SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[Mark One]
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: June 30, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________to_____________
Commission file number: 0-26028
IMAGING DIAGNOSTIC SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Florida 22-2671269
(State of incorporation) (IRS employer Ident. No.)
6531 NW 18th Court, Plantation, FL. 33313
(address of principal office) (Zip Code)
Registrant's telephone number, including area code: (954) 581-9800
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of class)
Indicate by check mark whether the registrant:(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in rule 12b-2 of the act). Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company
(as defined in rule 12b-2 of the act). Yes [ ] No [X]
Based on the average closing bid and asked prices of the common stock on the
latest practicable date, September 12, 2005, the aggregate market value of the
voting stock held by non-affiliates of the registrant was $36,291,577.
The number of shares outstanding of each of the issuer's classes of common
stock, as of September 12, 2005 was 203,730,670. As of September 12, 2005, the
issuer had no shares of preferred stock outstanding.
Documents Incorporated By Reference
[None]
IMAGING DIAGNOSTIC SYSTEMS, INC.
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
PART I Page No.
- ------ --------
ITEM 1. Our Business 3
ITEM 2. Description of Our Property 19
ITEM 3. Legal Proceedings 19
ITEM 4. Submission of Matters to a Vote of Securities Holders 19
PART II
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ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters 20
ITEM 6. Selected Financial Data 24
ITEM 7. Management's Discussion and Analysis of Financial Conditions and
Results of Operations 25
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 35
ITEM 8. Financial Statements 36
ITEM 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure 93
ITEM 9A. Controls and Procedures 93
ITEM 9B. Other Information 97
PART III
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ITEM 10. Directors and Executive Officers of the Registrant 98
ITEM 11. Executive Compensation 102
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 105
ITEM 13. Certain Relationships and Related Transactions 106
ITEM 14. Principal Accounting Fees and Services 106
PART IV
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ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 107
SIGNATURES 109
2
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934. ACTUAL RESULTS AND EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
AS A RESULT OF THE "KNOWN UNCERTAINTIES" AS SET FORTH IN ITEM 7 "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-CAUTIONARY STATEMENTS."
PART I
ITEM 1. OUR BUSINESS
------------
OVERVIEW
Imaging Diagnostic Systems, Inc. ("IDSI") is a development stage medical
technology company. Since its inception in December 1993, we have been engaged
in the development and testing of a Computed Tomography Laser Breast Imaging
System for detecting breast cancer (CT Laser Mammography or, "CTLM(R)"). We are
currently in the process of commercializing the CTLM(R) in certain international
markets.
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 breast imaging will improve early
diagnosis, reduce diagnostic uncertainty, and decrease the number of biopsies
performed on benign lesions. The CTLM technology is unique and patented. IDSI
intends to develop our technologies into a family of related products. We
believe these technologies and clinical benefits constitute substantial markets
for our products well into the future.
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). We currently
have a limited source of operating revenue and have incurred substantial net
operating losses since our inception. On June 30, 2005, we had an accumulated
deficit of $83,976,015 after discounts and dividends on Preferred Stock. Such
losses have resulted principally from costs associated with our operations. We
expect operating losses will continue for at least the next 12 months as
substantial costs and expenses continue due principally to the commercialization
of the CTLM(R), sales and marketing in the international market, activities
related to our regulatory processes, and advanced product development
activities. Our ability to achieve profitability will depend in large part on
our obtaining regulatory approvals for our proposed products and developing the
capacity to manufacture and market our approved products either by ourselves or
in collaboration with others. There can be no assurance as to if or when we will
ever receive US regulatory approvals for the commercialization of the CTLM(R),
or achieve profitability. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
BREAST CANCER
According to the American Cancer Society ("ACS"), approximately 223,500 new
cases of invasive breast cancer and 56,300 cases of non-invasive (localized)
breast cancer occurred in the United States during 2004. Breast cancer ranks as
the second leading cause of cancer-related death among women, causing an
estimated 44,000 deaths in 2004.
There is widespread agreement that screening for breast cancer, when combined
with appropriate follow-up, will reduce mortality from the disease. According to
the National Cancer Institute (NCI), the five-year survival rate decreases from
96% to 78% after the cancer has spread to the lymph nodes, and to 18% after it
has spread to other organs such as the lung, liver or brain. A major problem
3
with current detection methods is that studies have shown that mammography does
not detect 15%-20% of breast cancers detected by physical exam alone.
Breast cancer screening is generally recommended as a routine part of preventive
healthcare for women over the age of 20 (approximately 90 million in the United
States). For these women, the American Cancer Society (ACS) has published
guidelines for breast cancer screening including: (i) monthly breast
self-examinations for all women over the age of 20; (ii) a baseline mammogram
for women by the age of 40; (iii) a mammogram every one to two years for women
between the ages of 40 and 49; and (iv) an annual mammogram for women age 50 or
older.
Each year, approximately eight million women in the United States require
diagnostic testing for breast cancer due to a physical symptom, such as a
palpable lesion, pain or nipple discharge, discovered through self or physical
examination (approximately seven million) or a non-palpable lesion detected by
screening x-ray mammography (approximately one million). Once a physician has
identified a suspicious lesion in a woman's breast, the physician may recommend
further diagnostic procedures, including a diagnostic x-ray mammography, an
ultrasound study, a magnetic resonance imaging procedure, or a minimally
invasive procedure such as fine needle aspiration or large core needle biopsy.
In each case, the potential benefits of additional diagnostic testing must be
balanced against the costs, risks and discomfort to the patient associated with
undergoing the additional procedures
Due in part to the limitations in the ability of the currently available
modalities to identify malignant lesions, a large number of patients with
suspicious lesions proceed to surgical biopsy, an invasive and expensive
procedure. Approximately 1.3 million surgical biopsies are performed each year
in the United States, of which approximately 70-80% result in the surgical
removal of benign breast tissue. The average cost of a surgical biopsy ranges
from approximately $1,000 to $5,000 per procedure. Thus, biopsies of benign
breast tissue may cost the U.S. health care system approximately $2.45 billion
annually. In addition, biopsies result in pain, scarring, and anxiety to
patients. Patients who are referred to biopsy usually are required to schedule
the procedure in advance and generally must wait up to 48 hours for their biopsy
results.
SCREENING AND DIAGNOSTIC MODALITIES
Mammography
- -----------
Mammography is an x-ray imaging modality commonly used for both routine breast
cancer screening and as a diagnostic tool. A mammogram produces either films or
electronic images of the internal structure of the breast and surrounding
tissues. In a screening mammogram, radiologists seek to detect suspicious
lesions, while in a diagnostic mammogram radiologist seek to characterize
suspicious lesions.
A certified technologist performs the x-ray procedure under strict guidance from
the Congressional Mammography Quality Standards Act (MQSA). MQSA was enacted to
improve x-ray breast cancer detection studies by tightly regulating machine
specifications, quality control procedures, technologist training and
certification, and other variables. Still, mammography is viewed as an
`imperfect' breast cancer detection tool and is often supplemented with
follow-up studies including more x-rays at later dates, closer physical
examination of the patient, adjunctive ultrasound exams, and, when available,
breast MRI or Scintimammography, and biopsy.
Because x-ray mammography exposes the patient to radiation, the American Cancer
Society recommends that mammograms be limited to once per year. In addition,
x-ray mammography is considered to be less effective for women with dense
breasts. Various mechanical means have been implemented to squeeze or compress
the breast and flatten the tissue so that x-rays may penetrate the tissue more
uniformly. These techniques are often painful and uncomfortable to patients.
Most mammography exams include 2 views of each breast which equates to 4
compressions per patient.
According to the CDC, 62.8% of women over age 40 received a mammogram in 2004.
Estimates are that in 2004 there were more than 49 million screening mammograms
alone in the US and 117 million world wide (TriMark, Jan. 2005 estimates).
The Centers for Medicare and Medicaid Services (CMS) announced its final rule
establishing a 3.3% increase in new payment rates for outpatient services
4
starting January 1, 2005. The increase, together with other policies contained
in the final Outpatient Prospective Payment System (OPPS) rule, will increase
projected Medicare payments to hospitals for outpatient services to $24.6
billion, compared to projected payments of $23.1 billion in 2004.CMS also
significantly increased payments for diagnostic mammograms by removing them from
payment under the OPPS, as required by the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (MMA). Like screening mammograms
performed in hospital outpatient departments, diagnostic mammograms will be paid
under the Medicare physician fee schedule, resulting in increases of nearly 40%
over current OPPS rates for traditional mammograms, and about 60% for digital
diagnostic mammograms.
The Medicare billing of a diagnostic mammogram is approximately $120 to $160 per
procedure and requires the use of x-ray equipment ranging in cost from $75,000
to $225,000 and perhaps ultrasound equipment ranging from $60,000 to $200,000.
Digital Mammography
- -------------------
Digital mammography, also referred to as "full-field digital" mammography, is
the latest form of breast x-ray examination. These systems eliminate the use of
x-ray film and record images directly on electronic panels. The digital images
can then be manipulated and examined on an electronic viewing station. However,
the limitations of conventional mammography still exist in digital mammography.
Digital mammography units sell for prices ranging from $300,000 to $430,000 and
Medicare billing for the procedures range from $170 to $200.
Magnetic Resonance Imaging
- --------------------------
Magnetic resonance imaging ("MRI") produces images using a magnetic field and
radiofrequency (RF) gradients under computer control to produce proton density
images. When applied to breast exams, MRI produces images with 10 to 100 times
more contrast resolution than an x-ray. MRI has proven effective in imaging
breasts with prosthetic implants, detecting recurrent cancer, evaluating the
response to chemotherapy and serving as an additional imaging option when
mammography or ultrasound fails to provide sufficient imaging information.
MRI offers the advantage over x-ray that it can visualize fine-details in breast
tissue but also detect blood flow and angiogenesis associated with malignancies.
The disadvantages are that MRI systems are not widely available in the global
market and the costs of using conventional MRI scanners for breast exams are
sometimes prohibitive. MRI systems sell for approximately $1,200,000 and
Medicare billing is $1,500.
Ultrasound
- ----------
Ultrasound systems can image breast tissue by `sonar' techniques. Sound
transducers are placed directly on breast tissue coupled with an acoustic gel
substance. Trained sonographers locate suspicious areas by moving the transducer
and observing the sonar image on an electronic viewing station. In some
countries physicians perform the study.
Ultrasound images are localized to specific areas of suspicion usually detected
by a previous mammogram. If mammographic results suggest a lesion, ultrasound
may differentiate a solid from a cystic mass. The Medicare billing rate is $240
per procedure and requires the use of capital equipment ranging in cost from
approximately $60,000 to $200,000.
CTLM(R)
- -------
Although the CTLM(R) system is a CT-like scanner, its energy source for imaging
is a laser diode beam and not ionizing radiation such as is found in
conventional x-ray mammography or CT scanners. 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 breast imaging will improve early
diagnosis, reduce diagnostic uncertainty, and decrease the number of biopsies
performed on benign lesions.
5
A breast exam utilizing the CTLM(R) is non-invasive and can be performed by a
medical technician. A patient lies face down on the scanning table with one
breast hanging into a specially designed scanning chamber. Once the entire
breast is scanned the other breast may be positioned in the chamber for
scanning. Both breasts can be scanned in approximately 24 minutes. The CTLM(R)
is a sophisticated electro-mechanical scanner under microprocessor and computer
control. Results are available immediately in digital format for comparison to
mammography results, consultation, transmission to multi-modality reading
stations, or archiving.
Images and study results present as multiple-slice data sets which can be viewed
slice-by-slice or as a 3D volume with image manipulation tools. Images are
usually viewed in gray and green color shades, since color displays are common
with other molecular imaging modalities such as nuclear medicine, PET, fMRI, and
in radiation therapy imaging.
Fluorescence Imaging
- --------------------
Fluorescence and molecular imaging techniques are of growing importance to the
drug development industry and for disease detection. Certain molecules exhibit
the phenomenon of emitting light after being illuminated by light of an
appropriate wavelength, e.g., from a laser. The light that is emitted is
referred to as "fluorescent" light. The compounds that produce fluorescence are
commonly referred to as fluorescent dyes. At least one company to our knowledge
is developing a fluorescent compound for possible use in breast cancer
detection.
The CTLM(R) system laser diodes can stimulate fluorescent light emissions when
used in conjunction with such compounds. When an appropriate fluorescent
compound has been introduced into the blood, areas with an abundance of blood
vessels, i.e., the angiogenesis associated with a tumor, may retain a higher
concentration of the fluorescent compound. As the CTLM(R) scanner illuminates
these areas, fluorescent radiation is emitted and detected. Reconstructed
CTLM(R) images then locate and quantify the fluorescent area within the
perimeter of the scanned breast.
Several CTLM(R)'s were retrofitted with laser diodes tuned to specific
wavelengths of light which matched the compounds. Optical filters were added to
limit the spectral response to required wavelengths. Experiments were conducted
by placing fluorescent compounds inside a breast equivalent phantom and scanning
it with CTLM(R). The ability to excite the compound, detect the location of the
fluorescence within the simulated breast, and create an image has not, to our
knowledge, been accomplished before. On September 14, 1999, a patent was issued
to IDSI titled "Laser Imaging Apparatus Using Biomedical Markers that Bind to
Cancer Cells" as Patent No 5,952,664.
In March 2002, we signed an agreement with Schering AG to evaluate the
advantages of new fluorescence compounds for the potential use of detecting
breast cancer. The collaboration is assisting in determining the potential
benefits of using both technologies adjunctively to enhance capabilities to
detect breast cancer. We have installed two CTLM(R) systems in Germany for
Schering AG's clinical trials: one at Charite's Robert-Rossle Clinic in Berlin
and the other at the University of Muenster. In August 2003, Schering AG
announced that their innovative method for breast cancer detection showed
positive results in a clinical Phase 1 study. In September 2004, we installed a
third CTLM(R) system for Schering AG in Charite Hospital in Berlin, Germany as
part of their Phase 1 clinical studies of fluorescent imaging compounds.
LASER IMAGER FOR LAB ANIMALS
In November 2003, we announced the signing of a collaborative agreement with the
Rumbaugh-Goodwin Institute for Cancer Research, Inc. for the development of
optical imaging products for the laboratory market. This agreement could assist
IDSI in addressing a new market, targeting pharmaceutical developers and
researchers who monitor cancer growth and who use optical imaging in their
clinical research. The first model of the Laser Imager for Lab Animals
"LILA(TM)" product line is a miniature optical helical CT scanner in a
third-generation configuration for imaging green fluorescent protein, derived
from the DNA of jellyfish. The scanner is a work-in-progress.
6
GOVERNMENT REGULATION
United States Regulation
- ------------------------
The United States Food and Drug Administration (the "FDA") has regulatory
authority over the testing, manufacturing, and sale of the CTLM(R) in the United
States. Because the CTLM(R) is a medical device, it is subject to the relevant
provisions of the Federal Food, Drug and Cosmetic Act (FD&C Act") and its
implementing regulations. Pursuant to the FD&C Act, the FDA regulates, among
other things, the manufacturing, labeling, distribution, and promotion of the
CTLM(R) in the United States. The FD&C Act requires that a medical device must
(unless exempted by regulation) be cleared or approved by the FDA before being
commercially distributed in the United States. The FD&C Act also requires that
manufacturers of medical devices, among other things, comply with specific
labeling requirements and manufacture devices in accordance with Current Good
Manufacturing Practices ("CGMPs"), which require that companies manufacture
their products and maintain related documentation in a conformed manner with
respect to manufacturing, testing, and quality control activities. The FDA
inspects medical device manufacturers and distributors, and has broad authority
to order recalls of medical devices, to seize non-complying medical devices, to
enjoin and/or impose civil penalties, and to criminally prosecute violators.
The FDA classifies medical devices intended for human use into three classes:
Class I; Class II; and Class III. In general, Class I devices are products for
which the FDA can determine that their safety and effectiveness can be
reasonably assured by general controls under the FD&C Act relating to such
matters as adulteration, misbranding, registration, notification, records and
reports, and QSRs. Class II devices are products for which the FDA determines
that these general controls are insufficient to provide reasonable assurance of
safety and effectiveness, and that require special controls such as the
promulgation of performance standards, post-market surveillance, patient
registries, or such other actions as the FDA deems necessary. Class III devices
are devices for which the FDA has insufficient information to conclude that
either general controls or special controls would be sufficient to assure safety
and effectiveness, and which are life-supporting, life-sustaining, of
substantial importance in preventing impairment of human health (e.g., a
diagnostic device to detect a life-threatening illness), or present a
potentially unreasonable risk of illness or injury.
The FD&C Act further provides that, unless exempted by regulation, medical
devices may not be commercially distributed in the United States unless they
have been approved or cleared by the FDA. Manufacturers of Class III devices
must apply to the FDA for pre-marketing approval ("PMA") before marketing can
begin. PMA applications must demonstrate, among other matters, that the medical
device is safe and effective. A PMA application is typically a complex
submission, usually including the results of clinical studies, and preparing an
application is a detailed and time-consuming process.
Once a PMA application has been filed, the FDA has by regulation 180 days to
review it; however, the review time may be extended by the FDA asking for
additional information or clarification of information already provided in the
submission. In addition, the FDA will inspect the manufacturing facility to
ensure compliance with the FDA's quality system regulations commonly referred to
as QSRs prior to approval of a PMA. The PMA process is a lengthy and expensive
one, and there can be no assurance that a PMA application will be approved
within 180 days.
We have engaged the services of U.S. regulatory consultants who specialize in
FDA matters and to assist us in the final preparation and submission of our PMA
application. See Item 1. "Business-Regulatory and Clinical Status, United
States/FDA". If we are unable to obtain prompt FDA approval, it will have a
material adverse effect on our business and financial condition and would result
in postponement of the commercialization of the CTLM(R). See "Regulatory and
Clinical Status".
Any products manufactured or distributed by us pursuant to a PMA are or will be
subject to pervasive and continuing regulation by the FDA. The FDA Act also
requires that our products be manufactured in registered establishments and in
accordance with QSR regulations. Labeling, advertising and promotional
activities are subject to scrutiny by the FDA and, in certain instances, by the
Federal Trade Commission. The export of medical devices is also subject to
regulation in certain instances. In addition, the marketing and use of our
products may be regulated by various state agencies.
7
All lasers manufactured for us are subject to the Radiation Control for Health
and Safety Act administered by the Center for Devices and Radiological Health of
the FDA. The law requires laser manufacturers to file new product and annual
reports and to maintain quality control, product testing, and sales records, and
to comply with labeling and certification requirements. Various warning labels
must be affixed to the laser, depending on the class for the product under the
performance standard. Both the FDA and the individual states may inspect the
manufacturers of our products on a routine basis for compliance with current QSR
regulations and other requirements.
In addition to the foregoing, we are subject to numerous federal, state, and
local laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, and fire hazard control. There can be no
assurance that we will not be required to incur significant costs to comply with
such laws and regulations and that such compliance will not have a material
adverse effect upon our ability to conduct business. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Cautionary Statements - Extensive Government Regulation, No Assurance
of Regulatory Approvals".
Foreign Regulation
- ------------------
Sales of medical devices outside of the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approval for sale in foreign countries may be longer or
shorter than that required for FDA clearance or approval, and the requirements
may differ. The laws of certain European and Asian countries may permit us to
begin marketing the CTLM(R) in Europe and Asia before marketing would be
permitted in the United States. In order to sell our products within the
European Economic Area ("EEA"), companies are required to achieve compliance
with requirements of the Medical Devices Directive ("MDD") and affix a "CE"
marking on their products to attest such compliance. In Europe, we have obtained
the certifications 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. In obtaining these
certifications, we utilized the services of UL International (UK). Ltd. as our
notified body ("NB"). An NB is a regulatory body from the private sector that is
responsible for the review and approval of the documentation submitted by us in
order to enable the CE mark to be affixed to products. Certain standards and
steps were complied with in order to obtain the CE mark in order to distribute
the CTLM(R) in the EEA. These standards include risk assessment, quality
assurance and labeling. The listed standards are for the EEA market only and
additional document requirements and standards exist for other markets.
In October 2000, we contracted Underwriters Laboratories Inc. ("UL") to perform
safety testing and assist us in achieving regulatory certifications necessary to
begin selling the CTLM(R) system outside the United States. We also chose UL as
our Notified Body to certify our compliance with EN2900/4600/ISO9000 quality
assurance standards. The certifications and CE marking signify that the product
and its design, manufacturing and quality systems comply with international
standards. The UL safety testing is also necessary in order for the CTLM(R)
system to be sold in the United States once we receive FDA approval. In January
2001 we received notice from UL of completion for worldwide safety
classification of our CTLM(R) system.
In November 2000, we were recommended for CE marking, subject to review by UL's
Notified Body. In January 2001, we received regulatory approval from UL to apply
the CE marking to our CTLM(R) system. CE marking provides us the opportunity to
market the CTLM(R) within the European Union, one of the largest markets in the
world. In addition, CE marking permits medical device product sales in many
other markets worldwide. In May 2005, we replaced our prior authorized
representative with Emergo Europe effective August 1, 2005.
In May 2001, we received ISO 9002 certification demonstrating our commitment for
quality and our ability to provide consistency, reliability, value and
exceptional customer service. ISO 9002 certification is significant in
facilitating the global marketing of our CTLM(R) system by conforming to an
effective quality management system recognized as the gold standard around the
world.
On September 25, 2001, we received a Certificate of Exportability from the FDA
for the CTLM(R). The FDA requires unapproved products that are subject to PMA
requirements to have prior FDA Certificate of Exportability in order to be
exported outside of the United States. On September 6, 2005, we received a
renewal of our Certificate of Exportability dated August 31, 2005, which will be
valid for two years.
8
In October 2003, we announced that we received a Certificate of Approval that
our Quality Management System has been inspected and upgraded to the following
quality assurance standards: ISO 9001:2000, ISO, 3485:2003, EN 46001:1996 and
Annex II have been granted. As of the date of this report, almost 100 countries,
including the United States, the United Kingdom, Germany, Australia, Canada,
Japan and France have adopted ISO Standards as the primary means for evaluating
the quality of manufacturing products. We have been re-inspected by UL and our
Certificates of Approval have been renewed through August 9, 2008.
REGULATORY AND CLINICAL STATUS
In order to sell the CTLM(R) commercially in the United States, we must obtain
marketing clearance from the Food and Drug Administration. A Pre-Market Approval
(PMA) 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.
In our initial PMA application we followed the guidelines of the "Standardized
Shell for Modular Submission" for the FDA approval process. We filed four
modules from September 2000 to May 2001, which were accepted, and then filed our
PMA application in April 2003. In June 2003 we received notification from FDA
that an initial review of our PMA had been conducted and was sufficiently
complete to permit a substantive review and was, therefore, suitable for filing.
An in-depth evaluation of the safety and effectiveness of the device was
conducted as part of the PMA application process.
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.
In August 2003, 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
application, 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 worked with our FDA counsel and consultants to prepare an
amendment to our PMA application to address the deficiencies noted in the
letter.
In February 2004, we received a warning letter from the FDA specifically
regarding the bio-monitoring 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. 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 was required at that time. In March 2004, we received an extension of
time to respond to the FDA's August 22, 2003 letter regarding our pre-market
approval application.
In September 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.
In October 2004, we issued a press release of a shareholder letter written by
our new CEO, Tim Hansen, detailing the steps he had taken in FDA and other
corporate development matters during his first three months as CEO of the
Company. In the letter he stated among other things, the following: "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
9
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."
In November 2004, we received a letter from the FDA stating that it has
determined that the CTLM(R) proposed clinical investigation is a non-significant
risk (NSR) device study because it does not meet the definition of a significant
risk (SR) device under section 812.3(m) of the investigational device exemptions
(IDE) regulation 21 CFR 812.
In January 2005 we issued a press release of a shareholder letter entitled,
"Imaging Diagnostic Systems, Inc. Releases Letter to Shareholders" written by
Tim Hansen, CEO. The letter contained a brief status update of the three top
priorities stated in Mr. Hansen's initial letter to shareholders released in
October 2004. Specific to our PMA activities, the letter stated, "...we are
altering course. The clinical study we had analyzed and which we intended to
submit to the FDA did not, in our opinion, adequately reflect the capabilities
of CTLM(R) as an adjunctive mammography tool. Our clinical cases were collected
on CTLM(R) systems dating back to 2001. Since that time IDSI has developed
significant improvements in the scanning subsystems, image reconstruction and
image display software. We have also improved quality assurance routines to
ensure better operator and physician training, and improved image quality
control. These enhancements were routinely implemented as they became validated
on our international CTLM(R) shipments, but the same changes were not made to
the 2001 units in order to maintain our PMA modules in their original forms. We
now intend to collect data using our latest systems because we believe the
results will yield a stronger study to support our PMA application.
Consequently, we will install updated CTLM(R) systems in the US and upgrade
several international units to collect data under a new protocol. Our plan will
extend the time to actual PMA submission from what we were anticipating in
October, but we believe this approach will better support the application."
We are currently selecting prospective sites and arranging agreements to gather
clinical exams for a subsequent PMA submission.
CLINICAL COLLABORATION SITES UPDATE
CTLM(R) Systems have been installed and patients are being scanned under
clinical collaboration agreements as follows:
1. Schering AG (Three Units)
o Robert-Rossle Clinic, Berlin, Germany
o University of Muenster, Muenster, Germany
o Humboldt University of Berlin, Charite Hospital, Berlin, Germany
2. The University of Vienna, Allgemeines Hospital, Vienna, Austria
3. Humboldt University of Berlin, Charite Hospital, Berlin, Germany
4. The Comprehensive Cancer Centre, Gliwice, Poland (Two Systems)
5. Catholic University Hospital, Rome, Italy
6. Charles University Hospital, Prague, Czech Republic
7. Gazi University Hospital, Ankara, Turkey
8. Friendship Hospital, Beijing, Peoples Republic of China
In September 2004, we announced that we have installed a third 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.
10
In November 2004, we announced that the Comprehensive Cancer Centre in Gliwice,
Poland signed a clinical collaborative agreement to gather data to expand
diagnostic and therapeutic applications of the CTLM(R) system. The system was
shipped to Poland in December 2004 and installed in January 2005. In August
2005, we announced that our distributor in Poland purchased this system. See
"International Sales".
In December 2004, we announced that the Catholic University in Rome, Italy
signed a clinical collaboration agreement and that a CTLM(R) system had been
shipped to their Department of Radiology and installed in January 2005. This
agreement marked the sixth out of eight targeted European sites for our clinical
collaboration program.
In February 2005, we announced that Charles University Hospital in Prague, Czech
Republic had signed a clinical collaborative agreement to gather data and expand
the proprietary applications of the CTLM(R). The system was shipped to the Czech
Republic in March and subsequently installed in April. This agreement marked the
seventh out of eight targeted European sites for our clinical collaboration
program.
In March 2005, we shipped a CTLM(R) system to Turkey, which was installed in May
2005 at Gazi Hospital in Ankara to gather data and expand the proprietary
applications of the CTLM(R). With this installation, we have now completed our
clinical collaboration program of eight CTLM(R) systems for the European region.
In April 2005, we announced that we would fulfill a request by Professor B.
Maciejewski, MD, PhD FACR, Director of the Institute of Oncology at the
Comprehensive Cancer Centre in Gliwice, Poland to install a second CTLM(R)
System for clinical research. The system was installed in June 2005. In August
2005, we announced that our distributor in Poland purchased this system. See
"International Sales".
We are in discussions with other European hospitals and clinics wishing to
participate in our clinical collaboration program. The additional collaboration
sites will be announced upon the signing of our clinical collaboration
agreements. We have been commercializing the CTLM(R) in many global markets and
we previously announced our plans to set up this network to foster research and
to promote the technology in local markets. We will continue to support similar
programs in China and in other global regions. These investments may accelerate
CTLM(R) market acceptance while providing valuable clinical experiences.
PRODUCT QUALITY AND SAFETY
Product Safety Evaluation -We believe that one of the most important aspects of
product safety is the design of the product. If safety standards are not
considered through the design of the product, the product safety evaluation may
require that the mechanical and electrical parts of the product be re-designed.
Throughout the CTLM(R) design process, we have made every effort to confirm that
it complies with all domestic and international safety standards. New
requirements, or new interpretations of existing requirements, may affect the
CTLM(R). In January 2001 we received notice of completion for worldwide safety
classification of our CTLM(R) system from Underwriters Laboratories Inc. (UL).
Quality Assurance -We have implemented and intend to maintain a full quality
system at our corporate offices. Our Quality Assurance Manager ("QAM") has
completed the process of implementation in accordance with the required
standards. After implementation of the quality system, auditors from
Underwriters Laboratories completed an assessment of our quality systems. UL
found us in compliance with ISO 9002 and in May 2001 issued a certificate
signifying such compliance for the manufacture and servicing of laser-based
diagnostic mammography imaging systems. We have been subsequently inspected and
upgraded to the following quality assurance standards: ISO 9001:2000, ISO,
3485:2003, EN 46001:1996 and Annex II have been granted. See "Foreign
Regulation".
11
DOMESTIC SALES AND MARKETING
There are approximately 9,000 Mammography Quality Standards Act (MQSA) centers
certified in the U.S. IDSI will begin marketing the CTLM(R) to the centers
following FDA approval. There are 600 MQSA centers located in 49 of the larger
cities in the U.S., which are believed to have patient volume in excess of 40
patients per day. These centers will be IDSI's initial marketing targets.
Since the field of Molecular Optical Imaging is relatively new to most
radiologists and mammographers, the extent that, and rate at which, the CTLM(R)
achieves market acceptance and penetration will depend on many variables. These
include, but are 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 advantage of the CTLM(R) over existing technology and
cancer detection methods. We believe that the clinical data being collected and
assessed under our PMA or at research sites will have a significant impact on
the ultimate market size for our device. We have focused our efforts on
establishing a presence at major breast imaging conferences that are held each
year. Failure of our products to gain market acceptance would have a material
adverse effect on our business, financial condition, and results of operations.
There can be no assurance that physicians or the medical community in general
will accept and/or utilize the CTLM(R).
In order to market any products we may develop, we will have to develop a
marketing and distribution channel with technical expertise and distribution
capability. 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.
INTERNATIONAL SALES
We appointed a new Vice President, International Sales, in September 2004 and we
intend to pursue international sales in those countries where permitted prior to
commencing commercial sales in the United States. Sales in the United States
cannot occur unless and until we receive pre-market approval from the FDA. The
laws of certain countries permit us to begin marketing the CTLM(R) subject to
certain homologations before marketing would be permitted in the United States.
See "Government Regulation". As part of our global commercialization program for
the CTLM(R), we have installed systems at a number of International locations as
clinical partner reference sites. See "Clinical Collaboration Sites Update".
Until we receive pre-market approval from the FDA to market the CTLM(R) in the
United States, as to which there can be no assurance, our revenues, if any, will
be derived from sales to international distributors. A significant portion of
our revenues, therefore, may be subject to the risks associated with
international sales, including economical and political instability, shipping
delays, fluctuation of foreign currency exchange rates, foreign regulatory
requirements and various trade restrictions, all of which could have a
significant impact on our ability to deliver products on a timely basis. Future
imposition of, or significant increases in the level of customs duties, export
quotas or other trade restrictions could have a material adverse effect on our
business, financial condition and results of operations. The regulation of
medical devices continues to develop and there can be no assurance that new laws
or regulations will not have an adverse effect on us.
We filed our application with Health Canada for a new medical device license to
sell the CTLM(R) in Canada, in July 2001. 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 CMD/CSA ISO 13485-1998 certification, which is an
additional regulatory requirement that is evidence of compliance to the quality
system of the medical device.
We previously announced in November 2003 that we received a deposit from our
distributor, Veccsa S.A. ("Veccsa"), for the purchase of a CTLM(R) System who
intended to sell it to The Institutos Medicos de Alta Tecnologia, a
12
comprehensive diagnostic imaging center in Buenos Aires, Argentina pending
product registration from the Ministry of Health of Argentina. We subsequently
received product registration in June 2004 but due to the delay in receiving the
registration, the customer requested a re-negotiation of the terms of the sale
with the distributor; however, we decided to follow a different marketing
strategy. In June 2005, we reached an agreement with Veccsa to establish a
regional referral center in Buenos Aires as part of a market development
initiative for South America. In July 2005, we shipped a CTLM(R) System to
Buenos Aires to be installed in a referral center. Veccsa has agreed to purchase
this system with payments commencing one-year after the date of installation.
In November 2003, we announced receipt of a purchase order with a guaranteed
letter of credit for three CTLM(R) Systems from our Chinese distributor, China
Far East International Trading Corp (CFETC). Headquartered in Beijing, CFETC was
established in 1985 and has 23 satellite offices located throughout China as
well as four international branches located in the United States, Belgium,
Southeast Asia and Hong Kong. CFETC works in conjunction with the Chinese
Government's Ministry of Foreign Trade and Economic Co-Operation. In February
2004, we shipped four CTLM(R) Systems to China in accordance with an irrevocable
confirmed letter of credit. The fourth system will be used for The State Food
and Drug Administration (SFDA) testing and subsequent training and clinical
research in a hospital. In September 2004 we rewrote our distribution agreement
with CFETC extending it to a five year agreement with annual purchase
commitments. CFETC subsequently installed a CTLM system in Beijing where
physicians compiled and will publish a comprehensive CT laser mammography
standard and interpretation manual in the local language. IDSI sponsored a
portion of this effort. The site is also being used by CFETC as a sales
reference.
INTERNATIONAL DISTRIBUTORS
In May 2003, we engaged the services of an international sales and marketing
consultant. In March 2004, we terminated our agreement with the consultant. In
order to achieve our international marketing goals, management added a full-time
Vice President of International Sales in September 2004
We intend to add new distributors to cover international regions. Where
performance fails to meet agreed upon targets, distributors may be terminated.
We expect such changes to occur in the normal course of introducing a new
product to global markets.
THIRD-PARTY REIMBURSEMENT; HEALTH CARE REFORM
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 such payers to the physicians and clinics utilizing
the CTLM(R) or by refusing reimbursement. If examinations utilizing our products
were not reimbursed under these programs, our ability to sell our products may
be materially and/or adversely affected. There can be no assurance that
third-party payers will provide reimbursement for use of our products. In
international markets, reimbursement by private third-party medical insurance
providers, including governmental insurers and independent providers, varies
from country to country. In certain 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.
PRODUCT LIABILITY
Our business exposes us to potential product liability risks, which are inherent
in the testing, manufacturing and marketing of cancer detection products. While
the CTLM(R) is being developed as an adjunct to other diagnostic techniques,
there can be no assurance that we will not be subjected to future claims and
potential liability. At present we carry $3,000,000 in product liability
insurance to cover both clinical sites and sales.
13
COMPETITION
The medical device industry generally, and the diagnostic imaging segments in
particular, are characterized by rapidly evolving technology and intense
competition. The IDSI approach of employing continuous wave laser optical
technology in a CT-like device to produce 3D images is unique and patented, and
the concept of imaging angiogenesis in the breast to differentiate between
benign and malignant tissue is well accepted.
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 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, a method of molecular functional
imaging, which can visualize the process of angiogenesis which may be used to
distinguish between benign and malignant tissue. Unlike X-ray or ultrasound,
optical molecular imaging is a revolutionary functional imaging modality. In
this respect, CTLM(R) may compete with magnetic resonance imaging (MRI) in
breast imaging because both CTLM and MRI have the capacity to visualize function
at the molecular level.
The CTLM(R) Laser Breast System differs from any other optical imaging device in
several ways:
1. CTLM(R) employs advanced continuous wave laser signals versus
transillumination or time domain approaches which we tested earlier
and subsequently abandoned.
2. CTLM(R) does not compress or even touch the breast--it is painless.
3. CTLM(R) is truly 3D and presents the breast study as a volume on a
viewing workstation vs. planar or 2D approaches that superimpose many
layers of information upon themselves. CT and MRI are examples of 3D
imagers like CTLM(R).
Two companies, to our knowledge, are targeting the breast optical imaging
markets. 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 although DOBI is active commercially in
many international venues. CTLM(R) Breast Imaging Systems are in clinical
settings in Italy, Germany, Austria, Poland, Peoples Republic of China, Czech
Republic, Turkey and the United Arab Emirates. In vivo human studies of
fluorescent compounds are also underway at our 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.
14
PATENTS
The original patent for the CTLM(R) was granted in December 1997 under U.S.
Patent Number 5,692,511 (the "Patent"). The Patent has a total of 4 independent
claims and 24 subordinate claims. The independent claims serve to provide an
overall outline of the disclosure of the invention. The subordinate claims
provide additional information to identify pertinent details of the invention as
they relate to the respective specific independent claim. We own the rights to
the Patent for its 17-year life pursuant to an exclusive patent licensing
agreement with the late Richard Grable, who invented the CTLM(R) and served as
our Chief Executive Officer and whose estate has owned the Patent since his
death in August 2001. See "Patent Licensing Agreement" and "Certain
Transactions." As of the date of this report, we own 17 patents and have six
additional United States patents pending with regard to optical tomography, many
of which are based on the original CTLM(R) technology. We also have 11
International patents and have 15 International patents pending.
In September 1999, we were granted a patent for "A Laser Imaging Apparatus Using
Biomedical Markers That Bind To Cancer Cells". This patent was issued under U.S.
Patent No. 5,952,664. The biomedical marker we are currently testing is a
fluorescent marker. We plan to continue studying other biomedical markers in
conjunction with major pharmaceutical companies as a potential advanced
diagnostic feature to be used with our CTLM(R) system. The CTLM(R) in
combination with the fluorescent feature has the potential to be used with
photodynamic therapy (PDT) to aid in the treatment of breast cancer.
In November 1999, we were granted an Australian patent for "Diagnostic
Tomographic Laser Apparatus" as Australian patent number 712849. This patent,
the Australian counterpart of U.S. Patent No. 5,692,511, was issued in the name
of Richard J. Grable and is exclusively licensed to Imaging Diagnostic Systems,
Inc. See "Patent Licensing Agreement".
In February 2000, we were granted a patent for: "Device for Determining the
Perimeter of the Surface of an Object Being Scanned and for Limiting Reflection
from the Object Surface". The patent was issued under U.S. Patent No. 6,029,077.
This particular patent covers the technique for determining the perimeter of the
breast, which simplifies the algorithms necessary to produce the image.
In March 2000, we were granted a patent for: "Apparatus and Method for
Determining the Perimeter of the Surface of an Object Being Scanned". The patent
was issued under U.S. Patent No. 6,044,288. This patent covers an optical
technique to determine the perimeter of a scanned breast. The U.S. Patent No.
6,029,077 described in the previous paragraph covers a different technique to
perform the same measurement. Together, these two patents protect the practical
techniques that can be used to acquire this information.
In August 2000, we were granted a patent for: "Detector Array for Use in a Laser
Imaging Apparatus". The patent was issued under U.S. Patent No. 6,100,520. This
patent describes the several different variations that can be used while
scanning the breast without any contact between the breast and the optical
components. Unlike the conventional method, this unique feature allows the
CTLM(R) to scan the breast without the use of breast compression.
In October 2000, we were granted a patent for: "Method of Reconstructing an
Image Being Scanned". The patent was issued under U.S. Patent No. 6,130,958.
This patent describes the algorithms used to reconstruct images from data
acquired from CTLM(R) scans.
In December 2000, we were granted a patent for: "Detector Array With Variable
Gain Amplifiers For Use In A Laser Imaging Apparatus". The patent was issued
under U.S. Patent No. 6,150,649. This patent describes the proprietary
electronics used in the CTLM(R) detector array.
In February 2001, Mr. Richard Grable was granted a patent for "Diagnostic
Tomographic Laser Imaging Apparatus". This patent was issued for his proprietary
scanning bed, a unique feature of the CTLM(R), and was issued as U.S. Patent No.
6,195,580. The patent allows for a fixed horizontal platform including a top
surface with an opening through which the female breast is vertically pendent
using a laser beam for the detection of breast abnormalities. See "Patent
Licensing Agreement".
15
In April 2001, we were granted a patent for: "Detector Array for Use in a Laser
Imaging Apparatus". The patent was issued under Patent No. 6,211,512. The patent
allows for several different optics variations while scanning the breast without
contact between the breast and the optical components. This feature allows the
CTLM(R) to scan the breast without the use of breast compression.
In January 2002, we announced that we were granted a patent for "Detector Array
With Variable Gain Amplifiers for Use in a Laser Imaging Apparatus," as U.S.
Patent No. 6,331,700. This patent protects some of the non-obvious, but
essential, design aspects of an optical CT scanner. This patent addresses the
solution to the problem of accommodating a huge dynamic range of light
intensities emitted from the breast.
In February 2002, we were issued a patent for "Time-Resolved Breast Imaging
Device," as U.S. Patent No. 6,339,216. This patent protects the key electronics
of a time-resolved optical CT scanner. It addresses the solution to the problem
of simultaneously accommodating a large dynamic range of light intensities
emitted from the breast while achieving the necessary temporal resolution.
In May 2003, we were granted a patent for "Medical Optical Imaging Scanner Using
Multiple Wavelength Simultaneous Data Acquisition for Breast Imaging," as U.S.
Patent No. 6,571,116.
In October 2003, we were granted a Canadian patent for "Diagnostic Tomographic
Laser Imaging Apparatus" as Canadian patent number 2223606. This patent, the
Canadian counterpart of U.S. Patent No. 5,692,511, was issued in the name of
Richard J. Grable and is exclusively licensed to Imaging Diagnostic Systems,
Inc. See "Patent Licensing Agreement".
In December 2003, we were granted a European patent for "Diagnostic Tomographic
Laser Imaging Apparatus" as European patent number 0837649. This patent, the
European counterpart of U.S. Patent No. 5,692,511, was issued in the name of
Richard J. Grable and is exclusively licensed to Imaging Diagnostic Systems,
Inc. See "Patent Licensing Agreement".
In January 2004, we were granted a patent for "Phantom For Optical And Magnetic
Resonance Imaging Quality Control," as U.S. Patent No. 6,675,035. This invention
relates to phantoms for use in optical and magnetic resonance imaging that
emulates the optical characteristics of breast tissue that resembles the breast
in shape and size, as an integral component of a quality assurance protocol to
verify the performance of the medical imaging apparatus being evaluated.
In January 2004, we were granted a patent for "Method For Improving The Accuracy
Of Data Obtained In A Laser Imaging Apparatus," as U.S. Patent No. 6,681,130.
This method improves the accuracy of data obtained using a diagnostic medical
imaging apparatus that employs a near-infrared laser and array of detectors with
variable gain amplifiers that can accommodate the wide dynamic range of signals
available from the detectors.
In February 2004, we were granted a patent for "Laser Imaging Apparatus Using
Biomedical Markers That Bind To Cancer Cells" as U.S. Patent No. 6,693,287. This
patent protects the proprietary method of collecting data while using
"biomedical" markers that bind to cancer cells during a CT laser scan to provide
a positive identification of the cancer area, to selectively activate the Photo
Dynamic Therapy (PDT) drug to destroy the cancer.
In April 2004, we were granted a Canadian Patent for "Laser Imaging Apparatus
Using Biomedical Markers That Bind To Cancer Cells" as Canadian Patent No.
2,373,299. This patent broadly covers the optical imaging of fluorescent
compounds.
In May 2004, we were granted a patent for "Medical Optical Imaging Scanner Using
Multiple Wavelength Simultaneous Data Acquisitions For Breast Imaging" as U.S.
Patent No. 6,738,658. This patent protects the concept of differential
reconstruction: reconstructing the difference in data before and after an
injection of a contrast agent, such as a fluorescent compound.
16
In June 2004, 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 were granted a European patent for "Method For Reconstructing
The Image Of An Object Scanned With A Laser Imaging Apparatus" as European
patent number 1005286. This patent is the European counterpart of U.S. Patent
No. 6,130,958 and protects the algorithms used to reconstruct CTLM images.
In July 2004, we were granted an Australian patent for "Laser Imaging Apparatus
Using Biomedical Markers That Bind To Cancer Cells" as Australian patent number
775069. This patent is the Australian counterpart of U.S. Patent No. 5,952,664
and protects the fluorescent imaging application of the CTLM.
In August 2004, 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 December 2004, we were granted a Hong Kong patent for "Apparatus For
Determining The Perimeter Of The Surface Of An Object Being Scanned" as Hong
Kong patent number HK1029506. This patent is the Hong Kong counterpart 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 December 2004, we were granted a Hong Kong patent for "Method For
Reconstructing The Image Of An Object Scanned With A Laser Imaging Apparatus" as
Hong Kong patent number HK1029508. This patent is the Hong Kong counterpart of
U.S. Patent No. 6,130,958 and protects the algorithms used to reconstruct CTLM
images.
In June 2005, we were granted a European patent for "Laser Imaging Apparatus
Using Biomedical Markers That Bind To Cancer Cells" as European patent number
1181511. This patent is the European counterpart of U.S. Patent No. 5,952,664
and protects the fluorescent imaging application of the CTLM.
We intend to file for patents on products, including the CTLM(R), for which we
believe the cost of obtaining a patent is economically reasonable in relation to
the expected protection obtained. There can be no assurances that any patent
that we apply for will be issued, or that any patents issued will protect our
technology. If the patents we license or obtain are infringed upon, or if we are
required to defend any patent infringement cases brought against us that will
require substantial capital, the expenditure of which we might not be able to
afford.
PATENT LICENSING AGREEMENT
IDSI was formed in December 1993 for the sole purpose of developing and
commercializing Richard Grable's invention, a CT laser breast-imaging device
(the "Mammoscan(TM)"). The Mammoscan(TM) had already been exhibited at the
Radiology Society of North America ("RSNA") 1989 session and held the promise of
a new, emerging technology for the detection of breast abnormalities without
compression or ionizing X-rays. This device used a laser diode for its energy
source and a 386 processor that was extremely slow. Once the technology became
available to speed up the processing, IDSI's founders (Richard Grable, Linda
Grable and Allan Schwartz) believed that this device would be a major
breakthrough in the early detection of breast cancer.
17
Mr. Grable invented the CTLM(R) by making major improvements in the
Mammoscan(TM) technology. In June 1998, we finalized an exclusive patent license
agreement with Mr. Grable, which encompasses the technology for the CTLM(R). The
term of the license is for the life of the Patent (17 years) and any renewals,
subject to termination under specific conditions. As consideration for this
license, we issued to Mr. Grable 7,000,000 shares of common stock. In addition,
we agreed to pay Mr. Grable a royalty based upon a percentage, ranging from 6%
to 10%, of the net selling price (the dollar amount earned from our sale, both
international and domestic, before taxes minus the cost of the goods sold and
commissions or discounts paid) of all the products and goods in which the patent
is used. Mr. Grable agreed that these royalty provisions will not apply to any
sales and deliveries of CTLM(R) systems made by IDSI prior to receipt of the PMA
for the CTLM(R). In addition, following issuance of the PMA, IDSI and Mr. Grable
agreed that Mr. Grable would be paid guaranteed minimum royalties of at least
$250,000 per year based on the sales of the products and goods in which the
CTLM(R) patent is used. Due to Mr. Grable's death in August 2001, his interest
in the patent license agreement passed to his estate. Mr. Grable's widow, Linda
Grable, is the principal beneficiary of Mr. Grable's estate.
The following table sets forth the Patent licensing royalty structure:
ANNUAL GROSS SALES PERCENTAGE OF NET SELLING PRICE
----------------- -------------------------------
$0 to $1,999,999 10%
$2,000,000 to $3,999,999 9%
$4,000,000 to $6,999,999 8%
$7,000,000 to $9,999,99 7%
Greater than $10,000,000 6%
18
EMPLOYEES
As of September 2005, we have 43 full-time employees, including our four
executive officers. Thirty-three percent of our employees (14) are employed in
the areas of scientific, clinical and product research and development. In
September 2004, we had 45 full-time employees, of which thirty-eight percent
(17) were employed in the areas of scientific, clinical and product research and
development. The decrease is due to normal business employment variations. Our
ability to develop our products and provide our services is dependent upon our
recruiting, hiring and retaining qualified technical personnel. To date, we have
been able to recruit and retain sufficient qualified personnel. None of our
employees are represented by a labor union. We have not experienced any work
stoppages and consider our relations with our employees to be good.
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. Therefore, we have entered into employment agreements
with certain of our executive officers and key employees. 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 to our business. 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.
ITEM 2. DESCRIPTION OF OUR PROPERTY
---------------------------
Our headquarters facility is located at 6531 N.W. 18th Court, Plantation,
Florida. The facilities are owned by us and comprise a 24,000-sq. ft. building
with ample space to expand, located on a 5-acre landscaped tract. We believe
that our facility is adequate for our current and reasonably foreseeable future
needs. We intend to assemble the CTLM(R) at our facility from hardware
components that will be made by vendors to our specifications.
ITEM 3. LEGAL PROCEEDINGS
-----------------
We are not aware of any material legal proceedings, pending or contemplated, to
which we are, or would be a party to, or of which any of our property is, or
would be, the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On February 23, 2005 we held a special meeting of stockholders at our corporate
offices at 6531 NW 18th Court, Plantation, Florida for the following purpose:
To consider and act upon a proposal to amend the Company's Articles of
Incorporation to increase the number of authorized shares from 200,000,000
to 300,000,000;
The stockholders voted in favor of the proposal. The affirmative vote of a
majority of the outstanding shares of the Common Stock present in persons or
represented by Proxy at the Special Meeting and entitled to vote were required
to approve the proposal to amend the Company's Articles of Incorporation to
increase the number of authorized shares from 200,000,000 to 300,000,000.
Votes were cast as follows: FOR 168,515,781 AGAINST 8,635,541 ABSTAIN 424,879
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
Our Common Stock is traded on the NASDAQ's OTC Bulletin Board market under the
symbol IMDS. There has been trading in our common stock since September 20,
1994. The following table sets forth, for each of the fiscal periods indicated,
the high and low bid prices for the common stock, as reported on the OTC
Bulletin Board. These per share quotations reflect inter-dealer prices in the
over-the-counter market without real mark-up, markdown, or commissions and may
not necessarily represent actual transactions.
QUARTER ENDING HIGH BID LOW BID
FISCAL YEAR 2004
First Quarter $1.80 $0.81
Second Quarter $1.25 $0.84
Third Quarter $1.15 $0.57
Fourth Quarter $0.79 $0.39
FISCAL YEAR 2005
First Quarter $0.68 $0.27
Second Quarter $0.50 $0.38
Third Quarter $0.41 $0.28
Fourth Quarter $0.295 $0.195
FISCAL YEAR 2006
First Quarter (through September 12, 2005) $0.31 $0.19
On September 12, 2005, the closing trade price of the common stock as reported
on the OTC Bulletin Board was $.19. As of such date, there were approximately
2,633 registered holders of record of our common stock.
20
SALE OF UNREGISTERED SECURITIES
- -------------------------------
Private Placement of Preferred Stock
We have had to rely on the private placement of preferred and common stock to
obtain working capital. In deciding to issue preferred stock pursuant to the
private placements, we took into account the number of common shares authorized
and outstanding, the market price of the common stock at the time of each
preferred sale and the number of common shares the preferred stock would have
been convertible into at the time of the sale. At the time of each private
placement of preferred stock there were enough shares, based on the price of our
common stock at the time of the sale of the preferred to satisfy the preferred
conversion requirements. Although our board of directors tried to negotiate a
floor on the conversion price of each series of preferred stock prior to sale,
it was unable to do so. In order to obtain working capital we will continue to
seek capital through debt or equity financing which may include the issuance of
convertible preferred stock whose rights and preferences are superior to those
of the common stock holders. We have endeavored 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;
however, in order to satisfy our working capital needs, we have been and may
continue to be forced to issue convertible securities and debentures with no
limitations on conversion. In addition, the dividends on the preferred stock
affect the net losses applicable to shareholders. There are also applicable
adjustments as a result of the calculation of the deemed preferred stock
dividends because we have entered into contracts providing for discounts on the
preferred stock when it is converted.
In the event that we issue preferred stock without a limit on the number of
shares that can be issued upon conversion and the price of our common stock
decreases, the percentage of shares outstanding that will be held by preferred
holders upon conversion will increase accordingly. The lower the market price
the greater the number of shares to be issued to the preferred holders, upon
conversion, thus increasing the potential profits to the holders when the price
per share increases and the holders sell the common shares. In addition, the
sale of a substantial amount of preferred stock to relatively few holders could
cause a possible change-in-control. In the event of a voluntary or involuntary
liquidation while the preferred stock is outstanding, the holders will be
entitled to a specified preference in distribution of our property available for
distribution. As of the date of this report there are no outstanding shares of
preferred stock.
Series K Preferred
See "Financing/Equity Line of Credit".
PRIVATE PLACEMENT OF COMMON STOCK
- ---------------------------------
ISSUANCE OF STOCK FOR SERVICES
We, from time to time, have issued and may continue to issue stock for services
rendered by consultants, all of whom have been unaffiliated.
Since we have generated no significant 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 according to registration statements on Form S-8. The aggregate
fair market value of the 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.
21
ISSUANCE OF STOCK FOR SETTLEMENTS IN LIEU OF CASH
On March 28, 2002, we issued 350,000 restricted shares of common stock to
Anthony Giambrone in settlement of a lawsuit for alleged breach of a consulting
agreement. The shares were issued in an exempt transaction pursuant to section
4(2) of the Securities Act of 1933, as amended. The suit was dismissed by
stipulation on April 23, 2002. In addition we agreed that, if the market price
of our common stock on March 28, 2003, was less than $.75 per share, then we
would issue to him additional shares of common stock equal to the quotient of
(a) 262,500 minus the product of (i) 350,000 and (ii) the market price, divided
by (b) the market price. On March 28, 2003, the market price of our stock was
$.17, so we issued to him 1,194,118 additional shares bearing a restricted
legend. Under the settlement agreement, we were obligated to register the shares
issued to Mr. Giambrone, subject to certain conditions. The shares were
subsequently registered on July 23, 2003.
On or about September 18, 2003, we entered into a settlement agreement to settle
a lawsuit filed by Ladenburg Thalmann & Co. Inc. for alleged breach of an
investment-banking contract. Under this settlement we agreed to issue 401,785
shares of our common stock to Ladenburg in exchange for Ladenburg's dismissal
with prejudice of its claims against us. As of the date of the Settlement
Agreement the value of the stock was approximately $450,000. We and Ladenburg
jointly moved for Court approval of the settlement as fair to Ladenburg so that
the delivery of the shares to and the resale of the shares in the United States
by Ladenburg may be exempt from registration under Section 3(a)(10) of the
Securities Act of 1933. In an order dated October 24, 2003, the Judge ordered
and adjudged that the settlement was approved as fair to the party to whom the
shares will be issued within the meaning of Section 3(a)(10) and the case was
closed. The shares were issued on November 12, 2003.
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.
Since July 17, 2000, Charlton Avenue LLC ("Charlton") has provided all of our
necessary funding through the private placement sale of convertible preferred
stock with a 9% dividend and common stock through various private equity credit
agreements. We initially sold Charlton 400 shares of our Series K convertible
preferred stock for $4 million and subsequently issued an additional 95 Series K
shares to Charlton for $950,000 on November 7, 2000. 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. The total of $4,950,000 was designed to serve as bridge financing
pending draws on the Charlton private equity line provided through the various
private equity credit agreements described in the following paragraphs.
From November 2000 to April 2001, Charlton converted 445 shares of Series K
convertible preferred stock into 5,600,071 common shares and we redeemed 50
Series K shares for $550,000 using proceeds from the Charlton private equity
line. Spinneret converted 5 Series K shares for $63,996. All Series K
convertible preferred stock has been converted or redeemed and there are no
convertible preferred shares outstanding.
Prior Equity Agreements
- -----------------------
From August 2000 to February 2004, we obtained funding through three Private
Equity Agreements with Charlton. Each equity agreement provided that the timing
and amounts of the purchase by the investor were at our sole discretion. The
22
purchase price of the shares of common stock was set at 91% of the market price.
The market price, as defined in each agreement, was 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. 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 fees in advance. We reached an agreement to pay Spinneret in advance
as requested and paid them $250,000 out of proceeds from a put.
From the date of our first put notice, January 25, 2001 to our last put notice,
February 11, 2004, under our Third Private Equity Credit Agreement, we drew a
total of $20,506,000 and issued 49,311,898 shares to Charlton. As each of the
obligations under these prior agreements was satisfied, the agreements were
terminated. The Third Private Equity Agreement was terminated on March 4, 2004
upon the effectiveness of our first Registration Statement for the Fourth
Private Equity Credit Agreement.
The Fourth Private Equity Credit Agreement
- ------------------------------------------
On January 9, 2004, we and Charlton entered into a new "Fourth Private Equity
Credit Agreement" which replaced 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
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 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.
We intend to make sales under the Fourth Private Equity Credit Agreement from
time to time in order to raise working capital on an "as needed" basis. We have
already drawn well in excess of the $1,000,000 minimum and, based on our current
assessment of our financing needs, we expect to draw up to the $15,000,000
available under the Fourth Private Equity Credit Agreement. As of the date of
this report, under the Fourth Private Equity Credit Agreement we have drawn down
$9,598,541 and issued 33,830,101 shares of common stock and have an available
balance to draw of $5,401,459.
As of the date of this report, since January 2001, we have drawn an aggregate of
$30,104,541 in gross proceeds from our equity credit lines with Charlton and
have issued 83,141,999 shares as a result of those draws.
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. To the extent that we utilize
our Private Equity Credit Agreements, 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.
23
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following selected financial data should be read in conjunction with
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Item 8. Financial Statements"
Year Ended Year Ended Year Ended Year Ended Year Ended
June 30, 2005 June 30, 2004 June 30, 2003 June 30, 2002 June 30, 2001
------------- ------------- ------------- ------------- -------------
(Restated)** (Restated)* (Restated)* (Restated)*
Sales $ 374,952 $ 733,211 $ 184,085 $ - $ -
Cost of Sales 166,685 284,682 79,189 - -
------------ ----------- ----------- ------------ -----------
Gross Profit 208,267 448,529 104,896 - -
------------ ----------- ----------- ------------ -----------
Operating Expenses 7,338,806 8,160,982 7,487,696 7,287,348 8,320,858
------------ ----------- ----------- ------------ -----------
Operating Loss (7,130,539) (7,712,453) (7,382,800) (7,287,348) (8,320,858)
Gain (Loss) on sale of fixed assets - (5,669) 11,254 - -
Interest income 5,680 9,305 689 1,031 53,688
Other income 409,962 - - - -
Interest expense (598,021) (694,142) (987,917) (711,335) (1,265,280)
------------ ----------- ----------- ------------ -----------
Net Loss (7,312,918) (8,402,959) (8,358,774) (7,997,652) (9,532,450)
Dividends on cumulative Pfd. stock:
From discount at issuance - - - - (708,130)
Earned - - - - (422,401)
------------ ----------- ----------- ----------- -----------
Net loss applicable to
common shareholders $ (7,312,918) $ (8,402,959) $ (8,358,774) $ (7,997,652) $ (10,662,981)
============== ============= ============= ============= ==============
Net Loss per common share $ (0.04) $ (0.05) $ (0.06) $ (0.06) $ (0.10)
============== ============= ============= ============= ==============
Weighted avg. no. of common shares,
Basic & Diluted 185,636,553 167,982,750 145,150,783 125,746,307 111,651,970
============== ============= ============= ============= ==============
Cash and Cash Equivalents $ 765,523 $ 554,354 $ 1,361,507 $ 194,894 $ 207,266
Total Assets 5,608,004 5,683,328 5,943,415 5,915,719 5,979,944
Deficit accumulated during
the development stage (83,976,015) (76,663,097) (68,260,138) (59,901,364) (51,903,712)
Stockholders' Equity 4,772,538 4,170,395 4,706,003 3,224,443 4,831,540
* See Notes 2(m) and 8 to the financial statements.
** Revision reflects restatements from prior fiscal years. See Note 3 to the
financial statements.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
"Selected Financial Data" and the Condensed Financial Statements included
elsewhere in this report and the information described under the caption "Risk
Factors" below.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the U.S. The preparation of
these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to customer programs and
incentives, inventories, and intangible assets. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Inventory
Our inventories consist of raw materials, work-in-process and finished goods,
and are stated at the lower of cost (first-in, first-out) or market. As a
designer and manufacturer of high technology medical imaging equipment, we may
be exposed to a number of economic and industry factors that could result in
portions of our inventory becoming either obsolete or in excess of anticipated
usage. These factors include, but are not limited to, technological changes in
our markets, our ability to meet changing customer requirements, competitive
pressures in products and prices and reliability, replacement and availability
of key components from our suppliers. We evaluate on a quarterly basis, using
the guidance of ARB 43, Chapter 4, Statement 5, our ability to realize the value
of our inventory based on a combination of factors including the following: how
long a system has been used for demonstration or clinical collaboration purpose;
the utility of the goods as compared to their cost; physical obsolescence;
historical usage rates; forecasted sales or usage; product end of life dates;
estimated current and future market values; and new product introductions.
Assumptions used in determining our estimates of future product demand may prove
to be incorrect, in which case excess and obsolete inventory would have to be
adjusted in the future. If we determined that inventory was overvalued, we would
be required to make an inventory valuation adjustment at the time of such
determination. Although every effort is made to ensure the accuracy of our
forecasts of future product demand, significant unanticipated changes in demand
could have a significant negative impact on the value of our inventory and our
reported operating results. Additionally, purchasing requirements and
alternative usage avenues are explored within these processes to mitigate
inventory exposure.
RESULTS OF OPERATIONS
We are in the process of commercializing our operations and as part of our
transition plan to exit from SFAS 7 reporting as a development stage enterprise,
we have changed the format of our management discussion and analysis of
financial condition and results of operations (MD&A) to better disclose and
discuss the three most significant categories of expenses, i.e., general and
administrative (G&A), research and development (R&D), and sales and marketing
(S&M).
In our previous filings, the discussion of compensation and related benefits
only included salaries, payroll taxes and bonuses for two categories: 1)
administrative and engineering and 2) research and development. We expanded the
25
research and development category and are now combining engineering with
research and development under our new R&D discussion. We have renamed the
administrative and engineering category as general and administrative. We have
created an additional category, sales and marketing. Also in our previous
discussions, the costs of salaries, payroll taxes and bonuses for sales and
marketing were included in administrative and engineering.
In addition, we are expanding our discussion of health insurance and worker's
compensation insurance so that they fall into compensation and related benefits
for one of the three expense categories, where we previously included them under
insurance costs.
Twelve Months Ended June 30, 2005 and June 30, 2004
- ---------------------------------------------------
SALES AND COST OF SALES
- -----------------------
Revenues during the year ended June 30, 2005, were $374,952 representing a
decrease of $358,259 or 49% from $733,211 during the year ended June 30, 2004.
The Cost of Sales during the year ended June 30, 2005, was $166,685 representing
a decrease of $117,997 or 41% from $284,682 during the year ended June 30, 2004.
The decrease in revenues is a result of selling three CTLM(R) Systems with a
lesser average selling price compared to four CTLM(R) System during the year
ended June 30, 2004.
GENERAL AND ADMINISTRATIVE (G&A)
- --------------------------------
Our general and administrative expenses include compensation and related
benefits for employees in the areas of administration, finance, human resources
and information technology. Also included are travel/subsistence related to G&A
activities; property and casualty insurance; directors' and officers' liability
insurance; professional fees associated with our corporate and securities
attorneys and independent auditors; maintenance of our current patents;
corporate governance expenses; stockholder expenses; consulting; utilities;
maintenance; telephones; office supplies and sales and property taxes.
General and administrative expenses during the year ended June 30, 2005, were
$3,014,800 representing a decrease of $3,434,959 or 53% from $6,449,759 during
the year ended June 30, 2004. Of the $3,014,800 and $6,449,759, compensation and
related benefits comprised $1,846,825 (61%) and $3,461,852 (54%), respectively.
The decrease of $3,434,959 was due primarily to the reclassification of
$1,873,188 in compensation and related benefits, $316,436 in travel and
subsistence, $148,221 in consulting and $185,388 in professional fees to the
appropriate R&D and S&M expense categories.
We do not expect a material increase in our general and administrative expenses
until we realize a significant increase in revenue from the sale of our product.
RESEARCH AND DEVELOPMENT (R&D)
- ------------------------------
We incur research and development expenses to develop significant enhancements
to our sole product, the CTLM(R). These expenses consist primarily of
compensation and related benefits; clinical, legal and consulting fees
associated with our PMA application; costs associated with materials and
components we use to make product enhancements to the CTLM(R); materials and
components for new product research; professional fees associated with the
research and applications for new patents; and the costs associated with the
travel/subsistence, shipping, training, installing and servicing of our clinical
collaboration sites.
Research and development expenses during the year ended June 30, 2005, were
$2,553,567 representing an increase of $2,015,848 or 375% from $537,719 during
the year ended June 30, 2004. Of the $2,553,567 and $537,719, compensation and
related benefits comprised $1,525,531 (60%) and $374,437 (70%), respectively.
The increase of $2,015,848 was due primarily to the reclassification of
$1,525,531 in compensation and related benefits, $64,495 in travel and
26
subsistence, $101,862 in consulting, and $185,388 in outside legal services from
the G&A expense category.
Clinical expenses during the year ended June 30, 2005, were $445,322
representing an increase of $393,676 or 762% from $51,676 as a result of PMA
study expenses during the fiscal year ended June 30, 2005.
We expect a significant increase in our R&D expenses because of the costs
associated with conducting clinical trials in the United States required for our
PMA application. We also expect our consulting expenses and professional fees to
increase due to the costs associated with the preparation and submission of our
PMA application to the FDA at the conclusion of the U.S. clinical trials. See
Item 1. Our Business - "Clinical Collaboration Sites Update"
SALES AND MARKETING (S&M)
- -------------------------
Our sales and marketing expenses consist primarily of compensation and related
benefits for employees in the areas of sales, marketing, sales support and sales
administration. Also included are the expenses associated with advertising and
promotion; trade shows; conferences; promotional and training costs related to
marketing the CTLM(R); commissions; travel/subsistence; consulting;
certification expenses; and product liability insurance.
Sales and marketing expenses during the year ended June 30, 2005, were
$1,083,706 representing an increase of $672,427 or 164% from $411,279 during the
year ended June 30, 2004. Of the $1,083,706 and $411,279, compensation and
related benefits comprised $347,657 (32%) and $0 (0%), respectively.
The increase of $672,427 was due primarily to the reclassification of $347,657
in compensation and related benefits, and $251,941 in travel and subsistence,
and $46,359 in consulting expenses from the G&A expense category.
The increases were further due to the international travel expenses associated
with developing our distributor network. We expect commissions, advertising and
promotion and travel and subsistence costs to increase as we continue to
implement our global commercialization program. We are in the process of
expanding our sales and marketing department which will result in an increase of
compensation and related benefits costs.
AGGREGATED OPERATING EXPENSES
- -----------------------------
The following discussion explains the sum of significant expenses that are
included in our three most significant categories of expenses, i.e., general and
administrative (G&A), research and development (R&D), and sales and marketing
(S&M). Also included are Inventory valuation adjustments and Depreciation and
amortization.
Total operating expenses (G&A, R&D, S&M, Inventory valuation adjustments and
Depreciation and amortization) during the year ended June 30, 2005, were
$7,338,806 representing a decrease of $822,176 or 11% from $8,160,982 when
compared to the operating expenses during the year ended June 30, 2004.
Settlement expenses during the year ended June 30, 2005, were $0 representing a
decrease of $450,000, which was the one-time settlement expense associated with
a case which was settled in the fiscal year ended June 30, 2004.
Compensation and related benefits during the year ended June 30, 2005, were
$3,720,013 representing a decrease of $116,276 or 3% from $3,836,289 during the
year ended June 30, 2004. The decrease in compensation is primarily due to the
fair market value of the 2004 holiday bonus given to the employees in January
2005, which was $307,100 less than the 2003 holiday bonus given in January 2004.
Consulting expenses during the year ended June 30, 2005, were $267,456
representing a decrease of $134,670 or 33% from $402,156 during the year ended
June 30, 2004. The decrease was due primarily to the hiring of a vice president
of international sales in September 2004, which eliminated the expense of an
international marketing consultant. However, we will continue to use other
consultants in certain countries to assist our vice president of international
sales. There was also a reduction in consulting fees due to the termination of
our financial advisor concurrent with the termination of the Third Private
Equity Credit Agreement.
27
Professional expenses during the year ended June 30, 2005, were $307,775
representing a decrease of $123,037, or 29% from $430,813 during the year ended
June 30, 2004. The decrease was due primarily to the elimination of legal fees
associated with a previous case.
Clinical expenses during the year ended June 30, 2005, were $445,322
representing an increase of $393,676 or 762% from $51,676 as a result of PMA
study expenses during the fiscal year ended June 30, 2005. We expect a
significant increase in the fiscal year ending June 30, 2006 due to the costs
associated with conducting clinical trials in the United States required for our
PMA application. See Item 1. Our Business - "Clinical Collaboration Sites
Update"
Travel and subsistence costs during the year ended June 30, 2005, were $346,872
representing an increase of $22,633 or 7% from $324,239 during the year ended
June 30, 2004. This increase was primarily due to additional travel costs
associated with domestic and international trade shows and the development of
our distributor network.
Inventory Valuation Adjustments during the year ended June 30, 2005, were
$499,194 representing a decrease of $87,316 or 15% from $586,510 during the year
ended June 30, 2004. The decrease is due to a reduction in write-downs of
obsolete lasers and other components that are no longer used in the
manufacturing of the CTLM(R). See "Critical Accounting Policy - Inventory".
Depreciation and amortization during the year ended June 30, 2005, were $187,539
representing an increase of $11,824 or 7% from $175,715 during the year ended
June 30, 2004.
Interest expense during the fiscal year ended June 30, 2005, was $598,021
representing a decrease of $96,121 or 14% from the corresponding period for
2004. The decrease is due primarily to the amount of the draws and the recording
of the 7% and 9% discounts on our equity credit line as interest with Charlton
Avenue, LLC ("Charlton"). See Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters - "Financing/Equity Line of Credit"
We have recorded other income of $409,962 as a result of the extinguishment of
debt from a loan and related accrued interest payable as of June 30, 2005. See
Notes to the Financial Statements, Note 10 "Short-Term Debt".
Twelve Months Ended June 30, 2004 and June 30, 2003
- ---------------------------------------------------
Revenues during the year ended June 30, 2004, were $733,211 representing an
increase of $549,126 or 298% from $184,085 during the year ended June 30, 2003.
The Cost of Sales during the year ended June 30, 2004, was $284,682 representing
an increase of $205,493 or 259% from $79,189 during the year ended June 30,
2003. The increase is a result of selling four CTLM(R) Systems compared to one
CTLM(R) System during the year ended June 30, 2003.
General and administrative expenses in the aggregate during the 12 months ended
June 30, 2004 were $4,288,625 representing a decrease of $760,205 or 15% from
$5,048,830 during the 12 months ended June 30, 2003. General and administrative
expenses in the aggregate are derived from deducting compensation and related
benefits, research and development expenses, depreciation and amortization and
adding interest income to the net loss as presented on the Statement of
Operations. The decrease in general and administrative expenses was due
primarily to a reduction in inventory write-downs of $323,934 and the $391,853
reduction in costs associated with comparing the one-time settlement of $450,000
for the Ladenburg case to the one-time settlement of $841,853 for the Giambrone
case in the prior period. See Item 3. "Legal Proceedings". Selling, general and
administrative expenses ("SG&A") in the aggregate during the year ended June 30,
2004, were $643,892 representing an increase of $218,136 or 51% from $425,756
during the year ended June 30, 2003. The increase in SG&A was primarily due to
costs associated with commercializing the CTLM(R) in the international market.
Compensation and related benefits during the year ended June 30, 2004, were
$3,836,289 representing an increase of $944,986 or 33% from $2,891,303 during
the year ended June 30, 2003. The increase in compensation is primarily due to
28
the recording of a holiday stock bonus of $382,950 given to the employees during
the third quarter and the accrual of the payment obligation of $420,000 to Linda
Grable pursuant to her retirement agreement. See Item 10. "Executive
Compensation".
Consulting expenses during the year ended June 30, 2004, were $402,156
representing an increase of $24,884 or 7% from $377,272 during the year ended
June 30, 2003. The increase was due primarily to the engagement of an
international sales and marketing consultant during the year ended June 30,
2004.
Inventory Valuation Adjustments during the year ended June 30, 2004, were
$586,510 representing a decrease of $323,934 or 36% from $910,444 during the
year ended June 30, 2003. The decrease is due to a reduction in write-downs of
obsolete lasers and other components that are no longer used in the
manufacturing of the CTLM(R). See "Critical Accounting Policy - Inventory".
Professional expenses during the year ended June 30, 2004, were $430,813
representing a decrease of $81,966, or 16% from $512,779 during the year ended
June 30, 2003. The decrease was due primarily to reduced litigation expenses as
a result of the settlement of lawsuits during the year ended June 30, 2004. See
Item 3. "Legal Proceedings".
Travel and subsistence costs during the year ended June 30, 2004, were $324,239
representing an increase of $85,917 or 36% from $238,322 during the year ended
June 30, 2003. This increase was primarily due to additional travel costs
associated with domestic and international trade shows and the development of
our distributor network.
Interest expense during the year ended June 30, 2004, was $694,142 representing
a decrease of $293,775, or 30% from $987,917 during the year ended June 30,
2003. The decrease was primarily due to a reduction in the use of our Private
Equity Credit lines resulting in a decrease in recording of the 9% discount on
the Third Private Equity Credit Agreement and the 7% discount on the Fourth
Private Equity Credit Agreement.
BALANCE SHEET DATA
We have financed our operations since inception by the issuance of equity
securities with aggregate net proceeds of approximately $53,873,479 and through
loan transactions in the aggregate net amount of $2,595,029. Furthermore, we
issued equity securities for the conversion of all outstanding convertible
debentures in the aggregate net amount of $3,240,000.
Our combined cash and cash equivalents totaled $765,523 at June 30, 2005. We do
not expect to generate a positive internal cash flow for at least the next 12
months due to our need to obtain the PMA, the expected costs of commercializing
our initial product, the CTLM(R), and the time required for homologations from
certain countries.
Our inventory, which consists of raw materials, work in process (including
completed units under testing) and finished goods, totaled $2,020,498 at June
30, 2005 and $2,357,864 at June 30, 2004. Raw materials used for research and
development or other purposes are expensed and not included in inventory. This
decrease is primarily due to the valuation adjustment of $499,194 recorded
during the year. We expect to recover our investment because the CTLM(R)
represents a new technology for imaging the breast using a laser beam instead of
ionizing X-ray to produce three dimensional images. We expect over time that the
CTLM(R) will gain worldwide acceptance in the medical community because its
basis in science is Computed Tomography. See Note 6 "Inventories".
Our property and equipment, net, totaled $2,166,920 at June 30, 2005 and
$2,301,095 at June 30, 2004. This decrease is due primarily to depreciation
during the fiscal year ending June 30, 2005.
Our Intangible assets (formerly "Other assets") totaled $341,765 at June 30,
2005 compared to $375,941 at June 30, 2004. The June 30, 2004 total of $375,941
reflects the restatement of a total of $430,302 consisting of $372,410 for
fiscal year 2001 and $57,892 for fiscal year 2002 from intangible assets to
certification expense.
Our Total Current Liabilities are $835,466 at June 30, 2005 compared to
$1,512,933 at June 30, 2004. The June 30, 2004 total of $1,512,933 reflects the
restatement of Other Current Liabilities. Prior to the restatement, Other
29
Current Liabilities consisted of the accrued compensation resulting from
variable plan accounting treatment of certain historical stock options. See
"Notes to Financial Statements", Notes 2(m) and 8.
LIQUIDITY AND CAPITAL RESOURCES
We are currently a development stage company and our continued existence is
dependent upon our ability to resolve our liquidity problems, principally by
obtaining additional debt and/or equity financing. We have yet to generate a
positive internal cash flow, and until significant sales of our product occur,
we are mostly dependent upon debt and equity funding from outside investors. In
the event that we are unable to obtain debt or equity financing or are unable to
obtain such financing on terms and conditions acceptable to us, we may have to
cease or severely curtail our operations. This would materially impact our
ability to continue as a going concern.
We have financed our operating and research and development activities through
several Regulation S and Regulation D private placement transactions. Net cash
used for operating and product development expenses during fiscal 2005 was
$6,972,964 primarily due to our purchase of additional materials to continue the
manufacture of CTLM(R) Systems in anticipation of receiving orders from our
distributors in certain countries where permitted by law compared to net cash
used by operating activities and product development of the CTLM(R) and related
software development of $6,834,193 in fiscal 2004. At June 30, 2005, we had
working capital of $2,263,853 compared to working capital of $1,493,359 at June
30, 2004.
If and when we receive a PMA from the FDA, which cannot be assured, we believe
that, based on our current business plan approximately $5 million will be
required above and beyond normal operating expenses over the next year to
complete all necessary stages in order for us to market the CTLM(R) in the
United States and foreign countries. The $5 million will be used to purchase
inventory, sub-contracted components, tooling, manufacturing templates and
non-recurring engineering costs associated with preparation for full capacity
manufacturing and assembly and marketing, advertising and promotion, training,
ongoing regulatory expenses, and other costs associated with product launch. If
the need should arise for capital in excess of the Fourth Private Equity Credit
Agreement or if the Fourth Private Equity Credit Agreement is unavailable due to
the price of our common stock, our inability to comply with the registration
provision, Charlton's breach of its agreement, or any other reason, we may be
forced to seek additional funding through public or private financing,
collaboration, licensing and other arrangements with corporate partners. See
"Sale of Unregistered Securities-Financing/Equity Line of Credit."
During fiscal 2005, we were able to raise a total of $7,204,370 less expenses
through Regulation D transactions. We do not expect to generate a positive
internal cash flow for at least the next 12 months due to our need to obtain the
PMA, the expected costs of commercializing our initial product, the CTLM(R), and
the expense of our continuing product development program. We will require
additional funds for operating expenses, developing our CD-ROM clinical atlas,
FDA regulatory processes, manufacturing and marketing programs and to continue
our product development program. Accordingly, we plan to utilize the Fourth
Private Equity Credit Agreement to raise the funds required prior to the end of
fiscal year 2006 in order to continue operations. In the event that we are
unable to utilize the Fourth Private Equity Credit Agreement, we would have to
raise the additional funds required by either equity or debt financing,
including entering into a transaction(s) to privately place equity, either
common or preferred stock, or debt securities, or combinations of both; or by
placing equity into the public market through an underwritten secondary
offering. If additional funds are raised by issuing equity securities, dilution
to existing stockholders will result, and future investors may be granted rights
superior to those of existing stockholders.
No assurances, however, can be given that the necessary future financing will be
available or, if available, that it will be obtained on terms satisfactory to
us. Our ability to effectuate our business plan and continue operations is
dependent on our ability to raise capital, structure a profitable business, and
generate revenues. If our working capital were insufficient to fund our
operations, we would have to explore additional sources of financing.
Capital expenditures for the fiscal 2005 were $23,641 as compared to $334,264
for fiscal 2004. These expenditures were a direct result of purchases of
computer and other equipment, office, warehouse and manufacturing fixtures and
computer software. We anticipate that our capital expenditures for fiscal 2006
will be approximately $75,000.
During the year ending June 30, 2005, there were no changes in our existing debt
agreements and we had no outstanding bank loans as of June 30, 2005. Our annual
30
fixed commitments, including salaries and fees for current employees and
consultants, rent, payments under license agreements and other contractual
commitments are approximately $7.4 million, as of the date of this report and
are likely to increase as additional agreements are entered into and additional
personnel are retained. We will require substantial additional funds for our
product development programs, operating expenses, regulatory processes, and
manufacturing and marketing programs, which are presently estimated at an
aggregate of approximately $620,000 per month. The foregoing projections are
subject to many conditions most of which are beyond our control. Our future
capital requirements will depend on many factors, including the following: the
progress of our product development projects, the time and cost involved in
obtaining regulatory approvals; the cost of filing, prosecuting, defending and
enforcing any patent claims and other intellectual property rights; competing
technological and market developments; changes and developments in our existing
collaborative, licensing and other relationships and the terms of any new
collaborative, licensing and other arrangements that we may establish; and the
development of commercialization activities and arrangements. We do not expect
to generate a positive internal cash flow for at least 12 months as substantial
costs and expenses continue due principally to the commercialization of the
CTLM(R), activities related to our FDA PMA process, and advanced product
development activities. We intend to use the Fourth Private Equity Credit
Agreement as our principal source of additional capital. We plan to continue our
policy of investing excess funds, if any, in a High Performance Money Market
account at Wachovia Bank N.A.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This report 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.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Risks associated with our business
We must comply with extensive government regulation 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 rely on outside FDA consultants to assist us in
obtaining the PMA from the FDA.
31
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.
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 safe and effective, 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.
32
We depend on market acceptance to sell our products, which have not been proven,
and a lack of acceptance of the CTLM(R) could cause our business to fail.
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.
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.
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.
33
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
substantial 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.
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, Asia,
South America 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 economical and political instability,
o shipping delays,
o fluctuation of foreign currency exchange rates,
o foreign regulatory requirements, and
o various trade restrictions, all of which could have a significant impact on
our ability to deliver products on a timely basis.
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. While we attempt
to minimize the risk of doing business with distributors in countries which are
having difficult financial times by requesting payment via an irrevocable letter
of credit ("L/C") drawn on a United States bank prior to shipment of the
CTLM(R), it is not always possible to obtain an L/C from our distributor. In
these cases we must seek alternative payment arrangements which include
third-party financing, leasing or extending payment terms to our distributors.
Our business has the risk of product liability claims, and preferred insurance
coverage may be 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.
34
Risks associated with our industry
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
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
As of the date of this report, we believe that we do not have any material
quantitative and qualitative market risks.
35
ITEM 8. FINANCIAL STATEMENTS
--------------------
Index to Financial Statements
Page
----
Report of Independent Registered Public Accounting Firm 37
Financial Statements
Balance Sheets 39
Statements of Operations 40
Statements of Stockholders' Equity 41
Statements of Cash Flows 50
Notes to Financial Statements 52
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2005 and 2004, and the related
statements of operations, stockholders' equity and cash flows for the years
ended June 30, 2005, 2004 and 2003 and for the period December 10, 1993 (date of
inception) to June 30, 2005. 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, 2005 and 2004 and the results
of its operations and its cash flows for the years ended June 30, 2005, 2004 and
2003 and for the period December 10, 1993 (date of inception) to June 30, 2005
in conformity with United States generally accepted accounting principles.
As discussed in Note 3 to the financial statements, the Company has restated its
financial statements to reflect the changes in accounting for the treatment of
certain costs previously capitalized as intangible assets, and for compensation
previously accrued and recorded to other current liabilities, on options granted
to officers of the Company.
The Company is in the development stage as of June 30, 2005 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.
37
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 5. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Imaging
Diagnostic Systems, Inc.'s internal control over financial reporting as of June
30, 2005, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated August 22, 2005 expressed an unqualified opinion on
management's assessment of internal control over financial reporting and an
unqualified opinion on the effectiveness of internal control over financial
reporting.
/s/
Margolies, Fink and Wichrowski
Certified Public Accountants
Pompano Beach, Florida
August 22, 2005
38
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Balance Sheets
June 30, 2005 and 2004
ASSETS
2005 2004
---- ----
(Restated)*
Current assets:
Cash and cash equivalents $ 765,523 $ 554,354
Accounts receivable 264,535 28,925
Loans receivable 14,576 570
Inventory 2,020,498 2,357,864
Prepaid expenses 34,187 64,579
------------ ------------
Total current assets 3,099,319 3,006,292
------------ ------------
Property and equipment, net 2,166,920 2,301,095
Intangible assets, net 341,765 375,941
------------ ------------
$ 5,608,004 $ 5,683,328
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 783,966 $ 1,172,526
Customer deposits 30,000 40,000
Short term debt 21,500 300,407
------------ ------------
Total current liabilities 835,466 1,512,933
------------ ------------
Commitments and contingencies - -
Stockholders equity:
Common stock, no par value; authorized 300,000,000 shares,
issued 199,900,569 and 173,327,412 shares, respectively 87,150,773 79,235,712
Additional paid-in capital 1,597,780 1,597,780
Deficit accumulated during the development stage (83,976,015) (76,663,097)
------------ -------------
Total stockholders' equity 4,772,538 4,170,395
------------ ------------
$ 5,608,004 $ 5,683,328
============ ============
* See Notes 2(m) and 8
See accompanying notes to the financial statements.
39
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Statements of Operations
From Inception
(December 10,
Year Ended Year Ended Year Ended 1993) to
June 30, 2005 June 30, 2004 June 30, 2003 June 30, 2005
------------- ------------- ------------- --------------
(Restated)* (Restated)* (Restated)*
Net Sales $ 374,952 $ 733,211 $ 184,085 $ 1,292,248
Cost of Sales 166,685 284,682 79,189 530,556
------------ ------------ ------------ -------------
Gross Profit 208,267 448,529 104,896 761,692
------------ ------------ ------------ -------------
Operating Expenses:
General and administrative 3,014,800 6,449,759 4,925,900 43,586,744
Research and development 2,553,567 537,719 1,165,995 14,250,847
Sales and Marketing 1,083,706 411,279 245,028 4,527,280
Inventory valuation adjustments 499,194 586,510 910,444 3,734,195
Depreciation and amortization 187,539 175,715 240,329 2,421,108
Amortization of deferred compensation - - - 4,064,250
------------ ------------ ------------ -------------
7,338,806 8,160,982 7,487,696 72,584,424
------------ ------------ ------------ -------------
Operating Loss (7,130,539) (7,712,453) (7,382,800) (71,822,732)
Gain (Loss) on sale of fixed assets - (5,669) 11,254 5,585
Interest income 5,680 9,305 689 274,517
Other income 409,962 - - 409,962
Interest expense (598,021) (694,142) (987,917) (5,995,587)
------------- ------------ ------------ -------------
Net Loss (7,312,918) (8,402,959) (8,358,774) (77,128,255)
Dividends on cumulative Pfd. stock:
From discount at issuance - - - (5,402,713)
Earned - - - (1,445,047)
------------ ------------ ------------ -------------
Net loss applicable to
common shareholders $ (7,312,918) $ (8,402,959) $ (8,358,774) $ (83,976,015)
============== ============== ============== ==============
Net Loss per common share:
Basic and Diluted:
Net loss per common share $ (0.04) $ (0.05) $ (0.06) $ (1.02)
============== ============== ============== ==============
Weighted avg. no. of common shares 185,636,553 167,982,750 145,150,783 82,490,877
============== ============== ============== ==============
* See Notes 2(m) and 8
See accompanying notes to the financial statements.
40
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.
41
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.
42
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.
43
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 (restated)* -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1998 (restated)* 611 6,110,000 36,493,544 23,983,073 1,884,846
----------- ----------- ----------- ----------- -----------
* See Note 2(m) and 8
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 (restated)* (6,715,732)* -- -- (6,715,732)*
----------- ----------- ----------- -----------
Balance at June 30, 1998 (restated)* (27,070,677)* (14,309) (1,300,812) 3,592,121 *
----------- ----------- ----------- -----------
* See Note 2(m) and 8
See accompanying notes to the financial statements.
44
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 (restated)* 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 (restated)* -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1999 (restated)* 596 5,960,000 49,297,675 29,820,729 1,490,827
----------- ----------- ----------- ----------- -----------
* See Note 2(m) and 8
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
-------------- ------------- --------------- -------------
Balance at June 30, 1998 (restated)* (27,070,677)* (14,309) (1,300,812) 3,592,121 *
----------- ----------- ----------- -----------
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 (restated)* (6,543,292)* -- -- (6,543,292)*
----------- ----------- ----------- -----------
Balance at June 30, 1999 (restated)* (34,563,119)* (14,309) -- 2,694,128 *
----------- ----------- ----------- -----------
* See Note 2(m) and 8
See accompanying notes to the financial statements.
45
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 (restated)* 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 (restated)* -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at June 30, 2000 (restated)* -- -- 105,511,678 42,818,057 1,597,780
------------ ------------ ------------ ------------ ------------
* See Note 2(m) and 8
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
---------------- ------------- -------------- -------------
Balance at June 30, 1999 (restated)* (34,563,119)* (14,309) -- 2,694,128 *
------------ ------------ --- ------------
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 (restated)* (6,531,662)* -- -- (6,531,662)*
------------ ------------ --- ------------
Balance at June 30, 2000 (restated)* (41,240,731)* (27,908) -- 3,147,198 *
------------ ------------ --- ------------
* See Note 2(m) and 8
** See Note 15 for a detailed breakdown by Series.
See accompanying notes to the financial statements.
46
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 (restated)* -- -- 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 (restated)* -- -- -- -- --
---- ----------- ----------- ----------- -----------
Balance at June 30, 2001 (restated)* -- -- 119,427,847 55,151,781 1,597,780
==== =========== =========== =========== ===========
* See Note 2(m) and 8
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
---------------- ------------- -------------- -------------
Balance at June 30, 2000 (restated)* (41,240,731)* (27,908) -- 3,147,198 *
------------ -------- --- -----------
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 (restated)* (9,532,450)* -- -- (9,532,450)*
------------ -------- --- -----------
Balance at June 30, 2001 (restated)* (51,903,712)* (14,309) -- 4,831,540 *
============ ======== === ===========
* See Note 2(m) and 8
** See Note 15 for a detailed breakdown by Series.
See accompanying notes to the financial statements.
47
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 (restated)* -- -- 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 (restated)* -- -- -- -- --
---- ----------- ----------- ----------- -----------
Balance at June 30, 2002 (restated)* -- $ -- 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 (restated)* -- -- -- -- --
---- ----------- ----------- ----------- -----------
Balance at June 30, 2003 (restated)* -- -- 162,994,039 71,368,361 1,597,780
---- ----------- ----------- ----------- -----------
* See Note 2(m) and 8
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
---------------- ------------- -------------- -------------
Balance at June 30, 2001 (restated)* (51,903,712)* (14,309) -- 4,831,540 *
------------ -------- --- -----------
Common stock issued - line of equity transactions -- -- -- 6,213,805
Common stock issued - exchange for services
and compensation -- -- (117,600) 176,750
Net loss (restated)* (7,997,652)* -- -- (7,997,652)*
------------ -------- --- -----------
Balance at June 30, 2002 (restated)* (59,901,364)* (14,309) -- 3,224,443 *
------------ -------- --- -----------
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 (restated)* (8,358,774)* -- -- (8,358,774)*
------------ -------- --- -----------
Balance at June 30, 2003 (restated)* (68,260,138)* -- -- 4,706,003 *
------------ -------- --- -----------
* See Note 2(m) and 8
** See Note 15 for a detailed breakdown by Series.
See accompanying notes to the financial statements.
48
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 (restated)* -- -- 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 (Restated)** -- -- 173,327,412 79,235,712 1,597,780
---- ----------- ----------- ----------- ------------
Common stock issued - line of equity transactions -- -- 26,274,893 7,797,807 --
Common stock issued - exchange for services
and compensation -- -- 285,000 113,850 --
Common stock issued - exercise of stock options -- -- 13,264 3,404 --
Net Loss -- -- -- -- --
---- ----------- ----------- ----------- -----------
Balance at June 30, 2005 -- $ -- 199,900,569 $87,150,773 $ 1,597,780
==== =========== =========== =========== ============
* See Note 2(m) and 8
** Revision reflects restatements from prior fiscal years. See Note 3
Deficit
Accumulated
During the
Development Subscriptions Deferred
Stage Receivable Compensation Total
---------------- ------------- -------------- -------------
Balance at June 30, 2003 (restated)* (68,260,138)* -- -- 4,706,003 *
------------ -------- --- -----------
Common stock issued - line of equity transactions -- -- -- 6,541,700
Common stock issued - exchange for services
and compensation -- -- -- 832,950
Common stock issued - exercise of stock options -- -- -- 492,701
Net loss (8,402,959) -- -- (8,402,959)
------------ -------- --- -----------
Balance at June 30, 2004 (Restated)** (76,663,097)* -- -- 4,170,395 *
------------ -------- --- -----------
Common stock issued - line of equity transactions -- -- -- 7,797,807
Common stock issued - exchange for services
and compensation -- -- -- 113,850
Common stock issued - exercise of stock options -- -- -- 3,404
Net Loss (7,312,918) -- -- (7,312,918)
------------- -------- --- -----------
Balance at June 30, 2005 $(83,976,015) $ -- $ -- 4,772,538
============= ======== ===== ===========
* See Note 2(m) and 8
** Revision reflects restatements from prior fiscal years. See Note 3
** See Note 15 for a detailed breakdown by Series.
See accompanying notes to the financial statements.
49
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, 2005 June 30, 2004 June 30, 2003 June 30, 2005
------------- ------------- ------------- --------------
(Restated)* (Restated)* (Restated)*
Net loss $ (7,312,918) $ (8,402,959) $ (8,358,774) $(77,128,255)
------------- ------------- ------------- -------------
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 187,539 175,715 240,329 2,421,108
Gain on sale of fixed assets - 5,669 (11,254) (5,585)
Extinguishment of debt (409,962) - - (409,962)
Inventory valuation adjustment 499,194 586,510 910,444 3,734,195
Amoritization of deferred compensation - - - 4,064,250
Noncash interest, compensation and consulting services 711,740 1,521,346 1,827,425 18,006,498
(Increase) decrease in accounts and
loans receivable - employees (249,616) (28,040) 16 (317,797)
(Increase) decrease in inventories (161,828) (932,099) 3,457 (2,696,430)
(Increase) decrease in prepaid expenses 30,392 (35,857) 27,985 (34,187)
(Increase) decrease in other assets - - 131,909 (306,618)
Increase (decrease) in accounts payable and
accrued expenses (257,506) 235,522 (300,554) 949,401
Increase (decrease) in other current liabilities (10,000) 40,000 - 30,000
------------- ------------- ------------- -------------
Total adjustments 339,953 1,568,766 2,829,757 25,434,873
------------- ------------- ------------- -------------
Net cash used for operating activities (6,972,965) (6,834,193) (5,529,017) (51,693,382)
------------- ------------- ------------- -------------
Cash flows from investing activities:
Proceeds from sale of property & equipment - 18,603 11,254 29,857
Prototype equipment - - - (2,799,031)
Capital expenditures (23,641) (334,264) (43,314) (4,430,141)
------------- ------------- ------------- -------------
Net cash used for investing activities (23,641) (315,661) (32,060) (7,199,315)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Repayment of capital lease obligation - - - (50,289)
Proceeds from convertible debenture - - - 3,240,000
Proceeds from (repayments) loan payable, net - - (1,153,310) 2,595,029
Proceeds from issuance of preferred stock - - - 18,039,500
Proceeds from exercise of stock options 3,404 492,701 903,989
Net proceeds from issuance of common stock 7,204,370 5,850,000 7,881,000 34,929,990
------------- ------------- ------------- -------------
Net cash provided by financing activities 7,207,774 6,342,701 6,727,690 59,658,219
------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 211,168 (807,153) 1,166,613 765,522
Cash and cash equivalents at beginning of period 554,354 1,361,507 194,894 -
------------- ------------- ------------- -------------
Cash and cash equivalents at end of period $ 765,522 $ 554,354 $ 1,361,507 $ 765,522
============= ============= ============= =============
See Notes 2(m) and 8
See accompanying notes to the financial statements.
50
From Inception
(December 10,
Year Ended Year Ended Year Ended 1993) to
June 30, 2005 June 30, 2004 June 30, 2003 June 30, 2005
------------- ------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 78 $ 5,916 $ 131,145 $ 215,962
========== ========== ========== ===========
Supplemental disclosures of noncash
investing and financing activities:
Issuance of common stock and options
in exchange for services $ - $ 450,000 $ 841,853 $ 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 $ 113,850 $ 382,950 $ 128,800 $ 2,691,788
========== ========== ========== ===========
Issuance of common stock through
exercise of incentive stock options $ - $ - $ - $ 3,117,702
========== ========== ========== ===========
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.
51
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 4) 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.
(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.
52
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(b) Revenue Recognition
We recognize revenue in accordance with the guidance presented
in the SEC's Staff Accounting Bulletin No. 104. We sell our
medical imaging products, parts, and services to independent
distributors and in certain unrepresented territories directly
to end-users. Revenue is recognized when persuasive evidence of
a sales arrangement exists, delivery has occurred such that
title and risk of loss have passed to the buyer or services have
been rendered, the selling price is fixed or determinable, and
collectibility is reasonable assured. Unless agreed otherwise,
our terms with international distributors provide that title and
risk of loss passes F.O.B. origin.
To be reasonably assured of collectibility, our policy is to
minimize the risk of doing business with distributors in
countries which are having difficult financial times by
requesting payment via an irrevocable letter of credit ("L/C")
drawn on a United States bank prior to shipment of the CTLM(R).
It is not always possible to obtain an L/C from our distributor
so in these cases we must seek alternative payment arrangements
which include third-party financing, leasing or extending
payment terms to our distributors.
In the event that management determines that a receivable
becomes uncollectible, a policy would be established to
recognize estimates of uncollectible amounts using the allowance
method for each quarterly period. Management will periodically
review the receivables at the end of each quarterly reporting
period and the appropriate accrual will be made.
(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 (including completed units under testing) and
finished goods, are carried at the lower of cost or market. Cost
is determined using the first-in, first-out (FIFO) method. Raw
materials consist of purchased parts, components and supplies.
Work-in-process includes completed units undergoing final
inspection and testing.
We have used and will continue to use CTLM(R) systems from
finished goods as demonstrators or for clinical collaboration.
At the conclusion of the demonstration or clinical collaboration
period, the CTLM(R) may be sold at reduced prices. On a
quarterly basis, using the guidance of ARB 43, Chapter 4,
Statement 5, our ability to realize the value of our inventory
is based on a combination of factors including the
53
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
following: how long a system has been used for demonstration or
clinical collaboration purpose; the utility of the goods as
compared to their cost; physical obsolescence; historical usage
rates; forecasted sales or usage; product end of life dates;
estimated current and future market values; and new product
introductions.
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 $499,194, $586,510,
$910,444, and $3,734,195, for the years ended June 30, 2005,
2004 and 2003, and for the period December 10, 1993 (date of
inception) to June 30, 2005, respectively.
(e) Prototype equipment
Prototype equipment of $677,395 was reclassified as follows:
$512,453 as research and development expense and $164,942 as
computer and lab equipment in June 1996.
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. We no longer have prototype equipment and
this note 2(e) will be deleted once we are no longer deemed a
development stage enterprise.
(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. Expenditures for renewals and
betterments which increase the estimated useful life or capacity
of the asset are capitalized; expenditures for repairs and
maintenance are expensed when incurred.
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.
54
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,
raw materials which are used in testing and the development of
the Company's CTLM(R) device or other products, 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.
(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.
The weighted average Black-Scholes value of options granted
during 2005, 2004 and 2003 was $.27, $.57 and $.19 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:
55
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
From
Inception
(December 10,
Year Ended Year Ended Year Ended 1993) to
June 30, 2005 June 30, 2004 June 30, 2003 June 30, 2005
------------- ------------- ------------- --------------
(Restated)* (Restated)* (Restated)*
Net loss to common shareholders,
as reported $ (7,312,918) $ (8,402,959) $ (8,358,774) $ (83,976,015)
Less: stock-based employee compensation
determined under the fair value method,
net of income tax effect 620,907 985,166 933,244 5,537,149
-------------- -------------- -------------- ----------------
Net loss to common shareholders,
pro forma $ (7,933,825) $ (9,388,125) $ (9,292,018) $ (89,513,164)
============== ============== ============== ===============
Basic and diluted loss per share -
As reported $ (.04) $ (.05) $ (.06) $ (1.02)
============== ============== ============== ==============
Pro forma $ (.04) $ (.06) $ (.06) $ (1.09)
============== ============== ============== ==============
* See Note 2(m) and 8
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 2005,
2004 and 2003, respectively: no dividend yield; volatility of
66.16%, 75.65%, and 107.8%, risk-free interest rate of 4%, 4%
and 4%, and an expected term of ten years.
(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.
56
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company has determined that no impairment losses need to be
recognized through the fiscal year ended June 30, 2005.
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.
(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 certain initial UL and CE costs are reflected in "Intangible
Assets" on the balance sheet, net of accumulated amortization
(Note 8). The patent license agreement has a fixed life of
seventeen years and will continue to be amortized over its
remaining useful life. During the fiscal year ending June 30,
1999, we incurred costs of $8,225 related to the process of
obtaining UL and CE approvals and determined that these costs
should be amortized based on their useful life of three years on
a straight-line basis.
(n) Warranty Reserve
The Company has established a warranty reserve effective for the
fiscal year ending June 30, 2005 and has estimated that our
warranty replacement costs for the year would be $14,400.
Although the Company tests its product in accordance with its
quality programs and processes, its warranty obligation is
affected by product failure rates and service delivery costs
incurred in correcting a product failure. Should actual product
failure rates or service costs differ from the Company's
estimates, which are based on limited historical data, where
applicable, revisions to the estimated warranty liability would
be required.
57
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(o) 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.
(p) 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.
(q) 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, 2005, the Company had no items
qualifying as other comprehensive income.
(r) 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.
58
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.
On December 16, 2004, the FASB issued Statement of Financial
Accounting Standards ("SFAS") No. 123 (revised 2004),
Share-Based Payment, ("SFAS 123R"). SFAS 123R requires all
share-based payments to employees to be recognized at fair value
in the financial statements. SFAS 123R replaces SFAS No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), supersedes
Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25"), and SFAS No. 148,
Accounting for Stock-Based Compensation -- Transition and
Disclosure --an Amendment of FASB Statement No. 123 and amends
FASB Statement No. 95, Statement of Cash Flows. SFAS 123R is
effective for public companies at the beginning of the first
interim or annual period beginning after June 15, 2005.
Accordingly, we will be adopting SFAS 123R effective July 1,
2005.
As such, effective with the Company's fiscal quarter ending
September 30, 2005, SFAS 123R will eliminate the Company's
ability to account for stock options using the method permitted
under APB 25 and instead require us to recognize compensation
expense should the Company issue options to its employees or
non-employee directors. The Company is in the process of
evaluating the impact adoption of SFAS No. 123R will have on the
financial statements.
SFAS No. 153, Exchange of Nonmonetary Assets, an amendment of
APB Opinion No. 29 ("SFAS 153"), was issued in December 2004.
APB Opinion No. 29, Accounting for Nonmonetary Transactions
("APB 29"), provides the basic principle that exchanges of
nonmonetary assets should be measured based on the fair value of
the assets exchanged. However, APB 29 includes certain
exceptions to that principle. SFAS 153 amends APB 29 to
eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial
substance. SFAS 153 is effective for nonmonetary exchanges
occurring on or after July 1, 2005. The adoption of this
standard does not have an effect on the Company's financial
statements.
(s) Reclassifications
Certain amounts in the prior period financial statements have
been reclassified to conform with the current period
presentation.
59
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(3) RESTATEMENT
The June 30, 1998 through 2003 financial statements have been restated for the
fiscal year ending June 30, 2004 for the expensing of certain costs previously
capitalized as intangible assets, and for compensation expense recorded on
options granted to officers of the Company which should not have been accounted
for under variable plan treatment. The cumulative net effect on stockholders'
equity through June 30, 2003 was an increase of $584,184. A detailed analysis of
this restatement and its effect on the net loss applicable to common
shareholders, an increase of $430,302, on an annual basis is as follows:
Fiscal year
ended June 30, Intangible asset Compensation Total
- --------------- ---------------- -------------- ------------
1998 $ - $ 265,978 $ 265,978
1999 - 263,902 263,902
2000 - 1,491,267 1,491,267
2001 (372,410) (566,211) (938,621)
2002 (57,892) (262,200) (320,092)
2003 - (178,250) (178,250)
---------------- -------------- ------------
Totals $ (430,302) $ 1,014,486 $ 584,184
============== ============== ============
The effect on net loss per common share for the years 2001 and 2002 was
immaterial.
(4) 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 16)
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.
60
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(5) GOING CONCERN
The Company is currently a development stage enterprise and our continued
existence is dependent upon our ability to resolve our liquidity problems,
principally by obtaining additional debt and/or equity financing. We have yet to
generate a positive internal cash flow, and until significant sales of our
product occur, we are mostly dependent upon debt and equity funding. See Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
In the event that we are unable to obtain debt or equity financing or we are
unable to obtain such financing on terms and conditions acceptable to us, we may
have to cease or severely curtail our operations. This would materially impact
our ability to continue as a going concern. In the event that we are unable to
draw on our private equity line, alternative financing would be required to
continue operations. Management has been able to raise the capital necessary to
reach this stage of product development and has been able to obtain funding for
capital requirements to date. There is no assurance that, if and when Food and
Drug Administration ("FDA") marketing clearance is obtained, the CTLM(R) will
achieve market acceptance or that we will achieve a profitable level of
operations.
We have commenced our planned principal operations of the manufacture and sale
of our sole product, the CTLM(R), CT Laser Mammography System. We are continuing
to appoint distributors and are installing systems under our clinical
collaboration program as part of our global commercialization program. We have
sold a total of eight systems as of June 30, 2005; however, we continue to
operate as a development stage enterprise because we have yet to produce
significant revenues, we rely on raising capital through our Fourth Private
Equity Credit Agreement and we have to create product awareness as a foundation
to developing our markets through our existing distributor network and through
the appointment of additional distributors and the training of their field
service engineers. We would be able to exit SFAS 7 Development Stage Enterprise
reporting upon having sufficient revenues for two successive quarters such that
we would not have to utilize our Fourth Private Equity Credit Agreement for
capital to cover our quarterly operating expenses.
(6) INVENTORIES
Inventories consisted of the following:
June 30,
-------------------------------
2005 2004
------------- -------------
Raw materials $ 577,211 $ 1,100,112
Work-in process 105,902 93,869
Finished goods 1,337,385 1,163,883
------------- -------------
$ 2,020,498 $ 2,357,864
============= =============
61
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(7) PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, less accumulated
depreciation:
June 30,
--------------------------------
2005 2004
--------------- --------------
Furniture and fixtures $ 262,264 $ 262,264
Building and land 2,086,330 2,086,330
Clinical equipment - 30,714
Computers, equipment and software 387,890 333,535
CTLM(R) software costs 352,932 352,932
Trade show equipment 298,400 298,400
Laboratory equipment 212,560 212,560
--------------- -------------
3,600,376 3,576,735
Less: accumulated depreciation (1,433,456) (1,275,640)
--------------- -------------
Totals $ 2,166,920 $ 2,301,095
============== ============
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, 2005 and 2004 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
===========
62
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(8) INTANGIBLE ASSETS
Intangible assets consist of the following:
June 30,
-----------------------------
2005 2004
------------ ------------
(Restated) (Restated)
Patent license agreement, net of accumulated
amortization of $239,235 and $205,059 respectively $ 341,765 $ 375,941
UL & CE approvals, net of accumulated
amortization of $8,225 and $8,225 respectively - -
------------ ------------
Totals $ 341,765 $ 375,941
============ ============
During June 1998, the Company finalized an exclusive Patent License Agreement
with its former chief executive officer. (See Note 20) 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 16). The License agreement has been
recorded at the historical cost basis of the chief executive officer, who owned
the patent. The amortization expense for the year ended June 30, 2005 for the
patent license agreement is $34,176, and will be for the five succeeding years.
The core costs of obtaining the initial UL and CE approvals have an indefinite
life, and intangible assets having an indefinite life are not amortized at the
point of acquisition or subsequent to point of acquisition in accordance with
the guidance of SFAS 142. We recorded the initial costs of these systems and
protocols as an intangible asset with an indefinite life because we believed
that the costs of obtaining them applied to our Company's entire functional
process including manufacturing, labeling and compliance. We followed the
guidance provided in a paradigm, Figure 23-1: Summary of Accounting for
Intangible Assets by SFAS 142, in which questions are asked relative to
indefinite life, asset impairment and whether assumption of indefinite life is
still valid.
We made a decision to follow a more conservative path in the treatment of these
assets and have reclassified these intangible assets to certification expense.
This reclassification resulted in a decrease of $430,302 in Other Assets and an
increase of $430,302 to Deficit accumulated during the development stage. This
restatement is retroactive to the dates of acquisition of the intangible assets,
which occurred during fiscal years 2001 and 2002.
63
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(9) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30,
--------------------------
2005 2004
----------- -----------
Accounts payable - trade $ 472,623 $ 486,225
Accrued property taxes payable 14,085 14,085
Accrued compensated absences 132,088 122,084
Accrued interest payable - 126,548
Accrued wages payable 128,333 420,000
Other accrued expenses 36,837 3,584
----------- -----------
Totals $ 783,966 $ 1,172,526
=========== ===========
(10) SHORT-TERM DEBT
Short-term debt consisted of the following:
June 30,
--------------------------
2005 2004
----------- -----------
Loan payable $ 21,500 $ 300,407
----------- -----------
$ 21,500 $ 300,407
=========== ===========
The Company had borrowed a total of $475,407, from an unrelated third-party on
an unsecured basis. The loan accrued interest at a rate of 6% per annum and was
payable on demand. The Company repaid $175,000 as of June 30, 2004. Based on its
review of this transaction, Company management has disputed the validity of the
debt, and has extinguished $409,962 of the loan and related accrued interest
payable during the year ended June 30, 2005. This extinguishment has been
recorded as "Other Income" for the year ended June 30, 2005.
64
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(11) EQUITY LINE OF CREDIT
On August 17, 2000 the Company finalized a financing agreement with a private
institutional equity investor, which contained 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 15). The Private Equity Agreement committed 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 were at the sole
discretion of the Company. However, they were required 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 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 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 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 was three years from
the effective date of a registration statement covering the second Private
Equity Agreement shares, (ii) the minimum amount required to be drawn through
the end of the commitment period was $2,500,000, (iii) the minimum stock price
requirement was reduced to $.20, and (iv) the minimum average trading volume was
reduced to $40,000.
On October 29, 2002, the Company entered into a new "Third Private Equity Credit
Agreement" which the Company intended to supplement the second Private Equity
Agreement. The terms of the Third Private Equity Credit Agreement were
substantially equivalent to the terms of the prior agreement, in that (i) the
commitment period was three years from the effective date of a registration
statement covering the Third Private Equity Credit Agreement shares, (ii) the
maximum commitment was $15,000,000, (iii) the minimum amount required to be
drawn through the end of the commitment period was $2,500,000, (iv) the minimum
stock price requirement was reduced to $.10, and (v) the minimum average trading
volume in dollars was reduced to $20,000.
On January 9, 2004, the Company entered into a new "Fourth Private Equity Credit
Agreement" which replaced 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 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.
These financing agreements have had 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
65
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(11) EQUITY LINE OF CREDIT (Continued)
Agreement. The Company sold $2,840,000 of common stock under the terms of the
initial private equity 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 applicable 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 applicable
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
credit line agreements, 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. During the year ended June 30, 2005, an additional $7,204,370
of common stock was sold under the terms of the Fourth Private Equity Credit
Agreement and the Company issued a total of 26,274,893 shares of common stock.
The Company recorded a total of $593,437 of deemed interest expense as a result
of the 7% discount off the market price under the Fourth Private Equity Credit
Agreement.
(12) 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, 2005 are as
follows:
Year ending June 30, Amount
------------------- ------
2006 $ 5,604
2007 4,159
Thereafter 356
--------
Total minimum future lease payments $ 10,119
========
Total rent expense for all operating leases amounted to $12,229, $12,449 and
$8,630 for the years ended June 30, 2005, 2004 and 2003, respectively, and
$349,648 from inception (December 10, 1993) to June 30, 2005.
66
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(13) 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 $63,395,000 to offset future
taxable income. Such carryforwards expire in years beginning 2014. There would
be no limitation as to the utilization of the net operating losses in future
years resulting from the issuance of additional common stock during the fiscal
year ended June 30, 2005. The deferred tax asset recorded by the Company as a
result of these tax loss carryforwards is approximately $25,041,000 and
$22,580,000 at June 30, 2005 and 2004, 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, 2004 to June 30, 2005 was an increase of approximately $2,461,000.
(14) 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.
67
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) 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.
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.
68
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
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.
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:
69
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
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.
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.
70
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
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.
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.
71
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) 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.
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.
72
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
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.
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.
73
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) CONVERTIBLE PREFERRED STOCK (Continued)
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.
The following schedule reflects the number of shares of preferred stock that
have been issued, converted and are outstanding as of June 30, 2005, 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:
74
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) 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)
75
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) 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.
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 15).
76
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) COMMON STOCK (Continued)
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 15), 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.
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 15) 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.
77
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) COMMON STOCK (Continued)
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.
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.
78
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) COMMON STOCK (Continued)
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 15) accounted for the issuance of 4,865,034 shares ($1,972,296).
The remaining 7,939,097 shares were issued as follows:
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.
79
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) COMMON STOCK (Continued)
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.
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 14) accounted for
the issuance of 3,834,492 shares ($507,115), and the conversion of Convertible
Preferred Stock (see Note 15) 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 15) 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 11) accounted for the issuance of 3,407,613 shares ($3,143,666). The
remaining 4,844,489 shares were issued as follows:
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.
80
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) COMMON STOCK (Continued)
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 11) 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.
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 11) 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.
81
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(16) COMMON STOCK (Continued)
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 11) accounted for the issuance of 8,630,819
shares ($6,541,700). 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.
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 range 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 range from $.19
per share to $.65 per share.
During the year ended June 30, 2005, the Company issued a total of 26,573,157
shares ($7,915,061) of its common stock. The common stock issued through the
equity line of credit (See Note 11) accounted for the issuance of 26,274,893
shares ($7,797,807). The remaining 298,264 shares were issued as follows:
1. During September 2004, 100,000 restricted shares were issued
to our CEO in conjunction with his employment agreement.
Compensation of $38,000 was charged as the fair market value of
the common stock on the date of issuance was $.38 per share.
2. During January 2005, 185,000 shares of bonus stock were
issued to Company employees. Compensation of $75,850 was charged
as the fair market value of the common stock on the date of
issuance was $.41 per share.
3. Common stock issued to employees as a result of the exercise
of their incentive stock options amounted to 13,264 shares
during the year. The Company received $3,404 from the exercise
of 13,264 option shares. The exercise prices range from $.20 per
share to $.27 per share.
82
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS
During July 1994, the Company adopted a non-qualified Stock Option Plan (the
"Plan"), whereby officers and employees of the Company could be granted options
to purchase shares of the Company's common stock. Under the plan and pursuant to
their employment contracts, an officer could 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 provided for
the granting, exercising and issuing of incentive stock options pursuant to
Internal Revenue Code Section 422. The Company was entitled to grant incentive
stock options to purchase up to 4,850,000 shares of common stock. This Plan also
allowed the Company to provide long-term incentives in the form of stock options
to the Company's non-employee directors, consultants and advisors, who were not
eligible to receive incentive stock options. In January 2002, the 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 provided
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 , all options
outstanding under the 1995 and 2000 Plans remained outstanding; however, no new
options could be granted under those plans. The Board of Directors or a company
established compensation committee had direct responsibility for the
administration of these plans.
The exercise price of the non-statutory stock options was required to be equal
to no less than 50% of the fair market value of the common stock on the date
such option is granted.
83
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
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.
On August 24, 2005, the Board Of Directors resolved that the Company's 1995,
2000, 2002 and 2004 Stock Option Plans and Stock Options Agreements that were
entered into pursuant to these plans, be amended to increase the
post-termination exercise period following the termination of the Optionee's
employment/directorship or in the event of change of control of the Company, to
be three(3) years from the date of termination or change of control, subject to
those options that were vested as of the date of termination or change of
control and subject to the original term of the option, which ever time is less.
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.
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 -
----------- -----------
84
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) 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 .85 -
Granted 1,459,705 .38 -
Exercised - -
Canceled (56,788) .74 -
----------- -------------
Outstanding at June 30, 2003 7,862,507 .76 -
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 .84 31,748 .69
Granted - 4,253,159 .34
Exercised (13,264) .26 -
Canceled (142,891) .68 -
----------- -------------
Outstanding at June 30, 2005 8,667,678 .98 4,284,907 .34
=========== =============
** 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 FASB
Interpretation No. 44, of APB Opinion No. 25.
85
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) 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
Granted - 800,000 .35
Exercised - -
Canceled - -
------------ -----------
Outstanding at June 30, 2005 500,000 .39 1,500,000 .54
============ ===========
A summary of the vested and exercisable stock options of the Company is
presented as follows:
June 30, 2005 June 30, 2004 June 30, 2003
------------- ------------- -------------
Employee ISO 7,699,103 7,053,586 4,941,985
Director ISO 500,000 650,000 575,000
Employee Non-Statutory 88,486 - -
Director Non-Statutory 950,000 - -
------------- ------------- --------------
Total 9,237,589 7,703,586 5,516,985
============= ============= ==============
86
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
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.
On November 7, 1994, the Company granted 300,000 non-qualified options to its
general counsel, then 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 did 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 expired 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 expired 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 vested one year from the grant date,
with one-third vesting each of the next two years. The options expired 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 expired on July
4, 2001.
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 was being amortized over the remaining term
of the employment contracts (three years).
87
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
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 vested one year from the grant date, with
one-third vesting each of the next two years. The options expired 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 expired 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 was 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 vested one year from the grant date, with
one-third vesting each of the next two years. The options expired 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 was amortized over the remaining term of the employment
contract (one year).
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 vested one year from the grant date, with
one-third vesting each of the next two years. The options expired 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 vested
one-third from the grant date, with one-third vesting each of the next two
years. The options expired 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
88
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
the issuance of the options. The officers' options vested immediately, while the
employees' options vested one-third from the grant date, with one-third vesting
each of the next two years. The options expired 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 became 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.
Vesting for certain of the officers' options was immediately, while the other
officers' options and the employees' options vested 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
expired in ten years and became exercisable on a quarterly pro-rata basis
(25,000 shares) from the date of grant. The option was 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 was immediate, while the other
officers' options and the employees' options vested 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 became
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
89
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) STOCK OPTIONS (Continued)
options. Vesting for certain of the officers' options is immediate, while the
other officers' options and the employees' options vested over varying periods
up to five 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, 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 became
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.
At various dates during the year ended June 30, 2005, the Company issued to
various employees and two consultants Non-Statutory options to purchase
4,253,159 shares of common stock at prices ranging from $.20 to $.44. 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 was 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.
At various dates during the year ended June 30, 2005, the Company issued to its
Directors Non-Statutory options to purchase 800,000 shares of common stock at
prices ranging from $.31 to $.44. 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, 2005:
Outstanding options Exercisable options
------------------- -------------------
Weighted
average
Range of remaining Weighted Weighted
exercise prices Shares life (years) avg. price Shares avg. price
- --------------- ------------- ------------ ----------- ----------- ------------
$ .19 - 1.25 13,810,035 7.77 $ .56 8,095,039 $ .65
1.26 - 2.49 142,550 4.02 .74 142,550 .74
2.50 - 2.85 1,000,000 5.00 2.85 1,000,000 2.85
------------ ---------- ------------ ----------- ----------- -----------
$ .19 - 2.85 14,952,585 7.55 $ .72 9,237,589 $ .89
============= ========== ============ =========== =========== ===========
At June 30, 2005, 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.
90
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(18) 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, 2005 was $788,891.
(19) 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 Company believes that its accounts receivable are
fully collectible as recorded and no allowance for doubtful accounts has been
provided. 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,
2005 and 2004, the aggregate fair value of the Company's debt obligations
approximated its carrying value.
(20) COMMITMENTS AND CONTINGENCIES
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.
On April 15, 2004, Linda B. Grable retired as CEO and Chairman of the Board.
Pursuant to her Retirement Agreement the Company accrued the balance of her
employment agreement through its expiration date of December 15, 2005 and as of
June 30, 2005 that obligation is $128,333. The Company is also obligated to pay
her health insurance to that date.
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.
On September 12, 2005, the Company entered into a one-year employment agreement
effective August 30, 2005 with Allan L. Schwartz, our Executive Vice-President
and Chief Financial Officer at an annual salary of $185,000.
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.
91
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(21) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal 2005
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
June 30, 2005 March 31, 2005 December 31, 2004 September 30, 2004
------------- -------------- ----------------- ------------------
Net Sales $ - $ 374,952 $ - $ -
Gross Profit $ - $ 208,267 $ - $ -
Operating Loss $ (1,832,777) $ (1,514,569) $ (2,121,387) $ (1,661,806)
Net loss applicable to
common shareholders $ (1,579,466) $ (1,639,175) $ (2,256,934) $ (1,837,343)
Net Loss per common share $ (0.01) $ (0.01) $ (0.01) $ (0.01)
Weighted avg. no. of common shares,
Basic & Diluted 185,636,553 187,800,485 183,133,979 176,855,811
Cash and Cash Equivalents $ 765,523 $ 364,434 $ 538,097 $ 766,614
Total Assets $ 5,608,004 $ 5,528,833 $ 5,507,562 $ 5,888,629
Deficit accumulated during
the development stage $ (83,976,015) $ (82,396,549) $ (80,757,374) $ (78,500,439)
Stockholders' Equity $ 4,772,538 $ 4,262,030 $ 4,139,497 $ 4,493,573
Fiscal 2004
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
June 30, 2004 March 31, 2004 December 31, 2003 Sepetmber 30, 2003
------------- -------------- ----------------- ------------------
(Restated)* (Restated)* (Restated)* (Restated)*
Sales $ 180,228 $ 552,983 $ - $ -
Gross Profit $ 88,709 $ 359,820 $ - $ -
Operating Loss $ (2,366,984) $ (1,708,232) $ (2,257,339) $ (1,379,898)
Net loss applicable to
common shareholders $ (2,465,807) $ (1,859,172) $ (2,391,066) $ (1,686,914)
Net Loss per common share $ (0.01) $ (0.01) $ (0.01) $ (0.01)
Weighted avg. no. of common shares,
Basic & Diluted 167,982,750 167,197,384 166,943,524 165,289,775
Cash and Cash Equivalents $ 554,354 $ 876,756 $ 1,012,093 $ 1,653,820
Total Assets $ 5,683,329 $ 6,467,599 $ 6,376,408 $ 6,890,216
Deficit accumulated during
the development stage $ (76,663,097) $ (74,197,290) $ (72,338,118) $ (69,947,051)
Stockholders' Equity $ 4,170,395 $ 5,117,729 $ 5,178,656 $ 5,694,078
* See Notes 2(m) and 8
92
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
the information required to be disclosed in the reports that we file under the
Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
our Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosures. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can only provide reasonable assurance of
achieving the desired control objectives, and in reaching a reasonable level of
assurance, management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and the Company's Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of our fourth fiscal quarter covered by this report.
Based on the foregoing, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective at the
reasonable assurance level.
There has been no change in our internal controls over financial reporting
during our fourth fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial reporting.
93
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Imaging Diagnostic Systems, Inc. (the "Company") is
responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined in
Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of
1934 as a process designed by, or under the supervision of, the company's
principal executive and financial officers and effected by the company's board
of director7s, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of the Company's internal
control over financial reporting as of June 30, 2005. In making this assessment,
the Company's management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO") in Internal
Control-Integrated Framework. The COSO framework is based upon five integrated
components of control: control environment, risk assessment, control activities,
information and communications and ongoing monitoring.
Based on the assessment performed, management has concluded that the Company's
internal control over financial reporting is effective and provides reasonable
assurance regarding the reliability of its financial reporting and the
preparation of its financial statements as of June 30, 2005 in accordance with
generally accepted accounting principles. Further, management has not identified
any material weaknesses in internal control over financial reporting as of June
30, 2005.
The Company's external auditors, Margolies, Fink and Wichrowski, Certified
Public Accountants have audited the Company's financial statements for the year
ended June 30, 2005 included in this annual report on Form 10-K and, as part of
that audit, have issued a report on management's assessment of internal control
over financial reporting, a copy of which is included in this annual report on
Form 10-K.
/s/ Timothy B. Hansen
Chief Executive Officer and Director
/s/ Allan L. Schwartz
Executive Vice President, Chief Financial Officer and Director
94
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Imaging Diagnostic Systems, Inc.
We have audited management's assessment, included in the accompanying Management
Report on Internal Control Over Financial Reporting, that Imaging Diagnostic
Systems, Inc. (the "Company") maintained effective internal control over
financial reporting as of June 30, 2005, based on the criteria established in
"Internal Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company: (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company: and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of June 30, 2005, is fairly stated,
in all material respects, based on the criteria established in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of June 30, 2005, based on the criteria established in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
95
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the balance sheet of the Company as
of June 30, 2005, and the related statements of operations, stockholders' equity
and cash flows for the year then ended, and our report dated August 22, 2005
expressed a going concern opinion on those financial statements.
/s/
Margolies, Fink and Wichrowski
Certified Public Accountants
Pompano Beach, Florida
August 22, 2005
96
ITEM 9B. OTHER INFORMATION
None.
97
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The following table sets forth certain information concerning our directors and
executive officers:
The following table sets forth certain information concerning our directors and
executive officers:
Name* Age Position Year Elected or Appointed
- ---- --- -------- -------------------------
Tim Hansen 61 Chief Executive Officer and Director 2004
Allan L. Schwartz 63 Executive Vice-President, Chief 1994
Financial Officer and Director
Edward R. Horton 47 Chief Operating Officer 2001
Deborah O'Brien 41 Senior Vice-President 2003
Sherman Lazrus 72 Director 2002
Patrick J. Gorman 51 Director 2003
Edward Rolquin 76 Director 2003
Jay S. Bendis 58 Director 2003
Allan Schwartz is one of the co-founders and as such may be deemed "promoter"
and "parent" as defined in the Rules and Regulations promulgated under the
Securities Act, as those terms are defined in the rules and regulations
promulgated under the Securities Act. Directors serve until the next meeting of
shareholders. Officers serve at the pleasure of the Board of Directors.
We have adopted a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley
Act of 2002 that applies to our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions.
Tim Hansen
Tim Hansen was appointed our Chief Executive Officer and a Director of the
Company by the Board of Directors in July 2004. Prior to his appointment as CEO
and Director of IDSI, Mr. Hansen served as General Manager of Radiation
Management Services, a business of Cardinal Health, Inc. (NYSE:CAH) of Dublin,
Ohio from January 2002 to July 2004. From August 2001 to January 2002 he served
as the President of Syncor Radiation Management in Cleveland, Ohio, a division
of Syncor International Corporation (NASDAQ:SCOR) of Woodland Hills, CA.
Cardinal Health acquired Syncor in January 2003. From April 2000 to August 2001
Mr. Hansen was a consultant to Inovision, LLC serving as President of Inovision
Radiation Measurements in Cleveland, Ohio. He also served as President of
Cleaner Foods, Inc. of Cleveland, OH and a Director of Kliniki St. Paul of
Warsaw, Poland from March 2000 to August 2001. From 1982 to 2000 Mr. Hansen held
several high-level executive positions with Picker International, Inc. of
Cleveland, Ohio. From 1999 to 2000 he served as President of Picker Medical
Systems, a leading manufacturer of diagnostic imaging systems including CT and
MRI scanners, nuclear medicine imagers and X-Ray systems. Picker International
was a wholly owned subsidiary of G.E.C. plc/Marconi Medical Systems with $1.6
billion in annual sales. Philips Medical Systems acquired Marconi in October
2001. Prior to Picker, Mr. Hansen was Vice President of Sales, Service and
Marketing for Xonics Medical Systems, Inc. of Des Plaines, IL; National Sales
Manager, Manager, Business Planning and Marketing Manager, X-Ray and CT for
General Electric Medical Systems of Milwaukee, WI; and Regional Sales Manager
for Smith Kline Instruments, a subsidiary of Smith Kline and French. Mr. Hansen
holds a Bachelor of Science degree in Economics from the University of
Wisconsin-Milwaukee.
98
Allan L. Schwartz
Mr. Schwartz is Executive Vice-President and Chief Financial Officer of the
Company and is responsible for its financial affairs. He has a wide range of
management, marketing, field engineering, construction, and business development
experience. Prior to joining the Company as a founder in 1993, he developed the
Chronometric Trading System for analyzing stock market trends using neural
networks and developed pre-engineered homes for export to Belize, Central
America for S.E. Enterprises of Miami, Florida. In 1991 he formed Tron
Industries, Inc. for the development of low-voltage neon novelty items and
self-contained battery powered portable neon. He is a graduate of C.W. Post
College of Long Island University with a B.S. in Business Administration.
Previous innovations by Mr. Schwartz before relocating to Florida have included
the use of motion detection sensors in commercial burglar alarm systems for
Tron-Guard Security Systems. Inc. and the use of water reclamation systems with
automatic car wash equipment. Mr. Schwartz has been a Director and Officer of
the Company since its inception.
Edward R. Horton
Mr. Horton was appointed Chief Operating Officer by the Board of Directors in
August 2001 and is responsible for all operational activities including the
planning, purchasing, production, quality assurance, engineering and
distribution functions. Mr. Horton began his career almost 20 years ago in the
medical device industry beginning with Bristol Myers as a manufacturing
engineer. He then became the VP of Manufacturing and Operations for Microtek
Medical Inc. in 1993. From 1997 to 2001 he was a co-founder and Vice President
of Operations for Deka Medical, Inc. bringing the company from a start-up to a
revenue producing company with over $23 million in annual sales in just 4 years.
Mr. Horton holds a B.S. degree in Industrial Engineering from Bradley University
and a M.B.A. from University of North Florida.
Deborah O'Brien
Deborah O'Brien was appointed Senior Vice President on September 15, 2003. Ms.
O'Brien has been employed at IDSI since 1995. During her tenure, she has held
the positions of Director of Investor Relations, Vice President of Corporate
Communications and most recently, since September 2001, Vice President of
Business Development. Her responsibilities have included developing and
executing a strategic corporate communications campaign, managing internal
communications, outside public relations, marketing, and clinical applications.
In addition, Ms. O'Brien was directly responsible for the development and
establishment of consumer and industry awareness of our CTLM(R) System via a
media outreach which targeted industry publications, national network
television, radio, nationally-circulated publications and high traffic internet
sites. As Vice President of Business Development, she was closely involved with
various regulatory and marketing projects and played an integral role in the
development and preparation of our PMA Application. She also supervised and
managed the collection of clinical data for the PMA process. Prior to joining
IDSI, she worked for seven years in the financial arena, managing investor
accounts, and in the medical device industry, marketing medical equipment. Ms.
O'Brien began her career in the mortgage loan industry as an account executive
with Citibank.
Sherman Lazrus
Mr. Lazrus has been a Director since December 2002 and serves as a member of the
Compensation Committee. On April 15, 2004, the Board of Directors appointed him
Co-Chairman of the Board. He has enjoyed a distinguished career with nearly 40
years' experience in government and private sector health care and health care
finance. He was elected to the Board of Directors of Emergency Filtration
Products, Inc., Las Vegas, NV (OTCBB: EMFP) in December 1998, and appointed as
Interim Chief Executive Officer in June 2001 and appointed Chairman of the Board
of Directors in August 2002. He continues to serve in these positions. Mr.
Lazrus presently also serves as President of American Medical Capital, a
division of American Medical Enterprises, LLC located in Bethesda, Maryland, a
financial services and investment banking company specializing in the healthcare
industry, a position he has held since 1991. Mr. Lazrus was initially employed
with the Federal Government and while at the Department of Health, Education and
Welfare in 1964 he was involved with the development of the Medicare and
Medicaid Programs and served as the Director of Policy Coordination for the two
programs. Also while employed by the Federal Government, Mr. Lazrus served from
1965 to 1966 in the office of the Director of the National Institute of
99
Health and was involved in planning activities in areas involving biomedical
research. He later administered the Social Security Administration's Disability
Insurance Research Programs as Director of Program Analysis. Mr. Lazrus's final
Federal Government position encompassed the administration of the military
health care system serving as the Deputy Assistant Secretary of Defense from
1974 to 1976. In this position he was the Federal Government's senior career
health official. Mr. Lazrus also served in the State of Maryland's Governor's
office as Director of the Governor's Study Group on Vocational Rehabilitation
from 1966 to 1968 and later developed a comprehensive human services delivery
system for the City of Washington, D.C. from 1968 to 1972. While in the private
sector, Mr. Lazrus from 1976 to 1978 was Vice President of American Medical
International Inc., a major NYSE hospital corporation, which owned and operated
numerous hospitals around the world. The company is now known as Tenet
Healthcare Corporation. As a developer Mr. Lazrus was responsible for the
development of various Washington D.C. area office buildings, shopping centers,
industrial warehouses and residential communities. Mr. Lazrus attended George
Washington University where he received A.A., B.A. and M.B.A. degrees.
Patrick J. Gorman
Mr. Gorman is a Certified Public Accountant. He has been a Director since
January 2003 and serves as Chairman of the Audit Committee. On February 26,
2005, the Board of Directors appointed him Co-Chairman of the Board. He is
currently the Chief Executive Officer and Chairman of the Board of Directors of
Applied Nanoscience Inc., a nanotechnology company based in Hauppauge, New York.
From 1991 to 2005 he worked in private practice, serving both publicly traded
and privately held companies. Mr. Gorman served as Corporate Tax Manager for
Axsys Technologies, Inc. in Deer Park, New York from 1987 to 1990 and
Controller/Tax Manager for Computer Associates in Jericho, New York from 1983 to
1986. Prior to joining Computer Associates, he served as Tax Manager with Ernst
& Young in Melville, New York and Tax Accountant for Arthur Andersen in New York
City. Mr. Gorman holds a MS in Taxation from Long Island University and is a
member of the NYSSCPA and the AICPA.
Edward Rolquin
Mr. Rolquin of Naples, Florida, a consultant and retired corporate executive,
has been a Director since February 2003 and serves as a member of the
Compensation Committee. He has enjoyed a distinguished 48-year career in
management, sales and finance with international experience in the medical
industry. From 1989 to 1995, he served as a consultant for the Chinese
government on various import, export and technology transfer projects. From 1984
to 1992 Mr. Rolquin was the Founder and President of JR Micrographics in
Huntington, NY that specialized in medical records management. He has served in
a management and consultant capacity while working with major international
companies such as Anaconda Copper Mining Company in Chile and El Salvador from
1952 to 1984, Mobil Oil from 1976 to 1984, Cerro Corp., (an international mining
company in Peru) from 1962 to 1978, and Esso (Standard Oil) from 1957 to 1968.
Mr. Rolquin was responsible for equipping five hospitals for Anaconda, a 100-bed
hospital in Chile for Cerro Corp., a 50-bed dispensary for Mobil Oil, and a
hospital for Esso.
Jay S. Bendis
Mr. Bendis of Akron, Ohio, has been a Director since February 2003 and serves as
a member of the Audit Committee and is Chairman of the Compensation Committee.
On April 15, 2004, the Board of Directors appointed him Co-Chairman of the
Board. He has over 30 years experience in sales and marketing and is currently
President of Transfer Technology Consultants, Akron, OH, where he specializes in
transferring new product concepts through to commercialization working with
established and start-up companies in both domestic and international markets.
He is also a partner in the Crystal Corridor Group, Hudson, OH, which works with
Kent State University's Liquid Crystal Institute in facilitating liquid crystal
technology. From 1995 to 2000, Mr. Bendis was Vice President of Sales and
Marketing and a Director of American Bio Medica Corp. a public company in
Kinderhook, NY, which develops and markets on-site drug abuse diagnostic kits.
From 1993 to 1999, he was the President and co-founder of Emerging Technology
Systems, Akron, OH, which is a research and development company specializing in
developing new concept medical devices. From 1990 to 1992, he was a co-founder
and Vice President of Sales and Marketing and a Director for Scientific Imaging
Instruments of Trumbull, CT. From 1985 to 1990, he served as National Sales
Manager of the XANAR Laser Corp., Colorado Springs, CO, a division of Johnson &
Johnson, where he directed its national sales force and developed its marketing
strategy for integrating high power lasers into
100
the hospital market. From 1979 to 1984, he was the Sales and Marketing Manager
for the IVAC Corp., San Diego, CA, a division of Eli Lilly Corp. and has had
sales and management experiences with XEROX and A.M. International. He has also
served as a member of the Edison BioTechnology Center Advisory Council for the
State of Ohio. Mr. Bendis presently serves on the Boards of several private
companies and earned his B.A. in Marketing/Management from Kent State
University.
AUDIT COMMITTEE
The Board of Directors has elected Patrick J. Gorman as Chairman of the Audit
Committee. In addition, the Board has determined that Mr. Gorman is an "audit
committee financial expert," as defined under new SEC regulations, who is
independent of management of the Company. Jay S. Bendis also serves as a member
of the Audit Committee.
COMPENSATION COMMITTEE
The Board of Directors has elected Jay S. Bendis as Chairman of the Compensation
Committee. Sherman Lazrus and Edward Rolquin also serve as members of the
Compensation Committee.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
The Board of Directors has elected Sherman Lazrus as Chairman of the Nominating
and Corporate Governance Committee. Jay S. Bendis, Patrick J. Gorman and Edward
Rolquin also serve as members of the Nominating and Corporate Governance
Committee.
COMPENSATION OF DIRECTORS Each director who is not an employee of the Company
receives a quarterly retainer of $3,000 and $800 per diem fees for days in which
a Board meeting is attended or a non-employee board member is otherwise required
to visit the Company or spend a significant amount of a day on Company matters.
The Co-Chairmen receive a quarterly retainer of $5,000 each, which includes
their services as Chairman of the Audit Committee and Compensation Committee,
respectively. Non-employee directors are also reimbursed for travel expenses. In
October 2004, the Compensation Committee made a proposal to raise the daily
workshop fee from $600 to $800 per day, to raise the quarterly retainers of
directors from $2,000 to $3,000, and to raise the Co-Chairman's quarterly
retainers from $2,000 to $5,000. They further agreed that any new directors
appointed by the Board or elected by the shareholders shall receive 100,000
options, $3,000 quarterly retainer and $800 per day for workshop days. The Board
voted in favor of the proposal. The increased director compensation became
effective on October 1, 2004. In December 2003, the Board voted to increase the
amount of options that non-employee directors are eligible to receive from
100,000 to 200,000 shares per year, vesting at 50,000 shares per quarter of
service to the Company. The new option structure will take effect on each
non-employee director's respective anniversary date. The option price will be at
the Fair Market Value (FMV) on each respective director's anniversary date. All
future options will be granted under the 2004 Non-Statutory Stock Option Plan,
which was adopted on March 24, 2004 by the stockholders at our annual meeting.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers, and persons who own more than 10 percent of our common
stock, to file with the SEC initial reports of ownership and reports of changes
in ownership, furnishing us with copies of all Section 16(a) forms they file. To
the best of our knowledge, based solely on review of the copies of such reports
furnished to us, all Section 16(a) filing requirements applicable to our
officers and directors were complied with during the year ended June 30, 2005.
101
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The following table sets forth the compensation awarded to, earned by or paid to
our Chief Executive Officer and other executive officers for services rendered
to us during fiscal 2005, 2004 and 2003. No other person during these years, who
served as one of our executive officers, had a total annual salary and bonus in
excess of $100,000. Also, see "Stock Option Plan-Option Grants in Last Fiscal
Year".
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------- ----------------------
Name & Principal
Position Fiscal Year Salary Other Annual Restricted Shares Underlying
Compensation (5) Stock Awards Options Granted
Linda B Grable (1) 2003 $280,000 $3,200
2004 $347,594 $11,500
2005 $280,000
Timothy B. Hansen, CEO 2005 $194,423 $38,000 3,000,000
and Director (2)
Allan L. Schwartz, 2003 $144,275 $3,200 500,000
Exec. V.P., CFO and 2004 $184,219 $11,500 500,000
Director (3) 2005 $199,784 500,000
Edward R. Horton 2003 $113,300 $1,775
COO 2004 $114,400 $5,750
2005 $123,675 175,000
Deborah O'Brien 2004 $92,542 $11,500 302,000
Senior V. Pres. (4) 2005 $99,750
(1) Ms. Grable our former CEO and Director, retired on April 15, 2004.
Under her retirement agreement Ms. Grable is entitled to receive her
$280,000 annual salary through December 15, 2005. Salary recorded for
f/y 2004 includes $47,704 in accrued wages payable as of 6/30/02 to
Linda B. Grable as heir to the estate of Richard J. Grable and $19,890
in accrued wages payable as of 6/30/02 to Linda B. Grable.
(2) Mr. Hansen commenced employment on July 26, 2005. Restricted stock
awards for f/y 2005 include $38,000 of non-cash compensation for
sign-on bonus in restricted stock.
(3) Salary recorded for Mr. Schwartz in f/y 2005 includes base salary of
$185,000 plus $5,179 as additional wages while serving as Interim CEO
and $9,605 vacation pay. Salary recorded for f/y 2004 includes base
salary of $154,329 plus $19,890 in accrued wages payable as of 6/30/02
and $10,000 additional wages while serving as Interim CEO.
(4) Ms. O'Brien was appointed Senior Vice President on September 15, 2003.
Salary recorded for f/y 2005 includes base salary of $95,000 plus
$4,750 vacation pay.
(5) Other Annual Compensation reflects non-cash compensation for holiday
stock bonuses which was previously included in the total amount of
salaries paid to executive officers in 2004.
EMPLOYMENT AGREEMENTS
- ---------------------
On August 29, 1999, we entered into five-year employment agreements with Richard
Grable, Allan Schwartz and Linda Grable. 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 provide 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 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 provided
for an annual salary of $185,000 and options to purchase up to an aggregate of
500,000 shares of our common stock at an exercise price of $.30 per share, in
accordance with our 2004 Non-Statutory Stock Option Plan. These options vested
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). On April 15, 2004, we
paid the balance due of this death benefit to Linda Grable, as beneficiary of
Richard Grable.
102
On August 15, 2001, we entered into a three-year employment agreement with
Edward Horton, our 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, we 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.
On December 1, 2001, we entered into a new three-year employment agreement with
Linda 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 our common stock at an exercise price of $.60 per share.
The incentive stock options were scheduled to vest at 750,000 shares per year
starting December 1, 2002. In addition, she 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 unexpired term of her agreement was $466,667 (based on her salary of
$280,000 per year). Payments are made on the 15th and 30th of each month which
is our normal payroll schedule. The payments will continue through December 15,
2005.
On September 15, 2003, we entered into a three-year employment agreement with
Deborah O'Brien, our 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, we entered into a three-year employment agreement with Timothy
Hansen, our 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. He also
receives a $500 car allowance per month and received pre-approved living
expenses for a three-month period and moving expenses.
On February 23, 2005, Mr. Hansen was granted an additional 1,500,000
non-statutory stock options at an exercise price of $.32, 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
- --------------- --------------------
February 23, 2006 500,000
August 23, 2006 250,000
February 23, 2007 250,000
August 23, 2007 250,000
February 23, 2008 250,000
103
On September 12, 2005, we entered into a one-year employment agreement effective
August 30, 2005 with Allan L. Schwartz, our Executive Vice-President and Chief
Financial Officer at an annual salary of $185,000. Mr. Schwartz was also granted
100,000 non-statutory stock options at an exercise price of $.20 per share, the
fair market value at the date of the grant, which will vest on August 30, 2006.
The following table sets forth certain information with regard to the Options
granted by the Company to executive management for the fiscal year ended June
30, 2005. Linda B. Grable (retired), Timothy Hansen, Allan L. Schwartz, Edward
Horton and Deborah O'Brien did not exercise any options during fiscal 2005.
Option/SAR Grants in Last Fiscal Year
No. of % of Total
Securities Options Granted Exercise or Market Price
Underlying to Employees In Base Price On Date of Expiration
Name Options Fiscal Year ($/Share) Grant Date
- ---- Granted ---------- --------- --------- --------
-------
Timothy Hansen 1,500,000 29.7% $.38 $.38 7/8/2014
Timothy Hansen 1,500,000 29.7% $.32 $.32 2/23/2015
Allan L. Schwartz 500,000 9.9% $.30 $.27 8/30/2015
Edward Horton 175,000 3.5% $.28 $.28 8/28/2015
Stock Option Plans
- ------------------
Our 1995 Stock Option Plan was approved by our Board of Directors and adopted by
the shareholders at the March 1995 annual meeting. The plan provided for the
granting, exercising and issuing of incentive options pursuant to Internal
Revenue Code, Section 422.
On August 30, 1999, we established an equity incentive plan. The shareholders
had to approve this plan within one year. The maximum number of shares that
could be granted under this plan was 15,000,000 shares of common stock and
5,000,000 shares of preferred stock. The series, rights and preferences of the
preferred stock were to be determined by our Board of Directors. This plan also
included any stock available for future stock rights under our 1995 Stock Option
Plan. On January 3, 2000 the Board of Directors decided to replace this equity
incentive plan and adopted our 2000 Non-Statutory Stock Option Plan so as to
provide a critical long-term incentive for employees, non-employee directors,
consultants, attorneys and advisors of the Company. On May 10, 2000 our
shareholders approved the 2000 Non-Statutory Stock Option Plan, which was
replaced with our 2002 Incentive and Non-Statutory Stock Option Plan approved by
our shareholders on March 13, 2002. Our Board of Directors has direct
responsibility for the administration of the plan.
On February 4, 2004, the Board of Directors adopted our 2004 Non-Statutory Stock
Option Plan (the "2004 Plan"), which was adopted by the shareholders on March
24, 2004 at our annual meeting to provide a long-term incentive for employees,
non-employee directors, consultants, attorneys and advisors of the Company and
its subsidiaries. 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.
On August 24, 2005, the Board Of Directors resolved that the Company's 1995,
2000, 2002 and 2004 Stock Option Plans and Stock Options Agreements that were
entered into pursuant to these plans, be amended to increase the
post-termination exercise period following the termination of the Optionee's
employment/directorship or in the event of change of control of the Company, to
be three(3) years from the date of termination or change of control, subject to
those options that were vested as of the date of termination or change of
control and subject to the original term of the option, which ever time is less.
104
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table shows the beneficial ownership of our common stock as of
September 12, 2005 regarding:
o each person that we know of who beneficially owns more than 5% of the
outstanding shares of our common stock,
o each current director and executive officer, and
o all executive officers and directors as a group.
Name and Address Number of Shares Owned % of Outstanding
of Beneficial Owner Beneficially (1)(2) Shares of Common Stock
- ------------------- ---------------------- ----------------------
Linda B. Grable 19,660,274(3) 9.7%
Timothy B. Hansen 600,000(4) 0.3%
6531 NW 18th Court
Plantation, FL 33313
Allan L. Schwartz 6,888,852(5) 3.4%
6531 NW 18th Court
Plantation, FL 33313
Edward Horton 687,500(6) 0.3%
6531 NW 18th Court
Plantation, FL 33313
Deborah O'Brien 935,000(7) 0.5%
6531 NW 18th Court
Plantation, FL 33313
Sherman Lazrus 460,000(8) 0.2%
Patrick J. Gorman 1,216,160(9) 0.6%
Edward Rolquin 410,000(8) 0.2%
Jay S. Bendis 465,000(8) 0.2%
All officers and directors 11,662,512(10) 5.7%
as a group (8 persons)
All beneficial owners 31,322,786(11) 15.4%
Listed above (9 persons)
(1) Except as indicated in the footnotes to this table, based on
information provided by such persons, the persons named in the table
above have sole voting power and investment power with respect to all
shares of common stock shown beneficially owned by them.
(2) Percentage of ownership is based on 203,730,670 shares of common stock
outstanding as of September 12, 2005 plus each person's options that
are exercisable within 60 days. Shares of common stock subject to
stock options that are exercisable within 60 days as of August 29,
2005 are deemed outstanding for computing the percentage of that
person and the group.
(3) Based on the last filing of record includes 3,250,000 shares subject
to options and 16,410,274 shares owned by Linda B. Grable.
(4) Mr. Hansen was issued 100,000 restricted shares pursuant to his
employment agreement dated July 8, 2004. Includes 500,000 shares
subject to options.
105
(5) Includes 2,500,000 shares subject to options and 9,000 shares owned by
the wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims
beneficial ownership.
(6) Includes 675,000 shares subject to options.
(7) Includes 425,000 shares subject to options.
(8) Includes 450,000 shares of options owned by Sherman Lazrus, 400,000
shares of options owned by Edward Rolquin and 400,000 shares of
options owned by Jay S. Bendis.
(9) Includes 450,000 shares subject to options and 183,356 shares owned by
the wife of Patrick J. Gorman, Diana Gorman, of which he disclaims
beneficial ownership.
(10) Includes 5,800,000 shares subject to options held by, Timothy Hansen,
Allan Schwartz , Edward Horton, Deborah O'Brien, Sherman Lazrus,
Patrick J. Gorman, Edward Rolquin and Jay S. Bendis. Also includes
9,000 shares owned by the wife of Allan L. Schwartz, Carolyn Schwartz,
of which he disclaims beneficial ownership and 183,356 shares owned by
the wife of Patrick J. Gorman, Diana Gorman, of which he disclaims
beneficial ownership.
(11) Includes all of the shares in footnote 10 plus 3,250,000 shares
subject to options held by Linda B. Grable.
Dividend Policy
To date, we have not declared or paid any dividends with respect to our common
stock, and the current policy of the Board of Directors is to retain any
earnings to provide for our growth. We do not anticipate paying cash dividends
on our common stock in the foreseeable future.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The late Richard Grable and Linda Grable were husband and wife. Linda Grable
continues to be a "control person" as a result of her control of a substantial
portion of our outstanding stock.
In June 1998, we finalized an exclusive patent license agreement with Richard
Grable. Mr. Grable was the owner of the patent which encompasses the technology
for the CTLM(R). IDSI and Mr. Grable had previously entered into an oral
agreement for the exclusive license for the patent that was never memorialized
in written form. The term of the license is for the life of the patent (17
years) and any renewals, subject to termination under specific conditions. As
consideration for this license, we issued to Mr. Grable 7,000,000 shares of
common stock. In addition, we agreed to pay Mr. Grable a royalty based upon a
percentage, ranging from 6% to 10%, of the net selling price (the dollar amount
earned from our sale, both international and domestic, before taxes minus the
cost of the goods sold and commissions or discounts paid) of all the products
and goods in which the patent is used. Mr. Grable agreed that these royalty
provisions will not apply to any sales and deliveries of CTLM(R) systems made by
IDSI prior to receipt of the PMA for the CTLM(R). In addition, following
issuance of the PMA, IDSI and Mr. Grable agreed that he would be paid guaranteed
minimum royalties of at least $250,000 per year based on the sales of the
products and goods in which the CTLM(R) patent is used. Upon Mr. Grable's death
in August 2001, his interest in the patent license agreement passed to his
estate, of which Linda Grable is the principal beneficiary.
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 unexpired term of her agreement was $466,667 (based on her salary of
$280,000 per year). Payments are made on the 15th and 30th of each month which
is our normal payroll schedule. The payments will continue through December 15,
2005.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
--------------------------------------
For the Fiscal Years ended June 30, 2005 and 2004, we paid audit fees totaling
$30,508 and $24,715 respectively, and paid fees for tax services totaling $2,000
and $2,000 respectively.
106
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(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.
10.2 Patent Licensing Agreement. Incorporated by reference to our
Registration Statement on Form S-2, File Number 333-59539. 10.3
Incentive Stock Option Plan - is incorporated by reference to Exhibit
10(b) of the Form 10-SB.
10.60 Employment Agreement with Deborah O'Brien, Senior Vice President dated
September 15, 2003.
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.
10.67 Stock Option Agreement with Timothy B. Hansen, Chief Executive Officer,
dated February 23, 2005. Incorporated by reference to our Registration
Statement on Form S-2, File Number 333-123197 filed on March 8, 2005.
107
10.68 One-Year Employment Agreement with Allan L. Schwartz, Executive Vice
President and Chief Financial Officer dated September 12, 2005.
14.1 Code of Ethics for Senior Financial Officers
31.1 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(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
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.
A Form 8-K was filed on January 27, 2005 announcing the issuance of a
press release entitled, "Imaging Diagnostic Systems, Inc. Releases
Letter to Shareholders" written by Tim Hansen, CEO. The letter is a
brief status update of the three top priorities stated in Mr. Hansen's
initial letter to shareholders released in October 2004.
A Form 8-K was filed on February 24, 2005 to report that our
shareholders, at a Special Meeting held on February 23rd, approved a
proposal to amend our Articles of Incorporation to increase the number
of authorized shares of the our common stock, no par value, from
200,000,000 to 300,000,000.
A Form 8-K was filed on February 24, 2005 to report that we entered
into a Stock Option Agreement, pursuant to our 2004 Non-Statutory Stock
Option Plan, to provide as an added incentive to our Chief Executive
Officer, Timothy B. Hansen, an option to purchase 1,500,000 shares at
an option exercise price of $.32, which was the fair market value on
the date of the grant. The shares will vest over a three-year period in
accordance with a schedule included in the agreement.
108
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, Imaging Diagnostic Systems, Inc. has duly caused this
report to be signed on our behalf by the undersigned, thereunto duly authorized,
IMAGING DIAGNOSTIC SYSTEMS, INC.
By: /s/ Timothy B. Hansen
---------------------
Timothy B. Hansen, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Annual Report on Form 10-K has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/Timothy B. Hansen Chief Executive Officer September 13, 2005
- --------------------
Timothy B. Hansen and Director
/s/Allan L. Schwartz Director, Executive Vice-President, September 13, 2005
- --------------------
Allan L. Schwartz and Chief Financial Officer
(Principal Accounting and Financial
Officer)
/s/ Jay S. Bendis Co-Chairman of the Board September 13, 2005
- -----------------
Jay S. Bendis and Director
/s/ Patrick J. Gorman Co-Chairman of the Board September 13, 2005
- ---------------------
Patrick J. Gorman and Director
/s/ Sherman Lazrus Director September 13, 2005
- ---------------------
Sherman Lazrus
/s/ Edward Rolquin Director September 13, 2005
- ------------------
Edward Rolquin
109