ITEM 1. OUR BUSINESS
OVERVIEW
Imaging Diagnostic Systems, Inc. ("IDSI") is a development stage medical
technology company. Since its inception in December 1993, we have been engaged
in the development and testing of a Computed Tomography Laser Breast Imaging
System for detecting breast cancer (CT Laser Mammography or, "CTLM(R)"). We are
currently in the process of commercializing the CTLM(R) in certain international
markets.
Although the CTLM(R) system is a CT-like scanner, its energy source for imaging
is a laser beam and not ionizing radiation such as is found in conventional
x-ray mammography or CT scanners. The advantage of imaging without ionizing
radiation may be significant in our markets. X-ray mammography is a
well-established method of imaging the structures within the breast. Ultrasound
is often used as an adjunct to mammography to help differentiate tumors and
cysts. The CTLM(R) is being marketed as an adjunct to mammography and will not
compete directly with X-ray mammography. CTLM(R) is, however, an emerging new
modality offering the potential of molecular functional imaging, which can
visualize the process of angiogenesis which may be used to distinguish between
benign and malignant tissue.
We believe that the adjunctive use of CT laser breast imaging will improve early
diagnosis, reduce diagnostic uncertainty, and decrease the number of biopsies
performed on benign lesions. The CTLM technology is unique and patented. IDSI
intends to develop their technologies into a family of related products. We
believe these technologies and clinical benefits constitute substantial markets
for our products well into the future.
We have a limited history of operations. Since our inception in December 1993,
we have been engaged principally in the development of the CTLM(R). We currently
have a limited source of operating revenue and have incurred substantial net
operating losses since our inception. On June 30, 2004, we had an accumulated
deficit of $77,247,281 after discounts and dividends on Preferred Stock. Such
losses have resulted principally from costs associated with our operations. We
expect operating losses will continue for at least the next 12 months as
substantial costs and expenses continue due principally to the commercialization
of the CTLM(R), sales and marketing in the international market, activities
related to our regulatory processes, and advanced product development
activities. Our ability to achieve profitability will depend in large part on
obtaining regulatory approvals for our proposed products and to develop the
capacity to manufacture and market our approved products either by ourselves or
in collaboration with others. There can be no assurance as to if or when we will
ever receive US regulatory approvals for the commercialization of the CTLM(R),
or achieve profitability. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
BREAST CANCER
According to the American Cancer Society ("ACS"), approximately one in eight
women in the United States will develop breast cancer during her lifetime.
Nationwide, it was estimated that in 2003 211,300 new cases of invasive breast
cancer would occur among women in the United States, and approximately 40,200
women would die from this disease. Excluding skin cancers, the breast is the
most frequent site of cancer among American women, accounting for 32% of
incident cancers and 17% of cancer deaths. It is the second leading cause of
cancer death for American women following lung cancer, which is the leading
cause of cancer death among women. The annual cost of breast cancer
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management in the United States alone is approximately $25 billion.
There is widespread agreement that screening for breast cancer, when combined
with appropriate follow-up, will reduce mortality from the disease. According to
the National Cancer Institute (NCI), the five-year survival rate decreases from
96% to 78% after the cancer has spread to the lymph nodes, and to 18% after it
has spread to other organs such as the lung, liver or brain. A major problem
with current detection methods is that studies have shown that mammography does
not detect, 15%-20% of breast cancers detected by physical exam alone.
Breast cancer screening is generally recommended as a routine part of preventive
healthcare for women over the age of 20 (approximately 90 million in the United
States). For these women, the American Cancer Society (ACS) has published
guidelines for breast cancer screening including: (i) monthly breast
self-examinations for all women over the age of 20; (ii) a baseline mammogram
for women by the age of 40; (iii) a mammogram every one to two years for women
between the ages of 40 and 49; and (iv) an annual mammogram for women age 50 or
older. As a result of family medical histories and other factors, certain women
are at "high risk" of developing breast cancer during their lifetimes. For these
women, physicians often recommend close monitoring, particularly if an
abnormality posing increased risk factors has been detected.
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 cost the U.S. health care system approximately $2.45 billion annually. In
addition, biopsies result in pain, scarring, and anxiety to patients. Patients
who are referred to biopsy usually are required to schedule the procedure in
advance and generally must wait up to 48 hours for their biopsy results.
SCREENING AND DIAGNOSTIC MODALITIES
Mammography
Mammography is an x-ray imaging modality commonly used for both routine breast
cancer screening and as a diagnostic tool. A mammogram produces either films or
electronic images of the internal structure of the breast and surrounding
tissues. In a screening mammogram, radiologists seek to detect suspicious
lesions, while in a diagnostic mammogram radiologist seek to characterize
suspicious lesions. Mammograms require subjective interpretation by a trained
radiologist.
A certified technologist performs the x-ray procedure under strict guidance from
the Congressional Mammography Quality Standards Act (MQSA). MQSA was enacted to
improve x-ray breast cancer detection studies by tightly regulating machine
specifications, quality control procedures, technologist training and
certification, and other variables. Still, mammography is viewed as an
`imperfect' breast cancer detection tool and is often supplemented with
follow-up studies including more x-rays at later dates, closer physical
examination of the patient, adjunctive ultrasound exams, and, when available,
breast MRI or Scintimammography, and biopsy.
Because x-ray mammography exposes the patient to radiation, the American Cancer
Society recommends that mammograms be limited to once per year. In addition,
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x-ray mammography is considered to be less effective for women under the age of
50 who have dense breast tissue which may compromise the breast x-ray study.
Various mechanical means have been implemented to squeeze or compress the breast
to pull tissue away from the chest wall and flatten the tissue so that x-rays
may penetrate the tissue more uniformly. These techniques introduce pain and
discomfort to many mammogram patients. Most mammography exams include 2 views of
each breast which equates to 4 compressions per patient.
The cost of a diagnostic mammogram is approximately $55 to $200 per procedure
(an average of $113) and requires the use of x-ray equipment ranging in cost
from $75,000 to $225,000 and perhaps ultrasound equipment ranging from $60,000
to $200,000.
Digital Mammography
Digital mammography, also referred to as "full-field digital" mammography, is
the latest form of breast x-ray examination. These systems eliminate the use of
x-ray film and record images directly on electronic panels. The digital images
can then be manipulated and examined on an electronic viewing station. However,
the limitations of conventional mammography still exist in digital mammography.
Digital mammography units sell for an average price of $430,000 and procedures
range from $250 to $500.
Magnetic Resonance Imaging
Magnetic resonance imaging ("MRI") produces images using a magnetic field and
radiofrequency (RF) gradients under computer control to produce proton density
images. When applied to breast exams, MRI produces images with 10 to 100 times
more contrast resolution than an x-ray. MRI has proven effective in imaging
breasts with prosthetic implants, detecting recurrent cancer, evaluating the
response to chemotherapy and serving as an additional imaging option when
mammography or ultrasound fails to provide sufficient imaging information.
MRI offers the advantage over x-ray that it can visualize fine-details in breast
tissue but also detect blood flow and angiogenesis associated with malignancies.
The disadvantages are that MRI systems are not widely available in the global
market and the costs of using conventional MRI scanners for breast exams are
sometimes prohibitive. MRI systems sell for approximately $1,200,000 and
procedures range from $1,000 to $2,000.
Ultrasound
Ultrasound systems can image breast tissue by `sonar' techniques. Sound
transducers are placed directly on breast tissue coupled with an acoustic gel
substance. Trained sonographers locate suspicious areas by moving the transducer
and observing the sonar image on an electronic viewing station. In some
countries physicians perform the study.
Ultrasound images are localized to specific areas of suspicion usually detected
by a previous mammogram. If mammographic results suggest a lesion, ultrasound
may differentiate a solid from a cystic mass. The cost for a breast ultrasound
is approximately $125 to $500 per procedure (an average of $235) and requires
the use of capital equipment ranging in cost from approximately $60,000 to
$200,000.
CTLM(R)
Although the CTLM(R) system is a CT-like scanner, its energy source for imaging
is a laser diode beam and not ionizing radiation such as is found in
conventional x-ray mammography or CT scanners. The advantage of imaging without
ionizing radiation may be significant in our markets. X-ray mammography is a
well-established method of imaging the structures within the breast. Ultrasound
is often used as an adjunct to help differentiate tumors and cysts. The CTLM(R)
is being marketed as an adjunct to mammography and will not compete directly
with X-ray mammography. CTLM(R) is, however, an emerging new modality offering
the potential of molecular functional imaging, which can visualize the process
5
of angiogenesis which may be used to distinguish between benign and malignant
tissue.
We believe that the adjunctive use of CT laser breast imaging will improve early
diagnosis, reduce diagnostic uncertainty, and decrease the number of biopsies
performed on benign lesions.
A breast exam utilizing the CTLM(R) is non-invasive and can be performed by a
medical technician. A patient lies face down on the scanning table with one
breast hanging into a specially designed scanning chamber. Once the entire
breast is scanned the other breast may be positioned in the chamber for
scanning. Both breasts can be scanned in approximately 24 minutes. The CTLM(R)
is a sophisticated electro-mechanical scanner under microprocessor and computer
control. Results are available immediately in digital format for comparison to
mammography results, consultation, transmission to multi-modality reading
stations, or archiving.
Images and study results present as multiple-slice data sets which can be viewed
slice-by-slice or as a 3D volume with image manipulation tools. Images are
usually viewed in gray and green color shades, since color displays are common
with other molecular imaging modalities such as nuclear medicine, PET, fMRI, and
in radiation therapy imaging.
FLUORESCENCE IMAGING
Fluorescence and molecular imaging techniques are of growing importance to the
drug development industry and for disease detection. Certain molecules exhibit
the phenomenon of emitting light after being illuminated by light of an
appropriate wavelength, e.g., from a laser. The light that is emitted is
referred to as "fluorescent" light. The compounds that produce fluorescence are
commonly referred to as fluorescent dyes. A number of pharmaceutical companies
are developing fluorescent compounds for possible use in breast cancer
detection.
The CTLM(R) system laser diodes stimulate fluorescent light emissions when used
in conjunction with these 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, will retain a higher
concentration of the fluorescent compound. As the CTLM(R) scanner illuminates
these areas, fluorescent radiation is emitted and detected by the system's
detectors. Reconstructed CTLM(R) images then locate and quantify the fluorescent
area within the perimeter of the scanned breast.
Several CTLM(R)'s were retrofitted with laser diodes tuned to specific
wavelengths of light which matched the compounds. Optical filters were added to
limit the spectral response to required wavelengths. Experiments were conducted
by placing fluorescent dyes inside a breast equivalent phantom and scanning it
with CTLM(R). The ability to excite the dye, detect the location of the
fluorescence within the simulated breast, and create an image has not, to our
knowledge, been accomplished before. On September 14, 1999, a patent was issued
to IDSI titled "Laser Imaging Apparatus Using Biomedical Markers that Bind to
Cancer Cells" as Patent No 5,952,664.
The FDA has approved the use of radioactive compounds to identify breast cancer
locations. The use of non-radioactive fluorescent dyes for breast imaging, we
believe, has the potential to play a significant role in breast cancer
detection. We intend to work with contrast agent manufacturers to explore and
develop this emerging technique. The FDA must first approve the use of
non-radioactive florescent dyes before they can be used commercially in the
United States. Any such approval could take several years.
In March 2002, we signed an agreement with Schering AG to evaluate the
advantages of new fluorescence dyes for the potential use of detecting breast
cancer. Our CTLM(R) systems are being used in conjunction with Schering AG's
dyes during their clinical trials. The collaboration is assisting in determining
the potential benefits of using both technologies adjunctively to enhance
capabilities to detect breast cancer. We have installed two CTLM(R) systems in
Germany for Schering AG's clinical trials: one at Charite's Robert-Rossle Clinic
in Berlin and the other at the University of Muenster. In August 2003, Schering
AG announced that their innovative method for breast cancer detection showed
positive results in a clinical Phase 1 study. In September 2004, we installed a
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third CTLM(R) system for Schering AG in Charite Hospital in Berlin, Germany as
part of their Phase 1 clinical studies of fluorescent imaging compounds.
LASER IMAGER FOR LAB ANIMALS
In November 2003, we announced the signing of a collaborative agreement with the
Rumbaugh-Goodwin Institute for Cancer Research, Inc. for the development of
optical imaging products for the laboratory market. With this agreement, IDSI
plans to address a new market, targeting pharmaceutical developers and
researchers who monitor cancer growth and who use optical imaging in their
clinical research. The first model of the Laser Imager for Lab Animals
"LILA(TM)" product line is a miniature optical helical CT scanner in a
third-generation configuration for imaging green fluorescent protein, derived
from the DNA of jellyfish. The scanner is a work-in-progress and we expect to
have a working prototype in the first half of 2005. It is believed the LILA(TM)
will provide a useful tool for scientists to monitor cancer growth, metastasis
and the effect of new therapies in the treatment of cancer.
GOVERNMENT REGULATION
United States Regulation
The United States Food and Drug Administration (the "FDA") has regulatory
authority over the testing, manufacturing, and sale of the CTLM(R) in the United
States. Because the CTLM(R) is a medical device, it is subject to the relevant
provisions of the Federal Food, Drug and Cosmetic Act (FD&C Act") and its
implementing regulations. Pursuant to the FD&C Act, the FDA regulates, among
other things, the manufacturing, labeling, distribution, and promotion of the
CTLM(R) in the United States. The FD&C Act requires that a medical device must
(unless exempted by regulation) be cleared or approved by the FDA before being
commercially distributed in the United States. The FD&C Act also requires that
manufacturers of medical devices, among other things, comply with specific
labeling requirements and manufacture devices in accordance with Current Good
Manufacturing Practices ("CGMPs"), which require that companies manufacture
their products and maintain related documentation in a conformed manner with
respect to manufacturing, testing, and quality control activities. The FDA
inspects medical device manufacturers and distributors, and has broad authority
to order recalls of medical devices, to seize non-complying medical devices, to
enjoin and/or impose civil penalties, and to criminally prosecute violators.
The FDA classifies medical devices intended for human use into three classes:
Class I; Class II; and Class III. In general, Class I devices are products for
which the FDA can determine that their safety and effectiveness can be
reasonably assured by general controls under the FD&C Act relating to such
matters as adulteration, misbranding, registration, notification, records and
reports, and QSRs. Class II devices are products for which the FDA determines
that these general controls are insufficient to provide reasonable assurance of
safety and effectiveness, and that require special controls such as the
promulgation of performance standards, post-market surveillance, patient
registries, or such other actions as the FDA deems necessary. Class III devices
are devices for which the FDA has insufficient information to conclude that
either general controls or special controls would be sufficient to assure safety
and effectiveness, and which are life-supporting, life-sustaining, of
substantial importance in preventing impairment of human health (e.g., a
diagnostic device to detect a life-threatening illness), or present a
potentially unreasonable risk of illness or injury.
The FD&C Act further provides that, unless exempted by regulation, medical
devices may not be commercially distributed in the United States unless they
have been approved or cleared by the FDA. Manufacturers of Class III devices
must apply to the FDA for pre-marketing approval ("PMA") before marketing can
begin. PMA applications must demonstrate, among other matters, that the medical
device is safe and effective. A PMA application is typically a complex
submission, usually including the results of clinical studies, and preparing an
application is a detailed and time-consuming process.
Once a PMA application has been filed, the FDA has by regulation 180 days to
review it; however, the review time may be extended by the FDA asking for
additional information or clarification of information already provided in the
submission. In addition, the FDA will inspect the manufacturing facility to
ensure compliance with the FDA's quality system regulations commonly referred to
as QSRs prior to approval of a PMA. The PMA process is a lengthy and expensive
7
one, and there can be no assurance that a PMA application will be approved
within 180 days.
We have engaged the services of U.S. regulatory consultants who specialize in
FDA matters and to assist us in the final preparation and submission of our PMA
application. We filed our PMA application on April 29, 2003 and requested
expedited review. We are in the process of amending our PMA application to
address deficiencies outlined in a letter from the FDA in August 2003. See Item
1. "Business-Regulatory and Clinical Status, United States/FDA". If we are
unable to obtain prompt FDA approval, it will have a material adverse effect on
our business and financial condition and would result in postponement of the
commercialization of the CTLM(R). See "Regulatory and Clinical Status".
Any products manufactured or distributed by us pursuant to a PMA are or will be
subject to pervasive and continuing regulation by the FDA. The FDA Act also
requires that our products be manufactured in registered establishments and in
accordance with QSR regulations. Labeling, advertising and promotional
activities are subject to scrutiny by the FDA and, in certain instances, by the
Federal Trade Commission. The export of medical devices is also subject to
regulation in certain instances. In addition, the marketing and use of our
products may be regulated by various state agencies.
All lasers manufactured for us are subject to the Radiation Control for Health
and Safety Act administered by the Center for Devices and Radiological Health of
the FDA. The law requires laser manufacturers to file new product and annual
reports and to maintain quality control, product testing, and sales records, and
to comply with labeling and certification requirements. Various warning labels
must be affixed to the laser, depending on the class for the product under the
performance standard.
Both the FDA and the individual states may inspect the manufacturers of our
products on a routine basis for compliance with current QSR regulations and
other requirements.
In addition to the foregoing, we are subject to numerous federal, state, and
local laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, and fire hazard control. There can be no
assurance that we will not be required to incur significant costs to comply with
such laws and regulations and that such compliance will not have a material
adverse effect upon our ability to conduct business. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Cautionary Statements - Extensive Government Regulation, No Assurance
of Regulatory Approvals".
Foreign Regulation
Sales of medical devices outside of the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approval for sale in foreign countries may be longer or
shorter than that required for FDA clearance or approval, and the requirements
may differ. The laws of certain European and Asian countries may permit us to
begin marketing the CTLM(R) in Europe and Asia before marketing would be
permitted in the United States. In order to sell our products within the
European Economic Area ("EEA"), companies are required to achieve compliance
with requirements of the Medical Devices Directive ("MDD") and affix a "CE"
marking on their products to attest such compliance. In Europe, we have obtained
the certifications necessary to enable the CE mark to be affixed to our products
in order to conduct sales in member countries of the EEA, subject to compliance
with additional regulations imposed by individual countries. In obtaining these
certifications, we utilized the services of UL International (UK). Ltd. as our
notified body ("NB"). An NB is a regulatory body from the private sector that is
responsible for the review and approval of the documentation submitted by us in
order to enable the CE mark to be affixed to products. Certain standards and
steps were complied with in order to obtain the CE mark in order to distribute
the CTLM(R) in the EEA. These standards include risk assessment, quality
assurance and labeling. The listed standards are for the EEA market only and
additional document requirements and standards exist for other markets.
In October 2000, we contracted Underwriters Laboratories Inc. ("UL") to perform
safety testing and assist us in achieving regulatory certifications necessary to
begin selling the CTLM(R) system outside the United States. We also chose UL as
our Notified Body to certify our compliance with EN2900/4600/ISO9000 quality
assurance standards. The certifications and CE marking signify that the product
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and its design, manufacturing and quality systems comply with international
standards. The UL safety testing is also necessary in order for the CTLM(R)
system to be sold in the United States once we receive FDA approval. In January
2001 we received notice from UL of completion for worldwide safety
classification of our CTLM(R) system.
In November 2000, we were recommended for CE marking, subject to review by UL's
Notified Body. In January 2001, we received regulatory approval from UL to apply
the CE marking to our CTLM(R) system. CE marking provides us the opportunity to
market the CTLM(R) within the European Union, one of the largest markets in the
world. In addition, CE marking permits medical device product sales in many
other markets worldwide.
In May 2001, we received ISO 9002 certification demonstrating our commitment for
quality and our ability to provide consistency, reliability, value and
exceptional customer service. ISO 9002 certification is significant in
facilitating the global marketing of our CTLM(R) system by conforming to an
effective quality management system recognized as the gold standard around the
world.
On September 25, 2001, we received a Certificate of Exportability from the FDA
for the CTLM(R). The FDA requires unapproved products that are subject to PMA
requirements to have prior FDA Certificate of Exportability in order to be
exported outside of the United States. On September 17, 2003, we received a
renewal of our Certificate of Exportability, which will be 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, 3485:2003, EN 46001:1996 and
Annex II have been granted. As of the date of this report, almost 100 countries,
including the United States, the United Kingdom, Germany, Australia, Canada,
Japan and France have adopted ISO Standards as the primary means for evaluating
the quality of manufacturing products.
Regulatory and Clinical Status
In order to sell the CTLM(R) commercially in the United States, we must obtain
marketing clearance from the Food and Drug Administration. A PreMarket Approval
application must be supported by extensive data, including pre-clinical and
clinical trial data, as well as extensive literature to prove the safety and
effectiveness of the device. Under the Food, Drug, and Cosmetic Act, the FDA has
180 days to review a PMA application, although in certain cases the FDA may
increase that time period through requests for additional information or
clarification of existing information.
We followed the guidelines of the "Standardized Shell for Modular Submission"
for the FDA approval process. The FDA assigned a Modular Shell Control Number
and a general description of items required for the submission. Below is a table
indicating the status of our FDA Modular Submission:
Module # Description of Module Submission Date Filed Date Accepted
Module 1 General Information & Safety 9/27/2000 1/7/2002
Module 2 Software 4/17/2001 6/12/2001
Module 3 Non-Pivotal Clinical 5/1/2001 8/13/2001
Module 4 Manufacturing & Quality Systems 1/2/2001 9/25/2001
PMA PMA Submission 4/29/2003 Pending
On April 29, 2003, we announced that we submitted our PMA with the U.S. Food and
Drug Administration (FDA) seeking marketing approval for our Computed Tomography
Laser Mammography System, the CTLM(R).
On June 18, 2003, we announced that we received notification from the Food and
Drug Administration that an initial review of our PMA had been conducted and was
found to be sufficiently complete to permit a substantive review and, therefore,
9
suitable for filing. An in-depth evaluation of the safety and effectiveness of
the device will be conducted to determine the final approval of the PMA
application.
On August 27, 2003, we announced in an 8-K filing that we received a letter from
the FDA dated August 22, 2003. The FDA letter outlined the deficiencies in our
PMA application, which must be resolved before the FDA's review could be
completed. The FDA stated that until these deficiencies are resolved, the PMA
application is not approvable in its current form. We are continuing to work
closely with the FDA and our new regulatory consultants to address the
deficiencies and to submit an amendment to our PMA application.
On February 2, 2004, we announced in an 8-K filing that we received a warning
letter from the FDA specifically regarding the bio-monitoring section of an
inspection conducted August 13th through August 18th, 2003 at our facility. We
submitted our response to this letter to the FDA on February 9, 2004.
On February 10, 2004, we announced in an 8-K filing that we had submitted our
response to the warning letter and on March 29, 2004, we announced in an 8-K
filing that our responses to the FDA's warning letter regarding the
bio-monitoring inspection addressed each of the issues and no further response
to the FDA is required at this time.
On March 25, 2004, we announced in an 8-K filing that the FDA agreed with our
request for an extension of time to respond to the FDA's August 22, 2003 letter
regarding our pre-market approval application. We are seeking PreMarket
approval from the FDA for this intended use: "The Imaging Diagnostics Computed
Tomography Laser Mammography (CTLM(R)) scanner is intended for use as an adjunct
to mammography in patients who have equivocal mammographic findings within ACR
BI-RADS categories 3 or 4. In particular, it is not intended for use in cases
with clear mammographic or non-mammographic indications for biopsy. This device
provides the radiologist with additional information to guide a biopsy
recommendation". We are continuing to work closely with the FDA and our
new regulatory consultants to address the deficiencies and to submit an
amendment to our PMA application.
Patients are continuing to be scanned at our various collaboration sites,
including the University of Vienna, Allgemeines Hospital, the Humboldt
University of Berlin, Charite Hospital and at Policlinico Paolo Giancone
Hospital in Palermo, Italy. IDSI expects to remain involved in the PMA
supplement process if we receive approval as the CTLM(R) technology platform
will evolve to expand the range of clinical utility. The Company intends to
pursue a rigorous clinical program to discover and commercialize the envisioned
applications.
Product Quality and Safety
Product Safety Evaluation -We believe that one of the most important aspects of
product safety is the design of the product. If safety standards are not
considered through the design of the product, the product safety evaluation may
require that the mechanical and electrical parts of the product be re-designed.
Throughout the CTLM(R) design process, we have made every effort to confirm that
it complies with all domestic and international safety standards. New
requirements, or new interpretations of existing requirements, may affect the
CTLM(R). In January 2001 we received notice of completion for worldwide safety
classification of our CTLM(R) system from Underwriters Laboratories Inc. (UL).
Quality Assurance -We have implemented and intend to maintain a full quality
system at our corporate offices. Our Quality Assurance Manager ("QAM") has
completed the process of implementation in accordance with the required
standards. After implementation of the quality system, auditors from
Underwriters Laboratories completed an assessment of our quality systems. UL
found us in compliance with ISO 9002 and in May 2001 issued a certificate
signifying such compliance for the manufacture and servicing of laser-based
diagnostic mammography imaging systems.
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DOMESTIC SALES AND MARKETING
There are approximately 9,600 Mammography Quality Standards Act (MQSA) centers
certified in the U.S. IDSI will begin marketing the CTLM(R) to the centers
following FDA approval. There are 600 MQSA centers located in 49 of the larger
cities in the U.S., which are believed to have patient volume in excess of 40
patients per day. These centers will be IDSI's initial marketing targets.
Since the field of Molecular Optical Imaging is relatively new to most
radiologists and mammographers, the extent that, and rate at which, the CTLM(R)
achieves market acceptance and penetration will depend on many variables. These
include, but are not limited to, the establishment and demonstration in the
medical community of the clinical safety, efficacy, and cost-effectiveness of
the CTLM(R), and the advantage of the CTLM(R) over existing technology and
cancer detection methods. We believe that the clinical data being collected and
assessed under our PMA process will have a significant impact on the ultimate
market size for our device. We have focused our efforts on establishing a
presence at major Breast Imaging Conferences that are held each year. Failure of
our products to gain market acceptance would have a material adverse effect on
our business, financial condition, and results of operations. There can be no
assurance that physicians or the medical community in general will accept and/or
utilize the CTLM(R).
In order to market any products we may develop, we will have to develop a
marketing and sales force with technical expertise and distribution capability.
There can be no assurance that we will be able to establish sales and
distribution capabilities or that we will be successful in gaining market
acceptance for any products we may develop.
International Sales
We appointed a new Vice President, International Sales, in September 2004 and we
intend to pursue international sales in those countries where permitted prior to
commencing commercial sales in the United States. Sales in the United States
cannot occur unless and until we receive pre-market approval from the FDA. The
laws of certain countries permit us to begin marketing the CTLM(R) subject to
certain homologations before marketing would be permitted in the United States.
See "Government Regulation". In preparation for launching international sales of
the CTLM(R) we have installed systems at University of Vienna, Allgemeines
Hospital and at Charite Hospital, Humboldt-University Berlin as demonstrators.
We have arranged special terms on a CTLM(R) System to our distributor,
Biomedical International S.n.c. of Rome, Italy, which was installed in June 2004
at Policlinico Paolo Giancone Hospital in Palermo, Sicily.
Until we receive pre-market approval from the FDA to market the CTLM(R) in the
United States, as to which there can be no assurance, our revenues, if any, will
be derived from sales to international distributors. A significant portion of
our revenues, therefore, may be subject to the risks associated with
international sales, including economical and political instability, shipping
delays, fluctuation of foreign currency exchange rates, foreign regulatory
requirements and various trade restrictions, all of which could have a
significant impact on our ability to deliver products on a timely basis. Future
imposition of, or significant increases in the level of customs, duties, export
quotas or other trade restrictions could have a material adverse effect on our
business, financial condition and results of operations. The regulation of
medical devices continues to develop and there can be no assurance that new laws
or regulations will not have an adverse effect on us.
We filed our application with Health Canada for a new medical device license to
sell the CTLM(R) in Canada, in July 2001 shortly after our May 2001 filing of
the last module as part of our PMA modular submission process. Since July 2001,
we have supplemented our Canadian application from time to time with the
information requested by Health Canada. We filed a new application with Health
Canada in June 2003. On June 18, 2003 we received notification from the Medical
Device Bureau of Health Canada that our application had been accepted for
review. On November 14, 2003 we announced that we received notification from the
Medical Device Bureau of Health Canada that our application for a "New Medical
Device" license was approved. The license was issued in accordance with the
Medical Device Regulations, Section 36. Furthermore, we possess the CMD/CSA ISO
11
13485-1998 certification, which is an additional regulatory requirement that is
evidence of compliance to the quality system of the medical device.
In November 2003, we announced that we received a deposit for the purchase of a
CTLM(R) System through our distributor, Veccsa S.A., who intended to sell it to
The Institutos Medicos de Alta Tecnologia, a comprehensive diagnostic imaging
center in Buenos Aires, Argentina pending product registration from the Ministry
of Health of Argentina. We received product registration in June 2004 but due to
the delay in receiving the registration, the customer requested a re-negotiation
of the terms of the sale with the distributor. We and Veccsa S.A are in the
process of negotiating new terms and conditions for the sale, which may or may
not be acceptable to the distributor's customer.
In November 2003, we announced receipt of a purchase order with a guaranteed
letter of credit for three CTLM(R) Systems from our Chinese distributor, China
Far East International Trading Corp (CFETC). Headquartered in Beijing, CFETC was
established in 1985 and has 23 satellite offices located throughout China as
well as four international branches located in the United States, Belgium,
Southeast Asia and Hong Kong. CFETC works in conjunction with the Chinese
Government's Ministry of Foreign Trade and Economic Co-Operation. In February
2004, we shipped four CTLM(R) Systems to China in accordance with an irrevocable
confirmed letter of credit. The fourth system will be used for The State Food
and Drug Administration (SFDA) testing and subsequent training and clinical
research in a hospital.
On May 4, 2004, we announced shipment of a CTLM(R) System to Dubai as a result
of a purchase order from Axis Medical LLC from February 2004. Full payment was
received and the revenue from the sale was recorded in the fourth quarter.
INTERNATIONAL DISTRIBUTORS
In May 2003, based on our commitment to develop international sales, we engaged
the services of an international sales and marketing consultant. The consultant
had experience in the international marketing of medical imaging devices,
establishing worldwide distribution networks, launching new products and
creating training and development programs. In March 2004, we terminated our
agreement with the consultant. In order to achieve our international marketing
goals, management decided to seek a full-time international sales Vice President
who joined IDSI in September 2004.
We intend to add new distributors to cover international regions. Where
performance fails to meet agreed upon targets, distributors may be terminated.
We expect such changes to occur in the normal course of introducing a new
product to global markets.
THIRD-PARTY REIMBURSEMENT; HEALTH CARE REFORM
In the United States, suppliers of health care products and services are greatly
affected by Medicare, Medicaid, and other government insurance programs, as well
as by private insurance reimbursement programs. Third-party payers (Medicare,
Medicaid, private health insurance companies and other organizations) may affect
the pricing or relative attractiveness of our products by regulating the level
of reimbursement provided by such payers to the physicians and clinics utilizing
the CTLM(R) or by refusing reimbursement. If examinations utilizing our products
were not reimbursed under these programs, our ability to sell our products may
be materially and/or adversely affected. There can be no assurance that
third-party payers will provide reimbursement for use of our products. In
international markets, reimbursement by private third-party medical insurance
providers, including governmental insurers and independent providers, varies
from country to country. In certain countries, our ability to achieve
significant market penetration may depend upon the availability of third-party
governmental reimbursement. Revenues and profitability of medical device
companies may be affected by the continuing efforts of governmental and third
party payers to contain or reduce the cost of health care through various means.
12
PRODUCT LIABILITY
Our business exposes us to potential product liability risks, which are inherent
in the testing, manufacturing and marketing of cancer detection products. While
the CTLM(R) is being developed as an adjunct to other diagnostic techniques,
there can be no assurance that we will not be subjected to future claims and
potential liability. At present we carry $3,000,000 in product liability
insurance to cover both clinical sites and sales.
COMPETITION
The medical device industry generally, and the diagnostic imaging segments in
particular, are characterized by rapidly evolving technology and intense
competition. The IDSI approach of employing continuous wave laser optical
technology in a CT-like device to produce 3D images is unique and patented, and
the concept of imaging angiogenesis in the breast to differentiate between
benign and malignant tissue is well accepted.
Although the CTLM(R) system is a CT-like scanner, its energy source for imaging
is a laser beam and not ionizing radiation such as is found in conventional
x-ray mammography or CT scanners. The advantage of imaging without ionizing
radiation may be significant in our markets. X-ray mammography is a
well-established method of imaging the structures within the breast. Ultrasound
is often used as an adjunct to help differentiate tumors and cysts. The CTLM(R)
is being marketed as an adjunct to mammography and will not compete directly
with X-ray mammography. CTLM(R) is, however, a method of molecular functional
imaging, which can visualize the process of angiogenesis which may be used to
distinguish between benign and malignant tissue. Unlike X-ray or ultrasound,
optical molecular imaging is a revolutionary functional imaging modality. In
this respect, CTLM(R) may compete with magnetic resonance imaging (MRI) in
breast imaging because both CTLM and MRI have the capacity to visualize function
at the molecular level.
The CTLM(R) Laser Breast System differs from any other optical imaging device in
several ways:
1. CTLM(R) employs advanced continuous wave laser signals versus
transillumination or time domain approaches which we tested earlier
and subsequently abandoned.
2. CTLM(R) does not compress or even touch the breast--it is painless.
3. CTLM(R) is truly 3D and presents the breast study as a volume on a
viewing workstation vs. planar or 2D approaches that superimpose many
layers of information upon themselves. CT and MRI are examples of 3D
imagers like CTLM(R).
Two companies, to our knowledge, are targeting the breast optical imaging
markets. Advanced Research Technologies, Inc. (ART) (TSX:ARA) is developing a
non-3D imager which does not utilize our patented continuous wave technology and
in which the breast must be immersed in a gel. ART has signed distribution
agreements with GE Medical should a product become available.
DOBI Medical International, Inc. (DBMI:OB) is developing an optical imager based
upon compression and transillumination of the breast, which produces a 2D `map'
of relative oxygenation. IDSI views this adaptation of older technology as
unlikely to become a threat to our CT laser 3D approach.
Neither ART nor DOBI have FDA approval. To IDSI's knowledge, no other company
has a functioning optical imaging device designed for use as an adjunct to
mammography. CTLM(R) Breast Imaging Systems are in clinical settings in Italy,
Germany, Austria, Peoples Republic of China, and the United Arab Emirates. In
vivo human studies of fluorescent compounds are also underway at three Schering
AG locations.
Methods for the detection of cancer are subject to rapid technological
innovation and there can be no assurance that future technical changes will not
render our CTLM(R) obsolete. There can be no assurance that the development of
new types of diagnostic medical equipment or technology will not have a material
adverse effect on our business, financial condition, and results of operations.
13
PATENTS
The patent for the CTLM(R) was issued in December 1997 under Patent Number
5,692,511 (the "Patent"). The Patent has a total of 4 independent claims and 24
subordinate claims. The independent claims serve to provide an overall outline
of the disclosure of the invention. The subordinate claims provide additional
information to identify pertinent details of the invention as they relate to the
respective specific independent claim. We own the rights to the Patent for its
17-year life pursuant to an exclusive patent licensing agreement with the late
Richard Grable, who invented the CTLM(R) and served as our Chief Executive
Officer and whose estate has owned the Patent since his death in August 2001.
See "Patent Licensing Agreement" and "Certain Transactions." As of the date of
this report, we own 17 patents and have nine additional United States patents
pending with regard to optical tomography, many of which are based on the
original CTLM(R) technology. We also have eight International patents and have
28 International patents pending.
In September 1999, we were issued a patent for a laser imaging apparatus using
biomedical markers that bind to cancer cells. This patent was issued under
Patent Number 5,952,664 and is owned by the Company. The biomedical marker we
are currently testing is a fluorescent marker. We plan to continue studying
other biomedical markers in conjunction with major pharmaceutical companies as a
potential advanced diagnostic feature to be used with our CTLM(R) system. The
CTLM(R) in combination with the fluorescent feature has the potential to be used
with photodynamic therapy (PDT) to aid in the treatment of breast cancer.
In February 2000, we were issued 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 Patent Number 6,029,077
and is owned by the Company. 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 issued a patent for: "Apparatus and Method for
Determining the Perimeter of the Surface of an Object Being Scanned". The patent
was issued under Patent Number 6,044,288, and is owned by the Company. This
additional patent covers an optical technique to determine the perimeter of a
scanned breast. The Company's patent 6,029,077 described in the previous
paragraph covers a different technique to perform the same measurement.
Together, these two patents protect the practical techniques that can be used to
acquire this information.
In August 2000, we were issued a patent for: "Detector Array for Use in a Laser
Imaging Apparatus". The patent was issued under Patent Number 6,100,520 and is
owned by the Company. This patent describes the several different variations
that can be used while scanning the breast without any contact between the
breast and the optical components. Unlike the conventional method, this unique
feature allows the CTLM(R) to scan the breast without the use of breast
compression.
In October 2000, we were issued a patent for: "Method of Reconstructing an Image
Being Scanned". The patent was issued under Patent Number 6,130,958 and is owned
by the Company. This patent describes the algorithms used to reconstruct images
from data acquired from CTLM(R) scans.
In December 2000, we were issued a patent for: "Detector Array With Variable
Gain Amplifiers For Use In A Laser Imaging Apparatus". The patent was issued
under Patent Number 6,150,649 and is owned by the Company. This patent describes
the proprietary electronics used in the CTLM(R) detector array.
In February 2001, Mr. Grable was issued a patent for "Diagnostic Tomographic
Laser Imaging Apparatus". This patent was issued for his proprietary scanning
bed, a unique feature of the CTLM(R), and was issued as U.S. Patent Number
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. The patent should
prevent others in the industry from utilizing a scanning bed with a laser breast
imaging system that requires the patient to lie in the prone position. See
"Patent Licensing Agreement".
In April 2001, we were issued a patent for: "Detector Array for Use in a Laser
Imaging Apparatus". The patent was issued under Patent No. 6,211,512 and is
14
owned by the Company. The patent allows for several different optics variations
while scanning the breast without contact between the breast and the optical
components. This feature allows the CTLM(R) to scan the breast without the use
of breast compression.
In January 2002, we announced that we were issued 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 issued 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 January 2004, we announced that we were issued 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 announced that we were issued 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 announced that we were issued a patent for "LASER IMAGING
APPARATUS USING BIOMEDICAL MARKERS THAT BIND TO CANCER CELLS" as U.S. Patent No.
6,693,287. This patent protects the proprietary method of collecting data while
using "biomedical" markers that bind to cancer cells during a CT laser scan to
provide a positive identification of the cancer area, to selectively activate
the Photo Dynamic Therapy (PDT) drug to destroy the cancer.
In April 2004, we announced that 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 announced that we were issued a patent for "MEDICAL OPTICAL
IMAGING SCANNER USING MULTIPLE WAVELENGTH SIMULTANEOUS DATA ACQUISITIONS FOR
BREAST IMAGING" as 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 announced that we were granted a Chinese Patent for "DIAGNOSTIC
TOMOGRAPHIC LASER IMAGING APPARATUS" as Chinese Patent No. ZL95197940X. The
patent was issued in the name of Richard J. Grable for a period of 20 years from
the date of filing until July 10, 2015 and is exclusively licensed to Imaging
Diagnostic Systems, Inc. See "Patent Licensing Agreement".
In August 2004, we announced that we were granted a European Patent for
"APPARATUS FOR DETERMINING THE PERIMETER OF THE SURFACE OF AN OBJECT BEING
SCANNED" as European Patent No. 1003419. This is the European equivalent of U.S.
Patent No. 6,044,288, which protects a key element in the optical technique used
to determine the perimeter of an object being scanned.
15
We intend to file for patents on products, including the CTLM(R), for which we
believe the cost of obtaining a patent is economically reasonable in relation to
the expected protection obtained. There can be no assurances that any patent
that we apply for will be issued, or that any patents issued will protect our
technology. If the patents we license or obtain are infringed upon, or if we are
required to defend any patent infringement cases brought against us, that will
require substantial capital, the expenditure of which we might not be able to
afford.
PATENT LICENSING AGREEMENT
IDSI was formed in December 1993 for the sole purpose of developing and
commercializing Richard Grable's invention, a CT laser breast-imaging device
(the "Mammoscan(TM)"). The Mammoscan(TM) had already been exhibited at the
Radiology Society of North America ("RSNA") 1989 session and held the promise of
a new, emerging technology for the detection of breast abnormalities without
compression or ionizing X-rays. This device used a laser diode for its energy
source and a 386 processor that was extremely slow. Once the technology became
available to speed up the processing, IDSI's founders (Richard Grable, Linda
Grable and Allan Schwartz) believed that this device would be a major
breakthrough in the early detection of breast cancer.
Mr. Grable invented the CTLM(R) by making major improvements in the
Mammoscan(TM) technology. In June 1998, we finalized an exclusive patent license
agreement with Mr. Grable, which encompasses the technology for the CTLM(R). The
term of the license is for the life of the Patent (17 years) and any renewals,
subject to termination, under specific conditions. As consideration for this
license, we issued to Mr. Grable 7,000,000 shares of common stock. In addition,
we agreed to pay Mr. Grable a royalty based upon a percentage, ranging from 6%
to 10%, of the net selling price (the dollar amount earned from our sale, both
international and domestic, before taxes minus the cost of the goods sold and
commissions or discounts paid) of all the products and goods in which the patent
is used. Mr. Grable agreed that these royalty provisions will not apply to any
sales and deliveries of CTLM(R) systems made by IDSI prior to receipt of the PMA
for the CTLM(R). In addition, following issuance of the PMA, IDSI and Mr. Grable
agreed that Mr. Grable would be paid guaranteed minimum royalties of at least
$250,000 per year based on the sales of the products and goods in which the
CTLM(R) patent is used. Due to Mr. Grable's death in August 2001, his interest
in the patent license agreement passed to his estate. Mr. Grable's widow, Linda
Grable, is the principal beneficiary of Mr. Grable's estate.
The following table sets forth the Patent licensing royalty structure:
ANNUAL GROSS SALES PERCENTAGE OF NET SELLING PRICE
$0 to $1,999,999 10%
$2,000,000 to $3,999,999 9%
$4,000,000 to $6,999,999 8%
$7,000,000 to $9,999,99 7%
Greater than $10,000,000 6%
16
EMPLOYEES
As of the date of this Report, we have 45 full-time employees, including our
four executive officers. Thirty-eight percent of our employees (17) are employed
in the areas of scientific, clinical and product research and development. As of
September 2003, we had 43 full-time employees, of whom 32 were employed in the
areas of scientific, clinical, and product research and development. The
increase and reallocation of human resources is due to our focus on
commercializing the CTLM(R). Our ability to provide our services is dependent
upon our recruiting, hiring and retaining qualified technical personnel. To
date, we have been able to recruit and retain sufficient qualified personnel.
None of our employees are represented by a labor union. We have not experienced
any work stoppages and consider our relations with our employees to be good.
Due to the specialized scientific nature of our business, we are highly
dependent upon our ability to attract and retain qualified scientific, technical
and managerial personnel. Therefore, we have entered into employment agreements
with certain of our executive officers and key employees. The loss of the
services of existing personnel as well as the failure to recruit key scientific,
technical and managerial personnel in a timely manner would be detrimental to
our research and development programs and to our business. Our anticipated
growth and expansion into areas and activities requiring additional expertise,
such as marketing, will require the addition of new management personnel.
Competition for qualified personnel is intense and there can be no assurance
that we will be able to continue to attract and retain qualified personnel
necessary for the development of our business.