights similar to those of
the regular common stockholders, with the number of votes equal to the number of
shares of common stock that would be issued upon conversion thereof. The Series
A Preferred Stock shall rank senior to any other class of capital stock of the
Company now or hereafter issued as to the payment of dividends and the
distribution of assets on redemption, liquidation, dissolution or winding up of
the Company.
(Continued)
F-33
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) CONVERTIBLE PREFERRED STOCK (Continued)
As of June 30, 1996, 1,600 shares of the Series A Preferred Stock had been
converted into a total 425,416 shares (including accumulated dividends) of the
Company's common stock. The remaining 2,400 shares of Series A Preferred Stock
were converted into 1,061,202 shares (including accumulated dividends) of the
Company's common stock during the fiscal year ended June 30, 1997.
The Company issued 450 shares of "Series B Convertible Preferred Stock" ("Series
B Preferred Stock") and warrants to purchase up to an additional 112,500 shares
of common stock on December 17, 1996 pursuant to Regulation D and Section 4(2)
of the Securities Act of 1933. The agreement called for a purchase price of
$10,000 per share, with proceeds to the Company amounting to $4,500,000.
The holders of the Series B Preferred Stock could have converted up to 34% of
the Series B Preferred Stock 80 days from issuance (March 7, 1997), up to 67% of
the Series B Preferred Stock 100 days from issuance (March 27, 1997), and may
convert their remaining shares 120 days from issuance (April 19, 1997) without
the payment of any additional consideration, into fully paid and nonassessable
shares of the Company's no par value common stock based upon the "conversion
formula". The conversion formula states that the holder of the Series B
Preferred Stock will receive shares determined by dividing (i) the sum of
$10,000 by the (ii) "Conversion Price" in effect at the time of conversion. The
"Conversion Price" shall be equal to eighty-two percent (82%) of the Market
Price of the Company's common stock; provided, however, that in no event will
the "Conversion Price" be greater than $3.85. The warrants are exercisable at
any time for an exercise price of $5.00 and will expire five years from the date
of issue.
The agreement provides that no fractional shares shall be issued. In addition,
provisions are made for any stock dividends or stock splits that the Company may
issue with respect to their no par value common stock. The Company is also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Convertible Preferred Stock. The
holders of the Series B Preferred Stock are also entitled to receive a seven
percent (7%) per share, per annum dividend out of legally available funds and to
the extent permitted by law. These dividends are payable quarterly on the last
business day of each quarter commencing with the calendar quarter next
succeeding the date of issuance of the Series B Preferred Stock. Such dividends
shall be fully cumulative and shall accrue, whether or not declared by the Board
of Directors of the Company, and may be payable in cash or in freely tradeable
shares of common stock.
The Series B Preferred Stockholders shall have voting rights similar to those of
the regular common stockholders, with the number of votes equal to the number of
shares of common stock that would be issued upon conversion thereof. The Series
B Preferred Stock shall rank senior to any other class of capital stock of the
Company now or hereafter issued as to the payment of dividends and the
distribution of assets on redemption, liquidation, dissolution or winding up of
the Company.
(Continued)
F-34
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) CONVERTIBLE PREFERRED STOCK (Continued)
On September 4, 1998, the Company received a notice of conversion from the
Series B Holders. The Series B Holders filed a lawsuit against the Company on
October 7, 1998. The Company was served on October 19, 1998. The lawsuit alleged
that the Company has breached its contract of sale to the Series B Holders by
failing to convert the Series B Holders and failure to register the common stock
underlying the Preferred Stock. The Series B Holders demanded damages in excess
of $75,000, to be determined at trial, together with interest costs and legal
fees. On April 6, 1999, the Series B Holders sold their preferred stock to an
unaffiliated third party ("the Purchaser") with no prior relationship to the
Company, or the Series B Holders. As part of the purchase agreement, the Series
B Holders were required to dismiss the lawsuit with prejudice and the Company
and the Series B Holders exchanged mutual general releases (see Series I).
As of June 30, 2000, the Series B Preferred Stock has been converted into
30,463,164 shares of the Company's common stock, and 60 shares were canceled at
the request of the holder.
During the years ended June 30, 1999 and 1998 the Company issued a total of six
Private Placements of convertible preferred stock (see schedule incorporated
into Note 15). The Private Placements are summarized as follows:
Series C Preferred Stock
On October 6, 1997, the Company finalized the private placement to foreign
investors of 210 shares of its Series C Convertible Preferred Stock at a
purchase price of $10,000 per share and warrants to purchase up to 160,000
shares of the Company's common stock at an exercise price of $1.63 per
share, and warrants to purchase up to 50,000 shares of the Company's common
stock at an exercise price of $1.562 per share. The agreement was executed
pursuant to Regulation S as promulgated by the Securities Act of 1933, as
amended. As of June 30, 2001, 40,000 warrants at the $1.63 exercise price
were exercised, and the remaining 140,000 warrants had expired. The
remaining 50,000 warrants ($1.562 exercise price) are outstanding as of June
30, 2001.
The Series C Preferred Stock is convertible, at any time, commencing 45 days
from the date of issuance and for a period of three years thereafter, in
whole or in part, without the payment of any additional consideration, into
fully paid and nonassessable shares of the Company's no par value common
stock based upon the "conversion formula". The conversion formula states
that the holder of the Series C Preferred Stock will receive shares
determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price"
in effect at the time of conversion.
(Continued)
F-35
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) CONVERTIBLE PREFERRED STOCK (Continued)
The "Conversion Price" shall be equal to seventy-five percent (75%) of the
Average Closing Price of the Company's common stock; however, in no event
will the "Conversion Price" be greater than $1.222. Pursuant to the
Regulation S documents, the Company was also required to escrow an aggregate
of 3,435,583 shares of its common stock (200% of the number of shares the
investor would have received had the shares been converted on the closing
date of the Regulation S sale).
In connection with the sale, the Company paid an unaffiliated investment
banker $220,500 for placement and legal fees, providing net proceeds to the
Company of $1,879,500.
Series D Preferred Stock
On January 9, 1998, the Company finalized the private placement to foreign
investors of 50 shares of its Series D Convertible Preferred Stock at a
purchase price of $10,000 per share and warrants to purchase up to 25,000
shares of the Company's common stock at an exercise price of $1.22 per
share. The agreement was executed pursuant to Regulation S as promulgated by
the Securities Act of 1933, as amended. As of June 30, 2001 the warrants had
expired.
The Series D Preferred Stock is convertible, at any time, commencing 45 days
from the date of issuance and for a period of three years thereafter, in
whole or in part, without the payment of any additional consideration, into
fully paid and nonassessable shares of the Company's no par value common
stock based upon the "conversion formula". The conversion formula states
that the holder of the Series D Preferred Stock will receive shares
determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price"
in effect at the time of conversion. The "Conversion Price" shall be equal
to seventy-five percent (75%) of the Average Closing Price of the Company's
common stock.
In connection with the sale, the Company issued four preferred shares to an
unaffiliated investment banker for placement fees and paid legal fees of
$5,000, providing net proceeds to the Company of $495,000. The shares
underlying the preferred shares and warrant are entitled to demand
registration rights under certain conditions.
Series E Preferred Stock
On February 5, 1998, the Company finalized the private placement to foreign
investors of 50 shares of its Series E Convertible Preferred Stock at a
purchase price of $10,000 per share and warrants to purchase up to 25,000
shares of the Company's common stock at an exercise price of $1.093 per
share. The agreement was executed pursuant to Regulation S as promulgated by
the Securities Act of 1933, as amended. As of June 30, 2001 the warrants had
expired.
(Continued)
F-36
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) CONVERTIBLE PREFERRED STOCK (Continued)
The Series E Preferred Stock is convertible, at any time, commencing 45 days
from the date of issuance and for a period of three years thereafter, in
whole or in part, without the payment of any additional consideration, into
fully paid and nonassessable shares of the Company's no par value common
stock based upon the "conversion formula".
The conversion formula states that the holder of the Series E Preferred
Stock will receive shares determined by dividing (i) the sum of $10,000 by
the (ii) "Conversion Price" in effect at the time of conversion. The
"Conversion Price" shall be equal to seventy-five percent (75%) of the
Average Closing Price of the Company's common stock.
In connection with the sale, the Company issued four preferred shares to an
unaffiliated investment banker for placement fees and paid legal fees of
$5,000, providing net proceeds to the Company of $495,000. The shares
underlying the preferred shares and warrant are entitled to demand
registration rights under certain conditions.
Series F Preferred Stock
On February 20, 1998, the Company finalized the private placement to foreign
investors of 75 shares of its Series F Convertible Preferred Stock at a
purchase price of $10,000 per share. The agreement was executed pursuant to
Regulation S as promulgated by the Securities Act of 1933, as amended.
The Series F Preferred Shares pay a dividend of 6% per annum, payable in
Common Stock at the time of each conversion and are convertible, at any
time, commencing May 15, 1999 and for a period of two years thereafter, in
whole or in part, without the payment of any additional consideration, into
fully paid and nonassessable shares of the Company's no par value common
stock based upon the "conversion formula". The conversion formula states
that the holder of the Series F Preferred Stock will receive shares
determined by dividing (i) the sum of $10,000 by the (ii) "Conversion Price"
in effect at the time of conversion. The "Conversion Price" shall be equal
to seventy percent (70%) of the Average Closing Price of the Company's
common stock.
In connection with the sale, the Company paid an unaffiliated investment
banker $50,000 for placement and legal fees, providing net proceeds to the
Company of $700,000. The shares underlying the preferred shares and warrant
are entitled to demand registration rights under certain conditions.
(Continued)
F-37
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) CONVERTIBLE PREFERRED STOCK (Continued)
Series H Preferred Stock
On June 2, 1998, the Company finalized the private placement to foreign
investors of 100 shares of its Series H Convertible Preferred Stock at a
purchase price of $10,000 per share and Series H-"A" warrants to purchase up
to 75,000 shares of the Company's common stock at an exercise price of $1.00
per share, and Series H-"B" warrants to purchase up to 50,000 shares of the
Company's common stock at an exercise price of $1.50 per share. The
agreement was executed pursuant to Regulation D as promulgated by the
Securities Act of 1933, as amended. As of June 30, 2001 none of the warrants
had been exercised.
The Series H Preferred Stock is convertible, at any time, for a period of
two years thereafter, in whole or in part, without the payment of any
additional consideration, into fully paid and nonassessable shares of the
Company's no par value common stock based upon the "conversion formula". The
conversion formula states that the holder of the Series H Preferred Stock
will receive shares determined by dividing (i) the sum of $10,000 by the
(ii) "Conversion Price" in effect at the time of conversion. The "Conversion
Price" shall be equal to the lesser of $.53 or seventy-five percent (75%) of
the Average Closing Price of the Company's common stock for the ten-day
trading period ending on the day prior to the date of conversion.
In connection with the sale, the Company issued eight preferred shares and
paid $10,000 to an unaffiliated investment banker for placement and legal
fees, providing net proceeds to the Company of $990,000. The shares
underlying the preferred shares and warrant are entitled to demand
registration rights under certain conditions.
The Company was in technical default of the Registration Rights Agreement
("RRA"), which required the S-2 Registration Statement to be declared
effective by October 2, 1998. Pursuant to the RRA, the Company was required
to pay the Series H holders, as liquidated damages for failure to have the
Registration Statement declared effective, and not as a penalty, 2% of the
principal amount of the Securities for the first thirty days, and 3% of the
principal amount of the Securities for each thirty day period thereafter
until the Company procures registration of the Securities. On March 25,
1999, the Company issued 424,242 shares of common stock as partial payment
of the liquidated damages. The cumulative liquidated damages expense for the
years ended June 30, 2001 amounted to $140,000.
(Continued)
F-38
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) CONVERTIBLE PREFERRED STOCK (Continued)
Series I Preferred Stock
On April 6, 1999, the Company entered into a Subscription Agreement with the
Purchaser of the Series B Preferred Stock whereby the Company agreed to
issue 138 shares of its Series I, 7% Convertible Preferred Stock
($1,380,000). The consideration for the subscription agreement was paid as
follows:
1. Forgiveness of approximately $725,795 of accrued interest
(dividends) in connection with the Series B Convertible Preferred
stock. The Company recorded the forgiveness of the accrued
interest (dividends) by reducing the accrual along with a
reduction in the accumulated deficit.
2. Settlement 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.
4. A limitation on the owner(s) of the Series B Convertible
Preferred stock to ownership of not more than 4.99% of the
Company's outstanding common stock at any one time.
The Series I Preferred stock pays a 7% premium, to be paid in cash or freely
trading common stock at the Company's sole discretion, upon conversion.
The Series I Preferred Stock is convertible, at any time, in whole or in
part, without the payment of any additional consideration, into fully paid
and nonassessable shares of the Company's no par value common stock based
upon the "conversion formula". The conversion formula states that the holder
of the Series I Preferred Stock will receive shares determined by dividing
(i) the sum of $10,000 by the (ii) "Conversion Price" in effect at the time
of conversion. The "Conversion Price" shall be equal to seventy-five percent
(75%) of the Average Closing Price of the Company's common stock.
Pursuant to the Series I designation and the Subscription Agreement, the
Series I Holder, or any subsequent holder of the Preferred Shares, is
prohibited from converting any portion of the Preferred Stock which would
result in the Holder being deemed the beneficial owner of 4.99% or more of
the then issued and outstanding common stock of the Company.
(Continued)
F-39
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) CONVERTIBLE PREFERRED STOCK (Continued)
Series K Preferred Stock
On July 17, 2000, the Company finalized the private placement to foreign
investors of 500 shares of its Series K Convertible Preferred Stock at a
purchase price of $10,000 per share. The agreement was executed in
accordance with and in reliance upon the exemption from securities
registration by Rule 506 under Regulation D as promulgated by the Securities
Act of 1933, as amended.
The Company was obligated to pay a 9% dividend on the convertible preferred
in cash or common stock at its option semi-annually, on June 30, and
December 31, of each calendar year or upon conversion date. The Company also
had 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%
If the Company, for whatever reason, was 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 twenty consecutive trading days prior to the conversion date. The
agreement further provides that the Company register the underlying common
shares in a registration statement as soon as possible after the closing date,
and must use their best efforts to file timely and cause the registration
statement to become effective within 120 days from the closing date. The
registration statement was effective on December 13, 2000.
The entire amount of the Series K Convertible Preferred Stock was converted or
redeemed by the Company during the year ended June 30, 2001 into 5,664,067
shares of common stock, including 219,225 shares as payment of the 9% accrued
dividend.
The agreements provided that no fractional shares shall be issued. In addition,
provisions were made for any stock dividends or stock splits that the Company
may issue with respect to their no par value common stock. The Company was also
required to reserve and keep available out of its authorized but unissued common
stock such number of shares of common stock as shall be available to effect the
conversion of all of the outstanding shares of Convertible Preferred Stock. The
preferred stockholders shall not be entitled to vote on any matters submitted to
the stockholders of the Company, except as to the necessity to vote for the
authorization of additional shares to effect the conversion of the preferred
stock. The holders of any outstanding shares of preferred stock shall have a
preference in distribution of the Company's property available for distribution
to the holders of any other class of capital stock, including but not limited
to, the common stock, equal to $10,000 consideration per share.
(Continued)
F-40
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) CONVERTIBLE PREFERRED STOCK (Continued)
The following schedule reflects the number of shares of preferred stock that
have been issued, converted and are outstanding as of June 30, 2003, including
certain additional information with respect to the deemed preferred stock
dividends that were calculated as a result of the discount from market for the
conversion price per share:
(Continued)
F-41
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) Convertible Preferred Stock (Continued)
Series A Series B Series C Series D
Shares Amount Shares Amount Shares Amount Shares Amount
---------- ------------- -------- ------------- -------- ------------- -------- ------------
Balance at June 30, 1995 - $ - - $ - - $ - - $ -
Sale of Series A 4,000 3,600,000
Series A conversion (1,600) (1,440,000)
---------- -------------
Balance at June 30, 1996 2,400 2,160,000
Sale of Series B 450 4,500,000
Series A conversion (2,400) (2,160,000)
---------- ------------- -------- -------------
Balance at June 30, 1997 - - 450 4,500,000
Sale of preferred stock
(Series C - H) 210 2,100,000 54 540,000
Conversion of preferred stock (210) (2,100,000) (25) (250,000)
---------- ------------- -------- ------------- -------- ------------- -------- ------------
Balance at June 30, 1998 - - 450 4,500,000 - - 29 290,000
Sale of Series I
Conversion of preferred stock (60) (600,000) (29) (290,000)
---------- ------------- -------- ------------- -------- ------------- -------- ------------
Balance at June 30, 1999 - - 390 3,900,000 - - - -
Conversion of preferred stock, net (390) (3,900,000)
---------- ------------- -------- ------------- -------- ------------- -------- ------------
Balance at June 30, 2000 - - - - - - - -
Sale of Series K
Conversion of preferred stock
---------- ------------- -------- ------------- -------- ------------- -------- ------------
Balance at June 30, 2001 - $ - - $ - - $ - - $ -
========== ============= ======== ============= ======== ============= ======== ============
Additional information:
Discount off market price 25% 18% 25% 25%
============= ============= ============= ============
Fair market value-issue rate $ 8.31 $ 3.25 $ 1.63 $ 0.99
============= ============= ============= ============
Deemed preferred stock dividend $1,335,474 $ 998,120 $ 705,738 $182,433
============= ============= ============= ============
Series E Series F Series H Series I
Shares Amount Shares Amount Shares Amount Shares Amount
-------- ----------- -------- ----------- ------- ------------ ---------- -------------
Balance at June 30, 1995 - $ - - $ - - $ - - $ -
Sale of Series A
Series A conversion
Balance at June 30, 1996
Sale of Series B
Series A conversion
Balance at June 30, 1997
Sale of preferred stock
(Series C - H) 54 540,000 75 750,000 108 1,080,000
Conversion of preferred stock (30) (300,000) (75) (750,000)
-------- ----------- -------- ----------- ------- ------------
Balance at June 30, 1998 24 240,000 - - 108 1,080,000
Sale of Series I 138 1,380,000
Conversion of preferred stock (24) (240,000) (40) (400,000)
-------- ----------- -------- ----------- ------- ------------ ---------- -------------
Balance at June 30, 1999 - - - - 68 680,000 138 1,380,000
Conversion of preferred stock, net (68) (680,000) (138) (1,380,000)
-------- ----------- -------- ----------- ------- ------------ ---------- -------------
Balance at June 30, 2000 - - - - - - - -
Sale of Series K
Conversion of preferred stock
-------- ----------- -------- ----------- ------- ------------ ---------- -------------
Balance at June 30, 2001 - $ - - $ - - $ - - $ -
======== =========== ======== =========== ======= ============ ========== =============
Additional information:
Discount off market price 25% 30% 25% 25%
=========== =========== ============ =============
Fair market value-issue rate $ 1.07 $ 1.24 $ 0.57 $ 0.38
=========== =========== ============ =============
Deemed preferred stock dividend $182,250 $318,966 $351,628 $ 492,857
=========== =========== ============ =============
Series K Total
Shares Amount Shares Amount
----------- ------------- --------- -------------
Balance at June 30, 1995 - $ - - $ -
Sale of Series A 4,000 3,600,000
Series A conversion (1,600) (1,440,000)
--------- -------------
Balance at June 30, 1996 2,400 2,160,000
Sale of Series B 450 4,500,000
Series A conversion (2,400) (2,160,000)
------- -----------
Balance at June 30, 1997 450 4,500,000
Sale of preferred stock
(Series C - H) 501 5,010,000
Conversion of preferred stock (340) (3,400,000)
--------- -------------
Balance at June 30, 1998 611 6,110,000
Sale of Series I 138 1,380,000
Conversion of preferred stock (153) (1,530,000)
----------- ------------- --------- -------------
Balance at June 30, 1999 - - 596 5,960,000
Conversion of preferred stock, net (596) (5,960,000)
----------- ------------- --------- -------------
Balance at June 30, 2000 - - - -
Sale of Series K 50 5,000,000 50 5,000,000
Conversion of preferred stock (50) (5,000,000) (50) (5,000,000)
----------- ------------- --------- -------------
Balance at June 30, 2001 - $ - - $ -
=========== ============= ========= =============
Additional information:
Discount off market price 12.5%
=============
Fair market value-issue rate $ 1.13
=============
Deemed preferred stock dividend $ 708,130
=============
(Continued)
F-42
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) COMMON STOCK
On June 8, 1994, at a special meeting of shareholders of the Company, a one for
one hundred reverse stock split was approved reducing the number of issued and
outstanding shares of common stock from 68,875,200 shares to 688,752 shares
(510,000 shares of original stock, for $50,000, and the 178,752 shares acquired
in the merger). In addition, the board of directors approved the issuance of an
additional 27,490,000 shares of common stock that had been provided for in the
original merger documents. However, during April, 1995 the four major
shareholders agreed to permanently return 12,147,480 of these additional shares.
Therefore, the net additional shares of common stock issued amounts to
15,342,520 shares, and the net additional shares issued as a result of this
transaction have been reflected in the financial statements of the Company (See
Statement of Stockholders' Equity).
The Company has sold 1,290,069 shares of its common stock through Private
Placement Memorandums dated April 20, 1994 and December 7, 1994, as subsequently
amended. The net proceeds to the Company under these Private Placement
Memorandums were approximately $1,000,000. In addition, the Company has sold
690,722 shares of "restricted common stock" during the year ended June 30, 1995.
These shares are restricted in terms of a required holding period before they
become eligible for free trading status. As of June 30, 1995, receivables from
the sale of common stock during the year amounted to $523,118. During the year
ended June 30, 1996, 410,500 shares of the common stock related to these
receivables were canceled and $103,679 was collected on the receivable. The
unpaid balance on these original sales and other subsequent sales of common
stock, in the amount of $35,559, as of June 30, 1997, is reflected as a
reduction to stockholder's equity on the Company's balance sheet.
During the year ended June 30, 1995, 115,650 shares of common stock were issued
to satisfy obligations of the Company amounting to $102,942, approximately $.89
per share. The stock was recorded at the fair market value at the date of
issuance.
In addition, during the year ended June 30, 1995, wages accrued to the officers
of the Company in the amount of $151,000, were satisfied with the issuance of
377,500 shares of restricted common stock. Compensation expense has been
recorded during the fiscal year pursuant to the employment agreements with the
officers. In addition, during the year ended June 30, 1995, 75,000 shares of
restricted common stock were issued to a company executive pursuant to an
employment agreement. Compensation expense of $78,750 was recorded in
conjunction with this transaction.
(Continued)
F-43
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) COMMON STOCK (Continued)
During the year ended June 30, 1996, the Company sold, under the provisions of
Regulation S, a total of 700,471 shares of common stock. The proceeds from the
sale of these shares of common stock amounted to $1,561,110. The Company issued
an additional 2,503,789 shares ($4,257,320) of its common stock as a result of
the exercise of stock options issued in exchange for services rendered during
the year. Cash proceeds associated with the exercise of these options and the
issuance of these shares amounted to $1,860,062, with the remaining $2,397,258
reflected as noncash compensation. These 2,503,789 shares were issued at various
times throughout the fiscal year. The stock has been recorded at the fair market
value at the various grant dates for the transactions. Compensation, aggregating
$2,298,907, has been recorded at the excess of the fair market value of the
transaction over the exercise price for each of the transactions.
As of June 30, 1996, there were a total of 425,416 shares of common stock issued
as a result of the conversion of the Series A Convertible Preferred Stock and
the related accumulated dividends (See Note 16).
Common stock issued to employees as a result of the exercise of their incentive
stock options and their non-qualified stock options during the fiscal year ended
June 30, 1996 amounted to 1,187,900, of which 996,400 shares were issued
pursuant to the provisions of the non-qualified stock option plan and were
exercised in a "cash-less" transaction, resulting in compensation to the
officers of $567,164. Compensation cost was measured as the excess of fair
market value of the shares received over the value of the stock options tendered
in the transaction. The excess of fair market value at July 15, 1995
approximated $.57 per share on the 996,400 shares issued.
During the year ended June 30, 1997, the Company issued a total of 1,881,295
shares ($5,461,589) of its common stock. The conversion of Series A Convertible
Preferred Stock, including accrued dividends (See Note 16), accounted for the
issuance of 1,081,962 shares ($2,808,643). The remaining 799,333 shares were
issued as follows:
1. Services rendered by independent consultants in exchange for
31,200 shares. Research and development expenses of $90,480 were
charged as the fair market value at November 20, 1996 was $2.90
per share.
2. On December 20, 1996, bonus stock was issued to Company
employees, 3,200 shares. Compensation expense of $10,463 was
charged as the fair market value at that date was $3.27 per
share.
3. On January 3, 1997 bonus stock was issued to the officers of
the Company, 350,000 shares. Compensation expense of $907,900
was charged, as the fair market value at that date was $2.59 per
share.
(Continued)
F-44
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) COMMON STOCK (Continued)
4. On February 13, 1997, 4,000 shares were issued to an outside
consultant in exchange for services performed. Consulting
services of $11,500 were recorded, representing the fair market
value ($2.88 per share) on that date.
5. Services rendered by an independent consultant during June
1997 in exchange for 199,000 shares. Consulting expenses of
$548,149 were charged, as the fair market value on the date of
the transaction was approximately $2.75 per share.
6. Exercise of incentive stock options comprised of 27,000
shares ($33,750) exercised and paid for at $1.25 per share, and
334,933 shares ($1,103,203) acquired in the exchange for options
tendered in a cash-less transaction.
7. The Company repurchased 150,000 shares ($52,500), which had
been previously acquired by one of its employees.
During the year ended June 30, 1998, the Company issued a total of 11,588,460
shares ($8,583,721) of its common stock. The conversion of Convertible Preferred
Stock (see Note 16) accounted for the issuance of 6,502,448 shares ($4,984,684).
The remaining 5,056,012 shares were issued as follows:
1. Services rendered by independent consultants in exchange for
100,000 shares. Consulting expenses of $221,900 were charged as
the fair market value at July 10, 1997 was $2.22 per share.
2. Services rendered by an independent consultant in exchange
for 200,000 shares. Consulting expenses of $400,000 were charged
as the fair market value at August 20, 1997 was $2.00 per share.
3. Services rendered by an independent consultant in exchange
for 40,000 shares. Consulting expenses of $67,480 were charged
as the fair market value at September 4, 1997 was $1.69 per
share.
4. Services rendered by a public relations company in exchange
for 166,000 shares. Public relations expenses of $269,750 were
charged as the fair market value at October 24, 1997 was $1.63
per share.
5. On December 15, 1997, bonus stock was issued to Company
employees, for 39,300 shares. Compensation expense of $41,658
was charged as the fair market value at that date was $1.06 per
share.
(Continued)
F-45
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) COMMON STOCK (Continued)
6. Services rendered by an independent consultant in exchange
for 250,000 shares. Consulting expenses of $320,000 were charged
as the fair market value at January 7, 1998 was $1.28 per share.
7. Services rendered by an independent consultant during May
1998 in exchange for 200,000 shares. Consulting expenses of
$140,000 were charged, as the fair market value on that date was
$.70 per share.
8. The Company sold 500,000 shares on May 15, 1998 in a
Regulation D offering at $.40 per share, and received cash
proceeds of $200,000.
9. On June 5, 1998, the Company issued to its chief executive
officer 3,500,000 shares ($1,890,000) as consideration for an
exclusive Patent License Agreement (see Note 7). The market
value of the stock on this date was $.54 per share. The excess
of the fair market value of the common stock over the historical
cost basis of the patent license was recorded as a distribution
to the shareholder; recorded as a reduction to additional
paid-in capital of $3,199,000.
10. On June 11, 1998, the Company issued 25,000 shares to its
corporate counsel as additional bonus compensation. Legal
expenses of $12,750 were recorded as the market value of the
stock on that date was $.51 per share.
11. A total of 65,712 non-qualified stock options were exercised
and proceeds of $22,999 ($.35 per share) was received by the
Company.
On July 10, 1998, the majority shareholders of the Company authorized, by
written action, the Company's adoption of an Amendment to the Company's Articles
of Incorporation increasing the Company's authorized shares of common stock from
48,000,000 shares to 100,000,000 shares. The Florida Statutes provide that 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 outstanding stockholders of each voting group entitled to
vote. On August 5, 1998, the Company filed an Information Statement with the
Securities and Exchange Commission with regard to the Written Action. The
Majority Shareholders consent with respect to the Amendment was effective on
February 18, 1999. The number of authorized shares was further increased to
150,000,000 shares during the shareholders annual meeting held on May 10, 2000,
and increased again during the 2002 annual meeting to 200,000,000 shares,
effective January 3, 2003.
During the year ended June 30, 1999, the Company issued a total of 12,804,131
shares ($5,837,656) of its common stock. The conversion of Convertible Preferred
Stock (see Note 16) accounted for the issuance of 4,865,034 shares ($1,972,296).
The remaining 7,939,097 shares were issued as follows:
(Continued)
F-46
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) COMMON STOCK (Continued)
1. The Company sold 200,000 shares on August 5, 1998 in a
Regulation D offering at $.30 per share, and received cash
proceeds of $60,000.
2. In June 1999, the Company issued to its chief executive
officer 3,500,000 shares ($1,890,000), representing the balance
of shares to be issued as consideration for the exclusive Patent
License Agreement (see Note 7).
3. On November 9, 1998, the Company issued 15,000 shares to its
corporate counsel as additional bonus compensation. Legal
expenses of $10,800 were recorded as the market value of the
stock on that date was $.72 per share.
4. A total of 65,612 non-qualified stock options were exercised
and proceeds of $22,964 ($.35 per share) was received by the
Company. An additional $101,500 was received this year for stock
sold in the prior year.
5. A total of 480,000 shares were issued in connection with
loans that were received by the Company. The total loan fee
expenses (based on the market value of the stock at the date of
issuance) charged to the statement of operations for the year
was $292,694, or an average of $.61 per share.
6. A total of 2,974,043 shares were issued as repayment of
various accounts payable and loans payable during the year. A
total of $1,196,992 (average of $.40 per share) of debts were
satisfied through the issuance of the stock.
7. On December 11, 1998, bonus stock was issued to Company
employees, for 130,200 shares. Compensation expense of $79,422
was charged as the fair market value at that date was $.61 per
share.
8. On March 26, 1999, the Company issued 424,242 shares of stock
as partial-payment ($140,000) on the liquidated damages in
connection with Series H Preferred Stock. The fair market value
at that date was $.33 per share.
9. During the year a total of 150,000 shares were issued for to
various independent parties for services rendered to the
Company. Expenses of $81,788 were charged, or an average price
of $.50 per share.
(Continued)
F-47
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) COMMON STOCK (Continued)
During the year ended June 30, 2000, the Company issued a total of 56,214,003
shares ($12,997,328) of its common stock. The conversion of Convertible
Debentures accounted for the issuance of 4,060,398 shares ($3,958,223), the
conversion of Redeemable Convertible Preferred Stock (see Note 15) accounted for
the issuance of 3,834,492 shares ($507,115), and the conversion of Convertible
Preferred Stock (see Note 16) accounted for the issuance of 41,581,242 shares
($6,806,219). The remaining 6,737,871 shares were issued as follows:
1. The Company sold 100,000 shares on April 27, 2000 in a
Regulation D offering at $1.57 per share, and received cash
proceeds of $157,000.
2. A total of 5,061,294 shares were issued as repayment of
various loans payable during the year. A total of $1,067,665
(average of $.21 per share) of debts were satisfied through the
issuance of the stock.
3. On November 12, 1999, bonus stock was issued to Company
employees, for 145,000 shares. Compensation expense of $12,325
was charged as the fair market value at that date was $.09 per
share. The company also canceled 8,000 shares, which had been
previously issued to an independent contractor for consulting
services. A reduction of $31,000 was recorded to consulting
expenses for the year.
4. A total of 7,297 shares were issued in connection with a loan
that was received by the Company. The total loan fee expense and
interest charged to income amounted to $2,408 during the year.
5. During the year at total of 150,652 shares were issued for
the exercise of warrants. On March 21, 2000, the Company
received $100,000 for the exercise of 107,527 warrants at an
exercise price of $.93 per share. The Company recorded a charge
to consulting expense, as the fair market value at the date the
warrants were issued was $1.84. The Company also received
$21,563 from the exercise of 43,125 of Series G Preferred Stock
warrants during the last quarter of the fiscal year.
6. Exercise of 1,281,628 incentive stock options, ($395,810)
exercised and paid for at prices ranging from $.13 per share to
$1.13 per share.
During the year ended June 30, 2001, the Company issued a total of 13,916,169
shares ($12,333,724) of its common stock. The conversion of Convertible
Preferred Stock (see Note 16) accounted for the issuance of 5,664,067 shares
($5,580,531), and the common stock issued through the equity line of credit (See
Note 12) accounted for the issuance of 3,407,613 shares ($3,143,666). The
remaining 4,844,489 shares were issued as follows:
(Continued)
F-48
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) COMMON STOCK (Continued)
1. A total of 810,000 shares were issued as repayment of a loan
payable during the year. (See Note 10) A total of $530,000 of
debt was satisfied through the issuance of the stock, and an
additional $863,200 was charged as interest expense as the fair
market value of the stock at the date of issuance was $1.72 per
share.
2. On December 7, 2000, 143,500 shares of bonus stock were
issued to Company employees. Compensation expense of $219,555
was charged as, the fair market value of the common stock at
that date was $1.53 per share. The Company also issued 10,000
shares on May 17, 2001. Consulting services of $8,300 was
charged, as the fair market value of the stock was $.83 per
share.
3. During the year a total of 99,375 shares of common stock were
issued for the exercise of warrants. The Company received $4,687
from the exercise of 99,375 Series G Preferred Stock warrants.
On August 10, 2000, the Company received $65,200 for the
exercise of 40,000 Series C Preferred Stock warrants at an
exercise price of $1.63 per share.
4. Common stock issued to officers as a result of the exercise
of their incentive stock options and their non-qualified stock
options amounted to 3,755,414 shares. The options were exercised
in a "cash-less" transaction, resulting in compensation to the
officers of $1,848,566. An additional 26,200 shares were issued
to employees upon the exercise of their incentive stock options
during the year, at exercise prices ranging from $.35 per share
to $.60 per share.
During the year ended June 30, 2002, the Company issued a total of 12,167,866
shares ($6,508,155) of its common stock. The common stock issued through the
equity line of credit (See Note 12) accounted for the issuance of 11,607,866
shares ($6,213,805). The remaining 560,000 shares were issued as follows:
1. On November 21, 2001, 210,000 shares of bonus stock were
issued to Company employees. Deferred compensation of $117,600
was charged as, the fair market value of the common stock at
that date was $.56 per share, and the stock will not be
physically delivered to the employees until January 2003.
2. A total of 350,000 shares were issued in conjunction with the
settlement on March 22, 2002 of a lawsuit. Settlement expense of
$176,750 has been charged on the statement of operations, as the
fair market value of the stock at the date of issuance was $.51
per share.
(Continued)
F-49
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) COMMON STOCK (Continued)
During the year ended June 30, 2003, the Company issued a total of 31,398,326
shares ($9,708,425) of its common stock. The common stock issued through the
equity line of credit (See Note 12) accounted for the issuance of 29,390,708
shares ($8,737,772). The remaining 2,007,618 shares were issued as follows:
1. During December 2002, 258,500 shares of bonus stock were
issued to Company employees. Compensation of $62,425 was charged
as, the fair market value of the common stock on the dates of
issuance averaged $.24 per share. In addition, the Company
recorded an adjustment for deferred compensation, which resulted
in a reduction to common stock for $73,500.
2. A total of 1,194,118 shares were issued in conjunction with
the settlement on June 5, 2003 of a lawsuit. Settlement expense
of $841,853 has been charged on the statement of operations, as
the fair market value of the stock at the date of issuance was
$.70 per share.
3. During the year a total of 555,000 shares were issued to
various parties for services rendered to the Company. Expenses
of $139,875 were charged, or an average price of $.25 per share.
During the year ended June 30, 2004, the Company issued a total of 10,333,373
shares ($7,867,351) of its common stock. The common stock issued through the
equity line of credit (See Note 12) accounted for the issuance of 8,630,819
shares ($5,850,000). The remaining 1,702,554 shares were issued as follows:
1. During November 2003, 401,785 shares were issued in
conjunction with the settlement on September 18, 2003 of a
lawsuit. Settlement expense of $450,000 has been charged on the
statement of operations as the fair market value of the stock at
the date of the settlement agreement was $1.12 per share.
2. During January 2004, 333,000 shares of bonus stock were
issued to Company employees. Compensation of $382,950 was
charged as the fair market value of the common stock on the date
of issuance was $1.15 per share.
(Continued)
F-50
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) COMMON STOCK (Continued)
3. Common stock issued to directors as a result of the exercise
of their incentive stock options amounted to 450,000 shares
during the year. The Company received $262,500 from the exercise
of 450,000 option shares. The exercise prices ranging from $.55
per share to $.65 per share.
4. Common stock issued to employees as a result of the exercise
of their incentive stock options amounted to 517,769 shares
during the year. The Company received $230,201 from the exercise
of 517,769 option shares. The exercise prices ranging from $.19
per share to $.65 per share.
(18) STOCK OPTIONS
During July 1994, the Company adopted a non-qualified Stock Option Plan (the
"Plan"), whereby officers and employees of the Company may be granted options to
purchase shares of the Company's common stock. Under the plan and pursuant to
their employment contracts, an officer may be granted non-qualified options to
purchase shares of common stock over the next five calendar years, at a minimum
of 250,000 shares per calendar year. The exercise price shall be thirty-five
percent of the fair market value at the date of grant. On July 5, 1995 the Board
of Directors authorized an amendment to the Plan to provide that upon exercise
of the option, the payment for the shares exercised under the option may be made
in whole or in part with shares of the same class of stock. The shares to be
delivered for payment would be valued at the fair market value of the stock on
the day preceding the date of exercise. The plan was terminated effective July
1, 1996, however the officers will be issued the options originally provided
under the terms of their employment contracts.
On March 29, 1995, the incentive stock option plan was approved by the Board of
Directors and adopted by the shareholders at the annual meeting. This original
plan was revised and on January 3, 2000 the Board of Directors adopted the
Company's "2000 Non-Statutory Plan", and the plan was subsequently approved by
the shareholders on May 10, 2000 at the annual meeting. This plan provides for
the granting, exercising and issuing of incentive stock options pursuant to
Internal Revenue Code Section 422. The Company may grant incentive stock options
to purchase up to 4,850,000 shares of common stock of the Company. This Plan
also allows the Company to provide long-term incentives in the form of stock
options to the Company's non-employee directors, consultants and advisors, who
are not eligible to receive incentive stock options. In January 2002, our Board
replaced the 1995 Plan and 2000 Plan with a new combined stock option plan, the
2002 Incentive and Non-Statutory Stock Option Plan (the "2002 Plan"), which
provides for the grant of incentive and non-statutory options to purchase an
aggregate of 6,340,123 shares of Common Stock. Upon approval of the 2002 Plan at
the next shareholders' meeting, all options outstanding under the 1995 and 2000
Plans will remain outstanding; however, no new options will be granted under
those plans. The Board of Directors or a company established compensation
committee has direct responsibility for the administration of these plans.
(Continued)
F-51
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(18) STOCK OPTIONS (Continued)
The exercise price of the non-statutory stock options shall be equal to no less
than 50% of the fair market value of the common stock on the date such option is
granted.
On February 4, 2004, the Board of Directors adopted the Company's 2004
Non-Statutory Stock Option Plan (the "2004 Plan"), which was adopted by the
shareholders on March 24, 2004 at the annual meeting, to provide a long-term
incentive for employees, non-employee directors, consultants, attorneys and
advisors of the Company. The maximum number of options that may be granted under
the 2004 Plan shall be options to purchase 8,432,392 shares of Common Stock (5%
of our issued and outstanding common stock as of February 4, 2004). Options may
be granted under the 2004 Plan for up to 10 years after the date of the 2004
Plan. The 2004 Non-Statutory Stock Plan replaced the 2002 Incentive and
Non-Statutory Stock Option Plan.
In accordance with the provisions of APB No. 25, the Company records the
discount from fair market value on the non-qualified stock options as a charge
to deferred compensation at the date of grant and credits additional paid-in
capital. The compensation is amortized to income over the vesting period of the
options. In addition, the Company is periodically accruing compensation on the
officers' incentive stock options in accordance with the provisions of FASB
Interpretation No. 28 ("Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans").
Transactions and other information relating to the plans are summarized as
follows:
Employee Plan:
Incentive Stock Options Non Statutory Stock Options
-------------------------------- ----------------------------
Shares Wtd. Avg. Price Shares Wtd. Avg.
------------- ---------------- ------------- ------------
Price
Outstanding at June 30, 1994 -0- -0-
Granted 75,000 $ 1.40 1,500,000 $ 1.12
Exercised - -
------------- --------------
Outstanding at June 30, 1995 75,000 1.40 1,500,000 1.12
Granted 770,309 1.66 750,000 1.44
Exercised (164,956) .92 (1,800,000) 1.50
------------- ------------
Outstanding at June 30, 1996 680,353 1.81 450,000 .13
Granted 371,377 3.27 750,000 3.88
Exercised (395,384) 1.10 -
------------- -------------
Outstanding at June 30, 1997 656,346 3.07 1,200,000 2.47
Granted 220,755 1.95 750,000 2.75
Exercised - (65,712) .35
Canceled (175,205) 4.25 -
------------- ----------------
(Continued)
F-52
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(18) STOCK OPTIONS (Continued)
Outstanding at June 30, 1998 701,896 2.42 1,884,288 2.66
Granted 786,635 .48 750,000 .43
Exercised - (65,612) .35
Canceled (82,500) 3.37 -
-------------- -------------
Outstanding at June 30, 1999 1,406,031 .53 ** 2,568,676 2.24
Granted 3,139,459 .34 -
Exercised (770,702) .37 (318,676) .35
Canceled (64,334) .47 -
-------------- -------------
Outstanding at June 30, 2000 3,710,454 .42 2,250,000 2.35
Granted 1,915,700 2.59 -
Exercised (3,030,964) .32 (750,000) .31
Canceled (279,982) .60 (1,500,000) 2.75
------------- --------------
Outstanding at June 30, 2001 2,315,208 2.38 -
Granted 6,839,864 .68 -
Exercised - -
Canceled (2,695,482) 1.17 -
------------ --------------
Outstanding at June 30, 2002 6,459,590 1.57 -
Granted 1,459,705 .38 -
Exercised - -
Canceled (56,788) .74 -
------------- --------------
Outstanding at June 30, 2003 7,862,507 1.19 -
Granted 1,576,620 1.12 31,748 .69
Exercised (517,769) .44 -
Canceled (97,525) .78 -
-------------
Outstanding at June 30, 2004 8,823,833 1.26 31,748 .69
=========== =============
** On June 25, 1999, the exercise price of 502,225 outstanding incentive stock
options was restated to $.60 per share. The Company has recorded compensation of
$330,569 during the fiscal year ended June 30, 1999 as a result of this
repricing, in accordance with the guidelines discussed in the proposed FASB
interpretation of APB Opinion No. 25.
(Continued)
F-53
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(18) STOCK OPTIONS (Continued)
Director Plan:
Incentive Stock Options Non Statutory Stock Options
-------------------------------- ----------------------------
Shares Wtd. Avg. Price Shares Wtd. Avg.
------------- ---------------- ------------- ------------
Price
Outstanding at June 30, 2000 -0-
Granted 150,000 $.65
Exercised -
Canceled -
------------
Outstanding at June 30, 2001 150,000 .65
Granted 300,000 .55
Exercised -
Canceled -
-----------
Outstanding at June 30, 2002 450,000 .58
Granted 400,000 .18
Exercised -
Canceled -
-------------
Outstanding at June 30, 2003 850,000 .40 -
Granted 100,000 1.07 700,000 .76
Exercised (450,000) .58 -
Canceled - -
------------- --------
Outstanding at June 30, 2004 500,000 .39 700,000 .76
=========== ========
At June 30, 2004, 2003 and 2002, 7,053,586, 4,941,985 and 2,244,045
respectively, of the employee incentive stock options were vested and
exercisable. The employee stock options vest at various rates over periods up to
ten years. At June 30, 2004, 2003 and 2002, 650,000, 575,000 and 300,000,
respectively, of the director stock options were vested and exercisable. Shares
of authorized common stock have been reserved for the exercise of all options
outstanding. The following summarizes the option transactions that have
occurred:
On July 5, 1994 the Company issued non-qualified options to its officers and
directors to purchase an aggregate of 750,000 shares of common stock at 35%
of the fair market value at the date of grant. Compensation expense of
$567,164 was recorded during the year ended June 30, 1996 as a result of the
discount from the market value.
(Continued)
F-54
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(18) STOCK OPTIONS (Continued)
On November 7, 1994, the Company granted 300,000 non-qualified options to
its general counsel, currently a vice-president of the Company, at an
exercise price of $0.50 per share. Deferred compensation of $150,000 was
recorded on the transaction and is being amortized over the vesting period.
The options were all exercised as of June 30, 1997.
On March 30, 1995, the Company granted to the director of engineering, a
non-qualified option to purchase up to 150,000 shares of common stock per
year, or a total of 450,000 shares, during the period March 30, 1995 and
ending March 31, 1999. The exercise price shall be $0.35 per share. The
options do not "vest" until one year from the anniversary date. Deferred
compensation of $472,500 was recorded on the transaction and is being
amortized over the vesting period. The Company also granted the individual,
incentive options to purchase 75,000 shares of common stock at an exercise
price of $1.40 per share. The options originally expired on March 30, 1998,
but were reissued on March 30, 1998 for two years.
On July 5, 1995 the Company issued non-qualified options to its officers and
directors to purchase an aggregate of 750,000 shares of common stock at 35%
of the fair market value at the date of grant. Compensation expense was
recorded during the year ended June 30, 1996 as a result of the discount
from the market value.
On September 1, 1995, the Company issued to its three officers and directors
incentive options to purchase 107,527 shares, individually, at an exercise
price of $0.93 per share (110% of the fair market value). The options expire
on September 1, 1999.
On September 1, 1995, the Company issued to an employee incentive options to
purchase 119,047 shares of common stock at an exercise price of $0.84 per
share. The options expire on September 1, 1999
At various dates during the fiscal year ended June 30, 1996, the Company
issued to various employees incentive options to purchase 328,681 shares of
common stock at prices ranging from $0.81 to $8.18. In all instances, the
exercise price was established as the fair market value of the common stock
at the date of grant, therefore no compensation was recorded on the issuance
of the options. In most cases, one-third of the options vest one year from
the grant date, with one-third vesting each of the next two years. The
options expire in ten years from the grant date.
On July 4, 1996, the Company issued to its three officers and directors
incentive options to purchase 22,883 shares, individually, at an exercise
price of $4.37 per share (110% of the fair market value). The options expire
on July 4, 2001.
(Continued)
F-55
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(18) STOCK OPTIONS (Continued)
On July 5, 1996 the Company issued non-qualified options to its officers and
directors to purchase an aggregate of 750,000 shares of common stock at 35%
of the fair market value at the date of grant. Deferred compensation of
$1,891,500 was recorded on the transaction and is being amortized over the
remaining term of the employment contracts (three years).
At various dates during the year ended June 30, 1997, the Company issued to
various employees incentive options to purchase 264,778 shares of common
stock at prices ranging from $2.56 to $3.81. In all instances, the exercise
price was established as the fair market value of the common stock at the
date of grant, therefore no compensation was recorded on the issuance of the
options. In most cases, one-third of the options vest one year from the
grant date, with one-third vesting each of the next two years. The options
expire in ten years from the grant date.
On July 4, 1997, the Company granted to its three officers and directors
incentive options to purchase 34,000 shares, individually, at an exercise
price of $2.94 per share (110% of the fair market value). The options expire
on July 4, 2002.
On July 5, 1997, the Company issued non-qualified options to its officers
and directors to purchase 750,000 shares of common stock at 35% of the fair
market value at the date of grant. Deferred compensation of $1,340,625 was
recorded on the transaction and is being amortized over the remaining term
of the employment contract (two years).
At various dates during the year ended June 30, 1998, the Company issued to
various employees incentive options to purchase 204,905 shares of common
stock at prices ranging from $.55 to $2.60. In all instances, the exercise
price was established as the fair market value of the common stock at the
date of grant, therefore no compensation was recorded on the issuance of the
options. In most cases, one-third of the options vest one year from the
grant date, with one-third vesting each of the next two years. The options
expire in ten years from the grant date.
On July 5, 1998, the Company issued non-qualified options to its officers
and directors to purchase 750,000 shares of common stock at 35% of the fair
market value at the date of grant. Deferred compensation of $622,500 was
recorded on the transaction and is being amortized over the remaining term
of the employment contract (one year).
(Continued)
F-56
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(18) STOCK OPTIONS (Continued)
At various dates during the year ended June 30, 1999, the Company issued to
various employees incentive options to purchase 786,635 shares of common
stock at prices ranging from $.46 to $.60. In all instances, the exercise
price was established as the fair market value of the common stock at the
date of grant, therefore no compensation was recorded on the issuance of the
options. In most cases, one-third of the options vest one year from the
grant date, with one-third vesting each of the next two years. The options
expire in ten years from the grant date.
At various dates during the year ended June 30, 2000, the Company issued to
its officers and various employees incentive options to purchase 3,139,459
shares of common stock at prices ranging from $.23 to $4.38. The exercise
price was established as the fair market value of the common stock at the
date of grant for employees, and 110% of the fair market value at the date
of grant for officers, therefore no compensation was recorded on the
issuance of the options. The officers' options vested immediately, while the
employees' options vest one-third from the grant date, with one-third
vesting each of the next two years. The options expire in five years from
the grant date.
At various dates during the year ended June 30, 2001, the Company issued to
its officers and various employees incentive options to purchase 1,915,700
shares of common stock at prices ranging from $.65 to $2.85. The exercise
price was established as the fair market value of the common stock at the
date of grant for employees, and 110% of the fair market value at the date
of grant for officers, therefore no compensation was recorded on the
issuance of the options. The officers' options vested immediately, while the
employees' options vest one-third from the grant date, with one-third
vesting each of the next two years. The options expire in five years from
the grant date.
In addition, on November 20, 2000 the Company granted to each director a
stock option to purchase 50,000 shares (an aggregate of 150,000 shares) of
the Company's common stock at an exercise price of $.65 per share. The
option expires in ten years and shall become exercisable on a quarterly
pro-rata basis (12,500 shares) from the date of grant. The option is not
intended to be an incentive stock option pursuant to Section 422 of the
Internal Revenue Code.
At various dates during the year ended June 30, 2002, the Company issued to
its officers and various employees incentive options to purchase 6,839,864
shares of common stock at prices ranging from $.50 to $.93. The exercise
price was established as the fair market value of the common stock at the
date of grant for employees, and 110% of the fair market value at the date
of grant for officers, therefore no compensation was recorded on the
issuance of the options.
(Continued)
F-57
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(18) STOCK OPTIONS (Continued)
Vesting for certain of the officers' options is immediately, while the other
officers' options and the employees' options vest over varying periods up to
three years from the date of grant. The options expire from four to ten
years from the grant date.
In addition, on November 20, 2001 the Company granted to each director a
stock option to purchase 100,000 shares (an aggregate of 300,000 shares) of
the Company's common stock at an exercise price of $.55 per share. The
option expires in ten years and shall become exercisable on a quarterly
pro-rata basis (25,000 shares) from the date of grant. The option is not
intended to be an incentive stock option pursuant to Section 422 of the
Internal Revenue Code.
At various dates during the year ended June 30, 2003, the Company issued to
its officers and various employees incentive options to purchase 1,459,705
shares of common stock at prices ranging from $.19 to $.79. The exercise
price was established as the fair market value of the common stock at the
date of grant for employees, and 110% of the fair market value at the date
of grant for officers, therefore no compensation was recorded on the
issuance of the options. Vesting for certain of the officers' options is
immediately, while the other officers' options and the employees' options
vest over varying periods up to three years from the date of grant. The
options expire from four to ten years from the grant date.
In addition, at various dates during the year ended June 30, 2003 the
Company granted to each new director a stock option to purchase 100,000
shares (an aggregate of 400,000 shares) of the Company's common stock at
exercise price ranging from $.20 to $.25 per share. The option expires in
ten years and shall become exercisable on a quarterly pro-rata basis (25,000
shares) from the date of grant. The option is not intended to be an
incentive stock option pursuant to Section 422 of the Internal Revenue Code.
At various dates during the year ended June 30, 2004, the Company issued to
its officers and various employees incentive options to purchase 1,576,620
shares of common stock at prices ranging from $.81 to $1.25. At various
dates during the year ended June 30, 2004, the Company issued to various
employees Non-Statutory options to purchase 31,748 shares of common stock at
prices ranging from $.39 to $.78. The exercise price was established as the
fair market value of the common stock at the date of grant for employees,
and 110% of the fair market value at the date of grant for an officer,
therefore no compensation was recorded on the issuance of the options.
Vesting for certain of the officers' options is immediate, while the other
officers' options and the employees' options vest over varying periods up to
five years from the date of grant. The options expire from four to ten years
from the grant date.
(Continued)
F-58
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(18) STOCK OPTIONS (Continued)
In addition, at various dates during the year ended June 30, 2004, the
Company issued to its Directors stock options to purchase 100,000 shares of
the Company's common stock at prices ranging from $1.03 to $1.11. At various
dates during the year ended June 30, 2004, the Company issued to its
Directors Non-Statutory options to purchase 700,000 shares of common stock
at prices ranging from $.69 to $.88. The options expire in ten years and
shall become exercisable on a quarterly pro-rata basis (50,000 shares) from
the date of grant. Options issued to the Directors are not intended to be
incentive stock options pursuant to Section 422 of the Internal Revenue
Code.
The following table summarizes information about all of the stock options
outstanding at June 30, 2004:
Outstanding options Exercisable options
------------------- -------------------
Weighted
average
Range of remaining Weighted Weighted
exercise prices Shares life (years) avg. price Shares avg. price
- --------------- ------------- ------------ ----------- ------------ ------------
$ .11 - 1.25 8,853,351 4.64 $ .69 6,501,356 $ .64
1.36 - 2.49 142,550 1.55 1.55 142,550 1.60
2.50 - 3.75 1,059,680 2.91 2.91 1,059,680 2.91
------------------------------------------------------------------------------------------------
$ .11 - 3.75 10,055,581 4.41 $ .94 7,703,586 $ .97
===============================================================================================
At June 30, 2004, the Company has issued options pursuant to four different
stock option plans, which have been previously described. The Company applies
APB Opinion No. 25 and related Interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its fixed stock option
plans with respect to its employees, however compensation has been recorded with
respect to its officers due to their provisions of utilizing "additional
incentive stock options" to exercise their incentive stock options, and acquire
shares of common stock. The compensation cost that has been charged against
income for the officers was $(178,250) and $(262,200) for 2003 and 2002,
respectively.
(Continued)
F-59
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(18) STOCK OPTIONS (Continued)
The weighted average Black-Scholes value of options granted during 2004, 2003
and 2002 was $.49, $.19 and $.36 per option, respectively. Had compensation cost
for the Company's fixed stock-based compensation plan been determined based on
the fair value at the grant dates for awards under this plan consistent with the
method of SFAS 123, the Company's pro forma net loss and pro forma net loss per
share would have been as indicated below:
From
Inception
(December 10,
Year Ended Year Ended Year Ended 1993) to
June 30, 2004 June 30, 2003 June 30, 2002 June 30, 2003
------------- ------------- ------------- --------------
Net loss to common shareholders -
As reported $ (8,402,959) $ (8,180,524) $ (7,677,560) $ (68,844,322)
============= ============= ============== =============
Pro forma $ (7,221,569) $ (7,328,944) $ (7,031,083) $ (65,582,880)
============= ============= ============== =============
Basic and diluted loss per share -
As reported $ (.05) $ (.06) $ (.06) $ (1.10)
============== ============== ============== ==============
Pro forma $ (.04) $ (.05) $ (.06) $ (1.05)
============== ============== ============== ==============
For purposes of the preceding proforma disclosures, the weighted average fair
value of each option has been estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 2004, 2003 and 2002, respectively: no dividend
yield; volatility of 75.65%, 107.8% and 79.2%; risk-free interest rate of 4%, 4%
and 5%; and an expected term of five years.
(19) CONCENTRATION OF CREDIT RISK
During the year, the Company has maintained cash balances in excess of the
Federally insured limits. The funds are with a major money center bank.
Consequently, the Company does not believe that there is a significant risk in
having these balances in one financial institution. The cash balance with the
bank at June 30, 2004 was $578,880.
(Continued)
F-60
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(20) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, receivables, accounts payable
and accrued liabilities approximated their fair values due to the short maturity
of these instruments. The fair value of the Company's debt obligations is
estimated based on the quoted market prices for the same or similar issues or on
current rates offered to the Company for debt of the same remaining maturities.
At June 30, 2004 and 2003, the aggregate fair value of the Company's debt
obligations approximated its carrying value.
(21) COMMITMENTS AND CONTINGENCIES
On August 29, 1999, the Company entered into five-year employment agreements
with Richard Grable (CEO), Allan Schwartz (Executive Vice President) and Linda
Grable (President). Under these agreements, base annual salaries were as
follows: Richard Grable, $286,225; Linda Grable, $119,070; and Allan Schwartz,
$119,070. In addition, each person received a car allowance of $500 per month.
Each employment agreement provided for performance bonuses, health insurance,
car allowances, and other customary benefits, and a cost of living adjustment of
7% per annum. No bonuses were paid to date to the three executives during the
five-year terms of their respective employment agreements. Upon the expiration
of Mr. Schwartz's employment agreement on August 29, 2004, he entered into a
one-year Employment Extension Agreement on August 30, 2004 which provides for an
annual salary of $185,000 and options to purchase up to an aggregate of 500,000
shares of the Company's common stock at an exercise price of $.30 per share, in
accordance with the Company's 2004 Non-Statutory Stock Option Plan. These
options shall vest on August 30, 2005.
At a special meeting of the Board of Directors held on August 28, 2001 the
Board, with Linda Grable abstaining, voted to grant a death benefit of one
year's salary ($286,225) to Richard Grable's beneficiary in recognition of his
services as a co-founder, CEO and inventor of the CTLM(R). This benefit was paid
to Linda Grable as beneficiary in installments with the final payment made on
April 15, 2004.
On August 15, 2001, the Company entered into a three-year employment agreement
with Edward Horton, Chief Operating Officer, at an annual salary of $110,000.
The COO was also granted 500,000 incentive stock options at an exercise price of
$.77 per share, the fair market value at the date of the grant, which vested
ratably over the three-year period. Upon the expiration of his employment
agreement on August 15, 2004, the Company entered into a one-year employment
agreement with Mr. Horton at an annual salary of $125,000. He was also granted
175,000 non-statutory stock options at an exercise price of $.28, the fair
market value at the date of the grant, which will vest at the end of the
one-year period.
(Continued)
F-61
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(21) COMMITMENTS AND CONTINGENCIES (Continued)
On December 1, 2001, the Company entered into a new three-year employment
agreement with Linda Grable (appointed to CEO upon the death of Richard Grable).
Under this agreement, Ms. Grable received an annual base salary of $280,000. Ms.
Grable received incentive options to purchase up to an aggregate of 2,250,000
shares of the Company's common stock at an exercise price of $.60 per share. The
incentive stock options vested at 750,000 shares per year starting December 1,
2002. In addition, she also received a car allowance of $500 per month. On April
15, 2004, Ms. Grable retired as CEO and Chairman of the Board. As part of her
Retirement Agreement the Board of Directors agreed to pay out the remainder of
her employment agreement and continue coverage of her health insurance through
its expiration on December 15, 2005. The total amount due for the un-expired
term of her agreement is $466,667 (based on her salary of $280,000 per year).
Payments are made on the 15th and 30th of each month. Payments will continue to
be made through December 15, 2005.
On September 15, 2003, the Company entered into a three-year employment
agreement with Deborah O'Brien, Senior Vice-President, at an annual salary of
$95,000. The Senior Vice-President was also granted 302,000 incentive stock
options at an exercise price of $1.13 per share, the fair market value at the
date of the grant, which will vest ratably over the three-year period.
On July 8, 2004, the Company entered into a three-year employment agreement with
Timothy Hansen, its new Chief Executive Officer, commencing on July 26, 2004 at
an annual salary of $210,000 and appointed him a Director of the Company. Mr.
Hansen was granted 1,500,000 non-statutory stock options at an exercise price of
$.38, the fair market value at the date of the grant, which will vest over the
three-year period in accordance with the table below:
Date of Vesting No. of Option Shares
- --------------- --------------------
July 8, 2005 500,000
January 8, 2006 250,000
July 8, 2006 250,000
January 8, 2007 250,000
July 8, 2007 250,000
Mr. Hansen also received 100,000 restricted shares of our common stock. The
executive will receive a $500 car allowance per month along with pre-approved
living expenses for a three-month period and moving expenses.
The Company has entered into agreements with various distributors located
throughout Europe, Asia and South America to market the CTLM(R) device. The
terms of these agreements range from eighteen months to three years. The Company
has the right to renew the agreements, with renewal periods ranging from one to
five years.
F-62
This prospectus is part of a registration statement
we filed with the SEC. You should rely on the
information or representations provided in this
prospectus. We have authorized no one to provide you 7,000,000 SHARES
with different information. The selling security
holders described in this prospectus are not making IMAGING DIAGNOSTIC SYSTEMS, INC.
an offer in any jurisdiction where the offer is not
permitted. You should not assume that the Common Stock
information in this prospectus is accurate as of any
date other than the date of this prospectus.
----------------
TABLE OF CONTENTS
----------------
----------------
Page
Forward-Looking Statements........................3 PROSPECTUS
Prospectus Summary................................3 ----------------
Recent Developments...............................5
The Offering......................................8
Risk Factors......................................9
Where You Can Find More Information..............22
Incorporation of Certain Documents by Reference..22
Information With Respect to the Registrant.......22
Financing/Equity Line of Credit..................23
Selling Security Holder..........................27
Use of Proceeds..................................28
Plan of Distribution.............................28
Description of Securities........................29
Disclosure of Commission Position on
Indemnification for Securities and Liabilities..31
Experts ........................................31 IMAGING DIAGNOSTIC SYSTEMS, INC.
Legal Matters....................................31 6531 NW 18TH COURT
Financial Information............................32 PLANTATION, FLORIDA 33313
(954) 581-9800
November __, 2004
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table shows the estimated expenses in connection with the issuance
and distribution of the securities being registered:
SEC registration fees .........................................$355
Legal fees and expenses......................................$5,000
Accounting fees and expenses.................................$2,000
Miscellaneous..................................................$145
TOTAL $7,500
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Florida General Corporation Act permits a Florida corporation to indemnify a
present or former director or officer of the corporation (and certain other
persons serving at the request of the corporation in related capacities) for
liabilities, including legal expenses, arising by reason of service in such
capacity if such person shall have acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and in any criminal proceeding if such person had no reasonable
cause to believe his conduct was unlawful. However, in the case of actions
brought by or in the right of the corporation, no indemnification may be made
with respect to any matter as to which such director or officer shall have been
adjudged liable, except in certain limited circumstances.
Article VII of our Articles of Incorporation authorizes us to indemnify
directors and officers as follows:
1. So long as permitted by law, no director of the corporation shall be
personally liable to the corporation or its shareholders for damages
for breach of any duty owed by such person to the corporation or its
shareholders; provided, however, that, to the extent required by
applicable law, this Article shall not relieve any person from
liability for any breach of duty based upon an act or omission (i) in
breach of such person's duty of loyalty to the corporation or its
shareholders, (ii) not in good faith or involving a knowing violation
of law or (iii) resulting in receipt by such person of an improper
personal benefit. No amendment to or repeal of this Article and no
amendment, repeal or termination of effectiveness of any law
authorizing this Article shall apply to or effect adversely any right
or protection of any director for or with respect to any acts or
omissions of such director occurring prior to such amendment, repeal or
termination of effectiveness.
2. So long as permitted by law, no officer of the corporation shall be
personally liable to the corporation or its shareholders for damages
for breach of any duty owed by such person to the corporation or its
shareholders; provided, however, that, to the extent required by
applicable law, this Article shall not relieve any person from
liability for any breach of duty based upon an act or omission (i) in
breach of such person's duty of loyalty to the corporation or its
shareholders, (ii) not in good faith or involving a knowing violation
of law or (iii) resulting in receipt by such person of an improper
personal benefit. No amendment to or repeal of this Article and no
amendment, repeal or termination of effectiveness of any law
authorizing this Article shall apply to or effect adversely any right
or protection of any director for or with respect to any acts or
omissions of such officer occurring prior to such amendment, repeal or
termination of effectiveness.
3. To the extent that a Director, Officer, or other corporate agent of
this corporation has been successful on the merits or otherwise in
defense of any civil or criminal action, suit, or proceeding referred
to in sections (a) and (b), above, or in defense of any claim, issue,
or matter therein, he shall be indemnified against any expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
4. Expenses incurred by a Director, Officer, or other corporate agent
in connection with a civil or criminal action, suit, or proceeding may
be paid by the corporation in advance of the final disposition of such
action suit, or proceeding as authorized by the Board of Directors upon
receipt of an undertaking by or on behalf of the corporate agent to
II-1
repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified.
INDEMNIFICATION FOR LIABILITIES UNDER THE SECURITIES ACT OF 1933 MAY BE
PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING US ACCORDING TO THE
PROVISIONS IN OUR ARTICLES OF INCORPORATION, WE HAVE BEEN INFORMED THAT IN THE
OPINION OF THE SEC, THIS INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED
IN THE ACT AND IS THEREFORE UNENFORCEABLE
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
EXHIBIT DESCRIPTION
3.1 Articles of Incorporation (Florida)- Incorporated by reference to
Exhibit 3(a) of our Form 10-KSB for the fiscal year ending June 30, 1995
3.2 Amendment to Articles of Incorporation (Designation of Series A
Convertible Preferred Shares) - Incorporated by reference to Exhibit 3.
(i). 6 of our Form 10-KSB for the fiscal year ending June 30, 1996. File
number 033-04008.
3.3 Amendment to Articles of Incorporation (Designation of Series B
Convertible Preferred Shares). Incorporated by reference to our
Registration Statement on Form S-1 dated July 1, 1997.
3.4 Amendment to Articles of Incorporation (Designation of Series C
Convertible Preferred Shares). Incorporated by reference to our Form 8-K
dated October 15, 1997.
3.5 Amendment to Articles of Incorporation (Designation of Series D
Convertible Preferred Shares). Incorporated by reference to our Form 8-K
dated January 12, 1998.
3.6 Amendment to Articles of Incorporation (Designation of Series E
Convertible Preferred Shares). Incorporated by reference to our Form 8-K
dated February 19,1998.
3.7 Amendment to Articles of Incorporation (Designation of Series F
Convertible Preferred Shares). Incorporated by reference to our Form 8-K
dated March 6, 1998.
3.8 Amendment to Articles of Incorporation (Designation of Series H
Convertible Preferred Shares). Incorporated by reference to our
Registration Statement on Form S-2 File Number 333-59539.
3.9 Certificate of Dissolution - is incorporated by reference to Exhibit
(3)(a) of our Form 10-KSB for the fiscal year ending June 30, 1995.
3.10 Articles of Incorporation and By- Laws (New Jersey) -are incorporated by
reference to Exhibit 3 (i) of our Form 10-SB, as amended, file number
0-26028, filed on May 6, 1995 ("Form 10-SB").
3.11 Certificate and Plan of Merger - is incorporated by reference to Exhibit
3(i) of the Form 10-SB.
3.12 Certificate of Amendment - is incorporated by reference to Exhibit 3(i)
of the Form 10-SB.
3.13 Amended Certificate of Amendment-Series G Designation.
3.14 Certificate of Amendment-Series I Designation
3.15 Amended Certificate of Amendment-Series B Designation
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.
5 Opinion of Adorno & Yoss, P.A., including its consent.
10.2 Patent Licensing Agreement. Incorporated by reference to our
Registration Statement on Form S-2, File Number 333-59539.
10.3 1995 Incentive Stock Option Plan. Incorporated by reference to Exhibit
10(b) of the Form 10-SB.
10.12 Syncor Distribution Agreement. Incorporated by reference to our
Amendment number 1 to Registration on Form S-2, File Number 333-60405.
10.14 Consultronix S.A. Distribution Agreement. Incorporated by reference to
our Form 10 KSB/A filed on April 9, 1999.
10.15 Iberadac, S.A. Distribution Agreement. Incorporated by reference to our
Form 10 KSB/A filed on April 9, 1999.
10.17 Form of Debenture Subscription Documents. Incorporated by reference to
our Amendment number 1 to Registration on Form S-2, File Number
333-60405.
II-2
10.18 Form of Mortgage. Incorporated by reference to our Amendment number 1 to
Registration on Form S-2, File Number 333-60405.
10.20 1999 Equity Incentive Plan
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.
10.27 Consulting Agreement by and between IDSI and Anthony Giambrone, dated
January 26, 2000. Incorporated by reference to our Post-Effective
Amendment No. 4 to Registration on Form S-2, File Number 333-60405.
10.28 Employment Agreement(s) for Richard J. Grable, Allan L. Schwartz and
Linda B. Grable signed August 30, 1999. Incorporated by reference to our
Post-Effective Amendment No. 4 to Registration on Form S-2, File Number
333-60405.
10.29 2000 Non-Statutory Stock Option Plan Incorporated by reference to our
Form 10-KSB for the fiscal year ending June 30, 2000 filed on September
14, 2000.
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.
Incorporated by reference to our Form 10-QSB for the quarter ending
September 30, 2000 filed on November 13, 2000.
10.39 Amended Private Equity Credit Agreement dated as of November 30, 2000
between IDSI and Charlton Avenue LLC, which replaces and supersedes
Exhibit 10.33. Incorporated by reference to our Amendment No. 2 to
Registration on Form S-2, File Number 333-46546.
10.40 Stipulation for Settlement and Dismissal with Prejudice dated January
17, 2001 between IDSI and the beneficial owners of the Cycle of Life
promissory note. Incorporated by reference to our Registration on Form
S-2, File Number 333-55766, filed on February 16, 2001.
10.41 Distribution Agreement between IDSI and Medical Imaging Systems, Inc.
Incorporated by reference to our Form 10-KSB for the fiscal year ending
June 30, 2001 filed on September 27, 2001.
10.42 Distribution Agreement between IDSI and Medical Imaging Services, Ltd.
Incorporated by reference to our Form 10-KSB for the fiscal year ending
June 30, 2001 filed on September 27, 2001.
10.43 Employment Agreement with John d'Auguste, President. Incorporated by
reference to our Form 10-QSB for the quarter ending September 30, 2001,
filed on November 13, 2001.
10.44 Employment Agreement with Ed Horton, Chief Operating Officer.
Incorporated by reference to our Form 10-QSB for the quarter ending
September 30, 2001, filed on November 13, 2001.
10.45 Employment agreement with Linda B. Grable, Chief Executive Officer.
Incorporated by reference to our Form 10-QSB for the quarter ending
September 30, 2001, filed on November 13, 2001.
10.46 2002 Incentive and Non-Statutory Stock Option Plan. Incorporated by
reference to our Schedule 14A proxy statement filed on February 7, 2002.
10.47 Amendment dated as of November 15, 2001, to Amended Private Equity
Credit Agreement, dated as of November 30, 2000 between IDSI and
Charlton Avenue LLC. The Amended Private Equity Credit Agreement is
incorporated by reference to our Amendment No. 2 to registration on Form
S-2, File Number 333-46546, and the Amendment to the Amended Private
Equity Agreement is incorporated by reference to our Form 10-QSB for the
quarter ending March 31, 2002, filed on May 15, 2002.
10.48 Private Equity Agreement between IDSI and Charlton Avenue, LLC dated as
of May 15, 2002. Incorporated by reference to our Form 10-QSB for the
quarter ending March 31, 2002, filed on May 15, 2002.
II-3
10.49 Registration Rights Agreement between IDSI and Charlton Avenue, LLC
dated as of May 15, 2002. Incorporated by reference to our Form 10-QSB
for the quarter ending March 31, 2002, filed on May 15, 2002.
10.50 $350,000 Promissory Note dated May 21, 2002, from IDSI to Charlton
Avenue, LLC.
10.51 $750,000 Balloon Promissory Note and Mortgage from IDSI to Peter
Wolofsky, incorporated by reference to our Form 8-K filed on June 25,
2002.
10.52 Private Equity Agreement between IDSI and Charlton Avenue LLC dated as
of May 15, 2002, with exhibits. Incorporated by reference to our
Amendment No. 1 to our Registration on Form S-2, File Number 333-88604
filed on June 28, 2002.
10.53 Amendment dated as of July 18, 2002, to Private Equity Agreement dated
as of May 15, 2002 between IDSI and Charlton Avenue LLC. Incorporated by
reference to our Amendment No. 2 to our Registration on Form S-2, File
Number 333-88604 filed on July 18, 2002.
10.54 Letter of Intent between IDSI and Sanotech Group Srl. Dated January 8,
2002.
10.55 Distributorship Agreement between IDSI and JAMCO Medical Inc. dated
March 22, 2002.
10.56 Financial Services Consulting Agreement between Linda B. Grable and
iCapital Finance, Inc. dated September 19, 2002.
10.57 Third Private Equity Credit Agreement between IDSI and Charlton Avenue
LLC dated as of October 29, 2002, with exhibits. Incorporated by
reference to our Form S-2, File Number 333-101070 filed on November 7,
2002.
10.58 Registration Rights Agreement between IDSI and Charlton Avenue, LLC
dated as of October 29, 2002. Incorporated by reference to our Form S-2,
File Number 333-101070 filed on November 7, 2002.
10.61 Fourth Private Equity Credit Agreement between IDSI and Charlton Avenue
LLC dated as of January 9, 2004, with exhibits. Incorporated by
reference to our Form S-2, File Number 333-112377 filed on January 30,
2004.
10.62 Registration Rights Agreement between IDSI and Charlton Avenue, LLC
dated as of January 9, 2004. Incorporated by reference to our Form S-2,
File Number 333-112377 filed on January 30, 2004.
10.63 Retirement Agreement between IDSI and Linda B. Grable dated April 15,
2004. Incorporated by reference to our Form S-2, File Number 333-116694
filed on June 21, 2004.
10.64 Employment Agreement with Timothy B. Hansen, Chief Executive Officer
dated July 8, 2004. Incorporated by reference to our Form 10-K filed on
September 17, 2004.
10.65 Employment Agreement with Edward Horton, Chief Operating Officer dated
August 15, 2004. Incorporated by reference to our Form 10-K filed on
September 17, 2004.
10.66 One-Year Employment Extension Agreement with Allan L. Schwartz,
Executive Vice President and Chief Financial Officer dated August 30,
2004. Incorporated by reference to our Form 10-K filed on September 17,
2004.
14.1 Code of Ethics for Senior Financial Officers.
23.1 Consent of Adorno & Yoss, P.A., included as part of exhibit 5.
23.2 Consent of Margolies, Fink and Wichrowski, Certified Public Accountants.
(b) Reports on Form 8-K
A Form 8-K was filed on July 13, 2004, stating that Tim Hansen was
appointed by the Board of Directors to serve as the new Chief Executive
Officer and Board member. Mr. Hansen has served in top-level executive
positions in the medical imaging industry over a 30-year period and was
notably President of Picker Medical Systems, a leading company in the
diagnostic imaging market. Most recently, Mr. Hansen was with Cardinal
Health, Inc. as the general manager of the Radiation Management
Services, a leading provider of medical imaging quality assurance
instruments and solutions.
A Form 8-K was filed on September 28, 2004, announcing that our CT
Laser Mammography System (CTLM(R)) had received Chinese State Food and
Drug Administration (SFDA) marketing approval. The Peoples Republic of
China SFDA issued the registration "Certificate for Medical Device".
The medical device registration number is 20043241646.
A Form 8-K was filed on September 29, 2004, announcing that we signed a
multi-year agreement with China Far East International Trading
Corporation (CFETC) for the exclusive sale of our CTLM(R) System in the
II-4
People's Republic of China. The new agreement also includes clinical
research and collaboration programs and supersedes our previous
distribution contract with CFETC.
A Form 8-K was filed on October 18, 2004 announcing the issuance of a
press release entitled, "Shareholder Letter From Imaging Diagnostic
Systems, Inc." written by Tim Hansen, CEO. The letter detailed the
three top priorities chosen by Mr. Hansen and the Board of Directors.
First: get the U.S. FDA Pre Market Approval (PMA) completed; second,
launch a global commercialization program; and third, lay out a roadmap
to enhance the long-term growth of the Company.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in the volume
of securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424 (b) if, in the aggregate the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer of controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-5
SIGNATURES
According to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets the
requirement for filing Form S-2 and has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Plantation, State of Florida, on the 10th day of November 2004.
IMAGING DIAGNOSTIC SYSTEMS, INC.
By: /s/ Timothy B. Hansen
---------------------
Chief Executive Officer
and Director
According to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Dated: November 10, 2004 By: /s/ Allan L. Schwartz
---------------------
Executive Vice-President
Chief Financial Officer and Director
(PRINCIPAL ACCOUNTING AND
FINANCIAL OFFICER)
Dated: November 10, 2004 By: /s/ Jay Bendis
--------------
Jay Bendis, Co-Chairman of the Board
and Director
Dated: November 10, 2004 By: /s/ Sherman Lazrus
------------------
Sherman Lazrus, Co-Chairman of the Board
and Director
Dated: November 10, 2004 By: /s/ Patrick Gorman
------------------
Patrick Gorman, Director
Dated: November 10, 2004 By: /s/ Edward Rolquin
------------------
Edward Rolquin, Director