| IMPLANT SCIENCES CORP ITEM 1A RISK FACTORS This Report on Form 10-K contains certain forward-looking statements that are based on current expectations |
| In light of the important factors that can materially affect results, including those set forth in this paragraph and below, the inclusion of forward-looking information herein should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved |
| The Company has received a qualified opinion that it is a going concern |
| The Company may encounter competitive, technological, financial and business challenges making it more difficult than expected to continue to develop and market its products; the market may not accept the Companyapstas existing and future products; the Company may be unable to retain existing key management personnel; the Company has pending litigation; the Company has net losses; the Company may not be able to raise additional capital; and there may be other material adverse changes in the Companyapstas operations or business |
| Assumptions relating to budgeting, marketing, and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause the Company to alter its marketing, or other budgets, which may in turn affect the Companyapstas financial position and results of operations |
| The reader is therefore cautioned not to place undue reliance on forward-looking statements contained herein, which speak solely as of the date of this Form 10-K The Company assumes no responsibility to update any forward-looking statements as a result of new information, future events, or otherwise |
| The following factors should be considered carefully in evaluating the Company and its business: 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 |
| During the twelve months ended June 30, 2006, we had a net loss of approximately dlra7cmam084cmam000 and a net loss applicable to common shareholders of approximately dlra8cmam173cmam000 |
| 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 Administrationapstas Quality System Regulations and to broaden our sales and marketing capabilities |
| Our accumulated deficit as of June 30, 2006 is approximately dlra36cmam290cmam000 |
| 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 affect 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 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 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 |
| 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 |
| Under the terms of this agreement, we gave Rapiscan the exclusive worldwide rights to market our Quantum Sniffer^TM 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 Sniffer^TM 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 |
| 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 |
| 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 |
| Although we have seventeen United States patents issued and nine 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 |
| _________________________________________________________________ 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 |
| 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 |
| 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 |
| 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 patientapstas 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 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 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 |
| Armini or Dr |
| Bunker for any significant period of time, our business would be materially adversely affected |
| 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 110prca 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 dlra4dtta15 by 110prca 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 |
| We may be required to reduce or curtail certain operations and research and development projects to improve our cash resources |
| 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 · 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 |