Imagis SEC filing offers financing details and more
2002-10-02 06:18 PT - Street Wire
IN THE DETAILS
by Lee M. Webb
Imagis Technologies Inc., a Vancouver biometric player, has filed a registration statement with the U.S. Securities and Exchange Commission (SEC) in connection with shares and warrants issued to OSI Systems Inc. pursuant to a $1.75-million (U.S.) brokered private placement disclosed on July 9. Imagis trades on the TSX Venture Exchange, the Frankfurt Exchange and the OTC Bulletin Board.
The prospectus in the 74-page SEC registration statement filed on Sept. 23 covers the sale of an aggregate of 1,458,334 Imagis shares by OSI. U.S.-based OSI acquired 1,166,667 Imagis shares and 291,667 warrants exercisable at $1.50 (U.S.) over two years in the brokered July financing. Deepak Chopra, OSI's chairman and chief executive officer, was appointed to Imagis's board of directors on July 8.
The Sept. 23 SEC filing fleshes out some of the details of the $1.75-million (U.S.) financing. Among other things, the subscription agreement with OSI provides for an adjustment to the purchase price through the issuance of additional shares to OSI, if Imagis, with some unspecified exceptions, enters into another financing prior to July 9, 2003, at a price less than $1.50 (U.S.) per share. A similar adjustment would apply to the warrants, offering OSI at least some protection against a possible dilutive financing.
The likelihood that Imagis will have to go back to the well for some additional financing before July of next year appears to be quite high. The prospectus notes that the company's auditors have expressed substantial doubt about Imagis's ability to continue as a going concern. Through the first six months of the year, Imagis reported revenue of $2.05-million and expenses of $4.85-million, ringing up a loss of approximately $2.8-million and boosting its accumulated deficit to approximately $13-million as of June 30. The company had cash and short-term investments totalling $1.22-million at the end of the second quarter.
"We may require additional financing to fund our operations which may not be available to us," Imagis acknowledges in its latest SEC filing. "Our revenue is not sufficient to finance our operating expenses and capital requirements. Based upon current estimates, we believe we have sufficient capital to fund our requirements through the end of 2002. Accordingly, we will require additional financing to fund our capital requirements and operating activities. We do not have any current arrangements with respect to other potential sources of financing and we cannot assure you that we will be able to secure financing on favorable terms or at all."
In addition to providing OSI with some dilution protection under the subscription agreement, Imagis entered into a number of other agreements with OSI in connection with the $1.75-million (U.S.) financing. Those agreements carry a minimum price tag of $750,000 (U.S.).
Under a July 8 product development and marketing agreement, Imagis formed a strategic alliance with OSI to develop integrated airport and transportation security products. The agreement involves the commitment of a minimum of $250,000 (U.S.) to operate an internal transportation security group and develop the products. Imagis will receive an unspecified royalty for all sales made by OSI of the products developed under the agreement.
Imagis also entered into a software developer services agreement with OSI on July 8. Under that agreement, Imagis will engage the services of OSI software engineers and equipment in OSI's facility in Hyderabad, India. Imagis has committed to pay OSI a minimum of $250,000 (U.S.) under the agreement expiring on June 30, 2003.
Another $250,000 (U.S.) is earmarked under a July 8 joint venture letter of intent with OSI. Under that letter of intent, upon the establishment of a Brazilian company by OSI to handle marketing of products in Brazil, Imagis will invest $250,000 (U.S.) for a 20-per-cent stake in that entity.
According to the prospectus, Imagis also signed a letter agreement with OSI that "memorializes each parties' rights with respect to each other relating to their investment rights in Zixsys Inc." The specific details of that letter agreement are not disclosed.
Imagis has been touting an association with Japanese giant Sanyo Semiconductor Company through Zixsys, previously identified as SecurityART Inc., since January of this year. On Jan. 23, along with associated company Intacta Technologies Inc., Imagis announced that it had signed a memorandum of understanding to form a new venture with six subsidiaries and affiliates of Sanyo. By March the new venture was named SecurityART. According to the March 12 Imagis news release, SecurityART was initially capitalized with approximately $1.5-million (U.S.) provided by the Sanyo subsidiaries and affiliates, but Imagis and Intacta reported that they would also participate in the equity of the new venture.
On May 21, Imagis reported that it had licensed its facial recognition technology to the Japanese venture, renamed Zixsys. The licensing fee was not disclosed, nor was the royalty structure revealed. At the time, Imagis claimed that it intended to complete its investment and become a shareholder of Zixsys within three months. More than five months after that news release, Imagis has yet to announce whether it has completed its investment in Zixsys.
It is not clear what investment rights OSI might have with respect to the Japanese venture or how those rights might impact Imagis's long-awaited investment in Zixsys. Imagis's associated company, Intacta, has been silent with respect to its proposed equity stake in Zixsys for many months. Chaired by Imagis founder and current director Altaf Nazerali, cash-starved Intacta is struggling to stay afloat.
Meanwhile, Imagis continues to play the Sanyo-related face card. On Oct. 1, Imagis announced that Zixsys, identified as a Sanyo subsidiary, will be displaying its ID Controller at an exhibition in Japan. The Zixsys product incorporates a proximity card reader and an optical fingerprint sensor in addition to Imagis's facial recognition technology.
Beyond the disclosures regarding some of the fine print surrounding the $1.75-million (U.S.) financing, Imagis's Sept. 23 SEC filing offers other interesting snippets for investors willing to plough through the 74-page document and compare it with earlier filings. For example, Imagis's leased Vancouver office space seems to have mushroomed.
In its annual report for the year ending Dec. 31, 2001, which was filed on March 21, 2002, Imagis reported that it was subleasing "an approximately 800 square foot facility" as the company's West Georgia St. headquarters in Vancouver. The monthly rent on that pricey space was a whopping $10,000 payable to International Portfolio Management Inc., a company controlled by Mr. Nazerali. Stockwatch called attention to that exorbitant rent in a March 25 article.
According to Imagis's latest SEC filing, the company still pays $10,000 per month for its Vancouver office space, however it is getting more bang, or space, for its buck. Imagis now reportedly has the run of 5,000 square feet in the same building. The Sept. 23 filing does not disclose who is collecting the rent for the company's recently expanded office space.
The Sept. 23 SEC filing also discloses the holdings of Imagis insiders. The snapshot of insider holdings as of Sept. 16 may be of particular interest in light of recent Stockwatch reports of late insider filings and Imagis's Sept. 27 response to a Sept. 23 article.
Stockwatch stands by the substantive facts in the Sept. 23 article in light of information available at the time. As Stockwatch reported, and as Imagis subsequently acknowledged in its response to the article, Mr. Nazerali did not file an insider report disclosing a Nov. 14, 2001, transaction until Sept. 17, 2002. Imagis correctly points out that Mr. Nazerali did include a transaction code on the hard copy of his late filing, but that code was not published on the British Columbia Securities Commission (BCSC) Web site.
Stockwatch also reported on Sept. 23 that Imagis director Treyton Thomas was late in filing an insider trading report. On Sept. 27, Imagis reported that Mr. Thomas's filing was early, not late. However, Stockwatch's report was based on information provided by Mr. Thomas prior to the publication of the article and information available on the BCSC Web site.
On Sept. 21, two days before Stockwatch published the report, Mr. Thomas informed Stockwatch that after consulting with Leon Getz, a highly regarded securities lawyer, he had determined that he was in fact late in filing an insider report. Mr. Thomas provided a copy of the report he submitted to the BCSC on Sept. 20, disclosing a transaction that reportedly occurred on July 31. The BCSC published that report on its Web site. Moreover, a copy of the original report obtained from the BCSC includes the handwritten notation "Late," initialed by a BCSC official.
As reported by Imagis on Sept. 27, the options granted to Mr. Thomas were not accepted for filing by the TSX until Sept. 23. On Sept. 30, Mr. Thomas filed an amended insider report with the BCSC. Based on the information that is now available, Mr. Thomas's initial insider report was filed prematurely. Stockwatch is still reviewing the Imagis insider trading muddle and wider issues involving the role of regulators in ensuring the transparency of a system that is held to be a key element of continuous disclosure.
As previously reported by Stockwatch, Altaf Nazerali, Oliver "Buck" Revell and Deepak Chopra have been late in filing insider reports. In addition to Mr. Nazerali's late report involving 100,000 options, a review of insider reports filed since last November shows that the Imagis founder and current director acquired 60,000 options on Dec. 19, 2001, but did not report the transaction until May 15, 2002.
Andy Amanovich, Imagis's chief technology officer, has also been tardy in filing an insider report. According to hard copies of filings obtained from the BCSC, Mr. Amanovich exercised 30,000 options priced at $1 on July 12, but did not report the transaction until Aug. 8. Stockwatch is reviewing other filings.
While Imagis's Sept. 23 SEC filing provides a snapshot of insider holdings as of Sept. 16, it also raises some questions. For example, Iain Drummond, Imagis's president and chief executive officer, is reportedly the beneficial owner of 307,500 shares, according to the SEC filing. A note discloses that Mr. Drummond's reported beneficial holdings include "300,000 shares issuable upon exercise of options and warrants that are exercisable within 60 days of Sept. 16" but excludes 383,334 shares issuable upon the exercise of options that are not exercisable within 60 days of Sept. 16.
According to BCSC records of Mr. Drummond's holdings prior to the latest SEC filing, Imagis's president purchased 7,500 shares at $1.29 per share on Feb. 4, 2000; was granted 100,000 options exercisable at $1 on Sept. 24, 2001; and acquired 400,000 warrants exercisable at $1.25 on Feb. 23, 1999. Mr. Drummond's warrants were to expire in three equal amounts on Feb. 23, 2001, 2002 and 2003, if unexercised, but Imagis twice extended the expiry date on the Feb. 23, 2001 and Feb. 23, 2002, tranches. According to the latest extension announced in a June 24 news release, 266,666 warrants were set to expire on Aug. 31.
Given Mr. Drummond's reported holdings according to the Sept. 23 SEC filing and the absence of any insider report to the contrary, it appears that he did not exercise the 266,666 warrants priced at $1.25 that were set to expire at the end of August. If the warrants did expire unexercised, also a reportable event, that fact has not been disclosed in a BCSC insider trading report.
The SEC filing also invites questions regarding possibly different reporting formats between the SEC and the BCSC. According to the Sept. 23 SEC filing, Imagis director Roy Trivett had beneficial ownership of 283,468 shares as of Sept. 16. A subsequent note discloses that his beneficial ownership includes 166,668 shares issuable upon the exercise of options exercisable within 50 days of Sept. 16, 45,000 common shares held by Trivett Holdings and 22,500 shares issuable upon the exercise of warrants held by Trivett Holdings. Mr. Trivett's reported holdings do not include 83,332 shares issuable upon the exercise of options not exercisable within 60 days of Sept. 16.
According to BCSC filings, Trivett Holdings, controlled by Mr. Trivett, acquired 45,000 special warrants priced at $2.17 per special warrant in an Imagis private placement last November. Each special warrant was convertible into one share and one-half of a share purchase warrant, with each warrant exercisable at $2.55 for one year. While the specific reference in the SEC filing to 45,000 common shares held by Trivett Holdings seems to suggest that the 45,000 special warrants were converted, the BCSC does not have an insider report disclosing such a transaction. It is not clear whether the special warrants were actually converted or if this is simply a matter of different reporting formats.
In addition to the holdings of Mr. Drummond and Mr. Trivett, the SEC filing discloses that Mr. Nazerali beneficially owns 715,167 shares, including 261,667 shares issuable upon the exercise of options and 136,000 shares held by International Portfolio Management, but excluding 63,333 shares issuable upon the exercise of options not exercisable within 60 days of Sept. 16. Mr. Revell beneficially owns 185,000 shares, including 148,000 shares issuable upon the exercise of options within 60 days, but excluding 12,000 shares issuable upon the exercise of options not exercisable within 60 days of Sept. 16. Mr. Thomas beneficially owns 100,000 shares, including 100,000 shares issuable upon the exercise of options, but excluding 200,000 shares issuable upon the exercise of options not exercisable within 60 days of Sept. 16.
Imagis director Robert Gordon beneficially owns 60,000 shares, representing shares issuable upon the exercise of options. Wayne Smith, the company's chief financial officer, reportedly owns 8,333 shares, representing shares issuable upon the exercise of options, but excluding 16,667 shares issuable upon the exercise of options not exercisable within 60 days of Sept. 16. It is not clear when Mr. Smith was granted options, but he has not yet filed an insider report with the BCSC.
Former director Fred Clarke reportedly has beneficial ownership of more than 1.9 million shares. The bulk of those shares, more than 1.6 million, are indirectly held through Pacific Cascade Consultants Ltd. Mr. Clarke controls FWC Ltd., which owns 50 per cent of Pacific Cascade, with the other 50 per cent owned by Mr. Amanovich. Including his indirect holdings along with Mr. Clarke in Pacific Cascade, Mr. Amanovich beneficially owns more than 2.05 million shares.
(Pacific Cascade filed a lawsuit against Kerstin Loesch in the Supreme Court of British Columbia on June 4, seeking the return of 500,000 Imagis shares. According to both the lawsuit and BCSC filings, Ms. Loesch shares the same address as Shafiq Nazerali-Walji, an Imagis consultant. Mr. Nazerali-Walji is the brother of Mr. Nazerali. According to Imagis, the dispute was resolved to the mutual satisfaction of the parties. No further court documents were filed. Imagis officially announced Mr. Clarke's resignation from the company's board of directors on July 9.)
Mr. Chopra, the beneficial owner of more than 1.45 million shares represented by OSI's holdings, rounds out the Imagis insiders. According to the SEC filing, Imagis's officers and directors beneficially own 5.17 million shares, representing 24.8 per cent of the outstanding shares as of Sept. 16.
According to a Sept. 12 open letter to shareholders, Imagis estimates that it has more than 3,500 shareholders. If Imagis indeed has that many shareholders, then the average holdings, excluding the holdings of the nine officers and directors, clocks in at approximately 4,000 shares.
While curious shareholders may be wading through Imagis's latest SEC filing, some perhaps searching for the devil in the details, others may be more closely watching the recent rally in the stock price. In the last three trading sessions on the TSX, Imagis has gained 40 cents. Imagis closed at $1.68 on Oct. 1.
Comments regarding this article may be sent to lwebb@stockwatch.com.
(More information regarding Imagis Technologies is available in Canada Stockwatch articles published on March 7, 11, 15, 25, 27 and 28; April 2, 9 and 16; May 17, 23 and 30; June 4, 11, 18, 26 and 28; July 3, 12 and 18; and Sept. 12, 13, 16, 20, 23, 24 and 27, 2002.) |
