Imaging Diagnostic Systems (fka IMDS)

[jmurfk]

Here Zipcash. Here's a little Miami Herald article about the current CEO and her former husband. It's old, but gives a good background;

Quote:Published Monday, February 22, 1999, in the Miami Herald

Engineer's dream machine is a nightmare to shareholders

By JAMES McNAIR and NEIL REISNER


Dr. Stuart Kaplan said IDS was never ready to proceed full-speed, so he ended the relationship.

Diane Strait, in a statement given to the FDA, said Grable told her to modify images with a computer graphics program.

Richard Grable's dream machine is a narrow, thinly padded, fiberglass bed with a hole in it.

Grable's company, Imaging Diagnostic Systems in Plantation, touts it as a major breakthrough in the early detection of breast cancer with lasers. The National Cancer Institute and American Cancer Society estimate that 175,000 American women will be diagnosed with breast cancer in 1999. About 43,300 women will die.

At some point, Grable wants to substitute his computerized laser scanner for X-ray machines that require women's breasts to be clamped to the brink of pain. If he succeeds, he will have beaten the world's biggest medical equipment makers in the race to laser mammography.

``We're the closest to the finish line,' said Grable, who formed IDS in 1994 and serves as its chief executive officer. ``There's nobody else in the world who has done a study or who can show you images.'
But there's plenty of reason to wonder if IDS will even finish the race.

Will they finish?

To date, IDS has burned through $28 million and hasn't yet obtained U.S. Food and Drug Administration approval for its device, let alone sold one. Since early 1996, when IDS' common stock topped $9 a share, U.S. investors have bailed out, driving down the share price to 51 cents as of Friday. To stay alive, IDS has relied increasingly on high-priced money from offshore financing havens like Liechtenstein and Tortola. Its auditors express having ``substantial doubts' about the company's chances of survival.

The company's own statements and history make it an easy target for skepticism. Consider:

In June 1996, Grable wrote that IDS should have FDA marketing approval by mid-1997 based on test results of 400 to 600 patients. But as of last week, only 37 patients have been tested on the optical scanner -- no more than two outside the company's own lab -- and IDS still doesn't have FDA permission to sell the machine in the United States.

On several occasions since 1997, IDS has said it would begin clinical testing of its machine on hospital patients -- a mandatory step in obtaining FDA marketing approval. But its machine still hasn't seen the inside of a hospital.

From time to time, IDS has announced the assignment of ``exclusive distribution agreements' to medical equipment dealers in countries like Italy and Turkey. No overseas orders have been booked.

In November 1997, a former IDS employee told the FDA that Grable had ordered her to enhance images taken by the machine to make a better impression at an annual radiology convention. Grable refused to talk about it, calling her a ``disgruntled employee who was fired.'

In April 1998, IDS said it expected $66 million in revenue and $32 million in pre-tax profit from the machine in the year ending June 30, 1999. Now the company says it will need $8 million in financing to get through the next two years ``to complete all necessary stages in order to enable it to market' the machine. Yet it insists it will still achieve the revenue and profit forecasts, this time by June 2000.

IDS never disclosed that, because of technology delays, its profit projection would be delayed a year. Grable couldn't remember making the projection.
``We'll have to find it and see what it says,' he said.

The steady flow of public statements that don't come true has evoked the ire of some IDS shareholders. Dan O'Leary, a Detroit accountant who has invested several thousand dollars in IDS since 1996, said he believes the company's fudging of facts warrants a federal investigation.

``Whether this company is a sham or not is up to the government or the courts to decide,' O'Leary said. ``What is clear is that management has placed their own interests above the interests of the shareholder, failed to properly protect shareholder interests and made misleading statements that were damaging to shareholders.'

People in the radiology industry, too, have learned to filter what IDS has to say.

``You can't really expect them to get into into the market in a year or two,' said Brian Casey, editor of Diagnostic Imaging Scan newsletter. ``On the other hand, they've discussed this as though it's on the cusp of commercialization.'

Man behind the machine

At 56, Richard Grable has spent nearly a third of his life pushing contraptions to make breast exams easier and more reliable for women. The first, a breast illuminator, got into his head through a magazine story from Sweden in the late 1970s.

``It sounded like a good concept,' said Grable, an engineer by trade. ``The more I looked at it, the more I liked it.'

Grable and his wife Linda Grable started Lintronics Industries in 1981 to develop a breast illuminator of their own. Their first machine, the Lintro-Scan, employed off-the-shelf parts and infrared light. The Grables opened the publicity spigots.

In trade magazine ads and product brochures, Lintronics promoted the device as an alternative to X-ray mammography. In a promotional videotape sent to TV stations and prospective investors and buyers, a narrator says, ``Malignant tumors typically show up very dramatically on the (Lintro-Scan) monitor. Extremely effective in detecting tumors in their earliest stages of development.'

The claims eventually reached the FDA. From 1986 to 1990, FDA investigators took issue with the Lintro-Scan campaign and reminded the Grables that light-scanning devices not approved by the FDA couldn't be used for diagnosing diseases.

But by then, the Grables had already sold some of their machines in the United States. One company in Wisconsin toted around a Lintro-Scan in a van, advertising mammography screens in shopping center parking lots. Federal marshals seized it.

Lintronics did a fade. The Grables told the FDA that the first incarnation of the company, Lintronics Industries, was taken over by a hostile raider and driven into insolvency. They said they sold the second, Lintronics International.

After a short hiatus, the Grables formed Imaging Diagnostic Systems in 1994. It went public by doing what is commonly called a reverse IPO -- merging with a publicly traded ``shell' company already registered with the Securities and Exchange Commission. Ever since, IDS's shares have traded on the Nasdaq Electronic Bulletin Board, the nation's haunt for ``penny' stocks trading for less than $5. Both reverse IPOs and penny stocks are frowned upon by all but the most speculative investors.

Hitting the trail

IDS planned to pick up where Lintronics left off, using laser technology developed by Richard Grable to detect abnormalities in women's breasts. Once again, he hit the publicity trail, telling The Miami Herald in 1995, ``We feel that over the next year, we'll make a real impact on the imaging of the breast.'

Not much happened during the next year, however. The FDA gave IDS the go-ahead to test its prototype machine on up to 50 women at the Strax Breast Diagnostic Institute in Lauderhill. The machine was installed at Strax, but in the 18 months it was there, only two women were tested. Grable cited technology delays and the landlord's unwillingness to let IDS install a five-ton laser cooler on the roof. Dr. Stuart Kaplan, the medical director at Strax, said IDS was never ready to proceed full-speed, so he ended the relationship.

``We were waiting so long for them to develop the technology for us to be able to do a clinical trial,' Kaplan said. ``We said we needed the space for other things.'

At IDS' 34-employee headquarters and lab in Plantation, there is ample evidence of a medical technology company in a pre-production stage. Employees are testing the laser-optic systems and wiring computer work stations. The company has five finished machines and several variations of its scanning bed.

Despite the fact that IDS can't sell its machine in the United States yet, its publicity machine has chugged along nonstop. Its public relations firms are more like partners. At least three of them have accepted IDS shares as payment, giving them an added monetary incentive to put a positive spin on the company's press releases.

The company cajoled its way into puff pieces on Good Morning America, The Phil Donahue Show, CBS This Morning and, last week, on NBC 6 in Miami. In September, U.S. News & World Report fawned over IDS in a full-page story entitled, ``No more slam-o-gram.' Irate members of the American College of Radiology's Task Force on Breast Cancer flogged the magazine for treating IDS' unproven machine as a viable alternative to X-ray mammography.

IDS was a regular guest on the news wires in 1998. It said clinical trials of its machine ``will commence in hospitals in Miami, Chicago, Los Angeles, Boston and New York.' It said the machine is in the ``last stages' of development and is anticipated to be ``ready for distribution' in the summer (of 1998). It projected sales of $66 million and pre-tax earnings of $32 million for the year ending June 30, 1999.

Statements unfulfilled

So far, none of those statements have come true. IDS has obtained FDA approval to test its laser mammographer on up to 275 patients with breast abnormalities or positive mammograms at the Nassau County Medical Center in New York, but nowhere else. Grable said talks are under way with hospitals in the other cities, making the company's original statement ``still true.' He wouldn't identify the other hospitals.

As for the machine's commercial availability and sales projections, IDS attorney Rebecca Del Medico said technological problems led to delays. She said the revenue and profit projections now apply to the year ending June 30, 2000.

``At the time it (the release) was put out, the company believed it was true and was going to happen,' Del Medico said.

Grable's most missionary endeavor, though, occurs in November, when he crates up his machine to show at the Radiological Society of North America convention and trade show in Chicago.

Because potential future customers are there in force, Grable has done the road trip to RSNA every year since 1995. The company buys a space on the trade show floor, displaying its laser mammography prototype and images taken from tested patients.

In 1997, Grable's preparation for that event turned into a scandal.

Diane Strait, who joined IDS as a technical writer and graphic designer in late 1996, said Grable declared breast images taken during clinical testing as unfit for use at RSNA. In a statement given to the FDA, Strait said Grable told her to modify the images with a computer graphics program called PhotoShop. On one image, she darkened two cysts. On another, she brightened an area of cancer and moved it elsewhere on the breast.

``The altered images were posted at the IDSI booth at the RSNA meeting,' Strait said in her FDA affidavit. ``None were identified with the statement, `images enhanced.' '

When she learned that the company planned to send the images to the FDA, Strait said she objected, saying she didn't want to take part in a fraud. The following Monday, she said she was fired.

Grable wouldn't talk about Strait, her allegations or why she was fired.

``She made a statement filled with half-truths, and I'm not going to say what was true or untrue,' he snapped. ``I will not get down in the dirt with a disgruntled employee who was fired.'

No action taken

The FDA has taken no action. A spokeswoman would not confirm or deny if the agency is investigating the claim.
Strait, now a freelance technical writer, wasn't the only one at IDS who was disgruntled. Investors had complaints, too.

In an interview, O'Leary raised objections over the ownership of the laser mammography technology. In disclosures, the company treats it as its own. But the patent was issued to Grable, who then licensed it to IDS.

In return, Grable received 7 million shares of company stock and royalties of 6 percent to 10 percent of revenue from the machine. At present, the company has no revenue. Its stock, worth 51 cents a share Friday, makes Grable's 7 million shares worth about $3.6 million. Altogether, the Grables own 32.5 million shares.

Laurie Holtz, a forensic accountant in Miami, said the terms of the patent assignment sound stacked in Grable's favor.

``If he's getting shares and royalties for the patent, I don't quite get it. That sounds a little greedy,' Holtz said.

Considering that IDS has yet to sell a single machine, the Grables also draw lucrative salaries and stock options.

According to company documents filed with the SEC, Richard Grable received $286,000 in salary in 1998 and options to buy 500,000 shares of IDS stock for 31 cents a share, worth $100,000 as of Friday. The year before, Grable earned $673,000 in cash and stock. Linda Grable received $119,000 in 1998 and the same option package as her husband.

Grable said he, his wife and executives are, if anything, underpaid, given the amount of work they do.

``We did a survey of what executives of startup companies are paid and we're below the 50 percent mark,' he said.

CEOs of at least three startup medical companies in South Florida -- that have actual revenue -- take home less than Richard Grable. Alan Cohen of Andrx in Fort Lauderdale netted $257,000 in 1997. Paul Brown of HEARx in West Palm Beach earned $270,000. Jack Aronowitz of Technical Chemicals & Products in Pompano Beach earned $177,000. And none of the three received stock options in 1997.

Family spends millions

Further, while IDS is losing millions, the Grable family is spending millions on real estate and luxury cars -- nearly $4 million on real estate since October 1996. Public records show they took mortgages on several of the properties.

The Grables paid $732,000 in 1996 for their house in Plantation Acres, then added a $1.3 million unit in the Tony Portofino Tower in Miami -- $1 million of it borrowed -- and a $185,000 oceanfront condo in Fort Lauderdale's pricey Harbor Beach neighborhood off State Road A1A. In the past two years, Linda Grable has bought properties in Arizona and Ohio for sums totaling $483,000. Between them, they drive three Jaguars, two of them 1997 models.

Two Grable relations on the IDS payroll are living comfortably as well.
Trishia Grable, an IDS marketing employee, bought a $400,000 house, also in Harbor Beach, in 1997 and drives a 1995 Jaguar. IDS spokeswoman Deborah O'Brien -- who says she is Linda Grable's niece, not her daughter, as Linda Grable told the FDA in 1990 -- paid $565,000 for a house a block away from Trishia and drives a 1994 Mercedes S320.

Grable made the topic of his and his family's outside investments off-limits. He did say, however, that he has driven Jaguars for 35 years.
The Grables' lifestyles probably wouldn't bother IDS' shareholders and employees as much if the company were meeting its product release timetables and sales projections.

Since its inception, IDS has lost $28 million. It has no venture capital backing, no credibility in the U.S. stock market and no deep-pocketed partners. In the past three years, most of IDS' cash infusions have come from offshore stock offerings that give hefty discounts to foreign buyers of stock.
For instance, last June the company netted $990,000 from the issuance of preferred stock to Austost Anstalt Schaan in Liechtenstein and Balmore Funds in Tortola, British Virgin Islands. The attraction to IDS was the infusion of cash for working capital. The attraction to the investment firms was the ability to convert the preferred stock to IDS common stock at a 75 percent discount to what U.S. shareholders are paying for it.

At about the same time, IDS announced a deal that would allow IDS to draw up to $15 million by selling stock to Austost and Balmore. Nine months later, IDS still hasn't tapped that source of money, saying its stock is too underpriced.

Officers chip in

On Feb. 3, IDS announced yet another method of raising money. It said its officers and directors have agreed to sell a ``portion' of their personal stock to help the company pay its bills.

O'Leary, the IDS stockholder, calls the latest move a publicity stunt.

``I see no mention of the amounts they are sacrificing,' he said. ``How does it compare to the excessive compensation they have received from us in the past? It does me no good for someone to take a billion dollars from me and then try to look generous by handing me a $10 bill.'

Richard Grable said raising money conventionally in the United States has not worked out.

``When you try to raise money for a company, everybody goes for the throat,' he said. ``We've had offers from United States investors asking for 65 percent of the bid (price). Venture capital people sometimes ask for 40 to 60 percent of the company.'

This far along, Grable isn't willing to sell out or give up control. With his machine due to make its hospital debut on Long Island, Grable believes momentum is on his side. No starting date has been set. If it takes place, the test should tell the world -- once and for all -- whether or not the IDS machine is the real deal.

But according to documents filed with the SEC, IDS doesn't expect to reach the marketing phase for its machine for two years -- and that's only if it obtains $8 million to stay afloat during the clinical testing period. If IDS lives up to that schedule, testing will have taken five years. That strikes Marc Watson, managing director of C/max Capital, a Coconut Grove venture capital firm, as a long time.

Once a company has gone through an adequate span of research and development, Watson said, ``The clinical program shouldn't take that long. You have to basically demonstrate that the machine is comparable to some gold standard. If you have your data together, it can be a short process.'
A contrary view comes from Robert Wasserman, a stock analyst at Southeast Research Partners in Boca Raton. He said clinical trials can be quite involved.

``To some extent, it explains why a lot of the larger companies have done well this year, because it's increasingly expensive and difficult to get products approved by the FDA,' Wasserman said. ``It might have made sense for them (IDS) to do a joint venture with a Philips, Siemens or GE.'
The big question is whether or not IDS deserves the benefit of the doubt. Kaplan, the mammography clinic director who worked as closely with IDS as anyone, remains skeptical.

``I certainly don't discount it as being a possible viable technology,' he said. ``Technology doesn't develop overnight. Sometimes it takes years and years and years of researching and developing and testing

``But I always had a problem with the impression they wanted to give, that this (laser mammography) was out there, ready to go and ready to replace the mammogram,' he said. ``That was ludicrous.'