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Filed
Pursuant to Rule 424(b)(3)
Registration
No.
333-129911
1,780,485
Shares
Of
IMPLANT
SCIENCES CORPORATION
Common
Stock
This
prospectus relates to the offering for resale of Implant Sciences Corporation
common stock. In this prospectus, the terms “Implant,” the “Company,” “we,” or
“us” will each refer to Implant Sciences Corporation. We are a Massachusetts
corporation. Our principal offices are located at 107 Audubon Road, Wakefield,
MA 01880, and our telephone number is (781) 246-0700.
This
prospectus will be used by the selling stockholder to sell up to 1,780,485
shares of our common stock consisting of: (1) 949,252 shares
of
our common stock issuable on conversion of our Series D Convertible Redeemable
Preferred Stock (the “Series D”),
(2)
261,233 shares of our
common stock issued in conjunction with an amendment to the Series D, (3)
450,000 shares of our common stock issuable upon exercise of common stock
purchase warrants, and (4) 120,000 shares of our common stock issuable as
dividends on our Series D Convertible Redeemable Preferred Stock.
The
selling stockholder may sell these shares from time to time on the American
Stock Exchange, or otherwise. The selling stockholder may sell the shares of
common stock that are part of this offering at: (i) the prevailing market price
for the shares at the time the shares are sold; (ii) a price related to the
prevailing market price; (iii) a negotiated price; or (iv) prices determined
from time to time by the selling stockholder. See “Plan of Distribution.” We
will not receive any funds from sales of our common stock by the selling
stockholder. If the selling stockholder exercises its warrants in their entirety
for cash, we will receive proceeds of approximately $2,086,500 from such
exercise. Our common stock is currently traded on the American Stock Exchange
under the symbol “IMX.” On December 15, 2006, the last reported sale price of
our common stock was $2.42 per share.
The
mailing address and the telephone and facsimile numbers of our executive offices
are:
107
Audubon Road, #5
Wakefield,
MA 01880
Telephone
No: 781-246-0700
Fax:
781-246-3561
Investing
in our common stock involves risks. See “Risk Factors” beginning on Page
1.
The
Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this registration
statement is truthful or complete. Any representation to the contrary is a
criminal offense.
December
28, 2006
;
Page
RISK
FACTORS ......................................................................................................................................................
3
FORWARD-LOOKING
INFORMATION ...............................................................................................................
10
THE
OFFERING ...........................................................................................................................................................
10
USE
OF
PROCEEDS
......................................................................................................................................................
10
SELLING
STOCKHOLDER
..........................................................................................................................................
10
PLAN
OF
DISTRIBUTION
.......................................................................................................................................... 13
DESCRIPTION
OF SECURITIES
................................................................................................................................. 14
WHERE
YOU
CAN FIND MORE INFORMATION
.................................................................................................. 14
DISCLOSURE
OF SEC POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
.............. 15
LEGAL
MATTERS
........................................................................................................................................................ 15
EXPERTS
........................................................................................................................................................................ 15
You
should rely only on the information contained in this Prospectus or incorporated
by reference herein. Information on our website or the websites of any of our
subsidiaries or affiliates, if any, is not incorporated into this Prospectus,
and you should not rely on such information. We have not authorized anyone
to
provide you with any other information. This Prospectus may only be used where
it is legal to sell these securities. The information in this Prospectus is
accurate only as of the date noted above, regardless of the time of the delivery
of this prospectus or of any sale of our common stock.
RISK
FACTORS
An
investment in us involves a high degree of risk and common stock should not
be
purchased by anyone who cannot afford the loss of their entire investment.
You
should carefully consider all of the following risk factors discussed below
as
well as other information in the prospectus before purchasing the common stock.
The risks described below are not all of the risks facing us. Additional risks,
including those that are currently not known to us or that we currently deem
immaterial, may also impair our business operations.
The
Company has received a modified audit opinion on its ability to continue
as a going concern.
The
audit
report our independent registered public accounting firm issued on our audited
financial statements for the fiscal year ended June 30, 2006 contains a
modification regarding our ability to continue as a going concern. This
modification indicates that there is substantial doubt on the part of our
independent registered public accounting firm that we can continue as a going
concern in that we did not have sufficient cash and liquid assets at June 30,
2006, to cover our operating capital requirements for the next twelve-month
period and if sufficient cash cannot be obtained we would have to substantially
alter our operations, or we may be forced to discontinue operations. Such
an opinion from our independent registered public accounting firm may limit
our
ability to access certain types of financing, or may prevent us from obtaining
financing on acceptable terms.
We
do not operate at a profit and do not expect to be profitable for some time.
During
the twelve months ended June 30, 2006, we had a net loss of approximately
$7,084,000 and a net loss applicable to common shareholders of approximately
$8,173,000. During the three months ended September 30, 2006 we had a net loss
of approximately $1,610,000 and a net loss applicable to common shareholders
of
approximately $1,846,000. We plan to further increase our expenditures
to complete
the development and commercialization of our new products, to ensure compliance
with the Food and Drug Administration's Quality
System Regulations and to broaden our sales and marketing capabilities.
As a
result,
we believe that we will likely incur losses over the next several quarters.
Our accumulated deficit as of September 30, 2006 is approximately $38,237,000.
In addition, we have or will acquire approximately $2,300,000 of capital
equipment to maintain our operations. The additional equipment, for the most
part, has or will be financed with long term leases.
Management
believes that our existing cash resources, cash from operations and availability
on our revolving line of credit will meet working capital requirements over
the
next twelve months. However, unanticipated decreases in operating revenues,
unanticipated decreases in the market value of our common stock, delays in
government funding of grants, increases in expenses or further delays in product
development may adversely impact our cash position and require further cost
reductions. No assurance can be given that we will be able to operate profitably
on a consistent basis.
We
are experiencing rapid growth that could strain our managerial and other
resources.
Part
of
our growth has come through the acquisition of two separate businesses. In
October 2004, we acquired Core Systems, Inc, and in March 2005, we acquired
Accurel Systems International Corporation. There can be no assurances that
either of these acquisitions will be accretive and profitable to us as a whole.
We
may make
additional acquisitions of complementary medical and homeland security
manufacturing services providers that bring desired capabilities, customers
or
geographic coverage and either strengthen our position in our target markets
or
provide us with a presence in a new market. Although we are not currently
negotiating with any additional acquisition targets, it is possible that we
will
consider additional potential acquisitions in the future. The risks we may
encounter in pursuing these acquisitions, if any, include expenses associated
with, and difficulties in identifying, potential targets, costs associated
with
acquisitions we ultimately are unable to complete and higher prices for acquired
companies due to competition for attractive targets. Completing acquisitions
also may result in dilution to our existing stockholders and may require us
to
seek additional capital, if available, including increasing our indebtedness.
Once
acquired, the successful integration and operation of a business requires
communication and cooperation among key managers, the transition of customer
relationships, the management of ongoing projects of acquired companies and
the
management of new projects across previously independent facilities.
Customer
satisfaction or performance problems with an acquired company could also harm
our reputation as a whole, and any acquired business could significantly
underperform relative to our expectations. For all these reasons, our pursuit
of
an overall acquisition strategy or any individual completed, pending or future
acquisition may adversely affect the realization of our strategic goals.
In
addition,
while we anticipate cost savings, operating efficiencies and other synergies
as
a result of our acquisitions, the consolidation of functions and the integration
of departments, systems and procedures present significant management
challenges.
The
acquisition of new operations can also introduce new types of risks to our
business. For example, new acquisitions may require greater effort to address
United States Food and Drug Administration regulations, United States Department
of Homeland Security regulations, United States Department of Defense
regulations or similar foreign regulations.
Potential
undisclosed liabilities associated with acquisitions which could harm our
business.
We
conducted due diligence in connection with each of our acquisitions. In
connection with any of our acquisitions, there may be liabilities that we fail
to discover or that we inadequately assess in our due diligence efforts. In
particular, to the extent that prior owners of any acquired businesses or
properties failed to comply with or otherwise violated applicable laws or
regulations, or failed to fulfill their contractual obligations to their
customers or suppliers, we, as the successor owner, may be financially
responsible for these violations and failures and may suffer reputational harm
or otherwise be adversely affected. The discovery of any material liabilities
associated with our acquisitions could harm our business and
results of operations.
Intense
competition and rapid technological change could harm our financial
performance.
The
medical device industry is characterized by rapidly evolving
technology and
intense competition. In our radioactive products, such as prostate seed implants
and radioactive brachytherapy devices, we compete with many other companies
selling similar products with certain of such companies serving substantially
the entire radioactive prostate seed market. In our semiconductor market we
compete with many companies, including companies that have in-house capabilities
to implant, diagnose and repair their own wafers. In our explosives detection
equipment market, we compete with many companies, including companies that
have
substantially greater capital resources, greater research and development,
manufacturing and marketing resources and experience and greater name
recognition than we do. In addition, we expect new entrants into our
markets. There can be no assurance that our competitors will not succeed
in developing or marketing technologies and products that are more effective
than our products or that would render our products obsolete or noncompetitive.
Moreover, there can be no assurance that we will be able to price our products
and services at or below the prices of competing products and technologies
in
order to facilitate market acceptance. In addition, new procedures and
medications could be developed that replace or reduce the importance of
procedures that use our products. Accordingly, our success will depend, in
part,
on our ability to respond quickly to medical and technological changes through
the development and introduction of new products and enhancements. Product
development involves a high degree of risk, and there can be no assurance that
our new product development efforts will result in any commercially successful
products. Our failure to compete or respond to technological change in an
effective manner would have a material adverse effect on our business and
results of operations.
Our
medical products and technologies may not be accepted by the medical community
which could harm our financial performance.
There
can
be no assurance that our radioactive prostate seeds, brachytherapy sources,
orthopedic implant coatings, or radiopaque coatings will achieve acceptance,
or
continue to receive acceptance, by the medical community and market acceptance
generally. The degree of market acceptance for our products and services will
also depend upon a number of factors, including the receipt and timing of
regulatory approvals and the establishment and demonstration in the medical
community and among health care payers of the clinical safety, efficacy and
cost
effectiveness of our products. Certain of the medical indications that can
be
treated by our devices or devices treated using our coatings can also be treated
by other medical procedures. Decisions to purchase our products will primarily
be influenced by members of the medical community, who will have the choice
of
recommending medical treatments, such as radiotherapeutic seeds, or the more
traditional alternatives, such as surgery and external beam radiation therapy.
Many alternative treatments currently are widely accepted in the medical
community and have a long history of use. There can be no assurance that our
devices or technologies will be able to replace such established treatments
or
that physicians, health care payers, patients or the medical community in
general will accept and utilize our devices or any other medical products that
may be developed or treated by us even if regulatory and reimbursement approvals
are obtained. Long-term market acceptance of our products and services will
depend, in part, on the capabilities, operating features and price of our
products and technologies as compared to those of other available products
and
services. Failure of our products and technologies to gain market acceptance
would have a material adverse effect on our business and results of operations.
Our
explosives detection products and technologies may not be accepted by government
agencies, airports or airlines which could harm our future financial
performance.
There
can
be no assurance that our explosives detection systems will achieve acceptance
by
the domestic and international airports, government agencies and airlines,
and
market acceptance generally. The degree of market acceptance for our explosives
detection products and services will also depend upon a number of factors,
including the receipt and timing of regulatory approvals and the establishment
and demonstration of the ability of our proposed device to detect trace
explosives residues on personnel, baggage and other cargo prior to embarking
on
aircraft. Our failure to commercially develop our product to compete
successfully with respect to throughput, the ability to scan personnel, baggage
and other cargo carried onto airlines, and portability could delay, limit or
prevent market acceptance. Moreover, the market for explosives detection systems
technology, especially trace detection technology, is largely undeveloped,
and
we believe that the overall demand for explosives detection systems technology
will depend significantly upon public perception of the risk of terrorist
attacks. There can be no assurance that the public will perceive the threat
of
terrorist bombings to be substantial or that the airline industry and
governmental agencies will actively pursue explosives detection systems
technology. Long-term market acceptance of our products and services will
depend, in part, on the capabilities, operating features and price of our
products and technologies as compared to those of other available products
and
services. As a result, there can be no assurance, if the currently developed
prototype product is brought to a commercial product, that we will be able
to
achieve market penetration, revenue growth or profitability.
Our
future profitability depends on whether our products can successfully compete
in
the commercial
marketplace.
We
currently market radioactive prostate seeds. We also provide ion implantation
services for ion implantation of semiconductors and medical devices. We also
provide diagnostic services on semiconductor wafers. We plan to market
radiopaque coatings, and explosive detection systems that may require
substantial further investment in research, product development, preclinical
and
clinical testing and governmental regulatory approvals prior to being marketed
and sold. Our ability to increase revenues and achieve profitability and
positive cash flow will depend, in part, on our ability to complete such product
development efforts, obtain such regulatory approvals, and establish
manufacturing and marketing programs and gain market acceptance for such
proposed products.
The
market for explosive detection systems is intensely competitive and is
characterized by continuously developing technology and frequent introductions
of new products and features. We expect competition to increase as other
companies introduce additional and more competitive products in the explosive
detection systems market as we develop the capabilities and enhancements of
our
trace detection systems. Each of our competitors may have substantially greater
financial resources than us.
We
believe that our ability to compete in the explosive detection systems market
is
based upon such factors as: product performance, functionality, quality and
features; quality of customer support services, documentation and training;
and
the capability of the technology to appeal to broader applications beyond the
inspection of passengers, baggage, and cargo carried on airlines. Although
we
believe that our currently developed product has all of the capabilities to
meet
the United States government’s decree that all passengers, baggage, and cargo
carried on airlines must be screened thoroughly, certain of our competitors
may
have an advantage over our existing technology with respect to these factors.
There can be no assurance that we will be successful in convincing potential
customers that our products will be superior to other systems given all of
the
necessary performance criteria, that new systems with comparable or greater
performance, lower price and faster or equivalent throughput will not be
introduced, or that, if such products are introduced, customers will not delay
or cancel potential orders for us yet to be commercialized system. Further,
there can be no assurance that we will be able to bring to commercialization
and
further enhance our product to better compete on the basis of cost, throughput,
accommodation of detection of passengers, baggage or other cargo carried onto
airlines, or that we will otherwise be able to compete successfully with
existing or new competitors.
Our
product development efforts are subject to the risks inherent in the development
of such products. These risks include the possibility that development costs
will be much greater than currently anticipated, that our products will be
found
to be ineffective or unsafe, or will otherwise fail to receive necessary
regulatory approvals; that the products will be difficult to manufacture on
a
large scale or be uneconomical to market; that the proprietary rights of third
parties will interfere with our product development; or that third parties
will
market superior or equivalent products which achieve greater market acceptance.
Furthermore, there can be no assurance that we will be able to conduct our
product development efforts within the time frames currently anticipated or
that
such efforts will be completed successfully.
The
Company has commenced an arbitration against the former owners of Accurel
Systems International, Inc.
In
March
2006, the Company commenced an arbitration under the Rules of the American
Arbitration Association against Respondents Majid Ghafghaichi (“Majid”) and Vahe
Sarkissisian (“Vahe”), seeking a total of $3,994,000 for indemnification of
various losses, as defined in, and expressly allowed pursuant to, a Stock
Purchase Agreement dated March 9, 2005, between the Company, as the purchaser,
Accurel Systems International Corporation (“Accurel), and Majid and Vahe,
as the sellers of 100% of the issued and outstanding shares of Accurel
stock.
There
are
four claims asserted by the Company against Respondents: (1) Damages of $3.4
million resulting from misrepresentations concerning the loss of business from
a
key Accurel customer; (2) unauthorized withdrawals in the amount of
approximately $276,000 from Accurel by the Respondents prior to the closing;
(3)
approximately $49,000 of disallowed transaction expenses that the Respondents
improperly received; and (4) undisclosed net liabilities totaling approximately
$269,000.
Respondents
have asserted counterclaims seeking an aggregate amount in excess of $1,750,000,
based on an allegedly late payment to Respondents of Company stock and a Secured
Promissory Note as part of the consideration for their sale of Accurel stock.
Should
the Company be unsuccessful in prosecuting its lawsuit or defending itself
against the counterclaims, it could have a material adverse effect on our
business and results of operations.
There
are risks relating to our Development, Distribution and Manufacturing Agreement
with Rapiscan Systems, Inc.
In
March
of 2005, we entered into a Development, Distribution and Manufacturing Agreement
(the “Agreement”) with Rapiscan Systems, Inc. (“Rapiscan”). Under the
terms of this agreement, we gave Rapiscan the exclusive worldwide rights to
market our Quantum SnifferTM portable
and benchtop trace detection devices under their private label. We also
agreed to give Rapiscan the exclusive worldwide rights to distribute certain
other new security products which we may develop in the future with their
funding, as well as rights, in some circumstances, to manufacture certain
components of the Quantum SnifferTM portable
and benchtop trace detection devices.
In
March
2006, the Company brought suit against Rapiscan and its parent, OSI Systems,
Inc. The Company is requesting rescission of the Agreement, for lack of
performance and other grounds or in the alternative, termination of the
Agreement due to material breaches of contract and implied covenant of good
faith and fair dealing and for damages. Should the Company be unsuccessful
in
prosecuting its lawsuit, it could have a material adverse effect on our business
and results of operations.
In
March
2006, the Company received notice that Rapiscan filed a complaint against the
Company regarding the Agreement. Rapiscan’s complaint is based upon claims of
breach of contract, breach of warranty and tortuous interference with
contractual relations and is requesting a decree for specific performance,
declaratory relief and injunctive relief. Should the Company be unsuccessful
in
defending itself in the lawsuit, it could have a material adverse effect on
our
business and results of operations
In
August
2006, as a result of motions made by both parties, the two lawsuits have been
consolidated in the United States District Court for the Central District of
California with the Company as plaintiff. Presently, discovery is in process.
Rapiscan and OSI have filed a motion to dismiss certain of the Company’s claims.
The Company has not yet responded to the motion. It is expected that the Court
will hear and rule on the motion in October 2006.
Should
the Company be unsuccessful in prosecuting this matter, it may have a material
adverse effect on its business and results of operations.
We
own patents, trade secrets and other intellectual property and know-how that
we
believe allows us to compete effectively. Limitations on our ability to protect
our intellectual property or continue to use our intellectual property could
harm our financial performance.
Our
ability to compete effectively will depend, to a significant extent, on our
ability to operate without infringing the intellectual property rights of
others. Many participants in the medical device area aggressively seek patent
protection and have increasing numbers of patents, and have frequently
demonstrated a readiness to commence litigation based on patent infringement.
Third parties may assert exclusive patent rights to technologies that are
important to us.
Our
success will depend on our ability to obtain new patents and operate without
infringing on the proprietary rights of others.
Although
we have seventeen (17) United States patents issued and nine (9) United States
patent applications pending for our technology and processes, our success will
depend, in part, on our ability to obtain the patents applied for and maintain
trade secret protection for our technology and operate without infringing on
the
proprietary rights of third parties. The validity and breadth of claims in
medical technology patents involve complex legal and factual questions and,
therefore, may be highly uncertain. No assurance can be given that any pending
patent applications or any future patent application will issue as patents,
that
the scope of any patent protection obtained will be sufficient to exclude
competitors or provide competitive advantages to us, that any of our patents
will be held valid if subsequently challenged or that others will not claim
rights in or ownership of the patents and other proprietary rights held by
us.
Furthermore,
there can be no assurance that others have not or will not develop similar
products, duplicate any of our products or design around any patents issued
or
that may be issued in the future to us. In addition, whether or not patents
are
issued to us, others may hold or receive patents which contain claims having
a
scope that covers products or processes developed by us.
Moreover,
there can be no assurances that patents issued to us will not be challenged,
invalidated or circumvented or that the rights thereunder will provide any
competitive advantage. We could incur substantial costs in defending any patent
infringement suits or in asserting any patent rights, including those granted
to
third parties. Patents and patent applications in the United States may be
subject to interference proceedings brought by the United States Patent &
Trademark Office, or to opposition proceedings initiated in a foreign patent
office by third parties. We may incur significant costs defending such
proceedings. In addition, we may be required to obtain licenses to patents
or
proprietary rights from third parties. There can be no assurance that such
licenses will be available on acceptable terms if at all. 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 such licenses could
be foreclosed.
We
also
rely on unpatented proprietary technology, trade secrets and know-how and no
assurance can be given that others will not independently develop substantially
equivalent proprietary information, techniques or processes, that such
technology or know-how will not be disclosed or that we can meaningfully protect
our rights to such unpatented proprietary technology, trade secrets, or
know-how. Although we have entered into non-disclosure agreements with our
employees and consultants, there can be no assurance that such non-disclosure
agreements will provide adequate protection for our trade secrets or other
proprietary know-how.
If
we are not successful in managing our future growth, our business will
suffer.
We
have
limited experience in the commercial production of explosives detection systems.
Our future success will depend upon, among other factors, our ability to
recruit, hire, train and retain highly educated, skilled and experienced
management and technical personnel, to generate capital from operations, to
scale-up our manufacturing process and expand our facilities and to manage
the
effects of growth on all aspects of our business, including research,
development, manufacturing, distribution, sales and marketing, administration
and finance. Our failure to identify and exploit new product and service
opportunities, attract or retain necessary personnel, generate adequate revenues
or conduct our expansion or manage growth effectively could have a material
adverse effect on our business and results of operations.
Our
medical device products and services are subject to extensive government
regulation. If we fail to obtain or are delayed in obtaining the approval of
the
necessary federal and state government agencies, our business could be
materially affected.
The
manufacture and sale of our medical device products and services are subject
to
extensive regulation principally by the Food and Drug Administration in the
United States and corresponding foreign regulatory agencies in each country
in
which we sell our products. These regulations affect product approvals, product
standards, packaging requirements, design requirements, manufacturing and
quality assurance, labeling, import restrictions, tariffs and other tax
requirements. Securing Food and Drug Administration authorizations and approvals
requires submission of extensive clinical data and supporting information.
In
most instances, the manufacturers or licensees of medical devices that are
treated by us will be responsible for securing regulatory approval for medical
devices incorporating our technology. However, we plan on preparing and
maintaining Device Master Files which may be accessed by the Food and Drug
Administration. There can be no assurance that our medical device manufacturers
or licensees will be able to obtain regulatory clearance or approval for devices
incorporating our technology on a timely basis, or at all. Regulatory clearance
or approvals, if granted, may include significant limitations of the indicated
uses for which the product may be marketed. In addition, product clearance
or
approval could be withdrawn for failure to comply with regulatory standards
or
the occurrence of unforeseen problems following initial marketing. Changes
in
existing regulations or adoption of new governmental regulations or policies
could prevent or delay regulatory approval of products incorporating our
technology or subject us to additional regulation.
In
addition to Food and Drug Administration regulation, certain of our activities
are regulated by, and require approvals from, other federal and state agencies.
The use, management, transportation, and disposal of certain materials and
wastes are subject to regulation by several federal and state agencies depending
on the nature of the materials or waste material. Certain toxic chemicals and
products containing toxic chemicals may require special reporting to the United
States Environmental Protection Agency and/or its state counterparts. Our future
operations may require additional approvals from federal and/or state
environmental agencies. There can be no assurance that we will be able to obtain
necessary government approvals, or that we will be able to operate with the
conditions that may be attached to future regulatory approvals. Moreover, there
can be no assurance that we will be able to maintain previously-obtained
approvals. While it is our policy to comply with applicable regulations, failure
to comply with existing or future regulatory requirements and failure to obtain
or maintain necessary approvals could have a material adverse effect on our
business, financial condition, and results of operations.
Failure
or delay of our medical device manufacturers in obtaining Food and Drug
Administration and other necessary regulatory clearance or approval, the loss
of
previously obtained clearance or approvals, as well as failure to comply with
other existing or future regulatory requirements could have a material adverse
effect on our business, financial condition and results of operations.
Because
certain of our products utilize radiation sources, their manufacture,
distribution, transportation, import/export, use and disposal will also be
subject to federal, state and/or local laws and regulations relating to the
use,
handling, procurement and storage of radioactive materials. We must also comply
with United States Department of Transportation regulations on the labeling
and
packaging requirements for shipment of radiation sources to hospitals or other
users of our products. We expect that there will be comparable regulatory
requirements and/or approvals in markets outside the United States. If any
of
the foregoing approvals are significantly delayed or not obtained, our business
could be materially adversely affected.
Our
research and manufacturing activities involve the use of hazardous materials.
Any liability resulting from the misuse of such hazardous materials could
adversely affect our business.
Our
research and manufacturing activities sometimes involve the use of various
hazardous materials. Although we believe that our safety procedures for
handling, manufacturing, distributing, transporting and disposing of such
materials comply with the standards for protection of human health, safety,
and
the environment, prescribed by local, state, federal and international
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. Nor can we eliminate the risk that one or
more
of our hazardous material or hazardous waste handlers may cause contamination
for which, under laws imposing strict liability, we could be held liable. While
we currently maintain insurance in amounts which we believe are appropriate
in
light of the risk of accident, we could be held liable for any damages that
might result from any such event. Any such liability could exceed our insurance
and available resources and could have a material adverse effect on our business
and results of operations.
We
depend on third party reimbursement to our customers for market acceptance
of
our medical products. If third party payors fail to provide appropriate levels
of reimbursement for our products, our profitability would be adversely
affected.
Medicare,
Medicaid and other government insurance programs, as well as private insurance
reimbursement programs greatly affect suppliers of health care products. Several
of the products being developed, produced or processed by us, including our
orthopedic implants, prostate seeds, and interventional cardiology instruments
and devices, are currently being reimbursed by third party payers. Our customers
rely on third-party reimbursements to cover all or part of the costs of most
of
the procedures in which our products are used. Third party payers (including
health maintenance organizations) may affect the pricing or relative
attractiveness of our products by regulating the maximum amount of reimbursement
provided by such payers to the physicians, hospitals and clinics using our
devices, or by taking the position that such reimbursement is not available
at
all. The amounts of reimbursement by third party payers in those states that
do
provide reimbursement vary considerably.
Alternatively,
a diagnostic-related group may be assigned that does not reflect the costs
associated with the use of our devices or devices treated using our services,
resulting in limited reimbursement. If, for any reason, the cost of using our
products or services was not to be reimbursed by third party payers, our ability
to sell our products and services would be materially adversely affected. In
the
international market, reimbursement by private third party medical insurance
providers and governmental insurers and 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.
Product
liability claims could damage our reputation and hurt our financial
results.
To
date
no product liability claims have been asserted against us; however, the testing,
marketing and sale of implantable devices and materials entail an inherent
risk
that product liability claims will be asserted against us, if the use of our
devices is alleged to have adverse effects on a patient, including exacerbation
of a patient's condition, further injury, or death. A product liability claim
or
a product recall could have a material adverse effect on our business. Certain
of our devices are designed to be used in treatments of diseases where there
is
a high risk of serious medical complications or death.
Although
we have obtained product liability insurance coverage on our medical products,
there can be no assurance that in the future we will be able to obtain such
coverage on acceptable terms or that insurance will provide adequate coverage
against any or all potential claims. Furthermore there can be no assurance
that
we will avoid significant product liability claims and the attendant adverse
publicity. Any product liability claim or other claim with respect to
underinsured liabilities could have a material adverse effect on our business
and results of operations.
If
our suppliers cannot provide the components or services we require, our ability
to manufacture our products could be harmed.
We
rely
on a limited number of suppliers to provide materials and services used to
manufacture our products. If we cannot obtain adequate quantities of necessary
materials and services from our suppliers, there can be no assurance that we
would be able to access alternative sources of supply within a reasonable period
of time or at commercially reasonable rates. Moreover, in order to maintain
our
relationship with major suppliers, we may be required to enter into preferred
supplier agreements that will increase the cost of materials obtained from
such
suppliers, thereby also increasing the prices of our products. The limited
sources, the unavailability of adequate quantities, the inability to develop
alternative sources, a reduction or interruption in supply or a significant
increase in the price of raw materials or services could have a material adverse
effect on our business and results of operations.
If
our contract manufacturer cannot provide the services we require, our ability
to
manufacture our products could be harmed.
We
rely
on a single contract manufacturer to provide manufacturing services for our
explosives detection products. If these services become unavailable, we would
be
required to identify and enter into an agreement with a new contract
manufacturer or take the manufacturing in house. The loss of our contract
manufacturer could significantly disrupt production as well as increase the
cost
of production, thereby also increasing the prices of our products. These changes
could have a material adverse effect on our business and results of operations.
If
we were to lose the services of either our president or our chief scientist,
our
business would be adversely affected.
We
are
substantially dependent, for the foreseeable future, upon our Chairman of the
Board, President and Chief Executive Officer, Dr. Anthony J. Armini and our
Vice
President and Chief Scientist, Dr. Stephen N. Bunker, both of whom currently
devote their full time and efforts to management. We have entered into an
employment agreement with each of these officers. If we were to lose the
services of Dr. Armini or Dr. Bunker for any significant period of time, our
business would be materially adversely affected.
If
we cannot attract and retain the management, sales and other personnel we need,
we will not be successful.
There
is
intense competition for qualified personnel in the high technology field, 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. The loss
of
the services of existing personnel as well as the failure to recruit additional
qualified scientific, technical and managerial personnel in a timely manner
would be detrimental to our anticipated growth and expansion into areas and
activities requiring additional expertise such as marketing. The failure to
attract and retain such personnel could adversely affect our business and
results of operations.
If
we are unable to complete our assessments as to the adequacy of our internal
controls over financial reporting as required by Section 404 of the
Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability
of our financial statements, which could result in a decrease in the value
of
our common stock.
In
our
report on Form 10-K for the year ended June 30, 2006, our
independent auditors have reported to our Audit Committee certain matters
involving internal controls that our independent auditors considered to be
a
significant deficiency. A significant deficiency is a control deficiency or
combination of control deficiencies, that adversely affects the company’s
ability to initiate, authorize, record, process, or report external financial
data reliably in accordance with generally accepted accounting principles such
that there is more than a remote likelihood that a misstatement of the company’s
annual or interim financial statements that is more than inconsequential will
not be prevented or detected.
The
reportable condition related primarily to the closing and financial reporting
process. Management is confident that our financial statements for
the year ended June 30, 2006 fairly present, in all material respects, our
financial condition and results of operations.
The
reportable condition has been discussed in detail among management, our Audit
Committee and our independent auditors, and we are committed to addressing
and
resolving these matters fully and promptly, by putting in place the personnel,
processes, technology and other resources appropriate to support our financial
close processes. As part of this commitment, beginning in the second quarter
of
our fiscal year ended June 30, 2007, we intend to use the services of an outside
consultant to evaluate our closing and financial reporting process and make
recommendations to management to improve these processes.
We
cannot
assure you that we will successfully address the issues raised by our
independent auditors above. If we are unable to do so, and a misstatement,
error
or fraud is committed and remains undetected, we may suffer a material adverse
effect to our results of operations.
Our
quarterly results may fluctuate significantly, which could adversely affect
our
stock price.
We
believe that our operating results may be subject to substantial quarterly
fluctuations due to several factors, some of which are outside our control,
including fluctuating market demand for, and declines in the average selling
price of our products, the timing of significant orders from customers, delays
in the introduction of new or improved products, delays in obtaining customer
acceptance of new or changed products, the cost and availability of raw
materials, and general economic conditions. We plan to further increase our
expenditures to complete development and commercialization of our new products,
to increase our manufacturing capacity, to ensure compliance with the Food
and
Drug Administration's Quality Systems Regulations and to broaden our sales
and
marketing capabilities. A substantial portion of our revenue in any quarter
historically has been derived from orders booked in that quarter, and
historically, backlog has not been a meaningful indicator of revenues for a
particular period. Accordingly, our sales expectations currently are based
almost entirely on our internal estimates of future demand and not from firm
customer orders.
We
will be required to redeem the Series D Preferred for cash if the five day
average market price of our common stock, prior to a redemption date, is less
than 110% of the fixed conversion price.
We
will
be required to redeem the Series D Preferred for cash if the following
conditions are not met: (1) the shares must be issued pursuant to an effective
registration statement, (2) the average closing market price of the common
stock
for the five trading days immediately preceding a payment date must exceed
the
fixed conversion price of $4.15 by 110% and no one day’s closing price may be
less than the fixed conversion price, and (3) the conversion dollar value may
not exceed the aggregate of the prior 22 trading days’ dollar volume. We cannot
be certain that we will be able to redeem the monthly payment in shares of
common stock on a redemption date given the fixed conversion price of the
preferred stock and the associated market price of the common stock on a
redemption date. If we are required to redeem monthly payments in cash, this
will reduce our working capital necessary for our operations. Failure of
our ability to convert preferred shares into common shares will have a material
adverse affect on our cash resources. We may be required to reduce or
curtail certain operations and research and development projects to improve
our
cash resources. As of December 15, 2006, the closing price of our common stock
was $2.42 per share.
The
Company may have liability in connection with its recent securities
transactions.
We
amended the Series D financing terms with Laurus Master Fund in May 2006, while
the Registration Statement on Form S-3 was on file with the SEC but had not
yet
been declared effective. This may have been a violation of Section 5 of the
Securities Act and may provide Laurus with rescission rights. Although Laurus
has been offered rescission and has declined to rescind such transaction, there
is a possibility that such transaction could be reversed and the consideration
received by us may have to be repaid. Because we have made redemption payments
to Laurus in accordance with the terms of the Series D, if the transaction
was
rescinded, we would be required to pay Laurus the aggregate amount of
approximately $3,940,000, which would have a material adverse affect upon our
business.
If
third party credit is unavailable, our working capital could be restricted;
restrictions on our ability to raise additional capital under certain
circumstances.
Currently,
we rely on cash generated from our operations, private equity financing and
third party credit for working capital purposes. If such financing is no longer
available at acceptable rates, we would be required to reduce or curtail our
operations and research and development projects. This would have a material
adverse effect on our business and results of operations.
Further,
from March 4, 2005 and for a period 24 months thereafter, we are prohibited
from
issuing or selling any debt or equity securities that are convertible into,
exchangeable or exercisable for, or include the right to receive additional
shares of our common stock either:
| · |
at
a conversion, exercise or exchange rate or other price that is based
upon
and/or varies with the trading prices of or quotations for the shares
of
our common stock at any time after the initial issuance of such debt
or
equity securities, or
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| · |
with
a conversion, exercise or exchange price that is subject to being
reset at
some future date after the initial issuance of such debt or equity
security or upon the occurrence of specified or contingent events
directly
or indirectly related to our business or the market for our common
stock.
|
To
the
extent that these prohibitions affect our ability to raise additional capital
from potential future investors, we would be required to reduce or curtail
our
operations and research and development projects. This would have a material
adverse effect on our business and results of operations.
Shares
eligible for future sale may adversely affect the market.
From
time to
time, certain of our stockholders may be eligible to sell all or some of their
shares of common stock by means of ordinary brokerage transactions in the open
market pursuant to Rule 144, promulgated under the Securities Act, subject
to certain limitations. In general, pursuant to Rule 144, a stockholder (or
stockholders whose shares are aggregated) who has satisfied a one year holding
period may, under certain circumstances, sell within any three month period
a
number of securities which does not exceed the greater of 1% of the then
outstanding shares of common stock or the average weekly trading volume of
the
class during the four calendar weeks prior to such sale. Rule 144 also
permits, under certain circumstances, the sale of securities, without any
limitation, by our stockholders that are non-affiliates that have satisfied
a
two year holding period. Any substantial sale of our common stock pursuant
to
Rule 144 or pursuant to any resale prospectus may have material adverse
effect on the market price of our securities.
Because
of certain limitation on director/officer liability, our stockholders may have
limited rights to recover for breach of fiduciary duty.
As
permitted by Massachusetts law, our Restated Articles of Organization limit
the
liability of our directors for monetary damages for breach of a director's
fiduciary duty except for liability in certain instances. As a result of our
charter provision and Massachusetts law, stockholders may have limited rights
to
recover against directors for breach of fiduciary duty. In addition, our bylaws
provide that we shall indemnify our directors, officers, employees and agents
if
such persons acted in good faith and reasoned that their conduct was in our
best
interest.
We
have
never paid any cash dividends on our common stock and do not anticipate paying
any cash dividends on our common stock in the foreseeable future. We plan to
retain any future earnings to finance growth. If we decide to pay dividends
to
the holders of our common stock, such dividends may not be paid on a timely
basis.
The
anti-takeover provisions of our Restated Articles of Organization and of the
Massachusetts corporation law may delay, defer or prevent a change of control.
Our
board
of directors has the authority to issue up to 5,000,000 shares of preferred
stock and to determine the price, rights, preferences and privileges and
restrictions, including voting rights, of those shares without any further
vote
or action by our stockholders. The rights of the holders of common stock will
be
subject to, and may be harmed by, the rights of the holders of any shares of
preferred stock that may be issued in the future. The issuance of preferred
stock may delay, defer or prevent a change in control because the terms of
any
issued preferred stock could potentially prohibit our consummation of any
acquisition, reorganization, sale of substantially all of our assets,
liquidation or other extraordinary corporate transaction, without the approval
of the holders of the outstanding shares of preferred stock. In addition, the
issuance of preferred stock could have a dilutive effect on our stockholders.
Our
stockholders must give substantial advance notice prior to the relevant meeting
to nominate a candidate for director or present a proposal to our stockholders
at a meeting. These notice requirements could inhibit a takeover by delaying
stockholder action.
FORWARD-LOOKING
INFORMATION
Some
of
the information in this prospectus, or incorporated by reference into this
prospectus, contains forward-looking statements that involve substantial risks
and uncertainties. Any statement in this prospectus that is not a statement
of
an historical fact constitutes a "forward-looking statement". Further, when
we
use the words "may", "expect", "anticipate", "plan", "believe", "seek",
"estimate", "internal", and similar words, we intend to identify statements
and
expressions that may be forward-looking statements. We believe it is important
to communicate certain of our expectations to our investors. Forward-looking
statements are not guarantees of future performance. They involve risks,
uncertainties and assumptions that could cause our future results to differ
materially from those expressed in any forward-looking statements. Many factors
are beyond our ability to control or predict. You are accordingly cautioned
not
to place undue reliance on such forward-looking statements. We have no
obligation or intent to update publicly any forward-looking statements whether
in response to new information, future events or otherwise.
THE
OFFERING
| · |
This
registration statement relates to the resale of shares of our common
stock
issued and issuable to a selling stockholder, as well as the issuance
of
common stock purchase warrants that are exercisable into shares of
our
common stock. Specifically, the shares of our common stock included
in
this offering consist of :
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| · |
949,252
shares of our common stock issuable on conversion of our Series D
Convertible Redeemable Preferred
Stock;
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| · |
261,233
shares of our common stock issued as partial repayment of our Series
D
Convertible Redeemable Preferred
Stock;
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| · |
450,000
shares of our common stock issuable upon exercise of common stock
purchase
warrants;
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| · |
120,000
shares of our common stock issuable as dividends on our Series D
Convertible Redeemable Preferred
Stock.
|
USE
OF PROCEEDS
All
of
the shares of common stock offered by this prospectus are being offered by
the
selling stockholder. If all of the 450,000 warrants are exercised by the selling
stockholder, we would receive proceeds of approximately $2,086,500. We will
not
receive any additional proceeds from the sale of shares by the selling
stockholder. For information about the selling stockholder, see “Selling
Stockholder.”
SELLING
STOCKHOLDER
On
July
6, 2005, the Company executed a $3.0 million secured term note payable to Laurus
Master Fund, Ltd. (“Laurus”). The Company received $3,000,000 in gross proceeds,
less a management fee of $135,000 and related transaction costs of approximately
$32,000. The term note was collateralized by substantially all of the Company’s
assets, had a 4-month term and bore interest at a rate equal to the prime rate
plus one percent (1%). In connection with the financing, on September 30, 2005,
the Company issued Laurus a warrant to purchase up to 250,000 shares of the
Company’s common stock at a price equal to $3.75 per share. The warrants were
valued using the Black Scholes model and the following assumptions: volatility
of 67%, expected life of 5 years and a risk free interest rate of 3.77%. Net
proceeds from the financing were used for increasing the capacity of the Quantum
Sniffer™ production line, increasing unit inventories and the repayment of
certain indebtedness due and owed by the Company to the former shareholders
of
Accurel in connection with the acquisition of this wholly-owned subsidiary.
On
September 30, 2005, the Company issued 500,000 shares of Series D Redeemable
Convertible Preferred Stock (“Series D”) having a stated value of $10 per share,
pursuant to a Securities Purchase Agreement with Laurus. The Company received
$5,000,000 in gross proceeds, less a management and placement agent fee of
approximately $90,000, and related transaction costs of approximately $27,000.
The Company utilized the proceeds to repay the $3 million term note with Laurus
signed on July 6, 2005. The Series D has a dividend equal to the prime rate
plus
one percent (1%) (9.25% at June 30, 2006) and provides for redemption over
a
thirty-six month period pursuant to an amortization schedule. In conjunction
with the Series D, the Company also issued to Laurus a warrant to purchase
up to
50,000 shares of the Company’s common stock at a price equal to $10.20 per
share. The warrants were valued using the Black Scholes model and the following
assumptions: volatility of 80%, an expected life 5 years, and a risk free
interest rate of 4.12%. Net cash proceeds from this financing were $1,883,000
(which included repayments of $3,000,000 of principal related to the July 6,
2005 term note and $117,000 of issuance costs).
The
following table reflects the required redemption of the Series D before the
effect of the accrued dividends as of November 30, 2006:
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Year
ending June 30:
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Preferred
Stock Monthly Redemption Schedule
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2007
|
|
$
1,061,000
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2008
|
|
1,818,000
|
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2009
|
|
1,060,000
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Total
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$
3,939,000
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|
|
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The
monthly redemption of approximately $152,000 plus accrued dividends commences
on
October 1, 2006. At its option the Company deferred the October redemption
to
the end of the term. Subject to certain conditions, it is at the Company’s
option to pay this amount in cash or in common stock at a fixed conversion
price
of $4.15 per common share. This fixed conversion price is subject to reset
should the Company declare a stock dividend or split, combine the outstanding
common stock into a smaller number of shares, or issue, by reclassification
of
its common stock, any shares or other securities of the Company. The fixed
conversion price shall be adjusted proportionately so that the holder of the
Series D shall be entitled to receive the kind and number of shares or other
securities of the Company which such Laurus would have owned or have been
entitled to receive after the happening of any of the events described above,
had such shares of Series D Preferred Stock been converted immediately prior
to
the happening of such event.
The
following conditions must be met in order for the Company to be permitted to
pay
in common stock: (1) the shares must be issued pursuant to an effective
registration statement, (2) the average closing market price of the common
stock
for the five trading days immediately preceding a payment date must exceed
the
fixed conversion price by 110% and no one day’s closing price may be less than
the fixed conversion price, and (3) the conversion dollar value may not exceed
the aggregate of the prior 22 trading days’ dollar volume. The dividend rate is
subject to a 2% decrease for every 25% the average trading price for the five
trading days prior to a repayment date exceeds the fixed conversion price,
to a
minimum of 0%. In addition, upon notifying the holder, the Company has the
option of redeeming any outstanding shares of Series D with cash by paying
130%
of the stated value plus accrued interest.
As
a
condition of closing, the Company and each of its Subsidiaries granted a
security interest in their respective assets as well as providing Laurus a
right
of first refusal on future financing arrangements during the term of the
Agreement. In the event Laurus declines to exercise its right of first refusal,
it agreed to enter into such documentation as shall be reasonably requested
by
the Company in order to subordinate its rights under the Series D to the
subsequent financier. The registration rights associated with the Agreement
state that the Company will use its best efforts to have the registration
statement effective within 120 days from closing. In addition, the Company
is
required to maintain an effective registration statement, and ensure that shares
are not suspended from trading. Upon notice from Laurus, should the Company
be
declared in default of these items and have not cured the default within the
prescribed period, the Company may be assessed liquidated damages equal to
1/30th
of 0.1%
of the outstanding preferred balance, payable in cash, for each day the event
has occurred and remains outstanding. However, pursuant to the Agreement,
“liquidated damages do not apply should the Securities and Exchange Commission
(“SEC”) have an issue with respect to the Holder or with respect to the
structure of the transaction.”
In
accordance with the provisions of Emerging Issues Task Force (“EITF”) Issue
00-19, “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock,” the Company concluded that the
Series D contained a conversion feature which should be valued at fair value
and
be recorded as a liability on the balance sheet. This conversion feature is
not
considered to be a “conventional preferred” instrument because the Agreement
includes certain conditions under which the conversion price may be reset.
This
condition would suggest that the number of shares to be issued upon conversion
is not fixed, which is a requirement of a “conventional preferred” instrument.
This conversion feature was also determined to be a liability since it may
be
required to be repaid in cash, cannot be paid in unregistered shares and has
certain penalties. These conditions define the conversion feature as an embedded
derivative which must be separated from the host and reported at fair value
pursuant to SFAS 133, “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS No. 133”).
The
Series D also contains certain other embedded derivatives which, pursuant to
SFAS No. 133, must be bifurcated from the host contract and reported at its
fair
market value. The first feature includes a dividend rate that is subject to
adjustment based on the market price of the Company’s common stock. The second
feature, related to potential default provisions, could potentially increase
the
dividend and redemption price, similar to a default or penalty clause in a
debt-like instrument. Although the Company has valued all embedded derivatives
of the host contract as one derivative instrument, the Company believes the
value of the adjustable dividend rate and the potential default provisions
features are immaterial. Management considered a number of factors, including
independent appraisals when making this determination. The Company will continue
to measure all derivatives at each reporting period as future changes in value
may become material.
The
conversion feature aggregated to $1,397,000 on September 30, 2005 based on
the
Black- Scholes valuation model and the following assumptions: volatility 80%,
expected life 1.5 years, and a risk free interest rate of 3.96%. The
conversion feature is marked to market at each reporting period with
changes flowing through the statement of operations. As of September 30, 2006,
the fair value of this conversion feature approximated
$1,074,000. The value of the embedded derivates
related to the adjustable dividend rate and the potential default provisions
were determined to be immaterial.
The
Company valued the Series D at issuance at its residual value of $2,700,000
based on the fair values of the financial instruments issued in connection
with
this preferred stock financing, including the warrants, the embedded derivative
instruments and offering costs. The amounts recorded in the financial statements
represent the amounts attributed to the sale of the Series D preferred stock,
the amount allocated to warrants of $672,000, the value attributed to the
embedded derivatives of $1,397,000 and $271,000 of issuance costs (including
$154,000 of unamortized costs of the July 6, 2005 term note). Approximately
$40,000 of the warrant value was accounted for as interest expense in the period
ended December 31, 2005. The Company is accreting these discounts on the
carrying value of the preferred stock to its redemption value at September
1, 2008, or the actual conversion date, whichever is earlier. The accretion
of
these amounts is being recorded as a preferred dividend in the period of
accretion. As of September 30, 2006, $912,000 was amortized. The outstanding
balance on the Series D was $4,091,000 at September 30, 2006. At its option
the
Company deferred the October redemption of $152,000 to the end of the term.
The
November redemption was paid in cash and the December 2006 payment is currently
due.
On
May
31, 2006, the Company amended the Series D and the Certificate of Vote of
Directors Establishing a Class or Series of Stock. The terms of the amendment
permit the Company to defer approximately $455,000 of cash payments,
representing the January 2006, February 2006 and March 2006 amortization
payments, and to defer the October 2006 amortization payment, should such
payment be required in cash, to the mandatory redemption date of September
30,
2008. In consideration, the Company has agreed to the conversion of the April
2006, May 2006, June 2006, July 2006, August 2006 and September 2006
amortization payments into 261,233 shares of common stock of the Company at
a
conversion price of $3.48 per share, representing a reduction in principal
of
approximately $909,000, and to reduce the Fixed Conversion Price of the
remaining Series D stock from $6.80 per share to $4.15 per share. In addition,
Laurus was granted a warrant to purchase 150,000 shares of the Company’s common
stock at an exercise price of $4.26 per share. The warrants were valued at
$375,000 using the Black Scholes model and the following assumptions: volatility
of 79%, an expected life 5 years, and a risk free interest rate of 4.89%.
As
a
result of this amendment, it is estimated that 1,780,485 shares of common stock
will be issued through the conversion of the Series D Convertible Redeemable
Preferred stock, dividends payable in common stock and the exercise of warrants
issued in conjunction with this
financing.
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Extinguishment
of Series D debt instrument at May 31, 2006:
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Redemption
payments
due
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$909,000
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Unamortized
discount of warrants, derivative value of preferred stock conversion
and
issue costs
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266,000
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Derivatives
related to the preferred stock features
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578,000
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Subtotal
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$1,753,000
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Record
New Series D debt instrument at May 31, 2006:
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Fair
value of redemption payments made
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$1,011,000
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Issuance
of 150,000 warrants
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375,000
|
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Unamortized
discount of warrants, derivative value of preferred stock conversion
and
issue costs
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266,000
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Derivatives
related to the preferred stock features
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1,395,000
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Subtotal
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$3,047,000
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Loss
on extinguishment of Series D debt instrument
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$1,294,000
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The
$1,294,000 aggregate loss from these transactions is accounted for as an
extinguishment of debt and is included in Other expenses for the year ended
June
30, 2006.
Based
on
the information supplied to us by each selling stockholder, the following table
sets forth certain information regarding the approximate number of shares owned
by each selling stockholder as of December 1, 2006, and as adjusted to reflect
the sale by each selling stockholder of the shares of common stock offered
by
this prospectus. In addition, the selling stockholder has not been identified
as
a broker-dealer however the selling stockholder has identified itself as an
affiliate of a broker-dealer. The affiliated selling stockholder has stated
that
the purchased shares are being registered for resale in the ordinary course
of
business and that at the time of purchase, had no agreements or understandings,
directly or indirectly, with any person to distribute the securities and are
therefore not underwriters. Any broker-dealer or any affiliate of a
broker-dealer who is deemed to be an underwriter may not avail themselves of
sales under Rule 144.
| |
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Shares
Beneficially Owned Prior to Offering (1)
|
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Number
of Shares Offered
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Shares
Beneficially Owned After Offering (1) (2)
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Name
|
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Number
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Percent
(4)
|
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Number
|
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Percent
(4)
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Laurus
Master Fund, Ltd
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2,075,431
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16%
|
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1,780,485
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294,946
|
|
2%
|
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c/o
Ironshore Corporate Services Ltd.
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P.O.
Box 1234 G.T
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Queensgave
House
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South
Church Street
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Grand
Cayman, Cayman Island (3)
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1
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Beneficial
ownership is determined in accordance with the rules of the Securities
and
Exchange Commission and generally includes voting or investment power
with
respect to securities. Except as indicated, each person possesses
sole
voting and investment power with respect to all of the shares of
common
stock owned by such person, subject to community property laws where
applicable. In computing the number of shares beneficially owned
by a
person and the percentage ownership of that person, shares of common
stock
subject to options and convertible securities held by that person
that are
currently exercisable, or become exercisable within 60 days of the
date of
this prospectus are deemed outstanding. Such shares, however, are
not
deemed outstanding for the purpose of computing the percentage ownership
of any other person. The information as to each person has been furnished
by such person.
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2
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Assumes
that all shares of common stock offered in this prospectus and otherwise
beneficially owned will be sold.
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3
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Laurus
Master Fund, Ltd. Is managed by Laurus Capital Management, LLC, Eugene
Grin and David Grin, through other entities, are the controller principals
of Laurus Capital Management, LLC and share sole voting and investment
power over the securities owned by the Fund registered in this
Registration Statement, as amended. Includes warrants to purchase:
55,000
shares of our common stock at an exercise price of $6.23, 25,000
shares of
our common stock at $6.88 per share; 45,000 shares of our common
stock at
$8.25 per share; 50,000 shares of our common stock at $8.44 per share;
50,000 shares of our common stock at $10.13 per share; 250,000 shares
of
our common stock at $3.75 per share; 50,000 shares of our common
stock at
$10.20 per share; and 150,000 shares of our common stock at an exercise
price of $4.26 per share. In addition, it is estimated that approximately
120,000 shares of common stock may be issued in conjunction with
the
payment of dividends.
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4
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Based
on approximately 11,800,811shares of common stock issued and outstanding
as of December 1, 2006 plus, for each investor, such numbers of shares
of
common stock subject to options and convertible securities held by
each
person that are currently exercisable, or become exercisable within
60
days of the date of this table. The selling stockholder and we are
not
making any representation that any shares covered by the prospectus
will
or will not be offered for sale or resale. The selling stockholder
reserves the right to accept or reject, in whole or in part, any
proposed
sale of shares. The shares offered by this prospectus may be offered
from
time to time by the selling stockholder named above.
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Prior
Relationships between Selling Stockholder and Us
Other
than as a result of Laurus’ ownership of shares of our preferred stock, common
stock and warrants in private placements on October 7, 2002, August 28, 2003,
November 25, 2003 and September 30, 2005, a short term note on July 6, 2005,
and
amendment to the September 30, 2005 private placement, we are not aware of
any
material relationship between us and the selling stockholder.
PLAN
OF DISTRIBUTION
The
Selling Stockholder (the “Selling Stockholder”) of the common stock (“Common
Stock”) of Implant Sciences Corporation (the “Company”) and any of their
pledgees, assignees and successors-in-interest may, from time to time, sell
any
or all of their shares of Common Stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The Selling Stockholder may use any one
or
more of the following methods when selling shares:
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ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
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block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
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purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
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an
exchange distribution in accordance with the rules of the applicable
exchange;
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privately
negotiated transactions;
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settlement
of short sales entered into after the date of this
prospectus;
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broker-dealers
may agree with the Selling Stockholder to sell a specified number
of such
shares at a stipulated price per
share;
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a
combination of any such methods of
sale;
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through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
or
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any
other method permitted pursuant to applicable
law.
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Selling
Stockholders, who are not deemed to be underwriters, may also sell shares under
Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), if
available, rather than under this prospectus.
Broker-dealers
engaged by the Selling Stockholder may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the Selling Stockholder (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
Selling Stockholder does not expect these commissions and discounts relating
to
its sales of shares to exceed what is customary in the types of transactions
involved.
In
connection with the sale of our common stock or interests therein, the Selling
Stockholder may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The Selling
Stockholder may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The Selling
Stockholder may also enter into option or other transactions with broker-dealers
or other financial institutions or the creation of one or more derivative
securities which require the delivery to such broker-dealer or other financial
institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
Selling Stockholder and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. The Selling Stockholder has informed the
Company that it does not have any agreement or understanding, directly or
indirectly, with any person to distribute the Common Stock.
The
Company is required to pay certain fees and expenses incurred by the Company
incident to the registration of the shares. The Company has agreed to indemnify
the Selling Stockholder against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act.
Because
the Selling Stockholder may be deemed to be an “underwriter” within the meaning
of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act. In addition, any securities covered by
this
prospectus which qualify for sale pursuant to Rule 144 under the Securities
Act
may be sold under Rule 144 rather than under this prospectus. The Selling
Stockholder has advised us that they have not entered into any agreements,
understandings or arrangements with any underwriter or broker-dealer regarding
the sale of the resale shares. There is no underwriter or coordinating broker
acting in connection with the proposed sale of the resale shares by the Selling
Stockholder.
We
agreed
to keep this prospectus effective until the earlier of (i) the date on which
the
shares may be resold by the Selling Stockholder without registration and without
regard to any volume limitations by reason of Rule 144(k) under the Securities
Act or any other rule of similar effect or (ii) all of the shares have been
sold
pursuant to the prospectus or Rule 144 under the Securities Act or any other
rule of similar effect. The resale shares will be sold only through registered
or licensed brokers or dealers if required under applicable state securities
laws. In addition, in certain states, the resale shares may not be sold unless
they have been registered or qualified for sale in the applicable state or
an
exemption from the registration or qualification requirement is available and
is
complied with.
Under
applicable rules and regulations under the Exchange Act, any person engaged
in
the distribution of the resale shares may not simultaneously engage in market
making activities with respect to our common stock for a period of two business
days prior to the commencement of the distribution. In addition, the Selling
Stockholder will be subject to applicable provisions of the Exchange Act and
the
rules and regulations thereunder, including Regulation M, which may limit the
timing of purchases and sales of shares of our common stock by the Selling
Stockholder or any other person. We will make copies of this prospectus
available to the Selling Stockholder and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or prior to the time
of
the sale.
DESCRIPTION
OF SECURITIES
The
authorized capital stock of the Company consists of 20,000,000 shares of common
stock, $0.10 par value per share and 5,000,000 shares of preferred stock, $0.10
par value per share.
Common
Stock
Holders
of common stock are entitled to one vote per share in all matters to be voted
on
by the shareholders. Subject to the preferences that may be applicable to any
preferred stock then outstanding, holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time
by
the board of directors out of funds legally available thereof. In the event
of
our liquidation, dissolution or winding up, whether voluntary or involuntary,
holders of common stock are entitled to share ratably in all assets remaining
after payment of our liabilities and the liquidation preference, if any, of
any
then outstanding shares of preferred stock. Holders of common stock have no
preemptive rights and no rights to convert their common stock into any other
securities, and there are no redemption or sinking fund provisions with respect
to such shares. The rights, preferences and privileges of holders of common
stock are subject to, and may be materially adversely affected by, the rights
of
the holders of shares of any series of preferred stock which we may designate
and issue in the future. All outstanding shares of common stock are fully paid
and non-assessable.
Preferred
Stock
Our
Articles of Organization authorizes our board of directors to issue preferred
stock in one or more series and to determine the voting rights and dividend
rights, dividend rates, liquidation preferences, conversion rights, redemption
rights, including sinking fund provisions and redemption prices, and other
terms
and rights of each of these series.
Massachusetts
Law
We
have
more than 200 stockholders, as a result of which we are subject to the
provisions of Chapter 110F of the Massachusetts General Laws, an anti-takeover
law. In general, this statute prohibits a publicly held Massachusetts
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction
in
which the person becomes an interested stockholder, unless either (i) prior
to
that date, the board of directors approved either the business combination
or
the transaction in which the person became an interested stockholder, (ii)
the
interested stockholder acquires 90% of the outstanding voting stock of the
corporation (excluding shares held by certain affiliates of the corporation)
at
the time it becomes an interested stockholder or (iii) the business combination
is approved by the board of directors and by the holders of two-thirds of the
outstanding voting stock of the corporation (excluding shares held by the
interested stockholder) voting at a meeting. In general, an "interested
stockholder" is a person who owns 5% (15% in the case of a person eligible
to
file a Schedule 13G under the Securities Act of 1933, as amended, with respect
to the common stock) or more of the outstanding voting stock of the corporation
or who is an affiliate or associate of the corporation and was the owner of
5%
(15% in the case of a person eligible to file a Schedule 13G under the
Securities Act with respect to the common stock) or more of the outstanding
voting stock within the prior three years. A "business combination" includes
mergers, consolidations, stock and asset sales, and other transactions with
the
interested stockholder resulting in a financial benefit (except proportionately
as a stockholder of the corporation) to the interested stockholder. We may
at
any time amend our articles or by-laws to elect not to be governed by Chapter
110F by a vote of the holders of a majority of its voting stock. Such an
amendment would not be effective for twelve months and would not apply to a
business combination with any person who became an interested stockholder prior
to the date of the amendment.
Our
by-laws provide that any holder of 10% or more of the outstanding shares of
common stock may call a meeting of stockholders.
WHERE
YOU CAN FIND MORE INFORMATION
This
prospectus is part of a registration statement on Form S-3 Amendment No. 2
we
filed with the SEC under the Securities Act of 1933. This prospectus does not
contain all of the information contained in the registration statement. For
further information about us and our common stock, you should read the
registration statement and the exhibits filed with the registration statement.
You may read and copy any materials we file with the SEC at the Securities
and
Exchange Commission's public reference room at 100 F. Street, N.E., Washington,
D.C. 20549. You can request copies of these documents by writing to the
Securities and Exchange Commission and paying a fee for the copying costs.
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for more
information about the operation of the public reference rooms.
We
file
certain documents with the Securities and Exchange Commission electronically
and
these documents may be inspected and copied at the Securities and Exchange
Commission’s Web site at http://www.sec.gov. We are a reporting company under
the Securities Exchange Act of 1934, and consequently, file reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy these reports, proxy statements and other information
at
the Securities and Exchange Commission’s public reference room at the address
appearing above.
The
Securities and Exchange Commission allows us to "incorporate by reference"
the
information we file with it. Incorporation by reference means that we can
disclose important information to you by referring you to the information we
filed with the Securities and Exchange Commission. The information incorporated
by reference is considered to be part of this prospectus, and later information
filed with the Securities and Exchange Commission will update and supersede
this
information.
We
incorporate by reference the documents listed below and any future documents
we
subsequently file with the Securities and Exchange Commission pursuant to
sections 13(a), 13(c), 14 or 15(d) of the Exchange Act of 1934, prior to the
termination of this offering.
(a) Our
annual report, filed with the Securities and Exchange Commission on Form 10-K,
for the fiscal year ended June 30, 2006 and the Form 10-Q for the quarter ended
September 30, 2006.
(b) The
description of our common stock contained in the registration statement on
Form
8-A filed with the Securities and Exchange Commission on April 21, 1999 under
section 12 of the Exchange Act, including all amendments and reports
subsequently filed for the purpose of updating such description.
You
may
request and receive, at no cost, copies of these filings by writing or
telephoning us at the following address:
Diane
J.
Ryan
Vice
President, Finance
Implant
Sciences Corporation
107
Audubon Road #5
Wakefield,
MA 01880
(781)
246-0700
DISCLOSURE
OF SEC POSITION
ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our
amended and restated Articles of Organization and By-Laws provide that we may
indemnify our directors and officers, to the fullest extent permitted under
Massachusetts law, including in circumstances in which indemnification is
otherwise discretionary under Massachusetts law.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers or persons controlling us, pursuant to
the
foregoing provisions, or otherwise, we have been advised that, in the opinion
of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act of 1933, and is, therefore,
unenforceable.
LEGAL
MATTERS
Ellenoff
Grossman & Schole LLP of 370 Lexington Avenue, New York, New York 10017 will
issue an opinion, for us, about the legality and validity of the shares.
Ellenoff Grossman & Schole LLP owns a warrant to purchase 10,000 shares of
our common stock.
EXPERTS
The
financial statements of our Company, as of and for the year ended June 30,
2006
incorporated by reference in this registration statement on Form S-3 Amendment
No. 2, have been audited by UHY LLP, an independent registered public accounting
firm, to the extent and for the periods set forth in their report incorporated
herein by reference, and are incorporated herein in reliance upon such report
given upon the authority of said firm as experts in auditing and
accounting.
The
financial statements of our Company, as of and for the year ended June 30,
2005
incorporated by reference in this registration statement on Form S-3 Amendment
No. 2, have been audited by BDO Seidman, LLP, an independent registered public
accounting firm, to the extent and for the periods set forth in their report
incorporated herein by reference, and are incorporated herein in reliance upon
such report given upon the authority of said firm as experts in auditing and
accounting.
The
consolidated financial statements of Core Systems Inc, as of November 30, 2003
and September 30, 2004, and the related consolidated statements of operations,
stockholders’ deficit and cash flows for the twelve and ten month periods ended
November 30, 2003 and September 30, 2004 incorporated in this Registration
Statement on Form S-3 Amendment No. 2, by reference were audited by Nation
Smith
Hermes Diamond APC, an independent registered public accounting firm, as stated
in their report dated December 23, 2004 incorporated by reference from Implant
Sciences’ Form 8-K/A filed with the Securities and Exchange Commission on
December 29, 2004. Such financial statements have been incorporated by reference
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
The
financial statements of Accurel Systems International Corporation, incorporated
in this Registration Statement on Form S-3 Amendment No. 2 by reference to
Implant Sciences’ Form 8-K/A filed on April 13, 2005 have been so incorporated
in reliance on the report of Ireland San Filippo, LLP, independent certified
public accountants, given on the authority of said firm as experts in auditing
and accounting.