Item 1. Our Business
Overview
Imaging Diagnostic Systems, Inc. (“IDSI”) is a development stage medical technology company. Since inception in December 1993, we have been engaged in the development and testing of a laser breast imaging system that uses computed tomography and laser techniques designed to detect breast abnormalities. The CT Laser Mammography system (“CTLM®”) is currently being commercialized in certain international markets where regulatory approvals have been obtained. However, it is not yet approved for sale in the U.S. market. The CTLM® system must obtain marketing clearance through the U.S. Food and Drug Administration (“FDA”) before commercialization can begin in the U.S. market.
Our financial statements have been prepared assuming that we will continue as a going concern. Our auditors, in their report for the fiscal year ended June 30, 2012, stated that we have incurred recurring operating losses and will have to obtain additional capital to sustain operations. These conditions raise substantial doubt about our ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 5 “Going Concern”, in the Notes to the Financial Statements. The accompanying financial statements to this Annual Report do not include any adjustments to reflect the possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Originally, the FDA determined the CTLM® to be a “new medical device” for which there was no predicate device and designated it as a Class III medical device. Consequently; the CTLM® was required to go through the FDA Premarket approval (“PMA”) application process. In May 2003 we filed a PMA application for the CTLM® with the FDA. In August 2003, we received a letter from the FDA citing deficiencies in our PMA application requiring a response to the deficiencies. We initially planned on submitting an amendment to the PMA application to resolve the deficiencies and requested an extension. In March 2004 we received an extension to respond with the amendment; however, in October 2004, we made a decision to voluntarily withdraw the original PMA application and resubmit a modified PMA in a simpler and more clinically and technically robust filing.
In November 2004, we received a letter from the FDA stating that the CTLM® study has been declared a Non-Significant Risk (“NSR”) study when used for our intended use.
In 2005, we initiated the PMA process by designing a new clinical study protocol and a modified intended use, which limited the participants in the study to patients with dense breast tissue. The inclusion criteria was modified because we believed that we would be more successful in proving our hypothesis of the CTLM® system’s intended use and have the most success at obtaining marketing clearance from the FDA. Concurrently, we identified qualified clinical sites and retained them to proceed with our clinical study.
In 2006, we made changes to bring the CTLM® system to its most current design level. We believe these changes improved the CTLM®’s image quality and reliability. Upgraded CTLM® systems were installed at our U.S. clinical sites and data collection proceeded in accordance with our clinical protocol. The data collection continued from 2006 to 2010, progressing slowly due to low patient volume pursuant to the inclusion criteria of our clinical protocol.
We announced in March 2009 that our research and development team achieved a technical breakthrough with a new reconstruction algorithm that improved the visualization of angiogenesis in the CTLM® images. Angiogenesis is the process in which new blood vessels are formed in response to a chemical signal sent out by cancerous tumors. The CTLM visualizes the blood distribution in the breast, to detect the new blood vessels (angiogenesis) required for cancerous lesions to grow. The improved algorithm enhances the images by reducing the number of artifacts occasionally produced during an examination, thereby making diagnosis easier. We also incorporated streamlined
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numerical methods into the software so that the new algorithm does not require additional computing resources, allowing us to provide the improved functionality to existing customers as a software upgrade.
As of May 2009, 10 clinical sites had participated in the clinical trials and at the time we believed we had sufficient clinical data to support our PMA application. However, we did not have sufficient financing to support the clinical sites, initiate the reading phase, the statistical analysis study and the submission of the PMA application to the FDA.
Through the years, new MRI and other dedicated breast imaging systems gained FDA marketing clearance pursuant to applications under the FDA’s Section 510(k) premarket notification of intent to market (a “Section 510(k) premarket notification”). In the last several years, the De Novo 510(k) process became an alternate pathway for new technologies with low to moderate risk an opportunity to seek FDA marketing clearance through this simpler process. In addition, laser safety data and clinical safety and efficacy data were obtained through previous clinical trials to support an FDA application through the traditional 510(k) process. We believe our CTLM® system is of low to moderate risk due to the series of technical studies conducted as well as the series of clinical studies we were engaged in which led the FDA to determine in 2004 that our clinical studies were a Non Significant Risk (NSR) device study.
A Section 510(k) premarket notification is a premarket submission made to the FDA to demonstrate that the device to be marketed is at least as safe and effective as, that is, substantially equivalent to, a legally marketed device that is not subject to PMA. Submitters must compare their device to one or more similar legally marketed devices and make and support their substantial equivalency claims. A legally marketed device is a device that was legally marketed prior to May 28, 1976 for which a PMA is not required, or a device which has been reclassified from Class III to Class II or I, or a device which has been found to be substantially equivalent through the 510(k) process. The legally marketed device(s) to which equivalence is drawn is commonly known as the "predicate" device.
To submit a Section 510(k) premarket notification application, a company must meet the following guidelines:
To demonstrate substantial equivalence to another legally U.S. marketed device, the 510(k) applicant must demonstrate that the new device, in comparison to the predicate:
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has the same intended use as the predicate; and
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has the same technological characteristics as the predicate; or
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has the same intended use as the predicate; and
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has different technological characteristics when compared to the predicate, and
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does not raise new questions of safety and effectiveness; and
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demonstrates that the device is at least as safe and effective as the legally marketed device.
One possible outcome resulting from applying for a Section 510(k) premarket notification of intent to market that we believed would have been an option, was the evaluation of automatic class III designation, commonly referred to “De Novo process”. The De Novo process is an alternate pathway provided by the FDA to classify certain new devices that had automatically been placed in Class III due to lack of a predicate. The De Novo classification process was created to provide a mechanism for the classification of certain lower-risk devices for which there is no predicate, but would otherwise fall into Class III. The De Novo process is most applicable when the risks of a device are well-understood and appropriate special controls can be established to mitigate those risks.
The de novo process cannot be requested until a Section 510(k) premarket notification has been submitted and the FDA responds with a determination that the device is “not substantially equivalent” (NSE) to the predicate device. The FDA then classifies the applicant devices into Class III designation. Applicants who receive a class III determination from the FDA may request an evaluation for reclassification into Class I or II.
In March 2010, we decided to focus on the possibility of obtaining FDA marketing clearance through a Section 510(k) premarket notification for our CTLM® system instead of a PMA application based on our own research of other medical imaging devices that received a Section 510(k) premarket notification, such as the Aurora MRI Breast Imaging System (the “breast MRI”). Other sources of our research were obtained through reading medical imaging industry publications, the FDA’s website, and discussions with attendees
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at medical imaging trade shows; specifically the Radiological Society of North America in Chicago, IL in November 2009; Arab Health Show in Dubai, UAE in January 2010, and European Congress of Radiology in Vienna, Austria in March 2010. We began the process of examining the various potential predicate devices that could be credible to support our Section 510(k) premarket notification application.
In July 2010, we made our decision to select as our predicate device the breast MRI. This decision was made as a result of our examination of comparative clinical images between CTLM® and breast MRI, which are both functional molecular imaging devices having the ability to visualize angiogenesis in the breast. We began preparing the Section 510(k) premarket notification submission and engaged the services of a FDA regulatory consultant to review our preliminary draft and then re-engaged the services of our FDA regulatory counsel to complete the Section 510(k) premarket notification application and to submit it to the FDA.
On November 22, 2010, we submitted a Section 510(k) premarket notification application to the FDA for its review. We believed that the Section 510(k) premarket notification submission was the best process to obtain U.S. marketing clearance in the least burdensome and most timely manner. FDA marketing clearance would enable us to market and sell the CTLM® system throughout the United States. Also, we believed that receipt of U.S. marketing clearance will substantially enhance our ability to sell the CTLM® in the international market.
On January 21, 2011, we received a request for additional information from the FDA regarding our Section 510(k) premarket notification application. A request for additional information is quite common during the FDA review process. Due to the extensive amount of additional information requested, we filed the response to the FDA request on July 8, 2011. Upon receipt of our response at the FDA offices, the FDA 90-day response time clock was re-activated. Consequently, we expected to get either an FDA determination on our Section 510(k) application or another request for additional information within the next 90-day time frame.
On August 2, 2011, we received official notification from the FDA that the review of our Section 510(k) premarket notification application had been completed and that the FDA determined that the device, (CTLM®), is not substantially equivalent to devices marketed in interstate commerce prior to May 28, 1976, the enactment date of the Medical Device Amendments, or to any device which has been reclassified into Class I (General Controls) or Class II (Special Controls), or to another device found to be substantially equivalent through the Section 510(k) process. This decision was based on the fact that the FDA was not aware of a legally marketed preamendments device labeled or promoted for using “Diffuse Optical Tomography” (DOT) to image the optical attenuation properties of breast tissue in order to aid the diagnosis of cancer, other conditions, diseases, or abnormalities. Therefore, this device was classified by statute into class III (Premarket Approval), under Section 513(t) of the Federal Food, Drug, and Cosmetic Act (the “Act”). All FDA determined Class III devices must fall under Section 515(a)(2) of the Act (which) requires a class III device to have an approved application (PMA) before it can be legally marketed.
The determination by the FDA that our CTLM® imaging technology will now be recognized as a DOT device and that there are no other DOT devices known to the FDA, presents us with a unique technological opportunity. Essentially, IDSI could be the first medical imaging company to file a PMA application for a Diffuse Optical Tomography breast imaging device. Since the FDA has identified CTLM® as a class III device, a formal clinical study will be required to obtain PMA approval. We have begun the PMA process and plan to use clinical studies previously collected, if permitted to do so by the FDA, in addition to new studies we plan to collect over the next several months.
In previous filings, management had disclosed the potential to have our CTLM® device approved through the FDA “De Novo” process. This process would only become an option to us if the FDA did not approve our 510(k) premarket notification of intent to market the device. While waiting for a ruling from the FDA on our 510(k) premarket notification of intent to market the CTLM®, management continued to research the advantages and disadvantages regarding the potential option to initiate a De Novo application if the FDA determined our traditional 510(k) application to be “Not Substantially Equivalent”. Our research identified several articles illustrating the potential pitfalls of going down the De Novo pathway. One such article from Medical Device Consultants (MDCI), a full service contract research organization and consulting firm that helps emerging and established firms commercialize novel and innovative medical devices, dated March 21, 2011(included below) best summarizes the issues that we would face if we choose the De Novo pathway.
“The De Novo process has been around since the implementation of the FDA Modernization Act of 1997 (FDAMA). The FDAMA was intended to help improve the efficiency of bringing low-risk medical devices to market, allowing for simpler reclassification of devices that were classified as Class III due to the lack of a
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suitable predicate. The section of the FDAMA that handled this aspect of medical device classification (Section 513(f)(2)) became known as the De Novo process.
De Novo is a two-step process that requires a company to submit a 510(k) and complete a standard review, including an analysis of the risk to the patient and operator associate with the use of the device and the substantial equivalence rationale. Once that has been accomplished, and the medical device in question has been determined to be Not Substantially Equivalent (NSE) by the FDA, the product is automatically classified as a Class III device. The manufacturer can then submit a request for evaluation of Automatic Class III designation to have the product reclassified from Class III into Class I or Class II. The FDA will review the device classification proposal and either recommend special controls to create a new Class I or II device classification or determine that the product is a Class III device. If FDA determines that the level of risk associated with the use of the device is appropriate for a Class II or Class I designation, then the product can be cleared as a 510(k) and FDA will issue a new classification regulation and product code. This also adds the device in question to the predicate pool, which in turn broadens the market for other medical device companies considering products in a similar therapeutic area. If the device is not approved through De Novo, then it must go through the standard premarket approval (PMA) process for Class III devices.
The number of FDA NSE determinations due to the lack of a suitable predicate is very low for those low risk medical devices that have the potential for reaching the market via the De Novo process. Medical device manufacturers are attracted to the cost efficiencies associated with the De Novo process when compared against the investment and post-market FDA oversight associated with a PMA. Unfortunately, the time to market for devices eligible for the De Novo process can be very long.
FDAMA calls for the FDA to review and return a decision on a De Novo reclassification submission within 60 days of receipt (the initial submission must be sent by the manufacturer within 30 days of receiving NSE notification). In practice, however, the amount of time taken to review De Novo requests by the FDA and issue the special controls guidance has risen from 62 days in 2006 to 241 days since 2007. Tacked on to the 510(k) review times, devices traveling the De Novo pathway average 482 days of review time from beginning to end.
Further compounding the delays associated with De Novo is the fact that the entire process resembles a procedural “black hole.” The FDA is not required to provide any updates concerning the status of a De Novo application, nor is there any simple way for medical device manufacturers to track a De Novo submission on their own.
De Novo is rare in the realm of low-risk medical devices - a mere 54 products took this particular route between 1998 and 2009. Given the extensive delays associated with the process, MDCI advises medical device companies to consider all other market approval pathways before deciding on to pursue a De Novo reclassification.”
Prepared by Benjamin Hunting, Cindy Nolte, and Helen Mayfield
MDCI Blogging Team”
Understanding that the above statements were a fair representation of the regulatory industry's general feelings towards the FDA De Novo process, management decided to accept and heed the FDA's letter (received on August 2, 2011) detailing their decision of CTLM® being “not substantially equivalent” and furthermore, accepting their recommendation that CTLM® is a class III device that would require a PMA submission. Other considerations such as comparing time frames between De Novo and the PMA process were taken into account. The average De Novo application took 482 days to be reviewed compared to the average PMA review of 284 days. In addition, upon further review, both the De Novo and PMA process require virtually identical clinical safety and efficacy data; therefore, the PMA path was chosen. Management has identified potential FDA regulatory consultants who can guide us through the complete PMA application process and is presently in contract negotiations with several prospective consulting firms.
Progress toward re-submitting a PMA application during Fiscal Year 2012 and the beginning months of Fiscal Year 2013 was significantly delayed and then eventually halted simply due to lack of funding to hire the necessary FDA consultants required to assist in the process. Our employees have reached their level of FDA expertise related to preparing the “ground work” for a PMA application submission and can proceed no further without the expert assistance of FDA consultants.
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During the fiscal year ended June 30, 2012, there was a significant reduction in key Company staff due to employee resignations, retirement and layoffs, which reduced operating overhead until additional external funding could be secured. We will not hire replacement staff until such time as we have secured sufficient funding to complete the PMA filing with the FDA. Prior to the reduction in key staff members, an internal PMA application strategy that might allow inclusion of previously collected patient data was developed. This approach (generally referred to as a PMA Protocol) will need to be qualified by our FDA consultants prior to presenting our approach to the FDA Reviewers/Examiners. The forum for this process is generally referred to as an FDA “Pre- IDE” meeting (essentially a pre-clinical meeting) between the Company, its FDA Consultants and the FDA/PMA Examiners. During the “Pre-IDE” meeting, the Company (and its FDA Consultants) would present their approach for both data collection, patient selection and data analysis. The FDA Reviewers would provide input (critique and suggestions) to us as to what they believe an acceptable PMA protocol would require. Once agreement is reached by all parties the next logical step is to implement the protocol. .
During fiscal 2012, a significant reduction in operating overhead/expenses occurred due to the reduction in key staff. This reduction in staff halted any progress towards getting the PMA application started as a result of our financial and funding limitations. We will not be able to proceed with the PMA application process until funding has been secured and the FDA consultants engaged to continue the process. There can be no assurance that we will obtain this funding.
In summary, our management team believes that the more structured and proven PMA application approach with its semi-rigid timetable for mandatory responses would provide us with the best route to achieve marketing clearance for our innovative new imaging modality that in the future will be classified as Diffuse Optical Tomography.
The CTLM® system is a Diffuse Optical Tomography (DOT) CT-like scanner. Its energy source is a laser beam and not ionizing radiation such as is used in conventional x-ray mammography or CT scanners. The advantages of imaging without ionizing radiation may be significant in our markets. CTLM® is an emerging new imaging modality offering the potential of functional molecular imaging, which can visualize the process of angiogenesis which may be used by the radiologist to distinguish between benign and malignant tissue. X-ray mammography is a well-established method of imaging the breast but has limitations especially in dense breast cases. While x-ray mammography and ultrasound produce two dimensional images (2D) of the breast, the CTLM® produces 3D images. Ultrasound is often used as an adjunct to mammography to help differentiate tumors from cysts or to localize a biopsy site. We believe the CTLM® will be used to provide the radiologist with additional information to manage the clinical case; help diagnose breast cancer earlier; reduce diagnostic uncertainty especially in mammographically dense breast cases; and may help decrease the number of biopsies performed on benign lesions. Because breast cancers nearly always develop in the dense tissue of the breast (not in the fatty tissue), older women who have mostly dense tissue on a mammogram are at an increased risk of breast cancer. Abnormalities in dense breasts can be more difficult to detect on a mammogram. The CTLM® technology is unique and patented. We intend to develop our technology into a family of related products. We believe these technologies and clinical benefits constitute substantial markets for our products well into the future.
As of the date of this report, we have had no substantial revenues from our operations and have incurred net losses applicable to common shareholders since inception through June 30, 2012 of $120,973,036 after discounts and dividends on preferred stock. We anticipate that losses from operations will continue for at least the next 12 months, primarily due to an anticipated increase in marketing and manufacturing expenses associated with the international commercialization of the CTLM®, expenses associated with our FDA approval process, and the costs associated with advanced product development activities. We will need sufficient financing through the sale of equity or debt securities to complete the approval process and, in the event that we obtain marketing clearance, to have sufficient funding to launch the CTLM® in the U.S. There can be no assurance that we will obtain this financing. Finally, there can be no assurance that we will obtain FDA marketing clearance, that the CTLM® will achieve market acceptance or that sufficient revenues will be generated from sales of the CTLM® to allow us to operate profitably.
Breast Cancer
The National Cancer Institute (NCI) estimated that approximately 207,090 new cases of invasive breast cancer and 54,010 cases of carcinoma in situ (CIS) non-invasive (localized) breast cancer have been diagnosed in the United States during 2010. Breast cancer ranks as the second leading cause of cancer-related death among women and will cause an estimated 39,840 deaths in women in the U.S. in 2010. Based on rates from 2005-2009, 1 in 8 women will be diagnosed with breast cancer during their lifetime.
There is widespread agreement that screening for breast cancer, when combined with appropriate follow-up, will
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reduce mortality from the disease. According to the National Cancer Institute (NCI), the five-year relative survival rate of women who have cancer confined to the primary site is 98%. It decreases from 98% to 84% after the cancer has spread to the lymph nodes, and to 23% after it has spread to other organs such as the lung, liver or brain. A major problem with current detection methods is that studies have shown that mammography does not detect 10%-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). Besides skin cancer, breast cancer is the most commonly diagnosed cancer among U.S. women. 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 clinical breast exam (CBE) every three years for women in their 20s and 30s; (iii) a baseline mammogram for women by the age of 40; and (iv) an annual mammogram for women age 40 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 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 a diagnostic mammogram seeks to characterize suspicious lesions.
In the U.S., a certified technologist performs the x-ray procedure under the Congressional Mammography Quality Standards Act (MQSA). MQSA was enacted to improve x-ray breast cancer detection studies by 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. X-ray mammography is documented to be less effective for women with dense breasts. X-ray mammography machines use mechanical means to squeeze or compress the breast and flatten the volume so that x-rays may penetrate more uniform tissue. These techniques are technically necessary but are often painful and uncomfortable to patients. Most mammography exams include 2 views of each breast which equates to 4 compressions per session.
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.
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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 $300,000 to $430,000 and Medicare billing for the procedures ranges 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. 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 not only visualizes fine-details in breast tissue but also detects 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. Dedicated breast MRI systems sell for approximately $1,200,000 and Medicare billing is approximately $1,500.
Ultrasound
Ultrasound imaging is routinely used in breast imaging practices. 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 over the area of interest. In some countries physicians perform the study and interpret the results. Ultrasound images are localized to areas of suspicion usually detected by a previous mammogram. If mammographic results suggest the presence of a lesion, ultrasound may help differentiate a solid from a cystic mass and locate a biopsy site. The Medicare billing rate is approximately $240 per procedure and requires the use of capital equipment ranging in cost from approximately $60,000 to $200,000.
CTLM®
The CTLM® system is a Diffuse Optical Tomography (DOT) CT-like scanner. Its energy source is a laser beam and not ionizing radiation such as is used in conventional x-ray mammography or CT scanners. The advantages of imaging without ionizing radiation may be significant in our markets. CTLM® is an emerging new imaging modality offering the potential of functional molecular imaging, which can visualize the process of angiogenesis which may be used by the radiologist to distinguish between benign and malignant tissue. X-ray mammography is a well-established method of imaging the breast but has limitations especially in dense breast cases. While x-ray mammography and ultrasound produce two dimensional images (2D) of the breast, the CTLM® produces 3D images. Ultrasound is often used as an adjunct to mammography to help differentiate tumors from cysts or to localize a biopsy site. We believe the CTLM® will be used to provide the radiologist with additional information to manage the clinical case; help diagnose breast cancer earlier; reduce diagnostic uncertainty especially in mammographically dense breast cases; and may help decrease the number of biopsies performed on benign lesions. Because breast cancers nearly always develop in the dense tissue of the breast (not in the fatty tissue), older women who have mostly dense tissue on a mammogram are at an increased risk of breast cancer. Abnormalities in dense breasts can be more difficult to detect on a mammogram. The CTLM® technology is unique and patented. We intend to develop our technology into a family of related products. We believe these technologies and clinical benefits constitute substantial markets for our products well into the future.
A CTLM® breast exam is non-invasive and can be performed by a medical technician. A patient lies face down on a scanning table with one breast suspended naturally into a specially designed scanning chamber. The scanner images the breast in contiguous slices from chest wall to nipple in minutes. One breast is scanned at a time. The CTLM® 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.
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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® 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® scanner illuminates these areas; fluorescent light is emitted and detected. Reconstructed CTLM® images then locate and quantify the fluorescent area within the area of interest.
Several CTLM®’s were retrofitted with laser diodes tuned to specific wavelengths of light which matched the compounds. Optical filters limited the spectral responses to selected wavelengths. Experiments were conducted by placing fluorescent compounds inside a breast equivalent phantom and scanning it with CTLM®. To our knowledge we were the first with the ability to excite a fluorescent compound, detect its location within the simulated breast, and create an image. 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. We installed three CTLM® systems for Schering AG’s clinical trials: one at Charité’s Robert-Rössle Clinic in Berlin, one at the University of Muenster, and the third at Charité Hospital in Berlin, Germany as part of their Phase 1 clinical studies of fluorescent imaging compounds. In November 2005, we announced that Schering AG had completed the evaluation of fluorescent imaging compound SF64 with three modified CT Laser Mammography systems. The loaned systems, which had been modified to Schering AG's specifications were subsequently returned to IDSI and have been re-manufactured.
In July 2009, we announced the commencement of a breast cancer imaging study at the Charité, Medical University in Berlin, Germany. The study will examine the potential role of the CTLM® as an enhanced breast cancer screening tool when used in combination with the fluorescent dye, Indocyanine Green (ICG). The study will be conducted at the Campus Virchow-Klinikum and the principal investigator is radiologist Dr. Alexander Poellinger. IDSI is continuing to research and develop fluorescence imaging techniques.
Laser Imager for Lab Animals
Our Laser Imager for Lab Animals “LILA™” program is an optical helical micro-CT scanner in a third-generation configuration. The system was designed to image numerous compounds, especially green fluorescent protein, derived from the DNA of jellyfish. The LILA scanner is targeted at pharmaceutical developers and researchers who monitor cancer growth and who use multimodality small animal imaging in their clinical research.
IDSI’s strategic thrust for the LILA project changed, as we decided to focus on women’s health business markets with a family of CTLM® systems and related devices and services. The animal imager did not fit our business model although the fundamental technology is related to the human breast imager. Consequently, we sought to align the project with a company already in the animal imaging market that might complete the LILA and commercialize it.
On August 30, 2006 we announced an exclusive license agreement under which Bioscan, Inc. would integrate LILA technology into their animal imaging portfolio. Under the agreement we would transfer technology to Bioscan by December 2006 upon receipt of the technology transfer fee. We have received full payment of $250,000 for the technology transfer fee and $69,000 for the parts associated with the agreement. The agreement also provides for royalties on future sales. Bioscan has commenced its work on the LILA project and placed one of their engineers at our facility so that he can confer with our engineers if necessary. Bioscan pays us for use of the space and consulting fees if they require our engineering assistance. There can be no assurance that it will be successful or that we will receive any royalties from Bioscan.
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Government Regulation
United States Regulation
The CTLM® is a medical device and it is subject to the relevant provisions of the United States 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® in the United States. The 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, 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. The CTLM® is a Class III device. A premarket approval (PMA) is the FDA process of scientific and regulatory review to evaluate the safety and effectiveness of Class III medical devices. Class III devices are those that support or sustain human life, are of substantial importance in preventing impairment of human health, or which present a potentially unreasonable risk of illness or injury. Due to the level of risk associated with Class III devices, the FDA has determined that general and special controls alone are insufficient to assure the safety and effectiveness of Class III devices. Therefore, these devices require a PMA application in order to obtain marketing clearance.
The FDA automatically classifies new technologies in Class III when limited safety information is available and no predicate device is available. It allows for multiple clinical studies to be pursued to gather the necessary data to obtain safety and clinical information to be used for future FDA submissions. At the time that we were developing the CTLM® system and considering marketing clearance there was not enough data on laser based technologies nor were there approved other new medical devices dedicated to breast imaging other than the traditional x-ray technology. As a result, the FDA recommended that we seek a PMA application.
In 2005, we initiated the PMA process by designing a new clinical study protocol and a modified intended use, which limited the participants in the study to patients with dense breast tissue. The inclusion criteria was modified because we believed that we would be more successful in proving our hypothesis of the CTLM® system’s intended use and have the most success at obtaining marketing clearance from the FDA. Concurrently, we identified qualified clinical sites and retained them to proceed with our clinical study.
In 2006, we made changes to bring the CTLM® system to its most current design level. We believe these changes improved the CTLM®’s image quality and reliability. Upgraded CTLM® systems were installed at our U.S. clinical sites and data collection proceeded in accordance with our clinical protocol. The data collection continued from 2006 to 2010 progressing slowly due to low patient volume pursuant to the inclusion criteria of our clinical protocol.
We announced in March 2009 that our research and development team achieved a technical breakthrough with a new reconstruction algorithm that improved the visualization of angiogenesis in the CTLM® images. Angiogenesis is the process in which new blood vessels are formed in response to a chemical signal sent out by cancerous tumors. The CTLM visualizes the blood distribution in the breast, to detect the new blood vessels (angiogenesis) required for cancerous lesions to grow. The improved algorithm enhances the images by reducing the number of artifacts occasionally produced during an examination, thereby making diagnosis easier. We also incorporated streamlined numerical methods into the software so that the new algorithm does not require additional computing resources, allowing us to provide the improved functionality to existing customers as a software upgrade.
As of May 2009, 10 clinical sites had participated in the clinical trials and at the time we believed we had sufficient clinical data to support our PMA application. However, we did not have sufficient financing to support the clinical sites, initiate the reading phase, the statistical analysis study and the submission of the PMA application to the FDA.
Through the years, new MRI and other dedicated breast imaging systems gained FDA marketing clearance pursuant to applications under the FDA’s Section 510(k) premarket notification. In the last several years, the De Novo 510(k) process became an alternate pathway for new technologies with low to moderate risk an opportunity to seek FDA marketing clearance through this simpler process. In addition, laser safety data and clinical safety and efficacy
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data were obtained through previous clinical trials to support an FDA application through the traditional 510(k) process. We believe our CTLM® system is of low to moderate risk due to the series of technical studies conducted as well as the series of clinical studies we were engaged in which led the FDA to determine in 2004 that our clinical studies were a Non Significant Risk (NSR) device study.
A Section 510(k) premarket notification is a premarket submission made to the FDA to demonstrate that the device to be marketed is at least as safe and effective as, that is, substantially equivalent to, a legally marketed device that is not subject to PMA. Submitters must compare their device to one or more similar legally marketed devices and make and support their substantial equivalency claims. A legally marketed device is a device that was legally marketed prior to May 28, 1976 for which a PMA is not required, or a device which has been reclassified from Class III to Class II or I, or a device which has been found to be substantially equivalent through the 510(k) process. The legally marketed device(s) to which equivalence is drawn is commonly known as the "predicate" device.
To submit a Section 510(k) premarket notification application, a company must meet the following guidelines:
To demonstrate substantial equivalence to another legally U.S. marketed device, the 510(k) applicant must demonstrate that the new device, in comparison to the predicate:
·
has the same intended use as the predicate; and
·
has the same technological characteristics as the predicate; or
·
has the same intended use as the predicate; and
·
has different technological characteristics when compared to the predicate, and
·
does not raise new questions of safety and effectiveness; and
·
demonstrates that the device is at least as safe and effective as the legally marketed device.
One possible outcome resulting from applying for a Section 510(k) premarket notification of intent to market that we believed would have been an option, was the evaluation of automatic class III designation, commonly referred to “De Novo process”. The De Novo process is an alternate pathway provided by the FDA to classify certain new devices that had automatically been placed in Class III due to lack of a predicate. The De Novo classification process was created to provide a mechanism for the classification of certain lower-risk devices for which there is no predicate, but would otherwise fall into Class III. The De Novo process is most applicable when the risks of a device are well-understood and appropriate special controls can be established to mitigate those risks.
The de novo process cannot be requested until a Section 510(k) premarket notification has been submitted and the FDA responds with a determination that the device is “not substantially equivalent” (NSE) to the predicate device. The FDA then classifies the applicant devices into Class III designation. Applicants who receive a class III determination from the FDA may request an evaluation for reclassification into Class I or II.
In March 2010, we decided to focus on the possibility of obtaining FDA marketing clearance through a Section 510(k) premarket notification for our CTLM® system instead of a PMA application based on our own research of other medical imaging devices that received a Section 510(k) premarket notification, such as the Aurora MRI Breast Imaging System (the “breast MRI”). Other sources of our research were obtained through reading medical imaging industry publications, the FDA’s website, and discussions with attendees at medical imaging trade shows; specifically the Radiological Society of North America in Chicago, IL in November 2009; Arab Health Show in Dubai, UAE in January 2010, and European Congress of Radiology in Vienna, Austria in March 2010. We began the process of examining the various potential predicate devices that could be credible to support our Section 510(k) premarket notification application.
In July 2010, we made our decision to select as our predicate device the breast MRI. This decision was made as a result of our examination of comparative clinical images between CTLM® and breast MRI, which are both functional molecular imaging devices having the ability to visualize angiogenesis in the breast. We began preparing the Section 510(k) premarket notification submission and engaged the services of a FDA regulatory consultant to review our preliminary draft and then re-engaged the services of our FDA regulatory counsel to complete the Section 510(k) premarket notification application and to submit it to the FDA.
On November 22, 2010, we submitted a Section 510(k) premarket notification application to the FDA for its review. We believed that the Section 510(k) premarket notification submission was the best process to obtain U.S. marketing clearance in the least burdensome and most timely manner. FDA marketing clearance would enable us to
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market and sell the CTLM® system throughout the United States. Also, we believed that receipt of U.S. marketing clearance will substantially enhance our ability to sell the CTLM® in the international market.
On January 21, 2011, we received a request for additional information from the FDA regarding our Section 510(k) premarket notification application. A request for additional information is quite common during the FDA review process. Due to the extensive amount of additional information requested, we filed the response to the FDA request on July 8, 2011. Upon receipt of our response at the FDA offices, the FDA 90-day response time clock was re-activated. Consequently, we expected to get either an FDA determination on our Section 510(k) application or another request for additional information within the next 90-day time frame.
On August 2, 2011, we received official notification from the FDA that the review of our Section 510(k) premarket notification application had been completed and that the FDA determined that the device, (CTLM®), is not substantially equivalent to devices marketed in interstate commerce prior to May 28, 1976, the enactment date of the Medical Device Amendments, or to any device which has been reclassified into Class I (General Controls) or Class II (Special Controls), or to another device found to be substantially equivalent through the Section 510(k) process. This decision was based on the fact that the FDA was not aware of a legally marketed preamendments device labeled or promoted for using “Diffuse Optical Tomography” (DOT) to image the optical attenuation properties of breast tissue in order to aid the diagnosis of cancer, other conditions, diseases, or abnormalities. Therefore, this device was classified by statute into class III (Premarket Approval), under Section 513(t) of the Federal Food, Drug, and Cosmetic Act (the “Act”). All FDA determined Class III devices must fall under Section 515(a)(2) of the Act (which) requires a class III device to have an approved application (PMA) before it can be legally marketed.
The determination by the FDA that our CTLM® imaging technology will now be recognized as a DOT device and that there are no other DOT devices known to the FDA, presents us with a unique technological opportunity. Essentially, IDSI could be the first medical imaging company to file a PMA application for a Diffuse Optical Tomography breast imaging device. Since the FDA has identified CTLM® as a class III device, a formal clinical study will be required to obtain PMA approval. We have begun the PMA process and plan to use clinical studies previously collected, if permitted to do so by the FDA, in addition to new studies we plan to collect over the next several months.
In previous filings, management had disclosed the potential to have our CTLM® device approved through the FDA “De Novo” process. This process would only become an option to us if the FDA did not approve our 510(k) premarket notification of intent to market the device. While waiting for a ruling from the FDA on our 510(k) premarket notification of intent to market the CTLM®, management continued to research the advantages and disadvantages regarding the potential option to initiate a De Novo application if the FDA determined our traditional 510(k) application to be “Not Substantially Equivalent”. Our research identified several articles illustrating the potential pitfalls of going down the De Novo pathway. One such article from Medical Device Consultants (MDCI), a full service contract research organization and consulting firm that helps emerging and established firms commercialize novel and innovative medical devices, dated March 21, 2011(included below) best summarizes the issues that we would face if we choose the De Novo pathway.
“The De Novo process has been around since the implementation of the FDA Modernization Act of 1997 (FDAMA). The FDAMA was intended to help improve the efficiency of bringing low-risk medical devices to market, allowing for simpler reclassification of devices that were classified as Class III due to the lack of a suitable predicate. The section of the FDAMA that handled this aspect of medical device classification (Section 513(f)(2)) became known as the De Novo process.
De Novo is a two-step process that requires a company to submit a 510(k) and complete a standard review, including an analysis of the risk to the patient and operator associate with the use of the device and the substantial equivalence rationale. Once that has been accomplished, and the medical device in question has been determined to be Not Substantially Equivalent (NSE) by the FDA, the product is automatically classified as a Class III device. The manufacturer can then submit a request for evaluation of Automatic Class III designation to have the product reclassified from Class III into Class I or Class II. The FDA will review the device classification proposal and either recommend special controls to create a new Class I or II device classification or determine that the product is a Class III device. If FDA determines that the level of risk associated with the use of the device is appropriate for a Class II or Class I designation, then the product can be cleared as a 510(k) and FDA will issue a new classification regulation and product code. This also adds the device in question to the predicate pool, which in turn broadens the market for other medical device companies considering products in a similar therapeutic area. If the device is not approved through De Novo, then it must go through the standard premarket approval (PMA) process for Class III devices.
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The number of FDA NSE determinations due to the lack of a suitable predicate is very low for those low risk medical devices that have the potential for reaching the market via the De Novo process. Medical device manufacturers are attracted to the cost efficiencies associated with the De Novo process when compared against the investment and post-market FDA oversight associated with a PMA. Unfortunately, the time to market for devices eligible for the De Novo process can be very long.
FDAMA calls for the FDA to review and return a decision on a De Novo reclassification submission within 60 days of receipt (the initial submission must be sent by the manufacturer within 30 days of receiving NSE notification). In practice, however, the amount of time taken to review De Novo requests by the FDA and issue the special controls guidance has risen from 62 days in 2006 to 241 days since 2007. Tacked on to the 510(k) review times, devices traveling the De Novo pathway average 482 days of review time from beginning to end.
Further compounding the delays associated with De Novo is the fact that the entire process resembles a procedural “black hole.” The FDA is not required to provide any updates concerning the status of a De Novo application, nor is there any simple way for medical device manufacturers to track a De Novo submission on their own.
De Novo is rare in the realm of low-risk medical devices - a mere 54 products took this particular route between 1998 and 2009. Given the extensive delays associated with the process, MDCI advises medical device companies to consider all other market approval pathways before deciding on to pursue a De Novo reclassification.”
Prepared by Benjamin Hunting, Cindy Nolte, and Helen Mayfield
MDCI Blogging Team”
Understanding that the above statements were a fair representation of the regulatory industry's general feelings towards the FDA De Novo process, management decided to accept and heed the FDA's letter (received on August 2, 2011) detailing their decision of CTLM® being “not substantially equivalent” and furthermore, accepting their recommendation that CTLM® is a class III device that would require a PMA submission. Other considerations such as comparing time frames between De Novo and the PMA process were taken into account. The average De Novo application took 482 days to be reviewed compared to the average PMA review of 284 days. In addition, upon further review, both the De Novo and PMA process require virtually identical clinical safety and efficacy data; therefore, the PMA path was chosen. Management has identified potential FDA regulatory consultants who can guide us through the complete PMA application process and is presently in contract negotiations with several prospective consulting firms.
Progress toward re-submitting a PMA application during Fiscal Year 2012 and the beginning months of Fiscal Year 2013 was significantly delayed and then eventually halted simply due to lack of funding to hire the necessary FDA consultants required to assist in the process. Our employees have reached their level of FDA expertise related to preparing the “ground work” for a PMA application submission and can proceed no further without the expert assistance of FDA consultants.
During the fiscal year ended June 30, 2012, there was a significant reduction in key Company staff due to employee resignations, retirement and layoffs, which reduced operating overhead until additional external funding could be secured. We will not hire replacement staff until such time as we have secured sufficient funding to complete the PMA filing with the FDA. Prior to the reduction in key staff members, an internal PMA application strategy that might allow inclusion of previously collected patient data was developed. This approach (generally referred to as a PMA Protocol) will need to be qualified by our FDA consultants prior to presenting our approach to the FDA Reviewers/Examiners. The forum for this process is generally referred to as an FDA “Pre- IDE” meeting (essentially a pre-clinical meeting) between the Company, its FDA Consultants and the FDA/PMA Examiners. During the “Pre-IDE” meeting, the Company (and its FDA Consultants) would present their approach for both data collection, patient selection and data analysis. The FDA Reviewers would provide input (critique and suggestions) to us as to what they believe an acceptable PMA protocol would require. Once agreement is reached by all parties the next logical step is to implement the protocol. .
During fiscal 2012, a significant reduction in operating overhead/expenses occurred due to the reduction in key staff. This reduction in staff halted any progress towards getting the PMA application started as a result of our financial and funding limitations. We will not be able to proceed with the PMA application process until funding has been secured and the FDA consultants engaged to continue the process. There can be no assurance that we will obtain this funding.
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In summary, our management team believes that the more structured and proven PMA application approach with its semi-rigid timetable for mandatory responses would provide us with the best route to achieve marketing clearance for our innovative new imaging modality that in the future will be classified as Diffuse Optical Tomography.
The CTLM® system is a Diffuse Optical Tomography (DOT) CT-like scanner. Its energy source is a laser beam and not ionizing radiation such as is used in conventional x-ray mammography or CT scanners. The advantages of imaging without ionizing radiation may be significant in our markets. CTLM® is an emerging new imaging modality offering the potential of functional molecular imaging, which can visualize the process of angiogenesis which may be used by the radiologist to distinguish between benign and malignant tissue. X-ray mammography is a well-established method of imaging the breast but has limitations especially in dense breast cases. While x-ray mammography and ultrasound produce two dimensional images (2D) of the breast, the CTLM® produces 3D images. Ultrasound is often used as an adjunct to mammography to help differentiate tumors from cysts or to localize a biopsy site. We believe the CTLM® will be used to provide the radiologist with additional information to manage the clinical case; help diagnose breast cancer earlier; reduce diagnostic uncertainty especially in mammographically dense breast cases; and may help decrease the number of biopsies performed on benign lesions. Because breast cancers nearly always develop in the dense tissue of the breast (not in the fatty tissue), older women who have mostly dense tissue on a mammogram are at an increased risk of breast cancer. Abnormalities in dense breasts can be more difficult to detect on a mammogram. The CTLM® technology is unique and patented. We intend to develop our technology into a family of related products. We believe these technologies and clinical benefits constitute substantial markets for our products well into the future.
In addition, sales of medical devices outside the U.S. 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 marketing clearance and the requirements may differ.
Regulatory approvals, if granted, may include significant limitations on the indicated uses for which the CTLM® 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. 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.
We have engaged the services of FDA regulatory consultants who specialize in FDA matters who assisted us in the final preparation and submission of our FDA application. 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®. See “CTLM® Development History, Regulatory and Clinical Status”.
Any products manufactured or distributed by us pursuant to FDA marketing clearance will be subject to pervasive and continuing regulation by the FDA. Labeling, advertising and promotional activities are subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. In addition, the marketing and use of our products may be regulated by various state agencies. The export of medical devices is also subject to regulation in certain instances. 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”.
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Foreign Regulation
Sales of CTLM® systems 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 have permitted us to begin marketing the CTLM® 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”), we were required to achieve compliance with requirements of the Medical Devices Directive (“MDD”) and affix a “CE” marking on our 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 obtaining these certifications, we utilized the services of a notified body (“NB”). A NB is a private sector regulatory body responsible for the review and approval of the documentation submitted by us to gain CE approval. 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® system. CE marking provides us the opportunity to market the CTLM® within the European Union, one of the largest markets in the world and permits medical device product sales in many other markets worldwide.
In October 2000, we contracted Underwriters Laboratories Inc. (“UL”) to perform safety testing and assist us in achieving the regulatory certifications necessary to begin selling the CTLM® system outside the United States. We also chose our Notified Body to certify our compliance with EN29000/46001/ISO9000 quality assurance standards. In January 2001 we received notice from UL of completion for worldwide safety classification of our CTLM® system. We replaced our European authorized representative with Emergo Europe effective August 1, 2005 in the normal course of business.
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® system by conforming to an effective quality management system recognized around the world.
On September 25, 2001, we received a Certificate of Exportability from the FDA for the CTLM®. The FDA requires unapproved Class III products that are subject to PMA requirements to have FDA Certificate of Exportability in order to be exported outside of the United States. We received a renewal of our Certificate of Exportability dated June 22, 2009, which is valid for two years.
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, 13485:2003, 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 EC Certificate of Approval and our ISO 13485:2003 have been renewed through May 29, 2012.
We have received marketing approval in China and Canada; the CE Mark for the European Union; ISO 13485:2003 registration; UL Electrical Test Certificate; and Product registrations in Brazil and Argentina. The registrations for Brazil and Argentina were not renewed in 2009 because of the costs associated with new testing requirements by UL. We have now completed the Electromagnetic Compatibility (“EMC”) testing required by UL and plan to submit our renewal application for these product registrations in 2011.
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CTLM® DEVELOPMENT HISTORY, REGULATORY AND CLINICAL STATUS
Since inception, the entire mission of IDSI was to further develop and refine the CT Laser Mammography system which was invented in 1989 by our late co-founder, Richard J. Grable. The 1994 prototype was built on a platform using then state-of-the-art computer processors which were slow and lasers which were very sensitive to temperature changes and required frequent calibration and servicing.
In order to market and sell the CTLM® in the United States, we must obtain marketing clearance from the Food and Drug Administration. Initially, we were seeking marketing clearance through an application through Pre-Market Approval (PMA) which must be supported by extensive data, including pre-clinical and clinical trial data, as well as evidence to prove the safety and effectiveness of the device.
A PMA is the FDA process of scientific and regulatory review to evaluate the safety and effectiveness of Class III medical devices. Class III devices are those that support or sustain human life, are of substantial importance in preventing impairment of human health, or which present a potentially unreasonable risk of illness or injury. Due to the level of risk associated with Class III devices, the FDA has determined that general and special controls alone are insufficient to assure the safety and effectiveness of Class III devices. Therefore, these devices require a PMA application in order to obtain marketing clearance.
The FDA automatically classifies new technologies in Class III when limited safety information is available and no predicate device is available. It allows for multiple clinical studies to be pursued to gather the necessary data to obtain safety and clinical information to be used for future FDA submissions. At the time that we were developing the CTLM® system and considering marketing clearance there was not enough data on laser based technologies nor were there approved other new medical devices dedicated to breast imaging other than the traditional x-ray technology. As a result, the FDA recommended that we seek a PMA application.
We received FDA approval to begin our non-pivotal clinical study in February 1999. The first CTLM® was installed at Nassau County (NY) Medical Center in July 1999 and a second CTLM® was installed at the University of Virginia Health System. We submitted the non-pivotal clinical data to the FDA in May 2001. In spite of our efforts to control operating temperatures with thermal cooling cabinets for the lasers and voltage stabilizers to control power, our engineering team led by Mr. Grable decided that they would re-design the CTLM® system into a compact, robust system using surface-mount technology for the electronics and a solid state diode laser that did not require a separate chiller to control its operating temperature. It was a case where technology had to catch up with the invention. Unfortunately, Mr. Grable passed away unexpectedly in 2001. It took several years to re-design and test but our efforts were successful and we began to collect the clinical data necessary to file the PMA application.
In May 2003, we filed a PMA application for the CTLM® to the FDA. In August 2003, we received a letter from the FDA citing deficiencies in our PMA application requiring a response to the deficiencies. We initially planned on submitting an amendment to the PMA application to resolve the deficiencies and requested an extension. In March 2004 we received an extension to respond with the amendment however, in October 2004, we made a decision to voluntarily withdraw the original PMA application and resubmit a modified PMA in a simpler and more clinically and technically robust filing.
In November 2004, we received a letter from the FDA stating that the CTLM® study had been declared a Non-Significant Risk (NSR) study when used for our intended use.
In 2005, we initiated the PMA process by designing a new clinical study protocol and a modified intended use, which limited the participants in the study to patients with dense breast tissue. The inclusion criteria was modified because we believed that we would be more successful in proving our hypothesis of the CTLM® system’s intended use and have the most success at obtaining marketing clearance from the FDA. Concurrently, we identified qualified clinical sites and retained them to proceed with our clinical study.
One of the regulatory requirements for a company (sponsor) to conduct a clinical study within a hospital or imaging center is the regulatory body’s Institutional Review Board (“IRB”) within each hospital or imaging center, which must approve the clinical research the sponsor is requesting. We understood the IRB approval process based on prior experience encountered with the first clinical trial. The IRBs of hospital or imaging centers do not necessarily have a set time frame for reviewing and approving proposed clinical research for a sponsor. Therefore, there is no way a sponsor can anticipate the length of time it will take each IRB to approve the clinical study. We
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were delayed in this process due to the time it took to obtain the necessary approvals from the IRBs since certain IRBs took longer than others to approve the clinical research.
In 2006, we made changes to bring the CTLM® system to its most current design level. We believe these changes improved the CTLM®’s image quality and reliability. Upgraded CTLM® systems were installed at our U.S. clinical sites and data collection proceeded in accordance with our clinical protocol. The data collection continued from 2006 to 2010, progressing slowly due to low patient volume pursuant to the inclusion criteria of our clinical protocol.
In our clinical trial, the physician at each hospital or imaging center who oversees the clinical study is responsible for ensuring that each patient meets the requirements of the study. However, there is no way to determine if the patient that is having her standard x-ray mammogram qualifies for the clinical study of the CTLM® system. For example, each hospital or imaging center has a variable amount of patients scheduled for their mammogram, but it is impossible to determine whether or not a particular patient would meet the inclusion criteria (requirement) of the clinical study. So if there are 13 patients scheduled for a mammogram, we may get only one, or even none that qualify for the clinical study because it is based on the specific inclusion and exclusion criteria determined in the protocol.
The inclusion and exclusion criteria can outline as little or as much as necessary to prove a study, whether it takes five criteria or 15 criteria to prove the study. In order for a patient to qualify, she must meet all the criteria. Otherwise, she cannot be examined and cannot participate as a patient. Therefore, it is impossible to determine how many patients getting their mammogram will qualify each day for the CTLM clinical study because they must meet all the inclusion and exclusion criteria of the study protocol. As a result, it has been impossible for us to anticipate how many cancer cases we will collect as the study proceeded.
In September 2008, we were advised that we did not have sufficient cancer cases to finish the clinical study required for the PMA statistical analysis to be processed by our independent bio-statistician. The clinical study participants were not from a pre-selected patient population. Therefore, we did not know whether the patients had cancer or did not have cancer before they participated in the clinical study.
We announced in March 2009 that our research and development team achieved a technical breakthrough with a new reconstruction algorithm that improved the visualization of angiogenesis in the CTLM® images. Angiogenesis is the process in which new blood vessels are formed in response to a chemical signal sent out by cancerous tumors. The CTLM visualizes the blood distribution in the breast, to detect the new blood vessels (angiogenesis) required for cancerous lesions to grow. The improved algorithm enhances the images by reducing the number of artifacts occasionally produced during an examination, thereby making diagnosis easier. We also incorporated streamlined numerical methods into the software so that the new algorithm does not require additional computing resources, allowing us to provide the improved functionality to existing customers as a software upgrade.
As of May 2009, 10 clinical sites had participated in the clinical trials and at the time we believed we had sufficient clinical data to support our PMA application. However, we did not have sufficient financing to support the clinical sites, initiate the reading phase, the statistical analysis study and the submission of the PMA application to the FDA.
Through the years, new MRI and other dedicated breast imaging systems gained FDA marketing clearance pursuant to applications under the FDA’s Section 510(k) premarket notification. In the last several years, the De Novo 510(k) process became an alternate pathway for new technologies with low to moderate risk an opportunity to seek FDA marketing clearance through this simpler process. In addition, laser safety data and clinical safety and efficacy data were obtained through previous clinical trials to support an FDA application through the traditional 510(k) process. We believe our CTLM® system is of low to moderate risk due to the series of technical studies conducted as well as the series of clinical studies we were engaged in which led the FDA to determine in 2004 that our clinical studies were a Non Significant Risk (NSR) device study.
A Section 510(k) premarket notification is a premarket submission made to the FDA to demonstrate that the device to be marketed is at least as safe and effective as, that is, substantially equivalent to, a legally marketed device that is not subject to PMA. Submitters must compare their device to one or more similar legally marketed devices and make and support their substantial equivalency claims. A legally marketed device is a device that was legally marketed prior to May 28, 1976 for which a PMA is not required, or a device which has been reclassified from Class III to Class II or I, or a device which has been found to be substantially equivalent through the 510(k) process. The legally marketed device(s) to which equivalence is drawn is commonly known as the "predicate" device.
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To submit a Section 510(k) premarket notification application, a company must meet the following guidelines:
To demonstrate substantial equivalence to another legally U.S. marketed device, the 510(k) applicant must demonstrate that the new device, in comparison to the predicate:
·
has the same intended use as the predicate; and
·
has the same technological characteristics as the predicate; or
·
has the same intended use as the predicate; and
·
has different technological characteristics when compared to the predicate, and
·
does not raise new questions of safety and effectiveness; and
·
demonstrates that the device is at least as safe and effective as the legally marketed device.
One possible outcome resulting from applying for a Section 510(k) premarket notification of intent to market that we believed would have been an option, was the evaluation of automatic class III designation, commonly referred to “De Novo process”. The De Novo process is an alternate pathway provided by the FDA to classify certain new devices that had automatically been placed in Class III due to lack of a predicate. The De Novo classification process was created to provide a mechanism for the classification of certain lower-risk devices for which there is no predicate, but would otherwise fall into Class III. The De Novo process is most applicable when the risks of a device are well-understood and appropriate special controls can be established to mitigate those risks.
The de novo process cannot be requested until a Section 510(k) premarket notification has been submitted and the FDA responds with a determination that the device is “not substantially equivalent” (NSE) to the predicate device. The FDA then classifies the applicant devices into Class III designation. Applicants who receive a class III determination from the FDA may request an evaluation for reclassification into Class I or II.
In March 2010, we decided to focus on the possibility of obtaining FDA marketing clearance through a Section 510(k) premarket notification for our CTLM® system instead of a PMA application based on our own research of other medical imaging devices that received a Section 510(k) premarket notification, such as the Aurora MRI Breast Imaging System (the “breast MRI”). Other sources of our research were obtained through reading medical imaging industry publications, the FDA’s website, and discussions with attendees at medical imaging trade shows; specifically the Radiological Society of North America in Chicago, IL in November 2009; Arab Health Show in Dubai, UAE in January 2010, and European Congress of Radiology in Vienna, Austria in March 2010. We began the process of examining the various potential predicate devices that could be credible to support our Section 510(k) premarket notification application.
In July 2010, we made our decision to select as our predicate device the breast MRI. This decision was made as a result of our examination of comparative clinical images between CTLM® and breast MRI, which are both functional molecular imaging devices having the ability to visualize angiogenesis in the breast. We began preparing the Section 510(k) premarket notification submission and engaged the services of a FDA regulatory consultant to review our preliminary draft and then re-engaged the services of our FDA regulatory counsel to complete the Section 510(k) premarket notification application and to submit it to the FDA.
On November 22, 2010, we submitted a Section 510(k) premarket notification application to the FDA for its review. We believed that the Section 510(k) premarket notification submission was the best process to obtain U.S. marketing clearance in the least burdensome and most timely manner. FDA marketing clearance would enable us to market and sell the CTLM® system throughout the United States. Also, we believed that receipt of U.S. marketing clearance will substantially enhance our ability to sell the CTLM® in the international market.
On January 21, 2011, we received a request for additional information from the FDA regarding our Section 510(k) premarket notification application. A request for additional information is quite common during the FDA review process. Due to the extensive amount of additional information requested, we filed the response to the FDA request on July 8, 2011. Upon receipt of our response at the FDA offices, the FDA 90-day response time clock was re-activated. Consequently, we expected to get either an FDA determination on our Section 510(k) application or another request for additional information within the next 90-day time frame.
On August 2, 2011, we received official notification from the FDA that the review of our Section 510(k) premarket notification application had been completed and that the FDA
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determined that the device, (CTLM®), is not substantially equivalent to devices marketed in interstate commerce prior to May 28, 1976, the enactment date of the Medical Device Amendments, or to any device which has been reclassified into Class I (General Controls) or Class II (Special Controls), or to another device found to be substantially equivalent through the Section 510(k) process. This decision was based on the fact that the FDA was not aware of a legally marketed preamendments device labeled or promoted for using “Diffuse Optical Tomography” (DOT) to image the optical attenuation properties of breast tissue in order to aid the diagnosis of cancer, other conditions, diseases, or abnormalities. Therefore, this device was classified by statute into class III (Premarket Approval), under Section 513(t) of the Federal Food, Drug, and Cosmetic Act (the “Act”). All FDA determined Class III devices must fall under Section 515(a)(2) of the Act (which) requires a class III device to have an approved application (PMA) before it can be legally marketed.
The determination by the FDA that our CTLM® imaging technology will now be recognized as a DOT device and that there are no other DOT devices known to the FDA, presents us with a unique technological opportunity. Essentially, IDSI could be the first medical imaging company to file a PMA application for a Diffuse Optical Tomography breast imaging device. Since the FDA has identified CTLM® as a class III device, a formal clinical study will be required to obtain PMA approval. We have begun the PMA process and plan to use clinical studies previously collected, if permitted to do so by the FDA, in addition to new studies we plan to collect over the next several months.
In previous filings, management had disclosed the potential to have our CTLM® device approved through the FDA “De Novo” process. This process would only become an option to us if the FDA did not approve our 510(k) premarket notification of intent to market the device. While waiting for a ruling from the FDA on our 510(k) premarket notification of intent to market the CTLM®, management continued to research the advantages and disadvantages regarding the potential option to initiate a De Novo application if the FDA determined our traditional 510(k) application to be “Not Substantially Equivalent”. Our research identified several articles illustrating the potential pitfalls of going down the De Novo pathway. One such article from Medical Device Consultants (MDCI), a full service contract research organization and consulting firm that helps emerging and established firms commercialize novel and innovative medical devices, dated March 21, 2011(included below) best summarizes the issues that we would face if we choose the De Novo pathway.
“The De Novo process has been around since the implementation of the FDA Modernization Act of 1997 (FDAMA). The FDAMA was intended to help improve the efficiency of bringing low-risk medical devices to market, allowing for simpler reclassification of devices that were classified as Class III due to the lack of a suitable predicate. The section of the FDAMA that handled this aspect of medical device classification (Section 513(f)(2)) became known as the De Novo process.
De Novo is a two-step process that requires a company to submit a 510(k) and complete a standard review, including an analysis of the risk to the patient and operator associate with the use of the device and the substantial equivalence rationale. Once that has been accomplished, and the medical device in question has been determined to be Not Substantially Equivalent (NSE) by the FDA, the product is automatically classified as a Class III device. The manufacturer can then submit a request for evaluation of Automatic Class III designation to have the product reclassified from Class III into Class I or Class II. The FDA will review the device classification proposal and either recommend special controls to create a new Class I or II device classification or determine that the product is a Class III device. If FDA determines that the level of risk associated with the use of the device is appropriate for a Class II or Class I designation, then the product can be cleared as a 510(k) and FDA will issue a new classification regulation and product code. This also adds the device in question to the predicate pool, which in turn broadens the market for other medical device companies considering products in a similar therapeutic area. If the device is not approved through De Novo, then it must go through the standard premarket approval (PMA) process for Class III devices.
The number of FDA NSE determinations due to the lack of a suitable predicate is very low for those low risk medical devices that have the potential for reaching the market via the De Novo process. Medical device manufacturers are attracted to the cost efficiencies associated with the De Novo process when compared against the investment and post-market FDA oversight associated with a PMA. Unfortunately, the time to market for devices eligible for the De Novo process can be very long.
FDAMA calls for the FDA to review and return a decision on a De Novo reclassification submission within 60 days of receipt (the initial submission must be sent by the manufacturer within 30 days of receiving NSE notification). In practice, however, the amount of time taken to review De Novo requests by the FDA and issue the special controls guidance has risen from 62 days in 2006 to 241 days since 2007. Tacked on to the
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510(k) review times, devices traveling the De Novo pathway average 482 days of review time from beginning to end.
Further compounding the delays associated with De Novo is the fact that the entire process resembles a procedural “black hole.” The FDA is not required to provide any updates concerning the status of a De Novo application, nor is there any simple way for medical device manufacturers to track a De Novo submission on their own.
De Novo is rare in the realm of low-risk medical devices - a mere 54 products took this particular route between 1998 and 2009. Given the extensive delays associated with the process, MDCI advises medical device companies to consider all other market approval pathways before deciding on to pursue a De Novo reclassification.”
Prepared by Benjamin Hunting, Cindy Nolte, and Helen Mayfield
MDCI Blogging Team”
Understanding that the above statements were a fair representation of the regulatory industry's general feelings towards the FDA De Novo process, management decided to accept and heed the FDA's letter (received on August 2, 2011) detailing their decision of CTLM® being “not substantially equivalent” and furthermore, accepting their recommendation that CTLM® is a class III device that would require a PMA submission. Other considerations such as comparing time frames between De Novo and the PMA process were taken into account. The average De Novo application took 482 days to be reviewed compared to the average PMA review of 284 days. In addition, upon further review, both the De Novo and PMA process require virtually identical clinical safety and efficacy data; therefore, the PMA path was chosen. Management has identified potential FDA regulatory consultants who can guide us through the complete PMA application process and is presently in contract negotiations with several prospective consulting firms.
Progress toward re-submitting a PMA application during Fiscal Year 2012 and the beginning months of Fiscal Year 2013 was significantly delayed and then eventually halted simply due to lack of funding to hire the necessary FDA consultants required to assist in the process. Our employees have reached their level of FDA expertise related to preparing the “ground work” for a PMA application submission and can proceed no further without the expert assistance of FDA consultants.
During the fiscal year ended June 30, 2012, there was a significant reduction in key Company staff due to employee resignations, retirement and layoffs, which reduced operating overhead until additional external funding could be secured. We will not hire replacement staff until such time as we have secured sufficient funding to complete the PMA filing with the FDA. Prior to the reduction in key staff members, an internal PMA application strategy that might allow inclusion of previously collected patient data was developed. This approach (generally referred to as a PMA Protocol) will need to be qualified by our FDA consultants prior to presenting our approach to the FDA Reviewers/Examiners. The forum for this process is generally referred to as an FDA “Pre- IDE” meeting (essentially a pre-clinical meeting) between the Company, its FDA Consultants and the FDA/PMA Examiners. During the “Pre-IDE” meeting, the Company (and its FDA Consultants) would present their approach for both data collection, patient selection and data analysis. The FDA Reviewers would provide input (critique and suggestions) to us as to what they believe an acceptable PMA protocol would require. Once agreement is reached by all parties the next logical step is to implement the protocol. .
During fiscal 2012, a significant reduction in operating overhead/expenses occurred due to the reduction in key staff. This reduction in staff halted any progress towards getting the PMA application started as a result of our financial and funding limitations. We will not be able to proceed with the PMA application process until funding has been secured and the FDA consultants engaged to continue the process. There can be no assurance that we will obtain this funding.
In summary, our management team believes that the more structured and proven PMA application approach with its semi-rigid timetable for mandatory responses would provide us with the best route to achieve marketing clearance for our innovative new imaging modality that in the future will be classified as Diffuse Optical Tomography.
The CTLM® system is a Diffuse Optical Tomography (DOT) CT-like scanner. Its energy source is a laser beam and not ionizing radiation such as is used in conventional x-ray mammography or CT scanners. The advantages of imaging without ionizing radiation may be significant in our markets. CTLM® is an emerging new imaging modality offering the potential of functional molecular imaging, which can visualize the process of angiogenesis which may be used by the radiologist to distinguish between benign and malignant
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tissue. X-ray mammography is a well-established method of imaging the breast but has limitations especially in dense breast cases. While x-ray mammography and ultrasound produce two dimensional images (2D) of the breast, the CTLM® produces 3D images. Ultrasound is often used as an adjunct to mammography to help differentiate tumors from cysts or to localize a biopsy site. We believe the CTLM® will be used to provide the radiologist with additional information to manage the clinical case; help diagnose breast cancer earlier; reduce diagnostic uncertainty especially in mammographically dense breast cases; and may help decrease the number of biopsies performed on benign lesions. Because breast cancers nearly always develop in the dense tissue of the breast (not in the fatty tissue), older women who have mostly dense tissue on a mammogram are at an increased risk of breast cancer. Abnormalities in dense breasts can be more difficult to detect on a mammogram. The CTLM® technology is unique and patented. We intend to develop our technology into a family of related products. We believe these technologies and clinical benefits constitute substantial markets for our products well into the future.
While we believed the net benefits of submitting a 510(k) application outweighed those of a PMA application for the shareholders, patients and customers, the FDA determined that we must file a PMA application to obtain marketing clearance. The high costs and lengthened review period associated with a PMA application are much greater than with a 510(k) submission.
The procedural and substantive differences in the FDA marketing clearance process between a 510(k) application and a PMA application are in the costs associated with the applications and the duration of the review process. The 510(k) filing fee for small business is $2,174, and the fees of the FDA regulatory consultant assisting with the submission and pre-submission review process were approximately $55,000. The PMA filing fee for a small business is $59,075. We estimate that the fees of the FDA regulatory consultants assisting with the PMA submission and the completion of the data collection phase will be approximately $1,000,000.
In our prior SEC filings, we included disclosure regarding the estimated dates by which we believed that we would be able to file our PMA application including December 2008, March 2009, June 2009, March 2010, April 2010 and July 2010. All of these projections proved incorrect. There were many factors contributing to why we were not able to achieve our projected timelines. After each delay, we disclosed in subsequent SEC filings a new projected date based on what we believed at that point in time would be a reasonable estimate of when we would be able to file our application for FDA marketing clearance. The factors contributing to these delays include, but are not limited to, the following:
·
Designing a new clinical study protocol and a modified intended use,
·
Identifying qualified clinical sites and retaining them to proceed with our clinical study,
·
Obtaining the necessary approvals from the Institutional Review Boards (“IRB”),
·
Updating the CTLM® system to its most current design level,
·
Our research and development team finalizing the improvements regarding the reconstruction algorithm by enhancing the CTLM® images by reducing the number of artifacts which would enable the physician to interpret the images more easily,
·
Low patient volume following the inclusion criteria of our clinical protocol,
·
Lack of cancer cases required for the PMA statistical analysis, and
·
Lack of sufficient financing to support the clinical sites, initiate the reading phase, the statistical analysis study and the preparation and submission of the PMA application to the FDA.
We believed that our Private Equity Credit Agreements would provide substantially all of the financing needed by IDSI for its operations and the costs associated with the filing of our FDA application for marketing clearance. Unfortunately, the continued sale of stock through our Private Equity Credit Agreements caused dilution, a decline in the stock price, and the depletion of our available authorized shares.
There was no assurance that the Section 510(k) premarket notification would result in marketing clearance. Since we were unsuccessful in our pursuit of Section 510(k) marketing clearance, we would have to return to the PMA process, which would take substantial additional time and funding, with no assurance of success.
We are engaging the services of FDA regulatory consultants who specialize in FDA matters. If we are unable to obtain prompt FDA marketing clearance, it will have a material adverse effect on our business and financial condition and would result in postponement of the commercialization of the CTLM®.
In addition, sales of medical devices outside the U.S. may be subject to international regulatory requirements that vary from country to country. The time required to gain approval for
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international sales may be longer or shorter than required for FDA marketing clearance and the requirements may differ. Also, we believe that receipt of U.S. marketing clearance will substantially enhance our ability to sell the CTLM® in the international market.
Regulatory approvals, if granted, may include significant limitations on the indicated uses for which the CTLM® 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. Product approvals could be withdrawn for failure to comply with regulatory standards or the occurrence of unforeseen problems following initial marketing.
Any products manufactured or distributed by us pursuant to FDA marketing clearance will be subject to pervasive and continuing regulation by the FDA. Labeling, advertising and promotional activities are subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. In addition, the marketing and use of our products may be regulated by various state agencies. The export of medical devices is also subject to regulation in certain instances. 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”.
The development chronology stated above details how complicated the process is to develop a brand new medical imaging technology. We believe that we have a strong patent portfolio and are the world leader in optical tomography. We have received marketing approval in China and Canada; the CE Mark for the European Union; ISO 13485:2003 registration; UL Electrical Test Certificate; and Product registrations in Brazil and Argentina. The registrations for Brazil and Argentina were not renewed in 2009 because of the costs associated with new testing requirements by UL. We have now completed the Electromagnetic Compatibility (“EMC”) testing required by UL and plan to submit our renewal application for these product registrations in 2011. Worldwide, our end users have completed more than 25,000 patient scans, and we have sold 17 CTLM® systems as of the date of this report. Our decision to fund the Company primarily through the sale of equity has enabled us to reach this important milestone.
In fiscal 2010, fiscal 2011, fiscal 2012 and thus far in fiscal 2013, we have used the proceeds from short-term loans, long-term loans and proceeds from our Southridge Private Equity Credit Agreement for working capital. Going forward we intend to use the proceeds from short term and long term loans and issuance of convertible preferred stock, as our sources of working capital. We may also seek to raise fund through our Private Equity Credit Agreement with Southridge which requires an effective S-1 Registration Statement. Substantial additional financing will be required before and after receipt of FDA marketing clearance, assuming it is received, as to which there can be no assurance. See Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters - “Financing/Equity Line of Credit.”
Clinical Collaboration Sites Update
CTLM® Systems have been installed and patients are being scanned under clinical collaboration agreements as follows:
1)
Humboldt University of Berlin, Charité Hospital, Berlin, Germany
2)
The Comprehensive Cancer Centre, Gliwice, Poland
3)
Catholic University Hospital, Rome, Italy
4)
MeDoc HealthCare Center, Budapest, Hungary
5)
Tianjin Medical University’s Cancer Institute and Hospital, Tianjin, China
We were pleased to learn in June 2012 that a clinical paper produced by Dr. J. Qi, an independent CTLM® researcher based in Tianjin Medical University Cancer Institute and Hospital Tianjin, China, is pending publication in “Clinical Imaging,” a highly respected radiology journal based in New York, NY. Each article accepted for publication undergoes a thorough review for content and accuracy by an editorial board of Radiologists.
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The paper by Dr. Qi titled, “CTLM as an adjunct to Mammography in the diagnosis of Patients with Dense Breasts”, reported that when a CTLM® study was combined with a (digital) x-ray based mammogram -breast cancer detection rate otherwise medically referred to as test “sensitivity” was significantly improved from a low of 34.40% to a new high of 81.57% when dealing with Extremely Dense Breasts (ACR classification). In addition, the researchers “could distinguish malignant from benign lesions”.
We are very pleased that the clinical benefits of a CTLM® breast exam have been validated by a group of independent researchers. We believe that Dr. Qi’s results will be further validated upon completion of our PMA application to the FDA.
The abstract of the article can be found at www.clinicalimaging.org and searched under the title “CTLM as an adjunct to mammography in the diagnosis of patients with dense breasts”.
We are in discussions with other hospitals and clinics wishing to participate in our clinical collaboration program. We have been commercializing the CTLM® 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 outside of the United States. These investments may accelerate CTLM® market acceptance while providing valuable clinical experiences.
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Domestic Sales and Marketing
The CTLM will be positioned as an adjunct to x-ray mammography and may be especially useful in studies of dense breasts. Consequently, CTLM will be marketed to centers performing x-ray mammography. There are approximately 8,600 Mammography Quality Standards Act (MQSA) centers certified in the United States. Sales in the U.S. cannot occur unless and until we receive pre-market approval from the FDA. IDSI will begin marketing to the centers following FDA approval.
Since CT laser breast imaging is a new imaging modality the rate at which the CTLM® 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®, and the advantage of the CTLM® when used as an adjunct to existing technology and cancer detection methods. We believe that the clinical data being collected and assessed under our FDA clinical trial and at research sites will have a significant impact on the ultimate market size for our device. 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®.
In order to effectively 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.
On July 11, 2011, we announced that we established a scientific advisory panel to assist with product development, future clinical studies and additional applications of our CTLM®. The advisory panel will consist of leading physicians and scientists. The initial members are Huabei Jiang, Ph.D., Professor in the J. Crayton Pruitt Family Department of Biomedical Engineering at the University of Florida; Alexander Poellinger, MD, head of the Outpatient’s Care Center of Charite Hospital, (Radiology) in Berlin, Germany; and Eric Milne, MD, FFR, FRCP, FRCP&S, our former Director of Clinical Research and former Chairman of Radiology and Chief of Chest Radiology at University of California - Irvine.
International Sales
We are pursuing international sales in those countries where regulations permit us to begin marketing the CTLM® subject to certain homologations. Some countries, including Japan, require FDA approval before the CTLM® can be marketed. As part of our global commercialization program for the CTLM®, 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® in the United States, a significant portion of our revenues 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.
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International Distributors - Global Commercialization
The following table details the regulatory requirement and status of each country in which we have sold or marketed the CTLM®.
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(1) Will be renewed upon appointment of new distributor.
(2)
Distributor will renew ANVISA.
(3)
MOH - Ministry of Health
(4)
DOH - Department of Health
(5)
CICI - The Croatian Institute for Health Insurance
(6)
JFDA - Jordan Food and Drug Administration
(7)
BHDT - Bureau of Health Devices and Technology
(8) TGA had requested additional documentation of our initial approval from our former distributor, which they did not provide timely. The initial approval was canceled and
our new distributor will resubmit the application.
(9) CDSCO - Medical Device Division, Not required as this time but will be required for some classes of medical devices in 2011 or 2012.
(10)
BPFK - Malaysia National Pharmaceutical Control Bureau, Registration is voluntary
(11)
COFEPRIS - Mexico Ministry of Health
(12) DirJenPOM - We received a deposit from our distributor Jainsons Pty Ltd. and the system was installed in Jakarta, Indonesia. Our distributor is responsible for registering the CTLM® with the Indonesia Director General of Food and Drugs (“DirJen POM”) who controls the registration of medical devices. Product registrations for medical devices issued from certain designated countries such as Canada can be used to support the registration in Indonesia with the DirJen POM. The CTLM® system has received international certifications and licenses from the European Union, CE mark; Canada, CMDCAS Canadian Health screening; China, SFDA; and ISO 13485 issued by UL.
(13) Our distributor, National Diagnostic Service and Management LLC of Novi, Michigan, through its affiliate Phoenix Med of Moscow, Russia, has submitted an application to the Ministry of Health which is currently pending.
We market our CTLM® system in the countries listed in the table above, where permitted. Product registration is not necessarily required to market our CTLM® in a particular country. Prior to processing a Purchase Order, we would contact either a regulatory service or the distributor in that particular country to determine what, if any, product registration is required.
We have never shipped nor would we ever ship a CTLM® system to any country without first obtaining the necessary regulatory approvals or product registration, if required. Any medical device that is shipped into a country without approval or registration would be quarantined in customs and the shipper would be advised that the device would be sent back to them. However, we are permitted to ship CTLM® systems for product demonstration or exhibition at trade shows without registering the product in that country.
In March 2009, we announced that we had redefined our marketing strategy and launched a new campaign focusing on the international market. Because of our disappointment with the performance of many of our previous distributors, we have terminated their distribution agreements for non-performance or allowed their agreements to expire. In April 2009, we were pleased to announce that we renewed our distribution agreement with EDO MED Sp. Z.o.o. as our exclusive distributor in Poland. EDO MED will continue to market and provide technical service support for the CTLM® throughout Poland, as well as to assist with and promote the ongoing research efforts utilizing CTLM® technology at the Comprehensive Cancer Centre in Gliwice, Poland and other institutes and research centers. Currently, the CTLM® system is in use at the Comprehensive Cancer Centre, Maria Sklodowska-Curie Memorial Institute, in Gliwice.
In the Asia-Pacific Region, we previously announced that we contracted with BAC, Inc. to manage our representative office in Beijing, existing distributors and develop new areas. As part of our continuing cost cutting initiatives, we closed our representative office in January 2009, and in December 2008, we terminated our contract with BAC, Inc. for non-performance. In March 2009, we announced the appointment of Jainsons Pty Ltd Company as our new distributor for Australia and New Zealand. In July 2010, we announced that we installed a CTLM® system at Tata Memorial Hospital, the national cancer comprehensive cancer center in Mumbai, India. The system was placed by Anto Puthiry, Managing Director of High-Tech Healthcare Equipments Pvt. Ltd. We continue to seek qualified distribution channels in China but as of the date of this report we have not secured such channels.
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In September 2007, we announced the installation of a CTLM® system at the Tianjin Medical University’s Cancer Institute and Hospital (“Tianjin”), the largest breast disease center in China. The hospital evaluated the CTLM® under three research protocols designed to improve current methods of addressing breast cancer imaging and treatment follow-up. We previously announced that we installed a CTLM® system at Beijing’s Friendship Hospital, which enabled CTLM® clinical procedures to become listed on the Regional and subsequently the National Schedule for patient payments.
In December 2008, we announced that a recent study of the CTLM® was one of the featured scientific abstracts at the Radiological Society of North America (“RSNA”) from November 30th to December 5th. Dr. Jin Qi, a radiologist at the Tianjin Medical University Cancer Institute and Hospital, Tianjin, China was selected for her clinical paper, “CTLM as an Adjunct to Mammography in the Diagnosis of Patients with Dense Breasts.” Dr. Qi attended RSNA with IDSI and was present at our exhibit. Dr. Qi’s clinical paper was accepted as one of the European Congress of Radiology’s conference presentations in March 2009. The study demonstrated that: “when the CTLM® system was used as an adjunct to mammography in heterogeneously and extremely dense breasts, the sensitivity (detecting cancer) increased significantly.”
We previously signed an exclusive distributor in Malaysia, where interest in breast cancer detection and treatment was surging due to publicity surrounding their former First Lady, who succumbed to the disease. In September 2007, we announced the installation of a CTLM® system at the Univeriti Putra Malaysia (“UPM”) in Kuala Lumpur, Malaysia. The CTLM® was installed at UPM’s academic facility within the jurisdiction of the Ministry of Education and was evaluated by specialists from UPM in conjunction with specialists from Serdang Hospital in Kuala Lumpur. Following the evaluation at UPM, we appointed a new distributor, Daichi Holding Berhad (“Daichi”) of Penasng, Malaysia. The CTLM® was removed from UPM academic facility at the conclusion of the evaluation period. Daichi issued a purchase order for this system and it was initially installed in August 2009 at Catherine Women’s Medical Center in Petaling Jaya, Malaysia. On September 22, 2009, we announced that Daichi completed the purchase of the system with full payment. In June 2010, Daichi notified us that they were relocating the system and is now installed at the Breast Wellness (M) SDN. BHD (a public limited liability company) in Petaling Jaya, Malaysia.
Activities in Europe and the Middle East are top marketing priorities for IDSI. As a result of our participation as an exhibitor at the Arab Health Medical Conference in January 2010 in Dubai, UAE, and at the European Congress of Radiology (“ECR”) in March 2010 in Vienna, Austria, we were able to meet with qualified distributors to discuss their interest in representing us in their respective territories. While attending Arab Health, we hired a Managing Director to market the CTLM® in the UAE and parts of the Middle East. We are not marketing or seeking distributors and will not market the CTLM® directly or indirectly in Iran, Sudan and/or Syria and other Middle Eastern countries that are subject to U.S. economic sanctions and export controls.
Additionally, we are negotiating with distributors in Egypt, Jordan, Saudi Arabia, India, and Belgrade. In April 2009, we signed a non-exclusive agreement with Neomedica d.o.o. Beograd to market the CTLM® system to the private and public sectors of Slovenia, Croatia, Serbia, Montenegro, and Macedonia. In October 2008, we announced that our distributor, Laszlo Meszaros of Kardia Hungary Kft. purchased the first CTLM® system for Budapest, Hungary. The CTLM® system has been installed at the new MeDoc HealthCare Center (“MDHC”) located in Budapest, in collaboration with Dr. Maria Gergely, Chief Radiologist of Uzsoki Hospital.
Our distributor, The Oyamo Group (“Oyamo”) placed an order for the first CTLM® system for Israel in October 2008. Oyamo obtained the import license from The Israeli Ministry of Health for the CTLM® system and the system was installed in November 2010 at Sheba Medical Center at Tel Hashomer, which is outside of Tel Aviv.
In December 2008, we announced that a new study evaluating the CTLM system as an adjunct to mammography was featured in the December 2008 issue of Academic Radiology. Alexander Poellinger, M.D., a radiologist at Charite Hospital in Berlin. Germany, authored “Near-infrared Laser Computed Tomography of the Breast: A Clinical Experience” along with colleagues at Charite and IDSI’s Director of Advanced Development as co-author. Their work demonstrated an increase in accuracy of diagnosing malignant and benign breast lesions in patients who were examined with mammography and CTLM adjunctively compared to mammography alone. Dr. Poellinger’s clinical paper was distributed to doctors
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and distributors visiting our booth at the European Congress of Radiology in March 2009.
In March 2010, we exhibited our CTLM® system and clinical results at the annual European Congress of Radiology (ECR 2010) held from March 4 -8, in Vienna, Austria. ECR 2010 attracted approximately 19,000 participants worldwide. ECR is one of the largest medical meetings in Europe and the second largest radiology meeting in the world and currently has 45,000 members.
In November 2010, we exhibited our CTLM® system with our Canadian distributor, Arc Diagnostic at the Health Achieve 2010 in Toronto, Canada. This exposition provided IDSI the opportunity to introduce and showcase the CTLM® system for the first time in Canada to prestigious hospitals, decision makers and Ministry of Health and business leaders in the area.
In November 2010, we exhibited our CTLM® system at the 96th RSNA show in Chicago, IL from November 28th to December 2nd.
In December 2010, we announced that we received a deposit for two CTLM® systems from our distributor, Jainsons Pty Ltd for India and Indonesia. The first CTLM® system was installed at a private imaging center in Ahmedabad, India on December 11, 2010.
In January 2011, we exhibited the CTLM® at the Arab Health 2011 medical conference held from January 24 - 27 at the Dubai International Convention and Exhibition Centre in Dubai, United Arab Emirates (UAE). We presented clinical images obtained from the CTLM® system, identified potential distributors for the Middle East region and obtained prospective sales leads. The Arab Health Exhibition and Congress is one of the largest and most prestigious healthcare events in the Middle East, with over 2,700 exhibitors from 141 countries and more than 65,000 medical professionals.
In February 2011, we announced that we completed installation and applications training of a CTLM® system at the Hang Lekiu Medical Center in Jakarta, Indonesia. This was the second CTLM® system installed to complete the order from our distributor, Jainsons Pty Ltd, received in December 2010.
On April 26, 2011, we announced that we have signed an exclusive distribution agreement with Kepter Internacional (“Kepter”) of Monterrey, Mexico to promote our CTLM® systems throughout Mexico. Kepter is headquartered in Monterrey, Mexico with operations in Central and South America. The company represents innovative technologies nationally and internationally providing solutions for various aspects of the healthcare industry and infectious control. Kepter's strategy is to offer environmental friendly and cost effective alternatives to conventional operations in the healthcare and commercial construction industry. Currently, Kepter’s representatives are working closely with the Mexican Health Ministry to gain national acceptance for the CTLM® system; however, there can be no assurance that this acceptance will be obtained.
In July 2011, we announced that we signed an exclusive distribution agreement with National Diagnostic Service and Management LLC (“NDSM”) of Novi, Michigan and its affiliate Phoenix Med of Moscow, Russia to promote our CTLM® systems throughout Russia. NDSM and its partners distribute medical diagnostic and medical laser equipment and service support throughout Russia. As an independent distributor with over 15 years of experience within the Russian medical market and employing only product certified engineers, NDSM and Phoenix Med have a long established reputation within the women’s health medical community. NDSM has initiated the medical device registration process required to import medical equipment into Russia.
On August 2011, we announced that we would be exhibiting our CTLM® at the FIME 2011 medical trade fair conference to be held on August 10th to 12th in Miami Beach, FL. Dr. Jose Cisneros, our Director of Clinical Research was invited to present, “New Imaging Modalities for Breast Cancer” featuring our CTLM® system at the FIME conference.
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In October 2011, we announced that the CTLM® purchase was confirmed after a successful rigorous evaluation of our CTLM® system at the Hang Lekiu Medical Center in Jakarta, Indonesia. This positive outcome reinforces DOT as a valuable new breast imaging modality. Hang Lekiu Medical Center is a leading provider of advanced multi-disciplined medical care in a modern patient friendly environment. The evaluation was initiated February 2011 by introducing the unique clinical benefits of CTLM® to Indonesia’s Health Minister Endang Rahayu Sedyaningsih, local officials and key news organizations.
In November 2011, we announced that our exclusive distributor for Mexico, Kepter Internacional (“Kepter”), placed an order for five CTLM® systems with one system to be delivered and installed the third week of December 2011. In connection with the first system, Kepter paid a $45,000 deposit. Kepter advised us that they were unable to accept delivery in December so we shipped the system in January 2012. In August 2012, the CTLM® was installed at the Centro Medico Ave in Monterrey, Mexico. On September 12, 2012, Linda Grable Chairman/CEO and Deborah O’Brien, Senior Vice-President attended the official inauguration of the CTLM® installation at the Centro Medico Ave. The event was attended by the medical community, government officials and local community leaders. IDSI's exclusive distributor in Mexico, Kepter, has created a new company, “Sistemas de Diagnostico e Imagenologia de Mexico S.A. de C.V.”, committed to establishing other CTLM® sites throughout Mexico. A video of the event can be viewed at http://vimeo.com/49416717.
In November 2011, we announced that we would be exhibiting our CTLM® at the 97th annual Radiological Society of North America (RSNA) Scientific Assembly meeting in Chicago, IL from November 27th to December 2nd. This meeting gave us the opportunity to present the CTLM® system which has been recently recognized as Diffuse Optical Tomography (DOT) to the national and international markets.
In December 2011, we announced that we signed an exclusive distribution agreement with ID Matrix Systems to market and sell our CTLM® systems to private and government hospitals and private imaging centers throughout China and Hong Kong. The agreement stipulates that ID Matrix must purchase a minimum of 15 CTLM® systems within the first year of the contract along with a 50% deposit with each order to remain our exclusive distributor for the territories.
In December 2011, we received an order for one CTLM® system with a deposit of $50,000 from our exclusive distributor, ID Matrix, which was initially scheduled to ship to China during the first week of January 2012. The distributor was not ready to take delivery so we will wait for their instructions for delivery.
In January 2012, we exhibited the CTLM® at the 37th annual Arab Health 2012 medical conference held from January 23 - 26 at the Dubai International Convention and Exhibition Centre in Dubai, United Arab Emirates (UAE). . This meeting gave us the opportunity to present the CTLM® system which has been recently recognized as Diffuse Optical Tomography (DOT) to the Middle East markets. We presented clinical images obtained from the CTLM® system, identified potential distributors for the Middle East region and obtained prospective sales leads. The Arab Health Exhibition and Congress is the largest and most prestigious healthcare event in the Middle East, with over 3,000 exhibitors from 100 countries and more than 70,000 medical professionals.
On May 14, 2012, we signed a distribution agreement with Shimadzu Medical to market the CTLM® in Australia, New Zealand and the Pacific Islands. Shimadzu Medical Systems (Oceania) Pty Ltd is an Australasian subsidiary of Shimadzu Corporation, Kyoto, Japan.
Among our global users, we have three systems in Poland, two in Italy, two in the Czech Republic, two systems in the United Arab Emirates, two systems in India, and two systems in China as well as one system each in Germany, Hungary, Malaysia, Israel, Indonesia, Brazil and Mexico. As of the date of this report, IDSI’s users have performed over 25,000 CT Laser Mammography (CTLM®) patient scans worldwide.
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® or by refusing reimbursement. 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.
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The U.S. President and Congress have enacted a comprehensive reform of the U.S. healthcare system through the passage of the Health Care Reform Act of 2010 (the “Act”). The ultimate effect of this new Act to reform health care is uncertain, and there can be no assurance that the changes made to the U.S. healthcare system will not materially adversely affect us. Some of the provisions in the Act may limit and further reduce and control spending on healthcare products 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. These reforms could cause U.S. healthcare providers to limit use of or not use the CTLM® systems, in which case we would be materially adversely affected.
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® 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. We previously carried $3,000,000 in product liability insurance to cover both clinical sites and sales. As part of our cost savings initiatives, we cancelled the policy as we have not had any adverse experiences after conducting more then 25,000 patient scans worldwide.
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® 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® is being marketed as an adjunct to mammography and will not compete directly with X-ray mammography. CTLM® 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® 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.
To our knowledge, several companies are targeting the breast optical imaging market. Advanced Research Technologies, Inc. (ART) (TSX:ARA) is developing a non-3D imager which does not utilize our patented continuous wave technology and in which the breast must be immersed in a gel to be scanned. ART may have distribution agreements with GE Medical should a product become available. ART has not received a PMA.
In December 2005, Philips Medical Systems announced their intent to develop optical imaging equipment with an intention to “be on the market early after 2010.” IDSI also believes that Siemens Medical Systems may be developing optical imaging equipment.
CTLM® Laser Mammography Systems are installed in the following countries: Italy, Germany, Poland, Hungary, the Czech Republic, the Peoples Republic of China, Malaysia, Israel, India, Indonesia, Brazil, Mexico and the United Arab Emirates. Over 25,000 breast exams have been completed on CTLM® systems.
Patents
The rapid technological advancements that characterize the medical device industry have led us to rely on a combination of patents, trade secrets, copyrights, trademarks, and confidentiality procedures and processes to protect our CTLM® and other technologies that we have developed.
The original patent for the CTLM® 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.
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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® 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 22 patents and have two additional United States patents pending with regard to optical tomography, many of which are based on the original CTLM® technology. We also have 17 International patents and have two International patents pending.
Intellectual Property
We hold the following patents:
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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® system. The CTLM® 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.
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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® 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® 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® 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®, 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”.
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® to scan the breast without the use of breast compression.
In January 2002, 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
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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.
In June 2004, we were granted a Chinese Patent for “Diagnostic Tomographic Laser Imaging Apparatus” as Chinese Patent No. ZL95197940X. The patent, the Chinese counterpart of U.S. Patent 5,692,511, 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.
In January 2007, we were granted U.S. Patent 7,155,274, entitled “Optical Computed Tomography Scanner for Small Laboratory Animals,” the first patent application of the LILA technology.
In May 2007, a new patent for our optical CT scanner for small laboratory animals was issued as U.S. Patent 7,212,848. This second patent adds the concept of a second laser which will provide a geographic reference for the fluorescence image. Our first patent covered the basic CT fluorescent imaging of small laboratory animals.
In November 2007, we announced the issuance of Chinese patent ZL 99 8 16608.1, issued July 11, 2007, entitled “Laser Imaging Apparatus using Biochemical Markers that Bind to Cancer Cells.” The patent is granted for a period 20 years from date of filing, until April 1, 2019. This patent, equivalent to U.S. patent 5,952,664, protects the concept of imaging and activating a photodynamic therapy agent in an optical CT scanner.
In November 2008, we were granted U.S. Patent 7,446,875, entitled “Apparatus and Method for Acquiring Time Resolved Measurements Utilizing Direct Digitization of the Temporal Point Spread Function of the Detected Light”. This invention developed by our engineers covers a key technology for time-resolved optical imaging which improves the quality of the imaging data and decreases the time required to acquire the image data.
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In July 2011, we were granted U.S. Patent 7,977,619, entitled “Detector Array for Use in a Laser Imaging Apparatus”. This patent protects the use of a number of different types of photo-detectors and several detector geometries for our Diffuse Optical Tomography (“DOT”) application.
In September 2011, we were granted U.S. Patent 8,027,711, entitled “Laser imaging apparatus with variable patient positioning.” This invention is designed to simplify patient positioning thus providing better image quality and simplified operator setup.
We intend to file for patents on products, including the CTLM®, 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, we could be materially adversely affected.
Patent Licensing Agreement
IDSI was formed in December 1993 for the sole purpose of developing and commercializing Mr. Richard Grable's invention, a CT laser breast-imaging device (the “Mammoscan™”).
In June 1998, IDSI signed an exclusive patent license agreement with the late Richard Grable, which covers some of the technology for the CTLM®. The term of the license is for the life of the Patent (17 years) and any renewals, subject to termination under specific conditions. The Patent Licensing Agreement has an expiration date of December 2, 2014. As consideration for this license, Mr. Grable received 7,000,000 shares of common stock and a royalty based upon a percentage, ranging from 6% to 10%, of the dollar amount earned from each sale before taxes minus the cost of the goods sold and commissions or discounts paid. The license agreement provided Mr. Grable with protection against dilution where, upon the occurrence of any stock dividend, stock split, combination or exchange of shares, reclassification or recapitalization of the Company's common stock, reorganization of the Company, consolidation with or merger into or sale or conveyance of all or substantially all of the Company's assets to another corporation or any other similar event which serves to decrease the number of Shares issued pursuant to the agreement (the "Event"), Mr. Grable shall receive, as additional consideration, that number of shares equal to the difference between the 7,000,000 Shares issued under the agreement and the number of Shares Mr. Grable has remaining subsequent to the Event.
The license agreement may be terminated at any time by Mr. Grable in the event that IDSI shall fail to perform any of its covenants and obligations in the agreement. Upon written notice of termination delivered to IDSI by Mr. Grable, stating the nature and character of the breach and allowing IDSI an opportunity to cure such failure within 15 days after giving notice, if the failure has not been corrected by IDSI within the 15 day period Mr. Grable may terminate the agreement without the requirement of any additional notice to IDSI to that effect. Notwithstanding the above, Mr. Grable is not required to give IDSI the opportunity to correct a default that is a repetition within any 12 month period of a prior default for the same cause and may terminate the agreement by written notice in that event.
The royalty provisions do not apply to sales made prior to receipt of FDA marketing clearance for the CTLM®. In addition, following FDA marketing clearance, Mr. Grable would be eligible for minimum royalties of $250,000 per year based on the sales of the products and goods in which the CTLM® patent is used. Mr. Grable’s interests in the patent license agreement passed to his estate in August 2001. Linda B. Grable, our Chairman and CEO, is the principal beneficiary of Mr. Grable’s estate.
The following table sets forth the Patent licensing royalty structure:
The Patent Licensing Agreement was originally filed as Exhibit 10.2 to our Form S-2 on July 21, 1998 as a text document. To make the Patent Licensing Agreement more accessible on EDGAR, we re-filed the Agreement on March 15, 2011, Exhibit 10.115 in Amendment No. 2 of our S-1 Registration Statement.
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Employees
As of October 2012, we have 10 full-time employees, including our four executive officers. Two of our employees (20%), are employed in the areas of scientific, clinical and product research and development. In September 2011, we had 18 full-time employees, of which six (33%) were employed in the areas of scientific, clinical and product research and development. During fiscal 2012 there was a significant reduction in key Company staff due to employee resignations, retirement and layoffs, which reduced operating overhead until additional external funding could be secured. We will not hire replacement staff until such time as we have secured sufficient funding to complete the PMA filing with the FDA. 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 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 1A.
Item 1A. Risk factors
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-K contains “forward-looking statements” within the meaning of the federal securities laws and use terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “projects”, “potential,” or “continue,” or the negative or other comparable terminology regarding beliefs, plans, expectations, or intentions regarding the future. These forward-looking statements involve substantial risks and uncertainties, and actual results could differ materially from those discussed and anticipated in such statements. 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®. This strategy assumes that the CTLM® will provide benefits, from both a medical and an economic perspective, to alternative techniques for diagnosing and managing breast cancer. Factors that could cause actual results to materially differ include, without limitation, the timely and successful completion of our U.S. Food and Drug Administration (“FDA”) clinical trials; the timely and successful submission of our FDA application to obtain marketing clearance; manufacturing risks relating to the CTLM®, including our reliance on a single or limited source or sources of supply for some key components of our products as well as the need to comply with especially high standards for those components and in the manufacture of optical imaging products in general; uncertainties inherent in the development of new products and the enhancement of our existing CTLM® product, including technical and regulatory risks, cost overruns and delays; our ability to accurately predict the demand for our CTLM® product as well as future products and to develop strategies to address our markets successfully; the early stage of market development for medical optical imaging products and our ability to gain market acceptance of our CTLM® product by the medical community; our ability to expand our international distributor network for both the near and longer-term to effectively implement our globalization strategy; our dependence on senior management and key personnel and our ability to attract and retain additional qualified personnel; risks relating to financing utilizing our Private Equity Credit Agreement or other working capital financing arrangements; technical innovations that could render the CTLM® or other products marketed or under development by us obsolete; competition; risks and uncertainties relating to intellectual property, including claims of infringement and patent litigation; risks relating to future acquisitions and strategic investments and alliances; and reimbursement policies for the use of our CTLM® product and any products we may introduce in the future. There are also 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 that 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. These risks and uncertainties include, but are not limited to, those described above or
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elsewhere in this report. All forward-looking statements and risk factors included in this document are made as of the date of this report based on information available to us as of the date of this report, and we assume no obligation to update any forward-looking statements or risk factors. You are cautioned not to place undue reliance on these forward-looking statements.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Risks associated with our financial results
We have incurred and are incurring significant losses and we may not be able to continue our business in the future.
At June 30, 2012, we had an accumulated deficit of $120,973,036 after discounts and dividends on preferred stock. These losses have resulted principally from costs associated with research and development, clinical trials and from general and administrative costs associated with our operations. We expect operating losses will continue until such time as we obtain marketing clearance for the CTLM® from the FDA. However, there can be no assurance that we will ever obtain this marketing clearance. The losses are due primarily to the anticipated expenses associated with:
• demonstrator sites
• clinical collaboration sites
• FDA PMA approval process,
• anticipated commercialization of the CTLM®, and
• other research and development programs
We have a limited history of operations. Since our inception in December 1993, we have been engaged principally in the development of the CTLM®, which has not received marketing clearance for sale in the United States. While we have received FDA export approval for foreign sales, we have made only 17 foreign sales. Consequently, we have limited experience in manufacturing, marketing and selling our products. We currently have no source of material operating revenues and have incurred substantial net operating losses since inception.
Our auditors have raised substantial doubts as to our ability to continue as a going concern as we have not been and may not be able to be profitable.
We have received an opinion from our auditors stating that the fact that we have suffered substantial losses and have yet to generate an internal cash flow raises substantial doubt about our ability to continue as a going concern. Our ability to achieve profitability will depend on our ability to obtain regulatory approvals for the CTLM®, develop the capacity to manufacture and market the CTLM® and achieve market acceptance of the CTLM®. There can be no assurance we will achieve profitability if and when we receive regulatory approvals for the development, commercial manufacturing and marketing of the CTLM®.
Risks associated with our lack of capital
We require additional capital which we may be unable to raise which may cause us to stop or cut back our operations.
Through June 30, 2012 we have spent approximately $81 million. Our currently estimated annual expenses are approximately $3 million. In the year following receipt of marketing clearance for our CTLM® from the FDA, we anticipate that we will need approximately $10 million to fully complete all necessary stages in order to manufacture and market the CTLM® in the United States and foreign countries. We plan on using the net proceeds raised from the sale of convertible preferred stock and common stock through private placements and through short-term loans obtained through the issuance of convertible promissory notes to develop and market this product family, including funds for:
• research, engineering and development programs,
• pre-clinical and clinical testing of the family of products,
• regulatory processes,
• inventory,
• marketing programs, and
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• operating expenses (including general and administrative expenses).
We may also seek to raise fund through our Private Equity Credit Agreement with Southridge Partners II, LP (“Southridge”) which requires an effective S-1 Registration Statement.
Our future capital requirements depend on many factors, including the following:
• the progress of our research and development projects,
• the progress of pre-clinical and clinical testing on other proposed products,
• 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.
In addition, our fixed commitments are substantial and would increase if additional agreements were entered into and additional personnel were retained. We do not expect to generate a positive internal cash flow for at least 12 months due to an anticipated increase in marketing and manufacturing expenses associated with the international commercialization of the CTLM®, expenses associated with our FDA process, and the costs associated with advanced product development activities.
Although we have from time to time reviewed opportunities provided to us by investment bankers or potential investors in regard to additional equity financings, there can be no assurance that additional financing will be available when needed, or if available, will be available on acceptable terms. Insufficient funds may prevent us from implementing our business strategy and will require us to further delay, scale back or eliminate our research, product development and marketing programs; and may require us to license to third parties rights to commercialize products or technologies that we would otherwise seek to develop ourselves, or to scale back or eliminate our other operations. See “Financing/Equity Line of Credit.”
We have had and may have to issue securities, sometimes at prices substantially below market price, for services which may further depress our stock price and dilute the holdings of our shareholders.
Since we have generated no material revenues to date, our ability to obtain and retain consultants may be dependent on our ability to issue stock for services. Since July 1, 1996, we have issued an aggregate of 2,306,500 shares of common stock covered by registration statements on Form S-8. The aggregate fair market value of those shares when issued was $2,437,151. The issuance of large amounts of our common stock, sometimes at prices well below market price, for services rendered or to be rendered and the subsequent sale of these shares may further depress the price of our common stock and dilute the holdings of our shareholders. In addition, because of the possible dilution to existing shareholders, the issuance of substantial additional shares may cause a change-in-control. On July 15, 2008, we entered into a Financial Services Consulting Agreement (the “Agreement”) with R.H. Barsom Company, Inc. of New York, NY, an unaffiliated third-party, to provide us with investor relations services and guidance and assistance in available alternatives to maximize shareholder value. The aggregate fair market value of the 5,000,000 restricted shares when issued was $55,000. In April 2010, we issued 250,000 restricted shares to Frederick P. Lutz to satisfy the balance of $2,250 previously owed to him for investor relation services and for providing additional investor relation services. The aggregate fair market value of the 250,000 restricted shares when issued was $13,500. (See Item 5 Market for Registrant's Common Equity and Related Stockholder Matters - Private Placement of Common Stock - Issuance of Stock for Services)
We have in the past and may have to in the future sell additional unregistered convertible securities, possibly without limitations on the number of common shares the securities are convertible into, and we have also negotiated, and may continue to negotiate, the conversion of other debt instruments into common stock. These transactions could dilute the value of the holdings of current shareholders.
We have relied on the private placement of convertible preferred stock, convertible debentures and convertible promissory notes to obtain working capital and may continue to do so in the future. As of the date of this report, we have issued 216,827,591 shares of common stock which were converted from privately placed preferred stock and
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debentures. This number of shares of common stock represents approximately 3% of the currently outstanding number of shares of common stock.
In deciding to issue preferred stock and debentures through 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 stock or debenture sale, and
•
number of common shares the preferred stock or debentures would have been convertible into at the time of the sale
At the time of each private placement there were enough shares, based on the price of our common stock at the time of the sale of the preferred stock, debentures or promissory notes to satisfy the conversion requirements. Although our board of directors attempted to negotiate a floor on the conversion price of each series of preferred stock and debentures prior to their sale, it was unable to do so.
In order to obtain working capital we will continue to:
•
seek capital through debt or equity financing which may include the issuance of convertible debentures, convertible promissory notes or convertible preferred stock whose rights and preferences are superior to those of the common stockholders, and
•
attempt to negotiate the best transactions possible taking into account the impact on our shareholders, dilution, loss of voting power and the possibility of a change-in-control.
Nonetheless, in order to satisfy our working capital needs, it may become necessary to issue convertible securities without a floor on the conversion price.
If we choose to redeem all of our outstanding short and long-terms debts with shares of our common stock, we will have to issue approximately 8,530,797,206 shares as of October 10, 2012. The 8,530,797,206 shares are broken down as follows:
• We may be obligated to issue Southridge a total of 3,482,410,567 shares to redeem short-term notes totaling $347,145 of which $285,172 is principal, $47,776 is premium and $14,197 is interest.
• We may be obligated to issue Southridge a total of 1,766,560,000 shares to redeem short-term note purchased from a private investor totaling $176,656 of which $68,550 is principal and $108,106 is premium.
• We may be obligated to issue Panache Capital LLC (“Panache”) a total of 740,257,562 shares to redeem short-term notes totaling $76,951 of which $61,800 is principal, $4,500 is premium and $10,651 is interest.
• We may be obligated to issue Levin Consulting a total of 990,466,170 shares to redeem short-term notes totaling $99,046 of which $85,000 is principal, $12,750 is premium and $1,296 is interest.
• We may be obligated to issue SGI Group a total of 486,956,930 shares to redeem short-term notes totaling $48,696 of which $36,000 is principal, $5,400 is premium and $7,296 is interest.
• We may be obligated to issue OTC Global Partners a total of 138,434,000 shares to redeem short-term notes totaling $13,843 of which $12,000 is principal, $1,800 is premium and $43 is interest.
• We may be obligated to issue FLUX Carbon Starter a total of 235,360,500 shares to redeem short-term notes totaling $23,536 of which $23,500 is principal and $36 is interest.
• We may be obligated to issue a private investor a total of 173,382,572 shares to redeem short-term notes totaling $43,323 of which $36,617 is principal, $5,492 is premium and $1,213 is interest.
• We may be obligated to issue JMJ Financial a total of 317,385,714 shares to redeem two long-term notes totaling $66,651 of which $50,526 is principal, $9,735 is consideration on the principal and $6,750 is interest. JMJ may convert both principal and interest into our common stock at 75% of the average of the three lowest closing prices in the 20 days previous to the conversion. We have the right to enforce a conversion floor of $0.015 per share; however, if we receive a conversion notice in which the Conversion Price is less than $0.015 per share, JMJ will incur a conversion loss [(Conversion Loss = $0.015 - Conversion Price) x number of shares being converted]
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which we must make whole by either of the following options: pay the conversion loss in cash or add the conversion loss to the balance of principal due. Prepayment of the Note is not permitted.
In the event that we issue convertible preferred stock or convertible debentures without a limit on the number of shares that can be issued upon conversion and if the price of our common stock decreases:
•
the percentage of shares outstanding that will be held by these holders upon conversion will increase accordingly,
•
the lower the market price the greater the number of shares to be issued to these holders upon conversion, thus increasing the potential profits to the holder when the price per share later increases and the holder sells the common shares,
•
the preferred stockholders' and debenture holders’ potential for increased share issuance and profit, including profits derived from short sales of our common stock, in addition to a stock overhang of an indeterminable amount, may depress the price of our common stock,
•
the sale of a substantial amount of preferred stock or debentures to relatively few holders could effectuate a possible change-in-control, and
•
in the event of our voluntary or involuntary liquidation while the preferred stock or debentures are outstanding, the holders of those securities will be entitled to a preference in distribution of our property.
• We may need to record a derivative liability.
We may draw on our equity credit line provided that we have an effective S-1 Registration Statement, which may cause the value of our common stock to decline and dilute the holdings of our shareholders.
Since January 2001 we have raised $42,714,650 and issued 425,676,012 common shares through a series of six Private Equity Credit Agreements with Charlton Avenue LLC (“Charlton”).
On November 23, 2009 we executed a new Private Equity Credit Agreement with Southridge, which was amended on January 7, 2010. Pursuant to our Southridge Private Equity Credit Agreement, when we deem it necessary, we may raise capital through the private sale of our common stock to Southridge at a price equal to 93% of the market price, based on the formula set forth in our agreement with Southridge. We may need capital in excess of the amounts available under the Southridge Private Equity Credit Agreement, and we may seek additional funding through public or private financing or collaborative, licensing and other arrangements with corporate partners. As we utilize the Southridge Private Equity Credit Agreement or additional funds are raised by issuing equity securities, especially convertible preferred stock, dilution to existing shareholders will result and future investors may be granted rights superior to those of existing shareholders. Since January 2010 we have raised $2,485,000 and issued 106,732,137 common shares through the Southridge Private Equity Credit Agreement. See “Financing/Equity Line of Credit/Debentures.”
Our last effective registration statement relating to the Southridge Private Equity Credit Agreement terminated in June 2011. There can be no assurance that we will be able to obtain the effectiveness of another registration statement.
We have increased and in the future may need to increase our authorized shares of common stock to have sufficient shares available to raise capital for continuing operations and strategic initiatives which may cause the value of our common stock to decline and dilute the holdings of our shareholders.
On July 12, 2011, our shareholders approved an increase of our authorized common stock to 2,000,000,000 shares.
On March 9, 2012, our Board approved an increase in the number of authorized shares of Common Stock from 2,000,000,000 shares to 4,000,000,000 shares. On March 21, 2012, we entered into a Series Q Preferred Stock Purchase Agreement with our CEO, Linda B. Grable, pursuant to which she was issued all of the 51 authorized shares of Series Q Preferred Stock, with a stated value of $0.001 per share as partial consideration for past and future services rendered and recorded the nominal amount of $1.00 for this issuance. The Series Q Preferred Stock
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has no economic value and was issued solely for voting purposes. On March 22, 2012, Ms. Grable as our majority stockholder approved the increase in our authorized capital by written consent in lieu of a meeting in accordance with Florida law.
On August 2, 2012, our Board approved an increase in the number of authorized shares of Common Stock from 4,000,000,000 shares to 10,000,000,000 shares and recommended to the majority stockholder that the authorized capital increase be approved. On August 2, 2012, the majority stockholder approved the authorized capital increase by written consent in lieu of a meeting in accordance with Florida law.
We now have issued and outstanding 7,287,218,961shares of common stock out of 10,000,000,000 authorized shares. We have reserved 13,333,333 shares to cover the conversion of the 20 shares of Series L Convertible Preferred Stock outstanding; 77,986,989 shares to cover outstanding options; 1,600,000,000 shares are reserved for Southridge; 300,000,000 shares are reserved for Panache Capital, 235,000,000 shares are reserved for FLUX Carbon Starter; 250,000,000 shares are reserved for Levin Consulting; 105,000,000 shares are reserved for SGI Group.
On February 23, 2011, we entered into a Convertible Promissory Note Agreement with an unaffiliated third party, JMJ Financial (the “Lender” or “JMJ”), relating to a private placement of a total of up to $1,800,000 in principal amount of a Convertible Promissory Note (the “Note”) providing for advances of a gross amount of $1,600,000 in seven tranches. Pursuant to the terms of a Registration Rights Agreement (the “Rights Agreement”) dated February 23, 2011, between the Company and JMJ, we are required to file within 10 days from the effective date of an increase of authorized shares approved by our shareholders, an S-1 Registration Statement (the “Registration Statement”) covering 130,000,000 shares of Company common stock to be reserved for conversion of the Note. Notwithstanding the increase of our authorized shares to 2,000,000,000 approved by our shareholders on July 12, 2011, we have not filed the registration statement as required by the agreement. See “Sale of Unregistered Securities-Issuance of Common Stock in Connection with Long-Term Loans.”
We now have issued and outstanding 7,287,218,961shares of common stock out of 10,000,000,000 authorized shares leaving a balance of 2,712,781,039 authorized shares available for issuance.
As of October 10, 2012, we would be required to issue hypothetically 8,750,117,528 authorized shares apportioned as follows:
•
77,986,989 shares required for the exercise of all outstanding options, of which a total of 37,402,000 shares are subject to options granted to our four executive officers.
• 13,333,333 shares required for the conversion of the 20 shares of Series L Convertible Preferred Stock.
•
130,000,000 shares required to be registered for conversion of a $1.8 million convertible promissory note held by JMJ Financial.
•
If we choose to redeem all of our outstanding short and long-terms debts that already have convertible features with shares of our common stock, we will have to issue approximately 8,528,797,206.
After adding the 8,750,117,528 hypothetical shares to our current issued and outstanding balance of 7,287,218,961, we would have 16,037,336,489 shares outstanding. In this hypothetical model we would be 6,037,336,489 shares short.
Related parties’ interest in our current obligations for share issuances total 37,402,000 shares, which are subject to options granted to our four executive officers. Of this 37,402,000 shares, Linda Grable has 10,000,000 stock options outstanding; Allan Schwartz has 10,600,000 stock options outstanding; Deborah O’Brien has 6,802,000 stock options outstanding; and Michael Addley has 10,000,000 stock options outstanding. As of the date of this report, Linda Grable’s, Allan Schwartz’s and Deborah O’Brien’s stock options are all fully vested; and 7,500,000 of Michael Addley’s stock options are fully vested. There are no further outstanding commitments to related parties at this time. See “Security Ownership of Certain Beneficial Owners and Management” and “Outstanding Equity Awards”
The issuance of additional shares of common stock or the rights to acquire such shares would have the effect of diluting our earnings per share in the event that we become profitable and will dilute the voting power of current shareholders who do not acquire sufficient additional shares to maintain their percentage of share ownership. Additional shares of common stock could also be used by IDSI to oppose a hostile takeover attempt; however, the Board of Directors presently knows of no such attempt to obtain control of the Company.
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Our currently authorized common stock may not be sufficient to satisfy our financing needs.
On July 12, 2011, our shareholders approved an increase of our authorized common stock to 2,000,000,000 shares.
On March 9, 2012, our Board approved an increase in the number of authorized shares of Common Stock from 2,000,000,000 shares to 4,000,000,000 shares. On March 21, 2012, we entered into a Series Q Preferred Stock Purchase Agreement with our CEO, Linda B. Grable, pursuant to which she was issued all of the 51 authorized shares of Series Q Preferred Stock, with a stated value of $0.001 per share as partial consideration for past and future services rendered and recorded the nominal amount of $1.00 for this issuance. The Series Q Preferred Stock has no economic value and was issued solely for voting purposes. On March 22, 2012, Ms. Grable as our majority stockholder approved the increase in our authorized capital by written consent in lieu of a meeting in accordance with Florida law.
On August 2, 2012, our Board approved an increase in the number of authorized shares of Common Stock from 4,000,000,000 shares to 10,000,000,000 shares and recommended to the majority stockholder that the authorized capital increase be approved. On August 2, 2012, the majority stockholder approved the authorized capital increase by written consent in lieu of a meeting in accordance with Florida law.
We now have issued and outstanding 7,287,218,961shares of common stock out of 10,000,000,000 authorized shares. We have reserved 13,333,333 shares to cover the conversion of the 20 shares of Series L Convertible Preferred Stock outstanding; 77,986,989 shares to cover outstanding options; 1,600,000,000 shares are reserved for Southridge; 300,000,000 shares are reserved for Panache Capital, 235,000,000 shares are reserved for FLUX Carbon Starter; 250,000,000 shares are reserved for Levin Consulting; 105,000,000 shares are reserved for SGI Group.
On February 23, 2011, we entered into a Convertible Promissory Note Agreement with an unaffiliated third party, JMJ Financial (the “Lender” or “JMJ”), relating to a private placement of a total of up to $1,800,000 in principal amount of a Convertible Promissory Note (the “Note”) providing for advances of a gross amount of $1,600,000 in seven tranches. Pursuant to the terms of a Registration Rights Agreement (the “Rights Agreement”) dated February 23, 2011, between the Company and JMJ, we are required to file within 10 days from the effective date of an increase of authorized shares approved by our shareholders, an S-1 Registration Statement (the “Registration Statement”) covering 130,000,000 shares of Company common stock to be reserved for conversion of the Note. Notwithstanding the increase in our authorized shares to 2,000,000,000 approved by our shareholders on July 12, 2011, we have not filed the registration statement as required by the agreement. See “Sale of Unregistered Securities-Issuance of Common Stock in Connection with Long-Term Loans.”
We now have issued and outstanding 7,287,218,961shares of common stock out of 10,000,000,000 authorized shares leaving a balance of 2,712,781,039 authorized shares available for issuance.
As of October 10, 2012, we would be required to issue hypothetically 8,750,117,528 authorized shares apportioned as follows:
•
77,986,989 shares required for the exercise of all outstanding options, of which a total of 37,402,000 shares are subject to options granted to our four executive officers.
• 13,333,333 shares required for the conversion of the 20 shares of Series L Convertible Preferred Stock.
•
130,000,000 shares required to be registered for conversion of a $1.8 million convertible promissory note held by JMJ Financial.
•
If we choose to redeem all of our outstanding short and long-terms debts that already have convertible features with shares of our common stock, we will have to issue approximately 8,528,797,206.
After adding the 8,750,117,528 hypothetical shares to our current issued and outstanding balance of 7,287,218,961, we would have 16,037,336,489 shares outstanding. In this hypothetical model we would be 6,037,336,489 shares short.
Related parties’ interest in our current obligations for share issuances total 37,402,000 shares, which are subject to options granted to our four executive officers. Of this 37,402,000 shares, Linda Grable has 10,000,000 stock options outstanding; Allan Schwartz has 10,600,000 stock options outstanding; Deborah O’Brien has 6,802,000 stock options outstanding; and Michael Addley has 10,000,000 stock options outstanding. As of the date of this report, Linda Grable’s, Allan Schwartz’s and Deborah O’Brien’s stock options are all fully vested; and 7,500,000 of
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Michael Addley’s stock options are fully vested. There are no further outstanding commitments to related parties at this time. See “Security Ownership of Certain Beneficial Owners and Management” and “Outstanding Equity Awards
The Southridge Private Equity Credit Line may not be available when we need it, thus limiting our ability to bring our CTLM® to market.
The Southridge Private Equity Credit Line contains various conditions to our being able to use it, including effectiveness of the required registration statement and the absence of any material adverse change in our business or financial condition. Further, Southridge is a limited partnership registered in the state of Delaware and if it were unable or unwilling to fulfill its obligations, our legal remedies would be limited. Thus, we may be unable to draw down on the Southridge Private Equity Credit Line when we need the funds, and that could severely harm our business and financial condition and our ability to bring the CTLM® to market. Prior to the effective date of the Southridge Private Equity Credit Line, we were almost exclusively dependent on Charlton for working capital for nine years. Since April 1999, we have issued to Charlton a total of 469,676,012 shares of common stock through conversion of $13,410,000 face amount of our preferred stock and debentures purchased by Charlton and through $44,714,650 in purchases under all of our private equity lines. Since January 2010 we have raised $2,485,000 and issued 106,732,137 common shares through the Southridge Private Equity Credit Agreement. See “Financing/Equity Line of Credit/Debentures.”
We have had and may have to issue securities, sometimes at substantially below market price, in order to pay off our debts which may further depress our stock price and dilute the holdings of our shareholders.
Since we have generated no material revenues to date, we have had difficulty in paying off some of our debts which have become due. In order to pay these debts, we have issued shares and/or warrants to purchase shares of common stock. We have also entered into agreements whereby the lender, sometimes at its option, may be issued other equity securities, such as warrants, to pay off debt. On some occasions, we have converted debt into equity at prices that were well below the market price. In addition, as we have no material revenues, we may have to issue more shares of common stock or other equity securities, sometimes at prices well below market price, in order to pay off current or future debts that become due. These types of issuances of common stock and other equity securities to pay off debt may further depress the price of our common stock and would dilute the holdings of our shareholders, and if substantial dilution does occur, could also cause a change-in-control.
Conversions of our convertible preferred stock and exercise of our convertible debentures and warrants may cause a change of control and other detrimental effects to the value of our shareholders’ holdings.
If we issue substantial amounts of convertible securities and the market price of our common stock declines significantly, we could be required to issue a number of shares of common stock sufficient to result in our current stockholders not having an effective vote in the election of directors and other corporate matters. In the event of a change-in-control, it is possible that the new majority stockholders may take actions that may not be consistent with the objectives or desires of our current stockholders.
We would most likely be required to convert any convertible preferred stock, convertible debentures, and convertible promissory notes which we choose to issue based on a formula that varies with the market price of our common stock. As a result, if the market price of our common stock increases after the issuance of our convertible preferred stock and convertible debentures, it is possible that, upon conversion of the convertible preferred stock and convertible debentures, we will issue shares of common stock at a price that is far less than the then-current market price of the common stock.
If the market price of our common stock decreases after we issue the convertible preferred stock or convertible debentures, upon conversion, we will have to issue an increased number of shares to the preferred stock and convertible debenture holders. The sale of convertible preferred stock and debentures may result in a very large conversion at one time. As of the date of this report, we have no Debentures outstanding and 20 shares of Series L convertible preferred stock outstanding. In the event that we issue additional convertible preferred
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have to seek shareholder approval increase the number of authorized shares. In addition, if we issue warrants they will likely be exercisable at a fixed price based on the then-existing market price of our common stock. If the market price of our common stock thereafter exceeds the warrant exercise price, exercise of the warrants may pose a risk to shareholders because these exercises may drive down the market price of our common stock. In addition, if we issue warrants they will likely be exercisable at a fixed price. If the market price of our common stock exceeds the warrant exercise price, exercise of the warrants may pose a risk to investors because these issuances may drive down the market price of our common stock.
Due to our lack of capital, we have outstanding obligations due our vendors who could file liens and other claims against us, which could force us to cease operations.
A claim could be made by any vendor at any time where payment is significantly past due. If the amount past due is sent to a collection agency or attorney by a vendor, and we do not have the capital to satisfy the obligation, a lien or other claim may be filed against us which could force us to cease operations. As of June 30, 2012, we owe a total of $928,385 in trade payables. However, we have arranged in the past and plan to arrange in the future, arrange payment plans with our vendors with past due balances.
Risks associated with our industry
We depend on market acceptance to sell our products, which have not been proven, and a lack of acceptance would depress our sales.
There can be no assurance that physicians or the medical community in general will accept and utilize the CTLM® or any other products that we develop. The extent and rate the CTLM® 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® and the advantages of the CTLM® 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.
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® 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®. Failure to obtain favorable rates of third-party reimbursement could discourage the purchase and use of the CTLM® 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 the effect of the recently-passed Health Care Reform Act of 2010 and other possible legislation, whereby our potential customers may not receive adequate reimbursement for the use of our product on their patients, which may cause our potential customers to use other services and products.
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The U.S. President and Congress have enacted a comprehensive reform of the U.S. healthcare system through the passage of the Health Care Reform Act of 2010 (the “Act”). The ultimate effect of this new Act to reform health care is uncertain, and there can be no assurance that the changes made to the U.S. healthcare system will not materially adversely affect us. Some of the provisions in the Act may limit and further reduce and control spending on healthcare products 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. These reforms could cause U.S. healthcare providers to limit use of or not use the CTLM® systems, in which case we would be materially adversely affected.
Competition in the medical imaging industry may result in competing products, superior marketing and lower revenues and profits for us.
The market in which we intend to participate is highly competitive. Many of the companies in the cancer diagnostic and screening markets have substantially greater technological, financial, research and development, manufacturing, human and marketing resources and experience than we do. These companies may succeed in developing, manufacturing and marketing products that are more effective or less costly than our products. The competition for developing a commercial device utilizing computed tomography techniques and laser technology is difficult to ascertain given the proprietary nature of the technology.
To IDSI’s knowledge, no other company has a functioning optical imaging device designed for use as an adjunct to mammography. CTLM® systems are in clinical settings in Italy, Germany, Poland, the Czech Republic, the Peoples Republic of China, Mexico, Hungary, Malaysia, Brazil, United Arab Emirates, Israel, Indonesia and India. Over 25,000 breast exams have been performed on CTLM® systems. 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® obsolete. There can be no assurance that the development of new types of diagnostic medical equipment or technology will not have a material adverse effect on our business, financial condition, and results of operations.
Risks associated with our securities
Our common stock is considered "a penny stock" and may be difficult to sell.
The SEC adopted regulations which generally define "penny stock" to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. Presently, the market price of our common stock is substantially less than $5.00 per share and therefore may be designated as a "penny stock" according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of investors to sell their shares. In addition, since our common stock is traded on the OTC Bulletin Board, investors may find it difficult to obtain accurate quotations of our common stock.
The continued sale of our equity securities will dilute the ownership percentage of our existing stockholders and may decrease the market price for our common stock.
Given our lack of significant revenues and the doubtful prospect that we will earn significant revenues in the next several years, we will require additional financing of approximately $3,000,000 for the next 12 months, which will require us to issue additional equity securities or incur additional debt. We expect to continue our efforts to acquire financing to fund our planned development and expansion activities, which will result in dilution to our existing stockholders. In short, our continued need to sell equity will result in reduced percentage ownership interests for all of our investors, which may decrease the market price for our common stock.
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We do not intend to pay dividends and there will thus be fewer ways in which you are able to make a return on your investment.
We have never paid dividends and do not intend to pay any dividends for the foreseeable future. To the extent that we may require additional funding currently not provided for in our financing plan, our funding sources may prohibit the declaration of dividends. Because we do not intend to pay dividends, any return on your investment will need to result from an appreciation in the price of our common stock. Therefore, there will be fewer ways in which you are able to make a return on your investment.
Because the SEC imposes additional sales practice requirements on brokers who deal in shares of penny stocks, some brokers may be unwilling to trade our securities. This means that you may have difficulty reselling your shares, which may cause the value of your investment to decline.
Our shares are classified as penny stocks and are covered by Section 15(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) which imposes additional sales practice requirements on brokers-dealers who sell our securities in this offering or in the aftermarket. For sales of our securities, broker-dealers must make a special suitability determination and receive a written agreement from you prior to making a sale on your behalf. Because of the imposition of the foregoing additional sales practices, it is possible that broker-dealers will not want to make a market in our common stock. This could prevent you from reselling your shares and may cause the value of your investment to decline.
Financial Industry Regulatory Authority (FINRA) sales practice requirements may limit your ability to buy and sell our common stock, which could depress the price of our shares.
FINRA rules require broker-dealers to have reasonable grounds for believing that an investment is suitable for a customer before recommending that investment to the customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status and investment objectives, among other things. Under interpretations of these rules, FINRA believes that there is a high probability such speculative low-priced securities will not be suitable for at least some customers. Thus, FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our shares, have an adverse effect on the market for our shares, and thereby depress our share price.
The volatility of our stock price could adversely affect your investment in our common stock.
The price of our common stock has fluctuated substantially since it began trading on the OTC Bulletin Board in September 1994. For example, in the current fiscal year which began July 1, 2012, the bid price ranged from a low of $0.0002 in the second quarter to a high of $0.0019 in the first quarter, and in our last fiscal year which ended June 30, 2011, the bid price ranged from a low of $0.0003 in the fourth quarter to a high of $0.023 in the first quarter. The market price of our shares, like that of the common stock of many other medical device companies, is likely to continue to be highly volatile. Factors that may have an impact on the price of our common stock include:
• the timing and results of our clinical trials or those of our competitors,
• governmental regulation,
• healthcare legislation,
• geopolitical events,
• equity or debt financing, and
•
developments in patent or other proprietary rights pertaining to our competitors or us, including litigation, fluctuations in our operating results, and market conditions for medical device company stocks and life science stocks in general.
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We may issue preferred stock at any time to prevent a takeover or acquisition, any of which issuance could dilute the price of our common stock.
Our articles of incorporation authorize the issuance of preferred stock with designations, rights, and preferences that may be determined from time to time by the board of directors. Our board of directors is empowered, without stockholder approval, to designate and issue additional series of preferred stock with dividend, liquidation, conversion, voting and other rights, including the right to issue convertible securities with no limitations on conversion, which could adversely affect the voting power or other rights of the holders of our common stock. This could substantially dilute the common shareholders’ interest and depress the price of our common stock. In addition, the preferred stock could be utilized as a method of discouraging, delaying or preventing a change-in-control. The substantial number of issued and outstanding convertible preferred stock and the convertible debentures, and their terms of conversion may discourage or prevent an acquisition of our company.
If we use our Equity Credit Line for financing our operations it could dilute the price of our common stock.
Until the time when we are able to generate material revenues, we are dependent on equity or other financing to continue operations. We will require substantial additional funds for our operations, the costs associated with the FDA approval process and the costs associated with advanced product development activities. In order to successfully launch our medical device internationally, we would need sufficient financing to provide centers of excellence for demonstration and training in our largest potential markets, exhibit at industry leading medical trade shows and to market the technology through placement of ads and scientific articles in medical publications and trade journals. Without the necessary funding, we have been unable to install a sufficient number of CTLM® systems to establish centers of excellence, and this has materially adversely affected our international commercialization efforts. In the event that we are unable to utilize our Equity Credit Line, our common shares may be used for the conversion of new convertible preferred stock, debentures and promissory notes and or to accommodate other future issuances of equity securities.
We now have issued and outstanding 7,287,218,961 shares of common stock out of 10,000,000,000 authorized shares.
We now have issued and outstanding 7,287,218,961shares of common stock out of 10,000,000,000 authorized shares leaving a balance of 2,712,781,039 authorized shares available for issuance.
As of October 10, 2012, we would be required to issue hypothetically 8,750,117,528 authorized shares apportioned as follows:
•
77,986,989 shares required for the exercise of all outstanding options, of which a total of 37,402,000 shares are subject to options granted to our four executive officers.
• 13,333,333 shares required for the conversion of the 20 shares of Series L Convertible Preferred Stock.
•
130,000,000 shares required to be registered for conversion of a $1.8 million convertible promissory note held by JMJ Financial.
•
If we choose to redeem all of our outstanding short and long-terms debts that already have convertible features with shares of our common stock, we will have to issue approximately 8,528,797,206.
After adding the 8,750,117,528 hypothetical shares to our current issued and outstanding balance of 7,287,218,961, we would have 16,037,336,489 shares outstanding. In this hypothetical model we would be 6,037,336,489 shares short.
We currently are controlled by our executive officers and directors; however, a change-in-control may occur.
Our management beneficially owns 103,005,009 shares of our common stock or 1.44% (assuming exercise of their currently exercisable options) of our common stock. Although management owns a minority of the outstanding common stock, since we do not have cumulative voting, and since, in all likelihood the officers and directors will be voting as a block and will be able to obtain proxies of other shareholders, management may remain in a position to elect all of our directors and control our policies and issue up to 67,284,946,237 shares to draw the balance of
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$12,515,000 available under the Southridge Private Equity Credit Agreement. The amounts of shares issuable under the Southridge Private Equity Credit Agreement or any subsequent Private Equity Credit Agreement could increase substantially if our common stock price declines. Dilution to management's ownership percentage as a result of share issuances under the Southridge Private Equity Credit Agreement and subsequent financings could cause a change in control.
We have not paid and do not currently intend to pay dividends, which may limit the current return you may receive on your investment in our common stock.
Since inception, we have not paid a dividend on our common stock and do not intend to pay dividends on our common stock in the foreseeable future.
Risks associated with our technology
We depend on third-party licensing agreements for patents and software without which our operations may be curtailed.
We hold the rights, through an exclusive patent licensing agreement, for the use of the patent for the CTLM® technology. In addition, we own 22 patents and have 2 additional United States patents pending with regard to optical tomography. We also have three non-exclusive licensing agreements for software from third-parties. If any of these agreements were terminated, our operations may be curtailed until alternative solutions were found.
In June 1998, IDSI signed an exclusive patent license agreement with the late Richard Grable, which covers some of the technology for the CTLM®. The term of the license is for the life of the Patent (17 years) and any renewals, subject to termination under specific conditions. The Patent Licensing Agreement has an expiration date of December 2, 2014. As consideration for this license, Mr. Grable received 7,000,000 shares of common stock and a royalty based upon a percentage, ranging from 6% to 10%, of the dollar amount earned from each sale before taxes minus the cost of the goods sold and commissions or discounts paid. The license agreement provided Mr. Grable with protection against dilution where, upon the occurrence of any stock dividend, stock split, combination or exchange of shares, reclassification or recapitalization of the Company's common stock, reorganization of the Company, consolidation with or merger into or sale or conveyance of all or substantially all of the Company's assets to another corporation or any other similar event which serves to decrease the number of Shares issued pursuant to the agreement (the "Event"), Mr. Grable shall receive, as additional consideration, that number of shares equal to the difference between the 7,000,000 Shares issued under the agreement and the number of Shares Mr. Grable has remaining subsequent to the Event.
The license agreement may be terminated at any time by Mr. Grable in the event that IDSI shall fail to perform any of its covenants and obligations in the agreement. Upon written notice of termination delivered to IDSI by Mr. Grable, stating the nature and character of the breach and allowing IDSI an opportunity to cure such failure within 15 days after giving notice, if the failure has not been corrected by IDSI within the 15 day period Mr. Grable may terminate the agreement without the requirement of any additional notice to IDSI to that effect. Notwithstanding the above, Mr. Grable is not required to give IDSI the opportunity to correct a default that is a repetition within any 12 month period of a prior default for the same cause and may terminate the agreement by written notice in that event. The royalty provisions do not apply to sales made prior to receipt of FDA marketing clearance for the CTLM®. In addition, following FDA marketing clearance, Mr. Grable would be eligible for minimum royalties of $250,000 per year based on the sales of the products and goods in which the CTLM® patent is used. Mr. Grable’s interests in the patent license agreement passed to his estate in August 2001. Linda B. Grable, our Chairman and CEO, is the principal beneficiary of Mr. Grable’s estate.
The following table sets forth the Patent licensing royalty structure:
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The Patent Licensing Agreement was originally filed as Exhibit 10.2 to our Form S-2 on July 21, 1998 as a text document. To make the Patent Licensing Agreement more accessible on EDGAR, we re-filed the Agreement on March 15, 2011, Exhibit 10.115 in Amendment No. 2 of our S-1 Registration Statement.
Our business would lose its primary competitive advantage if we are unable to protect our proprietary technology, or if substantially the same technology is developed by others.
We rely primarily on a combination of trade secrets, patents, copyright and trademark laws, and confidentiality procedures to protect our technology. Our ability to compete effectively in the medical imaging products industry will depend on our success in protecting our proprietary technology, both in the United States and abroad. There can be no assurances that any patent that we apply for will be issued, or that any patents issued will not be challenged, invalidated, or circumvented, that we will have the financial resources to enforce them, or that the rights granted will provide any competitive advantage. We hold 17 foreign patents; however, we have applied for 2 patents in various foreign countries. We could incur substantial costs in defending any patent infringement suits or in asserting any patent rights, including those granted by third parties, the expenditure of which we might not be able to afford. Although we have entered into confidentiality and invention agreements with our employees and consultants, there can be no assurance that these agreements will be honored or that we will be able to protect our rights to our non-patented trade secrets and know-how effectively. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how. In addition, we may be required to obtain licenses to patents or other proprietary rights from third parties. If we do not obtain required licenses, we could encounter delays in product development or find that the development, manufacture, or sale of products requiring these licenses could be foreclosed. Additionally, we may, from time to time, support and collaborate in research conducted by universities and governmental research organizations. There can be no assurance that we will have or be able to acquire exclusive rights to the inventions or technical information derived from such collaborations or that disputes will not arise with respect to rights in derivative or related research programs that we conducted in conjunction with these organizations.
It may be necessary to enter into unfavorable agreements or defend lawsuits which would be costly if we infringe upon the intellectual property rights of others.
There has been substantial litigation regarding patent and other intellectual property rights in the medical device and related industries. We have been, and may be in the future, notified that we may be infringing on intellectual property rights possessed by other third parties. If any claims are asserted against our intellectual property rights, we may seek to enter into royalty or licensing arrangements. There is a risk in situations that no license will be available or that a license will not be available on reasonable terms. Alternatively, we may decide to litigate these claims or design around the patented technology. These actions could be costly and would divert the efforts and attention of our management and technical personnel. Consequently, any infringement claims by third parties or other claims for indemnification by customers resulting from infringement claims, whether or not proven to be true, may be costly to defend and may further limit the use of our technology.
We may not be able to keep up with the rapid technological change in the medical imaging industry which could make the CTLM® obsolete.
Methods for the detection of cancer are subject to rapid technological innovation and there can be no assurance that technical changes will not render our proposed products obsolete. Although we believe that the CTLM® can be upgraded to maintain its state-of-the-art character, the development of new technologies or refinements of existing ones might make our existing system technologically or economically obsolete, or cause a reduction in the value of, or reduce the need for, our CTLM®. There can be no assurance that the development and commercial availability of new types of diagnostic medical equipment or technology will not have a material adverse effect on our business, financial condition, and results of operations. Although we are aware of no substantial technological changes pending, should a change occur, there can be no assurance that we will be able to acquire the new or improved technology which may be required to update the CTLM®.
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Risks associated with our business
We must comply with extensive governmental regulations and have no assurance of receiving critical regulatory approvals or clearances, the lack of which could cause us to cut back or cease operations.
A 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® system in the U.S. and other countries.
In the United States, the CTLM® is regulated as a medical device and is subject to the FDA's requirements for marketing clearance.
A premarket approval (PMA) is the FDA process of scientific and regulatory review to evaluate the safety and effectiveness of Class III medical devices. Class III devices are those that support or sustain human life, are of substantial importance in preventing impairment of human health, or which present a potentially unreasonable risk of illness or injury. Due to the level of risk associated with Class III devices, the FDA has determined that general and special controls alone are insufficient to assure the safety and effectiveness of Class III devices. Therefore, these devices require a PMA application in order to obtain marketing clearance.
The FDA automatically classifies new technologies in Class III when limited safety information is available and no predicate device is available. It allows for multiple clinical studies to be pursued to gather the necessary data to obtain safety and clinical information to be used for future FDA submissions. At the time that we were developing the CTLM® system and considering marketing clearance there was not enough data on laser based technologies nor were there approved other new medical devices dedicated to breast imaging other than the traditional x-ray technology. As a result, the FDA recommended that we seek a PMA application.
In 2005, we initiated the PMA process by designing a new clinical study protocol and a modified intended use, which limited the participants in the study to patients with dense breast tissue. The inclusion criteria was modified because we believed that we would be more successful in proving our hypothesis of the CTLM® system’s intended use and have the most success at obtaining marketing clearance from the FDA. Concurrently, we identified qualified clinical sites and retained them to proceed with our clinical study.
In 2006, we made changes to bring the CTLM® system to its most current design level. We believe these changes improved the CTLM®’s image quality and reliability. Upgraded CTLM® systems were installed at our U.S. clinical sites and data collection proceeded in accordance with our clinical protocol. The data collection continued from 2006 to 2010 progressing slowly due to low patient volume pursuant to the inclusion criteria of our clinical protocol.
We announced in March 2009 that our research and development team achieved a technical breakthrough with a new reconstruction algorithm that improved the visualization of angiogenesis in the CTLM® images. Angiogenesis is the process in which new blood vessels are formed in response to a chemical signal sent out by cancerous tumors. The CTLM visualizes the blood distribution in the breast, to detect the new blood vessels (angiogenesis) required for cancerous lesions to grow. The improved algorithm enhances the images by reducing the number of artifacts occasionally produced during an examination, thereby making diagnosis easier. We also incorporated streamlined numerical methods into the software so that the new algorithm does not require additional computing resources, allowing us to provide the improved functionality to existing customers as a software upgrade.
As of May 2009, 10 clinical sites had participated in the clinical trials and at the time we believed we had sufficient clinical data to support our PMA application. However, we did not have sufficient financing to support the clinical sites, initiate the reading phase, the statistical analysis study and the submission of the PMA application to the FDA.
Through the years, new MRI and other dedicated breast imaging systems gained FDA marketing clearance pursuant to applications under the FDA’s Section 510(k) premarket notification. In the last several years, the De Novo 510(k) process became an alternate pathway for new technologies with low to moderate risk an opportunity to seek FDA marketing clearance through this simpler process. In addition, laser safety data and clinical safety and efficacy data were obtained through previous clinical trials to support an FDA application through the traditional 510(k) process. We believe our CTLM® system is of low to moderate risk due to the series of technical studies conducted as well as the series of clinical studies we were engaged in which led the FDA to determine in 2004 that our clinical studies were a Non Significant Risk (NSR) device study.
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A Section 510(k) premarket notification is a premarket submission made to the FDA to demonstrate that the device to be marketed is at least as safe and effective as, that is, substantially equivalent to, a legally marketed device that is not subject to PMA. Submitters must compare their device to one or more similar legally marketed devices and make and support their substantial equivalency claims. A legally marketed device is a device that was legally marketed prior to May 28, 1976 for which a PMA is not required, or a device which has been reclassified from Class III to Class II or I, or a device which has been found to be substantially equivalent through the 510(k) process. The legally marketed device(s) to which equivalence is drawn is commonly known as the "predicate" device.
To submit a Section 510(k) premarket notification application, a company must meet the following guidelines:
To demonstrate substantial equivalence to another legally U.S. marketed device, the 510(k) applicant must demonstrate that the new device, in comparison to the predicate:
• has the same intended use as the predicate; and
• has the same technological characteristics as the predicate; or
• has the same intended use as the predicate; and
• has different technological characteristics when compared to the predicate, and
• does not raise new questions of safety and effectiveness; and
• demonstrates that the device is at least as safe and effective as the legally marketed device.
One possible outcome resulting from applying for a Section 510(k) premarket notification of intent to market that we believed would have been an option, was the evaluation of automatic class III designation, commonly referred to “De Novo process”. The De Novo process is an alternate pathway provided by the FDA to classify certain new devices that had automatically been placed in Class III due to lack of a predicate. The De Novo classification process was created to provide a mechanism for the classification of certain lower-risk devices for which there is no predicate, but would otherwise fall into Class III. The De Novo process is most applicable when the risks of a device are well-understood and appropriate special controls can be established to mitigate those risks.
The de novo process cannot be requested until a Section 510(k) premarket notification has been submitted and the FDA responds with a determination that the device is “not substantially equivalent” (NSE) to the predicate device. The FDA then classifies the applicant devices into Class III designation. Applicants who receive a class III determination from the FDA may request an evaluation for reclassification into Class I or II.
In March 2010, we decided to focus on the possibility of obtaining FDA marketing clearance through a Section 510(k) premarket notification for our CTLM® system instead of a PMA application based on our own research of other medical imaging devices that received a Section 510(k) premarket notification, such as the Aurora MRI Breast Imaging System (the “breast MRI”). Other sources of our research were obtained through reading medical imaging industry publications, the FDA’s website, and discussions with attendees at medical imaging trade shows; specifically the Radiological Society of North America in Chicago, IL in November 2009; Arab Health Show in Dubai, UAE in January 2010, and European Congress of Radiology in Vienna, Austria in March 2010. We began the process of examining the various potential predicate devices that could be credible to support our Section 510(k) premarket notification application.
In July 2010, we made our decision to select as our predicate device the breast MRI. This decision was made as a result of our examination of comparative clinical images between CTLM® and breast MRI, which are both functional molecular imaging devices having the ability to visualize angiogenesis in the breast. We began preparing the Section 510(k) premarket notification submission and engaged the services of a FDA regulatory consultant to review our preliminary draft and then re-engaged the services of our FDA regulatory counsel to complete the Section 510(k) premarket notification application and to submit it to the FDA.
On November 22, 2010, we submitted a Section 510(k) premarket notification application to the FDA for its review. We believed that the Section 510(k) premarket notification submission was the best process to obtain U.S. marketing clearance in the least burdensome and most timely manner. FDA marketing clearance would enable us to market and sell the CTLM® system throughout the United States. Also, we believed that receipt of U.S. marketing clearance will substantially enhance our ability to sell the CTLM® in the international market.
On January 21, 2011, we received a request for additional information from the FDA regarding our Section 510(k) premarket notification application. A request for additional information is quite common during the FDA review process. Due to the extensive amount of additional information requested, we filed the response to the FDA request
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on July 8, 2011. Upon receipt of our response at the FDA offices, the FDA 90-day response time clock was re-activated. Consequently, we expected to get either an FDA determination on our Section 510(k) application or another request for additional information within the next 90-day time frame.
On August 2, 2011, we received official notification from the FDA that the review of our Section 510(k) premarket notification application had been completed and that the FDA determined that the device, (CTLM®), is not substantially equivalent to devices marketed in interstate commerce prior to May 28, 1976, the enactment date of the Medical Device Amendments, or to any device which has been reclassified into Class I (General Controls) or Class II (Special Controls), or to another device found to be substantially equivalent through the Section 510(k) process. This decision was based on the fact that the FDA was not aware of a legally marketed preamendments device labeled or promoted for using “Diffuse Optical Tomography” (DOT) to image the optical attenuation properties of breast tissue in order to aid the diagnosis of cancer, other conditions, diseases, or abnormalities. Therefore, this device was classified by statute into class III (Premarket Approval), under Section 513(t) of the Federal Food, Drug, and Cosmetic Act (the “Act”). All FDA determined Class III devices must fall under Section 515(a)(2) of the Act (which) requires a class III device to have an approved application (PMA) before it can be legally marketed.
The determination by the FDA that our CTLM® imaging technology will now be recognized as a DOT device and that there are no other DOT devices known to the FDA, presents us with a unique technological opportunity. Essentially, IDSI could be the first medical imaging company to file a PMA application for a Diffuse Optical Tomography breast imaging device. Since the FDA has identified CTLM® as a class III device, a formal clinical study will be required to obtain PMA approval. We have begun the PMA process and plan to use clinical studies previously collected, if permitted to do so by the FDA, in addition to new studies we plan to collect over the next several months.
In previous filings, management had disclosed the potential to have our CTLM® device approved through the FDA “De Novo” process. This process would only become an option to us if the FDA did not approve our 510(k) premarket notification of intent to market the device. While waiting for a ruling from the FDA on our 510(k) premarket notification of intent to market the CTLM®, management continued to research the advantages and disadvantages regarding the potential option to initiate a De Novo application if the FDA determined our traditional 510(k) application to be “Not Substantially Equivalent”. Our research identified several articles illustrating the potential pitfalls of going down the De Novo pathway. One such article from Medical Device Consultants (MDCI), a full service contract research organization and consulting firm that helps emerging and established firms commercialize novel and innovative medical devices, dated March 21, 2011(included below) best summarizes the issues that we would face if we choose the De Novo pathway.
“The De Novo process has been around since the implementation of the FDA Modernization Act of 1997 (FDAMA). The FDAMA was intended to help improve the efficiency of bringing low-risk medical devices to market, allowing for simpler reclassification of devices that were classified as Class III due to the lack of a suitable predicate. The section of the FDAMA that handled this aspect of medical device classification (Section 513(f)(2)) became known as the De Novo process.
De Novo is a two-step process that requires a company to submit a 510(k) and complete a standard review, including an analysis of the risk to the patient and operator associate with the use of the device and the substantial equivalence rationale. Once that has been accomplished, and the medical device in question has been determined to be Not Substantially Equivalent (NSE) by the FDA, the product is automatically classified as a Class III device. The manufacturer can then submit a request for evaluation of Automatic Class III designation to have the product reclassified from Class III into Class I or Class II. The FDA will review the device classification proposal and either recommend special controls to create a new Class I or II device classification or determine that the product is a Class III device. If FDA determines that the level of risk associated with the use of the device is appropriate for a Class II or Class I designation, then the product can be cleared as a 510(k) and FDA will issue a new classification regulation and product code. This also adds the device in question to the predicate pool, which in turn broadens the market for other medical device companies considering products in a similar therapeutic area. If the device is not approved through De Novo, then it must go through the standard premarket approval (PMA) process for Class III devices.
The number of FDA NSE determinations due to the lack of a suitable predicate is very low for those low risk medical devices that have the potential for reaching the market via the De Novo process. Medical device manufacturers are attracted to the cost efficiencies associated with the De Novo process when compared against the investment and post-market FDA oversight associated with a PMA. Unfortunately, the time to market for devices eligible for the De Novo process can be very long.
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FDAMA calls for the FDA to review and return a decision on a De Novo reclassification submission within 60 days of receipt (the initial submission must be sent by the manufacturer within 30 days of receiving NSE notification). In practice, however, the amount of time taken to review De Novo requests by the FDA and issue the special controls guidance has risen from 62 days in 2006 to 241 days since 2007. Tacked on to the 510(k) review times, devices traveling the De Novo pathway average 482 days of review time from beginning to end.
Further compounding the delays associated with De Novo is the fact that the entire process resembles a procedural “black hole.” The FDA is not required to provide any updates concerning the status of a De Novo application, nor is there any simple way for medical device manufacturers to track a De Novo submission on their own.
De Novo is rare in the realm of low-risk medical devices - a mere 54 products took this particular route between 1998 and 2009. Given the extensive delays associated with the process, MDCI advises medical device companies to consider all other market approval pathways before deciding on to pursue a De Novo reclassification.”
Prepared by Benjamin Hunting, Cindy Nolte, and Helen Mayfield
MDCI Blogging Team”
Understanding that the above statements were a fair representation of the regulatory industry's general feelings towards the FDA De Novo process, management decided to accept and heed the FDA's letter (received on August 2, 2011) detailing their decision of CTLM® being “not substantially equivalent” and furthermore, accepting their recommendation that CTLM® is a class III device that would require a PMA submission. Other considerations such as comparing time frames between De Novo and the PMA process were taken into account. The average De Novo application took 482 days to be reviewed compared to the average PMA review of 284 days. In addition, upon further review, both the De Novo and PMA process require virtually identical clinical safety and efficacy data; therefore, the PMA path was chosen. Management has identified potential FDA regulatory consultants who can guide us through the complete PMA application process and is presently in contract negotiations with several prospective consulting firms.
Progress toward re-submitting a PMA application during Fiscal Year 2012 and the beginning months of Fiscal Year 2013 was significantly delayed and then eventually halted simply due to lack of funding to hire the necessary FDA consultants required to assist in the process. Our employees have reached their level of FDA expertise related to preparing the “ground work” for a PMA application submission and can proceed no further without the expert assistance of FDA consultants.
During the fiscal year ended June 30, 2012, there was a significant reduction in key Company staff due to employee resignations, retirement and layoffs, which reduced operating overhead until additional external funding could be secured. We will not hire replacement staff until such time as we have secured sufficient funding to complete the PMA filing with the FDA. Prior to the reduction in key staff members, an internal PMA application strategy that might allow inclusion of previously collected patient data was developed. This approach (generally referred to as a PMA Protocol) will need to be qualified by our FDA consultants prior to presenting our approach to the FDA Reviewers/Examiners. The forum for this process is generally referred to as an FDA “Pre- IDE” meeting (essentially a pre-clinical meeting) between the Company, its FDA Consultants and the FDA/PMA Examiners. During the “Pre-IDE” meeting, the Company (and its FDA Consultants) would present their approach for both data collection, patient selection and data analysis. The FDA Reviewers would provide input (critique and suggestions) to us as to what they believe an acceptable PMA protocol would require. Once agreement is reached by all parties the next logical step is to implement the protocol. .
During fiscal 2012, a significant reduction in operating overhead/expenses occurred due to the reduction in key staff. This reduction in staff halted any progress towards getting the PMA application started as a result of our financial and funding limitations. We will not be able to proceed with the PMA application process until funding has been secured and the FDA consultants engaged to continue the process. There can be no assurance that we will obtain this funding.
In summary, our management team believes that the more structured and proven PMA application approach with its semi-rigid timetable for mandatory responses would provide us with the best route to achieve marketing clearance for our innovative new imaging modality that in the future will be classified as Diffuse Optical Tomography.
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The CTLM® system is a Diffuse Optical Tomography (DOT) CT-like scanner. Its energy source is a laser beam and not ionizing radiation such as is used in conventional x-ray mammography or CT scanners. The advantages of imaging without ionizing radiation may be significant in our markets. CTLM® is an emerging new imaging modality offering the potential of functional molecular imaging, which can visualize the process of angiogenesis which may be used by the radiologist to distinguish between benign and malignant tissue. X-ray mammography is a well-established method of imaging the breast but has limitations especially in dense breast cases. While x-ray mammography and ultrasound produce two dimensional images (2D) of the breast, the CTLM® produces 3D images. Ultrasound is often used as an adjunct to mammography to help differentiate tumors from cysts or to localize a biopsy site. We believe the CTLM® will be used to provide the radiologist with additional information to manage the clinical case; help diagnose breast cancer earlier; reduce diagnostic uncertainty especially in mammographically dense breast cases; and may help decrease the number of biopsies performed on benign lesions. Because breast cancers nearly always develop in the dense tissue of the breast (not in the fatty tissue), older women who have mostly dense tissue on a mammogram are at an increased risk of breast cancer. Abnormalities in dense breasts can be more difficult to detect on a mammogram. The CTLM® technology is unique and patented. We intend to develop our technology into a family of related products. We believe these technologies and clinical benefits constitute substantial markets for our products well into the future.
In addition, sales of medical devices outside the U.S. 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 marketing clearance and the requirements may differ.
Regulatory approvals, if granted, may include significant limitations on the indicated uses for which the CTLM® 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. 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:
• FDA marketing clearance for the CTLM®,
•
foreign marketing clearances for the CTLM® or regulatory approvals or clearances for other products that we may develop, on a timely basis, or at all,
• timely receipt of approvals or clearances,
• continued approval or clearance of previously obtained approvals and clearances, and
• 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, products other than the CTLM® device are at early stages of development. There can be no assurance that any of our proposed products, including the CTLM®, will:
• be found to be safe and effective,
• meet applicable regulatory standards or receive necessary regulatory clearance,
•
be safe and effective, developed into commercial products, manufactured on a large scale or be economical to market, or
• achieve or sustain market acceptance.
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Therefore, there is substantial risk that our product development and commercialization efforts will prove to be unsuccessful.
We depend on market acceptance to sell our products, which have not been proven, and a lack of acceptance of the CTLM® 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® or any other products that we develop. The extent and rate the CTLM® 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® and the advantages of the CTLM® 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®; 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® 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 our three 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.
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We have a limited manufacturing history that could cause delays in the production and shipment of our product.
We will have to expand our CTLM® manufacturing and assembly capabilities and contract for the manufacture of the CTLM® 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®.
We have used and do use third parties to manufacture and deliver the components of the CTLM® 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® 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 marketing clearance approval for the CTLM® 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® in Asia, Europe, China, South America, Mexico and the Middle East. Our marketing plans for the Middle East are subject to the following: that (i) certain Middle Eastern countries are subject to economic sanctions, (ii) IDSI is not marketing and will not market the CTLM® in countries that are subject to economic sanctions, and (iii) IDSI has and will have no agreements, commercial arrangements, or other contacts with the government or entities controlled by the government in any such country for so long as the sanctions remain in place. Until we receive marketing clearance from the FDA to market the CTLM® 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:
• economic and political instability,
• shipping delays,
• fluctuation of foreign currency exchange rates,
• foreign regulatory requirements,
•
various trade restrictions, all of which could have a significant impact on our ability to deliver products on a timely basis, and
• inability to collect outstanding receivables to the extent that irrevocable letters of credit are not used.
Significant increases in the level of customs duties, export quotas or other trade restrictions could have a material adverse effect on our business, financial condition and results of operations. The regulation of medical devices in foreign countries continues to develop, and there can be no assurance that new laws or regulations will not have an adverse effect on us. In order to minimize the risk of doing business with distributors in countries which are having difficult financial times, our international distribution agreements may require payment via an irrevocable letter of credit drawn on a United States bank prior to shipment of the CTLM®.
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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 previously carried $3,000,000 in product liability insurance to cover both clinical sites and sales. As part of our cost savings initiatives, we cancelled the policy as we have not had any adverse experiences after conducting more than 25,000 patient scans worldwide. We have assumed the risk of product liability. A successful product liability claim against us could have a material adverse effect on the Company. Furthermore, there can be no assurance that, in the future, we will be able to obtain adequate or maintain product liability insurance on acceptable terms.
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Item 1B.
Item 1B. Unresolved Staff Comments
None
Item 2.
Item 2. Description of Our Property
On June 2, 2008, we executed a Business Lease Agreement with Ft. Lauderdale Business Plaza Associates, an unaffiliated third-party, for 9,870 square feet of commercial office and manufacturing space at 5307 NW 35th Terrace, Ft. Lauderdale, Florida. The term of the lease is five years and one month with the first monthly rent payment due September 1, 2008 with an option to renew for one additional period of three years. The monthly base rent for the initial year is $6,580 plus applicable sales tax. During the term and any renewal term of the lease, the base annual rent shall be increased each year. Commencing with the first day of August 2009 and each year thereafter, the base annual rent shall be cumulatively increased by 3.5% each lease year plus applicable sales tax. IDSI will also be obligated to pay as additional rent its pro-rata share of all common area maintenance expenses which is estimated to be $3,084 per month for the first 12 months of the lease. The total monthly rent including Florida sales tax for the first 12 months is $10,244. Upon the execution of the lease, we paid the first month’s rent of $10,244 and a security deposit of $13,160. In August 2008, we moved into our new headquarters facility. We believe that our new facility is adequate for our current and reasonably foreseeable future needs and provides us with a monthly cost savings of $23,196 per month. We intend to assemble the CTLM® at our facility from hardware components that will be made by vendors to our specifications.
On September 13, 2007, we entered into an agreement with an unaffiliated third-party for the sale and lease-back of our prior facility at 6531 N.W. 18th Court, Plantation, Florida. On March 31, 2008, pursuant to the sale/lease-back transaction, we closed the sale of our commercial building for $4.4 million to Bright Investments LLC (“Bright”), an unaffiliated third-party and a sister company to Superfun B.V. On April 29, 2008, we gave six months prior written notice of termination of our lease of the Plantation facility as part of our cost cutting initiatives.
On July 21, 2011, we entered into an agreement with Ft. Lauderdale Business Plaza Associates, an unaffiliated third-party, for an additional 4,800 square feet of commercial office space at 5301 NW 35th Terrace, Ft. Lauderdale, Florida. The term of the lease will run concurrent with our original lease commencing on September 1, 2011 and terminating on September 30, 2013. The monthly base rent for the initial year is $4,500 plus applicable sales tax and increase by 3.5% each year to the lease expiration. We terminated this lease agreement and obtained a release dated August 2, 2012 from Ft. Lauderdale Business Plaza Associates.
Item 3.
Item 3. Legal Proceedings
In April 2008, we were served with a lawsuit filed against us in Venice, Italy, by Gio Marco S.p.A. and Gio IDH S.p.A., related Italian companies which, between them, had purchased three CTLM® systems in 2005. One system was purchased directly from us, and the other two were purchased from our former Italian distributor and an affiliate of the distributor.
The plaintiffs alleged that they purchased the CTLM® systems for experimental purposes based on alleged oral assurances by our sales representative to the effect that we would promptly receive PMA approval for the CTLM® and that we would give them exclusive distribution rights in Italy. The plaintiffs are seeking to recover a total of €628,595, representing the aggregate purchase price of the systems plus related expenses.
Based on our preliminary investigation of this matter, we believed that this claim was without merit, and we vigorously defended the case. Our Italian counsel responded to the lawsuit in November 2008 and requested and was granted an extension to May 2009 to respond. Our counsel filed our defenses in the Court of Venice at a hearing held in June 2009. The judge set the next hearing for March 3, 2010 in order to allow the parties to clarify their claims and defenses. At the hearing, the plaintiffs did not prove all of the facts underlying their claims. The Judge set a hearing for November 10, 2010 for the “clarification of conclusions”. At that time, our counsel planned to present our demand for damages from “vexatious litigation” by the plaintiffs. The November 10, 2010 hearing was postponed until November 17, 2010. At the hearing, the plaintiffs failed to present their statements to the court in a timely manner and therefore, we believe that the plaintiffs should no longer be able to pursue any legal remedy in this matter. The last hearing of the case was held on November 17, 2010. A hearing was held on September 28, 2011 and the Judge declared that the case was closed. Our counsel requested a copy of the order of the court to be
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sent to the Plaintiffs notifying them that the case was closed. Because the court is sending notice to the plaintiffs, the time for appeal is reduced from one year to one month. If the plaintiffs do not appeal, the court’s decision becomes final. As of the date of this report, we have not received a copy of the order of the court notifying us that the case was closed.
On March 1, 2011, a lawsuit was filed against us in the United States District Court, Southern District of New York, by Shraga Levin (“Levin”), an individual who provided services as a placement agent in connection with arranging financing for us. In July 2008, Mr. Levin arranged financing for up to $800,000 through 8% Senior Secured Convertible Debentures to be purchased by Whalehaven Capital Fund Limited (“Whalehaven”) or its registered assigns. A first closing occurred on August 1, 2008 for a gross amount of $400,000 and a second closing occurred on November 20, 2008, for a gross amount of $400,000. Subsequent to the first closing Whalehaven assigned a portion of its Debenture to Alpha Capital Anstalt (“Alpha”). Mr. Levin was paid a total of $44,000 cash and received a Common Stock Purchase Warrant (“Warrant”) for 1,866,666 shares at an exercise price of $0.0228 for his services as a placement agent. The Warrant provided a feature for cashless exercise and a re-pricing provision for the exercise price in the event that any shares were sold or granted at a price less than $0.0228 while Mr. Levin’s warrant was outstanding. There was a re-pricing of the Whalehaven and Alpha warrants based on those investors’ agreement to immediately exercise their warrants and on October 16, 2009, Mr. Levin exercised his warrant at $0.005 per share as a result of the re-pricing he exercised as to the entire 1,866,666 shares, electing the cashless exercise feature, and received a net of 1,392,891 shares. The Warrant was cancelled upon delivery of the shares.
In his complaint dated March 1, 2011, Mr. Levin was seeking an additional 5,814,665 shares based on his belated contention that the Warrant language required an increase in the number of shares covered by the Warrant as a result of the re-pricing. He was also seeking liquidated damages for the late issuance of the shares claimed equal to 2% of the value of the stock per trading day.
On April 15, 2011, we entered into a settlement with Mr. Levin. While we believe that we have substantial defenses to Mr. Levin’s claim because we believe he was paid in full for his services and received all of the shares due from the exercise in full of the Warrant at $0.005 per share, we settled the matter to avoid costly litigation. Pursuant to the settlement, we agreed to issue to Mr. Levin, based on a cashless exercise as to 50% of the disputed shares, 2,907,333 shares of common stock upon the receipt of shareholder approval of the increase in authorized shares. The cashless exercise is based on the market price of IDSI stock on December 28, 2010 ($.04), when Mr. Levin tendered his warrant exercise as to the disputed shares. The settlement stipulation was filed with the court on May 18, 2011, and the 2,907,333 shares were issued on July 18, 2011. This case is now closed.
Item 4.
Item 4. Mine Safety Disclosures.
Not Applicable
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PART II
Item 5.
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.
On October 10, 2012, the closing trade price of the common stock as reported on the OTC Bulletin Board was $0.0002. As of such date, there were approximately 2,843 registered holders of record of our common stock.
Sale of Unregistered Securities
Debenture Private Placement
On August 1, 2008, we entered into a Securities Purchase Agreement (the “Initial Purchase Agreement”) with an unaffiliated third party, Whalehaven Capital Fund Limited (“Whalehaven”), relating to a private placement (the “Initial Private Placement”) of a total of up to $800,000 in principal amount of one-year 8% Senior Secured Convertible Debentures (the “Initial Debentures”). We were required to file within 30 days an S-1 Registration Statement (the “Registration Statement”) covering the shares of common stock underlying the Initial Debentures and related Warrants pursuant to the terms of a Registration Rights Agreement dated August 1, 2008, between IDSI and Whalehaven; however, with Whalehaven’s consent, we were permitted to file the Registration Statement promptly after the filing of our Annual Report on Form 10-K.
The Initial Purchase Agreement provided for the sale of the Initial Debentures in two closings. The first closing, which occurred on August 4, 2008, was for a principal amount of $400,000. The second closing would be for up to $400,000 and would occur within the earlier of five business days following the effective date of the Registration Statement and December 1, 2008, provided that the closing conditions in the Initial Purchase Agreement were met. We retained the option to use our existing equity credit line until the Registration Statement was declared effective. Sales under the Initial Purchase Agreement were subject to an 8% placement agent fee. Thus, the first closing generated proceeds to IDSI of $368,000, before normal transaction costs.
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Prior to maturity, the Initial Debentures would bear interest at the rate of 8% per annum, payable quarterly in cash or, at our option, in shares of common stock based on the then-existing market price provided that we were in compliance with the Initial Purchase Agreement.
The Initial Debentures could be converted in whole or in part at the option of the holder any time after the closing date into our Common Stock at the lesser of (i) a set price, initially $.019 per share, which was the closing price of our shares on the closing date (“fixed conversion price”) or (ii) 80% of the 3 lowest bid prices during the 10 consecutive trading days immediately preceding a conversion date; however, the terms of each Initial Debenture prevent the holder from converting the Debenture to the extent that the conversion would result in the holder and its affiliates beneficially owning more than 4.99% of the outstanding shares of our common stock; however, the limit could be increased to 9.99% on 61 days prior written notice from the holder.
At any time after closing, we could redeem for cash, upon written notice, any and all of the outstanding Initial Debentures at a 25% premium of the principal amount plus accrued and unpaid interest on the Initial Debentures to be redeemed.
The Initial Debentures were secured by a pledge of substantially all of our assets pursuant to a Security Agreement dated August 1, 2008, between IDSI and Whalehaven.
Pursuant to the first closing of the Initial Private Placement, we issued to Whalehaven five-year Warrants to purchase 22,222,222 shares of our common stock. The exercise price of these Warrants was $0.0228, i.e., 120% of the market price on the closing date. The Warrants were subject to cashless exercise at Whalehaven’s option.
The placement agent was entitled to receive a Warrant to purchase common stock equal to 12% of Whalehaven’s Warrants with an exercise price equal to Whalehaven’s exercise price. Consequently, a Warrant to purchase 2,666,666 shares was issued to the placement agent based on the first closing.
On October 23, 2008, we entered into an Amendment Agreement (the “Amendment”) with Whalehaven relating to the Initial Purchase Agreement, and the Initial Debenture due August 1, 2009, in the principal amount of $400,000 issued by us to Whalehaven pursuant to the Initial Purchase Agreement. The Amendment provided that the minimum conversion price would be $.013 per share and that the contemplated second closing for another $400,000 debenture would be abandoned. Consequently, no debenture or warrants were issued beyond the securities issued in connection with the first closing, as the total facility amount was limited to $400,000.
On November 12, 2008, our Registration Statement relating to the Initial Debenture was declared effective. On November 20, 2008, we entered into a Securities Purchase Agreement with two unaffiliated third parties, Whalehaven and Alpha Capital Anstalt (“Alpha”), relating to a private placement (the “New Private Placement”) of $400,000 in principal amount of one-year 8% Senior Secured Convertible Debentures (the “New Debentures”). We were required to file a Registration Statement covering the shares of common stock underlying the New Debentures, including any shares payable as interest, pursuant to the terms of a Registration Rights Agreement dated November 20, 2008, between IDSI and Whalehaven and Alpha promptly following our annual meeting of shareholders, which was held on December 29, 2008. At the meeting the shareholders voted to approve an amendment to our articles of incorporation to increase the authorized shares from 450,000,000 to 950,000,000 (the “Share Amendment”). We were required to use commercially reasonable efforts to cause a Registration Statement to be declared effective as promptly as practicable and no later than 75 days after filing. In the case of a review by the Securities and Exchange Commission the effectiveness date deadline extended to 120 days. In the absence of timely filing or effectiveness, we would be subject to customary liquidated damages.
The New Private Placement generated gross proceeds of $368,000 after payment of an 8% placement agent fee but before other expenses associated with the transaction.
Prior to maturity, the New Debentures provided interest at the rate of 8% per annum, payable quarterly in cash or, at the Company’s option, in shares of common stock based on the then-existing market price.
The New Debentures could be converted in whole or in part at the option of the holder any time after the shareholders have voted to approve the Share Amendment at the lesser of (i) a set price, initially $.033 (the closing price of the shares on the closing date) or (ii) 80% of the 3 lowest bid prices during the 10 consecutive trading days immediately preceding a conversion date; provided, however, that the Conversion Price is subject to a floor price, initially $0.013, and provided further however, that the terms of each Initial Debenture prevent the holder from converting the Debenture to the extent that the conversion would result in the holder and its affiliates beneficially
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owning more than 4.99% of the outstanding shares of our common stock; however, the limit could be increased to 9.99% on 61 days prior written notice from the holder.
After the effectiveness of the Registration Statement, we could redeem for cash, upon written notice, any and all of the outstanding Debentures at a 25% premium of the principal amount plus accrued and unpaid interest on the Debentures to be redeemed.
The New Debentures were secured by a pledge of substantially all of our assets pursuant to a Security Agreement dated November 20, 2008 between IDSI and Whalehaven and Alpha. This security interest was pari passu with the security interest granted to Whalehaven on August 1, 2008, in connection with the Company’s sale of the $400,000 Initial Debenture to Whalehaven.
In November 2008, Whalehaven converted $160,000 principal amount of the Initial Debenture and received 9,206,065 shares of our common stock as a result. On November 26, 2008, Whalehaven sold to Alpha $50,000 principal amount of the Initial Debenture and the right to purchase 5,555,555 shares underlying the Warrant. As a result of this transaction, the Warrant for 22,222,222 shares were replaced by a warrant held by Whalehaven covering 16,666,667 shares (the "Whalehaven Warrant") and a warrant held by Alpha covering 5,555,555 shares (the "Alpha Warrant") (collectively, the "Warrants").
On December 10, 2008, we entered into an Amendment Agreement with Whalehaven and Alpha relating to the Warrants. Under this Amendment Agreement, we agreed to reduce the exercise price of the Warrants to $.015 per share in exchange for the Purchasers' agreement to immediately exercise the Warrants as to 7,000,000 shares (5,000,000 covered by the Whalehaven Warrant and 2,000,000 covered by the Alpha Warrant). We used the $105,000 proceeds from the warrant exercise for working capital.
On December 15, 2008, Alpha converted $15,000 principal amount of its Initial Debenture and received 1,052,628 shares of our common stock as a result.
We entered into a second Amendment Agreement dated as of December 31, 2008, with Whalehaven and Alpha relating to the Warrants. Under this Amendment Agreement, we agreed to reduce the exercise price of the Warrants to $.005 per share in exchange for the Purchasers' agreement to immediately exercise the Warrants as to 14,755,555 shares (11,200,000 by Whalehaven and 3,555,555 by Alpha). We further agreed to issue new Warrants to purchase at $.005 per share up to a number of shares of Common Stock equal to the number of shares underlying the existing Warrants being exercised by Whalehaven and Alpha under the second Amendment Agreement.
In December 2008 we received $56,000, and in January 2009 we received $17,778 in proceeds from these Warrant exercises, we used the proceeds for working capital.
After the issuance of shares pursuant to Whalehaven’s Notice of Exercise of its Warrant and subsequent issuance of new Warrants, they had a balance of 11,666,667 shares available for exercise. After the issuance of shares pursuant to Alpha’s Notice of Exercise of its Warrant and subsequent issuance of new Warrants, they had a balance of 3,555,555 shares available for exercise.
We entered into a third Amendment Agreement dated as of March 20, 2009, with Whalehaven and Alpha. This Amendment Agreement pertained to a request by the Company to the Holders that they agree to a suspension of the Company’s obligations under the Registration Rights Agreements for both the Initial and New Debentures. In consideration for such suspensions, the Company agreed to an adjustment in the conversion price for both debentures whereby the floor price was reduced from $0.013 to $0.005 and the set price was reduced from $0.019 to $0.01. The new formula for determining the conversion price on any Conversion Date would be equal to the lesser of (a) $0.01, subject to certain standard adjustments (the “Set Price”) and (b) 80% of the average of the 3 lowest Closing Prices during the 10 Trading Days immediately prior to the applicable Conversion Date (subject to adjustments) (the “Conversion Price”); provided, however, that the Conversion Price shall in no event be less than $0.005 (subject to certain standard adjustments).
As of the date of this report, Whalehaven had sold to Alpha a total of $100,000 principal amount of the August Debenture and received from Alpha a total of $50,000 principal amount of the November Debenture, which it had acquired from Alpha on March 17, 2009 in connection with the sale of $50,000 of the August Debenture to Alpha.
As of the date of this report, Whalehaven had converted the $300,000 of the August Debenture which it did not sell to Alpha and has received 36,841,918 shares as a
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result. Whalehaven has converted $250,000 of the November Debenture and has received 51,600,363 shares as a result. Thus, Whalehaven has converted all of its August and November Debentures into 88,442,281 shares of common stock.
In October 2009, Whalehaven exercised Warrants to purchase 6,000,000 shares and received 4,648,649 shares of common stock using the cashless conversion feature with a Volume Weighted Average Price (“VWAP”) conversion price of $0.022. The shares were issued pursuant to Rule 144. Whalehaven held Warrants to purchase 5,666,667 shares of common stock at an exercise price of $0.005.
As of the date of this report, Alpha had converted $100,000 of the August Debenture and received 17,313,265 shares as a result. Alpha has converted $150,000 of the November Debenture and has received 28,429,066 shares as a result. Thus, Alpha has converted all of its August and November Debentures into 45,742,331 shares of common stock which does not include interest. In October 2009, we issued Alpha 2,166,263 shares as a result of the 8% interest on their portion of the debentures.
In October 2009, Alpha exercised its remaining Warrants to purchase 3,555,555 shares and received 2,942,528 shares of common stock using the cashless conversion feature with a VWAP exercise price of $0.029. The shares were issued pursuant to Rule 144.
In October 2009, the Placement Agents exercised their Warrants to purchase 2,666,666 shares and received 1,989,845 shares of common stock using the cashless conversion feature with a VWAP exercise price of $0.0197. The shares were issued pursuant to Rule 144.
In December 2009, Whalehaven exercised its remaining Warrants to purchase 5,666,667 shares and received 4,542,328 shares of common stock using the cashless conversion feature with a VWAP exercise price of $0.0252. The shares were issued pursuant to Rule 144.
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 20 shares of Series L Convertible Preferred Stock. (See “Issuance of Stock in Connection with Short-Term Loans”)
Series K Preferred
See “Financing/Equity Line of Credit”.
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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 registered on Form S-8 when issued was $2,437,151. On July 15, 2008, we entered into a Financial Services Consulting Agreement (the “Agreement”) with R.H. Barsom Company, Inc. of New York, NY, an unaffiliated third-party, to provide us with investor relations services and guidance and assistance in available alternatives to maximize shareholder value. The term of the Agreement is six months, with payment for services being made with shares of IDSI’s common stock with a restricted legend to Richard E. Barsom. The total payment will be 5,000,000 restricted shares, with the first payment of 2,500,000 restricted shares paid on July 16, 2008, and the second payment of 2,500,000 restricted shares due three months after July 15, 2008. The aggregate fair market value of the 5,000,000 restricted shares when issued was $55,000. The Company agreed to register as soon as practicable the aggregate of 5,000,000 shares in an S-1 Registration Statement. In April 2010, we issued 250,000 restricted shares to Frederick P. Lutz to satisfy the balance of $2,250 previously owed to him for investor relation services and for additional investor relation services. The aggregate fair market value of the 250,000 restricted shares when issued was $13,500.
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.
Issuance of Stock in Connection with Short-Term Loans
In November 2009, we borrowed a total of $237,500 from four private investors pursuant to short-term promissory notes. These notes were due and payable in the amount of principal plus 20% premium, so that the total amount due was $285,000. In addition, we issued to the investors 70 shares of restricted common stock for each $1 lent so that a total of 16,625,000 shares of stock were issued to the investors. The aggregate fair market value of the 16,625,000 shares of stock when issued was $465,500. $30,000 principal on one of the notes was sold to OTC Global Partners in October 2012. As of the date of this report, we have repaid an aggregate principal and premium in the amount of $148,500 on these short-term notes and owe a balance of $192,100 of which $100,000 is the principal remaining from one note and $92,100 is the balance of premium due from three notes. The original due date of December 21, 2009, was first extended to February 28, 2010, with a second extension to June 15, 2010, a third extension to September 30, 2010 and a fourth extension to October 31, 2010. Further extensions of the $100,000 note were made through June 30, 2012 for 3% additional premium per month. However, as of the date of this report, we are accruing this 3% additional premium per month but have not yet received an extension of maturity date and are in technical default of the note. We are negotiating with the lender to extend the maturity date. In connection with all of the extensions, a total of $85,600 of additional premium was accrued as of the date of this report.
In December 2009, we borrowed a total of $400,000 from a private investor pursuant to three short-term promissory notes. These notes were payable from March 10 through March 15, 2010 in the amount of principal plus 15% premium, so that the total amount due was $460,000. In addition, we issued to the investor 24,000,000 shares of restricted common stock as collateral. These shares are to be returned and cancelled upon payment of the notes. The original due date of March 15, 2010 was first extended to June 15, 2010, with a second extension to September 30, 2010 and a third extension to October 31, 2010. Further extensions of the notes were made through June 30, 2012 for 3% additional premium per month on each note. However, as of the date of this report, we are accruing this 3% additional premium per month but have not yet received an extension of maturity date and are in technical default of the note. We are negotiating with the lender to extend the maturity date. In connection with these extensions a total of $323,906 of additional premium was accrued for the December 2009 notes as of the date of this report. In April 2011, Southridge purchased a total of $200,000 in principal value of promissory notes from the private investor. As of the date of this report, Southridge has converted $131,450 principal and $55,600 premium into 251,995,632 shares of which 20,746,666 shares of our common stock that was previously issued as collateral.
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On January 8, 2010, we borrowed a total of $600,000 from a private investor pursuant to two short-term promissory notes. These notes were payable April 6, 2010 in the amount of principal plus 15% premium, so that the total amount due was $690,000. In addition, we issued to the investor 31,363,637 shares of restricted common stock as collateral. These shares are to be returned and cancelled upon payment of the notes. The original due date of April 6, 2010 was first extended to June 15, 2010, with a second extension to September 30, 2010 and a third extension to October 31, 2010. Further extensions of the notes were made through May 31, 2012 for 3% additional premium per month on each note. In January 2011, Southridge purchased a total of $600,000 in principal value of promissory notes from the private investor. From January 2011 to June 2012, Southridge fully converted the $600,000 principal and $344,550 premium into 413,172,232 shares of our common stock of which 31,056,108 shares were collateral shares and 382,116,124 new shares were issued pursuant to Rule 144.
On February 25, 2010, we borrowed $350,000 from a private investor pursuant to a short-term promissory note. We issued to the investor 35 shares of Series L Convertible Preferred Stock as collateral. This note had a maturity date of April 30, 2010; however, the investor gave us notice of conversion to the collateral shares on March 31, 2010. The Note was cancelled upon this conversion. The 35 shares of Series L Convertible Preferred Stock accrue dividends at an annual rate of 9% and are convertible into an aggregate of 16,587,690 shares of common stock (473,934 shares of common stock for each share of preferred stock). Pursuant to the Certificate of Designation, Rights and Preferences for the Series L Convertible Preferred Stock, we are obligated to reduce the conversion price and reserve additional shares for conversion if we sold or issued common shares below the price of $.0211 per share (the market price on the date of issuance of the Preferred Stock). In October 2010, we obtained a waiver from the private investor holding the 35 shares of Series L Convertible Preferred Stock in which the investor agreed to convert no more than the 16,587,690 common shares currently reserved as we do not have sufficient authorized common shares to reserve for further conversions pursuant to the Certificate of Designation, Rights and Preferences. The investor agreed to a conversion floor price of $.015, which required us to reserve an additional 6,745,643 common shares.
On January 6, 2011, the investor converted 15 shares of the Series L Convertible Preferred Stock into 10,000,000 shares of common stock. As of the date of this report, the investor holds 20 shares of the Series L Convertible Preferred Stock.
On December 13, 2010, we borrowed a total of $60,000 from a private investor pursuant to a short-term promissory note. The note is payable on or before January 31, 2011. As consideration for this loan, we were obligated to pay back his principal, $26,400 in premium and issue 3,000,000 restricted shares of common stock upon the approval by our shareholders of an increase in authorized common stock at our annual meeting to be held on July 12, 2011. On September 9, 2011, we issued the 3,000,000 common shares pursuant to Rule 144. We received an extension of maturity date to October 31, 2012 for this note.
In November and December 2010, we received a total of $145,000 from Southridge pursuant to three short-term promissory notes. All three notes provide for a redemption premium of 15% of the principal amount on or before March 31, 2011. Interest will accrue at 8% per annum until maturity. Southridge may elect at an Event of Default to convert any part or all of the $145,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In January 2011, we received a total of $157,000 from Southridge pursuant to three short-term promissory notes. All three notes provide for a redemption premium of 15% of the principal amount on or before May 31, 2011. Interest will accrue at 8% per annum until maturity. Southridge may elect at an Event of Default to convert any part or all of the $157,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In February 2011, we received a total of $115,000 from Southridge pursuant to two short-term promissory notes. Both notes provide for a redemption premium of 15% of the principal amount on or before May 31, 2011. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $115,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
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In March 2011, we received $60,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before May 31, 2011. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $60,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In April 2011, we received $165,000 from Southridge pursuant to two short-term promissory notes. The notes provide for a redemption premium of 15% of the principal amount on or before July 31, 2011. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $165,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In May 2011, we received $80,000 from Southridge pursuant to two short-term promissory notes. The notes provide for a redemption premium of 15% of the principal amount on or before July 31, 2011. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $80,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In July 2011, we received $150,000 from Southridge pursuant to a short-term promissory note. The note provided for a redemption premium of 15% of the principal amount on or before December 31, 2011. We received an extension of maturity date to February 29, 2012 for these notes. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $150,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In August 2011, we received $82,500 from Southridge pursuant to two short-term promissory notes of which the principal on these notes was $100,000 and $7,500, respectively. The $100,000 note provided for a $25,000 original issue discount and both notes provided for a redemption premium of 15% of the principal amount on or before December 31, 2011. We received an extension of maturity date to February 29, 2012 for these notes. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $107,500 principal amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. The $7,500 note has been paid in full through the conversion to common stock pursuant to Rule 144.
In August 2011, we received $50,000 from OTC Global Partners, LLC pursuant to a short-term promissory note. The note provided for a redemption premium of 15% of the principal amount on or before March 1, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. OTC Global Partners, LLC may elect at an Event of Default to convert any part or all of the $50,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.014 or (b) 65% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In September 2011, we received $133,000 from Southridge pursuant to two short-term promissory notes of which the principal on these notes was $100,000 and $100,000, respectively. One of the $100,000 notes provided for a $33,000 original issue discount and the other $100,000 note provided a $34,000 original issue discount. The notes provided for a redemption premium of 15% of the principal amount on or before December 31, 2011. We received an extension of maturity date to December 31, 2012 for these notes. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $200,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.0075 or (b) 70% of the average of the three lowest closing bid prices
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during the 10 trading days immediately prior to the date of the conversion notice. The $100,000 note has been paid in full through the conversion to common stock pursuant to Rule 144.
In October 2011, we received $67,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $100,000. The note provides for a $33,000 original issue discount. The note provided for a redemption premium of 15% of the principal amount on or before January 12, 2012. We received an extension of maturity date to December 31, 2012 for this note. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $100,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.0075 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.
In October 2011, we received $67,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $100,000. The note provides for a $33,000 original issue discount. The note provided for a redemption premium of 15% of the principal amount on or before January 26, 2012. We received an extension of maturity date to December 31, 2012 for this note. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $100,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.005 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.
In October 2011, we received $78,500 from Asher Enterprises pursuant to a short-term promissory note due on or before July 26, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Asher Enterprises may elect at an Event of Default to convert any part or all of the $78,500 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 58% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In November 2011, we received $20,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $20,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 62% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
On November 21, 2011, Southridge sold their May 12, 2011 $60,000 short-term promissory note to Panache Capital, LLC (“Panache”). The terms of the original note remain the same except that the maturity date is now November 21, 2012 and interest will accrue at 10% per annum until maturity above and beyond the premium.
In November 2011, we received $40,000 from Panache pursuant to a short-term promissory note. The note provides a maturity date of November 21, 2012. Interest will accrue at 10% per annum until maturity. Panache may elect at an Event of Default to convert any part or all of the $40,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 62% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In November 2011, we received $53,000 from Asher Enterprises pursuant to a short-term promissory note due on or before September 5, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Asher Enterprises may elect at an Event of Default to convert any part or all of the $53,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 58% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In December 2011, we received $17,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 18, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $17,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 62% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In December 2011, we received $12,000 from an unaffiliated third party investor pursuant to a short-term promissory note. The note provided for a redemption premium of 15% of the principal amount on or before March 8, 2012. Interest will accrue at 10% per annum until maturity above and beyond the premium. On January 6, 2012,
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we amended a promissory note in the principal amount of $12,000 dated December 9, 2011 held by an unaffiliated third-party investor. The note provided for a redemption premium of 15% of the principal amount on or before March 8, 2012. Interest will accrue at 10% per annum until maturity above and beyond the premium. The amendment provided for the issuance of three (3) restricted shares of Series P Preferred Stock having a stated value of $5,000 per share. These shares, having a total value of $15,000, will be used as collateral for the note held by the investor. We received an extension of maturity to June 4, 2012 for this note. Thereafter, a late fee premium of 1% per month will be due if unpaid.
In December 2011, we borrowed a total of $21,604 from a private investor pursuant to two short-term promissory notes. The notes provided for a 2% premium per month. One of the notes was payable on or before December 16, 2011 and the other on or before January 6, 2012. We received an extension of maturity date to June 30, 2012 for these notes for 3% additional premium per month on each note.
In January 2012, we received a total of $175,200 from an unaffiliated third party investor pursuant to five short-term promissory notes with a maturity date ranging from March 5, 2012 to March 20, 2012. The notes provided for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 10% per annum until maturity above and beyond the premium. We issued a total of 38 Series P Preferred Stock to the investor as collateral with a total stated value of $190,000. We received an extension of maturity to June 4, 2012 for these notes. Thereafter, a late fee premium of 1% per month will be due if unpaid.
In February 2012, we received a total of $42,000 from an unaffiliated third party investor pursuant to two short-term promissory notes with a maturity date ranging from April 13, 2012 to April 30, 2012. The notes provided for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 10% per annum until maturity above and beyond the premium. We issued a total of 9 Series P Preferred Stock to the investor as collateral with a total stated value of $45,000. We received an extension of maturity to June 4, 2012 for these notes. Thereafter, a late fee premium of 1% per month will be due if unpaid.
On February 23, 2012, Southridge sold their $100,000 short-term promissory note to Panache Capital, LLC (“Panache”) of which a balance of $70,000 principal was remaining after Southridge converted $30,000 principal in a debt to equity conversion on February 17, 2012. The terms of the original note remain the same except that the maturity date is now November 21, 2012 and interest will accrue at 10% per annum until maturity above and beyond the premium.
In February 2012, we received $25,000 from Panache pursuant to a short-term promissory note. The note provides a maturity date of February 28, 2013. Interest will accrue at 10% per annum until maturity. Panache may elect at an Event of Default to convert any part or all of the $25,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 55% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In March 2012, we received $30,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before March 18, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 62% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In April 2012, we received $11,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $11,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In April 2012, we received $2,500 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before April 25, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $2,500 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
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In May 2012, we received a total of $25,000 from an unaffiliated third party investor pursuant to a short-term promissory note with a maturity date of August 2, 2012. The note provides for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 10% per annum until maturity above and beyond the premium. We issued a total of 5 Series P Preferred Stock to the investor as collateral with a total stated value of $25,000.
In May 2012, we received $8,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before May 14, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $8,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In May 2012, we received $13,000 from Linda Grable pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before May 21, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Ms. Grable may elect at an Event of Default to convert any part or all of the $13,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In May 2012, we received $32,000 from a private investor pursuant to two short-term promissory notes with a maturity date ranging from May 17, 2013 to May 20, 2013. The notes provides for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $32,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In June 2012, we received $6,672 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before June 17, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $6,672 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In June 2012, we received $14,000 from a private investor pursuant to two short-term promissory notes with a maturity date ranging from June 6, 2013 to June 20, 2013. The notes provide for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $14,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In July 2012, we received $20,100 from a private investor pursuant to four short-term promissory notes with a maturity date ranging from July 9, 2013 to July 24, 2013. The notes provide for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $20,100 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In August 2012, we received $25,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $25,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice. We reserved 50,000,000 shares of our common stock in connection with this loan.
In August 2012, we received $95,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $95,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock
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on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 400,000,000 shares of our common stock in connection with this loan.
On August 20, 2012, Southridge sold $70,000 of their original $100,000 short-term promissory note dated October 12, 2011 to Levin Consulting Group. The terms of the original note remain the same except that the holder may elect at an Event of Default to convert any part or all of the $70,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
In August 2012, we received $35,000 from Levin Consulting Group pursuant to a short-term promissory note with a maturity date of August 20, 2013. The note provides for a redemption premium of 15% of the principal amount on or before November 18, 2012; 20% on or before December 18, 2012; 25% on or before January 17, 2013; and 30% on or before February 16, 2013. Interest will accrue at 10% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $35,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
On August 20, 2012, Southridge sold $30,000 of their original $100,000 short-term promissory note dated October 12, 2011 to SGI Group LLC (“SGI”). The terms of the original note remain the same except that the holder may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
In August 2012, we received $15,000 from SGI pursuant to a short-term promissory note with a maturity date of August 20, 2013. The note provides for a redemption premium of 15% of the principal amount on or before November 18, 2012; 20% on or before December 18, 2012; 25% on or before January 17, 2013; and 30% on or before February 16, 2013. Interest will accrue at 10% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $15,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
In September 2012, we received $29,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $30,000. The note provides for a $1,000 original issue discount. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 150,000,000 shares of our common stock in connection with this loan.
In September 2012, we received $25,000 from Panache pursuant to a short-term promissory note of which the principal on the note was $30,000. The note provides for a $5,000 original issue discount. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Panache may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided
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that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 200,000,000 shares of our common stock in connection with this loan.
In September 2012, we received $30,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 20% on or before December 17, 2012; 25% on or before March 17, 2013; and 30% on or before June 15, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 700,000,000 shares of our common stock in connection with this loan.
On September 26, 2012, a private investor sold $30,000 of its original $100,000 short-term promissory note dated November 23, 2009 to OTC Global Partners. The terms of the original note remain the same except that the new note provides for a new redemption premium of 15% of the principal amount on or before September 25, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. OTC Global Partners may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
In October 2012, we received $30,000 from Panache pursuant to a short-term promissory note. The note provides a maturity date of September 28, 2013. Interest will accrue at 10% per annum until maturity. Any amount on principal or interest that remains unpaid when due, shall bear an interest rate of 22% from the due date until paid. Panache may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
In October 2012, we received $38,500 from FLUX Carbon Starter pursuant to a short-term promissory note. The note provides a maturity date of October 3, 2013. We received net proceeds of $33,250 after deductions of $3,500 for legal fees and $1,750 for a finder’s fee. Interest will accrue at 10% per annum until maturity. FLUX Carbon Starter may elect at an Event of Default to convert any part or all of the $38,500 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
In October 2012, we received $27,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $40,000. The note provides for a $13,000 original issue discount. The note provides for a redemption premium of 20% on or before January 7, 2012; 25% on or before April 7, 2013; and 30% on or before July 15, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $40,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 300,000,000 shares of our common stock in connection with this loan.
On May 11, 2011, Southridge executed a debt to equity conversion of a $80,000 short-term promissory note dated November 11, 2010 plus accrued interest of $3,174. We issued Southridge 11,089,826 common shares pursuant to Rule 144 based on an agreed exchange price of $0.0075 per share. We still owe Southridge $12,000 in premium associated with this note.
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On July 13, 2011, Southridge executed a debt to equity conversion of a $14,000 short-term promissory note dated December 16, 2010 plus accrued interest of $641. We issued Southridge 1,464,132 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We still owe Southridge $2,100 in premium associated with this note.
On July 13, 2011, Southridge executed a debt to equity conversion of a $51,000 short-term promissory note dated December 22, 2010 plus accrued interest of $2,269. We issued Southridge 5,326,915 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We still owe Southridge $7,650 in premium associated with this note.
On July 21, 2011, Southridge executed a debt to equity conversion of a $55,000 short-term promissory note dated January 13, 2011 plus accrued interest of $2,278. We issued Southridge 5,727,836 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We still owe Southridge $8,250 in premium associated with this note.
On July 21, 2011, Southridge executed a debt to equity conversion of a $22,000 short-term promissory note dated January 19, 2011 plus accrued interest of $882. We issued Southridge 2,288,241 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We still owe Southridge $3,300 in premium associated with this note.
On August 24, 2011, Southridge executed a debt to equity conversion of a $80,000 short-term promissory note dated January 28, 2011 plus accrued interest of $3,647. We issued Southridge 8,364,712 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We still owe Southridge $12,000 in premium associated with this note.
On August 24, 2011, Southridge executed a partial debt to equity conversion of a $80,000 short-term promissory note dated February 7, 2011 in which they converted $20,000 principal plus accrued interest of $868. We issued Southridge 2,086,795 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We still owe Southridge $60,000 principal, $12,000 in premium and $2,683 in interest associated with this note.
On August 24, 2011, Southridge executed a debt to equity conversion of a $80,000 short-term promissory note dated January 28, 2011 plus accrued interest of $3,647. We issued Southridge 8,364,712 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We canceled the $12,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On August 24, 2011, Southridge executed a partial debt to equity conversion of a $80,000 short-term promissory note dated February 7, 2011 in which they converted $20,000 principal plus accrued interest of $868. We issued Southridge 2,086,795 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.
On September 27, 2011, Southridge executed a final debt to equity conversion of a $80,000 short-term promissory note dated February 7, 2011 in which they converted the remaining $60,000 principal plus accrued interest of $868. We issued Southridge 8,399,781 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share. We canceled the $12,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On September 27, 2011, Southridge executed a debt to equity conversion of a $35,000 short-term promissory note dated February 15, 2011 plus accrued interest of $1,688. We issued Southridge 4,891,689 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share. We canceled the $5,250 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On September 27, 2011, Southridge executed a debt to equity conversion of a $60,000 short-term promissory note dated March 31, 2011 plus accrued interest of $2,315. We issued Southridge 8,308,603 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share. We canceled the $9,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On September 28, 2011, we amended the terms of all debt agreements with Southridge Partners II, LP and agreed to amend the conversion terms of the Notes such that the principal portion of the Notes, plus accrued interest, shall be convertible into shares of our common stock at a conversion price per share equal to the lesser of (a) $0.0075 or (b) ninety percent (90%) of the average of the three (3) lowest closing bid prices during the ten (10) trading days immediately prior to the date of the conversion notice.
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On October 13, 2011, Southridge executed a debt to equity conversion of a $100,000 short-term promissory note dated April 14, 2011 plus accrued interest of $3,989. We issued Southridge 20,797,808 common shares pursuant to Rule 144 based on an agreed conversion price of $0.005 per share. We canceled the $15,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On November 3, 2011, Southridge executed a debt to equity conversion of a $65,000 short-term promissory note dated April 26, 2011 plus accrued interest of $2,721. We issued Southridge 13,544,219 common shares pursuant to Rule 144 based on an agreed conversion price of $0.005 per share. We canceled the $9,750 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On November 16, 2011, Southridge executed a debt to equity conversion of a $20,000 short-term promissory note dated May 6, 2011 plus accrued interest of $850. We issued Southridge 6,725,939 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0031 per share. We canceled the $3,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On December 15, 2011, Panache executed a partial debt to equity conversion of a $60,000 short-term promissory note dated May 12, 2011 in which they converted $14,415 principal. We issued Panache 5,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.002883 per share.
On January 3, 2012, Panache executed a partial debt to equity conversion of a $60,000 short-term promissory note dated May 12, 2011 in which they converted $12,896 principal. We issued Panache 8,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.001612 per share.
On January 10, 2012, Panache executed a partial debt to equity conversion of a $60,000 short-term promissory note dated May 12, 2011 in which they converted $12,896 principal. We issued Panache 8,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.001612 per share.
On January 18, 2012, Panache executed a partial debt to equity conversion of a $60,000 short-term promissory note dated May 12, 2011 in which they converted $12,710 principal. We issued Panache 10,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.001271 per share.
On January 27, 2012, Panache executed a debt to equity conversion of a $60,000 short-term promissory note dated May 12, 2011 in which they converted the final $7,083 in principal. We issued Panache 5,712,097 common shares pursuant to Rule 144 based on an agreed conversion price of $0.001224 per share. We still owe Panache $3,139 in accrued interest associated with this note.
On January 23, 2012, Southridge executed a partial debt to equity conversion of a $150,000 short-term promissory note dated July 27, 2011 in which they converted $85,000 principal. We issued Southridge 66,390,690 common shares with a restrictive legend based on an agreed conversion price of $0.0013 per share. The restrictive legend was removed on February 2, 2012 pursuant to Rule 144.
On January 27, 2012, Southridge executed a partial debt to equity conversion of a $150,000 short-term promissory note dated July 27, 2011 in which they converted $30,000 principal. We issued Southridge 24,193,548 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0012 per share.
On February 7, 2012, Southridge executed a partial debt to equity conversion of a $150,000 short-term promissory note dated July 27, 2011 in which they converted $18,500 principal and $6,411 interest. We issued Southridge 24,277,321 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00103 per share.
On February 10, 2012, Southridge executed a partial debt to equity conversion of a $150,000 short-term promissory note dated July 27, 2011 in which they converted $16,500 principal and $99 interest. We issued Southridge 17,272,248 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00096 per share.
On February 17, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $30,000 principal and $3,858 interest. We issued Southridge 34,237,571 common shares on February 27, 2012 pursuant to Rule 144 based on an agreed conversion price of $0.00099 per share.
On February 23, 2012, Southridge executed a debt to equity conversion of a $7,500 short-term promissory note dated August 23, 2011 in which they converted $7,500 principal and $289 interest. We issued Southridge 7,545,592
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common shares pursuant to Rule 144 based on an agreed conversion price of $0.00103 per share.
On February 28, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated September 12, 2012 in which they converted $51,000 principal and $3,595 interest. We issued Southridge 60,728,054 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.0009 per share.
On March 5, 2012, OTC Global Partners executed a debt to equity conversion of a $50,000 short-term promissory note dated August 30, 2011 in which they converted $50,000 principal and $2,027 interest. We issued OTC Global Partners 72,765,035 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000715 per share.
On April 13, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated September 12, 2012 in which they converted $49,000 principal and $1,096 interest. We issued Southridge 123,693,557 restricted common shares on April 24, 2012 pursuant to Rule 144 based on an agreed conversion price of $0.00041 per share.
On April 13, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated September 28, 2012 in which they converted $4,000 principal and $4,340 interest. We issued Southridge 20,591,916 restricted common shares on April 24, 2012 pursuant to Rule 144 based on an agreed conversion price of $0.00041 per share.
On May 1, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $9,765 principal. We issued Panache 21,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000465 per share.
On May 1, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $12,000 principal. We issued Asher 26,086,957 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00046 per share.
On May 2, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $15,000 principal. We issued Asher 44,117,647 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00034 per share.
On May 10, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $13,000 principal. We issued Asher 68,421,053 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00019 per share.
On May 10, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $7,440 principal. We issued Panache 30,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000248 per share.
On May 15, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $9,330 principal. We issued Panache 50,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001866 per share.
On May 21, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $18,500 principal. We issued Asher 102,777,778 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00018 per share.
On May 22, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $9,330 principal. We issued Panache 50,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000186 per share.
On May 29, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $12,000 principal. We issued Asher 66,666,667 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00018 per share.
On May 30, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $9,330 principal. We issued Panache 50,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000186 per share.
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On June 4, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $8,000 principal and $3,140 in interest. We issued Asher 85,692,308 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00013 per share.
On June 5, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $9,920 principal. We issued Panache 80,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000124 per share.
On June 8, 2012, Asher executed a partial debt to equity conversion of a $53,000 short-term promissory note dated November 29, 2011 in which they converted $12,000 principal. We issued Asher 85,692,308 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00014 per share.
On June 12, 2012, Asher executed a partial debt to equity conversion of a $53,000 short-term promissory note dated November 29, 2011 in which they converted $14,000 principal. We issued Asher 100,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00014 per share.
On June 15, 2012, Asher executed a partial debt to equity conversion of a $53,000 short-term promissory note dated November 29, 2011 in which they converted $13,000 principal. We issued Asher 68,421,053 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00019 per share.
On June 20, 2012, Asher executed a partial debt to equity conversion of a $53,000 short-term promissory note dated November 29, 2011 in which they converted $14,000 principal and $2,120 in interest. We issued Asher 94,823,529 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00017 per share.
On July 17, 2012, Ms. Grable executed a full debt to equity conversion of a $13,000 short-term promissory note in which she converted $13,000 principal and $148 in interest. We issued Ms. Grable 43,827,215 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.0003 per share.
On July 17, 2012, a private investor executed a partial debt to equity conversion of five of her notes in which she converted $19,583 principal into 100,000,000 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.000177 per share.
On July 25, 2012, a private investor executed a full debt to equity conversion of a $3,000 short-term promissory note in which she converted $3,000 principal into 10,000,000 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.0003 per share.
On July 30, 2012, a private investor executed a partial debt to equity conversion of a $10,000 short-term promissory note in which she converted $6,900 principal into 23,000,000 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.0003 per share.
On August 7, 2012, a private investor sold their December 2011 short-term promissory notes totaling $21,604 in principal and $5,334 in premium to OTC Global Partners. A new short-term promissory note was issued to OTC Global Partners dated August 7, 2012 with a taking period back to December 7, 2011. OTC Global Partners may elect at an Event of Default to convert any part or all of the $21,604 Principal Amount of the Note plus accrued premium into shares of our common stock at a conversion price $0.00032.
On August 7, 2012, OTC Global Partners executed a partial debt to equity conversion of the $21,604 short-term promissory note in which they converted $21,604 principal and $2,396 in premium. We issued OTC Global Partners 75,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00032 per share.
On September 5, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated September 28, 2011 in which they converted $85,582 principal. We issued Southridge 380,363,446 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00023 per share.
On September 10, 2012, Levin Consulting Group executed a partial debt to equity conversion of the $70,000 short-term promissory note originally dated August 25, 2011 and purchased on August 20, 2012 from Southridge, in which they converted $20,000 principal. We issued Levin Consulting Group 80,000,000 common shares pursuant to Rule 144 based on an agreed
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conversion price of $0.00025 per share. On September 21, 2012 we issued Levin Consulting Group an additional 120,000,000 shares because the closing bid price on the clearing date fell below the Initial closing bid price.
On September 10, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $14,885 principal. We issued Panache 80,026,882 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000186 per share.
On September 11, 2012, Southridge executed a final debt to equity conversion of a $100,000 short-term promissory note dated September 28, 2011 in which they converted $10,418 principal and $3,004 in interest. We issued Southridge 89,478,883 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00015 per share.
On September 11, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated October 26, 2011 in which they converted $32,500 principal and $7,036 in interest. We issued Southridge 263,570,776 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00015 per share.
On September 12, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated October 26, 2011 in which they converted $4,150 principal. We issued Southridge 27,666,667 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00015 per share.
On September 12, 2012, Panache executed a partial debt to equity conversion of a $40,000 short-term promissory note dated November 21, 2011 in which they converted $23,250 principal. We issued Panache 125,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000186 per share.
On September 19, 2012, Panache executed a final debt to equity conversion of a $40,000 short-term promissory note dated November 21, 2011 in which they converted $16,750 principal and $3,244 in interest. We issued Panache 128,991,484 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000155 per share.
On September 20, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated October 26, 2011 in which they converted $47,300 principal and $153 in interest. We issued Southridge 379,627,369 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000125 per share.
On September 27, 2012, OTC Global Partners executed a partial debt to equity conversion of the $30,000 short-term promissory note in which they converted $18,000 in principal. We issued OTC Global Partners 180,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001 per share.
On September 28, 2012, Panache executed a partial debt to equity conversion of a $25,000 short-term promissory note dated February 28, 2012 in which they converted $13,200 principal. We issued Panache 120,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00011 per share.
On October 1, 2012, Southridge executed a final debt to equity conversion of a $100,000 short-term promissory note dated October 26, 2011 in which they converted $16,050 principal and $219 in interest. We issued Southridge 162,691,781 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001 per share.
On October 1, 2012, Southridge executed a partial debt to equity conversion of a $20,000 short-term promissory note dated November 14, 2011 in which they converted $10,900 principal and $1,398 in interest. We issued Southridge 122,983,562 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001 per share.
On October 2, 2012, Southridge executed a final debt to equity conversion of a $20,000 short-term promissory note dated November 14, 2011 in which they converted $9,100 principal and $18 in interest. We issued Southridge 91,175,304 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001 per share.
On October 3, 2012, SGI Group executed a partial debt to equity conversion of the $30,000 short-term promissory note originally dated August 25, 2011 and purchased on August 20, 2012 from Southridge, in which they converted $9,000 principal and $106 in interest. We issued SGI Group 182,124,200 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00005 per share.
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On October 4, 2012, Panache executed a partial debt to equity conversion of a $25,000 short-term promissory note dated February 28, 2012 in which they converted $6,600 principal. We issued Panache 120,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000055 per share.
From January 2011 to April 2011, Southridge acquired promissory notes from a private investor totaling $800,000 in principal and 55,363,907 shares of common stock which were issued as collateral. Southridge proposed that we amend the conversion terms of the notes permitting the holder to convert the notes and we agreed to the amendment. From January 12, 2011 to October 10, 2012, Southridge issued notices of conversion to settle $525,000 in principal plus accrued premiums totaling $255,651 into 53,143,682 shares of our common stock, of which 51,802,774 shares were collateral shares and 1,340,908 new shares were issued pursuant to Rule 144.
As of the date of this report, we owe a total of $1,842,269 of short term debt of which $1,217,724 is principal, $594,830 is accrued premium and $29,716 is accrued interest. We have repaid aggregate principal and premium in the amount of $173,376 on these short-term notes and a total of $2,347,787 principal, $405,790 in premium, and $102,416 in interest has been converted into 4,736,716,636 shares of our common stock of which 51,802,774 shares were collateral shares and 4,684,913,862 new shares were issued pursuant to Rule 144. Out of the original 55,363,637 shares of common stock held as collateral, a balance of 3,561,133 shares remains on the $268,550 principal of the remaining notes.
There can be no assurances that we will be able to pay our short-term loans when due. If we default on any or all of the notes due to the lack of new funding, the holders could exercise their right to sell the remaining 3,561,133 collateral shares and could take legal action to collect the amount due which could materially adversely affect IDSI and the value of our stock.
Issuance of Stock in Connection with Long-Term Loans
On February 23, 2011, we entered into a Convertible Promissory Note Agreement with an unaffiliated third party, JMJ Financial (the “Lender” or “JMJ”), relating to a private placement of a total of up to $1,800,000 in principal amount of a Convertible Promissory Note (the “Note”) providing for advances of a gross amount of $1,600,000 in seven tranches. Pursuant to the terms of a Registration Rights Agreement (the “Rights Agreement”) dated February 23, 2011, between the Company and JMJ, we are required to file within 10 days from the effective date of an increase of authorized shares approved by our shareholders, an S-1 Registration Statement (the “Registration Statement”) covering 130,000,000 shares of Company common stock to be reserved for conversion of the Note.
Although our shareholders on July 12, 2011, voted to increase our authorized shares to 2,000,000,000, we have not filed the registration statement as required by the Rights Agreement.
The Note provides for funding in seven tranches as stipulated in the Funding Schedule attached. The first tranche of $300,000 was closed on February 24, 2011, and we received $258,000 after deductions of $30,000 for a 10% Finder’s Fee and $12,000 for an Origination Fee. The second tranche of $100,000 closed on May 20, 2011, and we received $93,000 after deduction of $7,000 for a 7% Finder’s Fee. A partial closing on the third tranche of $35,000 closed on October 7, 2011 and we received $32,250 after deduction of $2,750 for a 7% Finder’s Fee. A partial closing on the third tranche of $25,000 closed on February 8, 2012 and we received $25,000. In connection with this partial third tranche we will pay a 7% Finder’s Fee, which is $1,750. A partial closing on the third tranche of $25,000 closed on February 29, 2012 and we received $25,000. In connection with this partial third tranche we will pay a 7% Finder’s Fee, which is $1,750. A final closing on the third tranche of $15,000 closed on April 4, 2012 and we received $15,000. In connection with this final third tranche we will pay a 7% Finder’s Fee, which is $1,050. A partial closing on the fourth tranche of $10,000 closed on October 3, 2012 and we received $10,000. In connection with this partial third tranche we will pay a 7% Finder’s Fee, which is $700. Although we are not being funded based on the on achievement of milestones relating to the Registration Statement, we continue to draw funds from the Promissory Note from time to time based on the lender’s ability to fund us. For the remaining three tranches, we are obligated to pay a Finder’s Fee equal to 7% in cash at each closing date. We may cancel the unfunded portion of the Agreement at a fee of 20% of the unfunded amount. As of the date of this report, $1,290,000 in principal amount remains unfunded and if we choose to cancel we will have to pay JMJ $258,000 to terminate the agreement.
The Note, after the seven tranches are drawn, would generate net proceeds of $1,467,000 after payment of the Origination Fee and a 7% Finder’s Fee. JMJ has the option to provide an additional $1,600,000 of funding on substantially the same terms as the first Agreement; however, we have the right to cancel, without penalty, the Note Agreement within five days of
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JMJ’s execution. Once executed and accepted by both parties and five days has passed, cancellation of unfunded payments is permitted at a fee of 20% of the unfunded amount. Cancellation of funded portions is not permitted.
The funding schedule of the seven tranches is as follows:
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$300,000 paid to Borrower within 2 business days of execution and closing of the agreement.
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$100,000 paid to Borrower within 5 business days of filing of Definitive Proxy to increase authorized shares to 2,000,000,000 or more.
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$100,000 paid to Borrower within 5 business days of effective increase in authorized shares to 2,000,000,000 or more.
§
$100,000 paid to Borrower within 5 business days of filing of registration statement, and that registration statement must be filed no later than 10 days from the effective increase of authorized shares.
§
$400,000 paid to Borrower within 5 business days of notice of effective registration statement, and that registration statement must be effective no later than 120 days from the execution of the agreement.
§
$300,000 paid to Borrower within 90 business days of notice of effective registration statement, and that registration statement must be effective no later than 120 days from the execution of the agreement.
§
$300,000 paid to Borrower within 150 business days of notice of effective registration statement, and that registration statement must be effective no later than 120 days from the execution of the agreement.
The conditions to funding each payment are as follows:
§
At the time of each payment interval, the Conversion Price calculation on Borrower’s common stock must yield a Conversion Price equal to or greater than $0.015 per share (based on the Conversion Price calculation, regardless of whether a conversion is actually completed or not).
§
At the time of each payment interval, the total dollar trading volume of Borrower’s common stock for the previous 23 trading days must be equal to or greater than $1,000,000. The total dollar volume will be calculated by removing the three highest dollar volume days and summing the dollar volume for the remaining 20 trading days.
§
At the time of each payment interval, there shall not exist an event of default as described within any of the agreements between Borrower and Holder.
Prior to the maturity date of February 2, 2014, JMJ may convert both principal and interest into our common stock at 75% of the average of the three lowest closing prices in the 20 days previous to the conversion. We have the right to enforce a conversion floor of $0.015 per share; however, if we receive a conversion notice in which the Conversion Price is less than $0.015 per share, JMJ will incur a conversion loss [(Conversion Loss = $0.015 - Conversion Price) x number of shares being converted] which we must make whole by either of the following options: pay the conversion loss in cash or add the conversion loss to the balance of principal due. Prepayment of the Note is not permitted.
The Note has a 9% one-time interest charge on the principal sum. No interest or principal payments are required until the Maturity Date, but both principal and interest may be included in conversions prior to the maturity date.
On August 24, 2011, JMJ executed a debt to equity conversion of $36,015 in principal of the first tranche of $300,000 which we closed on February 24, 2011. We issued JMJ 3,500,000 common shares pursuant to Rule 144 based on a conversion price of $0.0103 per share.
On August 31, 2011, JMJ executed a debt to equity conversion of $41,160 in principal of the first tranche of $300,000 which we closed on February 24, 2011. We issued JMJ 4,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.01029 per share.
On September 15, 2011, JMJ executed a debt to equity conversion of $37,597 in principal of the first tranche of $300,000 which we closed on February 24, 2011. We issued JMJ 4,100,000 common shares pursuant to Rule 144 based on a conversion price of $0.00917 per share.
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On September 28, 2011, JMJ executed a debt to equity conversion of $40,950 in principal of the first tranche of $300,000 which we closed on February 24, 2011. We issued JMJ 5,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00819 per share.
On October 12, 2011, JMJ executed a debt to equity conversion of $36,750 in principal of the first tranche of $300,000 which we closed on February 24, 2011. We issued JMJ 5,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00735 per share.
On December 15, 2011, JMJ executed a debt to equity conversion of $63,840 in principal of the first tranche of $300,000 which we closed on February 24, 2011. We issued JMJ 20,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.003192 per share.
On January 24, 2012, JMJ executed a debt to equity conversion totaling $44,100 of which $43,688 was principal and $412 was consideration for the first tranche of $300,000, which we closed on February 24, 2011. We issued JMJ 30,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00147 per share.
On February 9, 2012, JMJ executed a debt to equity conversion totaling $44,100 of which $37,088 was consideration and $7,012 was interest for the first tranche of $300,000, which we closed on February 24, 2011. We issued JMJ 35,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00126 per share.
On February 29, 2012, JMJ executed a debt to equity conversion totaling $39,550 of which $19,988 was interest for the first tranche of $300,000, which we closed on February 24, 2011 and $19,562 was principal for the second tranche of $100,000, which we closed on May 20, 2011. We issued JMJ 50,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.000791 per share.
On April 24, 2012, JMJ executed a debt to equity conversion of $29,120 in principal of the second tranche of $100,000 which we closed on May 20, 2012. We issued JMJ 52,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00056 per share.
On May 9, 2012, JMJ executed a debt to equity conversion of $28,980 in principal of the second tranche of $100,000 which we closed on May 20, 2012. We issued JMJ 69,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00042 per share.
On May 14, 2012, JMJ executed a debt to equity conversion of $4,389 in principal of the second tranche of $100,000 which we closed on May 20, 2011. We issued JMJ 19,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.000231 per share.
On May 24, 2012, JMJ executed a debt to equity conversion of $22,260 in principal of the second tranche of $100,000 which we closed on May 20, 2011. We issued JMJ 106,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00021 per share.
On May 31, 2012, JMJ executed a debt to equity conversion of $2,940 in principal of the second tranche of $100,000 which we closed on May 20, 2011. We issued JMJ 14,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00021 per share.
On June 6, 2012, JMJ executed a debt to equity conversion totaling $19,551 of which $14,249 was interest for the second tranche of $100,000, which we closed on May 20, 2011 and $5,302 was principal for the third tranche of $35,000, which we closed on October 7, 2011. We issued JMJ 105,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.000186 per share.
On September 7, 2012, JMJ executed a debt to equity conversion of $19,572 in principal of the third tranche of $35,000, which we closed on October 7, 2011. We issued JMJ 120,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.000163 per share.
On October 3, 2012, JMJ executed a debt to equity conversion totaling $42,000 of which $14,501 was principal and $3,150 was interest for the third tranche of $35,000, which we closed on October 7, 2011; and $24,349 was principal of the fourth tranche of $25,000, which we closed on February 8, 2012. We issued JMJ 300,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00014 per share.
As of the date of this report, we owe JMJ a total of $66,651 of which $50,526 is principal, $9,375 is consideration on the principal and $6,750 is interest.
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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.
From July 2000 until August 2007, when we entered into an agreement for the sale/lease-back of our headquarters facility, Charlton Avenue LLC (“Charlton”) 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. See “Item 2, Results of Operations, Liquidity and Capital Resources, Sale/Lease-Back” 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 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.
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 were more favorable to us than the terms of the prior Third Private Equity Credit Agreement. The new, more favorable terms were: (i) The put option price was 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 was 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 was $15,000,000, (iv) the minimum amount we were required to draw through the end of the commitment period was $1,000,000, while the prior Third Private Equity Credit Agreement minimum amount was $2,500,000, (v) the minimum stock price requirement was controlled by us as we had the option of setting a floor price for each put transaction (the previous
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minimum stock price in the Third Private Equity Credit Agreement was fixed at $.10), (vi) there were 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.
We made sales under the Fourth Private Equity Credit Agreement from time to time in order to raise working capital on an “as needed” basis. Under the Fourth Private Equity Credit Agreement we drew down $14,198,541 and issued 66,658,342 shares of common stock. We terminated use of the Fourth Private Equity Credit Agreement and instead began to rely on the Fifth Private Equity Credit Agreement (described below) upon the April 26, 2006, effectiveness of our S-1 Registration Statement filed March 23, 2006.
On March 21, 2006, we and Charlton entered into a new “Fifth Private Equity Credit Agreement” which has replaced our prior Fourth Private Equity Credit Agreement. The terms of the Fifth Private Equity Credit Agreement were similar to the terms of the prior Fourth Private Equity Credit Agreement. The new credit line’s terms were (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 (the “Valuation Period”), (ii) the commitment period was two years from the effective date of a registration statement covering the Fifth Private Equity Credit Agreement shares, (iii) the maximum commitment was $15,000,000, (iv) the minimum amount we were required to draw through the end of the commitment period was $1,000,000, (v) the minimum stock price, also known as the floor price was computed as follows: In the event that, during a Valuation Period, the Bid Price on any Trading Day fell more than 18% below the closing trade price on the trading day immediately prior to the date of the Company’s Put Notice (a “Low Bid Price”), for each such Trading Day the parties had no right and were under no obligation to purchase and sell one tenth of the Investment Amount specified in the Put Notice, and the Investment Amount accordingly would be deemed reduced by such amount. In the event that during a Valuation Period there existed a Low Bid Price for any three Trading Days-not necessarily consecutive-then the balance of each party’s right and obligation to purchase and sell the Investment Amount under such Put Notice would terminate on such third Trading Day (“Termination Day”), and the Investment Amount would be adjusted to include only one-tenth of the initial Investment Amount for each Trading Day during the Valuation Period prior to the Termination Day that the Bid Price equaled or exceeded the Low Bid Price and (vi) there were no fees associated with the Fifth Private Equity Credit Agreement.
We made sales under the Fifth Private Equity Credit Agreement from time to time in order to raise working capital on an “as needed” basis. Prior to the expiration of the Fifth Private Equity Credit Agreement on March 21, 2008, we drew down $5,967,717 and issued 82,705,772 shares of common stock.
The Sixth Private Equity Credit Agreement
On April 21, 2008, we and Charlton entered into a new “Sixth Private Equity Credit Agreement” which has replaced our prior Fifth Private Equity Credit Agreement. The terms of the Sixth Private Equity Credit Agreement are similar to the terms of the prior Fifth Private Equity Credit Agreement. This new credit line’s 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 (the “Valuation Period”), (ii) the commitment period is three years from the effective date of a registration statement covering the Sixth Private Equity Credit Agreement shares, (iii) the maximum commitment is $15,000,000, (iv) There is no minimum commitment amount, (v) the minimum stock price, also known as the floor price is computed as follows: In the event that, during a Valuation Period, the Bid Price on any Trading Day falls more than 20% below the closing trade price on the trading day immediately prior to the date of the Company’s Put Notice (a “Low Bid Price”), for each such Trading Day the parties shall have no right and shall be under no obligation to purchase and sell one tenth of the Investment Amount specified in the Put Notice, and the Investment Amount shall accordingly be deemed reduced by such amount. In the event that during a Valuation Period there exists a Low Bid Price for any three Trading Days-not necessarily consecutive-then the balance of each party’s right and obligation to purchase and sell the Investment Amount under such Put Notice shall terminate on such third Trading Day (“Termination Day”), and the Investment Amount shall be adjusted to include only one-tenth of the initial Investment Amount for each Trading Day during the Valuation Period prior to the Termination Day that the Bid Price equals or exceeds the Low Bid Price and (vi) there are no fees associated with the Sixth Private Equity Credit Agreement. The conditions to our ability to draw under this private equity line, as described above, may materially limit the draws available to us.
Under the Sixth Private Equity Credit Agreement we have drawn down $2,042,392 and issued 227,000,000 shares of common stock. On November 23, 2009, we terminated our Sixth Private Equity Credit Agreement in connection
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with the execution of the Southridge Private Equity Credit Agreement.
As of the date of this report, since January 2001, we have drawn an aggregate of $42,714,650 in gross proceeds from our equity credit lines with Charlton and have issued 425,676,012 shares as a result of those draws.
The Southridge Private Equity Credit Agreement
On November 23, 2009, we and Southridge entered into a new “Southridge Private Equity Credit Agreement” which has replaced our prior Sixth Private Equity Credit Agreement with Charlton. On January 7, 2010, we and Southridge amended the terms of the “Southridge Private Equity Credit Agreement” and revised the language to clarify that Southridge is irrevocably bound to accept our put notices subject to compliance with the explicit conditions of the Agreement.
The terms of the Southridge Private Equity Credit Agreement are similar to the terms of the prior Sixth Private Equity Credit Agreement with Charlton. This new credit line’s 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 (the “Valuation Period”), (ii) the commitment period is three years from the effective date of a registration statement covering the Southridge Private Equity Credit Agreement shares, (iii) the maximum commitment is $15,000,000, (iv) There is no minimum commitment amount, and (v) there are no fees associated with the Southridge Private Equity Credit Agreement. The conditions to our ability to draw under this private equity line, as described above, may materially limit the draws available to us.
We are obligated to prepare promptly, and file with the SEC within sixty (60) days of the execution of the Southridge Private Equity Credit Agreement, a Registration Statement with respect to not less than 100,000,000 of Registrable Securities, and, thereafter, use all diligent efforts to cause the Registration Statement relating to the Registrable Securities to become effective the earlier of (a) five (5) business days after notice from the Securities and Exchange Commission that the Registration Statement may be declared effective, or (b) one hundred eighty (180) days after the Subscription Date, and keep the Registration Statement effective at all times until the earliest of (i) the date that is one year after the completion of the last Closing Date under the Purchase Agreement, (ii) the date when the Investor may sell all Registrable Securities under Rule 144 without volume limitations, or (iii) the date the Investor no longer owns any of the Registrable Securities (collectively, the "Registration Period"), which Registration Statement (including any amendments or supplements, thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.
We are further obligated to prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to keep the Registration Statement effective at all times during the Registration Period, and, during the Registration Period, and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement until the expiration of the Registration Period.
On January 12, 2010, we filed a Registration Statement for 120,000,000 shares pursuant to the requirements of the Southridge Private Equity Credit Agreement. This Registration Statement was declared effective on February 25, 2010. On May 24, 2010 we filed a Post-Effective Amendment No. 1 to our Registration Statement to update our financial statements and related notes to the financial statements and business information for the quarter ending March 31, 2010. We reduced the amount of shares registered to 85,744,007 shares. This amended Registration Statement was declared effective on May 27, 2010.
As of the date of this report, we have drawn down $2,485,000 and issued 106,732,137 shares of common stock under the Private Equity Credit Agreement with Southridge, all pursuant to the Registration Statement declared effective in May 2010.
On December 21, 2010, we filed a new Registration Statement as amended, covering 35,487,756 shares which have been sold pursuant to the Southridge Private Equity Agreement.
On July 13, 2011, we filed a new Registration Statement covering 200,000,000 shares to be issued pursuant to the Southridge Private Equity Agreement. This Registration Statement was not declared effective and was withdrawn in May 2012.
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As of the date of this report, since January 2001, we have drawn an aggregate of $45,199,650 in gross proceeds from our equity credit lines with Charlton and Southridge and have issued 532,408,149 shares as a result of those draws.
Southridge Partners II, LP - Short-Term Loans
In November and December 2010, we received a total of $145,000 from Southridge pursuant to three short-term promissory notes. All three notes provide for a redemption premium of 15% of the principal amount on or before March 31, 2011. Interest will accrue at 8% per annum until maturity. Southridge may elect at an Event of Default to convert any part or all of the $145,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In January 2011, we received a total of $157,000 from Southridge pursuant to three short-term promissory notes. All three notes provide for a redemption premium of 15% of the principal amount on or before May 31, 2011. Interest will accrue at 8% per annum until maturity. Southridge may elect at an Event of Default to convert any part or all of the $157,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In February 2011, we received a total of $115,000 from Southridge pursuant to two short-term promissory notes. Both notes provide for a redemption premium of 15% of the principal amount on or before May 31, 2011. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $115,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In March 2011, we received $60,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before May 31, 2011. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $60,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In April 2011, we received $165,000 from Southridge pursuant to two short-term promissory notes. The notes provide for a redemption premium of 15% of the principal amount on or before July 31, 2011. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $165,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In May 2011, we received $80,000 from Southridge pursuant to two short-term promissory notes. The notes provide for a redemption premium of 15% of the principal amount on or before July 31, 2011. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $80,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In July 2011, we received $150,000 from Southridge pursuant to a short-term promissory note. The note provided for a redemption premium of 15% of the principal amount on or before December 31, 2011. We received an extension of maturity date to February 29, 2012 for these notes. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $150,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
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In August 2011, we received $82,500 from Southridge pursuant to two short-term promissory notes of which the principal on these notes was $100,000 and $7,500, respectively. The $100,000 note provided for a $25,000 original issue discount and both notes provided for a redemption premium of 15% of the principal amount on or before December 31, 2011. We received an extension of maturity date to February 29, 2012 for these notes. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $107,500 principal amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. The $7,500 note has been paid in full through the conversion to common stock pursuant to Rule 144.
In September 2011, we received $133,000 from Southridge pursuant to two short-term promissory notes of which the principal on these notes was $100,000 and $100,000, respectively. One of the $100,000 notes provided for a $33,000 original issue discount and the other $100,000 note provided a $34,000 original issue discount. The notes provided for a redemption premium of 15% of the principal amount on or before December 31, 2011. We received an extension of maturity date to December 31, 2012 for these notes. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $200,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.0075 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. The $100,000 note has been paid in full through the conversion to common stock pursuant to Rule 144.
In October 2011, we received $67,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $100,000. The note provides for a $33,000 original issue discount. The note provided for a redemption premium of 15% of the principal amount on or before January 12, 2012. We received an extension of maturity date to December 31, 2012 for this note. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $100,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.0075 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.
In October 2011, we received $67,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $100,000. The note provides for a $33,000 original issue discount. The note provided for a redemption premium of 15% of the principal amount on or before January 26, 2012. We received an extension of maturity date to December 31, 2012 for this note. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $100,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.005 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.
In November 2011, we received $20,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $20,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 62% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
On November 21, 2011, Southridge sold their May 12, 2011 $60,000 short-term promissory note to Panache Capital, LLC (“Panache”). The terms of the original note remain the same except that the maturity date is now November 21, 2012 and interest will accrue at 10% per annum until maturity above and beyond the premium.
In December 2011, we received $17,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 18, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $17,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 62% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
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On February 23, 2012, Southridge sold their $100,000 short-term promissory note to Panache Capital, LLC (“Panache”) of which a balance of $70,000 principal was remaining after Southridge converted $30,000 principal in a debt to equity conversion on February 17, 2012. The terms of the original note remain the same except that the maturity date is now November 21, 2012 and interest will accrue at 10% per annum until maturity above and beyond the premium.
In March 2012, we received $30,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before March 18, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 62% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In April 2012, we received $11,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $11,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In April 2012, we received $2,500 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before April 25, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $2,500 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In May 2012, we received $8,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before May 14, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $8,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In June 2012, we received $6,672 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before June 17, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $6,672 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In August 2012, we received $25,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $25,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice. We reserved 50,000,000 shares of our common stock in connection with this loan.
In August 2012, we received $95,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $95,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 400,000,000 shares of our common stock in connection with this loan.
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On August 20, 2012, Southridge sold $70,000 of their original $100,000 short-term promissory note dated October 12, 2011 to Levin Consulting Group. The terms of the original note remain the same except that the holder may elect at an Event of Default to convert any part or all of the $70,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
On August 20, 2012, Southridge sold $30,000 of their original $100,000 short-term promissory note dated October 12, 2011 to SGI Group LLC (“SGI”). The terms of the original note remain the same except that the holder may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
In September 2012, we received $29,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $30,000. The note provides for a $1,000 original issue discount. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 150,000,000 shares of our common stock in connection with this loan.
In September 2012, we received $30,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 20% on or before December 17, 2012; 25% on or before March 17, 2013; and 30% on or before June 15, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 700,000,000 shares of our common stock in connection with this loan.
In October 2012, we received $27,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $40,000. The note provides for a $13,000 original issue discount. The note provides for a redemption premium of 20% on or before January 7, 2012; 25% on or before April 7, 2013; and 30% on or before July 15, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $40,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 300,000,000 shares of our common stock in connection with this loan.
On May 11, 2011, Southridge executed a debt to equity conversion of a $80,000 short-term promissory note dated November 11, 2010 plus accrued interest of $3,174. We issued Southridge 11,089,826 common shares pursuant to Rule 144 based on an agreed exchange price of $0.0075 per share. We still owe Southridge $12,000 in premium associated with this note.
On July 13, 2011, Southridge executed a debt to equity conversion of a $14,000 short-term promissory note dated December 16, 2010 plus accrued interest of $641. We issued Southridge 1,464,132 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We still owe Southridge $2,100 in premium associated with this note.
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On July 13, 2011, Southridge executed a debt to equity conversion of a $51,000 short-term promissory note dated December 22, 2010 plus accrued interest of $2,269. We issued Southridge 5,326,915 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We still owe Southridge $7,650 in premium associated with this note.
On July 21, 2011, Southridge executed a debt to equity conversion of a $55,000 short-term promissory note dated January 13, 2011 plus accrued interest of $2,278. We issued Southridge 5,727,836 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We still owe Southridge $8,250 in premium associated with this note.
On July 21, 2011, Southridge executed a debt to equity conversion of a $22,000 short-term promissory note dated January 19, 2011 plus accrued interest of $882. We issued Southridge 2,288,241 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We still owe Southridge $3,300 in premium associated with this note.
On August 24, 2011, Southridge executed a debt to equity conversion of a $80,000 short-term promissory note dated January 28, 2011 plus accrued interest of $3,647. We issued Southridge 8,364,712 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We still owe Southridge $12,000 in premium associated with this note.
On August 24, 2011, Southridge executed a partial debt to equity conversion of a $80,000 short-term promissory note dated February 7, 2011 in which they converted $20,000 principal plus accrued interest of $868. We issued Southridge 2,086,795 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.
On September 27, 2011, Southridge executed a final debt to equity conversion of a $80,000 short-term promissory note dated February 7, 2011 in which they converted the remaining $60,000 principal plus accrued interest of $868. We issued Southridge 8,399,781 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share. We canceled the $12,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On September 27, 2011, Southridge executed a debt to equity conversion of a $35,000 short-term promissory note dated February 15, 2011 plus accrued interest of $1,688. We issued Southridge 4,891,689 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share. We canceled the $5,250 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On September 27, 2011, Southridge executed a debt to equity conversion of a $60,000 short-term promissory note dated March 31, 2011 plus accrued interest of $2,315. We issued Southridge 8,308,603 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share. We canceled the $9,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On September 28, 2011, we amended the terms of all debt agreements with Southridge Partners II, LP and agreed to amend the conversion terms of the Notes such that the principal portion of the Notes, plus accrued interest, shall be convertible into shares of our common stock at a conversion price per share equal to the lesser of (a) $0.0075 or (b) ninety percent (90%) of the average of the three (3) lowest closing bid prices during the ten (10) trading days immediately prior to the date of the conversion notice.
On October 13, 2011, Southridge executed a debt to equity conversion of a $100,000 short-term promissory note dated April 14, 2011 plus accrued interest of $3,989. We issued Southridge 20,797,808 common shares pursuant to Rule 144 based on an agreed conversion price of $0.005 per share. We canceled the $15,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On November 3, 2011, Southridge executed a debt to equity conversion of a $65,000 short-term promissory note dated April 26, 2011 plus accrued interest of $2,721. We issued Southridge 13,544,219 common shares pursuant to Rule 144 based on an agreed conversion price of $0.005 per share. We canceled the $9,750 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On November 16, 2011, Southridge executed a debt to equity conversion of a $20,000 short-term promissory note dated May 6, 2011 plus accrued interest of $850. We issued Southridge 6,725,939 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0031 per share. We canceled the $3,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
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On January 23, 2012, Southridge executed a partial debt to equity conversion of a $150,000 short-term promissory note dated July 27, 2011 in which they converted $85,000 principal. We issued Southridge 66,390,690 common shares with a restrictive legend based on an agreed conversion price of $0.0013 per share. The restrictive legend was removed on February 2, 2012 pursuant to Rule 144.
On January 27, 2012, Southridge executed a partial debt to equity conversion of a $150,000 short-term promissory note dated July 27, 2011 in which they converted $30,000 principal. We issued Southridge 24,193,548 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0012 per share.
On February 7, 2012, Southridge executed a partial debt to equity conversion of a $150,000 short-term promissory note dated July 27, 2011 in which they converted $18,500 principal and $6,411 interest. We issued Southridge 24,277,321 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00103 per share.
On February 10, 2012, Southridge executed a partial debt to equity conversion of a $150,000 short-term promissory note dated July 27, 2011 in which they converted $16,500 principal and $99 interest. We issued Southridge 17,272,248 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00096 per share.
On February 17, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $30,000 principal and $3,858 interest. We issued Southridge 34,237,571 common shares on February 27, 2012 pursuant to Rule 144 based on an agreed conversion price of $0.00099 per share.
On February 23, 2012, Southridge executed a debt to equity conversion of a $7,500 short-term promissory note dated August 23, 2011 in which they converted $7,500 principal and $289 interest. We issued Southridge 7,545,592 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00103 per share.
On February 28, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated September 12, 2012 in which they converted $51,000 principal and $3,595 interest. We issued Southridge 60,728,054 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.0009 per share.
On April 13, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated September 12, 2012 in which they converted $49,000 principal and $1,096 interest. We issued Southridge 123,693,557 restricted common shares on April 24, 2012 pursuant to Rule 144 based on an agreed conversion price of $0.00041 per share.
On April 13, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated September 28, 2012 in which they converted $4,000 principal and $4,340 interest. We issued Southridge 20,591,916 restricted common shares on April 24, 2012 pursuant to Rule 144 based on an agreed conversion price of $0.00041 per share.
On September 5, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated September 28, 2011 in which they converted $85,582 principal. We issued Southridge 380,363,446 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00023 per share.
On September 11, 2012, Southridge executed a final debt to equity conversion of a $100,000 short-term promissory note dated September 28, 2011 in which they converted $10,418 principal and $3,004 in interest. We issued Southridge 89,478,883 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00015 per share.
On September 11, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated October 26, 2011 in which they converted $32,500 principal and $7,036 in interest. We issued Southridge 263,570,776 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00015 per share.
On September 12, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated October 26, 2011 in which they converted $4,150 principal. We issued Southridge 27,666,667 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00015 per share.
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On September 20, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated October 26, 2011 in which they converted $47,300 principal and $153 in interest. We issued Southridge 379,627,369 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000125 per share.
On October 1, 2012, Southridge executed a final debt to equity conversion of a $100,000 short-term promissory note dated October 26, 2011 in which they converted $16,050 principal and $219 in interest. We issued Southridge 162,691,781 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001 per share.
On October 1, 2012, Southridge executed a partial debt to equity conversion of a $20,000 short-term promissory note dated November 14, 2011 in which they converted $10,900 principal and $1,398 in interest. We issued Southridge 122,983,562 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001 per share.
On October 2, 2012, Southridge executed a final debt to equity conversion of a $20,000 short-term promissory note dated November 14, 2011 in which they converted $9,100 principal and $18 in interest. We issued Southridge 91,175,304 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001 per share.
From January 2011 to April 2011, Southridge acquired promissory notes from a private investor totaling $800,000 in principal and 55,363,907 shares of common stock which were issued as collateral. Southridge proposed that we amend the conversion terms of the notes permitting the holder to convert the notes and we agreed to the amendment. From January 12, 2011 to October 10, 2012, Southridge issued notices of conversion to settle $525,000 in principal plus accrued premiums totaling $255,651 into 53,143,682 shares of our common stock, of which 51,802,774 shares were collateral shares and 1,340,908 new shares were issued pursuant to Rule 144.
From November 2010 through October 2012, we received a total of $1,634,672 from Southridge pursuant to short-term promissory notes. As of the date of this report, we may be obligated to issue Southridge a total of 3,482,410,567 shares to redeem short-term notes totaling $347,145 of which $285,172 is principal, $47,776 is premium and $14,197 is interest.
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Item 6.
Item 6. Selected financial data
The following selected financial data should be read in conjunction with "Item 7.
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 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 may not be 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 provided in ASC 330 (“Inventory”), 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.
Stock-Based Compensation
The computation of the expense associated with stock-based compensation requires the use of a valuation model. ASC-718, (“Compensation-Stock Compensation”) is a very complex accounting standard, the application of which requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility, expected option lives, and expected option forfeiture rates, to value equity-based compensation. The Company currently uses a Black-Scholes option pricing model to calculate the fair value of its stock options. The Company primarily uses historical data to determine the assumptions to be used in the Black-Scholes model and has no reason to believe that future data is likely to differ materially from historical data. However, changes in the assumptions to reflect future stock price volatility and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards. ASC-718 requires the recognition of the fair value of stock compensation in net income. Although every effort is made to ensure the accuracy of our estimates and assumptions, significant unanticipated changes in those estimates, interpretations and assumptions may result in recording stock option expense that may materially impact our financial statements for each respective reporting period.
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Impact of Derivative Accounting
As a result of recent financing transactions we have entered into, our financial statements for the year ended June 30, 2011 and future periods have and will be impacted by the accounting effect of the application of derivative accounting. The application of EITF 07-05 “Determining Whether an Instrument (or Embedded Feature) is Indexed to a Company's Own Stock,” which was effective on January 1, 2009 will significantly affect the application of ASC Topic 815 and ASC Topic 815-40 for both freestanding and embedded derivative financial instruments in our financial statements. Generally, warrants, conversion features in debt, and similar terms that include “full-ratchet” or reset provisions, which mean that the exercise or conversion price adjusts to pricing in subsequent sales or issuances, no longer meet the definition of indexed to a company's own stock and are not exempt from equity classification provided in ASC Topic 815-15. This means that instruments that were previously classified in equity are reclassified to liabilities and ongoing measurement under ASC Topic 815. The amount of quarterly non-cash gains or losses we will record in future periods will be based upon the fair market value of our common stock on the measurement date.
Results of Operations
In the continuing process of commercializing our operations and as part of our transition plan to exit from reporting as a development stage enterprise, we continue to use the format established for the fiscal year ending June 30, 2005 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, research and development, and sales and marketing.
Beginning with the fiscal year ending June 30, 2005 we also expanded our discussion of health insurance and worker’s compensation insurance so that they fell into compensation and related benefits for one of the three expense categories, where previously they were included under insurance costs. For the fiscal year ending June 30, 2006, we expanded our compensation and related benefits disclosure to include the non-cash compensation related to the expensing of stock options in the three expense categories.
Twelve Months Ended June 30, 2012 and June 30, 2011
SALES AND COST OF SALES
Revenues during the year ended June 30, 2012, were $211,720 representing an increase of $156,602 or 284% from $55,118 during the year ended June 30, 2011. The increase in revenues is primarily a result of recording the sale of our CTLM® system to one of our distributors in fiscal 2012 compared to the installment sale of our CTLM® system to one of our distributors in fiscal 2011.
The Cost of Sales during the year ended June 30, 2012, was $35,895 representing an increase of $20,630 or 135% from $15,265 during the year ended June 30, 2011. The increase in Cost of Sales is primarily a result of recording the sale of our CTLM® system to one of our distributors in fiscal 2012 compared to the installment sale of our CTLM® system to one of our distributors in fiscal 2011.
GENERAL AND ADMINISTRATIVE
Our general and administrative expenses include compensation and related benefits for employees in administration, finance, human resources and information technology. Also included are travel/subsistence related to general and administrative activities; property and casualty insurance; directors’ and officers’ liability insurance; professional fees associated with our corporate and securities attorneys and independent auditors; patent maintenance; 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, 2012, were $2,214,184 representing a decrease of $882,025 or 28% from $3,096,209 during the year ended June 30, 2011. Of the $2,214,184 and $3,096,209, compensation and related benefits comprised $1,123,088 (51%) and $1,638,657 (53%), respectively, representing a decrease of $515,569 or
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31%. Of the $1,123,088 and $1,638,657 compensation and related benefits, $18,725 (2%) and $354,399 (22%), respectively, were due to non-cash compensation associated with expensing stock options.
The general and administrative decrease of $882,024 is due primarily to a decrease of $515,569 in compensation and related benefits as a result of non-cash compensation associated with the expensing of stock options; $224,206 in payroll tax penalty & interest; $59,788 in proxy service expense for the processing and preparation of proxy materials for our annual meeting; $102,000 in loan cost expenses as a result of a reduction of the issuance of restricted shares in connection with short-term loans; $37,364 in premium expenses and $37,500 in additional consideration expense associated with short-term loans; $37,860 in placement fees associated with our Long-Term Promissory Notes with JMJ Financial; $43,610 in settlement expense associated the settlement agreement with Shraga Levin recorded in the prior fiscal year (see Item 3 Legal Proceedings).
The total decrease is partially offset by increases of $158,000 in original issue discount expense associated with short-term loans and $10,658 in legal expenses involving corporate and securities matters.
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
We incur research and development expenses to develop significant enhancements to our sole product, the CTLM®. These expenses consist primarily of compensation and related benefits; clinical, legal and consulting fees associated with our FDA application; costs of materials and components we use to make product enhancements; 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 clinical collaboration sites.
Research and development expenses during the year ended June 30, 2012 were $638,079 representing a decrease of $255,800 or 29% from $893,879 during the year ended June 30, 2011. Of the $638,079 and $893,879, compensation and related benefits comprised $581,210 (91%) and $735,047 (82%), respectively, representing a decrease of $153,836 or 21%. Of the $581,210 and $735,047 compensation and related benefits, $3,033 (1%) and $17,435 (2%), respectively, were due to non-cash compensation associated with expensing stock options.
The research and development decrease of $255,799 is due primarily to decreases of $139,435 in compensation and related benefits as a result of having fewer employees; $44,269 in FDA legal expenses; and $53,412 in consulting expenses due to the work performed by our consulting radiologist; $9,348 in new patent application expenses; and $6,545 in travel related expenses.
Clinical expenses during the year ended June 30, 2012, were $8,003 representing an increase of $6,252 or 357% from $1,751 as a result of the costs associated with a clinical study conducted at the Tianjin Medical University’s Cancer Institute and Hospital in Tianjin, China.
We expect a significant increase in our research and development expenses during the fiscal year ending June 30, 2013 due to increased costs associated with conducting the clinical trial and preparing the FDA application for Pre-Market Approval and submitting it to the FDA. We also expect our consulting expenses and professional fees to increase due to the costs associated with conducting the clinical trial and preparing the FDA application. See Item 1. Our Business - “CTLM® Development History, Regulatory and Clinical Status”.
SALES AND MARKETING
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; representative office expense; trade shows; conferences; promotional and training costs related to marketing the CTLM®; commissions; travel/subsistence; consulting; certification expenses; and product liability insurance.
Sales and marketing expenses during the year ended June 30, 2012, were $358,183 representing a decrease of $94,784 or 21% from $452,967 during the year ended June 30, 2011. Of the $358,183 and $452,967, compensation and related benefits comprised $76,948 (21%) and $77,131 (17%), respectively, representing a decrease of $183 or 0%. Of the $76,948 and $77,131 compensation and related benefits, $450 (1%) and $3,870 (5%), respectively, were due to non-cash compensation associated with expensing stock options.
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The sales and marketing decrease of $94,784 was due primarily to decreases of $34,542 in travel related expenses; $25,006 in regulatory expenses; $15,946 in trade show expenses; $6,900 in consulting expenses; and a reduction in bad debt expense of $4,750.
We expect a significant increase in our sales and marketing expenses during the fiscal year ending June 30, 2013 due to the continued implementation of our global commercialization program. We expect commissions, trade show expenses, advertising and promotion and travel and subsistence costs to increase due to this program.
AGGREGATED OPERATING EXPENSES
Total operating expenses (general and administrative, research and development, sales and marketing, inventory valuation adjustments and depreciation and amortization) during the year ended June 30, 2012, were $3,314,718 representing a decrease of $1,324,183 or 29% from $4,638,901 when compared to the operating expenses during the year ended June 30, 2011. The overall decrease in expenses was a result of the reduced costs associated with short-term loans.
Compensation and related benefits during the year ended June 30, 2012, were $1,781,247 representing a decrease of $669,588 or 27% from $2,450,835 during the year ended June 30, 2011 due to a decrease in staff. Of the $1,781,247 and $2,450,835 compensation and related benefits, $22,208 (1%) and $375,704 (15%), respectively, were due to non-cash compensation associated with expensing stock options. The net decrease of $669,588 was due to a $316,093 decrease in cash compensation and a decrease of $353,495 in the recording of non-cash compensation related to the expensing of stock options.
Inventory valuation adjustments during the year ended June 30, 2012, were $95,096 representing a decrease of $43,633 or 46% from $95,096 during the year ended June 30, 2011. The decrease is due to the additional write-down of systems that have lost value due to usage as demonstrators on consignment. See “Critical Accounting Policy - Inventory”.
Depreciation and amortization during the year ended June 30, 2012, were $52,810 representing a decrease of $47,941 or 48% from $100,751 during the year ended June 30, 2011. The decrease of $47,941is due primarily to less depreciation being recorded during the year ended June 30, 2012.
Interest expense during the fiscal year ended June 30, 2012, was $1,260,008 representing a decrease of $403,801 or 24% from $1,663,809 during the year ended June 30, 2011. The decrease of $403,801 is primarily due to the recording the changes of derivative liability. Of the $1,260,008, $1,179,622 is the amortization of the debt discount on the convertible promissory notes at below market prices on the Short-Term and Long-Term Promissory Notes; $78,605 is interest on Short-Term and Long-Term Promissory Notes. See Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters - “Financing/Equity Line of Credit”
Other income during the year ended June 30, 2012, was $218,053 representing an increase of $107,195 or 97% from $110,858 during the year ended June 30, 2011. Of the $218,053 other income, $108,300 of income as a result of the cancellation of loan premiums that were originally recorded in prior accounting periods. When the promissory notes were converted through debt to equity exchanges, the Company was able to cancel the loan premium that was only applicable under the cash redemption feature of the note. $92,029 represented the extinguishment of debt and $4,750 represented an adjustment to the allowance for doubtful accounts.
We previously presented the gain on the sale of our Plantation property as a non-operating expense item. We have reviewed the guidance provided by ASC and have determined that the gain should be presented in the income section of our Statement of Operations.
Twelve Months Ended June 30, 2011 and June 30, 2010
SALES AND COST OF SALES
Revenues during the year ended June 30, 2011, were $55,118 representing a decrease of $126,054 or 70% from $181,172 during the year ended June 30, 2010. The decrease in revenues is primarily a result of recording the installment sale of our CTLM® system to one of our distributors in fiscal 2011 compared to the sale of a CTLM® system to our distributor in Malaysia in fiscal 2010.
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The Cost of Sales during the year ended June 30, 2011, was $15,265 representing a decrease of $7,247 or 32% from $22,512 during the year ended June 30, 2010. The decrease in Cost of Sales is primarily a result of recording the installment sale of our CTLM® system to one of our distributors in fiscal 2011 compared to the a sale of a CTLM® system to our distributor in Malaysia in fiscal 2010.
GENERAL AND ADMINISTRATIVE
Our general and administrative expenses include compensation and related benefits for employees in administration, finance, human resources and information technology. Also included are travel/subsistence related to general and administrative activities; property and casualty insurance; directors’ and officers’ liability insurance; professional fees associated with our corporate and securities attorneys and independent auditors; patent maintenance; 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, 2011, were $3,096,209 representing a decrease of $488,399 or 14% from $3,584,608 during the year ended June 30, 2010. Of the $3,096,209 and $3,584,608, compensation and related benefits comprised $1,638,657 (53%) and $1,768,030 (49%), respectively, representing a decrease of $129,374 or 7%. Of the $1,638,657 and $1,768,030 compensation and related benefits, $354,399 (22%) and $578,961 (33%), respectively, were due to non-cash compensation associated with expensing stock options.
The general and administrative decrease of $488,399 is due primarily to a decrease of $720,500 in loan cost expenses as a result of a reduction of the issuance of restricted shares in connection with short-term loans; $96,877 in premium expenses associated with short-term loans; $129,374 in compensation and related benefits as a result of non-cash compensation associated with the expensing of stock options, $26,705 in travel related expenses; and $37,500 for a call option fee associated with obtaining a medium term bank bond to be used as collateral for a bank loan in fiscal year 2010.
The total decrease is partially offset by increases of $295,883 in payroll tax penalty & interest, $63,351 in proxy service expenses for the processing and preparation of proxy materials for our annual meeting which was held in July 2011; $50,000 in additional consideration and $49,000 in placement fees associated with our Long-Term Promissory Notes with JMJ Financial; $43,610 in settlement expense associated the settlement agreement with Shraga Levin (see Item 3 Legal Proceedings); $18,237 in directors and officers liability insurance; and $6,990 in legal expenses involving corporate and securities matters.
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
We incur research and development expenses to develop significant enhancements to our sole product, the CTLM®. These expenses consist primarily of compensation and related benefits; clinical, legal and consulting fees associated with our FDA application; costs of materials and components we use to make product enhancements; 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 clinical collaboration sites.
Research and development expenses during the year ended June 30, 2011, were $893,879 representing an increase of $158,936 or 22% from $734,943 during the year ended June 30, 2010. Of the $893,879 and $734,943, compensation and related benefits comprised $735,047 (82%) and $643,315 (88%), respectively, representing an increase of $91,732 or 14%. Of the $735,047 and $643,315 compensation and related benefits, $17,435 (2%) and $9,552 (1%), respectively, were due to non-cash compensation associated with expensing stock options.
The research and development increase of $158,936 is due primarily to an increase of $91,732 in compensation and related benefits as a result of non-cash compensation associated with the expensing of stock options; $48,200 in FDA Legal expenses; and $27,782 in consulting expenses due to the work performed by our consulting radiologist.
Clinical expenses during the year ended June 30, 2011, were $1,751 representing a decrease of $3,904 or 69% from $5,655 as a result of concluding costs associated with our FDA clinical trials.
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We expect a significant increase in our research and development expenses during the fiscal year ending June 30, 2012 due to increased costs associated with conducting the clinical trial and preparing the FDA application for Pre-Market Approval and submitting it to the FDA. We also expect our consulting expenses and professional fees to increase due to the costs associated with conducting the clinical trial and preparing the FDA application. See Item 1. Our Business - “CTLM® Development History, Regulatory and Clinical Status”.
SALES AND MARKETING
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; representative office expense; trade shows; conferences; promotional and training costs related to marketing the CTLM®; commissions; travel/subsistence; consulting; certification expenses; and product liability insurance.
Sales and marketing expenses during the year ended June 30, 2011, were $452,967 representing an increase of $112,534 or 33% from $340,433 during the year ended June 30, 2010. Of the $452,967 and $340,433, compensation and related benefits comprised $77,131 (17%) and $762 (0%), respectively, representing an increase of $76,369 or 10,023%. Of the $77,131 and $762 compensation and related benefits, $3,870 (5%) and $0 (0%), respectively, were due to non-cash compensation associated with expensing stock options.
The sales and marketing increase of $112,534 was due primarily to an increase in compensation and related benefits of $76,369 as a result of the increase in staff; $30,723 in regulatory expenses; $26,375 in travel related expenses; $12,147 in freight expenses.
The total increase is partially offset by decrease of $26,241 in trade show expense.
We expect a significant increase in our sales and marketing expenses during the fiscal year ending June 30, 2012 due to the continued implementation of our global commercialization program. We expect commissions, trade show expenses, advertising and promotion and travel and subsistence costs to increase due to this program.
AGGREGATED OPERATING EXPENSES
Total operating expenses (general and administrative, research and development, sales and marketing, inventory valuation adjustments and depreciation and amortization) during the year ended June 30, 2011, were $4,638,901 representing a decrease of $233,206 or 5% from $4,872,107 when compared to the operating expenses during the year ended June 30, 2010. The overall decrease in expenses was a result of the reduced costs associated with short-term loans.
Compensation and related benefits during the year ended June 30, 2011, were $2,450,835 representing an increase of $38,728 or 2% from $2,412,107 during the year ended June 30, 2010 due to an increase in staff which was partially offset by a decrease in stock option expense. Of the $2,450,835 and $2,412,107 compensation and related benefits, $375,704 (15%) and $588,483 (24%), respectively, were due to non-cash compensation associated with expensing stock options. The net increase of $38,728 was due to a $251,507 increase in cash compensation which was partially offset by a decrease of $212,779 in the recording of non-cash compensation related to the expensing of stock options.
Inventory valuation adjustments during the year ended June 30, 2011, were $95,096 representing an increase of $27,418 or 41% from $67,678 during the year ended June 30, 2010. The increase is due to the additional write-down of systems that have lost value due to usage as demonstrators on consignment. See “Critical Accounting Policy - Inventory”.
Depreciation and amortization during the year ended June 30, 2011, were $100,751 representing a decrease of $43,694 or 30% from $144,445 during the year ended June 30, 2010.
Interest expense during the fiscal year ended June 30, 2011, was $1,663,809 representing an increase of $1,487,905 or 846% from $175,904 during the year ended June 30, 2010. The increase of $1,487,905 is primarily due to the recording of the $771,845 discount to the fair value at the debt to equity conversion of promissory notes that were originally issued with collateral shares of our common stock; $716,729 is the amortization of the debt discount on our convertible promissory notes; and $117,193 is imputed interest associated
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with our equity credit line with Southridge as per the terms and conditions of our private equity credit agreement. Our utilization of the equity credit line decreased during fiscal 2010 compared to the prior period. See Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters - “Financing/Equity Line of Credit”
Other income during the year ended June 30, 2011, was $110,858 representing a decrease of $7,938 or 7% from $118,796 during the year ended June 30, 2010. Of the $110,858 other income, $91,482 represented an adjustment to the allowance for doubtful accounts and $13,010 represented the extinguishment of debt.
We previously presented the gain on the sale of our Plantation property as a non-operating expense item. We have reviewed the guidance provided by ASC and have determined that the gain should be presented in the income section of our Statement of Operations.
Balance Sheet Data
We have financed our operations since inception by the issuance of equity securities with aggregate net proceeds of approximately $70,271,248 and through loan transactions in the aggregate net amount of $6,471,970. Furthermore, we issued equity securities for the conversion of all outstanding convertible debentures in the aggregate net amount of $4,040,000.
Our combined cash and cash equivalents totaled $1,623 at June 30, 2012. We do not expect to generate a positive internal cash flow for at least the next 12 months due to our efforts to obtain FDA marketing clearance, the expected costs of commercializing our initial product, the CTLM®, and the time required for homologations from certain countries.
Our inventory, which consists of raw materials, work in process (including completed units under testing), finished goods less Inventory Reserve, totaled $246,020 at June 30, 2012 and $322,562 at June 30, 2011. Raw materials used for research and development or other purposes are expensed and not included in inventory. This decrease is primarily due to inventory valuation adjustments of $51,462 and $35,895 to Cost of Goods Sold. We expect to recover our investment because the CTLM® represents a new technology for imaging the breast using a laser beam instead of ionizing x-ray to produce three dimensional images. During fiscal year 2012, we continued to receive encouraging results and scientific clinical papers from our various clinical collaboration sites worldwide. We continue to believe that over time the CTLM® will gain worldwide acceptance in the medical community because computed tomography has a strong basis in science. (See Note 6 “Inventories”).
Our property and equipment, net, totaled $131,152 at June 30, 2012 and $161,713 at June 30, 2011. The overall decrease of $30,561 is due primarily to depreciation during fiscal year 2012 (See Note 7 - Property and Equipment).
Our Intangible assets (formerly “Other assets”) totaled $102,530 at June 30, 2012 compared to $136,706 at June 30, 2011. This decrease is due to the amortization of a patent licensing agreement.
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 private placement transactions. Net cash used for operating and product development expenses, which include our purchase of additional materials to continue the manufacture of CTLM® Systems in anticipation of receiving orders from our distributors in certain countries where permitted by law was $1,620,489 during fiscal 2012, compared to net cash used by operating activities and product development of the CTLM® and related software development of $2,451,709 during fiscal 2011. At June 30, 2012, we had negative working capital of ($5,650,805) compared to negative working capital of ($4,424,145) at June 30, 2011.
If and when we receive approval from the FDA, which cannot be assured, we believe that, based on our current business plan approximately $10 million will be required above and beyond normal operating expenses over the next year to fully complete all necessary stages in order for us to market the CTLM® in the United States and foreign countries. The $10 million will be used to purchase inventory, sub-contracted components, tooling and
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manufacturing templates and pay 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. We expect to use our Amended Private Equity Agreement with Southridge and/or alternative financing facilities to raise the additional funds required to continue operations. In the event that we are unable or elect not to utilize the Amended Private Equity Agreement with Southridge or any successor agreement(s) on comparable terms, 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, whether to Southridge or other investors, dilution to existing stockholders will result, and future investors may be granted rights superior to those of existing stockholders. See “Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters/Financing/Equity Line of Credit”.
During fiscal 2012, we raised a total of $0 through private placement transactions pursuant to our Amended Private Equity Credit Agreement with Southridge dated January 7, 2010. We do not expect to generate a positive internal cash flow for at least the next 12 months due to limited expected sales and the expected costs of commercializing our initial product, the CTLM®, in the international market and the expense of continuing our ongoing product development program. We will require additional funds for operating expenses, FDA regulatory processes, manufacturing and marketing programs and to continue our product development program. We expect to use our Amended Private Equity Agreement with Southridge and/or alternative financing facilities to raise the additional funds required to continue operations. In the event that we are unable or elect not to utilize the Amended Private Equity Agreement with Southridge or any successor agreement(s) on comparable terms, 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, whether to Southridge or other investors, dilution to existing stockholders will result, and future investors may be granted rights superior to those of existing stockholders. In the event we are unable to draw from this new private equity line, alternative financing will be required to continue operations, and there is no assurance that we will be able to obtain alternative financing on commercially reasonable terms. There is no assurance that, if and when Food and Drug Administration (“FDA”) marketing clearance is obtained, the CTLM® will achieve market acceptance or that we will achieve a profitable level of operations.
As of the date of this report, since January 2001, we have drawn an aggregate of $45,199,650 in gross proceeds from our equity credit lines with Charlton and Southridge and have issued 532,408,149 shares as a result of those draws.
As of the date of this report, we have issued and outstanding 7,287,218,961 shares of common stock out of 10,000,000,000 authorized shares. In addition, we have reserved 77,986,989 shares to cover outstanding options. We had anticipated that revenues would have been a significant source of cash by the date of this report, but commercialization has been slower than expected largely due to the delay in obtaining FDA approval, which we believe has depressed our stock price. We previously used the proceeds of the sale of our building and the proceeds of the sale of convertible debentures for working capital. In May 2008, we returned to equity funding through our Private Equity Credit Agreement(s). From November 2009 through September 2011 we relied on short-term loans from private investors for working capital (“See Issuance of Stock in Connection with Short-Term Loans”). From February 2011 through October 2012, we also relied on long-term loans from private investors for working capital (“See Issuance of Stock in Connection with Long-Term Loans”).
From May 2010 to June 2012, claims were made by the IRS for payment of our accrued payroll taxes, interest and penalties, which as of June 30, 2012 was $1,489,640. We engaged tax counsel to handle this matter and intend to fully satisfy our tax obligations. In order to qualify for an IRS Installment Agreement, we must be current in our payment of payroll taxes in the period they are due. We have paid all of our payroll taxes payable for the calendar year 2012.
The IRS sent formal collection demands for each quarter we were delinquent in payment of payroll taxes beginning with the quarter ending March 31, 2010. On November 22, 2011, the IRS filed a lien with the Secretary of State of Florida in Tallahassee, Florida totaling $779,996. Subsequently, on February 2, 2012, the IRS filed a lien with the Secretary of State of Florida in Tallahassee, Florida totaling $140,439; and on June 28, 2012, the IRS filed a lien with the Secretary of State of Florida in Tallahassee, Florida totaling $1,479. Our tax counsel negotiated an Installment Agreement to make installment payments to satisfy outstanding taxes, penalties and interest due. The Installment Agreement states that we must pay $15,000 a month for 12 months with the first payment due by November 28, 2012; $20,000 a month for 12 months beginning November 28, 2013; and $25,000 a month for 12
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months beginning November 28, 2014 until such time as the balance owed is paid in full. In the event that we are able to pay off the balance due to the IRS, our tax counsel would attempt to negotiate a waiver on the penalties.
From July 1, 2012 through October 10, 2012, we have made payments to the IRS totaling $121,584. We have paid all of our payroll taxes payable for the calendar year 2012. Of the $121,584, we paid accrued payroll taxes totaling $67,359 for the quarter ending March 31, 2012 and $21,134 for the quarter ending June 30, 2012. These payments reduced the balance of accrued payroll taxes from $1,480,455 to $1,391,691. We paid a total of $33,091 for the quarter ending September 30, 2012 and $2,174 during the second quarter through October 10, 2012.
If we ultimately are unable to pay the outstanding payroll tax, penalties and interest on a timetable pursuant to the terms of the Installment Agreement, we may have to cease operations.
Issuance of Stock in Connection with Short-Term Loans
In November 2009, we borrowed a total of $237,500 from four private investors pursuant to short-term promissory notes. These notes were due and payable in the amount of principal plus 20% premium, so that the total amount due was $285,000. In addition, we issued to the investors 70 shares of restricted common stock for each $1 lent so that a total of 16,625,000 shares of stock were issued to the investors. The aggregate fair market value of the 16,625,000 shares of stock when issued was $465,500. $30,000 principal on one of the notes was sold to OTC Global Partners in October 2012. As of the date of this report, we have repaid an aggregate principal and premium in the amount of $148,500 on these short-term notes and owe a balance of $192,100 of which $100,000 is the principal remaining from one note and $92,100 is the balance of premium due from three notes. The original due date of December 21, 2009, was first extended to February 28, 2010, with a second extension to June 15, 2010, a third extension to September 30, 2010 and a fourth extension to October 31, 2010. Further extensions of the $100,000 note were made through June 30, 2012 for 3% additional premium per month. However, as of the date of this report, we are accruing this 3% additional premium per month but have not yet received an extension of maturity date and are in technical default of the note. We are negotiating with the lender to extend the maturity date. In connection with all of the extensions, a total of $85,600 of additional premium was accrued as of the date of this report.
In December 2009, we borrowed a total of $400,000 from a private investor pursuant to three short-term promissory notes. These notes were payable from March 10 through March 15, 2010 in the amount of principal plus 15% premium, so that the total amount due was $460,000. In addition, we issued to the investor 24,000,000 shares of restricted common stock as collateral. These shares are to be returned and cancelled upon payment of the notes. The original due date of March 15, 2010 was first extended to June 15, 2010, with a second extension to September 30, 2010 and a third extension to October 31, 2010. Further extensions of the notes were made through June 30, 2012 for 3% additional premium per month on each note. However, as of the date of this report, we are accruing this 3% additional premium per month but have not yet received an extension of maturity date and are in technical default of the note. We are negotiating with the lender to extend the maturity date. In connection with these extensions a total of $323,906 of additional premium was accrued for the December 2009 notes as of the date of this report. In April 2011, Southridge purchased a total of $200,000 in principal value of promissory notes from the private investor. As of the date of this report, Southridge has converted $131,450 principal and $55,600 premium into 251,995,632 shares of which 20,746,666 shares of our common stock that was previously issued as collateral.
On January 8, 2010, we borrowed a total of $600,000 from a private investor pursuant to two short-term promissory notes. These notes were payable April 6, 2010 in the amount of principal plus 15% premium, so that the total amount due was $690,000. In addition, we issued to the investor 31,363,637 shares of restricted common stock as collateral. These shares are to be returned and cancelled upon payment of the notes. The original due date of April 6, 2010 was first extended to June 15, 2010, with a second extension to September 30, 2010 and a third extension to October 31, 2010. Further extensions of the notes were made through May 31, 2012 for 3% additional premium per month on each note. In January 2011, Southridge purchased a total of $600,000 in principal value of promissory notes from the private investor. From January 2011 to June 2012, Southridge fully converted the $600,000 principal and $344,550 premium into 413,172,232 shares of our common stock of which 31,056,108 shares were collateral shares and 382,116,124 new shares were issued pursuant to Rule 144.
On February 25, 2010, we borrowed $350,000 from a private investor pursuant to a short-term promissory note. We issued to the investor 35 shares of Series L Convertible Preferred Stock as collateral. This note had a maturity date of April 30, 2010; however, the investor gave us notice of conversion to the collateral shares on March 31, 2010. The Note was cancelled upon this conversion. The 35 shares of Series L Convertible Preferred Stock accrue dividends at an annual rate of 9% and are convertible into an aggregate of 16,587,690 shares of common stock (473,934 shares of common stock for each share of preferred stock). Pursuant to the Certificate of Designation, Rights and Preferences for the Series L
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Convertible Preferred Stock, we are obligated to reduce the conversion price and reserve additional shares for conversion if we sold or issued common shares below the price of $.0211 per share (the market price on the date of issuance of the Preferred Stock). In October 2010, we obtained a waiver from the private investor holding the 35 shares of Series L Convertible Preferred Stock in which the investor agreed to convert no more than the 16,587,690 common shares currently reserved as we do not have sufficient authorized common shares to reserve for further conversions pursuant to the Certificate of Designation, Rights and Preferences. The investor agreed to a conversion floor price of $.015, which required us to reserve an additional 6,745,643 common shares.
On January 6, 2011, the investor converted 15 shares of the Series L Convertible Preferred Stock into 10,000,000 shares of common stock. As of the date of this report, the investor holds 20 shares of the Series L Convertible Preferred Stock.
On December 13, 2010, we borrowed a total of $60,000 from a private investor pursuant to a short-term promissory note. The note is payable on or before January 31, 2011. As consideration for this loan, we were obligated to pay back his principal, $26,400 in premium and issue 3,000,000 restricted shares of common stock upon the approval by our shareholders of an increase in authorized common stock at our annual meeting to be held on July 12, 2011. On September 9, 2011, we issued the 3,000,000 common shares pursuant to Rule 144. We received an extension of maturity date to October 31, 2012 for this note.
In November and December 2010, we received a total of $145,000 from Southridge pursuant to three short-term promissory notes. All three notes provide for a redemption premium of 15% of the principal amount on or before March 31, 2011. Interest will accrue at 8% per annum until maturity. Southridge may elect at an Event of Default to convert any part or all of the $145,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In January 2011, we received a total of $157,000 from Southridge pursuant to three short-term promissory notes. All three notes provide for a redemption premium of 15% of the principal amount on or before May 31, 2011. Interest will accrue at 8% per annum until maturity. Southridge may elect at an Event of Default to convert any part or all of the $157,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In February 2011, we received a total of $115,000 from Southridge pursuant to two short-term promissory notes. Both notes provide for a redemption premium of 15% of the principal amount on or before May 31, 2011. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $115,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In March 2011, we received $60,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before May 31, 2011. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $60,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In April 2011, we received $165,000 from Southridge pursuant to two short-term promissory notes. The notes provide for a redemption premium of 15% of the principal amount on or before July 31, 2011. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $165,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
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In May 2011, we received $80,000 from Southridge pursuant to two short-term promissory notes. The notes provide for a redemption premium of 15% of the principal amount on or before July 31, 2011. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $80,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In July 2011, we received $150,000 from Southridge pursuant to a short-term promissory note. The note provided for a redemption premium of 15% of the principal amount on or before December 31, 2011. We received an extension of maturity date to February 29, 2012 for these notes. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $150,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In August 2011, we received $82,500 from Southridge pursuant to two short-term promissory notes of which the principal on these notes was $100,000 and $7,500, respectively. The $100,000 note provided for a $25,000 original issue discount and both notes provided for a redemption premium of 15% of the principal amount on or before December 31, 2011. We received an extension of maturity date to February 29, 2012 for these notes. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $107,500 principal amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. The $7,500 note has been paid in full through the conversion to common stock pursuant to Rule 144.
In August 2011, we received $50,000 from OTC Global Partners, LLC pursuant to a short-term promissory note. The note provided for a redemption premium of 15% of the principal amount on or before March 1, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. OTC Global Partners, LLC may elect at an Event of Default to convert any part or all of the $50,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.014 or (b) 65% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In September 2011, we received $133,000 from Southridge pursuant to two short-term promissory notes of which the principal on these notes was $100,000 and $100,000, respectively. One of the $100,000 notes provided for a $33,000 original issue discount and the other $100,000 note provided a $34,000 original issue discount. The notes provided for a redemption premium of 15% of the principal amount on or before December 31, 2011. We received an extension of maturity date to December 31, 2012 for these notes. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $200,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.0075 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. The $100,000 note has been paid in full through the conversion to common stock pursuant to Rule 144.
In October 2011, we received $67,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $100,000. The note provides for a $33,000 original issue discount. The note provided for a redemption premium of 15% of the principal amount on or before January 12, 2012. We received an extension of maturity date to December 31, 2012 for this note. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $100,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.0075 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.
In October 2011, we received $67,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $100,000. The note provides for a $33,000 original issue discount. The note provided for a redemption premium of 15% of the principal amount on or before January 26, 2012. We received an extension of maturity date to December 31, 2012 for this note. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the
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$100,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.005 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.
In October 2011, we received $78,500 from Asher Enterprises pursuant to a short-term promissory note due on or before July 26, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Asher Enterprises may elect at an Event of Default to convert any part or all of the $78,500 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 58% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In November 2011, we received $20,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $20,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 62% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
On November 21, 2011, Southridge sold their May 12, 2011 $60,000 short-term promissory note to Panache Capital, LLC (“Panache”). The terms of the original note remain the same except that the maturity date is now November 21, 2012 and interest will accrue at 10% per annum until maturity above and beyond the premium.
In November 2011, we received $40,000 from Panache pursuant to a short-term promissory note. The note provides a maturity date of November 21, 2012. Interest will accrue at 10% per annum until maturity. Panache may elect at an Event of Default to convert any part or all of the $40,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 62% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In November 2011, we received $53,000 from Asher Enterprises pursuant to a short-term promissory note due on or before September 5, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Asher Enterprises may elect at an Event of Default to convert any part or all of the $53,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 58% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In December 2011, we received $17,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 18, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $17,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 62% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In December 2011, we received $12,000 from an unaffiliated third party investor pursuant to a short-term promissory note. The note provided for a redemption premium of 15% of the principal amount on or before March 8, 2012. Interest will accrue at 10% per annum until maturity above and beyond the premium. On January 6, 2012, we amended a promissory note in the principal amount of $12,000 dated December 9, 2011 held by an unaffiliated third-party investor. The note provided for a redemption premium of 15% of the principal amount on or before March 8, 2012. Interest will accrue at 10% per annum until maturity above and beyond the premium. The amendment provided for the issuance of three (3) restricted shares of Series P Preferred Stock having a stated value of $5,000 per share. These shares, having a total value of $15,000, will be used as collateral for the note held by the investor. We received an extension of maturity to June 4, 2012 for this note. Thereafter, a late fee premium of 1% per month will be due if unpaid.
In December 2011, we borrowed a total of $21,604 from a private investor pursuant to two short-term promissory notes. The notes provided for a 2% premium per month. One of the notes was payable on or before December 16, 2011 and the other on or before January 6, 2012. We received an extension of maturity date to June 30, 2012 for these notes for 3% additional premium per month on each note.
In January 2012, we received a total of $175,200 from an unaffiliated third party investor pursuant to five short-term promissory notes with a maturity date ranging from March 5, 2012 to March 20, 2012. The notes provided for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 10% per annum until
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maturity above and beyond the premium. We issued a total of 38 Series P Preferred Stock to the investor as collateral with a total stated value of $190,000. We received an extension of maturity to June 4, 2012 for these notes. Thereafter, a late fee premium of 1% per month will be due if unpaid.
In February 2012, we received a total of $42,000 from an unaffiliated third party investor pursuant to two short-term promissory notes with a maturity date ranging from April 13, 2012 to April 30, 2012. The notes provided for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 10% per annum until maturity above and beyond the premium. We issued a total of 9 Series P Preferred Stock to the investor as collateral with a total stated value of $45,000. We received an extension of maturity to June 4, 2012 for these notes. Thereafter, a late fee premium of 1% per month will be due if unpaid.
On February 23, 2012, Southridge sold their $100,000 short-term promissory note to Panache Capital, LLC (“Panache”) of which a balance of $70,000 principal was remaining after Southridge converted $30,000 principal in a debt to equity conversion on February 17, 2012. The terms of the original note remain the same except that the maturity date is now November 21, 2012 and interest will accrue at 10% per annum until maturity above and beyond the premium.
In February 2012, we received $25,000 from Panache pursuant to a short-term promissory note. The note provides a maturity date of February 28, 2013. Interest will accrue at 10% per annum until maturity. Panache may elect at an Event of Default to convert any part or all of the $25,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 55% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In March 2012, we received $30,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before March 18, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 62% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In April 2012, we received $11,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $11,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In April 2012, we received $2,500 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before April 25, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $2,500 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In May 2012, we received a total of $25,000 from an unaffiliated third party investor pursuant to a short-term promissory note with a maturity date of August 2, 2012. The note provides for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 10% per annum until maturity above and beyond the premium. We issued a total of 5 Series P Preferred Stock to the investor as collateral with a total stated value of $25,000.
In May 2012, we received $8,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before May 14, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $8,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In May 2012, we received $13,000 from Linda Grable pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before May 21, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Ms. Grable may elect at an Event of Default to convert any part or all of the $13,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a
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conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In May 2012, we received $32,000 from a private investor pursuant to two short-term promissory notes with a maturity date ranging from May 17, 2013 to May 20, 2013. The notes provides for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $32,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In June 2012, we received $6,672 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before June 17, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $6,672 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In June 2012, we received $14,000 from a private investor pursuant to two short-term promissory notes with a maturity date ranging from June 6, 2013 to June 20, 2013. The notes provide for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $14,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In July 2012, we received $20,100 from a private investor pursuant to four short-term promissory notes with a maturity date ranging from July 9, 2013 to July 24, 2013. The notes provide for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $20,100 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In August 2012, we received $25,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $25,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice. We reserved 50,000,000 shares of our common stock in connection with this loan.
In August 2012, we received $95,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $95,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 400,000,000 shares of our common stock in connection with this loan.
On August 20, 2012, Southridge sold $70,000 of their original $100,000 short-term promissory note dated October 12, 2011 to Levin Consulting Group. The terms of the original note remain the same except that the holder may elect at an Event of Default to convert any part or all of the $70,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
In August 2012, we received $35,000 from Levin Consulting Group pursuant to a short-term promissory note with a maturity date of August 20, 2013. The note provides for a redemption premium of 15% of the principal amount on or before November 18, 2012; 20% on or before December 18, 2012; 25% on or before January 17, 2013; and 30%
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on or before February 16, 2013. Interest will accrue at 10% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $35,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
On August 20, 2012, Southridge sold $30,000 of their original $100,000 short-term promissory note dated October 12, 2011 to SGI Group LLC (“SGI”). The terms of the original note remain the same except that the holder may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
In August 2012, we received $15,000 from SGI pursuant to a short-term promissory note with a maturity date of August 20, 2013. The note provides for a redemption premium of 15% of the principal amount on or before November 18, 2012; 20% on or before December 18, 2012; 25% on or before January 17, 2013; and 30% on or before February 16, 2013. Interest will accrue at 10% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $15,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
In September 2012, we received $29,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $30,000. The note provides for a $1,000 original issue discount. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 150,000,000 shares of our common stock in connection with this loan.
In September 2012, we received $25,000 from Panache pursuant to a short-term promissory note of which the principal on the note was $30,000. The note provides for a $5,000 original issue discount. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Panache may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 200,000,000 shares of our common stock in connection with this loan.
In September 2012, we received $30,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 20% on or before December 17, 2012; 25% on or before March 17, 2013; and 30% on or before June 15, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 700,000,000 shares of our common stock in connection with this loan.
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On September 26, 2012, a private investor sold $30,000 of its original $100,000 short-term promissory note dated November 23, 2009 to OTC Global Partners. The terms of the original note remain the same except that the new note provides for a new redemption premium of 15% of the principal amount on or before September 25, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. OTC Global Partners may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
In October 2012, we received $30,000 from Panache pursuant to a short-term promissory note. The note provides a maturity date of September 28, 2013. Interest will accrue at 10% per annum until maturity. Any amount on principal or interest that remains unpaid when due, shall bear an interest rate of 22% from the due date until paid. Panache may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
In October 2012, we received $38,500 from FLUX Carbon Starter pursuant to a short-term promissory note. The note provides a maturity date of October 3, 2013. We received net proceeds of $33,250 after deductions of $3,500 for legal fees and $1,750 for a finder’s fee. Interest will accrue at 10% per annum until maturity. FLUX Carbon Starter may elect at an Event of Default to convert any part or all of the $38,500 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
In October 2012, we received $27,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $40,000. The note provides for a $13,000 original issue discount. The note provides for a redemption premium of 20% on or before January 7, 2012; 25% on or before April 7, 2013; and 30% on or before July 15, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $40,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 300,000,000 shares of our common stock in connection with this loan.
On May 11, 2011, Southridge executed a debt to equity conversion of a $80,000 short-term promissory note dated November 11, 2010 plus accrued interest of $3,174. We issued Southridge 11,089,826 common shares pursuant to Rule 144 based on an agreed exchange price of $0.0075 per share. We still owe Southridge $12,000 in premium associated with this note.
On July 13, 2011, Southridge executed a debt to equity conversion of a $14,000 short-term promissory note dated December 16, 2010 plus accrued interest of $641. We issued Southridge 1,464,132 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We still owe Southridge $2,100 in premium associated with this note.
On July 13, 2011, Southridge executed a debt to equity conversion of a $51,000 short-term promissory note dated December 22, 2010 plus accrued interest of $2,269. We issued Southridge 5,326,915 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We still owe Southridge $7,650 in premium associated with this note.
On July 21, 2011, Southridge executed a debt to equity conversion of a $55,000 short-term promissory note dated January 13, 2011 plus accrued interest of $2,278. We issued Southridge 5,727,836 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We still owe Southridge $8,250 in premium associated with this note.
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On July 21, 2011, Southridge executed a debt to equity conversion of a $22,000 short-term promissory note dated January 19, 2011 plus accrued interest of $882. We issued Southridge 2,288,241 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We still owe Southridge $3,300 in premium associated with this note.
On August 24, 2011, Southridge executed a debt to equity conversion of a $80,000 short-term promissory note dated January 28, 2011 plus accrued interest of $3,647. We issued Southridge 8,364,712 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We canceled the $12,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On August 24, 2011, Southridge executed a partial debt to equity conversion of a $80,000 short-term promissory note dated February 7, 2011 in which they converted $20,000 principal plus accrued interest of $868. We issued Southridge 2,086,795 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.
On September 27, 2011, Southridge executed a final debt to equity conversion of a $80,000 short-term promissory note dated February 7, 2011 in which they converted the remaining $60,000 principal plus accrued interest of $868. We issued Southridge 8,399,781 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share. We canceled the $12,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On September 27, 2011, Southridge executed a debt to equity conversion of a $35,000 short-term promissory note dated February 15, 2011 plus accrued interest of $1,688. We issued Southridge 4,891,689 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share. We canceled the $5,250 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On September 27, 2011, Southridge executed a debt to equity conversion of a $60,000 short-term promissory note dated March 31, 2011 plus accrued interest of $2,315. We issued Southridge 8,308,603 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share. We canceled the $9,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On September 28, 2011, we amended the terms of all debt agreements with Southridge Partners II, LP and agreed to amend the conversion terms of the Notes such that the principal portion of the Notes, plus accrued interest, shall be convertible into shares of our common stock at a conversion price per share equal to the lesser of (a) $0.0075 or (b) ninety percent (90%) of the average of the three (3) lowest closing bid prices during the ten (10) trading days immediately prior to the date of the conversion notice.
On October 13, 2011, Southridge executed a debt to equity conversion of a $100,000 short-term promissory note dated April 14, 2011 plus accrued interest of $3,989. We issued Southridge 20,797,808 common shares pursuant to Rule 144 based on an agreed conversion price of $0.005 per share. We canceled the $15,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On November 3, 2011, Southridge executed a debt to equity conversion of a $65,000 short-term promissory note dated April 26, 2011 plus accrued interest of $2,721. We issued Southridge 13,544,219 common shares pursuant to Rule 144 based on an agreed conversion price of $0.005 per share. We canceled the $9,750 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On November 16, 2011, Southridge executed a debt to equity conversion of a $20,000 short-term promissory note dated May 6, 2011 plus accrued interest of $850. We issued Southridge 6,725,939 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0031 per share. We canceled the $3,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On December 15, 2011, Panache executed a partial debt to equity conversion of a $60,000 short-term promissory note dated May 12, 2011 in which they converted $14,415 principal. We issued Panache 5,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.002883 per share.
On January 3, 2012, Panache executed a partial debt to equity conversion of a $60,000 short-term promissory note dated May 12, 2011 in which they converted $12,896 principal. We issued Panache 8,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.001612 per share.
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On January 10, 2012, Panache executed a partial debt to equity conversion of a $60,000 short-term promissory note dated May 12, 2011 in which they converted $12,896 principal. We issued Panache 8,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.001612 per share.
On January 18, 2012, Panache executed a partial debt to equity conversion of a $60,000 short-term promissory note dated May 12, 2011 in which they converted $12,710 principal. We issued Panache 10,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.001271 per share.
On January 27, 2012, Panache executed a debt to equity conversion of a $60,000 short-term promissory note dated May 12, 2011 in which they converted the final $7,083 in principal. We issued Panache 5,712,097 common shares pursuant to Rule 144 based on an agreed conversion price of $0.001224 per share. We still owe Panache $3,139 in accrued interest associated with this note.
On January 23, 2012, Southridge executed a partial debt to equity conversion of a $150,000 short-term promissory note dated July 27, 2011 in which they converted $85,000 principal. We issued Southridge 66,390,690 common shares with a restrictive legend based on an agreed conversion price of $0.0013 per share. The restrictive legend was removed on February 2, 2012 pursuant to Rule 144.
On January 27, 2012, Southridge executed a partial debt to equity conversion of a $150,000 short-term promissory note dated July 27, 2011 in which they converted $30,000 principal. We issued Southridge 24,193,548 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0012 per share.
On February 7, 2012, Southridge executed a partial debt to equity conversion of a $150,000 short-term promissory note dated July 27, 2011 in which they converted $18,500 principal and $6,411 interest. We issued Southridge 24,277,321 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00103 per share.
On February 10, 2012, Southridge executed a partial debt to equity conversion of a $150,000 short-term promissory note dated July 27, 2011 in which they converted $16,500 principal and $99 interest. We issued Southridge 17,272,248 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00096 per share.
On February 17, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $30,000 principal and $3,858 interest. We issued Southridge 34,237,571 common shares on February 27, 2012 pursuant to Rule 144 based on an agreed conversion price of $0.00099 per share.
On February 23, 2012, Southridge executed a debt to equity conversion of a $7,500 short-term promissory note dated August 23, 2011 in which they converted $7,500 principal and $289 interest. We issued Southridge 7,545,592 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00103 per share.
On February 28, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated September 12, 2012 in which they converted $51,000 principal and $3,595 interest. We issued Southridge 60,728,054 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.0009 per share.
On March 5, 2012, OTC Global Partners executed a debt to equity conversion of a $50,000 short-term promissory note dated August 30, 2011 in which they converted $50,000 principal and $2,027 interest. We issued OTC Global Partners 72,765,035 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000715 per share.
On April 13, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated September 12, 2012 in which they converted $49,000 principal and $1,096 interest. We issued Southridge 123,693,557 restricted common shares on April 24, 2012 pursuant to Rule 144 based on an agreed conversion price of $0.00041 per share.
On April 13, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated September 28, 2012 in which they converted $4,000 principal and $4,340 interest. We issued Southridge 20,591,916 restricted common shares on April 24, 2012 pursuant to Rule 144 based on an agreed conversion price of $0.00041 per share.
On May 1, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $9,765 principal. We issued Panache 21,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000465 per share.
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On May 1, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $12,000 principal. We issued Asher 26,086,957 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00046 per share.
On May 2, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $15,000 principal. We issued Asher 44,117,647 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00034 per share.
On May 10, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $13,000 principal. We issued Asher 68,421,053 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00019 per share.
On May 10, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $7,440 principal. We issued Panache 30,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000248 per share.
On May 15, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $9,330 principal. We issued Panache 50,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001866 per share.
On May 21, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $18,500 principal. We issued Asher 102,777,778 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00018 per share.
On May 22, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $9,330 principal. We issued Panache 50,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000186 per share.
On May 29, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $12,000 principal. We issued Asher 66,666,667 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00018 per share.
On May 30, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $9,330 principal. We issued Panache 50,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000186 per share.
On June 4, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $8,000 principal and $3,140 in interest. We issued Asher 85,692,308 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00013 per share.
On June 5, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $9,920 principal. We issued Panache 80,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000124 per share.
On June 8, 2012, Asher executed a partial debt to equity conversion of a $53,000 short-term promissory note dated November 29, 2011 in which they converted $12,000 principal. We issued Asher 85,692,308 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00014 per share.
On June 12, 2012, Asher executed a partial debt to equity conversion of a $53,000 short-term promissory note dated November 29, 2011 in which they converted $14,000 principal. We issued Asher 100,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00014 per share.
On June 15, 2012, Asher executed a partial debt to equity conversion of a $53,000 short-term promissory note dated November 29, 2011 in which they converted $13,000 principal. We issued Asher 68,421,053 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00019 per share.
On June 20, 2012, Asher executed a partial debt to equity conversion of a $53,000 short-term promissory note dated November 29, 2011 in which they converted $14,000 principal and $2,120 in interest. We issued Asher 94,823,529 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00017 per share.
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On July 17, 2012, Ms. Grable executed a full debt to equity conversion of a $13,000 short-term promissory note in which she converted $13,000 principal and $148 in interest. We issued Ms. Grable 43,827,215 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.0003 per share.
On July 17, 2012, a private investor executed a partial debt to equity conversion of five of her notes in which she converted $19,583 principal into 100,000,000 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.000177 per share.
On July 25, 2012, a private investor executed a full debt to equity conversion of a $3,000 short-term promissory note in which she converted $3,000 principal into 10,000,000 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.0003 per share.
On July 30, 2012, a private investor executed a partial debt to equity conversion of a $10,000 short-term promissory note in which she converted $6,900 principal into 23,000,000 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.0003 per share.
On August 7, 2012, a private investor sold their December 2011 short-term promissory notes totaling $21,604 in principal and $5,334 in premium to OTC Global Partners. A new short-term promissory note was issued to OTC Global Partners dated August 7, 2012 with a taking period back to December 7, 2011. OTC Global Partners may elect at an Event of Default to convert any part or all of the $21,604 Principal Amount of the Note plus accrued premium into shares of our common stock at a conversion price $0.00032.
On August 7, 2012, OTC Global Partners executed a partial debt to equity conversion of the $21,604 short-term promissory note in which they converted $21,604 principal and $2,396 in premium. We issued OTC Global Partners 75,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00032 per share.
On September 5, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated September 28, 2011 in which they converted $85,582 principal. We issued Southridge 380,363,446 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00023 per share.
On September 10, 2012, Levin Consulting Group executed a partial debt to equity conversion of the $70,000 short-term promissory note originally dated August 25, 2011 and purchased on August 20, 2012 from Southridge, in which they converted $20,000 principal. We issued Levin Consulting Group 80,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00025 per share. On September 21, 2012 we issued Levin Consulting Group an additional 120,000,000 shares because the closing bid price on the clearing date fell below the Initial closing bid price.
On September 10, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $14,885 principal. We issued Panache 80,026,882 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000186 per share.
On September 11, 2012, Southridge executed a final debt to equity conversion of a $100,000 short-term promissory note dated September 28, 2011 in which they converted $10,418 principal and $3,004 in interest. We issued Southridge 89,478,883 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00015 per share.
On September 11, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated October 26, 2011 in which they converted $32,500 principal and $7,036 in interest. We issued Southridge 263,570,776 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00015 per share.
On September 12, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated October 26, 2011 in which they converted $4,150 principal. We issued Southridge 27,666,667 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00015 per share.
On September 12, 2012, Panache executed a partial debt to equity conversion of a $40,000 short-term promissory note dated November 21, 2011 in which they converted $23,250 principal. We issued Panache 125,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000186 per share.
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On September 19, 2012, Panache executed a final debt to equity conversion of a $40,000 short-term promissory note dated November 21, 2011 in which they converted $16,750 principal and $3,244 in interest. We issued Panache 128,991,484 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000155 per share.
On September 20, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated October 26, 2011 in which they converted $47,300 principal and $153 in interest. We issued Southridge 379,627,369 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000125 per share.
On September 27, 2012, OTC Global Partners executed a partial debt to equity conversion of the $30,000 short-term promissory note in which they converted $18,000 in principal. We issued OTC Global Partners 180,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001 per share.
On September 28, 2012, Panache executed a partial debt to equity conversion of a $25,000 short-term promissory note dated February 28, 2012 in which they converted $13,200 principal. We issued Panache 120,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00011 per share.
On October 1, 2012, Southridge executed a final debt to equity conversion of a $100,000 short-term promissory note dated October 26, 2011 in which they converted $16,050 principal and $219 in interest. We issued Southridge 162,691,781 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001 per share.
On October 1, 2012, Southridge executed a partial debt to equity conversion of a $20,000 short-term promissory note dated November 14, 2011 in which they converted $10,900 principal and $1,398 in interest. We issued Southridge 122,983,562 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001 per share.
On October 2, 2012, Southridge executed a final debt to equity conversion of a $20,000 short-term promissory note dated November 14, 2011 in which they converted $9,100 principal and $18 in interest. We issued Southridge 91,175,304 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001 per share.
On October 3, 2012, SGI Group executed a partial debt to equity conversion of the $30,000 short-term promissory note originally dated August 25, 2011 and purchased on August 20, 2012 from Southridge, in which they converted $9,000 principal and $106 in interest. We issued SGI Group 182,124,200 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00005 per share.
On October 4, 2012, Panache executed a partial debt to equity conversion of a $25,000 short-term promissory note dated February 28, 2012 in which they converted $6,600 principal. We issued Panache 120,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000055 per share.
From January 2011 to April 2011, Southridge acquired promissory notes from a private investor totaling $800,000 in principal and 55,363,907 shares of common stock which were issued as collateral. Southridge proposed that we amend the conversion terms of the notes permitting the holder to convert the notes and we agreed to the amendment. From January 12, 2011 to October 10, 2012, Southridge issued notices of conversion to settle $525,000 in principal plus accrued premiums totaling $255,651 into 53,143,682 shares of our common stock, of which 51,802,774 shares were collateral shares and 1,340,908 new shares were issued pursuant to Rule 144.
As of the date of this report, we owe a total of $1,842,269 of short term debt of which $1,217,724 is principal, $594,830 is accrued premium and $29,716 is accrued interest. We have repaid aggregate principal and premium in the amount of $173,376 on these short-term notes and a total of $2,347,787 principal, $405,790 in premium, and $102,416 in interest has been converted into 4,736,716,636 shares of our common stock of which 51,802,774 shares were collateral shares and 4,684,913,862 new shares were issued pursuant to Rule 144. Out of the original 55,363,637 shares of common stock held as collateral, a balance of 3,561,133 shares remains on the $268,550 principal of the remaining notes.
There can be no assurances that we will be able to pay our short-term loans when due. If we default on any or all of the notes due to the lack of new funding, the holders could exercise their right to sell the remaining 3,561,133 collateral shares and could take legal action to collect the amount due which could materially adversely affect IDSI and the value of our stock.
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Issuance of Stock in Connection with Long-Term Loans
On February 23, 2011, we entered into a Convertible Promissory Note Agreement with an unaffiliated third party, JMJ Financial (the “Lender” or “JMJ”), relating to a private placement of a total of up to $1,800,000 in principal amount of a Convertible Promissory Note (the “Note”) providing for advances of a gross amount of $1,600,000 in seven tranches. Pursuant to the terms of a Registration Rights Agreement (the “Rights Agreement”) dated February 23, 2011, between the Company and JMJ, we are required to file within 10 days from the effective date of an increase of authorized shares approved by our shareholders, an S-1 Registration Statement (the “Registration Statement”) covering 130,000,000 shares of Company common stock to be reserved for conversion of the Note.
Although our shareholders on July 12, 2011, voted to increase our authorized shares to 2,000,000,000, we have not filed the registration statement as required by the Rights Agreement.
The Note provides for funding in seven tranches as stipulated in the Funding Schedule attached. The first tranche of $300,000 was closed on February 24, 2011, and we received $258,000 after deductions of $30,000 for a 10% Finder’s Fee and $12,000 for an Origination Fee. The second tranche of $100,000 closed on May 20, 2011, and we received $93,000 after deduction of $7,000 for a 7% Finder’s Fee. A partial closing on the third tranche of $35,000 closed on October 7, 2011 and we received $32,250 after deduction of $2,750 for a 7% Finder’s Fee. A partial closing on the third tranche of $25,000 closed on February 8, 2012 and we received $25,000. In connection with this partial third tranche we will pay a 7% Finder’s Fee, which is $1,750. A partial closing on the third tranche of $25,000 closed on February 29, 2012 and we received $25,000. In connection with this partial third tranche we will pay a 7% Finder’s Fee, which is $1,750. A final closing on the third tranche of $15,000 closed on April 4, 2012 and we received $15,000. In connection with this final third tranche we will pay a 7% Finder’s Fee, which is $1,050. A partial closing on the fourth tranche of $10,000 closed on October 3, 2012 and we received $10,000. In connection with this partial third tranche we will pay a 7% Finder’s Fee, which is $700. Although we are not being funded based on the on achievement of milestones relating to the Registration Statement, we continue to draw funds from the Promissory Note from time to time based on the lender’s ability to fund us. For the remaining three tranches, we are obligated to pay a Finder’s Fee equal to 7% in cash at each closing date. We may cancel the unfunded portion of the Agreement at a fee of 20% of the unfunded amount. As of the date of this report, $1,290,000 in principal amount remains unfunded and if we choose to cancel we will have to pay JMJ $258,000 to terminate the agreement.
The Note, after the seven tranches are drawn, would generate net proceeds of $1,467,000 after payment of the Origination Fee and a 7% Finder’s Fee. JMJ has the option to provide an additional $1,600,000 of funding on substantially the same terms as the first Agreement; however, we have the right to cancel, without penalty, the Note Agreement within five days of JMJ’s execution. Once executed and accepted by both parties and five days has passed, cancellation of unfunded payments is permitted at a fee of 20% of the unfunded amount. Cancellation of funded portions is not permitted.
The funding schedule of the seven tranches is as follows:
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$300,000 paid to Borrower within 2 business days of execution and closing of the agreement.
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$100,000 paid to Borrower within 5 business days of filing of Definitive Proxy to increase authorized shares to 2,000,000,000 or more.
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$100,000 paid to Borrower within 5 business days of effective increase in authorized shares to 2,000,000,000 or more.
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$100,000 paid to Borrower within 5 business days of filing of registration statement, and that registration statement must be filed no later than 10 days from the effective increase of authorized shares.
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$400,000 paid to Borrower within 5 business days of notice of effective registration statement, and that registration statement must be effective no later than 120 days from the execution of the agreement.
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$300,000 paid to Borrower within 90 business days of notice of effective registration statement, and that registration statement must be effective no later than 120 days from the execution of the agreement.
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$300,000 paid to Borrower within 150 business days of notice of effective registration statement, and that registration statement must be effective no later than 120 days from the execution of the agreement.
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The conditions to funding each payment are as follows:
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At the time of each payment interval, the Conversion Price calculation on Borrower’s common stock must yield a Conversion Price equal to or greater than $0.015 per share (based on the Conversion Price calculation, regardless of whether a conversion is actually completed or not).
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At the time of each payment interval, the total dollar trading volume of Borrower’s common stock for the previous 23 trading days must be equal to or greater than $1,000,000. The total dollar volume will be calculated by removing the three highest dollar volume days and summing the dollar volume for the remaining 20 trading days.
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At the time of each payment interval, there shall not exist an event of default as described within any of the agreements between Borrower and Holder.
Prior to the maturity date of February 2, 2014, JMJ may convert both principal and interest into our common stock at 75% of the average of the three lowest closing prices in the 20 days previous to the conversion. We have the right to enforce a conversion floor of $0.015 per share; however, if we receive a conversion notice in which the Conversion Price is less than $0.015 per share, JMJ will incur a conversion loss [(Conversion Loss = $0.015 - Conversion Price) x number of shares being converted] which we must make whole by either of the following options: pay the conversion loss in cash or add the conversion loss to the balance of principal due. Prepayment of the Note is not permitted.
The Note has a 9% one-time interest charge on the principal sum. No interest or principal payments are required until the Maturity Date, but both principal and interest may be included in conversions prior to the maturity date.
On August 24, 2011, JMJ executed a debt to equity conversion of $36,015 in principal of the first tranche of $300,000 which we closed on February 24, 2011. We issued JMJ 3,500,000 common shares pursuant to Rule 144 based on a conversion price of $0.0103 per share.
On August 31, 2011, JMJ executed a debt to equity conversion of $41,160 in principal of the first tranche of $300,000 which we closed on February 24, 2011. We issued JMJ 4,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.01029 per share.
On September 15, 2011, JMJ executed a debt to equity conversion of $37,597 in principal of the first tranche of $300,000 which we closed on February 24, 2011. We issued JMJ 4,100,000 common shares pursuant to Rule 144 based on a conversion price of $0.00917 per share.
On September 28, 2011, JMJ executed a debt to equity conversion of $40,950 in principal of the first tranche of $300,000 which we closed on February 24, 2011. We issued JMJ 5,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00819 per share.
On October 12, 2011, JMJ executed a debt to equity conversion of $36,750 in principal of the first tranche of $300,000 which we closed on February 24, 2011. We issued JMJ 5,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00735 per share.
On December 15, 2011, JMJ executed a debt to equity conversion of $63,840 in principal of the first tranche of $300,000 which we closed on February 24, 2011. We issued JMJ 20,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.003192 per share.
On January 24, 2012, JMJ executed a debt to equity conversion totaling $44,100 of which $43,688 was principal and $412 was consideration for the first tranche of $300,000, which we closed on February 24, 2011. We issued JMJ 30,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00147 per share.
On February 9, 2012, JMJ executed a debt to equity conversion totaling $44,100 of which $37,088 was consideration and $7,012 was interest for the first tranche of $300,000, which we closed on February 24, 2011. We issued JMJ 35,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00126 per share.
On February 29, 2012, JMJ executed a debt to equity conversion totaling $39,550 of which $19,988 was interest for the first tranche of $300,000, which we closed on February 24, 2011 and $19,562 was principal for the second tranche of $100,000, which we closed on May 20, 2011. We issued JMJ 50,000,000 common shares pursuant to
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Rule 144 based on a conversion price of $0.000791 per share.
On April 24, 2012, JMJ executed a debt to equity conversion of $29,120 in principal of the second tranche of $100,000 which we closed on May 20, 2012. We issued JMJ 52,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00056 per share.
On May 9, 2012, JMJ executed a debt to equity conversion of $28,980 in principal of the second tranche of $100,000 which we closed on May 20, 2012. We issued JMJ 69,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00042 per share.
On May 14, 2012, JMJ executed a debt to equity conversion of $4,389 in principal of the second tranche of $100,000 which we closed on May 20, 2011. We issued JMJ 19,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.000231 per share.
On May 24, 2012, JMJ executed a debt to equity conversion of $22,260 in principal of the second tranche of $100,000 which we closed on May 20, 2011. We issued JMJ 106,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00021 per share.
On May 31, 2012, JMJ executed a debt to equity conversion of $2,940 in principal of the second tranche of $100,000 which we closed on May 20, 2011. We issued JMJ 14,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00021 per share.
On June 6, 2012, JMJ executed a debt to equity conversion totaling $19,551 of which $14,249 was interest for the second tranche of $100,000, which we closed on May 20, 2011 and $5,302 was principal for the third tranche of $35,000, which we closed on October 7, 2011. We issued JMJ 105,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.000186 per share.
On September 7, 2012, JMJ executed a debt to equity conversion of $19,572 in principal of the third tranche of $35,000, which we closed on October 7, 2011. We issued JMJ 120,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.000163 per share.
On October 3, 2012, JMJ executed a debt to equity conversion totaling $42,000 of which $14,501 was principal and $3,150 was interest for the third tranche of $35,000, which we closed on October 7, 2011; and $24,349 was principal of the fourth tranche of $25,000, which we closed on February 8, 2012. We issued JMJ 300,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00014 per share.
As of the date of this report, we owe JMJ a total of $66,651 of which $50,526 is principal, $9,375 is consideration on the principal and $6,750 is interest.
Capital expenditures for fiscal 2012 were $0 as compared to $0 for the prior year. During fiscal 2012, we reclassified the net realizable value of $11,928 of CTLM® systems in Clinical equipment to Inventory. We anticipate that our capital expenditures for fiscal 2013 will be approximately $25,000.
During the year ending June 30, 2012, there were no changes in our existing debt agreements other than extensions and we had no outstanding bank loans as of June 30, 2012. Our annual fixed commitments, including salaries and fees for current employees and consultants, rent, payments under license agreements and other contractual commitments are approximately $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 $250,000 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 international commercialization of the
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CTLM®, activities related to our FDA regulatory process, and advanced product development activities. We expect to use our Amended Private Equity Agreement with Southridge and/or alternative financing facilities to raise the additional funds required to continue operations. In the event that we are unable or elect not to utilize the Amended Private Equity Agreement with Southridge or any successor agreement(s) on comparable terms, 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, whether to Southridge or other investors, dilution to existing stockholders will result, and future investors may be granted rights superior to those of existing stockholders. There is no assurance that, if and when Food and Drug Administration (“FDA”) marketing clearance is obtained, the CTLM® will achieve market acceptance or that we will achieve a profitable level of operations. No assurances, however, can be given that this financing or any 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. In the absence of adequate funding, we will have to cease operations.
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Item 7A.
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.
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Item 8.
Item 8. Financial Statements
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Imaging Diagnostic Systems, Inc.
We have audited the accompanying balance sheets of Imaging Diagnostic Systems, Inc. (A Development Stage Enterprise) as of June 30, 2012 and 2011, and the related statements of operations, stockholders’ equity (deficit), and cash flows for each of the years ended June 30, 2012 and 2011. 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 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 the financial statements are free of 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 principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2012 and 2011, and the results of its operations and cash flows for each of the years then ended June 30, 2012 and 2011 in conformity with generally accepted accounting principles in the United States of America.
The accompanying financial statements have been prepared assuming that Imaging Diagnostic Systems, Inc. will continue as a going concern. As more fully described in Note 5, the Company has incurred recurring operating losses and will have to obtain additional capital to sustain operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 5. The accompanying financial statements do not include any adjustments to reflect the possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
/s/ SHERB & CO, LLP
Certified Public Accountants
Boca Raton, Florida
October 15, 2012
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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 a development stage enterprise and during fiscal year ending June 30, 2012, utilized the proceeds from short-term loans and our Private Equity Credit Agreements with Charlton Avenue, LLC and Southridge Partners II LP (“Southridge”). As additional working capital will be required, the Company will obtain such capital through the use of its Private Equity Credit Agreement with Southridge and other sources of financing. Since January 2003, the Company has had revenues of $2,591,502 from the sale of its CTLM® Breast Imaging System. There is no assurance that once the development of the CTLM® 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.
(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®. It is not always possible to obtain an L/C from our distributors so in these cases we must seek alternative payment arrangements which include third-party financing, leasing or extending payment terms to our distributors.
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IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(c) Allowance for Doubtful Accounts
In the event that management determines that a receivable becomes uncollectible, or events or circumstances change, which result in a temporary cessation of payments from the distributor, we will make our best estimate of probable or potential losses in our accounts receivable balance 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 based on current available evidence and historical experience.
Our allowance for doubtful accounts was $18,750 as of June 30, 2012 and was $23,500 in the prior fiscal year.
(d) 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.
(e) Inventory
Inventories, consisting principally of raw materials, work-in-process (including completed units under testing), finished goods and units placed on consignment, 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® systems from finished goods as demonstrators or for clinical collaboration. At the conclusion of the demonstration or clinical collaboration period, the CTLM® may be sold at reduced prices. On a quarterly basis, using the guidance provided by ASC 330, our ability to realize the value of our inventory is based on a combination of factors including the following: how long a consigned 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 $51,462, $95,096 and $4,966,907, for the years ended June 30, 2012, 2011 and for the period December 10, 1993 (date of inception) to June 30, 2012, respectively.
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IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(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.
Using the guidance provided by ASC 985, 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 require 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.
(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® 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® 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
The Company relies on the guidance provided by ASC 260, (“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.
The Company has excluded vested options and warrants in the amount of 43,245,600 and 34,479,473 during the years June 30, 2012 and 2011 as the inclusion of such options and warrants would be anti-dilutive.
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IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(i) Patent license agreement
The patent license agreement will be amortized over the seventeen-year life of the patent, the term of the agreement. See Note 2(m) Intangible Assets for disclosure on impairment policy.
(j) Stock-based compensation
The Company relies on the guidance provided by ASC 718, (“Share Based Payments”). ASC 718 requires companies to expense the value of employee stock options and similar awards and applies to all outstanding and vested stock-based awards.
In computing the impact, the fair value of each option is estimated on the date of grant based on the Black-Scholes options-pricing model utilizing certain assumptions for a risk free interest rate; volatility; and expected remaining lives of the awards. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In estimating the Company’s forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining lives of unvested options, and the amount of vested options as a percentage of total options outstanding. If the Company’s actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what we have recorded in the current period. The impact of applying ASC 718 approximated $22,208 and $375,703, respectively, in additional compensation expense for the twelve months ended June 30, 2012 and 2011.
The fair value concepts were not changed significantly in ASC 718, however, in adopting this Standard, companies were given the option to choose among alternative valuation models and amortization assumptions. We elected to continue to use the Black-Scholes option pricing model and expense the options as compensation over the requisite service period of the grant. We will reconsider use of the Black-Scholes model if additional information becomes available in the future that indicates another model would be more appropriate, or if grants issued in future periods have characteristics that cannot be reasonably estimated using this model.
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IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Our expected term assumption of eight years for the years ended June 30, 2012 and 2011, was based upon the guidance provided by SEC Staff Accounting Bulletin 107 enabling us to use the simplified method for “plain vanilla” options for this calculation. This provision was allowed to be used for grants made on or before December 31, 2007. On December 21, 2007, the SEC issued Staff Accounting Bulletin 110 which extended the timeframe we will have to use the simplified method on an interim basis. The SEC will suspend use of this method once detailed information on exercise terms become readily available. We then will be required to estimate the expected term of an option using historical data.
See Note 22 - Stock Options
(k) Long-lived assets
The Company relies on the guidance provided by ASC 360 (“Property, Plant & Equipment”). ASC 360 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.
In April 2008, the Company adopted FASB ASC 350-30 and ASC 275-10-50 (formerly FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142 ("SFAS 142"), “Goodwill and Other Intangible Assets.” The Company will apply ASC 350-30 and ASC 275-10-50 prospectively to intangible assets acquired subsequent to the adoption date. The adoption of these revised provisions had no impact on the Company’s Audited Financial Statements.
The Company has determined that no impairment losses need to be recognized through the fiscal year ended June 30, 2012.
(l) Income taxes
The Company provides for income taxes using the asset and liability method as required by ASC 740 (“Income Taxes”). ASC 740 recognizes the amount of federal and state taxes payable or refundable for the current year as well as deferred tax assets and liabilities for the future tax consequence of events recognized in the financial statements and income tax returns. Deferred income tax assets and liabilities are adjusted to recognize the change in tax laws or tax rates. These changes are recognized in income in the year that includes the enactment date.
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IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(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 (See Note 9). The patent license agreement has a fixed life of seventeen years and will continue to be amortized over its remaining useful life.
Long-lived assets, including patents, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
The impairment analysis for patents can be very subjective as we rely upon signed distribution, dealer or license agreements with variable cash flows to substantiate the recoverability of these long-lived assets. In our analysis we also take into account our position as a world-wide market leader in CT optical tomography; net sales of CTLM® systems of $2,591,502 since January 2003; the growing acceptance of our technology with over 25,000 scans performed world-wide; approvals or product registration in the following countries: CE Mark for the European Union, Canada, Peoples Republic of China, Argentina, Brazil and Colombia. We believe the fair value of our patent license exceeds the carrying amount of $102,529.
We have recorded accumulated amortization of $478,471 with a balance remaining of $102,529, which will be amortized over the next three years at $8,544 per quarter. We will continue to test for impairment on an annual basis or more frequently if events and circumstances change using the guidance provided in ASC 350. Examples of such events and circumstances are:
·
A significant adverse change in legal factors or in the business climate
·
An adverse action or assessment by a regulator
·
Unanticipated competition
·
Loss of key personnel
·
An expectation that all or a significant portion of a deporting unit will be sold or otherwise disposed of.
Based on our analysis, we determined that there was no impairment as of June 30, 2012.
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IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(n) Warranty Reserve
The Company established a warranty reserve effective for the fiscal year ending June 30, 2005. The table below reflects the Warranty Reserve established for the last three fiscal years. 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.
(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
The Company relies on the guidance provided by ASC 220, (“Comprehensive Income”). ASC 220 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, 2012, the Company had no items qualifying as other comprehensive income.
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IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(r) Impact of recently issued accounting standards
In May 2011, the FASB together with the International Accounting Standards Board (IASB) jointly issued ASU 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.
All other issued but not yet effective FASB issued guidances have been deemed to be not applicable hence when adopted, these guidances are not expected to have any impact on the financial position of the company.
(s) Reclassifications
Certain amounts in the prior period financial statements have been reclassified to conform with the current period presentation.
(3) OTHER INCOME
During the fiscal years ending June 30, 2012 and 2011, the Company recorded a net total of Other Income of $218,053 and $110,858 of which $92,029 and $13,010, respectively, represents extinguishment of debt. In the fiscal year ending June 30, 2012, we recorded $108,300 of income as a result of the cancellation of loan premiums that were originally recorded in prior accounting periods. When the promissory notes were converted through debt to equity exchanges, the Company was able to cancel the loan premium that was only applicable under the cash redemption feature of the note.
Of the $218,053 and $110,858 Other Income, $3,536 and $6,411, respectively, represents the monthly rent expense and fees we charged Bioscan Inc. During the fiscal year ending June 30, 2007, the Company sold its LILA technology to Bioscan Inc. for the sum of $250,001 which we received and recorded as Other Income.
(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 No. 16, wherein the shareholders of IDSI-Fl. retained the majority of the outstanding stock of Alkan Corp. after the merger. (see Note 21)
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.
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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® 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®, 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 17 systems as of June 30, 2012; however, we continue to operate as a development stage enterprise because we have yet to produce significant revenues. Should additional working capital be required, the Company will obtain such capital through the use of its Southridge Private Equity Credit Agreement and other sources of financing. 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 the status of a Development Stage Enterprise pursuant to the guidance provided by ASC 915 (“Development Stage Entities”) reporting sufficient revenues for two successive quarters such that we would not have to utilize our Southridge Private Equity Credit Agreement or alternative funding sources for capital to cover our quarterly operating expenses.
(6) INVENTORIES
Inventories consisted of the following:
We review our Inventory for parts that have become obsolete or in excess of our manufacturing requirements and our Finished Goods for valuation pursuant to our Critical Accounting Policy for Inventory. For the fiscal year ending June 30, 2012, we reclassified the net realizable value of $11,928 from Clinical Equipment to Consignment Inventory due to a CTLM® system being purchased by one of our Distributors. For the fiscal year ending June 30, 2011, we reclassified the net realizable value of $6,525 of CTLM® systems in Inventory to Clinical equipment. For the fiscal year ending June 30, 2009, we reclassified the net realizable value of $8,591 as this CTLM® system is being used as a clinical system at the University of Florida. For the fiscal year ending June
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IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(6) INVENTORIES (Continued)
30, 2008 since such finished goods are being utilized for collecting data for our FDA application, we reclassified the net realizable value of $311,252 of CTLM® systems in Inventory to Clinical equipment. For the fiscal year ending June 30, 2009 we identified $408,000 of Inventory that we deem impaired due to the lack of inventory turnover. For the fiscal year ending June 30, 2010 we identified $399,000 of Inventory that we deem impaired due to the lack of inventory turnover. We reduced Inventory Reserve by $9,000 for the fiscal year ending June 30, 2012 due to the sale of the CTLM® system to our distributor Kepter Internacional. For the fiscal year ending June 30, 2012, we identified $390,000 of Inventory that we deem impaired due to the lack of inventory turnover.
(7) PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, less accumulated depreciation:
For the fiscal year ending June 30, 2008, we reclassified the net realizable value of $311,252 of CTLM® systems in Inventory to Clinical equipment as these CTLM® systems continue to be used as clinical systems associated with the data collection for our FDA application which we planned to submit to the FDA in December 2008.
For the fiscal year ending June 30, 2009, we reclassified the net realizable value of $8,591 of CTLM® systems in Inventory to Clinical equipment as this CTLM® system is being used as a clinical system at the University of Florida.
For the fiscal year ending June 30, 2011, we reclassified the net realizable value of $6,525 of CTLM® systems in Inventory to Clinical equipment.
For the fiscal year ending June 30, 2012, we reclassified the net realizable value of $11,928 from Clinical Equipment to Consignment Inventory.
The estimated useful lives of property and equipment for purposes of computing depreciation and amortization are:
Telephone equipment, acquired under a long-term capital lease at a cost of $50,289, is included in furniture and fixtures. The CTLM® software is fully amortized.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(8) SALE/LEASE-BACK OF BUILDING
On March 31, 2008, we closed the sale of our commercial building for $4.4 million to Bright Investments LLC (“Bright”), an unaffiliated third-party and a sister company to Superfun B.V. pursuant to our September 13, 2007 sale/lease-back agreement with Superfun B.V. We received payments of $2,200,000 in the quarter ending September 30, 2007, $550,000 in the quarter ending December 31, 2007, and $1,650,027 in the quarter ending March 31, 2008. We recorded the advanced payments received as a current liability on the Balance Sheet which was carried until we received the full payment of $4.4 million. At that time we conveyed title to our property and executed the five year lease. Pursuant to existing FASB guidance at the time of the sale, we recorded the sale, removed the sold property and its related liabilities from the Balance Sheet and deferred the gain over the five year term of the operating lease. We computed the amount of gain on the sale portion of the sale/lease-back in accordance with the existing FASB guidance at the time of the sale. In this regard, we recorded a gain of $1,609,525 and recorded a deferred gain of $1,040,000, which is the present value of the lease payments over the five year term of the lease. We planned to amortize the deferred gain in proportion to the gross rental charged to expense over the lease term. The lease provided a six-month rent holiday with rent payments commencing on September 14, 2008. To account for the rent holiday, we recorded $13,935 for Rent Expense from March 14th to March 31st and accrued that amount as a deferred rent liability. From April 1st to September 14th, we recorded rent expense of $24,000 per month and accrued that amount as a deferred rent liability. The $144,000 deferred rent liability was amortized on a straight-line basis over the lease term. See “Item 2, Results of Operations, Liquidity and Capital Resources, Sale/Lease-Back.
The lease provided that either party may cancel the lease without penalty or fault upon 180 days prior notice given to the other party. On April 29, 2008, we gave six months prior written notice of termination of our lease of our Plantation, Florida facility as part of our cost cutting initiatives. On September 24, 2008, we gave notice to Bright that we vacated the Plantation, Florida premises. Because of our termination of the lease, we accelerated the deferred gain of $1,040,000 on the sale of our commercial building and accelerated amortization of the deferred rent liability of $144,000 and recorded the accrual of 45 days of rent expense in the amount of $35,506.85 for the period September 15 to October 28, 2008.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(9) INTANGIBLE ASSETS
Intangible assets consist of the following:
During June 1998, the Company signed an exclusive Patent License Agreement with its former chief executive officer. The officer was the originator of patents issued on December 2, 1997 which covers some of the technology of the CTLM®. 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 21). 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, 2012 for the patent license agreement is $34,177, with a balance to be amortized over the remaining life of the patent which is three (3) years. We will review the value of this patent and test it for impairment on an annual basis. No impairment of this intangible asset was identified for the fiscal year ending June 30, 2012.
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 ASC 350. 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 ASC 350, in which questions are asked relative to indefinite life, asset impairment and whether assumption of indefinite life is still valid.
(10) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
As of June 30, 2012, we owe $610,796 in accrued wages and $1,489,640 in accrued payroll taxes. The $1,489,640 in accrued payroll taxes represents unfunded payroll taxes, interest and penalties for the last ten quarters commencing with the quarter ending March 31, 2010. The reason we incurred the penalties and interest was due to the difficulty in raising capital to have sufficient funds to pay the taxes.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(11) CUSTOMER DEPOSITS
Customer deposits consisted of the following:
Deposits received from customers are identified and accounted for as customer deposits and are presented as both a current asset and an offsetting current liability on our balance sheet. In the event of a cancellation or termination of a customers’ order, the deposit is refunded less any fees previously agreed to.
(12) SHORT-TERM DEBT
From November 10, 2009 to June 30, 2012 we borrowed $3,726,941 in the aggregate from twelve unaffiliated third party investors.
In November 2009, we borrowed a total of $237,500 from four private investors pursuant to short-term promissory notes. These notes were due and payable in the amount of principal plus 20% premium, so that the total amount due was $285,000. In addition, we issued to the investors 70 shares of restricted common stock for each $1 lent so that a total of 16,625,000 shares of stock were issued to the investors. The aggregate fair market value of the 16,625,000 shares of stock when issued was $465,500. $30,000 principal on one of the notes was sold to OTC Global Partners in October 2012. As of the date of this report, we have repaid an aggregate principal and premium in the amount of $148,500 on these short-term notes and owe a balance of $192,100 of which $100,000 is the principal remaining from one note and $92,100 is the balance of premium due from three notes. The original due date of December 21, 2009, was first extended to February 28, 2010, with a second extension to June 15, 2010, a third extension to September 30, 2010 and a fourth extension to October 31, 2010. Further extensions of the $100,000 note were made through June 30, 2012 for 3% additional premium per month. However, as of June 30, 2012, we are accruing this 3% additional premium per month but have not yet received an extension of maturity date and are in technical default of the note. We are negotiating with the lender to extend the maturity date. In connection with all of the extensions, a total of $73,600 of additional premium was accrued as June 30, 2012.
In December 2009, we borrowed a total of $400,000 from a private investor pursuant to three short-term promissory notes. These notes were payable from March 10 through March 15, 2010 in the amount of principal plus 15% premium, so that the total amount due was $460,000. In addition, we issued to the investor 24,000,000 shares of restricted common stock as collateral. These shares are to be returned and cancelled upon payment of the notes. The original due date of March 15, 2010 was first extended to June 15, 2010, with a second extension to September 30, 2010 and a third extension to October 31, 2010. Further extensions of the notes were made through June 30, 2012 for 3% additional premium per month on each note. We have not yet received an extension of maturity date and are in technical default of the note. We are negotiating with the lender to extend the maturity date. In connection with these extensions a total of $283,400 of additional premium was accrued for the December 2009 notes as the date of this report. As of June 30, 2012, Southridge has converted $131,450 principal and $55,600 premium into 251,995,632 shares of which 20,746,666 shares of our common stock that was previously issued as collateral.
On January 8, 2010, we borrowed a total of $600,000 from a private investor pursuant to two short-term promissory notes. These notes were payable April 6, 2010 in the amount of principal plus 15% premium, so that the total amount due was $690,000. In addition, we issued to the investor 31,363,637 shares of restricted common stock as collateral. These shares are to be returned and cancelled upon payment of the notes. The original due date of April 6, 2010 was first extended to June 15, 2010, with a second extension to September 30, 2010 and
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(12) SHORT-TERM DEBT (Continued)
a third extension to October 31, 2010. Further extensions of the notes were made through July 31, 2011 for 3% additional premium per month on each note. In January 2011, Southridge purchased a total of $600,000 in principal value of promissory notes from the private investor. As of the date of this report, Southridge has converted $600,000 principal and $340,099 premium into 384,456,103 shares of our common stock of which 31,056,108 shares were collateral shares and 353,399,995 new shares were issued pursuant to Rule 144. Although we are in technical default of these two notes, the holder, Southridge has elected to convert these notes into common shares. In connection with these prior extensions through June 30, 2012 and the accrual of the additional premiums through May 31, 2012, a total of $255,647 of additional premium was accrued for the January 2010 notes as of June 30, 2012.
On February 25, 2010, we borrowed $350,000 from a private investor pursuant to a short-term promissory note. We issued to the investor 35 shares of Series L Convertible Preferred Stock as collateral. This note had a maturity date of April 30, 2010; however, the investor gave us notice of conversion to the collateral shares on March 31, 2010. The Note was cancelled upon this conversion. The 35 shares of Series L Convertible Preferred Stock accrue dividends at an annual rate of 9% and are convertible into an aggregate of 16,587,690 shares of common stock (473,934 shares of common stock for each share of preferred stock). Pursuant to the Certificate of Designation, Rights and Preferences for the Series L Convertible Preferred Stock, we are obligated to reduce the conversion price and reserve additional shares for conversion if we sold or issued common shares below the price of $.0211 per share (the market price on the date of issuance of the Preferred Stock). In October 2010, we obtained a waiver from the private investor holding the 35 shares of Series L Convertible Preferred Stock in which the investor agreed to convert no more than the 16,587,690 common shares currently reserved as we do not have sufficient authorized common shares to reserve for further conversions pursuant to the Certificate of Designation, Rights and Preferences. The investor agreed to a conversion floor price of $.015, which required us to reserve an additional 6,745,643 common shares.
On January 6, 2011, the investor converted 15 shares of the Series L Convertible Preferred Stock into 10,000,000 shares of common stock. As of the date of this report, the investor holds 20 shares of the Series L Convertible Preferred Stock.
On December 13, 2010, we borrowed a total of $60,000 from a private investor pursuant to a short-term promissory note. The note is payable on or before January 31, 2011. As consideration for this loan, we were obligated to pay back his principal, $20,400 in premium and issue 3,000,000 restricted shares of common stock upon the approval by our shareholders of an increase in authorized common stock at our annual meeting to be held on July 12, 2011. On September 9, 2011, we issued the 3,000,000 common shares pursuant to Rule 144. We received an extension of maturity date to June 30, 2012 for this note.
In November and December 2010, we received a total of $145,000 from Southridge pursuant to three short-term promissory notes. All three notes provide for a redemption premium of 15% of the principal amount on or before March 31, 2011. Interest will accrue at 8% per annum until maturity. Southridge may elect at an Event of Default to convert any part or all of the $145,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In January 2011, we received a total of $157,000 from Southridge pursuant to three short-term promissory notes. All three notes provide for a redemption premium of 15% of the principal amount on or before May 31, 2011. Interest will accrue at 8% per annum until maturity. Southridge may elect at an Event of Default to convert any part or all of the $157,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(12) SHORT-TERM DEBT (Continued)
In February 2011, we received a total of $115,000 from Southridge pursuant to two short-term promissory notes. Both notes provide for a redemption premium of 15% of the principal amount on or before May 31, 2011. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $115,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In March 2011, we received $60,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before May 31, 2011. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $60,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In April 2011, we received $165,000 from Southridge pursuant to two short-term promissory notes. The notes provide for a redemption premium of 15% of the principal amount on or before July 31, 2011. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $165,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In May 2011, we received $80,000 from Southridge pursuant to two short-term promissory notes. The notes provide for a redemption premium of 15% of the principal amount on or before July 31, 2011. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $80,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In July 2011, we received $150,000 from Southridge pursuant to a short-term promissory note. The note provided for a redemption premium of 15% of the principal amount on or before December 31, 2011. We received an extension of maturity date to February 29, 2012 for these notes. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $150,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In August 2011, we received $82,500 from Southridge pursuant to two short-term promissory notes of which the principal on these notes was $100,000 and $7,500, respectively. The $100,000 note provided for a $25,000 original issue discount and both notes provided for a redemption premium of 15% of the principal amount on or before December 31, 2011. We received an extension of maturity date to February 23, 2013 for these notes. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $107,500 principal amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. The $7,500 note has been paid in full through the conversion to common stock pursuant to Rule 144.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(12) SHORT-TERM DEBT (Continued)
In August 2011, we received $50,000 from OTC Global Partners, LLC pursuant to a short-term promissory note. The note provided for a redemption premium of 15% of the principal amount on or before March 1, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. OTC Global Partners, LLC may elect at an Event of Default to convert any part or all of the $50,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.014 or (b) 65% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In September 2011, we received $133,000 from Southridge pursuant to two short-term promissory notes of which the principal on these notes was $100,000 and $100,000, respectively. One of the $100,000 notes provided for a $33,000 original issue discount and the other $100,000 note provided a $34,000 original issue discount. The notes provided for a redemption premium of 15% of the principal amount on or before December 31, 2011. We received an extension of maturity date to December 31, 2012 for these notes. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $200,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.0075 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. The $100,000 note has been paid in full through the conversion to common stock pursuant to Rule 144.
In October 2011, we received $67,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $100,000. The note provides for a $33,000 original issue discount. The note provided for a redemption premium of 15% of the principal amount on or before January 12, 2012. We received an extension of maturity date to December 31, 2012 for this note. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $100,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.0075 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.
In October 2011, we received $67,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $100,000. The note provides for a $33,000 original issue discount. The note provided for a redemption premium of 15% of the principal amount on or before January 26, 2012. We received an extension of maturity date to December 31, 2012 for this note. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $100,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.005 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.
In October 2011, we received $78,500 from Asher Enterprises pursuant to a short-term promissory note due on or before July 26, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Asher Enterprises may elect at an Event of Default to convert any part or all of the $78,500 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 58% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In November 2011, we received $20,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $20,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 62% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
On November 21, 2011, Southridge sold their May 12, 2011 $60,000 short-term promissory note to Panache Capital, LLC (“Panache”). The terms of the original note remain the
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(12) SHORT-TERM DEBT (Continued)
same except that the maturity date is now November 21, 2012 and interest will accrue at 10% per annum until maturity above and beyond the premium.
In November 2011, we received $40,000 from Panache pursuant to a short-term promissory note. The note provides a maturity date of November 21, 2012. Interest will accrue at 10% per annum until maturity. Panache may elect at an Event of Default to convert any part or all of the $40,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 62% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In November 2011, we received $53,000 from Asher Enterprises pursuant to a short-term promissory note due on or before September 5, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Asher Enterprises may elect at an Event of Default to convert any part or all of the $53,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 58% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice. This note has been paid in full through the conversion to common stock pursuant to Rule 144.
In December 2011, we received $17,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 18, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $17,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 62% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In December 2011, we received $12,000 from an unaffiliated third party investor pursuant to a short-term promissory note. The note provided for a redemption premium of 15% of the principal amount on or before March 8, 2012. Interest will accrue at 10% per annum until maturity above and beyond the premium. On January 6, 2012, we amended a promissory note in the principal amount of $12,000 dated December 9, 2011 held by an unaffiliated third-party investor. The note provided for a redemption premium of 15% of the principal amount on or before March 8, 2012. Interest will accrue at 10% per annum until maturity above and beyond the premium. The amendment provided for the issuance of three (3) restricted shares of Series P Preferred Stock having a stated value of $5,000 per share. These shares, having a total value of $15,000, will be used as collateral for the note held by the investor. We received an extension of maturity to June 4, 2012 for this note. Thereafter, a late fee premium of 1% per month will be due if unpaid. We have not yet received an extension of maturity date and are in technical default of the note. We are negotiating with the lender to extend the maturity date.
In December 2011, we borrowed a total of $21,604 from a private investor pursuant to two short-term promissory notes. The notes provided for a 2% premium per month. One of the notes was payable on or before December 16, 2011 and the other on or before January 6, 2012. We received an extension of maturity date to August 31, 2012 for these notes for 3% additional premium per month on each note.
In January 2012, we received a total of $175,200 from an unaffiliated third party investor pursuant to five short-term promissory notes with a maturity date ranging from March 5, 2012 to March 20, 2012. The notes provided for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 10% per annum until maturity above and beyond the premium. We issued a total of 38 Series P Preferred Stock to the investor as collateral with a total stated value of $190,000. We received an extension of maturity to June 4, 2012 for these notes. Thereafter, a late fee premium of 1% per month will be due if unpaid. We have not yet received an extension of maturity date and are in technical default of the note. We are negotiating with the lender to extend the maturity date.
In February 2012, we received a total of $42,000 from an unaffiliated third party investor pursuant to two short-term promissory notes with a maturity date ranging from April 13, 2012 to April 30, 2012. The notes provided for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 10% per annum until
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(12) SHORT-TERM DEBT (Continued)
maturity above and beyond the premium. We issued a total of 9 Series P Preferred Stock to the investor as collateral with a total stated value of $45,000. We received an extension of maturity to June 4, 2012 for these notes. Thereafter, a late fee premium of 1% per month will be due if unpaid. We have not yet received an extension of maturity date and are in technical default of the note. We are negotiating with the lender to extend the maturity date.
On February 23, 2012, Southridge sold their $100,000 short-term promissory note to Panache Capital, LLC (“Panache”) of which a balance of $70,000 principal was remaining after Southridge converted $30,000 principal in a debt to equity conversion on February 17, 2012. The terms of the original note remain the same except that the maturity date is now November 21, 2012 and interest will accrue at 10% per annum until maturity above and beyond the premium.
In February 2012, we received $25,000 from Panache pursuant to a short-term promissory note. The note provides a maturity date of February 28, 2013. Interest will accrue at 10% per annum until maturity. Panache may elect at an Event of Default to convert any part or all of the $25,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 55% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In March 2012, we received $30,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before March 18, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 62% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In April 2012, we received $11,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2012. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $11,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In April 2012, we received $2,500 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before April 25, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $2,500 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In May 2012, we received a total of $25,000 from an unaffiliated third party investor pursuant to a short-term promissory note with a maturity date of August 2, 2012. The note provides for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 10% per annum until maturity above and beyond the premium. We issued a total of 5 Series P Preferred Stock to the investor as collateral with a total stated value of $25,000. We have not yet received an extension of maturity date and are in technical default of the note. We are negotiating with the lender to extend the maturity date.
In May 2012, we received $8,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before May 14, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $8,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(12) SHORT-TERM DEBT (Continued)
In May 2012, we received $13,000 from Linda Grable pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before May 21, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Ms. Grable may elect at an Event of Default to convert any part or all of the $13,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In May 2012, we received $32,000 from a private investor pursuant to two short-term promissory notes with a maturity date ranging from May 17, 2013 to May 20, 2013. The notes provides for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $32,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In June 2012, we received $6,672 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before June 17, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $6,672 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In June 2012, we received $14,000 from a private investor pursuant to two short-term promissory notes with a maturity date ranging from June 6, 2013 to June 20, 2013. The notes provides for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $14,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In May 2012, we received $8,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before May 14, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $8,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
On May 11, 2011, Southridge executed a debt to equity conversion of a $80,000 short-term promissory note dated November 11, 2010 plus accrued interest of $3,174. We issued Southridge 11,089,826 common shares pursuant to Rule 144 based on an agreed exchange price of $0.0075 per share. We canceled the $12,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On July 13, 2011, Southridge executed a debt to equity conversion of a $14,000 short-term promissory note dated December 16, 2010 plus accrued interest of $641. We issued Southridge 1,464,132 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We canceled the $2,100 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On July 13, 2011, Southridge executed a debt to equity conversion of a $51,000 short-term promissory note dated December 22, 2010 plus accrued interest of $2,269. We issued Southridge 5,326,915 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We canceled the $7,650 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On July 21, 2011, Southridge executed a debt to equity conversion of a $55,000 short-term promissory note dated January 13, 2011 plus accrued interest of $2,278. We issued Southridge 5,727,836 common shares pursuant to Rule
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(12) SHORT-TERM DEBT (Continued)
144 based on an agreed exchange price of $0.01 per share. We canceled the $8,250 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On July 21, 2011, Southridge executed a debt to equity conversion of a $22,000 short-term promissory note dated January 19, 2011 plus accrued interest of $882. We issued Southridge 2,288,241 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We canceled the $3,300 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On August 24, 2011, Southridge executed a debt to equity conversion of a $80,000 short-term promissory note dated January 28, 2011 plus accrued interest of $3,647. We issued Southridge 8,364,712 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share. We canceled the $12,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On August 24, 2011, Southridge executed a partial debt to equity conversion of a $80,000 short-term promissory note dated February 7, 2011 in which they converted $20,000 principal plus accrued interest of $868. We issued Southridge 2,086,795 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.
On September 27, 2011, Southridge executed a final debt to equity conversion of a $80,000 short-term promissory note dated February 7, 2011 in which they converted the remaining $60,000 principal plus accrued interest of $868. We issued Southridge 8,399,781 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share. We canceled the $12,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On September 27, 2011, Southridge executed a debt to equity conversion of a $35,000 short-term promissory note dated February 15, 2011 plus accrued interest of $1,688. We issued Southridge 4,891,689 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share. We canceled the $5,250 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On September 27, 2011, Southridge executed a debt to equity conversion of a $60,000 short-term promissory note dated March 31, 2011 plus accrued interest of $2,315. We issued Southridge 8,308,603 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0075 per share. We canceled the $9,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On September 28, 2011, we amended the terms of all debt agreements with Southridge Partners II, LP and agreed to amend the conversion terms of the Notes such that the principal portion of the Notes, plus accrued interest, shall be convertible into shares of our common stock at a conversion price per share equal to the lesser of (a) $0.0075 or (b) ninety percent (90%) of the average of the three (3) lowest closing bid prices during the ten (10) trading days immediately prior to the date of the conversion notice.
On October 13, 2011, Southridge executed a debt to equity conversion of a $100,000 short-term promissory note dated April 14, 2011 plus accrued interest of $3,989. We issued Southridge 20,797,808 common shares pursuant to Rule 144 based on an agreed conversion price of $0.005 per share. We canceled the $15,000 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On November 3, 2011, Southridge executed a debt to equity conversion of a $65,000 short-term promissory note dated April 26, 2011 plus accrued interest of $2,721. We issued Southridge 13,544,219 common shares pursuant to Rule 144 based on an agreed conversion price of $0.005 per share. We canceled the $9,750 in premium associated with this note because the note was fully converted into common stock and was not redeemed for cash.
On November 16, 2011, Southridge executed a debt to equity conversion of a $20,000 short-term promissory note dated May 6, 2011 plus accrued interest of $850. We issued Southridge 6,725,939 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0031 per share. We canceled the $3,000 in premium associated with
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(12) SHORT-TERM DEBT (Continued)
this note because the note was fully converted into common stock and was not redeemed for cash.
On December 15, 2011, Panache executed a partial debt to equity conversion of a $60,000 short-term promissory note dated May 12, 2011 in which they converted $14,415 principal. We issued Panache 5,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.002883 per share.
On January 3, 2012, Panache executed a partial debt to equity conversion of a $60,000 short-term promissory note dated May 12, 2011 in which they converted $12,896 principal. We issued Panache 8,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.001612 per share.
On January 10, 2012, Panache executed a partial debt to equity conversion of a $60,000 short-term promissory note dated May 12, 2011 in which they converted $12,896 principal. We issued Panache 8,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.001612 per share.
On January 18, 2012, Panache executed a partial debt to equity conversion of a $60,000 short-term promissory note dated May 12, 2011 in which they converted $12,710 principal. We issued Panache 10,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.001271 per share.
On January 27, 2012, Panache executed a debt to equity conversion of a $60,000 short-term promissory note dated May 12, 2011 in which they converted the final $7,083 in principal. We issued Panache 5,712,097 common shares pursuant to Rule 144 based on an agreed conversion price of $0.001224 per share. We still owe Panache $3,139 in accrued interest associated with this note.
On January 23, 2012, Southridge executed a partial debt to equity conversion of a $150,000 short-term promissory note dated July 27, 2011 in which they converted $85,000 principal. We issued Southridge 66,390,690 common shares with a restrictive legend based on an agreed conversion price of $0.0013 per share. The restrictive legend was removed on February 2, 2012 pursuant to Rule 144.
On January 27, 2012, Southridge executed a partial debt to equity conversion of a $150,000 short-term promissory note dated July 27, 2011 in which they converted $30,000 principal. We issued Southridge 24,193,548 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0012 per share.
On February 7, 2012, Southridge executed a partial debt to equity conversion of a $150,000 short-term promissory note dated July 27, 2011 in which they converted $18,500 principal and $6,411 interest. We issued Southridge 24,277,321 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00103 per share.
On February 10, 2012, Southridge executed a partial debt to equity conversion of a $150,000 short-term promissory note dated July 27, 2011 in which they converted $16,500 principal and $99 interest. We issued Southridge 17,272,248 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00096 per share.
On February 17, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $30,000 principal and $3,858 interest. We issued Southridge 34,237,571 common shares on February 27, 2012 pursuant to Rule 144 based on an agreed conversion price of $0.00099 per share.
On February 23, 2012, Southridge executed a debt to equity conversion of a $7,500 short-term promissory note dated August 23, 2011 in which they converted $7,500 principal and $289 interest. We issued Southridge 7,545,592 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00103 per share.
On February 28, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated September 12, 2012 in which they converted $51,000
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(12) SHORT-TERM DEBT (Continued)
principal and $3,595 interest. We issued Southridge 60,728,054 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.0009 per share.
On March 5, 2012, OTC Global Partners executed a debt to equity conversion of a $50,000 short-term promissory note dated August 30, 2011 in which they converted $50,000 principal and $2,027 interest. We issued OTC Global Partners 72,765,035 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000715 per share.
On April 13, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated September 12, 2012 in which they converted $49,000 principal and $1,096 interest. We issued Southridge 123,693,557 restricted common shares on April 24, 2012 pursuant to Rule 144 based on an agreed conversion price of $0.00041 per share.
On April 13, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated September 28, 2012 in which they converted $4,000 principal and $4,340 interest. We issued Southridge 20,591,916 restricted common shares on April 24, 2012 pursuant to Rule 144 based on an agreed conversion price of $0.00041 per share.
On May 1, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $9,765 principal. We issued Panache 21,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000465 per share.
On May 1, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $12,000 principal. We issued Asher 26,086,957 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00046 per share.
On May 2, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $15,000 principal. We issued Asher 44,117,647 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00034 per share.
On May 10, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $13,000 principal. We issued Asher 68,421,053 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00019 per share.
On May 10, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $7,440 principal. We issued Panache 30,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000248 per share.
On May 15, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $9,330 principal. We issued Panache 50,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001866 per share.
On May 21, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $18,500 principal. We issued Asher 102,777,778 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00018 per share.
On May 22, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $9,330 principal. We issued Panache 50,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000186 per share.
On May 29, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $12,000 principal. We issued Asher 66,666,667 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00018 per share.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(12) SHORT-TERM DEBT (Continued)
On May 30, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $9,330 principal. We issued Panache 50,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000186 per share.
On June 4, 2012, Asher executed a partial debt to equity conversion of a $78,500 short-term promissory note dated October 24, 2011 in which they converted $8,000 principal and $3,140 in interest. We issued Asher 85,692,308 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00013 per share.
On June 5, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $9,920 principal. We issued Panache 80,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000124 per share.
On June 8, 2012, Asher executed a partial debt to equity conversion of a $53,000 short-term promissory note dated November 29, 2011 in which they converted $12,000 principal. We issued Asher 85,692,308 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00014 per share.
On June 12, 2012, Asher executed a partial debt to equity conversion of a $53,000 short-term promissory note dated November 29, 2011 in which they converted $14,000 principal. We issued Asher 100,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00014 per share.
On June 15, 2012, Asher executed a partial debt to equity conversion of a $53,000 short-term promissory note dated November 29, 2011 in which they converted $13,000 principal. We issued Asher 68,421,053 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00019 per share.
On June 20, 2012, Asher executed a partial debt to equity conversion of a $53,000 short-term promissory note dated November 29, 2011 in which they converted $14,000 principal and $2,120 in interest. We issued Asher 94,823,529 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00017 per share.
From January 2011 to April 2011, Southridge acquired promissory notes from a private investor totaling $800,000 in principal and 55,363,907 shares of common stock which were issued as collateral. Southridge proposed that we amend the conversion terms of the notes permitting the holder to convert the notes and we agreed to the amendment. From January 12, 2011 to May 18, 2012, Southridge issued notices of conversion to settle $700,000 in principal plus accrued premiums totaling $395,699 into 405,202,769 shares of our common stock, of which 51,802,774 shares were collateral shares and 353,399,995 new shares were issued pursuant to Rule 144.
As of June 30, 2012, we owe a total of $1,813,762 of short term debt of which $1,234,411 is principal, $541,452 is accrued premium and $37,899 is accrued interest. We have repaid aggregate principal and premium in the amount of $173,376 on these short-term notes and a total of $1,830,035 principal, $395,699 in premium, and $46,178 in interest has been converted into 1,232,252,551 shares of our common stock of which 51,802,774 shares were collateral shares and 1,180,449,777 new shares were issued pursuant to Rule 144. Out of the original 55,363,637 shares of common stock held as collateral, a balance of 3,561,133 shares remains on the $300,000 principal of the remaining notes.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(12) SHORT-TERM DEBT (Continued)
There can be no assurances that we will be able to pay our short-term loans when due. If we default on all of the notes due to the lack of new funding, the holders could exercise their right to sell the remaining 3,561,133 collateral shares and could take legal action to collect the amount due which could materially adversely affect IDSI and the value of our stock.
(13) LONG-TERM DEBT
On February 23, 2011, we entered into a Convertible Promissory Note Agreement with an unaffiliated third party, JMJ Financial (the “Lender” or “JMJ”), relating to a private placement of a total of up to $1,800,000 in principal amount of a Convertible Promissory Note (the “Note”) providing for advances of a gross amount of $1,600,000 in seven tranches. Pursuant to the terms of a Registration Rights Agreement (the “Rights Agreement”) dated February 23, 2011, between the Company and JMJ, we are required to file within 10 days from the effective date of an increase of authorized shares approved by our shareholders, an S-1 Registration Statement (the “Registration Statement”) covering 130,000,000 shares of Company common stock to be reserved for conversion of the Note. Although our shareholders on July 12, 2011, voted to increase our authorized shares to 2,000,000,000, we have not filed the registration statement as required by the Rights Agreement.
The Note provides for funding in seven tranches as stipulated in the Funding Schedule attached. The first tranche of $300,000 was closed on February 24, 2011, and we received $258,000 after deductions of $30,000 for a 10% Finder’s Fee and $12,000 for an Origination Fee. The second tranche of $100,000 closed on May 20, 2011, and we received $93,000 after deduction of $7,000 for a 7% Finder’s Fee. A partial closing on the third tranche of $35,000 closed on October 7, 2011 and we received $32,250 after deduction of $2,750 for a 7% Finder’s Fee. A partial closing on the third tranche of $25,000 closed on February 8, 2012 and we received $25,000. In connection with this partial third tranche we will pay a 7% Finder’s Fee, which is $1,750. A partial closing on the third tranche of $25,000 closed on February 29, 2012 and we received $25,000. In connection with this partial third tranche we will pay a 7% Finder’s Fee, which is $1,750. A final closing on the third tranche of $15,000 closed on April 4, 2012 and we received $15,000. In connection with this final third tranche we will pay a 7% Finder’s Fee, which is $1,050. The remaining four tranches are to be funded based on achievement of milestones relating to the Registration Statement, with the final tranche of $300,000 being available 150 days after effectiveness of the Registration Statement, which must be effective 120 days after the date of the Agreement. For the remaining four tranches, we are obligated to pay a Finder’s Fee equal to 7% in cash at each closing date. We may cancel the unfunded portion of the Agreement at a fee of 20% of the unfunded amount. As of the date of this report, $1,300,000 in principal amount remains unfunded and if we choose to cancel we will have to pay JMJ $260,000 to terminate the agreement.
The Note, after the seven tranches are drawn, would generate net proceeds of $1,467,000 after payment of the Origination Fee and a 7% Finder’s Fee. JMJ has the option to provide an additional $1,600,000 of funding on substantially the same terms as the first Agreement; however, we have the right to cancel, without penalty, the Note Agreement within five days of JMJ’s execution. Once executed and accepted by both parties and five days has passed, cancellation of unfunded payments is permitted at a fee of 20% of the unfunded amount. Cancellation of funded portions is not permitted.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(13) LONG-TERM DEBT (Continued)
The funding schedule of the seven tranches is as follows:
§
$300,000 paid to Borrower within 2 business days of execution and closing of the agreement.
§
$100,000 paid to Borrower within 5 business days of filing of Definitive Proxy to increase authorized shares to 2,000,000,000 or more.
§
$100,000 paid to Borrower within 5 business days of effective increase in authorized shares to 2,000,000,000 or more.
§
$100,000 paid to Borrower within 5 business days of filing of registration statement, and that registration statement must be filed no later than 10 days from the effective increase of authorized shares.
§
$400,000 paid to Borrower within 5 business days of notice of effective registration statement, and that registration statement must be effective no later than 120 days from the execution of the agreement.
§
$300,000 paid to Borrower within 90 business days of notice of effective registration statement, and that registration statement must be effective no later than 120 days from the execution of the agreement.
§
$300,000 paid to Borrower within 150 business days of notice of effective registration statement, and that registration statement must be effective no later than 120 days from the execution of the agreement.
The conditions to funding each payment are as follows:
§
At the time of each payment interval, the Conversion Price calculation on Borrower’s common stock must yield a Conversion Price equal to or greater than $0.015 per share (based on the Conversion Price calculation, regardless of whether a conversion is actually completed or not).
§
At the time of each payment interval, the total dollar trading volume of Borrower’s common stock for the previous 23 trading days must be equal to or greater than $1,000,000. The total dollar volume will be calculated by removing the three highest dollar volume days and summing the dollar volume for the remaining 20 trading days.
§
At the time of each payment interval, there shall not exist an event of default as described within any of the agreements between Borrower and Holder.
Prior to the maturity date of February 2, 2014, JMJ may convert both principal and interest into our common stock at 75% of the average of the three lowest closing prices in the 20 days previous to the conversion. We have the right to enforce a conversion floor of $0.015 per share; however, if we receive a conversion notice in which the Conversion Price is less than $0.015 per share, JMJ will incur a conversion loss [(Conversion Loss = $0.015 - Conversion Price) x number of shares being converted] which we must make whole by either of the following options: pay the conversion loss in cash or add the conversion loss to the balance of principal due. Prepayment of the Note is not permitted.
The Note has a 9% one-time interest charge on the principal sum. No interest or principal payments are required until the Maturity Date, but both principal and interest may be included in conversions prior to the maturity date.
On August 24, 2011, JMJ executed a debt to equity conversion of $36,015 in principal of the first tranche of $300,000 which we closed on February 24, 2011. We issued JMJ 3,500,000 common shares pursuant to Rule 144 based on a conversion price of $0.0103 per share.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(13) LONG-TERM DEBT (Continued)
On August 31, 2011, JMJ executed a debt to equity conversion of $41,160 in principal of the first tranche of $300,000 which we closed on February 24, 2011. We issued JMJ 4,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.01029 per share.
On September 15, 2011, JMJ executed a debt to equity conversion of $37,597 in principal of the first tranche of $300,000 which we closed on February 24, 2011. We issued JMJ 4,100,000 common shares pursuant to Rule 144 based on a conversion price of $0.00917 per share.
On September 28, 2011, JMJ executed a debt to equity conversion of $40,950 in principal of the first tranche of $300,000 which we closed on February 24, 2011. We issued JMJ 5,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00819 per share.
On October 12, 2011, JMJ executed a debt to equity conversion of $36,750 in principal of the first tranche of $300,000 which we closed on February 24, 2011. We issued JMJ 5,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00735 per share.
On December 15, 2011, JMJ executed a debt to equity conversion of $63,840 in principal of the first tranche of $300,000 which we closed on February 24, 2011. We issued JMJ 20,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.003192 per share.
On January 24, 2012, JMJ executed a debt to equity conversion totaling $44,100 of which $43,688 was principal and $412 was consideration for the first tranche of $300,000, which we closed on February 24, 2011. We issued JMJ 30,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00147 per share.
On February 9, 2012, JMJ executed a debt to equity conversion totaling $44,100 of which $37,088 was consideration and $7,012 was interest for the first tranche of $300,000, which we closed on February 24, 2011. We issued JMJ 35,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00126 per share.
On February 29, 2012, JMJ executed a debt to equity conversion totaling $39,550 of which $19,988 was interest for the first tranche of $300,000, which we closed on February 24, 2011 and $19,562 was principal for the second tranche of $100,000, which we closed on May 20, 2011. We issued JMJ 50,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.000791 per share.
On April 24, 2012, JMJ executed a debt to equity conversion of $29,120 in principal of the second tranche of $100,000 which we closed on May 20, 2012. We issued JMJ 52,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00056 per share.
On May 9, 2012, JMJ executed a debt to equity conversion of $28,980 in principal of the second tranche of $100,000 which we closed on May 20, 2012. We issued JMJ 69,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00042 per share.
On May 14, 2012, JMJ executed a debt to equity conversion of $4,389 in principal of the second tranche of $100,000 which we closed on May 20, 2011. We issued JMJ 19,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.000231 per share.
On May 24, 2012, JMJ executed a debt to equity conversion of $22,260 in principal of the second tranche of $100,000 which we closed on May 20, 2011. We issued JMJ 106,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00021 per share.
On May 31, 2012, JMJ executed a debt to equity conversion of $2,940 in principal of the second tranche of $100,000 which we closed on May 20, 2011. We issued JMJ 14,000,000
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(13) LONG-TERM DEBT (Continued)
common shares pursuant to Rule 144 based on a conversion price of $0.00021 per share.
On June 6, 2012, JMJ executed a debt to equity conversion totaling $19,551 of which $14,249 was interest for the second tranche of $100,000, which we closed on May 20, 2011 and $5,302 was principal for the third tranche of $35,000, which we closed on October 7, 2011. We issued JMJ 105,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.000186 per share.
As of the June 30, 2012, we owe JMJ a total of $116,198 in long-term debt of which $79,698 is principal, $27,500 is consideration on the principal and $9,000 is interest.
(14) 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 19). 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 were more favorable to the Company than the terms of the prior Third Private Equity Credit Agreement. The new, more favorable terms were: (i) The put option price was 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 was 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 was $15,000,000, (iv) the minimum amount the Company was required to draw through the end of the commitment period was $1,000,000, while the prior Third Private Equity Credit Agreement minimum amount was $2,500,000, (v) the minimum stock price requirement was controlled by the Company as it had the option of setting a floor price for each put transaction (the
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(14) EQUITY LINE OF CREDIT (Continued)
previous minimum stock price in the Third Private Equity Credit Agreement was fixed at $.10), (vi) there were no fees associated with the Fourth Private Equity Credit Agreement; the prior private equity agreements required the payment of a 5% consulting fee, which was subsequently lowered to 4% by mutual agreement in September 2001, and (vii) the elimination of the requirement of a minimum average daily trading volume in dollars. The previous trading volume requirement in the Third Private Equity Credit Agreement was $20,000.
On March 21, 2006, the Company and Charlton entered into a new “Fifth Private Equity Credit Agreement,” which replaced the Company’s prior Fourth Private Equity Credit Agreement upon the April 25, 2006, effectiveness of our S-1 Registration Statement filed on March 23, 2006 to register shares underlying the Fifth Private Equity Credit Agreement. The terms of the Fifth Private Equity Credit Agreement are similar to the terms of the prior Fourth Private Equity Credit Agreement. The new credit line’s material 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 (the “Valuation Period”), (ii) the commitment period is two years from the effective date of a registration statement covering the Fifth Private Equity Credit Agreement shares, (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, (v) the minimum stock price, also known as the floor price is computed as follows: In the event that, during a Valuation Period, the Bid Price on any Trading Day falls more than 18% below the closing trade price on the trading day immediately prior to the date of the Company’s Put Notice (a “Low Bid Price”), for each such Trading Day the parties shall have no right and shall be under no obligation to purchase and sell one tenth of the Investment Amount specified in the Put Notice, and the Investment Amount shall accordingly be deemed reduced by such amount. In the event that during a Valuation Period there exists a Low Bid Price for any three Trading Days-not necessarily consecutive-then the balance of each party’s right and obligation to purchase and sell the Investment Amount under such Put Notice shall terminate on such third Trading Day (“Termination Day”), and the Investment Amount shall be adjusted to include only one-tenth of the initial Investment Amount for each Trading Day during the Valuation Period prior to the Termination Day that the Bid Price equals or exceeds the Low Bid Price and (vi) there are no fees associated with the Fifth Private Equity Credit Agreement. The conditions to the Company’s ability to draw under this private equity line, as described above, may materially limit the draws available to the Company.
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 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.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(14) EQUITY LINE OF CREDIT (Continued)
During the year ended June 30, 2006, an additional $6,844,171 of common stock was sold under the terms of the equity credit line agreements, and the Company issued a total of 47,776,064 shares of common stock. The Company recorded a total of $565,372 of deemed interest expense as a result of the 7% discount off the market price under the Fourth Private Equity Credit Agreement and Fifth Private Equity Credit Agreement.
During the year ended June 30, 2007, an additional $4,192,717 of common stock was sold under the terms of the Fifth Private Equity Credit Agreement and the Company issued a total of 63,861,405 shares of common stock. The Company recorded a total of $367,698 of deemed interest expense as a result of the 7% discount off the market price under the Fifth Private Equity Credit Agreement.
On April 21, 2008, we and Charlton entered into a new “Sixth Private Equity Credit Agreement” which has replaced our prior Fifth Private Equity Credit Agreement. The terms of the Sixth Private Equity Credit Agreement are similar to the terms of the prior Fifth Private Equity Credit Agreement. This new credit line’s 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 (the “Valuation Period”), (ii) the commitment period is three years from the effective date of a registration statement covering the Sixth Private Equity Credit Agreement shares, (iii) the maximum commitment is $15,000,000, (iv) There is no minimum commitment amount, (v) the minimum stock price, also known as the floor price is computed as follows: In the event that, during a Valuation Period, the Bid Price on any Trading Day falls more than 20% below the closing trade price on the trading day immediately prior to the date of the Company’s Put Notice (a “Low Bid Price”), for each such Trading Day the parties shall have no right and shall be under no obligation to purchase and sell one tenth of the Investment Amount specified in the Put Notice, and the Investment Amount shall accordingly be deemed reduced by such amount. In the event that during a Valuation Period there exists a Low Bid Price for any three Trading Days-not necessarily consecutive-then the balance of each party’s right and obligation to purchase and sell the Investment Amount under such Put Notice shall terminate on such third Trading Day (“Termination Day”), and the Investment Amount shall be adjusted to include only one-tenth of the initial Investment Amount for each Trading Day during the Valuation Period prior to the Termination Day that the Bid Price equals or exceeds the Low Bid Price and (vi) there are no fees associated with the Sixth Private Equity Credit Agreement. The conditions to our ability to draw under this private equity line, as described above, may materially limit the draws available to us.
During the year ended June 30, 2008, an additional $275,000 of common stock was sold under the terms of the Fifth Private Equity Credit Agreement and the Company issued a total of 7,726,647 shares of common stock. The Company recorded a total of $23,782 of deemed interest expense as a result of the 7% discount off the market price under the Fifth Private Equity Credit Agreement.
During the year ended June 30, 2008, an additional $215,000 of common stock was sold under the terms of the Sixth Private Equity Credit Agreement and the Company issued a total of 6,252,783 shares of common stock. The Company recorded a total of $16,665 of deemed interest expense as a result of the 7% discount off the market price under the Sixth Private Equity Credit Agreement.
During the year ended June 30, 2009, an additional $1,530,173 of common stock was sold under the terms of the Sixth Private Equity Credit Agreement and the Company issued a total of 158,747,217 shares of common stock. The Company recorded a total of $144,713 of deemed interest expense as a result of the 7% discount off the market price under the Sixth Private Equity Credit Agreement.
During the year ended June 30, 2010, an additional $297,219 of common stock was sold under the terms of the Sixth Private Equity Credit Agreement and the Company issued a total of 62,000,000 shares of common stock. The Company recorded a total of $24,792 of deemed interest expense as a result of the 7% discount off the market price under the Sixth Private Equity Credit Agreement.
On November 23, 2009, we and Southridge entered into a new “Southridge Private Equity Credit Agreement” which has replaced our prior Sixth Private Equity Credit Agreement with Charlton. On January 7, 2010, we and Southridge amended the terms of the “Southridge Private Equity Credit Agreement” and revised the language to clarify that Southridge is irrevocably bound to accept our put notices subject to compliance with the explicit conditions of the Agreement.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(14) EQUITY LINE OF CREDIT (Continued)
The terms of the Southridge Private Equity Credit Agreement are similar to the terms of the prior Sixth Private Equity Credit Agreement with Charlton. This new credit line’s 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 (the “Valuation Period”), (ii) the commitment period is three years from the effective date of a registration statement covering the Southridge Private Equity Credit Agreement shares, (iii) the maximum commitment is $15,000,000, (iv) There is no minimum commitment amount, and (v) there are no fees associated with the Southridge Private Equity Credit Agreement. The conditions to our ability to draw under this private equity line, as described above, may materially limit the draws available to us.
We are obligated to prepare promptly, and file with the SEC within sixty (60) days of the execution of the Southridge Private Equity Credit Agreement, a Registration Statement with respect to not less than 100,000,000 of Registrable Securities, and, thereafter, use all diligent efforts to cause the Registration Statement relating to the Registrable Securities to become effective the earlier of (a) five (5) business days after notice from the Securities and Exchange Commission that the Registration Statement may be declared effective, or (b) one hundred eighty (180) days after the Subscription Date, and keep the Registration Statement effective at all times until the earliest of (i) the date that is one year after the completion of the last Closing Date under the Purchase Agreement, (ii) the date when the Investor may sell all Registrable Securities under Rule 144 without volume limitations, or (iii) the date the Investor no longer owns any of the Registrable Securities (collectively, the "Registration Period"), which Registration Statement (including any amendments or supplements, thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.
We are further obligated to prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the Prospectus used in connection with the Registration Statement as may be necessary to keep the Registration Statement effective at all times during the Registration Period, and, during the Registration Period, and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement until the expiration of the Registration Period.
On January 12, 2010, we filed a Registration Statement for 120,000,000 shares pursuant to the requirements of the Southridge Private Equity Credit Agreement. This Registration Statement was declared effective on February 25, 2010. On May 24, 2010 we filed a Post-Effective Amendment No. 1 to our Registration Statement to update our financial statements and related notes to the financial statements and business information for the quarter ending March 31, 2010. We reduced the amount of shares registered to 85,744,007 shares. This amended Registration Statement was declared effective on May 27, 2010.
During the year ended June 30, 2010, $1,100,000 of common stock was sold under the terms of the Southridge Private Equity Credit Agreement and the Company issued a total of 28,803,569 shares of common stock. The Company recorded a total of $102,754 of deemed interest expense as a result of the 7% discount off the market price under the Southridge Private Equity Credit Agreement.
On December 21, 2010 we filed a Registration Statement for 35,487,756 shares pursuant to the requirements of the Southridge Private Equity Credit Agreement. This Registration Statement was declared effective on June 8, 2011.
During the year ended June 30, 2011, $1,385,000 of common stock was sold under the terms of the Southridge Private Equity Credit Agreement and the Company issued a total of 77,928,568 shares of common stock. The Company recorded a total of $117,193 of deemed interest expense as a result of the 7% discount off the market price under the Southridge Private Equity Credit Agreement.
During the year ended June 30, 2012, the Company did not sell any common stock under the terms of the Southridge Private Equity Credit Agreement.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) LEASES
The Company leases certain office equipment under capital 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, 2012 are as follows:
Total rent expense for capital leases amounted to $6,515 and $5,327 for the years ended June 30, 2012 and 2011, respectively, and $396,061 from inception (December 10, 1993) to June 30, 2012.
Total rent expense for operating leases amounted to $140,108 and $131,931 for the years ended June 30, 2012 and 2011, respectively, and $693,115 from inception (December 10, 1993) to June 30, 2012.
See Operating Lease - Fort Lauderdale Business Plaza Associates, footnotes i and ii
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(15) LEASES (Continued)
Operating Lease - Fort Lauderdale Business Plaza Associates
(i)On June 2, 2008, the Company executed a Business Lease Agreement with Ft. Lauderdale Business Plaza Associates, an unaffiliated third-party, for 9,870 square feet of commercial office and manufacturing space at 5307 NW 35th Terrace, Ft. Lauderdale, Florida. The term of the lease is five years and one month with the first monthly rent payment due September 1, 2008 with an option to renew for one additional period of three years. The monthly base rent for the initial year is $6,580 plus applicable sales tax. During the term and any renewal term of the lease, the base annual rent shall be increased each year. Commencing with the first day of August 2009 and each year thereafter, the base annual rent shall be cumulatively increased by 3.5% each lease year plus applicable sales tax. IDSI will also be obligated to pay as additional rent its pro-rata share of all common area maintenance expenses which is estimated to be $3,084 per month for the first 12 months of the lease. The total monthly rent including Florida sales tax for the first 12 months is $10,244. Upon the execution of the lease, we paid the first month’s rent of $10,244 and a security deposit of $13,160.
(ii)On July 21, 2011, we entered into an agreement with Ft. Lauderdale Business Plaza Associates, an unaffiliated third-party, for an additional 4,800 square feet of commercial office space at 5301 NW 35th Terrace, Ft. Lauderdale, Florida. The term of the lease will run concurrent with our original lease commencing on September 1, 2011 and terminating on September 30, 2013. The monthly base rent for the initial year is $4,500 plus applicable sales tax and increase by 3.5% each year to the lease expiration.
(16) 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 $92,500,000 to offset future taxable income. Such carryforwards expire in years beginning 2015 through 2032. The deferred tax asset recorded by the Company as a result of these tax loss carryforwards is approximately $35,600,000 and $34,400,000 at June 30, 2012 and 2011, respectively. The Company has established a full valuation allowance and reduced the deferred tax asset resulting from its tax loss carryforwards by an equal amount as the realization of the deferred tax asset is uncertain. The net change in the deferred tax asset and valuation allowance for the year ended June 30, 2012 was an increase of approximately $1,200,000 and increase of $4,300,000 for the year ended June 30, 2011, which includes an adjustment for the effects of future state income tax benefits. The reconciliation of the income tax benefit computed at the U.S. federal statutory rate of 35% has been increased by state income taxes, net of federal benefit of 3.5% and decreased by permanent differences relating to stock based compensation, stock option expense, derivative liability expense, and debt discounts in the amount of 3% and 13% for fiscal 2012 and 2011, and further decreased to 0% by the increase in the valuation allowance against the deferred tax asset for each of the respective years then ended. In addition to the uncertainty regarding the attainment of future taxable income which could be offset by net operating loss carryforwards (NOLs), the Company’s ability to utilize NOLs may also be limited in accordance with Internal Revenue Code Section 382 following certain owner shifts and changes in control. The Company is not aware of the existence of any uncertain tax positions in its tax returns requiring adjustment or disclosure.
(17) CONVERTIBLE DEBENTURES
On August 1, 2008, we entered into a Securities Purchase Agreement (the “Initial Purchase Agreement”) with an unaffiliated third party, Whalehaven Capital Fund Limited (“Whalehaven”), relating to a private placement (the “Initial Private Placement”) of a total of up to $800,000 in principal amount of one-year 8% Senior Secured Convertible Debentures (the “Initial Debentures”). We were required to file within 30 days an S-1 Registration Statement (the “Registration Statement”) covering the shares of common stock underlying the Initial Debentures and related Warrants pursuant to the terms of a Registration Rights Agreement dated August 1, 2008, between IDSI and Whalehaven; however, with Whalehaven’s consent, we were permitted to file the Registration Statement promptly after the filing of our Annual Report on Form 10-K.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) CONVERTIBLE DEBENTURES (Continued)
The Initial Purchase Agreement provided for the sale of the Initial Debentures in two closings. The first closing, which occurred on August 4, 2008, was for a principal amount of $400,000. The second closing would be for up to $400,000 and would occur within the earlier of five business days following the effective date of the Registration Statement and December 1, 2008, provided that the closing conditions in the Initial Purchase Agreement have been met. We retained the option to use our existing equity credit line until the Registration Statement is declared effective. Sales under the Initial Purchase Agreement were subject to an 8% placement agent fee. Thus, the first closing generated proceeds to IDSI of $368,000, before normal transaction costs.
Prior to maturity, the Initial Debentures bear interest at the rate of 8% per annum, payable quarterly in cash or, at our option, in shares of common stock based on the then-existing market price provided that we are in compliance with the Initial Purchase Agreement.
The Initial Debentures may be converted in whole or in part at the option of the holder any time after the closing date into our Common Stock at the lesser of (i) a set price, initially $.019 per share, which was the closing price of our shares on the closing date (“fixed conversion price”) or (ii) 80% of the 3 lowest bid prices during the 10 consecutive trading days immediately preceding a conversion date; however, the terms of each Initial Debenture prevent the holder from converting the Debenture to the extent that the conversion would result in the holder and its affiliates beneficially owning more than 4.99% of the outstanding shares of our common stock; however, the limit may be increased to 9.99% on 61 days prior written notice from the holder.
At any time after closing, we may redeem for cash, upon written notice, any and all of the outstanding Initial Debentures at a 25% premium of the principal amount plus accrued and unpaid interest on the Initial Debentures to be redeemed.
The Initial Debentures are secured by a pledge of substantially all of our assets pursuant to a Security Agreement dated August 1, 2008, between IDSI and Whalehaven.
Pursuant to the first closing of the Initial Private Placement, we issued to Whalehaven five-year Warrants to purchase 22,222,222 shares of our common stock. The exercise price of these Warrants was $0.0228, i.e., 120% of the market price on the closing date. The Warrants are subject to cashless exercise at Whalehaven’s option.
The placement agent was entitled to receive a Warrant to purchase common stock equal to 12% of Whalehaven’s Warrants with an exercise price equal to Whalehaven’s exercise price. Consequently, a Warrant to purchase 2,666,666 shares was issued to the placement agent based on the first closing.
On October 23, 2008, we entered into an Amendment Agreement (the “Amendment”) with Whalehaven relating to the Initial Purchase Agreement, and the Initial Debenture due August 1, 2009, in the principal amount of $400,000 issued by us to Whalehaven pursuant to the Initial Purchase Agreement. The Amendment provided that the minimum conversion price would be $.013 per share and that the contemplated second closing for another $400,000 debenture would be abandoned. Consequently, no debenture or warrants would be issued beyond the securities issued in connection with the first closing, as the total facility amount was limited to $400,000.
On November 12, 2008, our Registration Statement relating to the Initial Debenture was declared effective. On November 20, 2008, we entered into a Securities Purchase Agreement with two unaffiliated third parties, Whalehaven and Alpha Capital Anstalt (“Alpha”), relating to a private placement (the “New Private Placement”) of $400,000 in principal amount of one-year 8% Senior Secured Convertible Debentures (the “New Debentures”). We were required to file a Registration Statement covering the shares of common stock underlying the New Debentures, including any shares payable as interest, pursuant to the terms of a Registration Rights Agreement dated November 20, 2008, between IDSI and Whalehaven and Alpha promptly following our annual meeting of shareholders, which was held on December 29, 2008. At the meeting the shareholders voted to approve an amendment to our articles of incorporation to increase the authorized shares from 450,000,000 to 950,000,000 (the “Share Amendment”). We were required to use commercially reasonable efforts to cause a Registration Statement to be declared effective as promptly as practicable and no later than 75 days after filing. In the case of a review by the Securities and Exchange
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) CONVERTIBLE DEBENTURES (Continued)
Commission the effectiveness date deadline extended to 120 days. In the absence of timely filing or effectiveness, we would be subject to customary liquidated damages.
The New Private Placement generated gross proceeds of $368,000 after payment of an 8% placement agent fee but before other expenses associated with the transaction.
Prior to maturity, the New Debentures bear interest at the rate of 8% per annum, payable quarterly in cash or, at the Company’s option, in shares of common stock based on the then-existing market price.
The New Debentures may be converted in whole or in part at the option of the holder any time after the shareholders have voted to approve the Share Amendment at the lesser of (i) a set price, initially $.033 (the closing price of the shares on the closing date) or (ii) 80% of the 3 lowest bid prices during the 10 consecutive trading days immediately preceding a conversion date; provided, however, that the Conversion Price is subject to a floor price, initially $0.013, and provided further however, that the terms of each Initial Debenture prevent the holder from converting the Debenture to the extent that the conversion would result in the holder and its affiliates beneficially owning more than 4.99% of the outstanding shares of our common stock; however, the limit may be increased to 9.99% on 61 days prior written notice from the holder.
After the effectiveness of the Registration Statement, we may redeem for cash, upon written notice, any and all of the outstanding Debentures at a 25% premium of the principal amount plus accrued and unpaid interest on the Debentures to be redeemed.
The New Debentures are secured by a pledge of substantially all of our assets pursuant to a Security Agreement dated November 20, 2008 between IDSI and Whalehaven and Alpha. This security interest is pari passu with the security interest granted to Whalehaven on August 1, 2008, in connection with the Company’s sale of the $400,000 Initial Debenture to Whalehaven..
In November 2008, Whalehaven converted $160,000 principal amount of the Initial Debenture and received 9,206,065 shares of our common stock as a result. On November 26, 2008, Whalehaven sold to Alpha $50,000 principal amount of the Initial Debenture and the right to purchase 5,555,555 shares underlying the Warrant. As a result of this transaction, the Warrant for 22,222,222 shares was replaced by a warrant held by Whalehaven covering 16,666,667 shares (the "Whalehaven Warrant") and a warrant held by Alpha covering 5,555,555 shares (the "Alpha Warrant") (collectively, the "Warrants").
On December 10, 2008, we entered into an Amendment Agreement with Whalehaven and Alpha relating to the Warrants. Under this Amendment Agreement, we agreed to reduce the exercise price of the Warrants to $.015 per share in exchange for the Purchasers' agreement to immediately exercise the Warrants as to 7,000,000 shares (5,000,000 covered by the Whalehaven Warrant and 2,000,000 covered by the Alpha Warrant). We used the $105,000 proceeds from the warrant exercise for working capital.
On December 15, 2008, Alpha converted $15,000 principal amount of its Initial Debenture and received 1,052,628 shares of our common stock as a result.
We entered into a second Amendment Agreement dated as of December 31, 2008, with Whalehaven and Alpha relating to the Warrants. Under this Amendment Agreement, we agreed to reduce the exercise price of the Warrants to $.005 per share in exchange for the Purchasers' agreement to immediately exercise the Warrants as to 14,755,555 shares (11,200,000 by Whalehaven and 3,555,555 by Alpha). We further agreed to issue new Warrants to purchase at $.005 per share up to a number of shares of Common Stock equal to the number of shares underlying the existing Warrants being exercised by Whalehaven and Alpha under the second Amendment Agreement.
In December 2008 we received $56,000, and in January 2009 we received $17,778 in proceeds from these Warrant exercises, we used the proceeds for working capital.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) CONVERTIBLE DEBENTURES (Continued)
After the issuance of shares pursuant to Whalehaven’s Notice of Exercise of its Warrant and subsequent issuance of new Warrants, they have a balance of 11,666,667 shares available for exercise. After the issuance of shares pursuant to Alpha’s Notice of Exercise of its Warrant and subsequent issuance of new Warrants, they have a balance of 3,555,555 shares available for exercise.
We entered into a third Amendment Agreement dated as of March 20, 2009, with Whalehaven and Alpha. This Amendment Agreement pertains to a request by the Company to the Holders that they agree to a suspension of the Company’s obligations under the Registration Rights Agreements for both the Initial and New Debentures. In consideration for such suspensions, the Company agreed to an adjustment in the conversion price for both debentures whereby the floor price was reduced from $0.013 to $0.005 and the set price was reduced from $0.019 to $0.01. The new formula for determining the conversion price on any Conversion Date shall be equal to the lesser of (a) $0.01, subject to certain standard adjustments (the “Set Price”) and (b) 80% of the average of the 3 lowest Closing Prices during the 10 Trading Days immediately prior to the applicable Conversion Date (subject to adjustments) (the “Conversion Price”); provided, however, that the Conversion Price shall in no event be less than $0.005 (subject to certain standard adjustments).
As of June 30, 2009, Whalehaven has sold to Alpha a total of $100,000 principal amount of the August Debenture and received from Alpha a total of $50,000 principal amount of the November Debenture, which it had acquired from Alpha on March 17, 2009 in connection with the sale of $50,000 of the August Debenture to Alpha. Whalehaven now holds a principal amount of $250,000 in the November Debenture. Whalehaven also holds Warrants to purchase 11,666,667 shares of common stock at an exercise price of $0.005.
As of June 30, 2009, Whalehaven has converted the $300,000 of the August Debenture which it did not sell to Alpha and has received 36,841,918 shares as a result. Whalehaven has converted $181,000 of the November Debenture and has received 37,803,364 shares as a result. Whalehaven holds a principal amount of $69,000 in the November Debenture.
As of June 30, 2009, Alpha has converted $100,000 of the August Debenture and received 17,313,265 shares as a result. Alpha holds a principal amount of $150,000 in the November Debenture. Alpha also holds Warrants to purchase 3,555,555 shares of common stock at an exercise price of $0.005.
As of June 30, 2010, Whalehaven had sold to Alpha a total of $100,000 principal amount of the August Debenture and received from Alpha a total of $50,000 principal amount of the November Debenture, which it had acquired from Alpha on March 17, 2009 in connection with the sale of $50,000 of the August Debenture to Alpha.
As of June 30, 2010, Whalehaven had converted the $300,000 of the August Debenture which it did not sell to Alpha and has received 36,841,918 shares as a result. Whalehaven has converted $250,000 of the November Debenture and has received 51,600,363 shares as a result. Thus, Whalehaven has converted all of its August and November Debentures into 88,442,281 shares of common stock.
In October 2009, Whalehaven exercised Warrants to purchase 6,000,000 shares and received 4,648,649 shares of common stock using the cashless conversion feature with a Volume Weighted Average Price (“VWAP”) conversion price of $0.022. The shares were issued pursuant to Rule 144. Whalehaven held Warrants to purchase 5,666,667 shares of common stock at an exercise price of $0.005.
As of June 30, 2010, Alpha had converted $100,000 of the August Debenture and received 17,313,265 shares as a result. Alpha has converted $150,000 of the November Debenture and has received 28,429,066 shares as a result. Thus, Alpha has converted all of its August and November Debentures into 45,742,331 shares of common stock which does not include interest. In October 2009, we issued Alpha 2,166,263 shares as a result of the 8% interest on their portion of the debentures.
In October 2009, Alpha exercised its remaining Warrants to purchase 3,555,555 shares and received 2,942,528 shares of common stock using the cashless conversion feature with a VWAP conversion price of $0.029. The shares were issued pursuant to Rule 144.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(17) CONVERTIBLE DEBENTURES (Continued)
In October 2009, the Placement Agents exercised its Warrants to purchase 2,666,666 shares and received 1,989,845 shares of common stock using the cashless conversion feature with a VWAP conversion price of $0.0197. The shares were issued pursuant to Rule 144.
In December 2009, Whalehaven exercised its remaining Warrants to purchase 5,666,667 shares and received 4,542,328 shares of common stock using the cashless conversion feature with a VWAP conversion price of $0.0252. The shares were issued pursuant to Rule 144.
(18) 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.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(19) 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.
As of June 30, 1996, 1,600 shares of the Series A Preferred Stock had been converted into a total 425,416 shares (including accumulated dividends) of the Company’s common stock. The remaining 2,400 shares of Series A Preferred Stock were converted into 1,061,202 shares (including accumulated dividends) of the Company’s common stock during the fiscal year ended June 30, 1997.
The Company issued 450 shares of “Series B Convertible Preferred Stock” (“Series B Preferred Stock”) and warrants to purchase up to an additional 112,500 shares of common stock on December 17, 1996 pursuant to Regulation D and Section 4(2) of the Securities Act of 1933. The agreement called for a purchase price of $10,000 per share, with proceeds to the Company amounting to $4,500,000.
The holders of the Series B Preferred Stock could have converted up to 34% of the Series B Preferred Stock 80 days from issuance (March 7, 1997), up to 67% of the Series B Preferred Stock 100 days from issuance (March 27, 1997), and may convert their remaining shares 120 days from issuance (April 19, 1997) without the payment of any additional consideration, into fully paid and nonassessable shares of the Company’s no par value common stock based upon the “conversion formula”. The conversion formula states that the holder of the Series B Preferred Stock will receive shares determined by dividing (i) the sum of $10,000 by the (ii) “Conversion Price” in effect at the time of conversion. The “Conversion Price” shall be equal to eighty-two percent (82%) of the Market Price of the Company’s common stock; provided, however, that in no event will the “Conversion Price” be greater than $3.85. The warrants are exercisable at any time for an exercise price of $5.00 and will expire five years from the date of issue.
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.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(19) CONVERTIBLE PREFERRED STOCK (Continued)
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 16). The Private Placements are summarized as follows:
Series C Preferred Stock
On October 6, 1997, the Company finalized the private placement to foreign investors of 210 shares of its Series C Convertible Preferred Stock at a purchase price of $10,000 per share and warrants to purchase up to 160,000 shares of the Company’s common stock at an exercise price of $1.63 per share, and warrants to purchase up to 50,000 shares of the Company’s common stock at an exercise price of $1.562 per share. The agreement was executed pursuant to Regulation S as promulgated by the Securities Act of 1933, as amended. As of June 30, 2001, 40,000 warrants at the $1.63 exercise price were exercised, and the remaining 140,000 warrants had expired. The remaining 50,000 warrants ($1.562 exercise price) are outstanding as of June 30, 2001.
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.
In connection with the sale, the Company issued four preferred shares to an unaffiliated investment banker for placement fees and paid legal fees of $5,000, providing net proceeds to the Company of $495,000. The shares underlying the preferred shares and warrant are entitled to demand registration rights under certain conditions.
Series E Preferred Stock
On February 5, 1998, the Company finalized the private placement to foreign investors of 50 shares of its Series E Convertible Preferred Stock at a purchase price of $10,000 per share and warrants to purchase up to 25,000 shares of the Company’s common stock at an exercise price of $1.093 per share. The agreement was executed pursuant to Regulation S as promulgated by the Securities Act of 1933, as amended. As of June 30, 2001 the warrants had expired.
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.
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.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(19) 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.
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.
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.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(19) CONVERTIBLE PREFERRED STOCK (Continued)
Series K Preferred Stock
On July 17, 2000, the Company finalized the private placement to foreign investors of 500 shares of its Series K Convertible Preferred Stock at a purchase price of $10,000 per share. The agreement was executed in accordance with and in reliance upon the exemption from securities registration by Rule 506 under Regulation D as promulgated by the Securities Act of 1933, as amended.
The 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.
Series L Preferred Stock
On February 25, 2010, the Company issued 35 shares of its Series L Convertible Preferred Stock at a purchase price of $10,000 per share as collateral in connection with a $350,000 short-term loan. On March 31, 2010 the holder converted the note into the collateral shares of 35 preferred shares of Series L Convertible Preferred Stock. We may at any time, at the option of the Board of Directors, redeem in whole or in part the Series L Convertible Preferred Stock by paying in cash a per price share sum equal to $11,150 plus accrued but unpaid dividends. Any redemption affected shall be made on a pro rata basis among the holders of the Series L Preferred Stock in proportion to the number of shares of Series L Preferred Stock then held by them. We have reserved 16,587,690 shares of common stock stock (473,934 shares of common stock valued at $.0211 for each share of preferred stock) to cover the conversion of the 35 shares of Series L Convertible Preferred Stock outstanding. The 35 shares of Series L Convertible Preferred Stock accrue dividends at an annual rate of 9%. In October 2010, we obtained a waiver from the private investor holding the 35 shares of Series L Convertible Preferred Stock in which the investor agreed to convert no more than the 16,587,690 common shares currently reserved as we do not have sufficient authorized common shares to reserve for further conversions pursuant to the Certificate of Designation, Rights and Preferences. On January 6, 2011, the investor converted 15 shares of the Series L Convertible Preferred Stock into 10,000,000 shares of common stock. As of the date of this report, the investor holds 20 shares of the Series L Convertible Preferred Stock. At our annual meeting on July 12, 2011, our shareholders approved a proposal to increase our authorized shares from 950,000,000 to 2,000,000,000 which eliminated the need for the waiver. Pursuant to the Certificate of Designation of Series L Convertible Preferred Stock, (iii) Issuance of Securities, a reset provision is provided if common shares are issued less than $.0211 on or before the conversion of all of the Series L Convertible Preferred shares. The investor agreed to a fixed conversion floor price of $.015, which required us to reserve an additional 6,745,643 common shares. The reset provision triggered a Derivative Liability valuation for such provision.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(19) CONVERTIBLE PREFERRED STOCK (Continued)
Series P Preferred Stock
From January 1, 2012 to June 30, 2012, we issued 55 shares of our Series P Preferred Stock which has a stated value of $5,000 per share as collateral in connection with nine short-term promissory notes from an unaffiliated third party investor. The total stated value of the collateral is $275,000.
Series Q Preferred Stock
On March 21, 2012 we entered into a Series Q Preferred Stock Purchase Agreement with our CEO, Linda B. Grable pursuant to which she was issued all of the 51 authorized shares of Series Q Preferred Stock, with a stated value of $0.001 per share as partial consideration for past and future services rendered and recorded the nominal amount of $1.00 for this issuance. The Series Q Preferred Stock has no economic value and was issued solely for voting purposes.
The following schedule reflects the number of shares of preferred stock that have been issued, converted and are outstanding as of June 30, 2012, 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:
10-K Financial Table of Contents
10-K Financial Table of Contents
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(20) DERIVATIVE LIABILITY
Effective June 1, 2010, we adopted the ASC 815 guidance provided for Derivatives and Hedging which applies to any free standing financial instruments or embedded features that have characteristics of a derivative and to any free standing financial instruments that are potentially settled in an entity’s own common stock. As of June 30, 2010, we had 35 shares of Series L Convertible Preferred Stock outstanding for which the underlying common has a reset provision which classifies the Series L Convertible Preferred Stock as a free standing derivative instrument. ASC 815 requires the Series L Convertible Preferred Stock to be recorded as a liability as it is no longer afforded equity treatment. As a result of the reset provision we recorded a Derivative Liability of $64,524 which accrued on the date of issuance and recorded an increase of $137,631 as a result in changes in the market price of our stock. The total Derivative Liability for the Series L Convertible Preferred Stock for the fiscal year ended June 30, 2010 was $202,156.
For the quarter ending September 30, 2010, we recorded additional Derivative Expense of $19,355 due to a conversion rate adjustment from $.0211 to $.019933 associated with Series L Convertible Preferred Stock issued to the holder. For the quarter ending December 31, 2010, we recorded additional Derivative Expense of $81,827 due to a conversion rate adjustment from $.019933 to $.015 associated with Series L Convertible Preferred Stock issued to the holder. On January 6, 2011, the investor converted 15 shares of the Series L Convertible Preferred Stock into 10,000,000 shares of common stock. On May 11, 2011, we obtained a waiver from the private investor where the investor agreed to convert no additional Series L Convertible Preferred Stock into common shares until the approval by our shareholders of an increase in authorized common stock at our next annual meeting to be held on July 12, 2011. Due to this conversion and the receipt of the waiver, we retired $303,337 of Derivative Liability. This waiver encompasses a total of 13,333,333 shares issuable upon full conversion of the 20 shares of the Series L Convertible Preferred Stock held by the investor as of the date of this report.
For the fiscal year ending June 30, 2011, we recorded an initial Derivative Liability of $142,954 on two JMJ notes and an additional Derivative Liability of $187,691 for the quarter ending June 30, 2011. As of June 30, 2011 the Derivative Liability of the JMJ notes was $330,645.
For the fiscal year ending June 30, 2011, the Derivative Liability of the Southridge Promissory Notes was $722,000 and a decrease of Derivative Liability of $360,982 for the quarter ending June 30, 2011. As of June 30, 2011 the Derivative Liability of the Southridge notes was $361,018.
As of June 30, 2011, we had 20 shares of Series L Convertible Preferred Stock outstanding for which the underlying common has a reset provision which classifies the Series L Convertible Preferred Stock as a free standing derivative instrument. The total Derivative Liability for the Series L Convertible Preferred Stock for the fiscal year ended June 30, 2011 was $102,409.
The total net Derivative Liability for the fiscal year ending June 30, 2011 is $794,072.
The following are the ranges of the input variables we used for the fiscal year ending June 30, 2011.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(20) DERIVATIVE LIABILITY (Continued)
For the fiscal year ending June 30, 2012, we recorded mark to market changes in the Derivative Liability of which required a credit to Derivative Expense of $965,836.
As of June 30, 2012 the Derivative Liability of the JMJ notes was $141,591.
As of June 30, 2012 the Derivative Liability of the Short-Term Convertible Promissory Notes was $819,467.
As of June 30, 2012, we had 20 shares of Series L Convertible Preferred Stock outstanding for which the underlying common has a reset provision which classifies the Series L Convertible Preferred Stock as a free standing derivative instrument. The total Derivative Liability for the Series L Convertible Preferred Stock as of June 30, 2012 was $0.
The total net Derivative Liability for the fiscal year ending June 30, 2012 is $961,058.
The following are the ranges of the input variables we used for the fiscal year ending June 30, 2012.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(21) 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.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(21) COMMON STOCK (Continued)
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 19).
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 19), 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 19) 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.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(21) 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 9). 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.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(21) 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 19) 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 9).
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.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(21) 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 19) accounted for the issuance of 3,834,492 shares ($507,115), and the conversion of Convertible Preferred Stock (see Note 19) 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 19) 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 14) 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. 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.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(21) 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 14) 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 14) accounted for the issuance of 29,390,708 shares ($8,737,772). The remaining 2,007,618 shares were issued as follows:
1. During December 2002, 258,500 shares of bonus stock were issued to Company employees. Compensation of $62,425 was charged as, the fair market value of the common stock on the dates of issuance averaged $.24 per share. In addition, the Company recorded an adjustment for deferred compensation, which resulted in a reduction to common stock for $73,500.
2. A total of 1,194,118 shares were issued in conjunction with the settlement on June 5, 2003 of a lawsuit. Settlement expense of $841,853 has been charged on the statement of operations, as the fair market value of the stock at the date of issuance was $.70 per share.
3. During the year a total of 555,000 shares were issued to various parties for services rendered to the Company. Expenses of $139,875 were charged, or an average price of $.25 per share.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(21) COMMON STOCK (Continued)
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 14) 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 14) 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.
During the year ended June 30, 2006, the Company issued a total of 47,776,064 shares ($7,409,543) of its common stock. The common stock issued through the equity line of credit (See Note 14) accounted for the issuance of 47,776,064 shares ($7,409,543).
During the year ended June 30, 2007, the Company issued a total of 63,861,405 shares ($4,560,415) of its common stock. The common stock issued through the equity line of credit (See Note 14) accounted for the issuance of 63,861,405 shares ($4,560,415).
During the year ended June 30, 2008, the Company issued a total of 13,979,430 shares ($490,000) of its common stock. The common stock issued through the equity line of credit (See Note 14) accounted for the issuance of 13,979,430 shares ($490,000).
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(21) COMMON STOCK (Continued)
During the year ended June 30, 2009, the Company issued a total of 285,861,319 shares ($2,646,083) of its common stock. The common stock issued through the equity line of credit (See Note 14) accounted for the issuance of 158,747,217 shares ($1,674,885). The conversion of Convertible Debentures accounted for the issuance of 93,958,547 shares ($621,220). The exercise of warrants accounted for the issuance of 21,755,555 shares ($195,778).
The remaining 11,400,000 shares were issued as follows:
1. During July 2008, 5,000,000 restricted shares were issued to a consultant. Compensation expense of $55,000 was recorded as the fair market value of the common stock on the date of issuance was $.011 per share.
2. During November 2008, 3,000,000 shares of restricted stock were issued to a shareholder in a private placement pursuant to Rule 144. The shareholder paid the Company $75,000 as the fair market value of the shares on the date of issuance was $.025.
3. During March 2009, 2,400,000 shares of restricted stock were issued to Company employees. Compensation expense of $19,200 was charged as the fair market value of the common stock on the date of issuance was $.008 per share.
4. During March 2009, 1,000,000 shares of restricted stock were issued to a shareholder in a private placement pursuant to Rule 144. The shareholder paid the Company $5,000 as the fair market value of the shares on the date of issuance was $.005.
During the year ended June 30, 2010, the Company issued a total of 225,708,835 shares ($2,497,491) of its common stock. The common stock issued through the equity line of credit (See Note 14) accounted for the issuance of 90,803,568 shares ($1,524,764). The conversion of Convertible Debentures accounted for the issuance of 45,334,856 shares ($223,743). The exercise of warrants accounted for the issuance of 11,180,822 shares ($89,444).
The remaining 78,389,589 shares were issued as follows:
1. During December 2009, 16,625,000 shares of restricted stock were issued to a various investors as additional consideration for short-term loans. Premium expense of $465,500 was recorded as the fair market value of the shares on the date of issuance was $.028.
2. During December 2009, 3,000,000 shares of common stock were issued to Company employees and 750,000 shares of restricted stock were issued to Company officers. Compensation expense of $75,000 was charged as the fair market value of the common stock on the date of issuance was $.02 per share. A total of 200,000 shares of common stock were canceled. Compensation expense of $1,600 was credited as the fair market value of the common stock on the date of issuance was $.008 per share.
3. During December 2009 and January 2010 a total of 55,363,637 shares of restricted stock were issued as collateral in connection with short-term loans. A total of $1,150,000 was recorded as Common Stock - Debt Collateral.
4 During April 2010, 250,000 shares of restricted stock were issued to a consultant of which $2,250 was satisfaction of an aged accounts payable owed to him for investor relations services and for providing a limited amount of investor relation services without further charge. Additional Paid-In-Capital of $11,250 was
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(21) COMMON STOCK (Continued)
recorded as the fair market value of the common stock on the date of issuance was $.054 per share. The aggregate fair market value of the 250,000 restricted shares when issued was $13,500.
5. During May 2010, 2,600,952 shares of restricted stock were issued to Company employees. Compensation expense of $128,389 and Additional Paid-In-Capital of $10,793 were recorded as the fair market value of the common stock on the date of issuance was $.045 per share.
During the year ended June 30, 2011, the Company issued a total of 105,109,302 shares ($2,625,268) of its common stock. The common stock issued through the equity line of credit (See Note 14) accounted for the issuance of 77,928,568 shares ($1,502,193) to Southridge. The conversion of 15 shares of the Series L Convertible Preferred Stock accounted for the issuance of 10,000,000 shares ($150,000).
The conversion of Promissory Notes accounted for the issuance of 12,430,734 shares ($112,674).
The remaining 17,180,734 shares were issued as follows:
1. During September 2010, 4,000,000 shares of common stock were issued to Company employees and 750,000 shares of restricted stock were issued to Company officers. Compensation expense of $109,250 was charged as the fair market value of the common stock on the date of issuance was $0.023 per share.
2. January 2011 to April 2011, Southridge acquired promissory notes from a private investor totaling $800,000 in principal and 55,363,907 shares of common stock which were issued as collateral. Southridge proposed that we amend the conversion terms of the notes permitting the holder to convert the notes and we agreed to the amendment. From January 12, 2011 to June 30, 2011, Southridge issued notices of conversion to settle $525,000 in principal plus accrued premiums totaling $255,651 into 53,143,682 shares of our common stock, of which 51,802,774 shares were collateral shares and 1,340,908 new shares were issued pursuant to Rule 144.
3. During May 2011, an $80,000 Promissory Note plus $3,174 in interest was converted by Southridge into 11,089,826 shares of common stock which were issued pursuant to Rule 144.
During the year ended June 30, 2012, the Company issued a total of 2,748,988,849 shares ($2,266,869) of its common stock.
The conversion of Promissory Notes accounted for the issuance of 2,733,679,759 shares ($2,060,630).
The remaining 15,309,090 shares were issued as follows:
1. During July 2011, 2,907,333 shares of common stock were issued to Shraga Levin pursuant to a settlement entered into on April 15, 2011. Settlement expense of $43,610 was charged as the fair market value of the common stock on the date of settlement was $0.015.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(21) COMMON STOCK (Continued)
2. During September 2011, 3,000,000 shares of common stock were issued to a private investor as additional consideration for a short-term loan. The fair market value of the common stock on the date of issuance was $0.014 per share.
3. During September 2011, 401,757 shares of restricted stock were issued to Company employees. Compensation expense of $6,629 was charged as the fair market value of the common stock on the date of issuance was $0.0165 per share.
4. During November 2011, 7,500,000 shares of common stock were issued to Company employees and 1,500,000 shares of restricted stock were issued to Company officers. Compensation expense of $54,000 was charged as the fair market value of the common stock on the date of issuance was $0.006 per share.
(22) STOCK OPTIONS
The Company relies on the guidance provided by ASC 718 (“Compensation-Stock Compensation”). ASC 718 requires companies to expense the value of employee stock options and similar awards and applies to all outstanding and vested stock-based awards.
In computing the impact, the fair value of each option is estimated on the date of grant based on the Black-Scholes options-pricing model utilizing certain assumptions for a risk free interest rate; volatility; and expected remaining lives of the awards. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. The Company cannot assess its forfeiture rate at this time.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(22) STOCK OPTIONS (Continued)
The Company continues to use an expected term of eight years as provided by Staff Accounting Bulletin 110. Our expected term assumption of eight years for the year ended June 30, 2011, was based upon the guidance provided by SEC Staff Accounting Bulletin 107 enabling us to use the simplified method for “plain vanilla” options for this calculation. This provision was allowed to be used for grants made on or before December 31, 2007. On December 21, 2007, the SEC issued Staff Accounting Bulletin 110 which extended the timeframe we will have to use the simplified method on an interim basis. The SEC will suspend use of this method once detailed information on exercise terms become readily available. We then will be required to estimate the expected term of an option using historical data by analyzing its historical forfeiture rate, the remaining lives of unvested options, and the amount of vested options as a percentage of total options outstanding. If the Company’s actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what we have recorded in the current period. The impact of applying ASC 718 approximated $375,704 and $588,564, respectively, in additional compensation expense for the twelve months ended June 30, 2011 and 2010.
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
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(22) STOCK OPTIONS (Continued)
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.
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.
On July 26, 2007, the Board of Directors adopted the Company’s 2007 Non-Statutory Stock Option Plan (the “2007 Plan”), which must be adopted by the shareholders at the annual meeting which must occur within one year of the Board’s adoption of the 2007 Plan. The 2007 Plan will 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 2007 Plan shall be options to purchase 15,693,358 shares of Common Stock (5% of our issued and outstanding common stock as of July 26, 2007). Options may be granted under the 2007 Plan for up to 10 years after the date of the 2007 Plan. The 2007 Non-Statutory Stock Plan replaced the 2004 Non-Statutory Stock Option Plan.
On March 11, 2010, the Board of Directors adopted the Company’s 2010 Non-Statutory Stock Option Plan (the “2010 Plan”), which must be adopted by the shareholders at the annual meeting which must occur within one year of the Board’s adoption of the 2010 Plan. The 2010 Plan will 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 2010 Plan shall be options to purchase 37,428,466 shares of Common Stock (5% of our issued and outstanding common stock as of March 11, 2010). Options may be granted under the 2010 Plan for up to 10 years after the date of the 2010 Plan. The 2010 Non-Statutory Stock Plan replaced the 2007 Non-Statutory Stock Option Plan.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(22) STOCK OPTIONS (Continued)
Transactions and other information relating to the plans are summarized as follows:
Employee Plan:
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(22) STOCK OPTIONS (Continued)
Employee Plan (Continued)
** 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 re-pricing, in accordance with the guidance provided by ASC 718.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(22) STOCK OPTIONS (Continued)
Director Plan
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(22) STOCK OPTIONS (Continued)
Director Plan (Continued)
A summary of the vested and exercisable stock options of the Company is presented as follows:
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.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(22) STOCK OPTIONS (Continued)
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 expire in ten years from the grant date.
On July 4, 1996, the Company issued to its three officers and directors incentive options to purchase 22,883 shares, individually, at an exercise price of $4.37 per share (110% of the fair market value). The options 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).
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.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(22) STOCK OPTIONS (Continued)
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 at 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
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.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(22) STOCK OPTIONS (Continued)
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 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, 2004, the Company issued to its officers and various employees incentive options to purchase 1,576,620 shares of common stock at prices ranging from $.81 to $1.25. At various dates during the year ended June 30, 2004, the Company issued to various employees Non-Statutory options to purchase 31,748 shares of common stock at prices ranging from $.39 to $.78. The exercise price was established as the fair market value of the common stock at the date of grant for employees, and 110% of the fair market value at the date of grant for an officer, therefore no compensation was recorded on the issuance of the options. Vesting for certain of the officers’ options is immediate, while the other officers’ options and the employees’ options 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.
At various dates during the year ended June 30, 2006, the Company issued to various employees Non-Statutory options to purchase 532,855 shares of common stock at prices ranging from $.14 to $.30. The exercise price was established as the fair market value of the common stock on the date of grant for employees. Options granted during the fiscal year ended June 30, 2006 vest over varying periods from one year up to three years from the date of grant. The options expire ten years from the grant date.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(22) STOCK OPTIONS (Continued)
At various dates during the year ended June 30, 2006, the Company issued to its Directors Non-Statutory options to purchase 800,000 shares of common stock at prices ranging from $.13 to $.14. 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.
For the fiscal year ending June 30, 2006, the total compensation for options recorded was $632,558. We have $479,717 of non-cash unvested stock option compensation remaining to be expensed over the next three years. These unvested options are being expensed each quarter over the remaining vesting periods.
At various dates during the year ended June 30, 2007, the Company issued to various employees Non-Statutory options to purchase 3,927,437 shares of common stock at prices ranging from $.085 to $.127. The exercise price was established as the fair market value of the common stock on the date of grant for employees. Options granted during the fiscal year ended June 30, 2007 vest over varying periods from six-months up to three years from the date of grant. The options expire ten years from the grant date.
At various dates during the year ended June 30, 2007, the Company issued to its Directors Non-Statutory options to purchase 800,000 shares of common stock at prices ranging from $.069 to $.089. 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.
For the fiscal year ending June 30, 2007, the total compensation for options recorded was $431,313. We have $299,911 of non-cash unvested stock option compensation remaining to be expensed over the next three years. These unvested options are being expensed each quarter over the remaining vesting periods.
At various dates during the year ended June 30, 2008, the Company issued to various employees Non-Statutory options to purchase 2,336,526 shares of common stock at prices ranging from $.042 to $.084. The exercise price was established as the fair market value of the common stock on the date of grant for employees. Options granted during the fiscal year ended June 30, 2008 vest over varying periods from one year up to three years from the date of grant. The options expire ten years from the grant date.
At various dates during the year ended June 30, 2008, the Company issued to its Directors Non-Statutory options to purchase 600,000 shares of common stock at prices ranging from $.05 to $.051. The options expire in ten years and shall become exercisable on a quarterly pro-rata basis (50,000 shares) from the date of grant. In connection with the resignations of the three outside directors, we agreed to vest their respective options for 200,000 shares each which we granted in late 2007 and early 2008. Options issued to the Directors are not intended to be incentive stock options pursuant to Section 422 of the Internal Revenue Code.
In connection with the sale of our commercial property to Bright Investments, LLC, we agreed to grant a two-year Non-Qualified option to purchase 3,000,000 shares of common stock at $.035 upon the receipt of the down payment which was August 2, 2007.
For the fiscal year ending June 30, 2008, the total compensation for options recorded was $183,182. We have $79,633 of non-cash unvested stock option compensation remaining to be expensed over the next three years. These unvested options are being expensed each quarter over the remaining vesting periods.
At various dates during the year ended June 30, 2009, the Company issued to various employees Non-Statutory options to purchase 7,123,300 shares of common stock at prices ranging from $.01 to $.055. The exercise price was established as the fair market value of the common stock on the date of grant for employees. Options granted during the fiscal year ended June 30, 2009 vest over varying periods from immediately up to three years from the date of grant. The options expire ten years from the grant date.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(22) STOCK OPTIONS (Continued)
For the fiscal year ending June 30, 2009, the total compensation for options recorded was $145,577. We have $10,178 of non-cash unvested stock option compensation remaining to be expensed over the next three years. These unvested options are being expensed each quarter over the remaining vesting periods.
At various dates during the year ended June 30, 2010, the Company issued to various employees Non-Statutory options to purchase 18,600,000 shares of common stock at prices ranging from $.022 to $.05. The exercise price was established as the fair market value of the common stock on the date of grant for employees. Options granted during the fiscal year ended June 30, 2010 vest over varying periods from immediately up to two years from the date of grant. The options expire ten years from the grant date.
For the fiscal year ending June 30, 2010, the total compensation for options recorded was $588,483. We have $334,037 of non-cash unvested stock option compensation remaining to be expensed over the next three years. These unvested options are being expensed each quarter over the remaining vesting periods.
At various dates during the year ended June 30, 2011, the Company issued to various employees Non-Statutory options to purchase 2,200,000 shares of common stock at an exercise price of $.027. The exercise price was established as the fair market value of the common stock on the date of grant for employees. Options granted during the fiscal year ended June 30, 2011 vest one year from the date of grant. The options expire ten years from the grant date.
For the fiscal year ending June 30, 2011, the total compensation for options recorded was $375,704. We have $48,978 of non-cash unvested stock option compensation remaining to be expensed over the next three years. These unvested options are being expensed each quarter over the remaining vesting periods.
At various dates during the year ended June 30, 2012, the Company issued to various employees Non-Statutory options to purchase 10,000,000 shares of common stock at an exercise price of $0.005. The options expire in ten years and shall become exercisable on a quarterly pro-rata basis (2,500,000 shares) from the date of grant. The exercise price was established as the fair market value of the common stock on the date of grant for employees.
On August 1, 2011, the Company issued to its Director Non-Statutory options to purchase 250,000 shares of common stock at an exercise price of $0.015. The options expire in ten years and shall become exercisable on a quarterly pro-rata basis (62,500 shares) from the date of grant. In connection with the resignations of the outside director, we agreed to vest his respective options for 250,000 shares each which we granted in August 2012. Options issued to the Directors are not intended to be incentive stock options pursuant to Section 422 of the Internal Revenue Code.
For the fiscal year ending June 30, 2012, the total compensation for options recorded was $22,208. We have $12,800 of non-cash unvested stock option compensation remaining to be expensed over the next three years. These unvested options are being expensed each quarter over the remaining vesting periods.
The intrinsic value of a stock option/SSAR is the amount by which the market value of the underlying stock exceeds the exercise price of the option/SSAR. The intrinsic value for options/SSARs exercised in the fiscal years ended June 30, 2012 and 2011 was $-0- and $-0-, respectively.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(22) STOCK OPTIONS (Continued)
The following table summarizes information about all of the stock options outstanding at June 30, 2012:
At June 30, 2012, the Company has issued options pursuant to five different stock option plans, which have been previously described. On March 11, 2010, the Board adopted the Company’s 2010 Non-Statutory Stock Option Plan (the “2010 Plan”) and re-adopted the 2010 Plan on February 3, 2011, which was adopted by the shareholders at our annual meeting held on July 12, 2011.
(23) CONCENTRATION OF CREDIT RISK
During the year, the Company did not have cash balances in excess of the Federally insured limits of $250,000. The funds are on deposit with Wells Fargo Bank, N.A.. 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, 2012 was $1,623.
(24)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, receivables, accounts payable, short-term debt and accrued liabilities approximated their fair values due to the short maturity of these instruments. After a review of our accounts receivable, the Company has recorded an allowance of $18,750 for doubtful accounts. 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, 2012 and 2011, the aggregate fair value of the Company’s debt obligations approximated its carrying value.
The Company relies upon the guidance of ASC 820 (“Fair Value Measurements and Disclosures”). ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(24) FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
Upon adoption of ASC 820, there was no cumulative effect adjustment to the beginning retained earnings and no impact on the consolidated financial statements.
The carrying value of the Company’s cash and cash equivalents, accounts payable, short-term borrowings (including convertible notes payable), and other current liabilities approximate fair value because of their short-term maturity. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the consolidated financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.
The following table sets forth the Company’s financial instruments as of June 30, 2011 which are recorded on the balance sheet at fair value on a recurring basis by level within the fair value hierarchy. As required by ASC 820, these are classified based on the lowest level of input that is significant to the fair value measurement:
At June 30, 2011, the carrying amount of the Series L Convertible Preferred Stock at par value is deemed to be the fair value. The balance sheet also reflects a liability for the accrued dividend payable on the Series L Convertible Preferred Stock.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(24) FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The following table sets forth the Company’s financial instruments as of June 30, 2012 which are recorded on the balance sheet at fair value on a recurring basis by level within the fair value hierarchy. As required by ASC 820, these are classified based on the lowest level of input that is significant to the fair value measurement:
At June 30, 2012, the carrying amount of the Series L Convertible Preferred Stock at par value is deemed to be the fair value. The balance sheet also reflects a liability for the accrued dividend payable on the Series L Convertible Preferred Stock.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(25) COMMITMENTS AND CONTINGENCIES
In June 1998, IDSI signed an exclusive patent license agreement with Mr. Grable, which encompasses the technology for the CTLM®. Mr. Grable’s interests in the patent license agreement passed to his estate in August 2001. Mrs. Grable is the principal beneficiary of Mr. Grable’s estate. The term of the license is for the life of the Patent (17 years) and any renewals, subject to termination under specific conditions. The license agreement provides for a royalty based upon a percentage, ranging from 6% to 10%, of the dollar amount earned from each sale before taxes minus the cost of the goods sold and commissions or discounts paid. We are obligated to pay royalties based on the formula upon receiving FDA approval to market the CTLM® in the U.S. In addition, following FDA approval, Mrs. Grable would be eligible for minimum royalties of $250,000 per year based on the sales of the products and goods in which the CTLM® patent is used.
In April 2008, we were served with a lawsuit filed against us in Venice, Italy, by Gio Marco S.p.A. and Gio IDH S.p.A., related Italian companies which, between them, had purchased three CTLM® systems in 2005. One system was purchased directly from us, and the other two were purchased from our former Italian distributor and an affiliate of the distributor. We are obligated to pay an additional legal fee of 2,000 Euros in December 2009 in this matter.
The plaintiffs allege that they purchased the CTLM® systems for experimental purposes based on alleged oral assurances by our sales representative to the effect that we would promptly receive FDA approval for the CTLM® and that we would give them exclusive distribution rights in Italy. The plaintiffs are seeking to recover a total of €628,595, representing the aggregate purchase price of the systems plus related expenses.
Based on our preliminary investigation of this matter, we believed that this claim was without merit, and we vigorously defended the case. Our Italian counsel responded to the lawsuit in November 2008 and requested and was granted an extension to May 2009 to respond. Our counsel filed our defenses in the Court of Venice at a hearing held in June 2009. The judge set the next hearing for March 3, 2010 in order to allow the parties to clarify their claims and defenses. At the hearing, the plaintiffs did not prove all of the facts underlying their claims. The Judge set a hearing for November 10, 2010 for the “clarification of conclusions”. At that time, our counsel planned to present our demand for damages from “vexatious litigation” by the plaintiffs. The November 10, 2010 hearing was postponed until November 17, 2010. At the hearing, the plaintiffs failed to present their statements to the courtin a timely manner and therefore, we believe that the plaintiffs should no longer be able to pursue any legal remedy in this matter. The last hearing of the case was held on November 17, 2010. We will have to wait for the court to issue a final dismissal in this matter.
On March 22, 2010, the Company entered into two-year employment agreement and accompanying stock option agreement with Linda B. Grable, our Chief Executive Officer. The agreement provided an annual base salary of $168,000. Ms. Grable was also granted an option to purchase 6,000,000 shares of the Company’s common stock, of which 3,000,000 shares vested and became exercisable on the effective date of the employment agreement and 3,000,000 shares shall vest and become exercisable on March 22, 2011. The option exercise price per share is $.05, the closing price of the Company’s common stock on March 22, 2010. Ms. Grable’s new employment agreement replaces her previous employment agreement which expired on April 15, 2010.
On March 22, 2010, the Company entered into two-year employment agreement and accompanying stock option agreement with Allan L. Schwartz, our Executive Vice-President and Chief Financial Officer. The agreement provided an annual base salary of $192,400. Mr. Schwartz was also granted an option to purchase 6,000,000 shares of the Company’s common stock, of which 3,000,000 shares vested and became exercisable on the effective date of the employment agreement and 3,000,000 shares shall vest and become exercisable on March 22, 2011. The option exercise price per share is $.05, the closing price of the Company’s common stock on March 22, 2010. His previous employment agreement expired on March 22, 2010.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(25) COMMITMENTS AND CONTINGENCIES (Continued)
On March 22, 2010, the Company entered into two-year employment agreement with Deborah O’Brien, our Senior Vice-President. The agreement provided an annual base salary of $138,000. Ms. O’Brien was also granted an option to purchase 6,000,000 shares of the Company’s common stock, of which 3,000,000 shares vested and became exercisable on the effective date of the employment agreement and 3,000,000 shares shall vest and become exercisable on March 22, 2011. The option exercise price per share is $.05, the closing price of the Company’s common stock on March 22, 2010. Her previous employment agreement expired on September 14, 2008.
We previously carried $3,000,000 in product liability insurance to cover both clinical sites and sales. As part of our cost savings initiatives, we cancelled the policy as we have not had any adverse experiences after conducting more then 25,000 patient scans worldwide. We are now self-insuring the risk of product liability.
From May 2010 to June 2012, claims were made by the IRS for payment of our accrued payroll taxes, interest and penalties, which as of June 30, 2012 was $1,489,640. We engaged tax counsel to handle this matter and intend to fully satisfy our tax obligations. In order to qualify for an IRS Installment Agreement, we must be current in our payment of payroll taxes in the period they are due. We have paid all of our payroll taxes payable for the calendar year 2012.
The IRS sent formal collection demands for each quarter we were delinquent in payment of payroll taxes beginning with the quarter ending March 31, 2010. On November 22, 2011, the IRS filed a lien with the Secretary of State of Florida in Tallahassee, Florida totaling $779,996. Subsequently, on February 2, 2012, the IRS filed a lien with the Secretary of State of Florida in Tallahassee, Florida totaling $140,439; and on June 28, 2012, the IRS filed a lien with the Secretary of State of Florida in Tallahassee, Florida totaling $1,479. Our tax counsel negotiated an Installment Agreement to make installment payments to satisfy outstanding taxes, penalties and interest due. The Installment Agreement states that we must pay $15,000 a month for 12 months with the first payment due by November 28, 2012; $20,000 a month for 12 months beginning November 28, 2013; and $25,000 a month for 12 months beginning November 28, 2014 until such time as the balance owed is paid in full. In the event that we are able to pay off the balance due to the IRS, our tax counsel would attempt to negotiate a waiver on the penalties.
From July 1, 2012 through October 10, 2012, we have made payments to the IRS totaling $121,584. We have paid all of our payroll taxes payable for the calendar year 2012. Of the $121,584, we paid accrued payroll taxes totaling $67,359 for the quarter ending March 31, 2012 and $21,134 for the quarter ending June 30, 2012. These payments reduced the balance of accrued payroll taxes from $1,480,455 to $1,391,691. We paid a total of $33,091 for the quarter ending September 30, 2012 and $2,174 during the second quarter through October 10, 2012.
If we ultimately are unable to pay the outstanding payroll tax, penalties and interest on a timetable pursuant to the terms of the Installment Agreement, we may have to cease operations.
(26) SUBSEQUENT EVENTS - UNAUDITED
On August 2, 2012, the Board approved the Authorized Share Increase in the number of authorized shares of Common Stock from 4,000,000,000 shares of Common Stock to 10,000,000,000 shares of Common Stock and recommended to the Majority Stockholder that the Authorized Share Increase be approved. On August 2, 2012, the Majority Stockholder approved the Authorized share increase by written consent in lieu of a meeting in accordance with Florida law.
On July 21, 2011, we entered into an agreement with Ft. Lauderdale Business Plaza Associates, an unaffiliated third-party, for an additional 4,800 square feet of commercial office space at 5301 NW 35th Terrace, Ft. Lauderdale, Florida. The term of the lease will run concurrent with our original lease commencing on September 1, 2011 and terminating on September 30, 2013. The monthly base rent for the initial year is $4,500 plus applicable sales tax and increase by 3.5% each year to the lease expiration. We terminated this lease agreement and obtained a release dated August 2, 2012 from Ft. Lauderdale Business Plaza Associates.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(26) SUBSEQUENT EVENTS - UNAUDITED (Continued)
In July 2012, we received $20,100 from a private investor pursuant to four short-term promissory notes with a maturity date ranging from July 9, 2013 to July 24, 2013. The notes provide for a redemption premium of 15% of the principal amount upon maturity. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $20,100 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
In August 2012, we received $25,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $25,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice. We reserved 50,000,000 shares of our common stock in connection with this loan.
In August 2012, we received $95,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $95,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 400,000,000 shares of our common stock in connection with this loan.
On August 20, 2012, Southridge sold $70,000 of their original $100,000 short-term promissory note dated October 12, 2011 to Levin Consulting Group. The terms of the original note remain the same except that the holder may elect at an Event of Default to convert any part or all of the $70,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
In August 2012, we received $35,000 from Levin Consulting Group pursuant to a short-term promissory note with a maturity date of August 20, 2013. The note provides for a redemption premium of 15% of the principal amount on or before November 18, 2012; 20% on or before December 18, 2012; 25% on or before January 17, 2013; and 30% on or before February 16, 2013. Interest will accrue at 10% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $35,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
On August 20, 2012, Southridge sold $30,000 of their original $100,000 short-term promissory note dated October 12, 2011 to SGI Group LLC (“SGI”). The terms of the original note remain the same except that the holder may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(26) SUBSEQUENT EVENTS - UNAUDITED (Continued)
In August 2012, we received $15,000 from SGI pursuant to a short-term promissory note with a maturity date of August 20, 2013. The note provides for a redemption premium of 15% of the principal amount on or before November 18, 2012; 20% on or before December 18, 2012; 25% on or before January 17, 2013; and 30% on or before February 16, 2013. Interest will accrue at 10% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $15,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
In September 2012, we received $29,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $30,000. The note provides for a $1,000 original issue discount. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Southridge may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 150,000,000 shares of our common stock in connection with this loan.
In September 2012, we received $25,000 from Panache pursuant to a short-term promissory note of which the principal on the note was $30,000. The note provides for a $5,000 original issue discount. The note provides for a redemption premium of 15% of the principal amount on or before December 31, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Panache may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 200,000,000 shares of our common stock in connection with this loan.
In September 2012, we received $30,000 from Southridge pursuant to a short-term promissory note. The note provides for a redemption premium of 20% on or before December 17, 2012; 25% on or before March 17, 2013; and 30% on or before June 15, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 700,000,000 shares of our common stock in connection with this loan.
On September 26, 2012, a private investor sold $30,000 of its original $100,000 short-term promissory note dated November 23, 2009 to OTC Global Partners. The terms of the original note remain the same except that the new note provides for a new redemption premium of 15% of the principal amount on or before September 25, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. OTC Global Partners may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(26) SUBSEQUENT EVENTS - UNAUDITED (Continued)
the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
In October 2012, we received $30,000 from Panache pursuant to a short-term promissory note. The note provides a maturity date of September 28, 2013. Interest will accrue at 10% per annum until maturity. Any amount on principal or interest that remains unpaid when due, shall bear an interest rate of 22% from the due date until paid. Panache may elect at an Event of Default to convert any part or all of the $30,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
In October 2012, we received $38,500 from FLUX Carbon Starter pursuant to a short-term promissory note. The note provides a maturity date of October 3, 2013. We received net proceeds of $33,250 after deductions of $3,500 for legal fees and $1,750 for a finder’s fee. Interest will accrue at 10% per annum until maturity. FLUX Carbon Starter may elect at an Event of Default to convert any part or all of the $38,500 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the five trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date.
In October 2012, we received $27,000 from Southridge pursuant to a short-term promissory note of which the principal on the note was $40,000. The note provides for a $13,000 original issue discount. The note provides for a redemption premium of 20% on or before January 7, 2012; 25% on or before April 7, 2013; and 30% on or before July 15, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. The holder may elect at an Event of Default to convert any part or all of the $40,000 Principal Amount of the Note plus accrued interest into shares of our common stock at an Initial Conversion Price equal to 50% of the lowest closing bid price during the ten trading days immediately prior to the date of the conversion notice; provided that if the closing bid price for the common stock on the Clearing Date is lower than the Initial closing bid price, then the Purchase price shall be adjusted such that the discount shall be taken from the Closing Bid Price on the clearing date. We reserved 300,000,000 shares of our common stock in connection with this loan.
On July 17, 2012, Ms. Grable executed a full debt to equity conversion of a $13,000 short-term promissory note in which she converted $13,000 principal and $148 in interest. We issued Ms. Grable 43,827,215 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.0003 per share.
On July 17, 2012, a private investor executed a partial debt to equity conversion of five of her notes in which she converted $19,583 principal into 100,000,000 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.000177 per share.
On July 25, 2012, a private investor executed a full debt to equity conversion of a $3,000 short-term promissory note in which she converted $3,000 principal into 10,000,000 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.0003 per share.
On July 30, 2012, a private investor executed a partial debt to equity conversion of a $10,000 short-term promissory note in which she converted $6,900 principal into 23,000,000 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.0003 per share.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(26) SUBSEQUENT EVENTS - UNAUDITED (Continued)
On August 7, 2012, a private investor sold their December 2011 short-term promissory notes totaling $21,604 in principal and $5,334 in premium to OTC Global Partners. A new short-term promissory note was issued to OTC Global Partners dated August 7, 2012 with a taking period back to December 7, 2011. OTC Global Partners may elect at an Event of Default to convert any part or all of the $21,604 Principal Amount of the Note plus accrued premium into shares of our common stock at a conversion price $0.00032.
On August 7, 2012, OTC Global Partners executed a partial debt to equity conversion of the $21,604 short-term promissory note in which they converted $21,604 principal and $2,396 in premium. We issued OTC Global Partners 75,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00032 per share.
On September 5, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated September 28, 2011 in which they converted $85,582 principal. We issued Southridge 380,363,446 Common shares pursuant to Rule 144 based on an agreed conversion price of $0.00023 per share.
On September 10, 2012, Levin Consulting Group executed a partial debt to equity conversion of the $70,000 short-term promissory note originally dated August 25, 2011 and purchased on August 20, 2012 from Southridge, in which they converted $20,000 principal. We issued Levin Consulting Group 80,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00025 per share. On September 21, 2012 we issued Levin Consulting Group an additional 120,000,000 shares because the closing bid price on the clearing date fell below the Initial closing bid price.
On September 10, 2012, Panache executed a partial debt to equity conversion of a $100,000 short-term promissory note dated August 25, 2011 in which they converted $14,885 principal. We issued Panache 80,026,882 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000186 per share.
On September 11, 2012, Southridge executed a final debt to equity conversion of a $100,000 short-term promissory note dated September 28, 2011 in which they converted $10,418 principal and $3,004 in interest. We issued Southridge 89,478,883 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00015 per share.
On September 11, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated October 26, 2011 in which they converted $32,500 principal and $7,036 in interest. We issued Southridge 263,570,776 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00015 per share.
On September 12, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated October 26, 2011 in which they converted $4,150 principal. We issued Southridge 27,666,667 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00015 per share.
On September 12, 2012, Panache executed a partial debt to equity conversion of a $40,000 short-term promissory note dated November 21, 2011 in which they converted $23,250 principal. We issued Panache 125,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000186 per share.
On September 19, 2012, Panache executed a final debt to equity conversion of a $40,000 short-term promissory note dated November 21, 2011 in which they converted $16,750 principal and $3,244 in interest. We issued Panache 128,991,484 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000155 per share.
On September 20, 2012, Southridge executed a partial debt to equity conversion of a $100,000 short-term promissory note dated October 26, 2011 in which they converted $47,300 principal and $153 in interest. We issued Southridge 379,627,369 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000125 per share.
10-K Financial Table of Contents
IMAGING DIAGNOSTIC SYSTEMS, INC.
(a Development Stage Company)
Notes to Financial Statements (Continued)
(26) SUBSEQUENT EVENTS - UNAUDITED (Continued)
On September 27, 2012, OTC Global Partners executed a partial debt to equity conversion of the $30,000 short-term promissory note in which they converted $18,000 in principal. We issued OTC Global Partners 180,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001 per share.
On September 28, 2012, Panache executed a partial debt to equity conversion of a $25,000 short-term promissory note dated February 28, 2012 in which they converted $13,200 principal. We issued Panache 120,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00011 per share.
On October 1, 2012, Southridge executed a final debt to equity conversion of a $100,000 short-term promissory note dated October 26, 2011 in which they converted $16,050 principal and $219 in interest. We issued Southridge 162,691,781 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001 per share.
On October 1, 2012, Southridge executed a partial debt to equity conversion of a $20,000 short-term promissory note dated November 14, 2011 in which they converted $10,900 principal and $1,398 in interest. We issued Southridge 122,983,562 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001 per share.
On October 2, 2012, Southridge executed a final debt to equity conversion of a $20,000 short-term promissory note dated November 14, 2011 in which they converted $9,100 principal and $18 in interest. We issued Southridge 91,175,304 common shares pursuant to Rule 144 based on an agreed conversion price of $0.0001 per share.
On October 3, 2012, SGI Group executed a partial debt to equity conversion of the $30,000 short-term promissory note originally dated August 25, 2011 and purchased on August 20, 2012 from Southridge, in which they converted $9,000 principal and $106 in interest. We issued SGI Group 182,124,200 common shares pursuant to Rule 144 based on an agreed conversion price of $0.00005 per share.
On October 4, 2012, Panache executed a partial debt to equity conversion of a $25,000 short-term promissory note dated February 28, 2012 in which they converted $6,600 principal. We issued Panache 120,000,000 common shares pursuant to Rule 144 based on an agreed conversion price of $0.000055 per share.
As of October 10, 2012 we owe a total of $1,872,269 in short-term debt. Of the $1,872,269 we owe a total of $1,247,724 in principal, $594,830 in premium and $29,716 in interest.
We have not yet received an extension of maturity dates on $322,750 principal of notes from a private investor and are in technical default of the notes. We are negotiating with the lender to extend the maturity dates.
On September 7, 2012, JMJ executed a debt to equity conversion of $19,572 in principal of the third tranche of $35,000, which we closed on October 7, 2011. We issued JMJ 120,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.000163 per share.
On October 3, 2012, JMJ executed a debt to equity conversion totaling $42,000 of which $14,501 was principal and $3,150 was interest for the third tranche of $35,000, which we closed on October 7, 2011; and $24,349 was principal of the fourth tranche of $25,000, which we closed on February 8, 2012. We issued JMJ 300,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.00014 per share.
We received $10,000 from a partial closing on the fourth tranche with JMJ on October 3, 2012. In connection with this partial third tranche we will pay a 7% Finder’s Fee, which is $700.
As of October 10, 2012, we owe a total of $66,651 in long-term debt. Of the $66,651 we owe a total of $50,526 in principal, $9,375 is consideration on the principal and $6,750 is interest.
The Company has entered into agreements with various distributors located throughout Europe, Asia and South America to market the CTLM® device. The terms of these agreements range from twelve months to three years. The Company has the right to renew the agreements, with renewal periods ranging from one to five years.
10-K Main Table of Contents
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.
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, and as more fully described below, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective.
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.
Management's Annual Report on Internal Control Over Financial Reporting
Management of our company is responsible for establishing and maintaining adequate internal control over financial reporting, as required by Sarbanes-Oxley (SOX) Section 404 A. Our company's internal control over financial reporting is a process designed under the supervision of our company's Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our company's financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
As of June 30, 2012, management assessed the effectiveness of our company's internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting such assessments. Based on that evaluation, they concluded that, during the period covered by this report, such internal controls and procedures were not effective to detect the inappropriate application of US GAAP rules as more fully described below. This was due to deficiencies that existed in the design or operation of our internal control over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.
Those identified control weaknesses include:
1.
We do not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the selection and application of U.S. GAAP and SEC reporting requirements commensurate with our financial reporting requirements.
2.
We do not maintain sufficient policies and procedures to prevent and/or detect material misstatements over the valuation and recording of derivative securities or beneficial conversion rights of debt and equity instruments.
10-K Main Table of Contents
Due to the nature of these material weaknesses in our internal control over financial reporting, there is more than a remote likelihood that misstatements which could be material to our annual or interim financial statements could occur and would not be prevented or detected. To remediate these weaknesses, during fiscal year 2013, we will:
·
Implement changes to our internal control over financial reporting to ensure that we properly record and calculate derivative securities and beneficial conversion rights of debt and equity instruments.
Our plan is to:
·
Either hire additional accounting personnel or employ third party consultants to assess our current deficiencies and to formulate recommendations and implement them and overall financial reporting controls to assure compliance with GAAP and SEC requirements.
·
We anticipate that we will be able to complete these remediation efforts by the end our next fiscal year-end of June 30, 2013.
Management believes that the material weaknesses set forth in items (1) and (2) above did not have an effect on our company’s financial results.
We are committed to improving our financial organization. As part of this commitment, we will prepare and implement sufficient written policies and checklists which will set forth procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements.
Management believes that preparing and implementing sufficient written policies and checklists will remedy the following material weaknesses (i) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements; and (ii) ineffective controls over period end financial close and reporting processes.
We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow. This annual report does not include an attestation report of our company's registered public accounting firm regarding internal control over financial reporting.
Management's report is not subject to attestation by our company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission.
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Item 9B.
Item 9B. Other Information -
None
The remainder of this page is intentionally blank.
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Part III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Directors, Executive Officers and Corporate Governance
Compensation Discussion and Analysis
This section describes the material elements of compensation awarded to, earned by or paid to the individuals who served as our former chief executive officer, our current chief executive officer, our executive vice president & chief financial officer, and our senior vice president during fiscal 2011. These individuals are listed in the “Summary Compensation Table” below and are referred to as the “Named Executive Officers”.
Our executive compensation programs were determined and proposed by our Compensation Committee and approved by our Board of Directors, for so long as the Compensation Committee was in existence. None of the Named Executive Officers were members of the Compensation Committee or otherwise had any role in determining the compensation of other Named Executive Officers, although the Compensation Committee did consider the recommendations of our CEO in setting compensation levels for our other executive officers. Our Compensation Committee was comprised of three out of our four independent directors. On February 27, 2008, Edward Rolquin, a member of the Compensation Committee, announced his retirement from the Board of Directors. On April 16, 2008, we received and accepted the resignations of our three outside directors: Jay Bendis; Patrick Gorman; and Sherman Lazrus. Mr. Gorman was not a member of the Compensation Committee. These resignations were tendered to comply with a request by outside funding sources as a condition to such funding. Upon their resignations, the Board of Directors assumed the duties of the Compensation Committee. Thus, the Board of Directors performed the duties of the Compensation Committee for fiscal 2010, fiscal 2011 and fiscal 2012.
Executive Compensation Program Objectives and Overview.
The Compensation Committee conducts an annual review of our executive compensation programs to ensure that:

the program is designed to achieve our goals of promoting financial and operational success by attracting, motivating and facilitating the retention of key employees with outstanding talent and ability; and

the program adequately rewards performance which is tied to creating stockholder value.

Our current executive compensation program is based on two components, which are designed to be consistent with our compensation philosophy: (1) base salary and (2) grants of stock options.
In structuring executive compensation packages, the Compensation Committee considers how each component promotes retention and/or motivates performance by the executive. Base salaries, perquisites and personal benefits, and severance and other termination benefits are primarily intended to attract and retain highly qualified executives. We believe that in order to attract and retain top executives, we need to provide them with compensation levels that reward their continued productive service. At the present time the Compensation Committee does not award annual incentive bonuses while we are in the development stage but does believe that such annual awards do motivate executive officers to achieve specific strategies and operating objectives and also help us to attract and retain top executives. The Compensation Committee has discussed the implementation of long-term equity incentives which are primarily intended to align executive officers’ long-term interests with stockholders’ long-term interests, although we believe they also play a role in helping us to attract and retain top executives. Currently, stock option grants are the part of our executive compensation program designed to reward performance and thus the creation of stockholder value.
We view our current executive compensation program as one in which the individual components combine together to create a total compensation package for each executive officer that we believe achieves our compensation objectives. In determining our current executive compensation program and the amounts of compensation for each component of our program, the Compensation Committee evaluates the current executive compensation data for companies in our industry. The Compensation Committee believes that our current executive compensation program is appropriate based on the evaluation of the compensation paid by companies in our industry.
10-K Main Table of Contents
All references below to the Compensation Committee refer to the Board of Directors since April 16, 2008, except where the context requires otherwise.
Current Executive Compensation Program Elements.
Base Salaries
Salaries for our four executive officers are reviewed by the Compensation Committee on an annual basis. During fiscal 2012, the cash salaries paid to Linda Grable, Allan Schwartz, Deborah O’Brien and Michael Addley were $168,000, $192,400, $138,000, and $50,000 respectively. During fiscal 2011, the cash salaries paid to Linda Grable, Allan Schwartz and Deborah O’Brien were $168,000, $192,400, and $138,000, respectively. During fiscal 2010, the cash salaries paid to Linda Grable, Allan Schwartz and Deborah O’Brien were $156,000, $192,400, and $105,859, respectively.
Annual Incentive Bonuses
The Compensation Committee may elect to award incentive bonuses as part of total compensation to executive officers who have rendered services during the year that exceed those normally required or anticipated or who have achieved specific targeted objectives with regard to sales performance, financial performance, inventory efficiencies and other criteria which may be established from time to time. These bonuses are intended to reflect the Compensation Committee’s determination to reward any executive who, through extraordinary effort, has substantially benefited the Company and its stockholders during the year. During fiscal 2012, no annual incentive bonuses were paid.
Stock Option Grants
Our policy is that the long-term compensation of our Named Executive Officers and other executive officers should be directly linked to the value provided to stockholders. Therefore, we have periodically made grants of stock options to provide further incentives to our executives to increase stockholder value. During fiscal 2012 the stock option grant to Michael Addley was 10,000,000 shares. During fiscal 2012 and fiscal 2011, there were no stock option grants made to Linda Grable, Allan Schwartz and Deborah O’Brien. During fiscal 2010, the stock option grants made to Linda Grable, Allan Schwartz and Deborah O’Brien were 6,000,000, 6,000,000 and 6,000,000, respectively. Stock options are granted with an exercise price that is equal to the closing price of our common stock on the grant date. Thus, the recipients will realize value on their stock options if our stockholders realize value on their shares.
The Compensation Committee bases its grants of stock options to executives on a number of factors, including:
•
the executive’s position with us and total compensation package;
•
the executive’s performance of his or her individual responsibilities; and
•
the executive’s contribution to the success of our financial performance.
Compensation Committee Report
The following statement shall not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, and shall not otherwise be deemed filed under either of these acts.
Due to the resignation of our independent directors, the Compensation Committee did not review and discuss with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee was an officer or employee of our Company during the prior year or was formerly an officer of our Company. During the fiscal year ended June 30, 2012, none of our executive officers served on the Compensation Committee of any other entity, any of whose directors or executive officers served either on our Board of Directors or on our Compensation Committee.
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The following table sets forth certain information concerning our directors and executive officers:
Linda Grable and Allan Schwartz are 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.
Linda Grable
Linda Grable was appointed our Chief Executive Officer and a Director of the Company in April 2008. Ms. Grable had previously served as our Chief Executive Officer from August 2001 until April 2004, and, from inception in 1993 until April 2004, had served as Chairman of the Board and Director of the Company. Ms. Grable retired as our CEO and Chairman of the Board on April 16, 2004. Upon the resignations of our independent directors, Ms. Grable volunteered to come out of retirement to serve as our Chief Executive Officer and a Director. She has played a major role in raising approximately $46 million in debt and equity funding for the research and development of the CTLM® device. She has over 40 years experience in negotiating funding with banking institutions for both medical and real estate development businesses. Ms. Grable has over 25 years of executive experience in the medical device industry, for both sales and marketing in the U.S. and foreign countries. She is a graduate of Ohio State University and holds a BA in Journalism and Marketing.
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.
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® 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 FDA Application. She also supervised and managed the collection of clinical data for the FDA approval process. Prior to joining IDSI, she worked for seven years in the financial arena, managing investor
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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.
Michael Addley
Mr. Addley is an executive with decades of experience leading domestic and international medical device operations. The Company believes that his extensive experience in launching “high-tech” medical devices and new procedures will play a valuable role in the Company’s efforts to pursue FDA marketing clearance. Most recently, from 2006-2008, Mr. Addley served as Vice President/New Business Development of Polar Technics Ltd. (Australia), and since 2008 has provided consulting services to medical device manufacturers, including the Company, through his consulting firm Addley International Corp., London, Ontario.
Committees
Due to the resignation on April 16, 2008 of our three remaining independent directors, the following committees have no members until such time as new independent members are appointed to fill these committees: Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee. Until such time as we secure sufficient funding to enable the Company to obtain additional qualified independent directors, the responsibilities of these committees will continue to be served by the three current executive officers/directors.
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 ten 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, 2012.
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Item 11.
Item 11. Executive Compensation
The following table sets forth the compensation awarded to, earned by or paid to our Chief Executive Officer, Executive Vice President & CFO, and Senior Vice President for services rendered to us during fiscal 2012.
SUMMARY COMPENSATION TABLE - FISCAL 2012
(1)
All Named Executive Officers receive reimbursement for auto expense in the amount of $500 per month. However, during f/y 2012, 2011 and 2010 the Executive Officers agreed to accrue various monthly auto expenses until a time where the Company secures additional financing.
(2)
Salary recorded for f/y 2012 and 2011 includes base salary of $168,000. From January 1, 2012 to June 30, 2012, Ms. Grable deferred $65,159 of her salary which will be accrued until such time as the Company secures additional financing. Effective January 1, 2010, Ms. Grable’s salary increased from $144,000 to $168,000. Previously, from January 1, 2009 through June 30, 2009, Ms. Grable deferred $39,000 of her salary which was accrued until such time as the Company secures additional financing. The Company secured the additional financing and Ms. Grable was paid the $39,000 of deferred salary in f/y 2010. On April 16, 2008, Ms. Grable came out of retirement and rejoined the company as Chairman of the Board and CEO. As of June 30, 2012, Ms. Grable is owed a total of $65,159 of her salary from the current fiscal year.
(3)
Salary recorded for f/y 2012 and 2011 includes base salary of $192,400. From January 1, 2012 to June 30, 2012, Mr. Schwartz deferred $76,475 of his salary which will be accrued until such time as the Company secures additional financing. Previously, from January 1, 2009 through June 30, 2009, Mr. Schwartz deferred $52,108 of his salary which was accrued until such time as the Company secures additional financing. The Company secured the additional financing and Mr. Schwartz was paid the $52,108 of deferred salary in f/y 2010. From July 1, 2008 through July 31, 2008, Mr. Schwartz deferred $4,008 of his salary until a time where the Company secures additional financing. Salary recorded for f/y 2008 includes base salary of $179,142 plus $6,660 vacation pay. From April 1, 2008 through June 30, 2008, Mr. Schwartz deferred $12,025 of his salary until a time where the Company secures additional financing. As of June 30, 2012, Mr. Schwartz is owed a total of $92,508 of his salary from the current and previous fiscal years.
(4)
Salary recorded for f/y 2012 and 2011 includes base salary of $138,000, however Ms. O’Brien is only working part-time and her reduced base salary is $69,000. From January 1, 2012 to June 30, 2012, Ms. O’Brien deferred $22,539 of her salary which will be accrued until such time as the Company secures additional financing. Ms. O’Brien took a temporary leave of absence during f/y 2010 and was only paid $105,859. Previously, from January 1, 2009 through June 30, 2009, Ms. O’Brien deferred $37,375 of her salary which was accrued until such time as the Company secures additional financing. The Company secured the additional financing and Ms. O’Brien was paid the $37,375 of deferred salary in f/y 2010.
(5)
Salary recorded for f/y 2012 includes base salary of $100,000. From January 1, 2012 to June 30, 2012, Mr. Addley deferred $37,652 of his salary which will be accrued until such time as the Company secures additional financing.
(6)
During the third and fourth quarter of f/y 2012, the Executive Officers were paid a portion of their respective salaries with the balance due accrued until such time as the Company secures additional financing. The Company secured the additional financing and all three Executive Officers were paid their deferred salary in f/y 2010 except Mr. Schwartz is owed a total of $16,033 of his salary from previous fiscal years.
(7)
During November 2011, 500,000 shares of shares of common stock were issued as a bonus to all Company employees. However, the executive officers’ shares were issued with a restrictive legend while the other employees’ shares were issued without restrictive legend due to the de-minimus size of the issuance. Compensation expense of $3,000 per employee was recorded as the fair market value of the common stock on the date of issuance was $.006 per share. During September 2010, 250,000 shares of shares of common stock were issued as a bonus to all Company employees. However, the executive officers’ shares were issued with a restrictive legend while the other employees’ shares were issued without restrictive legend due to the de-minimus size of the issuance. Compensation expense of $5,750 per employee was recorded as the fair market value of the common stock on the date of issuance was $.023 per share. During December 2009, 250,000 shares of common stock were issued as a bonus to all Company employees. However, the executive officers’ shares were issued with a restrictive legend while the other employees’ shares were issued without restrictive legend due to the de-minimus size of the issuance. Compensation expense of $5,000 per employee was recorded as the fair market value of the common stock on the date of issuance was $.02 per share. .
(8)
Amount listed represents the dollar amount we recognized for financial reporting purposes under FASB guidance, “Share Based Payment”. Assumptions made for the purpose of computing this amount are discussed in Note 2(j) to the Notes to our Financial Statements contained in this report.
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OUTSTANDING EQUITY AWARDS AT FISCAL 2012 YEAR-END
The following table sets forth information concerning unexercised options outstanding for each of our Named Executive Officers at June 30, 2012.
(1)
Ms. Grable had 10,000,000 stock options outstanding as of June 30, 2012 of which 10,000,000 are fully vested.
(2)
Mr. Schwartz had 11,100,000 stock options outstanding as of June 30, 2012 of which 11,100,000 are fully vested.
(3)
Ms. O’Brien had 6,802,000 stock options outstanding as of June 30, 2012 of which 6,802,000 are fully vested.
(4)
Mr. Addley had 10,000,000 stock options outstanding as of June 30, 2012 of which 5,000,000 are fully vested.
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OPTION EXERCISES AND STOCK VESTED - FISCAL 2012
The following table sets forth information concerning each exercise of stock options for each of our Named Executive Officers during the year ended June 30, 2012.
Employment Agreements
Linda Grable
On April 16, 2008, Ms. Grable came out of retirement and rejoined the company as Chairman of the Board and CEO. Previously, on April 15, 2004 Ms Grable retired. On April 28, 2008, we entered into a two-year employment agreement and an accompanying stock option agreement with Ms. Grable. The Agreement is for a two-year term commencing April 16, 2008, and provides an annual base salary of $144,000 per annum. The option agreement provides an option to purchase 1,000,000 shares of the Company’s common stock which shall vest and become exercisable in one year from the date of the grant. The option exercise price per share is $.045.
On March 23, 2009, we entered into a one-year employment agreement effective March 23, 2009 at an annual salary of $144,400. Ms. Grable was also granted an option to purchase 3,000,000 shares of the Company’s common stock which shall vest and become exercisable on March 24, 2009. The option exercise price per share is $.01 based on the closing price on March 23, 2009 of $.0085. The new agreement supersedes her April 16, 2008 employment Agreement except that the 1,000,000 options granted in that agreement remain in effect and vested on April 16, 2009.
On March 22, 2010, we entered into two-year employment agreement and accompanying stock option agreement with Ms. Grable. The agreement provided an annual base salary of $168,000. She was also granted an option to purchase 6,000,000 shares of the Company’s common stock, of which 3,000,000 shares vested and became exercisable on the effective date of the employment agreement and 3,000,000 shares shall vest and become exercisable on March 22, 2011. The option exercise price per share is $.05, the closing price of the Company’s common stock on March 22, 2010. Ms. Grable’s new employment agreement replaces her previous employment agreement which expired on April 15, 2010. On March 21, 2012, Ms. Grable’s employment agreement expired and she is serving as CEO with no current employment agreement.
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Allan L. Schwartz
On August 30, 2004 Allan L. Schwartz, our Executive Vice-President and Chief Financial Officer, entered into a one-year Employment Extension Agreement, 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. On September 12, 2005, we entered into a one-year employment agreement effective August 30, 2005 with Mr. Schwartz, 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. On September 12, 2006, we entered into a one-year employment agreement effective August 30, 2006 with Mr. Schwartz at an annual salary of $185,000. Mr. Schwartz was also granted 250,000 non-statutory stock options at an exercise price of $.114 per share, the fair market value at the date of the grant, which will vest on August 30, 2007. On August 30, 2007, we entered into a one-year employment agreement effective August 30, 2006 with Mr. Schwartz at an annual salary of $192,400. Mr. Schwartz was also granted 250,000 non-statutory stock options at an exercise price of $.058 per share, in accordance with our 2007 Non-Statutory Stock Option Plan. The exercise price was the fair market value at the date of the grant, and the options vested on August 30, 2008. On March 23, 2009, we entered into a one-year employment agreement effective March 23, 2009 at an annual salary of $192,400. Mr. Schwartz was also granted an option to purchase 3,000,000 shares of the Company’s common stock which shall vest and become exercisable on March 24, 2009. The option exercise price per share is $.01 based on the closing price on March 23, 2009 of $.0085.
On March 22, 2010, we entered into two-year employment agreement with Mr. Schwartz at an annual salary of $192,400. Mr. Schwartz was also granted an option to purchase 6,000,000 shares of the Company’s common stock, of which 3,000,000 shares vested and became exercisable on the effective date of the employment agreement and 3,000,000 shares shall vest and become exercisable on March 22, 2011. The option exercise price per share is $.05, the closing price of the Company’s common stock on March 22, 2010. His previous employment agreement expired on March 22, 2010. On March 21, 2012, Mr. Schwartz’s employment agreement expired and he is serving as Executive Vice-President and CFO with no current employment agreement.
Deborah O’Brien
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 September 12, 2006, we entered into a one-year employment agreement with Ms. O’Brien at an annual salary of $125,000. The Senior Vice-President was also granted a $25,000 performance bonus opportunity (which later expired) and 250,000 non-statutory stock options at an exercise price of $.114 per share, the fair market value at the date of the grant, which will vest in one year. On August 30, 2007, we entered into a one-year employment agreement commencing on September 15, 2007 with Ms. O’Brien at an annual salary of $138,000. The Senior Vice-President was also granted 250,000 non-statutory stock options on September 15, 2007 at an exercise price of $.084 based on the fair market value at the date of the grant. These options vested on September 15, 2008. From September 15, 2008, until March 22, 2010, Ms. O’Brien worked without an employment agreement.
On March 22, 2010, we entered into two-year employment agreement with Ms. O’Brien at an annual salary of $138,000. Ms. O’Brien was also granted an option to purchase 6,000,000 shares of the Company’s common stock, of which 3,000,000 shares vested and became exercisable on the effective date of the employment agreement and 3,000,000 shares shall vest and become exercisable on March 22, 2011. The option exercise price per share is $.05, the closing price of the Company’s common stock on March 22, 2010. On March 21, 2012, Mr. O’Brien’s employment agreement expired and she is serving as Senior Vice-President with no current employment agreement.
Michael Addley
On December 8, 2011, we entered into entered into a two-year employment agreement and accompanying stock option agreement with Michael W. Addley to become the Company’s Chief Operating Officer effective January 1, 2012. The Agreement provides an annual base salary of $100,000 per annum and an option to purchase 10,000,000 shares of the Company’s common stock, of which 2,500,000 shares which shall vest and become exercisable on
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April 1, 2012; 2,500,000 shares shall vest and become exercisable on June 29, 2012; 2,500,000 shares shall vest and become exercisable on September 27, 2012; 2,500,000 shares shall vest and become exercisable on December 25, 2012. The option exercise price per share is $.005, the closing price of the Company’s common stock on December 8, 2011.
Potential Payments Upon Termination or Change in Control
Michael Addley
Upon termination of Mr. Addley’s employment agreement for any reason other than voluntary termination; termination “without cause” or termination by the Company for “Cause” as defined below, the following will apply:
(b) Termination without Cause. The Company may terminate the Executive’s employment without cause. Such termination will become effective upon the date specified in the termination notice, provided that such date is at least 180 days from the date of such notice. In the event of such termination without cause:
(i) The Company will continue to pay the Executive his salary pursuant to Section 3(a) through the 180 day notice period.
(ii) The Company will continue to maintain through the 180 day notice period, the benefits provided to the Executive referred to in Section 3(b) as in effect on the date of termination.
On the effective date of termination, all options that were scheduled to vest will vest and will remain exercisable for a period of three years from the date of this Agreement.
The compensation payments and other consideration to which the Executive is entitled on termination without cause shall not be diminished or otherwise affected by any employment thereafter obtained or income thereafter earned by Executive nor will the Company maintain that it is entitled to mitigation of amounts owed under this section for any reason.
(c) Termination for Cause. The Company may terminate the Executive’s employment at any time for cause by giving written notice of termination setting forth such cause. Such termination shall become effective upon the giving of such notice, except that, where the basis for cause is capable of cure within 30 days, termination based upon cause shall not become effective unless Executive shall fail to complete such cure within 30 days of receipt of written notice of the existence of such cause. Upon such termination the Executive shall have no right to compensation, commission, bonus, benefits or reimbursement pursuant to this Agreement, for any period subsequent to the effective date of termination. Further, upon termination for cause, all of the Executive’s unvested stock options shall terminate. For purposes of this section, “cause” shall mean: (1) the Executive is convicted of a felony; (2) the Executive, in carrying out his duties hereunder, commits gross negligence or willful misconduct resulting, in either case, in material harm to the Company; (3) the Executive misappropriates Company funds or otherwise defrauds the Company; (4) the Executive materially breaches any provision of this Agreement; or (5) the Executive materially fails to perform his duties under section 4 resulting in material harm to the Company.
(d) Death or Disability. Upon the death or disability of the Executive, the Executive shall be entitled to and the Company will pay the Executive’s salary from the date of death or from the date of disability for six months or through the end of the Term, whichever is longer. (For purposes of this Section, “disability” shall mean that for a period of six months in any 12-month period the Executive is incapable of substantially fulfilling his duties because of physical, mental or emotional incapacity arising from injury, sickness or disease.) Should the Executive be rendered disabled, the Company will continue to maintain for the benefit of the Executive the employee benefit programs referred to in Section 3(b) that were in effect on the date of the disability.
(e) Special Termination. In the event that (i) the Executive, with or without a change in title or formal corporate action, shall no longer exercise all of his customary duties and responsibilities and shall no longer possess substantially all the authority customary for a Chief Operating Officer in a publicly-traded company; (ii) the Company materially breaches this Agreement or the performance of its duties and obligations hereunder; or (iii) any entity or person not now an executive officer of the Company becomes either individually or as part of a group the beneficial owner of 20% or more of the Company’s common stock, the Executive, by written notice to the Company, may elect to deem the Executive’s employment hereunder to have been terminated by the Company
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without cause under Section 2(b) hereof, in which event the Executive shall be entitled to the compensation provided for in Section 2(b).
(f) Voluntary Termination. The Executive, on 30 days prior written notice to the Company, may terminate his employment voluntarily. Upon such termination, the Company will pay the Executive’s compensation through the date of such termination. After such date, the Executive shall no longer be entitled to receive any compensation, reimbursement or benefits, and all unvested stock options shall terminate upon termination of the Executive’s employment.
Upon termination of Mr. Addley’s employment agreement without “cause” or by change of control as defined in paragraph (e) Special Termination (ii), we will be obligated to pay the balance of compensation due on his two-year contract which commenced on January 4, 2012. Assuming such termination occurred on June 30, 2012, we estimate that amount to be $50,000.
Director Compensation - Fiscal 2012
During fiscal 2012, we had one independent director, David Schmidt. Mr. Schmidt resigned his position as a Director on June 26, 2012.
During fiscal 2011, we had no independent directors. Our employee directors do not receive separate compensation for their Board service.
In connection with David Schmidt’s appointment to our Board of Directors on August 1, 2011, as an independent, non-employee director, he was compensated $2,000 per quarter and received an annual option grant of 250,000 shares vesting 62,500 shares per quarter beginning on November 1, 2011. All of his options were vested in connection with his resignation. Our non-employee Board members are paid $600 per diem fees for days in which a board meeting is attended or the director is otherwise required to visit the Company or spend a significant amount of a day working on Company matters (“workshop days”). We reimburse reasonable travel expenses for attending board meetings and expenses associated with workshop days.
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 years from the date of termination or change of control, subject to
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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.
On July 26, 2007, the Board of Directors adopted the Company’s 2007 Non-Statutory Stock Option Plan (the “2007 Plan”), which was adopted by the shareholders at our annual meeting held on December 29, 2008. The 2007 Plan will 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 2007 Plan shall be options to purchase 15,693,358 shares of Common Stock (5% of our issued and outstanding common stock as of July 26, 2007). Options may be granted under the 2007 Plan for up to 10 years after the date of the 2007 Plan. The 2007 Non-Statutory Stock Plan replaced the 2004 Non-Statutory Stock Option Plan.
The purposes of the 2007 Plan is to provide directors, officers and employees of, consultants, attorneys and advisors to the Company and its subsidiaries with additional incentives by increasing their ownership interest in the Company. Directors, officers and other employees of the Company and its subsidiaries are eligible to participate in the 2007 Plan. Options in the form of Non-Statutory Stock Options ("NSO") may also be granted to directors who are not employed by the Company and consultants, attorneys and advisors to the Company providing valuable services to the Company and its subsidiaries. In addition, individuals who have agreed to become an employee of, director of or an attorney, consultant or advisor to the Company and/or its subsidiaries are eligible for option grants, conditional in each case on actual employment, directorship or attorney, advisor and/or consultant status. The 2007 Plan provides for the issuance of NSO's only, which are not intended to qualify as "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code, as amended.
The maximum number of options that may be granted under the 2007 Plan shall be options to purchase 15,693,358 shares of Common Stock (4.99% of the Company's issued and outstanding common stock as of July 26, 2007).
Options may be granted under the 2007 Plan for up to 10 years after the date of the 2007 Plan. The Board of Directors of the Company or a Compensation Committee will administer the 2007 Plan with the discretion generally to determine the terms of any option grant, including the number of option shares, exercise price, term, vesting schedule and the post-termination exercise period. Notwithstanding this discretion (i) the term of any option may not exceed 10 years and (ii) an option will terminate as follows: (a) if such termination is on account of termination of employment for any reason other than death, without cause, such options shall terminate one year thereafter; (b) if such termination is on account of death, such options shall terminate 15 months thereafter; and (c) if such termination is for cause (as determined by the Board of Directors and/or Compensation Committee), such options shall terminate immediately. Unless otherwise determined by the Board of Directors or Compensation Committee, the exercise price per share of Common Stock subject to an option shall be equal to no less than 100% of the fair market value of the Common Stock on the date such option is granted. No NSO shall be assignable or otherwise transferable except by will or the laws of descent and distribution or except as permitted in accordance with SEC Release No.33-7646 as effective April 7, 1999 and in particular that portion thereof which expands upon transferability as is contained in Article III entitled "Transferable Options and Proxy Reporting" as indicated in Section A, 1 through 4 inclusive and Section B thereof.
The 2007 Plan may be amended, altered, suspended, discontinued or terminated by the Board of Directors without further stockholder approval, unless such approval is required by law or regulation or under the rules of the stock exchange or automated quotation system on which the Common Stock is then listed or quoted. Thus, stockholder approval will not necessarily be required for amendments which might increase the cost of the 2007 Plan or broaden eligibility except that no amendment or alteration to the Plan shall be made without the approval of stockholders which would (a) increase the total number of shares reserved for the purposes of the Plan or decrease the exercise price (except as provided in Article X of the 2007 Plan relating to recapitalizations and mergers) or change the classes of persons eligible to participate in the Plan or (b) extend the exercise period or (c) materially increase the benefits accruing to 2007 Plan participants or (d) materially modify Plan participation eligibility requirements or (e) extend the expiration date of the Plan. Unless otherwise indicated the 2007 Plan will remain in effect until terminated by the Board of Directors.
On March 11, 2010, the Board of Directors adopted the Company’s 2010 Non-Statutory Stock Option Plan (the “2010 Plan”) and re-adopted the 2010 Plan on February 3, 2011. The Plan was adopted by the shareholders at our annual meeting held on July 12, 2011. The 2010 Plan will 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 2010 Plan shall be options to purchase 37,428,466 shares of Common Stock (5% of our issued and outstanding common stock as of March 10, 2010). Options may be granted under the 2010 Plan for up to 10
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years after the date of the 2010 Plan. The 2010 Non-Statutory Stock Plan replaced the 2007 Non-Statutory Stock Option Plan.
On December 16, 2011, the Board of Directors adopted the Company’s 2011 Non-Statutory Stock Option Plan (the “2011 Plan”). The 2011 Plan will 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 2011 Plan shall be options to purchase 58,491,605 shares of Common Stock (5% of our issued and outstanding common stock as of December 16, 2011). Options may be granted under the 2012 Plan for up to 10 years after the date of the 2011 Plan. The 2011 Non-Statutory Stock Plan replaced the 2010 Non-Statutory Stock Option Plan.
On August 8, 2012, the Board of Directors adopted the Company’s 2012 Non-Statutory Stock Option Plan (the “2012 Plan”). The 2012 Plan will 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 2012 Plan shall be options to purchase 196,781,578 shares of Common Stock (5% of our issued and outstanding common stock as of August 8, 2012). Options may be granted under the 2012 Plan for up to 10 years after the date of the 2012 Plan. The 2012 Non-Statutory Stock Plan replaced the 2011 Non-Statutory Stock Option Plan.
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Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table shows the beneficial ownership of our common stock as of October 10, 2012 regarding:
·
each person that we know of who beneficially owns more than 5% of the outstanding shares of our common stock,
·
each current director and executive officer, and
·
all executive officers and directors as a group.
(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 7,287,218,961 shares of common stock outstanding as of October 10, 2012 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 October 10, 2012 are deemed outstanding for computing the percentage of that person and the group.
(3)
Includes 10,000,000 shares subject to options and 61,337,489 shares owned by Linda B. Grable.
(4)
Includes 10,600,000 shares subject to options and 9,000 shares owned by the wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims beneficial ownership.
(5)
Includes 6,802,000 shares subject to options.
(6)
Includes 7,500,000 shares subject to options.
(7)
Includes 34,902,000 shares subject to options held by Linda Grable, Allan Schwartz, Deborah O’Brien and Michael Addley. Also includes 9,000 shares owned by the wife of Allan L. Schwartz, Carolyn Schwartz, of which he disclaims beneficial ownership.
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.
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Item 13.
Item 13. Certain Relationships and Related Transactions
The late Richard and Linda Grable were husband and wife. Ms. Grable continues to control a substantial portion of our outstanding stock.
In June 1998, IDSI signed an exclusive patent license agreement with Richard Grable. 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 Mr. Grable 7,000,000 shares of common stock and granted a royalty ranging from 6% to 10% of the dollar amount earned from each CTLM® sale before taxes minus the cost of the goods sold and commissions or discounts paid. The royalty provisions do not apply to any sales prior to receipt of the FDA approval for the CTLM®. In addition, following issuance of FDA approval, IDSI Mr. Grable would be paid a minimum royalty of at least $250,000 per year. Mr. Grable’s interest in the patent license agreement passed to his estate, of which Linda Grable is the principal beneficiary.
On March 21, 2012 we entered into a Series Q Preferred Stock Purchase Agreement with Ms. Grable pursuant to which she was issued all of the 51 authorized shares of Series Q Preferred Stock, with a stated value of $0.001 per share as partial consideration for past and future services rendered and recorded the nominal amount of $1.00 for this issuance. The Series Q Preferred Stock has no economic value and was issued solely for voting purposes.
In May 2012, we received $13,000 from Linda Grable pursuant to a short-term promissory note. The note provides for a redemption premium of 15% of the principal amount on or before May 21, 2013. Interest will accrue at 8% per annum until maturity above and beyond the premium. Ms. Grable may elect at an Event of Default to convert any part or all of the $13,000 Principal Amount of the Note plus accrued interest into shares of our common stock at a conversion price equal to 50% of the average of the two lowest closing bid prices during the five trading days immediately prior to the date of the conversion notice.
On July 17, 2012, Ms. Grable executed a full debt to equity conversion of a $13,000 short-term promissory note in which she converted $13,000 principal and $148 in interest. We issued Ms. Grable 43,827,215 restricted common shares pursuant to Rule 144 based on an agreed conversion price of $0.0003 per share.
Item 14.
Item 14. Principal Accounting Fees and Services
For the Fiscal Years ended June 30, 2012 and 2011, we paid audit fees totaling $31,500 and $49,000 respectively, and paid fees for tax services totaling $2,500 and $2,500 respectively.
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Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Exhibits
EXHIBIT
DESCRIPTION
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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/ Linda B. Grable
Linda B. Grable, Chief Executive Officer and Chairman of the Board of Directors
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/Linda B. Grable
Chief Executive Officer
October 15, 2012
Linda B. Grable
and Chairman of the Board of Directors
/s/Allan L. Schwartz
Director, Executive Vice-President,
October 15, 2012
Allan L. Schwartz
and Chief Financial Officer
(Principal Accounting and Financial
Officer)